You're absolutely, positively pre-approved; maybe: how credit companies twist the truth - and why regulators let them

Four Fickle Fiefdoms

The irony is that, while it is the Fed and FDIC that profess to be taking the closest look at this problem, it is the OCC that oversees most of the troublemakers. (The Office of Thrift Supervision regulates savings and loans, which tend not to be major players in the credit card market.) If that doesn't make sense to you, you're not alone. The fractured banking regulatory apparatus is a senseless system that grew out of historical accident rather than conscious design. It's complicated, inefficient, and duplicative; more than one of the regulatory agency employees I spoke with acknowledged that having four separate regulators makes it more difficult to monitor problems and devise solutions. Over the years, scores of lawmakers, presidential administrations, special commissions, and agency heads have advocated a single bank regulator; Treasury Secretary Lloyd Bentsen most recently headed a charge for the Clinton administration. Unfortunately, that effort, like all that came before it, was torpedoed. This time it was the Fed, buttressed by the banking industry, that led the fight against it.

Why? Two reasons. First, the bank regulators don't want to lose their turf. Former Senator William Proxmire told the Banking Committee in 1991 of his earlier efforts to consolidate the regulatory functions of the Fed, FDIC, and OCC: "I seriously underestimated the depth of the entrenched opposition to regulatory consolidation. All three bank regulatory agencies vehemently opposed tile legislation. Privately, however, each agency let it be known it would withdraw its objections if it could assume the powers of the other two." [emphasis added!

Second, the banks have a sweetheart deal. When deciding how to charter themselves and their subsidiaries, they can look for the regulator that's willing to give them the easiest treatment. Because the regulators don't want to lose their banks to other agencies, they may be inclined to soften their oversight. As Paul Starobin writes in the National Journal, "Lawmakers have long warned that the shopping-around threat encourages lax regulation."

It may be telling that most major credit card companies are chartered as national banks, placing them under the watch of the OCC, which has a demonstrably more lenient record in examinations for truth-in-lending violations (dealing with issues like disclosure of terms and interest rates) than the other three regulators. Between 1992 and 1994, the Fed found violations in an average of 83 percent of its examinations; the FDIC, 78 percent; the OTS, 69 percent; and the OCC, only 49 percent.

But the bank regulators don't need to merge to solve the problem of deceptive advertising. The Fed can easily issue a regulation or guideline spelling out the parameters of deceptive advertising, as the FTC has done. More specifically, it can force banks to qualify their use of the term "preapproval." As McKinley at CardTrak notes, "The word is used freely, but it's really nothing more than `pre-screened.' It needs, to be better defined--that `pre-approved' means approved, not just screened or pre-qualified." It's a simple solution. And where the Fed goes, the other regulators are required to follow.