John C. Bryan Compliance Examiner Maura E. Migliorini UDAP Examination Specialist Kevin G. McMahon Senior Compliance Examiner Barbara M.

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1 Unfair or Deceptive Acts or Practices (UDAP) John C. Bryan Compliance Examiner Maura E. Migliorini UDAP Examination Specialist Kevin G. McMahon Senior Compliance Examiner Barbara M. Neenhold Senior Compliance Examiner

2 Section 5 Background Prohibits unfair or deceptive trade practices in or affecting commerce. Congress expressly rejected defining unfair and deceptive. Implemented with respect to state non-member banks by applying authority under Section 8 of the FDI Act to enforce any law.

3 Background Continued FIL : Unfair or Deceptive Acts or Practices: Applicability of Federal Trade Commission Act FIL : Unfair or Deceptive Acts or Practices by State-Chartered Banks Sets standards used to assess whether an act or practice is unfair or deceptive Interplay between FTC Act and other consumer protection statutes Managing Risks

4 Background Continued Act or practice may be unfair, deceptive or both. Act or practice may or may not also be a violation of another regulation. Applies to both consumers and businesses. A finding of intent is not necessary. Applies to the entire lifecyle of a product or service.

5 When is an act or practice unfair? Causes or is likely to cause substantial injury to consumers Injury cannot be reasonably avoided by consumer Injury not outweighed by countervailing benefits to consumer or competition Determination is influenced by Public Policy *FTC Statement of Policy on Unfairness 5

6 When is an act or practice deceptive? Representation, omission, or practice: Misleads or is likely to mislead consumers Considered from the perspective of the reasonable consumer Must be material *FTC Statement of Policy on Deception 6

7 UDAP Risk Management UDAP risk management should be integrated into compliance management system. Board and Management Oversight Compliance Program Policies and Procedures Training Monitoring Consumer Complaint Response 7 Audit

8 UDAP Risk Management (Continued) The Areas with the greatest potential for unfair or deceptive acts and practices include: Third Party credit and deposit products; Products with complaints; New Products all types; Advertising/solicitations; Account disclosures; and Management & monitoring of 3 rd party service providers. 8

9 Sources of Red Flags Complaints Web searches Scripts Interest Rate & Fee structures Internal audit/monitoring findings 9

10 Managing and Monitoring Third Parties Purchasing a new product from a third party vendor. Using a third party to administer or service a new or existing product. Using third parties to develop a new product. 10

11 Managing and Monitoring Third Parties The following four basic elements of an effective third-party risk management program include: Risk Assessment Due Diligence Contract Structuring and Review Oversight 11

12 Managing and Monitoring Third Parties Third Party relationships Do not rely on compliance guarantees Fully understand products or services offered by third parties Monitor penetration rates Review comments/complaints received about products and services throughout the life cycle. 12

13 Complaints Complaints can highlight potential UDAP issues: Misleading or false statements Missing disclosures or information Undue or excessive fees Inability to reach customer service Previously undisclosed or unauthorized charges 13

14 Complaints Complaints do NOT have to be written in letter format Third-party complaints Social Media Call Centers/Recordings Online on blogs, BBB, etc. Any other way institution receives feedback 14

15 Advertising and Marketing Materials ALL Advertisements and scripts should be reviewed prior to use. Advertising mediums: Internet Lobby Signs /Direct mail Telephone Newspapers/Magazines Take-One Applications Cross-selling 15

16 4 P s of Online Advertising Prominence Presentation Placement Proximity 16

17 Advertising Practices Clear and Conspicuous Truthful Substantiation The totality of the circumstances and the net impression of the advertisement or solicitation should be evaluated 17

18 Advertising Practices (Cont.) Sufficiently Qualified Sufficient Information Ongoing communications made should reinforce, not controvert or cloud, the intended message 18

19 Advertising Practices (Cont.) All material information should be included: Representations about costs are presumed to be material Representations that go to the heart of a consumer s decision with respect to a bank product or service 19

20 FTC Recommendations for Advertising DO Format ads to direct attention to key information Present information clearly and conspicuously Disclose all decision impacting information near most highly promoted features and place any qualifiers near claim it is qualifying DO NOT Use small font to hide costs, critical terms or conditions Use pop-up windows or hyperlinks to display key information Bury information at the end of a long webpage Use a fast moving scroll on websites 20

21 UDAP Best Practices Exercise oversight over entire product life cycle Monitor third parties to assess UDAP risk Review marketing and representations Analyze, react, and respond to consumer complaints 21

22 UDAP Best Practices (cont.) Review and Monitor Fees Fee amounts and descriptions must be uniform across various disclosures. Customers should be provided with enough information to make informed decisions. Requirements apply to both loan and deposit products. Review and Monitor Compensation 22

23 UDAP Best Practices (cont.) Contracts - Understand limitations and allowances of all account agreements Monitor these agreements to ensure they do not contradict disclosures Monitor software updates that may affect the contract language 23

24 Practices that May Increase the Risk of UDAP Violations Not properly managing third party relationships Ignoring or not properly monitoring complaints Not reviewing any and all ads for possible UDAPs Bundled products that may hide material fees Incentives for employees to sell Price structures that are complex or may hide material fees Products where the commission for them is higher but where the product or service may not be beneficial to the consumer or may involve higher fees for consumers Disclosures that cannot be accessed until after purchasing the product Not training employees on, and the importance of UDAP regularly. 24