• Guidance Issued on Unfair or Deceptive Acts or Practices by State-Chartered Banks
  • April 21, 2004 | Author: Allen M. Lee
  • Law Firm: Manatt, Phelps & Phillips, LLP - Palo Alto Office
  • The Board of Governors of the Federal Reserve System ("Board") and the Federal Deposit Insurance Corporation ("FDIC") (collectively, the "Agencies") jointly issued a statement on March 11, 2004 ("Statement") outlining the standards they will apply to enforce the prohibitions against unfair or deceptive trade practices by state-chartered banks under Section 5 of the Federal Trade Commission ("FTC") Act ("Act"), 15 U.S.C. § 45.

    1. Unfair Acts or Practices

      The Agencies will apply a three-part test to assess whether an act or practice is unfair. An act or practice may be deemed 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. Public policy may also be considered in the analysis. See 15 U.S.C. § 45(n).

      1. The act or practice must cause or is likely to cause substantial injury to consumers.

        An injury may be substantial if it raises a significant risk of concrete harm. Trivial harms or speculative harms, such as emotional harms, will not typically rise to the level of substantial injury. An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury.

      2. Consumers must not reasonably be able to avoid the injury.

        Practices that interfere with consumers' ability to effectively make decisions, such as withholding material price information until after the consumer has committed to purchasing the product or service, may be deemed unfair. A practice may also be unfair where consumers are subject to undue influence or are coerced into purchasing unwanted goods or services.

      3. The injury must not be outweighed by countervailing benefits to consumers or to competition.

        Acts or practices that are injurious in their net effects may be deemed unfair. Offsetting benefits include lower prices, a wider availability of products and services, costs to the bank in taking preventive measures, and the costs to society as a whole of any increased burdens.

      4. Public policy may be considered

        The Agencies will consider public policy, as established by statute, regulation, or judicial decisions, as evidence in determining whether an act or practice is unfair. For example, the fact that a particular lending practice violates a state law or banking regulation may be considered as evidence that the practice is unfair. Conversely, the fact that a particular practice is allowed by statute may be considered as evidence that the practice is not unfair. It should be noted that there may be circumstances in which an act or practice may be deemed unfair or deceptive even though it may be in compliance with other applicable laws. For example, disclosures that meet the Truth in Lending Act's requirement that the costs and terms of credit be disclosed "clearly and conspicuously" may nonetheless violate the FTC Act where the depository institution advertises "guaranteed" or "lifetime" interest rates and the institution intends to change the rates.

    2. Deceptive Acts and Practices

      A three-part test will also be used in assessing whether a representation, omission, or practice is "deceptive." A representation, omission, or practice may be deemed "deceptive" where (1) the representation, omission, or practice misleads or is likely to mislead the consumer, (2) the consumer's interpretation of the representation, omission, or practice is reasonable under the circumstances, and (3) the misleading representation, omission, or practice is material.

      1. There must be a representation, omission, or practice that misleads or is likely to mislead the consumer

        Representations that mislead or are likely to mislead the consumer may be express or implied, oral or written. Omissions of information may be deemed deceptive if disclosure of the omitted information is necessary to prevent a consumer from being misled. The Agencies will evaluate individual statements, representations, or omissions in the context of the entire advertisement, transaction, or course of dealing rather than in isolation. The following acts or practices have the potential to be deceptive: making misleading cost or price claims; using bait-and-switch techniques; offering to provide a product or service that is not 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. The act of practice must be considered from the perspective of the reasonable consumer

        In assessing whether an act or practice is misleading, the consumer's interpretation or expectation must be reasonable in light of the claims made. When representations or marketing practices are targeted to a specific audience, such as the elderly or the financially unsophisticated, the standard is based upon the effects of the act or practice on a reasonable member of that group. However, 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. Where a representation conveys more than one meaning, the representation may be deceptive if any of the meanings are misleading.

      3. The representation, omission, or practice must be material

        A representation, omission, or practice will be considered material if it is likely to affect a consumer's decision regarding a product or service. Information about costs, benefits, or restrictions on the use or availability of a product will generally be deemed material. The following representations and omissions will be deemed material: (1) express claims regarding a financial product or service, (2) implied claims where it is demonstrated that the institution intended that the consumer draw certain conclusions based upon the claims, (3) claims made with the knowledge that they are false, and (4) omissions where the financial institution knew or should have known that the consumer needed the omitted information to evaluate the product or service.