By:  Jennifer Winston

Jwinston@cusolaw.com

Last month, the CFPB released Consumer Financial Protection Circular 2023-01 emphasizing unlawful negative option marketing practices.

The CFPB has stated that engaging in negative option marketing practices violate the Consumer Financial Protection Act’s (CFPA) prohibition on unfair, deceptive, or abusive acts or practices (UDAAP).  “Negative option” refers to either a term or condition under which a seller may interpret a consumer’s silence, failure to take affirmative action to reject a product or service, or failure to cancel an agreement as acceptance or continued acceptance of the offer.  These negative options are commonly seen in automatic renewal plans, continuity plans, and trial marketing plans. The CFPB argues that serious harm to consumers occurs when the consumer is charged when they did not wish to receive the product or service. The CFPB has received many consumer complaints, especially from older consumers, that did not intend to purchase or subscribe.  In addition, complaints have been received about the difficulty of cancelling subscription-bases services and charges that still occur after cancellation.

The CFPB gives three areas where negative option marketing practices may violate the CFPA – disclosure, consent, and cancellation.  Violations may occur in these areas when the seller:

• Misrepresents or fails to clearly and conspicuously disclose the material terms of a negative option program;
• Fails to obtain consumers’ informed consent; or
• Misleads consumers who want to cancel, erects unreasonable barriers to cancellation, or fails to honor cancellation requests that comply with procedures.

An example of a disclosure violation provided by CFPB is when a consumer signs up for a free trial but is actually enrolled in a subscription program with recurring monthly fees unless cancelled by the consumer by a specific date. Terms that are disclosed in a fine print or low contrast would still result in a violation because disclosures must be clear and conspicuous.   A consent violation would occur when a seller falsely represents to a consumer they are agreeing to receive information about a service when they are actually purchasing it or fails to explain automatic, recurring charges at the time of purchase.   Cancellation violations occur when consumers must make multiple requests to cancel or are persuaded from cancelling with misrepresentations about costs and benefits of the product.  Depending on the facts in each case, such conduct may be unfair, deceptive, or abusive under the CFPA.

Credit unions and other entities should be aware that in addition to the CFPA’s UDAAP prohibitions, the violations discussed in this circular may also violate the Electronic Fund Transfer Act (EFTA), Regulation E, and the Telemarketing Sales Rule.

Please reach out to our office if you have any questions on how this circular may impact your marketing practices.