I. INTRODUCTION
The Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) issued an interagency guidance, outlining standards to be considered by the regulatory agencies in determining whether certain acts or practices of state-chartered banks constitute unfair or deceptive trade practices under § 5 of the Federal Trade Commission Act (FTC Act). Such standards will be applied when the agencies are determining whether to take supervisory and enforcement actions against financial institutions. The FRB and FDIC guidance also covered risk management relating to unfair and deceptive trade practices, including best practices as well as general guidance on measures that state-chartered banks can take to avoid such practices.
The guidance reminds state-chartered banks that § 5(a) of the FTC Act prohibits “unfair or deceptive acts or practices in or affecting commerce” and applies to all persons engaged in commerce, including banks. Both agencies affirmed their authority to take appropriate action when unfair or deceptive acts or practices are discovered under § 8 of the Federal Deposit Insurance Act. While the guidance was issued for state-chartered banks supervised by the FRB or the FDIC, financial institutions chartered by the Office of Thrift Supervision and the Office of the Comptroller of the Currency may use it as a model of best practices in consumer protection.
II. STANDARDS FOR DETERMINING WHAT IS UNFAIR OR DECEPTIVE
The FTC Act prohibits unfair or deceptive acts or practices. An act or practice may be found unfair when it “causes or is likely to cause substantial injury to consumers which is not reasonably avoided by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” A representation, omission or practice is deceptive if it is likely to mislead a consumer acting reasonably under the circumstances and is likely to affect a consumer’s conduct or decision regarding a product or service. The standards for unfairness and deception are independent of each other. Whether an act or practice may be both unfair and deceptive will depend in each instance on an analysis of the facts and circumstances.
A. Unfair Acts Or Practices
An act or practice is unfair where it (1) causes or is likely to cause substantial injury to consumers; (2) cannot be reasonably avoided by consumers; and (3) is not outweighed by countervailing benefits to consumers or to competition.
1. The act or practice must cause or be likely to cause substantial injury to consumers.
To be unfair, an act or practice must cause or be likely to cause substantial injury to consumers. Substantial injury usually involves monetary harm. An act or practice that causes a small amount of harm to a large number of individuals may be deemed to cause substantial injury. An injury may be substantial if it raises a significant risk of concrete harm. Trivial or merely speculative harms are typically insufficient for a finding of substantial injury. Emotional impact and other more subjective types of harm will not ordinarily make a practice unfair.
2. Consumers must not reasonably be able to avoid the injury.
A practice is not considered unfair if consumers may reasonably avoid injury. Consumers cannot reasonably avoid injury from an act or practice if it interferes with their ability to effectively make decisions. Withholding material price information until after the consumer has committed to purchase the product or service would be an example of preventing a consumer from making an informed decision. A practice may also be unfair where consumers are subject to undue influence or are coerced into purchasing unwanted products or services.
Regulators will not second-guess the wisdom of particular consumer decisions, but will consider whether a bank’s behavior unreasonably creates or takes advantage of an obstacle to the free exercise of consumer decision-making.
3. The injury must not be outweighed by countervailing benefits to consumers or to competition.
To be unfair, the act or practice must be injurious in its net effects – i.e., the injury must not be outweighed by any offsetting consumer or competitive benefits that are also produced by the act or practice. Offsetting benefits may include lower prices or a wider availability of products and services.
Costs incurred for remedies or measures to prevent the injury are also taken into account in determining whether an act or practice is unfair, which may include costs to the bank in taking preventive measures and costs to society as a whole of any increased burden and similar matters.
B. Deceptive Acts And Practices
A three-part test determines whether a representation, omission or practice is deceptive: (1) the representation, omission or practice must mislead or be likely to mislead the consumer; (2) the consumer’s interpretation of the representation, omission or practice must be reasonable under the circumstances; and (3) the misleading representation, omission or practice must be material.
1. Representation, omission or practice misleads or likely to mislead consumer.
An act or practice may be found to be deceptive if there is a representation, omission or practice that misleads or is likely to mislead the consumer. Deception is not limited to situations in which a consumer has already been misled. Rather, an act or practice may be found to be deceptive if it is likely to mislead consumers. A representation may be in the form of express or implied claims or promises and may be written or oral. Omission of information may be deceptive if disclosure of the omitted information is necessary to prevent a consumer from being misled.
In determining whether an individual statement, representation or omission is misleading, the statement, representation or omission is evaluated in the context of the entire advertisement, transaction or course of dealing to determine whether it constitutes deception. Acts or practices that have the potential to be deceptive include: making misleading cost or price claims; using bait-and-switch techniques; offering to provide a product or service that is not in fact available; omitting material limitations or conditions from an offer; selling a product unfit for the purposes for which it is sold; and failing to provide promised services.
2. Act or practice considered from perspective of the “reasonable consumer.”
In determining whether an act or practice is misleading, the consumer’s interpretation of or reaction to the representation, omission or practice must be reasonable under the circumstances. The test is whether the consumer’s expectations or interpretation are reasonable in light of the claims made. When representations or marketing practices are targeted to a specific audience (e.g., elderly or financially unsophisticated), the standard is based upon the effects of the act or practice on a reasonable member of that group. If a representation conveys two or more meanings to reasonable consumers and one meaning is misleading, the representation may be deceptive. Moreover, a consumer’s interpretation or reaction may indicate that an act or practice is deceptive under the circumstances, even if the consumer’s interpretation is not shared by a majority of consumers in the relevant class, so long as a significant minority of such consumers is misled.
3. Material representation, omission or practice required.
A representation, omission or practice is material if it is likely to affect a consumer’s decision regarding a product or service. In general, information about costs, benefits or restrictions on the use or availability of a product or service is material. Express claims made with respect to a financial product or service are presumed material. Similarly, an implied claim is presumed material when demonstrated that the bank intended that the consumer draw certain conclusions based upon the claim. Claims made with knowledge that they are false are also presumed to be material. Omissions will be presumed to be material when the bank knew or should have known that a consumer needed the omitted information to evaluate the product or service.
III. MANAGING RISKS RELATED TO UNFAIR OR DECEPTIVE ACTS OR PRACTICES
The guidance outlines “best practices” to address areas with the greatest potential for unfair or deceptive acts and practices, including: advertising and solicitation; servicing and collections; and management and monitoring of employees and third-party service providers. Banks also should monitor compliance with their own policies in these areas, have procedures for receiving and addressing consumer complaints and monitor activities performed by third parties on behalf of the bank.
The guidance offers the following suggestions to state-chartered banks for managing risk in the area of unfair and deceptive practices:
The need for clear and accurate disclosures that are sensitive to the sophistication of the target audience is heightened for products and services that have been associated with abusive practices. Particular care should be taken in marketing credit and other products and services to the elderly, the financially vulnerable and financially unsophisticated customers. In addition, creditors should pay particular attention to ensure that disclosures are clear and accurate with respect to: points and other charges that will be financed as part of home-secured loans; terms and conditions related to insurance offered in connection with loans; loans covered by the Home Ownership and Equity Protection Act; reverse mortgages; credit cards designed to rehabilitate the credit position of the cardholder; and loans with pre-payment penalties, temporary introductory terms or terms that are not available as advertised to all consumers.
IV. CONCLUSION
The development and implementation of policies and procedures in these areas outlined above and other areas identified by the bank should assist and assure a state-chartered bank that its products and services are provided in a manner that is fair, allows informed customer choice and is consistent with the FTC Act.