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.

Weekly Fintech Focus

  • FTC explains that merchants using BNPL services are also subject to consumer protection obligations.
  • CFPB ends its no-action letter and compliance sandbox policies.
  • CFPB sues an online lender for Military Lending Act violations related to the lender’s membership fees.
Continue Reading Fintech Legal Report—Week of September 30, 2022

Weekly Fintech Focus

  • The OCC is focusing on fintech-bank partnerships as explained in a speech by Acting Comptroller of the Currency Michael J. Hsu
  • Congressmembers seek information related to a firearms BNPL provider
Continue Reading Fintech Legal Report—Week of September 9, 2022

Weekly Fintech Focus

  • CFPB warns firms about UDAAP violations for information security weaknesses.
  • CFPB issued an interpretive rule to clarify that digital marketing providers can be covered service providers under the CFPA for targeting and placement of advertisements for financial products and services.
Continue Reading Fintech Legal Report—Week of August 12, 2022

CFPB Highlights Emerging Risks in the Convergence of Payments and Commerce

On August 4, 2022, the Consumer Financial Protection Bureau (CFPB) released a report on the emerging risks consumers face in the growing presence of new products that blur the line between payments and commerce, namely: buy now, pay later (BNPL) offerings; embedded commerce; and integrated “super apps.” Specifically:

Continue Reading Fintech Legal Report—Week of August 19, 2022

Weekly Fintech Focus

  • Democratic senators urge CFPB to focus on bank liability for fraud occurring on P2P payment platforms.
  • CFPB and OCC issue $225M fine to a bank for failures related to unemployment benefits payments.
  • UK financial regulators open consultation on oversight of financial institutions’ third-party service providers.
Continue Reading Fintech Legal Report—Week of July 22, 2022

Weekly Fintech Focus

  • The CFPB terminates a no-action letter with an AI credit underwriter.
  • A CFPB circular confirms that AI underwriting models are subject to anti-discrimination laws including adverse action notices.
  • BNPL companies and credit bureaus face urging by the CFPB to properly report consumer information.
  • The CFPB launches an initiative to improve customer service at big banks.
Continue Reading Fintech Legal Report—Week of June 17, 2022

Weekly Fintech Focus

  • The CFPB plans to review CARD Act Rules.
  • The Treasury Department proposes clarifications to regulatory treatment of Earned Wage Access programs.

CFPB Director Chopra Plans to Review CARD Act Rules

The day after a tough hearing with the Senate Banking Committee, on April 27, 2022, the House Financial Services Committee held a hearing in which Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra spoke with lawmakers about his plans to explore whether the CFPB should revisit and potentially revise previously written rules to implement the Credit Card Accountability Responsibility and Disclosure Act (the CARD Act).

These rules cover various consumer protection requirements and restrictions such as limits on interest rate increases and certain fees. Particularly, Chopra’s comments suggest that the CFPB could pursue tougher restrictions on issuer fees as part of a broader effort to manage what he refers to as “junk fees.” Chopra did not provide a specific definition on what fees the agency may scrutinize, but his responses to inquiries from lawmakers indicates that it could cover a broad array of charges that are imposed on bank accounts, credit cards, and other financial products, such as late fees and other fees that do not compensate for a specific service.

Continue Reading Fintech Legal Report—Week of May 6, 2022

Weekly Fintech Focus

  • The CA DFPI issued an interpretive opinion on an earned wage access product, finding that the structure of the earned wage access program was not a loan product.
  • The CFPB issued a compliance bulletin outlining and reiterating prohibitions and restrictions under ECOA and Regulation B related to the distribution of government benefits via prepaid cards.
  • Numerous financial regulators issued an interagency statement to encourage creditors to engage in special purpose credit programs.

CA DFPI Issues Interpretive Opinion on Earned Wage Access

On February 11, 2022, the California Department of Financial Protection and Innovation (DFPI)  issued an interpretive opinion letter that FlexWage, a New Jersey-based financial services company that partners with employers to provide employees’ earned wages in advance of payday, is not subject to licensure under the California Deferred Deposit Transaction Law (CDDTL) with respect to its earned wage access (EWA) product. EWA products provide employees with access to earned but as yet unpaid wages. DFPI also concluded that FlexWage did not require a license under the California Financing Law (CFL).

DFPI stated that FlexWage’s EWA product is not a loan subject to the CFL because it is the employer, not FlexWage, that is providing the funds and those funds do not exceed the amount that the employer already owes the employee. FlexWage does not originate or facilitate loans since the wages have already been earned by the employee and are not subject to repayment.  Therefore, this product is not a loan but a facilitation of an existing financial obligation from the employer to the employee.

While cost typically is not a factor in the assessment, DFPI considered whether FlexWage’s EWA product suggested evasion of the CFL. DFPI determined that it did not and noted the fact that the fee FlexWage charges for this service, which appears as an itemized deduction from the employee’s pay, is substantially lower than what it could charge as an “administrative fee” under the CFL.

DFPI also determined that the EWA product was not a “deferred deposit transaction” under the CDDTL. This was based largely on the same reasoning as DFPI’s reasoning under the CFL–specifically, the source of the funding, the limit on the funding amount, and the limit on the fees were determining factors against imposing a licensing requirement on FlexWage under the CDDTL.

CFPB Issues Compliance Bulletin on Reg. E’s Compulsory Use Prohibition

On February 15, 2022, the CFPB issued a compliance bulletin on outlining and reiterating prohibitions against prepaid cards being the sole method for distributing government benefits.

The Electronic Fund Transfer Act (EFTA), as implemented by Regulation E, provides that no person may require a consumer to establish an account for receipt of electronic fund transfers with a particular financial institution as a condition of receipt of a government benefit. This prohibition applies to “government benefit accounts,” accounts established by a government agency for distributing government benefits to a consumer electronically, with certain exemptions listed in Regulation E.

Typically, consumers receive their government benefits (e.g., social security payments, veterans’ benefits, unemployment insurance, child support, pension plan payments) through direct deposit into their bank account, by prepaid card, or by check.

The compulsory use prohibition is designed to ensure that consumers receiving government benefits have a choice with respect to how they receive their funds. For example, a government agency that requires consumers to receive benefits through direct deposit will not violate the compulsory use prohibition if it allows consumers to choose the financial institution they want to use in receiving the direct deposit. Alternatively, a government agency may give a consumer the choice of having their benefits deposited at a particular institution (designated by the government agency) so long as the consumer is able to receive their benefits by another means.

However, the CFPB’s Compliance Bulletin highlights and reinforces the CFPB’s existing position that consumers are not provided a choice, and that there is a violation of the EFTA, when a consumer is required to receive the first payment of government benefits on a prepaid card (or otherwise at a particular institution), even if the consumer can later redirect the payment to an account of their choice. In such a scenario, the CFPB’s position is that the consumer does not have a choice with respect to how to receive the first payment of the government benefit; rather, with respect to that first payment, the consumer was required to establish an account with the financial institution that issued the prepaid card as a condition of receiving the funds.

Although the Compliance Bulletin does not announce a new position, it serves to highlight one that was recently an element of a CFPB consent order issued to prison financial services company JPay that included a $6 million fine (as covered in our blog here).

Financial Regulators Encourage Special Purpose Credit Programs

On February 22, 2022, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Department of Housing and Urban Development, the Department of Justice, and the Federal Housing Finance Authority issued an interagency statement reminding creditors that ECOA and Regulation B permit creditors to establish special purpose credit programs (SPCPs) to provide credit to specified classes of persons.

The interagency statement notes that there has been confusion over the applicability and permissibility of creditors instituting SPCPs and this interagency statement aims to encourage creditors to pursue SPCPs that comply with ECOA and Regulation B. If creditors have questions, the agencies also encourage engagement and consultation with the applicable regulator.

A number of agencies have made prior statements through advisory opinions or other guidance to explain the availability of SPCPs to various types of creditors, including:

  • The CFPB issued an Advisory Opinion on SPCPs to clarify that for-profit creditors must include a written plan to establish and administer to SPCP and to clarify the types of data that may be relied on to inform the creditor’s determination of the need for the SPCP.
  • HUD released guidance concluding that SPCPs that conformed with the requirements of ECOA and Regulation B did not violate the Fair Housing Act.

This blog has covered these developments here, here and here.

Weekly Fintech Focus

  • CFPB announces initiatives to address junk fees in consumer financial products and services.
  • CFPB seeks comment on BNPL services.
  • The OCC approves another banking charter for a fintech company.
  • FDIC and FinCEN launch Tech Sprint to address challenges in digital identity.

Continue Reading Fintech Legal Report—Week of February 4, 2022