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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.

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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.

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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.^[1] 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,^[2] 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.

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”) ^[3] targets deceptive or abusive telemarketing practices.^[4] The Act specifically directed the Commission to issue a rule defining and prohibiting deceptive and abusive telemarketing practices.^[5] In addition, the Act mandated that the rule address some specified practices, which the Act designated as “abusive.” ^[6] 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.^[7]

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.^[8] 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.” ^[9] 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”).^[10] As a result, some entities and products fall outside the jurisdiction of the TSR.^[11] Further, the Rule wholly or partially exempts from its coverage several types of calls.^[12]

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.^[13] Second, the TSR requires telemarketers Start Printed Page 77521to 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.^[14] Third, the Rule prohibits telemarketers and sellers from requesting or receiving payment in advance of obtaining: credit repair services; ^[15] recovery services; ^[16] offers of a loan or other extension of credit, the granting of which is represented as “guaranteed” or having a high likelihood of success; ^[17] and debt relief services.^[18] Fourth, the Rule prohibits credit card laundering ^[19] and other forms of assisting and facilitating sellers or telemarketers engaged in violations of the TSR.^[20]

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.^[21] Finally, the TSR requires that telemarketers transmit to consumers' telephones accurate Caller ID information ^[22] and places restrictions on calls made by predictive dialers ^[23] and those delivering pre-recorded messages.^[24]

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.^[25] 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.^[26]

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.^[27] 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 Start Printed Page 77522traditional paper checks and remotely created checks.

Electronic payment alternatives to remotely created checks and remotely created payment orders include conventional payment methods, such as Automated Clearinghouse (“ACH”) ^[28] debits and traditional debit card transactions—both of which involve consumer bank accounts—as well as credit card transactions.^[29] 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,^[30] a threshold that NACHA recently reduced to 0.5 percent.^[31]

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.^[32] Among other things, payment card networks monitor whether a merchant's monthly number of chargebacks ^[33] 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.^[34]

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.^[35]

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.^[36] Under Regulation E and the EFTA, the financial institution has the burden of proof for showing the transaction was “authorized” or “unauthorized.” ^[37] For ACH transactions, consumers also benefit from NACHA's systemic oversight and enforcement of operating rules governing participants in the ACH Network.^[38]

Credit card transactions also are governed by federal law—Regulation Z and the Truth in Lending Act (“TILA”).^[39] This regulation provides protections for consumers using credit cards that are similar to, but more robust than, those for ACH debits under EFTA Start Printed Page 77523and 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.^[40]

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.^[41] 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.” ^[42] 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.^[43] 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.

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.^[44] 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.^[45] 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.^[46] 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).^[47] 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.

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.^[48] However, the Remittance Rule provides no similar rights for consumers using other types of cash-to-cash transfers.

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.^[49] 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, Start Printed Page 77524once 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.^[50] The providers of two other cash reload mechanisms, Vanilla Reload Network and Reloadit, have made similar announcements.^[51]

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,^[52] consumer groups,^[53] consumers,^[54] industry trade associations,^[55] businesses,^[56] a U.S. Senator; ^[57] and an academic.^[58] 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.

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

The Commission has carefully reviewed and analyzed the entire record developed in this proceeding.^[59] 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.^[60] In some instances, the Commission has made modifications to its original proposal. The Final Rule Start Printed Page 77525addresses deceptive and abusive practices in telemarketing by:

• 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,^[61] 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.^[62] 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.

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.^[63] 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.

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.^[64] 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.^[65] 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.”  ^[66] 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.” ^[67] 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.^[68]

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.^[69] 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.^[70] 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.^[71] Many commenters described Start Printed Page 77526how 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.^[72] 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.

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.^[73] 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.^[74] 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.^[75] As a result, they maintained, the proposed Rule would not adversely affect legitimate telemarketers, who already accept more conventional payment methods.

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.” ^[76] 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.^[77] 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.

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.^[78] 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.^[79] Two of these commenters urged the Commission to work closely with the CFPB, Federal Reserve Bank, and other regulators to implement such a prohibition.^[80]

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.^[81] 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.^[82] 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.^[83]

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 Start Printed Page 77527number 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.^[84] The remaining comments were submitted primarily by financial services industry members and associations.^[85] 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.^[86] 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.

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,^[87] 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.^[88] Commenters from the financial services industry also did not provide specific support or evidence.^[89]

The commenters in opposition took issue with other aspects of the unfairness analysis the Commission articulated in the NPRM.^[90] 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. ^[91] 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).^[92] Further, many argued that the Commission overstated the operational weaknesses of the check clearing system in detecting and deterring fraudulent telemarketers and unauthorized transactions.^[93]

At least one commenter argued that the Commission failed to demonstrate that remotely created payment orders, themselves, caused unavoidable harm to consumers.^[94] 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.^[95]

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.^[96] 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.^[97] 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).^[98] 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 Start Printed Page 77528created check adjustment claims, compared with the overall volume of such transactions.^[99] 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]

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]

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.

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.

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 Start Printed Page 77529consumers' 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]

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]

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]

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 v. 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]

Other Sun Bright Ventures victims unsuccessfully attempted to reverse unauthorized remotely created checks drawn on their bank accounts.^[129] For Start Printed Page 77530example, 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]

In another case, FTC v. 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]

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 v. 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]

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 v. 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 v. 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] In FTC v. 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.

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 Start Printed Page 77531massive 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 v. 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]

(2) Operational Weaknesses Make It Difficult To Detect and Stop Consumer Injury

Operational weaknesses in the check clearing system incentivize unscrupulous telemarketers to use remotely created checks and remotely created payment orders to initiate unauthorized and fraudulent debits to consumer accounts.^[150] The check clearing system lacks the ability to distinguish remotely created checks and remotely created payment orders from other checks in the collection process. In addition, the check clearing system lacks the centralized, systemic monitoring necessary to analyze transaction trends and root out fraudulent actors. As a result, perpetrators of telemarketing fraud and unscrupulous payment processors continue to exploit these payment methods to siphon money from victims of fraud.

Comments from both supporters and opponents of the amendment agreed that the banking system lacks the ability to detect and distinguish remotely created checks and remotely created payment orders from other checks flowing through the check clearing system. To address this problem, some commenters opposed to the proposal advocated the use of a unique MICR identifier for remotely created checks. First Data suggested that “[b]anks can simply change the file formats used to send remotely created check transactions to the paying bank by adding an indicator field.” ^[151] ECCHO stated that in June 2013 the committee responsible for developing and maintaining technical standards for MICR line information started discussions on the potential for a MICR line identifier for remotely created checks.^[152]

Such proposals for ways to separately identify remotely created checks have been debated for at least the past decade, however, and there is nothing in the record to indicate that there will be a solution to the problem in the reasonably foreseeable future. Prior efforts to modify the MICR line have failed. In 2005, the Board of Governors of the Federal Reserve (“Federal Reserve”) found that “without broad support for such a rule, and in light of the impracticalities of enforcement, the Board has determined not to pursue a MICR identifier for remotely created checks.” ^[153] And, according to ECCHO, even if financial institutions supported and implemented the MICR identifier for remotely created checks, it would not necessarily provide a means for banks to monitor the transaction or returns activity of individual merchants. This is because “[a] check that is passing through multiple banks in the collection process does not carry with it information that identifies the merchant depositor [but only identifies the merchant's bank or ODFI].” ^[154] Therefore, while the implementation of an identifier for remotely created checks would assist in monitoring remotely created checks, the future of such proposals is speculative at best, and the barriers to centralized monitoring of RCCs and the individual merchants that issue them will remain for the foreseeable future.

The decentralized nature of the check clearing system further compounds the problem of monitoring remotely created checks and remotely created payment orders.^[155] Several commenters agreed Start Printed Page 77532there exists no centralized, system-wide monitoring of remotely created check or remotely created payment order volume or returns activity among various financial institutions.^[156] As the Federal Financial Institutions Examination Council (“FFIEC”) has summarized, “the check-clearing networks do not provide the level of technological and organizational controls of those in the ACH network. This lack of systemized monitoring of the electronically created payment orders increases the susceptibility to fraud by Web-based vendors and telemarketers.” ^[157]

To counteract these deficiencies, some commenters suggested certain voluntary or mandatory reporting measures and regimes.^[158] For a variety of reasons, the alternatives proposed by these commenters are equally, if not more, problematic. Creating a searchable national database or registry of all telemarketers would be costly to implement and unnecessarily burdensome for the many legitimate telemarketers and sellers that have never used remotely created checks and remotely created payment orders.^[159] The same defects apply to the proposed mandate for telemarketers and payment processors to report to the Commission all return rates for their remotely created checks and payment orders.^[160] And, because the Commission lacks jurisdiction over banks, it cannot “require every bank to collect and report to its primary federal regulator” when a merchant has “abnormal” or “significant” return rates, nor can it require banks to conduct business only with telemarketers listed in a database or registry.^[161] Because none of these proposed solutions provide a near-term, effective means for centralized monitoring, and each would create unnecessary and expansive regulatory burdens, the Commission is not persuaded that they are an adequate substitute for a prohibition on the use of remotely created checks and remotely created payment orders.

The record amply demonstrates that perpetrators of telemarketing fraud exploit the weaknesses of the check clearing system to avoid detection. The Commission has sued telemarketers that relied extensively on remotely created checks and remotely created payment orders to debit the accounts of consumers. In recent cases, the defendants allegedly debited the accounts of consumers with whom they have never spoken; consumers who suffer from dementia; and consumers who felt pressured or tricked into providing their bank account information by telemarketer claims about important health care benefits, Medicare, or other products and services.^[162]

The record also lays bare the effect of the potential financial incentives that may encourage unscrupulous payment processors to offer perpetrators of telemarketing fraud these two payment methods that afford the least amount of oversight and transaction monitoring.^[163] In many law enforcement cases, the Commission has charged that payment processors have known about or deliberately ignored underlying law violations committed by their merchant clients. Payment processors have sometimes actively helped merchant clients avoid detection and scrutiny, apparently for no reason other than to keep the transaction fees flowing. For example, the Commission alleged that certain payment processors urged fraudulent merchants to switch from ACH debits to remotely created checks and remotely created payment orders to avoid NACHA's one percent threshold for unauthorized returns ^[164] or used tactics to evade compliance monitoring systems designed to flag fraud.^[165] In email communications and promotional materials, defendants in payment processing cases have explicitly described the systemic weaknesses of the check clearing system to detect patterns of fraud.^[166]

The rulemaking record confirms the existence and harmful effect of the significant operational weaknesses within the check clearing system that incentivize perpetrators of telemarketing fraud to exploit remotely created checks and remotely created payment orders to siphon money from the bank accounts of their victims. Once deposited into the check clearing system, banks cannot distinguish remotely created checks and remotely created payment orders from traditional checks, making it impossible to monitor and halt fraudulent transaction activity. The likelihood of any future implementation of a unique MICR identifier or other method for tracking remotely created checks and remotely created payment orders is far from certain.^[167] Even a unique identifier would not necessarily permit the monitoring of individual merchants, nor would it provide a centralized, system for monitoring remotely created check volumes and returns activity necessary to manage the risks posed by these payments in telemarketing transactions. These significant consumer protection Start Printed Page 77533deficiencies in the check clearing system stand in stark contrast to the centralized transaction monitoring of individual merchants conducted by the payment card networks and the ACH network.^[168] For these reasons, the Commission has determined that these weaknesses in the check clearing system have allowed, and are likely to continue to allow, remotely created checks and remotely created payment orders to cause significant consumer injury in telemarketing transactions.

(3) Consumer Protections Available for Unauthorized and Disputed Remotely Created Check and Remotely Created Payment Order Transactions

The significant harm to consumers resulting from the operational weaknesses of the check clearing system (when used in telemarketing transactions) is exacerbated by differences in the laws and regulations governing conventional payment methods and novel payment methods.^[169] Basic protections are available to consumers in credit card transactions and ACH transactions, which are subject to federal regulations. These same protections are not necessarily available in remotely created check transactions, which are subject to the UCC.^[170] In particular, significant disparities exist in consumer liability for unauthorized transactions when banks disclaim liability for certain transactions or vary by agreement the timeframes in which consumers can dispute unauthorized transactions.^[171]

Under Regulation Z, a consumer has no liability for unauthorized credit card transactions conducted over the telephone—so-called “card not present” transactions.^[172] Consumers also have the right to dispute a credit card transaction for goods or services if there are problems with the delivery or calculation errors, among other issues, and to hold back payment while the dispute is pending.^[173] Likewise, Regulation E and the EFTA provide similar, though less robust, protections against liability for unauthorized electronic fund transfers, including for traditional debit card transactions and ACH debits.^[174] For instance, Regulation E imposes limited liability on a consumer for an unauthorized transfer, depending on how quickly she reports the loss.^[175] Regulation E also establishes explicit timeframes and rights for consumers addressing disputes about unauthorized or incorrect electronic fund transfers from their bank accounts, including specific notice and investigation timeframes,^[176] as well as the right to receive a provisional re-credit of disputed funds.^[177] In addition, payment card network rules provide consumers with zero liability protection for debit and GPR card purchases in certain circumstances.^[178]

By contrast, remotely created checks and remotely created payment orders are governed by UCC protections.^[179] Commenters opposed to the prohibition argued that the UCC provides similar, if not better, protections for consumers than Regulation E and the EFTA or Regulation Z and the TILA.^[180] These commenters emphasized that section 4-401(a) of the UCC provides that a bank may pay a check only when it is “properly payable.” ^[181] Indeed, absent consumer negligence that substantially contributes to the fraud, the UCC imposes zero liability for consumers where a wrongdoer forges the consumer's signature on a check, uses a counterfeit check, forges an endorsement, or alters the amount of the check.^[182] To take advantage of the UCC's limited liability for unauthorized checks, a consumer must examine her bank statement with “reasonable promptness” and provide the bank with notification “promptly” after the discovery of the fraud.^[183]

Start Printed Page 77534

Unlike Regulation E, however, according to commenters who support the amendment, these provisions of the UCC provide no legally mandated error resolution procedure or specific timeframes for enforcing the limits on liability under the UCC.^[184] Instead, UCC Articles 3 and 4 generally permit banks to vary the UCC requirements by agreement or contract. For example, in its deposit account agreement, a bank can disclaim its liability for fraudulent checks,^[185] so long as the bank does not disclaim “ordinary care” and complies with the mandate of UCC section 1-304 to act in “good faith.” ^[186] Indeed, some bank-customer agreements disclaim liability for paying remotely created checks and remotely created payment orders by deeming such items as authorized, without regard to the express verifiable authorization requirements of the TSR.^[187]

Unlike the dedicated timeframes under Regulation E, the UCC also permits banks to define (and significantly shorten) the standard by which “reasonable promptness” will be measured.^[188] Some bank-customer agreements define “prompt” reporting to be as few as fourteen days, and similarly shorten the one-year “statute of repose” codified in section 4-406(f) of the UCC.^[189] The statute of repose provides that a consumer has one year within which to assert fraud, regardless of the consumer's or the bank's care or lack thereof.^[190] Courts have repeatedly upheld such variations of the reporting requirements of the UCC.^[191] When banks significantly shorten the reporting period, it can have the same effect as a disclaimer.^[192]

The ABA posits that, when combined with Regulation CC and Operating Circular 3, such “differences in the details and the technical legal process between the consumer protections for [unauthorized] check transactions and those for credit and debit cards and ACH transactions” do not result in different outcomes for consumers.^[193] According to the ABA, this is because consumers indirectly benefit from the shift in warranties for remotely created checks under Regulation CC and Circular 3, which in theory incentivize paying banks to re-credit consumers' accounts for unauthorized transactions.^[194] In practice, however, Regulation CC explicitly permits a bank of first deposit (the warranting bank) to defend a warranty claim in cases of unauthorized signature or alteration by showing that the consumer failed to discover and report the problem to her bank (the paying bank) with reasonable Start Printed Page 77535promptness.^[195] As noted above, in some cases this may be as few as 14 days.^[196]

For the reasons discussed above, the Commission finds that the regulatory framework applicable to remotely created checks, including provisions under the UCC pertaining to unauthorized and fraudulent checks, which may be varied by agreement, are more limited than those provided under Regulation E and the EFTA or Regulation Z and the TILA. This finding applies equally to remotely created payment orders, which commenters agreed are indistinguishable from remotely created checks and, therefore, are handled by banks in the same manner.^[197]

Finally, the greater burdens on consumers in recovering unauthorized and fraudulent withdrawals made by remotely created checks and remotely created payment orders are known to fraudulent merchants and create a strong incentive for them to use these payment methods. The record includes examples of payment processors actively marketing remotely created check and remotely created payment order processing services for the purpose of evading the stricter consumer protection requirements of ACH debits and credit card transactions.^[198] For instance, while promoting its remotely created check product, one payment processor claims on its Web site that “[a] consumer must visit the bank and sign an affidavit” to dispute a “Check21” transaction, in contrast to an ACH debit, which “[a] consumer can dispute . . . by phone.” ^[199] The goal, in one processor's own words, is to avoid payment systems that “go too far with consumer protection.” ^[200]

Thus, the Commission is persuaded that the protections available to consumers who have been defrauded by telemarketers through the use of remotely created checks are substantially less robust than the protections afforded by conventional payment systems, and that con-artists exploit these weaknesses. The UCC provides no legally mandated error resolution procedure, no recredit right, and no specific timeframes for enforcing its zero liability rule, thereby abandoning a consumer to choose between accepting an unauthorized debit or suing her bank. These deficiencies, in combination with those of the check clearing system to detect and halt fraud, create powerful incentives that attract fraudulent sellers, telemarketers and their payment processors seeking to profit from unauthorized and fraudulent debits from consumers' bank accounts that go unnoticed or unrecovered.

b. The Injury Is Not Reasonably Avoidable by Consumers

Having determined that the use of remotely created checks and remotely created payment orders in telemarketing causes substantial injury, the next inquiry is whether consumers can avoid the injury. The extent to which a consumer can reasonably avoid injury is examined, in part, by analyzing whether the consumer can make an informed choice. In this context, the Unfairness Statement articulates how certain types of sales techniques may prevent consumers from effectively making their own decisions, thus necessitating corrective action.^[201] The Commission seeks, through these amendments, “to halt some form of seller behavior that unreasonably creates or takes advantage of an obstacle to the free exercise of consumer decisionmaking.” ^[202]

As described in the Federal Register Notice for the debt relief amendments to the TSR, consumers cannot reasonably avoid harm if they do not understand the risk of injury from an act or practice.^[203] In the context of remotely created checks and remotely created payment orders in telemarketing transactions, consumers can avoid the injury only if they understand the intricacies of how the operational and regulatory frameworks of these payment methods differ from conventional alternatives. Consumers are unlikely to know that remotely created checks are not subject to the same systematic and centralized monitoring as are other payment mechanisms, or to understand the implications of such monitoring on detecting and deterring fraud. Further, consumers are not likely to know that weaker consumer protections apply when remotely created checks are used. Indeed, the various legal requirements and protections that apply to electronic transactions are not transparent to most consumers.^[204] The differences between Start Printed Page 77536the laws that apply to bank debits processed through the ACH system as opposed to the check clearing system do not lend themselves to easy categorization, description in consumer education pieces, or oral disclosures during telemarketing calls. Helping consumers understand their rights is even more challenging when consumers have to consult individual (and non-negotiable) contracts with their bank to learn how quickly they must act to protect themselves from unauthorized remotely created check transactions. Moreover, the comparative benefits and risks of remotely created checks and remotely created payment orders or the existence of NACHA rules prohibiting outbound telemarketers from initiating ACH debits from their bank accounts are not transparent to consumers.^[205]

Some opponents argued that consumers are in control of whether they give out their bank account information over the telephone to fraudsters.^[206] As was the case in the debt relief industry, the ability of consumers to understand and avoid the risk of injury here too is compromised by the fact that they do not know that the goods or services offered by the telemarketer are a sham. The record leaves no dispute that the widespread unlawful practices employed by fraudulent telemarketers and sellers using remotely created checks cause substantial and unavoidable harm to consumers.

When fraudulent telemarketers deceive consumers into turning over their bank routing and account information, consumers have no knowledge, let alone choice, as to how the telemarketer will decide to initiate the withdrawal from their bank account.^[207] The choice of whether to route a consumer's bank account information through the ACH Network or the check clearing system is exclusively in the hands of the telemarketer or seller, as is the threshold decision as to what payment information the telemarketer demands from the consumer.^[208] Once the telemarketer has elected to create unsigned checks routed through the check clearing system, the telemarketer causes further economic harm that consumers cannot reasonably avoid. Namely, selecting that payment system creates more obstacles both to detection of any misconduct by industry or law enforcement and to recovery of consumer losses. The paucity of consumer protections available (as discussed in section II.A.3.a(3)) makes it difficult for consumers to obtain a reversal of the transaction from their bank. Further, given the difficulty of locating the telemarketing scammer, consumers typically cannot mitigate this harm by seeking a refund. In sum, the resulting harm in the form of fraudulent withdrawals from consumer bank accounts, as well as the investment of time, trouble, aggravation, and expense of attempting to obtain a reversal of such withdrawals, cannot be avoided.^[209]

In opposing the amendment and the Commission's unfairness analysis, the ABA submits that the unavoidability of harm must be connected to the cause of that harm. Here, the ABA posits, the unavoidable harm is the telemarketer's initial deception, and not the telemarketer's choice of payment system routing.^[210] The Commission agrees with the ABA's comment to the extent it observes that a seller's or telemarketer's misconduct through misrepresentation or omission undermines the consumer's decisionmaking process and is not reasonably avoidable. However, the initial deception is only one aspect of the seller's behavior that causes substantial injury and is not reasonably avoidable. The telemarketer's use of remotely created checks causes equally unavoidable harm to consumers by taking advantage of another obstacle to the free exercise of consumer decisionmaking—the fact that reasonable consumers are unlikely to know or understand the implications of the telemarketer's choice of payment routing.

The ABA further argues that, unless unavoidability is connected to the telemarketer's deception, the Commission will cast as unavoidable any injury resulting from a merchant's decisions about its operations—a business's choice between two competing debit card networks, for example.^[211] The Commission finds this argument unpersuasive. A merchant's choice between two competing debit card networks has no effect on consumer protections against fraud because both transactions are covered by Regulation E and subject to the same centralized monitoring regime. This result is in stark contrast to the practices documented in the rulemaking record where a telemarketer deliberately chooses to route a consumer's payment through a specific payment system that affords the consumer less protection from fraud and provides the telemarketer with more ability to evade scrutiny than other payment systems and regulatory frameworks.^[212]

Here, telemarketers' misrepresentations and use of remotely created checks and remotely created payment orders routed through the check clearing system undermine consumers' decisionmaking, thereby causing unavoidable substantial injury. This conclusion is amply buttressed by Start Printed Page 77537the absence of reliable information in the rulemaking record to identify any legitimate uses of remotely created checks and remotely created payment orders in telemarketing transactions covered by the Rule.

c. The Benefits of Remotely Created Checks and Remotely Created Payment Orders in Telemarketing Do Not Outweigh the Harm to Consumers

The final prong of the Commission's unfairness analysis recognizes that costs and benefits attach to most business practices and requires the Commission to determine whether the harm to consumers from remotely created checks and remotely created payment orders in telemarketing is outweighed by countervailing benefits to consumers or competition.^[213] Commenters opposed to the amendment have advanced numerous arguments regarding the benefits of remotely created checks and remotely created payment orders, including that there are legitimate uses of these payments in non-telemarketing transactions. The commenters also argue that fraud will continue despite the prohibition. In addition to the public comments, the Commission has considered its own rulemaking history in which the Commission proposed and ultimately declined to adopt a similar provision in 1995 because it deemed sufficient benefits to accrue to consumers from the use of remotely created checks. As a result of the development of numerous payment mechanisms available to consumers with checking accounts, the use of alternative payments by legitimate telemarketers, and the rulemaking record as a whole, the Commission is now persuaded that any historical benefits of remotely created checks in telemarketing are no longer cognizable. Today, the vast majority of consumers with checking accounts have debit cards linked to their accounts.^[214] Moreover, the current rulemaking record contains no specific examples of legitimate telemarketers' and sellers' use of remotely created checks and remotely created payment orders.^[215] Further, the Commission concludes that consumers and competition benefit from the bright line rule that a prohibition provides.

According to some commenters, the benefits of remotely created checks and remotely created payment orders in telemarketing transactions for consumers with checking accounts include the convenience of paying for impulse purchases of goods and services sold over the telephone when the consumer does not have (or wish to use) another form of payment.^[216] Other commenters argued that consumers also benefit from the ability to receive more detailed transaction information than ACH debits provide and better protection against identity theft than paper checks sent through the mail.^[217] The asserted benefits for telemarketers and sellers include faster settlement times than ACH debits,^[218] the ability to accept payments quickly and easily over the telephone from any consumer with a checking account,^[219] and the potential savings in transaction costs over comparable payment alternatives.^[220]

The Commission first considered these benefits of using remotely created checks (referred to as “demand drafts”) in telemarketing transactions during the original 1995 TSR rulemaking proceeding when it proposed to require written authorization for remotely created checks. At that time, few electronic payment methods were available for consumers and businesses. For example, less than 15 percent of all consumer transactions were conducted with credit and debit cards, while checks and cash accounted for the remaining 85 percent of consumer transactions.^[221] NACHA had not yet introduced electronic check applications that would enable consumers and businesses to utilize the ACH Network for non-recurring payments and credits.^[222] Opponents to the 1995 proposal to require written authorization for remotely created checks included numerous telemarketers, sellers, and payment processors. These commenters characterized this payment method as an innovative and important part of the future development of electronic payments and provided specific examples of their legitimate use in telemarketing and non-telemarketing transactions.^[223] Against that rulemaking Start Printed Page 77538record, which identified the lack of available electronic payment methods for consumers, widespread use by legitimate telemarketers and non-telemarketers, and potential alternative methods of verifying consumer authorization, the Commission instead adopted the express verifiable authorization requirements of the current Rule.

Since then, and despite the express verifiable requirements of the TSR, telemarketers and sellers have continued to perpetrate fraud via remotely created checks and remotely created payment orders, resulting in the persistent, ongoing, and substantial harm to consumers.^[224] During the same time period, remarkable developments in technology and the law have paved the way for new electronic payment alternatives and the widespread adoption by consumers of various card-based payments, electronic fund transfer methods, and online payments. As NACHA highlighted, the ACH system has evolved to enable consumers to initiate debits conveniently and securely in many situations where remotely created checks used to be needed by consumers (i.e. for last minute bill-pay scenarios) or preferred by merchants (i.e. for recurring debits and to receive same day settlement of funds).^[225] Commenters in support of the prohibition agreed that today consumers who wish to purchase goods or services from telemarketers and sellers can use payment options such as credit or debit cards or ACH debits (for certain telemarketing transactions) that provide robust and consistent protection against fraud, are subject to systemic monitoring, and offer the same convenience as remotely created checks and remotely created payment orders.^[226]

Studies of consumer payment preferences document the decline in check usage and the rise in the adoption of credit, debit, and prepaid cards, as well as online bill payment options and ACH debits.^[227] According to the Federal Reserve Bank of Boston, 97.1 percent of American consumers have adopted one or more types of payment card.^[228] Similarly, the Federal Reserve's 2010 Survey of Consumer Finances demonstrates that the “usage of electronic forms of payment, including ATMs, debit cards, automatic bill paying, and smart cards [closed-loop GPR cards], has risen from about 78 percent of households in 1995 to almost 94 percent of households in 2010.” ^[229] In 2013, the Federal Reserve summarized these adoption and usage patterns by consumers and noted the precipitous decline in checks, finding that “[b]y 2012, about two-thirds of consumer and business payments were made with payment cards [i.e., credit, debit, and prepaid cards].” ^[230] The same study concluded that card-based payments “increased their share from 43 percent of all noncash payments in 2003 to 67 percent in 2012, while the use of ACH grew more modestly, increasing from a share of 11 percent in 2003 to 18 percent in 2012.” ^[231] In turn, “[c]hecks represented nearly half (46 percent) of all noncash payments in 2003, but only 15 percent in 2012.” ^[232]

In the United States, debit cards have become the most widely used noncash payment instrument, substituting for a significant number of cash, check, and credit card payments at the point of sale and initiated over the telephone or Internet.^[233] The decline in check usage and the rise in the adoption of payment cards, as well as online bill payment options and ACH debits, contradict the assertions of some commenters that consumers with checking accounts need remotely created checks and remotely created payment orders to make telemarketing purchases.^[234] Other comments made conclusory allegations that legitimate telemarketers use remotely created checks and remotely created payment orders, but no comment provided specific evidence of such purported legitimate use in telemarketing transactions covered by the Rule.^[235] Consumer preferences and their adoption of payment methods necessarily influence merchants' willingness to accept particular payment instruments, even if, as one commenter generally asserts, it may cost more to do so.^[236] Accordingly, as some commenters in support noted, legitimate telemarketers and sellers already accept conventional payment methods.^[237] Indeed, when 97.1 percent of U.S. Start Printed Page 77539households have adopted one or more types of payment card, is not surprising that legitimate telemarketers and sellers no longer rely on remotely created checks as a method of payment. The rulemaking record contains numerous cases demonstrating that deceptive sales techniques and fraud accompany the use of remotely created checks and remotely created payment orders in telemarketing.^[238]

Specifically, comments representing the views of financial institutions—including those serving as banks of first deposit (“BOFDs”) for bank customers that purportedly deposit remotely created checks and remotely created payment orders in legitimate telemarketing transactions—failed to provide data or even anecdotal evidence about the number of bank customers that do so.^[239] The Commission notes that the BSA and associated anti-money laundering (“AML”) laws and regulations require financial institutions to engage in initial and ongoing customer due diligence (a process referred to as Know Your Customer (“KYC”)).^[240] As ECCHO recognized, a “BOFD is required under federal law to apply its [KYC] policy to its merchant and merchant processor customers to understand their business and ensure that their business is and continues to be legitimate.” ^[241] Despite these obligations, including the monitoring of accounts to identify suspicious activities, comments from the financial services industry lacked information on the number and types of customers that would be affected by the prohibition.

Similarly, comments from one payment processor speculated that “thousands” of its merchants rely on these payment methods, but failed to report the number of its own merchant clients engaged in telemarketing that use remotely created checks and remotely created payment orders.^[242] The only telemarketing firm to submit comments also provided no data on the number of its telemarketing clients that would be affected by the prohibition.^[243]

As evidence of the widespread legitimate use of remotely created checks, ECCHO provided an estimate that it asserted showed an overall average of 258 unauthorized remotely created check adjustment claims per day, compared to 2.04 million remotely created checks deposited each day.^[244] The Commission finds this estimate unpersuasive and largely irrelevant, as ECCHO's figures materially underestimate the incidence of problematic remotely created checks and remotely created payment orders. First, as ECCHO recognized, its estimate included only unauthorized remotely created check adjustment claims, not check returns.^[245] A check adjustment claim is an interbank process, distinct from banks' check-collection and check-return processes, which banks use to make financial adjustments related to checks pursuant to agreements between themselves.^[246] A check return is an automated means by which a paying bank returns a check unpaid to a depository bank. Because the return process is automated, paying banks use this process to return remotely created checks that were unauthorized by consumers. The choice of whether to initiate an adjustment or a return is up to the paying bank.^[247]

Second, ECCHO's estimate relied on adjustment claims data for only those items coded as “unauthorized,” which fails to account for the variety of return reason codes used by banks when returning fraudulent remotely created checks and payment orders. Indeed, because there are no universal definitions for return reason codes,^[248] a paying bank may classify the grounds for return as a breach of warranty, an irregular signature, or simply use the catchall “refer to maker.” ^[249] Moreover, when a consumer's account has been debited repeatedly without authorization, it may become overdrawn and trigger an NSF return, or the consumer may close the account, resulting in a “closed account” return reason code.^[250] Accordingly, the OCC advises that banks “should not accept high levels of returns regardless of the return reason.” ^[251]

Finally, unauthorized return rates, and even overall return rates, necessarily fail to account for those victims who do not detect the fraudulent withdrawals or who have been thwarted in obtaining a return by the reporting timeframes of the UCC and their bank deposit agreements.^[252] Thus, Start Printed Page 77540the Commission does not find ECCHO's estimates persuasive.

A different objection was raised by commenters asserting that the prohibition would prevent, directly or indirectly, a variety of legitimate transactions conducted over the telephone for which remotely created checks and remotely created payment orders are preferable for businesses, citing insurance premium payments, last-minute credit card bill payments and the collection of debts.^[253] Thus, opponents argued, the Commission must weigh the costs of a total prohibition on remotely created checks and remotely created payment orders and consider the widespread benefits of such payments to all consumers and businesses. However, the amended Rule covers only telemarketing transactions involving a plan, program, or campaign to induce the purchase of goods or services subject to the TSR. As such, the use of remotely created checks in other transactions conducted over the telephone, including the examples of non-telemarketing transactions cited by commenters, would not be prohibited.

Nevertheless, some commenters anticipate that processors and banks will cease processing all remotely created checks and payment orders because they will fear liability under the TSR's prohibition against assisting and facilitating a Rule violation.^[254] The risk of unwittingly processing remotely created checks or remotely created payment orders on behalf of a telemarketer appears exaggerated.^[255] The TSR prohibition against assisting and facilitating violations of the TSR is not a strict liability standard. Instead, liability depends upon a showing that the alleged facilitator knew or consciously avoided knowing that the telemarketer was violating the TSR prohibitions against remotely created checks and remotely created payment orders.^[256] Non-bank providers of remotely created check processing services subject to the Commission's jurisdiction will continue to implement and enforce appropriate KYC policies and procedures, as already required by their financial institutions,^[257] to determine which of their merchant-customers are engaged in covered telemarketing activities.^[258] Indeed, currently payment processors routinely conduct risk assessments and ongoing monitoring that should include a basic understanding of each merchant-customer's marketing methods and a review of unusual changes in transaction activity. To investigate suspicious spikes in reversals of transactions by merchant-consumers (or other signs of fraudulent activity), payment processors already have in place policies and procedures designed to ensure they know which of their merchant-customers engage in telemarketing and, therefore, must comply with certain authorization requirements.^[259] For example, § 310.3(a)(3) of the TSR requires telemarketers and sellers to obtain (and retain) ^[260] evidence of a consumer's express verifiable consent to be charged when using payment methods that are not credit or debit cards. The same is true for payment processors that initiate ACH debits for merchant-customers, as NACHA Operating Rules require payment processors (also referred to as “Third-Party Senders”) and their merchant-customers to meet the authorization requirements for TEL Entries.^[261] The Commission, therefore, is persuaded that remotely created check payment processors (and banks) can and will continue to identify the marketing methods used by their merchant-customers and keep processing remotely created checks for those merchant-customers not engaged in telemarketing. For the same reasons, the Commission also is persuaded that payment processors will not face increased compliance costs.^[262]

Finally, comments in opposition to the Rule argue that the prohibition will not benefit consumers because perpetrators of fraud will continue to submit remotely created checks and remotely created payment orders without consumers' authorization or simply switch to other payment methods.^[263] The Commission disagrees that the prohibition will have little or no impact in reducing consumer harm.^[264] First, these comments overstate the ease Start Printed Page 77541with which perpetrators can gain and maintain access to traditional payments channels like the ACH Network. For example, originating depository financial institutions (“ODFIs”) are familiar with and already must take steps to ensure compliance with NACHA's TEL Rule prohibiting ACH debits in outbound telemarketing transactions.^[265] Second, based on the injury estimates in the law enforcement cases in the rulemaking record, hundreds of millions of dollars in consumer injury could be minimized or prevented by restricting the use of remotely created checks and remotely created payment orders in telemarketing.^[266] Neither the existing TSR nor the amended Rule can eliminate all telemarketing fraud. No statute or rule can. However, the provisions of the TSR provide vital guidance to industry and create a level playing field for legitimate marketers. Such rules also guide consumers and form the basis for effective consumer education campaigns and law enforcement actions that protect consumers from deception and abuse.

In sum, the evidence in the rulemaking record demonstrates that the harm to consumers, in the form of unauthorized and fraudulent charges from remotely created checks and remotely created payment orders in telemarketing transactions vastly outweighs the benefits to consumers or competition. With the advent of payment alternatives offering the same convenience and more consumer protection against unauthorized charges, the past benefits of remotely created checks and remotely created payment orders no longer remain cognizable. Studies on consumer payment preferences confirm consumers' migration to electronic payment alternatives including online bill pay, ACH debits, traditional and prepaid debit cards, and credit cards. In turn, the rulemaking record contains only conclusory assertions that legitimate telemarketers and sellers use or rely on remotely created checks and remotely created payment orders. Moreover, the Commission concludes that a prohibition against the use of remotely created checks and remotely created payment orders in telemarketing will serve to push telemarketers engaged in illegal conduct to use payment methods that are subject to greater monitoring and afford greater protections to consumers. A prohibition also will provide the telemarketing industry with bright lines for compliance with the Rule. These changes will benefit both consumers and competition.

d. Additional Policy Arguments Do Not Alter the Commission's Conclusion

Some commenters argued that a prohibition on remotely created checks and remotely created payment orders will result in the fragmentation of the payment system and amounts to a direct and impermissible regulation of banks, an action exceeding the FTC's jurisdiction. The direct regulation of telemarketing under the TSR, however, is a proper exercise of the Commission's authority to protect consumers from deceptive and abusive telemarketing practices. Indeed, the Telemarketing Act specifically directed the Commission to promulgate and enforce the TSR to address deceptive and abusive telemarketing practices.^[267] The final Rule is consistent with the Commission's authority under the Act.

Rather than further fragmenting the payment system, the Commission believes that the prohibition will result in clearer compliance obligations for telemarketers and sellers. Under the existing TSR and state law, telemarketers and sellers already are subject to a variety of overlapping restrictions and requirements regarding the acceptance of certain payment methods. For example, telemarketers and sellers must abide by state laws that mandate prior written authorization for remotely created checks or other debits from consumer bank accounts.^[268] Like the express verifiable authorization requirement for remotely created checks in § 310.3(a)(3) of the existing TSR, the prohibition against remotely created checks is a direct regulation of telemarketers and sellers covered by the TSR, not a regulation of the payment system or financial institutions. Such compliance obligations for telemarketers and sellers already affect the criteria used by payment processors to conduct initial due diligence and ongoing monitoring of their clients engaged in telemarketing.

Finally, some commenters argued that the Commission's analysis demonstrated a pure policy preference for ACH transactions over checks. They expressed the opinion that, because ACH debits and remotely created checks are both payee-initiated withdrawals from consumer bank accounts, they share the same risk profile in telemarketing. In support of this position, commenters cited FTC cases against telemarketing frauds and payment processors that used ACH debits. As described in section II.A.3 above, the regulatory framework, due diligence, and centralized monitoring of the ACH Network generally provide consumers with more robust consumer protections against fraud. Even with the added safeguards of the ACH Network, NACHA has never permitted the use of ACH debits in outbound telemarketing, due to the substantial risk of fraud in telephone-initiated transactions.^[269] It is appropriate, therefore, to prohibit the use of remotely created checks and remotely created payment orders, which provide fewer safeguards than ACH debits in telemarketing transactions.

4. Final Rule Language

The NPRM proposed adding to the TSR new definitions for “remotely created check” and “remotely created payment order.” As proposed, the definition of remotely created check mirrored the definition used in Regulation CC. The definition of remotely created payment order closely tracked the definition of remotely created check, but was broad enough to encompass electronic payment orders that most closely resemble remotely created checks.

The Commission solicited public comment as to whether the proposed definitions adequately, precisely, and correctly described each payment alternative. In response, the Commission received relevant comments from the Federal Reserve Bank of Atlanta and the CFPB. Both commenters expressed concern that the definitions were too narrow to be effective. Specifically, they emphasized the limitations of including a requirement that the check or payment order be “unsigned,” because a telemarketer or seller could easily apply a “graphical image of a signature” to the signature block of a check or payment order to circumvent the prohibition.^[270] The Commission agrees that the definitions should be modified to reduce the likelihood of circumvention.

Based on the record evidence, the Commission concludes that there are two defining characteristics of remotely created checks and remotely created payment orders. First, these payments are created or initiated by the payee-merchant, not the payor-consumer. Second, these payments are deposited Start Printed Page 77542into or cleared through the check clearing system, not the ACH Network. The new definition incorporates these two elements. In addition, based on the convergence of paper and electronic payments in the check clearing system, the Commission thinks it appropriate to combine the definition of remotely created check with the definition of remotely created payment order. Therefore, the amended Rule eliminates the separate definition of remotely created check, and includes a single definition of remotely created payment order, which includes any payment instruction or order drawn on a person's account that is (a) created by or on behalf of the payee and (b) deposited into or cleared through the check clearing system. To be clear, the term includes, without limitation, a “remotely created check,” as defined in Regulation CC, Availability of Funds and Collection of Checks, 12 CFR 229.2(fff), but does not include a payment order cleared through an Automated Clearinghouse or subject to the Truth in Lending Act, 15 U.S.C. 1601 et seq., and Regulation Z, 12 CFR part 1026.

In practice, the amended Rule prohibits telemarketers and sellers from accepting any payment order, instruction, or check, whether electronic, imaged, or paper, that is remotely created by the payee and deposited into the check clearing system. As the rulemaking record demonstrates, when combined with the weaknesses of the check clearing system, these types of payee-initiated withdrawals pose a significant risk in telemarketing transactions.

The payments landscape is constantly evolving to meet the needs of consumers and businesses, as evidenced by recent payment innovations, including mobile payments, digital wallets, and virtual currencies. The Rule amendments do not and cannot address the benefits and risks of all existing or future electronic payment alternatives.^[271] The Commission is confident, however, that the amended Rule's definition of remotely created payment order is sufficiently tailored and flexible to protect consumers from telemarketing fraud while enabling the use of current and future payment alternatives. For example, a payment order or instruction sent through the ACH Network would not qualify as a remotely created payment order under the definition. The definition also excludes so-called “digital checks” that a consumer creates and sends via a smartphone application, for example, as long as the payment was not created by the payee-merchant. The Commission recognizes that, unlike remotely created payment orders and remotely created checks, such digital checks or “electronic payment orders” could provide consumers with robust authentication features to ensure that the transaction has been initiated and authorized by the account holder.

To implement the prohibition against the use of remotely created payment orders in outbound telemarketing transactions, the Commission amends § 310.4(a) to add a new paragraph (a)(9). Section 310.4(a)(9) of the amended Rule states that it is an abusive practice for a seller or telemarketer to create or cause to be created, directly or indirectly, a remotely created payment order as payment for goods or services offered or sold through telemarketing or as a charitable contribution solicited or sought through telemarketing.

Section 310.6(b) exempts certain types of inbound telemarketing calls from TSR coverage. For example, inbound calls from consumers in response to general media advertisements are exempt from coverage, with the exception of a few types of products and services.^[272] Similarly, inbound calls from consumers in response to a direct mail solicitation that provides material disclosures and makes no misrepresentations are exempt from coverage.^[273] The NPRM proposed changes to the general media and direct mail exemptions that would prohibit the use of remotely created checks and remotely created payment orders in inbound telemarketing transactions by sellers that wish to take advantage of the exemption.

Only one commenter, First Data, offered specific comments on this aspect of the proposal. First Data suggested that the Commission should adopt an amendment akin to NACHA's TEL Rule that would permit the use of remotely created checks and remotely created payment orders in inbound telemarketing transactions.^[274] First Data argued that, like ACH debits, the use of remotely created payment orders should be permitted in inbound transactions.^[275] However, the same operational and regulatory weaknesses associated with the use of remotely created payment orders exist equally in inbound and outbound telemarketing calls. Specifically, unlike ACH debits subject to NACHA's TEL Rule, remotely created checks and remotely created payment orders are not subject to centralized monitoring or identification and expose consumers to the lesser remedies of the UCC.

For these reasons, the Commission has determined that the prohibitions in § 310.4(a)(9) should apply to both outbound and inbound telemarketing. However, to minimize the burden on sellers and telemarketers that have qualified for the general media and direct mail exemptions from the TSR for inbound telemarketing, the Commission has modified the proposed amendments to § 310.6(b)(5) and (6). The purpose of the modification is to clarify that sellers and telemarketers that comply with the prohibition on the use of remotely created payment orders (including remotely created checks) in inbound telemarketing remain exempt from the TSR's requirements if they otherwise qualify for the general media or direct mail exemptions. Thus, they only are covered by the TSR if they violate the prohibition. Moreover, while non-compliance with one of these prohibitions subjects the violator to a TSR enforcement action for the violation, it does not deprive the violator of its exemption from the other requirements of the TSR.

B. Final Rule and Comments Received on Cash-to-Cash Money Transfers and Cash Reload Mechanisms

Money transfer providers enable individuals to send (or “remit”) money quickly and conveniently to distant Start Printed Page 77543friends and family using a network of agents in different locations in the U.S. and abroad. As used in the current rulemaking proceeding, the term “cash-to-cash money transfer” describes a specific type of money transfer in which a consumer brings currency to a money transfer provider that transfers the value to another person who picks up currency at the money transfer provider's location or agent in a different location. The definition does not include money transfers that meet the definition of “electronic fund transfer” in section 903 of EFTA.

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 extract money anonymously and irrevocably from the victims of fraud. As discussed in section I.B.1.a above, cash-to-cash money transfers are: (1) Not subject to the same limits on liability and error resolution procedures as ACH debits and traditional debit cards; (2) not subject to voluntary zero liability protection as provided for certain GPR card transactions; and (3) not subject to the same robust dispute resolution procedures as for credit card payments.^[276] Indeed, after a cash-to-cash money transfer is picked up, there is no recourse for the consumer to obtain a refund. This is true even for those cash-to-cash transfers made to locations outside of the U.S., which are governed by the Remittance Rule under Regulation E. Moreover, cash-to-cash money transfers are not subject to the same systemic monitoring and rules framework applied to ACH debits or card payments.^[277]

Increasingly, perpetrators of fraud are migrating from using cash-to-cash money transfers to cash reload mechanisms. Cash reload mechanisms are codes or devices that 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 a cash reload mechanism, such as MoneyPak, Vanilla Reload Network, or Reloadit.^[278] In exchange, the consumer receives a unique access or authorization code to use over the telephone or Internet to load the funds onto an existing GPR card within the same prepaid network, to add cash to a “digital wallet” with a payment intermediary (e.g., PayPal), or to pay a utility or other bill owed to an approved partner of the cash reload mechanism provider. Perpetrators of telemarketing fraud persuade consumers to buy a cash reload mechanism and provide the PIN code directly to the perpetrator over the telephone. The perpetrator can then offload a victim's money onto its own prepaid card and thereby anonymously and irrevocably extract money from its victims. As with cash-to-cash money transfers, once a cash reload mechanism is transmitted to an anonymous con artist who has loaded the funds onto his GPR card, the money is gone and cannot be recovered.

Like remotely created checks, remotely created payment orders, and cash-to-cash money transfers, cash reload mechanisms lack the same dispute resolution rights provided for card-based payments and ACH debits under the TILA and Regulation Z or the EFTA and Regulation E, respectively.^[279] As such, these novel payment methods expose consumers to a substantial risk of unrecoverable losses from telemarketing fraud. Because the Commission's law enforcement experience showed that such payment methods are used extensively 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.

Since the publication of the NPRM, all three major cash reload providers have developed alternatives to PIN-code cash reload mechanisms for adding funds to GPR cards. In July 2014, Green Dot acknowledged the risk that cash reload mechanisms pose to consumers and announced the complete discontinuance of its MoneyPak cash reload product by mid-2015.^[280] Users of Green Dot's prepaid products can now reload their cards by swiping them at a cash register. The swipe-reload is a “card-present” transaction, which prevents scammers from using a cash reload mechanism to load their own GPR cards remotely. In October 2014, InComm also announced the phase-in of a swipe reload process and the discontinuance of its cash reload mechanism, Vanilla Reload packs, at all retail stores in 2015.^[281] In November 2014, Blackhawk Network testified that it has created new alternatives to its “quick reload” Reloadit cash reload mechanism, including a swipe reload process.^[282]

1. Comments Supporting the Prohibition on Cash-to-Cash Money Transfers and Cash Reload Mechanisms

Ten commenters, including consumer advocacy groups, staff from state and federal agencies, and a United States senator, supported a prohibition on the use of cash-to-cash money transfers and cash reload mechanisms in telemarketing transactions.^[283] These comments advanced several common arguments, summarized below.

a. Cash-to-Cash Money Transfers

Many commenters agreed that the basic characteristics of cash-to-cash money transfers make them susceptible to abuse in telemarketing transactions. Commenters noted that such transfers provide a quick and convenient means for perpetrators of telemarketing and other frauds to receive money from their victims at locations around the world.^[284] The speed of the transfers, commenters argued, enables perpetrators to disappear with the funds within minutes of transmission.^[285] In addition, commenters noted that such transfers can be picked up in cash from remote locations with little or no identification, which allows scammers “to remain practically anonymous when Start Printed Page 77544retrieving their victim's money.” ^[286] Supporters of a prohibition emphasized that the lack of chargeback protections exacerbates the injury sustained by victims of telemarketing fraud.^[287] As a result, some commenters noted, perpetrators exploit cash-to-cash money transfers in connection with nearly every type of mass-marketing fraud, including so-called 419 scams from West Africa,^[288] lottery, loan, investment, and work-at-home schemes, and “the grandparent scam.” ^[289]

Comments supporting the amendment acknowledged that the amount of actual consumer loss is unknown, but agreed that losses to consumers are significant.^[290] Because legitimate telemarketers and sellers do not rely on cash-to-cash money transfers, the commenters argued that a prohibition would have “little to no impact on legitimate businesses.” ^[291] Commenters emphasized that the effectiveness of the prohibition will depend on the efforts of cash-to-cash money transfer providers to detect and deter the use of their money transfer systems by telemarketers.^[292] Some commenters argued that money transfer companies provide substantial assistance or support to those who engage in violations of the TSR.^[293] NCLC opined that money transfer providers lack sufficient financial incentives to detect misuse systematically because every money transfer earns a fee.^[294] According to DOJ-CPB, “[e]ven when fraud may be clear to money transfer businesses themselves, they do not always stop the fraudulent proceeds from passing through their hands.” ^[295] To counter this problem, several commenters urged the Commission to “make clear the legal responsibility, and liability, of the entities that control the method of payment.” ^[296] At a minimum, commenters argued, money transfer companies should ask their customers about the purpose of the transfer, stop any transfers prohibited by the amended TSR, and take additional steps to identify and terminate money transfer agents that are complicit in violating the TSR and other laws.^[297]

Some commenters suggested that the prohibition on cash-to-cash money transfers should go further to protect consumers. For example, NCLC argued that the Commission should alter the existing knowledge standard for assisting and facilitating violations of the Rule to impose strict liability on money transfer providers.^[298] According to NCLC, “[m]oney transmitters are in a position to police their system, and they will do so if they have strict liability for violations.” ^[299] In addition, several commenters encouraged the Commission to extend the prohibition beyond telemarketing transactions to protect consumers from fraud-induced transfers initiated via email or the internet.^[300] According to these commenters, the use of cash-to-cash transfers in such transactions causes as much harm to consumers as transactions over the telephone.” ^[301]

b. Cash Reload Mechanisms

Several commenters expressed general support for the prohibition against the use of cash reload mechanisms in telemarketing transactions for the same reasons they supported the prohibition on cash-to-cash money transfers.^[302] Some provided more detailed responses, noting that cash reload mechanisms provide perpetrators of telemarketing fraud with the same speed, irrevocability, and convenience as cash-to-cash money transfers.^[303] These commenters noted that the use of cash reload mechanisms in telemarketing fraud is increasing. DOJ-Criminal agreed that perpetrators are now using cash reload mechanisms in work-at-home, advance-fee loan, and sweepstakes scams.^[304] According to NCLC, cash reload mechanisms were the second most common method of payment in telemarketing fraud reported to the National Consumers League Fraud Center in 2012, accounting for eight percent of all telemarketing payments,^[305] compared to one percent in 2009.^[306] In one criminal case, DOJ-Criminal noted that “a single defendant obtained tens of thousands of dollars from the [Green Dot] MoneyPak cards of 50 different victims in at least 14 states.” ^[307]

Like cash-to-cash money transfers, commenters argued, cash reload mechanisms are not used by legitimate businesses as a payment method for telemarketing transactions. Commenters stated that legitimate businesses instead Start Printed Page 77545use electronic payments or debit or credit cards and have no need to use a cash reload system.^[308] These commenters noted that cash reload mechanisms enable perpetrators of fraud to evade consumer protections and liability for fraud.^[309] Supporters of the prohibition acknowledged that the sale of cash reload mechanisms off the rack at retail stores differentiates this payment method from cash-to-cash money transfers that are facilitated by money transfer agents. This “self-service” nature of cash reload mechanisms makes it difficult for the reload provider to intercept and warn potential victims.^[310] Nevertheless, commenters argued, a reload provider may still be able to “detect patterns or scrutinize suspicious transactions, such as withdrawals in foreign countries, cash reloads followed by immediate cash withdrawals, or high volume withdrawals by different customers at an unusual ATM.”. . .^[311]

2. Comments Opposing the Prohibition Against Cash-to-Cash Money Transfers and Cash Reload Mechanisms

a. Cash-to-Cash Money Transfers

The Commission received detailed comments opposing the prohibition of cash-to-cash money transfers in telemarketing transactions from The Money Services Roundtable (“TMSRT”), a group of several national non-bank money transmitters.^[312] Other commenters indicated their general opposition to a prohibition on the use of any novel payment methods in telemarketing, including cash-to-cash money transfers.^[313] At least one opponent of the amendment argued that deceptive or abusive telemarketers and sellers are the root of the problem, not the payment method itself.^[314] Neither TMSRT nor any other commenter, however, identified a single legitimate telemarketer or seller that requested or accepted payment via money transfer. For example, telemarketing firm InfoCision claimed generally that novel payment methods are “extremely important” to legitimate businesses and charities, but focused its comment on remotely created checks and remotely created payment orders.^[315]

According to TMSRT, the “vast majority of the millions of transactions completed by TMSRT members each week are not fraudulently induced.” ^[316] TMSRT highlighted the numerous reasons why consumers use money transfers, including to pay their rent or receive money used to pay children's tuition at school or medical expenses, and to help victims in areas devastated by disasters.^[317] Opponents expressed concern that the prohibition in telemarketing could disrupt such legitimate uses of cash-to-cash money transfers by those who depend on them, causing consumers to incur added costs and inconvenience. This is because consumers may “abandon” legitimate transactions in the face of additional scrutiny by providers of cash-to-cash money transfers designed to detect whether a transaction is the result of telemarketing.

TMSRT asserted that it would be challenging for money transfer providers to distinguish telemarketing-related money transfers from all other types of transfers. As a result, two comments warned, the prohibition could severely restrict consumer access to international and domestic funds transfers for all consumers, many of whom are unbanked, underserved by mainstream financial services, or do not have credit or debit cards because they are of “limited financial means and seek to avoid the fees associated with traditional banking products.” ^[318] TMSRT expressed concern that the restriction may force money transfer customers to use other payment methods, such as “sending cash in the mail, or worse, through unlicensed `underground' money transfer providers.” ^[319]

In addition, TMSRT questioned whether the prohibition would be effective against the types of fraud-induced money transfers discussed in the NPRM, and argued that it would not deter bad actors. Both the Electronic Transactions Association (“ETA”) and TMSRT expressed concern about third party liability for money transfer providers who accept telemarketing-related money transfers.^[320] Specifically, TMSRT noted that the amended Rule would require money transfer providers to “take steps to prevent potential telemarketers from receiving money transfers, even though the transmitters are unlikely to know or have reason to know if the individual recipient is a telemarketer (or a fraudster posing as a legitimate recipient).” ^[321] TMSRT expressed confusion as to whether money transfer providers “will be required to ask consumers several questions at the point of sale in order to ascertain whether they are sending money related to a telemarketing call.” ^[322] TMSRT argued that such questions can be easily circumvented when perpetrators coach their victims on how to answer and noted that some consumers may find such questioning invasive or may not know that they are dealing with a telemarketer. If the Commission adopts the prohibition, TMSRT argued, it should provide a safe harbor for money transfer providers that act in good faith and utilize fraud protection programs that include: (a) Designation of employees accountable for the fraud monitoring program; (b) transaction blocking for designated consumers; and (c) evaluation of transactional data to monitor and predict fraudulent activity.^[323]

TMSRT further argued that the prohibition is unnecessary because money transfer providers already have “taken steps to substantially reduce the amount of fraudulent activity that is occurring.” ^[324] Instead of a prohibition on the use of cash-to-cash money transfers in telemarketing, TMSRT suggested, the Commission should elicit information from other intermediaries that “unknowingly interact with abusive telemarketers,” such as Internet service providers or telecommunications companies.^[325] TMSRT further opined that the Commission should encourage information sharing among law enforcement and money transfer providers and conduct research into more effective disclosures for consumers to prevent fraud-induced transfers. According to TMSRT, the Commission should abandon the prohibition in favor of providing guidance on fraud prevention programs Start Printed Page 77546that money transfer providers should adopt.^[326]

b. Cash Reload Mechanisms

The Commission received general comments from InfoCision and ETA regarding the importance of all novel payment methods in telemarketing, and specific comments on the prohibition of cash reload mechanisms in telemarketing from two providers, Green Dot and InComm.^[327] InComm expressed the view that cash reload mechanisms are no more vulnerable to fraud than other payment methods, and noted that the rate of fraud for cash reloads is low in comparison to the overall transaction volume and dollar amount.^[328] In contrast, Green Dot agreed with the Commission's concerns about the misuse of cash reload mechanisms in telemarketing transactions.^[329] Both commenters described cash reload mechanisms as a convenient, low-cost payment method for consumers to pay authorized billing partners, load funds to accounts with online payment intermediaries, and conduct person-to-person transactions.^[330] Notably, neither commenter identified legitimate telemarketers or sellers covered by the TSR that use cash reload mechanisms.

After the close of the comment period, Green Dot submitted written testimony in a hearing held before the United States Senate Special Committee on Aging on July 16, 2014, in which the company announced the discontinuance of “the MoneyPak PIN method of reloading a card” in favor of a “card swipe” reload process.^[331] The card swipe reload method requires the GPR cardholder to physically present the card in the store and swipe it at the retail point of sale terminal in order to reload funds. Green Dot's testimony confirmed that “without the MoneyPak PIN, the scammer will have no method of instructing a senior to buy a [MoneyPak] and no method of redeeming any associated PIN number.” ^[332] In October 2014, InComm, which operates the Vanilla Reload Network cash reload mechanism, also announced its migration to the swipe reload process.^[333] InComm stated the new process would “eliminate[] opportunities for fraud and scam artists to take advantage of unsuspecting customers through the use of reload packs.” ^[334] Similarly, Blackhawk Network—a cash reload provider that did not comment on the proposed Rule—indicated that it has eliminated the use of its cash reload mechanism (“Reloadit pack”) to apply funds directly to any existing GPR card.^[335]

Before announcing its voluntary discontinuance of MoneyPak, Green Dot's comment expressed support for a prohibition, but suggested the Commission narrow the definition of cash reload mechanism to exclude from coverage those types of payment mechanisms that facilitate bill payment and other money transmission activity “so long as the payment mechanism cannot be used to add funds to a GPR Card.” ^[336] Similarly, before InComm started phasing out Vanilla Reload packs, InComm's comment opined that the broad definition of “telemarketing” would mean that unbanked consumers might not be able to use cash reload mechanisms to pay billers or e-commerce merchants, or make payments to a friend, family member, or other third party who happens to engage in telemarketing activities.^[337] InComm argued that a prohibition will not deter fraudulent telemarketers from utilizing cash reload mechanisms to defraud consumers, so the costs of a prohibition would necessarily outweigh any benefits.^[338]

InComm and Green Dot each expressed additional concern about the potential liability of a cash reload provider under the TSR's prohibition against assisting and facilitating violations of the Rule.^[339] These commenters noted that no single party in the lifecycle of a prepaid card transaction that uses a cash reload mechanism has “full visibility into the transaction from beginning to end,” which makes it difficult for the reload provider to know whether the transaction is related to telemarketing.^[340] In addition, one said, perpetrators of fraud frequently use stolen identities to open and access GPR cards onto which such funds are loaded, making it difficult for cash reload providers to preemptively shut off the redemption of the cash reload mechanism by telemarketers.^[341] To address these concerns, both commenters requested that the Commission explicitly exempt cash reload providers from the Rule's prohibition against providing substantial assistance or support to any seller or telemarketer while knowing or consciously avoiding knowledge that the seller or telemarketer is engaged in violations of certain provisions of the TSR.^[342]

3. The Commission Concludes That the Use of Cash-to-Cash Money Transfers and Cash Reload Mechanisms in Telemarketing Meets the Test for Unfairness

This amendment proceeding is limited in scope to the direct regulation of those telemarketers and sellers covered by the TSR and subject to the jurisdiction of the FTC. Accordingly, the amendment is limited to the use of cash-to-cash money transfers and cash reload mechanisms by telemarketers and sellers covered by the TSR. The Commission, therefore, cannot extend the prohibition to Internet based transactions, as suggested by some advocates.^[343] In addition, the Start Printed Page 77547Commission declines to revise the Rule's provision against assisting and facilitating to create strict liability for the providers of cash-to-cash money transfers and cash reload mechanisms, as suggested by supporters of a prohibition. Likewise, the Commission finds it unnecessary and inappropriate either to explicitly exempt or otherwise provide a safe harbor for money transfer or cash reload providers, as suggested by industry representatives. As described in more detail in Section II.A.3, the Commission continues to believe that the “conscious avoidance” standard is appropriate when seeking to hold third parties accountable for the actions of others under the TSR.

After careful consideration of the entire rulemaking record, the Commission concludes that the use of cash-to-cash money transfers and cash reload mechanisms in telemarketing transactions meets the unfairness test for an abusive telemarketing practice.

a. The Use of Cash-to-Cash Money Transfers and Cash Reload Mechanisms in Telemarketing Causes Substantial Harm to Consumers

The substantial consumer harm resulting from cash-to-cash money transfers and cash reload mechanisms in telemarketing is ongoing and persistent. The rulemaking record confirms that perpetrators of telemarketing fraud—not legitimate telemarketers and sellers—depend on the speed, convenience, anonymity, and irrevocability of these payment methods to siphon millions from consumer victims each year. Furthermore, the record is conspicuously devoid of evidence of the use of such payment mechanisms by legitimate telemarketers or sellers covered by the TSR.^[344]

The law enforcement experience of the Commission and the Department of Justice evidences the high risk to consumers and widespread injury caused by fraud-induced money transfers and cash reload mechanisms in telemarketing. As these enforcement cases and alerts show, perpetrators of fraud have employed a variety of means to dupe or pressure consumers into sending cash-to-cash money transfers, including fake foreign lottery or sweepstakes prizes,^[345] phony mystery shopper scams,^[346] and work-at-home opportunities.^[347] Increasingly, law enforcement is finding these same tactics are being used to convince consumers to send money via cash reload mechanisms.^[348]

In some widespread telemarketing frauds, the agents of cash-to-cash money transfer providers have been complicit in the schemes used to defraud consumers. The U.S. Department of Justice has obtained numerous criminal convictions of corrupt and collusive MoneyGram and Western Union agents that carried out, participated in, or laundered the proceeds from telemarketing fraud.^[349] For example, the U.S. Attorney's Office for the Middle District of Pennsylvania, alone, has brought conspiracy, fraud and money laundering charges against 28 former MoneyGram agents.^[350]

Law enforcement cases demonstrate that some money transfer providers “have a strong financial incentive to continue facilitating such transactions despite unmistakable signs of fraud.” ^[351] For nearly a decade, federal and state agencies have brought civil and criminal law enforcement actions against cash-to-cash money transfer providers to stop them from profiting from the use of their systems by fraudulent telemarketing schemes and other frauds. In 2005, Western Union entered into an agreement with 47 states and the District of Columbia to resolve allegations about the use of the company's wire transfer services by fraudulent telemarketers.^[352] Under the settlement, Western Union agreed to fund an $8.1 million national consumer awareness program, place prominent consumer warnings on the send forms used by customers, terminate agents who are involved in fraud, develop a computerized system aimed at identifying transfers that are at risk of fraud and blocking fraud-induced transfers before they are completed, and increase the company's anti-fraud staffing.

In 2008, MoneyGram entered into a similar agreement with 44 states and the District of Columbia to address the high number of money transfers sent by Start Printed Page 77548consumers to fraudulent telemarketers.^[353] The agreement required the company to fund a $1.1 million national consumer awareness program, use prominent consumer warnings on the forms used by consumers to wire money, revise and enhance the company's agent anti-fraud training programs, and provide special training to agents with elevated fraud levels at their locations.

In October 2009, the Commission reached a separate $18 million settlement with MoneyGram to settle charges that it allowed telemarketers to bilk U.S. consumers out of tens of millions of dollars using its money transfer system.^[354] According to the complaint, MoneyGram knew that its system was being used to defraud people but did very little about it. For example, the FTC alleged that MoneyGram knew, or consciously avoided knowing, that 131 of its more than 1,200 agents accounted for more than 95 percent of the fraud complaints MoneyGram received in 2008 regarding money transfers to Canada. The Commission further alleged that MoneyGram ignored warnings from law enforcement officials and its own employees that widespread fraud was being conducted over its network, and even discouraged its employees from enforcing the company's own fraud prevention policies or taking action against suspicious or corrupt agents.^[355] As a result of the settlement, MoneyGram is permanently enjoined from failing to: (1) Provide consumer fraud warnings, which must be reviewed and updated to ensure the company's effectiveness in preventing fraud, (2) enable a consumer to reverse a money transfer if the funds have not been picked up and the consumer alleges the transfer was induced by fraud; (3) establish, implement, and maintain a comprehensive anti-fraud program reasonably designed to detect and prevent fraud-induced money transfers as well as money transfer agents who may be complicit in fraud.^[356] The Commission sent more than 34,000 checks totaling almost $18 million to consumers identified as victims of a series of cross-border fraud schemes.^[357]

In 2012, the U.S. Attorney for the Middle District of Pennsylvania filed a criminal case against MoneyGram, alleging that the company willfully disregarded obvious signs that its money transfer network was being used by fraudulent telemarketers and other con-artists, including its own money transfer agents.^[358] According to the Statement of Facts, “MoneyGram's processing of fraudulent transactions [through complicit MoneyGram agents] was critical to the success of the fraud scheme because the Perpetrators relied on MoneyGram's money transfer system to receive the victim's money.” ^[359] To resolve the case, MoneyGram entered into a five-year deferred prosecution agreement in which it admitted to “criminally aiding and abetting wire fraud and failing to maintain an effective anti-money laundering program.” ^[360] The agreement required MoneyGram to provide $100 million to the victims of fraud-induced transfers, undertake enhanced compliance monitoring procedures, and employ a corporate compliance monitor.^[361]

Increasingly, law enforcement and consumer advocates have encountered the use of cash reload mechanisms in telemarketing schemes that defraud consumers in a variety of ways.^[362] The testimony and voluntary actions of three cash reload providers also support the conclusion that perpetrators of fraud are increasingly turning to cash reload mechanisms.^[363] As with cash-to-cash money transfers, these schemes include advance fees on bogus loans,^[364] “processing” fees for government grants,^[365] taxes on purported lottery or sweepstakes winnings,^[366] and claims of money owed to the IRS.^[367]

Existing consumer complaint data, including the complaints collected by the Commission's Consumer Sentinel Network (“CSN”), also indicates the significant injury resulting from fraud-induced money transfers and cash reload mechanisms. The CSN data includes unverified complaints and does not represent a statistical consumer survey. However, it provides important information on the number of consumer complaints reported and the amount of injury reported. The CSN data is consistent with the significant injury documented in law enforcement cases involving fraud-induced money transfers and cash reload mechanisms.^[368] Both MoneyGram and Western Union are data contributors to the CSN. These companies voluntarily contribute to the CSN a significant numbers of consumer complaints they receive from customers, which necessarily affects the distribution of the reported methods of payment.^[369] For Start Printed Page 77549example, in 2014 consumer complaints contributed to the CSN by MoneyGram and Western Union represented 3 percent of the total number of complaints received.^[370]

Between January 1, 2012, and December 31, 2014, the CSN database logged 322,850 consumer fraud complaints ^[371] in which the victims reported the method of payment as “Wire Transfer”—a category that includes cash-to-cash money transfers. These fraud complaints accounted for more than $1.4 billion in total reported consumer injury.^[372] In 2014 alone, the CSN received 106,472 consumer fraud complaints in which the method of payment was Wire Transfer, accounting for $500,705,082 in reported consumer injury.^[373] Statistics from the National Consumers League's (“NCL”) Fraud Center confirm the widespread use of cash-to-cash money transfers in telemarketing fraud. According to NCL's 2012 complaint data, cash-to-cash money transfers accounted for “nearly 63 percent of all telemarketing [fraud] payments.” ^[374]

The CSN consumer complaint data also is beginning to show the significant injury inflicted when perpetrators of fraud use cash reload mechanisms to siphon money from consumer victims. In 2014, CSN logged 119,100 consumer fraud complaints accounting for $80,860,327 in reported injury in which the victims reported the method of payment as “Prepaid Card”—a category that captures cash reload mechanisms.^[375] Green Dot voluntarily contributed a significant number (4 percent) of consumer complaints received by the CSN in 2014, which affects the distribution of the reported methods of payment.^[376] According to Green Dot estimates, consumer complaints of fraud-induced cash reloads “represented approximately $30 million in cash loads in 2013 out of total load volume of approximately $20 [b]illion, or approximately one-quarter of one percent of loads.” ^[377] NCL stated that its 2012 complaint data also indicate that a growing percentage of telemarketing fraud complaints involve payments made via cash reload mechanisms.^[378]

Notwithstanding the investigations, lawsuits, consumer alerts, monetary settlements, and injunctions requiring implementation and strengthening of anti-fraud measures, the use of cash-to-cash money transfers and cash reload mechanisms by telemarketers continues to cause substantial injury to consumers. As the rulemaking record makes clear, the substantial harm and losses sustained by consumers usually cannot be undone.^[379] Once a cash-to-cash money transfer is picked up, or funds are offloaded from a cash reload mechanism to a GPR card, the money is irretrievable. There are no federal or state statutory or contractual chargeback rights for consumers who make such payments.^[380] Existing federal and state laws pertaining to cash-to-cash money transfers and cash reload mechanisms are not aimed at consumer protection and do not address the abuse of these payment methods by fraudulent telemarketers and con artists.^[381] The absence of consumer protections providing consumers with the means to recover their money once they or their family members discover the fraud compounds the substantial injury sustained by consumers.

b. The Injury Is Not Reasonably Avoidable by Consumers

As described in the context of remotely created checks and remotely created payment orders, the Commission considers the extent to which a consumer can reasonably avoid injury, in part, by whether the consumer can make an informed choice. The Commission seeks “to halt some form of seller behavior that unreasonably creates or takes advantage of an obstacle to the free exercise of consumer decisionmaking.” ^[382] Unscrupulous telemarketers are adept at interfering with a consumer's decisionmaking by spawning lies about the products and services offered, as well as by steering consumers into making payments that are irretrievable.

As is true in other telemarketing contexts, the ability of consumers to identify and avoid the risk of injury is substantially diminished when telemarketers engage in deceit to sell sham goods or services. Consumers often rely upon the representations made in telemarketing calls and comply with the payment instructions dictated by the telemarketer or seller. When deceitful telemarketers persuade consumers to deliver payment via cash-to-cash money transfers or cash reload mechanisms, the telemarketer causes additional harm that consumers cannot reasonably avoid. Consumers cannot avoid risks they do not perceive, and consumers generally do not appreciate that these payment mechanisms pose enhanced obstacles to detection of fraudulent conduct, to identification of the perpetrator, and to recovery of financial losses.

The lack of systematic monitoring of these payment mechanisms makes Start Printed Page 77550detection and deterrence of fraud challenging. In particular, as noted previously, these payments are difficult to track, and by the time consumers realize the operation was a scam, they cannot mitigate their losses by seeking a refund or a reversal of the transaction.^[383] In fact, consumers typically discover all too late that legal protections to help recover money lost in a fraudulent transaction are absent once a cash-to-cash money transfer is picked up or a cash reload mechanism is offloaded.

Some opponents of a prohibition seem to suggest that consumers who have been deceived can and should reasonably avoid the harm—the initiation of a cash-to-cash money transfer or the turnover of a cash reload mechanism—by heeding the warnings not to transfer money or provide cash reloads to strangers.^[384] These warnings are posted by money transfer providers in storefronts and on send forms, among other places, or are provided on the back of cash reload mechanisms.

Consumers, however, are under no duty to ferret out the truthfulness of marketing claims.^[385] In telemarketing fraud perpetrated through cash-to-cash money transfers and cash reload mechanisms, a consumer often is thoroughly convinced and compelled—through false promises or fear of imminent threat of financial or legal consequences—to consummate payment by taking a number of burdensome steps. The consumer leaves his home in a determined effort to make immediate payment in the amount and manner dictated by the telemarketer or seller. Once a consumer is so deceived, generalized warnings against fraud (at the money transfer location or on the back of a cash reload mechanism) do not render avoidable the harm inflicted after the cash-to-cash transfer is picked up or the cash reload mechanism is offloaded by the telemarketer.

Green Dot recognized this dynamic in recent testimony to the U.S. Senate Special Committee on Aging, “it would appear that this tactic [consumer warnings on MoneyPak packaging] has not achieved the intended goal because the seniors ignore the warnings, convinced that the con artist is genuine.” ^[386] Thus, it is clear that for some consumers, once they are persuaded to initiate a cash-to-cash money transfer or provide the cash reload mechanism to the perpetrator, it is impossible to cure the initial deception with subsequent general warnings about the potential danger of sending money to strangers.^[387]

Opponents further argue that a prohibition against cash-to-cash money transfers and cash reload mechanisms is unwarranted because it is the unscrupulous actions of telemarketers and sellers—not the payment methods—that cause the unavoidable harm to consumers.^[388] The Commission agrees that the immediate source of the problem is the fraudulent conduct of the telemarketer or seller, but the payment mechanism makes the economic injury more significant as the money is largely irretrievable once it's been sent. Consumers are unlikely to appreciate that the regulatory framework includes a paucity of consumer protections or that the systems moving their money cannot track the specific recipient of their payment.

Furthermore, this argument by opponents ignores the fact that the record is replete with evidence of corrupt money transfer agents who have colluded with the perpetrators of telemarketing frauds, while money transfer companies did little to stop it.^[389] It also ignores the inextricable link in telemarketing transactions between these payment methods and fraudulent schemes, as there is no record evidence that legitimate telemarketers or sellers use cash-to-cash money transfers or cash reload mechanisms. For these reasons, the Commission has determined that a prohibition on the use of cash-to-cash money transfers and cash reload payment mechanisms by telemarketers and sellers is necessary to prevent substantial and unavoidable consumer harm.

c. The Benefits of Cash-to-Cash Money Transfers and Cash Reload Mechanisms in Telemarketing Do Not Outweigh the Harm to Consumers

The use of cash-to-cash money transfers and cash reload mechanisms by telemarketers and sellers produces clear adverse consequences for consumers that are not accompanied by an increase in services or benefits to consumers or to competition.

(1) Cash-to-Cash Money Transfers

The rulemaking record confirms that the substantial and unavoidable harm to consumers resulting from the use of cash-to-cash money transfers in telemarketing transactions is not outweighed by any countervailing benefits to consumers or competition. No commenter cited a single legitimate telemarketer or seller that uses cash-to-cash money transfers in telemarketing. Instead, representatives of the money transfer industry described the benefits that cash-to-cash money transfers provide to consumers in non-telemarketing transactions, such as personal remittances to family and friends. As the law enforcement cases and consumer complaint data demonstrate, fraudulent telemarketers and sellers prefer anonymous, unrecoverable money transfers to conventional payment alternatives that are subject to federal consumer protections and that ensure systemic monitoring and dispute rights.

The Commission recognizes that consumers who wish to transfer money to friends, send money to family to pay tuition and medical bills, or remit money abroad to family may benefit from the convenience, speed, and cost that cash-to-cash money transfers can provide. These benefits, however, do not extend to the telemarketing context. Unlike ACH debits and card-based payment methods—including GPR cards that are used widely by unbanked and underbanked consumers ^[390] —that permit a telemarketer to instantly complete the sale over the telephone, Start Printed Page 77551cash-to-cash money transfers require the consumer to take several burdensome steps to initiate payment after the telephone call ends. The consumer typically must go to a money transfer provider's location, fill out a send form, pay a fee, and provide the currency to be transferred. In addition, the recipient, which cannot even ensure the consumer will comply with its directions, incurs time and costs resulting from the delay in payment by having to go to a money transfer location to receive the funds in cash. As a result, legitimate telemarketers simply do not rely on burdensome, unpredictable and costly cash-to-cash money transfers to receive payment for goods or services purchased over the telephone. Not surprisingly then, the record is devoid of evidence that any legitimate telemarketers or sellers currently use (or have ever used) cash-to-cash money transfers in telemarketing transactions.

The Commission is of the firm view that a prohibition on the use of these payment methods by telemarketers and sellers will provide bright line guidance benefitting both consumers and the telemarketing industry. While the warnings that money transfer providers provide are useful, there are substantial benefits to bright line guidance. First, the message is clear and it is concise: It is illegal for telemarketers ask consumers to wire cash. Second, it is delivered by the government, a neutral and authoritative source. Third, it is a message about the requirements of the law rather than advice on when to be cautious in these types of transactions.

Pragmatically, consumers educated about the prohibition who later encounter a telemarketer asking for a cash-to-cash money transfer will be able to more quickly identify the illegal behavior and simply hang up. Money transfer providers will have the benefit of being able to deliver a clear and concise message to all consumers, and importantly, a message that does not implicate cash transfers to relatives or friends. Legitimate telemarketers and sellers should also benefit from increased consumer confidence.

Citing to the benefits that cash-to-cash money transfers provide to consumers in non-telemarketing transactions, such as personal remittances to family and friends,^[391] TMSRT asserts that the prohibition threatens to deprive consumers of these benefits because money transfer providers cannot distinguish such personal remittances from cash-to-cash money transfers “to individuals who may be telemarketers.” ^[392] Therefore, TMSRT argues, the prohibition on cash-to-cash money transfers in telemarketing will have the unintended consequence of severely restricting all cash-to-cash money transfers.^[393]

The Commission does not find TMSRT's argument persuasive. First, the prohibition affects a discrete sub-set of all money transfers: cash-to-cash transfers. The prohibition does not restrict or prohibit the use, in telemarketing or non-telemarketing transactions, of other types of money transfers that originate from or are received into bank accounts, payment cards (including GPR cards), or accounts with payment intermediaries, for example. Second, money transfer providers already are trained in how to detect consumer fraud ^[394] and other types of illegal activity. Indeed, they are required to file with FinCEN suspicious activity reports (“SARs”) identifying certain transactions in which the provider knows, suspects, or has reason to suspect its system is being used to facilitate criminal activity.^[395] Finally, two of the largest money transfer providers, MoneyGram and Western Union, have taken voluntary and court-mandated measures to improve their BSA and AML compliance, including their ability to identify and stop fraud-induced transactions and those agents who are complicit in fraud.^[396]

For cash-to-cash money transfer providers that have and enforce policies and procedures designed to screen out fraud-induced transfers, any additional burden should be minimal. TMSRT indicates that its members already have implemented fraud prevention programs, and it does not quantify the costs of any programmatic changes the Rule would require.^[397] Indeed, a prohibition on the use of cash-to-cash money transfers in telemarketing transactions should enhance the effectiveness of the efforts taken by responsible money transfer providers to deter and detect the abuse of their money transfer systems by reinforcing their anti-fraud warnings to consumers and money transfer agents.^[398]

TMSRT further argues that the amended rule would result in “substantial disruption” absent additional guidance on how members should determine if the recipient is a telemarketer.^[399] Commission staff regularly provides guidance to industry about how to comply with specific rules, as well as other legal obligations,^[400] while also recognizing in other contexts that it is critical for industry segments and individual members to have the flexibility to comply with the requirements of a rule in ways that are consistent with their business practices. As noted above, some members of TMSRT already have practices in place, for example, to train and incentivize agents to recognize and halt unlawful transactions. For instance, Western Union trains agents “on how to Start Printed Page 77552detect and deter fraud at the point-of-sale,” makes a fraud hotline available to all agents, has a monetary reward program to encourage agents to detect and deter consumer fraud, and monitors agent activity to identify those complicit in fraudulent activity.^[401]

The Commission also declines TMSRT's request to amend the proposed Rule to provide an exemption or safe harbor for providers of cash-to-cash money transfers.^[402] Past law enforcement actions by the Commission and others provide detailed information about how money transfer providers can operate within the bounds of the law. For example, in the Commission's case against MoneyGram, the complaint contains detailed allegations describing how MoneyGram knew that its system was being used to defraud people but did very little about it.^[403] The stipulated permanent injunction in the case also outlines specific measures that MoneyGram must take to detect and prevent fraud-induced money transfers (not just cash-to-cash money transfers), including those involving telemarketing.^[404] Similarly, DOJ-Criminal's complaint and deferred prosecution agreement illustrates the company's failure to terminate specific MoneyGram agents it knew to be involved in fraud schemes and its willful failure to maintain an effective AML program.^[405]

Under the amended Rule, a cash-to-cash money transfer provider that has actual knowledge that the transfer is related to telemarketing, or consciously avoids knowing (such as by deliberately ignoring) signs that the transfer is related to telemarketing, may be found liable for assisting and facilitating a violation of the TSR. The Commission sees no reason to afford special treatment to this industry segment, particularly given past actions, by either lowering or raising the liability standard.^[406] To the contrary, the Commission expects the bright lines set by the amended Rule to create a level playing field for all money transfer providers and assist consumers in avoiding fraud.

Finally, addressing commenters' general concerns about this Rule amendment, the Commission recognizes that regulation and law enforcement have limitations and cannot prevent or eliminate all fraud. However, the Commission concludes, based on the substantial record of fraudulent telemarketers' use of cash-to-cash money transfers, that a prohibition on the use of this type of money transfer in telemarketing is an important, beneficial, and a vital step in protecting consumers from the substantial and unavoidable harm caused by these practices. Given that there is no evidence that legitimate telemarketers use this payment mechanism, the Commission concludes that the burden on legitimate marketers is non-existent and that any burden to money transmitters seeking to comply with the new rule would be minimal given the existing prohibition against assisting and facilitating violations of the Rule and past law enforcement actions.

(2) Cash Reload Mechanisms

The rulemaking record confirms that the substantial and unavoidable harm to consumers resulting from the use of cash reload mechanisms in telemarketing transactions is unjustified by any countervailing benefits to consumers or competition. As with cash-to-cash money transfers, fraudulent telemarketers and sellers exploit cash reload mechanisms to avoid the use of conventional payment alternatives that are subject to federal consumer protection laws. Recent complaint data indicates that increasing numbers of consumers each year are paying tens of millions of dollars in fraud-induced cash reload mechanisms, including in the telemarketing context.^[407]

Also, as with cash-to-cash money transfers, the use of cash reload mechanisms in telemarketing requires the consumer to take several burdensome steps to initiate payment after the telephone call ends. The consumer typically must go to a retail location to select a cash reload card, pay a fee, provide the funds to be loaded, and engage in another telephone call to provide the telemarketer with the PIN code. For these reasons, it is not surprising that the record is devoid of evidence that any legitimate telemarketers or sellers rely on cash reload mechanisms in telemarketing transactions.

The rulemaking record demonstrates that cash reload mechanisms offer perpetrators of telemarketing fraud a relatively anonymous and irretrievable method for obtaining funds from consumers. The Commission concludes that this mounting economic harm is not outweighed by any countervailing benefits to consumers or competition. The largest cash reload provider, Green Dot, evidently agrees.^[408] Green Dot recently completed the discontinuance of its MoneyPak cash reload mechanism for GPR cards on its network.^[409] The company's testimony explains that “without the MoneyPak PIN, the scammer will have no method of instructing a senior to buy a product and no method of redeeming any associated PIN number.”^[410] Notably, other cash reload providers, InComm and Blackhawk Network, also completed the voluntary discontinuance of cash reload mechanisms for GPR cards on their networks.^[411] Despite the voluntary measures taken by these three major cash reload providers, the prohibition is necessary to ensure that all current and future cash reload providers abide by the same rules.

The Commission believes that a prohibition on the use of cash reload mechanisms will complement and reinforce the laudable response of these three cash reload providers to the growing use of these payment methods in telemarketing fraud. A prohibition on the use of these payment methods by telemarketers and sellers will provide bright line guidance benefitting both consumers and the telemarketing industry. Instead of general warnings from cash reload providers, consumer will receive the benefit of clear instructions and guidance from the federal government, advising that it is illegal for a seller or telemarketer to accept a cash reload mechanism as payment. Legitimate telemarketers and sellers, in turn, should benefit from increased consumer confidence.

Commenters opposed to the prohibition submit that the amendment is overbroad and “could potentially prohibit consumers' legitimate uses of cash reload mechanisms that are unrelated or incidental to any Start Printed Page 77553telemarketing activity,” such as payments to billers, e-commerce merchants, and utility companies.^[412] These comments overlook the fact that the prohibition is limited to telemarketing transactions covered by the Rule and does not extend to non-telemarketing transactions like the bill payment transactions they cite. The payment of an existing bill without further solicitation is not a telemarketing transaction subject to the TSR, and the language of the amended Rule does not broadly prohibit or restrict the use of cash reload mechanisms in such non-telemarketing transactions, as some opponents suggested.^[413]

Moreover, the implementation by the three major cash reload providers of the swipe reload process for GPR cards will likely render obsolete the use of cash reload mechanisms as direct payment for such non-telemarketing transactions. Today, consumers without access to traditional banking can load funds using the swipe process directly to a GPR card instead of using a PIN-based reload mechanism. In turn, consumers can use these GPR cards to pay for goods or services, make a bill payment, or buy from an e-commerce merchant. To the extent that cash reload mechanisms may have been used for such transactions in the past,^[414] the Commission is not persuaded that permitting their use is still necessary. Thus, any adverse effect of the TSR's prohibition against cash reload mechanisms on their use in non-telemarketing transactions would be minimal.

In light of the swipe reload availability, it may be useful to further clarify the scope of the cash reload ban in telemarketing. The prohibition does not prevent the use of other payment mechanisms, such as GPR cards, single-use prepaid cards, or funds in an account with an online payment intermediary, to pay for purchases. This is true even if a consumer uses a (PIN-based) cash reload mechanism to load funds onto an existing GPR card or another personal account. The Commission's concern is not the use of GPR cards or personal accounts—these have additional and more robust protections than cash reload mechanisms.^[415]

Comments opposed to the prohibition expressed concern about liability exposure for assisting and facilitating violations of the Rule and argue for a safe harbor or limitation on what constitutes “substantial assistance” under the TSR.^[416] The Commission recognizes that the “self-service” nature of cash reload mechanisms, to the extent they still exist in the marketplace, could create particular challenges for providers to know whether a consumer will use a cash reload mechanism to pay an authorized biller, reload a GPR card for a college-bound student, or send funds to a fraudulent telemarketer. The Commission is not persuaded, however, that it is necessary or appropriate to amend the proposed Rule to provide an exemption or safe harbor for providers of cash reload mechanisms, or otherwise to limit the assisting and facilitating provision as it may be applied to them. The record makes clear that providers of cash reload mechanisms already have implemented anti-fraud measures and proactively already have restricted the availability of a reload mechanism altogether. Commenters, however, have not shown how the rule change might impose costs different from those already incurred (or being eliminated) for fraud detection or why the general “substantial assistance” standard otherwise imposes a burden unique to providers of cash reload mechanisms. Thus, the Commission sees no basis upon which to change the existing TSR standards for “substantial assistance.”

4. Final Rule Language

The NPRM proposed new definitions of “cash-to-cash money transfer” and “cash reload mechanism.” The Commission solicited public comment as to whether the proposed definitions adequately, precisely, and correctly described each payment alternative. In response, the Commission received no comments on the definition of cash-to-cash money transfer; and relevant comments from two cash reload providers, InComm and Green Dot regarding the definition of cash reload mechanism. Both of these comments were received before three providers began implementing a swipe reload process for adding funds to GPR cards on their networks. At that time, both commenters expressed concern that the term, in combination with the definition of “telemarketing,” would restrict the use of this payment method by consumers in legitimate non-telemarketing transactions, such as bill payments.^[417] Only Green Dot proposed a specific change to the definition, suggesting that the Commission amend the definition specifically to cover only those cash reload mechanisms used to load GPR cards.^[418] Based on the evidence in the record, the Commission declines to narrow the definition of “cash reload mechanism” as proposed by Green Dot, which was based on a business model that has now shifted dramatically with the discontinuance of GreenDot's cash reload mechanism.

Nevertheless, the Commission concludes that some changes to the definition are warranted. As noted previously, the Commission's concern pertains to the ease with which perpetrators of telemarketing fraud use cash reload mechanisms as an inexpensive and largely irreversible method of siphoning money from defrauded consumers who divulge their cash reload PIN number or similar security code. Con artists can easily abscond with the money by applying funds from the cash reload mechanism to GPR cards or to online accounts they obtain using false names. This is the problem the Commission intends to curtail.

By contrast, the Commission does not intend the Rule to cover telemarketing transactions in which a consumer uses a GPR card (or an online account balance with a payment intermediary) to Start Printed Page 77554pay for goods and services. This is true even if the consumer previously added funds to the GPR card or other online account via a swipe reload process or (to the extent it still exists) a PIN-based cash reload mechanism). In those instances, the telemarketer or seller is accepting the GPR card as payment, not a cash reload mechanism like a PIN number.^[419] The Commission has revised the final definition of cash reload mechanism to ensure that the language is flexible enough to cover future adaptations by scammers, and sufficiently narrow to prohibit the abusive practices documented in the rulemaking record.

To implement the prohibition against the use of cash-to-cash money transfers and cash reload mechanisms, the Commission amends § 310.4(a) to add a new paragraph (a)(10). Section 310.4(a)(10) of the amended Rule states that it is an abusive practice for a seller or telemarketer to accept from a customer or donor, directly or indirectly, a cash-to-cash money transfer or cash reload mechanism as payment for goods or services offered or sold through telemarketing or as a charitable contribution solicited or sought through telemarketing. The language of the prohibition addresses the receipt, directly or indirectly, of a cash reload mechanism by a telemarketer or seller. For reasons already discussed above, the prohibition does not cover circumstances where a consumer pays bills or merchants (including telemarketers) using a GPR card or account with an online payment intermediary that was funded by a cash reload mechanism.

As with the prohibition against the use of remotely created payment orders, the Commission concludes that the risks associated with cash-to-cash money transfers and cash reload mechanisms exist equally in outbound and inbound telemarketing calls. Accordingly, the prohibitions in § 310.4(a)(10) apply to both outbound and inbound telemarketing. However, to minimize the burden on sellers and telemarketers that have qualified for the general media and direct mail exemptions from the TSR for inbound telemarketing, the Commission is modifying the proposed amendments to § 310.6(b)(5) and (6). The purpose of the modification is to clarify that sellers and telemarketers that comply with the prohibition on the use of cash-to-cash money transfers and cash reload mechanisms in inbound telemarketing remain exempt from the TSR's requirements if they otherwise qualify for the general media or direct mail exemptions. Thus, they are covered by the TSR only if they violate the prohibition. Moreover, while non-compliance with one of these prohibitions subjects the violator to a TSR enforcement action for the violation, it does not deprive the violator of its exemption from the other requirements of the TSR.

C. Final Rule and Comments Received on Expansion of Advance Fee Ban on Recovery Services

The original TSR prohibited the abusive telemarketing practice of collecting advanced fees for services promising to recover losses incurred by consumers in a previous telemarketing transaction.^[420] The NPRM proposed to expand the coverage of the existing advance fee ban on recovery services to include losses incurred in any prior transaction, not just telemarketing transactions.^[421] The Commission received several comments supporting the expansion of the Rule to cover non-telemarketing transactions.^[422] No commenters opposed the amendment.

The NPRM proposed the expansion in response to the widespread migration of frauds to other communication channels made possible by new technologies, including Internet Web sites and email. As a result, the Commission finds that telemarketers selling recovery services are just as likely to obtain lists of online scam victims as they are to obtain lists of victims of telemarketing fraud. These telemarketers can easily avoid the Rule's current advance fee prohibition simply by telemarketing their advance fee recovery services only to victims of online scams. Indeed, in United States v. Business Recovery Services, LLC, the defendants were charged with selling worthless do-it-yourself kits for as much as $499 to consumers who had lost money on business opportunity and work-at-home scams sold via telemarketing and online marketing.^[423] Where consumers' losses resulted from online scams, prosecutors could not charge defendants with violations of the TSR.

The Commission agrees with the DOJ-CPB that there exists “no logical reason” to differentiate recovery room victims based on whether the original scam was a telemarketing scam.^[424] To ensure that advanced fees are prohibited for all recovery services, regardless of whether the loss resulted from a telemarketing transaction, the Commission adopts the change to § 310.4(a)(3) proposed in the NPRM.

III. Final Rule and Comments Received on Clarifying Amendments

The Commission received comparatively few comments on the proposals in the NPRM to modify five existing TSR provisions to make Commission enforcement policy more transparent. These amendments: (1) Clarify that any recording made to memorialize a customer's or donor's express verifiable authorization (“EVA”) pursuant to § 310.3(a)(3)(ii) must include an accurate description, clearly and conspicuously stated, of the goods or services or charitable contribution for which payment authorization is sought; (2) clarify that the exemption for calls to businesses in § 310.6(b)(7) extends only to calls inducing a sale or contribution from the business, and not to calls inducing sales or contributions from individuals employed by the business; and (3) address provisions pertaining to the Do Not Call requirements of the TSR.

Specifically, the amendments to the Do Not Call provisions pertain to three sections. The first amendment expressly states that a seller or telemarketer bears the burden of demonstrating that the seller has an existing business relationship (“EBR”) with a customer whose number is listed on the Do Not Call Registry, or has obtained an express written agreement (“EWA”) from such a Start Printed Page 77555customer, as required by § 310.4(b)(1)(iii)(B)(i)-(ii). Second, the amendments illustrate the types of impermissible burdens on consumers that violate § 310.4(b)(1)(ii), which prohibits denying or interfering with a consumer's right to be placed on a seller's or telemarketer's entity-specific do-not-call list. In addition, they specify that a seller's or telemarketer's failure to obtain the information needed to place a consumer on a seller's entity-specific do-not-call list pursuant to that section disqualifies it from relying on the safe harbor for isolated or inadvertent violations in § 310.4(b)(3). Third, they modify the prohibition in section 310.8(c) against sellers sharing the cost of registry fees to emphasize that the prohibition is absolute.

A. Section 310.3(a)(3)(ii)—Oral Verification Recording as Evidence of EVA

The NPRM proposed an amendment to make it unmistakably clear that an oral verification recording of a consumer's agreement to be charged for a telemarketing transaction must include “an accurate description, clearly and conspicuously stated, of the goods or services or charitable contribution for which payment authorization is sought.” ^[425] Five comments supported this clarification,^[426] and none opposed it.

Section 310.3(a)(3)(ii) permits the use of an audio recording to memorialize a consumer's express verifiable oral authorization of a charge for a telemarketing transaction.^[427] It requires that the recording “evidences clearly both the customer's or donor's authorization of payment for the goods or services or charitable contribution that are the subject of the telemarketing transaction,” and the customer's or donor's receipt of specified material information about the transaction.^[428] The Commission has uniformly interpreted this provision as requiring a clear and conspicuous description in the recording of the goods, services, or charitable donation for which payment is sought.^[429] Because the Commission's law enforcement experience shows that some sellers and telemarketers appear to have omitted this information intentionally from their audio recordings to conceal from consumers the real purpose of the verification recording and the fact that they will be charged,^[430] the Commission has decided to adopt the proposed amendment.

B. Section 310.6(b)(7)—Limitation on Business-to-Business Exemption

The NPRM proposed an amendment to make it explicit that the business-to-business exemption is available only to sellers and telemarketers that are soliciting the purchase of goods or services or a charitable contribution by the business itself, rather than personal purchases or contributions by employees of the business. Five comments generally supported the amendment,^[431] and one argued against it.^[432]

The comment opposing the amendment is based on a fundamental misunderstanding. It incorrectly presumes that the existing provision exempts telemarketing calls directed to a business telephone number to solicit sales or charitable contributions from individual employees. That has never been the case. By its terms, the exemption applies only to “[t]elephone calls between a telemarketer and any business.” ^[433] Moreover, the fact that the exemption expressly excludes “calls to induce the retail sale of non-durable cleaning or office supplies,” which are hardly for the personal use of individual employees, provides additional evidence that the Commission limited the exemption at the outset to solicitations directed to a business, and not its employees.^[434]

Thus, the Commission's decision to adopt this amendment is simply a clarification of the scope of the existing exemption, not a change in its substance. This clarification should further deter telemarketers from attempting to circumvent the Registry by soliciting employees at their places of business to make personal charitable contributions or to purchase goods or services for their individual use.^[435] As amended, the exemption applies only to “[t]elephone calls between a telemarketer and any business to induce the purchase of goods or services or a charitable contribution by the business.”

C. Amendments To Clarify Do Not Call Provisions

The 2003 amendments to the TSR that created the National Do Not Call Registry included provisions: (1) Permitting live telemarketing calls to numbers on the registry if the seller has an EBR with the person called or has obtained his or her EWA to receive the call; (2) prohibiting sellers or telemarketers from denying or interfering in any way with a consumer's right to be placed on its entity-specific do-not-call list; and (3) barring sellers and telemarketers from sharing the fees for accessing the Registry. The remaining amendments seek to clarify these three provisions to reflect the Commission's intent and enforcement policy. The TSR requires sellers and telemarketers to delete from their calling lists any home or cell phone number that consumers have placed on the Registry.

1. Section 310.4(b)(1)(iii)(B)—EBR and EWA Burden of Proof

The NPRM proposed modifications to the EBR and EWA carve outs from the prohibition against outbound Start Printed Page 77556telemarketing calls to numbers on the National Do Not Call Registry. The amendments emphasize that calls to numbers on the Registry are permitted only if the seller or telemarketer “can demonstrate that the seller has” an EBR or EWA.^[436] Four comments supported the amendments.^[437] One comment opposed the amendment as unnecessary in view of prior Commission statements that sellers and telemarketers bear that burden, arguing that it would “confuse sellers, telemarketers, consumers, and regulators.” ^[438]

As stated in the NPRM, the Commission's goal in proposing these amendments was “to make it unmistakably clear that the burden of proof for establishing” an EWA or EBR as an affirmative defense to otherwise prohibited calls to numbers on the Registry “falls on the seller or telemarketer relying on it.” ^[439] The Commission believes that the two carve outs from the prohibition should transparently alert anyone reading them that the seller or telemarketer must be able to demonstrate that the seller meets the EWA or EBR requirements, rather than require research into applicable law and prior Commission statements to determine this burden of proof. Consequently, the Commission has decided to adopt the two amendments that accurately reflect existing law.

In adopting the amendments, the Commission again wishes to emphasize that each of the carve outs is limited to the specific seller that obtained the EWA directly from, or has an EBR directly with, the person called.^[440] Consequently, cold calls to consumers whose names and numbers appear on a calling list purchased from a third-party list broker are prohibited by the TSR's do-not-call provisions because the calls are not placed by the specific seller that obtained the EWA or EBR.

2. Section 310.4(b)(1)(ii) & (b)(3)—Denying or Interfering With a Consumer's Right To Opt-Out

The NPRM proposed an amendment to clarify the types of burdens that impermissibly deny or interfere with a consumer's right to be placed on an entity-specific do-not-call list. In addition, it included an amendment to disqualify a seller or telemarketer from the safe harbor for isolated or inadvertent violations if it fails to obtain the information needed to honor a do-not-call request.^[441] Six comments supported the amendments,^[442] and none opposed them.

The Commission accordingly has decided to adopt the amendment to § 310.4(b)(1)(ii), which currently prohibits sellers and telemarketers from “[d]enying or interfering in any way, directly or indirectly” with a consumer's right to be placed on an entity-specific do-not-call list. In order to make the prohibition more explicit and to put sellers and telemarketers clearly on notice of the practices it prohibits, the amendment adds illustrative examples of the types of burdens the Commission regards as impermissible. As amended, the prohibition lists the following examples of impermissible burdens: Harassing consumers who make such a request, hanging up on them, failing to honor the request, requiring the consumer to listen to a sales pitch before accepting the request, assessing a charge or fee for honoring the request, requiring the consumer to call a different number to submit the request, and requiring the consumer to identify the seller or charitable organization making the call or on whose behalf the call is made.^[443]

The Commission also amends § 310.4(b)(3), which provides a safe harbor for inadvertent violations of the prohibition in § 310.4(b)(1)(ii) against denying or interfering with an entity specific do-not-call request if certain requirements are met. The amendment was specifically supported by one comment and none opposed it.^[444] As amended, § 310.4(b)(3) withholds the benefits of the safe harbor from a seller or telemarketer that fails to obtain the information necessary to honor an entity-specific do-not-call request. This amendment emphasizes that § 310.4(b)(1)(ii) places the burden on sellers and telemarketers to obtain the information they need to comply with a do-not-call request because they are in a better position to obtain the information they need than consumers, who are often uncertain about the identity of the seller on whose behalf a call is made.^[445]

3. Section 310.8(c)—Prohibition on Registry Fee Sharing

The NPRM proposed a clarification that would make it explicit that the TSR prohibition against sellers sharing the cost of Registry fees is absolute. Five comments noted their support for the amendment,^[446] and none opposed it.

The original prohibition was adopted by the Commission in conformity with regulations previously adopted by the FCC that flatly ban any sharing or division of costs for accessing the National Do Not Call Registry.^[447] As the NPRM noted, it was the Commission's intention to adopt a blanket prohibition on any division or sharing of costs for accessing the Do Not Call Registry, but the provision could be read as permitting a person to sign up to access the Registry and, before ever actually accessing it, sell or transfer the registration for consideration to others seeking Registry access. The Commission has determined to adopt the proposed amendment to conform it more closely to the FCC prohibition and to prevent any possible misreading of the absolute prohibition.^[448] As amended, the prohibition in the final sentence of § 310.8(c) emphasizes that no person may participate in any arrangement to share the cost of accessing the National Do Not Call Registry, including any arrangement with any telemarketer or service provider to divide the costs to access the registry among various clients of that telemarketer or service provider.

IV. Regulatory Analysis and Regulatory Flexibility Act Requirements

The Regulatory Flexibility Act of 1980 (“RFA”) ^[449] requires a description and analysis of proposed and final rules that will have a significant economic impact on a substantial number of small entities.^[450] The RFA requires an agency to provide an Initial Regulatory Flexibility Analysis (“IRFA”) ^[451] with the proposed rule and a Final Regulatory Flexibility Analysis (“FRFA”) ^[452] with the final rule, if any. Section 605 of the RFA ^[453] provides that such an analysis is not required if the agency head certifies that the regulatory Start Printed Page 77557action will not have a significant economic impact on a substantial number of small entities.

Although the Commission believed that the amendments it proposed would not have a significant economic impact upon small entities, it included an IRFA in the NPRM and solicited public comment on it. None of the public comments received addressed the IRFA. The Commission continues to believe that the amendments it is adopting will not have a significant economic impact upon small entities, but nonetheless in the interest of caution is providing this FRFA.

A. Need for and Objectives of the Rule Amendments

As described in Sections II through III above, the amendments are intended to address telemarketing sales abuses arising from the use of remotely created checks, remotely created payment orders, cash-to-cash money transfers, cash reload mechanisms, recovery services, and entity-specific do-not-call requests. Other amendments clarify several TSR requirements in order to reflect longstanding Commission enforcement policy. The objective of the amendments is to curb deceptive and abusive practices occurring in telemarketing. The legal basis for the amendments is the Telemarketing Act.

B. Significant Issues Raised by Public Comments in Response to the IRFA, Including Any Comments Filed by the Chief Counsel for Advocacy of the Small Business Administration, and the Agency's Response, Including Any Changes Made in the Final Rule Amendments

As noted earlier, no comments, including any from the Small Business Administration, were received directly in response to the IRFA. Some concerns were raised about the potential effect of the prohibition against remotely created payment orders and remotely created checks on small business by FRBA and by InfoCision, as discussed in section II.A.2 above.^[454]

C. Description and Estimate of the Number of Small Entities To Which the Amendments Will Apply or Explanation Why No Estimate Is Available

The amendments to the Rule affect sellers and telemarketers engaged in “telemarketing,” as defined by the Rule 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.” ^[455] For the majority of entities subject to the amendments—sellers and telemarketers—a small business is defined by the Small Business Administration as one whose average annual receipts do not exceed $7 million.^[456]

Determining a precise estimate of how many of these are small entities, or describing those entities further, is not readily feasible because the staff is not aware of published data that report annual revenue or employment figures for the industry. The Commission invited comment and information on this issue, but received no comments.

D. Description of the Projected Reporting, Recordkeeping and Other Compliance Requirements of the Amendments, Including an Estimate of the Classes of Small Entities That Will Be Subject to the Requirement and the Type of Professional Skills Necessary for Preparation of the Report or Record

The Commission does not believe that the amendments impose any new disclosure, reporting, recordkeeping or other compliance burdens. Rather, the amendments add to or revise existing TSR prohibitions and clarify existing requirements. The amendments: (1) Add new prohibitions barring the use of remotely created checks, remotely created payment orders, cash-to-cash money transfers, and cash reload mechanisms in both outbound and inbound telemarketing; and (2) revise the existing prohibition on advance fee recovery services, now limited to recovery of losses in prior telemarketing transactions, to include recovery of losses in any previous transaction.

The amendments also include a number of minor technical revisions that do not impose any new disclosure, reporting, recordkeeping or other compliance burdens, but merely clarify existing TSR requirements to reflect Commission enforcement policy. These amendments state expressly (1) that the seller or telemarketer bears the burden of demonstrating under 16 CFR 310.4(b)(1)(iii)(B) that the seller has an existing business relationship (“EBR”) with a customer whose number is listed on the Do Not Call Registry, or has obtained the express written agreement (“EWA”) of such a customer to receive a telemarketing call, as previously stated by the Commission; (2) that the requirement in 16 CFR 310.3(a)(3)(ii) that any recording made to memorialize a customer's or donor's express verifiable authorization (“EVA”) must include an accurate description, clearly and conspicuously stated, of the goods or services or charitable contribution for which payment authorization is sought; (3) that the business-to-business exemption in 16 CFR 310.6(b)(7) extends only to calls inducing a sale or contribution from the business itself, and not to calls inducing sales or contributions from individuals employed by the business; (4) that under 16 CFR 310.8(c) no person can participate in an arrangement to share the cost of accessing the National Do Not Call Registry; and (5) provide examples of the types of impermissible burdens on consumers that the Commission regards as violations of 16 CFR 310.4(b)(1)(ii) because they deny or interfere with their right to be placed on a seller's or telemarketer's entity-specific do-not-call list. A related amendment specifies 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 16 CFR 310.4(b)(1)(ii) disqualifies it from relying on the safe harbor in 16 CFR 310.4(b)(3) for isolated or inadvertent violations.

The classes of small entities affected by the amendments include telemarketers or sellers engaged in acts or practices covered by the Rule. The Commission maintains its belief, in the absence of any comments it requested on this issue, that no professional skills will be required for compliance with the amendments because the amendments do not impose any new reporting, recordkeeping, disclosure or other compliance requirements, and do not extend the scope of the TSR to cover additional entities.

E. Steps Taken To Minimize the Significant Impact, If Any, of the Rule Amendments, Including Why Any Significant Alternatives Were Not Adopted

Although some of the public comments did suggest alternatives to the prohibition on the use of remotely Start Printed Page 77558created checks and remotely created payment orders in telemarketing, the Commission is not persuaded that the alternatives suggested would be equally effective in protecting consumers or that they are within the Commission's authority, as described above in section II.A.3.a(2). Nonetheless, in formulating the amendments, the Commission made every effort to avoid imposing unduly burdensome requirements on sellers and telemarketers. To that end, sellers and telemarketers that comply with the prohibitions on the use of remotely created checks and payment orders, cash-to-cash money transfers, and cash reload mechanisms in inbound telemarketing remain exempt from the TSR's requirements if they otherwise qualify for the general media or direct mail exemptions. Moreover, while non-compliance with one of these prohibitions subjects the violator to a TSR enforcement action for the violation, it does not deprive the violator of its exemption from the other requirements of the TSR. The Rule amendments regarding the advance fee ban on recovery services and the inapplicability of the safe harbor for telemarketers that fail to obtain the information necessary to honor a request to be placed on a seller's entity-specific do-not-call list do not add additional disclosure or recordkeeping burdens or unduly expand the scope of the TSR and are necessary to protect consumers.

V. Paperwork Reduction Act

The amendments adopted by the Commission do not create any new recordkeeping or disclosure requirements, or expand the existing coverage of those requirements to marketers not previously covered by the TSR. Accordingly, they do not invoke the Paperwork Reduction Act.^[457]

The new prohibitions on the use of remotely created checks, remotely created payment orders, cash-to-cash money transfers, and cash reload mechanisms apply not only to marketers making outbound calls that are currently subject to the TSR, but also to those who receive inbound calls from consumers as a result of direct mail or general media advertising. While the new prohibition on the use of novel payment methods applies to both outbound and inbound telemarketing calls, sellers and telemarketers that comply with these inbound telemarketing prohibitions remain exempt from the TSR if they otherwise qualify for the direct mail or general media exemptions.^[458] These two exceptions include exemption from the TSR's disclosure and recordkeeping obligations. Moreover, while non-compliance with one of these prohibitions subjects the violator to a TSR enforcement action for the violation, it does not deprive the violator of its exemption from the other requirements of the TSR.

The expansion of the TSR's ban on advance fees for recovery services to apply to funds lost in any prior transaction also has no discernible PRA ramifications because it, too, requires no disclosures or recordkeeping. The same is true for the amendment making sellers and telemarketers ineligible for the safe harbor for isolated or inadvertent TSR violations if they fail to obtain the information necessary to honor a request to be placed on a seller's entity-specific do-not-call list. Nothing in that amendment requires any disclosure or recordkeeping.^[459] Likewise, the Commission believes that the five technical amendments intended to make explicit the existing requirements of the TSR does not impose any new disclosure or recordkeeping obligations.

Start List of Subjects

List of Subjects in 16 CFR Part 310

• Telemarketing
• Trade practices

End List of Subjects

For the reasons set forth in the preamble, the Federal Trade Commission amends title 16 Code of Federal Regulations as follows:

Start Part

PART 310—TELEMARKETING SALES RULE 16 CFR PART 310

End Part Start Amendment Part

1. The authority citation for part 310 continues to read as follows:

End Amendment Part Start Authority

Authority: 15 U.S.C. 6101-6108.

End Authority Start Amendment Part

2. Amend § 310.2 by redesignating paragraphs (aa) through (ee) as paragraphs (dd) through (hh), redesignating paragraphs (f) through (z) as paragraphs (h) through (bb), and adding paragraphs (f), (g), and (cc) to read as follows:

End Amendment Part Start Amendment Part

3. Amend § 310.3 by redesignating paragraphs (a)(3)(ii)(A) through (G) as paragraphs (a)(3)(ii)(B) through (H) and adding paragraph (a)(3)(ii)(A) to read as follows:

End Amendment Part Start Amendment Part

4. Amend § 310.4 by:

End Amendment Part Start Amendment Part

a. Revising paragraph (a)(3);

End Amendment Part Start Amendment Part

b. Effective June 13, 2016, amending paragraph (a)(7)(ii)(B) by removing “or” from the end of the paragraph;

End Amendment Part Start Amendment Part

c. Effective June 13, 2016, amending paragraph (a)(8) by removing the final period and adding a semicolon in its place.

End Amendment Part Start Amendment Part

d. Effective June 13, 2016, adding paragraphs (a)(9) and (10);

End Amendment Part Start Amendment Part

e. Revising paragraphs (b)(1)(ii), (b)(1)(iii)(B), and (b)(3)(vi);

End Amendment Part

The revisions and additions read as follows:

Start Amendment Part

5. Amend § 310.6 by revising paragraphs (b)(5) through (7) to read as follows:

End Amendment Part Start Amendment Part

6. Effective June 13, 2016, § 310.6 is further amended by adding paragraphs (b)(5)(ii) and (b)(6)(ii) to read as follows:

End Amendment Part Start Printed Page 77560 Start Amendment Part

7. Amend § 310.8 by revising paragraph (c) to read as follows:

End Amendment Part Start SignatureEnd Signature

Note:

The following Statement of the Federal Trade Commission and Separate Statement of Commissioner Maureen K. Ohlhausen, Dissenting In Part, will not appear in the Code of Federal Regulations.

Statement of the Federal Trade Commission on Amendments to the Telemarketing Sales Rule

Following careful study of an extensive public record, the Commission is amending the Telemarketing Sales Rule (“TSR”) to address new forms of telemarketing fraud and more effectively protect consumers from deceptive and abusive telemarketing practices.^[1] The main change is a ban on the use in telemarketing of four types of non-conventional payment methods as to which fraudulent use is pervasive—remotely created checks (“RCCs”), remotely created payment orders (“RCPOs”), cash reload mechanisms, and cash-to-cash money transfers.

In assessing whether a telemarketing practice is “abusive,” we apply our traditional unfairness test and ask whether the practice causes or is likely to cause substantial injury to consumers that is neither reasonably avoidable by consumers nor outweighed by countervailing benefits to consumers or competition. As detailed at length in our Federal Register Notice, we conclude that the use of these four payment methods in telemarketing transactions constitutes an abusive practice.

The record demonstrates that the telemarketing use of each of these payment methods has resulted in rampant abuse that has caused substantial harm to consumers. This abuse persists despite significant law enforcement efforts by the Federal Trade Commission and other federal and state law enforcers. Indeed, gaps in our financial system make it difficult to detect and stop fraudulent use of these payment methods. And, in contrast to the overwhelming evidence of telemarketing fraud exploiting the use of these payment methods, we find almost no evidence that they are being used for legitimate telemarketing purposes. This has led numerous law enforcers to call for a prohibition on the use of all four of these non-conventional payment methods.^[2] Based on the record before us, as well as our own extensive enforcement experience, we agree that a ban is both necessary and appropriate.

Opponents of a ban acknowledge the substantial harm consumers have suffered and continue to suffer but argue that a prohibition is premature, would fragment legal requirements for payments, and would impinge on legitimate and emerging uses of the four payment methods. We find these arguments unpersuasive when balanced against the unmitigated and significant harm to consumers that the Commission continues to see in this area.

First, it is undeniable that years of public efforts to control the widespread abuse of RCCs and RCPOs in telemarketing have failed to protect consumers, and there is no indication that this situation will change in the foreseeable future. For instance, efforts to add protections to RCCs have languished for the past decade. Nor has there been any progress in recent years in efforts to improve the tracking of remotely created payments. Similarly, regulations governing remittances, including cash-to-cash money transfers, as well as proposed rules regarding prepaid accounts, which would address only certain cash reload mechanisms, do not address the telemarketing abuses that concern us. Simply put, there are no regulatory efforts underway that would address the serious harms to consumers that our proceeding has identified.

Second, we believe the clear, bright line rules we are putting in place provide much needed clarity for telemarketers and payment processors in a landscape that currently consists of a patchwork of state and federal rules. Rather than fragmenting the law in this area, we are simplifying it.

Finally, as noted above, we have found virtually no evidence of legitimate telemarketing uses of the four payment methods at issue. Our ban is focused on addressing abusive telemarketing practices using these payment methods; it does not get in the way of future innovation in the area of payor-initiated payments—including the use of digital checks created by consumers using their smartphones—in telemarketing and other transactions. In fact, the telemarketing industry has already adopted a variety of newer and safer payment alternatives.^[3] Moreover, in light of existing requirements, our amended TSR Rule is unlikely to impose any significant additional costs on the payments industry.^[4]

For all of these reasons, we believe the TSR amendments we announce today are an important and necessary step to stop ongoing substantial harm to consumers from telemarketing fraud.

By direction of the Commission, Commissioner Ohlhausen dissenting.

Donald S. Clark,

Secretary.

Separate Statement of Commissioner Maureen K. Ohlhausen, Dissenting in Part in the Matter of the Telemarketing Sales Rule

Today the Commission amends the Telemarketing Sales Rule (TSR) in an effort to combat telemarketing fraud.^[1] I support the Commission's long-standing efforts to combat fraud. However, I do not support the amendments prohibiting telemarketers and sellers in both inbound and outbound telemarketing calls from requesting or accepting as payment four “novel” payment methods: Remotely created checks (RCCs), remotely created payment orders (RCPOs), money transfers, and cash reload mechanisms. The amendments do not satisfy the third prong of the unfairness analysis in Start Printed Page 77561Section 5(n) of the FTC Act,^[2] which requires us to balance consumer injury against countervailing benefits to consumers or competition. 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.

The comments filed by the Federal Reserve Bank of Atlanta (FRBA) ^[3] raise several serious objections to these amendments that undergird my conclusion. Although the FRBA supports efforts to reduce telemarketing fraud and improve oversight of payments, it does not support the specific prohibitions on novel payments for the following reasons:

• “[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.” ^[4]

• “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.” ^[5]

• “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. A premature ban on their use in the telemarketing context may limit their use elsewhere as they would be stigmatized as a `risky' form of payment.” ^[6]

• “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.” ^[7]

• “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.” ^[8]

In sum, the FRBA's analysis of the prohibition of novel payments in telemarketing indicates that any reduction in consumer harm from telemarketing fraud is outweighed by the likely benefits to consumers and competition of avoiding a fragmented law of payments, not limiting the use of novel payments prematurely, and allowing financial regulators working with industry to develop better consumer protections. The FRBA has instead requested that we work together with our sister agencies by striving to “strengthen anti-fraud and consumer protection measures around existing and emerging payment mechanisms rather than by prohibiting the use of specific payment methods only in the telemarketing industry.” ^[9] I believe the better course for consumers and competition is to accept this invitation.

End Supplemental Information

Footnotes