The FTC Shines the Light on Hidden Fees and Hidden Disclosures: A Cautionary Tale for Advertisers
Surely we have all seen those television and online ads promising “no hidden fees” on services. It seems to have become the norm, as banks, mortgage lenders, and other businesses compete to lure consumers, using the promise of no fees as the hook of their advertising. But what happens when a company’s claim of “no hidden fees” turns out to be false and deceptive to consumers? Or when the disclosure of those fees is itself hidden in an obscure pop-up?
A new complaint (the “Complaint”) filed by the Federal Trade Commission (“FTC” or “Commission”) against online lending giant Lending Club Corporation (“Lending Club”) in the United States District Court for the Northern District of California last week highlights the perils and consequences companies may face if they deceptively market their services with the false promise of “no hidden fees.” This development should serve as a grave warning to advertisers about the importance of complying with FTC guidance on advertising practices.
The FTC’s Complaint Against Lending Club
On April 25, 2018, the FTC filed a lawsuit against Lending Club,1 alleging various abuses of the federal consumer protection laws. In total, four counts were alleged against Lending Club. Three were for unfair and deceptive business practices in violation of the Federal Trade Commission Act ("FTC Act"),2 including: (a) misleading consumers about the “up-front fees” it charged to consumers; (b) misleading consumers about the certainty of approved loans; and (c) the unauthorized withdrawal of funds from customers’ bank accounts. A fourth count was for violation of the federal Gramm-Bliley Act for (d) failure to properly notify consumers with a clear and conspicuous privacy notice.
The Complaint—and this article—centers on Lending Club’s purported history of deceptively advertising its “no hidden fees” in lending services to prospective borrowers. The assurance that “no hidden fees” would ensue in the transaction became the hook of Lending Club’s advertising efforts by mail and online, luring thousands of borrowers to apply for loans. Advertisements included and described in the Complaint show that Lending Club deceptively promised prospective borrowers “no hidden fees or prepayment penalties."3 In particular, one advertisement on a credit website assured borrowers that on approval, “your money goes straight to your account, with no hidden fees."4
The Complaint detailed Lending Club’s online loan application process—both before and after 2014 when Lending Club redesigned its online loan application procedure. The application process before the redesign showed that, once a consumer was approved in a front-end credit check, a page appeared that displayed a loan amount in bold letters, the interest rate, and payment plan of the offered loan. The same page displayed (ironically) a “smiling masked bandit” icon with accompanying text again assuring consumers there were no hidden fees.5 As the Complaint notes, in order to see the origination fee, consumers had to click on an obscure dot known as a "tooltip."6 The tooltip was a small green icon located under the interest rate amount. Only after clicking the tooltip, a pop-up bubble appeared and the actual origination fee was shown in small print at the end of the text. Without clicking the tooltip (which was easy to miss), consumers were not made aware of the up-front origination fee.
The Complaint demonstrates that Lending Club’s carefully hidden disclosures continued even after it redesigned the online application process in 2014. After receiving frequent complaints from customers and warnings from its own compliance review (more on this below), Lending Club, again ironically, “increased the prominence of the ‘No hidden fees’ representation and decreased the prominence of the tooltip."7 Even though Lending Club disclosed its origination fee on the same page as the loan amount, the disclosure of the origination fee remained obscure to consumers. Instead of being more conspicuous to consumers, the same up-front fee was (deceptively) displayed in an “unbolded itemization that appears sandwiched between more prominent, bolded paragraphs."8
Moreover, the origination fee was not insignificant. Lending Club took a percentage of the loan amount up front in the form of an origination fee, before disbursing the remaining amount to the consumer. The fee charged by Lending Club was “on average, approximately 5 percent—of the consumer’s requested loan amount and often amounts to more than a thousand dollars."9 As shown in the Complaint, consumers relied on receiving the full loan amount—without the substantial fee. The concealment of the origination fee left one consumer with insufficient funds to cover his relocation expenses, and left another consumer unable to pay his credit card debt, leaving him with “more bills to pay than he had before."10 To make matters worse, consumers had to pay interest on the entire loan amount, including the fee, leaving consumers “paying interest on principal that they never received."11
Lending Club Was Aware that Customers Were Misled by the Hidden Disclosure of the Origination Fee
Lending Club was fully aware that thousands of consumers applied for loans with no knowledge of the obscure origination fee. In fact, Lending Club received “[a]t least tens of thousands"12 of complaints directly from consumers about the hidden fees. Indeed, Lending Club’s own training materials for customer service representatives listed “I didn’t receive the full loan amount” as one of the two most common complaints that representatives were trained to address.13 Consumers “frequently complained that they only discovered the fee after [Lending Club] disbursed their loan proceeds, when they noticed that the amounts disbursed were smaller than they were expecting."14 Once consumers became aware of the fee, many elected to cancel their loans, often “preferring a loan from a competitor or no loan at all."15
Further, Lending Club ignored warnings from its own internal compliance review and from outside counsel. According to the Complaint, one compliance review warned that the concealment of the origination fee “is likely to mislead the consumer."16 Lending Club was also warned by an investor’s legal counsel about the obscurity of the origination fee disclosures. The same legal counsel explained to Lending Club that the upfront fee was “not clear and conspicuous” and wisely warned that the “relative obscurity” of the origination fee “could make it the target in a law enforcement action."17
According to the Complaint, Lending Club “ignored these warnings” and rather than improving over time, Lending Club’s “violations have become more egregious over the years."18 Because of the years of deceptive representations by Lending Club, and the resulting complaints by thousands of consumers, the FTC concluded the conduct of Lending Club to be an unfair and deceptive practice in clear violation of the FTC Act, and filed the current enforcement action. The Commission has demanded both injunctive and monetary relief against Lending Club. These damages typically run into the millions of dollars.
The Broad Enforcement Powers of the FTC
The Complaint against Lending Club is an example of the oft-forgotten broad enforcement power of the FTC and echoes the Commission’s ongoing efforts to protect consumers against all unfair and deceptive practices. Advertisers should be aware that the FTC’s enforcement authority reaches the marketing of ninety-five percent (95%) of all consumer goods and services. The FTC Act’s prohibition on “unfair or deceptive acts or practices” covers advertising claims in various mediums, including those used in online advertising. The FTC takes deceptive practices seriously and has issued several guides and policies to clarify what actions constitute deceptive advertising.
As early as 1983, the FTC provided guidance policy on deceptive advertising. According to the FTC Policy Statement on Deception (“Policy Statement”), when assessing advertisements for deceptive marketing, there is “no set formula for a clear and conspicuous disclosure."19 Rather, the FTC will interpret and determine an advertisement’s claims and message based on the impression of the advertisement as a whole. The Commission evaluates the “entire advertisement, transaction, or course of dealing in determining how reasonable consumers are likely to respond."20 An unfair practice is one that is “likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or competition."21 In evaluating disclosures, the Commission has recognized that “in many circumstances, reasonable consumers do not read the entirety of an ad or are directed away from the importance of the qualifying phrase by the acts or statements of the seller."22 The FTC’s 2013 guidance on “Dot Com Disclosures"23 stresses the importance of material disclosures—such as the existence of a fee—being clear and conspicuous when advertising to the consumer.24 The key is that the disclosures “must be communicated effectively so that consumers are likely to notice and understand them in connection with the representations that the disclosures modify."25 The disclosures must be placed as close as possible to the claim they qualify. “Simply making the disclosure available somewhere in the ad, where some customers might find it [whereas many will not], does not meet the clear and conspicuous standard."26
Among other guidance offered by the Commission, the Commission has warned that advertisers must not “bury the details,"27 emphasizing that important restrictions and conditions must “be disclosed clearly and conspicuously” so that the consumers are able to “evaluate the merits of an offer and make an informed purchasing decision."28 Specific to online advertising, the Commission cautions against the use of pop-up windows and hyperlinks to display key cost information. If using a hyperlink to display important cost information, the FTC recommends that advertisers “clearly label the hyperlink so it shows the importance, nature and relevance of the information to which it links."29
As this Complaint shows, the failure of Lending Club to clearly and conspicuously display to borrowers that it was charging a substantial up-front origination fee is an unfair and deceptive practice under Section 5(a) of the FTC Act.30 And the Complaint highlights only a few of the literally tens of thousands of complaints consumers made to Lending Club about the concealed origination fee. Looking at the consumer experience and the online application process, the FTC had ample reason to believe that the concealment of the origination fee was deceptive to the reasonable consumer. Once consumers were offered a loan, if they did not click the small toolkit icon, there was “no other disclosure on this page from which a consumer could learn of the existence of the up-front fee.”31 (Emphasis added.) Even after the company redesigned the online application experience in the winter of 2014, Lending Club continued to obscure the existence of the up-front fee. The deceptive sandwiching of the up-front fee in between two more prominent, bolded paragraphs was deemed by the FTC to be an even “more egregious” violation of advertising laws.
Conclusion: The Lesson for All Advertisers
All disclosures and disclaimers must be clear, conspicuous, and not likely to mislead consumers. The Complaint against Lending Club is one of many enforcement actions the FTC has taken to protect consumers against unfair and deceptive advertising practices. The Commission has broad enforcement power under the FTC Act to police these deceptive acts—a fact corporations and companies engaging in advertising often forget. At a time when consumer confidence is high,32 this enforcement action shines a bright light on deceptive practices enforced by the FTC, and the need for advertisers to revisit their advertising practices to ensure they are not the subject of a future enforcement action. Material terms must be clearly and conspicuously disclosed, and fees must never be hidden. Otherwise, an investigation and Complaint are likely, and the resulting fines are high.
2 15 U.S.C. §45(a).
3 Complaint at p. 4.
4 Id. at p. 5.
5 Id. at p. 9.
7 Id. at p. 13. (emphases in original).
8 Id. at p. 15.
9 Id. at p. 11. (emphasis added).
10 Id. at p. 12.
12Id. at p. 18.
13 Id. at p. 12.
14 Id. at p. 18.
16 Id. at p. 12.
17 Id. at pp. 12-13.
18 Id. at p. 13.
19 Federal Trade Commission, FTC Policy Statement on Deception (October 1983).
20 See Policy Statement at p. 4 (emphasis added). According to 1983 Policy Statement, the FTC examines apparent deceptive practices by considering three elements. First, the Commission will examine if there was a misrepresentation, omission, or practice that is likely to mislead a consumer. Second, the FTC will examine if, from the perspective of the consumer, the consumer acted reasonably in the circumstances. And third, the FTC will assess whether the misrepresentation, omission, or practice was a “material” one.
21 15 U.S.C. §45(n).
22 CCH Trade Regulation Reporter, ¶ 7569.09 (Oct. 21, 1970).
23 Federal Trade Commission, .com Disclosures: How to Make Effective Disclosures in Digital Advertising (March 2013).
24 Id. at p. 6.
27 Federal Trade Commission, Big Print, Little Print. What's the Deal? (June 2000).
28 Id. at p. 1.
29 Id. at p. 3.
30 15 U.S.C. §45(a).
32 Lucia Mutikani, U.S. consumer confidence, housing data highlight economy’s strength (April 24, 2018), https://www.reuters.com/article/us-usa-economy-housing/u-s-consumer-conf....