The Federal Trade Commission (FTC) has obtained a $1.3 billion judgment against the individual operator of several payday lenders and related servicing and marketing companies in a lawsuit filed in a Nevada federal district court that alleged the payday loan disclosures given to consumers violated the FTC Act and the Truth in Lending Act (TILA). According to the FTC, the judgment "represents the largest litigated judgment ever obtained by the FTC."

The FTC's complaint, originally filed in 2012, named the individual owner as a defendant together with the payday lenders and other corporate defendants. It alleged that the TILA disclosures given by the lenders understated the amount of a borrower’s repayment obligation because they were based on a borrower's use of a single payment option, rather than on a renewal plan involving multiple payments, in which a borrower would be automatically enrolled unless he or she opted out. According to the FTC, a renewal plan would result in total borrower payments that included a substantially higher finance charge than had been disclosed.

The FTC charged that the existence of the automatic renewal plan and the process for declining renewal involved a convoluted email and hyperlink procedure that was not clearly disclosed. The FTC claimed that the lenders had engaged in deceptive acts and practices in violation of the FTC Act and failed to accurately disclose the annual percentage rate and other loan terms in violation of the TILA.

The lenders had initially challenged the FTC's authority to bring the action based on their tribal affiliation. In March 2014, the district court accepted and adopted the magistrate judge's finding that the FTC Act was a federal statute of general applicability that gave the FTC authority to regulate Indian tribes, as well as arms of tribes, their employees, and their contractors. (For a fuller discussion of the court’s ruling, see our prior legal alert.) In May 2014, the district court granted summary judgment to the FTC on its FTC Act and TILA claims and several of the corporate defendants thereafter entered into settlements with the FTC.

In its order entered on September 30, 2016, the district court entered summary judgment in favor of the FTC on its claim that the individual defendant should be held liable for violations of the FTC Act. According to the court, the evidence abundantly established that the individual defendant participated in and had authority to control the payday lenders and demonstrated, at the very least, that he was recklessly indifferent to the misleading representations made by the lenders.

The $1.3 billion judgment is intended to provide restitution of the amount that, between 2008 and 2012, consumers paid in excess of the disclosed total of payments, i.e., the principal amount and one finance charge. The court agreed with the FTC that, as a matter of law, the FTC did not have to show that all consumers included in the restitution calculation were deceived or relied on the defendants' alleged misrepresentations. In addition to imposing the $1.3 billion judgment, the order permanently bans the individual defendant from engaging in consumer credit-related activity.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.


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