Business Law/Consumer Protection Laws

Question 1

Contracts - Elements

Answer 1

Certain elements must apply for a contract to be legally enforceable:
* There must be an agreement preceded by offer and an acceptance by the one to whom the offer is made (Counteroffer is not an acceptance)
* There must be consideration. Something of value must be exchanged in consideration of the
object of the contract (often money).
* The principal must have legal capacity to execute contracts.
For example:
* Incompetent or intoxicated adults have limited or no capacity to execute contracts
* Minors have capacity to contract for necessities (e.g., food, clothing, shelter) only
* The contract must be for a lawful purpose

Question 2

Contracts - Void/Voidable

Answer 2

Courts will not enforce a contract that asks either or both parties to do something illegal. There is a distinction between a void contract and a voidable contract:
* A void contract was never valid. It is not enforceable because it lacks one of the requirements for being an enforceable contract.
* A voidable contract is where one party has the option of voiding the contract if desired while the other party is bound by the contract.
Note: A financial planner can be sued for failing to deliver services or plans as required by a contract with a client.

Question 3

Agent

Answer 3

A legal representative of an insurance company with express, implied, and sometimes apparent
authority to act on behalf of the insurer (the insurance company).
There is no presumption in law that one person can legally act as an agent for another. There must be
some basis upon which to assert the agency relationship. An agent’s authority to legally bind the
principal (insurer) stems from three sources.

Question 4

Broker

Answer 4

A marketing intermediary between the insurer and policy owner who represents the policy owner rather than the insurance company

Question 5

Express Authority

Answer 5

Written, explicit direction from principal (the insurance company) to the agent

Question 6

Implied Authority

Answer 6

That which the public believes the individual has and is based on such indicators as
signage, rate books, etc. Implied authority is actual authority that the agent has to carry out the principal’s business in accordance with general business practices.

Question 7

Apparent Authority

Answer 7

arises out of the negligence of the principal in allowing the agent to appear to have the authority because of certain past actions of the agent.

Question 8

Ratifying Insurance

Answer 8

In addition, an agent-principal relationship may be created by ratification. For example, if the agent writes insurance on a person 85 years old even though the company’s limit is age 80 and if the company
accepts the application and premium, the insurer has ratified the act.

Question 9

Conditional Receipt

Answer 9

Evidence of a temporary contract obliging a life insurance company to provide coverage as long as a
premium accompanies an acceptable application. This gives the insurer time to process the application
and to issue or refuse a policy. If the applicant were to die before a policy is issued, the company must pay the death benefit if the policy would have been issued.
For example, Mr. A applies for $100,000 of life insurance but is killed in an automobile accident before the policy is issued. The company finds that it would have issued the policy, and therefore pays $100,000 to the beneficiary.

Question 10

Fiduciary liability

Answer 10

Fiduciary is a person, company, or association holding assets in trust for a beneficiary. The fiduciary is
charged with the responsibility of investing the money wisely for the beneficiary. Most states have laws governing how a fiduciary may invest a beneficiary’s assets

Question 11

Examples of Fiduciaries

Answer 11

• CFP® Certificants
• Executors of wills and estates
• Receivers in bankruptcy
• Trustees
• Those who administer the assets belonging to underage or incompetent beneficiaries
• Financial planners
• Physicians

Question 12

The Employee Retirement Income Security Act of 1974 (ERISA)

Answer 12

The Employee Retirement Income Security Act of 1974 (ERISA) is an example of a legislative act that
provides guidance for a fiduciary. This is federal legislation that defines fiduciary conduct for parties
associated with qualified corporate retirement plans.

Question 13

Prudent person rule

Answer 13

Fiduciaries must act as a prudent individual would be expected to act with discretion and intelligence to
seek reasonable income, preserve assets, and, in general, avoid speculative investments. Financial
professionals, including CFP® practitioners, are generally held to a higher standard than a nonprofessional, i.e., the prudent expert rule

Question 14

Bankruptcy - Chapter 11

Answer 14

Generally, for individuals who do not qualify under Chapter 13 because they exceed the debt limitations or do not have a regular source of income.

Question 15

Bankruptcy - Chapter 13

Answer 15

Reorganization: Payments to creditors are typically reduced to be more manageable. Creditors cannot harass the debtor. The advantage is that the debtor generally is not required to
relinquish assets.

Question 16

Bankruptcy - Chapter 7

Answer 16

The Bankruptcy Code (Chapter 7) permits a debtor to claim either the “federal” exemptions or the exemptions available under state law. There are 33 states which have opted out of Federal exemptions.

Question 17

State law exemptions (generally—specifics vary among states)

Answer 17

• Homestead (house and adjacent land)
• Limited amount of personal property
• Wages due to the head of a family including anyone providing more than one-half of support for a child or other dependent
• Limited amount of equity in a motor vehicle
• Pension and retirement plan rights (ERISA plans – see Recent Legislation for IRAs)
• Cash value of life insurance/proceeds of annuity contracts
• Disability benefits/ unemployment/workers comp
• Property held in tenancy by entirety

Question 18

Miscellaneous federal exemptions

Answer 18

Civil service retirement benefits/railroad pensions/veterans’ benefits

Question 19

Debts not generally cancelable by bankruptcy

Answer 19

• Student and government loans
• Wage withholding & FICA obligations/recent income taxes due
• Child support and alimony

Question 20

Chapter 7 - Means Test

Answer 20

• If the debtor’s average monthly net income for 60 months is > $10,000, chapter 7 bankruptcy is not an option.
• If the debtor’s average monthly net income for 60 months is < $6,000, filing under chapter 7 is allowed.
• If net monthly income is between $6,000 and $10,000, then the debtor can file under chapter 7; if net monthly income is < 25% of all non-priority unsecured debts.

In addition, the filer must supply proof he has completed consumer credit counseling within 6 months of
filing.

The filer must also provide tax returns and detailed earnings projections along with information on retirement accounts (particularly Roth and traditional IRAs over $1,000,000), Education Savings Accounts (opened within 2 years or non-child/grandchild beneficiary), and 529s (opened within 2 years or non-child/grandchild beneficiary).

SEPs, SIMPLEs, ERISA plans, and deferred compensation plans are generally exempt assets.
Funds in a traditional or Roth IRA (contributory) are now exempt up to $1 million. For a rollover IRA, the exemption is unlimited. However, if the IRA income exceeds a debtor’s need, it is not exempt.

Question 21

Fair Credit Reporting Act

Answer 21

• Consumers may review their files at any time for a nominal fee but are entitled to one free report per year.
• If consumers are denied credit, they have a right to receive a free copy of their file.
• Information may be retained up to 7 years.
• Only interested parties can access the file (creditors, mortgage companies, insurance companies,
  etc.)

Question 22

Consumer Credit Protection Act—also known as Truth in Lending

Answer 22

• Interest must be reported as annual percentage rate (APR).
• Credit terms must be disclosed, including fees, points, prepayment penalties, etc.
• Lost or stolen credit cards have limited liability of $50 per card.

Question 23

Credit Scores

Answer 23

Consumers who are turned down for a loan are entitled to receive a copy of their credit score that the
lender used to make that decision. Consumers are also entitled to a free credit score if they were offered a loan at rate that is higher than the one provided to borrowers with excellent credit. One would have the right to see a credit score any time it results in an adverse action which could include everything
from job rejection to higher insurance rate. However, one would not receive a free credit score when ordering free credit reports. Since 2005, all consumers have had the right to a free annual credit report from all three credit bureaus through
www.annualcreditreport.com. But the only way to get a credit score is to buy one from one of the credit
bureaus or through www.myfico.com.