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FTC reaches settlement with payment processor
On June 1, the FTC announced a settlement with a payment processor that the FTC alleged had engaged in unfair acts or practices in violation of the FTC Act by ignoring warnings that its client was operating a scheme through which it persuaded consumers to pay thousands of dollars each for worthless business coaching and investment mentoring services. (See InfoBytes coverage on the affiliate marketer settlements here.) The FTC’s complaint provides that the company’s processing data, which showed a large number of charges and associated refunds and chargebacks, immediately raised red flags regarding the client’s business model. According to the FTC, the company failed to adequately investigate why the client “greatly exceeded its approved processing volumes and accrued significant chargebacks,” and that while some of the client’s accounts were terminated, the company continued to provide processing services for five other accounts. In addition, the FTC states that the company failed to monitor both the products sold and claims made by the client. The settlement imposes a monetary judgment of over $46.7 million, which is suspended due to the company’s inability to pay. The company is also required to surrender any claims to the client’s assets, which are being held in receivership in a separate action.
SEC settles with blockchain company over unregistered ICO
On May 28, the SEC announced a settlement with a California-based blockchain services company resolving allegations that the company conducted an unregistered initial coin offering (ICO) of digital asset securities. According to the order, the company raised over $25 million by selling “Consumer Activity Tokens” to nearly 9,500 investors, including U.S. investors, to raise capital to “develop, administer, and market a blockchain-based search platform for targeted consumer advertising.” The company allegedly told investors that the tokens would increase in value and made the tokens available on third-party digital asset trading platforms after the ICO. However, the SEC found that the tokens constituted securities, and that the company allegedly violated Sections 5(a) and 5(c) of the Securities Act by distributing the tokens without having the required registration filed or in effect, nor did it qualify for an exemption to the registration requirements.
The order, which the company consented to without admitting or denying the findings, imposes a $400,000 penalty, and requires the company to disgorge $25.5 million and pay approximately $3.4 million in prejudgment interest. Additionally, the company is required to surrender all its remaining tokens to the fund administrator so they can be permanently disabled, publish notice of the order, and request the removal of the distributed tokens from all digital asset trading platforms.
Court rejects dismissal of CFPB claims against foreclosure relief services company
On May 20, the U.S. District Court for the Central District of California denied a foreclosure relief services company and its owner’s (collectively, “defendants”) motion to dismiss an action by the CFPB accusing the defendants of violating the Consumer Financial Protection Act (CFPA) and Regulation O. As previously covered by InfoBytes, in September 2019, the CFPB filed a complaint against the defendants, alleging that since 2014 the defendants made deceptive and unsubstantiated representations about the efficacy and material aspects of its mortgage assistance relief services, and made misleading or false claims about the experience and qualifications of its employees. The Bureau alleged that the defendants’ representations constituted abusive acts and practices because, among other things, consumers “generally did not understand and were not in a position to evaluate the accuracy of [the defendants’] marketing representations or the quality of the mortgage-assistance-relief services that [the defendants] sold.” Moreover, the Bureau claimed the defendants further violated Regulation O by charging consumers advance fees before rendering services. The defendants moved to dismiss the action.
The district court rejected all of the defendants’ arguments, concluding that the Bureau “as an organization and its establishment” are constitutionally permissible, and therefore, can bring enforcement actions against the company. The court also held that the Bureau adequately pleaded that the defendants’ were covered by the CFPA and Regulation O, as providers of “[a]udit and litigation documents to consumers, which Defendants claim will prevent foreclosure or modify the terms of [consumers] mortgage[s].” And lastly, the court held that the Bureau sufficiently alleged that the defendants took “unreasonable advantage of the consumer’s lack of understanding” of the material terms of the product they were selling.
FDIC releases April enforcement actions
On May 29, the FDIC released a list of administrative enforcement actions taken against banks and individuals in April. The FDIC issued 23 orders and 2 notices of changes, which “consisted of 12 Section 19 orders, 3 orders of prohibition, 1 order to pay, 3 consent orders, 1 order to cease and desist, 4 orders terminating consent orders, and 1 order terminating an order of restitution.” Among the actions is a cease and desist order and civil money penalty issued against a Louisiana-based bank for allegedly violating the Bank Secrecy Act, EFTA, RESPA, TILA, the National Flood Insurance Program, and HMDA. The order follows the issuance of a 2019 recommended decision on remand by an FDIC administrative law judge (ALJ), who also found that the bank failed to comply with a majority of the provisions outlined in a 2011 memorandum of understanding entered into with the FDIC two years prior to the filing of this action. Specifically, the recommended decision found that the bank, among other things, “violated the independence requirement of the FDIC’s rules and regulations pertaining to appraisals by allowing a lending officer originating loans to appraise the collateral underlying the loan,” and “allow[ing] a high ranking officer to repeatedly overdraw his bank account without being charged overdraft fees” in violation of Regulation O of the Federal Reserve Board. Other violations included that the bank failed to: (i) conduct independent property evaluations and appraisals; (ii) disclose unauthorized fees or investigate reports of erroneous charges; (iii) assess flood insurance needs or inform borrowers of force-placed flood insurance rules; (iv) file suspicious activity reports and currency transaction reports; (v) implement a “meaningful compliance program” to ensure the bank did not engage in foreign financial transactions with prohibited persons identified by the Office of Foreign Assets Control; and (v) “conduct proper compliance training or maintain an effective audit program for consumer compliance matters.” The FDIC’s order affirmed the ALJ’s recommended decision to subject the bank to an order to cease and desist and pay a $500,000 civil money penalty.
Additionally, the FDIC entered a consent order against an Illinois-based bank relating to alleged weaknesses in its Bank Secrecy Act compliance program.
FTC reaches settlement with dealership to resolve UDAP and fair lending allegations
On May 27, the FTC announced settlements with a New York City auto dealer and its general manager (collectively, “defendants”) to resolve allegations that the defendants engaged in illegal auto financing sales practices and maintained a policy of charging African-American and Hispanic car buyers more for financing that similarly situated non-Hispanic white consumers. The complaint alleges that the defendants violated the FTC Act, TILA, and ECOA. According to the complaint, the defendants engaged in deceptive and unfair practices by, among other things, allegedly (i) advertising low sales prices but failing to honor them; (ii) inflating the cost through a variety of methods, including telling buyers that they had to pay unnecessary charges to purchase “certified pre-owned” cars, double-charging consumers for taxes and fees without their consent, and altering the terms in the middle of a sale; and (iii) charge higher financing “markups” and fees to African-American and Hispanic customers.
The defendants—who neither admit nor deny the allegations—have each agreed under the terms of the settlements (see here and here) to pay $1.5 million in consumer redress. The orders also prohibit the defendants from misrepresenting the cost or terms to purchase, lease, or finance a car, and require the defendants to obtain express, informed buyer consent for all charges and provide clear financing disclosures. The defendants are also banned from engaging in unlawful credit discrimination, and are prohibited from engaging in credit transactions unless they establish a fair lending program that will, among other things, provide training for employees and cap the allowed rate markups.
The Commission vote authorizing the filing of the complaint and stipulated final order was 5-0. Commissioner Chopra issued a concurring statement addressing disparate impact and unfair discrimination in the auto industry, and emphasized it is time for the FTC to use its rulemaking authority to establish protections for car buyers and honest auto dealers. Commissioner Slaughter agreed that there is a need for auto financing and sales market reform, and suggested that the FTC can begin by initiating a rulemaking under Dodd-Frank to regulate dealer markups.
CFPB and Massachusetts AG sue credit-repair telemarketers
On May 22, the CFPB and the Massachusetts attorney general announced a joint lawsuit against a credit repair organization and the company’s president and owner (collectively, “defendants”) for allegedly committing deceptive acts and practices in violation of the Consumer Financial Protection Act (CFPA) and the Massachusetts Consumer Protection Law. The complaint also alleges the defendants engaged in deceptive and abusive telemarketing acts or practices in violation of the Consumer Financial Protection Act’s (CFPA) prohibition against deceptive acts or practices and the FTC’s Telemarketing Sales Rule (TSR). According to the complaint filed in the U.S. District Court for the District of Massachusetts, the defendants allegedly enrolled tens of thousands of consumers by deceptively claiming that their credit-repair services could help consumers substantially improve their credit scores. The services also allegedly promised to fix “unlimited” amounts of negative items from consumers’ credit reports. However, the complaint asserts that in “numerous instances,” the defendants failed to achieve these results. The defendants also allegedly engaged in abusive acts and practices in violation of the TSR by requesting and collecting fees before achieving any results related to repairing a consumer’s credit. Among other things, the complaint further alleges that the defendants claimed to have more than 60 credit repair experts but actually only employed a handful of Boston-based employees, only some of whom interacted with consumers. The majority of the interactions, the complaint alleges, were conducted by telemarketers located in Central America who were paid “almost entirely by commission” based on the number of consumers they enrolled.
The complaint seeks injunctive relief; “damages and other monetary relief against [the defendants] as the Court finds necessary to redress injury to consumers resulting from [the defendants’] violations, which may include, among other things, rescission or reformation of contracts, refund of monies paid, and restitution; and civil money penalties.”
OCC releases recent enforcement actions
On May 21, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included among the actions is an April 14 consent order to resolve the OCC’s claims that a California-based bank engaged in Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program violations. According to the consent order, an OCC examination identified deficiencies in the bank’s BSA/AML compliance program, including failure to implement a compliance program that “adequately covered the required BSA/AML program elements,” and failure to correct a previously identified BSA/AML compliance program problem. The consent order requires the bank to, among other things, (i) appoint a compliance committee of independent directors ; (ii) submit a written strategic plan to the OCC covering at least the next three years; (iii) ensure competent management and staff is in place to ensure compliance with the order, applicable laws, and rules and regulations; (iv) appoint a “permanent, qualified, and experienced BSA Officer”; (v) create and adopt a “written program of policies and procedures to provide for compliance with the BSA”; (vi) adopt a “written risk-based program of internal controls and processes to ensure compliance with the requirements to file SARs”; (vi) develop policies and procedures for performing customer due diligence; (vii) implement a program to manage BSA/AML and Office of Foreign Assets Control risk associated with processing wire transfers; and (viii) conduct a SAR “look-back” review, implement an independent BSA/AML audit program, and develop a comprehensive training program for bank employees.
FTC temporarily halts payday lending enterprise
On May 22, the FTC announced that the U.S. District Court for the District of Nevada granted a temporary restraining order against a group of 11 defendants operating a payday lending enterprise for allegedly deceptively overcharging consumers and withdrawing money from consumers’ accounts without permission. According to the complaint filed by the FTC, the defendants advertised loans with fixed payback terms, but in many cases, the payback terms would default to debiting the financial fee only. In some circumstances, consumers would receive an email with payback options, including “full payoff, loan extension, and loan buy down,” but the defendants would still require the consumer to notify them three days in advance if they wanted to pay off the entire loan amount, if not, only the “financial fee” would be debited. The FTC argues that the defendants violated the FTC Act, the Telemarketing Sales Rule, TILA/Regulation Z, and the Electronic Funds Transfer Act/Regulation E by, among other things, (i) marketing loan products as having a fixed number of payments when funds were only being applied to finance charges and payment withdrawals continued beyond the promised number of payments; (ii) failing to make the required loan disclosures; (iii) failing to obtain proper authorization for reoccurring bank account withdrawals; and (iv) unlawfully using remotely created checks. Beyond the temporary restraining order, the FTC is seeking a permanent injunction, contract rescission, restitution, and disgorgement.
CFTC issues new civil monetary penalty guidance
On May 20, the CFTC’s Division of Enforcement issued new civil monetary penalty guidance—the first such public issuance since 1994. The guidance, which has been incorporated into the Division’s Enforcement Manual, outlines a three-pronged approach enforcement staff will apply when evaluating the appropriate penalty for recommendation to the Commission: (i) “the gravity of the violation,” which may include the nature and scope of a violation, a respondent’s role in the violation, whether the conduct was intentional or willful, and the nature and scope of any consequences resulting from the violations; (ii) “mitigating and aggravating circumstances,” such as a respondent’s post-violation conduct, whether the respondent self-reported the misconduct, the extent of cooperation and remediation, and a respondent’s prior misconduct; and (iii) “other considerations,” including factors such as timely settlements and remedies and monetary relief to be imposed in parallel actions by other criminal authorities or self-regulatory agencies and organizations. “In applying the various factors, staff will be guided by the overarching consideration of ensuring that any proposed penalty achieves the dual goals of specific and general deterrence,” CFTC Director of Enforcement James McDonald stated.
FTC and Utah add TSR charges to real estate seminar complaint
On May 20, the FTC announced that it and the Utah Division of Consumer Protection amended their complaint against a Utah-based company and its affiliates (collectively, “defendants”) for allegedly using deceptive marketing to persuade consumers to attend real estate events costing thousands of dollars. The amended complaint adds additional defendants and new charges asserting the defendants violated the Telemarketing Sales Rule (TSR). As previously covered by InfoBytes, the U.S. District Court for the District of Utah issued a temporary restraining order against the defendants after the FTC and the Utah Division of Consumer Protection accused the defendants of violating the FTC Act, the Consumer Review Fairness Act (CRFA), and Utah state law, by marketing real estate events with false claims and celebrity endorsements. Among other things, the defendants allegedly told consumers they would (i) earn thousands of dollars in profits from real estate investment “flips” by using the defendants’ products; (ii) receive 100 percent funding for their real estate investments, regardless of credit history; and (iii) receive a full refund if they do not make “‘a minimum of three times’” the price of the workshop within six months. The amended complaint alleges that, in addition to the claims made at the real estate events, the defendants reiterated the false or misleading statements in the course of their telemarketing activities in violation of the TSR.