CH-18 Regulations Protecting Consumers – The Legal and Regulatory Environment of Business : Exam Guide

18 Key 1. Use and transfer of personal property by individuals in the U.S. is unrestricted. Answer: False The exclusive legal fence of property protects us in various ways, principally in the possession, use, and transfer of what we own. Yet we cannot use or transfer what we own without limits. We must respect the equal property right of others and not interfere with the exclusive legal fence that protects what belongs to them. 2. Consumer protection laws arise when legislatures define an ambiguous legal boundary between certain types of sellers and buyers in ways that favor buyers. Answer: True Consumer protection laws arise when legislatures define an ambiguous legal boundary between certain types of sellers and buyers in ways that favor buyers. 3. The Fair Credit Reporting Act regulates credit reports on both consumers and businesses. Answer: False The Fair Credit Reporting Act regulates the consumer credit reporting industry. Refer: Table 18.1 4. The major duty of the Magnuson-Moss Warranty Act is to require the FTC to issue rules regarding consumer product warranties. Answer: True The Magnuson-Moss Warranty Act requires the FTC to issue rules concerning consumer product warranties. 5. Trade practice regulation ensures fair competition by preventing those who would deceive consumers from diverting trade from those who compete honestly. Answer: True A highly competitive economy produces better goods and services at lower prices, while trade practice regulation ensures fair competition by preventing those who would deceive consumers from diverting trade from those who compete honestly. 6. Industry guides issued by the FTC are formal and legally binding. Answer: False Like advisory opinions, industry guides are informal and not legally binding. 7. Under the cease and desist order issued by the Bureau of Consumer Protection, a party assents to sign an order which restrains the promotional activity deemed offensive. Answer: False Under the consent-order procedure, a party "consents" to sign an order which restrains the promotional activity deemed offensive and agrees to whatever remedy, if any, the Bureau imposes. 8. The basic penalty for trade practice violations under the FTC Act is a civil fine of not more than $10,000 per violation. Answer: True The basic penalty for trade practice violations under the FTC Act is a civil fine of not more than $10,000 per violation. 9. The FTC commissioners are appointed by the president. Answer: True The president appoints the FTC commissioners for four-year terms and Congress annually must approve a budget for the FTC. 10. Using zip codes as a factor in denying credit has been determined to be illegal by the FTC due to possible discrimination that could result. Answer: True In one case, the FTC assessed a $200,000 civil penalty against a major national oil company. The FTC charged that the company practiced race and sex discrimination by using zip codes as a factor in deciding whether to extend credit and by failing to consider women's alimony and child support income. 11. Marie is a married woman with a good job. If she applies for credit solely in her own name, the credit company may not deny her individual credit if she is creditworthy, but the credit company is permitted to ask if she is married to maintain a complete file on her. Answer: False Unless the husband will be using the account or the consumer is relying on her husband's credit, it is illegal even to ask if the consumer is married. 12. A report containing information solely as to transactions between the consumer and the person making the report is not a "consumer report" covered by the Fair Credit Reporting Act (FCRA). Answer: True The Fair Credit Reporting Act (FCRA) provides that a report containing information solely as to transactions or experiences between the consumer and the person making the report is not a "consumer report" covered by the Act. 13. The Truth-in-Lending Act covers transactions in which the debtor is a corporation or a business entity, Answer: False The Truth-in-Lending Act covers all transactions in which: (1) the lender is in the business of extending credit in connection with a loan of money, a sale of property, or the furnishing of services; (2) the debtor is a natural person, as distinguished from a corporation or business entity. 14. Recording fees and taxes are not considered in a loan's finance charge. Answer: True Among the costs frequently paid by debtors which are not included in the finance charge are recording fees and taxes, such as a sales tax, which are not usually included in the listed selling price. 15. The Fair Debt Collection Practices Act applies only to consumer debt collections. Answer: True Due to complaints that some debt-collection agencies used techniques of harassment, deception, and personal abuse to collect debts, Congress in 1978 passed the Fair Debt Collection Practices Act. The Act covers only consumer debt collections. 16. The Fair Debt Collection Practices Act exempts attorneys who collect consumer debts on behalf of their clients. Answer: False Due to complaints that some debt-collection agencies used techniques of harassment, deception, and personal abuse to collect debts, Congress in 1978 passed the Fair Debt Collection Practices Act. It also applies to the Internal Revenue Service and attorneys who collect consumer debts on behalf of their clients. 17. A debt collector is not required to disclose his/her identity as a debt collector to delinquent customers they call when attempting to collect a legitimate, delinquent debt. Answer: False According to the Fair Debt Collection Practices Act, a collector cannot fail to disclose his/her identity as a collector. 18. Congress has specified that the Fair Debt Collection Practices Act preempts any state laws regulating debt collection in an effort to standardize enforcement in the industry. Answer: False Congress specified that the Fair Debt Collection Practices Act (FDCPA) does not preempt state laws regulating debt collections so long as they are more strict than FDCPA standards. 19. In a bankruptcy proceeding against an individual, the individual's property is liquidated under Chapter 7 of the bankruptcy law. Answer: True In a bankruptcy proceeding against an individual, the individual's property either will be liquidated under Chapter 7 of the bankruptcy law and the debts discharged, or the debts will be adjusted under Chapter 13. 20. The Consumer Financial Protection Bureau (CFPB) is run by a director appointed by the president with the advice and consent of the Senate. Answer: True The Consumer Financial Protection Bureau (CFPB) is run by a director appointed by the president with the advice and consent of the Senate for a five-year term. 21. Bankruptcy laws are subject to regulatory interpretation. Answer: False The bankruptcy laws are not subject to regulatory interpretation and depend upon assertion by private debtors, both in their capacity as consumers and in business. 22. Voluntary bankruptcy proceedings are filed by the creditor. Answer: False Bankruptcy proceedings begin upon the filing of either a voluntary or involuntary petition to the court. A voluntary petition is one filed by the debtor; an involuntary petition is filed by one or more creditors of the debtor. 23. In a bankruptcy proceeding against an individual, debts are adjusted under Chapter 13 of the bankruptcy law. Answer: True In a bankruptcy proceeding against an individual, the individual's property either will be liquidated under Chapter 7 of the bankruptcy law and the debts discharged, or the debts will be adjusted under Chapter 13. 24. The trustee in a bankruptcy is elected by the debtor to represent the debtor's estate during the bankruptcy. Answer: False The trustee is someone elected by the creditors to represent the debtor's estate in taking possession of and liquidating (selling off) the debtor's property. 25. Under bankruptcy laws, certain creditors receive priority over others in the distribution of a debtor's assets. Answer: True Under bankruptcy laws, certain creditors receive priority over others in the distribution of a debtor's assets. 26. The Fair Credit Billing Act limits a customer's liability for a thief's use of a stolen credit card to a maximum of $500. Answer: False The Fair Credit Billing Act administered by the Federal Trade Commission, limits liability on lost, stolen, or misused credit cards to $50. 27. With regard to the Magnuson-Moss Warranty Act, under full warranties, a warrantor must replace a defective product within a reasonable time and at no charge, barring the shipping costs. Answer: False With regard to the Magnuson-Moss Warranty Act, under full warranties, a warrantor must repair or replace a defective product within a reasonable time and at no charge, including no shipping costs. 28. The Federal Food, Drug and Cosmetic Act is administered by the FTC. Answer: False The Federal Food, Drug and Cosmetic Act is administered by the Food and Drug Administration. This Act and the rules established under it by the FDA establish that prescription drugs must be proven effective and safe by extensive testing before they can be sold. 29. Most of the laws which apply the concepts of privacy protect the individual from being overwhelmed by the intrusive power of the government and other large organizations. Answer: True Most of the laws and cases which apply the concepts of privacy protect the individual from being overwhelmed by the intrusive power of the government and other large organizations, including businesses. 30. Under the Right to Financial Privacy Act of 1978, the individual depositor has the right to challenge an agency's legal basis for seeking the financial records. Answer: True The Right to Financial Privacy Act of 1978 requires all government agencies seeking depositor records from banks and other financial institutions to notify depositors of this fact. The individual depositor then has 14 days to challenge an agency's legal basis for seeking the records. 31. In the past, courts have mainly used: A. statutory law to resolve consumer disputes. B. constitutional law to resolve consumer disputes. C. administrative regulations to resolve consumer disputes. D. principles of common law to resolve consumer disputes. E. principles of procedural law to resolve consumer disputes. Answer: D. principles of common law to resolve consumer disputes. In the past, courts mainly used the principles of common law to settle disputes over the property fence and whether it had been crossed or compensation was due. 32. The regulatory center for federal consumer protection is the: A. United States Consumer Product Safety Commission. B. Bureau of Consumer Protection. C. Federal Consumer Protection Agency. D. Bureau of Consumer Trade. E. Department of Consumer Affairs. Answer: B. Bureau of Consumer Protection. Although the Federal Trade Commission Act protects businesses as well as consumers, the consumer protection mission of the FTC is promoted by a special bureau called the Bureau of Consumer Protection. This body within the FTC is the regulatory center for federal consumer protection. politics influence it. Reed - Chapter 18 #32 33. The national "Do Not Call" list was created by a(n): A. Congressional statute. B. FTC trade regulation. C. executive order. D. uniform statute established on the state's level. E. procedural law. Answer: B. FTC trade regulation. Enforcement actions may also arise from allegations under Section 5 that a respondent's actions violate a trade regulation rule of the FTC. At the recommendation of the Bureau of Consumer Protection, the five-member Commission adopts trade regulation rules in exercising its quasi- legislative power. Examples of trade regulation rules include the familiar telemarketing sales rule that established the national "Do Not Call" list. 34. When the Bureau of Consumer Protection prosecutes a violator for violation of the FTC, the violator is called a(n): A. respondent. B. claimant. C. appellant. D. plaintiff. E. pursuer. Answer: A. respondent. The FTC prosecutes businesses for committing unfair or deceptive trade practices. Such prosecutions arise in one of two related ways. First, the Bureau of Consumer Protection may allege that an individual or company, called a respondent, has violated Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices. 35. Most cases brought by the Bureau of Consumer Protection are settled using: A. cease and desist orders. B. arbitration. C. mediation. D. injunction. E. consent orders. Answer: E. consent orders. Under the consent-order procedure, a party "consents" to sign an order which restrains the promotional activity deemed offensive and agrees to whatever remedy, if any, the Bureau imposes. Most cases brought by the Bureau are settled by this procedure. 36. Section 5 of the Act prohibits unfair or deceptive acts or trade practices. A. Equal Credit Opportunity B. Fair Credit Reporting C. Truth-in-Lending D. Fair Debt Collection Practices E. Federal Trade Commission Answer: E. Federal Trade Commission The FTC prosecutes businesses for committing unfair or deceptive trade practices. Such prosecutions arise in one of two related ways. First, the Bureau of Consumer Protection may allege that an individual or company, called a respondent, has violated Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices. 37. Upon request by the FTC, the federal courts may assess fines for each of the following EXCEPT: A. when companies violate the cease and desist order. B. when companies agree to fines as part of a cease and desist order. C. when companies knowingly violate a prior FTC order against others. D. when companies violate a trade regulation rule. E. when companies agree to fines as part of a consent order. Answer: E. when companies agree to fines as part of a consent order. To obtain fines, either the FTC or the Justice Department must ask the federal court to assess them. The exception is when companies agree to fines as part of a consent order. Fines may be assessed in three distinct situations: (1) for a violation of a consent or cease and desist order, (2) for a violation of a trade regulation rule, and (3) for a knowing violation of prior FTC orders against others. 38. The courts may assess fines against those found to have engaged in deceptive advertising upon request from the: A. Bureau of Consumer Protection only. B. Bureau of Consumer Protection and/or the Home Department. C. Bureau of Consumer Protection, the FTC, and the Justice Department. D. FTC or the Justice Department. E. FTC and the Home Department. Answer: D. FTC or the Justice Department. To obtain fines, either the FTC or the Justice Department must ask the federal court to assess them. 39. ECNAL Corp. manufactures bicycle parts and equipment. One of their new products, the Slipstream tire, is advertised to be 5 percent faster than the competition due to a new rubber compound used that reduces road drag and friction significantly. After receiving complaints of fraud, the FTC determines that the tire is made from rubber similar to that found in most bicycle tires and it does not, in fact, reduce road drag and friction any more than other tires on the market. The FTC has ordered ECNAL to include in their advertising the truth about the tire materials and their quality and specifically state that the Slipstream tire does not improve speed or performance. The FTC has ordered ENCAL to engage in: A. corrective advertising. B. cease and desist advertising. C. comparative advertising. D. parody advertising. E. social advertising. Answer: A. corrective advertising. One remedy the FTC has used in the past to accompany some of its orders is corrective advertising. When a company has advertised deceptively, the FTC can require it to run ads that admit the prior errors and correct the erroneous information. politics influence it. Reed - Chapter 18 #39 40. In advising advertisers about how it determines deceptive trade practices, the Federal Trade Commission looks at all of the following EXCEPT: A. the ad in context rather than focusing on certain words in the ad. B. implied claims—those that are literally made in the ad. C. what the ad does not say. D. whether the claim would be "material." E. whether the advertiser has sufficient evidence to support the claims in the ad. Answer: B. implied claims—those that are literally made in the ad. The FTC advises advertisers about how it determines deception. It looks at: 1. the ad in context rather than focusing on certain words in the ad. 2. both "express" and "implied" claims. An express claim is literally made in the ad. 3. what the ad does not say. 4. whether the claim would be "material." 5. whether the advertiser has sufficient evidence to support the claims in the ad. 41. Although the FTC is an independent regulatory agency, the FTC commissioners often reflect the views of: A. lawmakers of the upper house of Congress. B. the common public who elected them to their positions. C. the consumer products companies. D. the executive head of the Bureau of Consumer Protection. E. the president who appointed them. Answer: E. the president who appointed them. Although the FTC is an independent regulatory agency, it is understandable that the FTC commissioners often reflect the views of the president who appointed them. 42. Although the Equal Credit Opportunity Act protects each of the following from discrimination, special emphasis is aimed at preventing discrimination regarding: A. race. B. age. C. sex D. marital status. E. religion. Answer: C. sex Although the ECOA forbids discrimination on the basis of sex, marital status, race, color, age, religion, national origin, or receipt of welfare in any aspect of a consumer credit transaction, it is aimed especially at preventing sex discrimination. 43. Which of the following prevents discrimination in credit extension based on sex, age, race, religion, national origin, marital status, and receipt of welfare payments? A. The Federal Trade Commission Act B. The Fair Credit Reporting Act C. The Truth-in-Lending Act D. The Fair Debt Collection Practices Act E. The Equal Credit Opportunity Act Answer: E. The Equal Credit Opportunity Act In 1975, Congress passed the Equal Credit Opportunity Act (ECOA). This act prohibits discrimination based on sex, marital status, race, color, age, religion, national origin, or receipt of welfare in any aspect of a consumer credit transaction. 44. Big Prime is a major lender licensed to lend only in Delaware. Big Prime finds that customers in Sussex County perform far below customers in the other counties. Assume that the county which is heavily into farming and low-paying industrial jobs is 25 percent African-American and has a 40 percent population of legal and illegal immigrants. Big Prime finds that while it is profitable overall, it is losing money on the Sussex County loans. Further research reveals that Sussex County is one of the poorest-performing customer bases nationwide and most companies doing business there are losing money. The board of directors decides not to make any more loans in Sussex County. Big Prime is violating provisions of the: A. Federal Trade Commission. B. Fair Credit Reporting Act. C. Truth-in-Lending Act. D. Fair Debt Collection Practices Act. E. Equal Credit Opportunity Act. Answer: E. Equal Credit Opportunity Act. In 1975, Congress passed the Equal Credit Opportunity Act (ECOA). This Act prohibits discrimination based on sex, marital status, race, color, age, religion, national origin, or receipt of welfare in any aspect of a consumer credit transaction. 45. Private remedies for violation of the Equal Credit Opportunity Act include: A. actual and punitive damages up to $10,000. B. actual and punitive damages up to $10,000 and attorney's fees. C. actual damages, punitive damages up to $10,000, and attorney's fees and legal costs. D. attorney's fees and legal costs. E. actual damages up to $10,000. Answer: C. actual damages, punitive damages up to $10,000, and attorney's fees and legal costs. Private remedies for violation of the ECOA are recovery of actual damages, punitive damages up to $10,000, and attorney's fees and legal costs. 46. Infro, Inc., is a major lender licensed to lend only in Delaware. Infro tracks the payment history of its customers and finds that customers in Sussex County perform far below customers in the other counties. Assume that the county which is heavily into farming and low-paying industrial jobs is 25 percent African-American and has a 40 percent population of legal and illegal immigrants. Infro finds that while it is profitable overall, it is losing money on the Sussex County loans. Further research reveals that Sussex County is one of the poorest-performing customer bases nationwide and that most companies doing business in the county are losing money. The board of directors decides not to make any more loans in Sussex County. Which of the following is true? A. Before Infro implements its decision, it must get permission from the FTC to do so. B. If Infro goes through with its decision, it is engaging in redlining which is illegal. C. If Infro goes through with its decision, it is engaging in reverse redlining which is illegal. D. Infro, as a private company, is free to make business decisions that are advantageous to the company and has done nothing wrong. E. If Infro goes through with its decision, it is engaging in liquorlining which is legal. Answer: B. If Infro goes through with its decision, it is engaging in redlining which is illegal. It has been established that the practice of redlining, that is, refusing to make loans at all in certain areas where property values are low, can discriminate on the basis of race in granting mortgage credit. 47. Which of the following statements holds true for the term "redlining"? A. It refers to the practice in which real estate brokers guide prospective home buyers toward or away from certain neighborhoods based on their race. B. It refers to the perceived business practice of a company providing a product or a service to only the high-value or low-cost customers of that product or service. C. It refers to a way of encouraging white property owners to sell their houses at a loss by implying that racial minorities were moving into their previously racially segregated neighborhood, thus depressing real estate property values. D. It refers to an organization targeting minority consumers by charging them more than would be charged to a similarly situated majority consumer. E. It refers to the refusal of an organization to make loans at all in certain areas where property values are low. Answer: E. It refers to the refusal of an organization to make loans at all in certain areas where property values are low. It has been established that the practice of redlining, that is, refusing to make loans at all in certain areas where property values are low, can discriminate on the basis of race in granting mortgage credit. 48. The Fair Credit Reporting Act applies to anyone who prepares or uses a credit report in connection with: A. opening a bank account. B. promoting an employee. C. selling real estate. D. granting a business license. E. extending credit. Answer: E. extending credit. The Fair Credit Reporting Act applies to anyone who prepares or uses a credit report in connection with (1) extending credit, (2) selling insurance, or (3) hiring or firing an employee. 49. Which of the following regulates the consumer credit reporting industry? A. The Equal Credit Opportunity Act B. The Fair Credit Reporting Act C. The Truth-in-Lending Act D. The Fair Debt Collection Practices Act E. The Uniform Consumer Leases Act Answer: B. The Fair Credit Reporting Act Although most of the information contained in credit reports is accurate, the harm caused by occasionally inaccurate information and the potential for undue invasion of privacy led Congress to pass the Fair Credit Reporting Act. The law regulates credit reports on consumers but not those on businesses. 50. If there are violations of the Equal Credit Opportunity Act (ECOA), affected consumers: A. have the right to file a petition to the president to seek redressal. B. cannot seek public enforcement by the FTC but have the right to sue under private remedies provided in the Act. C. have to depend on public enforcement by the FTC as they do not have the right to sue. D. have the right to sue as well as the right to seek public enforcement by the FTC. E. have the right to resort to intimidatory tactics against the guilty party. Answer: D. have the right to sue as well as the right to seek public enforcement by the FTC. The Equal Credit Opportunity Act (ECOA) has both private remedies that consumers can pursue as well as public enforcement by the Federal Trade Commission. For this reason, consumers do not depend on the FTC to ensure they have equal opportunities for credit. If there are violations of the ECOA, affected consumers can sue. 51. The " " provisions of the FCRA requires that consumers who are seeking credit for personal, family, or household purposes be informed if their application is denied because of an adverse credit report. A. server B. subscriber C. access D. content E. user Answer: E. user The "user" provision of the FCRA requires that consumers who are seeking credit for personal, family, or household purposes be informed if their application is denied because of an adverse credit report. 52. reports refer to reports on a customer's character, general reputation, mode of living, and so on, obtained by personal interviews in the consumer's community. A. Credit B. Policy C. Market research D. Demographic E. Investigative consumer Answer: E. Investigative consumer The FCRA contains a provision on investigative consumer reports. These are reports on a consumer's character, general reputation, mode of living, and so on, obtained by personal interviews in the consumer's community. 53. Investigative consumer reports detailing a consumer's character, general reputation, and mode of living are: A. allowed under the FCRA without restriction should the consumer apply for credit, insurance, or a job. B. allowed under the FCRA with three days' advance notice to the consumer should the consumer apply for credit, insurance, or a job. C. allowed under the FCRA with five days' advance notice to the consumer should the consumer apply for credit, insurance, or a job. D. expressly prohibited under the FCRA because these are not credit-related issues. E. expressly prohibited under the FCRA because it violates the right to privacy of the consumer. Answer: B. allowed under the FCRA with three days' advance notice to the consumer should the consumer apply for credit, insurance, or a job. The FCRA contains a provision on investigative consumer reports. No one may obtain such a report unless at least three days' advance notice is given the consumer that such a report will be sought. 54. Under the FCRA, an injured consumer may only recover: A. actual damages, attorney's fees, and in some instances speculative damages. B. actual damages. C. punitive damages and the attorney's fees but no actual damages. D. actual damages, attorney's fees, and in some instances punitive damages. E. actual damages and the attorney's fees but no punitive damages. Answer: D. actual damages, attorney's fees, and in some instances punitive damages. The Federal Trade Commission can enforce the FCRA. In addition, anyone who violates the provisions of the act is civilly liable to an injured consumer. The consumer may recover actual damages, attorney's fees, and in some instances punitive damages. 55. The Federal Truth-in-Lending Act: A. sets minimum and maximum interest rates for various types of loans. B. mandates that a financing statement be prepared when credit is extended by a business to a consumer. C. applies to personal property loans such as car or education loans, but does not apply to real property loans such as a purchase of a house. D. regulates the advertising used by lenders to attract loan customers. E. establishes dischargeable debts in cases of bankruptcy. Answer: B. mandates that a financing statement be prepared when credit is extended by a business to a consumer. The Truth-in-Lending philosophy of full disclosure is accomplished through two concepts, namely, the finance charge and the annual percentage rate. The finance charge and annual percentage rate are made known to borrowers by use of a financing statement. 56. The total cost of money to a consumer is called the: A. annual percentage rate. B. funding charge rate. C. commercial charge. D. service charge. E. finance charge. Answer: E. finance charge. The finance charge is the sum of all charges payable directly or indirectly by the debtor or someone else to the creditor as a condition of the extension of credit. 57. Which of the following is included in the finance charge? A. Application fees charged to all applicants for credit. B. Charges for unanticipated late payments, exceeding a credit limit, or delinquency. C. Charges imposed by a financial institution for paying items that overdraw an account. D. Fees charged for participation in a credit plan. E. Fees for appraisals. Answer: E. Fees for appraisals. Included in the finance charge are interest, service charges, loan fees, points, finder's fees, fees for appraisals, credit reports or investigations, and life and health insurance required as a condition of the loan. Among the costs frequently paid by debtors which are not included in the finance charge are recording fees and taxes. Other items of cost not included are title insurance or abstract fees, notary fees, and attorney's fees for preparing deeds. 58. The Truth-in-Lending Act gives consumers the right to rescind certain transactions for a period of: A. seven business days from the date of the transaction or from the date that notice of the right to rescind is given, whichever comes first. B. three business days from the date of the transaction or from the date that notice of the right to rescind is given, whichever comes first. C. three business days from the date of the transaction or from the date that notice of the right to rescind is given, whichever is later. D. seven business days from the date of the transaction or from the date that notice of the right to rescind is given, whichever is later. E. five business days from the date of the transaction or from the date that notice of the right to rescind is given, whichever is later. Answer: C. three business days from the date of the transaction or from the date that notice of the right to rescind is given, whichever is later. The Truth-in-Lending Act gives debtors the right to rescind or cancel certain transactions for a period of three business days from the date of the transactions or from the date they are given the notice of their right to rescind, whichever is later. 59. Which of the following is true about the penalties and remedies under the Truth-in-Lending Act? A. There are no civil penalties for violation of Truth-in-Lending. B. The criminal liability provisions make creditors liable to debtors for an amount equal to twice the finance charge. C. Creditors may avoid liability in the event they make an error, provided they notify the debtor within 30 days after discovering the error. D. If creditors avoid liability in making an error by notifying the debtor within 60 days after discovering and correcting the error, the law allows for corrections in favor of the debtor only. E. Creditors are, in certain cases, allowed to collect finance charges in excess of those actually disclosed. Answer: D. If creditors avoid liability in making an error by notifying the debtor within 60 days after discovering and correcting the error, the law allows for corrections in favor of the debtor only. There are both civil and criminal penalties for violation of Truth-in-Lending. The civil liability provisions make creditors liable to debtors for an amount equal to twice the finance charge. Creditors may avoid liability in the event they make an error, provided they notify the debtor within 60 days after discovering the error and also correct the error. In this connection, the law allows for corrections in favor of the debtor only. Creditors cannot collect finance charges in excess of those actually disclosed. 60. A subprime mortgage refers to a mortgage securing a loan that is issued: A. to consumers at an interest rate lower than the prime interest rate established by the treasury. B. on property that cannot pass a reasonable safety inspection. C. to customers with excellent creditworthiness at a lower than ordinary market rate. D. to consumers who do not qualify for ordinary market rates due to a lack of creditworthiness. E. to consumers with excellent creditworthiness at a zero rate of interest. Answer: D. to consumers who do not qualify for ordinary market rates due to a lack of creditworthiness. Subprime mortgages refer to mortgages securing loans for consumers who do not qualify for ordinary market rates of interest because of lack of creditworthiness. 61. The Truth-in-Lending Simplification Act: A. permits debt collectors to contact third parties but the debt collector may not state that the consumer owes a debt. B. redefines the necessary items to be included in a finance statement. C. requires the First Bank of the United States to issue model disclosure forms. D. requires the imposition of fines for technical breaches of the Act. E. eliminates statutory penalties for purely technical violations of the Act. Answer: E. eliminates statutory penalties for purely technical violations of the Act. In 1980, Congress passed the Truth-in-Lending Simplification Act. Two changes from the original Act stand out. First, the law eliminates statutory penalties based on purely technical violations of the Act. Second, the Simplification Act requires the Federal Reserve Board to issue model disclosure forms. 62. The Fair Debt Collection Practices Act: A. forbids class-action suits but permits individual ones against the debt collectors. B. permits debt collectors to contact third parties; the collectors must disclose that they are pursuing a debt against the consumer but may not disclose the nature or amount of the debt. C. permits debt collectors to contact third parties; the collectors must disclose that they are pursuing a debt against the consumer and may also disclose the nature or amount of the debt. D. forbids debt collectors from contacting third parties regardless of the disclosure or nondisclosure of the existence of the consumer's debt. E. permits debt collectors to contact third parties but the debt collector may not state that the consumer owes a debt. Answer: E. permits debt collectors to contact third parties but the debt collector may not state that the consumer owes a debt. The FDCPA permits the collector to contact third parties, such as neighbors or employers, but it limits the way in which this contact may be carried out. The collector may not state that the consumer owes a debt nor contact any given third party more than once, except in very limited circumstances. 63. refers to the efforts of a debt collector to locate the debtor which may require that the collector contact third parties who know of the debtor's whereabouts. A. Bright-line rule B. Judicial restraint C. Prior restraint D. Redlining E. Skip-tracing Answer: E. Skip-tracing One of the first actions of a debt collector will usually be to locate the debtor. This action, known as "skip-tracing," may require that the collector contact third parties who know of the debtor's whereabouts. 64. Violations of the FDCPA entitle the debtor to sue the debt collector for: A. contemptuous damages, plus court costs and attorney's fees. B. punitive damages, plus court costs and attorney's fees. C. actual damages, plus court costs and attorney's fees. D. speculative damages, plus court costs and attorney's fees. E. nominal damages, plus court costs and attorney's fees. Answer: C. actual damages, plus court costs and attorney's fees. Violations of the FDCPA entitle the debtor to sue the debt collector for actual damages, including damages for invasion of privacy and infliction of mental distress, plus court costs and attorney's fees. 65. Shauna is delinquent on her car loan payment. The debt collector hired by the bank visits Shauna and verbally abuses her using highly offensive language. Shauna is annoyed. However, she has suffered no actual damages. Under the Fair Debt Collection Practices Act, the debt collector: A. may not be ordered to pay Shauna any money because she suffered no injury. B. may be ordered to pay up to $1,000 for using obscene language. C. may be ordered to pay up to $10,000 for having made a house visit. D. is not liable to Shauna, but the bank that hired the collector is liable to her. E. is allowed to use intimidatory tactics for habitual offenders. Answer: B. may be ordered to pay up to $1,000 for using obscene language. Once the debtor is located, the collector will seek to get payment on the overdue account. However, the FDCPA restricts methods that can be used in the collection process. The collector cannot physically threaten the debtor or use obscene language. In the absence of actual damages, the court may still order the collector to pay the debtor up to $1,000 for violations. 66. The Consumer Financial Protection Bureau applies to: A. businesses regulated by the Securities and Exchange Commission. B. Internet service providers. C. real estate agents and brokers. D. insurance companies. E. banks. Answer: E. banks. The Consumer Financial Protection Bureau (CFPB's) authority applies to banks and other financial businesses that extend credit or service loans, take deposits, cash or guarantees checks, provide consumer report information such as credit bureaus, and collect debts. It does not apply to insurance companies, Internet service providers, real estate agents and brokers, or businesses regulated by the Securities and Exchange Commission. 67. Which of the following is required in order to file a Chapter 13 bankruptcy? A. Unsecured debts under $360,475 and/or secured debts under $1,081,400. B. Unsecured debts over $450,000 and/or secured debts over $2,050,000. C. Debts must simply be in excess of the debtor's assets, regardless of the amount. D. Assets must simply be in excess of the debtor's debts, regardless of the amount. E. More than 10 years must have lapsed after the date fixed for the repayment of the debts. Answer: A. Unsecured debts under $360,475 and/or secured debts under $1,081,400. Under Chapter 13, individuals who have secured debts (mortgages, security interests against personal property, and so on) of less than $1,081,400 and unsecured debts of less than $360,475 (these amounts change periodically) can have their debts adjusted by the court for repayment. 68. Which of the following is considered a nondischargeable bankruptcy debt? A. Credit card debts B. Negligence claims C. Medical expenses D. Personal loans E. Intentional torts Answer: E. Intentional torts Certain debts cannot be discharged in bankruptcy. They include those arising from taxes, alimony and child support, and intentional torts (including fraud). 69. In a bankruptcy proceeding, which of the following debts will have the highest creditor priority? A. Government tax claims. B. Employees who are owed wages earned within 90 days of filing. C. Consumers who have paid deposits or prepayments for undelivered goods or services up to $1,800 per consumer. D. Creditors with claims in the ordinary course of business incurred after the bankruptcy was filed. E. General creditors. Answer: D. Creditors with claims in the ordinary course of business incurred after the bankruptcy was filed. The priority of bankruptcy creditors would be: 1. Creditors with claims that arise from the costs of preserving/administering debtor's estate. 2. Creditors with claims in the ordinary course of business after bankruptcy has been filed. 3. Employees who are owed wages earned within 90 days, or employee benefits earned within 180 days of the bankruptcy petition. 4. Consumers who have paid deposits or prepayments for undelivered goods or services. 5. Government (for tax claims). 6. Creditors who have other claims (general creditors). 70. In a bankruptcy proceeding, which of the following debts will have the lowest priority? A. Government tax claims. B. Employees who are owed wages earned within 90 days of filing. C. Consumers who have paid deposits or prepayments for undelivered goods or services up to $1,800 per consumer. D. Creditors with claims in the ordinary course of business incurred after the bankruptcy was filed. E. Creditors with claims that arise from the costs of preserving and administering the debtor's estate. Answer: A. Government tax claims. The priority of bankruptcy creditors would be: 1. Creditors with claims that arise from the costs of preserving/administering debtor's estate. 2. Creditors with claims in the ordinary course of business after bankruptcy has been filed. 3. Employees who are owed wages earned within 90 days, or employee benefits earned within 180 days of the bankruptcy petition. 4. Consumers who have paid deposits or prepayments for undelivered goods or services. 5. Government (for tax claims). 6. Creditors who have other claims (general creditors). 71. The Magnuson-Moss Warranty Act applies to all consumer product warranties regarding products priced or more. A. $10 B. $15 C. $20 D. $25 E. $50 Answer: B. $15 The Magnuson-Moss Warranty Act administered by the Federal Trade Commission applies to all product warranties on consumer products costing more than $15. 72. Under the Electronic Fund Transfer Act, for lost, stolen, or misused automatic teller and check cards (debit cards), the customer is liable for: A. $600 if reported after two days but before 60 days of consumer's learning of a misuse. B. amounts over $15 within the consumer's home state if reported within seven business days. C. $50 if reported within two business days of consumer's learning of a misuse. D. amounts over $15 within a 100-mile radius of the consumer's home if reported within seven business days. E. nothing. Answer: C. $50 if reported within two business days of consumer's learning of a misuse. The Electronic Fund Transfer Act limits liability on lost, stolen, or misused automatic teller and check cards (debit cards) to $50 if reported within two business days of consumers' learning of a misuse. After two business days consumers' responsibility is up to $500, except that after 60 days without reporting, responsibility becomes unlimited. 73. The Consumer Product Safety Commission may do all of the following EXCEPT: A. issue recalls of products. B. ban harmful consumer products. C. research potential product hazards. D. protect consumers against unsafe food products. E. develop mandatory and voluntary standards. Answer: D. protect consumers against unsafe food products. The commission protects consumers against unreasonable risk of injury by developing mandatory and voluntary standards, banning harmful consumer products, issuing recalls of products, and researching potential product hazards. The Federal Food, Drug and Cosmetic Act empowers the FDA to protect consumers against unsafe and adulterated foods. 74. The places constraints on how certain kinds of information collected by the federal government can be used and limits those to whom the information may be released. A. Fair Credit Reporting Act B. Fair Debt Collection Practices Act C. Right to Financial Privacy Act D. Electronic Communications Privacy Act E. Privacy Act Answer: E. Privacy Act The Privacy Act of 1974 places constraints on how certain kinds of information collected by the federal government can be used and limits those to whom the information may be released. 75. The Children's Online Privacy Protection Act (COPPA): A. prohibits individuals from browsing Web sites related to children. B. permits companies to collect information on children under the age of 10 without the consent of the parents in case of children's products. C. prohibits market research agencies from soliciting children under the age of 10 without the consent of the federal government. D. prohibits online advertisers from creating advertisements considered injurious to children. E. prohibits the online collection of information on children under the age of 13 without a parent's consent. Answer: E. prohibits the online collection of information on children under the age of 13 without a parent's consent. In 1998, the Federal Trade Commission adopted the Children's Online Privacy Protection Act (COPPA). The rule prohibits the online collection of information on children under the age of 13 without a parent's consent. 76. In what way does the Federal Trade Commission (FTC) exercise its quasi-legislative power? What is the nature and effect of this exercise? Answer: At the recommendation of the Bureau of Consumer Protection, the Federal Trade Commission (FTC) adopts trade regulation rules. These rules are formal interpretations of what the FTC regards as unfair or deceptive and they have the force and effect of law. These rules generally address a single practice in a single industry and cover all firms in the affected industry. 77. What are the two related ways in which the Federal Trade Commission (FTC) prosecutes businesses for committing unfair or deceptive trade practices? Answer: The Federal Trade Commission (FTC) prosecutes businesses for committing unfair or deceptive trade practices. Such prosecutions arise in one of two related ways. First, the Bureau of Consumer Protection may allege that a respondent has violated Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices. Enforcement actions may also arise from allegations under Section 5 that a respondent's actions violate a trade regulation rule of the FTC. At the recommendation of the Bureau of Consumer Protection, the five-member Commission adopts trade regulation rules in exercising its quasi-legislative power. These rules are formal interpretations of what the FTC regards as unfair or deceptive, and they have the force and effect of law. The rules usually deal with a single practice in a single industry, and they cover all firms in the affected industry. 78. What are the chief legal tools of the Bureau of Consumer Protection and how are they enforced? Answer: The chief legal tools of the Bureau are the consent order and the cease and desist order. Under the consent-order procedure, a party "consents" to sign an order which restrains the promotional activity deemed offensive and agrees to whatever remedy, if any, the Bureau imposes. Most cases brought by the Bureau are settled by this procedure. If a party will not accept a consent order, it will be prosecuted before an administrative law judge. If the party is found guilty, the judge issues a cease and desist order prohibiting future violations. Parties may appeal cease and desist orders to the full five- member commission and from there to the court of appeals if legal basis for further appeal is present. 79. What are the situations in which fines related to trade practice violations under the FTC Acts are assessed by the federal court? Answer: Fines related to trade practice violations under the FTC Acts may be assessed in three distinct situations: (1) for a violation of a consent or cease and desist order, (2) for a violation of a trade regulation rule, and (3) for a knowing violation of prior FTC orders against others. 80. Explain the concept of corrective advertising. Answer: In addition to assessing penalty fines, the FTC has broad powers to fashion appropriate remedies to protect consumers in trade regulation cases. One remedy the FTC has used in the past to accompany some of its orders is corrective advertising. When a company has advertised deceptively, the FTC can require it to run ads that admit the prior errors and correct the erroneous information. The correction applies to a specific dollar volume of future advertising. The theory is that the future advertising, however truthful itself, will continue to be deceptive unless the correction is made because it will remind consumers of the prior deceptive ads. 81. What remedies are used by the FTC, apart from penalty fines and corrective advertising, to protect consumers in trade regulation cases? Answer: The remedies that the FTC may use in its orders, or may seek to impose by court action under certain circumstances, include: (1) recission of contracts, (2) refund of money or return of property, (3) payment of damages to consumers, and (4) public notification of trade practice violations. When it is in the public interest, and when harm from an illegal practice is substantial and likely to continue, the FTC may ask the federal court to grant temporary or even permanent injunctions to restrain violators. 82. What five factors does the FTC take into account when looking at an advertisement to determine whether it is deceptive? Answer: There are five factors that the FTC takes into account when looking at an advertisement to determine whether it is deceptive. The FTC looks: (1) at the ad from the viewpoint of the reasonable consumer; the typical person looking at the ad, (2) at both express and implied claims made in the ad, (3) for omissions that could leave the consumer with a false impression of the product, (4) at whether the claims made are material to the consumer's decision to buy or use the product, and (5) at whether the advertiser has sufficient evidence to support the claims made in the ad. 83. Name the three major rights given to consumers under the Fair Credit Reporting Act. Answer: Rights given to the consumer under the Fair Credit Reporting Act are: (1) the right to be told the name of the agency providing the report, (2) the right to require that the agency reveal the information given in the report, and (3) the right to correct information or provide an explanation from the consumer's view of any disputed facts. 84. Explain the concept of "user" provisions as mentioned in the Fair Credit Reporting Act. Answer: Many businesses can avoid the pitfalls of being a credit reporting agency, but most businesses will be subject to the "user" provisions of this law. The "user" provision requires that consumers who are seeking credit for personal, family, or household purposes be informed if their application is denied because of an adverse credit report. They must also be informed of the source of the report and the fact that they are entitled to make a written request within 60 days as to the nature of the information received. If they request the information in the report, they are entitled to receive it so that they may challenge the accuracy of the negative aspects of its contents. 85. What is meant by finance charge? What are the items included in the finance charge? Answer: The finance charge is the sum of all charges payable directly or indirectly by the debtor, or someone else, to the creditor as a condition of receiving the extension of credit. Items which are included in the finance charge are interest, service charges, loan fees, points, finder's fees, fees for appraisals, credit reports and investigations, and life and health insurance if required as a condition of the loan. 86. What are the transactions that are covered by the Truth-in-Lending Act? Answer: The Truth-in-Lending Act covers all transactions in which: (1) the lender is in the business of extending credit in connection with a loan of money, a sale of property, or the furnishing of services; (2) the debtor is a natural person, as distinguished from a corporation or business entity; (3) a finance charge may be imposed; and (4) the credit is obtained primarily for personal, family, household, or agricultural purposes. It covers loans secured by real estate, such as mortgages, as well as unsecured loans and loans secured by personal property. Disclosure is necessary whenever a buyer pays in four installments or more. Truth-in-Lending imposes a duty on all persons regularly extending credit to private individuals to inform them fully of the cost of the credit. 87. What information should the financing statement contain apart from the finance charge and annual percentage rate? Answer: The financing statement must contain, in addition to the finance charge and the annual percentage rate, the following information: 1. Any default or delinquency charges that may result from a late payment. 2. Description of any property used as security. 3. The total amount to be financed, including a separation of the original debt from finance charges. 88. What are the two changes incorporated in the Truth-in-Lending Simplification Act that makes it different from the Truth-in-Lending Act? Answer: In 1980, Congress passed the Truth-in-Lending Simplification Act. Two changes from the original act stand out. First, the law eliminates statutory penalties based on purely technical violations of the Act. It restricts such penalties to failures to disclose credit terms that are of material importance in credit comparisons. Second, the Simplification Act requires the Federal Reserve Board to issue model disclosure forms. These are particularly important to small businesses that cannot afford legal counsel to help prepare such forms. Proper use of the forms proves compliance with the Simplification Act. 89. Which parties relevant to a delinquent debt collection will be regulated, and which will not be regulated, under the Fair Debt Collection Practices Act (FDCPA)? Answer: The Fair Debt Collection Practices Act (FDCPA) covers only consumer debt collections. It applies to all agencies and individuals whose primary business is the collection of debts for others. This includes the Internal Revenue Service and attorneys who collect debts on behalf of clients. Creditor collection efforts, however, are exempt from the provisions of this Act. 90. What guidelines as issued by the Fair Debt Collection Practices Act (FDCPA) does a debt collector have to follow in order to contact a debtor? Answer: One of the first actions of a debt collector will usually be to locate the debtor. This action, known as "skip-tracing," may require that the collector contact third parties who know of the debtor's whereabouts. The Fair Debt Collection Practices Act (FDCPA) permits the collector to contact third parties, such as neighbors or employers, but it limits the way in which this contact may be carried out. The collector may not state that the consumer owes a debt nor contact any given third party more than once, except in very limited circumstances. When the collector knows that an attorney represents the debtor, the collector may not contact any third parties, except the attorney, unless the attorney fails to respond to the collector's communication. 91. There are nine restrictions on loan collector's methods that are declared illegal under the Fair Debt Collection Practices Act. Name them. Answer: There are nine restrictions on loan collector's methods that are declared illegal under the Fair Debt Collection Practices Act. The collector cannot: • Physically threaten the debtor. • Use obscene language. • Represent himself/herself as an attorney unless it is true. • Threaten the debtor with arrest or garnishment unless the collector can legally take such action and intends to. • Fail to disclose his/her identity as a debt collector. • Telephone before 8:00 a.m. or after 9:00 p.m. in most instances. • Telephone repeatedly with intent to annoy. • Place collect calls to the debtor. • Use any "unfair or unconscionable means" to collect the debt. 92. What is the legal recourse for a debtor in case of violations of the Fair Debt Collection Practices Act by a collector? Answer: Violations of the Fair Debt Collection Practices Act entitle the debtor to sue the debt collector for actual damages, including damages for invasion of privacy and infliction of mental distress, plus court costs and attorney's fees. In the absence of actual damages, the court may still order the collector to pay the debtor up to $1,000 for violations. Class-action suits, as well as individual ones, are permitted under the Act. 93. What are the areas encompassed by the authority of the Consumer Financial Protection Bureau? Answer: The Consumer Financial Protection Bureau's authority applies to any "covered person" offering or providing a consumer financial product or service and to any business associated with that person. It applies to banks and other financial businesses that extend credit or service loans, provide real estate settlement or appraisal services, take deposits, transmit funds, cash or guarantees checks, provide financial data processing services, provide consumer report information such as credit bureaus, and collect debts. 94. What is the essential difference between a Chapter 7 and a Chapter 13 bankruptcy? Answer: The Chapter 7 bankruptcy results in the liquidation of much of the debtor's property followed by the discharge of the debtor's debts. In the Chapter 13 bankruptcy, the debtor retains most of his/her property and the debts are adjusted. The adjustment is to allow the debts to be repaid over a period of time. 95. What are the two types of petitions that are filed to begin bankruptcy proceedings? Answer: Bankruptcy proceedings begin upon the filing of either a voluntary or involuntary petition to the court. A voluntary petition is one filed by the debtor; an involuntary petition is filed by one or more creditors of the debtor. The creditors who sign the involuntary petition must be owed at least $2,300. If the court finds in an involuntary proceeding that the debtor is on the table to pay his/her debts as they mature, the court will order relief against the debtor. Relief may be also ordered if someone has been appointed to control the debtor's property for the purpose of satisfying a judgment or other lien. 96. What are the five powers granted to a trustee in bankruptcy? Answer: The five powers granted to a trustee in bankruptcy are: (1) to affirm and disaffirm the debtor's executory contracts, (2) to set aside fraudulent conveyances, (3) to void those transfers of property by a debtor that evidence a preference benefiting some creditors over others, (4) to collect debts owed to the debtor including the filing of law suits when necessary, and (5) to set aside statutory liens against the debtor's property which take effect upon the filing of the bankruptcy. 97. Robert has lost his ATM card and the thief has emptied his bank account. What law governs this situation and what are Robert's potential liabilities? Answer: Liability for money lost due to lost or stolen ATM and debit cards is defined under the Electronic Fund Transfer Act. If Robert reports the card stolen within two business days, his liability is limited to $50. Should he notify the issuer between three and sixty days, his liability rises to $500 and after sixty days his liability is unlimited. 98. Mention the warranty guidelines established for consumer product organizations in the Magnuson- Moss Warranty Act. Answer: The Magnuson-Moss Warranty Act applies to product warranties on consumer products costing more than $15. These warranties must be identified as "full" or "limited." Under full warranties, a warrantor must repair or replace a defective product within a reasonable time and at no charge, including no shipping costs. Implied warranties may not be limited in full warranties, and other limitations must be disclosed fully and conspicuously in readily understood language. All other warranties must be described as "limited warranties," and their limitations must also be described conspicuously and in plain English. 99. What is the purpose of the Privacy Act of 1974? Answer: The Privacy Act places constraints on how certain kinds of information collected by the federal government can be used and limits those to whom the information can be released. The Act further provides for a tort cause of action against those who violate the Act. 100. What are the provisions of the Right to Financial Privacy Act of 1978? Answer: The Right to Financial Privacy Act of 1978 requires all government agencies seeking depositor records from banks and other financial institutions to notify depositors of this fact. The individual depositor then has 14 days to challenge an agency's legal basis for seeking the records. Depositors are allowed to sue the government agencies or financial institutions which fail to comply with the statute for actual and punitive damages, plus attorney's fees. Test Bank for The Legal and Regulatory Environment of Business O. Lee Reed, Marisa Pagnattaro, Daniel Cahoy, Peter Shedd, Jere Morehead 9780073524993, 9780077437336, 9781260161793