The following article is reprinted from Basis Points® , Vol. 3, Issue 4, Copyright © 2004, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

Some of you may have that unenviable task of reviewing marketing scripts and related advertising materials. If you do, you know how difficult it is to convince the marketing folks that some of their brilliant copy may need to be reworked. The following detail from the Federal Reserve Board and the FDIC may come in handy. It sets out some basic standards that can be applied by anyone charged with rooting out unfair, deceptive and misleading communications.

In March 2004, the Board and the FDIC issued much-anticipated guidance outlining standards they will apply to determine when acts or practices by state-chartered banks are unfair or deceptive.

The Board and the FDIC first asserted their authority to prohibit state-chartered banks from engaging in unfair or deceptive acts and practices in May 2002. In the regulators' recent joint announcement, they made clear not only what standards they would apply to judge particular acts as unfair or deceptive, but also what steps state-chartered banks can take to avoid engaging in unfair or deceptive acts or practices.

The guidance is timely, given the announcement by the OCC in January 2004 that it would target national banks that engage in unfair or deceptive practices within the meaning of section 5 of the Federal Trade Commission Act (FTC Act) in connection with lending activities. The OCC made its announcement in connection with its regulations to preempt state laws that purport to regulate national banks' lending functions, including consumer protection laws, and to eliminate the ability of states to exercise visitorial powers over national banks.

Under the FTC Act, the Board must define what acts or practices by banks are unfair or deceptive. The guidance from the Board and the FDIC affirms federal law that an act or practice is "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 consumers or to competition." 15 U.S.C. § 45(n). An act or practice is "deceptive" if it is likely to mislead a consumer acting reasonably under the circumstances or affect the consumer's conduct or decision regarding a product or service.

The regulators noted that the FTC Act prohibits an act or practice if it is either unfair or deceptive, and that while an act or practice is often both unfair and deceptive, the test for each determination is different.

The regulators warned banks that certain acts or practices may not only violate section 5 of the FTC Act, but may also run afoul of other federal statutes, including the Truth in Lending Act (TILA), the Truth in Savings Act (TISA), the Equal Credit Opportunity Act, the Fair Housing Act and the Fair Debt Collection Practices Act. At the same time, however, the regulators remind us that technical compliance with TILA, RESPA, etc. does not shield a bank from a determination that an act or practice is deceptive or unfair.

As an example, the regulators noted that banks could advertise "guaranteed" or "lifetime" interest rates even though it intends to change the rates. While the disclosures accompanying such advertisements may comply with TILA or TISA, the ad could certainly mislead a customer, thus making the ad deceptive.

The regulators identified some best practices in the areas most likely to see unfair or deceptive acts, including advertising and solicitation, servicing and collections, and management and monitoring of employee and third-party service providers.

The regulators recommend that banks undertake the following:

• Review all promotional materials, marketing scripts, and customer agreements and disclosures to ensure that they fairly and adequately describe the terms, benefits, and material limitations of the product or service offered, including any related or optional products or services, and that they do not misrepresent such terms either affirmatively or by omission.
• Ensure that promotional materials, marketing scripts, and customer agreements and disclosures do not use fine print, separate statements or inconspicuous disclosures to correct potentially misleading headlines.
• Ensure that there is a reasonable factual basis for all representations made in all promotional materials, marketing scripts, and customer agreements and disclosures.
• Draw the attention of customers to key terms, including limitations and conditions, important to enable the customer to make an informed decision regarding whether the product or service meets the customer's needs.
• Clearly disclose all material limitations or conditions 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 (e.g., minimum transaction amounts, introductory or other fees, or other qualifications); or conditions for canceling a service without charge when the bank offers the service 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 products) that have been imposed and the reasons they are charged.
• Clearly inform customers of contract provisions that permit a change in the terms and conditions of an agreement.
• Clearly disclose any limitations, conditions, or restrictions on the offer when using terms such as "pre-approved" or "guaranteed."
• 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, disclosures and scripts to take account of the sophistication and experience of the target audience.
• Avoid 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 the bank will provide a particular service in connection with an account if the bank does not intend or is not able to provide the service to accountholders.
• 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.
• Ensure that costs and benefits of optional or related products and services are not misrepresented or presented in an incomplete manner.
• Accurately and completely represent the amount of potential, approved, or useable credit that the consumer will receive when making claims about amounts of credit available to consumers.
• Avoid advertising terms that are not available to most customers and using unrepresentative examples in advertising, marketing, and promotional materials.
• Avoid making representations to consumers that they may pay less than the minimum amount due required by the account terms without adequately disclosing any late fees, overlimit fees, or other account fees that will result from the consumer paying such reduced amount.
• Clearly disclose a telephone number or mailing address (and, as an addition, an email or website 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.
• Review consumer complaints to identify practices that have the potential to mislead customers.
• Implement and maintain effective risk and supervisory 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. Consumers 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.
• Consider the sophistication of the target audience for products and services that have been associated with abusive practices.
• Take particular care in marketing credit and other products and services to the elderly, the financially vulnerable, and customers who are not financially sophisticated.
• 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 pre-payment penalties, temporary introductory terms, or terms that are not available as advertised to all consumers.

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