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WASHINGTON - Comptroller of the Currency John Dugan pushed the Federal Reserve Board on Wednesday to make significant changes to its proposal to define unfair and deceptive credit card practices.
Mr. Dugan, whose agency oversees roughly 80% of the credit card industry, said the proposal could weaken banks and thrifts and lead to a drastic reduction of credit for consumers. He also warned that by labeling certain practices unfair and deceptive, the Fed would open the industry 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," Mr. Dugan said in an interview. "So they would be forced into a position of providing less credit to those consumers."
The Office of the Comptroller of the Currency outlined its views in a letter to the Fed late Monday, which was made public two days later. Its intervention may be the industry's last, best hope to persuade the central bank and two other regulators to scale back the proposal. Though the largest credit card issuers, including Bank of America Corp., Citigroup Inc., and Capital One Financial Corp., have raised objections to the plan, several observers have said they do not expect the Fed to make many changes.
The OCC response could have some impact, observers said.
"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 OCC's letter was in response to a proposal that the Fed, the Office of Thrift Supervision, and the National Credit Union Administration 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 would ban double-cycle billing and create guidelines for the allocation of payments.
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.
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 Mr. 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 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," Mr. Dugan wrote. "We also believe it is not consistent with consumer expectations."
He 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.
Mr. Dugan said card companies must be allowed to reprice outstanding balances at the expiration date of the card, and he suggested that consumers should be able to opt out of any rate increase.
In the interview, Mr. Dugan said the central bank was too broad by limiting industry practices rather than emphasizing enhanced disclosures.
He also warned that by defining unfair and deceptive practices, the central bank is exposing the industry to heavier legal liability.
"Some of the things they would not allow under new regulation they expressly allowed under old regulations, so it's not fair after the fact to say something is retroactively wrong and could give rise to litigation retroactively," he said.
To prevent this, he suggests in his letter that the Fed make clear the rules apply prospectively and promulgate the plan under the Truth-in-Lending Act, along with the FTC Act.
Under the Truth-in-Lending Act, he said, the central bank could "prevent" rather than "define" unfair and deceptive practices and thus avoid litigation risks. Also, more entities would be covered if TILA were applied, he wrote.
