lenders have been unable to shake a nagging concern this fall: Consumers delinquencies appear to be firmly on the rise. Bankers are monitoring the issue closely, bolstering collection efforts, and reexamining marketing strategies. Stock analysts, meanwhile, have been fielding calls from anxious investors. Though no one is expecting a full-blown crisis, there are clear causes for concern. The closely watched consumer delinquency index of the American Bankers Association has risen for three consecutive quarters for the first time since 1991. A handful of major banks reported run-ups in consumer loan losses for the third quarter. And fears of further problems contributed to a plunge in bank stocks last week. "It really raises the antennae," said Robert Ondercik, executive vice president and chief credit officer for National City Corp. Even though the Cleveland-based bank has not experienced loan losses, he said, "it caused us to focus in more on our underwriting and making sure we've been adhering to our standards." Heightening concerns is the fact that the uptick in consumer delinquencies has occurred without a corresponding rise in unemployment, a measure to which it has been closely tied. Economists, analysts, and bankers generally point to two factors: the rise in bankruptcy filings and rapid growth in lending. "One of the biggest things impacting is the rise in bankruptcies - it has lost the stigma that was attached to it at one time," said Lee Narwold, vice president of asset protection for People's Bank in Connecticut. Visa U.S.A. predicts there will be 914,000 filings by yearend, up from 832,829 from last year, and the highest level since 1992. New marketing strategies by banks may have contributed to the run-up in delinquencies, particularly in the credit card arena. Over the past five years, as the industry has repriced from fixed-rate cards carrying annual fees to variable rates with no fee, the level of outstandings has shot up for 20 consecutive quarters. "It's not surprising to see some increase in the delinquency rates independent of the (economic) cycle as those portfolios become more seasoned," said Gary Schlossberg, a senior economist at Wells Fargo Bank. The level of delinquent credit card accounts moved up eight basis points in the second quarter and 70 basis points from a year earlier, to 3.26%, the ABA said. By comparison, the association's seasonally adjusted composite index showed 1.95% of participating banks' closed-end consumer loan accounts were 30 days past due as of June 30. "Credit card marketing has changed so much over the last five years, I think it will be real dangerous for people to assume that the future will be like the past," said Richard C. Hartnack, vice chairman and group head of community banking for Union Bank, Los Angeles. "With delinquencies and chargeoffs rising, we don't know the effect the new marketing has had on consumer behavior." Overall, consumers are borrowing so much that at the current growth rate installment credit will surpass $1 trillion before the end of the year. That measure has been rising since April 1993. Perhaps a more telling measure is the debt burden ratio - what consumers pay toward debt as a percentage of their disposable income. It rose 30 basis points in the second quarter to 16.6%, still below the high of 18.1% reached in the fourth quarter of 1989. Susan Roth, an analyst with Bear, Stearns & Co., said she believes the first-half debt burden ratio increase was driven by higher interest rates, an increase in revolving balances, and slower income growth. Exactly how big a problem delinquencies may become is still unclear. "I don't believe the delinquencies will be threatening to the overall well-being of the banking industry," said Scott P. Marks, executive vice president of First Chicago Corp. Still, he and others expect chargeoffs and delinquencies will continue to rise for the next several quarters, and have taken steps to tighten underwriting and bolster collection efforts to recoup some of those losses. Some have reacted faster than others. A year ago, Bank of New York moved to a higher credit scoring threshold for credit cards because delinquencies were on the rise, said Paul Leyden, senior vice president. That caused the annual growth of the bank's outstandings to drop to 11% from 20%, he said, but the delinquencies are leveling. Even Wachovia Corp., which typically has low delinquencies, has seen those levels rise. "It's possibly the first time since we've substantially realigned our debt into a variable-rate structure that this has happened," said Beverly Wells, president, Wachovia Bank Card Services, Atlanta. Ms. Wells said a move to automated scoring, in tandem with sound credit policies, will help the issuer ride out this wave of increases. But Wachovia and other banks are thinking of taking the next step - moving to risk-based pricing. Issuers such as Citibank, AT&T Universal, and Capital One Financial Corp. have created agreements that allow them to raise the interest rate on an account if it is past due for six months to a year. Once the cardholder returns to good standing, the penalty rate falls back. The most punitive form of risk-based pricing, used by Capital One, allows the issuer to assess the cardholder's entire credit performance. Even if the cardholder pays Capital One on time, the Falls City, Va., issuer can use her performance elsewhere to raise the interest rate. Mr. Marks, who runs First Chicago's credit card operations, said the bank has been experimenting with risk-based pricing for a year. "I believe that the rise in chargeoffs will give extra impetus to participants in the industry to look at risk-based pricing," he said. Credit cards are not the only area of concern. In the second quarter, the Mortgage Bankers Association said that 4.15% of all home loans were at least 30 days past due, up 24 basis points from the first quarter. That, some observers say, may have marked the end of long-term decline. For the past three years mortgage delinquencies have been at historical lows, as consumers reduced monthly payments by refinancing out of high-rate loans in 1992 and 1993. The refinancing boom ran out of steam in early 1994, as interest rates began to rise. Richard F. Malloy, executive vice president of Norwest Mortgage, said he expects the rise in delinquencies to continue over the next couple of quarters because of the aging of those refinanced loans and for seasonal reasons. "I do not see anything that is alarming or a major concern at this point." However, he said, a sharper increase in short-term interest rates compared with long-term rates in 1994 and this year has had an impact on adjustable-rate mortgages moving to higher interest rate levels. "Although there are yearly caps on how much the payments can be," Mr. Malloy said, "it is putting pressure on delinquencies for that reason."

In general, bankers have responded to the rise in delinquencies by examining their underwriting criteria for loans and by putting more resources into collections. Mark Burns, senior vice president, retail division manager, for Amcore Financial, Rockville, Ill., said the bank will adhere to its underwriting criteria, which he said, never loosened. At the same time, it has hired more people and become more aggressive in collections. "We don't send out late notices - you get in contact with people early and you find out what their problems are and you try to deal and work through with those problems," he said. People's Bank invested in auto-dialer technology so that it can promptly call customers who are late with payments, Mr. Narwold said. Meanwhile, lenders can take heart in recent positive economic reports. The unemployment rate is 5.5%, and inflation is running at less than 3% a year. And Americans continue to earn more: personal income was up 0.4% in September, and workers' wages and benefits rose 2.7% through Sept. 30. "If the economy grows modestly and the job outlook deteriorates, other delinquencies could rise," said Sung Won Sohn, chief economist at Norwest Corp. The question is whether the increase in delinquency is an adjustment back to more normal levels, or whether something has changed and unemployment is not going to be the driver of loss trends, Ms. Roth said. "I think we're adjusting back from unsustainably low levels," Ms. Roth said. "And that from here, assuming that wage growth and credit expansion become more closely correlated, you will see a moderation in the rate of erosion of credit quality."

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