Business Opportunity Lender Settles FTC Charges

A finance company that allegedly used shady agents, deceptive contracts, and false claims to target thousands of would-be entrepreneurs will cancel $24 million in judgments allegedly obtained through deception and will reform all business opportunity financing contracts to settle charges by the Federal Trade Commission and an eight state task force that the practices violated federal and state laws. The law enforcement agencies charged that Leasecomm financed the purchase of business opportunities such as work-at-home operations using business opportunity sellers as its agents. According to the FTC, the contracts contained provisions purporting to waive consumers' defenses and allowing Leasecomm the right to sue consumers in Massachusetts, where it is based, rather than where consumers lived and purchased the business opportunity. The FTC alleged that most consumers could not afford to travel to Massachusetts to contest Leasecomm's charges and had default judgments entered against them in the Massachusetts court. If they didn't pay, Leasecomm resorted to aggressive collection measures such as wage garnishment and property attachment to collect, even though Leasecomm knew or should have known that their vendors used deceptive practices to sell their business ventures and promote the financing, according to the FTC's complaint.

Leasecomm is a wholly-owned operating subsidiary of MicroFinancial Incorporated. Both companies are based in suburban Boston, Massachusetts.

"Leasecomm's customers got a one-two punch," said Howard Beales, Director of the FTC's Bureau of Consumer Protection. "Leasecomm used sellers of highly suspect business opportunities to sell its financing, and then claimed it had no responsibility for their deception. Companies that try to hide behind the fine print in contracts and lie to consumers about what they're were signing, whether directly or through agents, simply do not pass muster."

"Leasecomm knowingly participated in a scheme that used the 'get-rich-quick' allure of selling products on the Internet to take advantage of thousands of consumers who were ultimately forced into debt," Massachusetts Attorney General Tom Reilly said. "This agreement relieves the debts of customers who fell prey to these 'business opportunities' and helps protect future consumers by requiring Leasecomm to change its business practices."

According to the FTC, the scheme worked as follows: Leasecomm Corporation financed business opportunities, including Internet web malls, multilevel marketing programs, medical billing software, coupon clipping programs and similar, often worthless, get-rich-quick schemes sold by third-party vendors. Consumers typically made little or no up-front payments, but signed a contract, which Leasecomm called a lease, requiring payments ranging from $3,000 - $4,000 over a three or four year period. While consumers thought the contracts covered many items included as part of a business venture -- training, Web site design, and consumer leads, for example -- they didn't. They covered only one small part of the venture -- a "virtual terminal," for example.

Leasecomm drafted its contracts to ensure that customers paid even when the vendors used misrepresentations or fraud, or when the products or services failed to perform as represented, according to the FTC complaint. The FTC alleges that Leasecomm knows or should know that many of its vendors engage in deceptive practices to sell their business ventures. In one case, a vendor signed up 1,882 consumers for a "business opportunity,"and nearly 1,500 went into default, the complaint alleges. Nevertheless, Leasecomm aggressively collected from many of those customers. Leasecomm pursues its customers "even when the customers have been defrauded and received nothing of value," the complaint alleges. When consumers argued that the lease really financed an entire business venture that was fraudulent and that the virtual terminal was worthless without the other elements of the package, Leasecomm took the position that the consumer still had an obligation to pay in full. When consumers set up their own internet Web sites to share information on how to fight Leasecomm, company employees falsely posed as consumers and made misleading statements about other consumers' absolute obligation to pay Leasecomm, according to the complaint.

According to the FTC, when consumers failed to pay, Leasecomm sued them. The FTC alleges that Leasecomm has sued over 27,000 consumers in the past three years in Massachusetts courts, and, as of January, had 2,200 suits pending. Few of the customers could afford the expense of litigation in a distant city and most suffered default judgments the FTC alleges. Although Leasecomm files its suits in Massachusetts, it aggressively enforces its judgments in the consumer's local forum. "Had Leasecomm filed the suits in the local forum in the first instance, customers might have been able to appear and present a defense," the complaint says. According to the FTC, Leasecomm adds to the consumer injury by imposing high collection fees, not only for late payments, but for every collection call it makes and letter it sends. These practices substantially increase the total payments due under the Leasecomm contract, the complaint says.

Leasecomm, and its parent corporation, Microfinancial, Inc., have agreed to settle the FTC charges and similar suits filed by members of the State Task Force, comprised of the attorneys general of Massachusetts, Florida, Illinois, Kansas, North Carolina, North Dakota and Texas, and by the District Attorney's Office for Ventura County, California. "This is an excellent example of federal-state law enforcement cooperation," Beales said.

The settlement will:

• bar misrepresentations about the terms of any contract -- including misrepresenting that consumers cannot raise defenses against Leasecomm;
  
• require disclosure of material facts about a contract, including disclosure thatLeasecomm, not the vendor, is financing the transaction;
  
• require that if Leasecomm sues consumers, it does so "where the customer resides or signed the contract;"
  
• require Leasecomm to vacate pending lawsuits filed in the wrong forum and correct any damage to the consumer's credit record;
  
• require that Leasecomm invalidate illegal provisions of existing contracts, including waivers of defenses;
  
• require that Leasecomm cancel and cease collections on approximately $24 million in final court judgments;
  
• require that Leasecomm give consumers who are the target of more than 2,000 pendingLeasecomm lawsuits currently filed in Massachusetts the option of having the suit conducted locally;
  
• require that consumers who were unlawfully required to agree to electronic funds transfers be given the option to switch to another payment method.

The settlement also contains certain bookkeeping and record keeping provisions to allow the agency to monitor compliance with its order.

The FTC vote to accept the settlement was 5-0.

The FTC has set up a special Web site for consumers who may be affected by this case at http://www.ftc.gov/ro/leasecomm/index.htm. It also has established a special phone number to provide information for consumers at: 1-877-382-4357.

NOTE: A stipulated final judgment and order is for settlement purposes only and does not constitute an admission of guilt. Stipulated final judgments and orders have the force of law when signed by the judge. The order was filed in the United States District Court for the District of Massachusetts.

Copies of the complaint and stipulated final judgment and order are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(Civil Action No. 0311034- REK)