WASHINGTON - The Comptroller of the Currency is urging NCUA, the Federal Reserve Board, and the Office of Thrift Supervision, to make significant changes to a proposal to define unfair and deceptive credit card practices.
The OCC, which oversees approximately 80% of the credit card industry, said the proposal could weaken banks and thrifts and lead to a drastic reduction of credit for consumers. Moreover, said OCC Chairman John Dugan, the Federal Reserve's plan to label certain practices unfair and deceptive would open up credit unions and bank up to litigation risks.
"The fear is it will result in a substantial constriction of credit because lenders won't be able to recover the costs of increased default that goes along with consumers that have less-than-good credit histories," Dugan told American Banker, an affiliate of Credit Union Journal. "So they would be forced into a position of providing less credit to those consumers."
The nation's largest credit card issuers, including Bank of America Corp., Citigroup Inc., and Capital One Financial Corp., have already voiced their objections to the plan, and while analysts are not anticipating the Federal Reserve will act in response to those, they do believe the OCC's input might be more persuasive.
"Coming from a fellow regulator, I think the board is going to pay attention to that...I think those suggestions will get a certain amount of weight because they are coming from John Dugan at the OCC," said Oliver Ireland, a partner at Morrison & Foerster LLP and a former Fed official.
The proposal, announced in May be the OTS, the Fed, and NCUA, was released in May to define certain credit card practices as unfair and deceptive under their rarely used Federal Trade Commission rule-writing authority. In addition to restricting card issuers' interest rate increases on existing balances, except in the case of a default on the card account, the plan bans double-cycle billing and create guidelines for payments allocation.
The plan has drawn more than 56,000 comment letters, with the industry arguing the proposal would severely hamper the credit card industry and consumer groups saying it should go further.
'Unintended & Undesirable Consequences'
In its letter, the OCC echoed many of the industry's concerns.
"We believe that particular aspects of the proposed rule would have unintended and undesirable consequences that raise safety and soundness concerns; are not necessary to assure fair treatment of consumers, and in some respects run counter to consumers' interests; and could result in a significant reduction in credit availability," Mr. Dugan wrote.
He said he supported the Fed's effort to check double-cycle billing and certain card fees. But he said the proposed rule's restrictions on interest rate repricing were too broad and unnecessarily stringent. The industry's strongest objection was to the risk-based-pricing limitations, which Dugan said presented the most sweeping change.
Under the proposal, card issuers could not raise interest rates on outstanding balances-with a few exceptions, including if the customer/member is delinquent at least 30 days.
"We believe that such a regulatory 'freeze' of pricing terms for unsecured revolving credit, wholly without regard to the substantial changes in customer risk profile that occur over extended periods, is not consistent with safe and sound lending practices," said Dugan in the letter to the Fed.
Dugan called the 30-day minimum trigger excessive and urged the Fed to select a shorter period, such as five days after the payment is due. He also recommended requiring credit card companies to provide enhanced disclosures of rate increases.
Dugan said card companies must be allowed to reprice outstanding balances at the card's expiration date, and he suggested that consumers should be able to opt out of any rate increase. (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com/ http://www.sourcemedia.com/
