Troublesome Lending and Marketing Practices
Unfair and Deceptive Practices -- a new regulatory hot buttonby Mary Beth Guard, BOL Guru
Did you ever want sea monkeys? I did. As a little kid, the highlight of my week was buying the latest comic book and a bottle of Pepsi. I not only loved reading about the adventures of the various superheroes, but I found the ads in the back of the comics irresistible. Imagine what a thrill it would be to have x-ray vision glasses or a miniature spy camera. I dreamed of being discovered as an incredible artist after "drawing Skippy" and owning my own set of sea monkeys. I couldn't wait until my allowance was large enough to permit me to purchase these miracle products. I believed every word in those ads. When sea monkeys were pictured grinning, I truly believed mine would smile.
It's a good thing I never scraped together the cash to purchase any sea monkeys. As it turns out, they're brine shrimp so tiny if they did have facial expressions (which I'm now pretty sure they don't) you wouldn't be able to see them.
I'm considerably less gullible than I was in my youth, but I occasionally still find myself watching a commercial or reading an ad and thinking "It must be true. They couldn't say those things unless they were true."
That's certainly the way it ought to be, but some marketing messages, through words or graphics, lead prospective customers to draw false conclusions about the product or service. Sea monkey syndrome. Fortunately, various state and federal laws and regulations aim to protect consumers from being harmed by unfair or deceptive practices. The impact of those laws and regs on banking practices has been receiving increased attention recently and is the subject of OCC AL-2002-3.
Federal law sources include:
- Section 5 of the Federal Trade Commission Act (15 U.S.C. 45(a)(1), which prohibits "unfair or deceptive acts or practices in or affecting commerce. (Bank regulatory authorities may enforce this by using authority under section 8 of the Federal Deposit Insurance Act, 12 U.S.C. 1818.)
- FRB Regulation AA, the Credit Practices Rule. This consumer protection regulation, which applies to banks and their subsidiaries, generally prohibits those entities from entering into consumer credit obligations that contain provisions providing for the following practices which are identified as being unfair or deceptive:
- Confessions of judgment;
- Waivers of exemption from attachment
- Assignments of wages; or
- Security interest in household goods.
There are certain exceptions to the prohibitions, of course, such as the exception which allows a purchase money security interest in household goods.
Also prohibited under Regulation AA:
--Misrepresenting the nature or extent of cosigner liability;
--Entering into a consumer credit transaction prior to notifying any cosigner about the extent of the cosigner's liability; and
--Imposing a delinquency charge on a payment, when the only delinquency is due to late fees and delinquency charges on a prior payment, and the payment otherwise qualifies as a full and timely payment of any principal and interest owed.
- Truth in Savings Act and Regulation DD.
- Prohibits false or misleading statements in advertisements relating to deposit accounts offered to consumers;
- Prohibits the use of the term "free" to describe an account unless there are no maintenance or activity fees charged on the account;
- Requires certain disclosures to be made when "trigger terms" are used in advertisements.
- Truth in Lending Act and Regulation Z
- Requires clear and conspicuous disclosures of certain terms of consumer credit;
- Requires certain disclosures to be made when "trigger terms" are used in advertisements.
- Provides that if an advertisement for credit states specific credit terms, it shall state only those terms that actually are or will be arranged or offered by the creditor. (In other words, it can only advertise actually available credit terms.)
- Based upon the totality of circumstances, a transaction may be in technical compliance with TILA and Reg Z and still constitute an unfair or deceptive act or practice.
- Equal Credit Opportunity Act and Regulation B
Discrimination in any aspect of credit on the basis of nine specially delineated factors is prohibited. If an unfair or deceptive credit practice is targeted at a group based upon the age, race, gender, marital status, national origin, (or other prohibited factor) of the members of the group, it could be both an unfair or deceptive practice and a violation of ECOA.
- GLB Privacy Requirements
According to the OCC, violations of the GLB privacy rule may constitute an unfair or deceptive act or practice. As an example, they mention unlawful disclosure of account numbers in connection with marketing of a third party's products or services.
- Fair Debt Collection Practices Act
The FDCPA prohibits unfair, deceptive and abuse practices by third party debt collectors collecting consumer debts. If a third party is collecting a consumer's debt on behalf of your institution, you risk potential liability if the collector engages in an unfair or deceptive practice and a party can prove you approved or assisted it.
And That's Not All . . .
When recipients of social security and SSI benefits sued a bank for exercising its right of offset to cover overdrafts, they argued that since social security and SSI funds in those accounts were statutorily exempt from attachment or other legal process, exercise of the right of offset amounted to an unfair or deceptive practice. [While their victory was ultimately overturned on appeal, the point is that the "unfair and deceptive practices" theory of liability can be used in a variety of circumstances.
In virtually any instance where a customer could look at something you've done (or that has been done on your behalf by an agent) and say "That is so not right", you could potentially face a claim for unfair and deceptive practices.
Three Principles of Potentially Deceptive Acts or Practices
If the following three factors are present, a practice may be found to be deceptive, and therefore unlawful, under section 5 of the Federal Trade Commission Act:
- There is a representation, omission, act or practice that is likely to mislead;
- The act or practice would be deceptive from the perspective of a reasonable consumer;
- The representation, omission, act, or practice is material.
Note two important points: The act or practice does not need to actually mislead -- it just needs to be likely to mislead. When looking at whether the act or practice would be deceptive from the perspective of a "reasonable consumer", a court will focus on a consumer from the >
Examples of potentially unfair or deceptive practices:
These examples will help you understand the types of conduct that could result in liability:
- Bait and switch techniques;
- False statements, either oral or written;
- Misleading claims about costs, benefits, procedures;
- Signing customers up for a service they can "cancel at any time", then making it virtually impossible for them to complete the cancellation process;
- Use of tiny print for important disclosures on documents intended for seniors;
- Saying one thing in advertisements and oral statements and something else in disclosures.
What You Can Do
The OCC offers a dozen strategies for minimizing your risk:
- Verify that information provided to consumers is complete and accurate and is not likely to mislead or deceive a reasonable consumer. This includes a review to ensure that customers receiving the information can reasonably be expected to understand the information about products or services -- including any material limitations -- without having to do "detective" work.
- Avoid the use of claims such as "guaranteed," "pre-approved," and "lifetime rates," if there is a significant possibility that consumers will not receive the terms that have been advertised, and this possibility is not described adequately.
- Provide a clear, up-front disclosure of any contract provision that permits a change in the terms of the products or services that are offered.
- Avoid engaging in promotions of a product or service that highlight a particular benefit, if that benefit will be negated by another aspect of the transaction. For example, a product should not be promoted as having "no annual fees" if the product requires the consumer to pay annual premiums for another linked product, such as mandatory credit life insurance, or if the agreement would permit imposition of such a fee at any time, and this possibility is not described adequately.
- Review telemarketing scripts used to market products to bank customers for accuracy and to ensure that they fairly and adequately describe the terms, benefits, and material limitations of the product or service being offered.
- Clearly notify consumers in connection with "free trial periods" for services -- at the time of an initial solicitation and subsequently -- if the consumer will be required to affirmatively act to cancel the service at the end of the trial period to avoid being billed for service past the trial period. Get clear and affirmative consent to terms and billing arrangements.
- Follow the guidance relating to due diligence in selecting a third-party vendor, monitoring vendor performance, and maintaining proper documentation about vendor management in OCC Advisory Letter 2000-9, "Third Party Risk," issued August 29, 2000, and in OCC Bulletin 2001-47, "Third Party Relationships," issued November 1, 2001. Appropriate due diligence includes a review of the competence and business practices of the third party, as well as the financial capacity of the third party.
- Ensure that contractual arrangements with third-party service providers protect the bank against risk. For example, a bank should carefully consider whether a contract with a telemarketer contains any financial incentive that could lead the telemarketer to mislead consumers. As another example, if a telemarketer's compensation is based on initial sales, and is unaffected by whether a consumer subsequently cancels the product or service, the telemarketer may have an incentive to mislead the consumer regarding the nature or benefits of the product or service.
- Ensure that promotional or other information in a solicitation or other communication does not conflict with or contradict required consumer disclosures, such as TILA and Privacy notices. Such conflict or contradiction could result in the disclosures not being "clear and conspicuous," as required by those laws, as well as the communication as a whole being deceptive in violation of the FTC Act.
- Institute appropriate procedures to ensure that consumer complaints and other communications are reviewed for indications that the institution's marketing or solicitations might have misled a consumer.
- Maintain procedures that ensure that payments are promptly posted.
- Monitor loan collection activities, including collection calls, of any third party on behalf of the institution.
One final thought. Prevention is essential, but if you become aware of an unfair or deceptive practice that you have already engaged in, your focus should be damage control. Consider how customers may have been harmed, then plot out a strategy for rectifying the damage. From the moment you hear the words "Houston, we have a problem" (or something to that effect!), be proactive about fixing it. Don't wait for the customer to sue or the examiners to order corrective action.
The original version appeared in the April 2002 edition of the Oklahoma Bankers Association Compliance Informer.
First published on BankersOnline.com 8/19/02
First published on 08/19/2002