The Federal Trade Commission’s settlement with an online consumer lending platform, Avant LLC, highlights the importance of legal and regulatory compliance in the fintech space, including—perhaps most importantly—what happens after a loan is made.
According to the Commission’s complaint, Avant offered personal consumer loans through its website. The complaint notes that although the loans were formally issued through a bank partner, Avant handled all stages of the process, and all consumer interactions, including advertising, application processing, and all aspects of loan servicing and collection of payments.
The Commission’s allegations stem primarily from Avant’s collection activities, and Avant’s representations about the payment process, under the Federal Trade Commission Act, the Telemarking Sales Rule (TSR); and the Electronic Fund Transfer Act (EFTA) and Regulation E. The allegations include that Avant:
- Misrepresented that consumers could pay using credit or debit cards, when such cards were often declined;
- Misstated the consumer’s payoff amount, leading to additional collection attempts and late fees;
- Charged extra or duplicated amounts that consumers did not authorize;
- Accepted remotely-created checks (RCCs) in violation of the Telemarketing Sales Rule (TSR); and
- Required consumers to use recurring electronic funds transfers (EFTs) in violation of the Electronic Fund Transfer Act (EFTA).
Pursuant to Avant’s April 15 settlement with the Commission, it will pay $3.85 million as equitable monetary relief. Under the settlement order, Avant is prohibited from taking unauthorized payments and from collecting payment by means of RCCs. The agreement also addresses Avant’s representations, and Avant is prohibited from misrepresenting: the methods of payment accepted for monthly payments, partial payments, payoffs, or any other purpose; the amount of payment that will be sufficient to pay off, in its entirety, the balance of an account; when payments will be applied or credited; or any material fact regarding payments, fees, or charges.
Dangers of Over-Marketing
The settlement order is an important reminder to start-up fintechs, as well as seasoned institutions pursuing new lines of business, regarding the dangers of over-marketing. A company’s advertising/marketing must not run ahead of the company’s technical capabilities or its regulatory compliance infrastructure. Otherwise, the company risks the allegation that its representations are deceptive.
Importance of Servicing Compliance
The FTC’s complaint and settlement order also highlight the importance of servicing to the overall lifecycle of a consumer loan, and why servicing remains a focus at the FTC and other agencies, including the Consumer Financial Protection Bureau (CFPB). Mistakes during servicing can cost consumers money by leading to late fees and account overdraft or non-sufficient funds charges. Moreover, late payments and delinquencies can affect consumers’ credit reports. Because of this, servicing often results in a high level of consumer inquiries and complaints, which companies must handle efficiently and effectively.
Dissenters Object to Pushing the Envelope
While the commissioners voted 5-0 to approve the settlement, two commissioners filed dissents pertaining to the FTC’s interpretation of the EFTA and TSR. A core element of both dissents is the argument that the FTC should stick safely within the scope of the statutes and regulations it enforces, in effect avoiding the same practice of “pushing the envelope” with regards to enforcement that the CFPB, in public statements by new leadership, has made it policy to avoid.
Phillips Dissent: “EFTA does not prohibit the use of RCCs as an alternative to EFTs, and we should not pretend it does.”
Commissioner Noah Joshua Phillips took issue with the settlement order’s treatment of RCCs under the EFTA. The dissent explains that RCCs are not “electronic funds transfers,” under the EFTA. So, by offering RCCs as an alternative payment method to EFT, Commissioner Phillips believes that Avant did not run afoul of the EFTA compulsory use provision, irrespective of Avant’s status as a telemarketer.
RCCs are, of course, prohibited for use by telemarketers under the TSR. The dissent takes issue with using this prohibition as a bridge to an EFTA violation, which Commissioner Phillips believes is a bridge too far. While stating that RCCs may not be “a meaningful alternative to recurring preauthorized EFTs under EFTA,” the dissent notes that “the law treats the two differently.”
Wilson Dissent: “Rulemaking rather than mandate broad policy changes through enforcement.”
Commissioner Christine S. Wilson dissented to both the TSR and EFTA violations from the settlement order. Regarding the TSR’s “Novel Payments” (including RCCs) prohibition, Commissioner Wilson took issue with the FTC’s decision to bring TSR charges regarding RCCs—while “recogniz[ing] that the TSR’s prohibition on RCCs is intended to be a bright line rule … .”
Commissioner Wilson also objected to what she views as an importation of the TSR RCC prohibition to the EFTA compulsory use prohibition. She explained that the consent order could lead to “odd results” and “disincentive[s],” such as discouraging lenders and online lending platforms from making or accepting consumer calls during the application process, so as not to fall under the TSR, and thus maintaining the ability to accept payment by RCC.
Commissioner Wilson argued that the correct forum for the FTC to pursue larger restrictions on RCCs would be through rulemaking, rather than enforcement. She also noted the difficulties that a “fragmented law of payments” could create, with multiple agencies taking different views of RCCs and other payment methods.
The Commission’s complaint and settlement order provide valuable insight and reminders to the online lending industry and others.
- Marketing should not outpace technical capability and compliance oversight.
- Servicing is a critical part of the loan lifecycle, and a source of risk and potentially systemic errors.
- Companies that engage in telemarketing must adhere to the TSR’s RCC prohibition, and, despite the dissents, regulators may view RCCs as a disfavored form of payment.
- Companies should provide viable alternatives to repayment by EFT when originating loans.