Download Chapter 15 - Wright State University

15
Consumer Protection
McGraw-Hill/Irwin
©2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Chapter
15
Consumer Protection
Key Points
• Understand the common law protections of
fraud, innocent misrepresentation and
unconscionable contracts
• Understand the roles of state law, the FTC,
CPSC and FDA
• Identify the federal laws governing the
debtor/creditor relationship including TILA,
FCBA, ECOA and FDCPA
• Know the basic bankruptcy provisions
Fraud and Innocent
Misrepresentation
• A victim of fraud is entitled to rescind the contract and seek
damages, including, in case of malice, punitive damages
• The required elements of fraud are:
• Misrepresentation of a material fact
• The misrepresentation was intentional
• The injured party justifiably relied on the misrepresentation
• Injury resulted
• Silence may constitute fraud
• Example: Tietsworth v. Harley-Davidson (Wis. 2004)
• Fraud can involve false conduct as well as false expression
• Innocent misrepresentation differs from fraud only in that the
falsehood was unintentional; ordinarily damages are not
awarded
Unconscionable Contracts
Definition: A contract which is so unfair or oppressive
as to demand intervention
• Procedural unconscionability: Where bargaining
power of the parties is so unequal that the
agreement, as a practical matter, was not freely
entered
• Substantive unconscionability: Where the clause
or contract in question was so manifestly one-sided,
oppressive or unfair as to “shock the conscience of
the court”
State Lemon Laws
All 50 states have laws designed to provide recourse for
consumers whose new vehicles turn out to be defective such
that they cannot be repaired after a reasonable effort
• Typically the vehicle must have been (1) returned to the
manufacturer or dealer three or four times to repair the
same defect and that defect must substantially impair the
value or safety of the vehicle or (2) have been unavailable
to the consumer for a total of at least 30 days in a 12-month
period
• Purchaser is entitled to a replacement vehicle or full refund
• Usually initial determination is done by arbitration
Example: General Motors v. Dohmann (Conn. 1998)
The Federal Trade Commission Act
The Federal Trade Commission (FTC) was created in 1914 to prevent
“unfair methods of competition and unfair or deceptive acts or
practices in and affecting commerce”
• An unfair trade practice (1) must be likely to cause substantial
injury to consumers, (2) must not be reasonably avoidable by
consumers themselves and (3) must not be outweighed by
countervailing benefits
• Deception requires a claim that is (1) false or likely to mislead a
reasonable consumer and (2) material to consumer’s decision
making
FTC processes:
• Rulemaking: The FTC promulgates rules which specify those
particular acts or practices that the commission deems deceptive
• Adjudication: The FTC may conduct investigations, settle matters
informally, issue formal complaints and conduct trials before an
administrative law judge
The Consumer Product Safety
Commission (CPSC)
The CPSC, created in 1972, is responsible for reducing the risks in
using consumer products
Duties:
• Data collection—The CPSC conducts research and collects
information as a foundation for regulating product safety
• Rulemaking—The CPSC promulgates mandatory consumer
product safety, performance and labeling standards
• Compliance—The CPSC is empowered to use a variety of
strategies in securing compliance, including inspections, testing
and issuing recalls
• Enforcement—In cases of severe and imminent hazards, the
CPSC may seek an immediate court order to remove a product
from the market; it may also seek voluntary compliance,
prosecute cases before an administrative law judge, hear appeals
from ALJ decisions and pursue further litigation in federal court
Food and Drug Administration
(FDA)
• Responsible for protecting public from
dangerous food items, drugs, medical
devices, radiation-emitting products and
cosmetics
• Currently in the midst of the Vioxx
controversy (a drug implicated in as
many as 139,000 heart attacks)
Consumer Privacy Issues
One major issue is identity theft:
• 9.3 million U.S. adults suffered identity theft in one
recent 12-month period
• Thieves get information by dumpster diving, from
stolen mail, computer hacking, and improperly
disposed of credit card applications
If laws are changed to increase privacy protections,
costs to consumers could increase
Truth in Lending Act (TILA)
TILA requires conspicuous disclosure of amounts financed, finance
charge, annual percentage rate (APR) and number of payments
• Finance charges include not just interest, but service charges,
points, loan fees and carrying charges
• Disclosure requirements apply to both open-end (e.g., VISA) and
closed-end loans (those of a fixed amount for a definite time)
Covered transactions are those where:
• Debtor is a “natural person”
• Creditor is regularly engaged in extending credit and is person to
whom debt is initially payable
• Purpose of credit is “primarily for personal, family, or household
purposes” not in excess of $25,000 or a “consumer real property
transaction”
• Credit is subject to a finance charge or payable in more than four
installments
Example: Bell v. May Department Stores (Mo. 1999)
Consumer Credit Reports
The Fair Credit Reporting Act (FCRA) provides the following protections:
• Anyone using information from a credit reporting agency (CRA) to
take an “adverse action” must notify the consumer
• On request, CRA must give consumer information filed on them
and list of all who have recently sought information about
consumer
• CRA must investigate any complaints of inaccurate information
• All inaccurate information must be corrected or removed, usually
within 30 days
• Negative information more than seven years old must generally
not be reported
• Consumer must provide written consent before a CRA can provide
information to consumer’s employer or prospective employer
• Consumers can sue for damages if their rights are violated
Other Federal Credit Laws
Fair Credit Billing Act (FCBA): Provides a mechanism to
deal with billing errors that accompany credit card
transactions
Electronic Fund Transfer Act (EFTA): Provides remedies
for consumers confronting electronic banking problems,
such as liability for lost or stolen cards and billing errors
Equal Credit Opportunity Act (ECOA): Requires credit to
be extended to all creditworthy applicants regardless of
sex, marital status, age, race, color, religion, national
origin, good faith exercise of rights under the Consumer
Credit Protection Act and receipt of public assistance (e.g.,
food stamps)
Example: Lucas Rosa v. Park West Bank (1st Cir. 2000)
Fair Debt Collection Practices Act
(FDCPA)
The FDCPA is designed to shield debtors from unfair debt
collection tactics by debt collection agencies and
attorneys; it does not extend to creditors who are
themselves trying to recover money owed to them
It forbids the following:
• Use of obscene language
• Contact with third parties other than to locate the debtor
• Use of, or threats to use, physical force
• Contact with the debtor during “inconvenient” hours
• Repeated phone calls with intent to harass
• Contacting debtor in an unfair, abusive or deceptive
manner
Example: Armstrong v. Rose Law Firm (Minn. D.C. 2002)
Bankruptcy—Liquidation
• In Chapter 7 liquidations, all assets except exemptions are
distributed to creditors
• Can be voluntary or involuntary (that is, started by creditors)
• Court will enter order for relief if it finds debtor has not been paying
his or her debts when due
• Creditors then hold a meeting
• Bankruptcy trustee is elected
• Trustee collects debtor’s property, converts it into money and
distributes proceeds to creditors
• Secured creditors are paid first; then “priority” claims, such as
employees’ wages and alimony/child support; then general
creditors
• When distribution is complete, judge may issue an order discharging
(relieving) debtor of any remaining debts except for certain claims
such as taxes and educational loans
Bankruptcy—Reorganization
• Purpose of Chapter 11 is to allow financially troubled
enterprises to continue in operation while payment
adjustments are arranged; both debtor and creditors
may ultimately benefit more than from liquidation
• Typically, debtor continues to operate the business
• Debtors company, its bankers and suppliers will meet to
work out a method for continuing operations
• Plan must be approved by the creditors and confirmed
by the court
• Debtor company is then required to carry out the plan
Bankruptcy—Adjustment of Debts
• Under Chapter 13, individuals can seek protection of
the court to arrange a debt adjustment plan
• Recent bankruptcy reform causes more individuals to
use Chapter 13 than before
• Restricted to those with steady incomes and
somewhat limited debts
• Debtor develops repayment plan; if creditors’ interests
are sufficiently satisfied, the court may confirm it and
appoint a trustee to oversee the plan
• Debtor may have three to five years to make the
necessary payments under the plan