Dealing with government regulation in business is an integral part of a manager?s responsibilities..

Dealing with government regulation in business is an integral part of a manager’s responsibilities. Recognizing what actions might violate particular consumer protection regulations is crucial to protecting the company and to insuring its profitable operation. Government regulation is found every day in the operation of businesses large and small, and once understood, it allows managers to make good decisions regarding business practices. When you have completed this topic, you will be able to: •list the common types of regulations designed to protect consumers, •identify types of illegal consumer credit practices,

•describe the warranty protection provided to consumers, and •describe the purpose and role of the Federal Trade Commission (FTC) in consumer protection.

Read Chapter 40, “Consumer Law”

Read the following chapter in Business Law and the Legal Environment: •chapter 40 (“Consumer Law”)

Then respond to the following points in your notebook:
•What is the role of the FTC?
•Describe prohibited sales activities under the FTC Act.
•How is consumer credit regulated?
•What is the Magnuson-Moss Warranty Act?
•What government regulations apply to consumer product safety?

Consumer Law-statutes that protect consumers from the unscrupulous.

Federal Trade Commission (FTC)=Created by congress in 1915 to regulate business. Most important agency enforcing consumer law. Prohibits unfair deceptive practices.

FTC options for enforcing the law:

1. Voluntary Compliance

When the FTC determines that a business has violated the law, it first asks the offender to sign a voluntary compliance affidavit promising to stop

2. Administrative hearing and appeals

If the company refuses to stop voluntarily, the FTC takes the case to an administrative law judge (ALJ) within the agency. The violator may settle the case at this point by signing a consent order.

3.Penalties

FTC can impose a fine for each violation of a voluntary compliance affidavit, a consent order, a cease and desist order, and an FTC rule.

Section 5 of FTC Act-

Prohibits unfair or deceptive sales practices.

deceptive sales practices=An advertisement is deceptive if it contains an important misrepresentation or omission that is likely to mislead a reasonable consumer.

Unfair acts or practices must meet 3 tests to considered unfair acts or practices:

1. It causes a substantial consumer injury
2. Harm of injury outweighs any benefit
3. The consumer could not reasonably avoid the injury

FTC can find unfair if violates public policy w/o meeting tests

Bait and switch advertisement=
Merchant may not advertise a product and say bad things about it in order to sell a different item.

Telemarketing=
prohibits telemarketers from calling anyone on the do-not-call registry. And
they cannot block their names and telephone number.

Do not call registry=
prohibits telemarketers from calling telephone numbers listed on the Do not call registry

Mail or Telephone Order Merchandise has the following guidelines: Must ship an item within the time stated or within 30 days after the receipt of order; if it can’t ship by that time, they must send the customer a new ship date or the right to cancel order.

*unordered merchandise received in the mail
Consumers may keep as a gift

Door to Door Rules-
Salesperson is required to notify the buyer that the she has the right to cancel the transaction prior to midnight of the third business day thereafter

Consumer Credit Regulations

TILA Truth in Lending Act- requires lenders to disclose the terms of a loan in an understandable and complete manner. disclosures must be clear and meaningful.. Must disclose the finance charge and APR. TILA applies when:
1. It’s a consumer loan
2. The loan has a finance charge and will be repaid in more than four installments
3. The loan is less than $25,000 or secured by a mortgage
4. The loan is made by someone in the business of offering credit.

High rate Home equity loans-
lender must notify consumer at least 3 business days before closing that
1. He does not have to go through with the loan
2. He could lose his house if he fails to make payments

Home Equity Loans-Rescission-
Can rescind for up to 3 days after signing and after 3 years if the mortgage lender didn’t comply with TILA.

Right to Rescind=
Consumers have the right to rescind a 2nd mortgage for three business days after the signing. If the lender did not comply w/ TILA may rescind for up to 3 yrs.

Credit card unauthorized charges- under TILA if consumer reports card stolen w/in 2 days only responsible for $50, after 2 days bank will only reimburse for losses over $500. Wait more than 60 days to report bank is not liable at all open end credit(credit card)= credit transaction in which lender makes a series of loans that can be re-payed at once or in installments.

open ended credit required disclosures

1. the amount owed at the beginning of the billing cycle 2. amounts and dates of all purchases, credits and payments; finance charges and late fees 3. the date by which a bill must be paid to avoid these charges 4. either the consequences of making the monthly minimum payment or a toll free number at which to obtain such information.

Close end credit(car loan)=
One loan, borrower knows the amount and the payment schedule in advance

subprime loans

For subprime loans, a lender:

(1) Must verify the borrower’s ability to repay the loan from income and assets other than the home’s value (2) May not charge a prepayment penalty if monthly payments can change in the first four years of the loan (3) Must collect property taxes and homeowner’s insurance for all first mortgages

Home equity Loans

Home Equity Loans-Enforcement=
FTC generally has the right to enforce Truth in Lending Act and Consumers have a right to file suit.

TILA provides additional consumer safe guards if:
1. APR is more than 10% higher than Treasury securities
2. Consumer pays fees and points at closing more than 8%
3. Loans that are less than 5 yrs cannot have balloon payments

Advertising=

Statute requires lenders to advertise their rates accurately. Can’t bait and switch.

Bait and Switch=

a merchant may not advertise a product and then disparage it to consumer in an effort to sell a different item and they must have enough items in stock to meet reasonable demand.

Truth in Lending Act (TILA)=
passed to ensure that consumers were adequately informed about the credit terms before entering into a loan and can compare the cost of the credit.

TILA enforcement
*FTC generally has the right to enforce TILA.

TILA requires disclosures:
Must be clear and in meaningful sequence, The lender must disclose the finance charge, and the creditor must also disclose the annual percentage rate.

TILA advertisements-
Under TILA lenders cannot advertise a loan as “fixed” if in fact its rate or payments will change

In the event of a dispute between the customer and and a merchant the credit card company cannot bill the customer if:

1. customer makes a good faith effort to resolve dispute
2. the dispute is for more than $50
3. the merchant is in the same state or is within 100 miles of their home

Fair Credit Bill Act (FCBA)-
Under FCBA a credit card company must promptly investigate and respond to any consumer complaints about a credit card bill *provides additional protection for credit card holders. It allows a customer to dispute an item on their billing statement and demands that the company respond to your dispute.

Fair Credit Reporting Act (FCRA)-
helps to ensure that consumer credit reports are accurate and regulates the reporting agencies.

Under FCRA:
1. A consumer report can be used only for a legitimate business need 2. A consumer reporting agency cannot report obsolete information 3. An employer cannot request a consumer report on any current or potential employee w/o the employees permission 4. Anyone who makes an adverse decision against a consumer because of a credit report must reveal the name and address of the reporting agency that supplied the negative info

Fair and accurate credit reporting Act (FACTA)-
created to reduce identity theft by providing consumers with one free credit report per year and making companies update their information. *Permits consumers to obtain 1 free credit report every year from each of the 3 major reporting agencies

Fair Debt Collections Practices Act (FDCPA)=
a collector must send the debtor a written notice containing the amount of debt, the name of the creditor to whom the debt is owed, and a statement that if the debtor disputes the debt (in writing), the collector will cease all collection efforts until it has sent evidence of the debt. *Debt collectors may not harass or abuse debtors

Equal Credit Opportunity Act (ECOA)=
Prohibits any creditor from discriminating against against a borrower on the basis of race, color, age, religion, national origin, sex or marital status or because the borrower is receiving welfare.

Magnuson-Moss Warranty Act=
Requires any supplier that offers a written warranty on a consumer product costing more than $15 to disclose the terms of the warranty in simple and readily understandable language before sale. *Magnuson-Moss Warranty Act does not require

manufacturers or sellers to provide a warranty on their products.

Consumer product safety Commission=
Evaluates consumer products and develops safety standards.

Consumer Product Safety Act (CPSA)=
the goal is to prevent injuries from products.

Consumer Leasing Act (CLA)=
protects a person when leasing a car. Makes sure that the company discloses all important information in writing, so that the borrower knows what the payments, interest, penalties, rights, and warranties are.

Debit Card=
This item works like a check because money is taken directly from your account so their is no bill.

Rules of a Debit Card:
If you report it stolen before any purchases are made, you are not responsible for any amount. If you report it stolen with in two days, you are responsible for $50. If you report it stolen after two days, you are responsible for $500.

Chapter Conclusion

Virtually no one will go through life without reading an advertisement, ordering from a catalog, borrowing money, needing a credit report, or using a consumer product. It is important to know your rights.

Chapter Review
1. The Federal Trade Commission (FTC) prohibits “unfair and deceptive acts or practices.” A practice is unfair if it meets the following three tests: • It causes a substantial consumer injury. • The harm of the injury outweighs any countervailing benefit. • The consumer could not reasonably avoid the injury.

2. The FTC considers an advertisement to be deceptive if it contains an important misrepresentation or omission that is likely to mislead a reasonable consumer. 3. FTC rules prohibit bait and switch advertisements. A merchant may not advertise a product and then disparage it to consumers in an effort to sell a different item. 4. The FTC prohibits telemarketers from calling telephone numbers listed on its do-not-call registry.

5. Consumers may keep as a gift any unordered merchandise that they receive in the mail. 6. Under the FTC door-to-door rules, a salesperson is required to notify the buyer that she has the right to cancel the transaction prior to midnight of the third business day thereafter. 7. In all loans regulated by the Truth in Lending Act (TILA), the disclosure must be clear and in meaningful sequence. The lender must disclose the finance charge and the annual percentage rate. 8. In the case of a high-rate home equity loan, the lender must notify the consumer at least three business days before the closing that (1) he does not have to go through with the loan (even if he has signed the loan agreement) and (2) he could lose his house if he fails to make payments. If the duration of a high-rate home equity loan is less than five years, it may not contain balloon payments.

9. Under TILA, consumers have the right to rescind a mortgage (other than a first mortgage) for three business days after the signing. If the lender does not comply with the disclosure provisions of TILA, the consumer may rescind for up to three years from the date of the mortgage. 10. Under TILA, a credit card holder is liable only for the first $50 in unauthorized charges made before the credit card company is notified that the card was stolen. If, however, you wait more than two days to report the loss of a debit card, your bank will only reimburse you for losses in excess of $500. If you fail to report the lost debit card within 60 days of receipt of your bank statement, the bank is not liable at all. 11. In the event of a dispute between a customer and a merchant, the credit card company cannot bill the customer if: • She makes a good faith effort to resolve the dispute • The dispute is for more than $50, and

• The merchant is in the same state where she lives or is within 100 miles of her house.

12. Under the Fair Credit Billing Act, a credit card company must promptly investigate and respond to any consumer complaints about a credit card bill. 13. Under the Fair Credit Reporting Act: • A consumer report can be used only for a legitimate business need • A consumer reporting agency cannot report obsolete information • An employer cannot request a consumer report on any current or potential employee without the employee’s permission, and • Anyone who makes an adverse decision against a consumer because of a credit report must reveal the name and address of the reporting agency that supplied the negative information.

The Magnuson-Moss Warranty Act requires manufacturers or sellers to provide at least a limited warranty on all products. (False) Answer:The Act does not require a warranty, but it does require that any supplier that offers a written warranty on a consumer product that costs more than $15 to disclose the terms of the warranty in simple, understandable language.

The federal consumer protection laws are meant to protect consumers from the consequences of bad business decisions. (False) Answer: These statutes were passed by Congress and state legislatures to protect consumers from unscrupulous merchants.

Under the Truth-in-Lending Act, the consumer is liable for the use of a credit card by unauthorized persons up to $500. (False) Answer: The Act makes a consumer liable for only $50.

When a borrower uses his home as security for a second mortgage, the borrower has the right to rescind for: 3 business days. Answer: The TILA gives the consumer this right for up to 3 days after the signing.

A commercial for basketball shoes included a testimonial from a famous basketball player. If the player does not use the basketball shoes in the ad:the ad is deceptive. Answer: Under the FTC Act, an advertisement is deceptive if it contains an important misrepresentation that is likely to mislead a reasonable consumer.

The Consumer Leasing Act requires a lessor to disclose which of the following? The consumer’s right to terminate a lease early. Answer: Any right to early termination must be disclosed before a lease is signed.

 

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