JANUARY 2005

Opt-Out Requirements
May Hurt Credit Card Competition

A new report from the Federal Reserve Board supports the claims of many critics of the Fair and Accurate Credit Transaction Act (FACT Act) provision that elevates the prominence of opt-out disclosures on credit card solicitations. Spotlight readers may recall that the 2003 FACT Act required the Federal Trade Commission to craft a regulation that will require financial institutions to more clearly disclose to consumers their rights to block direct mail credit solicitations. The FTC's proposal would require lenders to include two notices in each mailing. A simpler, more succinct notice would be in large letters and appear near the top of the mailing. A second, more detailed and technical notice would be required elsewhere in the solicitation. Consumers who chose to opt-out of receiving direct mail solicitations would be off-limits to marketers for five years.

The FACT Act also mandated the Federal Reserve Board to conduct a study of consumer attitudes toward credit card solicitations and awareness of their opt-out rights. The FRB's study, based in large part on survey research, was released in December. It found that unsolicited, pre-screened offers were the source of 53% of new credit card accounts in 2002, by far the largest single source. Only 6% of all customers with credit reports had opted out of receiving pre-screened solicitations, although only 20% were aware that they could do so. How do consumers deal with the flood of solicitations in their mailbox? About 55% said they throw them away unopened, while 34% said the open and skim the offers. Still, 65% of consumers did not favor additional regulatory restrictions that would block such marketing. The report concluded that "the fact that approximately 20 million consumers have placed their names on the opt-out lists maintained by the national [credit agencies] suggests that it is not especially difficult to avoid written offers of credit or insurance if so desired." Moreover, the Fed report noted that further restrictions on pre-screened marketing of financial services through the mail could hurt competition, raise prices, and limit underserved consumers' access to credit.

Creditors have annually mailed about 5 billion pre-screened solicitations in recent years. L. Richard Fischer, a well-known expert on privacy and credit reporting law, said "What the FTC should take from the Fed's report is ‘proceed with caution. It is quite clear that a lot of consumers have benefited from pre-screened solicitations." For its part, the FTC acknowledged that it would take the Fed's report into account before finalizing its rule. Andrew Smith, the FTC attorney overseeing the FACT Act rule-writing at the agency, told the American Banker, "We agree that pre-screening is good for consumers and for competition. The purpose of the rule is not to restrict pre-screening, but simply to inform consumers of their right to opt-out." Consumer activists found support for more aggressive disclosure in the Fed study. Gail Hillebrand, a Consumer Union lawyer, said that the Fed's data showed "nearly one-third of the people who know about opting out have actually done it. That would suggest that if everyone knew, you would get a rate of 30% opting out."