“unfair or deceptive acts or practices in or affecting commerce are hereby declared unlawful.”
by thomaS g. Pareigat and meg SCzyrba, CrCm
This oNe seNTeNCe, CourTesy of seCTioN 5
of the Federal Trade Commission Act [ 15 USC 45(a)( 1)], is the
statutory genesis of the rule we know fondly as “UDAP. ” While
all businesses are generally covered by Section 5 of the FTC Act, federal banking regulators have
the authority to cite institutions for engaging in practices that are considered unfair or deceptive.
In recent years, examining agencies have increased their UDAP-related scrutiny and stepped
up enforcement activities in this area. Cease and desist orders citing UDAP violations are on
the rise and by all indications will continue to grow. With the passage of the Dodd-Frank Act
in 2010, supervisory focus on UDAP will become even more intense. The Dodd-Frank Act not
only restates the general prohibition against “unfair or deceptive” practices, but it also adds a new
standard—“abusive practices”—for which banks may soon be cited. Overall, the UDAP net has
grown wider and is being cast even farther by policymakers and regulators. In the end, this means
there is greater likelihood that banking practices may be caught in the UDAP net.
Core UDAP Concepts
Before we delve into the most recent developments in UDAP law
and enforcement, let’s review the foundational aspects of the rule.
To bring clarity to the types of practices that are prohibited, the
FTC developed policy statements containing key definitional elements of conduct or practices that may be considered “unfair” or
“deceptive. ” Over 30 years later, these general standards continue
to serve as the foundation for UDAP analysis and enforcement.
More than 10 years ago, when bank regulators began seriously
enforcing the UDAP rule, they generally adopted the FTC standards, but built upon them with additional industry-specific
guidance. 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.
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 from the intended target market of the product
or service. (See sidebar for examples of practices that have been
deemed deceptive.)
Practices That have Been
Deemed Deceptive
General
■ ■ 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
■ ■ promises that did not materialize
■ ■ rates “as low as” or “as high as” were not
available to the majority of customers
■ ■ teaser rates that did not explain the duration
■ ■ claims that could not be substantiated
■ ■ asterisks that are buried
■ ■ using the term “free” when fees could result
Credit cards
■ ■ security deposits/fees for subprime cards that
consumed most of the available credit
home loans
■ ■ hidden terms such as balloon payments
Deposit products
■ ■ gift cards without pre-sale disclosures,
especially where fees could be imposed on
the balance
■ ■ atm balances that included overdraft
protection
