Federal Trade Commission Act Section 5: Unfair or Deceptive Acts or Practices
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Federal Trade Commission Act
Section 5: Unfair or Deceptive Acts or Practices
Background • A consumer’s interpretation of the representation,
omission, or practice is considered reasonable
Section 5 of the Federal Trade Commission Act under the circumstances; and
(FTC Act) (15 USC 45) prohibits ‘‘unfair or
• The misleading representation, omission, or prac-
deceptive acts or practices in or affecting
tice is material.
commerce.’’ The prohibition applies to all persons
engaged in commerce, including banks. Under
section 8 of the Federal Deposit Insurance Act, Relationship of Section 5 to
the Board has the authority to take appropriate Other Laws and Ratings
action when unfair or deceptive acts or practices
are discovered. Some acts or practices may violate both section 5
of the FTC Act and other federal or state laws.
Responsibilities for enforcing the prohibition
Other acts or practices may violate only the FTC
against unfair or deceptive practices as they apply
Act while fully complying with other consumer
to state-chartered banks are spelled out in a joint
protection laws and regulations. If a possible
statement issued on March 11, 2004, by the Board
violation of the FTC Act is found, the examiner
and the Federal Deposit Insurance Corporation.
should consider whether other statutory or regula-
That statement, which is included as an appendix
tory violations have occurred (the joint statement
to this chapter, describes in depth the legal
identifies laws that warrant particular attention in
standards for unfair and deceptive acts or prac-
this regard).
tices, discusses the management of risks relating
to unfair or deceptive acts or practices, and In addition, if an illegal credit practice is
provides general guidance on measures that identified through a review of FTC Act compli-
state-chartered banks can take to avoid engaging ance, the examiner should consider whether the
in such acts or practices, including best practices. illegal practice would adversely affect the institu-
tion’s Community Reinvestment Act rating pursu-
ant to the regulatory requirements of 12 CFR
Legal Standards 228.28(c).
The legal standards for unfairness and deception
are independent of each other; depending on the Compliance Risk Evaluation
facts, an act or practice may be unfair, deceptive,
or both. The legal standards are briefly described Violations of section 5 of the FTC Act can present
here. significant legal, reputational, and compliance risks
for banks. This possibility intensifies the need for
examiners to assess compliance with section 5 in
Unfair Acts or Practices conjunction with consumer compliance examina-
tions, related supervisory activities, and consumer
An act or practice is unfair where it
complaint investigations. Consistent with the
• Causes or is likely to cause substantial injury to Board’s risk-focused consumer compliance super-
consumers, vision program, the need to assess compliance
• Cannot be reasonably avoided by consumers, with section 5 should be considered when devel-
and oping risk assessments, scoping an examination,
or investigating a consumer complaint.
• Is not outweighed by countervailing benefits to
consumers or to competition. A determination about whether a particular act or
practice is unfair or deceptive will depend on an
Public policy, as established by statute, regula- analysis of the facts and circumstances. Although
tion, or judicial decisions, may be considered with individual violations or complaints may appear
all other evidence in determining whether an act or isolated, they may, when considered in the context
practice is unfair. of additional information, including other violations
or complaints, raise concerns about unfair or
deceptive acts or practices.
Deceptive Acts or Practices
Furthermore, the prohibition against unfair or
An act or practice is deceptive where deceptive acts or practices applies not only to all
• A representation, omission, or practice misleads products and services offered by a bank, but to
or is likely to mislead the consumer; every stage and activity, from product develop-
Consumer Compliance Handbook FTC Act • 1 (6/08)Section 5 of the FTC Act ment to the creation and rollout of marketing new or modified systems or products and to campaigns, and to servicing and collections. third-party arrangements. Therefore, particular attention should be paid to 2 (6/08) • FTC Act Consumer Compliance Handbook
Federal Trade Commission Act—Section 5
Examination Objectives and Procedures
EXAMINATION OBJECTIVES • Discuss any examiner concerns with bank
management.
• To determine the adequacy of the bank’s internal
procedures, policies, and controls to ensure
consistent compliance with section 5 of the FTC Evaluating Compliance Management
Act
Programs
• To determine if the bank complies with section 5
of the FTC Act, which prohibits unfair or decep- A bank’s compliance management program should
tive acts or practices focus on the avoidance of acts or practices that are
unfair or deceptive and on the prompt correction of
any such identified acts or practices. The degree of
EXAMINATION PROCEDURES specificity with which a compliance management
program should address this area will vary
To fulfill the examination objectives, and consis-
depending on the bank’s size, complexity, and
tent with the joint statement in the appendix to this
product offerings. A small bank that offers a limited
chapter, examiners should identify the bank’s
number of products through a few branches may
internal policies, procedures, and controls to be
not need the kind of specific, documented
reviewed for compliance with section 5 of the
compliance program needed by a bank engaged
FTC Act. In particular, the bank’s compliance
in, for example, nationwide mortgage or credit card
management systems, advertising and promo-
lending.
tional materials, initial and subsequent disclo-
sures, servicing and collections, and management
and monitoring of employees and third parties Items to Evaluate
should be reviewed as they relate to the products
and services identified as potential areas of 1. Determine whether the bank’s policies and
concern. procedures include guidance on preventing
unfair or deceptive acts or practices.
Examiners also should use these procedures in
conjunction with the guidance and best practices 2. Ascertain whether the bank reviews its practices
contained in the joint statement to determine in the context of federal regulations, policies,
whether an unfair or deceptive act or practice has and decisions on unfair or deceptive acts or
occurred. Specifically, examiners should, as practices.
appropriate, 3. Ascertain whether the bank’s compliance man-
• Review previous examinations reports, including agement function looks beyond the identification
consumer compliance and safety-and-soundness of individual violations to determine if its prac-
examination reports; tices may be unfair or deceptive.
• Review current and prior examination findings 4. Determine whether the bank trains its employees
regarding the institution’s compliance with Regu- on the provisions of the FTC Act that prohibit
lation AA (Unfair or Deceptive Acts or Practices: unfair or deceptive acts or practices.
Credit Practices Rules);1 5. Determine whether the bank reviews consumer
• Review the bank’s policies, procedures, and complaints to identify potential compliance prob-
internal controls; lems and negative trends that have the potential
to be unfair or deceptive. Determine whether the
• Review a sample of consumer complaints, adver- bank reviews concentrations of complaints about
tisements and promotional materials, disclo- the same product or about bank conduct in
sures, customer agreements, and third-party order to identify potential areas of concern.
contracts and instructions;
6. Determine whether the bank has identified any
• Interview management and staff about the bank’s potentially unfair or deceptive acts or practices
acts and practices; and and, if it has, verify that it corrected the identified
concerns and provided restitution to affected
1. See the examination procedures for Regulation AA elsewhere persons when appropriate.
in this handbook. Regulation AA applies to consumer credit
contracts other than those for the purchase of real estate. It 7. If the bank has identified potentially unfair or
prohibits banks and their subsidiaries from using (1) certain deceptive acts or practices, determine if it has
provisions in their consumer credit contracts, (2) a late-charge
accounting practice known as pyramiding, and (3) deceptive implemented changes to prevent future
cosigner practices. recurrences.
Consumer Compliance Handbook FTC Act • 3 (6/08)Section 5: Examination Objectives and Procedures
8. Determine whether the bank clearly discloses a value, availability, cost savings, benefits, or
telephone number or mailing address (and an terms of the product or service.
e-mail address or website if applicable) that 5. Determine whether the bank reviews all adver-
consumers may use to contact the bank or its tisements, promotional materials, and market-
third-party servicers regarding any complaints ing scripts to ensure that they fairly and
or inquiries they may have. adequately describe the terms, benefits, and
9. Determine whether the bank’s management is material limitations of the product or service
involved both in the development of new prod- being offered, including any related or optional
ucts and services and in decisions to reprice or products or services, and that they do not
change the terms of existing products and misrepresent such terms either affirmatively or
services. by omission.
6. Determine whether the bank avoids advertising
Evaluating Advertising and that a particular service or benefit will be
provided in connection with an account if the
Promotional Materials bank does not intend or is not able to provide
Because of the increasing complexity of certain the service or benefit to account holders.
products, particularly mortgage loans and credit 7. Determine whether the bank draws the atten-
cards, a bank’s advertising and promotional tion of customers to key terms, including
materials should be presented in a clear, bal- limitations and conditions that are important in
anced, and timely manner, with special attention enabling customers to make informed deci-
paid to products targeted toward the elderly, sions about whether the product or service
financially vulnerable, or financially unsophisti- meets their needs.
cated.2 Advertising and promotional materials
should present not only the benefits of the 8. Determine whether the bank, when using such
products and services, but also any potential terms as ‘‘pre-approved,’’ ‘‘guaranteed,’’ or
risks, such as payment shock or negative ‘‘fixed rates,’’ clearly discloses any limitations,
amortization. When a bank’s business is driven conditions, or restrictions on the offer.
largely by product marketing and promotion, it 9. Determine whether the bank ensures that the
should exercise particular caution to avoid poten- costs and benefits of related or optional
tially unfair or deceptive acts or practices. products and services, such as overdraft
protection, are clearly explained and are not
misrepresented or presented in an incomplete
Items to Evaluate
or overly complex manner.
1. Determine whether the bank reviews all adver-
10. Determine whether the bank avoids advertis-
tisements, promotional materials, and market-
ing terms that are not available to most
ing scripts to ensure that there is a reasonable
customers and avoids using unrepresentative
factual basis for all representations made.
examples in advertising, marketing, and pro-
2. Determine whether the bank reviews all adver- motional materials.
tisements, promotional materials, and market-
11. Determine whether the bank reviews its web-
ing scripts to ensure that these materials do not
site content and navigational process to ensure
use fine print, separate statements, or incon-
that consumers are able to readily obtain the
spicuous disclosures to correct potentially
necessary disclosures for its products.
misleading headlines.
12. Determine whether the bank reviews its adver-
3. Determine whether the bank tailors advertise-
tising and promotional materials to avoid rais-
ments, promotional materials, and marketing
ing concerns about unfair or deceptive acts or
scripts to take into account the sophistication
practices.
and experience of the target audience, includ-
ing the elderly and financially vulnerable.
4. Determine whether the bank (or its third-party Evaluating Initial and
servicer), in advertisements, promotional mate- Subsequent Disclosures
rials, marketing scripts, and recorded tele-
phone conversations, makes claims, represen- A bank’s disclosures with respect to initial terms
tations, or statements that may mislead and conditions, repricing, and changes in terms
members of the target audience about the cost, should be clear and accurate. The terms and
conditions of many credit and deposit products are
variable and may change periodically on the basis
2. Advertising and promotional materials include print and
electronic materials as well as scripts used for radio, Internet, or of external variables, such as changes in the prime
television advertising and telemarketing. rate. Many credit card products have terms that
4 (6/08) • FTC Act Consumer Compliance HandbookSection 5: Examination Objectives and Procedures
may change or increase automatically following a terms of an account or product, determine
specific event, such as an interest rate increase whether the bank’s customer agreements clearly
triggered by a consumer’s delinquency with the disclose that the bank may make future changes
creditor or another creditor. The disclosures for to the rate, terms, and conditions otherwise
products such as these—products having variable specified in any agreement signed by or given to
terms and conditions—should be clearly presented. the consumer. Determine whether the circum-
stances under which such changes may be
made are clearly explained.
Items to Evaluate
1. Determine whether the bank reviews all cus-
tomer agreements and disclosures to ensure Evaluating Servicing and Collections
that there is a reasonable factual basis for all Servicing and collection activities present a greater
representations made. risk of potential violations of section 5 of the FTC
2. Determine whether the bank’s customer agree- Act when conducted by affiliates or third-party
ments and disclosures fairly and adequately vendors and servicers. Thus, a bank should ensure
describe the terms, benefits, and material limi- that the disclosures provided for these servicing
tations or conditions of the product or service and collection activities are accurate and not
being offered. Limitations may take the form of, misleading. The bank should also ensure that the
for example, limited applicability (for instance, a activities are conducted fairly and in consonance
special interest rate that applies only to balance with any disclosures or agreements. For example,
transfers), limited duration (for instance, an statements should clearly indicate when payments
expiration date for terms that apply only during are due if penalties are to be avoided.
an introductory period), or a prerequisite for
obtaining particular terms (for instance, mini-
mum transaction amounts or introductory or
Items to Evaluate
other fees). Conditions may include, for example, 1. Determine whether the bank ensures that its
the consumer’s ability to cancel a service employees and third-party servicers have, and
without a charge. follow, procedures to credit consumer payments
in a timely manner.
3. Determine whether the bank’s disclosures make
claims, representations, or statements that may 2. Determine whether consumers are clearly told
mislead members of the target audience about when and if monthly payments are applied to
the cost, value, availability, cost savings, ben- fees, penalties, or other charges before being
efits, or terms of the product or service. applied to regular principal and interest.
4. Determine whether the bank informs consumers 3. Determine whether account statements clearly
in a clear and timely manner about any fees, disclose how fees, penalties, other charges, and
penalties, or other charges that have been interest and principal payments affect the
imposed (including charges for any force- account balance and whether these charges
placed products), and the reasons for their and payments have been calculated in accor-
imposition. dance with any written agreements with the
borrower.
5. Determine whether the bank clearly discloses
that optional or related products and services
that are offered simultaneously with credit— Monitoring the Conduct of
such as insurance, travel services, credit protec-
tion, and consumer report update services—are
Employees and Third Parties
not required as a prerequisite to obtaining credit A bank should have effective controls in place for
or are not considered in decisions to grant hiring personnel and for contracting and maintain-
credit. ing relationships with third parties. The controls
6. Determine whether the bank, when making should, for example, establish responsibilities vis-
claims about amounts of credit available to a-vis third parties for training and monitoring staff.
consumers, accurately and completely repre- The controls should also foster the bank’s ability to
sents the amount of potential, approved, or monitor the actual practices of its employees and
usable credit that the consumer will receive. third-party contractors and ensure that these
practices are consistent with the bank’s policies
7. Determine whether the bank clearly informs a
and procedures, applicable laws and regulations,
consumer when the account terms approved for
and third-party agreements. In addition, the bank’s
the consumer are less favorable than the terms
monitoring should include a review of training and
advertised or previously disclosed.
promotional materials used by its employees and
8. If the bank reserves the right to change the by third parties, to ensure that any concerns about
Consumer Compliance Handbook FTC Act • 5 (6/08)Section 5: Examination Objectives and Procedures
unfair or deceptive acts or practices are identified tors provide incentives for acts or practices that
early. could raise potential concerns, such as compen-
sation programs that steer consumers to particu-
lar products to the exclusion of other, potentially
Items to Evaluate beneficial products.
1. Determine whether, through its third-party agree- 3. Determine whether the bank monitors the train-
ments and internal policies, the bank has ing of employees and third parties who market or
effective controls for monitoring risks associated promote bank products or service loans, to
with selecting and managing third-party contrac- ensure that they are adequately trained to avoid
tors. Such agreements and policies should making statements or taking actions that might
outline the degree of monitoring, acceptable be unfair or deceptive. Monitoring should in-
error rates, and corrective action provisions in clude a review of training and promotional
case of noncompliance. They also should iden- materials, including telemarketing scripts.
tify issues that would need to be brought to the 4. Determine whether the bank monitors a third
attention of bank management. party’s primary interface with consumers by, for
2. Determine whether the bank’s compensation example, reviewing recorded telephone calls or
programs for employees and third-party contrac- transcripts of online communications.
6 (6/08) • FTC Act Consumer Compliance HandbookFederal Trade Commission Act—Section 5
Appendix: Statement on Unfair or Deceptive Acts
or Practices by State-Chartered Banks
The following statement was issued jointly by the example, the Federal Trade Commission has
Board of Governors of the Federal Reserve System broad authority to enforce the requirements of
and the Federal Deposit Insurance Corporation on section 5 of the FTC Act against many non-bank
March 11, 2004. entities.6 In addition, state authorities have pri-
mary responsibility for enforcing state statutes
against unfair or deceptive acts or practices. The
Purpose agencies intend to work with these other regula-
The Board of Governors of the Federal Reserve tors as appropriate in investigating and respond-
System and the Federal Deposit Insurance Corpo- ing to allegations of unfair or deceptive acts or
ration (the Board and the FDIC, or, collectively, the practices that involve state banks and other
agencies) are issuing this statement to outline the entities supervised by the agencies.
standards that will be considered by the agencies
as they carry out their responsibility to enforce the Standards for Determining What Is
prohibitions against unfair or deceptive trade
practices found in section 5 of the Federal Trade Unfair or Deceptive
Commission Act (FTC Act)3 as they apply to acts The FTC Act prohibits unfair or deceptive acts or
and practices of state-chartered banks. The agen- practices. Congress drafted this provision broadly
cies will apply these standards when weighing the in order to provide sufficient flexibility in the law
need to take supervisory and enforcement actions to address changes in the market and unfair or
and when seeking to ensure that unfair or decep- deceptive practices that may emerge.7
tive practices do not recur.
An act or practice may be found to be unfair
This statement also contains a section on where it ‘‘causes or is likely to cause substantial
managing risks relating to unfair or deceptive acts injury to consumers which is not reasonably
or practices that includes best practices, as well as avoidable by consumers themselves and not
general guidance on measures that state-chartered outweighed by countervailing benefits to consum-
banks can take to avoid engaging in such acts or ers or to competition.’’8 A representation, omission,
practices. or practice is deceptive if it is likely to mislead
Although the majority of insured banks adhere to a consumer acting reasonably under the circum-
a high level of professional conduct, banks must stances and is likely to affect a consumer’s conduct
remain vigilant against possible unfair or deceptive or decision regarding a product or service.
acts or practices both to protect consumers and to The standards for unfairness and deception are
minimize their own risks. independent of each other. While a specific act or
practice may be both unfair and deceptive, an act
Coordination of Enforcement Efforts or practice is prohibited by the FTC Act if it is
either unfair or deceptive. Whether an act or
Section 5(a) of the FTC Act prohibits ‘‘unfair or practice is unfair or deceptive will in each
deceptive acts or practices in or affecting com- instance depend upon a careful analysis of the
merce’’4 and applies to all persons engaged in facts and circumstances. In analyzing a particular
commerce, including banks. The agencies each act or practice, the agencies will be guided by the
have affirmed their authority under section 8 of the body of law and official interpretations for defining
Federal Deposit Insurance Act to take appropriate unfair or deceptive acts or practices developed
action when unfair or deceptive acts or practices by the courts and the FTC. The agencies will also
are discovered.5 consider factually similar cases brought by the
A number of regulators have authority to
combat unfair or deceptive acts or practices. For
6. 15 USC 45(a)(2) and Gramm−Leach−Bliley Act, section 133,
3. 15 USC 45. published in notes to 15 USC 41.
4. 15 USC 45(a). 7. See FTC Policy Statement on Unfairness (December 17,
5. 12 USC 1818(b)(1), (e)(1), and (i)(2). See letter from 1980) and FTC Policy Statement on Deception (October 14,
Chairman Alan Greenspan to the Hon. John J. LaFalce (May 30, 1983).
2002) and ‘‘Unfair or Deceptive Acts or Practices: Applicability of 8. This standard was first issued as a policy by the FTC and
the Federal Trade Commission Act,’’ FIL 57-2002 (May 30, 2002). later codified into the FTC Act as 15 USC 45(n).
Consumer Compliance Handbook FTC Act • 7 (6/08)Section 5: Appendix
FTC and other regulators to ensure that these Costs that would be incurred for remedies or
standards are applied consistently. measures to prevent the injury are also taken into
account in determining whether an act or prac-
tice is unfair. These costs may include the costs
Unfair Acts or Practices to the bank in taking preventive measures and
the costs to society as a whole of any increased
Assessing Whether an Act or Practice burden and similar matters.
Is Unfair
• Public policy may be considered—Public policy,
An act or practice is unfair where it (1) causes or is as established by statute, regulation, or judicial
likely to cause substantial injury to consumers, decisions, may be considered with all other
(2) cannot be reasonably avoided by consumers, evidence in determining whether an act or
and (3) is not outweighed by countervailing ben- practice is unfair. For example, the fact that a
efits to consumers or to competition. Public policy particular lending practice violates a state law
may also be considered in the analysis of whether or a banking regulation may be considered
a particular act or practice is unfair. Each of these as evidence in determining whether the act or
elements is discussed further below. practice is unfair. Conversely, the fact that a
particular practice is affirmatively allowed by
• The act or practice must cause or be likely to
statute may be considered as evidence that the
cause substantial injury to consumers—To be
practice is not unfair. Public policy considera-
unfair, an act or practice must cause or be likely
tions by themselves, however, will not serve as
to cause substantial injury to consumers. Sub-
the primary basis for determining that an act or
stantial injury usually involves monetary harm.
practice is unfair.
An act or practice that causes a small amount
of harm to a large number of people may be
deemed to cause substantial injury. An injury
may be substantial if it raises a significant risk Deceptive Acts and Practices
of concrete harm. Trivial or merely speculative
harms are typically insufficient for a finding of Assessing Whether an Act or Practice
substantial injury. Emotional impact and other Is Deceptive
more subjective types of harm will not ordinarily
A three-part test is used to determine whether a
make a practice unfair.
representation, omission, or practice is ‘‘decep-
• Consumers must not reasonably be able to avoid tive.’’ First, the representation, omission, or practice
the injury—A practice is not considered unfair if must mislead or be likely to mislead the consumer.
consumers may reasonably avoid injury. Consum- Second, the consumer’s interpretation of the repre-
ers cannot reasonably avoid injury from an act sentation, omission, or practice must be rea-
or practice if it interferes with their ability to sonable under the circumstances. Lastly, the
effectively make decisions. Withholding material misleading representation, omission, or practice
price information until after the consumer has must be material. Each of these elements is
committed to purchase the product or service discussed below in greater detail.
would be an example of preventing a consumer
• There must be a representation, omission, or
from making an informed decision. A practice
practice that misleads or is likely to mislead the
may also be unfair where consumers are subject
consumer—An act or practice may be found to
to undue influence or are coerced into purchas-
be deceptive if there is a representation, omis-
ing unwanted products or services.
sion, or practice that misleads or is likely to
The agencies will not second-guess the wis- mislead the consumer. Deception is not limited to
dom of particular consumer decisions. Instead, situations in which a consumer has already been
the agencies will consider whether a bank’s misled. Instead, an act or practice may be found
behavior unreasonably creates or takes advan- to be deceptive if it is likely to mislead consum-
tage of an obstacle to the free exercise of ers. A representation may be in the form of
consumer decision making. express or implied claims or promises and may
• The injury must not be outweighed by counter- be written or oral. Omission of information may be
vailing benefits to consumers or to competition— deceptive if disclosure of the omitted information
To be unfair, the act or practice must be injurious is necessary to prevent a consumer from being
in its net effects—that is, the injury must not be misled.
outweighed by any offsetting consumer or com- In determining whether an individual state-
petitive benefits that are also produced by the act ment, representation, or omission is misleading,
or practice. Offsetting benefits may include lower the statement, representation, or omission will not
prices or a wider availability of products and be evaluated in isolation. The agencies will
services. evaluate it in the context of the entire adver-
8 (6/08) • FTC Act Consumer Compliance HandbookSection 5: Appendix
tisement, transaction, or course of dealing to that the institution intended that the consumer
determine whether it constitutes deception. Acts draw certain conclusions based upon the claim.
or practices that have the potential to be Claims made with the knowledge that they are
deceptive include making misleading cost or false will also be presumed to be material.
price claims; using bait-and-switch techniques; Omissions will be presumed to be material
offering to provide a product or service that is not when the financial institution knew or should
in fact available; omitting material limitations or have known that the consumer needed the
conditions from an offer; selling a product unfit for omitted information to evaluate the product or
the purposes for which it is sold; and failing to service.
provide promised services.
• The act or practice must be considered from Relationship to Other Laws
the perspective of the reasonable consumer—In
determining whether an act or practice is Acts or practices that are unfair or deceptive within
misleading, the consumer’s interpretation of or the meaning of section 5 of the FTC Act may also
reaction to the representation, omission, or violate other federal or state statutes. On the other
practice must be reasonable under the circum- hand, there may be circumstances in which an act
stances. The test is whether the consumer’s or practice violates section 5 of the FTC Act even
expectations or interpretation are reasonable in though the institution is in technical compliance
light of the claims made. When representations with other applicable laws, such as consumer
or marketing practices are targeted to a specific protection and fair lending laws. Banks should be
audience, such as the elderly or the financially mindful of both possibilities. The following laws
unsophisticated, the standard is based upon warrant particular attention in this regard.
the effects of the act or practice on a
reasonable member of that group. Truth in Lending
If a representation conveys two or more and Truth in Savings Acts
meanings to reasonable consumers and one
Pursuant to the Truth in Lending Act (TILA),
meaning is misleading, the representation may
creditors must ‘‘clearly and conspicuously’’ dis-
be deceptive. Moreover, a consumer’s interpre-
close the costs and terms of credit.9 The Truth in
tation or reaction may indicate that an act or
Savings Act (TISA) requires depository institutions
practice is deceptive under the circumstances,
to provide interest and fee disclosures for deposit
even if the consumer’s interpretation is not
accounts so that consumers can compare deposit
shared by a majority of the consumers in the
products.10 TISA also provides that advertisements
relevant class, so long as a significant minority
must not be misleading or inaccurate and must not
of such consumers is misled.
misrepresent an institution’s deposit contract. An
In evaluating whether a representation, omis- act or practice that does not comply with these
sion, or practice is deceptive, the agencies will provisions of TILA or TISA may also violate the FTC
look at the entire advertisement, transaction, or Act. On the other hand, a transaction that is in
course of dealing to determine how a reason- technical compliance with TILA or TISA may
able consumer would respond. Written disclo- nevertheless violate the FTC Act. For example,
sures may be insufficient to correct a mislead- consumers could be misled by advertisements of
ing statement or representation, particularly ‘‘guaranteed’’ or ‘‘lifetime’’ interest rates when the
where the consumer is directed away from creditor or depository institution intends to change
qualifying limitations in the text or is counseled the rates, whether or not the disclosures satisfy the
that reading the disclosures is unnecessary. technical requirements of TILA or TISA.
Likewise, oral disclosures or fine print may be
insufficient to cure a misleading headline or
prominent written representation. Equal Credit Opportunity
and Fair Housing Acts
• The representation, omission, or practice must
be material—A representation, omission, or prac- The Equal Credit Opportunity Act (ECOA) prohibits
tice is material if it is likely to affect a consumer’s discrimination against persons in any aspect of a
decision regarding a product or service. In credit transaction on the basis of race, color,
general, information about costs, benefits, or religion, national origin, sex, marital status, age
restrictions on the use or availability of a product (provided the applicant has the capacity to con-
or service is material. When express claims are tract), the fact that an applicant’s income derives
made with respect to a financial product or from any public assistance program, and the fact
service, the claims will be presumed to be
material. Similarly, the materiality of an implied 9. 15 USC 1632(a).
claim will be presumed when it is demonstrated 10. 12 USC 4301 et seq.
Consumer Compliance Handbook FTC Act • 9 (6/08)Section 5: Appendix
that the applicant has in good faith exercised any sent such terms either affirmatively or by
right under the Consumer Credit Protection Act. omission. Ensure that these materials do not use
Similarly, the Fair Housing Act (FHA) prohibits fine print, separate statements, or inconspicu-
creditors involved in residential real estate transac- ous disclosures to correct potentially misleading
tions from discriminating against any person on the headlines, and ensure that there is a reasonable
basis of race, color, religion, sex, handicap, familial factual basis for all representations made.
status, or national origin. Unfair or deceptive
• Draw the attention of customers to key terms,
practices that target or have a disparate impact on
including limitations and conditions, that are
consumers who are members of these protected
important in enabling the customer to make an
classes may violate the ECOA or the FHA, as well
as the FTC Act. informed decision regarding whether the product
or service meets the customer’s needs.
• Clearly disclose all material limitations or condi-
Fair Debt Collection Practices Act tions on the terms or availability of products or
The Fair Debt Collection Practices Act prohibits services, such as a limitation that applies a
unfair, deceptive, and abusive practices related to special interest rate only to balance transfers; the
the collection of consumer debts. Although this expiration date for terms that apply only during
statute does not by its terms apply to banks that an introductory period; material prerequisites for
collect their own debts, failure to adhere to the obtaining particular products, services, or terms
standards set by this act may support a claim of (for example, minimum transaction amounts,
unfair or deceptive practices in violation of the FTC introductory or other fees, or other qualifications);
Act. Moreover, banks that either affirmatively or conditions for canceling a service without
or through lack of oversight permit a third-party charge when the service is offered on a free trial
debt collector acting on their behalf to engage in basis.
deception, harassment, or threats in the collection • Inform consumers in a clear and timely manner
of monies due may be exposed to liability for about any fees, penalties, or other charges
approving or assisting in an unfair or deceptive act (including charges for any force-placed prod-
or practice. ucts) that have been imposed, and the reasons
for their imposition.
Managing Risks Related to Unfair or • Clearly inform customers of contract provisions
that permit a change in the terms and conditions
Deceptive Acts or Practices of an agreement.
Since the release of the FDIC’s statement and the • When using terms such as ‘‘preapproved’’ or
Board’s letter on unfair and deceptive practices in ‘‘guaranteed,’’ clearly disclose any limitations,
May 2002, bankers have asked for guidance on conditions, or restrictions on the offer.
strategies for managing risk in this area. This
• Clearly inform consumers when the account
section outlines guidance on best practices to
terms approved by the bank for the consumer are
address some areas with the greatest potential for
less favorable than the advertised terms or terms
unfair or deceptive acts and practices, including
previously disclosed.
advertising and solicitation, servicing and collec-
tions, and the management and monitoring of • Tailor advertisements, promotional materials, dis-
employees and third-party service providers. Banks closures, and scripts to take account of the
should also monitor compliance with their own sophistication and experience of the target
policies in these areas and should have proce- audience. Do not make claims, representations,
dures for receiving and addressing consumer or statements that mislead members of the target
complaints and monitoring activities performed by audience about the cost, value, availability, cost
third parties on behalf of the bank. savings, benefits, or terms of the product or
service.
To avoid engaging in unfair or deceptive activity,
the agencies encourage use of the following • Avoid advertising that a particular service will be
practices, which have already been adopted by provided in connection with an account if the
many institutions: bank does not intend, or is not able, to provide
the service to account holders.
• Review all promotional materials, marketing
scripts, and customer agreements and disclo- • Clearly disclose when optional products and
sures to ensure that they fairly and adequately services—such as insurance, travel services,
describe the terms, benefits, and material credit protection, and consumer report update
limitations of the product or service being services that are offered simultaneously with
offered, including any related or optional prod- credit—are not required to obtain credit or
ucts or services, and that they do not misrepre- considered in decisions to grant credit.
10 (6/08) • FTC Act Consumer Compliance HandbookSection 5: Appendix
• Ensure that the costs and benefits of optional or servicers to ensure that they do not create
related products and services are not misrepre- unintended incentives to engage in unfair or
sented or presented in an incomplete manner. deceptive practices.
• When making claims about amounts of credit • Ensure that the institution and its third-party
available to consumers, accurately and com- servicers have and follow procedures to credit
pletely represent the amount of potential, consumer payments in a timely manner. Consum-
approved, or usable credit that the consumer will ers should be clearly told when and if monthly
receive. payments are applied to fees, penalties, or other
charges before being applied to regular principal
• Avoid advertising terms that are not available to
and interest.
most customers and using unrepresentative
examples in advertising, marketing, and promo- The need for clear and accurate disclosures that
tional materials. are sensitive to the sophistication of the target
audience is heightened for products and services
• Avoid making representations to consumers that
that have been associated with abusive practices.
they may pay less than the minimum amount
Accordingly, banks should take particular care in
required by the account terms without ade-
marketing credit and other products and services
quately disclosing any late fees, over-limit fees,
to the elderly, the financially vulnerable, and
or other account fees that will result from the
customers who are not financially sophisticated. In
consumer’s paying such a reduced amount.
addition, creditors should pay particular attention
• Clearly disclose a telephone number or mailing to ensure that disclosures are clear and accurate
address (and, as an addition, an e-mail or web with respect to the points and other charges that
site address if available) that consumers may use will be financed as part of home-secured loans; the
to contact the bank or its third-party servicers terms and conditions related to insurance offered
regarding any complaints they may have, and in connection with loans; loans covered by the
maintain appropriate procedures for resolving Home Ownership and Equity Protection Act; reverse
complaints. Consumer complaints should also be mortgages; credit cards designed to rehabilitate
reviewed by banks to identify practices that have the credit position of the cardholder; and loans with
the potential to be misleading to customers. prepayment penalties, temporary introductory
• Implement and maintain effective risk and super- terms, or terms that are not available as advertised
visory controls to select and manage third-party to all consumers.
servicers.
• Ensure that employees and third parties who Conclusion
market or promote bank products, or service
The development and implementation of policies
loans, are adequately trained to avoid making
and procedures in these areas and the other steps
statements or taking actions that might be unfair
outlined above will help banks ensure that products
or deceptive.
and services are provided in a manner that is fair,
• Review compensation arrangements for bank allows informed customer choice, and is consistent
employees as well as third-party vendors and with the FTC Act.
Consumer Compliance Handbook FTC Act • 11 (6/08)You can also read
