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On July 26, 2018, the FTC testified before two subcommittees of the U.S. House Committee on Oversight and Government Reform regarding the FTC’s continued focus on payment processors. Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection testified before the House Subcommittees on National Security and Government Operations about the FTC’s anti-fraud program and the 25 actions taken by the FTC against payment processors since 1996. 15 of the 25 cases were filed in the last 10 years.

While lawsuits against payment processors represent a small number of the total cases filed by the FTC, the FTC testified that it views the payment processor’s role as “an integral part” of the agency’s anti-fraud program because their services may facilitate fraudulent schemes. Specifically, the FTC explained that on multiple occasions, the payment processor was identified as an enforcement target because it provided services for multiple entities that were parties to other FTC, SEC or state actions.

The FTC relies on two key legal theories in bringing claims against payment processors. The first theory is that the payment processor allegedly engages in unfair conduct under Section 15(n) of the FTC Act, 15 U.S.C. § 45(n), by allegedly facilitating fraud. The second theory is that the payment processor allegedly violates the FTC’s Telemarketing Sales Rule in two ways. First, the FTC may allege that the payment processor was “assisting and facilitating” a violation of the Rule by providing services to another entity that the processor knows or consciously avoids knowing is violating the Rule. Second, the FTC may allege that the payment processor has engaged in “credit card laundering” by submitting a credit card transaction to the credit card network when the transaction is not between the cardholder and the actual merchant, such as when a shell company is used to hide the identity of the true merchant.

The FTC is not alone in attempting to pursue payment processors for allegedly facilitating consumer fraud. In 2015, the CFPB filed suit against alleged “phantom debt” collectors and various companies alleged to have provided services to the debt collectors, including payment processors. The CFPB claimed that the payment processors facilitated the alleged scheme by enabling the debt collectors to accept credit and debit card payments by engaging in deficient underwriting and failing to appropriately monitor the debt collectors’ accounts, such as by ignoring signs of fraud, such as high chargeback volumes. Last year, the court dismissed the CFPB’s claims against the payment processors as a discovery sanction for failure to produce a knowledgeable witness for deposition, although the case remains pending against the other parties.

The FTC’s testimony indicates that payment processors will continue to remain a potential target in the FTC’s ongoing anti-fraud program. In particular, any payment processor that provides services to a merchant (or multiple merchants) alleged by the FTC, SEC, or other federal or state regulator to have engaged in consumer fraud could itself come under scrutiny by the FTC.

On June 26, 2018, the Federal Trade Commission and New York Attorney General’s Office filed a lawsuit against a debt broker, debt collector and their principals to shut down a phantom debt collection scheme.  According to the complaint, debt broker Hylan Asset Management LLC and its owner, Andrew Shaevel, purchased, placed for collection, and sold phantom debts.  The complaint alleges that Hylan knew that the debts were fabricated because they were purchased from Hirsch Mohindra and Joel Tucker, two individuals who were previously sued by the FTC.  As a result of those actions, Mohindra was banned from the debt collection business and from selling debt portfolios and Tucker was banned from handling sensitive financial information about consumer debts.

The lawsuit also charges a debt collector, Worldwide Processing Group, LLC and its owner Frank Ungaro, Jr. for their role in collecting these phantom debts. The complaint alleges that Worldwide and Ungaro engaged in illegal collection practices and similarly knew that the debts were fabricated.

Hylan and Shaevel are charged with violating the FTC Act by marketing and distributing counterfeit and unauthorized debts.  Worldwide and Ungaro are charged with violating the FTC Act by making false or misleading representations that the consumers owe debts.  Worldwide and Ungaro are additionally charged with violating the Fair Debt Collection Practices Act by making false, deceptive, or misleading representations to consumers, engaging in unlawful communications with third parties, and failing to provide statutorily-required notices.

All of the defendants, including those individually named, are charged with violations of New York General Business Law § 349 by engaging in deceptive acts or practices in connection with conducting their debt sales and collection businesses, along with violations of New York State Debt Collection Law by engaging in prohibited debt collection practices under the statute, including, disclosing or threatening to disclose information affecting the debtor’s reputation for credit worthiness with knowledge or reason to know that the information is false and claiming, or attempting to enforce a right with knowledge or reason to know that the right does not exist.

This lawsuit is part of the FTC’s and State Attorneys General continuing efforts to crackdown on phantom debt schemes.

Politico has reported that on July 19, the Senate Banking Committee will hold a hearing on President Trump’s nomination of Kathy Kraninger to serve as CFPB Director.  While we find this surprising, we continue to believe that she will not be confirmed by the full Senate until after the mid-term elections.

Politico also reported that on July 12, the Senate Banking Committee will hold a hearing on credit reporting agencies at which the witnesses will include Peggy Twohig, CFPB Assistant Director for Nonbank Supervision, and Maneesha Mithal, an Associate Director in the FTC’s Bureau of Consumer Protection.

The FTC has announced that beginning in September 2018, it will hold a series of 15 to 20 public hearings “on whether broad-based changes in the economy, evolving business practices, new technologies, or international developments might require adjustments to competition and consumer protection enforcement law, enforcement priorities, and policy.”

In advance of the start of the hearings, the FTC is seeking public comment on 11 topics that include:

  • The state of antitrust and consumer protection law and enforcement, and its development since the FTC’s 1995 “Global Competition and Innovation Hearings”
  • Competition and consumer protection issues in communication, information, and media technology networks
  • The  intersection between privacy, big data, and competition
  • The FTC’s remedial authority to deter unfair and deceptive conduct in privacy and data security matters
  • The consumer welfare implications associated with the use of algorithmic decision tools, artificial intelligence, and predictive analytics
  • The interpretation and harmonization of state and federal statutes and regulations that prohibit unfair and deceptive acts and practices
  • The FTC’s investigation, enforcement, and remedial processes

The FTC will accept comments on the 11 topics through August 20, 2018.  Comments can address one or more of the 11 topics generally, or can address them with respect to a specific industry.  The FTC will also invite comments on the topic of each hearing.  It plans to issue a news release before each hearing with information about the agenda, date, and location, and with instructions on submitting comments.  In addition, it plans to invite public comment after the entire series of hearings is completed.

Among the purposes of the hearings and public comment process is to “stimulate thoughtful internal and external evaluation of the FTC’s near- and long-term law enforcement and policy agenda.”  The FTC has indicated that the hearings “may identify areas for enforcement and policy guidance, including improvements to the agency’s investigation and law enforcement processes, as well as areas that warrant additional study.”

 

As readers of this blog already know, Professor Jeff Sovern and I come at most issues from different sides of the street.  Over the years, through our respective blogs and at various programs, we have engaged in spirited but respectful debate about many consumer finance issues.  For that reason, I was particularly disappointed to read Jeff’s blog post about Andrew Smith’s appointment as Director of the FTC’s Bureau of Consumer Protection.

Despite his comment that he does not “mean that Mr. Smith is a thief,” Jeff’s characterization of Andrew as a “Payday Lender Lawyer” in the title of his blog post coupled with his use of the quote “set a thief to catch a thief,” seems intended to raise questions about Andrew’s integrity based solely on his past representation of payday lenders.  Although we strongly disagree with Jeff’s support for the CFPB’s payday lending rule and his criticism of the payday lending industry, those matters are certainly fair game for debate.  However, Andrew has had an unblemished ethical record as an attorney in private practice and as a government attorney in his previous tenure with the FTC.  Indeed, Andrew is considered to be among the country’s most prominent consumer financial services lawyers, as evidenced by his position as Chair of the American Bar Association Consumer Financial Services Committee, his appointment long ago as a fellow of the American College of Consumer Financial Services Lawyers, and his ranking by Chambers USA which evaluates America’s leading lawyers for business.

We also strongly reject the inference that payday lending is a form of theft and observe that, regardless of how an attorney’s clients are viewed, it is bad policy for a lawyer’s qualifications for government appointment to depend on his or her clients’ reputations.  If that were the standard, white collar criminal lawyers would never qualify for government service.

I am confident that in his new leadership role at the FTC, Andrew will continue to adhere to the highest ethical standards.

I was pleased to see the announcement yesterday afternoon by FTC Chairman Joseph Simons that the FTC has approved the appointment of Andrew Smith to serve as Director of the agency’s Bureau of Consumer Protection, beginning next week.

As I indicated in my prior blog post, I have known Andrew for many years going back to his tenure at the FTC earlier in his career and have always felt that Andrew was a very fair-minded attorney who studiously called the shots as he saw them.  In addition to bringing his excellent lawyering skills to the FTC, I am confident that Andrew will continue to take an even-handed approach in his new leadership role.

Andrew’s appointment was approved by a 3-2 vote, with both Democratic commissioners, Rohit Chopra and Rebecca Slaughter, voting against his appointment.

 

According to media reports, the FTC is expected to appoint Andrew Smith, an attorney in private practice in Washington, D.C. who currently represents many industry clients, to lead the FTC’s Consumer Protection Bureau.  His expected appointment has reportedly met with criticism from two Democratic Senators.

Before entering private practice, Andrew was an attorney with the FTC.  He currently chairs the American Bar Association’s Consumer Financial Services Committee.

I have known Andrew for many years going back to his tenure at the FTC where he served in senior supervisory and policy-making positions.  I always felt that Andrew was a very fair-minded attorney who studiously called the shots as he saw them.  As a leader of the ABA Consumer Financial Services Committee, including in his current position as Committee Chair, he has been very even-handed, always ensuring that the voices of consumer advocates are heard.  The ABA represents all of it members, not just lawyers who work for or represent the consumer financial services industry.

The knee-jerk criticism of Andrew by two Democratic Senators based on his prior legal work for clients and his need to recuse himself from FTC investigations involving those clients is completely unfounded.  If anything, it demonstrates that Andrew is an excellent lawyer and that his services are in high demand.  Indeed, the BTI Consulting Group recently named Andrew to its 2018 “Client Service All-Stars” list, which recognizes “the leaders in superior client service.”  Andrew is one of only three consumer financial services lawyers in the country named to this list.  My partner, Scott Pearson, also received this rare honor.

The U.S. Court of Appeals for the D.C. Circuit has rejected a trade group’s attempt to invalidate a November 2016 FTC opinion in which the agency concluded that outbound telemarketing calls made using soundboard technology are subject to the prior written consent requirement for robocalls in the FTC’s Telemarketing Sales Rule (TSR).

The TSR’s robocall written consent requirement applies to “any outbound telephone call that delivers a prerecorded message.”  The FTC’s 2016 opinion revoked a 2009 opinion in which it had concluded that because soundboard technology allows the caller and recipient to have a two-way conversation, such calls were not subject to the TSR’s robocall consent requirement.  (In calls using soundboard technology, the caller can play pre-recorded audio clips in response to the call recipient’s statements and break in to the call when needed to speak directly to the recipient.)  The FTC changed its position in response to an increasing number of consumer complaints that consumers were not receiving appropriate responses to their questions and comments and live operators were not intervening in the calls as well as evidence that callers using soundboard technology were handing more than one call at a time.  In its 2016 opinion, the FTC made the revocation of its 2009 opinion effective on May 12, 2017 so that industry would have time to make the changes necessary to bring itself into compliance.

The district court determined that the FTC’s 2016 opinion was a reviewable “final agency action” but rejected the trade group’s claim that the FTC’s action violated the Administrative Procedure Act (APA) because the FTC did not follow the notice and comment process.  According to the district court, because the 2009 opinion revoked by the 2016 opinion was clearly an “interpretive rule” rather than a “legislative rule,” the FTC’s “decision to rescind that opinion did not change the fundamental character of the agency’s action and transform an interpretive rule into a legislative one.”  As a result, the FTC was not required to follow the APA notice and comment procedures before issuing the 2016 opinion.

The district court also ruled on the trade group’s claim that subjecting soundboard technology to the TSR robocall written consent requirement violated the First Amendment because it constituted an impermissible content-based restriction on the speech of the trade group’s members engaged in charitable fundraising.  Having found the restriction, which distinguished between calls to new donors and calls to prior donors or members of the non-profit on whose behalf the calls were made, to be relationship-based rather than content-based and therefore only subject to intermediate First Amendment scrutiny, the district court concluded that the restriction  satisfied such scrutiny because it was narrowly tailored to serve a significant governmental interest (namely, “protecting against unwarranted intrusions into a person’s home or pocket”).

The D.C. Circuit, ruling on the trade group’s appeal, concluded that the 2016 opinion did not constitute a “final agency action.”  As a result, the D.C. Circuit vacated the district court’s opinion and dismissed the trade group’s complaint for failure to state a claim under the APA.  According to the D.C. Circuit, the 2016 opinion did not satisfy one of the two conditions for “final agency action” established by the U.S. Supreme Court in its 1997 decision in Bennett v. Spear.  The D.C. Circuit determined that the condition that the FTC’s action represent “the consummation of agency decisionmaking” was not satisified because the opinion was informal, expressing the views of the FTC staff, and did not represent “the conclusive view of the Commission.”  The D.C. Circuit also concluded that because the trade group’s First Amendment claims were pleaded only as APA claims, it was required to dismiss such claims “for want of a final agency action.”

The title of the FTC’s blog posting about the D.C. Circuit decision, “Decision bolsters FTC position on soundboard tech FTC staff,” suggests that the FTC staff believes the decision provides support for its view.  The press release reminds marketers that “the message…has not changed,” namely that “FTC staff regard calls using soundboard technology as robocalls for TSR purposes.  This means that companies must have each consumer’s express written consent before calling and that fundraisers can only use soundboard technology to solicit charitable contributions from previous donors: no robocalls to new donors.”

The use of soundboard technology also raises TCPA compliance issues.  In addition to generally prohibiting autodialed calls to wireless numbers without the called party’s prior express written consent, the TCPA generally prohibits calls to wireless numbers using ” an artificial or prerecorded voice.”  The TCPA also prohibits telemarketing calls to residential numbers using “an artificial or prerecorded voice” without the called party’s prior express written consent.

 

 

With the swearing in of four of the five newly-confirmed  FTC commissioners, control of the FTC is now in the hands of Republicans.

Yesterday, Joseph Simons, a Republican, was sworn in as FTC Chairman.  Today, Noah Phillips, a Republican, was sworn in along with Rebecca Slaughter and Rohit Chopra, both Democrats.

Republican Christine Wilson, the fifth newly-confirmed FTC commissioner, was appointed to fill the seat currently held by Maureen Ohlhausen, also a Republican.  Ms. Ohlhausen is awaiting Senate confirmation of her nomination by President Trump to serve as a judge on the U.S. Court of Federal Claims.  Ms. Wilson will be sworn in when Ms. Ohlhausen leaves the FTC.

We will be closely watching future FTC developments to see the impact of the change to Republican control on the FTC’s regulatory and enforcement priorities and initiatives.

 

Last Thursday, the Senate confirmed five individuals—three Republicans and two Democrats—nominated by President Trump to serve as FTC commissioners.  The change to Republican control can be expected to impact the FTC’s future regulatory and enforcement priorities and initiatives.

The confirmed nominees consist of the following individuals:

  • Joseph Simons.  Mr. Simons, a Republican, most recently worked as an attorney in private practice in Washington, D.C., and formerly served as a head FTC antitrust lawyer.
  • Noah Phillips.  Mr. Phillips, a Republican, most recently served as Chief Counsel to Senator John Cornyn, the Republican Whip.
  • Christine Wilson.  Ms. Wilson, a Republican, most recently served as Senior Vice President for Regulatory & International Affairs at Delta Air Lines.
  • Rohit Chopra.  Mr. Chopra, a Democrat, most recently served as a senior fellow at the Consumer Federation of America, formerly served as the CFPB’s Student Loan Ombudsman.
  • Rebecca Slaughter.  Ms. Slaughter, a Democrat, most recently served as Chief Counsel to Senator Chuck Schumer, the Senate Minority Leader.

The FTC has been operating with just two commissioners consisting of Acting Chairman Maureen Ohlhausen and Commissioner Terrell McSweeny.  Ms. Ohlhausen, a Republican whose term expires in September 2018, has been appointed by President Trump to serve as a judge on the U.S. Court of Federal Claims.  Since Ms. Wilson was appointed to fill Ms. Ohlhausen’s seat and the Senate has not yet confirmed Ms. Ohlhausen as a federal judge, it is uncertain when Ms. Wilson will be sworn in as an FTC commissioner.

Although the term of Ms. McSweeny, a Democrat, expired in September 2017, she continued to serve as an FTC Commissioner, reportedly pursuant to an FTC practice that allows a commissioner to remain in his or her position until a replacement is confirmed.  She has resigned effective April 28.