InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FTC takes action against day-trading company for deceptive sales techniques
On April 19, the FTC filed a complaint against a day-trading investment company and its CEO alleging the defendants violated the FTC Act and the Telemarketing Sales Rule (TSR) in connection with the company’s investment opportunities. According to the complaint, the Massachusetts-based defendants promote day-trading investments online and sell programs promising to show consumers how to earn substantial profits in a short time period. The FTC contends that the defendants promote these so-called “profitable” and “scalable” trading strategies to consumers through allegedly deceptive sales pitches and inform consumers that their strategies are effective even with initial investments as small as $500. However, the FTC claims that 74 percent of customers’ accounts actually lost money and that only 10 percent of the accounts earned more than $90.
Under the terms of the proposed stipulated order, the defendants are required to pay $3 million in consumer redress and are permanently restrained and enjoined from making unsubstantiated earnings claims concerning consumers’ potential to earn money using their trading strategies regardless of the amount of capital invested or the amount of time spent trading. Defendants are also prohibited from violating federal law, or from making any misrepresentations about investment opportunities, including misrepresentations in connection with telemarketing regarding the amount of “risk, liquidity, earnings potential, or profitability of goods or services that are the subject of a sales offer.”
FTC takes action against medical school for deceptive tactics
On April 14, the FTC filed a complaint against a Caribbean for-profit medical school and its Illinois-based operators alleging the defendants violated the Telemarketing Sales Rule, Holder Rule, and Credit Practices Rule (CPR) in connection with its marketing and credit practices. According to the complaint, the defendants improperly marketed the school’s medical license exam pass rate and residency match success. In addition, financing contracts omitted a legally-mandated Holder Rule notice in their credit agreements, among other things. Under the Holder Rule, “any seller that receives the proceeds of a purchase money loan [must] include, in the underlying credit contract, a specific notice informing the consumer of their right to assert claims against any holder of the credit contract.” In addition to omitting the required notice, the defendants also allegedly attempted to waive consumers’ legal rights by inserting language in the credit agreements stating, “ALL PARTIES, INCL[U]DING BOTH STUDENT BORROWER AND COSIGNER. . .WAIVE ANY CLAIM OR CAUSE OF ACTION OF ANY KIND WHATSOEVER THAT THEY MAY HAVE WITH RESPECT TO [DEFENDANT]…” The FTC also contended that the defendants included a notice informing cosigners of their liability in the middle of the contract, instead of providing a separate document containing specific language required by the CPR.
Under the terms of the proposed stipulated order, the defendants are required to pay a $1.2 million judgment that will go towards refunds and debt cancellation for affected consumers, and also cease collection of approximately $357,000 in consumer debt covered by the proposed order. Defendants are also required to notify each consumer that their debt is being cancelled and that consumer reporting agencies will be directed to delete the debt from the consumers’ credit reports. Additionally, defendants are prohibited from misrepresenting their pass rates and residency matches, and from making unsubstantiated claims or violating federal law. The order also provides Holder Rule protections, including prohibiting defendants from selling, transferring, or assigning any consumer credit contracts unless the recipient of such contract agrees, in writing, “that its rights are subject to the borrowers’ claims and defenses against [d]efendants” and requiring defendants to notify each borrower whose credit contract is sold.
CFPB’s TSR claims against software company to proceed
On April 5, the U.S. District Court for the Central District of California denied a motion to dismiss claims brought by the CFPB alleging violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the California-based software company and its owner (collectively, “defendants”) market and sell credit-repair business software and other tools to credit-repair businesses charging unlawful advance fees to consumers. According to the Bureau, the defendants provide substantial assistance to these businesses and purportedly encourage them to “charge unlawful advance fees” even though, under the TSR, companies that telemarket their services are prohibited from requesting or receiving fees from consumers until consumers are provided with a credit report showing that the promised results have been achieved.
The court was unpersuaded by the defendants’ argument that the Bureau exceeded its authority to pursue enforcement actions against them, claiming the credit-repair businesses that use defendants’ products and services are not “covered persons” under the CFPA, as the businesses “provide only retrospective credit-repair services and thus do not provide prospective consumer financial services under the CFPA.” The court held that the CFPA’s broad purpose and expansive language covers the services provided by the credit-repair businesses to improve or repair consumers’ credit and that such activity is considered “credit counseling” under the CFPA and is therefore a “consumer financial product or service.” The court further held that the credit-repair businesses were “covered persons” based on allegations that they provide consumers’ credit history to help with the approval of a mortgage or auto loan, recognizing that performing analysis relating to the credit history of consumers in connection with a decision regarding a consumer financial product or service is covered by the CFPA. The court also disagreed with the defendants’ argument that they are not “service providers” under the statute, in part, because the defendants “have the capacity to vet and monitor” the credit-repair businesses. The court also was not persuaded that the Credit Repair Organizations Act’s (CROA) provision allowing credit-repair businesses to charge monthly fees supersedes the TSR requirement that such a company cannot collect payment until the promised results have been achieved, holding that the requirements of each are not in conflict and noting that “if a credit repair agency does not qualify as a telemarketer, then it need not comply with the TSR—only the CROA is applicable,” and that nothing in the language of the CROA indicates that the defendants’ activities “may not simultaneously be regulated by the [TSR].”
District Court enters $2.8 million judgment in CFPB student debt relief action
On March 22, the U.S. District Court for the Central District of California entered a stipulated final judgment and order against one of the defendants in an action brought by the CFPB, the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney, alleging a student loan debt relief operation deceived thousands of student-loan borrowers and charged more than $71 million in unlawful advance fees. As previously covered by InfoBytes, the complaint asserted that the defendants violated the CFPA, the Telemarketing Sales Rule, and various state laws. Amended complaints (see here and here) also added new defendants and included claims for avoidance of fraudulent transfers under the Federal Debt Collection Procedures Act and California’s Uniform Voidable Transactions Act, among other things. A stipulated final judgment and order was entered against the named defendant in July (covered by InfoBytes here), which required the payment of more than $35 million in redress to affected consumers, a $1 civil money penalty to the Bureau, and $5,000 in civil money penalties to each of the three states. The court also previously entered final judgments against several of the defendants, as well as a default judgment and order against two other defendants and a settlement with two non-parties (covered by InfoBytes here, here, here, here, and here).
The final judgment issued against the settling defendant, who neither admitted nor denied the allegations except as specifically stated, permanently bans the defendant from participating in telemarking services or offering or selling debt-relief services, and prohibits it from misrepresenting benefits consumers may receive from a product or service. The defendant is also permanently restrained from violating applicable state laws, and may not disclose, use, or benefit from customer information obtained in connection with the offering or providing of the debt relief services. The settlement orders the defendant to pay more than $2.8 million in consumer redress, as well as a $1 civil money penalty to the Bureau and $5,000 to each of the three states.
FTC, DOJ halt deceptive credit repair operation
On March 21, the FTC and DOJ announced that the U.S. District Court for the Southern District of Texas entered a permanent injunction against a credit repair organization accused of allegedly defrauding consumers out of millions of dollars by promising to remove negative information from their credit reports, while actually filing fake identity theft reports to explain the negative items. (Press releases linked here and here.) According to the complaint, filed by the DOJ on behalf of the FTC, the defendants allegedly claimed their “two-step process” could remove negative items from consumers’ credit histories or credit reports through “advance disputing” of negative information and help boost credit scores by adding “credit building products” to consumers’ credit reports. However, according to the FTC, defendants failed to follow through on their credit repair promises, and instead filed identity theft reports even when consumers had not actually been victims of identity theft. The FTC claimed many consumers actually saw their credit scores decrease because the defendants’ “unsupported challenges rarely if ever cause[d] credit reporting agencies to delete or change any consumer’s credit information.” Company representatives also allegedly informed consumers that the process could boost consumers’ credit scores by 50-200 points within 90 days—a violation of the Credit Repair Organizations Act and the Telemarketing Sales Rule. Additionally, the FTC claimed that the defendants illegally required consumers to pay upfront fees up to $1,500, and failed to include disclosures detailing cancellation policies or provide consumers with copies of the contracts they were required to sign in order to obtain the defendants’ services. The permanent injunction imposes financial restrictions on the defendants and halts their operations.
FTC sues sales organization in business opportunity scam
On March 15, the FTC filed an administrative complaint against an independent sales organization and its owners (collectively, “respondents”) for allegedly opening merchant accounts for fictitious companies on behalf of a business opportunity scam previously sued by the FTC in 2013. According to the complaint, the scammers promoted business opportunities to consumers that falsely promised they would earn thousands of dollars. From its previous 2013 lawsuit, the FTC obtained judgments and settlements of over $7.3 million (covered by InfoBytes here). The complaint alleged that respondents violated the FTC Act and the Telemarketing Sales Rule by helping the scammers launder millions of dollars of consumers’ credit card payments from 2012 to 2013 and ignoring warning signs that the merchants were fake. The FTC claimed that the respondents, among other things, (i) opened merchant accounts based on “vague” business descriptions; (ii) ignored the fact that for most of the merchants, the principals or business owners had poor credit ratings, which should have raised questions about the financial health of the merchants; (iii) neglected to obtain merchants’ marketing materials or follow up on signs that the merchants were engaged in telemarketing; and (iv) ignored inconsistencies related to the bank accounts listed on several of the merchants’ applications. The FTC further claimed that the respondents created 43 different merchant accounts for fictitious companies on behalf of the scam and even provided advice to the organizers of the scam on how to spread out the transactions among different accounts to evade detection.
Under the terms of the proposed consent order (which is subject to public comment and final FTC approval), the respondents would be prohibited from engaging in credit card laundering, as well as any other tactics to evade fraud and risk monitoring programs. The respondents would also be banned from providing payment processing services to any merchant that is, or is likely to be, engaged in deceptive or unfair conduct, and to any merchant that is flagged as high-risk by credit-card industry monitoring programs. Furthermore, the respondents would be required to screen potential merchants and monitor the sales activity and marketing practices of current merchants engaged in certain activities that could harm consumers. The FTC noted that it is unable to obtain a monetary judgment due to the U.S. Supreme Court’s decision in AMG Capital Management 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.)
FTC seeks permanent injunction against auto warranties operation
On February 9, the FTC announced it was charging a Florida-based group of operators (defendants) with violations of the FTC Act and the Telemarketing Sales Rule for allegedly engaging in deceptive practices when marketing and selling automobile warranties. The complaint alleged the defendants, among other things, (i) misrepresented that they are affiliated with consumers’ car dealers or manufacturers; (ii) misrepresented that their warranties provide “bumper-to-bumper” coverage; (iii) falsely promised that consumers can obtain a full refund if they cancel within 30 days; (iv) used remotely created checks which are illegal in telemarketing transactions; and (v) called numbers on the do not call registry. According to the FTC, the defendants allegedly collected more than $6 million from consumers since 2018. The FTC seeks a permanent injunction against the defendants to prevent future violations, as well as redress for injured consumers through “rescission or reformation of contracts, the refund of money, the return of property, or other relief necessary to redress.”
District Court orders debt-relief company to pay $41.1 million CMP
On February 7, the U.S. District Court for the Northern District of Illinois entered a default judgment and order against a debt-relief company (default defendant) accused of allegedly violating the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act. As previously covered by InfoBytes, the Bureau filed the complaint in 2020 alleging that the company and its two owners (collectively, “defendants”) misrepresented material aspects of their student loan debt-relief services, and violated the TSR by requesting and receiving payment of disproportionate fees for their services before they altered or resolved the terms of the debts. The judgment against the default defendant imposes both permanent injunctive relief and monetary remedies including a $41.1 million civil monetary penalty. The default defendant must also pay $2.1 million in consumer restitution and is permanently enjoined from participating in the financial-advisory, debt-relief, or credit-repair service markets in any way, including through marketing or ownership of such services.
FTC settles with remaining student debt relief defendants
On January 26, the FTC announced settlements with the remaining participants in a student loan debt relief operation. As previously covered by InfoBytes, the FTC filed a complaint against the defendants for allegedly using telemarketing calls, as well as media advertisements, to enroll consumers in student debt relief services in violation of the FTC Act and the Telemarketing Sales Rule (TSR). The defendants allegedly misrepresented that they were affiliated with the U.S. Department of Education and misrepresented “material aspects of their debt relief services,” including by promising to enroll consumers in repayment programs to reduce or eliminate payments and balances. Additionally, the defendants allegedly charged illegal upfront fees, and often placed the consumers’ loans into temporary forbearance or deferments with their student loan servicers, without the consumer’s authorization. A $43 million settlement was reached in 2020 with certain of the defendants that was partially suspended conditioned upon the surrender of at least $835,000, as well as additional assets.
The FTC entered two settlements against the remaining defendants. The first settlement imposes a roughly $7.5 million monetary judgment, which is partially suspended after the individual defendant pays $743,386. The second settlement includes a $22 million monetary judgment, which is also partially suspended based on the defendants’ inability to pay. The settlement also requires the defendants to forfeit all frozen funds held by the receiver. Monies recovered in the action will go towards consumer refunds. Additionally, the defendants are banned from providing any debt relief products and services in the future, and are prohibited from making misrepresentations in connection with the sale of any products or services or from making any unsubstantiated claims. Defendants are also enjoined from violating the TSR.
CFPB bans payment processor for alleged fraud
On January 18, the CFPB filed a proposed stipulated judgment and order to resolve a complaint filed last year against an Illinois-based third-party payment processor and its founder and former CEO (collectively, “defendants”) for allegedly engaging in unfair practices in violation of the CFPA and deceptive telemarketing practices in violation of the Telemarketing Act and its implementing rule, the Telemarketing Sales Rule. As previously covered by InfoBytes, the CFPB alleged that the defendants knowingly processed remotely created check (RCC) payments totaling millions of dollars for over 100 merchant-clients claiming to offer technical-support services and products, but that actually deceived consumers—mostly older Americans—into purchasing expensive and unnecessary antivirus software or services. The tech-support clients allegedly used telemarketing to sell their products and services and received payment through RCCs, the Bureau claimed, stating that the defendants continued to process the clients’ RCC payments despite being “aware of nearly a thousand consumer complaints” about the tech-support clients. According to the Bureau, roughly 25 percent of the complaints specifically alleged that the transactions were fraudulent or unauthorized.
If approved by the court, the defendants would be required to pay a $500,000 civil penalty, and would be permanently banned from participating in or assisting others engaging in payment processing, consumer lending, deposit-taking, debt collection, telemarketing, and financial-advisory services. The proposed order also imposes $54 million in redress (representing the total amount of payments processed by the defendants that have not yet been refunded). However, full payment of this amount is suspended due to the defendants’ inability to pay.