Consumer Compliance Outlook: Fourth Quarter 2010

Understanding Regulation DD's Advertising Requirements

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

SCOPE OF THE REGULATION

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

MISLEADING ADVERTISEMENTS

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

'FREE' OR 'NO COST'

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

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

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

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

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

RATES AND YIELDS

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

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

OVERDRAFT SERVICES

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

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

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

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

UNFAIR AND DECEPTIVE ACTS AND PRACTICES (UDAP)

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

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

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

CONCLUSION

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