WASHINGTON - Regulators have taken notice as the country's largest banks, the very ones that once feasted on business borrowers, have remade themselves as consumer banks.
Perhaps not surprisingly, the shift has meant that regulators, who traditionally have focused on protecting lenders from bad borrowers, find themselves under mounting pressure to protect consumers from bad lenders.
To do so, experts said, the regulators will increasingly rely on a legal weapon that has its statutory underpinnings in an unconventional area: the ban on "unfair or deceptive acts or practices in or affecting commerce" in section 5 of the Federal Trade Commission Act.
"We are going to see more and more action by the bank regulatory agencies with respect to concerns about unfair and deceptive practices, particularly in the credit card industry," said Andrew Sandler, a lawyer with Skadden, Arps, Slate, Meagher & Flom LLP in Washington.
In September the Office of the Comptroller of the Currency issued an advisory letter warning national banks to avoid certain card practices, including bait-and-switch teaser offers and changing credit terms without adequate disclosure. In the last four years the OCC has cracked down on a half-dozen banks for such practices, including Providian National Bank, which was required to repay at least $300 million to borrowers. [See timeline.]
Julie Williams, the acting comptroller of the currency, said in an interview this month that her agency has begun reviewing the marketing practices of large credit card banks to ascertain how well they are complying with the new guidance.
Other regulators have also gotten into the act. In March the Fed and the Federal Deposit Insurance Corp. issued standards for enforcing the FTC Act's ban of unfair or deceptive acts or practices, also known as "UDAP."
Further, the Fed took the first step in a wholesale revision of its Truth-in-Lending regulations on Dec. 3, when it said it would conduct a broad examination of credit card practices, including how lenders disclose the terms of credit and whether current consumer protections are adequate.
Their actions are drawing the attention of industry officials.
When the American Bankers Association held a telephone briefing Nov. 30 on what it called the "new enforcement specter" of UDAP, it estimated that more than 500 bankers dialed in.
Not all of the emphasis on unfair or deceptive practices is coming from regulators. Consumers are increasingly alleging such practices in lawsuits against banks, and community groups claim that many large banks use the practices.
Just last week the Association of Community Organizations for Reform Now organized a group of unhappy mortgage customers who asked California's attorney general to investigate Wells Fargo & Co. Acorn, an avowed Wells critic, said the San Francisco company's mortgage subsidiary used unfair and deceptive practices to dupe borrowers into refinancings heavy on fees and short on benefits.
Though frequently associated with patently abusive techniques like loan flipping and equity stripping, unfair or deceptive practices can also be alleged in the extension of perfectly legal, commonplace products and services, such as bounce protection and pre-approved loans. The FTC has alleged unfair or deceptive practices in advertising, direct marketing, billing, and servicing. The focus is less on the product and more on the process.
Broad enforcement trends have boosted the scrutiny of practices that might be considered unfair or deceptive.
The emphasis in consumer protection enforcement "changed from race discrimination to one of unfairness" over the past decade, said Paul Hancock, a former Florida deputy attorney general, who is now a lawyer with Hogan & Hartson in Miami. It "switched from not merely looking at whether the practices were racially discriminatory … [but whether even if] they were applied uniformly without regard to race, would they be the types of practices that one would consider to be fair and without deception?"
Race discrimination "is a hard thing to prove, but if a practice is just unfair, its unfairness itself violates the law," Mr. Hancock said. "An agency doesn't have to go through the difficult challenge of deciding whether people are being treated unfairly because of their race or they are just being treated unfairly."
A trend more specific to the industry has also loomed large - federal preemption, in particular the authority put forth under new regulations the OCC adopted in January.
State officials have argued against federal preemption, which, they say, will devastate the dual-charter system; consumer advocates have claimed that the ramifications could be devastating for consumers.
The OCC's preemption rules are "cutting off the ability of states to provide additional protections for consumers," said Allen Fishbein, the director of housing and credit policy at the Consumer Federation of America. "It could very well mean a lessening of protection for consumers in an area where state attorneys general and other regulatory agencies have been pretty aggressive in protecting them."
Richard Riese, a senior compliance counsel at the ABA, said many industry observers believe the new emphasis on unfair or deceptive practices "springs from a desire by some of the banking agencies to demonstrate that, given their preemptive positions, they still do have means to pursue concerns in areas of predatory lending and abusive practices and are prepared to do so."
Mr. Hancock said federal regulators may believe they are on solid legal ground in advancing preemption, "but at the same time, they don't like to be accused of thereby condoning practices that otherwise would be challenged by the states." Preemption "has switched the focus so much to who is going to be enforcing these laws that you see a pretty aggressive response coming from the federal financial regulatory agencies."
Tomorrow: Bankers fear that the rules against unfair and deceptive practices are too unclear and that they will learn its parameters the hard way - through more enforcement actions. Community activists say the vagueness will be an excuse for regulatory inaction.
