[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON
THE ROLE OF CREDIT CARDS
IN SMALL BUSINESS FINANCING
=======================================================================
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
APRIL 3, 2008
__________
Serial Number 110-81
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
HEATH SHULER, North Carolina STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona TODD AKIN, Missouri
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas STEVE KING, Iowa
DAN LIPINSKI, Illinois JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa DAVID DAVIS, Tennessee
YVETTE CLARKE, New York MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
______
STANDING SUBCOMMITTEES
Subcommittee on Finance and Tax
MELISSA BEAN, Illinois, Chairwoman
RAUL GRIJALVA, Arizona VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
______
Subcommittee on Contracting and Technology
BRUCE BRALEY, IOWA, Chairman
HENRY CUELLAR, Texas DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania TODD AKIN, Missouri
MARY FALLIN, Oklahoma
(ii)
Subcommittee on Regulations, Health Care and Trade
CHARLES GONZALEZ, Texas, Chairman
RICK LARSEN, Washington LYNN WESTMORELAND, Georgia,
DAN LIPINSKI, Illinois Ranking
MELISSA BEAN, Illinois BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
______
Subcommittee on Urban and Rural Entrepreneurship
HEATH SHULER, North Carolina, Chairman
RICK LARSEN, Washington JEFF FORTENBERRY, Nebraska,
MICHAEL MICHAUD, Maine Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, PENNSYLVANIA, Chairman
CHARLIE GONZALEZ, Texas MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona LYNN WESTMORELAND, Georgia
(iii)
C O N T E N T S
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Chabot, Hon. Steve............................................... 2
WITNESSES
Spearman, Mr. Bill, President and CEO, Mid-Hudson Valley Federal
Credit Union, Kingston, NY, On behalf of the National
Association of Federal Credit Unions........................... 3
Rosacker, Mr. William C., President, United Bankers' Bank,
Bloomington, MN, On behalf of the Independent Community Bankers
of America..................................................... 5
Gatewood, Mr. Wayne M., USMC (Ret), President and Chief Executive
Officer, Quality Support, Inc., Landover, MD................... 7
Walker, Mr. David A., John A. Largay Professor, Georgetown
University, McDonough School of Business, Washington, DC....... 9
Lahm, Jr., Dr. Robert J., Assistant Professor of
Entrepreneurship, Jones College of Business, Middle Tennessee
State University, Murfreesboro, TN............................. 11
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 33
Chabot, Hon. Steve............................................... 35
Altmire, Hon. Jason.............................................. 36
Spearman, Mr. Bill, President and CEO, Mid-Hudson Valley Federal
Credit Union, Kingston, NY, On behalf of the National
Association of Federal Credit Unions........................... 37
Rosacker, Mr. William C., President, United Bankers' Bank,
Bloomington, MN, On behalf of the Independent Community Bankers
of America..................................................... 54
Gatewood, Mr. Wayne M., USMC (Ret), President and Chief Executive
Officer, Quality Support, Inc., Landover, MD................... 63
Walker, Mr. David A., John A. Largay Professor, Georgetown
University, McDonough School of Business, Washington, DC....... 70
Lahm, Jr., Dr. Robert J., Assistant Professor of
Entrepreneurship, Jones College of Business, Middle Tennessee
State University, Murfreesboro, TN............................. 92
Statements for the Record:
American Bankers Association..................................... 118
(v)
FULL COMMITTEE HEARING ON THE ROLE
OF CREDIT CARDS IN SMALL BUSINESS
FINANCING
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Thursday, April 3, 2008
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
1539 Longworth House Office Building, Hon. Nydia Velazquez
[chairwoman of the Committee] presiding.
Present: Representatives Velazquez, Gonzalez, Cuellar,
Ellsworth, Johnson, Sestak, Chabot, and Akin.
OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ
Chairwoman Velazquez. Good morning. I call this hearing to
order. Today the Committee will examine the increasing role
played by credit cards in financing our nation's small
businesses.
In the past, 60 percent of small firms made use of private
and federally guaranteed loans. In comparison, during that same
period, 77 percent of entrepreneurs opted to buy new equipment
and pay for other businesses using a credit card.
The reason is simple. Credit cards give small businesses
access to capital they need to grow. That fact is especially
crucial given the current economic climate in which small firms
are finding it difficult to secure traditional forms of
financing. Not surprisingly, the rate at which purchases are
charged continues to rise up to 14 percent over the last 5
years. Today we will delve into what that means for small
firms.
Credit cards have always been a convenient means of
payment. They expedite transactions while allowing for
considerable ease and security. Just as importantly, since 70
percent of small business owners pay their balances in full
each month, they're gaining the equivalent of a 30-day
interest-free loan.
While credit card use is on the up swing, many federal
programs specifically designed to offer small firms access to
capital are falling short of this goal. That is holding small
businesses back and denying the economic contributions from
entrepreneurs precisely when they matter most.
In the past months, members of this Committee have heard
testimony from the Federal Reserve, the Small Business
Administration, and a host of experts on small business lending
programs. Their testimony points to the considerable gap that
remains in financing.
The witnesses have also shed light on how the current
economic downturn, rising foreclosure rates, and a plummeting
housing market are compounding these capital challenges. In
fact, just when our small businesses' economy will benefit
tremendously from an infusion of capital, financial
institutions are pulling back on credit.
As the availability of capital diminishes, more businesses
are delaying important purchases, halting expansion, foregoing
the creation of new jobs, laying off current employees
altogether. Ironically this keeps small firms from doing what
they do best: fueling the nation's economic growth.
In such an environment, it will make sense for the SBA's
lending and investment program to step in. Sadly, the agency's
largest lending initiative, the 7(a) program, is doing the
exact opposite.
The SBA's mission is to raise fees and erecting new
barriers to small business loans. As a result, 7(a) lending
volume is down 14 percent and lending to minority-owned
businesses has decreased by nearly 9 percent. Clearly this all
runs counter to the program's mission.
Given these realities examining the role of credit cards in
the financing of small businesses just makes sense. With the
nation facing the prospect of a recession, it is also important
to remember that entrepreneurs have always led the way back to
economic recovery. This Committee will continue to work to
ensure they have the tools to do so again. And I know my
colleagues will join with me in strengthening what is working
in the current system while correcting what is not.
I want to thank all of the witnesses for being here today
and for offering their insights on these crucial issues. With
that, I recognize Ranking Member Chabot for his opening
statement.
OPENING STATEMENT OF MR. CHABOT
Mr. Chabot. Thank you, Madam Chairman, for holding this
hearing on small businesses and credit cards. I also want to
thank our distinguished panel of witnesses here. I know we all
look forward to hearing your testimony.
The financial services market in the United States is the
most competitive, innovative, and robust in the world. This
vibrant market has helped individuals, businesses, including
small businesses, to meet their daily needs and achieve their
dreams.
Cash management is an absolutely critical matter for small
companies. Careful management of cash and credit may mean the
difference between whether a business expands or doesn't or
whether it succeeds or fails.
According to the Government Accountability Office, the
prevalence and use of credit cards in the United States has
grown dramatically over the past 25 years. In 2005, consumer
held more than 691 million credit cards. And the total value of
transactions in which these cards were used exceeded $1.8
trillion.
More than half of small firms rely on credit cards to help
fund their operations, according to a financial services trade
association. Credit cards can allow a small company to finance
a purchase over time that they would otherwise not be able to
make. They can be a source of short-term interest-free loans to
enable a business to operate.
Credit cards can also help a company to manage cash flow or
track and manage employee purchases and expenses. In addition,
credit cards allow small companies to earn airline, hotel,
retail, or cash-back rewards to enhance the business.
Whether a small business is well-established or just
beginning, these tools can have a positive impact on business
operations. They can enable a small business to weather minor
disruptions to cash flow. For a newly established business,
credit cards provide the opportunity to build business credit.
Especially in a time of economic uncertainty, when credit
can be even more difficult to access, credit cards can make
available the capital needed to maintain a company's position
or expand, create jobs, and add significant value to our
economy.
Like any borrower or credit card customer, small businesses
must use credit responsibly and be vigilant about managing the
debt. Credit is extremely valuable and is a tremendous asset
when used wisely.
Again I thank the Chairwoman for holding this hearing. I
look forward to hearing this testimony from our witnesses very
shortly here. And I yield back the balance of my time.
Chairwoman Velazquez. Thank you, Mr. Chabot.
And now I welcome Mr. Bill Spearman. Mr. Spearman is the
President and CEO of the Mid-Hudson Valley Federal Credit
Union, which draws its field of membership from Ulster,
Dutchess and Orleans Counties, New York. He is testifying today
on behalf of the National Association of Federal Credit Unions,
a well-respected trade association that exclusively represents
the interests of federal credit unions.
Mr. Spearman, you have five minutes to make your
presentation. Thank you. Welcome.
STATEMENT OF MR. BILL SPEARMAN, PRESIDENT AND CEO, MID-HUDSON
VALLEY FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL
ASSOCIATION OF FEDERAL CREDIT UNIONS
Mr. Spearman. Good morning. And good morning, Chairwoman
Velazquez, Ranking Member Chabot, and members of the Committee.
My name again is Bill Spearman. I am here today to testify on
behalf of the National Association of Federal Credit Unions. I
serve as President and CEO of the Mid-Hudson Valley Federal
Credit Union, headquartered in Kingston, New York.
Mid-Hudson Valley is a community chartered credit union
serving nearly 50,000 members and with assets of $590 million.
MHVFCU and the entire credit union community participate this
opportunity to participate in this hearing regarding credit
card and small business lending.
Credit unions are not-for-profit financial cooperatives
governed by a volunteer board of directors, who are elected by
their members. At Mid-Hudson Valley, as with many credit
unions, our membership includes small business owners and some
of the businesses themselves.
Cooperative structure gives credit unions unique ability to
design services to meet the needs of the membership. It also
enhances the relationship that the credit unions have with
their member owners, giving them a unique working knowledge of
the way the business is run.
This unique relationship leads to better lending decisions
and mitigate risk for the credit union and also for the small
business. Even though credit unions have been able to grow in
their ability to help small businesses, many want to do more.
At Mid-Hudson Valley, we are an approved SBA lender.
However, some of the cumbersome aspects of the SBA process
constrain our efforts to take a more active role in the SBA
7(a) and 504 lending programs.
Moreover, the arbitrary member business lending cap that
was established 1998 as part of the Credit Union Membership
Access Act has also hindered the credit unions' ability to help
small business. The Credit Union Regulatory Improvements Act,
H.R. 1537, and the Credit Union Small Business Lending Act,
H.R. 1849, would help to provide relief to credit unions from
this arbitrary cap and ease the SBA process for credit unions.
Even though the credit union has been able to grow and help
small businesses, business lending to our members is a very
important part of the Mid-Hudson Valley Federal Credit Union.
During the early 1990s, the Mid-Hudson Valley area was left
reeling with the closure of the IBM Kingston plant that
employed over 7,000 employees.
As a federal credit union for that IBM plant, we help many
former IBM employees establish their own small business
ventures. Some of the bigger financial institutions in the area
were unwilling to lend to these entrepreneurs. As a result,
Mid-Hudson Valley stepped in and filled this void.
Today Mid-Hudson continues to help fuel small business
growth in our region. Credit card lending plays an integral
role in providing much needed capital for our small business
members. Currently 61 of our business members have credit card
accounts with the credit union. These small business members
pay their bills on time. And many do not carry balances and,
thus, do not generate a large amount of interest income for the
credit union.
Absent this capital provided by the credit cards, these
businesses surely would not be as successful as they are today.
Credit cards offer a convenient form of payment and an easy way
to track expenses.
Many small companies often utilize credit cards as a main
source of credit. Federal credit unions are the only federal
financial institution with a statutory usury ceiling, currently
at 18 percent. This helps ensure that small businesses using
credit cards from their credit unions do not face predatory
interest rates.
Federal credit unions have traditionally been responsible
lenders and have not participated in some of the predatory
practices that are engaged in today. Thankfully, double cycle
billing, universal default, and hair trigger repricing are not
a part of the credit union vocabulary. At
At Mid-Hudson Valley, we tend to hear the same reasons over
and over again as to why our members, small businesses, prefer
credit cards to assist them with their business. The ease of
obtaining credit, the ability to monitor cash flow with their
monthly statements, efficiency, fair rates, and overall
convenience are the main reasons why our small business owners
utilize credit cards.
Knowing our members helps us put them in the proper loan
products for their business needs. For example, if they needed
to purchase a copier for $5,000, we would not put them in a
credit card but, rather, suggest a term loan for those
purposes.
MHVFCU believes that any effort to restrict credit card
practices should be carefully crafted to ensure that smaller
financial institutions are not burdened by unnecessary
regulation and unintentionally harmed.
In conclusion, federal credit union small business lending
is strong and continues to grow. However, the current
regulatory framework prevents federal credit unions from doing
more for America's businesses. Legislative proposals such as
the Credit Unions Small Business Lending Act and the Credit
Union Regulatory Improvements Act would go a long way to
helping credit unions to bolster small business growth in
America.
Furthermore, credit card lending plays a pivotal role in
helping federal credit union business members start and grow
small businesses. NAFCU urges caution and careful consideration
of any legislation proposals that could simultaneously hurt
credit union lending and small business development.
I thank you for your time. And I am happy to answer any
questions that the Committee members may have.
[The prepared statement of Mr. Spearman may be found in the
Appendix on page 37.]
Chairwoman Velazquez. Thank you, Mr. Spearman.
Our next witness is Mr. William Rosacker. He is the
President of the United Bankers' Bank in Bloomington,
Minnesota. He is testifying today on behalf of the Independent
Community Bankers of America, a leading trade association
representing over 5,000 community banks of all sizes and
charter types throughout the United States.
Welcome, sir.
STATEMENT OF MR. WILLIAM C. ROSACKER, PRESIDENT, UNITED
BANKERS' BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS
OF AMERICA
Mr. Rosacker. Thank you, Chairwoman Velazquez and Ranking
Member Chabot. I am Bill Rosacker, and I am President of United
Bankers' Bank in Bloomington, Minnesota. I am pleased to be
here today on behalf of the Independent Community Bankers of
America.
On behalf of ICBA's nearly 5,000 members, I want to express
our appreciation for the opportunity to testify on the
important role credit cards play in supporting America's small
business.
Access to credit and capital is vital in today's economy.
Today I will focus on three points: first, how community banks
are able to help local small businesses run and finance their
operations successfully through the use of credit cards;
second, how community banks as small businesses themselves
benefit from the ability to offer credit card products; and,
finally, the legislative and regulatory landscape facing
community bankers and their small business customers.
Community banks play a vital role in providing capital
entrepreneurs need to succeed. In fact, community banks provide
nearly a third of the total dollar amount of bank business
loans under $100,000, many in the form of small business credit
card products.
A small business owner who chooses to do business with a
community bank gains an important advantage of local decision-
making. Community bankers know their customers and live and
work in their neighborhoods. Should a small business find
itself in a tough financial situation, both the banker and the
owner have a clear interest in making the business successful.
A small business credit card holder gains a new source of
capital that can help them meet their dynamic financial needs
while establishing a sound business credit history. A credit
card simplifies the accounting and cash flow management.
A small business can use a credit card to finance daily
expenditures, freeing up assets to be reinvested in the
business to help it grow, rather than tying it up in trade
credit receivables and payables.
Also, it has been my experience that a large majority of
small business credit card holders pay their statement balance
in full at the end of each month, using it as a transaction
account and almost provides them the same convenience as a
regular checking account.
A small retailer accepts credit cards, improves its
profitability and efficiency. For example, they are protected
against many types of fraud. They do not have to keep as much
cash on hand. And the business receives guaranteed funds in its
account immediately.
Also, as we all know, consumers will spend more if they go
to a merchant that accepts credit cards. After all, increasing
customer transactions is the best way to develop revenue.
If a small merchant signs with a community bank, it is
getting a tremendous value because of the benefits of the
electronic payments and sophisticated payments network that a
community banker can utilize to complete the transaction
quickly and, most importantly, securely.
While community banks are often lumped into a broad
category of bankers, it is important to keep in mind that a
community bank is a small business themselves. We face our own
unique set of challenges in a very competitive marketplace.
Contrary to popular belief, the consumer and business
credit cards we offer are not always the source of tremendous
profit. The real value lies in our basic ability to offer these
products to consumers and small businesses. Offering community
bank-issued credit cards creates a stronger relationship with
the customer and encourages loyalty for the long run.
Credit cards are a very small margin product for many
community banks, which do not issue consumer and credit cards
at volumes near the larger issuers. For the small business
owner, they can get the same product but with local customer
service at a competitive and often better rates from their
community banker.
One unique challenge facing community banks on a daily
basis is the burden of government regulation, which directly
affects the ability to support small businesses. There are a
number of legislative proposals which would greatly increase
the cumulative regulatory burden for card-issuing community
banks.
The increased regular costs and burdens could be the
tripping point that will cause community banks to discontinue
offering credit cards products. That said, there is also an
opportunity for Congress to enact measures to make it easier
for small businesses and community banks to grow and succeed.
ICBA would like to thank the Chairwoman Velazquez for
introducing the Communities First Act, H.R. 1869, which
provides much needed regulatory burden and tax relief for
community banks, their customers, and their communities.
In conclusion, even in the best of economic times, small
businesses can struggle in the search of capital. Community
bankers are well-positioned to meet these needs, be it through
traditional loans or highly competitive business credit
offerings. The support structure built on local decision-making
and long-term relationships unique to the community bank model
is a proven formula to help entrepreneurs succeed.
I want to thank you for this opportunity to testify. And I
look forward to your questions.
[The prepared statement of Mr. Rosacker may be found in the
Appendix on page 54.]
Chairwoman Velazquez. Thank you.
Our next witness is Mr. Wayne Gatewood. Mr. Gatewood is the
President and CEO of Quality Support Inc., a veteran, a
minority-owned small business that provides a distinctive array
of management, administrative meeting, and conference support
services for its wide array of government and corporate
clients.
Welcome.
STATEMENT OF MR. WAYNE GATEWOOD, JR., USMC (RET), PRESIDENT AND
CHIEF EXECUTIVE OFFICER, QUALITY SUPPORT, INC.
Mr. Gatewood. Good morning, Madam Chairwoman and Ranking
Member Chabot and members. After 21 years in the United States
Marine Corps, I started Quality Support in 1989, with $600 in a
small loan from my dad.
I initially used credit cards to pay for small corporate
needs and personal items that would otherwise require the
outlay of cash. To maximize my potential for success, I needed
time. And credit cards gave me that time.
From 1989 to 1998, because of favorable terms and
flexibility, American Express became our preferred source of
credit. In 1999, our company was selected to support a large
Department of State requirement. To take on this work, we would
need a credit line of one million dollars.
Even with a substantial cash balance and an established
track record, our bank turned us down flat. However, American
Express worked with us and authorized a credit line up to one
million dollars. By the end of our State Department contract,
we had charged $1.1 million on our American Express cards.
Since 1994, we have charged more than $8 million through
American Express. For calendar year 2008 alone, we are on pace
to charge $2.5 million through our AmEx account.
Bank lines can be expensive and hinder business operations.
Example, the following terms were offered us by a bank. We
rejected the offer. No corporate cash contribution or
distributions could be made while the agreement was in effect.
This would be the case, whether the line of credit was used or
not. We could not enter into any teaming agreements without
permission from the bank, thus stunting our opportunities for
future growth and stability.
In addition, Quality Support guaranteeing the loan, the
bank wanted me to personally guarantee the loan. The bank would
put a lien on our receivables, and the bank would be paid
directly from our clients. We would maintain a net worth of
$1.5 million for a $500,000 credit line. If we dipped even
slightly below the $1.5 million mark, even for a short period
of time, the bank could immediately call in the loan.
The bank reserved the right to call in the loan at their
discretion any time. The credit line would be for one year
only. And at the end of that year, all outstanding balances
were due. And terms would only be extended at the bank's
discretion.
At our expense, the bank could request field audits of our
finances or the records any time they chose and as many times
as they chose. We would pay for the preparation of all related
documents and be responsible for all out-of-pocket expenses
incurred by the bank, to include their attorneys' fees. This
would be the case, even if we never used the credit line and
was in addition to the $2,500 annual maintenance fee. To pay
for these expenses, the bank could debit any accounts
maintained by Quality Support without prior consent from us.
Although we now have two small bank lines of credit that do
not include such harsh terms, we still prefer to use our credit
card account with American Express. If we used a bank credit
line for short-term credit, we would have to pay interest. If
we used our cash, we would lose the opportunity of investing
the money elsewhere.
By using AmEx, we have access to the credit we need. We pay
no interest as long as we pay within the terms of our
agreement. And we are able to invest our cash on hand in
interest-bearing accounts.
AmEx is beneficial because of its simplicity. When we have
a short term requirement, such as a large hotel bill, we make a
phone call to Amex, explain the situation, sometimes provide
basic financial information. In most cases American Express
immediately increases our credit line for the short-term
requirement. Even when we don't have a need for short-term
credit increases, American Express offers us a healthy and
ongoing line of credit.
American Express ensures international purchasing capacity
for us and credibility internationally to support our
operations almost anywhere in the world. As a bonus, we receive
air miles for every dollar we spend with American Express.
Quality Support will continue using credit cards to enhance
and sustain our corporate operations. Credit cards when used
judiciously can provide the small business owners with the
flexible and quicker access to credit they otherwise may be
denied.
Quality Support's growth and success over the past 19 years
would not have been possible if access to credit had not been
available to us. We thank the credit card companies, especially
American Express OPEN, for giving us the capacity to form and
grow our company.
Thank you. This ends my testimony.
[The prepared statement of Mr. Gatewood may be found in the
Appendix on page 63.]
Chairwoman Velazquez. Thank you, Mr. Gatewood.
Our next witness is Dr. David Walker. Dr. Walker is the
John A. Largay Professor and Director Emeritus of the Capital
Markets Research Center at Georgetown University, which he
directed for 17 years. Previously Dr. Walker has served as the
Director of Research for the Office of the Comptroller of the
Currency.
In his research, Dr. Walker has analyzed free credit
availability and demand for SBA loans and has published several
studies on the financing of small firms through venture
capital, informal investment, and bank credit.
Welcome.
STATEMENT OF MR. DAVID WALKER, JOHN A. LARGAY PROFESSOR,
GEORGETOWN UNIVERSITY, McDONOUGH SCHOOL OF BUSINESS
Mr. Walker. Thank you. Madam Chairwoman, Ranking Member,
and Committee members, thank you for the opportunity to testify
in front of the House Committee on Small Business. I know we
have very limited time. So I would like to offer my conclusions
to begin my discussion.
I would like to urge the Committee to do whatever you can
to increase the supply of funds to small firms. These firms are
the growth engines of our economy, as I discuss in my
testimony.
Technically we are not in a recession. We do not have the
data to know whether or not GDP growth has been negative for
two consecutive quarters. For the fourth quarter of 2007,
growth was 0.6 percent. And we do not have data for the next
quarter.
No matter what label we use, the economy is in extremely
poor condition. Figure 1 on page 9 of my testimony suggests
that the contrast between the credit card interest rate and the
prime rate is quite similar to that during the previous
recession, as identified by the prestigious National Bureau of
Economic Research.
In my opinion, the stimulus package you have already
enacted and the current action that you and your colleagues are
working on this week to deal with the housing crisis will
probably enable us to avoid what we technically define as a
recession of two negative growth quarters.
My interest in small business originates from, one,
experience from my family owning and operating a retail store
in York, Pennsylvania for 93 years; two, working with the Small
Business Administration, which this Committee oversees; and,
three, extensive small business research and policy analysis,
beginning 40 years ago with my Ph.D. dissertation.
Small business and consumer credit are often
indistinguishable. Much of the credit available to small firms
is based on the entrepreneur's personal resources, credit card
loans, and lines of credit, and mortgage loans and potential
home equity loans and lines.
In our recent study, Dr. Thomas Durkin and I argue that
much of the consumer credit is revolving credit without a fixed
payment schedule, often credit card loans from financial
service firms to small business. I am pleased to submit that
study to the Committee for your background.
Much of today's credit crunch has been caused by what I
consider to be irresponsible mortgage lending and the
unreasonable assumption that there would be no finite limit to
housing prices during the current decade.
Consider, for example, a 2/28 subprime mortgage, where the
loan equaled virtually 100 percent of the 2005 property
appraisal. When the mortgage resets in 2008 at new rates for
years 3 through 30, they reset at an interest rate that is
generally above the market rate that you would find on an
adjustable rate mortgage today. If the borrower has negative
equity in 2008, the borrower will not be able to refinance at
the market adjustable rate that he or she would otherwise find.
The adjustable rate mortgages have allowed many legitimate
borrowers to purchase a home. They are not to blame for the
current credit crisis, as has been claimed sometimes. The
problem is the high reset rate, often above market rates, when
the reset is required and the borrower has no equity in the
property and no alternative but to agree to a high reset rate.
Costs of credit to small business are often very high
compared to rates available to other sectors. And this is
especially true during a credit crunch. Small firms relying on
debt secured by credit cards usually pay more than twice the
interest rate that large firms pay when borrowing at the prime.
The difference between the cost of credit for large and
small American firms is at least illustrated by the difference
between the prime interest rate and the rate of interest on
credit card balances, the difference of costs of debt for small
and large firms.
Figure 1 on page 9 shows the substantial difference in the
credit card rate and the prime rate between 1994 and 2007.
Throughout this period, the difference between the credit card
borrowing rate and the prime rate is substantial. Small firms
have incurred a much higher cost for external resources than
large firms over the past 13 years.
Thank you very much for this opportunity to meet you and
speak with you. I would be pleased to answer any of your
questions.
[The prepared statement of Mr. Walker may be found in the
Appendix on page 70.]
Chairwoman Velazquez. Thank you, Dr. Walker.
Our next witness is Dr. Robert J. Lahm. Dr. Lahm is
Assistant Professor of Entrepreneurship as well as the
Entrepreneurship Interim Program Coordinator for Middle
Tennessee State University. Previously Dr. Lahm has founded
private entrepreneurial ventures and has held positions as an
employee of other small and large businesses.
Although diverse, Dr. Lahm's research has often focused on
topics with practical implications for the small business
sector, particularly the issues of entrepreneurial
bootstrapping and the use of credit cards in small businesses.
Welcome.
STATEMENT OF DR. ROBERT LAHM, JR., ASSISTANT PROFESSOR OF
ENTREPRENEURSHIP, JONES COLLEGE OF BUSINESS, MIDDLE TENNESSEE
STATE UNIVERSITY
Dr. Lahm. Thank you, Madam Chairwoman, Ranking Member, and
the Committee, for allowing me to testify.
As you will note from my bio, I am not a lifelong academic.
I have been an entrepreneur. I have also been an
entrepreneurial bootstrapper; that is, one who has started the
business from scratch with little or no capital. I know how it
feels to float with my head bobbing, sometimes beneath and
sometimes above the surface of treacherous entrepreneurial
waters.
The credit card industry has in recent years been
aggressively targeting the small business market. My research
shows that credit cards, whether labelled or classified as
personal accounts or as business cards, have become the
surrogate for traditional sources of capital by bootstrappers.
In one of my earlier papers, entitled ``Just Say Charge It:
The Use of Credit in Entrepreneurial Start-ups,'' I estimated
that somewhere in the vicinity of eight and a half million
businesses with zero employees across all industry sectors were
using personal credit cards as a source of capital in 2002.
Usage rates as well as the total number of businesses have both
increased since that time.
The subject of entrepreneurial bootstrapping has thus far
not been vigorously researched. Bootstrappers do not or cannot
access traditional lenders, business angels who buy ownership
in their firm, or venture capital.
There are many reasons for this behavior. They may not want
other owners to meddle in their businesses. They may want to
prototype their business concept before jumping into selling
ownership for capital or they may fear the loss of control by
having other owners.
There are many dangers for would-be business or consumer
credit card holders. Most of us are aware of the game that is
played given the credit card companies incorporate regular
change of terms provisions in applicants' contracts. Indeed,
language such as we may change our terms at any time for any
reason foreshadow that they can and will do so regularly.
The biggest problem with respect to credit card companies
is that they can be whimsical in their treatment of credit card
holders. I believe my use of the word ``whimsical'' is
appropriate given that some issuers have added ``or for no
reason'' to their change in terms disclosures.
Another danger is that so-called business cards are no
different from ordinary credit cards relative to personal
liability. Whereas, many small business owners may think that
once they form a business, they are protected, they have
typically never heard of veil piercing.
Credit card companies may slap an unwary borrower with high
interest rates when payments are late, in addition to late
fees. According to a United States Government Accountability
Office report entitled ``Credit Cards Increase Complexity in
Rates and Fees Heightens Need for More Effective Disclosures to
Consumers,'' 35 percent of their credit card issuers' active
U.S. accounts were assessed late fees and 13 percent were
assessed over-limit fees in 2005. Even the Internal Revenue
Service uses the postmark to signify compliance with the spirit
of a taxpayer's filing deadline.
Knowing that entrepreneurship is vital to the economy, we
must start and find ways to study and support bootstrappers
since they comprise the vast majority of all start-ups. These
businesses may finally reach the cover of Inc, Fast Company, or
Entrepreneur, but they are started on kitchen tables.
As policy-makers, I would invite you to consider novel
approaches to disseminating formal education and training to
nascent entrepreneurs. We need better disclosure agreements.
When other industries have produced products that may be
hazardous to consumers' well-being, they have been forced to
educate consumers.
Unfortunately, personal finance has been greatly under-
served as the subject for contemporary students in high schools
and universities. While this may fall under the purview of the
U.S. Department of Education, this Committee could advocate for
increased attention to addressing the societal need for
financial literacy.
I fear a proposal to require that the terms of credit be
frozen at the time credit was taken would actually raise the
cost of credit to all. On the other hand, lenders who are
utilizing predatory lending tactics, trickery, and obviously
disingenuous strategy to trap borrowers in a classic game of
bait-and-switch with change in terms agreements must be stopped
given that entrepreneurs are the lifeblood of the economy.
I wish you well in your quest to create policies that can
nurture those businesses that deserve the opportunity to
succeed. If I may be of further service in the future, I will
hope you will call upon me again.
[The prepared statement of Dr. Lahm may be found in the
Appendix on page 92.]
Chairwoman Velazquez. Thank you, Dr. Lahm.
If I may, I would like to address my first question to Mr.
Spearman. What are some practices that credit unions use to
manage risks associated with credit, card lending to member
businesses?
Mr. Spearman. Well, basically what we do is we know all of
our businesses personally. We are involved many times in
helping them assemble a business plan. We work with them.
Generally speaking, we work with a lot of start-up
businesses, and we actually have them produce a business plan.
We provide them resources to do a business plan. So when they
come back to us, we have a pretty good idea that we are really
a partnership in this process.
And if it is a start-up business, we will probably start
with a credit card, but we will start at a modest credit limit
and work through that process. And generally speaking, the
credit card is perhaps the first instrument that is used in the
relationship. And soon it will be followed by other
relationships.
So we continue to work with them. And, really, in our
portfolio, which is a credit card portfolio, which is rather
small, we have about 61 accounts. We don't have any real
delinquency or any issues with those cards. Primarily they are
used for a payment device.
Chairwoman Velazquez. Mr. Rosacker, would you mind to
comment on some of the practices that your banks use to manage
risk associated with credit card lending?
Mr. Rosacker. I would love to. In conjunction with what Mr.
Spearman said, we also develop this deep relationship with the
customer. And, as I testified, you live in their same
neighborhood. The kids play Little League together. You know
that their goal is to succeed, and you want them to succeed.
And I think that through the sophisticated computer systems
that back the business credit card, you can actually monitor
their sales, their expenses, where they're spending money, how
they're spending money. And you can do that almost on a day-to-
day basis, where in a traditional business loan, you really
don't do that and can't do that other than on a quarterly or
whatever basis.
But I think, to sum it up, it is a relationship. It is the
fact that you have the tools computer-wise to do it. And,
finally, I think when you look at what a community bank is and
that small entrepreneur is, that is the time when one owner of
one business can sit down with the owner of another business
and solve the problem and make it a win-win situation.
Chairwoman Velazquez. Can you comment? How would
restricting lenders' ability to price risk affect credit
availability for small businesses?
Mr. Rosacker. I think that the risk and pricing for risk
are important. And I know that there are many studies that have
said this is tightening or this is loosening and what have you.
But I think when you look at it, credit card pricing is
significantly different than the traditional loan pricing.
There are significantly different risks involved in the credit
card from the standpoint it is unsecured credit. It is not a
collateralized line of credit, as you would in your
traditional.
So you do analyze it differently. And you do look at it.
But you have many more tools to use than you do in the
traditional business loan.
Chairwoman Velazquez. But will this restricting the ability
to price for risk create additional costs that will passed on
to--
Mr. Rosacker. Absolutely because you are going to have to
make up that limitation that you have on the risk in some other
form. I mean, you can't do it for nothing.
Chairwoman Velazquez. Mr. Gatewood, one of the reasons some
individuals advocate for traditional loans is that their terms
are perceived as being more fixed, thus providing businesses
with greater sense of certainty and enabling them to
effectively plan for the future. Do you believe that
traditional loan terms are more fixed than credit cards or that
they better enable businesses to plan for the future?
Mr. Gatewood. Well, thank you, ma'am.
Actually, I think they are fixed in favor of the banks. As
my testimony revealed, the loan applications received from the
banks were very restrictive. Certainly it was fixed there. So
we knew how much we could get over time, but the risk was huge.
And the autonomy that the bank had to call in the loan at
any time and to require us to go through them for a number of
our operations was just too restrictive.
Chairwoman Velazquez. Any of the other witnesses would like
to comment on that question?
Mr. Gatewood. Also, ma'am, if I might, again, as I say, the
credit card was our preferred means because if we paid on the
terms of the credit cards, there is absolutely no finance
charge. So our cost is minimal, if anything.
Chairwoman Velazquez. Dr. Lahm, in contrast to traditional
loans, most banks are willing to issue a credit card to a
business without requiring personal guarantees, origination
fees, or without taking a security interest in the business
assets. What makes credit cards more open to these less
restrictive lending terms compared to traditional loans?
Dr. Lahm. I have found the irony in the fact that banks
will not often provide traditional loans until a business is
established with, for example, three years of operational
history and a track record. But, yet, it is banks who will turn
right around and with a signature provide a credit card loan
for a substantial amount of money with no paperwork whatsoever
as compared to exorbitant layers of process, accounting, and so
forth, incurring costs for the businesses. And I think this
explains why credit cards are so popular.
I would say that credit card usage is very high with
respect to personal credit cards. And those who sign both
business and personal credit card agreements are, in fact,
signing that they are liable for those as persons with Social
Security numbers, with credit ratings, and so forth, which are
subject to be damaged or, of course, enhanced positively if
they perform in accordance with the bank's expectations and
reporting.
Chairwoman Velazquez. Thank you.
Dr. Walker, in the five years since the last Federal
Reserve survey of small business finance, credit card use by
businesses increased by 14 percent. During the same period, the
use of personal credit cards by consumers increased by less
than one percent. Are there factors associated with business
use of credit cards that have contributed to this rapid growth?
Mr. Walker. Well, from my knowledge, business has not found
any other alternatives at a price that they could afford. Even
right now the prime interest rate is 5.25 percent. The typical
credit card quotation yesterday was 13.4, more than 2 and a
half times.
And, yet, business cannot seem to find alternatives and
particularly small business. That's why I drew that contrast in
my testimony because I think it is a good indicator of what
small business faces when they go looking for funds.
Chairwoman Velazquez. Thank you.
And now I will recognize Mr. Chabot.
Mr. Chabot. Thank you, Madam Chair.
Mr. Spearman, I will begin with you if I can. You mentioned
that H.R. 1537, the Credit Union Regulatory Improvements Act,
which I support and cosponsored, would raise the business
lending cap. Could you explain a bit more why this is
important? And would lifting this cap increase credit card
lending, do you believe, to small businesses?
Mr. Spearman. Yes. Yes, it would. It would increase credit
card lending and would also create additional lending to small
businesses as well. The cap is a statutory cap that was created
in 1998. And at this point, our credit union is dangerously
close to that particular cap.
And since there is not necessarily a secondary market, much
as there is in the mortgage business, where you can sell the
mortgages and retain the servicing, there is no such
established process here in the credit union industry at this
point.
So it will create a pull-back, if you will, of financial
institutions that are at that level not to be able to offer
additional credit. And at this point, like I said, our
institution is facing that particular hurdle at this point in
time. And I know many other organizations are as well.
So it is a limiting factor. And it would also cause issues
on credit cards, particularly those that are larger credit
cards, say credit cards in advance of a $50,000 to $100,000
level.
The way the policy works is as long as the credit limit is
at that level, we have to account for that for the cap. Whether
the balance is used or not, it is the limit that is counted.
And that obviously could cause a problem, and it has caused
some problems there.
So we are anxious for relief and continue to work on that,
but it is an issue that we are facing. And I know many of my
colleagues are facing that as well.
Mr. Chabot. Thank you.
Mr. Rosacker, what standards do most banks use to evaluate
the creditworthiness of prospective small business customers?
Mr. Rosacker. Well, I think it depends, obviously,
significantly on the type of business you are going into and
where they are going to be doing their business. But I think
traditionally community banks use the same criteria. You are
looking at the capacity of the borrower, the creditworthiness
of the borrower, their business plan and when their break-even
point is going to be and what does their business plan look
like, and who they are going to do business with. Are they
going to do business with a certain segment of the economy that
is very susceptible to big swings in the economy or big swings
in the business?
So there is no cut and dried criteria, but there is an
overall review of the entire business plan. And strategic plan
of the small business owner is very important.
And I think that banks as a rule try to find ways to say
yes. That community banker lives and breaths that small
entrepreneur in this community. And, as I keep saying, it's
that relationship that goes in.
I think a good example of that is a young lady that
graduated from the University of Minnesota with a degree in
architectural design and focused primarily on landscape design.
She had excellent credentials but no idea on how to develop a
business plan, how to do things.
She worked with a community banker in Minnesota. They
developed a business plan. They got her incorporated. They did
all of the work for her and with her and set up a line of
credit with her. So it's a total relationship.
Mr. Chabot. Thank you very much.
Mr. Gatewood will be next, if I can. Your written testimony
said that credit cards give you and have given you the
flexibility and fund availability you need to operate,
particularly compared to traditional lines of credit. Would you
elaborate on that just a little bit?
Mr. Gatewood. Yes sir. Our credit cards give us a term to
pay or a length of time to pay from the time we borrow the
money. In my business, which is federal government contracting,
I have to turn around my money pretty quickly. It's sometimes
tough getting paid from the government.
The banks don't give us any flexibility. They have certain
days you have to pay. And if you don't, you start incurring
interest rates and sometimes fines and so forth and so on. And,
of course, you risk default.
I appreciate Mr. Rosacker talking about community banks,
but we don't deal with community banks here in Washington, D.C.
We deal with some of the nation's largest banks. And they are
not warm and friendly, not at all. So they have a huge risk
aversion. And over the lifetime of my 19 years in business, we
have really had a hard time dealing with banks.
The banks have a set date that that money has to be paid.
And there is no flexibility whatsoever. So we stay away from
them. We have gone, if I might say, in the federal government
contracting community--and this is no kidding. As a matter of
fact, some of you may have seen my e-mails to the Senate and
the House. It's 444 days without getting paid by the federal
government, 6 months oftentimes.
I am not saying that American Express tolerates any
tardiness or that the other credit cards we hold, Visa and
MasterCard, tolerate any tardiness, but they have customer
service reps that work with us that understand our business.
And they know they are going to be paid. And that is a huge
flexibility for small businesses supporting the federal
government community.
Mr. Chabot. Thank you very much.
Dr. Walker, you have researched business start-ups all over
the world. Is it common in other countries to use credit cards
to begin a business and perhaps to expand business as well?
Mr. Walker. From what I know, this is really just
beginning, that lots of the rest of the world is observing the
fact that so many successful small businesses in the United
States have begun this way and people looking at it and
thinking, gee, this may be a source of credit they never
imagined.
Also banks in many other countries really are just
beginning to make loans to small business and used to depend on
what we call informal investment, meaning other investors,
friends of the entrepreneur as well as the entrepreneur's
family.
Mr. Chabot. Thank you very much.
And, finally, Dr. Lahm, has the recent economic uncertainty
and tightening of credit in the financial markets resulted in
small businesses using credit cards more frequently? And do you
anticipate that that would be true in the near term?
Dr. Lahm. I would not have access to usage rates as of the
last several months. Most of the data that I have utilized has
been from earlier reports, Census reports, SBA reports, NFIB
reports, and so forth.
However, I am convinced that the credit card industry
itself can tell you where you had dinner last night. They know
exactly where you are, what you are spending, what you are
doing, and I don't believe that there are any illusions about
their ability to do data mining. And they could certainly
address your question very specifically if asked.
Mr. Chabot. Thank you.
Let me follow up with one more question, then. You once
wrote that there's not a lot of academic research on the use of
credit cards by entrepreneurs, despite the fact that there is
widespread use of financing with them. Is this still the case,
to your knowledge?
Dr. Lahm. I believe so. I can explain why if you are
interested.
Mr. Chabot. Yes. Sure.
Dr. Lahm. I don't believe that it is very sexy to study the
landscaper who has five persons on a work crew as compared to
some Silicon Valley start-up. Obviously when university
researchers, who are independent thinkers, of course, conduct
their research, they may be influenced by other factors, such
as the fact that larger businesses that are established have
better data sets. A landscaper might keep very minimal records.
Nevertheless, the problem is that these zero-employee
businesses are extraordinary in their numbers. It is the vast
majority of all businesses. But I don't think that they have
been given proper attention as yet. I believe this is changing.
Mr. Chabot. Thank you very much, Doctor. I yield back.
Chairwoman Velazquez. Mr. Gonzalez?
Mr. Gonzalez. Thank you very much, Madam Chairwoman.
I want to start off with a couple of observations. And the
first one is that we have got credit card issuers in the form
of independent and community bankers and the credit unions when
we price should have, the Chase people here, the Bank of
America, and so on, because they probably are the ones that
have the greatest percentage of credit card holders and users
and so on. But, nevertheless, we do appreciate you being here.
But I think that you probably represent what are the better
practices out there by those that issue credit cards.
Dr. Lahm and Mr. Walker, I want to cover a couple of basic
points. The first one is--and we're not here to cut off any
avenues or to access to capital and credit cards very
legitimate, prudently used, and so on. I think what we are
trying to explore is what is there the disproportionate use,
why isn't there as great an effort by the lender to go with
traditional forms of capital and financing and so on because
there are some disadvantages associated with credit card use.
So the first principle I would like to establish is, is the
risk so great with a small business man or woman that it does
not allow a lender to promote and extend traditional lines of
credit? And I will start with Dr. Lahm and very short because I
have got another one, and it will lead up to something else.
Is the risk just so extraordinary out there that the
lenders just can't really treat them as they would, let's say,
someone like a Bear Stearns?
Dr. Lahm. Well, I believe one of the points you raised in
your remarks kind of does suggest that there are differences
among lenders, the community bankers, for example, that we are
dealing with. Those who I know personally I recognize that they
do build their businesses on relationships, they get to know
their clientele, they understand these individuals, they may
have gone to church with them or otherwise been members of a
community over a long period of time. And they're in a capacity
such that they can assess and get to know, if you will, who it
is that they're working with and they can have a very close
working relationship.
The large institutions, though they may attempt to claim
that they have some warmth or fuzziness, still don't get it.
Even as marketers, I get letters from banks. And I love this
one, ``Your personal banker,'' but there is no signature.
[Laughter.]
Dr. Lahm. So go figure. So I do think that there are
differences. And I do think that at the credit union, community
bank level, relationship bank level, that the lending field is
quite different in terms of the model.
I do know that in terms of the large credit card issuers,
one of the things that changed, actually came from academic
research several years ago, some earlier researchers decided to
look at the relationship between someone's personal habits and
creditworthiness as compared to the likelihood that they might
be a good borrower for credit cards that are labeled as
business credit cards.
While I didn't think that that was rocket science and
didn't necessarily require empirical research, not to be
disrespectful of the researchers, I think it is pretty evident
that if someone wants to pay as a matter of practice in his or
her personal life, that they are likely to carry that value
system with them in their conduct of themselves in a business
capacity.
Mr. Gonzalez. I would agree with you.
Mr. Walker, does the risk just outweigh traditional
products out there, the availability?
Mr. Walker. I am afraid that it does, Congressman. And I
can tell you from my own family's experience that if we had bad
weather on what's called Black Friday, the day after
Thanksgiving, on that one day, that meant that our business did
not make a profit, no matter what else we did.
The small firms just don't have the ability to go to the
market for funds. And, of course, even though the law says that
no bank is too big to fail and the implication is that no firm
is too big to fail, the footnote in those laws says unless it
would have a negative impact on the whole economy. And so I
think it probably is too much.
Mr. Gonzalez. I guess my point is that it seems to me that
everything mitigates against the lender really making a
concerted effort to have traditional types of loan products out
there for businesses.
And let me just start by the fact that the interest rates
can be charged are drastically different, my understanding, in
a credit card setting, as opposed to the traditional loan. The
fees, the penalties, all of that is extraordinary as far as the
exposure to the business person.
And I think, Mr. Walker, you are exactly right, the old
thing about too big to fail. When it comes to small business,
it's probably too little to matter. And I think that is what we
are trying to get at here with the small business with the
Committee and trying to figure out why the over-reliance on
credit card type of financing or access to capital.
I think one reason is because it is so profitable. And so I
am going to ask both Mr. Spearman and--I'm sorry. I can't make
out--how do you pronounce this? I can't make it out.
Mr. Rosacker. Rosacker.
Mr. Gonzalez. And I don't know what it is for the community
or independent bankers I have such great respect for, so
different from my big banks. And, of course, my credit unions
have more credit union members in my district than probably
anywhere else in Texas.
The question is--and I'm trying to see how diplomatically I
can put this--do you all expend the same amount of money and
effort in extending to the small business man and woman loan
products, access to capital as you do in promoting credit
cards?
Mr. Spearman. We do spend more time in providing input into
business loans. In our situation, the credit cards become
more--they are certain a credit value for our credit cards in
the credit union operations and our--they end up being more of
a transaction to them.
The credit card is used mostly in most cases of managing
the operation. In many small businesses, the office for the
small business is the vehicle. I have seen it up PC set-ups,
cell phones. And they conduct their business from their
vehicle.
So the credit card, while it provides a credit limit, our
maximum credit limit in our portfolio is something like 30 or
40 thousand dollars. It's very small. So the credit portion of
that vehicle is really a small piece of what they are using the
card for. They are using it for transactions.
And I think, as the Committee's information research
showed, about 60 or 70 percent of the small business credit
cards get paid off every cycle. And so it becomes a vehicle for
them.
We do sit down. And in our situation, we do provide term
loans, vehicle loans, lines of credit of 100,000. And many of
the clients that we have start with the credit card. And then
we develop relationships with them for these lower-cost capital
situations. And I would assume the community bank situation
would be the same, but I will let Mr. Rosacker.
So we do do the traditional financing for our small
businesses. The credit card becomes a small important piece,
but it is part of the whole puzzle for the process.
Mr. Rosacker. I will address the same question, maybe
coming at it from a little bit different angle. But I do agree
that on the credit card side, 80 percent of our portfolio pays
off every month. So it is an interest-free loan.
On the other side, on the traditional products, one problem
arises out of the fact of how the regulatory agencies look at
market segments. When one market segment goes bad, the entire
country is bad.
So you get a knee-jerk reaction many times that the banker
says, ``Wait a minute. I am not going to go down that road
anymore because of the regulatory issues that the entire world
has gone sour in a certain market segment.'' And that's not
true. It is far different in California than it is in Virginia
and Minnesota as it is in Texas.
But also banks would like to use or have more access to the
SBA. And the SBA, the Small Business Administration, does not
make it real easy for banks to get access to capital and
funding and guarantees of loans. The fees have gone up
dramatically. So a lot of bankers can't sell that. And the red
tape and the bureaucracy are terrible.
So if there were a better streamlined method to use the
SBA, the community banks would certainly use that route, which
is a traditional route to go. But that is one area that needs
to be addressed because it is a real cumbersome thing to do.
There are many small community banks that will not even--
there's nobody even in the bank that knows anything about SBA.
Mr. Gonzalez. Thank you very much, Madam Chair, for giving
me the additional time.
Chairwoman Velazquez. Mr. Akin, do you have any question at
this point?
Mr. Akin. No, I don't have a question at the moment.
Chairwoman Velazquez. Thank you. Thank you,
Mr. Johnson?
Mr. Johnson. Thank you, Madam Chair.
Mr. Spearman and Mr. Rosacker, what percentage of your
small business customers using credit cards for business
purposes pay their credit card balances in full each month ?
Mr. Spearman. The percentage? About 70 percent.
Mr. Johnson. At your bank?
Mr. Spearman. At my--
Mr. Johnson. At your credit union?
Mr. Spearman. Yes.
Mr. Johnson. And how about you, Mr. Rosacker?
Mr. Rosacker. As I said, about 80 percent.
Mr. Johnson. Eighty percent? In 2005, Congress passed a
bill that made filing for bankruptcy more difficult and more
expensive. The credit card companies strongly supported this
legislation because they claimed that borrowers were being
reckless with their credit and then filing bankruptcy to avoid
paying their debts. These companies argued that credit card
fees would decrease when bankruptcies decreased because
individuals would not be able to avoid paying their debts by
filing of Chapter 13. As a result, there would be less risk to
the credit card companies in interest rates and fees would
decline.
This has not happened, however. Bankruptcies have fallen
precipitously by 62 percent between 2004 and 2006, but credit
card rates have not.
Given this seeming disconnect, why is it necessarily the
case that regulating this increasingly consolidated industry
would increase credit card fees? And this is for anyone on the
panel that may want to respond.
Mr. Rosacker. Well, I will take a stab at it from the
standpoint of we are talking about small business here and
individuals are significantly different. In the small business
world, the use of the credit card, again because 80 percent of
ours pay off, they don't pay any interest. And our fees are
traditionally well below the market value.
Again, they are our neighbor. They are our friends, not
that you are giving them anything preferential, but that is
just the way the community bank is.
We operate on a one to two to two and a half percent
margin, much smaller margin than the large credit card issuers.
Again, it's a service that we offer, but it isn't our profit-
making service.
Mr. Spearman. Yes. I will try to answer that as well. We do
I think recognize a number of studies that have been done on
the credit card industry regarding credit card rates and the
credit union industry as being one of, if not the, lowest. I
think the average rate credit unions charge nationally is
around 11 percent.
So we have always been, I guess, the low-cost provider. We
are maybe underwriting the credit cards a little more carefully
in the beginning. Yes, bankruptcies have subsided a little bit,
but now with economic situations and pressures, we have seen
the blip up. But we are very, very competitive with rates. We
don't charge those fees, and we provide a very competitive
product.
Now, to exhibit the result of this, our credit card
portfolio has actually grown over the last five years, in spite
of the competition that everyone receives in their mail every
day. Our portfolio--and I think people have read our fine print
and have not found any surprises in our fine print. And that is
why our portfolio has grown.
So we offer, we think, a very, very competitive product and
a fair product for our members.
Mr. Johnson. All right. Have any of you experienced or seen
predatory credit card lending to small businesses? And if so,
what form has it taken? And if not, can you explain why not and
if you anticipate predatory lending becoming a problem for
small businesses in the near future?
Mr. Rosacker. I don't think on the small business side the
community banks have--they're not into that. I mean, it would
not be to their best interest to have any hidden things in
their agreements and be in the piranha and predatory mode
because of the other relationships that they want to build.
And I would think, Bill, you would be the same way.
Mr. Spearman. Yes. We still actively engage in the credit
card programs for small business. We offer a very competitive
rate. I think right now the actual rate for a business account
is 11 percent, which is I think an extremely fair rate.
Mr. Johnson. Well, neither one of you would argue that
predatory lending in the credit card industry is nonexistent?
Mr. Spearman. I would agree. There is predatory lending out
there. We can only speak for the industries that we represent.
Mr. Johnson. How extensive is it, do you think?
Mr. Spearman. I don't know if I could really answer that
from our perspective. I don't have the data to be able to
identify that, but I have read and understand that there are
some issues out there in that regard. But I can't speak to our
industry in that regard.
Mr. Johnson. Dr. Lahm, do you want to jump in?
Dr. Lahm. Yes, sir. I don't know what we want to call
predatory lending in terms of a definition, but if someone is
late, they get a late fee. That is the least of their problems,
whatever it may be, $35. They tend to be tiered based on
account balances held. But when a revolver is late and when
they incur a late fee, that is just the beginning. The next
thing is 30-something plus interest.
I don't know what rate we are going to call legalized loan-
sharking, but I think we are certainly pushing it when we get
into 30-something plus interest. Maybe we'll just call it 40.
When they get to 40, we'll call it official legalized loan-
sharking.
But 35 percent, as I had read in my earlier testimony,
quoting a government report, 35 percent of account holders were
charged late fees in 2005. So there's a tremendous number of
big banks, in particular, accounts that are suffering through
these sorts of practices.
Mr. Johnson. Thank you.
Mr. Gatewood. Congressman, I think that, actually, the late
fees have gone up dramatically, but the rates on the credit
cards have come down a bit. If you compare, for instance, the
rates on the credit cards have come down faster than the prime
rate over the last couple of years. And I think what they are
doing is making it up in fees.
Mr. Johnson. There has got to be a profit motive to it and
a profit--
Chairwoman Velazquez. Time has expired.
Mr. Ellsworth?
Mr. Ellsworth. Thank you, Madam Chair. A lot of the
questions that I have been asked a couple of different ways
already. I would like to ask--we just heard some testimony
mentioned of the SBA and its effectiveness.
Do any of you have any suggestion on how we could make that
in Congress more effective, one, the SBA, just your shoot-from-
the-hip reaction? What can we do in this Committee to make that
more effective for you all?
And, second, just the ones, twos, and threes of how do we
make credit cards more effective for the small business owner?
What is a good way? What can we do in this Committee and this
Congress to make the use of credit cards more?
I was very interested in the interest rate. I think Dr.
Lahm just answered my question about the interest rates because
I get a lot of calls on that but how the SBA could be more
effective.
And so you all just start wherever.
Mr. Rosacker. Since I brought it up, I will take a shot at
it. I think from the community bank standpoint, they are not
big organizations. They don't have deep staff. Their lending
people are ag or commercial-orientated.
Streamlining the process so they can get at the SBA and get
the loan application in. Get rid of the red tape and some of
the fees. Make it easier. Most community bankers now shy away
from the SBA. I don't know in our part of the country--and our
bank covers about 11 states.
We have even seen a program put on by the SBA telling us
about programs and things that they are doing. I mean, they are
not out there. They are missing in action. And I think that
would be a big help.
Streamline the process and then educate us on what you can
do and can't do and won't do. Don't forget years ago the SBA
was very active, but they have slowly drifted away. And now you
have new young loan officers that have never seen the SBA and
don't know what it's all about. That would be my response, a
knee-jerk reaction.
Mr. Ellsworth. Thank you.
Mr. Spearman. If I could comment? While I agree with Mr.
Rosacker's comment on it, we have a couple of SBA loans. Our
member business loan officer is familiar with them but,
frankly, because of the tedious nature of the process sometimes
shies away. I certainly would support an increase in SBA
lending with a streamlined process.
And I guess I would suggest that we taken action on H.R.
1849 introduced by Chairwoman Velazquez and move on that issue.
It is an important tool that we have. We received education
years ago. Programs have changed. We don't see the SBA people.
We don't have contact with them.
I think it is a valuable tool. I really do think that it is
a valuable tool. I would like to see us use it more. And I
would encourage the Committee to do whatever they could to push
that along.
Certainly we are an approved lender. And we would
certainly want to include that product in more and more
opportunities with our member businesses.
Mr. Gatewood. Congressman, I sought a small business loan
for my wife's partnership. And inquiring of banks in the
Washington area, Washington, Maryland and Virginia, close in, I
found that if the loan was going to be an SBA guaranteed loan,
then the rate would be at least 50 basis points higher because
of the cost of dealing with the SBA process. And I am quite
sure that is not what the Committee intends and it is not what
any of us as public policy interest would prefer, but I think
that is the fact.
Mr. Ellsworth. Thank you.
I don't want to start a fight with the two gentlemen from
the end, but I know Mr. Chabot brought up the curiae
legislation. Does the Community Bankers Association have a
position on curiae? I know that when I talk to bankers and
credit unions back home, you know, it seems to be a little bit
of a sticky point, to say the least.
[Laughter.]
Mr. Rosacker. Can't we all just get along?
Mr. Ellsworth. I was going to say, if you want to switch
chairs before you answer this, that is okay.
Mr. Spearman. No. That is all right. He has no sharp
objects.
[Laughter.]
Mr. Rosacker. The community bankers have always taken the
position that we oppose expansion of powers, et cetera. And
that has been our history, and that is our position today.
So yes, we would be opposed to some expansion of that as we
move forward.
Mr. Ellsworth. Don't turn the microphone off now.
[Laughter.]
Mr. Spearman. We disagree. We would argue that the
enhancements in the bill are very, very important. They include
the risk-based lending process, which I think puts us on equal
basis with all financial institutions, modest increase in the
member business lending areas, and a number of other things
that would actually help us serve under-served areas and things
of that nature.
So we strongly obviously support the bill, respect the
community bankers in what they do in their communities. And so
that is the counterpoint on that.
Chairwoman Velazquez. Time. The time expired.
Mr. Ellsworth. Thank you very much.
Chairwoman Velazquez. Mr. Sestak?
Mr. Sestak. Thanks, Madam Chairwoman.
Just a question. Mr. Gatewood, I am really taken by your
written testimony. I wasn't here for your spoken testimony. It
really speaks of kind of what America is all about. You know,
here you are. You knew by your effort, you say, that you're
going to make it. So you with prudence used probably an
abnormal but, nevertheless, an accessible form of risk, so to
speak, access to capital, and use that to have float time, as
you describe it.
I guess my question is more--I mean, I really am taken that
this is neither inherently good nor bad, credit cards using for
business. I am more taken that oversight or transparency in
education and preventing ill use of it, I am convinced of that.
But I guess my question would have to do maybe just a
little different. I am more concerned about people being less,
like Mr. Gatewood here, be more risk-averse.
Yes, a credit card use is going up, but SBA's access to
capital is going down. Health premium has gone up 70 percent.
You know, people not going to small companies are going to big
companies because they still, by and large, give health
security to some degree.
Do you see this risk-averse, independent almost, credit
card usage? Because I think I got enough from that. Do you see
any of this in people who are even coming? Is there an impact
that you are seeing as the SBA comes down, as the economy comes
down?
Yes, more go into credit cards maybe, but is there more of
a sense of a difference of this entrepreneurialship you see and
I think emblazoned in you?
And I guess that is really more of a question for the
community bankers and credit unions.
Mr. Gatewood. Well, yes. As far as risk aversion is, let me
just be quite honest here. I hear the congressmen talk about
the predatory lending. No one is a victim unless they want to
be a victim.
First of all, business people, entrepreneurs as such, have
a responsibility to function responsibly. Good business people
understand what they are getting into or they shouldn't be in
business, first of all.
So I, for one, don't have a lot of feelings for people that
recklessly use credit cards or any form of lending.
Mr. Sestak. I guess mine was more of a strategic type of
take, not so much on the credit cards, because I think I got
enough out of the testimony and the great questions that are--
Mr. Gatewood. Right.
Mr. Sestak. I am just wondering about what you see,
particularly down at that end of the table, about small
business people coming forward to invest with their time and a
bit of risk as they reach for capital to do what you did.
That's kind of what I am curious about, the state of the risk
taking, so to speak, out there in the economy.
Mr. Gatewood. I think it is dependent upon the person and
what they have and what they can afford to give up as
collateral. I had absolutely no collateral, and the banks
wouldn't talk to me. So I had to take the risks I had.
I will tell you right now coming from a minority business
community at the same time, oftentimes we're just turned out
flat basically from where we come from.
Mr. Sestak. How about the institutions? Because they all
come to you.
Mr. Rosacker. I can respond to it this way. The
entrepreneurial individual is a risk taker from the start. And
I think that is what has built this great nation. We were all
risk takers at one time.
And I think bankers, contrary to the popular belief, we are
risk takers. Community bankers are the only people that bet
their personal net worth that that entrepreneurial is going to
succeed. And their personal net worth is in the value of that
bank, their franchise value.
So they are risk takers, community bankers. But when you
look at how that risk is assessed, when you are looking at a
traditional bank business loan, the regulatory agencies look at
it differently than they do a credit card loan.
They look at a credit card loan from the consumer side. Is
the application filled out properly? Is the closure statement
sent? And are they reminded of those terms annually?
Mr. Sestak. If I might, what about the person who walks in
the door? All your years you have been involved in this, for
the two of you, have you seen less people willing to be like
him? I am more interested in the trends right now.
Mr. Rosacker. No.
Mr. Sestak. You are saying you are still seeing the same
type or the breadth, not just the individual but the breadth,
willing to take?
Mr. Rosacker. I would say so because we are all community
bankers. And in that town of 500 people, 300 people, businesses
are dying, but there is somebody else willing to take the
hardware store business on or be it the gas station fellow or
the auto body repair store, the implement dealer.
There are always people walking in. They want a certain
lifestyle of living in a community, and that is their way of
doing it: staying in the community and starting a business. No,
I don't think it has dropped off at all.
Mr. Sestak. If I could, if you don't mind, Mr. Spearman?
Mr. Spearman. Thank you, Congressman.
Yes, I would agree with Bill on that. We are in the
business of managing risk, not risk-averse. Because of the--
Mr. Sestak. I am not worried about you. I am worried about
the person coming in the door.
Mr. Spearman. Yes. And we have no problems with people
walking in the door. Simply because of the fact in our area
that IBM went away a number of years ago, many of the folks
stayed in our community and started small business.
So all the business in our community, to be frank with you,
is small business. So we have a tremendous amount of demand for
that type situation. And that's relevant, again, to the member
business lending cap. We have no scarcity of people coming in
with innovative ideas, some well-thought-out, and some very,
very successful stories, just even based on our portfolio.
Mr. Sestak. Thank you.
Chairwoman Velazquez. Time has expired.
Mr. Cuellar?
Mr. Cuellar. Thank you, Madam Chair.
I have been a small business. I was in the import/export
business. And I never used credit cards for a way to finance. I
went to a bank. But I know of friends of mine that it was so
easy for them to go to a credit card and use the credit card
for financing.
Part of the reason has been mentioned already, ``Oh, you
know, you've got to go to SBA, so much paperwork.'' They're
going to say, ``No'' for whatever reasons have been mentioned.
And it's just the process is so long. And it was a lot easier
to just go ahead and get a loan. And, of course, when they have
to pay the high interest rates and when they have to pay all
the fees, the late fees and all of that, they regretted that.
But at the moment, they needed something to be done
quickly. It's the moment because you are under all the pressure
to get this done and get some money available, get some cash
into the business.
So I guess what the Committee has been referring to is, how
do we make this--you know, because there are a lot of steps. We
know the SBA, the accessibility, and all of that, the
paperwork. I mean, what is the easiest way to get this done?
By the way, credit cards are a heck of a job at marketing.
I mean, I think they know how to market. They know how to make
it easy. And it's on the moment when you need the money. And,
like I said, I have been a small businessman. But, you know, I
never used the credit cards for the business. I use it personal
but not for the business. It is so easy to just go ahead and
get something because on the moment you need the money.
So, I mean, how do we make this? How do we make government
more or how do we work with you to become more responsive?
And I don't want to get into curiae. You guys have done
very well sharing the same mike together, but how do we get
this competition? How do we make this more flexible?
And keep in mind put yourself in the shoes of a small
business person. They need this on the moment. They are not
going to go and do all this paperwork unless if it's a longer-
term type of situation. I mean, you have got to put yourself in
the shoes of the small business person.
From anybody?
Mr. Spearman. Well, part of the thing that we didn't talk
about, we have identified our small businesses. And small
businesses use business credit cards. What we haven't talked
about are the folks that are using our personal credit cards
for the same reason. We don't know that. So this is a lot of
times--
Mr. Cuellar. And they do that.
Mr. Spearman. I know they do that.
Mr. Cuellar. And they do that.
Mr. Spearman. And the point of view of education is if they
were to come into the organization, a bank, mini bank, credit
union, discuss what their plans are, I think we could handle it
a lot better.
But some of these decisions are made independently by the
individual. And we have no idea. Perhaps even some home equity
loans have been done in this regard. We have no idea because
they have never come in to talk to us.
Mr. Gatewood. And if I might add, sir, when I started my
business, I had, I would say, maybe 13-14 credit cards.
Sometimes I just paid the interest because I needed that lead
time to become successful. I knew I could make it happen.
And, in all due respects, you indicate you went to the
banks. Well, many of us don't have the capacity to do that. I
came out of the Marine Corps, 21 years. I never had a bank
account. I was overseas for 15 years of my 21-year Marine Corps
career. I never had a credit card. I was unknown.
Many of us who come from communities throughout the United
States never had bank accounts. Our families never had money. I
mean, I grew up on surplus food in the projects in upstate New
York, you know? So nobody would look at me.
The only way, the only way possible I was able to take this
idea I had and move forward with it was to use credit cards.
But I used them responsibly.
I knew when my payables were coming in. And I knew that I
would succeed over time. The banks would not let me in the
door.
Mr. Cuellar. Right.
Mr. Gatewood. They would not talk to me.
Mr. Cuellar. And you are hitting the point that I want to
emphasize. As a former small business person, the import/export
business and having a lot of folks on the border, you know,
going to the bank, you know, bank, credit union, whatever it
might have been, it was a lot easier just on the moment to move
it, to go with a credit card.
I didn't do that, but, again, you put yourself in their
shoes. So what do we do? And I guess it is more to you all. I
mean, is there anything that can be as flexible as a credit
card and not be the credit card company out there, but--
Mr. Rosacker. I suppose we could develop that at the SBA or
something. I think, like I said earlier, it is the streamlining
of the application process and the reams of paper that go along
with it and al of the disclosures and everything else that have
to be made, not that that is bad unto itself.
But, again, it is part of this whole regulatory burden. And
if you could shift some of this, make it streamlined, and move
forward with it, you know, make it a low-doc loan of some type,
yes, more banks would use it. But it is not an easy process to
go through today.
And I can only say streamline. And I don't have any
particular examples of how I would recommend doing it, but that
is it.
Mr. Walker. Congressman, I think that is why the home
equity lines have become so popular, that essentially what you
have is a line of credit. And when you want to use it, you
write a check.
The disadvantage, of course, to the institution is that it
is an off-balance sheet liability. And they really have no
control. If I have a line of credit of $400,000 and I have
drawn down nothing, tomorrow the bank could have a $400,000
loan outstanding to me without me even telling them they have
it.
Mr. Gatewood. If I might before--because I don't know what
time we are going to finish, Madam Chairwoman. So I am going to
take this opportunity, Madam Chairwoman and Mr. Chabot, Ranking
Member, to thank this Committee, particularly under your
leadership, ma'am, for what you are doing for Service-disabled
veterans and veteran-owned small businesses.
We need your help. We appreciate your help. And it is not
only our veterans but our women in business and our minority-
owned business. So I want to thank you for all of your
initiative and leadership.
Chairwoman Velazquez. Thank you.
Dr. Lahm, do you want to answer?
Dr. Lahm. Thank you. I would like to insert something. What
I have to say will be a little bit fuzzy, but I think it should
be a point that should be considered. Particularly the
bootstrapper, particularly the students that I work with, one
of the biggest problems is they don't have know-how.
You had an import/export business. I recently heard someone
who has expertise in that area addressing some study that he
had done, but basically 65 percent of all small businesses
wouldn't know where to turn to. They wouldn't have a clue where
to start should they begin pursuing an import/export
opportunity, which, of course, is a huge opportunity.
The point that I want to raise is that know-how is so
critical. I know the focus of today's meeting is capital
itself, but if we have know-how, we don't necessarily need
quite as much capital. And that is one of the biggest problems,
one of the biggest roles that the SBA could perhaps play. And
this goes to one of the earlier questions asked at the end.
Students don't have know-how. They have all of these grand
schemes. But they don't know how to actually act upon it. So if
you want to make the capital more efficient, make the people
more efficient through their knowledge enhancement.
Mr. Cuellar. Thank you. Thank you, Madam Chair.
Chairwoman Velazquez. SBA has a network of small business
development centers throughout the nation. And some of them
partner with higher education institutions. The problem is that
the funding for those has been cut in the last six years.
The same is true with the fact that the cost of guaranteed
loans has increased in the last six years at a time when there
is a credit crunch.
I understand, Mr. Gonzalez, you have more questions.
Mr. Gonzalez. Yes, Madam Chair. Just a couple of things. I
think it has been so enlightening. And I surely want to pick up
on something quickly. I think there has been by both the credit
unions and the independent community bankers--and I call
independent community bankers--to me they are one and the
same--which represent, really, the old way of doing business,
which I so appreciate because you still maintain relationships
with the customers.
But I think those remarks that maybe as great as 70 percent
or some number of credit card holders actually pay their
accounts on time or maybe in full. I know Mr. Gatewood--in
full?--which then means that the other 30 percent have to be
subsidizing that service, which then, in turn, means that you
have to build in those penalties, those fees, and those
interest rates. And I think it is undeniable.
And I am not casting blame on you two particular lenders on
it because I think, actually, where the abuses truly are and
taking advantage of the consumer lies elsewhere.
I think we set up ourselves a system where, yes, the
prudent and the responsible, but even those that are prudent
and responsible sometimes because of situations, circumstances
beyond their control cannot make that payment, cannot pay it in
full. And there are consequences.
The interest that they are paying on that balance far
exceeds what probably would be paid in a conventional loan
instrument. I think that is undeniable. And I think we have to
face this.
If it is, in fact, free money for 30 days or whatever it
is, like my American Express account, I have got to pay it at
the end of the month. And it does really instill discipline in
me, as opposed to, let's say, my Visa or whatever it is
account, which I don't pay fully at the end of the month.
So I understand it, but the problem that we have--and now
this leads me into the last question, which is going to be
posed to Mr. Walker and Dr. Lahm. And maybe it is just
something I have struggled with and I don't know if Mr. Chabot
and the Chairwoman--I don't think that Congressman Cuellar was
here.
But a couple of years ago or maybe more than a couple of
years ago, we voted on a bill that made it impossible to
discharge a consumer's credit card debt. We thought at that
time that was a good and prudent thing to do. We weren't going
to reward irresponsibility and so on.
I will tell you that part of that debate did entertain that
the lenders, the issuers, were going to do something else in
return. We were going to look at interest rates. We were going
to look at penalties. We were going to look at the fees. We
were going to look at how you score. We were going to look at
how you score credit and so on.
We were also going to look at practices such as you may be
paying your credit cards on time on two accounts, fall behind
on another one, and it impacted those other two accounts. We
were going to try to establish that you should set and
ascertain one's creditworthiness based on that relationship one
on one and not necessarily with a third party.
I will tell you now that never came to fruition. And I am
going to ask Mr. Walker and Dr. Lahm, did Congress make a
mistake to make it so incredibly difficult for the consumer to
discharge credit card debt, which impacts small businesses?
Mr. Walker. I am not sure, Congressman. I have studied that
history a bit, but I don't really feel like I can contribute to
that discussion.
Mr. Chabot. Would the gentleman yield?
Mr. Gonzalez. Of course.
Mr. Chabot. Thank you.
I just want to make sure I understand what you are talking
about. Are you talking about the bankruptcy reform bill when
you say it made it impossible to discharge debt on credit
cards?
Mr. Gonzalez. The way we set it up makes it nearly
impossible to completely discharge.
Mr. Chabot. Okay. I guess when you say, ``nearly
impossible,'' it depends on what you are really talking about
because the bankruptcy reform, what it did is that you can
discharge, just as you could before, except you have to go into
Chapter 13. Most people qualify, you know, depending on the
means test, how much your income levels are, et cetera. A whole
lot of people can still fully discharge debt, including credit
card debt.
Now, if you have a job and you have certain income levels,
then you have to go into Chapter 13, which is like a wage-
earner test. The idea is that, rather than discharging all of
the debt, if you had the ability to pay off some of the debt,
that made more sense to everybody. So that is why a lot of--
Mr. Gonzalez. But, see, you know, reclaiming my time, it is
unquestionable, indisputable that we made it so incredibly
difficult for the average consumer, businessman, businesswoman,
to take advantage of bankruptcy laws that were there, actually,
to take care of these circumstances.
There is no doubt. And if you talk, even to your bankruptcy
trustees, to the judges, and to the practitioners on both
sides, the creditor side as well as the bankruptcy applicant,
we have totally changed that whole universe. I think there is
no doubt about that.
So, Dr. Lahm, do you have an opinion on where we are in
that state of the law?
Dr. Lahm. Thank you. I yielded to my colleague to let him
go first, but I do have plenty to say. I am not sure what the
timer is.
Let me just start by saying I am in favor of responsible
borrowing and lending. And I think across this table and
probably in this room at large, we are all in favor of people
doing the right thing.
The problem is that the bigger banks, in particular, are
definitely plaything a game. I characterized their "or we may
change their terms for no reason" as whimsical. I think that is
a very fair statement.
A lot of the bankruptcies if they are frivolous, well, you
know, maybe they shouldn't be, those who are filing should not
be able to so easily discharge, but, on the other hand--and
payback is kind of interesting.
I personally have had dealings with the likes of MBNA. And
I remember very vividly a few years ago a discussion in which I
said, ``But we didn't do anything wrong. Go pick on someone who
has done something wrong.''
This was a discussion about an adverse decision that had
been made with respect to my wife and myself personally when we
had missed no payments. And the little quip, which I am happy
to repeat here today, was I said ``Why don't you go pick on
someone who has done something wrong?''
The quip was ``Oh, we pick on them, too!'' Well, I hope
that is entered into this record.
Furthermore, it doesn't take much cruising of the Internet
to find credit card company horror stories. Someone was on an
automated payment system. The bank failed to deliver on time,
no fault of their own. They were late.
Years ago anyone reasonable would have taken a letter from
the bank saying, ``Sorry. We messed up this payment. Please
know, credit card company, it was our fault. Let things go on
as normal.'' And someone would have accepted that.
They don't do that now. They are waiting for someone to be
late. They want someone to be late. And they will just cream
someone if they are late--one hour late. I have got a cite tip
for that, which is in a paper.
Chairwoman Velazquez. The time has expired.
Mr. Gonzalez. Thank you very much. And thank you for your
indulgence.
Chairwoman Velazquez. Mr. Chabot, do you have any
questions?
Mr. Chabot. Yes. I don't want to get into a huge discussion
here about the bankruptcy law, but it was basically kicked
around for seven or eight years in the Congress before it
finally passed years ago.
But the whole idea of the changes that did pass with
considerable support on both sides, although it was mostly
Republicans, but there were a fair number of Democrats who
supported the change as well, the idea was we had some folks
that were literally filing for bankruptcy on a fairly regular
basis, every seven years. There were just a lot of abuses in
the system.
And that was causing the average household to have an extra
cost of, I believe it was, 5-6 hundred dollars a year or
something. Just stuff costs more because people weren't paying
for what they bought. They were just filing bankruptcy. So we
were trying to do away with the abuses.
And Henry Hyde was instrumental in this. He was the Chair
of the Judiciary Committee, I believe, when this passed. And
what Henry was trying to do was a lot of folks who clearly--it
was a medical problem they had, loss of job. There were a lot
of people who really needed bankruptcy. It was still there.
They can still file and have all their debts discharged and get
a fresh start.
But for those folks that do have a reasonable income--and
this is written into the law--reasonable income and able to pay
at least a portion of their debts, why not have them over a
period of a number of years try to pay off some of that debt so
that that debt isn't just hoisted on the rest of the consumer
public? That was the idea of the bankruptcy reform.
So I just didn't want to leave unchallenged the fact that
all debt, that credit card debt, is non-dischargeable now. That
is just not the case. Some of the credit card debt is clearly
dischargeable by those folks at lower income levels. Folks that
have income and can pay off, some of that will be paid off. So
I just wanted to put that out there.
I yield back.
Chairwoman Velazquez. Well, again I want to thank all the
witnesses for participating today and for offering your
insights on this, the issues at hand. And I ask unanimous
consent that members will have five days to submit a statement
and supporting materials for the record. Without objection, so
ordered.
This hearing is now adjourned.
[Whereupon, at 11:46 a.m., the Committee was adjourned.]
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