Antitrust & Competition Alert
By: Jonathan Direnfeld and Sulina Gabale
On March 21, 2018 the Federal Reserve lifted its federal funds rate by a quarter percentage point to a range of 1.5% to 1.75%, the highest level since 2008. The Fed also significantly boosted its economic forecast and hinted that it may be more aggressive in its plan to continue to raise rates, signaling that the market should prepare for higher interest rates. For consumers with variable rate loan products, the rise in interest rates will result in the first substantial increase in loan payments in more than 10 years.
If history is our guide, the increase in interest rates will lead to an increase in consumer complaints of deceptive marketing for variable rate loan products. The Federal Trade Commission ("FTC") takes such complaints seriously and has a history of investigations and enforcement actions based on deceptive marketing of financial products. For newer lenders who entered the lending marketplace after 2008, this may be the first time their variable rate marketing is scrutinized by the FTC. It's a good time for all lenders to perform a "check-up" of variable rate marketing campaigns for compliance with the FTC's rules and regulations and avoid allegations of deceptive or misleading ad copy.
Previous FTC Variable Rate Enforcement Actions
Following the last run-up in interest rates in the mid-2000s, the FTC brought a number of enforcement actions relating to the deceptive marketing of variable rate loan products under Section 5 of the FTC Act, which prohibits "unfair or deceptive practices," i.e. marketing practices which are likely to mislead a "reasonable" consumer. The FTC also published guidance on "Deceptive Mortgage Ads" in 2012 to educate consumers on common "buzzwords" used in home loan advertisements and the importance of understanding all terms and conditions of a proposed loan offer.
The FTC's variable interest rate enforcement history reveals common themes and patterns of behavior that are ripe for regulatory investigation:
While these cases did not result in monetary penalties, most negotiated orders or consent decrees include burdensome reporting requirements and proscriptions on deceptive conduct for 20 years. For example, a consent order will require a company to maintain all documents relating to its marketing practices as well as any consumer complaints. At the FTC's request, the company must provide compliance reports and produce documents to demonstrate its compliance with the order.
Furthermore, the FTC can impose civil penalties of up to $42,000 per violation if the company is found to have violated the terms of the order by engaging in deceptive marketing, a prospect that forces many companies subject to a consent decree to take a more conservative (and potentially less effective) approach to marketing for the foreseeable future.
Avoiding Deception in Variable Rate Marketing
Lenders should consider the following key questions in evaluating their variable rate advertisements and marketing materials: