Friday, December 17, 2004

The Federal Reserve has sided with the financial industry in a dispute about the unsolicited mail that banks and insurance companies send to potential customers — sometimes called junk mail.

Without the mail, credit-card and insurance rates would be higher, according to a new report from the Federal Reserve.

“Further restrictions on the ability of lenders and insurers to provide written offers of credit or insurance to consumers would on balance result in a less competitive marketplace and thus relatively higher prices and reduced availability,” the central bank said in a report to Congress released last week.

Congress investigated the solicitations after complaints from consumer groups about the volume of the solicitations and the risks they can create for consumers, such as indebtedness and identity theft.

Financial institutions mail about 4 billion to 5 billion solicitations for credit cards or insurance each year in the United States, according to consumer advocacy groups.

“We have been critical of the credit-card marketing that offers cards to people without regard for their ability to afford them,” said Jean Ann Fox, director of consumer protection for the Consumer Federation of America. “The volume of mail is symptomatic of how aggressively they are marketing cards.”

At the same time, banks support legislation pending in Congress that would make it harder for consumers to escape debt through bankruptcy, nearly ensuring they will be overburdened by credit-card payments, she said.

Personal bankruptcies fell more than 2 percent in fiscal 2004 from a record high the previous year. There were 1.63 million nonbusiness bankruptcy filings in fiscal 2003, which ended Sept. 30, compared with 1.58 million this year.

However, the Federal Reserve downplayed any risks to consumers, saying successful advertising campaigns by banks can benefit consumers.

“It appears that written offers of credit and insurance sent directly to consumers, often resulting from prescreened solicitations lists using credit records … have the potential to increase competition in the market for credit cards,” the report said.

A survey sponsored by the Federal Reserve found a majority of Americans, or 65 percent, believe the government should not prohibit the mail solicitations, which banks screen to be sent only to people most likely to become their customers. The telephone survey of 500 persons was conducted by University of Michigan researchers last May.

An even bigger majority, or 80 percent, of respondents said they support a law that allows consumers to “opt out” of mail solicitations from the financial institutions.

“Credit-card solicitations are a valid form of business mail,” said Daniel Ray, spokesman for, an online financial service.

The biggest risk with them is identity theft, or the illegal use of other people’s credit, he said. The mail solicitations often include financial information about consumers that could make them vulnerable to identity theft, he said.

“To me, it’s simple math,” Mr. Ray said. “The more people who have their hands on your critical information, the greater the odds are that one of those people will misuse it.”

Consumers can put their names on opt-out lists that would block the solicitations by notifying national credit-reporting agencies, such as Equifax (888/567-8688) or Experian (888/397-3742).

Financial institutions use the credit-reporting agencies to select who will receive their mail solicitations.

The Federal Trade Commission (FTC) has proposed a simplified notice that would be required on the solicitations, but is not trying to ban them.

“For consumers who may be in the market for a credit card or insurance, prescreened offers provide an efficient way of alerting consumers to the availability of such offers,” said Joel Winston, FTC spokesman.

The Federal Reserve said shutting off the financial institutions’ access to customer information from the credit-reporting agencies would not necessarily reduce mail solicitations.

In fact, they could increase because advertising campaigns would not be as well targeted to specific consumers, the Federal Reserve reported. In addition, the added costs of advertising for the financial institutions could drive up rates for their customers.

The report said “a reduced ability to target solicitations to qualified customers” might result in more “junk mail.”

The central bank also rejected claims that mail solicitations could lead to irresponsible credit-card spending and identity theft.

“A number of pieces of evidence suggest that prescreened solicitations for credit cards or other forms of credit have not caused excessive indebtedness among large segments of the public,” the Federal Reserve said.

Banks agreed with the report’s conclusions that credit-card solicitations create no greater risk of indebtedness for consumers than any other spending habit.

“Some people are obese and you can’t blame that on convenience stores,” said Fritz Elmendorf, spokesman for the Consumer Bankers Association, a trade group for banks.

Tracey Mills, spokeswoman for the American Bankers Association, another banking trade group, said, “It’s not junk mail. It’s the second major source of generating new accounts.”

Regarding identity theft, or illegal use of other people’s credit cards, the Federal Reserve said although the evidence is thin, “only a small portion of credit-card fraud arises from prescreened solicitations.”

Officials from the District of Columbia, Maryland and Virginia attorney generals’ offices said they receive few complaints about junk mail.

“It’s an irritation but it’s not against the law,” said Traci Hughes, the D.C. attorney general’s spokeswoman.

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