Ms. Silva was among 418,000 clients in Chile who fell behind on their payments and had their debts repackaged by the retailer La 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 and Brazil, 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,” said Lewis 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 and Casas Bahia in 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 to LCA 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 the Central 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, said Kevin 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, the Central Bank has 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.”

Pascale Bonnefoy and Aaron Nelsen contributed reporting.

Article source: http://www.nytimes.com/2011/07/24/business/global/abuses-by-credit-issuers-in-chile-and-brazil-snare-consumers.html?partner=rss&emc=rss