South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
SANTIAGO, Chile — For Ana María Silva, what began as purchases of perfume and two pairs of shoes spiraled into a credit card nightmare, as her debt multiplied tenfold in five years — and not all because of her spending.
At the Santiago, Chile, offices of Dicom, a private, unregulated credit-rating agency owned by Equifax. A bad Dicom score can mean being rejected for jobs, mortgages and political office.
Ms. Silva was among 418,000 clients in Chile who fell behind on their payments and had their debts repackaged by the retailerLa Polar, which raised interest rates and extended loan terms without their knowledge. In early June, it came to light that executives at La Polar had been unilaterally renegotiating clients’ debts for more than six years. The news stunned Chileans and has become one of the biggest financial scandals of Chile’s 20-year economic boom.
“I share blame in this, but this company should have been more honorable and transparent,” said Ms. Silva, 30. “They were targeting people with more modest means. This became a vicious cycle that was never going to end.”
The scandal has underscored how South American countries — including Chile andBrazil, two of the region’s healthiest economies — are going through growing pains as the use of credit grows. The credit-fueled spending has driven extensive economic growth. But it has also opened the door to abuses, as credit issuers have used predatory techniques to lure customers, particularly young and less affluent ones, in countries where regulation is scant, annual interest charges can top 220 percent and consumers cannot seek bankruptcy protection, economists and consumer defense groups say.
“They are learning every trick that was learned in the United States to make credit cards the most valuable part of the banking business,” saidLewis Mandell, a professor emeritus at the State University of New York at Buffalo, who wrote a book on the history of the credit card industry. “And unfortunately, the problems this caused in the United States are likely to repeat themselves in Latin America.”
As La Polar was dealing with the fallout over the disclosure of its lending practices in Chile, the federal prosecutor’s office in Rio de Janeiro filed suit this month against three of Brazil’s biggest banks, accusing them of imposing more than $300 million in illegal bank charges on clients from 2008 to 2010.
The cases reveal troubling undercurrents in the South American economic boom: indiscriminate lending, lax regulation and ballooning over-indebtedness of large parts of the population, especially those with lower incomes.
The widespread proliferation of credit has been both rapid and relatively recent, developing over the past decade and spurring a consumer revolution across South America. Retail chains like La Polar in Chile andCasas Bahiain Brazil, which sell electronics and housewares, have thrived by offering relatively low-priced goods and extending easy credit terms to entire classes of people who had never had access to it.
The household debt-to-income levels in Brazil and Chile still trail that in the United States, where it has hovered around 140 percent, largely because of high mortgage balances. But they are rising fast. In Brazil, it reached a record high of 40 percent in April, up from 22 percent in 2006, according toLCA Consultores, an economic consulting firm. In Chile, where consumer debt rose by 254 percent, to roughly $34 million, between 2001 and 2008, the debt-to-income level topped 70 percent at the end of 2010, according to theCentral Bank.
“We have turned ourselves into modern slaves,” said Osvaldo Oyarce, a filmmaker who is trying to make a movie about Chilean consumerism. National economic success, he said, has come at a cost: “A population that is highly indebted, with high levels of depression and frustration.”
A bank superintendent closely monitors bank-issued credit cards, but cards issued for in-store use by retailers like La Polar are subject to “much lighter” regulation, saidKevin Cowan, a director in the financial policy division of Chile’s Central Bank. Last year, the bank began to include a chapter focused on household indebtedness in its risk reports. “We recognize that ultimately household debt could become a serious source of financial risk,” he said.
In Brazil, where credit card interest rates above 220 percent are among the highest in the world, theCentral Bankhas been trying for months to rein in household consumption, which grew by 10.4 percent in the last quarter of 2010. To better evaluate the risks of the credit expansion, the Central Bank will begin monitoring credit operations of as little as 1,000 reals, or roughly $640.
In both the La Polar and Brazilian bank overcharging cases, the creditors were reluctant to compensate consumers fully.
In Brazil, the prosecutor’s office opted to file its lawsuit, seeking double the amount it said the banks improperly charged customers, only after the three banks — Santander, Itaú-Unibanco and HSBC — ignored its appeals to fully compensate consumers, it said.
Brazil’s Central Bank had also told the banks that the fees they were charging were illegal and that they must stop the practice.
HSBC and Santander declined to comment on the case. Itaú stopped charging clients a commission in late 2008 after the warning, and it agreed to pay enough restitution to satisfy the Central Bank, said Claudia Politanski, executive legal director at the bank. She added that Itaú considered the restitution demands as “not having backing in jurisprudence.”
Last year, Sernac, the Chilean government’s consumer defense agency, received hundreds of complaints from La Polar customers who had been getting threatening letters from collection agencies. Sernac said it tried quietly to negotiate a solution with La Polar, but the company would not stop. Sernac filed a class-action suit last month on behalf of about 2,000 people who said La Polar had defrauded them. The number has since grown to 20,000.
La Polar’s top executives have since resigned, and the company has fired 11 managers involved in the lending practices. The company, in a statement, said it was pursing criminal action against several former employees and against its auditing firm, Pricewaterhouse Coopers. A state regulatory agencyfiled related chargesthis month. With nopersonal bankruptcylaw in Chile, when people fall behind or default, they face the prospect of being listed as a debtors or high-risk consumers in the Dicom, a private, unregulated credit-rating agency owned by Equifax. A bad Dicom credit score usually means being blacklisted for jobs, mortgages or political office.
“If you are in Dicom, if you are not in hell, you are on the way there,” said Stefan Larenas, president of the Organization of Consumers and Users of Chile, a consumer rights group. “It is a true social stigma here.”
Mr. Larenas said he has seen more cases of insolvency in his office. “Some people come here and cry; some say they want to kill themselves,” he said. “Some leave the country or escape to the south and live in an almost clandestine way for five years, waiting for their debts to clear.”
The customer abuses in the La Polar case doomed tens of thousands to Dicom purgatory after the repackaging of their debts geometrically increased what they owed through so-called acceleration clauses for late payers.
Manuel Céspedes said he received his La Polar card in 2007 when he was 19. He used it in the pharmacy and to buy a $1,000 laptop on a payment plan of $60 a month over 24 months. But in 2008, when he lost his job as a technical illustrator, he fell behind on the payments.
He said he later discovered that the retailer was repackaging his debt every three months. By the end of 2008, the roughly $430 he owed had tripled. By this March, it had topped $4,000.
“I couldn’t understand what was happening,” said Mr. Céspedes, now 23.
His poor Dicom rating has kept him from getting college loans and has made it hard to get a job to help pay his debt, he said.
Ms. Silva, a schoolteacher who stopped working when she had her first child in 2006, said she had been blacklisted with employers because of her credit problems stemming from her debt to La Polar, and she and her husband had been denied a mortgage.
“I don’t think everybody understands how these cards work,” she said. “It’s a temptation, and we all want a little more in our lives. I think the stores are counting on that.”
Pascale Bonnefoy and Aaron Nelsen contributed reporting.
A version of this article appeared in print on July 24, 2011, on page A6 of the New York edition with the headline: Rise of Consumer Credit in Chile and Brazil Leads to Big Debts and Lender Abuses.