VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act
An act or practice is unfair when 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.
Notwithstanding the repeal of such authority, the guidance indicated that the Agencies continue to have supervisory and enforcement authority regarding unfair or deceptive acts or practices, which could include those practices previously addressed in the former credit practices rules. Such practices included:
(1) the use of certain provisions in consumer credit contracts, (2) the misrepresentation of the nature or extent of cosigner liability, and (3) the pyramiding of late fees.
For deceptive acts - How do we apply the statement: The representation, omission, or practice must be material.
A representation, omission, or practice is material if it is likely to affect a consumer's decision to purchase or use a product or service. In general, information about costs, benefits, or restrictions on the use or availability of a product or service is material. When express claims are made with respect to a financial product or service, the claims will be presumed to be material. While intent to deceive is not a required element of proving that an act or practice is deceptive, the materiality of an implied claim will be presumed if it can be shown that the institution intended that the consumer draw certain conclusions based upon the claim. Claims made with knowledge that they are false will also be presumed to be material. Omissions will be presumed to be material when the financial institution knew or should have known that the consumer needed the omitted information to make an informed choice about the productor service.
For unfair practices, how do you define when consumers must not be reasonably able to avoid the injury.
An act or 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 or to take action to avoid injury. This may occur if material information about a product, such as pricing, is modified or withheld until after the consumer has committed to purchasing the product, so that the consumer cannot reasonably avoid the injury. It also may occur where testing reveals that disclosures do not effectively explain an act or practice to consumers. A practice may also be unfair where consumers are subject to undue influence or are coerced into purchasing unwanted products or services. In accordance with FTC case law, the FDIC will not second-guess the wisdom of particular consumer decisions. Instead, the FDIC will consider whether an institution's behavior unreasonably creates an obstacle that impairs the free exercise of consumer decision-making. The actions that a consumer is expected to take to avoid injury must be reasonable. While a consumer could potentially avoid harm by hiring independent experts to test products in advance or bring legal claims for damages, these actions generally would be too expensive to be practical for individual consumers and, therefore, are not reasonable.
For deceptive acts - How do we apply the statement: There must be a representation, omission, or practice that misleads or is likely to mislead the 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 a consumer. Deception is not limited to situations in which a consumer has already been misled. Instead, 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. An individual statement, representation, or omission is not evaluated in isolation to determine if it is misleading, but rather in the context of the entire advertisement, transaction, or course of dealing. 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.
Types of complaints warranted a possible UDAP or UDAAP include:
Complaints that allege misleading or false statements, missing disclosure information, excessive fees, inability to reach customer service, or previously undisclosed charges may indicate a possible FTC UDAP or Dodd-Frank UDAAP Note also that high rates of chargebacks or refunds regarding a product or service can be indicative of potential FTC UDAP or Dodd-Frank UDAAP violations. This information may not appear in the consumer complaint process.
What CMS element plays a key role in identifying unfair, deceptive, or abusive acts or practices?
Consumer complaints ------------ While the absence of complaints does not ensure that FTC UDAPs or Dodd-Frank UDAAPs are not occurring, the presence of complaints may be a red flag indicating that a more detailed review is warranted. This is especially the case when similar complaints are received from several consumers regarding the same product or service. One of the three tests in evaluating an apparent deceptive practice is: "The act or practice must be considered from the perspective of the reasonable consumer." Consumer complaints provide a window into the perspective of the reasonable consumer.
How does UDAAP relate to ECOA?
ECOA prohibits discrimination in any aspect of a credit transaction against persons on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), the fact that an applicant's income derives from any public assistance program, and the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The FHA prohibits creditors involved in residential real estate transactions from discriminating against any person on the basis of race, color, religion, sex, handicap, familial status, or national origin. FTC UDAPs and Dodd-Frank UDAAPs that target or have a disparate impact on consumers in one of these prohibited basis groups may violate the ECOA or the FHA, as well as the FTC Act or the Dodd-Frank Act. Moreover, some state and local laws address discrimination against additional protected classes, e.g., handicap in non-housing transactions, or sexual orientation. Such conduct may also violate the FTC Act or the Dodd-Frank Act
An act is deceptive when it:
First, the representation, omission, or practice must mislead or be likely to mislead the consumer. Second, the consumer's interpretation of the representation, omission, or practice must be reasonable under the circumstances. Third, the misleading representation, omission, or practice must be material
For deceptive acts - How do we apply the statement: The act or practice must be considered from the 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. In other words, whether an act or practice is deceptive depends on how a reasonable member of the target audience would interpret the marketing material. When representations or marketing practices are targeted to a specific audience, such as the elderly or the financially unsophisticated, the communication is reviewed from the point of view of 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 the consumers in the relevant class, so long as a significant minority of such consumers is misled. Written disclosures may be insufficient to correct a misleading statement or representation, particularly where the consumer is directed away from qualifying limitations in the text or is counseled that reading the disclosures is unnecessary. Likewise, oral disclosures or fine print are generally insufficient to cure a misleading headline or prominent written representation. Finally, a deceptive act or practice cannot be cured by subsequent truthful disclosures.
General risk for UDAP increases in what situations?
Institutions with increased risk: Institutions may have a higher risk profile for potential FTC UDAP or Dodd-Frank UDAAP violations if they introduce new products or services, especially those targeting individuals who are financially unsophisticated, vulnerable to financial abuse, or financially distressed. Risks may increase when an institution introduces a new delivery channel, a complex product, or a new activity, or when staff is not sufficiently qualified or trained. As in other areas, the strength of an institution's CMS, such as strong management controls, effective training, and on-going monitoring, is a mitigating factor
General risk for UDAP is limited in what situations?
Institutions with limited risk: Many institutions have low risk profiles for potential FTC UDAP or the Dodd-Frank UDAAP violations and would not generally require transaction testing. These include institutions that do not offer products associated with increased incidence of complaints, violations, chargebacks, or risk of consumer harm; have not introduced any new products; and have no consumer complaints (or a limited number of consumer complaints that are unrelated to FTC UDAP or Dodd-Frank UDAAP). However, examiners should be alert to possible FTC UDAPs or Dodd-Frank UDAAPs throughout an examination, including when reviewing specific products or services for compliance with other consumer compliance regulatory requirements.
How is an abusive act defined?
Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service OR Takes unreasonable advantage of: -A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; or -The inability of the consumer to protect its interests in selecting or using a consumer financial productor service; or -The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
Public policy may be considered when an act is unfair. How does this apply?
Public policy, as established by statute, regulation, judicial decision, or agency determination, may be considered with all other evidence in determining whether an act or practice is unfair. Public policy considerations by themselves, however, will not serve as the primary basis for determining that an act or practice is unfair. For example, the fact that a particular lending practice violates a state law or a banking regulation may be considered as evidence in determining whether the act or practice is unfair. Conversely, the fact that a particular practice is permitted by statute or regulation may, under some circumstances, be considered as evidence that the practice is not unfair. ---------- The requirements of the Truth in Lending Act (TILA), the Truth in Savings Act (TISA), the Fair Credit Reporting Act (FCRA), or the Fair Debt Collection Practices Act (FDCPA) are examples of public policy considerations. However, an institution's compliance with another statute or regulation does not insulate the institution from liability for an unfair act or practice under Section 5 of the FTC Act. Fiduciary responsibilities under state law may clarify public policy for actions, especially those involving trusts, guardianships, unsophisticated consumers, the elderly, or minors. State statutes and regulations that prohibit FTC UDAPs are often aimed at making sure that lenders do not exploit the lack of access to mainstream banking institutions by low-income individuals, the elderly, and minorities.
How does UDAAP relate to TILA?
Pursuant to TILA, creditors must "clearly and conspicuously" disclose the costs and terms of credit. An act or practice that does not comply with these provisions of TILA may also violate the FTC Act or the Dodd-Frank Act. Conversely, a transaction that is in technical compliance with TILA may nevertheless violate the FTC Act or the Dodd-Frank Act. For example, an institution's credit card advertisement may contain all the required TILA disclosures, but limitations or restrictions that are obscured or inadequately disclosed may be considered a FTC UDAP or Dodd-Frank UDAAP.
How does UDAAP relate to Privacy of Consumer Financial Information?
Regulation P (12 CFR Part 1016.12) prohibits an institution or its affiliates from disclosing a customer's account number or similar access code for a credit card, deposit, or transaction account to a nonaffiliated third party for use in telemarketing, direct mail marketing, or other marketing through electronic mail. There are only three exceptions to this prohibition. A financial institution may disclose its customers' account numbers to: (1) a consumer reporting agency; (2) its agent to market the institution's own products or services, provided that the agent is not authorized to directly initiate charges to the account; or (3) another participant in a private label credit card or an affinity or similar program involving the institution. Depending upon the totality of the circumstances, an institution that does not comply with these requirements may be also engaging in FTC UDAPs
What kinds of customers does Section 5 of the FTC Act cover?
Section 5 of the FTC Act also applies to transactions that may impact business customers as well as individual consumers
For unfair practices, how do you define substantial injury to consumers?
Substantial injury usually involves monetary harm, but can also include, in certain circumstances, unquantifiableor non-monetary harm. An act or practice that causes a small amount of harm to a large number of people, or a significant amount of harm to a small number of people, may be deemed to cause substantial injury. An injury may be substantial if it raises 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.
How does UDAAP relate to TISA?
TISA requires depository institutions to provide interest and fee disclosures for deposit accounts so that consumers may compare deposit products. TISA also provides that advertisements cannot be misleading or inaccurate or misrepresent an institution's deposit contract. As with TILA, an act or practice that does not comply with these provisions may also violate the FTC Act or the Dodd-Frank Act, but transactions that are in technical compliance with TISA may still be considered as unfair, deceptive, or abusive. For example, consumers could be misled by advertisements of "guaranteed" or "lifetime" interest rates when the creditor or depository institution intends to change the rates, even if the disclosures satisfy the technical requirements of TISA.
How does UDAAP relate to FCRA?
The FCRA contains significant responsibilities for institutions that obtain and use information about consumers to determine the consumer's eligibility for products, services, or employment; share such information among affiliates; and furnish information to consumer reporting agencies. The FCRA was substantially amended with the passage of the Fair and Accurate Credit Transactions Act (FACT Act) in 2003, which contained many new consumer disclosure requirements as well as provisions to address identity theft. Violations of the FCRA may also be considered as a FTC UDAP or Dodd-Frank UDAAP. For example, obtaining and using unsolicited medical information (outside of the exceptions provided by the rule) to make credit decisions may also be considered as unfair.
How does UDAAP relate to FDCPA?
The FDCPA prohibits unfair, deceptive, and abusive practices related to the collection of consumer debts. Although this statute does not apply to institutions that collect their own debts in their own name, failure to adhere to the standards set by the FDCPA may violate FTC UDAP.20 Moreover, institutions that either affirmatively or through lack of oversight permit a third-party debt collector acting on their behalf to engage in deception, harassment, or threats in the collection of monies due may be exposed to liability for participating in or permitting a FTC UDAP.
What are the sources for identifying complaints?
The primary sources for complaints are those received directly by the institution and those received by the FDIC National Center for Consumer and Depositor Assistance Consumer Response Unit (Consumer Response Unit). Secondary sources for complaints include State Attorneys General or Banking Departments, the Better Business Bureau, the FTC's Consumer Sentinel database, the CFPB's Consumer Complaint Database, consumer complaint boards, and web blogs. These include third parties / affiliates / subsidiaries
For unfair practices, how do you define: 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 — that is, the injury must not be outweighed by any offsetting consumer or competitive benefits that are also produced by the act or practice. Offsetting consumer or competitive benefits may include lower prices or a wider availability of products and services. Nonetheless, both consumers and competition benefit from preventing unfair acts or practices because prices are likely to better reflect actual transaction costs, and merchants who do not rely on unfair acts or practices are no longer required to compete with those who do. Unfair acts or practices injure both consumers and competitors because consumers who would otherwise have selected a competitor's product are wrongly diverted by the unfair act or practice. Costs that would be incurred for remedies or measures to prevent the injury are also taken into account in determining whether an act or practice is unfair. These costs may include the costs to the institution in taking preventive measures and the costs to society as a whole of any increased burden and similar matters.
True or False Unlike the standards for unfair or deception under Section 5 of the FTC Act, where all prongs of the test must be met for there to be a violation, the abusive standard lays out individual, stand-alone tests to determine if an act or practice is abusive. Although abusive acts also may be unfair or deceptive, examiners should be aware that the legal standards for abusive, unfair, and deceptive are independent of each other.
True!!!