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From Antitrust Law Daily, May 8, 2013

FTC Entitled to Disgorgement in Action Against Payday Lenders

By Jeffrey May, J.D.

The U.S. Court of Appeals in Denver today upheld an order requiring payday lenders to disgorge interest recovered on certain loans in violation of the FTC Act, the Fair Debt Collection Practices Act (FDCPA), and the Credit Practices Rule. The lenders unsuccessfully argued that the disgorgement order was improper because the profits they earned in the form of interest collected by means of illegal garnishment letters were not "ill gotten" (FTC v. LoanPointe, LLC, May 8, 2013, Brimmer, P.).

The FTC brought the action against the payday loan operation in April 2010 for illegally trying to garnish borrowers’ wages and using other illegal debt-collection practices. According to the agency, the lenders tried to pass the operation off, in letters to employers, as having the same collection rights as the government. The agency also alleged that the defendants falsely stated that consumers knew their pay would be garnished and had an opportunity to dispute the debt, and they also violated the law by telling employers and co-workers about consumers’ debt without their consent. In December 2011, a federal district court in Utah entered an order, requiring the defendants to disgorge, jointly and severally, profits from violations of Section 5 of the FTC Act, the FDCPA, and the Credit Practices Rule in the amount of $294,436.

Standard of Review. At the outset, the court rejected the lenders' request for de novo review. The court noted that the appeal was limited to whether the district court had a sufficient basis for disgorging the interest the defendants received on the loans that were repaid through garnishment. The district court’s rulings regarding the defendants' liability had not been appealed. Thus, the appropriate standard of review was for abuse of discretion.

A district court’s authority to award disgorgement under § 13(b) of the FTC Act fell within its general equitable jurisdiction, the appellate court explained. The same standard of review that applied to the appeal of an order granting injunctive relief—abuse of discretion—applied to the appeal of an order awarding equitable monetary relief.

Abuse of Discretion. The district court did not abuse its discretion in ordering disgorgement. The appellate court rejected the lenders' argument that a violation of the Credit Practices Rule on its own was not a sufficient basis for a disgorgement award. The lower court had found that the lenders violated the FTC Act and the FDCPA, in addition to the Credit Practices Rule. The district court had found that false statements in wage garnishment letters were deceptive under the FTC Act and that disclosing debts to employers without the borrowers’ consent was an unfair practice under the FTC Act. Moreover, the wage garnishment letters violated the FDCPA.

The appellate court also rejected the lenders' contention that the FTC should have been required to offer evidence that borrowers were actually deceived by their statements or otherwise objected to having their wages garnished without a court order. The FTC did not need to prove actual deception, only the likelihood that a consumer acting reasonably under the circumstances would be deceived, the court explained.

Lastly, the appellate court disposed of the lenders' argument that, because they were legitimately owed all the money they collected, they neither caused any damage nor reaped any undue benefit. "This rationale could be used to justify essentially any method of collecting a debt since it ignores the harm that can flow from the act of collection itself," the court stated. "Moreover, following this logic would deprive consumers of the specific protections accorded them under federal law."

According to the appellate court, the lower court "fashioned a remedy that serves the two purposes of disgorgement, stripping the wrongdoer of ill-gotten gains and deterring improper conduct, without penalizing appellants."

The case is No. 12-4006.

Attorneys: Imad Dean Abyad for FTC. John J.E. Markham, II (Markham & Read) for LoanPointe, LLC.

Companies: LoanPointe, LLC.

MainStory: TopStory ConsumerProtection FederalTradeCommissionNews ColoradoNews KansasNews NewMexicoNews OklahomaNews UtahNews WyomingNews

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