Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

Before a Conference Sponsored by

The Consumer Bankers Association

Robert Morris Associates

San Francisco, California

June 7, 1999

Last November, when I was awaiting the White House announcement of my
appointment to serve as Comptroller of the Currency, the then Acting
Comptroller, Julie Williams, made a speech on customer service. It was a
speech that I'd long thought needed to be given and had been looking
forward to giving myself as Comptroller.

The thrust of her remarks seemed irrefutable \-- at least to me. She
began by sketching the historical evolution of bank supervision \-- from
the days when it consisted of a simple measurement of a bank's internal
management and core operations, to today's broader, more encompassing
approach of assessing risk in all its manifestations \-- political,
social, and economic.

And that brought her to the central point. "Bankers," she said, "need to
weigh their business decisions \-- decisions that might be perfectly
above-board from a legal or regulatory standpoint \-- against the
reaction those decisions might elicit from the customers and communities
they are chartered to serve." "They need to be aware," she added, "that
actions perceived by a customer to be unreasonable or unfriendly may
trigger a backlash whose costs can easily exceed the narrow value of
that customer's business." Indeed, she argued that perceptions of
deterioration in bank customer service had already hurt the industry in
its efforts to achieve its legislative goals. By working to improve
customer service, she concluded, banks had an opportunity to swing
public opinion more to their side.

Generally, the speeches of bank regulators have a short shelf life: you
read about them in the trade press for a day or two, and that's that.
But Julie's speech sparked a spirited debate that lasted for weeks. Some
people were startled \-- even offended \-- that a regulator would depict
customer service as a safety and soundness issue. Others suggested
pointedly that regulators keep their noses out of the banks' lawful
relationship with their customers and let the free market do its job.
After all, they said, if customers don't like the service they're
getting, they're always free to take their business somewhere else.

But most commentators called the speech timely and important. Said one
banker, "we as an industry would be better off paying attention" to the
customer service problem than "to deny it or make excuses about it."

I applaud that kind of candor. I belief that customer service is a
subject that clearly falls within the OCC's purview \-- for all the
reasons Julie cited and for a few more. Of course, while it's important
to generate discussion, it's even better if a speech leads to
constructive action. The industry's progress \-- or lack of it \-- in
dealing with the customer service issue since Julie delivered her speech
is what I'd like to talk to you about today. And I'd like to discuss the
work of the OCC's customer assistance group \-- one way we're trying to
help bankers to do an even better job of meeting their customers'
service expectations.

First, Julie was absolutely right in affirming that customer service is
a safety and soundness issue \-- that is, unless you hold the view that
a bank can afford to alienate its customers and damage its reputation
without weakening itself. History is replete with cases of whole
industries brought to the brink of extinction because a "customer be
damned" attitude became embedded in the corporate culture. During the
late 1970s and early 1980s, for example, the domestic auto industry's
indifference to customer satisfaction and changing customer preferences
cost it a huge piece of the U.S. market \-- a loss it's still struggling
to recoup.

Banks could afford to turn a deaf ear to their customers if there were
no place else for their customers to turn. But that's clearly not the
case. Just as American households turned to foreign auto manufacturers
20 years ago, consumers of financial services have a wide choice of
nonbank suppliers today. Competition has never been stronger, and, more
than ever, customer service is a key competitive battleground. It
concerns me \-- as I know it concerns you \-- that an increasing number
of nonbank competitors are making a selling point of their nonbank
status. When advertising stresses, "we're NOT a bank," and promises a
higher level of responsiveness, local decision-making, and customer
service, it highlights a problem of major proportions for banks.

Customers all too frequently have negative predispositions about banks,
and bank practices too often validate them. For example, some
institutions' penchant for piling on fees and penalties reinforces the
stereotype of the banker as Scrooge. Customers often don't understand
why they should have to pay to gain access to their funds, or why
talking to a teller might warrant a surcharge. [You]{.underline} know
that all bank services are delivered at a cost, and that you can't last
long giving away products and services for nothing. But banks generally
have not done a good job of explaining this fact of life to customers.

Industries that regularly win higher scores for customer service are
likely to become your most significant future competitors. The computer
software industry, for example, always ranks near the top in consumer
surveys \-- a fact that should worry traditional bankers, given the
rapid growth of on-line financial transactions. Merrill, Lynch just last
week announced a major move into electronic delivery of financial
services. To suggest that the competitive challenges you face from those
quarters are unrelated to the safety and soundness of the banking system
and the value of the bank charter strikes me as woefully misinformed.

It's also the OCC's responsibility under the law to ensure that
consumers are protected in their dealings with national banks.
Unfortunately, there's mounting evidence of an increase in banking
practices that are at least seamy, if not downright unfair and deceptive
\-- practices that virtually cry out for government scrutiny.

Two particularly objectionable practices have recently come to our
attention. The first involves financial institutions that, without
letting customers know about it, have stopped reporting consumer credit
lines, high credit balances, and payment records to credit bureaus. Some
lenders, in particular, appear not to be reporting their payment
experiences with subprime borrowers in order to protect against good
customers being picked off by the competition \-- even though these
customers may have been lured into a high-rate loan as a way of
repairing a bad credit history. These high-interest borrowers may be
rudely surprised when they discover that their good credit history as a
subprime borrower isn't reflected in their credit files when they seek
credit in the future and that they are unable to obtain better rates
based on their good credit record.

Failure to report may not be explicitly illegal. But it can readily be
characterized as unfair; it may well be deceptive, and \-- in any
context \-- it's abusive. OCC staff has been discussing this issue with
the other banking agencies and with the Federal Trade Commission staff,
and is working to develop a joint supervisory response to this practice.
But that may not be the end of it: Congress is already homing in on the
problem.

The second item involves the sale of personal customer financial
information to telemarketing firms. What's happening is basically this.
A bank will enter into an agreement with an unaffiliated telemarketing
firm under which the bank provides extensive confidential customer
information in return for a commission on sales made by the marketing
firm. And the information goes well beyond mere lists of names. It also
includes addresses, telephone numbers, social security numbers, dates of
birth, credit card numbers, checking account numbers, account balances,
credit card purchases, last payment dates, occupations, marital status,
and credit scoring information.

With this information, a telemarketer can profile bank customers and
offer so-called "trial memberships" most likely to appeal to a
particular customer. If a customer indicates an interest in seeing
materials about the offer or expresses an interest in the trial
membership, his account at the bank is automatically charged by the
telemarketer \-- without the customer ever divulging his account number,
much less knowingly authorizing the charge or withdrawal.

In many cases, the customer may not realize that he's being charged
unless he spots and questions an unfamiliar item that appears on his
monthly statement. And in many cases, the "trial" membership
automatically converts into a continuing series of monthly charges
unless the customer affirmatively "opts out" of the program. The
disclosures provided to a customer about the need to opt out in order to
avoid continuing charges often leave much to be desired, and the bank's
published privacy policies frequently fail to make reference to this use
of confidential customer information.

In my judgment, this practice raises a number of serious legal concerns,
which we and others are currently reviewing. Judging from the calls we
receive from state attorney general offices around the country, the
scope of the concern may be widespread.

In addition to the legal issues, however, one must be troubled about the
implications of this practice for the preservation of customer
confidence in the confidentiality of the bank-customer relationship. We
heard loud complaints from many in the banking industry that the
now-defunct Know Your Customer regulation would do severe damage to
customer confidence \-- as I believe it would have. But there doesn't
seem to be the same sensitivity about damaging that relationship when
there are commissions to be earned from the sale of confidential
information.

Issues surrounding the transfer of customer information already have
lent momentum to proposals for new federal legislation, and the
emergence of practices such as I've described will only increase the
likelihood of new legislation.

And that brings up the third reason why customer service is a legitimate
public policy issue for bank regulators. What Julie warned about in her
November speech \-- the risk that consumer complaints would translate
into legislation that the industry may view as adverse to its interests
\-- now seems more real than ever before.

One can review the history of consumer protection legislation over the
past three decades and see one common and compelling theme: consumer
abuses that are allowed to continue without being addressed by the
industry are eventually addressed through regulatory legislation. And
this audience knows as well as any that the cure can be more painful
than the disease. Truth in Lending, Fair Credit Billing, Fair Credit
Reporting, and Truth in Savings were legislative responses to clear
abuses the industry proved unwilling to address on its own. These
enactments not only created significant compliance burdens for the
industry, but vastly expanded the enforcement responsibilities of the
banking agencies, and added significant complexity to the traditional
process of safety and soundness examination.

While it might be unfair to burden an entire industry with legislation
aimed at curbing the poor conduct of a few institutions, the persistent
failure of the industry itself to address abusive conduct creates a
fertile seedbed for legislation. Perhaps it's too late for industry
codes of conduct, self-policing arrangements, or even statements of best
practices to relieve the burdens of regulatory legislation already on
the books. But it may still be possible to avoid new legislation crafted
to remedy today's excesses.

What's needed, in my judgment, is for the leaders of the industry,
including the Consumer Bankers Association and RMA, to speak out on
these issues. You must emphasize to Congress and the American people
that the banking industry stands ready to take the steps necessary to
clean up its act. If you are unable or unwilling to develop an industry
self-regulatory mechanism, or to promulgate codes of conduct with
incentives for voluntary compliance, you can at least assist in that
effort by providing guidance on the kinds of practices that are and are
not acceptable. In my view, the banking industry's response must be
prompt and unambiguous in order to stem the tide of corrective
legislation.

This represents a significant challenge. And while it's not our job to
draft standards of fair conduct, we can help banks to respond more
effectively to consumer issues and concerns. In fact, over the past
year, we have \-- quite unexpectedly, I should add \-- amassed a
significant amount of information about bank-customer relationships that
can be of real value to bank management seeking to upgrade its service.

In April 1998, the OCC installed a state-of-the-art consumer hotline
system at our customer assistance center in Houston. Although we have
not widely advertised or promoted this facility, our call volume has
grown dramatically. In 1997, before we installed the new system, our
customer assistance group logged some 16,000 consumer complaints. In
1998, the number rose to more than 68,000. And, if the complaint volume
during the first quarter of 1999 holds for the entire year, we should be
well over 100,000 this year. Again, that's without any promotion on our
part.

Our approach to this operation is not regulatory- or
compliance-oriented. We are not seeking out violations of law. Most of
the complaints we receive are the result of a breakdown in
communications between a bank and a customer. We lend our good offices
to the resolution of disputes. If the customer's complaint lacks merit,
we're frank to say so. In my view, this operation has been a great
success, for both customers [and]{.underline} banks.

What's most disturbing, however, is the large number of complaints we
receive about bank practices \-- such as those I've already mentioned
\-- that, intentionally or not, violate the letter or the spirit of
consumer protection laws or that clearly strain the boundaries of
ethical conduct.

I think of our customer assistance center as performing two critical
functions. First, it provides an outlet for consumers, where their
complaints will receive prompt and efficient attention. Second, it adds
value to the supervisory process by giving bankers insight into their
customers' assessment of the service they provide. A number of national
bank CEOs to whom I've spoken have expressed surprise at learning the
extent of the service problem, and I suspect most CEOs or boards of
directors never learn through internal processes about bad customer
assessments of their service, or about questionable practices at the
marketing level. The information collected by our Houston unit can
inform senior management where steps are necessary to improve the
quality of the service their banks deliver. It can also point toward
internal processes and control weaknesses that they should be interested
in fixing.

Of course, when we find that consumer protection laws have been
violated, our response will be firm. But shoddy and unethical practices,
marketing schemes that overreach or exploit, and offensive sales
techniques may not be currently sanctionable under the law. It's very
much in the interests of the banking industry [and]{.underline} its
customers to eliminate such conduct. Effective self-policing should be
undertaken as a matter of enlightened self interest \-- not only to
improve customer relationships, but to demonstrate to Congress that new
regulatory legislation aimed at curbing abuses by banks is not needed.
The industry's future could well depend on how it responds to this
challenge.