State Attorneys General

A Connecticut-based automobile finance company settled a claim by the Massachusetts Attorney General’s Office that the finance company facilitated the sale of defective vehicles by a group of Massachusetts car dealerships.  As part of the settlement, Sensible Auto Lending LLC has agreed to provide debt relief in the amount of $733,925. 

According to the Massachusetts AG, Sensible Auto Lending facilitated the sale of defective or inoperable vehicles when it supplied dealerships with financing, despite knowing that consumers had complained about the dealerships and, further, knowing of high default and repossession rates of financings of vehicles sold by the dealerships.  The AG’s Office further found that Sensible Auto Lending failed to detail the cost of specific insurance policies that consumers were required to purchase, in violation of the Massachusetts Cost of Consumer Credit Disclosure Act.  The insurance policies, termed vendor single interest (“VSI”) policies, are designed to protect lenders when a vehicle is damaged or deemed a total loss, but the AG determined that Sensible Auto Lending used its VSI claims to recover credit losses.  As a result, consumers’ annual percentage rates on their loans exceeded the Massachusetts statutory cap of 21 percent. 

The terms of the settlement require Sensible Auto Lending to provide refunds to some of its customers, including those who purchased from certain dealerships, those who complained of mechanical defects with vehicles, and those who lost their vehicles to repossession.  In addition, the finance company must also waive all monies owed by the hundreds of consumers who purchased vehicles from other specified dealers.  Finally, the settlement agreement compels the lender to track consumer complaints, repossession rates, and delinquency rates of the dealerships with which it partners.  

“This settlement will give consumers victimized by these dealerships a clean slate by refunding them for faulty cars and repairing their credit,” said Massachusetts Attorney General Maura Healy in a statement.  “Sensible Auto has also changed its business practices so that consumers are protected from fraud in the future.”

On January 3, 49 state attorneys general announced a settlement with Career Education Corporation (“CEC”), a for-profit education company, to resolve claims that CEC engaged in unfair and deceptive practices.  The settlement requires CEC to forgo any collection efforts against $493.7 million in outstanding loan debt held by nearly 180,000 former students.  It also imposes a $5 million fine on the company.  California was the only state not participating.

CEC operates online courses through American InterContinental University and Colorado Technical University.  CEC’s other brands include Briarcliffe College, Brooks Institute, Brown College, Harrington College of Design, International Academy of Design & Technology, Le Cordon Bleu, Missouri College, and Sanford-Brown.  According to the attorneys general, CEC used “emotionally-charged language” emphasizing the pain in prospective students’ lives to encourage them to enroll in CEC’s schools, deceived students regarding the total costs of enrollment, misled students about the transferability of their earned credits, misrepresented job prospects for graduates, and deceived prospective students about post-graduation employment rates.  The attorneys general contended that students who enrolled in CEC classes incurred substantial debts that they could not repay or discharge, when they otherwise would not have done so absent the misrepresentations.  CEC denied the allegations, but entered into the settlement agreement to resolve the AGs’ claims.

The settlement agreement requires CEC to make improved disclosures to students, including anticipated total direct costs, median debt for completion of CEC’s programs, program default rates, program completion rates, transferability of credits, median earnings for graduates, and job placement rates.  CEC must also improve students’ ability to cancel their enrollment, allowing students no fewer than seven days to cancel and receive a full refund, and up to 21 days for students with fewer than 24 credits from online programs.  In addition, the AGs are requiring CEC to inform all qualifying former students that they no longer owe money to CEC.

The investigation was led by the Maryland Attorney General’s Office.  “CEC’s unscrupulous recruitment and enrollment practices caused considerable harm to Maryland students,” said Maryland Attorney General Brian Frosh.  “The company misled students.  It claimed that students would get better jobs and earn more money, but its substandard programs failed to deliver on those promises.  The school encouraged these students to obtain millions of dollars in loans, placing them at great financial risk.  Now CEC will have to change its practices and forgo collection on those loans.”

A copy of the settlement agreement is available here

A Florida federal judge entered a judgment for over $23 million last week against Robert Guice, the alleged operator of a telemarketing scam offering debt relief services to consumers.

The lawsuit, brought by the Federal Trade Commission and the Florida Attorney General, alleged that Guice created Loyal Financial & Credit Services, LLC (“Loyal”), Life Management Services of Orange County, LLC (“LMS”), and multiple shell companies to contact financially distressed consumers by phone and offer various services aimed at reducing credit card debt.  The services included transferring debt to no-interest credit cards and urging consumers to default to allow negotiations with credit card companies.

The government began investigating Guice and the companies in 2016 for multiple violations of Section 5 of the FTC Act (15 U.S.C. § 53(b)), the Florida Deceptive and Unfair Trade Practices Act, or “FDUTPA” (Fla. Sta. §501.201 et. seq.), and the Telemarketing Sales Rule, or “TSR” (16 C.F.R. § 310.1 et. seq.).  The Court initially granted the government’s request for a temporary restraining order, causing all business activities to cease in June 2016.

The government alleged that Loyal, LMS, and the shell companies operated as a common enterprise that was controlled by Guice. Under Guice’s leadership, the enterprise engaged in deceptive business practices, made material misrepresentations and omissions when selling services, and violated numerous provisions of the TSR, including calling consumers on the Do Not Call Registry.

On December 7, the Court entered summary judgment against Guice, the only remaining defendant in the lawsuit. The Court found that Guice, LMS, and Loyal tricked customers into purchasing services by misrepresenting the amount of money they would save, fabricating their affiliations with credit card companies, and failing to disclose the possible impact of their actions on customers’ credit scores, among other deceptive actions.  In determining the monetary damages, the Court relied on the government’s expert accountant who calculated the customers’ net losses to be over $23 million.

Consumer financial services companies are hopeful that the Supreme Court’s pending decision in Timbs v. Indiana will provide a Constitutional basis for challenging fines and penalties levied by state attorneys general and regulators.  The Supreme Court heard oral argument on November 28 on the issue of whether the Excessive Fines Clause has been (or should be) made applicable to the states through the Fourteenth Amendment.

Petitioner Tyson Timbs pled guilty to dealing a controlled substance and received a six-year sentence of mixed home detention and probation.  In addition, Timbs agreed to pay fines and court costs.  At the time of his conviction, the State of Indiana allowed a maximum fine of $10,000 for the underlying offense.  However, several months after Timbs’ sentencing, the State filed a case seeking civil forfeiture of a vehicle worth approximately $40,000 that Timbs drove at the time of his arrest.  After an evidentiary hearing on the State’s request, the Indiana trial court determined the forfeiture was grossly disproportionate to the underlying crime and therefore unconstitutional under the Eighth Amendment’s Excessive Fines Clause.  On appeal, the Indiana Supreme Court unanimously reversed on the basis that the U.S. Supreme Court has not held that the Excessive Fines Clause applies to the states.

The questions posed by the justices at oral argument suggest a consensus among the bench that the Excessive Fines Clause of the Eighth Amendment is applicable to the states under the Fourteenth Amendment.  However, the questions during oral argument suggest some disagreement on the scope of the rights protected by the Excessive Fines Clause.

Many state attorneys general and state regulators have heightened their supervisory and enforcement activity over consumer financial services companies in the wake of a perceived slackening of enforcement at the federal level, particularly from the Bureau of Consumer Financial Protection.  The industry is hopeful that a Timbs v. Indiana decision applying the Eighth Amendment Excessive Fines Clause against the states could provide significant protection from fines and penalties sought by states.

Last month, Troutman Sanders reported on the proposed TRACED Act which would instruct the Federal Communications Commission to engage in rulemaking to protect consumers from receiving unwanted calls and text messages from unauthenticated phone numbers.  FCC Chairman Ajit Pai tweeted his approval for the bill, but the FCC is not waiting on Congress to fight robocalls.  On November 21, it released its final report and order on creating a reassigned numbers database.

According to the FCC’s press release, the final draft of the report and order would create a comprehensive database to enable callers to verify whether a telephone number has been permanently disconnected, and is therefore eligible for reassignment, before calling that number, thereby helping to protect consumers with reassigned numbers from receiving unwanted robocalls.

More specifically, this proposal changes the existing federal regulatory scheme by:

  • Establishing a single, comprehensive reassigned numbers database that will enable callers to verify whether a telephone number has been permanently disconnected, and is therefore eligible for reassignment, before calling that number;
  • Establishing a minimum aging period of 45 days before permanently disconnected telephone numbers can be reassigned;
  • Requiring that voice providers that receive North American Numbering Plan numbers and the Toll Free Numbering Administrator report on a monthly basis information regarding permanently disconnected numbers; and
  • Selecting an independent third-party administrator, using a competitive bidding process, to manage the reassigned numbers database.

Pai announced the items tentatively included on the agenda for the December Open Commission Meeting scheduled for Wednesday, December 12. Considering that robocalls are the number one basis of complaints filed with the FCC and the speed in which the issue has been addressed, it will come as no surprise if the proposal is passed at the meeting.

Troutman Sanders will continue to monitor this and related FCC’s rulemaking decisions.

The Minnesota Department of Commerce recently entered into a consent order with collection agency Range Credit Bureau, Inc. regarding its compliance practices.

The Commissioner found numerous regulatory and compliance infractions, including the company’s ongoing failure to file an Unclaimed Property report with the state for funds owed to a customer whom the company could not locate; failure to implement an appropriate compliance management system; failure to establish background check procedures for the company’s individual collectors; and the company’s unlicensed collection activity in Minnesota and other states.

The order emphasizes the importance of strong internal compliance policies and systems.  Significantly, the Department of Commerce found violations not only for Range Credit’s collection activities, but also for its practices with respect to non-collections laws, such as background checks and state escheat obligations.

In addition to a monetary penalty of $50,000 (with $10,000 stayed, reducing the actual penalty to $40,000), the Consent Order requires Range Credit to take specific, compliance-oriented actions, including:

  • Developing and implementing a Compliance Management System (“CMS”), which includes a written Compliance Program.  The Compliance Program is required to address obligations for debt collection activities under state and federal law and include policies to prevent violations of consumer protection laws, a training program, a CMS monitoring system, and a complaint monitoring system.
  • Developing and implementing a background check policy; and
  • Completing an internal audit of all unclaimed funds and reporting the funds to the state.

This consent order highlights that regulators are considering not only whether a company or a collector holds a proper license, but also head-to-toe compliance practices.

In March 2018, the Predatory Lending Unit of the Virginia Attorney General Office’s Complaint against online lender Future Income Payments (“FIP”) began with the words of Sir Walter Scott: “what a tangled web we weave when we first practice to deceive.”[1] The lawsuit charged FIP with disguising unlawful loans – in excess of 183% per annum – through using “sales terminology” in an attempt to evade Virginia’s consumer lending laws.[2] On November 15, this web was untangled and resulted in a $50 million judgment against FIP including:

  • $20,098,160 in debt forgiveness for borrowers;
  • $31,740,000 as a civil penalty;
  • $414,474 in restitution;
  • $198,000 for costs and attorneys’ fees;
  • Injunctive relief preventing FIP from further violating the Virginia Consumer Protection Act; and
  • Declaratory relief that FIP’s agreements with Virginia consumers are usurious and illegal.

This swift action embodies Attorney General Mark Herring’s recent effort to vigorously enforce Virginia’s lending laws. In 2015, Herring established the Predatory Lending Unit, proclaiming the unit it to be the “first-of-its-kind,”[3] predicated upon investigating and prosecuting “suspected violations of state and federal consumer lending statutes, including laws concerning payday loans, title loans, consumer finance loans, mortgage loans, mortgage servicing, and foreclosure rescue services.”[4]

Since its creation, the Predatory Lending Unit has filed lawsuits and settled claims against at least five other online lenders alleged to be offering loans in excess of Virginia’s 12% interest ceiling.[5][6] These lawsuits have resulted in the recovery of more than $22 million in consumer relief.[7] Additionally, Herring’s Predatory Lending Unit intervened on behalf of a Virginia class action against CashCall, an online tribal lender.[8] Six days after Herring intervened, the matter was settled, resulting in 17,046 Virginians receiving $9,435,000 in consumer restitution and the forgiveness of more than $5,900,000 in outstanding debt.[9]

The Complaint against FIP indicates that the Predatory Lending Unit is keeping a keen eye on private litigation and other state regulatory efforts against online lenders with a nationwide footprint. Specifically, the Complaint detailed class actions filed in California, Florida, Alabama, and Massachusetts, along with regulatory settlements by the Massachusetts Attorney General and the New York Department of Financial Services — all against FIP. Even more, the Complaint quoted language from a Consumer Financial Protection Bureau action against FIP, emphasizing the underlying policy against usurious loans. See Complaint at p.4 (quoting CFPB v. Future Income Payments, LLC, No. SACV 17-00303-JLS (C.D. Cal. May 17, 2017), ECF No. 47) (“In the past few years, the income stream market has come under sharp scrutiny for allegedly marketing loans at undisclosed, exorbitant interest rates to vulnerable populations, including veterans and the elderly.”).

In light of the Predatory Lending Unit’s broad license to prosecute violations of Virginia’s lending laws, coupled with their cognizant awareness of independent private and regulatory actions, more regulatory enforcement and litigation in matters involving consumer lending should be expected from the Virginia Attorney General. Lenders must tread carefully and ensure their business practices comply with Virginia law.

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[1] See Commonwealth of West Virginia ex rel. Mark R. Herring v. Future Income Payments, LLC et al., available at http://r20.rs6.net/tn.jsp?f=001h2d4bPkbah4HgXCcxXDtMJYWjxXctk4CtUfZGQdGCaiFwoqAwlAlUETPN3IvUqmOdQBPCIv0lC8E_ayi66UrCCU3siIYYDgay-AxHwfJRjHYvCrCIhJk4lMmV8i5zsQNGe2mA5ky9S2eHXk_RMcuzSjsGin2WLBW3-cLBPikNNlrB7_sWqwOkY-MuUD5LxZxd19KxvGZ_71mVzR4W2PwlHwlS78epi2QwGwo4n_O7FZ1AFZqEbisCBr-D8d7PrFZ&c=83vVL8sS77P30tRQzSARu_8m0QTTinaoXhBzlS3Y8fKD9eAdgK94dg==&ch=tH6T1LlXUBJMybzARXROgv2DTWwh9X2sMYk57tpDwzrdUnxD6soBeQ.

[2] Id.

[3] Virginia Attorney General Press Release, “Attorney General Herring Launching Effort to Combat Predatory Lending, (March 26, 2015), available at https://www.oag.state.va.us/media-center/news-releases/480-march-26-2015-Herring-launching-effort-to-combat-predatory-lending.

[4] Virginia Attorney General Press Release, ” Herring Warns Virginians About Dangers of Predatory Loans,” (March 7, 2017), available at https://www.oag.state.va.us/media-center/news-releases/901-march-7-2017-Herring-warns-virginians-about-dangers-of-predatory-loans-w-video.

[5] See Virginia Code § 6.2-303.

[6] Virginia Attorney General Press Release, “Attorney General Herring Reaches Settlement with Internet Lender,” (October 25, 2017), available at https://www.oag.state.va.us/media-center/news-releases/1072-october-25-2017-ag-Herring-reaches-settlement-with-internet-lender; Virginia Attorney General Press Release, “Attorney General Herring Sues Allied Title Lending, LLC for Making Open-End Credit Loans to Violate Consumer Statutes,” (September 13, 2017), available at https://www.oag.state.va.us/media-center/news-releases/1032-september-13-2017-attorney-General-Herring-sues-allied-title-lending-llc-for-making-open-end-credit-loans-alleged-to-violate-consumer-statutes.; Virginia Attorney General Press Release, “Attorney General Herring Reaches Settlement with Open-End Credit Plan Internet Lender Worth More Than $3 Million,” (November 30, 2017), available at https://www.oag.state.va.us/media-center/news-releases/1092-november-30-2017-ag-Herring-reaches-settlement-with-open-end-credit-plan-internet-lender-worth-more-than-3-million.; Virginia Attorney General Press Release, “Virginia Consumers to Receive $2.7 Million in Relief from Settlement with Internet Lender,” (February 7, 2018), available at https://www.oag.state.va.us/media-center/news-releases/1122-february-7-2018-virginia-consumers-to-receive-2-7-million-in-relief-from-settlement-with-internet-lender.

[7] https://www.oag.state.va.us/media-center/news-releases/1185-may-4-2018-herring-alleges-illegal-predatory-loans-in-suit-against-one-of-virginia-s-largest-online-lenders

[8] See Attorney General of Virginia Intervenor-Complaint here: https://www.oag.state.va.us/consumer-protection/files/Lawsuits/CashCall-Complaint-and-Exhibits.pdf.

[9] Virginia Attorney General Press Release, “CashCall to Refund Millions to Virginia Consumers Over Illegal Online Lending Scheme,” (January 31, 2017), available at https://www.oag.state.va.us/media-center/news-releases/877-january-31-2017-cashcall-to-refund-millions-to-va-consumers-over-illegal-online-lending-scheme.

In an ominous sign, Americans’ total debt hit another record high, rising to $13.5 trillion in the last quarter, as student loan delinquencies jumped, according to Reuters. Specifically, flows of student debt into serious delinquency of 90 or more days rose to 9.1 percent in the third quarter from 8.6 percent in the previous quarter, reported the Federal Reserve Bank of New York, propelling the biggest jump in the overall U.S. delinquency rate in seven years.  

Total household debt, driven by $9.1 trillion in mortgages, now stands $837 billion higher than its previous peak in 2008, just as the Great Recession took hold and induced massive deleveraging across the United States. In fact, indebtedness has risen steadily for more than four years and sits more than 21% above its 2013 low point, and the $219 billion rise in total debt in the quarter that ended on September 30 amounts to the biggest jump since 2016. 

“The new charts in our report help to better understand how the debt and repayment landscape have shifted in the years following the Great Recession,” Donghoon Lee, research officer at the New York Fed, announced in a press release published on November 16. “Older borrowers now hold a larger share of total outstanding debt balances, while the shares held by younger borrowers have contracted and shifted toward auto loans and student loans.”

On November 16, Sen. John Thune (R-S.D.), the current chairman of the Senate Commerce Committee, and Ed Markey (D-Mass.), a member of the committee and the author of the Telephone Consumer Protection Act, unveiled the Telephone Robocall Abuse Criminal Enforcement and Deterrence Act (“TRACED Act”). Among other things, this bill would require carriers to eventually implement “an appropriate and effective call authentication framework” and instructs the Federal Communications Commission to engage in rulemaking to protect consumers from receiving unwanted calls and text messages from unauthenticated phone numbers.

According to its proponents, an “ever increasing number … of robocall scams” prompted this bill. Indeed, one report touted by Markey estimated the number of spam calls will grow from 29% of all phone calls this year to 45% of all calls next year.

In its current form, the TRACED Act gives regulators more time to find scammers, increases civil forfeiture penalties for those caught, promotes call authentication and blocking adoption, and brings relevant federal agencies and state attorneys general together to address impediments to criminal prosecution of robocallers who intentionally flout laws.

More specifically, this act makes the following changes to the existing federal regulatory scheme:

  • Broadens the authority of the FCC to levy civil penalties of up to $10,000 per call for those who intentionally violate telemarketing restrictions.
  • Extends the window for the FCC to catch and take civil enforcement action against intentional violations to three years after a robocall is placed. Under current law, the FCC has only one year to do so. The FCC has told the committee that “even a one-year longer statute of limitations for enforcement” would improve enforcement against willful violators.
  • Brings together the Department of Justice, FCC, Federal Trade Commission, Department of Commerce, Department of State, Department of Homeland Security, the Consumer Financial Protection Bureau, and other relevant federal agencies, as well as state attorneys general and other non-federal entities, to identify and report to Congress on improving deterrence and criminal prosecution at the federal and state level of robocall scams.
  • Requires providers of voice services to adopt call authentication technologies, enabling a telephone carrier to authenticate consumers’ phone numbers prior to initiating any call.
  • Directs the FCC to initiate a rulemaking to help protect subscribers from receiving unwanted calls or texts from callers using unauthenticated numbers.

Announcing the TRACED Act, neither senator minced their words. “The TRACED Act targets robocall scams and other intentional violations of telemarketing laws so that when authorities do catch violators, they can be held accountable,” Thune said in a statement. He continued: “Existing civil penalty rules were designed to impose penalties on lawful telemarketers who make mistakes. This enforcement regime is totally inadequate for scam artists and we need do more to separate enforcement of carelessness and other mistakes from more sinister actors.” Markey added: “As the scourge of spoofed calls and robocalls reaches epidemic levels, the bipartisan TRACED Act will provide every person with a phone much needed relief. It’s a simple formula: call authentication, blocking, and enforcement, and this bill achieves all three.”

Troutman Sanders will continue to monitor this and related legislative proposals.

By: Ashley Taylor, David Anthony, Stephen Piepgrass and Ryan Strasser

The Virginia Consumer Protection Act (VCPA), Virginia Code § 59.1-196 et seq., represents the Virginia General Assembly’s effort to enact a sweeping and potent remedial tool to protect consumers from exploitation by a business where the consumer has engaged in a “consumer transaction” with that business. Where a violation of the VCPA has occurred, the statute authorizes both consumers and the Virginia attorney general to enforce its prohibitions and to seek various forms of relief.

In recent years, the Virginia Office of the Attorney General has ramped up its VCPA enforcement efforts. In perhaps a harbinger of things to come, Virginia Attorney General Mark Herring filed a complaint on March 6, 2018, under the VCPA in Commonwealth ex rel. Herring v. Future Income Payments LLC f/k/a Pensions, Annuities and Settlements LLC, in the Circuit Court for the City of Hampton. Attorney General Herring asserts a single claim in the case — that the corporate defendant violated the VCPA.

To read more click here for the VBA Fall 2018 Journal