On October 3, 2013, the Consumer Financial Protection Bureau announced it had filed a complaint in federal district court in Washington state against a leading debt-settlement payment processor, Meracord LLC, and its CEO. The CFPB contends that Meracord helped third parties collect millions of dollars in illegal upfront fees from consumers.
The complaint alleged violations of the Federal Trade Commission’s Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act of 2010. The CFPB contended that Meracord maintained accounts and processed payments for consumers who had contracted with providers of debt-relief servicers and mortgage assistance relief services. As is often the case, when consumers enroll in a debt-relief program, they also enter into a separate agreement with a payment processor, which establishes and maintains a “dedicated account” for the consumer. At the time of enrollment, the debt-relief service provider instructs the consumer to stop paying his or her unsecured debts and, instead, to make monthly payments to the payment processor. The processor can later pay renegotiated debts to the creditor and also pay the debt-relief servicers’ fees.
The CFPB alleged that, since October 27, 2010, Meracord processed payments for more than 250,000 consumers receiving debt-relief services from more than 250 debt-relief service servicers. According to the agency, consumers paid debt-relief service providers before any debts were settled. The Telemarketing Sales Rule has special requirements for debt reduction services. In particular, providers are not allowed to request or take fees for services before providing debt-relief services resulting in actual renegotiation or other settlement of a consumer’s debt and a payment by the consumer to a creditor. The FTC asserted that Meracord processed payments for debt reduction services which routinely charged advanced fees to consumers in violation of the TSR.
The TSR also makes it unlawful for third parties to assist others in violating the TSR. The CFPB used this section of the TSR against Meracord. Since Meracord collected the payments from consumers and would know whether or not they had been disbursed to creditors, and when they had been disbursed to the debt-relief servicers, Meracord would have knowledge that the debt-relief servicers were violating the TSR by collecting fees prior to delivering debt-relief services that resulted in payments to creditors.
Meracord and its CEO have agreed to settle the case. In the Stipulated Final Judgment and Order, Meracord and its CEO, Linda Remsberg, agree that they will permanently enjoined from providing account-maintenance or payment-processing services to any provider of a debt-relief service or a mortgage assistance relief service. The proposed settlement (which must be approved in court) also provides for a civil money penalty of $1.37 million and compliance reporting and monitoring, as well as ongoing recordkeeping requirements.
The CFPB’s action signals that it will use its authority to reach organizations that it believes provide substantial assistance to others allegedly violating consumer protection laws within its jurisdiction. CFPB Director Richard Cordray said, “By taking a stand against those who facilitate illegal activity, we can root out harmful behavior across the debt-settlement industry and better protect consumers.” Thus, it is not only those companies dealing directly with consumers who need to be cognizant of the CFPB’s reach. In particular, organizations within the “chain” of industries such as debt-settlement and credit repair, should review their compliance with laws and rules the CFPB may enforce (usually shared with other agencies such as the FTC), and which include the Fair Debt Collections Practices Act, the Fair Credit Reporting Act, the Telemarketing Sales Rule, the Business Opportunities Rule, and other consumer financial-related statutes.
Since 2003, online marketers and merchants have been gathering twice a year to take part in the Affiliate Summit Conferences. In recent years, Ifrah Law has become a fixture at these shows, and our associate Rachel Hirsch is not only widely recognized as the face of the Ifrah Law Power Booth station, but also as a well-respected and preferred attorney counseling online advertisers on compliance-related matters and representing them in nationwide litigation.
After Rachel recently returned from this year’s Affiliate Summit East conference in Philadelphia, we interviewed her about new and emerging trends at this conference and in the industry.
Q. What struck you about the crowd at the conference this year?
A. In addition to the new venue, there were plenty of new faces at the conference this year. Surprisingly, however, despite the conference’s name, there weren’t as many affiliates there as there have been in the past. Traditionally, affiliates, sometimes known as “publishers,” are independent third-parties who generate or “publish” leads either directly for an advertiser or through an affiliate network. This year, with a reported crowd of about 4,000 people, the conference included more individuals representing networks, brokers, and online merchants than affiliates. (Official conference statistics bear this out. Only 29 percent of attendees were affiliates.)
Q. What about vendors?
A. According to the organizers, one out of every 10 people there was a vendor. The term “vendor,” however, is something of a misnomer. A vendor can be another term for an online merchant – someone who is actually selling a product on the market – or it can be a generic category for marketers who do not fit into the traditional categories of affiliates, merchants, or networks.
Q. What new industry trends did you notice?
At every conference, one or two markets always seem to have a dominant presence. At the Las Vegas conference in January, there was a large turnout of marketers in the online dating space. This year, two different markets emerged– diet/health and downloads.
Some of the exhibitors this year were manufacturers of neutraceuticals, which can include weight-loss products or testosterone-boosting products. The trend seems to be for online marketers to “white label” or “private label” neutraceuticals from bigger manufacturers. What this means is that online marketers or advertisers actually attach their brand names to a product and product label that they purchase from a manufacturer, either based on their own formulations or based on the manufacturer’s product specifications. Well-known products that would fall into this category include Raspberry Ketone, Green Coffee Bean, and Garcinia Cambogia.
There were also a lot of individuals and companies there in the so-called “download” space. This often means the use of browser plug-ins that the consumer can download himself or herself. These can install targeted advertising (often pop-ups or pop-under ads) on an existing web page.
Q. Are there any risks involved in private labeling?
A. Definitely. If your name is on the label, it doesn’t matter that you didn’t manufacture the product. Your company and your label are subject to FTC scrutiny to the extent that you make claims about the product that you cannot substantiate. And beyond that, the Food and Drug Administration will also flex its enforcement power to the extent you or your manufacturer fail to institute good manufacturing practices, or “GMPs.” While many companies claim that they are GMP-certified, many do not have practices and processes in place to account for defective product batches, serious adverse events resulting from product use, or product recalls.
Q. What are some other hot areas of enforcement by the federal government?
A. Well, how you market your product may be as closely scrutinized as the underlying message. Online marketers who make outbound calls to consumers, or who engage third-party vendors (such as call centers) to make these calls can run afoul of the Telephone Consumer Protection Act. Under the TCPA, anyone who calls customers without their express advance consent, or who hires anyone else to do so, can be hit with a $500 fine for each violation. That adds up, and the TCPA can be enforced by the Federal Communications Commission or by private plaintiffs. Upcoming changes in the TCPA, which will be effective in October 2013, make it even harder to stay on the right side of the law.
Q. How would you put it all together as far as the legal issues?
A. It’s not just the FTC any more. These days, online marketers need to be aware of other agencies with broad enforcement powers, such as the CFPB, the FDA, and the FCC. And don’t forget about the threat of private consumer litigation.
The credit reporting industry – dominated by Experian, Equifax and Transunion – maintains a precarious balance of obligations: On the one hand, these companies bear a responsibility to banks and other businesses at large to retain reliable information to ensure that the credit scores they report are a fair representation of the individual’s credit-worthiness. On the other hand, federal law, including the Fair Credit Reporting Act, imposes an obligation upon the credit reporting agencies and other related companies to conduct reasonable investigations to address disputes about errors in individuals’ credit files. In both instances, the companies bear a weighty responsibility.
For this reason, companies in the credit reporting industry are subject to intensive regulatory scrutiny – historically by the Federal Trade Commission and, more recently, by the Consumer Financial Protection Bureau. Both agencies have issued reports on their studies of the way in which credit reporting companies handle the information entrusted to them, and how they respond to consumer disputes.
This past Sunday, CBS’s 60 Minutes – a show that most people associate with responsible news reporting – ran a segment that unfairly distorted these reports about credit reporting agencies’ compliance with their obligations. The show, which was largely based on an advance copy of an FTC study, relied upon selective interpretation of the data in that study, throwing out snippets of information without being specific on what the data meant.
The vast majority of the story can hardly be viewed as unbiased: interviews with a politically motivated state attorney general, two plaintiffs’ attorneys who spend their careers suing the credit reporting agencies, a handful of dissatisfied consumers, and several disgruntled former call center employees whose role in addressing consumer complaints was never really explained in a meaningful way. The result was a show clearly intended to convey a message that the credit data retained by these companies is riddled with errors, and that the credit reporting agencies fail to comply with their legal obligations to take steps when there is a claim of an inaccuracy.
In fact, as the Consumer Data Industry Association has pointed out, the FTC study shows that 98 percent of credit reports are materially accurate. In this regard, 60 Minutes missed the most critical point in the research – that the measure of accuracy is tied to the question of whether an error has consequences for consumers and not just whether there is an error that has little or no impact on credit scores. The FTC study actually concluded that only 2.2 percent of credit reports have an error that would lead to higher-priced credit for the consumer.
60 Minutes compounded its error by repeatedly asserting that it was “nearly impossible to expunge” an error in a credit report, and providing a forum for a state attorney general and two plaintiffs’ attorneys to assert that the credit reporting companies do not comply with their obligations under federal law. This one-sided treatment does not square with a 2011 study from the Political and Economic Research Council that showed that consumers were satisfied with the resolution of their disputes in 95 percent of the cases. It also does not square with the results of a year-long study of the dispute process by the FTC in which the agency found no violations of law.
It is not hard to understand what motivated 60 Minutes to run this story: Because everyone has a credit score, an inflammatory story about credit scores is likely to get everyone’s attention. But the one-sided and distorted way in which 60 Minutes presented this information was a disservice to the public. And even if credit reporting agencies are not perfect, they deserve better treatment at the hands of those who have the public’s ear.
Recently, the Consumer Financial Protection Bureau, the watchdog agency of the financial industry, has proved that it has considerable bite. Created under the Dodd-Frank act to fill gaps in regulatory coverage, the CFPB’s mandate is to enforce federal regulations that, among other things, restrict “unfair deceptive or abusive acts or practices” in consumer finance. The CFPB in recent months announced two major debt relief crackdowns, the most recent of which permanently shut the doors of a Florida company.
Last month, the CFPB announced that it filed a complaint against a Florida debt-relief company that misled consumers across the country by charging upfront fees for debt-relief services without actually settling most of the consumers’ debts. According to the complaint, the defendants engaged in abusive practices by knowingly enrolling vulnerable consumers who had inadequate incomes to complete debt-relief programs. The complaint charged American Debt Settlement Solutions, Inc. (ADSS) and its owner, Michael DiPanni, with actions that were not just unfair and deceptive, but also abusive. Indeed, this case if the first time that the CFPB in its short history has enforced this prohibition on “abusive” acts or practices.
While “unfair” and “deceptive” are familiar terms to anyone who follows the Federal Trade Commission, the term “abusive” is new to Dodd-Frank and has been the subject of much consternation among Republicans in Congress, who consider it too vague. With this complaint, the CFPB provided what may be its first example of the type of conduct it will consider “abusive.” ADSS allegedly collected about $500,000 in fees from hundreds of consumers in multiple states, charging illegal upfront fees for debt-relief services and “falsely promising them it would begin to settle their debts within three to six months when, in reality, services rarely materialized.
The CFPB said the actions were “abusive” because consumers reasonably relied on the company to “act in their interest by enrolling them in a debt-relief program that they can be reasonably expected to complete, and which will therefore result in the negotiation, settlement, reduction, or alteration of the terms of their debts.” The CFPB simultaneously filed a proposed consent order that would settle the matter by halting the company’s operations and imposing a $15,000 fine.
ADSS and its owner may have walked away relatively unscathed, with only a civil penalty, but others caught in the CFPB’s cross hairs have not been as fortunate. Earlier this year, the CFPB filed suit against two lawyers and two debt relief companies in New York, alleging that they charged thousands of consumers illegal advance fees and left some worse off financially, while illegally profiting themselves. One of the lawyers, Michael Levitis, also faces mail and wire fraud charges brought by the Manhattan U.S. Attorney’s Office – the first-ever criminal charges stemming from a CFPB referral. What’s notable in this complaint is that the acts are described as both deceptive and unfair, but not as abusive.
Although a relatively new agency, the CFPB is proving that it has the chops to take down offenders in the financial industry. Both the Florida and New York cases are signs of future enforcement, and they send a stern warning to offenders – if you prey on vulnerable consumers, be prepared for a fight.
As part of its aggressive program to protect consumers in financial matters, the Consumer Protection Financial Bureau (CFPB) has announced that it is prepared to adopt a controversial “disparate impact” theory of liability against lenders. A case that the U.S. Supreme Court may accept would have a major impact on whether the CFPB is actually going to be able to do that.
The “disparate impact” theory was first articulated by the Supreme Court and further addressed by the Civil Rights Act of 1991 in the employment discrimination context. In a 1971 decision, Griggs v. Duke Power Co., the Court held that Title VII “proscribes not only overt discrimination but also practices that are fair in form, but discriminatory in operation.”
In the employment context, under Griggs, even though an employer may not intend to discriminate against a protected group, it may still be found liable under anti-discrimination laws for practices that disproportionately disadvantage such a group.
The theory was administratively adopted for federal fair lending laws in the 1990s, as laid out in a 1994 Interagency Policy Statement on Fair Lending. This statement from the Department of Justice and other federal agencies says that lenders may be liable for fair lending law violations if their policies or practices are shown to have a disparate impact on protected groups – even if there was no intent to discriminate. The statement, however, does not have the force of law.
In addition, the federal government, in practice, had not aggressively pursued fair lending cases in the absence of intentional discrimination against a protected group — until the Obama Administration’s CFPB announced its intention to use the “disparate impact” theory.
That is where the pending Supreme Court case, Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. comes in. In that case, the Township of Mount Holly, N.J., made plans to redevelop a blighted residential area that was primarily inhabited by low- and moderate-income minority residents. Under the plan, the neighborhood would be demolished, and significantly more-expensive housing would be built. Many of the residents objected to the redevelopment, saying that their neighborhood would be destroyed and that they would not be able to afford to live in the new neighborhood. They sued under the Fair Housing Act, alleging that although the plan was not specifically targeted against minorities, it would have a disparate impact on them. The U.S. Court of Appeals for the Third Circuit allowed the case to proceed, and the Supreme Court is now considering it.
The issue is whether “disparate impact” is cognizable under the Fair Housing Act, as it is in the employment context. If the Court holds that impact as well as intent leads to a cause of action under the Fair Housing Act, the CFPB will go ahead and act under the theory. It will bring cases, for example, against banks that make loans only in areas that happen to be inhabited by high-income people and decline to make loans in areas where low-income people (many of whom are minorities) live. It will use geography as a proxy for racial or ethnic discrimination: Where were loans made, and where were they denied?
The Supreme Court has not yet decided whether it will hear the Mount Holly case. The most recent activity was the Court’s request, at the end of October, that the U.S. solicitor general formally express the views of the U.S. government on the issue. The solicitor general has not yet filed, and it will probably be a few weeks until he does file and the justices consider the SG’s arguments and decide whether to grant certiorari.
Consumer advocacy groups have actively pushed the disparate impact theory. The National Fair Housing Alliance has filed administrative complaints against Bank of America, Wells Fargo, and U.S. Bancorp, alleging that bank practices in maintaining foreclosed properties discriminate against people in predominantly black and Hispanic neighborhoods. Bank of America, Wells Fargo and SunTrust have recently paid some $500 million to settle claims: Since the banks opted to settle these cases, there was no formal legal ruling on the theory of liability.
Thus, “disparate impact” has been slowly taking hold in the lending context – without any real statutory basis or judicial clarification. The theory is still being used only by extension or analogy to the employment context. A high court ruling would clarify this very important area of law. Lenders, developers, and borrowers are waiting for clarification.
On November 19, 2012, the Federal Trade Commission and the Consumer Financial Protection Bureau announced that they have launched a new coordinated effort to protect consumers, focusing on mortgage advertisements that they say are deceptive.
The CFPB and the FTC worked together to review roughly 800 mortgage ads. These ads were produced by entities involved in different aspects of the mortgage process, including mortgage brokers and lenders, lead generators, real estate agents, home builders, and others. The ads were featured on a wide range of media including newspaper, direct mail, email and social media.
The agencies stated that some of these ads had specifically targeted the elderly and veterans.
The letters warned the recipients that they may be in violation of the Mortgage Acts and Practices Advertising Rule (MAP Rule) that took effect in August 2011, which prohibits misleading claims concerning government affiliation, fees, costs, interest rates, payment associated with the loan, and the amount of cash or credit that is available to the consumer. The MAP Rule does not apply to traditional banks, meaning today’s actions affect only non-banks.
The FTC and the CFPB both have enforcement authority over non-bank mortgage ads under the MAP Rule. The agencies stressed that as part of the initiative they are working together to assure that consistent standards are applied across agencies. The agencies will conduct separate investigations focused on different targets to better utilize their resources and avoid double-teaming businesses.
“Working together and applying consistent standards to all types of clients in all types of ads is a very important means of making sure that mortgage advertisers are on notice that they have to comply with the law,” said Thomas Pahl, the assistant director of the FTC’s Division of Financial Practices.
The FTC and the CFPB issued more than 30 warning letters to mortgage advertisers, warning them that their advertisements may be deceptive. Both agencies stated that they have also opened formal investigations into other advertisers that may have committed more serious violations of the law. Violators of the MAP Rule can be subject to civil fines.
“Misrepresentation in mortgage products can deprive consumers of important information while making one of the biggest financial decisions of the lives,” CFPB Director Richard Cordray stated. “Baiting consumers with false ads to buy into mortgage products would be illegal.”
The review of the advertisements revealed several different types of claims that regulators could possibly find misleading, including ads that suggested that a company was affiliated with a government agency, ads that guaranteed approval and offered low monthly payments without discussing the conditions of the offers, and ads offering a low fixed mortgage rate without discussing significant loan terms.
The announcement shows that the FTC and the CFPB are taking an aggressive and proactive look at companies that offer products in the financial services sector. Companies that offer mortgage and other consumer lending products should know that the FTC and the CFPB are paying special attention to them and that their advertisements need to comply with federal regulations.
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.