ABA Bank Marketing - July/August 2011

Overall, bank regulator guidance provides insights into how UDAP standards will be applied to the business of banking. We get further insight into how bank regulators, state attorneys general, and even civil courts interpret and apply the “deception” and “unfairness” standards through settlement agreements and other public announcements related to UDAP cases.

Practices That Have Been Deemed Deceptive

General

m;Marketing practices that did not convey the whole
truth or explain requirements to obtain a benefit, or
that contained claims that could not be substantiated.
m;Promises that did not materialize.
m;Rates “as low as” or “as high as” were not available to the
majority of customers.
m;Teaser rates that did not explain the duration.
m;Claims that could not be substantiated.
m;Asterisks that are buried.
m;Using the term “free” when fees could result.

Credit cards

m;Security deposits/fees for subprime cards that consumed most of the available credit.

Home loans

m;Hidden terms such as balloon payments.

Deposit products

m;Gift cards without pre-sale disclosures, especially where fees could be imposed on the balance.

m;TM balances that included overdraft protection.

Deceptive practices

An act or practice is considered to be deceptive if it has the following three elements: ( 1) the representation, omission or practice is likely to mislead consumers ( 2) who are acting reasonably in the circumstances presented, and ( 3) the representation, omission or practice is material.

Note that under this standard the conduct needs only to be likely to mislead—there is no requirement that consumers were, in fact, misled. It is also important to remember that the focus is on the “reasonable consumer,” which generally means the average person who is the intended target market of the product or service. (See sidebar above for examples of practices that have been deemed deceptive.)

Regulators have more recently begun to rely on the unfairness standard, which defines an unfair practice as one that

m;Causes or is likely to cause substantial consumer injury. m;The injury cannot be reasonably avoided.

m;The injury is not outweighed by benefits to consumers or competition.

This standard generally focuses on the bank’s course of conduct or business practices that result in financial harm. Here, the focus is generally on the lack of consumer choice, or situations where consumers appear to be taken advantage of—by being coerced into making a purchasing decision or by being powerless to avoid financial harm at the hands of the bank. (See sidebar on page 24 for examples of practices that have been deemed unfair.)

Remember when?

UDAP compliance standards have evolved over the years. As noted above, there was a time when UDAP compliance was primarily centered on a bank’s disclosure practices—with a focus on accurate advertising copy, well-worded disclaimers and the like. The goal was to be certain that marketing messages and other disclosures were not misleading or deceptive. In response, banks generally developed a series of compliance controls focused on the marketing function—to ensure that the bank’s promotional materials and product-related statements accurately described the products’ features and benefits.

In today’s regulatory regime, regulators continue to cite and prosecute UDAP cases based on this more traditional UDAP analysis, so a bank must not lose focus on ensuring that its marketing and product promotion practices are sound. But in recent years there seems to have been a shift—or perhaps an expansion of the traditional interpretation of UDAP—beyond the realm of appropriate disclosures and into a more paternalistic pattern. We will explore this development and suggest ways to protect yourself in this ever-expanding field.

The UDAP net has grown wider and is being
cast even farther by policymakers and
regulators.

New directions in enforcement

The traditional interpretation of UDAP began to shift in 2008 when regulators used it to establish a duty to protect customers and customers’ customers from fraud, although there was never an allegation that the financial institution in question was the perpetrator.