CONSUMERLAW A. COMMON LAW APPROACH TO CONSUMER PROTECTION Tort: Elements of Deceit/Fraud 1.

Seller makes a representation Not confined to words, can be deeds or acts, can be implied Jones v. West Side Auto- rollback of odometer was a representation 2. Of present fact Where opinions are regarded as facts o Superior knowledge of one party; Volkes v. Arthur Murray o Fiduciary duty; Volkes v. Arthur Murray o No arms length bargaining Puffing is not fact: best one in the market o Broader quality claims o How specific is the representation? o Whether the ad describes virtues about the product that don't exist o Whether it is common practice in the industry to make the statements o How knowledgeable is the buyer about the product 3. Material If there is a loss, then it is usually material 4. False 5. Scienter: Actual knowledge that it was false or made the rep with reckless disregard of the facts Intent to deceive, mislead, convey a false impression Can be liable if you have no sufficient basis of info to justify the representation This is relevant to whether is damages or rescission; damages requires scienter In rescission, can be held liable for innocent misrepresentations if the statement is relied on; Halpert v. Rosenthal o If you don't know, say that 6. Purpose of the representation was to induce Look at the whole- infer from circumstances 7. Buyer relied on the Representation Can be inferred by actions of buyer Jones v. West Side Auto looked at odometer before purchase 8. Buyer was justified in relying on the representation Duty to inspect the item: if it is important to you, you will look for it; William v. Rank & Sons o Are there public records? o Is it something that the seller expects you to ask about? i.e.,- zoning Disclosure: o Generally no duty to disclose o Exceptions to no duty rule: (from Ollerman, p. 34) Seller conceals a defect, prevents investigation Seller told a half-truth or made an ambiguous statement if intent was to create false impression and he does so Fiduciary relationship b/w parties Customers to not have a fiduciary duty with car buyers. Facts peculiarly/exclusively w/in knowledge of one party and other is in no position to discover those facts himself Duty when it would lead to injustice o Duty to disclose known facts when: (from Ollerman)

Condition is latent (hidden) and not readily observable by purchaser Purchaser acts upon reasonable assumption that condition exists/doesn't exist 1

Special knowledge or means of knowledge not available to purchaser Existence of condition is material to transaction (would transaction occur or at same price) o Knowledge that the buyer is under a misapprehension of facts o Dont necessarily have to disclose items that might change: i.e.- might build an apt complex o Even if no duty to disclose, if any disclosure, must be whole truth o Duty to disclose facts basic to the transaction, if it is known that other party is mistaken and should reasonably expect a disclosure of the facts. o the states impose a duty on real estate agents to inspect the property that they are handling and disclose any material problems with it o Parties may be deemed to have constructive notice: i.e.- if the price is so much lower, then they should expect that something is wrong o If it is something that needs inspection: is it something that an inspector would catch? 9. Buyer sustains injury as a result of the representation 10. Why are there so many elements? 1. In procedure it has to be pled specifically because it goes against a persons character. 2. Making a jump through all these hoops is somewhat of a deterrent to bring a fraud claim. 3. There is some willingness to relax an element if all the other ones are present. Especially when the parties are not on equal grounds. Things to consider in CL Fraud Claim: Bargaining power of the parties o Parties relative knowledge: Buyers: mental capacity, educational background, relative sophistication The item being sold: if it requires specialized knowledge: more likely to see inducement & reliance Right to rescind k even for innocent misrepresentation Innocent misrepresentations are different from nondisclosure (nondisclosure may be a basis for damages claim)

Deceit is a type of Fraud higher standard because we do not want every consumer to bring a claim Elements of Fraud in Texas A Statement is Made That is False The Person making the statement knew it was false-Scienter The other party Relied on the Statement The party in Reliance suffered damages

Federal odometer fraud: federal motor vehicle information and cost saving act o Federal Odometer Regulation 32701-32711 (applies to all vehicles) 32701 Findings o Buyers are entitled to rely o The reliance must be justified o Odometer reading is material to decision making o Congress has limited power to regulate Commerce clause

32702 Defintions 32703 Preventing Tampering o goes beyond odometer case by banning devises that rollback odometers 32705 requires disclosure on transfer of vehicle Disclosure rules provide certainty to business so they may want this type of regulation even though it creates paper work. The administrative agency gives a safe harbor for businesses that use the forms so thats why used car dealers like have this regulation. o Elements of misrepresentation: False statement Of material Fact Reliance to detriment 2

Warranty (UCC 2-313), p. 819 of Supp. Elements: Affirmation of fact or promise made by the seller to the buyer (must be express) o 2-313(a) Opinion and value statements do not create warranties Relating to the goods (UCC only applies to goods) Becomes basis of the bargain (must be important to the K) Can get rescission, no damages Affirmation must be a part of the basis of the bargain Easier to prove because no scienter requirement, no causation/damages, no reliance

How to choose whether to sue under Deceit or warranty CL Fraud/Deceit Can get damages: more like a tort suit Can get punitive Must prove scienter, justified reliance, damages Warranty Can get rescission: more of a k suit No scienter SOL Warranty = 4 Years Tort = 2 years. Cases

Jones v. West Side Buick Auto Co. Facts: bought a car that was 3 years old. The odometer said 22,400, but the seller had turned back the odometer from 48,800. Issue: Was the misrepresentation of the car's mileage a misrepresentation? argues it was conduct not speech. Issue: Even if a misrepresentation, was it fraudulent? argues it was done according to custom. Court: Yes. o This was a representation; doesn't matter that made no statement. An action/conduct can be a representation (non-testimonial). o Court allowed reliance to be inferred because looked at odometer before purchase. o This was material b/c buyer considered mileage when he bought it. o Because the odometer reading was material, court says the custom of rolling back the odometer was not justified. o There was no reason to believe that was engaged in the used car business or was familiar with the custom. o Court balances evidence, more evidence of some elements than others

Note: No breach of warranty claim. There was no affirmation of fact. Nothing was said about the mileage on the car. Kings v. Towns Facts: Seller told buyer that old pots would cause cancer Note: Buyer could not have brought a warranty claim because the affirmation did not relate to the goods sold so she is left with a fraud claim. Note: In this case, the salesman lied and in Jones, the car salesman concealed the fact. Volkes v. Arthur Murray Inc. -

Facts: elderly widow bought dance lessons worth $31,000. She sued for full rescission of unused portion of K. (more like K claim) She sued on grounds of misrepresenting that she was making progress and therefore bought more lessons. argued that it was opinion and not fact and cannot have deceit for a statement of opinion. Court: Focused on relationship of parties and found inequity. 3

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Volkes not able to negotiate at arms length; Court said that a statement of a party having superior knowledge may be regarded as a statement of fact although it would be considered opinion if the parties were dealing on equal terms. In this situation, opinion would be regarded as a present fact (constructive fact). is not seeking punitive damages so it is possible that court used lower standards At trial, will have to show that s representations were false use expert witness Note: These affirmations were not on the goods itself (dance lessons) but rather, it applies to her. So, she would not have the warranty claim.

o Parker v. Arthur Murray (note 1, p 19) Facts: College educated bachelor spent $24k on dance lessons. He is injured in a car accident, and wants to
cancel the K and get back the unused portion of his money back and punitive damages (more like a tort claim). Court: The court said he couldn't get out the K b/c the statements by the that he was making progress were mere opinion and thus not actionable. This is different from Volkes b/c Parker sought punitive damages in addition to rescission. (Court imposed higher standards) And he is considered by the court to be a sophisticated purchaser. did win on impossibility to complete the K.

o Morehouse v. Behl (note 2, p. 20) Facts: Salesman, , sold a minivan and assured that vehicle was in excellent condition when he, at best
had no knowledge. The is arguing that he should not be held liable for fraud when he had no knowledge it was false. The can proceed on the fraud claim because of superior knowledge and experience. If does not know what shape it was in, then he should have kept his mouth shut. We expect the salesman to know about his cars.

o Sunderhaus v. Perel Lowenstein Note 3, p 21. When buying a diamond you are buying value. Statements by seller are more like fact. A jeweler has superior knowledge. o William v. Rank and Sons Buick Note 4, p. 22 Facts: H wanted air conditioning. said that claimed car had air conditioning. Not until later did find out
that there was not air but merely a vent. Court: Reliance was not justifiable. If A/C was so important to he would have checked it out while he had the car. Claim was for fraud and not warranty, therefore reliance required.

o Halpert v. Rosenthal p. 24 Facts: contracted to buy 's house for $54k. inquired about termites, said there were none. had put
down $2k in earnest money. During inspection, discovered termites and pulled out of K. sold the house to a different buyer for $35k ($19,000 difference). sued for breach of contract to recover the $19k difference. counterclaimed to recover the $2k earnest money. Court: Trial Court rendered judgment for on both counts. argues that there was no scienter on her part (did not know about the termites). The court said that even an innocent misrepresentation of a material fact warrants the granting of a claim for rescission; rescission is a K theory and no scienter is required. If you don't know, say "I don't know." 2 types of Fraud claims: Deceit requires scienter Rescission misrepresentation does not have to be intended, but must be relied on as a fact should not bear the cost of s misrepresentation. In a rescission case, we are not going to be so concerned w/ whether scienter is present or not.

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o Pumphrey v. Quillen p. 288 - bought house after assured that walls were made of tile, which they weren't. wins
o against the broker but not against the seller. Broker stated that they were tile walls as a positive fact. Dissent says it is not fair to hold the agent liable. Should the agent be liable? 4

Can get claim against the party who gave the agent misinformation Agent is in the business and can get insurance to transfer risk Purchaser is more justified in relying an statements of agent because they are experts Agent has fiduciary duty to the buyer higher standard.

o Ollerman v. O'Roarke Co., Inc. p. 32 Facts: bought land from . During construction, crew hit underground well, which cost additional $13k to
fix. alleges that defendant knew of the well but failed to disclose its existence to plaintiff. Well was not apparent to either party. sues for damages, not rescission of K. disputes duty to disclose. filed motion for failure to state a claim. Issue: Whether failure to disclose (omission) was a misrepresentation. Court: Affirms motion to dismiss General rule - (caveat emptor) no duty to disclose in an arm's length transaction, but if there is a duty, silence is a misrepresentation. Exceptions to no duty to disclose rule (see above) This court's holding - p. 36 Creates another exception - p. 35 Vendor/developer of a residential lot has a duty to non-commercial purchaser to disclose facts which are known to the vendor, material to the transaction, and not readily discernible to purchaser Note 2, p. 36-37 Failure to disclose plans to build multi-family dwellings near housing division Different outcome. Why? Not latent or a defect and the development of the other land is not the land purchased by . Zoning ordinances are presumptively good, court cannot say the zoning is having a detrimental effect. Zoning is an expression of public policy about the use of land in the public interest Developer in the well case has superior knowledge and here the public has access to determine through the public record what might be built near the subdivision.

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o Strawn v. Canuso p. 39
Developer may have a duty to disclose that its homes have been constructed near an abandoned hazardous waste dump. Must disclose if on-site defect, known to seller, defect is latent (not extrinsic): Court Rule builder-developer of residential real estate or a broker representing it is not only liable to a purchaser for affirmative and intentional misrepresentations, but is also liable for nondisclosure of off-site physical conditions known to it and unknown and not readily observable by the buyer if the existence of those conditions is of sufficient materiality to affect the habitability, use, or enjoyment of the property and, therefore, render the property substantially less desirable or valuable to the objectively reasonable buyer. Intrinsic something on the property or part of the K for sale Extrinsic something off of the property but still affects the property.

o Bramlett v. Adamson Ford, p. 41

sells a car and says Ill get you the best rate. did not disclose a 3% commission and says he cannot get a better rate because of s bad credit Ct says sellers are in business of selling and should not be under duty to tell where the profits are going. Fraud by misrepresentation requires that prove a false statement of material fact that the relied on to his detriment.

B. FEDERAL REGULATION OF CONSUMER TRANSACTIONS THROUGH THE FTC ACT (The Federal DTPS) Introduction Statutory Regulation on Deceit o FTC Act: 15 USCA 45(a)(1) FTC is empowered to direct and prevent persons, partnerships and corporations from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce. FTC Act did 2 things: 1) It established the FTC 2) In section 5(a), it makes unfair methods of competition in commerce unlawful 2 ways the FTC enforces this provision Investigative powers (6 of FTC Act) o They can investigate unfair or deceptive acts or practices. It is a super-discovery device. o Subpoena reserved for entities under investigation, used to demand documents o Civil investigation demand used for entities not under investigation Enforcement powers o Rule Making promulgation of rules and procedures; published in the federal register 18 and 22. Making rules that certain practices are unlawful. Trade practice advisory guides: explains the interpretation of the act in various contexts Advisory: does not have the force of law: still have to establish the ultimate fact of unfair or deceptive act or practice Bait and switch guides Conversation in tone Trade practice rules More substantive Violation of the rule is a violation of the law. FTC can proceed against company who they think has violated the rule. Example: FTC holder in due course rules o Adjudication: When it believes a violation has occurred, can issue a complaint Will probably bring a claim if. Threatens the existence of present or potential competition Flagrant oppression of the weak Aggregate of the loss serious and widespread Have a hearing w/in at least 30 days Can issue a cease and desist order: It the party agrees, then set out for public comment If party does not, then have a hearing before an admin law judge Consent decree without admitting guilt, agreement to change behavior FTC is Prosecutor and Judge Loser can appeal to a Court o Litigation (18) civil action brought if FTC believes rules are broken and entity does not cease and desist, also will file amicus briefs No private right of action, only FTC can sue If FTC believes an entity is breaking a rule or violation of the cease and desist order, it can take them to court immediately w/o going through the Commission. Proceeding of the commissioner must be in the public interest. Scope of FTC as to what is in the public interest is broad FTC is using litigation more than its commission power. 19(b) provides a nonexclusive list of potential remedies, including: o Recession or reformation of the contract o Refunding of money or return of property o Payment of damages and o Public notification of the unfair or deceptive act or rule violation. o Cease and desist orders form using name, advertisements 6

Punitive or treble damages are not available

Categories of Deceptive Conduct o Bait and switch: tashof o Advertising something as discount: tashof o Promise of easy credit- terms: tashof o Difference between cash and credit prices- the cost of credit: tashof o Omissions: international harvester o Misadvertising: Charles of the Ritz o Dissemination of false advertising, 12 (misleading in a material respect o Door to door sales, FTC Regs o Sales of used cars, FTC Regs Bait & Switch o def. using an item as a come on to bring you into the store to buy a more expensive item or an item that is more advantageous to the seller o insincere offer to sell a product or service which the seller in actual does not intend or want to sell Bait & Switch is a lure to sell higher priced items o Factors to indicate: was it a bona fide offer? o Was there disparagement? knocking something down in order to get you to buy something else can happen before or after the k o Whether or not they had sold any of the items at the lower price o Did they have any of the advertised items to begin with? Was it freely available to consumers o Was there an insufficient supply of the product compared to the anticipated demand? What is the size of the store? Where was the ad placed? Major papers, TV? o Was there a showing of a defective or unusable product o Is there a method of compensation or penalty given to salespersons as an incentive or disincentive to sell the higher priced product v. the advertised one o Is it a loss leader: lose money on an item but it brings people into the store o See Guides Against Bait Advertising Trade industry guide p not against the law if violated. FTC must prove violation of 5 of FTC Act. STANDARDS Standard for Deception under 45. FTC follows Likely to Mislead Test, does not require actual deception Charles of the Ritz standard: capacity to deceive, do not need to show actual deception. o Names can be a representation o Low standard - ignorant, unthinking, credulous consumer; most innocent consumer However, not false or deceptive if it will be unreasonably misunderstood by an insignificant and underrepresented segment of the population. This is a consumer products case, Intl Harvester is a business products case ct used different standards

international harverster standards: reasonable consumer o Three elements of deception o (1) representation, practice, or omission likely to mislead nondisclosure included physical appearance of the product circumstances of a specific transaction based on ordinary consumer expectations as to the irreducible min performance standards of a part class of good by merely offering the goods for sale, the seller is impliedly representing that they are reasonably fit for their intended use free of gross safety hazards, but not necessarily all or relatively probable dangers 7

dont need actual evidence= but just that it is likely to come about

o (2) consumers must be interpreting the message reasonably under the circumstances:
might be able to be ignorant and reasonable: it depends upon the definition of reasonable might depend on the specific people will not require evidence of interpretation by a set # of people those acting reasonably are: acted in a way consistent with the broad range of ordinary or average people (3) the misleading effects must be material likely to affect consumers conduct or decision all express claims are material implied claims if they are central characteristics of the products: costs, safety, or fitness for the purpose sold these might by implied warranties this is a higher standard than the Charles of the Ritz: makes it be material, and the reasonableness stuff: reasonable consumer Under Charles of the Ritz, it was merely the "capacity to deceive"

IN DEPTH: o Charles of the Ritz Distributorship Corp. v. FTC (193 O's case) p. 52 Suit originated with the FTC. No private right of action under FTCA Facts: A cease and desist order was issued by the FTC to stop using the name "Rejuvenesence" for the face cream. FTC claims Charles of the Ritz falsely represented the ability of the cream in its advertising and in the name of the product. The commission found that the advertising and the name misrepresented that it would restore youthfulness. CR argued that (1) the FTC did not prove that the product did not work and (2) that no reasonable person would really think that the cream would restore youthfulness. As to (1) Charles Ritz would not divulge the formula, so the defense did not stand. Standard: As to (2) The commission said that actual deception is not necessary, so long as it had the capacity to deceive. Not a reasonable person standard, standard is for the ignorant, credulous and unthinking. Ct. says names can be a representation. o Advertising Substantiation Program Policy Statement, p. 75 of supp.

Advertisers and ad agencies must have a reasonable basis for advertising claims before they are disseminated. Failure to possess and rely on a reasonable basis for objective claims constitutes an unfair and deceptive act or practice in violation of the FTC Act.

o Question 1, p. 55, Aspercreme case (1990's case)

Commission said that excise of the brand name was not needed here; it is only to be used in extreme cases. Affirmative disclosures can correct the misimpressions that aspercreme contains aspirin.

o International Harvester Co. p 60 Issue: Is there a duty to notify customers about hidden disasters? Was non-disclosure of a problem deceptive
under the FTC? Is there a duty to notify customers? Facts: Car had a fuel cap problem, causing fuel cap "guisery," were a build-up of gas pressure can cause the cap and fuel to shoot out and injure people. The first time the learned of these accidents was in 1955. They didn't begin to put a warning in the manual until 1963. The lawsuit was filed in 1983. Court: 3 elements of Deception: (1) there must be a representation, practice, or omission likely to mislead consumers; (2) the consumers must be interpreting the message reasonably under the circumstances; and (3) the misleading effects must be material, that is, likely to affect consumers' conduct or decision with regard to a product. Meeting the elements in this case: o All express claims are material, and implied claims are material if they pertain to the central characteristics of the product, such as its safety, cost, or fitness for the purpose sold. (Omissions as to safety are always material) o Actionable omissions: (1) Half truths; and (2) Silence that leads to implied false representations o Under UCC there is an implied warranty of merchantability (source of implied false representation) 8

Court says an omission may be enough to violate warranty of merchantability but not enough for deception. o The omission was not deceptive but was unfair. No deception because no breach of the implied warranty of fitness; product was fit for the intended use. o Reasonable interpretation o Don't have to provide evidence of actual deception - want evidence that is "likely"; a small percentage amount (15 %) satisfies the likely. o Can you be ignorant and reasonable? - appears that commission would have to show more in this case than Ritz; depends on definition of ignorant. Note: This case is here b/c many think that this raises the bar on what must be proved for deception - from capacity to mislead to likely to mislead. Business product v. consumer product may be a higher standard b/c its a business product. FTC follows the likely to mislead test. o

o In re Leon A Tashof - (advertising)

4 categories of deceptive conduct in this case: Bait & Switch o Disparagement (bad-mouthing the product) is a technique used in bait & switch but not needed to prove bait & switch o Evidence of a bona fide offer would be if any of the advertised products were actually sold Advertised free eye exams but charged $5 Advertised complete exam and glasses starting at $7.50 but least amount that could be paid would be $12.50 Brings the consumer into the store on an offer that is not bona fide (seller has no intention to sell the product at that price); using the ad as a come-on in order to sell higher priced or different product (p. 76) Not clear what T did to get consumers to spend more Clear that consumers did purchase more expensive glasses Note 3 - p. 83: hair dryers - audience number? Size of store? Number of merchandise on hand? All factors that might influence whether this is bait & switch - could add a disclaimer or limitation such as "subject to availability" or only 20 left." o Opposite of bait & switch - "loss leader" - ex: grocery store advertising eggs for $0.05 at Easter, used to get people into the store o Court does not provide a standard; court looked to what actually happened and said it was deceptive o Consumers get different rules because they are not thought to have equal information with sellers Misrepresentation Advertising as discount was false, misleading and deceptive. Unconscionability - promises of easy credit terms o Easy credit implies low cost and easy to obtain o Question whether enforcing loans is deceptive. o T was garnishing wages for his overpriced merchandise o FTC was looking at harsh collection practice in deciding that "easy" credit terms were deceptive. Easy to qualify, not so easy collection Cost of the credit o Mark-up in price is typically not part of the act of extending credit o But, the mark-up may become part of the cost of buying the item on credit o In this case, cannot determine where the credit costs are: (1) Extremely high finance charges or (2) Mark-ups

o Warner Lambert v. FTC, p 86, Listerine Case Issue: Whether FTC has authority to require corrective advertising. FTC does have power to issue cease and
desist orders. Court set forth standard for imposing corrective advertising. p 92 Did advertising play a substantial role in creating or reinforcing in the publics mind a false belief about the product Would the false belief continue after the false advertising ceases? 9

Goal of corrective advertising is to stop false advertising, not to be punitive, therefore requiring the statement contrary to prior advertising goes to far b/c it is punitive. Commercial speech is protected by the 1st amendment but false advertising is not protected FTC has the right to stop deceptive advertising including lingering effects and it is appropriate to require advertising that prevents deception. Limitations of the FTCA No private right of action Limited resources if the FTC

Remedies Would prefer to use lesser remedies if available o Affirmative disclaimers May not actually be effective, but it gives the public the info: it allows them to make their own decisions If not, will issue a cease and desist order for using: o The name o Advertisements o If violate, then monetary damages Can also apply to those who know of the order and engages in the same conduct 14 Penalties for false advertising No private right of action

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C. COMPREHENSIVE STATE REGULATION OF UNFAIR AND DECEPTIVE ACTS Legislative Solutions at the State Level There are 3 Types of State regulation Little FTC Acts Broadly prohibiting unfair or deceptive acts or practices Generally same as FTCA but provide for state AG to prosecute and private actions 12 states including Illinois, Mass. and Washington Deceptive Practices Statutes In Texas, DTPA Broadly prohibiting deception and numerous specific practices Provides a laundry list of unlawful activities 20 states including Texas, Michigan, and Ohio Consumer Fraud statutes Broadly prohibiting the use of deception, fraud, misrepresentation, concealment, etc. Scienter requirement, but eliminates the reliance requirement Allows private actions and public enforcement 12 states including California, New York, New Jersey

o Sale-lease back- sells an item to a purchaser and then leases it back

o Common form of a loan If a def includes a requirement for personal, family, or household purposes:

Look at the nature of the item: Searle v. Exley express The plaintiffs subjective purpose The nature and customary purpose of the good Even something for personal value may not fall into this category: i.e.- antique car

Why sue under these statutes as opposed to the other stuff Punitive damages Exemplary damages Treble damages Attorney fees and costs Above remedies may not be available under CL

o Searle v. Exley Express, p. 120

EE sells truck and provides a lease-back giving buyer job to haul for EE S purchases truck as an investment and to be driven by unemployed son S sues b/c EE misrepresented the condition of the truck under Oregon UTPA Court finds that the transaction doesn't fall under the UTPA To be covered by act, representation must pertain to goods or services used or bought primarily for personal, family or household purposes S argues truck to be use for family purposes Court discusses 2 tests: (1) customary/predominant purpose of the truck and; (2) s subjective purpose for the truck. o Look at more than subjective purpose; truck used for hauling freight. o Look to customary purpose i.e. bought by a substantial number of purchasers for the purpose

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D. STATE REGULATION IN TEXAS - TEXAS DECEPTIVE PRACTICES ACT DPTA is not limited to items for personal, family or household use. DTPA Analysis Gives Consumers the Right to a Private Action under the DTPA For a Claim under 17.50: A consumer may maintain an action where any of the following constitute a producing cause of economic damages or damages for mental anguish: Use or Employment of any False, Misleading, or Deceptive Act or Practice: Specifically Enumerated in 17.46(b) (The Laundry List); and Relied on by a Consumer to the Consumer's Detriment Breach of an Express or Implied Warranty Any Unconscionable Action or Course of Action by any person The Use or Employment by Any Person of an Act or Practice in Violation of Art. 21.21 of the Insurance Code Reliance is Required to make a finding of Misrepresentation To have a claim under this: 17.50

Must be a consumer: 17.45(4): Consumer means an individual, corporation, this state, or a subdivision or agency of this state who seeks or acquires by purchase or lease any goods or services o Consumer does not include a business consumer that has assets of $25M or more, or that is owned or controlled by a corporation or entity with assets of $25M or more. Must acquire or seek to acquire: Two-part test: Glenn Martin & Holman o Is there good faith intent to purchase? Going around and getting free consultations all over town during a promotion is probably not a good faith intent o Is there a capacity to purchase? If got turned down for a membership, not a consumer Do not need an actual sale: seek or acquire: Glenn Martin Consideration is not a Prerequisite for DTPA Consumer Status TX SC has said that the test for good faith is the actual belief of the consumer and not the reasonableness of the belief. Must look at the actual intent of the consumer. Look to the relationship to the transaction, not the contractual relationship: Wellborn v. Sears He got a garage door opener and the benefits that it provided If not the owner of the good nor its possessor: ask: Whether the objective of the transaction was to benefit the party claiming consumer status Have to show more than mere use/benefit from the item Must show "intended beneficiary" Tenant/landlord, employee/employer Not mere incidental beneficiary: o Passenger riding in a car, borrows goods Must be by purchase or lease o Does not require privity: Kennedy v. Sale

Do not have to be the actual purchaser: Wellborn v. Sears

Must be goods or services 17.45(1) -- Defines Goods as tangible chattels or real property purchased or leased for use 17.45(2) -- Defines Service as work, labor, or service purchased or leased for use, including services furnished in connection with the sale or repair of goods Not limited to personal, family or household purposes 12

Money is not a good -- Riverside National Bank v. Lewis Not: accts receivable, stock, option k, CD, insurance policy proceeds, trademarks, limited partnership interest, lottery ticket Lending money is not a service: Riverside National Bank v. Lewis Some banking activities might be services, but not the actual lending money Look to see if the lending of the money was simultaneous w/another act Consider the parties relationship to the transaction : consider how the consumer evaluates the transaction: how many transactions were there Bank makes payments to builders, this is not just lending money. From the consumers perspective, the bank is lending the money to purchase a home: it is all one transaction: Flenniken Argue that there was only one or many transactions

Must be for use o Requirement comes from the definition of goods and services Purchasing or leasing for any purpose Even if purchasing an item to resell it, still a consumer, ordinary meaning of use should apply Must form the basis of the complaint o There is no requirement of privity: Cameron v. Terrell Look at the relationship to the transaction: the role in the transaction The agent is the one who prepared the materials who made the mistake, not the seller As long as the goods or services form the basis of the complaint, he may sue any entity that violates the act The wrongful act must have been committed in connection w/the consumers transaction- could not sue upstream to those who were not a party to the sale: Amstadt v. US Brass Did not promote it directly to the buyer, Look to see if there were brochures in the home Look to see if the defense is available- 17.506a Have producing cause: o Always have to show causation, but reliance may not required Claim based in laundry list requires reliance o Must have causation in fact: Prudential Economic damages or damages for mental anguish o Economic damages: monetary costs, repaired, property related o Mental anguish: requires scienter o Treble damages after determination of award Prohibited Acts Use or Employment of any False, Misleading, or Deceptive Act or Practice: Specifically Enumerated in 17.46(b) (The Laundry List); and Relied on by a Consumer to the Consumer's Detriment Breach of an Express or Implied Warranty Any Unconscionable Action or Course of Action by any person The Use or Employment by Any Person of an Act or Practice in Violation of Art. 21.21 of the Insurance Code Laundry List

Puffing under subsections (6) & (7) The words "excellent" and "perfect" have been held to indicate a high degree of quality and are actionable under 17.46

Warranty actions: 17.50(a)(3) DTPA does not provide warranties: CL warranties and warranties provided by statutes apply 13

 Disclaimers, modifications, or limitations on warranties are all valid and enforceable under the DTPA as long as valid and enforceable notwithstanding the DTPA. Must prove the warranty exists, applies to the consumer and the warranty has been breached Unconscionability: 17.45(5) Act or practice to a consumers detriment that takes adv of the lack of knowledge, ability, experience, capacity to a grossly unfair degree More procedural: will not look at the final result except to the extent that the seller has taken adv of the consumer Seems to be a higher standard than common law: grossly unfair degree: stronger than unreasonable Do not forget to cross reference their definition of consumer Must be unconscionable at time of sale/k 17.49(c)(3): professional services exemption doesn't apply to unconscionable action that can not be characterized as advice, judgment or opinion State can bring action under 17.46(a) or (b) with no showing of reliance Private action is only brought under 17.46(b) and must show reliance Make sure that it Does not meet an exception: o Business exception 17.45(4): business consumer exemption -- assets of 25 million or more OR owned or controlled by a corporation or entity w/ assets of 25 million or more Look for wholly owned subsidiaries has the burden to prove this Promotes efficiency since most plaintiffs don't have that kind of money What the has to do Will generally pled the exception and then request the ct for discover on this issue Consistent with the general rule- don't look at financial issues until they become an issue o 17.49 (a) - Owner/employees of a paper, magazine, phone director, billboard, broadcast station: unless they had knowledge of the deceptive/false/misleading behavior OR had a direct or substantial financial interest (expectation which would be the direct result of a transaction) in the sale or distribution of the unauthorized materials o 17.49(b) - Any act or practice authorized by the specific FTC rules or regs o 17.49(c) A Defense for Professionals DTPA cannot be used for simple Negligence Claims against professionals Attorneys, Accountants Advice, Judgment, and Opinions are Exempt "This is a good settlement offer" is an Opinion "I filed the suit is a statement of fact that needs to be supported "Don't take the settlement. We're going to win big," is on the border of opinion versus a statement of fact Exceptions to this exception: Express misrepresentation of a material fact that is not one of the above o I filed the suit: would be express misrepresentation if did not file the suit o You should take the settlement offer would be an opinion o I recommend that you not take this settlement, we will win big- fuzzy if it is said to a client who has never been to trial before Failure to disclose info in violation of 17.46b23 Unconscionable action or course of action that is not advise, judgment, or opinion Breach of an express warranty that is not one of the above o See additional exceptions at 17.49

DEFENSES Warranty/K "as is" This is not a waiver: it may negate producing cause, not always The person admits that they are not relying on anything Producing cause only negated when agreement bargained for at arms length, freely, knowingly, intelligently negotiated. Prudential Look at the knowledge/sophistication of the buyer: 14

Did the consumer knowingly and voluntarily sign a k containing these provisions? Was this arms length bargaining? If arms length, then negotiating each k. Show that it was an important part of the bargain Was it a boiler-plate clause? Bargaining position of the parties Look at the nature of the circumstances: totality of the circumstances Were they fraudulently induced to sign it? Were there fraudulent statements Were they puffing or mere opinions? Only fraudulent if they knew it was false when they made the statements or w/reckless disregard for the truth Negates scienter: there is no evidence that they knew about the clause Was there interference with your attempt to ascertain the as is nature of the item? This only matters if your inspection would have made a difference I.e. -the inspections wouldn't have proved the materials used to make the bldg Is there a specific statement saying that you are not relying on anything but own examination of the property? Does it even contain the phrase as is? Waivers: 17.42 A waiver by a consumer of DTPA provisions is contrary to public policy thus unenforceable and void, unless Valid waivers: In writing Signed by the consumer Consumer is not in disparate bargaining position and is represented by legal counsel Must be bold and conspicuous Must be identified by the heading Waiver of Consumer Rights Invalid waivers: Consumers attorney was directly or indirectly identified, suggested, or selected by a or agent of the Not valid if brought by an AG requesting a restraining order o Not a waiver to agree to disclaim, modify, or limit damages for a breach of warranty:

Selling something as is doesnt waive DTPA: Prudential v. Jefferson

Statute of limitations: 17.565 s have to allege this have to show they meet at least one of the 3 Can be extended by 180 days if plaintiff proves that failure to timely file was due to the deft knowingly engaging in conduct solely calculated to induce plaintiff to refrain from or postpone the commencement of the action Test: limit reached: 2 years after the false, deceptive, or misleading conduct; OR 2 yrs after the consumers discovered; OR 2 yrs after the consumer should have discovered- exercising due diligence

A Fraud or Contract Claim has a 4-year Statute of Limitations period A Tort claim generally has a 2-year Statute of Limitations period A Cause of Action under the DTPA is 2 Years

17.506 Damages: Defenses Defenses for a when they rely on Information supplied by Others D must have informed the P in writing, in a reasonable and timely manner, prior to the consummation of the transaction that he relied on other sources of information This is an Affirmative Defense But D must prove he Reasonably did not know of the falsity or inaccuracy of the information he relied upon A suit can be filed against the 3rd party who supplied the information if the third party knew or should have reasonably foreseen that the info would be passed to consumer: 17.506c 15

DAMAGES 17.50(b) -o If the Act was done Knowingly Damages for Mental Anguish, plus 3x Economic Damages o If the Act was done "Intentionally" 3x Damages for Mental Anguish, plus 3x Economic Damages 17.50(b)(2) o Provides for Injunctive Relief 17.50(b)(3) o Equitable Relief Court Order to restore money or property 17-50(b)(4) o Any other equitable relief the court deems proper o Include revocation of a License to do Business in Texas 17.50(c) o If a case was brought in bad faith, attorney's fees and cost may be rewarded o Lawyer will have to do due diligence before filing a case under the DTPA o A Disincentive to file bad cases Other Provisions

17.505 Notice; Inspection o Consumer must put on Notice that a DTPA claim is being brought o Notice is another Affirmative Defense Notice has to be given 60 days before the filing of the suit under 17.50(b)(1) Make sure send the letter to all the parties involved: o Not just the seller, but the manufacturer To encourage the parties to resolve the case before it is filed o Must advise the person in reasonable detail Of the specific complaint Amount of economic damages Damages for mental anguish Expenses, including attorney fee When notice is not required o If the Statute of Limitations is running out, Notice is Not Required o Notice is only required if you are seeking monetary damages o Not required for injunctions or other relief If required notice is not given, files abatement no later than the 30th day after the person files an original answer. Suit will be abated to permit consumer to provide proper notice 17.43 - Cumulative remedies: Makes it a tie in statute: violations of other statutes may be a violation of the DTPA DTPA provides the procedure to seek the remedies Can not recover under another statute and DTPA, must chose one 17.44 - Construction and application Act should be liberally construed Applied to promote its underlying purposes: protect consumers against false, misleading, and deceptive business practices, unconscionable actions, and breaches of warranty 17.5052 Settlement Provision Settlement offers must include: 16

Attorney fees Amount for damages If P rejects a Settlement Offer and gets less at Trial, P has to take the lesser amount Attorney's Fees are Limited to the amount in the settlement offer If offers to pay the fees, and this is rejected, can be precluded from recovering the greater amount at trial, if the jury awards less Settlement offers are not an admission

17.61 -- Broad Powers of Discovery for the State/Subpoena Power

Things to consider when bringing a claim: Can present parole evidence: even if there is a written k giving the buyer the right to inspect goods before purchase, can still present evidence of an oral rep as to the quality of the goods o This is not a breach of k case Does not require intent o The good still does not have the characteristics it is represented to have o Injury to the consumer is the same o In line with the overall intent of the statute Can be awarded attorneys costs and fees if brought in bad faith or harassment o Lawyers has the obligation to investigate: 17.50c

Does not have to be a material element, just has to be a misrepresentation of some element: Pennington o This fits with the broad reading of the statute

Does not have to be in the business of selling that item, or in the business of selling at all: Pennington Companies are responsible for the statements of their agents: ought to train their reps accordingly Unsettled whether the DTPA claim can proceed after someone's death ALWAYS ARGUE ABOUT THE LEBERAL INTENT OF THE STATUTE ON THE EXAM! CASES

1. Pennington v. J W. Singleton, p. 1 - suit was brought by the purchaser of a boat for damages for misrepresentation
made by the seller to induce the sale. The trial court rendered judgment for the plaintiff. On appeal, the court rendered that the take nothing. SCT reversed the appeals court and affirmed the trial court. Seller made certain statements regarding the nature of the boat and motor. This is basically a puffing case. Is there really a difference btw "excellent" and "superfine. a. claims DTPA does not apply b/c he was not in the business of selling boats a) ct says statute does not limit cause of action to sellers in a trade b. claims his statements were puffing a) ct says under 17.46(b)(7) there is no intent requirement. made statements as to a particular standard or quality that were not true.

2. Martin v. Lou Poliquin Enterprises, Inc. p. 9

a. issue is who is the consumer? a) 17.45(5) individual, partnership, corporation.... who seek or acquire by purchase or lease, any goods or services, except that the term does not include a business consumer that has assets of $25 million or more. Case establishes standard for situations where there was no purchase. a) The court said that not all of the items in the laundry list require a purchase, so it shouldn't require one in this situation 2 part test: (1) subjective intent to purchase; (2) possess capacity to complete transaction

b. c.

3. Holeman v. Landmark v. Chevrolet p. 15

a. 2 part test for establishing consumer status: (1) good faith intention to purchase; (2) capacity to purchase. b. Facts: car dealership ad saying that they will accept all offers. They reject a ridiculously low offer and revoke their ad and then are sued. c. Court: not good faith here, attorney merely trying to find loophole in statute to get good deal. d. Courts not willing to let consumers to use DTPA as sword, only shield 17

4. Kennedy v. Sale p. 21 a. Dont have to be the actual purchaser to be the consumer," there is no privity requirement b.
a) acquired benefits, purchase made on his behalf Facts: The H was an employee of a company. The company negotiated a deal for group insurance. The was told by the insurance company that there was unlimited coverage, but the plan only provided $4k for pre-existing conditions.

5. Wellborn v. Sears, Roebuck & Co. p. 25 a. Facts: garage door closed and crushed and killed a 14 yr old boy. b. Court: The court found that the boy was a consumer under the DTPA as actual privity was not required.
You look to the relationship to the transaction not to the . The boy was a consumer because he was a beneficiary of the transaction, just like the employee was in Kennedy. c. SOL: DTPA 17.565 - statute of limitations - 2 years after the date that f/d/m act occurred, or 2 years after discovery or 2 years after should have discovered the f/d/m/ d. Demand Letter: The DTPA requires that a serve the with a demand letter as a prerequisite to filing suit. 17.505(a) This letter must give the notice of the amount of the claim and attorney's fees so as to give the a chance to pay the amount. This letter is a prerequisite to trebling of damages. Wellborn gave notice to Sears but not Chamberlain. The notice requirement is to encourage the settlement of claims.

6. Riverside National Bank v. Lewis p. 31 a. Facts: Lewis bought a car and financed it through the bank. The bank took a security interest in the car and
in an additional CD. He missed the first payment and his second payment bounced. He was asked to move his loan to another bank. In this case, the issue was only borrowing money. b. Court: The court said that borrowing money is not within the DTPA. Money is not a good; credit is not a service.

7. Flenniken v. Longview Bank and Trust p. 41 can be consumer even though this involved a loan b/c Flenniken
was buying a house and not seeking a loan, and a plaintiff establishes his standing as a consumer in terms of his relationship to a transaction, not by a contractual relationship with the defendant. This was an unconscionability case

8. Eckman v. Centennial Savings Bank p. 44 - It is the burden to plead and prove as an affirmative defense the $25
million exception.

9. Cameron v. Terrell & Garrett p. 49 sued seller's real estate agent for misrepresentation of the square footage in
the house. a. raised 2 arguments: (1) s are not consumers; (2) they were not the ones that furnished the goods are services to the s. b. Court said: a) The s were consumers in this case. (1) The s must have sought the goods or services through purchase or lease; (2) the goods or services purchased or leased must form the basis of the complaint. You must look to the transaction and the 's role in the transaction. i) Information regarding the square footage was used by in decision making ii) No express exemption for non-providers of goods or services b) 17.506 - provides a defense for defendants, when the written information they produced comes from information provided by someone else but must show that the defendant couldn't have discovered the truth of the information. c) Under 17.49(f) cannot bring a claim out of a written contract under certain conditions could argue that misrepresentation was oral to take it out of the exemption.

10. Amstadt v. US Brass Corp. p. 55 a. Facts: US Brass marketed plumbing systems to home builders with materials made by Celanese and Shell.
Marketed these systems to homebuilders and municipal zoning districts. moved into new house and the plumbing was bad. sued US Brass, the developer, Shell, and Celanese. They bring multiple claims including DTPA.

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b.

Court: The misrepresentations made by US Brass and some of the other s higher up in the chain were too far removed from the transaction of buying the home to have the misrepresentations actionable by the . Misrepresentations must be in connection with the consumer transaction a) The misrepresentations were not made to the s. b) Under 17.506 if the general contractor had said that he relied on US Brass's misrepresentations, the s could have directly sued US Brass. c) Ct holds the builder liable b/c they are in the best position to protect the consumer and indemnity is available.

11. Latham v. Castillo p. 69 (professional services) a. 's affirmative misrepresentations to his clients cause the clients to lose their day in court. Latham told the
Castillo's that he was affirmatively prosecuting a malpractice case, when in fact the SOL had ran. sues under DTPA. b. This is not a malpractice case, it is a misrepresentation case c. Court says under CL, economic damages need not be shown, mental anguish was enough d. To prove mental anguish, must show more than mere emotions e. 17.49(c) - nothing in this subchapter shall apply to a claim for damages based on the rendering of a professional service, the essence of which is the providing of advice, judgment, opinion or similar skill. This exemption does not apply to: an express misrepresentation of a material fact that cannot be characterized as advice, judgment or opinion.

12. Prudential Ins. Co. v. Jefferson Associates, Ltd. p. 81 a. Facts: Goldman bought the Jefferson building from Prudential, 2 years later they found out that the b. c.
building had asbestos and so they sued under fraud, breach of good faith, and DTPA. DTPA: Under 17.42, a consumer cannot waive your rights under the DTPA. "AS IS" Clause: the court said that the as is clause means that the misrepresentations could not be a producing cause of the injury because there could be no reliance. 2 exceptions: a) was fraudulent induced into the K b) if the Buyer is impaired by the seller from inspecting.

13. Pairett v. Gutierrez - H asserts that the summary judgment evidence does not negate the existence of a fact in issue. 14. Anglin Co. v. Tipps, p. 99. Anti-waiver provisions of DTPA
a. City argues that the anti-waiver provisions of the TDPA should bar arbitrations clause in the case. a) This case limits the expansive reach of the TDPA by saying that an Arbitration clause can force the case to an arbitrator rather than going to court.

15. Guzman v. Ugly Duckling Car Sales p. 107 a. Facts: K had a non-waiver provision to protect sellers remedy rights. is suing claiming that said one
thing and did another made false and misleading statements about acceptance of payments and the possibility of vehicle being repossessed. b. DTPA has non-waiver provision that protects consumers rights to provisions under TDPA. Jury rules for and against each party but awards no damages.

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E. REGULATING THE SUBSTANCE OF THE BARGAIN THROUGH WARRANTIES Think about warranties as quality standards Strict liability o What must consumer show to bring cause under strict liability o Seller liable for selling any product in a defective condition unreasonably dangerous to the user or consumer or to his property if: Seller has engaged in business of selling such a product; and It is expected to and does reach the user or consumer without substantial change to the condition in which it is sold. o Seller liable even though: Exercised all possible care in the preparation and sale of his product, and The user or consumer has not bought the product from or entered into any contractual relation with the seller no privity requirement. o o o o o If there is SPL, why do we still need Warranty Law? To deal with those cases where there is not a physical injury Where there is only an Economic Loss Where the product needs repair Strict Tort Liability deals with Products that are Defective Warranties cover Products that are not per se Defective

IF NO PERSONAL INJURY, LOOK TO WARRANTY 2 types of Warranties under UCC: Express and Implied Express warranty: UCC 2-313 3 ways to create: o Affirmation of fact or promise; made by the seller to the buyer, relating to the goods, that becomes a basis bargain Description of the goods made part of the basis of the bargain Sample or model which is made part of the basis of the bargain Express Warranties Do not have to be in writing Do not have to use formal words such as warrant or guarantee Do not have to specific intent to create a warranty Affirmation of value of goods or statement of sellers opinion or commendation does not create a warranty Look at disparity of knowledge to determine if sellers statements become a basis of the bargain Does not require reliance Does not require privity Cannot be disclaimed Implied Warranty of Merchantability: UCC 2-314 Seller must be a merchant with respect to the goods sold To be merchantable, the goods must: Pass with out objection in the trade If fungible, be of fair average quality Be fit for the ordinary purposes for which they are used Implied warranties may arise from course of dealing or usage of trade Applies to sale for use and sales for resale Applies to new and used goods Privity may be required They can be disclaimed only if done so properly Implied warranty: Fitness for Particular Purpose: UCC 2-315 When seller has reason to know of that the good will be used for a particular purpose AND that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods 20

Requires privity Applies to new and used goods

Disclaimers of Warranties: 2-316 Exclusion or Modification of Warranties Limitation of Warranty Express Warranties Express Warranties may NOT be Disclaimed If there is a disclaimer and an express warranty, the express warranty controls: Murray v. holiday rambler Read all words together to see what the parties intended Presumption will be made as to agreed to affirmative statements Exclusion of Implied Warranty of Merchantability Can be in Writing or Oral, language must mention Merchantability If in writing, must be CONSPICUOUS Must be clear to the buyer that there are no implied warranties No requirement of a signature note Exclusion of Implied Warranty of Fitness Must be in writing and CONSPICUOUS Language to exclude all implied warranties of fitness is sufficient if it states, for example, There are no warranties which extend beyond the description on the face hereof This is Safe-Harbor Language Conspicuous is defined in the Code 1-201(10): reasonable person would have noticed it. Purpose is to put the Buyer on Notice as to the specific terms of the Sale 2-316(3)(a) AS-IS disclaimer: All Implied Warranties are excluded by expressions like as is or with all faults or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain there is no implied warranty ---- Unless the Circumstances Indicate Otherwise See Knipp v. Weinbaum Unless circumstances indicate otherwise applies when circumstances indicate that buyer did not understand what was being done. Knipp v. Weinbaum -court held that it had to be part of the basis of the bargain; not just as to minor defects. In this case, 3-wheeler axle came off causing serious injury. No requirement that it be conspicuous No requirement that it must be in writing Does not apply to actions brought under the DTPA for misrepresentation 2-316(3)(b) Failure to Examine: When (1) buyer examined the goods before entering K, or (2) buyer refused to examine the goods, There is no implied warranty with regard to defects that the examination should have revealed Look at the buyers sophistication; buyer is accountable to what he reasonably could have discovered 2-316(3)(c) Course of dealing, course of performance or usage of trade An implied warranty can be excluded or modified by course of dealing or course of performance or usage of trade 2-316(c) allows Usage of Trade into Evidence as a Disclaimer of Implied Warranty (4) See 2-718 and 2-719 for limitations on remedies The test under 2-316 is whether the Express Language of the Disclaimer makes it clear to the buyer that the seller is not making any warranties or is limiting warranties as to the goods being sold Merely providing a copy of the documents containing an inconspicuous waiver does not establish actual knowledge Seller's burden to prove buyers actual knowledge of the disclaimer, not just the warranties

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Limitations of Remedies: UCC 2.719 Contractual Modification or Limitation of Remedy: (Limits the types of remedies available to the buyer) o (1) A seller may limit or alter the remedies available under the UCC. Limit remedies to return of the goods and repayment of the price to repair an replacement of nonconforming parts Limited remedy will be optional unless expressly agreed to be exclusive o (2) When the limited remedy fails of its essential purpose, any remedy under the UCC can be had, including revocation and consequential damages Look at the essential purpose of the warranty o (3) Cannot limit consequential damages if doing so is unconscionable. Limiting consequential damages for personal injury is prima facie unconscionable. o Clauses limiting consumers remedy in event of breach of warranty do not have to be conspicuous. Statutory Remedy for Breach of Warranty is Damages under 2-714 o The Difference between what was delivered and what was promised o The difference is the measure of damages, assuming buyer held goods

Difference b/t a limited warranty and a limited remedy: To determine if K is enforceable 1st step is to determine whether it's a disclaimer of warranties or a limitation of remedies o Limited warranty- what it takes for you to breach (Limits Liability) Warrant the engine but not the tires o Limited remedy: if there is a breach, then only certain remedies are available to you For a Disclaimer of Warranties to be effective, it must meet 2-316's requirements. For a Limitation of Remedies to be effective it must meet 2-719's requirements. 3 times to question a limited remedy 1. Remedy fails of its essential purpose 2-719 3 types of cases Latent defects with notice restriction Seller refuses to or can not repair Part to be replaced destroyed the entire good Test Substantial value of the bargain: subjective standard: value to buyer 2. The efforts have not resulted in a defect free good: need to look at sellers efforts: fixed one item, but it was something different: Consider revocation: 2-608: revocation of acceptance 2 Instances when can revoke Can revoke if there was a reasonable assumption that it would be cured and it has not seasonably been cured Acceptance is reasonably induced by the diff of discovery before acceptance or the sellers assurances Revocation 2-608 -- Revocation of Acceptance The Buyer must show the Existence of Non-conformity that Substantially Impairs the Value of the Goods to the Buyer Must first give an opportunity to cure Must occur within a reasonable time after discovery of the defects and before a substantial change in the condition Must notify the seller Continued use/substantial change in condition Show that it was reasonable use Look at the time that tried to revoke If seller refused, then it is their fault 22

3. Limitation on consequential damages Can be limited or excluded unless unconscionable More than unfairness: beyond belief Can not limit for personal injury: prima facie unconscionable

UCC 2-715 Consequential Damages o (2) Consequential damages include: (a) Any loss resulting from general or particular requirements and needs, of which seller had reason to know, which could not have been reasonably prevented by cover, and (b) Injury to person or property results from any breach of warranty See 2-719 (3) for limitations on consequential damages

Implied Warranty to perform repair services in a good and workmanlike manner: Melody Homes v. Barnes: Implied warranty of services Quality of work performed by one who has the knowledge, training, or experience necessary for the successful practice of a trade or occupation Performed in a manner generally considered proficient by those capable of judging the work Does not require repairmen to guarantee the results of their work; only have to perform in a good and workmanlike manner Can not be disclaimed or waived: Only applies to the repairs, not the original defects Lemon laws statutes that alter the way implied warranties are applied Alternative dispute resolution attempt for problems with defective new car sales (some states extend to used car sales) DTPA statutes have eclipsed the importance of lemon laws Defines at what point the remedy has failed - dependent on number of repairs in a year If remedy fails, K can be revoked CASES Berg v. Stromme, p. 311 o bought a new car. The K contained an express disclaimer of warranty among the boilerplate language on the back of the form. The boilerplate language on the back was inconsistent with the express conditions on the front. The contract had clear indication that the parties bargained for multiple aspects of the deal. The problem the court had with the disclaimer is that it wasn't agreed to, the Dealer tried to bury it. o has to show that the legal effect of the specific items on the front on the K created an express warranty and the disclaimer on the back did not override the express warranty. must also show that a new car should have an implied warranty of merchantability. o Court said warranties can be waives in certain circumstances: When the buyer has notice of the waiver When the waiver is negotiated

Knipp v. Weinbaum, p. 318 (three wheel motorcycle case) o Personal injury action against the seller of a used motorcycle. The ad said sold AS-IS. K disclaimed all
warranties with AS-IS clause. o Strict product liability did not apply because the good was modified after manufacture o Court Ct asks if there is an implied warranty of merchantability for used goods Under 2-314 there is no reason why not, it does not specifically exclude used goods Ct looks to 2-316 to determine if AS-IS clause is sufficient to disclaim the warranty As a matter of law, AS-IS disclosure was not enough but warranty could be waived as long as buyer understands a waiver is being disclaimed and the waiver is a basis of the bargain.

Murray v. Holiday Rambler Inc. (p. 322)

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s buy motor home; have multiple problems, repairs made but each time other problem occurred. s decide to revoke acceptance (rescind K) but KOA won't take it back so s filed suit; M suing KOA (dealer) and Holiday Rambler (manufacturer) o Ct addresses three issues Was there an exclusion of an implied or express warranty? K stated no express warranties but provided express language that there were no warranties including warranty of merchantability Court says that a portion of the warranty waiver created an express warranty with limited remedies. Therefore the waiver was not valid, because the express limited warranty conflicted with the general disclaimer and where there is a conflict the express warranty wins 2-316(1). s get their warranty - express warranty as to material and workmanship being free from defects at time of delivery to dealer Was there a limitation of the remedy Portion of the warranty waiver created an express warranty with limited remedies. Remedy limited - repair, replace by determination of manufacturer Defendant argues that remedy is limited so s cannot revoke acceptance; also argue that s drove motor home around so it is not in substantially the same condition as when purchased o Court looks at the facts - when did Ms discover the problem, did they act reasonably in getting it in for repairs, s paid money to KOA for something substantially impaired in value s attempted to have motor home fixed as soon as possible - look at that time period for "substantial change" in goods o Cannot revoke acceptance of goods that have substantially changed in condition - but cannot fault consumer for trying to work things out or get the goods fixed (seller cannot have it both ways) Ct held that when the remedy failed its essential purpose, s were entitled to revoke or any other remedy under UCC. Consequential damages wants loss of use of the motor home, ct says it is a remedy but there was not evidence o MAGNUSON-MOSS WARRANTY ACT: 15 U.S.C. 2301-2313 (SUPP PG 533). For MMWA to apply o Must have a written affirmative express warranty MMWA does not require written warranty, but if one is given to consumer MMWA applies See what qualifies as a written warranty at 101(6) o Must have a consumer Buyer of any consumer product See 101(3) for other consumers o Must be a consumer product Tangible personal property, distributed in commerce, which is normally used for personal, family or household use). Includes prop intended to be attached to or installed in any real prop even if it is not attached or installed ex: mobile homes Act regulates warrantors Includes a manufacturer Includes a dealer who agrees to perform repairs in manufacturers warranty 102 Rules governing contents of warranties (if there is a written warranty). Not required to provide a warranty, but if warranty provided, must disclose the type of warranty Full or limited Must disclose certain info: 102 (pg 535 supp). Terms and conditions must be fully and conspicuously disclosed in simple and readily understood language Must label either as full or limited warranty Can not condition it on the use of a second product: 102c If offering a full warranty, must meet the requirement of 104 24

o o

o
o

Remedy must be provided without charge Implied warranties cannot be limited in duration (see exception in 108) No limit on consequential damages unless the exclusion is conspicuous on the face of the warranty. If remedy fails, must provide for a refund Limited warranties are all warranties that are not full warranties Limited warranties must comply with 108

108 Implied Warranties o (a) Cannot modify or disclaim implied warranties if a written warranty is made to the consumer o (b) Limitation on duration of implied warranty Implied warranties may be limited in duration to the (1) duration of a written warranty if of reasonable duration, (2) if such limitation is conscionable, (3) if the limitation is in clear and unmistakable language, (4) and prominently displayed on face of warranty FTC Rules and Regulations, MMWA 700.6 Designation of Warranties o Full warranties can be limited to duration of first person to own product, warranty can expire on transfer 703.3 IDSM Must be free Can be a condition precedent if disclosed as such to consumer IDSM is public in nature (access to information) but private

How do MMWA and UCC work together? o Federal cause of action - $50K amount in controversy requirement (class claim); $25 amount in controversy requirement (individual claim) o Need a written warranty for MMWA to apply o Need consumer product for MMWA to apply

Ventura v. Ford Motor Co. (p. 339) o V sues manufacturer and dealer for defects in new car DTPA - Amstad case re: upstream manufacturers, if M didn't participate in deceptive transaction then consumer has no cause of action against M o M sends car to D with warranty - D sells to V w/no warranty except will do repairs under M's warranty o Repairs are not done - question whether V can revoke acceptance? Yes V can revoke acceptance to Dealer (D made an express warranty) First ask if limited remedy fails of its essential purpose Dealer gives no warranty M's warranty says that dealer will perform all repairs under M's warranty Dealer is actually making a warranty to perform the repairs under M's warranty Express warranty wins in a conflict (conflict is b/w what M and D are doing) Dealer agreed to perform the repairs; this makes Dealer a warrantor. MMWA applies to warrantors o What happens if Dealer is bankrupt? Plaintiff can go against M b/c M is the one who made the original warranty Under M-MWA look at written warranties, supplier and warrantor definitions M is a supplier - in business of making product directly or indirectly available to consumers M is also a warrantor Summary of Home Cases not include in the Texas business and commerce code OR M/M because they are movable implied warranty of good and workmanlike performance & habitability in sale of home if building a house, selling it as new: humber v. morton good and workmanlike manner suitable for human habitation 25

 see melody homes above waivers/ disclaimers not allowed for either new or repairs: buecher v. centex homes min standard would place the consumer in an inferior bargaining position allow for shoddy workmanship TEXAS HOME CASES

o In Re American Homestar, p. 159 given a warranty and signed a retail Installment K and an arbitration provision
App Ct says a binding arbitration clause violates MMWA conflicts with jurisdiction and rights given to courts and consumers s arguments: (1) FTC says no binding IDSM; (2) MMWA 110; (3) Legislative history Texas and Alabama Supreme courts are the only ones to come to this conclusion. To override FAA must have clear congressional intent.

o Cate v. Dover, p. 113

MMWA did not apply; product not one normally used for personal, family, or household purposes bought a lift to elevate autos, has problems with it. tried unsuccessfully to repair. says it disclaimed implied warranty of merchantability. provided a warranty and disclaimed warranty of merchantability within the warranty. says it does not matter that the disclaimer was conspicuous because has actual knowledge of the disclaimer Court says disclaimer must be conspicuous to a reasonable person

o Humber v. Morton, p. 123 Implied warranty of fitness/habitability developed out of landlord/tenant laws to protect the modern tenant
to make sure tenant gets what they think they are getting Court says that the Construction/Sale of a New House by the Builder/Vendor creates as a matter of law an Implied Warranty of Habitability Defective fireplace; claims home was not suitable foe human habitation Court characterizes as an implied warranty of habitability

o G-W-L, Inc. v. Robichaux, (1982) p. 133

Purchased new home; after construction, roof sags; claims breach of express and implied warranties waived implied warranties in the promissory note Issue is whether the disclaimer was enough to waive the implied warranty UCC does not apply because this is not a good, it is a house; MMWA does not apply because a house is not a consumer good; Must look to state law or courts Court said waiver was clear and free from doubt Court holds that implied warranty of habitability can be waived by language that is clear and free from doubt when the disclaimer is unequivocal and absolute in its expression.

o Melody Homes v. Barnes, (1987), p. 137

DTPA claim DTPA provides a claim for a breach of an express or implied warranty 17.50(a)(2) and provides opportunity for exemplary treble damages Two warranties discussed in this case failed to construct the home in a good and workmanlike manner failed to repair in an good and workmanlike manner Jury awards damages of $100 for 1. and $3,000 for 2. says didnt purchase the repair services with cash and therefore was not a consumer court rejects and says the repairs related to the purchase of the home ct holds that an implied warranty of repair is available good and workmanlike repair o work must be proficient o does not have to guarantee result 26

o end product does not have to be perfect but the work must be proficient o performance, not results ct says the warranty of repair in good and workmanlike manner cannot be waived; to the extent this conflicted with Robichaux it was overruled

o Buecher v. Centex Homes (2000), p. 153

for waiver of implied warranties of consumer goods, always look to UCC 2-316 & MMWA Court of Appeals Melody Homes overruled Robichaux, court is referring to implied warranty of habitability, ct says implied warranty of habitability can be waived but not in a preprinted standard form disclosure Supreme Court says there are 2 implied warranties for new homes o warranty of habitability state of the completed structure, is it habitable o warranty of good and workmanlike manner builders conduct, is the work proficient In Humber the house was habitable, in GWL the house was habitable but the roof sagged Court says good and workmanlike manner is generally contracted expressly for but in absence of express contract, Implied warranty will be a gap filler In order to waive the warranty of good and workmanlike workmanship must provide sufficient detail on the manner and quality of the desired construction o Possible ways to do this: provide for periodic inspection based on building codes o Builder has incentive to include the detail so that he is not latter surprised by the implied warranty for unknown defects Warranty of habitability latent defects detrimental to life, health or safety- generally cannot be waived

Centex Homes Defines 2 implied warranties good and workmanlike repairs and construction o can be waived if specific detail. Serves as a gap filler Habitability o Applies to residence, new home construction, dangerous, hazardous or conditions detrimental to life, health or safety, latent conditions o Majority says it can be waived if defect is adequately disclosed. can waive disclosed defects but not latent ones Dissent Does not agree with definition of a warranty Believes that is can be waived if clear acceptance of express warranty or knowingly agrees to accept risk. Objects to the increased cost for new homes, and says the warranty will not affect the shady operators because they do not follow the rules There are too many unknowns to the implied warranty Policy issue for non waivability person with expertise should bear the risk not the consumer

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F. LIMITS IN THE TERMS OF THE TRANSACTION o o Two doctrines that limit consumer transactions Doctrine of good faith and fair dealing Unconscionability

Difference between unconscionability and unfairness is that individual consumers generally bring unconscionability claims for damages, while unfairness is generally brought by the FTC for a request of cease and desist. Unconscionability under the UCC "Unconscionability" is NOT defined in the Code o Taken to mean "prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power o Basic test is whether the terms are so one sided as to be unconscionable at the time of the making of the contract Unconscionability is measured at the time the contract was made 2-302 -- Unconscionable Contract or Clause 2-302(l) - if the court finds any terms in the contrat to be unconscoinable the court may: o Refuse to enforce entire contract o Enforce the portion of the K that is not unconscionable o Limit application of any unconscionable clause to avoid unconscionable result 2-302(2) if a claim of Unconscionablity is made the parties can present evidence to aid the court in making its decision Unconscionability under 2-302 relates strictly to Procedural Unconscionability

Under UCC 2-719 - It is Prima Facie Unconscionable to Limit Warranties that Cause Physical Injuries to Consumers o Consumer's Remedy would be Actual and Consequential Damages under the UCC

Williams v. Walker- Thomas Furniture, p. 452 - Unconscionable K. rent to own plan; cross collateral clause, claims the K is unconscionable If you fail to make a payment they would take all your furniture not just the one you missed the payment on. Many places have laws against this, this was done by keeping open balances on all the items. Lower court upheld because it isnt illegal by any statute. The case was remanded to look at unconsionability. Which is a matter of Law. UCC 2-302 does not define unconscionability, but provides a basic test in the comments: so one-sided Ct says must have both requirements for unconscionability o Procedural - absence of meaningful choice on the part of one of the parties. Gross disparity of parties. Inequality of bargaining power, reasonable opportunity to understand the terms; look to education, business experience, knowledge of seller, reliance of buyer. Tainted by deception. Higher likelihood of deception with printed form contracts. Look for evidence of: education, review contract, evidence she wasnt told about the provision, other choices. o Substantive - contract terms which are unreasonably favorable to contracting party Look to all the circumstances surrounding the transaction. Look at what others are doing, How much she had paid and then got nothing. The Unconscionable Practice in the Case o That all installment purchase payments were prorated across all purchases Thus no product would ever be paid for until everything was paid for All cross-collateralization clauses are not per se unconscionable o All circumstances have to be looked at o But, after this case, these provisions were written out in many states o Look at the Retail Installment Sales Act for your state Cheshire Mortgage v. Montez - UCC doesn't apply b/c not a sale of good. 28

C agrees to finance vinyl siding but will only do so through a 1st mortgage. Original loan of $25,000 becomes $40,000 during this process and two mortgages were made, both charging fees including 10% prepaid interest on both loans. Refinced because the value had increased. There original payments were 407. The pl had to pay off a number of other debts, this greatly increased the amount of the loan. They had other cost such prepaid, financing Ect. Total was 26,000. when deciding to make the loan they didnt consider how much money the Pl made they just considered the value of the house. Another loan was then issued increasing it to 43000. The payments were about 700 with a balloon of 44,000. The court ordered foreclosure that is how the suit got brought about. Terms seem one-sided because interest rate and fees are so high; looks like predatory pricing Court says not unconscionable. Does not meet procedural prong o Ct looked at education and knowledge, testified in English, lived in US for 20 years, was not credible o Should be able to rely on K, unconscionability should be an extreme remedy o Court found for Def though on other grounds. Decent looked at the fact that this was just a scam to get the house, that the Pl knew the defendants would never be able to pay off the loan. Dissent is looking more at procedural Majority appears to look at procedural also they just look at it differently, seems to be looking at bargaining power only, what the family had done in the past, rather then looking at the act itself. Arent any def of unconsionabilty to help. . Truth in lending laws tend to protect this now. These laws may not always apply if the rate is low enough. Purdue v. Crocker High fees were were charged for insufficient funds. The pl agreed to this by signing a signature card. All they agreed to was the rules of the bank, which the bank could change. This court seems to think that you need both substantive and procedural unconsionabilty. Start with whether price in unconscionable then look to other elements such as how the terms were formed. The court finds that this is a contract of adhesion that wasnt bargained for. ON the contract it is small print with no description as to what the fees were ect. Leading to unfair surprise. The court said that even though 6 is small amount, when you add this together over all the customers it will be a llarge amount. Note 8 discusses arbitration clauses. 2 Part Test to Determine Unconscionability under CL Procedural Unconscionability How was the K entered o Unfair surprise, gross inequality of bargaining power (indicates absence of meaningful choice), absence of meaningful choice o Factors to look for: Manner in which the k was entered: where the k took place Office, parking lot Relative education of the parties Where are the terms? What do they look like? 29

Hidden, not explained, buried on the back, fine print, where they pointed out to the consumer? Consider terms in light of general commercial background, commercial needs of particular trade Language barriers: how testified, problems understanding the language, entered into other transactions Look at other places in the industry: this will indicate whether the consumer had a choice Substantive unconscionability o Look at the Contract Terms o Overly harsh or one sided results Could always go elsewhere o Terms which are unreasonably favorable to the other party o Factors Making loans even though knew couldn't pay Consumers considered themselves able to make payments, Made payments in the past Evidence of additional income Price: Usually not considered b/c it can be bargained for Unless knew the limited financial resources of the consumer How often the retailer uses the term

Unconscionability under Texas DTPA 17.45(5) Unconscionable action or course of action means an act or practice which, to a consumer's detriment, takes advantage of the lack of knowledge, ability, experience, or capacity of the consumers to a grossly unfair degree The Texas Act sounds, more Procedural than Substantive under Williams-Walker This is more about consumer's choices than the terms of the contract terms Could be a higher standard than CL: grossly unfair degree v. unreasonable For DTPA claim must meet definition of a consumer Under DTPA look to actions throughout parties relationship, not just when the K was entered; action of cause of action 17.49(c)(3): professional services exemption does not apply to unconscionable action that can not be characterized as advice, judgment or opinion Looks like procedural unconsionability and substantitve. A big question comes up as to whether attorneys should take more responsisbilty in preparing these contracts. Jones v. Stare Credit Discusses unconsionabilty in surprise on price. The court focuses on substanative unconsionabiliy. The terms greatly favor the defendants. Articles discuss how prices are greater in low income areas. However profits are lower due to a higher default rate. Because of this price can be a very diffucult to apply unconsionabiliy, because the merchant should have some say in this. Unfairness Commonwealth v. DeCotis The attonney genral brought suit against a trailer park owner. The def would charge fees if a tenant sold his trailer. There was an act that had a broad prohibition on deceptive practices. The law had no definition of unfair practices. Origninal tenenants didnt know about this fee. Court said this is decepetive not to disclose a fee you are going to charge. Another group had it disclosed by contract. The court looked to the FTC interpretation of unfair. It says that the courts should look at public policy. Should look to the conscious of the community. In this case the court says it is unfair to collect fees for something they didnt do. 30

The court also said that the consumer had little choice in selling the mobile home because the cost to move it is so much that it isnt worth it. FTC letter on Unfairness 1. Whether the practice unjustly injures consumers. Personal Economic Can be avoided. Look to cost benefit to fix the problem. Use economic analysis to make predictions. This is expensive so makes the government in the best position. 2. violates public policy Look to degree of consumer injury 3. Whether it is unethical. Doesnt make something unfair by itself.

This is codified in FTC act. International Harvester Court finds that this is unfair, but Int. is already fixing the problem. Does cost benefit analysis. The court said the personal injury outweighed the cost of fixing the problem. Orkin (Notes) Orkin would inspect house for lifetime for a small fee. The cost of doing this soon cost more then the inspection, so the increased the fees. This was a breach of the contract. The FTC came in and sued Orkin. Orkin said they just breeched the contract. FTC said that it was a substantial injury to all the consumers. Looked at cost to the marketplace. If orkin had to charge the orginial price they would have to charge more. Look to integrity of the market place. Leardi v. Brown Def landlord said there were warranty of habitability. Good Faith Best v. US National Bank Deals with NSF funds not being disclosed. The court said that the fee is not unconsionble. In good faith you look to this at the time of breech The pl claims the bank has a good faith obligation to set the NSF fees. The court says the bank had an obligation to fairly set prices within the parties expectations. Because it is called service charges then it would be expected that it would priced as cost plus reasonable overhead. 31

Court also says that it would be unfair to do this without notice. Do they tell you when the fees go up.

Problem on Pg 512 Unconsionable In Texas can get punitive for unconsionabilty. Unfairness seems like int. harvester. U ntethical to include this clause. Good Faith have claim because lack of choice to sign the clause. Looking at what happened after they signed the contract. Other Statutes Placing Substantive Limits on Specific Consumer Transactions Retail Installment Sales (RISA) Texas Finance Code 345 Statute only applies to retail installment sale transactions 345.001(7) o Retail installment transaction contract or agreement providing for a time price differential and buyer agrees to pay unpaid balance and time price differential in one or more installments o Retail buyer person who purchases or agrees to purchase goods or services from a retail seller 345.001(3) Under DTPA must acquire or seek to acquire goods or services o Retail seller in the business of selling to retail buyers 345.001(8) RISA only applies to retail sellers, while DTPA applies to all sellers. o Goods or Services - limited to personal, family or household use DTPA does not require goods to be for personal, family or household use, can be for business use MMWA only applies to consumer goods, not real property 345.051 Requirements on the K; must be: in writing, dated, signed by buyer, etc. 345.052 Contents of the K; must contain: name of seller/buyer, cash price, notice set forth in 345.052(d), etc. 345.053 If seller promises to compensate buyer for referrals, must disclose 345.066 before copy of K is delivered, buyer has right to rescind the K if the goods have not been delivered. 345.079 regulates cross collateral clauses; can have as long as seller complies with this act 345.055 limits fees that can be charged for a time price differential

Prohibitions of a retail installment k: 345.354 retail installment contract cannot contain: o Power of attorney to confess judgment If consumer defaults, he already agreed that seller can already take a judgment against him o Assignment of wages Could work & not earn any money- protect workers wages from creditors Now limited circumstances: child support 345.356 agreement may not: o Provide for waiver of buyers rights For an illegal act committed in the collection of payments under the K or repossession Agrees not to assert against the retail seller a claim or defense arising out of the sale Buyer may not waive any provision of the chapter before or at the time of the making of the retail K 345.355 Prohibitions on certain acts of repossession: protects breaches of the peace Door-to-Door Sales FTC Regulation - 16 CFR 429 o Violation of this regulation is an unfair and deceptive practice, FTC action o Applies to door to door sales 32

 o o o

o o

Consumer goods or services Purchase price of $25 or more Seller initiates the contact Buyer's agreement to purchase is made away from the sellers place of business Goods or services must be for personal, family, household use, and training for any purpose Goes further than RISA Must give copy of the contract and notice of buyers right to cancel as part of the K K must be in the same language as the verbal negotiation Must give a form to cancel on Seller cannot assign K for at least 10 days Exemptions: 429.3 (regulation does not apply) Cars, vans, trucks, motor vehicles sold at auctions, tent sales, if the seller is a seller of vehicles w/ a perm place of business Arts or crafts sold at fairs or similar places No private right of action tie in to DTPA Right to cancel cannot be waived

Texas Regs - Bus & C. Code Ch 39 o Purchase price more that $25 for consumer goods o Personal solicitations not at merchants place of business o Includes real and personal property, money or credit, must be for personal, family or household use, broader than FTC o Right to cancel is same as FTC, 3 days; K must be in same language as negotiation o 39.004 must give notice of right to cancel verbally and in writing and provide form to cancel o 39.008 its a violation to not follow the rule, cannot misrepresent the right to cancel o Buyer cannot waive this right o A violation is a false, misleading, or deceptive act for purposes of 17.46(b) of the DTPA o Remedy for violation: Texas private right of action Texas attorney fees and court costs and is a tie in statute to the DTPA FTC no private right of action, but works together with state law Key is that the Contract is Made in the Home If the K is made in the home, see if exemptions applies that would not make it a door-to-door sale If no exemption, then likely a door-to-door sale and subject to the 3-day right to rescission Problems page 514-515 o Problem 1 - FTC has exemption for arts and crafts sold at fairs and auctions; under Texas rule would apply if fair is not the regular place of business. Under FTC, no private right of remedy. Under Texas, get same rights as under the DTPA. UCCC applies only to sales at a residence. o Problem 2 Under FTC, what are the consequences of the sellers failure to give notice of the right to rescind? Consumer has no private right of action under FTC, can make a complaint to the AG or FTC. Look to state law for private right of action o Problem 3 - Furnace company knocks on door and asks if they can check consumers furnace They check it and say there a big emergency with the furnace and consumer contracts to but a new one. Must consumer be given a right to rescind? FTC applies consumer good, initiated by the seller. o Problem 4 - Same as 3 except consumer initiates the transaction see 429.0(a)(3), emergency situations that the buyer has initiated are exempted from regulations and no rescission. If seller said furnace has a leak when it did not, would have a TDPA claim for misrepresenting the need for repair o Problem 5 Consumer sees ad for a free dance lesson. Goes to the studio and gets the free lesson and a sales pitch and buys lessons. Can consumer rescind? No rescission under FTC because not doorto-door. If buyer calls based on ad and seller goes to buyers home for negotiation and sale, FTC door-to-door act may apply. If buyer initiates the contact and requests seller to come to home, FTC door to door act will not apply

Why they are troublesome High pressure tactics, invasion of privacy, cant go anywhere, cant just walk away Lowered resistance, especially if don't understand the purpose of the visit May gain entry to the home by misrepresenting the purpose of the visit 33

Fear of violence that a request to leave will lead to Consumers inability to compare the price to the price charged by other sellers Absence of the sellers supervisor

UK Consumer Protection Regulations o Consumer natural person acting for purposes outside a trade or business Under DTPA, does not have to be a natural person UK is not limited to the types of products in the DTPA Seller acting as part of trade Unfair term Not individually negotiated (Form Ks) this is assumed if drafted in advance Causing significant imbalance; and Detriment to the consumer Similar to definition of unconscionability under DTPA, but under DTPA unconscionability can exist throughout the transaction UK only apples to the K terms Terms must be in plain language Unfair terms are not binding See Schedule 2, (pg 293) for terms regarded as unfair

o o

o o o

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G. LIABILITY OF THIRD PARTIES The Traditional Rule of Holder in Due Course Under Common Law o Holder in due course rule (HDC) if third party takes the note in good faith (bona fide purchaser), without knowledge of defect, the buyer will have no rights or defenses against the third party creditor/lender only against the seller Under HDC, the creditor is protected when the promissory note and contract are assigned The right to services and the duty to pay are bifurcated in consumer transactions can have harsh results. i.e. buyer does not get goods/services under K, but is still obligated to pay An innocent buyer of a stolen promissory note has the right to collect the money Reason for this rule was to encourage negotiability of the promissory notes If the Vendor and the Buyer of the Note have a close relationship, then the Note Holder may not be able to assert the Holder in Due Course Rule Close Connectedness may Undermine Common Law Rule and Support Remedies under the FTC The Holder is shielded from an attempt by the maker to assert so-called "personal defenses" Real Defenses such as Duress, Infancy, Illegality, or Minority would still apply There is a presumption that at least a semi-arms-length transaction exists between the Vendor and the Financier Common law HDC only applies to promissory notes, does not apply to installment Ks A waiver of defenses clause will have the same effect for installment contracts as HDC has on promissory notes o Clause in the K that waives buyers rights to claim nonperformance of seller as a defense in a cause of action by the creditor for non-payment. Preservation of Consumers Claims and Defenses FTC Under the FTC Rule, the Consumer's Rights are preserved against the Assignee, unlike the Common Law Rule where a Good Faith Purchaser for Value owns the Negotiable Instrument and is entitled to collect from the consumer regardless of the underlying transaction. The General Intent of the notice is to make the consumer's obligation dependent on the seller's performance Places risk on lender, means that consumer doesn't have to pay if seller breaches, commits tort, violates the statute, provides defective product misconduct related to the transaction. Applies to the Negotiable Instrument When seller does not comply with the FTC Regulation, and consumer is making claims or defenses against the lender, court must look to the common law HDC rule o FTC rule regulates only the seller, not the 3rd party lender How it applies Regulates Sellers o Person who in the ordinary course of business sells or leases goods or services to consumers Must be sale or lease of goods and services Sale or lease must be to a consumer Natural person who seeks or acquires goods or services for personal, family or household purposes It is an unfair or deceptive act or practice within FTCA to take or receive a consumer credit contract or proceeds from a purchase money loan without the required notice contained in the contract. o Requires sellers to provide in their Ks, the language of 433.2 - "in connection with any sale or lease of goods or services to consumers" Notice provides consumer with same claims and defenses against creditor that it would have against the seller o FTC RULE SAYS ANY CLAIMS AND ANY DEFENSES Damages under the FTC Rule FTC rule limits the claim against the creditor to amounts paid by the creditor to the creditor You are, however, entitled to go against the seller under the DTPA or under any other cause of action for whatever damages you are seeking But, if the Creditor and the Note Holder are closely tied in together, Close Connectedness, then you may have a claim against both for J&S Liability under DTPA No private right of action under FTC 35

3 ways a creditor can avoid liability Holder in due course o See above for details o If close-connectedness court might say transaction is one and HDC will not apply Waiver of defenses o Applies to installment contracts, created contractual provisions by which the consumer promises not to assert against the assignee any defense might have against the seller: Direct loan financing o Instead of selling on credit & assigning K to financer, seller steers consumer to a particular lender whom the seller knows will lend the money. Becomes an independent transaction.

Close connectedness: o Seller is an agent of the lender o Seller and lender: one intertwined entity Substantial voice, control, vested interested in other entity o No good faith status o Knowing participation o Arranged the loan

Hypothetical: health club membership $360 ($30 for 12 months); retail installment K b/w consumer and club; club sells K to bank for $300 - club goes out of business but consumer is still paying $30/month to bank, consumer decides to quit paying on K b/c can't go to health club - bank wants payment on K b/c bank is bona fide purchaser for value, so takes free of defenses against club Club goes bankrupt, why hold bank responsible in this circumstance? Distribution of the loss - lender is in best position to bear cost and monitor the situation; consumer shouldn't have to bear loss of bad business Policing - understanding that this is how most consumer transactions are structured - parties, with someone providing the financing; businesses who don't provide quality services shouldn't be in business - lenders won't lend to those who don't provide quality service Problems Page 701 Which of the following transactions are w/in the scope of the Rule: Sale of aluminum siding to homeowner? o It is a sale of goods to a consumer o Personal property, consumer good o Does affect commerce o It is w/in scope of the rule Construction of garage to be attached to existing house? o It is a sale of good/service to consumer o It is w/in scope of the rule o Construction K is subject to rule because it is a service, service of constructing garage Sale of tractor to farmer for $15K? o Sale of good BUT o Tractor to farmer is not for consumer purposes - agricultural use for business purposes; must be for personal, family or household use o It is NOT w/in scope of rule Sale of $30K mobile home to consumer whose adult child will live in it? o Sale of good - mobile home is a consumer good o BUT sale is over $25K and it is not to be used as the principal dwelling of the consumer (see 226.3(b) of Reg. Z) not a credit sale Issuance of a credit card by Sears Roebuck & Co? o Go back to the definitions and use with the 433.2 section o FTC rule doesn't apply to credit cards - other provisions in federal law apply to credit cards and credit card issuer liability

o Iron and Glass Bank v. Franz 36

 Facts: Bank is suing to recover on loans owed by the . Seller breached the K to , argues that it does not have to pay the lender because the seller and lender were affiliated. Consumer argues that transaction is subject to the retail installment sales act - transactions subject to that act allow Consumer to assert its claims against SPA, against the Bank (Bank doesn't take loan free from claims against Spa). Retail installment sales are those between buyer and seller of goods and services. Issue: Were the transactions related? i.e. the purchase of goods and the lending of money The court used CL to determine whether the transactions were related. o Close connectedness Doctrine if transactions are substantially connected they will be treated as one. Issue: Did the failure of the Seller to provide notice required by FTC give the buyer a private right of action against the lender No, FTC regulations only place a duty only on the seller to give notice When seller does not comply with the FTC Regulation, and consumer is making claims or defenses against the lender, court must look to the common law The court held that the failure to provide notice was an unfair and deceptive act under FTC and state law and lenders knowing participation in the violation of the FTCA was itself an unfair or deceptive practice Court will look at all circumstances surrounding the loan to determine if the transaction is unfair or deceptive (determined by close connection of the transactions) so that state law can apply Under the state's DTPA this was actionable, even though there was no claim under the FTC. o Problem 1, p. 707 If the notice required by the FTCA is given, the consumer can assert a claim directly against the lender, but the claim is limited to the amount paid by the consumer o Problem 2, p.707 - consumer buys radial arm saw from seller pursuant to an installment K, which is subsequently assigned to the bank. The machine malfunctions and injures consumer. Can consumer sue bank? Yes. But only to the extent of the amount paid by the consumer. 433.2(a). FTC Rule limits recovery against the lender to the amount consumer paid under the K. o Problem 3, p. 707 when a K includes the FTC notice and a separate clause limiting the buyers rights to assert claims against the lender the clauses will be contrary and for policy reasons the FTC notice should apply.

o Ford Motor Credit v. Morgan p. 708 M purchased Mercury from Ford dealer, FMCC took assignment of retail installment K; K contained FTC rule; M made 15 months of payments ($137 x 15); M had financial problems and stopped paying; FMCC repossessed the car but it was vandalized before it could be sold FMCC sues M for collection of remaining payments M countered alleging fraud b/c car was piece of junk; M asserts it can recover from FMCC under FTC rule for Ford dealer's wrongdoing Court suggests that causation element of fraud is missing M stopped payment b/c of financial difficulty and not b/c of something Ford did that caused them harm Jury verdict for M - valid defense to FMCC's action to recover unpaid installments but M could not recover damages on counterclaims Court looked at FTC Rule "basis and purpose" M received value of car for 15 months Car was repossessed and then vandalized - not tendered by M, so no rescission M had no right to rescind sale - car was repossessed Rule allows refund when equities require it - that's not the case here, M had car, used value of car for 15 months, M stopped paying, didn't try to rescind the car Potential problem that consumer who pays less monthly installments gets more value than consumer who pays more installments and gets less value (focus on Bank - Bank loses more in X's case) M had 36 month K; paid 15 months - 21 months left (Bank suing for this); credited to the consumer (possible that this consumer gets benefit of car for 15 months - greater use/benefit than X) X had 3 6 month K; paid I month - 3 5 months left (Bank suing for this); credited to the consumer (X only has use of car for I month; less value than 15 months use to C) 37

FTC holder rule does not apply to credit card sales, Fair Credit Billing Act applies to credit card sales Claims against a credit card company are limited to transactions exceeding $50 and transactions within 100 miles of home assumption that the larger the transaction, the more likely it is on credit, will be paid in installments assumed that credit card companies police sellers FTC does not provide protection to credit card purchases

TEXAS: Home Savings Association v. Guerra Guerra had rock siding put on their house. It crumbled Guerra sued the builder and HSA who bought the loan from the builder asserting claims under DTPA. Both defendants were held J/S liable at trial. App. Ct. says the s could not be jointly and severally liable because the lender was not liable under DTPA because lender was not included in the deceptive or unconscionable acts but is liable up to the amount paid by , $1,250. Under the DTPA, if the lender had been closely connected to the sales transaction, or engaged in a deceptive act, they could have been held J&S liable under DTPA. o Holder has no derivative liability under DTPA unless inextricably intertwined in transaction w/seller as to be equally responsible for conduct of sale o Close connection shows more than mere extension of credit by holder - buyer is consumer w/respect to holder as well as seller International Harvester case - where IH logo appeared on retail installment K, holder inextricably intertwined w/seller

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H. QUALIFING FOR CREDIT: FAIR CREDIT REPORTING AND EQUAL CREDIT OPPT ACT FAIR CREDIT REPORTING ACT: (Title VI of the Consumer Credit Protection Act) FCRA protects against inaccuracy of information CL has two causes of action, but they a ineffective o Defamation has action for untrue statements made by who does not have a privileged o Invasion of the Right to Privacy public disclosure of private facts or place consumer in false light in the public eye Who it regulates: Consumer reporting agencies Consumer reports Users of consumer reports o Credit card companies, creditors, employers Furnishers o Company can be both a user and a furnisher of information

Provides rights to consumers

Generally: Purpose of FCRA: require consumer-reporting agencies to adopt reasonable procedures for meeting needs of consumer credit, which are fair and equitable to the consumer with regard to confidentiality, accuracy, relevancy and proper utilization of the information. Applies to situations in which a person collects information on a consumers 7 factors and the information is used by a third party as a basis for denying or increasing the charge for credit or insurance to be used primarily for personal, family or household purposes. Also applies if the information is used for purposes relating to employment opportunities or certain other business transactions. Act attempts to protect consumers from invasion of privacy and the dissemination of false, outdated, or misleading information by placing obligations on credit reporting agencies and users of the information about consumers. Consumer reporting agencies must adopt reasonable procedures to ensure that the information that they disseminate is accurate and up-to-date and that it is furnished only to users with certain permissible purposes. Credit reporting agencies and users have disclosure obligations designed to ensure that consumers will know when a consumer report has been used as the basis of action adverse to their interests, and that consumers will be informed about the nature of the information being disseminated about them. Furnishers of information to consumer reporting agencies are required to participate in the reinvestigation conducted by the consumer-reporting agency. If the obligations are not met or the consumer sustains damage notwithstanding eventual compliance with the obligations, the consumer may bring a civil action under the Act. The Act also makes it an offence for a user to obtain information on a consumer under false pretenses and for an officer or employee of a reporting agency to furnish such information to an unauthorized person. HOW THE FCRA WORKS When it applies Act applies to consumers o Individuals, only natural persons, not artificial entities Consumer report must be involved o Consumer report is information communicated by a consumer reporting agency to a third party; involving written, oral, or other communication of any information bearing on consumers 7 factors used or expected to be used or collected for certain purposes See exclusions for what is not a consumer report Must be a consumer reporting agency o A person or business who regularly collects certain information for the purpose of furnishing consumer reports to third parties for a fee, dues or cooperative nonprofit basis o Information communicated by anyone other that a reporting agency is not a consumer report Information must bear on a consumers 7 factors. 39

Reports about evictions, rental payment histories, list of consumers who pass bad checks Reports about artificial entities are not consumer reports even if they contain information on individuals because the report is not on a consumer o Reports on individuals in their business capacity are not consumer reports o Non-consumer specific list is not a consumer report Information must be used, expected to be used, or collected for a permissible purpose o If a reporting agency expects a user to use a report for a permissible purpose or if the agency collected the information in the report for a permissible purpose, the report is a consumer report even if the user applies the report to an impermissible purpose. o Must only show one: used, expected to be used, or collected or a permissible purpose o The test is whether in information would ordinarily be expected to be used for a permissible purpose, it does not require that the particular reporting agency expected the purpose for that transaction Permissible purposes that make the information a consumer report o Establishing consumers eligibility for: o o

Credit or insurance to be used for personal, family, or household purposes Employment purposes (see conditions for furnishing and using reports for employment purposes Other purposes authorized under 604

What it requires Reporting agencies o 604 can only issue consumer reports for purposes contained in 604 See limits on reports for employment purposes and transactions not initiated by the consumer o 605(a) limits information that can be put in the consumer report. See exemptions at 605(b) o 605(d)-(f) information that must be in the credit report o 606(d) limitations on preparation and distribution of investigative reports o 607 requirement to maintain reasonable procedures and provide notice to users and furnishers of information of their obligations o 609 information that must be disclosed to consumers o 610 form of the disclosures to consumers o 611 Obligations when consumer disputes accuracy of information in consumer report o 612 agency can charge a fee for certain disclosures o 613 notice and procedure required when public information is used for employment purposes o 614 limitations on the inclusion of information in an investigative report o o o o o o o o o o o o o o o o Furnishers of Information 623(a) Cannot report inaccurate information 623(a) Duty to correct and update information 623 Duty to report inaccurate information after notice of dispute form consumer 623 duty to not report disputed information unless notice of the dispute is given to the CRA 623 must participate in reinvestigation upon notice of dispute form CRA 623 Duty to report voluntary account closings 623 Duty to report dates of delinquencies Users of Credit Reports 604(f) Users must have a permissible purpose to obtain a consumer report and must certify that they has a permissible purpose 604(b) Obligations of users when consumer reports are obtained for employment purposes 604(c) Obligations of users or prescreened lists 606 Obligations of users of investigative consumer report 615 Must notify consumers when adverse actions are taken Consumers 615 - Right to be told if adverse action was taken based on information in a credit report 609 Right to find out what is in the file 611 Right to dispute information contained in a reporting agencies file 611 - Inaccurate information must be corrected or deleted 40

o o o o o

623 - If dispute information with furnisher of information, furnisher must not report the information to the CRA without including notice of the dispute 605 - Outdated information cannot be reported 604 - Access to the file is limited 604(b) - Consumer consent is required for reports that are provided to employers 604(c) - Consumer can choose to exclude their name form CRA lists for unsolicited credit and insurance offers

How it is enforced Civil liability for willful noncompliance o Any person (furnishers, users, CRA) who willfully fails to comply w/requirements o Actual damages, not more than 1,000 o Punitive damages o Attorney fees must have a smoking gun to show willful noncompliance: hard to prove w/ all the reasonable procedures requirements Users can be held liable for violations by their employees if there is a finding of apparent authority Civil Liability for negligent noncompliance o Any person o Actual damages, attorney fees and court costs Criminal Penalties for anyone who knowingly and willfully obtains information from a CRA under false pretenses Public enforcement FTC, various agencies Requirement that violations are unfair or deceptive practices Enforce through cease & desist orders for CRA, users of reports, & others not regulated by fed agencies State agencies: AG, consumer protection division CRA has reason to believe that information would be used for a permissible purpose Information is accurate:

DEFENSES:

If the info is accurate, can the consumer question the reasonableness of procedures? Ex: indicating litigation, but not saying that it was in his official capacity No if technically accurate: Austin Truth is a defense: If accurate, don't get to the procedures But the consumer can dispute the accuracy through 611 (1681i) Incomplete does not necessarily mean inaccurate If misleading enough, then not max possible accurate: can look at the procedures: Koropolous Precise nature of the information is within the control of the agency: their own classification and info Use a balancing test for determining accuracy: Koropolous The burden of the agency v. the consumer's need for accuracy/potential harm for inaccuracy Places more of a burden than Austin on the agencies Have to look at how misleading is it: if it is misleading enough to call the procedures into question, then get to look at the procedures Ex: if pulls up 12 w/the same name, should ask for more information to make sure that it is the right person Other courts have agreed with this Putting a warning on the report that the information may be technically accurate but you should check it: Would probably not be enough. The report was ordered in the first place for the agency to go back and check What can one expect the CRAs to do. May not have to require them to continually update after receipt and verification- this may place an undue burden on the agency 41

 Some courts may require the agencies to exercise reasonable care in verifying the information about the consumer: make sure that it relates to the consumer, that there are no extenuating circumstances to report FTC commentary: may depend on the situation Not: If it reasonably believes to be reputable and appears credible, More stringent if appears implausible and inconsistent, procedures for furnishing seem likely to result in inaccuracies, had numerous problems before w/that source Questions do arise as to whether the report here is accurate May have to do more than just Consult the same people that you consulted in the past Consult the people that the consumer is having disagreements with Must do a more thorough investigation if it is warned that the information may be inaccurate May have to go beyond the original source if unreliable, if the agency knows or should know that May also depend on the cost of verifying the accuracy of the story v. the possible harm inaccuracy can cause to the consumer Scope of the Act Greenway v. Information Dynamics, Ltd. o Facts: IDL collects history on customers who write bad checks, and they compile that info and sends the info out to their subscribers. The information is not specific to consumer or subscriber, but is for all consumers and subscribers o Issue: Is IDL a consumer reporting agency Yes, gathering consumer information for a monetary fee, furnishes a consumer report Ct decides case by relying on 603(d)(1)(C) looking to permitted uses of consumer reports 603(a)(3)(F) because the use of the report falls into the purpose of the consumer report under 604 it therefore was a consumer report o claims that this was in direct violation of 1681b of the FCRA

Permissible purposes: "the information can be reported to a person the agency has reason to believe intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished . . ." In this case, the users of the info would not likely do business with all the consumers whose info was supplied b/c not all the consumers and users were in the same cities or states. And the agency could not reasonably believe that would occur. o RULE: Under this case, even if the use falls under 603(d)(1)(A) or (B), the purpose of the report must be one authorized in 604 to be a consumer report. Court says that when an agency expects the report to be used for a purpose in 604, it is a credit report. Prescreening: o Permissible if the client agrees in advance that each consumer whose name is on the list will receive an offer of credit o The info will then be used in connection w/a credit transaction o Called a firm offer of credit or insurance: 1681a(l) Will be honored if the consumer is determined based on info in a consumer report to meet the specific criteria used to select the consumer for the offer Can be conditioned on Whether the criteria is established before the selection of the consumer for the offer, and for the purpose of determining whether to extend credit or insurance pursuant to the offer Verification Consumer furnishing any collateral that is a requirement for the extension of credit

Problem 5 page 235 - 604(c) - consumer reports furnished to users so that firm offers can be sent out to a specific group. "i.e. pre-approved credit card mailers". These are allowed under this section so long as certain requirements are met. See 604(c)

42

Problem 6: Andrews owns a furniture store and is also the mayor of littletown, Her opponent in an up-and-coming election is Barker. Andrews gets a Credit report on Barker. Credit Bureau assumes Andrews wants it for business. Credit Bureau will likely be protected by "reasonably believing" it was for business. Must have a reason to believe that the user is using the report for a legitimate business transaction. But Andrews may be screwed b/c this is not a permissible purpose for obtaining the information under 1681b. See also 1681n -civil liability for willful noncompliance. Obligations of Users of Consumer Reports Person ordering the credit report is the "user" Ex users: employers, creditors, insurance companies, credit card companies Problem middle of page 237 - consume takes the car for test drive, tells dealer she isn't sure she wants to purchase or lease, while she is driving the car salesperson orders report. Is this a violation? o consumer didn't authorize the report o there is no transaction yet - she's going for a test drive o go back to the permissible purposes for ordering the consumer report - 1681b o Go back to original definition of consumer report don't know that there will be a transaction consumer has not initiated a transaction - may not have needed credit there must be a legitimate business purpose o Dealer should ask for permission, or have the consumer sign a consent to run a credit report Problem at bottom of 237 o Consumer goes to MC to borrow $500, lists prior/current creditors, MC calls creditor C, C says that she borrowed $350, was consistently late by 3-4 days, now only owes $68, MC denies consumer's application b/c of information from creditor C - what must MC do to comply with 615( 168 1 m)? Denied application b/c of information given by consumer on application Didn't obtain a "consumer report" as defined under FCRA MC doesn't have to tell consumer why they denied her application Creditor C has a duty to provide accurate information - even though not giving a consumer report ( 168 1 s-2 Responsibilities of Furnishers of Information to CRA's)

Austin v. BankAmerica Service Corp. (p. 239) Facts: 1st attempt to get loan - Bank (user) took adverse action against A; denied his credit application, complied with FCRA procedures (written notice, etc.) 2nd attempt to get loan - Bank (user) told A they couldn't approve application but he should come to bank to talk to someone A sues the credit bureau who prepared the report for violation of 607(b) - accuracy of report. argument: Adverse action based on consumer report that said A was named defendant in lawsuit

A complains b/c his involvement in suit is in official capacity as sheriff A is not personally involved in the suit A says the information in the report was not accurate because he was named in the lawsuit in an official capacity. A says the report is not accurate to the maximum possible degree o Court analysis CRA submitted absolute defense of truth of the statement (A is defendant in lawsuit) A argued not accurate b/c didn't differentiate b/w personal/individual While the capacity fact might be helpful to the creditor, it doesn't make the report inaccurate true that A is defendant, so report is accurate o Cannot get to whether procedure is reasonable b/c report is accurate might be that A is really complaining about the credit reporting agency's procedures (not giving the whole picture) 1681i Procedure in Case of Disputed Accuracy (p. 1201 supp.) A can follow these procedures to dispute the accuracy of the information Court in Austin draws distinction b/w completeness and accuracy Court states that it won't issue guidelines on what is reasonable procedure 43

RULE: accuracy is a complete defense (technical accuracy) Policy reasons for this: Promote credit extension Promotes accuracy - can't complain if information is accurate (means/ends analysis) Koropoulos v. Credit Bureau Inc. (p. 242) Reconcile the decision in this case with decision in Austin o Koropoulos adopts a different standard of accuracy than Austin o Koropoulos - CRA had the information and was putting its label on it; places a greater burden on CRA "maximum possible accuracy" o Austin - CRA would have had to find the information; lesser burden on CRA "technical accuracy" w/truth as defense o Subsequent courts have held that if technically accurate, then accurate for the Act. Indicator "I9" wasn't clear - could have meant 1 of 4 different things o Creditor wrote loan off as a bad debt o Creditor placed the loan for collection o Creditor instituted a civil suit against the debtor to collect o Creditor determined debtor skipped/couldn't be located K's debt to VNB was placed with a collection agency And K paid in full; K complains that the 19 status is inaccurate b/c it doesn't clearly show what happened with the VNB debt . Court says the 19 status is not accurate: o Standard is maximum possible accuracy technically accurate is not enough (use balancing test) o The 19 indicator is incomplete, the 0 balance is incomplete cannot tell from reading these elements what happened to the VNB debt This type of information is in the control of the CRA Not too difficult to determine what category K's debt falls in and report it that way Balancing test used by the court to determine accuracy - weigh the potential that the information would create a misleading impression against the availability of more accurate information and the burden of providing such information (p. 245) Technically accurate info. can be misleading Is it misleading enough to call procedures into question? Yes in this case Look at the procedures Burden imposed in making distinctions o Classification system is so imprecise that it fails to amount to a reasonable procedure Must use reasonable procedures to insure maximum possible accuracy Under Austin do not get to reasonableness of procedures until determine if info is

accurate accurate

Under Koropolous reasonableness of procedures is used to determine if the info is

o Is it likely that credit will be denied based on the misleading information? How likely is it? What is the standard? S thinks that technical accuracy can be misleading so technical accuracy cannot be the standard Quantity of information is such that there must be something more than simple technical accuracy, which can be misleading Could a disclaimer or warning satisfy the "maximum possible accuracy" duty? S doesn't know - seems unlikely that it would meet duty Issue # 3 - 604 requires that the information from a CRA should only relate to the person applying for credit Credit Repair Agencies: Help explain the availability of correction procedures, 44

 May handle or direct the interaction with the CRA: identifying the agencies that have files on the consumers, writing letters to creditors or the agencies, advising the consumer what to do Cannot really fix or correct your credit- this is what they claim in the ads Promise consumers a chance to hide unfavorable credit info by establishing a new credit identity May charge excessive fees for doing things consumers could do on their own. Increased regulation by states on them Preys on customers who are already in financial difficulty Encouraged people to apply for an employer identification number: advise them to use this instead of their social security when applying for credit Credit repair organizations act: Requires pre k disclosure Prohibits anyone in the credit repair business from making false or misleading statements Must give & disclose to consumer a 3 day cooling off period in which to cancel any K formed with a CRO, prohibits the organization from receiving any compensation before it has performed the services K that don't comply are void, Consumer can get actual damages, punitive, attorney fees Examples of scams You wont get credit for 10 yrs: FALSE: this is the time pd that bankruptcies stay on credit reports: some creditors will extend to those w/prior bankruptcies Company is affiliated w/government: FALSE File segregation is legal: FALSE: is legal if it complies w/CROA, but using a false Social security # or making false statements to a lender is illegal. EQUAL CREDIT OPPORTUNITY ACT Does the ECOA Apply? Has there been an extension of credit covered by the ECOA? Is there an applicant as defined by the statute? Is there a creditor as defined by the statute? Credit under ECOA Definition is broader than TILA o Applies to credit arrangements with no finance charge or fewer than five installments ECOA applies whenever the obligation to pay is deferred, even if interest is not charged or the deferral is for only a short period of time. Not limited to consumer credit, can be for business, agricultural or investment purposes No formal written agreement is needed to fall under ECOA ECOA applies to all aspects of a credit transaction, prohibits any discrimination in any aspect of a credit transaction Pay as you go is not credit ECOA does not apply to issuance of insurance, only credit Applicant under ECOA Applicant is any person, does not matter what the credit is used for Must request or receive an extension of credit from a creditor Creditor under ECOA Any person who regularly extends, renews, or continues credit Any person who regularly arranges such credit, or Any person who participates in the decision to extend, renew, or continue credit Overview of Act Its unlawful for any creditor to discriminate against any applicant Prohibits discrimination or adverse action based on categories found in 701(a) o See exemptions to discrimination at 701(b)(c)

Requires notification of adverse actions or notice of incomplete applications o Must give specific reasons for adverse action - 701(d) 45

o Must give notification within 30 days of receiving application - 701(d)

Enforcement o Administrative Enforcement - 704 Several agencies are responsible, FTC is default if other agencies to not apply Private Right Action - 707 707(a) actual damages Inconvenience, embarrassment, humiliation, mental distress, injury to credit reputation 707 (b) Punitive damages: Are recoverable even if there is no actual damages Will consider The amt of awarded actual damages Frequency and persistence of failures of compliance by the creditor Resources of the creditor Number of persons adversely affected Extent to which the creditors failure of compliance was intentional Not more than 10,000 for individual, Lesser of 500,000 or 1% of creditors net worth in class actions 707(d) attorneys costs and fees: 169l ed Equitable & declaratory relief. 1691ec How specific must it be? Insufficient credit references, insufficient credit file: not allowed unless explanation by the credit as to why it was insufficient Does not allow to improve application, correct the misinformation, guard against discrimination Type of bank accts, type of credit references: ok: But others interpret need not describe how or why a factor adversely affected an applicant Could argue that scoring systems are not capable of giving precise, specific reasons for denial

2 ways to evaluate the info Judgmental Traditional approach: examines the application and the consumer report to evaluate character, capacity to carry the proposed debt, and capital (the resources available for satisfaction of the obligation) Factors: income, lengthen of employment, whether and for how long owned a home, consumers experience with other creditors Creditors determination or hunch as to what factors bear most directly on creditworthiness More subjective Can consider age or income derived from public assistance program only for the purpose of determining a pertinent element of creditworthiness Credit scoring: statistical analysis of the applicants past credit experience Statistical method which rates the likelihood that they will pay back the loan Selects factors as most relevant, assigns diff number of points teach of the factors Considers: consumers past delinquencies, type of credit, how often credit is applied for, number of inquiries Generally provide risk scores to their subscribers who then use the score to objectively evaluate an applicants credit worthiness: each creditor uses the scores differently Becomes meaningful w/I context of part lenders own cutoff points & risk guidelines If the total exceeds the number the creditor has fixed as the min score, then gets the credit If not, may then get a credit report and use the judgmental method Very feasible for very large creditors More objective More reliable: based on real data & statistics, treats all applicants Not unlawful to have 2 separate scoring systems- one for men and another for women But if women get less credit, then unlawfully discriminatory If not, then okay Okay to use if it is demonstratably and statistically sound Can use age as a predictable variable- can not assign elderly a negative value 46

Problems p. 263 Problem 3 - why can't sex or race be asked about in any circumstances? o B/c discrimination on those bases is prohibited o The provision protects creditors - if he can't ask, he can't discriminate intentionally or unintentionally on those bases Problem 4 In general, creditor cannot assign positive value to Spanish speaking surnames Special purpose credit programs must be in writing and identify a class of persons, must meet special social needs Problem 5 - Seller sells china, etc. on credit does seller violate ECOA by extending credit on more advantageous terms to single women enrolled in any 4 year college than to other women b/w 18-21? o 202.8(a)(3) - 1165 of supp. o Is this a special purpose credit program? Okay if meets special social needs - can it meet special social needs of age class if men are not included; what social need is met by extending credit to this class of women to purchase china o Does it make a difference that the terms are more advantageous, not that credit is being denied? o Probably can't offer special terms to one sex and not the other (can't offer special terms to one race over another); can draw a special purpose program on common characteristics (students are economically disadvantaged) but can't make distinctions w/in that program on the basis of sex (terms can't be more favorable to women than men) cannot discriminate based on the 7 factors Problem 7 - Scoring system characteristics are based on the performance on male customers, may not be the same characteristics as female customers - can separate scoring systems be set up for men and women? o Seems to violate the prohibitions of the statute - don't discriminate (classify) on basis of sex o Hard to prove discrimination if an empirical scoring method is used o One lawyer suggested - if it doesn't result in less women (or men) getting credit then it is okay to set up separate systems o Arguments f6r both positions Problem 8 - 202.5 cannot discourage from making an application Markham v. Colonial Mortgage, (p. 264) Engaged plaintiffs went home shopping, jointly applied for a mortgage and were denied basis of denial was that they were not married so their income wasn't aggregated as income for married persons would be ( indicated their loan would be approved if they submitted a marriage certificate). routinely aggregated married applicants but not single applicants. Claim is that ECOA is violated b/c credit is denied on basis of marital status discrimination based on marital status Court finds that ECOA was violated b/c applicants applied jointly treat couple the same as treat married persons for purposes of aggregating credit. o If both parties are obligated on the loan it should not matter that the parties are married o The refusal to aggregate was not justified o Court reserves the question as to whether income would be aggregated if 2 otherwise unrelated persons applied jointly for a loan Question 1, p. 269 A and C. 2 pilots jointly apply for loan -each is married to another person but cannot qualify on their own for the loan, jointly they can qualify - must the court aggregate their income for purposes of evaluating their loan application? o What is the creditors policy/practice? o If joint applicants income is routinely aggregated then it should be - if it is and the bank doesn't do it for A and C then they have a claim o The marital status of A and C is irrelevant in this context 47

Could creditor require signatures of A and C's spouses on the loan? Depends on community property questions Depends on whether A and C can qualify for the loan on their own or if they are relying on spouse's income to repay the loan Depends on whether the loan is secured or unsecured In some cases could require spouse signature if the spouse will be legally obligated to repay the loan Look at 202.7 Rules Concerning Extensions of Credit (d) Signature of Spouse or other Person. Question 6, p. 269 202.5 Secured v. Non secured credit o If joint assets serve as security of affect creditworthiness, then it may be OK to get Hs info Question 12, p. 269 Patients are not applicants for credit act does not apply o

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I. LIMITS ON THE PRICE OF CREDIT: LOANS AND CREDIT SALES Usury Law Usury = charge for the use of money Usury Laws limit maximum rate that can be charged on a loan o Usury laws only applies when interest is charged, usury laws only apply to loans, not to credit sales 301 of the Texas Finance Code 301.002(a)(4) Interest o Compensation for the use, forbearance, or detention of money o The term does NOT include time-price differential, regardless of how it is denominated 301.002(a)(10)-Loan o Advance of money made to or on behalf of an obligor (borrower), the principal amount of which the obligor has an obligation to repay to the creditor o Does not include a judgment by a court. 301.002(a)(17)-Usurious Interest o interest greater than the applicable legal amount There are two forms of credit: Sale credit Buying on time from the seller Credit price over the cash price is the time price differential this is not interest (TILA will not apply) Usury laws do not apply because not interest Transactions can be structured as credit sales to avoid usury laws Loan credit Borrowing money from one party to pay another Usury laws will apply Credit Cards Like loan credit and sale credit, regulated by state law Also regulated by TILA and National Banking Act Penalties for usury are historically harsh o Forfeiture of all interest and sometime forfeiture of interest o Courts may have an incentive to not find usury to avoid harsh penalties Some states do not provide for the use of sale credit because it is seen as a sham to avoid usury laws Retail Installment Sales Act (RISA) regulates how much the time price differential can be o Applies to credit sales Statute only to retail installment sale transactions 345.001(7)

Retail installment transaction contract or agreement providing for a time price differential and buyer agrees to pay unpaid balance and time price differential in one or more installments Retail buyer person who purchases or agrees to purchase goods or services from a retail seller 345.001(3) Under DTPA must acquire or seek to acquire goods or services Retail seller in the business of selling to retail buyers 345.001(8) RISA only applies to retail sellers, while DTPA applies to all sellers. Goods or Services - limited to personal, family or household use DTPA does not require goods to be for personal, family or household use, can be for business use MMWA only applies to consumer goods, not real property o 345.055 - Regulates how much the time price differential can be How does the "Retail Seller" differ under the RISA from the DTPA? o Under the DTPA, the potential defendant does not have to be someone regularly engaged in the business of selling s o Goods under the RISA have to be for personal, family or household use o Goods under the DTPA can include a business consumer 49

Time-Price Differential Analysis How to determine if a price is for cash or credit 1. Is it a Credit Sale or a Loan? 2. If it is a Sale, then it will be governed by the RISA 3. If it is a loan, then it might be regulated by the TILA 4. If Spa Sells to Bank ... Do the Analysis on the Facts to see the substance of the transaction 5. Look for hidden charges or costs to the consumer We are trying to determine if Usury laws or TILA Regs. are being broken

Carper v. Kanawha Banking & Trust Co., p. 380 o C bought mobile home; C paid $1000 down; took loan from Bank for $9,144 to pay purchase price of $6,180; loan payable in monthly installments of $95.25 o Bank (lender) and mobile home company (seller) want to call this a bona fide sale for time price differential - the credit price of $3,000+ is the time price differential o C claims usurious deal - C agreed to 6.5 % and the deal works out to 11+% o Issue: Was the sale a loan or a bona fide sale? Can't have usurious interest if don't have a loan To determine whether a bona fide sale or loan Look at intent of parties (disputed in this case) Look at terms of transaction - facts of the individual case Interest is not time price differential (a finance charge) Interest suggests a loan Court found this to be a question of fact and not a question of law Texas courts also take this approach - whether transaction is loan or bona fide sale for time price differential, the court will look at facts and circumstances and jury decides o To Determine if usury applies 1st, see if the buyer had the opportunity to choose between a cash and credit price that is seasonably disclosed before the buyer becomes bound by the contract Price has to be Communicated BEFORE the Transaction nd 2 look at the closeness of the relationship between the seller and the lender Here, the seller acted as an Agent of the Bank The Court examined o Sellers agreement with the buyer to finance the balance or arrange the loan o Additional profit to seller through dealer reserves o Splitting of profit between seller and lender from insurance premiums or other charges required of the buyer-borrower o Papers signed by Buyer-Borrower in Blank

3rd, look to see if credit terms expressed to the Buyer-Borrower are couched and calculated in terms of "interest or percentage"

There is not going to be usurious interest if time price differential results in interest rate higher that max allowed - time price differential is not interest but finance charge. Usury laws only apply to interest. Bona fide sale - communicate price before transaction is concluded; communicate the cash price and the credit price to potential buyers; if there is a finance charge it has to be disclosed; consider relationships b/w the parties; affirm that buyer understands difference b/w cash and credit prices - remember that court will always look at substance of transaction. Key question: Is the transaction a loan? Problem 7 (page 392) - Health spa sells annual memberships for $360. The spa sells the loan to a bank for $300. Is there a violation of the usury statute if the statute permits a max of $27 on a loan of $300? o Look to the transaction: Is there a relationship between the bank and the spa. was it assigned the same day? couched in terms of interest or percentage? are seller and lender splitting the profit? 50

what is the real cost of the membership to the spa?

Tri- County Federal Savings v. Lyle p. 393 Facts: money and where it goes: o $60K - $15K to seller and $45K into TC account at 8% interest o Fees: $60 appraisal; $ 10 credit report; $90 inspections Issue: Whether Lyles borrowed $60K or $15K? Court: o Appraisal fees and credit report fee are not part of the finance charge because paid to others o Finance charges incurred regardless of whether the loan is taken out or not - something paid in connection w/credit transaction, incident to credit transaction o Consider whether borrower has received benefit of full amount of principle - what is the amount that measures the benefit the borrower has received o Bank collecting double interest on the money in the account - interest on the account and interest borrower is paying on the account Escrow account with interest paid back to borrower might solve this problem o Have to look at who has control over the money o o o o Note: Ways to look at this problem: Determining the principle Focus is the use of the whole amount (can borrower use the whole amount of the money) Obligation to repay (look at what borrower is obligated to repay) Look at the principle amount of the loan and the duration Lender may start out charging a legal rate but manipulate the principle or duration to Must be usurious at the time of the transaction

charge excessive rates

Equitable Life Assurance Society v. Scali p. 399 Examines common practice of lender requiring insurance in connection with lending money for purchase of home Facts: appeal from a mortgage foreclosure decree entered in favor of the , mortgagee. argued that the mortgage loan was usurious. bought the house for $34k and obtained a loan for $25k. At time of loan, house was appraised at $38,500. As condition of the loan, required to take out a whole life insurance policy for the total amount borrowed from the bank, even- though he had his on policy. Maximum interest for a $25k loan is $176. Borrowers argue that requiring the insurance for $49/mo pushed the interest payment to $195, above the max amount. Court: requiring insurance alone is not usurious per se. Factors to consider: Insurance obtained but premium was patently in excess of actual cost of the insurance -- did the borrower actually receive something of value for their money? Premium goes into lender's pocket, commingled with interest he is getting, causes contents of pocket to be usurious. Requirement that borrower take out insurance that is excessive in amount or is otherwise unnecessary - is it reasonably necessary to have this insurance to secure the loan? o Court settles on this argument o Not the only test but applicable in this case o Where insurance is not reasonably necessary to secure the loan, and total of interest and insurance premium exceeds legal rate of interest, there is usury Supreme Court differed Court shouldn't interfere with lender's decision that insurance is necessary to secure the loan There was a real transfer of goods and services apart form the loan (they got an insurance policy) Exception for when insurance requirement is a sham, there must be proof of intent Understands the lower courts argument that insurance S had and was willing to assign would be sufficient collateral on the loan - but opts for policy of letting lenders decide what is necessary to secure their loans Requirement of insurance: is it a way to get more money for the loan? See Scali above Did you actually get the insurance? 51

Was the amt in excess of the actual cost of the transaction? Did they pay an amount that is related to the value? Is it reasonably necessary to secure the loan? Would need to show from the entire transaction that the requirement was a sham, mere device to collect usurious interest Compare to the prices that non-borrowers got

RESPA In Usury Section but could have been in TILA Section 2607-Prohibits a Referral Fee Requires uniform disclosures for mortgage transactions Applies to all Federally Related Mortgage Loans o Federally Related focuses on The Lender The nature of the property encumbered

Culpepper v. Inland Mortgage Corporations p. 413 o Facts: went to mortgage broker (premiere) to get a home mortgage loan. Premiere signs up IEI and
transfers the loan to Inland, who in turn pays Premiere a yield-spread-premium (YSP) for the deal. Premiere also charges the Consumer an origination fee for the services it provided, which is calculated as a percentage of the loan. o Real Estate Settlement Procedures Act (RESPA) prohibits a referral fee. 12 USCA 2607 (p412) (broker cannot receive a referral fee from mortgage lender for C's loan). o The court of appeals say that the premium is a referral fee under RESPA. (1) Is there a referral fee?; (2) Was it exempt? YSP looks like a referral fee -- the increase in mortgage rate is paid to the broker for bringing in the loan). Exemptions to this rule. Sale of goods --- court said not here. Payment for services -- not here either b/c paid Premiere for their services. 3rd possible test is to look at the market to determine if the price paid for the goods or services were reasonable. Useful only if payment is for a good or service in the first place Since this case, the HUD issued a statement saying that YSP's are not kickbacks or referral fees. Under the HUD Policy Statement 2 Threshold Questions are asked (1) Were Services actually performed? The statement does not distinguish for whom the services were performed o (2) Are the Payments to the Broker reasonably related to the Value Received? Look at the Total Compensation to see if the Money Paid is Reasonable o Loan Origination Fee + Yield-Spread Premium o Higher interest Rates do not necessarily justify a higher fee This test makes the presumption that the Yield Spread Charge is NOT a referral fee This Shifts the Burden!! Defendants would prefer this test! The Question Ultimately for the Courts will be whether the HUD Policy Statement will trump Culpepper Consumers cannot waive rights/limits of usury laws

HUD Test o

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J. THE NEED FOR INFORMATION: TRUTH IN LENDING AND REG Z Truth in Lending Act o Requires uniform disclosures regarding credit Single method of determining finance rate - APR 12 CFR 226 -- Regulation Z is the regulation created to implement the Truth in Lending Act.

When does TILA apply? 226.1(c) Coverage: Regulation applies to individual or business when: Credit is offered or extended to consumers Offer or extension of credit is done regularly Credit is subject to a finance charge or is payable by written agreement in more than 4 installments Credit is primarily for personal, family, or household use. o Unlike DTPA, must be for personal, family, HH use. o TILA covers both Loans and Credit Sales Analysis Is Credit offered or extended to consumers? Consumer is a natural person (not a corporation) The money, property, or services that are subject to the transaction must be primarily for personal, family, or household purposes o Questions as to whether a purchase was primarily for personal consumption as opposed to business looks at the transaction as a whole and to the purposes for which the credit was extended Under 226.2(11) credit card holders can be natural persons or entities Must be a right to defer payment of debt or to incur debt and defer its payment Is credit extended by a creditor? Can be a natural person or organization 2 elements comprise a creditor o Regularly Extends Consumer Credit which is payable by Written Agreement in More than 4 installments OR in which the payment of a finance charge is or may be required, and o The actual lender to whom the obligation is initially payable This is the Person on whom the TILA imposes the Disclosure Obligations Regularly extends credit if more than 25 times in the preceding calendar yr, more than 5 if secured by a dwelling: 226.2al7i If paying out, make sure that they are paying more than they would it paid all at once for it to be a finance charge A creditor can escape from liability under the Act if o They are not a regular extender of credit o Failure to specify the number of installments o Failure to charge a finance charge Look at how the debt is structured: If paying for services as you receive them- then not really deferring payment of debt: not really credit: 226.2(14) Credit arrangers are not subject to disclosure arrangements If go to buy a car, and the dealer assigns it, the assignor becomes the lender, not the dealer. o The dealer would be the creditor if the payments were originally payable to him Open or Closed?? Determine the kind of credit to determine the necessary disclosures

Exceptions: 104 (1603) Not credit transactions Credit transactions for credit involving Business, commercial or agricultural purposes Also would not be a consumer under 103(h) (1602h) Irrelevant whether a sole proprietor or if sold to the owner if still used for business purposes Look at the purpose of why buying an item: the primary use Government or governmental agencies, instrumentalities, organizations Securities or commodities Total amt financed > than 25,000: 53

Unless it is going to be the principal dwelling of the consumer: 226.3b Public utility tariffs

Finance Charge Reg. Z 226.4 -- Definition The cost of consumer credit as a dollar amount Includes any charge payable directly or indirectly by the consumer And imposed directly or indirectly by the creditor as an incident to or condition of extending the credit See Laundry List of what charges are Included in a Finance Charge -- 226.4(b) See Laundry List of what charges are Excluded from Finance Charges -- 226.4(c) HAVE TO LOOK AT THE ORIGINAL TRANSACTION WITH THAT SPECIFIC CONSUMER! TYPE OF CREDIT (DETERMINES DISCLOSURE REQUIREMENTS) Open Credit: 103(i); 226.2(20): revolving credit: credit cards: visa, mc: 102 (i); 1602i; 226.2-20 How to determine: Must meet 3 elements (1) Whether Creditor Reasonably contemplates repeated transactions May disguise as this though not really: o Initial sale of a big ticket item- may not really expect that there would be repeated transactions Amt of credit close to the amts of goods and services bought Benion v. Bank One -- one circuit ct to validate it Creditors interpretation of repeated, not the consumers Decide in the context of the creditors type of business and the creditors relationship with the consumers Could the consumer go to other places and use the card o Courts may find it const- the regulatory agency has the power and the expertise to change it if it wants to o Use of private label credit cards to finance door to door sales o Low monthly payments on satellite dishes (2) May impose a finance charge from time to time on an outstanding unpaid balance If the finance charge is pre-computed at the inception of the transaction, not open (3) May have a limit, but as you pay it off, the credit keeps replenishing After Benion Case, Board promulgated guidelines to determine reasonable contemplation of repeat sales Credit line limited to items not likely to be purchased in multiples Is there a requirement to purchase a designated item? If yes, look at the credit line and sales purchase Does creditor solicit repeated purchases? Does seller have proof of repeated transactions? Z 226.5 Disclosure Requirements for open credit: See 127; 226.5-226.16 Must be clear & conspicuous in writing in a form the customer can keep: 226.5(a)(1) Terms finance charge and annual percentage rate, when disclosed w/a #, must be more conspicuous than the other required disclosures: 225.5(a)(2) When disclosures are required 127, 226.5(b) Disclosure requirements for open ended credit. See 226.5 o First tier Requirements with application (see 226.5a(a)) o Second Tier Requirements -before first purchase (see 226.5(b) If simultaneously open & make a purchase, must be made before the purchase o Third Tier Requirements - each billing cycle (see 226.5(b)

Whenever there is a change to terms or the account is renewed (see 226.9)

Defenses: 54

Show the absence of one of the 3 elements

Closed CreditZ226.2(a)(10): single extension for a fixed amt, everything that is not open credit: Total amt of payments-, # of payments, due dates generally agreed upon by creditor & consumer at time of transaction Ex: mortgage for home, credit sales of large items: cars, furniture, major appliances Z 226.17a Disclosure Requirements for closed credit: See 128; 226.17-226.24 Form of Disclosures: Must be in writing, clearly & conspicuous, in a form the consumer may keep: 226.17(a) Disclosures in 226.18 must be grouped together and segregated from everything else Itemization of the amount financed must be separate from other disclosures under 226.18 Can exclude from the segregated disclosures: o Creditors identity o Variable rate example o Insurance or debt cancellation o Certain security interest charges Segregated disclosures can include o Acknowledgement of receipt o Date of transaction o Consumers name, address, acct

Time of disclosure 226.17b; 128b: Must be made before the credit is extended. 226.17(b) In home transactions, 3 days after application is made. 226.19(a) Payable on demand obligations 227.17(c) Creditor makes disclosures based on an assumed maturity of 1 year. Content: 226.18 must meet all the requirements of 226.18(a)-(r)

Problems

How do you decide what loan to take given varying rates and payment options? Std: R = 2(n)(C), where P(N+1) R is the rate; n is the number of the installments per year; C is the dollar amount of the finance charge; P is the principal amount of the credit; N is the total number of installments during the entire transactions

lending?

Woman selling her own house agrees to owner finance. Does she have to comply with truth in Probably not if this is only time she has ever sold her house. Seller is not a creditor 1602 Definition (f) creditor -- regularly extends consumer credit, payable in 4 or more payments or payment of finance charges. AND the payments must be payable to the person who extended the credit. o See also Reg Z 226.2(a)(I 7) - definition of creditor. What if Real estate agency extended the loan instead of the seller? Same analysis does the agency regularly extend consumer credit. TILA doe not extend to arrangers of credit, only extenders of credit

Attorney agrees to represent but he can't afford the $ 1000 fee. He agrees to let him pay it in installments. Is the attorney required to disclose? NO. There is no evidence that there is a written agreement to make payments in 4 or more payments.

IF the appliance Co borrows $12,000 from Bank to buy a new delivery truck. Must Bank make the disclosures? 103(h) consumer is a natural person when transaction is primarily for personal, family, or household purposes 55

 Under 226.2(11) a consumer is a cardholder or a natural person to whom consumer credit is offered or extended. If purchased with credit card, does not have to be for personal, family or household purposes If appliance company bought the truck with a credit card disclosures are required 1 year membership, 30 x 12 = $360, or cash for $310. Disclosures required if the sale is regulated by the Retail Installment Sales Act or if the credit or loan is governed by the TILA Hospital charges 1.5% per month on any balance not paid within 30 days of discharge; must the hospital comply with TILA? Is the Hospital a creditor? o Reg Z 226.2(a)(14) the hospital is extending credit o Reg Z 226.2(a)(17) no written agreement to make payments over more than 4 installments. Is there a finance charge? o Reg. Z 226.4(c) charges that are not finance charges Unanticipated late payment - late fee is not a finance charge Finance charge must be an obligation for which you must be responsible from the outset - closed credit vs. open credit problem Consumer has an $85,000 mortgage at 8.5%. Needs money to start a business. Another bank will lend money but will not take a second mortgage. So, consumer borrows $125,000 at 9.5%, pays off the first mortgage and used the balance for the business. Must the second bank give the disclosures? Loan is secured by a residence, proceeds used partially for business purposes Second bank does not need to disclose because the proceeds were used for business purposes purpose of the loan was for business interest rate was higher than the first rate is evidence that business was purposes of the loan. If he got a lower rate, purpose may have been to refinance the home In all cases look to the use of the credit, if personal, family or household purposes, TILA applies. Type of collateral used (i.e. home) only matters in cases of credit transactions for personal, family or household purposes Insurance company sells policy for $480 for six months; consumer pays either $480 at outset or installments of $125; if consumer chooses installments must company make TILA disclosures? If he quits paying he loses the premium, he is not obligated to pay Not deferring payment of debt - so this is not credit (reg. Z 226.2(a)(14) TILA would not apply b/c there is no extension of credit here Also not paying in more than four installments Benion v. Bank One Facts: Special credit program through bank one whereby Echostar sold satellite receivers and extended credit through a revolving credit plan which was financed through Bank One. Issue: whether this is a closed end or open ended credit transaction. Of the 3 requirements for open-end credit transactions, only the third, whether Bank One reasonably contemplated repeat transactions is in question. What does "reasonably contemplated" mean? Comment to 226.2 says reasonably contemplated means that the creditor must legitimately expect repeat business; requires a level of conduct on the part of the creditor. o Advertising credit terms: Ad may itself be a violation: must comply w/the act if the transaction would otherwise be covered Applies to everyone who advertises. How to do a TILA Ad analysis (1) Determine whether ad is for open or closed credit sale or loan or lease. (2) If Open Credit Sale or Loan, go to 226.16 Reg Z (3) If Closed Credit Sale or Loan, go to 226.24 Reg Z (4) If a Consumer Lease, go to 213.7 Reg M (4) If the Ad violated the TILA and Consumer suffers Damages (5) Possible Causes of Action are DTPA and TILA

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Ad for Open end Credit Sale: 226.16(b) (trigger) 226(a) state only the terms that actually are or will be arranged or offered by the creditor 226(b) Trigger -- if advertise anything that has to be disclose in Z 226.6 initial disclosures: finance charge, other charges, security interests, statement of billing rights then: clearly and conspicuously show 226.16b: (1) any min, fixed, transaction, activity or similar charge that could be imposed (2) any periodic rate that may be applied expressed as an annual percentage rate: multiply each periodic rate by the # of periods in the yr (3) any membership or participation fee 226(c) catalogues or multiple pg ads if in a table or a schedule in enough detail, then is a single ad if. o clearly and conspicuously set forth AND if any of the above are there clearly refers to that pg on which the table or schedule begins includes all the necessary disclosures for a rep scale of amts up to the level of the more commonly sold higher priced prop or services 226(d) home equity plans APR is not a trigger: not included in the disclosure requirements Ad for Closed Credit-226.24: (a) state only the terms that actually or will be arranged or offered by the creditor (b) rate of finance: if finance charge, then also annual percentage rate. If the APR will increase after consummation, have to state that Simple annual rate or periodic rate that is applied to an unpaid balance can be stated with but not more conspicuously than the APR 226.24(c)(l)-Triggering Terms: If uses the terms if any of these terms are present, must also have (c)(2) disclosures o amt or % of down payment, o # of payments or pd of repayment o amt of any payment o amt of any finance charge Then: 226.(c)(2) requirements o amt or % of down payment o terms of repayment o annual percentage rate, and that it may be increased after consummation (if it will) o can not just have a percentage- must say "annual percentage rate"

226.24(d) catalogues and multi-page ads table or schedule in detail to require the above disclosures will be considered a single pg if o it is clearly set forth o any statement of the terms appearing elsewhere in the catalogue or ad clearly refers to the pg on which the table or schedule begins table or schedule is okay if it includes all the appropriate disclosures for a rep scale of amts up to the level of the more commonly sold higher prop or services offered

Ad for Consumer Leases - 213.7 Reg M Disclosures must be clear and conspicious 213.7(b)(2) cannot use the term APR Triggers under 213.7(d)(1) If these terms are disclosed, must also have (d)(2) disclosures Remedy for violation of Advertising requirements Administrative enforcement under 108 No civil liability under 130 o Advertising Credit Terms Problems page 214: 11.5% financing - if this is a closed ended ad then it would likely need more information, it would need APR after the %. If it is open end, then it is not a trigger. 57

 ad says 6 monthly payments of $47.95. States the total cost. States 6 months no financing. This is a closed end credit sale. Under 226.24(c)(1) b/c it says the number of payments, then it must meet the disclosure requirement under 226.24(c)(2) which requires disclosure of (1) amount or percentage of down payment, (2) terms of repayment, (3) APR. TILA generally does not apply to non creditors. Even though this ad may only be by a credit arranger, the advertising provisions apply to everyone. See 144(b) exclusion for ads for residential real estate. as for real estate, the statute says that the advertising requirement do not apply to real estate advertising. But, according to the official comments, these rules are suppose to apply to everyone. An ad that states no down payment, could argue that this is a trigger of amount of down payment. If so, need required disclosures from (c)(2). Remedies 125 Right to rescind 125 Right of Rescission as to Certain Transactions Applies to open credit when security interest is in consumers dwelling. Does not apply to a residential mortgage transaction Applies to consumer transactions Must have a creditor Security interest does not have to be in writing Must provide the material disclosures found in 103(u). See 125(a) Must provide notice of the right to rescind and the forms to do so See 226.23 for what must be in the notice. Right of rescission extends to the latter of 3 days after notice and forms are provided or 3 years if the forms and material disclosures are made. Return of Money or property following rescission - when obligor rescinds, he is not liable for any finance charges, and any security interest given by obligor becomes void upon rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return the money or property given as earnest money, down payment or otherwise. Exempted Transactions: residential mortgage transaction as defined by 1602(w) transaction which constitutes a refinancing or consolidation of the principal balance then due and any accrued and unpaid finance charges of an existing extension of credit 112 criminal liability for willful and knowing violation 130 (1640) Civil Liability Private Remedies under 130 (1640) is Supplemented under 125 (1635) (Right of Rescission) o 3 day right to Cool Off Failure to Disclose the Nature of the Contract would allow o Actual Damages (may include consequential damages) o 2x the Finance Charge, not be less than $ 100 or more than $ 1000, and o costs and reasonable attorney fees No Causation or Intent has to be shown to find a violation of the TILA Actual Damages P must prove these damages Must prove: o Transaction within TILA and: o Creditor failed to comply with act or Reg Z o No showing of injury needed.

108 Administrative/Injunctive relief: Injunction Cease & Desist Order Restitution

Consumer Leases: Part E of TILA Analysis is very similar to TILA: Have to go to Reg M for various provisions 181(1) (pg230 supp) Definition -- consumer lease: 58

Use of personal property By a natural person Exceeding 4 months If terminable without penalty during the first 4 months, then exempted Total contractual obligation not exceeding 25000 Includes the total payments due under the lease, plus any trade in or initial payments, Does not include: o Option price stated in the k o Residual value at the end of the term of what the items is expected to be worth For personal, family, or household purposes Whether or not there is an opportunity to become owner of the property at the expiration of the lease.

Lease Definition refers to 103(g) credit sale definition "Credit sale." Means that lessee contracts to pay sum substantially equal to or in excess of the aggregate value of the property and services involved, AND it's agreed that lessee will become, for no other or a nominal amount of consideration, the owner of the property. Regulation M 213.2(e)(1), (2) "Consumer Lease" (442 supp). Doesn't include a lease that meets definition of credit sale under Reg Z, or a lease for agricultural, business., or comm. purposes. Regulation M 213.2(h) -- Lessor: Lessor means a person who regularly leases, offers to lease or arranges for the lease of personal property under a consumer lease. A person who has leased 5 times or more in the preceding year. Lessor includes arrangers of the lease o This differs from credit sale where only the creditor has a duty to disclose creditor does not include arrangers of credit Exception Agricultural, business, commercial purposes Government or governmental agency, instrumentality or organization Rent to own o They are terminable without penalty at any time o Aren't sales or leases so not covered under fed law, but are covered under state law open-ended Lessee bears the risk: Based on the diff b/t the residual value of the leased property and its realized value residual: value that we agree upon at the time of the transaction that we expect the item to have at the end of the lease term o agreeing on the price that you would pay at the end of the lease o ie- based on mileage realized: actual value of the item at the end of the lease o if you go over the mileage, the value will be less car lease closed end renting an apt lessor bears the risk

Reg M. 213.3-Disclosure requirements: See 182; 213.1-213.9 must be made clearly and conspicuously in writing must be made prior to the consummation of the lease can be made in another language, but must be made available in English at the lessees request can use estimates- 213.3d if it later becomes inaccurate, that inaccuracy is not a violation what must be disclosed: 213.4 183 Substantive limits on lessors ability to draft a lease 59

only applies when lessee is liable for the estimated residual value actual residual value should not exceed estimated residual value by more than 3 times amount of monthly payments

Damages -- Same TILA provisions above apply here actual damages 25% of the total periodic lease payments: statutory damages no less than 100 no more than 1000 costs, attorney fees Rent to own not generally covered by TILA because lease is less than 4 months in length are usually rented on a weekly basis, for less than one month most of the consumers who use these are unable to purchase the item through a regular credit arrangement & installment sales k states have created statutes to fill this gap what is it considered: not usury credit sale No: lessee contracts to pay only one installment, less than the value of the prop o Can always walk away & return item w/ no further obligations: only binding wk to wk Yes: can be viewed as a credit sale: agrees to pay a sum = to or > than the value of the goods, where there is an option to purchase for nominal consideration Rental purchase agreements act Covers rent to own violating this allows you to bring an action under the DTPA rental purchase agreement requirements rental term is 4 months or less requires certain disclosures, in plain language protects consumer if act is violated with a certain number of payments made To argue that the TILA applies to Rent To Own 226.2al6: applies to leases unless terminable w/penalty to the consumer argue that if a consumer pays on a rent to own deal for a long pd of time, but then terminates the agreement, the forfeiture of the consumers equity constitutes a penalty rent to own is like an installment k: resulting in ownership, not just leases

60

K. CONSUMER PROTECTION DURING CREDITORS ENFORCEMENTS Common law protections 3 C/L theories of recover: Intentional Infliction of Emotional Distress Invasion of privacy Defamation Emotional Distress Test outrageous, extreme conduct abusive language, shouting, railing at the debtor, repeated threats of arrests, ruination of credit, threats to appeal to employer to endanger employment goes beyond all possible bounds of decency regarded as atrocious utterly intolerable in a civilized community does not extend to mere insults, threats, annoyances, trivialities severity of emotional distress: must be intense no reasonable man could be expected to endure it consider the intensity and duration of the distress in many cases, the extreme & outrageous character of conduct is itself important evidence of distress not limited tcases of bodily harm intentional: knowledge that the distress would be severe, likely to result from the conduct relationship of the parties: abuse of a position or a relation w/another which gives actual or apparent authority over the other or power to affect his interests continuing relationship if you don't do this, I am going to do something else police officers, school authorities, landlords, collecting creditors Analysis Must look at the content of the activities: ie- the content of the phone calls That will indicate whether it is extreme or outrageous Repeated activities are not enough: Phone calls: Just calling is not enough Are they leaving a message on a machine where others can hear it? Restatement of torts: 46 Knowledge that another is peculiarly susceptible to emotional distress may make a persons conduct actionable when it otherwise would not be

Inducing to write a check Common tactic It is usually a violation of a law to write a bad check Getting check puts the creditor in a position: can take it tan attorney & claim violation of the statute Creditor then offers the opportunity to stop the criminal proceedings by paying the debt Invasion of privacy 2 types Intrusion into debtors solitude Def. Free from unwarranted invasion, right to be let alone, Intrusion into solitude Used frequently for o Numerous phone calls at inconvenient times o Personal visits o Abusive language publication of public facts Truth is not a defense: plaintiff still has a rt not thave the public info publicized Will sometimes tell the employer: gives leverage over the creditor: they have an interest, unlike telling neighbors/friends Unreasonably & seriously interferes with anothers interest in not having his affairs known to public 61

 Test

Publication of private facts Balance the interest of the creditor v. the interests of the debts v. interests of the 3rd party Must be an unreasonable invasion

Texas Debt Collection Act TFC pg 255 Broader than Federal Statute-Applies to ANY Debt Collector 3rd party collectors and creditors who collect own debts The Federal Act only applies to Professional Debt Collectors 3rd party collector only A Consumer can sue under the State Act or the Federal Act Protects Consumers - individual who has a consumer debt o Under DPTA consumer is an individual or business Regulates Debt Collectors - person who directly or indirectly engages in debt collection and includes a person who sells or offers to sell forms represented to be a collection system, device, or scheme intended to be used to collect consumer debts. o In TX may include the creditor

Third party debt collector same as debt collector in Fed statute o 3rd party debt collectors are also debt collectors Attorney Exclusion as a 3d Party Debt Collector

Must be a Consumer Debt means an obligation, or an alleged obligation, primarily for personal, family, or household purposes and arising from a transaction or an alleged transaction

Prohibits 392.301-Threats or Coercion 392.302-Harassment; Abuse 392.303-Unfair or Unconscionable Means 392.304-Fraudulent, Deceptive, or Misleading Representation 392.402-Criminal Penalties Not less than $ 100 or more than $500 fine for each violation. Offense is a misdemeanor 392.403--Civil Remedies Injunctive Relief Actual Damages Attorneys Fees 392.404 -- DTPA Full Scope of Damages Makes it a tie in to DTPA

Remedies

Fed statute: Fair Debt Collection Practices Act Subchapter VIIII of Consumer Credit Protection Act 800 pg 306 supp. Generally FDCPA is Very Different from the Texas Act Under the Federal Scheme, the target is Professional Debt Collectors Texas Statute applies to any debt collector The Act only targets 3rd Party Debt Collectors because There may be no recourse under State Law When creditors dealt unfairly with consumers, there were other ways the FTC could deal with creditors Does NOT Apply to Commercial Debts 62

813 - Consumer doesn't have to prove Intent to Breach the Statute Once the consumer alleges misconduct, the burden shifts to the debt collector to mount its defenses Mistake is the debt collector's defense Objective is to Eliminate abusive debt collection practices and to insure that ethical collectors are not competitively disadvantaged A Creditor is not a debt collector if he seeks to collect his own debt The Federal Statute would not apply to either Voneye or Davis In neither case was the party collecting debt a "Debt Collector" under the federal scheme Federal: Protects Consumers: natural persons obligated to pay a debt Regulates Debt collectors: 3rd pty debt collectors: o There was an assumption that creditors had an incentive to maintain good will o Must regularly collect, attempt to collect, either directly or indirectly debts owed o This includes other professions besides credit agencies Attorneys: heintz: if regularly does it through legal proceedings o Really irrelevant whether sent the letter in response to another statute- ie DTPA- will still have to meet these obligations o Debt: any obligation to pay arising out of a transaction in which the money, prop, insurance, or services which are the subject of the transaction are primarily for personal, family, or household use o Does not arise from an extension of credit o Arises from a breach of payment of obligations in the K b/t the parties Restricts content of communications by debt collectors and who can be communicated with: Can communicate w/other people re: acquisition of info: 804 o Skip tracing: ascertaining the consumers current address, employer, bank: prohibited here: 804 Communication w/ the consumer: 805(a) Communication w/3d parties: 805(b) Prohibits Harassment or abuse: 806 o Standard: looking at the more susceptible consumer: jeter v. credit bureau Other circumstances of the consumer Relationship b/t the consumer & the debt collection agency Egg shell plaintiff Would not be harassed by statement in and of itself. warning would not be enough False or misleading reps: 807 o Standard: least sophisticated consumer: jeter v. credit bureau o Tendency or capacity to decieve Unfair practices: 808 o Collect phone calls: prohibited if don't identify the true purpose of the call: 808(5) Enforcement Admin: 814 Private: 813 o Actual damages Factors to consider: 813(b) Frequency & persistence of noncompliance, nature of the noncompliance, extent to which noncompliance was intentional o Additional damages- not exceeding 1000 Even if there are multiple violations, the limit may apply for each consumer, not for each violation o Costs & Reasonable attorney fees Common Law Limits 63

tumor.

Public Finance Corp v. Davis consumer was indebted to Public finance on a promissory note executed by her and secured by a security interest in her household goods. She made regular payments until Aug. 1974. She quit paying because she lost her job. Public Finance filed suit on the note. She counterclaimed for intentional infliction of emotional distress. Public finance did the following: repeatedly called her at home and at the hospital where her daughter was suffering from a brain She was asked to write a check that wouldn't be deposited but it was and it bounced. They called her friends and told them that she was writing bad checks. They went to her house and inventoried her goods. Elements of IIED: Extreme and outrageous conduct Emotional distress must be severe Actor must know that severe emotional distress is certain or substantially certain to occur The court dismissed her claim for failure to state a claim. Court says she did not plead the facts as to the content of the letters and phone calls Abusive or threatening language may be extreme and outrageous In pleading must present facts of the extreme on outrageous behavior Dissent says the jury should be the one to decide if the actions were extreme and outrageous Comment "e" to Restatement 46 says that it must be more than mere insults, indignities or annoyances that are not extreme or outrageous Comment J to Restatement 46 says that the court determines whether on the evidence severe emotional distress can be found and the jury determines whether on the evidence, it has in fact existed.

o Voneye v. Turner o Voneye was the consumer and an employee of the US government. Turner was the agent and employee of the Aetna Finance Company. Voneye was the co-signer of a loan. Aetna sends a letter to Voneye's employer requesting his employer's assistance with collecting the debt. Voneye filed suit for invasion of privacy. o The court says there are two types of invasion of privacy (1) intruding into the person's solitude; (2) publication of private facts. o Court says the employer may have an interest in the payment of the obligation possible garnishment if not paid. Today garnishment only for child support, but employer may have other interests o Court says sending the letter to the employer was not sufficient publication o There are there elements of Invasion of Privacy: Unreasonable and unwarranted Interference with privacy Severe damages
Problem 6 (586) - Consumer's employer receives a letter from finance company asking for employee's address, phone #, and current salary. Is this permissible? No. 1692c(b) can only confirm or correct place of abode, employment, phone number. Can't ask for salary under 1692c(b). 1692f Problem 7: Collector makes a collect call to the debtor. Okay? NO. Can't conceal the true purpose of the call.

Problem 8: Would it violate 1692e of the FDCPA for a debt collector to write or state the following o "If you don't pay this debt, and creditor gets a judgment against you, you may lose your car, TV and even your home." false and misleading under 1692(5) - threat to take any action that cannot legally be taken or that is not intended to be taken. o "If you don't pay this debt, we will have to sue you. - okay, unless not intended Jeter v. Credit Bureau Facts: debt collector sends 2 letters. 1st one says that you are here by notified that if you don't pay your debt they will have to recommend that the creditor give the account to sue. Second letter says you have to pay w/in

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o o o o abuse o

5 days or will be sued. One month later she sues under 807(5) action not lawful or no intent, 807(10) deceptive means to collect & 806 - harassment or abuse. o Court: For purposes of the 807(10) claim, court applies a least sophisticated consumer test Same as in Charles of the Ritz The standard is objective, no actual deception is required For the 807(5) claim, must only intend to recommend to take legal action Must provide evidence of intention, look act past actions or policies Debt collector should follow provisions of 809 For the 806 claim, court provides a heightened standard Perspective of a consumer whose circumstances make him relatively more susceptible to harassment or Court says statements might be misleading be were not harassment Henitz v. Jenkins -

Facts: H=lawyer; J=consumer. H's client is a bank. J borrowed money to buy a car and defaults. H send demand letter for amount of loan and $4,173 in insurance costs. The problem is that the K didn't permit the insurance. She sued alleging that the insurance violated 1692e(2)(A) false representation of the character, amount, or legal status of any debt; Lawyer files 12(b)(6) motion alleging that as a lawyer he is not a debt collector and therefore the statute doesn't apply to him. Court: Lawyer is debt collector. He meets the definition under the statute. He regularly collects debt due or asserted to be owed or due another. Regularly may also include occasionally Generally attorneys will be subject to the FDCPA, litigation is included as a debt collection activity

Romea v. Heiberger &Associates - 3 day notice to vacate. If rent was to be claimed in court, the demand had to make the same request. Back rent is a debt and notice seeking back debt is covered by fair debt collections act and failure to provide proper information on the first communication with the debtor was a violation. (See 1692g). To prevent the problem, have the creditor write the letter himself. FDCPA only applies to 3rd party debt collectors.

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