Endorsements and Testimonials - FTC Rules

QUESTION 

I am the Director of Marketing at a mortgage lender in the Northwest. We are developing a marketing campaign using endorsements and testimonials on social media, social media influencers, press, radio, YouTube, and TV. While our compliance and legal departments are happy to review these promotions, they are not giving us clear guidelines to follow. 

Our legal department tells us that, because of the wide distribution of our campaign channels, some of the rules we must follow are based on the Federal Trade Commission's rules. I don't know if this is so, but I do know those rules can be kind of strict. I need to find out about some of the FTC's regulations involving endorsements and testimonials. 

What are some FTC guidelines for endorsements and testimonials? 

SOLUTION 

Advertising Tune-up

Marketing Tune-up

Advertising Manual

Advertising Compliance  

RESPONSE 

The Federal Trade Commission's (FTC) regulations are essential to follow for marketing campaigns. Indeed, the FTC implemented the Mortgage Acts and Practices – Advertising (MAP) rules![i] MAP rules are designed to prohibit misrepresentations regarding mortgage products. Yes, there are other Acts, regulations, and laws – federal and state – such as the following (to name a few salient ones): 

·       Fair Housing Act,

·       Equal Credit Opportunity Act,

·       Truth-in-Lending Act,

·       FHA/HUD, VA, USDA Regulations,

·       Real Estate Settlement Procedures Act,

·       State Regulations,

·       Fair Lending,

·       Unfair, Deceptive, or Abusive Acts or Practices, and

·       Federally required logos and disclosures. 

The Federal Trade Commission's MAP rules must be implemented in your marketing campaign. 

Advertising and marketing compliance is a highly complex area that requires very careful consideration prior to launching a marketing campaign. If you do not handle endorsements and testimonials appropriately, you can easily cause legal disputes and attract regulators. 

I have listed a few compliance solutions above. You can always contact me to discuss your particular marketing plan. We have worked for years with banks and nonbanks on their marketing campaigns. Here are just a few articles we've published on advertising compliance. 

The FTC requires endorsers to clearly and conspicuously disclose their sponsorship by the advertiser and requires that endorsements reflect the honest experience or opinion of the endorser and not contain representations that would be deceptive or unsubstantiated if the advertiser made them directly.[ii] Therefore, if an endorsement represents that the endorser uses the advertiser's product, the endorser must actually use the product at the time they endorse it.[iii] 

Advertisers using "consumer endorsements" must make clear whether the endorser's experience reflects the actual experience of typical consumers who use the product rather than the experience of a few individuals.[iv] Ensuring this clarity is critical because, in 2009, the FTC revised its guidance regarding consumer endorsements to eliminate the safe harbor previously provided for the use of disclaimers in conjunction with non-representative consumer testimonials, such as "results not typical" and "not all consumers will get this result." In other words, these disclaimers are no longer acceptable because the FTC believes they are not sufficient to overcome the misleading implication that a non-representative result depicted in an advertisement is what consumers will generally experience.

Endorsements and Testimonials

QUESTION 

Our banking department called us out for publishing testimonials that our loan officers use. We were contacted by an examiner who said they had checked out some of the testimonials and endorsements and found that some were either bogus or misleading. 

First of all, I didn’t know a banking department could go so far as to check out the veracity of testimonials. 

Secondly, our loan officers are honest and get their business from referrals, but the banking department makes them look like they were intentionally making up bogus testimonials. 

Thirdly, the loan officers have hundreds of endorsements and testimonials. I don’t see how we can verify every one of them. 

I think the department is way out of line! It feels like they are harassing us. I would like to know your opinion about this kind of advertising. Endorsements and testimonials are a big part of our marketing strategy. 

What are some guidelines for endorsements and testimonials?

COMPLIANCE SOLUTION 

Policies and Procedures: Advertising Compliance 

ANSWER 

Endorsements and testimonial advertising are an important and valuable part of overall marketing. Of course, scrutinizing advertisements is an inherent responsibility of banking departments. As consumer advocacy agencies, they must ensure that the public is properly informed of a loan product or service. 

Many interlocking regulations have a substantive impact on advertising compliance because contact with the public by means of advertising is one of the most prevalent ways a financial institution can encourage consumers to use its services. 

The banking department is not “way out of line.” It monitors your loan flow process from the earliest advertisement that leads to an application, thence to underwriting, loan closing, and beyond. If you believe verifying the testimonials is too big a task, don’t publish them! A banking department will want to see that you documented a validity review of a testimonial or endorsement. 

Most loan officers are certainly honest. They are the lifeblood of mortgage banking. Everyone works together to ensure the consumer has a good experience. However, loan officers are on the front lines, most working on commission; they bring in the loans and the ones who financially suffer the most when sales slow or loans don’t close for some reason. There is no reason for them to be defensive when a banking department finds errors in their testimonials. But you need to watch out for a “pattern or practice” of bogus endorsements and misleading testimonials. 

So, let’s focus on the nature of endorsements and testimonials and not get all huffed up in righteous indignation. I will offer some thoughts on this subject and suggest you share them with your loan officers. Contact me here if you need advertising compliance. We have a team devoted solely to advertising and marketing compliance. 

DEFINITION 

As you probably know, I like to get a definition in place for a cogent discussion. 

Here’s how I define endorsements and testimonials:[i] 

Endorsements and testimonials are any advertising message that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser. 

RULES OF THE ROAD 

There are certain indisputable rules of the road that you must apply. For this article, I use the terms endorsement and testimonial interchangeably. These are the four most important rules to follow. 

1.     Honesty 

Endorsements must reflect the endorser's honest opinions, findings, beliefs, or experiences. Furthermore, an endorsement may not convey any express or implied representation[ii] that would be deceptive if made directly by the advertiser. 

2.  Context 

Although the endorsement does not need to be the exact words of the endorser – unless the endorser requests it - the endorsement may not be presented out of context or reworded to distort in any way the endorser’s opinion or experience with the product. 

3.  Bona Fide User 

When the advertisement represents that the endorser uses the endorsed loan product or service, the endorser must have been a bona fide user of it at the time[iii] the endorsement was given. 

4.  Full Disclosure 

Advertisers are subject to liability for false or unsubstantiated statements made through endorsements or for failing to disclose material connections between themselves and their endorsers.[iv] (Be careful here! Endorsers may be liable for statements made in the course of their endorsements.) 

GUIDELINES FOR ENDORSEMENT TYPES 

Generally, three types of endorsements are encountered in mortgage banking: consumer, expert, and organization. I will provide a brief overview of each. 

Consumer Endorsements 

For the most part, there are three types of consumer endorsements.[v] Here’s a brief outline. 

1.     A consumer endorsement about the performance of an advertised product or service will be interpreted as representing that the product or service is effective for the purpose depicted in the advertisement. 

2.     An advertisement containing an endorsement relating the consumer’s experience on a central or key attribute of the product or service will likely be interpreted as representing that the endorser’s experience is representative of what consumers will generally achieve with the advertised product or service in actual, albeit variable, conditions of use.

 

3.     Advertisements presenting endorsements by what are represented, directly or by implication, to be “actual consumers” should utilize actual consumers in audio and video, or clearly and conspicuously disclose that the persons in such advertisements are not actual consumers of the advertised product.

 

Expert Endorsements

 

There are two primary guidelines involving expert endorsements,[vi] as follows:

 

1.     If an advertisement represents, directly or indirectly (viz., by implication), that the endorser is an expert concerning the endorsement, the endorser’s qualifications must state factually the endorser has the requisite expertise with respect to the endorsement.

 

2.     Although the expert may, in endorsing a loan product, take into account factors not within their expertise, the endorsement must be supported by an actual exercise of that expertise in evaluating the product’s features or characteristics to the extent to which they have relevant knowledge and expertise,[vii] and which are relevant to an ordinary consumer’s use of or experience with the product and, importantly, are available to the ordinary consumer.

 

Organization Endorsements 

Endorsements from organizations can be tricky. There is one essential guideline. 

1.     Organization endorsements, especially expert ones, represent the judgment of a group whose collective experience exceeds that of any individual member, and whose judgments are generally free of subjective factors that vary from individual to individual.

 

This is the tricky part because an organization’s endorsement must be reached by a process sufficient to ensure that the endorsement fairly reflects the collective judgment of the organization. Moreover, if an organization is represented as being an expert, then, in conjunction with a proper exercise of its expertise in evaluating the product,[viii] it must utilize an expert or experts recognized as such by the organization or standards previously adopted by the organization and suitable for judging the relevant merits of such products. 

MATERIAL DISCLOSURE 

A few words about material disclosure. If there’s a connection between the endorser and the seller of the advertised loan product or service that might materially affect the weight or credibility of the endorsement – for instance, where the audience does not reasonably expect the connection – such connection must be fully disclosed. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] 16 CFR Part 255, § 255.0(b): “…including verbal statements, demonstrations, or depictions of the name, signature, likeness, or other identifying personal characteristics of an individual or the name or seal of an organization.” For the purpose of this article, I refer the reader to Guides Concerning the Use of Endorsements and Testimonials in Advertising, Federal Trade Commission, 16 CFR Part 255.

[ii] §§ 255.2(a) and (b) regarding substantiation of representations conveyed by consumer endorsements.

[iii] § 255.1(b) regarding the “good reason to believe” requirement.

[iv] § 255.5

[v] § 255.2

[vi] § 255.3

[vii] See § 255.1(d) regarding the liability of endorsers.

[viii] Ibid

Social Media Influencers

QUESTION 

A social media influencer approached our marketing department to provide an endorsement. The influencer wants to be paid an endorsement fee. The marketing department says this would be a good lead source for us. We asked our regulator about it, and they cautioned that this comes under the advertising regulations. 

I am concerned that we do not know much about the regulations or what we are getting ourselves into. We've been a mortgage lender in business for over twenty years. We are familiar with getting testimonials from customers but have no experience getting endorsements from influencers. 

And, to say the least, we want no trouble with our regulator about our marketing involved with an influencer. So, we need some guidance. We are hoping you can shed some light on this situation. 

What are some of the concerns and challenges regarding endorsements from social media influencers? 

ANSWER 

I must admit that I can't figure out all the buzz behind the popularity of social media influencers; indeed, there are celebrity influencers who promote products and services to millions of social media followers, even though they fail to mention they were paid for their promotions. I won't get into the obvious concern that getting paid undermines the authenticity of the endorsement. 

You don't mention the name of your regulator, but no matter. I will provide an answer based on the Federal Trade Commission (FTC) advertising requirements, since the FTC serves a critical role in regulating advertising to protect consumers from false, misleading, or deceptive claims. 

The FTC is essentially a consumer advocacy agency that, among other things, combats untruthful advertising through enforcement actions, regulatory guidance, and consumer education. I think a cursory overview of the FTC's approach to ensuring truth in advertising can offer some helpful advice with respect to social media endorsements and testimonials. 

FTC Oversight 

The FTC's oversight of advertising is derived primarily from its authority under the FTC Act to prevent "unfair or deceptive acts or practices."[i] The FTC's deception enforcement policy specifies several factors in analyzing whether an act or practice is deceptive: 

·       There must be a representation, omission, or practice that is likely to mislead consumers. The FTC examines the overall net impression made by the ad, not just isolated words or phrases.[ii] 

·       The act or practice must be evaluated from the perspective of a reasonable consumer. The test is whether it is likely to mislead reasonable consumers. If the representation or practice impacts or is directed primarily to a particular group, the FTC examines reasonableness from the perspective of that group.[iii] 

·       The representation, omission, or practice must be material. That is, it must be important to consumers' decisions or conduct regarding the product.[iv] 

·       The representation, omission, or practice is likely to mislead consumers acting reasonably under the circumstances.[v] The facts and circumstances dictate the evaluation. 

It is critical to note that the FTC does not need to show actual deceit or even that any consumers were actually misled. Rather, it must simply show that the conduct in question has a tendency or capacity to deceive consumers who act reasonably.[vi] 

Tangentially relevant to your question is the action taken by the FTC against operators of websites that purport to provide independent reviews of products and services. The FTC has alleged the defendants posted fake positive reviews to increase sales and false negative reviews to harm competitors.[vii] Consider this an example of how the FTC combats deception relating to online reviews and endorsements. 

In addition to its authority to prevent deception, the FTC can challenge unfair practices.[viii] Unfair practices involve conduct that substantially injures consumers, violates established public policy, or may be unethical or unscrupulous.[ix] 

Advertising Issues 

One of the FTC's best known advertising guides is entitled Guides Concerning the Use of Endorsements and Testimonials in Advertising ("Endorsement Guides").[x] In this guidance, the FTC proposed extensive updates to the Endorsement Guides to address changes in the marketplace, especially the rise of social media influencers.[xi] The guidance defines an endorsement as 

an advertising message consumers likely believe reflects someone's independent opinions or experiences with a product.[xii] 

I will expand on this definition shortly. 

The Endorsement Guides outline FTC's views on topics like when endorsements must disclose material connections and how advertisers should substantiate claims made through endorsements. They also offer numerous examples to illustrate practical implementation. For instance, one example explains that tagging a brand in a social media post can constitute an endorsement as part of a paid relationship.[xiii] 

Here's where you must be very cautious, for you are now at the point where competent handling of the relationship with the social media influencer is imperative to avoid considerable regulatory risk. In updating the Endorsement Guides, the FTC clarified principles like the need to substantiate both express and implied claims made through endorsements.[xiv] If you are unfamiliar with such claims, pause your efforts and get professional compliance assistance. 

As a matter of fact, new examples include posting fake reviews and threats against negative reviewers.[xv] So, you must be sure to be current with the task at hand. These and other revisions, proposed and actual, reflect the FTC's close monitoring of deceptive practices in connection with consumer reviews, influencer marketing, and, in particular, social media influencer endorsements. 

The combination of general guides and specific guidance articles should be constantly monitored because the FTC updates and expands its guidance as technology and marketing practices continue evolving. 

Educating the Social Media Influencer 

For what it's worth, the FTC has also tried educating social media influencers on following endorsement guidelines in recent years. For instance, in 2019, the FTC sent educational letters to prominent social media figures reminding them about disclosing brand relationships. While not enforcement actions, these letters served as warnings to comply with the advertising guidelines. But none of what the influencer does or does not do about compliance will protect you, notwithstanding the FTC's consumer and business education efforts continuing to evolve as platforms, technologies, and advertising techniques change. 

Minefields 

Let's consider some salient minefields involving endorsements. Although the Endorsement Guides do not themselves have the force of regulations, they certainly reflect the FTC's views regarding endorsements. 

Definition of Endorsement 

The following is the FTC's broad definition of an endorsement. It is 

"Any advertising message that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser."[xvi] 

This definition covers endorsements in both traditional and social media. It encompasses statements, images, tags, likes, reviews, and much more. But, really, any message in advertising which consumers likely perceive as representing someone's independent opinions or experiences with a product or service can be an endorsement. 

And what is a nuanced example of a fake endorsement? An example would be where paid negative reviews of a competitor are obviously not endorsements, but fake positive reviews used to promote one's own products and services clearly are fake endorsements.[xvii]

Liability for Deceptive Endorsements 

Both advertisers and endorsers can be liable for false or unsubstantiated claims made through endorsements.[xviii] The advertiser is responsible for claims made through their ads, whether by directly making statements or using paid endorsers. 

Even though endorsers may be liable for deceptive endorsements they make, advertisers may also be liable for failing to adequately monitor endorsers for compliance issues.[xix] I suggest you draft and ratify a policy that sets forth how you, as an advertiser, will guide, monitor, and take action to remedy endorser non-compliance, whether the social media influencer, the endorser, is paid or not paid.[xx] 

This principle applies even when advertisers merely disseminate existing endorsements, like sharing (which is retweeting or reposting) positive social media endorsements. As an advertiser, you should always confirm that endorsements reflect a social media influencer's honest views before rebroadcasting them.[xxi]

Substantiating Endorsement Claims 

The advertiser must substantiate claims made through endorsements.[xxii] As with any advertising claims, you must substantiate consumer endorsements, because such endorsements are not necessarily competent or reliable evidence or proof.[xxiii] 

In reviewing such endorsements, my firm has evaluated endorsements that are skewed. When that happens, we advise our clients they are obligated to ensure that representations of outcomes made by consumers should generally achieve the outcomes associated with using the advertised product or service.[xxiv] Our rule of thumb is, when endorsements reference exceptional results well beyond the norm, the ads should clearly and conspicuously disclose what consumers can expect to experience.

Disclosures 

As an advertiser, you must disclose any connections between social media influencers, and other endorsers, and your company that could affect how people evaluate the endorsements.[xxv] This includes monetary payments and the receipt of free products or services. Put otherwise, any connections likely to affect the weight consumers give endorsements should be disclosed when they are not reasonably expected.[xxvi] 

Social media influencers, for example, should disclose brand sponsorships and gifts. Consumers may give greater credence to reviews and opinions from people they perceive as unbiased. Thus, clear disclosure of connections allows consumers to consider endorsements in full context. 

Jonathan Foxx
Chairman & Managing Director 

Lenders Compliance Group

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[i] Section 5, FTC Act, 15 USC § 45. False or misleading advertising falls under the umbrella of deceptive practices the FTC can prohibit.

[ii] See Federal Trade Commission, FTC Policy Statement on Deception (1983), as appended to In re Cliffdale Assocs., Inc., 103 FTC 110, 174 (1984).

[iii] Idem

[iv] Op. cit. ii, at 182

[v] Op. cit. ii, at 175-76

[vi] FTC v. Algoma Lumber Co., 291 U.S. 67, 81 (1934)

[vii] Complaint, FTC v. 427K, Inc., No. 4:22-cv-01069-JSW (N.D. Cal. February 28, 2022)

[viii] Op, cit. i

[ix] Federal Trade Commission, FTC Policy Statement on Unfairness (1980), as appended to In re Int'l Harvester Co., 104 FTC 949, 1070 (1984).

[x] 16 CFR § 255, Originally issued in 1980, 45 Fed. Reg. 3870 (January 18, 1980)

[xi] 87 FR, 44288 (July 26, 2022)

[xii] 16 CFR § 255.0(b)

[xiii] 16 CFR § 255.0(g)(5)(ii)

[xiv] 87 FR 44311 (July 26, 2022)

[xv] Idem

[xvi] Op. cit. xii

[xvii] 16 CFR § 255.0(g)(12)

[xviii] Idem

[xix] Op. cit. xvii

[xx] 16 CFR § 255.1(d)(3)

[xxi] 16 CFR § 255.2(a) & (b)

[xxii] 16 CCFR § 255.2(a)

[xxiii] Idem, Example 5

[xxiv] 16 CFR § 255.2(b)

[xxv] 16 CFR § 255.5

[xxvi] 16 CFR § 255.5(a)

Digital Advertising Disclosures

QUESTION 

We are going to start digital advertising soon. This is not an area that we understand well. We brought in an outside consultant for some guidance. They are good with marketing but have no experience in compliance. 

I drafted the advertising policy and kept it updated. However, the section on digital marketing has to be completely revised. I need some rudimentary definitions of digital advertising and a few guidelines for disclosures. 

What is digital advertising? 

What are some guidelines for digital advertising disclosures? 

ANSWERS 

For regulatory compliance purposes, I define digital advertising as a form of marketing through online channels, such as websites, streaming content, and more. My views throughout this article are meant to apply to regulatory compliance concerning mortgage banking. 

Advertising compliance is tricky and highly technical, legally speaking, and it is highly regulated. To support our clients, we offer Advertising Reviews and Marketing Compliance Reviews. 

Contact us here for information about these and other compliance services. 

Digital ads span media formats, including text, image, audio, and video. These ads are also used for brand awareness, customer engagement, launching new products, and driving repeat sales. 

Terms and Definitions 

According to Regulation Z, an advertisement is "a commercial message in any medium that promotes, directly or indirectly, a credit transaction." 

And "triggering terms" are specific terms used in various advertising media that "trigger" additional disclosures. 

Generally, the term "advertisement" does not include promotional material containing fifteen words or less that does not contain references to specific rates, points, discounts, fees, material loan factors, or "triggering terms," for instance, such as imprinted pencils, pens, or balloons. 

Traditional Advertising 

There's a considerable difference between traditional advertising, such as magazines, billboards, and direct mail, and digital advertising. Here's a non-comprehensive list of traditional advertisements: 

·      Newspapers, magazines, or catalog advertisements; 

·      Brochures, direct mail literature, messages on customer statements, or other printed materials, including applications; 

·      Electronic media, including Internet home pages and electronic billboards; 

·      Signs, either interior or exterior, and displays, and billboards; 

·      Radio, television, or public address system broadcasts; 

·      Oral communications between financial institution employees and actual or potential customers, including telephonic and face-to-face solicitations or responses to inquiries; and 

·      Communications made through Facebook, LinkedIn, text messaging, and other social media avenues. 

A host of federal and state regulations are involved in advertising compliance. For instance, an assortment of Acts, statutes, rules, regulations, guidelines, and practices apply at the federal level. Here are just a few of them: 

·     Fair Housing Act

·     Equal Credit Opportunity Act

·     Truth in Lending Act

·     Federal Trade Commission Mortgage Advertising Rules

·     The Federal Trade Commission (FTC) implemented the Mortgage Acts and Practices – Advertising (MAP) rules. MAP rules are designed to prohibit misrepresentations regarding mortgage products.

·     FHA/HUD Regulations

·     Real Estate Settlement Procedures Act

·     Unfair, Deceptive, or Abusive Acts or Practices 

We have found two key differences between traditional and digital advertising in our advertising compliance reviews. These differences are resilience and precision. 

Resilience 

An example of resilience is how quickly digital ads can go live. Printing and distributing ads through traditional channels – such as sending out newspapers or painting a billboard – can take significant time. However, digital advertising has a much shorter lead time, appearing on a website almost immediately after publishing the ad. If the digital ad is based on a template, the process may take only a few minutes. 

Another feature of resilience is, unlike print advertising, where an ad can't be changed once it has been published, digital ads are resilient even after the campaign goes live. Depending on the specific channel, it may be possible to adjust the creative content, timing and frequency, targeting, and more. Professional marketers call this "in-flight optimization," where you can make adjustments to ad campaigns based on how they are performing. 

Digital advertising also allows for budget adjustments in real-time. Complex and high-profile digital advertising campaigns may be just as expensive as traditional advertising (or more). Still, digital ads are also accessible to many financial institutions without significant budgets and may scale up or down to match the financial investment. 

Precision 

We have found that digital advertising provides another key difference between itself and traditional advertising. Traditional ads in magazines, on TV, or billboards reach anyone who sees them. In contrast, digital advertising lets the financial institution use different targeting methods to be more precise and reach audiences more likely to be interested in its products and services. 

Depending on the format, a company may limit its digital ad to certain times of day or exclude audiences who have already viewed the ad from seeing it again. With digital ads, an institution can reach audiences browsing online for loan products. Or the digital ad might reach the target audience when they're streaming a TV show, visiting a favorite website, or using social media. Even if they don't choose to contact the advertiser at that moment, reaching them in these different contexts can help them remember the institution's brand. 

Here's a non-comprehensive list of digital advertisements: 

·      Display advertising. These ads use text and visual elements, such as images or animation, and can appear on websites, apps, and devices. They appear in or alongside the content of a website. 

·      Online video advertising. These are video ads that use a video format. Video ads appear in places similar to display ads: on websites, apps, and devices. In-stream video ads appear before, during, or after video content. 

·      Search advertising. Also called search engine marketing (SEM), these ads appear in search engine results pages (SERPs). They are typically text ads that appear above or alongside search results. 

·      Audio advertising. These ads play before, during, or after online audio content, such as streaming music or podcasts. 

·      Social media advertising. Ads that appear on social media platforms like Facebook or LinkedIn. 

·      Streaming media advertising. These video ads appear in streaming media content delivered over the Internet without satellite or cable. 

Digital Marketing: Artificial Intelligence and Behavioral Analytics

QUESTION 

Our company has signed up marketing people who offer digital marketing. Our CEO is adding experts in artificial intelligence and behavioral analytics to our marketing department. As the Compliance Manager, I am concerned. 

I came here from an online lender, so I am not naïve about online marketing tools. Digital marketing is mostly a fancy name for online marketing, meaning the leverage of numerous channels such as resources for behavioral modeling, search engines, social media, all kinds of websites, emails, text messages, and a host of multimedia. This is a veritable forest of minefields governed by regulations. 

I get it! We need digital marketing for brand awareness and to generate business. Most consumers these days expect a branded, online presence. But the stakes are high, especially because the ability to police digital marketers is ridiculously labor intensive. 

However, the CFPB has recently been making lots of noise about digital marketing providers. It is going to hold digital marketing providers liable for UDAAP violations – and now we’re going to employ these people right here in my company! I’m worried about the implications. I need some insight into what to expect. 

What are the implications for hiring digital marketers or using digital marketing providers? 

ANSWER 

On August 10, 2022, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule that addresses when digital marketing providers who commingle the targeting and delivery of advertisements to consumers are covered by the Consumer Financial Protection Act of 2010 (CFPA). 

Under the interpretive rule,[i] when digital marketing providers are materially involved in a covered person’s content targeting, the digital marketing provider does not meet the time or space exception to the service provider definition. As a result, those digital marketing providers would typically meet the definition of service provider under the CFPA and be subject to that law’s consumer protections. 

Let me dig a little deeper and provide some background and context. 

Section 1002 of the CFPA defines the term "service provider" and sets forth two exceptions to that definition. Our focus is on the time and space exception. 

            Time and Space Exception 

Under one of those exceptions, a person is not a service provider solely by virtue of such person offering or providing to a covered person time or space for an advertisement for a consumer financial product or service through print, newspaper, or electronic media. 

When digital marketing providers go beyond traditional advertising, such as by using algorithmic models or other analytics, they are typically covered by the CFPA as service providers. The interpretive rule explains that the time or space exception does not cover digital marketing firms that are materially involved in developing content strategy. 

Many digital marketing providers play a dramatically different role in consumer advertising than traditional media sources like print newspapers or radio stations. Many digital marketers target and deliver ads to specific consumers using sophisticated analytical techniques, including machine learning (i.e., artificial intelligence, or “AI”) and behavioral analytics, to process large amounts of consumer data. In other words, many digital marketers aggregate and analyze immense amounts of granular consumer data and then use that data to determine what advertisements to provide to specific consumers at what times. 

The CFPB’s interpretive rule explains that digital marketing providers commingle the service of targeting and delivering advertisements with the activities of traditional media sources in providing airtime or physical space. 

Digital marketing providers obtain data from various sources, including, but not limited to, data collected directly from consumers, for instance, when registering for an account or conducting a search query into a search bar. 

Furthermore, digital marketers may harvest a wide variety of consumer data by monitoring and tracking a consumer’s web activity, including their browsing history, online activity, and even geolocation. There is a scary term for this type of marketing: surveillance advertising. 

Digital marketers may also obtain data from third-party data brokers or second-party partnerships with other companies. Using these tools and others, digital marketers collect granular consumer data that they analyze to develop insights about consumers’ behavior more broadly. 

The ways in which digital marketing providers specifically target ads are varied and evolve over time. Ultimately, the digital marketer may decide which group(s) the consumer belongs in and which financial services companies want to advertise to that group. Then they select the specific ad to display to that consumer and/or when to display the ad based on other factors (i.e., the amount a firm is willing to pay to display the ad). 

Thus, many digital marketing providers are materially involved in developing content strategy by identifying or selecting prospective customers and/or selecting or placing content to affect consumer engagement, including purchasing or adopting behavior. These activities go well beyond the activities of traditional media sources, such as print newspapers or radio, that only passively provide airtime or physical space for advertisements. 

The interpretive rule[ii] sets forth delineations for digital marketing being (1) a material service and (2) liable for UDAAP violations. 

As the interpretive rule explains: 

Digital marketers provide material services to financial firms. 

A material service is one that is significant or important. Digital marketing providers are typically materially involved in the development of content strategy when they identify or select prospective customers or select or place content to encourage consumer engagement with advertising. Digital marketers engaged in this type of ad targeting and delivery are not merely providing ad space and time, and they do not qualify under the time or space exception. 

The CFPB, states, and other consumer protection enforcers can sue digital marketers to stop violations of consumer financial protection law. 

Service providers are liable for unfair, deceptive, or abusive acts or practices under the CFPA. When digital marketers act as service providers, they are liable for consumer protection law violations 

A company is subject to the CFPA, including its prohibition on unfair, deceptive, or abusive acts or practices, if it offers or provides a financial product or service for use by consumers primarily for personal, family, or household purposes.[iii] And a “service provider” is also subject to the CFPA, including its UDAAP prohibition.[iv] 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] CFPB Warns that Digital Marketing Providers Must Comply with Federal Consumer Financial Protections, Press Release, Consumer Financial Protection Bureau, August 10, 2022

[ii] Limited Applicability of Consumer Financial Protection Act’s “Time or Space” Exception to Digital Marketers, Interpretative Rule, August 10, 2022

[iii] See 12 U.S.C. 5481(5), (6), (15)(A); 5531; 5536.

[iv] See 12 U.S.C. 5481(26); 5531; 5536.