FTC Provides 2016 Enforcement Report to CFPB

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The Federal Trade Commission has provided its annual Financial Acts Enforcement Report to the CFPB covering the FTC’s enforcement activities in 2016 relating to compliance with Regulation Z (Truth in Lending Act), Regulation M (Consumer Leasing Act), and Regulation E (Electronic Fund Transfer Act).  Under Dodd-Frank, the FTC retained its authority to enforce these regulations with respect to entities subject to its jurisdiction.  The FTC and CFPB coordinate their enforcement and related activities pursuant to a MOU entered into in 2012 and reauthorized in 2015.  The Report responds to the CFPB’s request for information regarding the FTC’s efforts, which focused on three areas: enforcement actions; rulemaking, research, and policy development; and consumer and business education.

Regulation Z/TILA.  The FTC’s TILA enforcement activities included: (1) initiating two actions in federal district court for civil penalties involving alleged deceptive advertising by auto dealers, one of which focused on dealer advertising aimed at non-English speaking consumers; (2) winning a $1.3 billion dollar judgment against a group of payday lenders in Kansas City for alleged deceptive lending practices, including failing to truthfully disclose loan terms; (3) obtaining a $13.4 million judgment for contempt against a consumer electronics retailer for violations of a prior consent order, which arose from failures to provide required written disclosures and account statements; and (4) continuing to litigate two federal cases involving alleged forensic audit scams by mortgage assistance relief services that offered, among other things, to review or audit mortgage documents to identify violations of the TILA, Regulation Z, and other federal laws, and obtaining in both cases monetary judgments against multiple defendants.

In the first of the federal court actions involving alleged deceptive advertising by auto dealers, the FTC sued three auto dealers who it alleged concealed sale and lease terms that added significant costs or limited who could qualify for advertised prices.  Such alleged concealment included using print too small to read without magnification to disclose that, in addition to a low monthly price, the consumer would be required to pay a down payment and fees up front and pay a large amount at the end of the financing term.  The dealers were alleged to have violated the TILA by advertising credit terms without clearly and conspicuously disclosing required information and by failing to keep and produce required records.

In the second of such federal court actions, the FTC sued nine dealerships and owners who it alleged had enticed consumers, particularly financially distressed and non-English speaking consumers, with advertisements that made misleading claims about the availability of vehicles for advertised prices and financing terms.  The group was alleged to have violated TILA and Regulation Z by not clearly disclosing required credit information in advertisements.

The FTC reported that its TILA rulemaking, research and policy efforts continued through 2016.  Though the FTC does not have rulemaking authority under the TILA, it nonetheless engages in research related to the TILA.  The FTC’s research initiatives included: (1) proposing a qualitative survey of consumer experiences in buying and financing automobiles at dealerships; (2) beginning a forum series exploring emerging financial technologies, where the inaugural forum addressed marketplace lending; (3) holding a workshop on improving the effectiveness of consumer disclosures related to advertising claims and privacy policies; (4) hosting a conference focused on TILA and other compliance issues facing Midwest consumers, and in particular payday loans and car title loans; and (5) participating in the interagency group that provides advice to the Department of Defense on Military Lending Act regulations.

TILA consumer and business education efforts by the FTC included: (1) providing online guidance to the military community about personal financial decisions and military consumer lending issues; (2) issuing blog posts and videos for consumers regarding automobile purchasing and financing; and (3) issuing guidance on deceptive payday lending practices, marketplace lending issues, and disclosures.

Regulation M/Consumer Leasing Act.  The FTC’s Regulation M enforcement efforts included one final administrative consent order involving auto dealers alleged to have deceived consumers and the filing of the two federal court actions discussed above.  In the consent order, the auto dealers, Southwest Kia and Sage Auto, were alleged to have advertised low monthly car lease payments and down payments, without disclosing other key terms and, in violation of the CLA, failed to disclose or clearly and conspicuously disclose lease terms.  In the Southwest Kia action, the dealers were alleged to have violated the CLA by advertising lease terms without clearly and conspicuously disclosing required information—for instance, a television advertisement offered vehicles for less than $200 a month and disclosed in fine print visible for two seconds that the offer only applied to leases and required a $1,999 payment at signing.  The Sage Auto defendants allegedly violated the CLA by failing to clearly and conspicuously disclose lease terms.  As an example, the defendants ran newspaper advertisements offering vehicles for $38 a month and $38 down, but the fine print below the ad listed additional charges of $2,695 at signing, limited the offer to leases, and limited the $38 payment to the first six months.

The CLA does not confer rulemaking authority on the FTC.  Nonetheless, the FTC hosted a workshop to examine consumer leasing of rooftop solar panels.  The FTC also worked with the ABA committee on consumer leasing issues.  FTC blog posts also addressed consumer leasing.

Regulation E/EFTA. The FTC’s Regulation E enforcement actions included six new or ongoing cases.  Four cases involved negative options and the payment terms that applied automatically absent cancellation.

In the first, the defendants allegedly obtained consumers’ credit or debit card information purportedly to pay shipping costs but imposed recurring monthly charges to their credit or debit card accounts for unordered products.  This case resulted in a $72.7 million monetary judgment suspended upon the defendants’ surrender of virtually all assets.

In the second case, customers were allegedly enticed to sign up for “free” or “risk free” trials but their bank accounts were electronically charged recurring monthly fees without authorization.  The second case resulted in an agreed-upon $280.9 million judgment against some defendants, though others continue to litigate.

The third case involved the alleged use of personal information to sign up for a “free trial” or discount program for weight-loss supplements, where customers’ bank accounts were then charged electronically on a recurring basis.  The defendants also allegedly failed to allow consumers to stop the charges.  The third case led to a $105 million judgment, again suspended after surrender of over $9 million in personal and business assets.

The fourth case also involved weight loss supplements.  Here, the FTC alleged consumers were promised a “risk-free trial” offer, and were then enrolled in an inadequately disclosed monthly plan resulting in additional charges to their credit card or debit card accounts.  Consumers who failed to cancel trial memberships were allegedly billed on a monthly basis.  The fourth action was filed along with a stipulated final order imposing a $16.4 million judgment, suspended after the sale and liquidation of personal and business assets.

The FTC’s two other EFTA-related cases were the payday lending case and consumer electronics retail cases discussed above.  In the payday lending case, the defendants allegedly violated the EFTA by conditioning payday loans on payment by preauthorized debits from bank accounts.  In the consumer electronics retail case, the FTC alleged an EFTA violation where the extension of credit was conditioned on mandatory preauthorized transfers.

As with the TILA and the CLA, the FTC lacks rulemaking authority under the EFTA, although it conducts research and policy work that touches on related issues.  In that regard, the FTC worked with the Department of Defense interagency group and ABA on electronic fund transfer issues, interpretive rules, and trainings.  The FTC also hosted various conferences addressing EFTA issues and other compliance issues in connection with marketplace lending, crowdfunding and peer-to-peer payments.

The FTC continued its consumer and business education efforts with blog posts providing guidance on negative option plans and recent cases, explaining possible EFTA and Regulation E violations, giving advice to consumers, and providing guidance to businesses on EFTA issues.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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