[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                     IMPROVING CREDIT CARD CONSUMER
                      PROTECTION: RECENT INDUSTRY
                       AND REGULATORY INITIATIVES

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 7, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-36


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

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

                CAROLYN B. MALONEY, New York, Chairwoman

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


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 7, 2007.................................................     1
Appendix:
    June 7, 2007.................................................    79

                               WITNESSES
                         Thursday, June 7, 2007

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance 
  Corporation....................................................    16
Carey, John P., Chief Administrative Officer, Citi Cards.........    46
Caywood, William, Senior Consumer Credit Risk and Compliance 
  Officer, Bank of America.......................................    47
Dugan, Hon. John C,, Comptroller of the Currency, Office of the 
  Comptroller of the Currency....................................    14
Finneran, John G., Jr., General Counsel, Capital One.............    50
Huizinga, James A., Sidley Austin LLP............................    44
Johnson, JoAnn M., Chairman, National Credit Union Administration    19
Keest, Kathleen E., Senior Policy Counsel, Center for Responsible 
  Lending........................................................    43
Landis, Marilyn, Basic Business Concepts, Inc., Pittsburgh, PA, 
  on behalf of the National Small Business Association...........    52
Mierzwinski, Edmund, Consumer Program Director, United States 
  Public Interest Research Group.................................    54
Mishkin, Hon. Frederic S., Governor, Board of Governors of the 
  Federal Reserve System.........................................    13
Neiman, Richard H., Superintendent, New York State Banking 
  Department, on behalf of the Conference of State Banking 
  Supervisors (CSBS).............................................    20
Reich, Hon. John M., Director, Office of Thrift Supervision......    17

                                APPENDIX

Prepared statements:
    Brown-Waite, Hon. Ginny......................................    80
    Carson, Hon. Julia...........................................    82
    Gillmor, Hon. Paul E.........................................    83
    Bair, Hon. Sheila C..........................................    85
    Carey, John P................................................   108
    Caywood, William.............................................   123
    Dugan, Hon. John C...........................................   131
    Finneran, John G., Jr........................................   175
    Huizinga, James A............................................   181
    Johnson, JoAnn M.............................................   185
    Keest, Kathleen E............................................   208
    Landis, Marilyn..............................................   226
    Mierzwinski, Edmund..........................................   233
    Mishkin, Hon. Frederic S.....................................   249
    Neiman, Richard H............................................   266
    Reich, Hon. John M...........................................   281

              Additional Material Submitted for the Record

Maloney, Hon. Carolyn:
    Letter from the National Association of Federal Credit Unions   295
    Statement of the New York State Consumer Protection Board....   297
Watt, Hon. Melvin L.:
    Written response to question submitted to Hon. Sheila Bair...   309


                     IMPROVING CREDIT CARD CONSUMER
                      PROTECTION: RECENT INDUSTRY
                       AND REGULATORY INITIATIVES

                              ----------                              


                         Thursday, June 7, 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 Maloney 
[chairwoman of the subcommittee] presiding.
    Present: Representatives Maloney, Watt, Ackerman, Moore, 
Waters, Carson, Hinojosa, McCarthy, Baca, Green, Clay, Scott, 
Cleaver, Bean, Hodes, Ellison, Perlmutter; Gillmor, Price, 
Castle, Biggert, Capito, Feeney, Hensarling, and Davis of 
Kentucky.
    Ex officio: Representative Bachus.
    Chairwoman Maloney. Welcome. The hearing will come to 
order. This hearing, entitled, ``Improving Credit Card Consumer 
Protection: Recent Industry and Regulatory Initiatives,'' is 
the second hearing in a series that this subcommittee is 
holding on credit card practices.
    There is no question that credit cards are an essential 
part of American lives. And in our increasingly electronic 
banking system, credit cards have replaced cash and checks for 
daily shopping, travel expenditures, business needs, and even 
paying big bills, such as college tuition.
    The average American family has five credit cards. The 
availability of credit has proven good for our economy. 
Consumers spent over $1.8 trillion in 2005, using credit cards. 
In our society, a person without a credit card cannot rent a 
car, buy plane tickets at the Internet discount rate, get an 
advance movie ticket online, make hotel reservation, or engage 
in other transactions that many of us take for granted.
    In many cases, the ability to pay with a credit card 
enables a consumer to make a purchase that they would not 
otherwise have been able to make at that time, or to pay an 
emergency bill that they were not prepared for.
    As a New Yorker, I know that the credit card industry is a 
strong engine, not only of our national economy, but of local 
economies, by providing jobs and getting small businesses 
access to credit.
    On the other hand, the use of credit cards has contributed 
to the increase of consumer debt to record levels. Among 
households that carry a balance, the average household carries 
over $13,000. That number is expected to rise dramatically, as 
consumers confront the fact that in the falling housing market, 
they can no longer refinance their home to pay off their credit 
cards or other debt.
    I am concerned that we will see a perfect storm in consumer 
credit as these pressures converge on Americans and that the 
ripple effect will be felt throughout our entire economy.
    Even though credit cards are indispensable to most working 
Americans, credit card complaints far outnumber all other 
complaints about banks filed with Federal regulators in recent 
years. In the wake of our first credit card hearing last month, 
this subcommittee has received a flood of correspondence from 
individuals with credit card complaints.
    The complaints we received center on what consumers see as: 
arbitrary and unfairly high interest rates and penalty fees; 
confusing practices that constantly change in the issuer's 
favor; and impossible barriers to getting help to sort through 
a problem, even when the issuer has caused the problem.
    Many people, myself included, believe that improved 
disclosure would help consumers avoid these pitfalls. For this 
reason, we set this hearing shortly after the Federal Reserve 
released its new Reg Z for public comment. As the first 
revision of Reg Z in over 25 years, it is long overdue, and 
much awaited.
    I think it represents a considerable improvement over the 
present situation, in which a long outdated rule struggles to 
keep up with an electronic financial universe it was not 
designed for.
    I must say, a very moving part of a hearing that we had was 
when the Federal Reserve chairman testified that he and his 
wife could not understand their credit card statement, and 
spent hours reading it. So this reform is long overdue.
    Among the major improvements in the proposal are: a 45-day 
notice period for increases in interest rates; display of the 
Schumer Box, not only at solicitation, but at account opening; 
and as changes in terms prohibiting the use of the term ``fixed 
rate'' for rates that are not fixed, to name a few.
    I personally like the new section that shows consumers all 
of the interest and all of the fees accrued for the month, and 
gives consumers a running total for the year-to-date. I welcome 
these improvements, and look forward to hearing the analysis 
and comments of our witnesses, starting with Fed Governor 
Mishkin, on this very big and important new development.
    But I am not sure that even the best disclosure will be 
enough to resolve some of the issues that we are confronting. 
In our previous hearing, we explored some of the abusive 
practices that have attracted the most criticism: universal 
default; double-cycle billing; trailing interest; retroactive 
rate increases; and limitless over-limit fees, among others.
    Some of these, such as double-cycle billing, are just too 
complex for disclosure, to make it fair. And if you doubt that, 
ask one of your issuer witnesses to explain it to you, using 
the numbers. It is very complicated.
    More systematically, I doubt that disclosure can be enough 
to protect consumers when the issuer can change any of the 
terms of the contract at any time, and in any way. That is the 
case for a surprisingly large number of cards, in which 
consumers are completely at the mercy of issuers. Many issuers 
can and do change the interest rate, the penalties, overlimit 
fees, how rates are calculated, the payment date, and many 
other features.
    Under the new rule, they will have to tell consumers about 
most of these changes in advance. But that really does not help 
even the most savvy customer, unless they move to a card with 
safe and stable terms.
    Consumer advocates argue that some common practices, like 
any-time and any-reason increases in rate, are just unsafe and 
unfair. At our last hearing, industry participants pointed out 
that several of the large issuers have recently taken steps to 
eliminate some of these abuses from their own products. I am 
happy to say that, on our second panel, we have several issuers 
who have announced such steps, and will explain what they have 
done to develop best practices, and to get rid of bad ones.
    Several large issuers have announced that they no longer 
use universal default. Others have announced reform of payment 
allocation, so that payments are applied to higher-rate 
accounts first. Some have said that they will abandon any-time, 
any-reason repricing.
    As a supporter of market-based solutions where possible, I 
welcome these steps. Perhaps the spotlight of congressional 
attention has helped to produce these commendable reforms. Yet 
I worry that as competitive pressures grow, issuers will go 
back to the most profitable modes of doing business, or issuers 
who adopt the best practices will simply lose business to those 
who have not.
    To discuss these issues and others, I am planning a credit 
card summit. I am delighted to say that the issuers testifying 
today--Citibank, Bank of America, Capital One, as well as J.P. 
Morgan Chase, and many consumer groups--have all agreed to 
participate.
    Among the results I want to achieve from this meeting is a 
way to use private forces to encourage best practices. For 
example, what if industry, working with consumer advocates, 
developed a gold standard for credit cards, and certified that 
certain of their products met this standard?
    Cards with this--the gold standard--might have easy-to-
understand terms, a hotline to resolve complaints, no fees for 
paying online, no use of universal default, or whatever feature 
the group determines represents best practices. Regulators 
could enforce this pledge that the issuers have made.
    Right now, the Federal Reserve is the only regulator with 
power to issue regulations banning unfair and deceptive 
practices under the Truth in Lending Act. It has not done much 
in that area. If other regulators had similar powers, perhaps 
we would see more regulatory monitoring of bad practices.
    Even more basically, I would like to encourage the 
regulators to enforce the laws that already exist. For example, 
the regulations governing processing of payment are disregarded 
by issuers who process payments in a way that results in many 
payments being late, even though they were mailed a week ahead 
of time. We have regulations to deal with this, but they are 
not adequately enforced, as the many letters complaining about 
unfair payment date practices attest to.
    The Federal banking agencies have done a great deal of work 
effectively on safety and soundness, but they have not put the 
same type of attention and focus on consumer protections, and 
we need to improve those efforts. This is the first 
congressional hearing on these new proposed disclosure 
regulations, which aim to give credit card customers clear and 
accurate information, and eliminate the ``gotcha'' moment, when 
people are hit with a charge they did not expect, and do not 
understand.
    More remains to be done, but this proposal is a long-
awaited and very welcome first step. Thank you. I reserve the 
balance of my time, and call on Mr. Gillmor.
    Mr. Gillmor. Thank you, Madam Chairwoman. If I might, I 
would like Ranking Member Bachus to go first on our side, and I 
will go second.
    Mr. Bachus. Thank you. First of all, Madam Chairwoman, I 
want to thank you for having the hearing, and I would also like 
to associate myself with your remarks.
    As the ranking member of the Financial Services Committee, 
many other members refer their constituents to me, or they will 
come to me, and they will describe a credit card practice that 
has occurred to one of their constituents, or sometimes a 
family member.
    And not only that, but recently--probably in the last 2 
years--more and more, I have constituents who come to me, like 
a young man whose wife had a premature baby. He was at the 
hospital for 2 months, which is a hardship case, but that 
doesn't excuse him from honoring his obligations, and he was 
paying his credit card on time.
    He realized it was the last day to pay his mortgage 
payment, so he called his mortgage company up, and they said, 
``Well, you can use your credit card,'' so he said, ``Great.'' 
He used his credit card. When his credit card bill came in, he 
noticed that not 8.5 percent interest was charged on that, but 
24.9 percent interest on the mortgage payment.
    So, he said, ``Oh, my gosh,'' you know, so he called his 
credit card company, and he said, ``I want to pay that off 
today, I am going to send you a check,'' so they said, 
``Okay.'' He sent that check in, plus his minimum payment for 
the month, and they applied it to his lowest balance.
    Now, here is a young man who would have never come into my 
office; he probably didn't have time. He saw me in a 
restaurant, and he came up to me and he basically said, 
``Congressman, I don't think that's right.'' And, quite 
frankly, I don't, either.
    Now, he explained to me that he called them back and said, 
``Where was I told that if I use my credit card, you know, to 
pay my mortgage payment, where was I told this?'' They sent him 
something. And he said, ``I have it at home. I would like to 
send it to you.''
    He sent it to me. I read it. It said, ``If you make a cash 
payment,'' but he wrote on his note that he paid his tuition 
using a credit card some 6 months before, and what was the 
difference? I mean, if that wasn't a cash payment, why was a 
mortgage payment? He said they explained, ``Well, you know, you 
can either pay with a credit card, or you can write a check. 
And when you do something like writing a check with the credit 
card, that's a cash payment.'' He said, ``I don't understand 
that.''
    Another example ia a businessman who came to me. I know 
him. He is worth millions of dollars. He owes nobody anything. 
He has perfect credit. He has two credit cards, and he uses 
them for convenience. And here is a guy who has 200 employees, 
and he has time to be outraged. He has time to get a lawyer. So 
what he does, around Christmas, he has two credit cards, one 
$15,000, one $30,000, and he goes to Europe and spends $20,000. 
He doesn't go over his limit; he is very careful not to do 
that.
    But in March, he suddenly looked at his credit card, and it 
had gone from 8.5 percent to 20-something percent. What in the 
world? So, he called his bank and his bank said, ``Well, we 
don't do that, we have referred that to another company. We 
referred that to another--our bank no longer does this, we 
farmed it out.''
    He has a lot of money with this bank, does business with 
them. They say, ``You need to call these people.'' He calls 
them and he says, ``What in the world are you doing? I have 
perfect credit. What is this about?'' ``Well, you either did 
one of these six or seven things.'' So, he doesn't know what he 
has done.
    They tell him he has to write somebody else, so he writes a 
letter. He gets a form, which he brings in and shows me. It is 
two pages: ``Thank you for your inquiry as to why your credit 
rate went up. Here are the various reasons it could have gone 
up.'' He then gets his lawyer to write and say, ``Could you 
please tell him, in this case, why it went up?'' He got another 
form-generated answer.
    But he has looked at all those reasons, and he thinks what 
happens is he had two credit cards. And one of the things that 
it actually said in there is, ``If you have our credit card, 
and there are other credit cards you have, and you approach 
your credit limit, we can up your''--and that's the only thing 
that could have possibly happened, because it was around 
Christmas.
    By the way, you know he never saw the notice. But do you 
know when they mailed the notice, which was a form-generated 
thing, which said, ``Important document enclosed,'' like we all 
get every day? They mailed it on December 19th. And here is a 
sophisticated guy who has hundreds of employees, he has lawyers 
at his disposal, and he still can't find out what happened to 
him.
    Now, of course, what did he do? He immediately paid off 
that credit card. He immediately wrote a check and sent it in. 
And Americans every day are getting outraged by this. They get 
another credit card. And yes, you can do that. But that still 
doesn't make all of this right.
    I am very happy that when I met with Citigroup a few weeks 
ago, and I talked about universal default, they said, ``We 
don't do that.'' Capital One has told me, ``We don't do that 
any more.'' I am very glad they're responding to that. If they 
don't start responding to this thing about where consumers can 
pay on their highest interest rate, I do believe that this 
Congress will take a run at it.
    I can't speak for all the members of the minority, but I 
can tell you that I have a file, and there are 28 Republicans 
who have written me letters complaining about stuff, and 
saying, ``You need to do something about this.''
    I have talked with the Federal Reserve, and they have 
limited duties, as you know. They have to respond to truth in 
limit and disclosures. And they say certain abusive practices, 
even if we think they're abusive, even if the GAO thinks 
they're abusive, even if we have 40,000 letters from people 
saying they don't think this is right, we really can't do 
anything about that. If anything is to be done, the Congress 
will have to do it. And they have actually said, ``That's your 
watch, not ours.''
    I am interested in hearing from all of you. I am going to 
read your testimony. But I will tell you that, as the 
chairwoman said, 90 percent--you know, subprime lending, it's a 
problem, and people have lost their housing. But the number of 
people--and I have had people in my district lose their 
houses--but the outrage over just a few of these practices is 
just something.
    The day it came out in the Birmingham News, I'd been 
appointed ranking member--and, regrettably, in that article it 
said that we did credit cards--I received 12 calls, 12 calls 
from people who said, ``I want to come in and talk to you.'' 
That's in my district. Thank you for being here.
    Chairwoman Maloney. Thank you for your statement. Mr. 
Ackerman for 3 minutes; he has been a very strong advocate for 
change in this area.
    Mr. Ackerman. I thank the chairwoman and the ranking 
member, and I want to associate myself with their statements. 
And thank you for the 3 minutes, and I hope you don't cut me 
off as I approach my 3 minutes.
    [Laughter]
    Mr. Ackerman. Be careful driving today, because as you 
approach the speed limit, maybe you could get a ticket.
    Consumer credit card issuers, consumers, regulators, 
certainly members of this subcommittee, should all agree that 
the Federal Reserve Board's recent proposed rule changes to 
Regulation Z are long overdue.
    Presenting potential credit card customers with easy-to-
read, clear, and understandable disclosure statements that 
plainly summarize the terms, fees, and interest rates that come 
with a particular card is more than just a good idea. It's a 
good idea that should have been implemented a long time ago, 
and without the necessity for Federal involvement.
    Such a requirement is not only ridiculously obvious, it is 
profitable. Informed consumers are not only happier people, 
they are better long-term customers.
    Over the past 15 years, credit card issuers have increased 
the number of solicitations sent to consumers by more than 500 
percent. Consumer protection has, sadly, not kept pace.
    When finalized, the proposed changes to Regulation Z will 
allow millions of Americans to put away their magnifying 
glasses, legal dictionaries, and crystal balls when combing 
through the piles of credit card offers they receive every 
month. Unfortunately, however, they will still need their life 
jackets and umbrellas to keep them from getting soaked by some 
of the more sinister credit industry practices that have, 
sadly, become commonplace.
    Perhaps the most infamous of these practices is universal 
default, a practice that substantially increases a consumer's 
annual interest rate because, just once, they forgot or failed 
to pay any other creditor on time.
    There is also double-cycle billing, a system under which a 
card issuer assesses interest retroactively on debts that may 
be partially or almost completely paid off.
    Then, of course, there are so-called pay-to-pay fees, under 
which the credit card consumer is charged simply for the 
opportunity to pay their bill online or by phone, bills that 
are deliberately sent late in the month.
    Each of these practices are legal; none of them are fair. 
None of them are necessary. There is no question that the 
consumer credit industry is critical to our economy, and that 
our credit cards have been a boon to millions of American 
households. But the protection of consumers is not the credit 
card industry's job, it is ours. And it is past time for 
consumer interests to get a boost.
    As a small contribution to this rebalancing of interest, I 
have already introduced legislation that addresses the pay-to-
pay problem. I am looking forward to hearing from our witnesses 
about industry plans to correct some of these and other 
egregious practices. It is my hope that they will be able to 
tell us about their plans to pursue more responsible, consumer-
friendly business practices, and how quickly they plan on doing 
so.
    But I am not quite ready to give up my crystal ball. Thank 
you very much, Madam Chairwoman.
    Chairwoman Maloney. Thank you. Ranking Member Gillmor, for 
5 minutes.
    Mr. Gillmor. Thank you, Madam Chairwoman, for calling this 
hearing today. And I also appreciate your comments on the 
issues in your opening remarks.
    Americans today have access to the best financial services 
in the world, and a critical part of those services is the 
credit card. The credit card industry has expanded rapidly over 
the past decade. We now have close to 700 million cards in use, 
and if my mailman is right, there are a few thousand more.
    The popularity of the credit card as a payment option has 
allowed for an evolution of credit card policies and fees. 
There are literally thousands of products offered by credit 
card issuers, all with different fees, rates, and features.
    With market competition and innovation, credit card issuers 
seem to be willing to adjust their products when consumers 
demand that a change is necessary.
    Recently, some of the largest credit card companies 
voluntarily modified some of their risk-based pricing policies, 
such as double-cycle billing. And I would expect this trend to 
continue, as a consumer with a bad deal can now shop around 
with more 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 segments of borrowers. What is unacceptable is 
for issuers to hide fees, policies, or practices from their 
customers.
    Disclosure is a major part of the answer, and that's why 
earlier this year Ranking Member Bachus and I sent a letter to 
Fed Chairman Bernanke requesting a prompt review of Regulation 
Z. I am pleased with the work of the Federal Reserve, in 
putting out this proposal, by completing overhauling the 
notices presented to perspective and active credit card 
customers. Consumers should be in a better position to evaluate 
their terms and to shop around.
    In particular, I was pleased to see the Federal Reserve 
attempt to simplify the disclosure of fees and interest. By 
presenting the customer with a box detailing their interest 
rate charges and fees for the year, the periodic statement will 
become a wake-up call for some Americans who have experienced 
the problems of reckless spending.
    From this exercise, and extensive consumer testing, the Fed 
hopefully has a clear picture of what the average credit card 
customer understands about their account, and what they do not. 
I look forward to closely examining the comments offered by the 
witnesses today, and to further revisions to this proposal. I 
yield back the balance of my time.
    Chairwoman Maloney. Thank you. Congressman Scott, for 1 
minute.
    Mr. Scott. Thank you very much, Madam Chairwoman. Again, 
this is certainly a very, very timely hearing. It is a very, 
very important hearing for us, and credit cards have a great 
purpose, but we have some tremendous problems.
    And more needs to be done, such as: eliminating unfair 
retroactive penalty rate hikes; requiring card issuers to apply 
consumer payments to a portion of their debt with the highest 
interest rates; and prohibiting over-limit fees from being 
repeated for a single over-the-limit purchase.
    We have to do more focusing on the fundamental problems in 
credit card marketing that allow these issuers to change the 
rules at any time, and impose retroactive interest rate 
increases.
    Now, I understand that we cannot and we will not, put all 
the blame on the card issuers, as some people just have bad 
credit. We know that. They make mistakes. However, it seems to 
me that many of these banks are simply not straightforward 
about their varying and confusing charges and rates. The so-
called practice of universal default is of major, major 
concern.
    And, in conclusion, Madam Chairwoman, I would just like to 
say that credit cards do serve a purpose. And as we said, we 
are not here to cast blame upon them. We need them. We just 
need them to be right, and to treat the American people right, 
because it is a fact that significant and aggressive changes 
have been made by the industry over the past decade, at the 
expense of their customers. I believe it is of utmost 
importance that these issues are addressed. Thank you, Madam 
Chairwoman.
    Chairwoman Maloney. Congressman Castle, for 5 minutes.
    Mr. Castle. Thank you, Madam Chairwoman. I will submit a 
statement for the record, and I will try to do this relatively 
briefly.
    I am one who believes that credit cards are indispensable 
to our consumer economy in America today. I doubt if there is 
anybody in this room who does not use credit cards. My father 
is probably the last person not to use credit cards, if I had 
to guess. They are just a fact of life. Probably most people in 
this room are carrying more than one credit card, if I had to 
guess.
    I believe that it is absolutely vital that we have 
transparency here, that people understand what they are dealing 
with. A lot of the confusion--I am from Delaware, where we have 
a lot of credit cards--but a lot of the confusion that comes 
into play happens because people simply don't understand what 
the ground rules are.
    They understand that they are going to have to pay 
interest. They understand that they are going to have to pay 
late charges. They understand, perhaps, fees for a card, or 
whatever it may be, and there are certain practices which I 
think you all are addressing, and some of the bigger credit 
card issuers are addressing themselves, but there are a lot of 
little things that I think fall into the category of non-
transparency.
    I think it is very hard to read some of the so-called 
disclosures, or even the bills and the forms, and understand 
exactly what it is you are supposed to do. I can tell you in my 
own case, I never know when I am supposed to pay my credit card 
payment by; it is usually very hard to determine that.
    So, I think exposing that, and making it as public as we 
can is vitally important. Whether or not we should do that by 
legislation or regulation, or working with the credit card 
issuers is something I am not as sure about, but I am doggone 
sure that needs to happen.
    I think there are practices which are questionable. Some of 
the fees which are charged, the universal charges, some of the 
other things that we have seen, which are very questionable, 
should be looked at carefully, as far as credit cards are 
concerned.
    I also think that the consumers themselves, all of us who 
are consumers, need to be paying attention to this, as well. I 
mean, it's sort of burying your head in the sand to say that, 
``The credit card companies sent me 20 credit cards. They are 
at fault. I accepted 10 of them, and I spent this amount of 
money, and now I am in serious debt.'' It's like saying a 
bartender kept filling your glass, when you asked him to fill 
your glass. There has to be some understanding by the consumers 
of what their responsibilities are, as well.
    But I just sense this lack of connection between what is 
happening in the marketplace, and what people understand of 
what their responsibilities are. And I think that we should, as 
a group, work together to attempt to make all of that as clear 
as possible, be it the box or some other methodology, to make 
absolutely sure that there is a clear understanding of what we 
are dealing with.
    With that, I think we would resolve a lot of the problems, 
and that way, individuals who are saying, ``We didn't 
understand what was happening,'' will no longer be able to use 
that excuse, and maybe they can't pay their credit cards for a 
variety of reasons, but the excuse won't be they didn't 
comprehend or understand what the circumstances are.
    I would hope that all of you in the various agencies would 
work very hard towards this end. We started to see some of 
that, and I think that's positive. And I think our committee is 
going to be vitally concerned about it.
    I would like to associate myself with practically all the 
segments I heard here today by each of the members. I believe 
that we have identified what a number of the problems are, and 
what we have to do for solutions. And, hopefully, we can do it 
in a way that will benefit everybody, and not be too Draconian. 
With that, I yield back.
    Chairwoman Maloney. Congressman Cleaver, for 3 minutes; he 
has offered an important bill on this subject.
    Mr. Cleaver. Thank you, Madam Chairwoman. I would also like 
to express appreciation to Congressman Ackerman and Congressman 
Ellison, who, along with you and the ranking member, are 
extremely interested in, and committed to doing something about 
this issue.
    Fortuitously, today's Washington Post carries a very, very 
sad story about a woman by the name of Erica Bermudo, who left 
college last year with $5,000 in credit card debt. There is no 
way in the world she should have ever gotten a credit card in 
the first place.
    And Congressman Udall and I drafted legislation based on 
what we had seen, and the complaints received like those from 
Ranking Member Bachus. And they ought to: require advance 
notice of interest rate increases, unless they reflect the end 
of an introductory rate for new accounts, or indexation to 
rate; require letting card holders avoid paying a higher rate 
by canceling the card in time; require card holders paying by 
mail to be told the date on which a mail payment must be 
postmarked, in order to avoid fees charged or increased 
interest rates; require that if a card issuer accepts payments 
made in person, a payment made at least one day before the due 
date would mean no late payment penalties; bar changing fees or 
other penalties because a credit card holder pays more than the 
monthly premium, or pays in full an existing account balance; 
bars imposing fees for charges that put a card over the credit 
limit if the issuer has authorized that charge, either in 
advance or at the time of the purchase. And it also requires 
that if a college student without employment is issued a card, 
that the parent or someone with a job assume responsibility for 
that card.
    The last time we held a hearing on this subject, as I began 
to talk about this, one of my colleagues mentioned that the 
representative of the credit card industry was shaking his 
head, which has inspired me, because I know, then, that we must 
be going in the right direction.
    We are representatives of the people of this country, and 
we get complaints over and over and over again with what is 
going on in the credit card industry. This means that change is 
needed. And change does not roll in on the wheels of 
inevitability. This means that we must make the changes, and I 
am prepared to do so.
    I yield back the balance of my time. Thank you, Madam 
Chairwoman.
    Chairwoman Maloney. Congressman Hodes, for 1 minute.
    Mr. Hodes. Thank you, Madam Chairwoman. I want to thank you 
for holding this important hearing, and to associate myself 
with the remarks of my colleagues, especially those of Mr. 
Cleaver.
    I am very concerned about credit card practices in this 
country, and the impact that these practices are having on my 
constituents in New Hampshire.
    Frankly, we are a nation in debt, and a nation of 
individual debtors. Credit cards have given consumers 
unprecedented buying power, and help to propel our economy. But 
easy credit and confusing credit card company practices have 
come with a very high price for many consumers.
    Experian Consumer Direct, a division of one of the major 
credit reporting agencies, issued a study in February of this 
year stating that the average person in this country has four 
credit cards. The report also found that 14 percent of 
consumers have 10 or more credit cards. New Hampshire is one of 
two States with the highest percentage of residents with that 
many cards.
    So while, clearly, credit cards are a valuable fixture of 
our economy, the high fees that the consumers face, and the way 
that disclosures and practices work, are of deep concern. I 
appreciate the proposal on Regulation Z as a first step. It's a 
good first step. And as you can hear, the tone of Members of 
Congress is very moderate.
    I have been subject to enough craziness with credit cards 
on my own, as the average everyday consumer, to come to 
Congress without any patience. I have no patience for the 
credit card industry, and I intend to join with my colleagues 
to protect my constituents, and the consumers of this country.
    Thank you very much, Madam Chairwoman. I yield back.
    Chairwoman Maloney. Congresswoman Biggert, for 1 minute.
    Mrs. Biggert. Thank you very much, Madam Chairwoman. I 
wasn't going to make an opening statement, but I think there is 
one piece of information that we are missing here, or has not 
been talked about, and that is financial literacy.
    And Congressman Hinojosa and I have been working on this. 
We have a financial literacy caucus here, in the House, and I 
think that what we found is that kids, middle school kids, 
didn't even know the difference between a check, credit card, 
and cash. And I think that we not only, you know, do--the 
credit card companies--and I congratulate all of those who have 
really worked on financial literacy. But to take up--the public 
agencies have been working on financial literacy, and a lot of 
the private industry. And I think that we are making some gains 
in the education.
    But if we start with the premise that the kids don't know 
that, and then they get to college, where they are given all of 
these credit cards without any education, I think it is part of 
our responsibility, as a public entity, and the private 
entities, to really increase the education, and start probably 
in the schools.
    And I have been working with schools that have so many 
programs that are working with the private. So I think that we 
are moving ahead, and it's not all doom and gloom, that--but 
it's amazing that--the lack of financial literacy that people 
in this day and age don't have, and we need to improve our 
education on that. I yield back.
    Chairwoman Maloney. Congressman Ellison, for 1 minute.
    Mr. Ellison. Madam Chairwoman, thank you for allowing me to 
weigh in at this point. I do have a statement I would like to 
submit for the record, but just briefly, I would like to say 
that this conversation takes place within the context of flat 
or declining real wages for working people, rising health care 
costs, stricter bankruptcy rules, and a generally difficult 
time for the working and middle-class people of the United 
States.
    So, where do credit cards fit into this profile? Some of 
the practices just make things worse. And I would just like to 
urge the industry to remember that we cannot kill the goose 
that laid the golden egg. When the American working person, who 
is also the American consumer, begins to feel the pinch too 
severely, it's not long before the corporate structure will 
begin to feel that same pain. Just as we have seen foreclosures 
in the subprime market, we have now seen the difficulties for 
people on Wall Street.
    So, I commend those parts of the industry that have said 
that, ``We are not going to engage in universal default, 
double-cycle billing, pay-to-pay,'' but I agree that when the 
pressure of competition comes down, we need to keep good 
lenders good. I am in favor of banning these practices, because 
I want our financial industry to maintain a good reputation 
among American consumers, and I think it has suffered a lot 
under some of these questionable, unethical practices.
    I just want to say, as I wrap up my remarks, that there is 
something known as a dram shop action. That means if you're 
sitting in a bar, and they keep on pouring, and you keep on 
asking, that, yes, the consumer may have responsibility, but 
the bar will, too. But the bar will, too.
    So, I think it's important for us all to bear in mind, that 
while financial literacy is important, and while disclosure is 
important, responsibility of the industry cannot be misdirected 
or sent away. Thank you.
    Chairwoman Maloney. And, finally, Congressman Hinojosa, for 
1 minute.
    Mr. Hinojosa. Thank you, Madam Chairwoman. I want to thank 
you, and express my sincere appreciation to you for holding 
this important hearing on credit cards today. I look forward to 
participating in future hearings on this issue.
    I understand that credit cards are used by credit bureaus 
and others to help determine credit worthiness of those seeking 
to purchase goods and services. And so I say that it is 
extremely important for me to identify myself with the other 
members who have expressed concerns on what is happening in 
this industry.
    However, I must stress in the 1 minute given to me by the 
chairwoman, to express concerns that I have with college 
education and savings, as it refers to credit cards. We are 
trying to reauthorize the Higher Education Act this year. And 
in all the hearings, we hear about how difficult it is on the 
two things that we talk about, and that is accessibility to 
higher education, and affordability.
    Credit cards are being used to address the need for 
affordability to buy books, to pay for college tuition, and 
many things like that. Why? Because savings in this country are 
now negative, compared to the 3 percent we used to save 10 
years ago. And credit cards are contributing to this problem of 
negative savings, and the negative problems in being able to 
afford college education.
    I invite you to join our coalition of Jump Start. Judy 
Biggert and I have worked with financial literacy education 
being available to students and parents at the 9th, 10th, 11th, 
and 12th grades, and in other groups, not just the high school 
students.
    But there is a serious problem, and if we can't work 
together to address it, then you force Congress to then make it 
very difficult to use a credit card for the purposes that I 
have expressed my concerns. So I invite you to dialogue with 
us, so that we don't have to go so far beyond what is necessary 
to prevent use of cards as it refers to college education. With 
that, I yield back, Madam Chairwoman.
    Chairwoman Maloney. Thank you very much. And any other 
statement can be put in the record.
    We are very fortunate today to have an all-star cast 
testifying: the Honorable Frederic Mishkin, Governor, Board of 
Governors of the Federal Reserve System; the Honorable John 
Dugan, Comptroller, Office of the Comptroller of the Currency; 
the Honorable Sheila Bair, Chairman, Federal Deposit Insurance 
Corporation; the Honorable John Reich, Director, Office of 
Thrift Supervision; the Honorable JoAnn Johnson, chairman, 
National Credit Administration; and the Honorable Richard 
Neiman, superintendent of the New York State Banking 
Department, who is representing the Conference of State Banking 
Supervisors.
    Thank you all for coming, and we look forward to your 
testimony. Governor Mishkin.

STATEMENT OF THE HONORABLE FREDERIC S. MISHKIN, GOVERNOR, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Mishkin. Chairwoman Maloney, Ranking Member Gillmor, 
and members of the subcommittee, I appreciate the opportunity 
to discuss the Federal Reserve Board's May 23rd proposal to 
make credit card disclosures more effective.
    In the last 25 years, credit cards have gone from being 
fairly common to being nearly ubiquitous. At the same time, 
credit cards have become more complicated, with more features 
and more complex pricing. Their complexities have bred concerns 
about the fairness and transparency of marketing practices, and 
account terms.
    The Federal Reserve Board believes our proposal helps to 
address many of these concerns. Our proposal seeks to ensure 
that consumers receive key information about the cost of credit 
cards in ways they can understand, in formats they can use, and 
at times when it is most helpful.
    It is our belief that more effective disclosure will make 
consumers less likely to fall into traps for the unwary, and 
better able to choose suitable products and to use them wisely. 
Better disclosures should also enhance competition among credit 
card issuers, and competition is usually the best cure for 
unfairness.
    As we developed new disclosures, we considered what 
individual consumers themselves had to say about them by 
conducting extensive consumer testing. In one-on-one 
interviews, consumers told us what information they find useful 
when making credit card decisions, and what information they 
ignore. We learned which words and formats for presenting 
information promote understanding, and which do not.
    These lessons are reflected in a myriad of preliminary 
judgements we have made about the appropriate content, format, 
and timing of disclosures. I want to highlight some of the 
improvements our proposal would make.
    Advertisements of so-called fixed rates would be restricted 
to rates that are truly not subject to change, either for the 
life of the account, or for a clearly disclosed period.
    The Schumer Box, currently required only with credit card 
solicitations and applications, would be updated to more 
effectively present information about rates and fees.
    Summary tables, similar to the Schumer Box, would accompany 
the lengthy, complex credit agreements that consumers receive 
at account opening, and when terms change. Penalty rates and 
fees would be highlighted in the Schumer Box, and in the other 
summary tables, and a reminder of late payment penalties would 
appear on every periodic statement.
    A consumer would be sent notice 45 days before a penalty 
rate was imposed, or the rate was increased for other reasons.
    Fees would be highlighted on the periodic statement. Fees 
would be grouped together in a prominent location. Fees would 
also be totaled for the billing cycle, and for the year-to-
date.
    Another way of disclosing the cost of credit, the effective 
APR, is the subject of two alternative proposals: One, to try 
to make it more meaningful; and two, to eliminate it if a 
meaningful disclosure is not reasonably attainable.
    A warning about the higher cost of making only the minimum 
payment would appear on the periodic statement, as the 
Bankruptcy Act requires. The proposal seeks to fulfill the 
spirit, not just the letter, of the Act. It would provide 
creditors incentives to base their estimate of the time to 
repay the balance on actual account terms, and to place that 
estimate directly on the periodic statement, rather than ask 
the consumer to call a toll-free telephone number.
    We expect that these and other aspects of our proposal 
would help consumers and improve competition, without imposing 
unwarranted burdens on credit card issuers. We have detailed 
the reasons for this expectation at great length, so that the 
public can evaluate our proposal, and tell us how we can do 
better.
    Madam Chairwoman, I look forward to our continuing efforts 
to ensure that consumers with credit are well informed, and 
consumer credit markets are well functioning. I am happy to 
address any questions you and the members of the subcommittee 
might have. Thank you.
    [The prepared statement of Governor Mishkin can be found on 
page 249 of the appendix.]

   THE HONORABLE JOHN C. DUGAN, COMPTROLLER OF THE CURRENCY, 
           OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Dugan. Chairwoman Maloney, Ranking Member Gillmor, and 
members of the subcommittee, I appreciate this opportunity to 
discuss the effectiveness of credit card disclosures and 
related issues.
    The credit card is, in many ways, a remarkable success, 
evolving from a novelty to an essential payment device for 
roughly three-fourths of American households. Credit card 
terms, marketing, and account management practices have also 
been evolving, in response to intense competition for customers 
and revenue.
    This competition has led to the virtual elimination of 
annual fees, lower interest rates for most consumers, and 
increased credit availability for more Americans. But 
competition has also led to more complex and aggressive pricing 
structures, as issuers seek to more effectively target 
customers, generate additional revenue, and manage their risks.
    Indeed, from a lender's perspective, credit card loans are 
perhaps the riskiest form of consumer credit. Unlike a home 
mortgage, a credit card loan is unsecured and open-ended. That 
means the borrower can increase the loan amount at any time, up 
to a specified limit, and the borrower can keep large balances 
outstanding for long periods.
    As a result, credit card accounts require substantial 
ongoing risk management, because a borrower's creditworthiness 
can deteriorate over time. One way that card issuers mitigate 
this risk is through changes in pricing, whether through 
increased interest rates or fees.
    Such risk-based pricing can be an important risk management 
tool. But the practice has also generated sharp criticism and 
numerous complaints, especially from consumers who were unaware 
that the cost of their credit could increase.
    This last point implicates the key focus of this hearing, 
the effectiveness of disclosures. As the GAO noted last year in 
its comprehensive report, disclosures are the primary means 
under Federal law for protecting consumers against inaccurate 
and unfair credit card practices.
    Unfortunately, disclosures plainly have not kept pace with 
the changes and complexities in credit card practices. Neither 
has disclosure regulation. In particular, such practices as 
universal default and double-cycle billing have been especially 
difficult for consumers to understand, given current disclosure 
rules.
    The OCC does not have the legal authority to issue 
regulations under the primary consumer protection statutes that 
govern credit card lending. Nevertheless, we do supervise many, 
but not all, of the largest credit card issuers. As described 
in detail in my written testimony, the OCC has a comprehensive 
risk-based program for oversight of credit card lending by 
national banks, using four primary tools: examination; 
complaint analysis; supervisory guidance; and enforcement.
    But there are limits to what the OCC can accomplish alone 
to reform disclosure practices, and that is why the Federal 
Reserve undertaking to revise its disclosure rules is so 
important. Changes to Regulation Z would set new standards that 
apply to all participants in the credit card industry.
    And improved effective disclosure of credit card terms can 
have three fundamental benefits for consumers: first, informed 
consumer choice; second, enhanced issuer competition to provide 
consumers the terms they want; and, third, greater transparency 
that will hold the most aggressive credit card practices up to 
the glare of public scrutiny and criticism, making issuers 
think long and hard about the cost of such practices before 
implementing them.
    Our preliminary reaction to the Board's proposal is very 
positive, as it incorporates many of the approaches to 
effective consumer disclosures that we previously recommended. 
Nevertheless, we do expect to provide additional suggestions 
during the comment period.
    A lingering question, of course, is this: Can improved 
disclosure be sufficient to address the fundamental issues 
raised by current credit card practices? We certainly hope so, 
and we believe changes to Reg Z show real promise for 
addressing a number of these issues.
    Moreover--and this, frankly, is partly due to public 
criticism raised by members of this subcommittee and others--
most national bank issuers have already moved away from such 
practices as universal default and double-cycle billing.
    In addition, there are potential costs associated with 
going beyond disclosure. For example, proposals to restrict 
risk-based pricing could have unintended consequences regarding 
banks' ability to manage risks, or on the availability and 
affordability of credit cards, more generally.
    As Congress continues to weigh these issues, the OCC stands 
ready to provide additional information that the subcommittee 
may need, based on our supervision of national banks. Thank you 
very much.
    [The prepared statement of Comptroller Dugan can be found 
on page 131 of the appendix.]

 STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL 
                 DEPOSIT INSURANCE CORPORATION

    Ms. Bair. Chairwoman Maloney, Congressmen Castle and 
Bachus, and members of the subcommittee, I appreciate the 
opportunity to testify on credit card practices.
    Today, more American households are using credit cards than 
ever before. Three in four households have some type of credit 
card. Nearly half carry a month-to-month balance, despite the 
high APRs. And the size of that debt burden for the typical 
household has increased by two-thirds since 1989.
    Recent growth in credit card debt is notably significant 
among lower-income people and young people, a trend I find 
troubling. FDIC-supervised banks have about 15 percent of the 
total credit card debt for all banks. That amounts to $104 
billion of reported credit card receivables, with most of that 
consolidated in the two largest FDIC-supervised credit card 
banks.
    Bank credit card practices are examined as part of both our 
safety and soundness examination and our compliance 
examination. This coordinated approach is especially important 
in supervising credit card banks, where safety and soundness 
and consumer protection issues overlap considerably.
    Last month, as you know, the Federal Reserve Board proposed 
amendments to Reg Z, the rule that implements the Truth in 
Lending Act, which governs credit card lending and other forms 
of credit. These new rules would make important changes to the 
format, timing, and content requirements for billing statements 
and other notices given to consumers about their credit cards. 
These changes should significantly improve the quality of 
credit card disclosures and are a highly positive step forward.
    TILA is, for the most part, a disclosure-based statute, as 
it applies to open-end credit. This may not be the best vehicle 
for prohibiting certain controversial practices, many of which 
were identified in the recent Government Accountability Office 
report. Some of these problematic practices are very complex, 
and difficult to explain. I am not convinced that full 
disclosure will completely address them.
    I would also like to note that while practices in the prime 
market have raised many concerns, we often see more egregious 
practices in the subprime credit card market. These include 
deceptive marketing, inadequate account disclosures, and 
accounts that have little or no credit left after opening fees 
and other charges are imposed.
    We use our supervisory authority to address unfair and 
deceptive practices by the banks and thrifts that we supervise. 
However, the FDIC does not have rulemaking authority under the 
Truth in Lending law, or the FTC Act.
    The FDIC is reviewing to what extent troubling credit card 
practices can be adequately addressed by supervisory action, or 
if some of the practices can be addressed through our safety 
and soundness rulemaking authority. It may be that some of 
these practices would best be addressed through rulemaking 
under unfair and deceptive acts and practices.
    Let me end by saying that growth and innovation in the 
credit card industry has had many positive effects on the 
economy and consumer access to credit. However, current 
industry practices and increasingly complex product innovations 
pose major challenges in maintaining a balance between bank 
profitability and consumer interest. Thank you very much.
    [The prepared statement of Chairman Bair can be found on 
page 85 of the appendix.]

 STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, OFFICE OF 
                       THRIFT SUPERVISION

    Mr. Reich. Good morning, Madam Chairwoman, Ranking Member 
Bachus, and members of the subcommittee. Thank you for the 
opportunity to address current issues with credit card lending 
by the thrift industry.
    By statute, thrifts must maintain 70 percent of their 
assets in mortgages and mortgage-related assets. However, this 
requirement makes accommodation for certain retail lending 
activities of thrifts, including credit card lending. This 
benefits consumers by increased competition among lenders, and 
promotes asset diversification and balance in a thrift 
operation, by avoiding exposure to a narrowly-focused lending 
strategy.
    The authority for Federal thrifts to issue credit cards is 
subject to OTS authority to supervise this activity. OTS 
authority includes the ability to examine, regulate, and limit 
the credit card operations of a Federal thrift to protect the 
institution and its customers.
    In addition to monitoring the performance and capital of 
thrift credit card lenders, we monitor the marketing, pricing, 
fee, and servicing practices of these programs. An important 
component of this is overseeing compliance with consumer 
protection laws, and institution account management and 
collection activities.
    We are particularly mindful of reputation risks that could 
undermine the safety and soundness of an institution and/or the 
Federal thrift charter out of which an institution conducts its 
credit card operations.
    In connection with our examination approach, we regularly 
conduct combined exams for safety and soundness and compliance 
with Federal consumer protection laws, including the Fair 
Lending Act, the Equal Credit Opportunity Act, and the Truth in 
Lending Act.
    We also examine for compliance with our regulations that 
prohibit discrimination and misrepresentations in advertising.
    We also track individual institution consumer complaints 
relating to various potential regulatory violations, including 
credit card lending programs.
    I should also mention that we hope to soon finalize an 
agreement with the Conference of State Bank Supervisors that 
will be a framework for sharing consumer complaint information 
with the States.
    Consumer complaint records play a significant role in our 
examinations, in assessing an institution's compliance 
management program, and in pursuing corrective action that may 
be appropriate to address programmatic weaknesses or 
deficiencies.
    We follow up with institutions on all consumer complaints 
filed with the Agency. This process is subject to stringent 
review timeframes, and we strive to provide timely and complete 
responses to consumers in all matters. We encourage 
institutions to resolve complaints directly, but we intervene 
when necessary to resolve a dispute.
    Fundamental to our oversight is ensuring that institutions 
conduct their activities in a manner consistent with sound 
consumer protection. If an institution's lending programs are 
potentially predatory, or lack adequate controls to support 
responsible lending, there are numerous options we can take to 
eliminate these risks. These include formal and informal 
supervisory approaches. While we often find informal actions to 
be sufficient and effective, we do not hesitate to use our 
formal enforcement authority when it is appropriate to do so.
    With respect to the Fed's proposed revision to Regulation 
Z, the proposal provides consumers with more time, better 
practical disclosures, and more comparative information upon 
which to make important credit decisions.
    I support these modifications, and encourage the Fed to 
consider all practical solutions to minimize potential 
regulatory burdens, particularly on smaller institutions under 
the proposal.
    The OTS will continue to work with our institutions to 
ensure safe and sound underwriting standards, and strong 
consumer protections. Thank you, Madam Chairwoman, and the 
members of the subcommittee, for holding this hearing, and for 
the opportunity to present OTS's views on these issues.
    [The prepared statement of Director Reich can be found on 
page 281 of the appendix.]

STATEMENT OF JOANN M. JOHNSON, CHAIRMAN, NATIONAL CREDIT UNION 
                         ADMINISTRATION

    Ms. Johnson. Good morning. Thank you for giving me the 
opportunity to testify today regarding improving credit card 
consumer protections. This is a timely and important subject 
that merits congressional oversight, and I commend you for your 
interest in improving the rules available to help consumers as 
they face a crowded landscape of credit card options.
    The Fed implements truth in lending through Reg Z, which 
applies to both Federal and state-chartered credit unions. NCUA 
is responsible for enforcement of Reg Z for Federal charters, 
while the FTC has responsibility for enforcement in state-
chartered credit unions.
    Additionally, Federal credit unions are subject to further 
requirements specified in the Federal Credit Union Act. 
Regardless of the source of regulatory authority, NCUA places a 
priority on ensuring that credit unions make clear and concise 
disclosures to members, and also work to protect consumers 
against inaccurate or unfair billing practices.
    NCUA uses regulatory alerts, letters to credit unions, and 
legal opinion letters to inform credit unions of their 
responsibilities to consumers under Reg Z. This regime has 
created a solid basis for credit union compliance with the law, 
and has promoted a system where credit card services are 
provided to members in a fair and understandable manner.
    Before I discuss specifics of NCUA oversight of credit 
unions, I would like to describe the industry's participation 
in credit card services. As of March of this year, just over 
one-half of all federally-insured credit unions offered credit 
cards to their members. Credit unions hold roughly 3 percent of 
the credit card market. Credit card loan growth in credit 
unions has averaged 4.2 percent over the last 5 years, and 
credit card balances represent 5 percent of total credit union 
loans.
    I want to underscore the fact that Federal credit unions 
are subject to an 18 percent cap on loan rates imposed by NCUA 
regulation. This cap has been in place since 1987. NCUA's 
policy is to include any credit fees as finance charges for 
purposes of the 18 percent cap, if those fees would be defined 
as a finance charge under Reg Z.
    The average outstanding credit card balance at year-end 
2006 was just over $2,000, with an average interest rate of 
slightly more than 11 percent. These rates are lower than the 
national average for credit cards issued by other providers.
    I also note a 2005 Woodstock Institute study that found 
pure complexities and more consumer-friendly terms offered by 
the 10 largest credit union issuers, versus other large 
issuers.
    Another issue relevant to the credit card discussion is 
that of Federal pre-emption of State law. NCUA has narrowly 
exercised its authority to pre-empt State laws, pre-empting 
only those laws affecting rates, terms, and conditions of loans 
offered by Federal credit unions, and other laws affecting 
certain fees.
    NCUA does not pre-empt State consumer disclosure laws, 
particularly those that emphasize plain-English descriptions 
that help consumers gain a better understanding of terms, or 
laws pertaining to insurance, collections, contracts, or 
attorneys' fees.
    While our general observation is that States in the areas 
of disclosure have taken steps in the right direction to 
protect consumers from harmful practices, NCUA believes having 
Federal requirements is beneficial for two reasons: One, it 
means a consistent, national practice, so that consumers in one 
State will get the same disclosures as those in another State; 
and, two, it clarifies the rules for financial institutions 
with locations in more than one State.
    I now want to turn to oversight, and enforcement of Reg Z. 
Through its examination and complaint monitoring process, NCUA 
plays a significant role in making certain that consumers are 
appropriately protected.
    During its safety and soundness exams, NCUA also clearly 
communicates to the credit union its responsibilities for 
complying with consumer protection rules, including Reg Z. We 
also communicate penalties that could result from violations. 
When a violation is noted, corrective actions are taken.
    During the almost 8,000 exams completed in Federal credit 
unions in 2006, NCUA noted 305 violations of Reg Z; 17 of those 
violations were specific to credit cards, and were addressed 
through the examination process, or other NCUA methods, such as 
documents of resolution or examiner findings. All of these can 
adversely affect the credit union's CAMEL rating.
    NCUA also maintains a structured consumer complaint 
resolution process. Our agency's Web site features a complaint 
center where consumers can directly contact our regional 
directors to register complaints or problems. Complaint logs 
since 2004 show few complaints about credit card practices. The 
80 that specifically pertained to credit cards focused on 
misunderstandings of terms and payment disputes, and they were 
resolved by our regional staff.
    The Fed is in the midst of an extensive review of Reg Z, 
and we are assessing these changes, and are pleased with many 
of the changes we see.
    In closing, I would like to say that although it's not a 
panacea, financial education, in concert with effective 
regulation and responsibility, can play a key role in improving 
consumers--empowering consumers to make the right choices. And 
we look forward to working with you to make these changes. 
Thank you.
    [The prepared statement of Ms. Johnson can be found on page 
185 of the appendix.]

STATEMENT OF RICHARD H. NEIMAN, SUPERINTENDENT, NEW YORK STATE 
   BANKING DEPARTMENT, ON BEHALF OF THE CONFERENCE OF STATE 
                   BANKING SUPERVISORS (CSBS)

    Mr. Neiman. Good morning, Madam Chairwoman, and members of 
the subcommittee. I am Richard Neiman, superintendent of banks 
for the State of New York, testifying today on behalf of CSBS.
    I am pleased to be here today to share our views on the 
need to improve disclosures and protections for users of bank-
issued credit cards. Being here also has a special meaning to 
me, personally, because this is where my introduction to 
Federal financial institutions and legislation began.
    As a congressional intern, I worked my way through college 
for the then-House Banking Committee under Chairman Wright 
Patman, and staff director, Dr. Paul Nelson. Who would have 
predicted that I would return to the same committee, over 30 
years later, only now as superintendent to address this 
important issue? So, I thank you again, and I am very honored 
to be here.
    Although CSBS has not formalized any Federal policy 
recommendations, the question of how to best protect credit 
card borrowers is a priority for State bank regulators, and one 
with broad-reaching implications for State authority, for pre-
emption, and the balance of our dual banking system.
    Today, I would like to highlight three areas that I believe 
need to be acknowledged and acted upon: one, the most troubling 
credit card practices we have identified in New York; two, the 
need for a Federal response to address abusive practices, and 
ensure that consumers receive meaningful information about 
credit card terms; and three, the important role States have 
played, and should continue to play, in protecting consumers.
    Credit cards are a major source of complaints for State law 
enforcement authorities and regulators. In 2006 alone, the New 
York attorney general received 4,000 credit card complaints, 
second only to the number of complaints about the Internet.
    According to the GAO, credit card issues are the largest 
source of complaints for the OCC, the Federal Reserve, and the 
FDIC.
    In New York, we have identified a number of credit card 
issuer practices that can be misleading or abusive, including 
those relating to universal default, double-cycle billing, 
unilateral changes in terms, deceptive promotion, and certain 
excessive penalty rates, overlimit, and late fees.
    However, OCC and OTS pre-emption of State laws has 
significantly limited a State authority to address these 
issues. A series of court decisions over the past 30 years has 
essentially eliminated a State's ability to protect consumers 
from abusive lending practices by lenders other than those 
lenders we directly charter.
    We believe that the public is best served by a system that 
provides effective and balanced dual Federal/State regulation. 
The Federal Reserve Board's recently proposed changes to 
Regulation Z are an important step in ensuring that consumers 
receive meaningful disclosures of credit card terms.
    However, credit card issuers should not perceive that 
simply by complying with required disclosures, they may 
continue to engage in practices that confuse and mislead 
consumers. Better disclosures, while important, are not a 
panacea.
    In considering solutions to the problems in the credit card 
industry, Congress should look at and support the role that 
States have played, and we hope will continue to play, in 
protecting consumers: first, through enforcement actions, such 
as those brought by the New York attorney general against 
subprime credit card lenders for deceptive practices; and 
second, through regulatory and legislative solutions that can 
serve as models for Federal regulation. New York and other 
States have pioneered initiatives in all aspects of consumer 
protection that can serve as Federal models.
    Third, through information gathering and monitoring 
compliance. On the State/Federal front, the regulatory 
landscape post-Wachovia demands more, not less, interaction. 
One example of inter-governmental partnership is the MOU that 
New York, as the first State, entered into with the OCC this 
past November, to enhance the resolution of consumer 
complaints.
    States are also in a position to provide valuable public 
information about credit card practices, and the cost of 
credit. The availability of credit to Americans across income 
lines has undeniable benefits to individuals, to households, 
and to the economy. Lending practices that have the effect of 
destroying a borrower's credit rating and financial future, 
however, fly in the face of our shared goal, which is to make 
the widest possible range of safe and sound banking services 
available to consumers.
    We look forward to sharing our views with the Federal 
Reserve, as it continues in the process of amending Reg Z, and 
we also seek additional opportunities to work with the Federal 
banking agencies to share best practices on monitoring 
compliance and consumer protection laws.
    Thank you for inviting me here today, and I would be happy 
to answer questions at the end. Thank you.
    [The prepared statement of Mr. Neiman can be found on page 
266 of the appendix.]
    Chairwoman Maloney. Thank you for all of your testimony.
    I would like to ask Governor Mishkin, while this proposal 
is very important and a very major, long-awaited updating of 
credit card disclosure, other regulators and consumer advocates 
believe that it is not enough to crack down on abusive 
practices that my colleagues and I have been talking about 
today.
    As I understand it, the Fed is the only regulator that has 
authority to regulate substantive credit card abuses. And I 
would like to ask you if that is correct. And if so, are you 
planning to use that power to regulate the abuses we have been 
talking about today?
    Mr. Mishkin. Thank you, Madam Chairwoman. We believe that 
the very key step, in terms of getting markets to work well, 
and to benefit consumers, is that they get sufficient 
information to make decisions that will do two things. One is 
they can make the right decisions, but also, that they 
encourage people who are providing them with the products to 
actually give them a product that is a good product.
    And our view is that this step that we have taken, in terms 
of this disclosure, is actually a very important step in 
exactly that direction.
    In terms of whether this will completely solve the problem, 
we don't know. And surely we will consider whether, in fact, 
other steps might have to be taken. But we also do have to be 
aware that when you write regulations, it's not easy to do, and 
you don't want to have unintended consequences that you will 
find after the fact are undesirable.
    So we do feel that this is an important step, in terms of 
disclosures, that we think that this will have a big impact on 
the markets, and we are hoping that, in fact, we can get 
comments on this disclosure proposal, and in fact, then take it 
from there. Thank you.
    Chairwoman Maloney. Well, then, let me move on to the other 
regulators. Would you support a legislative change that granted 
you similar authority to that of the Fed, to regulate 
substantive abuses by credit card issuers whom you have the 
authority to supervise?
    You testified earlier, Mr. Dugan, that you did not have 
that power. Would you support such a legislative change?
    Mr. Dugan. Chairwoman Maloney, I take it you're asking 
about regulations to establish unfair and deceptive practice--
    Chairwoman Maloney. Right, exactly.
    Mr. Dugan.--more generally, which could be credit cards, 
could be something else.
    Chairwoman Maloney. Yes.
    Mr. Dugan. And as I have previously written to the 
committee, I do think that is something that could be useful 
for, not just the OCC, but for other banking regulators to 
have.
    And the reason why I mention the others is that not only is 
it a useful tool, but so much of the time--credit cards are a 
good example, mortgage lending is another--you really have to 
do this on an across-the-board basis, and I think sometimes 
that each of the regulators could bring more of a perspective 
to bear, based on the institutions that they specifically 
regulate.
    And so, that is something that I have supported, but I 
think it should be done across-the-board, and something that 
should be considered as a way to jointly regulate where that is 
appropriate.
    Chairwoman Maloney. Governor Mishkin, would you support 
such a change?
    Mr. Mishkin. I don't have a position on that issue.
    Chairwoman Maloney. Chairman Bair?
    Ms. Bair. Yes, the FDIC does--we do think it would be 
helpful to have rulemaking authority under the unfair and 
deceptive acts and practices authority, as it would apply to 
our own banks.
    I agree with John. I think, as a practical matter, that it 
would be done and should be done on an inter-agency basis. If 
we were given rulemaking authority, that would increase our 
ability to have a seat at the table, if you will, to initiate 
such rulemaking.
    Chairwoman Maloney. Director Reich?
    Mr. Reich. Well, I agree with the comments that Chairwoman 
Bair just made about the rulemaking authority on an inter-
agency basis.
    I also agree with a comment that you made in your opening 
statement, that market-based solutions are a very important 
part of, hopefully, resolving many of the practices which we're 
talking about today. I think, clearly, there is a demonstrated 
need for the development of a set of best practices.
    And my own preference would be that many of the problem 
areas that we're talking about would be resolved through the 
adoption--through letting the market work, the adoption of 
market-based practices, rather than attempting to pass 
regulations to deal with every single area of perceived 
difficulty.
    Chairwoman Maloney. And Ms. Johnson?
    Ms. Johnson. Yes. If given that authority, we would work 
with our inter-agency colleagues to implement.
    Chairwoman Maloney. And I would like to ask the regulators, 
and Mr. Neiman, what abusive practices would you start cracking 
down on first? What would you target?
    Mr. Neiman. Well, I would--because the State's hands are 
tied, I would look at many of the abusive practices which can 
be the most troubling practices that you have talked about 
today: universal default; double-cycle billing; and late fees 
after credit limits are exceeded.
    I would look to restoring the balance, either returning 
power to the States to address these issues, but we would also 
support a national standard, whether through a legislative 
approach, or working with our colleagues at the regulatory 
level.
    Chairwoman Maloney. My time is up, and I--Mr. Castle, or 
Mr. Bachus? Who is--Mr. Bachus?
    Mr. Bachus. Thank you. Governor Mishkin, in your statement 
you say, ``Further, there are concerns that issuers' methods of 
calculating interest, such as the ways they choose to allocate 
customers' payments to different balances, are confusing or not 
clearly disclosed.''
    And what you are referring to is what I mentioned in my 
opening statement, where the credit card issuers charge 
different interest rates for different purchases or cash 
transactions.
    And you go on to say, ``The presence in the market of terms 
seemingly unfavorable to the consumer.'' Now, it would 
obviously be always unfavorable to the consumer to target that 
to the balance where there is either no interest rate, or where 
there is a low interest rate instead of the high interest rate. 
That is never going to be anything but unfavorable to the 
consumer, or unfair.
    You say here, ``The presence in the market of terms 
seemingly unfavorable to consumers appears to indicate that the 
market is not fully competitive.'' Is that one of the practices 
that you were referring to?
    Mr. Mishkin. In terms of getting a market to be 
competitive, consumers have to have the information that 
actually lets them make an informed decision. And one of the 
things that our proposal does is it makes it much clearer--and 
also, for me, in much larger print, which is a great help, in 
terms of getting older, and not being able to see as well--that 
it makes it much clearer that, in fact, this is the way that 
the payments will be allocated.
    Mr. Bachus. Right.
    Mr. Mishkin. I think the benefit of that is that 
competition then can start to work. That, in fact, if one 
credit card issuer is not giving a consumer as good a deal, 
then consumers, if they know this, can actually shop around and 
get a better product.
    And, in fact, the information that we see being provided 
about this, including congressional hearings like this, are 
actually helping to change industry practices in a positive 
way.
    Mr. Bachus. Yes. You know, all of you are regulators, and 
part of your duty is to listen to consumers, those that utilize 
your institutions. When they come to you with a complaint that 
their payments are going to their balance with the lowest 
interest rates, which is always unfavorable to them, is there 
any public interest argument that you can give them, why that 
would be so?
    Or even say this: Is there a risk-based reason that a card 
issuer would not allow their customers to pay off the amounts 
on their higher interest balances first? It seems to me that 
it's a safety and soundness issue. Any time they applied on the 
low interest rate, they increase the likelihood that the 
consumer will default, and increase the difficulty of them 
paying their obligation. But--
    Mr. Dugan. Mr. Bachus, this is an issue, in terms of 
disclosure, that the OCC did address in its guidance with 
respect to national banks, in the sense that we did not feel 
that national banks were adequately disclosing when they were 
always making the payments to the lower balances first.
    And so, we have directed, through our guidance, that we 
expect our banks to make that disclosure clear. And we are 
gratified that, in the proposed change to Reg Z, everybody 
may--
    Mr. Bachus. Yes. Let's say even if you say, ``Make that 
clear,'' but that still doesn't--even if they make it clear, 
these disclosures--even the Fed's proposal, and what they are 
going to do, I mean, that is better than now. But it is still 
pretty complex.
    But I guess I would ask each and every one of you, does 
applying it to the low interest balance increase the likelihood 
of them defaulting or not?
    You know, one of the things that you all are trying to do 
is encourage people to pay off their credit card debts. We all 
agree that credit card debt in this country is problematic. It 
seems to me that this practice just increases default rates, 
and increases consumer debt loads. I mean, even in the Fed 
statement, you say that it is certainly unfavorable to 
consumers.
    Is there any safety and soundness or risk-based reason to 
do that? Or is it just to increase your profits? That is the 
only thing to me, the only justification to me is just to 
increase--there is nothing favorable about it.
    Mr. Dugan. Mr. Bachus, I think that is a question you 
should ask the issuers on the issuer panel. But as to whether 
it is a safety and soundness risk, we do monitor, from a safety 
and soundness perspective, how issuers are managing their 
accounts more generally. We look very carefully at those kinds 
of rules. And we believe they have been able to manage the risk 
associated, even with payments like that.
    We do think it's important that they disclose it correctly. 
But going beyond that is not something that we felt that we had 
the authority to address.
    Mr. Bachus. Okay.
    Ms. Bair. Well, I would say, with regard to the specific 
instance that you mentioned, I would have a hard time seeing a 
public policy basis for that type of allocation.
    It sounds like there were two problems: one, the consumer 
wasn't given adequate notice that this payment was going to be 
treated as a cash advance at the higher interest payment; and 
then, two, to add insult to injury, when he made the payment, 
it was applied to a lower interest balance.
    We are carefully looking at this. I would say one 
argument--now, I am fact finding, but one argument that has 
been made to me with regard to the question of the zero balance 
transfers--is that when you have a zero balance transfer 
situation, and the payments are applied there first, the 
economics of that helps facilitate providing the zero balance 
transfer deals.
    Now, whether that outweighs some of the other issues, I 
don't know. But that is one situation where a public policy 
argument has been made to me that this type of tiered payment 
allocation facilitates these very low interest transfers to 
consumers.
    Chairwoman Maloney. Time has expired. Mr. Watt, for 5 
minutes.
    Mr. Watt. Thank you, Madam Chairwoman. Ms. Bair, there are 
two parts of your written testimony that I want to focus on, 
because they are very troubling.
    One is on page 6, where you talk about the 27 institutions 
the FDIC has identified as credit card lending specialists. 
First of all, before I forget it, would you provide a list of 
those institutions to the committee?
    Ms. Bair. Yes, I would be happy to.
    Mr. Watt. And you go on to say that credit card lenders--
those 27, I presume--had a return on assets of 3.7 percent in 
the first quarter of 2007, while the banking industry, overall, 
had a return on assets of 1.21 percent.
    And in the first quarter of 2007, the ratio of non-interest 
income, which includes fee income, the average assets was 9.61 
percent for those 27 credit card specialists, versus 2.09 
percent for all insured banks and thrifts.
    Ms. Bair. Yes.
    Mr. Watt. Then, on page 17 of your written testimony, you 
introduce a concept that I really hadn't focused on, this 
subprime credit card. I never really had made a distinction 
between prime and subprime credit card lenders. We make that 
distinction in the mortgage field all the time.
    Are these 27 institutions that you identify on page 6 the 
primary subprime credit card lenders that you're talking about 
on page 17?
    Ms. Bair. No.
    Mr. Watt. Or are they two different groups of people that 
you are talking about?
    Ms. Bair. No, I believe--I will check with our economist--
this is for the industry, as a whole. We went to--
    Mr. Watt. Okay, how many subprime credit card lenders have 
you all identified, and could you provide the committee a list 
of those--
    Ms. Bair. Yes, I would be happy to do that.
    Mr. Watt.--subprime credit card lenders, if it is different 
than the credit card lending specialists?
    Ms. Bair. It would be a different group, and yes, I would 
be happy to provide--
    Mr. Watt. Okay. There would be some overlap, I presume.
    Ms. Bair. Yes, yes. On page six, we are talking about the 
industry as a whole, those who specialize in--
    Mr. Watt. Okay. Now, the question I want to ask is are you 
telling me that the FDIC does not have any authority to address 
that kind of disparity in returns?
    You are talking about 9.6 percent of a credit card 
specialist income coming from fees or non-interest. I mean, it 
seems to me that there is something wrong with that picture.
    And so, my question is, is there anything that you have 
done, or can do, to address that kind of disparity?
    And can you have a set of rules that is more aggressive for 
subprime lenders, just like we are talking about in the 
mortgage area, this notion that we have to have one set of 
rules that fits everybody, when the violations don't seem to 
square up on both sides of the ledger, it seems to me to be a 
misconception.
    Do you have anything that you can do to those people who 
seem to be abusing the system?
    Ms. Bair. Well, first of all, I would like to say this is 
for the industry, as a whole. FDIC-supervised institutions are 
only about 15 percent of the market. And--
    Mr. Watt. So, then that is in Mr. Mishkin's territory, is 
what you are saying. And what I keep hearing all of you saying 
is that the Fed hasn't done squat to really deal with this 
problem, and doesn't seem to be doing squat to deal with it, 
even though they are the only ones that have the authority to 
do it.
    So I am going to--I have 1 more minute, and I have my soap 
box here, and you got me on it. Let me talk about my other 
primary complaint, which is you all talk about risk-based 
pricing. I have absolutely no problem with risk-based pricing. 
The problem that I see is that nobody is assessing the risk out 
there.
    When I see my father, after he died, getting all of these 
solicitations, I mean, I would not have given my father credit 
on a credit card. I am serious. It is not your assessment of 
risk, you have to assess some risk before you can do risk-based 
pricing. Isn't that right?
    Is anybody assessing risk in the credit card industry any 
more, or are they just mailing out and sending the credit card 
to whomever will fill out an application and send it back in, 
unsolicited?
    Mr. Dugan. Mr. Watt, they are assessing the risk. I mean, 
if they are not, they would have a fundamental problem with us, 
because--
    Mr. Watt. Well, we have a fundamental problem here, because 
there is--you know, these people are just sending out credit 
cards and making money on fees, rather than interest.
    I don't have any problem with people making money on 
interest. At least that is a fair way that has been disclosed 
to everybody. But when they are not assessing the risk, and 
they are just building those defaults into--and charging 
everybody else who is paying for it, without any distinction, 
that is where I get really troubled about the practices that 
are going on here.
    Mr. Dugan. If I could just follow up on the subprime point 
that you had before, there are--the OCC has had a number of 
institutions in the past that were engaged in subprime credit 
card lending. We found a number of problems on the unfair and 
deceptive side that rose to the level where we took a number of 
strong enforcement actions that resulted in quite a lot of--
multi-hundreds of millions of dollars--returned to consumers.
    The fact is, now, as it is the same with subprime lending 
in the mortgage business, we don't have a lot of subprime 
credit card lending, because we have not been--
    Mr. Watt. Well, somebody does.
    Mr. Dugan. And that may--
    Mr. Watt. Who has it?
    Mr. Dugan. I cannot answer that question. I can only speak 
for--
    Mr. Watt. Maybe the Fed can tell us.
    Chairwoman Maloney. We are going to break for 10 minutes to 
run for votes, and I am going to ask the panelists to come 
back. Many people have more questions. Thank you very much.
    [Recess]
    Chairwoman Maloney. I would like to ask Governor Mishkin. 
We have heard everyone on this panel, on both sides of the 
aisle, talk about the challenge that we face, the really--
almost a crisis in the credit card industry. And many people 
have testified that you are the only one that has the authority 
at this point to do anything about it.
    I want to compliment the Fed for the truly outstanding 
leadership that you put forward in the subprime guidance. It 
was tremendously measured, helpful. It is being implemented, it 
is correcting the problem. Why are you not moving forward with 
guidance on credit cards?
    You have the authority to do it. Everyone is testifying 
there is a problem. From your prior testimony, it sounds like 
you have no intention of coming forward with guidance or 
regulation in this area.
    Mr. Mishkin. I would not characterize it to say we have no 
intention of going further, that we--
    Chairwoman Maloney. I am pleased to--
    Mr. Mishkin. We do want to make sure that we take the 
appropriate steps at the right time. And we are very open to 
thinking hard about these problems in order to make this market 
work better.
    The credit card market is incredibly important to the 
American consumer. And, in fact, we very much want to have a 
situation where the markets work well, and that the consumer is 
actually being served well.
    So we feel that our disclosure proposal is a major step in 
the right direction. I think it is a very great improvement 
over what was there before, and we certainly will keep an open 
mind to try to make this market work as well as it possibly 
can.
    Chairwoman Maloney. Well, my colleagues join me in thanking 
you for the Reg Z. It is a major step forward. But we are 
hearing from all of the regulators today, and the members on 
both sides of the aisle, that it does not correct abusive 
practices. I would urge the Fed to consider coming forward with 
guidance, and taking further steps in that direction.
    I will now call on my good friend and colleague from the 
great State of New York, Gary Ackerman.
    Mr. Ackerman. I thank the chairwoman, and again, thank you 
for calling this very important hearing.
    You are the people who do the regulating, and the 
overseeing, and the supervising of the industry, which 
certainly needs all of that. And it is very frustrating to hear 
of all the abuses and things that are going on that just seem 
outright unfair and confusing and misleading, very often, to so 
many consumers.
    It was said this morning during the testimony that 
competition is good for fairness, and, indeed, hopefully it is. 
But sometimes, all the competition is to see who can one-up the 
other on coming up with some kind of complicated scheme that 
does not put all the information out in front of the public.
    And there has been some information to make a decision is 
absolutely essential for consumers getting a better deal. And 
that is true, also. But in practice, it is highly questionable 
as to what is really happening out there.
    I was actually going to do this with the next panel. But 
thinking about it, I seem to have a credit card, or been doing 
business with everybody that is representing one firm or 
another. So I thought otherwise. So you are stuck with this.
    This is stuff that I get. This is just me. These are just 
solicitations, every one of them a credit card. I'm a member of 
the Financial Services Committee, and I used to teach 
mathematics, and I was going to ask this of the next panel, 
because all this stuff, all the information is in every one of 
them. They disclose everything, and you really do need a 
magnifying glass with some of the type, and it is impossible to 
find, but sometimes there is an asterisk. You know, there are 
footnotes, and then you can't find the footnotes for three 
pages. And tell me if anybody is going to read this.
    But you are all smart people, and you are regulating the 
industry, so I am going to give you, as my grandmother used to 
say, ``a for-instance.'' So, if you have a pencil and paper, 
that would be good. If you have a calculator or a--one of those 
Black Berrys with a calculator in it, that's fair. Anything you 
want, a computer, you can consult with a friend, call anybody 
on your cell phone. You can poll the audience and come up 
with--
    [Laughter]
    Mr. Ackerman. But here is the question that I face, all 
right? I have a credit card with a limit of $7,500, and I owe 
$4,200 on that credit card, and I am paying a great rate of 6.5 
percent.
    And I get this offer, you see, and the offer gives me 
this--right on the envelope, tells me all sorts of things, and 
then tells me some other things and different things, and it 
offers me a great interest rate, some of us call it a sucker 
rate, but it is a come-on kind of a rate of 3.99 percent for a 
new credit card for 6 months. And then, after that, they tell 
me I am going to have to pay 8.74 percent interest.
    There is also a transaction fee in small print on the next 
page of 3 percent. Now, those transaction fees don't figure 
into interest rates, so they really change the name. This is 
one of those New York, you know, shell games, where you can't 
figure out what's going on, because it's happening so quick.
    So, the transition rate is not considered an interest rate, 
so you all don't take into consideration. I have to figure out, 
because I have to pay it in cold cash, whatever they call it.
    But I do know that if you charge me a 3 percent transition 
fee, and I pay it off quick--let's say in one day--I know that 
3 percent, if it was on an annualized basis, would be 3 times 
365 days in a year, which, in a non-leap-year year of 365 days 
would be 1,095 percent, almost 1,100 percent if I paid it off. 
And the quicker I pay it off, the more money it is.
    So, if I pay it off slower to amortize that 3 percent fee, 
I get a better deal on an annualized rate, if it was a rate. 
But then again, I get trapped into when they jack the rate up 
to 8.74 percent, and I was only paying 6.5 percent.
    So, my question is, if I take one full year to pay it off, 
and pay it off 100 percent after the first year, having 
transferred my balance of $4,200 at 65 percent at the rate of 
3.99 for 6 months, and then paid the 8.74 for the rest of the 
year, what interest rate would I be paying? Anybody? I only 
have 5 minutes.
    [Laughter]
    Mr. Ackerman. Time is running out. Would I be paying more 
at the end of that, than if I left it at my original 6.5 
percent? And that is the dilemma. I withdraw the question.
    [Laughter]
    Mr. Ackerman. I didn't want to embarrass the people who 
have all this power over me, and send me all this great 
information to help me make these informed decisions, because 
they're my good friends. I know that because they write me so 
often.
    [Laughter]
    Mr. Ackerman. But therein lies the dilemma. What is a poor 
consumer to do? There is something wrong with the interest 
industry.
    Take underwear, for example. Some people think it is not an 
option. So you go and buy it in a place like Sears. And you go 
in there, and they are selling underwear. But someone comes 
over to you with a clipboard and says, ``If you take out our 
credit card, you get 15 percent off today, everything you 
buy.''
    So, you fill out the form, and they approve your credit 
really quick, because they do this great investigation of you, 
and you are worthy of having underwear, at least, and they 
charge you an interest rate of 24.9 percent. You got 15 percent 
off of the total price, but you are still paying 24.9 percent.
    How much do you think they make on the underwear? It is 
something obscene when you are making more money on the charge 
card than you are on the underwear. It seems that the retail 
business has caught on that there is more money in the 
interest, in the credit card industry, than in the retail 
business.
    The underwear is an excuse to charge you interest. They are 
not selling underwear; they are selling credit. And, 
unfortunately, in today's retail industry, you are going to be 
paying interest long after that underwear wears out.
    Chairwoman Maloney. I grant the gentleman 60 additional 
seconds.
    [Laughter]
    Mr. Ackerman. Well, I thank the generosity of the--I bought 
the underwear anyway, so don't be concerned.
    Does anybody have a response to what is going on? And this 
is not a way to inform a consumer. There is no way, when you 
have a system of fees that is not put into the structure, and 
everybody comes up with it's a 3-month deal, or it's a 6-month 
deal, or no interest for a year, and there is no correlation.
    I am introducing legislation that would say, basically, 
that you have to divulge what the annualized rate would be, as 
if it were all interest when you charge a transaction fee. Is 
there any response to that?
    [No response]
    Mr. Ackerman. You all are not regulating that, it seems to 
me.
    Mr. Mishkin. Let me just add that I think one of the very 
key things we did in this proposal is to actually make it very 
clear what the fees are. And our consumer testing indicated to 
us--
    Mr. Ackerman. What the fees are, but it is clear what the 
fees are. The fees are 3 percent, if you have a magnifying 
glass, usually. A lot of institutions are capping it now, at a 
specific dollar amount.
    But there is no way for the average consumer to translate 
that, as we did with mortgages, and say, ``Everything has to be 
expressed in an annualized way so that people can compare 
apples to apples,'' and there were--we all know about points 
and this and that, that don't seem to fit into the--but is 
there going to be an addressing of this, or do we have to do 
that? Because the regulatory industry is not.
    Chairwoman Maloney. Mr. Mishkin?
    Mr. Mishkin. One of the things that our consumer testing 
found is that consumers really reacted very strongly to 
information about fees, and that, in fact, the sticker shock 
from getting information about the fees really did have a big 
impact on their understanding of the cost of using credit.
    And this is one of the reasons why we felt that focusing on 
a separate box on fees, which was a change from what was 
before--and also, on periodic statements, making it clear to 
people what the fees have been, and accumulating it for them--
actually can make a big difference, in terms of them 
understanding--
    Mr. Ackerman. If the Chair would just indulge me another--
    Chairwoman Maloney. So granted.
    Mr. Ackerman. If you completely divulge it in, you know, 72 
point, bold, chartreuse type, it still doesn't help the 
consumer, because each of the credit card companies will inform 
them, but one will give the deal for 3 months, one for 6 
months, one for 9 months, and nobody annualizes it.
    And just as you were not able to, and I am not able to--
unless we had a lot of time on our hands--figure out, there is 
no way to compare it. You know, 3 months at 3 percent, or 6 
months at 2 percent, or a year--you know, what does it boil 
down to for me in dollars is really what consumers need to 
know.
    And it would be a simple thing to do that, because they 
have come up with these methods of expressing and divulging so 
that you can't figure it out and compare it quickly. But if 
everybody had to express it in the same term, ``This is what it 
costs you for a year for this money, fees and everything, on an 
annualized basis, whether you take it out for 3 months or a 
year, or forever,'' that's what you should be doing.
    Chairwoman Maloney. Is there any response? And then Mr. 
Green.
    [No response]
    Mr. Ackerman. Thank you very much for your interest.
    [Laughter]
    Chairwoman Maloney. Mr. Green?
    Mr. Green. Thank you, Madam Chairwoman, and I also thank 
the ranking member, and, in his absence, Ranking Member Bachus 
for his comments. I too will associate myself with the comments 
that have been made this morning.
    It appears that there really is bipartisanship on this 
committee, especially as it relates to the concerns that are 
being raised today.
    Let me start by asking if everyone agrees with the 
recommendations of Mr. Mishkin. Am I pronouncing your name 
correctly, sir? Mr. Mishkin, of the Board of Governors? Does 
everybody agree with his recommendations? Is there someone who 
is of the opinion that he has gone too far, or that he hasn't 
gone far enough?
    Mr. Dugan. It is an 800-page proposal, and it came out last 
week. We have looked at it preliminarily, and we like many of 
the things in it, but--
    Mr. Green. That is typically the way we do business here.
    [Laughter]
    Mr. Dugan. I think that we are likely to recommend some 
other additional changes, as we have done in the past. But that 
is one of the things we are studying right now.
    For example, we have talked, as I talked about in my 
testimony, I think we would like to see the Federal Reserve 
explore the possibility--to the extent that rate changes are 
made, and they are applied to existing balances, most issuers--
or at least most large national bank issuers--provide an opt-
out to consumers, and now you have 45 days to look at that.
    But not all do; it is not required. I think it would be a 
question about whether that would be something to apply across-
the-board, to put more of an element of fairness across-the-
board. So it's that kind of thing. There are a couple of other 
things.
    But, generally, this is a very positive proposal, not just 
for what was required to be disclosed, but the way in which it 
is required to be disclosed, in a simpler, more standardized 
format.
    Mr. Green. The opt-out provision, is that something that 
everyone finds acceptable? Who has a concern with an opt-out 
provision? Anyone?
    Ms. Bair. No, I think that would be a good addition, to 
make sure that if consumers do want to opt out, if they are 
given advance notice of a rate change, that they can continue 
making minimum payments to pay off that balance. I think that 
is actually crucial for the opt-out to be meaningful. So I 
think that is an excellent suggestion by OCC.
    Mr. Green. Is there any aspect of this, including the 
universal default, the retroactive application of increased 
rates, the double-cycle billing, paying late by paying on the 
same day but not within a certain timeframe on the same day, is 
there any aspect of this that you find abhorrent, to the extent 
that it is invidious, to the extent that you think it shouldn't 
exist?
    Mr. Reich. There may be situations where credit card 
lenders may be justified in taking an action that may look 
something like universal default. And that might involve 
bankruptcy, situations where a bankruptcy occurs, or a mortgage 
foreclosure occurs, that a credit card company may be justified 
in making an immediate rate adjustment, based on information 
that becomes known to them.
    And that might look like a universal default situation, and 
it makes me a little bit nervous when we start talking about 
prohibitions, blanket prohibitions, that we may be initiating a 
situation where there would be unintended consequences.
    Mr. Green. If you have multiple credit cards, conceivably 
you could have multiple--and all of your payments would be on 
the same date--conceivably, you could have different times on 
the same date to make your payments. I assume that everyone 
agrees with this premise: multiple cards; same date to pay, but 
you could have different times on the same date.
    Would it be helpful to at least have a certain time on the 
date that the payment is due? Such that if you have five cards, 
you don't find yourself with five different dates. Maybe not 
likely, but it conceivably could happen.
    Is there any way for the industry to do some introspection 
and conclude that maybe this is something that we can work 
together on, so that we don't have people who are Internet-
savvy, who like to do things on the Internet, they do it on the 
last day, and it is understandable now, people do this on the 
last day, they pay. And they think that they paid timely, but 
they find out that there is a certain time on that date that 
you must pay within. Any comments, please.
    Mr. Mishkin. In our proposal, we actually do have a 
requirement that the time of day is actually specified, so it 
does address the issue that you have been talking about.
    Mr. Green. Specified? Give me a little bit more 
information, please.
    Mr. Mishkin. It says when payment is due; it tells you 
exactly the time, as well.
    Mr. Green. This is for each card--each card issuer would 
have a specified date that would be made available and known to 
the consumer?
    Mr. Mishkin. Yes.
    Mr. Green. Here is the dilemma, if there is one. It is 
this: You have--some people have 10 credit cards. I don't 
advise it. In my opinion, if you have one, you probably have 
about all you need, for me anyway, in my--
    Chairwoman Maloney. I grant the gentleman 60 more seconds.
    Mr. Green. Thank you, and I will wrap it up quickly. But 
would it not be helpful if we--if everybody agreed that at a 
certain time on a certain date, that this would be a good 
thing, to have the card holder pay by, as opposed to 12:00, 
5:00, 8:00, 11:00, all on the same day? Do you follow me?
    Because you can give the time, but if everybody gets a 
different time, I think that that does cause a little bit of 
confusion with the consumer, and it would be great--most 
consumers, by the way, think that midnight is probably the 
time. If I can pay it by midnight on the date that it is due, I 
have paid timely. Most don't realize that there is another 
time.
    Thank you, Madam Chairwoman. You have been generous with 
the time. I yield back.
    Chairwoman Maloney. Any comment?
    [No response]
    Chairwoman Maloney. Okay. Mr. Gillmor?
    Mr. Gillmor. Thank you, Madam Chairwoman. Mr. Mishkin, I 
think the Fed has done very good work here. I have a question 
on the list of fees, and I think that is good to have that 
specific list.
    But concerns have been raised that the list is exclusive. 
And could a side effect of this be generation of a lot of 
imaginative new fees that don't have to go on there? Will you 
comment on that concern?
    Mr. Mishkin. We had specified the types of fees that do 
have to be disclosed, because it is clear that these are fees 
that are extremely common in the industry.
    One issue is we never know what kind of innovation we are 
going to have in the financial industry. It is extraordinary, 
what has happened in terms of who could imagine paying bills 
the way we pay them now, using the Internet, for example?
    The problem is that we may not know what the actual new 
product is that is going to be provided. What we do want to 
make sure of is that when a person actually uses a new product, 
that the fee is disclosed to them at that time.
    In fact, one concern we have is that if the only time that 
you get the fee disclosed to you is in writing is when you 
actually get the credit card, and 3 years later you are 
actually going to do something because you didn't think about 
it before, but you want to think about doing it now, we want to 
make sure that you get the fee disclosed to you at that time, 
so that you can make an informed decision at that time.
    Mr. Gillmor. Thank you. Mr. Neiman, you said that 
competition among credit card issuers has lowered average 
interest rates, but at the same time it has encouraged the 
expansion of fee-based profit.
    Do you want to explain why you think that is happening? Is 
that because people can figure out the interest rate easier 
than they can figure out the fees?
    Mr. Neiman. I don't remember the reference in the testimony 
you are referring to, but I think one of the concerns--and I 
think with the over-expansion--the greater competition--and I 
think Comptroller Dugan talked about the expansion of credit 
cards as a result of risk-based pricing, as well as the 
securitization process.
    But I think that the flip side of that is a greater 
responsibility on the issuance of those cards by the issuers, 
both with respect to an increased responsibility, and, I think, 
with respect to the ability of the borrower to pay. This is 
very similar to some of the issues that you are already 
addressing in the area of the subprime issue in the area, but I 
think it is critical, as well, in the expansion of credit card 
opportunities.
    Mr. Gillmor. Thank you. And, Chairwoman Bair, in your 
written testimony you noted a 40 percent decline in consumer 
complaints regarding credit cards over the past few years. Do 
you have any thoughts as to why?
    Ms. Bair. Well, those are just FDIC-received complaints. It 
is still a healthy percentage. Credit cards still generate a 
healthy percentage of our complaints. We think some of that may 
be charter transfers, that we don't have as many credit card 
issuers as we used to have. But because we don't track it, that 
is a guess. We are not really sure.
    Mr. Gillmor. Okay, thank you. I yield back.
    Chairwoman Maloney. Thank you. Congresswoman Waters.
    Ms. Waters. Thank you very much, Madam Chairwoman. I have 
to apologize. We had a Judiciary Subcommittee hearing going on 
at the same time, and so I have been back and forth. And the 
question that I truly wanted to ask should have been asked of 
the first panel, but--
    Chairwoman Maloney. This is the first panel.
    Ms. Waters. Oh.
    Chairwoman Maloney. The regulators.
    Ms. Waters. Is this still the first panel?
    Chairwoman Maloney. Yes, it is.
    Ms. Waters. Oh, this is who I wanted to ask a question. 
Okay, this is who I wanted.
    Credit cards are an absolute almost-necessity. You cannot 
rent a car, you cannot make hotel reservations, and you cannot 
make flight reservations. You can get on the airplane, but if 
you pay cash you are profiled, and you are suspect. That is one 
of the indicators for those who think that they should take a 
closer look at people who are traveling, they may be traveling 
for criminal purposes, etc.
    So, credit cards are pretty essential for daily life. And 
since they have evolved to that point, I really do think there 
should be more regulation.
    And I am very, very concerned about this whole subprime 
credit card lending. Just as we have the problem with 
mortgages, and the defaults that we are looking at now, it 
seems as if we have these subprime credit card lenders who 
charge all kind of fees, and it seems to me there should be 
some regulation, or there should be some ceilings.
    Okay, we know that no one is going to talk about a ceiling 
on interest rates, you can do what you want. But then, we get 
into late fees, and how late fees are charged. And this 
business about paying--your interest rate is going up if you 
are one day late, and all of that, I just really think we ought 
to look very closely at some of these fees, and start to talk 
about regulating fees.
    For example, I think there perhaps should be regulation on 
the yearly fees that are charged. I think that if there are 
monthly fees--which there shouldn't be, but I understand that 
there are some lenders who have monthly kind of maintenance 
fees. And I do think that there should be a limit on how much 
you can increase the interest rates when you have determined 
that there is some additional risk involved.
    Now, having said that, I would like to get some response. 
Who would like to talk about why there should or should not be 
more attention paid to this proliferation of fees, and perhaps 
some discussion about regulation? Let me start with--well, 
anybody. Who would like to respond?
    [No response]
    Ms. Waters. Board of Governors, Mr. Frederic Mishkin?
    Mr. Mishkin. I think the issue of fees is very important.
    Ms. Waters. I cannot hear you.
    Mr. Mishkin. The issue of fees is very important. This is 
one of the reasons why, in our proposal, we stressed so much 
clear information about fees. We found, in our consumer 
testing, that this is something that really does have an impact 
on consumers' understanding of what is going on, and also in 
terms of their actions.
    Ms. Waters. I am maintaining that, even though you are 
moving to look at this, do something about it, I am going a bit 
further. I am talking about creating some discussion about the 
regulation of fees, above and beyond the basic interest rates 
that are charged.
    Mr. Mishkin. The only comment I would have here is that the 
issue about regulation, setting prices or maximum prices, is 
that we have to think very hard about the unintended 
consequences, and that in that context, something that first 
sounds like it will be very helpful could actually end up 
either--may mean the people who would like to get credit 
couldn't get it, or whether there would be other sorts of 
problems, or that markets that eventually could be very 
beneficial might not develop.
    Ms. Waters. But have you, Mr. Dugan, taken a look at the 
proliferation of the creation of fees?
    It seems to me that there is a whole new business that is 
being offered to banks and financial institutions about the 
creation of new fees, how they can make more money.
    And somewhere, I think I read that there were some 
financial institutions making more on fees than on their basic 
products. Have you given any thought to what we can do to slow 
down this proliferation of fees, or to contain them? And what 
do you think about the idea of regulating fees?
    Mr. Dugan. Ms. Waters, I would say a couple of things. One 
is, picking up on a question of Mr. Gillmor, I do think that 
the simpler disclosure of interest rates that this committee--
this Schumer Box that showed interest rates--did have an effect 
over the years, in having a lot of competition and lowering the 
average rates.
    And I think there hasn't been as good a disclosure, because 
we haven't updated Reg Z in 25 years, to show what these fees 
are. I think that's part of the benefit of this proposal, is 
that when we see them, they are clearly shown. They are shown 
not just in the initial thing, but in your periodic statements, 
and how much you have done each year.
    I am hopeful, and I believe it will be the case, that there 
will be more competition about fees that consumers will have--
    Ms. Waters. Where do they show them, when they have decided 
that, despite the fact you started out as a good risk, that now 
you missed a day or two, and whatever their criteria is, they 
are going to increase those interest rates automatically? Where 
is that shown?
    Mr. Dugan. I don't think there is any requirement to--in 
the proposal--to show the reasons for it. They will show what 
the fees are that are being charged.
    Ms. Waters. You don't have to show the reasons for it, but 
Ms. Jones has been paying 15 percent, and then on her next 
billing she is now paying 20 percent or 30 percent. There has 
been no additional notice, no recall of anything that was told 
the person in the very beginning that, ``Should you miss 5 
days, or if you are 5 days late, you are going to get a late 
fee, plus we are going to increase your interest rates.''
    Nobody explains that. And all of a sudden, there is this 
increase.
    Mr. Dugan. Well--
    Ms. Waters. How do you deal with that?
    Mr. Dugan. Well, I think it is a real fundamental issue you 
are raising. And it partly is dealt with in the new proposal, 
in--
    Ms. Waters. How?
    Mr. Dugan. They have to give advance notice for any change 
in the fee, and it has to be 45 days, which is more than the 15 
days under current law.
    And, as I was saying earlier, most of the large issuers now 
will allow you to opt out of that increase, and close your 
account, and pay it off over time and go to get another credit 
card. So there is something that does address that directly.
    Mr. Neiman. May I also respond to Congresswoman Waters--
pick up on your point on the subprime offerings and the fees?
    One of the earliest actions that New York took against a 
subprime credit issuer--remember, we only have a limited number 
of credit card issuers over which we have the ability to bring 
enforcement actions--but it was a case where they were--had 
issued a pre-approved premium card to a select group of 
borrowers, saying that, ``You have been pre-approved for up to 
$2,500 in credit.''
    In reality, most of the borrowers had a credit limit of 
$300, and that was reduced by $150 in fees. An action was 
brought, and settled for $9 million in fines. And it just kind 
of highlights the types of concerns, and we share your concerns 
about having the ability to address those deceptive practices, 
as well as to bring enforcement actions.
    And States often are in the best position to act quickly, 
as the industry changes and develops new products.
    Chairwoman Maloney. The gentlewoman's time has expired.
    Ms. Waters. Thank you.
    Chairwoman Maloney. Mr. Scott.
    Mr. Scott. Thank you very much, Madam Chairwoman. This is 
truly a very, very revealing hearing, and it is much more 
serious than I thought. This borders on sophisticated predatory 
lending by a highly respected segment of our financial services 
industry with a product that certainly, without any 
equivocation--represents the actual key to life.
    The credit card now is a key to life in our community. And 
credit card issuers are now bordering on being sophisticated 
predators. Let me just explain to you why I come to this 
conclusion.
    First of all, we are dealing with a sophisticated way of 
building up penalty interest that hovers right now at an 
average of over 30 percent. That is number one.
    Number two, companies are now applying payments to the 
least costly debt, thus forcing customers to pay more in 
interest. For example, a way of an industry practice that 
includes charging interest on debt that has already been paid. 
Let me give you an example.
    If you go--and this is a common practice, this is why it is 
predatory, this is why it is deceptive and unfair, and down 
right low down--if you take--and here is a consumer who goes 
out and pays--and has a price of a product of $4,000, and he 
pays $3,000 of it right out, they charge the interest on the 
complete $4,000.
    That is unmercifully pathetic, with this industry, to--when 
they pay their bill on time, you charge the interest on the 
entire amount when he has already paid most of it. When the 
interest should be on just the $1,000, it is charged on the 
$4,000.
    Now, you say the Fed has done something. What the Fed has 
done with this 15 to 45-day extension is absolutely 
insignificant, when you look at the depth of the abuses and the 
aggressive marketing and pricing packages that are done.
    So what do we do about this? I would like to ask each of 
you--because I think that we need some serious regulation--I 
need Congress to reach in real deep and do some serious 
regulation of the industry, because again, the credit card is 
the key to life. We don't use cash any more; we are a credit 
card society. Everything is based on that, and we need them for 
emergencies.
    So, I think we should do these things. I think we should 
cap penalty interest rate increases. Don't you agree? Good.
    I think you should prohibit--we should prohibit--interest 
from being charged on late fees, or over-the-limit fees, and 
prohibit the late fees if a card issuer delays crediting a 
payment. Does that not make sense? Does that not get to it? 
What is this? This is a complicated language of a whole--almost 
worse than a foreign language.
    I don't even understand it. Nobody reads that. All the 
people want is that credit card. You think they read that fine 
point? They don't read the big point. I don't know what it says 
and what it does. But I know this. You do. And your industry 
knows, and your industry knows that you are taking advantage of 
this.
    You are taking advantage of the opportunities that are 
presented in a free enterprise system, where everybody is out 
here to make a profit. And how do you make a profit on this? 
You make a profit on the interest you charge on the credit. But 
where you're really making your money is in these late fees, 
and in these penalty fees.
    And so, it just seems to me to be a pattern of doing these 
kinds of things. So I would like to get your comment. I mean, 
because if you do--if you--if we can bar companies--and again, 
like I said at the very beginning, I know many people in this 
industry, and they are good and decent people, and I really 
think that you are going to provide the leadership within your 
industry to clean this up, but it is our job to lay it out, 
examine it--
    Chairwoman Maloney. The Chair grants an additional 60 
seconds.
    Mr. Scott. Thank you so much, Madam Chairwoman. So I think 
that these are the things we need to do.
    Ms. Waters. Will the gentleman yield for 1 second? Over 
here, Mr. Scott? Will you please ask them to answer your 
questions about paying on the $4,000--
    Mr. Scott. Oh, yes.
    Ms. Waters. The interest rates after you have paid already 
$3,000 of it. I really want to hear their answer.
    Chairwoman Maloney. Yes, let's hear their answer.
    Mr. Scott. But I still need my 60 seconds, please. Go 
ahead.
    [Laughter]
    Mr. Mishkin. People usually referred to this practice as 
double-cycle billing. One of the good things is that when light 
is shed on this, it creates a problem for the people who are 
doing it.
    What we are seeing is that more and more--in fact, there 
are fewer and fewer credit card issuers who are actually doing 
this. The major credit card issuers have been dropping exactly 
this practice, because of the fact that it doesn't smell right 
to people.
    So, I think that one of the key issues here is that the 
role of Congress is to shed light on this. We are trying to 
shed light on this through these disclosures. That actually 
helps make it possible for consumers to say, ``We're not going 
to use a credit card that has this feature.'' And, indeed, then 
the industry actually starts providing better products.
    Mr. Scott. That is why I say this is predatory, 
sophisticated predatory, because you know, by the very nature 
of your answer--
    Chairwoman Maloney. The gentleman's--
    Mr. Scott. May I get my 60 second, please? Because I think 
that, number one, we have to bar companies from charging 
interest on debt paid by the due date. And you all agree with 
that. Any disagreement?
    [No response]
    Mr. Scott. We can include that? That would be very helpful.
    Then, we need to cap the penalty interest rate increases. 
Any problem with that?
    [No response]
    Mr. Scott. Okay. Then, we need to prohibit interest from 
being charged on late fees, or over-the-limit fees, and 
prohibit late fees if a card issuer delays crediting a payment. 
I think those are things that we need to incorporate in the 
legislation. And I think that we will--
    Chairwoman Maloney. Thank you so much.
    Mr. Scott. And I thank the chairwoman.
    Chairwoman Maloney. Mr. Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman. I apologize for 
being late. I am doing the graduation tomorrow for the pages, 
so I stopped by the desk to chat with them, and told them that 
I had to go off to the committee, and told them what committee 
it was, and what we were talking about.
    A young page, 17 years old, just told me that he has 
already received letters and applications for a credit card. 
Seventeen years old. He is a page. He gets a card every day to 
go downstairs to get a free meal. He can't pay a credit card. 
He said he just decided he didn't want to send it in. I just 
wanted to--I have the spirit of sharing, so I just wanted to 
share that.
    My question is to OCC. Have you investigated, or taken any 
enforcement actions against a top-10 credit card issuer since 
the Providian case? And have you taken any action against a 
credit card issuer for a consumer-related problem since 2003?
    Mr. Dugan. The answer to your question is we have taken a 
number of enforcement actions for unfair and deceptive 
practices in the credit card industry, generally, particularly 
on the subprime side. And the--as a result of the enforcement 
actions that we have taken, which is on consumer issues, not on 
safety and soundness issues, there are very few subprime credit 
card lenders left in the national banking system.
    In terms of large bank issuers, our actions have tended to 
be more through the process of supervision and through our 
account management guidance, and through--for example, the 
agencies got together and found that consumers were not being 
charged--were being charged very small minimum payments, to the 
point where it wasn't covering the interest each month, and the 
debt was growing, even though they would make a minimum 
payment. They would get deeper in debt after they made a 
required minimum payment.
    We believe that raised both safety and soundness and 
consumer protection problems. And so, the agencies issued 
guidance to stop that. It took a while for the industry to 
adjust to it, and we felt the need to go out and demand that 
each of our issuers pay all finance charges, plus 1 percent of 
principal, so that a consumer, when they made a payment, would 
move his way out of debt--his or her way out of debt--and not 
get deeper into debt.
    Mr. Cleaver. Okay, thank you. So the answer is no?
    Mr. Dugan. Well, to which question?
    Mr. Cleaver. Well, actually, to both of them. You know--
    Mr. Dugan. We have taken enforcement action since 2003.
    Mr. Cleaver. Against? Against?
    Mr. Dugan. And we have--
    Mr. Cleaver. Against one of the top 10 credit card--
    Mr. Dugan. Not against the top 10, not a formal enforcement 
action. The answer is no to that question.
    Mr. Cleaver. Okay. The--do you have any reason for not 
having done so?
    I mean, you mention the subprime credit, and we all have 
problems with them. I think what you are hearing is that there 
are problems with some of the non-subprime credit card lenders. 
And I think for us to pile on the subprime lenders is not quite 
at least where I am coming from.
    I want to know about--I mean, this young kid, I won't call 
the name, he didn't get an application from, ``Come Get it 
Credit Company,'' you know, it was one of the top 10.
    Mr. Dugan. Mr. Cleaver, we, in fact, have taken a number of 
informal actions, and we have a range of tools, as I tried to 
lay out in our testimony, where we address practices, and try 
to get changes made through the supervisory process, through 
informal actions, through matters requiring attention, through 
so-called safety and soundness orders, which is a little bit of 
a misnomer, because it includes consumer protection issues, as 
well.
    So, we have taken a range of action, with respect to our 
large credit card providers, all of which are outlined in the 
testimony. And even though we haven't gone to the last resort 
of taking a formal enforcement action, it does not mean that we 
haven't had a rigorous supervisory program to address practices 
consistent with the law that is in place, with what is required 
in the Reg Z and the consumer protection responsibilities.
    And when we see a practice that rises to an unfair and 
deceptive action, even though we don't have rulemaking 
authority, we do not hesitate to take enforcement action in the 
area, and we have done so.
    Mr. Cleaver. Thank you very kindly. I will yield back the 
balance of my time.
    Chairwoman Maloney. Thank you. Mr. Ellison?
    Mr. Ellison. Madam Chairwoman, thank you for your calling 
this hearing together. It is excellent.
    Ms. Bair, could you tell me, if credit cards are being sent 
to everyone--or not everyone, but a lot of people, including my 
19-year-old son--how can it be that the industry can sort of 
claim that they have to increase rates in order to adjust for 
risk? I mean, it seems like it's self-imposed risk, when you 
make credit cards so available to everybody. Can you help me 
understand that?
    Ms. Bair. I think that is a good question, and it is 
something that we are evaluating, as well. I will tell that 
when my son was 9 years old, he once got a credit card 
application, so I am there with you.
    Mr. Ellison. I am not surprised.
    Ms. Bair. And I used to teach at the University of 
Massachusetts, and I saw my students getting solicitations and 
getting in over their head on credit card debt. So I do think 
it is troubling.
    And, clearly, the business model has been to make it widely 
available, and risk-base price it, and we have run into some 
problems with young people and others who do not have a lot of 
financial history of dealing with financial matters getting 
themselves into trouble.
    So, I do not have an answer, but I share your concern.
    Mr. Ellison. Yes. I appreciate you saying that, because I 
mean, I think that for an industry to say, ``Well, we have to 
have these rates because it's so risky,'' and then they send 
cards everywhere, it's just sort of disingenuous.
    Let me also ask this question. Is part of the problem lax 
enforcement? I was somewhat surprised to hear that the top 10 
have not received any enforcement action. Do you feel that, as 
regulators, you have enough resources to really hold the top 10 
credit card companies accountable for questionable practices 
like double-cycle billing, you know, universal default, all 
these kinds of things? Do you have enough resources to do your 
job?
    Mr. Dugan. Yes, I think--well, speaking for the OCC, I--
    Mr. Ellison. Well, thank you, because I am now shocked that 
you are not doing it.
    Mr. Dugan. Well, you mentioned double-cycle billing. That 
is lawful.
    Mr. Ellison. Well, I mean, let me ask you this. Do you 
think that there are practices that are, in fact, technically 
lawful, but sort of stretch the spirit of the law?
    I mean, if you are there to protect the industry and 
protect consumers as well, I mean, there might be some things 
that are lawful, but still, kind of beyond the pale. I mean, 
there is a--
    Mr. Dugan. I absolutely agree with that. I think that is 
what I was trying to describe--
    Mr. Ellison. Okay, okay. Please. Because I only have 5 
minutes, that is why I am--
    Mr. Dugan. I understand that. But what I was trying to get 
at before is, for example, this minimum payment requirement 
that I talked about.
    Mr. Ellison. Right.
    Mr. Dugan. That was something that we imposed--``we,'' on 
an inter-agency basis, wasn't strictly required specifically in 
the law. We believed it was an inappropriate practice, both for 
the consumer, and from a safety and soundness perspective. We 
took direct action, had plenty of resources to do it. That is 
number one.
    Number two, I think it is a mistake to think only in terms 
of enforcement actions. What we do and how we achieve change, 
with respect to the providers goes through the entire 
supervisory process, and--
    Mr. Ellison. And I don't--
    Mr. Dugan.--there are many, many things that we bring--
    Mr. Ellison. Forgive me for jumping in, but I appreciate 
that. We shouldn't think only in terms of enforcement actions, 
but it seems to me that we should at least sometimes think in 
terms of enforcement actions.
    And what I have heard is that there really haven't been any 
for the top 10, which creates certain interesting points of 
view, because it's like, wow, I mean, if you are a small credit 
card company doing sort of questionable practices, you are 
going to get scrutiny, and if you are a big one, you are not. 
So, I just--
    Mr. Dugan. I disagree with that.
    Mr. Ellison. Well, I mean--
    Mr. Dugan. Because they get plenty of scrutiny--
    Mr. Ellison. Well, wait a minute. Wait a minute. You said 
there were enforcement actions on the little guys, but not the 
big ones.
    Mr. Dugan. Not because they are little or big, it is 
because of what practices they engage in, where--
    Mr. Ellison. Excuse me. The next question I have is about 
pre-emption. I don't like Federal pre-emption, because I want 
more eyes on the problem, and I think that State attorneys 
general can help bring forth a level of accountability that 
sometimes our Federal Government doesn't think--well, I won't 
even say if that is the case--but for one reason or another, it 
doesn't provide.
    Mr. Neiman, do you have any views on this subject?
    Mr. Neiman. Yes, I certainly do. I mean, I question whether 
Federal regulators would ever have sufficient resources--or 
sometimes incentives--to take the actions that are necessary 
to--with respect to enforcement, and even the number of 
resources necessary to handle customer complaints.
    I do strongly feel that the States are in a much better 
position to address these at a local level. That is why we have 
local police forces, and don't rely on county and State and 
Federal police, because local police are closer to the 
community. They understand the issues better, and they can 
react more quickly.
    Mr. Ellison. So--
    Mr. Neiman. I think there are other models out there, like 
the FTC, as well as the EPA, where both Federal and State 
regulators--
    Mr. Ellison. I think the dual system of regulation is a 
good one, and I would be a very strong proponent of allowing 
the States to stay in the game, here, and in fact, expanding 
State ability to protect consumers in the area of financial 
services.
    Chairwoman Maloney. You raised some very important points, 
and your time has expired. And I would like to note, for the 
record, that there will be a hearing next week on June 13th on 
Federal pre-emption, so we can raise this issue and discuss it 
further.
    I do have more questions, but in the interest of time, I am 
going to be placing them in writing to the panelists. I thank 
them for their time, and their testimony. I urge my colleagues 
to likewise place their additional questions in writing. And 
without objection, the hearing record will remain open for 30 
days for members to submit written questions to these 
witnesses, and to place additional comments that they would 
like into the official record.
    This panel is closed. We thank you for your testimony, your 
time. And the second panel is called. Thank you.
    [Recess]
    Chairwoman Maloney. I would like to recognize and introduce 
the second panel: Kathleen Keest, from the Center for 
Responsible Lending; James Huizinga, from Sidley Austin; John 
Carey, chief administrative officer of Citi Cards; William 
Caywood, senior consumer credit risk and compliance officer for 
Bank of America; John Finneran, general counsel for Capital 
One; Marilyn Landis, vice chair of the National Small Business 
Association; and Ed Mierzwinski, consumer program director for 
the United States Public Interest Research Group.
    I thank you all for coming, and for your testimony. And 
would you please begin, Ms. Keest? Thank you.

 STATEMENT OF KATHLEEN E. KEEST, SENIOR POLICY COUNSEL, CENTER 
                    FOR RESPONSIBLE LENDING

    Ms. Keest. Thank you for inviting me to talk today about 
the rules that the Fed has proposed to govern the disclosures 
in this marketplace that you have made very clear affects all 
of your constituents today to the tune of about $800 billion.
    And I wanted to start with a reminder that truth in lending 
was--at the time it was enacted--enacted as a complement to 
substantive consumer protection regulations, not as a 
substitute for it. And the rules--as much of an improvement as 
they are--that have been proposed by the Fed don't offer that 
adequate substitute.
    In looking over the rules, we looked at three questions. 
One was how are the disclosures going to be made? And we give 
the Board very high marks for that. The improvements in the way 
that the disclosures are going to be made are a vast 
improvement, and we commend them for it.
    We also commend them for adding the 45-day advance notice 
to the imposition of the penalty fees. Although, as you have 
all highlighted, that certainly doesn't solve the problem.
    The second question was, what is to be disclosed under the 
new regulation? And we have a lot of more concerns about that. 
As everybody has recognized, there is extraordinary pricing 
complexity here that challenged the ability of disclosures to 
handle the problem. There are opaque and complicated accounting 
systems, and there is a proliferation of fees.
    And, as we found out today, that is a serious problem now, 
and that was the problem 40 years ago, when Truth in Lending 
was enacted. What we feel is the problem with the regulation is 
that--the regulation that has been proposed--is that, 40 years 
ago, Truth in Lending was enacted to standardize the price tag 
so that people could make order out of the chaotic pricing. And 
what we feel has happened is that the Board has given in to the 
pricing chaos, rather than reigning it in.
    The accounting problems that people have all talked about 
that are unfair--and there is a law against unfairness now--
have not been dealt adequately with in the regulations, 
although with some of them there are some improvements. But 
with some of them, not at all. In fact, like the double-cycle 
billing, they basically just threw up their hands and said, 
``We can't deal with this, this way.''
    With respect to the problems that were enacted with that 
comparative price tag that you need, the Board is offering two 
alternatives. One is, again, simply to give it up as too 
complex. And that certainly is not an adequate alternative, and 
is certainly not going to solve the problem.
    The other, as they recognized, if you actually paid a 
little attention to coming up with something that is consistent 
and descriptive, people can use it, and they propose that as an 
alternative, but we fear that they aren't going to--we fear 
that they don't favor that alternative.
    And that brings us to the last question, which most of you 
have been focusing on already today, which is whether it is 
enough.
    Duncan MacDonald, who was a former city executive, has 
written in, ``The American Banker,'' that this is an industry 
that has lost its way, and the regulators haven't helped it 
regain its way.
    We heard many times today about the unintended consequences 
of regulation. But unintended consequences flow from 
insufficient regulation, as well. And we fear that the Fed, 
with as much improvement as it has had, by its refusal to go 
further and using its unfairness regulatory authority, is 
leaving Congress with the job of curing some of these abuses 
that we have seen today. Thank you.
    [The prepared statement of Ms. Keest can be found on page 
208 of the appendix.]
    Chairwoman Maloney. Thank you very much.
    Mr. Huizinga?

       STATEMENT OF JAMES A. HUIZINGA, SIDLEY AUSTIN LLP

    Mr. Huizinga. Good afternoon, Chairwoman Maloney, Ranking 
Member Gillmor, and members of the subcommittee. My name is Jim 
Huizinga, and I am a partner in the Washington, D.C., office of 
Sidley Austin. It is my pleasure to appear before you today to 
discuss the evolution of the credit card industry, and the 
revisions to Regulation Z recently proposed by the Board of 
Governors of the Federal Reserve System.
    Congress enacted the Truth in Lending Act, or TILA, almost 
40 years ago to provide consumer protection in the developing 
consumer credit marketplace. The Board has regulatory authority 
to implement TILA through its Regulation Z. Regulation Z 
requires comprehensive cost disclosures for consumers so they 
can shop for credit, which facilitates competition among 
creditors.
    Standardized disclosure, under Regulation Z, fosters 
competition among credit card issuers on the basis of key 
account terms, such as interest rates and fees. Competition 
based on these disclosures is especially effective in the 
credit card industry, because there is wide availability of 
credit card offerings and balance transfer features, allowing 
consumers to move easily from one card issuer to another.
    The credit card industry has evolved significantly over the 
years, including through the development of risk-based pricing, 
and de-bundling of prices. However, Regulation Z's basic 
methods of protecting consumers can be just as effective today 
as when Regulation Z was first enacted. The key is to update 
and improve Regulation Z disclosures to ensure that consumers 
can shop effectively for credit cards in today's marketplace.
    As you know, the Board recently released significant 
proposed revisions to Regulation Z. The Board's proposal is a 
major undertaking to increase the understandability and 
usefulness of Regulation Z disclosures. Although it is likely 
that both industry and consumer groups will seek many changes 
to the proposal, I believe there is a consensus that credit 
card disclosures need to be improved. I also believe the 
proposal is, generally, a major step in the right direction.
    I think it is critically important that, for the most part, 
the proposal avoids price controls and similar restrictions. 
Price controls seldom work, and it would be far preferable to 
allow the fierce competition in the marketplace to drive the 
future developments of credit card products.
    Significantly, the Board's proposal is based on actual 
consumer testing. The Board has attempted to determine what 
consumers want to see in disclosures, and not necessarily what 
consumer groups, the industry, or the Board itself might assume 
consumers want.
    The Board's proposal contains very significant changes. 
Broadly speaking, the Board proposes: number one, to improve 
and increase disclosures relating to newer pricing methods, 
including penalty pricing; number two, to expand the use of 
standardized charts to facilitate easy and quick review of 
credit terms; and number three, to use terminology that 
consumers understand, such as ``interest rates and fees,'' 
instead of legal terms that have little meaning to consumers.
    The Board's proposal also would adopt a significant 
substantive protection to facilitate the ability of consumers 
to move credit card balances to a new creditor, because of an 
interest rate increase. In particular, Regulation Z would 
expand the advance notice period for interest rate increases 
from 15 to 45 days, and, for the first time, apply that longer 
notice period before penalty interest rates can be imposed.
    These changes are designed to better allow a consumer to 
shop for a new credit card, and transfer an existing balance to 
a new creditor, if the consumer qualifies for a better rate.
    As I mentioned, I believe the Board may need to consider 
some changes to its proposal. Some of the items included in the 
proposal appear at first blush to impose significant costs on 
the industry, without providing counterbalancing benefits to 
consumers. The net result may be increased credit costs to 
consumers without appreciable consumer benefits.
    For example, the expectation that certain disclosures would 
be provided on long, legal-sized paper may be a costly 
proposition. Furthermore, the proposal to completely redesign 
periodic statements will cause substantial resources to be 
allocated by card issuers, which may or may not be justified, 
in light of the fact that periodic statements have not tended 
to be confusing for consumers.
    In conclusion, I believe that the underlying approach of 
TILA to consumer protection for credit cards is just as 
effective today as when Regulation Z was originally adopted. 
Given the significant competition in the credit card 
marketplace, a well-informed consumer has, literally, dozens of 
options when choosing a credit card. The Board has done an 
admirable job in proposing necessary changes to Regulation Z, 
to ensure that consumers do, in fact, receive information they 
need to shop effectively in today's credit card marketplace. 
Thank you again, Chairwoman Maloney, for the opportunity to 
appear before the subcommittee. I would be happy to answer any 
questions you may have.
    [The prepared statement of Mr. Huizinga can be found on 
page 181 of the appendix.]

STATEMENT OF JOHN P. CAREY, CHIEF ADMINISTRATIVE OFFICER, CITI 
                             CARDS

    Mr. Carey. Good afternoon, Chairwoman Maloney, Ranking 
Member Gillmor, and members of the subcommittee. My name is 
John Carey, and I am the chief administrative officer of Citi 
Cards. I appreciate the opportunity to appear before you today 
to discuss the credit card business, and how we serve our 
customers.
    Citi Cards is one of the leading providers of credit cards 
in the United States, employing 33,000 people in 28 locations 
across 20 States. Credit cards have become an integral part of 
our Nation's economy, providing meaningful benefits to 
merchants and consumers alike. Merchants enjoy the prompt 
payment, security, and efficiency of credit cards. For 
consumers, credit cards are a safe and convenient alternative 
to cash, making everyday purchases more efficient, making 
online shopping possible, and helping them track and manage 
their spending.
    I understand that the subcommittee's primary focus today is 
on the initiatives in the credit card industry that affect 
consumers, including the Federal Reserve Board's new proposed 
revision to Regulation Z. Let me turn to the Fed's proposal 
first, and then describe what we have been doing at Citi in 
recent years, including new initiatives implemented to improve 
our customers' experience.
    Two weeks ago, the Fed issued a comprehensive proposal to 
revise Reg Z, focusing on disclosure and other practices. This 
lengthy proposal will, of course, require a detailed study. But 
let me state in no uncertain terms that we applaud what the Fed 
has done, and believe it can foster significant improvements 
for consumers.
    The new proposal is aimed at enhancing the clarity of 
disclosures, improving customer understanding of key credit 
card terms and conditions, and maximizing transparency. In 
effect, the proposed changes seek to move credit card 
disclosures towards the successful model of food labeling, 
where consumers can get all the information they need in 
simple, uniform terms, that allow them to readily compare one 
product to another.
    Consumers should be able to do this in the credit card 
world, relying on consistent presentation of important 
information when applying for credit, when opening an account, 
when receiving their statement, and when the terms of the 
account change. This is the right approach, and we strongly 
support it.
    Our own efforts to make credit card disclosures clear and 
understandable are entirely consistent with the approach taken 
by the Fed. Indeed, all of the effective and simpler-to-read 
disclosures cited by the GAO in its September 2006 report on 
credit cards were Citi disclosures. Our work in this area 
intensified in 2005, following a public call from the OCC for 
improved credit card disclosures, and has continued right to 
the present.
    Citi was one of the first card issuers to revise its 
solicitation letters, promotional materials, and card member 
agreements, to more prominently disclose the important pricing 
terms in the product. Today we are continuing to improve and 
simplify our Schumer Box, and implement major redesign of our 
customer statements.
    In short, we want consumers to understand clearly what we 
are offering and what our competitors are offering, so that 
they can make informed choices. We are confident that we can 
compete on quality, service, and value, and that it will be 
good for customers and good for Citi.
    But improving disclosures isn't the end of the discussion. 
Citi has also recently adopted two major initiatives that 
represent a change in the industry, and that we hope other 
issuers will adopt, as well.
    First, Citi was among the first issuers to eliminate 
repricing for what we call off-us credit behavior. Not just 
automatic repricing, known by some as universal default, but 
any repricing.
    Second, we eliminated what is commonly known as any-time, 
any-reason increases to the rates and fees of our customers' 
accounts, for example, to respond to general market conditions 
or credit history. Once a card is issued, we will not 
voluntarily increase the rates or fees on the account until the 
card expires and a new card is issued, which is generally 2 
years.
    Further, to assist customers to pay on time and avoid 
exceeding their credit limit, we have established an alert 
system with consumers that they can tailor to meet their 
individual needs to notify them in advance about key dates and 
information related to their bills.
    Moreover, Citi is an industry leader in financial education 
and literacy, and we have put in place numerous programs to 
encourage and promote responsible borrowing.
    Finally, we are also a leader in protecting our consumers 
from identity theft and fraud, and in offering immediate, 
effective help, regardless of the card which was affected by 
this identity theft.
    Madam Chairwoman, we are working on a daily basis to 
enhance the products and services we offer our customers. This 
job is never finished. We know that there is always room for 
improvement. I look forward to answering any questions that you 
or the subcommittee may have.
    [The prepared statement of Mr. Carey can be found on page 
108 of the appendix.]

 STATEMENT OF WILLIAM CAYWOOD, SENIOR CONSUMER CREDIT RISK AND 
              COMPLIANCE OFFICER, BANK OF AMERICA

    Mr. Caywood. Thank you. Good afternoon, Chairwoman Maloney, 
Ranking Member Gillmor, and members of the subcommittee. My 
name is Bill Caywood, and I am the operational risk and 
compliance officer for Bank of America, with a scope that 
includes credit cards. The committee has asked us for our views 
on the Federal Reserve Board's proposal to substantially revise 
its Regulation Z.
    As you have heard today, the job of describing how the 
credit card works has become complex. Certainly, card 
agreements were simpler when the product was offered only to 
wealthier customers who paid an annual fee, and were required 
to repay the balance in full each month. But the current system 
has expanded access to credit, and made the credit card a more 
useful instrument for more consumers than ever before.
    Our initial review of the new Reg Z suggests that the 
proposed revisions are an improvement on the existing 
regulation. It will provide customers meaningful disclosures in 
an even clearer format, and it will facilitate comparison 
shopping, and better allow consumers to modify their behavior, 
potentially reducing their cost of credit.
    In its proposal, the Board has amended several of the 
required disclosures to provide a useful tabular summary. 
Furthermore, transactions, interest charges, and fees will be 
grouped together in a new way that we think will be more easily 
understood by customers. We believe that the revised statement 
will quickly and more clearly provide customers relevant 
information about their accounts, and assist them to better 
understand the cause of any credit-related fees incurred during 
the previous cycle.
    While our overall reaction to the proposal is favorable, 
the proposed changes to Reg Z would require issuers to expend 
considerable time and resources to rewrite the vast majority of 
our communications with our customers, and to change the ways 
that these communications are delivered. It would also require 
substantial time to prepare and test, and it will be important 
for the Board to allow sufficient time for that to occur.
    We have also identified one area in the proposal described 
in my written testimony, where we believe it can be improved. 
Our review between now and October, when the comment period 
ends, may identify others, and we will include those in a 
comprehensive comment to the Board.
    Some specific credit card practices have been the focus of 
recent criticism and discussion here today. We believe it is 
important to reiterate Bank of America's position on these 
issues.
    Bank of America has never engaged in double-cycle billing.
    Bank of America has never engaged in universal default. 
That is, automatically repricing a customer, without further 
notice or consent, based only on the customer's default with 
another lender.
    Bank of America limits the frequency of risk-based 
repricing by amendment. In addition, when we determine that an 
account's risk has increased, and propose an increased interest 
rate, the customer can opt out of the proposed change in terms 
and pay down the account over time under the existing terms. We 
call this, ``Just Say No.''
    Bank of America limits the number of consecutive over-limit 
fees. We have a hard stop at three.
    I am proud to say that we arrived at these policies some 
time ago, by listening to our customers, and implementing 
practices designed to meet their financial needs and concerns. 
More recently, we have modified our default repricing, to be 
based on two events: late payments or overlimit transactions.
    We think it is fair to give customers a second chance. And 
when customers with increased rates pay us on time for 6 
months, and stay within their credit limit, they can qualify 
for a rate reduction, or a ``cure.''
    It was also from listening to our customers that we learned 
that they have a growing desire for improved information and 
more control over their finances. This is why we offer easy-to-
use tools to help our customers manage their accounts 
responsibly. Online banking allows customers to view 
information about their credit card and other accounts. 
Customers can track activity, transfer funds, and pay bills any 
time, anywhere they have Internet access.
    Alerts are messages that we send to computers, PDAs, or 
mobile phones to inform or protect our customers. They can warn 
a customer when he or she is approaching a credit limit, or has 
an upcoming payment due date. Our alerts go by e-mail or text 
message, or both. Customers love this option. We have more than 
1.3 million enrolled to receive alerts already.
    We have also gone beyond the required disclosures to 
provide customers with brochures that describe, in plain 
language, how credit cards work, and how to avoid fees. One 
example is called, ``Credit Cards and You,'' which I have a 
copy of here, which provides clear information about interest 
rates, grace periods, and how cash advances and balance 
transfers are treated, how payments are allocated among 
outstanding balances, and the importance of paying on time and 
staying within your credit limit.
    In addition, Bank of America believes that financial 
literacy is best taught early. That is why we sponsor basic 
money management programs for high school and college students 
with our partner, Monster.com. Between August 2006 and March 
2007, we made nearly 240 presentations to more than 13,000 
students on college campuses.
    Why are we engaged in these financial education efforts? 
Our research shows that customers who are empowered with this 
information are more satisfied and more likely to look to us 
for a deposit or mortgage account.
    Second, our business does best when our customers manage 
their credit responsibly. One of the great myths that we hear 
is that credit card companies prefer customers to default on 
their obligation, so that we can earn higher fees. That's 
simply not the case. Our credit losses exceed by a wide margin 
our revenue from late and overlimit fees. We want informed 
customers, and that is why we have not only undertaken our own 
efforts to educate them, but we support the efforts of the 
Board.
    In conclusion, thank you for this opportunity to address 
the subcommittee, and I would be happy to respond to any 
questions the members may have.
    [The prepared statement of Mr. Caywood can be found on page 
123 of the appendix.]

 STATEMENT OF JOHN G. FINNERAN, JR., GENERAL COUNSEL, CAPITAL 
                              ONE

    Mr. Finneran. Good afternoon Chairwoman Maloney, Ranking 
Member Gillmor, and members of the subcommittee. My name is 
John Finneran, and I am the general counsel of Capital One 
Financial Corporation. I want to thank you for this opportunity 
to address the subcommittee this afternoon.
    Today the credit card is among the most popular forms of 
payment in America. It is valued by consumers and merchants 
alike for its convenience, efficiency, and security. But credit 
cards have also become more complex, with a variety of benefits 
and terms. The current disclosure regime under the Truth in 
Lending Act, as implemented by Regulation Z, did not 
contemplate this complexity.
    As well as meeting the current requirements of Reg Z, in 
recent years, Capital One has implemented a dynamic disclosure 
regime, focused on simple and timely communication of critical 
information to our customers, as well as our prospective 
customers.
    We at Capital One want to join those who have praised the 
Federal Reserve Board for the depth and thoroughness of its 
proposed changes to Reg Z. Capital One commented in advance of 
the rule with its own recommendations for comprehensive change, 
and were pleased to find in this proposal by the Fed new rules 
that incorporate many of our recommendations.
    For years, Capital One has been focused on two critical 
priorities which we believe to be integral to the empowerment 
of our customers, and the health of our industry--good 
disclosure and default repricing practice. Although we haven't 
had the time to assess the full implications of the Fed's 
proposal, we believe that the Board is focused appropriately on 
these issues, as well.
    The Fed's proposal, if adopted, would transform the basic 
concept of disclosure, altogether. It would move to a targeted 
regime of plain English notices that are delivered to customers 
at the moment when they are most relevant to them. We strongly 
support the Board's proposal in this regard.
    As importantly, the Federal Reserve's proposal has 
identified what Capital One believes to be the most challenging 
practice in the industry today, and that is aggressive default 
repricing. Requiring card issuers to notify customers 45 days 
prior to default repricing is a bold proposal. Capital One has 
already addressed this issue in a different way, with a single, 
simple default repricing policy that provides our customers 
with a warning before we will consider taking any action.
    Our policy is simple: Capital One will not default reprice 
any customer unless they pay 3 or more days late twice in a 12-
month period. After the first infraction, customers are 
provided with a prominent statement on their monthly bill, 
alerting them that they may be default repriced if they pay 
late again.
    Furthermore, the decision to default reprice someone is not 
automatic. For many customers, Capital One chooses not to do 
so. If we do default reprice someone after being late twice, we 
will let them earn back their prior rate by paying us on time 
for 12 consecutive months. This process of unrepricing is 
automatic.
    To be clear, Capital One does not practice any form of 
universal default. That has been our long-standing policy. We 
will not reprice a customer if they pay late on another account 
with us or any other lender, or because their credit score goes 
down for any reason. In addition, Capital One will not reprice 
customers if they go over their credit limit or bounce a check.
    While the Federal Reserve offers a different approach, we 
share the same goal, ensuring the customers receive a warning 
before they're repriced, and an opportunity to learn about the 
potential consequences of their behavior before they are 
repriced in any manner. We hope the Federal Reserve will 
consider the merits of our current approach, and determine 
whether some additional flexibility in the final rule is 
warranted.
    Although the optimal means of eliminating aggressive 
default repricing may be the subject of some debate this 
afternoon, Capital One recommends that the Federal Reserve go 
one step further. Issuers should be required to tell customers 
the exact type of infraction that caused the change in their 
interest rates.
    Today, when a customer is repriced for breaking a 
contractual rule, such as paying late, going over the limit, or 
defaulting on another account, the issuer is under no 
obligation to explain why. We believe that disclosing the 
infraction that caused the repricing will create a teachable 
moment, and will enable customers to gain the full benefits of 
greater transparency.
    As issuers, however, we have an obligation to ensure the 
customers not only understand the products we offer, but that 
our practices meet the standards of reasonableness and fairness 
our customers expect.
    Consistent with the Board's proposal, Capital One has 
adopted strict policies regarding the marketing and treatment 
of fixed rates. Our fixed rates are not subject to any form of 
repricing during the specific period for which they are 
promised. In addition, Capital One has never engaged in double-
cycle billing.
    The overwhelming majority of Capital One's customers use 
their accounts responsibly, and enjoy the many benefits this 
form of payment offers. Capital One looks for early 
indications, however, that a particular customer may be 
experiencing challenges. For example, any customer who pays us 
only the minimum for three consecutive months receives a notice 
on their statement that emphasizes the consequences of this 
practice, and encourages them to pay down their balance more 
quickly.
    While we support the Federal Reserve's efforts to provide 
more information in this regard, we believe that our current 
approach, providing notice only to those who actually routinely 
pay the minimum, enhances the relevancy of the disclosure, and 
better advances the Federal Reserve's stated objective of 
developing more targeted and dynamic disclosure regime.
    In conclusion, we believe that the Federal Reserve's 
proposal represents an important step forward for consumers and 
our industry. At Capital One, however, we do not view it as a 
substitute for continuously adapting our practices and policies 
to keep up with consumer demand, the rigors of competition, and 
the standards of sound banking. I thank you, and I look forward 
to answering your questions.
    [The prepared statement of Mr. Finneran can be found on 
page 175 of the appendix.]

  STATEMENT OF MARILYN LANDIS, BASIC BUSINESS CONCEPTS, INC., 
   PITTSBURGH, PA, ON BEHALF OF THE NATIONAL SMALL BUSINESS 
                          ASSOCIATION

    Ms. Landis. Congresswoman Maloney, and Ranking Member 
Gillmor, thank you for inviting me here today to discuss the 
impact that various credit card practices are having on 
America's small business community.
    My name is Marilyn Landis, and I am representing the 
National Small Business Association. I am also the owner of 
Basic Business Concepts, a consulting and financial management 
company serving small businesses. Prior to starting Basic 
Business Concepts, I spent 30 years working for and with 
commercial lenders, banks, and small businesses throughout 
western Pennsylvania.
    Access to capital is one of the largest obstacles facing 
America's small businesses. Many small and start-up businesses 
lack the assets necessary for traditional bank loans. Ongoing 
bank consolidation has resulted in fewer community banks and 
fewer character-based loans. Into this access-to-capital 
vacuum, a new capital issue has sprung to the forefront, an 
increased reliance on credit cards.
    Rapidly growing businesses that are not traditional brick 
and mortar like mine have neither equity and hard assets, nor 
historic cash flow to support their loan requests. We are 
forced to use bank credit lines which, if not secured with 
equity in our home, are increasingly credit card accounts. 
These businesses do not want to rely on credit card debt; they 
are forced to.
    According to a nationwide survey of small and mid-sized 
small business owners recently commissioned by NSBA, credit 
cards are a primary source of financing for America's small 
businesses. In fact, 44 percent of small business owners 
identified credit cards as a source of financing that their 
company had used in the prior 12 months, more than any other 
source of financing.
    In 1993, only 16 percent of small business owners 
identified credit cards as a source of funding they had used in 
the prior 12 months. Of the small business owners who use 
credit cards as a source of funding, 71 percent report carrying 
a balance month to month, and 36 percent are carrying a balance 
of more than $10,000.
    It is important to note that small business owners are not 
turning to credit cards to finance their businesses because 
they think they are getting a good deal. In fact, among those 
using credit cards, 53 percent say that the terms of their 
credit have gotten worse over the last 5 years.
    Why should the small business community's increased 
reliance on credit cards and their sense of worsening credit 
terms be of interest to this subcommittee? Put simply, small 
businesses are the engine of the U.S. economy, and the backbone 
of the communities you represent.
    The billions of dollars in retroactive interest rate hikes, 
escalating and possession of undisclosed fees, and unilateral 
and unforeseen interest rate increases is money diverted from 
economic development. A third of small and mid-sized businesses 
say that they would hire additional employees if more capital 
were available.
    In order to address the practices that make running a small 
business increasingly difficult, and hinder the economic 
development of the Nation's small businesses, NSBA supports 
credit card reform.
    NSBA supports the enactment of the new credit card 
regulations recently proposed by the Federal Reserve, improved 
disclosure, which must not be construed as simply more 
disclosure, is of paramount importance to the small business 
community. We are business people, more than capable of playing 
by the rules. But the rules must be made known, and they must 
be consistent and predictable.
    Let me detail a personal incident that demonstrates the 
inconsistent and unpredictable nature of current credit card 
practices. I have an Advanta credit card, for which I carry an 
average daily balance of around $5,000, at 2.99 percent. In 
November of 2006, I took a cash advance, paid the fee, paid the 
interest on the fee, and secured an additional $14,000 at 11.4 
percent. There was no activity for the next month, and I made 
my payment on time.
    Therefore, the following month, I was surprised to see my 
cash advance interest rate had gone from 11.49 to 20.01 
percent. Equally surprising was that my average daily balance, 
which I was paying previously 2.9 percent, had dropped by about 
$4,000, while the rest of my outstanding balance, which was now 
at 19.99, had jumped by that $4,000, with no explanation.
    One can imagine how difficult it is to adhere to a business 
plan with this sort of unpredictability lurking in an 
expenditure. My Bank of America card, on the other hand, had an 
interesting payment feature. The due dates have never stayed 
the same, fluctuating by 5 days in the last 7 months, and the 
statement cut-off date has stayed the same.
    The same can be true of my MBNA card, which was purchased 
by Bank of America. Previously, the due date was the 27th. But 
between December of 2006, and April of 2007, the due dates for 
the card have fluctuated greatly. Again, the statement date has 
stayed the same. It is this unpredictability that makes it very 
difficult to plan.
    While Regulation Z and the Truth in Lending Act requires 
that affected card holders should be notified in writing of any 
proposed change in rates at terms of 15 days before change, the 
Federal Reserve proposed increasing this notification to 45 
days. This opt-out option does little to help small businesses 
who are carrying large month-to-month balances. Most small 
business owners are forced to use credit cards to finance a 
capital expenditure or an expansion of their business.
    Further, as exorbitant as the penalty rates most credit 
card issuers may appear, the small business members of NSBA do 
not advocate a cap on rates. NSBA does support eliminating the 
retroactive application of penalty rates. This effectively 
increases the purchase price of the goods.
    In conclusion, America's small business community is not 
opposed to the credit card industry, nor is it in the habit of 
advocating the passage of increased Federal regulation, 
preferring free enterprise and market solutions. NSBA strongly 
encourages both the Administration and Congress to fully 
support small businesses as a true center of growth in the U.S. 
economy, and take the lead in ensuring credit card practices 
are not restricting small business growth.
    I thank you for your time, and welcome any questions.
    [The prepared statement of Ms. Landis can be found on page 
226 of the appendix.]
    Chairwoman Maloney. Mr. Mierzwinski?

  STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, 
          UNITED STATES PUBLIC INTEREST RESEARCH GROUP

    Mr. Mierzwinski. Thank you, Chairwoman Maloney, Ranking 
Member Gillmor, and members of the committee. I am Ed 
Mierzwinski, and on behalf of the State Public Interest 
Research Groups, I appreciate the opportunity to testify before 
the committee.
    Owning a credit card company is a license to steal. You can 
change the rules at any time, for any reason, including no 
reason, and you are allowed to operate nationwide, from any 
State that forms a safe harbor for you. We believe, as a 
consumer advocacy organization, that the Federal Reserve 
disclosure proposals are a first small step toward reform of 
this industry.
    If you look at this industry, and you look at the 
marketplace, you say, ``How do we ensure that a marketplace is 
disciplined?'' First, there must be competition. Well, in 
competition, we have a number of rules for competition. One of 
those rules is that you have to have a lot of players and easy 
entry. We have a tight oligopoly in this industry. The top 10 
players dominate the industry.
    Second, consumers don't have adequate information. They 
don't have the ability to make choices. Their contract can be 
changed at any time, they have no opportunity to fix their 
contract. It's a one-sided contract of adhesion. And many of 
the terms in it are too complex, even for financial literacy 
classes, which we support to improve.
    The problem is, you have a choice of law terms, you have 
these various contractual complexities, you have the ability to 
calculate interest in four or five different legal ways. It is 
impossible to address the problems.
    So, second, if you don't have a marketplace that is 
competitive, you have regulation. What kinds of regulation do 
you have? I would say there are three levels of regulation.
    First, there is private enforcement. There is virtually no 
ability of private consumers to police this marketplace, due to 
mandatory arbitration clauses that limit their ability to go to 
court. We need to get rid of the mandatory arbitration clauses 
that restrict consumers' ability to privately enforce their 
credit card contracts.
    The second level of protection is State enforcers. As you 
have heard, and as you will be hearing next week, we will 
discuss the State enforcers have been defanged by the OCC pre-
emption rules. Because the OCC regulates 9 of the 10 largest 
credit card companies, it effectively is the de facto policer 
of the entire industry.
    As this committee pointed out in a bipartisan vote several 
years ago, the OCC is inadequate, in terms of its enforcement 
ability, and its number of enforcers, its number of consumer 
complaint handlers to protect consumers against the industry.
    As we also know, neither the OCC, nor the Fed, which 
regulates the other large issuers, has taken any formal 
enforcement action against any of the large issuers in the last 
5 years or so. That does not send a clear message that we are 
on top of our game.
    So, when you have no private enforcement, when you have a 
defanging of the State enforcers, and when you have the Federal 
enforcers asleep at the switch, asleep at the wheel, you have a 
system that is out of control. That's where all these unfair 
practices are coming from.
    Now, your questions earlier, Madam Chairwoman, I commend 
you for your questions to the Federal Reserve. The consumer 
groups, in our comments to the Fed, the joint comments that the 
NCLC, Center for Responsible Lending, CFA, Consumers Union and 
others provided, we said the Fed should go further than 
disclosure changes. Let me just make one point that gets to 
some of the questions that Mr. Cleaver and others were asking.
    We believe that the Fed has the authority to order the 
banks to do exactly what the IRS has as its rule. If a bill is 
postmarked on the date due, the bill is timely. Why doesn't the 
Fed go further, and do that?
    We believe that the problems of this industry, where you 
are making just incredible amounts of money, but you want to 
make more money so you come up with unfair fees, the second way 
you make more money--the problem with this industry are now 
reaching out to new populations. And I got into details on this 
in my testimony.
    I would commend to you a report that I cite from the 
National Council of La Raza on the problems Latino customers 
are facing with credit card issues. And I would also point out 
that the programs founded on college campuses were very 
concerned about the aggressive marketing on campuses, where you 
get trinkets, frisbees, or bottles of soda in return for 
filling out credit applications.
    We have set up our own counter-programming on campus, where 
we hand out anti-credit card company marketing brochures. So, 
this one is the, ``Charge it to the Max Credit Card.'' In 
return for filling out the credit card application, we will 
give you a free skateboard key ring. I'm not exactly sure what 
a free skateboard key ring is, but in terms of the kinds of 
junk that they're handing out on campus, we are very concerned 
about it.
    In our testimony, we outline a number of the bills which we 
would support, and other consumer groups would support. Most of 
the provisions in them have been articulated in the members' 
questions.
    So, again, I appreciate the opportunity to testify before 
you today, and I encourage you to remember that the real 
solution is not disclosure. The solution is to ban the unfair 
practices, to reinstate the authority of State enforcers, and 
to give consumers a right to enforce the laws themselves, by 
eliminating mandatory arbitration clauses in credit card 
contracts.
    [The prepared statement of Mr. Mierzwinski can be found on 
page 233 of the appendix.]
    Chairwoman Maloney. Thank you. First, I will call on my 
colleague, Mr. Gillmor.
    Mr. Gillmor. Thank you very much, Madam Chairwoman. First, 
I will call on Mr. Huizinga. I want to ask you a question about 
profitability in the industry.
    Going back over the last, say, 10 or 15 years, what is the 
level of profitability now, compared to then? And the other--as 
part of that question, there has been some thought that while 
interest rates may have come down, fee income has gone up.
    So, two questions. One, what is your overall level of 
profitability over that period of time? And what is the 
component of that profitability, in terms of interest versus 
fees?
    Mr. Huizinga. The GAO did a comprehensive study of the 
credit card industry, and released their report last October; I 
think they addressed those issues in their report. I believe 
that GAO found the profitability of the major credit card 
issuers has remained relatively constant over the last 5- to 
10-year period.
    What has changed--which I think leads to your second 
question--is the method by which credit cards have been priced. 
We can all remember, many years ago, when all credit cards 
essentially had an annual fee and a 20 percent interest rate. 
And what has evolved over the last several years has been more 
individualized, tailored pricing, many times referred to as 
risk-based pricing, where more favorable rates are offered to 
consumers with better credit records, and higher interest rates 
are typically charged to those with less favorable credit 
records.
    There also has been a de-bundling of prices, which I think 
I alluded to briefly in my testimony, where there are more fees 
that are imposed for particular services that consumers may 
want.
    So, I think that in terms of the overall pricing, what we 
have seen is more of a change in the method of pricing and 
allocation of pricing, as opposed to increases in pricing. In 
fact, I think what the GAO study found was that, overall, many 
consumers have benefitted from the more tailored pricing 
models.
    Mr. Gillmor. Yes, but the question was, what's the mix? I 
mean, if it was 90 percent interest/10 percent fees 15 years 
ago, is it 50/50 now? Or is there data on that?
    Mr. Huizinga. I am not sure about the actual mix.
    Mr. Gillmor. Yes.
    Mr. Huizinga. There has been an increase in the fees. I 
think the Fed has addressed that, and we are seeing--I think we 
mentioned earlier the fact that Regulation Z is being updated, 
if you will.
    And I think one of the things that the regulation does is 
take account of that. In the proposal, there is an increased 
emphasis on disclosure of fees. That's both in the tables, as 
well as, importantly, on the periodic statement. When those 
fees are actually imposed, the Fed has greatly improved the 
disclosures, so the consumers will understand the fees that are 
being charged.
    Mr. Gillmor. Let me go to Mr. Mierzwinski. You talked in 
your written testimony about the fine print. I think we all 
agree there is lots of fine print there, nobody reads it, 
nobody understands it.
    But we have a problem here of coming up with some kind of 
balance. I mean, a lot of that fine print is there because the 
government requires it, and the regulators say you have to do 
it. So, I guess, what is your answer to how we find the balance 
of what has to be disclosed, and how you get it distilled in a 
form that people will read and will understand?
    Mr. Mierzwinski. Well, thank you, Mr. Gillmor. The fine 
print, or the mice type, as I sometimes call it, is a 
significant problem. And the fact that it can change at any 
time is an additional problem.
    We are still examining the Fed's proposals. The fact is 
that there can be some important disclosures that are made in 
bigger print, and that are the required disclosures, but the 
real problem is that they are allowed to charge as many fees as 
they want, they can use four different methods of balance 
calculation--
    Mr. Gillmor. Yes, but that is not--
    Mr. Mierzwinski. They can reach back--
    Mr. Gillmor. I understand. That is not responsive to my--
    Mr. Mierzwinski. Well, what is responsive is--
    Mr. Gillmor.--to the question.
    Mr. Mierzwinski. I would be happy to get back to you in 
detail in writing, then, Mr. Gillmor, with some ideas. But, 
obviously, we want to calculate the true cost of credit as 
accurately as possible. We don't think the Fed's rules will do 
all of it.
    Mr. Gillmor. Okay. No, I appreciate that. But one of the 
concerns--this isn't necessarily directed at you at all--but 
one of the concerns I have is that a lot of us in government, 
we complain about fine print, and then we introduce bills that 
require more fine print. And so that's a problem I think we 
have to deal with.
    Chairwoman Maloney. Mr. Gillmor?
    Mr. Gillmor. I yield back.
    Chairwoman Maloney. Thank you. I would like to ask 
unanimous consent to place into the record two documents: 
First, a letter that the National Association of Federal Credit 
Unions sent to the members of the subcommittee; and second, 
testimony from the New York State Consumer Protection Board. 
Without objection, these documents will be made part of the 
official record.
    We have been called for a series of votes. So in the 
interest of time, I would like to ask the panelists to get back 
to me and the committee members in writing what you would 
recommend for best practices for reforming the system.
    And I now yield to my colleague from the great State of New 
York, Gary Ackerman.
    Mr. Ackerman. I thank the chairwoman. I had a meeting 
scheduled during this time, but I was trying to arrange a 
meeting with Mr. Carey afterwards, so that I could ask him a 
question and not have to do it here, at the committee, about a 
practice that Citibank--I thought perhaps we could do it in my 
office, but you didn't seem to have time, so I came back down 
and rescheduled my other meeting.
    Here is the question. We just found a new first, I think. 
My chief of staff on another committee went home the other day, 
and got a notice from Citibank. He and his wife are customers, 
and they have, I believe, a Visa card, which they are content 
with. They got a notice about a new product that Citi was 
offering, which was an American Express card. And for their 
reasons, whatever they were, they weren't interested, and they 
threw the notice away. This was a short while ago.
    Yesterday, they got a notice from Citibank, thanking them 
for changing from the credit card that they had, which was a 
Visa card, to an American Express card that they didn't want. 
They didn't say they wanted it; they threw it away.
    So, after getting stuck in voicemail hell for a while, they 
got a real person, and after a protracted period of time, were 
able to explain to them that they didn't want it, they didn't 
order it. And it was explained to them that somewhere in the 
language of whatever it was that Citibank--embarrassingly, in 
my opinion--sent them, it said somewhere that, ``If you don't 
respond to us, we are switching your credit card,'' so that no 
response became the response that triggered them getting a new 
credit card, which they don't want.
    After a while, they got it straightened out. But I would 
venture to guess that more people--and the older you are, the 
more predisposed you are of doing this--don't read all those 
things, and don't bother to change it. And suddenly, the 
product that they did know about, that they ordered, that they 
were happy with, gets changed.
    Don't you think that it is unfair, if you get no response, 
to take an affirmative action, and assume that somebody wants 
to make a change, when most people think that if they throw 
something away, they're with the status quo?
    Shouldn't they have to affirmatively respond, rather than 
just taking the--what I assume to be the majority of people, 
who don't know what's happening to them, and just switching 
their credit cards with different terms and conditions?
    Mr. Carey. Congressman, I think your point is a very good 
point. I can certainly take that back to my business area, and 
we can review that. I understand the concern. I would say that 
the card that was offered was certainly equivalent, if not 
better, than the card that they had previously, and--
    Mr. Ackerman. I am not arguing. I have both.
    Mr. Carey. Okay.
    Mr. Ackerman. So I am--you know, I have no personal dog in 
that fight. But people are entitled to make decisions, and not 
have somebody swap--making the decisions.
    If we are in favor of people making their own choices based 
on information, then that choice shouldn't be taken away from 
them.
    Mr. Carey. You are absolutely correct. I agree with that.
    Mr. Ackerman. I do have some other issues, but I will--
hopefully, we can talk about them when you have the opportunity 
to meet.
    Mr. Carey. I look forward to it.
    Mr. Ackerman. I yield back the balance of my time.
    Chairwoman Maloney. We are going to adjourn for 10 minutes 
for votes. Thank you. And we will be coming back.
    [Recess]
    Chairwoman Maloney. The meeting will be called to order. 
Congressman Gillmor suggested that I begin without him, as he 
has a conflict, but he will try to get back.
    And I now recognize Congresswoman Bean, from the great 
State of Illinois.
    Ms. Bean. Thank you, Madam Chairwoman. I wanted to direct 
my question to Mr. Carey regarding what someone with the 
Federal Reserve has proposed, on the reworking of Reg Z.
    I know in your testimony, and I believe some of the other 
testimonies, there was discussion of how repricing practices 
could change, particularly if the 45-day notice period is 
implemented. What type of changes would you anticipate?
    Mr. Carey. The Fed's rule around the 45 days, I think, is 
centered around the concept that when customers apply for 
credit, they have an expectation that the rate that they 
applied for is something that they can rely on. And what the 
Fed has done with their 45-day rule is that they have, I think, 
provided some level of reliance for that.
    Now, what we have done at Citi is a little bit different 
from how the Fed has approached this. We have abandoned the 
practice of any-time, any-reason. So, if your credit behavior 
changes with other creditors, or if market conditions change, 
we would not change your rate for the life of the credit card, 
which is approximately 2 years, because we think it centers on 
the proposal that, ``Look, this is what I applied for, this is 
what my terms are, and in essence, a deal is a deal.''
    So, that is the approach we have taken. I think the Fed is 
on the right track with it. And we--you know, there are pieces 
of it we have to look at, but we generally think that this is 
the right approach towards dealing with most repricing issues.
    Ms. Bean. Okay. And the other question I would ask you--and 
there might be other panelists who may wish to respond, as 
well--is, clearly, looking back over the years where there was 
more average rates that were charged, and now there is more 
risk-based pricing, but also providing credit to a lot more 
folks in the process, if the industry moves far away from risk-
based pricing, is there then the risk that overall rates go up 
for the broader pool of credit card holders to cover those 
where we might lose practices that charge those who have 
worsening credit ratings, so that the whole pool of credit card 
holders aren't hit?
    Will that spread it, and is there also risk that average 
rates go up for the broader pool?
    Mr. Carey. I think that is a terrific question. You know, 
if you go back and look at the industry, the average credit 
card rates of 15 or 20 years ago were around 19 percent, on 
average, and it really didn't matter whether you were high risk 
or not. Everybody got the same price.
    Ms. Bean. Same rate.
    Mr. Carey. And what has happened over time is that the 
rates in the industry have gone down. Overall, they have gone 
down. And so, the people who have the best credit record in a 
risk-based credit system get the best pricing, and those who 
are higher risk pay a higher price for the credit.
    But what has also happened is that there is more access. 
People who would not have qualified for a credit card 20 years 
ago, now have an opportunity to apply for a credit card, and be 
approved for credit, and be able to use a credit card.
    So, we think that pricing would go up, and that the 
availability of the product would not--
    Ms. Bean. Go down.
    Mr. Carey. No, be as universal as it is now.
    Ms. Bean. Any other panelists, if I have time, who wish to 
comment on that?
    Mr. Mierzwinski. If I may?
    Ms. Bean. Yes.
    Mr. Mierzwinski. Very briefly, Congresswoman, I would 
simply say that we would be happy to try to provide you with 
more information, which I don't have in my written testimony, 
about one of the reasons that the cost of credit has declined--
and a point that I don't think has been made--is that the 
bank's cost of money declined dramatically over that period, as 
well.
    And second, we would point out that the use of risk-based 
pricing is something that the consumer groups don't necessarily 
directly oppose, but we do oppose using it as a cover for 
unfair practices. When they claim that, ``Oh, we had to do this 
because of risk-based pricing,'' well, obviously, now that 
everybody is stopping doing certain things, we think it really 
wasn't risk-based pricing.
    Ms. Bean. That is similar to recent hearings we have done 
in the broader committee on the subprime lending market. We 
don't want to discourage liquidity and access to mortgages to 
people with less than perfect credit. We certainly want that 
availability. But we don't want to go so overboard that we 
charge everybody for those who are in a higher risk pool, yes.
    That is all I have. I yield back.
    Chairwoman Maloney. The Chair recognizes Mr. Ellison.
    Mr. Ellison. Yes, I would like to follow up on this 
question of the price of money over the last 30 years. I think 
in 1979 we had high inflation and high interest rates.
    But I mean, the Fed engages in monetary policy, and they 
pursued the monetary policy that brought interest rates down. 
Isn't that correct, as a matter of American monetary policy? 
This is not a function of the credit card industry.
    Mr. Carey. It really depends upon the period of time which 
you are speaking about. I am talking about a period of time 
between 1995 and today.
    Mr. Ellison. Okay.
    Mr. Carey. And, again, I would have to go back and look at 
the cost of funds. But my understanding is that the cost of 
funds wasn't substantially different than it is today.
    Mr. Ellison. Any thoughts on that, Mr. Mierzwinski?
    Mr. Mierzwinski. My recollection is that the Fed lowered 
rates to historically low rates in the early part of this 
century, and rates for auto loans, rates for home loans, all 
kinds of rates declined to very low levels, as everyone knows, 
but credit card rates did not decline as much.
    Mr. Ellison. I would also like to ask some questions about 
risk-based pricing. Could you help me understand? Risk-based 
pricing is, I guess, a pricing scheme that ties the price of 
money to--or access to it--to the amount of risk associated 
with loaning that money.
    And if risk-based pricing is actually how the credit card 
companies do pricing, how could a congressional hearing shining 
light on things like double-cycle billing, universal default, 
how could just a congressional hearing actually get those sort 
of practices to be dispensed with voluntarily by the company? 
You understand my point? Maybe you don't. Mr. Caywood?
    Mr. Caywood. I understand your point, and I would just say, 
on behalf of Bank of America, that didn't happen.
    Mr. Ellison. Okay.
    Mr. Caywood. That we did not engage in universal default, 
or double-cycle billing well, well before any of the hearings 
began.
    Mr. Ellison. Right.
    Mr. Caywood. So, because we listened to our customers, and 
decided those were not practices we would engage in.
    Mr. Ellison. And, Mr. Caywood, I think you are making my 
point, exactly. If somebody says we have to do these things 
because of the risk, then how do you explain what Citigroup, 
Bank of America, and some of the--and I think half of the top 
10 have voluntarily dispensed with the practice?
    So, it seems to me that the practices of double-cycle 
billing and universal default cannot be rationally tied to 
risk-based pricing. Am I right or wrong?
    Mr. Caywood. I think those practices are different than 
risk-based pricing.
    Mr. Ellison. Right, you're right. They are different, but 
don't they, in fact, reflect the idea that these--that some of 
these credit card holders actually are--I mean, that these 
practices can be justified by greater risk? Because credit 
cards are a higher risk form of money. So they're justified by 
saying, ``Well, they are higher risk, so we can do these 
things.'' Am I right about that?
    Mr. Caywood. I think there are ways to do risk-based 
pricing without engaging in universal default.
    Mr. Ellison. Yes.
    Mr. Caywood. But--
    Mr. Ellison. And I think you and I agree on that, but I 
guess I am curious to know the other side of the coin. For 
companies that do it, how do they justify doing it? Do they 
justify it because credit cards are riskier?
    Mr. Caywood. I don't--
    Mr. Ellison. You don't do it that--
    Mr. Caywood. No, we don't. Sorry.
    Mr. Ellison. Mr. Mierzwinski, do you have any thoughts on 
it?
    Mr. Mierzwinski. I do, but Kathleen, I think, has some 
points.
    Mr. Ellison. Oh, I didn't see. Sorry about that.
    Ms. Keest. Well, I am afraid there is a--I think it is kind 
of a little bit of the, ``We can do it,'' ``What we can get 
away with, we will do.''
    Mr. Ellison. I think you are right.
    Ms. Keest. I mean, if you look at the way the penalty rates 
went up after the Smiley decision, which basically said all 
bets are off around the time the Smiley decision came down in 
1995, I think the penalty rates--sorry, not the penalty rates, 
but the penalty fees--were about $1.7 billion, and in 2005 they 
were $17 billion, reflecting 10 years of the effect of Smiley.
    And just in terms of sort of what people are thinking, I 
just put a Chase application that I got in the mail regarding 
the payment allocation system, and they just stuck in there, 
``You authorize us to allocate your payments and credits in a 
way that is most favorable to us.''
    Mr. Ellison. That sounds like a good deal.
    Ms. Keest. Yes, who could argue? So I think there is a lot 
of that, ``Hey, let us just push the limit, and see what we can 
get away with.''
    Mr. Ellison. And, in that case, isn't there an important 
role for Congress to play?
    Ms. Keest. Well, I think there are a lot of people who 
think that.
    Mr. Ellison. Yes. My next question is this. I have heard--
there were some folks on the earlier panel who--we talked about 
this one practice of universal default. Can you help me 
understand what legitimate economic basis the practice of 
universal default might have, as it relates to, say, risk?
    Chairwoman Maloney. The Chair grants the gentleman an 
additional 60 seconds.
    Mr. Ellison. Thank you, Madam Chairwoman, I will be quick.
    Chairwoman Maloney. To get this answer.
    Mr. Ellison. Other than Ms. Keest's point, which is getting 
as much as you can, is there any risk-based rationale for this 
practice?
    Mr. Huizinga. I think that, as has been mentioned, many 
creditors have moved away from it. I think I have heard the 
argument made that if a consumer defaults on one loan, that may 
be an indication that they may be likely to default on another 
loan. It may be an indication that there has been a difficulty 
in their credit situation, or the like, and it may evidence a 
higher risk on another loan, even though they haven't defaulted 
on that loan yet.
    Chairwoman Maloney. Okay--
    Mr. Mierzwinski. I would just add, Mr. Ellison, that the 
regulators came out with a guidance where they said that if you 
were going to risk reprice, it must really be based on risk. 
And so, clearly, so many people getting rid of it, it is 
probably not based on risk.
    Chairwoman Maloney. The gentleman's time has expired, and 
the chairwoman recognizes herself to follow up with a question 
to Ms. Keest.
    You mentioned that after the Smiley decision, the fees went 
up. What do you think the effect of the Wachovia decision on 
business practices will be? The recent decision.
    Ms. Keest. Well, it would be interesting to see what the 
folks from the banks here--I would say, on the fees, probably 
not a whole lot, for the simple reason that the credit card 
issuers are mostly being issued directly by the banks, anyway, 
rather than the operating--is that correct?
    Chairwoman Maloney. Would anyone else like to comment?
    [No response]
    Chairwoman Maloney. No? No comment? Okay. The Chair 
recognizes Mr. Bachus for 5 minutes.
    Mr. Bachus. Thank you. There has been a lot of talk about 
universal default. Now, I can certainly identify with a company 
that is extending credit, that all of a sudden sees a change in 
the consumer, or the credit card holder, that indicates that he 
may be going to have a difficulty. In fact, we have--our credit 
ratings now can pick up on some of these trends, although not 
always accurately.
    But let me ask you about this. I have a credit card. I have 
been told that I purchase stuff, and the interest rate will be 
8 percent, and I make $10,000 worth of purchases. Now, all of a 
sudden I default on maybe not your credit card, but on somebody 
else's, or my credit score goes down. And that indicates to 
you, ``I am not sure that I want to keep loaning this person 
money at 8 percent.''
    I can actually see the equity in saying, ``I am not going 
to loan you any more money at 8 percent,'' but I don't see the 
justice or the fairness in saying, ``The money I loaned you at 
8 percent, all of a sudden, I am loaning you that at 22 
percent.''
    What is your policy on that? Do you suddenly change the 
rules? And you are going to protect yourself, you don't want to 
loan any more money to this person. But what is the 
justification for going back and changing what was an agreement 
that you had?
    Now, you can say, ``Well, on page 32 of the small print, we 
said we could go back and do that,'' but you know, when you say 
a rate is fixed for 6 months or a year, you know, to me that 
indicates--I'm a law school graduate--a contract. I will just 
start with Citigroup.
    Mr. Carey. Congressman, that is not a practice that we 
engage in at all. So, if the customer has a problem with 
another creditor, and becomes viewed with very high risk, we 
don't change the rate.
    Mr. Bachus. What if they even defaulted on your credit 
card? Now, do you change the rate, right?
    Mr. Carey. We would change the rate, yes.
    Mr. Bachus. But is it just on new purchases, or do you go 
back on everything they have borrowed before, and--
    Mr. Carey. No, we would change the pricing. Again, these 
are in specific circumstances, depending upon the particular 
credit risk of the individual customer. We might reprice--
    Mr. Bachus. Yes. You know, the thing--
    Mr. Carey.--if they violated an agreement, yes.
    Mr. Bachus. I am going to say this, Mr. Carey. The thing I 
see about that is that when he is a credit risk, he doesn't pay 
you, that's right. When you increase his interest rate from 8 
percent to 22 percent, he really becomes a credit risk, not 
only to you, but to other people who have loaned him money.
    Mr. Carey. I understand.
    Mr. Bachus. You know, he probably has a car loan on a fixed 
rate. He may have a mortgage. And when you suddenly increase 
his borrowing costs by several hundred dollars a month, you 
make him a threat, not only to default on your payment, but on 
other people's.
    And then, if he decides to go into bankruptcy, 4 years ago 
we sort of shut that door, because credit card companies said 
to us, ``We have a problem. People are, you know, we are 
loaning them money, and they are going into bankruptcy.''
    Mr. Carey. I understand.
    Mr. Bachus. And it really has caused a lot of us to say, 
``What did we do 4 years ago?''
    Mr. Carey. I understand, Congressman.
    Mr. Bachus. But I just don't see the justification. You can 
change the rules going forward, and I am with you on this. 
There is more of a justification if he misses a payment. I am 
not talking if he is 3 days late, but if he is 60 days late, 
there is more of a justification.
    But still, what we are talking about--and I get handed 
these things all the time, unfortunately. As ranking member, it 
is the most unpleasant thing, since I have been ranking member. 
But I do not understand that.
    Another thing I do not understand. You loan money and your 
primary--I think--obligation and also intent is to get paid, is 
for somebody to reimburse you at whatever interest rate you 
charge them. But if you charge them 8 percent, but then if they 
make a mortgage payment--do you all charge them a different--
like, if they make a mortgage payment with their credit card?
    I don't know if you all heard the story of the young man 
who--I relayed in my opening statement--used his credit card to 
make a mortgage payment. All of a sudden, that was 22 percent. 
So he tried to not only make a minimum payment and pay that 
off, but he was told that he had to pay all $4,000 or $5,000 at 
the low interest rate, they applied it to the low interest 
rate, first, which is obviously to your benefit, I guess--or 
not you, personally, but the bank.
    But it is obviously the most detrimental thing to him, the 
most unfavorable thing you could do to your customer, and 
something that he would never agree to with a--
    Chairwoman Maloney. The Chair grants the gentleman an 
additional 60 seconds.
    Mr. Bachus. I would just maybe ask Citigroup or Capital 
One, or--and I appreciate you all being here, but what--
    Mr. Carey. I agree with you, Congressman.
    Mr. Bachus. Do you all do that? Do you all apply it to the 
lowest of the--if he has some money you have agreed at 0 
percent or 5 percent or 10 percent, do you apply it to the 
lowest first, and make them pay all that before you--do you 
know what you all--
    Mr. Carey. At Citi, we do apply it to the most inexpensive 
balance.
    Mr. Bachus. Which then, actually, causes his expense to go 
up, his cost to go up. Does it not?
    Mr. Carey. Yes, it might.
    Mr. Bachus. So you are concerned about being paid, but you 
are increasing his cost, which--doesn't that just make him more 
likely to default?
    Mr. Carey. I think you make a very good point about payment 
allocation, and the overall fairness with that. I believe that 
that is an area that ought to be looked at, and there ought to 
be an industry-wide solution to that problem, I agree with you.
    Mr. Bachus. Yes--
    Chairwoman Maloney. The gentleman's time has expired, thank 
you. Mr. Moore?
    Mr. Moore. Thank you, Madam Chairwoman. Mr. Carey, you said 
in your testimony that without the ability to differentiate 
risk, less creditworthy consumers would have fewer appropriate 
means of accessing credit, relatively risk-free consumers would 
face a higher cost of credit, and bank lending strategies would 
be significantly curtailed.
    My question, and I would like, I guess, your comment, your 
thoughts on this, Mr. Carey, is Citi and some other card 
companies made the decision to eliminate universal default and 
so-called any-time, any-reason repricing. Could you talk a 
little bit more about what the rationale was, and what factors 
led Citi to eliminate those practices, number one?
    And, number two, do you believe those practices should be 
eliminated across the industry?
    Mr. Carey. Congressman, I would be glad to respond. First 
of all, we spent a great deal of time talking to consumers on 
the telephone. We receive 150 million calls a year. We receive 
over--we have communications with--over 100 million pieces of 
communication every year. We engage in focus groups, we reach 
out to customers. We are very--from the customer complaints we 
receive from the OCC, we react to those accordingly.
    We also reach out to many of the community and consumer 
groups. Some of them are at this table, where we work with them 
to understand what their concerns are. And also, we have what I 
would say is a terrific legislative affairs group that works 
very closely with Members on the Hill, and with State 
government. And we take that information, and we try to adopt 
our practices based on transparency, based on fairness, and 
then based on providing customers the tools to make informed 
decisions about their lending.
    So, you know, I think that answers both your questions, but 
I am not certain.
    Mr. Moore. No, it doesn't. What about--
    Mr. Carey. Oh, on the individual practices? Oh, no. I agree 
with you. I think that universal default, I think, is a 
fundamentally unfair practice, and that is not a practice that 
we do. We looked at it.
    In fact, we looked at it long ago, and we gave customers 
back in 2005 the opportunity to opt out and still use the card, 
which was--you know, universal default is the idea that it 
automatically switches, and you can't opt out, and you can't 
use the card.
    Mr. Moore. Well, the second question, though, was beyond 
Citi. And I appreciate what you have said, and I appreciate the 
decision you all made. Beyond Citi, should these practices be 
eliminated throughout the industry?
    Mr. Carey. I think Congresswoman Maloney has come across, I 
think, a terrific idea, which is this concept of a summit, 
where we can gather together to drive best practices within the 
industry. And we fully endorse that, we think it is a terrific 
way to solve a lot of these issues, short of legislation.
    Mr. Moore. She has good ideas, and I would endorse that, as 
well. Thank you.
    Chairwoman Maloney. Mr. Hensarling, for 5 minutes.
    Mr. Hensarling. I thank you, Madam Chairwoman. Well, along 
with some of my colleagues, I must admit there are some 
practices of the credit card companies that don't absolutely 
thrill me. I haven't quite concluded in my role as legislator, 
that it is my prerogative to outlaw them.
    I will observe, particularly as I reach the ripe young age 
of 50, I reflect back upon when I attempted to get my first 
credit card, that very few people would offer me a credit card. 
Credit wasn't available. And I think 20, 30 years ago, people 
probably in this very room were debating, ``What are we going 
to do to get more credit to consumers?'' And now, to some 
extent we debate isn't there too much consumer credit out 
there?
    When I finally did get a credit card, one, it had an annual 
membership fee I had to pay, and the interest rate, compared to 
today, was exceedingly high. As time has gone by, I observe now 
there is a dizzying array of offers in my mailbox, practically 
on a daily basis, from a wide variety of banks. The interest 
rates are much lower. I can actually get cash back at the end 
of the year. I can get car rental insurance. I can get frequent 
flyer miles. I can get donations to my favorite charities. And, 
if I am able to pay on time, I get interest-free loans from the 
time of purchase.
    Such a deal. I think it should at least be noted that, in a 
competitive marketplace, good things can be yielded to the 
consumer. And I can think of no greater consumer protection 
than a competitive marketplace.
    So, I tend to focus on, number one, as I look at these 
types of issues, is the marketplace effective? And although I 
did not hear every bit of testimony today, I have not seen a 
lot of credible evidence telling me that there is not an 
effective competitive marketplace.
    So, typically, I would want to focus on is there effective 
disclosure? I know some speak of unfair practices, or--and 
deceptive practices. I care about deceptive practices. But if 
there is full disclosure, I am not sure there is a lot of 
commercial transactions between fully informed consenting 
adults that I care to outlaw, and I continue to be concerned 
about whether the cure is going to be worse than the ill, in 
that if we over-legislate, whether credit will become less 
available, and at higher cost, particularly to those who need 
it.
    But to the more effective disclosure--I shouldn't say more 
disclosure, but more effective--we have an all-new and improved 
Regulation Z. I will be the first to admit I haven't poured 
through all 800 pages of it. But it seems to--and at least in 
the view of the Fed--takes care of a lot of the challenges that 
we have today, and perhaps is very prospective in scope, and 
hopefully, will be in place for years to come.
    And, forgive me, I did miss much of the testimony. But to 
the extent people have managed to review the new Regulation Z, 
what is it that you would have us legislate that you do not see 
in the new Regulation Z? And anybody who wants that softball, I 
will let you have it.
    Ms. Keest. That was actually my assignment to talk about, 
and so I did talk about it in the written testimony.
    Mr. Hensarling. Forgive me.
    Ms. Keest. What we focused on was the regulation, the 
proposed regulations, are a considerable improvement, certainly 
in the formatting, and the understandable stuff. But the 
problem is with the price complexity--and I will let Ed answer 
your question about whether or not we have a competitive market 
with as much market concentration as we have--that the pricing 
complexity is really only dealt with by an effective way to 
sort of try to bring some order to the chaos, to the pricing 
chaos.
    And there are a couple of significant respects where even 
the Fed has thrown up its hands and said it is too complicated.
    And, you know, the cost of credit is principal times 
interest times time equals dollar signs. And we have all 
focused on, you know, the rate, which gets messed up with 
additional charges that complicate the things. And then you 
also have, mucking around with accounting principles, where 
they are mucking around with the principle and the time. And 
the Fed has, actually in a couple of cases, said, ``This is too 
complicated to deal with''--
    Mr. Hensarling. I see my time is about to run out. The tax 
code is very complicated, as well. Somehow Americans manage to 
plod through that each year.
    I would also have a fear, though, that if we try to 
homogenize this product, then the innovation from the 
marketplace might leave us--with that, I see the red light has 
come on, Madam Chairwoman.
    Chairwoman Maloney. Thank you. The chairwoman recognizes 
herself, following up on his questioning on the disclosure.
    In discussions with some banks, they have cited to me anti-
trust concerns as a reason for not amending their disclosures 
and making them clear, and help consumers understand them more.
    I would like to ask the issuers, with the new Reg Z, does 
that take care of the concerns? Some banks have told me, ``The 
reason we hand out 30 pages worth of information on this is 
because our lawyers tell us to, and we need to.'' But with the 
new Reg Z, well, do you see the industry voluntarily following 
the recommendations that the Fed has come out with, even though 
there is a comment period that extends until October with the 
clear stating of fees and so forth? Do you see any change now?
    I would like to start with Mr. Carey. And if there are 
issuers--anyone who would like to comment, but I would like to 
hear from--
    Mr. Huizinga. I can address that question.
    Chairwoman Maloney. Okay, sure.
    Mr. Huizinga. In terms of litigation, I think one of the 
things that issuers have struggled with is that these credit 
card products can be complicated. And there has been a lot of 
litigation over the years by consumers, challenging that the 
terms were not clear enough.
    And many times, the response to that has been to make them 
longer, to get into the detail. If someone didn't understand a 
particular point, to write a paragraph on that. And then, when 
somebody else didn't understand another point, to write a 
paragraph on that. And we ended up with very long disclosures, 
which I think everyone admits are not as effective as they 
should be. And I think the Fed's approach in Reg Z, really, is 
designed to address that.
    The Fed has tried to distill the key points that are 
important to consumers in shopping for credit, and to try to 
put them in a table, and in a way that can be easily 
understood. So, I think that is being addressed, in terms of 
moving from densely written disclosures that are very difficult 
to understand, to tables and summaries that have limited the 
information, hopefully in a more manageable way, so that people 
can shop better.
    Chairwoman Maloney. Not only can people shop better, we 
have heard testimony from very sophisticated people--including 
the head of Freddie Mac--that he could not understand his 
credit card disclosure form.
    But I would like to ask Mr. Carey and Mr. Caywood and Mr. 
Finneran with the new Reg Z, what impact does that have on you? 
Will you be changing your disclosures? Will you be making any 
changes because of Reg Z, or--
    Mr. Carey. Oh, yes. I mean, the--what is terrific about the 
Reg Z proposal is that, really for the first time, there is 
uniformity about format, type face, language, they have 
provided amount of language, designed to allow customers to 
truly understand the products that they--or services--that they 
want to acquire.
    And what is also good about it is that it is at each stage 
of the customer's interaction with the lender. So, when you are 
applying for a card, there are certain rates that are very 
important for you to know, very key things you need to know. 
That is important. When you get your card agreement and your 
credit card, they are laid out very much like the food labels.
    Chairwoman Maloney. Yes.
    Mr. Carey. The American public have gotten used to the food 
labels--
    Chairwoman Maloney. So you see industry conforming to 
what--
    Mr. Carey. Yes, yes, I do.
    Chairwoman Maloney. Great. The Chair recognizes Mr. Clay.
    Mr. Clay. Thank you, Madam Chairwoman. I have two examples 
of true experiences in my district of adverse dealings with 
credit cards. And this example and question are for Mr. Carey, 
Mr. Caywood, and Mr. Finneran.
    An 87-year-old female constituent was a caretaker for her 
sister. Ms. Mary Cutty dutifully paid her bills without always 
auditing the statements, as she was involved with her sister, 
and was trusting of the system. Her sister was recently 
transferred to a care facility, as the task got to be too much 
for Ms. Cutty.
    During the time that her sister was with her, there were 
two incomes in the home, and although bills increased, timely 
payments were made. Once the sister's income was given to the 
care facility, Ms. Cutty was very meticulous with her bills, 
because she had more time and less money.
    She was shocked to discover that her interest rate had 
increased to over 30 percent. She called my office as a last 
resort. And in distress, she tearfully explained her situation 
and said that she simply would never be able to pay off the 
debt at that percent rate. Now, she was in complete despair. 
She said that she is considering bringing her sister back home, 
because they may not be able to afford to live apart.
    Do we have to make money off the backs of Americans in 
their golden years with these cloaked methods of raising rates? 
If the intent is not predatory, surely the result is. How do we 
assist the Ms. Cuttys of this country? Can anyone try to tackle 
that?
    Mr. Carey. Congressman, what you describe is, I think, a 
terrible situation. That is not--it is awful. I agree with you. 
I think that it is not the right thing to do for individuals.
    And if it is our customer, we would--we want to talk to 
this customer, we want to engage with this customer, we want to 
help this customer. Generally, we find if we can talk to 
customers who are actually in true financial distress, we can 
work those things out. And we want to encourage people to 
engage with us.
    We are not interested in throwing people over the edge, 
throwing them out of the life boat. That is not what we do, 
that is not a practice that we want to do. People do find, 
through life circumstances, that terrible things happen to 
them. And when that happens, at least the company that I work 
for steps up and says, ``We have to make it right.''
    Mr. Clay. Mr. Carey, I am encouraged to hear that. Let me 
give you one other example.
    Consumers are often shocked by the impact of penalty 
payments and fluctuating interest rates. A true example was 
given to me by a student in my district, and the student 
happens to be here today, interning for me.
    This student purchased three cups of coffee that sent her 
beyond her credit limit each time. Because the penalty charges 
are $35 for each transaction, the student ended up $120 in debt 
for the three $5 charges at Starbuck's, plus the overage 
penalty payment.
    Would it not make more sense to lower penalty payments? 
Wouldn't it be a simple procedure for the credit card company 
to just decline the sale? How do we get away from this culture 
of force-feeding cards to students, knowing full well their 
limited incomes and the likelihood of overcharging--since it 
was a Bank of America charge, Mr. Caywood, can you address it?
    Mr. Caywood. I would be happy to address it. First, I can 
tell you that in any given month, you can't get more than one 
overlimit fee from Bank of America. So, the three cups of 
coffee, for that to occur, would have to be in three different 
months, which is possible. But we do cap the number of 
consecutive over-limit fees for any customer at three.
    So, we are very careful to make sure that we have that 
policy in place, and that we don't have repeated over-limit 
charges just continuing to occur on a customer that is stuck 
over their credit limit.
    Mr. Clay. Thank you for that response. And Mr. Finneran, 
Mr. Mierzwinski talked about due dates. Can consumers ask and 
receive a change in due date?
    Mr. Finneran. Yes, sir. They can.
    Mr. Clay. And what is the procedure, just to call?
    Mr. Finneran. Yes, the procedure is to call us, and we can 
adjust the due date and change their billing cycle to fit their 
particular circumstances.
    I would also note that with respect to due dates, we 
actually have, at Capital One, one of the longest cycle periods 
in the industry, the effect of which is to give people more 
time to pay their bill after they receive it, and still be on 
time.
    Mr. Clay. Okay. How do you feel about accepting the 
postmark date as the time of payment, in order for the customer 
to avoid the late payment?
    Mr. Finneran. I think it has a lot of operational 
complexities with it. We do provide to our customers multiple 
ways to pay their bill. In addition to getting the bill out on 
time, we certainly encourage them to pay on time and we seek to 
help them out as much as we can, as circumstances warrant.
    Mr. Clay. Well, Mr. Finneran, you know that most billing 
operations do accept the postmark date of the U.S. mail that is 
sent to those offices. Why would credit card companies have 
such difficulty?
    Mr. Finneran. Well, with all due respect, sir, I am not 
sure that is right. I believe most people expect to receive a 
payment by the time of the due date, and that business practice 
is with more than just credit cards.
    Mr. Clay. It is the custom of most billing--
    Chairwoman Maloney. The Chair extends 60 seconds.
    Mr. Clay.--of most billing departments to accept the 
postmark date. And I mean, I think that is only reasonable. If 
someone intends to get the payment there on time, I don't see 
why the company cannot honor that intent.
    Chairwoman Maloney. And the gentleman's time is expired. 
Mr. Davis of Kentucky?
    Mr. Davis of Kentucky. Thank you, Madam Chairwoman. That--
    Mr. Bachus. Madam Chairwoman, could I--I have to leave for 
a few minutes, but could I ask unanimous consent that after he 
gets through, Mr. Price could go, so--
    Chairwoman Maloney. Sure, absolutely.
    Mr. Bachus. Thank you.
    Mr. Davis of Kentucky. I think that Congressman Clay brings 
up an interesting area of interest--no pun intended. But the--
when looking at hardship situations that can occur, you can get 
into a cycle with the numbers and make it, you know, very 
problematic.
    And one of the questions in my mind, as coming to this 
committee as a business owner, you can hit a point on 
attempting to collect a debt that the cost of the collection 
actually will vastly outweigh the principal at the end of the 
day, and there comes a business cost that is somewhat 
problematic for someone who is already in a financial hardship 
situation, especially if you have a senior citizen who perhaps 
gets into a situation where they may be confused later in life, 
dealing with illness, or other things that might occur.
    And I was wondering if you might comment for a moment on 
how you deal with hardship situations. Maybe start with Mr. 
Carey.
    Mr. Carey. Well, sir, actually, I think it is a terrific 
program. In many ways, when customers come to us, and they say 
they are having difficulty paying their bills on time, we have 
a number of programs where we will work with the customer on an 
individual basis, either in a temporary program--say, for 
example, there is a loss of job, a temporary loss of job, or a 
temporary illness.
    I mean, we will go to the point of, in essence, extending 
interest-free lending, suspending minimum payments, or lowering 
minimum payments, in many ways, to try and accommodate the 
customer's individual need.
    Sometimes an individual is in way over their head, and 
there isn't an ability to dig out. We will work with those 
customers to try and find an arrangement that makes the most 
sense.
    So, I think your point is exactly right, that at some point 
it doesn't make a lot of sense to do it. It's also probably not 
the right thing to do, anyway.
    Mr. Davis of Kentucky. In context--and perhaps Mr. Finneran 
can follow on the same line--if you get into a situation--for 
example, I will go back to the senior citizen situation, where 
just a family member--I ended up walking through this process 
with them, and watching this occur, firsthand--they come to 
you. You recognize the situation.
    At what point do you make the decision, you know, both from 
a business and a moral decision, to actually write that down, 
write that credit off, absorb the loss, based on, you know, how 
you have already managed risk and you have assessed risk?
    Mr. Finneran. Sir, maybe I will go first. I think our 
program is similar to the one that Mr. Carey described. I think 
we try to work with each individual customer, based on their 
individual facts and circumstances.
    I think the key here is that we do try to encourage people 
to let us know when they are having difficulties, so that we 
can engage in that dialogue and see if we can come up with a 
solution that works for both parties.
    Mr. Davis of Kentucky. At what point do you move from--what 
triggers, causes you to move from an increasing interest rate 
to, let's say, more of an act of grace towards that customer?
    Mr. Finneran. I'm sorry, sir, I'm not sure I follow the 
question.
    Mr. Davis of Kentucky. Well, you know, having watched some 
of these situations occur, where debt will mount up, or 
payments are missed, and obviously something is wrong at some 
point, at what point does the company, in the dialogue with the 
customer, when a collection action is in process, make the 
point to go to another track, recognizing that collection is 
not going to be an effective activity?
    Mr. Finneran. It could be at multiple points in the 
dialogue with the individual customer, sir. It just depends 
upon the facts and circumstances of each individual case.
    Mr. Davis of Kentucky. Yes, I have to just say for the 
record, I was actually pleasantly surprised in a situation that 
we saw at a distance with a senior citizen who--I am not going 
to name the company at the time--but that actually, I think, 
did something very humanitarian, in terms of helping an elderly 
person manage their way out of a problem that was very 
significant, actually discouraged payment because of fixed 
income implications, and things like that, that, you know, it's 
part of the story that doesn't get told.
    Although, at the same time, I think we are dealing with 
interest rates that can be prohibitive in certain cases for 
individuals. But that leads me into another question.
    There is always kind of a yin and yang balance that we run 
into here in dealing with the availability of credit as we push 
that floor downward, and how you effectively measure risk, and 
regulation. And, certainly, we want to have a very strong 
advocate for protecting consumers, particularly things, 
legislation I have personally worked on since I have been in 
Congress for our military personnel, to protect them from 
predatory lending practices and other sorts of schemes.
    But to Mr. Mierzwinski, and Ms. Keest, one question that I 
have is, you know, can we go too far, in a regulatory 
environment, to create a situation that causes credit to be 
pulled back from those who may, in fact, be in that need, at 
the same time providing an adequate balance for consumer 
protection?
    Mr. Mierzwinski. Mr. Davis, if I could answer your previous 
question to the bank witnesses first, I would just point out to 
the committee that while the programs of these banks may be 
good programs for dealing with mitigating the risk of payments 
that people in hardship can face, I would also point out that 
the regulators have issued guidance requiring all banks to have 
programs like that, and it may be useful for the committee to 
ask further questions of the regulators, as to how did they 
enforce, and how do they know about how, significantly, all the 
banks are providing those hardship-based functions.
    Because that is one of the real problems out there, when a 
consumer calls a bank, does the bank just say, ``You better 
pay, or else,'' or does the bank say, ``We would like to work 
it out,'' and they are supposed to have special work-out 
programs.
    On your other question, obviously, it's always the issue. I 
personally don't think the Congress can go too far. I think you 
need to go further than where the Fed went.
    And I would encourage you that banning unfair practices is 
not going to eliminate the availability of credit. I think 
banks want new customers, banks are trying to find new 
customers, and they are trying to make credit available. And 
banning unfair and grotesque practices, you can still make a 
lot of money in this business. The problem is, they are making 
money with unfair practices on top of the good money that they 
deserve to make.
    Mr. Davis of Kentucky. And you mentioned, you know, 
grotesquely unfair practices. What do you think is the most 
egregious one that you point to? And, again, I come back to 
the--
    Chairwoman Maloney. The Chair grants an additional 60 
seconds.
    Mr. Davis of Kentucky. Thank you.
    Mr. Mierzwinski. Well, first, universal default, 
retroactive balance, being charged two penalty interest rates, 
changing the rules without notice, and the practice that Mr. 
Bachus talked a great deal about, which is to have your payment 
applied to the lowest portion interest of your entire bill.
    I could go on and on, but it is all outlined in detail in 
my testimony.
    Chairwoman Maloney. The time is expired. Mr. Cleaver, for 5 
minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman. I have just a 
couple of questions. Would all of you support a measure that 
would bar the issuance of credit cards to people under 18, 
unless they have a signature of a parent or guardian who would 
assume responsibility for the charges, or prove that they have 
means to repay the debt?
    Would all of you support--well, maybe who would not support 
that? Who thinks that is a bad idea?
    Mr. Finneran. I believe that is already the law in almost 
every State.
    Mr. Cleaver. It can't be.
    Mr. Finneran. For people under 18.
    Mr. Caywood. It is certainly already our practice at Bank--
    Mr. Finneran. It is certainly the practice of Capital One, 
and it is certainly the law in the State of Virginia, where we 
issue from.
    Mr. Carey. It is our practice, at Citi, as well.
    Mr. Cleaver. So, then, what we need to do is move it up to 
college-age students who are unemployed?
    Ms. Keest. I think most people think that loans should be 
made where there is ability to repay them, which means 
underwriting your loans.
    Mr. Cleaver. I am sorry?
    Ms. Keest. I said I think most people think that a loan 
should be made where there is ability to repay them, which 
means that they should be underwriting the loans.
    Mr. Cleaver. Yes. I call your attention to the article that 
I showed earlier today that was in the Washington Post today, 
with a young woman who--although she is 28 years old now, she 
was in college, and left college with a $5,000 credit card 
debt.
    And my son, who is in college in California, he is over 18, 
but that is about the amount of money he has, $.18. And he 
comes home with a credit card, you know, from school. And I 
don't believe in violence. He had only put $60 on it, on the 
credit card, but I could not imagine who would send Evan 
Cleaver a credit card.
    I mean, he is my son, I--you know, I feel uneasy putting 
money in his account while he is in college. And so the problem 
is when students are still in college, maybe they are 20, maybe 
they are over 18, but there is still a problem. Don't you 
agree?
    [No response]
    Mr. Cleaver. Do any of you agree? Do any of you have 
children in college?
    Mr. Carey. I have a child in college, and actually, my son 
is here. And he does have a credit card, which he applied for, 
because he has some income, and he is able to manage his credit 
wisely.
    I was not able to get a credit card when I was his age, and 
so therefore, I couldn't have access to the services that he is 
able to have access to.
    Mr. Cleaver. I was in the same situation, but you just hit 
it on the head. The issue is he has a job. He is able to pay 
his credit card debt. But there are students who receive the 
credit card while they are in college who are not employed. And 
I mean, it is in today's newspaper.
    Mr. Mierzwinski. Mr. Cleaver, you are raising a very fair 
point, and we have looked at this, and a number of bills, I 
believe, that have been considered say that a young person 
should be treated as anyone else. You either have to have a 
credit report that has a good score, or you have to have a job, 
or you have to have a co-signer. Or, in some of the bills that 
have been proposed, you at least have to have taken some sort 
of financial management course. And--
    Mr. Cleaver. That is in the bill I have introduced.
    Mr. Mierzwinski. Right. So the issue is right now they are 
just giving them away like candy, without any of that, because 
they are relying on the fact that they can make a debt 
collector call to the consumer and suggest you are going to 
have 7 years' bad luck. Maybe your parents ought to pay, even 
though they are not co-signers.
    Mr. Cleaver. I paid the $60. I mean, nobody else was going 
to pay it, he was going to go to jail. I do not believe in, you 
know, in violence, but I was going to shoot him in the leg if 
it had been higher.
    But the point I am making, which nobody wants to agree 
with, when you are sending credit cards to students in college, 
you know, there ought to be some evaluation of their capacity 
to pay. And you are going to say that there is, and I am 
telling you that all you have to do is go and talk to college 
students. They are getting credit cards, and they are being 
solicited.
    Chairwoman Maloney. The Chair grants an additional 60 
seconds for an answer, and then calls upon Mr. Price.
    Ms. Landis. I am not a credit card issuer, but if I could 
make one statement that is a concern from small business, I 
appreciate the fact that you ought to be able to repay it to 
get the credit card.
    What concerns me is if a regulation or a law were passed 
that said I had to prove income. What would I, as the owner of 
the company, be required to send in to prove income, that I 
could get the credit card to finance my business?
    So, that has been the concern, as I am listening to much of 
this testimony. Keep in mind that there are two groups of folks 
who use credit cards. There are individuals who use them for 
their personal purposes, and would pay that with their salary, 
and then there are businesses who use it to finance capital 
expansion of their business, and they are repaying that from 
the funds of their business.
    Mr. Cleaver. Okay, I have a response, but I will wait. 
Thank you.
    Chairwoman Maloney. Thank you. Mr. Price?
    Mr. Price. Thank you, Madam Chairwoman. I appreciate that. 
And just let the record show that I agreed that Mr. Cleaver 
ought to go before me on the previous questioning.
    I want to thank the panelists for being here. Somebody--I 
was trying to remember who said it. Somebody once said that 
Congress does two things well: nothing; and over-react. We have 
done a lot of nothing for a long time regarding this issue. My 
concern and my fear is that we may be about to over-react.
    I am struck by the importance of financial literacy. Many 
of us have supported the need for financial literacy, and for a 
general education of our young people about the--what it means 
to take on credit, and take on debt.
    And I am also struck by the lack of mention of any personal 
responsibility in this discussion. It strikes me as curious 
that--and I don't mean to cast aspersions on the individual in 
the Washington Post article, I haven't seen that, but it 
strikes me that she ought to have, at some point, recognized 
that $5,000, or getting to that point, was more than she was 
going to be able to repay.
    And I know that is heartless and cold, but I have 
experienced that myself, years ago, longer than I care to 
admit. I was an undergraduate and received a credit card, and 
charged too much, and learned a wonderful lesson. And that was 
that when you charge something, it comes due. And so, I suspect 
that I am a more wise consumer and individual, as it relates to 
gaining credit now, because of that experience.
    I have a couple of questions. Ms. Keest, the 2006 GAO 
report--and just, in general--I think it talked about the 
percent of debt as a percent of income in our Nation, as it 
relates to history, and it is approximately, as I recall, the 
same as in the 1980's, I think, as in terms of overall 
household debt.
    And I wonder if you would comment on that, as it relates to 
the degree of problem that we have. Or, am I inferring an 
incorrect conclusion?
    Ms. Keest. I don't recall that specific statistic. I don't 
think that is correct. It is my understanding that we are at--
in terms of debt compared to disposable income--at historic 
highs, and that revolving credit, the growth of revolving 
credit, has added a lot to that.
    Mr. Price. So--and ``revolving,'' you mean credit card 
debt?
    Ms. Keest. Yes.
    Mr. Price. So, credit card debt you believe to be a 
significant increase in percentage of overall debt that we have 
right now, is that correct?
    Ms. Keest. I believe so.
    Mr. Price. Okay.
    Ms. Keest. I would have to go back and check. But I think 
in some of the other hearings that Congress has held this year, 
there have been some charts on that.
    Mr. Price. Okay. I have to go back and look at that report. 
I appreciate that.
    Does anybody use universal default? Anybody here use 
universal default? I didn't think so.
    I want to talk a little bit about interchange fees. There 
is growing attention being brought to the use of interchange 
fees. And I am interested in anybody on the panel's comments 
regarding--my understanding is that there is no true regulation 
of interchange fees right now. I think Mr. Greenspan spoke last 
year, or the year before, about the Fed taking a look at that, 
or gaining more interest in that. I wonder if anybody might 
comment about the role of governmental regulation as it relates 
to interchange fees, support for that, and potential 
consequences.
    I must have missed some testimony. Mr. Huizinga?
    Mr. Huizinga. I could briefly answer that. An interchange 
is compensation that is paid by one bank to another bank in the 
bank card system.
    Mr. Price. Right.
    Mr. Huizinga. It is paid by the bank that provides the 
merchant services to the bank that issues the card.
    Merchants, in turn, will pay a merchant discount to their 
merchant bank, which many times will include--or typically does 
include--the interchange. Currently, the merchant discount is 
paid by the merchant, in exchange for the merchant receiving 
services or benefits--
    Mr. Price. Do we need regulation?
    Mr. Huizinga. I don't believe so.
    Mr. Price. Anybody think we need regulation of interchange 
fees?
    Mr. Mierzwinski. Mr. Price, the consumer groups have 
testified on this matter in other committees, and we are very, 
very concerned about the fact that everybody pays more at the 
pump, including people who pay with cash, because the 
interchange issue is a problem.
    Now, it may be resolved through the litigation that is 
occurring in the private anti-trust matters, but we are still 
looking at it very closely.
    Mr. Price. Ms. Landis, do you have any comment about 
interchange fees, and how they relate to small business?
    Ms. Landis. Interchange fees are a big cost for small 
business, there is no question about it. And it comes back to 
many of the things we have talked about here today.
    Business understands a contract, as several of you have 
said. If we enter a contract, we know clearly what we are 
getting into, and what our costs are. We can deal with it. It 
is the changes, the unpredictability that small business can't 
absorb fast enough in its pricing.
    Mr. Price. Thank you very much. My time is expired. I 
appreciate your testimony.
    Chairwoman Maloney. Mr. Perlmutter.
    Mr. Perlmutter. Thank you, Madam Chairwoman. And mine is 
more of a statement, I guess, than questions, because I missed 
so much of the panel's testimony. We were working on a stem 
cell bill which we believe affects about 110 million or 115 
million people, potentially has promise for that many people.
    Based on what I heard initially, credit cards probably 
touch 200 million people. And I was in our State senate, I have 
been here--I probably voted 10,000 times or more, and on Iraq, 
on immigration, on everything. And I will tell you the one type 
of vote that affects most people directly is on credit cards.
    And you know, my background is as a lawyer, representing 
banks and credit unions and financial services companies. There 
is a populist movement out there, concerned not so much about, 
you know, the boxes and, you know, the exact language of the 
disclosure, but by the rates and the fees themselves.
    And I think, you know, what we see from the poorest, who 
take advantage of credit cards, because it provides a great 
service, to the wealthiest--and it was Mr. Bachus who really 
struck the chord right out of the box, he had a businessman who 
kept getting different charges, he couldn't understand them, 
and finally he just paid it off.
    And then, we had the Governor from the Federal Reserve Bank 
talk about risk-based lending. Well, I'm not really sure what 
that means. I think this is profit-center-based lending.
    My concern is I have people in my district, business men 
and women, who want to establish usury limits, outlaw fees, 
outlaw, you know, a whole variety of things. That is against my 
sort of button-down nature. But that feeling out there is 
growing, and we get complaints day after day after day about 
credit cards.
    So, you know, I am just looking at the fees outlined in the 
proposed Reg Z boxes, you know. You think that you closed your 
account, then you get stuck with a $60 closed account fee, or a 
maintenance fee. You don't pay that, then you get a late charge 
on it. And pretty soon, either you have to deal with all the 
people on the phone to get them to eliminate that, or you pay 
it, just to be done with it.
    So, you know, my question is, I am looking at the--to 
anybody on the panel, in the fee box, if you have it in front 
of you, the applications and solicitations, sample credit card 
boxes, are all those--do any of you have--and I guess I am 
asking the credit card folks--do you have any fees that aren't 
listed in that box? Like a telephone fee, if you pay your 
account over the phone, do you get charged for that?
    Mr. Carey. We have a number of fees that are not.
    Mr. Perlmutter. Listed?
    Mr. Carey. No, no. They are here that we don't have.
    Mr. Perlmutter. Okay. But those that you do are listed?
    Mr. Carey. As best as I can tell right here.
    Mr. Perlmutter. You know, really, my concern again just 
goes to what people believe. Again, I think Mr. Ellison said it 
early on, you know. People in the middle are getting squeezed. 
And there is a belief that, you know, that you get nicked here, 
and you get nicked there, and you get nicked here, and you get 
nicked there. And there is a point where folks revolt and 
rebel.
    And, you know, obviously, people have a choice to use 
credit cards or not, but people are in a desperate mode, and 
desperate people do desperate things. They will use the credit 
cards.
    And if we go to risk-based lending and bankruptcy, the 
bankruptcy code was changed to favor--to assist lenders and 
credit card issuers. I don't know, and maybe you all could tell 
me, was there any reduction in interest rates or fees, because 
there was the elimination of a bankruptcy risk, or the 
reduction of a bankruptcy risk? Do we see that in sort of this 
risk-based lending? Anybody?
    [No response]
    Mr. Perlmutter. Okay. I mean, my stuff is rhetorical. I 
guess I am just saying Senator Dodd suggested that everybody 
take a good look at their practices, take a good look at--I am 
saying you take a good look at the spread, you know, over the 
discount rate, and what you're earning on these things, and you 
know, help us out voluntarily, if you can, because Dr. Price is 
right.
    You know, there hasn't been real oversight of this area for 
a long time, and I don't want us to over-react. I don't want us 
to take a blunderbuss, and start passing usury laws, and things 
like that, that really do tighten the credit, hurt people we 
don't intend to hurt, but to try to act because we have so many 
people who are feeling squeezed by these different things.
    And Madam Chairwoman, that is all I wanted to say. Thank 
you.
    Chairwoman Maloney. Thank you for your question, and I 
thank all the panelists. We have been called to a vote, 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 record will remain open for 30 days for 
members to submit those questions, and to enter the responses 
into the record.
    I thank you very much for coming. The meeting is adjourned. 
Thank you.
    [Whereupon, at 3:09 p.m., the hearing was adjourned.]


                            A P P E N D I X



                              June 7, 2007


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