United States: State AGs In The News - October 1st, 2015

Consumer Financial Protection Bureau

CFPB Double Teams With DOJ to Double Up on Fifth Third

  • The Consumer Financial Protection Bureau (CFPB) resolved two separate enforcement actions with Fifth Third Bancorp, the first claiming discriminatory auto loan pricing and the second claiming deceptive acts or practices in marketing credit card add-on products.
  • In the first action, the CFPB, working with the U.S. Department of Justice (DOJ), alleged that Fifth Third violated the Equal Credit Opportunity Act by giving auto dealers discretion to charge auto loan interest rates that were higher than those set by the bank, based on factors other than the consumer's creditworthiness. Although Fifth Third did not discriminate directly, the CFPB and DOJ alleged that its use of subjective and unguided pricing discretion as an indirect lender resulted in dealerships charging higher rates to qualified African-American and Hispanic borrowers.
  • In addition to paying a penalty of $18 million, Fifth Third agreed to limit dealer markup to 1.25 percent, for loans of 60 months or less, and 1 percent, for loans greater than 60 months.
  • In the second action, the CFPB alleged that Fifth Third (through the actions of its third-party service providers) violated the Consumer Financial Protection Act by deceptively enrolling consumers in a credit card add-on product without first providing adequate disclosure as to its terms and conditions. The CFPB also alleged that Fifth Third misled consumers through sales calls and other marketing efforts, where they indicated that the cardholder could sample the product "risk-free" when in fact the bank had already enrolled them for a monthly fee.
  • Fifth Third agreed to pay $3 million to affected consumers and a $500,000 penalty to the CFPB to resolve the allegations related to the add-on product. In addition, the bank agreed to create a Vendor Management Program and an internal audit process to monitor its service providers' compliance therewith.

Consumer Protection

FTC Sues Weight Loss Supplement Company for "Gagging" Consumers

  • The FTC filed a lawsuit in federal court against Roca Labs, Inc. and Roca Labs Nutraceutical USA, Inc. (together, "Roca") alleging that Roca's marketing and sales of its weight loss supplements—a powder that when mixed with water creates a gel-like substance purported to take up space in the stomach, and thus reduce the capacity for caloric intake—violated Sections 5 and 12 of the FTC Act.
  • In the complaint, the FTC alleged that Roca's marketing practices were deceptive because they stated or implied that consumers could lose substantial amounts of weight by taking Roca's products (e.g., as much as 21 pounds in one month, 90 percent success rate in achieving substantial weight loss) without adequate research to substantiate the claims. The FTC further alleged that Roca misrepresented that its products "create a natural gastric bypass effect in the stomach," and deceptively used search engine queries like "gastric bypass surgery" to direct consumers to its website.
  • The FTC also alleged that Roca unfairly used "gag clauses" in their sales contracts and terms and conditions of use, through which Roca threatened to sue purchasers if they complained to a third-party consumer reporting organization (e.g., Better Business Bureau), or posted negative comments about Roca and its products on Internet websites. Roca also failed to provide refunds: the initial three to four month supply cost $480. The lawsuit was filed in federal court for the Middle District of Florida, No. 8:15-cv-02231.

California AG Seeks Greater Transparency in Prop 65 Private Enforcement

  • California AG Kamala Harris has proposed amended regulations to govern the enforcement of Proposition 65, the state law requiring businesses with 10 or more employees to warn individuals through labeling when there is a risk of exposure to known carcinogens or other substances that may cause reproductive harm.
  • The amended regulations seek to address one particular area of scrutiny: Proposition 65 has been criticized over the years for too freely allowing private enforcement actions against unsuspecting businesses when the AG does not file a lawsuit after a notice period. These private enforcers are permitted to retain 25 percent of any penalty recovered—up to $2,500 per person exposed, per day. Because Proposition 65 claims can be combined with other state laws that allow disgorgement of profits (unfair practices) and attorneys' fees when a plaintiff acts in the public interest, Proposition 65 has been seen as creating lucrative opportunities for private litigants with little public benefit.
  • The amended regulations focus on increasing transparency and ensuring a public benefit when Proposition 65 is enforced through private lawsuits. The amended regulation requires private enforcers to provide greater disclosure to the AG's office during litigation, and would require a private plaintiff to demonstrate to a court approving a settlement, that any "Additional Settlement Payments" (i.e., payments in lieu of a civil penalty) are in the public interest, and would ensure that settlements are not structured so as to erode funding for the Office of Environmental Health Hazard Assessment.


Federal, State, and Local Regulators Clean Up Glass Producer

  • The U.S. Environmental Protection Agency (EPA), together with the states of Iowa and New York and the San Joaquin Valley Air Pollution Control District, settled claims with Guardian Industries Corp. for alleged violations of the U.S. Clean Air Act.
  • The regulators alleged that Guardian modified its furnaces at several glass manufacturing facilities across the nation without installing the proper pollution control technologies, and without obtaining the required permits under the Clean Air Act.
  • The Consent Decree, which is subject to court approval after a period of 30 days for public comment, requires Guardian to pay $312,000 in civil penalties to the EPA and the states. It also requires Guardian to install certain pollution control technologies estimated to reduce emissions of soot, nitrogen oxides, sulfur dioxide, and sulfuric acid by approximately 50 percent.

Wyoming AG Defends Laws Prohibiting Pictures

  • A coalition of conservation and animal rights groups has filed a lawsuit in U.S. District Court for the District of Wyoming challenging the constitutionality of two Wyoming statutes passed earlier this year that would restrict the ability of individuals to gather data on the condition of natural resources on private and public land.
  • The first law, Wyoming Statute § 6-3-414, criminalizes the collection of resource data on private land, where the data collector intends to submit the data to an agency of the state or federal government. It also states that data collected would not be admissible in any civil or administrative proceeding. The second law, § 40-26-101, prohibits gathering resource data on both private and public land if the person does not have specific authorization to gather the data. As commentators have noted, the Wyoming laws could apply to a broad range of activity, even tourist photos taken after hours in a National Park and posted on an internet forum.
  • The lawsuit seeks to declare the laws unconstitutional under the First Amendment, the Supremacy Clause, and the Equal Protection Clause. It also seeks to enjoin Wyoming AG Peter Michael and the state Department of Environmental Quality from enforcing them. The case is Western Watersheds Project v. Attorney General, Case No. 2:15-cv-00169.


Delaware and Massachusetts AGs Question Advisors' Use of Leveraged ETFs

  • Delaware AG Matt Denn and Massachusetts AG Maura Healy settled with LPL Financial, LLC, resolving the AGs' investigation into whether LPL violated state law through the use of leveraged exchange traded funds (ETFs) in consumer investment accounts.
  • The AGs' investigation centered on whether LPL's investment advisors properly disclosed the risks associated with leveraged ETFs, and whether such investments were even suitable for LPL's clients. Leveraged ETFs are investment funds that seek to achieve a multiple of the daily returns on an index like the Standard & Poor's 500. The AGs iterated, however, that returns from leveraged ETFs can be much more negatively affected during periods of market volatility, causing an investor to lose money when holding leveraged ETFs, even if the investor correctly guessed on the direction of the relevant index.
  •  Under the terms of the settlement, LPL will pay $1.6 million to compensate and educate investors, as well as $200,000 in civil penalties to both states

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