Great Expectations Creative Management, Inc., a franchisor of video dating services, and 23 of its franchises have agreed to settle Federal Trade Commission charges that they made inaccurate disclosures to consumers regarding the cost of financing member- ships in their services. The memberships range in price from $975 to $3,100, which consumers can pay in a lump sum or finance. Under the settlements, the respondents would be required to properly and accurately disclose the annual percentage rate (APR) and other credit terms of financed memberships, as required by the federal Truth in Lending Act. The 23 franchises also have agreed to make refunds to consumers who were misled by under- disclosed finance charges and APRs. The total refunds likely will exceed $200,000.
The Great Expectations franchises that are a part of this settlement operate businesses in 27 cities in 17 states, covering most parts of the country except the northeast. The owners of Great Expectations Creative Management also own four of the 23 respondent franchises. (See attached complete list.)
The Truth In Lending Act (TILA) requires creditors to dis- close to consumers all finance charges associated with a credit transaction, including the total finance charges expressed as an annual percentage rate (APR). The APR depends on several factors including the amount financed, the finance charges, and the duration of the contract. The TILA also requires creditors to provide each consumer with a separate, itemized disclosure of the amount financed. The itemization must contain specific infor- mation including whether there is a prepaid finance charge.
According to the FTC complaint detailing the charges in this case, Great Expectations Creative Management supplied its fran- chises with retail installment contracts that contained TILA-type disclosures that did not comply with the TILA. In providing financing to consumers, the franchises either used, or modeled their own retail installment contracts after, the forms supplied by the franchisor. The FTC alleged that one such contract, attached as an exhibit to the complaint and containing a pre- printed APR of 18 percent, gave erroneous instructions for franchises to use in calculating and disclosing the finance charge. The FTC charged that use of the contract resulted in false and misleading disclosures of the APR and finance charges to consumers and that, as a result, many consumers paid more in finance charges than had been disclosed to them.
In 1988, the FTC alleged, Great Expectations Creative Management learned from its own auditor that the calculations and disclosures in its retail installment contract violated the TILA. Nevertheless, the complaint states, the franchisor continued to disseminate the contract to franchises and did not inform them about the errors either at that time or in late 1990, when the franchisor created and began disseminating a revised contract. The revised contract, on its face, also violated the TILA in that it did not identify the creditor and did not contain the proper information in the itemization of the amount financed, the FTC charged.
The FTC complaint also charges the individual franchises with violating numerous disclosure requirements of the TILA. In addition, most of the named franchises allegedly misrepresented the finance charges and APRs to their customers. The complaint also charges that the franchises in Washington, D.C., Baltimore, Raleigh/Durham, Dallas, Houston, Phoenix, San Antonio, and Austin, which charged a set-up fee only to those customers who financed their memberships, failed to include the cost of the set-up fee in the finance charge and the APR, as required by the TILA.
Under 12 separate consent agreements to settle these charges, announced today for public comment before the Commission determines whether to make them final, all 24 respondents would be required to make all disclosures to consumers as required by the TILA when offering credit to their members. The settlements also would require the respondents to establish adjustment pro- grams to compensate their past and current members who overpaid (Great Expectations--05/18/95)
finance charges as a result of the challenged practices. Con- sumers would receive their refund checks and adjusted monthly payment amounts within 30 days after the Commission made the settlements final. In addition, the settlements would require each of the franchises to hire an accounting firm to review its refund program to ensure the program complies with the settlement requirements.
In addition, Great Expectations Creative Management would be prohibited from providing franchises with retail installment contracts or other financial instruments that did not comply with the TILA, and from providing contracts with pre-printed APRs. The franchisor also would be required to provide its franchises with the means for complying with TILA, including instructions for calculating the APR, finance charge or monthly payments, and a computer program that accurately calculate the disclosures required under the TILA. Further, Great Expectations Creative Management would be required to take reasonable steps to ensure franchises are complying with the TILA and to terminate, unless prohibited by state law, any franchise that it knows or should know is not complying with the TILA. Finally, the franchisor would have to send franchises a specifically-worded notice warning them to stop using prior contracts until the franchises verify that the contracts comply with the law, and cautioning them to have future TILA disclosure forms reviewed by their own attorneys.
The settlements also contain various reporting provisions designed to assist the FTC in monitoring the respondents' compliance.
The Commission vote to announce these agreements for public comment was 5-0. The proposed consent agreements will be pub- lished in the Federal Register shortly and will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.
NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $10,000.
Copies of the complaint and proposed consent agreements are available from the FTC's Public Reference Branch, Room 130, same address as above.
The 24 Respondents (grouped by settlement)
Great Expectations Creative Management, Inc.
Great Expectations, Inc., Encino, California (operates franchises in Encino, Los Angeles and Upland)
GEC Illinois, Inc., Schaumburg, Illinois
GEC Tennessee, Inc., Nashville, Tennessee
GEC Alabama, Inc., Huntsville, Alabama
G.E.C.H., Inc., doing business as Great Expectations of Cherry Hill,
Cherry Hill, New Jersey
Great Southern Video, Inc., doing business as Great Expectations of Dallas, Dallas, Texas
New West Video Enterprises, Inc., doing business as Great Expectations of Houston, Houston, Texas
MWVE, Inc., doing business as Great Expectations of Cleveland, Cleveland, Ohio
Sun West Video, Inc., doing business as Great Expectations for Singles, Scottsdale, Arizona
JAMS Financial, Inc., doing business as Great Expectations of Milwaukee, Brookfield, Wisconsin (corporate headquarters in Los Angeles)
Great Expectations of Columbus, Columbus, Ohio (corporate headquarters in Los Angeles)
APM Enterprises - Minn Inc., doing business as Great Expectations of Minneapolis, Edina,
Sterling Connections, Inc., doing business as Great Expectations of Seattle, Bellevue, Washington Private Eye Productions, Inc., doing business as Great Expectations of Portland, Portland, Oregon GREATEX Denver, Inc., doing business as Great Expectations of Denver, Denver, Colorado
TRIAAC Enterprises, Inc., doing business as Great Expectations of Sacramento, Sacramento, California
San Antonio Singles of Texas, Inc., doing business as Great Expectations of San Antonio, San Antonio, Texas (corporate headquarters in Houston, Texas)
Austin Singles of Texas, Inc., doing business as Great Expectations of Austin, Austin, Texas (corporate headquarters in Houston, Texas)
V.L.P. Enterprises, Inc., doing business as Great Expectations of San Diego, San Diego, California KGE, Inc., doing business as Great Expectations of Sausalito, Great Expectations of Mountain View, and Great Expectations of Walnut Creek (corporate headquarters in Mountain View and offices in each location)
Great Expectations of Baltimore, Inc., Towson, Maryland
Great Expectations of Washington, D.C., Vienna, Virginia
Great Expectations of Washington, Inc., doing business as Great Expectations of Raleigh/Durham, Raleigh, North Carolina
(FTC File No. 932 3040)