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Some Internet Service Cash Rebates May Be Disguised Loans

By Martha L. Arias

Human creativity has no boundaries.  This creativity, however, may be used for the good and the bad.   A very peculiar business model was invented in the United States, and is potentially harmful to our society.  This business consists in disguising small and extremely high interest loans by offering Internet services.  A customer signs a contract in which she/he receives Internet service for one year and, at the time of signing this contract, that customer also receives a cash rebate of up to US$120. A customer can only open up to three "Internet service" accounts.  By offering a rebate of $120 for an Internet service contract, this company is loaning small amounts with high interest rates; a clever way to go around usury and small loan laws.   

Fast cash businesses are very popular in the United States (U.S.). They offer several small loan options such as payday advance loans, tax check advance, cash advance, among others. These traditional businesses, however, must comply with laws and regulations intended to protect consumers.  Some of these laws are state usury and small loan/short term laws.  Federal financing laws usually do not apply to these businesses because they are not federally insured, given the small amount and short term of the loans offered.  Whether the federal government should regulate these businesses is the subject of debate in the U.S.  Some groups strongly oppose fast cash businesses because, they claim, these businesses abuse the needy. Other groups support them because they provide a small relief to Americans who live paycheck-by-paycheck.  Internet Service Providers (ISPs) are those companies providing Internet and e-mail services. Most ISPs require an annual contract and a monthly fee between $9.95 to 23.90 (not including telephone services).  Rebates are corporate incentives to promote business products or services. Rebates come in various forms, checks, store coupons, cash-in, etc. 

A clever entrepreneur incorporated a business to offer Internet services. Clients were to sign an annual Internet contract with bi-weekly payments of twenty dollars. By signing the Internet service contract, clients received a $120 cash rebate. If clients terminated the contract before the one-year expiration period, clients had to return the $120 cash rebate.  Another similarly clever entrepreneur offered the same service with cash rebates up to $300. Obviously, to qualify for this robust rebate, the monthly "Internet service" cost more -around $60 per month.  Is this business model legal?

The legality of cash rebate as the incentive for the signing of an Internet service contract depends on the specific facts and the state law at hand.  In Dep't of Fin. Insts. v. Mega Net Servs., 833 N.E.2d 477 (Ind. 4th D. Ct. App. 2005), the Indiana Court of Appeals was to design two consolidated cases in which the trial court had denied preliminary injunction against two ISPs that offered cash rebates to their customers as stated above. 

The Indiana court reversed the trial courts holding and remanded the case for further consideration. The Court of Appeals of Indiana held that the two so-called ISPs were providing disguised small loans in violation of Indiana Statute § 24-4.5-7-410, and that the ISPs' unlawful acts constituted irreparable harm enough to justify preliminary injunction.   Title 24 of the Indiana Statute addresses Trade Regulations; Consumer Sales and Credit; article 4.5 is titled Uniform Consumer Credit Code; and chapter 7 regulates Small Loans. Section 410 establishes limitations on agreements and practices, which specifically states that "[A] lender making small loans, or an assignee of a small loan, shall not commit nor cause to be committed any of the following acts:

   (a) Threatening to use or using the criminal process in any state to collect on a small loan.

   (b) Threatening to take action against a borrower that is prohibited by this chapter.

   (c) Making a misleading or deceptive statement regarding a small loan or a consequence of taking a small loan.

   (d) Contracting for or collecting attorney's fees on small loans made under this chapter.

   (e) Altering the date or any other information on a check or an authorization to debit the borrower's account held as security.

   (f) Using a device or agreement that the department determines would have the effect of charging or collecting more fees, charges, or interest than allowed by this chapter, including, but not limited to:

      (i) entering a different type of transaction with the borrower;

      (ii) entering into a sales/leaseback arrangement;

      (iii) catalog sales;

      (iv) entering into transactions in which a customer receives a purported cash rebate that is advanced by someone offering Internet content services, or some other product or service, when the cash rebate does not represent a discount or an adjustment of the purchase price for the product or service; [emphasis added] or

      (v) entering any other transaction with the borrower that is designed to evade the applicability of this chapter. [emphasis added]

   (g) Engaging in unfair, deceptive, or fraudulent practices in the making or collecting of a small loan.

   (h) Charging to cash a check representing the proceeds of a small loan.

   (i) Except as otherwise provided in this chapter:

      (i) accepting the proceeds of a new small loan as payment of an existing small loan provided by the same lender; or

      (ii) renewing, refinancing, or consolidating a small loan with the proceeds of another small loan made by the same lender.

   (j) Including any of the following provisions in a loan document:

      (i) A hold harmless clause.

      (ii) A confession of judgment clause.

      (iii) A mandatory arbitration clause, unless the terms and conditions of the arbitration have been approved by the director of the department.

      (iv) An assignment of or order for payment of wages or other compensation for services.

      (v) A provision in which the borrower agrees not to assert a claim or defense arising out of contract.

      (vi) A waiver of any provision of this chapter.

   (k) Selling insurance of any kind in connection with the making or collecting of a small loan.

   (l) Entering into a renewal with a borrower."

 

Literal (c) and (f)(iv) and (v) above clearly state that a cash rebate offered for the signing of an Internet service or any other contract is prohibited when the cash rebate does not represent a discount or an adjustment of the purchase price of the service or product, or when the rebate is used to disguise a small loan.  In Mega Net Servs. the court found that the $120 or $300 cash rebate and the monthly Internet service fees did not represent a discount or adjustment of the service offered. Instead, it was indicative of a high interest loan. Indeed, customer who terminated the Internet service contract before the one-year expiration date were to refund the cash rebate plus any accrued bi-weekly installment.  The court also considered the fact that one of the companies offering this service did not advertise their Internet service, but rather advertised their fast cash services.  Also, the court was suspicious of the per-customer limitation to subscribe for Internet services and obtain the cash rebate. The Indiana court reasoned that a person could have several Internet service accounts and there was no reason to limit access to those Internet accounts. It seems, the court added, that the rebate was the essence of these businesses rather than the Internet service offered.

Well, there is always a creative mind behind a corporate structure ready to target the needy.  These are precisely the type of businesses that do not create prosperity; instead, they suffocate the nation's labor force.

Full post as published by IBLS Internet Law Blog on February 01, 2010 (boomark / email).