FTC Amendment to Telemarketing Sales Rule Sounds Like Operation Choke Point

The Federal Trade Commission (FTC) announced last week that, following a public comment period, they have approved final amendments to a Telemarketing Sales Rule (TSR), including a change that will help protect consumers from fraud by prohibiting four discrete types of payment methods favored by con artists and scammers.

“Con artists like payments that are tough to trace and hard for people to reverse,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “The FTC’s new telemarketing rules ban payment methods that scammers like, but honest telemarketers don’t use.”

The TSR changes will stop telemarketers from dipping directly into consumer bank accounts by using certain kinds of checks and “payment orders” that have been “remotely created” by the telemarketer or seller. These two payment mechanisms make it easy for unscrupulous telemarketers to debit bank accounts without consumers’ permission, and can make it difficult to reverse the transactions with consumers’ banks.

In addition, the amendments will bar telemarketers from receiving payments through traditional “cash-to-cash” money transfers – provided by companies like MoneyGram, Western Union, and RIA. Scammers rely on cash transfers as a quick, anonymous, and irretrievable method to extract money from consumer victims – once it is picked up by the recipient, the money is gone.

The TSR changes also will prohibit telemarketers from accepting as payment “cash reload” mechanisms – such as MoneyPak, Vanilla Reload, or Reloadit packs used to add funds to existing prepaid cards. Scammers use the cash reload mechanism to apply the funds to their own prepaid debit cards and disappear with the money. In 2015, major cash reload providers replaced cash reload mechanisms with a swipe reload process, a safer alternative not affected by the TSR amendments.

As detailed in the Federal Register notice announcing the Final Rule, the amendments address changes in the financial marketplace to ensure consumers remain protected by the TSR’s antifraud provisions, but are narrowly tailored to allow for innovations with respect to other payment methods that are used by legitimate companies. According to the statement of basis and purpose accompanying the notice, the final rule also will:

• Expand the advance-fee ban on recovery services to include losses both in prior telemarketing and non-telemarketing transactions; and
• Require that a description of the goods or services purchased must be included in the tape recording of a consumer’s express verifiable authorization to be charged.

In addition, the TSR amendments update several provisions related to the National Do Not Call (DNC) Registry to, among other things:

• Expressly state that a seller or telemarketer has to demonstrate that it has an existing business relationship with, or has received an express written agreement from, a consumer it calls if the consumer’s number is on the DNC Registry;
• Illustrate the types of 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 if a seller or telemarketer does not get the information needed to place a consumer’s number on its entity-specific do-not-call list, the seller or telemarketer is disqualified from the safe harbor for isolated or accidental violations; and
• Emphasize that sellers are prohibited from sharing the cost of the fees to access the DNC Registry

The Commission vote approving publication of the notice in the Federal Register was 3-1, with Commissioner Maureen Ohlhausen voting no.

Chairwoman Edith Ramirez and Commissioners Julie Brill and Terrell McSweeny issued a Commission statement, which also was approved by a 3-1 vote, with Commissioner Ohlhausen voting no and issuing a separate statement, dissenting in part.

Ohlhausen’s position – evidently relying on analysis offered by the Federal Reserve Bank of Atlanta, is that, although the record shows there is consumer injury from the use of novel payment methods in telemarketing fraud, it is not clear that this injury likely outweighs the countervailing benefits to consumers and competition of permitting novel payments methods.

Most provisions of the final rule will become effective 60 days after publication.

insideARM Perspective

While this action may not intentionally relate to the Department of Justice program known as “Operation Choke Point,” it may have a similar effect. Commissioner Ohlhausen’s dessenting statement outlines multiple specific concerns that the Federal Reserve Bank of Atlanta related to prematurely cutting off novel payment methods:

• “[I]t is clearly preferable public policy not to create a fragmented ‘law of payments’ in which multiple federal agencies take differing and/or conflicting views on the legitimacy of specific payment instruments.”
• “[Remotely Created Payment Orders] (RCPOs) are an emerging form of payment. . . . Prohibiting their use prior to achieving clarity regarding the potentially enhanced consumer protections they offer or the business functionalities they could provide would be premature.”
• “With respect to the difficulty in distinguishing legitimate uses from fraudulent uses of RCPOs, the FRBA would ask that the FTC allow industry some time to develop mechanisms by which this distinction could be achieved. There is an opportunity, through authentication and other technology driven solutions, for RCPOs to provide many of the benefits of checks without carrying many of the risks.
• “FRBA and the Commission both perceive the check collection and return system is lacking a comprehensive method or process of identifying and responding to transactional patterns that are strongly indicative of large scale consumer fraud. However, FRBA does not believe that the problem can be addressed effectively by banning the use of RCCs and RCPOs.”
• “FRBA respectfully suggests that a strengthened regulatory response to this lack of data that could identify significant patterns of consumer fraud is not to ban the use of checks or any subset of checks, but to require every bank to collect and report to its primary federal regulator on a frequent basis each instance in which any of its customers deposited significant numbers of checks that resulted in an abnormal number or rate of returns.”

Of more serious concern to the ARM industry, it doesn’t seem to be a major leap that payment methods used by debt collectors would come under similar scrutiny. After all, the TCPA was also meant to protect consumers from telemarketing activity, but we have seen its effects spread much farther. Legitimate debt collectors also attempt to obtain “urgency payments” on a regular basis. If the alarmists and PR machines that routinely tie debt collection activity to “robo-calling” get involved, you can see the argument coming.