In September, 40 state attorneys general wrote to the U.S. Food and Drug Administration (FDA) asking the agency to take all available measures to issue regulations on the advertising, ingredients, and sale to minors of electronic cigarettes, also known as e-cigarettes or e-cigs. The full text of the letter is available here. The FDA has set a deadline of October 31 to issue proposals to regulate e-cigarettes, but the agency has delayed action in the past.
E-cigarettes are battery-operated nicotine delivery devices that are meant to replicate the flavor and sensation of smoking a tobacco cigarette. The sales of these products are rapidly growing and have doubled every year since 2008. In 2013, the industry is projected to reach $1.7 billion in sales. Tobacco giants Altria, which owns Philip Morris, and R.J. Reynolds, both of which have not previously been involved in the e-cigarette industry, are now launching their own brands.
E-cigarettes have been available for several years, but there has been very little regulation of the industry since its inception. However, the calls for the FDA to explore regulation are becoming louder, and momentum is growing to have the FDA take action. Last month, Rep. Henry Waxman (D-Calif.) and three other House Democrats sent a letter to FDA Commissioner Dr. Margaret Hamburg urging the agency to take action on regulating e-cigarettes. Those same representatives also sent a letter to the Chairman of the House Committee on Energy and Commerce, Subcommittee on Oversight and Investigations, and the Subcommittee on Health urging the subcommittees to hold a hearing on the increased use and health impact of e-cigarettes.
In the past, the FDA has stated that it would not feel compelled to regulate e-cigarette companies unless they overtly advertised their products as smoking cessation devices. We have previously looked at Federal Trade Commission regulation of e-cigarette advertising claims. The FTC has jurisdiction to regulate advertisements for any product, but has yet to flex enforcement muscle with regard to e-cigarettes. There are currently no federal rules about advertising e-cigs to young people, but the attorney general letter asked the FDA to “ensure that companies do not continue to sell or advertise to our nation’s youth.”
There has been very little regulation of the industry since its inception– partially because the extent of the FDA’s authority to regulate e-cigarettes is not clearly defined. In 2010, the U.S. Court of Appeals for the D.C. Circuit issued an opinion in Sottera, Inc. v. Food & Drug Administration, affirming the district court’s decision that the FDA could not regulate e-cigarettes as a medical device under the Food, Drug & Cosmetic Act and finding that the FDA’s authority is limited to traditional tobacco products. The FDA also has authority to regulate e-cigarettes under the Tobacco Control Act of 2008, but that authority is limited. Specifically, the Tobacco Control Act authorizes the FDA to regulate “tobacco products,” giving the agency authority to impose restrictions on their sale, advertising and promotions, and establish other standards for their distribution and production.
It remains to be seen what actions will be taken by the FDA in response, but it does seem as if some type of regulation may be on the horizon. The industry will need to adapt to these changes and be active in the rule making and comment process to make sure that the regulations proposed are fair. We will continue to monitor developments on e-cigarette regulations here.
Since 2003, online marketers and merchants have been gathering twice a year to take part in the Affiliate Summit Conferences. In recent years, Ifrah Law has become a fixture at these shows, and our associate Rachel Hirsch is not only widely recognized as the face of the Ifrah Law Power Booth station, but also as a well-respected and preferred attorney counseling online advertisers on compliance-related matters and representing them in nationwide litigation.
After Rachel recently returned from this year’s Affiliate Summit East conference in Philadelphia, we interviewed her about new and emerging trends at this conference and in the industry.
Q. What struck you about the crowd at the conference this year?
A. In addition to the new venue, there were plenty of new faces at the conference this year. Surprisingly, however, despite the conference’s name, there weren’t as many affiliates there as there have been in the past. Traditionally, affiliates, sometimes known as “publishers,” are independent third-parties who generate or “publish” leads either directly for an advertiser or through an affiliate network. This year, with a reported crowd of about 4,000 people, the conference included more individuals representing networks, brokers, and online merchants than affiliates. (Official conference statistics bear this out. Only 29 percent of attendees were affiliates.)
Q. What about vendors?
A. According to the organizers, one out of every 10 people there was a vendor. The term “vendor,” however, is something of a misnomer. A vendor can be another term for an online merchant – someone who is actually selling a product on the market – or it can be a generic category for marketers who do not fit into the traditional categories of affiliates, merchants, or networks.
Q. What new industry trends did you notice?
At every conference, one or two markets always seem to have a dominant presence. At the Las Vegas conference in January, there was a large turnout of marketers in the online dating space. This year, two different markets emerged– diet/health and downloads.
Some of the exhibitors this year were manufacturers of neutraceuticals, which can include weight-loss products or testosterone-boosting products. The trend seems to be for online marketers to “white label” or “private label” neutraceuticals from bigger manufacturers. What this means is that online marketers or advertisers actually attach their brand names to a product and product label that they purchase from a manufacturer, either based on their own formulations or based on the manufacturer’s product specifications. Well-known products that would fall into this category include Raspberry Ketone, Green Coffee Bean, and Garcinia Cambogia.
There were also a lot of individuals and companies there in the so-called “download” space. This often means the use of browser plug-ins that the consumer can download himself or herself. These can install targeted advertising (often pop-ups or pop-under ads) on an existing web page.
Q. Are there any risks involved in private labeling?
A. Definitely. If your name is on the label, it doesn’t matter that you didn’t manufacture the product. Your company and your label are subject to FTC scrutiny to the extent that you make claims about the product that you cannot substantiate. And beyond that, the Food and Drug Administration will also flex its enforcement power to the extent you or your manufacturer fail to institute good manufacturing practices, or “GMPs.” While many companies claim that they are GMP-certified, many do not have practices and processes in place to account for defective product batches, serious adverse events resulting from product use, or product recalls.
Q. What are some other hot areas of enforcement by the federal government?
A. Well, how you market your product may be as closely scrutinized as the underlying message. Online marketers who make outbound calls to consumers, or who engage third-party vendors (such as call centers) to make these calls can run afoul of the Telephone Consumer Protection Act. Under the TCPA, anyone who calls customers without their express advance consent, or who hires anyone else to do so, can be hit with a $500 fine for each violation. That adds up, and the TCPA can be enforced by the Federal Communications Commission or by private plaintiffs. Upcoming changes in the TCPA, which will be effective in October 2013, make it even harder to stay on the right side of the law.
Q. How would you put it all together as far as the legal issues?
A. It’s not just the FTC any more. These days, online marketers need to be aware of other agencies with broad enforcement powers, such as the CFPB, the FDA, and the FCC. And don’t forget about the threat of private consumer litigation.
Some affiliate marketers have recently gotten involved in the risky world of online trading. Online trading, particularly the trading of binary options, has become an attractive alternative for some affiliate marketers to traditional forms of online marketing.
However, those companies that do get involved in this market must be aware of the presence of the U.S. Commodity Futures Trading Commission (CFTC), which regulates these markets.
Simply put, binary options means “two options.” The system offers traders a simple choice whether an asset will close above a certain price (a “call option”) or below (a “put option”) at the end of the day. Lately, there seems to be a great deal of confusion regarding the legality of binary options trading in the United States.
The question is not so much whether binary options are legal in the United States but whether the firms offering them are listed on a proper U.S. exchange and are properly registered with and regulated by the Commodity Futures Trading Commission (CFTC). Nadex, for example, is a regulated U.S. exchange, which is designated by the CFTC and permitted to accept U.S. residents as members.
In a recent lawsuit, the CFTC charged the Ireland-based “Intrade The Prediction Market Limited” and “Trade Exchange Network Limited” with offering commodity option contracts to U.S. customers for trading, including option contracts on whether certain U.S. economic numbers or the prices of gold and currencies would reach a certain level by a certain future date, all in violation of the CFTC’s ban on off-exchange options trading.
For now, it seems that regulators like the CFTC have focused their attention on the actual firms offering these trading options. However, the CFTC has been sending cease and desist letters to affiliates in this space as well. Affiliates working in such risky markets must know the firms for which they are working. Some online trading firms may say they do not accept U.S. customers, but saying it is very different than actually representing and warranting that fact in a contractual document with their affiliates and indemnifying affiliates from liability.
For further information, see my article in the April 2013 issue of FeedFront, a magazine for affiliate marketers.
On May 6, 2013, the U.S. Senate passed the “Marketplace Fairness Act,” which allows states to collect sales tax on online purchases, whether or not the online retailer has a physical presence in the state. If this bill becomes law, it would change the structure that has been in place since the 1992 Supreme Court ruling in Quill v. North Dakota, 504 U.S. 298 (1992), which held that states could collect sales tax on online transactions only if they also had a physical presence in the state such as a warehouse, a store, or in some cases, an online affiliate.
The act would allow states to require all retailers with more than $1 million in sales to collect and remit sales taxes to state and local jurisdictions. Retailers would collect the tax at the point of purchase, code each sale by zip code, and remit the taxes to the eligible states and local municipalities. Although states would not be required to implement a tax on online sales, many would probably choose to do so as they look for ways to generate much-needed revenue to compensate for budget shortfalls. By taxing online sales, states could generate an estimated $23 billion a year in local and state sales taxes. Additionally, states are likely to receive pressure from local businesses seeking to level the playing fields for brick-and-mortar retailers who feel that they’re at an unfair advantage for having to charge tax on goods that customers can often buy tax-free online.
As Internet sales taxes become more common, one group likely to benefit is Internet affiliates. Prior to this bill, states such as Illinois sought to circumvent Quill by stating that Internet affiliates created the requisite “nexus” of a physical presence within a state. This caused online stores, including retailer behemoth Amazon, to cease using affiliates in any states where the affiliate would constitute a nexus. If a physical nexus is no longer required, affiliates would no longer be singled out and terminated due to their presence in any particular state.
Considerable support for a bill of this sort was likely inevitable. When online shopping was still new, online sales were minimal and most people did their shopping locally, meaning that the loss of state and local tax revenue was minimal. However, the dramatic increase in the choices available online, along with quick and free shipping, means that by some estimates up to 85 percent of Internet users do at least some shopping online. The corresponding decrease in patronage at local stores meant that states were missing out on taxes from those purchases. As a result, this bill would give states the opportunity to collect what they see as lost revenue.
That is not to say, however, that the bill will eventually become law. The bill faces stiff opposition in the Republican-controlled House, where some lawmakers see the bill as a tax increase. They face additional pressure from the Conservative Action Project, which has obtained more than 50 signatures from business and political leaders in a letter opposing the Marketplace Fairness Act on the premise that “retailers would be subject to laws imposed by states with which they have no direct connection, and in whose political system they have no voice. It is regulation without representation, allowing politicians to raise revenue, without fear of a public backlash.”
Currently, it appears that the bill is unlikely to become law. However, politicians will continue to raise revenue regardless. If the federal law does not pass, states will likely continue to issue broad and increasingly strained interpretations of what constitutes a “presence” in the state in order to collect revenues from online merchants.
The FTC is building up its army of watchdogs to police online marketing content and practices. Who those watchdogs are – and their relationship to the industry – might surprise you.
Earlier this month, the agency entered into a settlement agreement with Central Coast Nutraceuticals, an Internet marketer of weight-loss and health products. The agreement settles charges that were initiated against the company in 2010. The company is one of the many marketers targeted by the FTC for its tactics in selling acai berry diet products. Like more recent FTC targets, Central Coast was charged with deceptive advertising and unfair billing. The deceptive advertising allegations were based on (1) the marketer’s use of phony endorsements by Rachael Ray and Oprah Winfrey and (2) the marketer’s unsubstantiated claims about the benefits of its products. The unfair billing allegations were based on the marketer’s “free trial” scheme that baited consumers into pricy negative continuity programs.
Those tracking the FTC’s enforcement actions against online diet marketers are familiar with these allegations. Last spring, the FTC halted the sites of 10 operators who marketed acai berry diet pills for alleged fake endorsements from major media networks and unsubstantiated claims about the pills’ efficacy. An eleventh operator was slapped with an action last December for the same issues, including the use of negative continuity programs.
Since Central Coast was the first of these marketers to come under the agency’s fire, and the first to enter into a settlement agreement (the actions of the other 12 operators are still pending), it is likely that the Central Coast settlement agreement will be the template for the suits to follow. (The FTC uses its settlement agreements to establish its legal standards.)
A term in the settlement agreement that caught our attention is a requirement that the company monitor affiliate marketers it does business with in the future. This obligation includes reviewing marketing materials to make sure that those materials comply with the provisions of the settlement agreement. Again, the Central Coast agreement likely will be the standard for subsequent enforcement actions, so these monitoring duties likely will be included in future agreements with other companies.
There have been a few FTC actions in the past that have imposed monitoring duties on companies who find themselves in hot water with the agency. In March of last year, a seller of instructional DVDs entered into an agreement with the FTC that requires the company to periodically monitor and review affiliates’ representations and disclosures. That includes monthly visits to top affiliate websites “done in a way designed not to disclose to the affiliates that they’re being monitored.”
What does this mean? Corporate spying has taken on new meaning, thanks to FTC sanctions. Affiliate marketers have their business partners as their proverbial Gladys Kravitz. It is likely that this type of government-imposed self-regulation will become increasingly the norm. The FTC doesn’t like affiliate marketers or the layers of puffery they create between advertiser and consumer. Policing for free through private companies is a win-win for the agency.
Putting a snag in New Year’s resolutions for pound-shedding, the FDA and the FTC recently sent out warning letters to several companies that sell HCG-based diet products online. (These companies include Nutri-Fusion Systems LLC, Natural Medical Supply, HCG Platinum, LLC, theoriginalhcgdrops.com, HCG Diet Direct, LLC, and Hcg-miracleweightloss.com.)
The warning letters, which came at the outset of the holiday season (and just before the January windfall for the diet industry, which the government may or may not have had in mind), allege that the companies are in violation of federal law (1) for selling unapproved and misbranded new drugs and (2) for advertising the health benefits of products without sufficient back-up research.
The products at issue, generally liquid drops, contain the human chorionic gonadotropin (HCG) hormone, which comes from human placenta and is extracted from pregnant women’s urine. HCG has been popular for weight loss since the 1950s, when a British doctor published a study that the hormone aided dramatic weight loss (of up to a pound a day) by mobilizing fat stores without affecting muscle or normal/structural fat. The popularity of HCG-based diet products escalated in 2007 when the notorious infomercial man, Kevin Trudeau, published a diet book on HCG.
Responding to the increased demand, in came many enterprising online marketers. But there’s an issue with selling these products – government regulation. HCG is FDA-approved, but only as a prescription drug and only for certain medical conditions, which do not include weight loss.
To get around this government roadblock, companies have marketed their HCG products as “homeopathic.” The FDA allows for the manufacture and distribution – without FDA approval – of homeopathic drugs provided those drugs meet criteria set out in the agency’s Compliance Policy Guide under “Conditions Under Which Homeopathic Drugs May be Marketed (CPG 7132.15).”
But according to the FDA’s warning letters such as this one, the HCG products marketed by these companies don’t meet the Compliance Policy Guide criteria. The biggest issue, which companies are going to have a hard (read impossible) time getting around is that HCG is not an established homeopathic active ingredient. And if a product has any non-homeopathic active ingredients, it falls out of the homeopathic exceptions under the CPG. Since HCG is a regulated drug (several states, including California and New York, list it as a Schedule III controlled substance) and can’t fall under the homeopathic exception, companies marketing HCG-based products are subject to a host of FDA regulations that require FDA involvement and approval. As these companies operated outside the FDA’s purview, they now find themselves in hot water.
The FDA isn’t the only government agency barking up these marketers’ money trees. The FTC joined the investigation and incorporated their allegations into the warning letters. The letters note that the companies’ websites make a host of claims that the government alleges are unsubstantiated. Any advertisement that includes health claims requires “competent and reliable scientific evidence,” such as human clinical studies.
The letters give the companies 15 days to take corrective measures and notify the government of those measures. If you go on these companies’ sites today, you’ll notice a lot of “coming soon” and “products currently being improved”-type language. And this all takes place during the New Year’s resolution timeframe, when these companies could be raking it in.
A few takeaways from the warning letters: (1) If you are going to invest time and money into a product being marketed purely through a regulatory loophole, make sure you satisfy all the criteria to meet that exception. (2) Don’t go where Kevin Trudeau has gone. This is meant to be partially glib, but the fact of the matter is that Trudeau is an FTC pet peeve. You can be sure of FTC involvement if you trek the same path he has. (3) Disclaimers are not enough to avoid the FDA. A couple of the HCG marketers to whom warning letters were issued had included disclaimers on their websites that the products are not intended to treat, cure or prevent disease. Such disclaimers, according to the FDA, could not overcome other health claims and language on the sites. (4) At the end of the day, if the government wants to give you a hard time, there is little you can do about it. Other warning letters issued by the FDA regarding homeopathic products noted that “that there may be circumstances where a product that otherwise may meet the conditions set forth in the CPG may nevertheless be subject to enforcement action.” With this last pointer, all we can say is, do a cost-benefit risk analysis.
Google, Yahoo! and Bing have suspended their accounts with hundreds of advertisers and agents associated with mortgage programs under federal investigation. The move by Google and Microsoft (Microsoft powers Bing and Yahoo!) has basically shut down these businesses: Without the vehicle of the search engines, these sites cannot effectively generate traffic.
Why did Google and Microsoft cut the cord of these companies, and is there anything the companies can do? Google and Microsoft (we’ll call them the Government’s “Judge, Jury, and Executioner” or the “Enforcers”) acted upon the request of SIGTARP, a federal agency charged with preventing fraud, waste, and abuse under TARP’s Home Affordable Modification Program. (The pressure started a while back, as we wrote last March.)
SIGTARP is investigating mortgage programs that it believes have been wrongly charging “struggling homeowners a fee in exchange for false promises of lowering the homeowner’s mortgage.”
According to a source at SIGTARP, the agency handed Google and Microsoft a list of some 125 mortgage “schemes.” Apparently, the Enforcers then took that list, identified advertisers and agents associated with those mortgage programs, and opted to suspend relations with those companies (about 500 advertisers and agents for Google and about 400 for Microsoft). (SIGTARP’s announcements on these actions can be found here and here.)
So it looks as if these companies have been penalized through government action without any adjudicative process, merely through government pressure on private companies, i.e. Google and Microsoft. (More analysis from us on this to come.)
It’s easy to understand why the Enforcers would feel pressure. Google just settled with the Department of Justice and agreed to pay more than $500 million for its role in publishing prescription drug ads from Canada. Those familiar with that settlement may see Google’s recent actions for SIGTARP as follow-on. Likely Google is more apt to buckle to the Feds quickly because of the costly settlement, but the matters are not directly related. In fact, the prescription drug settlement agreement relates to prescription drug ads only.
While the SIGTARP investigation is “ongoing,” and Google and Microsoft are continuing to cooperate with the agency, what can companies who have been caught up in this firestorm do? The Enforcers do, fortunately, have grievance processes (see, for instance, Google’s grievance process here).
Either on their own, or with some added strength through legal representation, the companies can try to make their cases regarding the content and nature of the ads at issue.
What is the next step going to be? If the Federal Trade Commission identifies, say, a group of websites that it believes are promoting bogus weight-loss schemes, will the Enforcers simply move to shut off their access to the Web, without further ado?
The online advertising industry is inching its way to more comprehensive policies regarding the collection of consumer data. Several announcements this month by different self-regulatory groups show that pressure from government agencies and consumer watchdog groups concerned about consumer privacy is taking effect . . . slowly but surely.
The most recent pronouncement comes from the World Wide Web Consortium (W3C), an international standards body made up of more than 300 members, including Google and Facebook. W3C announced earlier this week two first drafts for standards that provide consumers more information and control over how their data is tracked online.
The first set of standards, Tracking Preference Expression (DNT), is supposed to define means for users to establish their tracking preferences and see whether sites will honor those preferences. The second set of standards, Tracking Compliance and Scope Specification, is intended to set forth practices for websites to comply with a defined “Do Not Track” preference.
W3C’s announcement has generated a good bit of attention on the other side of the pond, where the EU has been pushing for years for more transparency and consumer control over online behavioral advertising. But W3C’s standards are not expected to be finalized until mid-2012.
On this side of the pond, more clamoring has gone on about the Digital Advertising Alliance’s consumer data tracking policies. The DAA, another self-regulatory project put together by the American Advertising Federation, the Interactive Advertising Bureau, the Better Business Bureau, and several other similar groups, announced last week its latest set of principles. These principles, known as Principles for Multi-Site Data, are supposed to govern companies’ collection and use of online consumer data – like earlier DAA standards, but more comprehensive. The DAA appears to have published these in response to the FTC’s concern that prior DAA standards did not sufficiently address forms of Internet tracking.
There seems to be a trend here: companies (and their consortiums) with major online presences are having a hard time reforming their online behavioral advertising (OBA) tracking, and are doing so with the speed and enthusiasm of a satiated pig. It makes sense: advertising, and OBA, has been the center of Web business models. Shaking up the models by giving consumers opt-outs across pages significantly interrupts, for instance, how sellers get leads to their sites, how advertisers track their effectiveness, and how affiliates get paid.
But like it or not, change is the reality for companies who use OBA. Growing concerns over data privacy will force companies to take new approaches, as we’ve discussed thoroughly here already. See this post, this post, and this post, for example.
Slow and steady as self-regulation may be going, it looks like government agencies like the FTC are willing to let companies take the lead on data privacy standards (with the ever ready government prod to coax them). FTC Chairman Jon Leibowitz made this point last week, while praising the DAA’s latest set of principles: “We believe that you, the advertising industry, should give consumers choices about how they are tracked online.”
Companies should be aware, though, that the FTC is not washing its hands of data privacy issues; it rather intends to enforce those company-prescribed standards. So another business beware: whatever data privacy policies you adopt, make sure you adhere to them. If not, the FTC may come to ensure you do. See, for example, this recent enforcement action.
In an unusual and little-noticed recent settlement, Google Inc. has agreed to pay a forfeiture of $500 million because it permitted Canadian pharmacies to advertise to United States consumers on its site using Google AdWords, resulting in the illegal sale of prescription drugs through online channels into the United States between 2003 and 2009.
The U.S. Department of Justice announced this agreement on August 24, 2011, in conjunction with the Food and Drug Administration’s Office of Criminal Investigations and the Attorney General of Rhode Island.
The government said that this forfeiture represents the gross revenue received by Google as a result of Canadian pharmacies advertising through Google’s AdWords program, plus the gross revenue made by Canadian pharmacies from their sales to U.S. consumers.
Although Canada has its own system of regulation of pharmaceuticals, Canadian pharmacies that ship drugs outside that nation are not subject to that system, and the U.S. Food and Drug Administration regards those shipments into the United States as generally illegal since they don’t comply with its regulations regarding labeling, distribution, and the use of a valid prescription.
What is most unusual here is that Google agreed to pay the forfeiture – even though its role was simply to accept advertising by Canadian pharmacies and to turn a blind eye to the legal problems. According to the government, Google did so from 2003 through 2009, when it learned of the investigation and took a number of steps to prevent the unlawful sale of prescription drugs by online pharmacies, including Canadian pharmacies, to U.S. consumers.
Last March, we asked the question, “Does Google Need to Police Its Ads for Fraud?” when Consumer Watchdog asked whether Google should be held legally responsible for deceptive advertisements placed on its site by mortgage rescue companies. This forfeiture agreement puts Google – and others in its position – on notice that they may need to account for their actions in connection with potentially illegal advertising.
It may go even further. A blog that covers the affiliate marketing community has noted: “For affiliate marketers, the Google and Justice Department settlement has serious consequences. There are many opportunities to partner with products or services online that may or may not be entirely legal.”
In fact, this settlement may have significant effects on the affiliate marketing community. Does each affiliate marketer that places an ad on a website, or simply permits an ad to go on a website, need to check the accuracy and truthfulness of the ad, or risk a major fine? This is at the very least a question that affiliate marketers need to concern themselves with.
The FTC recently issued the Mortgage Acts and Practices – Advertising Final Rule. This rule is the FTC’s response to a congressional directive to address unfair or deceptive acts in the mortgage loan industry. Briefly, the MAP Rule (1) gives the FTC and state authorities the ability to seek civil penalties for deceptive mortgage advertising, (2) clarifies and provides examples of what constitutes deceptive mortgage advertising, and (3) institutes record-keeping requirements on mortgage advertisers.
FTC Commissioner Edith Ramirez asserted in her concurring statement that the “[t]he MAP Rule is narrow in scope — addressing only the advertising phase of the mortgage lifecycle by those subject to the Federal Trade Commission’s jurisdiction — and does not render unlawful any conduct that is not already banned by the prohibition on deception in Section 5 of the FTC Act.”
At first blush, one might think that the new rule merely states the obvious, i.e. that deceptive advertising, unlawful in other industries, is also unlawful in the mortgage industry and that the rule does nothing more than to provide guidelines for what may be considered unfair or deceptive. If that were all, the rule might have deserved a resounding “duh.”
However, the record-keeping requirements that are a part of this rule should instead inspire an “ugh.” The MAP Rule requires anyone subject to the rule (essentially, everyone involved in mortgage advertising with the exception of banks and other financial institutions specifically exempted from FTC oversight) to maintain records of:
• Commercial communications, sales scripts, training materials, and marketing materials regarding any term of any mortgage credit products; and
• Documents describing or evidencing all mortgage credit products and all additional products or services that may be offered in conjunction with the products at the time of the communication.
Under the rule, this documentation must be maintained for 24 months. And failure to keep these records could constitute an independent violation of the MAP Rule.
Considering that the MAP Rule touches everyone in commercial mortgage communications who is not specifically exempted, these record-keeping requirements are hefty. Not just lenders and brokers, but also real estate agents and brokers, ad agencies, affiliate marketers, and lead generators will be subject to the rule as long as they are involved in disseminating information on mortgage products. Compliance will require advertisers to monitor and keep records of downstream ads and will require the tracking of weekly changes in mortgage rates regardless of whether one is acting on behalf of loan originators.
The FTC justifies this burden as helpful in enforcement actions. But the costs of compliance with the MAP Rule outweigh this negligible benefit. How many companies that were once involved in dissemination of mortgage product information will simply decided not to communicate? This may be especially true, considering that the record-keeping requirements come with their own penalty for compliance failures. The result will be that the MAP Rule will discourage real estate agents, brokers and others from providing mortgage-related information to clients. It will create barriers to entry for those not large enough to afford a compliance program.
The FTC, in its press announcement on the final MAP Rule, claims the rule “is designed to create a level playing field for legitimate businesses to compete in the marketplace.” Instead, it appears that the FTC is reducing the size of the playing field by creating compliance costs that will discourage market entrants/players. How will the consumer benefit from fewer options?
Given the fact that the record-keeping requirements were not a part of the congressional directive regarding mortgage ads, we look forward to seeing someone in the industry challenge them in court.