Order Marks First Commission Action Against a Provider of "Payday Loans"
The Federal Trade Commission today announced two proposed agreements settling charges that Consumer Money Markets, Inc. (CMM), Continental Direct Services, Inc. (CDS) and several individuals and firms connected to the companies violated the FTC Act, the Telemarketing Sales Rule (TSR) and the Truth in Lending Act (TILA) by falsely representing that consumers who paid a membership fee of $149 to $169 would receive a credit line of thousands of dollars, along with cash-advance privileges.
In reality, after paying the up-front fee consumers found that they could only use the credit line to buy items from CMM's catalog, and that the "cash-on-demand" provision amounted to nothing more than high-interest "payday loans" - short-term loans of $20 to $40, with interest rates of up to 360 percent or more per year. The settlements would enjoin Las Vegas-based CMM, CDS and two related companies from engaging in such deceptive practices, require the company and its principals (including a list broker) to disgorge $350,000 they received from consumers and forgive an additional $1.6 million in outstanding consumer debts. The Nevada Attorney General's Office is joining the Commission in its TSR allegations, and also alleges violations of Nevada state law.
"These credit cons are especially contemptible," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "CMM had no intention of delivering the credit and cash advances they promised consumers. The FTC will not tolerate such blatant illegal activity by any lender."
Over the three years CMM pitched their "services" to consumers, she noted, the company collected membership fees of over $12 million from 80,000 consumers in 1996-99. Less than eight percent of their customers purchased even one catalog product or took out a cash loan. Bernstein thanked the Nevada Attorney General's Office for its assistance in investigating the matter.
CMM was created in the summer of 1996. Pitching products such as its "MoneyMarketCard," the company sent direct mail solicitations to consumers who had been identified from "lead lists." In the solicitations, the consumers were told they would receive a credit line of $5,500 at 14.99 percent interest, regardless of their previous credit history. CMM implied that consumers could use the credit line for general shopping but the company failed to disclose that, in fact, they could only use the credit line for CMM catalog shopping.
Interested consumers called a 1-800 number, and CMM's telemarketers approved anyone who had a checking account or credit card. In a 15-to-20 minute sales pitch, the telemarketer then repeated the themes of the solicitation, failing to clearly disclose important information such as high cash advance fees charged by the company and that consumers could only use the credit line for catalog purchases. They closed the presentation by attempting to secure the customer's authorization to automatically debit their checking or credit account for the $169.95 "membership fee," which the company collected shortly thereafter.
Weeks later, the consumers received a CMM packet that contained a company catalog and information about the cash-advance "privileges." To use the card, CMM required that consumers put down 30 percent on the purchase of all goods. Also, the initial loan amount - represented as up to $150 per transaction - was only $20, and instead of being on revolving credit, it had to be entirely repaid to Interstate Check Services, Inc. (ICS) - CMM's cash-loan affiliate - in 30 days. ICS charged $6 for each $20 loan, the equivalent of 360 percent interest for a 30-day loan and 720 percent for a 15-day loan. Few consumers ever applied for larger loans, the Commission said, with only eight of nearly 4,800 applicants receiving loans of more than $100 in 1999.
The complaint further contends that CMM's (and later CDS's) disclosures regarding their catalog, loan fees and high-interest loans were inadequate and in violation of the FTC Act, TSR and the TILA. For example, in advertising "payday loans," defendants CMM, CDS and ICS referred to finance charges but failed to disclose the annual percentage rates (APRs) of such loans, in violation of the TILA. As actual providers of such credit, they also failed to give adequate written disclosures to consumers regarding the APRs, finance charges and other critical information before finishing the transaction. In addition, the defendants failed to alert consumers to the severe limitations of both the catalog credit line and "cash-on-demand." In 1999, less than five percent of CMM's new members purchased any catalog products and less than eight percent applied for a "cash-on-demand" loan, after learning of the true restrictions. Still, from August 1996 to July 1999, the company collected membership fees totaling more than $12 million from 80,000 customers.
Finally, Continental Direct Services, Inc. (CDS) - a company not affiliated with CMM - purchased CMM's assets in July of 1999. CDS retained most of CMM's employees and continued the basic pitch, with some revisions. Despite these revisions, CDS's solicitations, telephone sales pitches and materials given to consumers in the catalog package continued to mislead many consumers. CDS, like CMM, used ICS to market its "cash-on-demand" loan program to consumers.
The proposed settlements concern the activities of CMM, ICS, CDS and several associated individuals. The most comprehensive order covers William S. Kelly (the list broker who provided CMM with consumer names), Data Tech Solutions, Inc. (Kelly's wholly owned Subchapter S corporation), CDS, Raymond Elia (owner and manager of Interstate Check Services), ICS, and Gary Allen Balazs (who became CMM's "Director of Operations" following the death of founder Jimmy Miller).
The order would enjoin the specific misrepresentations found in CMM's and CDS's advertisements. Additional fencing-in relief would be provided with respect to alleged FTC Act, TSR and TILA violations, and would require the defendants always to disclose the APRs and finance charges of payday loans in future advertisements when offering them in connection with prepaid membership or credit offerings.
The defendants would also be prohibited from exaggerating the contents of their catalogs, and would have to clearly disclose: 1) the membership fee; 2) any purchasing restrictions (such as catalog-only shopping); 3) any down-payment requirements; and 4) the distinctions between the company's cash advances and cash privileges of ordinary credit cards. Finally, the order contains standard fencing-in relief regarding TSR violations and misrepresentations of material fact.
Defendant Kelly would also be required to disgorge $150,000 and post bonds totaling $500,000 over the coming year. The bonds would be permanent, and would be required before Kelly could "engage, participate or assist ... in the telemarketing of any goods, services, or investments, or in the marketing through any medium of credit of catalog goods." Further, CDS would be required to forgive more than $1.6 million in consumer debts that it inherited from CMM and to pay $100,000 in disgorgement.
The second order would require Ana S. Miller (president and sole owner of CMM from November 1998 to July 1999) and CMM jointly to pay $100,000 in disgorgement. These funds, and the additional $150,000 from Kelly and $100,000 from CDS, may be applied to redress and consumer education or as disgorgement to the U.S. Treasury at the Commission's discretion. The Kelly order singles out one class of victims to be given redress -- those who paid finance charges for payday loans.
Finally, both orders contain standard monitoring and compliance provisions and could be reopened if it is determined that the defendants misrepresented their assets during the settlement process. The companies would also be required to keep detailed records on their activities for five years and would be prohibited from selling their customer lists, except under very specific circumstances.
The Commission vote to authorize staff to file the complaints and stipulated final judgments was 5-0. They were filed on August 30 in Las Vegas, Nevada. The judgments require the court's final approval and are not binding until signed by the judge.
Mitchell J. Katz
Office of Public Affairs
NOTE: Stipulated final judgments are for settlement purposes only and do not constitute an admission by the defendants of a law violation. Consent judgments have the force of law when signed by the judge. The civil action numbers were not available at press time.