The barely year-old Consumer Financial Protection Bureau came out of the gate this week with its first enforcement action. Capital One has the dubious honor of being CFPB’s premier target under the bureau’s authority to take action against entities that it believes engage in unfair, deceptive, or abusive practices in the offering of consumer financial products and services. Congress created the CFPB as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That law broadly empowers the CFPB to supervise and enforce the nation’s consumer financial laws.
The CFPB claimed that Capital One’s telemarketing vendors used certain deceptive marketing practices to pressure or mislead consumers into paying for “add-on” products such as payment protection and credit monitoring. The practices of particular concern to the CFPB included:
• Misleading consumers about the benefits of the products – for instance that the product would improve credit scores when that was inaccurate
• Deceiving consumers about the nature of the products – CFPB claims some consumers were told the products could be cancelled, while canceling was difficult to accomplish
• Taking orders from ineligible consumers and then denying claims later based upon eligibility
• Leading consumers to believe the products were free when they were not
• Enrolling consumers without the consumer’s express consent
Capital One agreed to a consent order, in which the bank neither admits nor denies the allegations. The consent order provides for refunds to two million consumers of at least $140 million and a $25 million penalty. The consent decree also places additional restrictions and oversight on Capital One, including a requirement that it stop the marketing of these products until it has presented an acceptable compliance plan to ensure these acts do not recur. Capital One must also submit to an independent audit to determine if it has met the conditions of the consent decree, and it must ensure the refunds are automatic so that consumers do not have to take any action to obtain their refunds.
In addition to the consent order and the associated press release, the CFPB also issued a compliance bulletin stressing that institutions will be held liable for actions by third-party vendors operating on their behalf. The agency stressed certain proactive actions that companies should take to ensure that marketing materials and customer service interactions do not violate the law. Among these practices are the review of scripts, ads, radio and TV commercials to make sure they reflect the actual terms of the products and are not deceptive or misleading. The CFPB also cautioned that employee incentive and compensation programs tied to add-on products should require that employees adhere to guidelines and not create incentives for employees to provide inaccurate information.
Those familiar with FTC enforcement will note many similarities, as the CFPB has stated it will follow FTC precedent on “unfair” and “deceptive” practices. The CFPB has also made clear that service providers and others who “knowingly or recklessly provide substantial assistance to a covered person or service provider” may face the CFPB’s wrath.
While this is the first CFPB action, others are sure to follow as the CFPB is engaged in ongoing examinations and has issued subpoenas. The CFPB is also working closely with state attorneys general and the FTC, sharing information on potential violations and coordinating enforcement actions. We expect to see several additional CFPB actions as the new agency flexes its enforcement muscles, particularly in the mortgage, credit card, educational and “pay day” loan arenas.
The FTC is building up its army of watchdogs to police online marketing content and practices. Who those watchdogs are – and their relationship to the industry – might surprise you.
Earlier this month, the agency entered into a settlement agreement with Central Coast Nutraceuticals, an Internet marketer of weight-loss and health products. The agreement settles charges that were initiated against the company in 2010. The company is one of the many marketers targeted by the FTC for its tactics in selling acai berry diet products. Like more recent FTC targets, Central Coast was charged with deceptive advertising and unfair billing. The deceptive advertising allegations were based on (1) the marketer’s use of phony endorsements by Rachael Ray and Oprah Winfrey and (2) the marketer’s unsubstantiated claims about the benefits of its products. The unfair billing allegations were based on the marketer’s “free trial” scheme that baited consumers into pricy negative continuity programs.
Those tracking the FTC’s enforcement actions against online diet marketers are familiar with these allegations. Last spring, the FTC halted the sites of 10 operators who marketed acai berry diet pills for alleged fake endorsements from major media networks and unsubstantiated claims about the pills’ efficacy. An eleventh operator was slapped with an action last December for the same issues, including the use of negative continuity programs.
Since Central Coast was the first of these marketers to come under the agency’s fire, and the first to enter into a settlement agreement (the actions of the other 12 operators are still pending), it is likely that the Central Coast settlement agreement will be the template for the suits to follow. (The FTC uses its settlement agreements to establish its legal standards.)
A term in the settlement agreement that caught our attention is a requirement that the company monitor affiliate marketers it does business with in the future. This obligation includes reviewing marketing materials to make sure that those materials comply with the provisions of the settlement agreement. Again, the Central Coast agreement likely will be the standard for subsequent enforcement actions, so these monitoring duties likely will be included in future agreements with other companies.
There have been a few FTC actions in the past that have imposed monitoring duties on companies who find themselves in hot water with the agency. In March of last year, a seller of instructional DVDs entered into an agreement with the FTC that requires the company to periodically monitor and review affiliates’ representations and disclosures. That includes monthly visits to top affiliate websites “done in a way designed not to disclose to the affiliates that they’re being monitored.”
What does this mean? Corporate spying has taken on new meaning, thanks to FTC sanctions. Affiliate marketers have their business partners as their proverbial Gladys Kravitz. It is likely that this type of government-imposed self-regulation will become increasingly the norm. The FTC doesn’t like affiliate marketers or the layers of puffery they create between advertiser and consumer. Policing for free through private companies is a win-win for the agency.
Like pawnbrokers, payday lenders cater to people in a tight squeeze. That means they can, in turn, put the squeeze on their customers, charging annual percentage interest rates above 300 percent for their short-term unsecured loans. That also means they are a popular target of federal regulators who are concerned about vulnerable consumers.
The FTC has recently brought a slew of cases against payday lenders. Some actions include one against a payday lender for allegedly tricking consumers into buying debit cards when they applied online for loans and another against a loan intermediary for allegedly tricking consumers into signing up for worthless continuity programs. The latest FTC action targeted a payday lender for garnishing borrowers’ wages.
One thing to glean from these actions is that the FTC is focused on the payday loan industry as a whole and not on some specific type of bad behavior by these lenders. In a twist on “if you build it, they will come,” if you have a payday lending operation, plan on a visit by the FTC. And any level of questionable behavior could very well become the basis of further FTC involvement.
The latest case, in which the FTC filed suit based upon Payday Financial LLC’s practice of garnishing borrowers’ wages, has an interesting twist: the FTC alleges that the payday lender deceived the borrowers’ employers.
The FTC goes after people and companies for false and deceptive practices affecting commerce – that’s its jurisdiction. Normally, its lawsuits allege practices that deceive consumers. So you would think in this case that the FTC would allege that the lender deceived borrowers, tricking them into giving permission for their wages to be garnished. Instead, the FTC alleges that Payday Financial deceived the borrowers’ employers, causing them to believe that Payday Financial was authorized to garnish the borrowers’ wages. The FTC alleged that the defendant’s notice to employers for wage garnishment looked “very similar, in both form and substance, to the documents sent by federal agencies when seeking to garnish wages for nontax debts owed to the United States.”
There are two unusual elements to this action. First, the FTC takes a bit of a circuitous route to get at jurisdiction, arguing that deceiving the borrowers/consumers’ employers impacted commerce. It makes sense when the FTC alleges that consumers’ actions, as a result of deceptive practices, impact commerce; it’s a bit of a stretch to move to a third party’s actions.
Secondly, the FTC argues that employers, normally considered sophisticated parties, were deceived. As we talked about earlier – the FTC focuses on protecting vulnerable consumers. Sophisticated parties are often held to a different standard.
So if you are a payday lender, a lesson from this may be: dot your I’s and cross your T’s. Your industry is not popular with the FTC. The agency is highly motivated to find that you have done something wrong.
The companies behind the ubiquitous “1 Tip for a Tiny Belly” ads are the most recent targets of a new FTC crackdown on online weight-loss ads that have conned millions of people. The ad seems innocent enough; it promises “1 Tip” to a svelte stomach. But this ad is actually the tip of something much larger: a scheme by the promoters and sellers of a host of diet pills and weight loss products to grab consumer credit card information and pile on additional, unapproved charges.
The headline typically reads: “1 Tip for a Tiny Belly,” in what appears to be hand-lettered type and positioned above a crudely animated drawing of a woman’s bare midriff, which shrinks and reinflates — flabby to svelte, svelte to flabby. Versions of these ads appear just about everywhere, including Facebook and the home pages of major news organizations. The government estimates that the accumulated number of “impressions”—the number of times it has flashed by a viewer on the Internet over the past 18 months — runs into “the tens of billions.”
In April, the FTC filed ten lawsuits against some of the companies and individuals behind these ads, but the “1 Tip” ads continued. The ads are the work of an army of affiliate marketers who place them on various websites on behalf of diet product sellers with such names as HCG Ultra Lean Plus. The promoters make money every time someone clicks through to the product seller’s site and orders a “free” sample. The samples, however, are not always free. The government estimates that the affiliate companies sued by the FTC spent more than $10 million buying Internet ads to push products such as acai berry diet products. One of the companies the government sued, IMM Interactive of Long Island, spent more than $1.3 million last year to place “flat belly” ads, which generated more than a billion impressions.
The FTC contends that almost everything about these ads is bogus. According to the FTC, these ads are part of a three-part scheme to obtain consumers’ credit card information and pile on additional, unapproved charges, which have led to thousands of consumer complaints. The “1 Tip” ad is the first step in this scheme, meant to lure consumers into the process. Consumers who click on the ad are directed to a second site, which looks like a diet or health-news page that seems to carry positive information about the products supposedly from credible news sources like CNN, USA Today, or ABC and to include brief “reader comments” extolling the virtues of the product. The pages then link to a third site, where consumers can use a credit or debit card to order “trial” samples of the featured products. But people who order the free sample find out later that they have actually agreed to pay $79.99 for an additional shipment of the product two weeks later, and another $79.99 for a shipment six weeks later, and so on until the consumer cancels the product, which is not always that easy.
These ads undoubtedly have power to attract the unwitting consumer in search of weight loss secrets. Some of this drawing power can be attributed to their appearance on websites belonging to real news organizations. In all of these cases, the credible news sites appear to be passive hosts of the ads. The ads are “served” to the news sites and thousands of others by ad networks, including those operated by Google and Pulse360, based in New York. The “host” sites, in turn, receive a commission for being part of the network or when their visitors click on one of the network-fed ads. If these ads continue, perhaps the the FTC will decide to investigate hosts of these ads, such as Google, for promoting these deceptive ads, as the Consumer Watchdog group encouraged the FTC to do in the case of mortgage scammers.
Last month, the Federal Trade Commission filed a lawsuit against a Canadian entrepreneur and a group of web-based businesses that promised “free” offers that were far from free. In its lawsuit, the FTC charges the online marketers with scamming consumers in the United States, the United Kingdom, Canada, Australia, and New Zealand out of more than $450 million by charging them for products and services that the customers did not purchase. The lawsuit is the latest federal action targeting companies involved in what is known as the upsell industry and comes as a warning to online marketers to be careful in wording their advertisements.
Among those targeted in the FTC action is 24-year-old Jesse Willms, the owner of ten web-based businesses that touted free trials or risk-free offers on several products, including acai berry weight-loss pills, teeth whiteners, health supplements, work-at-home opportunities, access to government grants, free credit reports, and penny auctions. The lawsuit alleges that Willms obtained customers’ credit or debit card information through the promise of free or risk-free trial offers. Willms and other defendants allegedly contracted with affiliate marketers that used banner ads, pop-ups, sponsored search terms, and unsolicited email to lead consumers to the defendant’s websites. Once there, customers would be unknowingly charged for trial products or extra bonus products, plus a monthly recurring fee of typically $79.95.
The FTC alleges that the defendants provided banks with false or misleading information, in order to acquire and maintain credit and debit card processing services from the banks in the face of mounting charge-back rates and consumer claims. Thus, in addition to the FTC violations, Willms and his companies also face charges of violating the Electronic Funds Transfer Act and other U.S. regulations by debiting consumers’ bank accounts without their signed, written consent and without providing consumers with a copy of the written authorization.
Willms and his companies are not the first to engage in this type of sales strategy. Online marketers often engage in a technique commonly referred to as upselling, whereby the seller provides opportunities to the customer to purchase related products or services for the purpose of making a larger sale. In this case, however, the customers had no reason to believe that other products or services were being sold to them because the defendants “buried” important terms and conditions in fine print, the FTC alleged. According to David Vladeck, the director of the FTC’s Bureau of Consumer Protection, “The defendants used the lure of a ‘free’ offer to open an illegal pipeline to consumers’ credit card and bank accounts …. ‘Free’ must really mean ‘free’ no matter where the offer is made.”
The defendants’ sites also made penny auction offers that promised free bonus bids, but the FTC alleged that customers were hit with unexpected charges, including $150 for introductory bonus bids and $11.95 a month for ongoing bonus bids. Willms and his companies also allegedly made false weight loss and cancer cure claims for their products.
Interestingly, Willms, an avid blogger, talked about companies that make false claims online in a September blog post. “I know it’s tempting to make false or borderline claims,” the blog said. “We get excited about products and services and want to yell from the rooftops about how great they are. But, you need to keep it realistic.” In another blog post, Willms wrote that he never uses the word “free” to promote products because customers will assume the free products are useless.
For online marketers, this lawsuit is just another reminder that the FTC requires advertisers to substantiate all claims made in their ads. Put simply, under the FTC Guidelines, you cannot make claims about a product or service that require proof you do not have. This lawsuit should come as a warning to those who run penny auction sites as well: No online marketer is exempt from the FTC Guidelines.
The Pennsylvania Attorney General filed a consumer protection lawsuit last month against Zoommania, LLC, a Philadelphia-based Internet electronics store, for a bait-and-switch scheme the company allegedly employed in online sales and for its creation of new websites to avoid negative customer feedback resulting from the scheme.
The complaint, which seeks restitution for consumers, alleges that the company’s websites would list inventory as being in stock, but when a consumer placed an order, he or she would receive a subsequent call or e-mail that the item requested was not in stock. A company representative would inform the consumer that he or she could receive the item in a timely manner by upgrading to a “kit” – i.e. a more costly bundled purchase of the requested item and other items. Without the upgrade, the company could not promise timely delivery. Not surprisingly, this tactic was not well received by customers who proceeded to fire off complaints on online forums, including on Yahoo and CNET. In response to all the negative feedback, the company merely set up new websites under which to operate, using the same bait-and-switch scheme.
Zoomania is just one of many online merchants under fire by various states’ attorneys general for employing such tactics. For instance, New York-based Starlight Camera & Video Inc. and Broadway Photo both recently entered settlement agreements with the Texas AG, agreeing to pay restitution to Texas customers. One of those companies also agreed to stop doing business in the state.
The Texas settlements show how one state’s laws and its law enforcers can reach businesses in other states. This may be a comfort to consumers who have been burned by online merchants. It also may be an important cost factor for merchants operating on the fringes of consumer protection laws: online merchants should be aware that they may be subject to government action in any state from which a customer made a purchase. Broadway Photo, for instance, signed an earlier settlement agreement with New York in 2009. That settlement did not prevent Texas, or any other state, from initiating an enforcement action. And, judging from the abundance of negative comments on online forums about these companies, other states may also pursue actions against them.
Indeed, online merchants employing envelope-pushing sales and marketing tactics should take a cue from online forums and consumer feedback. If lots of consumers are complaining, the government may not be far behind, as the volume of consumer complaints drives government enforcement action. Given the jurisdictional reach of state attorneys general across states, the threat of action can come from many directions. Instead of changing names, it may be better to start changing practices.