Comptroller of the Currency John Dugan put himself in the center of the controversy swirling around the proposed rules on unfair or deceptive credit card and overdraft practices that the Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration issued on May 19. The proposal has already generated more than 56,000 comments, most of them from consumers and consumer advocates.

Dugan submitted a comment letter that supports much of the proposal. However, his letter also contends that parts of the proposal “would have unintended and undesirable consequences that:

1. Raise safety and soundness concerns;
2. Are not necessary to assure fair treatment of consumers, and in some respects run counter to consumers’ interests; and,
3. Could result in a significant reduction in credit availability.”

Dugan’s reservations in part reflect industry objections to the proposal — a fact that is hardly surprising. As Dugan noted in his letter, national banks, which the OCC regulates, collectively account for almost 80 percent of all credit card lending in the United States. Together with the industry, Dugan raised two major issues.

Issue One — Repricing

Dugan called the restriction on repricing outstanding card balances “overly broad” and “unnecessarily stringent.” The proposed restriction would prohibit card issuers from repricing outstanding balances after the expiration of the term of the card — even where the expiration date is plainly printed on the front of the card and the customer is fully informed of the potential for repricing of outstanding balances well in advance of that time.

The proposed rule would permit repricing during the term of the account only if the rate changed pursuant to a variable-rate feature tied to an external public index, upon expiration of an introductory rate, or if the consumer’s payment is at least 30 days’ late.

“We believe that such a regulatory ‘freeze’ of pricing terms for unsecured revolving credit, wholly without regard to the substantial changes in customer risk profile that can occur over extended periods, is not consistent with safe and sound lending practices,” Dugan wrote in the OCC’s comment letter.

Issue Two — Litigation

Dugan also shares the industry’s worry that the proposed rule’s prohibition of unfair or deceptive acts or practices under the Federal Trade Commission Act would expose credit card lenders to retroactive litigation risk. “Based on the rationale provided in the preamble for prohibiting the practices at issue, litigants could argue that the [agencies] view certain practices as per se unfair under existing legal standards … even if the Board declares that the new federal regulations are intended to be prospective only.”

To avoid this “litigation trap,” Dugan recommended that the Fed use its Truth In Lending Act authority to set the operative restrictions and prohibitions, and then link those to rules promulgated under the FTC Act to prevent unfair or deceptive acts or practices. (Only time will tell if that approach represents a significant impediment to the class action bar. — Ed.)