An FTC Settlement Highlights Regulators’ Concerns with Third-Party Risk

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A Federal Trade Commission settlement with an independent sales organization and two of its executives illustrates the risk of demand drafts that enable the withdrawal of funds from a consumer’s checking account without a signature. It also underscores the FTC’s stepped-up focus on better merchant underwriting and monitoring.

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The FTC alleged in a federal lawsuit that Plano, Texas-based Landmark Clearing Inc. processed more than 110,000 so-called remotely created payment orders (RCPOs) valued at more than $5.3 million on behalf of one client merchant, Direct Benefits Group (DBG), an online shopping club that had return rates of more than 70%. The FTC charged DBG with debiting consumers\' bank accounts without their consent, and a federal judge halted DBG’s operation and froze its assets pending further litigation, according to an FTC news release.

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Similarly, Landmark allegedly processed 58,000 RCPOs valued at more than $5.7 million on behalf of Platinum Online Group, of which more than 83% were returned. In all, Landmark from the fall of 2008 until last spring allegedly used RCPOs to debit, or attempt to debit, millions of dollars from consumers’ accounts without their consent, according to the FTC. The charges drained many accounts, resulting not only in consumer inconvenience but also bounced-check and overdraft fees from banks.

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Under terms of the settlement announced Jan. 5, Landmark and two of its principals, Larry Wubbena, president and 33% owner, and Eric Loehr, executive vice president of new business development, can still provide processing services but are banned from using remotely created payment orders and a related debiting method called remotely created checks. Landmark, Wubbena, and Loehr also agreed to a $1.5 million judgment that was suspended in lieu of a $126,000 payment and the surrender of 26 lots Wubbena owns in a subdivision east of Dallas that the FTC plans to sell.

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Digital Transactions News calls to Landmark were not returned or not answered.

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Remotely created checks (RCCs) have been around for some time, but the FTC calls remotely created payment orders a “relatively new payment method.” Apart from initial customer approval, neither method requires a signature for subsequent transactions. Both are identical except at the first step; an RCC originates with a paper check while a remotely created payment order originates electronically.

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In the Landmark cases, the consumer’s signature was replaced with such statements as, “Authorized by Account Holder,” “Authorized by Drawee,” “Signature Not Required,” or similar language. Then the drafts were submitted for clearing through regular channels.

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Such demand drafts are not illegal provided the consumer freely gives the initial authorization for withdrawals from his checking account and knows what the drafts will be used for. The problem at Landmark was that many consumers whose accounts were debited had never heard of Landmark or its merchants, Lois C. Greisman, associate director in the FTC’s Division of Marketing Practices, tells Digital Transactions News.

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Plus, demand drafts get little of the network monitoring that automated clearing house and payment card transactions do, she adds. Landmark actively marketed its Virtual Draft product to prospective clients that had high check returns or payment card chargebacks. “‘If you have high chargebacks, we have a product for you,’” says Greisman in summarizing the marketing message. “The benefit of this is there are no eyes on it.”

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According to the FTC’s lawsuit, Landmark adopted an internal policy to accept merchants with return rates as high as 50%. The processor charged merchants a fee for every RCPO submitted in addition to a much higher fee for every returned item, the FTC alleged.

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The settlement also calls for Landmark to closely monitor their merchants’ return rates and business practices for compliance with the Federal Trade Commission Act and the federal Telemarketing Sales Rule. Further, Landmark must investigate any merchant whose total return rate exceeds 2.5% and shut off their processing services unless the investigation shows their business practices do not violate the FTC Act.

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In a speech at the Electronic Transactions Association’s Compliance Day conference last October in Chicago, an FTC official said the agency was leading a new working group of officials from a number of federal regulatory and law-enforcement agencies concerned with monitoring the risk to the payment system presented by third parties such as ISOs and the merchants they sign. “We need a more concerted effort to target the bad actors,” says Greisman.

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The FTC alleged that Landmark accepted Platinum Online as a merchant even though it previously terminated the merchant account of an online marketer controlled by the same principals as Platinum, EDebitPay, because of return rates that hit 86% in 2006. The FTC sued EDebitPay, whose principals agreed to pay $2.2 million in consumer redress.