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Federal Trade Commission Act

Section 5: Unfair or Deceptive Acts or Practices

Background

Section 5 of the Federal Trade Commission Act

(FTC Act) (15 USC 45) prohibits ‘‘unfair or

deceptive acts or practices in or affecting

commerce.’’ The prohibition applies to all persons

engaged in commerce, including banks. Under

section 8 of the Federal Deposit Insurance Act,

the Board has the authority to take appropriate

action when unfair or deceptive acts or practices

are discovered.

Responsibilities for enforcing the prohibition

against unfair or deceptive practices as they apply

to state-chartered banks are spelled out in a joint

statement issued on March 11, 2004, by the Board

and the Federal Deposit Insurance Corporation.

That statement, which is included as an appendix

to this chapter, describes in depth the legal

standards for unfair and deceptive acts or prac-

tices, discusses the management of risks relating

to unfair or deceptive acts or practices, and

provides general guidance on measures that

state-chartered banks can take to avoid engaging

in such acts or practices, including best practices.

Legal Standards

The legal standards for unfairness and deception

are independent of each other; depending on the

facts, an act or practice may be unfair, deceptive,

or both. The legal standards are briefly described

here.

Unfair Acts or Practices

An act or practice is unfair where it

• Causes or is likely to cause substantial injury to

consumers,

• Cannot be reasonably avoided by consumers,

and

• Is not outweighed by countervailing benefits to

consumers or to competition.

Public policy, as established by statute, regula-

tion, or judicial decisions, may be considered with

all other evidence in determining whether an act or

practice is unfair.

Deceptive Acts or Practices

An act or practice is deceptive where

• A representation, omission, or practice misleads

or is likely to mislead the consumer;

• A consumer’s interpretation of the representation,

omission, or practice is considered reasonable

under the circumstances; and

• The misleading representation, omission, or prac-

tice is material.

Relationship of Section 5 to

Other Laws and Ratings

Some acts or practices may violate both section 5

of the FTC Act and other federal or state laws.

Other acts or practices may violate only the FTC

Act while fully complying with other consumer

protection laws and regulations. If a possible

violation of the FTC Act is found, the examiner

should consider whether other statutory or regula-

tory violations have occurred (the joint statement

identifies laws that warrant particular attention in

this regard).

In addition, if an illegal credit practice is

identified through a review of FTC Act compli-

ance, the examiner should consider whether the

illegal practice would adversely affect the institu-

tion’s Community Reinvestment Act rating pursu-

ant to the regulatory requirements of 12 CFR

228.28(c).

Compliance Risk Evaluation

Violations of section 5 of the FTC Act can present

significant legal, reputational, and compliance risks

for banks. This possibility intensifies the need for

examiners to assess compliance with section 5 in

conjunction with consumer compliance examina-

tions, related supervisory activities, and consumer

complaint investigations. Consistent with the

Board’s risk-focused consumer compliance super-

vision program, the need to assess compliance

with section 5 should be considered when devel-

oping risk assessments, scoping an examination,

or investigating a consumer complaint.

A determination about whether a particular act or

practice is unfair or deceptive will depend on an

analysis of the facts and circumstances. Although

individual violations or complaints may appear

isolated, they may, when considered in the context

of additional information, including other violations

or complaints, raise concerns about unfair or

deceptive acts or practices.

Furthermore, the prohibition against unfair or

deceptive acts or practices applies not only to all

products and services offered by a bank, but to

every stage and activity, from product develop-

Consumer Compliance Handbook FTC Act • 1 (6/08)

ment to the creation and rollout of marketing

campaigns, and to servicing and collections.

Therefore, particular attention should be paid to

new or modified systems or products and to

third-party arrangements.

Section 5 of the FTC Act

2 (6/08) • FTC Act Consumer Compliance Handbook

Federal Trade Commission Act—Section 5

Examination Objectives and Procedures

EXAMINATION OBJECTIVES

• To determine the adequacy of the bank’s internal

procedures, policies, and controls to ensure

consistent compliance with section 5 of the FTC

Act

• To determine if the bank complies with section 5

of the FTC Act, which prohibits unfair or decep-

tive acts or practices

EXAMINATION PROCEDURES

To fulfill the examination objectives, and consis-

tent with the joint statement in the appendix to this

chapter, examiners should identify the bank’s

internal policies, procedures, and controls to be

reviewed for compliance with section 5 of the

FTC Act. In particular, the bank’s compliance

management systems, advertising and promo-

tional materials, initial and subsequent disclo-

sures, servicing and collections, and management

and monitoring of employees and third parties

should be reviewed as they relate to the products

and services identified as potential areas of

concern.

Examiners also should use these procedures in

conjunction with the guidance and best practices

contained in the joint statement to determine

whether an unfair or deceptive act or practice has

occurred. Specifically, examiners should, as

appropriate,

• Review previous examinations reports, including

consumer compliance and safety-and-soundness

examination reports;

• Review current and prior examination findings

regarding the institution’s compliance with Regu-

lation AA (Unfair or Deceptive Acts or Practices:

Credit Practices Rules);

• Review the bank’s policies, procedures, and

internal controls;

• Review a sample of consumer complaints, adver-

tisements and promotional materials, disclo-

sures, customer agreements, and third-party

contracts and instructions;

• Interview management and staff about the bank’s

acts and practices; and

• Discuss any examiner concerns with bank

management.

Evaluating Compliance Management

Programs

A bank’s compliance management program should

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

specificity with which a compliance management

program should address this area will vary

depending on the bank’s size, complexity, and

product offerings. A small bank that offers a limited

number of products through a few branches may

not need the kind of specific, documented

compliance program needed by a bank engaged

in, for example, nationwide mortgage or credit card

lending.

Items to Evaluate

1. Determine whether the bank’s policies and

procedures include guidance on preventing

unfair or deceptive acts or practices.

2. Ascertain whether the bank reviews its practices

in the context of federal regulations, policies,

and decisions on unfair or deceptive acts or

practices.

3. Ascertain whether the bank’s compliance man-

agement function looks beyond the identification

of individual violations to determine if its prac-

tices may be unfair or deceptive.

4. Determine whether the bank trains its employees

on the provisions of the FTC Act that prohibit

unfair or deceptive acts or practices.

5. Determine whether the bank reviews consumer

complaints to identify potential compliance prob-

lems and negative trends that have the potential

to be unfair or deceptive. Determine whether the

bank reviews concentrations of complaints about

the same product or about bank conduct in

order to identify potential areas of concern.

6. Determine whether the bank has identified any

potentially unfair or deceptive acts or practices

and, if it has, verify that it corrected the identified

concerns and provided restitution to affected

persons when appropriate.

7. If the bank has identified potentially unfair or

deceptive acts or practices, determine if it has

implemented changes to prevent future

recurrences.

1. See the examination procedures for Regulation AA elsewhere

in this handbook. Regulation AA applies to consumer credit

contracts other than those for the purchase of real estate. It

prohibits banks and their subsidiaries from using (1) certain

provisions in their consumer credit contracts, (2) a late-charge

accounting practice known as pyramiding, and (3) deceptive

cosigner practices.

Consumer Compliance Handbook FTC Act • 3 (6/08)

8. Determine whether the bank clearly discloses a

telephone number or mailing address (and an

e-mail address or website if applicable) that

consumers may use to contact the bank or its

third-party servicers regarding any complaints

or inquiries they may have.

9. Determine whether the bank’s management is

involved both in the development of new prod-

ucts and services and in decisions to reprice or

change the terms of existing products and

services.

Evaluating Advertising and

Promotional Materials

Because of the increasing complexity of certain

products, particularly mortgage loans and credit

cards, a bank’s advertising and promotional

materials should be presented in a clear, bal-

anced, and timely manner, with special attention

paid to products targeted toward the elderly,

financially vulnerable, or financially unsophisti-

cated.

Advertising and promotional materials

should present not only the benefits of the

products and services, but also any potential

risks, such as payment shock or negative

amortization. When a bank’s business is driven

largely by product marketing and promotion, it

should exercise particular caution to avoid poten-

tially unfair or deceptive acts or practices.

Items to Evaluate

1. Determine whether the bank reviews all adver-

tisements, promotional materials, and market-

ing scripts to ensure that there is a reasonable

factual basis for all representations made.

2. Determine whether the bank reviews all adver-

tisements, promotional materials, and market-

ing scripts to ensure that these materials do not

use fine print, separate statements, or incon-

spicuous disclosures to correct potentially

misleading headlines.

3. Determine whether the bank tailors advertise-

ments, promotional materials, and marketing

scripts to take into account the sophistication

and experience of the target audience, includ-

ing the elderly and financially vulnerable.

4. Determine whether the bank (or its third-party

servicer), in advertisements, promotional mate-

rials, marketing scripts, and recorded tele-

phone conversations, makes claims, represen-

tations, or statements that may mislead

members of the target audience about the cost,

value, availability, cost savings, benefits, or

terms of the product or service.

5. Determine whether the bank reviews all adver-

tisements, promotional materials, and market-

ing scripts to ensure that they fairly and

adequately describe the terms, benefits, and

material limitations of the product or service

being offered, including any related or optional

products or services, and that they do not

misrepresent such terms either affirmatively or

by omission.

6. Determine whether the bank avoids advertising

that a particular service or benefit will be

provided in connection with an account if the

bank does not intend or is not able to provide

the service or benefit to account holders.

7. Determine whether the bank draws the atten-

tion of customers to key terms, including

limitations and conditions that are important in

enabling customers to make informed deci-

sions about whether the product or service

meets their needs.

8. Determine whether the bank, when using such

terms as ‘‘pre-approved,’’ ‘‘guaranteed,’’ or

‘‘fixed rates,’’ clearly discloses any limitations,

conditions, or restrictions on the offer.

9. Determine whether the bank ensures that the

costs and benefits of related or optional

products and services, such as overdraft

protection, are clearly explained and are not

misrepresented or presented in an incomplete

or overly complex manner.

10. Determine whether the bank avoids advertis-

ing terms that are not available to most

customers and avoids using unrepresentative

examples in advertising, marketing, and pro-

motional materials.

11. Determine whether the bank reviews its web-

site content and navigational process to ensure

that consumers are able to readily obtain the

necessary disclosures for its products.

12. Determine whether the bank reviews its adver-

tising and promotional materials to avoid rais-

ing concerns about unfair or deceptive acts or

practices.

Evaluating Initial and

Subsequent Disclosures

A bank’s disclosures with respect to initial terms

and conditions, repricing, and changes in terms

should be clear and accurate. The terms and

conditions of many credit and deposit products are

variable and may change periodically on the basis

of external variables, such as changes in the prime

rate. Many credit card products have terms that

2. Advertising and promotional materials include print and

electronic materials as well as scripts used for radio, Internet, or

television advertising and telemarketing.

Section 5: Examination Objectives and Procedures

4 (6/08) • FTC Act Consumer Compliance Handbook

may change or increase automatically following a

specific event, such as an interest rate increase

triggered by a consumer’s delinquency with the

creditor or another creditor. The disclosures for

products such as these—products having variable

terms and conditions—should be clearly presented.

Items to Evaluate

1. Determine whether the bank reviews all cus-

tomer agreements and disclosures to ensure

that there is a reasonable factual basis for all

representations made.

2. Determine whether the bank’s customer agree-

ments and disclosures fairly and adequately

describe the terms, benefits, and material limi-

tations or conditions of the product or service

being offered. Limitations may take the form of,

for example, limited applicability (for instance, a

special interest rate that applies only to balance

transfers), limited duration (for instance, an

expiration date for terms that apply only during

an introductory period), or a prerequisite for

obtaining particular terms (for instance, mini-

mum transaction amounts or introductory or

other fees). Conditions may include, for example,

the consumer’s ability to cancel a service

without a charge.

3. Determine whether the bank’s disclosures make

claims, representations, or statements that may

mislead members of the target audience about

the cost, value, availability, cost savings, ben-

efits, or terms of the product or service.

4. Determine whether the bank informs consumers

in a clear and timely manner about any fees,

penalties, or other charges that have been

imposed (including charges for any force-

placed products), and the reasons for their

imposition.

5. Determine whether the bank clearly discloses

that optional or related products and services

that are offered simultaneously with credit—

such as insurance, travel services, credit protec-

tion, and consumer report update services—are

not required as a prerequisite to obtaining credit

or are not considered in decisions to grant

credit.

6. Determine whether the bank, when making

claims about amounts of credit available to

consumers, accurately and completely repre-

sents the amount of potential, approved, or

usable credit that the consumer will receive.

7. Determine whether the bank clearly informs a

consumer when the account terms approved for

the consumer are less favorable than the terms

advertised or previously disclosed.

8. If the bank reserves the right to change the

terms of an account or product, determine

whether the bank’s customer agreements clearly

disclose that the bank may make future changes

to the rate, terms, and conditions otherwise

specified in any agreement signed by or given to

the consumer. Determine whether the circum-

stances under which such changes may be

made are clearly explained.

Evaluating Servicing and Collections

Servicing and collection activities present a greater

risk of potential violations of section 5 of the FTC

Act when conducted by affiliates or third-party

vendors and servicers. Thus, a bank should ensure

that the disclosures provided for these servicing

and collection activities are accurate and not

misleading. The bank should also ensure that the

activities are conducted fairly and in consonance

with any disclosures or agreements. For example,

statements should clearly indicate when payments

are due if penalties are to be avoided.

Items to Evaluate

1. Determine whether the bank ensures that its

employees and third-party servicers have, and

follow, procedures to credit consumer payments

in a timely manner.

2. Determine whether consumers are clearly told

when and if monthly payments are applied to

fees, penalties, or other charges before being

applied to regular principal and interest.

3. Determine whether account statements clearly

disclose how fees, penalties, other charges, and

interest and principal payments affect the

account balance and whether these charges

and payments have been calculated in accor-

dance with any written agreements with the

borrower.

Monitoring the Conduct of

Employees and Third Parties

A bank should have effective controls in place for

hiring personnel and for contracting and maintain-

ing relationships with third parties. The controls

should, for example, establish responsibilities vis-

a-vis third parties for training and monitoring staff.

The controls should also foster the bank’s ability to

monitor the actual practices of its employees and

third-party contractors and ensure that these

practices are consistent with the bank’s policies

and procedures, applicable laws and regulations,

and third-party agreements. In addition, the bank’s

monitoring should include a review of training and

promotional materials used by its employees and

by third parties, to ensure that any concerns about

Section 5: Examination Objectives and Procedures

Consumer Compliance Handbook FTC Act • 5 (6/08)

unfair or deceptive acts or practices are identified

early.

Items to Evaluate

1. Determine whether, through its third-party agree-

ments and internal policies, the bank has

effective controls for monitoring risks associated

with selecting and managing third-party contrac-

tors. Such agreements and policies should

outline the degree of monitoring, acceptable

error rates, and corrective action provisions in

case of noncompliance. They also should iden-

tify issues that would need to be brought to the

attention of bank management.

2. Determine whether the bank’s compensation

programs for employees and third-party contrac-

tors provide incentives for acts or practices that

could raise potential concerns, such as compen-

sation programs that steer consumers to particu-

lar products to the exclusion of other, potentially

beneficial products.

3. Determine whether the bank monitors the train-

ing of employees and third parties who market or

promote bank products or service loans, to

ensure that they are adequately trained to avoid

making statements or taking actions that might

be unfair or deceptive. Monitoring should in-

clude a review of training and promotional

materials, including telemarketing scripts.

4. Determine whether the bank monitors a third

party’s primary interface with consumers by, for

example, reviewing recorded telephone calls or

transcripts of online communications.

Section 5: Examination Objectives and Procedures

6 (6/08) • FTC Act Consumer Compliance Handbook

Federal 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

Board of Governors of the Federal Reserve System

and the Federal Deposit Insurance Corporation on

March 11, 2004.

Purpose

The Board of Governors of the Federal Reserve

System and the Federal Deposit Insurance Corpo-

ration (the Board and the FDIC, or, collectively, the

agencies) are issuing this statement to outline the

standards that will be considered by the agencies

as they carry out their responsibility to enforce the

prohibitions against unfair or deceptive trade

practices found in section 5 of the Federal Trade

Commission Act (FTC Act)

as they apply to acts

and practices of state-chartered banks. The agen-

cies will apply these standards when weighing the

need to take supervisory and enforcement actions

and when seeking to ensure that unfair or decep-

tive practices do not recur.

This statement also contains a section on

managing risks relating to unfair or deceptive acts

or practices that includes best practices, as well as

general guidance on measures that state-chartered

banks can take to avoid engaging in such acts or

practices.

Although the majority of insured banks adhere to

a high level of professional conduct, banks must

remain vigilant against possible unfair or deceptive

acts or practices both to protect consumers and to

minimize their own risks.

Coordination of Enforcement Efforts

Section 5(a) of the FTC Act prohibits ‘‘unfair or

deceptive acts or practices in or affecting com-

merce’’

and applies to all persons engaged in

commerce, including banks. The agencies each

have affirmed their authority under section 8 of the

Federal Deposit Insurance Act to take appropriate

action when unfair or deceptive acts or practices

are discovered.

A number of regulators have authority to

combat unfair or deceptive acts or practices. For

example, the Federal Trade Commission has

broad authority to enforce the requirements of

section 5 of the FTC Act against many non-bank

entities.

In addition, state authorities have pri-

mary responsibility for enforcing state statutes

against unfair or deceptive acts or practices. The

agencies intend to work with these other regula-

tors as appropriate in investigating and respond-

ing to allegations of unfair or deceptive acts or

practices that involve state banks and other

entities supervised by the agencies.

Standards for Determining What Is

Unfair or Deceptive

The FTC Act prohibits unfair or deceptive acts or

practices. Congress drafted this provision broadly

in order to provide sufficient flexibility in the law

to address changes in the market and unfair or

deceptive practices that may emerge.

An act or practice may be found to be unfair

where it ‘‘causes or is likely to cause substantial

injury to consumers which is not reasonably

avoidable by consumers themselves and not

outweighed by countervailing benefits to consum-

ers or to competition.’’

A representation, omission,

or practice is deceptive if it is likely to mislead

a consumer acting reasonably under the circum-

stances and is likely to affect a consumer’s conduct

or decision regarding a product or service.

The standards for unfairness and deception are

independent of each other. While a specific act or

practice may be both unfair and deceptive, an act

or practice is prohibited by the FTC Act if it is

either unfair or deceptive. Whether an act or

practice is unfair or deceptive will in each

instance depend upon a careful analysis of the

facts and circumstances. In analyzing a particular

act or practice, the agencies will be guided by the

body of law and official interpretations for defining

unfair or deceptive acts or practices developed

by the courts and the FTC. The agencies will also

consider factually similar cases brought by the

3. 15 USC 45.

4. 15 USC 45(a).

5. 12 USC 1818(b)(1), (e)(1), and (i)(2). See letter from

Chairman Alan Greenspan to the Hon. John J. LaFalce (May 30,

2002) and ‘‘Unfair or Deceptive Acts or Practices: Applicability of

the Federal Trade Commission Act,’’ FIL 57-2002 (May 30, 2002).

6. 15 USC 45(a)(2) and Gramm−Leach−Bliley Act, section 133,

published in notes to 15 USC 41.

7. See FTC Policy Statement on Unfairness (December 17,

1980) and FTC Policy Statement on Deception (October 14,

1983).

8. This standard was first issued as a policy by the FTC and

later codified into the FTC Act as 15 USC 45(n).

Consumer Compliance Handbook FTC Act • 7 (6/08)

FTC and other regulators to ensure that these

standards are applied consistently.

Unfair Acts or Practices

Assessing Whether an Act or Practice

Is Unfair

An act or practice is 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 ben-

efits to consumers or to competition. Public policy

may also be considered in the analysis of whether

a particular act or practice is unfair. Each of these

elements is discussed further below.

• The act or practice must cause or be likely to

cause substantial injury to consumers—To be

unfair, an act or practice must cause or be likely

to cause substantial injury to consumers. Sub-

stantial injury usually involves monetary harm.

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

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.

• Consumers must not reasonably be able to avoid

the injury—A practice is not considered unfair if

consumers may reasonably avoid injury. Consum-

ers cannot reasonably avoid injury from an act

or practice if it interferes with their ability to

effectively make decisions. Withholding material

price information until after the consumer has

committed to purchase the product or service

would be an example of preventing a consumer

from making an informed decision. A practice

may also be unfair where consumers are subject

to undue influence or are coerced into purchas-

ing unwanted products or services.

The agencies will not second-guess the wis-

dom of particular consumer decisions. Instead,

the agencies will consider whether a bank’s

behavior unreasonably creates or takes advan-

tage of an obstacle to the free exercise of

consumer decision making.

• The injury must not be outweighed by counter-

vailing 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 com-

petitive benefits that are also produced by the act

or practice. Offsetting benefits may include lower

prices or a wider availability of products and

services.

Costs that would be incurred for remedies or

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

to the bank in taking preventive measures and

the costs to society as a whole of any increased

burden and similar matters.

• Public policy may be considered—Public policy,

as established by statute, regulation, or judicial

decisions, may be considered with all other

evidence in determining whether 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 affirmatively allowed by

statute may be considered as evidence that the

practice is not unfair. Public policy considera-

tions by themselves, however, will not serve as

the primary basis for determining that an act or

practice is unfair.

Deceptive Acts and Practices

Assessing Whether an Act or Practice

Is Deceptive

A three-part test is used to determine whether a

representation, omission, or practice is ‘‘decep-

tive.’’ First, the representation, omission, or practice

must mislead or be likely to mislead the consumer.

Second, the consumer’s interpretation of the repre-

sentation, omission, or practice must be rea-

sonable under the circumstances. Lastly, the

misleading representation, omission, or practice

must be material. Each of these elements is

discussed below in greater detail.

• 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, omis-

sion, or practice that misleads or is likely to

mislead the 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 consum-

ers. 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.

In determining whether an individual state-

ment, representation, or omission is misleading,

the statement, representation, or omission will not

be evaluated in isolation. The agencies will

evaluate it in the context of the entire adver-

Section 5: Appendix

8 (6/08) • FTC Act Consumer Compliance Handbook

tisement, transaction, or course of dealing to

determine whether it constitutes deception. 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.

• 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 circum-

stances. The test is whether the consumer’s

expectations or interpretation are 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.

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 interpre-

tation 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.

In evaluating whether a representation, omis-

sion, or practice is deceptive, the agencies will

look at the entire advertisement, transaction, or

course of dealing to determine how a reason-

able consumer would respond. Written disclo-

sures may be insufficient to correct a mislead-

ing 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 may be

insufficient to cure a misleading headline or

prominent written representation.

• The representation, omission, or practice must

be material—A representation, omission, or prac-

tice is material if it is likely to affect a consumer’s

decision regarding 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. Similarly, the materiality of an implied

claim will be presumed when it is demonstrated

that the institution intended that the consumer

draw certain conclusions based upon the claim.

Claims made with the 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 evaluate the product or

service.

Relationship to Other Laws

Acts or practices that are unfair or deceptive within

the meaning of section 5 of the FTC Act may also

violate other federal or state statutes. On the other

hand, there may be circumstances in which an act

or practice violates section 5 of the FTC Act even

though the institution is in technical compliance

with other applicable laws, such as consumer

protection and fair lending laws. Banks should be

mindful of both possibilities. The following laws

warrant particular attention in this regard.

Truth in Lending

and Truth in Savings Acts

Pursuant to the Truth in Lending Act (TILA),

creditors must ‘‘clearly and conspicuously’’ dis-

close the costs and terms of credit.

The Truth in

Savings Act (TISA) requires depository institutions

to provide interest and fee disclosures for deposit

accounts so that consumers can compare deposit

products.

TISA also provides that advertisements

must not be misleading or inaccurate and must not

misrepresent an institution’s deposit contract. An

act or practice that does not comply with these

provisions of TILA or TISA may also violate the FTC

Act. On the other hand, a transaction that is in

technical compliance with TILA or TISA may

nevertheless violate the FTC Act. 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, whether or not the disclosures satisfy the

technical requirements of TILA or TISA.

Equal Credit Opportunity

and Fair Housing Acts

The Equal Credit Opportunity Act (ECOA) prohibits

discrimination against persons in any aspect of a

credit transaction on the basis of race, color,

religion, national origin, sex, marital status, age

(provided the applicant has the capacity to con-

tract), the fact that an applicant’s income derives

from any public assistance program, and the fact

9. 15 USC 1632(a).

10. 12 USC 4301 et seq.

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Consumer Compliance Handbook FTC Act • 9 (6/08)

that the applicant has in good faith exercised any

right under the Consumer Credit Protection Act.

Similarly, the Fair Housing Act (FHA) prohibits

creditors involved in residential real estate transac-

tions from discriminating against any person on the

basis of race, color, religion, sex, handicap, familial

status, or national origin. Unfair or deceptive

practices that target or have a disparate impact on

consumers who are members of these protected

classes may violate the ECOA or the FHA, as well

as the FTC Act.

Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act prohibits

unfair, deceptive, and abusive practices related to

the collection of consumer debts. Although this

statute does not by its terms apply to banks that

collect their own debts, failure to adhere to the

standards set by this act may support a claim of

unfair or deceptive practices in violation of the FTC

Act. Moreover, banks 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

approving or assisting in an unfair or deceptive act

or practice.

Managing Risks Related to Unfair or

Deceptive Acts or Practices

Since the release of the FDIC’s statement and the

Board’s letter on unfair and deceptive practices in

May 2002, bankers have asked for guidance on

strategies for managing risk in this area. This

section outlines guidance on best practices to

address some areas with the greatest potential for

unfair or deceptive acts and practices, including

advertising and solicitation, servicing and collec-

tions, and the management and monitoring of

employees and third-party service providers. Banks

should also monitor compliance with their own

policies in these areas and should have proce-

dures for receiving and addressing consumer

complaints and monitoring activities performed by

third parties on behalf of the bank.

To avoid engaging in unfair or deceptive activity,

the agencies encourage use of the following

practices, which have already been adopted by

many institutions:

• Review all promotional materials, marketing

scripts, and customer agreements and disclo-

sures to ensure that they fairly and adequately

describe the terms, benefits, and material

limitations of the product or service being

offered, including any related or optional prod-

ucts or services, and that they do not misrepre-

sent such terms either affirmatively or by

omission. Ensure that these materials do not use

fine print, separate statements, or inconspicu-

ous disclosures to correct potentially misleading

headlines, and ensure that there is a reasonable

factual basis for all representations made.

• Draw the attention of customers to key terms,

including limitations and conditions, that are

important in enabling the customer to make an

informed decision regarding whether the product

or service meets the customer’s needs.

• Clearly disclose all material limitations or condi-

tions on the terms or availability of products or

services, such as a limitation that applies a

special interest rate only to balance transfers; the

expiration date for terms that apply only during

an introductory period; material prerequisites for

obtaining particular products, services, or terms

(for example, minimum transaction amounts,

introductory or other fees, or other qualifications);

or conditions for canceling a service without

charge when the service is offered on a free trial

basis.

• Inform consumers in a clear and timely manner

about any fees, penalties, or other charges

(including charges for any force-placed prod-

ucts) that have been imposed, and the reasons

for their imposition.

• Clearly inform customers of contract provisions

that permit a change in the terms and conditions

of an agreement.

• When using terms such as ‘‘preapproved’’ or

‘‘guaranteed,’’ clearly disclose any limitations,

conditions, or restrictions on the offer.

• Clearly inform consumers when the account

terms approved by the bank for the consumer are

less favorable than the advertised terms or terms

previously disclosed.

• Tailor advertisements, promotional materials, dis-

closures, and scripts to take account of the

sophistication and experience of the target

audience. Do not make claims, representations,

or statements that mislead members of the target

audience about the cost, value, availability, cost

savings, benefits, or terms of the product or

service.

• Avoid advertising that a particular service will be

provided in connection with an account if the

bank does not intend, or is not able, to provide

the service to account holders.

• Clearly disclose when optional products and

services—such as insurance, travel services,

credit protection, and consumer report update

services that are offered simultaneously with

credit—are not required to obtain credit or

considered in decisions to grant credit.

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• Ensure that the costs and benefits of optional or

related products and services are not misrepre-

sented or presented in an incomplete manner.

• When making claims about amounts of credit

available to consumers, accurately and com-

pletely represent the amount of potential,

approved, or usable credit that the consumer will

receive.

• Avoid advertising terms that are not available to

most customers and using unrepresentative

examples in advertising, marketing, and promo-

tional materials.

• Avoid making representations to consumers that

they may pay less than the minimum amount

required by the account terms without ade-

quately disclosing any late fees, over-limit fees,

or other account fees that will result from the

consumer’s paying such a reduced amount.

• Clearly disclose a telephone number or mailing

address (and, as an addition, an e-mail or web

site address if available) that consumers may use

to contact the bank or its third-party servicers

regarding any complaints they may have, and

maintain appropriate procedures for resolving

complaints. Consumer complaints should also be

reviewed by banks to identify practices that have

the potential to be misleading to customers.

• Implement and maintain effective risk and super-

visory controls to select and manage third-party

servicers.

• Ensure that employees and third parties who

market or promote bank products, or service

loans, are adequately trained to avoid making

statements or taking actions that might be unfair

or deceptive.

• Review compensation arrangements for bank

employees as well as third-party vendors and

servicers to ensure that they do not create

unintended incentives to engage in unfair or

deceptive practices.

• Ensure that the institution and its third-party

servicers have and follow procedures to credit

consumer payments in a timely manner. Consum-

ers should be clearly told when and if monthly

payments are applied to fees, penalties, or other

charges before being applied to regular principal

and interest.

The need for clear and accurate disclosures that

are sensitive to the sophistication of the target

audience is heightened for products and services

that have been associated with abusive practices.

Accordingly, banks should take particular care in

marketing credit and other products and services

to the elderly, the financially vulnerable, and

customers who are not financially sophisticated. In

addition, creditors should pay particular attention

to ensure that disclosures are clear and accurate

with respect to the points and other charges that

will be financed as part of home-secured loans; the

terms and conditions related to insurance offered

in connection with loans; loans covered by the

Home Ownership and Equity Protection Act; reverse

mortgages; credit cards designed to rehabilitate

the credit position of the cardholder; and loans with

prepayment penalties, temporary introductory

terms, or terms that are not available as advertised

to all consumers.

Conclusion

The development and implementation of policies

and procedures in these areas and the other steps

outlined above will help banks ensure that products

and services are provided in a manner that is fair,

allows informed customer choice, and is consistent

with the FTC Act.

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