InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FTC charges small-business financing operation with deceptive and unfair practices
On June 10, the FTC filed a complaint against two New York-based small-business financing companies and a related entity and individuals (collectively, “defendants”) for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, and making unauthorized withdrawals from consumers’ accounts. The FTC’s complaint alleges that the defendants purported “to provide immediate funds in a specific amount in exchange for consumers’ agreement to repay a higher amount from future business revenues” to be “remitted over time through daily debits from consumers’ bank accounts.” However, the defendants allegedly, among other things, (i) made false claims on their websites that their MCAs require “no personal guaranty of collateral from business owners,” when in fact, the contracts included such provisions; (ii) withheld various upfront fees ranging from hundreds to tens of thousands of dollars prior to disbursing funds to consumers (according to the complaint, these fees were either poorly disclosed in the contracts or not disclosed at all); (iii) directed agents to charge higher fees to consumers than permitted by the contracts; (iv) required businesses and their owners to sign confessions of judgment (COJs) as part of their contracts, and unlawfully and unfairly used the COJs to seize consumers’ personal and business assets, including in circumstances where consumers could not make payments due to technical issues outside their control, or in instances not permitted by the defendants’ financing contracts; (v) made threatening calls to borrowers, including threats of physical violence or reputational harm, to compel consumers to make payments; and (vi) made unauthorized withdrawals from consumers’ accounts. The FTC seeks a permanent injunction against the defendants, along with monetary relief including “rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, and other equitable relief.”
The same day, the FTC published a blog post highlighting the Commission’s ongoing efforts to combat questionable financing practices targeting small businesses. The FTC also held a forum in 2019 on marketplace lending to small businesses, which analyzed the potential for unfair and deceptive marketing, sales, and collection practices in the industry, and released a follow-up staff perspective paper earlier this year (see InfoBytes coverage here and here). In addition, over the past few years, several states have introduced legislation and advisories on MCAs and small business financing (see prior InfoBytes coverage here).
FTC, Ohio AG reach $8.6 million settlement with payment processor
On June 9, the FTC and the Ohio attorney general announced a settlement with a payment processor and its owners (collectively, “defendants”) for allegedly facilitating payments for multiple scam operations. The FTC’s 2019 complaint claimed that the defendants, among other things, generated and processed remotely created payment orders or remotely created checks (RCPOs) that allowed third-party merchants—including deceptive telemarketing schemes—the ability to withdraw money from consumers’ bank accounts (covered by InfoBytes here). According to the FTC, even though the FTC’s Telemarketing Sales Rule (TSR) prohibits sellers and telemarketers from using RCPOs in connection with telemarketing sales, the defendants allegedly marketed their RCPO payment processing services to telemarketers and other merchants considered “high risk” by financial institutions and card networks, and used RCPOs to process millions of dollars for credit card interest reduction and student loan debt relief telemarketing schemes. Under the terms of the settlement, the defendants are permanently banned from participating in any payment processing activities and are prohibited from violating the TSR and the Ohio Consumer Sales Practice Act. The settlement also imposes a monetary judgment of over $8.6 million, which is mostly suspended due to the defendants’ inability to pay.
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.
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.
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.
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.
FTC alleges telemarketer charged organizations for unordered subscriptions
On May 13, the FTC filed a complaint against a Pennsylvania-based telemarketing operation for allegedly misrepresenting “no obligation” trial offers to organizations and then enrolling recipients in subscriptions for several hundred dollars without their consent. The complaint also charged a New York-based debt collector with violating the FTC Act by illegally threatening the organizations if they did not pay for the unordered subscriptions. The FTC alleged that the telemarketing operation violated the FTC Act and the Unordered Merchandise Statute by calling organizations such as businesses, schools, fire and police departments, and non-profits to offer sample books or newsletters without disclosing that they were selling subscriptions and then sending publications without the recipients’ consent. The FTC alleged that, if the organizations agreed to accept what they believed to be free publications, the defendants enrolled the organizations in a negative option program without their consent, and automatically charged the organizations for annual subscriptions. The telemarketer worked with a debt collection firm that allegedly misrepresented that the debts were valid and used false threats to collect outstanding balances. According to the FTC, the debt collection firm handled collections nationwide despite not having a valid corporate registration in any state and only being licensed to collect debt in Washington State. The FTC seeks a permanent injunction against the defendants, along with monetary relief “including rescission or reformation of contracts, restitution, the refund of monies paid, and the disgorgement of ill-gotten monies.”
FTC settles with e-commerce telemarketers for $1.2 million
On May 13, the FTC announced a $1.2 million settlement with a group of telemarketing companies and their owners (collectively, “defendants”) for an allegedly deceptive e-commerce scheme in violation of the FTC Act, the Telemarketing Sales Rule (TSR), and the Consumer Review Fairness Act (CRFA). According to the complaint filed in the U.S. District Court for the Western District of Washington, the defendants sold products and services to consumers trying to start at-home internet-based businesses, which the defendants claimed would “substantially increase the visibility of and drive customer traffic to consumers’ ecommerce websites on the Internet.” The defendants would allegedly obtain leads by using a service that produces leads of consumers who have recently registered websites. The defendants would contact the consumers by telephone to sell services and would typically continue to call consumers to “upsell” additional products. The FTC argues that “[c]ontrary to [d]efendants’ representations, many consumers who purchase [d]efendants’ products and services do not end up with a functional website, earn little or no money, and end up heavily in debt.” The complaint alleges that the defendants violated the FTC Act, the TSR, and the CRFA by, among other things, (i) making unsubstantiated and false earnings and product claims; (ii) making false claims about business affiliations; and (iii) using contract provisions that restrict consumers’ ability to review or complain about purchased products or services.
The settlement with two of the entities and one owner includes a monetary judgment of over $16 million, which is partially suspended due to an inability to pay, and requires the defendants to surrender over $900,000. In separate settlements with the other two owners, large monetary judgments are also partially suspended due to an inability to pay, with one required to surrender over $100,000, and the other required to surrender over $200,000.
FTC and SBA warn companies about misleading PPP marketing
On May 14, the FTC and SBA sent letters to two companies for allegedly misleading small businesses seeking Paycheck Protection Program (PPP) loans. The first letter was sent to a California-based media company, which owns the web address “sba.com.” The letter claims the website suggests an “an affiliation or relationship with the SBA and approved PPP lenders” and encourages customers to apply for PPP loans through the site. The second letter, sent to a Utah-based company, asserts the company and its affiliate lead generators may be violating Section 5 of the FTC Act. Among other things, the FTC notes that one of the company’s affiliate lead generators advertises itself as an SBA loan packager for a $495 fee, even though the SBA prohibits lead generators from charging fees to PPP loan applicants. Both letters instruct the recipients to remove all deceptive claims and advertisements and remediate any harm that may have been caused. The letters require the companies to notify the FTC within 48 hours of the actions taken in response.
Credit card launderer settles FTC charges for $6.75 million
On April 22, the FTC filed a complaint against a Canadian company and its CEO (defendants) for allegedly participating in deceptive and unfair acts or practices in violation of the FTC Act and the Telemarketing Sales Rule (TSR) by, among other things, laundering credit card payments for two tech support scams that were sued by the FTC in 2014. The FTC alleges in its complaint that the defendants entered into contracts with payment processors to obtain merchant accounts to process credit card charges. While these contracts prohibited the defendants from submitting third-party sales through its merchant accounts, the FTC claims that the defendants used the accounts to process millions of dollars of consumer credit card charges on behalf of the two tech support operators and also processed charges for lead generators that directed consumers to the tech support scam. The FTC alleges that the defendants were aware of the unlawful conduct of at least one of the two operators and attempted to hide these charges from the payment processors.
Under the proposed settlement, the defendants neither admitted nor denied the allegations, except as specifically stated within the settlement, and (i) will pay $6.75 million in equitable monetary relief; (ii) are permanently enjoined from engaging in any further payment laundering or violations of the TSR; and (iii) will screen and monitor prospective high risk clients.