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proposals at four other banks were withdrawn after discussions with the banks led to positive
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.
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
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
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
"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.