Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—D. Nev.: Net impression of payday lenders’ complex online application process was deceptive, (Jun 4, 2014)

By Richard A. Roth, J.D.

A group of companies, individuals, and a law firm that the FTC said operated a payday lending operation used a website that, through small type and a multiplicity of links, created a deceptive application and repayment process, according to a federal district judge. The judge entered a pretrial judgment in favor of the FTC on the agency’s claims that the lender had violated the FTC Act Section 5 ban on unfair or deceptive acts or practices and had failed to make disclosures required by the Truth in Lending Act and Reg. Z—Truth in Lending (12 CFR Part 1026). The FTC enforcement action will move into determining what relief is appropriate against most of the defendants for the violations, although the attorney and his firm can continue to dispute some of the agency’s allegations (FTC v. AMG Services, Inc., May 28, 2014, Navarro, G.).

According to the FTC, most of the individuals were associated with one or more companies that extended payday loans over the Internet. One individual also was the founder of the law firm, which sold and collected the loans. The agency claimed they all comprised a common enterprise that was engaged in deceptive lending practices.

FTC’s claims. The FTC’s complaint raised four substantive charges:

• Count 1—deceptive practices relating to how repayment would be withdrawn from a consumer’s bank account and how much would be owed;

• Count 2—deceptive practices relating to threats of arrests and collection suits if loans were not repaid;

• Count 3—failing to disclose the finance charge, annual percentage rate, payment schedule, and total of payments as required by TILA and Reg. Z; and

• Count 4—conditioning an extension of credit on an agreement to repay the loan by recurring preauthorized electronic transfers, in violation of the Electronic Transfer Act.

All of the defendants other than the attorney and his law firm agreed to settle counts two and four, but they continued to contest counts one and three. The attorney and his firm contested all four counts and also the FTC’s assertion that a common enterprise existed. However, under an agreement by the parties, any consideration of counts two and four against the attorney and law firm were deferred, so the court’s summary judgment order applies only to counts one and three.

The website. As the FTC’s theory rested on the “net impression” created by the lenders’ website, a detailed description of that website and how it worked was in order. In addition to collecting routine application information, the website required a consumer to click four distinct boxes to accept the lender’s terms and conditions, add an electronic signature, and then select a box to complete the process. However, the applicant never was required actually to read, or indicate having read, the terms and conditions of the loan.

In fact, according to the judge, the website discouraged an applicant from reading the terms and conditions by separating them into nine different hyperlinks, each going to a different place on a single Internet page. The link to the actual note and the required TILA disclosures was the least conspicuous of these, the judge added. The judge also took issue with how the TILA disclosures were arranged and presented.

Repayments. Under the basic repayment plan described in the TILA disclosures, a borrower would repay the loan with a single payment that was the total of the amount borrowed plus a fixed charge. However, according to the judge, the application process allowed a borrower to select that plan only by navigating “dense text” following the TILA disclosures in the loan note (which was itself hard to find), and then employing a subsequent “convoluted email-and-hyperlink procedure.” Otherwise, the borrower automatically would be enrolled in a 10-pay-period automatic renewal plan.

The differences between the two plans were substantial. According to the judge, a $300 loan repaid under the basic plan would require a single $390 payment; however, the same $300 loan under the automatic renewal plan would require a total repayment of $975.

Magistrate’s recommendations, objections. Opposing summary motions by the FTC and the lenders were first heard by a magistrate judge, who recommended that a judgment be entered in favor of the agency and against the lenders, attorney, and law firm on counts one and three.

The defendants joined in a number of objections to the magistrate’s recommendation—four relating to the FTC Act allegations and two substantive objections relating to TILA allegations. However, the district court judge rejected them all.

FTC Act allegations. The most significant objection to the recommendation that summary judgment be granted in favor of the agency on its FTC Act charges was that whether the net impression of the loan note and disclosure was deceptive was a question of fact that could not be decided without a trial. However, precedent in the Ninth Circuit allowed this issue to be decided on summary judgment if no reasonable finder of fact could decide otherwise. No reasonable factfinder could find the documents were not deceptive, the district judge said.

The judge next rejected the lenders’ complaint that the magistrate had ignored their evidence in finding the note and disclosure document was deceptive. The submitted evidence was irrelevant, the district judge said, because the magistrate had based his recommendation on a finding that the TILA box and accompanying fine print was deceptive, not the note and disclosure.

The fact that the lenders’ attorney could extract from the document all of the needed disclosures and put them in a list also was irrelevant to whether the document was deceptive, the judge added. The question was whether the document was deceptive as presented. The large print told applicants one thing, while the fine print said something different, and that was deceptive.

Two other objections were rejected as well. The magistrate did not invent a new theory of ambiguity simply by citing an example of ambiguity not argued by the FTC, the judge said. The magistrate had not misconstrued or misunderstood facts, as claimed by the lenders, the judge also said.

TILA allegations. The magistrate judge was not required to engage in a technical inquiry into whether the TILA disclosures complied with the act, according to the judge. While disclosures that were “misleading in the abstract” could not violate TILA, misleading disclosures of terms TILA required to be disclosed clearly and conspicuously would be violations. The lenders had made misleading disclosures of just such terms, the district judge said.

The magistrate was correct in finding that the loan note disclosure was ambiguous because terms for the automatic renewal plan were likely to mislead consumers. The TILA box implied that there would be only one payment to be made, and the renewal plan was described elsewhere, the judge pointed out. That could mislead consumers about their obligations.

The case is No. 2:12-cv-00536-GMN-VCF.

Attorneys: Andrew A. Kassof (Kirkland & Ellis LLP) and Nicole Ducheneaux (Fredericks Peebles & Morgan LLP) for AMG Services, Inc., Red Cedar Services, Inc., and SFS, Inc. Von S. Heinz (Lewis Roca Rothgerber LLP) for AMG Capital Management, LLC, and Level 5 Motorsports, LLC. Courtney Anne Estep for the FTC.

Companies: AMG Capital Management; AMG Services, Inc.; Black Creek Capital Corporation; Broadmoor Capital Partners; LeadFlash Consulting; Level 5 Motorsports, MNE Services, Inc.; Muir Law Firm, LLC; Red Cedar Services, Inc.; SFS, Inc.

Cases: ConsumerProtection FederalTradeCommissionNews NevadaNews