What happened

According to the FTC’s complaint, an Illinois-based online lending company that advertised, marketed and offered consumer loans since 2003, in amounts ranging from $1,000 to $35,000, engaged in numerous forms of deceptive and unfair acts and practices, including in relation to the amounts owed by the borrowers, the methods of making payments, and the amounts and crediting of loan payoffs.

As part of its loan application, the lender required consumers to authorize the company to initiate recurring electronic fund transfers (EFTs) or remotely created checks (RCCs) for their recurring loan payments as a condition of obtaining credit. Although the lender also represented that consumers could change their payment method and make the required loan payments using a credit card, it frequently rejected payments by credit or debit card, the FTC said, and told consumers they had to use a different payment method.

In “many instances,” consumers were unable to make a timely payment because of the inability to pay with a debit or credit card and were charged additional interest on their loans as a result, the agency added. In other instances, the lender failed to timely credit payments to a borrower’s account and then charged the borrower additional interest and late fees.

Because the lender was a telemarketer under the Telemarketing Sales Rule (TSR), it was prohibited from using RCCs as repayment for the loans. Thus, the lender ran afoul of the TSR by mandating use of an RCC as a condition of extending credit, the agency alleged. It also violated the Electronic Fund Transfer Act (EFTA), which provides that no person may condition an extension of credit on the consumer’s repayment by preauthorized EFTs.

In addition, the lender misrepresented borrowers’ loan payoff amounts and, in some instances—even after confirming that a consumer paid a loan in full—insisted the borrower owed more money and that the payoff quote was erroneous, according to the FTC. The lender even deducted additional payments from some borrowers without prior warning, purportedly for payment on an outstanding loan, the agency said.

The lender was aware of these problems, the FTC said, acknowledging “persistent, unaddressed problems with its payoff quotes and practice of taking additional payments after consumers pay the quoted payoff amount” in internal documents. “Nevertheless, [the lender] has continued to provide payoff quotes to consumers, but not considered the loans fully paid when consumers have paid the amount quoted, and has assessed additional charges and attempted to collect additional amounts from those consumers,” the FTC told the court.

Unauthorized charges by the lender were common, the agency alleged, occurring in multiple ways. The lender sometimes charged consumers duplicate payments without authorization (one consumer’s monthly payment was debited from his account 11 times in a single day), took monthly payment amounts after a loan was paid off or took the entire payoff balance of a consumer’s loan without authorization, according to the complaint.

To settle the charges of violations of Section 5 of the FTC Act, the TSR and the EFTA, the lender agreed to pay a $3.85 million civil penalty, which will be used to reimburse consumers who were harmed by the lender, and agreed to compliance monitoring, reporting and recordkeeping as conditions of the settlement.

The stipulated order also prohibits the defendant from making future misrepresentations about payments (including methods of payment, the amount of payment sufficient to pay off a loan in full and when payments will be applied or credited), failing to timely credit consumer payments, collecting payment from paid-off borrowers and engaging in other unfair billing practices. The defendants also are banned from collecting payment by means of RCCs.

While the FTC vote to approve the settlement order was unanimous, two commissioners filed separate statements about the settlement. Commissioner Noah Joshua Phillips expressed support for the charges under the FTC Act and the TSR but took issue “with predicating EFTA liability on the fact that [the lender] happens to fall within the TSR’s definition of a telemarketer.”

“I believe the Commission could reach the same relief obtained in its settlement with [the lender] by pleading only a TSR violation,” he wrote. “Doing so would avoid the use of novel pleading based on the facts of a particular case to rewrite a statute based on our policy preferences. EFTA does not prohibit the use of RCCs as an alternative to EFTs and we should not pretend it does.”

Commissioner Christine S. Wilson took a similar position, going even further to vote against the TSR count and expressing concerns about regulatory overreach. “Here, the majority uses an alleged violation of the TSR to prohibit behavior the agency could not reach under EFTA alone,” she wrote. “If the Commission is sufficiently concerned about electronic draft payments, we should urge our regulatory counterparts to address the payment processing risks through rulemaking rather than mandate broad policy changes through enforcement.”

To read the FTC’s complaint, click here.

To read the stipulated order, click here.

To read Commissioner Phillips’ statement, click here.

To read Commissioner Wilson’s statement, click here.

Why it matters

The FTC emphasized that new platforms offering financial services—in this case, an online lender—remain subject to fundamental consumer protection principles. But two of the commissioners took issue with the agency’s use of the TSR and the EFTA as part of the case, expanding the potential liability for defendants. The TSR is a strict liability statute, and with the FTC taking an aggressive stance, there may be no place to hide for financial institutions and payment processors in similar actions.