[Federal Register Volume 72, Number 150 (Monday, August 6, 2007)]
[Proposed Rules]
[Pages 43570-43576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-15179]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 535

[Docket ID OTS-2007-0015]
RIN 1550-AC17


Unfair or Deceptive Acts or Practices

AGENCY: Office of Thrift Supervision, Treasury (OTS).

ACTION: Advance notice of proposed rulemaking (ANPR).

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SUMMARY: OTS is reviewing its regulations relating to unfair or 
deceptive acts or practices to determine whether and, if so, to what 
extent, additional regulation is needed to ensure customers of OTS-
regulated entities are treated fairly. This ANPR

[[Page 43571]]

seeks input and information on issues OTS is considering as part of 
this review.

DATES: Comments must be submitted by November 5, 2007.

ADDRESSES: You may submit comments, identified by OTS-2007-0015, by any 
of the following methods:
     Federal eRulemaking Portal: Go to 
http:www.regulations.gov, select ``Office of Thrift Supervision'' from 
the agency drop-down menu, then click submit. Select Docket ID ``OTS-
2007-0015'' to submit or view public comments and to view supporting 
and related materials for this advance notice of proposed rulemaking. 
The ``User Tips'' link at the top of the page provides information on 
using Regulations.gov, including instructions for submitting or viewing 
public comments, viewing other supporting and related materials, and 
viewing the docket after the close of the comment period.
     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: OTS-2007-0015.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: OTS-2007-0015.
     Instructions: All submissions received must include the 
agency name and docket number for this rulemaking. All comments 
received will be entered into the docket and posted on Regulations.gov 
without change, including any personal information provided. Comments, 
including attachments and other supporting materials received are part 
of the public record and subject to public disclosure. Do not enclose 
any information in your comment or supporting materials that you 
consider confidential or inappropriate for public disclosure.
     Viewing Comments Electronically: Go to http://www.regulations.gov, select ``Office of Thrift Supervision'' from the 
agency drop-down menu, then click ``Submit.'' Select Docket ID ``OTS-
2007-0015'' to view public comments for this advance notice of proposed 
rulemaking.
     Viewing Comments On-Site: You may inspect comments at the 
Public Reading Room, 1700 G Street, NW., by appointment. To make an 
appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-6518. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.

FOR FURTHER INFORMATION CONTACT: Glenn Gimble, Senior Project Manager, 
Compliance and Consumer Protection Division, (202) 906-7158; Suzanne 
McQueen, Consumer Regulations Analyst, Compliance and Consumer 
Protection Division, (202) 906-6459; or Richard Bennett, Compliance 
Counsel, Regulations and Legislation Division, (202) 906-7409, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION: 

I. Purpose and Goals of This ANPR

    The mission of OTS is ``to supervise savings associations and their 
holding companies in order to maintain their safety and soundness and 
compliance with consumer protection laws, and to encourage a 
competitive industry that meets America's financial services needs.'' 
\1\ Consistent with our mission, OTS is issuing this ANPR to determine 
whether the agency should expand its current prohibitions against 
unfair or deceptive acts or practices.
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    \1\ OTS Mission Statement, available at http://www.ots.treas.gov/mission.cfm?catNumber=39.
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    The ANPR identifies some of the issues that may warrant OTS's 
review. The discussion is not exhaustive of all the issues that could 
be raised. OTS invites commenters to respond to the questions presented 
and to offer comments or suggestions on any other issues related to 
unfair or deceptive acts or practices, including what other steps, OTS 
might undertake instead of or in addition to further rulemaking in this 
area. OTS recognizes that the financial services industry and consumers 
have benefited from consistency in rules and guidance as the federal 
banking agencies have adopted uniform or very similar rules in many 
areas. OTS is mindful of the goal of consistent interagency standards 
as it considers issues relating to unfair or deceptive acts and 
practices.

II. Legal Background

    The primary legal bases for this rulemaking are the Federal Trade 
Commission Act (FTC Act), 15 U.S.C. 41-58, and the Home Owners' Loan 
Act (HOLA), 12 U.S.C. 1461 et seq.

A. The FTC Act

1. Statutory Provisions
    Under section 18(f)(1) of the FTC Act, 15 U.S.C. 57a(f)(1), OTS is 
responsible for prescribing regulations to prevent unfair or deceptive 
acts or practices by savings associations in or affecting commerce, 
including acts or practices that are unfair or deceptive to 
consumers.\2\ In granting this authority, Congress allowed OTS great 
flexibility in determining the appropriate regulatory approach.
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    \2\ We note some outdated language in the statute, but find that 
it has no bearing on OTS's rulemaking authority. First, the statute 
refers to OTS's predecessor agency, the Federal Home Loan Bank Board 
(FHLBB), rather than to OTS. However, in section 3(e) of the HOLA, 
Congress transferred this rulemaking power of the FHLBB among others 
to the Director of OTS. 12 U.S.C. 1462a(e). Second, the statute 
refers to ``savings and loan institutions'' in some provisions and 
``savings associations'' in other provisions. Although ``savings 
associations'' is the term currently used in the HOLA, see e.g., 12 
U.S.C. 1462(4), the terms ``savings and loan institutions'' and 
``savings associations'' can be and are used interchangeably.
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    Section 18(f)(1) also provides that OTS's regulations may take a 
variety of approaches ``including'' (but not limited to) regulations 
``defining with specificity'' which acts or practices are unfair or 
deceptive, as well as regulations ``containing requirements prescribed 
for the purposes of preventing such acts or practices.'' Thus, in 
addition to listing specific acts or practices that are unfair or 
deceptive OTS may also impose measures designed to prevent such acts or 
practices from occurring.\3\ The use of the word ``including'' reveals 
that even these two regulatory approaches are not meant to be the only 
options for OTS rulemaking. For example, OTS could issue principles-
based regulations that articulate general principles and standards for 
evaluating whether acts or practices are unfair or deceptive, similar 
to OTS's principles-based Advertising rule (12 CFR 563.27). This 
provision of the FTC Act assigns the same rulemaking authority to the 
Board of Governors of the Federal Reserve System (Board) with respect 
to banks and to the National Credit Union Administration (NCUA) with 
respect to federal credit unions.
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    \3\ The legislative history gives as an example an FTC rule that 
mandates certain testing procedures to determine the octane rating 
of gasoline to avoid unfair or deceptive octane ratings being posted 
on gasoline pumps. Senate Conference Report No. 93-1408, December 
18, 1974 (to accompany S. 356), reprinted in 1974 U.S.C.C.A.N. 7702, 
7764.
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    Separately and additionally, section 18(f)(1) provides that 
whenever the Federal Trade Commission (FTC) uses its authority in 
section 18(a)(1)(B) to prescribe a rule defining with specificity which 
acts or practices are unfair or deceptive, within 60 days after such 
rule takes effect OTS generally must promulgate substantially similar 
regulations prohibiting savings associations from engaging in

[[Page 43572]]

substantially similar acts or practices and imposing similar 
requirements. Thus, this provision specifies procedures to ensure that 
the regulations of the OTS--at a minimum--are consistent with 
regulations the FTC may prescribe. It does not limit OTS's rulemaking 
authority or set a ceiling on the acts or practices that OTS can 
address in its regulations. However, it does set a floor for OTS's 
regulation, subject to two exceptions.\4\ Section 18(f)(1) assigns the 
same rulemaking authority to the Board with respect to banks and to the 
NCUA with respect to federal credit unions.
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    \4\ One exception is if OTS finds that such acts or practices 
are not unfair or deceptive. This portion of section 18(f)(1) 
assigns the Board (with respect to banks) and the NCUA (with respect 
to federal credit unions) the same ability to make findings creating 
exceptions. The second exception is if the Board finds that 
implementation of similar regulations by banks, savings 
associations, or federal credit unions would seriously conflict with 
essential monetary and payments systems policies and the Board 
publishes such a finding and the reasons for it in the Federal 
Register.
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    The two grants of rulemaking authority to OTS in section 18(f)(1) 
give OTS exclusive authority to promulgate unfair or deceptive acts or 
practices regulations applicable to savings associations. Section 
5(a)(2) of the FTC Act, 15 U.S.C. 45(a)(2), expressly provides that the 
FTC's power to prevent unfair or deceptive acts or practices in or 
affecting commerce does not apply to savings associations, banks, or 
federal credit unions among others.
    Section 18(f)(3) expressly provides that OTS is to enforce the 
regulations it promulgates under section 18(f) through section 8 of the 
Federal Deposit Insurance Act (FDIA), 12 U.S.C. 1818. Section 8 of the 
FDIA authorizes OTS to take appropriate enforcement actions against 
savings associations for violations of any ``law, rule, or 
regulation.'' This enforcement authority includes enforcement actions 
for violations of section 5 of the FTC Act.\5\ Section 18(f)(6) 
clarifies that OTS may use other authority it possesses to issue rules 
governing enforcement of the regulations it prescribes under section 
18(f) regardless of any FTC Act rules issued by the Board.
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    \5\ OTS Op. Chief Counsel (June 9, 2006) at 11 n.52, available 
at http:// www.ots.treas.gov/docs/5/56218.pdf and OTS Op. Chief 
Counsel (October 25, 2004) at 10 n.37, available at http://www.ots.treas.gov/docs/5/560404.pdf.
    Section 18(f)(5), 15 U.S.C. 57a(f)(2), clarifies that the Office 
of the Comptroller of the Currency, the Board, and the Federal 
Deposit Insurance Corporation may exercise, in addition to section 8 
of the FDIA, any other authority conferred on them by law and that, 
with respect to these agencies, a violation of any regulation 
prescribed under section 18(f) constitutes not just a regulatory 
violation, but a statutory violation as well. While this language 
does not reference OTS, section 8 itself authorizes OTS to take 
enforcement action for a violation of regulations, including 
applicable FTC Act regulations.
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2. OTS Unfair or Deceptive Acts or Practices Rulemaking Under the FTC 
Act to Date
    OTS has exercised its rulemaking authority in the area of unfair or 
deceptive acts or practices to parallel the FTC's rulemakings. The FTC 
issued its Credit Practices Rule over 20 years ago. 49 FR 7740 (March 
1, 1984). The FTC's rule took effect on March 1, 1985. Shortly after 
that effective date, the FHLBB (OTS's predecessor agency) issued a 
substantially similar rule. 50 FR 19325 (May 8, 1985). OTS's Credit 
Practices Rule (12 CFR part 535) is also similar to that of the Board 
(12 CFR part 227) and the NCUA (12 CFR part 706).
    OTS's Credit Practices Rule protects consumers by prohibiting 
certain unfair or deceptive acts and practices by a savings association 
in connection with consumer credit: \6\
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    \6\ The rule also applies to an operating subsidiary of a 
federal savings association. See 12 CFR 559.3(h)(1).
    ``The term `consumer' means a natural person who seeks or 
acquires goods, services, or money for personal, family, or 
household purposes, and who applies for or is extended 'consumer 
credit' as defined in Sec.  561.12 of [OTS's regulations].'' 12 CFR 
535.1(b) (definition of a consumer). In turn, OTS's section 561.12 
regulation provides:
    ``The term consumer credit means credit extended to a natural 
person for personal, family, or household purposes, including loans 
secured by liens on real estate and chattel liens secured by mobile 
homes and leases of personal property to consumers that may be 
considered the functional equivalent of loans on personal security: 
Provided, the savings association relies substantially upon other 
factors, such as the general credit standing of the borrower, 
guaranties, or security other than the real estate or mobile home, 
as the primary security for the loan. Appropriate evidence to 
demonstrate justification for such reliance should be retained in a 
savings association's files. Among the types of credit included 
within this term are consumer loans; educational loans; unsecured 
loans for real property alteration, repair or improvement, or for 
the equipping of real property; loans in the nature of overdraft 
protection; and credit extended in connection with credit cards.''
    For further information about OTS's Credit Practices rule see 
OTS Examination Handbook section 1355 (December 1999), available at 
http://www.ots.treas.gov/docs/4/422242.pdf.
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    1. Entering into, or enforcing provisions in a consumer credit 
obligation a savings association purchases, containing any of the 
following unfair credit practices (subject to certain exceptions): (a) 
A cognovit or confession of judgment; (b) an executory waiver or 
limitation of exemption from attachment on real or personal property; 
(c) an assignment of wages or other earnings; or (d) a nonpossessory 
security interests in household goods other than a purchase-money 
security interest.
    2. Misrepresenting the nature or extent of cosigner liability or 
entering into a consumer credit transaction prior to notifying any 
cosigner about the extent of the cosigner's liability; and
    3. Imposing a delinquency charge on a payment, when the only 
delinquency is due to late fees and delinquency charges on a prior 
payment, and the payment otherwise qualifies as a full and timely 
payment of any principal and interest owed.\7\
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    \7\ OTS's Credit Practices Rule allows OTS to determine, upon 
application by an appropriate state agency, that provisions of the 
rule will not be in effect in a state that administers and enforces 
a state requirement or prohibition that affords a level of 
protection to consumers that is substantially equivalent to, or 
greater than, the protection afforded by the rule. 12 CFR 535.5. 
According to OTS records, it has granted one such application, to 
the State of Wisconsin. 51 FR 45879 (December 23, 1986).
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B. HOLA

1. Statutory Provisions
    While the FTC Act grants OTS exclusive authority to promulgate 
unfair or deceptive acts or practices regulations applicable to savings 
associations, HOLA gives OTS authority to promulgate regulations, 
including regulations on unfair or deceptive acts or practices, 
applicable to a variety of other entities within the savings 
association and savings and loan holding company structure. These other 
entities would also be subject to FTC rules on unfair or deceptive acts 
or practices.\8\
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    \8\ Section 133(a)-(b) of the Gramm-Leach-Bliley Act, Pub. L. 
106-102 (Nov. 12, 1999), clarified that while certain subsidiaries 
and affiliates of savings associations would not be deemed to be 
savings associations for purposes of the FTC Act, OTS could exercise 
its other authority over these entities under federal banking law. 
15 U.S.C. 41 note.
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    Under HOLA, OTS has the authority to regulate and examine savings 
associations, subsidiaries owned in whole or part by a savings 
association, service corporations owned in whole or in part by a 
savings association, savings and loan holding companies, subsidiaries 
of savings and loan holding companies other than a bank or subsidiary 
of a bank, and certain service providers.\9\ However, regulation of

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functionally regulated subsidiaries is subject to the functional 
regulation principles in the Gramm-Leach-Bliley Act.\10\
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    \9\ 12 U.S.C. 1462a(b)(2), 1463(a), 1464(a), 1464(d)(7)(A), 
1464(d)(7)(D), 1467a(b), 1467a(g), 1467a(o)(7), and 1820(d); 12 CFR 
559.3(o)(1), 559.3(o)(2), 563.170, and 584.1(g). OTS exercises 
enforcement authority over these entities under 12 U.S.C. 1464(d), 
1464(d)(7)(C), 1467a(g), 1467a(o), 1813(q)(4), 1818 and 12 CFR 
559.3(h)(1).
    Service providers are subject to OTS regulation and examination 
to the extent they perform authorized services for: (1) A savings 
association; (2) a subsidiary of a savings association; or (3) a 
``savings and loan affiliate or entity'' (i.e., a savings and loan 
holding company or a subsidiary other than a bank or subsidiary of 
that bank that is wholly-or partially-owned by a savings and loan 
holding company) that is regularly examined or subject to 
examination by the Director of OTS. 12 U.S.C. 1464(d)(7)(D). Some 
service providers are institution-affiliated parties (e.g., certain 
agents or independent contractors) for purposes of OTS enforcement 
authority. See 12 U.S.C. 1813(u) and 1818.
    \10\ Section 45 of FDIA, 12 U.S.C. 1831v, and section 10 of the 
Bank Holding Company Act, 12 U.S.C. 1848a, as added and amended by 
sections 112 and 113 of GLBA.
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    OTS is considering using its rulemaking authority under HOLA to 
issue regulations on unfair or deceptive acts or practices that would 
cover savings associations, non-functionally regulated subsidiaries 
owned in whole or part by a savings association, service corporations 
owned in whole or in part by a savings association, savings and loan 
holding companies, and non-functionally regulated subsidiaries of 
savings and loan holding companies other than a bank or subsidiary of a 
bank. OTS is not contemplating covering service providers directly with 
such a rulemaking at this time. Of course, savings associations and 
others covered directly by the rule would remain responsible for 
compliance with the rule, even if they outsource operations to a third 
party.
    Exercising HOLA authority in this manner would be consistent with 
HOLA's mandate that OTS ensure safety and soundness, since engaging in 
unfair or deceptive acts or practices can pose risk, including 
reputation risk, compliance risk, and legal risk. HOLA also assigns the 
Director of OTS a broad mandate to prescribe such regulations as he may 
determine necessary for carrying out the HOLA and all other laws within 
his jurisdiction. 12 U.S.C. 1462a(b)(2) (emphasis added). The other 
laws within OTS's jurisdiction include over thirty federal consumer 
protection statutes and regulations. OTS has jurisdiction to examine 
for compliance with and enforce these statutes and regulations, 
including section 5 of the FTC Act.
2. OTS Consumer Protection Rulemaking Under HOLA to Date
    In recognition of OTS's consumer protection mission and the mandate 
that the Director give primary consideration to the best practices of 
thrift institutions in the United States (12 U.S.C. 1464(a)), the 
agency has supplemented its Credit Practices Rule with other 
regulations issued under HOLA and other statutes. These rules are 
unique among the federal banking agencies in the way they protect 
consumers.
    One example is OTS's long-standing Advertising Rule, which 
prohibits savings associations from using advertising or making any 
representation that is inaccurate in any particular manner or that in 
any way misrepresents a savings association's services, contracts, 
investments, or financial condition. The rule encompasses all forms of 
advertising, including print or broadcast media, displays or signs, 
stationery, and all other promotional materials.\11\ OTS enforces its 
Advertising rule under section 8 of the FDIA.\12\
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    \11\ This rule dates back nearly 50 years. See 23 FR 9917 
(December 23, 1958).
    \12\ OTS Op. Acting Chief Counsel (September 3, 1993), available 
at 1993 OTS LEXIS 34.
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    OTS has also used HOLA to impose consumer protections not otherwise 
mandated by federal law for home loans made by federal savings 
associations. These protections encompass regulation of late charges, 
prepayment penalties, and adjustments to the interest rate, payment, 
balance or term to maturity. For example, a federal savings association 
may not assess a late charge on a home loan for any payment received 
within 15 days of the due date.
    OTS has also issued a Nondiscrimination Rule (12 CFR part 528), 
which extends beyond the federal fair lending laws by prohibiting 
discrimination not covered by those laws. For example, OTS's 
Nondiscrimination Rule covers all services offered by a savings 
association, not just lending. 12 CFR 528.2. OTS's Nondiscrimination 
Rule also prohibits discrimination in lending on the basis of handicap 
and familial status regardless of whether or not the loan is 
residential real estate-related, whereas the Equal Credit Opportunity 
Act does not prohibit discrimination on these bases and the Fair 
Housing Act, while it prohibits discrimination on these bases, only 
covers residential real estate-related transactions. 12 CFR 528.2. 
Further, the rule imposes a requirement prescribed for the purposes of 
preventing lending discrimination by aiding in assessing fair lending 
compliance; it requires savings association and other lenders who file 
Home Mortgage Disclosure Act (HMDA) Loan Application Registers with OTS 
to enter the reason for denials, whereas this information is otherwise 
optional under HMDA. Compare 12 CFR 528.6 with 12 CFR 203.5(c)(1).
    OTS recognizes that acts or practices that are unfair or deceptive 
might also violate other statutes or regulations addressing similar 
conduct. Conversely, an act or practice may be unfair or deceptive even 
though it does not violate other statutes or regulations addressing 
similar conduct.

C. Issues

    Issue 1. Should OTS consider further rulemaking on unfair or 
deceptive acts or practices that would cover products and services in 
addition to consumer credit? If so, should the rule be limited to 
financial products and services and how should that scope be defined?
    Issue 2. Should OTS consider further rulemaking on unfair or 
deceptive acts or practices that would cover more than just the savings 
association, but related entities as well?

III. Principles in Defining Unfair or Deceptive Acts or Practices

    Part 535 of OTS's regulations address prohibited consumer credit 
practices. However, to date, OTS has not provided comprehensive 
guidance explaining which principles define unfair or deceptive acts or 
practices. Similarly, OTS has not provided comprehensive guidance on 
which specific acts or practices it considers unfair or deceptive other 
than those articulated in the Credit Practices rule. OTS is considering 
a variety of approaches to provide further definition, including the 
following, either individually or by combining two or more approaches.

A. FTC Model

    OTS could adopt guidance issued by the FTC as OTS's standard and 
incorporate it into an OTS regulation.\13\ We note that other federal 
banking agencies have used the FTC guidance in developing guidance on 
unfair or deceptive acts or practices for entities they regulate.\14\
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    \13\ See FTC's Policy Statement on Unfairness, issued on 
December 17, 1980, available at http://www.ftc.gov/policystmt/ad-unfair.htm; FTC's Policy Statement on Deception, issued on October 
14, 1983, available at http://www.ftc.gov/bcp/policystmet/ad-decept.htm.
    \14\ See Board and FDIC guidance entitled, ``Unfair or Deceptive 
Act or Practices by State-Chartered Banks,'' issued on March 11, 
2004, available at http://www.fdic.gov/news/news/financial/2004/fil2604a.html and OCC guidance in Advisory Letter 2002-3, ``Guidance 
on Unfair or Deceptive Acts or Practices'' issued on March 22, 2002, 
available at http://www.occ.treas.gov/ftp/advisory/2002-3.doc.
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    In sum, the FTC guidance provides that acts or practices are unfair 
where: (1) The act or practice causes or is likely to cause substantial 
injury to consumers; (2) consumers cannot reasonably avoid the injury; 
and (3) the injury is not outweighed by countervailing benefits to 
consumers or to competition. Public policy is also considered in 
analyzing whether a particular act or practice is unfair. Acts or 
practices are deceptive where the act or practice involves a 
representation,

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omission, or other practice that (1) misleads or is likely to mislead 
the consumer; (2) the consumer reasonably interprets under the 
circumstances; and (3) is material.

B. Converting Guidance Into Rules

    OTS, both individually and on an interagency basis, has issued 
several important pieces of guidance to the industry on consumer 
protection issues. OTS could convert all or portions of this guidance 
into regulatory requirements under the rubric of unfair or deceptive 
acts or practices. For example, the recently issued interagency 
Statement on Working with Mortgage Borrowers encourages institutions to 
consider prudent workout arrangements that increase the potential for 
financially stressed residential borrowers to keep their homes for 
those borrowers who have demonstrated a prior willingness and ability 
to repay the loan according to its terms.\15\ OTS could identify, as a 
principle, that failing to consider and implement reasonable workout 
arrangements is an unfair practice and incorporate such a finding into 
a rulemaking.
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    \15\ OTS CEO Memorandum  255 (April 17, 2007,) 
available at http://www.ots.treas.gov/docs/2/25255.pdf.
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    Other recent guidance OTS could similarly draw from includes:
     Interagency Guidance on Nontraditional Mortgage Product 
Risks, 71 FR 58609 (October 4, 2006).
     Interagency Statement on Subprime Mortgage Lending, 72 FR 
37569 (July 10, 2007).
     OTS Guidance on Overdraft Protection Programs, 70 FR 8428 
(February 18, 2005).
     OTS Guidance on Gift Card Programs, OTS CEO Memorandum 254 
(February 28, 2007).

C. Other Federal Agency Models

    OTS could consider issuing guidelines along the lines of the OCC's 
Guidelines Establishing Standards for Residential Mortgage Lending 
Practices.\16\ These Guidelines advise national banks against becoming 
involved, directly or indirectly, in residential mortgage lending 
activities involving abusive, predatory, unfair or deceptive lending 
practices. The Guidelines list as examples equity stripping, fee 
packing, loan flipping, refinancing special mortgages, and 
encouragement of default. Other sections of the guidelines discuss 
prudent consideration of certain loan terms, conditions and features 
that may, under particular circumstances, be susceptible to abusive, 
predatory, unfair or deceptive practices. Among the practices listed 
are financing single premium credit insurance, negative amortization, 
balloon payments in short-term transactions, and prepayment penalties 
that are not limited to the early years of the loan, particularly in 
subprime loans.
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    \16\ 12 CFR part 30, Appendix C.
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    OTS could also consider the approach the Department of Housing and 
Urban Development (HUD) has taken in connection with setting housing 
goals for secondary market mortgage purchases by Government Sponsored 
Enterprises (GSEs) Fannie Mae and Freddie Mac.\17\ HUD defines ``HOEPA 
mortgages'' to mean mortgage loans above the HOEPA thresholds but 
including loans to finance the acquisition or initial construction of a 
consumer's principal dwelling and open-end credit plans, which are both 
otherwise excluded from HOEPA.\18\ HUD defines ``mortgages with 
unacceptable terms and conditions'' to include loans with excessive 
fees (generally total points and fees charged to a borrower exceeding 
the greater of five percent of the loan amount or $1,000), prepayment 
penalties except in limited circumstances, prepaid single premium 
credit life insurance, or failure of the lender to adequately consider 
the borrower's ability to make payments.\19\
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    \17\ It is the duty of an independent office within HUD, the 
Office of Federal Housing Enterprise Oversight (OFHEO), to ensure 
that these GSEs are adequately capitalized and operating in a safe 
and sound manner. 12 U.S.C. 4511 and 4513; 12 CFR 1700.1. Except for 
that authority of OFHEO and other matters relating to safety and 
soundness, the Secretary of HUD has general regulatory power over 
these GSEs to ensure that the purposes of their chartering acts and 
the Federal Housing Enterprises Financial Safety and Soundness Act 
of 1992 (Pub. L. 102-550) are accomplished. 12 U.S.C. 4541; 24 CFR 
81.1. See also HUD's Regulation of Fannie Mae and Freddie Mac, 
available at http://www.hud.gov/offices/hsg/gse/gse.cfm.
    \18\ 24 CFR 81.2(b).
    \19\ 24 CFR 81.2(b).
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    HUD's regulations provide that GSE purchases of mortgages in either 
category do not count toward meeting the GSEs' goals for purchasing 
mortgages.\20\ OTS could consider restricting OTS-regulated entities 
from originating (or purchasing) such loans as unfair or deceptive.
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    \20\ CFR 81.16(c)(12).
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D. State Law Models

    OTS could prohibit specific unfair or deceptive acts or practices 
of the types listed in various state unfair or deceptive acts or 
practices statutes. For example, the Michigan Consumer Protection Act 
prohibits dozens of specific acts or practices such as causing a 
probability of confusion or misunderstanding as to the legal rights, 
obligations, or remedies of a party to a transaction or gross 
discrepancies between the oral representations of the seller and the 
written agreement covering the same transaction or failure of the other 
party to the transaction to provide the promised benefits.\21\
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    \21\ MCLS Sec.  445.902 (2007).
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    For mortgage lending, OTS could also prohibit specific unfair or 
deceptive acts or practices of the types listed in various state 
predatory lending laws. For example, North Carolina's predatory lending 
law \22\ covers all consumer home loans (first and second liens and 
manufactured housing). It limits prepayment penalties, financing credit 
insurance, flipping, and default incentives. It describes a class of 
high cost home loans with high points and fees or annual percentage 
rate (APR), and for those loans it requires consumer counseling and 
prohibits financing fees and points in the loans.\23\ The North 
Carolina law expressly provides that making a loan in violation of the 
law constitutes an unfair or deceptive act or practice under North 
Carolina law.\24\
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    \22\ 1999 N.C. Sess. Laws 332 as amended by 2003 N.C. Sess. Laws 
401, available at http://www.ncga.state.nc.us/EnactedLegislation/SessionLaws/PDF/1999-2000/SL1999-332.pdf and http://www.ncga.state.nc.us/EnactedLegislation/SessionLaws/PDF/2003-2004/SL2003-401.pdf.
    \23\ OTS notes, however, that the impact of the North Carolina 
law and other state predatory lending laws is a matter of some 
disagreement. Among many studies is one from the Government 
Accountability Office (GAO), which reported in 2004 that the impact 
of North Carolina's laws on high cost loans and licensing of brokers 
was uncertain. GAO, Consumer Protection: Federal and State Agencies 
Face Challenges in Combating Predatory Lending, GAO-04-280 (January 
2004), available at http://www.gao.gov/new.items/d04280.pdf.
    \24\ N.C. Gen. Stat. section 24-10.2(e)(2007).
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E. Targeted Practices Approach

    Under this approach, OTS could simply list a number of specific 
practices that it would prohibit as unfair or deceptive, such as in the 
area of credit card lending, residential mortgage lending, gift cards, 
and deposit accounts. For example, OTS could consider listing the 
following under this approach:
1. Credit Card Lending
    a. Imposing an interest rate increase that is triggered by adverse 
information unrelated to the credit card account or card issuer. This 
practice is commonly referred to as ``universal default'' or, more 
recently as, adverse action pricing in contrast to long-established 
risk based pricing.
    b. Imposing an over-the-limit-fee that is triggered by the 
imposition of a penalty fee, such as a late fee.

[[Page 43575]]

    c. Charging penalty fees in consecutive months based on previous 
late or over the limit transactions, not on a new or additional 
transaction offense.
    d. Requiring as a condition of a credit card account, a consumer's 
waiver of his or her right to a court trial and consent to binding 
mandatory arbitration.
    e. Applying payments first to balances subject to a lower rate of 
interest before applying to balances subject to higher rates of 
interest or applying payments first to fees, penalties, or other 
charges before applying them to principal and interest.
2. Residential Mortgage Lending
    a. Repetitive refinancing of the same mortgage loan by the same 
lender whereby the consumer's equity is used to finance the refinancing 
and from which transaction fees are paid and whereby the consumer does 
not financially benefit from the terms of the new loan over the terms 
of the old loan.
    b. Encouraging a consumer to default on a loan as a prerequisite to 
refinancing the loan.
    c. Imposing changes in loan terms upon default, such as imposing 
significant interest rate increases or a balloon payment.
    d. Layering discretionary pricing on top of pricing that has 
already taken risk into account, for example, where a branch or loan 
officer charges more points than called for by the rate sheet provided 
by the institution's central office.
    e. Force placing hazard insurance without first giving reasonable 
notice to borrowers to cure a deficiency.
    f. Failing to employ reasonable loss mitigation measures prior to 
initiating foreclosure.
3. Gift Cards
    a. Imposing fees that exceed a certain amount or percentage of the 
original gift amount.
    b. Setting an expiration date less than one year from the date of 
issuance.
4. Deposit Accounts
    Freezing accounts containing federal benefit payments upon receipt 
of attachment or garnishment orders and setting off of debts owed to 
the financial institution from federal benefit payments deposited in 
accounts.\25\
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    \25\ House Committee on Financial Services Chairman Frank has 
expressed concerns about these practices and certain interstate debt 
collection practices. See Letter from Chairman Frank to OTS et al., 
June 21, 2007, available at http://www.house.gov/apps/list/press/financialsvcs_dem/press2062707.shtml.
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F. Issues on Alternative Models and Approaches

    Issue 3. What would be the impact on the industry and consumers of 
any of the various models and approaches discussed?
    Issue 4. OTS's current Credit Practices rule lists specific acts or 
practices that are unfair or deceptive per se; it prohibits such 
practices regardless of the specific facts or circumstances. Would it 
be appropriate for OTS to determine that additional acts or practices 
are unfair or deceptive per se regardless of the specific facts or 
circumstances?
    Issue 5. Should OTS consider a principles-based approach to a 
potential rulemaking that can evolve as products, practices and 
services change? If so, what principles should OTS consider in 
determining that a specific act or practice is unfair or deceptive? 
Please provide examples.
    Issue 6. Are the principles in the FTC guidance appropriate for the 
thrift industry? Should OTS consider adopting and incorporating them as 
part of an enhanced rule on unfair or deceptive acts or practices that 
includes standards to determine whether a particular act or practice is 
unfair or deceptive? Are any of the other models or approaches 
discussed in part III of this Supplementary Information appropriate for 
OTS to consider? What other models, approaches, or principles should 
OTS consider?
    Issue 7. Can the acts or practices encompassed within any 
particular model or approach described in part III of this 
Supplementary Information be conducted in a manner that is not unfair 
or deceptive to the consumer? If so, how?
    Issue 8. The FTC has taken enforcement actions for violations of 
section 5 of the FTC Act. Should OTS draw specific examples of unfair 
or deceptive practices from FTC enforcement actions? If so, which 
examples?
    Issue 9. How would the practices in OTS's current Credit Practices 
rule and those identified in part III of this Supplementary Information 
fit into any of those approaches?
    Issue 10. Are the acts or practices currently listed in the Credit 
Practices rule the only ones that are capable of targeting specific 
conduct without allowing for easy circumvention or having unintended 
consequences?
    Issue 11. Has the current rule been easy to circumvent or created 
unintended consequences? What would be the impact, in this regard, of 
including additional acts or practices in the rule?

IV. Advertising

    As referenced in Part II.B.2 of this Supplementary Information, 
OTS's Advertising Rule (12 CFR 563.27) prohibits savings associations 
from using advertising or making any representation that is inaccurate 
in any particular manner or that in any way misrepresents a savings 
association's services, contracts, investments, or financial condition. 
The rule encompasses all forms of advertising, including print or 
broadcast media, displays or signs, stationery, and all other 
promotional materials. OTS has previously articulated two principles in 
interpreting its Advertising rule:

    1. The rule prohibits both misstatements of material facts and 
omissions of material facts.\26\ For example, it prohibits false 
representations to the public about a savings association's deposit 
accounts, including misrepresentations regarding the extent of FDIC 
insurance coverage.\27\
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    \26\ FHLBB Memorandum R-51a (September 9, 1981), available at 
1981 FHLBB LEXIS 33.
    \27\ OTS Op. Acting Chief Counsel (September 3, 1993), available 
at 1993 OTS LEXIS 34.
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    2. The rule prohibits statements that, while technically 
accurate, would mislead a consumer. For example, it prohibits 
stating that money can be withdrawn from a passbook account at any 
time without also indicating that such withdrawals will result in a 
loss of interest.\28\
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    \28\ FHLBB Inter-Office Communication (January 18, 1977), 
available at 1977 FHLBB LEXIS 219. For more information about this 
rule see OTS Examination Handbook section 1355 (December 1999), 
available at http://www.ots.treas.gov/docs/4/422261.pdf.

    OTS is considering whether to expand its advertising rule by 
providing more comprehensive guidance. One approach OTS is considering 
would be to incorporate materials from FTC advertising guides. FTC has 
issued advertising guides related to bait advertising (16 CFR part 
238), the use of the word ``free'' and similar representations (16 CFR 
part 251), deceptive pricing (16 CFR part 233), advertising warranties 
and guarantees (16 CFR part 239), and endorsements and testimonials (16 
CFR part 255).\29\ OTS recognizes, however, that parts of these guides 
may not directly relate to the provision of financial products and 
services or be appropriate for a rule.
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    \29\ These FTC guides and other FTC guidance on unfair or 
deceptive advertising are summarized in a useful FTC publication 
entitled Advertising Practices, Frequently Asked Questions: Answers 
for Small Business (April 2001), available at http://www.ftc.gov/bcp/conline/pubs/buspubs/ad-faqs.pdf.
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Issues

    Issue 12. Should OTS expand its regulations on advertising to 
incorporate guides on advertising the FTC has

[[Page 43576]]

issued under the FTC Act? If so, which examples or principles should 
OTS consider?
    Issue 13. What other acts or practices that may not currently be 
covered by OTS's advertising regulation should OTS consider prohibiting 
as unfair or deceptive in the advertising or marketing of products or 
services offered by OTS supervised entities?
    Issue 14. What would be the impact on the industry and consumers of 
expanding OTS's advertising regulation?

V. Process for Resolving Questions Concerning Unfair Acts or Practices

    OTS recognizes that: (1) No set of principles or standards, no 
matter how effectively crafted, will lend themselves to an easy 
determination in every case as to whether a practice would violate a 
regulation on unfair or deceptive acts or practices; and (2) no 
established list of acts or practices deemed unfair or deceptive per se 
will ever be complete or current. OTS also recognizes that the 
overwhelming majority of institutions and the individuals employed by 
those institutions wish and seek to operate fairly with respect to the 
products and services they offer to their customers and other 
consumers.
    Furthermore, OTS is keenly aware of the subjectivity and burden 
involved in applying a set of principals or standards to a set of 
particular facts in any given case. For this reason, OTS has a 
longstanding practice whereby institutions (primarily through OTS 
regional offices) or consumers (primarily through OTS's Consumer 
Affairs or External Affairs functions) confer with OTS about a 
particular practice or a program about which they have questions. We 
expect this process to continue with respect to unfair or deceptive 
acts and practices questions or concerns.

Executive Order 12866

    OTS does not know now whether it will propose changes to its 
regulations and, if so, whether these changes will constitute a 
significant regulatory action under Executive Order 12866. This ANPR 
neither establishes nor proposes any regulatory requirements. OTS has 
submitted a notice of planned regulatory action to OMB for review. 
Because this ANPR does not contain a specific proposal, information is 
not available with which to prepare a regulatory analysis. OTS will 
prepare a preliminary regulatory analysis if it proceeds with a 
proposed rule that constitutes a significant regulatory action.
    Accordingly, OTS solicits comment, information, and data on the 
potential effects on the economy of changes to its regulations that 
commenters may recommend. OTS will carefully consider the costs and 
benefits associated with this rulemaking.

    Dated: July 31, 2007.

    By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. E7-15179 Filed 8-3-07; 8:45 am]
BILLING CODE 6720-01-P