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




                THE CREDIT CARDHOLDERS' BILL OF RIGHTS:
                PROVIDING NEW PROTECTIONS FOR CONSUMERS

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 13, 2008

                               __________

       Printed for the use of the Committee on Financial Services
                          Serial No. 110-100











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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

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

                CAROLYN B. MALONEY, New York, Chairwoman

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
































                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 13, 2008...............................................     1
Appendix:
    March 13, 2008...............................................    71

                               WITNESSES
                        Thursday, March 13, 2008

Ausubel, Lawrence M., Professor, Department of Economics, 
  University of Maryland.........................................    24
Baer, Gregory, Deputy General Counsel, Regulatory and Public 
  Policy, Bank of America........................................    18
Finneran, John G., Jr., General Counsel, Capital One.............    22
Franke, Carter, Marketing Executive, JPMorgan Chase..............    25
Ireland, Oliver I., Partner, Morrison & Foerster.................    27
Levitin, Adam J., Associate Professor of Law, Georgetown 
  University Law Center..........................................    20
Porter, Katherine M., Associate Professor, The University of Iowa 
  College of Law.................................................    29
Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard Law 
  School.........................................................    16

                                APPENDIX

Prepared statements:
    Brown-Waite, Hon. Ginny......................................    72
    Castle, Hon. Michael N.......................................    74
    Ausubel, Lawrence M..........................................    76
    Baer, Gregory................................................    91
    Finneran, John G., Jr........................................   101
    Franke, Carter...............................................   105
    Ireland, Oliver I............................................   108
    Levitin, Adam J..............................................   117
    Porter, Katherine M..........................................   140
    Warren, Elizabeth............................................   153

              Additional Material Submitted for the Record

Maloney, Hon. Carolyn:
    Letter from the National Small Business Association, dated 
      March 11, 2008.............................................   164
Campbell, Hon. John:
    GAO Report entitled, ``Credit Cards, Increased Complexity in 
      Rates and Fees Heightens Need for More Effective 
      Disclosures to Consumers,'' dated September 2006...........   165
Castle, Hon. Michael N.:
    ``Table 4: Revenues and Profits of Credit Card Issuers in 
      Card Industry Directory per $100 of Credit Card Assets''...   279
Price, Hon. Tom:
    Wall Street Journal article entitled, ``Freedom Means 
      Responsibility,'' by former Senator George McGovern, dated 
      March 7, 2008..............................................   280
    ``Credit Controls: 1980''....................................   282
Levitin, Adam J.:
    Slide show presented at hearing..............................   313







 
                      THE CREDIT CARDHOLDERS' BILL
                        OF RIGHTS: PROVIDING NEW
                       PROTECTIONS FOR CONSUMERS

                              ----------                              


                        Thursday, March 13, 2008

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Carolyn B. 
Maloney [chairwoman of the subcommittee] presiding.
    Members present: Representatives Maloney, Watt, Ackerman, 
Sherman, Moore of Kansas, Waters, Green, Clay, Scott, Cleaver, 
Bean, Davis of Tennessee, Hodes, Ellison, Klein, Perlmutter; 
Biggert, Price, Castle, Capito, Feeney, Hensarling, Garrett, 
Neugebauer, Campbell, McCarthy of California, and Heller.
    Ex officio: Representatives Frank and Bachus.
    Also present: Representative Udall.
    Chairwoman Maloney. I call this hearing to order, and I 
thank everyone for being here, particularly my ranking member, 
Judy Biggert.
    I would first like to ask unanimous consent that Mark 
Udall, who is not a member of this committee, be allowed to sit 
on the panel and be allowed to ask some questions. Is there any 
objection?
    Hearing none, it is so ordered.
    My colleague, Ms. Biggert, has requested 15 minutes per 
side, and that is fine with our side. And I am pleased that our 
chairman, Barney Frank, is with us.
    Before we start, I want to inform the committee that there 
have been fairness concerns raised about having consumers 
testify this morning without a waiver that allowed their credit 
card issuers to respond publicly. In the interest of having the 
fairest hearing possible, I have decided to postpone the first 
panel to a future date.
    We do have our witnesses here, and they are ready to 
testify. They are seated here. They have traveled from across 
the country to be here. However, in order to have a discussion 
that entirely focuses on the substance and not on process, we 
are doing everything we can to accommodate any concerns that 
have been raised. It is my hope that between now and a future 
date, we can get consumer witnesses here so that the committee 
can hear real world examples of how this credit card bill would 
help consumers.
    First of all, I would like--
    The Chairman. Would the gentlewoman yield?
    Chairwoman Maloney. Yes, I would.
    The Chairman. I appreciate the chairwoman of the 
subcommittee making that accommodation. I just want to say, as 
Chair of the committee, it has been and will be our policy that 
no testimony will be given in any context in which there cannot 
be a full and free response. So I appreciate the chairwoman 
accommodating us on that, and as we go forward, that will be 
the context in which it happens.
    Some aspects of this process are new to us, new to a lot of 
us. We don't always get everything--you don't always see all 
the implications the first time. There has been no bad faith 
involved, in my judgment, on anybody's part. And this will give 
us time to comply with what I would assume was a universally 
accepted principle that all debate should be conducted in fully 
fair terms.
    I thank the gentlewoman.
    Chairwoman Maloney. First of all, I am delighted to welcome 
our witnesses to the first of two legislative hearings on H.R. 
5244, the Credit Cardholders' Bill of Rights, which I 
introduced with Chairman Frank last month and which we are glad 
to say has over 82 cosponsors to date, including many members 
of this committee.
    Credit cards may represent the single most successful 
financial product introduced in our country in the last 50 
years. They have given consumers unprecedented convenience and 
flexibility in both making purchases and in managing their 
personal finances.
    Over 75 percent of the adult population in America have 
credit cards. Credit cards have become a necessity of daily 
life without which it is almost impossible to travel, make non-
cash purchases, or do daily business.
    But with that great success, with that huge growth, with 
that necessity, comes shared responsibility. The credit card 
industry has been clear about the responsibility imposed upon 
consumers: Make your minimum payments on time and stay under 
your limit. But what about the reciprocal responsibility of 
card companies? What about the responsibility to stick to the 
terms of the deal that the customer agreed to?
    Cardholders who pay at least the minimum payment on time 
every month and don't go over their limit expect that, in 
return, they can count on the card companies not imposing rate 
hikes or penalty fees. They don't expect the rate on money they 
already borrowed to go up dramatically, with no notice. They 
don't expect their monthly payments to double and triple, 
sending them further and further into debt.
    But almost every card agreement allows the card company to 
do just that. And a cardholder who makes one late payment, even 
if the reason has been that they were at the hospital, will 
soon find that their previous history of on-time payment for 
years and years doesn't make any difference, that one late 
payment can increase their rates, in some cases substantially.
    Even cardholders who are financially responsible and do 
their very best to meet their obligations fall victim to rate 
hikes that are unexplained, totally out of proportion, 
irreversible, inescapable, and which drive them deeper and 
deeper into debt.
    Recently Chairman Bernanke testified to this committee that 
the Fed was going to use its unfair and deceptive practices 
authority to regulate the very same abuses my bill goes after 
because, he said, their authority to regulate disclosure was 
not enough.
    Ranking Member Biggert asked him, and I quote, ``What would 
consumers need to know to make informed decisions?'' And he 
responded, and I quote, ``They need to know the interest rate 
and how it varies over time and what that means to them in 
terms of payments.'' Well, how can a responsible consumer know 
their interest rate and what their payments will be if the 
interest rate changes for any time, any reason, and is applied 
to their existing balances?
    This bill aims to bring back some balance to the playing 
field. It attempts to put some of the responsibility for fair 
dealing back on the card companies and give cardholders the 
tools they need to control their finances and make sure they 
can pay back their debts responsibly.
    It puts an end to any time/any reason repricing, stops 
issuers from raising rates on existing balances of cardholders 
who make their payments on time, and gives all cardholders 
faced with any rate increase the ability to stop borrowing more 
and pay off their loan on the terms that they agreed to.
    We seem to have forgotten that a credit card agreement is 
just that, an agreement. When the terms change--and the 
interest rate is the most important term for most customers--
cardholders should have a chance to say no to the new deal and 
pay off the loan they have at the terms that they originally 
agreed to.
    USA Today called this, and I quote, `` a sensible bill and 
much-needed reform.'' Unlike other proposals before Congress, 
our bill does not set price controls. It does not set rate caps 
or limit the size of fees. I believe that our bill is a much-
needed correction to a market that has gotten wildly out of 
balance.
    I have always believed that responsible access to credit is 
critical to our economy, and that access to appropriate credit 
should be as broad as possible consistent with the safety and 
soundness of the financial system. I believe in free market 
solutions, but the free market only works when consumers have 
the information they need and the ability to make informed 
choices.
    I think our bill will help cardholders and issuers exercise 
their shared responsibility and promote a sounder economy. And 
I look forward to the testimony of our witnesses.
    I now recognize my good friend, Ranking Member Judy 
Biggert.
    Mrs. Biggert. Thank you. Thank you, Madam Chairwoman. I 
made a mistake, and I would ask unanimous consent to increase 
the time to 20 minutes per side.
    Chairwoman Maloney. Whatever the ranking member wants.
    Mrs. Biggert. Thank you.
    Chairwoman Maloney. And I yield as much time as she may 
consume.
    Mrs. Biggert. Thank you.
    The Chairman. If the chairwoman would yield, don't be 
setting any bad precedents here with that.
    [Laughter]
    Chairwoman Maloney. No, sir. Okay, Mr. Chairman.
    Mrs. Biggert. Thank you, Madam Chairwoman, for holding this 
hearing on your bill today. Despite our differences on the 
specifics of the bill, I have no doubt that the chairwoman 
herself believes that she has the best interests of the 
consumers at heart, and I believe that we all do. The borrowers 
need transparency. They need to know what the terms of their 
contract are simply, clearly, and reliably. And on this I agree 
with Chairwoman Maloney.
    There are a number of us in the room today who remember 
when there was only one credit card, the Diners Club card in 
the 1950's, a rare commodity for a few lucky individuals. A 
couple hundred customers used the cards at restaurants that 
were part of the card program.
    Within a short time, the card evolved into a travel and 
entertainment card, and was issued only to high-income, highly 
creditworthy individuals who could immediately pay off their 
entire bill balance upon receipt of the card. Let's not forget 
that not much more than 2 decades ago, interest rates were 
capped by State regulation. Card issuers charged borrowers a 
sizeable annual fee. And if you didn't pay off the entire 
balance each month, you faced a 20 percent fixed income rate.
    No matter what your income or creditworthiness, it is hard 
for young people today to believe it, but that is what credit 
cards were like in the early days, prizes that were won by 
people who, when you think about it, didn't especially need 
them.
    We don't want to go back to those days, so fast forward to 
today. Innovation, technology, competition, and reduced 
regulatory restrictions on interest rates have meant that 
Americans of all income levels, ages, and walks of life have 
access to credit cards and much, much cheaper credit cards. 
According to the Federal Reserve data, about three-quarters of 
American families have at least one credit card.
    Would everyone in this room with a credit card please raise 
their hand?
    [Show of hands]
    Mrs. Biggert. It is obviously a popular financial tool. But 
my goal is to ensure that everyone who wants and likes their 
credit card is not hurt today in this weakened economy or 
tomorrow in an improved economy by the problems of a few 
customers or abuses of a few issuers. We must first do no harm.
    That having been said, do I believe that each and every 
cardholder is completely happy with his or her credit card? Of 
course not, no more than every cable TV subscriber or utility 
company customer is completely happy with their service.
    But unlike customers of those companies, credit card 
borrowers have thousands of cards to choose from. They have 
greater access to credit, access to cheaper credit, and access 
to financial education and counseling on financial matters.
    The success story of credit cards, I think, is often 
overlooked. Credit card loans can be used for emergencies, 
holiday shopping, paying bills, taking vacations, buying books 
for school, and starting a business. You can even buy a cup of 
coffee at Starbucks with a credit card.
    Unfortunately, the credit card success story does not bring 
us here today. What brings us here today are the problems that 
some borrowers may have with their credit card companies and 
some practices that should be changed.
    As for the facts, I am pleased that Congress tasked the 
experts at the Federal Reserve under the Truth in Lending Act 
and Federal Trade Commission Act with the job of gathering 
empirical evidence on all consumers and credit cards.
    Two weeks ago, Federal Reserve Chairman Bernanke testified 
before this committee that the Fed is writing regulations to 
update disclosures and notices as well as rules to address 
unfair and deceptive practices. He anticipates a final release 
of both sets of rules later this year.
    I am inclined to reserve judgment on the bill, H.R. 5244, 
until we hear the results of what we in Congress authorized the 
Fed to undertake, its revision of Regulation Z, which is the 
culmination of 4 years of intensive expert review utilizing 
consumer focus groups and other sound methodology as opposed to 
anecdotal evidence.
    Do consumers need improved and more helpful disclosures? Do 
they need information so that they have the tools to make more 
informed decisions about choosing a credit card, about their 
card, or borrowing altogether? Finally, what is the best way to 
address these matters? Is it through education, legislation, 
regulation, self-regulation--in other words, letting the 
marketplace and competition work for the consumer--or is 
updating disclosures and cracking down on unfair and deceptive 
practices the answer?
    I must say that after reviewing data studies and testimony, 
at this time it appears that regulation and education should at 
least be among the first steps. Should Congress step in on that 
basis and preempt the Fed? I'm not sure that is the answer.
    But with that, I look forward to hearing from today's 
witnesses and I yield back.
    Chairwoman Maloney. The Chair recognizes Chairman Frank--
and thanks him for his leadership on this issue and so many 
others--for as much time as he may consume.
    The Chairman. I thank the chairwoman. I admire the energy 
she has put into this.
    I would say to my friends in the industry, it is a busy 
morning, and if you want to know whether this is a serious 
legislative effort, look at the membership. I am the chairman, 
so I am always here when there is a full committee hearing.
    Sometimes I am by myself; sometimes there are only one or 
two people; sometimes I have all the Republicans and not many 
Democrats; sometimes Democrats and not Republicans. Frankly, 
even by ethnicity, the turnout may vary depending on the issue. 
You have the most broadly representative membership of this 
committee. This is an issue that counts.
    For better or worse, credit card practices have engaged the 
interest of America's middle class. And this is an issue that 
has an impact with them. They are more capable of voicing their 
opinions than some other sectors of our economy, so you should 
know this is a serious issue.
    It is also manifested, and the gentlewoman from Illinois 
mentioned regulation. I am interested to note that two of the 
financial regulators are in fact engaged in this now. When 
Chairman Bernanke testified before us a few weeks ago at the 
Humphrey-Hawkins hearing, he said something I hadn't heard in 
my 28 years in this body, a Chairman of the Federal Reserve 
Board uttering the words, ``consumer protection.'' It had not 
happened since 1981. I have been at every one of the meetings.
    And he is, as you know, in the process of talking about 
regulations with regard to credit cards that go beyond 
disclosure, that go beyond the Truth in Lending Act into 
substance.
    Similarly, I have been very pleased to see Mr. Reich, the 
Director of the OTS, going forward with promulgating a code of 
unfair and deceptive practices and including some very specific 
things here. And part of the reason for that is--and, you know, 
you get sometimes the consequences of what you wish for.
    Many of the bank issuers of credit cards were successful in 
persuading the Comptroller of the Currency and the Office of 
Thrift Supervision to preempt a great number of State laws so 
that in many cases there are--well, not in many cases--there 
are virtually no State consumer protection laws that would be 
bank-specific that apply to the credit card issuers who are 
national banks.
    I had differences with that on its own. But it was clearly 
a problem because it left a vacuum. And the vacuum in 
regulation, we ought to be clear: Nature may abhor a vacuum, 
but the people who used to be regulated are kind of fond of it.
    We now have the need for the Federal regulators to step in 
and fill part of the vacuum that they created. Both the OTS and 
the Federal Reserve are doing this, and the Federal Reserve's 
authority covers all the other bank authorities.
    Finally, I would say that I believe the gentlewoman's bill, 
which I am glad to cosponsor, makes some very important 
distinctions. It does not set rates. We are not in the rate-
setting business. There are people here who would set rates, 
and I think, frankly, there is a lot of support in this body 
and in the other body for setting rates.
    We are not setting rates. We are saying, however, and I 
think this is one of the guidance principles, that 
retroactivity is a bad idea. My friends in the business 
community have generally been very staunch in pointing out the 
unfairness of retroactivity.
    I urge them to realize that this is a principle that covers 
both sides of this equation. And retroactive impositions on 
borrowers, that is, things affecting balances already incurred, 
violate the principle of retroactivity. We need to deal with 
that.
    I would also advise them--I am not sure, you are a 
consultant, and given the ethics rules, I never will be because 
it is too much trouble later on--but if I were in the business, 
I would be cognizant of the unhappiness.
    I mean, there are people in America who are convinced that 
you have a personal algorithm for each of us that lets you know 
when to send the bill so we are least likely to be able to pay 
it on time. You know when we are sleeping and you know when we 
are awake and you know when we are on vacation and you know 
when there may not be somebody checking the mailbox. I know it 
is not true, but if I were in that position, I would be unhappy 
if people thought that.
    So I urge you to cooperate with us. We are not setting 
rates. We are not going to alter your ability, I hope, if this 
bill goes through to do things going forward with a lot of 
notice. But there is a good deal of unhappiness there.
    And the final thing I would say is this: Obviously, the 
competitive model is an important one. This is a committee that 
I think on both sides has shown its support for the free market 
system. But given the number of credit card issuers, we don't 
have an equal competitive situation. You cannot rely here 
wholly on the market for the kinds of things we are talking 
about. And that is why I think this legislation should go 
forward.
    Thank you, Madam Chairwoman.
    Chairwoman Maloney. Thank you.
    The Chair now yields 4 minutes to the distinguished ranking 
member of the full committee, Representative Bachus.
    Mr. Bachus. Thank you, Chairwoman Maloney, for holding this 
hearing on your legislation which would restrict certain credit 
card industry practices. Whenever our committee considers bills 
of this magnitude, legislation that has the potential to 
significantly restructure a market that has benefitted hundreds 
of millions of American consumers and businesses, Members must 
fully understand the consequences, both intended and 
inadvertent, of our actions.
    Over the past 30 years, Americans' use of credit cards to 
conduct their everyday financial transactions, as well as 
address unexpected financial emergencies, has exploded. The GAO 
has reported that Americans now hold more than 690 million 
credit cards. So I will assume, when Ms. Biggert asked people 
to raise their hand if they had a credit card and two-thirds of 
the people raised their hand, I would assume the other third 
weren't listening.
    [Laughter]
    Mr. Bachus. Because I think we all have a credit card, or 
two or three.
    The GAO also found that between 1980 and 2005, the amount 
that Americans charged to their credit cards grew from an 
estimated $69 billion per year to more than $1.8 trillion, 
quite an increase.
    While the legislation covers a wide range of industry 
practices, at its core it is an attempt to impose limitations 
on creditors' ability to offer their products according to the 
risk posed to the individual consumers. As with any government 
intervention in the free market, the bill presents a real 
danger of restricting the range of products and services that 
credit card issuers currently offer, which could result--and I 
believe will result--in cutting off credit to some and raising 
the price of credit for all.
    Consumers could see increased minimum payments, reduced 
credit limits, and less access to credit cards. And some would 
say that is good. But here in America, we let people make those 
choices, not normally the government.
    The current economic uncertainty and the banks' need to 
preserve capital in the face of significant mortgage-related 
losses has already combined to reduce the amount of credit 
available to consumers and small businesses. That is the 
complaint we hear most often, is lack of credit, lack of 
availability of credit. We hear almost no complaints of too 
much credit from consumers. No matter how well-intended, ill-
conceived legislation could make a serious credit crunch far 
worse.
    Now, we can all share stories where someone has had a 
problem with a credit card or difficulty as a result of using a 
credit card. With 690 million credit cards, there would have to 
be problems. But think a minute if we suddenly took 200 million 
of those credit cards away, or 300 million. I believe that 
would present problems and difficulties for the American people 
also.
    And that may be what we are talking about. We may be 
talking, in this bill, about limiting the number of Americans 
who will be offered credit cards and will certainly increase 
the amount. Precipitous congressional action could be 
particularly counterproductive at a time when the Federal 
banking regulators are near completion of far-reaching 
proposals on the very same issues that H.R. 5244 seeks to 
address.
    Chairwoman Maloney. The Chair grants the gentleman an 
additional minute.
    Mr. Bachus. I thank you. Two weeks ago, Chairman Bernanke 
updated the committee on the status of the Federal Reserve's 
forthcoming revisions on Regulation Z for credit card 
disclosures. Everyone agrees that disclosures regarding the 
terms and conditions of credit card products are too complex. 
The Fed's Regulation Z revisions, once finalized, will go a 
long way towards alleviating consumer confusion and helping 
credit card customers make informed choices.
    To complement its rewrite of Regulation Z, the Fed 
announced last month that it will soon exercise its authority 
on the Federal Trade Commission to write regulations to root 
out unfair and deceptive acts or practices in the credit card 
industry. These proposals from the Fed will be based on 
extensive consumer testing as well as the Fed's 40 years of 
experience.
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Bachus. I thank the chairwoman for the extra time.
    Chairwoman Maloney. Thank you.
    The Chair yields 2 minutes to Congressman Ackerman.
    Mr. Ackerman. Thank you, Madam Chairwoman, for your 
leadership on this issue.
    There is little doubt that providing consumers access to 
credit is a critically important component of our economy, 
particularly now, as our economy may have already tipped over 
into a recession. With the sputtering economy, Americans across 
the country are becoming more dependent upon their credit cards 
to pay their bills and sometimes to just put food on their 
tables.
    But with practices such as any time/any reason pricing, pay 
to pay fees, universal default, restrictions on paying off high 
balances, and I could go on and on, the consumer credit market 
seems to be unfairly weighted against credit card customers.
    Indeed, as the ramifications of relaxed underwriting 
standards and unrealistic repayment terms within the mortgage 
industry threaten millions of homeowners and our economy as a 
whole, I believe we in Congress must ask the question: Is 
practically universal access to credit under the present 
conditions and practices truly beneficial to our economy? Or, 
if we continue along the path of permitting credit card 
companies to keep pushing the bounds of sound credit practices, 
will we soon find ourselves in another credit crisis?
    It strikes me that with all the fees and stipulations 
attached, with eye-bursting fine print, credit cards are 
becoming like the carefully fine-tuned products of the tobacco 
industry. They have just enough nicotine in them to get you 
hooked, but not enough to kill you, at least not right away.
    Ensnarled by unfair and unsound credit practices, American 
consumers find themselves suffering through years of mounting 
debt, increasing interest rates, and for many, financial ruin.
    It is my contention that credit card users deserve the 
right to know, with sufficient notice, that their interest rate 
is increasing. And they deserve an explanation as to why. 
Credit card users deserve the right to decide how a bill 
payment is applied to their account if they have multiple 
outstanding balances.
    Credit card users deserve the right to pay their bills on 
time in whatever manner they may choose without being charged 
extra. And furthermore, I believe it is critically important to 
the health of our economy to grant credit card customers these 
rights as well as the others included in H.R. 5244 as soon as 
possible so that we may prevent the second--
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Ackerman. I thank the chairwoman for her leadership.
    Chairwoman Maloney. Thank you. The Chair recognizes 
Congressman Garrett for 2 minutes.
    Mr. Garrett. I thank the Chair for holding the hearing 
today, and I welcome all the witnesses and appreciate your 
coming and the testimony that we are about to hear from you.
    You know, as we move now into the 21st Century, the 
financial products that become available to us are rapidly 
changing and expanding at the same time. Credit cards, as 
others have said already, really do provide an essential 
service to millions of Americans.
    The ability to establish credit, borrow money, has 
basically become fundamental to our economy. So whether it is 
buying a new washing machine or, as I just had to do, putting a 
new transmission in your car, or maybe, as some other people 
do, use your credit cards to start a home business, literally 
start up from scratch, they allow us to finance needed goods. 
It also allows us to pay it over time, and also, through some 
of the credit card companies, to track those costs as well on a 
monthly, quarterly, or at the end of the year basis.
    Unfortunately, we have heard a number of instances in news 
stories--like in today's paper; I guess they must have known 
you all were going to be here--and some from constituents as 
well where folks feel that they have maybe been misled or just 
didn't understand what they were getting into with these cards.
    But I think there are really probably a lot more stories 
out there that are left untold that aren't in today's paper of 
how credit cards have significantly helped people through some 
of their tough times, and also helped those people who are 
trying to start a business.
    So I think we need to sit back and wait a little bit and 
hear and consider. As we push to address the concerns of some 
of the consumers who have been negatively impacted, we can't 
really overreact and wind up eliminating credit for those 
people or raising costs for the creditworthy Americans who 
really do rely on credit cards for their daily lives.
    We are in tough economic times right now. We hear talk of 
recession. We hear talk of credit tightening. So if we pass 
legislation that prevents issuers from beginning to price for 
risk, I am afraid we will either tighten the credit market on 
the riskier borrowers or drive up prices on the rest of 
Americans.
    And I would just advise this committee to do what the 
chairman of the committee has done with regard to SOX, and to 
step back where another entity, in this case the Federal 
Reserve, is taking action on it. Let's see how--
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Garrett. --they deal with it before we act 
precipitously.
    And with that, I yield back.
    Chairwoman Maloney. The Chair recognizes Congressman Moore 
for 2 minutes.
    Mr. Moore. Thank you, Chairwoman Maloney, for convening 
this hearing and for your leadership in calling attention to 
this important issue which affects millions of Americans.
    Like many of the members on this committee, I have heard 
concerns from consumers about a lack of clarity from credit 
card issuers in explaining account features, terms, and pricing 
on their accounts. I believe it is very important that we take 
the necessary steps to improve disclosures and protect 
consumers from unexpected fees or rate increases.
    I also know that our Nation is experiencing a significant 
credit crunch at this time and that credit cards remain a 
lifeline for millions of Americans who would otherwise be 
unable to pay for basic services to meet their daily needs. 
That is why I believe we must take a careful, measured approach 
in addressing this very important issue to ensure that nothing 
we do here in Congress has unintended consequences for the 
marketplace or for the consumer.
    I practiced law for 28 years before I came to Congress, and 
for 12 of those years, I served as a district attorney. In that 
time, I learned that there are at least two sides to every 
story, and sometimes many more. The best legal and policy 
decisions, I believe, are made when we have all the facts 
before we make a decision, and all the information is on the 
table.
    Again, I thank the witnesses for being here today. I look 
forward to hearing your testimony and to talking to you about 
this issue further in the future. Thank you, Madam Chairwoman.
    Chairwoman Maloney. The Chair recognizes Congressman Price 
for 3 minutes.
    Mr. Price of Georgia. I thank the Chair, and I thank you 
for holding this hearing. I want to thank the ranking member 
for her tireless work on this effort as well. I want to thank 
all the witnesses.
    I read an article last week by former Senator George 
McGovern--yes, Senator George McGovern--who wrote in the Wall 
Street Journal that, ``The real question for policymakers is 
how to protect those worthy borrowers who are struggling 
without throwing out a system that works fine for the majority 
of its users.''
    We all support more clear and transparent disclosure. There 
is no doubt about it. And I don't have any doubt that the 
legislation that we are discussing today was written with a 
desire to help borrowers who use credit cards.
    However, not allowing for pricing for risk individually 
will mean a higher cost of credit for every single American. In 
fact, not allowing pricing for risk individually I believe to 
be a form of price controls.
    The proposed bill also dictates how card companies must 
treat the payment of multiple balances at different interest 
rates. This will mean American borrowers, all borrowers, can 
say goodbye to low introductory interest rate offers and 
balance transfers.
    If this legislation were to become law, credit card issuers 
would no longer offer these products. Some of us remember when 
interest rates for credit cards were 18 to 20 percent; that was 
all you could get. Those days will return, I would suggest, if 
this legislation is adopted.
    Fortunately, we don't operate in a bubble. We can learn 
lessons from our friends in the United Kingdom, where the 
Office of Fair Trading ordered credit card providers to halve 
penalty fees by setting a maximum charge. An article in the 
Daily Telegraph then said that several companies reintroduced 
annual fees, a practice that is minimal in the United States 
due to the individually risk-based pricing.
    We can also look back to our own history. In 1980, 
President Carter imposed price controls. In 1990, an analysis 
of that by the Federal Reserve in Richmond said that we learned 
three lessons from that: One, they may not deliver the desired 
results; two, they may have unintended and unforeseen adverse 
effects; and three, polices may tempt policymakers to impose 
credit controls again despite unfortunate previous experiences 
with such policies. The translation of that is: Americans lost 
the opportunity for the credit.
    It would be wise for us to learn from our experience in 
1980. Again, as Senator McGovern pointed out so eloquently, the 
nature of freedom of choice is that some people will misuse 
their responsibility and hurt themselves in the process. We 
should do our best to educate them, but without diminishing 
choice for everyone else.
    Madam Chairwoman, I have a copy of Senator McGovern's 
complete op-ed, and I commend it for everybody's reading, and 
also ask unanimous consent that it be included in the record.
    Chairwoman Maloney. Without objection, it is so ordered.
    Mr. Price of Georgia. And I will close, finally, with the 
quote that I began with from Senator McGovern's article, and 
that was, ``The real question for policymakers is how to 
protect those worthy borrowers who are struggling without 
throwing out a system that works fine for the majority of its 
users.''
    I yield back the balance of my time.
    Chairwoman Maloney. I now recognize Congresswoman Waters 
for 2 minutes.
    Ms. Waters. Thank you, Madam Chairwoman.
    Let me start by saying that I am proud to be an original 
cosponsor of H.R. 5244, the Credit Cardholders' Bill of Rights. 
This legislation is long overdue in light of some of the 
outrageous billing practices that have spread through the 
credit card industry recently.
    Contrary to the claims of the credit card and banking 
industry, H.R. 5244 is a measured response to these practices. 
I will say, however, that you are indeed brave, Madam 
Chairwoman, for taking on these lucrative practices of such a 
powerful industry.
    As chairwoman of the Subcommittee on Housing and Community 
Opportunity, I have certainly felt their wrath in the context 
of the foreclosure crisis. I have heard many of the same ``the 
sky is falling'' arguments about why even the most modest 
regulation can drive up the price of credit unacceptably. I 
don't buy it, and I am glad you, Madam Chairwoman, don't 
either.
    Indeed, I think the practices of the credit card industry 
may even be more troubling in some ways than those in the 
subprime mortgage market. Some have referred to the subprime 
adjustable rate mortgages at the heart of the mortgage crisis 
as exploding mortgages because of the substantial rate resets 
that occur after 2 or 3 years. But at least it was apparent to 
a borrower that the rate would increase even if the loan 
originator failed to do due diligence on its long-term 
affordability absent significant appreciation in the price of 
the house in question.
    By contrast, I think we could label credit card agreements 
landmine loans because it is not at all clear to consumers if, 
how, and when their interest rates are going to increase. And 
yet increase they do, for many reasons.
    I join with the chairwoman in believing they should either 
ban outright, or significantly limit such a so-called universal 
default, where companies can penalize a cardholder for payment 
behavior that has nothing to do with their particular card. 
Similarly, on-time payment is no guarantee against additional 
fees being imposed through double-cycle billing.
    Finally, the companies do their best to complicate what 
timely payment is, often--
    Chairwoman Maloney. The gentlewoman's time has expired.
    Ms. Waters. Thank you very much. I yield back the balance 
of my time.
    Chairwoman Maloney. The Chair recognizes Congressman Castle 
for 2 minutes. And I thank him for his work in a bipartisan way 
with the many meetings and roundtable discussions that we had 
leading up to this bill. Representative Castle.
    Mr. Castle. Thank you, Madam Chairwoman. And while I have 
an open mind about reform, I also think it is very important to 
keep some basic facts in our subsequent discussions in 
perspective.
    We are a nation with about 225 million credit-active 
Americans. According to the Federal Reserve, around 640 million 
credit cards are in circulation in this country. The Fed 
published a report a few years ago that said the average 
American consumer has 5 credit cards; and 1 in 10 consumers has 
more than 10 credit cards in their wallet. I have seen a study 
that shows that most consumers keep their credit cards a 
minimum of 7 years, and frequently much, much longer.
    My point is this: Consumers overall are a pretty savvy 
group. If they find a good deal, they stick with it. If they 
find a bad deal or are treated poorly, they drop that product 
or service in a heartbeat.
    Since the overwhelming majority, about 90 percent of the 
public, pays its credit card bills on time, I worry that well-
intended legislative efforts might go too far, especially since 
the finally updated version of Federal Reserve Regulation Z 
will address many of the provisions included in H.R. 5244. And 
it is scheduled for release soon.
    Chairman Bernanke, at our most recent hearing which he 
attended, when discussing the unfair and deceptive practices, 
he indicated that other steps are going to be announced in the 
next couple of months that would pertain to this as well.
    Let me be clear so our witnesses and the public can have a 
better appreciation for all that the Federal Reserve has done 
relative to these soon-to-be-released regulations. The 
professional staff of the Federal Reserve has put out for 
comment several different consumer-tested ideas related to 
credit cards that were developed in part with the help of 
consumer focus groups. They have been very deliberate in their 
approach to these issues, and have gone so far as hiring 
consumer focus groups to test proposed disclosure and billing 
ideas.
    Subsequently, as this process has unfolded, the Fed has had 
to review over 2,500 comments from banks, consumers, consumer 
groups, lawyers, and so forth concerning these issues and 
proposed solutions. All this work will come to an end later 
this year, and I would prefer to see what final changes are 
proffered by the Fed before pursuing any legislative proposals.
    Madam Chairwoman, our economy is struggling. And while I 
want to do everything I can to make certain consumers are dealt 
a fair hand and our financial services industry thrives, I look 
forward to the testimony today and the important work the 
Federal Reserve will release later this year.
    I yield back the balance of my time.
    Chairwoman Maloney. The Chair now recognizes Congressman 
Hodes for 1.5 minutes.
    Mr. Hodes. Thank you, Madam Chairwoman. I am happy to be 
here at this hearing. And I have taken a relatively restrained 
approach so far to this issue. I am not yet a cosponsor on the 
bill because I am interested to hear what the representatives 
here have to say and what the testimony divines.
    I will say I am here with--I brought a document which is a 
slightly redacted bill that I got from Bank of America. I would 
ask unanimous consent that after my remarks, this be included 
in the record, Madam Chairwoman.
    This bill shows a charge to me of $16.50, and says it was a 
purchase and adjustment. But of course, it was a late fee. And 
the late fee was because I posted the payment that was due on 
the 22nd of February--apparently it wasn't received till the 
23rd. So I was charged $15. And then $1.50 on top of that is 
the minimum finance charge. And the front of the bill shows 
that my annual percentage rate for the billing is 47.37 
percent. What a surprise to me.
    Then when I turned the bill over on the back and read 
through the small print, I found that my payment due date can 
change any time at the whim of the company. And I found that 
interesting because the discussion that I had with my wife 
prior to this billing period was, let's get our bill in on time 
and make sure we send it early--
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Hodes. --in order to make sure that we don't get hit 
with these kinds of payments. So I will be very interested to 
hear the testimony from folks about these kinds of practices.
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Hodes. Thank you, Madam Chairwoman.
    Chairwoman Maloney. The Chair now recognizes Representative 
Hensarling for 2 minutes.
    Mr. Hensarling. We are here today to consider H.R. 5244, a 
distinctly anti-consumer piece of legislation. I believe the 
bill begins to turn back the clock to an era where there was 
little competition, and a third fewer Americans had access to 
credit cards. And those that did paid the same high universal 
rate regardless of whether they paid their bills on time.
    I fear the bill represents another assault on personal 
economic freedom, and will certainly exacerbate the credit 
crunch that threatens our economy already. Instead of attacking 
risk-based pricing and competition, we should be celebrating 
it.
    Since credit card issuers have adopted risk-based pricing, 
interest rates have fallen substantially. We have seen the 
virtual disappearance of consumer-hated annual fees and a 
flowering of fringe benefits, from cash back to product 
protection to free plane tickets, just to mention a few. And I 
also note that credit cards are a vital tool for our Nation's 
26.8 million small businesses, and so testifies the SBA.
    Now, I don't come here today to defend all credit card 
companies and all of their practices. In fact, when I have not 
liked terms, both my wife and I have changed credit cards. And 
there is one particular company that we refuse to do business 
with. But competition has allowed this. And so I come here 
today to defend economic liberty, risk-based pricing, consumer 
empowerment, and a competitive marketplace.
    We should all know the terms of the credit cards that we 
have. If we don't, I suspect either: One, we were misled by a 
credit card company, in which case there are existing legal 
recourses, like Regulation Z and the Fair Credit Reporting Act; 
two, maybe we tried to read the terms but we couldn't 
understand them because of misguided government mandates that 
gave us voluminous disclosure written in legalese, as opposed 
to effective disclosure written in English; and three, maybe we 
just didn't bother to read the terms, and have nobody to blame 
but ourselves.
    I fear again that if we adopt the provisions of this, too 
many Americans will either be denied credit or see their credit 
card costs skyrocket, and no longer be able to pay for the 
bills they need in their everyday lives.
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Hensarling. I yield back.
    Chairwoman Maloney. The Chair recognizes Congressman Green 
for 30 seconds.
    Mr. Green. Thank you, Madam Chairwoman. With 30 seconds, 
let me just say that I am eager to hear from the witnesses that 
we have assembled. I too have received many comments from 
persons concerning things that are happening in the industry.
    And I will yield back some time to you, Madam Chairwoman. 
Thank you.
    Chairwoman Maloney. The Chair recognizes Congressman 
Neugebauer for 2 minutes.
    Mr. Neugebauer. Thank you, Madam Chairwoman.
    I would just make a couple of points here. I think when we 
saw a number of people raise their hands a while ago who have 
credit cards, I think we have to understand what credit card 
credit is. One, it is unsecured credit. Basically, it is 
unsupervised credit. And it is unrestricted credit for most of 
us.
    So I would be interested--and I am not going to do this to 
you, but we saw how many hands that were raised that have 
credit cards. But I wonder how many hands would raise if I 
said, could you call a family member today and say, would you 
loan me $15,000, unsecured, and they asked you, what are you 
going to do with it, and you said, well, I really don't know, 
but I might go to Las Vegas. Might buy my wife a new--
    And so what it is is these lending institutions are taking 
on an unsupervised, unsecured position. And there are things 
built into those credit card contracts that encourage good 
behavior, and there are things that are built into them that 
discourage poor behavior, because basically they are basically 
depending on just the desire of the person holding that card to 
pay that card back.
    I think what we have seen and will hear is a lot of people 
are confused. And the question is, today, are we trying to come 
up with some kind of consumer protection? And what are we 
actually trying to protect the consumer from? And I would say--
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Neugebauer. That was 2 minutes?
    [Laughter]
    Chairwoman Maloney. Yes. Yes, it was. It was a quality 2 
minutes. Thank you.
    The Chair recognizes Congressman Scott for 1 minute and 30 
seconds.
    Mr. Scott. Thank you so much, Madam Chairwoman. This is 
indeed an important hearing, a very timely hearing. We are a 
credit card nation, and have been for some time.
    But this issue is so important now because of the subprime 
mortgage meltdown. Folks are now using their credit cards just 
for the basic essence of survival. Many are even paying their 
home mortgages on credit cards.
    So this is very timely. There are issues of major concern 
that I think we need to address. One of major importance is 
universal default. I think we need to more clearly look at that 
for an example. I think also we have to look at stopping credit 
card companies from making--voluntarily changing the rates on 
their own.
    And in that regard, I think I ought to take a minute to 
give a tip of the hat to Citigroup, who is already making those 
changes because they see it as being unfair to the consumer.
    I am also very concerned about one major issue: After a 
customer has paid off all their fees, overdraft and the like, 
why is it so difficult to close the account? When all the debt 
is paid, why are additional fees added on when there isn't even 
any money in the account, and the customer has further 
requested that it be closed?
    There are a number of very serious practices that the 
industry is doing that certainly need to be stopped. And those 
of you in the industry who are voluntarily moving in this 
direction certainly need to be commended.
    But we have a very serious issue. It is a timely issue. And 
we must look at it with as clear a jaundiced eye as we possibly 
can. The consumers across America are expecting this committee 
to do it. I look forward to your testimonies.
    Chairwoman Maloney. Thank you. And finally, the Chair 
recognizes Congressman Udall for 1 minute.
    Mr. Udall. I thank the chairwoman for letting me sit in on 
this important hearing. And I would ask unanimous consent that 
my entire statement be included in the record.
    And if I might, I just want to acknowledge a fellow 
Coloradan, Susan Wones, who came all the way here to testify, 
and she will not be able to do so. She has a very important 
story to tell us about the treatment she has received from her 
credit card company, and I hope at some point she will be able 
to be heard because, after all, this is about Americans who are 
using credit in their daily lives.
    I want to commend the chairwoman for holding this hearing, 
and I know we are all going to look forward to working to bring 
fair and real reform that makes sense for consumers and the 
credit card companies alike. Thank you again, Madam Chairwoman, 
and I will yield back any time I have remaining.
    Chairwoman Maloney. That concludes our opening statements. 
I would like to note that everyone has 5 days to put their 
opening statements in the record.
    I would now like to recognize our distinguished panelists. 
We will begin with Ms. Elizabeth Warren, who is the Leo 
Gottlieb Professor of Law at Harvard Law School. She will be 
followed by: Greg Baer, deputy general counsel, regulatory and 
public policy, Bank of America; Adam J. Levitin, associate 
professor of law, Georgetown University Law Center; John 
Finneran, general counsel, Capital One; Lawrence Ausubel, 
professor, Department of Economics, University of Maryland; 
Carter Franke, Marketing Executive, JPMorgan Chase; Oliver I. 
Ireland, partner, Morrison & Foerster; and Katherine M. Porter, 
associate professor, the University of Iowa College of Law.
    Thank you all for coming. Each of you will be recognized 
for 5 minutes. Your entire testimony will be part of the 
official hearing record. So please begin, Ms. Warren, and thank 
all of you for coming here and preparing your testimony today.

 STATEMENT OF ELIZABETH WARREN, LEO GOTTLIEB PROFESSOR OF LAW, 
                       HARVARD LAW SCHOOL

    Ms. Warren. Madam Chairwoman, thank you for the opportunity 
to join in this discussion.
    We are here today to consider modest changes to the rules 
governing credit cards. In fact, we are here to discuss banning 
practices that many responsible lenders have already renounced. 
As a result, much of this discussion is about ensuring that all 
lenders follow best practices, practices that permit 
profitability for issuers and safety for customers.
    We are not here to regulate credit cards. This is not a 
hearing to discuss interest rate caps, fee regulation, or any 
restraint on free and competitive markets. And, contrary to 
some of the frenzied lobbying claims, we are most certainly not 
here to engage in price-fixing.
    Instead, this is a hearing about tricks and traps that 
undermine a competitive market. Lenders employ thousands of 
lobbyists, lawyers, marketing ad agencies, public relations 
firms, statisticians, and business strategists to help them 
maximize their profits.
    Customers need a little help, too. They need some basic 
protection to be certain that the products they buy meet 
minimum safety standards. Personal responsibility will always 
play a critical role in dealing with credit cards. But no 
family should be brought low by schemes designed to prey on the 
unwary.
    I want to speak for just a minute about the importance of 
credit card reforms in a time of economic uncertainty. The 
crisis in the subprime mortgage market has served as a bitter 
reminder of what can happen when lending terms are not 
transparent.
    When lenders are careless in screening their customers, 
when customers are unable to evaluate fully the risks 
associated with borrowing, the result is a series of risky 
loans, raising the eventual specter of high levels of default 
and economic upheaval.
    The events of recent months have reminded us we are all in 
this economic boat together. Credit markets affect everyone, 
and high risk lending can have an impact on prudent lenders and 
people who never borrow. Without careful regulation to support 
prudent lending, we face an increased risk that a credit card 
bubble will further destabilize both families and the larger 
economy.
    Nearly half of all credit cardholders missed payments in 
2006, the latest year we have data on. This makes them obvious 
targets for the most aggressive and unfair tactics. Sending in 
a payment that arrives one day late can cost a family an 
average of $28, when the cost to the company is measured in 
pennies.
    Under the rubric of universal default, customers have been 
hit with huge increases in interest rates, customers who have 
scrupulously met every single term of their credit card 
contracts. Anxiety has become a constant companion for 
Americans struggling with debt.
    Listen to these numbers: Today, one in every seven American 
families is dealing with a debt collector. Forty percent of 
families worry whether they can make their payments every 
month. One in five Americans is losing hope, saying they expect 
to die still owing on their bills.
    Credit card contracts have become a dangerous thicket of 
tricks and traps. Part of the problem is that disclosure has 
become a way to obfuscate rather than to inform. According to 
the Wall Street Journal, in the early 1980's, the typical 
credit card contract was a page long. By the early 2000's, it 
was more than 30 pages long.
    The additional language was designed in large part to add 
unexpected and incomprehensible language that favors the credit 
card companies. H.R. 5244 begins to clear a path through this 
tangle.
    All-purpose cards generated $115 billion in revenues in 
2006. Profits were a handsome $18.4 billion, a 45 percent jump 
from the year before. There is, of course, no breakdown in the 
interest and fee categories to explain how much of the industry 
revenue came from universal default, double-cycle billing, and 
other unscrupulous practices. But it is possible to gain some 
sense of the need for such tricks and traps by noting the 
number of highly profitable card issuers who have publicly 
renounced such practices.
    Companies should be commended for moving in the right 
direction on credit card terms. It is now the task of this 
committee to move their less ethical competitors into similar 
practices. Congresswoman Maloney and Chairman Frank and the 39 
cosponsors have taken an important first step toward ending 
practices that put both families and markets at risk. They 
deserve our thanks and our support.
    [The prepared statement of Professor Warren can be found on 
page 153 of the appendix.]
    Chairwoman Maloney. I thank the gentlelady. We now have 82 
cosponsors. And we appreciate very much your testimony.
    Mr. Baer.

 STATEMENT OF GREGORY BAER, DEPUTY GENERAL COUNSEL, REGULATORY 
               AND PUBLIC POLICY, BANK OF AMERICA

    Mr. Baer. Good morning, Chairwoman Maloney, Ranking Member 
Biggert, and members of the subcommittee. My name is Greg Baer, 
and I am deputy general counsel at Bank of America. I 
appreciate the opportunity to present our views today. Let me 
say a few words about risk-based pricing at Bank of America, 
and then turn to H.R. 5244.
    Risk-based pricing is first employed when we receive an 
application from a consumer and consider FICO score and general 
credit history. That information is useful, but as the years go 
by, the original information tells us less and less about the 
risks we are running. But our ongoing experience with the 
customer tells us quite a lot. We use that information to 
reprice in two ways.
    First, at Bank of America, we default reprice a customer if 
the customer violates his contract with us by going late or 
over limit not once but twice within a 12-month period. 
However, not all customers who hit our default triggers are 
necessarily repriced. We look at these customers individually 
and determine whether the default truly indicates higher risk.
    Second, when we see that a customer is exhibiting other 
risky behavior, such as maxing out credit lines or defaulting 
on other loans, we may seek to charge the customer a higher 
rate. But the customer always has notice and choice. The 
customer can simply decline the higher rate and repay the 
existing balance under the old rate.
    The only thing we ask the customer to do in return is to 
stop making additional charges on the card. This notice and 
choice is of course the distinction between risk-based pricing 
and universal default, a practice in which Bank of America has 
never engaged.
    I should note that our experience shows that nothing makes 
customers angrier than an increase in the interest rate. We 
have seen evidence of that today. At Bank of America, where our 
goal is to make a credit card customer a mortgage, a deposit, 
and a retirement savings customer, we have all the more reason 
to keep our customers satisfied. Thus, looking at our 2007 
portfolio, the overwhelming majority of customers--nearly 94 
percent--had the same or lower rate than they did at the 
beginning of the year.
    So why would we ever raise rates? First, because for these 
customers we are confident that we bear real increased risk. 
Rigorous testing shows that our models are extraordinarily 
predictive of consumer behavior.
    Furthermore, when we reprice customers, we find that many 
manage their credit more wisely, making larger monthly payments 
and paying down their debt faster. Thus, a higher interest rate 
not only allows us to earn income to compensate for greater 
risk, it can actually reduce the risk we are managing.
    There is a third type of repricing known as any time/any 
reason repricing generally done when market interest rates rise 
or an issuer is not earning a sufficient return. Because we use 
risk-based pricing, we believe that Bank of America has been 
less likely to have to use this type of repricing.
    Now let me turn to H.R. 5244. We are very concerned that 
this bill would significantly hinder our ability to price the 
risks of lending, and would result in less credit being made 
available to creditworthy borrowers, with generally higher 
prices for those who do receive credit. Let me highlight two of 
the concerns described in my written testimony.
    First, H.R. 5244 would prohibit risk-based repricing of 
existing debt at any time, even with notice and choice. It is 
important to note that in the great majority of cases, we learn 
about an increase in a customer's risk after the customer has 
run up a large balance, not before. Thus, the risk lies in that 
existing balance, not in future charges.
    Second, in addition to letting them opt out of risk-based 
repricing, H.R. 5244 would provide customers the ability to opt 
out of default repricing, that is, allow customers to breach 
their credit agreement but suffer no consequence for it. The 
bill thereby would take significant steps to reduce the 
customer's incentive to manage credit wisely.
    Recent experience suggests that this course is not a wise 
one. There is general consensus that a major cause of the 
mortgage crisis was an originate-to-distribute model where some 
participants in the system had incentives to externalize risk. 
A clear lesson of the past year has been that both lenders and 
consumers suffer when lenders do not sufficiently consider 
risk.
    Before closing, I would like to react to some testimony 
suggesting that the credit card industry is not competitive on 
price and does not risk-base price. We find this difficult to 
understand. For example, we have a team of approximately 30 
associates who engage solely in new account marketing, 
constantly evaluating new competitive strategies. They offer a 
variety of products with different interest rates, features, 
and benefits to see how they do.
    In 2007, we sent out approximately 111 million test pieces 
in over 500 tests, of which 36 million were price tests, trying 
to see how changes in rate can affect market share. The same 
competition occurs for existing customers. We fight for balance 
transfers through promotional rates and other offers.
    Customers often call us to inform us of an offer from a 
competitor at a lower rate than they are paying us, and our 
associates have discretion to match those rates when 
appropriate. And even when customers call in for reasons 
unrelated to rate, our associates check to see if they have 
balances with competitors, and offer them price incentives to 
transfer those balances.
    In short, any legislation premised on this industry not 
being highly competitive on price and terms would be based on a 
false premise.
    That concludes my remarks. I look forward to answering any 
questions that you might have.
    [The prepared statement of Mr. Baer can be found on page 91 
of the appendix.]
    Chairwoman Maloney. I thank the gentleman for his 
testimony, and note that both Ms. Warren and Mr. Baer pointed 
out in their testimony that many credit card companies do not 
engage in universal default and some of the other abuses that 
we are trying to correct in this legislation.
    And Mr. Levitin.

   STATEMENT OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF LAW, 
                GEORGETOWN UNIVERSITY LAW CENTER

    Mr. Levitin. Madam Chairwoman, members of the subcommittee, 
I am pleased to testify today in support of the Credit 
Cardholders' Bill of Rights. I am here to address a major 
argument put forth by the credit card industry against any form 
of regulation, namely that it would dissipate the benefits of 
so-called risk-based pricing.
    Credit card issuers contend that since the early 1990's, 
they have engaged in risk-based pricing and that risk-based 
pricing has benefitted creditworthy consumers in the form of 
lower costs of credit and subprime consumers in the form of 
greater availability of credit. Card issuers argue that any 
regulation of their billing practices would negate the benefits 
of risk-based pricing.
    It is important that the subcommittee understand that there 
are three problems with the card industry's risk-based pricing 
story. First, credit card pricing is, at best, only marginally 
risk-based. Credit cards have an astounding array of price 
points--annual fees, teaser interest rates, base interest 
rates, balance transfer interest rates, cash advance interest 
rates, overdraft advance interest rates, default interest 
rates, late fees, overlimit fees, balance transfer fees, cash 
advance fees, international transaction fees, telephone payment 
fees, and so on. I think I missed a few.
    Of this multitude of fees, only a couple--base interest 
rates and late fees--have any relation to consumers' credit 
risk. And even then, it is not narrowly tailored. Most issuers 
offer only a couple tiers of pricing for base rates and late 
fees. But consumer credit risk does not come just in sizes 
large and small.
    The majority of credit card pricing has no relation to 
cardholder risk whatsoever. Instead, the pricing is a function 
of the card issuer's ability to load on fee after fee after fee 
to customers who are locked into using the card because of high 
costs in switching cards.
    Not surprisingly, as the graph I have up shows, there is 
virtually no difference in the average effective interest rate 
for platinum cards, gold cards, and standard cards, even though 
these cards are issued to consumers with very different credit 
profiles. Viewed as a whole, credit card pricing is not risk-
based. It only reflects risk on the margins.
    The second problem with the risk-based pricing story is 
that it cannot be connected to lower costs of credit for 
creditworthy consumers. It is far from clear that overall 
credit costs have declined, much less that any decline could be 
attributed to risk-based pricing, since the early 1990's.
    Credit card pricing has become a game of three-card Monte. 
Card pricing has shifted away from the up-front visible price 
points, like annual fees and base interest rates, and shifted 
to back-end fees that consumers are likely to ignore or 
underestimate.
    For example, even as base interest rates have fallen, a 
host of new fees have sprouted up, and other fees, like late 
fees and overlimit fees, have soared. According to the GAO, 
from 1990 to 2005, late fees have risen an average of 160 
percent and overlimit fees have risen an average of 115 
percent. For creditworthy consumers, many credit card costs 
have risen since the advent of risk-based pricing.
    The one credit card price point that has declined for 
creditworthy consumers are base interest rates. This decline, 
however, is not attributable to risk-based pricing. Instead, 
virtually the entire decline is attributable to the decline in 
card issuers' cost of funds. The net interest margin, displayed 
on the graph, is the spread between the card issuers' cost of 
funds and the base interest rate at which they lend.
    This rate has remained basically static since the early 
1990's, indicating that base interest rates have declined at 
roughly the same rate as the cost of funds. In other words, the 
decline in base rates is due to the decline in issuers' cost of 
funds, not risk-based pricing.
    Even if credit card pricing were actually risk-based in a 
meaningful way, there is no evidence that connects it to lower 
pricing for creditworthy consumers. The third problem with the 
risk-based pricing story is that there is no evidence that 
connects it to greater availability of credit for subprime 
consumers.
    The availability of credit for subprime consumers has grown 
since the early 1990's, but this is a function of 
securitization rather than of risk-based pricing. Several years 
ago, Alan Greenspan told the Senate Banking Committee that, 
``Children, dogs, cats, and moose are getting credit cards.'' 
It is hard to reconcile a story of risk-based pricing with 
cards being issued to toddlers and pets.
    The greater availability of credit is instead a function of 
securitization. Securitization increases lenders' lending 
capacity and lets them pass off default risk onto capital 
markets. Securitization, not risk-based pricing, is the 
explanation for growth in lending to subprime consumers.
    Even if credit card pricing were truly risk-based, and even 
if it had the benefits claimed by the card industry, nothing in 
the Credit Cardholders' Bill of Rights implicates the risk-
based pricing model. The Cardholders' Bill of Rights is about 
banning abusive and manipulative billing tricks, nothing more 
and nothing less. It does not regulate interest rates or fee 
amounts, and it leaves card issuers with at least five ways of 
accounting for risk.
    Because the practices banned by the Cardholders' Bill of 
Rights are at best incidental to issuers' profitability, we 
should not expect to see the result in higher costs of credit, 
or lower availability of credit, or affect asset-backed 
securities markets.
    Instead, this legislation will help clarify credit card 
pricing, which is a prerequisite for an efficient, competitive 
market. H.R. 5244 will help consumers and will make for a fair 
and more efficient credit economy, and I strongly urge Congress 
to pass it into law.
    [The prepared statement of Professor Levitin can be found 
on page 117 of the appendix.]
    Chairwoman Maloney. Thank you.
    Mr. Finneran?

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

    Mr. Finneran. Thank you, Chairwoman Maloney, Ranking Member 
Biggert, and members of the subcommittee. I want to thank you 
for inviting me back to testify before the subcommittee, this 
time about pending credit card legislation.
    This subcommittee has played a constructive role in 
identifying problems that consumers have had with their credit 
cards. Capital One has been a willing and active participant in 
the dialogue about how to improve on the remarkable value 
delivered to millions of American consumers by credit card 
products.
    With respect to the practices that have been central to the 
debate, Capital One has worked diligently to establish a high 
standard of customer sensitivity. We do not engage in any form 
of universal default repricing. We have never done two-cycle 
billing.
    We have a single clear penalty repricing policy. We will 
impose a penalty rate on a consumer only if the consumer pays 
late twice, by 3 days or more, in a 12-month period with 
respect to that specific card. We will provide the customer 
with a prominent warning on the billing statement after the 
first infraction. In many cases, we choose not to reprice the 
customer even if the customer pays us late twice in the 12-
month period. If a customer is repriced but pays us on time for 
12 consecutive months, we will take that customer back to the 
prior rate. This unrepricing is automatic.
    We have supported the Federal Reserve's proposed 45-day 
notice for penalty repricing, and have gone beyond the Fed's 
proposal to urge that customers be given the opportunity to 
reject any repricing, close the account, and pay down the 
outstanding balance at the old rate over time. We provide our 
customers notice and the ability to opt out of overlimit 
transactions.
    Across our entire portfolio of customers, more than 30 
million, we work very hard to provide important notices in 
plain English that capture their attention at critical moments. 
We do so because we believe, as Chairman Bernanke said to this 
committee, that cardholders must understand the terms under 
which they are borrowing and be empowered to manage their 
credit wisely, as the overwhelming majority of our customers 
do.
    Capital One has never been a voice for the status quo. We 
have long advocated for changes in the way credit cards are 
marketed to consumers. We believe that the banking regulators 
have the statutory authority right now to implement an advanced 
consumer choice regime that effectively solves the most 
critical credit card problems identified by this committee with 
minimal risk of oversteering or unintended consequences.
    Toward that end, we have led the industry in recommending 
that consumers have clear, conspicuous 45-day notice and the 
right to opt out of all types of repricing. And we believe that 
such a regulatory initiative may be on the horizon.
    But, Madam Chairwoman, we also believe that it is unwise, 
especially at this time, to enact broad legislation that sets 
payment formulas in statute, redefines critical product 
features, and limits the tools of risk management for consumer 
credit. Capital One must therefore oppose H.R. 5244, and we do 
so for three fundamental reasons.
    First, the legislation sets multiple statutory limits on a 
lender's ability to price for the cost of credit. For example, 
under the heading of eliminating double-cycle billing, the bill 
actually redefines the concept of grace period and arbitrarily 
expands the degree to which all issuers, even those who don't 
engage in double-cycle billing, must extend credit interest-
free. Other provisions of the bill also raise the specter of 
price controls.
    Second, the consequences of so sweeping a bill would be to 
force the industry to raise the cost of credit for everyone, 
even those who present less risk of default to the lender, and 
reduce the availability of credit for those consumers who 
present a greater risk of default.
    Third, this result would be exactly the wrong policy 
prescription, particularly in this economic environment. As the 
mortgage crisis has unfolded, we have had a progressive 
tightening in the credit markets, and many believe we are near 
or in a recession.
    To ease the impact of a slowdown on our economy, the Fed 
has aggressively lowered the Federal funds rate, and Congress 
has passed a bipartisan stimulus package. H.R. 5244 could 
significantly counteract the positive effects of both of those 
policy initiatives. Madam Chairwoman, that would be especially 
unfortunate since the regulators, those policymakers uniquely 
positioned to evaluate the complex and dynamic credit card 
industry, are poised to address all of the issues targeted by 
H.R. 5244.
    Under its new Regulation Z rule, the Fed proposes a 45-day 
notice period for all types of repricing. The new rule also 
offers improved disclosure requirements for payment allocation, 
minimum payment, and interest rates. And that is just a partial 
list.
    Equally importantly, Chairman Bernanke has confirmed before 
this committee that the Fed will supplement its Reg Z rule with 
new credit card rules under its UDAP authority. It seems likely 
that those rules will go to the core of the committee's 
concerns. We believe that such rules may provide the best, 
safest, and most direct road to reform.
    Capital One has publicly called for balanced, reasoned 
change that can be implemented quickly, would improve 
disclosure, and enhance customer choice. We have also sought to 
work cooperatively with you and the committee. Though we must 
respectfully disagree about the impact of H.R. 5244, I want to 
thank you again for the opportunity to express our views.
    [The prepared statement of Mr. Finneran can be found on 
page 101 of the appendix.]
    Chairwoman Maloney. And thank you very much for your 
testimony.
    Mr. Ausubel?

  STATEMENT OF LAWRENCE M. AUSUBEL, PROFESSOR, DEPARTMENT OF 
               ECONOMICS, UNIVERSITY OF MARYLAND

    Mr. Ausubel. Chairwoman Maloney, Ranking Member Biggert, 
and members of the subcommittee, my name is Lawrence Ausubel, 
and I am a professor of economics at the University of 
Maryland. I am honored by the invitation to appear before you 
today.
    Credit card debt poses a common pool problem. Since it is 
not secured by any collateral, and since recoveries will be 
allocated pro rata under bankruptcy, each card issuer is 
motivated to try to collect from the common pool, and the 
attempt to collect by one issuer may pose a negative 
externality to others.
    When a consumer becomes financially distressed, each credit 
card lender has an incentive to try to become the first to 
collect. A useful explanation of penalty interest rates and 
universal default clauses is that each issuer is seeking to 
maximize its own individual claim on this common pool of debt.
    To the extent that the financially distressed consumer is 
still able to repay any debt, a high penalty rate, such as 29.9 
percent, takes advantage of the situation and provides 
incentives for this issuer to be repaid in front of other 
lenders. And to the extent that the consumer repays no debt, 
the high penalty rate maximizes the issuer's nominal loan 
balance, and therefore the issuer's pro rata share of 
recoveries following bankruptcy.
    Since every credit card issuer has this unilateral 
incentive to charge a high penalty rate, the likely outcome is 
inefficiently high penalty rates. As such, this common pool 
problem may be viewed as a market failure, yielding scope for 
Congress to intervene in useful ways.
    Universal default clauses arise in similar fashion. Each 
issuer individually has the incentive to impose penalty pricing 
when a consumer misses a payment to somebody else in order to 
collect first from the common pool. This prisoner's dilemma-
like game has the result that all issuers impose universal 
default, but no issuer is any better off if all have it than if 
none have it.
    Indeed, they may all be made worse off; an overextended 
consumer suffering a setback is often best dealt with by 
relaxing the terms of the loan and giving the consumer an 
opportunity to get back on his feet. Instead, penalty pricing 
and universal default create an explosion of finance charges 
from which it is difficult for the consumer to emerge.
    Given the current turmoil in credit markets and in real 
estate, additional pressure on consumers from credit card debt 
would be particularly unfortunate. Such pressures could be 
reduced if the proposed bill becomes law in a timely fashion.
    While it is almost axiomatic that consumers who have 
triggered penalty rates are greater risks than consumers who 
have not, I am unaware of any empirical evidence that the 
magnitude of higher rates bears any close relation to the 
magnitude of enhanced risk. Quite to the contrary; it is 
evident from other aspects of credit card pricing that the 
levels of many fees are based more on the relative 
insensitivity of consumer demand than on any particular 
relation to cost.
    Good examples are the 3 percent surcharges recently imposed 
by most issuers on credit card transactions made in foreign 
currencies, the $39 late fees imposed irrespective of the 
number of days payment is late, etc.
    As part of my written statement, I have included a new 
paper, co-authored with Professor Amanda Dawsey of the 
University of Montana, developing an economic model of the 
issue. While our analysis is very preliminary and incomplete, 
the penalty interest rate appears to be higher under universal 
default, and the higher interest rate appears to exceed the 
enhanced credit risk associated with missing a payment.
    A second result is that the probability of full repayment 
after missing a minimum payment is lower under universal 
default.
    Third, it appears that social welfare is frequently lower 
with universal default than without it.
    Separately from these issues, let me briefly observe that 
any time/any reason repricing would appear to be detrimental to 
competition in the credit card market. This conclusion comes 
from standard considerations in industrial organizations, such 
as search costs and switch costs.
    How can a consumer comparison shop if all he is told about 
future pricing is, we may change your APR and fees ``based on 
information in your credit report, market conditions, business 
strategies, or for any reason?'' That is a quote from the 
current Bank of America disclosure.
    Thank you.
    [The prepared statement of Professor Ausubel can be found 
on page 76 of the appendix.]
    Chairwoman Maloney. Thank you.
    Ms. Franke?

STATEMENT OF CARTER FRANKE, MARKETING EXECUTIVE, JPMORGAN CHASE

    Ms. Franke. Madam Chairwoman, and members of the committee, 
good morning. My name is Carter Franke and I am a senior vice 
president at JPMorgan Chase. I am proud to represent today the 
20,000 Chase card service employees who serve the needs of more 
than 100 million Chase card customers each and every day.
    Chase believes that building solid customer relationships 
is the best approach to long-term success in the credit card or 
in any industry, and we have worked to deepen those 
relationships for a number of years.
    Last year we articulated before Congress and in many other 
venues our belief that the appropriate use of credit cards 
involves a shared responsibility between banks and their 
customers. We said that credit cardholders need to use their 
cards responsibly, only purchasing what they can afford, never 
exceeding their credit limits, and making their payments on 
time.
    For banks like Chase, our responsibilities include the need 
to listen and respond to customer needs, to communicate clearly 
about our products, to make sure customers understand the terms 
of our agreement, and to go further by helping them live up to 
those terms.
    That is why early last year we developed our Clear & Simple 
program, to make sure that customers have clear information and 
to help simplify their relationship with us. Clear & Simple 
provides tools that help customers manage their accounts and 
use those tools and therefore virtually eliminate the 
possibility of ever paying a penalty fee.
    Also last year, after listening to our customers, we 
decided to make a major policy shift. As of March 1st of this 
year, we no longer use credit bureau information to initiate a 
reset of a customer's rate with us. We very much appreciated 
your announcement applauding our change, Madam Chairwoman. We 
believe that both in principle and practice, we share your 
concerns for consumers who use credit cards.
    However, in order to avoid the unintended consequences of 
higher interest rates and decreased access to credit for 
consumers, we believe that great caution must be exercised in 
the process of turning these concerns into complex new 
legislation.
    Even though Chase does not engage in a number of the 
practices the bill would prohibit--for example, two-cycle 
billing and bureau-based repricing--we do believe that the 
overall impact of the legislation would be to lessen our 
ability to price according to the individual risk profile of 
our customers, which is the bedrock of the competitive credit 
card industry today.
    Study after reputable study, including those by the GAO, 
the Federal Reserve, and just last month by the Congressional 
Research Service, have concluded that the ability to measure 
and price according to individual risk has significantly 
lowered average interest rates and brought credit cards to 
millions of Americans who could not have gotten them 15 years 
ago.
    While the bill has the admirable goal of protecting 
consumers, it seeks to do so through complex, expansive rules 
and restrictions that would micromanage the banks' ability to 
charge or change interest rates based on indicators that we 
know significantly raise a customer's risk of default. At 
Chase, for example, we know that 30 percent of customers who 
are late twice in one year will eventually default on their 
loans, an expensive process that raises cost for other 
customers.
    Without the ability to mitigate risk, banks will have to 
reduce the number of people they are able to make loans to, 
depriving many families access to mainstream credit and 
possibly driving them to subprime markets where interest rates 
are exorbitant.
    We believe that the Federal Reserve Board's process to put 
more information and greater control in the hands of consumers, 
combined with a commitment to ban practices that are unfair or 
deceptive, is preferable to the legislation currently under 
discussion, and that Congress should let the Fed's process 
continue to determine its effectiveness.
    In summary, let me quote Chairman Bernanke, speaking to the 
committee several weeks ago: ``Onerous regulations that create 
reductions in credit availability unconnected with the issues 
of disclosure would be a negative in the current environment.'' 
That is our point.
    We are concerned that this bill would reduce the 
availability of credit at the very time when Congress is doing 
all it can to increase credit availability and stimulate the 
economy.
    Thank you very much, and I look forward to your questions.
    [The prepared statement of Ms. Franke can be found on page 
105 of the appendix.]
    Chairwoman Maloney. Thank you very much.
    We have been called for two votes, and there are 8 minutes 
left in the vote. I did want to note that Chase did voluntarily 
incorporate some of the best practices that were in our Bill of 
Rights, and we congratulate you for that, and Bank of America, 
too, for those actions.
    But we are going to break now for two votes, and we will be 
right back. Thank you so very, very much, and I apologize for 
this inconvenience.
    [Recess]
    Chairwoman Maloney. The hearing will be called to order. 
Will the witnesses please take their seats, and we can resume 
in a few moments with Mr. Oliver I. Ireland.

  STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & FOERSTER

    Mr. Ireland. Chairwoman Maloney, Ranking Member Biggert, 
and members of the subcommittee, I am a partner in the 
Washington office of Morrison & Foerster. I was an Associate 
General Counsel at the Federal Reserve Board for over 15 years. 
And I have worked on credit card issues since 1975. I am 
pleased to be here today to discuss H.R. 5244, the Credit 
Cardholders' Bill of Rights Act of 2008.
    The current credit card disclosure regime has not kept up 
with the market. Recognizing this, in June 2007, the Federal 
Reserve Board proposed a comprehensive revision to the credit 
card provisions of its Regulation Z that address many of the 
issues raised by H.R. 5244.
    In addition, the Board is exploring additional credit card 
issues under its unfair and deceptive acts and practices 
authority. It is premature to address credit card practices in 
legislation until these initiatives are completed, probably 
later this year.
    The regulation of consumer credit is highly technical, and 
the risks from acting on inadequate information or simply 
imperfect drafting are significant. Unfortunately, I believe 
that H.R. 5244 reflects some of these problems.
    H.R. 5244 may lead to increased rates and reduce credit 
availability. For example, H.R. 5244 would limit risk-related 
increases in APRs on existing balances, would prolong the 
payoff of these balances, limit changes in terms generally, and 
require 45 days' advance notice and an additional 90-day opt-
out period for rate increases.
    The Federal Reserve Board's proposal is far simpler. It 
would require 45 days' prior written notice before increasing 
rates that applies to both changes in terms and default 
pricing. These prior notices in the Board's proposal would give 
a cardholder ample opportunity to seek a better rate elsewhere.
    In addressing double-cycle billing, H.R. 5244 appears to 
mandate grace periods that are not now provided for and to 
outlaw current interest rate calculation practices that are not 
considered to be double-cycle billing. Under the Board's 
proposal, double-cycle billing would continue to be disclosed 
in solicitations and account opening disclosures. If this does 
not fully address concerns, additional disclosures could 
address the issue without outlawing unrelated practices.
    H.R. 5244 would require pro rata allocation of payments to 
balances that are subject to different rates, thereby 
discouraging low promotional rates that can help customers to 
change accounts when their rates on existing accounts are 
increased. Under the Board's proposal, credit card issuers 
would be required to make a new payment allocation disclosure 
for discounted cash advance or balance transfers. This 
disclosure could be broadened to other circumstances where 
different rates apply to different unpaid balances.
    H.R. 5244 would require statements to be sent at least 25 
calendar days before the due date, a 75 percent increase over 
current Regulation Z requirements. This would discourage grace 
periods or require higher rates to address lost income. The 
Board's proposal would improve disclosures on due dates, cutoff 
times, and fees for late payments, and therefore, I think, 
addresses the issue.
    I think H.R. 5244's impact could go beyond consumer credit. 
Significantly, America's small businesses, which account for 
over 50 percent of the domestic workforce, rely heavily on 
credit cards. Over 77 percent of small businesses use credit 
cards to pay business expenses, and nearly 30 percent use cards 
to help finance their business operations. Not only is H.R. 
5244 likely to affect rates and availability of credit for 
consumers, but it is also likely to raise rates and reduce the 
availability of credit for small businesses.
    Finally, a significant source of funding for credit cards 
is derived from asset-backed securities. In an environment 
where market confidence has been shaken, any market perception 
that the risk profile of credit card receivables is changing 
could lead to a reduced access to this source of funding for 
card issuers that would require issuers to further tighten 
credit standards and raise rates.
    Thank you for the opportunity to be here today. I would be 
happy to answer any questions.
    [The prepared statement of Mr. Ireland can be found on page 
108 of the appendix.]
    Chairwoman Maloney. Thank you so much for your testimony.
    And our final witness is Ms. Porter.

  STATEMENT OF KATHERINE M. PORTER, ASSOCIATE PROFESSOR, THE 
               UNIVERSITY OF IOWA COLLEGE OF LAW

    Ms. Porter. Madam Chairwoman and members of the 
subcommittee, my testimony explains two key benefits of 
enacting H.R. 5244. First, it would provide Congress with 
timely, reliable, and complete data about credit card markets. 
Currently, such information is virtually nonexistent. The 
second focus of my testimony is explaining the innovative and 
important ways that this bill would empower consumers to 
responsibly use their cards.
    As Members of Congress, you work to ensure that our laws 
promote sound financial behavior and encourage positive 
economic growth. Effective lawmaking about credit cards 
requires knowledge, yet Congress and other agencies have almost 
no information about the actual functioning of credit card 
markets.
    Even the most powerful regulators or investigative 
agencies, like the OCC or GAO, cannot reliably answer basic, 
key questions about how American families use credit cards. How 
many households pay overlimit fees each month? What is the 
average actual interest rate charged to a revolving account 
balance?
    Similarly, very little is known about the profit structure 
of credit card issuers. Without such information, it is 
impossible to guard against a credit bubble and to ensure 
appropriate underwriting. Congress cannot rely solely on the 
card industry, consumer advocates, academic researchers, or 
Federal agencies to provide the necessary data.
    Such information will be at best only partially complete 
and at worst perhaps self-serving or unreliable. Without the 
legal mandate for data contained in H.R. 5244, Congress cannot 
fully understand and monitor credit cards, despite their 
powerful role in our economy.
    This bill would dramatically improve knowledge by gathering 
data on the types of transactions that incur fees or 
specialized interest rates by measuring how many cardholders 
pay such fees or rates and by documenting how issuers earn 
their revenue.
    Armed with such data, Congress and Federal regulators can 
monitor the economic wellbeing of American families and the 
financial stability of card issuers. Congress needs timely and 
comprehensive data to regulate effectively. Enacting H.R. 5244 
would give you such information, allowing you to assess whether 
our credit card policies need further reform.
    H.R. 5244 takes a moderate approach. At its core, this bill 
is about ensuring that consumers who try to use their cards in 
a responsible manner are able to succeed. It empowers 
cardholders to avoid default and to honor the terms of their 
card agreements. This bill would encourage responsible card use 
in at least three ways.
    First, it would commit consumers to set a firm limit for 
their cards. Issuers would have to honor these limits, and 
could not charge an overlimit fee if they extended additional 
credit in contravention of a consumer's express desire. Helping 
consumers stay within their credit limits is a sound financial 
practice that reduces the risks to consumers and issuers.
    The bill also limits issuers to imposing an overlimit fee 
only one time in a billing cycle. Issuers can manage their risk 
by refusing to authorize transactions that would exceed the 
bill. The law would merely prevent companies from churning 
overlimit fees for profit if they voluntarily take on 
additional risk.
    The bill also would reward consumers who do not overspend 
after exceeding the limit because such consumers could only be 
penalized for two subsequent months after initially exceeding a 
limit.
    The bill also empowers consumers to pay their credit card 
bills on time by creating standardized billing practices. 
Consumers who have the means to pay on time and intend to do so 
should be able to succeed in that goal, and not be tripped up 
by confusing and varying rules. The bill proposes a uniform 
rule that payment is timely if received by 5 p.m., and would 
prohibit issuers from imposing a late fee if a consumer could 
show the payment was mailed 7 days before the due date.
    The final way the bill promotes consumer responsibility is 
its requirement that the most vulnerable consumers pay the up-
front costs of obtaining a card. Subprime cards typically have 
very low credit limits of $250. Half or more of this amount is 
normally subsumed with fees charged at account opening. An 
annual fee, a program fee, an account setup fee, and a 
participation fee are all common.
    If such fees exceed 25 percent of the total credit limit, 
the bill would require the consumer to pay these fees before 
the card may be issued. This would prevent vulnerable, high-
risk consumers from becoming trapped with an inappropriate card 
they cannot afford.
    By empowering consumers to stay within their credit limits, 
by helping them succeed in paying on time, and by ensuring that 
consumers can afford the high fees of their cards, H.R. 5244 
would promote financial responsible practices that would 
benefit everyone.
    [The prepared statement of Professor Porter can be found on 
page 140 of the appendix.]
    Chairwoman Maloney. Thank you very much for your testimony. 
We literally just received an endorsement letter from the 
National Small Business Association in support of the 
legislation, and I would like unanimous consent to place it in 
the record, along with various newspaper editorials in support 
of the bill.
    Thank you. Thank all of you. And one of the provisions--
actually, Ms. Porter touched on it--that is in this bill that I 
like very much because it is simple and I believe it is very 
needed, as she testified, and it is the last provision 
requiring better data collection.
    We have had trouble getting basic data. For example, I 
would like to ask the issuers and Mr. Ireland and anyone else 
who would like to comment: How much revenue do card issuers 
make from each of the billing practices that H.R. 5244 directly 
regulates? Would any issuer like to comment?
    Mr. Baer. I will just say that I don't have that data.
    Chairwoman Maloney. You don't have it? Well, then, I think 
it is fair to ask, then: How can you say that the bill will 
have a negative impact on your profits if you don't have the 
data?
    Mr. Baer. Chairwoman Maloney, I think our central concern 
with the bill is less directed directly to profits but more 
just the ability to put into practice the risks that we measure 
and see in the marketplace. In fact, one could argue that the 
effect of the bill will simply be to change the way banks and 
issuers make profits. But our central concern is whether we can 
price for risk for customers who are exhibiting higher risk.
    Chairwoman Maloney. Well, does any other issuer have a 
comment on this, of having the data? No one? Mr. Ireland? Any 
academic? No one wants to comment? Mr. Ausubel?
    Mr. Ausubel. The only comment that I would make is that the 
last time that I was privy to such things, Visa, the 
organization, collected such numbers, aggregated them over all 
issuers, and distributed it to their members, including Bank of 
America. The title of the document at the time was the ``Visa 
Profitability Analysis Report,'' and it gave breakdown 
according to finance charges versus fees.
    Chairwoman Maloney. Well, thank you. Mr. Levitin?
    Mr. Levitin. I do not have direct knowledge of the 
profitability of issuers for any of these practices myself. 
However, I would bring to the committee's attention that I 
recently saw a resume from a senior vice president at HSBC, and 
one of the lines on her resume was that she previously worked 
at MBNA, which is now part of Bank of America, and she had 
headed up their risk-based repricing initiative.
    The resume boasted that this initiative brought in $52 
million of net income before tax to MBNA. What I think is 
interesting about it is that this resume did not phrase this in 
terms of, we were just covering loss. Instead, this was seen 
as--this was being boasted as, I am making the bank more 
profitable, that this is a profit center rather than just 
hedging against risk.
    Chairwoman Maloney. Well, in response to Mr. Baer's 
testimony that they were just pricing for--looking at risk-
based pricing. And I really would like to ask, based really on 
the testimony that you gave, Mr. Levitin, where you said that 
toddlers and pets are issued credit cards, and certainly many 
parents complain to many of us that their teenagers and college 
students are getting credit cards--but seriously, what evidence 
is there that pricing is based on risk and that it is done with 
any competence?
    Senator Levin held a compelling hearing earlier this 
Congress in which he made a good case that credit card 
companies increase rates with no basis in fact. He had 
witnesses who had multiple rates from the same cardholder. And 
how do multiple rates for the same cardholder show any 
reflection of the risk of the cardholder?
    Again, I ask any issuer or Mr. Ireland or any academic to 
respond.
    Mr. Baer. Chairwoman Maloney, I would like to respond, I 
guess, to the toddlers and pets point, as I think it represents 
a fundamental misunderstanding of the difference between 
marketing and credit extension at issuers.
    We send out millions of pieces of mail, obviously, in order 
to market our credit cards. We purchase lists in order to find 
out who we should be marketing to. That may mean that we end up 
sending a marketing solicitation, for example, to a toddler. 
Say, for example, a toddler signs up on the Carolina Panthers 
Web site as a fan. If we have a Carolina Panthers card, we may 
send that toddler a card, even more likely if the toddler lies 
about his or her age.
    That is not to say, however, that toddler is ever granted 
credit. The toddler would have to send in an application. That 
application would ask for their age. And then once the 
application was received, we would check on that toddler's 
credit score. We would pull a bureau report, we look at their 
credit history, and we would see that they had no credit 
history.
    So although that toddler or pet might get a mailer, there 
are really three reasons they would not get a card: First, 
because it is illegal; second, because they have no credit 
history and are unlikely to repay; and third, especially with 
the pets, we find that they have trouble pulling the cards out 
with their little paws.
    [Laughter]
    Chairwoman Maloney. But then to the more serious point: How 
do multiple rates for the same cardholder show any reflection 
of the risk of the cardholder? That was a point that was made 
in the Levin hearing and other hearings, and that is made 
really by individuals to our offices.
    Mr. Baer. I will let the other issuers have a turn as well. 
But I think that is reflective of the competition in the 
industry. A given customer might receive a better rate as a 
result of a promotion, which again we are trying to take market 
share from a competitor.
    If the customer is part of an affiliate group--for example, 
a Panthers fan or a member of the National Education 
Association or a medical practice group--that affiliation might 
get them a better rate. So it is really a reflection of 
competition that we will offer different rates based on how 
someone qualifies for a solicitation. But I will let others 
talk as well.
    Chairwoman Maloney. Would anyone else like to comment 
before--
    Mr. Ireland. Just a short comment, Chairwoman Maloney. The 
analysis of risk is an attempt to predict future behavior, and 
that is necessarily imprecise. And I would be kind of surprised 
to see multiple issuers, for example, agreeing 100 percent on 
the risk of any individual person who wasn't in bankruptcy or 
wasn't, at the other end of the scale, in super-prime 
territory.
    The question is not, it seems to me, whether that works all 
the time. The question ought to be: Is that a good idea, and 
should people be doing that? And I think, economically, pricing 
for risk is a very sound principle and is a key to market 
economies.
    Chairwoman Maloney. Well, the question was on the same 
cardholder having different cards with the same issuer with 
different rates. I guess another way of asking it is: What data 
do any issuers have to support the argument that repricing is 
based on risk? Anyone? Any comments from anyone?
    Ms. Franke. I would be glad to respond to that, in that we 
would love to share with the committee, for furthering the 
education of everyone, the statistical probability that we see, 
which is difficult to discuss in detail here. But again, we 
would be more than happy to share that information that is 
indicated by the reasons that a customer goes into default with 
one of our credit card companies.
    And we can assure you that there are indications that a 
customer is more risky, which will lead us to make a pricing 
change. And at Chase, we only reprice a customer now if they do 
not live up to the terms of their agreement with us. And we can 
show you indeed that if a customer defaults on their agreement 
with us, that their risk has increased and that we need to take 
an appropriate price change to cover that risk.
    Chairwoman Maloney. Mr. Ausubel? And then my time is 
expired.
    Mr. Ausubel. The point that I think is worth emphasizing is 
that there is no reason under economic theory that you would 
expect that the issuer is simply going to assess the exact 
amount of extra risk and then price equal to that amount.
    Suppose you have a customer whom you believed had a 5 
percent extra probability of default. But suppose your model 
told you that you could raise their rate by 10 percent and they 
probably wouldn't leave you. Then you will do it. They are not 
interested in simply coming up with the number and then setting 
their price equal to the cost.
    Chairwoman Maloney. Yes. That was the point that was made 
in Ms. Warren's testimony earlier.
    Would you like to augment?
    Okay. Ms. Biggert.
    Mrs. Biggert. Thank you, Madam Chairwoman.
    I would like to continue a little bit on this risk issue. 
Let's say we have--and maybe, first of all, Ms. Franke, because 
you said you don't include FICO scores or anything as far as 
looking at somebody's credit. But let's say somebody has had a 
card with one of the issuers for a long time.
    One of the cardholders has an income of $45,000. They have 
just defaulted on a car loan. They have defaulted on three 
other cards. And they have not paid their mortgage in 3 months. 
And the other person has maybe--could be the same amount of 
money, but let's say they have a higher income and they have 
one card, and they always pay the full balance on time.
    Do you think that the risk of the customer paying back the 
card, the one who has defaulted and had all the problems, do 
you think that risk stays the same? Does it go up, or does it 
go down?
    Ms. Franke. We would believe that risk was greater with a 
customer who has indicated a difficulty in meeting their 
obligations.
    Mrs. Biggert. But you are saying then that that should not 
be taken into account, whether to raise the interest rate?
    Ms. Franke. We are saying that at Chase, we believe that 
the best way for us to deal with our customer is to limit our 
pricing actions to those things that the customer understands 
would cause them to be in default with us. And that is missing 
a payment, exceeding their credit limit, or writing us a check 
that does not have sufficient funds.
    I do believe, however, that as a statistical indicator, 
that risk would be increased if someone is significantly in 
default on other obligations.
    Mrs. Biggert. But you would just keep them on the--as long 
as they paid your card, there is no--
    Ms. Franke. That is correct. At Chase we believe that we 
can adequately manage the risk based upon their behavior with 
us.
    Mrs. Biggert. Okay. Mr. Ireland, would you comment on that?
    Mr. Ireland. Well, I would like to go back just a moment to 
Congresswoman Maloney's example because it shows, I think, part 
of the difficulty with the bill.
    If I am a card issuer and I give multiple cards to the same 
person and my system is working right, I ought to be charging 
them the same rate on different cards, I think. I think the way 
the bill works, as I read the language of the bill where you 
make changes going forward based only on the performance of 
that account, that the bill would actually create a situation 
where it is much more likely that you would be charging the 
same cardholder different rates on different accounts because 
you couldn't consider the performance in another account for 
the individual account. And to the extent that is viewed as a 
problem, it aggravates that problem.
    Mrs. Biggert. Thank you.
    Mr. Baer, what would you do with do with the two separate 
cases?
    Mr. Baer. Sure. I think it is worth noting here that, 
again, there are two different ways where customers primarily 
get repriced. One is through trigger-based default repricing. 
At Bank of America, we will only do that based on two types of 
events, late or overlimit, not bounced check; and we will only 
do it, again, if they do it twice within a 12-month period. And 
even then, we do an individualized risk assessment.
    But I think it is fair to say that is how most people get 
repriced across the industry, is by default repricing. We 
also--and this is one of the reasons we can be more forgiving 
with respect to default repricing--we also do look at someone 
who is, as you described, defaulting to other issuers.
    Again, 94 percent of our customers for 2007 ended up with a 
lower or the same rate as at the beginning of the year. But 
there were a percentage of customers--I think it was actually 2 
to 3 percent--who we risk-based repriced because of behaviors 
such as defaulting with other issuers, maxing out their credit 
lines.
    Again, we hesitate to do that because this is a competitive 
market and we don't want to lose customers and they don't like 
it. But in those cases, we feel there is genuine risk that 
merits that repricing. And I think to Ms. Franke's point, I 
mean, our numbers show that if you identify that group of 
people with those risks, they actually default at a 50 percent 
higher rate than our average customers.
    So that again to us demonstrates the predictability of the 
models and the fact that this is legitimate risk-based pricing.
    Mrs. Biggert. What about the customer who always pays the 
minimum balance, never pays off any of it? Doesn't that 
exponentially raise the--well, the monthly payments go that it 
compounds interest at such a high rate that eventually they are 
just going to run into their credit limit.
    Mr. Baer?
    Mr. Baer. First let me stress that is an unusual case. I 
think we have looked at our numbers, and we have only about 1 
percent of our customers who are paying only the minimum 
payment for, I think, 6 months in a row. So that is very 
unusual behavior.
    And I think most of our customers--in fact, you could say 
99 percent of our customers--understand that the responsible 
way to manage credit is not just by making the minimum payment 
every month. So that is certainly a risk flag.
    But I think when you look at the way that we model, it 
would be unusual for someone--perhaps even rare--for someone to 
be repriced on a risk basis solely because they are making 
minimum payments. It is generally going to take a lot more than 
that.
    Mrs. Biggert. Would you be happy if the Fed acts to solve 
the issues of concern? Does it matter to the issuers whether 
the regulators make changes or Congress?
    Mr. Ireland?
    Mr. Ireland. Well, my experience is that in technical areas 
like this, the regulators will go in with a scalpel and do it 
more precisely and with less error. And I think one of the 
debates that has been going on here is how to separate out what 
some people consider inappropriate practices from dealing with 
legitimate risks. And I think that the regulators have--are 
better equipped to do that than the Congress is.
    Mrs. Biggert. Ms. Franke?
    Ms. Franke. We believe that the regulatory process should 
be allowed to continue, and that it will accomplish a great 
deal of what the legislation is attempting to accomplish.
    Mrs. Biggert. Mr. Finneran?
    Mr. Finneran. Yes, Congresswoman. We agree that the Fed has 
all the power. And in fact, they are three-quarters of the way 
through addressing a lot of these issues in their proposal to 
revamp the disclosure rules on Reg Z. And again, with the 
latest comments by Chairman Bernanke, they are going to take it 
further and consider taking action under their unfair and 
deceptive acts and practices authority with respect to some of 
the problems that we have been talking about here with the 
committee.
    Mrs. Biggert. Mr. Baer?
    Mr. Baer. The same.
    Mrs. Biggert. And Ms. Warren, would you think that could be 
solved by regulation?
    Ms. Warren. Well, the problem is, I think, as we heard, 
they haven't regulated. If you have regulators whose principal 
responsibility is to ensure the profitability of the banks 
rather than to protect the customers, then we end up with the 
circumstances we have that Chairman Frank started with.
    And that is we don't hear the words ``consumer protection'' 
spoken by a Federal Reserve Chairman for just about 27 years. 
And I don't think we can afford to go another 27 years of 
letting the banks make up the rules on what kinds of credit 
card practices they want to engage in.
    Mrs. Biggert. But when he said in the testimony this time, 
it was consumer protection.
    Ms. Porter?
    Ms. Porter. I would just echo Ms. Warren, that he said 
consumer protection. And he may be the Federal Reserve Chairman 
for another year or 2 years or 3 years or 4 years, but our 
Congress is charged with making laws that endure and stand the 
test of time, and with balancing the rights of consumers and 
regulators.
    The Federal Reserve's primary responsibility is to ensure 
the stability of the banking system. I am glad that Chairman 
Bernanke is going to also embrace, for the first time in 
basically my lifetime, the obligation to use the unfair and 
deceptive practices authority.
    Mrs. Biggert. Well, these regulations will be out at the 
end of this year, so I think that will be an issue that will be 
taken care of by then.
    I yield back.
    Chairwoman Maloney. Mr. Watt?
    Mr. Watt. Thank you, Madam Chairwoman, and thank you for 
this hearing because I think this is a complicated area and the 
need for hearings on the bill extremely important.
    Let me just deal with one thing about the variation changes 
in payment dates, particularly for people like me who pay bills 
only once a month. When somebody changes my payment date, it is 
a major, major problem.
    Is there some business justification for that? I think all 
three of the representatives of companies here testified that 
your company doesn't do it. That is a different question. But 
is anybody prepared to make a business case, a justification 
case, for being able to just change a payment date?
    Mr. Baer. I guess I would make more of a calendar case than 
a business case. For us, as I understand it--and this gets down 
into the weeds--we basically try to keep a 30-day cycle. But it 
is--and it ideally would be the first business day of one month 
to the first business day of the next. The problem arises, 
though, that you have Saturdays and Sundays, and we don't have 
them come due on Saturdays and Sundays. Same for holidays.
    So depending on what month you are in, how many days there 
are in the month, depending on how many holidays there are in 
that month, it is going to move around a little bit. But we 
certainly don't try to move it around--
    Mr. Watt. I understand. That is not the question I am 
asking. I am asking, is there some real overwhelming business 
justification for having the right to change a date, a payment 
date, arbitrarily? Well, ``arbitrarily'' is a bad word, but to 
change a payment date?
    Mr. Baer. Again, I think the only reason our payment date 
would move around, other than as you might expect it, is for 
the reason I have given. But otherwise, we don't do that.
    Mr. Watt. All right. Let me see if I can zero in on this 
Visa report that Mr. Ausubel talked about.
    What year did that cover? Do you remember?
    Mr. Ausubel. It was getting published annually, and it may 
still exist.
    Mr. Watt. So is that something you could get access to and 
provide to the committee to help us evaluate the relative 
benefits that are coming from late payment fees or other kinds 
of fees versus interest rates?
    Mr. Ausubel. My assumption is that you would have to make a 
formal request to a bank that is a member of Visa or a request 
to Visa itself.
    Mr. Watt. Bank of America is a member of Visa. So is that 
something you all could get access to and provide to the 
committee?
    Mr. Baer. I don't know about the particular report, but we 
are certainly happy to work with the committee and get that 
kind of information if it is available.
    Mr. Watt. On this issue of fees versus rates, the obvious 
appearance to the whole world is that the credit card industry, 
everybody in it, is making a lot of money on fees versus rates. 
Is that the case or--I mean, you know from your own personal 
bank's experience surely how much you are making on fees versus 
actual interest, don't you?
    Mr. Baer. Yes. No, I don't know the exact--
    Mr. Watt. I am not asking you the exact amount. But you are 
making a profit on late fees, aren't you?
    Mr. Baer. Actually, if you look at the amount that we gain 
in late and overlimit fees, it is a fraction of the amount that 
we lose in credit losses. So our late and overlimit fees are--
I'm just guessing--
    Mr. Watt. But credit losses are supposed to be priced by 
interest rates, aren't they?
    Mr. Baer. Well, that is what I am saying, is--
    Mr. Watt. I mean, isn't that the risk-based that--am I 
missing something here? The risk-based analysis is supposed to 
get you to a rate that covers credit losses. Isn't that right?
    Mr. Baer. Exactly, Congressman. What I am saying is that 
the late and overlimit fees are not sufficient to cover our 
losses. That is why we rely upon interest, including risk-based 
interest, in order to recoup those losses and earn a reasonable 
risk-adjusted--
    Mr. Watt. I guess the question I am asking is: Should you 
be relying on late payment fees to cover those before you are 
relying on interest rates? You are saying you rely on interest 
rate adjustments to cover those losses because late payment or 
other fees don't cover them. Shouldn't it be the reverse, I 
guess is the question I am asking.
    Mr. Baer. Well, and again, this speaks to the competitive 
market. I mean, it would be nice to be able to rely, for 
example, on annual fees. But what our customers show is that 
they don't like high late and overlimit fees, and they will 
change issuers if we charge them. So that is why we tend to 
rely more on interest. There may be other dynamics at work, but 
I think that is one.
    Mr. Watt. My time is up--5 minutes goes so fast--and I have 
a whole list of questions. But I will yield back.
    Chairwoman Maloney. Mr. Ausubel had his hand up. Did you 
want to make a comment on his testimony?
    Mr. Ausubel. I think, to give a fairly direct answer to the 
questions that Mr. Watt was asking, there is no doubt in my 
mind that issuers have erected an array of policies meant to 
induce consumers to accidentally miss payment--for example, 
delaying the mailing of statements, and giving a fairly short 
time for them to send checks in.
    I, myself, was subject--I paid a bill one day late last 
month and was assessed a $38 late fee and a finance charge of 
around $40.
    Mr. Watt. I think that has happened to every single one of 
us at one time or another, including myself in the last month. 
So I don't think there is any dispute about that, which is one 
of the things that troubles people. And it was as a result of a 
change in the payment date. That is what is troubling to 
people, I think.
    So I personally don't have any problem with assessing risk 
and charging interest based on that assessment of risk. But I 
think what is troubling here to a lot of people is that the 
interest rate that is being charged is really not reflective of 
anything any more because, to the extent that risks are being 
covered, they are really being covered, as Mr. Baer said, 
primarily by late payment fees rather than having an interest 
rate that factors in the actual risk that is being taken.
    So I am sorry, Madam Chairwoman. I had already yielded 
back.
    Chairwoman Maloney. I thank the gentleman. That is an 
important point, and as you know, the bill sets a specific pay 
date and a specific time so that people will not be tripped up 
in the future.
    Mr. Castle?
    Mr. Castle. Thank you, Madam Chairwoman.
    Let me start by asking for unanimous consent to submit a 
chart that shows revenues and profits of credit card issuers 
and a card industry directory for $100 credit card assets. And 
this was done in October of 2006. It reflects 2004, and it is 
GAO's, ``Credit Cards: Increased Complexity in Rates and Fees 
Heightens Need for More Effective Disclosures to Consumers,'' 
sort of in response to your earlier question about some of the 
numbers which I have. You may want to examine it.
    Chairwoman Maloney. Without objection, it is so ordered.
    Mr. Castle. This is sort of an unusual panel as I sit here 
and listen to you and read your testimony. Unfortunately, I had 
to be out while most of you spoke. Generally speaking, the 
banking institutions represented here seem to have much better 
practices, if not excellent practices, in this area, and 
perhaps some of these changes we are talking about have already 
been made by many of your institutions.
    There is some disagreement about the best methodology of 
regulating, and I am going to try to examine this because I am 
concerned that we are jumping ahead of both Regulation Z and 
the unfair and deceptive practices policies which the Federal 
Reserve is getting ready to make public in the next couple of 
months, at least according to what Chairman Bernanke told us 
when he was here.
    I tend to agree with what Mr. Ireland said, that regulators 
may balance interests more precisely and are better equipped to 
do it than we are on some subjects. I worry about broad 
legislative proposals when perhaps a better way to protect 
consumers could be done by regulation in a more precise way.
    So let me just start, Mr. Ireland, by asking you: Does the 
Federal Reserve Board have sufficient authority to rewrite card 
disclosures to address current concerns?
    Mr. Ireland. Yes.
    Mr. Castle. And Ms. Porter, you mentioned that you are 
concerned this has gone on for years without regulation. I 
think we all share that concern. I don't think anyone up here 
thinks that we shouldn't be doing this. It is a question of how 
we are going to do it.
    But have you factored in that they are looking closely at 
Regulation Z and what they have said about the unfair and 
deceptive practices at the Federal Reserve?
    Ms. Porter. I think that it is possible that a Federal 
regulator could attempt to correct many, although not all, of 
the practices covered in H.R. 5244. But those regulations are 
more easily changed, and the fundamental focus of the Federal 
Reserve has not been on ensuring consumer protection.
    And indeed, the Federal Reserve, unless it acts--has 
authority to supervise certain kinds of banks. But it also has 
authority to implement Regulation Z. But its past actions for 
the last 30 years have emphasized disclosure, disclosure, 
disclosure. And many of the provisions that H.R. 5244 would ban 
are not related to disclosure.
    Mr. Castle. Well, you can't--I mean, I would imagine, like 
me, you would like to see all this before we go too far. I 
mean, I just--you may be right about what you are saying. I 
don't know. But I am sort of curious as to what is going to be 
in Regulation Z and what is going to be in this unfair and 
deceptive practices report that they are going to give so we 
can determine if what you are saying is correct. It may well 
be, but I think that is something that we need to do.
    Mr. Ireland, can the consumers avoid the fees that many 
have complained about here today?
    Mr. Ireland. I think generally the answer is yes. If the 
consumers understand their accounts, pay attention to their 
accounts, and deal with them carefully, I think they can avoid 
the fees. I personally cannot recall incurring one of those 
fees, so it is at least possible for somebody to do that. And I 
charge on my credit card in preference to any other means of 
payment because of additional rights I get in terms of claims 
and defenses under the Truth in Lending Act.
    Mr. Castle. Did you say you personally can't recall 
incurring any of those fees just now?
    Mr. Ireland. That is correct.
    Mr. Castle. You are probably the only person in this room 
who hasn't incurred any of those fees somewhere or other.
    The credit card industry believes that the legislation 
before us, as I understand it, is inflexible and micromanages 
things in a way that is likely to increase interest rates for 
everybody else and reduce the availability of credit.
    Could any of the credit card companies indicate 
specifically what you are concerned about?
    Mr. Finneran. Yes. There were several provisions, I think, 
that were mentioned in our various testimony. One was 
redefining the grace period, which extends for all consumers an 
interest-free period where there would be no interest at all 
charged with respect to the loans that are made under credit 
cards. This changes the existing practices quite dramatically.
    I believe another provision was the requirement that 
payments be allocated in a particular order, which again is a 
change from most of the practice and indeed something that at 
least we have found that consumers fully understand and have 
shown themselves capable of taking advantage of many of the 
offers that the competitors in the marketplace make.
    And I believe Mr. Ireland had a few other provisions that 
he mentioned as well.
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Castle. Thank you.
    Chairwoman Maloney. Unless, Ms. Franke, did you want to 
make a comment on this?
    Ms. Franke. I was just going to make one comment, which was 
I would like to add to the point of the consumer enjoying the 
benefit of low rate offers that we do today through what we 
call balance transfers. And I do think, if we are not permitted 
to allocate those payments to the lowest rate, you will see 
those offers eliminated in the market. And we would be able to 
tell you that the consumer would be very disappointed if that 
were to happen.
    Mr. Castle. Thank you. Thank you, Madam Chairwoman.
    Chairwoman Maloney. Mr. Ackerman?
    Mr. Ackerman. Thank you, Madam Chairwoman.
    This whole thing is really a real mess. And the comfort 
level of consumers is not improving any, from what I can see, 
except for some people maybe around the margins, depending on 
which credit card company they might be dealing with.
    But one of our colleagues who expressed some concern 
earlier in saying that he was concerned about supporting this 
legislation because it would--and I will quote him--he said he 
``feared too many Americans would be denied credit'' if we 
reined in some of the vagaries and uncertainties that consumers 
face fathoming this.
    To quote the Pope when he spoke at Gdansk to the boatyard 
workers, ``Be not afraid.'' They will find you and they will 
give you credit. If you can't afford a house, if you have lost 
your job, if you can't verify your income, there are people 
marketing that they are going to buy you a house if you sign on 
the dotted line.
    There is no way that you are not going to get offers of 
credit. Last calendar year, these are solicitations to me and 
my wife. That is last calendar year. At the end of the year, we 
moved. I can't tell you what that does. But one of the things 
it does is it triggers everybody--as soon as you pay off a 
mortgage or apply for a new mortgage, every credit card company 
sees you in the crosshairs and you start getting more and more 
notices.
    I don't know how they found us so quickly. I couldn't 
change my address on the GPS, and I got to the mailbox at my 
new place and I had credit card offers up the wazoo. The 
interesting thing is I get some and my wife gets some, 
sometimes from the same institution, offering us different 
rates on identical word for word until you get to the rate 
part. And if we are both on the hook for the same card, I don't 
know how that works.
    My mom has been gone for 10 years. They found her now at my 
new address, and you should see: Her credit rating is better in 
the past couple of years than it was for her whole entire life, 
there are so many offers.
    And if you take a look at the confusion that these things 
have, it is absolutely astonishing. I mean, you could pick one 
out of the pile and read the back of it, with asterisks and 
swords and notes and crosses and everything else you could 
imagine. And you could actually read it verbatim one night at 
the comedy club and walk away with first prize. It is 
astonishing.
    It is a time for raising hands, I guess, earlier in the 
meeting. And I mean, there are people--I try to understand 
these and I try to read it to see if there is a good deal 
because I like a good deal when I can get one. I don't find it 
very often.
    But sometimes it is hard to understand what I have to pay 
in these great deals that are advertised all over the envelope 
in 12 different colors and things. And the zero is always the 
biggest thing on the thing, both on the envelope and in 
iridescent colors and what have you.
    But to figure out what it means and to find out what you 
are really paying is befuddling. Even if you are a Congressman 
who has been elected 13 times, are on the Financial Services 
Committee, taught mathematics, was an investigative reporter, 
and thought he was an educated consumer, not knowing half as 
much as any of you on the panel, can't figure out in 5 minutes 
what he would be paying if he borrowed $1,000 on a promotion 
that ended in 3 months, except if you paid one of the checks 
that they give you with your name already printed on it so it 
is really easy to get into this thing.
    And then you take out a cash advance a month later on the 
same $1,000. You pay half of it by the date the thing expires. 
With category A, B, C, and D on the back, how much in real 
interest would you be paying if there is a 3 percent 
transaction fee up front?
    And if any of you sitting there are representing a credit 
card company, I have your notice in here because I read who you 
are. So everybody is represented and then some. So if anybody 
would answer the question that I just posed, I will bring the 
pile to you, pick out one. You can use a calculator and tell 
me, at the end of 13 months, what your real interest rate would 
pay or how much in dollars you are paying. You have the balance 
of my time. Anybody?
    Mr. Levitin. I can't tell you the balance. But you know 
what? It doesn't matter because even if I could calculate that, 
there is probably an any time/any reason term change in there.
    Mr. Ackerman. Yes.
    Mr. Levitin. That means whatever I calculate could be 
wrong.
    Mr. Ackerman. So even if you were a much better consumer 
than me or any other consumer and really understood the 
legality, the fact that they all say, for any reason, if you 
didn't pay--if you defaulted on your Sears card and didn't pay 
for your socks--that is not stocks; that is socks--that your 
whole life starts to change on all the credit that you have 
been issued that you have ever had and all the cards that you 
had.
    So it really doesn't matter because any time, any place, 
anywhere, and for almost any reason, as long as you get 
notified--and notified, my goodness, what we have done 
requiring notification and privacy. You get three or four 
notices for each one of these every year as to the privacy. You 
can't keep up with the reading. And your eyesight doesn't get 
better.
    It is a real mess. The question I have, and everybody seems 
to think that for the most part, Regulation Z is a good thing--
the question is: What good is all this disclosure if all the 
disclosure does is tell you the ways that your credit card 
company can screw you, but it does it in bolder print or puts 
it in a box? What good is the disclosure? Anybody?
    Chairwoman Maloney. Any comments?
    Mr. Ackerman. We need more witnesses or I will yield back 
the balance of my time.
    Ms. Franke. I would say that the disclosure--
    Mr. Ackerman. I am sorry. Pull your microphone over.
    Ms. Franke. Excuse me. The disclosure helps the consumer to 
make an informed decision. It is a highly competitive industry. 
The disclosure will allow the customer to understand what 
product they are buying and what features they want to select.
    [Laughter]
    Mr. Ackerman. People are chuckling up here and back there. 
It seems that the disclosure is a further attempt to obscure 
and obfuscate what you are trying to figure out.
    Chairwoman Maloney. And they always have the any time/any 
reason tied to it.
    Mr. Ackerman. Mr. Ausubel?
    Chairwoman Maloney. Okay. Mr. Ausubel, and then we must go 
to Mr. Garrett.
    Mr. Ausubel. Another example that would support what you 
are saying is double-cycle billing. As I understand it, there 
are proposals--
    Mr. Ackerman. I paid one payment 2 months ago, left New 
York, came back to Washington, and had to race back home 
because my wife said we had another bill and it was going to be 
late.
    Mr. Ausubel. There are these proposals to disclose better 
double-cycle billing. Now, if you are going to do your hand-
raising question, how many people could sit down with a 
calculator and compute double-cycle billing? Or, for that 
matter, how many people really know what double-cycle billing 
is in the United States? What good would disclosing do?
    So my read of the regulatory history is that the regulators 
have been lax in enacting consumer protections except under the 
threat of legislation. So if I am hearing now that some 
regulations will be promulgated under the threat of 
legislation, it tells me you need legislation.
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Garrett?
    Mr. Ackerman. Let me just say something. I didn't mean to 
embarrass anybody here or any of the companies because you are 
among the better that are represented. Thank you.
    Chairwoman Maloney. Thank you.
    Mr. Garrett?
    Mr. Garrett. I thank the panel and I thank you for the 
opportunity.
    Just on the closing notes over here, I presume, just as in 
your contracts there is any time/any reason that you may make 
those changes, there is an any time/any reason that I as a 
customer can just void this contract--or not void this 
contract, but pay my bill and, in essence, be out of it.
    But again, as I said at the very beginning, I appreciate 
your testimony. I really have found it all interesting from all 
sides. Mr. Levitin, I really found yours quite interesting. I 
will be reading through it a little more so I can follow it 
all. But everyone here, I do appreciate it.
    This issue here with credit cards is really part of a 
larger issue that I referenced before, and that is the overall 
economic issue and the recession and the problems that we face 
right now. So I am going to digress for just a moment to face 
that larger issue. And we have Mr. Baer here that I want to 
throw out this question from.
    We are having a tougher time with credit markets and 
toughening in the credit lending in general. Can you give me 
your thoughts, your two cents, if you will, on the potential 
for banks to issue something called covered bonds to address 
this issue?
    My understanding is this is something that is already going 
on over in Europe. It is akin to what we do over here with the 
GSEs. It might be a way to open up some of the market and 
provide more flexibility and get the credit going again. And it 
does so, if I understand it correctly--and I will close on 
this--it does so in a way that keeps it with the banks, keeps 
more adjustability by the banks, and keeps the capital 
requirements there with the banks, if I am understanding it 
correctly. But correct me if I am wrong.
    Mr. Baer. Sure, Congressman. I think you have it correct. 
Covered bonds are actually a $2 trillion market in Europe. They 
are a primary, maybe the primary, means by which mortgage 
finance is financed in Europe. Yet in the United States, there 
have only actually been two issuers, we being one of them, who 
have gone to market. And there is a legal, almost technical 
legal obstacle, which I will get to.
    Mr. Garrett. Yes.
    Mr. Baer. But basically, the way cover bonds work is it is 
issued by a bank under its own name, so in that way it is like 
straight corporate debt. However, in the event that the issuer 
fails, there is a cover pool of mortgages that stay on balance 
sheet but that are identified as collateral in the event of 
failure.
    That makes this a very high credit quality issuance because 
you not only have the bank's name but then, in the event of 
default, you have the cover pool. It is important to understand 
it is different from asset-backed securities because with an 
asset-backed security or mortgage-backed security, you are 
looking to the underlying mortgages to generate the cash flows. 
But here you are looking to the bank to make the payments just 
the way it would on corporate debt. And you are only looking at 
those mortgages in the event of insolvency.
    Furthermore, unlike ABS, the issuer is required to refresh 
that pool of mortgages and always keep current, non-prepaid, 
non-defaulted mortgages in that pool. So it is a very high 
credit quality issuance.
    The only obstacle that we have seen to a large, potentially 
huge market in the United States around this is the question 
about what happens in the event of an issuer default, 
particularly with respect to a 90-day automatic stay that 
occurs in the event of a receivership in the United States.
    This question is largely up to the FDIC, and I know 
Chairman Bair has indicated that she is taking the lead in 
looking at this issue. I think other regulators--I note 
Secretary Paulson mentioned it today--have also looked at it. 
But we understand the FDIC has this under advisement and is 
considering whether some guidance in this area would 
potentially yield a potentially very large source of credit for 
mortgages.
    Mr. Garrett. Okay. At the beginning of your comments, there 
were impediments to implementing going forward with this. It is 
over at the FDIC. Is there anything that we need to be doing--
first, doing what we are doing here, having a hearing on it in 
more detail? And second, is there something congressionally, 
legislatively, that we should be looking at, or is that just 
all over there?
    Mr. Baer. Well, in Europe, and I think as of this month in 
the U.K. to the extent it is not part of Europe, there is a 
legislated covered bond program that is--these bonds are issued 
pursuant to legislation which the market takes as a good 
associate that they will continue to receive payments in the 
event of a default, that is, during the resolution of the 
institution, and that they can still look to that mortgage 
collateral.
    The FDIC could, and may want to just as an initial step, 
issue regulatory guidance on that. They have a fair amount of 
discretion. I won't speak for them, but they could certainly 
tell you some discretion about how they would act during an 
automatic stay period.
    So it may be they want to take a regulatory step before a 
legislative step and then decide how much legislation is 
necessary. But I would defer to the FDIC with respect to those 
judgments.
    Mr. Garrett. And I know we have other--this is a little bit 
far afield, but it is still on the credit issue. There are 
other economists and professors here as well. Is there anyone 
else that has a thought on it? And if not, I appreciate your 
insight.
    I see the chairman is not here. But does this chairman 
appreciate consideration for a hearing at some point on the 
topic? And there is that red light. Thank you. I didn't get 
into my other--I may submit some other questions that I do have 
for a couple of people. So thank you.
    Chairwoman Maloney. Thank you. The Chair recognizes Mr. 
Sherman, Congressman Sherman.
    Mr. Sherman. Thank you, and thank you for putting forward 
this bill.
    I know that there is this kind of Ayn Rand model of the 
universe where you have two equal parties free from government 
control negotiating their independent contract. The problem you 
have here is that on the issuer's side, you spend about $5 
million--I am making up a number--to do the legal research, to 
figure out your position, and to program your computers.
    And then the consumer spends about 25 minutes of time 
trying to figure out which credit card to use. And if we were 
to value the time the consumer can put in by their billing rate 
as a bookkeeper or whatever level of financial experience they 
have, you may have $5 worth of time being invested. And then we 
are told, well, this is an equal bargain, one side putting in 
$5 million worth of transactions cost, the other one putting in 
an amount of time worth about $5.
    The banks have put forward the idea that somehow, these 
oppressive provisions--and there are oppressive provisions in 
some of these contracts--benefit other consumers because while 
rates would be higher--
    Chairwoman Maloney. Excuse me. Congressman, can you take 
the chair? I am going to run and vote and keep the hearing 
going so that we can conserve time.
    Mr. Sherman. Okay. Sure.
    Chairwoman Maloney. Thank you so much. We have been called 
to one vote, but we are going to keep going.
    Mr. Sherman. [presiding] So the theory is that I won't be 
the victim of some sort of rate increase and that I will be the 
beneficiary of it because you will give me lower rates.
    Can someone tell me what is the average rate of interest 
imposed today on those who have balances on their credit cards? 
I mean, I tend to see it as between 15 and 20 percent. Do we 
have a different number?
    Mr. Finneran. I think the GAO report that was issued about 
18 months ago, I believe the figure was somewhere in the 12 
percent range.
    Mr. Sherman. The 12 percent range? So it is--oh, I didn't 
see you there.
    Ms. Porter. I would just respond that the GAO report was 
issued 18 months ago, and I think it is important that Congress 
and regulators have more up-to-date information than that; and 
also that the GAO report relied on voluntary disclosures of 
only select issuers and may not be representative of the entire 
industry.
    Mr. Sherman. Yes. I have seen an awful lot of cards being 
issued at over 25 percent. Yes?
    Mr. Levitin. I believe it is also important to note that 
the GAO report, I believe, did not include subprime issuances 
in its population. So the number is probably inflated.
    Mr. Sherman. In any case, it is hard to say that America's 
consumers are somehow benefitting from wonderfully low rates 
because a few of their friends may be paying more into the 
system as a result of some these oppressive provisions.
    One thing that isn't in the bill that I am thinking of 
suggesting to the author is the idea that every credit card 
statement on which there is a balance should disclose: ``Dear 
consumer, if you make the minimum payment, you will be paying 
this balance off for this amount of time, and you will be 
paying not only the principal amount of X but a total interest 
of Y. So this is how long it will take you, and this is how 
much interest you are going to pay us--assuming we don't change 
the rate--if you choose to just pay the minimum balance.''
    Does anybody have a comment on whether that should be 
included at the bottom of each statement? Yes?
    Ms. Warren. Congressman, yes, I do. I think consumers want 
this. I think one way we know this, that we have seen it 
tested, is the State of California passed a law requiring 
precisely this. And I think it gives us an insight into now our 
regulatory agencies in Washington have worked.
    Not only did the banks come in, the credit card issuers 
come in, and ask that the bill be overturned, the grounds on 
which they wanted it done was that any attempt to require them 
to disclose any information about whether or not--how much it 
would cost a consumer if they financed over time was preempted.
    And the OCC came in not on behalf of the consumers but on 
behalf of the credit card issuers to take the position that 
their non-requirement of information be the standard for 
requirement. And the Ninth Circuit Court of Appeals bought that 
argument.
    Mr. Sherman. It is rare that the Ninth Circuit--every other 
circuit would have probably ruled that way. I am surprised at 
the Ninth. But I will point out it does make sense to have a 
single national rule. It is either good for consumers in 
California and Texas, or it is bad for consumers in California 
and Texas.
    And what California was responding to was the total failure 
to have good national standards. I mean, I am sure there are 
quite a number of witnesses who could explain how burdensome it 
would be to have 50 different standards of this. But sometimes 
California feels the need to act when the Federal Government 
doesn't, perhaps even on greenhouse gases. But that is a 
different issue.
    I believe my time has expired. Please proceed.
    Mr. Hensarling. Thank you, Mr. Chairman. Although I have 
only been here for about 6 years and not 10 or 15, I can't help 
but note the irony of how people are decrying the excess amount 
of credit offerings that exist in America today when I know, I 
know in this very room, 10 to 15 years ago, many of these 
representatives of credit card companies were hauled before 
Congress because they weren't giving enough credit out to low- 
and middle-income Americans. And I do wish to note that irony.
    As I look at the historical record, I see where there was a 
significantly fewer number of Americans who had access to 
credit, and they seemingly paid a universally high rate before 
the advent of competition and risk-based pricing.
    I also note that approximately 20 years ago, the fringe 
benefits that we see today weren't around. I know today that I 
have the opportunity to get different rates, different fees, 
cash back, car rental insurance, donations to my favorite 
charity, frequent flyer miles, and, if I pay my bill on time, I 
get an interest-free, unsecured loan from the time of purchase. 
Such a deal.
    The first question I have is--and anybody who has the 
answer, I would be happy to hear it--how many customers paid 
the highest interest rate 20 years ago, and how many pay it 
today? Do we have anybody on the panel who has knowledge of 
that?
    [No response]
    Mr. Hensarling. If not, we will move on. How many customers 
might have paid no transactional cost last year? I would even 
be happy with a ballpark figure. Any takers on that one?
    [No response]
    Mr. Hensarling. I apparently seem to be stumping the band 
at the moment. Let me move--yes?
    Mr. Levitin. On that one, I may not be giving you exactly 
the figure you are looking for, but I can say that I have seen 
data that says about 39 percent of consumers did not 
consistently revolve a balance over the course of 2006.
    Mr. Hensarling. So a little less than half, then, would be 
your best recollection. Thank you.
    I know that, not unlike a balloon, when you push in on one 
side, something pushes out on the other side. When I look at--I 
must admit, philosophically I have trouble with telling 
informed consumers, assuming there is proper disclosure, that 
somehow we are going to outlaw consensual commercial 
transactions.
    But when I look at history before the advent of risk-based 
pricing, and I look at where we are today, it seems to be a far 
improved industry. But I notice that in the U.K., they 
seemingly have had a similar experience. In 2006, they decided 
that credit card default fees were too high and ordered card 
issuers to cut them or face legal action.
    In February 2007, two of the three largest issuers in the 
U.K. promptly imposed annual fees on their cardholders. 
Nineteen card issuers have raised interest rates. And by one 
estimate, credit standards are now so tight that 60 percent of 
new applicants are being rejected.
    Well, if it happened there, it seems to me that it can 
happen here. Would somebody on the panel like to tell me why we 
are not going to have the U.K. experience? Or does somebody 
fear the U.K. experience? I have very few takers on the panel 
today.
    Ms. Warren. No, Congressman, I would be glad to. Part of 
what you have to remember here is that they don't plan to lose 
money on this. Why do you think credit card companies give zero 
balance transfers? It is not because they are in the business 
of giving away money. They give zero balance transfers because 
they count on the fact that there will be some number of people 
who won't get it right.
    And that is, they will use that credit card after they got 
a zero balance transfer. They will get dinged at 22 percent 
interest. And every payment they make that goes into it will be 
paying down the zero balance transfer.
    Those are profit centers for the issuers. They are not good 
deals for the customers. I would--
    Mr. Hensarling. Well, I hope they are profit centers. I 
don't know--
    Ms. Franke. I would like to respond to that.
    Mr. Hensarling. Certainly, Ms. Franke.
    Ms. Franke. Because the consumer has the ability to make 
the choice as to whether they want to take low cost credit or 
not. When the consumer makes the decision that they want to 
take advantage of a low cost credit offer, it is to their 
benefit. And in the vast majority of instances, they are able 
to enjoy that opportunity.
    We want the consumer to be able to benefit from those 
things that we put in front of them. And I think that if we 
were not able to do that any longer because we were restricted 
in our ability to price for risk, you will indeed see two 
things happen, an increased cost of credit, and reduced access 
to credit to those people who need it most.
    Mr. Hensarling. With 6,000 credit cards out there, I assume 
if I don't like my terms, I can reject the terms and I can go 
and pick up somebody else's credit card.
    Ms. Franke. That is exactly correct.
    Mr. Hensarling. I see I am out of time. Thank you, Mr. 
Chairman.
    Mr. Sherman. Thank you. I will point out that all those 
freebies you get on the credit card aren't completely free. The 
merchants end up paying for those. And I just want to inform 
this committee that the Judiciary Committee is thinking of 
hearings on the other side of this transaction, which is the 
relationship between the merchants and the credit cards. Maybe 
this committee wants to get ahead of that or maybe you want to 
have them take over because we don't really care about our 
turf. We will see.
    With that, let me turn it over to Mr. Moore to ask his 
questions and to serve as temporary chair.
    Mr. Moore. [presiding] Thank you, Mr. Chairman. And I have 
just one question to ask, and then I am going to have to go 
vote. I understand Chairwoman Maloney is on her way back and 
should be here soon, but I would like to hear your answer, if 
you have an answer, to this question.
    A question for the credit card issuers on the panel with 
regard to what is called universal default: I understand that 
some issuers have voluntarily banned the use of an individual 
credit score in repricing a card account. As you know, the 
underlying bill attempts to ban the practice of universal 
default by restricting the ability of credit card issuers from 
raising interest rates based on any information other than how 
the individual is performing on that particular card account.
    I do have concerns about the lack of clarity that consumers 
often receive regarding account features, terms, and pricing, 
and I think we need to examine how to do a better job of 
ensuring that consumers don't get caught with unexpected fees 
or rate increases.
    But I also have some concerns about how this provision 
would affect businesses' ability to accurately price for risk. 
Given that some of you have voluntarily taken this step, can 
you explain to me what are some of the other sources of 
information you look to in order to predict the risk of your 
customers? And do you believe that the way the bill is 
currently written, it would have any effect on those who would 
offer credit in the future?
    Any responders here? Mr. Baer?
    Mr. Baer. Sure. As we--and I think traditionally the 
understanding of universal default has been--is basically a 
default that is automatic, no choice, repricing based on off-us 
behavior, that is, not with the issuer. Bank of America has 
never engaged in universal default.
    What we do do, though, is we will reprice customers with 
notice and choice if we observe an increase, a material 
increase, in their risk profile. That can take various forms. 
It could include maxing out their credit lines with us and 
other issuers, defaulting on a mortgage, defaulting to other 
issuers, and all types of behavior like that that, when you put 
them together in terms of our internal modeling, demonstrate a 
materially greater risk of charge-off.
    Mr. Moore. Thank you. Does anyone else wish to respond to 
this question?
    Mr. Finneran. Sir, I would just note that I think this 
really highlights one of the issues with the bill. Capital One 
does not engage in universal default and handles risk based 
pricing differently than Bank of America does. But I think the 
key is that what Mr. Baer is saying is that they only do it 
with respect to people to whom they give appropriate notice and 
an opportunity to opt out, which is exactly what we have been 
advocating with respect to all forms of repricing.
    I think a single targeted fix that can be best done by the 
Federal Reserve will address so many of the issues associated 
with change in terms for customers, that is clearly the way to 
go. And then you don't have to get into the nuances of trying 
to define what universal default is and what it isn't.
    Mr. Moore. Thank you. I am going to--Mr. Ausubel, I am 
going to have to go vote. We have been told that I now have 
less than 2 minutes, and I need to run over there. Mr. 
Perlmutter is going to come up and take over the chair here. Is 
that right?
    Mr. Perlmutter. Yes, I will take the chair, and I will 
behave myself.
    Mr. Moore. And I won't say the real chair, the regular 
chair, Ms. Maloney, should be back soon. So thank you very 
much. And I will--if you care to respond, I promise you I will 
look at your response later. Thank you.
    Mr. Perlmutter. [presiding] And the last shall be first.
    [Laughter]
    Mr. Perlmutter. I always get the chance to bring up the 
caboose because I have the least seniority of this entire 
committee. And I just want to thank the panel. This has been an 
outstanding panel, both representing the industry as well as 
representing academia, that has questions about where we have 
come from. And I just want to say a couple of things.
    I think from my point of view, and I think one of the 
professors mentioned this, or a couple, I mean, our job is to 
give a broad direction and then allow the regulators to work 
with the industry as to the specifics of what a universal 
default is, what a double-billing cycle is, how many fees can 
be charged, from late fees to annual fees and all that sort of 
stuff.
    I represented, just as disclosure, banks, credit card 
companies. I am a consumer who has suffered, having thought he 
terminated a card. Got an annual fee. Got a penalty on the 
annual fee. Got penalty interest on the annual fee and the 
penalty. So coming at it from both sides.
    I think we have to make a decision in the broad decision. 
And I think somebody said 27 years ago was the last time there 
had been an effort or consumer protection was brought up. I 
think the bigger question, and the one that is a moral 
question, is, you know, the other side of credit is debt. And 
do we want more debt?
    And whether it is a biblical kind of an approach or Thomas 
Jefferson or Teddy Roosevelt or whomever, in 1982, we passed 
the Garn-St Germain Act. I couldn't remember the name, but our 
very able staff found it for me. It basically loosened 
regulations and gave the industry the ability to work in these 
areas and to really control its fate and develop profit.
    I think the broader question for the Congress is: Where are 
we now? And there have been a number of folks up here who have 
complained about a particular practice or whatever. You know, 
the industry is there to earn profits for its shareholders, and 
I don't think we can deny that.
    But the question is--I think, Professor Warren, you said 
that rates--should there be limits on rates? You said that was 
off-limits. Well, I am not sure. We used to have usury laws in 
this country. And I certainly don't want to see that, but I 
want to give some instruction to the regulators as to, look. 
Keep an eye on this. Just because there has been a 
democratization of credit, is that good? From a societal point 
of view, is that good? So I do have some questions, and I will 
stop pontificating.
    Mr. Baer, with respect to the customer has notice and 
choice, which is what your testimony was, if that customer has 
already run up a bill--you know, you have given him a $10,000 
credit line, say, and they have now spent $5,000 against that 
credit. And you now see something--either there was a default 
or, if there wasn't a default, you see problems in their credit 
outside.
    When the customer has a notice and choice, is that what you 
are saying, look, we are going to up your rate. You can leave. 
You can pay this off and leave us. Is that what you mean by--
    Mr. Baer. They have two choices. First, they can accept the 
higher rate, which going forward will be applied to everything 
they owe us because we consider this a new loan every month. 
Or, alternatively, they can opt out and they can repay the 
existing balance under the original rate, no questions asked. 
All we ask is that they no longer use the card for new 
purchases.
    Mr. Perlmutter. I think a new loan every month, I think 
that is an interesting approach. And it is a 30-day loan or 
whatever it is. But for most people, especially as you--to the 
lower income stratas or other folks who are using the credit 
card for their basic stuff, they are going to be in real 
trouble to be able to pay that on a 30 day/30 day/30 day.
    Mr. Baer. Yes. Actually, I mean, to your larger point, I 
mean, I think we would certainly agree. There are people out 
there who are having trouble managing their finances and who 
should be borrowing less.
    The difficult question, I think, for this subcommittee and 
the Congress is: Can you identify those people through 
legislation first, without having an overlap effect where you 
are cutting off credit to people who can repay responsibly? And 
then the second very difficult question is: This bill would 
only cut off credit card credit to those people. So the 
question is: Would those people stop borrowing, or would they 
look to payday loans, rent-to-own, installment lending, or 
other types of much higher rate, much lower transparency forms 
of credit?
    And that is why where we come out on this is because the 
credit card industry is a highly competitive one where you can 
rest relatively assured that people are getting competitive 
rates, and because we have the Federal Reserve coming out with 
a Regulation Z that more than ever before is going to allow 
informed comparison shopping, and thereby allow consumers to 
take advantage of that competition--because that is a hallmark 
of perfect competition; you have to have informed consumers--we 
think when you put those two things together, this is a good 
time to let the market continue to work, aided by a disclosure 
regulation from the Federal Reserve.
    Mr. Perlmutter. Professor Warren?
    Ms. Warren. I just want to say one thing about informed 
consumers. I think the practices that Bank of America 
announces, where they say they will let people pay off over 
time, is a good practice, and we want to remember that is not 
the practice of all of the issuers. Many issuers say, no, the 
whole $5,000 is due right now if you don't want to have to pay 
the elevated interest rate.
    But the question of what constitutes an informed consumer 
troubles me deeply here. I listen to Bank of America describe 
how well they take account of this, and they measure this, and 
they weigh that, and they finally come up with a number. ``We 
are not going to do something we call universal default, but we 
are going to do something out there that is magic.''
    I have read my Bank of America statement, and I can't 
figure out how it is that they make the decision when I will be 
the one who receives the next arrow through the heart, that my 
interest rate has jumped from 11 percent to 29 percent.
    And to describe this as a market that consumers understand, 
low-priced credit that we talk about, I must have two dozen 
zero balance transfer offers in the last couple of months 
alone. Not one says, by the way, here is how we plan to make 
money off of you on this one. And that is the hope that you 
will use this credit card, not understand how the repayment is 
going to work, and we will manage to suck 20 percent interest 
rates out of you over the period of time that you try to pay 
back this balance.
    So it is fine to say we put a lot of words that are 
incomprehensible in a credit card statement. But the idea that 
we have consumers who are fully informed about these obscure 
practices simply does not represent reality.
    Mr. Perlmutter. And I would agree with that. I don't 
begrudge the industry--first of all, they probably had a 
lawsuit or two that has caused some of the addition of the 
language. So I respect that.
    I mean, I think again there has been--for the last 27 years 
the conversation has been about the free market and allowing 
opportunities for profit with people. And that is fine. But I 
think that the conversation now has to move back to debt. Is 
this something as a societal function we want more debt? And 
consumer protection.
    My time has expired, and I see the gentleman from Tennessee 
has--oh, I am. The gentleman from California.
    Mr. Campbell. Thank you, Mr. Chairman. Before I get to my 
couple of questions, I would like to ask unanimous consent to 
enter the GAO report entitled, ``Credit Cards Increase 
Complexity in Rates and Fees.''
    Chairwoman Maloney. Without objection.
    Mr. Campbell. Thank you, Madam Chairwoman.
    My first question is to the three representatives of the 
bank's credit card issuers. Mr. Levitin showed a chart that as 
far as risk-based pricing, that indicated that there was not a 
lot of price difference or interest rate difference charged 
based on someone's credit score, FICO score, or whatever it 
might be.
    Do you accept that chart? Is that correct? And if it is or 
it isn't, is there a situation in credit card charging because 
of what the rates are, where people with higher FICO stores, 
higher credit scores, will borrow money from other places 
because they can get it cheaper, and other people with lower 
credit scores will tend to not pay off their credit card every 
month? Any one of the three of you want to take that?
    Mr. Finneran. I mean, I will try. I am sorry, I didn't 
really get a chance to study the specific chart, but I can 
certainly share with you our practice at Capital One. We do 
differentiate based on credit score at the time of account 
acquisition, and offer varying interest rates depending upon 
the likelihood of those consumers to pay us back and handle 
their credit appropriately.
    Mr. Campbell. Do the rest of you agree with that?
    Ms. Franke. I would totally agree with that, and would say 
that we would love to be able to put forth the right analysis, 
with enough time to do it, that would show that you would 
absolutely see a decrease substantially in interest rates that 
much exceeds the decrease in cost of funds over the same period 
of time.
    Chairwoman Maloney. Mr. Levitin? A response?
    Mr. Levitin. The chart I showed is from a subscription data 
source that gathers its data from card issuers directly. It is 
not representing any particular issuer, so Capital One may be 
different. What it is showing is a composite of the entire 
credit card industry.
    And while we have some of the prettiest faces in the card 
industry up here saying that, you know, we don't do this 
practice and we don't do that one, it is rather irrelevant 
because this bill is about regulating the worst practices in 
the industry. And just looking at the best actors in the 
industry doesn't tell us what we need to know.
    Mr. Campbell. Okay. Then my next question is to the 
prettiest faces of academia, to the academicians that are up 
there. There has been a lot of talk today about the ads for 
credit cards, whether they are on television, whether they are 
the things you get in the mail, whatever, and what would appear 
to be a pretty intense competitive market for the credit card 
issuers to issue credit cards and get customers on their credit 
cards.
    Do you all believe, when you take into account the various 
cost aspects of credit cards--all of them, you know, the 
initial fee, the late fees, the interest rates, the bonuses or 
benefits you get--in academia, do you believe that there is 
price-fixing in the credit card industry, or do you believe 
that the market is working--or that there is a market in which 
there is price competition? I guess first Mr. Levitin, and then 
we will go to you, sir.
    Mr. Levitin. Well, let's start with, I mean, different 
aspects of credit card pricing. On the merchant side, I think 
there is a very good argument that there is price-fixing going 
on. There is major antitrust litigation about this right now 
pending in the Eastern District of--
    Mr. Campbell. On the merchant side relative to Visa and 
MasterCard?
    Mr. Levitin. Well, and also the issuers because the issuers 
are part of the--or alleged to be part of the price-fixing 
conspiracy as members of Visa and MasterCard. Really, Visa's 
only function--
    Mr. Campbell. Okay. I don't think that is subject to this 
bill.
    Mr. Levitin. It is not, but there is an important link, 
Congressman. Merchants are the ones who finance rewards 
programs, and the rewards programs are really the--it is like a 
Venus flytrap. That is the honey that sucks in the flies and 
then gets them into the--consumers into interest rate traps and 
late fee traps and over-limit traps. And the fixing on the 
merchant side encourages overuse of credit cards, that more 
people come into that flytrap.
    Mr. Campbell. Okay. Yes, sir?
    Mr. Ausubel. The vast proliferation of offers is an 
indication of high profits for every offer that is accepted. I 
mean, that is the simple truth of it. If the industry were 
unprofitable, 4 billion solicitations a year would not be 
mailed out. And--
    Mr. Campbell. But do you believe that there is price 
competition between them in those offers? Do you believe that 
that is one of the ways in which they are competing?
    Mr. Ausubel. Here is a quick way of understanding it. There 
are three or four terms of the credit card offer that consumers 
understand. They understand the introductory rate. I think they 
probably understand the post-introductory rate. They understand 
the annual fee.
    They have no notion of what double-cycle billing means. 
They have no idea what any reason type thing is. They have 
absolutely no idea what their penalty rate is or the terms that 
would trigger it. They have no notion what happens with their 
credit score in terms of increasing their interest rate. And 
they don't pay attention to most of the fees.
    So they compete, the issuers compete, on interest rate. But 
it is very profitable because a number of the other relevant 
terms are not salient, and consumers don't comparison shop.
    Mr. Campbell. And I will yield back, just with a final 
comment that if you look at the volume of advertising for the--
I was in the retail car business, which does lots and lots of 
advertising. It is one of the smallest margin businesses out 
there, just slightly ahead of food.
    So I think it just indicates that it is a competitive 
marketplace, and that there is business out there, and you are 
looking for ways to get it. I don't think it necessarily 
indicates that it is a high profitability--I mean, it is 
profitable or else people wouldn't go for the business at all. 
But I don't think it indicates how much, or not directly 
correlates.
    Sorry. I yield back, Madam Chairwoman.
    Chairwoman Maloney. Thank you. And I would like to thank 
the gentleman for submitting the GAO report into the record. 
And I would like to note that this GAO report, as well as a 
Federal Reserve report of 2005, noted that the number one 
reason credit card interest rates have gone down is because the 
cost of money has gone down.
    I now recognize Mr. Scott.
    Mr. Scott. Thank you very much, Madam Chairwoman. And 
again, my compliments to you for having this hearing. It is 
very, very informative and very, very timely, as I said.
    I would like to ask Ms. Franke--is it Franke or Franke?
    Ms. Franke. Franke.
    Mr. Scott. Franke. Very good. I found your testimony to be 
very, very interesting and intriguing. You said that this bill 
is complex, expansive, and it restrains credit availability.
    I would like for you to tell us exactly how--give us some 
examples within the bill that this bill does that. And I also 
want to get your opinion, and others may comment on this as 
well, in light of your concerns about the bill, just how we 
address this practice of universal default.
    This is a major, major concern. I would like to know your 
thoughts on that. And would it make sense to consider repricing 
a customer's interest rate only if they default on the company 
that issued the card instead of penalizing these people because 
of their behavior regarding different financial commitments, 
their specific history with other lenders, or information 
obtained from a credit report?
    And if a customer has made a late payment or goes over 
their credit limit, wouldn't it make sense to ensure that a 
person receives adequate notice to any changes that are made to 
that customer's rate and its status? And furthermore, wouldn't 
it be prudent for a credit card company to alert their 
customers of changes in terms?
    That, and also this one also: The concern about the clarity 
of credit card agreements with regard to what little 
information they are currently providing with minimum payments 
and only paying the small amount each month, customers are 
further penalized as the debt continues to balloon so that when 
a customer logs onto their account, why can't we ensure that 
the full amount is in the payment box instead of the small 
minimum payment?
    I feel that with this change, it may help encourage the 
credit card user to pay off more of the debt or pay in full 
each month. But by only making a minimum payment, say, on a 
$1,000 balance, as minimum as that, for example, that can lead 
to a debt that could take 15 years to pay off, if not longer.
    So my point is, I wanted to point out those areas where it 
is obvious there is a problem we need to address. And I wanted 
you to maybe answer that in light of your own opposition to 
this legislation. Can't you see some middle ground here where 
we need to move to address these particular concerns?
    Ms. Franke. Let me see if I can make an attempt to cover 
those topics. Let me do it in a couple of ways.
    First and foremost, I think we believe that there are 
changes that need to be made in the credit card industry. We 
believe that the regulatory actions that are being taken will 
be appropriate to handle those issues. They will address things 
such as disclosure, and how the customer has a keen 
understanding of their relationship with the credit card 
issuer.
    Starting at the end with your minimum payment question, if 
you were to go to the Chase Clear & Simple tools, you would 
find today a minimum pay calculator. We do believe that it is 
important for the consumer to be able to understand the time it 
will take for them to pay off their balance if they simply make 
the minimum payment.
    We don't believe, however, that should be legislated, and 
this is probably a longer conversation than we have to discuss 
today, because of what would be required for us to display that 
on each individual statement. It is quite difficult.
    We do think, though, that we need to promote to the 
consumer how they can easily get that information. So what is 
really important is that the customer understand how long it 
would take for them to pay their bill if they only make their 
minimum payment. We want to make sure we provide that 
information to them.
    Why don't we support this legislation? To us it is very 
simple. It gets to our ability to be able to price for risk. We 
believe that it is critical that we are able to continue to 
price for risk. And there are aspects of this bill that would 
limit our ability to do that.
    You asked about universal default. Universal default allows 
folks to use bureau-based information that informs their 
decisions as to someone who is risky. We at Chase, as we have 
said many times today, no longer believe that is in our 
customers' best interest. Our customers have told us that they 
would prefer to understand the clear circumstances under which 
we will raise their rate. And we have agreed that we will only 
do that in three circumstances.
    You did ask, though, about advance notice of that. Because 
that is the only tool we at Chase have today to make sure that 
we manage risk, it is important that we are able to take that 
pricing action at the time that the customer defaults on their 
agreement with us.
    If we are not able to do that for 135 days, as is outlined 
in this bill, it will significantly impair our ability to 
manage that risk, and it will therefore limit our ability to 
offer the vast majority of Americans the lowest rates 
available, and to offer credit to more Americans.
    So we believe that it is important that we have the 
permission to price for risk and that we are able to do that in 
a timely fashion.
    Mr. Scott. All right. Yes, Mr. Levitin?
    Mr. Levitin. I think it is important to point out that H.R. 
5244 does not prohibit all use of external off-us information. 
The only thing that H.R. 5244 prohibits is retroactive increase 
of interest rates based on off-us behavior.
    Section 2(a) of H.R. 5244 still allows issuers to increase 
rates prospectively based on off-us behavior. And the existing 
balance should have already been priced. That is the deal you 
had with the card company when you charged a balance. It 
shouldn't be able to be repriced retroactively.
    Chairwoman Maloney. Thank you. And now the Chair recognizes 
Mr. Bachus, Ranking Member Bachus.
    Mr. Bachus. Thank you. You might be aware that there was to 
be a panel preceding your panel of consumers who had various 
credit card complaints. The chairman and I discussed this 
yesterday when our staffs discovered that the credit card 
companies, without a waiver, could not respond because 
initially the hearing was going to be some consumers saying, 
this is what happened to me, and we felt like that the--and he 
and I agreed that the card issuers should have a right to then 
respond or answer because the first panel would actually be 
making charges against the companies.
    We had that agreement. We had a further agreement that we 
would postpone those hearings because it wouldn't be fair. And 
Ms. Maloney said this in her opening statement. It would not be 
fair for these customers to come, announce what had happened to 
them, and not have the credit card companies have a right, if 
they were going to be used as examples, to respond.
    I consider that as an agreement, which was really proposed 
to me. I believe if you make an agreement, you ought to keep 
it. That is part of what we have talked about today, what those 
agreements do. Is there a meeting of the minds?
    But unfortunately, we have had a Member release a press 
release detailing all the complaints that these witnesses had 
and all the charges, and making them available to the press, 
which really goes against the claims that--and I know the 
chairman, I think, is equally chagrined, that we all agreed we 
wanted a fair process where both sides could respond.
    And probably the most unfair thing and the most inaccurate 
thing is that some press is reporting that the credit card 
companies insisted that these witnesses did not testify. And I 
can tell you, as ranking member of this committee, that no 
credit card company--no credit card company--did that.
    So I hope in the future that when we make agreements--and I 
do not think the chairman is involved in that--but I think when 
we reach across the aisle in a bipartisan way and an 
arrangement is proposed, that it be honored.
    Ms. Warren, you are raising your hand?
    Ms. Warren. Thank you. I just have a question because I am 
just trying to understand this. I had never heard this before I 
arrived this morning.
    And the question I have is whether or not those same rules 
apply to the credit card companies. We have heard a lot of 
information today about how Bank of America does its risk-based 
pricing. We have heard many representations about how Chase 
conducts its business and what proportion of customers are 
paying and what proportion of its customers are not paying, and 
so on.
    That is information that is not publicly available. My 
testimony comes from a set of footnotes. It is all publicly 
available. The same is true for Professor Levitin. The same is 
true for Professor Ausubel. The same is true for Professor 
Porter.
    If it is a concern about whether or not people can say, all 
right, if you are going to testify about something that is 
private information, that information should be available to 
everyone.
    Mr. Bachus. No. Well, actually--
    Ms. Warren. I just wanted to know, is that going to be the 
new rule?
    Mr. Bachus. Yes. Dr. Warren, I think you make a good 
argument. Let me say this. Their practices, all the three 
credit card issuers here today, they have issued their best 
practices. And those practices are, in fact--and I know in your 
opening statement you acknowledged that most of the major 
credit card issuers are playing by the rules. In fact, you said 
several major credit card companies have dropped these 
practices; they should be commended. You pointed out that the 
majority of credit card issuers are not guilty of these 
practices.
    And what we had intended to do, and what was going to 
happen until this arrangement was proposed, is these witnesses 
were going to testify at the first hearing, and then the credit 
card companies would have been able to respond.
    But because we felt it would be unfair--and no, these 
credit card companies cannot talk about an individual and what 
happened in an individual case without that individual giving a 
waiver. And they were prepared. They were prepared to discuss 
individuals if the individuals had testified and given waivers, 
as we first anticipated.
    Ms. Warren. And I cannot discuss the practices of Bank of 
America, Chase, or any other issuer unless they make those data 
available. They come here and get to engage in a game of they 
show a little that reflects the best light. They come to this 
hearing and testify. They have testified in front of this 
committee that they do not engage in universal default, and yet 
they describe a practice that many people would describe as 
universal default.
    Mr. Bachus. Well, now, it is not a question of that they 
don't publish that. That is available to you and I both. In 
fact, in preparation for this hearing, I read what their 
practices were. And as you have said, you said that--you came 
in and said these tricks and traps, that several major issuers 
weren't doing that.
    Ms. Warren. At least we don't know if they are doing them. 
What we have is we have their testimony, but no revealed 
information.
    Mr. Bachus. I agree totally. We didn't know. And for that 
reason, we were going to have five people say, this is what 
they did to me. And then--
    Chairwoman Maloney. Mr. Ausubel would like to testify.
    Mr. Bachus. And then we were going to have--they were going 
to sign a waiver, and then the credit card companies could have 
said, you know, this is what happened in their case. In other 
words, there would have been an accusation and a chance to 
defend themselves. And that didn't happen because it was 
proposed that there wasn't enough time. But that was not our 
proposal.
    Chairwoman Maloney. Mr. Ausubel?
    Mr. Ausubel. Regardless of whether consumers are allowed to 
testify or not, I think an important point that has to come 
before this hearing is that just as it has been remarked that 
there are, I don't know, 3 million subprime mortgages that are 
ticking time bombs, there are also millions of credit cards in 
circulation that have universal default clauses in them right 
now, that have penalty interest rates as high as 29.99 percent 
in them. And those are ticking time bombs as well.
    Mr. Bachus. And let me say--
    Mr. Ausubel. And you can see the contagion effect that 
could have on the economy. And whether the consumers can--
    Chairwoman Maloney. The gentleman's time has expired. Mr. 
Cleaver?
    Mr. Bachus. If I could at least respond. Professor, I will 
agree we hear stories from time to time of people saying, this 
is what happened. So this hearing was designed--all the things 
you are talking about, this hearing was designed for five 
people or six people to come before the Congress and say, as 
opposed to anecdotal or somebody told me or this thing--for 
them to come before us and testify, this is what happened to 
me. And then the credit card companies would have--you know, we 
asked them to appear and explain whether or not this in fact 
happened.
    And yesterday it was a consensus. In fact, the chairman of 
the committee said it wouldn't be fair to do what--
    Chairwoman Maloney. Reclaiming my time, we do want to focus 
on substance and not on process. I now recognize Mr. Cleaver.
    Mr. Bachus. This is pretty--
    Chairwoman Maloney. Mr. Cleaver is recognized.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    One of the major credit card companies sent a credit card 
to Herman, Junior. He is my cousin. I wouldn't have given him a 
credit card. I would have given him anything but a credit card. 
He is one of the most irresponsible people I know. In fact, he 
is in jail now. I hope they took the credit card before they 
locked him up.
    But we have almost a one point below credit--I am sorry, 
savings rate in the country. Zero. Which means that we can't 
borrow money domestically. And it would seem to me that we all 
have a responsibility of trying to reverse that because if we 
don't, we are damaging unborn generations. We all owe right now 
about $30,000 on the U.S. debt, $9 trillion.
    And so is there any redeeming social value in sending 
credit cards to college students or people like Herman, Junior? 
One of the credit card companies.
    Mr. Baer. Well, I had said earlier--I don't know if you 
were here Congressman--
    Mr. Cleaver. I am sorry. I have been going back and forth 
between two committee hearings.
    Mr. Baer. I understand. Two issues. One I think is minors, 
and the other is college students, because I think they are 
very different cases.
    With respect to minors, while they may receive 
solicitations in the mail because they are on a marketing list, 
that is not at all to say they will actually be granted a card. 
They will still have to be verified that they are age-eligible 
and that they have sufficient credit to receive a card. So it 
does happen, and it is our loss because we can never finalize a 
transaction, that we will solicit someone. That doesn't 
necessarily mean we grant.
    With respect to--
    Mr. Cleaver. Excuse me, because my time is limited. So are 
you saying that college students are not receiving credit cards 
if they are not creditworthy?
    Mr. Baer. I started by saying there is a distinction 
between minors on the one hand and college students on the 
other. Let me now turn to college students.
    We are actually a very large lender to college students. We 
consider college students potentially our best customers 
because we want to take them from being a credit card customer 
to a deposit customer to a home mortgage to retirement savings 
50 years from now. We have no incentive with regard to college 
students for them to default because that makes them dislike 
us. It makes them less able to take all those other products 
for us.
    So what we do with college students, we have a max. We will 
not lend to any college student more than $1,500. The average 
line for a freshman is $500. The average line for a senior is 
$1,000. What we do with college students, and I think we are 
the largest lender to college students, we give them very small 
lines of credit that we think they can manage.
    Furthermore, we provide a phenomenal amount of financial 
literacy to them in terms of education about how to manage 
their credit. We do not risk-base reprice college students. We 
are more lenient on all of our fees towards college students. 
In other words, we set college students up to succeed when they 
get a credit card from us.
    Mr. Cleaver. Thank you. I am not finished, no. But there is 
no requirement for the new cardholder to provide information to 
the lender that he or she does in fact have a backstop in the 
event that they can't make the payments?
    Mr. Baer. I am not sure how exactly the credit metrics 
work. But certainly they get some credit for the fact that they 
are in college. On the other hand, they get very low credit 
lines.
    Mr. Cleaver. No, no, no, no. No. Do you require that a 
college student provide information that they can in fact--they 
have the financial wherewithal to make the payments? Is there a 
person with a job someplace who signs off on the credit card 
and declares that he or she will make the payments if the 
credit cardholder cannot?
    Mr. Baer. Do you mean do we require college students to 
have cosigners for their credit cards? If that is the question, 
the answer is no.
    Mr. Cleaver. Yes. That is where I was going.
    Mr. Baer. I am sorry. I misunderstood. The answer is no.
    Mr. Cleaver. Yes. Sometimes I am inarticulate. One of the 
things that I am concerned about is that college students do 
get these cards. It is the antithesis of saving. It is, go get 
in debt. You know, let's--I mean, right after 9/11, the 
President said, let's go shopping.
    And so we are just pushing it. Get in debt. A minus .6 
savings rate in the United States. And do you think that 
process of sending credit cards to students is helping the 
Nation?
    Mr. Baer. Well, Congressman, we think it is helping those 
college students because they are being given very low credit 
lines--
    Mr. Cleaver. But if you have no job, even if it is 1 
percent, you can't pay it.
    Mr. Baer. Well, I think our experience has been that 
actually, college students do not default on their credit cards 
at any greater rate than our general customers.
    Mr. Cleaver. I apologize for not bringing the article here. 
It was about 3 months ago in the Washington Post, almost a 
full-page story about a woman who did just that, received a 
credit card in college. And I can't remember how much--she is 
about $5- to $7,000 in debt right now. It was a full-page 
story, and I am going to try and get it before you leave.
    Chairwoman Maloney. The gentleman's time has expired. You 
can place this information in the record. And I would like to 
note that the Congressman is the author of a very thoughtful 
credit card reform bill that includes credit cards for college 
students.
    We now recognize Mr. Feeney. Congressman Feeney.
    Mr. Feeney. Thank you, Madam Chairwoman.
    You know, this is a little bit of deja vu all over again 
from my perspective. I remember, long before I got to Congress, 
watching in the 1960's and 1970's and 1980's, the lending 
industry in general being beat up because they were denying 
mortgage loans, for example, to people that were considered to 
have risky credit behind them.
    There were even implications that some of those decisions 
were made not based on profitability or risk, but based on 
ethnicity or race or gender. It seems to me that when you are 
chasing a profit, most capitalists, pure capitalists, anyway, 
are sort of neutral in terms of where they earn that profit 
from in a free society. But I suspect some of that happened.
    And there was a great deal of badgering that went on for a 
period of decades about how we ought to make capital more 
accessible so that everybody could aspire to the American dream 
of owning a home.
    And as a consequence of that, oh, for the last 5 years 
especially, there has been some very easy credit access to 
people of risky ability to pay back. Some of that has been 
through no-documentation loans. Some of that has been through 
100 percent or in excess of 100 percent financing of the asset. 
Some of it has been simply because there were a lot of 
interested investors in getting a good return on their capital.
    But now we had the subprime bubble. That is often what 
happens, whether because of monetary policy we inflate the 
currency or whether because the credit access caused a stock 
market bubble. In 1929, it took 15 years for this country to 
recover, largely because Congress jumped all over the place to 
hyper-regulate and hyper-tax every productive industry in the 
country, publicized a lot of formerly private utilities, and so 
forth.
    And I think we are going down that path. We are going to 
turn a recession into a deep depression if we are not careful, 
all because of the law of unintended consequences. It is not 
that anybody wants to do evil to the consumers out there. It is 
in the name of protecting consumers and protecting small 
individuals throughout the country that we do these abuses.
    I was thrilled. I think it was Congressman Price who 
mentioned earlier that Senator McGovern, not known as a limited 
government radical like some of us are, talked about the 
forgotten man when we regulate based on a policy of how we help 
half a percent or 2 or 4 percent of the population.
    And what I am afraid of in this bill is that we are going 
to--in the name of helping a few people, we are going to deny 
access to the best available credit rates to the 95 percent of 
the population who have made great use of this.
    Mr. Baer, I mean, let's take the other extreme. Supposing 
we just abolished credit cards in this country and everybody 
had to use cash or a debit card or a check. What do you think 
would be the impact on the American economy if we just took 
this horrible dangerous instrument that people carry around in 
their wallets with them away? We could just go to an all-cash 
economy. Can you give us a rough estimate of what the impact 
would be to our $13 trillion economy?
    Mr. Baer. I don't think I am qualified to give a numerical 
estimate. But, I mean, I would say because the vast majority of 
people who use credit cards are doing so responsibly, are using 
that to fund worthwhile purposes, even invest in businesses, 
that would obviously be a tremendous loss.
    And also, even if you abolished credit cards, as I think I 
had mentioned earlier, that is not to say that people would 
stop borrowing. They may start borrowing through less 
regulated, higher cost, less transparent forms.
    Mr. Feeney. Mr. Ausubel, if you can be brief, I will let 
you--remember my question. What would be the impact on a $13 
trillion economy of going to all debit cards or cash?
    Mr. Ausubel. The answer that I would give is that I think 
the various warnings that have been going out are rather 
alarmist. I mean, for example, the Senate bill bans 3 percent 
foreign transaction--
    Mr. Feeney. Well, if I can--I don't mean to be impolite, 
but I have 5 minutes and that is unresponsive. It may be a very 
interesting collateral observation, but it is unresponsive to 
the question I asked.
    Look. I think we want fair and full disclosure. I think we 
want economic literacy. And I wish some of the do-gooder 
advocates out there who don't have their own cash on the line 
making loans would be doing more to advance the cause of making 
sure that every single American student got a good education in 
how to protect himself and herself when they are making 
financial decisions.
    But when it comes down to what the risk is to our system 
and what the risk is to investors and how they will respond to 
over-zealous regulations, you will forgive me if I believe the 
capitalists and the investors, without which we won't have any 
credit when they tell me what the potential response.
    All of the panelists today from the private sector have 
said they don't engage in several of these practices--universal 
default, two-cycle billing, and some of the other abuses. 
Nonetheless, even though their competitors do and they are at a 
competitive disadvantage, they think it will be foolish for the 
American economy if we regulate things through congressional 
legislation.
    I happen to at this point buy that argument. With that, I 
will yield back the balance of my time.
    Chairwoman Maloney. The gentleman's time has expired. But 
both Ms. Porter and Mr. Ausubel wanted to respond to his 
comments, so I would like to give them that opportunity.
    Ms. Porter. I can say that based on a study of five 
national economies that Professor Ronald Mann did, large 
national economies similar to the U.S. economy, dollar for 
dollar, moving people from credit card spending onto debit card 
spending, moving people from card borrowing onto non-card 
borrowing, would lower the bankruptcy rate.
    Chairwoman Maloney. Mr. Ausubel, do you have a comment?
    Mr. Feeney. Well, now, if I can, the chairman has been 
gracious enough, and I am happy to have that response. I didn't 
ask about the bankruptcy rate. I asked about the effect on a 
$13 trillion goods and services economy. That is--you know, 
there may be some good things that happen as a result of 
killing your economy. Bankruptcy--
    Chairwoman Maloney. I would just say, reclaiming my time, 
Congressman, no one is advocating abolishing credit cards. We 
all acknowledge the important tool they are to our economy. And 
as one who represents a great number of retailers, they are 
absolutely essential for commerce in the district that I 
represent. What we are talking about is more notice and 
allowing cardholders to pay off their balances at the rate that 
they agreed to.
    I now recognize Mr. Davis.
    Mr. Davis of Tennessee. Madam Chairwoman, thank you very 
much.
    As we engage in this debate and this discussion, it would 
seem to me there is a reason for you folks being here today. If 
everything was apple pie and a pot of gold at the end of the 
rainbow, and we could find it, you wouldn't be here today. So 
there is obviously something happening in the financial world 
that the average person who lives in my district has complained 
about.
    I represent the fourth most rural residential congressional 
district in America. I have the third highest number of low 
wage earners and blue collar workers, who have a tough time 
having health care, and paying almost $4 a gallon for gasoline 
to drive to a job that just barely pays more than minimum wage, 
which we raised recently. So when we talk about the issues here 
today, in my district, we are engaged. We are connected. And we 
do feel the pain.
    I heard someone say a moment ago that credit card companies 
offer credit unsupervised. I am a farm boy. When we start 
moving cattle from one stall to another or from one field to 
another or loading them for market, we have a little stick. On 
the end of it, it has--excuse me, those who might not agree 
with this--it has a little shock on the end of it. And we are 
able to supervise livestock with that.
    A lot of folks in my district feel like they have been 
shocked by the bill that they get from the credit card 
companies. I am one of those, and I will explain in a moment 
why I feel that way.
    I also like to ride horses, now mainly mules because they 
are more safer to get on. Occasionally I put on a pair of 
spurs. And when I touch that animal in the side, it is to give 
supervision to that animal. A lot of my constituents back home 
have felt the pain of the spur in their ribs and in their 
wallet.
    Now, you might not follow what I am saying, but folks back 
home understand what I am saying. When we talk about high risk 
credit, those in this room have done more to establish the 
credit rating of most Americans than any other financial 
institution in America, either good or bad. So it seems to me 
real easy before you send out one of those I have heard as many 
as 8 billion solicitations, all you have to do is check their 
credit report and see if that is a good risk.
    So really, if you are sending high risk out, it is your 
fault. You should know whether or not these folks are good 
credit risks or not. All you have to do is click on--get the 
report, and then you are not taking much risk any more. So for 
me, I don't agree with some of the statements I am hearing 
today, and I do believe that it is supervised credit because we 
have felt some of the stings of it back home.
    When I also look at those 8 billion solicitations, or 4, I 
heard earlier, but I have come to believe that it is 8 billion, 
if it costs 15 cents to send those out, including the printing 
and everything else and postage, you are talking about $120 
million. Some folks say a trillion dollar business; some folks 
say $2.3 to $2.4 trillion. I don't know what that figure is. 
Perhaps collectively you all could arrive at that.
    That seems like an awful lot. But I will tell you how one 
of my staff members disciplines and supervises credit card 
companies. When he gets one of those solicitations--and he just 
told me this earlier--he takes it to the mailbox, tears it 
open, folds everything else back up, and puts it in the return 
envelope. And it costs 41 cents for you to get it back. So he 
is doing the best he can to discipline you all.
    So as we look at this thing, there are a lot of issues that 
we need to talk about, a lot of questions. Everything is not 
rosy. I wish it was. You provide a wonderful service. In the 
late 1970's, my wife and I got our credit cards, and we cut 
them up and we burned them. As I engaged in business that took 
me a long way from home in 1991, I applied for credit cards.
    I have two credit cards. One of those is listed on it, 
since 1991. I have never paid interest on it. I have never paid 
a late fee on it. I pay it off every month. I have another one 
that is smaller that has absolutely aggravated and wore me out, 
and that is why I feel something has to happen.
    When I called one day after being here, quite frankly, on 
the smaller amount that I had--it was less than $100--realized 
I had not paid it and it was due the next day, I called to see 
if I could pay it by phone. You can. It is $29. I owed $50-
something. It is $29. What is the late fee? $29. I am not going 
to pay you over the phone. I will send it to you.
    So when you tell me everything is fine and rosy, it really 
is not for some of us. So what I want to do is be sure that we 
work in a way to where that credit cards continue to be what 
they have been, a source for individuals to be able to use to 
be a consumer in this country. And that is what this hearing is 
about today.
    One of the questions I want to ask you is that $29 fee that 
someone was going to charge me by paying by phone, how much was 
that going to cost you? Because the other one I call in at the 
end of every month, I do it by phone. The phone says, tell me 
your card number. What is your mother's birthday? Do you want 
to pay it all off or do you want to pay--so in essence, they 
don't charge me anything for doing that.
    But most credit card companies do. So how much does it cost 
you to take that automated phone call, and how much should you 
charge for it? Anyone who wants to answer that.
    Ms. Franke. I can't.
    Mr. Davis of Tennessee. Do you have an idea what it costs?
    Ms. Franke. What I can tell you is that 98 percent of the 
payments are made for free. There are many, many options to pay 
your bill without ever incurring a charge. And we would always 
encourage our customers to take advantage of the ways that they 
can pay their bills on time without incurring any penalty fees. 
And again, 98 percent of all of our payments are made for free.
    Mr. Davis of Tennessee. I have a college degree. It is in 
agriculture. And I am a Member of Congress. When I start 
reading what is on the back of that card, before I get angry 
with it, I tear it up and throw it away. I mean, I don't think 
anybody reads what is on the back of those cards. We trust you. 
Literally, we trust you to be fair and honest with us. And that 
is what we have always done with our banks and others.
    So I don't want people to start distrusting a valuable 
source for us in this country. So if you could somehow maybe 
talk with other folks and see if you can tell me about what it 
would have cost me, had I agreed to pay the $29, what it would 
cost you to charge me $29 on less than a $60 bill.
    Chairwoman Maloney. Can any of the issuers answer his 
question, or can any of the academics answer his question, of 
how much does it cost the issuer to take a payment by phone? 
Can anyone answer that in relation to the fee?
    Mr. Baer. I don't know the exact amount. I do know it is 
our highest cost way of accepting a payment. But I don't know 
the relative cost.
    Chairwoman Maloney. Could you get it back to us in writing 
later after you have analyzed it?
    Mr. Baer. If we have it, we will give it to you.
    Mr. Davis of Tennessee. Can I--
    Chairwoman Maloney. Can all of the issuers respond to his 
question? Sure.
    Mr. Davis of Tennessee. I would like to make an 
announcement. For all folks who have credit cards and you get a 
request in the mail, send them back like my staff does and it 
costs them 41 cents.
    Chairwoman Maloney. Yes. Would any other issuer like to 
comment? Mr. Ireland first, or--okay. Then the academics. Mr. 
Levitin?
    Mr. Levitin. I can't speak to the issuer's overhead costs 
involved in accepting a payment by telephone. But they should 
be able to do it through an automated clearinghouse transaction 
that would cost them 5 cents. That is 5 pennies for the 
automated clearinghouse.
    Chairwoman Maloney. Can anyone else answer his question?
    Mr. Ireland. I would just like to comment. Automated 
clearinghouse transaction, to clear the transaction once you 
have formatted it and put it into the system, the interbank fee 
is on the order of 5 cents.
    To actually take in the transaction, link it up with the 
right account, account for it, and so on in a different 
environment is going to be significantly more than five cents. 
I don't know what the actual numbers are, but people have said 
they will bring them.
    Chairwoman Maloney. Go ahead.
    Mr. Ausubel. There are other nuisance fees that are much 
easier to trace down the cost of. So like if you take the 
foreign currency fees I think everyone at this table charges, 
any transaction that is paid in foreign currency they surcharge 
3 percent. That is on top of the conversion fees that Visa and 
MasterCard assess. So I would say that one it is clear the cost 
is literally zero.
    Mr. Baer. If I may just respond?
    Chairwoman Maloney. The Chair recognizes the gentleman for 
an additional minute. I do want to note that Mr. Davis is the 
author of a very comprehensive credit card reform bill, which 
does include price limits and price fees.
    Go ahead. An additional minute, in recognition of your hard 
work on your own bill.
    Mr. Davis of Tennessee. Okay. As you answer those questions 
concerning the fees for a phone call, what does it cost you to 
process me sending it in through my internet, through an e-
mail, where I actually go online and pay you online? Is there a 
difference in that and an automated phone call? And if I send 
you a check, in comparison for you to take the check out of the 
envelope, have the folks process that and enter that, which of 
the three would be the most expensive and which would be number 
one, two, and three?
    Mr. Finneran. I don't know the precise numbers, 
Congressman. But I think in order of expense, the cheapest is 
the internet because that is the most highly automated. I think 
the second least expensive is through the mail, simply because 
of the volume of people who actually choose to pay in that way.
    And the most expensive by a fair amount, although again I 
don't have the precise figure, is over the phone because few 
people choose to do it that way, and you have to have the 
people to take the phone call or to make sure that the 
automated aspects of it work and make all the linkages that Mr. 
Ireland referred to.
    For Capital One, and I know probably the other issuers at 
the table as well, notwithstanding some of the anecdotes that 
people like to pass around regarding billing due dates, we send 
our bills out a good 25 days before the due date. And we 
certainly encourage and provide multiple ways for people to pay 
on time. We spend a lot of time and effort to try to encourage 
people to not wait for the last day.
    Mr. Davis of Tennessee. I hate to interrupt you. But how 
long have you had that 25 day period when you send out your 
bills? Is this recently or is it--
    Chairwoman Maloney. Reclaiming my time, what our bill is 
approaching is all practices with all credit card companies. 
Many companies have very fine practices that give a great deal 
of notice, the 25-day limit, which many of my colleagues on the 
other side of the aisle requested be placed in the bill.
    I now recognize Mr. Clay for 5 minutes. And he will be 
followed by Mr. Ellison.
    Mr. Clay. Thank you so much, Madam Chairwoman.
    Since no one in authority will call the current economic 
straits of the country a recession or a depression, I will say 
that we are in an informal recession, that is, a recession that 
is felt by the millions that are losing all of their wealth, 
their homes, and in many cases their families.
    This has been caused by the outsourcing of jobs overseas, 
the replacement of workers in this country with cheaper 
laborers, the grand larceny of the housing mortgage community 
and various other credit and payment schemes, criminally high 
energy costs, and a few other economic burdens.
    At what point will it be determined that the consumer 
cannot pay all of the increases in interest rates, the 
additional fees and costs associated with credit? At what point 
will there be the realization that reasonable profit is better 
than the destruction of the consumer base that it is depending 
upon for the maximized profits that are being sought?
    When will the concept of losing money stop being confused 
with the concept of not meeting profit projections? And I will 
start right here. When do we concede that we must start--or 
that we must realize that consumers may not be able to pay all 
of these bills? I will start with you, ma'am.
    Ms. Warren. Congressman, I think we should be there right 
now. And I will just say, I will hit just a few of the numbers. 
One in every seven American families is dealing with a debt 
collector. Forty percent of American families worry whether or 
not they are going to be able to make their bills at the end of 
the month. And the one that truly breaks my heart is that one 
in every five American families says, I believe I will die 
still owing my bills.
    Congressman, how much worse does it have to get before we 
start taking some action to clean this up?
    Mr. Clay. And it is about what cost they incur now. People 
trying to heat their homes, fill their gas tanks up. On top of 
all of that, they are being pursued by companies wanting to 
collect on the debt.
    How about you, Mr. Baer? Any comment?
    Mr. Baer. Sure. Obviously it is a large topic. I mean, I 
would make one point, though, which is that in contrasting 
credit card lending to mortgage lending, there is a rather 
significant difference, which is credit card lending is wholly 
unsecured lending. So there is a rather significant constraint 
on our willingness to extend credit to people, namely, that if 
they do not repay it, there is no car. There is no home. There 
is no security at all.
    And I think that is why--and you may have the wrong group 
of lenders here because I think these are the lenders who are 
probably managing credit the most responsibly and intelligently 
and why, of course, we are interested in risk-based pricing.
    But we have every incentive not to have customers paying 
interest rates they can't repay or levels of debt that they 
can't repay because we bear 100 percent of the loss in the 
event that they don't repay. That is not to say we suffer the 
anguish, the personal anguish, that they might feel in that 
case, and the longer term potential bad ramifications of poor 
credit. But in terms of the immediate dollar financial loss, we 
feel 100 percent of it.
    So you should feel some assurance that at least the issuers 
here--
    Mr. Clay. Okay. I appreciate the response. But when will 
the concept of losing money stop being confused with the 
concept of not meeting projected profits? How about that? Do 
you have any response to that? There is a difference, don't you 
think?
    Mr. Baer. Yes. Now--
    Mr. Clay. Losing money compared to projected profits.
    Mr. Baer. I mean, our interest obviously is not in losing 
money, and our interest is in earning a reasonable risk-based 
return on capital, which in this case means lending to people 
we believe can repay it.
    Mr. Clay. Based on paying out bonuses at the end of the 
year and making sure your values are up in the stock market and 
all that. Correct?
    Mr. Baer. Well, again, if our customers aren't repaying us 
and we are suffering credit losses, that will not help our 
stock value.
    Mr. Clay. How about you, Mr. Levitin? Do you have any 
comment?
    Mr. Levitin. I think it is interesting what you point out 
about executive compensation and bonuses, that they are very 
often tied to short-term profits. And those short-term profits 
are--a good way of increasing short-term profits is by 
squeezing consumers through really dirty billing tricks.
    You can bump up profits a little bit in a quarter, and that 
beats the market's expectation by a penny, and walk away with a 
large golden parachute. And certainly looking at executive 
compensation practices is, I think, part of the picture here, 
and making sure that they are decoupled from things like 
billing practices and the profits generated by them.
    Mr. Clay. Thank you so much.
    Chairwoman Maloney. The gentleman's time has expired. Mr. 
Ellison, and I want to congratulate his hard work throughout 
four different hearings and a roundtable discussion that we had 
on this with issuers.
    Mr. Ellison. Well, Madam Chairwoman, I just want to thank 
you. I think that your leadership in this area is tremendous. 
Obviously there are powerful forces who are trying to stop us 
from protecting the consumers, and I just thank you for your 
courage and commitment.
    How profitable is the credit card business these days, Ms. 
Warren?
    Ms. Warren. The most recent data we have available is that 
they made about $18.4 billion in 2006. That was a 45 percent 
jump over the year before. We haven't seen the 2007 data.
    Mr. Ellison. $18.4 billion?
    Ms. Warren. $18.4 billion with a ``B.''
    Mr. Ellison. That is a lot of money. What is the percentage 
of profitability? Does that term--do you understand what I am 
asking you?
    Ms. Warren. Yes. The revenues were about $115 billion. So 
you can sort of figure it out from that one. Not bad.
    Mr. Ellison. Yes. And of course, you may not know this and 
we may need to come back for it. How much did the CEO at 
Capital One make?
    Ms. Warren. Oh, gosh. A lot more than I did.
    Mr. Ellison. Yes. Does anybody know?
    Ms. Warren. It is outside my range.
    Mr. Ellison. Mr. Finneran, do you know that? Your CEO, how 
much did he get?
    Mr. Finneran. Our CEO has not taken a salary since 1997. 
All of his compensation is in equity in the company, therefore 
what he makes is entirely dependent upon the success of the 
company.
    Mr. Ellison. Mr. Finneran, how much did he get paid last 
year?
    Mr. Finneran. Pardon me?
    Mr. Ellison. How much did he get paid last year? I am not 
asking you if it was salary or--I am asking you how much 
compensation did he receive?
    Mr. Finneran. Well, in our most recent proxy disclosure, I 
believe it was $17 million worth of equity grants.
    Mr. Ellison. $17 million. And how about the CEO of JPMorgan 
Chase, ma'am?
    Ms. Franke. I don't know.
    Mr. Ellison. You don't know that? Well, I will commend you 
on being extremely well-prepared on everything else. Bank of 
America?
    Mr. Baer. I don't know my CEO's exact compensation, or even 
his approximate compensation, for that matter.
    Mr. Ellison. Mr. Baer, come on.
    Mr. Baer. I don't.
    Mr. Ellison. Okay. Does anybody else know?
    [No response]
    Mr. Ellison. You know what? In 1980, the average CEO made 
about 41 times the average worker. In 2005, it was about 411 
times. So it is interesting how--it is too bad folks don't know 
what their boss made.
    I introduced--well, let me just skip that one.
    Demos has noted in a study that African American and Latino 
credit cardholders with balances are more likely than whites to 
pay interest rates higher than 20 percent. Why do you think 
that is? Well, is it true? And why do you think that might be? 
Mr. Ausubel, have you looked at this? Have you heard about 
this, Professor Warren? Haven't heard about that one?
    Ms. Warren. Oh, yes. No, I cited it in my testimony.
    Mr. Ellison. Oh, yes. Could you elaborate on that, please?
    Ms. Warren. Well, they looked at a survey of consumer 
finance data. But I don't think there is any question about the 
accuracy of the data.
    Mr. Ellison. Right.
    Ms. Warren. And they simply analyzed it by race. They also 
looked at the effects on single women. They looked at family 
income. And the people who are carrying the heavy burdens here 
are disproportionately African American, Latino, single 
mothers, and people in lower income categories.
    Mr. Ellison. Professor Warren, maybe you could help me with 
this. You know, I am just a simple guy, and I hear these 
financial people using big words like risk-based pricing and 
stuff like that. It sounds really important.
    Are they basically saying that these people are riskier, so 
we get to charge them more?
    Ms. Warren. They may be saying that, but--
    Mr. Ellison. But is that what they are saying?
    Ms. Warren. But in fact, that is not what they are doing. I 
mean, this is the point that Professor Levitin has really 
emphasized, and I want to be sure to highlight his research on 
this.
    Mr. Ellison. Would you please do that?
    Ms. Warren. Professor Levitin?
    Mr. Levitin. Sure. Most of the overall price that you pay 
on a credit card has nothing to do with your individual risk 
profile. It has to do with the cost to the issuer of borrowing 
money from the capital markets. It has nothing to do with 
whether you are risky or whether you are going to pay on time. 
Only at the very margins does it have any impact.
    Mr. Ellison. Basically, the pricing reflects what they can 
get from a consumer, right?
    Mr. Levitin. Very much so.
    Mr. Ellison. So it is pretty much about just getting money?
    Mr. Levitin. This is a--as they note, it is a competitive 
market and they want to squeeze every last drop of profit they 
can.
    Mr. Ellison. I am glad you said that about the competitive 
market thing, because I was talking to somebody just yesterday, 
and they told me that, well, I shouldn't worry about these 
credit card practices that seem so egregious to me because if 
people don't like it, they can just call somebody else.
    But then have you ever tried to call a credit card company? 
Could you just--Ms. Warren, Professor Levitin, have you tried 
to actually talk to these people and get them on the phone to 
discuss your bill?
    Ms. Warren. Of course not. That is why we all laugh. That 
is like the punch line to a joke, to call a credit card 
company.
    Mr. Ellison. Right.
    Ms. Warren. But I want to make the point here even so, even 
if you could reach someone, by the time you recognize most of 
these things have happened to you, they have happened to you.
    Mr. Ellison. Right.
    Ms. Warren. This is not about understanding in advance, 
golly, I have one of those cards that is going to have a new 
due date on it, or that they are going to switch me every 6 
months on the date that my payment is due. This is about things 
that you only know you have been bitten after the teeth are 
well sunk in. And then it is too late to do anything about it.
    Mr. Ellison. Let me ask you this. On this issue of the 
moving target of the payment date, it was pointed out to me 
yesterday that, hey, we don't want to have--
    Chairwoman Maloney. The gentleman's time has expired. And 
the moving target date is one that we end in this legislation 
that is before us today.
    I would like to thank all of my colleagues and the 
witnesses for your testimony today. We are moving forward with 
legislation. This bill is on four previous hearings and 
roundtable discussions with issuers and consumers and 
academics. And the next hearing will be held on April 9th.
    We look forward to passing legislation that will put into 
place reforms that will enable responsible consumers to better 
control their financial affairs, and will bar some of the most 
abusive practices that drive responsible cardholders further 
into debt. Our legislation is balanced and sensible, and I look 
forward to our next hearing.
    I do want to note that Members, if they have additional 
questions, and my colleague Mr. Ellison, can put his additional 
questions in writing to the panel. Without objection, the 
hearing will remain open for additional comments and questions 
for 30 days.
    And again, I want to thank the witnesses and thank everyone 
here. We will get your responses into the record. This meeting 
is adjourned. Thank you.
    [Whereupon, at 2:15 p.m., the hearing was adjourned.]













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                             March 13, 2008


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