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Consumer Compliance Outlook: Fourth Quarter 2010

Understanding Regulation DD's Advertising Requirements

By Amy Armstrong, Assistant Examiner, Federal Reserve Bank of Philadelphia

Depository institutions spend large sums on advertising to attract potential deposit customers and increase revenues. Many institutions rely on third-party vendors and internal marketing departments to ensure compliance with advertising laws and regulations. However, it is important that bank personnel and particularly compliance officers understand that depository institutions are ultimately responsible for ensuring that advertisements comply with federal law and are free from misleading statements or omissions. To facilitate compliance with these requirements, this article discusses the advertising provisions in Regulation DD, the implementing regulation for the Truth in Savings Act (TISA) issued by the Board of Governors of the Federal Reserve System (Board). It also briefly discusses the compliance requirements of §5(a) of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices (UDAP) and which applies to a depository institution's advertising and marketing campaigns.

SCOPE OF THE REGULATION

Regulation DD applies to all depository institutions except credit unions, so references to depository institutions do not include credit unions.¹ While Regulation DD is primarily focused on depository institutions, its advertising provisions in §230.8 “apply to any person who advertises an account offered by a depository institution, including deposit brokers.”² Regulation DD broadly defines an advertisement as a commercial message in any medium that promotes directly or indirectly (1) “the availability or terms of, or a deposit in, a new account”; and (2) for purposes of §230.8(a) and §230.11, “the terms of, or a deposit in, a new or existing account.”

MISLEADING ADVERTISEMENTS

Regulation DD generally prohibits advertisements that are misleading or inaccurate or that misrepresent an institution's deposit contract.³ To aid compliance, comment 230.8(a)-10 of the Official Staff Commentary (OSC) provides these examples of violations:

• representing an overdraft service as a “line of credit” (unless the service is subject to Regulation Z);
• representing that an institution will honor all checks or pay all transactions that overdraw an account, with or without a specified dollar limit, when the institution retains discretion not to honor checks or authorize transactions;
• representing that an overdrawn account can maintain a negative balance when the overdraft service agreement requires that the deposit account maintain a positive balance;
• describing an overdraft service as protecting solely against bounced checks when the overdraft service also applies to an account overdrawn by other means, such as ATM withdrawals, debit card transactions, or other electronic fund transfers.

'FREE' OR 'NO COST'

In addition to the general prohibition against misleading or inaccurate advertisements, Regulation DD imposes specific restrictions on advertisements. In particular, some depository institutions advertise free checking or no cost accounts. To ensure that consumers are not misled by the use of these terms, §230.8(a) (2) prohibits depository institutions from describing an account as “free” or “no cost” (or similar terminology) if any maintenance or activity fee can be imposed. These charges include:

• fees imposed for exceeding transaction limitations;
• fees for failing to maintain a minimum balance;
• monthly service fees;
• transaction and service fees that consumers reasonably expect to be imposed on a regular basis; or
• fees imposed to deposit, withdraw, or transfer funds.

However, comment 230.8(a)-4 of Regulation DD's OSC identifies five fees that are not considered maintenance or activity fees: check-printing fees, balance-inquiry fees, dormant account fees, stop-payment fees, and ATM or electronic transfer fees not required to obtain an account. In addition, the restriction under §230.8(a)(2) for free or no cost accounts applies only to maintenance or activity fees and not to incidental fees such as fees associated with state escheat laws, garnishment and attorney's fees, or photocopying fees. Thus, institutions imposing these incidental fees on a free checking or no cost account do not violate §230.8(a)(2).

Some institutions offer free or no cost accounts for a limited period of time. For example, a checking account might be free for the first year. Regulation DD permits an institution to advertise this type of account as free or no cost as long as the period during which it is free is stated in the advertisement.⁴

The OSC also clarifies that institutions may advertise free or no cost accounts for consumers meeting conditions not related to the deposit account. Comment 230.8(a)-8 includes this example: “Institutions may advertise a NOW account as 'free for persons over 65 years old,' even though a maintenance or activity fee is assessed on accounts held by consumers 65 or younger.”

Finally, institutions may advertise a particular account service as free (such as an account free of withdrawal fees), provided “the advertisement does not mislead consumers by implying that the account is free and that no other fee (a monthly service fee, for example) may be charged.”⁵

RATES AND YIELDS

Section 230.8(b) restricts the use of rates in advertisements. First, if an advertisement states a rate of return, the rate must be identified as an “annual percentage yield” (using that term). No other term can be used except for “interest rate,” provided it is stated in conjunction with the annual percentage yield. The abbreviation “APY” may be used if the term “annual percentage yield” is stated at least once in the advertisement. Often, advertisements will use the abbreviation in the text of the advertisement and direct the consumer to the bottom of the advertisement for the expansion of the abbreviation. Second, if the annual percentage yield is stated in an advertisement, §230.8(c) requires that the following additional disclosures be made clearly and conspicuously:

1. Variable rates. For variable-rate accounts, a statement that the rate may change after the account is opened.
2. Time annual percentage yield is offered. The period of time the annual percentage yield will be offered or a statement that the annual percentage yield is accurate as of a specified date.
3. Minimum balance. The minimum balance required to obtain the advertised annual percentage yield. For tiered-rate accounts, the minimum balance required for each tier shall be stated in close proximity and with equal prominence to the applicable annual percentage yield.
4. Minimum opening deposit. The minimum deposit required to open the account, if it is greater than the minimum balance necessary to obtain the advertised annual percentage yield.
5. Effect of fees. A statement that fees could reduce the earnings on the account.
6. Features of time accounts. For time accounts:
   1. Time requirements. The term of the account.
   2. Early withdrawal penalties. A statement that a penalty will or may be imposed for early withdrawal.
   3. Required interest payouts. For noncompounding time accounts with a stated maturity greater than one year that do not compound interest on an annual or more frequent basis, that require interest payouts at least annually, and that disclose an APY determined in accordance with section E of Appendix A of the regulation, a statement that interest cannot remain on deposit and that payout of interest is mandatory.

OVERDRAFT SERVICES

Many depository institutions have been heavily advertising their overdraft services to encourage customers to opt in for the service to comply with recent regulatory changes under Regulation E (Electronic Fund Transfers). Section 230.11(b)(1) requires, subject to certain exceptions discussed below, that institutions promoting overdraft services in advertisements include the following disclosures in a clear and conspicuous manner:

• the fee for each overdraft;
• the categories of transactions for which an overdraft fee can be imposed;
• the time period to repay an overdraft; and
• the circumstances under which the institution will not pay an overdraft.

To facilitate compliance, the OSC provides three examples of promoting overdraft services in advertisements that trigger these disclosure requirements:

• promoting the institution's policy or practice of paying overdrafts through print media advertisements such as newspapers or brochures, telephone solicitations, electronic mail, or messages posted on an Internet site;
• including a message on a periodic statement informing the consumer of an overdraft limit or funds available for overdrafts (stating, for example, that the consumer has a $500 overdraft limit or that $300 remains on the overdraft limit); or
• disclosing an overdraft limit or including the dollar amount of an overdraft limit in a balance disclosed on an automated system, such as a telephone- response machine, ATM screen, or the institution's Internet site.⁶

Section 230.11(b)(2) exempts certain overdraft communications and advertisements from these disclosure requirements. For communications, the exemptions apply to:

• an advertisement promoting overdraft services subject to Regulation Z and a written agreement (such as an overdraft line of credit);
• a communication by an institution about the payment of overdrafts in response to a consumerinitiated inquiry about deposit accounts or overdrafts;⁷
• an advertisement made through broadcast or electronic media, such as television or radio. However, this exception does not apply to advertisements on an institution's Internet site, on an ATM screen, on telephone-response machines, or sent by electronic mail.
• an advertisement made on outdoor media, such as billboards;
• an ATM receipt;
• an in-person discussion with a consumer;
• disclosures required by federal or other law;
• information on a periodic statement or notice about a specific overdrawn item or the amount by which an account is overdrawn;
• a notice to consumers, such as at an ATM, that completing a requested transaction may trigger a fee for overdrawing an account, or a general notice that items overdrawing an account may trigger a fee;
• informational or educational materials about overdrafts that do not specifically describe the institution's overdraft service; or
• an opt-out or opt-in notice regarding the institution's payment of overdrafts or provision of discretionary overdraft services.

For advertisements, the regulation exempts indoor sign advertisements for overdrafts from the disclosure requirements, provided the sign clearly and conspicuously discloses that fees may apply and that consumers should contact an employee for further information.⁸

UNFAIR AND DECEPTIVE ACTS AND PRACTICES (UDAP)

While this article has focused on the advertising requirements of Regulation DD, it is not the only law regulating deposit product advertising. Section 5(a) of the Federal Trade Commission Act (15 U.S.C. §45(a)) prohibits unfair or deceptive acts or practices. This law applies to all aspects of a depository institution's consumer products and services, including advertisements.⁹ Under §5(n), an act or practice is “unfair” if it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”¹⁰

A three-pronged test is used to determine if an act or practice is “deceptive.” First, the representation, omission, or practice must be misleading or likely to be misleading to the consumer. Second, the consumer's interpretation of the representation, omission, or practice must be reasonable under the circumstances. Finally, the misleading representation, omission, or practice must be material. A complete discussion of UDAP is beyond the scope of this article. For further information, readers should consult the joint guidance on UDAP for state-chartered institutions published by the Board and the Federal Deposit Insurance Corporation.¹¹

To avoid unfair or deceptive advertisements, institutions should ensure that appropriate policies and procedures are in place; that communication is open and effective among all departments of the institution, including contact with third-party vendors; and that advertisements are reviewed for UDAP compliance before publication. Institutions should always:

• Avoid advertising that a particular service will be provided in connection with an account if the bank does not intend or is not able to provide the service to account holders;
• Avoid advertising terms that are not available to most customers and the use of unrepresentative examples in advertising, marketing, and promotional materials;
• Implement and maintain effective risk and supervisory controls to select and manage third-party servicers; and
• Ensure that employees and third parties who market or promote bank products are adequately trained to avoid making statements or taking actions that might be unfair or deceptive.

CONCLUSION

Advertising compliance begins and ends with a strong compliance program and includes effective policies and procedures, awareness, education, and communication between all areas. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.

• ¹ Section 272 (12 U.S.C. §4311) of TISA excludes credit unions from the scope of Regulation DD's coverage, but they are subject to the National Credit Union Administration's implementing regulation for TISA, 12 C.F.R. §707, which is substantially similar to the Board's Regulation DD.
• ² 12 C.F.R. §230.1(c)
• ³ §230.8(a)
• ⁴ Comment 230.8(a)-7
• ⁵ Comment 230.8(a)-6
• ⁶ For the last example of promoting overdraft services on an ATM screen or telephone-response machine, §230.11(b)(3) specifies that only two of the four disclosures in §230.11(b)(1) must be made, namely, the fee(s) for paying each overdraft and the period by which the overdraft must be repaid.
• ⁷ Providing information about the payment of overdrafts in response to a balance inquiry made through an automated system, such as an ATM or an institution's Internet site, is not a response to a consumer-initiated inquiry for purposes of this exemption.
• ⁸ §230.11(b)(4)
• ⁹ Section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act expands the UDAP lexicon by also prohibiting “abusive” practices. This term is defined in §1031(d), and its meaning will likely be fleshed out in a future rulemaking by the new Bureau of Consumer Financial Protection. The bureau can also issue regulations identifying specific unfair, deceptive, or abusive acts or practices. Section 1031 becomes effective on the bureau's designated transfer date, which is currently July 21, 2011, but could be extended by six months. Section 1031 will be codified in the U.S. Code as 12 U.S.C. §5531.
• ¹⁰ 15 U.S.C. §45(n)
• ¹¹ Unfair or Deceptive Acts or Practices by State-Chartered Banks, March 11, 2004; available on the Board's website.