Although most bankers realize that federal unfair and deceptive trade practices laws apply to banks as well as other types of businesses, few bankers have ever experienced an unfair and deceptive trade practices review by a bank regulator. The FDIC, in particular, has noted an increase in violations of Section 5 of the Federal Trade Commission Act (“Section 5”), which prohibits unfair or deceptive trade practices. Other banking regulators have also begun to focus more on unfair and deceptive trade practices as a way to help combat predatory lending. Regulators speculate that the increased number of violations may be due to increased competition among financial institutions, along with the growing dependence on fee income. Given this focus by bank regulators, it is important that bankers make sure they understand and are in compliance with the law as it pertains to unfair and deceptive trade practices. Bankers should also be mindful of red fl ags and high-risk areas that could trigger heightened scrutiny by bank regulators in the area of unfair and deceptive trade practices.
The identification by bank examiners of red flags or high-risk activities at a bank could trigger heightened scrutiny by regulators, including a special review of the bank’s products and services to determine whether there are any unfair or deceptive trade practices. In the event bank regulators were to uncover actual violations, depending on the nature and severity of the violations, the bank’s compliance examination ratings could suffer and, in severe cases, enforcement actions could be taken and restitution required. Section 5 violations could also result in the downgrading of a bank’s Community Reinvestment Act rating, which, unlike the bank’s compliance rating, is public information. Public knowledge that a bank violated Section 5 may lead to reputational harm, lawsuits and financial damages. As with all violations of law, from a bank regulator’s perspective, failure to address these issues on an ongoing basis could result in questions about the adequacy of bank management and safety and soundness concerns.
Section 5 prohibits “unfair or deceptive practices in or affecting commerce,” and applies to all persons engaged in commerce, including banks. While the Federal Trade Commission Act is enforced generally by the Federal Trade Commission (“FTC”), the authority for enforcing Section 5, as it relates to fi nancial institutions, rests with a bank’s primary federal regulator.
Under Section 5, the standards for determining what is unfair or deceptive are independent of each other. While a single act may be both unfair and deceptive, the FTC Act prohibits an act that is either unfair or deceptive.
An act or practice may be found to be unfair where it: (i) causes or is likely to cause substantial injury to consumers; (ii) cannot be reasonably avoided by consumers; and (iii) is not outweighed by countervailing benefi ts to consumers or to competition. Public policy may also be considered in analyzing whether an act or practice is unfair. “Substantial injury” typically, but not always, involves monetary harm. However, an act or practice that causes a small amount of harm to a large number of people may be considered to have caused substantial injury. Speculative types of harm, such as emotional impact, generally would not make a practice unfair. A consumer cannot “reasonably avoid” injury if an act or practice interferes with the consumer’s ability to effectively make decisions. For example, failure to provide material information to a consumer until after he or she has committed to purchase a product would not allow the consumer to reasonably avoid injury. To be deemed unfair, an act or practice must be injurious in its net effects; the injury must not be outweighed by offsetting benefits, such as lower-cost products or wider availability of products.
A representation, omission or practice is deceptive if (i) it is misleading or likely to mislead a consumer; (ii) the consumer is acting reasonably under the circumstances; and (iii) the representation, omission or practice is likely to affect a consumer’s conduct or decision regarding a product or service. In determining whether a representation misleads or is likely to mislead, the entire advertisement, transaction, or course of dealing must be evaluated. If a representation or practice is targeted to a particular group, its reasonableness must be evaluated from the vantage point of that group.
The majority of Section 5 violations tend to involve deception; occasionally, however, a practice or act or the sum of practices and acts has been found to be unfair. Whether an act or practice is unfair or deceptive will, in each case, depend on a careful analysis of the specific facts and circumstances.
Certainly acts or practices that are found to be unfair or deceptive under Section 5 may also violate other applicable laws and regulations. However, there may also be circumstances where a bank is in technical compliance with other applicable laws and regulations, but is in violation of Section 5.
Unfair and deceptive practices are not always readily apparent to examiners. As a result, in addition to reviewing a bank’s public disclosures, promotional materials and advertisements, examiners will also attempt to gain insight into a bank’s practices through the following sources.
Consumer complaints are a key source of information for examiners in uncovering unfair and deceptive trade practices. When reviewing such complaints prior to an examination, examiners tend to look for trends, such as whether the bank received a number of the same or similar types of complaints, or whether a small number of complaints had a broad impact. Consumer allegations or claims that could indicate possible unfair and deceptive trade practices include the use of misleading or false statements, missing disclosures or information, undue or excessive fees, consumer inability to reach a bank’s customer service department, or previously undisclosed charges.
INVESTIGATIONS BY OTHER AGENCIES
Since banking customers are not always aware that consumer complaints involving banks should be directed to particular bank regulators, bank examiners will also pay close attention to consumer complaints regarding banks that are received by other agencies, such as state agencies and the FTC.
CRITICISM IN THE MEDIA
Consumer reports in newspaper articles, television news programs, or radio programs can draw the attention of examiners to particular issues or corroborate potential issues of which examiners are already aware. Additionally, the FDIC has indicated that information contained on various websites, including blogs where consumers write about problems they have had with banks and/or their products or services, may be used as a source of information for examiners with regard to issues involving unfair or deceptive practices issues.
Bank regulators have identifi ed higher rates of unfair and deceptive trade practices in institutions that are engaged in certain high-risk areas, such as subprime lending, and in institutions that heavily rely on thirdparty service providers.
Subprime lending, by its nature, involves the extension of credit to consumers who may be less sophisticated and more financially vulnerable. While the presence of subprime products and services themselves may not be evidence of unfair or deceptive practices, products that are overly complex or that have complicated pricing structures could trigger concerns regarding unfair or deceptive practices. Additionally, products targeted to other vulnerable groups, such as the elderly or recent immigrants, could lead to additional scrutiny for unfair and deceptive practices.
THIRD-PARTY AFFILIATED AND UNAFFILIATED RELATIONSHIPS
Prohibitions against unfair and deceptive practices apply not only to banks but also to their subsidiaries and other affi liated and unaffi liated third parties. Unaffi liated third parties may include companies providing advertising services, issuing credit cards through the bank, or brokering loans. The FDIC has noted that third-party relationships, both affiliated and nonaffi liated, are one of the most common features in Section 5 violations found by FDIC examiners.
In analyzing third-party arrangements, examiners will consider factors such as the types of products and services provided by the third party, the due diligence conducted by the bank prior to entering into an agreement with the third party, and the extent of the bank’s oversight and monitoring of the third party.
Examiners will be particularly interested in whether a bank’s oversight of third parties goes beyond simply rubber-stamping disclosures or solicitations provided by third parties.
To avoid heightened scrutiny by bank regulators and potential violations of unfair and deceptive trade practice laws, below is a nonexhaustive list of some of the best practices suggested by bank regulators:
- Review all promotional materials, marketing scripts, customer agreements and disclosures prepared by the bank and any third party to ensure they do not misrepresent terms, either affi rmatively or by omission. Ensure that these materials do not use fi ne print, separate statements or inconspicuous disclosures to correct potentially misleading headlines.
- Draw the attention of customers to key terms, including limitations and conditions that are important in enabling customers to make an informed decision about a product.
- Clearly disclose all material limitations or conditions on the terms or availability of products.
- Inform consumers in a clear and timely manner about any fees, penalties or other charges.
- When using terms such as “preapproved” or “guaranteed,” clearly disclose any limitations, conditions or retractions on the offer.
- Clearly disclose a telephone number or mailing address that consumers may use to contact the bank or the third-party provider regarding any complaints, and maintain appropriate procedures for resolving complaints.
- Clearly inform consumers when the account terms approved by the bank for the consumer are less favorable than the advertised terms or terms previously disclosed.
- Tailor advertisements, promotional materials, disclosures and scripts to take account of the sophistication and experience of the target audience.
- Do not make claims, representations or statements that mislead the target audience about the cost, value, availability, cost savings, benefi ts or terms of the product.