Search results for: Lina Khan

On May 12, the Senate Commerce Committee voted overwhelmingly to move forward with Lina Khan’s nomination to the Federal Trade Commission (FTC), which suggest that Khan is likely to be confirmed as an FTC commissioner by the full Senate. Khan has been a critic of big tech and advocate of competitive markets, as we previously discussed here.

Khan received unanimous support from the Commerce Committee’s Democratic members, and eight of the 12 Republican members also voted to proceed with her nomination. Showing Republican support, Sen. Roger Wicker stated, “I believe she is focused on addressing one of the most pressing issues of the day: reining in the big social media platforms. However, I do remain concerned that a broadly over-regulatory approach as an FTC commissioner could have a negative effect on the economy and undermine free market principles.”

The Commerce Committee’s broad support for Khan may signal that both parties support a stronger stance against big tech. At her April 21 confirmation hearing, Khan stated, “I’ve been quite public about my concerns about concentrated power in the context of digital markets. On the competition side, we’re continuing to see a whole range of potential risks.” Khan also expressed her concern that some big tech companies are using their success in one market to dominate others.

If Khan is confirmed, President Joe Biden will need to nominate another commissioner or chair to the FTC to fill out its five seats. He has nominated current FTC Commissioner Rohit Chopra to lead the Consumer Financial Protection Bureau (CFPB), as we discussed here, but has not named a permanent FTC chair after naming Rebecca Kelly Slaughter as acting chair.

Senate Democratic leaders may be holding up the confirmation vote for Chopra until Khan is confirmed, so that Khan may step into Chopra’s vacated FTC seat and avoid the possibility of Slaughter being the only Democratic FTC commissioner.

On March 22, President Joe Biden announced his intent to nominate Lina Khan to be a commissioner of the Federal Trade Commission (FTC). Khan is an outspoken critic of big tech and a former legal advisor to FTC Commissioner Rohit Chopra, Biden’s nominee to lead the Consumer Financial Protection Bureau (CFPB). Khan’s anticipated nomination again signals that the Biden administration intends to reinvigorate the federal consumer protection agencies.

Khan — who is 32 years old — has had a meteoric rise after publishing a law review article in 2017 that sharply criticized big tech companies. In that article, she argued that current antitrust doctrine “underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive,” and urged regulators to apply common carrier obligations and duties — which typically apply to railroads and utility companies — to restrain the power of big tech. “The rise of these companies is posing a whole new set of questions about how we do antitrust policy,” Khan has said.

Consumer protection watchdogs and critics of big tech have responded enthusiastically to Khan’s nomination. “Silicon Valley is no doubt terrified by this pick. That is a very good thing,” said Public Citizen. And big tech critic Senator Amy Klobuchar was also enthusiastic. “We need all hands on deck as we work to take on some of the biggest monopolies in the world,” said Sen. Klobuchar. “Lina’s experience working both in Congress and at the Federal Trade Commission and as an advocate for competitive markets will be vital as we advance efforts to strengthen enforcement and protect consumers.”

Khan is currently an associate professor of law at Columbia Law School. She previously served as counsel to the U.S. House Judiciary Committee’s Subcommittee on Antitrust, Commercial, and Administrative Law, where she helped lead the committee’s investigation of big tech companies. Prior to that, Khan was a legal advisor to FTC Commissioner Rohit Chopra.

In response to her nomination, Khan tweeted, “So very honored and humbled by this nomination, and excited to get to work if I’m fortunate enough to be confirmed!”

On August 7, the U.S. Department of Treasury hosted a virtual briefing to discuss the steps that the Biden-Harris administration is taking to address perceived unfair and deceptive practices in the consumer solar energy industry. Deputy Secretary of Treasury Wally Adeyemo, along with Federal Trade Commission (FTC) Chair Lina Khan and Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra, announced a new interagency consumer solar industry initiative directed at both sales and financing of residential systems. Each made statements about the unique effort to root out anti-competitive and sometimes-fraudulent activity by a handful of “bad actors” who are taking advantage of the burgeoning industry. The presenters also noted that they will be coordinating with state attorneys general (AG) and state financial regulators.

Continue Reading Regulators Promote “All-of-Government” Solar Energy Market Initiative

On October 11, the Consumer Financial Protection Bureau (CFPB or Bureau) published a special edition of its Supervisory Highlights report. This report serves as a “victory lap” for the Bureau, which highlights the relief it has obtained for consumers since the release of its March 2023 Special Fees Edition, discussed here. According to the Bureau, its supervisory efforts have led to institutions refunding over $140 million to consumers, including $120 million in overdraft and non-sufficient funds (NSF) fees.

Continue Reading October 11 Was a Red-Letter Day in the Growing Federal-State War on Fees

To help you keep abreast of relevant activities, below find a breakdown of some of the biggest events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Federal Activities

State Activities

Continue Reading Troutman Pepper Weekly Consumer Financial Services Newsletter

To help you keep abreast of relevant activities, below find a breakdown of some of the biggest events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Federal Activities

State Activities

Federal Activities:

  • On December 16, the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) filed an amicus brief in the Eleventh Circuit in support of a plaintiff-appellant who filed a Section 1681s-2(b) claim against a furnisher for failing to conduct a reasonable investigation under the Fair Credit Reporting Act. The case presents a question about the scope of a furnisher’s duty to investigate “legal” inaccuracies or disputes concerning the legal validity of a debt obligation as opposed to factual inaccuracies involving tradelines in a consumer report. For more information, click here.
  • On December 15, the FTC announced that because of a lawsuit it filed in May 2022 against the operators of the credit repair scheme “The Credit Game,” those operators now face a lifetime ban from the credit repair industry. In its original complaint against the scheme operators, the FTC alleged that the operators provided false information to credit reporting agencies; pitched customers a supposed business opportunity to create their own fake credit repair scheme; and encouraged users to pay for misleading services using COVID-19 tax relief funds. For more information, click here.
  • On December 15, the Office of the Comptroller of the Currency, along with the Federal Financial Institutions Examination Council, released revised procedures for how its examiners will investigate financial institutions for Fair Debt Collection Practices Act compliance, incorporating Regulation F changes into their review. For more information, click here.
  • On December 15, Senator Patrick Toomey introduced a Senate bill to amend the Consumer Financial Protection Act to place the CFPB’s budget and funding under the congressional appropriations process, while also changing the CFPB’s leadership structure to a five-member commission. For more information, click here.
  • On December 15, the Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking that will implement provisions of the Corporate Transparency Act that authorize a federal agency engaged in national security, intelligence, or law enforcement to receive disclosures of identifying information associated with reporting companies, their beneficial owners, and their company applicants. For more information, click here.
  • At a December 14 Open Commission Meeting, FTC Chair Lina Khan discussed the FTC’s recent consent orders and how these orders require companies to implement comprehensive security programs founded on three principles: (1) efficacy, which requires that orders address actual problems and may entail implementation of multifactor authentication and zero-trust architecture; (2) accountability, which requires that orders change business conduct; and (3) administrability, which may require companies to publish and abide by data retention schedules to provide the FTC a clear roadmap to litigation if a company fails to comply with an order. For more information, click here.
  • On December 13, the CFPB and the Federal Housing Finance Agency published updated loan-level data for public use through the National Survey of Mortgage Originations. Due to the COVID-19 pandemic, 2020 mortgage borrowers reported that “a paperless online” mortgage process was important. Furthermore, many mortgage borrowers responded to low interest rates offered during 2020, and 75% of borrowers in 2020 reported being “very satisfied” that they obtained the lowest possible interest rate for which they could qualify. For more information, click here.
  • On December 13, the CFPB distributed over $95 million in redress to over 87,000 consumers harmed by Consumer Advocacy Center, Inc., d/b/a Premier Student Loan Center, a student-loan debt-relief company. The redress payment stems from a 2019 lawsuit filed against Premier by the CFPB, the Minnesota attorney general’s office, the North Carolina Department of Justice, and the Los Angeles city attorney. In the lawsuit, the CFPB alleged Premier violated the Consumer Financial Protection Act and the Telemarketing Sales Rule by charging and collecting improper advance fees before consumers received any adjustment of their student loans or made any payments toward any modified loans. For more information, click here.
  • On December 13, the Securities and Exchange Commission (SEC) filed a civil enforcement action against FTX ex-CEO Sam Bankman-Fried. The SEC alleged that Bankman-Fried violated the Securities Act and the Exchange Act by making numerous fraudulent representations or nondisclosures, which led 90 U.S.-based investors to invest approximately $1.1 billion in the cryptocurrency exchange FTX that resulted in a $2 billion consumer loss. Specifically, the SEC alleged that Bankman-Fried:
    • Failed to disclose the diversion of FTX customer deposits to Alameda Research, a quantitative crypto trading firm that Bankman-Fried co-founded in 2017;
    • Failed to disclose that Alameda could use FTX customer deposits for its own trading purposes or whatever other purposes Bankman-Fried desired;
    • Failed to disclose that Alameda had a virtually unlimited line of credit at FTX;
    • Failed to disclose Alameda’s collateral on FTX, which largely consisted of FTX-affiliated FTT tokens that were highly illiquid;
    • Told consumers that their digital assets were secure and segregated from assets FTX held on its own balance sheet.

For more information, click here.

  • On December 13, the U.S. Department of Justice (DOJ) unsealed its indictment against Sam Bankman-Fried. The eight-count indictment revealed, among other things, that the DOJ charged Bankman-Fried with wire fraud, commodities fraud, securities fraud, money laundering, and campaign finance law violations for his various multimillion-dollar bipartisan contributions to political candidates and action groups in anticipation of the 2022 midterm elections. For more information, click here.
  • On December 13, the Commodity Futures Exchange Commission (CFTC) filed a complaint against Sam Bankman-Fried, FTX, and Alameda Research for violations of the Commodity Exchange Act and CFTC Regulation 180.1(a), which makes it unlawful for any person to intentionally or recklessly sell a commodity in commerce through fraud, deceit, or material misrepresentations. Many of the CFTC’s allegations against Sam Bankman-Fried and his organizations are rooted in the FTX’s misappropriation of $8 billion worth of customer deposits diverted to bank accounts owned and controlled by Alameda. Notably, in the complaint, the CFTC expressly asserted that “[c]ertain digital assets are ‘commodities,’ including bitcoin (BTC), ether (ETH), tether (USDT) and others, as defined under the [Commodity Exchange Act].” For more information, click here.
  • On December 13, the CFPB issued a technical rule, updating the Code of Federal Regulations to reflect the closed-end mortgage loan reporting threshold under the Home Mortgage Disclosure Act (HMDA) of 25 mortgage loans in each of the two preceding calendar years as established by the 2015 HMDA Rule. For more information, click here.
  • On December 13, the Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking to its regulations, governing the use of the official FDIC sign and insured depository institutions’ (IDIs) advertising statements, while also clarifying the FDIC’s regulations on misrepresentations of deposit insurance coverage. The proposed rule will amend the definition of “non-deposit product” and “uninsured financial product” to include “crypto-assets,” thereby requiring IDI’s to clearly, continuously, and conspicuously display disclosures indicating that crypto-assets are not insured by the FDIC. For more information, click here.
  • On December 12, the CFPB issued a proposed rule, requiring certain nonbank financial firms to register with the CFPB when those entities become subject to certain local, state, or federal consumer protection agency or court orders. Under the proposed rule, the CFPB intends to develop an online, public repository that will maintain the agency and court orders brought against nonbank financial firms to track and mitigate the consumer risks associated with repeat offenders of unfair, deceptive, or abusive acts or practices. For more information, click here.
  • On December 12, the U.S. Supreme Court granted a petition for certiorari to consider whether the Administrative Procedure Act authorizes President Joe Biden’s student debt relief plan. For more information, click here.
  • On December 9, FinCEN issued a notice, extending the filing date for the “Report of Foreign Bank and Financial Accounts” to April 15, 2023 for certain U.S. individuals who have only signature authority, but no financial interest, in one or more foreign financial accounts. For more information, click here.
  • On December 8, the SEC issued guidance on the investor disclosure obligations of entities directly or indirectly exposed to the material impacts of crypto-asset market developments, which may include (1) a company’s exposure to counterparties and other market participants; (2) risks related to a company’s liquidity and ability to obtain financing; and (3) risks related to legal proceedings, investigations, or regulatory impacts in the crypto-asset markets. For more information, click here.

State Activities:

  • On December 15, the New York Department of Financial Services (NYDFS) issued guidance, reminding all New York banking organizations, as well as all branches and agencies of foreign banking organizations that received NYDFS-issued licenses, that they are expected to seek approval from the NYDFS before engaging in new or significantly different virtual currency-related activity. New York-state chartered banks are exempted from New York’s BitLicense requirement, but these organizations must obtain approval from the NYDFS superintendent to engage in virtual currency business activity. For more information, click here.
  • On December 12, New York Attorney General Letitia James announced the resolution of a lawsuit against an energy service company for allegedly misleading consumers into overpaying millions for gas and electrical utility services. As part of the resolution, the energy service company will stop the allegedly problematic business practices and will provide restitution to impacted New York consumers. For more information, click here.
  • On December 12, California Attorney General Rob Bonta sent a letter, joining a bipartisan coalition of attorneys general in support of the Federal Communications Commission’s (FCC) proposal to require mobile wireless providers to block illegal text messages from phone numbers that are invalid, unallocated, unused, or found on a “do-not-originate” list. The corresponding press release stated: “During 2021, according to the FTC, consumers reported a total loss of $131 million due to fraud by text-message.” Further, Attorney General Bonta stated that the FCC’s proposal marks an “important first step toward addressing this growing threat and an extension of current call-blocking requirements.” For more information, click here.
  • On December 5, an Arizona Superior Court for Maricopa County issued an order to show cause to the state of Arizona and scheduled an expedited evidentiary hearing in a suit, challenging the newly passed Arizona Protection from Predatory Debt Collection Act, also known as Proposition 209. Proposition 209 has been touted as a way to protect Arizonans with medical debt from bankruptcy, has set new exemption limits on property subject to debt collection, and has decreased the portion of a judgment debtor’s income subject to garnishment. The plaintiffs, led by the Arizona Creditors Bar Association, Inc., contend Proposition 209 should be declared void due to the vagueness of the savings clause. The evidentiary hearing occurred on December 16, 2022. For more information, click here.

On October 20, the Federal Trade Commission (FTC) issued an Advanced Notice of Proposed Rulemaking, seeking public comment on the harms stemming from what it characterizes as “junk fees,” i.e., fees that are allegedly unnecessary, unavoidable, or unexpected, and that inflate costs while adding little value. The term also encompasses “hidden fees,” which are fees for goods or services that are deceptive or unfair, including because they are only disclosed at the latter stage in the consumer’s purchasing process or not at all. While the FTC has been active in bringing enforcement actions against alleged “junk fees,” it generally lacks the authority to seek penalties against first-time violators or the ability to obtain financial compensation for consumers in instances in which “junk fees” violate the FTC’s prohibition on unfair or deceptive practices. This new rule would change that.

According to the FTC, these so-called “junk fees” are prevalent in a variety of industries: “Junk fees manifest in markets ranging from auto financing to international calling cards and payday loans.” Examples of fees that the FTC is questioning include “mobile cramming” charges, connection and maintenance fees on prepaid phone cards, account fees, fees that diminish the amount a borrower receives from a loan, miscellaneous fees levied on fuel cards, auto dealer fees, undisclosed fees for funeral services, hotel “resort” fees, hidden fees for academic publishing, poorly disclosed ancillary insurance products, and membership programs.

According to the FTC, fees it is considering regulating fall into the following categories:

  • Unnecessary charges for worthless, free, or fake products or services.
    • Consumers may be subject to charges for products or services that cost companies nothing to provide, are available for free, or should be included as part of the purchase price.
  • Unavoidable charges imposed on captive consumers.
    • Consumers may be forced to pay unwanted fees because they have no way to avoid or opt out of them, either because they are dealing with a company with a monopoly, or they have already sunk money into the product or service and can’t easily walk away.
  • Surprise charges that secretly push up the purchase price.
    • According to the FTC, this happens when companies unexpectedly tack on undisclosed charges, hide fees in the fine print, add fees onto the end of a purchase process, or use digital dark patterns or other deception to collect on them.

The FTC is seeking comment on, among other things, the prevalence of each of the above practices and the costs and benefits of a rule that would require upfront inclusion of any mandatory fees whenever consumers are quoted a price for a good or service. Once the notice has been published in the Federal Register, consumers can submit comments electronically.

This proposed rulemaking is not the only new rule the FTC is considering attacking fees. As we discussed here, in June 2022, the FTC released a proposed Motor Vehicle Dealers Trade Regulation Rule. The proposed rule would create a host of new compliance challenges for motor vehicle dealers, including a new national standard for price advertising, trigger disclosures for payments, added paperwork for the sale of add-on products, a prohibition on “no benefit” add-on products, and additional recordkeeping requirements. The deadline for comments expired on September 12.

The FTC and other regulators have also been challenging fees through enforcement actions, and this notice comes hard on the heels of announcement by the FTC of charges against an automotive dealer that it discriminated against certain groups of car purchasers in how it imposed additional charges in motor vehicle sales. We discuss this settlement here.

FTC Chair Lina Khan explained the reasoning for the proposed new rule in her statement: “These types of extra or redundant fees can mislead consumers, or prevent them from knowing the true cost of a purchase until they’ve already invested substantial time and energy.” Chair Khan also claimed that “junk fees” have negative ramifications for other business owners as well. “These fees don’t only harm consumers — they can also force honest businesses to compete on an unfair playing field. A company selling a widget for 25 dollars might lose sales to a company selling a comparable widget for 20 dollars, plus a six-dollar widget-certification fee tacked on at the end.”

Troutman Pepper will continue to monitor important developments involving the FTC and the proposed rules, and we will provide further updates as they become available.

To help you keep abreast of relevant activities, below find a breakdown of some of the biggest events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Federal Activities

State Activities

Federal Activities:

  • On October 14, U.S. Representative and Chairman of the Select Subcommittee on the Coronavirus Crisis James Clyburn sent a letter to Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra to request that the agency review the nation’s three largest nationwide consumer reporting agencies (NCRAs) for possible violations of the Fair Credit Reporting Act (FCRA), including potentially failing to investigate legitimate consumer disputes. This letter follows Chairman Clyburn’s May 2022 letters to the NCRAs, requesting information on the companies’ efforts to respond to and resolve credit reporting inaccuracies raised by consumers during the pandemic. For more information, click here.
  • On October 13, the CFPB published a report on terms and fees associated with banking products marketed in partnership with colleges to students. The report raises questions about whether some marketing deals between colleges and financial institutions comply with Department of Education rules. In conjunction with the release of this report, the Department of Education issued guidance to schools on requirements for college-sponsored banking arrangements, while committing to additional oversight on this issue. For more information, click here.
  • On October 13, the CFPB, the Federal Reserve Board, and the Office of the Comptroller of the Currency (OCC) announced that the 2023 threshold for exempting loans from special appraisal requirements for higher-priced mortgage loans will increase from $28,500 to $31,000. For more information, click here.
  • On October 13, the Federal Reserve and the CFPB announced the dollar thresholds used to determine whether certain consumer credit and lease transactions in 2023 are exempt from Regulation Z (truth in lending) and Regulation M (consumer leasing). For more information, click here.
  • On October 12, Federal Trade Commission Chair Lina Khan and the Department of Justice – Antitrust Division Assistant Attorney General Jonathan Kanter participated in the G7 Joint Competition Policy Makers & Enforcers Summit as part of the “2022 G7 Digital and Technology Track.” Hosted by the German Bundeskartellamt and Ministry for Economic Affairs and Climate Action, the summit explored how G7 governments approach competition policy and enforcement in digital markets. The participating delegates included G7 competition authorities and economic ministries from Canada, France, Germany, Italy, Japan, the U.K., and the U.S., plus the European Commission. For more information, click here.
  • On October 12, Federal Reserve Vice Chair for Supervision Michael Barr delivered remarks at DC Fintech Week in a speech titled, “Managing the Promise and Risk of Financial Innovation,” which focused on financial innovation supported by new technologies or fintech. For more information, click here.
  • On October 12, Coin Center, a nonprofit digital assets advocacy group, filed a lawsuit against the U.S. Department of Treasury (Treasury) in the U.S. District Court for the Northern District of Florida, arguing the sanctions the Treasury imposed on Tornado Cash exceeded its regulatory authority because Tornado Cash, as open-source software available to the public, does not constitute a “person” as defined by the International Emergency Economic Powers Act (50 U.S.C. 1701, et seq.). For more information, click here.
  • On October 11, the CFPB issued its 27th edition of Supervisory Highlights, which included findings on examinations of student loan servicers. For more information, click here.
  • On October 11, U.S. Representative Patrick McHenry led Republican members of the Task Force on Financial Technology in sending a letter to Acting Comptroller of the Currency Michael Hsu. Task force Republicans urged Acting Comptroller Hsu to clarify the OCC’s position on partnerships between banks and financial technology firms, as well as provide clarity to the marketplace. For more information, click here.
  • On October 11, JPMorgan and Visa announced their collaboration to facilitate cross-border payments. JPMorgan’s proprietary blockchain platform Onyx, primarily used for wholesale payment transactions, has an integrated Interbank Information Network, which JPMorgan rebranded as Liink. Liink enables user institutions to transfer payment-related account information efficiently and securely without the use of correspondent banking. Confirm, one of Liink’s product stacks, enables user institutions to validate account information prior to payment initiation, which ensures payments will reach the desired end client. Visa, through its multilateral payment network B2B Connect, will integrate Confirm into its processes to validate Visa-facilitated cross-border payments. For more information about JPMorgan’s Liink, click here. For more information about Visa’s B2B Connect, click here.
  • On October 11, the Treasury’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) announced settlements for over $24 million and $29 million, respectively, with Bittrex, Inc. (Bittrex), a virtual currency exchange based in Bellevue, WA. This is OFAC’s largest virtual currency enforcement action to date. It also represents the first parallel enforcement actions by FinCEN and OFAC in this space. Investigations by OFAC and FinCEN found apparent violations of multiple sanctions programs and willful violations of the Bank Secrecy Act’s anti-money laundering and suspicious activity report reporting requirements. For more information, click here.
  • On October 11, the Financial Stability Board (FSB) published a proposed framework for the international regulation of crypto-asset activities. Within the proposed framework, the FSB directed a set of questions to the public and will solicit comments on the proposed recommendations up and until December 15. For more information, click here.
  • On October 11, Acting Comptroller of the Currency Michael Hsu delivered remarks at DC Fintech Week, where he discussed the importance of identifying and monitoring cryptocurrency risks to protect consumers and the financial system. For more information, click here.
  • On October 10, the FSB issued “G20 Roadmap for Enhancing Cross-Border Payments,” which focused on five areas: (1) committing to a joint public and private sector vision to enhance cross-border payments; (2) coordinating on regulatory, supervisory, and oversight frameworks; (3) improving existing payment infrastructures and arrangements to support the requirements of cross-border payments market; (4) increasing data quality and straight-through processing by enhancing data and market practices; and (5) exploring the potential role of new payments infrastructures and arrangements. For more information, click here.
  • On October 6, the CFPB issued a blog post on mortgage borrowers’ ability to challenge inaccurate appraisals through the reconsideration of value process. For more information, click here.
  • On October 6, the Federal Reserve announced that it will replace its current bank application filing system with a new and upgraded system later this month. Applications’ substantive requirements will remain the same in the new system, making the filing process more intuitive and minimizing paper applications and communications. For more information, click here.
  • On October 3, FSB Chair Klaas Knot sent a letter to the G20 finance ministers and Central Bank governors, concerning global financial stability occurring after the release of two FSB reports. The letter expressed concerns that the risks crypto assets pose to financial stability are “likely to come back to the fore sooner rather than later.” For more information, click here.

State Activities:

  • On October 12, New York Attorney General Letitia James secured nearly $2 million from an e-commerce retailer for its failure to properly remediate a data breach that compromised consumers’ personal information worldwide. Based on information discovered during its investigation, the AG’s office determined that the company failed to implement appropriate safeguards to protect consumer data prior to the breach, failed to take action to protect consumer data after the breach, and failed to accurately communicate the extent of the cyberattack to consumers. In addition to paying the penalties, the company must also enhance its cybersecurity measures to protect consumer data going forward. For more information, click here.
  • On October 12, Maryland Attorney General Brian Frosh issued a warning to consumer vehicle buyers to be on high alert for vehicles potentially damaged by large-scale floods. Frosh warns consumers that in the wake of hurricanes like Ian, flood-damaged vehicles commonly make their way to salvage auctions. However, as Frosh warns, these vehicles are not always properly branded as “salvage” or “total loss” vehicles when they hit the market for consumption. Accordingly, Frosh gives consumers several tips to identify flood-damaged vehicles before making a purchase. For more information, click here.

On July 29, the Federal Trade Commission (FTC) filed a complaint and executed a stipulated order with payment processor First American Payment Systems LP (First American) and companies that market its services — Eliot Management Group LLC (Eliot) and Think Point Financial LLC (Think Point) (collectively, the defendants). The FTC alleged that the defendants violated Section 5 of the Federal Trade Commission Act (FTC Act), 15 U.S.C. § 45, and Section 4 of the Restore Online Shoppers’ Confidence Act (ROSCA), 15 U.S.C. § 8403, arising out of the marketing of First American’s payment processing services to merchants and the alleged failure to provide clear and conspicuous contractual terms in the online application and agreement between First American and the merchants.

Section 5 of the FTC Act prohibits unfair and deceptive acts and practices by businesses against consumers. ROSCA is also a consumer protection statute that, among other things, prohibits businesses from charging consumers for goods or services sold in transactions effected on the internet through a negative option feature unless the business: (1) clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer’s billing information; (2) obtains the consumer’s express informed consent before making the charge; and (3) provides simple mechanisms that allow consumers to stop recurring charges.

The defendants agreed to pay $4.9 million to the FTC, which will be used for redress. This is an unprecedented case because the FTC is using consumer protection statutes to sue a processor for alleged acts against the merchants with whom the processors do business.

First American provides payment processing services to small businesses, and its sales agents are Eliot and Think Point. Although First American provides its payment processing services to small businesses, the complaint refers to the small businesses as “consumers” even though they are not consumers (some of the merchants, however, are sole proprietors). While it is not unprecedented for the FTC to sue a business for alleged violations of the FTC Act made against other businesses, this lawsuit represents the first time that the FTC has sued a payment processor for alleged violations of the FTC Act arising out of alleged false statements concerning payment processing services that are marketed and provided to other businesses. The alleged false statements, made through Eliot and Think Point, include the following:

  • Although the written agreement between First American and the merchants stated that the merchants would have to pay an early termination fee, the defendants allegedly told the merchants (before the parties signed the contract) that the merchants would be able cancel the payment processing services at any time without an early termination fee. The merchants claimed that they were not aware of the early termination fee until they attempted to cancel the processor’s services.
  • Although the written agreement between First American and the merchants listed the fee schedule, the defendants allegedly told the merchants (before the parties signed the contract) that the processing fees would not exceed a certain dollar amount.
  • The defendants also allegedly told the merchants that the merchants would save significant amounts of money on processing fees compared to their prior processing relationships. According to the complaint, that promise never materialized.

The complaint also alleges that the defendants violated the FTC Act by continuing to debit the merchants’ accounts notwithstanding that the merchants expressly told First American to stop debiting their accounts. The defendants sometimes disguised the fact that they were attempting the debits by changing the company names associated with the debits. These debits occurred after the merchants terminated First American’s processing services, and First American attempted to collect the early termination fee and other fees through the debits.

As stated above, ROSCA only applies to business-to-consumer transactions. Although automatic renewal clauses stating that the agreement will automatically renew unless terminated a certain number of days before the end of the current term are common in the payment processing industry, the FTC alleged that the automatic renewal (also known as a negative option) in First American’s agreements violated ROSCA. The FTC alleged that First American violated ROSCA by failing to disclose all material terms of the transaction clearly and conspicuously, failing to obtain the merchants’ express informed consent before charging them (after termination), and failing to provide simple mechanisms for the merchants to cancel the contract. The ROSCA violations also included: (1) allegations that the processor’s sales agents did not discuss the automatic renewal with the merchants before the parties executed the agreements; and (2) allegations that the merchants could not review all of the terms and conditions of the agreement without clicking on several hyperlinks embedded throughout the online merchant agreement.

Our Take

Because the FTC sued a small business arising out of alleged acts in its business dealings with other small businesses, every payment processor that provides processing services to small businesses should be concerned about this case. In civil litigation, most breach of contract and fraudulent inducement cases with similar alleged facts would not survive a motion to dismiss where, as here, the written agreement that the parties signed is allegedly inconsistent with the oral representations made by the defendant. An integrated written agreement will most likely trump the contract and tort claims in civil litigation. While the FTC’s complaint alleged that some of the merchants spoke English as a second language, nothing prevented the merchants from seeking redress through state laws that require an agreement to be in the same language in which it was negotiated. The FTC, however, stepped in and sent a signal that it will label small businesses as “consumers” in order to allow the FTC to state a claim against payment processors irrespective of the state law remedies available to the businesses on an individual basis.

Another interesting point in this case is that the FTC alleged that the processor violated the FTC Act by debiting the merchants’ accounts without consent. Engaging in such an act will likely violate Regulation E, which implements the Electronic Fund Transfer Act (EFTA). EFTA, like the FTC Act and ROSCA, only applies to consumers and it appears that the FTC did not allege an EFTA violation because the Consumer Financial Protection Bureau (CFPB) enforces the EFTA. In any event, this case may be a sign of things to come for payment processors under FTC Chair Lina Khan.

To help you keep abreast of relevant activities, below find a breakdown of some of the biggest events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Federal Activities

State Activities

Privacy and Cybersecurity Activities Continue Reading Troutman Pepper Weekly Consumer Financial Services Newsletter