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April 21, 2009

Leading Credit Card Lenders Face Proxy Votes on Predatory Lending
    by Robert Kropp

ICCR members submit shareowner proposals requesting evaluations of predatory lending practices, and banks' objections are disallowed by the SEC. -- Arguing that high-cost credit card debt has been compounded by such predatory and abusive tactics on the part of lenders as universal default policies, bait-and-switch marketing tactics, hidden fees, and intentionally complicated cardholder agreements, members of the Interfaith Center on Corporate Responsibility (ICCR), a shareowner advocacy group, have submitted shareowner proposals designed to reform predatory practices at three banks that together control more that 60% of the credit card business in the US.

Challenges by the three banks—Citigroup, JPMorgan Chase, and Bank of America—to the shareowner proposals were disallowed by the Securities and Exchange Commission (SEC). Similar proposals at four other banks were withdrawn after discussions with the banks led to positive engagement.

By the end of 2008, credit card debt in the US had reached $973 billion, which translates into an average credit card debt per household of over $8,000. Increasing consumer debt in a time of deteriorating economic conditions threatens the possibility of a successful economic recovery, as access to credit tightens and consumers rein in household spending in the face of uncertainty.

Open-ended lending practices by credit card issuers have been a driving force in this indebtedness. In the current economic downturn, it is likely that such practices "could lead to unprecedented charge-offs on credit card balances, costing the banks billions of dollars this year," according to a Sustainability Background Report issued by RiskMetrics Group, a proxy research provider that has recommended that shareowners vote in favor of the proposals.

According to Jane Meacham, ESG Researcher at RiskMetrics, "Banks have abandoned prudent lending practices, collateralized credit card receivables into derivatives that are bought and sold without regard to the credit quality of their constituent parts, aggressively marketed cards with credit limits approaching or beyond some customers' annual income, and, perhaps most critically, used ineffective underwriting models to determine whether the borrower can actually repay the credit being extended."

"For the last twenty years, top credit card issuers have found a formula for increasing short-term profits," said Josh Frank, Senior Researcher for the Center for Responsible Lending, a nonprofit research and policy organization working to eliminate abusive financial practices. "That formula relies on driving up debt."

Mark Regier, Stewardship Investing Services Manager for MMA Praxis Mutual Funds and lead filer for the resolution at JP Morgan Chase, said, "Investors have been concerned about the sustainability of predatory credit card lending policies and practices within the financial services industry. While many credit card practices were boosting short term profits of issuers, they were dramatically increasing high costs and unsecured debt, and promoting imprudent practices that have ignored the best interests of the borrowers."

The shareowner resolutions request that Boards of Directors complete reports to shareowners that evaluate practices commonly deemed to be predatory, the credit card marketing, lending, and collection practices of the companies, and the impacts these practices have on borrowers. The proposals assert that trapping consumers in debt under predatory terms that make successful repayment virtually impossible weakens the long-term financial prospects of the companies, as well as the national economy as a whole.

In its recommendation that shareowners vote against the proposal, the Board of Directors at Bank of America stated, "While we recognize that although some of the loans extended during this credit crisis were the result of predatory lending practices, many were also the result of irresponsible borrowing practices by individuals. While there was clearly a failure in regulatory oversight by the Federal Reserve and state regulators, we believe there will be forthcoming legislation and/or regulation to rein in these practices."

The regulation referred to by Bank of America was issued by the Federal Reserve in December 2008. It requires credit card issuers to end many of the practices addressed in the shareowner resolutions, but allows banks until 2010 to adopt the new regulations. The American Bankers Association, a leading industry trade group, opposed the new regulations.

The ICCR members that are leading the shareowner proposals argue that the Federal Reserve's regulations do not go far enough in addressing predatory and abusive credit card lending practices, and that to delay implementation of them in a time of economic crisis is a mistake.

Linda Sherry, Director of National Priorities at Consumer Action, a nonprofit consumer advocacy organization, argues that it was aggressive marketing by credit card lenders and not consumer demand that led to the current historic levels of credit card debt. In 2007 alone, credit card issuers mailed 5.2 billion credit card solicitations, with households receiving an average of 36 solicitations each.

"Consumer Action receives hundreds of complaints every month from consumers about the tactics of credit card issuers," Sherry said. "Credit card issuers have caused a good deal of economic distress through reckless lending, especially to vulnerable consumers. Their practices can seriously destabilize families' finances, and push families that are getting by into default and even bankruptcy."

"As family finances are pushed to the limit and defaults increase, a tipping point will surely occur," Sherry continued. "Companies will face greater default, negative public relations, and increased regulation."

Regier of MMA Praxis outlined critical issues that have not yet been addressed by credit card issuers. He urged companies to mitigate the impact of their policies on consumers by helping them manage and reduce their debt, develop new standards of underwriting, provide increased disclosure, and adopt policies on predatory lending practices.

"In this time of economic crisis, we ask these companies to stand with the American people by putting an immediate end to non-default re-pricing of credit balances," Regier said.

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