Credit Card Lending - United States Secretary of the Treasury

Comptroller¡¯s Handbook

Safety and Soundness

Capital

Adequacy

(C)

Asset

Quality

(A)

Management

(M)

Earnings

(E)

Liquidity

(L)

Sensitivity to

Market Risk

(S)

Other

Activities

(O)

Credit Card Lending

Version 2.0, April 2021

Of?ce of the

Comptroller of the Currency

Washington, DC 20219

Version 2.0

Contents

Introduction ......................................................................................................................1

Overview ............................................................................................................... 1

Credit Card Products .............................................................................................. 3

General Purpose Cards ...................................................................................... 4

Proprietary or Private-Label Cards .................................................................... 6

Corporate or Commercial Cards ........................................................................ 7

Secured Cards................................................................................................... 7

Risks Associated With Credit Card Lending ............................................................ 8

Credit Risk ....................................................................................................... 8

Operational Risk ............................................................................................... 9

Liquidity Risk................................................................................................. 10

Strategic Risk ................................................................................................. 11

Reputation Risk .............................................................................................. 12

Interest Rate Risk............................................................................................ 12

Compliance Risk ............................................................................................ 13

Risk Management................................................................................................. 14

Information Technology.................................................................................. 16

Scoring Models............................................................................................... 17

Model Documentation ............................................................................... 22

Model Management and Tracking.............................................................. 22

Marketing and Underwriting of New Accounts ................................................ 26

Prescreened Solicitations ........................................................................... 27

Applications.............................................................................................. 30

Portfolio Acquisitions................................................................................ 32

Account Management ..................................................................................... 32

Line Increases and Decreases..................................................................... 34

Over-Limit Authorizations......................................................................... 34

Repricing of Accounts and Other Changes to Credit Terms......................... 35

Account Closures ...................................................................................... 35

Cross-Selling Initiatives............................................................................. 36

Retention Strategies................................................................................... 36

Other Account Management Tools............................................................. 36

Securitized Assets........................................................................................... 38

Collections ..................................................................................................... 38

Credit Losses ............................................................................................ 38

Re-Aging .................................................................................................. 41

Fixed Payment Programs ........................................................................... 42

Settlement Programs.................................................................................. 44

Consumer Credit Counseling ..................................................................... 44

Collections Reports ................................................................................... 45

Delinquency, Classification, and Charge-Off Policies................................. 46

Nonaccrual Status ..................................................................................... 47

Recoveries ................................................................................................ 48

Consumer Debt Sales ................................................................................ 48

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Fraud Risk Management ................................................................................. 50

Purchased Credit Card Relationships ............................................................... 54

Allowance for Loan and Lease Losses or Allowance for Credit Losses ............. 54

ALLL Under the Incurred Loss Methodology............................................. 55

ACL Under the Current Expected Credit Losses Methodology.................... 56

Accounting for Rebate or Reward Programs............................................... 57

Reserving for Credit Card Partnership Programs ........................................ 58

Profit Analysis................................................................................................ 58

Ancillary Products: Debt Cancellation Contracts and Debt Suspension

Agreements............................................................................................... 60

Examination Procedures.................................................................................................65

Scope................................................................................................................... 65

Procedures ........................................................................................................... 67

Management................................................................................................... 68

Primary Examination Procedures ............................................................... 68

Supplemental Examination Procedures....................................................... 70

Risk Management ........................................................................................... 72

Primary Examination Procedures ............................................................... 73

Supplemental Examination Procedures....................................................... 77

Information Technology.................................................................................. 82

Primary Examination Procedures ............................................................... 82

Supplemental Examination Procedures....................................................... 83

Marketing and Product Development............................................................... 84

Primary Examination Procedures ............................................................... 84

Supplemental Examination Procedures....................................................... 85

Underwriting .................................................................................................. 87

Primary Examination Procedures ............................................................... 88

Supplemental Examination Procedures....................................................... 89

Account Management ..................................................................................... 92

Primary Examination Procedures ............................................................... 92

Supplemental Examination Procedures....................................................... 93

Collections ..................................................................................................... 95

Primary Examination Procedures ............................................................... 95

Supplemental Examination Procedures....................................................... 97

Profit Analysis.............................................................................................. 104

Supplemental Examination Procedures..................................................... 104

ALLL or ACL .............................................................................................. 106

Supplemental Examination Procedures..................................................... 106

Purchased Credit Card Relationships ............................................................. 107

Supplemental Examination Procedures..................................................... 107

Third-Party or Private-Label Partner Management ......................................... 109

Supplemental Examination Procedures..................................................... 109

Debt Suspension and Cancellation Programs.................................................. 114

Supplemental Examination Procedures..................................................... 115

Accounting for Rebate Programs ................................................................... 118

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Supplemental Examination Procedures..................................................... 119

Program Availability and Eligibility Standards .............................................. 119

Supplemental Examination Procedures..................................................... 119

Credit Terms and Methods of Payment.......................................................... 120

Supplemental Examination Procedures..................................................... 120

Credit Reporting ........................................................................................... 121

Supplemental Examination Procedures..................................................... 121

Compliance With Consumer Protection-Related Laws and Regulations .......... 121

Conclusions........................................................................................................ 122

Internal Control Questionnaire ............................................................................ 124

Verification Procedures ...................................................................................... 127

Appendixes....................................................................................................................128

Appendix A: Transaction Testing........................................................................ 128

Appendix B: Suggested Request Items for Credit Card Lending Activities ........... 135

Appendix C: Uniform Retail Credit Classification and

Account Management Policy Checklist (RCCP Checklist) ............................. 140

Appendix D: Account Management and Loss Allowance Guidance Checklist....... 144

Appendix E: Debt Suspension Agreement and

Debt Cancellation Contract Forms and Disclosure Worksheet ........................ 148

Appendix F: Debt Suspension and Debt Cancellation

Product Information Worksheet..................................................................... 152

Appendix G: Loss Forecasting Tools................................................................... 155

Appendix H: Credit Scoring and Development of Scoring Models ....................... 159

Appendix I: Profit Analysis................................................................................. 166

Appendix J: Glossary.......................................................................................... 169

Appendix K: Abbreviations ................................................................................ 176

References.....................................................................................................................178

Comptroller¡¯s Handbook

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Introduction

The Office of the Comptroller of the Currency¡¯s (OCC) Comptroller¡¯s Handbook booklet,

¡°Credit Card Lending,¡± is prepared for use by OCC examiners in connection with their

examination and supervision of national banks, federal savings associations, and federal

branches and agencies of foreign banking organizations (collectively, banks). Each bank is

different and may present specific issues. Accordingly, examiners should apply the

information in this booklet consistent with each bank¡¯s individual circumstances. When it is

necessary to distinguish between them, national banks, federal savings associations (FSA),

and covered savings associations are referred to separately.1

Overview

The credit card is one of the most universally accepted and convenient payment methods,

used by millions of consumers and merchants worldwide as a routine means of payment for a

variety of products and services.

Because of their profitability, credit cards play a role in the strategic plans of many banks

that may function as issuers, merchant acquirers, or agent banks. There are several major

issuers, very few of them are community banks. Many community banks use referral

programs or other contracted services provided by large bank issuers to provide credit cards

to their customers. Issuing banks hold or sell credit card loans and, therefore, bear some

credit risk. Some banks are involved in an arrangement commonly known as ¡°rent-a-BIN.¡±

This arrangement allows an entity, such as a merchant processor, to conduct credit card

activities using a bank¡¯s Visa bank identification number or Mastercard Interbank Card

Association number in return for a fee paid to the bank. 2

A merchant bank, or acquiring bank, is an entity that has entered into an agreement with a

merchant to accept deposits generated by credit card transactions. Processing merchant sales

drafts may result in customer chargebacks and, therefore, create operational, reputation,

strategic, and credit risks to the merchant bank.

An agent bank is a bank that has entered into an agreement to participate in an acquiring

bank¡¯s merchant processing program. Many agent banks are community banks that offer

merchant processing as a customer service. Agent banks are exposed to reputation risk and

Generally, references to ¡°national banks¡± throughout this booklet also apply to federal branches and agencies

of foreign banking organizations unless otherwise specified. Refer to the ¡°Federal Branches and Agencies

Supervision¡± booklet of the Comptroller¡¯s Handbook for more information regarding applicability of laws,

regulations, and guidance to federal branches and agencies. Certain FSAs may make an election to operate as a

covered savings association. For more information, refer to OCC Bulletin 2019-31, ¡°Covered Savings

Associations Implementation: Covered Savings Associations,¡± and 12 CFR 101, ¡°Covered Savings

Associations.¡±

1

For more information about rent-a-BIN arrangements, refer to the ¡°Merchant Processing¡± booklet of the

Comptroller¡¯s Handbook.

2

Comptroller¡¯s Handbook

1

Credit Card Lending

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