BCOR 320 1nd Edition Lecture 27 Chapter 26: Consumer lawFederal Trade Commission: • Created in 1915 to regulate business.• The FTC may enforce the law by:– Voluntary compliance– Administrative hearings and appeals– Penalties• Consumer Financial Protection Bureau – – Created in to regulate consumer financial products and services• Including mortgages, credit cards, and private student loansSales:• Section 5 of the Federal Trade Commission Act (FTC Act) prohibits “unfair and deceptive acts or practices”• Deceptive acts or practices– Under the FTC Act, an advertisement is deceptive if it contains an important misrepresentation or omission that is likely to mislead a reasonable consumer• Unfair practices– The Commission considers a practice to be unfair if it meets all of the following three tests:• It causes substantial consumer injury• The harm of the injury outweighs any countervailing benefit• The consumer could not reasonably avoid the injuryThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.• In addition, the FTC may decide that a practice is unfair simply because it violates public policy, even if it does not meet these three testsAdditional Sales Rules:• Bait-and-switch: A practice where sellers advertise products that are not generally available but are being used to draw interested parties in so that they will buy other products• 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• Merchandise bought by mail, telephone, or online– The FTC had established the following rules• Ordered items must be shipped when promised, or within 30 days• If a company cannot ship the product promised, it must send the customer a notice with the new shipping date and an opportunity to cancel• If the company cannot ship by the second shipment date it must send the customer another notice • This time, the company must cancel the order unless the customer returns the notice, indicating that he still wants the item• Telemarketing – FTC rules prohibit telemarketers from calling any telephone number listed on its do-not-call registry• Unordered merchandise– Under §5 of the FTC Act, anyone who receives unordered merchandise in the mail can treat it as a gif• Door-to-door sales – 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 thereaferConsumer Credit: • Penalty for violating usury statutes varies among states• Depending upon the jurisdiction, the member may forfeit:– Interest above the usury limit– All of the interest– All of the loan and the interestThe truth in lending Act:• Application – TILA applies to a transaction only if all of the following tests are met:– It is a consumer loan– The loan has a finance charge or will be repaid in more than four installments– The loan is for less than $51,800 or secured by a mortgage on real estate, or is aprivate educational loan– The loan is made by someone in the business of offering credit• Disclosure - In all loans regulated by TILA:– The disclosure must be clear and in meaningful sequence– The lender must disclose the finance charge– The creditor must also disclose the annual percentage rate (APR)– Closed-end credit - Before finalizing the loan, the lender must disclose:• The cash price• The total down payment• The amount financed• An itemized list of all other charges• The number, amount, and dates of all payments• Total amount of payments• Late payment and pre-payment penalties• The lender’s security interest in the item purchased– Enforcement – FTC generally has the right to enforce TILA• Home Loans: Mortgage loans - TILA prohibits unfair, abusive, or deceptive home mortgage lending practices• TILA:• Requires lenders to make good-faith effort to determine whether a borrower can afford to repay the loan• Prohibits lenders from coercing or bribing an appraiser into misstating a home’svalue• Bans prepayment penalties on adjustable rate mortgages• Subprime loan: A loan that has an above-market interest rate because the borrower is high-risk• Regulated by the TILAHome Loans: • If a home equity loans:– Has an APR that is more than 10 percentage higher than Treasury securities, or– The consumer must pay fees and points higher than 8% of the total loan amount• Then:– The lender must notify the consumer that he does not have to go through with the loan, and he could lose his house if he fails to make payments, and– Loans for less than five years may not have a balloon payment– Rescission - Under TILA, consumers have the right to rescind a mortgage for up to three business days afer the signingCredit Cards:• Disclosure– TILA establishes disclosure rules for credit cards• Called open-end credit– In any advertisement or solicitation, the lender must disclose:• Credit terms• That the rate is introductory– Before establishing an open-end credit account, the lender must disclose to theconsumer:• When a finance charge will be imposed• How the finance charge with be calculated– In each monthly statement, the lender must disclose:• The amount owed at the beginning of the billing cycle• Amounts and dates of all purchases, credits, and payments• Finance charges and late fees• The date by which a bill must be paid to avoid these charges• Either the consequences of making the monthly minimum payment or atoll-free number that can be used to obtain such information• Regulation of credit card debt– Many consumers struggled to pay their credit card bills during the economic crisis in 2008– In response, Congress increased oversight of credit card companies by passing the Credit Card Act of 2009• Liability– Stolen cards – Under the TILA, you are liable only for the first $50 in charges thethief makes before you notify the credit card company– Disputes with merchants - 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• The merchant is in the same state where she lives or is within 100 miles of her house– Disputes with