QUESTION
We are a small mortgage lender in the Midwest. Our compliance department consists of only me. Our legal support is an outside attorney. Last week we received the report from our banking department about their recent examination. Their report claimed that our marketing campaign led to "material interference" and, therefore, was a UDAAP violation.
Their whole gripe is about them saying we "omitted" some details in our marketing to mislead potential borrowers. First of all, it's not true that we left out details! Secondly, even if we did omit details, it wasn't intentional, and I don't see how they can prove we intended to leave them out.
Our attorney asked me to write you. I was a little shy, but my CEO said I should write you. We hope you can shed some light on how we wound up with this violation.
How does intent get factored into a material interference violation?
What is the meaning of "material interference" in UDAAP?
ANSWER
Please be assured that you should never be shy about writing me. My firm and I are devoted to the mortgage community, and these newsletters are one of the ways we can serve and participate.
Let's take a quick look at what constitutes an abusive act or practice, as described by the Consumer Financial Protection Act (CFPA) in its guidelines relating to UDAAP (viz., Unfair, Deceptive, or Abusive Acts or Practices).
Generally, UDAAP violations are triggered if a company[i]
(1) obscures important features of a product or service, or
(2) leverages certain circumstances to take an unreasonable advantage.
Broadly stated, UDAAP allegations result from concerns over gaps in understanding, unequal bargaining power, and consumer reliance on information.[ii]
Two critical analytical elements build on the foregoing criteria in alleging a UDAAP violation: (a) material interference and (b) unreasonable advantage.
Material inference is the ability of a consumer to understand a term or condition of a consumer financial product. I'll elaborate further on this element in a moment.
Unreasonable advantage is more nuanced. It consists of three parts, all or any of which can cause a UDAAP violation. Unreasonable advantage happens when the following situations exist:[iii]
1. There is a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.
2. The consumer has the inability to protect the consumer's interests in selecting or using a consumer financial product or service.
3. When the consumer reasonably relies on a company to act in the consumer's interests.
An act or practice only needs to fall into one of the categories above to be abusive, but an act or practice could fall into more than one category.
Turning to your questions, we'll discuss intent concerning material interference, and then we'll discuss the meaning of material interference in UDAAP
How does intent get factored into a material interference violation?
Intent is not a required element to show material inference. Although evidence of intent would provide a basis for inferring material interference, it is not necessary to show material interference.
It is reasonable to infer that an act or omission materially interferes with a consumer's ability to understand a term or condition when a company intends it to interfere. This view has become enshrined in a policy statement from the Federal Trade Commission, as follows:
When evidence exists that a seller intended to make an implied claim, the Commission will infer materiality.[iv] [Emphasis added.]
From this policy position, a sort of domino effect may take place. Material interference can be established with evidence that the act's or omission's natural consequence would impede a consumer's ability to understand. And then material interference can be shown with evidence that the act or omission did in fact impede a consumer's actual understanding.
Put otherwise, UDAAP prohibitions occur where an entity "materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service."[v]
What is the meaning of "material interference" in UDAAP?
UDAAP has its very own "sins of commission and omission." The former involves acts or practices, and the latter omits essential terms or conditions of a financial product or service. Indeed, both "sins" can occur simultaneously.
Material interference may, among other things, include actions or omissions that obscure, withhold, de-emphasize, render confusing, or hide information relevant to the ability of a consumer to understand terms and conditions. Interference takes numerous forms, including buried disclosures, physical or digital interference, overshadowing, and various other means of manipulating a consumer's understanding.
For instance, concerning buried disclosures – what sometimes is referred to as "fine print" disclosure – these disclosures are designed to limit a consumer's comprehension of a term or condition, including, but not limited to, through the use of fine print, complex language, jargon, or the timing of the disclosure.[vi] Entities can also interfere with understanding by omitting material terms or conditions.[vii]
Physical interference happens when any physical conduct impedes a consumer's ability to see, hear, or understand the terms and conditions, including, but not limited to, physically hiding or withholding notices.[viii]
Digital interference impedes a consumer's ability to see, hear, or understand the terms and conditions when presented to someone in an electronic or virtual format. This form of interference includes, but is not limited to, user interface and user experience manipulations – such as the use of pop-up or drop-down boxes, multiple click-throughs, or other actions or "dark patterns" that have the effect of making the terms and conditions materially less accessible or salient.[ix]
Overshadowing happens when the prominent placement of certain content, such as an opt-in form, interferes with comprehending other content, such as a form that provides terms and conditions.[x] For instance, overshadowing happens when a consumer's ability to consider the contents of a terms and conditions disclosure is overshadowed by the consumer's attention being directed by focusing on an opt-in disclosure (or some other disclosure).
As to other means of material interference aimed at manipulating a consumer's understanding, there are many ways. Amongst them are excluding important (i.e., material) terms. Certain transaction terms are so consequential that if they are not conveyed to a consumer prominently, clearly, and unambiguously, it may be reasonable to presume that the entity has engaged in acts or omissions that materially interfere with a consumer's ability to understand. That information includes, but is not limited to, pricing or costs, limitations on the consumer’s ability to use or benefit from the product or service, and contractually specified consequences of default.
Another means to manipulate a consumer’s understanding is where an entity’s provision of a product or service may interfere with the consumer’s ability to understand if the product or service is so complicated that material information about it cannot be sufficiently explained or if the entity’s business model functions in a manner that is inconsistent with its product’s or service’s apparent terms.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i] By
“company,” I am referring to covered persons, service providers, and persons
that provide substantial assistance to abusive conduct by a covered person or
service provider as ‘‘entity’’ or ‘‘entities.’’
[ii]
See §
1031(d)(2), Consumer Financial Protection Act (CFPA). Section 1031 of the
Dodd-Frank Act (DFA). Note: The principles of “unfair” and “deceptive”
practices in the DFA are similar to those under Section 5 of the Federal Trade
Commission Act (FTC Act). The Federal Trade Commission (FTC) and federal
banking regulators have applied these standards through case law, official
policy statements, guidance, examination procedures, and enforcement actions
that may inform Consumer Financial Protection Bureau. For the purposes of this
article, my outline abbreviates some statutory requirements.
[iii]
Idem §
1031(d); 12 U.S.C. 5531(d)
[iv] Policy
Statement on Deception at 5, Federal Trade Commission
[v]
CFPA §
1031(d)(1); 12 U.S.C. 5531(d)(1)
[vi]
See TD Bank, N.A., File No. 2020–BCFP–0007, at 16–20, August 20, 2020
[vii]
See TMX Finance LLC, File No. 2016–CFPB–0022, at 6, September 26, 2016
[viii]
See Complaint at 6, 18–19, CFPB v. All American Check Cashing, Inc., No.
3:16–cv–00356, S.D. Miss. May 11, 2016
[ix] “Dark
Patterns” has been discussed in detail in Bringing Dark Patterns to Light,
FTC Staff Report, September 2022
[x]
See First Amended Complaint at 12–13, 26–27, CFPB v. TCF National
Bank, No. 17–cv– 00166, D. Minn. March 1, 2017. See also CFPB v. TCF Nat’l
Bank, No. 17–cv–00166, 2017 WL 6211033, at *2–3, D. Minn. Sept. 8, 2017
