New federal regulations may put a damper on the pre-approved offers that have been a credit card marketing staple of the 1990s.
Fair Credit Reporting Act amendments that took effect at the end of September permit credit issuers to do "post-screens" on accounts they had previously offered on a pre-approved basis.
Because these reevaluations could result in the withdrawal of offers of credit, consumer advocates and other critics complain that the "pre- approval" message constitutes deceptive marketing. Class actions and regulations at the state level could force major modifications of the practice.
Banks and credit bureaus say pre-approved offers are neither misleading nor deceptive, but are essential weapons in their competitive arsenals.
They use available information in consumer files to make highly targeted offers of both unsecured and home equity loans.
The Federal Trade Commission, though not a direct regulator of bank holding companies, has taken an activist stance against pre-approved credit offers, primarily on consumer privacy grounds.
"The change in the post-screening rule will lead to the necessity of changing some of the language on credit card offers," said David Medine, an attorney with the FTC in Washington. "The one thing that has to go is 'pre- approved' if there is significant post-screening.
"At a certain point the term becomes deceptive because you are not in fact approved," Mr. Medine added. "I think consumers justifiably have taken approval to mean you are virtually certain to get this offer."
Consumers may also find the language in pre-approved offers vague.
A recent solicitation from Capital One Financial Corp. read: "Saying yes to the benefits of this MasterCard couldn't be easier. Simply place your sticker on the enclosed Pre-Approved Acceptance Certificate and ... we'll immediately assign your credit line and send your new MasterCard."
But a separate disclosure document with the offer included this statement under "miscellaneous information":
"Pre-approval is based on an initial assessment that I (the prospective cardholder) met Capital One's credit standards."
Peggy L. Twohig, the FTC's assistant director for credit practices, said, "Credit card companies are getting great response rates because of pre-approved offers on envelopes (because) it gets people to open them."
She wants credit card issuers to water down "pre-approved," perhaps by using the term "pre-selected."
She said pre-selected is "absolutely fine because that is exactly what's happening," Ms. Twohig said.
"They are pre-selecting me and I'm special."
Mr. Medine said consumers who are denied pre-approved credit card offers can suffer further injury to their credit reports.
"Once you return the offer, the credit or card issuer has a permissible purpose to pull your full credit report and an inquiry will be recorded," Mr. Medine added. "It is well known that a large number of inquiries can actually cause you to be denied credit."
BAI Global of Tarrytown, N.Y., which produces the Mail Monitor survey of card solicitation activity, said 55% of the nearly one billion offers in the first half of 1997 were pre-approvals.
But the response rate on those was 1.2%, compared with the 1.4% on offers that were not pre-appoved.
Lisa Itzkowitz, BAI Global's director of marketing, said the difference in response rates is partially related to the growing number of people who would not qualify for a pre-approved card, but who are also desperate for credit and therefore more likely to respond to almost any offer.
"'Pre-approved' is definitely one more enticement to the consumer to accept the card," Ms. Itzkowitz said. "It will lead the consumer to believe they are one step closer to getting the card, which is an enticing marketing message."
Pre-approved credit card offers have consumer advocacy groups up in arms.
"We are looking at them very closely, but we haven't decided what to do," said Edmund Mierzwinski of the U.S. Public Interest Research Group in Washington.
He said while some banks are complying with the Fair Credit Reporting Act amendments and changing "pre-approved" to "pre-selected," others are "still puffing their offers and misleading consumers."
But the Office of the Comptroller of the Currency is defending pre- approvals.
"If they are done right, they can be a good marketing tool," said David D. Gibbons, the deputy comptroller for credit risk.
"There are a lot of risks to be managed in pre-approved solicitations," which he called "a good thing" for bank safety and soundness.
Bank issuers were generally reluctant to talk specifically about pre- approved cards.
"Whatever the ruling, it won't have a big impact on us," said MBNA Corp. spokesman Peter Frank.
But at a recent Executive Enterprises Inc. conference in Chicago on credit card delinquencies, Clinton W. Walker, executive vice president and general counsel of First USA Bank, a Banc One Corp. affiliate, said, "There will be litigation over this."
"Credit card companies are not favored" by the public, he said. They are becoming political "targets" like tobacco companies and "could be subject to major, major problems."
Norman Magnuson, director of public affairs at Associated Credit Bureaus, a Washington-based trade group, said he thinks pre-approved credit card offers are appropriate as long as the issuer is in compliance with the Fair Credit Reporting Act.
"You can post-screen as long as you put language in a pre-screen offer that says you will post-screen," he said.
Martin Abrams, vice president of information policy, Experian Information Solutions Inc., Orange, Calif., contended that consumers are "privacy pragmatists." They may not like getting an overflow of junk mail at home, but they "like the effects of the pre-screen process because it gives them more competitive offers."
"There are always multiple interests we are trying to balance," Mr. Abrams said, and credit bureaus like Experian "want most consumers to have as many opportunities as possible. The vast majority of consumers benefit when a consumer who doesn't deserve credit doesn't get it."