Advertising of Credit Pre-Approvals by Non-Creditors Probably Misleading | Cadwalader, Wickersham & Taft LLP


Federal banking regulators have put in place guidelines regarding the advertising of pre-approvals for credit and, of course, Regulation Z and the Truth in Lending Act contain provisions regarding how and when a pre-approval may be communicated to customers. Also, a credit “pre-approval” is a standard that is meant to signify that the consumer’s credit has been assessed to a certain level by the lender (usually through what is called pre-screening, or because the customer has accepted an initial assessment), and that the consumer will be approved for the credit product, assuming that an interim bankruptcy or other extremely adverse credit event has not occurred.

In a recent case involving Credit Karma as an advertiser, the Federal Trade Commission (“FTC”) found that consumers perceive the message that they have been pre-approved for credit that meets the standard described. According to revelations buried in the ads, Credit Karma claimed that 90% of recipients of “pre-approved” offers would be approved, when in fact more than a third of customers responding to the ad were turned down for the offers. . . And, in order for customers to get the pre-approved offers, they had to agree to allow their credit inquiry, which resulted in a “hard pull” of their credit report, an activity that would typically lower a customer’s credit. consumer. score.

In truth, Credit Karma presented an advertisement telling its customers that they had been pre-approved for various credit products, but had in fact not done any credit screening of the customer and had no contact with creditors providing advertised credit products. As such, this advertisement was found to be misleading under Section 5 of the FTC Act, and despite the FTC’s inability to seek relief for Section 5 violations in federal court, Credit Karma has agreed to pay $3 million to the FTC to resolve the allegations in the administrative complaint the FTC had filed against the company.


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