Unfair or Deceptive: Avoid Like the Plague

At Compliance Action, we've been warning for some time about unfair or deceptive trade practices. We have even gone so far as to say that prohibiting and preventing such practices is what compliance is all about. Now we have been joined by some big guns, most recently the OCC.

In the past year, there have been three significant enforcement cases based on unfair or deceptive trade practices: Providian, the Associates, and now Alliance Mortgage. In the wake of this trend, the OCC has issued an Advisory Letter, AL 2002-3, outlining what constitutes unfair or deceptive trade practices and providing guidance on what banks should do to avoid such practices.

This is a major development. The bank regulatory agencies have long had authority to prevent unfair or deceptive trade practices but have not taken independent action on such practices until the Providian case. Now there have been two enforcement actions by the OCC and one by the Federal Trade Commission. What this means is that an important bank regulatory agency has stepped up to the plate, announced that it is in fact possible for banks to treat customers in ways that are deceptive or unfair, and further demonstrated that it will take enforcement action when it finds violations.

Unfair or Deceptive Trade Practices ("UDTP") has been a relative sleeper in the world of banking. Financial institutions have been sufficiently preoccupied with specific compliance issues such as Truth in Lending, Equal Credit Opportunity, Expedited Funds Availability and more. These consumer protection laws effectively defined the world of compliance for financial institutions. In fact, they functioned to ensure fair trade practices for the products most commonly provided by financial institutions.

The opposite of compliance is not merely non-compliance and violations; it is also unfair or deceptive trade practices. Consider what compliance laws require: advising borrowers of the terms and costs of credit before they become obligated, giving fair and consistent treatment to all loan customers, giving fair and consistent treatment to check deposits, and giving customers information about the terms and rates paid on deposits. The opposite of these would be - well, unfair or deceptive.

The OCC has opened a new way of looking at the compliance responsibilities of financial institutions. It amounts to a business ethic. All financial institutions would be wise to study OCC AL 2002-3 and measure their policies and business practices against it.

Part of the concerns that are behind this Advisory Letter are situations that OCC examiners have encountered that don't quite violate Truth in Lending or another lending statute, but that come so close to violating it (lawyers call this bending the law) that the situation concerns examiners. This is particularly a concern with the introduction of new forms of fee income.

Current marketing practices, driven by intense competition, are a force pushing institutions closer and closer to UDTPs. OCC raised its concerns in the context of lending and the aggressive marketing practices used by creditors. However, it is only a short hop to seeing the same concerns in the area of deposits, and non-deposit investment or insurance products.

What is a Deceptive Practice?
The FTC measures deceptive trade practices in a three-step process. First, the practice involves a representation, omission, act, or practice that is likely to mislead. The test is based on the likelihood that a typical customer (not a financial institution employee this time) will be misled by the representation.

Deceptive sales materials or presentations generally occur when the goal of selling the product outweighs honesty and the loan officer or other individual is focused on selling rather than on letting the customer make a balanced decision. In the UDTP cases, telemarketers were trained to use scripts that were designed to either provide misinformation to the consumer and/or to avoid giving clear, accurate answers to their questions about the product.

The >
In the world if financial products, bait and switch can occur. Advertising a car loan at a very low or 0% APR but limiting that rate to prime customers buying the most expensive model would constitute a bait and switch for less qualified customers wishing to purchase an economy model. Attracted by the 2.9% APR, they may find themselves paying 12% or more.

Second, the act or practice would be deceptive from the perspective of a reasonable consumer. This may be evaluated in context. For example, when telemarketers are directed to provide unclear and slightly misleading sales presentations to sophisticated customers, the practice may not be deceptive while it would be if directed to less sophisticated consumers.

Both affirmative representations and withholding information may meet this test. In the Providian case, telemarketers were scripted to tout the values of unemployment insurance with the card without telling the customer that it wouldn't be available to customers working part-time. A second script problem involved telling the consumer that the card had no membership fee while withholding information about the cost of required insurance in order to get the no-member-fee card.

Third, a practice is unfair if the representation, omission, act, or practice is material. If it will influence the consumers choice or decision, it is material. If it is important to know in order to make a reasonable decision, it is material. Any information about costs, terms and conditions, and benefits is likely to be considered material.

Identifying Unfair Practices
Unfairness is also measured by a three-pronged test. First, if the practice causes substantial injury it may be unfair. This would include requiring purchase or payment of fees before learning the full terms or conditions of the product. Accepting a deposit for a new account without telling the customer about the hold that will be placed on the check could cause customer injury. The second component of the unfairness test looks at whether the harm or injury is not outweighed by benefits to the consumer or to competition. This measurement balances consumer protection with regulatory burden.

The final component of the unfairness test considers whether the customer could have reasonably avoided the harm, but for the practice. This again looks to informed choice and free choice. The law encourages giving consumers full and fair information and the opportunity to make choices. This is potentially lost if a product is offered only through the telemarketer and the consumer is required to choose the product during the call or lose the wonderful opportunity forever.

Examples
The Advisory Letter provides several examples of UDTPs that are taken from the OCC's two enforcement cases. The examples include failure to provide enough information to enable the consumers to make an informed and reasonable decision, failure to disclose significant fees or material terms, and failure to disclose product limitations.

Essentially, these examples can be managed or avoided by clear adherence to compliance disclosure requirements. The elements in both Providian and The Associates cases involved less-than-complete disclosures and withholding information about the terms or consequences of the transaction that are detrimental to the consumer.

Sources for identifying UDTPs
Problem practices come to the attention of the financial regulatory agencies and the FTC in a variety of ways. Perhaps the most prolific source is consumer complaints. All three of the recent UDTP cases were identified by consumer complaints. The real enforcement activity began when the consumers complained to their states' Attorneys General. Complaints and questions provided the Attorneys General with a rich resource for enforcement actions.

Other sources include routine examinations - both compliance and safety and soundness, and referrals from state agencies.

Enforcement actions
Problems identified under laws prohibiting unfair or deceptive trade practices can be enforced in a variety of ways. First, there can be litigation brought as a private action or by a state or federal agency. The regulatory agencies, both state and federal, can take enforcement actions. Consequences include monetary judgments and reputation damage.

The enforcement agencies do not need to prove that consumers were in fact misled or deceived. They merely have to establish that a reasonable consumer is likely to be deceived by the presentation. Then the damages begin.

ACTION STEPS

Review your institution's goals and sales processes for vulnerability to UDTPs. Look at what drives and motivates product managers and sales reps.
Review your institution's strategic plan and code of ethics. Both should support doing business in a fair and non-deceptive manner.
Advise anyone with marketing responsibility about UDTP concerns and discuss methods for fair marketing practices.
Train! And use the UDTP cases to explain why compliance exists.