The TSR’s New Prohibitions on Certain Payment Methods: Do They Apply to Online

Lenders?

February 16, 2016

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Today’s Presenters Michael Goodman Andrew Smith Hudson Cook, LLP Covington & Burling, LLP mgoodman@hudco.com andrewsmith@cov.com Tel: 202-327-9704 Stephen Bumgarner Burr & Forman LLP sbumgarn@burr.com

Regularly represents lenders in financial services litigation matters in the Southeast – Alabama, Georgia, Florida,

Tennessee and Mississippi

.

Telemarketing Sales Rule • Amended effective June 13, 2016

– will be enforced by FTC and CFPB • Prohibits use of certain payment methods in

outbound and inbound TM transactions – remotely created checks and purchase orders

• TSR requirements generally – what is TM? what is inbound TM? what requirements

for inbound TM? • Payment method ban and RCC’s generally

What is “telemarketing”? • What you think it means and what the Telemarketing Sales

Rule says it means may be very different. • The TSR says telemarketing is a plan, program, or

campaign conduct to induce a purchase by use of one or more interstate telephone call.

• This covers outbound calls you place to prospects as well as inbound calls that prospects place to you. The TSR covers calls you receive as well as calls that you make.

• Sales calls placed to prospects who have submitted an inquiry or application to you are telemarketing, even if you are simply returning the consumer’s call or responding to an online communication.

What is “telemarketing”? • The line between “telemarketing” and fulfillment or customer service

can be extremely difficult to draw. – When I worked on the 2003 TSR amendments as an FTC staff attorney,

the hypothetical we used was calls from a doctor’s office inviting local seniors to a free hearing screening.

– We determined that these were sales calls because the ultimate purpose was to market the doctor’s services. The doctor was “hoping” that the free hearing screening would identify some consumers who would benefit from additional services, and the doctor intended to market his or her services to those consumers following from the free hearing screening.

– This meant that the calls promoting the free screening were conducted to induce a purchase.

• It could be similarly difficult to know where to draw the line when placing or taking telephone calls to help a consumer complete an application. Answering questions about the application process does not sound like sales, but how easy would it be for that conversation to turn into a sales pitch?

Inbound telemarketing and TSR compliance

• The most prominent TSR provisions apply only to outbound calls: – do-not-call – prerecorded message restrictions

Inbound telemarketing and TSR compliance

• However, several TSR provisions apply equally to inbound calls: – Disclosures required before the consumer

consents to pay; – Prohibited misrepresentations; – Express verifiable authorization; – Advance fee loan ban; – Debt relief service provisions; – Express informed consent requirement; – New payment method bans; – Recordkeeping.

Inbound telemarketing and TSR compliance

• These provisions are subject to certain activity-based exemptions: – Calls followed by a face-to-face sales

presentation; – Inbound calls that were not prompted by any

marketing efforts; – Inbound calls in response to general media

advertising; – Inbound calls in response to certain targeted

forms of advertising.

Inbound telemarketing and TSR compliance

• Several of these exemptions are PARTIAL, not full – The new payment method bans are carved

out of almost every exemption. – This means that the new payment method

bans generally apply even when the call is otherwise exempt from the TSR.

TSR November 2015 Amendments

• Bans the use of four types of payment methods in connection with telemarketing: – Remotely Created Checks (RCCs) – Remotely Created Payment Orders (RCPOs) – Cash Reload Mechanisms – Cash-to-Cash Money Transfers

These four types of payments disliked:

• FTC – use of these payment methods in telemarketing transactions constitutes an abusive practice.

• FTC – use of these payment methods has resulted in rampant abuse leading to substantial harm to consumers.

• Gaps in financial system make it difficult to detect and stop improper use of these payment methods.

• “Numerous law enforcers” have called for a prohibition on the use of all four.

Remotely Created Checks

• RCC is a type of check which is created by the payee using the consumer’s personal and financial account information and which is not signed by the payor.

• RCC is deposited into the check clearing system like any other check.

• RCC usually bears a statement indicating that the account holder authorized the check.

Remotely Created Payment Orders

• RCPO is an electronic version of an RCC.

• Electronic image looks and functions like an RCC – but never exists in paper form.

Cash-to-Cash Money Transfer

• Cash-to-cash money transfer is a specific type of money transfer in which a consumer brings cash/currency to a money transfer provider that transfers the value to another person who can pick up the cash in person.

• Viewed as abusive because:

• Fast way to anonymously and irrevocably extract money from consumer; and

• Once picked up, no recourse for the consumer to obtain a refund.

Cash Reload Mechanisms

• Virtual deposit slip for consumers to load funds onto a GPR card without a bank intermediary.

• Consumer pays cash (plus small fee) to a retailer that sells cash reload mechanisms.

CFPB Enforcement Action Against Non-Bank Short-Term, Small-Dollar

Lender

• Pertinent part – CFPB alleged that the Company “unfairly” used RCCs to debit consumers’ bank accounts after consumers revoked authorization for automatic withdrawals.

• Unlawful practice alleged by CFPB as to RCCs:

• Company’s contracts with consumers included provision allowing the Company to use RCCs if consumer canceled his/her authorization for ACH withdrawals.

• Claim that Company used contract provision to take consumers’ funds when they believed did not owe money to the Company.

CFPB’s Claims Against Non-Bank Small-Dollar Lender

• Truth-in-Lending Act • Electronic Fund Transfer Act • Dodd-Frank – Unfair and Deceptive Acts

and Practices (“UDAAP”)

What are some options?

• No RCC’s, RCPO’s, money transfer, cash reload mechanism

• No in-bound calls prior to funding • Careful control over your call center

– training, scripts, supervision, compensation, discipline

Today’s Presenters Michael Goodman Andrew Smith Hudson Cook, LLP Covington & Burling, LLP mgoodman@hudco.com andrewsmith@cov.com Tel: 202-327-9704 Stephen Bumgarner Burr & Forman LLP sbumgarn@burr.com

Regularly represents lenders in financial services litigation matters in the Southeast – Alabama, Georgia, Florida,

Tennessee and Mississippi

Today’s presentation is interactive

If you’d like to ask a question you may do one of two things:

Please type your question into the Chat feature on this webinar

OR

Unmute yourself by dialing *6 and ask your

question.