Expanding the scope of deception? Key questions and takeaways from the CFPB's recent settlements with SettleIt and Nationwide Equities Corporation
Since mid-April, the Consumer Financial Protection Bureau has entered into two settlements that shine a light on the Bureau’s potential strategy for enforcing the prohibition against deception under the Dodd-Frank Act.
The first matter involved a lawsuit against SettleIt, a debt-settlement business. In a complaint that the CFPB filed contemporaneously with the settlement document, the CFPB alleged a number of violations of the Telemarketing Sales Rule (TSR) and the prohibition against “abusive” practices in the Dodd-Frank Act. The TSR states that it is a deceptive practice for a telemarketer to, among other things, fail to “disclose truthfully, in a clear and conspicuous manner … [t]he total costs to purchase, receive, or use … any goods or services that are the subject of the sales offer,” as well as “all material restrictions, limitations, or conditions” on the offer. 16 C.F.R. § 310.3(a).
Although the complaint did not allege an independent violation of the “deception” prong in the Dodd-Frank Act prohibition against unfair, deceptive, or abusive acts or practices (UDAAP), TSR requirements and the elements of deception overlap in several respects. Indeed, echoing the requirements of the TSR, the CFPB’s UDAAP examination materials state that marketing and disclosure materials must describe “clearly, prominently, and accurately” the costs, benefits and other material terms of a product or service. Accordingly, the SettleIt matter could lay the groundwork for enforcement of the prohibition against deception in the future, outside of the context of the TSR.
Against this backdrop, certain of the allegations in the SettleIt complaint may be viewed as expanding the scope of what constitutes “deception” under UDAAP. For example, the CFPB described SettleIt’s sales pitches as “deemphasiz[ing]” the cost of SettleIt’s debt settlement services, and disclosing the fee “in the middle” of a “long” recorded disclosure at the end of each sales call and in the middle of a written section of the disclosures called “Compensation” – all in violation of the TSR. In particular, the CFPB alleged that such practices violated the TSR’s requirement to “truthfully” disclose the cost of SettleIt’s program and the prohibition against “misrepresenting” any material aspect of a debt-relief service.
A second CFPB settlement, the consent order in the matter of Nationwide Equities Corporation (NWEC), further illustrates the CFPB’s expansive view of what constitutes a misleading representation, and how the Bureau may approach the deception prohibition in UDAAP in the future. Like the SettleIt agreement, the NWEC consent order does not allege a specific violation of the deception prong in UDAAP (although the order makes a single reference, without elaboration, to the statutory prohibition against UDAAP in 12 U.S.C. § 5531). Instead, in NWEC, the company had allegedly violated the Mortgage Acts and Practices Advertising Rule (Regulation N) by, among other things, making “false, misleading, and inaccurate representations” in advertisements for reverse mortgage products that were targeted to homeowners aged 62 or older.
Of particular relevance, the consent order states that NWEC had sent solicitation letters to customers advertising a loan “that allows senior homeowners to immediately increase their monthly cash flow TAX FREE.” In another solicitation, the company allegedly claimed that taking out a reverse mortgage “eliminates monthly mortgage payments” while allowing the borrower to “stay in your home.”
According to the consent order, NWEC’s statement that a reverse mortgage could allow homeowners to “increase their monthly cash flow TAX FREE” and “eliminate monthly mortgage payments” unlawfully implied that no payments would be required in relation to their home in the future, when payments for property taxes and insurance would still be required. Moreover, according to the consent order, the statement that borrowers could use a reverse mortgage to eliminate monthly mortgage payments and “stay in” their home, unlawfully implied that they had an unconditional right to stay in their homes, even if they failed to pay property taxes and insurance. In fact, the NWEC consent order goes so far as to say that NWEC’s advertisements “contained misrepresentations that taxes would not be assessed.”
Scope of the deception prohibition
The findings from the SettleIt and NWEC settlements raise important questions about the scope of the deception prohibition in UDAAP – questions that cannot be answered clearly from the four corners of the documents. Among these questions are how much the costs of products must be “emphasized” (or, alternatively, “not deemphasized”) in order to comply with any requirement to clearly, prominently and accurately disclose to consumers the cost of a product.
Likewise, the NWEC order potentially expands the scope of conduct that would constitute a “misrepresentation” of fees or costs. For example, in 2016 the CFPB entered into a consent order with a reverse mortgage company, American Advisors Group, for alleged violations of Regulation N that were similar to those described in NWEC. But unlike in NWEC, the CFPB alleged that American Advisors told consumers they “cannot” lose their home with a reverse mortgage, that the consumers had the “right to stay in their home for the remainder of [their] life,” and that consumers would have “no monthly payments.” NWEC’s advertisements, in contrast, stated that a reverse mortgage eliminated “monthly mortgage payments” while allowing consumers to stay in their home, without any explicit representation that the right to stay was unconditional, or that the consumers would be relieved of their obligation to continue to make payments for taxes and insurance.
The NWEC order also arguably muddies the water about what a reasonable consumer could be expected to understand about the homeownership process, including the relationship – or lack thereof – between the payment of a mortgage and the legal responsibility to pay property taxes.
A reminder to financial services companies
For now, these settlements should be read as reminding consumer financial services companies to clearly articulate the costs, material aspects and material limitations of products and services in advertisements, in compliance with applicable regulations and the UDAAP prohibition. However, one could also read these settlements as expanding the scope – even if only subtly – of prohibited deception in advertising.
It is not yet clear whether the SettleIt and NWEC enforcement actions reflect a more aggressive posture regarding the disclosure requirements in advertisements, or whether those actions arose from specific concerns that are unique to the companies at issue in the settlements. Institutions should expect to learn more in the coming months, as UDAAP enforcement actions continue to be issued in the new Administration.
In the meantime, institutions should continue to apply best practices set forth in the CFPB’s UDAAP Examination Manual and in applicable advisory opinions (eg, Bulletin 2013-07 and Bulletin 2017-1), as well as in guidance published by the Federal Trade Commission (eg, Advertising and Marketing on the Internet, September 2000). Among these best practices are ensuring that (i) all claims can be supported; (ii) applicable disclosures are prominent enough for a consumer to notice; (iii) the disclosures are in a format that is clear and easy to understand; and (iv) the disclosures are in close proximity to the information that they qualify.
But another best practice highlighted by the CFPB’s two recent settlements is to be careful in assuming that the consumers to whom advertisements are directed possess a certain level of knowledge or understanding, especially if the targeted consumers are older adults or other potentially vulnerable populations. For consumer financial services companies, the best practice of all may be to err on the side of over-disclosure, as circumstances warrant – particularly in this new Administration.