Telemarketing Sales Rule, 77519-77561 [2015-30761]

Download as PDF Vol. 80 Monday, No. 239 December 14, 2015 Part III Federal Trade Commission mstockstill on DSK4VPTVN1PROD with RULES3 16 CFR Part 310 Telemarketing Sales Rule; Final Rule VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\14DER3.SGM 14DER3 77520 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations FEDERAL TRADE COMMISSION 16 CFR Part 310 RIN 3084–AB19 Telemarketing Sales Rule Federal Trade Commission. Final rule. AGENCY: ACTION: In this document, the Commission adopts amendments to the Telemarketing Sales Rule (‘‘TSR’’ or ‘‘Rule’’). These amendments define and prohibit the use of certain payment methods in all telemarketing transactions; expand the scope of the advance fee ban for recovery services; and clarify certain provisions of the Rule. The amendments are necessary to protect consumers from deceptive or abusive practices in telemarketing. DATES: Effective on February 12, 2016, except for amendatory instructions 4.b., 4.c., 4.d., and 6, which are effective on June 13, 2016. ADDRESSES: This document is available on the Internet at the Commission’s Web site at www.ftc.gov. The complete record of this proceeding, including the final amendments to the TSR and the Statement of Basis and Purpose (‘‘SBP’’), is available at www.ftc.gov. FOR FURTHER INFORMATION CONTACT: Karen S. Hobbs or Craig Tregillus, Attorneys, Division of Marketing Practices, Bureau of Consumer Protection, Federal Trade Commission, 600 Pennsylvania Avenue NW., Room CC–8528, Washington, DC 20580, (202) 326–3587 or 2970. SUPPLEMENTARY INFORMATION: This document states the basis and purpose for the Commission’s decision to adopt amendments to the TSR that were proposed and published for public comment in the Federal Register on July 9, 2013.1 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 mstockstill on DSK4VPTVN1PROD with RULES3 SUMMARY: 1 Telemarketing Sales Rule Notice of Proposed Rulemaking, 78 FR 41200 (July 9, 2013) (hereinafter NPRM). The text of the TSR is set forth at 16 CFR part 310. Unless stated otherwise, references to specific provisions of the TSR refer to the current version of the Rule published in the Code of Federal Regulations, revised as of January 1, 2015. 2 All of the public comments are available at http://ftc.gov/os/comments/tsrantifraudnprm/ index.shtm. In addition, a list of commenters cited in this SBP, along with their short citation names or acronyms used throughout the SBP, is attached as Appendix A. Where a commenter submitted more than one comment, the comment is identified separately. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 prerecorded messages and debt relief offers.8 The TSR applies to virtually all 3 15 U.S.C. 6101–6108. Subsequently, the USA PATRIOT Act, Public Law 107–56, 115 Stat. 272 (Oct. 26, 2001), expanded the Telemarketing Act’s definition of ‘‘telemarketing’’ to encompass calls soliciting charitable contributions, donations, or gifts of money or any other thing of value. 4 Other statutes enacted by Congress to address telemarketing fraud during the early 1990’s include the Telephone Consumer Protection Act of 1991, 47 U.S.C. 227 et seq., which restricts the use of automated dialers, bans the sending of unsolicited commercial facsimile transmissions, and directs the Federal Communications Commission (‘‘FCC’’) to explore ways to protect residential telephone subscribers’ privacy rights; and the Senior Citizens Against Marketing Scams Act of 1994, 18 U.S.C. 2325 et seq., which provides for enhanced prison sentences for certain telemarketing-related crimes. 5 15 U.S.C. 6102(a). 6 15 U.S.C. 6102(a)(3). 7 15 U.S.C. 6103, 6104. 8 Telemarketing Sales Rule Statement of Basis and Purpose and Final Rule, 60 FR 43842 (Aug. 23, 1995) (hereinafter TSR Final Rule 1995); Amended Telemarketing Sales Rule Statement of Basis and Purpose, 68 FR 4580 (Jan. 29, 2003) (hereinafter TSR Amended Rule 2003); Amended Telemarketing Sales Rule Statement of Basis and Purpose, 73 FR PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 ‘‘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 antifraud 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 51164 (Aug. 29, 2008) (hereinafter TSR Amended Rule 2008); Amended Telemarketing Sales Rule Statement of Basis and Purpose, 75 FR 48458 (Aug. 10, 2010) (hereinafter TSR Amended Rule 2010). 9 16 CFR 310.2(cc) (using the same definition as the Telemarketing Act, 15 U.S.C. 6106). 10 15 U.S.C. 6105(b). 11 15 U.S.C. 45(a)(2) (setting forth certain limitations to the Commission’s jurisdiction with regard to its authority to prohibit unfair or deceptive acts or practices). These entities include banks, savings and loan institutions, and certain federal credit unions. It should be noted, however, that although the Commission’s jurisdiction is limited with respect to the entities exempted by the FTC Act, the Commission has made clear that the Rule does apply to any third-party telemarketers those entities might use to conduct telemarketing activities on their behalf. See TSR Proposed Rule, 67 FR 4492, 4497 (Jan. 30, 2002) (citing TSR Final Rule 1995, 60 FR 43843) (‘‘As the Commission stated when it promulgated the Rule, ‘[t]he Final Rule does not include special provisions regarding exemptions of parties acting on behalf of exempt organizations; where such a company would be subject to the FTC Act, it would be subject to the Final Rule as well.’’’). 12 For example, § 310.6(a) exempts telemarketing calls to induce charitable contributions from the Do Not Call Registry provisions of the Rule, but not from the Rule’s other requirements. In addition, there are exceptions to some exemptions that limit their reach. See, e.g., 16 CFR 310.6(b)(5)–(6). 13 The TSR requires that telemarketers soliciting sales of goods or services promptly disclose several key pieces of information: (1) The identity of the seller; (2) the fact that the purpose of the call is to sell goods or services; (3) the nature of the goods or services being offered; and (4) in the case of prize promotions, that no purchase or payment is necessary to win. 16 CFR 310.4(d). Telemarketers also must disclose, in any telephone sales call, the cost of the goods or services and certain other material information. 16 CFR 310.3(a)(1). In addition, the TSR prohibits misrepresentations about, among other things, the cost and quantity of the offered goods or services. 16 CFR 310.3(a)(2). It also prohibits making false or misleading statements to induce any person to pay for goods or services or to induce charitable contributions. 16 CFR 310.3(a)(4). E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations to obtain consumers’ ‘‘express informed consent’’ to be charged on a particular account before billing or collecting payment and, through a specified process, to obtain consumers’ ‘‘express verifiable authorization’’ to be billed through any payment system other than a credit or debit card.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 14 16 CFR 310.4(a)(7); 16 CFR 310.3(a)(3). CFR 310.4(a)(2). 16 16 CFR 310.4(a)(3). 17 16 CFR 310.4(a)(4). 18 16 CFR 310.4(a)(5). 19 16 CFR 310.3(c). 20 16 CFR 310.3(b). 21 16 CFR 310.4(b). 22 16 CFR 310.4(a)(8). 23 16 CFR 310.4(b)(1)(iv). 24 16 CFR 310.4(b)(1)(v). mstockstill on DSK4VPTVN1PROD with RULES3 15 16 VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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-tobusiness 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 nontransferrable, 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 25 NPRM, PO 00000 supra note 1, at 41200. Frm 00003 Fmt 4701 Sfmt 4700 77521 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 26 Id. at 41202–07. the reasons raised by certain commenters, and discussed in detail in Section II.A.4 below, the Final Rule adopts a revised definition of ‘‘remotely created payment order’’ that deletes the reference to the absence of the payor’s signature and eliminates the need for a separate definition of ‘‘remotely created check.’’ The revised definition of ‘‘remotely created payment order’’ includes any payment instruction or order drawn on a person’s account that is created by the payee and deposited into or cleared through the check clearing system. The definition is broad enough to include a ‘‘remotely created check,’’ as defined in Regulation CC. 27 For E:\FR\FM\14DER3.SGM 14DER3 77522 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 traditional 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,’’ ‘‘nonsufficient 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 28 ACH transactions are electronic payment instructions to either credit or debit a bank account. ACH credit transactions push funds into an account, while ACH debit transactions pull funds from an account. NACHA, What is ACH?: Quick Facts About the Automated Clearing House (ACH) Network (Jul. 1, 2013), available at https://www. nacha.org/news/what-ach-quick-facts-aboutautomated-clearing-house-ach-network. ACH credits include payroll direct deposits, Social Security benefits, and interest payments. Examples of ACH debit transactions include mortgage, loan, and insurance premium payments. FFIEC, Bank Secrecy Act/Anti-Money Laundering Examination Manual, Automated Clearing House Transactions— Overview 217 (Feb. 27, 2015), available at http:// www.ffiec.gov/bsa_aml_infobase/pages_manual/ olm_059.htm. 29 Unlike most general-purpose reloadable cards and other prepaid cards, traditional debit cards (also referred to as ‘‘check cards’’) are linked to consumer checking accounts at a financial institution. See infra notes 176–178; Electronic Funds Transfer Act (‘‘EFTA’’), 15 U.S.C. 1693; Regulation E, 12 CFR part 1005. 30 NACHA, 2013 Operating Rules, Art. 2, Subsection 2.17.2.1, Additional ODFI Action and Reporting When the Return Threshold is Exceeded (Mar. 15, 2013) (describing the actions that originating financial institutions (‘‘ODFIs’’) must take when an originator’s unauthorized return rate exceeds 1 percent). VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 generalpurpose 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 31 In September 2015, amendments to NACHA’s Operating Rules will take effect. Among other things, these amendments reduce the threshold for unauthorized returns from one percent to 0.5 percent. Press Release, NACHA, NACHA Membership Approves New Rules to Further Improve ACH Network Quality (Aug. 26, 2014), available at https://www.nacha.org/rules/updates. NACHA also adopted new monthly return rate thresholds for other types of ACH debit returns, including a three percent threshold for returns based on ‘‘account data issues’’ (i.e., debits returned for invalid account numbers or an inability to locate the account) and a total return rate of 15 percent. 32 Network-branded debit cards and GPR cards can be used like credit cards to make purchases at a variety of stores, online, or over the telephone. These so-called ‘‘signature’’ debit card purchases (i.e., without the use of a PIN) are processed through and, thus, subject to the operating rules and anti-fraud monitoring of the payment card networks. 33 ‘‘Chargeback’’ is a payments industry term used to describe the process through which a disputed charge to a consumer’s credit card is refunded to the consumer and charged back to the entity, often a merchant, that placed the charge on the consumer’s account. See NPRM, supra note 1, at 41203 & nn.47–48. 34 For example, Visa’s operating rules state: Visa monitors the total volume of US Domestic Interchange, International Interchange, and Chargebacks for a single Merchant Outlet and identifies US Merchants that experience all of the following activity levels during any month: • 100 or more interchange transactions • 100 or more Chargebacks • A 1% or higher ratio of overall Chargeback-toInterchange volume Visa, U.S.A, Visa Core Rules and Visa Product Service Rules, 500 (Apr. 15, 2015), available at https://usa.visa.com/dam/VCOM/download/aboutvisa/15-April-2015-Visa-Rules-Public.pdf. MasterCard maintains similar, but not identical, thresholds for its excessive chargeback monitoring programs (at least 100 chargebacks and a chargeback ratio of 1.5 percent). MasterCard, Security Rules and Procedures—Merchant Edition, 54 (Feb. 5, 2015), available at http://www.master card.com/us/merchant/pdf/SPME-Entire_Manual_ public.pdf. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 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 35 NPRM, supra note 1, at 41206–07. infra notes 176–178; EFTA, 15 U.S.C. 1693; Regulation E, 12 CFR part 1005. With certain exceptions, most GPR cards are not subject to the EFTA or Regulation E. However, payment card networks voluntarily extend their same zero liability protection to GPR purchases as they apply to credit and traditional debit cards processed through their networks. Federal Reserve Bank of Atlanta, Retail Payments Risk Forum, Dispelling prepaid card myths: Not all cards are created equal (July 5, 2011), available at http://portalsandrails. frbatlanta.org/2011/07/dispelling-prepaid-cardmyths-not-all-cards-created-equal.html; see also infra note 178. The CFPB recently published a proposed rule that would extend to ‘‘prepaid accounts,’’ including GPR cards, the protections of Regulation E and the EFTA, with certain important modifications. Notice of Proposed Rulemaking Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z) (hereinafter ‘‘Prepaid Account Rule’’), 79 FR 77102 (Dec. 23, 2014). At this time, the CFPB has not taken further action on the proposal. 37 15 U.S.C. 1693g. 38 See supra notes 30–31. 39 See infra notes 172–173 and accompanying text; TILA, 15 U.S.C. 1601 et seq.; Regulation Z, 12 CFR part 1026. 36 See E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations and Regulation E. These rights include error and dispute resolution rights, as well as limited liability for unauthorized transactions. In addition, consumers are protected by the operators of the payment card networks that enforce compliance with operating rules designed to detect and deter fraud.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 40 See supra notes 32–34 and accompanying text. the UCC (in whole or in part) has been enacted, with some local variation, in all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands. 42 UCC 4–401 cmt. 1 (‘‘An item is properly payable from a customer’s account if the customer has authorized the payment and the payment does not violate any agreement that may exist between the bank and its customer.’’). 43 See infra note 189 (citing bank deposit agreements shortening timeframe to 14 days). 44 NPRM, supra note 1, at 41202 (citing injury estimates from law enforcement cases). mstockstill on DSK4VPTVN1PROD with RULES3 41 Currently, VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 Final Rule 2003, supra note 8, at 4606. Final Rule 1995, supra note 8, at 43850 & n.80 (noting examples of businesses, such as ‘‘two of the baby Bells, GEICO, Citicorp, Telecheck, Equifax, Bank of America, Discovery Card, Dunn and Bradstreet, and First of America Bank.’’); see also TSR Revised Notice of Proposed Rulemaking, 60 FR 30406, 30413 (June 8, 1995) (hereinafter TSR RNPRM). 47 TSR Final Rule 1995, supra note 8, at 43850– 51. Under § 310.3(a)(3), a consumer’s authorization is considered verifiable if it is obtained in one of three ways: Advance written authorization signed by the consumer; an audio recording of the consumer giving express oral authorization; or written confirmation of the transaction mailed to the consumer before submitting the charge for payment. 77523 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, 45 TSR 46 TSR PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 48 15 U.S.C. 1693o–1; 12 CFR part 1005, subpart B (effective October 28, 2013); NPRM, supra note 1, at 41211 & n.129. 49 For reasons discussed in section II.B.3.c below, legitimate merchants and billers typically do not accept cash reload mechanisms directly from consumers. Instead, merchants and most billers accept as payment the GPR card itself. In the past, Green Dot Corporation permitted certain approved billing partners to accept its MoneyPak cash reload mechanisms directly from customers. Unlike perpetrators of telemarketing fraud, however, these approved billers did not use the PIN-based cash reload mechanisms to add the funds onto existing GPR cards. See infra note 414 and accompanying text (describing the operation of MoneyPak and other cash reload mechanisms). E:\FR\FM\14DER3.SGM 14DER3 77524 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 once a cash reload mechanism is transmitted to an anonymous con artist, the money is gone and cannot be recovered. In response to concerns about the misuse of its cash reload mechanism by perpetrators of fraud, Green Dot Corporation (‘‘Green Dot’’) announced it would discontinue its MoneyPak cash reload mechanism in favor of a swipe-reload process—where a consumer presents her existing GPR card at the register and loads funds directly to the card.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. 50 Written Statement of Green Dot Corporation For U.S. Senate Special Committee on Aging Hearing ‘‘Hanging Up on Phone Scams: Progress and Potential Solutions to this Scourge,’’ 2 (July 16, 2014) (hereinafter ‘‘Written Statement of Green Dot’’), available at http://www.aging.senate.gov/ imo/media/doc/Green_Dot_7_16_14.pdf. See infra section II.B for a detailed discussion. 51 Press Release, InComm, InComm Expands Vanilla Reload Network, Plans to Add Swipe Reload at Over 15,000 More Retail Locations: InComm removes reload packs from stores to help prevent victim assisted fraud (Oct. 24, 2014) (hereinafter ‘‘InComm Press Release’’), available at http://www.incomm.com/news-events/Pages/Press %20Releases/InComm-Expands-Vanilla-ReloadNetwork-Plans-to-Add-Swipe-Reload-to-Over15000-More-Retail-Locations.aspx; Testimony of William Tauscher Chairman and Chief Executive Officer Blackhawk Network Holdings, Inc. Before United States Senate Special Committee on Aging Hearing ‘‘Private Industry’s Role in Stemming the Tide of Phone Scams,’’ at 3 (Nov. 19, 2014) (hereinafter ‘‘Testimony of Blackhawk Network’’), available at http://www.aging.senate.gov/imo/ media/doc/Tauscher_11_19_14.pdf (describing Blackhawk’s ‘‘elimination of quick load with the scratch-off PIN’’ for its Reloadit Pack product). VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 nontelemarketing 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 52 N.J. Acting Att’y Gen. and Vt. Att’y Gen.’s Office (on behalf of 24 states and the District of Columbia) (collectively, ‘‘AGO’’); Consumer Fin. Prot. Bureau (‘‘CFPB’’); Consumer Prot. Branch, U.S. Dep’t of Justice (‘‘DOJ–CPB’’); Criminal Div., U.S. Dep’t of Justice (‘‘DOJ-Criminal’’); and Fed. Reserve Bank of Atlanta (‘‘FRBA’’). 53 AARP; Ams. for Fin. Reform (‘‘AFR’’) (on behalf of itself and Arkansans against Abusive Payday Lending; Chicago Consumer Coal.; Consumer Action; Consumer Fed’n of Am.; Consumers Union, the Advocacy and Policy Arm of Consumer Reports; Maryland Consumer Rights Coal.; Nat’l Consumer Law Ctr.; National Ass’n of Consumer Advocates; Pub. Citizen; Pub. Justice Ctr.; Florida Consumer Action Network; U.S. PIRG; and Utah Coal. of Religious Cmtys.); and the Nat’l Consumer Law Ctr. (‘‘NCLC’’) (on behalf of its lowincome clients and the Ctr. For Responsible Lending; Consumer Action; Consumer Fed’n of Am.; Consumers Union, the Advocacy and Policy Arm of Consumer Reports; Nat’l Ass’n of Consumer Advocates; the Nat’l Consumers League; and U.S. PIRG). 54 Three supported all or part of the proposed amendments: Michalik, Cordero, and Frankfield. Five did not specifically address the proposed amendments: Burden, Bailey-Waddell, Manness, Seaman, and Farrington. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 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 55 Amer. Bankers Ass’n (‘‘ABA’’); The Clearing House and Fin. Servs. Roundtable (‘‘The Associations’’); Credit Union Nat’l Ass’n. (‘‘CUNA’’); Elec. Check Clearing House Org. (‘‘ECCHO’’); Elec. Transactions Ass’n. (‘‘ETA’’); NACHA—The Elec. Payments Ass’n. (‘‘NACHA’’); The Money Servs. Roundtable (‘‘TMSRT’’); and Nat’l Ass’n. of Fed. Credit Unions (‘‘NAFCU’’). 56 Blue Diamond Remodeling, Inc. (‘‘Blue Diamond’’); DCS Holdings Group, LLC (‘‘DCS Holdings’’); G3 Assocs.; Green Dot Corp. (‘‘Green Dot’’); InfoCision Mgmt. Corp. (‘‘InfoCision’’); Interactive Commc’ns Int’l, Inc. (‘‘InComm’’); Michael; NetSpend; PPA—Biondi; PPA—Frank; Samuel (‘‘First Data’’); Thayer Gate Advisors (‘‘Thayer’’); and Transp. FCU. 57 The Hon. Bill Nelson. 58 Prof. Sarah Jane Hughes (‘‘Hughes’’). 59 The record includes the NPRM, and the law enforcement cases and experience referenced therein, which are hereby incorporated by reference. 60 The Commission’s decision to amend the Rule is made pursuant to the rulemaking authority granted by the Telemarketing Act to protect consumers from deceptive and abusive practices. 15 U.S.C. 6102(a)(1) and (a)(3). E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations addresses deceptive and abusive practices in telemarketing by: • Prohibiting the use of remotely created payment orders in outbound and inbound telemarketing transactions; Æ 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; Æ 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; Æ Adopting the proposed definition of ‘‘cash-to-cash money transfer;’’ Æ 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. mstockstill on DSK4VPTVN1PROD with RULES3 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 61 The Telemarketing Act authorizes the Commission to promulgate Rules ‘‘prohibiting deceptive telemarketing acts or practices and other abusive telemarketing acts or practices.’’ 15 U.S.C. 6102(a)(1). In determining whether a practice is ‘‘abusive,’’ the Commission has used the Section 5(n) unfairness standard where appropriate. See TSR Amended Rule 2003, supra note 8, at 4614. 62 See 15 U.S.C. 45(n) (codifying the Commission’s unfairness analysis, set forth in a letter from the FTC to Hon. Wendell Ford and Hon. John Danforth, Committee on Commerce, Science and Transportation, United States Senate, Commission Statement of Policy on the Scope of Consumer Unfairness Jurisdiction, reprinted in In re Int’l Harvester Co., 104 F.T.C. 949, 95–101 (1984)) (hereinafter ‘‘Unfairness Policy Statement’’). VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 63 The states are: Arizona, Arkansas, Delaware, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nevada, New Hampshire, New Jersey (joined via separate comment letter), New Mexico, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Vermont, and Washington. AGO at 1. 64 DOJ–CPB at 2; AFR at 1; AARP at 3; AGO at 11; CFPB at 1; NCLC at 2–3; DOJ-Criminal at 3; Transp. FCU. 65 AARP at 3; AGO at 11 (reaffirming the views expressed by the Attorneys General of 34 states, the District of Columbia, and American Samoa in 2005 comment letter filed by National Association of Attorneys General, Proposed Amendment to Regulation CC Remotely Created Checks, FRB Docket No. R–1226 (May 9, 2005), available at http://www.federalreserve.gov/SECRS/2005/May/ 20050512/R-1226/R-1226_264_1.pdf); NACHA at 1; NCLC at 1, 5; Michael; DOJ–CPB at 1–2; DOJCriminal at 1& 3. 66 Michael. PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 77525 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 67 DOJ–CPB at 1. at 2 (citing Financial Crimes Enforcement Network, Advisory FIN–2012–A010, Risk Associated with Third-Party Payment Processors (Oct. 22, 2012); NACHA, Remotely Created Checks and ACH Transactions: Analyzing the Differentiators (March 2010); FFIEC, Bank Secrecy Act Anti-Money Laundering Examination Manual: Third-Party Payment Processors B Overview (2010); Federal Reserve Bank of Atlanta, 2008 Risk & Fraud in Retail Payments: Detection & Mitigation Conference Summary (Oct. 6–7, 2008); Public Comment filed with the Federal Reserve by the National Association of Attorneys General, the National Consumer Law Center, Consumer Federation of America, Consumers Union, the National Association of Consumer Advocates, and U.S. Public Interest Research Group in Docket No. R–1226 (May 9, 2005)). 69 AGO at 11 (citing a ‘‘lack of consumer awareness of how strangers can debit their bank accounts without authorization’’); Trans. FCU (noting that consumers do not realize their account information ‘‘can easily be used to generate additional unauthorized payments’’); NCLC at 6 (‘‘Consumers cannot protect themselves from the dangers of RCCs and RCPOs’’); Michael. 70 AGO at 11 (noting ‘‘the hurdles that consumers often encounter in trying to obtain a recredit to their bank account when—if at all—they discover an unauthorized debit’’); NCLC at 4–5 (noting that ‘‘the use of RCCs and RCPOs is popular for scammers because the consumer protections are weak and poorly enforced . . .’’ and explaining how RCCs and RCPOs can make it difficult for consumers to initiate stop payment orders). 71 AGO at 11 (highlighting ‘‘the difficulty, if not impossibility, of tracking remotely created checks’’); 68 Id. E:\FR\FM\14DER3.SGM Continued 14DER3 77526 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 how a telemarketer’s choice to use a consumer’s bank account information to create a remotely created check, instead of originating an ACH debit or accepting a payment card, determines the level of scrutiny and monitoring applied to the transaction and the telemarketer or seller.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 NACHA at 3 (‘‘RCCs are difficult, if not impossible, for individual financial institutions to monitor as a class’’); NCLC at 9 (‘‘a systemic monitoring system is lacking for the check system.’’). 72 AFR at 1 (‘‘RCCs and RCPOs are heavily used by scammers and others who wish to avoid the consumer protections and fraud prevention mechanisms associated with modern electronic payment devices’’); DOJ–CPB at 2 (‘‘we have seen third party payment processors that promote their use of RCCs as a means to process transactions for merchants that have been blacklisted from credit card and ACH transactions’’); Trans. FCU (‘‘[w]e have seen these types of payment mechanisms used by scammers, often targeting elderly or financially distressed members’’); NACHA at 3 (‘‘Because RCCs are not monitored systemically . . . fraudsters are able to use RCCs to evade the authorization requirements and strong protections that NACHA has implemented through the ACH system’’); NCLC at 6 (‘‘RCCs and RCPOs are also used by entities who wish to escape scrutiny by the systems used to detect fraud in other payment systems.’’). 73 One commenter from the financial services industry, NetSpend, described the significant adverse impact that remotely created checks have on its prepaid Visa and MasterCard debit card business and the banks that issue its cards. Netspend at 1. NetSpend explained that its debit cards do not have checking account functionality, so any remotely created checks drawn on the card account number are automatically returned unpaid by the issuing bank. NetSpend states that ‘‘some financial institutions and their third-party vendors choose to ignore the 100% return-rate’’ and continue to submit remotely created checks each month against its prepaid debit cards that lack checking privileges. As a result, NetSpend reports, it pays about $75,000 per year in bank fees to just one of its card issuing banks for processing thousands of remotely created check images before the bank can automatically reject them. Id. NetSpend also stated that it suffered significant losses from remotely created checks originated by First Bank of Delaware—a bank that the Department of Justice sued for processing remotely created payments for ‘‘fraudulent merchants and telemarketers wishing to skirt the rules of the electronic funds transfers networks.’’ Id.; see also U.S. v. First Bank of Delaware, Civ. No. 12–6500 (E.D. Pa. Nov. 19, 2012). VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 74 AARP at 3 (concluding that ‘‘the benefit to consumers of the proposed rule outweighs the burden to businesses in complying with this rule’’); Hughes at 1 (‘‘I find the cost-benefit analysis articulated in the [NPRM] to be persuasive’’); NACHA at 3 (explaining that ‘‘[i]n 2010, NACHA adopted rules (that became effective in 2011) allowing for recurring payments to be authorized over the telephone’’ thereby eliminating the few advantages for legitimate businesses of remotely created checks over ACH). 75 AARP at 3 (concluding that ‘‘legitimate businesses have access to a variety of other payment methods’’); AFR at 1 (noting that remotely created checks and remotely created payment orders ‘‘have few legitimate uses for which other payment systems could not substitute’’); DOJ–CPB at 3 (‘‘The FTC’s proposed rule change will not adversely affect legitimate telemarketers’’ that can ‘‘use a variety of other payment means’’); NCLC at 7 (‘‘With the availability of modern electronic payment methods, there are no longer any legitimate reasons to use either payment mechanism that can justify their risks.’’). 76 CFPB at 2 (‘‘The Bureau believes that the RCC and RCPO definitions ultimately adopted by the Commission should not hinge on the presence or absence of the consumer’s signature’’); FRBA–2 at 2 (stating that ‘‘this broader prohibition will better serve the Commission’s purposes’’). 77 FRBA–2 at 2. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 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 78 AFR at 1; NCLC at 2; see also NACHA at 4 (noting that ‘‘it seems likely that bad actors would attempt to move activity online, as e-commerce is not covered by the telemarketing sales rule.’’). In addition, two individuals went so far as to suggest either banning all telemarketing or requiring ‘‘everything in writing.’’ Seaman (adding, ‘‘[i]f consumers want something, they will call the company themselves’’); G3 Assocs. (‘‘It’s real simple . . . make them put it in writing (either snail mail or email) . . . if they are legit they will if they won’t, hang up!’’). 79 AFR at 1 (urging the Commission to apply the proposed ban to ‘‘sales initiated by email or other methods that do not use a telephone’’); NCLC at 4 (noting the use of these payments by internet payday lenders that provide loans to consumer in states where payday lending is illegal or where they are not licensed). 80 AFR at 1; NCLC at 7. 81 DOJ–CPB at 2 (noting that payment processors market the use of remotely created checks to process transactions for merchants that have been kicked out of payment card networks and ACH network); NCLC at 8 (‘‘Payment processors and ODFIs play critical roles in the misuse of RCCs and RCPOs.’’). 82 NCLC at 8. 83 AFR at 1 (‘‘Payment processors and the banks that originate RCCs and RCPOs should be strictly liable for processing unlawful payments’’); NCLC at 7–8 (‘‘The best way to stop RCCs and RCPOs from entering into the system and reaching consumers’ accounts is to . . . hold payment processors and ODFIs strictly liable for accepting RCCs or RCPOs that violate the TSR.’’). E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations number of specific entities described in detail their legitimate use of and dependence on remotely created checks, in response to the current NPRM, the Commission received only one comment from a telemarketing firm covered by the amended Rule— InfoCision. InfoCision asserted generally that the amended Rule would increase the burdens on legitimate businesses and charities that rely on novel payment methods.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 84 InfoCision at 2. generally, ABA; The Associations; CUNA; ECCHO; ETA; First Data; FRBA; NAFCU; PPA— Biondi; PPA—Frank. 86 ABA at 7 (stating the prohibition exceeds ‘‘the FTC’s mission, jurisdiction, and authority’’); see also ECCHO at 3; The Associations at 2. Other comments acknowledged the amended Rule would not apply to financial institutions, but raised concerns about potential negative effects on the broader payment system. ABA at 7; CUNA at 1; FRBA–1 at 2; The Associations at 10. To minimize these effects, commenters encouraged the Commission to coordinate closely with the Federal Reserve Board, CFPB, bank regulators, and other stakeholders. CUNA at 1; FRBA–1 at 4; NAFCU at 1. 87 ABA at 2; ETA at 2; The Associations at 2; ECCHO at 13. mstockstill on DSK4VPTVN1PROD with RULES3 85 See VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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, 88 InfoCision at 2. at 1 (‘‘we do not speak extensively in this comment letter of all of the potential legitimate uses of RCCs by telemarketing and other merchants’’); DCS Holdings (‘‘we do not have quantifiable data concerning how many businesses depend on one or more of these [payment] methods’’); ECCHO at 12– 13 (estimating the total number of remotely created checks cleared and returned as unauthorized in 2010 without identifying the number related to telemarketing); First Data at 7 (estimating that ‘‘thousands’’ of small businesses in its system accept RCCs and RCPOs, ‘‘some’’ of which ‘‘may be used via telemarketing transactions’’); Thayer (‘‘[the prohibition] will make business far more difficult for legitimate telemarketing firms’’). Furthermore, First Data, itself a credit card payment processor, described its use of remotely created checks to withdraw money from the bank accounts of startup merchants that have yet to obtain corporate credit or debit cards. First Data at 7. First Data did not provide estimates of the number of such transactions. Id. 90 ABA at 1, 3; ECCHO at 4; The Associations at 5. 91 ECCHO suggested that the Commission ‘‘should undertake additional primary research to validate the statements in the Proposal regarding the relative burdens associated with a consumer obtaining a credit of funds to his/her account when making a claim of an unauthorized payment of any type (card, ACH or check).’’ ECCHO at 7. 92 ABA at 8–9 (noting that, despite differences in ‘‘details and the technical legal process,’’ the protections for consumers ‘‘are, as a practical matter, comparable’’); ECCHO at 6 (‘‘the UCC and other check law protections against unauthorized RCCs are arguably better for consumers than Regulation E and Regulation Z.’’); The Associations at 4–5 (expressing disagreement that consumer protections for unauthorized remotely created checks and remotely created payment orders are inadequate); PPA—Biondi (same); PPA—Frank (same). 93 PPA—Biondi; PPA—Frank. 89 ABA PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 77527 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 94 ABA at 6 (opining that the unavoidability must be connected to the cause of the harm, which is the telemarketer’s initial deception, not the choice of payment system routing); see also ECCHO at 5 (suggesting the Commission should focus ‘‘on the actions of the telemarketer that give rise to unfair or abusive practices and not on the use of a particular payment instrument.’’); ETA at 1 (‘‘it is not the payment methods themselves that are fraudulent, but rather the actors that are attempting to sell goods and services in a fraudulent manner that constitute the problem’’); PPA—Frank (‘‘The change here is just like blaming the gun and not the person who pulls the trigger . . .’’). 95 ABA at 5 (stating that fraudulent telemarketers will shift to other payment mechanisms); CUNA at 2 (same); PPA—Biondi (same); see also ECCHO at 4 (opining that the proposed Rule will have no deterrent effect on a ‘‘telemarketer who is already violating the TSR by not obtaining customer authorization for a debit transaction of any type— ACH, card, or RCC.’’). 96 ABA at 7 (noting that not all consumers have or are eligible for the conventional payment methods described in the NPRM); First Data at 3 (stating that the prohibition will result in delayed receipt of goods or services purchased over the telephone); PPA—Biondi (stating that RCCs and RCPOs benefit consumers because ‘‘there is more space available for providing information about the transaction to the consumer’’); PPA—Frank (same). 97 ABA at 6; see also DCS Holdings; ECCHO at 3; FRBA–1 at 2; PPA—Frank; The Associations at 2. 98 ABA at 2; ECCHO at 4; ETA at 2; PPA—Biondi The Associations at 9. E:\FR\FM\14DER3.SGM 14DER3 77528 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations created 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 mstockstill on DSK4VPTVN1PROD with RULES3 In the context of TSR rulemaking proceedings, the Commission has determined to apply the unfairness test 99 ECCHO estimated that banks processed approximately 2.04 million remotely created checks per day in 2009. ECCHO at 13–14. Based on a survey of three large financial institutions, ECCHO estimated the percentages and numbers of the unauthorized RCC adjustment claims to be .01264% or approximately ‘‘258 unauthorized RCCs per day industry wide.’’ Id. 100 CUNA at 1; ECCHO at 3–4; FRBA–1 at 2; NAFCU at 1. 101 The Associations at 2, 10–11 (‘‘Rather than prohibiting the use of RCCs and RCPOs by telemarketers altogether, we believe the FTC should impose return reporting requirements on telemarketers and their [non-depository] processors that use RCCs and RCPOs’’); compare DCS Holdings (proposing that the Commission ‘‘require monitoring and quantifying all payment types processed for returns, volumes, velocity patterns etc.’’). 102 FRBA–1 at 4. 103 PPA—Frank (‘‘How about requiring alk (sic) telemarketers to register providing all product and fulfillment details for what they are selling’’); DCS Holdings (‘‘Require all banks and third party processors only do business with ‘Registered’ telemarketers . . .’’). 104 The MICR information appears at the bottom of each check, and contains numbers that identify the bank branch, bank routing number, check number, and account number at the payor bank. 105 ECCHO at 10; First Data at 8. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 106 15 U.S.C. 6102(a)(1) (‘‘The Commission shall prescribe rules prohibiting deceptive telemarketing acts or practices and other abusive telemarketing acts or practices.’’). 107 TSR Amended Rule 2003, supra note 8, at 4614. 108 Thus, the Commission need not demonstrate actual consumer injury, but only the likelihood of substantial injury. In this proceeding, however, there is sufficient evidence that the use of remotely created checks and remotely created payment orders in telemarketing causes actual injury. 109 Since 1995, the Commission has filed more than 300 cases involving violations of the TSR, many of which have included fraudulent or unauthorized remotely created checks. See, e.g., FTC v. Sun Bright Ventures, LLC, Civ. No. 14– 02153–JDW–EAJ (M.D. Fla. July 20, 2015) (Stip. Perm. Inj.); FTC v. First Consumers, LLC, Civ. No. 14–1608 (E.D. Pa. Feb. 19, 2015) (Summ. J.); FTC v. AFD Advisors, Civ. No. 13–6420 (N.D. Ill. Aug. 26, 2014) (Stip. Perm. Inj.); FTC v. Ideal Financial Solutions, Inc., Civ. No. 13–00143–MMD–GFW (D. Nev. June 30, 2015) (Partial Summ. J.); FTC v. Group One Networks, Inc., Civ. No. 09–0352 (M.D. Fla. Mar. 19, 2010) (Stip. Perm. Inj.); FTC v. FTN Promotions, Inc., Civ. No. 07–1279–T–30TGW (M.D. Fla. Dec. 30, 2008) (Stip. Perm. Inj.); FTC v. 3d Union, Civ. No. 04–0712–RCJ–RJJ (D. Nev. July 19, 2005) (default judgment); FTC v. 4086465 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 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 Canada, Inc. d/b/a International Protection Center, Civ. No. 04–1351 (N.D. Ohio Nov. 14, 2005) (Stip. Perm. Inj.); FTC v. Win USA Services, Ltd., Civ No. 98–1614Z (W.D. Wash. Apr. 13, 2000) (Summ. J.); FTC v. Consumer Money Markets, Inc., Civ. No. 00– 1071–PMP–RJJ (Sept. 6, 2000) (Stip. Perm. Inj.); FTC v. National Credit Management Group, Civ. No. 98– 936(ALJ) (D.N.J. May 4, 1999) (Stip. Perm. Inj.); FTC v. SureCheK Systems, Inc., No. 1–97–CV–2015 (JTC) (N.D. Ga. June 11, 1998) (Stip. Perm. Inj.); FTC v. National Credit Foundation, Inc., Civ. No. 96–2374– PHX–ROS (Apr. 10, 1997) (Stip. Perm. Inj.); FTC v. Universal Credit Corporation, Civ. No. 96–0114– LHM(EEx) (C.D. Cal. Dec. 6, 1996) (Stip. Perm. Inj.); FTC v. Diversified Marketing Service Corp., Civ. No. 96–0388M (Oct. 18, 1996) (Stip. Perm. Inj.); FTC v. Windward Marketing, Ltd, Civ. No. 96–0615–FMH (N.D. Ga. Oct. 10, 1996). States have brought additional cases against telemarketers and sellers that used remotely created checks to withdraw money from consumer bank accounts without authorization. See e.g., State of Ohio ex rel. v. Simplistic Advertising, Inc., Civ. No. 08–7232 (Franklin County, OH Ct. Com. Pl. filed May 16, 2008); State of Ohio ex rel. v. 6450903 Canada, Inc., Civ. No. 05CVH7233 (Franklin County, OH Ct. Com. Pl. May 8, 2009) (default judgment). 110 See FTC v. Sun Bright Ventures, supra note 109 (entry of stipulated monetary judgment order for $1,418,981); FTC v. First Consumers, supra note 109 (entry of $10,734,255.81 monetary judgment); FTC v. AFD Advisors, supra note 109 (entry of stipulated monetary judgment of $1,091,450.68). 111 Pl.’s Mot. and Memo. In Supp. of TRO at 8– 9, Sun Bright Ventures, Civ. No. 14–02153. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 consumers’ authorization to be debited.112 The rates at which consumers and banks returned these transactions were grossly outside comparable industry norms for debits from consumer bank accounts.113 For example, the defendants allegedly generated overall return rates of approximately 68 percent and an unauthorized return rate of 28 percent.114 By comparison, in 2013 NACHA reported that overall return rates for ACH debit transactions averaged just 1.42 percent, while unauthorized return rates averaged .03 percent.115 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 coldcalling 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 112 Compl. ¶ 23, Sun Bright Ventures, supra note 109. On June 5, 2015, an FBI Special Agent filed a criminal complaint and arrest warrant charging Glenn Erikson with wire fraud in connection with his part in the SunBright Ventures telemarketing scheme. U.S. v. Glenn Erikson, Cr. No. 15–0520– MPK (W.D. Pa. June 5, 2015). 113 Due to the decentralized nature of the check clearing system and the inability to track remotely created checks and remotely created payment orders, neither the banking industry nor the Federal Reserve maintain data on average industry return rates. Therefore, the Commission’s cases have referenced NACHA return rate statistics for ACH debits as a benchmark for return rates of remotely created check and remotely created payment order transactions. See Pl.’s Summ. J. Ex. 50, Dec. Professor Amelia Helen Boss, ¶ 16 (Oct. 21, 2014) (hereinafter ‘‘Dec. Prof. Amelia Helen Boss’’), filed in First Consumers, supra note 109 (‘‘The strong similarities between RCCs and ACH transactions make comparisons of system data particularly appropriate, and, as will be discussed below, such comparisons are extremely important in the analysis of returns.’’). 114 Compl. ¶ 37, Sun Bright Ventures, supra note 109. 115 Id. at ¶ 36; see also NACHA, 2013 ACH Network Return Rate Statistics (on file with the Commission); NACHA RFC, supra note 31, at 3–5 (citing 2012 statistics evidencing an overall ACH debit return rate of 1.5 percent and an unauthorized return rate of 0.03 percent). 116 Pl.’s Summ. J. Ex. 75, Summary of Deposits and Returns (hereinafter ‘‘Summary of Deposits and Returns’’), filed in First Consumers, supra note 109. These return rates vastly exceed NACHA’s recently VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 established overall return rate threshold of 15 percent for ACH debit transactions. 117 Id. To calculate return rates under NACHA’s rules, NACHA divides the number of ACH debit transactions by the number of returned debit transactions. Due to incomplete information on the number of remotely created checks cleared and returned from the five banks used most heavily by the defendants, it was not possible for the FTC’s expert witness, Professor Amelia Helen Boss, to calculate return rates by the number of items deposited and returned. Dec. Prof. Amelia Helen Boss, supra note 113, at ¶ 32 & n.1, filed in First Consumers, supra note 109. Instead, Professor Boss calculated the defendants’ return rates using the value of the deposits and returns, yielding even higher overall return rates. When calculated by value, defendants’ overall return rates ranged from 8.57 percent to 46.23 percent, with unauthorized return rates between 6 percent and 16.9 percent. Summary of Deposits and Returns, supra note 116. 118 See supra notes 30–31 and accompanying text describing NACHA’s return rate thresholds and network statistics. 119 Summary of Deposits and Returns, supra note 116. 120 The permanent injunction bans the defendants from all telemarketing and from accepting or depositing remotely created checks or remotely created payment orders. On the same date, the court entered default judgments (and a similar permanent injunction) against the corporate defendants in the case. 121 Compl. ¶ 18, AFD Advisors, supra note 109. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 77529 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 122 The Commission described to the Court how the defendants would stop the recording process if the consumer did not answer ‘‘correctly,’’ and start a new recording. Pl.’s Mot. and Memo. In Supp. of TRO at 7, AFD Advisors, supra note 109. The defendants would repeat this process until they obtained a ‘‘clean’’ recording that purported to demonstrate the consumer’s authorization. 123 Press Release, U.S. Attorney for the Southern District of Illinois, U.S. Seniors Deceived By Foreign Scammers In Medicare Hoax (July 24, 2014), available at http://www.justice.gov/usao/ils/News/ 2014/Jul/07242014_Sebai%20Press%20 Release.html. 124 Id. 125 See supra note 109 (citing FTC and state cases). 126 ABA at 8–9; ECCHO at 8–9; The Associations at 6. 127 Pl.’s TRO Ex. 15 ¶ 5, filed in Sun Bright Ventures, supra note 111. 128 Id. at ¶ 7. 129 Pl.’s TRO Ex. 8 ¶ 3, filed in Sun Bright Ventures, supra note 109 (bank refused to reverse the $448 remotely created check). Other victims in the Sun Bright Ventures case complained that banks E:\FR\FM\14DER3.SGM Continued 14DER3 77530 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 example, an 86-year-old widow’s bank refused to reverse the $448 remotely created check drawn on her account because she failed to dispute it within 30 days, ignoring the fact that she had been hospitalized during the 30 days before she noticed the unauthorized withdrawal.130 An 82-year old victim filed an affidavit with his bank, contesting two remotely created checks made out to the defendants for $448.52 each.131 Initially, the bank reversed the charges and returned the money to his account. However, a few months later, the bank revoked the credit to his account because it received a voice recording of the consumer answering the defendants’ ‘‘yes’’ or ‘‘no’’ questions purportedly authorizing the debits.132 The bank revoked the refund despite the consumer’s allegations that the tape was fraudulent, noting several discrepancies including the fact that he never verified his age as between 18–75, when he was in fact 82 years old, and that the representative’s voice on the recording was a woman’s, instead of the man with whom he had spoken.133 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 made it difficult to reverse the transactions. See, e.g., Pl.’s TRO Ex. 7 ¶ 6–8 (only after a consumer visited her credit union a second time, and spoke to a different representative, did the credit union reverse the $399 unauthorized remotely created check); Pl.’s TRO Ex. 13 ¶ 3 (bank was ‘‘not convinced’’ the remotely created check was unauthorized by declarant’s mother, who was diagnosed with dementia, and refused to reverse $448 withdrawal). 130 Pl.’s TRO Ex. 1 ¶¶ 4–6, filed in Sun Bright Ventures, supra note 109. 131 Pl.’s TRO Ex. 18 ¶¶ 4–5, filed in Sun Bright Ventures, supra note 109. 132 Id. at ¶¶ 5–6. 133 Id. 134 Pl.’s TRO Ex. 24 ¶ 21, filed in FTC v. Handicapped & Disabled Workshops, Inc., Civ. No. 08–0908–PHX–DGC (D. Ariz. Dec. 9, 2008) (Stip. Perm. Inj.). Another victim similarly failed to obtain reversals for approximately $1,800 of $5,500 worth of unauthorized remotely created checks initiated by the Handicapped & Disabled Workshops defendants from May through November 2007. Pl.’s TRO Exs. 21 & 22. 135 Pl.’s TRO Ex. 24 ¶ 21, filed in Handicapped & Disabled Workshops, supra note 134. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 136 Pl.’s TRO Ex. 13 ¶¶ 3–5, 9, 13, filed in FTC v. NHS Systems, Civ. No. 08–2215–JS (E.D. Pa. Mar. 28, 2013) (Stip. Perm. Inj.). 137 Pl.’s TRO Ex. 5 ¶¶ 8, 18, filed in NHS Systems, supra note 136. 138 See Dec. Prof. Amelia Helen Boss, supra note 113, at ¶ 36, filed in First Consumers, supra note 109 (‘‘many fraudulent debits go undetected by the consumer victim and, even if discovered, the victim may not assert its claim against the bank in time, or the bank may refuse to re-credit the account and return the check.’’). 139 Id. 140 Compl. ¶ 37, Sun Bright Ventures, supra note 109. 141 See, e.g., Pl.’s TRO Ex. 8 ¶¶ 8–12, filed in FTC v. Instant Response Systems, Civ. No. 13–0976– ILG–VMS (E.D.N.Y. Apr. 14, 2015) (Summ. J.) (describing how she spent many months trying in PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 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 vain to obtain a refund from defendants after being pressured and harassed into providing her bank account information to the defendant for a home medical alert device, which cost her $840). 142 Pl.’s TRO Ex. 6 ¶¶ 7–9, filed in Sun Bright Ventures, supra note 109. 143 Pl.’s TRO Ex. 2 ¶ 5, filed in First Consumers, supra note 109. 144 The most recent example includes the simultaneous criminal and civil actions initiated by DOJ-Criminal and DOJ–CPB against CommerceWest Bank, of Irvine, California, for allegedly ‘‘allow[ing] one of its clients to facilitate the theft of tens of millions of dollars from the bank accounts of unsuspecting, innocent consumers.’’ Compl. ¶ 2, U.S. v. CommerceWest Bank, Civ. No. 15–0379 (C.D. Cal. filed Mar. 10, 2015). Under the terms of the settlement, the bank agreed to pay $4.9 million to resolve civil and criminal complaints alleging the bank facilitated consumer telemarketing fraud schemes and violated the Bank Secrecy Act (‘‘BSA’’) while processing remotely created check transactions for V Internet Corp LLC., a third-party payment processor based in Las Vegas. Press Release, DOJ, CommerceWest Bank Admits Bank Secrecy Act Violation and Reaches $4.9 Million Settlement with Justice Department (Mar. 20, 2015), available at http://www.justice.gov/opa/pr/ commercewest-bank-admits-bank-secrecy-actviolation-and-reaches-49-million-settlement-justice. See also, U.S. v. CommerceWest Bank, Civ. No. 15– 0379 (C.D. Cal. Mar. 10, 2015) (No. 3–1) (consent decree for permanent injunction and civil penalty); U.S. v. CommerceWest Bank, Cr. No. 15–0025 (C.D. Cal. Mar. 10, 2015) (deferred prosecution agreement and information). E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 massive telemarketing enterprise.145 In separate actions, the Office of the Comptroller of the Currency (‘‘OCC’’) and the U.S. Department of Justice alleged that Wachovia Bank maintained account relationships with certain payment processors 146 responsible for depositing more than $418 million in remotely created checks on behalf of fraudulent telemarketers,147 including the defendants in FTC 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.149 145 U.S. v. Wachovia, N.A., Cr. No. 10–20165 (S.D. Fla. Mar. 16, 2010); In the Matter of Wachovia Bank, N.A., AA–EC–10–16 (Mar. 10, 2010). In 2010, Wachovia agreed to pay more than $150 million in restitution to resolve the matters, and entered into a deferred prosecution agreement with the U.S. Attorney for the Southern District of Florida. See Press Release, United States Department of Justice, Wachovia Enters Into Deferred Prosecution Agreement: Bank Agrees to Pay $160 Million (Mar. 17, 2010), available at http://www.justice.gov/dea/ divisions/hq/2010/pr031710p.html; Press Release, OCC, OCC, Wachovia Enter Revised Agreement to Reimburse Consumers Directly (Dec. 11, 2008), available at http://www.occ.gov/ftp/release/2008143.htm. 146 U.S. v. Payment Processing Ctr., LLC, Civ. No. 06–0725 (E.D. Pa. Aug. 12, 2010) (Stip. Perm. Inj.); FTC v. Your Money Access (‘‘YMA’’), Civ. No. 07– 5147–ECR (E.D. Pa. Oct. 22, 2010) (Stip. Perm. Inj.). The FTC also brought cases against many of the telemarketers that worked with the processors. 147 See, e.g., Universal Premium Servs., Civ. No. 06–0849 (C.D. Cal. Apr. 17, 2008) (Summ. J.); FTC v. Sun Spectrum Commc’ns. Org., Inc., Civ. No. 03– 81105 (S.D. Fla. Oct. 3, 2004) (Stip. Perm. Inj.); FTC v. Xtel Marketing, Inc., Civ. No. 04–7238 (N.D. Ill. July 22, 2005) (Stip. Perm. Inj.); FTC v. 120194 Canada, Ltd., Civ. No. 1:04–07204 (N.D. Ill. Mar. 8, 2007) (Summ. J.); FTC v. Oks, Civ. No. 05–5389 (N.D. Ill. Mar. 18, 2008) (permanent injunction); FTC v. Frankly Speaking, Inc., Civ. No. 1:05–60 (M.D. Ga. May 14, 2005) (Stip. Perm. Inj.). 148 FTC v. FTN Promotions, Inc. (‘‘Suntasia’’), Civ. No. 07–1279–T30TGW (M.D. Fla. Dec. 30, 2008) (Stip. Perm. Inj.). 149 In 2008, the Suntasia defendants agreed to pay more than $16 million to settle Federal Trade Commission charges, and as part of its settlement with the OCC, Wachovia paid an additional $33 million to Suntasia victims. Id.; Press Release, FTC, Suntasia Marketing Defendants Pay More Than $16 Million to Settle FTC Charges (Jan. 13, 2009), available at https://www.ftc.gov/news-events/pressreleases/2009/01/suntasia-marketing-defendantspay-more-16-million-settle-ftc. Subsequently, the court found the individual defendants in the original Suntasia case (Byron Wolf and Roy Eliasson) in contempt of the permanent injunction, and imposed a judgment of $14.75 million against the defendants. The judgment represented the amount they illegally took from consumers in a second scheme in which they debited consumers’ accounts without their consent for membership in VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 (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 a continuity program. See Press Release, FTC, Court Finds Telemarketers in Contempt; Imposes $14.75 Million Judgment (Jan. 31, 2014), available at http:// www.ftc.gov/news-events/press-releases/2014/01/ court-finds-telemarketers-contempt-imposes-1475million-judgment. 150 Dec. Prof. Amelia Helen Boss, supra note 113, at ¶ 24, filed in First Consumers, supra note 109 (‘‘[a] fraudster may find that use of RCCs is both easier and subjects it to lower risks of detection than the use of ACH debits. . . . A payor bank will often have a pre-approval and underwriting process before it will begin to accept ACH transactions from a merchant, and that relationship is carefully monitored. Moreover, the monitoring of ACH activity by the system processor (NACHA) is much more elaborate. Thus, a fraudulent processor [or merchant] may choose to use the lower technology RCC to escape detection.’’). 151 First Data at 8. See also Atlanta Federal Reserve Retail Payment Office, When It Comes to RCCs, Can We Make the Invisible Visible? (Jan. 6, 2014), available at http://portalsandvrails.frb atlanta.org/2014/01/when-it-comes-to-rccs-can-wemake-invisible-visible.html. PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 77531 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 152 For a detailed explanation of the MICR standards committee, visit http://x9.org/. See also ECCHO at 10. ECCHO recently published a white paper proposing to ‘‘[d]etermine if there is industry support’’ for piloting a unique MICR identifier for RCCs, ‘‘with future intent for a permanent code.’’ ECCHO, RCC Identifier White Paper at 3 (Apr. 23, 2014), available at http://www.eccho.org/uploads/ Sec%209-1%20RCC%20Identifier%20Paper.pdf. The paper does not outline next steps or a proposed timeline. 153 Final Rule, Regulation CC, 70 FR 71218, 71223 (Nov. 28, 2005). 154 ECCHO at 11 (‘‘decentralized nature of forward check presentment and check return presents operational challenges for any one network or collecting bank to see the totality of volume associated with a particular merchant.’’). 155 Some commenters argued that monitoring exists in the check clearing system, and suggested that the Federal Reserve Bank could calculate check return rates to monitor and deter unauthorized transactions. PPA—Biondi; PPA—Frank; First Data at 9. Comments filed by the FRBA and financial services industry did not confirm the existence of centralized monitoring by any intermediary parties. FRBA–1 at 4; see generally ABA; ECCHO; The Associations. E:\FR\FM\14DER3.SGM 14DER3 77532 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 there 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 156 FRBA–1 at 4; ECCHO at 10; NACHA at 3; NCLC at 9. 157 FFIEC, Retail Payment Systems Booklet— February 2010 16 (Feb. 2010), available at http:// ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_ RetailPaymentSystems.pdf; see also NACHA at 3 (‘‘Because RCCs are not monitored systemically (indeed, RCCs are difficult, if not impossible, for individual financial institutions to monitor as a class), fraudsters are able to use RCCs to evade the authorization requirements and strong protections that NACHA has implemented through the ACH system.’’); FFIEC, Bank Secrecy Act/Anti-Money Laundering Manual, supra note 28, at 235 (‘‘The increased use of RCCs by processor customers also raises the risk of fraudulent payments being processed through the processor’s bank account.’’). 158 See supra notes 101–103 and accompanying text. 159 See PPA-Frank; DCS Holdings. 160 See The Associations at 2, 10–11; DCS Holdings. 161 See FRBA–1 at 6; DCS Holdings; PPA—Frank. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 162 See supra note 109 (listing FTC cases). at 11 (‘‘Payment processors and ODFIs rake in transaction fees from the scammers and the scammed alike’’); Compl. ¶ 41, FTC v. Automated Electronic Checking, Inc. (‘‘AEC’’), Civ. No. 3:13– 00056–RCJ–WGC (D. Nev. filed Feb. 5, 2013) (‘‘AEC’s pricing structure has been such that the income earned by AEC from returned transactions was significantly higher than the income earned from merely processing a transaction that ultimately cleared. The more returned transactions generated by AEC’s client merchants, the higher the return fees earned by AEC and its banks’’); Pl.’s Mot. and Memo. In Support of Summ. J. Ex. 2, Dec. Dennis M. Kiefer ¶ 33 (Oct. 2, 2008), filed in YMA, supra note 146 (expert describing how ‘‘YMA charged fees resulting from bad ACH and [remotely created check] transactions that were many multiples of the fees they otherwise would have charged.’’). 164 AEC, supra note 163, at ¶ 29 (defendants allegedly urged merchant clients to avoid NACHA’s threshold by switching from ACH debits to RCPOs); FTC v. Landmark Clearing Inc., Civ. No. 4:11–00826 (E.D. Tex. filed Dec. 15, 2011), Compl. ¶ 38 (alleging that defendants expressly advertised their RCPO processing product as a less regulated alternative to ACH transactions); Pl.’s Mot. and 163 NCLC PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 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 Memo. In Support of Summ. J. Ex. 1, Dec. Elliott C. McEntee ¶ 50 (Oct. 1, 2008), filed in YMA, supra note 146 (expressing his expert opinion that ‘‘YMA was moving its highest risk merchants from the ACH to demand drafts to avoid being detected by the Federal Reserve and NACHA. This enabled YMA to continue to assist merchants in defrauding consumers for a much longer period of time.’’). 165 AEC, supra note 163, at ¶ 58 (alleging defendants advised merchants to use different billing descriptors, customer service email accounts and telephone numbers, as well as corporate names or DBAs, to ‘‘fly under the bank radar’’). 166 Id. at ¶ 29 (‘‘For example, in January 2008, AEC’s principal Mark Turville notified one client merchant that ‘NACHA is going to a 1% threshold for unauthorized transactions starting 12–21–2007 and being enforced 3–21–2008.’ Turville urged the merchant to consider switching to RCPOs: ‘As you know our new [RCPO] product is now being used by most of our clients and does not have a 1% restriction . . .’’). See also infra note 198 and accompanying text (describing marketing claims of some payment processors offering remotely created check and remotely created payment order processing services). 167 ECCHO at 10 (‘‘While ECCHO cannot unilaterally determine that an RCC identifier will be established within the check standard, ECCHO can assure the FTC that the issue of an RCC identifier will be considered at appropriate industry standards meetings.’’). The Commission notes that the amended Rule will not preclude the financial services industry from adopting a unique MICR identifier or implementing other measures to increase oversight and visibility of remotely created checks and remotely created payment orders. The Commission will consider the effect of such monitoring if and when it is implemented. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations deficiencies 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 168 See supra notes 30–34 and accompanying text. at 3 (‘‘Most importantly, however, lack of Regulation E or NACHA Operating Rule-type protections for RCC transactions exposes RCCs to the types of heightened risks of fraud and abuse identified in the Release.’’). 170 The Commission recognizes the unsettled legal landscape applicable to remotely created payment orders, including the fact that the UCC does not apply to these payments. See NPRM, supra note 1, at 41204. As a practical matter, however, banks fail to distinguish between remotely created checks and remotely created payment orders, and simply apply the UCC to remotely created payment orders. Industry commenters confirm this fact. ABA at 3; ECCHO at 14; FRBA–1 at 2; The Associations at 4. 171 In 1995, the Federal Reserve Bank of San Francisco described the protections consumers might have under the UCC as illusory and noted the pronounced financial disincentive to accept claims by a consumer that he or she did not authorize a particular draft because the banks must bear the loss of the amount of any draft that was unauthorized. TSR Final Rule 1995, 60 FR at 43850. 172 12 CFR 1026.12(b); Regulation Z Official Staff Commentary, Supplement I, 12 CFR 1026.12(b)(2)(iii)–3 (‘‘The cardholder may not be mstockstill on DSK4VPTVN1PROD with RULES3 169 NACHA VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 recredit of disputed funds.177 In addition, held liable under 1026.12(b) when the card itself (or some other sufficient means of identification of the cardholder) is not presented.’’). In instances involving unauthorized charges resulting from the theft or loss of the card, a consumer’s liability is limited to $50. 15 U.S.C. 1643(a)(1)(B); 12 CFR 1026.12(b). 173 12 CFR 1026.13(a) and (d)(1). If a billing error appears on a consumer’s monthly statement, a consumer may dispute the error within 60 days from the date the statement is mailed to the consumer. 12 CFR 1026.13(b)(1). In addition to these federal law protections, private payment card network rules have certain voluntary initiatives that may provide consumers with zero liability protection in many instances, with certain exceptions. See infra note 178 (describing voluntary zero liability protections). 174 See 12 CFR 1005.6. 175 If a consumer loses an ‘‘access device,’’ such as a debit card or ATM card, she faces tiered liability, depending upon when she notifies her bank of the theft or loss. 12 CFR 1005.6(b)(3). If the consumer reports the loss or theft of an access device within two business days from discovery of the loss or theft, the consumer’s maximum liability is $50. 12 CFR 1005.6(b)(1). If the consumer notifies the bank more than two days after discovery of the theft or loss, her liability is limited to $500. 12 CFR 1005.6(b)(2). If the consumer fails to notify the bank within sixty days after her statement was mailed to her that first showed the unauthorized charges, she may be held liable for all unauthorized charges occurring after the 60-day period. 12 CFR 1005.6(b)(3). If the unauthorized transfers are made without an access device, the consumer must report them to avoid liability, within 60 calendar days of the bank’s transmittal of the periodic statement that shows the unauthorized transfers. Otherwise, the consumer faces liability for any unauthorized transfers that occur after the 60-day period and potentially unlimited liability. See 12 CFR 1005.6(b)(3)–2, Supp. 1, CFPB Regulation E Official Staff Commentary. 176 15 U.S.C. 1693(b). When a consumer provides her bank notice of an error such as an unauthorized transfer or an incorrect transfer, the bank must complete an investigation of the claim within ten business days. 12 CFR 1005.11; 15 U.S.C. 1693f(a). 177 If the bank requires a longer time to process or investigate the claim, it must provisionally credit the consumer’s account for the amount disputed and can take no more than 45 days to complete its investigation, in most instances. At the conclusion PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 77533 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 of the investigation, the bank must credit the consumer’s account if it determines that an error occurred. If it believes that no error occurred, the bank must send the consumer a notice explaining the findings of its investigation. 12 CFR 1005.11; 15 U.S.C. 1693f(c)–(d). 178 For so-called signature debit card purchases (i.e., without the use of a PIN) that are processed through their networks, Visa and MasterCard provide consumers with the same zero liability protections extended to credit card purchases, with certain conditions. For example, Visa states that ‘‘Visa’s Zero Liability Policy . . . protects you from unauthorized charges. Any funds taken from your account due to fraudulent use will be returned to your card.’’ Visa USA, Protections for Visa Debit cards, available at https://usa.visa.com/support/ consumer/debit-cards.html#2. See also, MasterCard, Zero Liability Protection, retrieved from https:// www.mastercard.us/en-us/about-mastercard/whatwe-do/terms-of-use/zero-liability-termsconditions.html (last visited July 21, 2015) (providing zero liability for consumer purchases if the consumer exercised reasonable care in protecting their card from loss or theft and promptly reported to their financial institution when they knew the card was lost or stolen). 179 See supra note 170 (recognizing that banks treat remotely created payment orders the same way they treat remotely created checks). 180 ABA at 8; ECCHO at 6; The Associations at 3. Commenters also emphasized that Regulation CC, Federal Reserve Operating Circular Number 3 (‘‘Operating Circular 3’’), and private clearinghouse agreements encourage paying banks to promptly recredit their customers’ accounts. Id. 181 ABA at 8–9; ECCHO at 6; The Associations at 4–5. 182 Interbank of N.Y. v. Fleet Bank, 730 N.Y.S. 2d 208 (N.Y. Civ. Ct. 2001) (holding that the notation ‘‘verbally authorized by your depositor’’ is legally equivalent to a customer’s signature and can be deemed a forged signature under the UCC). 183 UCC 4–406 (stating a general obligation of bank customers to examine their bank statements E:\FR\FM\14DER3.SGM Continued 14DER3 77534 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 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 and report unauthorized alterations and signatures on checks with ‘‘reasonable promptness’’). 184 As one commenter noted, to enforce compliance, the consumer may have to resort to legal action against her bank. NCLC at 4–5. See also e.g., Mark E. Budnitz, Consumer Payment Products and Systems: The Need for Uniformity and the Risk of Political Defeat, 24 Ann. Rev. Banking & Fin. L. 247, 253 (2005) (‘‘The UCC contains no error resolution procedure, much less a recredit right. The UCC only gives the consumer the option of suing the financial institution for violating the UCC.’’). 185 See, e.g., Cincinnati Insurance Co. v. Wachovia Bank, 72 U.C.C. Rep. Serv. 2d (West) 744 (D. Minn. 2010) (holding that a deposit account agreement can shift liability for an unauthorized check from the bank to its customer); but cf., Kaiser Aluminum & Chem. Corp. v. Mellon Bank, 43 U.C.C. Rep. Serv. 2d (West) 928, 933 n.4 (W.D. Pa. 1997), aff’d, 162 F.2d 1151 (3d Cir. 1998) (holding a fraudulent alteration discharges the liability of a bank customer unless the customer’s negligence substantially contributed to the altering of the check, despite deposit account agreement shifting liability from bank to customer). 186 The UCC states this general rule for contracting out of liability for checks in Article 4 section 4–103(a), including the fact that the provisions of the UCC ‘‘may be varied by agreement’’ and that ‘‘the parties may determine by agreement the standards by which the bank’s responsibility is to be measured if those standards are not manifestly unreasonable.’’ 187 See, e.g., Wells Fargo, Consumer Account Agreement, at 23 (Oct. 29, 2014) (‘‘If you voluntarily disclose your account number to another person orally, electronically, or in writing, or by some other means, and the Bank determines that the context of such disclosure implies your authorization to debit your account, the Bank may treat such disclosure as your authorization to that person to issue items drawn against your account’’) (emphasis in original); Bank of America, Deposit Agreement & Disclosures, at 23 (Feb. 6, 2015), available at https://www.bankofamerica.com/ deposits/resources/deposit-agreements.go (‘‘If you voluntarily disclose your account number to another person orally, electronically, in writing or by other means, you are deemed to authorize each item, including electronic debits, which result from your disclosure’’); Gorham Savings Bank, Deposit Account Agreement, at 8 (2015) (‘‘If you give out your account number to a third person by telephone, you also agree that such act authorizes VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 the recipient of the information to initiate debits to the account. You agree that the Bank may not be held liable for complying with such authorizations’’); Associated Bank, Deposit Account Agreement, 5.13.4 (2015), available at https://www. associatedbank.com/forms-and-disclosures/depositaccount-agreement (‘‘If you voluntarily give information about your Account (such as our routing number and your Account number) to a party who is seeking to sell you goods or services, and you don’t physically deliver a check to the party, any debit to your Account initiated by the party to whom you gave the information is deemed authorized’’); Regions, Deposit Agreement, at 9 (Mar. 2014), available at http://www.regions.com/ virtualdocuments/Deposit_Agreement_3_6_14.pdf (‘‘If we pay an item that you have not signed, but you have provided information identifying your account to a seller of property or services who created an item purportedly authorized by you, payment of the item is deemed to be authorized.’’). 188 Section 4–406(c) requires consumers to exercise ‘‘reasonable promptness’’ in examining the statement and notifying the bank after the discovery of the first fraudulent check in a series. ‘‘With respect to any subsequent fraudulent check perpetrated by the same wrongdoer before the bank is notified of the fraud,’’ section 4–406(d) requires the consumer to report the activity to the bank within a ‘‘reasonable period of time’’ not to exceed thirty days. Paul S. Turner, Contracting Out of the UCC: Variation by Agreement Under Articles 3, 4, and 4A, 40 Loy. L.A. L. Rev. 443, 454–455 (Fall 2006). 189 Stephan C. Veltri and Greg Cavanagh, Survey—Uniform Commercial Code: Payments, 68 Bus. Law. 1203, 1213 (2013) (‘‘The [UCC] gives contracting parties wide latitude to vary the effect of the statute’s terms. In the hands of some courts, the latitude seems limitless.’’) (citations omitted). For example, Gorham Savings Bank requires customers to notify the bank of any errors, forgeries, or alterations within 14 days. Gorham Savings Bank, Deposit Account Agreement, supra note 187, at 3 (14 days). See, e.g., Associated Bank, supra note 187, at 32 (14 days); Wilshire State Bank, Deposit Account Agreement, at 10 (July 21, 2011), available at https://www.wilshirebank.com/public/pdf/ depagreeprivacy.pdf (14 days); see also Freese v. Regions Bank, N.A., 644 SE.2d 549 (Ga. Ct. App. 2007) (upholding the reduction of time period in 4– 406(f) to 30 days); Peters v. Riggs Nat. Bank, N.A., 942 A.2d 1163 (DC 2008) (60 days). 190 Courts have found that, unlike a statute of limitations, the UCC’s statute of repose is not subject to equitable tolling. See, e.g., Peters v. Riggs Nat. Bank, N.A., 942 A.2d 1168 (‘‘equitable tolling cannot apply to statutes of repose’’); Estate of Decker v. Farm Credit Servs. of Mid-America, ACA, 684 N.E.2d 1137, 1139 (Ind. 1997) (‘‘While equitable principles may extend the time for commencing an action under statutes of limitation, nonclaim statutes impose a condition precedent to the enforcement of a right of action and are not subject to equitable exceptions’’); Brighton, Inc. v. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 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 Colonial First Nat’l Bank, 422 A.2d 433, 437 (App.Div.1980) (‘‘The one-year period limitation . . . is not merely a statute of limitations, but a rule of substantive law barring absolutely a customer’s untimely asserted right to make such a claim against the bank.’’). 191 See, e.g., Stowell v. Cloquet Co-op Credit Union, 557 N.W.2d 567 (Minn. 1997) (enforcing agreement requiring account holder to examine his monthly statements and notify credit union of errors within 20 days of mailing statement); Clemente Bros. Contracting Corp. v. HafnerMilazzo, 2014 WL 1806924 (N.Y. 2014) (14 days); Napleton v. Great Lakes Bank, N.A., 945 N.E.2d 111 (Ill. App. Ct. 2011) (30 days); Graves v. Wachovia Bank, Nat’l Ass’n, 607 F.Supp.2d 1277 (M.D. Ala. 2009) (40 days); Am. Airlines Employees Fed. Credit Union v. Martin, 29 S.W.3d 86 (Tex. 2000) (60 days). But see, In re Clear Advantage Title, Inc., 438 B.R. 58 (Bkrtcy. D.N.J. 2010) (finding 60-day timeframe ‘‘manifestly unreasonable’’); Mueller v. Miller, 834 N.E.2d 862 (Ohio Ct. App. 2005) (holding an agreement for a 30-day notice unenforceable). 192 Turner, Contracting Out of the UCC, supra note 188, at 453 (‘‘A reporting requirement imposes an obligation on the customer to report the payment of a forged or fraudulent check within a specified period of time. The reporting requirement is not a disclaimer or waiver and does not directly vary the UCC rules on check fraud. When the time allowed for reporting is a very brief period, however, the reporting requirement can have the same effect as a disclaimer’’) (citations omitted). 193 ABA at 8. 194 Id. at 9 (‘‘Amendments to Regulation CC in 2006 in 12 CFR 229.34(d) require the bank of first deposit to warrant that the customer whose account is being debited . . . authorized the RCC payment. The effect is to permit bank customers to dispute such transactions and to have the item returned to the bank of first deposit’’); ECCHO at 9; First Data at 7; The Associations at 5. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 promptness.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 195 12 CFR 229.34(d)(2) (which provides that if a paying bank asserts a claim for breach of warranty under paragraph (d)(1), the warranting bank may defend by proving that the customer of the paying bank is precluded under U.C.C. 4–406, as applicable, from asserting against the paying bank the unauthorized issuance of the check.). The applicable provisions of Circular 3 do not alter this framework. Federal Reserve Operating Circular 3, Adjustments for Certain Warranty Claims; Errors, 20.10(f) (Dec. 2012) (‘‘The sending bank agrees to deal directly with the requesting bank or another non-Reserve Bank party to resolve any claims or defenses related to the adjustment or the warranty set forth in Section 229.34(d) of Regulation CC with respect to the check.’’). 196 See supra notes 189–192. 197 ABA at 3; ECCHO at 14; FRBA–1 at 2; The Associations at 4. 198 NCLC at 5–6 (citing examples of promotional materials for payment processors). One payment processor’s Web site states that its remotely created payment order transactions ‘‘are governed by check laws and the Uniform Commercial Code, bypassing restrictive ACH rules and regulations.’’ National ACH, Check 21 Payment Processing helps You Increase Sales (Oct. 1, 2013), available at http:// www.nationalach.com/check-21-paymentprocessing-helps-businesses-increase-sales/. The Commission’s cases against payment processors confirm the use of remotely created checks and remotely created payment orders as a method of skirting additional scrutiny, regulation, and consumer protections. See Compl. ¶ 23, Landmark Clearing, supra note 164 (alleging that defendants expressly advertised their RCPO processing product as a less regulated alternative to ACH transactions); Compl. ¶ 29, AEC, supra note 163 (defendants allegedly urged merchant clients to avoid NACHA’s threshold by switching from ACH debits to RCPOs); Dec. Dennis M. Kiefer ¶ 31, YMA, supra note 163 VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 (describing YMA’s efforts to migrate telemarketing clients with high ACH return rates to remotely created checks); see also George F. Thomas, It’s Time to Dump Demand Drafts, Digital Transactions 39 (July 2008), available at http://www.radix consulting.com/TimetoDumpDemandDrafts.pdf (noting that certain ‘‘organizations believe the check-collection system provides [them] better protections than the ACH . . . in the area of consumer chargeback. This is not sufficient justification for using this instrument.’’). 199 Check21.com, ACH vs. Check21, retrieved from http://www.check21.com/Check-21-vsACH.html (last visited on June 24, 2015); see also, National Processing, ACH vs. Check 21—Which Is Right for You, (Sept. 17, 2013), available at http://nationalprocessing.com/blog/ach-vs-check21-which-is-right-for-you/ (‘‘If there is a dispute a customer will have only 40 days to visit the local branch of his bank and fill out the proper forms. A stark contrast to this is the way the disputes are handled with ACH. These customers can dispute a transaction over the telephone rather than person and have an additional 20 days to file a dispute.’’). 200 NCLC at 6 (citing a blog posting by Ed Starrs, CEO, MyECheck, dated June 20, 2012, retrieved from http://www.myecheck.com/merchants-are-ata-disadvantage-in-most-e-commerce-transactionsdue-to-deficiencies-in-payment-systems/ #prettyPhoto). PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 77535 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 201 15 U.S.C. 45(n); see also Unfairness Policy Statement, supra note 62, at 1074. 202 Unfairness Policy Statement, supra note 62, at 1074.; see also FTC v. Neovi, Inc., 598 F. Supp. 2d 1104 (S.D. Cal. Sept. 16, 2008), aff’d, 604 F.3d 1150, 1158 (9th Cir. 2010) (‘‘In determining whether consumers’ injuries were reasonably avoidable, courts look to whether the consumers had a free and informed choice.’’); Am. Fin. Servs. Ass’n, 767 F.2d 957, 976 (D.C. Cir. 1985), cert. denied, 475 U.S. 1011, 106 S.Ct. 1185, 89 L.Ed.2d 301 (1986) (‘‘The requirement that the injury cannot be reasonably avoided by the consumers stems from the Commission’s general reliance on free and informed consumer choice as the best regulator of the market.’’); see also FTC v. J.K. Publs., Inc., 99 F.Supp.2d 1176, 1201 (C.D. Cal 2002); FTC v. Windward Marketing, Ltd., 1997 U.S. Dist. LEXIS 17114, * 29–30 (N.D.Ga. Sept. 30, 1997). 203 TSR Amended Rule 2010, supra note 8, at 48487 (citing Unfairness Policy Statement, supra note 62, at 1074); In re Orkin Exterminating Co., 108 F.T.C. 263, 366–67 (1986), aff’d, 849 F.2d 1354 (11th Cir. 1988); In re Int’l Harvester, 104 F.T.C. 949, 1066 (1984)). 204 See Budnitz, Consumer Payment Products and Systems, supra note 184, at 248 (‘‘the development of new payment systems and recent proliferation of new payment products have created a complex and E:\FR\FM\14DER3.SGM Continued 14DER3 77536 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 the 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 nonnegotiable) 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 confusing marketplace in which consumers cannot adequately understand their rights and responsibilities.’’). 205 Id. (‘‘For consumers of payment products, the current legal landscape is incomprehensible. Different payment products are subject to very different laws, or no law at all besides contract law. Consequently, consumers’ rights and responsibilities vary greatly.’’); NCLC at 6 (‘‘Consumers also do not understand the different levels of protection for different types of payments.’’). 206 ABA at 6. 207 NCLC at 6 (‘‘the consumer has no way of knowing how the payment will be processed and no effective control over how the payee processes the payments.’’); ABA at 5 (‘‘Congress believes that choice of payment routing is for the merchant to decide, not the consumer.’’); Dec. Prof. Amelia Helen Boss, supra note 113, at ¶ 16 filed FTC v. First Consumers, supra note 109 (‘‘From the perspective of a consumer dealing with a merchant and providing banking account information, it is virtually impossible to know whether an RCC or ACH item will be created; once the necessary banking information is given to the payee, the VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 choice between the two is within the control and discretion of the payee.’’). 208 Obviously, a fraudulent telemarketer can perpetrate its misdeeds through the ACH Network, depending on its tolerance for scrutiny and detection. However, unscrupulous merchants attempting to originate ACH debits must account for the scrutiny they will receive both in underwriting and risk analysis. In addition, they must account for the systemic monitoring of their transaction activity to detect violations of operating rules and regulations. Moreover, NACHA’s ‘‘TEL Rule’’ (abbreviation for telephone-initiated debits) specifically prohibits the use of the ACH Network by outbound telemarketers that initiate calls to consumers with whom they have no existing relationship. NACHA Operating Rules, Art. II, 2.5.15 (Specific Provisions for TEL Entries) (2013). The TEL Rule recognizes the inherent risk of fraud associated with the anonymous and ‘‘unique characteristics of TEL Entries, particularly given that a TEL transaction takes place in a non face-to-face environment.’’ NACHA, TEL Brief Risk Management for TEL ODFIs and RDFIs Issue No. 3 (Dec. 2009), available at http://www.neach.org/uploads/resources/doc/tel_ brief_no_3_risk_for_odfirdfi.pdf. Under the TEL Rule, only inbound telemarketers and sellers that have existing business relationships with consumers may obtain a consumer’s authorization to initiate an ACH debit over the telephone. As evidence of a consumer’s authorization of a TEL transaction, the telemarketer or seller must either: (1) Record the oral authorization of the consumer, or (2) provide the consumer with written notice confirming the oral authorization prior to the settlement date of the entry. Id. 209 As the Ninth Circuit noted in FTC v. Neovi, supra note 202, at 1158, ‘‘[r]egardless of whether a bank eventually restored consumers’ money, the consumer suffered unavoidable injuries that could not be fully mitigated.’’ PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 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 210 ABA at 6. at 5. 212 For the same reasons, the Commission is equally unpersuaded by the ABA’s other examples of business decisions in which consumers have no choice (i.e., the credit reporting agency that a business may consult and the choice of telecommunications company that a business uses to call consumers). 211 Id. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations the 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 mstockstill on DSK4VPTVN1PROD with RULES3 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 213 TSR Amended Rule 2010, 75 FR at 48485 (employing cost benefit analysis in determining debt settlement amendments to the TSR). 214 Federal Reserve Bank of Boston, The 2011 and 2012 Surveys of Consumer Payment Choice, at Table 2 (Sept. 2014) (hereinafter ‘‘2011 and 2012 Surveys of Consumer Payment Choice’’), available at http://www.bostonfed.org/economic/rdr/2014/ rdr1401.pdf (finding 85 percent of consumers have had a traditional debit card). For the small percentage of checking account holders without traditional debit cards, there exist few, if any, barriers to obtaining debit card access. It is not known whether consumers without such traditional debit cards also lack other payment cards, such as credit cards or GPR cards. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 215 TSR Final Rule 1995, supra note 8, at 43850. The Commission received only one comment from a telemarketing firm, InfoCision, but it did not provide support for its conclusory statement that novel payment methods are important to legitimate businesses and charities. InfoCision at 2. InfoCision’s Web site states that it ‘‘work[s] with a roster over 200 clients across industries, including Fortune 500 companies and the nation’s leading nonprofit organizations.’’ InfoCision, Our Clients, available at http://www.infocision.com/Company Info/Clients/Pages/default.aspx (last visited June 10, 2015). InfoCision’s Web site identifies numerous clients, including Easter Seals, March of Dimes, American Diabetes Association, and Unicef. A review of the individual donation Web sites for each listed client indicates they accept card payments directly from consumers, suggesting that the inability to employ novel payment mechanisms should not be a major problem at least when dealing with the vast majority of consumers who have payment cards. 216 ABA at 7 (‘‘[remotely created checks] allow a customer that does not have a debit, credit, or prepaid card to purchase goods that the customer would otherwise be denied’’); First Data at 3 (noting that consumers could be delayed in receiving goods or services); InfoCision at 2 (stating that legitimate businesses and charities ‘‘need to offer customers multiple means of accepting payments or charitable donations’’). 217 First Data at 3 (citing increased risks of identity theft for checks sent through the mail); PPA-Biondi (‘‘many of the alternative methods don’t provide enough transaction information for the consumer’’); PPA-Frank (same). 218 ABA at 6 (emphasizing the speed of settlement compared to ACH transactions in certain circumstances), but see infra note 225 (describing improvements to the ACH Network providing for same-day settlement). 219 ABA at 6 (highlighting the ability of businesses to accept payments from consumers that do not have other types of payment methods); First Data at 4 (describing the lost sales opportunities for sellers that ‘‘would be left without a timely and reliable payment mechanism when transacting business with a consumer that solely relies upon checks’’); FRBA–1 at 3 (noting reasons why businesses may choose remotely created checks and remotely created payment orders over ACH debits); PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 77537 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 PPA-Frank (noting that merchants that do not meet credit standards necessary for ACH origination services need remotely created checks). 220 InfoCision at 2 (‘‘Traditional methods [of payment] are more costly and time consuming’’). The NPRM requested, but the Commission did not receive, specific comments detailing what additional costs, if any, would result from using payment alternatives to remotely created checks and remotely created payment orders in telemarketing transactions. NPRM, supra note 1, at 41223. To the extent that remotely created checks and remotely created payment orders may cost telemarketers and sellers less than comparable payments, such as ACH, any modest cost benefits do not outweigh the significant harm to consumers. As one provider explains on its Web site, remotely created checks and remotely created payment orders are ‘‘an alternative to ACH payment processing and specifically designed for businesses and industries classified as high risk merchants.’’ National ACH Web site, supra note 199. Notably, these providers do not explicitly mention cost savings when comparing remotely created checks and remotely created payment orders with ACH payments. Check21 Web site, supra note 199. 221 TSR Final Rule 1995, supra note 8, at 43850 & n.79. 222 Consumers and businesses used the ACH Network primarily for facilitating recurring credits (i.e., payroll and retirement benefits) and recurring debits (e.g., insurance premiums and mortgage payments). See Terri R. Bradford, The Evolution of the ACH (Dec. 2007), available at http://www. kansascityfed.org/Publicat/PSR/Briefings/PSRBriefingDec07.pdf. 223 TSR Final Rule 1995, supra note 8, at 43850– 51; see also TSR RNPRM, supra note 46, at 30413– 14 & n.63. E:\FR\FM\14DER3.SGM 14DER3 77538 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations record, which identified the lack of available electronic payment methods for consumers, widespread use by legitimate telemarketers and nontelemarketers, 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 cardbased 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 224 See section II.A.3.a(1). at 3; NCLC at 7. On May 19, 2015, NACHA announced that its voting membership approved amendments to the NACHA Operating Rules enabling same-day ACH settlement services, which means ACH debits will clear as quickly as remotely created checks and remotely created payment orders. Press Release, NACHA, NACHA Leads Industry Toward Ubiquitous, Same-Day ACH Settlement (Mar. 18, 2014), available at https:// www.nacha.org/news/nacha-leads-industry-towardubiquitous-same-day-ach-settlement. 226 AARP at 3; AFR at 1; NCLC at 7; DOJ–CPB at 3; Transp. FCU. 227 The Commission notes that consumers increasingly are using prepaid debit cards, mobile payments, and online payment accounts (e.g., PayPal) to purchase goods and services. Unlike remotely created checks, remotely created payment mstockstill on DSK4VPTVN1PROD with RULES3 225 NACHA VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 orders, and ACH debits, however, these payment alternatives do not require a bank account. 228 2011 and 2012 Surveys of Consumer Payment Choice, supra note 214, at Table 6. 229 Loretta J. Mester, Changes in the Use of Electronic Means of Payment: 1995–2010: An Update Using the Recently Released 2010 Survey of Consumer Finances, 95 Business Review 25 (Third Quarter 2012), available at http://www. philadelphiafed.org/research-and-data/ publications/business-review/2012/q3/brq312_ changes-in-use-of-electronic-means-of-payment1995-2010.pdf. 230 The Federal Reserve System, The 2013 Federal Reserve Payments Study: Recent and Long-Term Payment Trends in the United States: 2003–2012, 12 (Dec. 2013) (citations omitted) (hereinafter ‘‘Recent and Long-Term Payment Trends in the United States: 2003–2012’’), available at https:// www.frbservices.org/files/communications/pdf/ research/2013_payments_study_summary.pdf. The survey also found that ‘‘[c]ompared with credit, debit, ACH, and check, prepaid card payments (including both general-purpose and private-label) increased at the fastest rate from 2009 to 2012 (15.8 percent annually), reaching a total of 9.2 billion transactions in 2012. The number of prepaid card payments increased 3.3 billion from 2009 to 2012, which is higher growth than reported in previous studies.’’ Id. at 8. See also, Banking on Prepaid 2 (The Pew Charitable Trusts June 30, 2015) (reporting that between 2012 and 2014 use of GPR cards grew by 50 percent, and estimating that approximately 23 million Americans, more than one-quarter of whom do not have a checking account, are now regularly using such cards), available at http://www.pewtrusts.org/en/researchand-analysis/reports/2015/06/banking-on-prepaid. 231 Recent and Long-Term Payment Trends in the United States: 2003–2012, supra note 230, at 12. 232 Id. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 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. 233 Id. (debit and prepaid cards accounted for 45 percent of all noncash payments in 2012); see also Bank for International Settlements, Committee on Payment and Settlement Systems, Innovations in Retail Payments, 23 (May 2012), available at http://www.bis.org/publ/cpss102.pdf. Because remotely created checks (and remotely created payment orders) require a checking account at a financial institution, comparisons with usage rates for electronic fund transfers (i.e., ACH debits and traditional debit cards linked to consumer checking accounts) are more relevant for purposes of this rulemaking than comparisons with usage rates for credit cards. 234 Certain opponents of the prohibition claim that the additional transaction information available for remotely created checks and remotely created payment orders is a benefit to consumers, enabling them to better understand the nature of the withdrawals to their accounts. PPA-Biondi; PPAFrank. Whether such additional transaction information exists (assuming it is truthful), however, does nothing to prevent the harm of unauthorized withdrawals in the first place or to mitigate the damage after unauthorized withdrawals have occurred. 235 See supra note 89 and accompanying text. The Commission received only one comment from a telemarketing firm (InfoCision). While InfoCision states that the prohibition on using novel payment methods in telemarketing will harm legitimate companies, it does not provide specific evidence of transactions or merchants that use these methods. InfoCision at 2. Other commenters provided examples of legitimate transactions conducted over the telephone—to make last-minute credit card payments, pay mortgage or other bills, or receive payments in business-to-business transactions—that are not telemarketing transactions covered by the Rule or the proposed prohibition. ABA at 3; ECCHO at 2; First Data at 7; The Associations at 9. None of these commenters provided any specific information on the number of legitimate telemarketers that rely on remotely created checks and remotely created payment orders. 236 See supra note 220. 237 AARP at 3; NCLC at 7; DOJ–CPB at 3; Transp. FCU. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations households 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.242 238 See supra note 109 and accompanying text. at 1 & n.1 (describing the organization as representing banks of all sizes and charters); ECCHO at 1 (‘‘ECCHO is a non-profit clearinghouse owned by 3,000 financial institutions’’); The Associations at Appendix A (noting the membership of The Clearing House and The Financial Services Roundtable). 240 The BSA is codified at 12 U.S.C. 1829b, 12 U.S.C. 1951–1959, 18 U.S.C. 1956–1957 & 1960, 31 U.S.C. 5311–5314 and 5316–5332, with implementing regulations at 31 CFR ch. X. 241 ECCHO at 11, citing 31 CFR 1020.210 (Customer Identification Programs for Banks); see also The Associations at 7–8 (citing bank regulatory guidance documents emphasizing the responsibility of financial institutions to ‘‘take steps to know and monitor their customers in order to prevent unauthorized RCCs from entering the payment stream.’’). 242 First Data, itself a credit card payment processor, also stated that it uses remotely created checks and remotely created payment orders in mstockstill on DSK4VPTVN1PROD with RULES3 239 ABA VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 checkreturn 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 limited scenarios when it telemarkets its payment processing services to small, start-up businesses which do not yet have access to a corporate credit card. First Data at 7. Although First Data did not estimate the number of such transactions, the Commission notes that business-to-business telemarketing transactions (with a few exceptions not relevant here) are exempt from the TSR. 243 InfoCision at 1 (‘‘InfoCision provides a full spectrum of direct marketing services, including inbound and outbound call center solutions, direct mail and fulfillment, and interactive (web), and data solutions.’’). 244 ECCHO at 13–14. 245 Id. at 13 & n.19 (‘‘We would note that the sampling that was conducted for this purpose was limited to RCCs handled by banks in the adjustment process. It is possible that during this sampling period there were also a material number of additional unauthorized RCC claims/items that were handled by paying banks as returns rather than adjustments.’’). 246 For example, after the paying bank’s midnight deadline to return a check has passed, it might use a check adjustment claim to recover the amount of the check from the depositary bank, provided that the appropriate agreements between the banks are in place. See, e.g., 12 CFR 229.2(xx), comment 1, example (b) (stating that an adjustment request is not a paper or electronic representation of a substitute check, because it is not being handled for collection or return as a check). 247 See Check Image Central, Resolving Duplicates As Adjustments Versus Returns, at 2–4 (Dec. 2006), available at http://checkimagecentral.org/pdf/ ResolvingDuplicatesAsAdjustmentsVersus Returns.pdf (describing the advantages and PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 77539 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, disadvantages to each method of dishonor, and explaining that the choice is up to the paying bank). 248 See Check Image Central, Proper Use of Return Codes in Image Exchange, at 1 (Dec. 20, 2014), available at http://checkimagecentral.org/pdf/ ProperUseOfReturnCodesInImageExchange.pdf (‘‘The Uniform Commercial Code (UCC) and Regulation CC (Reg. CC), do not include a list of specific reasons that an item may be dishonored and returned. However with image exchange, the . . . [standard] exchange format provides a list of return reasons and associated codes that must be used for image exchange.’’). 249 Dec. Prof. Amelia Helen Boss, supra note 113, at ¶ 36, filed in First Consumers, supra note 109 (describing several reasons why ‘‘unauthorized return rates [alone] may greatly underestimate the true number of unauthorized transactions.’’). 250 Id. 251 OCC, OCC Bulletin 2008–12: Risk Management Guidance n.7 (Apr. 24, 2008) (emphasis added), available at http://www.occ.gov/ news-issuances/bulletins/2008/bulletin-200812.html; see also FFIEC, BSA/AML Examination Manual, Third-Party Payment Processors— Overview 237 (Nov. 17, 2014), available at http:// www.ffiec.gov/bsa_aml_infobase/pages_manual/ olm_063.htm (‘‘[A] bank should thoroughly investigate high levels of returns and should not accept high levels of returns on the basis that the processor has provided collateral or other security to the bank.’’). This also holds true for ACH return rates. See supra notes 30–31 (describing NACHA’s return rate thresholds, including a new 15 percent overall return rate threshold). 252 Id. (‘‘The most important reasons why the return rates understate the number of unauthorized returns, however, stem from the fact that the rate is completely dependent upon the victim discovering the unauthorized activity and following a prescribed method of seeking reimbursement. . . . [M]any fraudulent debits go undetected by the consumer victim and, even if discovered, the victim may not assert its claim against the bank in time, E:\FR\FM\14DER3.SGM Continued 14DER3 77540 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 the 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 or the bank may refuse to re-credit the account and return the check.’’). 253 See supra note 98 and accompanying text. The Commission notes that these examples are not telemarketing transactions covered by the TSR. 254 See, e.g., DCS Holdings; ETA at 1; FRBA–1 at 2. 255 Notably, First Data, the only payment processor to file a comment, never suggested that it would cease processing remotely created checks and remotely created payment orders altogether. First Data at 4. 256 16 CFR 310.3(b). VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 their financial institutions,257 to determine which of their merchantcustomers 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 merchantcustomer’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 257 As discussed above, banks also have in place Know Your Customer requirements, policies, and procedures to understand their customers’ (and their payment processor’s customers’) businesses. See supra notes 240–241 and accompanying text; see also Ana R. Cavazos-Wright, Federal Reserve Bank of Atlanta, An Examination of Remotely Created Checks at 14–15 (May 2010) (‘‘Banks’ risk management programs must address their customers’ use of remotely created checks to ensure the integrity of the check clearing network is preserved. Strong risk management practices such as customer due diligence at account origination and during the customer relationship are the first line of defense against fraudulent transactions.’’). 258 Financial institutions themselves will continue to enforce KYC requirements as well. For example, First Data asserted that ‘‘[m]any of the egregious business types cited in the proposal such as phony telephone offers, bogus charity solicitations, purported medical discount plans, illegal online gambling, etc. are high-risk areas that should have been properly screened by the depository bank. In these cases, the depository bank could have prevented this activity through properly applying Know Your Customer policies and complying with the FDIC and/or OCC Third-Party Processor Guidelines.’’). First Data at 8. See also Transp. FCU. (‘‘the proposed rule changes should not unduly restrict legitimate commerce, particularly involving already regulated financial institutions . . . ’’). 259 States requiring express written authorization or signed confirmation before submitting payment against a consumer’s account include: Arkansas (Ark. Code Ann. 4–99–203(b)(1)); Hawaii (Haw. Rev. Stat. 481P–1); Kansas (Kan. Stat. Ann. 50– 672(c)); Kentucky (Ky. Rev. Stat. 367.46955(5)); Montana (Mont. Code Ann. 30–14–1411(1)(e)); and Vermont (9 Vt. Stat. Ann. 2464(b)(2)). 260 See 16 CFR 310.5(a)(5) (requiring telemarketers and sellers to keep, for a period of 24 months from the date the record is produced, certain records, including all verifiable authorizations received under the Rule). PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 ‘‘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 261 See supra note 208 (describing the authorization requirements for TEL Entries (either obtaining a tape recording of the consumer’s oral authorization or providing, in advance of the settlement date of the entry, written notice to the consumer that confirms the oral authorization)). 262 First Data asserted that it would take considerable time and expense to implement automated processes to block remotely created checks for telemarketing transactions. First Data at 4. Similarly, CUNA stated that ‘‘financial institutions and other entities will have to make appropriate risk management changes.’’ CUNA at 2. Neither CUNA nor First Data identified any expenses they would incur, over and above those currently incurred for compliance with KYC and BSA, and other existing requirements. The fact that existing compliance obligations should necessitate determining whether customers are engaged in covered telemarketing undermines industry’s claims about possible increased compliance costs. 263 ABA at 5 (arguing the FTC has failed to demonstrate that a ban will ‘‘measurably address the problem’’ because unscrupulous telemarketers will simply shift to other payment instruments); First Data at 3 (‘‘prohibiting the use and acceptance of remotely created checks in telemarketing transactions does not provide any meaningful benefit to consumers . . .’’); see also ECCHO at 4; FRBA–1 at 2; The Associations at 8–9. 264 The Commission is not alone in this conclusion. As the NCLC comment noted, several years after the Commission adopted the express verifiable authorization requirements of the TSR, the Canadian Payments Association (‘‘CPA’’) banned the use of remotely created checks (referred to as ‘‘tele-cheques’’). In doing so, the CPA ‘‘considered whether procedures could be put in place to sufficiently mitigate the risks associated with this payment instrument’’ and found ‘‘there was a generally held view that tele-cheques represent an unacceptable level of risk, since the key to mitigating the risk of unauthorized transactions is the ability to verify authorization.’’ Canadian Payments Association. Prohibition of Tele-cheques in the Clearing and Settlement System—Policy Statement (June 1, 2003), available at http://www.cdnpay.ca/imis15/eng/Act_Rules/ Automated_Clearing_Settlement_System_ACSS_ Rules/eng/rul/policy_statement_telecheques.aspx. E:\FR\FM\14DER3.SGM 14DER3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations with 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 supra note 208. NPRM, 78 FR at 41207 & n.84 (describing injury estimates from cases). 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 265 See 266 See VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 267 15 U.S.C. 6101–6108. supra note 259. 268 See PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 77541 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 payeemerchant, not the payor-consumer. Second, these payments are deposited 269 NACHA, TEL Brief Risk Management for TEL ODFIs and RDFIs Issue No. 3, supra note 208 (the TEL Rule recognizes the inherent risk of fraud associated with the anonymous and ‘‘unique characteristics of TEL Entries, particularly given that a TEL transaction takes place in a non face-toface environment.’’). 270 FRBA–2 at 2. E:\FR\FM\14DER3.SGM 14DER3 77542 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 into 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 271 The Commission continues to monitor developments in the marketplace, including developments and improvements in payments utilized by telemarketers and sellers, to ensure that consumers are adequately protected against telemarketing fraud while balancing the needs of businesses. For example, the Commission published a 2013 report entitled ‘‘Paper, Plastic . . . or Mobile? An FTC Workshop on Mobile Payments’’ which summarized consumer protection concerns surrounding the increase in use of mobile payments, including dispute resolution, data security, and privacy. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 272 The Rule excludes from the general media exemption the following products and services: Investment opportunities, business opportunities other than business arrangements covered by the Franchise or Business Opportunity Rules, credit card loss protection plans, debt relief services, credit repair services, recovery services, and advance fee loans. 16 CFR 310.6(b)(5). The exceptions to the general media exemption reflect the Commission’s law enforcement experience with deceptive telemarketers’ use of mass media to advertise ‘‘certain goods or services that have routinely been touted by fraudulent sellers using general media advertising to generate inbound calls.’’ 2003 TSR Amendments, supra note 8, at 4658. 273 Inbound calls in response to direct mail advertising, like general media advertising, are exempt from coverage under the Rule. 16 CFR 310.6(b)(6). The Rule also excludes from the direct mail exemption investment opportunities, business opportunities other than business arrangements covered by the Franchise or Business Opportunity Rules, credit card loss protection plans, debt relief services, credit repair services, recovery services, and advance fee loans. Id. PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 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 noncompliance 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 274 First Data at 6. 275 Id. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 friends 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 ‘‘cashto-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, cashto-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-tocash 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 276 See also supra notes 175–177 (discussing ACH debits and traditional debit cards); notes 36 & 178 (discussing GPR cards); and notes 172–173 (discussing credit cards). 277 See supra section I.B.1.a (discussing systemic monitoring of ACH Network and payment card system). 278 There are three major providers of cash reload mechanisms in the United States: Green Dot Corporation (MoneyPak); InComm (Vanilla Reload Network); and Blackhawk Network California, Inc. (Reloadit). VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 279 As noted above, the Rule’s definition of ‘‘cashto-cash money transfers’’ excludes transfers that are electronic funds transfers as defined in section 903 of EFTA, which provides for dispute resolution procedures. Cash reload mechanisms are not currently governed by Regulation E. The CFPB’s proposed Prepaid Account Rule seeks to extend to ‘‘prepaid accounts’’ the protections of Regulation E and the EFTA, with certain important modifications. Prepaid Account Rule, supra note 36, at 77102. Although the proposed Prepaid Account Rule arguably might be read to cover cash reload mechanisms, the error resolution and liability limits of Regulation E would not be available unless the cash reload mechanism is ‘‘registered’’ (i.e., the consumer provides ‘‘identifying information such as name, address, date of birth, and Social Security Number or other government-issued identification number so that the financial institution can identify the cardholder and verify the cardholder’s identity.’’). Id. at 77166. Thus, unregistered cash reload mechanisms would not be covered by the error resolution and liability limits of Regulation E under the proposed Prepaid Account Rule. The Commission may revisit the definition of cash reload mechanism if warranted by a final Prepaid Account Rule. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 77543 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 280 Written Statement of Green Dot, supra note 50, at 2. 281 InComm Press Release, supra note 51. of Blackhawk Network, supra note 51, at 3 (highlighting the company’s ‘‘elimination of quick load with the scratch-off PIN and enhanced fraud mitigation efforts’’). 283 AARP; AFR; AGO; DOJ–CPB; DOJ-Criminal; Michalik; NCLC; NetSpend; Hon. Bill Nelson; Transp. FCU. 284 AGO at 4 & nn.9–10 (noting that Western Union has more than 489,000 agent locations and MoneyGram has approximately 244,000 agents). 285 AGO at 3; DOJ-Criminal at 2; NCLC at 11. 282 Testimony E:\FR\FM\14DER3.SGM 14DER3 77544 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 retrieving 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 286 NCLC at 11; see also AGO at 2 (noting that cash-to-cash money transfers can be ‘‘picked up by a person with a forged ID in many different locations’’); DOJ-Criminal at 2 (stating that fraudsters ‘‘can rapidly receive and transfer victim proceeds with less regulatory or industry oversight than traditional payment methods such as checks and payment cards’’). 287 AGO at 4 (‘‘Compounding the difficulty for consumers is the fact that unlike with fraudulent credit card payments or unauthorized bank debits, senders of money transfers have no established right to a refund once their transfer has been picked up, regardless of how fraudulent the conduct of the receiver was in inducing the transaction.’’). 288 The term ‘‘419 scam’’ encompasses a variety of common confidence scams. The number ‘‘419’’ refers to the article of the Nigerian Criminal Code dealing with fraud. 289 AGO at 4–5. 290 See AARP at 3 (AARP agrees with the FTC that these payment methods ‘‘pose a significant threat to potential victims of telemarketing fraud.’’); AGO at 5 (noting that the overall extent of the problem ‘‘cannot be known with precision, but it is clearly very substantial’’); DOJ–CPB at 1 (stating that losses resulting from ‘‘global mass-marketing fraud is in the tens of billions of dollars per year’’); NCLC at 12 (reporting that in 2012 cash-to-cash money transfers were the top method of payment in telemarketing fraud reported to the National Consumer League’s Fraud Center, ‘‘accounting for nearly 63 percent of all telemarketing payments (up from 49 percent in 2009).’’). 291 NCLC at 12 (suggesting that, when used in the telemarketing context, such transfers are ‘‘merely vehicles for evading consumer protections and liability for fraud’’); see also, AARP at 3 (‘‘[C]onsumers are not well protected when novel payment methods are used, and legitimate businesses have access to a variety of other payment methods that do provide consumers with more robust protections, the benefit to consumers of the proposed rule outweighs the burden to businesses in complying with this rule.’’); DOJ–CPB at 1 (noting that the proposal would ‘‘[leave] open safer mechanisms for legitimate marketers to accept consumer payments.’’). VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 292 AGO at 10 (‘‘It is now appropriate, indeed critical, for the FTC to clarify those companies’ responsibility for making reasonable inquiry into whether consumers who propose to wire money are doing so in response to a prohibited communication.’’); NCLC at 14 (‘‘Money transmitters are in a position to police their system’’). 293 AGO at 10; NCLC at 14–15; DOJ–CBP at 3; DOJ-Criminal at 3. 294 NCLC at 14 (‘‘Whether or not money transmitters are knowing parties to fraudulent transactions, every fraudulent transfer coming through their services earns them more profit at the expense of the scammers’ victims.’’); DOJ-Criminal at 3 & n.10 (describing the proliferation of corrupt money transfer agents and citing criminal prosecutions); see also infra note 350 and accompanying text. 295 DOJ–CPB at 3 (citing the U.S. v. MoneyGram Int’l, Inc., Cr. No. 12–291 (M.D. Pa. Nov. 9, 2012). 296 AGO at 10 (emphasis in original). 297 Id.; see also AFR at 1 (‘‘The FTC should strengthen the rules against assisting or facilitating the use of the banned payment methods’’); DOJCriminal at 3 (‘‘Over the past decade, criminals’ techniques have shifted from bribery or physical intimidation or assault of money transfer agents to fraudulent applications by mass-marketing fraud ring members to become agents of legitimate money transfer companies’’) (citations omitted). 298 NCLC at 13. 299 Id. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 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-tocash 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, DOJCriminal 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 300 AFR at 1 (‘‘The payment system ban should apply to sales initiated by email or other methods that do not use a telephone.’’); AGO at 9 (‘‘The prohibition on telemarketing using money transfers should extend to commercial communications using money transfers.’’); NCLC at 13 (‘‘The proposed ban on the four payment systems should apply not only to transactions that involve a telephone but also to sales initiated by email, over the internet or through other methods that are not covered by the TSR.’’). 301 AGO at 1; NCLC at 2. 302 See generally AARP; AGO; AFR; DOJCriminal; DOJ–CPB; Michalik; NCLC; Hon. Bill Nelson. 303 AGO at 11; DOJ–CPB at 3; DOJ-Criminal at 4; NCLC at 11–12. 304 DOJ-Criminal at 4; see also AGO at 11. 305 NCLC at 12. 306 Id. 307 DOJ-Criminal at 4. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations use 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 ‘‘selfservice’’ 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 308 AARP at 3; NCLC at 13. at 4; DOJ–CPB at 3; DOJ-Criminal at 4; NCLC at 12. 310 NCLC at 15 (‘‘Cash reload systems operate somewhat differently from cash-to-cash money transfers’’). 311 Id. (‘‘The cash-to-cash money transfer and cash reload system industries are capable of creating internal systems to minimize fraudulent transactions. They are in a much better position than consumers themselves to root out the systemic problems.’’). 312 TMSRT at 1. The group includes: RIA Financial Services, Sigue Corporation, Western Union Financial Services, Inc., MoneyGram Payment Systems, Inc., and Integrated Payment Systems, Inc. 313 CUNA at 1; ETA at 1; InfoCision at 2. 314 ETA at 1–2. mstockstill on DSK4VPTVN1PROD with RULES3 309 AGO VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 telemarketingrelated 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 fraudinduced 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 telemarketing315 InfoCision at 2; see also supra note 215. at 1. 317 Id. None of these money transfers involve telemarketing under the TSR. 318 TMSRT at 4; see also ETA at 2. 319 TMSRT at 5. 316 TMSRT PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 77545 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 320 ETA at 1 (‘‘The ETA is concerned that a payment processor’s innocent acceptance or processing of a ‘novel’ payment method in a nonfraudulent telemarketing sales transaction would be deemed an abusive act or practice.’’). 321 TMSRT at 5. 322 Id. 323 Id. at 6–7. 324 Id. at 5. 325 Id. at 5–6. E:\FR\FM\14DER3.SGM 14DER3 77546 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations that 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-toperson 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 326 Id. at 6. 327 InfoCision at 2; ETA at 1. at 3. 329 Green Dot at 1; see Written Statement of Green Dot, supra note 50. 330 InComm at 3; Green Dot at 1. 331 Written Statement of Green Dot, supra note 50, at 2. 332 Id. At a subsequent hearing held by the U.S. Senate Special Committee on Aging, a third cash reload provider, Blackhawk Network, testified it will replace its ‘‘Quick Reload’’ process with swipe reload. Testimony of Blackhawk Network, supra note 51, at 3. mstockstill on DSK4VPTVN1PROD with RULES3 328 InComm VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 ecommerce 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 333 InComm Press Release, supra note 51. As of March 31, 2015, Vanilla Reload PIN code cash reload is ‘‘no longer available for purchase.’’ See www.vanillareload.com (last visited June 6, 2015). 335 Testimony of Blackhawk Network, supra note 51, at 3. Instead, consumers can use a swipe reload method to reload their own GPR card at a register, or sign up for a Reloadit Safe—an account that acts like a digital wallet into which consumers can deposit the funds on Reloadit packs. In turn, the consumer can use the funds from the Reloadit Safe to load GPR cards she has registered with her Reloadit Safe. See Reloadit How It Works, available at https://www.reloadit.com/HowItWorks (last visited June 6, 2015). 336 Green Dot at 2. 337 InComm at 2–3 (noting the proposal ‘‘could potentially prohibit consumers’ legitimate uses of cash reload mechanisms that are unrelated or incidental to any telemarketing activity’’). 338 InComm at 2. 339 Green Dot at 2; InComm at 4. 334 Id. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 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 cashto-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 340 Green Dot at 2; see also InComm at 4. at 4. 342 InComm at 4; see also Green Dot at 2. 343 AGO at 1 (recommending that ‘‘the prohibition extend to transactions proposed by email, which transactions cause as much harm to consumers, if not more, than transactions over the phone’’). The AGO comment cites to Consumer Sentinel Network data provided by the FTC to conclude that fraudinduced money transfers in connection with email communication is a problem of ‘‘equivalent or greater magnitude’’ than telemarketing. AGO at 7. The AGO letter notes that, from January 1, 2011 through June 3, 2013, the Commission received 26,379 complaints (accounting for $188,963,368 of injury) in which consumers identified the payment method as ‘‘wire transfer’’ and the method of communication as ‘‘telephone.’’ Id. During the same time frame, the Commission received 67,217 complaints (accounting for $596,315,020 in injury) for money transfer complaints where the method of contact was ‘‘email.’’ Id. The Commission notes that the data cited by the AGO comment include only those complaints in which the consumer reported both the method of payment and the method of initial contact. As a result, these figures exclude a significant number of complaints in which consumers did not report either the method of payment or the method of contact. For example, from January 1, 2011 through 341 InComm E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations Commission 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. mstockstill on DSK4VPTVN1PROD with RULES3 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 June 3, 2013, only 26 percent (or 305,990) of all consumer complaints (1,165,090) reported the method of payment, while 48 percent of consumer complaints (560,811) included the method of contact. FTC, Consumer Sentinel Network Data Book for January–December 2013, at 8–9 (Feb. 2014), available at https://www.ftc.gov/system/files/ documents/reports/consumer-sentinel-networkdata-book-january-december-2013/sentinelcy2013.pdf. Moreover, the overall Consumer Sentinel data in 2013 demonstrated that consumer fraud victims reported the telephone as the method of contact in 40 percent of complaints, while email was the method of contact in 33 percent of complaints. Id. at 9. 344 InComm expressed concern that the proposed amendment would restrict the ability of consumers to use cash reload mechanisms for nontelemarketing transactions, including e-commerce transactions and payments to billers (such as utility, cable, or telephone providers). InComm at 2–3. As discussed in detail in section II.B.3.c(2) below, the Commission is unpersuaded that these transactions will be adversely affected by the prohibition on cash reload mechanisms in telemarketing. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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.348 345 See, e.g., FTC v. Bezeredi, Civ. No 05–1739 (W.D. Wash. Apr. 3, 2007) (Summ. J.); FTC v. 627867 B.C. Ltd. dba Cash Corner, Civ. No 03–3166 (W.D. Wash. Aug. 4, 2006) (Stip. Perm. Inj.); FTC v. World Media Brokers, Inc., No. 02C6985 (N.D. Ill. June 22, 2004), aff’d, 415 F.3d 758 (7th Cir. 2005) (Partial Summ. J.); see also Press Release, DOJ, Jamaican Man First to be Extradited to Face Fraud Charges in International Lottery Scheme (Feb. 12, 2015) (indictment describing how defendant and co-conspirators obtained victims’ money via MoneyGram, Western Union, and Jamaica National money transfers), available at http://www.justice. gov/opa/pr/jamaican-man-first-be-extradited-facefraud-charges-international-lottery-scheme; Press Release, FBI, Jamaican DJ Arrested in Florida in Connection with North Dakota Telemarketing Lottery Scam: Twenty-Six Individuals Currently Indicted (May 27, 2014), available at http:// www.fbi.gov/minneapolis/press-releases/2014/ jamaican-dj-arrested-in-florida-in-connection-withnorth-dakota-telemarketing-lottery-scam; Press Release, FBI, Telemarketer Sentenced in Manhattan Federal Court to 75 Months in Prison for Sweepstakes Fraud That Targeted Elderly Victims (Sept. 24, 2013), available at http://www.fbi.gov/ newyork/press-releases/2013/telemarketersentenced-in-manhattan-federal-court-to-75months-in-prison-for-sweepstakes-fraud-thattargeted-elderly-victims. 346 See, e.g., U.S. v. Brister, Cr. No. 13–0276 (E.D. Pa. June 6, 2013) (indictment describing various mystery shopper and job schemes used by defendant to induce victims to transfer money via Western Union), available at http://www.justice. gov/usao/pae/News/2013/June/brister_ indictment.pdf; FTC Consumer Alert, Mystery Shopper Scams (Nov. 2012), available at http:// www.ftc.gov/bcp/edu/pubs/consumer/alerts/ alt151.shtm; Press Release, DOJ, Georgia Woman Pleads Guilty In Mystery Shopper Scam (July 23, 2014), available at http://www.justice.gov/usao/ paw/news/2014/2014_july/2014_07_23_03.html; Press Release, DOJ, Santa Barbara County Man Sentenced to Six Years in Federal Prison for Running $6 Million Job Scam (Apr. 5, 2011), available at https://www.fbi.gov/losangeles/pressreleases/2011/la040511.htm (defendant sentenced for $6 million bogus mystery shopper scam). 347 FTC v. USS Elder Enters., Inc., Civ. No. 04– 1039 (C.D. Cal. Jul. 26, 2005) (default judgment against telemarketers using bogus work-at-home opportunity to lure consumers to send at least $885,196 in money transfers). 348 AARP Bulletin, Scam Alert: Beware of Green Dot MoneyPak Scams—The crooks’ other preferred payment method has become the weapon of choice (Apr. 23, 2012), available at http://www.aarp.org/ money/scams-fraud/info-04-2012/avoid-moneypakscams.html; Press Release, Better Business Bureau, Fraud Task Force Warns Consumers Of Scams Using Western Union, MoneyGram, Green Dot MoneyPaks (Aug. 2, 2012), available at http:// PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 77547 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-tocash 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 interact.stltoday.com/pr/business/PR080212034 59861. 349 DOJ-Criminal at 3 & n.10 (citing examples of cases involving corrupt money transfer agents); NCLC at 14 & nn.56–59 (same). 350 Press Release, DOJ, MoneyGram International Inc. Admits Anti-Money Laundering and Wire Fraud Violations, Forfeits $100 Million in Deferred Prosecution (Nov. 9, 2012), available at http://www. justice.gov/opa/pr/2012/November/12-crm1336.html. 351 Id.; DOJ–CPB at 3. 352 See Press Release, Office of the Vermont Attorney General, Western Union Enters Into Settlement With Attorneys General (Nov. 14, 2005), available at http://ago.vermont.gov/focus/news/ western-union-enters-into-settlement-withattorneys-general.php. A copy of the five-year, multi-state agreement is available on the Web site of the Office of the Iowa Attorney General at http://www.state.ia.us/government/ag/latest_news/ releases/nov_2005/Western_Union.html. E:\FR\FM\14DER3.SGM 14DER3 77548 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 consumers 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 353 See Press Release, Office of the Vermont Attorney General, Attorney General Announces $1.2 Million Settlement With MoneyGram (July 2, 2008), available at http://ago.vermont.gov/focus/news/ attorney-general-announces-1.2-million-settlementwith-moneygram.php. A copy of the five-year, multi-state agreement can be found on the Web site of the Texas Attorney General at http://www.oag. state.tx.us/newspubs/releases/2008/070208money gram_avc.pdf. 354 FTC v. MoneyGram Int’l, Inc., Civ. No. 1:09– 06576 (N.D. Ill. Oct. 19, 2009) (Stip. Perm. Inj.). 355 See Press Release, FTC, MoneyGram to Pay $18 Million to Settle FTC Charges That it Allowed its Money Transfer System To Be Used for Fraud (Oct. 20, 2009), available at http://www.ftc.gov/ news-events/press-releases/2009/10/moneygrampay-18-million-settle-ftc-charges-it-allowed-itsmoney. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 356 Stip. Order for Perm. Inj. and Final Judgment, filed in FTC v. MoneyGram, supra note 354. 357 See Press Release, FTC, FTC Mails Redress Checks to Fraud Victims Who Lost Money Through MoneyGram’s Money Transfer System (Apr. 28, 2010), available at http://www.ftc.gov/news-events/ press-releases/2010/04/ftc-mails-redress-checksfraud-victims-who-lost-money-through. 358 U.S. v. MoneyGram Int’l, Inc., Cr. No. 1:12– 291 (M.D. Pa. Nov. 9, 2012). 359 Statement of Facts, ¶ 18, filed in US v. MoneyGram, Cr. No. 1:12–291 (M.D. Pa. Nov. 9, 2012). 360 See Press Release, DOJ, supra note 350 (alleging, among other things, that MoneyGram failed to implement policies or procedures governing the termination of agents involved in fraud and/or money laundering; (2) failed to implement policies regarding the filing of the required Suspicious Activity Reports (SARs) when victims reported fraud to MoneyGram on transactions over $2,000; (3) failed to file SARs on agents MoneyGram knew were involved in the fraud; and (4) failed to conduct effective AML audits of or due diligence on its agents, prospective agents, and outlets). 361 Id. According to the Statement of Facts, MoneyGram has implemented a number of remedial actions, including the creation of an Anti-Fraud Alert System to identify and place on hold potentially fraudulent transactions. Statement of Facts, supra note 359, at ¶ 32f. 362 See supra note 348; DOJ-Criminal at 4; NCLC at 11–12; AFR at 1; see also Jorgen Wouters, Daily Finance, Beware of Green Dot MoneyPak Scams PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 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 fraudinduced 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 (June 23, 2011), available at http://www.daily finance.com/2011/06/23/beware-of-green-dotmoneypak-scams/ (article including statements of president and CEO of the BBB regarding the increase of frauds using cash reload mechanisms). 363 See, e.g., Written Statement of Green Dot, supra note 50, at 2; Testimony of Blackhawk Network, supra note 51, at 3; InComm Press Release, supra note 51. 364 Consumer Alert, Bill Schuette Attorney General, Green Dot MoneyPak Cards, available at http://www.michigan.gov/ag/0,4534,7-164-17337_ 20942-318482--,00.html. 365 Consumer Alert, Federal Reserve, $ Consumer Help (Dec. 11, 2013), available at https://www. federalreserveconsumerhelp.gov/. 366 Sue McConnell, BBB Consumer News and Opinion Blog: Cleveland Woman Loses Hundreds of Dollars to Government Grant Scam (Feb. 28, 2014), available at http://www.bbb.org/blog/2014/02/ cleveland-woman-loses-hundreds-of-dollars-togovernment-grant-scam/. 367 Press Release, FBI, Internal Revenue Service Telephone Scam (Sept. 29, 2014), available at https://www.fbi.gov/sandiego/press-releases/2014/ internal-revenue-service-telephone-scam; Press Release, FBI, U.S. Attorney’s Office Warns Public of Lottery Scam Telephone Calls (May 28, 2013), available at https://www.fbi.gov/minneapolis/pressreleases/2013/us-attorneys-office-warns-public-oflottery-scam-telephone-calls. 368 See supra notes 345–350 and accompanying text (describing law enforcement cases involving money transfers). 369 FTC, Consumer Sentinel Network Data Book for January–December 2014, at 8 & n.2 (Feb. 2015) (hereinafter ‘‘2014 Consumer Sentinel Network Data Book’’), available at https://www.ftc.gov/system/ E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 example, 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 files/documents/reports/consumer-sentinelnetwork-data-book-january-december-2014/ sentinel-cy2014-1.pdf. 370 Id. at 74. 371 Id. at 8–9. These figures include telemarketing and non-telemarketing complaints. 372 The 2014 Consumer Sentinel Network Data Book documented a total of $1,468,647,723 in injury from January 1, 2011 through December 31, 2014. Id. at 8 & n.2. 373 Id. at 8–9. These figures include telemarketing and non-telemarketing complaints. 374 NCLC at 12. 375 2014 Consumer Sentinel Network Data Book, supra note 369, at 8. 376 Id. at 8 n.2 & 74. 377 Written Statement of Green Dot Corporation, supra note 50, at 2. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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-tocash 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-tocash 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 378 NCLC at 12. NPRM, supra note 1, at 41213 (describing injury estimates from consumer complaint data and cases). 380 If the CFPB’s proposed Prepaid Account Rule is adopted, the protections of the EFTA and Regulation E would extend to registered cash reload mechanisms. See supra note 279. The Commission is aware of no state law providing chargeback rights for consumers using cash-to-cash money transfers or cash reload mechanisms. State laws governing money services businesses (‘‘MSBs’’), including the Texas statute highlighted in the comment submitted by InComm, typically mandate disclosures to consumers. InComm at 5 & n.2 (referencing a Texas statute, 7 TX ADC 33.51, which requires MSBs to provide consumers with customer service contact information, and information on how to file a complaint with the Texas Department of Banking if a complaint remains unresolved). 381 The BSA and related laws target terrorism financing, tax evasion, and money laundering activity. U.S. Department of Treasury, FinCEN, Statutes & Regulations: Bank Secrecy Act, available at http://www.fincen.gov/statutes_regs/bsa/. The Prepaid Access Rule amends the money services businesses rules of the BSA regulations to mandate similar reporting and transactional information collection requirements on providers and sellers of certain types of prepaid access, including some cash reload mechanisms that meet certain criteria. Final Rule; Bank Secrecy Act Regulations— Definitions and Other Regulations Relating to Prepaid Access, 76 FR 45403–02 (Jul. 29, 2011). In addition, state statutes provide licensing requirements for money transfer providers. See, e.g., Ariz. Rev. Stat. 6–1202 (licensing requirements for money transfer providers); Kan. Stat. Ann. 9–509 (same). Certain cash-to-cash money transfers (those made to locations outside of the U.S.) are governed by the Remittance Rule, which provides disclosures to customers of money transfer providers. 12 CFR 1005.30(e) (definition of ‘‘remittance transfer’’ includes transfers ‘‘sent by a remittance transfer provider’’ to a ‘‘designated recipient’’ outside of the 379 See PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 77549 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 cashto-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 United States). In contrast, cash reload mechanisms, which consumers purchase directly from a retailer at the point of sale, may not qualify as remittance transfers covered by the Remittance Rule, depending on whether cash reloads are transferring funds outside of the United States and whether the transfer is ‘‘sent by a remittance transfer provider.’’ Whether the Remittance Rule applies to a particular cash-to-cash money transfer or cash reload mechanism, however, is immaterial to the Commission’s analysis of the Final Rule. As discussed in section I.B.1.b above, existing laws regulate the relationship between the consumer and the money transfer provider, not the relationship between the consumer and the telemarketer or seller. See also, supra note 279 (discussing the CFPB’s Proposed Prepaid Account Rule). 382 See supra note 202 (citing cases deciding whether consumers’ injuries were reasonably avoidable). E:\FR\FM\14DER3.SGM 14DER3 77550 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 detection 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 383 See Neovi, supra note 202, at 1158 (‘‘Regardless of whether a bank eventually restored consumers’ money, the consumer suffered unavoidable injuries that could not be fully mitigated.’’). 384 TMSRT at 2 n.5 (noting that ‘‘consumers engage in cash-to-cash transfers with telemarketers despite explicit warnings not to do so.’’). 385 As Judge Easterbrook stated in Mayer v. Spanel Intern. Ltd., 51 F.3d 670, 675 (7th Cir. Mar. 31, 1995), ‘‘[t]olerating fraud by excusing deceit when the victim is too easily gulled increases . . . the volume of fraud’’). See also, FTC v. Crescent Pub. Group, Inc., 129 F.Supp.2d 311, 321 (S.D.N.Y. Jan. 24, 2001) (describing consumer reliance on express claims to be ‘‘presumptively reasonable,’’ and noting that ‘‘[i]n evaluating [the] tendency . . . to deceive, it is appropriate to look not at the most sophisticated, but the least sophisticated consumer.’’) (citations omitted). VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 386 Written Statement of Green Dot, supra note 50, at 2; see generally, Testimony of Blackhawk Network, supra note 51. 387 AARP at 2 (‘‘AARP studies have confirmed that education alone will not protect older people from telemarketing fraud. . . . ‘‘there is always a hard core of victims whose behavior cannot be changed by messages’’); see also Letter from the FTC to Hon. John D. Dingell, Chairman Committee on Energy and Commerce, United States House of Representatives, Commission Policy Statement on Deception, appended to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984) (‘‘When representations or sales practices are targeted to a specific audience, such as children, the elderly, or the terminally ill, the Commission determines the effect of the practice on a reasonable member of that group.’’). 388 ETA at 1 (‘‘The ETA submits that it is not the payment methods themselves that are fraudulent, but rather the actors that are attempting to sell goods and services in a fraudulent manner that constitute the real problem.’’); TMSRT at 2 (‘‘[T]he NPRM suggests that these payment methods themselves, rather than an abusive telemarketing practice are the problem.’’). 389 DOJ-Criminal at 3 & nn.9–13 (citing numerous cases brought by the Department of Justice); see supra note 350. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 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-tocash money transfers in telemarketing. Instead, representatives of the money transfer industry described the benefits that cash-to-cash money transfers provide to consumers in nontelemarketing 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, 390 See supra notes 227–233 and accompanying text (describing studies of consumer payment preferences and the rapid growth of prepaid cards). E:\FR\FM\14DER3.SGM 14DER3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations cash-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 391 TMSRT at 1. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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, 392 Id. at 3. At the same time, TMSRT maintains that money transfer providers ‘‘have taken steps to substantially reduce the amount of fraudulent activity that is occurring.’’ Id. at 5. 394 For example, in testimony to the U.S. Senate Special Committee on Aging, an official from Western Union explained how the company trains money transfer agents to help identify potential fraud victims, including ‘‘how to listen to consumers for verbal cues indicating fraudulent activity, look for body language that indicates nervousness or a sense of urgency, and ask questions to determine the consumer’s relationship with the receiver and reasons for sending the money.’’ Testimony of Mr. Phil Hopkins, Vice President Global Security, The Western Union Company, submitted to the United States Senate, Special Committee on Aging, at 4–5 (Mar. 13, 2013). http://www.aging.senate.gov/imo/media/doc/07_ Hopkins_3_13_13.pdf. According to the testimony, ‘‘[i]f an Agent suspects the transaction is fraudulent, the Agent is trained to refuse the transaction or report it to Western Union for further investigation.’’ Id. 395 Indeed, money transfer providers are required to implement an effective AML program, which is ‘‘reasonably designed to prevent the [money transfer provider] from being used to facilitate money laundering and the financing of terrorist activities,’’ and ‘‘shall be commensurate with the risks posed by the location and size of, and the nature and volume of the financial services provided by, the [money transfer provider].’’ FinCEN, Interpretive Release 2004–01: Anti-Money Laundering Program Requirements For Money Services Businesses with respect to Foreign Agents or Foreign Counterparties, 7 (2004) (citing 31 CFR 103.125). In addition, FinCEN has made clear that the AML programs of money transfer providers should, among other things, ‘‘establish procedures for conducting reasonable, risk-based due diligence on potential and existing foreign agents and counterparties to help ensure that such foreign agents and counterparties are not themselves complicit in illegal activity.’’ Id. at 9. This includes ‘‘establish[ing] procedures for risk-based monitoring and review of transactions’’ sufficient to ‘‘identify and, where appropriate, report as suspicious such 393 Id. PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 77551 two of the largest money transfer providers, MoneyGram and Western Union, have taken voluntary and courtmandated measures to improve their BSA and AML compliance, including their ability to identify and stop fraudinduced 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 occurrences as[] instances of unusual wire activity’’. Id. at 10. 396 See supra notes 352–361 and accompanying text discussing law enforcement cases against Western Union and MoneyGram. 397 TMSRT at 3. 398 Moreover, the prohibition will have no adverse impact on the industry’s potential implementation of a database of terminated agents. Id. at 7 (‘‘Facilitation of such a database will be instrumental in fighting telemarketing fraud and should be considered as an approach to addressing the issues raised in the rulemaking.’’). 399 Id. at 5. 400 See, e.g., Compliance Guide, FTC, Complying With the Telemarketing Sales Rule, available at http://www.ftc.gov/tips-advice/business-center/ complying-telemarketing-sales-rule; Business Guide, FTC, .com Disclosures: How to Make Effective Disclosures in Digital Advertising (March 2013), available at http://www.ftc.gov/system/files/ documents/plain-language/bus41-dot-comdisclosures-information-about-onlineadvertising.pdf. E:\FR\FM\14DER3.SGM 14DER3 77552 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations detect and deter fraud at the point-ofsale,’’ 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-tocash 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, DOJCriminal’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-tocash 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 401 See supra note 394. at 7. 403 See supra notes 354–355 and accompanying text. 404 The allegations and settlements reached by state attorneys general against Western Union are similarly instructive. See supra notes 352–353 and accompanying text. 405 See supra notes 350 and accompanying text. 406 The Commission also declines the requests of some commenters to impose strict liability on those cash-to-cash money transfer providers that, despite their best efforts to detect unlawful transactions, unwittingly transfer money in connection with telemarketing transactions. AFR at 1; NCLC at 13. mstockstill on DSK4VPTVN1PROD with RULES3 402 TMSRT VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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. 407 Written Statement of Green Dot, supra note 50, at 2; 2014 Consumer Sentinel Network Data Book, supra note 371, at 8. PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 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 408 Green Dot weighed the impact of its decision on ‘‘honest customers who routinely rely on the MoneyPak PIN method for adding money to a family member’s card’’ in determining to ‘‘eliminate the MoneyPak as an instrument of [fraud]’’). Written Statement of Green Dot, supra note 50, at 2. 409 According to the Web site www.moneypak.com (last visited April 8, 2015), ‘‘MoneyPak® is no longer available for purchase.’’ 410 Id. 411 InComm Press Release, supra note 51; Testimony of Blackhawk Network, supra note 51, at 3 & 5. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations telemarketing 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 nontelemarketing 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 412 InComm at 2; see Green Dot at 2. at 2–3; ETA at 1. The prohibition restricts a telemarketer or seller from accepting a cash reload mechanism as payment only ‘‘for goods or services offered or sold through telemarketing or as a charitable contribution solicited or sought through telemarketing’’). NPRM, supra note 1, at 41218. 414 Before the discontinuance of MoneyPak, Green Dot established ‘‘authorized biller relationships’’ permitting consumers to use a cash reload mechanism to legitimately pay existing bills without having to first load the funds onto an existing GPR card or into an account with an online payment intermediary. It appears that no other cash reload providers currently have established such authorized biller relationships. For example, consumers cannot redeem a Vanilla Reload Pack directly with a biller or e-commerce merchant. Instead, consumer must use Vanilla Bill Payment, which is a single-use prepaid card that can be used to make purchases or pay bills wherever MasterCard or Visa are accepted. See, InComm, Vanilla Bill Pay: Important Things to Know, available at https://www.vanillabillpay.com/ product.html (follow link to Vanilla Visa Web page and click on ‘‘Click here to learn more about your Vanilla Bill Payment Prepaid Visa®’’) (last visited February 12, 2015). Similarly, Blackhawk’s Reloadit Pack can be used only to reload an existing GPR or a Reloadit Safe (an online account balance). See, Blackhawk Network, Inc., Reloadit: How it Works, available at https://www.reloadit.com/HowItWorks (last visited February 11, 2015). For these reasons, the Commission is unpersuaded that the prohibition against cash reload mechanisms in telemarketing will have any adverse effect on consumers’ ability to pay billers and utility companies. mstockstill on DSK4VPTVN1PROD with RULES3 413 InComm VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 still necessary. Thus, any adverse effect of the TSR’s prohibition against cash reload mechanisms on their use in nontelemarketing 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, singleuse 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 (PINbased) 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 415 See supra notes 32 & 36 (describing how merchants accepting network-branded debit cards, including prepaid cards, are subject to the operating rules and anti-fraud monitoring of the payment card networks) and 178 (describing the voluntary zero liability protections afforded consumers in signature debit card transactions). In addition, the CFPB’s proposed Prepaid Account Rule may extend to GPR cards the protections of the EFTA and Regulation E. See Prepaid Account Rule, supra note 36. 416 Green Dot at 2; InComm at 4; ETA at 1. PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 77553 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-tocash 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 nontelemarketing 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 417 Green 418 Green E:\FR\FM\14DER3.SGM Dot at 2; InComm at 2–3. Dot at 2. 14DER3 mstockstill on DSK4VPTVN1PROD with RULES3 77554 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations pay 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 419 Similarly, the prohibition does not apply to payments made from a digital wallet or safe, regardless of whether they were deposited by means of a swipe reload or PIN-based cash reload mechanism. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 noncompliance 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 nontelemarketing 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 420 16 CFR 310.4(a)(3). supra note 1, at 41215. 422 AARP at 1 (‘‘AARP strongly supports the FTC proposal[ ] to . . . expand the scope of the advance fee ban on recovery services’’); AFR at 2 (‘‘We support the proposal to ban advance fees charged for purported help in recovering losses in connection with prior internet scams’’); AGO at 12 (expressing support for ‘‘broadening the ban on telemarketing recovery services to include losses incurred in any medium’’); DOJ–CPB at 3–4 (‘‘The goal of this specific provision is to protect consumers from the deceptive acts of recovery services, not the underlying business from which the consumer lost money. Thus, whether the underlying business acted through telemarketing is irrelevant.’’); DOJ-Criminal at 4 (‘‘Because massmarketing fraud techniques have changed over time, there is no substantial reason that the TSR’s scope should be limited only to recovery schemes that claim to recover funds lost in a previous telemarketing transaction.’’); Michael (stating that recovery companies ‘‘prey on victims of work-athome and other similar companies who have been defrauded for thousands of dollars and are looking for a place to turn.’’); NCLC at 15 (‘‘There is no reason to make a distinction based on the circumstances of the [original] loss.’’); see generally Transp. FCU. 421 NPRM, PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 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 423 U.S. v. Bus. Recovery Servs., LLC, Civ. No. 11– 00390–JAT (D. Ariz. Sept. 13, 2013) (Stip. Perm. Inj.); DOJ–CPB at 4–5; Press Release, FTC, FTC Settlement and Default Judgment Impose Permanent Ban on Marketers of Scam ‘Recovery’ Kits (Nov. 20, 2013), available at http://www.ftc. gov/news-events/press-releases/2013/11/ftcsettlement-default-judgment-impose-permanentban-marketers. 424 DOJ–CPB at 4. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations customer, 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 mstockstill on DSK4VPTVN1PROD with RULES3 425 NPRM, supra note 1, at 41217. 426 Transp. FCU at 1; DOJ-Criminal at 5; AGO at 12; AARP at 1–2; NCLC at 15–16. The latter two comments, while supporting the amendment, also argued for a recording of the entire telemarketing call, a proposal that would require a separate rulemaking proceeding. 427 Section 310.3(a)(3) prohibits sellers and telemarketers from billing for telemarketing purchases or donations without a customer’s or donor’s ‘‘express verifiable authorization,’’ if payment is not made by credit or debit card. 428 16 CFR 310.3(a)(3)(ii). The new mandate of an accurate description of the goods or services or charitable contribution will be added to the list of required disclosures identified in § 310.3(a)(3)(ii)(A). The six original disclosures the seller or telemarketer has been required to make and include in the recording by § 310.3(a)(3)(ii)(A)– (G) will be renumbered as § 310.3(a)(3)(ii)(B)–(H). These disclosures are the number of debits, charges or payments (if more than one); the date(s) the debit(s), charge(s), or payment(s) will be submitted VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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-tobusiness 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 for payment; the amount(s) of the debit(s), charges(s), or payment(s); the customer’s or donor’s name; the customer’s or donor’s billing information identified with sufficient specificity that the customer or donor understands what account will be used to collect payment for the goods or services or charitable contribution that are the subject of the telemarketing transaction; a telephone number for customer or donor inquiry that is answered during normal business hours; and the date of the customer’s or donor’s oral authorization. 429 As the Commission noted in the NPRM, ‘‘it is difficult to imagine how a verification recording could ‘evidence clearly’ a payment authorization ‘for the goods or services or charitable contribution that are the subject of the telemarketing transaction’ without mentioning the goods, services, or charitable contribution.’’ 78 FR at 41217 & n. 182 (citing cases alleging material changes or complete omissions in verification recordings of the pre-sale descriptions of the goods or services). 430 Id. 431 AFR at 2; NCLC at 16; AGO at 12; DOJ–CPB at 1; DOJ-Criminal at 1; cf. Blue Diamond Remodeling at 1 (complaining that its business has been ‘‘flooded by telemarketer calls for years’’). 432 InfoCision at 4–5. 433 16 CFR 310.6(b)(7) (emphasis added). PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 77555 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 434 Id.; see also TSR Final Rule 1995, supra note 8, at 43861 (discussing the exemption and noting that cleaning and office supply scams are not included in the exemption because ‘‘such telemarketing falls within the Commission’s definition of deceptive telemarketing acts or practices’’). Contrary to an additional objection on First Amendment grounds, InfoCision at 4–6, it remains the Commission’s opinion that telemarketing calls made to business telephone numbers to solicit individual employees at work can be deceptive, and therefore are properly subject to the limited commercial speech restrictions of the TSR. 435 NPRM, supra note 8, at 41219 (mentioning solicitations to employees at work for dietary products, auto warranties, and credit assistance). E:\FR\FM\14DER3.SGM 14DER3 77556 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 telemarketing 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 doat 41218–19. at 2; NCLC at 16; AGO at 12; DOJ–CPB at 4 (citing legal principles and case law assigning the burden to the seller or telemarketer). 438 InfoCision at 4. 439 NPRM, supra note 1, at 41218. 440 Id. at 41219. 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 436 Id. 437 AFR VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 441 Id. at 41218. FCU; AFR at 2; NCLC at 16; AGO at 12; DOJ–CPB at 1; DOJ-Criminal at 1. 443 See NPRM, supra note 1, at 41218. 444 DOJ-Criminal at 1. 445 See NPRM, supra note 1, at 41200. 442 Transp. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 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 446 AFR at 2; NCLC at 16; AGO at 12; DOJ–CPB at 1; DOJ-Criminal at 1. 447 Telemarketing Sales Rule Fees, 68 FR 45134, 45136 nn.29–30 (July 31, 2003) (citing 47 CFR 64.1200(c)(2)(i)(E), as amended July 3, 2003)). The prohibition is necessary because ‘‘allowing telemarketers and others to share the information obtained from the national registry would threaten the financial support for maintaining the database.’’ Id. at 45136. 448 See NPRM, supra note 1, at 41220. 449 5 U.S.C. 601–612. 450 The RFA definition of ‘‘small entity’’ refers to the definition provided in the Small Business Act, which defines a ‘‘small-business concern’’ as a business that is ‘‘independently owned and operated and which is not dominant in its field of operation.’’ 15 U.S.C. 632(a)(1). 451 5 U.S.C. 603. 452 5 U.S.C. 604. 453 5 U.S.C. 605. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations action 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. mstockstill on DSK4VPTVN1PROD with RULES3 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 454 See also supra note 220; InfoCision at 2; FRBA–1 at 3. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 455 16 CFR 310.2(dd). The Commission notes that, as mandated by the Telemarketing Act, the interstate telephone call requirement in the definition excludes small business sellers and the telemarketers who serve them in their local market area, but may not exclude some sellers and telemarketers in multi-state metropolitan markets, such as Washington, DC. 456 These numbers represent the size standards for most sellers in retail and service industries ($7 million total receipts). The standard for ‘‘Telemarketing Bureaus and Other Contact Centers’’ (NAICS Code 561422) is also $7 million. A list of the SBA’s current size standards for all industries can be found in SBA, Table of Small Business Size Standards Matched to North American Industry Classification System Codes, available at http://www.sba.gov/sites/default/files/ files/Size_Standards_Table.pdf. PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 77557 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 entityspecific 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 E:\FR\FM\14DER3.SGM 14DER3 77558 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 created 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 noncompliance 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 entityspecific 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 457 44 U.S.C. 3501–3521. The PRA also addresses reporting requirements, but neither the TSR nor the amendments present them. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 noncompliance 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. List of Subjects in 16 CFR Part 310 Telemarketing, Trade practices. For the reasons set forth in the preamble, the Federal Trade Commission amends title 16 Code of Federal Regulations as follows: PART 310—TELEMARKETING SALES RULE 16 CFR PART 310 1. The authority citation for part 310 continues to read as follows: ■ Authority: 15 U.S.C. 6101–6108. 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: ■ § 310.2 Definitions. * * * * * (f) Cash-to-cash money transfer means the electronic (as defined in section 106(2) of the Electronic Signatures in Global and National Commerce Act (15 U.S.C. 7006(2)) transfer of the value of cash received from one person to 458 16 CFR 310.6(b)(5)–(6). though some sellers and telemarketers, in order to prove that they are eligible for the safe harbor, might seek to document the fact that they have honored such requests, neither the amendment nor the TSR requires them to do so. 459 Even PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 another person in a different location that is sent by a money transfer provider and received in the form of cash. For purposes of this definition, money transfer provider means any person or financial institution that provides cashto-cash money transfers for a person in the normal course of its business, whether or not the person holds an account with such person or financial institution. The term cash-to-cash money transfer includes a remittance transfer, as defined in section 919(g)(2) of the Electronic Fund Transfer Act (‘‘EFTA’’), 15 U.S.C. 1693a, that is a cash-to-cash transaction; however it does not include any transaction that is: (1) An electronic fund transfer as defined in section 903 of the EFTA; (2) Covered by Regulation E, 12 CFR 1005.20, pertaining to gift cards; or (3) Subject to the Truth in Lending Act, 15 U.S.C. 1601 et seq. (g) Cash reload mechanism is a device, authorization code, personal identification number, or other security measure that makes it possible for a person to convert cash into an electronic (as defined in section 106(2) of the Electronic Signatures in Global and National Commerce Act (15 U.S.C. 7006(2)) form that can be used to add funds to a general-use prepaid card, as defined in Regulation E, 12 CFR 1005.2, or an account with a payment intermediary. For purposes of this definition, a cash reload mechanism is not itself a general-use prepaid debit card or a swipe reload process or similar method in which funds are added directly onto a person’s own general-use prepaid card or account with a payment intermediary. * * * * * (cc) Remotely created payment order means any payment instruction or order drawn on a person’s account that is created by the payee or the payee’s agent and deposited into or cleared through the check clearing system. 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 (ACH) Network or subject to the Truth in Lending Act, 15 U.S.C. 1601 et seq., and Regulation Z, 12 CFR part 1026. * * * * * 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: ■ E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations § 310.3 Deceptive telemarketing acts or practices. (a) * * * (3) * * * (ii) * * * (A) An accurate description, clearly and conspicuously stated, of the goods or services or charitable contribution for which payment authorization is sought; * * * * * ■ 4. Amend § 310.4 by: ■ a. Revising paragraph (a)(3); ■ b. Effective June 13, 2016, amending paragraph (a)(7)(ii)(B) by removing ‘‘or’’ from the end of the paragraph; ■ c. Effective June 13, 2016, amending paragraph (a)(8) by removing the final period and adding a semicolon in its place. ■ d. Effective June 13, 2016, adding paragraphs (a)(9) and (10); ■ e. Revising paragraphs (b)(1)(ii), (b)(1)(iii)(B), and (b)(3)(vi); The revisions and additions read as follows: mstockstill on DSK4VPTVN1PROD with RULES3 § 310.4 Abusive telemarketing acts or practices. (a) * * * (3) Requesting or receiving payment of any fee or consideration from a person for goods or services represented to recover or otherwise assist in the return of money or any other item of value paid for by, or promised to, that person in a previous transaction, until seven (7) business days after such money or other item is delivered to that person. This provision shall not apply to goods or services provided to a person by a licensed attorney; * * * * * (9) Creating or causing 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; or (10) Accepting from a customer or donor, directly or indirectly, a cash-tocash 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. (b) * * * (1) * * * (ii) Denying or interfering in any way, directly or indirectly, with a person’s right to be placed on any registry of names and/or telephone numbers of persons who do not wish to receive outbound telephone calls established to comply with paragraph (b)(1)(iii)(A) of this section, including, but not limited to, harassing any person who makes VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 such a request; hanging up on that person; failing to honor the request; requiring the person to listen to a sales pitch before accepting the request; assessing a charge or fee for honoring the request; requiring a person to call a different number to submit the request; and requiring the person to identify the seller making the call or on whose behalf the call is made; (iii) * * * (B) That person’s telephone number is on the ‘‘do-not-call’’ registry, maintained by the Commission, of persons who do not wish to receive outbound telephone calls to induce the purchase of goods or services unless the seller or telemarketer: (1) Can demonstrate that the seller has obtained the express agreement, in writing, of such person to place calls to that person. Such written agreement shall clearly evidence such person’s authorization that calls made by or on behalf of a specific party may be placed to that person, and shall include the telephone number to which the calls may be placed and the signature 664 of that person; or (2) Can demonstrate that the seller has an established business relationship with such person, and that person has not stated that he or she does not wish to receive outbound telephone calls under paragraph (b)(1)(iii)(A) of this section; or * * * * * (3) * * * (vi) Any subsequent call otherwise violating paragraph (b)(1)(ii) or (iii) of this section is the result of error and not of failure to obtain any information necessary to comply with a request pursuant to paragraph (b)(1)(iii)(A) of this section not to receive further calls by or on behalf of a seller or charitable organization. * * * * * ■ 5. Amend § 310.6 by revising paragraphs (b)(5) through (7) to read as follows: § 310.6 Exemptions. * * * * * (b) * * * (5) Telephone calls initiated by a customer or donor in response to an advertisement through any medium, other than direct mail solicitation, provided, however, that this exemption does not apply to: (i) Calls initiated by a customer or donor in response to an advertisement 664 For purposes of this Rule, the term ‘‘signature’’ shall include an electronic or digital form of signature, to the extent that such form of signature is recognized as a valid signature under applicable federal law or state contract law. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 77559 relating to investment opportunities, debt relief services, business opportunities other than business arrangements covered by the Franchise Rule or Business Opportunity Rule, or advertisements involving offers for goods or services described in § 310.3(a)(1)(vi) or § 310.4(a)(2) through (4); (ii) [Reserved] (iii) Any instances of upselling included in such telephone calls; (6) Telephone calls initiated by a customer or donor in response to a direct mail solicitation, including solicitations via the U.S. Postal Service, facsimile transmission, electronic mail, and other similar methods of delivery in which a solicitation is directed to specific address(es) or person(s), that clearly, conspicuously, and truthfully discloses all material information listed in § 310.3(a)(1), for any goods or services offered in the direct mail solicitation, and that contains no material misrepresentation regarding any item contained in § 310.3(d) for any requested charitable contribution; provided, however, that this exemption does not apply to: (i) Calls initiated by a customer in response to a direct mail solicitation relating to prize promotions, investment opportunities, debt relief services, business opportunities other than business arrangements covered by the Franchise Rule or Business Opportunity Rule, or goods or services described in § 310.3(a)(1)(vi) or § 310.4(a)(2) through (4); (ii) [Reserved] (iii) Any instances of upselling included in such telephone calls; and (7) Telephone calls between a telemarketer and any business to induce the purchase of goods or services or a charitable contribution by the business, except calls to induce the retail sale of nondurable office or cleaning supplies; provided, however, that §§ 310.4(b)(1)(iii)(B) and 310.5 shall not apply to sellers or telemarketers of nondurable office or cleaning supplies. ■ 6. Effective June 13, 2016, § 310.6 is further amended by adding paragraphs (b)(5)(ii) and (b)(6)(ii) to read as follows: § 310.6 Exemptions. * * * * * (b) * * * (5) * * * (ii) The requirements of § 310.4(a)(9) or (10); or * * * * * (6) (ii) The requirements of § 310.4(a)(9) or (10); or * * * * * E:\FR\FM\14DER3.SGM 14DER3 77560 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations ■ 7. Amend § 310.8 by revising paragraph (c) to read as follows: § 310.8 Fee for access to the National Do Not Call Registry. * * * * * (c) The annual fee, which must be paid by any person prior to obtaining access to the National Do Not Call Registry, is $60 for each area code of data accessed, up to a maximum of $16,482; provided, however, that there shall be no charge to any person for accessing the first five area codes of data, and provided further, that there shall be no charge to any person engaging in or causing others to engage in outbound telephone calls to consumers and who is accessing area codes of data in the National Do Not Call Registry if the person is permitted to access, but is not required to access, the National Do Not Call Registry under this Rule, 47 CFR 64.1200, or any other Federal regulation or law. 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. * * * * * By direction of the Commission, Commissioner Ohlhausen dissenting. Donald S. Clark, Secretary. mstockstill on DSK4VPTVN1PROD with RULES3 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 nonconventional 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 1 This statement reflects the views of Chairwoman Ramirez, Commissioner Brill, and Commissioner McSweeny. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 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 2 The Commission received comments in support of the proposed TSR amendments from the following federal and state agencies: Consumer Protection Branch, U.S. Department of Justice; Criminal Division, U.S. Department of Justice; Consumer Financial Protection Bureau; and the Offices of Attorneys General in 24 states and the District of Columbia. PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 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 3 See Press Release, InComm, InComm Expands Vanilla Reload Network, Plans to Add Swipe Reload at Over 15,000 More Retail Locations: InComm removes reload packs from stores to help prevent victim assisted fraud (Oct. 24, 2014), available at http://www.incomm.com/news-events/ Pages/Press%20Releases/InComm-ExpandsVanilla-Reload-Network-Plans-to-Add-SwipeReload-to-Over-15000-More-Retail-Locations.aspx (describing InComm’s plans to add over 15,000 swipe reload locations to its network to help eliminate fraud perpetrated through the use of reload packs); Testimony of William Tauscher Chairman and Chief Executive Officer Blackhawk Network Holdings, Inc. Before United States Senate Special Committee on Aging Hearing ‘‘Private Industry’s Role in Stemming the Tide of Phone Scams,’’ at 3 (Nov. 19, 2014), available at http:// www.aging.senate.gov/imo/media/doc/Tauscher_ 11_19_14.pdf (describing Blackhawk’s enhancements to its reload options for its Reloadit Pack product to combat fraud). 4 Payment processors and their financial institutions already must comply with the Bank Secrecy Act and associated anti-money laundering laws and regulations which require initial and ongoing customer due diligence. See 12 U.S.C. 1829b, 12 U.S.C. 1951–1959, 18 U.S.C. 1956–1957 & 1960, 31 U.S.C. 5311–5314 and 5316–5332, with implementing regulations at 31 CFR Ch. X. These obligations require banks to understand and monitor the business of their merchant and merchant processor customers. 1 These amendments make several clarifications of the existing rule, which I support. Additionally, I support the amendment’s expansion of the prohibition against advanced fees for all recovery services, regardless of whether the original loss resulted from a telemarketing transaction. E:\FR\FM\14DER3.SGM 14DER3 Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Rules and Regulations Section 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 mstockstill on DSK4VPTVN1PROD with RULES3 2 15 U.S.C. 45(n) (prohibiting acts or practices that cause or are likely to cause substantial injury to consumers, which are not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition). 3 The FRBA operates the Federal Reserve System’s Retail Payments Product Office, which manages and oversees the check and Automated Clearing House (ACH) services that the Federal Reserve banks provide to U.S. financial institutions. VerDate Sep<11>2014 18:39 Dec 11, 2015 Jkt 238001 77561 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. 4 Comments of Federal Reserve Bank of Atlanta, at 2 (Aug. 8, 2013), https://www.ftc.gov/policy/ public-comments/comment-00031-1. 5 Id. 6 Id. at 3. 7 Id. at 4. [FR Doc. 2015–30761 Filed 12–11–15; 8:45 am] PO 00000 Frm 00043 Fmt 4701 Sfmt 9990 BILLING CODE 6750–01–P 8 Id. 9 Id. E:\FR\FM\14DER3.SGM 14DER3

Agencies

[Federal Register Volume 80, Number 239 (Monday, December 14, 2015)]
[Rules and Regulations]
[Pages 77519-77561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-30761]



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Vol. 80

Monday,

No. 239

December 14, 2015

Part III





Federal Trade Commission





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16 CFR Part 310





Telemarketing Sales Rule; Final Rule

Federal Register / Vol. 80 , No. 239 / Monday, December 14, 2015 / 
Rules and Regulations

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FEDERAL TRADE COMMISSION

16 CFR Part 310

RIN 3084-AB19


Telemarketing Sales Rule

AGENCY: Federal Trade Commission.

ACTION: Final rule.

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

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

ADDRESSES: This document is available on the Internet at the 
Commission's Web site at www.ftc.gov. The complete record of this 
proceeding, including the final amendments to the TSR and the Statement 
of Basis and Purpose (``SBP''), is available at www.ftc.gov.

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

SUPPLEMENTARY INFORMATION: This document states the basis and purpose 
for the Commission's decision to adopt amendments to the TSR that were 
proposed and published for public comment in the Federal Register on 
July 9, 2013.\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.
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    \1\ Telemarketing Sales Rule Notice of Proposed Rulemaking, 78 
FR 41200 (July 9, 2013) (hereinafter NPRM). The text of the TSR is 
set forth at 16 CFR part 310. Unless stated otherwise, references to 
specific provisions of the TSR refer to the current version of the 
Rule published in the Code of Federal Regulations, revised as of 
January 1, 2015.
    \2\ All of the public comments are available at http://ftc.gov/os/comments/tsrantifraudnprm/index.shtm. In addition, a list of 
commenters cited in this SBP, along with their short citation names 
or acronyms used throughout the SBP, is attached as Appendix A. 
Where a commenter submitted more than one comment, the comment is 
identified separately.
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    Beginning on February 12, 2016, sellers and telemarketers will be 
required to comply with the amended TSR requirements, except for Sec.  
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\
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    \3\ 15 U.S.C. 6101-6108. Subsequently, the USA PATRIOT Act, 
Public Law 107-56, 115 Stat. 272 (Oct. 26, 2001), expanded the 
Telemarketing Act's definition of ``telemarketing'' to encompass 
calls soliciting charitable contributions, donations, or gifts of 
money or any other thing of value.
    \4\ Other statutes enacted by Congress to address telemarketing 
fraud during the early 1990's include the Telephone Consumer 
Protection Act of 1991, 47 U.S.C. 227 et seq., which restricts the 
use of automated dialers, bans the sending of unsolicited commercial 
facsimile transmissions, and directs the Federal Communications 
Commission (``FCC'') to explore ways to protect residential 
telephone subscribers' privacy rights; and the Senior Citizens 
Against Marketing Scams Act of 1994, 18 U.S.C. 2325 et seq., which 
provides for enhanced prison sentences for certain telemarketing-
related crimes.
    \5\ 15 U.S.C. 6102(a).
    \6\ 15 U.S.C. 6102(a)(3).
    \7\ 15 U.S.C. 6103, 6104.
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    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\
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    \8\ Telemarketing Sales Rule Statement of Basis and Purpose and 
Final Rule, 60 FR 43842 (Aug. 23, 1995) (hereinafter TSR Final Rule 
1995); Amended Telemarketing Sales Rule Statement of Basis and 
Purpose, 68 FR 4580 (Jan. 29, 2003) (hereinafter TSR Amended Rule 
2003); Amended Telemarketing Sales Rule Statement of Basis and 
Purpose, 73 FR 51164 (Aug. 29, 2008) (hereinafter TSR Amended Rule 
2008); Amended Telemarketing Sales Rule Statement of Basis and 
Purpose, 75 FR 48458 (Aug. 10, 2010) (hereinafter TSR Amended Rule 
2010).
    \9\ 16 CFR 310.2(cc) (using the same definition as the 
Telemarketing Act, 15 U.S.C. 6106).
    \10\ 15 U.S.C. 6105(b).
    \11\ 15 U.S.C. 45(a)(2) (setting forth certain limitations to 
the Commission's jurisdiction with regard to its authority to 
prohibit unfair or deceptive acts or practices). These entities 
include banks, savings and loan institutions, and certain federal 
credit unions. It should be noted, however, that although the 
Commission's jurisdiction is limited with respect to the entities 
exempted by the FTC Act, the Commission has made clear that the Rule 
does apply to any third-party telemarketers those entities might use 
to conduct telemarketing activities on their behalf. See TSR 
Proposed Rule, 67 FR 4492, 4497 (Jan. 30, 2002) (citing TSR Final 
Rule 1995, 60 FR 43843) (``As the Commission stated when it 
promulgated the Rule, `[t]he Final Rule does not include special 
provisions regarding exemptions of parties acting on behalf of 
exempt organizations; where such a company would be subject to the 
FTC Act, it would be subject to the Final Rule as well.''').
    \12\ For example, Sec.  310.6(a) exempts telemarketing calls to 
induce charitable contributions from the Do Not Call Registry 
provisions of the Rule, but not from the Rule's other requirements. 
In addition, there are exceptions to some exemptions that limit 
their reach. See, e.g., 16 CFR 310.6(b)(5)-(6).
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    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

[[Page 77521]]

to obtain consumers' ``express informed consent'' to be charged on a 
particular account before billing or collecting payment and, through a 
specified process, to obtain consumers' ``express verifiable 
authorization'' to be billed through any payment system other than a 
credit or debit card.\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\
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    \13\ The TSR requires that telemarketers soliciting sales of 
goods or services promptly disclose several key pieces of 
information: (1) The identity of the seller; (2) the fact that the 
purpose of the call is to sell goods or services; (3) the nature of 
the goods or services being offered; and (4) in the case of prize 
promotions, that no purchase or payment is necessary to win. 16 CFR 
310.4(d). Telemarketers also must disclose, in any telephone sales 
call, the cost of the goods or services and certain other material 
information. 16 CFR 310.3(a)(1).
     In addition, the TSR prohibits misrepresentations about, among 
other things, the cost and quantity of the offered goods or 
services. 16 CFR 310.3(a)(2). It also prohibits making false or 
misleading statements to induce any person to pay for goods or 
services or to induce charitable contributions. 16 CFR 310.3(a)(4).
    \14\ 16 CFR 310.4(a)(7); 16 CFR 310.3(a)(3).
    \15\ 16 CFR 310.4(a)(2).
    \16\ 16 CFR 310.4(a)(3).
    \17\ 16 CFR 310.4(a)(4).
    \18\ 16 CFR 310.4(a)(5).
    \19\ 16 CFR 310.3(c).
    \20\ 16 CFR 310.3(b).
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    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\
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    \21\ 16 CFR 310.4(b).
    \22\ 16 CFR 310.4(a)(8).
    \23\ 16 CFR 310.4(b)(1)(iv).
    \24\ 16 CFR 310.4(b)(1)(v).
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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 Sec.  
310.4(b)(1)(ii) disqualifies it from relying on the safe harbor for 
isolated or inadvertent violations in Sec.  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\
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    \25\ NPRM, supra note 1, at 41200.
    \26\ Id. at 41202-07.
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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

[[Page 77522]]

traditional paper checks and remotely created checks.
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    \27\ For the reasons raised by certain commenters, and discussed 
in detail in Section II.A.4 below, the Final Rule adopts a revised 
definition of ``remotely created payment order'' that deletes the 
reference to the absence of the payor's signature and eliminates the 
need for a separate definition of ``remotely created check.'' The 
revised definition of ``remotely created payment order'' includes 
any payment instruction or order drawn on a person's account that is 
created by the payee and deposited into or cleared through the check 
clearing system. The definition is broad enough to include a 
``remotely created check,'' as defined in Regulation CC.
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    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\
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    \28\ ACH transactions are electronic payment instructions to 
either credit or debit a bank account. ACH credit transactions push 
funds into an account, while ACH debit transactions pull funds from 
an account. NACHA, What is ACH?: Quick Facts About the Automated 
Clearing House (ACH) Network (Jul. 1, 2013), available at https://www.nacha.org/news/what-ach-quick-facts-about-automated-clearing-house-ach-network. ACH credits include payroll direct deposits, 
Social Security benefits, and interest payments. Examples of ACH 
debit transactions include mortgage, loan, and insurance premium 
payments. FFIEC, Bank Secrecy Act/Anti-Money Laundering Examination 
Manual, Automated Clearing House Transactions--Overview 217 (Feb. 
27, 2015), available at http://www.ffiec.gov/bsa_aml_infobase/pages_manual/olm_059.htm.
    \29\ Unlike most general-purpose reloadable cards and other 
prepaid cards, traditional debit cards (also referred to as ``check 
cards'') are linked to consumer checking accounts at a financial 
institution. See infra notes 176-178; Electronic Funds Transfer Act 
(``EFTA''), 15 U.S.C. 1693; Regulation E, 12 CFR part 1005.
    \30\ NACHA, 2013 Operating Rules, Art. 2, Subsection 2.17.2.1, 
Additional ODFI Action and Reporting When the Return Threshold is 
Exceeded (Mar. 15, 2013) (describing the actions that originating 
financial institutions (``ODFIs'') must take when an originator's 
unauthorized return rate exceeds 1 percent).
    \31\ In September 2015, amendments to NACHA's Operating Rules 
will take effect. Among other things, these amendments reduce the 
threshold for unauthorized returns from one percent to 0.5 percent. 
Press Release, NACHA, NACHA Membership Approves New Rules to Further 
Improve ACH Network Quality (Aug. 26, 2014), available at https://www.nacha.org/rules/updates. NACHA also adopted new monthly return 
rate thresholds for other types of ACH debit returns, including a 
three percent threshold for returns based on ``account data issues'' 
(i.e., debits returned for invalid account numbers or an inability 
to locate the account) and a total return rate of 15 percent.
---------------------------------------------------------------------------

    Likewise, the payment card networks, such as American Express, 
Discover, MasterCard, and Visa, impose on participants (e.g., 
merchants, banks, and third party payment processors) a system of 
rules, monitoring, and penalties for noncompliance. Transactions 
processed through the payment card networks, including certain types of 
debit and general-purpose reloadable debit card (``GPR card'') 
transactions, are subject to systemic monitoring to identify unusual 
activity associated with fraud.\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\
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    \32\ Network-branded debit cards and GPR cards can be used like 
credit cards to make purchases at a variety of stores, online, or 
over the telephone. These so-called ``signature'' debit card 
purchases (i.e., without the use of a PIN) are processed through 
and, thus, subject to the operating rules and anti-fraud monitoring 
of the payment card networks.
    \33\ ``Chargeback'' is a payments industry term used to describe 
the process through which a disputed charge to a consumer's credit 
card is refunded to the consumer and charged back to the entity, 
often a merchant, that placed the charge on the consumer's account. 
See NPRM, supra note 1, at 41203 & nn.47-48.
    \34\ For example, Visa's operating rules state:
    Visa monitors the total volume of US Domestic Interchange, 
International Interchange, and Chargebacks for a single Merchant 
Outlet and identifies US Merchants that experience all of the 
following activity levels during any month:
     100 or more interchange transactions
     100 or more Chargebacks
     A 1% or higher ratio of overall Chargeback-to-
Interchange volume
    Visa, U.S.A, Visa Core Rules and Visa Product Service Rules, 500 
(Apr. 15, 2015), available at https://usa.visa.com/dam/VCOM/download/about-visa/15-April-2015-Visa-Rules-Public.pdf. MasterCard 
maintains similar, but not identical, thresholds for its excessive 
chargeback monitoring programs (at least 100 chargebacks and a 
chargeback ratio of 1.5 percent). MasterCard, Security Rules and 
Procedures--Merchant Edition, 54 (Feb. 5, 2015), available at http://www.mastercard.com/us/merchant/pdf/SPME-Entire_Manual_public.pdf.
---------------------------------------------------------------------------

    In contrast to the transactions processed by the ACH and payment 
card networks, remotely created checks and remotely created payment 
orders are not subject to such centralized and systemic monitoring. 
This is due to the decentralized nature of the check clearing system 
and the inability of banks to distinguish these items from other checks 
deposited for clearing.\35\
---------------------------------------------------------------------------

    \35\ NPRM, supra note 1, at 41206-07.
---------------------------------------------------------------------------

    In addition to these operational differences between conventional 
and novel payment mechanisms, different laws govern each type of 
payment. As described in detail in section II.A.3.a(3) below, 
electronic fund transfers such as ACH debits and traditional debit card 
transactions are governed by Regulation E and the EFTA, which provide 
consumers with specific rights, including liability limits for 
unauthorized transactions, the right to a prompt re-credit of funds, 
specified deadlines for completing investigations of unauthorized 
transactions, and the right to notification of the results of such 
investigations.\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\
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    \36\ See infra notes 176-178; EFTA, 15 U.S.C. 1693; Regulation 
E, 12 CFR part 1005. With certain exceptions, most GPR cards are not 
subject to the EFTA or Regulation E. However, payment card networks 
voluntarily extend their same zero liability protection to GPR 
purchases as they apply to credit and traditional debit cards 
processed through their networks. Federal Reserve Bank of Atlanta, 
Retail Payments Risk Forum, Dispelling prepaid card myths: Not all 
cards are created equal (July 5, 2011), available at http://portalsandrails.frbatlanta.org/2011/07/dispelling-prepaid-card-myths-not-all-cards-created-equal.html; see also infra note 178. The 
CFPB recently published a proposed rule that would extend to 
``prepaid accounts,'' including GPR cards, the protections of 
Regulation E and the EFTA, with certain important modifications. 
Notice of Proposed Rulemaking Prepaid Accounts Under the Electronic 
Fund Transfer Act (Regulation E) and the Truth in Lending Act 
(Regulation Z) (hereinafter ``Prepaid Account Rule''), 79 FR 77102 
(Dec. 23, 2014). At this time, the CFPB has not taken further action 
on the proposal.
    \37\ 15 U.S.C. 1693g.
    \38\ See supra notes 30-31.
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    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

[[Page 77523]]

and Regulation E. These rights include error and dispute resolution 
rights, as well as limited liability for unauthorized transactions. In 
addition, consumers are protected by the operators of the payment card 
networks that enforce compliance with operating rules designed to 
detect and deter fraud.\40\
---------------------------------------------------------------------------

    \39\ See infra notes 172-173 and accompanying text; TILA, 15 
U.S.C. 1601 et seq.; Regulation Z, 12 CFR part 1026.
    \40\ See supra notes 32-34 and accompanying text.
---------------------------------------------------------------------------

    In contrast, remotely created checks are governed principally by 
Articles 3 and 4 of the Uniform Commercial Code (``UCC''), a series of 
state laws applicable to negotiable instruments and commercial 
contracts.\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.
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    \41\ Currently, the UCC (in whole or in part) has been enacted, 
with some local variation, in all 50 states, the District of 
Columbia, Puerto Rico, and the Virgin Islands.
    \42\ UCC 4-401 cmt. 1 (``An item is properly payable from a 
customer's account if the customer has authorized the payment and 
the payment does not violate any agreement that may exist between 
the bank and its customer.'').
    \43\ See infra note 189 (citing bank deposit agreements 
shortening timeframe to 14 days).
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    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 Sec.  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.
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    \44\ NPRM, supra note 1, at 41202 (citing injury estimates from 
law enforcement cases).
    \45\ TSR Final Rule 2003, supra note 8, at 4606.
    \46\ TSR Final Rule 1995, supra note 8, at 43850 & n.80 (noting 
examples of businesses, such as ``two of the baby Bells, GEICO, 
Citicorp, Telecheck, Equifax, Bank of America, Discovery Card, Dunn 
and Bradstreet, and First of America Bank.''); see also TSR Revised 
Notice of Proposed Rulemaking, 60 FR 30406, 30413 (June 8, 1995) 
(hereinafter TSR RNPRM).
    \47\ TSR Final Rule 1995, supra note 8, at 43850-51. Under Sec.  
310.3(a)(3), a consumer's authorization is considered verifiable if 
it is obtained in one of three ways: Advance written authorization 
signed by the consumer; an audio recording of the consumer giving 
express oral authorization; or written confirmation of the 
transaction mailed to the consumer before submitting the charge for 
payment.
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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.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 1693o-1; 12 CFR part 1005, subpart B (effective 
October 28, 2013); NPRM, supra note 1, at 41211 & n.129.
---------------------------------------------------------------------------

    Cash reload mechanisms are similarly problematic. Cash reload 
mechanisms act as a virtual deposit slip for consumers to load funds 
onto a GPR card without a bank intermediary. A consumer simply pays 
cash, plus a small fee, to a retailer that sells cash reload 
mechanisms, such as MoneyPaks, Vanilla Reloads, or Reloadit packs. In 
exchange, the consumer receives a unique access or personal 
identification number (``PIN'') authorization code. The consumer can 
use the PIN code over the telephone or Internet to transfer the funds 
onto any existing GPR card within the same prepaid network, apply the 
funds to a ``digital wallet'' with a payment intermediary (e.g., 
PayPal), or pay a utility or other bill owed to an approved partner of 
the cash reload mechanism provider.\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,

[[Page 77524]]

once a cash reload mechanism is transmitted to an anonymous con artist, 
the money is gone and cannot be recovered. In response to concerns 
about the misuse of its cash reload mechanism by perpetrators of fraud, 
Green Dot Corporation (``Green Dot'') announced it would discontinue 
its MoneyPak cash reload mechanism in favor of a swipe-reload process--
where a consumer presents her existing GPR card at the register and 
loads funds directly to the card.\50\ The providers of two other cash 
reload mechanisms, Vanilla Reload Network and Reloadit, have made 
similar announcements.\51\
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    \49\ For reasons discussed in section II.B.3.c below, legitimate 
merchants and billers typically do not accept cash reload mechanisms 
directly from consumers. Instead, merchants and most billers accept 
as payment the GPR card itself. In the past, Green Dot Corporation 
permitted certain approved billing partners to accept its MoneyPak 
cash reload mechanisms directly from customers. Unlike perpetrators 
of telemarketing fraud, however, these approved billers did not use 
the PIN-based cash reload mechanisms to add the funds onto existing 
GPR cards. See infra note 414 and accompanying text (describing the 
operation of MoneyPak and other cash reload mechanisms).
    \50\ Written Statement of Green Dot Corporation For U.S. Senate 
Special Committee on Aging Hearing ``Hanging Up on Phone Scams: 
Progress and Potential Solutions to this Scourge,'' 2 (July 16, 
2014) (hereinafter ``Written Statement of Green Dot''), available at 
http://www.aging.senate.gov/imo/media/doc/Green_Dot_7_16_14.pdf. See 
infra section II.B for a detailed discussion.
    \51\ Press Release, InComm, InComm Expands Vanilla Reload 
Network, Plans to Add Swipe Reload at Over 15,000 More Retail 
Locations: InComm removes reload packs from stores to help prevent 
victim assisted fraud (Oct. 24, 2014) (hereinafter ``InComm Press 
Release''), available at http://www.incomm.com/news-events/Pages/Press%20Releases/InComm-Expands-Vanilla-Reload-Network-Plans-to-Add-Swipe-Reload-to-Over-15000-More-Retail-Locations.aspx; Testimony of 
William Tauscher Chairman and Chief Executive Officer Blackhawk 
Network Holdings, Inc. Before United States Senate Special Committee 
on Aging Hearing ``Private Industry's Role in Stemming the Tide of 
Phone Scams,'' at 3 (Nov. 19, 2014) (hereinafter ``Testimony of 
Blackhawk Network''), available at http://www.aging.senate.gov/imo/media/doc/Tauscher_11_19_14.pdf (describing Blackhawk's 
``elimination of quick load with the scratch-off PIN'' for its 
Reloadit Pack product).
---------------------------------------------------------------------------

    Like remotely created checks and payment orders, cash-to-cash money 
transfers and cash reload mechanisms are categorized herein as 
``novel'' telemarketing payment methods because they lack the same 
error resolution rights and liability limits provided by the TILA and 
Regulation Z (for credit card payments) or the EFTA and Regulation E 
(for electronic fund transfers, ACH debits, and traditional debit card 
transactions). Thus, the use of cash-to-cash money transfers and cash 
reload mechanisms expose consumers to the risk of unrecoverable losses 
from telemarketing fraud. Because it appeared from the Commission's law 
enforcement experience that all these novel payment methods are used 
almost exclusively by perpetrators of telemarketing fraud, who 
typically ignore the TSR's ``express verifiable authorization'' 
requirement, the NPRM proposed to prohibit their use in all 
telemarketing transactions.
2. Proposed Expansion of Prohibition on Telemarketing Recovery Services
    Telemarketers pitching ``recovery services'' contact victims of 
prior scams promising to recover the money they lost or the prize or 
merchandise they never received, in exchange for a fee paid in advance. 
Once the fee is paid, consumers rarely receive any benefit from the 
promised recovery services. To protect consumers from this abusive 
practice, Sec.  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.
---------------------------------------------------------------------------

    \52\ N.J. Acting Att'y Gen. and Vt. Att'y Gen.'s Office (on 
behalf of 24 states and the District of Columbia) (collectively, 
``AGO''); Consumer Fin. Prot. Bureau (``CFPB''); Consumer Prot. 
Branch, U.S. Dep't of Justice (``DOJ-CPB''); Criminal Div., U.S. 
Dep't of Justice (``DOJ-Criminal''); and Fed. Reserve Bank of 
Atlanta (``FRBA'').
    \53\ AARP; Ams. for Fin. Reform (``AFR'') (on behalf of itself 
and Arkansans against Abusive Payday Lending; Chicago Consumer 
Coal.; Consumer Action; Consumer Fed'n of Am.; Consumers Union, the 
Advocacy and Policy Arm of Consumer Reports; Maryland Consumer 
Rights Coal.; Nat'l Consumer Law Ctr.; National Ass'n of Consumer 
Advocates; Pub. Citizen; Pub. Justice Ctr.; Florida Consumer Action 
Network; U.S. PIRG; and Utah Coal. of Religious Cmtys.); and the 
Nat'l Consumer Law Ctr. (``NCLC'') (on behalf of its low-income 
clients and the Ctr. For Responsible Lending; Consumer Action; 
Consumer Fed'n of Am.; Consumers Union, the Advocacy and Policy Arm 
of Consumer Reports; Nat'l Ass'n of Consumer Advocates; the Nat'l 
Consumers League; and U.S. PIRG).
    \54\ Three supported all or part of the proposed amendments: 
Michalik, Cordero, and Frankfield. Five did not specifically address 
the proposed amendments: Burden, Bailey-Waddell, Manness, Seaman, 
and Farrington.
    \55\ Amer. Bankers Ass'n (``ABA''); The Clearing House and Fin. 
Servs. Roundtable (``The Associations''); Credit Union Nat'l Ass'n. 
(``CUNA''); Elec. Check Clearing House Org. (``ECCHO''); Elec. 
Transactions Ass'n. (``ETA''); NACHA--The Elec. Payments Ass'n. 
(``NACHA''); The Money Servs. Roundtable (``TMSRT''); and Nat'l 
Ass'n. of Fed. Credit Unions (``NAFCU'').
    \56\ Blue Diamond Remodeling, Inc. (``Blue Diamond''); DCS 
Holdings Group, LLC (``DCS Holdings''); G3 Assocs.; Green Dot Corp. 
(``Green Dot''); InfoCision Mgmt. Corp. (``InfoCision''); 
Interactive Commc'ns Int'l, Inc. (``InComm''); Michael; NetSpend; 
PPA--Biondi; PPA--Frank; Samuel (``First Data''); Thayer Gate 
Advisors (``Thayer''); and Transp. FCU.
    \57\ The Hon. Bill Nelson.
    \58\ Prof. Sarah Jane Hughes (``Hughes'').
---------------------------------------------------------------------------

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

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

[[Page 77525]]

addresses deceptive and abusive practices in telemarketing by:
---------------------------------------------------------------------------

    \59\ The record includes the NPRM, and the law enforcement cases 
and experience referenced therein, which are hereby incorporated by 
reference.
    \60\ The Commission's decision to amend the Rule is made 
pursuant to the rulemaking authority granted by the Telemarketing 
Act to protect consumers from deceptive and abusive practices. 15 
U.S.C. 6102(a)(1) and (a)(3).
---------------------------------------------------------------------------

     Prohibiting the use of remotely created payment orders in 
outbound and inbound telemarketing transactions;
    [cir] 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;
    [cir] 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;
    [cir] Adopting the proposed definition of ``cash-to-cash money 
transfer;''
    [cir] 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.
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    \61\ The Telemarketing Act authorizes the Commission to 
promulgate Rules ``prohibiting deceptive telemarketing acts or 
practices and other abusive telemarketing acts or practices.'' 15 
U.S.C. 6102(a)(1). In determining whether a practice is ``abusive,'' 
the Commission has used the Section 5(n) unfairness standard where 
appropriate. See TSR Amended Rule 2003, supra note 8, at 4614.
    \62\ See 15 U.S.C. 45(n) (codifying the Commission's unfairness 
analysis, set forth in a letter from the FTC to Hon. Wendell Ford 
and Hon. John Danforth, Committee on Commerce, Science and 
Transportation, United States Senate, Commission Statement of Policy 
on the Scope of Consumer Unfairness Jurisdiction, reprinted in In re 
Int'l Harvester Co., 104 F.T.C. 949, 95-101 (1984)) (hereinafter 
``Unfairness Policy Statement'').
---------------------------------------------------------------------------

1. Comments Supporting the Prohibition on Remotely Created Checks and 
Remotely Created Payment Orders
    Numerous commenters, including members of the financial services 
industry, a federal credit union, small businesses, an academic, 
consumer advocacy groups, individual consumers, staff from federal 
agencies, and Offices of Attorneys General in 24 states and the 
District of Columbia supported the prohibition on the use of remotely 
created checks and remotely created payment orders in telemarketing 
transactions.\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.
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    \63\ The states are: Arizona, Arkansas, Delaware, Hawaii, 
Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, 
Minnesota, Mississippi, Nevada, New Hampshire, New Jersey (joined 
via separate comment letter), New Mexico, Oregon, Pennsylvania, 
Rhode Island, Tennessee, Utah, Vermont, and Washington. AGO at 1.
---------------------------------------------------------------------------

    In general, commenters in support of the prohibition argued that 
these payment methods are highly susceptible to fraud in telemarketing 
and cause significant harm to consumers in the form of unauthorized and 
fraudulent withdrawals from their financial accounts.\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\
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    \64\ DOJ-CPB at 2; AFR at 1; AARP at 3; AGO at 11; CFPB at 1; 
NCLC at 2-3; DOJ-Criminal at 3; Transp. FCU.
    \65\ AARP at 3; AGO at 11 (reaffirming the views expressed by 
the Attorneys General of 34 states, the District of Columbia, and 
American Samoa in 2005 comment letter filed by National Association 
of Attorneys General, Proposed Amendment to Regulation CC Remotely 
Created Checks, FRB Docket No. R-1226 (May 9, 2005), available at 
http://www.federalreserve.gov/SECRS/2005/May/20050512/R-1226/R-1226_264_1.pdf); NACHA at 1; NCLC at 1, 5; Michael; DOJ-CPB at 1-2; 
DOJ-Criminal at 1& 3.
    \66\ Michael.
    \67\ DOJ-CPB at 1.
    \68\ Id. at 2 (citing Financial Crimes Enforcement Network, 
Advisory FIN-2012-A010, Risk Associated with Third-Party Payment 
Processors (Oct. 22, 2012); NACHA, Remotely Created Checks and ACH 
Transactions: Analyzing the Differentiators (March 2010); FFIEC, 
Bank Secrecy Act Anti-Money Laundering Examination Manual: Third-
Party Payment Processors B Overview (2010); Federal Reserve Bank of 
Atlanta, 2008 Risk & Fraud in Retail Payments: Detection & 
Mitigation Conference Summary (Oct. 6-7, 2008); Public Comment filed 
with the Federal Reserve by the National Association of Attorneys 
General, the National Consumer Law Center, Consumer Federation of 
America, Consumers Union, the National Association of Consumer 
Advocates, and U.S. Public Interest Research Group in Docket No. R-
1226 (May 9, 2005)).
---------------------------------------------------------------------------

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

[[Page 77526]]

how a telemarketer's choice to use a consumer's bank account 
information to create a remotely created check, instead of originating 
an ACH debit or accepting a payment card, determines the level of 
scrutiny and monitoring applied to the transaction and the telemarketer 
or seller.\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.
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    \69\ AGO at 11 (citing a ``lack of consumer awareness of how 
strangers can debit their bank accounts without authorization''); 
Trans. FCU (noting that consumers do not realize their account 
information ``can easily be used to generate additional unauthorized 
payments''); NCLC at 6 (``Consumers cannot protect themselves from 
the dangers of RCCs and RCPOs''); Michael.
    \70\ AGO at 11 (noting ``the hurdles that consumers often 
encounter in trying to obtain a recredit to their bank account 
when--if at all--they discover an unauthorized debit''); NCLC at 4-5 
(noting that ``the use of RCCs and RCPOs is popular for scammers 
because the consumer protections are weak and poorly enforced . . 
.'' and explaining how RCCs and RCPOs can make it difficult for 
consumers to initiate stop payment orders).
    \71\ AGO at 11 (highlighting ``the difficulty, if not 
impossibility, of tracking remotely created checks''); NACHA at 3 
(``RCCs are difficult, if not impossible, for individual financial 
institutions to monitor as a class''); NCLC at 9 (``a systemic 
monitoring system is lacking for the check system.'').
    \72\ AFR at 1 (``RCCs and RCPOs are heavily used by scammers and 
others who wish to avoid the consumer protections and fraud 
prevention mechanisms associated with modern electronic payment 
devices''); DOJ-CPB at 2 (``we have seen third party payment 
processors that promote their use of RCCs as a means to process 
transactions for merchants that have been blacklisted from credit 
card and ACH transactions''); Trans. FCU (``[w]e have seen these 
types of payment mechanisms used by scammers, often targeting 
elderly or financially distressed members''); NACHA at 3 (``Because 
RCCs are not monitored systemically . . . fraudsters are able to use 
RCCs to evade the authorization requirements and strong protections 
that NACHA has implemented through the ACH system''); NCLC at 6 
(``RCCs and RCPOs are also used by entities who wish to escape 
scrutiny by the systems used to detect fraud in other payment 
systems.'').
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    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.
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    \73\ One commenter from the financial services industry, 
NetSpend, described the significant adverse impact that remotely 
created checks have on its prepaid Visa and MasterCard debit card 
business and the banks that issue its cards. Netspend at 1. NetSpend 
explained that its debit cards do not have checking account 
functionality, so any remotely created checks drawn on the card 
account number are automatically returned unpaid by the issuing 
bank. NetSpend states that ``some financial institutions and their 
third-party vendors choose to ignore the 100% return-rate'' and 
continue to submit remotely created checks each month against its 
prepaid debit cards that lack checking privileges. As a result, 
NetSpend reports, it pays about $75,000 per year in bank fees to 
just one of its card issuing banks for processing thousands of 
remotely created check images before the bank can automatically 
reject them. Id. NetSpend also stated that it suffered significant 
losses from remotely created checks originated by First Bank of 
Delaware--a bank that the Department of Justice sued for processing 
remotely created payments for ``fraudulent merchants and 
telemarketers wishing to skirt the rules of the electronic funds 
transfers networks.'' Id.; see also U.S. v. First Bank of Delaware, 
Civ. No. 12-6500 (E.D. Pa. Nov. 19, 2012).
    \74\ AARP at 3 (concluding that ``the benefit to consumers of 
the proposed rule outweighs the burden to businesses in complying 
with this rule''); Hughes at 1 (``I find the cost-benefit analysis 
articulated in the [NPRM] to be persuasive''); NACHA at 3 
(explaining that ``[i]n 2010, NACHA adopted rules (that became 
effective in 2011) allowing for recurring payments to be authorized 
over the telephone'' thereby eliminating the few advantages for 
legitimate businesses of remotely created checks over ACH).
    \75\ AARP at 3 (concluding that ``legitimate businesses have 
access to a variety of other payment methods''); AFR at 1 (noting 
that remotely created checks and remotely created payment orders 
``have few legitimate uses for which other payment systems could not 
substitute''); DOJ-CPB at 3 (``The FTC's proposed rule change will 
not adversely affect legitimate telemarketers'' that can ``use a 
variety of other payment means''); NCLC at 7 (``With the 
availability of modern electronic payment methods, there are no 
longer any legitimate reasons to use either payment mechanism that 
can justify their risks.'').
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    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.
---------------------------------------------------------------------------

    \76\ CFPB at 2 (``The Bureau believes that the RCC and RCPO 
definitions ultimately adopted by the Commission should not hinge on 
the presence or absence of the consumer's signature''); FRBA-2 at 2 
(stating that ``this broader prohibition will better serve the 
Commission's purposes'').
    \77\ FRBA-2 at 2.
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    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\
---------------------------------------------------------------------------

    \78\ AFR at 1; NCLC at 2; see also NACHA at 4 (noting that ``it 
seems likely that bad actors would attempt to move activity online, 
as e-commerce is not covered by the telemarketing sales rule.''). In 
addition, two individuals went so far as to suggest either banning 
all telemarketing or requiring ``everything in writing.'' Seaman 
(adding, ``[i]f consumers want something, they will call the company 
themselves''); G3 Assocs. (``It's real simple . . . make them put it 
in writing (either snail mail or email) . . . if they are legit they 
will if they won't, hang up!'').
    \79\ AFR at 1 (urging the Commission to apply the proposed ban 
to ``sales initiated by email or other methods that do not use a 
telephone''); NCLC at 4 (noting the use of these payments by 
internet payday lenders that provide loans to consumer in states 
where payday lending is illegal or where they are not licensed).
    \80\ AFR at 1; NCLC at 7.
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    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\
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    \81\ DOJ-CPB at 2 (noting that payment processors market the use 
of remotely created checks to process transactions for merchants 
that have been kicked out of payment card networks and ACH network); 
NCLC at 8 (``Payment processors and ODFIs play critical roles in the 
misuse of RCCs and RCPOs.'').
    \82\ NCLC at 8.
    \83\ AFR at 1 (``Payment processors and the banks that originate 
RCCs and RCPOs should be strictly liable for processing unlawful 
payments''); NCLC at 7-8 (``The best way to stop RCCs and RCPOs from 
entering into the system and reaching consumers' accounts is to . . 
. hold payment processors and ODFIs strictly liable for accepting 
RCCs or RCPOs that violate the TSR.'').
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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

[[Page 77527]]

number of specific entities described in detail their legitimate use of 
and dependence on remotely created checks, in response to the current 
NPRM, the Commission received only one comment from a telemarketing 
firm covered by the amended Rule--InfoCision. InfoCision asserted 
generally that the amended Rule would increase the burdens on 
legitimate businesses and charities that rely on novel payment 
methods.\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.
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    \84\ InfoCision at 2.
    \85\ See generally, ABA; The Associations; CUNA; ECCHO; ETA; 
First Data; FRBA; NAFCU; PPA--Biondi; PPA--Frank.
    \86\ ABA at 7 (stating the prohibition exceeds ``the FTC's 
mission, jurisdiction, and authority''); see also ECCHO at 3; The 
Associations at 2. Other comments acknowledged the amended Rule 
would not apply to financial institutions, but raised concerns about 
potential negative effects on the broader payment system. ABA at 7; 
CUNA at 1; FRBA-1 at 2; The Associations at 10. To minimize these 
effects, commenters encouraged the Commission to coordinate closely 
with the Federal Reserve Board, CFPB, bank regulators, and other 
stakeholders. CUNA at 1; FRBA-1 at 4; NAFCU at 1.
---------------------------------------------------------------------------

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

    \87\ ABA at 2; ETA at 2; The Associations at 2; ECCHO at 13.
    \88\ InfoCision at 2.
    \89\ ABA at 1 (``we do not speak extensively in this comment 
letter of all of the potential legitimate uses of RCCs by 
telemarketing and other merchants''); DCS Holdings (``we do not have 
quantifiable data concerning how many businesses depend on one or 
more of these [payment] methods''); ECCHO at 12-13 (estimating the 
total number of remotely created checks cleared and returned as 
unauthorized in 2010 without identifying the number related to 
telemarketing); First Data at 7 (estimating that ``thousands'' of 
small businesses in its system accept RCCs and RCPOs, ``some'' of 
which ``may be used via telemarketing transactions''); Thayer 
(``[the prohibition] will make business far more difficult for 
legitimate telemarketing firms''). Furthermore, First Data, itself a 
credit card payment processor, described its use of remotely created 
checks to withdraw money from the bank accounts of start-up 
merchants that have yet to obtain corporate credit or debit cards. 
First Data at 7. First Data did not provide estimates of the number 
of such transactions. Id.
---------------------------------------------------------------------------

    The commenters in opposition took issue with other aspects of the 
unfairness analysis the Commission articulated in the NPRM.\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\
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    \90\ ABA at 1, 3; ECCHO at 4; The Associations at 5.
    \91\ ECCHO suggested that the Commission ``should undertake 
additional primary research to validate the statements in the 
Proposal regarding the relative burdens associated with a consumer 
obtaining a credit of funds to his/her account when making a claim 
of an unauthorized payment of any type (card, ACH or check).'' ECCHO 
at 7.
    \92\ ABA at 8-9 (noting that, despite differences in ``details 
and the technical legal process,'' the protections for consumers 
``are, as a practical matter, comparable''); ECCHO at 6 (``the UCC 
and other check law protections against unauthorized RCCs are 
arguably better for consumers than Regulation E and Regulation 
Z.''); The Associations at 4-5 (expressing disagreement that 
consumer protections for unauthorized remotely created checks and 
remotely created payment orders are inadequate); PPA--Biondi (same); 
PPA--Frank (same).
    \93\ PPA--Biondi; PPA--Frank.
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    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\
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    \94\ ABA at 6 (opining that the unavoidability must be connected 
to the cause of the harm, which is the telemarketer's initial 
deception, not the choice of payment system routing); see also ECCHO 
at 5 (suggesting the Commission should focus ``on the actions of the 
telemarketer that give rise to unfair or abusive practices and not 
on the use of a particular payment instrument.''); ETA at 1 (``it is 
not the payment methods themselves that are fraudulent, but rather 
the actors that are attempting to sell goods and services in a 
fraudulent manner that constitute the problem''); PPA--Frank (``The 
change here is just like blaming the gun and not the person who 
pulls the trigger . . .'').
    \95\ ABA at 5 (stating that fraudulent telemarketers will shift 
to other payment mechanisms); CUNA at 2 (same); PPA--Biondi (same); 
see also ECCHO at 4 (opining that the proposed Rule will have no 
deterrent effect on a ``telemarketer who is already violating the 
TSR by not obtaining customer authorization for a debit transaction 
of any type--ACH, card, or RCC.'').
---------------------------------------------------------------------------

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

[[Page 77528]]

created 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\
---------------------------------------------------------------------------

    \96\ ABA at 7 (noting that not all consumers have or are 
eligible for the conventional payment methods described in the 
NPRM); First Data at 3 (stating that the prohibition will result in 
delayed receipt of goods or services purchased over the telephone); 
PPA--Biondi (stating that RCCs and RCPOs benefit consumers because 
``there is more space available for providing information about the 
transaction to the consumer''); PPA--Frank (same).
    \97\ ABA at 6; see also DCS Holdings; ECCHO at 3; FRBA-1 at 2; 
PPA--Frank; The Associations at 2.
    \98\ ABA at 2; ECCHO at 4; ETA at 2; PPA--Biondi The 
Associations at 9.
    \99\ ECCHO estimated that banks processed approximately 2.04 
million remotely created checks per day in 2009. ECCHO at 13-14. 
Based on a survey of three large financial institutions, ECCHO 
estimated the percentages and numbers of the unauthorized RCC 
adjustment claims to be .01264% or approximately ``258 unauthorized 
RCCs per day industry wide.'' Id.
    \100\ CUNA at 1; ECCHO at 3-4; FRBA-1 at 2; NAFCU at 1.
---------------------------------------------------------------------------

    Some commenters opposing the prohibition offered alternatives to 
the Commission's proposal. These suggestions included voluntary or 
mandatory reporting of remotely created check and remotely created 
payment order return rates to the Commission by telemarketers or their 
non-depository payment processors; \101\ requiring financial 
institutions to disclose to bank regulators each instance of 
``abnormal'' or ``significant'' remotely created check and remotely 
created payment order transaction or returns activity by their 
customers; \102\ mandating that all banks and payment processors only 
do business with telemarketers on a registry of telemarketers;'' \103\ 
and implementing a magnetic ink character recognition (``MICR'') line 
\104\ identifier for remotely created checks and remotely created 
payment orders.\105\
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    \101\ The Associations at 2, 10-11 (``Rather than prohibiting 
the use of RCCs and RCPOs by telemarketers altogether, we believe 
the FTC should impose return reporting requirements on telemarketers 
and their [non-depository] processors that use RCCs and RCPOs''); 
compare DCS Holdings (proposing that the Commission ``require 
monitoring and quantifying all payment types processed for returns, 
volumes, velocity patterns etc.'').
    \102\ FRBA-1 at 4.
    \103\ PPA--Frank (``How about requiring alk (sic) telemarketers 
to register providing all product and fulfillment details for what 
they are selling''); DCS Holdings (``Require all banks and third 
party processors only do business with `Registered' telemarketers . 
. .'').
    \104\ The MICR information appears at the bottom of each check, 
and contains numbers that identify the bank branch, bank routing 
number, check number, and account number at the payor bank.
    \105\ ECCHO at 10; First Data at 8.
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3. The Commission Concludes That the Use of Remotely Created Checks and 
Remotely Created Payment Orders in Telemarketing Meets the Test for 
Unfairness
    In the context of TSR rulemaking proceedings, the Commission has 
determined to apply the unfairness test to evaluate whether certain 
acts and practices qualify as ``other abusive telemarketing acts or 
practices'' \106\ under the Telemarketing Act.\107\ As set forth in 
Section 5(n) of the FTC Act, an act or practice is unfair if: (a) It 
causes or is likely to cause \108\ substantial injury to consumers, (b) 
the injury is not reasonably avoidable by consumers, and (c) the injury 
is not outweighed by countervailing benefits to consumers or 
competition. Based on the entire record in this proceeding, the 
Commission concludes that the use of remotely created checks and 
remotely created payment orders in telemarketing transactions meets the 
unfairness test and, thus, is an abusive practice.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 6102(a)(1) (``The Commission shall prescribe 
rules prohibiting deceptive telemarketing acts or practices and 
other abusive telemarketing acts or practices.'').
    \107\ TSR Amended Rule 2003, supra note 8, at 4614.
    \108\ Thus, the Commission need not demonstrate actual consumer 
injury, but only the likelihood of substantial injury. In this 
proceeding, however, there is sufficient evidence that the use of 
remotely created checks and remotely created payment orders in 
telemarketing causes actual injury.
---------------------------------------------------------------------------

a. The Use of Remotely Created Checks and Remotely Created Payment 
Orders in Telemarketing Causes Substantial Harm to Consumers
(1) Law Enforcement Record
    The rulemaking record demonstrates the persistent, ongoing, and 
substantial harm caused by the use of remotely created checks and 
remotely created payment orders in telemarketing transactions. For 
nearly two decades, the Commission and its state and federal law 
enforcement partners have used every available tool at their disposal 
to combat the abuse of remotely created checks in unlawful 
telemarketing transactions. In many of these cases, the Commission has 
sought and courts have granted extraordinary equitable and monetary 
relief, including ex parte temporary restraining orders and asset 
freezes aimed at immediately halting the perpetrators of widespread 
telemarketing fraud.\109\ These fraudulent schemes have victimized 
consumers nationwide with pitches for a variety of products, such as 
phony medical discount products, advance fee loans, credit card 
interest rate reduction services, and magazine subscriptions. Despite 
aggressive and active law enforcement actions, telemarketers and 
sellers continue to abuse remotely created checks and, increasingly, 
remotely created payment orders, to defraud consumers, as exemplified 
by recent cases filed by the Commission.
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    \109\ Since 1995, the Commission has filed more than 300 cases 
involving violations of the TSR, many of which have included 
fraudulent or unauthorized remotely created checks. See, e.g., FTC 
v. Sun Bright Ventures, LLC, Civ. No. 14-02153-JDW-EAJ (M.D. Fla. 
July 20, 2015) (Stip. Perm. Inj.); FTC v. First Consumers, LLC, Civ. 
No. 14-1608 (E.D. Pa. Feb. 19, 2015) (Summ. J.); FTC v. AFD 
Advisors, Civ. No. 13-6420 (N.D. Ill. Aug. 26, 2014) (Stip. Perm. 
Inj.); FTC v. Ideal Financial Solutions, Inc., Civ. No. 13-00143-
MMD-GFW (D. Nev. June 30, 2015) (Partial Summ. J.); FTC v. Group One 
Networks, Inc., Civ. No. 09-0352 (M.D. Fla. Mar. 19, 2010) (Stip. 
Perm. Inj.); FTC v. FTN Promotions, Inc., Civ. No. 07-1279-T-30TGW 
(M.D. Fla. Dec. 30, 2008) (Stip. Perm. Inj.); FTC v. 3d Union, Civ. 
No. 04-0712-RCJ-RJJ (D. Nev. July 19, 2005) (default judgment); FTC 
v. 4086465 Canada, Inc. d/b/a International Protection Center, Civ. 
No. 04-1351 (N.D. Ohio Nov. 14, 2005) (Stip. Perm. Inj.); FTC v. Win 
USA Services, Ltd., Civ No. 98-1614Z (W.D. Wash. Apr. 13, 2000) 
(Summ. J.); FTC v. Consumer Money Markets, Inc., Civ. No. 00-1071-
PMP-RJJ (Sept. 6, 2000) (Stip. Perm. Inj.); FTC v. National Credit 
Management Group, Civ. No. 98-936(ALJ) (D.N.J. May 4, 1999) (Stip. 
Perm. Inj.); FTC v. SureCheK Systems, Inc., No. 1-97-CV-2015 (JTC) 
(N.D. Ga. June 11, 1998) (Stip. Perm. Inj.); FTC v. National Credit 
Foundation, Inc., Civ. No. 96-2374-PHX-ROS (Apr. 10, 1997) (Stip. 
Perm. Inj.); FTC v. Universal Credit Corporation, Civ. No. 96-0114-
LHM(EEx) (C.D. Cal. Dec. 6, 1996) (Stip. Perm. Inj.); FTC v. 
Diversified Marketing Service Corp., Civ. No. 96-0388M (Oct. 18, 
1996) (Stip. Perm. Inj.); FTC v. Windward Marketing, Ltd, Civ. No. 
96-0615-FMH (N.D. Ga. Oct. 10, 1996).
    States have brought additional cases against telemarketers and 
sellers that used remotely created checks to withdraw money from 
consumer bank accounts without authorization. See e.g., State of 
Ohio ex rel. v. Simplistic Advertising, Inc., Civ. No. 08-7232 
(Franklin County, OH Ct. Com. Pl. filed May 16, 2008); State of Ohio 
ex rel. v. 6450903 Canada, Inc., Civ. No. 05CVH7233 (Franklin 
County, OH Ct. Com. Pl. May 8, 2009) (default judgment).
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    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

[[Page 77529]]

consumers' authorization to be debited.\112\ The rates at which 
consumers and banks returned these transactions were grossly outside 
comparable industry norms for debits from consumer bank accounts.\113\ 
For example, the defendants allegedly generated overall return rates of 
approximately 68 percent and an unauthorized return rate of 28 
percent.\114\ By comparison, in 2013 NACHA reported that overall return 
rates for ACH debit transactions averaged just 1.42 percent, while 
unauthorized return rates averaged .03 percent.\115\
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    \110\ See FTC v. Sun Bright Ventures, supra note 109 (entry of 
stipulated monetary judgment order for $1,418,981); FTC v. First 
Consumers, supra note 109 (entry of $10,734,255.81 monetary 
judgment); FTC v. AFD Advisors, supra note 109 (entry of stipulated 
monetary judgment of $1,091,450.68).
    \111\ Pl.'s Mot. and Memo. In Supp. of TRO at 8-9, Sun Bright 
Ventures, Civ. No. 14-02153.
    \112\ Compl. ] 23, Sun Bright Ventures, supra note 109. On June 
5, 2015, an FBI Special Agent filed a criminal complaint and arrest 
warrant charging Glenn Erikson with wire fraud in connection with 
his part in the SunBright Ventures telemarketing scheme. U.S. v. 
Glenn Erikson, Cr. No. 15-0520-MPK (W.D. Pa. June 5, 2015).
    \113\ Due to the decentralized nature of the check clearing 
system and the inability to track remotely created checks and 
remotely created payment orders, neither the banking industry nor 
the Federal Reserve maintain data on average industry return rates. 
Therefore, the Commission's cases have referenced NACHA return rate 
statistics for ACH debits as a benchmark for return rates of 
remotely created check and remotely created payment order 
transactions. See Pl.'s Summ. J. Ex. 50, Dec. Professor Amelia Helen 
Boss, ] 16 (Oct. 21, 2014) (hereinafter ``Dec. Prof. Amelia Helen 
Boss''), filed in First Consumers, supra note 109 (``The strong 
similarities between RCCs and ACH transactions make comparisons of 
system data particularly appropriate, and, as will be discussed 
below, such comparisons are extremely important in the analysis of 
returns.'').
    \114\ Compl. ] 37, Sun Bright Ventures, supra note 109.
    \115\ Id. at ] 36; see also NACHA, 2013 ACH Network Return Rate 
Statistics (on file with the Commission); NACHA RFC, supra note 31, 
at 3-5 (citing 2012 statistics evidencing an overall ACH debit 
return rate of 1.5 percent and an unauthorized return rate of 0.03 
percent).
---------------------------------------------------------------------------

    In March 2014, the Commission sued the perpetrators of a similar 
scheme targeting senior citizens: First Consumers, LLC, its principals, 
and related entities. The Commission charged the defendants with cold-
calling tens of thousands of seniors claiming to sell fraud protection, 
legal protection, and pharmaceutical benefit services. In some 
instances, the telemarketers who carried out the fraud impersonated 
government and bank officials, and enticed consumers to disclose their 
confidential bank account information. From 2010 through 2013, the 
defendants used consumers' bank account information to create and 
deposit $18,856,360.56 in remotely created checks at various banks--
$8,122,104.75 of which were returned by consumers or their banks.\116\ 
The defendants' rate of unauthorized returns ranged from at least 1.61 
percent to 9.18 percent,\117\ alarmingly high in light of the 0.03 
percent average industry unauthorized return rate for ACH debits and 
NACHA's maximum threshold of 1 percent (currently 0.5 percent) for 
unauthorized returns.\118\ The defendants' overall return rates were 
similarly excessive, ranging from at least 7.79 percent to 32.13 
percent.\119\ On February 19, 2015, the Court granted the Commission's 
motion for summary judgment, and entered a final order against the 
individual defendant, including a permanent injunction and monetary 
relief in the amount of $10,734,255.81--the total amount consumers 
lost.\120\
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    \116\ Pl.'s Summ. J. Ex. 75, Summary of Deposits and Returns 
(hereinafter ``Summary of Deposits and Returns''), filed in First 
Consumers, supra note 109. These return rates vastly exceed NACHA's 
recently established overall return rate threshold of 15 percent for 
ACH debit transactions.
    \117\ Id. To calculate return rates under NACHA's rules, NACHA 
divides the number of ACH debit transactions by the number of 
returned debit transactions. Due to incomplete information on the 
number of remotely created checks cleared and returned from the five 
banks used most heavily by the defendants, it was not possible for 
the FTC's expert witness, Professor Amelia Helen Boss, to calculate 
return rates by the number of items deposited and returned. Dec. 
Prof. Amelia Helen Boss, supra note 113, at ] 32 & n.1, filed in 
First Consumers, supra note 109. Instead, Professor Boss calculated 
the defendants' return rates using the value of the deposits and 
returns, yielding even higher overall return rates. When calculated 
by value, defendants' overall return rates ranged from 8.57 percent 
to 46.23 percent, with unauthorized return rates between 6 percent 
and 16.9 percent. Summary of Deposits and Returns, supra note 116.
    \118\ See supra notes 30-31 and accompanying text describing 
NACHA's return rate thresholds and network statistics.
    \119\ Summary of Deposits and Returns, supra note 116.
    \120\ The permanent injunction bans the defendants from all 
telemarketing and from accepting or depositing remotely created 
checks or remotely created payment orders. On the same date, the 
court entered default judgments (and a similar permanent injunction) 
against the corporate defendants in the case.
---------------------------------------------------------------------------

    In September 2013, the Commission sued AFD Advisors and its 
principal, Fawaz Sebai, for operating a telemarketing enterprise that 
allegedly pitched a prescription drug discount card that, victims were 
told, would provide substantially discounted or even free prescription 
drugs.\121\ According to the complaint, in less than a year, the 
Montreal-based defendants deposited nearly $2 million in remotely 
created checks from consumer victims, and caused additional harm in the 
form of non-sufficient funds (``NSF'') fees resulting from defendants' 
unexpected withdrawals. As part of the scheme, the defendants allegedly 
coached their elderly victims through purported recorded authorizations 
that the defendants used to defeat consumers' attempts to reverse the 
withdrawals as unauthorized.\122\ In July 2014, a federal grand jury 
indicted Fawaz Sebai and two other Canadian citizens on eight counts of 
mail and wire fraud in connection with the alleged scheme.\123\ Arrest 
warrants have been issued, and the United States Attorney for the 
Southern District of Illinois will seek extradition of the defendants 
from Canada.\124\
---------------------------------------------------------------------------

    \121\ Compl. ] 18, AFD Advisors, supra note 109.
    \122\ The Commission described to the Court how the defendants 
would stop the recording process if the consumer did not answer 
``correctly,'' and start a new recording. Pl.'s Mot. and Memo. In 
Supp. of TRO at 7, AFD Advisors, supra note 109. The defendants 
would repeat this process until they obtained a ``clean'' recording 
that purported to demonstrate the consumer's authorization.
    \123\ Press Release, U.S. Attorney for the Southern District of 
Illinois, U.S. Seniors Deceived By Foreign Scammers In Medicare Hoax 
(July 24, 2014), available at http://www.justice.gov/usao/ils/News/2014/Jul/07242014_Sebai%20Press%20Release.html.
    \124\ Id.
---------------------------------------------------------------------------

    The Commission's record of law enforcement cases amply demonstrates 
that the harm resulting from the use of remotely created checks and 
remotely created payment orders in telemarketing is significant.\125\ 
Several opponents of the proposed Rule amendment questioned the 
significance and prevalence of injury, noting that consumers who 
complain to their banks obtain reversals of unauthorized remotely 
created checks and remotely created payment orders.\126\ Declarations 
from consumer victims in cases brought by the Commission, however, 
illustrate how banks can frustrate consumers' efforts to obtain 
reversals of such remotely created checks. For example, when one 74-
year old victim in FTC 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\
---------------------------------------------------------------------------

    \125\ See supra note 109 (citing FTC and state cases).
    \126\ ABA at 8-9; ECCHO at 8-9; The Associations at 6.
    \127\ Pl.'s TRO Ex. 15 ] 5, filed in Sun Bright Ventures, supra 
note 111.
    \128\ Id. at ] 7.
---------------------------------------------------------------------------

    Other Sun Bright Ventures victims unsuccessfully attempted to 
reverse unauthorized remotely created checks drawn on their bank 
accounts.\129\ For

[[Page 77530]]

example, an 86-year-old widow's bank refused to reverse the $448 
remotely created check drawn on her account because she failed to 
dispute it within 30 days, ignoring the fact that she had been 
hospitalized during the 30 days before she noticed the unauthorized 
withdrawal.\130\ An 82-year old victim filed an affidavit with his 
bank, contesting two remotely created checks made out to the defendants 
for $448.52 each.\131\ Initially, the bank reversed the charges and 
returned the money to his account. However, a few months later, the 
bank revoked the credit to his account because it received a voice 
recording of the consumer answering the defendants' ``yes'' or ``no'' 
questions purportedly authorizing the debits.\132\ The bank revoked the 
refund despite the consumer's allegations that the tape was fraudulent, 
noting several discrepancies including the fact that he never verified 
his age as between 18-75, when he was in fact 82 years old, and that 
the representative's voice on the recording was a woman's, instead of 
the man with whom he had spoken.\133\
---------------------------------------------------------------------------

    \129\ Pl.'s TRO Ex. 8 ] 3, filed in Sun Bright Ventures, supra 
note 109 (bank refused to reverse the $448 remotely created check). 
Other victims in the Sun Bright Ventures case complained that banks 
made it difficult to reverse the transactions. See, e.g., Pl.'s TRO 
Ex. 7 ] 6-8 (only after a consumer visited her credit union a second 
time, and spoke to a different representative, did the credit union 
reverse the $399 unauthorized remotely created check); Pl.'s TRO Ex. 
13 ] 3 (bank was ``not convinced'' the remotely created check was 
unauthorized by declarant's mother, who was diagnosed with dementia, 
and refused to reverse $448 withdrawal).
    \130\ Pl.'s TRO Ex. 1 ]] 4-6, filed in Sun Bright Ventures, 
supra note 109.
    \131\ Pl.'s TRO Ex. 18 ]] 4-5, filed in Sun Bright Ventures, 
supra note 109.
    \132\ Id. at ]] 5-6.
    \133\ Id.
---------------------------------------------------------------------------

    In another case, FTC 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\
---------------------------------------------------------------------------

    \134\ Pl.'s TRO Ex. 24 ] 21, filed in FTC v. Handicapped & 
Disabled Workshops, Inc., Civ. No. 08-0908-PHX-DGC (D. Ariz. Dec. 9, 
2008) (Stip. Perm. Inj.). Another victim similarly failed to obtain 
reversals for approximately $1,800 of $5,500 worth of unauthorized 
remotely created checks initiated by the Handicapped & Disabled 
Workshops defendants from May through November 2007. Pl.'s TRO Exs. 
21 & 22.
    \135\ Pl.'s TRO Ex. 24 ] 21, filed in Handicapped & Disabled 
Workshops, supra note 134.
---------------------------------------------------------------------------

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

    \136\ Pl.'s TRO Ex. 13 ]] 3-5, 9, 13, filed in FTC v. NHS 
Systems, Civ. No. 08-2215-JS (E.D. Pa. Mar. 28, 2013) (Stip. Perm. 
Inj.).
    \137\ Pl.'s TRO Ex. 5 ]] 8, 18, filed in NHS Systems, supra note 
136.
---------------------------------------------------------------------------

    Still other consumers simply never dispute such transactions with 
their bank in the first place.\138\ As the FTC's expert witness 
observed in FTC 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.
---------------------------------------------------------------------------

    \138\ See Dec. Prof. Amelia Helen Boss, supra note 113, at ] 36, 
filed in First Consumers, supra note 109 (``many fraudulent debits 
go undetected by the consumer victim and, even if discovered, the 
victim may not assert its claim against the bank in time, or the 
bank may refuse to re-credit the account and return the check.'').
    \139\ Id.
    \140\ Compl. ] 37, Sun Bright Ventures, supra note 109.
    \141\ See, e.g., Pl.'s TRO Ex. 8 ]] 8-12, filed in FTC v. 
Instant Response Systems, Civ. No. 13-0976-ILG-VMS (E.D.N.Y. Apr. 
14, 2015) (Summ. J.) (describing how she spent many months trying in 
vain to obtain a refund from defendants after being pressured and 
harassed into providing her bank account information to the 
defendant for a home medical alert device, which cost her $840).
    \142\ Pl.'s TRO Ex. 6 ]] 7-9, filed in Sun Bright Ventures, 
supra note 109.
    \143\ Pl.'s TRO Ex. 2 ] 5, filed in First Consumers, supra note 
109.
---------------------------------------------------------------------------

    Even the most aggressive and highly coordinated law enforcement 
cases have not been able to make consumer victims whole.\144\ Consider 
the series of actions taken by the Commission, federal prosecutors, and 
bank regulators against Wachovia Bank, N.A., two of its payment 
processing customers, and one

[[Page 77531]]

massive telemarketing enterprise.\145\ In separate actions, the Office 
of the Comptroller of the Currency (``OCC'') and the U.S. Department of 
Justice alleged that Wachovia Bank maintained account relationships 
with certain payment processors \146\ responsible for depositing more 
than $418 million in remotely created checks on behalf of fraudulent 
telemarketers,\147\ including the defendants in FTC 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\
---------------------------------------------------------------------------

    \144\ The most recent example includes the simultaneous criminal 
and civil actions initiated by DOJ-Criminal and DOJ-CPB against 
CommerceWest Bank, of Irvine, California, for allegedly ``allow[ing] 
one of its clients to facilitate the theft of tens of millions of 
dollars from the bank accounts of unsuspecting, innocent 
consumers.'' Compl. ] 2, U.S. v. CommerceWest Bank, Civ. No. 15-0379 
(C.D. Cal. filed Mar. 10, 2015). Under the terms of the settlement, 
the bank agreed to pay $4.9 million to resolve civil and criminal 
complaints alleging the bank facilitated consumer telemarketing 
fraud schemes and violated the Bank Secrecy Act (``BSA'') while 
processing remotely created check transactions for V Internet Corp 
LLC., a third-party payment processor based in Las Vegas. Press 
Release, DOJ, CommerceWest Bank Admits Bank Secrecy Act Violation 
and Reaches $4.9 Million Settlement with Justice Department (Mar. 
20, 2015), available at http://www.justice.gov/opa/pr/commercewest-bank-admits-bank-secrecy-act-violation-and-reaches-49-million-settlement-justice. See also, U.S. v. CommerceWest Bank, Civ. No. 
15-0379 (C.D. Cal. Mar. 10, 2015) (No. 3-1) (consent decree for 
permanent injunction and civil penalty); U.S. v. CommerceWest Bank, 
Cr. No. 15-0025 (C.D. Cal. Mar. 10, 2015) (deferred prosecution 
agreement and information).
    \145\ U.S. v. Wachovia, N.A., Cr. No. 10-20165 (S.D. Fla. Mar. 
16, 2010); In the Matter of Wachovia Bank, N.A., AA-EC-10-16 (Mar. 
10, 2010). In 2010, Wachovia agreed to pay more than $150 million in 
restitution to resolve the matters, and entered into a deferred 
prosecution agreement with the U.S. Attorney for the Southern 
District of Florida. See Press Release, United States Department of 
Justice, Wachovia Enters Into Deferred Prosecution Agreement: Bank 
Agrees to Pay $160 Million (Mar. 17, 2010), available at http://www.justice.gov/dea/divisions/hq/2010/pr031710p.html; Press Release, 
OCC, OCC, Wachovia Enter Revised Agreement to Reimburse Consumers 
Directly (Dec. 11, 2008), available at http://www.occ.gov/ftp/release/2008-143.htm.
    \146\ U.S. v. Payment Processing Ctr., LLC, Civ. No. 06-0725 
(E.D. Pa. Aug. 12, 2010) (Stip. Perm. Inj.); FTC v. Your Money 
Access (``YMA''), Civ. No. 07-5147-ECR (E.D. Pa. Oct. 22, 2010) 
(Stip. Perm. Inj.). The FTC also brought cases against many of the 
telemarketers that worked with the processors.
    \147\ See, e.g., Universal Premium Servs., Civ. No. 06-0849 
(C.D. Cal. Apr. 17, 2008) (Summ. J.); FTC v. Sun Spectrum Commc'ns. 
Org., Inc., Civ. No. 03-81105 (S.D. Fla. Oct. 3, 2004) (Stip. Perm. 
Inj.); FTC v. Xtel Marketing, Inc., Civ. No. 04-7238 (N.D. Ill. July 
22, 2005) (Stip. Perm. Inj.); FTC v. 120194 Canada, Ltd., Civ. No. 
1:04-07204 (N.D. Ill. Mar. 8, 2007) (Summ. J.); FTC v. Oks, Civ. No. 
05-5389 (N.D. Ill. Mar. 18, 2008) (permanent injunction); FTC v. 
Frankly Speaking, Inc., Civ. No. 1:05-60 (M.D. Ga. May 14, 2005) 
(Stip. Perm. Inj.).
    \148\ FTC v. FTN Promotions, Inc. (``Suntasia''), Civ. No. 07-
1279-T30TGW (M.D. Fla. Dec. 30, 2008) (Stip. Perm. Inj.).
    \149\ In 2008, the Suntasia defendants agreed to pay more than 
$16 million to settle Federal Trade Commission charges, and as part 
of its settlement with the OCC, Wachovia paid an additional $33 
million to Suntasia victims. Id.; Press Release, FTC, Suntasia 
Marketing Defendants Pay More Than $16 Million to Settle FTC Charges 
(Jan. 13, 2009), available at https://www.ftc.gov/news-events/press-releases/2009/01/suntasia-marketing-defendants-pay-more-16-million-settle-ftc. Subsequently, the court found the individual defendants 
in the original Suntasia case (Byron Wolf and Roy Eliasson) in 
contempt of the permanent injunction, and imposed a judgment of 
$14.75 million against the defendants. The judgment represented the 
amount they illegally took from consumers in a second scheme in 
which they debited consumers' accounts without their consent for 
membership in a continuity program. See Press Release, FTC, Court 
Finds Telemarketers in Contempt; Imposes $14.75 Million Judgment 
(Jan. 31, 2014), available at http://www.ftc.gov/news-events/press-releases/2014/01/court-finds-telemarketers-contempt-imposes-1475-million-judgment.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \150\ Dec. Prof. Amelia Helen Boss, supra note 113, at ] 24, 
filed in First Consumers, supra note 109 (``[a] fraudster may find 
that use of RCCs is both easier and subjects it to lower risks of 
detection than the use of ACH debits. . . . A payor bank will often 
have a pre-approval and underwriting process before it will begin to 
accept ACH transactions from a merchant, and that relationship is 
carefully monitored. Moreover, the monitoring of ACH activity by the 
system processor (NACHA) is much more elaborate. Thus, a fraudulent 
processor [or merchant] may choose to use the lower technology RCC 
to escape detection.'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \151\ First Data at 8. See also Atlanta Federal Reserve Retail 
Payment Office, When It Comes to RCCs, Can We Make the Invisible 
Visible? (Jan. 6, 2014), available at http://portalsandvrails.frbatlanta.org/2014/01/when-it-comes-to-rccs-can-we-make-invisible-visible.html.
    \152\ For a detailed explanation of the MICR standards 
committee, visit http://x9.org/. See also ECCHO at 10. ECCHO 
recently published a white paper proposing to ``[d]etermine if there 
is industry support'' for piloting a unique MICR identifier for 
RCCs, ``with future intent for a permanent code.'' ECCHO, RCC 
Identifier White Paper at 3 (Apr. 23, 2014), available at http://www.eccho.org/uploads/Sec%209-1%20RCC%20Identifier%20Paper.pdf. The 
paper does not outline next steps or a proposed timeline.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \153\ Final Rule, Regulation CC, 70 FR 71218, 71223 (Nov. 28, 
2005).
    \154\ ECCHO at 11 (``decentralized nature of forward check 
presentment and check return presents operational challenges for any 
one network or collecting bank to see the totality of volume 
associated with a particular merchant.'').
---------------------------------------------------------------------------

    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

[[Page 77532]]

there 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\
---------------------------------------------------------------------------

    \155\ Some commenters argued that monitoring exists in the check 
clearing system, and suggested that the Federal Reserve Bank could 
calculate check return rates to monitor and deter unauthorized 
transactions. PPA--Biondi; PPA--Frank; First Data at 9. Comments 
filed by the FRBA and financial services industry did not confirm 
the existence of centralized monitoring by any intermediary parties. 
FRBA-1 at 4; see generally ABA; ECCHO; The Associations.
    \156\ FRBA-1 at 4; ECCHO at 10; NACHA at 3; NCLC at 9.
    \157\ FFIEC, Retail Payment Systems Booklet--February 2010 16 
(Feb. 2010), available at http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_RetailPaymentSystems.pdf; see also NACHA at 3 
(``Because RCCs are not monitored systemically (indeed, RCCs are 
difficult, if not impossible, for individual financial institutions 
to monitor as a class), fraudsters are able to use RCCs to evade the 
authorization requirements and strong protections that NACHA has 
implemented through the ACH system.''); FFIEC, Bank Secrecy Act/
Anti-Money Laundering Manual, supra note 28, at 235 (``The increased 
use of RCCs by processor customers also raises the risk of 
fraudulent payments being processed through the processor's bank 
account.'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \158\ See supra notes 101-103 and accompanying text.
    \159\ See PPA-Frank; DCS Holdings.
    \160\ See The Associations at 2, 10-11; DCS Holdings.
    \161\ See FRBA-1 at 6; DCS Holdings; PPA--Frank.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \162\ See supra note 109 (listing FTC cases).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \163\ NCLC at 11 (``Payment processors and ODFIs rake in 
transaction fees from the scammers and the scammed alike''); Compl. 
] 41, FTC v. Automated Electronic Checking, Inc. (``AEC''), Civ. No. 
3:13-00056-RCJ-WGC (D. Nev. filed Feb. 5, 2013) (``AEC's pricing 
structure has been such that the income earned by AEC from returned 
transactions was significantly higher than the income earned from 
merely processing a transaction that ultimately cleared. The more 
returned transactions generated by AEC's client merchants, the 
higher the return fees earned by AEC and its banks''); Pl.'s Mot. 
and Memo. In Support of Summ. J. Ex. 2, Dec. Dennis M. Kiefer ] 33 
(Oct. 2, 2008), filed in YMA, supra note 146 (expert describing how 
``YMA charged fees resulting from bad ACH and [remotely created 
check] transactions that were many multiples of the fees they 
otherwise would have charged.'').
    \164\ AEC, supra note 163, at ] 29 (defendants allegedly urged 
merchant clients to avoid NACHA's threshold by switching from ACH 
debits to RCPOs); FTC v. Landmark Clearing Inc., Civ. No. 4:11-00826 
(E.D. Tex. filed Dec. 15, 2011), Compl. ] 38 (alleging that 
defendants expressly advertised their RCPO processing product as a 
less regulated alternative to ACH transactions); Pl.'s Mot. and 
Memo. In Support of Summ. J. Ex. 1, Dec. Elliott C. McEntee ] 50 
(Oct. 1, 2008), filed in YMA, supra note 146 (expressing his expert 
opinion that ``YMA was moving its highest risk merchants from the 
ACH to demand drafts to avoid being detected by the Federal Reserve 
and NACHA. This enabled YMA to continue to assist merchants in 
defrauding consumers for a much longer period of time.'').
    \165\ AEC, supra note 163, at ] 58 (alleging defendants advised 
merchants to use different billing descriptors, customer service 
email accounts and telephone numbers, as well as corporate names or 
DBAs, to ``fly under the bank radar'').
    \166\ Id. at ] 29 (``For example, in January 2008, AEC's 
principal Mark Turville notified one client merchant that `NACHA is 
going to a 1% threshold for unauthorized transactions starting 12-
21-2007 and being enforced 3-21-2008.' Turville urged the merchant 
to consider switching to RCPOs: `As you know our new [RCPO] product 
is now being used by most of our clients and does not have a 1% 
restriction . . .''). See also infra note 198 and accompanying text 
(describing marketing claims of some payment processors offering 
remotely created check and remotely created payment order processing 
services).
---------------------------------------------------------------------------

    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

[[Page 77533]]

deficiencies 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.
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    \167\ ECCHO at 10 (``While ECCHO cannot unilaterally determine 
that an RCC identifier will be established within the check 
standard, ECCHO can assure the FTC that the issue of an RCC 
identifier will be considered at appropriate industry standards 
meetings.''). The Commission notes that the amended Rule will not 
preclude the financial services industry from adopting a unique MICR 
identifier or implementing other measures to increase oversight and 
visibility of remotely created checks and remotely created payment 
orders. The Commission will consider the effect of such monitoring 
if and when it is implemented.
    \168\ See supra notes 30-34 and accompanying text.
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(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\
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    \169\ NACHA at 3 (``Most importantly, however, lack of 
Regulation E or NACHA Operating Rule-type protections for RCC 
transactions exposes RCCs to the types of heightened risks of fraud 
and abuse identified in the Release.'').
    \170\ The Commission recognizes the unsettled legal landscape 
applicable to remotely created payment orders, including the fact 
that the UCC does not apply to these payments. See NPRM, supra note 
1, at 41204. As a practical matter, however, banks fail to 
distinguish between remotely created checks and remotely created 
payment orders, and simply apply the UCC to remotely created payment 
orders. Industry commenters confirm this fact. ABA at 3; ECCHO at 
14; FRBA-1 at 2; The Associations at 4.
    \171\ In 1995, the Federal Reserve Bank of San Francisco 
described the protections consumers might have under the UCC as 
illusory and noted the pronounced financial disincentive to accept 
claims by a consumer that he or she did not authorize a particular 
draft because the banks must bear the loss of the amount of any 
draft that was unauthorized. TSR Final Rule 1995, 60 FR at 43850.
---------------------------------------------------------------------------

    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\
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    \172\ 12 CFR 1026.12(b); Regulation Z Official Staff Commentary, 
Supplement I, 12 CFR 1026.12(b)(2)(iii)-3 (``The cardholder may not 
be held liable under 1026.12(b) when the card itself (or some other 
sufficient means of identification of the cardholder) is not 
presented.''). In instances involving unauthorized charges resulting 
from the theft or loss of the card, a consumer's liability is 
limited to $50. 15 U.S.C. 1643(a)(1)(B); 12 CFR 1026.12(b).
    \173\ 12 CFR 1026.13(a) and (d)(1). If a billing error appears 
on a consumer's monthly statement, a consumer may dispute the error 
within 60 days from the date the statement is mailed to the 
consumer. 12 CFR 1026.13(b)(1). In addition to these federal law 
protections, private payment card network rules have certain 
voluntary initiatives that may provide consumers with zero liability 
protection in many instances, with certain exceptions. See infra 
note 178 (describing voluntary zero liability protections).
    \174\ See 12 CFR 1005.6.
    \175\ If a consumer loses an ``access device,'' such as a debit 
card or ATM card, she faces tiered liability, depending upon when 
she notifies her bank of the theft or loss. 12 CFR 1005.6(b)(3). If 
the consumer reports the loss or theft of an access device within 
two business days from discovery of the loss or theft, the 
consumer's maximum liability is $50. 12 CFR 1005.6(b)(1). If the 
consumer notifies the bank more than two days after discovery of the 
theft or loss, her liability is limited to $500. 12 CFR 
1005.6(b)(2). If the consumer fails to notify the bank within sixty 
days after her statement was mailed to her that first showed the 
unauthorized charges, she may be held liable for all unauthorized 
charges occurring after the 60-day period. 12 CFR 1005.6(b)(3). If 
the unauthorized transfers are made without an access device, the 
consumer must report them to avoid liability, within 60 calendar 
days of the bank's transmittal of the periodic statement that shows 
the unauthorized transfers. Otherwise, the consumer faces liability 
for any unauthorized transfers that occur after the 60-day period 
and potentially unlimited liability. See 12 CFR 1005.6(b)(3)-2, 
Supp. 1, CFPB Regulation E Official Staff Commentary.
    \176\ 15 U.S.C. 1693(b). When a consumer provides her bank 
notice of an error such as an unauthorized transfer or an incorrect 
transfer, the bank must complete an investigation of the claim 
within ten business days. 12 CFR 1005.11; 15 U.S.C. 1693f(a).
    \177\ If the bank requires a longer time to process or 
investigate the claim, it must provisionally credit the consumer's 
account for the amount disputed and can take no more than 45 days to 
complete its investigation, in most instances. At the conclusion of 
the investigation, the bank must credit the consumer's account if it 
determines that an error occurred. If it believes that no error 
occurred, the bank must send the consumer a notice explaining the 
findings of its investigation. 12 CFR 1005.11; 15 U.S.C. 1693f(c)-
(d).
    \178\ For so-called signature debit card purchases (i.e., 
without the use of a PIN) that are processed through their networks, 
Visa and MasterCard provide consumers with the same zero liability 
protections extended to credit card purchases, with certain 
conditions. For example, Visa states that ``Visa's Zero Liability 
Policy . . . protects you from unauthorized charges. Any funds taken 
from your account due to fraudulent use will be returned to your 
card.'' Visa USA, Protections for Visa Debit cards, available at 
https://usa.visa.com/support/consumer/debit-cards.html#2. See also, 
MasterCard, Zero Liability Protection, retrieved from https://www.mastercard.us/en-us/about-mastercard/what-we-do/terms-of-use/zero-liability-terms-conditions.html (last visited July 21, 2015) 
(providing zero liability for consumer purchases if the consumer 
exercised reasonable care in protecting their card from loss or 
theft and promptly reported to their financial institution when they 
knew the card was lost or stolen).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \179\ See supra note 170 (recognizing that banks treat remotely 
created payment orders the same way they treat remotely created 
checks).
    \180\ ABA at 8; ECCHO at 6; The Associations at 3. Commenters 
also emphasized that Regulation CC, Federal Reserve Operating 
Circular Number 3 (``Operating Circular 3''), and private 
clearinghouse agreements encourage paying banks to promptly re-
credit their customers' accounts. Id.
    \181\ ABA at 8-9; ECCHO at 6; The Associations at 4-5.
    \182\ Interbank of N.Y. v. Fleet Bank, 730 N.Y.S. 2d 208 (N.Y. 
Civ. Ct. 2001) (holding that the notation ``verbally authorized by 
your depositor'' is legally equivalent to a customer's signature and 
can be deemed a forged signature under the UCC).
    \183\ UCC 4-406 (stating a general obligation of bank customers 
to examine their bank statements and report unauthorized alterations 
and signatures on checks with ``reasonable promptness'').

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[[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\
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    \184\ As one commenter noted, to enforce compliance, the 
consumer may have to resort to legal action against her bank. NCLC 
at 4-5. See also e.g., Mark E. Budnitz, Consumer Payment Products 
and Systems: The Need for Uniformity and the Risk of Political 
Defeat, 24 Ann. Rev. Banking & Fin. L. 247, 253 (2005) (``The UCC 
contains no error resolution procedure, much less a recredit right. 
The UCC only gives the consumer the option of suing the financial 
institution for violating the UCC.'').
    \185\ See, e.g., Cincinnati Insurance Co. v. Wachovia Bank, 72 
U.C.C. Rep. Serv. 2d (West) 744 (D. Minn. 2010) (holding that a 
deposit account agreement can shift liability for an unauthorized 
check from the bank to its customer); but cf., Kaiser Aluminum & 
Chem. Corp. v. Mellon Bank, 43 U.C.C. Rep. Serv. 2d (West) 928, 933 
n.4 (W.D. Pa. 1997), aff'd, 162 F.2d 1151 (3d Cir. 1998) (holding a 
fraudulent alteration discharges the liability of a bank customer 
unless the customer's negligence substantially contributed to the 
altering of the check, despite deposit account agreement shifting 
liability from bank to customer).
    \186\ The UCC states this general rule for contracting out of 
liability for checks in Article 4 section 4-103(a), including the 
fact that the provisions of the UCC ``may be varied by agreement'' 
and that ``the parties may determine by agreement the standards by 
which the bank's responsibility is to be measured if those standards 
are not manifestly unreasonable.''
    \187\ See, e.g., Wells Fargo, Consumer Account Agreement, at 23 
(Oct. 29, 2014) (``If you voluntarily disclose your account number 
to another person orally, electronically, or in writing, or by some 
other means, and the Bank determines that the context of such 
disclosure implies your authorization to debit your account, the 
Bank may treat such disclosure as your authorization to that person 
to issue items drawn against your account'') (emphasis in original); 
Bank of America, Deposit Agreement & Disclosures, at 23 (Feb. 6, 
2015), available at https://www.bankofamerica.com/deposits/resources/deposit-agreements.go (``If you voluntarily disclose your 
account number to another person orally, electronically, in writing 
or by other means, you are deemed to authorize each item, including 
electronic debits, which result from your disclosure''); Gorham 
Savings Bank, Deposit Account Agreement, at 8 (2015) (``If you give 
out your account number to a third person by telephone, you also 
agree that such act authorizes the recipient of the information to 
initiate debits to the account. You agree that the Bank may not be 
held liable for complying with such authorizations''); Associated 
Bank, Deposit Account Agreement, 5.13.4 (2015), available at https://www.associatedbank.com/forms-and-disclosures/deposit-account-agreement (``If you voluntarily give information about your Account 
(such as our routing number and your Account number) to a party who 
is seeking to sell you goods or services, and you don't physically 
deliver a check to the party, any debit to your Account initiated by 
the party to whom you gave the information is deemed authorized''); 
Regions, Deposit Agreement, at 9 (Mar. 2014), available at http://www.regions.com/virtualdocuments/Deposit_Agreement_3_6_14.pdf (``If 
we pay an item that you have not signed, but you have provided 
information identifying your account to a seller of property or 
services who created an item purportedly authorized by you, payment 
of the item is deemed to be authorized.'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \188\ Section 4-406(c) requires consumers to exercise 
``reasonable promptness'' in examining the statement and notifying 
the bank after the discovery of the first fraudulent check in a 
series. ``With respect to any subsequent fraudulent check 
perpetrated by the same wrongdoer before the bank is notified of the 
fraud,'' section 4-406(d) requires the consumer to report the 
activity to the bank within a ``reasonable period of time'' not to 
exceed thirty days. Paul S. Turner, Contracting Out of the UCC: 
Variation by Agreement Under Articles 3, 4, and 4A, 40 Loy. L.A. L. 
Rev. 443, 454-455 (Fall 2006).
    \189\ Stephan C. Veltri and Greg Cavanagh, Survey--Uniform 
Commercial Code: Payments, 68 Bus. Law. 1203, 1213 (2013) (``The 
[UCC] gives contracting parties wide latitude to vary the effect of 
the statute's terms. In the hands of some courts, the latitude seems 
limitless.'') (citations omitted). For example, Gorham Savings Bank 
requires customers to notify the bank of any errors, forgeries, or 
alterations within 14 days. Gorham Savings Bank, Deposit Account 
Agreement, supra note 187, at 3 (14 days). See, e.g., Associated 
Bank, supra note 187, at 32 (14 days); Wilshire State Bank, Deposit 
Account Agreement, at 10 (July 21, 2011), available at https://www.wilshirebank.com/public/pdf/depagreeprivacy.pdf (14 days); see 
also Freese v. Regions Bank, N.A., 644 SE.2d 549 (Ga. Ct. App. 2007) 
(upholding the reduction of time period in 4-406(f) to 30 days); 
Peters v. Riggs Nat. Bank, N.A., 942 A.2d 1163 (DC 2008) (60 days).
    \190\ Courts have found that, unlike a statute of limitations, 
the UCC's statute of repose is not subject to equitable tolling. 
See, e.g., Peters v. Riggs Nat. Bank, N.A., 942 A.2d 1168 
(``equitable tolling cannot apply to statutes of repose''); Estate 
of Decker v. Farm Credit Servs. of Mid-America, ACA, 684 N.E.2d 
1137, 1139 (Ind. 1997) (``While equitable principles may extend the 
time for commencing an action under statutes of limitation, nonclaim 
statutes impose a condition precedent to the enforcement of a right 
of action and are not subject to equitable exceptions''); Brighton, 
Inc. v. Colonial First Nat'l Bank, 422 A.2d 433, 437 (App.Div.1980) 
(``The one-year period limitation . . . is not merely a statute of 
limitations, but a rule of substantive law barring absolutely a 
customer's untimely asserted right to make such a claim against the 
bank.'').
    \191\ See, e.g., Stowell v. Cloquet Co-op Credit Union, 557 
N.W.2d 567 (Minn. 1997) (enforcing agreement requiring account 
holder to examine his monthly statements and notify credit union of 
errors within 20 days of mailing statement); Clemente Bros. 
Contracting Corp. v. Hafner-Milazzo, 2014 WL 1806924 (N.Y. 2014) (14 
days); Napleton v. Great Lakes Bank, N.A., 945 N.E.2d 111 (Ill. App. 
Ct. 2011) (30 days); Graves v. Wachovia Bank, Nat'l Ass'n, 607 
F.Supp.2d 1277 (M.D. Ala. 2009) (40 days); Am. Airlines Employees 
Fed. Credit Union v. Martin, 29 S.W.3d 86 (Tex. 2000) (60 days). But 
see, In re Clear Advantage Title, Inc., 438 B.R. 58 (Bkrtcy. D.N.J. 
2010) (finding 60-day timeframe ``manifestly unreasonable''); 
Mueller v. Miller, 834 N.E.2d 862 (Ohio Ct. App. 2005) (holding an 
agreement for a 30-day notice unenforceable).
    \192\ Turner, Contracting Out of the UCC, supra note 188, at 453 
(``A reporting requirement imposes an obligation on the customer to 
report the payment of a forged or fraudulent check within a 
specified period of time. The reporting requirement is not a 
disclaimer or waiver and does not directly vary the UCC rules on 
check fraud. When the time allowed for reporting is a very brief 
period, however, the reporting requirement can have the same effect 
as a disclaimer'') (citations omitted).
---------------------------------------------------------------------------

    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

[[Page 77535]]

promptness.\195\ As noted above, in some cases this may be as few as 14 
days.\196\
---------------------------------------------------------------------------

    \193\ ABA at 8.
    \194\ Id. at 9 (``Amendments to Regulation CC in 2006 in 12 CFR 
229.34(d) require the bank of first deposit to warrant that the 
customer whose account is being debited . . . authorized the RCC 
payment. The effect is to permit bank customers to dispute such 
transactions and to have the item returned to the bank of first 
deposit''); ECCHO at 9; First Data at 7; The Associations at 5.
    \195\ 12 CFR 229.34(d)(2) (which provides that if a paying bank 
asserts a claim for breach of warranty under paragraph (d)(1), the 
warranting bank may defend by proving that the customer of the 
paying bank is precluded under U.C.C. 4-406, as applicable, from 
asserting against the paying bank the unauthorized issuance of the 
check.). The applicable provisions of Circular 3 do not alter this 
framework. Federal Reserve Operating Circular 3, Adjustments for 
Certain Warranty Claims; Errors, 20.10(f) (Dec. 2012) (``The sending 
bank agrees to deal directly with the requesting bank or another 
non-Reserve Bank party to resolve any claims or defenses related to 
the adjustment or the warranty set forth in Section 229.34(d) of 
Regulation CC with respect to the check.'').
    \196\ See supra notes 189-192.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \197\ ABA at 3; ECCHO at 14; FRBA-1 at 2; The Associations at 4.
---------------------------------------------------------------------------

    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\
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    \198\ NCLC at 5-6 (citing examples of promotional materials for 
payment processors). One payment processor's Web site states that 
its remotely created payment order transactions ``are governed by 
check laws and the Uniform Commercial Code, bypassing restrictive 
ACH rules and regulations.'' National ACH, Check 21 Payment 
Processing helps You Increase Sales (Oct. 1, 2013), available at 
http://www.nationalach.com/check-21-payment-processing-helps-businesses-increase-sales/. The Commission's cases against payment 
processors confirm the use of remotely created checks and remotely 
created payment orders as a method of skirting additional scrutiny, 
regulation, and consumer protections. See Compl. ] 23, Landmark 
Clearing, supra note 164 (alleging that defendants expressly 
advertised their RCPO processing product as a less regulated 
alternative to ACH transactions); Compl. ] 29, AEC, supra note 163 
(defendants allegedly urged merchant clients to avoid NACHA's 
threshold by switching from ACH debits to RCPOs); Dec. Dennis M. 
Kiefer ] 31, YMA, supra note 163 (describing YMA's efforts to 
migrate telemarketing clients with high ACH return rates to remotely 
created checks); see also George F. Thomas, It's Time to Dump Demand 
Drafts, Digital Transactions 39 (July 2008), available at http://www.radixconsulting.com/TimetoDumpDemandDrafts.pdf (noting that 
certain ``organizations believe the check-collection system provides 
[them] better protections than the ACH . . . in the area of consumer 
chargeback. This is not sufficient justification for using this 
instrument.'').
    \199\ Check21.com, ACH vs. Check21, retrieved from http://www.check21.com/Check-21-vs-ACH.html (last visited on June 24, 
2015); see also, National Processing, ACH vs. Check 21--Which Is 
Right for You, (Sept. 17, 2013), available at http://nationalprocessing.com/blog/ach-vs-check-21-which-is-right-for-you/ 
(``If there is a dispute a customer will have only 40 days to visit 
the local branch of his bank and fill out the proper forms. A stark 
contrast to this is the way the disputes are handled with ACH. These 
customers can dispute a transaction over the telephone rather than 
person and have an additional 20 days to file a dispute.'').
    \200\ NCLC at 6 (citing a blog posting by Ed Starrs, CEO, 
MyECheck, dated June 20, 2012, retrieved from http://www.myecheck.com/merchants-are-at-a-disadvantage-in-most-e-commerce-transactions-due-to-deficiencies-in-payment-systems/#prettyPhoto).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \201\ 15 U.S.C. 45(n); see also Unfairness Policy Statement, 
supra note 62, at 1074.
    \202\ Unfairness Policy Statement, supra note 62, at 1074.; see 
also FTC v. Neovi, Inc., 598 F. Supp. 2d 1104 (S.D. Cal. Sept. 16, 
2008), aff'd, 604 F.3d 1150, 1158 (9th Cir. 2010) (``In determining 
whether consumers' injuries were reasonably avoidable, courts look 
to whether the consumers had a free and informed choice.''); Am. 
Fin. Servs. Ass'n, 767 F.2d 957, 976 (D.C. Cir. 1985), cert. denied, 
475 U.S. 1011, 106 S.Ct. 1185, 89 L.Ed.2d 301 (1986) (``The 
requirement that the injury cannot be reasonably avoided by the 
consumers stems from the Commission's general reliance on free and 
informed consumer choice as the best regulator of the market.''); 
see also FTC v. J.K. Publs., Inc., 99 F.Supp.2d 1176, 1201 (C.D. Cal 
2002); FTC v. Windward Marketing, Ltd., 1997 U.S. Dist. LEXIS 17114, 
* 29-30 (N.D.Ga. Sept. 30, 1997).
---------------------------------------------------------------------------

    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

[[Page 77536]]

the 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\
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    \203\ TSR Amended Rule 2010, supra note 8, at 48487 (citing 
Unfairness Policy Statement, supra note 62, at 1074); In re Orkin 
Exterminating Co., 108 F.T.C. 263, 366-67 (1986), aff'd, 849 F.2d 
1354 (11th Cir. 1988); In re Int'l Harvester, 104 F.T.C. 949, 1066 
(1984)).
    \204\ See Budnitz, Consumer Payment Products and Systems, supra 
note 184, at 248 (``the development of new payment systems and 
recent proliferation of new payment products have created a complex 
and confusing marketplace in which consumers cannot adequately 
understand their rights and responsibilities.'').
    \205\ Id. (``For consumers of payment products, the current 
legal landscape is incomprehensible. Different payment products are 
subject to very different laws, or no law at all besides contract 
law. Consequently, consumers' rights and responsibilities vary 
greatly.''); NCLC at 6 (``Consumers also do not understand the 
different levels of protection for different types of payments.'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \206\ ABA at 6.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \207\ NCLC at 6 (``the consumer has no way of knowing how the 
payment will be processed and no effective control over how the 
payee processes the payments.''); ABA at 5 (``Congress believes that 
choice of payment routing is for the merchant to decide, not the 
consumer.''); Dec. Prof. Amelia Helen Boss, supra note 113, at ] 16 
filed FTC v. First Consumers, supra note 109 (``From the perspective 
of a consumer dealing with a merchant and providing banking account 
information, it is virtually impossible to know whether an RCC or 
ACH item will be created; once the necessary banking information is 
given to the payee, the choice between the two is within the control 
and discretion of the payee.'').
    \208\ Obviously, a fraudulent telemarketer can perpetrate its 
misdeeds through the ACH Network, depending on its tolerance for 
scrutiny and detection. However, unscrupulous merchants attempting 
to originate ACH debits must account for the scrutiny they will 
receive both in underwriting and risk analysis. In addition, they 
must account for the systemic monitoring of their transaction 
activity to detect violations of operating rules and regulations.
    Moreover, NACHA's ``TEL Rule'' (abbreviation for telephone-
initiated debits) specifically prohibits the use of the ACH Network 
by outbound telemarketers that initiate calls to consumers with whom 
they have no existing relationship. NACHA Operating Rules, Art. II, 
2.5.15 (Specific Provisions for TEL Entries) (2013). The TEL Rule 
recognizes the inherent risk of fraud associated with the anonymous 
and ``unique characteristics of TEL Entries, particularly given that 
a TEL transaction takes place in a non face-to-face environment.'' 
NACHA, TEL Brief Risk Management for TEL ODFIs and RDFIs Issue No. 3 
(Dec. 2009), available at http://www.neach.org/uploads/resources/doc/tel_brief_no_3_risk_for_odfirdfi.pdf. Under the TEL Rule, only 
inbound telemarketers and sellers that have existing business 
relationships with consumers may obtain a consumer's authorization 
to initiate an ACH debit over the telephone. As evidence of a 
consumer's authorization of a TEL transaction, the telemarketer or 
seller must either: (1) Record the oral authorization of the 
consumer, or (2) provide the consumer with written notice confirming 
the oral authorization prior to the settlement date of the entry. 
Id.
    \209\ As the Ninth Circuit noted in FTC v. Neovi, supra note 
202, at 1158, ``[r]egardless of whether a bank eventually restored 
consumers' money, the consumer suffered unavoidable injuries that 
could not be fully mitigated.''
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \210\ ABA at 6.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \211\ Id. at 5.
    \212\ For the same reasons, the Commission is equally 
unpersuaded by the ABA's other examples of business decisions in 
which consumers have no choice (i.e., the credit reporting agency 
that a business may consult and the choice of telecommunications 
company that a business uses to call consumers).
---------------------------------------------------------------------------

    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

[[Page 77537]]

the 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.
---------------------------------------------------------------------------

    \213\ TSR Amended Rule 2010, 75 FR at 48485 (employing cost 
benefit analysis in determining debt settlement amendments to the 
TSR).
    \214\ Federal Reserve Bank of Boston, The 2011 and 2012 Surveys 
of Consumer Payment Choice, at Table 2 (Sept. 2014) (hereinafter 
``2011 and 2012 Surveys of Consumer Payment Choice''), available at 
http://www.bostonfed.org/economic/rdr/2014/rdr1401.pdf (finding 85 
percent of consumers have had a traditional debit card). For the 
small percentage of checking account holders without traditional 
debit cards, there exist few, if any, barriers to obtaining debit 
card access. It is not known whether consumers without such 
traditional debit cards also lack other payment cards, such as 
credit cards or GPR cards.
    \215\ TSR Final Rule 1995, supra note 8, at 43850. The 
Commission received only one comment from a telemarketing firm, 
InfoCision, but it did not provide support for its conclusory 
statement that novel payment methods are important to legitimate 
businesses and charities. InfoCision at 2. InfoCision's Web site 
states that it ``work[s] with a roster over 200 clients across 
industries, including Fortune 500 companies and the nation's leading 
nonprofit organizations.'' InfoCision, Our Clients, available at 
http://www.infocision.com/CompanyInfo/Clients/Pages/default.aspx 
(last visited June 10, 2015). InfoCision's Web site identifies 
numerous clients, including Easter Seals, March of Dimes, American 
Diabetes Association, and Unicef. A review of the individual 
donation Web sites for each listed client indicates they accept card 
payments directly from consumers, suggesting that the inability to 
employ novel payment mechanisms should not be a major problem at 
least when dealing with the vast majority of consumers who have 
payment cards.
---------------------------------------------------------------------------

    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\
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    \216\ ABA at 7 (``[remotely created checks] allow a customer 
that does not have a debit, credit, or prepaid card to purchase 
goods that the customer would otherwise be denied''); First Data at 
3 (noting that consumers could be delayed in receiving goods or 
services); InfoCision at 2 (stating that legitimate businesses and 
charities ``need to offer customers multiple means of accepting 
payments or charitable donations'').
    \217\ First Data at 3 (citing increased risks of identity theft 
for checks sent through the mail); PPA-Biondi (``many of the 
alternative methods don't provide enough transaction information for 
the consumer''); PPA-Frank (same).
    \218\ ABA at 6 (emphasizing the speed of settlement compared to 
ACH transactions in certain circumstances), but see infra note 225 
(describing improvements to the ACH Network providing for same-day 
settlement).
    \219\ ABA at 6 (highlighting the ability of businesses to accept 
payments from consumers that do not have other types of payment 
methods); First Data at 4 (describing the lost sales opportunities 
for sellers that ``would be left without a timely and reliable 
payment mechanism when transacting business with a consumer that 
solely relies upon checks''); FRBA-1 at 3 (noting reasons why 
businesses may choose remotely created checks and remotely created 
payment orders over ACH debits); PPA-Frank (noting that merchants 
that do not meet credit standards necessary for ACH origination 
services need remotely created checks).
    \220\ InfoCision at 2 (``Traditional methods [of payment] are 
more costly and time consuming''). The NPRM requested, but the 
Commission did not receive, specific comments detailing what 
additional costs, if any, would result from using payment 
alternatives to remotely created checks and remotely created payment 
orders in telemarketing transactions. NPRM, supra note 1, at 41223. 
To the extent that remotely created checks and remotely created 
payment orders may cost telemarketers and sellers less than 
comparable payments, such as ACH, any modest cost benefits do not 
outweigh the significant harm to consumers. As one provider explains 
on its Web site, remotely created checks and remotely created 
payment orders are ``an alternative to ACH payment processing and 
specifically designed for businesses and industries classified as 
high risk merchants.'' National ACH Web site, supra note 199. 
Notably, these providers do not explicitly mention cost savings when 
comparing remotely created checks and remotely created payment 
orders with ACH payments. Check21 Web site, supra note 199.
---------------------------------------------------------------------------

    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

[[Page 77538]]

record, 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.
---------------------------------------------------------------------------

    \221\ TSR Final Rule 1995, supra note 8, at 43850 & n.79.
    \222\ Consumers and businesses used the ACH Network primarily 
for facilitating recurring credits (i.e., payroll and retirement 
benefits) and recurring debits (e.g., insurance premiums and 
mortgage payments). See Terri R. Bradford, The Evolution of the ACH 
(Dec. 2007), available at http://www.kansascityfed.org/Publicat/PSR/Briefings/PSR-BriefingDec07.pdf.
    \223\ TSR Final Rule 1995, supra note 8, at 43850-51; see also 
TSR RNPRM, supra note 46, at 30413-14 & n.63.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \224\ See section II.A.3.a(1).
    \225\ NACHA at 3; NCLC at 7. On May 19, 2015, NACHA announced 
that its voting membership approved amendments to the NACHA 
Operating Rules enabling same-day ACH settlement services, which 
means ACH debits will clear as quickly as remotely created checks 
and remotely created payment orders. Press Release, NACHA, NACHA 
Leads Industry Toward Ubiquitous, Same-Day ACH Settlement (Mar. 18, 
2014), available at https://www.nacha.org/news/nacha-leads-industry-toward-ubiquitous-same-day-ach-settlement.
    \226\ AARP at 3; AFR at 1; NCLC at 7; DOJ-CPB at 3; Transp. FCU.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \227\ The Commission notes that consumers increasingly are using 
prepaid debit cards, mobile payments, and online payment accounts 
(e.g., PayPal) to purchase goods and services. Unlike remotely 
created checks, remotely created payment orders, and ACH debits, 
however, these payment alternatives do not require a bank account.
    \228\ 2011 and 2012 Surveys of Consumer Payment Choice, supra 
note 214, at Table 6.
    \229\ Loretta J. Mester, Changes in the Use of Electronic Means 
of Payment: 1995-2010: An Update Using the Recently Released 2010 
Survey of Consumer Finances, 95 Business Review 25 (Third Quarter 
2012), available at http://www.philadelphiafed.org/research-and-data/publications/business-review/2012/q3/brq312_changes-in-use-of-electronic-means-of-payment-1995-2010.pdf.
    \230\ The Federal Reserve System, The 2013 Federal Reserve 
Payments Study: Recent and Long-Term Payment Trends in the United 
States: 2003-2012, 12 (Dec. 2013) (citations omitted) (hereinafter 
``Recent and Long-Term Payment Trends in the United States: 2003-
2012''), available at https://www.frbservices.org/files/communications/pdf/research/2013_payments_study_summary.pdf. The 
survey also found that ``[c]ompared with credit, debit, ACH, and 
check, prepaid card payments (including both general-purpose and 
private-label) increased at the fastest rate from 2009 to 2012 (15.8 
percent annually), reaching a total of 9.2 billion transactions in 
2012. The number of prepaid card payments increased 3.3 billion from 
2009 to 2012, which is higher growth than reported in previous 
studies.'' Id. at 8. See also, Banking on Prepaid 2 (The Pew 
Charitable Trusts June 30, 2015) (reporting that between 2012 and 
2014 use of GPR cards grew by 50 percent, and estimating that 
approximately 23 million Americans, more than one-quarter of whom do 
not have a checking account, are now regularly using such cards), 
available at http://www.pewtrusts.org/en/research-and-analysis/reports/2015/06/banking-on-prepaid.
    \231\ Recent and Long-Term Payment Trends in the United States: 
2003-2012, supra note 230, at 12.
    \232\ Id.
---------------------------------------------------------------------------

    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.

[[Page 77539]]

households 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\
---------------------------------------------------------------------------

    \233\ Id. (debit and prepaid cards accounted for 45 percent of 
all noncash payments in 2012); see also Bank for International 
Settlements, Committee on Payment and Settlement Systems, 
Innovations in Retail Payments, 23 (May 2012), available at http://www.bis.org/publ/cpss102.pdf. Because remotely created checks (and 
remotely created payment orders) require a checking account at a 
financial institution, comparisons with usage rates for electronic 
fund transfers (i.e., ACH debits and traditional debit cards linked 
to consumer checking accounts) are more relevant for purposes of 
this rulemaking than comparisons with usage rates for credit cards.
    \234\ Certain opponents of the prohibition claim that the 
additional transaction information available for remotely created 
checks and remotely created payment orders is a benefit to 
consumers, enabling them to better understand the nature of the 
withdrawals to their accounts. PPA-Biondi; PPA-Frank. Whether such 
additional transaction information exists (assuming it is truthful), 
however, does nothing to prevent the harm of unauthorized 
withdrawals in the first place or to mitigate the damage after 
unauthorized withdrawals have occurred.
    \235\ See supra note 89 and accompanying text. The Commission 
received only one comment from a telemarketing firm (InfoCision). 
While InfoCision states that the prohibition on using novel payment 
methods in telemarketing will harm legitimate companies, it does not 
provide specific evidence of transactions or merchants that use 
these methods. InfoCision at 2. Other commenters provided examples 
of legitimate transactions conducted over the telephone--to make 
last-minute credit card payments, pay mortgage or other bills, or 
receive payments in business-to-business transactions--that are not 
telemarketing transactions covered by the Rule or the proposed 
prohibition. ABA at 3; ECCHO at 2; First Data at 7; The Associations 
at 9. None of these commenters provided any specific information on 
the number of legitimate telemarketers that rely on remotely created 
checks and remotely created payment orders.
    \236\ See supra note 220.
    \237\ AARP at 3; NCLC at 7; DOJ-CPB at 3; Transp. FCU.
    \238\ See supra note 109 and accompanying text.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \239\ ABA at 1 & n.1 (describing the organization as 
representing banks of all sizes and charters); ECCHO at 1 (``ECCHO 
is a non-profit clearinghouse owned by 3,000 financial 
institutions''); The Associations at Appendix A (noting the 
membership of The Clearing House and The Financial Services 
Roundtable).
    \240\ The BSA is codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-
1959, 18 U.S.C. 1956-1957 & 1960, 31 U.S.C. 5311-5314 and 5316-5332, 
with implementing regulations at 31 CFR ch. X.
    \241\ ECCHO at 11, citing 31 CFR 1020.210 (Customer 
Identification Programs for Banks); see also The Associations at 7-8 
(citing bank regulatory guidance documents emphasizing the 
responsibility of financial institutions to ``take steps to know and 
monitor their customers in order to prevent unauthorized RCCs from 
entering the payment stream.'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \242\ First Data, itself a credit card payment processor, also 
stated that it uses remotely created checks and remotely created 
payment orders in limited scenarios when it telemarkets its payment 
processing services to small, start-up businesses which do not yet 
have access to a corporate credit card. First Data at 7. Although 
First Data did not estimate the number of such transactions, the 
Commission notes that business-to-business telemarketing 
transactions (with a few exceptions not relevant here) are exempt 
from the TSR.
    \243\ InfoCision at 1 (``InfoCision provides a full spectrum of 
direct marketing services, including inbound and outbound call 
center solutions, direct mail and fulfillment, and interactive 
(web), and data solutions.'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \244\ ECCHO at 13-14.
    \245\ Id. at 13 & n.19 (``We would note that the sampling that 
was conducted for this purpose was limited to RCCs handled by banks 
in the adjustment process. It is possible that during this sampling 
period there were also a material number of additional unauthorized 
RCC claims/items that were handled by paying banks as returns rather 
than adjustments.'').
    \246\ For example, after the paying bank's midnight deadline to 
return a check has passed, it might use a check adjustment claim to 
recover the amount of the check from the depositary bank, provided 
that the appropriate agreements between the banks are in place. See, 
e.g., 12 CFR 229.2(xx), comment 1, example (b) (stating that an 
adjustment request is not a paper or electronic representation of a 
substitute check, because it is not being handled for collection or 
return as a check).
    \247\ See Check Image Central, Resolving Duplicates As 
Adjustments Versus Returns, at 2-4 (Dec. 2006), available at http://checkimagecentral.org/pdf/ResolvingDuplicatesAsAdjustmentsVersusReturns.pdf (describing the 
advantages and disadvantages to each method of dishonor, and 
explaining that the choice is up to the paying bank).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \248\ See Check Image Central, Proper Use of Return Codes in 
Image Exchange, at 1 (Dec. 20, 2014), available at http://checkimagecentral.org/pdf/ProperUseOfReturnCodesInImageExchange.pdf 
(``The Uniform Commercial Code (UCC) and Regulation CC (Reg. CC), do 
not include a list of specific reasons that an item may be 
dishonored and returned. However with image exchange, the . . . 
[standard] exchange format provides a list of return reasons and 
associated codes that must be used for image exchange.'').
    \249\ Dec. Prof. Amelia Helen Boss, supra note 113, at ] 36, 
filed in First Consumers, supra note 109 (describing several reasons 
why ``unauthorized return rates [alone] may greatly underestimate 
the true number of unauthorized transactions.'').
    \250\ Id.
    \251\ OCC, OCC Bulletin 2008-12: Risk Management Guidance n.7 
(Apr. 24, 2008) (emphasis added), available at http://www.occ.gov/news-issuances/bulletins/2008/bulletin-2008-12.html; see also FFIEC, 
BSA/AML Examination Manual, Third-Party Payment Processors--Overview 
237 (Nov. 17, 2014), available at http://www.ffiec.gov/bsa_aml_infobase/pages_manual/olm_063.htm (``[A] bank should 
thoroughly investigate high levels of returns and should not accept 
high levels of returns on the basis that the processor has provided 
collateral or other security to the bank.''). This also holds true 
for ACH return rates. See supra notes 30-31 (describing NACHA's 
return rate thresholds, including a new 15 percent overall return 
rate threshold).
---------------------------------------------------------------------------

    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,

[[Page 77540]]

the Commission does not find ECCHO's estimates persuasive.
---------------------------------------------------------------------------

    \252\ Id. (``The most important reasons why the return rates 
understate the number of unauthorized returns, however, stem from 
the fact that the rate is completely dependent upon the victim 
discovering the unauthorized activity and following a prescribed 
method of seeking reimbursement. . . . [M]any fraudulent debits go 
undetected by the consumer victim and, even if discovered, the 
victim may not assert its claim against the bank in time, or the 
bank may refuse to re-credit the account and return the check.'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \253\ See supra note 98 and accompanying text. The Commission 
notes that these examples are not telemarketing transactions covered 
by the TSR.
---------------------------------------------------------------------------

    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, Sec.  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\
---------------------------------------------------------------------------

    \254\ See, e.g., DCS Holdings; ETA at 1; FRBA-1 at 2.
    \255\ Notably, First Data, the only payment processor to file a 
comment, never suggested that it would cease processing remotely 
created checks and remotely created payment orders altogether. First 
Data at 4.
    \256\ 16 CFR 310.3(b).
    \257\ As discussed above, banks also have in place Know Your 
Customer requirements, policies, and procedures to understand their 
customers' (and their payment processor's customers') businesses. 
See supra notes 240-241 and accompanying text; see also Ana R. 
Cavazos-Wright, Federal Reserve Bank of Atlanta, An Examination of 
Remotely Created Checks at 14-15 (May 2010) (``Banks' risk 
management programs must address their customers' use of remotely 
created checks to ensure the integrity of the check clearing network 
is preserved. Strong risk management practices such as customer due 
diligence at account origination and during the customer 
relationship are the first line of defense against fraudulent 
transactions.'').
    \258\ Financial institutions themselves will continue to enforce 
KYC requirements as well. For example, First Data asserted that 
``[m]any of the egregious business types cited in the proposal such 
as phony telephone offers, bogus charity solicitations, purported 
medical discount plans, illegal online gambling, etc. are high-risk 
areas that should have been properly screened by the depository 
bank. In these cases, the depository bank could have prevented this 
activity through properly applying Know Your Customer policies and 
complying with the FDIC and/or OCC Third-Party Processor 
Guidelines.''). First Data at 8. See also Transp. FCU. (``the 
proposed rule changes should not unduly restrict legitimate 
commerce, particularly involving already regulated financial 
institutions . . . '').
    \259\ States requiring express written authorization or signed 
confirmation before submitting payment against a consumer's account 
include: Arkansas (Ark. Code Ann. 4-99-203(b)(1)); Hawaii (Haw. Rev. 
Stat. 481P-1); Kansas (Kan. Stat. Ann. 50-672(c)); Kentucky (Ky. 
Rev. Stat. 367.46955(5)); Montana (Mont. Code Ann. 30-14-
1411(1)(e)); and Vermont (9 Vt. Stat. Ann. 2464(b)(2)).
    \260\ See 16 CFR 310.5(a)(5) (requiring telemarketers and 
sellers to keep, for a period of 24 months from the date the record 
is produced, certain records, including all verifiable 
authorizations received under the Rule).
    \261\ See supra note 208 (describing the authorization 
requirements for TEL Entries (either obtaining a tape recording of 
the consumer's oral authorization or providing, in advance of the 
settlement date of the entry, written notice to the consumer that 
confirms the oral authorization)).
    \262\ First Data asserted that it would take considerable time 
and expense to implement automated processes to block remotely 
created checks for telemarketing transactions. First Data at 4. 
Similarly, CUNA stated that ``financial institutions and other 
entities will have to make appropriate risk management changes.'' 
CUNA at 2. Neither CUNA nor First Data identified any expenses they 
would incur, over and above those currently incurred for compliance 
with KYC and BSA, and other existing requirements. The fact that 
existing compliance obligations should necessitate determining 
whether customers are engaged in covered telemarketing undermines 
industry's claims about possible increased compliance costs.
---------------------------------------------------------------------------

    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

[[Page 77541]]

with 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.
---------------------------------------------------------------------------

    \263\ ABA at 5 (arguing the FTC has failed to demonstrate that a 
ban will ``measurably address the problem'' because unscrupulous 
telemarketers will simply shift to other payment instruments); First 
Data at 3 (``prohibiting the use and acceptance of remotely created 
checks in telemarketing transactions does not provide any meaningful 
benefit to consumers . . .''); see also ECCHO at 4; FRBA-1 at 2; The 
Associations at 8-9.
    \264\ The Commission is not alone in this conclusion. As the 
NCLC comment noted, several years after the Commission adopted the 
express verifiable authorization requirements of the TSR, the 
Canadian Payments Association (``CPA'') banned the use of remotely 
created checks (referred to as ``tele-cheques''). In doing so, the 
CPA ``considered whether procedures could be put in place to 
sufficiently mitigate the risks associated with this payment 
instrument'' and found ``there was a generally held view that tele-
cheques represent an unacceptable level of risk, since the key to 
mitigating the risk of unauthorized transactions is the ability to 
verify authorization.'' Canadian Payments Association. Prohibition 
of Tele-cheques in the Clearing and Settlement System--Policy 
Statement (June 1, 2003), available at http://www.cdnpay.ca/imis15/eng/Act_Rules/Automated_Clearing_Settlement_System_ACSS_Rules/eng/rul/policy_statement_telecheques.aspx.
    \265\ See supra note 208.
    \266\ See NPRM, 78 FR at 41207 & n.84 (describing injury 
estimates from cases).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \267\ 15 U.S.C. 6101-6108.
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \268\ See supra note 259.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \269\ NACHA, TEL Brief Risk Management for TEL ODFIs and RDFIs 
Issue No. 3, supra note 208 (the TEL Rule recognizes the inherent 
risk of fraud associated with the anonymous and ``unique 
characteristics of TEL Entries, particularly given that a TEL 
transaction takes place in a non face-to-face environment.'').
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \270\ FRBA-2 at 2.
---------------------------------------------------------------------------

    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

[[Page 77542]]

into 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.
---------------------------------------------------------------------------

    \271\ The Commission continues to monitor developments in the 
marketplace, including developments and improvements in payments 
utilized by telemarketers and sellers, to ensure that consumers are 
adequately protected against telemarketing fraud while balancing the 
needs of businesses. For example, the Commission published a 2013 
report entitled ``Paper, Plastic . . . or Mobile? An FTC Workshop on 
Mobile Payments'' which summarized consumer protection concerns 
surrounding the increase in use of mobile payments, including 
dispute resolution, data security, and privacy.
---------------------------------------------------------------------------

    To implement the prohibition against the use of remotely created 
payment orders in outbound telemarketing transactions, the Commission 
amends Sec.  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.
---------------------------------------------------------------------------

    \272\ The Rule excludes from the general media exemption the 
following products and services: Investment opportunities, business 
opportunities other than business arrangements covered by the 
Franchise or Business Opportunity Rules, credit card loss protection 
plans, debt relief services, credit repair services, recovery 
services, and advance fee loans. 16 CFR 310.6(b)(5). The exceptions 
to the general media exemption reflect the Commission's law 
enforcement experience with deceptive telemarketers' use of mass 
media to advertise ``certain goods or services that have routinely 
been touted by fraudulent sellers using general media advertising to 
generate inbound calls.'' 2003 TSR Amendments, supra note 8, at 
4658.
    \273\ Inbound calls in response to direct mail advertising, like 
general media advertising, are exempt from coverage under the Rule. 
16 CFR 310.6(b)(6). The Rule also excludes from the direct mail 
exemption investment opportunities, business opportunities other 
than business arrangements covered by the Franchise or Business 
Opportunity Rules, credit card loss protection plans, debt relief 
services, credit repair services, recovery services, and advance fee 
loans. Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \274\ First Data at 6.
    \275\ Id.
---------------------------------------------------------------------------

    For these reasons, the Commission has determined that the 
prohibitions in Sec.  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 Sec.  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

[[Page 77543]]

friends 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\
---------------------------------------------------------------------------

    \276\ See also supra notes 175-177 (discussing ACH debits and 
traditional debit cards); notes 36 & 178 (discussing GPR cards); and 
notes 172-173 (discussing credit cards).
    \277\ See supra section I.B.1.a (discussing systemic monitoring 
of ACH Network and payment card system).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \278\ There are three major providers of cash reload mechanisms 
in the United States: Green Dot Corporation (MoneyPak); InComm 
(Vanilla Reload Network); and Blackhawk Network California, Inc. 
(Reloadit).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \279\ As noted above, the Rule's definition of ``cash-to-cash 
money transfers'' excludes transfers that are electronic funds 
transfers as defined in section 903 of EFTA, which provides for 
dispute resolution procedures. Cash reload mechanisms are not 
currently governed by Regulation E. The CFPB's proposed Prepaid 
Account Rule seeks to extend to ``prepaid accounts'' the protections 
of Regulation E and the EFTA, with certain important modifications. 
Prepaid Account Rule, supra note 36, at 77102. Although the proposed 
Prepaid Account Rule arguably might be read to cover cash reload 
mechanisms, the error resolution and liability limits of Regulation 
E would not be available unless the cash reload mechanism is 
``registered'' (i.e., the consumer provides ``identifying 
information such as name, address, date of birth, and Social 
Security Number or other government-issued identification number so 
that the financial institution can identify the cardholder and 
verify the cardholder's identity.''). Id. at 77166. Thus, 
unregistered cash reload mechanisms would not be covered by the 
error resolution and liability limits of Regulation E under the 
proposed Prepaid Account Rule. The Commission may revisit the 
definition of cash reload mechanism if warranted by a final Prepaid 
Account Rule.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \280\ Written Statement of Green Dot, supra note 50, at 2.
    \281\ InComm Press Release, supra note 51.
    \282\ Testimony of Blackhawk Network, supra note 51, at 3 
(highlighting the company's ``elimination of quick load with the 
scratch-off PIN and enhanced fraud mitigation efforts'').
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \283\ AARP; AFR; AGO; DOJ-CPB; DOJ-Criminal; Michalik; NCLC; 
NetSpend; Hon. Bill Nelson; Transp. FCU.
---------------------------------------------------------------------------

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

[[Page 77544]]

retrieving 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\
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    \284\ AGO at 4 & nn.9-10 (noting that Western Union has more 
than 489,000 agent locations and MoneyGram has approximately 244,000 
agents).
    \285\ AGO at 3; DOJ-Criminal at 2; NCLC at 11.
    \286\ NCLC at 11; see also AGO at 2 (noting that cash-to-cash 
money transfers can be ``picked up by a person with a forged ID in 
many different locations''); DOJ-Criminal at 2 (stating that 
fraudsters ``can rapidly receive and transfer victim proceeds with 
less regulatory or industry oversight than traditional payment 
methods such as checks and payment cards'').
    \287\ AGO at 4 (``Compounding the difficulty for consumers is 
the fact that unlike with fraudulent credit card payments or 
unauthorized bank debits, senders of money transfers have no 
established right to a refund once their transfer has been picked 
up, regardless of how fraudulent the conduct of the receiver was in 
inducing the transaction.'').
    \288\ The term ``419 scam'' encompasses a variety of common 
confidence scams. The number ``419'' refers to the article of the 
Nigerian Criminal Code dealing with fraud.
    \289\ AGO at 4-5.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \290\ See AARP at 3 (AARP agrees with the FTC that these payment 
methods ``pose a significant threat to potential victims of 
telemarketing fraud.''); AGO at 5 (noting that the overall extent of 
the problem ``cannot be known with precision, but it is clearly very 
substantial''); DOJ-CPB at 1 (stating that losses resulting from 
``global mass-marketing fraud is in the tens of billions of dollars 
per year''); NCLC at 12 (reporting that in 2012 cash-to-cash money 
transfers were the top method of payment in telemarketing fraud 
reported to the National Consumer League's Fraud Center, 
``accounting for nearly 63 percent of all telemarketing payments (up 
from 49 percent in 2009).'').
    \291\ NCLC at 12 (suggesting that, when used in the 
telemarketing context, such transfers are ``merely vehicles for 
evading consumer protections and liability for fraud''); see also, 
AARP at 3 (``[C]onsumers are not well protected when novel payment 
methods are used, and legitimate businesses have access to a variety 
of other payment methods that do provide consumers with more robust 
protections, the benefit to consumers of the proposed rule outweighs 
the burden to businesses in complying with this rule.''); DOJ-CPB at 
1 (noting that the proposal would ``[leave] open safer mechanisms 
for legitimate marketers to accept consumer payments.'').
    \292\ AGO at 10 (``It is now appropriate, indeed critical, for 
the FTC to clarify those companies' responsibility for making 
reasonable inquiry into whether consumers who propose to wire money 
are doing so in response to a prohibited communication.''); NCLC at 
14 (``Money transmitters are in a position to police their 
system'').
    \293\ AGO at 10; NCLC at 14-15; DOJ-CBP at 3; DOJ-Criminal at 3.
    \294\ NCLC at 14 (``Whether or not money transmitters are 
knowing parties to fraudulent transactions, every fraudulent 
transfer coming through their services earns them more profit at the 
expense of the scammers' victims.''); DOJ-Criminal at 3 & n.10 
(describing the proliferation of corrupt money transfer agents and 
citing criminal prosecutions); see also infra note 350 and 
accompanying text.
    \295\ DOJ-CPB at 3 (citing the U.S. v. MoneyGram Int'l, Inc., 
Cr. No. 12-291 (M.D. Pa. Nov. 9, 2012).
    \296\ AGO at 10 (emphasis in original).
    \297\ Id.; see also AFR at 1 (``The FTC should strengthen the 
rules against assisting or facilitating the use of the banned 
payment methods''); DOJ-Criminal at 3 (``Over the past decade, 
criminals' techniques have shifted from bribery or physical 
intimidation or assault of money transfer agents to fraudulent 
applications by mass-marketing fraud ring members to become agents 
of legitimate money transfer companies'') (citations omitted).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \298\ NCLC at 13.
    \299\ Id.
    \300\ AFR at 1 (``The payment system ban should apply to sales 
initiated by email or other methods that do not use a telephone.''); 
AGO at 9 (``The prohibition on telemarketing using money transfers 
should extend to commercial communications using money 
transfers.''); NCLC at 13 (``The proposed ban on the four payment 
systems should apply not only to transactions that involve a 
telephone but also to sales initiated by email, over the internet or 
through other methods that are not covered by the TSR.'').
    \301\ AGO at 1; NCLC at 2.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \302\ See generally AARP; AGO; AFR; DOJ-Criminal; DOJ-CPB; 
Michalik; NCLC; Hon. Bill Nelson.
    \303\ AGO at 11; DOJ-CPB at 3; DOJ-Criminal at 4; NCLC at 11-12.
    \304\ DOJ-Criminal at 4; see also AGO at 11.
    \305\ NCLC at 12.
    \306\ Id.
    \307\ DOJ-Criminal at 4.
---------------------------------------------------------------------------

    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

[[Page 77545]]

use 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\
---------------------------------------------------------------------------

    \308\ AARP at 3; NCLC at 13.
    \309\ AGO at 4; DOJ-CPB at 3; DOJ-Criminal at 4; NCLC at 12.
    \310\ NCLC at 15 (``Cash reload systems operate somewhat 
differently from cash-to-cash money transfers'').
    \311\ Id. (``The cash-to-cash money transfer and cash reload 
system industries are capable of creating internal systems to 
minimize fraudulent transactions. They are in a much better position 
than consumers themselves to root out the systemic problems.'').
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \312\ TMSRT at 1. The group includes: RIA Financial Services, 
Sigue Corporation, Western Union Financial Services, Inc., MoneyGram 
Payment Systems, Inc., and Integrated Payment Systems, Inc.
    \313\ CUNA at 1; ETA at 1; InfoCision at 2.
    \314\ ETA at 1-2.
    \315\ InfoCision at 2; see also supra note 215.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \316\ TMSRT at 1.
    \317\ Id. None of these money transfers involve telemarketing 
under the TSR.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \318\ TMSRT at 4; see also ETA at 2.
    \319\ TMSRT at 5.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \320\ ETA at 1 (``The ETA is concerned that a payment 
processor's innocent acceptance or processing of a `novel' payment 
method in a non-fraudulent telemarketing sales transaction would be 
deemed an abusive act or practice.'').
    \321\ TMSRT at 5.
    \322\ Id.
    \323\ Id. at 6-7.
---------------------------------------------------------------------------

    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

[[Page 77546]]

that money transfer providers should adopt.\326\
---------------------------------------------------------------------------

    \324\ Id. at 5.
    \325\ Id. at 5-6.
    \326\ Id. at 6.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \327\ InfoCision at 2; ETA at 1.
    \328\ InComm at 3.
    \329\ Green Dot at 1; see Written Statement of Green Dot, supra 
note 50.
    \330\ InComm at 3; Green Dot at 1.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \331\ Written Statement of Green Dot, supra note 50, at 2.
    \332\ Id. At a subsequent hearing held by the U.S. Senate 
Special Committee on Aging, a third cash reload provider, Blackhawk 
Network, testified it will replace its ``Quick Reload'' process with 
swipe reload. Testimony of Blackhawk Network, supra note 51, at 3.
    \333\ InComm Press Release, supra note 51.
    \334\ Id. As of March 31, 2015, Vanilla Reload PIN code cash 
reload is ``no longer available for purchase.'' See 
www.vanillareload.com (last visited June 6, 2015).
    \335\ Testimony of Blackhawk Network, supra note 51, at 3. 
Instead, consumers can use a swipe reload method to reload their own 
GPR card at a register, or sign up for a Reloadit Safe--an account 
that acts like a digital wallet into which consumers can deposit the 
funds on Reloadit packs. In turn, the consumer can use the funds 
from the Reloadit Safe to load GPR cards she has registered with her 
Reloadit Safe. See Reloadit How It Works, available at https://www.reloadit.com/HowItWorks (last visited June 6, 2015).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \336\ Green Dot at 2.
    \337\ InComm at 2-3 (noting the proposal ``could potentially 
prohibit consumers' legitimate uses of cash reload mechanisms that 
are unrelated or incidental to any telemarketing activity'').
    \338\ InComm at 2.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \339\ Green Dot at 2; InComm at 4.
    \340\ Green Dot at 2; see also InComm at 4.
    \341\ InComm at 4.
    \342\ InComm at 4; see also Green Dot at 2.
---------------------------------------------------------------------------

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

[[Page 77547]]

Commission 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.
---------------------------------------------------------------------------

    \343\ AGO at 1 (recommending that ``the prohibition extend to 
transactions proposed by email, which transactions cause as much 
harm to consumers, if not more, than transactions over the phone''). 
The AGO comment cites to Consumer Sentinel Network data provided by 
the FTC to conclude that fraud-induced money transfers in connection 
with email communication is a problem of ``equivalent or greater 
magnitude'' than telemarketing. AGO at 7. The AGO letter notes that, 
from January 1, 2011 through June 3, 2013, the Commission received 
26,379 complaints (accounting for $188,963,368 of injury) in which 
consumers identified the payment method as ``wire transfer'' and the 
method of communication as ``telephone.'' Id. During the same time 
frame, the Commission received 67,217 complaints (accounting for 
$596,315,020 in injury) for money transfer complaints where the 
method of contact was ``email.'' Id.
    The Commission notes that the data cited by the AGO comment 
include only those complaints in which the consumer reported both 
the method of payment and the method of initial contact. As a 
result, these figures exclude a significant number of complaints in 
which consumers did not report either the method of payment or the 
method of contact. For example, from January 1, 2011 through June 3, 
2013, only 26 percent (or 305,990) of all consumer complaints 
(1,165,090) reported the method of payment, while 48 percent of 
consumer complaints (560,811) included the method of contact. FTC, 
Consumer Sentinel Network Data Book for January-December 2013, at 8-
9 (Feb. 2014), available at https://www.ftc.gov/system/files/documents/reports/consumer-sentinel-network-data-book-january-december-2013/sentinel-cy2013.pdf. Moreover, the overall Consumer 
Sentinel data in 2013 demonstrated that consumer fraud victims 
reported the telephone as the method of contact in 40 percent of 
complaints, while email was the method of contact in 33 percent of 
complaints. Id. at 9.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \344\ InComm expressed concern that the proposed amendment would 
restrict the ability of consumers to use cash reload mechanisms for 
non-telemarketing transactions, including e-commerce transactions 
and payments to billers (such as utility, cable, or telephone 
providers). InComm at 2-3. As discussed in detail in section 
II.B.3.c(2) below, the Commission is unpersuaded that these 
transactions will be adversely affected by the prohibition on cash 
reload mechanisms in telemarketing.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \345\ See, e.g., FTC v. Bezeredi, Civ. No 05-1739 (W.D. Wash. 
Apr. 3, 2007) (Summ. J.); FTC v. 627867 B.C. Ltd. dba Cash Corner, 
Civ. No 03-3166 (W.D. Wash. Aug. 4, 2006) (Stip. Perm. Inj.); FTC v. 
World Media Brokers, Inc., No. 02C6985 (N.D. Ill. June 22, 2004), 
aff'd, 415 F.3d 758 (7th Cir. 2005) (Partial Summ. J.); see also 
Press Release, DOJ, Jamaican Man First to be Extradited to Face 
Fraud Charges in International Lottery Scheme (Feb. 12, 2015) 
(indictment describing how defendant and co-conspirators obtained 
victims' money via MoneyGram, Western Union, and Jamaica National 
money transfers), available at http://www.justice.gov/opa/pr/jamaican-man-first-be-extradited-face-fraud-charges-international-lottery-scheme; Press Release, FBI, Jamaican DJ Arrested in Florida 
in Connection with North Dakota Telemarketing Lottery Scam: Twenty-
Six Individuals Currently Indicted (May 27, 2014), available at 
http://www.fbi.gov/minneapolis/press-releases/2014/jamaican-dj-arrested-in-florida-in-connection-with-north-dakota-telemarketing-lottery-scam; Press Release, FBI, Telemarketer Sentenced in 
Manhattan Federal Court to 75 Months in Prison for Sweepstakes Fraud 
That Targeted Elderly Victims (Sept. 24, 2013), available at http://www.fbi.gov/newyork/press-releases/2013/telemarketer-sentenced-in-manhattan-federal-court-to-75-months-in-prison-for-sweepstakes-fraud-that-targeted-elderly-victims.
    \346\ See, e.g., U.S. v. Brister, Cr. No. 13-0276 (E.D. Pa. June 
6, 2013) (indictment describing various mystery shopper and job 
schemes used by defendant to induce victims to transfer money via 
Western Union), available at http://www.justice.gov/usao/pae/News/2013/June/brister_indictment.pdf; FTC Consumer Alert, Mystery 
Shopper Scams (Nov. 2012), available at http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt151.shtm; Press Release, DOJ, Georgia Woman 
Pleads Guilty In Mystery Shopper Scam (July 23, 2014), available at 
http://www.justice.gov/usao/paw/news/2014/2014_july/2014_07_23_03.html; Press Release, DOJ, Santa Barbara County Man 
Sentenced to Six Years in Federal Prison for Running $6 Million Job 
Scam (Apr. 5, 2011), available at https://www.fbi.gov/losangeles/press-releases/2011/la040511.htm (defendant sentenced for $6 million 
bogus mystery shopper scam).
    \347\ FTC v. USS Elder Enters., Inc., Civ. No. 04-1039 (C.D. 
Cal. Jul. 26, 2005) (default judgment against telemarketers using 
bogus work-at-home opportunity to lure consumers to send at least 
$885,196 in money transfers).
    \348\ AARP Bulletin, Scam Alert: Beware of Green Dot MoneyPak 
Scams--The crooks' other preferred payment method has become the 
weapon of choice (Apr. 23, 2012), available at http://www.aarp.org/money/scams-fraud/info-04-2012/avoid-moneypak-scams.html; Press 
Release, Better Business Bureau, Fraud Task Force Warns Consumers Of 
Scams Using Western Union, MoneyGram, Green Dot MoneyPaks (Aug. 2, 
2012), available at http://interact.stltoday.com/pr/business/PR08021203459861.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \349\ DOJ-Criminal at 3 & n.10 (citing examples of cases 
involving corrupt money transfer agents); NCLC at 14 & nn.56-59 
(same).
    \350\ Press Release, DOJ, MoneyGram International Inc. Admits 
Anti-Money Laundering and Wire Fraud Violations, Forfeits $100 
Million in Deferred Prosecution (Nov. 9, 2012), available at http://www.justice.gov/opa/pr/2012/November/12-crm-1336.html.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \351\ Id.; DOJ-CPB at 3.
    \352\ See Press Release, Office of the Vermont Attorney General, 
Western Union Enters Into Settlement With Attorneys General (Nov. 
14, 2005), available at http://ago.vermont.gov/focus/news/western-union-enters-into-settlement-with-attorneys-general.php. A copy of 
the five-year, multi-state agreement is available on the Web site of 
the Office of the Iowa Attorney General at http://www.state.ia.us/government/ag/latest_news/releases/nov_2005/Western_Union.html.
---------------------------------------------------------------------------

    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

[[Page 77548]]

consumers 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.
---------------------------------------------------------------------------

    \353\ See Press Release, Office of the Vermont Attorney General, 
Attorney General Announces $1.2 Million Settlement With MoneyGram 
(July 2, 2008), available at http://ago.vermont.gov/focus/news/attorney-general-announces-1.2-million-settlement-with-moneygram.php. A copy of the five-year, multi-state agreement can be 
found on the Web site of the Texas Attorney General at http://www.oag.state.tx.us/newspubs/releases/2008/070208moneygram_avc.pdf.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \354\ FTC v. MoneyGram Int'l, Inc., Civ. No. 1:09-06576 (N.D. 
Ill. Oct. 19, 2009) (Stip. Perm. Inj.).
    \355\ See Press Release, FTC, MoneyGram to Pay $18 Million to 
Settle FTC Charges That it Allowed its Money Transfer System To Be 
Used for Fraud (Oct. 20, 2009), available at http://www.ftc.gov/news-events/press-releases/2009/10/moneygram-pay-18-million-settle-ftc-charges-it-allowed-its-money.
    \356\ Stip. Order for Perm. Inj. and Final Judgment, filed in 
FTC v. MoneyGram, supra note 354.
    \357\ See Press Release, FTC, FTC Mails Redress Checks to Fraud 
Victims Who Lost Money Through MoneyGram's Money Transfer System 
(Apr. 28, 2010), available at http://www.ftc.gov/news-events/press-releases/2010/04/ftc-mails-redress-checks-fraud-victims-who-lost-money-through.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \358\ U.S. v. MoneyGram Int'l, Inc., Cr. No. 1:12-291 (M.D. Pa. 
Nov. 9, 2012).
    \359\ Statement of Facts, ] 18, filed in US v. MoneyGram, Cr. 
No. 1:12-291 (M.D. Pa. Nov. 9, 2012).
    \360\ See Press Release, DOJ, supra note 350 (alleging, among 
other things, that MoneyGram failed to implement policies or 
procedures governing the termination of agents involved in fraud 
and/or money laundering; (2) failed to implement policies regarding 
the filing of the required Suspicious Activity Reports (SARs) when 
victims reported fraud to MoneyGram on transactions over $2,000; (3) 
failed to file SARs on agents MoneyGram knew were involved in the 
fraud; and (4) failed to conduct effective AML audits of or due 
diligence on its agents, prospective agents, and outlets).
    \361\ Id. According to the Statement of Facts, MoneyGram has 
implemented a number of remedial actions, including the creation of 
an Anti-Fraud Alert System to identify and place on hold potentially 
fraudulent transactions. Statement of Facts, supra note 359, at ] 
32f.
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    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\
---------------------------------------------------------------------------

    \362\ See supra note 348; DOJ-Criminal at 4; NCLC at 11-12; AFR 
at 1; see also Jorgen Wouters, Daily Finance, Beware of Green Dot 
MoneyPak Scams (June 23, 2011), available at http://www.dailyfinance.com/2011/06/23/beware-of-green-dot-moneypak-scams/ 
(article including statements of president and CEO of the BBB 
regarding the increase of frauds using cash reload mechanisms).
    \363\ See, e.g., Written Statement of Green Dot, supra note 50, 
at 2; Testimony of Blackhawk Network, supra note 51, at 3; InComm 
Press Release, supra note 51.
    \364\ Consumer Alert, Bill Schuette Attorney General, Green Dot 
MoneyPak Cards, available at http://www.michigan.gov/ag/0,4534,7-
164-17337_20942-318482_,00.html.
    \365\ Consumer Alert, Federal Reserve, $ Consumer Help (Dec. 11, 
2013), available at https://www.federalreserveconsumerhelp.gov/.
    \366\ Sue McConnell, BBB Consumer News and Opinion Blog: 
Cleveland Woman Loses Hundreds of Dollars to Government Grant Scam 
(Feb. 28, 2014), available at http://www.bbb.org/blog/2014/02/cleveland-woman-loses-hundreds-of-dollars-to-government-grant-scam/.
    \367\ Press Release, FBI, Internal Revenue Service Telephone 
Scam (Sept. 29, 2014), available at https://www.fbi.gov/sandiego/press-releases/2014/internal-revenue-service-telephone-scam; Press 
Release, FBI, U.S. Attorney's Office Warns Public of Lottery Scam 
Telephone Calls (May 28, 2013), available at https://www.fbi.gov/minneapolis/press-releases/2013/us-attorneys-office-warns-public-of-lottery-scam-telephone-calls.
---------------------------------------------------------------------------

    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

[[Page 77549]]

example, in 2014 consumer complaints contributed to the CSN by 
MoneyGram and Western Union represented 3 percent of the total number 
of complaints received.\370\
---------------------------------------------------------------------------

    \368\ See supra notes 345-350 and accompanying text (describing 
law enforcement cases involving money transfers).
    \369\ FTC, Consumer Sentinel Network Data Book for January-
December 2014, at 8 & n.2 (Feb. 2015) (hereinafter ``2014 Consumer 
Sentinel Network Data Book''), available at https://www.ftc.gov/system/files/documents/reports/consumer-sentinel-network-data-book-january-december-2014/sentinel-cy2014-1.pdf.
    \370\ Id. at 74.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \371\ Id. at 8-9. These figures include telemarketing and non-
telemarketing complaints.
    \372\ The 2014 Consumer Sentinel Network Data Book documented a 
total of $1,468,647,723 in injury from January 1, 2011 through 
December 31, 2014. Id. at 8 & n.2.
    \373\ Id. at 8-9. These figures include telemarketing and non-
telemarketing complaints.
    \374\ NCLC at 12.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \375\ 2014 Consumer Sentinel Network Data Book, supra note 369, 
at 8.
    \376\ Id. at 8 n.2 & 74.
    \377\ Written Statement of Green Dot Corporation, supra note 50, 
at 2.
    \378\ NCLC at 12.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \379\ See NPRM, supra note 1, at 41213 (describing injury 
estimates from consumer complaint data and cases).
    \380\ If the CFPB's proposed Prepaid Account Rule is adopted, 
the protections of the EFTA and Regulation E would extend to 
registered cash reload mechanisms. See supra note 279. The 
Commission is aware of no state law providing chargeback rights for 
consumers using cash-to-cash money transfers or cash reload 
mechanisms. State laws governing money services businesses 
(``MSBs''), including the Texas statute highlighted in the comment 
submitted by InComm, typically mandate disclosures to consumers. 
InComm at 5 & n.2 (referencing a Texas statute, 7 TX ADC 33.51, 
which requires MSBs to provide consumers with customer service 
contact information, and information on how to file a complaint with 
the Texas Department of Banking if a complaint remains unresolved).
    \381\ The BSA and related laws target terrorism financing, tax 
evasion, and money laundering activity. U.S. Department of Treasury, 
FinCEN, Statutes & Regulations: Bank Secrecy Act, available at 
http://www.fincen.gov/statutes_regs/bsa/. The Prepaid Access Rule 
amends the money services businesses rules of the BSA regulations to 
mandate similar reporting and transactional information collection 
requirements on providers and sellers of certain types of prepaid 
access, including some cash reload mechanisms that meet certain 
criteria. Final Rule; Bank Secrecy Act Regulations--Definitions and 
Other Regulations Relating to Prepaid Access, 76 FR 45403-02 (Jul. 
29, 2011). In addition, state statutes provide licensing 
requirements for money transfer providers. See, e.g., Ariz. Rev. 
Stat. 6-1202 (licensing requirements for money transfer providers); 
Kan. Stat. Ann. 9-509 (same).
    Certain cash-to-cash money transfers (those made to locations 
outside of the U.S.) are governed by the Remittance Rule, which 
provides disclosures to customers of money transfer providers. 12 
CFR 1005.30(e) (definition of ``remittance transfer'' includes 
transfers ``sent by a remittance transfer provider'' to a 
``designated recipient'' outside of the United States). In contrast, 
cash reload mechanisms, which consumers purchase directly from a 
retailer at the point of sale, may not qualify as remittance 
transfers covered by the Remittance Rule, depending on whether cash 
reloads are transferring funds outside of the United States and 
whether the transfer is ``sent by a remittance transfer provider.'' 
Whether the Remittance Rule applies to a particular cash-to-cash 
money transfer or cash reload mechanism, however, is immaterial to 
the Commission's analysis of the Final Rule. As discussed in section 
I.B.1.b above, existing laws regulate the relationship between the 
consumer and the money transfer provider, not the relationship 
between the consumer and the telemarketer or seller. See also, supra 
note 279 (discussing the CFPB's Proposed Prepaid Account Rule).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \382\ See supra note 202 (citing cases deciding whether 
consumers' injuries were reasonably avoidable).
---------------------------------------------------------------------------

    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

[[Page 77550]]

detection 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.
---------------------------------------------------------------------------

    \383\ See Neovi, supra note 202, at 1158 (``Regardless of 
whether a bank eventually restored consumers' money, the consumer 
suffered unavoidable injuries that could not be fully mitigated.'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \384\ TMSRT at 2 n.5 (noting that ``consumers engage in cash-to-
cash transfers with telemarketers despite explicit warnings not to 
do so.'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \385\ As Judge Easterbrook stated in Mayer v. Spanel Intern. 
Ltd., 51 F.3d 670, 675 (7th Cir. Mar. 31, 1995), ``[t]olerating 
fraud by excusing deceit when the victim is too easily gulled 
increases . . . the volume of fraud''). See also, FTC v. Crescent 
Pub. Group, Inc., 129 F.Supp.2d 311, 321 (S.D.N.Y. Jan. 24, 2001) 
(describing consumer reliance on express claims to be 
``presumptively reasonable,'' and noting that ``[i]n evaluating 
[the] tendency . . . to deceive, it is appropriate to look not at 
the most sophisticated, but the least sophisticated consumer.'') 
(citations omitted).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \386\ Written Statement of Green Dot, supra note 50, at 2; see 
generally, Testimony of Blackhawk Network, supra note 51.
    \387\ AARP at 2 (``AARP studies have confirmed that education 
alone will not protect older people from telemarketing fraud. . . . 
``there is always a hard core of victims whose behavior cannot be 
changed by messages''); see also Letter from the FTC to Hon. John D. 
Dingell, Chairman Committee on Energy and Commerce, United States 
House of Representatives, Commission Policy Statement on Deception, 
appended to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984) 
(``When representations or sales practices are targeted to a 
specific audience, such as children, the elderly, or the terminally 
ill, the Commission determines the effect of the practice on a 
reasonable member of that group.'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \388\ ETA at 1 (``The ETA submits that it is not the payment 
methods themselves that are fraudulent, but rather the actors that 
are attempting to sell goods and services in a fraudulent manner 
that constitute the real problem.''); TMSRT at 2 (``[T]he NPRM 
suggests that these payment methods themselves, rather than an 
abusive telemarketing practice are the problem.'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \389\ DOJ-Criminal at 3 & nn.9-13 (citing numerous cases brought 
by the Department of Justice); see supra note 350.
---------------------------------------------------------------------------

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,

[[Page 77551]]

cash-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.
---------------------------------------------------------------------------

    \390\ See supra notes 227-233 and accompanying text (describing 
studies of consumer payment preferences and the rapid growth of 
prepaid cards).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \391\ TMSRT at 1.
    \392\ Id. at 3.
    \393\ Id. At the same time, TMSRT maintains that money transfer 
providers ``have taken steps to substantially reduce the amount of 
fraudulent activity that is occurring.'' Id. at 5.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \394\ For example, in testimony to the U.S. Senate Special 
Committee on Aging, an official from Western Union explained how the 
company trains money transfer agents to help identify potential 
fraud victims, including ``how to listen to consumers for verbal 
cues indicating fraudulent activity, look for body language that 
indicates nervousness or a sense of urgency, and ask questions to 
determine the consumer's relationship with the receiver and reasons 
for sending the money.'' Testimony of Mr. Phil Hopkins, Vice 
President Global Security, The Western Union Company, submitted to 
the United States Senate, Special Committee on Aging, at 4-5 (Mar. 
13, 2013). http://www.aging.senate.gov/imo/media/doc/07_Hopkins_3_13_13.pdf. According to the testimony, ``[i]f an Agent 
suspects the transaction is fraudulent, the Agent is trained to 
refuse the transaction or report it to Western Union for further 
investigation.'' Id.
    \395\ Indeed, money transfer providers are required to implement 
an effective AML program, which is ``reasonably designed to prevent 
the [money transfer provider] from being used to facilitate money 
laundering and the financing of terrorist activities,'' and ``shall 
be commensurate with the risks posed by the location and size of, 
and the nature and volume of the financial services provided by, the 
[money transfer provider].'' FinCEN, Interpretive Release 2004-01: 
Anti-Money Laundering Program Requirements For Money Services 
Businesses with respect to Foreign Agents or Foreign Counterparties, 
7 (2004) (citing 31 CFR 103.125). In addition, FinCEN has made clear 
that the AML programs of money transfer providers should, among 
other things, ``establish procedures for conducting reasonable, 
risk-based due diligence on potential and existing foreign agents 
and counterparties to help ensure that such foreign agents and 
counterparties are not themselves complicit in illegal activity.'' 
Id. at 9. This includes ``establish[ing] procedures for risk-based 
monitoring and review of transactions'' sufficient to ``identify 
and, where appropriate, report as suspicious such occurrences as[] 
instances of unusual wire activity''. Id. at 10.
    \396\ See supra notes 352-361 and accompanying text discussing 
law enforcement cases against Western Union and MoneyGram.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \397\ TMSRT at 3.
    \398\ Moreover, the prohibition will have no adverse impact on 
the industry's potential implementation of a database of terminated 
agents. Id. at 7 (``Facilitation of such a database will be 
instrumental in fighting telemarketing fraud and should be 
considered as an approach to addressing the issues raised in the 
rulemaking.'').
---------------------------------------------------------------------------

    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

[[Page 77552]]

detect 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\
---------------------------------------------------------------------------

    \399\ Id. at 5.
    \400\ See, e.g., Compliance Guide, FTC, Complying With the 
Telemarketing Sales Rule, available at http://www.ftc.gov/tips-advice/business-center/complying-telemarketing-sales-rule; Business 
Guide, FTC, .com Disclosures: How to Make Effective Disclosures in 
Digital Advertising (March 2013), available at http://www.ftc.gov/system/files/documents/plain-language/bus41-dot-com-disclosures-information-about-online-advertising.pdf.
    \401\ See supra note 394.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \402\ TMSRT at 7.
    \403\ See supra notes 354-355 and accompanying text.
    \404\ The allegations and settlements reached by state attorneys 
general against Western Union are similarly instructive. See supra 
notes 352-353 and accompanying text.
    \405\ See supra notes 350 and accompanying text.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \406\ The Commission also declines the requests of some 
commenters to impose strict liability on those cash-to-cash money 
transfer providers that, despite their best efforts to detect 
unlawful transactions, unwittingly transfer money in connection with 
telemarketing transactions. AFR at 1; NCLC at 13.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \407\ Written Statement of Green Dot, supra note 50, at 2; 2014 
Consumer Sentinel Network Data Book, supra note 371, at 8.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \408\ Green Dot weighed the impact of its decision on ``honest 
customers who routinely rely on the MoneyPak PIN method for adding 
money to a family member's card'' in determining to ``eliminate the 
MoneyPak as an instrument of [fraud]''). Written Statement of Green 
Dot, supra note 50, at 2.
    \409\ According to the Web site www.moneypak.com (last visited 
April 8, 2015), ``MoneyPak[supreg] is no longer available for 
purchase.''
    \410\ Id.
    \411\ InComm Press Release, supra note 51; Testimony of 
Blackhawk Network, supra note 51, at 3 & 5.
---------------------------------------------------------------------------

    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

[[Page 77553]]

telemarketing 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\
---------------------------------------------------------------------------

    \412\ InComm at 2; see Green Dot at 2.
    \413\ InComm at 2-3; ETA at 1. The prohibition restricts a 
telemarketer or seller from accepting a cash reload mechanism as 
payment only ``for goods or services offered or sold through 
telemarketing or as a charitable contribution solicited or sought 
through telemarketing''). NPRM, supra note 1, at 41218.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \414\ Before the discontinuance of MoneyPak, Green Dot 
established ``authorized biller relationships'' permitting consumers 
to use a cash reload mechanism to legitimately pay existing bills 
without having to first load the funds onto an existing GPR card or 
into an account with an online payment intermediary. It appears that 
no other cash reload providers currently have established such 
authorized biller relationships. For example, consumers cannot 
redeem a Vanilla Reload Pack directly with a biller or e-commerce 
merchant. Instead, consumer must use Vanilla Bill Payment, which is 
a single-use prepaid card that can be used to make purchases or pay 
bills wherever MasterCard or Visa are accepted. See, InComm, Vanilla 
Bill Pay: Important Things to Know, available at https://www.vanillabillpay.com/product.html (follow link to Vanilla Visa Web 
page and click on ``Click here to learn more about your Vanilla Bill 
Payment Prepaid Visa[supreg]'') (last visited February 12, 2015). 
Similarly, Blackhawk's Reloadit Pack can be used only to reload an 
existing GPR or a Reloadit Safe (an online account balance). See, 
Blackhawk Network, Inc., Reloadit: How it Works, available at 
https://www.reloadit.com/HowItWorks (last visited February 11, 
2015). For these reasons, the Commission is unpersuaded that the 
prohibition against cash reload mechanisms in telemarketing will 
have any adverse effect on consumers' ability to pay billers and 
utility companies.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \415\ See supra notes 32 & 36 (describing how merchants 
accepting network-branded debit cards, including prepaid cards, are 
subject to the operating rules and anti-fraud monitoring of the 
payment card networks) and 178 (describing the voluntary zero 
liability protections afforded consumers in signature debit card 
transactions). In addition, the CFPB's proposed Prepaid Account Rule 
may extend to GPR cards the protections of the EFTA and Regulation 
E. See Prepaid Account Rule, supra note 36.
---------------------------------------------------------------------------

    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.''
---------------------------------------------------------------------------

    \416\ Green Dot at 2; InComm at 4; ETA at 1.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \417\ Green Dot at 2; InComm at 2-3.
    \418\ Green Dot at 2.
---------------------------------------------------------------------------

    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

[[Page 77554]]

pay 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.
---------------------------------------------------------------------------

    \419\ Similarly, the prohibition does not apply to payments made 
from a digital wallet or safe, regardless of whether they were 
deposited by means of a swipe reload or PIN-based cash reload 
mechanism.
---------------------------------------------------------------------------

    To implement the prohibition against the use of cash-to-cash money 
transfers and cash reload mechanisms, the Commission amends Sec.  
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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \420\ 16 CFR 310.4(a)(3).
    \421\ NPRM, supra note 1, at 41215.
    \422\ AARP at 1 (``AARP strongly supports the FTC proposal[ ] to 
. . . expand the scope of the advance fee ban on recovery 
services''); AFR at 2 (``We support the proposal to ban advance fees 
charged for purported help in recovering losses in connection with 
prior internet scams''); AGO at 12 (expressing support for 
``broadening the ban on telemarketing recovery services to include 
losses incurred in any medium''); DOJ-CPB at 3-4 (``The goal of this 
specific provision is to protect consumers from the deceptive acts 
of recovery services, not the underlying business from which the 
consumer lost money. Thus, whether the underlying business acted 
through telemarketing is irrelevant.''); DOJ-Criminal at 4 
(``Because mass-marketing fraud techniques have changed over time, 
there is no substantial reason that the TSR's scope should be 
limited only to recovery schemes that claim to recover funds lost in 
a previous telemarketing transaction.''); Michael (stating that 
recovery companies ``prey on victims of work-at-home and other 
similar companies who have been defrauded for thousands of dollars 
and are looking for a place to turn.''); NCLC at 15 (``There is no 
reason to make a distinction based on the circumstances of the 
[original] loss.''); see generally Transp. FCU.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \423\ U.S. v. Bus. Recovery Servs., LLC, Civ. No. 11-00390-JAT 
(D. Ariz. Sept. 13, 2013) (Stip. Perm. Inj.); DOJ-CPB at 4-5; Press 
Release, FTC, FTC Settlement and Default Judgment Impose Permanent 
Ban on Marketers of Scam `Recovery' Kits (Nov. 20, 2013), available 
at http://www.ftc.gov/news-events/press-releases/2013/11/ftc-settlement-default-judgment-impose-permanent-ban-marketers.
---------------------------------------------------------------------------

    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 Sec.  310.4(a)(3) proposed in the NPRM.
---------------------------------------------------------------------------

    \424\ DOJ-CPB at 4.
---------------------------------------------------------------------------

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 Sec.  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 Sec.  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

[[Page 77555]]

customer, as required by Sec.  310.4(b)(1)(iii)(B)(i)-(ii). Second, the 
amendments illustrate the types of impermissible burdens on consumers 
that violate Sec.  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 Sec.  
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.
---------------------------------------------------------------------------

    \425\ NPRM, supra note 1, at 41217.
    \426\ Transp. FCU at 1; DOJ-Criminal at 5; AGO at 12; AARP at 1-
2; NCLC at 15-16. The latter two comments, while supporting the 
amendment, also argued for a recording of the entire telemarketing 
call, a proposal that would require a separate rulemaking 
proceeding.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \427\ Section 310.3(a)(3) prohibits sellers and telemarketers 
from billing for telemarketing purchases or donations without a 
customer's or donor's ``express verifiable authorization,'' if 
payment is not made by credit or debit card.
    \428\ 16 CFR 310.3(a)(3)(ii). The new mandate of an accurate 
description of the goods or services or charitable contribution will 
be added to the list of required disclosures identified in Sec.  
310.3(a)(3)(ii)(A). The six original disclosures the seller or 
telemarketer has been required to make and include in the recording 
by Sec.  310.3(a)(3)(ii)(A)-(G) will be renumbered as Sec.  
310.3(a)(3)(ii)(B)-(H). These disclosures are the number of debits, 
charges or payments (if more than one); the date(s) the debit(s), 
charge(s), or payment(s) will be submitted for payment; the 
amount(s) of the debit(s), charges(s), or payment(s); the customer's 
or donor's name; the customer's or donor's billing information 
identified with sufficient specificity that the customer or donor 
understands what account will be used to collect payment for the 
goods or services or charitable contribution that are the subject of 
the telemarketing transaction; a telephone number for customer or 
donor inquiry that is answered during normal business hours; and the 
date of the customer's or donor's oral authorization.
    \429\ As the Commission noted in the NPRM, ``it is difficult to 
imagine how a verification recording could `evidence clearly' a 
payment authorization `for the goods or services or charitable 
contribution that are the subject of the telemarketing transaction' 
without mentioning the goods, services, or charitable 
contribution.'' 78 FR at 41217 & n. 182 (citing cases alleging 
material changes or complete omissions in verification recordings of 
the pre-sale descriptions of the goods or services).
    \430\ Id.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \431\ AFR at 2; NCLC at 16; AGO at 12; DOJ-CPB at 1; DOJ-
Criminal at 1; cf. Blue Diamond Remodeling at 1 (complaining that 
its business has been ``flooded by telemarketer calls for years'').
    \432\ InfoCision at 4-5.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \433\ 16 CFR 310.6(b)(7) (emphasis added).
    \434\ Id.; see also TSR Final Rule 1995, supra note 8, at 43861 
(discussing the exemption and noting that cleaning and office supply 
scams are not included in the exemption because ``such telemarketing 
falls within the Commission's definition of deceptive telemarketing 
acts or practices''). Contrary to an additional objection on First 
Amendment grounds, InfoCision at 4-6, it remains the Commission's 
opinion that telemarketing calls made to business telephone numbers 
to solicit individual employees at work can be deceptive, and 
therefore are properly subject to the limited commercial speech 
restrictions of the TSR.
---------------------------------------------------------------------------

    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.''
---------------------------------------------------------------------------

    \435\ NPRM, supra note 8, at 41219 (mentioning solicitations to 
employees at work for dietary products, auto warranties, and credit 
assistance).
---------------------------------------------------------------------------

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

[[Page 77556]]

telemarketing 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\
---------------------------------------------------------------------------

    \436\ Id. at 41218-19.
    \437\ AFR at 2; NCLC at 16; AGO at 12; DOJ-CPB at 4 (citing 
legal principles and case law assigning the burden to the seller or 
telemarketer).
    \438\ InfoCision at 4.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \439\ NPRM, supra note 1, at 41218.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \440\ Id. at 41219.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \441\ Id. at 41218.
    \442\ Transp. FCU; AFR at 2; NCLC at 16; AGO at 12; DOJ-CPB at 
1; DOJ-Criminal at 1.
---------------------------------------------------------------------------

    The Commission accordingly has decided to adopt the amendment to 
Sec.  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\
---------------------------------------------------------------------------

    \443\ See NPRM, supra note 1, at 41218.
---------------------------------------------------------------------------

    The Commission also amends Sec.  310.4(b)(3), which provides a safe 
harbor for inadvertent violations of the prohibition in Sec.  
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, Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \444\ DOJ-Criminal at 1.
    \445\ See NPRM, supra note 1, at 41200.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \446\ AFR at 2; NCLC at 16; AGO at 12; DOJ-CPB at 1; DOJ-
Criminal at 1.
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \447\ Telemarketing Sales Rule Fees, 68 FR 45134, 45136 nn.29-30 
(July 31, 2003) (citing 47 CFR 64.1200(c)(2)(i)(E), as amended July 
3, 2003)). The prohibition is necessary because ``allowing 
telemarketers and others to share the information obtained from the 
national registry would threaten the financial support for 
maintaining the database.'' Id. at 45136.
    \448\ See NPRM, supra note 1, at 41220.
---------------------------------------------------------------------------

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

[[Page 77557]]

action will not have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \449\ 5 U.S.C. 601-612.
    \450\ The RFA definition of ``small entity'' refers to the 
definition provided in the Small Business Act, which defines a 
``small-business concern'' as a business that is ``independently 
owned and operated and which is not dominant in its field of 
operation.'' 15 U.S.C. 632(a)(1).
    \451\ 5 U.S.C. 603.
    \452\ 5 U.S.C. 604.
    \453\ 5 U.S.C. 605.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \454\ See also supra note 220; InfoCision at 2; FRBA-1 at 3.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \455\ 16 CFR 310.2(dd). The Commission notes that, as mandated 
by the Telemarketing Act, the interstate telephone call requirement 
in the definition excludes small business sellers and the 
telemarketers who serve them in their local market area, but may not 
exclude some sellers and telemarketers in multi-state metropolitan 
markets, such as Washington, DC.
    \456\ These numbers represent the size standards for most 
sellers in retail and service industries ($7 million total 
receipts). The standard for ``Telemarketing Bureaus and Other 
Contact Centers'' (NAICS Code 561422) is also $7 million. A list of 
the SBA's current size standards for all industries can be found in 
SBA, Table of Small Business Size Standards Matched to North 
American Industry Classification System Codes, available at http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
---------------------------------------------------------------------------

    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

[[Page 77558]]

created 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\
---------------------------------------------------------------------------

    \457\ 44 U.S.C. 3501-3521. The PRA also addresses reporting 
requirements, but neither the TSR nor the amendments present them.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \458\ 16 CFR 310.6(b)(5)-(6).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \459\ Even though some sellers and telemarketers, in order to 
prove that they are eligible for the safe harbor, might seek to 
document the fact that they have honored such requests, neither the 
amendment nor the TSR requires them to do so.
---------------------------------------------------------------------------

List of Subjects in 16 CFR Part 310

    Telemarketing, Trade practices.

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

PART 310--TELEMARKETING SALES RULE 16 CFR PART 310

0
1. The authority citation for part 310 continues to read as follows:

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


0
2. Amend Sec.  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:


Sec.  310.2  Definitions.

* * * * *
    (f) Cash-to-cash money transfer means the electronic (as defined in 
section 106(2) of the Electronic Signatures in Global and National 
Commerce Act (15 U.S.C. 7006(2)) transfer of the value of cash received 
from one person to another person in a different location that is sent 
by a money transfer provider and received in the form of cash. For 
purposes of this definition, money transfer provider means any person 
or financial institution that provides cash-to-cash money transfers for 
a person in the normal course of its business, whether or not the 
person holds an account with such person or financial institution. The 
term cash-to-cash money transfer includes a remittance transfer, as 
defined in section 919(g)(2) of the Electronic Fund Transfer Act 
(``EFTA''), 15 U.S.C. 1693a, that is a cash-to-cash transaction; 
however it does not include any transaction that is:
    (1) An electronic fund transfer as defined in section 903 of the 
EFTA;
    (2) Covered by Regulation E, 12 CFR 1005.20, pertaining to gift 
cards; or
    (3) Subject to the Truth in Lending Act, 15 U.S.C. 1601 et seq.
    (g) Cash reload mechanism is a device, authorization code, personal 
identification number, or other security measure that makes it possible 
for a person to convert cash into an electronic (as defined in section 
106(2) of the Electronic Signatures in Global and National Commerce Act 
(15 U.S.C. 7006(2)) form that can be used to add funds to a general-use 
prepaid card, as defined in Regulation E, 12 CFR 1005.2, or an account 
with a payment intermediary. For purposes of this definition, a cash 
reload mechanism is not itself a general-use prepaid debit card or a 
swipe reload process or similar method in which funds are added 
directly onto a person's own general-use prepaid card or account with a 
payment intermediary.
* * * * *
    (cc) Remotely created payment order means any payment instruction 
or order drawn on a person's account that is created by the payee or 
the payee's agent and deposited into or cleared through the check 
clearing system. 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 (ACH) Network or 
subject to the Truth in Lending Act, 15 U.S.C. 1601 et seq., and 
Regulation Z, 12 CFR part 1026.
* * * * *

0
3. Amend Sec.  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:

[[Page 77559]]

Sec.  310.3  Deceptive telemarketing acts or practices.

    (a) * * *
    (3) * * *
    (ii) * * *
    (A) An accurate description, clearly and conspicuously stated, of 
the goods or services or charitable contribution for which payment 
authorization is sought;
* * * * *

0
4. Amend Sec.  310.4 by:
0
a. Revising paragraph (a)(3);
0
b. Effective June 13, 2016, amending paragraph (a)(7)(ii)(B) by 
removing ``or'' from the end of the paragraph;
0
c. Effective June 13, 2016, amending paragraph (a)(8) by removing the 
final period and adding a semicolon in its place.
0
d. Effective June 13, 2016, adding paragraphs (a)(9) and (10);
0
e. Revising paragraphs (b)(1)(ii), (b)(1)(iii)(B), and (b)(3)(vi);
    The revisions and additions read as follows:


Sec.  310.4  Abusive telemarketing acts or practices.

    (a) * * *
    (3) Requesting or receiving payment of any fee or consideration 
from a person for goods or services represented to recover or otherwise 
assist in the return of money or any other item of value paid for by, 
or promised to, that person in a previous transaction, until seven (7) 
business days after such money or other item is delivered to that 
person. This provision shall not apply to goods or services provided to 
a person by a licensed attorney;
* * * * *
    (9) Creating or causing 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; or
    (10) Accepting 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.
    (b) * * *
    (1) * * *
    (ii) Denying or interfering in any way, directly or indirectly, 
with a person's right to be placed on any registry of names and/or 
telephone numbers of persons who do not wish to receive outbound 
telephone calls established to comply with paragraph (b)(1)(iii)(A) of 
this section, including, but not limited to, harassing any person who 
makes such a request; hanging up on that person; failing to honor the 
request; requiring the person to listen to a sales pitch before 
accepting the request; assessing a charge or fee for honoring the 
request; requiring a person to call a different number to submit the 
request; and requiring the person to identify the seller making the 
call or on whose behalf the call is made;
    (iii) * * *
    (B) That person's telephone number is on the ``do-not-call'' 
registry, maintained by the Commission, of persons who do not wish to 
receive outbound telephone calls to induce the purchase of goods or 
services unless the seller or telemarketer:
    (1) Can demonstrate that the seller has obtained the express 
agreement, in writing, of such person to place calls to that person. 
Such written agreement shall clearly evidence such person's 
authorization that calls made by or on behalf of a specific party may 
be placed to that person, and shall include the telephone number to 
which the calls may be placed and the signature \664\ of that person; 
or
---------------------------------------------------------------------------

    \664\ For purposes of this Rule, the term ``signature'' shall 
include an electronic or digital form of signature, to the extent 
that such form of signature is recognized as a valid signature under 
applicable federal law or state contract law.
---------------------------------------------------------------------------

    (2) Can demonstrate that the seller has an established business 
relationship with such person, and that person has not stated that he 
or she does not wish to receive outbound telephone calls under 
paragraph (b)(1)(iii)(A) of this section; or
* * * * *
    (3) * * *
    (vi) Any subsequent call otherwise violating paragraph (b)(1)(ii) 
or (iii) of this section is the result of error and not of failure to 
obtain any information necessary to comply with a request pursuant to 
paragraph (b)(1)(iii)(A) of this section not to receive further calls 
by or on behalf of a seller or charitable organization.
* * * * *

0
5. Amend Sec.  310.6 by revising paragraphs (b)(5) through (7) to read 
as follows:


Sec.  310.6  Exemptions.

* * * * *
    (b) * * *
    (5) Telephone calls initiated by a customer or donor in response to 
an advertisement through any medium, other than direct mail 
solicitation, provided, however, that this exemption does not apply to:
    (i) Calls initiated by a customer or donor in response to an 
advertisement relating to investment opportunities, debt relief 
services, business opportunities other than business arrangements 
covered by the Franchise Rule or Business Opportunity Rule, or 
advertisements involving offers for goods or services described in 
Sec.  310.3(a)(1)(vi) or Sec.  310.4(a)(2) through (4);
    (ii) [Reserved]
    (iii) Any instances of upselling included in such telephone calls;
    (6) Telephone calls initiated by a customer or donor in response to 
a direct mail solicitation, including solicitations via the U.S. Postal 
Service, facsimile transmission, electronic mail, and other similar 
methods of delivery in which a solicitation is directed to specific 
address(es) or person(s), that clearly, conspicuously, and truthfully 
discloses all material information listed in Sec.  310.3(a)(1), for any 
goods or services offered in the direct mail solicitation, and that 
contains no material misrepresentation regarding any item contained in 
Sec.  310.3(d) for any requested charitable contribution; provided, 
however, that this exemption does not apply to:
    (i) Calls initiated by a customer in response to a direct mail 
solicitation relating to prize promotions, investment opportunities, 
debt relief services, business opportunities other than business 
arrangements covered by the Franchise Rule or Business Opportunity 
Rule, or goods or services described in Sec.  310.3(a)(1)(vi) or Sec.  
310.4(a)(2) through (4);
    (ii) [Reserved]
    (iii) Any instances of upselling included in such telephone calls; 
and
    (7) Telephone calls between a telemarketer and any business to 
induce the purchase of goods or services or a charitable contribution 
by the business, except calls to induce the retail sale of nondurable 
office or cleaning supplies; provided, however, that Sec. Sec.  
310.4(b)(1)(iii)(B) and 310.5 shall not apply to sellers or 
telemarketers of nondurable office or cleaning supplies.

0
6. Effective June 13, 2016, Sec.  310.6 is further amended by adding 
paragraphs (b)(5)(ii) and (b)(6)(ii) to read as follows:


Sec.  310.6  Exemptions.

* * * * *
    (b) * * *
    (5) * * *
    (ii) The requirements of Sec.  310.4(a)(9) or (10); or
* * * * *
    (6)
    (ii) The requirements of Sec.  310.4(a)(9) or (10); or
* * * * *

[[Page 77560]]


0
7. Amend Sec.  310.8 by revising paragraph (c) to read as follows:


Sec.  310.8  Fee for access to the National Do Not Call Registry.

* * * * *
    (c) The annual fee, which must be paid by any person prior to 
obtaining access to the National Do Not Call Registry, is $60 for each 
area code of data accessed, up to a maximum of $16,482; provided, 
however, that there shall be no charge to any person for accessing the 
first five area codes of data, and provided further, that there shall 
be no charge to any person engaging in or causing others to engage in 
outbound telephone calls to consumers and who is accessing area codes 
of data in the National Do Not Call Registry if the person is permitted 
to access, but is not required to access, the National Do Not Call 
Registry under this Rule, 47 CFR 64.1200, or any other Federal 
regulation or law. 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.
* * * * *

    By direction of the Commission, Commissioner Ohlhausen 
dissenting.
Donald S. Clark,
Secretary.

    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.
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    \1\ This statement reflects the views of Chairwoman Ramirez, 
Commissioner Brill, and Commissioner McSweeny.
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    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.
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    \2\ The Commission received comments in support of the proposed 
TSR amendments from the following federal and state agencies: 
Consumer Protection Branch, U.S. Department of Justice; Criminal 
Division, U.S. Department of Justice; Consumer Financial Protection 
Bureau; and the Offices of Attorneys General in 24 states and the 
District of Columbia.
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    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\
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    \3\ See Press Release, InComm, InComm Expands Vanilla Reload 
Network, Plans to Add Swipe Reload at Over 15,000 More Retail 
Locations: InComm removes reload packs from stores to help prevent 
victim assisted fraud (Oct. 24, 2014), available at http://www.incomm.com/news-events/Pages/Press%20Releases/InComm-Expands-Vanilla-Reload-Network-Plans-to-Add-Swipe-Reload-to-Over-15000-More-Retail-Locations.aspx (describing InComm's plans to add over 15,000 
swipe reload locations to its network to help eliminate fraud 
perpetrated through the use of reload packs); Testimony of William 
Tauscher Chairman and Chief Executive Officer Blackhawk Network 
Holdings, Inc. Before United States Senate Special Committee on 
Aging Hearing ``Private Industry's Role in Stemming the Tide of 
Phone Scams,'' at 3 (Nov. 19, 2014), available at http://www.aging.senate.gov/imo/media/doc/Tauscher_11_19_14.pdf (describing 
Blackhawk's enhancements to its reload options for its Reloadit Pack 
product to combat fraud).
    \4\ Payment processors and their financial institutions already 
must comply with the Bank Secrecy Act and associated anti-money 
laundering laws and regulations which require initial and ongoing 
customer due diligence. See 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, 18 
U.S.C. 1956-1957 & 1960, 31 U.S.C. 5311-5314 and 5316-5332, with 
implementing regulations at 31 CFR Ch. X. These obligations require 
banks to understand and monitor the business of their merchant and 
merchant processor customers.
---------------------------------------------------------------------------

    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

[[Page 77561]]

Section 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.
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    \1\ These amendments make several clarifications of the existing 
rule, which I support. Additionally, I support the amendment's 
expansion of the prohibition against advanced fees for all recovery 
services, regardless of whether the original loss resulted from a 
telemarketing transaction.
    \2\ 15 U.S.C. 45(n) (prohibiting acts or practices that cause or 
are likely to cause substantial injury to consumers, which are not 
reasonably avoidable by consumers themselves and not outweighed by 
countervailing benefits to consumers or to competition).
---------------------------------------------------------------------------

    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:
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    \3\ The FRBA operates the Federal Reserve System's Retail 
Payments Product Office, which manages and oversees the check and 
Automated Clearing House (ACH) services that the Federal Reserve 
banks provide to U.S. financial institutions.
---------------------------------------------------------------------------

     ``[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\
---------------------------------------------------------------------------

    \4\ Comments of Federal Reserve Bank of Atlanta, at 2 (Aug. 8, 
2013), https://www.ftc.gov/policy/public-comments/comment-00031-1.
---------------------------------------------------------------------------

     ``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\
---------------------------------------------------------------------------

    \5\ Id.
---------------------------------------------------------------------------

     ``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\
---------------------------------------------------------------------------

    \6\ Id. at 3.
---------------------------------------------------------------------------

     ``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\
---------------------------------------------------------------------------

    \7\ Id. at 4.
---------------------------------------------------------------------------

     ``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\
---------------------------------------------------------------------------

    \8\ Id.
---------------------------------------------------------------------------

    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.
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    \9\ Id.

[FR Doc. 2015-30761 Filed 12-11-15; 8:45 am]
BILLING CODE 6750-01-P