QUESTION
We are being sued for a violation of UDAAP. The lawsuit is based on the allegation that we materially interfered with the ability of a consumer to understand our terms and conditions. As far as I know, we have never intentionally misled a consumer. Our legal counsel is fighting back, but our reputation is already getting hit with negative press.
I am the Chief Operating Officer, and with permission of our Board, I am writing you to ask for some history involving this kind of allegation. Your response could help us broaden our perspective and assist us in making sure this incident never happens again.
We recently signed up for your UDAAP Tune-up, but it will not start for a few weeks. In the meantime, a word from you about some facets of this allegation would be appreciated.
What is "material interference" involving terms and conditions in the context of UDAAP?
ANSWER
Thank you for your interest in our UDAAP Tune-up. Our UDAAP review is in demand. When it comes to Unfair, Deceptive, or Abusive Acts or Practices (UDAAP), it is essential to be proactive. Don’t wait for a regulatory investigation; certainly, don’t think you can wiggle your way out of a lawsuit, which often metastasizes into class action litigation.
You can have your counsel contact me to discuss your case explicitly if they want expert witness support.
There are many litigious access points to allege UDAAP violations, given that many regulatory frameworks are implicated.[i] You mentioned that you never intended to mislead the consumer; however, it is important to recognize that intent is not required to show material interference.
Brief History
In 2010, Congress passed the Consumer Financial Protection Act of 2010 (CFPA) and banned abusive conduct.[ii] The CFPA's prohibition on abusive conduct was the most recent congressional tailoring of the Federal prohibitions to ensure fair dealing and protect consumers and market participants in the United States.
The 2007-2008 financial crisis tested consumer protection laws, government watchdogs, and the ability of the existing authorities to address predatory lending, considered to be a primary cause of the collapse. The financial crisis was set in motion by avoidable interlocking forces. At its core were mortgage lenders profiting (by selling on the secondary market) on loans that set people up to fail because they could not repay.
Consequently, Congress concluded that federal agencies' enforcement of the prohibitions on unfair and deceptive acts or practices was too limited to be effective at preventing the financial crisis. Therefore, it amended existing law. This is the point at which the FDIC, in 2007, said the term “unfairness” is a restrictive legal standard and the term “abusive” should be added because it is more legally flexible.[iii] In the CFPA, Congress granted authority over unfair or deceptive acts or practices to the states, the Federal banking agencies, and the newly created Consumer Financial Protection Bureau (CFPB). Congress also added a prohibition on abusive acts or practices.
There have been numerous updates to the regulatory supervision and enforcement of UDAAP over the years. Indeed, since the enactment of the CFPA, government enforcement and supervisory agencies have taken dozens of actions to condemn prohibited abusive conduct. Earlier this year, the CFPB issued a Policy Statement to summarize those actions and explain how the Bureau analyzes the elements of abusiveness through relevant examples. This Policy Statement is the CFPB’s first formal issuance that summarizes precedent on abusive acts or practices and provides an analytical framework for identifying abusive acts or practices.[iv]
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For information about our UDAAP Tune-up, please contact us here.
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I will provide a cursory overview of the CFPA prohibitions. Thereafter, I’ll briefly explain the prohibition regarding “material interference” as it relates to terms and conditions.
Overview
Under the CFPA, there are two abusiveness prohibitions.[v] An abusive act or practice:
(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or
(2) Takes unreasonable advantage of:
· A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
· The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
· The reasonable reliance by the consumer on a covered person to act in the consumer's interests.
The statutory text of these two prohibitions may be summarized at
a high level as:
(1) obscuring important features
of a product or service,
or
(2) leveraging certain circumstances to take an unreasonable advantage. The circumstances, or three prongs, that Congress set forth generally concern gaps in understanding, unequal bargaining power, and consumer reliance.[vi]
Unlike unfairness but similar to deception, abusiveness requires no showing of substantial injury to establish liability but is focused on conduct that Congress presumed to be harmful or distorts the proper functioning of the market. Put otherwise, an act or practice need only fall into just one of the categories above to be abusive, but an act or practice could fall into more than one category.[vii]
Material Interference in Terms and Conditions
The first abusive act or practice that takes unreasonable advantage of consumers, gaps in understanding, concerns situations where an entity “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.”[viii] Material interference may be shown when an act or omission is intended to impede consumers’ ability to understand terms or conditions, has the natural consequence of impeding consumers’ ability to understand, or actually impedes understanding.
Acts or omissions may be material interference. Material interference may 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 can take numerous forms, such as “buried disclosures,” physical or digital interference, “overshadowing,” and various other means of manipulating consumers’ understanding.
What is a buried disclosure? It is a disclosure that limits people’s comprehension of a term or condition, including, but not limited to, fine print, complex language, jargon, or the timing of the disclosure. There could be an oral component, too.[ix] Entities can also interfere with understanding by omitting material terms or conditions.
There may be physical interference, where physical conduct impedes a person’s ability to see, hear, or understand the terms and conditions, including, but not limited to, physically hiding or withholding notices.[x]
Digital interference may occur where there are impediments to a person’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-ups 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.[xi]
Material interference includes a process of overshadowing, which is the prominent placement of certain content that interferes with the comprehension of other content, including terms and conditions.[xii]
Facing Litigation
There are several methods to prove material interference with a consumer’s ability to understand terms or conditions. My response focuses on the prong of leveraging certain circumstances to take unreasonable advantage of consumers, to wit, gaps in understanding, but the other two prongs, unequal bargaining power, and consumer reliance, may also be implicated in material interference litigation.
First, while intent is not required to show material interference, it is reasonable to infer that an act or omission materially interferes with consumers’ ability to understand a term or condition when the entity intends it to interfere.[xiii]
Second, material interference can be established with evidence that the act or omission's natural consequence would impede consumers’ ability to understand.
And third, material interference can also be shown with evidence that the act or omission did, in fact, impede consumers’ actual understanding.
While evidence of intent would provide a basis for inferring material interference under the first method, it is not a required element to show material interference.
Certain transaction terms are so consequential that when not conveyed to people prominently or clearly, it may be reasonable to presume that the entity engaged in acts or omissions that materially interfere with consumers’ ability to understand. That information includes, but is not limited to, pricing or costs, limitations on the person’s ability to use or benefit from the product or service, and contractually specified consequences of default.
An entity’s provision of a product or service may interfere with consumers’ 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 the apparent terms of its products or services.
Chairman & Managing Director
[i] See, for instance, Federal Trade Commission v. Standard Education Society, 86 F.2d 692, 696 (2d Cir. 1936), reviewed in part on other grounds, 302 U.S. 112, 116 (1937) (describing the congressional prohibitions intended to regulate methods of fair dealing in the marketplace). Certain other Federal consumer financial laws, including the Fair Debt Collection Practices Act (FDCPA) and the Home Ownership and Equity Protection Act (HOEPA), reference either the term “abusive” or “abuse.” See 15 USC § 1692d (FDCPA), 15 USC § 1639(p)(2)(B) (HOEPA). The Telemarketing and Consumer Fraud and Abuse Prevention Act also directed the Federal Trade Commission (FTC) to “prescribe rules prohibiting deceptive telemarketing acts or practices and other abusive telemarketing acts or practices.” See 15 USC § 6102(a)(1).
[ii] CFPA § 1036(a)(1)(B), 12 USC § 5536(a)(1)(B). In CFPA § 1031, Congress prohibited covered persons and services providers from committing or engaging in unfair, deceptive, or abusive acts or practices in connection with the offering or provision of consumer financial products or services. CFPA § 1031(d) sets forth the general standard for determining whether an act or practice is abusive. See 12 USC § 5531(d).
[iii] Federal
Deposit Insurance Corporation (FDIC) Chairwoman Sheila Bair explained in
congressional testimony that unfairness “can be a restrictive legal standard”
and proposed that Congress consider “adding the term ‘abusive,’” which she
noted existed in the Home Ownership and Equity Protection Act, and which “is a
more flexible standard to address some of the practices that make us all
uncomfortable.” See Improving Federal Consumer Protection in Financial
Services, House Committee on Financial Services, Sheila C. Bair, (June 13,
2007), Federal Deposit Insurance Corporation
[iv] The CFPB
previously issued a Policy Statement on Abusive Acts or Practices in 2020, see
85 FR 6733 (February 6, 2020), rescinded on March 19, 2021, see 86 FR 14808. My
response uses several salient policy analyses stated in the 2023 Policy
Statement.
[v] CFPA § 1031(d), 12 USC § 5531(d)
[vi] It is worth
noting that the 2023 Policy Statement uses the phrases “gaps in understanding,”
“unequal bargaining power,” and “consumer reliance” as shorthand descriptors of
the inquiries required under the three subparagraphs of CFPA § 1031(d)(2). However, these shorthand phrases do not limit in any way
the scope of § 1031(d)(2)’s text.
[vii] The conduct
that underlies an abusiveness determination may also be found to be unfair or
deceptive, depending on the circumstances.
[viii] CFPA § 1031(d)(1), 12 USC § 5531(d)(1)
[ix]
Indeed, in TD Bank, N.A., File No. 2020-BCFP-0007, August 20, 2020, at
16-20, the bank materially interfered with consumers’ ability to understand
terms and conditions of overdraft-protection service by withholding any written
notice regarding those terms and conditions until after eliciting an
oral-enrollment decision that followed a misleading or incomplete oral
presentation regarding the service.
[x] See,
CFPB v. All American Check Cashing, Inc., Complaint at 6, 18-19, No.
3:16-cv-00356 (S.D. Miss., May 11, 2016)
[xi] See
Bringing Dark Patterns to Light (September 2022), FTC Staff Report
[xii]
For example of “overshadowing,” see, CFPB v. TCF National Bank, First
Amended Complaint, at 12-13, 26-27, No. 17-cv-00166 (D. Minn., March 1, 2017)
[xiii]
Cf. “When evidence exists that a seller intended to make an implied claim, the Commission
will infer materiality.” Policy Statement on Deception, at 5, Federal Trade
Commission
