From across the sea, U.S. credit marketers may be getting a warning of things to come. Britain is about to treat the purveyors of wide-open consumer credit offerings in much the same way that the U.S. treats advertising for cigarettes. The restrictions will come complete with financial health warnings.
Like their colonial cousins, the Brits are concerned that too many of their citizenry are being caught up in a plastic credit craze. Not only are they concerned about consumers taking on more debt than they can handle, but also that their financial institutions could get stuck with yet another major source of bad loan problems, to add to defaulted foreign and real estate loans.Great Britain has proposed that lenders no longer offer unasked-for consumer credit line increases. Exceptions would be for cost-of-living increases.
Further, lenders would not be able to sell credit services, insurance or other products without the specific request of the consumer. Offers such as "it's yours automatically, unless YOU tell us that you don't want it," will be banned.
Lenders will have to take greater pains in removing people from their mailing lists who do not want junk mail or don't want to be tempted by unsolicited credit offerings.
Lending agreements may well contain a bold faced consumer warning, "DO NOT SIGN THIS AGREEMENT UNLESS YOU ARE SURE THAT YOU CAN AFFORD THE PAYMENTS." There also will be extended recession periods when consumers can back out of credit deals, no questions asked.
The proposed regulations also will have some teeth in them, with fines running to $30,000 and jail terms. While $30,000 may not seem like a lot to a multi-billion dollar financial institution, it can add up when thousands or millions of consumers could be involved. And again of course, there is the threat of jail terms, but as a practical matter that may be tougher to pin down.
As proposed, the regulations would apply only to banks and the British equivalent of S&Ls. However, the British are considering expanding the prohibitions to finance companies, retailer credit cards and charge accounts.
We too have similar problems. Hour after hour we are bombarded with radio and TV ads offering credit to everyone, even if "everyone else has turned you down." The loans come in the form of credit cards and additional borrowing power against the last remaining equity in your home. Sometimes the credit line is secured by cash that the consumer must put up and leave on deposit with the lender.
However, responsible U.S. card issuers already are dealing with the problem. They not only don't want their retail customer base getting into trouble, they want to avoid bad loan paper as well.
The biggest abusers of consumer credit generally are less reputable financial organizations and not your big name banks.
Yet some consumer lenders will always offer credit to obvious credit risks. The key to these lenders of last resort is that they charge significantly higher fees and interest rates. The flip side of this coin is higher rates of default and bankruptcy.
Consumers need protection from the unscrupulous. But if we want to lower government taxes and for Uncle Sam to stay out of our pocketbooks, maybe we have to forego some of his well-intended benevolent protection.
Reader questions will be answered and may appear in this column if mailed to Gary Meyers, 308 W. Erie, Suite 300, Chicago, IL 60610.