After Successfully Weathering a Decade or More of State Deceptive Trade Practice Claims, Banks Now Face the Rising Tide of Federal Enforcement Proceedings

May 25, 2006

Until relatively recently, banks have not been frequent targets under state or federal unfair or deceptive trade practice laws. During the last decade, however, this has started to change and lawsuits against banks have been steadily on the rise. Although the reasons behind the trend are many, one of the principal reasons is increased competition among lenders, which, in turn, has led to more aggressive marketing by banks and their subsidiaries for consumer business.[1] The marketing increasingly takes place through large direct mail or telemarketing campaigns, and involves numerous types of secured and unsecured consumer credit, and different credit-related products. Other developments such as improvements in technology and easier access to consumer information, which have resulted in a rise in “pre-approved” banking products, have also contributed to the trend. And finally, recent media stories have drawn attention to potential problems with fees for banking products and services – contributing to the increase in claims.[2]

In addition to an increased number of claims, the connection between banks and state and federal deceptive trade practice law has grown more complicated. In recent years, some jurisdictions have held that federal law in this area preempts state law as far as banks are concerned. Other jurisdictions have held the opposite; suggesting that state deceptive trade practice laws are not preempted as long as they mirror FTC regulations. And to make things even more complicated, the Office of the Comptroller of the Currency has begun to take a much more visible and assertive position in its enforcement. As a result, financial institutions and their counsel must be aware of a wide, sometimes confusing, and currently evolving array of state and federal laws. With this in mind, the purpose of this article is twofold: (1) to illustrate the recent types of deceptive or unfair trade practice claims that have been raised against banks under state and federal law and (2) to summarize the variety of legal paths that these claims take.

State claims

In recent years, state deceptive trade practice claims against banks have included such allegations as “bait and switch” tactics, unfair check-posting policies, excessive fees for services, “pre-approved” offers that are later rescinded, and undisclosed conditions on products or services. Although the claims in many of the cases discussed below were dismissed or remanded, financial institutions will be well-served by simply being aware of the types of claims that are being raised in jurisdictions throughout the country.

For example, unfair or deceptive trade practice claims have been filed against banks objecting to the manner in which checks are posted to an account. Generally, consumers claimed that they incurred overdraft fees because the banks improperly posted checks from highest to lowest amount. As the argument goes, if the bank had posted the smaller checks first for which sufficient funds existed, then they would only have incurred overdraft fees for the larger checks. In Hill v. St. Paul Federal Bank for Savings,[3] which is representative, the court held in favor of the bank on the grounds that banks are permitted to pay checks that they receive on the same banking day in any order, unless an account specifically says otherwise. Likewise, in Daniels v. PNC Bank, N.A., the unfair trade practice claim failed when the account agreement between the bank and the customer allowed the bank to post checks in any order it found convenient.[4]

Another common type of claim involves offers for “pre-approved” or “pre-qualified” loans or consumer credit. In Kennedy v. Chase Manhattan Bank USA,[5]a husband and wife asserted that they had received pre-qualified offers for credit card accounts from two banks. Based on the representations made by the banks, the consumers believed that they were pre-approved for credit. However, after their credit reports were pulled and found to be unsatisfactory, the consumers were denied credit. On appeal, the Fifth Circuit upheld the district’s decision that the bank’s action did not constitute an unfair or deceptive trade practice because the “pre-qualified” offer stated that the offer could be rescinded based on additional credit checks. Similarly, in Livingstone Floemeh-Mawutor v. Banknorth,[6] the consumers unsuccessfully alleged that Banknorth violated the law by placing “unfair” conditions on a loan for which they thought they were already approved. The Court held that the loan conditions were clearly stated and that the bank had not committed an unfair or deceptive act by requiring the consumer to comply with additional requirements; therefore, the bank had not violated Massachusetts law.[7]

Since unfair or deceptive trade practice claims frequently involve contracts, it is not uncommon to see breach of contract and unfair trade practice claims brought together. In recent cases dealing with such a situation, courts have either dismissed the deceptive trade practice claim and kept the breach of contract claim, or they have required the consumer to show substantial aggravating circumstances accompanying the breach to sustain the additional deceptive trade practice claim.[8] In Charlotte Commercial Group v. Fleet National Bank, the Court held that mere breach of contract, even if intentional, cannot sustain an action under North Carolina’s unfair and deceptive trade practices act.[9]

Finally, financial institutions have faced deceptive or unfair trade practice claims alleging excessive or hidden, undisclosed fees. In Rubin v. MasterCard International,[10]for example, consumers alleged that currency conversion fees on purchases outside the United States were not properly disclosed in the consumer agreement. (The case, which had been removed to federal court on the grounds of federal question jurisdiction, was remanded to state court in Florida after the court held that federal law did not apply.) Other examples of claims involving excessive fees include Jacobs v. ABN-AMRO Bank,[11] where plaintiffs alleged a violation of New York’s unfair and deceptive trade practice law for excessive facsimile fees and recording discharge/release of lien fees in a mortgage transaction,[12]and Sims v. First Consumers National Bank[13]where plaintiffs alleged that fees were kept hidden in the course of high pressure telemarketing.

Who can bring suit against banks under state law?

The question of standing is important when deceptive or unfair trade practice claims are raised against banks, and laws vary widely in this area from state to state. Several states empower a state official (typically the attorney general) to enforce the state’s deceptive or unfair trade practice laws.[14] Other states provide at least some sort of private right of action, although this is not uniform among states.[15]

Minnesota is a good example of the variety of parties that can initiate such a lawsuit within a given state. The Minnesota Attorney General is charged with enforcing certain laws regarding unfair practices in business and commerce.[16] However, Minnesota also has a “private attorney general statute” which allows an individual to stand in the place of the attorney general if the cause of action benefits the public. [17] In Davis v. U.S. Bancorp[18] a husband and wife used the private attorney general statute to bring suit against a bank that included claims under the Equal Credit Opportunity Act, fraud, negligent misrepresentation, and state unfair trade practice statutes. Their unfair trade practice claims were dismissed because the court determined that addressing the specific misrepresentations made by the bank would not benefit the public. In contrast, in Collins v. Minn. School of Business, the court held that prosecution of unfair trade practices (misrepresentations) made on television advertisements would benefit the public.[19] Therefore, the individual suit was allowed to proceed.

Other states specifically exempt financial institutions from general state unfair trade practice laws. In Maine, for example, the legislature has created separate statutory provisions for financial institutions[20] and has specifically exempted them from liability under the state’s Unfair Trade Practices Act.[21] In a recent Maine case, Shapiro v. Haenn,[22] the consumer brought a suit against a bank and the bank’s attorney after the bank allegedly failed to release a mortgage following receipt of full payment. The case was dismissed because the consumer brought the suit under the general Unfair Trade Practices Act rather than the statute that governed financial institutions.

Finally, a recent Rhode Island case held that banks cannot be sued under the state’s deceptive trade practices act because of an exemption for federally regulated institutions. In Chavers v. Fleet Bank,[23] the consumers alleged that Fleet used “bait and switch” tactics to induce them to open credit card accounts. The complaint alleged that Fleet solicited their business based on a percentage rate of 8.5% and then later raised that rate. The court held that Fleet was exempt from liability under Rhode Island’s deceptive trade practices act because it was regulated by the Office of the Comptroller of the Currency. A federal district court in Louisiana reached a similar conclusion in Bank One v. Colley, a case where the bank was found to be exempt from Louisiana’s Unfair Trade Practices Act as a matter of law because banks are “regulated with respect to unfair and/or deceptive trade practices under the U.S. Code.”[24]

The holding in Chavers shows the extent to which the nexus between state and federal law in this area is evolving. For defendant banks that would prefer to be in federal court, the preemption issue may be a welcome development. In any case, financial institutions need to be aware of possible changes in the law and, regardless of whether a particular state’s courts decide that federal law preempts state law, federally regulated financial institutions must be aware of federal unfair and deceptive trade practice law.

Federal law

Unfair or deceptive acts or practices are unlawful under federal law, which is spelled out in section 5 of the Federal Trade Commission Act (FTC Act) prohibiting “unfair or deceptive acts or practices in or affecting commerce.” [25] Under section 8 of the Federal Deposit Insurance Act,[26] the Office of the Comptroller of the Currency (OCC) may take appropriate enforcement actions against national banks and their subsidiaries for violations of any law or regulation, which necessarily includes section 5 of the FTC Act.[27]

Until a few years ago, the OCC did not regularly take enforcement actions against banks and their subsidiaries for unfair or deceptive trade practices. This changed quite dramatically, however, in 2000 when the OCC began to assert this power.[28] The problem with enforcing section 5 of the FTC Act is that the FTC has not specifically defined what constitutes an unfair or deceptive practice. The FTC has clearly regulated several related areas through a series of acts: for example, the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Debt Collection Practices Act. But outside of these specific acts, other potential violations of section 5 must be decided on a case-by-case basis.

Fortunately, the FTC has provided some general guidelines to determine whether an act or practice may be determined to be unfair or deceptive; these guidelines distinguish between deceptive acts on the one hand, and unfair acts on the other.[29] And, more importantly, the OCC has issued its own guidelines in response to the FTC standards, which are particularly useful in light of the OCC’s recent move to enforce these regulations.[30]

Under these guidelines, the FTC/OCC will judge financial institutions on the following criteria.

Deceptive acts or practices.

Practices may be deemed “deceptive” if the following three factors are present:

1.) There is a representation, omission, act, or practice that is likely to mislead.

According to FTC guidance, practices that can be misleading or deceptive include false oral and written representations; misleading claims about costs of services or products; use of “bait-and-switch” techniques; and failure to provide promised services or products.[31] Importantly, the focus is on whether a practice is likely to mislead, rather than on whether it actually misleads. In its interpretation, the OCC has said that it will consider the entire advertisement, transaction, or course of dealing in determining whether practices are misleading.[32]

2.) The act or practice would be deceptive from the perspective of a reasonable consumer.

The failure to provide information may be a deceptive act or practice and is evaluated from the perspective of whether a reasonable consumer is likely to have been misled by the omission. A consumer’s reaction to an act or practice may be reasonable even if it is not the only reaction that a consumer might have, or it is not shared by the majority of consumers.[33] In addition, the OCC has said that it will evaluate the act or practice from the perspective of any specific audience to which it was targeted or which was reasonably foreseeable.[34]

3.) The representation, omission, act, or practice is material.

A material misrepresentation or practice is one that is likely to affect a consumer’s choice or conduct concerning a product or service. Generally, information about costs, benefits, or significant limitations related to the product or service would be material.[35]

Unfair acts or practices.

The FTC has issued the following three factors to determine whether an act is unfair.

1.) The practice causes substantial consumer injury.

Generally, monetary harm, such as when a consumer pays a fee or interest charge, or incurs other similar costs to obtain a bank product or service as a result of an unfair practice, will be considered a substantial injury.[36] An injury may also be substantial if it does a small harm to a large number of consumers, or if it raises a significant risk of specific harm.[37]

2.) The injury is not outweighed by benefits to the consumer or to competition.

To be unfair, a practice must be more injurious than it is beneficial. In other words, the FTC guidelines state that an analysis of the net effects includes the costs and harm to the consumer as well as the costs and regulatory burdens to banks, potential restrictions on competition, and the availability of credit that may result from a finding of unfairness.[38]

3.) The injury caused by the practice is one that consumers could not reasonably have avoided.

For example, the injury could reasonably have been avoided if the consumer had sufficient information to make an informed choice. The OCC’s interpretation is that a practice is not unfair solely on the grounds that a consumer could have obtained a more appropriate or satisfactory product or service elsewhere. [39] Rather, a practice is unfair when it is coercive, or otherwise makes it difficult for the customer to make a choice, such that the resulting injury could not reasonably have been avoided.

How has the OCC enforced these guidelines in practice?

The OCC has taken enforcement actions in a wide variety of situations since 2000. For instance, the OCC proceeded against a bank for failing to provide sufficient information to allow consumers to understand the terms of the service being offered without being misled.[40] In this case, the OCC determined that the bank violated federal unfair and deceptive trade practices by charging duplicative and excessive fees for services without providing sufficient information to the consumer. The OCC ordered the bank to pay restitution and assessed a $10,000 monetary penalty.[41]

The OCC concluded that consumers were misled when they were offered a credit product on which a fee was imposed and were not made aware that the fee would attach until after they accepted the product.[42] According to the OCC, the bank violated federal deceptive trade practice law when it marketed a card with no annual fee, but then charged an annual fee to its consumers. The OCC ordered the bank to establish a $6 million dollar reserve to fund restitution payments for consumers.[43]

Failure to adequately disclose material limitations affecting the product being offered resulted in another recent OCC enforcement action.[44] The OCC concluded that the bank marketed credit cards to consumers when it knew or should have known that the consumers would not have use of the cards for a full year, yet the bank charged annual fees on their monthly credit card statements. The OCC ordered the bank to refund the pro rata share of the annual fees charged to the consumers.[45]

Other recent enforcement actions by the OCC involving unfair or deceptive trade practices involved: failure to adequately disclose significant fees that were required to obtain a particular product or service, misrepresentation about benefits or features of an advertised product that did not apply to the product actually purchased by the consumer, and failure to disclose exceptions to products or services.[46] In each of these cases the OCC ruled against the bank, which resulted in consequences ranging from civil penalties to consumer restitution and refunds.

Deceptive Trade Practices and Other Laws

Although complaints of unfair or deceptive trade practices are sometimes raised on their own, they are frequently raised together with another legal claim. Not surprisingly, the federal compliance laws governing credit and lending are often that “other legal claim” in deceptive trade practice law suits against banks. For this reason, financial institutions and their counsel should be aware of the general nature of these laws and their connection to unfair and deceptive trade practice law. Three of the more familiar federal compliance laws are discussed below.

1.) Truth in Lending Act.

Under the Truth in Lending Act (TILA), a creditor that extends consumer credit must make certain disclosures “clearly and conspicuously” that describe the cost and terms of that credit.[47] Depending on the circumstances, an act that violates TILA may also violate deceptive trade practice law.[48] For its part, the OCC has pointed out that an institution may be engaged in unfair or deceptive acts or practices even if the transaction at issue is otherwise in technical compliance with applicable TILA provisions.[49]

2.) Equal Credit Opportunity Act.

The Equal Credit Opportunity Act (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, or the fact that an applicant’s income derives from any public assistance program.[50] Simply put, if an alleged unfair or deceptive trade practice is targeted at consumers based on their age, race, gender, or other prohibited factor, then a financial institution may also be liable for an ECOA violation.[51]

3.) Fair Debt Collection Practices Act.

The Fair Debt Collection Practices Act (FDCPA) prohibits unfair, deceptive, and abusive practices related to collection of consumer debts.[52] Banks that face a lawsuit involving charges of unfair or deceptive practices in relation to consumer debts may also face similar charges based on general unfair or deceptive trade practice law. The OCC has also cautioned banks regarding possible FDCPA liability when a third party collects debts on its behalf; a bank may face potential liability for approving or assisting in an unfair or deceptive act or practice.[53]

An Ounce of Prevention

While the area of deceptive and unfair trade practice law may seem daunting for financial institutions and their counsel, the OCC, FTC, and various state offices have issued a number of guidelines offering practical advice that is directly on point.[54] Although many of these suggestions seem obvious, they might be best considered in the context of the old adage “an ounce of prevention equals a pound of cure.”

1) Verify that information provided to consumers is complete and accurate and is not likely to mislead or deceive a reasonable consumer without the consumer having to do “detective” work.[55] 2) Avoid the use of claims such as “guaranteed,” “pre-approved,” and “lifetime rates,” if there is a possibility that consumers will not receive the terms that have been advertised, and this possibility is not described adequately. 3) Provide a clear, up-front disclosure of any contract provision that permits a change in the terms of the products or services that are offered. 4) Avoid engaging in promotions of a product or service that highlight a particular benefit, if that benefit will be negated by another aspect of the transaction. For example, a product should not be promoted as having “no annual fees” if the product requires the consumer to pay annual premiums for another linked product. 5) Review telemarketing scripts used to market products to bank consumers for accuracy and to ensure that they fairly and adequately describe the terms, benefits, and material limitations of the product or service being offered. 6) Notify consumers in connection with “free trial periods” for services if the consumer will be required to affirmatively act to cancel the service at the end of the trial period. 7) Ensure that contractual arrangements with third-party service providers protect the bank against risk. For example, a bank should carefully consider whether a contract with a telemarketer contains any financial incentive that could lead the telemarketer to mislead consumers. 8) Ensure that promotional or other information in a solicitation or other communication does not conflict with or contradict required consumer disclosures, such as TILA notices.

Jeffrey S. Rosenstiel is a member of Frost Brown Todd LLC in its Cincinnati, Ohio office. He practices in the firm’s banking/commercial litigation group. Elizabeth A. Lenhart also works in the Cincinnati office of Frost Brown Todd LLC as an associate in the litigation department.

[1]See March 22, 2002 News Release, “OCC Chief Counsel Julie L. Williams Urges Banks to be Vigilant In Avoiding Unfair and Deceptive Marketing Practices” (available at www.occ.treas.gov/ftp/release/2002-30.doc).

[2]See, e.g., The Plastic Trap: Soaring Interest Compounds Credit Card Pain, New York Times, Nov. 21, 2004.

[3] 768 N.E.2d 322 (Ill. App. 2002).

[4] 738 N.E.2d 447 (Ohio App. 2000).

[5] 369 F.3d 833 (5th Cir. 2004).

[6] 2004 U.S. Dist. LEXIS 26029 (D. Mass. 2004).

[7] M.G.L. c. 93A.

[8]See Charlotte Commercial Group, Inc. v. Fleet National Bank 2003 U.S. Dist. LEXIS 5392 (M.D.N.C. 2003); Landreneau v. Fleet Financial Group, 197 F. Supp. 2d 551 (M.D. La. 2002). For additional analysis of the ability to obtain tort remedies for breach of contract, see Amy Doehring, Blurring the Distinction Between Contract and Tort: Courts Permitting Business Plaintiffs to Recover Tort Damages for Breach of Contract, 12 Bus. Tort J. ___ (Winter 2005).

[9] N.C. Gen. Stat. § 75-1.1.

[10] 42 F. Supp. 2d 217 (S.D.N.Y. 2004). The relevant Florida statute is Fla. Stat. § 501.201 et seq.

[11] 2004 U.S. Dist. LEXIS 6888 (E.D.N.Y. 2004).

[12] N.Y. Gen Bus. Law § 349(a).

[13] 303 A.D. 2d 288 (N.Y. App. 2003).

[14] For example, California (Cal. Bus. & Prof. Code § 17200 et seq.), Illinois (815 ILCS 505/1), and Arkansas (Ark. Code. Ann. §§ 4-88-101).

[15] For example, Hawaii (Haw. Rev. Stat. §§ 480-2, 480-13), Oregon (Or. Rev. Stat. § 646.638), Pennsylvania (Pa. Cons. State. Ann. §§ 201-9.2), and Texas (Tex. Bus. & Com. Code Ann. § 17.50) all allow some sort of private right of action.

[16]On December 30, 2004, the Minnesota Attorney General filed a suit against Capital One Bank and Capital One F.S.B. alleging deceptive marketing of credit cards under the authority of Minn Stat. §§ 8.01, 8.31, 8.32.

[17] Minn. Stat. § 8.31(3)(a).

[18] 383 F.3d 761 (8th Cir. 2004).

[19] 655 N.W.2d 320 (Minn. 2003).

[20] 9 M.R.S.A. §§ 241-43.

[21] 5 M.R.S.A. §§ 205-A et seq.

[22] 190 F. Supp. 2d 64 (D. Me. 2002).

[23] 844 A.2d 666 (R.I. 2004). The Rhode Island Supreme Court adopted the reasoning of a 2003 Third Circuit case, Roberts v. Fleet Bank, 342 F.2d 260 (3rd Cir. 2003).

[24] 294 F. Supp. 2d 864, 868 (M.D. La. 2003).

[25] 15 U.S.C. § 45(a)(1).

[26] 12 U.S.C. § 1818.

[27] For additional discussion of this authority, see OCC Advisory Letter AL 2002-3, issued March 22, 2002.

[28] In 2000, the OCC entered into a settlement agreement with Providian National Bank; Providian agreed to pay restitution to consumers for marketing a credit card without fully disclosing the significant fees and limitations attached to the product. In the Matter of Providian National Bank, OCC Enforcement Action No. 200-53, (June 28, 2000).

[29] The Federal Trade Commission issued a Policy Statement on Deception in October 1983 (available at www.ftc.gov/bcp/policystmt/ad-decept.htm) and a Policy Statement on Unfairness in December 1980 (available at www.ftc.gov/bcp/policystmt/ad-unfair.htm), which remain the guidelines in these areas.

[30]See OCC Advisory Letter AL 2002-3.

[31] FTC Policy Statement on Deception.

[32] OCC AL 2002-3.

[33] FTC Policy Statement on Deception.

[34] OCC AL 2002-3.

[35]Id.

[36] FTC Policy Statement on Unfairness.

[37]Id.

[38]Id.

[39] OCC AL 2002-3.

[40]In the Matter of Clear Lake National Bank, San Antonio, Texas, OCC Enforcement Action No. 2003-25 (November 7, 2003).

[41]Id.

[42]In the Matter of First National Bank in Brookings, South Dakota, OCC Enforcement Action No. 2003-1 (January 27, 2003).

[43]Id.

[44]In the Matter of First Consumers National Bank, Beaverton, Oregon, OCC Enforcement Action No. 2003-10 (July 31, 2003).

[45]Id.

[46] The OCC webpage at www.occ.gov.treas lists all enforcement actions.

[47] 15 U.S.C. § 1601, et seq.

[48]See Rubin v. Mastercard International (S.D.N.Y. 2004) 342 F. Supp 2d 217. The court stated that a TILA violation may give rise to liability under state deceptive trade practice law. Since the plaintiff had not specifically raised a TILA complaint, however, the case was remanded to Florida state court.

[49] OCC Advisory Letter AL 2002 -3.

[50] 15 U.S.C. § 1691, et seq.

[51]Davis v. U.S. Bancorp, 383 F.3d 761(8th Cir. 2004) (ECOA claim dismissed because bank complied with all requirements).

[52] 15 U.S.C. § 1692, et seq.

[53] OCC Advisory Letter AL 2002-3.

[54] In addition to the OCC and FTC advisory and policy statements already cited, individual states have issued nearly identical guidelines. See, for example, the Guidelines issued by the Commissioner of the Georgia Department of Banking and Finance on October 3, 2003, available at www.state.ga.us.

[55] The points specifically mentioned in this list are taken from the FDIC “Financial Institution Letter, March 11, 2004,” (available at www.fdic.gov/news/press/2004/pr2004.html), and the OCC AL 2002-3.