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Fall 2004-07 OCC advises against certain credit card practices by national banks

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Number 57
Fall 2004

OCC advises against certain credit card practices by national banks

The Office of the Comptroller of the Currency has alerted national banks to its concern regarding credit card practices that may constitute unfair or deceptive acts or practices. OCC Advisory Letter AL 2004-10 (September 14, 2004).

Credit limits "up to"

The first practice is soliciting credit card products by advertising credit limits "up to" a maximum dollar amount. The OCC is concerned with situations where the advertised maximum is in fact seldom extended.

In order not to be "essentially illusory," using the OCC's own words:

a meaningful number of applicants must receive a significant credit line;

material information about the cost and usefulness of the card must be clearly and conspicuously presented;

national banks should not target customers who have limited or poor credit histories, for a product that has a credit limit far higher than most of these applicants are likely to receive;

nor should they provide most applicants with a credit line that is significantly lower than the maximum amount advertised, without prominently disclosing that that is the line that the customer will possibly receive;

nor advertise possible uses of the card when the initial credit line is likely to be so limited that such uses are substantially illusory.

In addition, national banks should "strongly consider" providing and disclosing mechanisms for customers to cancel cards at little or no cost when they learn of the actual credit limit granted.

Teaser rates

Another criticized practice is using so-called "teaser interest rates" to attract customers. These are low initial rates to be in effect only for a limited period, to be then replaced with a higher one. The low rate may also be subject to other restrictions or features of the promotion that may limit the customer's ability to benefit from the program.

The OCC advises that national banks:

should disclose fully and prominently in marketing material and credit agreements all material limitations on the applicability of promotional rates, such as: time period for which it will remain in effect, and categories of balances or charges to which it will not apply;

should not make representations that create the impression that such limitations do not exist;

  • should disclose fully and prominently in marketing material and credit agreements all fees that may apply in connection with such rates.

Default rates

A third practice frowned upon by the OCC is the application of a higher interest rate if the customer fails to make a payment, or for other reasons, such as: increased use of the credit line, failure to make more than the required minimum payment, or decrease in the customer's credit rating.

The OCC points out examples of practices with similar effects, such as: shortening the due date for receipt of payments, and raising charges for late payment, exceeding the credit limit or obtaining a cash advance.

Accordingly, the OCC says that a national bank:

should disclose fully and prominently in marketing material the circumstances under which the interest rate or other charges may be increased, or other such adverse actions taken;

should disclose fully and prominently in marketing material and credit agreements that the bank reserves the right to change unilaterally the Annual Percentage Rate or other credit terms.

"The practices described in this advisory letter may involve unfair or deceptive acts or practices, or other violations of laws or regulations. These practices also can damage a bank's reputation and good name, and are contrary to the standards under which the OCC expects national banks to operate.

"In the event that OCC finds a national bank to be engaged in the practices identified in this advisory letter, it will take all appropriate supervisory action necessary to address the matter."

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