A consumer group blasted the aggressive marketing practices of credit card issuers Wednesday and urged Congress to punish those that let customers become deeply indebted.
Stephen Brobeck, executive director of the Consumer Federation of America, called on the Senate to reject bankruptcy legislation passed by the House June 10, which would force most borrowers to repay at least a portion of their unsecured debts.
"Banks are hypocritical to seek bankruptcy restrictions when their irresponsible marketing and extension of credit card debt has been an important cause of rising personal bankruptcies," Mr. Brobeck said.
A federation analysis indicated that many of the most aggressive bank card sellers are experiencing high chargeoff rates, suggesting they are recklessly offering credit to people who cannot afford more debt.
Among the largest 26 bank card issuers, the group singled out Mellon Bank Corp., First Union Corp., and CoreStates Financial Corp., which First Union recently acquired. The chargeoff analysis was based on data from Veribanc Inc.
Banking industry officials disagreed with the conclusions. "We stand by our ongoing marketing efforts and extend credit only to quality individuals," a First Union spokeswoman said.
"No lender extends credit under the assumption they are not going to be repaid," said William P. Binzel, vice president for government affairs at MasterCard International.
A Mellon spokesman said the bank is tightening its lending standards and may lower credit limits for high-risk customers.
Mr. Brobeck also disputed the industry's argument that rising losses from bankruptcies are forcing customers to pay more for credit. From 1994 to 1997 bank card chargeoff rates have almost doubled, to 5.6%, though the average interest rate remained steady at 15.7%, he said.
He also said card issuers have hurt themselves by repeatedly increasing customer debt limits. According to his group's study, bank card debt grew by 23.5% from Jan. 1, 1997 to March 31, 1998, while all revolving consumer credit increased only 7.6%.
Mr. Brobeck said bankruptcy reform legislation should prohibit lenders from collecting on loans extended after a person's debt level, excluding mortgage obligations, reaches 40% of income.
Such legislation also would require credit card bills to include a disclosure stating how long it would take to pay off a debt if only the minimum monthly payments were made.
Mr. Binzel of MasterCard said limiting court protections for lenders that offer credit to high-risk borrowers would put an unfair burden on the industry.
"Debt-to-income ratio is already a factor that creditors consider," he said. "Ultimately, somebody would have to be a credit czar" to dictate underwriting standards.
Mr. Binzel also argued that bankruptcy losses are hurting consumers, even if interest rates are not climbing.
"The Consumer Federation is ignoring the fact that the bank card market is the most competitive industry" in the United States, he said. "To the extent that companies cannot reduce losses from bankruptcy, they are prevented from reducing fees, providing new incentives, and other benefits as well."
