The Federal Trade Commission has entered into a consent order with Credit Karma, LLC to settle the FTC’s claims that Credit Karma engaged in deceptive acts and practices in violation of Section 5 of the FTC Act by making false or misleading claims that consumers were pre-approved for certain credit products.  The order requires Credit Karma to pay $3 million to the FTC, which sum “may be deposited into a fund administered by the Commission or its designee to be used for relief, including consumer redress and any attendant expenses for the administration of the redress fund.”

To use Credit Karma’s services, consumers must sign up for a Credit Karma account and become a member.  Credit Karma sends members advertisements and recommendations for third-party financial products, such as credit cards.  In its proposed complaint, the FTC alleged that, from February 2018 to April 2021, Credit Karma represented in advertisements and recommendations sent by email to members that they had been “pre-approved” for third-party financial products.  The FTC also alleged that (1) Credit Karma made pre-approval claims in advertisements and marketing materials displayed on its website and mobile application, and (2) to the extent Credit Karma disclosed that final approval of pre-approved consumers was not certain, it did so by using “buried” disclaimers that falsely claimed pre-approved consumers had a 90% likelihood of approval or that indicated pre-approval was not a guarantee of approval.

According to the FTC’s complaint, the third parties offering such financial products had not pre-approved the consumers to whom Credit Karma had sent the offers and almost a third of the consumers who received and applied for pre-approved offers were subsequently denied based on the third party’s underwriting review.  Such reviews included a hard inquiry on consumers’ credit reports, which the FTC alleged had lowered the credit scores of many consumers whose applications were denied.  The FTC alleged that as a result of the pre-approvals “numerous consumers have applied for the advertised products and damaged their credit scores, wasting significant time and harming their ability to secure other financial products in the future.”

The FTC alleged that based on A/B testing that showed consumers were more likely to click on offers saying “preapproved” than those saying they had “excellent” odds of being approved, Credit Karma knew that the  “pre-approvals” conveyed “false certainty” to consumers.  (The complaint describes A/B testing as “a method of comparing two versions of a claim or design to determine which better derives sales or consumer action.”)  According to the complaint, “[w]hen user interfaces are designed, including with the aid of A/B testing, to trick consumers into taking actions in the company’s interest, such design tricks have been described as ‘dark patterns.’”  The FTC alleged that Credit Karma was aware that consumers who received the pre-approved offers were misled by them based on its receipt of complaints and its identification in training materials of potential questions from “pre-approved” consumers whose applications were denied.

In addition to paying $3 million to the FTC, the consent order prohibits Credit Karma from making any misrepresentations about approval, including pre-approval, or about a consumer’s odds or likelihood of being approved, unless the representation is non-misleading, “including that, at the time such representation is made, [Credit Karma] possesses and relies upon a reasonable basis for the representation.”  For a 5-year period after the order is issued, Credit Karma must create and maintain certain records, including “records of any market, behavioral, or psychological research, or user, customer, or usability testing, including any A/B or multivariate testing, copy testing, surveys, focus groups, interviews, clickstream analysis, eye or mouse tracking studies, heat maps, or session replays or recordings concerning the subject matter of the Order.”