[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES ISSUES:
A CONSUMER'S PERSPECTIVE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 15, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-111
U.S. GOVERNMENT PRINTING OFFICE
97-015 WASHINGTON : 2004
_________________________________________________________________
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
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
SPENCER BACHUS, Alabama MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware CAROLYN B. MALONEY, New York
PETER T. KING, New York LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois JAY INSLEE, Washington
WALTER B. JONES, Jr., North DENNIS MOORE, Kansas
Carolina MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York
VITO FOSSELLA, New York MIKE ROSS, Arkansas
GARY G. MILLER, California CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota BRAD MILLER, North Carolina
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas DAVID SCOTT, Georgia
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
TIM MURPHY, Pennsylvania CHRIS BELL, Texas
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina BERNARD SANDERS, Vermont
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
STEVEN C. LaTOURETTE, Ohio, Vice BERNARD SANDERS, Vermont
Chairman CAROLYN B. MALONEY, New York
RICHARD H. BAKER, Louisiana MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio DENNIS MOORE, Kansas
JIM RYUN, Kansas PAUL E. KANJORSKI, Pennsylvania
WALTER B. JONES, Jr, North Carolina MAXINE WATERS, California
JUDY BIGGERT, Illinois DARLENE HOOLEY, Oregon
PATRICK J. TOOMEY, Pennsylvania JULIA CARSON, Indiana
VITO FOSSELLA, New York HAROLD E. FORD, Jr., Tennessee
MELISSA A. HART, Pennsylvania RUBEN HINOJOSA, Texas
SHELLEY MOORE CAPITO, West Virginia KEN LUCAS, Kentucky
PATRICK J. TIBERI, Ohio JOSEPH CROWLEY, New York
MARK R. KENNEDY, Minnesota STEVE ISRAEL, New York
TOM FEENEY, Florida MIKE ROSS, Arkansas
JEB HENSARLING, Texas CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
TIM MURPHY, Pennsylvania JOE BACA, California
GINNY BROWN-WAITE, Florida CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina
RICK RENZI, Arizona
C O N T E N T S
----------
Page
Hearing held on:
September 15, 2004........................................... 1
Appendix:
September 15, 2004........................................... 47
WITNESSES
Wednesday, September 15, 2004
Draut, Tamara, Director, Economic Opportunity Program, Demos: A
Network for Ideas and Action................................... 25
Fox, Jean Ann, Director of Consumer Protection, Consumer
Federation of America.......................................... 22
Lively, Randy H. Jr., President and CEO, American Financial
Services Association........................................... 17
McEneney, Michael F., Partner, Sidley Austin Brown & Wood LLP on
behalf of the Consumer Bankers Association..................... 20
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 48
Oxley, Hon. Michael G........................................ 51
Castle, Hon. Michael N....................................... 53
Gillmor, Hon. Paul E......................................... 54
LaTourette, Hon. Steven C.................................... 55
Ross, Hon. Mike.............................................. 57
Draut, Tamara................................................ 58
Fox, Jean Ann................................................ 77
Lively, Randy H. Jr.......................................... 103
McEneney, Michael F.......................................... 109
Additional Material Submitted for the Record
Bachus, Hon. Spencer:
Composition of Gross Job Growth.............................. 113
Food Marketing Institute, prepared statement..................... 114
FINANCIAL SERVICES ISSUES:
A CONSUMER'S PERSPECTIVE
----------
Wednesday, September 15, 2004
U.S. House of Representatives,
Subcommittee on Financial Institutions and Consumer
Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:03 a.m., in
Room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the subcommittee] presiding.
Present: Representatives Bachus, Castle, Kelly, Gillmor,
Ryun, Biggert, Toomey, Capito, Tiberi, Kennedy, Feeney,
Hensarling, Brown-Waite, Sanders, Maloney, Sherman, Meeks,
Moore, Ross, Davis, Baca, and Bell.
Chairman Bachus. [Presiding.] The Committee on Financial
Services, Financial Institutions, has come to order.
Mr. Castle is recognized.
Mr. Castle. Thank you, Chairman Bachus. I thank you very
much for holding this hearing, which covers a panoply of
subjects of interest to all of us.
Now more than ever we live in a world that has become
increasingly complicated when it comes to personal financial
matters. A generation ago, a basic knowledge of balancing a
checkbook and maintaining a savings account was adequate.
However, in today's complex world, many Americans are faced
with difficult decisions, such as determining what type of loan
they need, whether to invest in stocks or bonds, how to best
manage credit, and how soon to start planning for family
education needs and their retirement.
There are approximately 40,000 different credit card
products available--an intimidating thought to the most
educated consumer. Unfortunately, large numbers of consumers
never learn the basics of maintaining their personal finances
and may struggle unnecessarily with choices leading to
financial freedom.
Today, our nation's youth are bombarded with a multitude of
financial options at an increasingly young age. Yet many are
ill equipped to make informed decisions about financial
matters.
According to a 2001 Teenage Research Unlimited survey,
teenagers spend, rather than save, 98 percent of their money--a
total of $172 billion in 2002.
Various public and private organizations have developed
programs to promote public knowledge of basic finances. Many of
these organizations are working with elementary and secondary
students to provide them with a strong education in money
management and provide teacher training on how they can
integrate basic financial education principles in the
curriculum.
For example, in my home State of Delaware, MBNA opened a
financial advisory service, FAS, over 10 years ago which offers
professional advice to MB&A people and their immediate family
members.
Since the service was established, MBNA has extended the
service into the community and into the local school systems to
the facilitation of basic credit and money management
curriculums to all grade levels in elementary, high schools and
colleges throughout the country.
FAS has educated nearly 1,500 students in Delaware, 14,000
students throughout the country since 1995.
I think all of the organizations offering financial
literacy programs to our communities should be applauded.
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. It has helped
sustain our economy in recent years.
That system is supported by the Fair Credit Reporting Act,
which this committee reauthorized last year, and ensures that
factual information is available on which to base the extension
of credit, employment or insurance.
Virtually every business in this nation and every consumer
who has ever used credit depends on this system. Without this
strong national system, consumers would pay higher costs for
credit.
Educating consumers and enabling individuals to understand
all of their financial options and opportunities is a daunting
task. The review by the subcommittee today will help us better
understand how consumers in the financial services industry can
have a more symbiotic relationship.
Mr. Chairman, I do thank you for holding this hearing
today, and I look forward to hearing from each of our
witnesses.
I yield back the balance of my time.
[The prepared statement of Hon. Michael N. Castle can be
found on page 53 in the appendix.]
Chairman Bachus. Thank you.
Mr. Sherman, we welcome you to the hearing. Would you like
to make an opening statement?
Mr. Sherman. I would, unless the chairman would like to
give one first.
Chairman Bachus. I will let you proceed and then I will
reserve mine.
Mr. Sherman. Okay.
Mr. Chairman, thank you for holding these hearings. We need
to take a balanced approach toward protecting consumers on the
one hand and allowing access to credit on the other.
We could, as a national policy, say, we are not going to
allow anybody to pay any more for credit than those who have
the very best credit records. The effect would be to deny the
opportunity to borrow to most people who really need it.
At the other extreme, we could lift all the standards, lift
all the rules and allow consumers to live in a world where
their State legislatures cannot protect them and this Congress
refuses to do so as well.
In evaluating the credit opportunities facing consumers,
there is sometimes a tendency to express everything as an
annual percentage rate, which makes sense if one is borrowing
thousands of dollars for months or years. But when I go to use
the ATM machine, I found the bank where I only pay $1, and I
withdraw $40.
I think that is a good deal in one respect, and that is,
there are many times in my life when having $40 is worth a
dollar. I don't need government to tell me that I am paying
20,000 percent interest, or infinity percent interest, to get
my own money and therefore should be denied the opportunity to
get $40 when I need it.
Likewise, we have payday lenders--and there are a lot of
reasons to provide some significant regulations in that area.
But to express everything as a percentage ignores the real
human circumstance where your car is in the shop and you cannot
get it out unless you give the mechanic $300.
Now, we can always tell people, ``Go rent a car for the
next two weeks and that way we will protect you from a $40
charge or a $20 charge or whatever,'' or we can recognize that
sometimes a charge by a bank or a financial institution of $10
or $20 or $30 or $40 needs to be looked at as a charge rather
than as an annual percentage rate, whether it is convenience or
whether it is bailing somebody out of a jam.
This Bush administration has done worse than zero in
protecting consumers. If they just did nothing, well, okay.
But instead, we have the OCC--and I may have to leave these
hearings for a bit, Mr. Chairman, to go speak on the floor on
this; I know that we have an amendment coming up on the floor--
decides that Congress should be irrelevant, State legislatures
should be irrelevant, and we should strip away all State
protections, and we should do so not by congressional action
but by runaway regulators, and we should do this only for
national banks.
So what we are saying is: Those lenders who choose not to
be national banks, ``You don't live in a free market economy;
you live in a tilted economy where different rules apply,
depending upon where you get your charter.''
We are turning to bank regulators and saying, ``It is time
to compete. Throw the doors open.''
The state regulators and the federal regulators should be
in a race to the bottom to try to get hand-out charters and get
business in an entrepreneurial spirit to capture financial
institution market share.
We are turning to Congress and saying, ``We don't need you.
We will just do it at the administration level.'' And we are,
of course, turning to consumers and saying, ``Not only will the
federal government do nothing, we will make sure the States do
nothing to protect you as well.''
And then finally, I believe we have--what?--maybe eight or
nine people that is the complaint department at the OCC for the
entire country, because you are going to call for the firing of
all State consumer protectors since they won't be able to do
anything with regard to national banks.
This regulation is absolutely absurd. It is an attack on
democracy and an attack on consumers.
Likewise, the decision of this administration, who without
congressional involvement tell banks that ``it is not enough
that you have Gramm-Leach-Bliley, we are going to going to give
you something extra and not go through Congress'' is also an
attack on consumers.
So I look forward to protecting consumers, to having
national standards where we need them, and to make sure that
whatever national standards or preemptions are called for are
decided through a legislative process, balanced process.
And I thank the chairman.
Chairman Bachus. Thank you, Mr. Sherman.
At this time I will give my opening statement.
I want to welcome our panelists.
This hearing supplements the numerous hearings that this
committee has held over the past 2 years, hearings which in
many instances have focused on how we can improve the
regulation of our financial services markets for the benefit of
consumers.
For example, consumer benefits with a focus of our
extensive hearings on the Fair Credit Reporting Act last year,
you will recall President Bush proposed and signed into law the
Fair and Accurate Credit Transactions Act of 2003, historic
legislation to ensure that citizens are treated fairly when
they apply for credit.
Consumers will now have a right to receive their credit
reports free of charge every year as part of a national
financial literacy campaign.
In addition, the legislation creates important new tools to
address the growing problem of identify theft by establishing a
nationwide fraud alert system.
On our committee, Mr. LaTourette and Shadegg have, along
with Ms. Biggert and Ms. Kelly and Ms. Moore and Ms. Hooley,
played I think a very important role in this.
But I commend the Treasury Department and the
administration as well as this committee for that fine work on
that legislation.
Also, I think what some people have said is one of the most
important consumer pieces of legislation was signed into law by
President Bush on June 27th, 2003, when he--well, actually he
helped to launch the do-not-call registry with the chairman of
the Federal Trade Commission and the Federal Communications
Commission. Over 54 million phone numbers have been registered
on the national list, protecting millions of Americans from
most unwanted telephone solicitations.
And I would say to anyone listening now: If you have not
called, you can call 1-888-382-1222. And there is also a Web
site: www.donotcall.gov.
Also, legislation has recently been signed--although it has
been tied up in the court by some civil libertarians--
protecting consumers from unsolicited commercial e-mail,
including nonsolicited pornography and other offensive matters.
I think the Bush administration is working through the courts
to try to enact that.
Also, I think an important thing that this committee and
also the administration has done is to work very hard to
promote financial education. I know Mr. Ney, on our
subcommittee, has promoted this in the sub-crime lending area.
I mentioned I thank Congresswomen Biggert and Kelly in
their important work in this area.
Other legislation, achieving the American dream of owning a
home, important legislation where approximately 40,000 low-to
moderate-income families per year will be able to purchase
their first home. And in doing so, they will strengthen
America's housing market and every community in which those
homes are located.
The average assistant grant will be $5,000 per family, with
the down payment and closing costs. A member of this committee,
Ms. Katherine Harris, or Congressman Katherine Harris of
Florida, was the main sponsor of that.
There are also several other programs.
But let me just depart by that to say in general in the
minute that I have remaining that consumers in America--in
reviewing fair credit reporting, we found out we have more
choices as Americans than people in any other country for
credit. More credit is available to us. And those that have
enjoyed, over the last 20 years, the greatest increase and
access to credit have been minorities and low-income citizens.
The growth in home ownership and credit extension to our
minorities is truly amazing in this country. Where countries
like France have an average of three or four credit card
choices, we have over 1,000.
That is not to say we don't have problems.
One problem that Mr. Sanders and I championed last year was
efforts to end what we considered unfair practices in the bait-
and-switch areas. Unfortunately, Mr. Sanders and I only
garnered 22 votes in this full committee, actually, this full
committee, on our legislation.
Forty-four of our colleagues, the majority of our
colleagues, by far voted against this legislation. We offered a
similar amendment on the floor and we only had 142 votes there;
272 of our colleagues, including a majority in both parties,
voted against our legislation.
But we have regulation proposed.
And this committee did then go back and substituted an
amendment, which I think was a good amendment, to address this
issue, but the Senate saw fit to strip that amendment out.
I will close simply by saying that members have told me
that we have a religious holiday later in the day for many of
our members, and they have asked that we speed these hearings
up. We expect votes on the House floor and we want to hear from
our panelists.
But also, members have asked that they be allowed to make
opening statements and have urged me and I think it is
important that they have that opportunity.
At this time I will recognize Mr. Sanders for any opening
statement he may wish to make.
[The prepared statement of Hon. Spencer Bachus can be found
on page 48 in the appendix.]
Mr. Sanders. Thank you very much, Mr. Chairman.
And as you have indicated, the issues that we are dealing
with today is of enormous importance to the American people. So
I thank you very much for holding this hearing.
And I thank all of our guests for being with us today.
I especially want to welcome Tamara Draut, the director of
Economic Opportunity Program at DEMOS, and Jean Ann Fox from
the Consumer Federation of America for being with us.
But thank you all very much.
Mr. Chairman, as a result of what I would consider to be
the collapse of the middle class: the fact that we have lost
many decent paying jobs, that many people are working longer
hours for low wages, new jobs being created paying low wages
and the jobs that are being lost, what we are seeing in our
country is that consumers are now being crushed with a record-
breaking $2 trillion in debt, which has more than doubled in
the last decade.
A lot of folks out there are deeply in debt and under a lot
of economic pressure. In fact, a record-breaking 1.6 million
families went bankrupt last year alone, an increase of more
than 125 percent since 1989.
And tragically, as Harvard University Professor Elizabeth
Warren and others have noted, it is the children--children are
more likely to suffer through their parents' bankruptcy than
through a divorce.
And you made the point, Mr. Chairman, that in France those
poor folks there only have four credit cards and we have 1,000.
I know that, because I get those 1,000 people sending me their
applications every other day.
In fact, in a given year a credit card company sent out
some 5 billion--this is true--5 billion credit card
solicitations, and usually targeting young people who don't
know enough about financial management.
Credit card issuers made a record-breaking $7.3 billion in
profits by charging excessive late fees last year. And total
credit card fees have increased from $8.3 billion in 1995 to an
astounding $21 billion last year, accounting for 35 percent of
total credit card profits.
And, Mr. Chairman, I know that you share some of these
concerns.
This is an issue we have to deal with.
The bottom line is that the American consumer is being
ripped off big time by credit card companies who are charging
usurious--usurious--rates.
We all know that interest rates for the last couple of
years have been almost historically low. And yet you have hard-
pressed families who are paying 25, 28 percent interest rate on
their credit card. And this is an issue that we have to address
in a multifaceted way.
The chairman correctly mentioned that he and I worked
together trying to address this issue and we did not have the
votes.
Mr. Chairman, you also remember that on the day we brought
it forth, this place was loaded with lobbyists from banks and
credit card companies putting excessive pressure on members,
not only on this committee but on Congress. And that is the way
it goes.
That is part of the political problem that we have in
America because these guys who have huge sums of money want to
make sure that Congress does not represent consumers, that we
allow a process to continue by which they make excessive
profits by ripping off millions of people through outrageously
high interest rates on their credit cards, and this is an issue
that has to be addressed.
Let me just mention, going into a little bit of depth about
what I call this bait-and-switch scam--and it is a scam. And it
is a scam that this Congress should not allow to continue.
Here is the deal: Folks, you are going to get today--go to
your mailbox, especially if you have a kid in college, you are
likely to get a couple of these cards: zero interest rate,
2.66, guaranteed. And then three months from now, after your
son or daughter fills this out or you fill it out, what you
will find is you are paying 13 percent, 18 percent, 25 percent.
``Well, how did that happen?"
They promised you zero interest rate. Well, read line 65.
Get out your magnifying glass, read line 65 on page 18, which
tells you that the big front-page story about zero interest
rates is totally meaningless because they can raise rates
anytime they want.
Now, some of the justification that they use for raising
interest rates--we did some research and we found that 3 years
ago you were late paying off a college loan, or you were late
on a mortgage payment, you are now ``a financial risk'' and
``we are raising your rates.'' That is one reason.
Despite the fact that every single month you paid your bill
to that credit card company on time, that is irrelevant. Or
they don't need any reason at all.
A fellow I know saw his interest rates jump significantly.
He called up the credit card company and they said, ``Oh, you
caught us. We will lower your rates.''
Chairman Bachus. Thank you.
Mr. Sanders. But, Mr. Chairman, you took a little bit of
time extra. Let me have just that----
Chairman Bachus. With unanimous consent, the gentleman----
Mr. Sanders. Just a little bit.
This is a scandal. It is a scandal, and Congress has got to
stand up to these lobbyists and these credit card companies and
these banks who are ripping off the American people, because
they are causing a lot of damage. The people who are hurt the
most are people who go through divorces, who loose their jobs,
who need to use the credit card for daily needs. And we cannot
accept that.
So I would hope, Mr. Chairman, that you and I and others
will have the courage to stand up to the banks and
substantially lower credit card interest rates in this country.
Thank you very much.
Chairman Bachus. I thank the gentleman.
Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman.
The title of this hearing is rather wide-ranging: Financial
Services Issues, A Consumer's Perspective. Well, I happen to be
a consumer, my family is consumers, some of my best friends are
consumers. So I think I bring a consumer's perspective to this
particular hearing.
It has been my observation over several decades of life
that the best consumer protection we can have is a competitive
marketplace providing a wide variety of goods and services to
consumers at competitive prices.
We had many, many hearings on the extension of the Fair
Credit Reporting Act, and we had testimony after testimony--
which I thought was very persuasive--that in America we enjoy
the widest range of financial services at the most competitive
prices.
We have credit offerings today that people could only dream
about decades before.
I don't know who writes these memorandums for the members,
but I certainly agree that benefits generated in today's
marketplace also derive from the ability of financial services
providers to segregate risk and price, financial products
accordingly.
Years ago, a bank may have had only one or two loan
products for which a consumer either qualified or did not. And
that was true decades ago. And now we have extended credit to
those who previously have not had it. And what we have enjoyed?
Among other things, we have enjoyed the highest rate of
home ownership in the entire history of the republic. We have
seen a booming economy here recently, enjoying some of the
greatest economy growth in almost 20 years, and part of that is
due to access to credit.
Some people will want to say, ``Okay, well, maybe we have
access to a lot of different products but the cost is still too
high.''
Well, I don't know. To me, I see a lot of signs of a very
effective marketplace. I just had my staff go to something
called bankrate.com that examines different credit card
offerings.
The best I can tell, Mr. Chairman, as a consumer in
America, I have hundreds of credit cards I can choose from with
interest rates ranging anywhere from 17.88 percent at something
called Bath National Bank, and here is 8.95 percent at Simmons
First National Bank and everything in between with all kinds of
different terms. To me, that looks like pretty effective
competition.
In addition, I come from Dallas, Texas, if you want to pull
out the yellow pages and see who will compete for payday loans,
there are 110 different offerings. They are about as ubiquitous
as the convenience stores and 7-Elevens. To me, that seems to
indicate, again, there is effective competition.
I read where 30 years ago only 2 percent of low income
people had access to credit cards. Today, it is 28 percent. We
have had an explosion of ATMs, credit card offerings.
All in all, I believe the American consumer is far better
off today when it comes to the accessibility and the cost of
credit products, than he was 30 years ago, and I believe the
free enterprise system has a lot to do with it.
I did not even see the yellow light, Mr. Chairman. I am
already out of time?
Chairman Bachus. You still do have additional time.
Mr. Hensarling. Okay, well, I just saw the red light come
on.
Chairman Bachus. Your time has been exceeded. But you are
doing very good.
[Laughter.]
Mr. Hensarling. I would just leave, if I could, Mr.
Chairman, and take 30 seconds extra.
I believe if there are those in this committee who believe
that somehow consumers are being wronged, I would hearken back
to something our Founding Fathers wrote, Jefferson in
particular, when it came to our political democracy, and that
is, ``I know no safe depository of the ultimate powers of the
society but the people themselves. And if we think them not
enlightened enough to exercise their control with a wholesome
discretion, the remedy is not to take it from them but to
inform their discretion by education. We should not outlaw
freedom, we should not outlaw competition; we should help
educate with financial literacy the members of our society.''
Thank you, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Hensarling.
Mr. Meeks?
Mr. Meeks. Thank you, Mr. Chairman.
And I want to thank the chairman and ranking member for
organizing this hearing. Too often issues of dealing with
consumers are put on the back burner. And we have to make sure
they are on the front burner.
But also, too often sometimes we like to pit one against
the other. I want to be clear that I am not in opposition to
the financial services industry. In fact, the financial
services industry is very important to me and the State of New
York.
Many of my constituents not only rely upon the credit that
they can get through financial services, but they are employed
by them. And so, therefore, I think that we need to make sure
that we have a meeting of the minds and are able to work
collectively to get together for the benefit of both the
consumers as well as financial institutions.
But we don't often here. I mean, when you talk about issues
that Mr. Sanders talked about, and yet we don't get the votes,
and we should keeping working them, bait and switch, something
is just apparently just wrong and we need to make sure.
I go by my life experiences sometimes. And to say that some
of the interest rates are not usury and some people not taken
advantage of, if we shut our eyes to that, then we are just
dead wrong.
I can just go by just a personal experience myself, and
that is, visiting my 78-year-old dad.
You know, he did not have a lot of education, et cetera,
and I just happened to go to review some of his accounts. And I
looked at some of the credit cards that he had. So that in many
of them, he was being charged a 25 and a 26 percent interest
rate, apparently because he did not even know.
So I instantly called some of these cards and they dropped
them down to 9 and 8 percent. But they were doing it simply
because they could do it. That is wrong. And we must stop that.
And we must put that on the front burner and not ignore that.
Ultimately somebody is going to have to pay. I mean, when
he does not pay the bills, then somebody is going to pay it
anyway, whether it is going to be the consumer or the financial
institution or some insurance company. It has to be paid.
So we might as well look at it and try to come with some
best practices that is good for the consumers and the people as
opposed to taking advantage. Because we cannot let people take
advantage of those simply because they can.
One of the keys to this is financial literacy, particularly
for the young. We must educate individuals because that is the
quickest way to put this out of business. But until we can do
that, we have to act and hold accountable those in the industry
to make sure that they are not taking advantage of those that
are vulnerable.
Then on the other side, we have to make sure we don't throw
the baby out with bath water. For example, we take payday
lending. We have to make sure that those who offer payday
lending, who are payday lenders, adhere to best practices of
the industry and are not providing customers with multiple or
rollover loans.
At the same time, we have to acknowledge the fact that many
payday lenders do adhere to the rules.
And at the same time, I--again, using myself and my family
as an example--can talk about times where payday lending was
utilized so that my family--in particular, I could talk about
one of my sisters now--could avoid excessive late payments or
bouncing a check, that they understood what it was and it was
with a reputable company. So we cannot eliminate the industry.
We have to work to make sure that we have people who follow
the best-practice rules. I think that is the key here.
That is why this hearing is so important, because we have
to balance the two, that we make sure that we don't throw the
baby out with the bath water, we hold people accountable who
are taking advantage of others, but then we just don't simply
brand an industry bad when in fact it does offer alternative
means to individuals so they can avoid late fees and excessive
interest rates and bouncing checks.
And so I hope and thank the panel for being here and look
forward to working closely together so that we can have a
balanced argument that benefits both the consumer as well as
not put individuals out of business and thereby limiting choice
the consumers may have.
Thank you, and I yield back.
Chairman Bachus. Thank you, Mr. Meeks.
At this time I recognize Ms. Biggert.
I would like to commend Ms. Biggert for your work on
financial literacy, which some of the members have noted.
Mrs. Biggert. Thank you very much, Mr. Chairman. And thank
you for holding this hearing today, which does cover a broad
range of financial services issues.
But this morning I would like briefly to highlight the
progress that our country has made in one specific consumer
protection initiative, financial literacy, which has been
mentioned several times, but I think it is so important.
Chairman Bachus. What I am saying they mentioned is your
work----
Mrs. Biggert. Oh, thank you, thank you very much.
The House Financial Services Committee and Congress and our
federal agencies and private-sector advocates I think have made
great strides toward achieving our goal to help Americans,
especially young Americans, become literate in finance so that
they can make informed decisions about their financial future.
In December 2003, as part of the Fair and Accurate Credit
Transactions Act, Congress authorized the Financial Literacy
and Education Commission, FLEC. The commission has taken an
important step recently by asking the public for its input on
the development of a national strategy. And I would urge my
colleagues to consider providing their thoughts as the
commission's efforts to develop a national strategy will be a
key focus of the federal government's efforts in this area.
So I think that the commission would benefit from the views
of the members of Congress as it designs the national strategy.
Secondly, financial literacy is certainly a lifelong
process, which ideally begins in grade school with a solid
foundation in economics. And the importance of K through 12
economics as the cornerstone of a lifelong financial literacy
program is one of the reasons why I support the Excellence of
Economic Education program, the EEE program that will develop
competitive grants for innovative success-oriented programs
that deliver economics to our schools.
If our schools don't teach the ABCs of finance and
economics, our children are likely to fall into that behind in
life, especially in today's global competitive economy.
And thirdly, Congress continues to take an active role in
ensuring that our citizens of all ages and walks of life have
access to objective financial education.
Just last week in the Subcommittee on Capital Markets,
Insurance and Government-Sponsored Enterprises, we held a
hearing entitled: GI Finances, Protecting Those Who Protect Us.
And during this hearing it was revealed that our military may
not be as objectively educated as they could be about finance.
So since our military personnel often have unique financial
needs and opportunities, perhaps this is a new opportunity for
us to examine how both the public and private sectors can
effectively coordinate to help educate our service men and
women about financial services.
And then I might note, Mr. Lively, in your written
testimony you mentioned your organization's commitment to
financial literacy and your involvement in FLEC. I want to
thank you for your dedication to our cause and encourage you,
as well as the other witnesses, to expound on your recent
efforts with FLEC and provide your ideas to them as they
develop a national strategy for financial literacy.
So thank you very much.
And thank you, Mr. Chairman. I yield back.
Chairman Bachus. Thank you, Ms. Biggert.
Mr. Ross?
Mr. Ross. Thank you, Mr. Chairman.
And I cannot think of a more appropriate time to be holding
this hearing than this time in our nation's history. I was a
little surprised when I heard one of those who spoke earlier
and before me today talk about this robust economy. In the
country I live in, we have 9 million people out of work. We
have lost a million jobs to China. We have 44 million people
without health insurance and one in five children living in
poverty.
We have the largest budget deficit ever in our nation's
history for the second year in a row. Our government today is
spending $900,000 more than is taken in every 60 seconds.
And because of this, Mr. Chairman, we are seeing more and
more people who need financial help. And that is why I believe
this hearing is so timely today.
I want to thank you, Mr. Chairman, and Ranking Member
Sanders for having this important hearing to discuss various
consumer perspectives about products and practices within the
financial services industry.
With the increase in competition and innovation that has
occurred in the marketplace, the American consumer is able to
obtain a variety of products suited to their needs. I am
concerned that existing federal law has not kept pace with the
speed of the marketplace. I encourage this committee to
continue its review of these laws and update them when
necessary.
I urge the consumer groups to work with industry to ensure
that those who utilize credit products receive adequate
protection while having access to these services.
Again, thank you for convening this hearing, and I look
forward to the testimony of our witnesses in continuing to work
with the interested parties on these important issues.
I cut my statement short in deference to time, Mr.
Chairman, but I would like to submit the entire statement for
the record.
[The prepared statement of Hon. Mike Ross can be found on
page 57 in the appendix.]
Chairman Bachus. I thank you.
Mr. Ross, if you would permit me, you mentioned the
unemployment rate and the job growth. And I simply point out to
you--I think maybe there is a misconception--the unemployment
right now is 5.4 percent. During the 1990s, it averaged 5.8
percent. During the 1980s it averaged 7 percent. And that was
sort of skewed somewhat by the last year of the Jimmy Carter
administration when it reached unbelievable heights, and that
sort of skews the whole 1980s.
During the 1970s it was 6 percent.
So actually they are basically at 30-year lows.
And as for job growth, this year--you talked about this
year--from January to July, the job growth is 62.1 percent.
During the Clinton administration the first time, it was 60
percent, the second time it was 63.
So it actually is growing faster than that mean.
And I know for every person out of work it is a tragedy.
But I think that there is some debate there. I know now is not
the time to do that.
I would like to recognize at this time Mr. Feeney--oh, I am
sorry, I apologize. I did not know you had a response.
Mr. Ross. Absolutely, Mr. Chairman. And if it was not such
a serious matter it would be funny.
Chairman Bachus. We can for the record, because I don't
want to do this to you, I will introduce my things from the
Department of Labor and vice versa.
Mr. Ross. You want to talk numbers that say that the
unemployment rate is down compared to the 1990s, you know, I
can talk numbers about the worst job growth record since
Herbert Hoover. All these things mean one thing: Consumers need
credit and they need access to credit where there are consumer
protections and safeguards in place.
We can talk statistics all day long, Mr. Chairman. What I
am concerned about is real working families.
I was with a lady in her 50s, a woman who is in her 50s, in
Queen, Arkansas, just a week ago who that day lost her job, a
job she had held for 25 years. What complicates it even more is
that she was told that she could keep her health care for $800
a month under a COBRA plan. Her unemployment benefits won't
even be $800 a month.
These are serious times. These are difficult times for a
lot of working families all across America. And I would hope
that we could work in a bipartisan way, not by pointing to this
number or that number, but work to truly try to restore this
economy and put people back to work.
Unfortunately until that happens, we need to make sure that
our consumers are well protected when it comes to being able to
acquire the money they need to put clothes on the backs of
their children and feed their families, and oftentimes in my
district simply be able to afford their manufactured home
payment.
These are tough times. And I hope this hearing today will
go a long way toward providing the kind of protections that our
consumers need when they go to the bank or utilize a credit
card or a payday loan.
And with that, Mr. Chairman, I thank you.
Chairman Bachus. I thank you. I think working in a
bipartisan way is always the best way.
At this time I would like to recognize Mr. Feeney for an
opening statement.
Mr. Feeney. Well, thank you, Mr. Chairman. I appreciate the
hearing. Access to credit for all Americans is important.
One of the concerns I have is that at the State level in
Florida--and I know some 30-some other States have dealt with
the issue surrounding payday lending. These are sort of unusual
loans that fill a niche that traditional lenders are not
interested in.
And I hope we do as we did in Florida, which is to take a
rational approach to this so that we don't, as the gentleman
said earlier, throw the baby out with the bath water.
There are a lot of do-gooders in the media and elsewhere
that would like to make sure that every American, regardless of
creditworthiness or access to assets for security for a loan,
has low-interest loans, and that would be a very ideal
situation. But very few of them are interested in investing
their own capital to make those low-interest loans, people that
have no assets and no creditworthiness.
The fact of the matter is that there are alternatives to
people that do not have access to credit who have very little
assets or no assets and do not have established credit. Some of
them are not pleasant--going to a loan shark and going to a
skylark over time was something traditionally done in the
streets of America. Others are even less pleasant perhaps--
selling drugs or prostitution, other illegal activities. You
have to make that week's rent payment.
Appropriate regulations, like usury laws, are something
that I fully support. I think a lot of the responsible states
have done the right thing. But they have recognized that if
there was a huge windfall profit in this area of lending money
to people with little or no assets and little or no
creditworthiness, that the way free markets deal with that is
for people that see the problem to invest their own capital in
it and go out and make those low-interest loans to people that
cannot get traditional loans at traditional lenders.
So I hope we will approach the payday issue as responsible
States like Florida have done in the past.
Chairman Bachus. Thank you.
Mr. Baca?
Mr. Baca. Thank you very much, Mr. Chairman, for hosting
this hearing that I feel is very important as we look at
protecting our consumers in terms of credit.
I would like to state a little bit in reference to--as we
look at the unemployment. I know that you have touched base,
and I want to retaliate a little bit in response.
Because when we look at 9 million people unemployed right
now and we look at the average salary being at $9,000 less than
we--and we have done more of the outsourcing, that is why, in
terms of technology, credit reporting and everything else is so
important, because a lot of the work really is going
outsourcing.
So it is important to know the new technology, the new
knowledge, and protection of individuals and consumers is very
important, and that is what people should know.
And then the majority of the jobs, when you look at those
jobs that are created, it is not new jobs that are created; it
is people that are doing two or three or four different jobs
and we are counting twice the number, too, as well, and that is
why the numbers seem to be high when in reality they are a
little bit lower.
But we can debate that even further in reference to that.
But all in this area, I think it is important because we
need to protect our consumers.
Today, consumers confront a host of modern technologies
such as electronic banking, remittance, electronic payments
that no one dreamed of just 10 years ago. But the law has not
kept pace. Consumer protection may be too outdated to protect
against consumer abuse.
And we need to make sure that our consumers have trust,
faith and change their attitudes and behavior of how we deal
today with technology in banking. And that is part of the
education, the literacy, that needs to go on.
But people have to have faith and trust. Once we develop
that kind of faith and the trust and the literacy that goes on
and the technology--and changing attitudes, because amongst the
elderly, it is always so hard to change their attitude. ``I
like the way we did banking in the past.'' When we change it,
it is like, ``Do we really have trust in it?"
So we must ensure that consumers have proper information,
that they are not subject to bait-and-switch tactics, that they
are not defrauded and that their funds and nest eggs are
protected from criminal and scam artists.
We must ensure that the consumers are safe and that they
enjoy the best access they can to properly give them to our
banking system.
I thank the witnesses for coming today and I look forward
to asking them questions later on, too, as well.
And thank you very much for having this hearing today.
Chairman Bachus. Thank you, Mr. Baca.
At this time I recognize the gentleman from Pennsylvania,
Mr. Toomey.
Mr. Toomey. Thank you, Mr. Chairman. And I just, too,
briefly want to commend you and the ranking member for holding
this hearing. I think this is a useful exercise.
I hope we are going to hear about how and why the United
States financial services industry has simply become by far and
away that industry which provides the most extensive, most
efficient, most widespread availability of credit to its
population in the entire world. There is no other country that
is close.
And it has been a big part of why our economy has
outperformed the rest of the world, why our standard of living
is the highest in the world, and why our prospects for a strong
economic growth continue to be terrific.
I hope we will also talk about how and why it is that the
best consumer protection out there is the marketplace, is the
fact that consumers have a choice, is the fact that there is a
competitive industry in all aspects of providing credit, and
therefore every player in that industry has to be concerned
about losing customers and therefore providing the best
possible services for that customer. That is how our economy
works, that is how this industry works.
I hope that we can avoid the greatest danger to the
continued growth and availability of credit, which would be
excessive and inappropriate regulation coming out of
Washington.
So I hope we are going to learn more about these things
today.
I want to thank you for holding this hearing, Mr. Chairman.
Chairman Bachus. I thank the gentleman.
Mr. Davis from Alabama?
Mr. Davis. Thank you, Mr. Chairman. And given our time
constraints, I will be brief.
Let me just make two separate points.
The first one, I want to make sure I give the Chair of this
subcommittee an enormous amount of credit. One of the things
that makes this committee I think unique among a lot of the
standing committees in the House is that we have a real
capacity to occasionally get things done on this committee. We
have a real capacity to occasionally find a common ground, as I
sit here somewhere near the middle of this room, we have the
capacity to make things happen on this committee.
I was enormously impressed by the work of my friend and my
colleague from Alabama, who is the Chair today, of a work that
he did in leading us to a bipartisan, effective Fair Credit
Reporting Act last year.
When I came to this institution in early 2003, some very
strong mindset that fair credit reporting would go the way of
bankruptcy reform, an idea that a lot of us would embrace but
that there would be significant partisan backbite around the
issue.
There has been the mindset that, well, it will clear the
House, would not go anywhere in the Senate.
One of the reasons that we have passed that legislation,
the signing of the law by the president about a year ago, is
because of the leadership we share on this subcommittee.
And that capacity to get something done across the aisle is
a mindset that I hope we bring to this set of issues.
Make no mistake, it is very easy for us to talk about these
things in theory. It is very easy for us to talk about these
things in the abstract. The reality is that, particularly for
those of us on this side of the aisle, a lot of our
constituents are unbanked, a lot of our constituents are
outside the reach and the protection of the conventional
financial services industry.
And we can do one or two things with those folks: We can be
so concerned about them in theory that we don't help them in
practice, or we can sit back and condone practices that are
occasionally abusive.
You know, we have to find the middle ground I think between
those two things.
The realities of these final weeks, so we are not going to
get much done at any level. But I am hoping that when we come
back here in January, the 109th Congress, that we will have a
real ability to steer toward the kind of middle ground on
payday lending, on the small lending practices that will begin
to address the real gaps we have in this country.
One final point: One of the most amazing statistics in
America today is the wealth gap between African Americans and
Caucasians. The average assets, when you subtract out the debt,
for an African American family is less than $20,000. It is over
$120,000 for Caucasians. That is a 6 to 1 gap that is not based
on any law that we can change tomorrow, it is not based on the
old kind of segregation or discriminatory practices, but it is
ingrained in our society. We have to combat it. And I have the
mindset that maybe this committee can be a part of that
process.
I yield back the balance of my time.
Chairman Bachus. I thank the gentleman. I appreciate those
kind words.
Mr. Davis is a Harvard graduate. I am beginning to like
Harvard more and more.
[Laughter.]
At this time, I would like to--are there any other members
that have an opening statement?
If not, we will proceed to the introduction of the panel.
Testifying today will be Michael McEneney, a partner in the
Washington, DC, office of the law firm of Sidley Austin Brown
and Wood. His practice focuses primarily on regulatory and
legislative issues impacting financial institutions with
special emphasis on consumer issues. He is a frequent speaker
and writer on financial services issues and has testified
before Congress on behalf of a number of financial services
organizations.
We welcome Mr. McEneney.
And actually he is representing the Consumer Banking
Association here today.
We will also hear from Mr. Randy Lively, president and CEO
of the American Financial Services Association. That is a
Boston-based trade association representing market-funding
financial services firms that provide credit to consumers and
small businesses.
His extensive background includes 22 years with Sears
Roebuck. He also, in 1981, joined Zale Corporation, a national
retail jewelry chain based in Irving, Texas. He is a graduate
of LSU and is on the board of trustees for the National
Foundation for Consumer Credit advisory board for Georgetown
University.
We welcome you.
Our third panelist is Ms. Jean Fox, director of consumer
protection for the CFA. Ms. Fox is an advocate for consumer
protection for the Consumer Federation of America, a nonprofit
association of 300 consumer groups established in 1968 to
advance the consumer industry research, education and advocacy.
She specializes in financial services, electronic commerce and
consumer protection issues.
She is the co-author of many reports and articles on payday
lending. I won't go through--it is a long list.
She is also a co-author of a series of annual reports on
refund anticipation loans. And I know that some of our members
have expressed a particular interest in that--a very extensive
and long background.
I think Mr. Sanders particularly requested that we have
your testimony because he has talked about refund anticipation
loans on many occasions.
Our third panelist is Ms. Tamara Draut. She is the director
of economic opportunity program for A Network for Ideas and
Action, New York, New York. Is that correct?
Ms. Draut. Demos.
Chairman Bachus. Okay, Demos, A Network For Ideas and
Action, thank you.
They manage the development and execution of all research
related to economic security issues, including research on
credit card debt trends, a principal investigator for a
national household survey research project to study the nature
and scope of credit card debt among low-and moderate-income
households.
And she has authored several reports and publications
including ``The Growth of Debt Among Young Americans,''
something this committee has concerns about, ``The Growth of
Debt Among Older Americans'' and several other publications.
She is a graduate of the Columbia University School of
International and Public Affairs and Ohio University EW Scripps
School of Journalism.
We welcome all four of our witnesses.
At this time we will start with Mr. Lively. We will go from
my left to right.
Welcome, you all.
STATEMENT OF RANDY LIVELY, PRESIDENT AND CEO, AMERICAN
FINANCIAL SERVICES ASSOCIATION
Mr. Lively. Mr. Chairman, Representative Sanders and
members of the subcommittee, I am Randy Lively, president and
chief executive officer of the American Financial Services
Association.
AFSA is a national trade association whose 300 member
companies include consumer and commercial finance companies,
captive auto finance companies, credit card issuers, mortgage
lenders and other financial services firms that lend to
consumers and small businesses.
I thank you, Mr. Chairman, for conducting this hearing,
given the importance of consumers' credit in driving our
economy.
As of July 2004, outstanding consumer credit was over $2
trillion, according to seasonally adjusted figures from the
Federal Reserve. Census Bureau figures for the second quarter
of 2004 show a homeownership rate of 69.2 percent, meaning
there are more homeowners in America than at any time in
history.
Credit availability also enables people to buy vehicles
that transport them to work, pay for education and training
that qualifies them for jobs and to start or expand small
businesses.
AFSA members are proud of their role in helping create
advancement opportunities for many Americans and sustaining
growth for our nation's economy. As you know, we supported the
committee's successful effort that led to last year's enactment
of the Fair and Accurate Credit Transactions Act.
We thank you for your leadership, Mr. Chairman, in crafting
balanced legislation that preserves our nation's consumer
credit system.
The FACT Act assures uniformity in our national credit-
granting system and maintains creditors' ability to offer a
variety of products and services to meet borrowers' financial
needs.
In recent weeks, the subject of consumer credit has emerged
on another front with the announcement of the Kerry-Edwards
plan to protect Americans from abusive financial deals. A fact
sheet on this plan says that Senators Kerry and Edwards are
committed to ensuring that responsible consumers continue to
gain access to credit and that companies must be responsible
and must play fair.
AFSA agrees with both of these objectives, but when it
comes to the plan's recommendations on how to reduce lending
abuse, we have an entirely different point of view.
In the short time I have today, I would like to touch upon
two things that we are doing in this area.
The first is our members' code of ethics which includes
voluntary standards in a number of areas, such as mortgage
lending, arbitration agreements and the collection of past-due
accounts. AFSA and its members believe the interest of the
public can be well served by conducting business in a way which
builds and fosters public trust and confidence in the industry.
Each AFSA member is expected to review our code and establish
and enforce their own policies to carry out the letter and the
spirit of these standards.
The second thing to mention is our long-time involvement in
consumer education initiatives for both adults and youth.
The AFSA Education Foundation is a founding partner of the
Jump$tart Coalition for Personal Financial Literacy, whose
nearly 140 partners include government agencies, associations,
educational institutions and consumer organizations all working
together to improve financial understanding in grades K through
12 and on into college.
As the chairman of the Jump$tart Coalition, I am very proud
of its accomplishments and its success in drawing attention to
the need for youth financial education in this country.
Our other major education initiative is MoneySKILL, a free,
online personal finance curriculum from the AFSA Education
Foundation that is aimed at the millions of high school
students who graduate each year without understanding credit
use, budgeting, retirement, or other money management basics.
To date, teachers in 45 states as well as in Canada, Guam,
China, Germany, Malaysia, New Zealand and South Africa have
registered to use the program.
We continue to explore opportunities to reach more students
with MoneySKILL, including possible partnerships that will
allow the curriculum to become available to higher-risk youth.
MoneySKILL consists of 34 modules that students complete in
about 40 minutes each. Within the course's general content
areas--which include income, expenses, assets, liabilities and
risk management--students receive unbiased information on a
number of fundamentals. These include the effect of income
taxes on take-home pay, understanding interest when borrowing,
using credit cards responsibly, how buying a car compares with
leasing one, and understanding different types of insurance and
the costs and benefits of borrowing, to name a few.
Mr. Chairman, we certainly appreciate and welcome Senators
Kerry and Edwards' interest in reducing abusive lending, a
practice that has long been condemned by the association and
its members. And we agree that the industry should take a
leadership role in addressing the problems, which is in part
why we are involved in programs like MoneySKILL and coalitions
like Jump$tart.
At the same time, we are concerned about the impact of
these plans on the functioning of the consumer credit market.
When limits are placed on a creditor's ability to use
performance-based pricing, responsible consumers who pay their
bills on time inevitably bear the burden of higher costs
generated by those who fail to properly manage their use of
debt.
As noted by Federal Reserve Board Chairman Alan Greenspan,
credit-scoring technologies have served as the foundation for
the development of our national markets for consumer and
mortgage credit, allowing lenders to build highly diversified
loan portfolios that substantially mitigate credit risk.
Over the past 80 years, the U.S. financial services system
has evolved into the most efficient in the world and one that
serves more of its population than any other.
Proposals to tinker with the underpinning of this system
should not be taken lightly.
The good news is that we already have laws in existence to
get at the unscrupulous lenders who are defrauding people, and
we ought to do everything possible to enforce those laws to
their fullest extent.
Ultimately, however, the most effective way to deal with
both excessive use of consumer debt and abusive lending is
through education.
Chairman Bachus. Thank you.
Mr. Lively, if you could wrap up.
Mr. Lively. Yes, sir.
Chairman Bachus. Is that a convenient point?
Mr. Lively. It is.
Correct choices by the consumers represent the behavioral
solutions to many of the problems that are being discussed. We
believe equipping people with the knowledge to make decisions
that benefit them, and avoid those that don't, will greatly
improve their financial situations while making our economy
even stronger.
Thank you very much for the opportunity.
[The prepared statement of Randy Lively can be found on
page 103 in the appendix.]
Chairman Bachus. Thank you.
Mr. McEneney, we welcome you to the committee.
STATEMENT OF MICHAEL F. MCENENEY, PARTNER, SIDLEY AUSTIN BROWN
& WOOD LLP, ON BEHALF OF THE CONSUMER BANKERS ASSOCIATION
Mr. McEneney. Thank you very much, Mr. Chairman.
Chairman Bachus, Ranking Member Sanders and members of the
Subcommittee, my name is Michael McEneney, and I am a partner
in the law firm of Sidley Austin Brown and Wood.
It is my pleasure to appear before you this morning on
behalf of the Consumer Bankers Association
Today's hearing is focused on financial products and
services from the consumer's perspective. There is no doubt
that today's financial marketplace looks quite good from the
consumer's perspective.
The financial services marketplace offers consumers a wider
variety of financial products and services than ever before.
Not only can consumers choose from a wide range of products,
but they can obtain them over the phone, using the Internet, or
through personal interaction at the financial institutions'
offices.
Our financial marketplace is truly a success story.
However, the success did not develop overnight or by accident.
In fact, it was not too long ago when retail banking services
looked much different than they do today.
Back then many people had to carry cash or checks at all
times because credit cards as we know them did not exist. And
to get that cash, people had to spend time going to the bank
branch and standing in line for a teller because there was no
such thing as an ATM.
Visiting the bank branch in person was also necessary to
get a loan, and in many instances you had to have an account
with the bank to get that loan. The approval process could last
for weeks, and fewer people qualified for loans than would
qualify today.
There are obviously a number of reasons for the spectacular
evolution of the financial services industry and the ever-
expanding choices available to consumers. However, I believe
that most of these reasons relate to providing financial
institutions with the flexibility to compete fiercely with one
another to provide a better product to consumers at lower
costs.
I would like to use a few examples to illustrate my point.
First, the process by which consumers obtain home mortgages
has been simplified and made more efficient through increased
competition in the marketplace. Today, consumers benefit from
lenders across the country competing with one another to
provide consumers with home loan opportunities wherever they
may reside. Decisions are often made almost instantaneously,
and lenders are able to offer loans that meet a variety of
consumer needs.
Given the number of lenders and types of mortgages
available, creditworthy borrowers are likely to have several
choices when choosing how to finance their homeownership.
Second, I think we may take for granted that a consumer
today can obtain a credit card that suits his or her individual
needs. The credit card may offer frequent flyer miles, the logo
of the consumer's charity, or a rebate on purchases made with
the credit card.
The consumer can also shop for low interest rates and cards
that do not have any annual fees. There once was a time when
annual fees were common and consumers obtained few ancillary
benefits for using the cards.
Today, most people can find an offer for a card without an
annual fee or for a card that offers benefits simply by reading
their mail.
Third, the ability of financial institutions to price their
products in a more precise manner has resulted in enormous
benefits for all consumers.
Thanks to our national credit reporting systems, successful
lenders are able to use the increasing amounts of information
available to them to evaluate and manage risk that allows them
to lower the cost of credit to those consumers that have good
credit history.
But consumers with good histories are not the only ones who
benefit.
Now, instead of a bank offering a one-size-fits-all loan
product to only those consumers with above-average credit
histories, the bank can use risk-based pricing to offer more
consumers access to credit at a variety of risk-based prices.
That means more home mortgages, more college education loans
and more auto loans for safe transportation for consumers of
all walks of life, not just the wealthy or those with perfect
credit histories.
Competition in the market place also means an expanding pie
where those who have been traditionally underserved can enter
the mainstream of our economy.
CBA's members continue to develop and expand product
offerings to satisfy the demands of an increasingly diverse
market. This includes efforts to bank the so-called unbanked
through use of payroll cards, stored value products and
remittance services in addition to offering low-cost
traditional banking products, such as checking accounts. For
example, CBA is hosting a Hispanic banking forum later this
month to highlight bank activities in this area and provide an
opportunity for banks to share their knowledge and experience.
Mr. Chairman, current law ensures that consumers receive
valuable disclosures with respect to financial products. But it
is also important to note that our financial marketplace is a
complex system that relies on providing consumers with choice.
Disclosure laws are important, but they can only do so much
in the absence of fundamental financial literacy on the part of
consumers.
Banks have long understood this point, and that is why
banks have been in the forefront of efforts to expand financial
education.
In April 2004, in fact, CBA published a survey regarding
the progress made in the financial literacy of consumers as a
result of banks' educational efforts. The results of the survey
evidence an increase in banks that participate in consumer
financial literacy education.
In fact, of those banks that responded, a full 100 percent
of the institutions participate in at least one of the eight
areas of concentration.
Although the entire survey can be found at www.cbanet.org,
I would to be able to submit a copy of the survey for the
record.
In conclusion, Mr. Chairman, I would like to assure you
that CBA's members are committed to ensuring that consumers
receive the information they need, including three information
disclosures and financial education materials and
opportunities.
Thank you again for inviting me to appear before you today.
I would be pleased to answer any questions.
[The prepared statement of Michael F. McEneney can be found
on page 109 in the appendix.]
Mr. Tiberi. [Presiding.] Thank you, sir. Thanks for your
testimony.
Ms. Fox?
STATEMENT OF JEAN ANN FOX, DIRECTOR OF CONSUMER PROTECTION,
CONSUMER FEDERATION OF AMERICA
Ms. Fox. Representative Tiberi, Ranking Member Sanders and
members of the committee, I am Jean Ann Fox, director of
consumer protection for Consumer Federation of America.
I am testifying today also on behalf of Consumers Union,
the Center for Responsible Lending, the National Consumer Law
Center, on behalf of their low-income clients, and the U.S.
Public Industry Search Group. The National Community
Reinvestment Coalition has asked to join our comments as well.
We thank you for holding this hearing to look into
financial services from a consumer perspective. And I have to
tell you, from our perspective, the financial marketplace looks
quite different than you have heard so far this morning.
The trends that we are seeing include explosive growth of
quick-cash credit products offered at exorbitant interest rates
and under unfair terms, including payday loans, bounced-check
loans, which banks call courtesy overdrafts, tax refund loans
and other financial products.
Besides seeing an explosive growth in high-cost, quick-cash
credit being marketed to consumers, we have also noted that
there is targeting of cash-strapped and credit-constrained
consumers--minorities, members of the military and the working
poor--for these high-cost financial services.
And we also note the misuse of bank powers to undercut
state authority to regulate the credit market and protect
consumers at the State level.
Besides developments in the credit market, we also have a
lot of developments in the financial services market, with
electronic products coming on the market without upgrading the
consumer protections that should apply to these new ways of
carrying and spending money so that consumers can have
confidence in things such as payroll cards or pre-paid debit
cards, other forms of electronic money. The rules have not kept
up with the developments in the market, and we urge your
attention to that issue.
I would like to speak briefly about a few of the high-cost
credit products that we have concentrated on in the last few
years. But I am interested in answering your questions on any
other aspect of our testimony.
Payday lending has been mentioned by several of you. This
is a very big market. There are $40 billion in loans made per
year. Consumers are paying about $6 billion to borrow money in
$300-or-so increments, paying $15 to $30 per $100 for loans
that are due and payable in full on their next payday, or the
check that they have left behind with the payday lender will
bounce, setting off another cascade of financial problems.
These are small loans subject to state small-loan
regulation and covered by federal credit law, including Truth
in Lending, according to the Federal Reserve and a series of
court decisions.
We have noted that competition does not effectively protect
consumers at this end of the market. If competition did
discipline prices, consumers in Chicago would be paying the
lowest rates for payday loans rather than the highest--
typically 520 percent annual interest for loans in Illinois.
We also note that the payday loan industry best-practices
do not adequately regulate this product. The trade association
best practices say nothing about the cost of the loans. They
don't prevent repeat borrowing, which is one of the serious
problems with this product. For example, in Iowa the average
payday-loan customer at a single lender will have over 12 loans
per year, which is a continuous borrowing experience, not an
occasional quick-cash transaction.
States have dealt with payday lending in a variety of ways.
There are 33 states that have authorized it, two where it is
not prevented by state law, 15 states where it is currently not
legal.
The industry has not been content to stick to the States
where they have legal authorization to make their loans. These
companies have partnered with banks located in states without
usury limits and claim the right to make payday loans in states
where it is not authorized, such as in North Carolina or New
York or Georgia.
The Georgia legislature took action this year to stop that
practice. They enacted an anti-rent-a-bank payday loan law
signed by Governor Perdue, that has been upheld so far in
federal court challenges.
But payday lenders also partner with banks to do business
in ways that exceed the limits of states where the state law
makes it legal to do payday lending. For example, in Texas, the
rules under the Texas Finance Commission allow payday lending,
but under terms that are covered by the state's small-loan law.
So almost all of the payday lending in Texas is done through
rent-a-bank arrangements at much higher rates than Texas rules
allow.
The same problem exists in New York, North Carolina,
Pennsylvania and Michigan.
We have not come before you to ask you to outlaw payday
lending. We think that is an issue at the State level, although
we do think Congress should be concerned that financial
institutions are encouraging consumers to write checks without
money in the bank, and are doing that through FDIC-insured
banks.
But we do urge your immediate attention to the problem of
rent-a-bank payday lending. The FDIC is the only federal
regulator that allows banks under its supervision to partner
with storefront lenders to undercut the ability of states to
enforce their laws, and we ask your attention to that problem.
We are also concerned about the explosive growth in
``courtesy overdraft'' bank bounce loans, a product which we
believe is the bankers' response to how much money the payday
lenders are making by encouraging people to write checks
without money in the bank.
And this is not your old-fashioned overdraft protection
that you apply for and have to be creditworthy to get and get a
contract that the bank will in fact cover any of your checks
that overdraw your account. These are ``courtesy'' programs
where the banks advertise that it is okay to write a check
without money in the bank but do not promise to cover those
overdrafts. Banks charge their penalty fee as if you have done
something wrong rather than something they have given you
permission to do.
And besides covering the checks, these bounce loans also
apply when you put your ATM card in to withdraw cash and you
are allowed to withdraw more money than you have on deposit
without being given a warning of that, asked for your
permission, or given any disclosures on what those cash
advances are going to cost.
We conducted a poll this summer to ask consumers what they
think about key features of bank bounced-check loans, and 68
percent of them said that they think it is unfair for banks to
permit overdrafts without their affirmative consent. An even
greater majority, 82 percent, said that it is unfair for banks
to permit overdrafts at the ATM without notice or warning on
the screen about asking for their consent to advance the funds
and impose a fee.
We have urged the Federal Reserve to modify their proposed
rules in order to address some of the fundamental problems with
bounced-check loans, but we do note for your consideration that
if that is not done, that we need Congress to change explicitly
Truth in Lending so it is clear that cash advances done at the
ATM and by banks that give you permission to overdraw your bank
account is credit that deserves the Truth in Lending
disclosures that every other form of lender has to abide by.
We also note there has been a big growth in the refund
anticipation loan market. This is another form of quick-cash
loan to consumers who are having trouble making ends meet. This
is a bank loan based on your tax return so that you get money
in a day or two rather than waiting a couple of weeks for the
IRS to direct deposit your tax refund into your own bank
account, which is available to consumers for free.
Consumers paid $1.14 billion in loan fees and an additional
$406 million in filing fees in 2002 to get quick-cash loans
based on their tax refunds. And again, banks are partnering
with tax-prep firms in order to export their home state
deregulated interest rate so that a state like Massachusetts
that has a small loan interest rate cap has difficulty
enforcing that in this situation.
Chairman Bachus. [Presiding.] Ms. Fox, if you could wrap
up. We appreciate your testimony.
Ms. Fox. Thank you, and I will be glad to answer questions
on any of these other subjects.
On the question of the credit card universal default, we
think that that should be prohibited. There are so many reasons
why a consumer's credit score could change that have nothing to
do with whether they are paying their bills on time. It is just
fundamentally unfair to change a consumer's interest rate at
one lender because of a change in their credit score of their
experience with another lender. We appreciate your concern
about that matter.
And I would be glad to answer your questions, and thank you
for the opportunity.
[The prepared statement of Jean Ann Fox can be found on
page 77 in the appendix.]
Chairman Bachus. Thank you.
Ms. Draut?
STATEMENT OF TAMARA DRAUT, DIRECTOR, ECONOMIC OPPORTUNITY
PROGRAM, DEMOS: A NETWORK FOR IDEAS AND ACTION
Ms. Draut. Good morning, Chairman Bachus, Ranking Member
Sanders and members of the committee. I want to thank you for
holding this hearing and asking Demos to participate.
As noted, Demos, which takes its name from the Greek word
for people, is a national public policy organization. We are
nonpartisan and nonprofit, based in New York.
As director of the Economic Opportunity Program, I oversee
the organization's research and policy efforts on issues
related to economic security.
Demos began studying the growth of debt out of our overall
interest in the economic well-being of working families. I very
briefly want to share with you one or two key findings about
the growth of credit card debt from our research.
Our research shows that credit card debt has grown most
rapidly among three segments of the population: older
Americans, young adults and the middle class.
Between 1992 and 2001, credit card debt among those aged 65
to 69, presumably the newly retired, rose 217 percent to an
average balance of nearly $6,000. Older Americans are now in
more credit card debt than the average household.
Young adults' credit card debt more than doubled over the
same time period. And middle-income families saw an increase in
their credit card debt of 75 percent.
I want to be clear from the outset that Demos believes the
availability of credit is beneficial to households. Using
revolving credit to pay off large, unexpected expenses, like
car repairs, allows families to spread payments over time,
providing less disruption to the family budget.
Using credit to supplement a family's income during a job
loss can help ensure the family stays afloat and devote
precious income to maintaining the mortgage, rent, or keeping
the lights on.
However, beneficial access to credit becomes all too
destructive due to widespread, abusive and capricious industry
practices.
I would like to focus the rest of my testimony on three of
these practices, all of which ensure many households never get
a fair chance to pay down their debt.
I also want to say from the outset that we fully support
risk-based pricing, the practice of charging less creditworthy
customers more for their credit. I do not think the following
policies fit this criteria.
As Ranking Member Sanders and Chairman Bachus both
mentioned briefly, I want to just touch as well on bait-and-
switch or universal default practices in which credit card
companies routinely raise the interest rate on a card holder
for being late with another creditor.
The resulting rate increase is often double the original
rate and typically ranges from 24.99 APR to 30 percent. Demos
believes this practice unduly punishes many responsible
debtors.
The second practice I would like to talk about is the
treatment and definition of late payments. All the major
issuers now consider a payment to be late if it arrives after 1
or 2 p.m. on the due date, even if, as they say, the check is
in the mail. This zero tolerance policy also penalizes
responsible debtors.
A run-of-the-mill tardy payment now results in a late fee
that averages $31 and a rate increase that is typically double
or even triple the original APR--again, these penalty APRs
range from 24.99 percent to 30 percent.
I want to underscore that these rates are being paid by
cardholders who are not typically considered delinquent or in
default. They may be 1 minute, 1 hour or 1 day late on a
payment. And yet they are paying the same penalty rates that
they would pay if they were behind by a month or more.
Finally, I want to draw attention to the retroactive
application of penalty rates.
Whether a rate increase results from a run-of-the-mill
tardy payment or is due to bait-and-switch practices, this new
rate is applied to all of the cardholder's existing balances.
By applying the higher rate to previous purchases means
that credit card companies are essentially changing the terms
retroactively on consumers and in essence raising the price of
every item or every service purchased previously with the card.
We believe this is a violation of the account terms on
which the cardholder and company agreed upon and which issuers
should be held accountable.
These severe default rates levied on customers who are
paying their bills in good faith, if not always in perfect
time, constitute an enormous and undue increase in the cost and
length of debt repayment.
Indebted families need protection from these punitive rate
hikes and penalties. We urge Congress to consider the following
actions: One, to limit interest rate increases to future
purchases only; two, to prohibit bait-and-switch practices;
three, we support limiting the amount a cardholder's rate can
be raised to an amount no higher than 50 percent of the
original rate. For example, if the original APR is 9 percent,
the rate can only be raised to 13.5 percent.
Finally, we believe it is imperative that a late payment
grace period of three to five days is allowed to ensure that
responsible debtors are not unduly penalized.
While other reforms are certainly necessary, we believe
these modest protections would help give families a fair chance
to pay down their debt and get back on the path to savings and
financial stability.
I appreciate your time today and will be happy to answer
any questions.
[The prepared statement of Tamara Draut can be found on
page 58 in the appendix.]
Chairman Bachus. Thank you.
That concludes our panelists' testimony.
I am going to reserve my questions at this time.
Mr. Sanders?
Mr. Sanders. Thank you, Mr. Chairman.
This has been a very interesting hearing. The testimony has
also been illuminating.
I think Mr. Lively mentioned his concerns about Kerry's
proposal. Raising that issue reminds me a little bit of what
Senator Edwards calls the two Americas. And that is what we are
hearing today, two Americas.
We have heard from some of our Republican friends that the
economy has never been so good, that financial services are
providing all of these opportunities, we have the highest
standard of living in the world--everything is just rosy,
peachy.
And then we hear from other people who are talking about
the decline of good paying jobs, the growing gap between the
rich and the poor, the increase in poverty, the fact that 45
million Americans have no health insurance, that people who are
desperate are borrowing money at exorbitant interest rates.
So let me start off by asking my friends from the banking
community here, let me just ask you--you will excuse me, maybe
being a little personal here, but let me ask you a question
about morality.
Somebody works hard, they lose their jobs. We have lost
close to 2.7 million manufacturing jobs in the last few years.
It happens everyday to somebody. They borrow money. They have
to go to their credit card to pay their mortgage or their rent
or their kids' student loans. And then out of nowhere, for no
particular reason, having paid their credit card loans to the
company on time, every month, their rates go up from 9 percent
to 25 percent. That happens in America today.
Do you think that is moral, Mr. Lively? Do you think that
is moral behavior, something that we should be proud of?
Mr. Lively. I don't think what we are talking about here--I
don't know that I can discuss this in the context of morality.
I think what we are talking about here is creditors are taking
risk in the marketplace. They are the ones whose money is at--
--
Mr. Sanders. If you lend me money and I pay you back on
time every month, and you double my interest rates for any
reason that you want, and I have lost my job and I need to
borrow money--I am asking you a question, a personal question.
We hear a lot about morality in America. Is that a moral
act, in your judgment? Should that be something that we should
condone? Should the people of America condone when somebody
gets divorced or loses their job, having to pay twice the
interest rates that they originally agreed to, when they paid
their bill every single month? Have you ever thought of the
morality of that?
Mr. Lively. You know, I just don't think I can go to the
question of morality in a financial----
Chairman Bachus. What if you just substituted the word
``ethical business practice'' in a----
Mr. Sanders. I mean, you can ask that question, a good
question.
Chairman Bachus. I was trying to assist you.
Mr. Sanders. No, no, no, no, because I think--you know,
what we hear more and more, there are some people out there
talking good versus evil, ``I am moral, you are not moral.''
I think the way we behave publicly has something to do with
morality. There is Biblical phraseology dealing with usurious
rates.
Let me rephrase it: Is it usury when a rich person today
can go to the bank and borrow money at 4.5 percent and a
working person pays 28 percent? Is that usury in your judgment?
Mr. Lively. No, sir, it is not usury in my judgment. It is
the function of risk-relationships applying to the cost of the
services that are being provided.
Mr. Sanders. It is not usury.
Mr. McHenry, is that usury in your judgment?
Mr. McEneney. McEneney.
Mr. Sanders. I am sorry.
Mr. McEneney. Well, actually, if I could, I would like to
comment on both questions.
Mr. Sanders. Start with usury, because I am interested in
that one.
Mr. McEneney. Well, actually, it is not usury, quite
clearly.
Mr. Sanders. Charging 28 percent is not usury when the
prime rate is 4.5 percent?
Mr. McEneney. Well, I think it has to be taken in that
broader context that you asked the question of morality. I am
one of those people who thinks that all people, including
businesses like banks, should conduct themselves ethically and
with a moral basis.
One of the ways that banks do that is by making credit
available to people of all economic walks of life, to people
across the economic spectrum----
Mr. Sanders. We don't have a lot of time, I apologize.
Mr. McEneney. And I think----
Mr. Sanders. But you did not answer my question. My
question is that you lend me money, I pay you back every month
on time. I fulfilled my end of the deal and you double or
triple my interest rates. Do you think that is ethical?
Mr. McEneney. Well, what happens is--what we are talking
about is risk-based practices.
Mr. Sanders. No, no, you are putting the term on it. I am
saying I pay you back every single month on time. I fulfilled
my end. You have doubled or tripled my interest rates. Is that
ethical?
Mr. McEneney. The circumstances under which I am aware that
that happens is quite ethical----
Mr. Sanders. Okay, thank you, thank you. Let me go to Ms.
Fox. We don't have a lot of time.
Ms. Fox, is it ethical if I pay back my loan to you every
single month and you double or triple my interest rate?
Ms. Fox. No, it is not ethical. No, I don't believe that is
ethical and it is not good public policy, and it has an
unintended consequence of putting consumers in a position where
they are less likely to be able to repay everyone else, and it
puts consumers in a downward spiral of unaffordable debt.
Mr. Sanders. Ms. Draut, do you think it is ethical that
some people borrow money at 4.5 percent, and working people who
have fulfilled their end of the bargain, paying off what they
are supposed to pay off every month, on time, are paying 15 or
20 percent? Do you think that is ethical or good practices?
Ms. Draut. Absolutely not.
And I would like to add that this is not about a difference
in creditworthiness; this is about a difference in need and use
of credit. And working families need and use credit more often,
and as a result are paying a much higher price than their
wealthier counterpart.
Mr. Sanders. Ms. Draut, do you have any figures as to how
many millions of people today are using their credit cards to
buy food or to take care of basic necessities?
Ms. Draut. Well, unfortunately there is very little data
out there about why people go into debt, how long they stay in
debt and what they are using their credit cards for.
I can tell you that I would hope to be able to answer your
question in about four months from now when we complete our own
household survey asking those very questions.
I will tell you that in interviewing hundreds of people
through my research at Demos, credit cards have become a Band-
Aid for the family budget. When somebody loses a job, when
there is an unexpected expense, the credit card makes up the
slack. It could be groceries, it can be car repairs.
But most of the people we talk to are going into credit
card debt to cover the mundane, everyday basics of life, not to
get a luxury vacation or designer sneakers or new jewelry.
Mr. Sanders. Thank you very much.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Sanders.
Ms. Biggert?
Mrs. Biggert. Thank you very much, Mr. Chairman.
My first question is for Mr. Lively: How important is
financial literacy to improving consumer experiences in the
financial services marketplace?
Mr. Lively. In the scheme of things, financial literacy is
one of the greatest challenges we have as a society in dealing
with the complexities of our marketplace. And if we are
successful in achieving an improved level of understanding of
how to manage money in today's marketplace on the part of our
majority of our citizens, everyone will benefit from that.
Mrs. Biggert. Then, Mr. McEneney, from what we have heard
there certainly is a marketplace for products such as the
payday lending and refund anticipation loans. Would regulating
these products reduce consumer choices?
Second of all, should we focus our efforts on educating the
American consumer so that they, not the government, can choose
whether or not to engage in such transactions?
Mr. McEneney. Well, first of all, there is no question that
if price were regulated, that is, if the fees were limited for
these products, that many consumers buy and provide a
convenience, many consumers find are extremely important when
they have an emergency need for cash.
There is no question that if you regulate fees, then those
services and loans are going to go away to a significant
extent, particularly for lower-and moderate-income families.
That is obviously an impact that nobody wants.
They are regulated, though, in terms of disclosures. For
example, refund anticipation loans are subject to the Truth in
Lending Act and consumers are provided disclosures up front.
But after receiving those disclosures, the consumers decide
that they really do want the loan.
And in fact, refund anticipation loans are quite popular
with a lot of consumers. I think the numbers I saw were
something in the neighborhood of 60 percent of refund
anticipation loan customers are repeat customers.
Now, having said all that, all these folks get disclosures.
The key is helping them understand what those disclosures mean
and also understanding how to conduct their financial lives in
a way so that they don't get into trouble. And that really goes
to financial literacy.
The importance of that issue I think is reflected in the
fact that organizations like CBA and its members are devoting
enormous resources to try and to get out there and really help
people understand how to manage their finances. Because after
all, the folks who manage their finances well make the best
customers, including for banks.
Mrs. Biggert. Well, we have seen that very few families are
actually saving money, or saving it for a rainy day, when they
have problems. Would a financial literacy education help that?
Mr. McEneney. Absolutely.
Mrs. Biggert. Will they know how much money to put away?
Mr. McEneney. Absolutely. You know, one of the keys is
helping people understand how much money is coming into the
household, how much money goes out for basic expenses, how much
money they have left to save and how much money they can really
afford to borrow.
I think all creditors would agree that consumers that
understand how to manage their debt in a way so that they only
borrow the amount that they can actually repay is better for
everyone. It is the sort of fundamental cornerstone of
successful lending. People have to pay you back, and the more
education you can do in terms of ensuring that people don't get
in over their heads, the better off you are.
Mrs. Biggert. Thank you.
Mr. Lively, Ms. Draut's testimony I think paints a pretty
bleak picture with respect to credit card debt. Do you have any
comment on that? Is that the way the marketplace is really
reacting?
Mr. Lively. Actually, the vast majority of American
consumers manage their debt quite well. The problem is that in
the last 25 years, we have brought into the marketplace,
through the advances in technology, the capacity to understand
through scoring algorithms how to price for risk.
We are now extending credit to a whole new generation of
people who were not there 20 years ago. And many of these
people also grew up during the period of time when we stopped
basically preparing people with life skills to go into the
marketplace.
And the consequence of that is twofold: One, we have a lot
of folks who now have access to credit who are less skilled in
managing the process.
And so as time goes on, we are going to catch up with the
power curve we got behind through the advances in technology.
It is unfortunate that we have these issues. But at the
same time, these issues are growing out of a hugely successful
economic system that continues to grow and embrace more and
more citizens.
Mrs. Biggert. Thank you, thank you very much.
I yield back, Mr. Chairman.
Chairman Bachus. Thank you.
Mr. Sherman?
Mr. Sherman. Thank you. I have a lot of comments, and then
I promise a question at the end.
This idea of a financial literacy--wonderful thing. But it
is like the Band-Aid, like, ``Let's engage in all the unfair
practices possible, protect us from all State regulation, and
don't worry about it because we will send out pamphlets to
people that will tell them not to buy the unfair products that
we are selling.''
The idea that the average consumer is managing their credit
well means that many consumers are in debt $5,000, $10,000,
$15,000 at 15, 20, 25 percent interest, but as long as they
don't default so the banks gets the 15 or 25 percent interest,
that is managing their credit well.
The fact is that the average American family does not have
any savings at all or very little for retirement, and many,
many are paying outrageous interest rates month after month.
Let me endanger my own re-election by criticizing my
bosses, namely the people I represent, and reflect on one thing
and that is, we do have consumers making bad decisions because
we live in a have-it-now, spend-it-now, a nonsaving-oriented
culture.
And financial literacy may be a part of that answer, but a
change in the culture to one more akin to Japan or Europe,
where people save for retirement and they can tap upon that
savings for a rainy day, sure beats a situation where you max
out your credit cards in ordinary life and you need a payday
loan when a crisis comes up.
I realize that is difficult to say because we in Congress
make more money and should have less difficulty running our
financial lives than many of our constituents.
As to sub-prime loans, which we have talked about very
little here, we are in this bizarre circumstance where if you
are a national bank, you have no regulation whatsoever. I am
surprised the whole country is not up in arms over that. But if
you are not a national bank, then the lender is subject to
perhaps thousands of different regulations, and if they make
even one mistake in one city regulation, they get subject to
some big class action lawsuit.
Clearly, we would benefit by having a set of national
standards that is not a lowest common denominator, and I
think--and this is not just a home state thing--should be
patterned after the California standards that are working quite
well if it was not for the OCC screwing them up by lifting them
off the--by causing half the lenders in the state not to be
subject to them.
So I look forward to this committee taking a look at some
prime lending with the idea of making sure that all consumers
in the country get basic protections, good protections, even if
they cannot be everything that some of our panelists would
suggest. That is a much better alternative to having half the
lenders totally exempt from state regs and other half of the
citizens of the country living in states with inadequate state
regulation.
I would like now to turn to Mr. Lively.
I have a bill. The bill says if there is a national
disaster and the president declares it, and often postal
service is out, that if you are late, by just a length of the
national disaster, in paying your bill, which you typically pay
by mail, that you don't get hit with a late penalty.
And basically your organization, as much as any, is the
reason that bill is not going anywhere. And it occurs to me
that maybe you could look in the camera--because there are
people in hotel rooms right now in northern Mississippi,
northern Alabama, they have just fled the hurricane. Maybe they
don't have anything better to do than to watch C-SPAN.
And maybe you can tell them why you think that unless they
happen to have some brother-in-law who's a lawyer who can get
on the phone and yell with one of your service representatives,
why the average person fleeing this hurricane is going to get
hit with late charges and why you are here to defend that as a
national practice.
Mr. Lively. Virtually every one of the companies who
provide services in the marketplace have specific policies to
deal with the kind of national----
Mr. Sherman. And you know, sir, what those policies are. If
you are smart enough and savvy enough and you tell it to the
right person and you use just the right words, then they will
lift it. But if you are an ordinary consumer, bang, use the
hurricane in order to impose penalties.
Why are you opposed to simply having a statute that says,
``no penalty for people who are mailing their checks from an
area of a national disaster for the length of time of that
presidentially declared national disaster''?
Mr. Lively. We have a program in the education foundation
of AFSA that provides consumers with information on how to
interface with their creditors in the event of one of these
kinds of disasters.
Mr. Sherman. So get an MBA or get----
Mr. Lively. Sir, excuse me, but the companies stand tall at
the end of the day because they do indeed look after their
customers.
Mr. Sherman. The fact is, the vast majority of those people
who are fleeing this hurricane are going to get hit with late
penalties, they are not going to read your pamphlet, you have
not given them the pamphlet, they have better things to do than
to read your pamphlet. The pamphlet won't tell them exactly how
to deal with each and every lender.
And lenders who are members of your organization don't want
a simple computerized rule that says if you have a
presidentially declared disaster, that should not be a profit
center for the bank.
I yield back.
Chairman Bachus. Thank you.
Mr. McEneney--did you want him to answer?
Mr. McEneney. I was just going to ask if I could comment on
this whole issue of the national disaster and the late fees. I
think one of the things that Mr. Lively was referring to is
that there is actually a history here in the credit card
industry of dealing with these sorts of issues in a way that I
think meets the objectives of your bill.
For example, I know Chairman Bachus, at one point in the
not too distant past, worked with folks in the credit card
industry in connection with some of the mail disruptions that
occurred post-9/11. What the industry did was voluntarily to go
ahead and ensure that people were not imposed late----
Mr. Sherman. Only if you call, only if you say the right
words, only if you are savvy. And why are you opposed to a
national standard that will apply even if the disaster happens
to a constituency whose member of Congress does not work out a
special deal, because you are looking for a profit centered out
of the hurricanes. Shame on you.
Chairman Bachus. Mr. Sherman, actually they waive their
fees in all cases.
Mr. Sherman. On a case-by-case basis.
Chairman Bachus. No, I mean on the 9/11. The industry----
Mr. Sherman. When the pressure gets hot, when the member of
Congress is able to shame them on a particular disaster. But
the fact is, they have got no policy for this hurricane. Nobody
here can say, as an automatic rule in the computer--not when
you call, but in the computer--that the victims of this
hurricane are not going to get hit with late charges.
Now, 9/11, under tremendous political pressure they decided
9/11 would not be a profit center.
Chairman Bachus. I think it would be tremendously complex
and the national disaster does not have a time period, for one
thing.
Mr. Sherman. I have a bill. If we have the markup of that
bill, I assure you that the practical problems will be worked
out. It is a short bill. We can certainly provide--or we could
just say two weeks, and that would solve this for an awful lot
of people. The bill is 2549, and I am looking for co-sponsors.
Chairman Bachus. And certainly one thing we are doing with
this hearing today is bringing these things out. I welcome you
pointing that out.
Mr. Toomey?
Mr. Toomey. Thank you, Mr. Chairman.
Just to follow up on this idea, my thought on this is:
There are lots of nice things, tangentially related services,
that businesses can offer their consumers, their customers,
including banks, credit card providers, others. It is a very
long list. And some do and some don't.
I think the question here is: who ought to drive that
process. Should it be consumers making choices amongst
competing firms that are offering different services--that is
what you call a market economy, that is what you call economic
freedom, that is what you call the system that is generated the
most wealth and opportunity in the history of the world--or
should we sit here and dictate it and issue fiats and say, ``We
don't really care what consumers prefer, we don't really care
what businesses want to offer, what business model makes sense.
We are simply going to demand that you provide certain set of
services or benefits that we will dictate.'' That is really the
choice.
I, for one, think that as much as possible we ought to
stick with the former model, because that is the one that
clearly has been much, much more successful everywhere in the
world it has been tried.
As for one specific issue I would like to touch on, it has
to do with this idea that is characterized in Ms. Draut's
testimony as the bait-and-switch tactic. And I just have to
comment and then I will have a question about this.
First of all, I was in the financial services industry for
a few years in a capacity in which in some respects we extended
credit in the area that I was in. I have also been a small
business owner, and in that capacity I have been a borrower. So
I have been receiving credit.
Now, every loan document that I ever saw, whether I was
with a bank or whether I was in my restaurant business, every
one that I can ever remember had a provision in there that
says, ``Notwithstanding whether you are current on the loan
that you have either lent or borrow,'' as the case may be, ``if
you default on another obligation that you have somewhere else,
then this loan,'' on which you are not in default--or I should
say not in a payment default--"this loan will be considered to
be in default as well.''
And there is an obvious and simple reason for this, and
that is because if somehow I have become unable to make my
obligations with respect to another lender, it is pretty
reasonable to assume that my creditworthiness has diminished,
and that is why I am in default to this other lender, whoever
he may be.
Mr. Sanders. Would the gentleman yield?
Mr. Toomey. Let me finish my point. This obviously
addresses something.
But I have to be very honest with you. It never ever
occurred to me, on either side of this transaction as a lender
or a borrower, that it was somehow unethical for a financial
institution to acknowledge that my creditworthiness has changed
and therefore the circumstances under which I am borrowing
money has changed and therefore--in fact, in the cases that I
am alluding to, it was not a question of an increase in
interest rates; the lender had the full authority to accelerate
the loan and demand full repayment immediately, and if I failed
to do that, I could be put into bankruptcy.
I, to this day, believe that is an extremely reasonable,
perfectly ethical arrangement. It seems to me that is about
evaluating risk and pricing it accordingly.
Now, you could take the view that we should not price-risk,
that we should have a uniform standard, sort of socialistic
model that says, ``Regardless of your ability to repay,
regardless of the change in your circumstances to repay, we are
going to have a single uniform rate.'' You could do that. It
would result in an extremely inefficient allocation of capital,
it would result in higher prices being paid by people who are
not in default, who are paying their bills, and I would not
advocate that we go in that direction.
So my question is--after my question I will be happy to
yield to the gentleman from Vermont--but my question is: This
provision by which a rate goes up when someone is in default on
another obligation, I would just like to ask you folks whether
you consider that to be a matter of adjusting prices for risk.
And if you could just sort of go down the row, I would
appreciate it.
Mr. McEneney. Yes, sir, it is.
The only circumstances in which I see the types of changes
that you are talking about are clearly circumstances where you
are pricing for risk, and it is also clear that it is ethical
if it is done the right way.
Consumers receive disclosures, being told that this could
happen. And unless those disclosures are made, it is not only
unacceptable from an ethical standpoint, it is against the law.
Ms. Fox. We think it is simply an unfair business practice
to change the price on debt that consumers have already
incurred under an agreed-upon rate when they are not behind in
paying that particular creditor.
Mr. Toomey. Do you agree that the failure to make a payment
on another obligation is a reflection or certainly can be a
reflection on the change in the creditworthiness of the
borrower?
Ms. Fox. It could mean that another creditor made a
mistake, it could mean they are counting you as late because
payment came in at 2 o'clock and not 1 o'clock----
Mr. Toomey. And could it be that there is a change in the
creditworthiness?
Ms. Fox. It could, but a creditor can adjust to that by,
for example, on a credit card, lowering the credit limit rather
than raising the price. There are other things that can be done
without turning this into a profit center that consumers view
as a gotcha.
Mr. Toomey. Do you think it also should be forbidden in the
corporate environment? If it is unethical to do this with the
consumers, is it unethical to do this with a small business
owner?
Ms. Fox. Well, I try to represent consumer protection
issues, and I don't speak to what happens with businesses. I
would think that a business owner would be much more likely to
be on a more level playing field with a lender, whereas the
consumer credit contracts, these are contracts of adhesion.
They are not negotiated between the consumer and the credit
card bank; they are take-it-or-leave-it agreements. They don't
have the same leverage that you would have as a business owner.
Ms. Draut. One of the additional issues with the bait-and-
switch practices is that credit card defaults, or default with
another credit card, is not the only reason why a person's
credit score would fluctuate or decrease, or go down in point.
Oftentimes that may happen because they have actually taken on
what I think most people would agree as productive debt: a new
mortgage, maybe a new auto loan.
So it is not just about penalizing cardholders for being--
--
Mr. Toomey. Are you prepared to acknowledge that taking on
additional debt is often an indication of diminished
creditworthiness?
Again, going back to my little experience, one of the other
provisions in these loan agreements was always that before you
took on additional debt, you had to get an approval from the
bank that was lending money in the first place because
obviously too much debt diminishes your creditworthiness.
See, every way you look at it, it seems to me this is very
often a reflection of risk.
Chairman Bachus. Mr. Sanders?
Mr. Sanders. I appreciate my friend's remarks. But in your
opening thoughts, you used the word default, which I understand
it means that you are late for 90 days and not paying your loan
off. Do you see that as the same thing as somebody paying their
loan at 5 o'clock in the afternoon rather than 2 o'clock being
one day late--that is number one.
And the second issue: As you well know, credit card
companies are substantially raising interest rates for no
reason whatsoever. They tell you that they are going to charge
you 7 percent and they double it for no reason at all. Do you
think that that is appropriate?
Mr. Toomey. I think that if credit cards come out of the
clear blue for no reason and double their rates, they are going
to find they are losing a lot of customers and it is not a
sustainable business practice.
So I think that the market is going to just prevent that
from happening in a whimsical fashion.
Mr. Sanders. I would disagree. Credit card companies are
making huge profits. And as you know, in a busy world not
everybody looks at their interest rates. Right? You know that.
What they are looking at is they owe $50 at the end of the day.
I would hope that my friend would acknowledge that there is
a lot of rip-off and unethical behavior going on here.
Chairman Bachus. Let me interject. I actually taught this
course in law school. It is an extremely complex issue.
Years ago we had divided courts of law and equity, and
people would go into the equity court many times when debts
were accelerated and the equity court enjoined that
acceleration.
There are numerous exceptions being able to accelerate
them. There would have to be reasonable causes.
What happens in a consumer standpoint is, they cannot go in
and litigate each one of these where a business can.
It is not an altogether simple matter.
With credit cards today, you know, you have 20 pages of
small print, and they do have the contractual right to do it.
There are laws on the books, however, but who is going to
go into court over $100 and advance those laws.
Ms. Fox. Mr. Chairman, could I point to that as well?
These are retroactive rate increases. Consumers have
obligated themselves for debt on their credit card at a certain
price that they think they can afford. And if that interest
rate is increased after the fact, and it applies to their total
balance, now you have a purchase at a higher price that you did
not budget for, that you don't have the capacity to pay.
And these are open-end credit transactions, not a closed-in
loan that would accelerate if there were some change. We just
think this is unfair to consumers, it undermines consumer
confidence in the market, and it needs to be stopped.
Chairman Bachus. It is an extremely complex issue. There is
impairment of credit.
As Mr. Toomey said, I think in a lot of these cases, what
allows them to do that is that there is something in the
contract which says you have to receive permission. And that is
true of almost--and that is why most of your business loans are
accelerated because there are provisions in the original loan
saying you are impairing credit.
And credit cards, I am not sure that that--in fact, in
mortgages, in certain type, you know, State laws and federal
laws actually prohibit acceleration.
I will say in defense of this committee, this committee
almost overwhelmingly--Ms. Maloney offered an amendment, Mr.
Sanders and I offered one, and there was a substitute by Ms.
Maloney, and it overwhelmingly passed this committee in an
attempt at least find a middle ground, and I think 90 percent
of the members on this committee, if not 100 percent, it may
have been unanimous, to address this issue.
It went to the House; it passed unanimously. And it went
over to the Senate, and I am not blaming the other body, but
when fair credit reporting came back to us, it was not on
there.
This is a very emotional issue. I know there are members of
this committee that have switched their opinion after they
were--at least one high-ranking member of this committee that
voted against Mr. Sanders' and my amendment, after he felt like
he was bait-and-switched, he switched sides.
Obviously the problem with it is, there are obvious cases
of tremendous abuse where people abuse it, get a lot of credit
cards and they milk the system.
It is an issue that is with us, and hopefully in the future
we will continue to look at it.
In defense of this whole committee, we came to a common
ground in the House as to at least, you know, I think an
appropriate thing.
Mr. Ross?
Mr. Ross. On the issue of credit cards: You know, every
week, just like every other member of Congress, I drive 2 hours
to the airport--I guess some don't have it quite this bad--but
I drive 2 hours to the airport, get there an hour early, and
then fly to Memphis and wait and hour and a half and then fly
to D.C., and then a few days later do it all over again in
reverse.
On the trip, the 2-hour trip from the airport to home each
week, I go through my week's worth of personal mail. And I have
been keeping a tally. On average--some weeks are more, some
weeks are less; this tally has been going on for, well,
approaching a year now--on average I will receive eight credit
card applications per week.
My first question is: How many credit card companies are
there? Can anyone answer that for me?
Mr. McEneney. I think there is something, like, in the U.S.
10,000-or-so different banks that issue credit cards.
Mr. Ross. So eight times 50, so it is about 400, I am
hearing from about 400 of them a year. So I have a ways to go.
You know, and I cannot help but think--I can remember when
my wife and I were both in college and literally getting by on
$400 a month. And thinking back to those days, you know, when
you need new tires or your transmission breaks down or your
washing machine breaks, for a lot of families that are barely
getting by and for a lot of families that are living paycheck
to paycheck, you know, maybe that first, second and third
credit card application in the mail, they just throw away
because they know they cannot afford to make the payments on
it, they know they cannot afford the interest rates that come
with it, they know that if they ever start using that card they
will never get caught back up.
But by the time that sixth, seventh or eighth credit card
application rolls around and they have a sick child or they
have a car broke down, a lot of them are filling them out. And
they are building up a debt, a debt that has now reached
epidemic proportions, as is evidenced by the mass, a huge
number, exorbitant number of bankruptcies that we see in this
country today.
Now, granted a lot of those bankruptcies are coming from
the 44 million people in this country who cannot afford health
insurance. But a lot of them are coming from credit card debt.
And that troubles me. And I understand there has got to be
some personal responsibility there and people have to think for
themselves and make decisions for themselves.
But, folks, you know, when you get eight applications a
week, sooner or later the enticement is going to be there. You
know, when you are down on your luck and you need the money to
go ahead and go for it, and then you spend the next few years
trying to get out of debt, and when you cannot do it, then you
file bankruptcy, which is certainly not good for anyone in this
economy that we live in today.
What I am confused about--and I don't who at this table can
answer this question.
I own a small business back home. I have 12 employees, so I
know what it is like to meet a payroll every Friday.
I had an employee not too long ago that had run up one of
these huge credit card debts and they were charging him 20-
something percent. Just a low-to middle-class worker, working
hard to support his kids. And he showed me one day, you know,
and I look at it, and it was, like, in excess of 20 percent
interest, and there was no way he was ever going to get caught
up.
So I picked up the phone and I called the credit card
company, did not tell them I was a member of Congress, I was
just, you know, Joe Smith off the street. And I was able to
negotiate a settlement for him to where if he paid it off--he
paid something like, I want to say it was 35 cents on the
dollar.
I mean, if credit card companies are able to take those
kind of hits, there is got to be a lot of profit in this
somewhere. And if I am just not following this thing--you all
help me, whichever one of you think you are smartest on this
issue, speak up, please.
Ms. Draut. I would like to answer that question.
I think you raised two questions.
I want to go back to your original question about how many
credit card companies are there, because this has come up many,
many times during this hearing, this issue of competition, free
market, choice for consumers.
And I just want to point out to the committee that there
are about 10 issuers of credit cards that control close to 80
percent of the market. Of those 10, we just had four merge into
two. So we are going to have even less market competition in
the credit card industry.
There really are not that many choices for consumers,
because all of the major issuers follow each other's lead and
engage in the same practices.
And now I am forgetting the last question you had that I
volunteered to answer. I apologize.
Chairman Bachus. Just ask the question over again, Mr.
Ross.
Mr. Ross. What I am trying to find out is, if you can
settle for 35 cents on the dollar, then there must be a lot of
profit somewhere in this business.
Ms. Draut. I wanted to mention that not every card company
will agree to negotiate or to bring the card member's rate back
down. It really depends on the luck of the draw. If you happen
to get with a company that is open to helping you out, you are
very lucky.
We have talked to a lot of people--and Mr. Meeks shared his
personal experience, I want to share mine.
I have been penalized for a 1-minute late payment, called
the creditor, said, ``Why am I paying 27.99 percent?'' No
negotiation. ``That is the rate, Ms. Draut, I am sorry.''
So it is not across-the-board policy that card companies
will in fact work with their customers to help them pay down
the debt.
Mr. Ross. Would you suggest that before people file
bankruptcy that they reach out to these credit card companies
and try to negotiate a settlement?
Ms. Draut. Absolutely.
Mr. Ross. And again, I think that gets back to the basics
we need: financial literacy.
You know, we have kids graduating from high school today
that can do math I could not do in college and I cannot do it
today. But they don't know how to balance a checkbook. They
don't understand that when you borrow money you got to pay it
back.
We need financial literacy in the classroom today, I
believe.
Mr. McEneney. Congressman?
Mr. Ross. Yes?
Mr. McEneney. Could I just add something to the answer?
You talked about the applications coming in. That is a
reflection of the competition, the fierce competition, amongst
these various players that really helps drive the cost of
credit down, including credit card credit, and make it more
widely available to all sorts of folks.
Now, on your question of, you know, can you take 35 cents
on the dollar. The truth is, you cannot take 35 cents on the
dollar too many times. But one of the only ways you take 35
cents on the dollar in the situation you talked about is if you
are able to price for risk.
What that credit card issuer was able to do is determine
that a certain number of people are going to default and to set
the interest rate, the price, at the appropriate level so it
could accommodate----
Mr. Ross. Well, with a 21 percent interest rate, they must
have been thinking a lot of people were going to default.
Mr. Chairman, I have one other very important----
Chairman Bachus. And actually, Mr. Davis, if you--what we
will do is, I will give you an additional--actually we have two
other members that have not----
Mr. Ross. We can come back.
Chairman Bachus. Mr. Davis?
Mr. Davis. Thank you, Mr. Chairman.
The panelists should know the one way to get us inside the
5-minute rules is for votes to be called. So that is what
happened. So it may make us all a little bit briefer.
Let me try to pose several quick questions. Let me start
with Mr. Lively and McEneney.
One of the goals of this hearing has been to try to flesh
out and identify possible areas of reform, possible things this
institution can do that might create a fair and more equitable
lending world.
Are there any institutional changes or any pieces of
legislation, are there any reforms that are not on the books
today that either of you would embrace, that you think would be
salutary and would be helpful for the industry.
If you could each mention maybe one or two each.
Mr. McEneney. From my perspective, the key would be to
focus the folks that are having difficulty repaying their
debts, really come up with a solution that focuses on them.
You cannot restrict rates. If you restrict rates, you
reduce credit availability to all sorts of people who pay their
debts on time.
So I think the solutions have to focus on the people who
are struggling. What is it that is going on with those folks
that we could possibly help them with?
And I think the biggest issue, and probably the biggest
thing we can do, is find ways to provide financial education so
that they understand the economic consequences of the choices
they make when they take on debt, and they can understand how
much debt they can and cannot afford, and also to quite
honestly drive them to develop habits to promote savings.
Focusing on financial education I think is the one most
important thing we can do.
Mr. Davis. Is your answer essentially the same, Mr. Lively?
Mr. Lively. Just a little more meat on that answer, and
that is, we have ourselves confronted with a conundrum here in
terms of the basics of communication about all of this stuff.
On the one hand we have disclosures that are intended to
inform and educate that are fairly extensive. In every
agreement, you have just got a lot of disclosure.
One of the problems with that disclosure is the lack of
understanding of financial issues causes the consumer not to
pay attention to the disclosures. So when they get confronted
with a change of terms that is arisen out of an agreement that
is in the contract, they get very upset about it. And the
fundamental is that circumstances that were previously agreed
to have been imposed because of the change in the consumer's
behavior and capacity, and that leads us into a cry for more
disclosure or for some other remedial action.
The fact of the matter, if we can get people better
educated in the scope of managing their personal financial
affairs, they will avoid a lot of these things because they
will have thought them through and they will understand better
how to manage their affairs.
Mr. Davis. In the interest of time, let me ask a slightly
different question to you all: Are there any institutional
changes or proposed reforms that either of you think might
potentially--speaking to Ms. Draut and Ms. Fox now--that either
of you think might potentially go too far, that either of you
think might have the perverse effect of constraining the
availability of credit?
Ms. Draut. Well, that is a good question. And I don't think
we have enough information, really, to answer that question
accurately.
I don't think that we can just take opponents of some re-
regulatory steps' word for it. I think that is the easy answer
and the easy fear to put out there, that we will shut off
access to the credit market. I think we need a lot more
research and understanding. We need to model the effects of
certain regulatory steps and see what the real effect may be.
Mr. Davis. One quick question, because our time is running
down, and I want to certainly give Ms. Maloney adequate time to
ask questions.
As far as the payday lending institutions go, I understand
that in an ideal world you probably would favorite it if they
did not exist at all, but it is not the world that we live in.
They exist in a number of states.
If you had to design two characteristics that would make
payday lending institutions more equitable and more
responsible, what would those two characteristics be?
Ms. Fox. That they not be allowed to ask consumers to write
checks without funds on deposit to secure the loan, and that
the rate and repayment terms be affordable so that consumers
can actually manage to pay off the loans without getting caught
in a debt cycle in order to keep their checks from bouncing so
they can pay off these loans.
It is the single balloon payment and the very high rate and
the fact that they are holding your check that turns what
should be a regulated small loan into a debt trap.
Chairman Bachus. Thank you.
Ms. Maloney?
Mrs. Maloney. Thank you very much. I would like to thank
you and the ranking member for your leadership on consumer
protection issues and other items before this committee.
As was mentioned earlier, we all worked together on the
bait-and-switch. It was my compromise on the floor, that at
least should be notified of any change in rate. It was removed
from the bill in the conference committee.
But I would like to hear your feelings on notice for cash
advances. A lot of times you will have a credit card at 6
percent or 7 percent, yet the cash advance jumps dramatically
to 19, 20 percent. And I certainly think there should at least
be notice, that people understand that.
I remember I put one bill before this body that there was a
great deal of opposition to. And it merely required for notice
for ATM machines, that if you are going to charge a fee, then
at least let the consumer know that the fee is being charged
and let them make that decision.
I gladly pay my ATM fee because of the convenience of being
able to get to my checking account here in Washington or
wherever.
But I think at very least, there should be notice and I
would like your comments on that.
But I want to ask you a question about an item that was
actually on the floor today and debated on the floor today, and
it was on the floor this morning, and it was basically the
efforts of the OCC to preempt State banking regulators.
A number of us on this committee are concerned that the
result will be to deprive our constituents possibly of the
consumer protections that they have at present in their
localities and States. We are not sure that OCC has the
resources or the knowledge to duplicate the efforts of the 50
states.
Legislation has been introduced by one of our colleagues,
Congressman Gutierrez, to address this problem. It was on the
floor today in the form of an amendment. But this subcommittee
has not addressed it yet, and I hope they will.
But I would like to ask the witnesses about the OCC's
letter yesterday--I don't know if you have had a chance to see
it--in which they advised that certain credit practices are not
acceptable for national banks. And is that effort enough? How
does that effort compare to State regulation on bait-and-switch
and other areas? Do you have a view on the OCC's preemptive
efforts?
Mr. McEneney. I would be happy to respond to that.
First, I have heard that folks may be concerned that the
OCC's preemption efforts may reduce consumer protection in some
way. But I think when you step back and look at the
extraordinary powers that the OCC has--and the letter is an
example of that, which I will come to in a second--to regulate
the banks that are within their jurisdiction, it really is
extraordinary.
They have the authority to regulate, which is to tell the
banks what they can and cannot do; they have the authority to
examine them, which is to come in and figure out whether the
banks are doing that or not; and to supervise them, which is to
say, if they don't like the direction a bank is heading in,
they can stand over the bank's shoulder and say, ``We would
like you to go in this direction.'' And if they still don't
like the way it is going, they can take the wheel and direct
the bank more firmly.
What that enables the OCC to do is to issue things like
this advisory letter--now, some folks say, ``Well, it is just
an advisory letter.'' I can tell you, advising national banks,
there is no such thing as just an advisory letter.
What this letter means, if you are a national bank, is, you
better pay attention.
And I can tell you, across the country over the next few
days and weeks, national banks will be looking at that letter,
going back to their practices, figuring out whether any of
their practices raise issues under that letter, and if they do,
change them. And if they don't change them--which I think would
be the exception--examiners will come in and change it for
them.
It is extraordinary power, and what it results in is this
extremely efficient mechanism that the banking agencies have,
like the comptroller, to impact behavior simply by having
access to a word processor.
They send out this notice, it impacts behavior throughout
the country, and that is far more efficient in terms of
regulating and addressing abusive practice than any other
mechanism I am aware of.
Mrs. Maloney. Any other comments?
Ms. Fox. Mr. Chairman, may I respond also to this question?
We think that the committee needs to finish its action on
curbing the sweeping preemption of state law that the OCC has
attempted. We did have a chance to look at the advisory that
was issued yesterday, and we think that draws attention to the
issues that you have been discussing. Some of the requirements
are going to be quite helpful.
But simply disclosing the markup of interest rates because
of a change in the consumer's creditworthiness, this does not
go far enough. This needs to be prohibited, not just disclosed.
Mrs. Maloney. Thank you.
Would anybody else like to comment?
I cannot walk as fast as the chairman, so I have to run to
go vote. He beats me to the floor every time.
Thank you for your testimony and your work.
Chairman Bachus. Thank you.
I am going to close out the questioning. I will ask any
other committee members that if they have questions, we want to
give everybody plenty of time. This is an important issue,
consumer issues.
And I will ask, Mr. McEneney, does the federal government--
whether that be Congress or the Federal Reserve--have a role in
the regulation of interchange fees, particularly in the
movement of so many transactions from cash or checks from which
the regulatory role is very clear to debit or credit
transactions?
Mr. McEneney. Mr. Chairman, I would be happy to answer
that.
I should probably quickly point out, though, that I don't
represent the companies that are involved in the interchange
process on that issue, but I would be happy to respond based on
my general knowledge of the industry.
Chairman Bachus. That would be helpful.
Mr. McEneney. You know, I think when you take a look at
what interchange fees are, they are fees that are charged to
banks that are parties to a payment card transaction, and the
fees are set among those banks, commercial enterprises.
And so I think point number one is, it is not a consumer
fee; it is a fee that is set amongst commercial enterprises.
And I think typically Congress and the federal agencies would
not get involved in that sort of fee arrangement.
The other thing I would point out is that given the
competition that exists in this arena, with checks and cash and
all sorts of payment cards, a wide variety of different payment
methodologies competing, it would not seem that there would be
a need to get involved in that issue on that basis as well.
And the final point I would make is that I think there are
real distinctions between the federal regulators' involvement
in cash and checks--which obviously are heavily dependent on
the federal government, if not exclusively dependent on the
federal government--to effectuate--either issue those payment
methods, in the case of cash or to process the payments in the
case of checks, I think those types of payment methodologies
are totally distinguished from these private-sector
organizations through negotiations with different commercial
enterprises--set the prices.
And I really think for the federal government to get
involved in that arena, it would be unprecedented, and I think
probably have consequences potentially that would cause more
harm than good.
Chairman Bachus. Thank you.
Ms. Fox. Mr. Chairman, could I raise a related point?
These new forms of payment that depend on the electronic
system that are developing outside the consumer protection laws
have given consumers confidence in using credit, and to a
lesser extent debit cards, for a long time.
And we do note that this week the Federal Reserve announced
proposed changes to reg E, which implements the Electronic
Funds Transfer Act, to apply those protections to the payroll
cards. That does not go far enough. It needs to apply to all
these new forms, a debit card that effectively takes the place
of a consumer having a bank account note.
We don't have the liability limit, we don't have the
dispute process, we don't have the disclosure requirements. We
don't even know if FDIC insurance applies to the pool that
store value cards draw from in all cases.
This is an area that we would urge this committee to
examine as you go forward next year of harmonizing the consumer
protections that apply to all forms of consumer payment
mechanisms so that consumers don't have to know that there are
three different ways their check can be processed, for example,
depending on whether it goes through as paper, if it goes
through the check-21 process, or if it is done through lockbox
conversion at the place where you sent your mortgage payment.
Consumers have no control over that, but they don't know
what the rules are because they are different every way that
payments are processed. We really need to address that.
Chairman Bachus. Thank you.
I will just close with a comment, if other members don't
have questions.
This committee has tried to take a multiple approach to
this whole issue of credit, availability of credit,
creditworthiness and consumers and their rights and obligations
under what is widespread availability of credit, which creates
many opportunities but problems.
One of the things we have done is try to encourage them to
migrate or utilize your credit unions, banks, more mainstream,
get them into more mainstream financial institutions where the
costs are less than, say, some of the, you know, check cashers,
payday lenders, things of this nature.
Secondarily, we do think financial literacy is very
important. You know, for many young Americans, financial
literacy is getting overextended on a credit card. That is how
they learn.
Unfortunately, what sometimes is available to the upper
class and the upper middle class, income-wise, is a whole
different world for those who don't have the resources to learn
in a painless experience. For instance, if an upper middle
class or upper class child from those families gets
overextended on a credit card, it probably means a visit to
mother or dad and they bail them out, and then they caution
them not to let that happen again.
With low-income kids, with low-wage earners, that is simply
not possible.
Plus, financial literacy only--I think when you say
financial literacy, know who you are dealing with, know what
the contract is.
I think with the credit cards, okay, what is the rate? The
rate is going to be that way for a year, okay. And you would
have to read 25 pages and really have a law degree to figure
out that that payment could change without you ever missing a
payment.
And what I have done, I have actually--in 10 years I have
had interest rates change on me, to my surprise. What I am able
to do is write--I won't mention names. But other people, what
they have done is simply paid it off and gone on. Well, pay it
off and get another credit--you know.
That is not available to some people. They don't have
$3,500 in the bank, see that their rate has gone up, get
annoyed, write a $3,500 check and pay it off, or $1,500. It
just simply--that is not an option for them.
So sometimes our own experiences--members of Congress on a
salary of $160,000 is really not the experience of the average
American in coping with these changes.
So these are difficult issues. This is why we had this
hearing today.
And we welcome your testimony today. I think one benefit of
it will be to read over your testimony closer in the weeks to
come and hopefully come to some consensus. Because we do have,
among young people in particular--Mr. Draut, you mentioned
certain at-risk populations. It is an unmanageable problem for
them in many respects.
We have to be, as Mr. Hensarling and Mr. Toomey said, we
have to--in our system there is just a certain amount of
paternalistic things. Government cannot be mom and dad. It
cannot be the rich uncle.
But we appreciate your testimony. We appreciate all your
testimony.
At this time our committee stands adjourned.
[Whereupon, at 12:40 p.m., the subcommittee was adjourned.]
A P P E N D I X
September 15, 2004
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]