Credit--Disclosure Requirements

Questions 1-5 relate to the US Court of Appeals opinion in Ford Motor Company v. Federal Trade Commission:

< style="font-family: arial;">1.  What was Ford advertising that resulted in this lawsuit?

    "6% plan"
    1/2% monthly on original unpaid balance (see * p. 2)



2.  Why did the FTC allege that the advertising campaign was deceptive?

    -the average member of the publid thought it meant 6% simple interest
    -in fact, it was an "add on" interest rate



3. What was the actual simple interest rate of the 6% rate advertised by Ford?

    -11.5% (almost double)
    -why? (will see in a minute)



4.  What was Ford’s defense?

    -everyone else was doing it (including at least two federal agencies)



5.  Did the FTC buy that defense?  Why or why not?

    -no
    -* p. 4


Insert here the attached explanation of three "6% financing plans"



6.  True or False: Prior to 1968, the biggest problem in the disclosure of credit costs was lack of uniformity in the way costs were disclosed by various creditors.

    -add-on rate
    -discount rate
    -simple interest rate
    -only the amount of payments stated (e.g., "only $50 a month")
    -"no money down"

    -whether these were good deals or not was impossible to determine



7. To resolve the problems associated with disclosure of credit costs, Congress passed
a. the Fair Credit Reporting Act
b. the Equal Credit Opportunity Act
c. the Truth-in-Lending Act
d. the Fair Credit Billing Act

    -we saw this in an earlier class because it provides a 3-day right to cancel
    -but it's primarily a disclosure law


8. Congress gave rulemaking power under the Act to
a. the Federal Trade Commission, which adopted Regulation Z
b. the Federal Trade Commission, which adopted Regulation M
c. the Federal Reserve Board, which adopted Regulation Z
d. the Federal Reserve Board, which adopted Regulation X

    -fairly common practice
    -Congress passes a law, then gives regulatory agency authority to "fill in" with rules
    -in this case, it's the FRB and Reg. Z


9. The Regulation requires that the cost of credit be disclosed
a. based on the simple interest rate
b. based on the actuarial rate
c. using the term "annual percentage rate" or "apr"
d. all of the above are true

    -TILA is merely a disclosure law
    -does not regulate the RATE of interest
    -that's determined on state-by-state basis



10. A new car loan and home mortgage are examples of
a. open-end transactions
b. revolving accounts
c. closed-end transactions
d. all of the above

    -why is a car loan "closed end"?
       -cuz it doesn't anticipate additional transactions under the contract
       -unlike a credit card, which does
    -note that (a) and (b) are the same thing


11. Identify five or more disclosures that the Regulation requires in all closed-end transactions.

    -see list of 10 in sec. 4 of lecture notes
    -see "federal box" in sec. 2


12. In an open-end transaction, the Regulation requires
a. a single set of disclosures
b. two sets of disclosures
c. three sets of disclosures
d. four sets of disclosures

    -why two sets?
       -initial disclosures in original contract (e.g., when you get credit card)
       -monthly statements


13. Identify five or more disclosures that the Regulation requires in all open-end transactions.

    -see sec. 5 of lecture notes


14. What is a "triggering term" as used in the Regulation?

    -see sec. 6
    -a term that, if used in an ad, "triggers" the requirement to disclose other terms
    -prevents advertisers from only advertising the most attractive terms of an offer
       -e.g., can't advertise only the monthly payment or "no money down" cuz consumer doesn't know if it's a good deal or not


Questions 15-16 related to the Applied Graphics ad linked in the lecture notes.

15. Does the ad include any triggering terms? If so, what are they?

    -"no money down"
    -monthly payment


16. Is the ad missing any of the required disclosures? If so, what are they?

    -terms (i.e., how many months)
    -annual percentage rate (APR)


Questions 17-30 relate to the opinion of the Kansas Court of Appeals in Remco Enterprises v. Houston:

17.  What was the nature of plaintiff Remco's business? What would you guess was its target market?

    -"Rent-to-Own" (at time was world's largest RTO company)
    -low income consumers who couldn't pay cash and had no credit


18.  What was the socioeconomic status of defendant Houston?

    -definitely in target market
    -20, welfare mom, 3 kids, $320/month income


19.  What were the products she had contracted to "rent to own"?

    -television
    -stereo


20.  What were the terms of the contracts?

    -stereo: 69 weekly payments of $12
    -tv: 104 payments of $17 ($1768)
    -tv and stereo payments represented 1/3 of her monthly income



21.  Was the consumer obligated to make payments until she owned the goods?

    -no; she could stop paying and return the goods at any time


22.  How did the case end up in litigation? Who sued whom and why?

    -Houston paid off stereo
    -after 68 payments on tv, stopped paying
    -Remco sued to recover tv and missed payments
    -Houston counterclaimed



23.  Houston alleged that the sale violated TILA--that it was a “disguised credit sale” and should have disclosed the amount of the finance charge and the annual percantage rate.  How did the court rule on that claim? Why?

   -case of "first impression" in Kansas
    -other states had ruled both ways
    -staff of FRB had issued opinions that RTO was not a "credit sale" covered by TILA because there was no obligation to pay the full value of the property
       --and FRB staff opinions given great weight
    -proposed 1978 amendment to TILA to include RTO in definition of "credit sale" was not enacted
    -finally, 1980 amendment to TILA specifically excluded leases that were terminable at any time by the consumer
    -thus held against Houston

   
24.  Houston also alleged that the contract was “unconscionable.”  What about the contract did she say made it unconscionable?

    -price
    -see * p. 3 for Kansas law on unconscionability
       -more specific than Vermont's law
  



25. What did case law in other states indicate was the markup over retail that would suggest the sale was unconscionable?

    -2.5 times

   
26.  What was the markup over retail in this case?

    -2 times


27.  How did the court rule on unconscionability?

    -ruled against Houston



28. What reasons did it give?

    -see * p. 4-5



29. What did the court say about the impact of defendant's financial and educational background on its decision?

    -see * p. 5
    -Do you think she REALLY understood the nature of the deal she was getting?



30.  Do you think the contract was unconscionable? (Had this been a credit sale, the
annual percentage rate would be 93.5%. Does this information affect your answer--considering that you're probably paying less than 20% on your credit card balance?)


31. How did the Vermont Attorney General's Office deal with the problem, exemplified by the Remco case, of excessive credit costs in rent-to-own transactions?

<>    --Rule CF 115
    --Esp. 115.04 (b) and 115.05

    -disclosures are similar to what is required under TILA for credit sale
 
What AG has done is not attempt to ban RTO contracts, cuz they do fulfill a need.

However, Rule allows consumers to make the deal fully undertanding what they're getting into; what they're paying