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The Brown M&M Theory of Telltale Minor Regulatory Violations or What's Wrong with "Earn a savings rate 5X the national average"?

posted by Adam Levitin

A CapitalOne savings account ad has got me thinking about whether Van Halen has anything to teach regulators. Van Halen is famous for its use of a contract that requires provision of M&Ms for the band, but expressly prohibits provision of any brown M&Ms. It's not that they taste different, of course, but that if a concert promoter fails to adhere to the brown M&M term in the contract, it's a red flag that there might be other more serious problems, so the band will undertake a safety check of the stage and equipment. 

IMG_5469So what does this have to do with CapOne?  I'm one of the few folks in the world who bothers to teach the Truth in Savings Act, so I'm probably more inclined to pay attention to deposit account advertising than most folks. I was about to throw out an early May issue of The Economist (yes, my tastes run distinctly to middle brow), when a CapitalOne ad caught my eye.

The ad, which I've posted to the right says, "Why settle for average?  Earn a savings rate 5X the national average."  In smaller, less bold font it then says "Open a new savings account in about 5 minutes and earn 5X the national average." Under that, in smaller, but bold, "This is Banking Reimagined®." Faint, fine print on the bottom says "ONLY NEW ACCOUNTS FOR CONSUMERS. RATE COMPARISON BASED ON FDIC NATIONAL RATE FOR SAVINGS BALANCE < $100,000. OFFERED BY CAPITAL ONE, N.A. MEMBER FDIC © 2019 CAPITAL ONE" Above this is a photo featuring some random dude (or celebrity I don't recognize) with a croissant and coffee and faux casual outfit (jeans and a t-shirt, but a jacket with a pocket square) inviting the reader to join him. Breakfast and banking perhaps? But in the background, over his shoulder is a sign that says "Savings Rate 5X National Average" (its hard to read in the original, and doesn't come across in my photo, unfortunately).

So what's the problem here?

Two things. First, Reg DD, the Truth in Savings implementing regulation provides that:

If an advertisement states a rate of return, it shall state the rate as an “annual percentage yield” using that term. (The abbreviation “APY” may be used provided the term “annual percentage yield” is stated at least once in the advertisement.) The advertisement shall not state any other rate, except that the “interest rate,” using that term, may be stated in conjunction with, but not more conspicuously than, the annual percentage yield to which it relates.

The problem here is that the ad is very clearly stating a "rate":  "Earn a savings rate 5X the national average." (emphasis added). The ad uses the magic word rate without expressing it as an APY or a no more conspicuous "interest rate". That seems to me to be a straight forward problem.

The second problem is that the ad is misleading. The same regulation prohibits provides that an advertisment shall not "Be misleading or inaccurate or misrepresent a depository institution's deposit contract". What's misleading here? I can't tell whether the offer is for a fixed rate that is TODAY 5X the national average rate TODAY, whether it is for a fixed rate that is TODAY 5x the national average rate when the ad was published, or whether it is for a floating rate that will ALWAYS be 5X the national average. I think this one could confuse a reasonable person, the present tense use of the verb "earn" does not make clear the time period involved. 

Now perhaps you think I'm being ridiculous and of course it is one reading or another. But that just underscores that there's a violation of the prohibition on using the word "rate" without an APY. The use of an APY would resolve any lack of clarity. 

Now I'm rather skeptical that anyone has been seriously harmed by what seem to be Reg DD violations, and there's no private right of action under TISA (although it might be actionable as a state UDAP violation with the TISA violation as the predicate). I'm not going to get my knickers in a knot over this. But I am left wondering whether little violations of federal consumer law like this should be treated as brown M&Ms by the CFPB:  if the compliance attorneys who should be vetting ads missed this, what else might they be missing? (Let me be clear, I am not suggesting that there is actually any more serious violation by Capital One--I have no idea one way or the other.)

More generally, should regulators be on the look out for brown M&Ms? I'm not sure if a brown M&M strategy makes sense for regulatory enforcement; it may well be that there is no correlation between minor violations and major ones, but neither would it surprise me. This seems like the sort of thing that a regulatory agency should try to figure out as it attempts to prioritize its enforcement resources. But doing so requires an agency to keep its eye out for minor violations in order to know if they are a telltale tripwire. 


I noticed that in the comments to 1030.8(c), it says:

1. Trigger terms. The following are examples of information stated in advertisements that are not “trigger” terms:

. . .

iii. “1% over our current rates,” so long as the rates are not determinable from the advertisement.

Source: https://www.consumerfinance.gov/policy-compliance/rulemaking/regulations/1030/Interp-8/#8-b-Interp-3-ii

I'm curious how this relates to the point that you are making about the application of 1030.8(b) to the "5x the national average" marketing verbiage.

The trigger term comment applies to 1030.8(c), which is about when additional disclosures are required, not about the 1030.8(b) requirement to disclose the APY if stating a "rate". Perhaps it suggests that "5x the national average" isn't really a problem under 1030.8(b), but formally it doesn't apply.

The consumer protection laws themselves are the brown M&M's in relation to the overall quality of bank management and the bank's operational risks and safety and soundness. A bank that is in non-compliance with fair lending, CRA, or other consumer regulations more than likely is messing up on risk management, employee incentive structures, etc. So I think you are talking about brown M&Ms inside of brown M&Ms.

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