The controversial issue of universal-default clauses in credit card agreements has resurfaced as credit card lenders begin to face up to spreading weakness in their consumer markets.
Citigroup Inc. is thinking of resurrecting its policy of "any time, for any reason" interest rate increases. The company had abandoned that policy in early 2007 as part of its public renunciation of the practice of universal default, under which a lender reserves the right to change borrowing terms over late payments to other creditors.
A source at the company said Wednesday that it could make a decision as soon as today about whether to bring back the "any time, for any reason" policy. The prospect of a policy change at Citi was first reported in The New York Times on Tuesday. Samuel Wang, a spokesman for Citi, declined to comment when reached by American Banker.
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Mr. Fairbank, without referring to a possible decision by Citigroup, said that Capital One's past policies could help it reap benefits from a set of proposed rules for the credit card business now in a comment period.
"To the extent that the new regulation levels the playing field we could re-enter markets like prime revolver," he said. "We are probably better positioned that any credit card players by staying on the sidelines for most of these practices."
Capital One intends "to provide our feedback," he said. "Many of the practices such as universal default and double-cycle billing are things we have never done. The proposals, however, would have a cost to Capital One in the near term but potentially longer-term benefits."
When Citigroup softened its policy last year, it drew a distinction between "any time, for any reason" interest rate repricing, which it said customers viewed as "unfair and one-sided," and universal default. The company's decision was praised on Capitol Hill.
The latter practice has borne the brunt of regulatory scrutiny. One pending proposal from the Federal Reserve Board would prevent credit card companies from raising interest rates on customers' existing debt for any reason other than a default on the card account, and most major issuers have either disavowed the practice or say they have never engaged in it.
"It ebbs and flows," said John R. Ulzheimer, the president of educational services at the lead generator Credit.com Inc. "Every once in a while, issuers will come out and publicly state that they're going to suspend the practice."
JPMorgan Chase & Co. said it abandoned universal default in 2005, and said last November that it would no longer raise interest rates if cardholders' credit scores dropped. A spokeswoman for the company's cards division said Wednesday that there had not been any changes to that policy.
Discover Financial Services said it has never engaged in universal default, and Barclays PLC and U.S. Bancorp said they do not practice it.
A spokeswoman for HSBC Holdings PLC said by e-mail that the company "does not increase the rate on a customer's account solely because the customer has defaulted with another creditor. We may, however, reprice an account based on a change in the customer's overall risk profile."
Betty Riess, a spokeswoman for Bank of America Corp., said that though B of A has "never engaged in the practice of universal default for our consumer credit cards — commonly defined as placing a customer in default resulting in higher rates without notice or the opportunity to opt out" — it does "periodically review the credit risk for each account and may reprice individual accounts based on that risk assessment."
Ms. Riess said B of A notifies affected cardholders of such rate increases in advance and gives them the opportunity to pay off the outstanding balance at the original rate.
Joseph Ridout, a spokesman for the nonprofit Consumer Action, said that Washington Mutual Inc. has recently "been the most enthusiastic" about practicing universal default, which he defined as "the use of extraneous factors that have nothing whatsoever to do with one's financial relationship with the bank and punitively repricing the cardholder."
B of A "is also up there, but not to the degree" of Wamu, Mr. Ridout said.
Alan Elias, a spokesman for Wamu, said, "We do not practice universal default. We do not raise somebody's interest rates up to the default rates simply because of their behavior with another lender."
Wamu cardholders' rates are affected "first and foremost by their financial behavior with us, and secondarily through credit reports" and other indicators of credit behavior, he said.
