Consumer Protection Agencies Target Junk Fees and Dark Patterns for Enforcement Action and Rulemaking

The Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) are cracking down on the assessment of junk fees and the use of dark patterns, which harm consumers. Recently, the CFPB sued an online event registration company for its use of dark patterns and duping customers into signing up for unwanted subscription services. Soon the FTC will seek public comment on the harm to consumers caused by junk fees.

On October 18, 2022, the Consumer Financial Protection Bureau (CFPB) sued the online event registration company ACTIVE Network, alleging that it used dark patterns to get consumers to inadvertently click links, sign up for subscriptions, and purchase products and services.

Dark patterns refer to hidden tricks built into websites that can be used to mislead consumers, disguise ads, make it difficult to cancel subscriptions or recurring charges, and bury junk fees.

According to the agency, ACTIVE inserted a webpage into its online event registration and payment process with a highlighted call to action (CTA) button (usually labeled “Accept”) that many consumers clicked thinking they were accepting charges to participate in an event, but which instead enrolled them in a trial membership that automatically converted into a paid subscription with an $89.95 annual fee. The agency also alleged that ACTIVE increased its discount club’s annual membership fee without sending written notice of the new payment at least 10 days before charging consumers. The CFPB claimed that ACTIVE has generated more than $300 million in fees from about 3 million memberships since 2011.

The CFPB is suing to require ACTIVE to change its unlawful enrollment practice, reimburse consumers, and pay a penalty. Iowa and Vermont separately sanctioned ACTIVE for violating state consumer finance protection laws, with both actions resulting in settlements.

In addition to the CFPB, the Federal Trade Commission (FTC) also plans to take action on junk fees, announcing on October 20 that it will explore a new rule to crack down on unnecessary, unavoidable, or surprise fees that inflate costs while adding little to no value.

According to the FTC, companies charge junk fees in a variety of contexts, such as including hidden fees to which consumers did not consent, misrepresenting services as optional or upgrades as mandatory, and charging for products or services with little to no value. Like the CFPB, the FTC also notes that companies often impose such fees on captive consumers by deploying digital dark patterns and other tricks to hide or mask them. The agency is concerned that these fees are common in many sectors of the U.S. economy.

The FTC will seek public comment on the harm such fees cause consumers and the unfair and deceptive tactics companies employ to harvest them to determine whether a new rule would better protect consumers. In particular, the FTC seeks comment on junk fees that involve unnecessary charges for worthless, free, or fake products or services; unavoidable charges imposed on captive consumers; and surprise charges that secretly push up the purchase price.

CFPB Takes Action to Address Junk Data in Credit Reports

The Consumer Financial Protection Bureau (CFPB) is asking consumer reporting agencies to screen consumers’ credit reports and remove junk data. Junk data can lead to consumers’ being denied credit. It is paramount that consumer reporting agencies take reasonable care to ensure the information contained in a consumer’s credit report is accurate.

On October 20, 2022, the Consumer Financial Protection Bureau (CFPB) issued new guidance to consumer reporting companies regarding their obligation to screen for and eliminate junk data from consumers’ credit reports.

Junk data can take many forms, some of which include credit reports that reflect a child’s having a mortgage or a person’s incurring debt years before their birth. The CFPB noted that obviously false junk data can lead to consumers’ being denied credit, housing, or employment, or paying more for credit. It also noted that children in foster care may be especially susceptible to these real-world  consequences because of the high rate of identity theft affecting that population.

The CFPB’s guidance underscored consumer reporting companies’ legal obligation to follow reasonable procedures that assure maximum possible accuracy of information. This includes policies and procedures that enable these companies to screen for and eliminate junk data, particularly in cases of inconsistent account information (i.e., where two or more pieces of information cannot all be true) and information that cannot be accurate (i.e., where information reflects obvious impossibilities). The agency’s guidance also stressed that consumer reporting companies should further identify and prevent the reporting of illegitimate credit transactions for minors.

According to the CFPB, complaints concerning incorrect information on consumer reports have represented the largest share of credit or consumer reporting complaints it has received for at least the last six years.

The CFPB stated that its guidance is one in a series of actions being taken by the agency to ensure consumer reporting companies comply with consumer financial protection law.

Fifth Circuit Says CFPB’s Structure Is Unconstitutional

The Fifth Circuit ruled that the Consumer Financial Protection Bureau’s (CFPB) funding violates the U.S. Constitution’s requirement that Congress appropriate the budgets of federal agencies, calling into question the CFPB’s rulemaking since the agency’s inception. Should the ruling stand, Congress will need to approve the CFPB’s funding.

In a case brought by a payday lending group, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit ruled that the way in which the Consumer Financial Protection Bureau (CFPB) is financed “violates the Constitution’s structural separation of powers.”

The Fifth Circuit reasoned that because the CFPB receives its funding from the Federal Reserve, which is itself outside the appropriations process, and because this funding is not subject to Congressional review by statute, the agency’s funding is “double-insulated on the front end from Congress’ appropriations power” and “Congress relinquished its jurisdiction . . . on the back end.” Thus, “[w]herever the line between a constitutionally and unconstitutionally funded agency may be,” the Fifth Circuit concluded, “this unprecedented arrangement crosses it.”

Commentators have noted, however, that the CFPB is not unique as an agency that does not receive its annual funding determined by Congress, pointing to other agencies that also are funded in other ways, such as the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC).

Going forward, the ruling appears to call into question the validity of CFPB rules in the Fifth Circuit. Should it stand, the CFPB would need annual budget approval by Congress.


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Photo of Sam Boro Sam Boro

Sam Boro advises fintech companies, banks, merchants, and marketplaces in the development and launch of new payment products and services. He supports clients in negotiating agreements and partnerships, understanding regulatory compliance issues, and designing smooth user interfaces.

Photo of Samuel Klein Samuel Klein

Samuel Klein is a graduate of the American University Washington College of Law, where he was a member of the American University Law Review.

Ross Handler

Ross T. Handler counsels fintech, nonbank, and financial services institutions on compliance with state and federal finance laws. He advises financial services clients on money transmission and consumer and commercial lending laws related to the offering and operation of financial products and services…

Ross T. Handler counsels fintech, nonbank, and financial services institutions on compliance with state and federal finance laws. He advises financial services clients on money transmission and consumer and commercial lending laws related to the offering and operation of financial products and services, including credit, debit and prepaid cards, and other consumer lending constructs.