By Donna L. Wilson and Kirk D. Jensen
Illustrating the adage that no good deed goes unpunished, retailers offering financially-strapped or credit-challenged consumers the option of layaway are facing criticism and threats of litigation and regulatory scrutiny.
According to Senator Charles Schumer, if retailers do not better disclose their layaway fees to customers, he intends to ask the Federal Trade Commission (“FTC”) to determine whether they are breaking the law and engaging in deceptive or misleading business practices. Senator Schumer is accusing the industry of “taking advantage of people and charging them outrageous interest rates, under the guise of making it easier and more affordable to shop.”
Although layaway programs were commonplace—and generally noncontroversial—throughout much of the 20th century, in the last decade retailers generally had ceased offering a layaway option to consumers given the increasing consumer preference for and the convenience of credit cards. For the retailer, layaway imposes additional costs, such as administrative costs for handling the account, storage costs, and the risk that the consumer will not complete the transaction, which retailers attempt to offset through layaway fees. However, with increasing numbers of consumers unable to obtain credit, layaway has become an attractive alternative which offers numerous advantages to consumers. For example, it enables consumers to buy an item at its lowest price, rather than wait and lose the discounted pricing. Also, if for some reason a consumer cannot ultimately complete the purchase, it is not reported to the credit bureaus.
Layaway programs, however, impose legal and compliance risks on retailers and other merchants, and are subject to an array of federal and state laws. For example, on the federal side, there is the Federal Trade Commission Act (the “FTC Act”), and such financial services statutes and regulations as the Truth in Lending Act (“TILA”) and its implementing regulation, Regulation Z. The FTC Act prohibits unfair or deceptive acts or practices in or affecting commerce. TILA and Regulation Z apply if your customers are required to agree in writing to make payments until the purchase is paid in full, and require certain written disclosures before a transaction is made under an open-end consumer credit plan. Both TILA and the FTC Act carry potentially substantial penalties.
Meanwhile, on the state side, retailers must comply with statutes that expressly regulate layaway programs (for example, in California, the District of Columbia, Idaho, Illinois, Massachusetts, Maryland, New York, Ohio, and Rhode Island). These statutes dictate, for example, the maximum amount of service charges, any cancellation policies, and the content of disclosures. Certain of these state statutes impose strict liability, and carry the risk of statutory damages or multipliers of actual damages. For example, in the District of Columbia, retailers are prohibited from charging more than one dollar ($1.00) in total service fees for all items purchased on a given day, and default, late fees and cancellation fees also are severely limited. Non-compliance with the District of Columbia requirements can result in penalties of up to $1,000 per violation. In addition, retailers must ensure that their layaway programs comply with state statutes that prohibit unfair or deceptive practices more generally. Otherwise, they run the risk of federal and state regulatory and enforcement actions and investigations, as well as follow-on class action litigation.
Wilson and Jensen are lawyers with BuckleySandler LLP.