Unfair or Deceptive: New Warnings from OCC

In Advisory Letter 2004-10, the Comptroller of the Currency advises national banks on credit card marketing and account management practices that may be unfair or deceptive. While the guidance is officially limited to credit card practices and only directly applies to national banks, all financial institutions should read this carefully and evaluate their marketing and account management practices in the context of this guidance.

The guidance in this Advisory Letter is really generic and can be provided to any product the institution offers. However, the specific topic of the Advisory Letter, credit card marketing and account management, is clearly a concern at the OCC based on consumer complaints and examiner findings. So issuers of credit cards should pay special attention to the Advisory Letter.

Marketing
The specific problems identified in marketing are classic temptations of marketers. When the goal is to meet a sales target, it is tempting to focus on the sales rather than on the honesty and clarity of the message.

Clearly, making promises that are not true is inappropriate. However, also a problem is the practice of omitting important information or placing that information in a context that effectively hides it.

OCC identifies several areas of concern. One is what the OCC has dubbed "up to" marketing. This involves promoting a product with a line of credit up to a highly enticing amount but in reality rarely making that amount available or using the amount to attract applicants who are unlikely to qualify. The creditor then has the consumer on the hook and offers a lesser product and the sale goal is met.

The "up to" concerns include targeting the advertisement to a population that is not likely to qualify for the term or offering a default product that is significantly less desirable than the lead product marketed.

OCC also cites the practice of advertising uses of the product when the uses are largely illusory. We are familiar with this in the context of home equity lines of credit. The advertising promise of tax benefits resulted in significant additions to the Truth in Lending Act and took most of the creative room out of HELOC marketing.

A second marketing practice that OCC identifies is promotional rate marketing. Using a promotional rate is a popular technique for promoting all sorts of credit products and even occasionally deposit products.

There are several concerns with the use and presentation of promotional rates. The first, of course, is whether the promotional rate is actually available. The rate may be available only if certain very unlikely conditions are met.

The second issue is adequate disclosure on limitations of the promotional rate. Limitations would include the time for which the rate is available and the services for which the rate is available. For example, the promotional rate may be available only on balance transfers of a certain minimum amount, or the rate may be available only for a short period of time. Other examples would include an introductory rate on the first several cash withdrawals or purchases from a specific vendor. Such limitations make the value and use of the promotional rate largely illusory.

The OCC is also concerned that some programs promote an introductory rate but impose fees that effectively take away the rate's benefit. For example, the rate may be applied to balance transfers from another account, but the lender then charges a fee to carry out the balance transfer. The fee could obliterate or exceed the advantage of the promotional rate.

The OCC is looking for several best practices in marketing promotional rates or terms. First, disclose any material limitations. This might include time periods of availability or conditions to qualify for the term.

Second, avoid making any representation that there are no conditions or limitations on the promotional rate or term. Instead, alert the consumer to the reality of the restrictions.Finally, disclose any fees fully and prominently. Hiding fees or other costs in mouse-print is definitely not a good idea.

Providian led the way in the arena of deceptive marketing. Not only did Providian marketing campaigns omit or slide over certain critical information, Providian actually instructed its sales staff to avoid answering consumer questions or to give misleading information rather than correct information.

The question to ask marketers is whether they are highlighting important features of the product or whether they are hiding information or misleading the consumer. The former is valid marketing; the latter is deceptive.

Account Management
Marketers aren't the only target of this Advisory Letter. The letter also deals with account management in ways that may treat the consumer unfairly or deceive the consumer. The activities that concern the OCC are driven by two trends. The first is the drive toward fee income or anything to improve the bottom line. The second is the tendency to forget that the account relationship is based on a contract which places certain obligations on both parties.

The OCC has identified several practices that benefit the bank but reduce the benefits of the product for the consumer or actually make the product cost more. The Advisory Letter identifies practices such as shortening the due date for the payment, or increasing late payment fees, cash advance fees or other penalties. Rate changes based on customer activity, such as the level of product use or the timeliness of payments is also raised as a concern.

For best practices in product management, the OCC recommends full and prominent disclosure of circumstances under which the rate will increase or fees will be imposed. This is particularly important for terms that the consumer may not reasonably anticipate, such as making timely payments to other creditors. Second, the OCC recommends that information about when and how the bank may change the rate or impose fees be prominent in both marketing materials and credit agreements - to say nothing of disclosures! If you think this sounds hauntingly similar to the disclosure requirements of home equity lines of credit, you are correct. In fact, the rules laid out in Regulation Z for HELOC disclosures could be used as a standard by which to measure other advertisements and disclosures.

Fair Warning
With AL 2004-10, the OCC gives fair warning to national banks. The letter identifies problem practices and states that OCC will take enforcement action. The action may use existing consumer credit protection laws such as Truth in Lending and Regulation Z. Alternatively - or in addition - the enforcement may be based on the FTC Act's prohibitions of unfair or deceptive trade practices.

Worth Noting
To illustrate how seriously the OCC looks at these issues, look at the speech given by retiring Comptroller John Hawke. In that speech, complete with warnings to the industry about self-regulation, Hawke singled out credit card advertisements and disclosures as the single clearest example of problem practices. Without more honesty in disclosure, there will be more regulation.

ACTION STEPS

Review the last several marketing campaigns for specific products and determine whether they meet the OCC's standard for clarity and fairness. If not, it's time to sit down with marketing and senior management.
Review disclosures and identify ways that the institution may make rate or fee changes and the ways that are not permissible. Keep this list handy and share it with product managers.
Meet with operations staff to find out how fees, charges, and other calculations are actually conducted. Review some transactions in accounts to verify this.
Now compare what your systems are actually doing on accounts with the disclosures you have given customers. If they don't match, you have work to do!
Give senior management a briefing of fair and non-deceptive trade practices. Provide some examples of the wrong way to do business so that your comments have a context.