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Appeal of Violation of Federal Trade Commission Act and Material Supervisory Determinations (First Quarter 2012)


A federal thrift (Thrift) filed an appeal of violations of 15 U.S.C. § 45(a)(1) the Federal Trade Commission (FTC) Act and 12 C.F.R. § 563.27 of the OTS Advertising Regulations cited in the most recent Compliance Limited Report of Examination (CLROE).  As a result of the violations, the component rating for compliance was downgraded to 4 and the Thrift’s Community Reinvestment Act Performance Evaluation (CRA PE) rating was downgraded to Needs to Improve.  The Thrift also appealed material supervisory conclusions related to those ratings.


The CLROE concluded that overdraft practices violated Section 5 of the FTC Act.  Specifically, the CLROE concluded the Thrift engaged in unfair and deceptive practices through a courtesy automated overdraft protection (AOP) program. 

The “deceptive” practices noted in the CLROE were:

  1. Automatic enrollment of customers in the AOP program without disclosing to customers material facts about the AOP  program;
  2. Marketing checking and savings accounts as “free” and having low cost features while omitting material information about costs of the AOP program; and,
  3. Suspending customers’ enrollment in the AOP program and reinstating enrollment in the program after the accounts returned to a positive balance, without disclosing the suspension or the reinstatement status of accounts to customers.

The “unfair” practice noted in the CLROE was the failure to establish a reasonable limit on aggregate overdraft fees as it related to consumers who frequently overdraw their accounts.

The basis for the appeal was management’s belief the CLROE was flawed, insufficient to support an FTC Act violation, and inconsistent with regulatory guidance.  Specifically, the appeal asserted that OTS guidance did not denounce automatic enrollment into overdraft programs as improper.  The appeal also argued that citing a violation of the OTS advertising regulation for not including overdraft information when advertising checking and savings accounts was inconsistent with Regulation DD.   The appeal further stated, with regards to suspensions and reinstatements, that guidance was not re-issued until May 2010, and the time period under examination was January 2009 – May 2010; therefore, the standard was applied retroactively.  The appeal disagreed with the determination that lack of an aggregate overdraft limit was harmful to consumers simply based on the frequency of use.

The appeal concluded that without violations of the FTC Act and the OTS advertising regulation, the 4 rating for compliance was not supported.  The appeal also found no regulatory requirement to lower the CRA PE rating after a “limited” examination on the basis of a single aspect of an otherwise outstanding performance.


The ombudsman conducted a comprehensive review of the information submitted by the Thrift as well as documentation supplied by the Supervisory Office (SO).   The ombudsman relied on OTS examination policies and procedures that were in effect and utilized by the examination staff during the review period.  Specifically, the ombudsman utilized the OTS Compliance Rating Scale from the OTS Examination Handbook Section 70 Appendix B; Examination Handbook Section 1354 “Unfair or Deceptive Acts or Practices, Federal Trade Commission Act, Section 5” issued under CEO Memorandum #347 in May 2010 (EH 1354); CEO Memorandum #211 “Guidance on Overdraft Protection Programs” issued February 2005 (2005 OTS Guidance); OTS Advertising Regulation 12 C.F.R. § 563.27; and OTS Examination Handbook Section 1500 Community Reinvestment Act including the Large Bank Rating Matrix.


The ombudsman concurred with the supervisory office determination regarding those elements of the AOP program deemed deceptive.  The elements above are material representations, omissions, or practices that are likely to mislead a reasonable consumer and therefore cause the consumer to act to their detriment.

The ombudsman did not concur with the supervisory office determination that failure to establish a limit on aggregate overdraft fees meets the definition of an unfair practice.  The absence of an aggregate overdraft limit, on a stand alone basis, is not sufficient to support a finding of unfairness.

The overall conclusion was that elements of the AOP program were deceptive and represented a violation of the FTC Act. 

With regard to the downgrade in the bank’s compliance rating to 4, the ombudsman found the standards were appropriately applied.  The substance and volume of deficiencies cited within the bank’s compliance program in the May 24, 2010 Comprehensive Report of Examination coupled with the FTC Act violation, represented material shortfalls in the implementation of a comprehensive compliance management program.

With regard to the downgrade in the bank’s CRA performance to Needs to Improve, the ombudsman found the rating downgrade was consistent with OTS policy.  The violation of the FTC Act is evidence of an enterprise-wide illegal credit practice that impacted a large number of consumers.  As such, the performance rating was appropriately adjusted to reflect the magnitude of the violation.