Generally speaking, those who wish to engage in payday lending will find that the industry is heavily regulated. In addition to regulation at the state level, payday lenders must comply with a wide variety of federal laws such as the Truth in Lending Act (“TILA”), and its implementing regulations known as Regulation Z, which requires that lenders disclose loan terms and APR to potential consumers, and the Electronic Funds Transfer Act (“EFTA”), which prohibits lenders from requiring, as a condition of loan approval, a customer’s authorization for loan repayment through a recurring electronic fund transfer. In addition, violations of the TILA and the EFTA can subject payday lenders to liability under the Federal Trade Commission Act (“FTCA”) for unfair or deceptive business practices.
In an effort to skirt federal and state regulation, many payday lenders have established affiliations with American Indian tribes and conduct their lending activities on tribal lands. However, it has been the position of the Federal Trade Commission (“FTC”) that the FTCA and various other laws apply to payday lenders regardless of American Indian tribal affiliations. Recently, the issue of whether the FTC had jurisdiction over payday lenders operating in affiliation with American Indian tribes was the subject of a series of federal court decisions in the case of Federal Trade Commission v. AMG Services, Inc. Not only do the recent decisions clarify the authority of the FTC in its regulation of all payday lenders, but the decisions also highlight the potential multiple liabilities payday lenders face when they fail to adequately disclose terms mandated by the TILA.
In AMG, the FTC sued numerous payday lenders operating in affiliation with American Indian Tribes for violations of the FTCA related to improper disclosures of terms under the TILA and EFTA violations. In response, AMG argued that they were exempt from regulation and FTC enforcement because of their affiliation with the American Indian tribes. In deciding the issue, the District Court of Nevada ruled on two separate issues: 1) whether the FTC had authority to regulate payday lenders operating in affiliation with American Indian Tribes; and 2) if so, whether the lenders’ conduct violated the FTCA.
In finding that the FTC can regulate payday lenders operating in conjunction with American Indian tribes, the Court found that the FTCA is a broad statute of general applicability which grants the FTC the authority to bring suit against “any person, partnership, or corporation for violating any provision of law enforced by the FTC.” Thus, the District Court found that “the FTC does have authority under the FTC Act to regulate Indian Tribes, Arms of Indian Tribes, employees of Arms of Indian Tribes and contractors of Arms of Indian Tribes.” A copy of the District Court’s order can be read here and the FTC’s press release on the decision can be read here.
Based upon this finding, on June 4, 2014, the court issued its second ruling in the AMG matter finding that the payday lenders violated the FTCA by imposing undisclosed charges and inflated fees which AMG failed to disclose to its customers. The Court found that while AMG disclosed its initial fee and APR rate in the loan documents, it was AMG’s practice to conceal and scatter the terms of its automatic rollover program through the loan agreement such that the program’s existence was hidden. (“Rollover” is a term used to describe the extension of a payday loan. In circumstances where a borrower cannot repay a payday loan, certain states allow for the borrower to extend the term of the loan by paying a fee to the lender. As a result, borrowers will often “rollover” their loan several times resulting in excessive fees paid for the original amount borrowed.) Further, the District Court found the defendants’ own documents showed that defendants’ instructed their employees to conceal how the loan repayment plans worked.
As explained by the District Court:
[T]he net impression of the Loan Note Disclosure is likely to mislead borrowers acting reasonably under the circumstances because the large prominent print in the TILA Box implies that borrowers will incur one finance charge while the fine print creates a process under which multiple finance charges will be automatically incurred unless borrowers take affirmative action.
Thus, because of the misleading net impression created by how the defendants disclosed the terms of their rollover programs, the District Court found the lenders’ practices to be deceptive, misleading, and in violation of the FTCA.
In addition, because the misleading disclosures at issue involved the disclosure of the appropriate finance charge, APR, total number of payments, and the payment schedule, the District Court went on to find that the defendants failed to make appropriate and adequate disclosures as required by the TILA. A copy of the FTC’s press release regarding the District Court’s decision can be read here and the order of the District Court can be read here.