Banks Get a Warning on Credit Card Lending
Feeling pretty smug about those pre-approved credit card applications banks keep sending you? Impressed that your credit rating is that good?
Don’t be.
The federal agency that regulates 2,800 national banks sent letters Thursday advising them that it would be better not to offer such credit without checking the person’s credit-worthiness.
The letter from the U.S. Comptroller of the Currency’s office says banks are ignoring basic lending controls as they compete aggressively in the fast-growing credit card business.
Comptroller of the Currency Edward Ludwig said that consumer lending poses no fundamental threat to banks at this time, because banks are earning near-record profits and have large reserves against potential losses. Nevertheless, Ludwig said, “there are some problems with credit card lending that neither regulators nor the banking industry can ignore.”
In the advisory letter to national banks and regulators, Ludwig’s agency identifies “weaknesses in some pre-approved solicitation programs.” The comptroller’s office declined to name banks with such problems but alluded to the major banks that send out pre-approved solicitations.
“In these highly competitive environments, they, like the rest of us, sometimes cut corners and need to be reminded that these are important issues,” said Jimmy F. Barton, chief national bank examiner.
In 1995, banks mailed 2.7 billion credit card solicitations, or about 17 for each U.S. adult, according to a survey by Behavioral Analysis Inc.
Credit card loans, while only a fraction of overall bank lending, have grown faster than any other type of consumer loan in the past three years.
The Federal Deposit Insurance Corp. said this month that bad consumer loans--chiefly credit card debt--rose 36% to $3.8 billion in the second quarter from the corresponding period a year before.
A greater number of personal bankruptcies was cited as a chief cause for the rise. However, Barton said he sees a connection between the delinquencies and the practice of mass-mailing of credit card applications.
