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FTC settles with remaining operators of student loan debt-relief scam
On May 17, the FTC announced settlements to resolve litigation against the remaining defendants involved in a student loan debt-relief operation charged with allegedly engaging in deceptive and abusive practices by collecting advance fees and making false promises to consumers that they could lower or eliminate loan payments or balances. As previously covered by InfoBytes, the FTC filed complaints against two groups of defendants involved in the debt-relief operation claiming the defendants, among other things, charged consumers advance fees and enrolled consumers in a high-interest financing program without making required disclosures. These actions, the FTC, contended, violated the FTC Act, TILA, and the Telemarketing Sales Rule (TSR), and stipulated orders were entered against several of the defendants in 2019. The terms of the stipulated final orders reached with the remaining defendants (see here and here) prohibit the defendants from (i) engaging in transactions involving secured or unsecured debt relief products and services; (ii) making misrepresentations and unsubstantiated claims regarding any products and services; (iii) violating the TSR; and (iv) collecting any further payments from consumers who purchased debt-relief services prior to the entry of the order. Additionally, certain defendants are required to pay a more than $24.5 million monetary judgment, which will be partially suspended due to inability to pay. One of the defendants is also required to pay $11,500, which will go towards consumer redress.
FTC settles with photo app developer over its facial recognition technology
On May 7, the FTC announced a final settlement with the developer of a California-based photo app (defendant) for allegedly deceiving consumers concerning its use of facial recognition technology and its retention of the photos and videos of users who previously deactivated their accounts. The FTC filed a complaint in January claiming, among other things, that the defendant violated the FTC Act by misleading users about their ability to control the face recognition feature and remove photos after account deletion. According to the FTC’s complaint, the defendant automatically activated its face recognition feature for all mobile app users except those consumers who lived in Texas, Illinois, Washington and the European Union. The FTC alleged that the defendant also failed to keep its promise to delete the photos and videos of users who deactivated their accounts and instead retained them indefinitely. Under the terms of the stipulated final order, the defendant must “clearly and conspicuously disclose to the User from whom Respondent has collected the Biometric Information, separate and apart from any ’privacy policy,’ ’terms of use‘ page, or other similar document, all purposes for which Respondent will use, and to the extent applicable, share, the Biometric Information; and obtain the affirmative express consent of the User from whom Respondent collected the Biometric Information.” The settlement also calls for the deletion of all photos and videos that were collected from users who requested deactivation of their accounts.
FTC reaches $20 million settlement with company for misusing consumer credit reports
On April 29, the FTC announced a civil complaint and stipulated order filed by the DOJ on its behalf against a home security and monitoring company accused of allegedly violating the FCRA by improperly obtaining consumers’ credit reports to help potential customers qualify for financing for its products and services. According to the complaint, company employees allegedly engaged in a process known as “white paging,” in which the credit history of another individual with the same or similar name as the potential customer is used to qualify the potential customer for the company’s financing program. Additionally, the FTC claimed that company sales representatives allegedly added “impermissible co-signers” to accounts for unqualified customers by unlawfully using the credit history of the “co-signers” without their permission. In the event a customer defaulted on a loan, the company referred the impermissible co-signer to its debt buyer, potentially harming the co-signer’s credit score and subjecting the individual to debt collections, the FTC stated. According to the complaint, the company was aware of the misconduct, terminated hundreds of sales representatives as a result of these practices, but later rehired some of the same sales representatives because they generated millions of dollars in revenue.
Under the terms of the stipulated order—the largest to date for an FTC FCRA action—the company is required to pay a $15 million civil money penalty, as well as $5 million to compensate harmed individuals. Additionally, the company must (i) implement an employee monitoring and training program to prevent further FCRA violations; (ii) establish and maintain an identity theft prevention program; (iii) establish a customer service task force to verify all accounts that reference more than one address or include a co-signer before referring the accounts to a debt collector and assist individuals who were improperly referred to debt collectors; and (iv) obtain biennial assessments by an independent third party to ensure compliance.
While the Commission voted 4-0 to approve the stipulated final order, Commissioner Rohit Chopra issued a separate statement noting that he believes the FTC “should have also alleged that the company violated the FTC Act’s prohibitions on deceptive practices by falsifying credit applications,” and that because the company “turned a blind eye to obvious compliance failures by its sales force” it also allegedly “violated the FTC Act’s prohibition on unfair practices.”
CFPB, FTC remind landlords of tenant pandemic protections
On May 3, the CFPB acting Director Dave Uejio and FTC acting Chairwoman Rebecca Kelly Slaughter released a joint notification letter to the nation’s largest apartment landlords that together own over 2 million units. The letter serves as a reminder of federal protections put in place to keep tenants in their homes throughout the Covid-19 pandemic, including an eviction moratorium recently extended by the CDC to June 30, and an interim final rule issued by CFPB last month (covered by InfoBytes here), effective May 3, that established new notice requirements under the FDCPA. The letter also encourages the landlords to “notify debt collectors working on your behalf, which may include attorneys, of the CDC Moratorium, applicable state or local moratoria, and those parties’ obligations under the FTC Act and the FDCPA, including under the CFPB’s interim final rule.” Furthermore, the letter asks landlords to examine their practices in light of the CDC moratorium to ensure that they “comply with the FTC Act and the [FDCPA]” and “remediate any harm to consumers stemming from any law violations.” As previously covered in InfoBytes, in March, the CFPB and FTC issued a joint statement indicating staff at both agencies will be monitoring and investigating eviction practices to ensure that they comply with the law.
FTC asks Congress to restore redress authority
On April 27, acting FTC Chairwoman Rebecca Kelly Slaughter asked the House Energy and Commerce Subcommittee on Consumer Protection and Commerce to pass legislation to clarify Section 13(b) of the FTC Act and restore the Commission’s ability to return money to harmed consumers following the U.S. Supreme Court’s decision in FTC v. AMG Capital Management. As previously covered by InfoBytes, on April 22, the Court unanimously reduced the FTC’s powers by holding that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement.”
Section 13(b), Slaughter testified, has been “the agency’s primary and most effective way of returning money to consumers,” as it authorizes the Commission to sue directly in federal court for violations of the FTC Act. Until recently, “seven of the twelve courts of appeals, relying on longstanding Supreme Court precedent, interpreted the language in Section 13(b) to authorize district courts to award the full panoply of equitable remedies necessary to provide complete relief for consumers, including disgorgement and restitution of money,” Slaughter emphasized, noting, however, that a shift in recent court interpretations of Section 13(b) has “significantly limited the Commission’s primary and most effective tool for providing refunds to harmed consumers.” Slaughter also stressed that “if Congress does not act promptly, the FTC will be far less effective in its ability to protect consumers and execute its law enforcement mission.”
H.R. 2668, introduced by House Democrats, seeks to affirmatively confirm the FTC’s authority to seek permanent injunctions and other equitable relief for violations of any law under its enforcement authority. In her prepared statement, Slaughter told the Subcommittee that legislation such as H.R. 2668 is “urgently needed to address legal challenges to critical authority that enables the FTC to do its job of protecting consumers and competition.” She further noted that legislation is needed to ensure that the FTC is able to prevent harmful conduct from reoccurring. Slaughter pointed to two recent decisions issued by the U.S. Court of Appeals for the Third Circuit that reinterpreted Section 13(b) and “jeopardize[d] the FTC’s ability to enjoin illegal conduct in federal court.” The decisions “hamper the Commission’s longstanding ability to protect consumers by enjoining defendants from resuming their unlawful activities when the conduct has stopped but there is a reasonable likelihood that the defendants will resume their unlawful activities in the future,” she stated.
FTC settles with MCA providers for $9.8 million
On April 22, the FTC announced a settlement with two New York-based merchant cash advance providers and two company executives (collectively, “defendants”) for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, making unauthorized withdrawals from consumers’ accounts, and misrepresenting collateral and personal guarantee requirements. As previously covered by InfoBytes, the FTC filed a complaint against the defendants last year claiming, among other things, that the defendants (i) falsely advertised that MCAs do not require collateral or personal guarantees, but when consumers defaulted on their financing agreements, the defendants frequently filed lawsuits against them, including against individual business owners who provided personal guarantees, to collect the unpaid amount; (ii) misrepresented the amount of total financing in the contract that consumers would receive by withholding fees that are deducted from the promised funds; and (iii) made unfair, unauthorized withdrawals from customers’ bank accounts in excess of consumers’ authorization without express informed consent, while continuing to debit customers’ bank accounts after the MCAs were fully repaid.
Under the terms of the stipulated order, which was approved by the court on May 5, the defendants are required to pay more than $9.8 million to the FTC to go towards redress to affected customers. The defendants are also permanently prohibited from making misleading statements to consumers about the terms of their financing or making withdrawals from consumers’ bank accounts without first receiving their express informed consent, and are required to clearly and conspicuously disclose any financing fees as well as the actual amount consumers will receive after the fees are assessed. Further, the defendants must establish a process to monitor any marketers or funding companies that work on their behalf to ensure, among other things, that such companies abide by the terms of the settlement.
FTC testifies on combating Covid-19 scams
On April 27, FTC staff testified on behalf of the Commission before the Senate Commerce Committee’s Subcommittee on Consumer Protection, Product Safety, and Data Security, briefing lawmakers on the FTC’s efforts to protect consumers from scams and frauds connected to the Covid-19 pandemic. During the testimony, presented by acting Director of the Bureau of Consumer Protection Daniel Kaufman, the FTC highlighted that the agency filed more than a dozen law enforcement actions, led the elimination of deceptive claims made by more than 350 companies, and released more than 100 alerts to update consumers and businesses on identifying and avoiding these schemes. According to the testimony, the FTC responded rapidly to identify and stop schemes that have proliferated during the pandemic in response to the demand for scarce goods, to peddle potential treatments and cures, and to exploit consumers’ and businesses’ financial hardships during the crisis. Acting Director Daniel Kaufman noted that “the FTC issued its first warnings to consumers about COVID-19 related scams in February 2020, even before the declaration of a national emergency.” Additionally, the FTC has brought enforcement actions to protect consumers’ privacy and data from digital harms amplified by the ongoing pandemic, and has partnered with the CFPB to ensure “that renters are not subjected to unlawful practices in light of the eviction crisis caused by COVID-19.” The testimony also pointed out that the FTC has received more than 436,000 reports concerning fraud, identity theft, and other consumer problems since January 2020, reflecting $399 million in fraud losses.
Supreme Court: FTC may not seek restitution or disgorgement under 13(b)
On April 22, the U.S. Supreme Court unanimously reversed the U.S. Court of Appeals for the Ninth Circuit’s decision in AMG Capital Management v. FTC, holding that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement.” The opinion impacts petitioners who were ordered in 2018 to pay an approximately $1.3 billion judgment for allegedly operating a deceptive payday lending scheme and making false and misleading representations about loan costs and payments (covered by InfoBytes here). At the time, the 9th Circuit rejected the petitioner’s challenge to the judgment (based on, among other things, the argument that the FTC Act only allows the court to issue injunctions), concluding that a district court may grant any ancillary relief under the FTC Act, including restitution. As previously covered by InfoBytes, last year the Court granted review and consolidated two cases that had reached different conclusions regarding the availability of restitution under § 13(b): (i) the 9th Circuit’s decision in FTC v. AMG Capital Management; and (ii) the 7th Circuit’s ruling in FTC v. Credit Bureau Center (covered by InfoBytes here), which held that Section 13(b) does not give the FTC power to order restitution.
In examining “whether Congress, by enacting §13(b) and using the words ‘permanent injunction,’ granted the Commission authority to obtain monetary relief directly from courts and effectively bypass the requirements of the administrative process,” the Court unanimously held that § 13(b) “does not explicitly authorize the Commission to obtain court-ordered monetary relief,” and that “such relief is foreclosed by the structure and history of the Act.” As such, the Court determined that it is “highly unlikely” that Congress would grant the FTC authority to circumvent traditional § 5 administrative proceedings by collecting restitution or disgorgement as an equitable relief power. Moreover, the Court discussed § 19 of the FTC Act, which was enacted two years after § 13(b) and “authorizes district courts to grant ‘such relief as the court finds necessary to redress injury to consumers,’ including through the ‘refund of money or return of property.’” The Court noted that since § 19 has limited authority and is only available against those who have engaged in an unfair or deceptive act or practice through which the FTC has issued a final cease and desist order (i.e. through an administrative proceeding), the Court found it “highly unlikely that Congress would have enacted provisions expressly authorizing conditioned and limited monetary relief if the Act, via §13(b), had already implicitly allowed the Commission to obtain that same monetary relief and more without satisfying those conditions and limitations.” Further, the Court stated that it was unlikely that Congress would have granted the FTC authority to “so readily” circumvent traditional § 5 administrative proceedings.
The Court stated that nothing in its opinion, however, prohibits the FTC “from using its § 5 or § 19 authority to obtain restitution on behalf of consumers,” adding that if the Commission “believes that authority too cumbersome or otherwise inadequate, it is, of course, free to ask Congress to grant it further remedial authority”—a request that the FTC made before the Senate Committee on Commerce, Science, and Transportation on Oversight of the Federal Trade Commission in 2020 and again on April 20, 2021 (covered by InfoBytes here). The Court reversed the judgment against the petitioners and remanded the case for further proceedings in line with its opinion.
FTC acting Chairwoman Rebecca Kelly Slaughter issued a statement following the Court’s decision: “With this ruling, the Court has deprived the FTC of the strongest tool we had to help consumers when they need it most. We urge Congress to act swiftly to restore and strengthen the powers of the agency so we can make wronged consumers whole.”
FTC provides AI guidance
On April 19, the FTC’s Bureau of Consumer Protection wrote a blog post identifying lessons learned to manage the consumer protection risks of artificial intelligence (AI) technology and algorithms. According to the FTC, over the years the Commission has addressed the challenges presented by the use of AI and algorithms to make decisions about consumers, and has taken many enforcement actions against companies for allegedly violating laws such as the FTC Act, FCRA, and ECOA when using AI and machine learning technology. The FTC stated that it has used its expertise with these laws to: (i) report on big data analytics and machine learning; (ii) conduct a hearing on algorithms, AI, and predictive analytics; and (iii) issue business guidance on AI and algorithms. To assist companies navigating AI, the FTC has provided the following guidance:
- Start with the right foundation. From the beginning, companies should consider ways to enhance data sets, design models to account for data gaps, and confine where or how models are used. The FTC advised that if a “data set is missing information from particular populations, using that data to build an AI model may yield results that are unfair or inequitable to legally protected groups.”
- Watch out for discriminatory outcomes. It is vital for companies to test algorithms—both prior to use and periodically after that—to prevent discrimination based on race, gender, or other protected classes.
- Embrace transparency and independence. Companies should consider how to embrace transparency and independence, such as “by using transparency frameworks and independent standards, by conducting and publishing the results of independent audits, and by opening. . . data or source code to outside inspection.”
- Don’t exaggerate what your algorithm can do or whether it can deliver fair or unbiased results. Under the FTC Act, company “statements to business customers and consumers alike must be truthful, non-deceptive, and backed up by evidence.”
- Data transparency. In the FTC guidance on AI last year, as previously covered by InfoBytes, an advisory warned companies to be careful about how they get the data that powers their models.
- Do more good than harm. Companies are warned that if their models cause “more harm than good—that is, in Section 5 parlance, if it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers and not outweighed by countervailing benefits to consumers or to competition—the FTC can challenge the use of that model as unfair.”
- Importance of accountability. The FTC warns of the importance of being transparent and independent and cautions companies to hold themselves accountable or the FTC may do it for them.
FTC brings first action under Covid-19 Consumer Protection Act
On April 15, the FTC announced a civil complaint filed by the DOJ on its behalf, against a St. Louis-based company and its owner for violating the Covid-19 Consumer Protection Act and the FTC Act by making deceptive marketing health claims about their products. (See also DOJ press release here.) This is the first action the FTC has brought under the new law, which makes it unlawful under Section 5 of the FTC Act “for any person, partnership, or corporation to engage in a deceptive act or practice in or affecting commerce . . . that is associated with the treatment, cure, prevention, mitigation, or diagnosis of COVID–19” or “a government benefit related to COVID–19.” The FTC’s complaint alleges that the defendants deceptively marketed their products as being an effective treatment for Covid-19 based on the results of certain scientific studies, even though they “lacked any reasonable bases” for their claims. According to the FTC’s announcement, the defendants also allegedly advertised—without scientific support—that their products were equally, or more, effective than the currently available vaccines. The FTC seeks an injunction against the defendants, along with monetary penalties and other civil remedies to prevent harm caused by the defendants’ misrepresentations.