ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Friday, September 27, 1996 TAG: 9609270053
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: Associated Press
A federal banking regulator urged large banks Thursday to perform some basic research before mailing preapproved credit card applications, such as determining if the potential borrower is creditworthy.
The Comptroller of the Currency, the agency which regulates 2,800 national banks, reminded banks not to ignore basic lending controls as they aggressively compete in the fast-growing credit card business.
Comptroller Eugene Ludwig, in an advisory letter to banks, said there's no fundamental threat to banks from consumer lending at this time, since many of them 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.''
Ludwig's concern about lax review of credit card holders comes at a time of rising delinquencies on plastic money.
Earlier this month, the Federal Deposit Insurance Corp. said bad consumer loans - chiefly credit card debt - rose 36 percent to $3.8 billion in the second quarter from a year earlier. The American Bankers Association also reported that credit card delinquencies hit the highest rate since the agency began keeping records 22 years ago.
Higher personal bankruptcies were cited as a prime cause for the rise. However, Jimmy Barton, chief national bank examiner, said he believes there is a connection between the delinquencies and weaknesses in mass mailing of credit card applications.
The comptroller's office declined to identify which banks have problems with their preapproved credit card 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,'' Barton said.
In 1995, banks mailed 2.7 billion credit card solicitations, or about 17 for each adult American, 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 comptroller's letter identified five broad problem areas in the credit card business.
They were ``a poor choice of solicited customers''; lack of a comprehensive and independent risk management program for the new card loans; a failure to properly test and analyze markets targeted for credit card solicitations; weakening in card loan underwriting to pump up lending volume ``without proper testing and follow-up''; and banks' failure to adequately monitor how the new loans performed against the bankers' expectations.
``Aggressive competition recently has pressured some banks to forgo customary and effective testing of new credit card products and preapproved solicitation campaigns in hopes of capturing a product market before a competitor,'' the letter said.
To remedy these problems, the regulator advised banks to limit solicitations, tighten credit standards, and more thoroughly analyze which borrowers are creditworthy. In addition, it urged banks to improve ongoing monitoring of high-risk customers and their payment histories, and to strengthen collection efforts.
The comptroller also urged banks to ensure the people who receive preapproved credit card solicitations actually are creditworthy.
LENGTH: Medium: 65 linesby CNB