[House Hearing, 110 Congress]
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                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                             APRIL 26, 2007


       Printed for the use of the Committee on Financial Services

                           Serial No. 110-26

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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio              JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

                CAROLYN B. MALONEY, New York, Chairwoman

MELVIN L. WATT, North Carolina       PAUL E. GILLMOR, Ohio
GARY L. ACKERMAN, New York           TOM PRICE, Georgia
BRAD SHERMAN, California             RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois          DEBORAH PRYCE, Ohio
DENNIS MOORE, Kansas                 MICHAEL N. CASTLE, Delaware
4PAUL E. KANJORSKI, Pennsylvania     PETER T. KING, New York
MAXINE WATERS, California            EDWARD R. ROYCE, California
JULIA CARSON, Indiana                STEVEN C. LaTOURETTE, Ohio
RUBEN HINOJOSA, Texas                WALTER B. JONES, Jr., North 
CAROLYN McCARTHY, New York               Carolina
JOE BACA, California                 JUDY BIGGERT, Illinois
AL GREEN, Texas                      SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
LINCOLN DAVIS, Tennessee             J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
KEITH ELLISON, Minnesota             STEVAN PEARCE, New Mexico
RON KLEIN, Florida                   RANDY NEUGEBAUER, Texas
TIM MAHONEY, Florida                 GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio              PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado              JOHN CAMPBELL, California

                            C O N T E N T S

Hearing held on:
    April 26, 2007...............................................     1
    April 26, 2007...............................................    29

                        Thursday, April 26, 2007

Ireland, Oliver I., Morrison and Foerster LLP....................    18
Sherry, Linda, Director, National Priorities, Consumer Action....    19
Wilmarth, Arthur E., Jr., Professor of Law, George Washington 
  University Law School..........................................    12
Yingling, Edward L., President and CEO, American Bankers 
  Association....................................................    14
Zeldin, Cindy, Federal Affairs Coordinator, Economic Opportunity 
  Programs, Demos: A Network for Ideas & Action..................    10
Zywicki, Todd J., Professor of Law, George Mason University Law 
  School.........................................................    15


Prepared statements:
    Castle, Hon. Michael N.......................................    30
    Maloney, Hon. Carolyn........................................    31
    Ireland, Oliver I............................................    34
    Sherry, Linda................................................    44
    Wilmarth, Arthur E., Jr......................................    64
    Yingling, Edward L...........................................    84
    Zeldin, Cindy................................................   106
    Zywicki, Todd J..............................................   120

              Additional Material Submitted for the Record

Baca, Hon. Joe:
    National Council of La Raza Issue Brief entitled, ``Latino 
      Credit Card Use: Debt Trap or Ticket to Prosperity''.......   150
Maloney, Hon. Carolyn:
    Letter to Chairwoman Maloney and Ranking Member Gillmor from 
      the American Bankers Association providing additional 
      information requested at the hearing.......................   172




                        Thursday, April 26, 2007

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2128 Rayburn House Office Building, Hon. Carolyn B. 
Maloney [chairwoman of the subcommittee] presiding.
    Present: Representatives Maloney, Watt, Ackerman, McCarthy, 
Baca, Green, Clay, Cleaver, Hodes, Ellison, Klein, Perlmutter; 
Gillmor, Castle, and Hensarling.
    Also present: Representative Bachus, ex officio
    Chairwoman Maloney. This hearing will come to order. The 
topic of today's hearing is ``Credit Card Practices: Current 
Consumer and Regulatory Issues.'' First, I would like to thank 
all of the witnesses for coming today and for the testimony 
they have prepared. And I would like to thank the members on 
this committee who have an interest in this subject, many of 
whom have introduced legislation pertaining to different 
aspects of it. This is the first in a series of hearings on 
credit card practices. At our second hearing, to be held the 
first week in June, we plan to have the Federal and State 
regulators discuss the anticipated revision to the regulations 
governing disclosure for credit cards by the Federal Reserve. 
The Federal Reserve have informed me that they expect to be 
issuing this in late May, and we also expect to have a panel of 
consumers and industry representatives to comment on the Fed's 
    Credit cards may represent the single most successful 
financial product introduced to our country in the last 50 
years. Their benefits are manifest, giving consumers 
unprecedented convenience and flexibility in both making 
purchases and in managing their personal finances. Consumer 
spending, facilitated in large part by the ease of payments 
afforded by credit cards, accounts for nearly two-thirds of the 
annual U.S. economic activity. And even more dramatically, one 
can argue that the broad availability of credit cards, coupled 
with advances in technology, has helped to create and support 
and expand an online retail industry that is projected to reach 
$129 billion in sales this year according to a recent Business 
Week article. All told, 145 million people in America, about 
half the population, own credit cards. In short, credit cards, 
like many other tools in our society, have changed from a 
luxury item available to the few, to a necessity demanded and 
needed by the many.
    But with that great success, with that widespread growth, 
with that necessity, comes great responsibility. The credit 
card industry has been clear about the responsibility imposed 
on consumers: the responsibility to become financially 
literate; the responsibility to spend only in accordance with 
your means; and the responsibility to pay your bills on time. 
But this spectacular growth in the credit cards industry does 
not seem to have created the same sense of responsibility in 
the 10 credit card issuers that control 90 percent of the 
market, much less the other 6,000-plus U.S. credit card 
issuers. It is true that competition among issuers has created 
initial consumer choice and can reward the diligent consumer 
with lower interest rates and no annual fee. But the industry 
has also acted to implement practices that quickly became 
industry standards, such as double cycle billing, universal 
default, no notice interest rate hikes, outside fees as much as 
$39 for a late payment, that brings us to our hearing today. 
For example, a recent article in Electronic Payments 
International reported that credit card issuers were expected 
to rake in a record $17.1 billion in credit card penalty fees 
in 2006, a rise of 15.5 percent from 2004, and a tenfold 
increase from 1996 when credit card issuers raised $1.7 billion 
in revenues from fees.
    Did American consumers become 10 times less responsible in 
2006 than in 1996? Or did the industry make a concerted and 
deliberate effort to squeeze even more revenue out of consumers 
by increasing fees and creating pitfalls in violations of the 
card agreement that allowed the issuer to penalize even the 
most responsible consumers?
    Credit card issuers hold an enormous amount of power. 
Enshrined in the card member agreement, just listen to this 
section from an April 2007 card agreement of a major card 
issuer that was sent to my office, and I quote from the card 
agreement: ``We may suspend or cancel your account, any feature 
or any component of your account at our sole discretion at any 
time with or without cause whether or not your account is in 
default and without giving you notice subject to applicable 
law.'' From terms like that, it is not hard to see how fee 
income went up tenfold in the past 10 years.
    I have always believed that responsible access to credit is 
critical to our economy and that access to appropriate credit 
should be as broad as possible, consistent with the safety and 
soundness of the financial system. Similarly, I approach credit 
card regulation from the point of view that we should both 
protect consumers and keep responsibly issued credit available 
in as many of our communities as possible. I am generally in 
favor of market-based solutions whenever possible, but in this 
case I am not convinced that the industry is going to make the 
changes that are necessary. I do want to credit some major 
issuers who have taken steps to move toward better practices: 
CitiBank has announced that it will eliminate any time for any 
reason re-pricing and universal default; and Chase has said 
that it will no longer use double cycle billing, but rather 
average daily balance. But I do not see the development of best 
practices that industry holds itself to across the board. For 
example, in the wake of the key GAO report last September 
finding that the increased complexity in rates and fees 
requires better disclosure, even industry agrees that changes 
to credit card disclosures are desperately needed because no 
one can understand their statement. Yet industry has not taken 
comprehensive action on this point. And if the industry fails 
to make meaningful changes, if the major issuers continue to 
lead the way in a race to the bottom rather than in a race to 
improvement, it is my belief that we will see bipartisan 
legislation coming forward to fix the problems that industry 
proved itself incapable or unwilling to fix on their own.
    I look forward to the testimony, and I would now like to 
recognize the ranking member, Mr. Gillmor. He has 15 minutes, 
and we have 15 minutes over here, so we will go back and forth.
    Mr. Gillmor. I want to thank the Chair for calling this 
hearing, and for yielding. I think this morning's hearing is 
going to be a very important information-gathering session. At 
this point, we do not know whether legislation is going to come 
out of this or if it does, exactly what form it will take. But 
I do think it is important that whatever we do in this respect, 
we work together on it, and try to get bipartisan support on 
both sides of the aisle. I think that is going to be important 
not only for the committee, but also for the consumer and the 
industry; I think that is going to be one of our mutual goals.
    Americans have access to some of the best financial 
services in the world and a critical part of those services is 
the credit card. Consumers are becoming increasingly reliant on 
electronic forms of payment and with the prevalence of the 
credit card comes some serious policy discussion. The credit 
card industry has expanded rapidly over the past decade and 
there are 600,000,000 cards in use today. My wife has a large 
part of those.
    Mr. Gillmor. The popularity of the credit card has allowed 
for an evolution of credit card policies and fees. There are 
literally thousands of products offered by credit card issuers 
with all different fees, rates, and features. With market 
competition and innovation, credit card issuers seem to be 
willing to adjust their products when the consumer dictates a 
change is necessary.
    Earlier this year, some of the biggest credit card 
companies voluntarily eliminated some of their controversial 
policies such as universal default and double cycle billing, 
and I would expect that trend to continue as the consumer with 
a bad deal can shop around with ease. Due to the nature of 
credit cards, fees are a major component of how an issuer is 
able to recoup the dangers of extended credit with no 
collateral. It is fair for banks to constantly evaluate how 
best to charge for the risks associated with particular 
elements of borrowers. But what is not acceptable or fair is 
for the issuers to hide fees, policies, or practices from their 
customers. Disclosure is the answer and that is why earlier 
this year, Ranking Member Bachus and I sent a letter to Federal 
Reserve Chairman Bernanke requesting a prompt review of 
Regulation Z. If consumers are aware of how their payments or 
lack thereof will affect their fees and interest rate, the 
choice is theirs to make.
    So I look forward to working with Chairwoman Maloney and my 
colleagues on both sides of the aisle to address the policy 
issues in consumer credit, and I yield back.
    Chairwoman Maloney. The Chair recognizes my good friend and 
colleague from New York, Gary Ackerman, who has worked long and 
hard on this issue, for 3 minutes, and he has introduced a bill 
on a common fee, which has been called the pay-to-pay fee, 
where consumers are charged $5 to $15 because they have paid 
their credit card bill over the phone. I congratulate him for 
his interest and work on this bill. Gary Ackerman for 3 
    Mr. Ackerman. Thank you, Madam Chairwoman. I just hope that 
the transcriber puts the comma in the right place indicating 
that I have worked hard on this bill, and recognizing me for 3 
minutes, rather than that I worked hard on the bill for 3 
    Mr. Ackerman. Thank you, Madam Chairwoman, for scheduling 
the hearing. As you know, over the past 10 years, credit card 
companies have steadily increased financial burdens on American 
consumers, which in itself could be bad enough, but in 
addition, credit card agreements have become increasingly more 
complex with teaser rates, universal default, double cycle 
billing, transfer fees, membership fees, finance fees, over-
limit fees, cash advance fees, stop-payment order fees, and the 
list goes on. Credit card companies have absolutely failed to 
disclose in an honest, straightforward manner the real terms of 
their product to American consumers.
    In a particularly gluttonous practice, some credit card 
companies, having induced customers to pay their bills online, 
are now charging fees for their customers to pay bills online 
or by phone. It is not just simply for an express payment that 
posts the same day, but a fee simply to pay their bill. It is 
like having to pay a fee in order to pay for your groceries at 
the check-out counter. Since both online and phone method 
payments would provide the customer the ability to quickly make 
their payments and check to ensure the payment will post before 
the due date, a fee to use these payment options is aimed at 
encouraging credit card customers to pay their bills by mail. 
Naturally, some customers--maybe they are on vacation, maybe 
their statement got lost in the mail--will make their payments 
too late and have to pay a late fee. One late payment, of 
course, could result in your being tossed into the not-so-
tender trap of paying a significantly increased rate.
    In what is perhaps one of the most insidious schemes of 
all, some credit card companies are now sending their monthly 
statements out late in the month, giving their customers much 
less time to make their payments without risking a late fee, 
causing them to pay online or by phone only to discover they 
are being charged a fee to pay by phone or online. It is heads, 
I win; tails, you lose. A customer who is on vacation, do not 
worry, he didn't leave home without his American Express Card, 
stands no chance of paying his credit card bill without being 
assessed a late fee to pay online or by phone. It would be the 
equivalent of the Federal Government mandating that taxes be 
paid by April 15th but not allowing W-2 statements to be mailed 
out until April 6th. You would not receive your W-2 in the mail 
until maybe April 10th. And when you show up at the post office 
before April 15th, you are told that there is a $15 charge to 
pay by mail. Because of this outrageous predatory tactic, I 
have introduced, as the Chair mentioned, along with her co-
sponsorship, legislation that would prohibit credit card 
companies from charging a fee to their customers explicitly for 
paying online or by phone. H.R. 873, the Credit Card Payment 
Fee Act, would not deal with express payments or any other of 
the various schemes that credit card companies have undertaken 
to swindle the American public, but would simply protect credit 
card customers from being entrapped in the vice of their Visa.
    There are of course many other practices within the credit 
card industry that require reform. I would echo the conclusion 
of a September 2006 Government Accountability Office report 
that called for revised disclosures more clearly emphasizing 
the terms of a credit card agreement that affect cardholder 
costs, especially those actions that will cause a default or 
result in penalty phases.
    I look forward to hearing from our witnesses this morning. 
I am kind of upset that the credit card companies themselves 
have provided no witnesses today. I hope that they are not 
going to squeal too much like stuffed pigs if the legislation 
is going to affect them and then claim that they had no input 
into the system. I thank the witnesses who are here today. I 
thank the Chair and look forward to hearing from our panel.
    Chairwoman Maloney. Thank you. Congressman Bachus, for 5 
    Mr. Bachus. Good morning. Thank you, Congresswoman Maloney, 
for holding this hearing and, Mr. Gillmor, for your interest in 
this. I think it is important for the committee to gain a 
better understanding of the current practice of pricing, 
billing, and disclosure practices of the credit card industry 
and the impact those practices are having on consumers. 
According to the GAO, Americans now hold 690 million credit 
cards, and between 1980 and 2005, the amount that Americans 
charged to their credit cards grew from an estimated $69 
billion per year to more than $1.8 trillion. Not only have 
credit cards broadened the availability of consumer credit, 
allowing more Americans access to credit they deserve, they 
also provide consumers with a safe and effective tool for 
making purchases. Credit cards are very important to our 
national economy and have played a key role in the development 
of Internet commerce. Recently, however, concerns have been 
expressed over a number of credit card practices, including 
double billing cycles, universal default, late payment fees, 
over the limit fees, and shortening of grace periods. While I 
am pleased that some of the large credit card issuing financial 
institutions have been proactive in addressing these concerns, 
it is still important that we fully examine these issues to 
ensure adequate protection of the American consumer.
    I am particularly concerned about the 55 percent of college 
students who acquire their first credit card during their first 
year of college, and the 92 percent of college students who 
acquire at least one credit card by their second year of 
college. A combination of aggressive and targeted marketing by 
many credit card issuers and the lack of financial literacy and 
immaturity often ends badly for college students. The 
experience of my colleagues may be different but a substantial 
percentage of the complaints I receive from constituents 
involves the parents of these students. And I might say that I 
could join my other constituents in having legitimate 
complaints on what I have witnessed in dealing with one or two 
of my five children. And I can say without a doubt that the 
treatment of them by the credit card companies was not fair and 
    Credit card disclosures are governed by the Truth in 
Lending Act and Regulation Z administered by the Federal 
Reserve Board. In December 2004, the Federal Reserve began a 
review of Regulation Z requirements concerning the format of 
open-end credit disclosures and the content of such disclosures 
and the substantive protections provided to consumers. It is 
now April 2007 and the Federal Reserve has yet to issue any 
proposed revisions to Regulation Z. Until the Federal Reserve 
completes its process, it will be difficult to assess whether 
additional measures will be needed going forward. Earlier this 
year, in an effort to accelerate this process, Mr. Gillmor and 
I wrote to Federal Reserve Chairman Bernanke urging the 
completion of his Regulation Z review, as Mr. Gillmor 
mentioned. In my view, the failure of credit card disclosure 
requirements to keep pace with market developments has resulted 
in some consumers not adequately understanding their credit 
card accounts. It is my belief that consumers must be well 
informed about credit card offerings in order to choose a 
credit card that is best suited to their individual needs. I 
look forward to hearing from today's panel on current credit 
card industry practices and the state of the Federal credit 
card disclosure framework.
    Chairwoman Maloney. The Chair recognizes Congressman 
Cleaver, my friend from Missouri. He has introduced legislation 
and has worked hard on this issue, and I recognize him for 3 
    Mr. Cleaver. Thank you, Madam Chairwoman. The reality now 
is that there is such a thing as death by plastic and it is 
becoming more and more apparent. I want to express appreciation 
for you holding this hearing with Ranking Member Gillmor. 
Recently, the Federal Reserve reported that inflation adjusted 
household debt grew by over 26 percent from late 2001 to 2004, 
while income remained flat, and that American families carried 
credit card balances that rose nearly 16 percent or around an 
average of $5,100. And many of these hard-working people are 
now experiencing a debt crisis while being subjected to onerous 
credit card terms that help to perpetuate this debt crisis. 
Under your leadership, Madam Chairwoman, the subcommittee has 
an opportunity to address a portion of this crisis and to 
impact credit card companies all over this country. I 
introduced, along with my friend and colleague, Congressman 
Mark Udall, a bill that we believe will be a part of the 
solution to the current debt crisis. The proposal seeks to 
protect consumers from banks and other credit card issuers who 
unbelievably and unjustly can increase interest rates without 
notice. And talking about an injustice, this is an injustice. 
H.R. 1461, the Credit Card Accountability Responsibility and 
Disclosure Act of 2007 would end credit card practices such as 
universal default where credit card issuers impose a higher 
interest rate on a credit card account if there has been any 
change in the credit holder's credit history, even if the 
change is completely unrelated to the credit card account, such 
as being late on a utility bill. There are some other changes, 
Madam Chairwoman, but trying to keep under my 3-minute limit, 
the bill requires that credit card holders be given clear 
notice of any fees or changes or charges in interest rates that 
would result from late payments. And finally, under H.R. 1461, 
minors who apply for a credit card would need one of the three 
things: the signature of a parent or guardian willing to take 
responsibility for the applicant's debt; information indicating 
that the applicant has some other means of repaying the debt; 
or a certification that the applicant has completed a credit 
counseling course by a qualified nonprofit budget or credit 
counseling agency. I perform weddings, Madam Chairwoman, and I 
have recently suggested to couples who come to me after college 
wanting to get married that we change the ceremony to say, 
``Until debt do us part.'' Thank you, Madam Chairwoman.
    Chairwoman Maloney. Congressman Castle, for 3 minutes.
    Mr. Castle. Thank you, Chairwoman Maloney, and Ranking 
Member Gillmor, for holding this hearing before the Financial 
Institutions and Consumer Credit Subcommittee today. Credit 
cards have become a staple in today's marketplace. They provide 
enormous convenience, efficiency, and other benefits to 
consumers, businesses, and local and national economies. Credit 
cards have generated more than $2.5 trillion in transactions a 
year in the United States. Clearly, they have become an 
indispensable tool of America's consumer economy.
    Today, consumers have a choice, as we have heard earlier, 
between 6,000 credit card lenders. Although some consumers view 
the large number of credit options to be daunting, the strong 
national credit system in the United States has been a driving 
force that has helped sustain our economy in recent years. 
Educating consumers and enabling individuals to understand 
their credit terms is an important task. The review by this 
subcommittee today will help us to better understand how 
consumers in the financial services industry can have a more 
symbiotic relationship.
    Certain industry practices related to credit card fees, 
penalties, and interest rates have received a considerable 
amount of media attention lately. It is important to note that 
in response to increasing concerns, several credit card 
issuers, such as CitiGroup and Chase Card Services, have taken 
significant steps to improve their practices and ensure that 
their customers have a better understanding of their accounts. 
Therefore, Madam Chairwoman, after we hear from consumer 
organizations, institutions, and university professors, I do 
hope we will take the time to hear from industry regulators so 
that we can keep the scope of these issues in some context, and 
you did mention in your opening statement that we would hear 
from them in the first week of June.
    Madam Chairwoman, I thank you for holding this hearing 
today, and I look forward to hearing from each of our witnesses 
today. I yield back.
    Chairwoman Maloney. Thank you. I really want to recognize 
the keen interest of the members of the panel in this issue and 
recognize Congressman Baca for 2 minutes.
    Mr. Baca. Thank you, Madam Chairwoman. First of all, I 
would like to thank you for holding this important hearing here 
this morning. As Chair of the Congressional Spending Caucus, I 
am concerned about the barriers Latino families continue to 
face in access to affordable credit. Latinos are the fastest 
growing and largest minority in the country with 45 million 
people, 17 percent of the total population, yet they tend to 
have less personal savings, and fewer assets than other 
American families. Many low-income Latino families have an 
unhealthy reliance on credit cards, which can expose them to 
predators within the financial market. We need to have a better 
understanding of the Latino experience so that we can help them 
avoid accumulating high levels of uninsured debt and move them 
into the American middle class. The National Council of La Raza 
has written and issued a brief which examines how credit card 
industry practices impact Hispanic access to affordable credit. 
It also provides policy recommendations for empowering and 
protecting the Hispanic consumers. I would like to ask 
unanimous consent to insert this brief into today's record.
    Chairwoman Maloney. Without objection, it will be placed in 
the record. Thank you.
    Mr. Baca. And I appreciate Congressman Bachus talking about 
targeting and marketing students on the credit cards. I am very 
concerned about the impact it has had not on a lot of our 
college kids, but also on a lot of our high school kids. Not 
only do we need to well educate our consumers, but we also need 
to educate the parents, because the parents are unaware that 
the kids are applying for the credit cards. And when the TRW 
report comes out, they find out that they cannot get credit 
because they had a credit card debt during that period of time. 
We need to address that; in fact, I am having a conference on 
May 12th to address that.
    With that, Madam Chairwoman, I look forward to hearing the 
witnesses today, and I appreciate your having this hearing. I 
yield back the balance of my time.
    Chairwoman Maloney. Thank you. Congressman Hensarling is 
recognized for 2 minutes.
    Mr. Hensarling. Thank you, Madam Chairwoman. I approach 
this hearing as I approach most hearings with the adage running 
through my mind, ``First, do no harm.'' My guess is a couple of 
decades ago people might have been gathering in a similar 
hearing wondering why low-income people or people of color were 
not granted credit and now we have a multiplicity of options 
for credit for people who have never enjoyed it before. We may 
not always like the terms, but credit is available in our 
society like it has never been available before, which for many 
families is a very good thing. It allows them maybe to pay for 
their groceries, and to buy school clothes, where they 
otherwise might not have been able to do it. I think there is a 
valid question about whether there is effective disclosure; 
consumers do have a right to know what they are getting into. I 
am curious at some point whether Congress has proven to be part 
of the problem or part of the solution. Because there is so 
much disclosure, I think that occasionally perhaps less would 
be more, and I think that it is good that this committee will 
look into this particular issue.
    I also am reminded, at least according to my reading of the 
Constitution, that nobody has a constitutional right to borrow 
money from somebody else. If you do not like the terms, you 
have the right to walk away. I myself have done that on a 
couple of occasions when I did not like the terms or I did not 
like the service or I got tired of speaking to the computerized 
voice on the other end of the 1-800 line. So I always want to 
make sure consumers have those options. We know there are at 
least 10 major players in this market and at least 6,000 
different companies that are making some type of offer to 
consumers today. There appears to be effective competition, so 
the question in my mind is, is there effective disclosure?
    And so, Madam Chairwoman, I appreciate your holding this 
hearing, and I look forward to hearing more about this. But I 
am concerned that the wrong prescription could lead to a 
lessening of the availability of credit at the margins or 
perhaps making that credit more expensive. Thank you and I 
yield back.
    Chairwoman Maloney. Thank you. Congressman Watt for 2 
minutes, and thank him for his leadership and hard work on this 
    Mr. Watt. Thank you, Madam Chairwoman. I thank the Chair 
for holding this hearing, which for my purposes is very similar 
to, and equally as important as, the hearing that the Chair 
convened on exploding foreclosures and mortgage lending because 
in both areas there are very, very serious problems and 
probably a need for some legislative action. The only way we 
can determine what legislative action is needed and desirable 
is to get into the legislative record the facts about what is 
happening. There is the perception and I believe the fact that 
there are real problems in the credit card area resulting from 
teaser rates, increases in rates without appropriate notice, 
exorbitant late payment fees, fees for paying online, a major 
issue is interchange fees, which I think is the hidden charges 
that really nobody has focused on yet but I hope we will get 
some testimony about in this and subsequent hearings, and the 
general availability of easy credit. Mr. Hensarling is right, 
there was a time when there was no credit available. It may in 
fact be too easy now both in this area and in the mortgage 
area. And part of that is that in this area there is no real 
definition of what Mr. Bachus referred to as fair and 
equitable. So unless the industry itself will set some 
standards that are acceptable and deemed as reasonable to the 
public, it may be incumbent on us to really more aggressively 
define what that last little phrase in the disclosure notice or 
contract said when they finally got to the end after saying we 
can do all these things subject to law. Right now, the law is 
murky in a number of these areas and if the industry cannot 
define what is appropriate, then I think it may be necessary 
for us to do it in the legislative process. But we need the 
background, and today's hearing, and I hope subsequent hearings 
where we will hear from the regulators and the industry itself 
and other players, will lead to finding the appropriate 
legislative steps to take. I yield back and I again thank the 
chairwoman for convening the hearing.
    Chairwoman Maloney. Thank you. Without objection, all 
members' opening statements will be made part of the record.
    We have a distinguished panel of witnesses who include both 
consumer and industry representatives as well as academics, and 
I will not attempt to give you a full biography of each but 
just a few highlights.
    Linda Sherry, Consumer Action's director of national 
priorities, joined the San Francisco-based National Consumer 
Education and Advocacy Group in 1994, from a background as a 
weekly newspaper reporter in Long Island from my State, New 
York, and in California. Sherry, who moved to Washington, D.C., 
in August of 2004 to establish an office for Consumer Action, 
is responsible for the organization's national advocacy work 
and for the research and writing of Consumer Action's free 
educational publication and Web site content.
    Mr. Arthur E. Wilmarth, Jr. is a professor of law at George 
Washington University Law School. Professor Wilmarth has 
written extensively about banking regulation, including the 
role of the Federal and State governments in regulating credit 
    Mr. Todd J. Zywicki is a professor of law at George Mason 
University Law School. He served as Director of the Office of 
Policy for the Federal Trade Commission from 2003 to 2004. More 
recently, he has written and testified on consumer credit 
    Mr. Edward L. Yingling is president and CEO of the American 
Bankers Association, and is testifying on behalf of the 
    Mr. Oliver I. Ireland, formerly Associate General Counsel 
of the Federal Reserve Board, is now at the law firm of 
Morrison and Foerster, where his practice includes representing 
credit card networks.
    Cindy Zeldin is the Federal affairs coordinator in the 
economic opportunity programs at Demos, a public policy 
research and advocacy organization that has conducted extensive 
research on household debt. Most recently, Ms. Zeldin co-
authored the Demos Report, ``Borrowing to Stay Healthy'', which 
examined medical debt that accrues on credit cards. I thank all 
of the witnesses for coming, and I would like to recognize Ms. 
Zeldin first, and then left to right. Ms. Zeldin?


    Ms. Zeldin. Chairwoman Maloney, Ranking Member Gillmor, and 
members of the subcommittee, thank you for inviting me to 
testify today. I am here representing Demos, a nonprofit, 
nonpartisan research and public policy organization working on 
issues related to economic security. We approach our work on 
credit card debt and lending industry practices through the 
lens of rising insecurity among low- and middle-income 
households in a rapidly changing economy. Against an economic 
backdrop simultaneously characterized by stagnant incomes at 
the median and the rapidly rising costs of big ticket 
necessities like housing, health care, and education, our 
Nation has witnessed tremendous growth in credit card debt over 
the past 2 decades.
    At the same time as our economy has undergone major 
changes, the banking and financial industry has been steadily 
de-regulated. While deregulation has expanded access to credit 
for many people who had been denied or excluded from mainstream 
financial services in the past, this credit has come at a high 
cost. It is low- and moderate-income households whose levels of 
credit card debt have increased the most in recent years and 
our research indicates that these households are increasingly 
turning to credit cards to manage economic shocks like job loss 
or a major medical expense or to fill in the gap between the 
cost of basic living expenses and stagnant incomes.
    The democratization of credit has in many ways become our 
modern day safety net, albeit one that comes with high interest 
rates and an endless array of penalty fees that are unleashed 
upon borrowers in response to just the slightest slip-up. With 
debt service taking a bigger bite of the household budget, 
there is less left over to build savings and assets, quickly 
trapping families in a cycle of debt. Once in debt, the 
capricious and abusive practices of the lending industry make 
it exceedingly difficult to climb out.
    Credit card debt has roughly tripled since 1989, with 
Americans owing more than $800 billion in credit card debt 
today. Our national savings rate has steadily declined and the 
number of people filing for bankruptcy since 1990 has more than 
doubled to just over 2 million in 2005. The average amount of 
credit card debt among all households with credit card debt 
grew 89 percent between 1989 and 2004. In particular, low- and 
moderate-income households, senior citizens, and young adults 
under age 34 have seen rapid increases in credit card debt.
    To better understand the factors contributing to household 
indebtedness, Demos and the Center for Responsible Lending 
commissioned a national household survey of households with 
credit card debt in 2005; 7 out of 10 low- and middle-income 
households reported using their credit cards as a safety net, 
relying on credit cards to pay for car repairs, basic living 
expenses, medical expenses, or home repairs. The widespread 
availability of revolving credit can indeed help individuals 
and families weather difficult financial times or manage large 
unexpected costs, like a major medical expense or car or home 
repair, by spreading payments over time and providing less 
disruption to the family budget. However, all too often, the 
practices of the credit card industry turn this beneficial 
credit into a debt trap.
    The credit card market is a broken market. When consumers 
initially shop for a credit card, the key element of their 
comparison shopping is generally the interest rate on the card, 
yet the card issuer reserves the right to change the terms of 
the card agreement at any time for any reason with a 15-day 
notice, making competition illusory. A consumer can diligently 
shop for the best terms and conditions out there but then have 
these terms and conditions unilaterally changed on them.
    The first practice I would like to address is penalty 
pricing or interest rate hikes and fees for an array of 
infractions, many of which are quite minor and are not 
necessarily reflective of a cardholder's risk profile. When a 
payment is late, major card issuers typically increase the 
interest rate on the card to a penalty or default rate. Due 
dates are often listed down to the hour and payments received 
after that time are processed the following day. With payment 
grace periods generally no longer in place, cardholders who 
submit payments that are nominally late are routinely hit with 
interest rate increases that can drastically increase the cost 
of credit. It is also important to note that these penalty 
interest rates are applied retroactively to the entire existing 
card balance, not simply prospectively to future purchases. 
Cardholders who are late are also slapped with a late fee. Late 
fees have steadily increased from the $5 to $10 range in 1990 
to an average of about $34 in 2005. Penalty pricing is also 
typically invoked when a cardholder exceeds the credit limit on 
their card. Rather than denying the purchase, it is now routine 
practice to allow the transaction to go through but to apply an 
over-the-limit fee and then increase the cardholder's interest 
rate; over-the-limit fees averaged about $31 in 2005.
    The second practice I would like to highlight is universal 
default, a bait and switch practice whereby card issuers 
retroactively change a cardholder's interest rate not because 
of any change in behavior with that particular card, but 
because of a change in the cardholder's credit score or their 
payment behavior with another lender. While some card issuers 
have halted this policy, others still engage in it, and still 
others increase interest rates because of behavior with other 
credit rates that institute these increases through a change in 
terms rather than automatically. Other practices, double cycle 
billing and payment allocation--
    Chairwoman Maloney. The Chair grants the witness an 
additional 30 seconds.
    Ms. Zeldin. In absence of meaningful regulation, credit 
card companies are free to design credit card agreements that 
are not only confusing in their complexity but that once 
deciphered are fundamentally unfair. Despite borrowing money 
under one set of terms and conditions, a borrower can be asked 
to pay back that money under an entirely different set of 
conditions for being a day or two late or for going just over 
their credit limit even if they are attempting to pay back 
their debt in good faith. Once in penalty territory, households 
are typically paying interest rates of 27 percent. For low- and 
middle-income households, whose levels of credit card have 
increased the most in recent years, these penalty interest 
rates drain resources from already tight family budgets, 
inhibiting the ability of these households to pay down their 
debt, let alone save money to weather future economic shocks.
    Thank you.
    [The prepared statement of Ms. Zeldin can be found on page 
106 of the appendix.]
    Chairwoman Maloney. Without objection, all of the written 
statements will be made part of the record, and you will each 
be recognized for 5 minutes, so a summary of your testimony for 
5 minutes is requested. Mr. Wilmarth? Thank you.


    Mr. Wilmarth. Chairwoman Maloney, Ranking Member Gillmor, 
and members of the committee, thank you for inviting me to 
participate in this important hearing.
    Chairwoman Maloney. Turn on your mike, we cannot hear you.
    Mr. Wilmarth. Pardon me. Chairwoman Maloney, Ranking Member 
Gillmor, and members of the committee, thank you for inviting 
me to participate in this important hearing. The credit card 
industry has experienced a very rapid and dramatic 
consolidation over the past 2 decades. During that time, the 
share of the top 10 issuers has risen from 40 percent to 87 
percent. The share of the top five issuers has grown from 35 
percent to 71 percent. There are many technological factors 
that have contributed to this consolidation. Those factors have 
created large economies of scale and barriers to entry. The 
largest federally-charted banks dominate the credit card 
industry. Four of the five top credit card issuers and 7 of the 
top 10 issuers are national banks. An eighth issuer among the 
top 10 is a federally-charted thrift. Only two are non-banks, 
American Express and Discover, both of which have a 
longstanding presence in the industry. As I will mention, 
Federal preemption helps to explain why so many of the largest 
issuers are federally-charted depository institutions and why 
they are also dominant players in other segments of the 
consumer credit industry. For example, seven of the top home 
mortgage lenders are either nationally-chartered banks or 
federally-chartered thrifts.
    You have already heard a lot today about fees and profits. 
As my statement points out, the profitability of credit card 
banks has remained well above that of all other banks over the 
past 15, if not 25, years. And these unusually high profits 
certainly raise questions as to the competitive features of the 
credit card industry. Average annual non-penalty interest rates 
of credit card issuers have remained above 13 percent in every 
year between 1994 and 2005 except for 2003, when the average 
rate was 12.92 percent. This is at a time when we have had 
historically low interest rates. Of course, as you have heard, 
penalty interest rates have been far higher and now are in the 
range above 24 or 25 percent. You have also heard about how 
credit cards have contributed to the rapidly growing debt 
burdens of U.S. households.
    What I want to focus on in the remainder of my time is the 
impact of Federal preemption. In 1978, the U.S. Supreme Court 
gave national banks most favored lender status and the right to 
export interest rates across State lines. In 1996, the Supreme 
Court upheld a regulation of the OCC, which defined interest to 
include a wide variety of fees, such as annual fees, over-the-
limit fees, late payment fees, bad check fees, and cash advance 
fees, so those fees could also be exported across State lines. 
In 1998, the OCC issued a ruling which allowed national banks 
to export interest rates from any State in which they have 
either their main office or branch. In 2004, the OCC went much 
further; it adopted a sweeping set of preemption rules which, 
to put it bluntly, essentially preempts all State consumer 
protection laws from applying to the practices and activities 
of national banks. And just recently, the GAO recommended that 
the OCC make clear what State laws were preempted or were not 
preempted. The OCC has not issued any such list. So far the OCC 
has acknowledged only that State fair lending laws might apply 
to national banks but they have given no such indication for 
other types of State consumer protection laws. The OCC also 
issued a regulation in 2004, which gave them the sole and 
exclusive right to enforce all applicable laws, including any 
State laws that might be applicable to national banks so that 
States have no enforcement rule under the OCC's rules.
    The OCC's rules have spurred many large, multi-state banks 
to convert to national charter including J.P. Morgan Chase, 
HSBC, and Bank of Montreal. As a result, the share of national 
banking assets has risen from 56 to 67 percent and the share of 
State assets has fallen to 33 percent. Just last year, the Bank 
of New York, one of the largest state-chartered banks, decided 
to sell all of its retail branches to J.P. Morgan Chase, again 
thereby indicating the powerful impact of Federal preemption. 
In September 2005, Chairman Don Powell indicated that unless 
Congress acted, the dual banking system was severely 
    I point out in my testimony that the OCC has had a very 
unimpressive record of enforcing consumer protection laws 
against national banks. A careful search of their Web site and 
other public records indicate only 13 public enforcement orders 
against national banks since January 1, 1995; 11 of those 13 
were against small national banks, only two were against large 
national banks, and in each case another agency acted first. In 
one case, a State prosecutor in California, in another case, 
the Department of HUD. So my bottom line is that the OCC cannot 
be relied upon to be a vigorous consumer protection authority 
for the national banking system, which dominates the credit 
card industry.
    Thank you very much.
    [The prepared statement of Professor Wilmarth can be found 
on page 64 of the appendix.]
    Mr. Watt. [presiding] Mr. Yingling is recognized.

                      BANKERS ASSOCIATION

    Mr. Yingling. Thank you Chairwoman Maloney, Ranking Member 
Gillmor, and members of the subcommittee, for inviting me to 
testify this morning. I would like to take a few minutes at the 
outset to discuss just what a remarkable product the credit 
card is. For example, we take it for granted, but the 
processing system for cards handles more than 10,000 
transactions every second with nearly enough communication 
lines to encircle the globe 400 times. As the recent GAO report 
pointed out, the credit card industry is highly competitive and 
highly innovative. It has changed greatly since it began 56 
years ago. First, up until around 1990, almost all cards had an 
annual fee of $20 to $50. Today, most cards charge no annual 
fee. In fact, many cards have rewards features such as rebates, 
points, or mileage. Thus for many consumers, most of the 
millions who do not revolve, the card is free or they actually 
earn something when they use it. Second, for those who do take 
out a loan, interest rates, according to the GAO, have declined 
by 6 percentage points since 1990. Before, almost everyone paid 
18 to 20 percent. For the 28 popular cards the GAO studied, the 
average rate in 2005 was 12.3 percent. Third, and most 
importantly, more low- and moderate-income people have been 
able to obtain credit cards.
    While we recognize there are concerns about debt levels, it 
is important to note that, according to the Fed, in the last 10 
years, credit card balances have declined from 3.9 percent to 
only 3 percent of household debt. I think most people would be 
amazed that credit card debt is only 3 percent of total 
household debt.
    Credit cards are also very important to small businesses, a 
fact often overlooked. Without them, small businesses would be 
at a huge disadvantage to larger businesses, which could afford 
their own in-house credit programs. Moreover, without cards, 
commerce over the Internet, which means tremendous savings for 
consumers, would be extremely difficult.
    However, as the GAO report laid out, as credit cards have 
evolved, the competition that resulted in no annual fees, lower 
interest rates, rewards programs, greater convenience, and more 
availability to more consumers has also led to greater 
complexity. It is this complexity which is understandably 
raising concerns and needs to be addressed. One important issue 
is that the disclosures have not kept up. The ABA and card 
companies strongly support and are working for better, clearer 
disclosures. We are optimistic that the Fed will soon develop 
better disclosures, and we are glad to hear that they are 
moving quickly, Madam Chairwoman. We are also working on 
additional tools for consumers, such as easily accessed 
explanations and information, to go with these new disclosures.
    A second area of emphasis must be financial education. The 
ABA and the major credit card companies are working together to 
improve this education with a particular emphasis on college 
age individuals. We have completed a scan of the available 
resources and found that every major credit card issuer, in 
addition to the ABA, has an education program. Now we are 
working to maximize the delivery of these programs to 
consumers. We are pleased, Madam Chairwoman, that you will be 
participating in our annual Teach Children to Save Day on 
Monday in New York. Representatives Price, Green, Drake, Costa, 
and Wynn have also participated. In October, we will be having 
our 5th annual Get Smart About Credit Day, which raises 
awareness about credit issues among students. Last year, 
Treasury Secretary Paulson and Members of Congress joined us in 
teaching this program.
    While we work hard to improve disclosures and financial 
education, we recognize that there are other issues about 
credit cards which are of concern to Members of Congress. As 
the GAO pointed out, for millions of Americans credit cards 
provide more services at low, or more often no cost, and lower 
interest rates than ever before. However, for others, the 
increasing complexity has caused confusion, with some ending up 
in difficult financial situations. The industry takes these 
concerns very seriously and is working to address them. Madam 
Chairwoman, Congressman Gillmor, Congressman Watt, and others 
who have spoken this morning, we take your introductory 
comments very seriously. We need to address these issues, and I 
want to assure you that we are working very hard, we are 
meeting literally every week to move forward, and we want to 
keep you informed.
    Recently, individual institutions have announced important 
changes in policies. We are seeing that competition is now 
leading to streamlined and simplified practices. The industry 
recognizes that policies that alienate some of its customers or 
leave individuals in financial difficulty from which they 
cannot extricate themselves are in no one's interest. We pledge 
to work with you in Congress and our customers to address these 
    Thank you.
    [The prepared statement of Mr. Yingling can be found on 
page 84 of the appendix.]

                     UNIVERSITY LAW SCHOOL

    Mr. Zywicki. Chairwoman Maloney and members of the 
subcommittee, credit cards have transformed the ways in which 
we shop, travel, and live. Credit card issuers are forced to 
compete for my loyalty every time I pull out my wallet to buy 
gas or a new book for my daughter. In such a competitive 
environment, issuers face relentless competition to retain my 
loyalty, and I admit I am not the slightest bit sentimental 
about switching to a better deal if one comes along. I have 
four cards and each of them actually pay me to use them. I had 
five until 2 weeks ago, but one did not give me a good enough 
deal so I canceled it. Little wonder in this competitive 
environment that, according to one Federal Reserve economist, 
90 percent of credit card owners reported they are very or 
somewhat satisfied with their credit cards versus only 5 
percent who are somewhat dissatisfied and only 1 percent, that 
is 1 out of 100, who are very dissatisfied. Moreover, two-
thirds of respondents in a Federal Reserve survey also reported 
that credit card companies usually provide enough information 
to enable them to use credit cards wisely and 73 percent stated 
the option to revolve balances on their credit card made it 
easier to manage their finances versus only 10 percent who said 
it made it more difficult.
    Nonetheless, the myriad uses of credit cards and the 
increasing heterogeneity of credit card owners has spawned 
increasing complexity in credit card terms and concerns about 
confusion that this may reduce consumer welfare. In particular, 
three concerns about credit cards have been expressed. First, a 
fear of a rise of consumer indebtedness supposedly caused by 
access to credit cards. Second, a concern about unjustifiably 
high interest rates on credit cards. And, third, a growing use 
by card issuers of so-called hidden fees, such as late fees and 
overdraft fees.
    Although these concerns are often expressed, based on 
standard economic theory and the date we have available today, 
none of these concerns appears to have any merit. I address 
each of these concerns in detail in my written testimony, and I 
will only briefly summarize those findings here. First, the 
concern that credit cards have caused consumer over-
indebtedness and financial distress is simply based on a faulty 
understanding of the ways in which consumers use revolving 
credit. Although credit card use and debt has risen 
substantially over the past 25 years, the data make clear that 
this rise in credit card debt has been the result of a 
substitution by consumers of credit card for other less 
attractive types of debt such as retail store credit, layaway 
plans, pawn shops, rent-to-own, and personal finance companies. 
Just a generation ago when you bought a refrigerator or a 
bedroom set you bought on time, promising to pay in monthly 
installments for a term of months. If you needed a short-term 
loan to repair a blown transmission, you might have to borrow 
several thousand dollars on an unsecured basis from a personal 
finance company, a family member, or even your local loan shark 
whose late payment terms were somewhat more onerous than those 
that we see today. Today, a consumer would likely use a credit 
card for each of these transactions and in fact many of these 
traditional types of consumer loans do not even exist anymore. 
Thus, the growth in credit card borrowing, as I show in my 
written testimony, mirrors a near identical decline in consumer 
use of installment consumer credit during that same time. As a 
result, the debt service ratio for consumer credit has 
fluctuated in a very narrow band over the past 25 years and in 
fact is approximately the same today as it was in 1980. Nor are 
interest rates on credit card unreasonably high when compared 
to similar loans. In fact, the General Accounting Office 
estimates that approximately 93 percent of credit cards now 
have variable interest rates tied to the underlying cost of 
funds and interest rates become both lower and more flexible 
over time. Moreover, the past few decades have seen the near 
complete abolition of annual fees on standard credit cards with 
no rewards programs and this has dramatically reduced the cost 
of using credit and heightened competition. When compared to 
relevant alternatives, such as payday lenders and personal 
finance companies, credit cards offer extremely competitive 
interest rates and low-fixed costs, especially for lower income 
and younger borrowers with limited credit options. It is not 
clear to me how the lives of lower income families would be 
improved by making it more difficult for them to get credit 
cards, thus forcing them to rely on pawn shops or payday 
lenders to buy books or sports equipment for their children. 
Nor is it clear how a college student or any other young 
American would be made better off by paternalistically being 
denied a credit card and thus having to furnish their apartment 
through a rent-to-own company. Moreover, given the paucity of 
attractive credit options available to low-income borrowers, 
there is little wonder that the substitution effect of credit 
card debt has been most pronounced for those families. And, in 
fact, the Federal Reserve reported in the 2004 Survey of 
Consumer Finances that even though credit card ownership has 
become increasingly widespread, the percentage of lowest income 
quintile households in financial distress is actually at its 
lowest level since 1989.
    The past few years have also seen an increase in the use of 
risk-based penalty fees, such as late fees and overdraft fees. 
Although these fees represent only about 10 percent of issue 
revenues, they have caused great consternation in some 
quarters. A recent study by Massoud, Saunders and Scholnick, 
however, concluded that these fees were risk-based fees based 
on borrower behavior. Moreover, they found a clear trade-off 
between the use of these risk-based fees and interest rates. 
Thus, for instance, a one standard deviation reduction on 
credit card interest rates, 273 basis points, was found to be 
associated with a $2.40 increase in late fees. The economic 
trade-off is clear: the lower and more flexible interest rates 
the past decade have become possible--
    Chairwoman Maloney. The Chair grants an additional 30 
seconds for you to wind up.
    Mr. Zywicki. --only because credit card issuers become more 
efficient at risk-based pricing. Issuers no longer must rely 
solely on interest rates, which are an attempt to predict 
before the fact the borrower's risk, but can make greater use 
of risk-based penalty fees for those borrowers who demonstrate 
their riskiness through their actual behavior. Any regulatory 
efforts to cap late fees or over-limit fees would therefore 
almost certainly lead to increased interest rates for all 
consumers or other offsetting adjustments in credit contract 
terms. This cross-subsidization would be especially unfair to 
low-income but responsible borrowers who would otherwise be 
lumped into the same interest rate category as other borrowers.
    Thank you.
    [The prepared statement of Professor Zywicki can be found 
on page 120 of the appendix.]
    Chairwoman Maloney. Mr. Ireland.


    Mr. Ireland. Good morning, Chairwoman Maloney, Ranking 
Member Gillmor, and members of the subcommittee. I am a partner 
in the Washington, D.C., office of Morrison and Foerster. 
Before coming to Morrison and Foerster, I was an Associate 
General Counsel in the legal division of the Board of Governors 
of the Federal Reserve System for over 15 years. I have over 30 
years experience in banking and financial services, and I am 
pleased to be here today to discuss the important issues 
involving the credit card industry.
    Today, credit cards are among the most popular and widely 
accepted forms of consumer payment in the world. Due to the 
convenience, efficiency, security, and access to credit that 
they provide, credit cards have become a driving force in our 
economy and new markets such as the Internet. Credit cards 
offer a wide-range of benefits in addition to access to credit, 
including freedom from carrying cash, protection from loss or 
theft, and preservation of claims and defenses that a consumer 
may have against a merchant. Approximately half of all credit 
card holders pay their balances in full every month and 
therefore also enjoy an interest-free loan. Although fees and 
card issuer revenues from fees have increased in recent years, 
consumers also are enjoying lower interest rates and wider 
access to credit. Despite the benefits, credit card practices, 
such as so-called universal default and double cycle billing 
have been criticized as unfair, in part, I think, because they 
are inconsistent with the consumer's expectation. These 
criticisms call into question the current credit card 
disclosure regime. Credit cards are subject to extensive 
disclosure requirements under the Truth in Lending Act and 
Regulation Z implemented by the Federal Reserve Board. TILA, or 
Truth in Lending, requires comprehensive, virtually cradle-to-
grave, disclosure. In addition to TILA, the Federal bank 
regulatory agencies have the power under the Federal Trade 
Commission Act to address unfair and deceptive acts and 
practices on a case-by-case basis.
    Simply put, I think the current credit card disclosures are 
too detailed, complicated, and they focus on the wrong 
information. Nevertheless, I believe that improved disclosures 
offer the potential to address current concerns about credit 
card practices. Although there could be credit card practices 
that are so unfair and so resistant to market pressure that 
they cannot be addressed through an improved disclosure regime, 
it is premature to conclude that improved disclosures cannot 
resolve these issues.
    New approaches to disclosures may be able to simplify 
disclosures. For example, there appears to be a broad 
recognition that the Schumer Box disclosure format is 
effective. Similarly, the Federal banking agencies recently 
proposed a standardized model Gramm-Leach-Bliley Act privacy 
note that would provide limited information in a uniform manner 
to facilitate consumer understanding. The model emphasizes 
simplicity as opposed to accuracy and precision, something that 
credit card issuers cannot do lest they face class action 
litigation under TILA or over the terms of their account 
agreements. Simplified disclosures could improve the ability to 
comparison shop and avoid surprise late charges and other fees. 
In addition, as Louis Brandeis noted almost a century ago, 
``Sunlight is said to be the best disinfectant and electric 
light is the best policeman.'' Simplified disclosures for 
credit card accounts can lead to changes in credit or practices 
by fostering market discipline.
    Achieving these goals is not without challenges. First, 
open-end credit accounts are complex and their terms will 
necessarily reflect this complexity. Second, disclosures cannot 
be the only source of education about financial issues. We need 
improved financial literacy. Third, there is a tension between 
simple disclosures and legal liability. Some sort of a safe 
harbor for simplified disclosures may be necessary. Despite 
these challenges, I believe that TILA, coupled with the banking 
agencies' other powers, provide ample authority for addressing 
current issues.
    I appreciate the opportunity to be here today and would be 
pleased to answer any of your questions.
    [The prepared statement of Mr. Ireland can be found on page 
34 of the appendix.]
    Chairwoman Maloney. Ms. Sherry?

                        CONSUMER ACTION

    Ms. Sherry. Chairwoman Maloney, Ranking Member Gillmor, and 
members of the subcommittee, my name is Linda Sherry, and I am 
the director of national priorities for Consumer Action. I 
thank you for your leadership on this issue.
    Consumer Action is a nonprofit organization that has served 
consumers for 36 years. For more than 20 years, we have 
conducted surveys of credit card rates, fees, and conditions, 
and our survey has become a barometer of industry practices. 
The focus of our study was to track the industry and help 
consumers obtain clear and complete facts about rates and 
charges before they apply for credit. I am pleased to share 
with you some preliminary findings from our most recent survey 
of 83 cards from 20 banks, including the top 10 issuers. Our 
surveyors posed as potential customers and this methodology 
gives us unique insight into what people face when they shop 
for credit cards. It is striking how often customer service 
people cannot provide even the basic facts required by Federal 
credit card disclosure laws. This leaves potential customers in 
danger of applying for a card that at best does not suit them 
and at worst contains predatory terms and conditions. All top 
10 issuers advertise cards on their Web sites without firm 
APRs. Instead, they skirt regulations by providing only a 
meaningless range of rates. Cardholders have no way of knowing 
what the terms on that card will actually be until it arrives 
in the mail. Why should cardholders have to wait until the card 
has been issued to read the contract that governs their use of 
the card? Such practices make it difficult, if not impossible, 
for consumers to shop around to get the best deal. Most major 
issuers deny that they employ universal default punitive 
interest rates based solely on how customers handle other 
credit accounts. However, many still use credit reports as a 
reason to make adverse account changes under change and terms 
provisions. Standard in the vast majority of credit card 
agreements, unilateral change of terms provisions are cited as 
a way for companies to manage risk. But these take it or leave 
it contracts of adhesion force cardholders onto an uneven 
playing field even before they actually become customers 
    Last month, we went to the Web sites of the top 10 issuers 
to review publicly available change of terms disclosures; 9 out 
of 10 reserved the right to change APRs and other terms at any 
time. Six banks included specific reference to credit reports 
or scores or other creditors as a reason to change cardholder 
terms. We asked customer service people at 20 issuers, ``Do you 
raise my interest rate because of my credit record with other 
credit cards or lenders?'' It appears that half of the surveyed 
banks would, at the time of the survey, raise cardholders' APRs 
based on information from credit reports and scores. Even if 
you never paid late on your card, you could be subjected to a 
default APR. The industry has aggressively increased fees and 
penalty interest rates, fueling profits that are up by nearly 
80 percent since 2000. We have a right to know whether these 
fees bear any true relation to the bank's costs.
    Average APR data doesn't tell the whole story. The spread 
of non-penalty rates is strikingly wide at individual banks. At 
one top 10 issuer, rates ranged from 8.25 percent to 25 percent 
on non-penalty rates. The different rates are often referred to 
using deceptive terms like ``preferred,'' ``elite,'' or 
``premium.'' Is there anything premium about a rate of 18.24 
    Residual interest or trailing interest is a deceptive 
method of calculating credit card interest right up until the 
day full payment is received; 45 percent of surveyed banks 
employ the practice. Penalty rates are as high 32.24 percent. 
Late payments result in higher penalty rates with 85 percent of 
issuers. Often the increase is automatic and standardized, not 
tied to any individual performance. Late fees have more than 
doubled in the last decade. The average grace period at the top 
10 issuers has shrunk by more than 3 days since 1995. Cash 
advance fees have jumped 40 percent in the last decade. More 
disturbingly, 90 percent of the cards have no cap on the fee.
    Before closing, I would like to bring to your attention 
just how important credit card reform is to your constituents. 
In less than a year, 12,327 individual constituents have used 
Consumer Action's Web site to write to you for protection 
against abusive credit card practices. This is a follow-the-
leader industry. When one issuer steps out with a new anti-
consumer practice, other banks are quick to follow. When 
attention is focused on one bad practice, such as universal 
default, issuers jump to say they don't do it. The problem is 
that lesser known unfair practices continue, such as residual 
interest allocation of payments to low-interest balances, junk 
fees on foreign transactions, and Sunday and holiday due dates 
that trigger unjustified late fees.
    I thank you for your diligence in investigating credit card 
industry practices. Credit cards are an integral part of our 
lives. We protect people from unsafe products, shouldn't we 
also give cardholders an even playing field?
    [The prepared statement of Ms. Sherry can be found on page 
44 of the appendix.]
    Chairwoman Maloney. Thank you very much for your testimony. 
I would like to begin by asking Ms. Zeldin and Ms. Sherry this 
question. No matter whose statistics that you read or look at, 
the level of consumer credit debt is really quite high. And we 
know that consumers with high credit debt have traditionally 
moved that debt into mortgage debt by taking out home equity 
loans or refinancing their homes to pay off their cards. And I 
am concerned that we may be confronting a ``perfect storm'' 
with the weakening of the subprime market. The opportunity to 
consolidate credit card debt into home mortgages or home equity 
loans is less likely to be an available solution. What do your 
studies find? Is this a realistic concern, and I ask for your 
comments, Ms. Zeldin and Ms. Sherry?
    Ms. Zeldin. Yes, it is a concern. There was a lot of--I do 
not have the figures in front of me--but the refinancing boom 
did result in a lot of refinancing of credit cards, not just in 
the subprime market but now that home prices look to be 
declining in the entire housing market and homeowners will have 
less home value to draw upon, we can expect that drawing out 
home equity lines of credit will decrease and that will reduce 
the availability of consumers to refinance and have lines of 
credit that are at lower interest rates than what they may have 
been paying on their credit cards.
    Chairwoman Maloney. Ms. Sherry, any comments?
    Ms. Sherry. Yes, I just think that really points to the 
desperation of people who are burdened with unsecured credit 
card debt with moving target terms that increases their debt so 
their interest rate would be increased, and that would increase 
their overall debt load. It points to the desperation of these 
folks that they would actually go and get a home equity loan, 
which would put their own home in jeopardy to get out from 
under this kind of debt. So, yes, I definitely see it as a 
problem. I see people making unwise moves in the past and even 
as we speak today to move credit card debt into home equity 
debt, not a good move.
    Chairwoman Maloney. Thank you, and I would like to address 
this question first to Mr. Yingling and Mr. Ireland, as well as 
anyone else who would like to comment. There seems to be 
widespread agreement that the credit card disclosures are 
difficult for consumers to understand. I was struck last week 
when William Syron, the head of Freddie Mac, testified, and he 
said that he used credit card disclosure as an example of 
uselessness in testifying to this committee, and that he and 
his wife spent literally hours trying to figure what their 
credit card statement meant to no avail. And I would like to 
know, can industry take steps to correct that in the absence of 
Federal regulation? And what is industry doing about 
acknowledging the problem with disclosure? And apart from 
disclosure, are there other issues including, but not limited 
just to those, where you believe regulation or legislation is 
needed? Do you believe that correcting disclosure will cure the 
problems with universal default, double cycle billing, or 
retroactive interest increases? And I first would like Mr. 
Yingling and Mr. Ireland to start and then the consumer 
advocates and anyone else who would like to discuss this.
    Mr. Yingling. First just a comment on your previous 
question. I think it is fairly understandable that people would 
refinance into a home equity loan. They have equity in their 
home, and if they put it into a home equity loan, they get a 
lower interest rate because it is secured and in many cases, it 
is also tax deductible. So I do not think it is quite a sign of 
desperation; I think it is fairly rational.
    The disclosures do not work. There is, I think, unanimous 
agreement. At one point, actually I am old enough to remember 
when they were first enacted starting in this very committee, 
they were considered to be model disclosures. But what has 
happened is that the product has gotten more complex. Some of 
the things that we disclose now are really not that important, 
and we do not disclose some of the things that are important, 
some of the things that are of concern to members of this 
committee. So we are optimistic that we will come out with a 
much, much better disclosure. We cannot design it ourselves 
because it is subject to extensive law and regulation, but we 
can work with the Fed and work with you in your oversight 
capacity to make sure that basic disclosure is useable. And, 
importantly, you can use that kind of format still, the 
original boxes, maybe even in a clearer fashion, and we have 
seen some banks do that on their own and use common 
terminology. Then it is very easy to take three or four offers 
and look at them and compare them across lines. One of the 
difficult things to decide is that you cannot have too many 
things in that box or you undermine the consumer usefulness of 
that box. So in addition to the box, we want to be able to have 
other disclosures behind it and other resources behind it so 
that consumers who want more, will read that box, that is the 
most important thing, and they will compare it, and then if 
they want to know more, they will have more available. We are 
working on that.
    With respect to legislation and regulation, we hear, as I 
said in my oral testimony, the concerns. We hear them very 
clearly. We are working hard on it. It is a not an accident 
that you are seeing some major changes. Interestingly enough, I 
think card companies are starting to compete in ways beyond 
lowering the annual fee, lowering the interest rate. They are 
trying to compete now on offering simpler products, more easily 
understood products. You do see companies, for example, that 
now offer cards that have no over-the-limit fees. They have 
eliminated them. They are offering simplified kinds of cards. 
We also are going to work on issues that we may be able to do 
as an industry. We are working on those. Frankly, we have to be 
very careful because there are anti-trust issues, but we are 
hard at work on it.
    Chairwoman Maloney. Thank you. My time has expired. Mr. 
Gillmor is recognized for 5 minutes.
    Mr. Gillmor. Thank you very much. Let me ask on the issue 
of disclosure, which everybody agrees is poor, probably because 
there is too much of it, and it is not understandable. I guess 
my question is, whose fault is that, and how do you correct it? 
Is it the companies, is it the Federal Reserve which supposedly 
has the jurisdiction to regulate here? So I guess I would ask 
the panel does the Federal Reserve have adequate authority in 
the area of disclosure? And, two, is it their fault that it is 
all messed up? And if not theirs, whose?
    Mr. Ireland. Mr. Gillmor, the Federal Reserve has very 
broad authority under the Truth in Lending Act to fashion 
disclosures for Regulation Z. In the area of open-end credit, 
as I indicated in my testimony, the overall account and the 
transactions and disclosing those transactions is a complicated 
issue if only because you have constantly moving balances that 
you are paying interest on but you may also have different 
interest rates, as we have discussed here, and fee charges in 
certain cases. But fees have been around for a long time though 
the levels have changed. And that disclosure is sort of 
inherently a complicated disclosure. The Truth in Lending Act 
itself encourages very precise, very accurate disclosures 
because it provides for civil liability, including class 
actions, if you do not do it right. So the first challenge that 
the institution faces is getting the disclosure right. 
Institutions are now working, as Mr. Yingling said, on trying 
to simplify some of their disclosures but there are limits as 
to what they can do within the current statute and the current 
rules. I think the Fed has an ability to contribute very 
substantially toward simplified disclosures. I think they may 
have to think creatively to do it. I also think that they have 
perhaps waited longer than they should to pick up this issue. 
As we have discussed here, there have been significant changes 
in the credit card industry over the years, and they have not 
done a comprehensive review of the Truth in Lending and credit 
card disclosures in a couple of decades.
    Mr. Gillmor. Mr. Yingling?
    Mr. Yingling. I would just say that it is the lawyers' 
    Mr. Gillmor. Well, I am a reformed lawyer.
    Mr. Yingling. I am, too.
    Mr. Zywicki. Congressman, if I may just add briefly, 
according to a study done by Federal Reserve economist Thomas 
Durkin, to keep this in perspective, two-thirds of credit card 
owners find it very easy or somewhat easy to find out 
information about their credit card. Only about 6 percent say 
it is very difficult. And I would call the panel's attention to 
some of the key aspects of the GAO report where they note that 
one of the big problems is that the old TILA rules require 
disclosure of increasingly irrelevant terms or trivial terms 
such as the minimum finance charge, such as things like method 
of computing balances, which are too difficult to disclose in a 
very simple sort of way. And what the GAO report observes is 
that focusing on trivial, outdated, or irrelevant disclosures 
makes it more difficult for consumers to find the information 
they need to get disclosure. And the concern is that this 
market is changing much faster than the regulations and if 
further disclosure is going to be mandated, I think we should 
    Mr. Gillmor. I am running out of time because my time is 
limited here, and I do have another question I want to ask the 
panel. I think one of the most helpful things you could do is 
give us an answer to that. Mr. Ireland says it is inherently 
complex. Is it so inherently complex we are not going to be 
able to fix it? But not now because I do want ask my other 
question, but I think that is one of the most useful things 
that could come from this panel is an answer as to how to make 
us have meaningful disclosure. The other thing I want to ask, 
we keep hearing about how profitable the credit card is, I do 
not know whether it is or not compared to other industries. A 
lot of industries, you can go look and you can find for the 
auto industry, the drug industry, the banking industry, what 
return on equity is, and what the return on revenues are. What 
are the returns on equity, the returns on revenue in the credit 
card industry? Certainly there have been some studies. Mr. 
    Mr. Yingling. Actually, the Fed does a regular study so it 
is available. Credit card company profits compared to most 
industries are actually not very high. The return has been 
relatively stable for the last 20 years. Some of this is in the 
GAO study by the way. And the return on assets is slightly 
above 3 percent. Just to put that into perspective, that is 
slightly lower than the automobile industry and considerably 
lower than other industries. It is higher than other types of 
lending but, as the Fed points out, if you adjust that back for 
risk, because credit card lending is unsecured, it is within 
the parameters of what you would expect. Another test is if you 
look at the PE ratios of credit card companies, how the market 
looks at credit card companies, their price earnings ratio in 
the stock market is lower than the S&P 500 average. So, 
although you hear a lot of talk about how profitable it is, 
when you look at it compared to other industries, it is not all 
that profitable.
    Chairwoman Maloney. Thank you. The gentleman's time is 
expired. And we have been called for a sequence of votes that 
may take up to an hour. The Chair recognizes Congressman Watt 
for 5 minutes.
    Mr. Watt. Thank you, Madam Chairwoman. I will be quick 
because I am not sure whether we are coming back or not. But 
let me just first go with this notion, Mr. Zywicki, that you 
advanced that you are somehow getting a free credit card and 
that if we do something in this area, we are likely to 
incentivize cross-subsidization. I am sure you know that 
somebody is paying for your credit card. I know when I get a 
free ride for whatever period it is that I have free interest, 
no interest, somebody is paying for that. And so there is 
substantial cross-subsidization going on already in this 
market. The half of the people that Mr. Ireland says who are 
getting free interest are being subsidized by people who are 
paying on the other side very high interest rates, late payment 
fees, and the various other charges that are going on.
    Now, one of those is interchange fees which not a single 
person on this panel has said a word about. Those are the fees 
that credit card issuers charge to retailers for the use of 
their credit card. I am looking at a charge here that suggests 
that about $30 billion in interchange fees are charged, late 
fees, $16 billion, cash advance fees, $5 billion, annual fees 
on credit cards, $3 billion. So interchange fees, which was not 
mentioned by a single witness here, is the highest part of the 
cost of credit cards that we all pay at some level, even the 
people who do not use credit cards, the people who pay cash, 
are cross-subsidizing those of us who use credit cards because 
they are having to pay those interchange fees. And one of the 
concerns I have is that those interchange fees are not really--
they are not addressing the cost of the transaction because all 
the studies I have seen suggest that only 17 percent of those 
fees are going to actually covering--and I suspect most of it 
is going to pay for all of the mailings that we get in the mail 
asking us to issue credit cards--to buy another credit card. 
When you say, Ms. Sherry, shop for credit cards, there is 
nobody shopping for credit cards, they are readily available to 
everybody, I guess at least a solicitation a day asking me to 
take out a different kind of credit card. Even from the lenders 
that I already have a credit card from wanting me to upgrade. 
Now I uniformly throw those things in the wastebasket but 
somebody is paying for those mailings. And the easy credit that 
is available out there is part of the problem.
    Now, having gotten on my platform, let me just go to Mr. 
Yingling. You said that somebody is sitting in a room every 
week trying to solve this problem. Who is it that is trying to 
solve this? And are we going to have to solve it here or is the 
industry going to come up with some satisfactory standards 
about how to get this because if it doesn't, everybody is 
unhappy about it except Mr. Zywicki, who says that somebody is 
subsidizing him and he doesn't have to worry about it anymore. 
Tell me who is meeting to solve the problem?
    Mr. Yingling. We have a group called the Card Policy 
    Mr. Watt. Who?
    Mr. Yingling. The Card Policy Council is a group within the 
ABA, and it consists of the major credit card issuers: 
MasterCard; Visa; American Express; and Discover.
    Mr. Watt. Are you all issuing anything publicly to tell 
people what--have you set a best practices standard? Is there 
any kind of industry standard coming out of this?
    Mr. Yingling. What we are doing frankly is working our way 
through all the issues, some of which you just talked about, 
others that others have talked about. We are working in the 
disclosure area. We are working in the literacy area. We are 
working on some of these other issues that you all are 
concerned about. We should come up and brief you about it with 
your concerns, some of which you see--
    Mr. Watt. Would you send me something in writing? My time 
is up and we have to go vote, but we never have enough time to 
address these issues. Somebody tell me what the solution to 
this problem is short of our legislating in this area? Anybody 
on this panel who has a solution to it, just give me a short 
description of it in writing if you would.
    Mr. Yingling. We will.
    Chairwoman Maloney. All of the members of the committee 
would appreciate that. The Chair recognizes Mr. Castle for 2 
minutes and Mr. Ackerman for 2 minutes. We have been called and 
we are on a second bell. We polled the members, and we will not 
be coming back after this hour-long session. Mr. Castle?
    Mr. Castle. I have 2 minutes so that eliminates the 
questions I was going to ask each of you very quickly. I would 
just like to second what the chairwoman and Mr. Watt said. I 
think any suggestions about some of these changes would be very 
helpful. Mr. Wilmarth, very quickly, you had a lot of concerns 
with the OCC and some federalization, etc., what is your 
recommendation for change, if anything, in that area, if you 
could do that briefly?
    Mr. Wilmarth. Well, I have two recommendations at the end 
of my testimony. One is I think this area is closely linked to 
the mortgage area in my opinion, and I think the Congress needs 
to look at comprehensive, uniform standards of fair lending 
practices that would level the playing field between federally-
chartered institutions and state-chartered lenders. My second 
proposal is, as I have said, you cannot rely upon the OCC, 95 
percent of whose budget is funded by the major banks, to be a 
completely independent regulator. My opinion is that you need 
enforcement. The best tool for enforcement is the Federal Trade 
Commission Act. You should give the FTC, which is currently 
barred from bringing unfair and deceptive acts and practices 
cases against banks, you need to give the FTC authority to 
bring that kind of enforcement action against national banks 
because State attorneys general are independent enforcement 
bodies for State banks. There is no independent enforcement 
body for national banks.
    Mr. Castle. Thank you. To Mr. Yingling, and I think to Mr. 
Ireland as well, you all talked about the disclosures. For me 
it is pretty simple--if I get a bill from a credit card, I like 
to know what is the real due date on there and what it is going 
to cost me if I do not get it in in that particular time. My 
God, it is very hard to figure out. But I think that is very 
important. And I think some of the banks are already starting 
to do this, the credit card banks. And you both have suggested 
that other things have to be done in that area, and I know it 
is a little bit uncertain with a particular box or whatever it 
may be. But, first of all, is that happening anyhow in the 
marketplace? And, secondly, is there real focus on making these 
changes even before regulations have to be imposed or we in 
Congress have to pass something to make it happen?
    Mr. Ireland. Well, I can tell you that credit card issuers 
are devoting major resources to simplifying their disclosures 
and making them easier for consumers to understand. Their 
ability to do that is limited by Federal law. They are going to 
need some help from the Federal Reserve to get to the end of 
this trail.
    Mr. Castle. Thank you.
    Chairwoman Maloney. Mr. Ackerman?
    Mr. Ackerman. Thank you very much, Madam Chairwoman. I do 
not have to do much shopping either, all I have to do is go to 
my mailbox. This is all for me. The past year or so, there was 
a lot more that my wife threw out because she thinks I am 
getting compulsive about looking at these things. I do not know 
that I actually make money on them, as Mr. Zywicki does, but I 
do try to read most of them and do as good as I could. I am not 
a law professor; I am just a social studies teacher. But I just 
pulled this one, which was on the top and started to highlight 
it from a bank that has been chasing me to open an account. And 
they offered me this wonderful platinum thing where I can get a 
0 percent introductory rate until I read it and they tell me 
about the 7.99 fixed APR thereafter. But then I read all the 
print on the front, which has lots of 0 percents all over the 
place and frozen things and whatever, and I turn to the back 
and read in the small print, which I can only do without my 
glasses, and I will round it off to the nearest one-hundredth 
of a percent so you do not get 7.99. There are rates here that 
they offer me and tell me that I am going to be subject to all 
of these under different sets of conditions and they are: 0 
percent; 8 percent; 13 percent; 14 percent; 16 percent; 20 
percent; 21 percent; 24 percent; and 29 percent. Each of those 
is one one-hundredth less, you understand. And for the benefit 
of doing all this, paying as much as 29 percent after I get 
sucked in thinking I am paying 0 percent, it tells me that I 
have the great pleasure of not having to pay an annual fee. I 
think this 29 percent thing is great. I remember when I was a 
kid growing up on New Lotts Avenue, Shelly, he worked out of 
the candy store, he went to jail once for doing something like 
that; 29 percent is not 0 percent. And I would venture to say 
that, and I will paint with a very broad brush, but the people 
on the lower socio-economic scale of the ladder, those people 
that you run classes for on how to open a bank account, and 
savings, and all those kinds of things, they are not the people 
who read this. Those are the people who are going to default 
thinking they are getting a better rate, switching from another 
credit card, not knowing about the fine print on the back, 
getting sucked in, and finding out that they are now paying a 
rate that they cannot afford, and they should have stuck with 
what they had. These are the people that we have to be 
concerned with, not myself or Mr. Zywicki. I get a lot of 
these; they are offering me free money. I took one of them. I 
took several of them as a matter of fact. Some bank offered 
me--some non-bank, forgive me, some non-bank offered me 
$50,000. I said, that is a great deal. I called them up, they 
said, ``Yes, we switch it into your account.'' I am pre-
approved. I said, ``That is wonderful. I will take every nickel 
you are giving me, and I will pay it back by July,'' whatever 
it was. The next thing I knew, the first statement I got, I had 
$250 worth of fees because I was over my credit limit. I said, 
``How could I be over my credit limit, I have not missed a 
payment, it is my first bill?'' They said, ``Well, the first 
day that you take that $50,000, we add'' blah, blah, blah. I 
was tough enough to fight that but a lot of people who are not 
sophisticated enough do not know what they are getting into. 
And I think, just being the skeptical social studies teacher 
that I am, that is deliberate. And I think that is what we have 
to fix. And I would, as my friend Mr. Watt said, I would like 
the industry to sit down with us and say, ``Here is how we can 
fix this. We do not have to offer people nine rates, thinking 
they are not paying any.''
    Chairwoman Maloney. That is a wonderful statement, but we 
may miss a vote. I want to thank the panelists and the members 
for being here for their interest. And the Chair notes that 
some members may have additional questions for the panel, which 
they may wish to submit in writing. Without objection, the 
hearing records will remain open for 30 days for members to 
submit written questions to these witnesses and to place their 
responses in the record.
    And this hearing is adjourned, and I thank everybody for 
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]
                            A P P E N D I X

                             April 26, 2007