[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







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                 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


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