On-line Rebate Companies Judged To Be Too Risky

New York Attorney General Spitzer today warned consumers about the high risks associated with on-line "rebate companies" that sell products at prices well above normal retail levels, but promise rebates that make the products free or low-cost.

This warning was issued in response to an upsurge of complaints about such companies, in particular UrbanQ.com, a rebate company operating out of Cedarhurst, New York. Spitzer said that his office was aware of approximately 200 complaints filed against UrbanQ - filed either with his office, other government agencies or the Better Business Bureau - reporting that consumers had not received promised rebates.

UrbanQ.com has not responded to the attempts of Spitzer’s office to mediate the complaints, and the office is continuing to investigate such companies and hold them to their promises.

Spitzer noted that last year, a similar rebate-oriented Internet merchant, Cyberrebate.com, (also of Cedarhurst, New York) sought bankruptcy protection, leaving nearly 200,000 of the company’s consumers owed over $90 million in the form of product rebates.

The Attorney General emphasized that, while his office can intervene in such transactions, and seek to hold companies to their promises to deliver rebates on time – as it did in 2000 with Cyberrebate – the Attorney General’s powers are limited once companies file for bankruptcy protection or become financially unable to deliver rebates.

The "rebate company" business model is predicated on the assumption that a significant percentage of consumers will not redeem their rebates. Spitzer called this assumption "flawed," because the vast majority of consumers usually do redeem their rebates when the rebates are worth more than the product itself.

Spitzer also announced that he has proposed legislation that would regulate such unreliable rebate practices. The "Rebate Protection Act" bill would prohibit excessive, time-staggered rebates unless the rebate merchant has posted a bond sufficient to cover the amount of potential consumer loss. Until that legislation is considered, Spitzer is warning consumers not to trust or invest in such business models, built as they are on flawed assumptions and unreasonably high risks of loss.

"One lesson of the CyberRebate.com bankruptcy, and UrbanQ’s present failure to pay rebates, is that there is unacceptable risk when a retail company sets its prices far above the normal retail price, and then offers a rebate – in essence incurring a future debt – in the amount of 50 to 100 percent of the price paid," Spitzer said. "When this occurs, the amount of leverage and risk carried on a company’s books can become unreasonably high. Because this leverage and risk really is placed on the backs of later consumers, the practice holds an unacceptable possibility of consumer harm," the Attorney General said.

"There is significant risk when a retail company sets its prices far above the normal retail price, and then offers a rebate – in essence incurring a future debt – in the amount of 50 to 100 percent of the price paid," stated Spitzer. "When this occurs, the company becomes too highly leveraged and places new customers at significant risk of harm."

Spitzer urged consumers to consider that when they pay an unreasonable sum for a product – relying on repayment by rebate – they are effectively becoming creditors of a company.

"If consumers would not be comfortable loaning money to a company, they should feel no more comfortable giving that company a temporary windfall, to be repaid at a later date through a rebate," Spitzer said. "Consumers are not banks, and should be careful not to assume that role."

 


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