CFPB, Federal Agencies, State Agencies, and Attorneys General
Politico has reported that in remarks made at a fintech policy event last week, Andrew Smith, the FTC’s Director of Consumer Protection, indicated that fintech companies will be a focus of the FTC’s enforcement activities.
According to Politico, Mr. Smith said that FTC was particularly interested in online lending, with an emphasis on small-business lending. Mr. Smith is also reported to have identified lead generation in the context of online lending as a key area of interest for the FTC.
The FTC has filed a lawsuit in a California federal district court against three interrelated student loan debt relief companies and the individual who is their majority owner for alleged violations of Section 5 of the FTC Act and the Telemarketing Sales Rule (TSR). The TSR implements the Telemarketing and Consumer Fraud and Abuse Act. While the CFPB appears to be embarking on a new strategic path in 2018 that will result in less aggressive enforcement, the lawsuit demonstrates that the FTC is continuing to target the debt relief industry for compliance with consumer protection statutes. According to the FTC’s press release, the lawsuit represents the eighth action the FTC has taken in “Operation Game of Loans,” the FTC’s enforcement initiative targeting deceptive student loan debt relief scams.
The FTC alleges that the defendants violated Section 5 and the TSR by engaging in conduct that included the following:
The FTC’s complaint seeks consumer redress and injunctive relief.
On Thursday, December 14, the Federal Communications Commission voted 3-2 to reverse its 2015 order classifying the provision of broadband internet access services as a “telecommunication service” subject to Title II of the Communications Act of 1934, and restoring the classification of broadband internet access services as an “information service” under Title I of the Communications Act. This reclassification moves the provision of broadband internet services from treatment as a utility (with greater governmental oversight over the provision of the utility’s services) to treatment as another offering by a telecommunications service provider.
The December 14 Order consequentially rescinds the rules prohibiting blocking of lawful internet content and applications, throttling or degrading lawful internet traffic, and paid prioritization of certain internet traffic. These three prohibitions form the core of the “net neutrality” rules – essentially, the rules that required all internet traffic to be treated equally.
The FCC reversal on net neutrality could impact consumer payments in a couple of ways. First, fintech companies (generally speaking, young companies with fewer resources whose business models are supported by fast, cheap internet access) which find their internet speeds either throttled or more costly may be outcompeted by larger, more established businesses which can more easily pay for higher internet speeds. This may result in fewer fintech companies bringing new ideas and products to market.
A more direct impact may be felt in peer to peer payment platforms. One could imagine two or three reasonably similar mobile device based payment applications, which have purchased (or can afford) varying degrees of internet access. If one P2P platform takes 1-2 seconds to transact, while another takes 10-15, from a user experience perspective it is reasonable to assume the slower platform will quickly be abandoned in favor of the quicker platform. Again, this favors providers with either larger margins or deeper pockets that can afford to pay for faster internet access, or a model that introduces tiered pricing for speeds. One can imagine P2P platforms offering free and premium versions of their platform, with a premium version introducing higher access and settlement speeds.
Relatedly, the FCC and the Federal Trade Commission signed a memorandum of understanding on December 14 in which the FTC agreed to monitor the broadband market, and investigate and take enforcement actions against internet service providers for unfair or deceptive acts or practices (using the FTC’s authority under Section 5 of the FTC Act). While the FTC is focused on UDAP issues with respect to the provision of internet services, might the CFPB look at internet speeds (and their disclosure) in connection with consumer financial services and identify potential issues for purposes of its authority to prohibit unfair, deceptive, or abusive acts or practices? For example, would banks or platform providers need to disclose their internet speed, and could they face a UDAAP challenge if their transactions failed to meet such speeds?
Following the FCC’s vote, New York Attorney General Eric Schneiderman announced his plans to “lead a multistate lawsuit to stop the rollback of net neutrality.” According to media reports, nearly 20 states, including Massachusetts, Mississippi, Hawaii, Maine, Vermont, and Illinois, have indicated that they intend to participate in Mr. Schneiderman’s lawsuit.
The FTC has entered a proposed consent order with Victory Media, Inc. (VMI) to settle the FTC’s charges that VMI violated Section 5 of the FTC Act by engaging in deceptive acts or practices in connection with its promotion of post-secondary schools to military veterans and servicemembers.
According to the FTC’s complaint, VMI creates advertising, marketing, and promotional content for schools that VMI disseminates through various media, such as magazines, and that targets veterans and servicemembers seeking new education and employment opportunities. VMI also operates several websites directed at military consumers on which it posts articles and other information on educational topics and schools and describes itself as an advisor to such consumers on social media sites. In addition, on one of its websites, VMI operates a search tool for military consumers seeking to identify schools in their fields of interest.
The FTC claimed that the following conduct by VMI constituted false, misleading or deceptive acts or practices in violation of Section 5:
In addition to reporting and recordkeeping and requirements, the terms of the proposed consent order include the following:
Last Friday, as expected, the FTC announced the launch of a coordinated federal-state law enforcement initiative targeting deceptive student loan debt relief companies. According to the FTC, 11 states and the District of Columbia are participating in the initiative, which is being called “Operation Game of Loans.” The participating states are Colorado, Florida, Illinois, Kansas, Maryland, North Carolina, North Dakota, Oregon, Pennsylvania, Texas, and Washington,
The initiative includes seven FTC actions, including an action filed by the FTC earlier this month in Florida federal court, and 29 actions by state AGs.
A recent flurry of FTC enforcement activity targeting companies offering student loan debt relief services suggests such companies could be the subject of the announcement scheduled for tomorrow “of a major coordinated consumer fraud enforcement initiative” between the FTC and state attorneys general.
The announcement was originally scheduled to be made on October 11 at a press conference in Chicago, Illinois featuring Thomas Pahl, Acting Director of the FTC’s Bureau of Consumer Protection, and Illinois Attorney General Lisa Madigan. However, after postponing the press conference and rescheduling it for October 13, the FTC issued an update stating that the FTC “and attorneys general in 11 states and the District of Columbia will issue an announcement” on October 13 that “will be posted on FTC.gov.” The FTC also indicated that “[s]enior officials from the FTC and the offices of the state attorneys general will be available for telephone interviews upon request.”
Earlier this month, the FTC filed a complaint in a Florida federal court for a permanent injunction and other equitable relief against Student Debt Doctor LLC and its individual principal alleging that the defendants conducted a deceptive student loan debt relief operation. At the FTC’s request, the court entered an ex parte order temporarily freezing the company’s assets and appointing a receiver. The FTC filed at least two other actions in federal courts in September 2017 against companies and individuals also alleged to have conducted deceptive student loan debt relief operations.
Based on a Law360 article reporting on an interview with Thomas Pahl, the Acting Director of the FTC Bureau of Consumer Protection, it appears that under its new leadership, the FTC will take a less aggressive approach to enforcement than the agency had taken under the Obama Administration. Mr. Pahl was appointed Acting Director by Maureen Ohlhausen, who President Trump named Acting Chairman of the FTC.
While Mr. Pahl stated that privacy enforcement will continue to be an FTC priority, he indicated that the FTC will not follow the Obama Administration’s approach of labeling certain privacy and data security practices unfair or deceptive in the absence of clear consumer harm. According to Mr. Pahl, the FTC’s enforcement activity will target practices where there is concrete, tangible evidence of consumer injury.
With regard to national advertising, Mr. Pahl indicated that the FTC’s enforcement activity will focus on fraud and quasi-fraud and will prioritize matters involving advertising and marketing directed at certain populations such as the military, the elderly, and consumers living in rural areas. He also indicated that in deciding whether to recommend an enforcement action, FTC staff will look at consumer injury and the costs and benefits of a practice.
With regard to financial practices, Mr. Pahl indicated that the FTC’s enforcement activity will target matters involving fraud or quasi-fraud in areas such as debt collection and payday lending, with priority given to matters that are outside of the CFPB’s jurisdiction. Such matters include claims against auto dealers, claims under the Credit Repair Organizations Act, and claims against companies belonging to industries for which the CFPB has created a “larger participant” rule, such as debt collectors, but that do not qualify as a “larger participant.” Under the Dodd-Frank Act, the CFPB has authority to supervise, regardless of size, providers of residential mortgage loans and certain related services, payday loans, and private education loans. Dodd-Frank also gave the CFPB supervisory authority over providers considered to be “a larger participant of a market for other consumer financial products or services.”
Once CFPB Director Cordray departs and is replaced by a successor appointed by President Trump, we would hope and expect that he or she will narrow the CFPB’s enforcement priorities in a manner similar to what Mr. Pahl has described for the FTC.
The Federal Trade Commission has provided its annual Financial Acts Enforcement Report to the CFPB covering the FTC’s enforcement activities in 2016 relating to compliance with Regulation Z (Truth in Lending Act), Regulation M (Consumer Leasing Act), and Regulation E (Electronic Fund Transfer Act). Under Dodd-Frank, the FTC retained its authority to enforce these regulations with respect to entities subject to its jurisdiction. The FTC and CFPB coordinate their enforcement and related activities pursuant to a MOU entered into in 2012 and reauthorized in 2015. The Report responds to the CFPB’s request for information regarding the FTC’s efforts, which focused on three areas: enforcement actions; rulemaking, research, and policy development; and consumer and business education.
Regulation Z/TILA. The FTC’s TILA enforcement activities included: (1) initiating two actions in federal district court for civil penalties involving alleged deceptive advertising by auto dealers, one of which focused on dealer advertising aimed at non-English speaking consumers; (2) winning a $1.3 billion dollar judgment against a group of payday lenders in Kansas City for alleged deceptive lending practices, including failing to truthfully disclose loan terms; (3) obtaining a $13.4 million judgment for contempt against a consumer electronics retailer for violations of a prior consent order, which arose from failures to provide required written disclosures and account statements; and (4) continuing to litigate two federal cases involving alleged forensic audit scams by mortgage assistance relief services that offered, among other things, to review or audit mortgage documents to identify violations of the TILA, Regulation Z, and other federal laws, and obtaining in both cases monetary judgments against multiple defendants.
In the first of the federal court actions involving alleged deceptive advertising by auto dealers, the FTC sued three auto dealers who it alleged concealed sale and lease terms that added significant costs or limited who could qualify for advertised prices. Such alleged concealment included using print too small to read without magnification to disclose that, in addition to a low monthly price, the consumer would be required to pay a down payment and fees up front and pay a large amount at the end of the financing term. The dealers were alleged to have violated the TILA by advertising credit terms without clearly and conspicuously disclosing required information and by failing to keep and produce required records.
In the second of such federal court actions, the FTC sued nine dealerships and owners who it alleged had enticed consumers, particularly financially distressed and non-English speaking consumers, with advertisements that made misleading claims about the availability of vehicles for advertised prices and financing terms. The group was alleged to have violated TILA and Regulation Z by not clearly disclosing required credit information in advertisements.
The FTC reported that its TILA rulemaking, research and policy efforts continued through 2016. Though the FTC does not have rulemaking authority under the TILA, it nonetheless engages in research related to the TILA. The FTC’s research initiatives included: (1) proposing a qualitative survey of consumer experiences in buying and financing automobiles at dealerships; (2) beginning a forum series exploring emerging financial technologies, where the inaugural forum addressed marketplace lending; (3) holding a workshop on improving the effectiveness of consumer disclosures related to advertising claims and privacy policies; (4) hosting a conference focused on TILA and other compliance issues facing Midwest consumers, and in particular payday loans and car title loans; and (5) participating in the interagency group that provides advice to the Department of Defense on Military Lending Act regulations.
TILA consumer and business education efforts by the FTC included: (1) providing online guidance to the military community about personal financial decisions and military consumer lending issues; (2) issuing blog posts and videos for consumers regarding automobile purchasing and financing; and (3) issuing guidance on deceptive payday lending practices, marketplace lending issues, and disclosures.
Regulation M/Consumer Leasing Act. The FTC’s Regulation M enforcement efforts included one final administrative consent order involving auto dealers alleged to have deceived consumers and the filing of the two federal court actions discussed above. In the consent order, the auto dealers, Southwest Kia and Sage Auto, were alleged to have advertised low monthly car lease payments and down payments, without disclosing other key terms and, in violation of the CLA, failed to disclose or clearly and conspicuously disclose lease terms. In the Southwest Kia action, the dealers were alleged to have violated the CLA by advertising lease terms without clearly and conspicuously disclosing required information—for instance, a television advertisement offered vehicles for less than $200 a month and disclosed in fine print visible for two seconds that the offer only applied to leases and required a $1,999 payment at signing. The Sage Auto defendants allegedly violated the CLA by failing to clearly and conspicuously disclose lease terms. As an example, the defendants ran newspaper advertisements offering vehicles for $38 a month and $38 down, but the fine print below the ad listed additional charges of $2,695 at signing, limited the offer to leases, and limited the $38 payment to the first six months.
The CLA does not confer rulemaking authority on the FTC. Nonetheless, the FTC hosted a workshop to examine consumer leasing of rooftop solar panels. The FTC also worked with the ABA committee on consumer leasing issues. FTC blog posts also addressed consumer leasing.
Regulation E/EFTA. The FTC’s Regulation E enforcement actions included six new or ongoing cases. Four cases involved negative options and the payment terms that applied automatically absent cancellation.
In the first, the defendants allegedly obtained consumers’ credit or debit card information purportedly to pay shipping costs but imposed recurring monthly charges to their credit or debit card accounts for unordered products. This case resulted in a $72.7 million monetary judgment suspended upon the defendants’ surrender of virtually all assets.
In the second case, customers were allegedly enticed to sign up for “free” or “risk free” trials but their bank accounts were electronically charged recurring monthly fees without authorization. The second case resulted in an agreed-upon $280.9 million judgment against some defendants, though others continue to litigate.
The third case involved the alleged use of personal information to sign up for a “free trial” or discount program for weight-loss supplements, where customers’ bank accounts were then charged electronically on a recurring basis. The defendants also allegedly failed to allow consumers to stop the charges. The third case led to a $105 million judgment, again suspended after surrender of over $9 million in personal and business assets.
The fourth case also involved weight loss supplements. Here, the FTC alleged consumers were promised a “risk-free trial” offer, and were then enrolled in an inadequately disclosed monthly plan resulting in additional charges to their credit card or debit card accounts. Consumers who failed to cancel trial memberships were allegedly billed on a monthly basis. The fourth action was filed along with a stipulated final order imposing a $16.4 million judgment, suspended after the sale and liquidation of personal and business assets.
The FTC’s two other EFTA-related cases were the payday lending case and consumer electronics retail cases discussed above. In the payday lending case, the defendants allegedly violated the EFTA by conditioning payday loans on payment by preauthorized debits from bank accounts. In the consumer electronics retail case, the FTC alleged an EFTA violation where the extension of credit was conditioned on mandatory preauthorized transfers.
As with the TILA and the CLA, the FTC lacks rulemaking authority under the EFTA, although it conducts research and policy work that touches on related issues. In that regard, the FTC worked with the Department of Defense interagency group and ABA on electronic fund transfer issues, interpretive rules, and trainings. The FTC also hosted various conferences addressing EFTA issues and other compliance issues in connection with marketplace lending, crowdfunding and peer-to-peer payments.
The FTC continued its consumer and business education efforts with blog posts providing guidance on negative option plans and recent cases, explaining possible EFTA and Regulation E violations, giving advice to consumers, and providing guidance to businesses on EFTA issues.
At the Auto Finance Risk and Compliance Summit held this week, Calvin Hagins, CFPB Deputy Assistant Director for Originations, stated that the CFPB is increasingly asking lenders about ancillary product programs during examinations, particularly about the percentage of consumers buying these products.
In June 2015, when the CFPB released its larger participant rule for nonbank auto finance companies, it also issued auto finance examination procedures in which ancillary products, like GAP insurance and extended service contracts, received heavy attention. We commented that by giving so much attention to these products, the CFPB was signaling its intention to give lots of scrutiny to these products in the auto finance market. Mr. Hagins’s comments confirm that the CFPB is in fact looking closely at these products in exams.
Speaking at the Summit as a member of a regulatory panel, Mr. Hagins indicated that companies should expect to get questions from CFPB examiners about ancillary products. He indicated that the CFPB specifically looks at how the product is offered to the consumer, when in the contracting process is it offered, how disclosures are being provided to the consumer, and the acceptance rate. As an example, he indicated that a 95% acceptance rate would cause CFPB examiners to raise questions about how the rate was achieved.
At the Summit, Colin Hector, an FTC attorney, indicated that the FTC is also interested in ancillary products, particularly whether there is a potential for consumer deception in how they are sold. He commented that, in its enforcement work, the FTC has focused on ancillary product sales that occur at the end of the sales process when consumers may be led to believe they must purchase the products to obtain financing and the seller has increased leverage because the consumer is more invested in completing the transaction.
A Texas federal district court has entered a $2 million civil penalty judgment against the former president of a debt collection company for alleged violations of the FDCPA and FTC Act. The judgment follows the court’s finding in a prior order that $2 million was a “reasonable and appropriate penalty for [the president’s] violations of the Fair Debt Collection Practices Act.” The company and former president had previously been banned by the court from “participating in debt collection activities” and “advertising, marketing, promoting, offering for sale, selling, or buying any consumer or commercial debt or any consumer information relating to a debt.”
In January 2015, the DOJ, on behalf of the FTC, had filed a complaint against the company and its former president and vice president alleging that the defendants had engaged in various practices in violation of the FDCPA and FTC Act, including impersonating attorneys and attorneys’ staff and falsely threatening consumers with litigation or wage garnishment. In April 2016, the court entered summary judgment against the company and former president, stating “the summary judgment record is clear and uncontroverted that [the company] is a debt collector covered by the FDCPA and that its collectors have committed numerous violations of the FDCPA and Section 5 of the FTC Act.” With regard to the company’s president, the court found that as president and sole owner of the company, he had actual or implied knowledge of the FDCPA violations because he “not only played a role in formulating the policies and practices that resulted in the violative acts, but in fact actually set the policies of his company. As President, he had the authority to fire or otherwise discipline his employees for employing deceptive debt collection activities.” In September 2016, the court entered a stipulated order permanently banning the company’s former vice president from participating in debt collection activities and activities related to the sale or purchase of consumer or commercial debts or debt-related consumer information. The order also imposed a $496,000 civil penalty judgment that was suspended except for $10,000 based on inability to pay.)
In its order finding $2 million to be an appropriate penalty, the court noted that the FTC Act authorizes a penalty of up to $40,000 for each act that violates the FDCPA “with actual or implied knowledge of the FDCPA” and that the “maximum theoretical penalty for the estimated 109,634 violations exceeds $4 billion.” The court stated that the FTC had established the defendant’s lack of good faith through his admissions that the company had no formal FDCPA training program and that he had hired “abusive collection managers and refused to fire them if they were effective.” The court also noted his awareness of consumer complaints and that he “he had the ultimate authority over the collection managers and the collectors.”
