FTC Staff Comment Before the Department of Treasury, Office of Thrift Supervision Concerning Unfair or Deceptive Acts or Practices

Unfair or Deceptive Acts or Practices, 72 Fed. Reg. 43,570 (advance notice of proposed	1
rulemaking Aug. 6, 2007).
Unfair or Deceptive Acts or Practices, 72 Fed. Reg. at 43,570-71.	2
15 U.S.C. § 57a(f)(1). The OTS also can exercise its authority under the Home Owners’	3
Loan Act (“HOLA”) to prohibit unfair or deceptive acts or practices by savings associations and certain
affiliated entities, as well as certain service providers. 12 U.S.C. §§ 1461-1470. The OTS ANPR states
that this would be consistent with HOLA’s mandate that the OTS ensure safety and soundness, since
engaging in unfair or deceptive acts or practices can pose significant reputation risk, compliance risk, and
legal risk. Unfair or Deceptive Acts or Practices, 72 Fed. Reg. at 43,573.
15 U.S.C. § 57a(f)(1).	4
UN ITED STATES OF AM ERICA
FEDERAL TRADE COMMISSION
W ASH IN GTO N , D .C. 20580
Bureau of Consum er Protection
December 12, 2007
John E. Bowman
Chief Counsel
Regulation Comments, Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Re: 	Public Comment, OTS-2007-0015
Dear Mr. Bowman:
The staff of the Bureau of Consumer Protection at the Federal Trade Commission
(“FTC” or “Commission”) appreciates the opportunity to comment on the Office of Thrift
Supervision (“OTS”)’s advance notice of proposed rulemaking regarding unfair or deceptive acts
or practices (the “OTS ANPR”).1
In its notice, the OTS has requested information to help it assess whether it should
expand its current prohibitions against unfair or deceptive acts or practices. 	One legal basis for2
the potential rulemaking is the FTC Act. 	The FTC Act provides that the OTS has the authority3
to prescribe regulations to prevent unfair or deceptive acts or practices by savings associations. 4
The OTS ANPR states that the agency is considering a variety of approaches to address “unfair
or deceptive acts or practices,” including adopting FTC guidance as an OTS regulation,

Unfair or Deceptive Acts or Practices, 72 Fed. Reg. at 43,573-74.	5
Id. at 43,573.	6
15 U.S.C. § 45(a). Nonbank financial companies include nonbank mortgage companies,	7
mortgage brokers, finance companies, and units of bank holding companies.
15 U.S.C. §§ 1601-1666j (requiring disclosures and establishing other requirements in	8
connection with consumer credit transactions).
15 U.S.C. § 1639 (providing additional protections for consumers who enter into certain	9
high-cost refinance mortgage loans).
15 U.S.C. § 1667-1667f (requiring disclosures, limiting balloon payments, and regulating	10
advertising in connection with consumer lease transactions) .
2
converting past OTS guidance into rules, adopting additional OTS guidance, or prohibiting
specific unfair or deceptive practices. The OTS is considering taking action to curtail certain
practices in credit card lending, residential mortgage lending, gift cards, and deposit accounts.5
As the OTS ANPR notes, the agency could incorporate the FTC’s standards for
unfairness and deception under Section 5 of the FTC Act into an OTS regulation. 	As the OTS6
considers whether to do so, the Commission submits this comment describing its extensive
experience addressing unfair and deceptive practices under the FTC Act. First, the comment
summarizes the FTC’s interest and experience with respect to financial services. Second, the
comment describes how the Commission has used its unfairness authority in rulemaking and law
enforcement actions to prevent financial services providers from harming consumers. Third, the
comment discusses how the FTC has used its deception authority in law enforcement actions to
prevent financial service providers from injuring consumers. The Commission staff
recommends that the OTS consider the FTC’s experience applying the current legal standards in
determining whether to impose rules prohibiting or restricting particular acts and practices of
financial institutions.
I. 	The FTC’s Interest and Experience
The Commission enforces Section 5 of the Federal Trade Commission Act (“FTC Act”),
prohibiting unfair or deceptive acts or practices, as to most entities engaged in commerical
activities, including nonbank financial companies. 	The FTC also enforces statutes that address7
specific consumer credit practices, including the Truth in Lending Act, the Home Ownership8
and Equity Protection Act, the Consumer Leasing Act, 	the Fair Debt Collection Practices9 	10

15 U.S.C. §§ 1692-1692o (prohibiting abusive, deceptive, and unfair debt collection	11
practices by third-party debt collectors).
15 U.S.C. §§ 1681-1681x (imposing standards for consumer reporting agencies and	12
information furnishers in connection with the credit reporting system and placing restrictions on the use
of credit reporting information). The Fair and Accurate Credit Transactions Act of 2003 amended the
Fair Credit Reporting Act.
15 U.S.C. §§ 1691-1691f (prohibiting creditor practices that discriminate on the basis of	13
race, color, religion, national origin, sex, marital status, age [provided the applicant has the capacity to
contract], receipt of public assistance, and exercise of certain legal rights).
15 U.S.C. §1679-1679j (prohibiting untrue or misleading representations and requiring	14
certain affirmative disclosures in the offering or sale of “credit repair” services).
E.g., FTC, B UREAU OF E CONOMICS S TAFF R EPORT , J AMES M. L ACKO AND J ANIS K.	15
P APPALARDO , I MPROVING C ONSUMER M ORTGAGE D ISCLOSURES : A N E MPIRICAL A SSESSMENT OF
C URRENT AND P ROTOTYPE D ISCLOSURE F ORMS (June 2007) (finding that the current federally required
mortgage disclosures fail to convey key mortgage costs to many consumers and better disclosures can
significantly improve consumer recognition of mortgage costs).
Materials on credit topics are available at the Commission’s For Consumers Credit web	16
page, at http://www.ftc.gov/bcp/menus/consumer/credit.shtm (last visited Dec. 10, 2007). The web page
includes consumer education materials such as “Mortgage Payments Sending You Reeling? Here’s What
to Do,” “High-Rate, High-Fee Loans (HOEPA/Section 32 Mortgages),” and “Reverse Mortgages: Get the
Facts Before Cashing In On Your Home’s Equity.”
3
Act, 	the Fair Credit Reporting Act, 	the Equal Credit Opportunity Act, 	and the Credit Repair11 	12 	13
Organizations Act. 	In addition, the Commission conducts research on consumer credit14
matters, 	develops consumer and business education materials related to consumer credit,15 	16
responds to inquiries about these matters from consumers, industry and the media, and works
with other federal and state law enforcement entities to protect consumers from unfair,
deceptive, or other unlawful practices.
II. 	FTC Use of Unfairness Authority for Financial Goods and Services
A. 	Overview of Unfairness Principles
When it was enacted in 1914, Section 5 of the FTC Act prohibited “unfair methods of
competition in commerce.” Through the use of this authority, the Commission was able to
challenge acts and practices that were harmful to consumers to the extent that the agency could
prove that they were harmful to competition. The concept of “unfair methods of competition”

Letter from the FTC to Hon. Wendell Ford and Hon. John Danforth, Committee on	17
Commerce, Science and Transportation, United States Senate, Commission Statement of Policy on the
Scope of Consumer Unfairness Jurisdiction (December 17, 1980), reprinted in In re Int’l Harvester Co.,
104 F.T.C. 949, 1070, 1074 n.3 (1984) (“Unfairness Policy Statement”).
In 1975, Congress expanded FTC jurisdiction to reach activities “affecting commerce.”	18
Magnuson-Moss Warranty-Federal Trade Commission Improvement Act, Pub. L. No. 93-637, § 201(a),
88 Stat. 2193, 2200 (1975).
H.R. Rep. No. 1613, 75 	Cong., 1 Sess. 3 (1977).	19 	th 	st
J. H OWARD B EALES , F EDERAL T RADE C OMMISSION , T HE FTC’ S U SE OF U NFAIRNESS
	20
A UTHORITY , I TS R ISE , F ALL , AND R ESURRECTION §II.A. (2003), http://www.ftc.gov/speeches/beales/
unfair0603.shtm.
Unfair or Deceptive Advertising and Labeling of Cigarettes in Relation to the Health	21
Hazards of Smoking, Statement of Basis and Purpose, 29 Fed. Reg. 8324, 8355 (1964).
Beales, supra note 20, at §II.A.	22
4
was “understood as reaching most of the conduct now characterized as consumer unfairness.”17
In 1938, Congress amended Section 5 of the FTC Act to also prohibit “unfair or
deceptive acts or practices” in commerce. 	The purpose of this amendment was to make “the18
consumer, who may be injured by an unfair trade practice, of equal concern before the law, with
the merchant or manufacturer injured by the unfair methods of a dishonest competitor.”19
Congress deliberately chose to frame Section 5 of the FTC Act in general terms because
it recognized that defining the terms “unfair” and “deceptive” with specificity would create the
risk that the acts and practices described would become outdated or easily evaded. From 1938
until 1964, the Commission often brought cases simply alleging that respondents violated the
law by engaging in “unfair or deceptive acts or practices,” without attempting to distinguish
between the concepts of unfairness and deception.20
In 1964, in the Statement of Basis and Purpose for the rule entitled Unfair or Deceptive
Advertising and Labeling of Cigarettes in Relation to the Health Hazards of Smoking (the
“Cigarette Rule”), the Commission first articulated distinct principles for determining whether
an act or practice is unfair. The FTC explained that in making this determination, it would
consider: (1) whether the practice “offends public policy,” as set forth in statutes, the common
law, or otherwise; (2) “whether it is immoral, unethical, oppressive, or unscrupulous; [and]
(3) whether it causes substantial injury to consumers (or competitors or other businessmen).”21
In the subsequent decade, the Commission rarely used its unfairness authority.22

405 U.S. 233, 244 (1972).	23
Am. Fin. Servs. Ass’n v. FTC, 767 F.2d 957, 971 (D.C. Cir. 1985); Sperry & Hutchinson	24
Co., 405 U.S. at 244 n.5.
Sperry & Hutchinson Co., 405 U.S. at 244.	25
E.g., F EDERAL T RADE C OMMISSION , FTC S TAFF R EPORT ON T ELEVISION A DVERTISING TO
	26
C HILDREN 189 (1978) (“FTC S TAFF R EPORT ON T ELEVISION A DVERTISING TO C HILDREN ”).
Am. Fin. Servs. Ass’n, 767 F.2d at 969.	27
Beales, supra note 20, at §II.A.	28
FTC Improvements Act, Pub. L. No. 96-252 (May 1980); Beales, supra note 20, at §II.C.	29
Unfairness Policy Statement at 1073.	30
Id.	31
5
In 1972, in FTC v. Sperry & Hutchinson Co., 	the Supreme Court addressed the FTC’s23
articulation of unfairness in the Cigarette Rule. 	The Court stated that, in determining if acts or24
practices are unfair, the Commission, “like a court of equity, considers public values beyond
simply those enshrined in the letter or encompassed in the spirit of the antitrust laws.” 	The25
Supreme Court’s dicta approving the FTC’s use of broad equitable considerations in concluding
that acts and practices are unfair encouraged the agency to use its unfairness authority more
frequently during the 1970’s. 	Specifically, the Commission commenced a series of26
rulemakings, sometimes relying on broad unfairness theories to try to regulate entire industries. 27
The rulemakings often failed to consider properly the cost-benefit tradeoffs of the proposed
rules, and many in Congress opposed the Commission’s broad rulemaking agenda. 	Congress28
eventually responded by passing legislation restricting the FTC’s authority. 29
In the late 1970s, the FTC recognized that it needed an approach to unfairness that was
more systematic and rigorous than its broad equitable approach. On December 17, 1980, the
Commission therefore issued its Unfairness Policy Statement, declaring that “[un]justified
consumer injury is the primary focus of the FTC Act.” 	The statement articulated a three-part30
test to determine whether the consumer injury that an act or practice causes, or is likely to cause,
renders a practice “unfair:”
The injury must be substantial; it must not be outweighed by
countervailing benefits to consumers or competition that the practice
produces; and it must be an injury that consumers themselves could not
reasonably have avoided.31

Id.	32
15 U.S.C. § 45(n). Section 5(n) of the FTC Act, however, also provides that “[i]n	33
determining whether an act or practice is unfair, the Commission may consider established public policies
as evidence to be considered with all other evidence.”
Unfairness Policy Statement at 1073.	34
Id.	35
Id. (footnotes omitted).	36
Id.	37
Id.	38
6
The Unfairness Policy Statement also explained that, in most instances, the proper role of
“public policy” is as evidence to be considered in determining the balance of costs and benefits. 32
During the 1980’s and the early 1990’s, the Commission used the analytical framework
set forth in its Unfairness Policy Statement. The Commission found that tying its analysis to the
concept of consumer injury resulted in a more effective and objective use of its unfairness
authority. In 1994, Congress enacted Section 5(n) of the FTC Act, which codified the three-part
unfairness test from the FTC’s Unfairness Policy Statement and rejected public policy as an
independent basis for finding unfairness.33
Today the FTC uses a well-reasoned three-part test to determine whether an act or
practice is “unfair:” it must cause, or be likely to cause, substantial consumer injury; the injury
must not be outweighed by countervailing benefits to consumers or competition that the practice
produces; and it must be an injury that consumers themselves could not reasonably have
avoided. 	In analyzing whether injury is substantial, the Commission is not concerned with34
trivial or merely speculative harms, although the substantial injury test may be met by small
harm to a large number of consumers. 	“In most cases a substantial injury involves monetary35
harm . . . Unwarranted health and safety risks may also support a finding of unfairness.
Emotional impact and other more subjective types of harm, on the other hand, will not ordinarily
make a practice unfair.” 	Once it is determined that there is substantial consumer injury, the36
next step is to determine whether the harm is outweighed by countervailing benefits to
consumers or competition. Generally, it is important to consider both the costs of imposing a
remedy and any benefits that consumers enjoy as a result of the practice. 	Finally, a practice is37
only unfair if the injury is not one that a consumer can reasonably avoid. If consumers could
reasonably have made a different choice, but did not, the practice is not unfair under the statute.38
The Commission takes the approach that well-informed consumers generally are capable
of making choices for themselves. However, the agency may prohibit or restrict acts and

Unfairness Policy Statement at 1076.	39
15 U.S.C. § 57a(a)(1)(B); rulemaking procedures are set forth at 15 U.S.C. § 57a(b).	40
15 U.S.C. §§ 6101-6108.	41
Preservation of Consumers’ Claims and Defenses, Statement of Basis and Purpose, 40	42
Fed. Reg. 53,506 (Nov. 18, 1975) (codified at 16 C.F.R. § 433). The Commission promulgated this rule
before it issued the Unfairness Policy Statement.
7
practices as unfair, through rulemaking or law enforcement, if they unreasonably create or take
advantage of an obstacle to the ability of consumers to make informed choices, thus causing, or
being likely to cause, consumer injury. The Commission’s current focus on “substantial net
harm” is the best way to ensure that it uses its resources wisely. 	When used appropriately,39
unfairness is an important tool to address practices that, although not deceptive, cause substantial
and unjustified net harm.
B. 	FTC Use of Unfairness in Financial Services Rules
The Commission may issue rules pursuant to Section 18 of the FTC Act to define acts or
practices that are unfair or deceptive. 	In appropriate circumstances, the FTC promulgates rules40
to prevent and prohibit unfair practices. The Commission has issued the Holder in Due Course
Rule (“HDC Rule”) and the Credit Practices Rule (“CPR”) in the consumer credit area. In
addition, pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention Act, 	the41
Commission has issued the Telemarketing Sales Rule, which prohibits certain unfair credit-
related practices.
1. 	Holder in Due Course Rule
In 1975, the Commission issued the HDC Rule. 	The holder-in-due-course doctrine may42
immunize the subsequent holder of a negotiable instrument from the claims or defenses that the
consumer could have asserted against the original holder. The subsequent holder is entitled to
such immunity if it takes the instrument for value, in good faith, and without notice of any
claims or defenses against it. For example, if a consumer purchased a defective refrigerator from
a department store on an installment plan and the department store sold the installment contract
to a creditor, the holder-in-due course doctrine would prevent the consumer from raising the
claims that the refrigerator is defective when the creditor seeks to obtain payment under the
installment contract.
In its rulemaking, the Commission determined that the use of the holder-in-due-course

Id. at 53,522. Specifically, the Commission stated that it is an unfair practice “for a seller	43
to employ procedures in the course of arranging the financing of a consumer sale which separate the
buyer’s duty to pay for goods or services from the seller’s reciprocal duty to perform as promised.” Id.
Id. at 53,522-23.	44
Id. at 53,523.	45
Id. at 53,523-24.	46
Id. at 53,524.	47
Id. at 53,520.	48
Id. at 53,523.	49
Id.	50
16 C.F.R. § 433.2. The notice states: “Any holder of this consumer credit contract is	51
subject to all claims and defenses which the debtor could assert against the seller of goods or services
obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the debtor shall not exceed
amounts paid by the debtor hereunder.”
8
doctrine in consumer credit disputes was unfair. 	The FTC considered the impact of this43
doctrine in an environment of extensive breaches of contract, breaches of warranty,
misrepresentation, and fraud in credit sale transactions. The Commission’s primary concern was
that the system wholly allocated costs arising from the seller’s practices to the consumer,
because creditors demanded payment as “holders in due course,” even though the creditor was in
a better position to prevent the seller’s harmful practices. 	The FTC found that consumers were44
“clearly injured” by a system that “force[d] them to bear the full risk and burden of sales related
abuses.” 	In promulgating the HDC Rule, the Commission found that sellers or creditors45
imposed adhesive contracts upon consumers. 	The FTC also determined that consumer injury46
was not “off-set by a reasonable measure of value received in return.” 	Indeed, the Commission47
found that readily available credit from a “fly-by-night” salesperson who does not perform as
promised does not benefit consumers. 	And the FTC determined that consumers and honest48
merchants would benefit as prices came to reflect actual transaction costs, and honest merchants
no longer needed to compete with those who relied on abusive sales practices. 49
Therefore, the Commission concluded that the use of certain credit transactions to
foreclose consumer claims and defenses arising from credit sale transactions was an unfair
practice. 	To remedy the unfair practice, the HDC Rule requires sellers to include a specific50
contract provision in the text of certain consumer credit contracts, rendering the contract
ineligible for treatment as a negotiable instrument under state contract law. 	Thus, the HDC51
Rule allows consumers to bring claims related to the sale of the goods or services against the

Almost twenty years later, a House of Representatives report stated that the Holder in	52
Due Course rule has not had a significant impact on credit availability. H.R. R EP . N O . 103-652, at 163
(1994) (Conf. Rep.), reprinted in 1994 U.S.C.C.A.N. 1993.
FTC Credit Practices Rule, 49 Fed. Reg. 7740 (March 1, 1984) (codified at 16 C.F.R.	53
§ 444).
FTC Credit Practices Rule, 16 C.F.R. § 444.	54
FTC Credit Practices Rule, 49 Fed. Reg. at 7743; 7749; 7753.	55
Id. at 7753.	56
Id. at 7744. Consumers likewise faced destitution where the creditor took security	57
interests in necessary household goods. Id. at 7743. Moreover, waiver of exemption clauses potentially
resulted in consumers losing possessions deemed basic necessities by state law. Id. at 7744. Pyramiding
of late charges, that is, the assessment of a late charge where the creditor applied a payment to an
outstanding late charge before the monthly payment due, caused a subsequent payment to be treated as
late even when it was timely. Treating such payment as late resulted in the consumer being unknowingly
assessed multiple late charges for a single late payment, even though subsequent payments were made on
time. Id. at 7744.
9
creditor, with monetary recovery limited to the amount the consumer paid under the contract. 52
2. 	Credit Practices Rule
The Commission issued the CPR in 1985. 	In the CPR, the FTC determined that certain53
remedies that creditors frequently included in credit contracts for use when consumers defaulted
on the loans were unfair: confessions of judgment (or other waiver of the right to notice and the
opportunity to be heard); wage assignments; security interests in household goods; waivers of
exemption; pyramiding of late charges; and cosigner liability. 54
The Commission found that substantial economic injury to consumers resulted from the
use of these remedies by creditors. For example, confessions of judgment deprived consumers
of notice of a lawsuit and the opportunity to present defenses, potentially leading to unjust loss
of property. 	Evidence in the record also showed that consumers frequently paid disputed debts55
that were not in fact owed when threatened with execution or garnishment based on confessions
of judgment. 	Wage assignments also occurred without a hearing or other due process and often56
led to job loss or severely reduced income.57
The FTC also determined that consumers could not reasonably avoid harm from these
practices. The record showed that, because creditor remedies were relevant only in the event of
default and default was relatively infrequent, in looking for credit consumers reasonably

Id. at 7744; 7746.	58
Id. at 7745.	59
Id. at 7744; 7746-47.	60
Id. at 7744.	61
Id.	62
Id.	63
Id. at 7748.	64
Id. at 7744.	65
Id. at 7754.	66
Id.	67
10
concentrated their search on other factors, such as interest rates and payment terms. 58
Furthermore, consumers could not bargain over the boilerplate contract terms specifying creditor
remedies. 	Shopping for credit contracts was difficult already, because contracts were written in59
technical language and sometimes were not provided until the transaction was consummated.60
Moreover, individual creditors had little incentive to provide better terms and explain their
benefits to consumers, because a costly education effort would be required with all creditors
sharing the benefits. 	Such a campaign also may have attracted primarily the riskiest61
borrowers. 62
The Commission also examined empirical evidence concerning the causes of default, and
concluded that these are usually circumstances or events beyond the debtor’s immediate
control. 	Moreover, although certain actions could reduce the consumer’s risk of default, no63
reasonable level of precautions could eliminate the risk. 	Thus, consumers could not reasonably64
avoid the harsh consequences of creditors’ remedies by avoiding default.
The Commission carefully considered potential costs of its proposed credit practice
restrictions, such as increased collection costs, increased screening costs, larger legal costs, and
increases in bad debt losses. 	For example, the FTC considered assertions that banning65
confessions of judgment might decrease credit supply, increase credit cost, or result in
heightened security requirements for loans. 	It found that empirical evidence instead showed66
that where certain states had prohibited or restricted confessions of judgment, there had been no
significant effect on the cost or availability of credit. 	In fact, the record showed that about67
ninety-one percent of debtors failed to appear and defend when creditors sued them; thus,
although creditors may have experienced a slight delay in collection activities with a ban on

Id.	68
Id. at 7759.	69
Id.	70
Id.	71
Id.	72
Id. at 7784.	73
Id.	74
Am. Fin. Servs. Ass’n, 767 F.2d at 964.	75
11
confessions of judgment, it was unlikely that any significant additional costs would be incurred
in the vast majority of cases. 68
The Commission also evaluated claims regarding the benefits of wage assignments.
Some commenters argued that wage assignments allowed consumers with no other collateral to
obtain a secured loan, but record evidence indicated that in a substantial number of loans secured
by wage assignments, other security was also provided. 	Other commenters argued that wage69
assignments spared creditors the cost of going to court. 	The FTC found that court costs would70
be moderate in an undisputed case, and the rights were extremely valuable to consumers when
they have defenses. 	The Commission also cited a study finding that wage assignment71
restrictions had no statistically significant effects on credit costs. 72
Indeed, in the CPR rulemaking process, the Commission considered several other
proposed rule provisions and found that the costs to consumers and competition outweighed the
injury caused by the practices. For example, the FTC rejected proposed provisions prohibiting
creditors from requiring debtors to pay creditors’ attorneys’ fees in debt collection. 	The73
Commission determined that creditors already have an incentive to minimize attorneys’ fees, as
most defaulted borrowers do not actually pay the full amount owed for attorneys’ fees.
Moreover, any benefit that such a prohibition would provide to debtors would be offset by losses
to creditors. Further, such a provision might increase total legal costs by encouraging debtors to
raise additional defenses. 	Thus, the Commission carefully considered the evidence in the74
record to determine whether each regulatory proposal met the unfairness standard.
In a court challenge to two of the CPR’s provisions, an association of consumer finance
companies argued that in the absence of seller deception or coercion, the FTC may not intercede
in the market to obtain “better bargains” for consumers. 	The court reviewed the Commission’s75

Id. at 972-75.	76
Id. at 975-76, 986.	77
Id. at 976-78.	78
Id. at 976.	79
Id. at 977.	80
Id.	81
Id.	82
Id. at 977-78.	83
Id. at 989. The Federal Home Loan Bank Board (OTS’s predecessor agency), the Federal	84
Reserve Board, and the National Credit Union Association issued substantially similar rules applicable to
their supervised institutions. 12 C.F.R. § 535; 12 C.F.R. § 227; 12 C.F.R. § 706.
12
record establishing that the practices caused substantial injury; 	that the marginal cost to76
industry was clearly overshadowed by the much greater risks to consumers; 	and that the injury77
was not reasonably avoidable by consumers. 	As to the balancing of costs and countervailing78
benefits, the court cited favorably the Commission’s determination that the CPR would have
only a marginal impact on the cost or availability of credit, and that this marginal cost was
clearly overshadowed by the much greater risks to consumers resulting from the use of the
challenged remedies.79
In determining whether the FTC correctly concluded that the harm from the practices was
not reasonably avoidable, the court relied on the Commission’s findings that (1) consumers are
not, as a practical matter, able to shop and bargain over alternative collection provisions; and
(2) default is ordinarily the product of forces beyond a borrower’s control. 	Specifically, the80
FTC had found that contracts offered by creditors serving higher-risk borrowers were often
substantially identical. The Commission also had found that consumers’ ability to shop and
bargain was further limited by the technical language and fine print used in the contracts. 	And81
it found that in some cases, comparison was impossible because the creditor refused to provide
the contract until the borrower was ready to sign it. 	Moreover, relying principally on two large82
survey studies of the causes of default, the Commission concluded that because default was both
unforeseeable and unavoidable, the creditors’ use of the challenged remedies was not reasonably
avoidable. 	Based on all of these findings, the court held that the Commission’s decision to83
prohibit the use of certain security interests and wage assignments was supported by substantial
evidence in the record.84

15 U.S.C. § 6102(a).	85
Telemarketing Sales Rule; Final Rule, 68 Fed. Reg. 4580, 4614 (Jan. 29, 2003) (codified	86
at 16 C.F.R. §310) (citing H.R. REP. NO. 103-20 at 8 (1993)).
The TSR prohibits disclosing or receiving, for consideration, unencrypted consumer	87
account numbers for use in telemarketing, causing billing information to be submitted for payment
without the express informed consent of the customer or donor, and failing to follow specified steps for
obtaining express informed consent of the customer or donor in any telemarketing transaction involving
preacquired account information and a free-to-pay conversion feature. 16 C.F.R. §310.4(a)(5-6).
“Credit repair” refers to claims that one can remove negative information from	88
consumers’ credit reports, even if the information is accurate and timely.
“Recovery services” refers to claims that purport to recover money consumers lost to	89
investment fraud.
Telemarketing Sales Rule; Final Rule, 68 Fed. Reg. 4580, 4613-14 (Jan. 29, 2003)	90
(codified at 16 C.F.R. §310).
Id. at 4614.	91
13
3. 	Telemarketing Sales Rule
In 1994, the Telemarketing and Consumer Fraud and Abuse Prevention Act directed the
Commission to issue a rule prohibiting “deceptive and abusive” telemarketing acts or practices. 85
In the resulting Telemarketing Sales Rule (“TSR”), the FTC prohibited specific “abusive”
practices that either were “directly consistent with the Act’s emphasis on privacy protection, and
with the intent, made explicit in the legislative history, that the TSR address these particular
practices,” or satisfied the FTC’s traditional unfairness test. 	The TSR generally applies broadly86
to telemarketing of all types of products and services, including financial services, and
specifically prohibits certain financial-related practices 	because they are unfair. For example,87
the TSR bans (a) requesting or receiving payment for “credit repair” services prior to delivery
and proof that such services have been rendered; 	(b) requesting or receiving payment for88
“recovery services” prior to delivery and proof that such services have been rendered; 	and89
(c) requesting or receiving payment for a loan when a seller or telemarketer has guaranteed or
represented a high likelihood of success in obtaining or arranging a loan or other extension of
credit (sometimes called “advance fee loan”).90
With respect to credit repair, recovery services, and advance fee loans, in many instances,
telemarketers take consumers’ money for services that the seller has no intention of providing
and in fact does not provide. 	Each of these practices had been the subject of large numbers of91
consumer complaints and enforcement actions, and in each case caused substantial injury to

Id.	92
Id.	93
Id.	94
Id.	95
E.g., FTC v. EdebitPay LLC, No. 07-4880 (C.D. Cal. 2007); FTC v. PharmacyCards, No.	96
04-0712 (D. Nev. 2004); FTC v. Verity Int’l Ltd., No. 00-7422 (S.D.N.Y. 2000); FTC v. J.K Publications,
Inc., No. 99-00044 (C.D. Cal. 1999); FTC v. Hold Billing Serv., Ltd., No. 98-0629 (W.D. Tex. 1998).
FTC v. J.K Publ’ns, Inc., 99 F. Supp.2d 1176, 1201-03 (C.D. Cal. 2000).	97
Id.	98
14
consumers. 	Taking money without providing anything in return caused substantial harm to92
consumers without any countervailing benefits to consumers or competition. 	Finally, having93
no way to know these offered services were illusory, consumers had no reasonable means to
avoid the harm that resulted from accepting the offers. 	Thus, these practices met the statutory94
criteria for unfairness. The Commission determined that consumer injury could be avoided by a
rule prohibiting telemarketers from requesting or receiving payment for these services until after
performance of the services was completed. 95
C. 	Law Enforcement Actions Regarding Unfairness
In the last decade, the Commission also has used case-by-case law enforcement to
challenge certain acts and practices as unfair. The acts and practices challenged include a range
of practices that cause widespread and significant consumer harm. In bringing these cases, the
Commission has weighed the costs and benefits of the acts and practices being evaluated. This
comment will provide examples in the areas of processing payments, unilateral contract
modifications, and loan servicing.
1. 	Processing Payments
In a number of cases, the FTC has found that companies have assessed charges on
consumers or debited their bank accounts without any contact with the consumers at all, simply
by obtaining their telephone billing information or bank account numbers and sending charges
through a payment system. 	These practices clearly result in significant consumer injury, and96
there are no countervailing benefits to consumers or competition. 	Consumers also cannot97
reasonably avoid the practice because they never had contact with the company billing or
debiting their accounts. 	Thus, imposing charges on consumers in these circumstances is an98

Id.	99
E.g., FTC v. Interbill Ltd., No. 06-01644 (D. Nev. 2006); FTC v. Global Marketing	100
Group, Inc., No. 06-02272 (M.D. Fla. 2006); FTC v. Universal Processing, Inc., No. 05-6054 (C.D. Cal.
2005); FTC v. First Am. Payment Processing, Inc., No. 04-0074 (D. Ariz. 2004); FTC v. Elec. Fin.
Group, No. 03-211 (W.D. Tex. 2003); FTC v. Windward Mktg., Ltd., No. 96-615 (N.D. Ga. 1997).
FTC v. Windward Mktg., Ltd., No. 96-615, 1997 U.S. Dist. LEXIS 17114, at *37-38	101
(N.D. Ga. Oct. 1, 1997).
In re Orkin Exterminating Co., 108 F.T.C. 263 (1986), aff’d, Orkin Exterminating Co. v.	102
FTC, 849 F.2d 1354 (11 	Cir. 1988); see also Gateway Learning Corp., FTC Docket No. C-4120 (July 7,	th
2004) (consent order) (retroactive application of a materially changed privacy policy to information that
the respondent had previously collected from consumers was an unfair practice).
Orkin Exterminating Co., 849 F.2d at 1356.	103
Id. at 1358.	104
15
unfair act or practice. 	Moreover, the Commission has sued payment processors that submitted99
unauthorized charges to be debited from consumers’ accounts. 	In FTC v. Windward100
Marketing, for example, the court, in determining that a payment processor had engaged in
unfair practices, found that the processor had notice that it was processing payments for which
consumers had not given their consent. 	Processing charges in these circumstances causes101
substantial injury to consumers, has no offsetting benefits to consumers and competition, and
cannot be reasonably avoided.
2. 	Unilateral Contract Modification
Unilaterally modifying contracts also was found to be an unfair practice in In re Orkin
Exterminating Co. 	There, the Orkin termite and pest control company offered consumers102
“lifetime” guarantees for the continued protection of a treated house or other structure. During a
particular time period, the company’s contracts provided that a customer could renew the
coverage of its “lifetime” guarantee by paying a specific annual renewal fee. 	Subsequently,103
the company raised the annual renewal fee for customers with those contracts. 104
The promise to consumers in this case was made and honored for years before the
company modified the contract unilaterally to increase its fee. However, consumers were
harmed when the company later decided to break its promise through unilaterally modifying the
contract. To address the consumer injury from the unilateral contract modification, the
Commission issued an administrative complaint alleging that it was unfair in violation of Section

Beales, supra note 20 at §IV.A. In the financial services context, the FTC has sued	105
companies selling payment processing services to small business clients for unilaterally modifying the
contracts. FTC v. Merchant Processing, Inc., No. 07-00533 (D. Ore. 2007); FTC v. Certified Merchant
Serv. Ltd., No. 02-44 (E.D. Tex. 2002).
Note that, “[a]lthough all breaches of contract cause injury, not all breaches necessarily	106
constitute unfair practices.” Timothy J. Muris and J. Howard Beales, III, The Limits of Unfairness Under
the Federal Trade Commission Act 37 (Association of National Advertisers, Inc. 1991). Under the
common law, the damages available in a private action for breach of contract usually provide an incentive
not to breach contracts. In ordinary circumstances, private enforcement of contracts therefore is
sufficient to prevent consumer injury. However, if the prospect of liability for damages in private action
is not sufficient to deter a company from breaching consumer contracts, treating breaches in these
circumstances as unfair may be necessary to prevent them from injuring consumers. See Orkin, 108
F.T.C. at 375 and 379-80 (separate statement of Chairman Oliver) (“some, perhaps many, Orkin
customers were unable or unwilling to avail themselves of their private remedies because the individual
losses are so small,” thus eliminating the company’s incentive not to breach its fixed fee service contacts
with consumers).
Orkin, 849 F.2d at 1365.	107
Id.	108
Id. at 1365.	109
16
5 of the FTC Act. 	After an administrative proceeding, the Commission concluded that Orkin105
had engaged in an unfair practice through raising its fee, and the company appealed.106
On appeal, the court held that there was sufficient evidence in the record to support the
Commission determination that Orkin’s fee increase was unfair. The court affirmed the
Commission’s finding of “substantial injury,” emphasizing that the FTC had found that Orkin’s
breach of these contracts generated more than $7 million in renewal fees over a four year period
of time. 	The court also affirmed the Commission’s determination that the fee increase did not107
provide a benefit to consumers or competition, noting that the FTC had found that there was no
improvement in the amount or quality of the service provided when the fee was increased. 108
Finally, the court affirmed the Commission’s finding that consumers could not reasonably avoid
the injury from the fee increase, as the contracts gave no indication that the company would raise
the renewal fees for any reason. 109
3. 	Loan Servicing
The Commission also has challenged allegedly unfair practices in the servicing of

United States v. Fairbanks Capital Corp., No. 03-12219 (D. Mass. 2003); FTC v. Capital	110
City Mortgage Corp., No. 98-00237 (D.D.C. 1998).
FTC v. Capital City Mortgage Corp., No. 98-00237 (D.D.C. 1998).	111
Unfairness Policy Statement at 1073.	112
17
subprime mortgage loans. 	For example, in November 2003, the Commission, along with the110
Department of Housing and Urban Development, announced a settlement with Fairbanks Capital
Corp. (now called Select Portfolio Servicing, Inc.). The Commission alleged that Fairbanks
engaged in several unfair practices. In particular, the FTC alleged that Fairbanks failed to timely
or properly post payments received from borrowers, and then assessed late fees and other
charges as a result. The injury caused by improper posting was substantial, including significant
delinquency fees and possibly improper foreclosures when the borrower could not pay the
sometimes hundreds of dollars of fees imposed by Fairbanks. The injury was not reasonably
avoidable by consumers because, even if they sent their payments on time, the servicer did not
credit payments to their accounts on time. Finally, there was no increase in services or benefits
to consumers from improper posting of payments, nor any benefits to competition. Thus, the
Commission alleged that Fairbanks’ conduct constituted an unfair practice under Section 5.
In addition, the FTC alleged that Fairbanks’ practice of placing casualty insurance on
consumers’ homes when such insurance was already in place, while failing to disclose
adequately to consumers that their mortgage accounts would be assessed for such insurance, was
an unfair practice. The practice caused substantial injury. Consumers who refused to pay for the
duplicative insurance incurred significant delinquency fees that put them at risk of foreclosure.
Consumers could not reasonably avoid this injury because, even if they provided proof of their
insurance coverage to Fairbanks, the company allegedly did not remove the insurance charges
from their accounts.
The Commission also alleged unfair loan servicing practices in litigation against Capital
City Mortgage Corp. (“Capital City”), which both originated and serviced subprime mortgage
loans. 	According to the Commission’s complaint, Capital City required borrowers to pay111
money not owed or suffer impairment of title to the property securing their loan, refusing to
release liens in many instances where borrowers paid all amounts due under the loan. This
practice clearly caused substantial injury to consumers. 	The injury was not reasonably
avoidable by consumers, as even when they paid the amounts due under their loans, Capital City
refused to release the lien without additional payments. Finally, these practices were not
outweighed by countervailing benefits to consumers or competition.
As stated in the Unfairness Policy Statement, a wide variety of business practices can be
unfair if they unreasonably create or take advantage of an obstacle to consumer decision-making
in a “well-functioning market.” 	The Commission has used its unfairness authority carefully to112
prevent practices that cause or are likely to cause substantial injury not reasonably avoidable by

Even if consumers do not take away a claim from a seller’s silence in the circumstances,	113
the Commission nevertheless may challenge such “pure omissions” as unfair. Such pure omissions are
likely to be considered unfair if they concern: (1) core aspects of the transaction that virtually all
consumers would consider essential to an informed decision, or (2) the basic characteristics of common
law merchantability, such as information bearing on the fitness of a product for its intended use and
information bearing on significant hidden safety standards. In re International Harvester, 104 F.T.C.
949, 1062 (1984). For example, in International Harvester, a tractor manufacturer did not inform farmers
that if they removed or loosened a fuel cap on a hot or running tractor to check fuel levels, it could cause
fuel geysering. The Commission concluded that the manufacturer’s silence was unfair in these
circumstances because: (1) it caused farmers to suffer fatal and serious burns, (2) consumers and
competition received no benefits from the manufacturer’s silence, and (3) farmers could not reasonably
avoid injury, because, although they understood generally they should not remove a fuel cap from a hot or
running engine, they did not appreciate that something as dangerous as fuel geysering could occur. Id. at
1064-67.
Id. at 1060.	114
Id. at 1056.	115
Id.	116
Federal Trade Commission Policy Statement on Deception, appended to In re Cliffdale	117
Assocs., 103 F.T.C. 110, 174-83 (1984) (“Deception Policy Statement”); see also FTC v. Tashman, 318
F.3d 1273, 1277 (11 	Cir. 2003); FTC v. Gill, 265 F.3d 944, 950 (9 	Cir. 2001); FTC v. QT, Inc., 448 F.	th 	th
18
consumers, and are not outweighed by countervailing benefits to consumers and competition. 113
III. 	FTC Use of Deception Authority
A. 	Overview of Deception Principles
As with unfairness, since 1938 the Commission has had the authority under Section 5 of
the FTC Act to bring cases to prevent deceptive acts or practices. Deceptive acts and practices
under the FTC Act are a subset of unfair acts and practices. 	A full analysis of the three114
elements of the unfairness test are not necessary when considering a deceptive act or practice
because: (1) deception is very unlikely to benefit consumers or competition, and (2) consumers
cannot reasonably avoid being harmed by deception. 	Consequently, the Commission employs115
a truncated analytical framework for deception in which a finding of false or misleading material
statement or omissions is presumed to injure consumers. 116
In 1984, the FTC issued its Deception Policy Statement, setting forth the elements of
deception. An act or practice is deceptive if (1) there is a representation or omission of
information that is likely to mislead consumers acting reasonably under the circumstances; and
(2) that representation is material to consumers. 	Injury is likely if inaccurate or omitted117

Supp. 2d 908, 957 (N.D. Ill. 2006); FTC v. Think Achievement, 144 F. Supp. 2d 993, 1009 (N.D. Ind.
2000); FTC v. Minuteman Press, 53 F. Supp. 2d 248, 258 (E.D.N.Y. 1998).
Deception Policy Statement at 171.	118
FTC v. Simeon Mgmt. Corp., 532 F.2d 708, 716 (9 	Cir. 1976); FTC v. Pharmtech	119 	th
Research, Inc., 576 F. Supp. 294, 300 (D.D.C. 1983).
In some circumstances, silence also may be deceptive. Silence associated with the appearance of
a particular product, the circumstances of a specific transaction, or ordinary consumer expectations
represents that the product is reasonably fit for its intended purpose. Deception Policy Statement at 170.
For example, in connection with sale of a car, consumers assume in the absence of other information that
the car can go fast enough for ordinary use on a freeway. If the car cannot, the seller’s silence on this
point may have been deceptive.
FTC v. QT, Inc., 448 F. Supp. 2d 908, 957 (N.D. Ill. 2006).	120
FTC v. Kraft, Inc., 970 F.2d 311, 319 (7 	Cir. 1992); QT, Inc., 448 F. Supp. 2d at 958.	121 	th
In re Kraft, Inc., 114 F.T.C. 40, 121, aff’d, 970 F.2d 311 (7 	Cir. 1992).	122 	th
Id. at 122.	123
FTC v. Cyberspace.com, 453 F.3d 1196, 1200 (9 	Cir. 2006) (“A solicitation may be	124 	th
likely to mislead by virtue of the net impression it creates even though the solicitation also contains
truthful disclosures”); FTC v. Gill, 265 F.3d 944, 956 (9 	Cir. 2001) (affirming deception finding based	th
on “overall ‘net impression’” of statements); Removatron Int’l Corp. v. FTC, 884 F.2d 1489, 1497 (1 st
Cir. 1989) (advertisement was deceptive despite written qualification); Thompson Medical Co. v. FTC,
19
information is material.118
A claim may be deceptive by either misrepresenting or omitting a material fact that
causes consumers to be misled. 	There are two types of claims: express and implied. Express119
claims directly represent the fact at issue, while implied claims do so in an oblique or indirect
way. 	The Commission may rely on its own reasoned analysis to determine what claims,120
including implied ones, are conveyed in a challenged advertisement, so long as those claims are
reasonably clear from the face of the advertisement. 	If, after a facial analysis, the Commission121
cannot conclude that a particular advertisement can reasonably be read to contain a particular
implied message, it needs extrinsic evidence to determine whether such a reading is
reasonable. 	Extrinsic evidence may include, but is not limited to, results from consumer122
surveys.123
A claim is deceptive if the overall net impression that consumers take away based on all
of the elements (language, pictures, graphics, etc.) in an advertisement is likely to mislead
them. 	The FTC evaluates whether the consumer’s impression or interpretation of a124

791 F.2d 189, 197 (D.C. Cir. 1986) (literally true statements may nonetheless be deceptive); FTC v. QT,
Inc., 448 F. Supp. 2d 908, 958 (N.D. Ill. 2006).
Deception Policy Statement at 177.	125
Id. at 178.	126
Id. at 184.	127
E.g., id. at 183; In re Haagen Dazs Co., 119 F.T.C. 762 (1995); Stouffer Food Corp., 118	128
F.T.C. 746 (1994); In re Kraft, Inc., 114 F.T.C. 40, 124 (1991), aff’d, 970 F.2d 311 (7 	Cir. 1992).	th
Deception Policy Statement at 183.	129
Id.; F EDERAL T RADE C OMMISSION , D OT C OM D ISCLOSURES : I NFORMATION ABOUT
	130
O NLINE A DVERTISING , http://www.ftc.gov/bcp/conline/pubs/ buspubs/dotcom/index.shtml; F EDERAL
T RADE C OMMISSION , D IETARY S UPPLEMENTS : A N A DVERTISING G UIDE F OR I NDUSTRY 1988 at Section
A.3; In re Kent & Spiegel Direct, Inc., 124 F.T.C. 300 (1997); In re Synchronal Corp., 116 F.T.C. 1189
(1993) (consent orders requiring disclosures to be repeated during television infomercials); In re
Nutri/System, Inc., 116 F.T.C. 1408 (1993) (consent order requiring a shorter disclosure for 15 second
20
representation or omission is reasonable. Reasonableness is evaluated based on the
sophistication and understanding of consumers in the group to whom the act or practice is
targeted, which may be a general audience or a specific audience, such as children or the
elderly. 	A claim may be susceptible to more than one reasonable interpretation, and if one125
such interpretation is misleading, then the ad is deceptive, even if other, non-deceptive
interpretations are possible.126
Disclaimers or qualifying statements can be very important to the deception analysis.
Once an affirmative representation is made, the Commission carefully examines any disclaimers
to make sure that they are sufficiently clear and prominent to convey the qualifying information
effectively to consumers. Qualifications are only effective if they are both noticed and
understood by consumers. “[I]n many circumstances, reasonable consumers do not read the
entirety of an ad or are directed away from the importance of the qualifying phrase by the acts or
statements of the seller;” 	thus, a fine print disclosure at the bottom of a print advertisement or127
a brief video superscript in a television advertisement therefore is unlikely to qualify a claim
effectively. 	Similarly, because consumers “may glance only at the headline” of an128
advertisement, “accurate information in the text may not remedy a false headline.”129
The FTC has provided extensive guidance to businesses on what constitutes a clear and
prominent disclosure of information. The agency’s guidance focuses on the impact on
consumers of specific elements such as clarity of language, relative type size and proximity to
the claim being qualified, and an absence of contrary claims, inconsistent statements, or other
distracting elements that could undercut the disclosure.130

television ads).
Kraft, Inc. v. FTC, 970 F.2d 311, 322 (7 	Cir. 1992); In re Cliffdale Assocs., Inc., 103	131 	th
F.T.C. 110, 165 (1984); see also FTC v. SlimAmerica, Inc., 77 F. Supp.2d 1263, 1272 (S.D. Fla. 1999)
(citations omitted).
Deception Policy Statement at 171.	132
FTC v. Pantron I Corp., 33 F.3d 1088, 1095-1096 (9 	Cir. 1994).	133 	th
In re Peacock Buick, 86 F.T.C. 1532, 1562 (1975), aff’d, 553 F.2d 97 (4 	Cir. 1977);	134 	th
Deception Policy Statement at 190.
Am. Home Prod., 98 F.T.C. 136, 368 (1981), aff'd, 695 F.2d 681 (3rd Cir. 1982).	135
Novartis Corp. v. FTC, 223 F.3d 783, 786-87 (D.C. Cir. 2000).	136
The Commission also uses a variety of other means to identify and prevent deceptive	137
claims, such as legislative rules, interpretive rules, guides, policy statements, informal business guidance,
and public workshops.
FTC v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. 2001); In re First Plus	138
Fin. Group, Inc., FTC Docket No. C-3984 (2000).
FTC v. EdebitPay LLC, No. 07-4880 (C.D. Cal. 2007); FTC v. Chase Fin. Funding, No.	139
04-549 (C.D. Cal. 2004).
FTC v. Mortgages Para Hispanos.Com Corp., No. 06-00019 (E.D. Tex. 2006); FTC v.	140
Stewart Fin. Company Holdings, Inc., No. 03-2648 (N.D. Ga. 2003); FTC v. First Alliance Mortgage Co.,
No. 00-964 (C.D. Cal. 2002); FTC v. Diamond, No. 02-5078 (N.D. Ill. 2002); United States v. Mercantile
21
A representation or omission is material if it is likely to affect a consumer’s choice of or
conduct regarding a product. 	If consumers are likely to have chosen differently but for the131
claim, the claim is likely to have caused consumer injury. 	Express claims are presumed132
material. 	Similarly, information regarding the cost of a product or service is presumed133
material. 	Intentional claims, 	and claims about the purpose and efficacy of a product or134 	135
service, 	are also presumed material.136
Most of the FTC’s consumer protection efforts in connection with financial services
concern deceptive claims. In addition, case-by-case law enforcement actions are the main tool
that the Commission uses to prevent these deceptive claims. 	Combining its broad deception137
authority under Section 5 of the FTC Act with case-by-case law enforcement results in the
Commission being able to move swiftly to combat deception. The Commission can challenge
deceptive claims regardless of the medium or format used, including direct mail
solicitations, 	email solicitations, 	oral representations, 	television and radio advertising,138 	139 	140 	141

Mortgage Co., No. 02-5079 (N.D. Ill. 2002).
FTC v. DebtSet, No. 07-558, (D. Colo. 2007); FTC v. AmeriDebt, No. 03-3317 (D. Md.	141
2003).
FTC v. EdebitPay LLC, No. 07-4880 (C.D. Cal. 2007); FTC v. DebtSet, No. 07-558, (D.	142
Colo. 2007); FTC v. AmeriDebt, No. 03-3317 (D. Md. 2003).
FTC v. AmeriDebt, No. 03-3317 (D. Md. 2003).	143
In re R.N. Motors, Inc., FTC Docket No. C-3947 (Apr. 27, 2000); In re Simmons	144
Rockwell Ford Mercury, Inc., FTC Docket No. C-3950 (Apr. 27, 2000); In re Chrysler Corp., FTC
Docket No. C-3847 (Jan. 13, 1999); In re Martin Advertising, FTC Docket No. C-3846 (Jan. 13, 1999); In
re Frank Bommarito Oldsmobile, Inc., FTC Docket No. C-3774 (Jan. 9, 1998); In re Toyota Motor Sales,
U.S.A., Inc., FTC Docket No. C-3776 (Jan. 9, 1998); In re Beuckman Ford, Inc., FTC Docket No. C-3777
(Jan. 9, 1998); In re Volkswagen of America, Inc., FTC Docket No. C-3778 (Jan. 9, 1998); In re Suntrup
Ford, Inc., FTC Docket No. C-3779 (Jan. 9, 1998); In re Lou Fusz Automotive Network, Inc., FTC
Docket No. C-3780 (Jan. 9, 1998).
The FTC has sued over 55 companies since 1998 alleging that they charged advance fees	145
for credit cards but never provided the cards. E.g., FTC v. Remote Response Corp., No. 06-20168 (S.D.
Fla. 2006); FTC v. Centurion Fin. Benefits LLC, No. 05-5442 (N.D. Ill. 2005); FTC v. 3RBancorp, No.
04-7177 (N.D. Ill. 2004); FTC v. SunSpectrum Commc’ns Org., Inc., No. 03-81105 (S.D. Fla. 2003); FTC
v. Platinum Universal, LLC, No. 03-61987 (S.D. Fla. 2003); FTC v. Assail, Inc., No. 03-007 (W.D. Tex.
2003); FTC v. Star Credit Servs., Inc., No. 02-4500 (E.D.N.Y. 2002); FTC v. Capital Choice Consumer
Credit, Inc., No. 02-21050 (S.D. Fla. 2002); FTC v. Bay Area Business Council, Inc., No. 02-5762 (N.D.
Ill. 2002); FTC v. 1st Beneficial Credit Servs. LLC, No. 02-1591 (N.D. Ohio 2002); FTC v. Membership
Servs., Inc., No. 01-1868 (S.D. Cal. 2001); FTC v. Am. Consumer Membership Servs., No. 99-1206
(N.D.N.Y. 1999).
22
and Web sites. 	The FTC can challenge deceptive claims for all types of financial goods and142
services, from mortgage and personal lending, to credit counseling services, 	to automobile143
leasing.144
The FTC has targeted deception relating to various financial services products and
services, including those identified in the OTS ANPR: credit card and payment card lending,
residential mortgage lending, gift cards, and deposit accounts. This comment will describe
selected cases in which the FTC has challenged deceptive acts and practices in those areas.
B. 	Law Enforcement Actions Regarding Deception
1. 	Credit Cards and Other Payment Cards
The Commission frequently has taken action to protect consumers from deceptive
representations in the marketing of credit cards and other payment cards. 	As a recent example,145

FTC v. EDebitPay LLC, No. 07-4880 (C.D. Cal. 2007).	146
United States v. Mercantile Mortgage Co., No. 02-5079 (N.D. Ill. 2002)	147
(misrepresentations regarding balloon payments and other loan terms); FTC v. Associates First Capital
Corp., No. 01-00606 (N.D. Ga. 2001); FTC v. First Alliance Mortgage Co., No. 00-964 (C.D. Cal. 2000)
(misrepresentations regarding up-front fees and other loan costs); FTC v. CLS Fin. Serv., Inc., No. 99-
1215 (W.D. Wash. 1999) (misrepresentations that credit was open-end credit); FTC v. Wasatch Credit
Corp., No. 99-579 (D. Utah 1999) (same); In re First Plus Fin. Group, Inc., FTC Docket No. C-3984
(2000) (misrepresentations regarding the amount of money consumers would save by obtaining its loans);
FTC v. Capital City Mortgage Corp., No. 98-00237 (D.D.C. 1998) (misrepresentations regarding various
loan terms).
FTC v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. 2001).	148
23
the FTC sued prepaid stored-value card seller EDebitPay, LLC and its affiliates (“EDebitPay”)
in July 2007. 	Defendants’ email and Internet advertisements stated that there were “No146
Annual Fees” and “No Security Deposit” associated with the card. In fact, defendants allegedly
debited a $159.95 fee from the consumer’s bank account for “application and processing.”
Providing consumers with some information about a characteristic, feature, or other attribute of a
good or service but failing to provide other material information related to it is a deceptive act or
practice if consumers are left with a false or misleading impression. The FTC alleges that
consumers reasonably understood from EdebitPay’s statements that there were no substantial
fees imposed to obtain and use the card. The claim that there were no “annual fees” or “security
deposit” therefore left a misleading impression. Information concerning the cost of a product,
such as substantial fees, is presumed material to consumers in making decisions.
2. 	Mortgage Lending
In many cases, the Commission has alleged that mortgage lenders have misrepresented
material terms related to their loans. 	For instance, the FTC’s complaint against Associates147
First Capital Corporation and Associates Corporation of North America (“The Associates”)
alleged that the defendants made false and misleading statements about subprime home equity
loan costs and single-premium credit insurance. 	According to the Commission complaint, The148
Associates engaged in a course of conduct through which they represented that consumers could
pay off their current unsecured debts with a home equity loan for the same amount. The
Associates made this claim in advertisements for home equity loans that contained charts
showing that the “solution” to unsecured debt of $24,000 was a home equity loan of $24,000, as
well as in custom-tailored written proposals provided to consumers. In fact, the complaint
alleged, consumers could not pay off their current debts with a home equity loan for the same
amount, because The Associates’ home equity loan also (a) required the payment of substantial
loan fees and closing costs, and (b) in some instances, mandated that consumers purchase single-
premium credit insurance. Thus, the “loan amount” listed in the credit advertisements

Indeed, as several banking agencies have recognized, an advertisement or transaction that	149
is in technical compliance with the Truth in Lending Act may nevertheless violate the FTC Act. Board of
Governors of Federal Reserve System and Federal Deposit Insurance Corporation, Unfair or Deceptive
Acts or Practices by State Chartered Banks (March 11, 2004), at 5-6, available at
www.federalreserve.gov/BoardDocs/press/bcreg/2004/20040311/attachment.pdf; OCC Advisory Letter
2002-3, Guidance on Unfair or Deceptive Acts or Practices (March 22, 2002), at 6, available at
www.occ.gov/ftp/advisory/2002-3.doc.
Peacock Buick, 86 F.T.C. 1532, 1562 (1975), aff’d, 553 F.2d 97 (4 	Cir. 1977).	150 	th
FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); FTC v. Diamond, No. 02-5078	151
(N.D. Ill. 2002).
FTC v. Diamond, No. 02-5078 (N.D. Ill. 2002).	152
FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); FTC v. Ranney, No. 04-1065	153
(D. Colo. 2004); FTC v. Diamond, No. 02-5078 (N.D. Ill. 2002); FTC v. Mortgages Para Hispanos.Com
Corp., No. 06-00019 (E.D. Tex. 2006).
FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004).	154
24
misrepresented the true cost of the loan. 	A higher loan amount imposed higher fee and interest149
costs on consumers, and information regarding the cost of a product is presumed material. 150
Moreover, the Commission has brought several enforcement actions against mortgage
brokers for allegedly deceiving consumers about key loan terms, such as the existence of a
prepayment penalty 	or a large balloon payment due at the end of the loan. 	Similarly, the151 	152
Commission has charged brokers with falsely promising consumers low fixed payments and
rates on their mortgage loans. 	In June 2004, the Commission sued Chase Financial Funding153
(“CFF”), a California mortgage broker, and its principals, in connection with sending unsolicited
email and direct mail promising a “3.5% fixed payment” loan. 	The FTC alleged that CFF did154
not offer any such loan and that the loan CFF falsely advertised was actually a “payment option”
adjustable rate mortgage. With this mortgage, interest accrued at a higher rate, the principal
balance would increase if consumers made payments at the advertised rates, and payments were
not “fixed.” CFF’s alleged misrepresentations regarding mortgage rates involved facts that a
reasonable person likely would have considered important in choosing a loan, and were therefore
material.
3. 	Gift Cards
The Commission has used the same deception principles to challenge deception in
relatively new financial products, such as gift cards. Specifically, the FTC has brought cases
against sellers of gift cards that carried concealed fees or expiration dates. The Commission
alleged that the companies represented, expressly or by implication, that consumers could

In re Kmart Corp., FTC Docket No. C-4197 (Aug. 14, 2007) (final order); In re Darden	155
Restaurants, Inc., FTC Docket No. C-4189 (May 7, 2007) (final order).
FTC v. Stewart Fin. Co. Holdings, Inc., No. 03-2648 (N.D. Ga. 2003).	156
In re Peacock Buick, 86 F.T.C. 1532, 1562 (1975), aff’d, 553 F.2d 97 (4 	Cir. 1977).	157 	th
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redeem their gift cards for goods or services of an equal value to the monetary amount of the
card. However, these gift cards charged consumers “dormancy” fees 	fees imposed against the
cards during periods of non-use 	or imposed expiration dates. The FTC settled separate cases
against two such gift card retailers, Kmart Corporation and Darden Restaurants, Inc., alleging
that they failed to disclose adequately to consumers the dormancy fees associated with their
cards. 	The Commission charged that the failure to disclose adequately the fees, in light of the155
representations made about the value of the cards, resulted in consumers being misled. The FTC
also alleged that the claim on the Kmart gift card that it “never expire[s]” was deceptive because
in fact, defendants’ application of a dormancy fee caused the card to expire.
4. 	Deposit Accounts
Although the nonbank companies over which the FTC has jurisdiction generally do not
offer deposit accounts, the Commission has challenged certain representations about deposit
account services. For example, the FTC charged a regional subprime lending company, Stewart
Finance, and its affiliates with making deceptive claims in selling small personal loans and
inducing consumers to participate in a “direct deposit” program. 	In particular, the complaint156
alleged that Stewart Finance actively solicited Social Security recipients by offering loans of
$150 if they agreed to have their Social Security or other government benefits automatically
deposited into bank accounts with financial institutions that Stewart Finance designated. Stewart
Finance allegedly trained employees to tell customers that the direct deposit was a “free service”
that would “not cost you any extra money.” In fact, the Commission alleged that Stewart
Finance deducted monthly fees of $4 to $6 from the customer’s account. In addition, if the
consumer wished to withdraw money from his account, he allegedly had to do so using an
automated teller machine and often incurred a fee. As discussed above, information regarding
the cost of a product is presumed material. 157
In sum, the FTC has challenged a wide variety of deceptive representations and
omissions related to financial goods and services. The Commission staff believes that these
efforts to combat false and misleading information in the marketplace has helped consumers
make better-informed decisions.

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IV. 	Conclusion
In sum, the Commission’s activities are focused primarily on ensuring that consumers
obtain the truthful, non-misleading information they need to make informed financial decisions,
and on protecting them from unlawful acts and practices that are likely to cause them harm. The
FTC uses case-by-case enforcement and carefully crafted rules to accomplish these goals. The
Commission staff recommends that the OTS consider the FTC’s experience applying its current
legal standards in determining whether to impose rules prohibiting or restricting particular acts
and practices of financial institutions.
The FTC staff appreciates your consideration of this information. If any other
information would be useful regarding these matters, please contact Peggy L. Twohig, Associate
Director for Financial Practices, at (202) 326-3224.
Sincerely,
Lydia B. Parnes, Director, Bureau of Consumer Protection
Peggy L. Twohig, Associate Director, Division of Financial Practices
Thomas B. Pahl, Assistant Director, Division of Financial Practices
Allison I. Brown, Senior Attorney, Division of Financial Practices