(MONEY Magazine) – LIKE NANCY DONLEY, 41, YOU MAY THINK THAT TOUGH consumer-protection laws and vigilant regulatory agencies are watching out for you. "I thought that we were the No. 1 country in the world and everything was safe," the Chicago real estate broker recalls.

In 1993 Donley tragically discovered just how misplaced her trust was. Her six-year-old son Alex died after eating a home-cooked frozen hamburger patty contaminated with E. coli O157:H7, a highly toxic strain of bacteria that the U.S. Department of Agriculture's outmoded food-inspection practices don't test for.

"As a parent I always erred on the side of being protective," Donley says. "My son wore a bicycle helmet. The first thing he did when he got into a car was put on the seat belt. Imagine realizing I put his life in danger by feeding him something that's USDA-approved."

Gaps in the consumer-protection safety net like the one young Alex Donley fell through are widening every day, a three-month Money investigation has concluded. Our reporting included interviews with more than 120 government and industry officials, consumer advocates and academics, as well as an examination of more than 100 state and local consumer-protection agencies in all 50 states and the District of Columbia. We learned that key consumer laws are being undermined in the U.S. Congress and many state legislatures. Protections that Americans have long taken for granted--from food inspection to automobile lemon laws to standardized bank disclosures--are under attack and in some cases disappearing. "There is a slash-and-burn attitude," says Bernice Friedlander, acting director of the U.S. Office of Consumer Affairs. "The philosophy of Congress seems to be let the buyer beware. Then if you break your neck or get into trouble, they'll change the liability laws so you can't help yourself."

The war on consumer protection has roots that are both ideological and economic. As part of their fervor to reduce burdensome government regulation of private enterprise, the conservative Republicans who control Congress are ready to roll back many consumer laws and sharply reduce funding to enforce the ones that remain. At the same time, state and local consumer-protection offices, which handle most individual complaints, are curtailing or closing their operations, largely because of budget cuts. Among our key findings:

Some important consumer protections have already been gutted. Last year, for example, Congress made it easier for white-collar criminals to get away with lying to investors, as MONEY reported in our February issue ("How to Protect Yourself Against Getting Hurt by Congress' Securities Reform"). Congress also made it tougher for homeowners to back out of mortgage contracts if they discover they've been cheated.

Other crucial safeguards are under attack. For example, pending legislation before the 104th Congress would wipe out the section of the 1991 Truth in Savings Act that helps savers compare the interest rates offered by competing banks.

Spending cuts are eroding existing protections. At least 25 of the state and local consumer agencies Money examined are investigating a smaller portion of complaints than they did in the late 1980s, cutting telephone hotline hours or otherwise curtailing services because their budgets have been slashed. Thirty agencies or their branch offices have shut their doors altogether (for the national rundown, see the 50-state table on pages 104-105).

Consumer protections have failed to keep up with new dangers. Take managed-care medical programs such as HMOs. While the number of people participating in HMOs has more than quadrupled since the 1980s, at least 11 states still lack adequate safeguards for people enrolled in them.

Furthermore, in the few areas where consumer protection has improved, the gains have been meager at best. New leadership at the Consumer Product Safety Commission and the Federal Trade Commission has made those agencies more willing to attack such problems as unsafe toys and telemarketing fraud. But both agencies have been hampered by ever-tightening budgets. The CPSC, for instance, lacks the investigators and modern testing equipment needed to stay on top of hazardous products. "Consumer protection is a shadow of its former self," says Richard Hesse, a professor of law at Franklin Pierce Law Center in Concord, N.H. and a longtime consumer lawyer.

Consumerism dates back to the turn of the century. In 1906, when Upton Sinclair published The Jungle, his famous indictment of unsanitary conditions in the meat-packing industry, the resulting outcry led to the passage of pure-food laws. In the 1920s and '30s, says University of Utah professor Robert Mayer, a leading historian of the movement, a series of pharmaceutical-related deaths prompted passage of laws requiring that drugs be proved safe (though not necessarily effective). The third and strongest wave of consumerism came in 1962 when President Kennedy proclaimed four basic consumer rights: safety, information, choice and a voice in the development of consumer policies. The movement picked up speed with the emergence of Ralph Nader, who made his name with a 1965 expose of unsafe automobiles. Over the next 15 years, Congress set tough safety standards for cars, banned dangerous toys, required that drugs be proved effective as well as safe and gave consumers more information about food content, borrowing costs and sales practices.

But in 1978, Congress defeated a plan to create a Cabinet-level federal consumer-protection agency. Three years later, President Reagan began slashing funds for consumer protection. The Consumer Product Safety Commission lost 40% of its staff between 1980 and 1985, while the FTC saw its staff reduced by 50% between 1980 and 1989. "We had a situation starting in the early 1980s where the federal government was missing in action," says Minnesota attorney general Hubert Humphrey III, whose father, the late Senator and Vice President Hubert Humphrey, fought for many consumer protections.

The assault on consumer agencies stepped up last year, with the arrival of the 104th Congress. Funding for the already skeletal CPSC is likely to be reduced by another 6% or so, and the current Congress has other targets in mind as well. For example, it proposes to cut spending for the enforcement of environmental laws by 25%, to save $1.8 billion, and of worker health and safety laws by 33%, for $50 million.

Legislation pending before Congress would make it tougher for consumers to sue if they are injured by dangerous or defective products. It would also force federal agencies to quantify the dollar value of any new pro-consumer rules and guarantee that the benefits will exceed the costs. "There's definitely a new lack of sympathy for consumers and their problems," says Willard Ogburn, director of the National Consumer Law Center in Boston, a public interest law firm.

Republicans contend that their actions will benefit consumers. In the case of product liability, for example, House Commerce Committee chairman Thomas Bliley Jr. (R-Va.) says, "The goal of this legislation is to reduce abusive lawsuits that increase prices paid by all consumers and damage American productivity."

On the state and local level, budget cuts have poked still more holes in the consumer-protection safety net. "At the same time that we are seeing Washington starting to divert responsibilities back to the states, which I happen to agree with, the states are having very difficult budget times of their own," says New York attorney general Dennis Vacco, a Republican.

Knowing an opportunity when they see one, special-interest groups are working to weaken or repeal pro-consumer laws in many states. New Jersey, for instance, enacted a law limiting punitive damages in product-liability and personal-injury cases last year after heavy lobbying by chemical makers, tobacco companies and other industry groups. In Wisconsin, a state long known for pro-consumer activism, real estate agents are pushing to be exempted from laws that bar false or deceptive statements.

Pro-business legislators aren't the only ones giving consumer issues short shrift. Consumer advocates complain that the news media now pay far less attention to these concerns than they did back in the 1970s. "The media have backed away because they don't want to lose advertising," says Ralph Nader.

Perhaps because of less media attention, the American public has shown little objection to the funding cuts and rollbacks of consumer-protection laws. "Consumers are the least organized group, and therefore their protections get cut early," says Stewart Lee, retired chairman of the economics department at Geneva College in Beaver Falls, Pa. and a veteran consumer advocate.

Here, in greater detail, are four examples of the kinds of problems that American consumers are, or may soon be, facing.

ERODING BANK LAWS

When you borrow money from a bank or deposit your money in a bank account, federal laws say you have a right to clear information on all terms and conditions. And if you are cheated, you have the right to seek damages. Both of those rights, however, could soon disappear.

Congress started to pare banking safeguards last year when it amended the Truth in Lending Act. For one thing, it weakened the rules that allow consumers to back out of a loan if they are overcharged, such as through excessive mortgage-closing costs. The new standards, which were enacted on Sept. 30 of last year, retroactive to June 1, limit that right to cases where the lender's errors or overcharges exceed 1% of the loan's value. Though that may not seem like a huge amount of money, "it's a green light to put as much as 1% of the loan amount into phony charges," says David Allman, an Atlanta real estate litigation lawyer. So on a $100,000 home mortgage, a lender could theoretically overcharge the borrower as much as $1,000 with impunity.

The assault on "truth" doesn't stop there. Pending bank deregulation bills would also weaken the Truth in Savings Act, enacted in 1991 after decades of lobbying by consumer advocates. The House proposal would kill the critical requirement that banks report their interest rates in a standardized fashion known as the annual percentage yield, or APY. That rule makes it easier for customers to comparison shop and prevents banks from using accounting tricks--such as paying interest only on the lowest amount on deposit during a month. Bankers complain that the current rule is both costly and unnecessary. But a 1995 study by Consumers Union claimed that savers could lose more than $300 million a year if the law is repealed. The American Bankers Association disputes that estimate.

Also under the House bill, banks would no longer be required to tell people with automatically renewing certificates of deposit when their CDs have matured or even how much interest their new CDs will pay. That change would all but encourage some banks to switch unwary customers into certificates with uncompetitively low yields.

Both the House bill and a companion Senate measure would bar savers from suing banks that make errors that cheat consumers, even if the consumer can prove that the error was intentional. Bankers say the changes would eliminate "wasteful" class-action suits. Consumers would still be protected, the bankers insist, because regulators could slap errant banks with fines. But bank regulators have done a poor job of protecting consumers in the past, says Richard Morse, a professor emeritus at the University of Kansas who helped draft the original Truth in Savings Law. "The change gives banks a license for skimming, to steal a little every day out of depositors' accounts," Morse says.

These proposals are currently stuck in Congress--but not out of concern that savers will be hurt. Rather, legislators in the House are waiting for the banking and insurance industries to settle a turf battle over whether banks should be allowed to sell insurance, an issue also addressed by the bill.

State legislatures, meanwhile, are busily rewriting pro-consumer credit-card laws to make them more pro-bank. The race to relax the rules began in the early 1980s, when legislators in Delaware and South Dakota swept away restrictions on interest rates, late fees and over-the-limit charges. The goal: to get credit-card operators to set up shop in their states. Banks and card issuers in other states then threatened to export jobs too unless their states' rules were weakened.

Some states, as we're seeing, have been only too happy to comply. Last year, Colorado, Georgia and Oregon all boosted the dollar amount of late fees that banks and other card issuers can levy. Arizona and Hawaii, which had prohibited such often outrageous fees, changed their laws to allow them. Other states that have weakened the consumer protections in their credit-card rules include Illinois, Massachusetts, New York and Virginia.

THE RETURN OF NURSING-HOME HORRORS

Stories about elderly patients who were needlessly strapped to their beds, drugged into a perpetual stupor, left to lie in their urine and feces and otherwise abused led Congress to pass tough nursing-home rules in 1987. Although nightmarish nursing homes haven't vanished, experts say the law's high standards and stiff penalties have dramatically improved the quality of life for many residents. A 1995 report by the Research Triangle Institute, a nonprofit think tank affiliated with three North Carolina universities, found that since the 1987 law went into effect, the physical and mental decline of many residents had slowed, their hospital stays had been cut by 25%, and the use of physical restraints and unnecessary tranquilizers had been reduced by more than 25%. "It's astounding," says Research Triangle senior policy analyst Catherine Hawes. "This is one of the great success stories of the 1990s."

Despite that success, the federal rules would have been drastically weakened by Medicaid reform legislation passed in 1995 had not President Clinton vetoed it. Among other things, the law would have scrapped training requirements for nurse's aides (who provide 90% of hands-on care), reduced inspections and dropped maximum penalties for facilities that fail to meet federal standards by 50%, to $5,000 a day from the current $10,000. Rules that protect patients and their families from financial ruin would also have been eliminated.

The effort to roll back the protections is expected to continue. Nursing-home operators say relaxing the federal standards makes sense in light of the government's plan to cut spending on Medicaid, which covers roughly two-thirds of nursing-home residents. However, nursing-home researchers fear that scandals would once again become commonplace.

Protections for nursing-home residents are also under attack in separate federal legislation that could eliminate as much as 80% of funding for the ombudsman programs in many states. That program coordinates a nationwide network of about 7,600 people, largely volunteers, who act as consumer advocates for nursing-home residents. "A lot of people in nursing homes don't have anybody to look after them," says Charlene Harrington, head of the Department of Social and Behavioral Science at the University of San Francisco's School of Nursing and a member of the National Academy of Science nursing-home panel.

Meanwhile, nursing-home operators are lobbying to relax rules in states such as New York and Ohio, where the standards for care exceed federal requirements. Other states, consumer groups say, have failed even to enforce the federal standards because of pressure from the industry.

Says Helen Daspit of Harahan, La., who had to battle to get better nursing- home care for her husband (see pages 102-103): "Nursing homes are bad enough now. If they were to weaken the rules it would be a disaster."

DANGEROUSLY LAX FOOD STANDARDS

You may think that Alex Donley's tragic death, described at the beginning of this article, was a freak event. But food poisoning is far more common and far more dangerous than most people know. Food-related illnesses kill at least 10,000 Americans each year and sicken another 80 million, according to the federal Centers for Disease Control. You may well have been one of the victims, since most cases of food poisoning go undiagnosed and end up being attributed to other causes.

Although it's impossible to guarantee the absolute safety of the food supply, our current inspection system fails to provide even the basic safeguards many consumers assume are in place, says Caroline Smith DeWaal, director of food safety for the Center for Science in the Public Interest. Introduced way back in 1906, the system relies on inspectors who use sight, touch and smell to detect trichinosis, anthrax and other diseases that infect animals and in some cases spread to humans. But while those diseases have largely been eradicated, the current system is ill equipped to detect invisible bacterial threats like E. coli O157:H7--currently responsible for some 250 deaths and 20,000 illnesses a year--and salmonella.

Changes in food production and distribution have made bacterial contamination a more serious threat. Faster chicken-processing speeds, for instance, make it tougher for inspectors to spot fecal contamination, which can carry bacteria. "A second and a half to two seconds is not a lot of time to see whether a bird flying by on a line is good, bad or indifferent, especially when your eyes are stinging from the chlorine used to disinfect the birds," says Robert Robinson, director of food and agriculture issues for the General Accounting Office.

The growth of global food markets has further complicated matters. The ground beef in the Jack-in-the-Box hamburgers contaminated with E. coli O157:H7 that killed four people and sickened more than 500 others in 1993 came from the U.S. and two other countries. "If somebody makes a mistake in just one place, it may end up traveling long distances and being spread among a large number of people," says former assistant secretary of agriculture Carol Tucker Foreman.

Although change has been slow in coming, food safety is one area where consumers could soon gain ground. Microbiological spot testing, which can catch E. coli, has been voluntarily employed for the past two years by some large food producers, including Foodmaker, parent of the Jack-in-the-Box restaurant. Other producers will soon be following that example. The Department of Agriculture is expected to issue new rules this month that will require the meat and poultry industries to test for bacterial contamination and alter their production processes to improve food safety. Meat and poultry groups say they support modernizing the food safety system but are waiting to see the USDA's final rule before commenting further.

"We are on the brink of change, but it's long overdue," says Michael Taylor, acting undersecretary of agriculture for food safety. Taylor notes that the National Academy of Sciences first recommended modernizing the food safety system a decade ago.

Since her son's death, Nancy Donley has begun lobbying for stronger safety rules as part of a group called Safe Tables Our Priority. Although encouraged by the new rules, she's concerned about provisions that would give small slaughterhouses more time than large ones to comply with rules requiring daily microbiological testing. "The system," she says, "is only as strong as its weakest link."

Furthermore, the proposed rules will take at least three years to fully implement, which means more deaths and illnesses are all but inevitable. Worse, consumer advocates say, the new standards could still be derailed by Congress. That nearly happened last year when the House Appropriations Committee approved an amendment that would have delayed the standards by at least two years. (The amendment was later withdrawn in the face of negative publicity.)

In the meantime, budget cuts have left the USDA with only 1,845 inspectors covering processing plants, 13% fewer than the agency says it needs to inspect the plants as required by law. As a result, some processors are no longer inspected as often as federal standards call for and inspectors are having to ignore other all-too-common practices, such as food mislabeling or the injection of water into ham and chicken simply to boost their weight and their price at the supermarket.

Food safety is another area where consumers shouldn't expect their states to pick up where the federal government has left off. Some states are already having trouble inspecting the numerous restaurants, retail outlets and grocery stores that are exempt from federal food-safety laws. VIRTUALLY NO REGULATION OF MANAGED CARE

Whether by choice or simply because their companies give them no other option, more than 70% of the people covered by employer-sponsored health plans now participate in managed-care arrangements such as HMOs. But as consumers have rushed into managed care, lawmakers have been in no rush to create consumer safeguards. "Consumerism in this area is in its infancy," says Mark Smith, executive vice president of the Kaiser Family Foundation, which studies health-care issues.

Managed-care consumers face an unusually bewildering marketplace. "It's very hard to get good information on services, the qualifications of doctors and the financial incentives those doctors have to skimp on services," says Columbia University professor Stephen Isaacs, author of The Consumers' Legal Guide to Today's Health Care (Houghton Mifflin, 1992).

Once consumers have chosen a managed-care plan, they may find that they have little recourse if they are denied treatment or reimbursement for care. For instance, when a patient appeals an HMO's decision, the challenge is usually heard by employees of the HMO. Many plans also require members to agree to binding arbitration, blocking them from taking their HMO to court if they're harmed physically or financially. "There was no one, no medical consumer advocate, to step in when my daughter was denied the care she needed," says Harry Christie, who battled for nearly a year before an arbitrator ruled that his California HMO, FHP/Take Care, must pay for his daughter's cancer surgery. The California Department of Corporations fined the HMO $500,000 last year. The HMO, which is challenging the fine, maintains that its doctor was qualified to perform the operation (see page 106).

Although a number of states, including California, New Jersey and Texas, have adopted tougher rules in recent years, a 1995 study by the Los Angeles-based Center for Health Care Rights found that no state provided all the protections consumers need. Some states, including New Hampshire, New York, Ohio and Tennessee, fail to offer even the most basic safeguards. Worse, there are few or no protections in most states for consumers who participate in physician-sponsored health-care networks, where a doctor's financial interests clearly can conflict with patient needs, or in other new types of managed care.

The HMO industry argues that state managed-care rules are only a small part of a network of protections, including federal rules and state corporation and insurance laws, that it must abide by. But the federal protections, which cover only HMOs that participate in Medicare and Medicaid, are far from effective, according to a 1995 GAO study. It found that the government has been slow to use sanctions and other enforcement tools and that patients who appealed an HMO's decision to deny treatment were often forced to wait six months or more for a decision on their appeal.

What you can do: Harry Christie's story offers a vital lesson for all consumers: Stand up for your rights and, if you care about these issues, speak out for consumer protections in general. Consumer advocate Nader says people should press their legislators on all levels to support consumer protection. For example, it's not too late to urge your representatives in Congress to oppose the weakening of Truth in Savings. (The Senate bill is S. 650, the House bill H.R. 2520.) Failing that, Nader wearily adds, about the best consumers can do in the current environment is "redouble their efforts to shop more wisely."