'Advance-fee' loan promotion company must pay $3 million restitution

| 9/5/2002

American Savings Discount Club (ASDC) and two individual defendants, who promoted advance-fee loans through a discount club, must establish a restitution fund of about $3 million, are subject to a lifetime ban on credit-related telemarketing and face a lifetime telemarketing bond of $500,000.

ASDC has agreed to these provisions in order to settle a complaint the Federal Trade Commission filed jointly with the attorney general's offices of Virginia, Wisconsin and North Carolina. The complaint alleged the company pitched a fraudulent advance-fee loan promotion to hundreds of thousands of consumers nationwide.

According to the FTC, the defendants enrolled consumers who signed up for the purported advance-fee loan program, without their knowledge, in a "discount club," and required them to be "members" of the club for three months prior to applying for the promised loan. Additionally, the defendants charged consumers a $30 monthly membership fee to remain in the club and be "eligible" to apply for the loan.

"The defendants took advantage of consumers who were in financial need, providing little or nothing in return for their up-front payment, and misled them about the likelihood of securing a low-interest loan," said J. Howard Beales III, director of the FTC's Bureau of Consumer Protection. "It is believed that the defendants collected almost $50 million over five years, with only $9 million paid out to consumers through loans, discounts or other benefits," Beales said.

In their complaint against defendants ASDC (also known as The Tungsten Group), Tungsten Group II (a sales arm of ASDC), Robert J. Demellweek and David Vincent Jensen, the FTC and attorneys general charged each violated Section 5 of the FTC Act, the Commission's Telemarketing Sales Rule (TSR) and relevant state laws.

The complaint stated, in connection with their advance-fee loan scheme, the defendants' telemarketers represented that consumers would get a low-interest loan between $500 and $1,500 in exchange for an up-front payment of $100. That $100 consisted of a $40 administrative fee and the first and last monthly loan payments of $30 each. If the consumer agreed, the defendants deducted $100 from his or her bank account almost immediately via electronic transfer.

According to the complaint, the defendants told many consumers who tried to cancel that the $40 fee was non-refundable. Only after the money was debited, however, did consumers find that the defendants had enrolled them in a "discount club," in which consumers could purportedly receive reduced prices on gas, oil changes, prescription drug purchases, and other items.

The consumers also learned, contrary to what they thought, they had not been "pre-approved" for the loan, but could only apply for a loan after paying the $30 membership fee for three months. Those consumers who did get a loan paid a loan repayment fee -- above and beyond the monthly fee - resulting in total payments of nearly $41 per month for a 12-month, $500 loan.

In addition, according to the FTC, those consumers who chose not to cancel their "discount club" membership found it was nothing more than a Ponzi scheme. That is, the sole source of the loans to other consumers was the defendants' own funds, with an ever-increasing number of consumers needed to fund the new loans. If the defendants charged one consumer $100 on one day, for example, they would have to find four additional consumers to be able to loan that first consumer $500. Consumer expectations thus grew exponentially, with less and less money available to pay out.

Under the terms of the order, the defendants will pay about $3 million, with a net amount of about $2.5 million available for consumer redress. If they are found to have misrepresented their financial condition or to have hidden assets, however, the order would require the court to enter a $40 million judgment against the defendants.

In addition, the order bans the defendants for life from telemarketing credit-related products or services and for three years from any telemarketing or sales of any credit-related goods or services. The order also imposes a lifetime bond requirement mandating they post a $500,000 bond before conducting any telemarketing or sales of credit-related goods or services. It also prohibits the defendants from making misrepresentations similar to those alleged in the complaint and from violating the TSR. Finally, it requires the defendants to comply with the state laws they are alleged to have violated.