On July 20, 2022, the Federal Trade Commission (“FTC”) and 18 state attorneys general led by New York Attorney General Letitia James announced that they have entered into a settlement with Harris Originals of NY, Inc. and related entities (collectively, “Harris Jewelry”), a national jewelry retailer that markets and sells military-themed gifts, to resolve their lawsuit which alleged that Harris Jewelry had engaged in unlawful sales and credit practices targeting servicemembers.  The action is notable in that it is the first time the FTC has brought an action under the Military Lending Act (“MLA”).

The complaint filed against Harris Jewelry – which used the slogan “Serving Those Who Serve” – alleged that it strategically located its stores on or near military bases and actively pushed its customers to finance purchases through retail installment contracts (RICs), telling customers, without any review of an individual customer’s circumstances, that this was a way for customers to improve their credit scores.  This practice, referred to and marketed as the “Harris Program,” was alleged to be pervasive in Harris Jewelry’s sales practices and to have resulted in customers using financing for approximately 90% of Harris Jewelry’s sales.  The complaint further alleged that in-store credit specialists assisting customers were instructed to add a protection plan to a RIC for each item of merchandise purchased, without first obtaining express informed consent.  These credit improvement representations and the misrepresentations regarding protection plans formed the basis for claims of deceptive acts or practices in violation of Section 5(a) of the FTC Act and various state UDAP statutes.

Beyond its alleged deceptive practices, the complaint alleged the following violations by Harris Jewelry:

  • Failing to clearly and conspicuously state financing terms in its advertisements or provide all mandated disclosures within its closed-end retail installment contracts in violation of the Truth in Lending Act.  For closed-end credit, TILA and Regulation Z require creditors to disclose, before the credit is extended, clearly and conspicuously in writing, specific financing terms, including the identity of the creditor, the amount financed, the itemization of the amount financed, the finance charge, the annual percentage rate, and the payment schedule.  Collecting payments from customers by electronic fund transfers (“EFTs”), including debit cards and ACH payments, using EFT customer preauthorizations that were sometimes incomplete or incorrect, often conflicted with the TILA payment schedule provided in the retail installment contract, and were not clear and readily understandable, as required under the Electronic Funds Transfer Act and Regulation E. 
  • Failing to make required disclosures under the MLA and the implementing Department of Defense (“DoD”) regulation based on Harris Jewelry’s alleged failure to provide disclosures in accordance with TILA, including the Itemization of the Amount Financed.  While the mandatory loan disclosures under the DoD regulation require creditors to provide “any disclosure required by Regulation Z, which shall be provided only in accordance with the requirements of Regulation Z that apply to that disclosure” (12 C.F.R. § 232.6(a)(2)), it is rare to see a claim that an alleged violation of TILA constitutes a MLA violation.
  • Failing to provide servicemembers with oral disclosure of the military annual percentage rate (“MAPR”) or provide a toll-free number to obtain a statement of the MAPR in violation of the MLA. 
  • Failing to include the required FTC Holder Rule notice in its RICs.  The notice advises consumers of their right to assert against a RIC purchaser any claims and defenses that the consumer could assert against the original creditor.

Under the terms of the stipulated settlement order filed with the U.S. District Court for the Eastern District of New York, Harris Jewelry will issue approximately $10.9 million in refunds to 46,000 customers who paid for protection plans and provide additional refunds for overpayments.  The company will place an additional $2.725 million in escrow to provide additional restitution, pay $1 million to the state attorneys general for law enforcement and education efforts, cease collections on $21 million in loans made to 13,000 servicemembers, and assist with the deletion of any negative credit entries.  Having already closed all of its stores last year, the company will cease all business and dissolve following completion of its settlement obligations.  A judgment in the amount of $24 million is suspended pending Harris Jewelry’s compliance with the terms of the stipulated settlement order.

In a blog post on the FTC website accompanying the announcement of the settlement, the FTC highlighted lessons learned from the Harris Jewelry action that it believes apply to other businesses.  These include that (i) claims about credit improvement require substantiation, (ii) add-on products require consumers’ express informed consent, and (iii) aiming illegal sales practices at members of the military will arouse law enforcement ire.  While none of these lessons are new, the FTC’s use of its MLA enforcement authority is somewhat new.  Amendments to the MLA in 2013 granted enforcement authority to the FTC and the other agencies specified in Section 108 of TILA, including the Federal Reserve Board, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency.  (State regulators may also supervise MLA requirements pursuant to state law).

Milani Mithal, the head of the FTC’s Bureau of Consumer Practices Division of Financial Practices recently testified as to the FTC’s enforcement efforts to address the financial exploitation of servicemembers before the House Committee on Oversight and Reform, Subcommittee on National Security.

The FTC commissioners approved the stipulated final order by a 5-0 vote.  We expect the settlement to be approved by the court.