Episode Description:
This COMPLY Podcast episode features Sandy Brown, Assistant Director, Bureau of Consumer Protection’s Division of Financial Practices at the Federal Trade Commission. This excerpt from Sandy reviews a broad range of consumer protection issues organizations are facing today and shares what’s on the FTC’s radar in her role supervising enforcement and policy work.
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Episode Transcript:
Ashley:
Hello, COMPLY podcast listeners. Today’s podcast features Sandy Brown, Assistant Director of the Bureau of Consumer Protection’s Division of Financial Practices at the Federal Trade Commission. This excerpt from Sandy reviews a broad range of consumer protection issues organizations are facing today and shares what’s on the FTC’s radar in her role supervising enforcement and policy work.
Thanks for listening and enjoy the show!
Sandy:
My name is Sonya Brown and I’m an Assistant Director in the Division of Financial Practices at the FTC. I’ve worked on and supervised a variety of different consumer protection investigations in the financial services space, including ones involving hidden fees, disguised advertising, deceptive lead generation, and more. So I’m looking forward to sharing my perspective on what the agency is focused on these days and what lenders and others in the financial marketplace should keep in mind in terms of compliance and consumer protection. Before diving in, I wanna note that everything I say today reflects only my own thoughts and opinions. I’m not speaking on behalf of the Commission or any individual Commissioner or the Bureau of Consumer Protection. So today I plan to discuss four topics that are important areas of focus for the FTC right now, including small business financing, fair lending, endorsements, and dark patterns for each of these, I will give some case examples and takeaways for you all.
Sandy:
First, small business financing, which is a priority area for the FTC. The FTC Act gives the agency broad jurisdiction over companies, engaging in unfair or deceptive practices that are harmful to consumers, including small business consumers. And unlike many specific financial statutes, The FTC Act applies regardless of whether the product being offered is for household credit or for business needs. Small businesses act as an important engine in the US economy. But unfortunately many have been struggling, including because of the tumult caused by the pandemic. To make ends meet many small businesses increasingly have been turning to alternatives to traditional loans, such as merchant cash advances. As many of you may know, an MCA works like this; the MCA provider advances an upfront sum to a small business in exchange for a fixed amount of that business’s future receivables. The business must then repay the advance, plus a factor often between 20% to 50% of the amount. Daily payments are theoretically supposed to rise or fall based on daily sales.
Sandy:
But we’ve heard concerns; for example, when daily sales drop, some MCA providers may not conduct promised true-ups or reconciliations to reduce merchant’s payments. Many MCA providers have direct access to the small business’ bank account and we’ve seen situations where they keep debiting the account, even after payoff. We’ve also seen MCA providers engage in misleading practices to promote their products and some providers and their agents may use potentially abusive collection practices. In our MCA cases, we’ve challenged a number of deceptive representations made to lure small businesses like companies that claimed in advertising that the product required, no personal guarantees are collateral, but the contracts that otherwise. Or companies that said consumers would receive a specific amount in their advance. But then we alleged, they charged upfront fees, which meant consumers got less than they were promised. Another issue that crops up in these cases is servicing, which was a part of our allegations against a large MCA provider, Yellowstone.
Sandy:
The company was supposed to take daily payments only until the MCA was paid off, but we alleged the company continued to take daily debits from the small business’ bank accounts, even after payoff. We alleged the company was well aware of this practice and internally acknowledged that it would continue to charge consumers four or five more times after payoff. We ultimately obtained a settlement that required Yellowstone to pay 9.8 million dollars and cease engaging in the alleged violations. What are the lessons for those operating in the small business financial services space? First, remember even if the consumer later figures out what’s going on, for example by seeing specific contract terms that contradict the company’s advertising, that doesn’t nullify the deception that occurred in the advertising. Those are known as deceptive door openers and they violate the FTC Act. Further, companies should make sure that the product is being serviced as expected and works the way the consumer thinks it will. If it doesn’t and consumers complain, pay attention, and be responsive.
Sandy:
Overall, we hope our work in this area reminds financial services providers to not assume a small business is any different from an individual in terms of sophistication. The overwhelming majority of these enterprises are very small. According to SBA, 80% of small businesses are sole proprietorships, and research by the Federal Reserve indicates that among small businesses that do have employees, roughly half employ only four or fewer people. So while these businesses may be experts in their own industries, they’re understanding of financing offers and contracts may be similar to individual consumers in personal credit transactions, which leaves them vulnerable to the same consumer protection harms.
Sandy:
I’m going to now turn to my second topic, which is fair lending. Combating harm aimed at specific marginalized communities continues to be a top priority of Chair Khan and the FTC. The FTC enforces the Equal Credit Opportunity Act, ECOA, which prohibits discrimination on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or good faith exercise of any rights under the Consumer Credit Protection Act. ECOA also requires creditors to provide applicants upon request with the reasons underlying decisions to deny credit. Earlier this month, we, along with the state of Illinois, announced an action against an auto dealer group called Napleton, which included charges related to fair lending and unwanted add-on products like gap insurance and extended warranties. According to our complaint, Napleton charged consumers for add-ons, that consumers never agreed to purchase, and in some cases had specifically declined with unauthorized charges buried in a mountain of paperwork.
Sandy:
We also said that Napleton told other consumers they had to purchase add-ons to finance the vehicle, supposedly because of a dealership or finance company policy, but this also wasn’t true. We said that as a result of this conduct, many consumers were out hundreds and often thousands of dollars for unwanted or unauthorized add-ons. Importantly, we also allege that Napleton engaged in discriminatory practices that resulted in Black car buyers paying more for add-ons and paying disproportionately higher interest rate markups than similarly situated white applicants. Under the terms of the settlement, Napleton was required to pay $10 million and agree to an injunction. The injunction requires Napleton to adopt a fair lending program that among other things puts a cap on the additional interest markup they can charge consumers and requires them to train their employees in fair lending practices, take action against employees who violate the program terms, and notify the FTC about any discrimination complaints they receive. The takeaway here is simple, The FTC won’t tolerate discrimination. Companies must make sure their practices don’t treat consumers differently on the basis of race, national origin, or any other protected characteristic.
Sandy:
Turning now to my third topic, which is endorsements. This is a topic that cuts across so many industries, including the financial services sector because when people are thinking about buying a product, taking out a loan, or undertaking just about any commercial transaction, consumer reviews are often one of the foremost trusted sources of information for them. That’s certainly true for me; when I’m picking out a product online the first thing I do is look at reviews. And people should be able to trust that reviews reflect honest opinions of people who have actually used the product and are not just being paid to tout it. But the rise of social media has blurred the line between authentic or neutral content and advertising. Leading to an explosion of deceptive endorsements and fake reviews across marketplaces. And companies that use fake reviews harm shoppers, and they also harm honest businesses that work hard to earn real reviews.
Sandy:
The FTC has had a long history of stamping out fake consumer reviews and other deceptive endorsements. One example is our action against LendEDU, which involved comparison shopping websites for student loans and other financial products. LendEDU’s website provided rate tables, rankings, and reviews for what the company represented to be the best or top companies offering loans and other products. They described their website as quote, “objective”, honest, accurate , unbiased.” In reality, we alleged it was pay-to-play. They solicited lenders to pay for their placement on the website, but by touting how many more clicks they would get depending on where they were ranked. And when companies refused to pay, they dropped them in the rankings. They also touted positive consumer reviews of their website that in fact were written by their own employees or their friends, family members, and associates. What are the lessons for compliance?
Sandy:
Companies shouldn’t give the impression that a ranking review or other endorsement is objective and unbiased if it’s actually based on compensation. And that’s true, whether you’re the seller or a third party. That brings me to my final topic for today, which is dark patterns. Dark patterns are design practices that trick or manipulate users into making choices they would not have otherwise made. They often take advantage of consumers’ cognitive biases to steer their conduct or delay access to information they would need to make fully informed decisions. Related to what I just discussed, some dark patterns, manipulate consumer choice by inducing false beliefs. This type of dark pattern includes using ads that are deceptively formatted to look like celebrity endorsements or news articles or using advertising designed to look like a neutral comparison website that actually ranks companies based on compensation. Like the LendEDU case I just mentioned. Another related dark pattern employed by lead generators is to convey a false connection or affiliation to someone a consumer might trust.
Sandy:
The FTC challenged this type of dark pattern in its case against Sunkey Publishing. Sunkey used websites, such as Army.com, and designed them to appear as official military recruiting websites. Sunkey falsely promised to use the information collected only for military recruitment purposes and not to share it with anyone else. In reality, our case alleged that Sunkey sold the information to for-profit schools and claimed that the military endorsed those schools. Now this particular lead generator, wasn’t sharing financial information, but the case illustrates some basic principles that apply across industries. Don’t misrepresent who you are, who you’re affiliated with, or what you’re going to do with a consumer’s information.
Sandy:
Another type of dark pattern involves delaying or hiding important information from consumers. An example here is a company charging hidden fees, or engaging in drip pricing where they reveal fees very late in the transaction, often after the consumer has invested a lot of time in the selection and buying process. We’ve also taken action against companies for using design tactics like nondescript drop-down arrows or small icons to hide the full cost of their financial products. For example, in our case against rent-to-own company, Progressive Leasing, we alleged that they hid the total cost of the product below inconspicuous dropdown links. They also used a document signing application that auto-scrolled to the signature page of the contract, thereby bypassing key terms for consumers. The FTC held a workshop on dark patterns last year and the transcripts and videos from that event, which are posted online at ftc.gov, provide a lot of helpful background information on the conduct that we describe as dark patterns, and that can often be unlawful. That concludes my time with you today; thank you very much for having me.
Ashley:
Thanks for listening to this episode of the COMPLY podcast! We hope you enjoyed hearing from Sandy Brown on consumer protection issues organizations are facing today.
For additional insights into all things marketing compliance, you can head to content.performline.com, and if you haven’t yet be sure to subscribe to the COMPLY podcast at content.performline.com/podcast or wherever you listen to podcasts!
Thanks again for listening and we’ll see you next time!
