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PART One
Introduction
CHAPTER 4
Consumer Protection Laws

John E. Grable, PhD, CFP^®
University of Georgia

Sonya L. Britt, PhD, CFP^®
Kansas State University

CONNECTIONS DIAGRAM

Consumer protection laws, a combination of federal, state, and local regulations, impact every aspect of financial planning. These laws, in conjunction with the work of consumer advocacy groups, exist to empower consumers in the marketplace. Policies and rules also help guide how financial planning is delivered either as a service or as a product at the household level. Each law provides consumers with legal protections to combat fraud, misrepresentation, discrimination, and illegal behavior on the part of producers and service providers. When combined, these laws, rules, and regulations work to provide a safety net of consumer finance protection.

INTRODUCTION

The United States has a long and lively history related to consumerism, which is defined as the notion that goods and services help explain the role of individuals in society.36 At the outset of the Industrial Revolution, interactions between producers and consumers were dictated by the concept of caveat emptor, which means “may the buyer beware.” Problems associated with a marketplace in which consumers undertake non-regulated risks when making financial products and other financial decisions include lack of choice, lack of information, lack of redress to resolve grievances, and lack of representation. According to Garman, consumer protection laws have been systematically enacted as a way to protect and secure the following consumer rights:37

LEARNING OBJECTIVE

The student will be able to:

a. Describe consumer laws that impact clients, including bankruptcy, banking, credit, privacy regulations, and other relevant laws.

Rationale

A key element associated with the practice of financial planning involves providing advice in the consumer interest. Consumer protection laws provide a framework for nearly all client–planner interactions. Some laws dictate what actions may be appropriate, whereas other regulations provide a means of redress for consumers. The ability to discriminate between and among appropriate and problematic advice, policies, and projected client outcomes, using consumer protection laws as a guide, is an essential planning skill. In addition to understanding the role of consumerism in the United States and laws associated with protecting the consumer interest, it is also important for financial planners to have a working knowledge of relevant laws that can impact how a client interacts in the marketplace, such as the six legal forms of bankruptcy, as shown in Table 4.1. Privacy rules are also important. Consider the Health Insurance Portability and Accountability Act of 1996 (HIPAA) rules that protect individual medical records and personal health information.38 More broadly, Federal Trade Commission rules, under the Gramm-Leach-Bliley Act, have a direct impact on the day-to-day practice of financial planning. These privacy rules require any financial institution that provides services to consumers to disclose firm policies on the dissemination of non-public information to third parties. Custodians must adhere to these rules, and therefore financial planners should also consider establishing their own client privacy guidelines and annually disclosing this information to clients. As is the case with other aspects of consumer regulation, these examples highlight only a few of the relevant laws financial planners must consider when working with clients.

Related Content Areas Associated with the Learning Objective

■ Financial planners must have both theoretical and applied knowledge of financial and consumer regulations.
■ This learning objective is associated with knowledge about regulations of financial institutions, financial services laws, and general legal and ethical requirements for financial planners.

Table 4.1 United States Bankruptcy Laws

IN CLASS

*Appropriate for on-campus course.

** Appropriate for both on-campus and distance courses.

PROFESSIONAL PRACTICE CAPABILITIES

Entry-Level: An entry-level personal financial planner can identify the key aspects associated with the following consumer laws, rules, and regulations:

Sales Transaction Laws

■ Federal antispam law.
■ National Do Not Call Registry rules.
■ Telemarketer regulations.
■ Switching/slamming telephone rules.
■ Postal Service gift rules.
■ Federal Trade Commission mail-order merchandise return rules.
■ Door-to-door cooling-off period rules.
■ Regulation M (Federal Reserve Board Consumer Leasing Act regulations).
■ Lemon laws.
■ Rent-to-own laws.
■ Gramm-Leach-Bliley Act regulations regarding sales of insurance through federally insured banks.

Privacy Laws

■ Privacy Act of 1974.
■ Cable Privacy Protection Act of 1984.
■ Electronic Communications and Privacy Protection Act of 1988.
■ Right to Financial Privacy Act of 1978.
■ Video Privacy Protection Act of 1988.
■ Telephone Consumer Protection Act of 1991.
■ Health Insurance Portability and Accountability Act of 1996.
■ Children’s Online Privacy Protection Act of 1998.
■ Gramm-Leach-Bliley Act of 1999 (opt-out privacy options).
■ Fair and Accurate Credit Transactions Act of 2003.

Consumer Credit Laws

■ Truth in Lending Act of 1968.
■ Fair Credit Reporting Act of 2003.
■ Fair Credit Billing Act of 1975.
■ Equal Credit Opportunity Act of 1975.
■ Fair Debt Collection Practice Act of 1977.
■ Fair Credit and Charge Card Disclosure Act of 1988.
■ Lost credit card liability protection.
■ Lost debit card liability protection.
■ Electronic Funds Transfer Act.
■ Credit reporting correction rules.
■ Check Clearing for the 21st Century Act of 2004.
■ Identity theft rules.
■ Federal Deposit Insurance Corporation (FDIC) guidelines.
■ Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009.

Housing Laws

■ Home Ownership and Equity Protection Act of 1994 (as an amendment to the Truth in Lending Act).
■ Home Equity Loan Consumer Protection Act of 1988.
■ Regulation Z (Federal Reserve Board).
■ Fair housing antidiscrimination rules.
■ Mortgage disclosure rules.

Competent: In addition to having a working knowledge of the laws, rules, and regulations listed, a competent personal financial planner has the skills necessary to help a client file a complaint or obtain redress under an appropriate consumer protection rule.

Expert: An expert personal financial planner can work with and inform a client’s legal representative in relation to consumer protection laws. Further, an expert planner can anticipate threats to a client’s financial situation and predict ways to counter such threats through legal and regulatory remedies. In some situations, an expert financial planner can help inform public policy by providing advice to lawmakers and regulators.

IN PRACTICE

Sarah

Terrance is a new financial planner whose target market clientele includes single and widowed retirees. He loves working with older clients because he sees himself as a defender of elder rights, as well as a caretaker of client assets. Recently, one of Terrance’s clients, Sarah, received a phone call from someone claiming to be a financial planner who insisted on talking to her about opportunities to invest in new gold-producing firms in Alaska. Unsure what to do, Sarah consulted Terrance, who explained that the call was likely a scam. Terrance then worked with Sarah to add her name to the National Do Not Call Registry. All was well until last week when, at 7:30 in the morning, Sarah received a call from the same broker. This time Sarah asked that the caller provide his name and return telephone number. The broker did not answer directly but instead attempted to promote another gold mining company. Finally, the broker revealed his name and a phone number. Sarah ended the call but was confused because she thought that she would not receive these types of phone solicitations. Again, she talked with Terrance. Terrance was perplexed because he knew the broker was in violation of the Telephone Consumer Protection Act of 1991: First, the broker had called someone who was on the National Do Not Call Registry; second, he had called Sarah before 8:00 a.m. Both actions are prohibited by the law. Based on this, Terrance helped Sarah file a complaint with the Federal Communications Commission, which took action against the broker and his firm.

Wilma

The possibility for a criminal to steal a client’s identity continues to increase as the world of consumer finance becomes more electronically interconnected. Consider the case of Wilma Jee. She recently returned from a two-week vacation when she realized that she had forgotten to request that her mail be held at the post office. When she arrived home she was concerned that she had just a few catalogs and other pieces of junk mail in her mailbox. Her concern became alarm when a few days later she received a call from the fraud department of a credit card company. Apparently, someone had stolen Wilma’s mail while she was on vacation. The thief used one of her credit card billing statements to access her credit. The individual used her credit line to purchase several high-cost items at a large online discount retailer. When the thief attempted to purchase gas, the credit card company put a hold on the card. Unfortunately, damage had already been done to Wilma’s credit history. Given her sense of panic, she turned to her financial planner to learn more about credit and identify theft.

Wilma learned that under the Truth in Lending Act, she is protected if a thief uses a credit card account illegally. The maximum out-of-pocket expense associated with a lost or stolen credit card is $50. While this may be the maximum financial responsibility, Wilma was startled to learn that the true cost associated with a stolen identity is the time it can take to repair the damage caused by a thief. The Federal Trade Commission, according to the FDIC,39 reports that consumers have been denied loans, deprived of mortgages, and accused of shoplifting as the result of credit reports that inaccurately record charges made by a thief. It can take anywhere from a few months to several years to fix credit reports, records, and related financial damage associated with identity theft. The FDIC recommends the following seven steps as a way to help clients avoid becoming an identity theft victim:

1. Protect key accounts and information, including Social Security numbers, credit card numbers, passwords, and personal information.
2. Never carry a Social Security card in a wallet.
3. Don’t let mail sit in a mailbox for an extended period of time.
4. Shred all receipts, account information, and credit card statements.
5. Use a safe to store important personal information, data, and unused credit cards, checks, and other valuable items.
6. Check each expense on a credit card statement.
7. Review with clients their credit reports at least once each year.

Wilma’s financial planner provided the following federal resources to help her navigate issues associated with credit and identity theft:

■ FDIC, Federal Reserve Board, Office of the Comptroller of the Currency, and Office of Thrift Supervision or the National Credit Union Administration: www.fdic.gov/consumers/consumer/news/index.html.
■ Federal Trade Commission: www.consumer.gov/idtheft or 877-ID-THEFT (877-438-4338).
■ U.S. Department of Justice and the Federal Bureau of Investigation (FBI): www.usdoj.gov/criminal/fraud/idtheft.html.
■ Social Security Administration: Fraud Hotline 800-269-0271 or www.ssa.gov website.

NOTES

Visit www.wiley.com/go/wileycfpboard2e to access nearly 400 practice questions. Your access code is at the back of this book. CFP^® professionals in the United States can also choose to obtain the full 28 credit hours by taking and passing the test.