Fed says financial junk mail is useful

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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.