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Bank Regulator Calls for Opt-Out Provision on Fee Hikes

Consumers should not get stuck paying new, higher rate on existing balances

By Truman Lewis
ConsumerAffairs.com

September 27, 2007

Many consumers have argued that they should have the option of "opting out" of the higher rates and should be allowed to pay off their balance at the old rate.

That argument has just won a powerful supporter: Comptroller of the Currency John C. Dugan.

“My take on all this is that there is plainly a state of disequilibrium when it comes to consumer protection for credit cards, and the system needs fixing,” the Dugan said in a speech to the Financial Services Roundtable. He said that disgruntled consumers hit with unexpected rate increases may just have a point.

He noted that the Federal Reserve is now considering a change to its Truth-in-Lending rules that would generally prohibit rate increases unless the cardholder receives 45 days prior notice.

The notice would allow the consumer to avoid the rate increase by paying off the card balance or moving it to another card.

But Dugan said the provision might not provide a meaningful choice for some consumers, especially those for whom the rate hike was triggered by something unrelated to the account, such as a lower credit bureau score. Some consumers might have balances that are too large to pay off, and others might not be able to find a card company willing to roll over the balance.

“The practical reality is that the consumer would get stuck paying the higher rate on the full amount of his or her outstanding balance, because there would be no realistic alternative,” the comptroller said.

“He or she could very well complain that the rate increase was totally unexpected and would undoubtedly believe that the higher rate was being applied ‘unfairly’ and ‘retroactively’ to balances the consumer accrued when the lower rate was in effect,” Dugan said.

“In circumstances like these, I think the disgruntled consumer has a point,” he said.

Charlene of Littlestown, Pa., would agree. Chase raised her credit card interest rate "astronomically," even though her payments had been made automatically from her checking account and she had never been late, she said. She closed the account and has been paying on it ever since, at the new, higher rate.

"I pay my bills ontime and it works against me!" Charlene said in her complaint to ConsumerAffairs.com. "No other business can contract with you, change the contract and get away with it."

Opt out

The comptroller suggested that when consumers are notified that their rates will surge to a penalty rate – which can be as high as 30 percent or more – they should be allowed to opt out, subject to several exceptions:

• First, the opt-out would not be available if the increase resulted from payment default on that card, as opposed to other circumstances, such as a missed payment on another obligation.

• Second, the opt-out would not apply to rates that increase only because of the passage of time, as is the case when low initial rates expire after some predetermined period of time.

• Finally, the card issuer would not be obliged to allow the consumer to make new charges on the card at the old rate.

“But the opt-out would allow the consumer to keep the balance outstanding on the card at the old rate, with a requirement to pay off that balance or roll it over to another card within a reasonable period,” Mr. Dugan said.

Discourage "come-on" rates

The comptroller said that if most cardholders exercised the right to opt out, fewer products would be marketed that offer zero or low interest rates initially and depend upon steep increases in rates as the primary means of making the card profitable.

“But the cost of foregoing such a pricing strategy, even though clearly valued by some consumers, might well be outweighed by eliminating one source of bitter consumer complaints in the area of so-called ‘gotcha’ or ‘retroactive’ pricing,” he added.

Mr. Dugan noted in his speech that the primary focus of regulation has been on providing consumers, through mandated disclosures, with meaningful notice of the costs and terms of the card, while leaving lenders generally free to set costs and terms.

“The underlying theory of this approach to regulation is a familiar one: if consumers are provided adequate information about products, they will choose the ones they want and like best, and banks will compete to innovate to structure these products, without government interference, to best meet that demand,” he said.

Although this paradigm has worked phenomenally well by many measures, it has also led to a swelling of sharp complaints in recent years about such aggressive practices as eye-popping penalty interest rates, “universal default” provisions that trigger the higher rates, and ever-increasing fees, Dugan said.

“My take on all this is that there is plainly a state of disequilibrium when it comes to consumer protection for credit cards, and the system needs fixing,” the comptroller added. Dugan said the Fed’s rulemaking is a good place to address his proposal for a consumer opt-out, and the OCC will submit a comment letter making that recommendation.

The Office of the Comptroller of the Currency regulates national banks. Although it does not dictate credit card policies of the banks it charters, it has broad oversight powers and Dugan's comments are likely to resonate with bankers.

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