VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act

FDIC Consumer Compliance Examination Manual — June 2022 VII–1.1

Federal Trade Commission Act, Section 5

and

Dodd-Frank W all Street Reform and Consumer

Protection Act, Sections 1031 and 1036

Introduction

These examination procedures inform examiners about

activities that may constitute unfair, deceptive, or abusive acts

or p ractices and how to evaluate the effectiveness of FDIC-

supervised institutions’ processes for identifying, measuring,

monitoring, and otherwise mitigating the risks associated with

them. In this context, unfair, decep tive, or abusive acts or

practices are legal standards established pursuant to Section 5

of the Federal Trade Commission Act (FTC Act) and the

Dodd-Frank Wall Street Reform and Consumer Protection Act

(the Dodd-Frank Act). Throughout these procedures these

standards will be referred to, resp ectively, as “FTC UDAPs”

and “Dodd-Frank UDAAPs.”

The FDIC utilizes a risk-focused examination approach to

promote, assess, and confirm institutions’ compliance with

FTC UDAPs and/or Dodd-Frank UDAAPs. While FTC

UDAPs and/or Dodd-Frank UDAAPs occur infrequently, they

may result in significant consumer harm and erode consumer

confidence in the financial institution. Heightened risk may be

present in situations involving: changes to a bank’s products or

services; the offering of a complex or atyp ical product; and

marketing and delivery strategies using one or more third party

providers.

A FTC UDAP and/or Dodd-Frank UDAAP finding is

dependent on the relevant sp ecific facts and circumstances;

each institution is different and presents distinct p otential

risks. Accordingly, examination staff should apply the

instructions in these procedures consistently as part of their

assessment of institutions. In addition, the FDIC will conduct

app ropriate legal analy sis based on the FTC UDAP and/or

Dodd-Frank UDAAP standards, and consider the p articular

facts and circumstances at each institution to determine

whether a violation has occurred.

Back ground

In 1938, Congress expanded the FTC Act to not only prohibit

unfair methods of competition but to also prohibit “unfair or

deceptive acts or practices” in or affecting commerce to allow

____________________

The term “ covered person” means (1) any person who engages in offering or

providing a consumer financial product or service; and (2) any affiliate of a

person described in (1) if such affiliate acts as a service provider to such

person. See 12 U.S.C. § 5481(6).

Information on Dodd-Frank and its standards of unfair, deceptive and

abusive begin on page VII-1.4.

the FTC to directly p rotect consumers. See 15 U.S.C. § 45(a)

(Section 5 of the FTC Act). These procedures provide

information regarding the applicability of Section 5 of the FTC

Act.

In 2010, Congress passed t

he Dodd-Frank Act. Section 1036

of the Dodd-Frank Act prohibits a “covered person”

from

engaging in unfair, deceptive, or abusive acts or practices

(Dodd-Frank UDAAP). See 12 U.S.C. § 5536. Section 1031 of

the Dodd-Frank Act provides authority to the Consumer

Financial Protection Bureau (CFPB) to promulgate rules

identifying such acts or practices as unfair, deceptive, or

abusive in connection with consumer financial products and

services generally. See 12 U.S.C. § 5531. These procedures

also provide information regarding Sections 1031 and 1036 of

the Dodd-Frank Act.

The legal standards for “unfair” and “deceptive” under Section

5 of the FTC Act and the Dodd-Frank Act are substantially

similar. Further, the legal standards for unfair, deceptive, or

abusive are independent of each other. Depending on the facts,

an act or p ractice may be unfair or deceptive or abusive or any

combination of the three, or not constitute a violation.

Section 5 of the FTC Act

The banking agencies

have authority to enforce Section 5 of

the FTC Act for the institutions they supervise and their

institution affiliated parties (IAPs). The FDIC has provided

notice to state nonmember institutions of its intent to cite them

and their IAPs for violations of Section 5 of the FTC Act, and

of its intent to take appropriate action pursuant to its authority

under Section 8 of the Federal Deposit Insurance Act (FDI

Act) when a FTC UDAP violation is cited. The FTC has

authority to take action against nonbanks that engage in a FTC

UDAP. If a FTC UDAP involves an entity or entities over

which more than one agency has enforcement authority such

as, for example, the FDIC and the FTC, the agencies may

coordinate their enforcement actions. Unlike many consumer

protection laws, Section 5 of the FTC Act also applies to

transactions that may imp act business customers as well as

individual consumers.

On March 11, 2004, the FDIC and the Board of Governors of

the Federal Reserve System (FRB) issued additional guidance

regarding FTC UDAPs prohibited by Section 5 of the FTC

3 Federal Deposit Insurance Corporation, Federal Reserve Board, and O ffi c e

of the Comptroller of the Currency.

FTC v. IFC Credit Corp., 543 F. Supp. 2d 925, 943 (2008): “The FTC has

construed the term ‘consumer’ to include businesses as well as individuals.

Deference must be given to the interpretation of the agency charged by

Congress with the statute’s implementation.”

VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act

VII–1.2 FDIC Consumer Compliance Examination Manual — June 2022

Act.

Following the release of the guidance, the FDIC issued

examination procedures, which include:

• Standards used to assess whether an act or practice is

unfa

ir or deceptive

• Interplay between the FTC Act and other consumer

protection statutes

• Examination procedures for determining compliance with

the FTC Act standards, including risk assessment

procedures that should be followed to determine if

transaction testing is warranted

• Best p ractices for documenting a case

• Corrective actions that should be considered for violations

of Section 5 of the FTC Act

• List of resources

NOTE: In August 2014, the FDIC, FRB, CFPB, the National

Credit Union Administration (NCUA), and the Office of the

Comptroller of the Currency (OCC) (collectively, the

Agencies) issued guidance regarding certain consumer credit

practices as they relate to Section 5 of the FTC Act. The

authority to issue credit practices rules under Section 5 of the

FTC Act (e.g., Regulation AA, Credit Practices Rule) for

banks, savings associations, and federal credit unions was

repealed as a consequence of the Dodd-Frank Act.

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.

The guidance clarifies that institutions should not construe the

repeal of these rules to indicate that the unfair or deceptive

practices described in these former regulations are

permissible. The guidance makes clear that these practices

remain subject to Section 5 of the FTC Act and Sections 1031

and 1036 of the Dodd-Frank Act.

Standards for Determining What is Unfair or Deceptive

The legal standard for unfairness is independent of the legal

standard for deception. Depending on the facts, an act or

practice may be unfair, decep tive, both, or neither.

Section 5 of the FTC Act also ap plies to commercial

transactions and businesses. In applying these statutory

factors, the FDIC will identify and take action whenever it

____________________

5 See FIL-26-2004, Unfair or Deceptive Acts or Practices Under Section 5 of

the Federal Trade Commission Act (March 11, 2004).

finds conduct that is unfair or deceptive, as such conduct that

falls well below the high standards of business practice

expected of banks and the parties affiliated with them.

FTC UDAPs may also violate other federal or state laws.

However, practices that fully comply with consumer

protection or other laws may still violate Section 5 of the FTC

Act. For additional information, please refer to the

“Relationship to Other Laws” section further in this document.

Unfair Acts or Practices

The FDIC applies the same standards as the FTC in

determining whether an act or p ractice is unfair. These

standards were first stated in the FTC Policy Statement on

Unfairness. 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.

Congress codified the three-part unfairness test in 1994.

Public policy may also be considered in the analysis of

whether a p articular act or p ractice is unfair. All three of the

elements necessary to establish unfairness are discussed

further below.

• The act or practice must cause or be likely to cause

substanti al i njury to consumers.

Substantial injury usually involves monetary harm, but

can also include, in certain circumstances, unquantifiable

or 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.

• 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

15 U.S.C. § 45(n).

VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act

FDIC Consumer Compliance Examination Manual — June 2022 VII–1.3

exp lain an act or p ractice to consumers.

A practice may

also be unfair where consumers are subject to undue

influence or are coerced into purchasing unwanted

products or services.

Because consumers should be able to survey the available

alternatives, choose those that are most desirable, and

avoid those that are inadequate or unsatisfactory, the

question is whether an act or practice unreasonably

impairs the consumer’s ability to make an informed

decision, not whether the consumer could have made a

wiser decision. 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 imp airs 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.

• The 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 p ractices because p rices 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 comp etitor’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

____________________

7 The FRB’s testing of certain disclosures concluded that consumers cannot

reasonably avoid certain payment allocation and billing practices because

disclosures fail to adequately explain these practices. See Jeanne M.

Hogarth & Ellen A. Merry, Designing Disclosures to Inform Consumer

Financial Decisionmaking: Lessons Learned from Consumer Testing,

Federal Reserve Bulletin (August 2011),

https://www.federalreserve.gov/pubs/bulletin/2011/pdf/designingdisclosure

s2011.pdf (summarizing the outcomes of consumer tests on various

financial product disclosures). The FTC discusses potential ways to make

electronic disclosures clear and understandable in its “Dot Com

Disclosures: How to Make Effective Disclosures in Digital Advertising”

(March 2013), available at

https://www.ftc.gov/sites/default/files/attachments/press-r

eleases/ftc-s t aff-

revises-online-advertising-disclosure-

guidelines/130312dotcomdisclosures.pdf.

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.

Public Policy May be Considered

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 p ractice 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.

Deceptive Acts or Practices

A three-part test is used to determine whether a representation,

omission, or practice is decep tive. This test was first laid out in

the FTC Policy Statement on Deceptive Acts and Practices.

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.

As a

general matter, the standards for establishing deception are

See FTC Policy Statement on Deceptive Acts and Practices.

9 See FTC Act Policy Statement on Deceptive Acts and Practices.

VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act

VII–1.4 FDIC Consumer Compliance Examination Manual — June 2022

less burdensome than the standards for establishing unfairness

because, under deception, there is no requirement of

substantial injury or the likelihood of substantial injury, or the

other elements of unfairness related to consumer injury. The

following discusses all three of the elements necessary to

establish deception.

• 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. Decep tion 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.

• 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 sp ecific 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.

____________________

10 Clear and Conspicuous Disclosures

When evaluating the three-part test for deception, the four “Ps” should be

considered: prominence, presentation, placement, and proximity. First, is

the statement prominent enough for the consumer to notice? Second, is the

information presented in an easy to understand format that does not

contradict other information in the package and at a time when the

consumer’s attention is not distracted elsewhere? Third, is the placement of

the information in a location where consumers can be expected to look or

hear? Finally, is the information in close proximity to the claim it qualifies?

More information is available at:

https://www.ftc.gov/sites/default/files/attachments/press-releases/ftc-s t a ff-

revises-online-advertising-disclosure-

guidelines/130312dotcomdisclosures.pdf

If a representation conveys two or more meanings to

reasonable consumers and one meaning is misleading, the

representation may be decep tive. 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 decep tive act

or practice cannot be cured by subsequent truthful

disclosures.

• 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 exp ress claims are

made with respect to a financial product or service, the

claims will be p resumed 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 imp lied 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 product

or service.

Sections 1031 and 1036 of the Dodd-Frank Act (Dodd-

Frank UDAAP)

Title X of the Dodd-Frank Act provides exclusive supervisory

VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act

FDIC Consumer Compliance Examination Manual — June 2022 VII–1.5

authority and primary enforcement authority to the CFPB for

insured depository institutions with total assets over $10

billion for the Dodd-Frank UDAAP provisions of Sections

1031 and 1036 of the Dodd-Frank Act.

The Dodd-Frank Act

provides the FDIC with supervisory and enforcement

authority for Dodd-Frank UDAAP, as well as other Federal

consumer financial laws, for state, nonmember banks with

total assets of $10 billion or less.

As a result of the

provisions contained in the Dodd-Frank Act and Section 5 of

the FTC Act, the FDIC has supervisory or enforcement

authority that includes both FTC UDAP and Dodd-Frank

UDAAP in certain situations.

The standards for determining whether an act or practice is

unfair or deceptive under the Dodd-Frank Act are

substantially similar to the FTC Act standards.

Section 1036

of the Dodd-Frank Act prohibits unfair, deceptive, or abusive

acts and practices with respect to consumer financial products

and services generally.

An abusive act or p ractice is one

that:

•

M aterially 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:

o A lack of understanding on the part of the

consumer of the material risks, costs, or conditions

of the product or service; or

o The inability of the consumer to protect its interests

in selecting or using a consumer financial product

or service; or

o The reasonable reliance by the consumer on a

covered person

to act in the interests of the

consumer.

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.

The Role of Consumer Complaints in Identifying

Unfai r , Deceptive, or Abus i ve Acts or Practices

Consumer complaints play a key role in the detection of a FTC

UDAPs and Dodd-Frank UDAAPs. Consumer complaints

____________________

12 U.S.C. § 5531; 12 U.S.C. § 5536.

The Dodd-Frank Act provided the FDIC backup enforcement authority with

respect to Dodd-Frank UDAAP over FDIC-supervised institutions with

total assets over $10 billion

The FDIC also has the authority to enforcement any federal law or regulation

under the general grant of authority provided by Section 8 of the Federal

Deposit Insurance Corporation Act, 12 U.S.C. § 1818.

have often been an essential source of information for possible

FTC UDAPs and Dodd-Frank UDAAPs and can also be an

indicator of weaknesses in elements of the institution’s

compliance management system, such as training, internal

controls, or monitoring.

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 app arent decep tive p ractice 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.

Complaint Resolution Procedure s

Examiners should interview institution staff about consumer

complaints and the institution’s procedures for resolving and

monitoring consumer complaints. Examiners should determine

whether management has responded promptly and

appropriately to consumer comp laints. The FDIC expects

institutions to be proactive in resolving consumer complaints,

as well as monitoring complaints for trends that indicate

potential FTC UDAP or Dodd-Frank UDAAP concerns.

Institutions should centralize consumer complaint handling

and ensure that all complaints are captured, whether they are

made via telephone, mail, email, in person, the institution’s

regulator, text message, live chat, or other methods. In

addition to resolving individual complaints, an institution

should take action to improve its business practices and

compliance management sy stem, when appropriate. The

institution’s audit and/or monitoring function should also

include a review of consumer complaints.

Sources for Identifying Complaints

Consumer complaints can originate from many different

sources. 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

Comp laint Database, consumer complaint boards, and web

blogs. In many cases, complaints have been identified through

See 12 U.S.C. § 5531.

See 12 U.S.C. § 5536.

The term “ covered person” means (1) any person who engages in offering

or providing a consumer financial product or service; and (2) any affiliate

o f a person described in (1) if such affiliate acts as a service provider to

such person. See 12 U.S.C. § 5481(6).

See 12 U.S.C. § 5531(d)(1)-(2).

VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act

VII–1.6 FDIC Consumer Compliance Examination Manual — June 2022

simple Internet searches with the institution’s name or

particular product or service that it offers. At times, former

employees may p ost complaints. These can be an important

information source. For institutions that have significant third-

party relationships, complaints may have been directed to the

third party, rather than to the institution. Examiners should

determine if the institution is provided with copies of

complaints received by third parties. If they are not, this would

be a red flag and should be examined further.

Analyzing Complaints

Examiners should consider conducting transaction testing

when consumers repeatedly complain about an institution’s

product or service. However, even a single comp laint may

raise valid concerns that would warrant transaction testing.

Comp laints that allege misleading or false statements, missing

disclosure information, excessive fees, inability to reach

customer service, or previously undisclosed charges may

indicate a p ossible FTC UDAP or Dodd-Frank UDAAP.

If a large volume of complaints exists, examiners should

create a spreadsheet that details the complainant, date, source

(i.e., institution, website, etc.), product or service involved,

summary of the issue, and action taken by the institution. The

spreadsheets can then be used to identify trends by type of

product or issue. The Consumer Response Unit can be of

assistance during this process by creating spreadsheets for

complaints that were received by the FDIC.

When reviewing complaints, examiners should look for trends.

While a large volume of comp laints may indicate an area of

concern, the number of complaints alone is not dispositive of

whether a p otential FTC UDAP or Dodd-Frank UDAAP

exists. Conversely, a small number of complaints does not

undermine the seriousness of the allegations that are raised. If

even a single complaint raises valid concerns relative to a FTC

UDAP or Dodd-Frank UDAAP, a more thorough review may

be warranted. It is important to focus on the issues raised in

the complaints and the institution’s responses, and not just on

the number of complaints.

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.

When reviewing complaints, also look for any complaints

lodged against subsidiaries, affiliates, third-parties, and

affinity groups regarding activities that involve the institution,

a product offered through the institution, or a product offered

____________________

18 See Supervisory Insights FDIC, Supervisory Insights, Winter 2006, Vol. 3,

Issue 2, Chasing the Asterisk: A Field Guide to Caveats, Exceptions,

Material Misrepresentations, and Other Unfair or Deceptive Acts or

Practices.

using the institution’s name. While the institution may not be

actively involved in the activity, if it is a branded product or

product offered through a third-party relationship, the

institution can be held responsible and face the same risks as if

the activity was housed within the institution. In re Columbus

Bank and Trust Company, First Bank of Delaware, First Bank

and Trust (Brookings, South Dakota), and CompuCredit

Corporation

is an examp le of where comp laints against a

third-party directly related to the institutions and the

institutions were held accountable for the activities of the

third-party.

Relationship to Other Laws

Unfair, deceptive, or abusive acts or p ractices that violate the

FTC Act or the Dodd-Frank Act may also violate other federal

or state laws. These include, but are not limited to, TILA,

TISA, the Equal Credit Opportunity Act (ECOA), the Fair

Housing Act (FHA), the FDCPA, the FCRA, and laws related

to the privacy of consumer financial information. On the other

hand, certain practices may violate the FTC Act or the Dodd-

Frank Act while complying with the technical requirements of

other consumer protection laws. Examiners should consider

both possibilities. The following laws may warrant p articular

attention in this regard:

Truth in Lending Act (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.

Truth in Savings Act (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 p ractice that does not comp ly 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

19 Available at http://www.fdic.gov.

VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act

FDIC Consumer Compliance Examination Manual — June 2022 VII–1.7

depository institution intends to change the rates, even if the

disclosures satisfy the technical requirements of TISA.

Equal Credit Opportunity (ECOA) and Fair Housing (FHA)

Acts

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 app licant’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. M oreover, 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.

Fair Debt Collection Practices Act (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.

M oreover,

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

particip ating in or p ermitting a FTC UDAP.

Fair Credit Reporting Act (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.

____________________

The same conduct could also violate Dodd-Frank UDAAP; however,

interpretive authority for the Dodd-Frank Act rests with the CFPB.

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.

Examination Procedures

Examination Objectives

1. To assess the quality of the financial institution’s

compliance management systems, internal controls, and

policies and procedures for avoiding unfair, deceptive, or

abusive acts or practices.

2. To identify products, services, or activities that materially

increase the risk of being unfair, deceptive, or abusive.

3. To gather facts that help determine whether a financial

institution’s products, services, programs, or operations

are likely to be unfair, decep tive, or abusive.

General Guidance

During pre-examination planning, examiners should determine

if transaction-related testing is warranted for one or more of

the institution’s products or services. Also, examiners should

be alert to possible FTC UDAPs and Dodd-Frank UDAAPs

throughout an examination, including when reviewing specific

products or services for compliance with other consumer

compliance regulatory requirements.

The following risk assessment and transaction-related

examination procedures should be used, as appropriate, to

assist examiners in recognizing potential FTC UDAPs and

Dodd-Frank UDAAPs, analyzing potential issues, and

determining an appropriate response.

Risk Assessment Procedures

The risk assessment process should begin during the pre-

examination planning stage, when the institution is first

contacted to discuss the Compliance and Information

Document Request (CIDR). The CIDR can then be customized

to request information that is needed to determine the

The same conduct could also violate Dodd-Frank UDAAP; however,

interpretive authority for the Dodd-Frank Act rests with the CFPB.

VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act

VII–1.8 FDIC Consumer Compliance Examination Manual — June 2022

institution’s risk profile for potential FTC UDAPs and Dodd-

Frank UDAAPs.

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 CM S, such as strong

management controls, effective training, and on-going

monitoring, is a mitigating factor.

Institutions with limited risk: M any 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 comp laints 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.

Transaction-Related Examination Procedures

If, upon conclusion of the risk assessment procedures, risks

requiring further investigation are noted, examiners should

conduct transaction testing, as necessary. Use examiner

judgment in deciding whether to sample individual products,

services, or marketing programs. Increase the samp le to

achieve confidence that all aspects of the financial institution’s

products and services are sufficiently reviewed.

An FTC UDAP or Dodd-Frank UDAAP analy sis is fact-

sp ecific and cannot be based on a p articular checklist;

however, transaction-related examination procedures fall into

the following general categories: marketing and disclosures,

availability of credit, availability of advertised terms, repricing

and other changes, servicing, and collections.

The following are examples of items that should be reviewed,

as ap plicable:

• Advertisement and marketing documentation

• New product development documentation

• Documentation of software testing

• Procedural manuals, including those for servicing and

collections

• Customer disclosures, notices, agreements, and periodic

statements for each product and service reviewed

• Account statements

• Agreements with third-parties

• Compensation programs

• Promotional materials

• Telemarketing and customer service scripts

• Recorded calls for telemarketing or collections

• Organization charts and process workflows

• Relevant marketing and advertising materials, including

website pages

• Relevant disclosures and customer contracts

• Collection scripts and notices

• Relevant training materials

• Relevant software algorithms or p arameters

• Consumer complaint files

Collaboration with Others

Regional Examination S pecialists

Examiners should follow field office, regional, and national

consultation procedures, including contacting the ap p rop riate

Regional Examination Specialists for assistance in

determining whether unfair, decep tive, or abusive acts or

practices have occurred.

Legal Division (Legal)

Following ap plicable protocol, examiners are encouraged to

consult with Regional or Washington Office Legal, as

app ropriate, as early as possible when potential violations of

the FTC Act or the Dodd-Frank Act are identified. Legal staff

can provide valuable assistance to examiners during the onsite

examination, including advising examiners on the types of

documentation that should be obtained and developing

interview questions.

Risk Management S upervision

Following regional protocol, examiners should consider if a

potential violation of the FTC Act

or the Dodd-Frank Act

could have an impact on the safety and soundness of the bank

and alert risk management staff accordingly. This may warrant

a joint onsite presence at the institution, request for additional

information or other appropriate supervisory action.

Policy and Research Branch

The Policy and Research Branch can provide assistance in

conducting an analysis of large amounts of customer data.

Examiners should follow regional and Washington

consultation procedures in seeking assistance from Policy and

Research.

VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act

FDIC Consumer Compliance Examination Manual — June 2022 VII–1.9

Documentation

Documentation of potential FTC UDAP or Dodd-Frank

UDAAP violations is extremely important. The following

guidance should be used to facilitate review of a potential

violation:

1. Create an inventory of documentary evidence gathered

and interviews conducted.

2. Create chronologies or charts to explain complex fact

patterns.

3. For printed materials (marketing, solicitations,

disclosures), an original, unmarked copy should be

maintained.

4. For websites, print copies or save the webpages

electronically as soon as p ossible. Websites are easily

altered, so versions of the website that support the case

must be preserved by the examiner. When possible save

webp ages electronically such as a PDF. The electronically

saved copy should be formatted such that the following

information is included: window title, URL, date, time,

page number, total number of pages. In cases where the

website includes links for additional information, notate

the page succession.

5. If consumer complaints are voluminous, create

spreadsheets or summaries. Refer to the Analyzing

Complaints section for additional guidance.

6. Indicate the type of institution reports that are available.

For those documents received, notate why it was obtained,

how it was received, when, and from whom.

7. Maintain a final, typed version of the interview notes. All

examiners that participated in the interview should review

the notes and attest to their accuracy. Consider having the

interviewee review the notes.

8. During the examination, the examiner should consider the

types of corrective actions that may be pursued. For cases

where restitution to consumers may be necessary, the

examiner should obtain information needed to identify and

estimate restitution.

9. If the potential violation involves an affiliate or third

party, obtain the information and documentation needed to

determine whether an affiliate is an IAP. Refer to the IAP

examination procedures for further information and

guidance.

10. The following includes a list of other documents that are

generally needed:

• Income reports

• Third-party contracts

• Relevant board minutes

• Relevant audit reports

• Due diligence records

• Training materials

• Telemarketing and customer service scripts

• Software p arameters

• Account agreements

• Collection scripts and notices

• Consumer communications and notifications

• Billing Statements

Corrective Actions to be Considered for Violations of

Section 5 FTC Act or Sections 1031 and 1036 of the

Dodd-Frank Act

As with any violation of law or regulation, the response to a

violation of Section 5 of the FTC Act and Sections 1031 and

1036 of the Dodd-Frank Act will depend on a number of

factors, including:

• The nature of the violation;

• Whether it is a repeat violation or a variation of a

previously cited violation;

• The harm, or potential harm, suffered by consumers;

• The number of parties affected; and

• The institution’s overall compliance posture and history,

both in general and with respect to FTC UDAP and Dodd-

Frank UDAAP.

Level 3 or Level 2 violations may result in a downgrade of the

institution’s compliance and CRA ratings and potentially, the

institution’s risk management rating. In determining the

overall CRA rating for an institution, examiners consider

evidence of discrimination or other illegal acts, including

violations of Section 5 of the FTC Act or Sections 1031 or

1036 of the Dodd-Frank Act.

In addition to determining a violation’s impact on the

institution’s compliance and CRA ratings, examiners must

consider corrective actions that should be taken. These may

include requiring the discontinuance of the act or practice,

restitution to consumer and business customers, informal or

formal enforcement actions, and assessment of a civil money

penalty . Examiners should refer to the Formal and Informal

Enforcement Actions Manual in the references section below

for additional guidance.

List of Resources

This list includes references that are cited in the text, as well as

additional resources that may be useful to examiners.

Agency Issuances

•

Interagency Guidance: Deposit-Reconciliation

Practices (FIL 35-2016).

•

Interagency Guidance Regarding Unfair or

Decep tive Credit Practices (FIL 44-2014).

VII. Unfair, Deceptive, and Abusive Practices - Federal Trade Commission Act/Dodd-Frank Act

VII–1.10 FDIC Consumer Compliance Examination Manual — June 2022

•

FDIC, Supervisory Insights, Winter 2008, Vol. 5, Issue 2,

From the Examiner’s Desk: Unfair and Deceptive Acts

and Practices: Recent FDIC Experience

•

FDIC, Supervisory Insights, Winter 2006, Vol. 3, Issue 2,

Chasing the Asterisk: A Field Guide to Caveats,

Exceptions, Material Misrepresentations, and Other

Unfair or Deceptive Acts or Practices.

•

FIL 26-2004: Unfair or Deceptive Acts or Practices by

State-Chartered Banks.

•

FTC Policy Statement on Decep tive Acts and Practices.

•

FTC Policy Statement on Unfairness.

•

FTC's Dot Com Disclosures: How to Make Effective

Disclosures in Digital Advertising

•

Joint Guidance on Overdraft Protection Programs, 70 Fed.

Reg. 9127 (Feb. 24, 2005).

•

CFPB Unfair, Deceptive, or Abusive Acts or Practices

(UDAAPs) examination procedures

References

FDIC Formal and Informal Enforcement Actions Manual

FIL-44-2008 Third-Party Risk: Guidance for Managing Third-

Party Risk

CFPB Enforcement Actions Involving Unfair, Deceptive or

Abusive Acts or Practices

FTC Enforcement Actions Involving Unfair or Deceptive

Acts or Practices

FTC’s Subprime Lending Cases

FTC Unfair or Deceptive Acts or Practices Enforcement

Actions: Mortgage Servicing

FTC Unfair or Deceptive Acts or Practices Enforcement

Actions: Collection Practices

Other Regulations with Provisions that Relate to Accurate

Adverti sing

12 CFR Part 1026: Regulation Z Truth in Lending

12 CFR Section 1026.16: Open-end advertising

12 CFR Section 1026.24: Closed-end advertising

12 CFR Part 1030: Regulation DD, Truth in Savings

Advertising: 12 CFR Section 1030.8

12 CFR Section 1030.11: Additional disclosure requirements

for institutions advertising the payment of overdrafts

12 CFR Part 328, Subpart A – Advertisement of Membership

12 CFR Part 328, Subpart B – False Advertising,

Misrepresentation of Insured Status, and Misuse of the FDIC’s

Name or Logo

12 CFR Part 343: Consumer Protection in Sales of Insurance

12 CFR Section 343.40(d): Advertising