Compliance Corner: Third Quarter 2004

Interagency Guidance Issued on Unfair or Deceptive Acts or Practices by State-Chartered Banks

by Eddie L. Valentine, Supervising Examiner

On March 11, 2004, the Board of Governors of the Federal Reserve System (Board) and the Federal Deposit Insurance Corporation (FDIC) issued guidance outlining standards they will apply to determine when acts or practices by state-chartered banks are unfair or deceptive.¹ Such practices are illegal under section 5 of the Federal Trade Commission Act (FTC Act).

Purpose
To respond to questions raised by institutions under the agencies' supervision, the Board and the FDIC jointly issued a statement that provides guidance on steps that state-chartered banks can take to avoid engaging in unfair or deceptive acts or practices. The approach outlined in the statement is based on long-established standards used by the FTC to enforce section 5 of the FTC Act against non-bank entities.

The joint statement outlines standards for state-chartered banks that are consistent with the March 2002 standards articulated by the OCC for national banks in Advisory Letter 2002-3, Guidance on Unfair or Deceptive Acts or Practices², and are guided by the Federal Trade Commission's December 1980 FTC Policy Statement on Unfairness³ and October 1983 FTC Policy Statement on Deception.⁴ These standards will be applied to determine when specific acts or practices by state-chartered banks are unfair or deceptive.

High Risk Areas
The guidance addresses areas with the greatest potential for unfair or deceptive acts or practices. These areas include advertising and solicitations, customer agreements and disclosures, loan servicing and collection practices, and managing and monitoring employees and third-party service providers.

Best Practices
In response to questions raised by the institutions under the agencies' supervision, the joint statement also provides guidance on best practices that state-chartered banks are encouraged to use to avoid engaging in certain unfair or deceptive acts or practices. It outlines specific measures that banks should consider incorporating into their policies and procedures to protect consumers and minimize their own risk.

To avoid engaging in unfair or deceptive activity, institutions are encouraged to adopt the following practices.

Review all promotional materials, marketing scripts, customer agreements, and disclosures to ensure that they fairly and accurately describe the terms, benefits, and material limitations of the product or service being offered. Ensure that these materials do not rely on fine print or inconspicuous disclosures to correct potentially misleading or unclear "headlines."
Be sensitive to the importance of clear and accurate disclosures when marketing credit and other products and services to the elderly, the financially vulnerable, and other consumers who may not be financially sophisticated.
When using such terms as "pre-approved" or "guaranteed," clearly and conspicuously disclose any limitations or conditions on the offer.
When making any claims about the amount of potential credit that an applicant may receive, represent accurately and completely the amount of usable credit that will be available after fees assessed at account opening are billed to the account.
Implement and maintain effective risk and supervisory controls to select and manage third-party vendors and servicers. Ensure that employees and third parties that market bank products or service loans are adequately trained.
Review compensation arrangements with employees and third parties to ensure that they do not create unintended incentives to engage in unfair or deceptive practices.
Ensure that loan servicing procedures are in place and are followed so that consumers' payments are credited in a timely manner. Consumers should be informed when regular monthly payments are applied to fees, penalties, or other charges instead of being applied to principal and interest.
Disclose a telephone number or address (including e-mail or website addresses, as applicable) that consumers may use to file any complaints, and maintain appropriate procedures for resolving complaints. Review consumer complaints to identify practices that have the potential to mislead consumers.

Conclusion
State-chartered financial institutions should review how they plan to implement procedures to conform to the joint guidance on unfair or deceptive acts or practices. Adopting the suggested best practices might be the easiest way to effect compliance and minimize risk. As always, staff will also need to be trained to ensure their understanding of the guidance.

If you have any questions regarding this article, please contact Supervising Examiner Eddie L. Valentine or Robin P. Myers, Consumer Compliance/CRA Examinations Unit Manager, through the Regulations Assistance Line at (215) 574-6568.

¹ The joint guidance Unfair or Deceptive Acts or Practices by State-Chartered Banks is available on the Board of Governors' website .
² Advisory Letter 2002-3 is available on the OCC's website .
³ The FTC Policy Statement on Unfairness is available on the FTC's website .
⁴ The FTC Policy Statement on Deception is available on the FTC's website .

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.

Compliance Corner: Third Quarter 2004

Interagency Guidance Issued on Unfair or Deceptive Acts or Practices by State-Chartered Banks

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