With the recent focus on the subprime mortgage meltdown and foreclosure prevention — and the resultant litigation and enforcement fallout — card lenders might believe that the near-term "fair" lending risk in the consumer financial services space likely will be confined to mortgage lending.
That is not the case.
One of the most significant recent developments has been the increased focus on allegedly unfair and deceptive practices by card lenders, not only by consumer groups and plaintiff's attorneys, but also by the Federal Trade Commission, banking regulators, state attorneys general, and Congress.
Federal and state agencies have issued enforcement actions focused on rates, fees, advertising, disclosures, ancillary products, and collections. In addition, congressional committees are holding hearings and introducing legislation with evocative titles such as the Stop Unfair Practices in Credit Cards Act.
These trends will intensify as access to mortgage credit continues to tighten. Borrowers, no longer able to use their homes to meet the seemingly insatiable demand for consumer credit, will rely increasingly on credit cards, with an inevitable default crisis to follow.
Then, as always, elected officials, enforcement agencies, regulators, the media, and consumers will seek to focus blame on lenders. Card lenders will be particularly vulnerable to attack, because of the wide range of laws under which their practices can be challenged.
At the federal level, for example, actions have been brought under laws covering false advertising, consumer fraud, and unfair and deceptive trade practices. Similar laws exist in many states. Regardless of the forum, the risks fall into several broad categories: rates and fees, disclosures, marketing, ancillary product sales, and collection practices.
With respect to rates and fees, recent enforcement activity has focused on excessive annual fees (particularly for cards with very low limits); activation charges; up-front processing fees; late, over-limit, and penalty fees; and interest rate adjustments based on default, reduced credit scores, and use of other credit.
Such enforcement often focuses not only on the rates and fees charged to consumers, but also on the lender's failure to provide clear and conspicuous disclosure of the circumstances under which consumers will be charged higher rates or additional fees.
Another key issue is marketing, where issuers have come under attack for deceptive "bait and switch" tactics. This issue has surfaced most frequently in the context of credit limits, where a solicitation may state that a borrower is approved "up to" a given amount, but in practice that level of credit may never be extended.
Marketing also has fair-lending implications. In recent years, for instance, issuers who have been alleged to target elderly or minority populations for products viewed as "predatory" have been the subject of enforcement actions.
Activity related to ancillary product sales has focused on membership programs that are invoiced on card bills. Among the issues attacked are misleading "free trial" memberships and "reward" and "rebate" offers. Promotions involving "live" checks have come under special scrutiny.
On the collections side, enforcement has focused on adherence to the federal Fair Debt Collection Practices Act and similar state laws.
Prudent issuers will want to consider several steps to mitigate their risk. They will want to ensure that their rates are viewed as reasonable and based on sound risk parameters and industry standards. They should also ensure there is a reasonable relationship between each fee charged and the service provided.
Disclosures also should be reviewed carefully. While governing laws, such as the Truth-in-Lending Act, often make succinct disclosures difficult to achieve, there is no question that strides can be made in terms of clarity, organization, and presentation.
With respect to marketing, a prudent issuer will make sure that materials accurately convey the true nature of the product being offered. Practices such as labeling low-limit cards as "Platinum," "Premium," or "Gold" should be given close scrutiny, since federal and state agencies likely will view such practices as a red flag.
Third-party marketing relationships should receive a high level of scrutiny. Lenders should know their business partners and evaluate whether membership program have value to the consumer and are being initiated on clearly defined terms, and whether the consumer can terminate any such program easily.
Finally, issuers should take advantage of this period of relative calm before the storm to make sure they have a strong compliance program, particularly with respect to collection practices, and an effective process for handling customer complaints.
