On August 20, 2008, John Dugan, Comptroller of the Currency, publicly released a comment letter he submitted to the Federal Reserve in response to its May 19, 2008 proposed rule amending provisions of Regulation AA to define unfair and deceptive credit card practices. The Federal Reserve issued the Proposed Rule jointly with the OTS and the NCUA under their rarely used FTC rule-writing authority. The Proposed Rule would restrict the ability of card issuers to increase interest rates on existing balances (except in the case of a default), prohibit double-cycle billing, and create guidelines for the allocation of payments.

The OCC is the primary regulator of national banks and national banks account for roughly 80 percent of the credit card lending in the U.S. In the letter, Comptroller Dugan states that while the OCC supports key parts of the proposal, the agency believes that, in its current form, certain aspects of the Proposed Rule could weaken banks and thrifts and lead to a drastic reduction of credit for consumers by limiting the ability of credit card issuers to “recover the costs of increased default that goes along with consumers that have less-than-good credit histories." Comptroller Dugan also argues that by labeling certain industry practices as “unfair and deceptive,” the Proposed Rule would open banks and thrifts to increased risk of litigation. Finally, Comptroller Dugan takes the view that the Proposed Rule constitutes “a major shift away from the Federal Reserve’s longstanding reliance on disclosure as its primary form of consumer protection regulation” to substantive restrictions on specific credit card practices — a shift the OCC believes is not necessary to assure fair treatment to consumers.

Specific reforms in the Proposed Rule that Comptroller Dugan urges the Federal Reserve to reconsider include: (i) restrictions on the re-pricing of outstanding credit card balances; and (ii) the risk of unforeseen liability by potential retroactive application of the Proposed Rule’s new restrictions and by labeling industry practices as “unfair and deceptive.”

Repricing of Credit Card Balances. In the letter, Comptroller Dugan stated that the Proposed Rule’s prohibition on the re-pricing of credit card balances at the end of a term constitutes a “regulatory freeze of pricing terms for unsecured revolving credit” that is “not consistent with safe and sound lending practices . . . or consumer expectations.”

He recommends that the Federal Reserve amend the Proposed Rule to include an exception that would permit creditors to reprice any outstanding balance at the expiration date of a particular credit card, asserting that consumers should be able to opt out of any rate increase by closing the account and paying off the balance under the existing terms. With respect to the Proposed Rule’s prohibition on rate increases where payment is less than 30 days late, Comptroller Dugan states that: “consumers can reasonably understand that late payments on their credit card loans will lead to increased pricing with respect to those loans.” He urges the Federal Reserve to amend the Proposed rule by selecting a shorter period, such as five days after the due date, to allow card issuers to raise interest rates on late paying consumers. Comptroller Dugan also recommends the adoption of a broad risk-based pricing regime that would permit card issuers to adjust the interest rate on any outstanding balance whenever the consumer has made a certain number of late payments within a designated time period.

Retroactive Application; Unforeseen Risk. Comptroller Dugan warns that by promulgating the Proposed Rule under authority granted to it by section 18(f)(1) of the FTC Act, and based on the rationales contained in the preamble to the Proposed Rule, the Federal Reserve is exposing banks to retroactive civil liability for actions that are expressly permitted under current credit card regulations. He further warns that by defining many existing credit card industry practices to be “unfair and deceptive,” the Federal Reserve is generally exposing the industry to potential civil liability and class actions. To prevent this, Comptroller Dugan recommends that the Federal Reserve amend the Proposed Rule to specifically provide that it only applies prospectively, and that the changes are being promulgated under the TILA as well as the FTC Act. Because TILA permits the Federal Reserve to "prevent" rather than "define" unfair and deceptive practices, the risk of litigation may be eliminated. The use of TILA also would permit more entities to be covered by the Proposed Rule.

Industry observers believe Comptroller Dugan’s letter largely echoes many of the industry's concerns.