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Board of Governors of the Federal Reserve System
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Federal Reserve Board of Governors


Compliance Guide to Small Entities

Regulation AA: Unfair or Deceptive Acts or Practices
12 CFR 227

This description should not be interpreted as a comprehensive statement of the regulation. Rather, it is intended to give a broad overview of the regulation's requirements. The full regulation is available on the Government Printing Office web site.

The Federal Trade Commission Act (FTC Act) requires each federal bank supervisory agency to institute procedures for handling consumer complaints involving unfair or deceptive acts or practices by banks under its jurisdiction. In 1976, the Board adopted formal procedures for receiving and handling consumer complaints about state-chartered banks that are members of the Federal Reserve System. These procedures are contained in subpart A of the Board's Regulation AA.

In 1985, the Board amended Regulation AA by adopting a Credit Practices Rule that is substantially similar to the FTC's Credit Practices Rule. The purpose of the Board's rule is to define certain unfair or deceptive acts or practices that are unlawful in connection with banks' extensions of credit to consumers. The Board modified certain provisions of the FTC's rule to take into account the needs and characteristics of the banking industry. The Board's Credit Practices Rule became effective January 1, 1986. The rule is contained in subpart B of Regulation AA.

A general description of the regulation, by section, follows.

Subpart A: Consumer Complaints

Section 227.1 Definitions
Defines key terms used in subpart A.

Section 227.2 Consumer complaint procedure
Outlines the process for submitting a consumer complaint involving a state member bank to the Federal Reserve System. The complaint should be in writing, if possible, should describe the act or practice that is thought to be unfair, deceptive, or in violation of existing law or regulation, and should include all relevant facts.

The complaint may be sent either to the Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, in Washington, D.C., or to the Federal Reserve Bank of the District in which the state member bank is located. (Full addresses are listed in the regulation.)

Within fifteen business days of receipt of a written complaint, a substantive response or an acknowledgment will be sent to the complainant. If an acknowledgement is sent, it will set a reasonable time by which a substantive response will be made.

Complaints received by the Board or a Federal Reserve Bank involving an institution other than a state member bank will be forwarded to the federal agency having jurisdiction over that institution.

Subpart B: Credit Practices Rule

Section 227.11 Authority, purpose, and scope
Sets forth the Board's authority under the FTC Act to issue rules for banks defining unfair or deceptive acts or practices.

The purpose of the Credit Practices Rule is to declare certain acts or practices by banks in connection with consumer credit transactions to be unlawful. The rule applies to all banks and their subsidiaries (except savings banks, which are subject to rules issued by the Office of Thrift Supervision). Compliance with the Board's Credit Practices Rule is enforced by a financial institution's primary federal regulator. The Board of Governors of the Federal Reserve System enforces compliance by state member banks.

Section 227.12 Definitions
Defines key terms used in subpart B.

Section 227.13 Unfair credit contract provisions
Declares that it is an unfair act or practice for a bank to include certain contract provisions in a consumer credit obligation, or to enforce any such provisions if they are contained in a consumer credit obligation purchased by the bank. Four types of provisions are prohibited:

  1. Confession of judgment: A contract provision in which the consumer generally waives the right to notice and an opportunity to be heard in the event of a lawsuit.
  2. Waiver of exemption: A contract provision in which the consumer waives the benefit of any laws that protect the consumer's real or personal property from seizure or sale to satisfy a debt. A contractual waiver is not prohibited if it is restricted to property pledged as collateral for the debt.
  3. Assignment of wages: A contract provision that gives a bank the right to receive the consumer's wages or earning. An assignment of wages or earnings is prohibited unless (1) the debtor may revoke the assignment at any time, (2) the assignment is a pre-authorized payment plan established at the time the debt is incurred, or (3) the assignment applies only to wages or earnings already earned at the time of the assignment.
  4. Security interests in household goods: A contract provision that creates a nonpossessory security interest in household goods if the debt is not incurred to purchase the goods.
Section 227.14 Unfair or deceptive practices involving cosigners
Prohibits a bank from misrepresenting the nature and extent of a cosigner's liability. Also prohibits a bank from obligating a cosigner unless the cosigner has been informed of the nature of the cosigner's liability. To comply with this section, a bank must give the cosigner a written notice prior to the cosigner's becoming obligated. The notice must be substantially similar to the model notice provided in the Board's regulation. The notice may be a separate document or may be included in the credit obligation.

The purpose of the notice is to inform the cosigner that (1) if the borrower does not pay the debt, the cosigner may have to pay up to the full amount of the debt plus any late fees or collection costs and (2) the lender may collect the debt from the cosigner and does not first have to try to collect from the borrower. In the case of open-end credit, the cosigner notice must be given before the cosigner becomes obligated for any fees or transactions.

Section 227.15 Unfair late charges
Prohibits the practice of assessing a delinquency charge on a full payment that is made in a timely manner if the only delinquency is attributable to a late fee or delinquency charge assessed on an earlier installment (referred to as "pyramiding late charges").

Section 227.16 State exemptions
Sets forth the manner in which a state agency may apply to the Board for an exemption from any provision in the Board's Credit Practices Rule. The Board may grant such an exemption if it determines that the state administers and enforces a state law that provides consumers with protection equivalent to or greater than the Board's rule.

For additional information related to Regulation AA, see Staff Guidelines on the Credit Practices Rule and Interagency Guidance on Unfair or Deceptive Practices by State-Chartered Banks (31 KB PDF).

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Last update: August 25, 2008