Alston & Bird Consumer Finance Blog

Federal Trade Commission (FTC)

What Do the CFPB’s and FTC’s 2020 Debt Collection Activity Forecast for 2021?

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On March 22, 2021, the Consumer Financial Protection Bureau (CFPB) released its 2020 annual report to Congress on the administration of the Fair Debt Collection Practices Act (FDCPA). The CFPB’s annual report follows the Federal Trade Commission’s (FTC) annual letter to the CFPB regarding the FDCPA, publicly released on March 19, 2021. The annual report highlights both agencies’ efforts to protect and provide debt collection relief to consumers, particularly in light of the ongoing COVID-19 pandemic and resulting economic hardship.

In the latest Consumer Protection/FTC / Financial Services Litigation Advisory, Kathleen Benway, Kelley Connolly Barnaby, and Laura Komarek explore the reports from the CFPB and FTC on their work in 2020 and anticipate a tougher environment for debt collectors going forward.

FTC Seeks Comment on Proposed Changes to FCRA Rules for Motor Vehicle Dealers

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A&B ABstract: The FTC is seeking public comment on proposed changes to five FCRA rules aimed at clarifying that these rules, as promulgated by the FTC, apply only to motor vehicle dealers, as equivalent rules promulgated by the CFPB will apply to other entities.

The Federal Trade Commission (“FTC”) has announced it is seeking public comment on proposed changes to existing rules implementing parts of the Fair Credit Reporting Act (“FCRA”). According to the FTC, the proposed changes would clarify that five FCRA rules promulgated by the FTC apply only to motor vehicle dealers.

This clarification is needed because after the Dodd-Frank Act transferred to the Consumer Financial Protection Bureau (“CFPB”) the FTC’s rulemaking authority under certain portions of the FCRA, the FTC rescinded several of its FCRA rules, which had been replaced by rules issued by the CFPB. However, the FTC retained rulemaking authority for other rules to the extent the rules apply to motor vehicle dealers (as defined in the Dodd-Frank Act) that are predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both.

In particular, the rule changes (each of which are addressed in separate Notices of Proposed Rule Making) would apply to the following five rules:

  1. The Address Discrepancy Rule (16 CFR Part 641), which outlines the obligations of users of consumer reports when they receive a notice of address discrepancy from a nationwide consumer reporting agency (“CRA”);
  2. The Affiliate Marketing Rule (16 CFR Part 680), which gives consumers the right to restrict a person from using certain information obtained from an affiliate to make solicitations to the consumer;
  3. The Furnisher Rule (16 CFR Part 660), which requires entities that furnish information to CRAs to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of the information relating to consumers provided to a CRA;
  4. The Pre-screen Opt-Out Notice Rule (16 CFR Parts 642 and 698), which outlines requirements for those who use consumer report information to make unsolicited credit or insurance offers to consumers; and
  5. The Risk-Based Pricing Rule (16 CFR Part 640), which requires those who use information from a consumer report to offer less favorable terms to consumers to provide them with a notice about the use of such data.

Each of these FTC rules, as revised, will be limited in scope to apply only in relation to motor vehicle dealers, subject to certain exceptions, and those persons and entities originally covered by these rules who are not motor vehicle dealers remain subject to similar rulemakings promulgated by the CFPB. For example, with regard to the Pre-screen Opt-Out Notice Rule, the proposed amendment would replace the general term “person” with the term “motor vehicle dealers,” as defined, thus narrowing the scope of the rule to entities that are “predominantly engaged in the sale and servicing of motor vehicles, excluding those dealers that directly extend credit to consumers and do not routinely assign the extensions of credit to an unaffiliated third party.” The proposed rule amendments also reinstate certain model notices that are otherwise identical to the CFPB’s model notices applicable to certain entities that are not motor vehicle dealers.

Additionally, the FTC is seeking comment on the effectiveness of these five rules including the following considerations:

  • whether there is a continuing need for specific provisions of each rule;
  • the benefits each rule has provided to consumers;
  • what modifications, if any, should be made to each rule to benefit consumers and businesses; and
  • what modifications, if any, should be made to each rule to account for changes in relevant technology or economic conditions.

Takeaways: These proposed amendments to the relevant FCRA rules will serve to clarify the distinction between the rules applicable to motor vehicle dealers – promulgated by the FTC ­– and rules applicable to other entities, which have been issued by the CFPB.  Comments on these issues must be submitted to the FTC within 75 days from the date the notices of proposed rulemaking are published in the Federal Register. Instructions on how to file comments will be included in the notices published in the Federal Register.

FTC Brings its First Case Alleging ECOA Violations in More than a Decade

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A&B ABstract:

On May 27, 2020, the Federal Trade Commission (FTC) announced a complaint and settlement against a New York auto dealer alleging that it charged higher rates to African American and Hispanic customers, advertised prices it refused to honor, and fabricated fees in violation of the Equal Credit Opportunity Act (ECOA), Truth in Lending Act (TILA) and Section 5 of the FTC Act.   This is the first time the FTC has alleged ECOA violations against an auto dealer.

The FTC’s Case

The Complaint, filed in the U.S. District Court for Southern District of New York, alleges that Bronx Honda instructed salespeople to charge higher financing markups and fees to African American and Hispanic customers. The Complaint also alleges Bronx Honda advertised deceptive offers for vehicles, which were not honored when customers visited the dealership, and charged unauthorized fees. As part of the settlement, Bronx Honda will pay $1.5 million in equitable monetary relief, agreed to a ceiling on the dealer markup, and will implement a Fair Lending Program.

The vote in favor of the complaint and settlement was 5-0, with the two Democratic commissioners, Rohit Chopra and Rebecca Kelley Slaughter each issuing a concurring statement. Both commissioners called on the agency to use the authority granted under the Dodd Frank Act to promulgate rules to address abuses in the auto lending industry.  Commissioner Chopra also advocates use of disparate impact analysis for detecting unlawful discrimination, given what he describes as the difficulties of uncovering direct evidence of discriminatory intent.

The Complaint:

A summary of the FTC’s complaint counts follows:

Violation of the Equal Credit Opportunity Act (Reg. B)

The Complaint alleges Bronx Honda charged the average African American borrower approximately $163 more in interest, and the average Hispanic borrower approximately $211 more in interest, than similarly situated non-Hispanic white borrowers.

According to the Complaint, African American and Hispanic borrowers received the maximum dealer interest rate markup permitted by the financing entity 50% more often than similarly situated non-Hispanic white borrowers. Further, according to the Complaint, employees of Bronx Honda instructed sales personnel to charge higher markups and additional fees to African American and Hispanic customers only.

Violation of Section 5 of the FTC Act

The Complaint alleges Bronx Honda’s website advertised vehicles at specific prices but sales representatives refused to sell those vehicles at those prices when customers came to the dealership. The Complaint also alleges Bronx Honda represented as required certain charges and fees that were either not authorized by customers or were not required.

For example, according to the Complaint, Bronx Honda’s website listed vehicles with a specific price and monthly payment amounts, but in numerous cases sales representatives told customers the price advertised was in error and the vehicle could only be purchased for a higher price.

Further, Bronx Honda charged customers hundreds or thousands of dollars for warranties and repairs to “Certified Pre-Owned” vehicles, which were already covered by the manufacturer. In addition, Bronx Honda changed customers up to $695 in documentation fees that are statutorily capped at $75 by the state of New York and would unilaterally increase the price of finance contracts at closing without disclosing the change to the customer.

Violation of the Truth in Lending Act (Reg. Z)

The Complaint alleges Bronx Honda advertised monthly payment amounts without disclosing required terms and advertised a rate of finance for closed-end credit without using the term “annual percentage rate.” According to the Complaint, Bronx Honda’s online vehicle listings included the monthly payment amounts without disclosing any of the other required terms.

Relief:

In addition to paying the $1.5 million financial judgement, Bronx Honda must adopt a Fair Lending Program which includes written guidance establishing objective, non-discriminatory criteria for assessing (or not assessing) fees and charges. Bronx Honda must designate a qualified senior manager to be responsible for the program, mandate employee training once a year and report its compliance with those requirements to the FTC for the next fifteen years. Finally, Bronx Honda is barred from entering into retail installment contracts that carry an interest rate higher than 185 basis points above the “buy rate,” except for specific, documented reasons.

Takeaways:

This case breaks new ground for the FTC, charging an auto dealer with illegal racial discrimination under ECOA for the first time. Companies should ensure employees are trained to treat all customers equally and review sales data to ensure no class of customer is getting a worse deal. The fact that both Democratic commissioners have called on the FTC to issue rules to address unfair and deceptive abuse and discrimination in auto lending may signal that the agency will become more active in this area.

In addition, this case represents the FTC’s latest effort to enforce advertising disclosure requirements mandated by TILA. The FTC has brought many cases over the last several years against auto dealers for failing to properly disclose credit related terms. If a company advertises vehicle financing along with a “triggering term” (like a sample monthly payment amount or nominal interest rate), it must also clearly and conspicuously disclose addition information like annual percentage rate, term of the loan and any balloon payments.

 

Misrepresentation and Deception: Government Enforcement Agencies Ready to Litigate

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A&B ABstract:  The COVID-19 pandemic appears to be drafting the attention to consumer protection regulators to products that were active after the 2008 recession.

In the midst of the global pandemic, with unemployment rates surging to unprecedented levels, consumer protection regulators appear focused on areas where cash-strapped consumers may turn,  such as credit repair, payday loans, and mortgage and other debt relief.

Notably, these are the same areas that consumer protection regulators were active in during the post-2008 recession. For example, on May 22, 2020, the Consumer Financial Protection Bureau (CFPB) and Commonwealth of Massachusetts filed a lawsuit alleging that defendants misrepresented that they can offer solutions that will or likely will substantially increase consumers’ credit scores despite not achieving those results.

In addition, on May 19, 2020, the Federal Trade Commission (FTC) was granted a temporary restraining order and asset freeze against a payday lending operation alleging that it deceptively overcharged consumers millions of dollars and withdrew money repeatedly from consumers’ bank accounts without their permission.

These lawsuits are just two of many efforts that government enforcement agencies have undertaken recently to combat fraud and protect consumers. Businesses should be aware that agencies are actively pursuing litigation as a means to remedy potential consumer harm.

CFPB and Commonwealth of Massachusetts v. Commonwealth Equity Group d/b/a Key Credit Repair and Nikitas Tsoukales

The CFPB and Massachusetts allege that Commonwealth Equity Group d/b/a Key Credit Repair (KCR) and its president, Nikitas Tsoukales violated §§ 1031 and 1036 of the Consumer Financial Protection Act (CFPA), the Telemarketing Sales Rule’s (TSR) prohibition on deceptive and abusive telemarketing acts or practices, and the Massachusetts Credit Services Organization Law. 16 C.F.R. §§ 310.3 & 310.4; M.G.L. c. 93, §§ 68A-E (MA-CSO). KCR markets to consumers a service for supposedly removing harmful information from the consumer’s credit history, credit record, or credit scores or ratings.  Since 2011, KCR has collected at least $23 million in fees from tens of thousands of consumers through its telemarketing services.

The Complaint

According to the complaint, consumers pay KCR a “first work fee” upon enrolling with the company and then charges an additional monthly fee. KCR allegedly collects these fees from consumers before performing any service. KCR markets to consumers that “on average it can raise a person’s credit score by 90 points in 90 days” and that clients start “seeing removals of bad credit history in 45 days.”  However, “consumers did not see credit scores with an average 90-point increase in 90 days,” nor did they see “removals on their credit reports within 45 days” of enrolling with KCR in many instances.

The Complaint alleges that this scheme constitutes an abusive telemarking act because it is an improper advance fee to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating.

Further, the Complaint alleges that KCR’s conduct violates the CFPA because KCR allegedly misrepresented the material aspects of its services. Therefore, the CFPB and Massachusetts are seeking injunctive and monetary relief as well as civil monetary penalties.

FTC v. Lead Express, Inc., et al.

On May 11, 2020, the FTC filed an ex parte emergency motion for a temporary restraining order and sought other relief including an asset freeze against 11 payday lenders operating as a common enterprise through websites and telemarketing.  The FTC alleged that the entities were engaging in the deceptive, unfair, and unlawful marketing tactics in violation of the FTC Act, the TSR, the Truth in Lending Act (TILA) , and the Electronic Fund Transfer Act (EFTA).

The Complaint

According to the FTC’s complaint, despite claiming that consumers’ loans would be repaid after a fixed number of payments, the defendants typically initiated repeated finance-charge-only withdrawals without crediting the withdrawals to the consumers’ principal balances. Thus, consumers allegedly paid significantly more than what they were told they would pay. These misrepresentations violate Section 5(a) of the FTC Act (15 U.S.C. § 45(a)) as well as the TSR (16 C.F.R. § 310.3(a)(2)(iii)).  Additionally, the defendants allegedly made recurring withdrawals from consumers’ bank accounts without proper authorization which violates Section 907(a) of EFTA (15 U.S.C. § 1693e(a)) and illegally used remotely created checks, which under the TSR (16 C.F.R. § 310.4(a)(9)) are a prohibited form of payment in telemarketing.

The complaint also alleges that the defendants often failed to make required credit transaction disclosures in violation of Section 121 and 128 of TILA (15 U.S.C. §§ 1631 and 1638), and Sections 1026.17 and 1026.18 of Regulation Z (12 C.F.R. §§ 1026.17 and 1026.18).

The Court Order

On May 22, 2020, the District Court of Nevada granted an emergency motion for temporary restraining order against all eleven defendants. The order restrains the defendants from: (1) engaging in prohibited business activities in connection with advertising, marketing, promoting, or offering any loan or extension of credit, (2) releasing or using customer information, and (3) destroying, erasing falsifying documents relating to the business.  Furthermore, the defendants’ assets are frozen pending the show-cause hearing or further court order which will take place via videoconferencing on June 2, 2020.

Takeaway

With these two cases, government enforcement agencies support their statements that as the global pandemic continues, they are watching for deceptive or fraudulent practices in the financial services industry. Businesses should remain vigilant in their compliance with existing and new laws and regulations.

FTC Releases Staff Perspective on Trends in Small Business Financing

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A&B ABstract

On February 26, 2020, the Federal Trade Commission (“FTC”) Bureau of Consumer Protection released a staff perspective (“Perspective”) on consumer protection issues related to small business financing.  Based on information presented at the FTC’s “Strictly Business” Forum (“Forum”) held in May 2019, the Perspective discusses trends in small business lending, including the emergence of new online options available to businesses, and potential benefits and consumer protection concerns.

Discussion

According to the Perspective, small businesses often face significant challenges to obtain financing, which is typically for relatively small amounts (often $250,000 or less).  The Perspective notes that while many small enterprises can and do obtain loans from traditional lenders, other businesses may not qualify for such loans.  As a result, small businesses have increasingly turned to relatively new online providers offering loans, lines of credit, and other products.

Rise in Online Lending and New Players

Small businesses are increasingly turning to online lenders.  The Perspective cites a survey by several Federal Reserve Banks that found that in 2018, 32% of small businesses reported applying for online financing — up from 24% in 2017 and 19% in 2016.  According to the Perspective,  online financing products have a broad range of features that vary from product to product. While some online lenders offer loans or credit agreements that resemble traditional bank loans or lines of credit that accrue interest and require monthly payments over a set term length, others charge consumers flat fees and may require weekly or daily repayments.  Also, some alternative products do not offer the advantage of early payoff.

The Perspective also notes that many online lenders are new to the market and often base their underwriting on non-traditional sources including financial technologies and alternative data.  Among these new entrants are payment processors and technology platforms, which often leverage the information they already collect from small businesses ( including credit card receipts or sales information) to offer financing products. Additional new entrants include nonprofit “microlenders” that rely on fintech, such as crowd funding, to attempt to offer affordable loans to underserved borrowers.

According to the Perspective, many online providers cater to higher-risk businesses or owners with low credit scores and typically offer them higher-cost products.  One such product,  “merchant cash advances” (“MCA”),  seems especially concerning to the FTC. With an MCA, the provider buys a fixed portion of a business’ future credit card or debit card sales receivables.  In exchange, the business must repay, often on a daily basis, the advanced amount plus a factor of that amount — often between 20% and 50% of the advance.

Potential Benefits and Risks of Online Financing

 The Perspective identified potential benefits and risks of online financing that were discussed at the Forum.  Among the potential benefits are: speed and convenience, broadening access to credit, and flexible financing amounts, terms and repayment options. Forum participants also expressed a number of concerns about how some products are being offered in the evolving marketplace (including the use of aggressive, potentially misleading sales tactics and abusive collection practices).

The Perspective also reflects the concern that inconsistent information and non-uniform disclosures could impede the ability of business owners to make “apples-to-apples” comparisons of their options for financing. According to the Perspective, small business owners often are confused about the central features of financing products, and underestimate the costs of the products.

Takeaways

Because of the possibility of consumer confusion in the small business financing marketplace, providers should keep in mind the FTC Act’s prohibition against deceptive and misleading claims as they are designing and marketing their products.  According to the Perspective, small business owners’ understanding of financial products may be more akin to that of individual consumers in personal credit transactions.   Further, the Perspective warns that providers should avoid the types of practices that the FTC has alleged to be deceptive in enforcement actions involving small business and individual consumer financing.  Such actions have included allegations of deceptive fees, consumer savings, payment amounts and/or interest rates.