[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
CREDIT CARD PRACTICES: CURRENT
CONSUMER AND REGULATORY ISSUES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
APRIL 26, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-26
U.S. GOVERNMENT PRINTING OFFICE
36-821 PDF WASHINGTON DC: 2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP,
Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
CAROLYN B. MALONEY, New York, Chairwoman
MELVIN L. WATT, North Carolina PAUL E. GILLMOR, Ohio
GARY L. ACKERMAN, New York TOM PRICE, Georgia
BRAD SHERMAN, California RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois DEBORAH PRYCE, Ohio
DENNIS MOORE, Kansas MICHAEL N. CASTLE, Delaware
4PAUL E. KANJORSKI, Pennsylvania PETER T. KING, New York
MAXINE WATERS, California EDWARD R. ROYCE, California
JULIA CARSON, Indiana STEVEN C. LaTOURETTE, Ohio
RUBEN HINOJOSA, Texas WALTER B. JONES, Jr., North
CAROLYN McCARTHY, New York Carolina
JOE BACA, California JUDY BIGGERT, Illinois
AL GREEN, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
LINCOLN DAVIS, Tennessee J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
KEITH ELLISON, Minnesota STEVAN PEARCE, New Mexico
RON KLEIN, Florida RANDY NEUGEBAUER, Texas
TIM MAHONEY, Florida GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado JOHN CAMPBELL, California
C O N T E N T S
----------
Page
Hearing held on:
April 26, 2007............................................... 1
Appendix:
April 26, 2007............................................... 29
WITNESSES
Thursday, April 26, 2007
Ireland, Oliver I., Morrison and Foerster LLP.................... 18
Sherry, Linda, Director, National Priorities, Consumer Action.... 19
Wilmarth, Arthur E., Jr., Professor of Law, George Washington
University Law School.......................................... 12
Yingling, Edward L., President and CEO, American Bankers
Association.................................................... 14
Zeldin, Cindy, Federal Affairs Coordinator, Economic Opportunity
Programs, Demos: A Network for Ideas & Action.................. 10
Zywicki, Todd J., Professor of Law, George Mason University Law
School......................................................... 15
APPENDIX
Prepared statements:
Castle, Hon. Michael N....................................... 30
Maloney, Hon. Carolyn........................................ 31
Ireland, Oliver I............................................ 34
Sherry, Linda................................................ 44
Wilmarth, Arthur E., Jr...................................... 64
Yingling, Edward L........................................... 84
Zeldin, Cindy................................................ 106
Zywicki, Todd J.............................................. 120
Additional Material Submitted for the Record
Baca, Hon. Joe:
National Council of La Raza Issue Brief entitled, ``Latino
Credit Card Use: Debt Trap or Ticket to Prosperity''....... 150
Maloney, Hon. Carolyn:
Letter to Chairwoman Maloney and Ranking Member Gillmor from
the American Bankers Association providing additional
information requested at the hearing....................... 172
CREDIT CARD PRACTICES: CURRENT
CONSUMER AND REGULATORY ISSUES
----------
Thursday, April 26, 2007
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128 Rayburn House Office Building, Hon. Carolyn B.
Maloney [chairwoman of the subcommittee] presiding.
Present: Representatives Maloney, Watt, Ackerman, McCarthy,
Baca, Green, Clay, Cleaver, Hodes, Ellison, Klein, Perlmutter;
Gillmor, Castle, and Hensarling.
Also present: Representative Bachus, ex officio
Chairwoman Maloney. This hearing will come to order. The
topic of today's hearing is ``Credit Card Practices: Current
Consumer and Regulatory Issues.'' First, I would like to thank
all of the witnesses for coming today and for the testimony
they have prepared. And I would like to thank the members on
this committee who have an interest in this subject, many of
whom have introduced legislation pertaining to different
aspects of it. This is the first in a series of hearings on
credit card practices. At our second hearing, to be held the
first week in June, we plan to have the Federal and State
regulators discuss the anticipated revision to the regulations
governing disclosure for credit cards by the Federal Reserve.
The Federal Reserve have informed me that they expect to be
issuing this in late May, and we also expect to have a panel of
consumers and industry representatives to comment on the Fed's
action.
Credit cards may represent the single most successful
financial product introduced to our country in the last 50
years. Their benefits are manifest, giving consumers
unprecedented convenience and flexibility in both making
purchases and in managing their personal finances. Consumer
spending, facilitated in large part by the ease of payments
afforded by credit cards, accounts for nearly two-thirds of the
annual U.S. economic activity. And even more dramatically, one
can argue that the broad availability of credit cards, coupled
with advances in technology, has helped to create and support
and expand an online retail industry that is projected to reach
$129 billion in sales this year according to a recent Business
Week article. All told, 145 million people in America, about
half the population, own credit cards. In short, credit cards,
like many other tools in our society, have changed from a
luxury item available to the few, to a necessity demanded and
needed by the many.
But with that great success, with that widespread growth,
with that necessity, comes great responsibility. The credit
card industry has been clear about the responsibility imposed
on consumers: the responsibility to become financially
literate; the responsibility to spend only in accordance with
your means; and the responsibility to pay your bills on time.
But this spectacular growth in the credit cards industry does
not seem to have created the same sense of responsibility in
the 10 credit card issuers that control 90 percent of the
market, much less the other 6,000-plus U.S. credit card
issuers. It is true that competition among issuers has created
initial consumer choice and can reward the diligent consumer
with lower interest rates and no annual fee. But the industry
has also acted to implement practices that quickly became
industry standards, such as double cycle billing, universal
default, no notice interest rate hikes, outside fees as much as
$39 for a late payment, that brings us to our hearing today.
For example, a recent article in Electronic Payments
International reported that credit card issuers were expected
to rake in a record $17.1 billion in credit card penalty fees
in 2006, a rise of 15.5 percent from 2004, and a tenfold
increase from 1996 when credit card issuers raised $1.7 billion
in revenues from fees.
Did American consumers become 10 times less responsible in
2006 than in 1996? Or did the industry make a concerted and
deliberate effort to squeeze even more revenue out of consumers
by increasing fees and creating pitfalls in violations of the
card agreement that allowed the issuer to penalize even the
most responsible consumers?
Credit card issuers hold an enormous amount of power.
Enshrined in the card member agreement, just listen to this
section from an April 2007 card agreement of a major card
issuer that was sent to my office, and I quote from the card
agreement: ``We may suspend or cancel your account, any feature
or any component of your account at our sole discretion at any
time with or without cause whether or not your account is in
default and without giving you notice subject to applicable
law.'' From terms like that, it is not hard to see how fee
income went up tenfold in the past 10 years.
I have always believed that responsible access to credit is
critical to our economy and that access to appropriate credit
should be as broad as possible, consistent with the safety and
soundness of the financial system. Similarly, I approach credit
card regulation from the point of view that we should both
protect consumers and keep responsibly issued credit available
in as many of our communities as possible. I am generally in
favor of market-based solutions whenever possible, but in this
case I am not convinced that the industry is going to make the
changes that are necessary. I do want to credit some major
issuers who have taken steps to move toward better practices:
CitiBank has announced that it will eliminate any time for any
reason re-pricing and universal default; and Chase has said
that it will no longer use double cycle billing, but rather
average daily balance. But I do not see the development of best
practices that industry holds itself to across the board. For
example, in the wake of the key GAO report last September
finding that the increased complexity in rates and fees
requires better disclosure, even industry agrees that changes
to credit card disclosures are desperately needed because no
one can understand their statement. Yet industry has not taken
comprehensive action on this point. And if the industry fails
to make meaningful changes, if the major issuers continue to
lead the way in a race to the bottom rather than in a race to
improvement, it is my belief that we will see bipartisan
legislation coming forward to fix the problems that industry
proved itself incapable or unwilling to fix on their own.
I look forward to the testimony, and I would now like to
recognize the ranking member, Mr. Gillmor. He has 15 minutes,
and we have 15 minutes over here, so we will go back and forth.
Mr. Gillmor. I want to thank the Chair for calling this
hearing, and for yielding. I think this morning's hearing is
going to be a very important information-gathering session. At
this point, we do not know whether legislation is going to come
out of this or if it does, exactly what form it will take. But
I do think it is important that whatever we do in this respect,
we work together on it, and try to get bipartisan support on
both sides of the aisle. I think that is going to be important
not only for the committee, but also for the consumer and the
industry; I think that is going to be one of our mutual goals.
Americans have access to some of the best financial
services in the world and a critical part of those services is
the credit card. Consumers are becoming increasingly reliant on
electronic forms of payment and with the prevalence of the
credit card comes some serious policy discussion. The credit
card industry has expanded rapidly over the past decade and
there are 600,000,000 cards in use today. My wife has a large
part of those.
[Laughter]
Mr. Gillmor. The popularity of the credit card has allowed
for an evolution of credit card policies and fees. There are
literally thousands of products offered by credit card issuers
with all different fees, rates, and features. With market
competition and innovation, credit card issuers seem to be
willing to adjust their products when the consumer dictates a
change is necessary.
Earlier this year, some of the biggest credit card
companies voluntarily eliminated some of their controversial
policies such as universal default and double cycle billing,
and I would expect that trend to continue as the consumer with
a bad deal can shop around with ease. Due to the nature of
credit cards, fees are a major component of how an issuer is
able to recoup the dangers of extended credit with no
collateral. It is fair for banks to constantly evaluate how
best to charge for the risks associated with particular
elements of borrowers. But what is not acceptable or fair is
for the issuers to hide fees, policies, or practices from their
customers. Disclosure is the answer and that is why earlier
this year, Ranking Member Bachus and I sent a letter to Federal
Reserve Chairman Bernanke requesting a prompt review of
Regulation Z. If consumers are aware of how their payments or
lack thereof will affect their fees and interest rate, the
choice is theirs to make.
So I look forward to working with Chairwoman Maloney and my
colleagues on both sides of the aisle to address the policy
issues in consumer credit, and I yield back.
Chairwoman Maloney. The Chair recognizes my good friend and
colleague from New York, Gary Ackerman, who has worked long and
hard on this issue, for 3 minutes, and he has introduced a bill
on a common fee, which has been called the pay-to-pay fee,
where consumers are charged $5 to $15 because they have paid
their credit card bill over the phone. I congratulate him for
his interest and work on this bill. Gary Ackerman for 3
minutes.
Mr. Ackerman. Thank you, Madam Chairwoman. I just hope that
the transcriber puts the comma in the right place indicating
that I have worked hard on this bill, and recognizing me for 3
minutes, rather than that I worked hard on the bill for 3
minutes.
[Laughter]
Mr. Ackerman. Thank you, Madam Chairwoman, for scheduling
the hearing. As you know, over the past 10 years, credit card
companies have steadily increased financial burdens on American
consumers, which in itself could be bad enough, but in
addition, credit card agreements have become increasingly more
complex with teaser rates, universal default, double cycle
billing, transfer fees, membership fees, finance fees, over-
limit fees, cash advance fees, stop-payment order fees, and the
list goes on. Credit card companies have absolutely failed to
disclose in an honest, straightforward manner the real terms of
their product to American consumers.
In a particularly gluttonous practice, some credit card
companies, having induced customers to pay their bills online,
are now charging fees for their customers to pay bills online
or by phone. It is not just simply for an express payment that
posts the same day, but a fee simply to pay their bill. It is
like having to pay a fee in order to pay for your groceries at
the check-out counter. Since both online and phone method
payments would provide the customer the ability to quickly make
their payments and check to ensure the payment will post before
the due date, a fee to use these payment options is aimed at
encouraging credit card customers to pay their bills by mail.
Naturally, some customers--maybe they are on vacation, maybe
their statement got lost in the mail--will make their payments
too late and have to pay a late fee. One late payment, of
course, could result in your being tossed into the not-so-
tender trap of paying a significantly increased rate.
In what is perhaps one of the most insidious schemes of
all, some credit card companies are now sending their monthly
statements out late in the month, giving their customers much
less time to make their payments without risking a late fee,
causing them to pay online or by phone only to discover they
are being charged a fee to pay by phone or online. It is heads,
I win; tails, you lose. A customer who is on vacation, do not
worry, he didn't leave home without his American Express Card,
stands no chance of paying his credit card bill without being
assessed a late fee to pay online or by phone. It would be the
equivalent of the Federal Government mandating that taxes be
paid by April 15th but not allowing W-2 statements to be mailed
out until April 6th. You would not receive your W-2 in the mail
until maybe April 10th. And when you show up at the post office
before April 15th, you are told that there is a $15 charge to
pay by mail. Because of this outrageous predatory tactic, I
have introduced, as the Chair mentioned, along with her co-
sponsorship, legislation that would prohibit credit card
companies from charging a fee to their customers explicitly for
paying online or by phone. H.R. 873, the Credit Card Payment
Fee Act, would not deal with express payments or any other of
the various schemes that credit card companies have undertaken
to swindle the American public, but would simply protect credit
card customers from being entrapped in the vice of their Visa.
There are of course many other practices within the credit
card industry that require reform. I would echo the conclusion
of a September 2006 Government Accountability Office report
that called for revised disclosures more clearly emphasizing
the terms of a credit card agreement that affect cardholder
costs, especially those actions that will cause a default or
result in penalty phases.
I look forward to hearing from our witnesses this morning.
I am kind of upset that the credit card companies themselves
have provided no witnesses today. I hope that they are not
going to squeal too much like stuffed pigs if the legislation
is going to affect them and then claim that they had no input
into the system. I thank the witnesses who are here today. I
thank the Chair and look forward to hearing from our panel.
Chairwoman Maloney. Thank you. Congressman Bachus, for 5
minutes.
Mr. Bachus. Good morning. Thank you, Congresswoman Maloney,
for holding this hearing and, Mr. Gillmor, for your interest in
this. I think it is important for the committee to gain a
better understanding of the current practice of pricing,
billing, and disclosure practices of the credit card industry
and the impact those practices are having on consumers.
According to the GAO, Americans now hold 690 million credit
cards, and between 1980 and 2005, the amount that Americans
charged to their credit cards grew from an estimated $69
billion per year to more than $1.8 trillion. Not only have
credit cards broadened the availability of consumer credit,
allowing more Americans access to credit they deserve, they
also provide consumers with a safe and effective tool for
making purchases. Credit cards are very important to our
national economy and have played a key role in the development
of Internet commerce. Recently, however, concerns have been
expressed over a number of credit card practices, including
double billing cycles, universal default, late payment fees,
over the limit fees, and shortening of grace periods. While I
am pleased that some of the large credit card issuing financial
institutions have been proactive in addressing these concerns,
it is still important that we fully examine these issues to
ensure adequate protection of the American consumer.
I am particularly concerned about the 55 percent of college
students who acquire their first credit card during their first
year of college, and the 92 percent of college students who
acquire at least one credit card by their second year of
college. A combination of aggressive and targeted marketing by
many credit card issuers and the lack of financial literacy and
immaturity often ends badly for college students. The
experience of my colleagues may be different but a substantial
percentage of the complaints I receive from constituents
involves the parents of these students. And I might say that I
could join my other constituents in having legitimate
complaints on what I have witnessed in dealing with one or two
of my five children. And I can say without a doubt that the
treatment of them by the credit card companies was not fair and
equitable.
Credit card disclosures are governed by the Truth in
Lending Act and Regulation Z administered by the Federal
Reserve Board. In December 2004, the Federal Reserve began a
review of Regulation Z requirements concerning the format of
open-end credit disclosures and the content of such disclosures
and the substantive protections provided to consumers. It is
now April 2007 and the Federal Reserve has yet to issue any
proposed revisions to Regulation Z. Until the Federal Reserve
completes its process, it will be difficult to assess whether
additional measures will be needed going forward. Earlier this
year, in an effort to accelerate this process, Mr. Gillmor and
I wrote to Federal Reserve Chairman Bernanke urging the
completion of his Regulation Z review, as Mr. Gillmor
mentioned. In my view, the failure of credit card disclosure
requirements to keep pace with market developments has resulted
in some consumers not adequately understanding their credit
card accounts. It is my belief that consumers must be well
informed about credit card offerings in order to choose a
credit card that is best suited to their individual needs. I
look forward to hearing from today's panel on current credit
card industry practices and the state of the Federal credit
card disclosure framework.
Chairwoman Maloney. The Chair recognizes Congressman
Cleaver, my friend from Missouri. He has introduced legislation
and has worked hard on this issue, and I recognize him for 3
minutes.
Mr. Cleaver. Thank you, Madam Chairwoman. The reality now
is that there is such a thing as death by plastic and it is
becoming more and more apparent. I want to express appreciation
for you holding this hearing with Ranking Member Gillmor.
Recently, the Federal Reserve reported that inflation adjusted
household debt grew by over 26 percent from late 2001 to 2004,
while income remained flat, and that American families carried
credit card balances that rose nearly 16 percent or around an
average of $5,100. And many of these hard-working people are
now experiencing a debt crisis while being subjected to onerous
credit card terms that help to perpetuate this debt crisis.
Under your leadership, Madam Chairwoman, the subcommittee has
an opportunity to address a portion of this crisis and to
impact credit card companies all over this country. I
introduced, along with my friend and colleague, Congressman
Mark Udall, a bill that we believe will be a part of the
solution to the current debt crisis. The proposal seeks to
protect consumers from banks and other credit card issuers who
unbelievably and unjustly can increase interest rates without
notice. And talking about an injustice, this is an injustice.
H.R. 1461, the Credit Card Accountability Responsibility and
Disclosure Act of 2007 would end credit card practices such as
universal default where credit card issuers impose a higher
interest rate on a credit card account if there has been any
change in the credit holder's credit history, even if the
change is completely unrelated to the credit card account, such
as being late on a utility bill. There are some other changes,
Madam Chairwoman, but trying to keep under my 3-minute limit,
the bill requires that credit card holders be given clear
notice of any fees or changes or charges in interest rates that
would result from late payments. And finally, under H.R. 1461,
minors who apply for a credit card would need one of the three
things: the signature of a parent or guardian willing to take
responsibility for the applicant's debt; information indicating
that the applicant has some other means of repaying the debt;
or a certification that the applicant has completed a credit
counseling course by a qualified nonprofit budget or credit
counseling agency. I perform weddings, Madam Chairwoman, and I
have recently suggested to couples who come to me after college
wanting to get married that we change the ceremony to say,
``Until debt do us part.'' Thank you, Madam Chairwoman.
Chairwoman Maloney. Congressman Castle, for 3 minutes.
Mr. Castle. Thank you, Chairwoman Maloney, and Ranking
Member Gillmor, for holding this hearing before the Financial
Institutions and Consumer Credit Subcommittee today. Credit
cards have become a staple in today's marketplace. They provide
enormous convenience, efficiency, and other benefits to
consumers, businesses, and local and national economies. Credit
cards have generated more than $2.5 trillion in transactions a
year in the United States. Clearly, they have become an
indispensable tool of America's consumer economy.
Today, consumers have a choice, as we have heard earlier,
between 6,000 credit card lenders. Although some consumers view
the large number of credit options to be daunting, the strong
national credit system in the United States has been a driving
force that has helped sustain our economy in recent years.
Educating consumers and enabling individuals to understand
their credit terms is an important task. The review by this
subcommittee today will help us to better understand how
consumers in the financial services industry can have a more
symbiotic relationship.
Certain industry practices related to credit card fees,
penalties, and interest rates have received a considerable
amount of media attention lately. It is important to note that
in response to increasing concerns, several credit card
issuers, such as CitiGroup and Chase Card Services, have taken
significant steps to improve their practices and ensure that
their customers have a better understanding of their accounts.
Therefore, Madam Chairwoman, after we hear from consumer
organizations, institutions, and university professors, I do
hope we will take the time to hear from industry regulators so
that we can keep the scope of these issues in some context, and
you did mention in your opening statement that we would hear
from them in the first week of June.
Madam Chairwoman, I thank you for holding this hearing
today, and I look forward to hearing from each of our witnesses
today. I yield back.
Chairwoman Maloney. Thank you. I really want to recognize
the keen interest of the members of the panel in this issue and
recognize Congressman Baca for 2 minutes.
Mr. Baca. Thank you, Madam Chairwoman. First of all, I
would like to thank you for holding this important hearing here
this morning. As Chair of the Congressional Spending Caucus, I
am concerned about the barriers Latino families continue to
face in access to affordable credit. Latinos are the fastest
growing and largest minority in the country with 45 million
people, 17 percent of the total population, yet they tend to
have less personal savings, and fewer assets than other
American families. Many low-income Latino families have an
unhealthy reliance on credit cards, which can expose them to
predators within the financial market. We need to have a better
understanding of the Latino experience so that we can help them
avoid accumulating high levels of uninsured debt and move them
into the American middle class. The National Council of La Raza
has written and issued a brief which examines how credit card
industry practices impact Hispanic access to affordable credit.
It also provides policy recommendations for empowering and
protecting the Hispanic consumers. I would like to ask
unanimous consent to insert this brief into today's record.
Chairwoman Maloney. Without objection, it will be placed in
the record. Thank you.
Mr. Baca. And I appreciate Congressman Bachus talking about
targeting and marketing students on the credit cards. I am very
concerned about the impact it has had not on a lot of our
college kids, but also on a lot of our high school kids. Not
only do we need to well educate our consumers, but we also need
to educate the parents, because the parents are unaware that
the kids are applying for the credit cards. And when the TRW
report comes out, they find out that they cannot get credit
because they had a credit card debt during that period of time.
We need to address that; in fact, I am having a conference on
May 12th to address that.
With that, Madam Chairwoman, I look forward to hearing the
witnesses today, and I appreciate your having this hearing. I
yield back the balance of my time.
Chairwoman Maloney. Thank you. Congressman Hensarling is
recognized for 2 minutes.
Mr. Hensarling. Thank you, Madam Chairwoman. I approach
this hearing as I approach most hearings with the adage running
through my mind, ``First, do no harm.'' My guess is a couple of
decades ago people might have been gathering in a similar
hearing wondering why low-income people or people of color were
not granted credit and now we have a multiplicity of options
for credit for people who have never enjoyed it before. We may
not always like the terms, but credit is available in our
society like it has never been available before, which for many
families is a very good thing. It allows them maybe to pay for
their groceries, and to buy school clothes, where they
otherwise might not have been able to do it. I think there is a
valid question about whether there is effective disclosure;
consumers do have a right to know what they are getting into. I
am curious at some point whether Congress has proven to be part
of the problem or part of the solution. Because there is so
much disclosure, I think that occasionally perhaps less would
be more, and I think that it is good that this committee will
look into this particular issue.
I also am reminded, at least according to my reading of the
Constitution, that nobody has a constitutional right to borrow
money from somebody else. If you do not like the terms, you
have the right to walk away. I myself have done that on a
couple of occasions when I did not like the terms or I did not
like the service or I got tired of speaking to the computerized
voice on the other end of the 1-800 line. So I always want to
make sure consumers have those options. We know there are at
least 10 major players in this market and at least 6,000
different companies that are making some type of offer to
consumers today. There appears to be effective competition, so
the question in my mind is, is there effective disclosure?
And so, Madam Chairwoman, I appreciate your holding this
hearing, and I look forward to hearing more about this. But I
am concerned that the wrong prescription could lead to a
lessening of the availability of credit at the margins or
perhaps making that credit more expensive. Thank you and I
yield back.
Chairwoman Maloney. Thank you. Congressman Watt for 2
minutes, and thank him for his leadership and hard work on this
issue.
Mr. Watt. Thank you, Madam Chairwoman. I thank the Chair
for holding this hearing, which for my purposes is very similar
to, and equally as important as, the hearing that the Chair
convened on exploding foreclosures and mortgage lending because
in both areas there are very, very serious problems and
probably a need for some legislative action. The only way we
can determine what legislative action is needed and desirable
is to get into the legislative record the facts about what is
happening. There is the perception and I believe the fact that
there are real problems in the credit card area resulting from
teaser rates, increases in rates without appropriate notice,
exorbitant late payment fees, fees for paying online, a major
issue is interchange fees, which I think is the hidden charges
that really nobody has focused on yet but I hope we will get
some testimony about in this and subsequent hearings, and the
general availability of easy credit. Mr. Hensarling is right,
there was a time when there was no credit available. It may in
fact be too easy now both in this area and in the mortgage
area. And part of that is that in this area there is no real
definition of what Mr. Bachus referred to as fair and
equitable. So unless the industry itself will set some
standards that are acceptable and deemed as reasonable to the
public, it may be incumbent on us to really more aggressively
define what that last little phrase in the disclosure notice or
contract said when they finally got to the end after saying we
can do all these things subject to law. Right now, the law is
murky in a number of these areas and if the industry cannot
define what is appropriate, then I think it may be necessary
for us to do it in the legislative process. But we need the
background, and today's hearing, and I hope subsequent hearings
where we will hear from the regulators and the industry itself
and other players, will lead to finding the appropriate
legislative steps to take. I yield back and I again thank the
chairwoman for convening the hearing.
Chairwoman Maloney. Thank you. Without objection, all
members' opening statements will be made part of the record.
We have a distinguished panel of witnesses who include both
consumer and industry representatives as well as academics, and
I will not attempt to give you a full biography of each but
just a few highlights.
Linda Sherry, Consumer Action's director of national
priorities, joined the San Francisco-based National Consumer
Education and Advocacy Group in 1994, from a background as a
weekly newspaper reporter in Long Island from my State, New
York, and in California. Sherry, who moved to Washington, D.C.,
in August of 2004 to establish an office for Consumer Action,
is responsible for the organization's national advocacy work
and for the research and writing of Consumer Action's free
educational publication and Web site content.
Mr. Arthur E. Wilmarth, Jr. is a professor of law at George
Washington University Law School. Professor Wilmarth has
written extensively about banking regulation, including the
role of the Federal and State governments in regulating credit
cards.
Mr. Todd J. Zywicki is a professor of law at George Mason
University Law School. He served as Director of the Office of
Policy for the Federal Trade Commission from 2003 to 2004. More
recently, he has written and testified on consumer credit
issues.
Mr. Edward L. Yingling is president and CEO of the American
Bankers Association, and is testifying on behalf of the
Association.
Mr. Oliver I. Ireland, formerly Associate General Counsel
of the Federal Reserve Board, is now at the law firm of
Morrison and Foerster, where his practice includes representing
credit card networks.
Cindy Zeldin is the Federal affairs coordinator in the
economic opportunity programs at Demos, a public policy
research and advocacy organization that has conducted extensive
research on household debt. Most recently, Ms. Zeldin co-
authored the Demos Report, ``Borrowing to Stay Healthy'', which
examined medical debt that accrues on credit cards. I thank all
of the witnesses for coming, and I would like to recognize Ms.
Zeldin first, and then left to right. Ms. Zeldin?
STATEMENT OF CINDY ZELDIN, FEDERAL AFFAIRS COORDINATOR,
ECONOMIC OPPORTUNITY PROGRAMS, DEMOS: A NETWORK FOR IDEAS &
ACTION
Ms. Zeldin. Chairwoman Maloney, Ranking Member Gillmor, and
members of the subcommittee, thank you for inviting me to
testify today. I am here representing Demos, a nonprofit,
nonpartisan research and public policy organization working on
issues related to economic security. We approach our work on
credit card debt and lending industry practices through the
lens of rising insecurity among low- and middle-income
households in a rapidly changing economy. Against an economic
backdrop simultaneously characterized by stagnant incomes at
the median and the rapidly rising costs of big ticket
necessities like housing, health care, and education, our
Nation has witnessed tremendous growth in credit card debt over
the past 2 decades.
At the same time as our economy has undergone major
changes, the banking and financial industry has been steadily
de-regulated. While deregulation has expanded access to credit
for many people who had been denied or excluded from mainstream
financial services in the past, this credit has come at a high
cost. It is low- and moderate-income households whose levels of
credit card debt have increased the most in recent years and
our research indicates that these households are increasingly
turning to credit cards to manage economic shocks like job loss
or a major medical expense or to fill in the gap between the
cost of basic living expenses and stagnant incomes.
The democratization of credit has in many ways become our
modern day safety net, albeit one that comes with high interest
rates and an endless array of penalty fees that are unleashed
upon borrowers in response to just the slightest slip-up. With
debt service taking a bigger bite of the household budget,
there is less left over to build savings and assets, quickly
trapping families in a cycle of debt. Once in debt, the
capricious and abusive practices of the lending industry make
it exceedingly difficult to climb out.
Credit card debt has roughly tripled since 1989, with
Americans owing more than $800 billion in credit card debt
today. Our national savings rate has steadily declined and the
number of people filing for bankruptcy since 1990 has more than
doubled to just over 2 million in 2005. The average amount of
credit card debt among all households with credit card debt
grew 89 percent between 1989 and 2004. In particular, low- and
moderate-income households, senior citizens, and young adults
under age 34 have seen rapid increases in credit card debt.
To better understand the factors contributing to household
indebtedness, Demos and the Center for Responsible Lending
commissioned a national household survey of households with
credit card debt in 2005; 7 out of 10 low- and middle-income
households reported using their credit cards as a safety net,
relying on credit cards to pay for car repairs, basic living
expenses, medical expenses, or home repairs. The widespread
availability of revolving credit can indeed help individuals
and families weather difficult financial times or manage large
unexpected costs, like a major medical expense or car or home
repair, by spreading payments over time and providing less
disruption to the family budget. However, all too often, the
practices of the credit card industry turn this beneficial
credit into a debt trap.
The credit card market is a broken market. When consumers
initially shop for a credit card, the key element of their
comparison shopping is generally the interest rate on the card,
yet the card issuer reserves the right to change the terms of
the card agreement at any time for any reason with a 15-day
notice, making competition illusory. A consumer can diligently
shop for the best terms and conditions out there but then have
these terms and conditions unilaterally changed on them.
The first practice I would like to address is penalty
pricing or interest rate hikes and fees for an array of
infractions, many of which are quite minor and are not
necessarily reflective of a cardholder's risk profile. When a
payment is late, major card issuers typically increase the
interest rate on the card to a penalty or default rate. Due
dates are often listed down to the hour and payments received
after that time are processed the following day. With payment
grace periods generally no longer in place, cardholders who
submit payments that are nominally late are routinely hit with
interest rate increases that can drastically increase the cost
of credit. It is also important to note that these penalty
interest rates are applied retroactively to the entire existing
card balance, not simply prospectively to future purchases.
Cardholders who are late are also slapped with a late fee. Late
fees have steadily increased from the $5 to $10 range in 1990
to an average of about $34 in 2005. Penalty pricing is also
typically invoked when a cardholder exceeds the credit limit on
their card. Rather than denying the purchase, it is now routine
practice to allow the transaction to go through but to apply an
over-the-limit fee and then increase the cardholder's interest
rate; over-the-limit fees averaged about $31 in 2005.
The second practice I would like to highlight is universal
default, a bait and switch practice whereby card issuers
retroactively change a cardholder's interest rate not because
of any change in behavior with that particular card, but
because of a change in the cardholder's credit score or their
payment behavior with another lender. While some card issuers
have halted this policy, others still engage in it, and still
others increase interest rates because of behavior with other
credit rates that institute these increases through a change in
terms rather than automatically. Other practices, double cycle
billing and payment allocation--
Chairwoman Maloney. The Chair grants the witness an
additional 30 seconds.
Ms. Zeldin. In absence of meaningful regulation, credit
card companies are free to design credit card agreements that
are not only confusing in their complexity but that once
deciphered are fundamentally unfair. Despite borrowing money
under one set of terms and conditions, a borrower can be asked
to pay back that money under an entirely different set of
conditions for being a day or two late or for going just over
their credit limit even if they are attempting to pay back
their debt in good faith. Once in penalty territory, households
are typically paying interest rates of 27 percent. For low- and
middle-income households, whose levels of credit card have
increased the most in recent years, these penalty interest
rates drain resources from already tight family budgets,
inhibiting the ability of these households to pay down their
debt, let alone save money to weather future economic shocks.
Thank you.
[The prepared statement of Ms. Zeldin can be found on page
106 of the appendix.]
Chairwoman Maloney. Without objection, all of the written
statements will be made part of the record, and you will each
be recognized for 5 minutes, so a summary of your testimony for
5 minutes is requested. Mr. Wilmarth? Thank you.
STATEMENT OF ARTHUR E. WILMARTH, JR., PROFESSOR OF LAW, GEORGE
WASHINGTON UNIVERSITY LAW SCHOOL
Mr. Wilmarth. Chairwoman Maloney, Ranking Member Gillmor,
and members of the committee, thank you for inviting me to
participate in this important hearing.
Chairwoman Maloney. Turn on your mike, we cannot hear you.
Mr. Wilmarth. Pardon me. Chairwoman Maloney, Ranking Member
Gillmor, and members of the committee, thank you for inviting
me to participate in this important hearing. The credit card
industry has experienced a very rapid and dramatic
consolidation over the past 2 decades. During that time, the
share of the top 10 issuers has risen from 40 percent to 87
percent. The share of the top five issuers has grown from 35
percent to 71 percent. There are many technological factors
that have contributed to this consolidation. Those factors have
created large economies of scale and barriers to entry. The
largest federally-charted banks dominate the credit card
industry. Four of the five top credit card issuers and 7 of the
top 10 issuers are national banks. An eighth issuer among the
top 10 is a federally-charted thrift. Only two are non-banks,
American Express and Discover, both of which have a
longstanding presence in the industry. As I will mention,
Federal preemption helps to explain why so many of the largest
issuers are federally-charted depository institutions and why
they are also dominant players in other segments of the
consumer credit industry. For example, seven of the top home
mortgage lenders are either nationally-chartered banks or
federally-chartered thrifts.
You have already heard a lot today about fees and profits.
As my statement points out, the profitability of credit card
banks has remained well above that of all other banks over the
past 15, if not 25, years. And these unusually high profits
certainly raise questions as to the competitive features of the
credit card industry. Average annual non-penalty interest rates
of credit card issuers have remained above 13 percent in every
year between 1994 and 2005 except for 2003, when the average
rate was 12.92 percent. This is at a time when we have had
historically low interest rates. Of course, as you have heard,
penalty interest rates have been far higher and now are in the
range above 24 or 25 percent. You have also heard about how
credit cards have contributed to the rapidly growing debt
burdens of U.S. households.
What I want to focus on in the remainder of my time is the
impact of Federal preemption. In 1978, the U.S. Supreme Court
gave national banks most favored lender status and the right to
export interest rates across State lines. In 1996, the Supreme
Court upheld a regulation of the OCC, which defined interest to
include a wide variety of fees, such as annual fees, over-the-
limit fees, late payment fees, bad check fees, and cash advance
fees, so those fees could also be exported across State lines.
In 1998, the OCC issued a ruling which allowed national banks
to export interest rates from any State in which they have
either their main office or branch. In 2004, the OCC went much
further; it adopted a sweeping set of preemption rules which,
to put it bluntly, essentially preempts all State consumer
protection laws from applying to the practices and activities
of national banks. And just recently, the GAO recommended that
the OCC make clear what State laws were preempted or were not
preempted. The OCC has not issued any such list. So far the OCC
has acknowledged only that State fair lending laws might apply
to national banks but they have given no such indication for
other types of State consumer protection laws. The OCC also
issued a regulation in 2004, which gave them the sole and
exclusive right to enforce all applicable laws, including any
State laws that might be applicable to national banks so that
States have no enforcement rule under the OCC's rules.
The OCC's rules have spurred many large, multi-state banks
to convert to national charter including J.P. Morgan Chase,
HSBC, and Bank of Montreal. As a result, the share of national
banking assets has risen from 56 to 67 percent and the share of
State assets has fallen to 33 percent. Just last year, the Bank
of New York, one of the largest state-chartered banks, decided
to sell all of its retail branches to J.P. Morgan Chase, again
thereby indicating the powerful impact of Federal preemption.
In September 2005, Chairman Don Powell indicated that unless
Congress acted, the dual banking system was severely
threatened.
I point out in my testimony that the OCC has had a very
unimpressive record of enforcing consumer protection laws
against national banks. A careful search of their Web site and
other public records indicate only 13 public enforcement orders
against national banks since January 1, 1995; 11 of those 13
were against small national banks, only two were against large
national banks, and in each case another agency acted first. In
one case, a State prosecutor in California, in another case,
the Department of HUD. So my bottom line is that the OCC cannot
be relied upon to be a vigorous consumer protection authority
for the national banking system, which dominates the credit
card industry.
Thank you very much.
[The prepared statement of Professor Wilmarth can be found
on page 64 of the appendix.]
Mr. Watt. [presiding] Mr. Yingling is recognized.
STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CEO, AMERICAN
BANKERS ASSOCIATION
Mr. Yingling. Thank you Chairwoman Maloney, Ranking Member
Gillmor, and members of the subcommittee, for inviting me to
testify this morning. I would like to take a few minutes at the
outset to discuss just what a remarkable product the credit
card is. For example, we take it for granted, but the
processing system for cards handles more than 10,000
transactions every second with nearly enough communication
lines to encircle the globe 400 times. As the recent GAO report
pointed out, the credit card industry is highly competitive and
highly innovative. It has changed greatly since it began 56
years ago. First, up until around 1990, almost all cards had an
annual fee of $20 to $50. Today, most cards charge no annual
fee. In fact, many cards have rewards features such as rebates,
points, or mileage. Thus for many consumers, most of the
millions who do not revolve, the card is free or they actually
earn something when they use it. Second, for those who do take
out a loan, interest rates, according to the GAO, have declined
by 6 percentage points since 1990. Before, almost everyone paid
18 to 20 percent. For the 28 popular cards the GAO studied, the
average rate in 2005 was 12.3 percent. Third, and most
importantly, more low- and moderate-income people have been
able to obtain credit cards.
While we recognize there are concerns about debt levels, it
is important to note that, according to the Fed, in the last 10
years, credit card balances have declined from 3.9 percent to
only 3 percent of household debt. I think most people would be
amazed that credit card debt is only 3 percent of total
household debt.
Credit cards are also very important to small businesses, a
fact often overlooked. Without them, small businesses would be
at a huge disadvantage to larger businesses, which could afford
their own in-house credit programs. Moreover, without cards,
commerce over the Internet, which means tremendous savings for
consumers, would be extremely difficult.
However, as the GAO report laid out, as credit cards have
evolved, the competition that resulted in no annual fees, lower
interest rates, rewards programs, greater convenience, and more
availability to more consumers has also led to greater
complexity. It is this complexity which is understandably
raising concerns and needs to be addressed. One important issue
is that the disclosures have not kept up. The ABA and card
companies strongly support and are working for better, clearer
disclosures. We are optimistic that the Fed will soon develop
better disclosures, and we are glad to hear that they are
moving quickly, Madam Chairwoman. We are also working on
additional tools for consumers, such as easily accessed
explanations and information, to go with these new disclosures.
A second area of emphasis must be financial education. The
ABA and the major credit card companies are working together to
improve this education with a particular emphasis on college
age individuals. We have completed a scan of the available
resources and found that every major credit card issuer, in
addition to the ABA, has an education program. Now we are
working to maximize the delivery of these programs to
consumers. We are pleased, Madam Chairwoman, that you will be
participating in our annual Teach Children to Save Day on
Monday in New York. Representatives Price, Green, Drake, Costa,
and Wynn have also participated. In October, we will be having
our 5th annual Get Smart About Credit Day, which raises
awareness about credit issues among students. Last year,
Treasury Secretary Paulson and Members of Congress joined us in
teaching this program.
While we work hard to improve disclosures and financial
education, we recognize that there are other issues about
credit cards which are of concern to Members of Congress. As
the GAO pointed out, for millions of Americans credit cards
provide more services at low, or more often no cost, and lower
interest rates than ever before. However, for others, the
increasing complexity has caused confusion, with some ending up
in difficult financial situations. The industry takes these
concerns very seriously and is working to address them. Madam
Chairwoman, Congressman Gillmor, Congressman Watt, and others
who have spoken this morning, we take your introductory
comments very seriously. We need to address these issues, and I
want to assure you that we are working very hard, we are
meeting literally every week to move forward, and we want to
keep you informed.
Recently, individual institutions have announced important
changes in policies. We are seeing that competition is now
leading to streamlined and simplified practices. The industry
recognizes that policies that alienate some of its customers or
leave individuals in financial difficulty from which they
cannot extricate themselves are in no one's interest. We pledge
to work with you in Congress and our customers to address these
concerns.
Thank you.
[The prepared statement of Mr. Yingling can be found on
page 84 of the appendix.]
STATEMENT OF TODD J. ZYWICKI, PROFESSOR OF LAW, GEORGE MASON
UNIVERSITY LAW SCHOOL
Mr. Zywicki. Chairwoman Maloney and members of the
subcommittee, credit cards have transformed the ways in which
we shop, travel, and live. Credit card issuers are forced to
compete for my loyalty every time I pull out my wallet to buy
gas or a new book for my daughter. In such a competitive
environment, issuers face relentless competition to retain my
loyalty, and I admit I am not the slightest bit sentimental
about switching to a better deal if one comes along. I have
four cards and each of them actually pay me to use them. I had
five until 2 weeks ago, but one did not give me a good enough
deal so I canceled it. Little wonder in this competitive
environment that, according to one Federal Reserve economist,
90 percent of credit card owners reported they are very or
somewhat satisfied with their credit cards versus only 5
percent who are somewhat dissatisfied and only 1 percent, that
is 1 out of 100, who are very dissatisfied. Moreover, two-
thirds of respondents in a Federal Reserve survey also reported
that credit card companies usually provide enough information
to enable them to use credit cards wisely and 73 percent stated
the option to revolve balances on their credit card made it
easier to manage their finances versus only 10 percent who said
it made it more difficult.
Nonetheless, the myriad uses of credit cards and the
increasing heterogeneity of credit card owners has spawned
increasing complexity in credit card terms and concerns about
confusion that this may reduce consumer welfare. In particular,
three concerns about credit cards have been expressed. First, a
fear of a rise of consumer indebtedness supposedly caused by
access to credit cards. Second, a concern about unjustifiably
high interest rates on credit cards. And, third, a growing use
by card issuers of so-called hidden fees, such as late fees and
overdraft fees.
Although these concerns are often expressed, based on
standard economic theory and the date we have available today,
none of these concerns appears to have any merit. I address
each of these concerns in detail in my written testimony, and I
will only briefly summarize those findings here. First, the
concern that credit cards have caused consumer over-
indebtedness and financial distress is simply based on a faulty
understanding of the ways in which consumers use revolving
credit. Although credit card use and debt has risen
substantially over the past 25 years, the data make clear that
this rise in credit card debt has been the result of a
substitution by consumers of credit card for other less
attractive types of debt such as retail store credit, layaway
plans, pawn shops, rent-to-own, and personal finance companies.
Just a generation ago when you bought a refrigerator or a
bedroom set you bought on time, promising to pay in monthly
installments for a term of months. If you needed a short-term
loan to repair a blown transmission, you might have to borrow
several thousand dollars on an unsecured basis from a personal
finance company, a family member, or even your local loan shark
whose late payment terms were somewhat more onerous than those
that we see today. Today, a consumer would likely use a credit
card for each of these transactions and in fact many of these
traditional types of consumer loans do not even exist anymore.
Thus, the growth in credit card borrowing, as I show in my
written testimony, mirrors a near identical decline in consumer
use of installment consumer credit during that same time. As a
result, the debt service ratio for consumer credit has
fluctuated in a very narrow band over the past 25 years and in
fact is approximately the same today as it was in 1980. Nor are
interest rates on credit card unreasonably high when compared
to similar loans. In fact, the General Accounting Office
estimates that approximately 93 percent of credit cards now
have variable interest rates tied to the underlying cost of
funds and interest rates become both lower and more flexible
over time. Moreover, the past few decades have seen the near
complete abolition of annual fees on standard credit cards with
no rewards programs and this has dramatically reduced the cost
of using credit and heightened competition. When compared to
relevant alternatives, such as payday lenders and personal
finance companies, credit cards offer extremely competitive
interest rates and low-fixed costs, especially for lower income
and younger borrowers with limited credit options. It is not
clear to me how the lives of lower income families would be
improved by making it more difficult for them to get credit
cards, thus forcing them to rely on pawn shops or payday
lenders to buy books or sports equipment for their children.
Nor is it clear how a college student or any other young
American would be made better off by paternalistically being
denied a credit card and thus having to furnish their apartment
through a rent-to-own company. Moreover, given the paucity of
attractive credit options available to low-income borrowers,
there is little wonder that the substitution effect of credit
card debt has been most pronounced for those families. And, in
fact, the Federal Reserve reported in the 2004 Survey of
Consumer Finances that even though credit card ownership has
become increasingly widespread, the percentage of lowest income
quintile households in financial distress is actually at its
lowest level since 1989.
The past few years have also seen an increase in the use of
risk-based penalty fees, such as late fees and overdraft fees.
Although these fees represent only about 10 percent of issue
revenues, they have caused great consternation in some
quarters. A recent study by Massoud, Saunders and Scholnick,
however, concluded that these fees were risk-based fees based
on borrower behavior. Moreover, they found a clear trade-off
between the use of these risk-based fees and interest rates.
Thus, for instance, a one standard deviation reduction on
credit card interest rates, 273 basis points, was found to be
associated with a $2.40 increase in late fees. The economic
trade-off is clear: the lower and more flexible interest rates
the past decade have become possible--
Chairwoman Maloney. The Chair grants an additional 30
seconds for you to wind up.
Mr. Zywicki. --only because credit card issuers become more
efficient at risk-based pricing. Issuers no longer must rely
solely on interest rates, which are an attempt to predict
before the fact the borrower's risk, but can make greater use
of risk-based penalty fees for those borrowers who demonstrate
their riskiness through their actual behavior. Any regulatory
efforts to cap late fees or over-limit fees would therefore
almost certainly lead to increased interest rates for all
consumers or other offsetting adjustments in credit contract
terms. This cross-subsidization would be especially unfair to
low-income but responsible borrowers who would otherwise be
lumped into the same interest rate category as other borrowers.
Thank you.
[The prepared statement of Professor Zywicki can be found
on page 120 of the appendix.]
Chairwoman Maloney. Mr. Ireland.
STATEMENT OF OLIVER I. IRELAND, MORRISON AND FOERSTER, LLP
Mr. Ireland. Good morning, Chairwoman Maloney, Ranking
Member Gillmor, and members of the subcommittee. I am a partner
in the Washington, D.C., office of Morrison and Foerster.
Before coming to Morrison and Foerster, I was an Associate
General Counsel in the legal division of the Board of Governors
of the Federal Reserve System for over 15 years. I have over 30
years experience in banking and financial services, and I am
pleased to be here today to discuss the important issues
involving the credit card industry.
Today, credit cards are among the most popular and widely
accepted forms of consumer payment in the world. Due to the
convenience, efficiency, security, and access to credit that
they provide, credit cards have become a driving force in our
economy and new markets such as the Internet. Credit cards
offer a wide-range of benefits in addition to access to credit,
including freedom from carrying cash, protection from loss or
theft, and preservation of claims and defenses that a consumer
may have against a merchant. Approximately half of all credit
card holders pay their balances in full every month and
therefore also enjoy an interest-free loan. Although fees and
card issuer revenues from fees have increased in recent years,
consumers also are enjoying lower interest rates and wider
access to credit. Despite the benefits, credit card practices,
such as so-called universal default and double cycle billing
have been criticized as unfair, in part, I think, because they
are inconsistent with the consumer's expectation. These
criticisms call into question the current credit card
disclosure regime. Credit cards are subject to extensive
disclosure requirements under the Truth in Lending Act and
Regulation Z implemented by the Federal Reserve Board. TILA, or
Truth in Lending, requires comprehensive, virtually cradle-to-
grave, disclosure. In addition to TILA, the Federal bank
regulatory agencies have the power under the Federal Trade
Commission Act to address unfair and deceptive acts and
practices on a case-by-case basis.
Simply put, I think the current credit card disclosures are
too detailed, complicated, and they focus on the wrong
information. Nevertheless, I believe that improved disclosures
offer the potential to address current concerns about credit
card practices. Although there could be credit card practices
that are so unfair and so resistant to market pressure that
they cannot be addressed through an improved disclosure regime,
it is premature to conclude that improved disclosures cannot
resolve these issues.
New approaches to disclosures may be able to simplify
disclosures. For example, there appears to be a broad
recognition that the Schumer Box disclosure format is
effective. Similarly, the Federal banking agencies recently
proposed a standardized model Gramm-Leach-Bliley Act privacy
note that would provide limited information in a uniform manner
to facilitate consumer understanding. The model emphasizes
simplicity as opposed to accuracy and precision, something that
credit card issuers cannot do lest they face class action
litigation under TILA or over the terms of their account
agreements. Simplified disclosures could improve the ability to
comparison shop and avoid surprise late charges and other fees.
In addition, as Louis Brandeis noted almost a century ago,
``Sunlight is said to be the best disinfectant and electric
light is the best policeman.'' Simplified disclosures for
credit card accounts can lead to changes in credit or practices
by fostering market discipline.
Achieving these goals is not without challenges. First,
open-end credit accounts are complex and their terms will
necessarily reflect this complexity. Second, disclosures cannot
be the only source of education about financial issues. We need
improved financial literacy. Third, there is a tension between
simple disclosures and legal liability. Some sort of a safe
harbor for simplified disclosures may be necessary. Despite
these challenges, I believe that TILA, coupled with the banking
agencies' other powers, provide ample authority for addressing
current issues.
I appreciate the opportunity to be here today and would be
pleased to answer any of your questions.
[The prepared statement of Mr. Ireland can be found on page
34 of the appendix.]
Chairwoman Maloney. Ms. Sherry?
STATEMENT OF LINDA SHERRY, DIRECTOR, NATIONAL PRIORITIES,
CONSUMER ACTION
Ms. Sherry. Chairwoman Maloney, Ranking Member Gillmor, and
members of the subcommittee, my name is Linda Sherry, and I am
the director of national priorities for Consumer Action. I
thank you for your leadership on this issue.
Consumer Action is a nonprofit organization that has served
consumers for 36 years. For more than 20 years, we have
conducted surveys of credit card rates, fees, and conditions,
and our survey has become a barometer of industry practices.
The focus of our study was to track the industry and help
consumers obtain clear and complete facts about rates and
charges before they apply for credit. I am pleased to share
with you some preliminary findings from our most recent survey
of 83 cards from 20 banks, including the top 10 issuers. Our
surveyors posed as potential customers and this methodology
gives us unique insight into what people face when they shop
for credit cards. It is striking how often customer service
people cannot provide even the basic facts required by Federal
credit card disclosure laws. This leaves potential customers in
danger of applying for a card that at best does not suit them
and at worst contains predatory terms and conditions. All top
10 issuers advertise cards on their Web sites without firm
APRs. Instead, they skirt regulations by providing only a
meaningless range of rates. Cardholders have no way of knowing
what the terms on that card will actually be until it arrives
in the mail. Why should cardholders have to wait until the card
has been issued to read the contract that governs their use of
the card? Such practices make it difficult, if not impossible,
for consumers to shop around to get the best deal. Most major
issuers deny that they employ universal default punitive
interest rates based solely on how customers handle other
credit accounts. However, many still use credit reports as a
reason to make adverse account changes under change and terms
provisions. Standard in the vast majority of credit card
agreements, unilateral change of terms provisions are cited as
a way for companies to manage risk. But these take it or leave
it contracts of adhesion force cardholders onto an uneven
playing field even before they actually become customers
sometimes.
Last month, we went to the Web sites of the top 10 issuers
to review publicly available change of terms disclosures; 9 out
of 10 reserved the right to change APRs and other terms at any
time. Six banks included specific reference to credit reports
or scores or other creditors as a reason to change cardholder
terms. We asked customer service people at 20 issuers, ``Do you
raise my interest rate because of my credit record with other
credit cards or lenders?'' It appears that half of the surveyed
banks would, at the time of the survey, raise cardholders' APRs
based on information from credit reports and scores. Even if
you never paid late on your card, you could be subjected to a
default APR. The industry has aggressively increased fees and
penalty interest rates, fueling profits that are up by nearly
80 percent since 2000. We have a right to know whether these
fees bear any true relation to the bank's costs.
Average APR data doesn't tell the whole story. The spread
of non-penalty rates is strikingly wide at individual banks. At
one top 10 issuer, rates ranged from 8.25 percent to 25 percent
on non-penalty rates. The different rates are often referred to
using deceptive terms like ``preferred,'' ``elite,'' or
``premium.'' Is there anything premium about a rate of 18.24
percent?
Residual interest or trailing interest is a deceptive
method of calculating credit card interest right up until the
day full payment is received; 45 percent of surveyed banks
employ the practice. Penalty rates are as high 32.24 percent.
Late payments result in higher penalty rates with 85 percent of
issuers. Often the increase is automatic and standardized, not
tied to any individual performance. Late fees have more than
doubled in the last decade. The average grace period at the top
10 issuers has shrunk by more than 3 days since 1995. Cash
advance fees have jumped 40 percent in the last decade. More
disturbingly, 90 percent of the cards have no cap on the fee.
Before closing, I would like to bring to your attention
just how important credit card reform is to your constituents.
In less than a year, 12,327 individual constituents have used
Consumer Action's Web site to write to you for protection
against abusive credit card practices. This is a follow-the-
leader industry. When one issuer steps out with a new anti-
consumer practice, other banks are quick to follow. When
attention is focused on one bad practice, such as universal
default, issuers jump to say they don't do it. The problem is
that lesser known unfair practices continue, such as residual
interest allocation of payments to low-interest balances, junk
fees on foreign transactions, and Sunday and holiday due dates
that trigger unjustified late fees.
I thank you for your diligence in investigating credit card
industry practices. Credit cards are an integral part of our
lives. We protect people from unsafe products, shouldn't we
also give cardholders an even playing field?
[The prepared statement of Ms. Sherry can be found on page
44 of the appendix.]
Chairwoman Maloney. Thank you very much for your testimony.
I would like to begin by asking Ms. Zeldin and Ms. Sherry this
question. No matter whose statistics that you read or look at,
the level of consumer credit debt is really quite high. And we
know that consumers with high credit debt have traditionally
moved that debt into mortgage debt by taking out home equity
loans or refinancing their homes to pay off their cards. And I
am concerned that we may be confronting a ``perfect storm''
with the weakening of the subprime market. The opportunity to
consolidate credit card debt into home mortgages or home equity
loans is less likely to be an available solution. What do your
studies find? Is this a realistic concern, and I ask for your
comments, Ms. Zeldin and Ms. Sherry?
Ms. Zeldin. Yes, it is a concern. There was a lot of--I do
not have the figures in front of me--but the refinancing boom
did result in a lot of refinancing of credit cards, not just in
the subprime market but now that home prices look to be
declining in the entire housing market and homeowners will have
less home value to draw upon, we can expect that drawing out
home equity lines of credit will decrease and that will reduce
the availability of consumers to refinance and have lines of
credit that are at lower interest rates than what they may have
been paying on their credit cards.
Chairwoman Maloney. Ms. Sherry, any comments?
Ms. Sherry. Yes, I just think that really points to the
desperation of people who are burdened with unsecured credit
card debt with moving target terms that increases their debt so
their interest rate would be increased, and that would increase
their overall debt load. It points to the desperation of these
folks that they would actually go and get a home equity loan,
which would put their own home in jeopardy to get out from
under this kind of debt. So, yes, I definitely see it as a
problem. I see people making unwise moves in the past and even
as we speak today to move credit card debt into home equity
debt, not a good move.
Chairwoman Maloney. Thank you, and I would like to address
this question first to Mr. Yingling and Mr. Ireland, as well as
anyone else who would like to comment. There seems to be
widespread agreement that the credit card disclosures are
difficult for consumers to understand. I was struck last week
when William Syron, the head of Freddie Mac, testified, and he
said that he used credit card disclosure as an example of
uselessness in testifying to this committee, and that he and
his wife spent literally hours trying to figure what their
credit card statement meant to no avail. And I would like to
know, can industry take steps to correct that in the absence of
Federal regulation? And what is industry doing about
acknowledging the problem with disclosure? And apart from
disclosure, are there other issues including, but not limited
just to those, where you believe regulation or legislation is
needed? Do you believe that correcting disclosure will cure the
problems with universal default, double cycle billing, or
retroactive interest increases? And I first would like Mr.
Yingling and Mr. Ireland to start and then the consumer
advocates and anyone else who would like to discuss this.
Mr. Yingling. First just a comment on your previous
question. I think it is fairly understandable that people would
refinance into a home equity loan. They have equity in their
home, and if they put it into a home equity loan, they get a
lower interest rate because it is secured and in many cases, it
is also tax deductible. So I do not think it is quite a sign of
desperation; I think it is fairly rational.
The disclosures do not work. There is, I think, unanimous
agreement. At one point, actually I am old enough to remember
when they were first enacted starting in this very committee,
they were considered to be model disclosures. But what has
happened is that the product has gotten more complex. Some of
the things that we disclose now are really not that important,
and we do not disclose some of the things that are important,
some of the things that are of concern to members of this
committee. So we are optimistic that we will come out with a
much, much better disclosure. We cannot design it ourselves
because it is subject to extensive law and regulation, but we
can work with the Fed and work with you in your oversight
capacity to make sure that basic disclosure is useable. And,
importantly, you can use that kind of format still, the
original boxes, maybe even in a clearer fashion, and we have
seen some banks do that on their own and use common
terminology. Then it is very easy to take three or four offers
and look at them and compare them across lines. One of the
difficult things to decide is that you cannot have too many
things in that box or you undermine the consumer usefulness of
that box. So in addition to the box, we want to be able to have
other disclosures behind it and other resources behind it so
that consumers who want more, will read that box, that is the
most important thing, and they will compare it, and then if
they want to know more, they will have more available. We are
working on that.
With respect to legislation and regulation, we hear, as I
said in my oral testimony, the concerns. We hear them very
clearly. We are working hard on it. It is a not an accident
that you are seeing some major changes. Interestingly enough, I
think card companies are starting to compete in ways beyond
lowering the annual fee, lowering the interest rate. They are
trying to compete now on offering simpler products, more easily
understood products. You do see companies, for example, that
now offer cards that have no over-the-limit fees. They have
eliminated them. They are offering simplified kinds of cards.
We also are going to work on issues that we may be able to do
as an industry. We are working on those. Frankly, we have to be
very careful because there are anti-trust issues, but we are
hard at work on it.
Chairwoman Maloney. Thank you. My time has expired. Mr.
Gillmor is recognized for 5 minutes.
Mr. Gillmor. Thank you very much. Let me ask on the issue
of disclosure, which everybody agrees is poor, probably because
there is too much of it, and it is not understandable. I guess
my question is, whose fault is that, and how do you correct it?
Is it the companies, is it the Federal Reserve which supposedly
has the jurisdiction to regulate here? So I guess I would ask
the panel does the Federal Reserve have adequate authority in
the area of disclosure? And, two, is it their fault that it is
all messed up? And if not theirs, whose?
Mr. Ireland. Mr. Gillmor, the Federal Reserve has very
broad authority under the Truth in Lending Act to fashion
disclosures for Regulation Z. In the area of open-end credit,
as I indicated in my testimony, the overall account and the
transactions and disclosing those transactions is a complicated
issue if only because you have constantly moving balances that
you are paying interest on but you may also have different
interest rates, as we have discussed here, and fee charges in
certain cases. But fees have been around for a long time though
the levels have changed. And that disclosure is sort of
inherently a complicated disclosure. The Truth in Lending Act
itself encourages very precise, very accurate disclosures
because it provides for civil liability, including class
actions, if you do not do it right. So the first challenge that
the institution faces is getting the disclosure right.
Institutions are now working, as Mr. Yingling said, on trying
to simplify some of their disclosures but there are limits as
to what they can do within the current statute and the current
rules. I think the Fed has an ability to contribute very
substantially toward simplified disclosures. I think they may
have to think creatively to do it. I also think that they have
perhaps waited longer than they should to pick up this issue.
As we have discussed here, there have been significant changes
in the credit card industry over the years, and they have not
done a comprehensive review of the Truth in Lending and credit
card disclosures in a couple of decades.
Mr. Gillmor. Mr. Yingling?
Mr. Yingling. I would just say that it is the lawyers'
fault.
Mr. Gillmor. Well, I am a reformed lawyer.
Mr. Yingling. I am, too.
Mr. Zywicki. Congressman, if I may just add briefly,
according to a study done by Federal Reserve economist Thomas
Durkin, to keep this in perspective, two-thirds of credit card
owners find it very easy or somewhat easy to find out
information about their credit card. Only about 6 percent say
it is very difficult. And I would call the panel's attention to
some of the key aspects of the GAO report where they note that
one of the big problems is that the old TILA rules require
disclosure of increasingly irrelevant terms or trivial terms
such as the minimum finance charge, such as things like method
of computing balances, which are too difficult to disclose in a
very simple sort of way. And what the GAO report observes is
that focusing on trivial, outdated, or irrelevant disclosures
makes it more difficult for consumers to find the information
they need to get disclosure. And the concern is that this
market is changing much faster than the regulations and if
further disclosure is going to be mandated, I think we should
keep--
Mr. Gillmor. I am running out of time because my time is
limited here, and I do have another question I want to ask the
panel. I think one of the most helpful things you could do is
give us an answer to that. Mr. Ireland says it is inherently
complex. Is it so inherently complex we are not going to be
able to fix it? But not now because I do want ask my other
question, but I think that is one of the most useful things
that could come from this panel is an answer as to how to make
us have meaningful disclosure. The other thing I want to ask,
we keep hearing about how profitable the credit card is, I do
not know whether it is or not compared to other industries. A
lot of industries, you can go look and you can find for the
auto industry, the drug industry, the banking industry, what
return on equity is, and what the return on revenues are. What
are the returns on equity, the returns on revenue in the credit
card industry? Certainly there have been some studies. Mr.
Yingling?
Mr. Yingling. Actually, the Fed does a regular study so it
is available. Credit card company profits compared to most
industries are actually not very high. The return has been
relatively stable for the last 20 years. Some of this is in the
GAO study by the way. And the return on assets is slightly
above 3 percent. Just to put that into perspective, that is
slightly lower than the automobile industry and considerably
lower than other industries. It is higher than other types of
lending but, as the Fed points out, if you adjust that back for
risk, because credit card lending is unsecured, it is within
the parameters of what you would expect. Another test is if you
look at the PE ratios of credit card companies, how the market
looks at credit card companies, their price earnings ratio in
the stock market is lower than the S&P 500 average. So,
although you hear a lot of talk about how profitable it is,
when you look at it compared to other industries, it is not all
that profitable.
Chairwoman Maloney. Thank you. The gentleman's time is
expired. And we have been called for a sequence of votes that
may take up to an hour. The Chair recognizes Congressman Watt
for 5 minutes.
Mr. Watt. Thank you, Madam Chairwoman. I will be quick
because I am not sure whether we are coming back or not. But
let me just first go with this notion, Mr. Zywicki, that you
advanced that you are somehow getting a free credit card and
that if we do something in this area, we are likely to
incentivize cross-subsidization. I am sure you know that
somebody is paying for your credit card. I know when I get a
free ride for whatever period it is that I have free interest,
no interest, somebody is paying for that. And so there is
substantial cross-subsidization going on already in this
market. The half of the people that Mr. Ireland says who are
getting free interest are being subsidized by people who are
paying on the other side very high interest rates, late payment
fees, and the various other charges that are going on.
Now, one of those is interchange fees which not a single
person on this panel has said a word about. Those are the fees
that credit card issuers charge to retailers for the use of
their credit card. I am looking at a charge here that suggests
that about $30 billion in interchange fees are charged, late
fees, $16 billion, cash advance fees, $5 billion, annual fees
on credit cards, $3 billion. So interchange fees, which was not
mentioned by a single witness here, is the highest part of the
cost of credit cards that we all pay at some level, even the
people who do not use credit cards, the people who pay cash,
are cross-subsidizing those of us who use credit cards because
they are having to pay those interchange fees. And one of the
concerns I have is that those interchange fees are not really--
they are not addressing the cost of the transaction because all
the studies I have seen suggest that only 17 percent of those
fees are going to actually covering--and I suspect most of it
is going to pay for all of the mailings that we get in the mail
asking us to issue credit cards--to buy another credit card.
When you say, Ms. Sherry, shop for credit cards, there is
nobody shopping for credit cards, they are readily available to
everybody, I guess at least a solicitation a day asking me to
take out a different kind of credit card. Even from the lenders
that I already have a credit card from wanting me to upgrade.
Now I uniformly throw those things in the wastebasket but
somebody is paying for those mailings. And the easy credit that
is available out there is part of the problem.
Now, having gotten on my platform, let me just go to Mr.
Yingling. You said that somebody is sitting in a room every
week trying to solve this problem. Who is it that is trying to
solve this? And are we going to have to solve it here or is the
industry going to come up with some satisfactory standards
about how to get this because if it doesn't, everybody is
unhappy about it except Mr. Zywicki, who says that somebody is
subsidizing him and he doesn't have to worry about it anymore.
Tell me who is meeting to solve the problem?
Mr. Yingling. We have a group called the Card Policy
Council.
Mr. Watt. Who?
Mr. Yingling. The Card Policy Council is a group within the
ABA, and it consists of the major credit card issuers:
MasterCard; Visa; American Express; and Discover.
Mr. Watt. Are you all issuing anything publicly to tell
people what--have you set a best practices standard? Is there
any kind of industry standard coming out of this?
Mr. Yingling. What we are doing frankly is working our way
through all the issues, some of which you just talked about,
others that others have talked about. We are working in the
disclosure area. We are working in the literacy area. We are
working on some of these other issues that you all are
concerned about. We should come up and brief you about it with
your concerns, some of which you see--
Mr. Watt. Would you send me something in writing? My time
is up and we have to go vote, but we never have enough time to
address these issues. Somebody tell me what the solution to
this problem is short of our legislating in this area? Anybody
on this panel who has a solution to it, just give me a short
description of it in writing if you would.
Mr. Yingling. We will.
Chairwoman Maloney. All of the members of the committee
would appreciate that. The Chair recognizes Mr. Castle for 2
minutes and Mr. Ackerman for 2 minutes. We have been called and
we are on a second bell. We polled the members, and we will not
be coming back after this hour-long session. Mr. Castle?
Mr. Castle. I have 2 minutes so that eliminates the
questions I was going to ask each of you very quickly. I would
just like to second what the chairwoman and Mr. Watt said. I
think any suggestions about some of these changes would be very
helpful. Mr. Wilmarth, very quickly, you had a lot of concerns
with the OCC and some federalization, etc., what is your
recommendation for change, if anything, in that area, if you
could do that briefly?
Mr. Wilmarth. Well, I have two recommendations at the end
of my testimony. One is I think this area is closely linked to
the mortgage area in my opinion, and I think the Congress needs
to look at comprehensive, uniform standards of fair lending
practices that would level the playing field between federally-
chartered institutions and state-chartered lenders. My second
proposal is, as I have said, you cannot rely upon the OCC, 95
percent of whose budget is funded by the major banks, to be a
completely independent regulator. My opinion is that you need
enforcement. The best tool for enforcement is the Federal Trade
Commission Act. You should give the FTC, which is currently
barred from bringing unfair and deceptive acts and practices
cases against banks, you need to give the FTC authority to
bring that kind of enforcement action against national banks
because State attorneys general are independent enforcement
bodies for State banks. There is no independent enforcement
body for national banks.
Mr. Castle. Thank you. To Mr. Yingling, and I think to Mr.
Ireland as well, you all talked about the disclosures. For me
it is pretty simple--if I get a bill from a credit card, I like
to know what is the real due date on there and what it is going
to cost me if I do not get it in in that particular time. My
God, it is very hard to figure out. But I think that is very
important. And I think some of the banks are already starting
to do this, the credit card banks. And you both have suggested
that other things have to be done in that area, and I know it
is a little bit uncertain with a particular box or whatever it
may be. But, first of all, is that happening anyhow in the
marketplace? And, secondly, is there real focus on making these
changes even before regulations have to be imposed or we in
Congress have to pass something to make it happen?
Mr. Ireland. Well, I can tell you that credit card issuers
are devoting major resources to simplifying their disclosures
and making them easier for consumers to understand. Their
ability to do that is limited by Federal law. They are going to
need some help from the Federal Reserve to get to the end of
this trail.
Mr. Castle. Thank you.
Chairwoman Maloney. Mr. Ackerman?
Mr. Ackerman. Thank you very much, Madam Chairwoman. I do
not have to do much shopping either, all I have to do is go to
my mailbox. This is all for me. The past year or so, there was
a lot more that my wife threw out because she thinks I am
getting compulsive about looking at these things. I do not know
that I actually make money on them, as Mr. Zywicki does, but I
do try to read most of them and do as good as I could. I am not
a law professor; I am just a social studies teacher. But I just
pulled this one, which was on the top and started to highlight
it from a bank that has been chasing me to open an account. And
they offered me this wonderful platinum thing where I can get a
0 percent introductory rate until I read it and they tell me
about the 7.99 fixed APR thereafter. But then I read all the
print on the front, which has lots of 0 percents all over the
place and frozen things and whatever, and I turn to the back
and read in the small print, which I can only do without my
glasses, and I will round it off to the nearest one-hundredth
of a percent so you do not get 7.99. There are rates here that
they offer me and tell me that I am going to be subject to all
of these under different sets of conditions and they are: 0
percent; 8 percent; 13 percent; 14 percent; 16 percent; 20
percent; 21 percent; 24 percent; and 29 percent. Each of those
is one one-hundredth less, you understand. And for the benefit
of doing all this, paying as much as 29 percent after I get
sucked in thinking I am paying 0 percent, it tells me that I
have the great pleasure of not having to pay an annual fee. I
think this 29 percent thing is great. I remember when I was a
kid growing up on New Lotts Avenue, Shelly, he worked out of
the candy store, he went to jail once for doing something like
that; 29 percent is not 0 percent. And I would venture to say
that, and I will paint with a very broad brush, but the people
on the lower socio-economic scale of the ladder, those people
that you run classes for on how to open a bank account, and
savings, and all those kinds of things, they are not the people
who read this. Those are the people who are going to default
thinking they are getting a better rate, switching from another
credit card, not knowing about the fine print on the back,
getting sucked in, and finding out that they are now paying a
rate that they cannot afford, and they should have stuck with
what they had. These are the people that we have to be
concerned with, not myself or Mr. Zywicki. I get a lot of
these; they are offering me free money. I took one of them. I
took several of them as a matter of fact. Some bank offered
me--some non-bank, forgive me, some non-bank offered me
$50,000. I said, that is a great deal. I called them up, they
said, ``Yes, we switch it into your account.'' I am pre-
approved. I said, ``That is wonderful. I will take every nickel
you are giving me, and I will pay it back by July,'' whatever
it was. The next thing I knew, the first statement I got, I had
$250 worth of fees because I was over my credit limit. I said,
``How could I be over my credit limit, I have not missed a
payment, it is my first bill?'' They said, ``Well, the first
day that you take that $50,000, we add'' blah, blah, blah. I
was tough enough to fight that but a lot of people who are not
sophisticated enough do not know what they are getting into.
And I think, just being the skeptical social studies teacher
that I am, that is deliberate. And I think that is what we have
to fix. And I would, as my friend Mr. Watt said, I would like
the industry to sit down with us and say, ``Here is how we can
fix this. We do not have to offer people nine rates, thinking
they are not paying any.''
Chairwoman Maloney. That is a wonderful statement, but we
may miss a vote. I want to thank the panelists and the members
for being here for their interest. And the Chair notes that
some members may have additional questions for the panel, which
they may wish to submit in writing. Without objection, the
hearing records will remain open for 30 days for members to
submit written questions to these witnesses and to place their
responses in the record.
And this hearing is adjourned, and I thank everybody for
coming.
[Whereupon, at 11:30 a.m., the hearing was adjourned.]
A P P E N D I X
April 26, 2007
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]