Telemarketing Sales Rule

Federal RegisterDec 14, 2015

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FEDERAL TRADE COMMISSION

16 CFR Part 310

RIN 3084-AB19

Telemarketing Sales Rule

AGENCY:

Federal Trade Commission.

ACTION:

Final rule.

SUMMARY:

In this document, the Commission adopts amendments to the Telemarketing Sales Rule (“TSR” or “Rule”). These amendments define and prohibit the use of certain payment methods in all telemarketing transactions; expand the scope of the advance fee ban for recovery services; and clarify certain provisions of the Rule. The amendments are necessary to protect consumers from deceptive or abusive practices in telemarketing.

DATES:

Effective on February 12, 2016, except for amendatory instructions 4.b., 4.c., 4.d., and 6, which are effective on June 13, 2016.

ADDRESSES:

This document is available on the Internet at the Commission's Web site at

www.ftc.gov

. The complete record of this proceeding, including the final amendments to the TSR and the Statement of Basis and Purpose (“SBP”), is available at

www.ftc.gov

FOR FURTHER INFORMATION CONTACT:

Karen S. Hobbs or Craig Tregillus, Attorneys, Division of Marketing Practices, Bureau of Consumer Protection, Federal Trade Commission, 600 Pennsylvania Avenue NW., Room CC-8528, Washington, DC 20580, (202) 326-3587 or 2970.

SUPPLEMENTARY INFORMATION:

This document states the basis and purpose for the Commission's decision to adopt amendments to the TSR that were proposed and published for public comment in the

Federal Register

on July 9, 2013.

After careful review and consideration of the entire record on the issues presented in this rulemaking proceeding, including 43 public comments submitted by a variety of interested parties,

the Commission has decided to adopt, with several modifications, the proposed amendments to the TSR intended to curb deceptive or abusive practices in telemarketing and improve the effectiveness of the Rule.

Telemarketing Sales Rule Notice of Proposed Rulemaking,

78 FR 41200 (July 9, 2013) (hereinafter

NPRM

). The text of the TSR is set forth at 16 CFR part 310. Unless stated otherwise, references to specific provisions of the TSR refer to the current version of the Rule published in the Code of Federal Regulations, revised as of January 1, 2015.

All of the public comments are available at

http://ftc.gov/os/comments/tsrantifraudnprm/index.shtm

. In addition, a list of commenters cited in this SBP, along with their short citation names or acronyms used throughout the SBP, is attached as Appendix A. Where a commenter submitted more than one comment, the comment is identified separately.

Beginning on February 12, 2016, sellers and telemarketers will be required to comply with the amended TSR requirements, except for § 310.4(a)(9) and (10), the prohibitions against accepting remotely created payment orders, cash-to-cash money transfers, and cash reload mechanisms, which will be effective on June 13, 2016.

I. Background

A. Overview of the TSR

Enacted in 1994, the Telemarketing and Consumer Fraud and Abuse Prevention Act (“Telemarketing Act” or “Act”)

targets deceptive or abusive telemarketing practices.

The Act specifically directed the Commission to issue a rule defining and prohibiting deceptive and abusive telemarketing practices.

In addition, the Act mandated that the rule address some specified practices, which the Act designated as “abusive.”

The Act also authorized state attorneys general or other appropriate state officials, as well as private persons who meet stringent jurisdictional requirements, to bring civil enforcement actions in federal district court.

15 U.S.C. 6101-6108. Subsequently, the USA PATRIOT Act, Public Law 107-56, 115 Stat. 272 (Oct. 26, 2001), expanded the Telemarketing Act's definition of “telemarketing” to encompass calls soliciting charitable contributions, donations, or gifts of money or any other thing of value.

Other statutes enacted by Congress to address telemarketing fraud during the early 1990's include the Telephone Consumer Protection Act of 1991, 47 U.S.C. 227

et seq.,

which restricts the use of automated dialers, bans the sending of unsolicited commercial facsimile transmissions, and directs the Federal Communications Commission (“FCC”) to explore ways to protect residential telephone subscribers' privacy rights; and the Senior Citizens Against Marketing Scams Act of 1994, 18 U.S.C. 2325

et seq.,

which provides for enhanced prison sentences for certain telemarketing-related crimes.

15 U.S.C. 6102(a).

15 U.S.C. 6102(a)(3).

15 U.S.C. 6103, 6104.

Pursuant to the Act's directive, the Commission promulgated the original TSR in 1995 and subsequently amended it in 2003 and again in 2008 and 2010 to add, among other things, provisions establishing the National Do Not Call Registry and addressing the use of pre-recorded messages and debt relief offers.

The TSR applies to virtually all “telemarketing,” defined to mean “a plan, program, or campaign which is conducted to induce the purchase of goods or services or a charitable contribution, by use of one or more telephones and which involves more than one interstate telephone call.”

The Telemarketing Act, however, explicitly states that the jurisdiction of the Commission in enforcing the Rule is coextensive with its jurisdiction under Section 5 of the Federal Trade Commission Act (“FTC Act”).

As a result, some entities and products fall outside the jurisdiction of the TSR.

Further, the Rule wholly or partially exempts from its coverage several types of calls.

Telemarketing Sales Rule Statement of Basis and Purpose and Final Rule,

60 FR 43842 (Aug. 23, 1995) (hereinafter

TSR Final Rule 1995

);

Amended Telemarketing Sales Rule Statement of Basis and Purpose,

68 FR 4580 (Jan. 29, 2003) (hereinafter

TSR Amended Rule 2003

);

Amended Telemarketing Sales Rule Statement of Basis and Purpose,

73 FR 51164 (Aug. 29, 2008) (hereinafter

TSR Amended Rule 2008

);

Amended Telemarketing Sales Rule Statement of Basis and Purpose,

75 FR 48458 (Aug. 10, 2010) (hereinafter

TSR Amended Rule 2010

16 CFR 310.2(cc) (using the same definition as the Telemarketing Act, 15 U.S.C. 6106).

15 U.S.C. 6105(b).

15 U.S.C. 45(a)(2) (setting forth certain limitations to the Commission's jurisdiction with regard to its authority to prohibit unfair or deceptive acts or practices). These entities include banks, savings and loan institutions, and certain federal credit unions. It should be noted, however, that although the Commission's jurisdiction is limited with respect to the entities exempted by the FTC Act, the Commission has made clear that the Rule does apply to any third-party telemarketers those entities might use to conduct telemarketing activities on their behalf.

See TSR Proposed Rule,

67 FR 4492, 4497 (Jan. 30, 2002) (citing

TSR Final Rule 1995,

60 FR 43843) (“As the Commission stated when it promulgated the Rule, `[t]he Final Rule does not include special provisions regarding exemptions of parties acting on behalf of exempt organizations; where such a company would be subject to the FTC Act, it would be subject to the Final Rule as well.'”).

For example, § 310.6(a) exempts telemarketing calls to induce charitable contributions from the Do Not Call Registry provisions of the Rule, but not from the Rule's other requirements. In addition, there are exceptions to some exemptions that limit their reach.

See, e.g.,

16 CFR 310.6(b)(5)-(6).

The TSR is fundamentally an anti-fraud rule that protects consumers from deceptive and abusive telemarketing practices. First, the Rule requires telemarketers to make certain disclosures to consumers, and it prohibits material misrepresentations.

Second, the TSR requires telemarketers

to obtain consumers' “express informed consent” to be charged on a particular account before billing or collecting payment and, through a specified process, to obtain consumers' “express verifiable authorization” to be billed through any payment system other than a credit or debit card.

Third, the Rule prohibits telemarketers and sellers from requesting or receiving payment in advance of obtaining: credit repair services;

recovery services;

offers of a loan or other extension of credit, the granting of which is represented as “guaranteed” or having a high likelihood of success;

and debt relief services.

Fourth, the Rule prohibits credit card laundering

and other forms of assisting and facilitating sellers or telemarketers engaged in violations of the TSR.

The TSR requires that telemarketers soliciting sales of goods or services promptly disclose several key pieces of information: (1) The identity of the seller; (2) the fact that the purpose of the call is to sell goods or services; (3) the nature of the goods or services being offered; and (4) in the case of prize promotions, that no purchase or payment is necessary to win. 16 CFR 310.4(d). Telemarketers also must disclose, in any telephone sales call, the cost of the goods or services and certain other material information. 16 CFR 310.3(a)(1).

In addition, the TSR prohibits misrepresentations about, among other things, the cost and quantity of the offered goods or services. 16 CFR 310.3(a)(2). It also prohibits making false or misleading statements to induce any person to pay for goods or services or to induce charitable contributions. 16 CFR 310.3(a)(4).

16 CFR 310.4(a)(7); 16 CFR 310.3(a)(3).

16 CFR 310.4(a)(2).

16 CFR 310.4(a)(3).

16 CFR 310.4(a)(4).

16 CFR 310.4(a)(5).

16 CFR 310.3(c).

16 CFR 310.3(b).

The TSR also protects consumers from unwanted telephone calls. With narrow exceptions, it prohibits telemarketers from calling consumers whose numbers are on the National Do Not Call Registry or who have specifically requested not to receive calls from a particular entity.

Finally, the TSR requires that telemarketers transmit to consumers' telephones accurate Caller ID information

and places restrictions on calls made by predictive dialers

and those delivering pre-recorded messages.

16 CFR 310.4(b).

16 CFR 310.4(a)(8).

16 CFR 310.4(b)(1)(iv).

16 CFR 310.4(b)(1)(v).

B. Overview of the Proposal To Amend the TSR

On July 9, 2013, the Commission proposed to amend the TSR to enhance its anti-fraud protections, as well as to clarify amendments that apply primarily, though not exclusively, to the provisions restricting unwanted calls. The Commission's Notice of Proposed Rulemaking (“NPRM”) detailed the proposed amendments to the TSR (“proposed Rule”). The subsections I.B.1 and I.B.2 below describe the Commission's proposal with respect to its anti-fraud amendments, which would:

1. Define and prohibit the use of four types of payment methods by telemarketers and sellers: “remotely created check,” “remotely created payment order,” “cash-to-cash money transfer,” and “cash reload mechanism.”

2. Expand the prohibition against advanced fees for recovery services (now limited to recovery of losses sustained in prior telemarketing transactions) to include recovery of losses in any previous transaction.

Section II sets forth the Commission's analysis of the comments received on the proposal, any modifications to the proposed language, and reasons for adopting the provisions of the Final Rule.

The clarifying amendments, discussed in Section III, serve three main functions. First, they specify that a description of the goods or services purchased must be included in the verification recording of a consumer's agreement to purchase them. Second, they clarify that the business-to-business exemption extends only to calls to induce a sale to or contribution from a business entity, and not to calls to induce sales to or contributions from individuals employed by the business. Finally, these amendments address the TSR's Do Not Call requirements to:

• State expressly that a seller or telemarketer bears the burden of demonstrating that the seller has an existing business relationship with, or has obtained an express written agreement from, a person whose number is listed on the Do Not Call Registry;

• Illustrate the types of impermissible burdens that deny or interfere with a consumer's right to be placed on a seller's or telemarketer's entity-specific do-not-call list;

• Specify that a seller's or telemarketer's failure to obtain the information necessary to honor a consumer's request to be placed on a seller's entity-specific do-not-call list pursuant to § 310.4(b)(1)(ii) disqualifies it from relying on the safe harbor for isolated or inadvertent violations in § 310.4(b)(3); and

• Emphasize that the prohibition against sellers sharing the cost of Do Not Call Registry fees, which are non-transferrable, is absolute.

1. Proposed Prohibition on Novel Payment Methods in Telemarketing

The NPRM proposed to prohibit the use of four types of “novel payment methods” in telemarketing, namely: Remotely created checks, remotely created payment orders, cash-to-cash money transfers, and cash reload mechanisms.

The Commission distinguishes these four payment methods from “conventional payment methods,” such as credit cards, and electronic fund transfers, such as debit cards. The conventional payment methods are processed or cleared electronically through networks that can be monitored systematically for fraud. Further enhancing the security of conventional payment methods is the fact that they are subject to federal laws that provide statutory limitations on a consumer's liability for unauthorized transactions and standard procedures for resolving errors. The NPRM contrasted and compared the features and vulnerabilities of the four types of novel payment methods, especially when used in telemarketing.

NPRM, supra

note 1, at 41200.

Id.

at 41202-07.

a. Remotely Created Checks and Remotely Created Payment Orders

Traditional checks require the signature of the account holder and instruct a financial institution to pay money from the account of the check writer (“payor”) to the check recipient (“payee”). As originally defined in the NPRM, a remotely created check (“RCC”) is a type of check which is created by the payee (typically a merchant, seller, or telemarketer) using the consumer's personal and financial account information and which is not actually signed by the payor.

In place of the payor's actual signature, the remotely created check usually bears a statement indicating that the account holder authorized the check, such as “Authorized by Account Holder” or “Signature Not Required.” A remotely created check is deposited into the check clearing system like any other check. As defined in the NPRM, a remotely created payment order (“RCPO”) is an electronic version of a remotely created check. The electronic image looks and functions like a remotely created check, but it never exists in paper form. Using remote deposit capture—a system that allows a depositor to scan checks remotely and transmit the check images to a bank for deposit—a merchant, seller, or telemarketer can deposit a remotely created payment order into the check clearing system in the same way as

traditional paper checks and remotely created checks.

For the reasons raised by certain commenters, and discussed in detail in Section II.A.4 below, the Final Rule adopts a revised definition of “remotely created payment order” that deletes the reference to the absence of the payor's signature and eliminates the need for a separate definition of “remotely created check.” The revised definition of “remotely created payment order” includes any payment instruction or order drawn on a person's account that is created by the payee and deposited into or cleared through the check clearing system. The definition is broad enough to include a “remotely created check,” as defined in Regulation CC.

Electronic payment alternatives to remotely created checks and remotely created payment orders include conventional payment methods, such as Automated Clearinghouse (“ACH”)

debits and traditional debit card transactions—both of which involve consumer bank accounts—as well as credit card transactions.

These alternatives are processed through different payment networks. Payment methods cleared through the ACH network are subject to regular oversight and scrutiny by NACHA—The Electronic Payments Association (“NACHA”), a private self-regulatory trade association that enforces a system of rules, monitoring, and penalties for noncompliance. Among other things, NACHA monitors the levels at which all ACH debits are returned (or rejected) by consumers or consumers' banks because high rates of returned transactions (“return rates”) can be indicative of unlawful practices, such as unauthorized debiting of consumer accounts. NACHA also monitors and categorizes specific types of returned transactions, based on the reason for the return, such as “unauthorized,” “non-sufficient funds,” or “invalid account numbers.” For many years, NACHA's rules have required banks to report and investigate any merchant with a monthly return rate of 1 percent or more for returns categorized as unauthorized,

a threshold that NACHA recently reduced to 0.5 percent.

ACH transactions are electronic payment instructions to either credit or debit a bank account. ACH credit transactions push funds into an account, while ACH debit transactions pull funds from an account. NACHA,

What is ACH?: Quick Facts About the Automated Clearing House (ACH) Network

(Jul. 1, 2013),

available at https://www.nacha.org/news/what-ach-quick-facts-about-automated-clearing-house-ach-network

. ACH credits include payroll direct deposits, Social Security benefits, and interest payments. Examples of ACH debit transactions include mortgage, loan, and insurance premium payments. FFIEC,

Bank Secrecy Act/Anti-Money Laundering Examination Manual, Automated Clearing House Transactions—Overview

217 (Feb. 27, 2015),

available at http://www.ffiec.gov/bsa_aml_infobase/pages_manual/olm_059.htm

Unlike most general-purpose reloadable cards and other prepaid cards, traditional debit cards (also referred to as “check cards”) are linked to consumer checking accounts at a financial institution.

See infra

notes 176-178; Electronic Funds Transfer Act (“EFTA”), 15 U.S.C. 1693; Regulation E, 12 CFR part 1005.

NACHA, 2013 Operating Rules, Art. 2, Subsection 2.17.2.1, Additional ODFI Action and Reporting When the Return Threshold is Exceeded (Mar. 15, 2013) (describing the actions that originating financial institutions (“ODFIs”) must take when an originator's unauthorized return rate exceeds 1 percent).

In September 2015, amendments to NACHA's Operating Rules will take effect. Among other things, these amendments reduce the threshold for unauthorized returns from one percent to 0.5 percent. Press Release, NACHA,

NACHA Membership Approves New Rules to Further Improve ACH Network Quality

(Aug. 26, 2014),

available at https://www.nacha.org/rules/updates

. NACHA also adopted new monthly return rate thresholds for other types of ACH debit returns, including a three percent threshold for returns based on “account data issues” (

i.e.,

debits returned for invalid account numbers or an inability to locate the account) and a total return rate of 15 percent.

Likewise, the payment card networks, such as American Express, Discover, MasterCard, and Visa, impose on participants (

e.g.,

merchants, banks, and third party payment processors) a system of rules, monitoring, and penalties for noncompliance. Transactions processed through the payment card networks, including certain types of debit and general-purpose reloadable debit card (“GPR card”) transactions, are subject to systemic monitoring to identify unusual activity associated with fraud.

Among other things, payment card networks monitor whether a merchant's monthly number of chargebacks

and chargeback rate (

i.e.,

the percentage of transactions that are “charged back” out of the total number of sales transactions submitted by a specific merchant) exceed certain parameters—for example, 100 chargebacks and a 1 percent chargeback rate in a given month.

Network-branded debit cards and GPR cards can be used like credit cards to make purchases at a variety of stores, online, or over the telephone. These so-called “signature” debit card purchases (

i.e.,

without the use of a PIN) are processed through and, thus, subject to the operating rules and anti-fraud monitoring of the payment card networks.

“Chargeback” is a payments industry term used to describe the process through which a disputed charge to a consumer's credit card is refunded to the consumer and charged back to the entity, often a merchant, that placed the charge on the consumer's account.

See NPRM, supra

note 1, at 41203 & nn.47-48.

For example, Visa's operating rules state:

Visa monitors the total volume of US Domestic Interchange, International Interchange, and Chargebacks for a single Merchant Outlet and identifies US Merchants that experience all of the following activity levels during any month:

• 100 or more interchange transactions

• 100 or more Chargebacks

• A 1% or higher ratio of overall Chargeback-to-Interchange volume

Visa, U.S.A,

Visa Core Rules and Visa Product Service Rules,

500 (Apr. 15, 2015),

available at https://usa.visa.com/dam/VCOM/download/about-visa/15-April-2015-Visa-Rules-Public.pdf

. MasterCard maintains similar, but not identical, thresholds for its excessive chargeback monitoring programs (at least 100 chargebacks and a chargeback ratio of 1.5 percent). MasterCard,

Security Rules and Procedures—Merchant Edition,

54 (Feb. 5, 2015),

available at http://www.mastercard.com/us/merchant/pdf/SPME-Entire_Manual_public.pdf

In contrast to the transactions processed by the ACH and payment card networks, remotely created checks and remotely created payment orders are not subject to such centralized and systemic monitoring. This is due to the decentralized nature of the check clearing system and the inability of banks to distinguish these items from other checks deposited for clearing.

NPRM, supra

note 1, at 41206-07.

In addition to these operational differences between conventional and novel payment mechanisms, different laws govern each type of payment. As described in detail in section II.A.3.a(3) below, electronic fund transfers such as ACH debits and traditional debit card transactions are governed by Regulation E and the EFTA, which provide consumers with specific rights, including liability limits for unauthorized transactions, the right to a prompt re-credit of funds, specified deadlines for completing investigations of unauthorized transactions, and the right to notification of the results of such investigations.

Under Regulation E and the EFTA, the financial institution has the burden of proof for showing the transaction was “authorized” or “unauthorized.”

For ACH transactions, consumers also benefit from NACHA's systemic oversight and enforcement of operating rules governing participants in the ACH Network.

See infra

notes 176-178; EFTA, 15 U.S.C. 1693; Regulation E, 12 CFR part 1005. With certain exceptions, most GPR cards are not subject to the EFTA or Regulation E. However, payment card networks voluntarily extend their same zero liability protection to GPR purchases as they apply to credit and traditional debit cards processed through their networks. Federal Reserve Bank of Atlanta, Retail Payments Risk Forum,

Dispelling prepaid card myths: Not all cards are created equal

(July 5, 2011),

available at http://portalsandrails.frbatlanta.org/2011/07/dispelling-prepaid-card-myths-not-all-cards-created-equal.html; see also infra

note 178. The CFPB recently published a proposed rule that would extend to “prepaid accounts,” including GPR cards, the protections of Regulation E and the EFTA, with certain important modifications.

Notice of Proposed Rulemaking Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z)

(hereinafter “Prepaid Account Rule”), 79 FR 77102 (Dec. 23, 2014). At this time, the CFPB has not taken further action on the proposal.

15 U.S.C. 1693g.

See supra

notes 30-31.

Credit card transactions also are governed by federal law—Regulation Z and the Truth in Lending Act (“TILA”).

This regulation provides protections for consumers using credit cards that are similar to, but more robust than, those for ACH debits under EFTA

and Regulation E. These rights include error and dispute resolution rights, as well as limited liability for unauthorized transactions. In addition, consumers are protected by the operators of the payment card networks that enforce compliance with operating rules designed to detect and deter fraud.

See infra

notes 172-173 and accompanying text; TILA, 15 U.S.C. 1601

et seq.;

Regulation Z, 12 CFR part 1026.

See supra

notes 32-34 and accompanying text.

In contrast, remotely created checks are governed principally by Articles 3 and 4 of the Uniform Commercial Code (“UCC”), a series of state laws applicable to negotiable instruments and commercial contracts.

As described in section II.A.3.a(3) below, the UCC provides that consumers are not liable for a check unless it is “properly payable.”

Unlike the defined rights of consumers under Regulation E and the EFTA, however, provisions of the UCC applicable to unauthorized checks (including remotely created checks) do not set forth specific timeframes for investigations and provide no right to the re-credit of funds during a bank's investigation. Moreover, the permissible timeframe for consumers to report unauthorized checks, and many other provisions of the UCC, can be varied by agreement or contract. These variations often appear in the fine print of take-it-or-leave-it bank deposit agreements.

Technically, the UCC does not cover remotely created payment orders. As a practical matter, however, banks process remotely created payment orders the same as remotely created checks because they cannot distinguish between the two during the check clearing process.

Currently, the UCC (in whole or in part) has been enacted, with some local variation, in all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands.

UCC 4-401 cmt. 1 (“An item is properly payable from a customer's account if the customer has authorized the payment and the payment does not violate any agreement that may exist between the bank and its customer.”).

See infra

note 189 (citing bank deposit agreements shortening timeframe to 14 days).

Unscrupulous telemarketers use remotely created checks and remotely created payment orders to exploit vulnerabilities in the check clearing system, enabling them to siphon “hundreds of millions of dollars” in telemarketing transactions from consumers' bank accounts.

In past TSR rulemaking proceedings, the Commission was concerned with providing protection in telemarketing transactions “when consumers are unaware that they may be billed via a particular method, when that method lacks legal protection against unlimited unauthorized charges, and when the method fails to provide dispute resolution rights,” as with novel payment methods like remotely created checks and payment orders.

In response to the original TSR rulemaking proceedings in which the Commission proposed to prohibit remotely created checks by requiring written authorization, the Commission received numerous, detailed comments from representatives of the automated payments industry and businesses demonstrating the widespread use of remotely created checks by legitimate telemarketers and sellers, as well as the lack of effective payment alternatives.

Based on the 1995 rulemaking record, the Commission revised its proposal and adopted the basic “express verifiable authorization” requirement for transactions involving such payment methods in § 310.3(a)(3).

In the most recent NPRM, however, the Commission amassed evidence from its own enforcement actions, and those of other federal and state agencies, demonstrating that the express verifiable authorization requirement is manifestly ineffective at preventing massive consumer losses in fraudulent telemarketing transactions involving remotely created checks and remotely created payment orders. The NPRM accordingly proposed to prohibit the use of these payment methods in telemarketing transactions.

NPRM, supra

note 1, at 41202 (citing injury estimates from law enforcement cases).

TSR Final Rule 2003, supra

note 8, at 4606.

TSR Final Rule 1995, supra

note 8, at 43850 & n.80 (noting examples of businesses, such as “two of the baby Bells, GEICO, Citicorp, Telecheck, Equifax, Bank of America, Discovery Card, Dunn and Bradstreet, and First of America Bank.”);

see also TSR Revised Notice of Proposed Rulemaking,

60 FR 30406, 30413 (June 8, 1995) (hereinafter

TSR RNPRM

TSR Final Rule 1995, supra

note 8, at 43850-51. Under § 310.3(a)(3), a consumer's authorization is considered verifiable if it is obtained in one of three ways: Advance written authorization signed by the consumer; an audio recording of the consumer giving express oral authorization; or written confirmation of the transaction mailed to the consumer before submitting the charge for payment.

b. Cash-to-Cash Money Transfers and Cash Reload Mechanisms

Money transfer providers enable individuals to send (or “remit”) money quickly and conveniently to distant friends and family, using a network of agents in various locations in the U.S. and abroad. As used in the NPRM and this Statement of Basis and Purpose (“SBP”), the term “cash-to-cash money transfer” describes a specific type of money transfer in which a consumer brings cash or currency to a money transfer provider that transfers the value to another person who can pick up cash in person.

As the NPRM described, the perpetrators of telemarketing scams frequently instruct consumers to use cash-to-cash money transfers because this method of payment is a fast way to anonymously and irrevocably extract money from the victims of fraud. Once a cash-to-cash money transfer is picked up, there is no recourse for the consumer to obtain a refund after the fraud is discovered. Cash-to-cash transfers to locations outside of the U.S. are governed by the Remittance Transfer Rule (“Remittance Rule”), part of the EFTA and Regulation E. Among other things, the Remittance Rule mandates disclosures to customers of money transfer providers, error resolution for mistakes, limited cancellation rights, and other protections.

However, the Remittance Rule provides no similar rights for consumers using other types of cash-to-cash transfers.

15 U.S.C. 1693

-1; 12 CFR part 1005, subpart B (effective October 28, 2013);

NPRM, supra

note 1, at 41211 & n.129.

Cash reload mechanisms are similarly problematic. Cash reload mechanisms act as a virtual deposit slip for consumers to load funds onto a GPR card without a bank intermediary. A consumer simply pays cash, plus a small fee, to a retailer that sells cash reload mechanisms, such as MoneyPaks, Vanilla Reloads, or Reloadit packs. In exchange, the consumer receives a unique access or personal identification number (“PIN”) authorization code. The consumer can use the PIN code over the telephone or Internet to transfer the funds onto any existing GPR card within the same prepaid network, apply the funds to a “digital wallet” with a payment intermediary (

e.g.,

PayPal), or pay a utility or other bill owed to an approved partner of the cash reload mechanism provider.

Perpetrators of telemarketing scams increasingly are instructing consumers to pay with a cash reload mechanism that the perpetrator can quickly use to offload the funds onto their own prepaid cards and thereby anonymously and irrevocably extract money from victims. As with a cash-to-cash money transfer,

once a cash reload mechanism is transmitted to an anonymous con artist, the money is gone and cannot be recovered. In response to concerns about the misuse of its cash reload mechanism by perpetrators of fraud, Green Dot Corporation (“Green Dot”) announced it would discontinue its MoneyPak cash reload mechanism in favor of a swipe-reload process—where a consumer presents her existing GPR card at the register and loads funds directly to the card.

The providers of two other cash reload mechanisms, Vanilla Reload Network and Reloadit, have made similar announcements.

For reasons discussed in section II.B.3.c below, legitimate merchants and billers typically do not accept cash reload mechanisms directly from consumers. Instead, merchants and most billers accept as payment the GPR card itself. In the past, Green Dot Corporation permitted certain approved billing partners to accept its MoneyPak cash reload mechanisms directly from customers. Unlike perpetrators of telemarketing fraud, however, these approved billers did not use the PIN-based cash reload mechanisms to add the funds onto existing GPR cards.

See infra

note 414 and accompanying text (describing the operation of MoneyPak and other cash reload mechanisms).

Written Statement of Green Dot Corporation For U.S. Senate Special Committee on Aging Hearing “Hanging Up on Phone Scams: Progress and Potential Solutions to this Scourge,” 2 (July 16, 2014) (hereinafter “Written Statement of Green Dot”),

available at http://www.aging.senate.gov/imo/media/doc/Green_Dot_7_16_14.pdf. See infra

section II.B for a detailed discussion.

Press Release, InComm,

InComm Expands Vanilla Reload Network, Plans to Add Swipe Reload at Over 15,000 More Retail Locations: InComm removes reload packs from stores to help prevent victim assisted fraud

(Oct. 24, 2014) (hereinafter “InComm Press Release”),

available at http://www.incomm.com/news-events/Pages/Press%20Releases/InComm-Expands-Vanilla-Reload-Network-Plans-to-Add-Swipe-Reload-to-Over-15000-More-Retail-Locations.aspx

; Testimony of William Tauscher Chairman and Chief Executive Officer Blackhawk Network Holdings, Inc. Before United States Senate Special Committee on Aging Hearing “Private Industry's Role in Stemming the Tide of Phone Scams,” at 3 (Nov. 19, 2014) (hereinafter “Testimony of Blackhawk Network”),

available at http://www.aging.senate.gov/imo/media/doc/Tauscher_11_19_14.pdf

(describing Blackhawk's “elimination of quick load with the scratch-off PIN” for its Reloadit Pack product).

Like remotely created checks and payment orders, cash-to-cash money transfers and cash reload mechanisms are categorized herein as “novel” telemarketing payment methods because they lack the same error resolution rights and liability limits provided by the TILA and Regulation Z (for credit card payments) or the EFTA and Regulation E (for electronic fund transfers, ACH debits, and traditional debit card transactions). Thus, the use of cash-to-cash money transfers and cash reload mechanisms expose consumers to the risk of unrecoverable losses from telemarketing fraud. Because it appeared from the Commission's law enforcement experience that all these novel payment methods are used almost exclusively by perpetrators of telemarketing fraud, who typically ignore the TSR's “express verifiable authorization” requirement, the NPRM proposed to prohibit their use in all telemarketing transactions.

2. Proposed Expansion of Prohibition on Telemarketing Recovery Services

Telemarketers pitching “recovery services” contact victims of prior scams promising to recover the money they lost or the prize or merchandise they never received, in exchange for a fee paid in advance. Once the fee is paid, consumers rarely receive any benefit from the promised recovery services. To protect consumers from this abusive practice, § 310.4(a)(3) of the TSR prohibits any telemarketer or seller from requesting or receiving payment for recovery services for losses in a previous telemarketing transaction “until seven (7) business days after such money or other item is delivered to that person.” The Commission is eliminating the requirement that the prior loss was the result of a telemarketing transaction. This will ensure that consumers who have incurred fraud losses in non-telemarketing transactions receive the same protection against recovery services fraud.

3. Other Proposed Clarifying Amendments

The NPRM also proposed a number of technical amendments to the TSR that are designed to clarify existing provisions, as noted in the introduction. They are discussed fully in section III.

C. Overview of Comments Received in Response to the NPRM

In response to the NPRM, the Commission received more than 40 comments representing the views of state and federal agencies,

consumer groups,

consumers,

industry trade associations,

businesses,

a U.S. Senator;

and an academic.

The commenters generally supported the Commission's efforts to combat telemarketing fraud and enforce the existing provisions of the TSR. The vast majority of commenters discussed the amendments to prohibit the use of novel payment methods in telemarketing transactions. Most financial services industry and business commenters opposed all or part of the amendments curtailing novel payment methods. Law enforcement and regulators, consumer advocates, and individual consumers expressed support for the amendments, with some commenters urging the Commission to expand the prohibitions to other industries and marketing methods. Several commenters expressed their views on the amendments to the recovery services, express verifiable consent, or Do Not Call related provisions of the Rule. The comments and the basis for the Commission's adoption or rejection of the commenters' suggested modifications to the proposed amendments are analyzed in detail in sections II and III below.

N.J. Acting Att'y Gen. and Vt. Att'y Gen.'s Office (on behalf of 24 states and the District of Columbia) (collectively, “AGO”); Consumer Fin. Prot. Bureau (“CFPB”); Consumer Prot. Branch, U.S. Dep't of Justice (“DOJ-CPB”); Criminal Div., U.S. Dep't of Justice (“DOJ-Criminal”); and Fed. Reserve Bank of Atlanta (“FRBA”).

AARP; Ams. for Fin. Reform (“AFR”) (on behalf of itself and Arkansans against Abusive Payday Lending; Chicago Consumer Coal.; Consumer Action; Consumer Fed'n of Am.; Consumers Union, the Advocacy and Policy Arm of Consumer Reports; Maryland Consumer Rights Coal.; Nat'l Consumer Law Ctr.; National Ass'n of Consumer Advocates; Pub. Citizen; Pub. Justice Ctr.; Florida Consumer Action Network; U.S. PIRG; and Utah Coal. of Religious Cmtys.); and the Nat'l Consumer Law Ctr. (“NCLC”) (on behalf of its low-income clients and the Ctr. For Responsible Lending; Consumer Action; Consumer Fed'n of Am.; Consumers Union, the Advocacy and Policy Arm of Consumer Reports; Nat'l Ass'n of Consumer Advocates; the Nat'l Consumers League; and U.S. PIRG).

Three supported all or part of the proposed amendments: Michalik, Cordero, and Frankfield. Five did not specifically address the proposed amendments: Burden, Bailey-Waddell, Manness, Seaman, and Farrington.

Amer. Bankers Ass'n (“ABA”); The Clearing House and Fin. Servs. Roundtable (“The Associations”); Credit Union Nat'l Ass'n. (“CUNA”); Elec. Check Clearing House Org. (“ECCHO”); Elec. Transactions Ass'n. (“ETA”); NACHA—The Elec. Payments Ass'n. (“NACHA”); The Money Servs. Roundtable (“TMSRT”); and Nat'l Ass'n. of Fed. Credit Unions (“NAFCU”).

Blue Diamond Remodeling, Inc. (“Blue Diamond”); DCS Holdings Group, LLC (“DCS Holdings”); G3 Assocs.; Green Dot Corp. (“Green Dot”); InfoCision Mgmt. Corp. (“InfoCision”); Interactive Commc'ns Int'l, Inc. (“InComm”); Michael; NetSpend; PPA—Biondi; PPA—Frank; Samuel (“First Data”); Thayer Gate Advisors (“Thayer”); and Transp. FCU.

The Hon. Bill Nelson.

Prof. Sarah Jane Hughes (“Hughes”).

II. Final Amended Rule Pertaining to the Anti-Fraud Amendments

The Commission has carefully reviewed and analyzed the entire record developed in this proceeding.

The record, as well as the Commission's own law enforcement experience and that of its state and federal counterparts, supports the Commission's view that the anti-fraud amendments to the TSR are necessary and appropriate to protect consumers from significant financial harm.

In some instances, the Commission has made modifications to its original proposal. The Final Rule

addresses deceptive and abusive practices in telemarketing by:

The record includes the NPRM, and the law enforcement cases and experience referenced therein, which are hereby incorporated by reference.

The Commission's decision to amend the Rule is made pursuant to the rulemaking authority granted by the Telemarketing Act to protect consumers from deceptive and abusive practices. 15 U.S.C. 6102(a)(1) and (a)(3).

• Prohibiting the use of remotely created payment orders in outbound and inbound telemarketing transactions;

○ Adopting a modified definition of the term “remotely created payment order” that broadly includes checks (including “remotely created checks”) and payments that are: (1) Created by the payee; and (2) sent through the check clearing system;

○ Eliminating the proposed definition of the term “remotely created check;”

• Prohibiting the use of cash-to-cash money transfers and cash reload mechanisms in outbound and inbound telemarketing transactions;

○ Adopting the proposed definition of “cash-to-cash money transfer;”

○ Adopting a revised definition of the term “cash reload mechanism” to clarify the exclusion of swipe reload methods of loading funds to GPR cards; and

• Expanding the advance fee ban on recovery services to include recovery of losses incurred in previous telemarketing and non-telemarketing transactions.

A. Final Rule and Comments Received on Remotely Created Checks and Remotely Created Payment Orders

Based on its review of the entire record, the Commission concludes that the use of remotely created checks and remotely created payment orders in telemarketing is an abusive practice. In reaching this conclusion, the Commission has applied the unfairness analysis set forth in Section 5(n) of the FTC Act,

finding that this practice causes or is likely to cause substantial injury to consumers that is not outweighed by countervailing benefits to consumers or competition and is not reasonably avoidable.

In the following sections, the Commission separately: (1) Reviews comments supporting the prohibition against each of the two novel payment methods, (2) reviews comments opposing the prohibition against each of them, (3) sets forth its legal analysis, and (4) describes the operation of the amended provisions, and related definitions, in the Final Rule.

The Telemarketing Act authorizes the Commission to promulgate Rules “prohibiting deceptive telemarketing acts or practices and other abusive telemarketing acts or practices.” 15 U.S.C. 6102(a)(1). In determining whether a practice is “abusive,” the Commission has used the Section 5(n) unfairness standard where appropriate.

See TSR Amended Rule 2003, supra

note 8, at 4614.

See

15 U.S.C. 45(n) (codifying the Commission's unfairness analysis, set forth in a letter from the FTC to Hon. Wendell Ford and Hon. John Danforth, Committee on Commerce, Science and Transportation, United States Senate, Commission Statement of Policy on the Scope of Consumer Unfairness Jurisdiction,

reprinted in In re Int'l Harvester Co.,

104 F.T.C. 949, 95-101 (1984)) (hereinafter “Unfairness Policy Statement”).

1. Comments Supporting the Prohibition on Remotely Created Checks and Remotely Created Payment Orders

Numerous commenters, including members of the financial services industry, a federal credit union, small businesses, an academic, consumer advocacy groups, individual consumers, staff from federal agencies, and Offices of Attorneys General in 24 states and the District of Columbia supported the prohibition on the use of remotely created checks and remotely created payment orders in telemarketing transactions.

Commenters expressed support for every aspect of the Commission's proposal, specifically described reasons why it is necessary and appropriate, and some suggested that the Commission's proposal should be applied to non-telemarketing transactions.

The states are: Arizona, Arkansas, Delaware, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nevada, New Hampshire, New Jersey (joined via separate comment letter), New Mexico, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Vermont, and Washington. AGO at 1.

In general, commenters in support of the prohibition argued that these payment methods are highly susceptible to fraud in telemarketing and cause significant harm to consumers in the form of unauthorized and fraudulent withdrawals from their financial accounts.

Commenters agreed that perpetrators of fraud frequently use remotely created checks and remotely created payment orders to extract money from consumer victims and inflict significant harm.

One small business owner suggested that businesses should never receive direct access to a consumer's account, describing it as “a perfect scenario for fraud and other deceitful actions to occur.”

The DOJ-CPB stated that a prohibition on remotely created checks and remotely created payment orders and other novel payment methods “would prevent hundreds of millions of dollars in consumer loss each year while, at the same time, leaving open safer mechanisms for legitimate marketers to accept consumer payments.”

In addition, the DOJ-CPB noted, “[t]he serious risks posed by RCCs are well documented in and outside of the FTC's [NPRM],” including in guidance documents published by bank regulators and public comments filed in other rulemaking proceedings.

DOJ-CPB at 2; AFR at 1; AARP at 3; AGO at 11; CFPB at 1; NCLC at 2-3; DOJ-Criminal at 3; Transp. FCU.

AARP at 3; AGO at 11 (reaffirming the views expressed by the Attorneys General of 34 states, the District of Columbia, and American Samoa in 2005 comment letter filed by National Association of Attorneys General, Proposed Amendment to Regulation CC Remotely Created Checks, FRB Docket No. R-1226 (May 9, 2005),

available at http://www.federalreserve.gov/SECRS/2005/May/20050512/R-1226/R-1226_264_1.pdf

); NACHA at 1; NCLC at 1, 5; Michael; DOJ-CPB at 1-2; DOJ-Criminal at 1& 3.

Michael.

DOJ-CPB at 1.

Id.

at 2 (citing Financial Crimes Enforcement Network, Advisory FIN-2012-A010, Risk Associated with Third-Party Payment Processors (Oct. 22, 2012); NACHA, Remotely Created Checks and ACH Transactions: Analyzing the Differentiators (March 2010); FFIEC, Bank Secrecy Act Anti-Money Laundering Examination Manual: Third-Party Payment Processors B Overview (2010); Federal Reserve Bank of Atlanta, 2008 Risk & Fraud in Retail Payments: Detection & Mitigation Conference Summary (Oct. 6-7, 2008); Public Comment filed with the Federal Reserve by the National Association of Attorneys General, the National Consumer Law Center, Consumer Federation of America, Consumers Union, the National Association of Consumer Advocates, and U.S. Public Interest Research Group in Docket No. R-1226 (May 9, 2005)).

Several commenters emphasized that consumers who provide their account numbers to a telemarketer have no effective control over how that payment is processed, little understanding of the different levels of protection afforded different types of payments, and no realization that the information they provide can be used to initiate additional unauthorized debits.

Many commenters pointed out how the consumer protections for remotely created checks and remotely created payment orders are less robust and more burdensome for consumers than those provided for credit cards and ACH debits.

Commenters also explained how protections for consumers whose accounts are debited via remotely created checks and remotely created payment orders are further diminished due to the lack of a systemic, centralized monitoring and identification of these payment types in the check clearing system.

Many commenters described

how a telemarketer's choice to use a consumer's bank account information to create a remotely created check, instead of originating an ACH debit or accepting a payment card, determines the level of scrutiny and monitoring applied to the transaction and the telemarketer or seller.

These commenters pointed out that telemarketers and sellers using remotely created checks and remotely created payment orders are often deliberately exploiting these regulatory and operational weaknesses to escape the heightened scrutiny and monitoring of the ACH and payment card networks.

AGO at 11 (citing a “lack of consumer awareness of how strangers can debit their bank accounts without authorization”); Trans. FCU (noting that consumers do not realize their account information “can easily be used to generate additional unauthorized payments”); NCLC at 6 (“Consumers cannot protect themselves from the dangers of RCCs and RCPOs”); Michael.

AGO at 11 (noting “the hurdles that consumers often encounter in trying to obtain a recredit to their bank account when—if at all—they discover an unauthorized debit”); NCLC at 4-5 (noting that “the use of RCCs and RCPOs is popular for scammers because the consumer protections are weak and poorly enforced . . .” and explaining how RCCs and RCPOs can make it difficult for consumers to initiate stop payment orders).

AGO at 11 (highlighting “the difficulty, if not impossibility, of tracking remotely created checks”);

NACHA at 3 (“RCCs are difficult, if not impossible, for individual financial institutions to monitor as a class”); NCLC at 9 (“a systemic monitoring system is lacking for the check system.”).

AFR at 1 (“RCCs and RCPOs are heavily used by scammers and others who wish to avoid the consumer protections and fraud prevention mechanisms associated with modern electronic payment devices”); DOJ-CPB at 2 (“we have seen third party payment processors that promote their use of RCCs as a means to process transactions for merchants that have been blacklisted from credit card and ACH transactions”); Trans. FCU (“[w]e have seen these types of payment mechanisms used by scammers, often targeting elderly or financially distressed members”); NACHA at 3 (“Because RCCs are not monitored systemically . . . fraudsters are able to use RCCs to evade the authorization requirements and strong protections that NACHA has implemented through the ACH system”); NCLC at 6 (“RCCs and RCPOs are also used by entities who wish to escape scrutiny by the systems used to detect fraud in other payment systems.”).

Virtually all of the commenters in support of the prohibition focused on the harm inflicted on consumers when unauthorized and fraudulent debits are withdrawn using remotely created checks and remotely created payment orders.

Commenters opined that the legitimate use of remotely created checks and payment orders in telemarketing transactions, if any, is significantly outweighed by the considerable evidence of harm inflicted on consumers.

Citing the existence of safer modern alternatives to remotely created checks and remotely created payment orders in telemarketing transactions, such as debit cards and ACH debits, commenters argued that the reasons to prohibit their use are even more compelling today than in the past.

As a result, they maintained, the proposed Rule would not adversely affect legitimate telemarketers, who already accept more conventional payment methods.

One commenter from the financial services industry, NetSpend, described the significant adverse impact that remotely created checks have on its prepaid Visa and MasterCard debit card business and the banks that issue its cards. Netspend at 1. NetSpend explained that its debit cards do not have checking account functionality, so any remotely created checks drawn on the card account number are automatically returned unpaid by the issuing bank. NetSpend states that “some financial institutions and their third-party vendors choose to ignore the 100% return-rate” and continue to submit remotely created checks each month against its prepaid debit cards that lack checking privileges. As a result, NetSpend reports, it pays about $75,000 per year in bank fees to just one of its card issuing banks for processing thousands of remotely created check images before the bank can automatically reject them.

Id.

NetSpend also stated that it suffered significant losses from remotely created checks originated by First Bank of Delaware—a bank that the Department of Justice sued for processing remotely created payments for “fraudulent merchants and telemarketers wishing to skirt the rules of the electronic funds transfers networks.”

Id.; see also U.S.

First Bank of Delaware,

Civ. No. 12-6500 (E.D. Pa. Nov. 19, 2012).

AARP at 3 (concluding that “the benefit to consumers of the proposed rule outweighs the burden to businesses in complying with this rule”); Hughes at 1 (“I find the cost-benefit analysis articulated in the [NPRM] to be persuasive”); NACHA at 3 (explaining that “[i]n 2010, NACHA adopted rules (that became effective in 2011) allowing for recurring payments to be authorized over the telephone” thereby eliminating the few advantages for legitimate businesses of remotely created checks over ACH).

AARP at 3 (concluding that “legitimate businesses have access to a variety of other payment methods”); AFR at 1 (noting that remotely created checks and remotely created payment orders “have few legitimate uses for which other payment systems could not substitute”); DOJ-CPB at 3 (“The FTC's proposed rule change will not adversely affect legitimate telemarketers” that can “use a variety of other payment means”); NCLC at 7 (“With the availability of modern electronic payment methods, there are no longer any legitimate reasons to use either payment mechanism that can justify their risks.”).

Two commenters responded to the Commission's specific request for comment regarding the proposed definitions of remotely created check and remotely created payment order by proposing discrete changes that would eliminate the requirement that the check or payment order be “unsigned.”

These commenters explained that the definition proposed in the NPRM was too narrow and technical to be fully effective, because a telemarketer engaged in fraud could instead insert “a graphical image of a signature into the signature block of each check or remotely created payment order” to circumvent the prohibition.

Instead, the commenters suggested that the Commission revise the definitions of remotely created check and remotely created payment order to make clear that both are a payment order or instruction: (1) Created or initiated by the payee and (2) deposited into or cleared through the check clearing system.

CFPB at 2 (“The Bureau believes that the RCC and RCPO definitions ultimately adopted by the Commission should not hinge on the presence or absence of the consumer's signature”); FRBA-2 at 2 (stating that “this broader prohibition will better serve the Commission's purposes”).

FRBA-2 at 2.

Several commenters supporting the proposed Rule urged the Commission to expand the prohibition on remotely created checks and remotely created payment orders to non-telemarketing transactions.

These commenters argued for a complete prohibition on these payment methods in all consumer transactions, noting the existence of abuse of remotely created checks and payment orders in connection with scams perpetrated via email and other media.

Two of these commenters urged the Commission to work closely with the CFPB, Federal Reserve Bank, and other regulators to implement such a prohibition.

AFR at 1; NCLC at 2;

see also

NACHA at 4 (noting that “it seems likely that bad actors would attempt to move activity online, as e-commerce is not covered by the telemarketing sales rule.”). In addition, two individuals went so far as to suggest either banning all telemarketing or requiring “everything in writing.” Seaman (adding, “[i]f consumers want something, they will call the company themselves”); G3 Assocs. (“It's real simple . . . make them put it in writing (either snail mail or email) . . . if they are legit they will if they won't, hang up!”).

AFR at 1 (urging the Commission to apply the proposed ban to “sales initiated by email or other methods that do not use a telephone”); NCLC at 4 (noting the use of these payments by internet payday lenders that provide loans to consumer in states where payday lending is illegal or where they are not licensed).

AFR at 1; NCLC at 7.

Some commenters also emphasized the essential assistance provided by payment processors and merchant banks to telemarketers and sellers that use remotely created checks and remotely created payment orders to debit consumer accounts without authorization.

NCLC expressed the view that the Rule's existing knowledge standard for assisting and facilitating is too burdensome, and would insulate payment processors from liability for processing prohibited payments for telemarketers.

NCLC and AFR urged the Commission to adopt a strict liability standard that would incentivize payment processors to develop robust mechanisms to ensure they are not processing these prohibited payments.

DOJ-CPB at 2 (noting that payment processors market the use of remotely created checks to process transactions for merchants that have been kicked out of payment card networks and ACH network); NCLC at 8 (“Payment processors and ODFIs play critical roles in the misuse of RCCs and RCPOs.”).

NCLC at 8.

AFR at 1 (“Payment processors and the banks that originate RCCs and RCPOs should be strictly liable for processing unlawful payments”); NCLC at 7-8 (“The best way to stop RCCs and RCPOs from entering into the system and reaching consumers' accounts is to . . . hold payment processors and ODFIs strictly liable for accepting RCCs or RCPOs that violate the TSR.”).

2. Comments Opposing the Prohibition on Remotely Created Checks and Remotely Created Payment Orders

In stark contrast to the 1995 rulemaking proceedings in which a

number of specific entities described in detail their legitimate use of and dependence on remotely created checks, in response to the current NPRM, the Commission received only one comment from a telemarketing firm covered by the amended Rule—InfoCision. InfoCision asserted generally that the amended Rule would increase the burdens on legitimate businesses and charities that rely on novel payment methods.

The remaining comments were submitted primarily by financial services industry members and associations.

Comments from the financial services industry contended that prohibiting telemarketers and sellers from using remotely created checks and remotely created payment orders would be a direct and impermissible regulation of banks, an action that exceeds the Commission's jurisdiction.

Overall, commenters opposed to the prohibition raised similar concerns. As described in detail below, commenters challenged the FTC's unfairness analysis, including the significance of the injury to consumers and the relative burdens on consumers and businesses; argued that the reach of the proposal was too broad; and suggested alternative courses of action.

InfoCision at 2.

See generally,

ABA; The Associations; CUNA; ECCHO; ETA; First Data; FRBA; NAFCU; PPA—Biondi; PPA—Frank.

ABA at 7 (stating the prohibition exceeds “the FTC's mission, jurisdiction, and authority”);

see also

ECCHO at 3; The Associations at 2. Other comments acknowledged the amended Rule would not apply to financial institutions, but raised concerns about potential negative effects on the broader payment system. ABA at 7; CUNA at 1; FRBA-1 at 2; The Associations at 10. To minimize these effects, commenters encouraged the Commission to coordinate closely with the Federal Reserve Board, CFPB, bank regulators, and other stakeholders. CUNA at 1; FRBA-1 at 4; NAFCU at 1.

While many commenters challenged the FTC's assertion that the use of these payment methods in telemarketing causes or is likely to cause substantial harm to consumers,

no commenter specified how or to what extent remotely created checks and remotely created payment orders are used in lawful telemarketing of legitimate products and services. For example, InfoCision claimed that novel payment methods are “extremely important” to legitimate businesses and charities that “need to offer customers multiple means of accepting payments or charitable donations” and that the amended Rule would increase the cost of collecting payments and donations but did not provide support for these claims.

Commenters from the financial services industry also did not provide specific support or evidence.

ABA at 2; ETA at 2; The Associations at 2; ECCHO at 13.

InfoCision at 2.

ABA at 1 (“we do not speak extensively in this comment letter of all of the potential legitimate uses of RCCs by telemarketing and other merchants”); DCS Holdings (“we do not have quantifiable data concerning how many businesses depend on one or more of these [payment] methods”); ECCHO at 12-13 (estimating the total number of remotely created checks cleared and returned as unauthorized in 2010 without identifying the number related to telemarketing); First Data at 7 (estimating that “thousands” of small businesses in its system accept RCCs and RCPOs, “some” of which “may be used via telemarketing transactions”); Thayer (“[the prohibition] will make business far more difficult for legitimate telemarketing firms”). Furthermore, First Data, itself a credit card payment processor, described its use of remotely created checks to withdraw money from the bank accounts of start-up merchants that have yet to obtain corporate credit or debit cards. First Data at 7. First Data did not provide estimates of the number of such transactions.

Id.

The commenters in opposition took issue with other aspects of the unfairness analysis the Commission articulated in the NPRM.

According to some commenters, the Commission failed to demonstrate that the regulatory framework applicable to remotely created checks and remotely created payment orders is a source of significant harm to consumers or a sufficient justification for the amendment.

To buttress that argument, commenters favorably compared the consumer protections that the UCC affords consumers who use remotely created checks and remotely created payment orders with those afforded by the EFTA (for ACH debits and traditional debit cards) and the TILA (for credit cards).

Further, many argued that the Commission overstated the operational weaknesses of the check clearing system in detecting and deterring fraudulent telemarketers and unauthorized transactions.

ABA at 1, 3; ECCHO at 4; The Associations at 5.

ECCHO suggested that the Commission “should undertake additional primary research to validate the statements in the Proposal regarding the relative burdens associated with a consumer obtaining a credit of funds to his/her account when making a claim of an unauthorized payment of any type (card, ACH or check).” ECCHO at 7.

ABA at 8-9 (noting that, despite differences in “details and the technical legal process,” the protections for consumers “are, as a practical matter, comparable”); ECCHO at 6 (“the UCC and other check law protections against unauthorized RCCs are arguably better for consumers than Regulation E and Regulation Z.”); The Associations at 4-5 (expressing disagreement that consumer protections for unauthorized remotely created checks and remotely created payment orders are inadequate); PPA—Biondi (same); PPA—Frank (same).

PPA—Biondi; PPA—Frank.

At least one commenter argued that the Commission failed to demonstrate that remotely created payment orders, themselves, caused unavoidable harm to consumers.

Indeed, some commenters asserted that the prohibition would do little to protect consumers when unscrupulous telemarketers thwart the Rule's existing express verifiable authorization requirements, regardless of the payment method used.

ABA at 6 (opining that the unavoidability must be connected to the cause of the harm, which is the telemarketer's initial deception, not the choice of payment system routing);

see also

ECCHO at 5 (suggesting the Commission should focus “on the actions of the telemarketer that give rise to unfair or abusive practices and not on the use of a particular payment instrument.”); ETA at 1 (“it is not the payment methods themselves that are fraudulent, but rather the actors that are attempting to sell goods and services in a fraudulent manner that constitute the problem”); PPA—Frank (“The change here is just like blaming the gun and not the person who pulls the trigger . . .”).

ABA at 5 (stating that fraudulent telemarketers will shift to other payment mechanisms); CUNA at 2 (same); PPA—Biondi (same);

see also

ECCHO at 4 (opining that the proposed Rule will have no deterrent effect on a “telemarketer who is already violating the TSR by not obtaining customer authorization for a debit transaction of any type—ACH, card, or RCC.”).

Most commenters, however, aimed their critique at the final cost-benefit prong of the Commission's unfairness analysis. These commenters expressed the view that the harm, if any, inflicted on consumers is outweighed by the benefits of using remotely created checks and remotely created payment orders in telemarketing transactions.

Because of the inability of banks to distinguish remotely created checks and remotely created payment orders from traditional checks, some argued that the prohibition would have a “

per se

application beyond telemarketing” that would cause banks to refuse to accept any remotely created checks and remotely created payment orders.

As a result, commenters emphasized, the amended Rule would cause substantial harm to all consumers and businesses that rely on these payment methods in non-telemarketing transactions (

e.g.,

last minute payments of credit card bills, insurance premiums, and mortgages).

As evidence of the responsible use of remotely created checks and remotely created payment orders by legitimate businesses, ECCHO provided estimates that they asserted showed relatively low overall rates of unauthorized remotely

created check adjustment claims, compared with the overall volume of such transactions.

In addition to their concern over curtailing currently accepted payment mechanisms, several commenters opined that any action to restrict remotely created checks and, more importantly, remotely created payment orders would stifle future innovation in payments.

100

ABA at 7 (noting that not all consumers have or are eligible for the conventional payment methods described in the NPRM); First Data at 3 (stating that the prohibition will result in delayed receipt of goods or services purchased over the telephone); PPA—Biondi (stating that RCCs and RCPOs benefit consumers because “there is more space available for providing information about the transaction to the consumer”); PPA—Frank (same).

ABA at 6;

see also

DCS Holdings; ECCHO at 3; FRBA-1 at 2; PPA—Frank; The Associations at 2.

ABA at 2; ECCHO at 4; ETA at 2; PPA—Biondi The Associations at 9.

ECCHO estimated that banks processed approximately 2.04 million remotely created checks per day in 2009. ECCHO at 13-14. Based on a survey of three large financial institutions, ECCHO estimated the percentages and numbers of the unauthorized RCC adjustment claims to be .01264% or approximately “258 unauthorized RCCs per day industry wide.”

Id.

100

CUNA at 1; ECCHO at 3-4; FRBA-1 at 2; NAFCU at 1.

Some commenters opposing the prohibition offered alternatives to the Commission's proposal. These suggestions included voluntary or mandatory reporting of remotely created check and remotely created payment order return rates to the Commission by telemarketers or their non-depository payment processors;

101

requiring financial institutions to disclose to bank regulators each instance of “abnormal” or “significant” remotely created check and remotely created payment order transaction or returns activity by their customers;

102

mandating that all banks and payment processors only do business with telemarketers on a registry of telemarketers;”

103

and implementing a magnetic ink character recognition (“MICR”) line

104

identifier for remotely created checks and remotely created payment orders.

105

101

The Associations at 2, 10-11 (“Rather than prohibiting the use of RCCs and RCPOs by telemarketers altogether, we believe the FTC should impose return reporting requirements on telemarketers and their [non-depository] processors that use RCCs and RCPOs”);

compare

DCS Holdings (proposing that the Commission “require monitoring and quantifying all payment types processed for returns, volumes, velocity patterns etc.”).

102

FRBA-1 at 4.

103

PPA—Frank (“How about requiring alk (sic) telemarketers to register providing all product and fulfillment details for what they are selling”); DCS Holdings (“Require all banks and third party processors only do business with `Registered' telemarketers . . .”).

104

The MICR information appears at the bottom of each check, and contains numbers that identify the bank branch, bank routing number, check number, and account number at the payor bank.

105

ECCHO at 10; First Data at 8.

3. The Commission Concludes That the Use of Remotely Created Checks and Remotely Created Payment Orders in Telemarketing Meets the Test for Unfairness

In the context of TSR rulemaking proceedings, the Commission has determined to apply the unfairness test to evaluate whether certain acts and practices qualify as “other abusive telemarketing acts or practices”

106

under the Telemarketing Act.

107

As set forth in Section 5(n) of the FTC Act, an act or practice is unfair if: (a) It causes or is likely to cause

108

substantial injury to consumers, (b) the injury is not reasonably avoidable by consumers, and (c) the injury is not outweighed by countervailing benefits to consumers or competition. Based on the entire record in this proceeding, the Commission concludes that the use of remotely created checks and remotely created payment orders in telemarketing transactions meets the unfairness test and, thus, is an abusive practice.

106

15 U.S.C. 6102(a)(1) (“The Commission shall prescribe rules prohibiting deceptive telemarketing acts or practices and other abusive telemarketing acts or practices.”).

107

TSR Amended Rule 2003, supra

note 8, at 4614.

108

Thus, the Commission need not demonstrate

actual

consumer injury, but only the

likelihood

of substantial injury. In this proceeding, however, there is sufficient evidence that the use of remotely created checks and remotely created payment orders in telemarketing causes actual injury.

a. The Use of Remotely Created Checks and Remotely Created Payment Orders in Telemarketing Causes Substantial Harm to Consumers

(1) Law Enforcement Record

The rulemaking record demonstrates the persistent, ongoing, and substantial harm caused by the use of remotely created checks and remotely created payment orders in telemarketing transactions. For nearly two decades, the Commission and its state and federal law enforcement partners have used every available tool at their disposal to combat the abuse of remotely created checks in unlawful telemarketing transactions. In many of these cases, the Commission has sought and courts have granted extraordinary equitable and monetary relief, including

ex parte

temporary restraining orders and asset freezes aimed at immediately halting the perpetrators of widespread telemarketing fraud.

109

These fraudulent schemes have victimized consumers nationwide with pitches for a variety of products, such as phony medical discount products, advance fee loans, credit card interest rate reduction services, and magazine subscriptions. Despite aggressive and active law enforcement actions, telemarketers and sellers continue to abuse remotely created checks and, increasingly, remotely created payment orders, to defraud consumers, as exemplified by recent cases filed by the Commission.

109

Since 1995, the Commission has filed more than 300 cases involving violations of the TSR, many of which have included fraudulent or unauthorized remotely created checks.

See, e.g., FTC

Sun Bright Ventures, LLC,

Civ. No. 14-02153-JDW-EAJ (M.D. Fla. July 20, 2015) (Stip. Perm. Inj.);

FTC

First Consumers, LLC,

Civ. No. 14-1608 (E.D. Pa. Feb. 19, 2015) (Summ. J.);

FTC

AFD Advisors,

Civ. No. 13-6420 (N.D. Ill. Aug. 26, 2014) (Stip. Perm. Inj.);

FTC

Ideal Financial Solutions, Inc.,

Civ. No. 13-00143-MMD-GFW (D. Nev. June 30, 2015) (Partial Summ. J.);

FTC

Group One Networks, Inc.,

Civ. No. 09-0352 (M.D. Fla. Mar. 19, 2010) (Stip. Perm. Inj.);

FTC

FTN Promotions, Inc.,

Civ. No. 07-1279-T-30TGW (M.D. Fla. Dec. 30, 2008) (Stip. Perm. Inj.);

FTC

3d Union,

Civ. No. 04-0712-RCJ-RJJ (D. Nev. July 19, 2005) (default judgment);

FTC

4086465 Canada, Inc. d/b/a International Protection Center,

Civ. No. 04-1351 (N.D. Ohio Nov. 14, 2005) (Stip. Perm. Inj.);

FTC

Win USA Services, Ltd.,

Civ No. 98-1614Z (W.D. Wash. Apr. 13, 2000) (Summ. J.);

FTC

Consumer Money Markets, Inc.,

Civ. No. 00-1071-PMP-RJJ (Sept. 6, 2000) (Stip. Perm. Inj.);

FTC

National Credit Management Group,

Civ. No. 98-936(ALJ) (D.N.J. May 4, 1999) (Stip. Perm. Inj.);

FTC

SureCheK Systems, Inc.,

No. 1-97-CV-2015 (JTC) (N.D. Ga. June 11, 1998) (Stip. Perm. Inj.);

FTC

National Credit Foundation, Inc.,

Civ. No. 96-2374-PHX-ROS (Apr. 10, 1997) (Stip. Perm. Inj.);

FTC

Universal Credit Corporation,

Civ. No. 96-0114-LHM(EEx) (C.D. Cal. Dec. 6, 1996) (Stip. Perm. Inj.);

FTC

Diversified Marketing Service Corp.,

Civ. No. 96-0388M (Oct. 18, 1996) (Stip. Perm. Inj.);

FTC

Windward Marketing, Ltd,

Civ. No. 96-0615-FMH (N.D. Ga. Oct. 10, 1996).

States have brought additional cases against telemarketers and sellers that used remotely created checks to withdraw money from consumer bank accounts without authorization.

See e.g., State of Ohio ex rel.

Simplistic Advertising, Inc.,

Civ. No. 08-7232 (Franklin County, OH Ct. Com. Pl. filed May 16, 2008);

State of Ohio ex rel.

6450903 Canada, Inc.,

Civ. No. 05CVH7233 (Franklin County, OH Ct. Com. Pl. May 8, 2009) (default judgment).

In the past two years alone, the Commission halted three separate telemarketing operations that were charged with using remotely created checks or remotely created payment orders to defraud thousands of consumers out of tens of millions of dollars.

110

In September 2014, the Commission sued Sun Bright Ventures, LLC, its principals, and related entities for operating a telemarketing scheme that allegedly deceived consumers into divulging their bank account information by pretending to be part of Medicare. Using consumer bank account information, the defendants allegedly used remotely created checks (and remotely created payment orders) to extract money from thousands of seniors and used tape-recorded “authorizations” to defeat consumers' disputes with their banks.

111

The Commission alleged these tape recordings were faulty, as they failed to show that the defendants obtained

consumers' authorization to be debited.

112

The rates at which consumers and banks returned these transactions were grossly outside comparable industry norms for debits from consumer bank accounts.

113

For example, the defendants allegedly generated overall return rates of approximately 68 percent and an unauthorized return rate of 28 percent.

114

By comparison, in 2013 NACHA reported that overall return rates for ACH debit transactions averaged just 1.42 percent, while unauthorized return rates averaged .03 percent.

115

110

See FTC

Sun Bright Ventures, supra

note 109 (entry of stipulated monetary judgment order for $1,418,981);

FTC

First Consumers, supra

note 109 (entry of $10,734,255.81 monetary judgment);

FTC

AFD Advisors, supra

note 109 (entry of stipulated monetary judgment of $1,091,450.68).

111

Pl.'s Mot. and Memo. In Supp. of TRO at 8-9,

Sun Bright Ventures,

Civ. No. 14-02153.

112

Compl. ¶ 23,

Sun Bright Ventures, supra

note 109. On June 5, 2015, an FBI Special Agent filed a criminal complaint and arrest warrant charging Glenn Erikson with wire fraud in connection with his part in the

SunBright Ventures

telemarketing scheme.

U.S.

Glenn Erikson,

Cr. No. 15-0520-MPK (W.D. Pa. June 5, 2015).

113

Due to the decentralized nature of the check clearing system and the inability to track remotely created checks and remotely created payment orders, neither the banking industry nor the Federal Reserve maintain data on average industry return rates. Therefore, the Commission's cases have referenced NACHA return rate statistics for ACH debits as a benchmark for return rates of remotely created check and remotely created payment order transactions.

See

Pl.'s Summ. J. Ex. 50, Dec. Professor Amelia Helen Boss, ¶ 16 (Oct. 21, 2014) (hereinafter “Dec. Prof. Amelia Helen Boss”), filed in

First Consumers, supra

note 109 (“The strong similarities between RCCs and ACH transactions make comparisons of system data particularly appropriate, and, as will be discussed below, such comparisons are extremely important in the analysis of returns.”).

114

Compl. ¶ 37,

Sun Bright Ventures, supra

note 109.

115

Id.

at ¶ 36;

see also

NACHA, 2013 ACH Network Return Rate Statistics (on file with the Commission);

NACHA RFC, supra

note 31, at 3-5 (citing 2012 statistics evidencing an overall ACH debit return rate of 1.5 percent and an unauthorized return rate of 0.03 percent).

In March 2014, the Commission sued the perpetrators of a similar scheme targeting senior citizens: First Consumers, LLC, its principals, and related entities. The Commission charged the defendants with cold-calling tens of thousands of seniors claiming to sell fraud protection, legal protection, and pharmaceutical benefit services. In some instances, the telemarketers who carried out the fraud impersonated government and bank officials, and enticed consumers to disclose their confidential bank account information. From 2010 through 2013, the defendants used consumers' bank account information to create and deposit $18,856,360.56 in remotely created checks at various banks—$8,122,104.75 of which were returned by consumers or their banks.

116

The defendants' rate of unauthorized returns ranged from at least 1.61 percent to 9.18 percent,

117

alarmingly high in light of the 0.03 percent average industry unauthorized return rate for ACH debits and NACHA's maximum threshold of 1 percent (currently 0.5 percent) for unauthorized returns.

118

The defendants' overall return rates were similarly excessive, ranging from at least 7.79 percent to 32.13 percent.

119

On February 19, 2015, the Court granted the Commission's motion for summary judgment, and entered a final order against the individual defendant, including a permanent injunction and monetary relief in the amount of $10,734,255.81—the total amount consumers lost.

120

116

Pl.'s Summ. J. Ex. 75, Summary of Deposits and Returns (hereinafter “Summary of Deposits and Returns”), filed in

First Consumers, supra

note 109. These return rates vastly exceed NACHA's recently established overall return rate threshold of 15 percent for ACH debit transactions.

117

Id.

To calculate return rates under NACHA's rules, NACHA divides the number of ACH debit transactions by the number of returned debit transactions. Due to incomplete information on the number of remotely created checks cleared and returned from the five banks used most heavily by the defendants, it was not possible for the FTC's expert witness, Professor Amelia Helen Boss, to calculate return rates by the number of items deposited and returned. Dec. Prof. Amelia Helen Boss,

supra

note 113, at ¶ 32 & n.1, filed in

First Consumers, supra

note 109. Instead, Professor Boss calculated the defendants' return rates using the value of the deposits and returns, yielding even higher overall return rates. When calculated by value, defendants' overall return rates ranged from 8.57 percent to 46.23 percent, with unauthorized return rates between 6 percent and 16.9 percent. Summary of Deposits and Returns,

supra

note 116.

118

See supra

notes 30-31 and accompanying text describing NACHA's return rate thresholds and network statistics.

119

Summary of Deposits and Returns,

supra

note 116.

120

The permanent injunction bans the defendants from all telemarketing and from accepting or depositing remotely created checks or remotely created payment orders. On the same date, the court entered default judgments (and a similar permanent injunction) against the corporate defendants in the case.

In September 2013, the Commission sued AFD Advisors and its principal, Fawaz Sebai, for operating a telemarketing enterprise that allegedly pitched a prescription drug discount card that, victims were told, would provide substantially discounted or even free prescription drugs.

121

According to the complaint, in less than a year, the Montreal-based defendants deposited nearly $2 million in remotely created checks from consumer victims, and caused additional harm in the form of non-sufficient funds (“NSF”) fees resulting from defendants' unexpected withdrawals. As part of the scheme, the defendants allegedly coached their elderly victims through purported recorded authorizations that the defendants used to defeat consumers' attempts to reverse the withdrawals as unauthorized.

122

In July 2014, a federal grand jury indicted Fawaz Sebai and two other Canadian citizens on eight counts of mail and wire fraud in connection with the alleged scheme.

123

Arrest warrants have been issued, and the United States Attorney for the Southern District of Illinois will seek extradition of the defendants from Canada.

124

121

Compl. ¶ 18,

AFD Advisors, supra

note 109.

122

The Commission described to the Court how the defendants would stop the recording process if the consumer did not answer “correctly,” and start a new recording. Pl.'s Mot. and Memo. In Supp. of TRO at 7,

AFD Advisors, supra

note 109. The defendants would repeat this process until they obtained a “clean” recording that purported to demonstrate the consumer's authorization.

123

Press Release, U.S. Attorney for the Southern District of Illinois,

U.S. Seniors Deceived By Foreign Scammers In Medicare Hoax

(July 24, 2014),

available at http://www.justice.gov/usao/ils/News/2014/Jul/07242014_Sebai%20Press%20Release.html

124

Id.

The Commission's record of law enforcement cases amply demonstrates that the harm resulting from the use of remotely created checks and remotely created payment orders in telemarketing is significant.

125

Several opponents of the proposed Rule amendment questioned the significance and prevalence of injury, noting that consumers who complain to their banks obtain reversals of unauthorized remotely created checks and remotely created payment orders.

126

Declarations from consumer victims in cases brought by the Commission, however, illustrate how banks can frustrate consumers' efforts to obtain reversals of such remotely created checks. For example, when one 74-year old victim in

FTC

Sun Bright Ventures

attempted to reverse the defendants' unauthorized remotely created check, a bank teller told her the bank could not refund the money because the victim had not reported the issue within 24 hours.

127

Only after the victim reported the matter to a police officer, who instructed her to return to the bank to demand a reversal, did the bank agree to refund the $448 that the defendants withdrew from her account.

128

125

See supra

note 109 (citing FTC and state cases).

126

ABA at 8-9; ECCHO at 8-9; The Associations at 6.

127

Pl.'s TRO Ex. 15 ¶ 5, filed in

Sun Bright Ventures, supra

note 111.

128

Id.

at ¶ 7.

Other

Sun Bright Ventures

victims unsuccessfully attempted to reverse unauthorized remotely created checks drawn on their bank accounts.

129

For

example, an 86-year-old widow's bank refused to reverse the $448 remotely created check drawn on her account because she failed to dispute it within 30 days, ignoring the fact that she had been hospitalized during the 30 days before she noticed the unauthorized withdrawal.

130

An 82-year old victim filed an affidavit with his bank, contesting two remotely created checks made out to the defendants for $448.52 each.

131

Initially, the bank reversed the charges and returned the money to his account. However, a few months later, the bank revoked the credit to his account because it received a voice recording of the consumer answering the defendants' “yes” or “no” questions purportedly authorizing the debits.

132

The bank revoked the refund despite the consumer's allegations that the tape was fraudulent, noting several discrepancies including the fact that he never verified his age as between 18-75, when he was in fact 82 years old, and that the representative's voice on the recording was a woman's, instead of the man with whom he had spoken.

133

129

Pl.'s TRO Ex. 8 ¶ 3, filed in

Sun Bright Ventures, supra

note 109 (bank refused to reverse the $448 remotely created check). Other victims in the

Sun Bright Ventures

case complained that banks

made it difficult to reverse the transactions.

See, e.g.,

Pl.'s TRO Ex. 7 ¶ 6-8 (only after a consumer visited her credit union a second time, and spoke to a different representative, did the credit union reverse the $399 unauthorized remotely created check); Pl.'s TRO Ex. 13 ¶ 3 (bank was “not convinced” the remotely created check was unauthorized by declarant's mother, who was diagnosed with dementia, and refused to reverse $448 withdrawal).

130

Pl.'s TRO Ex. 1 ¶¶ 4-6, filed in

Sun Bright Ventures, supra

note 109.

131

Pl.'s TRO Ex. 18 ¶¶ 4-5, filed in

Sun Bright Ventures, supra

note 109.

132

Id.

at ¶¶ 5-6.

133

Id.

In another case,

FTC

Handicapped & Disabled Workshops,

a declarant described how the defendants bilked his elderly mother-in-law out of thousands of dollars, including a remotely created check for $654.95.

134

Despite his existing legal power of attorney over his mother-in-law's financial affairs due to the fact she suffers from Alzheimer's disease, her bank refused to initiate a return, supposedly because she had “authorized” the withdrawal.

135

134

Pl.'s TRO Ex. 24 ¶ 21, filed in

FTC

Handicapped & Disabled Workshops, Inc.,

Civ. No. 08-0908-PHX-DGC (D. Ariz. Dec. 9, 2008) (Stip. Perm. Inj.). Another victim similarly failed to obtain reversals for approximately $1,800 of $5,500 worth of unauthorized remotely created checks initiated by the

Handicapped & Disabled Workshops

defendants from May through November 2007. Pl.'s TRO Exs. 21 & 22.

135

Pl.'s TRO Ex. 24 ¶ 21, filed in

Handicapped & Disabled Workshops, supra

note 134.

Even when consumers can obtain reversals of the original transactions, significant consumer injury also results from collateral consequences stemming from the unauthorized bank debit, such as overdraft or NSF fees. For example, one consumer victimized by the fake IRS refund pitch used by the defendants in

FTC

NHS Systems

grew suspicious shortly after he revealed his bank account number over the telephone.

136

Despite putting a hold on his bank account and warning his bank that a fraud-induced withdrawal was going to be posted to his account, the consumer's bank charged him NSF fees resulting from the unauthorized remotely created checks initiated by the defendants. After another

NHS Systems

victim reported the unauthorized remotely created checks to his bank, the bank threatened to report his overdrawn account to a credit reporting agency. The bank ultimately agreed to waive some, but not all, of the NSF fees caused by the numerous unauthorized remotely created checks posted against his account, but still required him to bring the account to a zero balance before he could close it.

137

136

Pl.'s TRO Ex. 13 ¶¶ 3-5, 9, 13, filed in

FTC

NHS Systems,

Civ. No. 08-2215-JS (E.D. Pa. Mar. 28, 2013) (Stip. Perm. Inj.).

137

Pl.'s TRO Ex. 5 ¶¶ 8, 18, filed in

NHS Systems, supra

note 136.

Still other consumers simply never dispute such transactions with their bank in the first place.

138

As the FTC's expert witness observed in

FTC

First Consumers,

“the victim may encounter roadblocks in attempting to achieve redress from the merchant, or simply may be embarrassed at his or her vulnerability.”

139

Evidence of such underreporting can be inferred from the overall return rates generated by perpetrators of fraud. For example, the fact that a thoroughly fraudulent telemarketing scheme generates a 68 percent overall return rate implies that 32 percent of the transactions were never challenged by consumer victims.

140

Some of these consumers overlook the unauthorized or fraudulent charge altogether, fail to notice it in time to make a claim under the terms of the account agreements with their banks, or may be unaware of their option to pursue the matter with their own bank. Other consumers frequently try in vain to pursue a refund directly from businesses on their own.

141

For example, after the defendants in

FTC

Sun Bright Ventures

initiated a $448 unauthorized remotely created check charge to his account, one elderly victim tried for six months to resolve the matter with the defendants directly—he never received a refund.

142

FTC

First Consumers,

a consumer thought she was talking to a representative of her bank, Wells Fargo, when she provided her bank account information to authorize a one-time payment of $38 for a theft protection plan from her account.

143

When she called the real Wells Fargo to inquire about the product, the representative told her that the defendants' company had no affiliation with the bank. Wells Fargo also apparently failed to advise her that, as the victim of an imposter scam, she could dispute the transaction. Instead of a $38 charge, the defendants initiated a remotely created check in the unauthorized amount of $387 against her account. The consumer tried for months to obtain a refund directly from the defendants, and never received her money back from the defendants or her bank.

138

See

Dec. Prof. Amelia Helen Boss,

supra

note 113, at ¶ 36, filed in

First Consumers, supra

note 109 (“many fraudulent debits go undetected by the consumer victim and, even if discovered, the victim may not assert its claim against the bank in time, or the bank may refuse to re-credit the account and return the check.”).

139

Id.

140

Compl. ¶ 37,

Sun Bright Ventures, supra

note 109.

141

See, e.g.,

Pl.'s TRO Ex. 8 ¶¶ 8-12, filed in

FTC

Instant Response Systems,

Civ. No. 13-0976-ILG-VMS (E.D.N.Y. Apr. 14, 2015) (Summ. J.) (describing how she spent many months trying in vain to obtain a refund from defendants after being pressured and harassed into providing her bank account information to the defendant for a home medical alert device, which cost her $840).

142

Pl.'s TRO Ex. 6 ¶¶ 7-9, filed in

Sun Bright Ventures, supra

note 109.

143

Pl.'s TRO Ex. 2 ¶ 5, filed in

First Consumers, supra

note 109.

Even the most aggressive and highly coordinated law enforcement cases have not been able to make consumer victims whole.

144

Consider the series of actions taken by the Commission, federal prosecutors, and bank regulators against Wachovia Bank, N.A., two of its payment processing customers, and one

massive telemarketing enterprise.

145

In separate actions, the Office of the Comptroller of the Currency (“OCC”) and the U.S. Department of Justice alleged that Wachovia Bank maintained account relationships with certain payment processors

146

responsible for depositing more than $418 million in remotely created checks on behalf of fraudulent telemarketers,

147

including the defendants in

FTC

FTN Promotions, Inc.

(“Suntasia”).

148

In 2007, the Commission charged the

Suntasia

defendants with deceptively telemarketing a variety of memberships in buyers' and travel clubs, resulting in $172 million in injury to nearly one million consumers. In settlement, the Commission and the OCC received approximately $50 million to be used for restitution; however, due to the extensive amount of injury caused by the defendants, the consumer victims were not made whole.

149

144

The most recent example includes the simultaneous criminal and civil actions initiated by DOJ-Criminal and DOJ-CPB against CommerceWest Bank, of Irvine, California, for allegedly “allow[ing] one of its clients to facilitate the theft of tens of millions of dollars from the bank accounts of unsuspecting, innocent consumers.” Compl. ¶ 2,

U.S.

CommerceWest Bank,

Civ. No. 15-0379 (C.D. Cal. filed Mar. 10, 2015). Under the terms of the settlement, the bank agreed to pay $4.9 million to resolve civil and criminal complaints alleging the bank facilitated consumer telemarketing fraud schemes and violated the Bank Secrecy Act (“BSA”) while processing remotely created check transactions for V Internet Corp LLC., a third-party payment processor based in Las Vegas. Press Release, DOJ,

CommerceWest Bank Admits Bank Secrecy Act Violation and Reaches $4.9 Million Settlement with Justice Department

(Mar. 20, 2015),

available at http://www.justice.gov/opa/pr/commercewest-bank-admits-bank-secrecy-act-violation-and-reaches-49-million-settlement-justice

see also

George F. Thomas,

It's Time to Dump Demand Drafts,

Digital Transactions 39 (July 2008),

available at http://www.radixconsulting.com/TimetoDumpDemandDrafts.pdf

(noting that certain “organizations believe the check-collection system provides [them] better protections than the ACH . . . in the area of consumer chargeback. This is not sufficient justification for using this instrument.”).

199

Check21.com,

ACH vs. Check21,

retrieved from

http://www.check21.com/Check-21-vs-ACH.html

(last visited on June 24, 2015);

see also

Unfairness Policy Statement,

supra

note 62, at 1074.

202

Unfairness Policy Statement,

supra

note 62, at 1074.;