OCC ISSUES GUIDELINES TO GUARD AGAINST UNFAIR OR DECEPTIVE CREDIT CARD MARKETING AND ACCOUNT MANAGEMENT PRACTICES
On September 14, 2004, the Office of the Comptroller of the Currency (OCC) issued an advisory letter warning national banks that they may be subject to appropriate supervisory action if they engage in three types of credit card marketing and account management practices that may be deemed unfair or deceptive or in violation of other laws or regulations. OCC Advisory Letter 2004-10. The first practice involves “up to” marketing, which is the practice of advertising credit limits “up to” a maximum dollar amount when that credit limit is seldom extended. The OCC recognized that “up to” marketing may be appropriate and beneficial under certain circumstances; however, it also indicated that national banks should not engage in the following activities that may be associated with “up to” marketing in order to avoid compliance and reputation risks:
- Targeting consumers who have limited or poor credit histories with solicitations for credit cards with a maximum, or “up to,” credit limit that is far greater than most of these applicants are likely to receive;
- Providing most applicants with a “default credit line” (the lowest credit line available) that is significantly lower than the maximum amount advertised, while failing to disclose fully and prominently in the promotional materials the default credit line and the possibility that the consumer will receive it; and
- Advertising the possible uses of the card when the initial available credit line is likely to be so limited that the advertised possible uses are substantially illusory.
The OCC also recommended that national banks provide and disclose readily exercisable mechanisms for consumers to cancel the card at little or no cost when they learn that actual credit limit granted.
The second practice addressed by the OCC involves the use of promotional rate solicitations that do not disclose material terms about the applicability of the promotional rates offered. Again, the OCC recognized that promotional rate marketing may be beneficial to consumers; however, it also indicated that national banks should refrain from the following activities in order to avoid disclosure problems:
- Failing to disclose fully and prominently in promotional materials and credit agreements any material limitations on the applicability of the promotional rate, such as the time period for which the rate will be in effect, any circumstances that could shorten the promotional rate period or cause the promotional rate to increase, the categories of balances or charges to which the rate will not apply, and if applicable, that payments will be applied to promotional rate balances first;
- Making representations that create the impression that material limitations regarding the applicability of the promotional rate do not exist; and
- Failing to disclose fully and prominently in promotional materials and credit agreements any fees that may apply (e.g., balance transfer fees) in connection with the promotional terms.
The last practice addressed by the OCC involves repricing and other changes in credit terms, such as increasing a cardholder’s APR if the cardholder fails to make timely payment. While the OCC indicated that these practices may be appropriate measures for managing credit risk, it also indicated that national banks should avoid the following practices in order to avoid heightened compliance and reputation risks:
- Failing to disclose fully and prominently in promotional materials the circumstances under which the credit card agreement permits the bank to increase the consumer’s APR (other than due to a variable rate feature), increase fees, or take other action to increase the cost of credit, such as, if applicable, failure to make timely payments to another creditor; and
- Failing to disclose fully and prominently in marketing materials and credit agreements, as applicable, that the bank reserves the right to change the APR (other than due to a variable rate feature), fees, or other credit terms unilaterally. This guidance follows on the heels of other OCC guidance regarding high up-front fees and nominal credit lines for secured cards [see OCC Advisory Letter 2004-4 (April 28, 2004)]. The guidance reflects an apparent new emphasis on the “unfair” prong of unfair and deceptive acts and practices regulation by federal and state regulators.
Mike Tomkies and Chuck Gall