FTC takes action and fines loan servicer: How to avoid being the subject of the next case
Loan servicers, beware! The Federal Trade Commission (FTC) recently issued a large fine to a loan servicer, based on Unfair or Deceptive Acts or Practices (UDAP) standards. On April 15, 2019, the FTC and Avant, LLC, an online consumer lender and loan servicing company, entered into a settlement and stipulated order to resolve a lawsuit that alleged Avant violated federal consumer protection laws. The FTC asserted that Avant’s loan servicing practices constituted unfair and deceptive acts and practices under Section 5 of the FTC Act (15 U.S.C. §§ 41-58, as amended).
The FTC has the authority to regulate businesses engaging in interstate commerce, including online lenders that fund consumers or small businesses, and, among other areas, the FTC has oversight and enforcement obligations concerning unfair and deceptive acts and practices under the FTC Act. Unlike UDAAP under the Dodd-Frank Act, which applies only to consumer transactions, the FTC Act applies to both consumer and commercial lenders and loan servicers, as well as all other businesses operating in interstate commerce.
The illegal practices in which the FTC alleged that Avant engaged included:
- Deceiving customers regarding Avant’s acceptance of credit and debit card payments, while such payments were often not accepted by Avant (e.g., Avant’s website stated credit or debit card payments were accepted)
- Deceiving customers regarding the amount needed to pay off their loans (e.g., incorrect payoff quotes, payoff quotes with incorrect or no stated expiration dates)
- Collecting additional payments after the payoff amount quoted to a customer was remitted to Avant in accordance with the applicable payoff quote
- Charging payments multiple times, sometimes in the same day (e.g., charging a monthly installment payment up to 11 times in one day)
The FTC alleged that such practices resulted in late fees, overdraft fees and damage to consumers’ credit reports for impacted customers.
Interestingly, the FTC also alleged that Avant violated the FTC’s Telemarketing Sales Rule (TSR) (16 C.F.R. Part 310) by using remotely-created customer payment checks in relation to products and services that were sold through telemarketing. This allegation and respective settlement was the first of its kind with regard to the TSR, and two FTC commissioners dissented to this aspect of the matter based on their belief that the applicable provision of the TSR was for fraudulent transactions and was not intended to be applied to legitimate products and services.
While the TSR generally applies only to consumer transactions, it is important to understand whether the TSR applies to your business. If it does, it is essential to ensure that servicing policies and procedures do not unintentionally violate the TSR, as in the case of remotely-created checks or other payments.
In the stipulated order, Avant was restrained from engaging in certain practices. Key takeaways include prohibitions and obligations related to:
- Timely and accurately applying customer payments
- Requiring a written payoff quote to customers to include a firm expiration date for any such quote
- Proscribing the collection of additional installment payments, fees or any amounts from customers that make all scheduled payments timely
- Proper and timely reporting of consumer transactions to consumer credit reporting agencies
- Prohibiting unauthorized charging of fees
- Ensuring that the use of remotely created payments is in compliance with the TSR, as interpreted by the FTC
- Refraining from the conditioning of extensions of credit to consumers based on a requirement of payments being made via preauthorized electronic funds transfers
Financial institutions, online lenders and other fintech companies need to ensure that their businesses operate in compliance with all laws and regulations to avoid being the subject of a similar action. Companies must deploy effective monitoring and testing programs to identify and prevent unlawful practices.
Utilizing an effective compliance program commensurate with the size and risk of the business is just as important as building an effective sales, marketing and technology operation.