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  • FTC imposes “record-setting” fine on auto dealer alleging discriminatory junk fees

    Federal Issues

    On April 1, the FTC and the Illinois Attorney General announced a proposed settlement with an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. Under the terms of the proposed settlement, the defendants are ordered to pay a $10 million penalty, of which $9.95 million will be used to provide monetary relief to consumers. According to the FTC, this is the highest penalty ever obtained against an auto dealer. The remaining balance of the penalty will be paid to the Illinois Attorney General Court Ordered and Voluntary Compliance Payment Projects Fund.

    According to the complaint, which brings claims under the FTC Act, TILA, ECOA, and comparable Illinois laws, eight of the defendant’s dealerships, along with the general manager of two of the Illinois dealerships, allegedly tacked on junk fees for unwanted “add-on” products such as service contracts, GAP insurance, and paint protection to consumers’ purchase contracts at the end of the negotiation process, often without consumers’ consent. In other instances, consumers were told that the add-ons were free or were required to purchase or finance their vehicle. The complaint further alleges that defendants discriminated against Black consumers by charging them higher interest rates or more for add-on products than similarly situated non-Latino white consumers. As result, Black consumers allegedly paid, on average, $190 more in interest and $99 more for add-on products.

    FTC Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter issued a joint statement noting that they “would have also supported a count alleging a violation of the FTC Act’s prohibition on unfair acts or practices.” Khan and Slaughter elaborated on reasons why the FTC “should evaluate under its unfairness authority any discrimination that is found to be based on disparate treatment or have a disparate impact,” pointing out that (i) discrimination based on protected status can cause substantial injury to consumers; (ii) “injuries stemming from disparate treatment or impact are unavoidable because affected consumers cannot change their status or otherwise influence the unfair practices”; and (iii) “injuries stemming from disparate treatment or impact are not outweighed by countervailing benefits to consumers or competition.”

    Federal Issues FTC Enforcement Fees State Issues Illinois State Attorney General Discrimination Auto Finance Fair Lending ECOA FTC Act TILA Disparate Impact

  • FTC sues company over “free” tax filing campaign

    Federal Issues

    On March 29, the FTC issued an administrative complaint against a company that produces tax filing software for allegedly engaging in deceptive business practices when advertising, marketing, distributing, and selling their purportedly “free” tax filing services. The FTC also filed a complaint for a temporary restraining order and an emergency motion for a temporary restraining order (TRO) and preliminary injunction against the company in the U.S. District Court for the Northern District of California, stating that unless the court steps in, the company will “be free to continue disseminating the deceptive claim that consumers can file their taxes for free using [the software] when, in truth, in numerous instances, defendant does not permit consumers to file their taxes for free using [the software].” The FTC stated in its announcement that millions of consumers are unable to take advantage of the tax filing software’s allegedly “free” service (including those who get a 1099 form for work in the gig economy or those who earn farm income), noting that roughly two-thirds of tax filers were unable to file their taxes for free in 2020. According to the complaint, these consumers are often informed they need to upgrade to a paid version to complete and file their taxes. The FTC specifically pointed to the company’s “Absolute Zero” ad campaign, in which the company informed consumers that its “offering was truly free.” The agency said company’s campaign included the words “Free Guaranteed” to “bolster and emphasize the claim that the offer was truly free.” While many of the company’s ads do contain a fine print disclaimer clarifying that the offer is limited to consumers with “simple tax returns,” the FTC said this is inadequate to cure the misrepresentation that consumers can file their taxes for free because the disclaimers are “disproportionately small compared to the prominent text emphasizing that the service is free,” appear for just seconds, and are in writing only and not read by a voiceover.

    Federal Issues FTC Enforcement UDAP Deceptive Consumer Finance

  • FinCEN fines company for willfully failing to comply with GTO

    Federal Issues

    On April 1, FinCEN announced its first enforcement action for failing to comply with the reporting and recordkeeping requirements of a Geographic Targeting Order (GTO). The 2014 GTO in question was designed to combat what FinCEN and the Department of Justice viewed as widespread trade-based money laundering in the Los Angeles Fashion District, in which businesses accepted bulk cash from Mexican drug trafficking organizations as part the black market peso exchange. The GTO required that a wide range of non-financial businesses within the Los Angeles Fashion District, including perfume stores, travel agencies, and electronics stores, report and keep records related to whether they “received currency in excess of $3,000 in one transaction or two or more related transactions in a 24-hour period.” FinCEN imposed a $275,000 penalty on a perfume company in the Los Angeles Fashion District for failure to report more than 114 covered transactions worth more than $2.3 million. According to FinCEN, these failures were first identified in a 2015 examination by the IRS. Later attempts made by the company to submit reports for the 114 transactions were declared “substantially incomplete,” as the reports, among other things, failed to include customer information or any indication that the cash payments were made on behalf of another person or business. The IRS rejected the reports and referred the matter to FinCEN, who conducted an investigation and determined that the company failed to comply with the reporting and recordkeeping requirements until long after it became aware of the GTO.

    The $275,000 civil money penalty was assessed based on a number of factors, including the company’s allegedly willful violations of the Bank Secrecy Act and the nature and seriousness of the violations, including the extent of possible public harm and the amounts involved. FinCEN noted that “[w]hile there is no direct evidence indicating that the unreported transactions involved illegal activity or the proceeds of illegal activity, the company’s failures were significant and led to the loss of valuable financial intelligence that could assist law enforcement efforts against significant money laundering activity on behalf of international drug trafficking organizations.” FinCEN also stated that the company’s actions impacted the agency’s mission to safeguard the financial system and target specific illicit financial threats, and that the company’s systemic failure to take any action in response to the GTO enabled them to continue.

    “FinCEN’s enforcement action puts nonfinancial trades and businesses on notice that they must comply with Geographic Targeting Orders,” FinCEN’s acting Director Himamauli Das stated. “This action also illustrates FinCEN’s long-standing efforts to partner with other government agencies to combat money laundering schemes designed to launder the proceeds of criminal activity through nonfinancial trades and businesses in the United States.”

    Federal Issues Financial Crimes FinCEN Enforcement Bank Secrecy Act GTO DOJ IRS

  • FINRA fines firm $2.3 million for misusing customer funds and charging unreasonable fees

    Securities

    On March 22, a decision was entered in a disciplinary proceeding between FINRA’s Department of Enforcement and a securities firm over whether the firm engaged in unauthorized trading and misused customer funds in response to mounting financial challenges in 2018. FINRA’s extended hearing panel alleged that the firm, in light of declining profits, informed customers that it would stop carrying retail accounts and levied “unreasonable and unnecessary” fees in a discriminatory manner on retail customers who did not close their accounts—including a $5,000 monthly account fee—without providing proper notice. According to the panel, the monthly fee was applied in a discriminatory manner, wherein the fee was waived for profitable accounts and certain customers. Other customers were required to pay a portion or all of the monthly fee in order to regain possession of other holdings. Moreover, the panel claimed that in most instances, “customers were not even aware of the $5,000 monthly account fee, let alone that the firm was taking their cash and securities to cover it.”

    The firm argued that the monthly fee should be considered reasonable because it resulted from an “arm’s-length agreement” between the firm and its customers, but the panel rejected the firm’s defense, pointing out that customers did not agree to the fee “as part of a contract freely negotiated at arm’s length between sophisticated parties with equal bargaining power.” The panel further asserted that, among other things, the firm also allegedly charged customers unfair prices in securities transactions, moved securities from customer accounts to firm accounts without authorization, and executed an unauthorized capital withdrawal disguised as a payment.

    In issuing its decision, the panel found no mitigating factors but identified several aggravating factors, including that the firm “continued a disturbing pattern of misconduct” after a temporary cease and desist order was issued. The firm is ordered to pay more than $2.3 million in restitution and must permanently cease and desist from converting or misusing customer funds or securities, effecting unauthorized transactions in customer accounts, charging unreasonable or discriminatory fees, or causing harm to investors, among others. The panel cautioned that it was “highly likely” that the firm’s misconduct would recur if it remained a FINRA member firm and stressed that expulsion was “the only alternative for protecting the investing public.” The firm denied all allegations.

    Securities FINRA Enforcement Fees

  • District Court denies majority of MSJ requests in FTC action against online discount club

    Courts

    On March 28, the U.S. District Court for the Northern District of Georgia denied the majority of motions for summary judgment filed by the FTC and defendants in a 2017 action that charged the operators of a group of marketing entities and payment processors (collectively, “defendants”) with numerous violations of law for allegedly debiting more than $40 million from consumers’ bank accounts for membership in online discount clubs without their authorization. As previously covered by InfoBytes, the FTC’s 2017 complaint alleged that the online discount clubs claimed to offer services to consumers in need of payday, cash advance, or installment loans, but instead enrolled consumers in a coupon service that charged an initial application fee as well as automatically recurring monthly fees.

    In reviewing the parties’ respective motions for summary judgment, the court first reviewed the FTC’s claims against the defendants allegedly responsible for launching the discount program (lead generator defendants) “as a way to salvage leads on loan-seeking consumers that the [lead generator defendants] were not able to sell to lenders or others.” The lead generator defendants allegedly used loan-seeking consumers’ banking information to enroll them in discount club memberships with automatically recurring monthly charges debited from the consumers’ bank accounts. While the lead generator defendants contended that the enrollments were authorized by the consumers themselves, the FTC claimed, among other things, that “loan-seeking consumers were redirected to the discount club webpage during the loan application process.” The court determined that because there exists a genuine issue of material fact as to whether the lead generator defendants’ loan application process, discount club webpages, and telemarketing practices were deceptive or if their practices violated the Restore Online Shoppers’ Confidence Act and the Telemarketing and Consumer Fraud and Abuse Prevention Act, the FTC is not entitled to judgment as a matter of law on its claim for injunctive relief or equitable monetary relief.

    The court also concluded that the FTC failed to present evidence showing that another defendant—a now-defunct entity whose assets and business operations were sold to some of the defendants—is violating or is about to violate the law because the FTC’s action was filed more than three years after the defunct entity ceased all operations. As such, the court found that the statute of limitations applies and the defunct entity is entitled to judgment as a matter of law on the FTC’s claims. However, the court determined that there is evidence suggesting the possibility that two individual defendants involved in monitoring and advising the defendants in the alleged discount club scheme, may continue the scrutinized conduct.

    With respect to the FTC’s claims against certain other individual defendants allegedly responsible for owning and managing some of the corporate defendants and their wholly-owned subsidiaries, the court considered defendants’ arguments “that they had a general lack of knowledge of (or authority to control) the alleged violative conduct” and “that the FTC does not have the right to seek equitable monetary relief” as a result. In denying the FTC’s motions for summary judgment against these individual defendants, the court found “that there are disputed issues of material fact as to these matters which should be decided by the trier of fact,” and that the FTC’s claim for equitable monetary relief required further analysis following the U.S. Supreme Court’s ruling in AMG Capital Management, LLC v. FTC, which held that the FTC does not have statutory authority to obtain equitable monetary relief under Section 13(b) of the FTC Act. (Covered by InfoBytes here.)

    Finally, the court concluded that sufficient evidence showed that another individual (who served as an officer of a defendant identified as being responsible for processing the remotely created checks used to debit consumers’ accounts during the discount club scheme) “knowingly and actively participated in acts that were crucial to the success of the . . . alleged discount scheme.” However, because there exists a genuine issue of material fact as to whether the lead generator and named defendants’ loan application process, discount club webpages, and telemarketing practices were deceptive, the court ruled that the FTC is not entitled to judgment as a matter of law as to its claims against the individual’s estate. The court also found that the individual’s estate is not entitled to summary judgment on either of its arguments related to the FTC’s request for monetary relief.

    Courts FTC Enforcement FTC Act ROSCA Telemarketing and Consumer Fraud and Abuse Prevention Act UDAP Consumer Finance

  • FCC signs robocall enforcement partnerships with states

    Federal Issues

    On March 28, the FCC announced it launched formal robocall investigation partnerships with the Connecticut, District of Columbia, Idaho, Kentucky, Minnesota, New Jersey, and Wyoming state attorneys general, bringing the total number of state-federal partnerships to 22. According to the FCC, the seven AGs entered into a Memoranda of Understanding (MOU) with state robocall investigators and the FCC’s Enforcement Bureau, which establishes critical information sharing and cooperation structures to investigate spoofing and robocall scam campaigns. The FCC also noted that it expanded existing MOUs in Michigan and West Virginia with robocall investigations. According to the press release, the MOUs help facilitate relationships with other actors, including other federal agencies and robocall blocking companies, and provide support for and expertise with critical investigative tools, including subpoenas and confidential response letters from suspected robocallers. The FCC also noted that “[d]uring investigations, both the FCC’s Enforcement Bureau and state investigators seek records, talk to witnesses, interview targets, examine consumer complaints, and take other critical steps to build a record against possible bad actors,” which “can provide critical resources for building cases and preventing duplicative efforts in protecting consumers and businesses nationwide.”

    Federal Issues FCC Robocalls State Attorney General State Issues Enforcement

  • Chopra: Large repeat offenders should face tougher consequences

    Federal Issues

    On March 28, CFPB Director Rohit Chopra warned that large, dominant banks and firms that repeatedly break the law “should be subject to the same consequences of enforcement actions as small firms.” Speaking before the University of Pennsylvania Law School as the 2022 Distinguished Lecturer on Regulation, Chopra told attendees that the current “double-standard” enforcement approach needs to end, and that the Bureau intends to establish dedicated units within its supervision and enforcement divisions to detect repeat offenders and corporate recidivists “to better hold them accountable.” This may mean that insured depository institutions lose access to federal deposit insurance or are put directly into receivership, Chopra stated, explaining that “[r]epeat offenses and, in particular, order violations, may be a sign that an institution’s condition or behavior is unsafe and unsound.”

    Pointing out that penalties become meaningless if regulators are not willing to enforce them, Chopra stated that the Bureau needs “to move away from just monetary penalties and consider an arsenal of options that really work to stop repeat offenses.” To address this, Chopra outlined a new set of “bright-line structural remedies, rather than press-driven approaches” that the Bureau will consider when it discovers large entities are repeatedly committing the same types of violations. These include: (i) imposing limits or caps on size or growth; (ii) banning certain types of business practices; (iii) forcing companies to divest certain product lines; (iv) placing limitations on leverage or requirements to raise equity capital; and (v) revoking government granted privileges. Additionally, with respect to licensed nonbank institutions of all sizes that repeatedly violate the law, Chopra indicated that the Bureau will deepen its collaboration with state licensing officials to allow states to determine whether to suspend licenses or liquidate assets.

    Chopra also raised the prospect of targeting individuals. “Agency and court orders bind officers and directors of the corporation, and so do the laws themselves, so there are multiple ways in which individuals are held accountable. Where individuals play a role in repeat offenses and order violations, it may be appropriate for regulatory agencies and law enforcers to charge these individuals and disqualify them. Dismissal of senior management and board directors, and lifetime occupational bans should also be more frequently deployed in enforcement actions involving large firms.” Chopra emphasized that “[w]hen it comes to individuals, we also need to pay close attention to executive compensation incentives. Important remedies for restoring law and order may include clawbacks, forfeitures, and other changes to executive compensation, including where we tie up compensation for longer periods of time and use that deferred compensation as the first pot of money to pay fines.”

    Federal Issues CFPB Enforcement Civil Money Penalties Nonbank State Issues

  • CFTC awards $625,000 to whistleblowers

    Securities

    On March 28, the CFTC announced approximately $625,000 in awards to four whistleblowers whose information led the agency to a successful Commodity Exchange Act enforcement action. The associated order noted that the claimants “provided the Commission with original information,” and “each provided ongoing cooperation and assistance to Division staff, which significantly contributed to the success of the Covered Action.” One claimant received a higher award percentage to recognize that he or she provided the highest level of ongoing assistance and cooperation.

    The CFTC has awarded approximately $330 million to whistleblowers since the enactment of its Whistleblower Program under Dodd-Frank, with whistleblower information helping prosecute enforcement actions leading to more than $3 billion in monetary sanctions.

    Securities CFTC Whistleblower Enforcement Commodity Exchange Act

  • FDIC releases February enforcement actions

    On March 25, the FDIC released a list of administrative enforcement actions taken against banks and individuals in February. During the month, the FDIC made public six orders consisting of “three Orders to Pay Civil Money Penalty, two orders terminating consent order, and one consent order.” Among those announced were two civil money penalties for alleged violations of the Flood Disaster Protection Act. In one civil money penalty, imposed against a Kansas-based bank, the FDIC claimed that the bank “made, increased, extended, renewed, sold, or transferred a loan secured by a building or mobile home located or to be located in a special flood hazard area without properly notifying the Administrator of FEMA or their designee.” The order requires the payment of a $2,250 civil money penalty. In another civil money penalty, imposed against a Minnesota-based bank, the FDIC claimed that the bank: (i) “made, increased, extended, or renewed loans secured by a building or mobile home located or to be located in a special flood hazard area without requiring that the collateral be covered by flood insurance”; (ii) “made, increased, extended or renewed a loan secured by a building or mobile home located or to be located in a special flood hazard area without providing timely notice to the borrower and/or the servicer as to whether flood insurance was available for the collateral”; and/or (iii) “failed to comply with proper procedures for force-placing flood insurance in instances where the collateral was not covered by flood insurance at some time during the term of the loan.” That order requires the payment of a $3,000 civil money penalty.

    Bank Regulatory Federal Issues FDIC Enforcement Flood Disaster Protection Act Flood Insurance

  • SEC awards $1.25 million to whistleblower

    Securities

    On March 25, the SEC announced that it awarded a whistleblower $1.25 million for providing specific and credible information that prompted SEC staff to begin an investigation that resulted in a successful SEC covered action. According to the redacted order, the whistleblower voluntarily provided original information and participated extensively in assisting SEC staff through identifying witnesses, explaining critical documents, and helping focus the investigation on key issues, which saved SEC time and resources.

    The SEC has awarded approximately $1.2 billion to 256 individuals since issuing its first award in 2012.

    Securities SEC Whistleblower Enforcement

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