UNITED STATES OF AMERICA Office of the Chairman January 15, 1999 Dolores S. Smith, Director Dear Ms. Smith: This letter responds to your request for information regarding the enforcement activities of the Federal Trade Commission under the Truth in Lending, Consumer Leasing, Equal Credit Opportunity, and Electronic Fund Transfer Acts (“Acts”) during the past year for use in preparing the Federal Reserve Board’s (“Board”) Annual Report to Congress. You have asked for information regarding the Commission’s enforcement activities pursuant to those Acts, including methods of enforcement and significant enforcement actions and the extent to which compliance is achieved by entities subject to the Commission’s enforcement authority. Also, you have asked whether the Commission recommends any changes to these laws or their implementing regulations or wishes to provide any other comments or observations. I. A DESCRIPTION OF THE COMMISSION’S ENFORCEMENT ACTIVITIES Truth in Lending Act and Consumer Leasing Act Since January 1998 up to the present, the Commission filed a complaint in federal district court charging a Washington, D.C. mortgage lender and its owner, inter alia, with violating the Truth In Lending Act (“TILA”) and Regulation Z and the Federal Trade Commission Act (“FTC Act”), in connection with alleged deceptive and unfair practices in home mortgage lending. The Commission also issued final decisions and orders in thirteen administrative cases concerning alleged deceptive lease and/or credit advertising in violation of the FTC Act, and failure to clearly and conspicuously disclose and/or failure to make available advertised lease and/or credit terms, in violation of the Consumer Leasing Act (“CLA”) and Regulation M and/or the TILA and Regulation Z. The above cases are discussed below. Other investigations of possible TILA and/or CLA violations are ongoing. In Federal Trade Commission v. Capital City Mortgage Corp. (“Capital City Mortgage”),(1) the Commission filed a complaint in United States District Court for the District of Columbia against a Washington, D.C. area mortgage company and its owner, Thomas K. Nash, alleging numerous violations of federal laws, inter alia, the TILA and Regulation Z and the FTC Act.(2) The complaint alleges that defendants’ borrowers, in many instances, are minority and/or elderly persons living on fixed or low incomes and that defendants’ loans include interest rates that generally ranged between 20-24 percent, for loans secured by home equity, and 9-12 percent, for purchase money loans. According to the complaint, in many instances, defendants’ transactions involve interest-only balloon, rather than amortizing, loans. The complaint alleges, inter alia, that defendants, in many instances, violated the TILA and Regulation Z, and engaged in unfair or deceptive acts or practices in violation of the FTC Act, by: 1) understating the annual percentage rate and finance charge; 2) overstating the amount financed; 3) failing to disclose or accurately disclose the payment schedule or the total of payments (including but not limited to failing to disclose a balloon payment); 4) failing to provide disclosures before consummating the transaction and in the required format; 5) failing to provide disclosures that accurately reflect the legal obligation; and 6) failing to provide or correct certain “good faith” disclosures. The complaint also alleges that defendants engaged in other deceptive or unfair practices in offering and extending credit and throughout the duration of the loans, in violation of the FTC Act, with the result that a number of borrowers were overcharged on their loans, were defaulted, and had title to their homes or other property impaired or completely lost (along with the equity). These alleged deceptive or unfair practices include: 1) representing a loan as an amortizing loan when, in fact, it was an interest-only balloon loan; 2) representing that loan payments were higher than they should have been under the loan instruments by demanding that borrowers pay for services not provided, for charges imposed by the government or related entities on defendants prior to the borrowers’ purchase of the property, and for no-insurance penalties when defendants were to provide the insurance or the borrower had timely purchased insurance; 3) collecting real estate tax escrow payments, failing to pay the taxes and representing that the taxes had been paid; 4) refusing to explain overcharges; 5) initiating foreclosure proceedings after nonpayment of overcharges and obtaining title by foreclosure or taking a deed in lieu thereof; 6) adding charges to arrears or loan principal and accruing compound interest and increasing the pay-off amount; 7) receiving sufficient pay-off amounts but refusing to release the lien without further payment; and 8) refusing to reinstate a borrower after the borrower paid the reinstatement fee. The complaint asks the court to award, inter alia, the amount necessary to prevent unjust enrichment and consumer redress (including refunds of monies paid, disgorgement of ill-gotten gains, and rescission of contracts) and to permanently restrain defendants from future law violations. The case is now in the discovery phase; a trial date has not yet been set.(3) In Chrysler Corporation, Inc. (“Chrysler”),(4) Bozell Worldwide, Inc. (“Bozell”),(5) and Martin Advertising, Inc. (“Martin”),(6) the Commission issued final decisions and orders in three cases involving alleged deceptive lease and/or credit advertising in the automobile industry, in violation of the CLA and Regulation M and/or the TILA and Regulation M and the FTC Act. The complaints charged that Chrysler and Bozell, its national advertising agency, and Martin, a regional advertising agency for General Motors’s dealerships and dealer associations, created and disseminated deceptive lease and/or credit advertisements that promoted various terms (including monthly payment amounts) and omitted key cost terms or buried this information in fine, and at times unreadable, print, in violation of the CLA and Regulation M and the FTC Act. Chrysler and Bozell also were charged with misrepresenting that the luxury vehicle model displayed in ads was available at the prominent, low lease terms, in violation of the FTC Act. In fact, according to the complaint, the low monthly payments applied to Chrysler models of lesser value than those featured in the ads, and information about lease inception fees and other terms appeared only in unreadable fine print and was not clear and conspicuous, in violation of the CLA and Regulation M and the FTC Act. The complaint against Martin also alleges that the company violated the FTC Act, the CLA and Regulation M, and the TILA and Regulation Z regarding its automobile lease and credit advertising. The complaint charges that Martin’s television and radio lease ads were deceptive by: 1) misrepresenting that consumers could purchase a vehicle by paying low monthly payments, when, in fact, the offers involved leases and the ads omitted this fact or hid the information in fine print or rapidly-stated audio disclosures; 2) misrepresenting the amount consumers were required to pay at lease inception; and 3) omitting or hiding important information about lease inception fees in unreadable fine print or incomprehensible audio disclosures. The complaint also alleges that Martin’s balloon payment credit ads were deceptive and falsely represented that consumers could buy a car by making only low monthly payments, inadequately disclosing the existence and amount of a final balloon payment, a substantial down payment, the annual percentage rate, or other terms of repayment. The complaint further alleges that Martin’s lease and credit ads violated the CLA and Regulation M and TILA and Regulation Z by omitting required disclosures or making disclosures that were not clear and conspicuous and by failing to state a rate of finance charge as an annual percentage rate or “APR.” The orders with Chrysler, Bozell, and Martin prohibit misrepresentations of the total amount due at lease signing or delivery, the amount down and/or downpayment, and the capitalized cost reduction or other amount that reduces the capitalized cost of the vehicle (or that no such amount is required). The orders also prohibit the companies from stating any charge that is part of the total due at lease signing or delivery, or that no such charge is required (other than a statement of the periodic payment) more prominently than a statement of the total amount due at lease signing or delivery. The orders also prohibit the companies from stating the amount of any payment unless the ad also states, clearly and conspicuously, all of the terms required by the CLA and Regulation M. In addition, the orders in Chrysler and Bozell prohibit these companies from misrepresenting the vehicle model available to consumers in connection with any advertised lease offer. In Martin, the order also prohibits the company from misrepresenting that any motor vehicle lease advertisement pertains to a cash or credit offer. This order also prohibits the company from misrepresenting the existence and amount of any balloon payment or the annual percentage rate. In addition, the order prohibits Martin from stating the monthly payment or other credit terms without, clearly and conspicuously, stating all of the terms required by the TILA and Regulation Z. Under all three orders, the disclosures required by the CLA or TILA for lease and/or credit advertising must be made “clearly and conspicuously”-- that is, in a manner that is readable (or audible) and understandable to a reasonable consumer. In Grey Advertising, Inc. (“Grey”),(7) Rubin Postaer and Associates, Inc. (“Rubin Postaer”),(8) and Foote, Cone and Belding, Inc. (“FCB”),(9) the Commission issued final decisions and orders with three national advertising agencies resolving charges that they violated the CLA and Regulation M and/or the TILA and Regulation Z and the FTC Act by misrepresenting, hiding, and failing to disclose adequately the true terms of their advertised automobile lease and credit deals. The orders settled charges that these companies developed and disseminated deceptive advertisements for “zero down,” “penny down,” or other low amounts due at inception in lease advertisements for Mitsubishi Motor Sales of America, Inc., American Honda Motor Corporation, and Mazda Motor of America, Inc., respectively. In Grey, Rubin Postaer, and FCB, the Commission alleged that the lease ads misrepresented the true amounts that consumers were required to pay at inception and did not adequately provide material cost information necessary to prevent misleading consumers who had to pay significant fees. According to the allegations, the ads presented information about these additional fees only in unreadable print that appeared: 1) in type too small; 2) for too short a duration; 3) in quick “scrolling”text; 4) against moving or distracting backgrounds; and/or 5) in a location far removed from the more prominent representations. The complaint against Grey also alleged that this company created and disseminated deceptive automobile balloon payment credit advertisements. The Commission alleged that these credit ads misrepresented that consumers could buy a car by making low monthly payments and paying low amounts “down” and did not adequately disclose the existence and amount of a several thousand dollar final balloon payment, the APR, and other terms of repayment. Instead, as alleged, the credit ads placed this critical cost information in unreadable fine print disclosures. Under all three final orders, the companies may not, inter alia, misrepresent in any motor vehicle lease advertisement the total amount due at lease signing or delivery, the amount down, and/or the downpayment, the capitalized cost reduction, or any other amount that reduces the capitalized cost of the vehicle (or that no such amount is required). Also, any ad that highlights an amount “down” or mentions certain other amounts due at lease inception (or states that there is no such charge) would have to provide an equally prominent statement of the total amount due at lease inception. The final order with Grey also, among other things, prohibits the company in any closed-end credit advertisement involving motor vehicles from misrepresenting the existence and amount of any balloon payment or the annual percentage rate. In Toyota Motor Sales, U.S.A., Inc. (“Toyota”),(10) Volkswagen of America, Inc. (“Volkswagen),(11) Suntrup Ford., Inc. and Suntrup Buick-Pontiac-GMC Truck, Inc. (“Suntrup”),(12) Lou Fusz Automotive Network, Inc. (“Lou Fusz”),(13) Beuckman Ford, Inc. (“Beuckman”),(14) and Frank Bommarito Oldsmobile, Inc. (“Bommarito”),(15) the Commission issued final decisions and orders with two major automobile manufacturers and five St. Louis, Missouri-area dealerships and their Chief Executive Officers (“CEOs”) pertaining to deceptive lease and/or credit advertisements. As reported on last year when the orders were accepted for public comment, these orders settled charges that the seven companies violated the CLA and Regulation M and/or the TILA and Regulation Z and the FTC Act by misrepresenting, hiding, or failing to adequately disclose the cost and terms of automobile lease and/or credit transactions. The orders in Toyota and Volkswagen prohibit misrepresentations of the total amount due at lease signing and require lease ads that state any charge that is part of the amount due at lease signing or that no such charge is required (excluding a statement of the periodic payment) to state with equal prominence the total amount due at lease signing. These manufacturers are also required to comply with all requirements of the CLA and Regulation M in lease ads. The orders in the St. Louis cases prohibit the dealerships and their CEOs from misrepresenting the costs of leasing, including the total amount due at lease signing. The orders also require compliance with all aspects of the CLA and Regulation M, including that mandatory triggered terms in advertisements be stated clearly and conspicuously. Also, the Lou Fusz order prohibits misrepresentations of the type of transaction advertised, including that the offer is for a one- payment lease. It enjoins Lou Fusz from advertising that a specific offer is available, unless the company usually and customarily offers to lease vehicles at the advertised terms. The Beuckman order would also prevent the company from stating the term “RCL” without stating clearly and conspicuously that this term refers to a lease. The Bommarito order also prohibits misrepresentations of the terms of financing a vehicle, including the amount of any balloon payment. In addition, Bommarito is required to include the amount of any final balloon payment prominently, and in close proximity, to certain advertised credit terms. The orders with the St. Louis dealerships also prohibit violations of the TILA and Regulation Z. The Commission continues to view consumer and business education efforts as important to its enforcement activities. In 1998, in view of increasing issues concerning possible home equity fraud, the Commission issued three consumer publications to provide additional information to consumers considering home equity loans and reverse mortgages: “Home Equity Loans: The Three-Day Cancellation Rule;” “Reverse Mortgages -- Cashing in on Home Ownership;” and “Home Equity Scams: Borrowers Beware.(16) The Commission also issued a news release, “Northwest, Air Canada Airlines Customers with Canceled Tickets May Have Rights under Federal Credit Law,” to assist consumers in using their rights under the Fair Credit Billing Act, an amendment to the TILA. The Commission staff also continued to participate in the Board-sponsored “Leasing Education Program Team,” involving the Board, Commission staff, and a coalition of entities (including consumer groups, state attorneys general and industry representatives) now developing online and other forms of lease materials to enhance awareness and understanding of leasing. All of the above consumer protection and business education materials were also made available to the public through the Commission’s Website at " www.ftc.gov. "(17) Equal Credit Opportunity Act In 1998, the Commission filed a complaint in federal district court charging a Washington, D.C. area mortgage lender with, inter alia, violations of the Equal Credit Opportunity Act (“ECOA”) and Regulation B and the FTC Act. This case is discussed below. Other enforcement efforts continue. In January 1998, the Commission filed a complaint in United States District Court for the District of Columbia in Capital City Mortgage,(18) alleging that this company and its owner, Thomas K. Nash, violated the ECOA and Regulation B and engaged in unfair or deceptive acts or practices in violation of the FTC Act, in numerous manners. These alleged ECOA violations included: 1) failing to take written applications for mortgage loans; 2) failing to collect required information about the race or national origin, sex, marital status, and age of applicants; 3) failing to provide applicants with written notice of adverse action; and 4) providing notice of adverse action, but failing to provide applicants with: a) the correct principal reason for the action taken or b) the correct name and address of the Federal Trade Commission, the federal agency that administers compliance with the ECOA with respect to Capital City and Nash. As indicated above, this case is now in the discovery phase, and it has been joined for discovery purposes with a private lawsuit.(19) The Commission is seeking civil penalties and injunctive relief for the alleged violations of the ECOA and Regulation B and the FTC Act. In May 1998, the Commission and other federal agencies submitted a joint comment to the Board about Regulation B.(20) The comment was submitted in response to the Board’s request for comment and advance notice of proposed rulemaking. In their comment, the agencies urged the Board to amend Regulation B to permit lenders voluntarily to collect information about the race and gender of applicants for non-mortgage credit. According to the comments, the current prohibition of collecting such information “needlessly inhibits the ability of financial service providers to learn about and respond to market opportunities to better serve underserved communities. The prohibition makes it difficult for institutions to know whether products intended to expand access to credit, including to minorities, reach their intended customer base.” The comments also urged the Board to clarify that creditors may not discriminate on a prohibited basis in their preapplication marketing practices.(21) The Commission continued its consumer and business education efforts in this area. In September 1998, Commissioner Thompson and Consumer Protection Bureau Director Bernstein participated in credit-related seminars as part of the Congressional Black Caucus Foundation’s Legislative Weekend.(22) Among other things, at this conference, a new FTC credit publication was released. The publication, “Bound for Good Credit,” combines in one source for consumers many of the agency’s most popular credit brochures (including information about the ECOA). The Commission staff also worked with other governmental agencies and with creditor and consumer organizations to increase awareness of and compliance with the ECOA. The Commission staff also continued to participate actively in the Interagency Task Force on Fair Lending. Electronic Fund Transfer Act In March 1998, in the America Online, Inc. (“AOL”),(23) CompuServe, Inc. (“CompuServe”),(24) and Prodigy Services Corporation (“Prodigy”),(25) the Commission issued final decisions and orders in three cases alleging violations of the FTC Act and the Electronic Fund Transfer Act (“EFTA”) and Regulation E. These cases resolved Commission charges that the companies’ “free trial” offers resulted in unexpected charges for many consumers. As reported on last year when the orders were accepted for public comment, the complaints alleged that these Internet service providers failed to make clear that consumers had an affirmative obligation to cancel before the trial period ended. As a result, consumers who failed to cancel were automatically enrolled as members and began incurring monthly charges. The settlements, inter alia, prohibit AOL, CompuServe and Prodigy from: misrepresenting the terms or conditions of any online service trial offer; and representing that an online service is free or otherwise representing that consumers need not pay for the online service, unless they disclose clearly and prominently in their instructional materials any obligation to cancel or take other action to avoid charges, and in all other advertisements include a statement directing consumers to where this disclosure is available. The AOL settlement also requires the company to disclose the manner in which fees or charges are assessed or calculated and bars misrepresentations about the terms or conditions of any electronic fund transfer from a consumer account. II. AN ASSESSMENT OF THE EXTENT TO WHICH COMPLIANCE IS Truth in Lending Act and Consumer Leasing Act This year, the Commission received various inquiries regarding home equity lending, including, for example, those concerning credit insurance and loan “flipping.” Many mortgage brokers requested information about the disclosure requirements of Regulation Z, including copies of the regulation and the Board’s Official Staff Commentary. Many businesses continued to request information about the lease advertising requirements of Regulation M, including copies of the Commission’s brochure, “Advertising Consumer Leases.” Some consumers requested information about lease transactions, including copies of the FRB-FTC Lease Education Program Team’s “Keys to Vehicle Leasing.” Equal Credit Opportunity Act The Commission received some inquiries about fair lending matters. The Commission continued to receive requests for information about ECOA requirements from mortgage lenders and mortgage brokers. Electronic Fund Transfer Act The Commission received some inquiries from consumers regarding EFTA protections for point-of-sale debit transactions, including those regarding unauthorized transactions and error resolution procedures. The Commission receives a small number of inquiries about these rules in comparison to those under the credit and lease requirements. III. ANY SUGGESTIONS FOR CHANGES IN THE ACTS OR THEIR IMPLEMENTING REGULATIONS The Commission supports the Board’s regulatory review, now under way, of Regulation B. The Commission also understands that the Board expects to undertake a review of Regulation Z, after conclusion of its Regulation B review. Because Regulation Z affects many diverse types of transactions and issues, the Commission would support any such effort to update and clarify these requirements as well. The Commission hopes that the information contained in this letter responds to your inquiry and will assist in preparation of the Board’s Annual Report to Congress. If any other information would be useful or if you request additional assistance, please contact David Medine, Associate Director, Division of Financial Practices, at (202) 326-3025. By direction of the Commission. Robert Pitofsky Endnotes (1) No. 98CV00237 (D.D.C. filed Jan. 29, 1998). (2) The complaint in this matter also alleges, inter alia, violations of the Equal Credit Opportunity Act. See infra p. 7. (3) The case has been joined, for purposes of discovery, with a private lawsuit, Hargraves v. Capital City Mortgage Corp., No. 98CV1021 (D.D.C. filed Apr. 24, 1998). (4) FTC Docket No. C-3847 (Jan. 13, 1999). (5) FTC Docket No. C-3845 (Jan. 13, 1999). (6) FTC Docket No. C-3846 (Jan. 13, 1999). (7) FTC Docket No. 3793 (Apr. 6, 1998). (8) FTC Docket No. 3794 (Apr. 6, 1998). (9) FTC Docket No. 3792 (Apr. 6, 1998). (10) FTC Docket No. C-3776 (Jan. 5, 1998). (11) FTC Docket No. C-3778 (Jan. 5, 1998). (12) FTC Docket No. C-3779 (Jan. 5, 1998). As indicated above, the final decision and order covered two related companies: Suntrup Ford, Inc. and Suntrup Buick-Pontiac-GMC- Truck, Inc. A separate consent agreement was signed by each company, however. See Suntrup Ford, Inc., FTC File No. 952 3200 (Oct. 7, 1997), and Suntrup Buick-Pontiac-GMC Truck, Inc., FTC File No. 952 3201 (Oct. 7, 1997). (13) FTC Docket No. C-3780 (Jan. 5, 1998). (14) FTC Docket No. C-3777 (Jan. 5, 1998). (15) FTC Docket No. C-3774 (Jan. 5, 1998). (16)” These publications were also designed to assist consumers in Texas, where the state constitution was amended to allow companies to offer general home equity loans, starting in 1998, for the first time in that state’s history. See, e.g., “FTC Release: FTC Education Effort Focuses on Home Equity Loan Fraud” (May 20, 1998). (17)” Information regarding the Commission’s enforcement actions and other activities discussed in this report are also available at this Website. (18) See supra note 1. (19) See supra note 3. (20) Letter from Commission, Department of Treasury, Department of Justice, Department of Housing and Urban Development, Office of the Comptroller of the Currency, Office of Thrift Supervision, and Small Business Administration to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System dated May 28, 1998. (21) The Commission voted 3-1 to file this comment with the Board, with Commissioner Azcuenaga not participating and Commissioner Swindle dissenting and issuing a statement concurring in part and dissenting in part. (22) See “FTC Release: FTC Officials Discuss Consumer Credit Issues and Highlight Consumer Education Efforts” (Sept. 18, 1998). (23) FTC Docket No. C-3787 (Mar. 24, 1998). (24) FTC Docket No. C-3789 (Mar. 24, 1998). (25) FTC Docket No. C-3788 (Mar. 24, 1998). (26) Among other things, the Commission is charged with enforcement of the FTC Act and various federal consumer credit laws and regulations, including the TILA, ECOA and EFTA, with respect to most nonbank entities in the nation. It does not have data regarding the extent of compliance by these numerous entities with these requirements. In lieu thereof, the Commission is providing information regarding certain issues raised by consumers and/or business entities pertaining to these mandates. |