In recent months, the Office of Thrift Supervision (“OTS”) has indicated that it intends to take an increasingly active role in regulating the business practices of banking institutions under its regulatory authority.  On August 6, 2007, the OTS announced the issuance of an Advance Notice of Proposed Rulemaking (“ANPR”) seeking public comment on approaches for the OTS to consider in expanding its regulations addressing unfair or deceptive acts or practices (“UDAP”) by OTS regulated entities.  The OTS requested public comment on a number of particular issues, including how an OTS regulation could provide greater clarity to institutions and benefit consumers and what is the proper scope of entities and practices that should be covered.

Furthermore, the OTS requested comment from other agencies with regulatory authority over UDAP, explaining that the banking industry, as well as consumers, benefit from consistency in federal banking regulations concerning banking practices.  Specifically, the OTS advised that it is considering adopting Federal Trade Commission (“FTC”) guidance or standards as a regulation or using FTC enforcement actions as models for regulating unfair or deceptive banking practices.

On December 12, 2007, in response to that request, the FTC issued a comment to the OTS describing its experiences addressing unfairness and deception.  In the context of unfairness, the FTC explained its general regulatory standard of unfairness, which applies when the actions of a regulated entity cause or are likely to cause consumer injury, are not outweighed by countervailing benefits to the consumer or to competition, and could not have reasonably been avoided by consumers.  Furthermore, the FTC emphasized that it has undertaken numerous enforcement actions under this rule in the context of subprime loan servicing.  For example, the FTC challenged the failure of lenders to timely or properly post payments leading to the assessment of late fees and other charges.  The FTC also emphasized enforcement actions that challenged the placement of casualty insurance on consumers’ homes without adequate disclosure that their mortgage accounts would be assessed with such insurance.

In its comment to the OTS, the FTC also described its regulatory activities regarding deceptive practices.  The FTC advised the OTS of its general rule that acts or practices are deemed to be deceptive by the FTC when there is a representation or omission or information that is likely to mislead consumers and that representation is material.  Moreover, the FTC advised of three areas in which it has focused its enforcement actions that are particularly relevant to banking institutions.  First is the area of credit card issuance.  The FTC advised that it has undertaken enforcement actions against the issuers of credit cards that deceptively advertised that their cards carried “no annual fees” or “no security deposit.”  Second, the FTC advised that it has undertaken a significant number of enforcement actions in the area of mortgage lending, particularly relating to subprime lending.  For example, the FTC highlighted its enforcement actions against subprime mortgage lenders regarding alleged misrepresentations concerning the terms and costs of such lenders’ loans.  The FTC also emphasized enforcement actions targeting misrepresentations regarding the existence of prepayment penalties or balloon payments.  Lastly, the FTC advised that it has undertaken a number of enforcement actions regarding deceptive representations regarding financial goods and services provided in connection with depository accounts.

Although the time period for accepting comments has expired, the OTS has provided no public indication of its regulatory intentions regarding UDAP.  However, since the OTS announced that it seeks interagency consistency in addressing this issue, the FTC’s comment to the OTS may provide some indication of the potential regulatory actions that will be taken by the OTS.  First, the FTC comment indicates that the OTS may promulgate broad rules addressing UDAP, as that has been the practice of the FTC in this area.  Second, if the OTS determines that it will regulate specific actions determined to be unfair or deceptive, it is likely that mortgage lending (particularly subprime lending) will be a focus of those regulations.   Third, the FTC comment indicates that the OTS regulations in this area are likely to account for considerations of public policy, as has been the practice of the FTC.  However, regardless of the specific regulatory actions the OTS undertakes, those banking institutions regulated by the OTS will likely face greater regulation and enforcement in the area of UDAP and are well advised to closely follow the progress of the OTS in formulating its regulatory scheme in this area.