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FTC shares 2018 enforcement report with the CFPB
On June 6, the FTC announced that it submitted its 2018 Annual Financial Acts Enforcement Report to the CFPB. The report—which the Bureau requested for its use in preparing its 2018 Annual Report to Congress—covers the FTC’s enforcement activities regarding Regulation Z (the Truth in Lending Act or TILA), Regulation M (the Consumer Leasing Act or CLA), and Regulation E (the Electronic Fund Transfer Act or EFTA). Highlights of the enforcement matters covered in the report include:
- Auto Lending and Leasing. The report discusses two enforcement matters related to deceptive automobile dealer practices. The first, filed in August 2018, alleged that a group of four auto dealers, among other things, advertised misleading discounts and incentives in their vehicle advertisements, and falsely inflated consumers’ income and down payment information on financing applications. The charges brought against the defendants allege violations of the FTC Act, TILA, and the CLA. The FTC sought, among other remedies, a permanent injunction to prevent future violations, restitution, and disgorgement. (Detailed InfoBytes coverage of the filing is available here.) In the second, in December 2018, the FTC mailed over 43,000 checks, totaling over $3.5 million, to consumers allegedly harmed by nine dealerships and owners engaged in deceptive and unfair sales and financing practices, deceptive advertising, and deceptive online reviews. (Detailed InfoBytes coverage is available here.)
- Payday Lending. The report covers two enforcement matters, including the U.S. Court of Appeals for the 9th Circuit’s December 2018 decision upholding the $1.3 billion judgment against defendants responsible for operating an allegedly deceptive payday lending program. The decision is the result of a 2012 complaint in which the FTC alleged that the defendants engaged in deceptive acts or practices in violation of Section 5(a) of the FTC Act by making false and misleading representations about costs and payment of the loans. (Detailed InfoBytes coverage is available here.) The report also indicates that, in February 2018, the FTC issued over 72,000 checks totaling more an $2.9 million to consumers stemming from a July 2015 settlement, that alleged that online payday operators used personal financial information purchased from third-party lead generators or data brokers to make unauthorized deposits into and withdrawals from consumers’ bank accounts, regardless of whether the consumer applied for a payday loan. (Detailed InfoBytes coverage is available here.)
- Negative Option. The report covers six enforcement matters related to alleged violations of the EFTA and Regulation E for “negative option” plans, including three new filings against online marketers for allegedly advertising “free trial” offers for products that enrolled consumers in expensive, ongoing plans without their knowledge or consent. The report notes that, in 2018, the FTC reached a settlement with one entity and obtained a court judgment against another, both resulting in injunctive relief and monetary settlements (which were suspended due to the defendants’ inability to pay). The report also notes that the FTC mailed 2,116 refund checks totaling more than $355,000 to people who bought an allegedly deceptive “memory improvement” supplement.
Additionally, the report addresses the FTC’s research and policy efforts related to truth in lending and leasing, and electronic fund transfer issues, including (i) a study of consumers’ experiences in buying and financing automobiles at dealerships; and (ii) the FTC’s Military Task Force’s work on military consumer protection issues. The report also outlines the FTC’s consumer and business education efforts, which include several blog posts warning of new scams and practices.
Federal Reserve releases report on 2017 debit card transactions
On March 21, the Federal Reserve Board announced the release of its biennial report on debit card transactions in 2017. The report is the fifth in a series published every two years pursuant to Section 920 of the Electronic Fund Transfer Act (EFTA). As in prior years, the 2017 report reflected that issuers’ costs of authorizing, clearing, and settling debit card transactions (excluding issuer fraud losses) varied significantly across respondents. Among other things, data compiled in the report estimates that (i) in 2017, payment card networks processed 68.5 billion debit and prepaid card transactions valued at $2.62 trillion in the U.S.; (ii) debit and prepaid card fraud losses to all parties increased to 11.2 basis points in 2017 from 10.3 basis points in 2015; and (iii) the median covered issuer had average fraud prevention and data security costs of 1.5 cents per transaction, down from 1.7 in 2015.
4th Circuit holds TILA and EFTA taxpayer payment agreement claims can proceed
On February 6, a three-judge panel for the U.S. Court of Appeals for the 4th Circuit affirmed a district court’s denial of a motion to dismiss a proposed class action suit against two tax payment financing companies, finding that (i) the plaintiff had standing under EFTA because he alleged that he suffered an injury in fact; and (ii) a taxpayer payment agreement (agreement) between the plaintiff and the financing companies qualifies as a consumer credit transaction subject to both TILA and EFTA. According to the decision, the plaintiff entered into an agreement to finance the payment of residential property taxes as allowed under state law. The plaintiff subsequently challenged the agreement on several grounds, including that it violated TILA, EFTA, and the Virginia Consumer Protection Act because many of the agreement’s terms had incorrect amounts, there was no itemized list of closing costs, and the agreement did not include “certain allegedly required financial disclosures.” Following the plaintiff’s initiation of a proposed class action, the defendants moved to dismiss for failure to state a claim, arguing, among other things, that the agreement is not a consumer credit transaction and therefore not subject to TILA or EFTA.
The district court, however, determined that the plaintiff had standing under the EFTA because he claimed he suffered an injury in fact—that the agreement was contingent on his agreeing to preauthorized electronic funds transfer payments—and that the agreement was subject to both TILA and EFTA. On appeal, the 4th Circuit agreed that the plaintiff satisfied the injury requirement “because he alleged that he was required to agree to [electronic funds transfer payment] authorization as a condition of the agreement and that the agreement contained terms requiring him to waive EFTA’s substantive rights regarding [electronic funds transfer payment] withdrawal.” Even if the court accepted the defendant’s assertion that there was no injury, it held that the plaintiff would still have standing to challenge the agreement because “there is a ‘realistic danger’ that [the plaintiff] will ‘sustain[] a direct injury’ as a result of the terms of the [agreement].” The court also found the agreement to be a credit transaction under the meaning of TILA and EFTA because under TILA, a consumer transaction is “one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family or household purposes.”
One judge concurred in part—regarding standing under EFTA—but dissented also, writing that the agreement does not qualify as a “credit transaction” under TILA because the Virginia code, and not a creditor, grants the taxpayer the right to defer payment of a local tax assessment by entering into an agreement with a third party like the defendant. “A[n] [agreement] is not a ‘credit transaction,’ within the meaning of TILA, because the preexisting obligation of the taxpayer is not severed by the third-party payor’s payment, and the third-party payor does not grant any right to the taxpayer that is not conferred already by statute,” the dissenting judge concluded. The judge further opined that protections for taxpayers who enter into an agreement should be resolved by the state, as the entity creating this form of tax payment.
Court holds credit union must face breach of contract claims over overdraft practices
On November 8, the U.S. District Court for the District of Massachusetts granted in part and denied in part a credit union’s motion to dismiss a putative class action challenging the institution’s overdraft practices. As summarized in the order, the plaintiff alleged the credit union improperly charged overdraft fees when the “available balance” of her account, which was calculated by deducting pending debits and deposit holds, was insufficient to cover a transaction, even though the “actual” or ledger balance would have covered the transaction. The plaintiff brought multiple claims against the credit union, including breach of contract and Electronic Funds Transfers Act (EFTA) claims.
The credit union moved to dismiss arguing, in part, that the relevant account agreements referenced the “available balance” method for overdraft purposes and that the term is a “well-known bank term that has long been understood to mean the money in an account minus holds placed on funds to account for uncollected deposits and for pending debit transaction.”
The court disagreed, concluding that “available balance” is not a defined term, is ambiguous, and therefore its meaning presents a factual dispute that cannot be resolved on a motion to dismiss. The court allowed, however, the EFTA claim to proceed only for violations that occurred within one year of the complaint filing.
District court approves stipulated final judgment in favor of CFPB against one of the operators of online lending operation
On July 23, the U.S. District Court for the Western District of Missouri approved a stipulated final judgment and order against one of the two dozen defendants in the CFPB’s suit against an alleged online payday lending operation. In 2014, the Bureau filed a complaint against numerous entities and three individuals, accusing the defendants of violating the Consumer Financial Protection Act, Truth in Lending Act, and Electronic Fund Transfer Act by, among other things, purchasing information from online lead generators in order to access checking accounts to illegally deposit payday loans and withdraw fees without consumer consent, along with falsifying loan documents as evidence that the consumers had agreed to the loans. The stipulated final judgment and order resolved the Bureau’s claims against one of the individual defendants, an in-house accountant who monitored the bank accounts and the movement of funds between the entity and individual defendants. While the settling defendant neither admitted nor denied the Bureau’s allegations (except with respect to jurisdiction), he agreed to pay a civil money penalty of $1 (based, in part, on his inability to pay) and to fully cooperate with the Bureau.
FTC reports on certain 2017 enforcement activities to the CFPB
On May 17, in response to a request from the CFPB, the FTC transmitted a letter summarizing its 2017 enforcement activities related to Regulation Z (TILA), Regulation M (Consumer Leasing Act), and Regulation E (Electronic Fund Transfer Act) for the CFPB’s use in preparing its 2017 Annual Report to Congress. The FTC highlighted numerous activities related to the enforcement of the pertinent regulations, including:
- Payday Lending. The FTC acknowledged the continued litigation against two Kansas-based operations and their owner for allegedly selling lists of counterfeit payday loan debt portfolios to debt collectors in violation of the FTC Act, previously covered by InfoBytes here.
- Military Protection. The FTC identified the July 2017 military consumer financial workshop and the launch of the new Military Task Force (previously covered by InfoBytes here and here) among the activities the agency engaged in related to protecting the finances of current and former members of the military. The FTC also noted continued participation in the interagency group working with the Department of Defense on amendments to its rule implementing the Military Lending Act.
- “Negative Option.” For actions under the Regulation E/EFTA, the FTC highlighted numerous “negative option” enforcement actions, in which the consumer agrees to receive goods or services from a company for a free trial option, but if the consumer does not cancel before the trial period ends, the consumer will incur recurring charges for continued goods or services. Among the actions highlighted is a case in which the FTC imposed a $179 million judgment (suspended upon the payment of $6.4 million) settling allegations that the online marketers’ offers of “free” and “risk free” monthly programs for certain weight loss and other products were deceptive.
- Auto Loans. The letter highlighted, among others, the FTC action against a Southern California-based group of auto dealerships that allegedly violated a prior consent order with the FTC by misrepresenting the cost to finance or lease a vehicle, previously covered by InfoBytes here.
FDIC fines Delaware-based bank for unfair and deceptive practices
On March 7, the FDIC announced that a Delaware-based bank agreed to settle allegations of unfair and deceptive practices in violation of Section 5 of the Federal Trade Commission Act for assessing transaction fees in excess of what the bank previously had disclosed. The FDIC also found that the bank’s practices violated the Electronic Funds Transfer Act, the Truth in Savings Act, and the Electronic Signatures in Global and National Commerce Act. According to the FDIC, from December 2010 through November 2014, the bank overcharged transaction fees to consumers who used prepaid and certain reloadable debit cards to make point-of-sale, signature-based transactions that did not require the use of a personal identification number. The transaction fees allegedly exceeded what the bank had disclosed to consumers. Under the terms of the settlement order, the bank will, among other things, (i) establish a $1.3 million restitution fund for eligible consumers; (ii) prepare a comprehensive restitution plan and retain an independent auditor to determine compliance with that plan; and (iii) provide the FDIC with quarterly written progress reports detailing its compliance with the settlement order. The settlement also requires the bank to pay a civil money penalty of $2 million.
Federal Reserve Governor Calls for Collaboration Between Regulators, Banks, Data Aggregators, and Fintech Firms for Financial Data Sharing Standards
On November 16, Federal Reserve Governor Lael Brainard spoke at a fintech conference sponsored by the University of Michigan regarding consumers’ right to understand and control how their financial data is used by third-party aggregators, and in developing fintech technology. “There's an increasing recognition that consumers need better information about the terms of their relationships with aggregators, more control over what is shared, and the ability to terminate the relationship,” Brainard noted. “Consumers should have relatively simple means of being able to consent to what data are being shared and at what frequency. And consumers should be able to stop data sharing and request the deletion of data that have been stored.”
Brainard emphasized that regulators, data aggregators, bank partners, and fintech developers should jointly develop a common, consistent message for how customer data is shared and protected within the fintech space and “other areas experiencing significant technological change.” As previously reported in InfoBytes, on October 18, the CFPB issued principles concerning the security and transparency of financial data sharing when companies—including fintech firms—get authorization from consumers to access their account data that reside in separate organizations to provide products and services.
CFPB Seeks Comments on Proposed Amendments to Prepaid Rule, Releases Updated Small Entity Compliance Guide
On June 15, the CFPB announced a request for comment on proposed amendments to Regulation E, which concerns prepaid accounts under the Electronic Fund Transfer Act (EFTA) and the Truth in Lending Act (Regulation Z). According to the Bureau, the request aims to address prepaid companies’ concerns over “unanticipated complexities” regarding certain aspects of the rule. As previously covered in InfoBytes, in April the CFPB issued a final rule delaying the general effective date to April 1, 2018. The prepaid rule provides consumers, among other things, additional federal protections under EFTA on prepaid financial products, person-to-person payment products, and other electronic accounts with the ability to store funds. Specifically, the proposed amendments would impact error resolution requirements for unregistered accounts, enhance flexibility for credit cards linked to digital wallets, and open for consideration whether a further delay to the rule’s effective date is necessary due to the proposed amendments or if safe harbor provisions should be added for early compliance. The proposal also addresses amendments affecting the following: (i) the exclusion of loyalty, award, or promotional gift cards; (ii) “unsolicited issuance of access devices and pre-acquisition disclosures”; and (iii) submission of account agreements to the Bureau. Comments are due 45 days after the request is published in the Federal Register.
Separately, on the same day, the Bureau released an updated edition of its small entity compliance guide for the prepaid rule. The guide notes the new effective date, and also offers clarification on prepaid reload packs, the consistent use of fee names and other terms, foreign language disclosure requirements, URL names in short form disclosures, mobile accessible transaction histories, account agreement submissions to the Bureau, and clarification that stipulates “reversing a provisional credit does not otherwise trigger Regulation Z coverage under the Prepaid Rule.”
FDIC Releases List of Enforcement Actions Taken Against Banks and Individuals in April 2017
On May 26, the FDIC released its list of 18 administrative enforcement actions taken against banks and individuals in April. Among the consent orders on the list are civil money penalties for violations of the Flood Disaster Protection Act of 1973 and its flood insurance requirements. Also on the list are a cease and desist order and a civil money penalty assessment issued to a Louisiana-based bank (Bank) for violations of the Bank Secrecy Act (BSA), EFTA, RESPA, TILA, HMDA, and the National Flood Insurance Program. According to the cease and desist order, the FDIC Board of Directors agreed with the Administrative Law Judge’s recommended decision that the Bank engaged in unsafe or unsound practices, which warranted a cease and desist order and civil money penalty. The order also addressed a number of shortcomings identified by the Bank’s examiners, including the following: (i) the Bank’s BSA program lacked adequate internal controls to ensure compliance; (ii) it failed to provide correct and compete electronic funds transfer disclosures to consumers; (iii) borrowers were provided “untimely and improperly completed” good faith estimates; and (iv) the Bank repeatedly failed to accurately report required HMDA information to federal agencies.
An additional eight actions listed by the FDIC related to unsafe or unsound banking practices and breaches of fiduciary duty, including five removal and prohibition orders. There are no administrative hearings scheduled for June 2017. The FDIC database containing all of its enforcement decisions and orders may be accessed here.