The CFPB has announced a settlement with USA Discounters, a retailer that operates a chain of stores near military bases and offers financing for purchases through retail installment sales contracts (RICs), to resolve charges involving an alleged fee scam. The consent order requires USA Discounters to make refunds to servicemembers of more than $350,000 and pay a $50,000 civil money penalty. In the consent order, USA Discounters does not admit or deny “any findings of fact or violations of law” but does admit “the facts necessary to establish the CFPB’s jurisdiction over USA Discounters and the subject matter of this action.”
According to the consent order, the CFPB found that, to enter into a RIC with USA Discounters, an active duty servicemember had to agree to pay a $5 fee for a company called SCRA Specialists LLC to be the servicemember’s representative with respect to his or her rights under the Servicemembers Civil Relief Act (SCRA). USA Discounters was found to have portrayed SCRA Specialists as an independent representative that would be available to receive notices of lawsuits filed by USA Discounters, inform USA Discounters of a change in the servicemember’s address, and verify the servicemember’s military status to determine whether the servicemember was eligible for protection under the SCRA.
The CFPB concluded that USA Discounters had engaged in unfair and deceptive acts and practices by conduct that included:
- telling servicemembers that it would use SCRA Specialists to verify the servicemember’s active military status and marketing this verification as a benefit, when in fact, USA Discounters was required by the SCRA to verify the servicemember’s military status to obtain a default judgment against the servicemember and routinely performed its own duty status verifications
- misleading servicemembers into believing they would have an independent representative when, in fact, SCRA Specialist received all of its revenue from USA Discounters’ customers and did not provide any representational services to servicemembers
- failing to provide the services that were promised in exchange for the $5 fee paid by servicemembers
The more than $350,000 in refunds that USA Discounters must make under the Consent Order is based on the CFPB’s finding that since 2009, the $5 fee was charged in more than 70,000 contracts which generated more than $350,000. For consumers with repaid RICs, USA Discounters must send them a check for the full $5 plus interest and for consumers with accounts in collection, USA Discounters must deduct the $5 fee plus interest from the account balance.
In addition to requiring payment of the refunds and the $50,000 penalty, the Consent Order prohibits USA Discounters from engaging in the challenged practices, offering the performance for a fee of any SCRA-related service involving a RIC for which USA Discounters is a creditor or assignee, and accepting any payment in exchange for the performance of any such service.
While the CFPB obviously believes it has enforcement authority over USA Discounters, and the Consent Order contains USA Discounter’s admission of the facts necessary to establish the CFPB’s jurisdiction, it is worth noting that Dodd-Frank Section 1027(a) limits the CFPB’s rulemaking, supervisory and enforcement authority as to retailers of “nonfinancial goods or services.” That provision, however, is one of the most confusing provisions of Dodd-Frank Title 10.
The provision contains an exclusion from CFPB authority for retailers of nonfinancial goods or services to the extent the retailer “extends credit directly to a consumer…exclusively for the purpose of enabling that consumer to purchase such nonfinancial good or service directly from” the retailer. It also states that the exclusion does not cover credit transactions arising from a transaction in which a retailer “of nonfinancial good or services regularly extends credit and the credit is subject to a finance charge.” However, it further states that despite this limitation on the exclusion, a retailer “that is not engaged significantly in offering or providing consumer financial products or services” continues to be excluded from CFPB authority. Thus, while USA Discounters may not have been able to take advantage of the retailer exclusion, the scope of the exclusion will undoubtedly be an issue in any CFPB enforcement efforts directed at a retailer. (Of course, a retailer that is not subject to the CFPB’s UDAAP enforcement authority would still be subject to the FTC’s UDAP enforcement authority.)
Despite agreeing to the Consent Order, USA Discounters could find itself the subject of further CFPB scrutiny as a result of a letter sent earlier this month to Director Cordray and Defense Secretary Hagel by a group of five Democratic Senators that urges the CFPB and Department of Defense (DOD) to investigate claims made in a recent report from ProPublica and the Washington Post that “certain retailers have undertaken aggressive debt collection actions against active duty servicemembers without affording them, arguably, a real opportunity to defend themselves.”
According to the Senators, the media has reported that certain retailers “may have violated the spirit” of the SCRA by including ” a provision in the fine print of their contracts that allow the retailers to bring suit against servicemembers in certain jurisdictions in the Commonwealth of Virginia, even though they may not be based there or, in fact, ever have been based there.” The Senators asserted that the retailers have used such provisions to “force involuntary garnishment of servicemembers’ wages while they are serving our country.”
In addition to calling on the CFPB and DOD to investigate these claims, the Senators asked the CFPB and DOD to determine what actions can be taken to “ensure due process for our servicemembers, especially the practice of including contractual provisions that may limit servicemembers’ ability to defend themselves while they are on active duty.”