OCTOBER 2004

OCC Advisory Letter Warns Card Issuers

Regulatory scrutiny of credit card marketing and pricing has intensified in recent months. Last month the Office of the Comptroller of the Currency (OCC) issued an advisory letter identifying three practices that it found "unacceptable." The letter targeted inadequate disclosure of the issuer's rights to change card terms, solicitations that promote large credit lines that are rarely extended, and the use of promotional rates without disclosing the restrictions on their applicability and continuation. The first issue has become politically charged, forming the basis for a plank in the Kerry-Edwards presidential campaign that would prohibit card issuers from raising the interest rate on an outstanding balance based on the cardholders handling of accounts with other creditors. It was also the focus of heated discussion at a September hearing of the House Financial Services Committee.

The OCC's Chief Counsel, Julie Williams clarified the agency's position on risk-based repricing of a card account. She said, "the fundamental practice of changing terms when there is a change in the customer's credit risk profile is not an objectionable practices—in fact, we think it is advisable for lenders where there is a deterioration in a customer's credit-risk profile. But, what it shouldn't be is a surprise to the customer that they have the ability to do that." Consequently, a national bank must disclose "fully and prominently" in the marketing materials and credit agreements that it has the right to change rates and fees, and under what circumstances it may do so.