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


 
                   H.R. 5244, 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

                               __________

                             APRIL 17, 2008

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-109
                               ----------

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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
BILL FOSTER, Illinois                DEAN HELLER, Nevada
ANDRE CARSON, Indiana

        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:
    April 17, 2008...............................................     1
Appendix:
    April 17, 2008...............................................    87

                               WITNESSES
                        Thursday, April 17, 2008

Autrey, Steven, Fredericksburg, Virginia.........................    18
Bowman, John E., Deputy Director, General Counsel, Office of 
  Thrift Supervision.............................................    39
Braunstein, Sandra F., Director, Division of Consumer and 
  Community Affairs, Board of Governors of the Federal Reserve 
  System.........................................................    41
Carey, John P., Chief Administrative Officer and Executive Vice 
  President, Citi Cards, Citigroup Inc...........................    60
Gruenberg, Martin J., Vice Chairman, Federal Deposit Insurance 
  Corporation....................................................    36
Levin, Hon. Carl, United States Senator, State of Michigan.......    12
Mierzwinski, Edmund, Consumer Program Director, U.S. Public 
  Interest Research Group........................................    68
Minetti, Carlos, Executive Vice President, Cardmember Services 
  and Consumer Banking, Discover Financial Services..............    63
Plunkett, Travis B., Legislative Director, Consumer Federation of 
  America........................................................    65
Sharnak, Larry, Executive Vice President and General Manager, 
  Consumer Cards, American Express Company.......................    62
Sherry, Linda, Director, National Priorities, Consumer Action....    67
Strachan, Stephen M., York, Pennsylvania.........................    21
Williams, Julie L., Chief Counsel and First Senior Deputy 
  Comptroller, Office of the Comptroller of the Currency.........    37
Wones, Susan, Denver, Colorado...................................    19
Wyden, Hon. Ron, United States Senator, State of Oregon..........    14

                                APPENDIX

Prepared statements:
    Carson, Hon. Andre...........................................    88
    Autrey, Steven...............................................    90
    Bowman, John E...............................................    94
    Braunstein, Sandra F.........................................   107
    Carey, John P................................................   118
    Gruenberg, Martin J..........................................   131
    Levin, Hon. Carl.............................................   149
    Mierzwinski, Edmund..........................................   186
    Minetti, Carlos..............................................   201
    Plunkett, Travis B...........................................   223
    Sharnak, Larry...............................................   246
    Sherry, Linda................................................   276
    Strachan, Stephen M..........................................   285
    Williams, Julie L............................................   332
    Wones, Susan.................................................   347
    Wyden, Hon. Ron..............................................   348

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    Letter to Hon. Ben S. Bernanke, Chairman, Board of Governors 
      of the Federal Reserve System, dated February 13, 2007.....   351
    Response letter from Chairman Bernanke, dated February 27, 
      2007.......................................................   353
Barrett, Hon. J. Gresham:
    Responses to questions submitted to Sandra Braunstein........   355
    Responses to questions submitted to John Carey...............   357
    Responses to questions submitted to Carlos Minetti...........   358
    Responses to questions submitted to Larry Sharnak............   361
Biggert, Hon. Judy:
    Section 2845 of the 2008 U.S. Master Tax Guide...............   364
    Statement of the Independent Community Bankers of America....   366
    Statement of John G. Finneran, Jr., General Counsel, Capital 
      One Financial Corporation..................................   371
    Supplemental statement of John G. Finneran, Jr...............   379
    Statement of the American Financial Services Association 
      (AFSA).....................................................   380
Maloney, Hon. Carolyn:
    Statement of the American Bankers Association................   385
    Supplemental information supplied by Larry Sharnak...........   406
    Letter from Chase regarding the account of Susan Wones, dated 
      April 16, 2008.............................................   410
    Letter to Susan Wones from Chase regarding her account, dated 
      April 8, 2008..............................................   413
    Letter from Chase regarding the account of Stephen Strachan, 
      dated April 16, 2008.......................................   416
    GAO Report entitled, ``Credit Cards, Increased Complexity in 
      Rates and Fees Heightens Need for More Effective 
      Disclosures to Consumers,'' dated September 2006...........   420
    Letter from GAO containing information supplementing the 
      September 2006 report referenced above, dated February 28, 
      2008.......................................................   534
Moore, Hon. Dennis:
    Letter to Hon. John C. Dugan, Comptroller of the Currency, 
      dated February 1, 2008.....................................   538
    Letter from Hon. John C. Dugan, Comptroller of the Currency, 
      dated April 15, 2008.......................................   540
Minetti, Carlos:
    Supplemental information provided for the record.............   545
Strachan, Stephen:
    Supplemental information provided for the record.............   546
Wones, Susan:
    Supplemental information provided for the record.............   551


                   H.R. 5244, THE CREDIT CARDHOLDERS'
                       BILL OF RIGHTS: PROVIDING
                     NEW PROTECTIONS FOR CONSUMERS

                              ----------                              


                        Thursday, April 17, 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, 
Moore of Kansas, Waters, Green, Clay, Miller of North Carolina, 
Scott, Cleaver, Bean, Davis of Tennessee, Hodes, Ellison, 
Foster; Biggert, Castle, Feeney, Hensarling, Garrett, 
Neugebauer, Davis of Kentucky, Campbell, McCarthy of 
California, and Heller.
    Ex officio present: Representatives Frank and Bachus.
    Also present: Representative Udall.
    Chairwoman Maloney. I would like to call this hearing to 
order. Before we begin this legislative hearing on H.R. 5244, 
the Credit Cardholders' Bill of Rights, I would like to thank 
my colleagues on the Republican side, Ranking Member Bachus and 
Congresswoman Biggert, and their staffs for working with us to 
make this hearing possible. There have been a number of issues 
that we have had to work through, but I am pleased that we have 
been able to do this in a constructive and bipartisan manner. I 
also would like to thank the staff of the full committee and my 
own staff for all of their hard work in putting this together.
    I would also like to state that this morning we will have 
consumer witnesses testifying before the committee. To ensure 
an open debate, we have asked them to sign an authorization 
that allows us to work within the relevant privacy laws, allows 
the committee to receive information about their accounts from 
their issuers, and allows the issuers to respond publicly 
regarding their testimony.
    At this time, I would like to ask unanimous consent that we 
keep the hearing record open for 30 days to allow our witnesses 
and their respective issuers to submit any information relevant 
to their accounts and to this hearing.
    [No response]
    Chairwoman Maloney. Hearing no objection, it is so ordered. 
I would also like to ask unanimous consent that Congressman 
Mark Udall of Colorado be allowed to fully participate in 
today's hearing.
    [No response]
    Chairwoman Maloney. Hearing no objection, it is so ordered. 
I yield myself as much time as I may consume.
    I am delighted to welcome the witnesses to the second of 
two legislative hearings on H.R. 5244, the Credit Cardholders' 
Bill of Rights. I introduced this bill with Chairman Frank 
about 2 months ago, and it now has over 101 co-sponsors to date 
and has received 10 editorials in support from national and 
regional papers.
    The core principle of our bill is notice and choice. 
Cardholders or consumers should not be trapped by high interest 
rate increases to which they did not agree and that are applied 
retroactively to their existing debt, causing it to balloon. As 
you will hear from our witnesses on the second panel, 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, and which have 
driven them deeper into debt.
    For example, Steve Autrey--you will be hearing from him 
later--had a fixed rate of 9.9 percent and he paid his bill on 
time every month for 8 years. He never went over his limit, 
except once when interest charges on the account put him over 
his limit. And he was never late in payment, except once, by 
one day. Nevertheless, his issuer raised his credit card 
interest rate from 9.9 percent to 15.9 percent, and when he 
complained, they told him that they reserved the right to raise 
fixed interest rates, even for good customers.
    Under our bill, card companies would have to spell out in 
advance all the specific reasons they could raise the rate, not 
just say that they could do it anytime, for any reason. And, 
they could not call a rate fixed unless it was really fixed. 
Cardholders faced with any rate increase would have the right 
to cancel the card and pay off the balance at the old rate.
    Banks argue that interest rates are based on the risk 
presented by the customer, but as Senator Levin's hearing this 
winter showed, and I congratulate the Senator on his work and 
for being with us today, a single customer can end up with 
different rates from the same issuer, which on its face is 
inconsistent with the idea that the rate is based on the risk.
    Our second cardholder who is testifying today, Susan Wones, 
has three credit cards from the same issuer, each with a 
different interest rate. On one of her cards, she has paid on 
time each month and never went over her limit. However, her 
rate went up from 14 percent to 25 percent. The reason she was 
given was that she was getting too close to her credit limit 
and that this made her a riskier customer. However, she has 
another credit card with the same issuer at 7.9 percent that 
they never changed the interest rate on, and she was able to 
get a third from the same issuer with an introductory offer of 
0 percent. Mrs. Wones' card company raised her rate even though 
she did not pay late or even go over her limit at the end of 
the month. Our bill would ensure that a customer like Mrs. 
Wones never has an interest rate increase on her existing 
balance.
    our third consumer witness today, Steve Strachan, is from 
York, Pennsylvania, where he runs a small business. He has a 
credit card score in the high 700s, close to perfect, which is 
critical to managing his company. But over the years, the 
interest rates on several of his cards have been raised for no 
other reason than the fact that he has used the credit limit he 
has been given. Again, our bill would ensure that a customer 
like Steve Strachan could never get an interest rate increase 
on his existing balance and could opt out of any future rate 
increases.
    We need to be very clear about the real world consequences 
of interest rate increases. They cause minimum payments to 
shoot up and make it very hard for people to ever get out of 
debt.
    I would like to show this one example that is on the easel 
down there, and it shows the example of a borrower who borrowed 
$1,000 at 15 percent. You can pay that off in just under 9 
years with minimum payments, and end up paying about $600 in 
interest. If your rate goes up to 30 percent, it will take you 
over 24 years to pay off the loan making minimum payments, even 
though those payments would be much larger, and you would pay 
almost $4,000 in interest for that same loan of only $1,000. We 
all have constituents who have written us with stories like 
these.
    This bill attempts to put some of the responsibility for 
fair dealing back on the card companies and to give cardholders 
the tools they need to control their finances and make sure 
they can pay back their debts responsibly by requiring card 
companies to give cardholders advance notice of any interest 
rate hike and the right to say no to borrowing more money at a 
higher rate than they originally agreed to.
    The bill also stops tricks and traps that make cardholders 
incur rate hikes and pricey fees and empowers cardholders to 
set limits on their credit. It shields cardholders from 
misleading terms like so-called ``fixed rates'' that are not 
really fixed, and protects the most vulnerable consumers from 
fee-heavy subprime cards.
    Finally, it gives Congress the tools to provide better 
oversight of the credit card industry. The bill sets no price 
controls, no rate caps, and no fees. It does not dictate any 
business model to credit card companies.
    I believe that it is a much needed correction to a market 
that has gotten wildly out of balance. A credit card agreement 
is a contract between a card company and a cardholder, but what 
good is a contract when only one party has any power to make 
any decisions? Cardholders deserve information and the right to 
make decisions about their own credit.
    That is what our bill does. It simply gives cardholders 
notice and choice.
    I would like to say that obviously credit cards are a very 
important part of our economy, and we just want them to be fair 
to consumers. If a consumer does not like the deal their card 
companies are giving them, they can go elsewhere without 
getting hit with a big rate increase on their existing debt. 
That is the free market at work.
    The principles in this bill are not radical. In fact, 
several leading card companies, including Citibank, JPMorgan 
Chase, and Capital One, for example, have voluntarily said that 
they will no longer practice universal default or double-cycle 
billing or continue with the practice of increasing interest 
rates anytime for any reason. I applaud such moves. This bill 
just raises everyone to the best standards that these companies 
have already incorporated. These are three of the most 
important parts of the bill that we have before us.
    The principle that a deal is a deal is as American as apple 
pie. This bill makes that principle apply to credit cards just 
as it does elsewhere.
    I look forward to the testimony, and I now recognize my 
colleague and good friend Judy Biggert for as much time as she 
may consume.
    Mrs. Biggert. Thank you, Madam Chairwoman, and I would also 
like to thank the witnesses for coming today, especially those 
on the third and fourth panels, whose testimony is likely to be 
heard well after Congress adjourns and Members head to the 
airport unless we move forward at a rapid rate. But I just want 
these witnesses to know that their testimony coming later in 
the day is no less important to me and my colleagues and we 
thank you for your patience.
    First I think it is good for all of us to remember just how 
credit cards have evolved over their relatively short history. 
They used to be products for a few wealthy individuals who 
could afford sizable annual fees and 20 percent interest rates. 
Now, credit cards are for all borrowers, from the lowest income 
individual, and they can offer interest rates starting at 0 
percent.
    Part of this success story is due to technology, 
innovation, and competition, which have allowed card issuers to 
assess a borrowers' creditworthiness and set a risk-appropriate 
card rate and limit. Americans 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 is often overlooked, and 
today, instead of taking out other loans using a store layaway 
plan or cash, millions of Americans, three quarters of 
Americans each day, choose to use plastic to pay the electric 
bill, take a family vacation, buy books for school, start a 
business, or even buy a cup of coffee.
    There is no question that until recently, regulations have 
not kept up with this rapid credit card evolution. Not long 
ago, the Federal Reserve recognized that consumers needed 
better information to shop for a credit card and understand 
their responsibilities and obligations when it comes to their 
credit card contract. Hence, was born Regulation Z, and I look 
forward to our conversations about Reg Z, as well as updates to 
the Unfair and Deceptive Practices Act today to learn how these 
two regulations will inform and protect consumers. Borrowers 
need transparency. They need to know what the terms of their 
contract are simply, clearly, and reliably. On this, I agree 
with Chairwoman Maloney.
    My goal is to make sure that the many are not punished for 
the transgressions of the few. In our weakened economy, or any 
economy for that matter, it is critical that we address the 
problems of a few customers or the abuses of a few issuers. We 
don't force the majority of credit card borrowers from low 
income to high income to pay for it with increased costs, fewer 
credit options, or worst-case scenario, no credit at all. We 
must first do no harm.
    As I said last month, I am inclined to reserve judgment on 
this bill, H.R. 5244. I want to hear the results. We in 
Congress authorize the Fed to undertake a revision of Reg Z, 
the Fed's 4-year intensive expert review utilizing consumer 
focus groups and other sound methodology, would seem to be just 
as worthy of our consideration as is the anecdotal, if not 
dramatic evidence as presented by today's witnesses. In 
addition, I look forward to the Fed's promulgation of updated 
rules regarding the Unfair and Deceptive Practices Act.
    Do consumers need improved and more helpful disclosures? Do 
they need information so they can have the tools to make more 
informed decisions about choosing a credit card, about their 
card, or about borrowing, in general?
    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 once again, after reviewing data, studies, 
and testimony, at this time it appears that regulation and 
education should at least be among the first steps. Should the 
Congress step in on the basis of a few cases and testimony and 
preempt the Fed? I am not sure that is the answer.
    With that, I look forward to hearing from today's 
witnesses, and I yield back.
    Chairwoman Maloney. Thank you. The Chair recognizes the 
distinguished chairman of the full committee, Chairman Frank, 
for as much time as he may consume, and thanks him for his hard 
work on this bill.
    The Chairman. Madam Chairwoman, you deserve the credit for 
formulating and bringing this bill forward, and it is my hope 
that we will actually be acting on it this year.
    I am very pleased to see our Senate colleagues, including 
my classmate, the Senator from Oregon, as well as the Senator 
from Michigan who has taken such an important lead on this. For 
someone who grew up in the era of Senator Joseph McCarthy as I 
did, seeing under Senator Levin's leadership the subcommittee 
that was the McCarthy subcommittee put to different uses is a 
sign that sometimes things do get better, as he chairs that 
subcommittee.
    I first want to say that there has been some discussion of 
the glitch involving waivers and the inability of people to 
testify last time. I know we are not supposed to lapse into 
languages other English, it gets some people all jittery, but I 
hope in the spirit of the Pope being here, I will be allowed to 
say, ``mea culpa.'' I was not supervising that process as well 
as I should have been. There were other things going on; I 
don't think anyone was ill-intentioned. I made the final 
decision to postpone the testimony of those witnesses because 
we had not done it in a way that met my own internal standard 
of fairness, so I apologize. I don't want to carry it too far, 
it is not ``mea maxima culpa,'' but it is ``mea culpa.''
    The next point I want to make is, to my friends in the 
banking industry, to the extent that we are doing anything 
binding here, it is saying that you can't retroactively raise 
people's interest rates. I know it is nice to be able to do 
that. We would all like to have the freedom to make as much 
money as we can in reasonable ways, but I do want to caution 
you. The argument that we should not act retroactively, the 
argument that we should not interfere with existing 
arrangements, has been a very powerful protection for people in 
the financial industry when people get angry. I think you would 
be ill-advised to erode that.
    And I understand you can say, ``But we had that right in 
the contract.'' No one believes that those contractual rights 
really meet our normal view of contract, and for the banking 
industry to resist our saying that whatever you do, you can't 
apply it retroactively, would be to set a precedent with regard 
to a number of other issues that I do not think you will want 
to see followed, but you do understand we are now going to be 
talking about whether or not we help people who made unwise 
decisions with mortgages. Resistance to that is less than it 
was before the Federal Reserve stepped in to help the counter 
parties of Bear Stearns.
    Logically there is not a connection, but as people 
understand, one of the important principles of legislation is 
that the ankle bone is connected to the neck bone, and once you 
do something in one place, you may see it again. So I advise 
you not to resist this notion that you do not undo things 
retroactively.
    Finally, I did want to comment on the last remarks of my 
good friend from Illinois, and she will have a right obviously 
to respond later on, but I think she gets it backward when she 
says that the Congress should not preempt the Fed. I am a 
supporter of the Federal Reserve system, but I do not find it 
in the Constitution. I do find Congress there.
    When you say we shouldn't do this legislatively, we should 
do it by regulation, remember that regulation does not spring 
from the earth. Regulation is only in pursuant of statutory 
authority granted by this Congress, and the notion that the 
legislative body should defer to the regulators gets it 
backward. The regulators get their instructions from the 
Congress, and I would think that the notion that we should not 
preempt the Fed; I would disagree with that. I think it is 
appropriate for us to take some action. To be honest, as I look 
back at the subprime crisis, and the decision of Mr. Greenspan 
not to do anything for a long time, I wish we had been able 
more vigorously to preempt him.
    So I thank the Chair again for convening this hearing. I 
think she has a very reasonable approach, and I hope we will be 
able to move forward.
    Chairwoman Maloney. The Chair recognizes Congressman Bachus 
for as much time as he may consume.
    Mr. Bachus. Thank you, Chairwoman Maloney, and I also 
commend you for holding this second hearing on the credit card 
bill of rights. Senators Levin and Wyden, I welcome you to our 
committee. We very much look forward to your testimony. By your 
presence, I acknowledge that this is an important hearing. It 
is important to all of our constituents.
    Credit cards are a valuable financial resource and 
convenience for those we represent. Americans rely on them 
every day. They are convenient, and they make life a lot 
simpler for many American consumers.
    There is, however, a widespread perception that credit card 
consumers are sometimes treated unfairly in their relations 
with credit card companies. We have heard that from our 
constituents. We have had many conversations on this committee 
and with constituents about complaints regarding the credit 
card industry and practices. I think it is a given that these 
agreements are complex and they are confusing to most 
Americans. Many of these conversations involve anecdotal 
accounts of problems faced by credit card customers.
    Today, we have those customers before us in a panel, and we 
will listen to them. They will present to us the problems that 
they encountered and the credit card companies are here to 
respond and discuss the actions and practices that they took 
with regard to these specific customers, and I think this will 
be enlightening.
    This hearing will be a valuable contribution toward us 
understanding this critical part of our credit system, and 
hopefully will inform our future deliberations on credit card 
reform, which I believe this committee believes is necessary. 
In fact the industry has acknowledged that reform is necessary. 
In closing, and this is probably the most important thing I 
will say, and the chairman referred to this, we have waited a 
long time for the Federal Reserve to issue final regulations 
regarding industry practices and consumer protection. They are 
long past due and I, for one, look forward to receiving them in 
the very near future. They should have already been here.
    Thank you again, Chairwoman Maloney, for holding this 
hearing, and thanks to our witnesses for being with us today.
    Chairwoman Maloney. Congressman Moore is recognized for 3 
minutes.
    Mr. Moore. Thank you, Madam Chairwoman, and thank you for 
convening this important hearing today.
    Prior to the introduction of H.R. 5244, Mr. Castle and I 
and several other bipartisan members of this committee sent a 
letter to the Office of the Comptroller of the Currency asking 
for their advice and expertise concerning various proposals to 
increase regulation of the credit card industry. Yesterday, we 
received a response from Comptroller Dugan at the OCC, and I 
would ask unanimous consent that both our letter and the 
response we received from the Comptroller's office be submitted 
into the record.
    Chairwoman Maloney. Without objection, it is so ordered.
    Mr. Moore. Thank you. I would like to highlight just a 
couple of points of the OCC's response. Mr. Dugan knows that 
the regulation of credit cards presents unique challenges 
because credit cards are fundamentally different from other 
common consumer credit products such as home mortgage loans. 
One example he gives is that, unlike a mortgage loan, each 
credit card transaction is a new extension of unsecured credit 
that is not separately underwritten at the time of the 
transaction. Additionally, the consumer, not the lender, 
generally determines the amount of credit that is involved, the 
amount of payment above the minimum required payment, and the 
length of repayment.
    While I believe most people agree that these unique 
features of credit cards have provided a new level of 
convenience and access to credit enjoyed by many consumers, I 
am also concerned that unsophisticated borrowers may have 
difficult navigating the terms of their contracts, which can 
result in consumers being caught with unexpected fees or rate 
increases.
    Comptroller Dugan goes on to say in his response that there 
are some issues or practices that may be ``so adverse to 
consumers or generally difficult to understand that they may 
require an alternative disclosure approach that would warn 
consumers about the result of the practice rather than simply 
describe its mechanics.'' An example he gives is double-cycle 
billing. Because of the unique features associated with credit 
cards, I believe regulators are positioned well with their 
expertise to act to protect consumers.
    As our chairman noted, Congress needs to continue pushing 
the regulators to take strong actions not only to improve 
disclosures for consumers, but to adjust those practices that 
may be unfair or deceptive, and I appreciate the chairwoman's 
leadership in drawing attention to these very important issues. 
For this reason, I am pleased that the Federal Reserve is 
working to finalize new rules under Reg Z this year, in 
addition to new rules regarding unfair and deceptive practices 
by issuers of credit cards. I look forward to reviewing these 
new rules, and I hope they will deal with many of the issues 
that will protect consumers.
    I thank the chairwoman, and I yield back my time.
    Chairwoman Maloney. The Chair recognizes Congressman Castle 
and thanks him for participating in the discussions and forums 
that we had on this bill and the principles.
    Mr. Castle. Thank you, Chairwoman Maloney, and thank you 
for what I consider to be a fair hearing. It is unfortunate 
that our schedules are such that we are probably not going to 
be able to participate in all of it, but the panels, I think, 
are comprehensive, and we should be able to get some answers to 
questions today, and I appreciate that, and I welcome the 
Senators here.
    As the subcommittee continues its examination of credit 
cards, I believe it is very important for members to be mindful 
of the very broad and comprehensive efforts that are drawing to 
a close at the Federal Reserve with practices controlled by 
Regulation Z. Obviously I disagree with the chairman of the 
full committee on where we are supposed to go, or who is 
supposed to go first with respect to what we are doing.
    A few years ago, the Board initiated a comprehensive review 
of Regulation Z, and in an effort to be fair, reasonable, and 
sensitive to the needs of consumers, the Fed hired an outside 
firm to conduct consumer testing and design for improved credit 
card disclosures. This firm has over 40 years of experience 
with this sort of thing, a firm with a diverse client base and 
experience doing similar work for government agencies and 
nonprofit organization clients.
    Testing with everyday consumers was conducted in the States 
of Maryland, Missouri, Colorado, Massachusetts, Alabama, and 
Texas. Each focus group consisted of between 8 and 13 people. 
In addition, four rounds of individual cognitive one-on-one 
interviews were conducted in each of these locations. Consumers 
were asked their opinion of six different types of disclosures 
related to credit cards: solicitation and application 
disclosures; initial or account opening disclosures; periodic 
statements; change in terms notices; convenience checks; and 
solicitation letters. This was done, I might add, with plenty 
of urging and prodding from my colleagues on this committee. I 
commend to your attention this report of over 200 pages and ask 
that you give it your full consideration.
    Subsequent to all of this, the Fed released for comment a 
draft of Regulation Z many months ago. Finally, after carefully 
reviewing over 2,500 comments from businesses, consumer groups, 
law firms, and the like, the Fed is about to complete this 
lengthy, and I might add costly, but important rewrite. I am as 
frustrated and anxious as anyone on this committee to have the 
final version of Regulation Z released.
    I do hope my colleagues will dedicate their time and that 
of their staffs to carefully review all that has gone into that 
effort and give it the consideration it deserves before we 
legislate. I come to a different conclusion than Mr. Frank on 
this. I truly believe that the effort they have made is 
sincere. I believe a number of financial institutions have 
started to make changes already, and that is the order in which 
we should go. We should look at Regulation Z and then go back 
to potentially legislating.
    But having said that, I congratulate the chairwoman on the 
hearing and the fact that we are considering a very important 
topic, and I yield back the balance of my time.
    Chairwoman Maloney. Chairwoman Waters is recognized for 3 
minutes.
    Ms. Waters. Thank you very much, Madam Chairwoman. I 
appreciate so very much that you have taken up this issue and 
your providing leadership to get Congress involved in the kind 
of oversight that we really have the responsibility for, but we 
don't often do.
    We are all credit card users, so many of us are very 
familiar with the abuses of the industry. Many of us have 
complained from time to time about abuses that we have 
witnessed or we have been involved in, but none of us took up a 
comprehensive effort to try and deal with the problems as we 
see them.
    This is so important because we cannot negotiate our lives 
without the use of credit cards. We must have credit cards in 
order to reserve a hotel room, to get on a plane, and to 
purchase goods and items, so it is a very necessary part of our 
life, and being that it is such a very necessary part of our 
life, we must understand what our responsibility and our role 
is, not only to protect our own personal interests, but the 
interest of our constituents.
    The Credit Cardholders' Bill of Rights certainly does go 
straight to the heart of some of these issues, and I am very 
pleased that the number one item listed in the bill of rights 
is an item that deals with arbitrary interest rate increases. I 
think that is such an abuse. As a matter of fact, I am reminded 
of some of the problems that we are experiencing and learning 
about as we look at the foreclosure problem and the subprime 
meltdown. What we are finding is the financial services 
community came up with all kinds of exotic products. None of us 
understood those products here in Congress, and our regulatory 
agencies did not take a look at no-documentation loans, they 
did not explore some of these ARMs that were being created or 
how they were being originated and initiated and by whom.
    I see some of the same kinds of abuses as we look at these 
credit cards. As a matter of fact, I just learned that if you 
have a credit card, if you decide that you are going to open up 
a credit account at a department store when they have these 
special offers and you make purchases on that same day they 
extend the credit to you, that your other credit card issuers 
can then increase your interest rate because they consider that 
if you open up an account at a department store on some kind of 
special offer where you take out the goods on that day, that 
somehow you have created another risk. Most people don't know 
that, and sometimes when folks go into a department store--
    Chairwoman Maloney. The gentlewoman's time has expired.
    Ms. Waters. Thank you very much. I appreciate the 
opportunity.
    Chairwoman Maloney. In interest of the Senators' time, we 
are going to have 4 more minutes of opening statements: 2 
minutes for Mr. Hensarling; 1 minute for Mr. Ackerman; and 1 
minute for Mr. Ellison. We will then get to the very important 
testimony of our Senators. We are so thrilled to have you here 
and we are really sensitive to your time constraints.
    The Chair recognizes Mr. Hensarling for 2 minutes.
    Mr. Hensarling. Thank you, Madam Chairwoman. Senator Levin, 
Senator Wyden, welcome. I am sorry you have to listen to so 
much talk, but we are led to believe that you do a whole lot 
more talking on your end of the Capitol than we do over here.
    As we sit here and examine today the Credit Cardholders' 
Bill of Rights, I fear for perhaps 95 percent of America, it 
may prove to be a credit cardholders' bill of wrongs. I fear 
that the legislation will help turn back the clock to an era 
where a third fewer Americans had credit cards, and those that 
did had little choice and paid the same high universal rate. I 
fear the bill represents another assault on personal economic 
freedom. It chips away at risk-based pricing, and I fear it is 
also fraught with unintended consequences.
    According to the ABA's delinquency bulletin for the 4th 
quarter of 2007, you had roughly 4.38 percent credit card loan 
delinquencies, which is in line with the 5 year average. That 
means that for every 22 people paying off their charges on 
time, there is one who is not. And unfortunately when you press 
in on one end of the balloon, it presses out somewhere else.
    What begins to happen when you chip away at risk-based 
pricing? A recent survey of banks shows that if legislation 
like this is passed, we know what will happen. Number one, some 
will opt to raise rates. Number two, some will tighten 
underwriting standards. Some will eliminate low-cost products. 
And some may actually drop their cards, particularly some of 
our small community banks who continue to suffer under a large 
regulatory burden.
    And we see similar legislation, this isn't just theory, I 
think there is a very practical model. If you look to the 
experience in Great Britain in 2006 when credit card issuers 
were ordered to cut default fees or face legal action, here is 
what happened: Two of the three biggest issuers promptly 
imposed annual fees on their cardholders, again harkening back 
to a previous era; 19 card issuers raised their interest rates; 
and by one estimate, credit standards were tightened so that 60 
percent of new applicants were being rejected.
    For all of the Americans who rely upon their credit cards 
to start and run their small businesses, perhaps to pay their 
utility bills at the end of the month, to stretch out that 
paycheck, this legislation, I fear, is a threat to them. 
Clearly there are legitimate issues of effective disclosure, 
and I think there is lots of blame to go around and that is 
worthy of this committee's attention. I do not believe there is 
an issue of effective competition, which again is the 
consumer's best friend. And with respect to distasteful 
practices, the disinfectant of sunshine and competition goes a 
long way.
    I yield back the balance of my time.
    Chairwoman Maloney. The Chair recognizes Congressman 
Ackerman for 1 minute.
    Mr. Ackerman. The balance between credit card issuers and 
consumers has gotten out of balance, and Congress needs to step 
in to restore fairness. The bill makes a great start to that 
goal, and a number of provisions that I thought critical have 
been integrated into the text, and I am grateful for the 
cooperation of Chairman Frank and Chairwoman Maloney.
    I do believe, however, that the legislation and our 
constituents would be better served if we could find a way to 
include provisions dealing with the so-called pay-to-pay fees. 
Pay-to-pay fees, for those who haven't personally experienced 
this devious practice, are fees that credit card issuers charge 
their customers simply to pay their bill by phone or online on 
time, but shortly before payment is due. When used in 
conjunction with changes in billing cycles, consumers can very 
quickly find themselves entrapped, handing over a lot of extra 
money just to avoid late fees caused by slow mail.
    This kind of greedy manipulation has to stop. It can be 
easily addressed during the mark-up for the legislation, and I 
look forward to working with the chairwoman to make this 
happen. If amended to include this provision--
    Chairwoman Maloney. Thank you so much, Congressman, for 
your hard work. Your time has expired. Mr. Ellison, for 1 
minute.
    Mr. Ellison. Thank you, Chairwoman Maloney. I cannot even 
begin to explain how important this hearing is to our consumers 
and working families. Higher gas prices, soaring food prices, 
and stagnant wages have made many of our families more and more 
reliant on borrowing against their homes and through credit 
cards. But they aren't getting a fair deal from many players in 
the credit card industry. They are subject to anytime, any 
reason re-pricing, and at risk of being subjected to unfair 
practices like universal default and double-cycle billing, all 
in the name of increased profits.
    The credit card companies say that risk-based pricing is to 
ensure that good consumers get better rates than more risky 
customers, but as you can see on--I have a chart that I hope to 
show soon--that is not the case. The chart was presented at the 
last hearing on the issue by Professor Levitin of Georgetown 
Law and shows that good consumers only get minimal savings for 
risk-based pricing. In fact, it shows that the greatest factor 
when determining pricing is not a borrower's risk, but the Fed 
funders' rate, the rate that credit cards borrow for the money 
they lend to you. I intend to ask the issuers about this when 
they are before us--
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Ellison. Thank you, ma'am.
    Chairwoman Maloney. Many of my colleagues have important 
statements to make. They can put them in the record or make 
them at the end of the hearing, but our two distinguished 
Senators have indicated that they are under time constraints, 
so I am delighted now to introduce, first, Senator Levin. We 
thank him for being here. He has been a leader on this issue by 
holding hearings that have shone a light on abusive practices 
and by introducing the first comprehensive credit card reform 
bill in this Congress, a mark against which subsequent bills 
must be measured. I also want to thank my good friend and 
former colleague Senator Wyden for coming to testify today and 
for all of his thoughtful and important work and for his 
important bill too. Senator Levin, you are recognized.

STATEMENT OF THE HONORABLE CARL LEVIN, A UNITED STATES SENATOR 
                   FROM THE STATE OF MICHIGAN

    Senator Levin. Thank you, Madam Chairwoman, and members of 
the subcommittee.
    Thanks for the opportunity to join with you today and share 
some of the experiences that we have had at the Permanent 
Subcommittee on Investigations at the Senate.
    We have been investigating this issue for a couple of years 
now. We have had a number of hearings. We have an extensive, 
lengthy record that demonstrates the abuses and the excesses 
that many members of the credit card industry have engaged in. 
We would ask that you take into account that record, and I will 
just quickly sum it up, given all your time constraints.
    We commend you on the work that you are doing. This 
subcommittee, particularly, is tackling credit card reform. It 
is a complex issue, but these excesses are causing huge 
financial pain to people who are already undergoing severe 
economic stress. Congressman Ellison made reference to the kind 
of challenges which middle-income families face, and I won't 
reiterate them other than to say that the credit card excesses, 
the high interest rates and the other abuses that take place, 
which I will quickly enumerate, just add insult to injury, add 
additional pain to the pain that is already being suffered by 
our middle-income families.
    The abuses that we have focused on, essentially, are as 
follows, not necessarily in any order of priority. A number of 
you have identified abuses that are either in the bill that is 
pending before you or you feel should be added.
    What I am going to list for you are just some of the 
abuses, excesses, that are in a bill that has been introduced 
in the Senate and that Congressman Davis has introduced here on 
the House side: Charging interest on debt that is paid on time; 
hiking the interest rates of cardholders who have faithfully 
paid their bills every month; applying higher interest rates, 
retroactively, to existing debt; imposing fees, late fees and 
over-the-limit fees, repeatedly. We have an example we will 
share with you in a moment where somebody went over the limit 
once and was charged 45 over-the-limit fees.
    Interest being charged on late fees--it is one thing to 
charge interest on money which is borrowed or on purchases 
which are being charged. It is a totally different thing to 
charge interest on penalties that are imposed. We think it is 
improper.
    As Congressman Ackerman mentioned a minute ago, charging 
people a fee to make a payment. If you make your payment over 
the phone, many companies charge you a $10 or $15 fee to make 
your payment. That is for an on-time payment, by the way.
    Let me just give you a couple of examples from some of the 
people we have heard from. Bonnie Rushing, a woman from 
Florida--suddenly her Bank of America credit card interest rate 
was tripled from 8 percent to 23 percent. She said she was 
never notified. The credit card company says there should have 
been a notice sent to her. They gave us an example of the type 
of notice which they think should have been sent to her--it was 
totally incomprehensible, even if it was sent to her.
    Now, that is a disclosure issue, but it goes much deeper 
than just disclosure. These bills that have been introduced, 
including yours, Madam Chairwoman, which we commend highly, 
address some of the abuses and go to what is needed here, which 
is change, not just disclosure of abuses, but correcting 
abuses.
    Bonnie Rushing could not figure out, even after she found 
out about the rate increase, as to why. She was totally unable 
to figure out why; she made phone calls but couldn't get a 
reason why. Finally, we tried to figure out why on the 
subcommittee, and the reason that we finally identified was the 
reason that Congresswoman Waters identified, which is we think 
this is the reason: that she took out a credit card at some 
retailer in response to a solicitation that she do so, because 
that would give her discounts on her purchases.
    She made the purchases she wanted, got the discounts, and 
then paid those bills on time; and that is the key thing here. 
Her own relationship with her own credit card company was 
timely. She was never, never behind on her payments; she always 
made at least a minimum payment. She took out another credit 
card at a retailer in response to a solicitation and then made 
those payments on time. And the only explanation that can be 
found for why her credit card jumped from 8 percent to 23 
percent is because she took out the credit card from the 
retailer.
    That triggered a computer, apparently at the credit rating 
company, that because she now took out another credit card, 
that made her a greater credit risk, even though she paid the 
other credit card on time. That is sometimes called universal 
default, and it has to end.
    Now, to add insult to that injury, the debt that she owed 
the credit card company was then retroactively treated to the 
higher interest rate. So that is the retroactivity interest 
element of your bill.
    I will share one other case with you, and then I will 
close. And that is the case of a man named Wes Wannemacher, a 
man from Ohio. He had a limit of $3,000 on his credit card. He 
charged $3,200. He was $200 over his limit. He was getting 
married. His expenses were $3,200. He charged them all to the 
credit card. That began a 6-year saga.
    That was the only thing he charged--$200 over the limit of 
$3,000. He went over once and was subsequently charged 47 over-
the-limit fees. After 6 years of paying on his credit card, he 
had paid $6,300 on his $3,200 debt, still owed $4,000, and he 
was charged these 47 over-the-limit fees. He was also charged 
interest on those fees, which totaled about $1,500 in interest 
on fees for going over the limit once.
    Madam Chairwoman and other members of the subcommittee, if 
it is going to be resolved, I am afraid that it has to be 
resolved here in Congress. The Federal Reserve has been looking 
at disclosure issues. It is endless. There are 5 billion 
solicitations a year to people to take out credit cards; that 
is how profitable this is. It is the most profitable part of 
the consumer lending world. Year after year, it is the most 
profitable part.
    Profit is perfectly fine. We all believe in profit. Abusing 
this system, which is what has happened in too many cases, is 
not fine. If it is going to be changed, it is going to be 
changed here. I commend you on your efforts to do just that.
    [The prepared statement of Senator Levin can be found on 
page 149 of the appendix.]
    Chairwoman Maloney. Thank you so much, Senator Levin, for 
your extraordinary work on this issue. I want to underscore one 
of the things that you said about how confusing the whole 
process is. We had Richard Syron, the head of Freddie Mac, 
testify before this committee that he and his wife went over 
their credit card application for hours and did not understand 
the terms. This is a leader in the finance industry saying that 
he agrees completely, certainly on the notification aspect of 
your testimony.
    Thank you again for what you are trying to do for our 
financial system.
    I now recognize my former colleague and good friend, 
Senator Wyden.

 STATEMENT OF THE HONORABLE RON WYDEN, A UNITED STATES SENATOR 
                    FROM THE STATE OF OREGON

    Senator Wyden. Thank you, Madam Chairwoman, very much, and 
I want to commend you, and also my friend of more than 25 
years, Chairman Barney Frank, as well as Congressman Bachus and 
others whom I had a chance to serve with, and it is great to 
have a chance to be with you.
    I am going to spare you the filibustering this morning and 
I would ask that my prepared remarks could be made a part of 
the record, Madam Chairwoman, and I could just highlight some 
of my principal concerns.
    Chairwoman Maloney. It is so ordered.
    Senator Wyden. Madam Chairwoman, first of all, I strongly 
support the work that you and Senator Levin are doing. It is 
very much in the interest of our consumers and is urgently 
needed for the very reason Senator Levin has mentioned; this is 
going to have to be resolved in the Congress.
    What I want to do is take just a few minutes and outline 
the approach that Senator Obama and I have offered up. It is 
Senate bill 2411. As you can guess, he is a little tied up 
today, so he can't be at the witness table, but here is what 
our concern has been.
    We think that the heart of the problem here is that the 
marketplace is failing the millions and millions of Americans 
who want to manage their money responsibly and that the 
marketplace is stacked against the consumer. And here is what 
it starts with, Madam Chairwoman. This is a credit card 
agreement, friends. It is 42 pages long, 42 pages larded up 
with every conceivable kind of legal mumbo jumbo: qualifiers; 
exemptions; disclaimers.
    I will tell you friends that unless you spend your free 
time reading the Uniform Commercial Code, nobody can sort their 
way through this. So this is the heart of the problem right 
here, this document, and as Senator Levin has mentioned, there 
are millions of these documents floating around the United 
States.
    Now, when you bring this up with the industry, they say, 
``Oh, valid point, but if people don't like them, they can 
change their card whenever they want.'' That is the argument of 
the industry. The fact of the matter is that it is not that 
simple. Credit scores are a very large factor in determining 
which credit card a consumer applies for and the number of 
times that you have applied for credit recently and the length 
of time that you have held a card count towards your 
creditworthiness. So while the issuers say that the market is a 
perfect laboratory of competition, the reality is that people 
who want to change their credit cards, as the industry suggests 
is the answer, cannot do that, because they have to be 
concerned about protecting their credit scores.
    So that makes the choice of which card to choose an 
important and long-lasting decision. But for the reasons I have 
outlined, the marketplace is stacked against them. So what 
Senator Obama and I are seeking to do is level the playing 
field and make the marketplace more fair. And so we are 
directing the Federal Reserve, people who know a lot about this 
business, to set up a system that goes to fairness and safety, 
not the issues that ought to be left for the marketplace.
    The issues that ought to be left for the marketplace are 
clearly fees and interest rates and rewards, these kinds of 
things. Our legislation doesn't touch that. That's something 
that the marketplace ought to resolve, but we do, in our 
legislation, get at the safety question. So, for example, I'm 
just going to use one particular term.
    A credit card agreement that gave a consumer 90 days notice 
before the issuer tends to change their terms would do well 
under the legislation I have written with Senator Obama. They 
would get points for doing something that was fundamentally 
fair and relevant to the safety issue. A credit card company 
that in effect said, ``No, we're not going to do it that way; 
we're going to change the agreement without any notice,'' would 
get just the opposite rating on the safety question.
    So we say that the Federal Reserve should evaluate these 
companies on the basis of these safety practices. The credit 
card companies would have to display the ratings on the 
marketing materials, billing statements, and agreement 
materials on the back of the card itself, and in doing so, once 
again, we go back to free enterprise marketplace principles.
    Because if you approach it that way, a credit company that 
does well with a Federal Reserve safety analysis will say, 
``Here is an opportunity for us to highlight that in our 
marketing and promotional material,'' and a credit card company 
that is scored down by the Federal Reserve, not on issues for 
the marketplace, but on safety issues, will have a reason to go 
out and improve.
    One last point that I would make, Madam Chairwoman, is that 
what you and Senator Levin seek to do--which I am supportive 
of--is to find these incredibly egregious practices that the 
credit card industry is engaged in and then you would ban those 
efforts. I think what you are doing is very much in the public 
interest, but the reality is, I think all of us who studied 
this came to this conclusion; this is an incredibly 
sophisticated industry.
    There is a reason, Madam Chairwoman, that credit card 
companies have consistently done well, year in and year out, no 
matter what the vagaries are of the American economy generally. 
They're very savvy, very sophisticated; and, my concern is if 
all we do is ban these egregious practices, these incredibly 
outlandish anti-consumer practices, what will happen is this 
industry, which has always been one step ahead of the oversight 
process, will just go out and figure out how to come up with a 
bunch of other egregious practices. And you, Madam Chairwoman, 
and Senator Levin and all of us, will be back here in a few 
years looking at another piece of legislation to try to finally 
drain the slump.
    So I hope that what Senator Obama and I are proposing can 
complement the good work that you, Madam Chairwoman, and 
Senator Levin are doing. I have worked it out with my good 
friend Senator Levin that softball questions can now be 
directed at me. Anything difficult ought to be directed at 
Senator Levin, but we very much look forward to working with 
you and hope that this can be a bipartisan effort.
    [The prepared statement of Senator Wyden can be found on 
page 348 of the appendix.]
    Chairwoman Maloney. I thank the witnesses and congratulate 
them on their extraordinary leadership and very hard work. I 
have consulted the committee members and there are no 
questions. We respect your time, we applaud your work, and we 
thank you deeply for finding time to give us your testimony 
today and your wisdom.
    Thank you very much for being here.
    Senator Levin. Madam Chairwoman, thank you, and I ask that 
my full testimony also be made a part of the record.
    Chairwoman Maloney. Absolutely. Thank you so much.
    Senator Levin. Thank you all.
    Chairwoman Maloney. I now would like to call the second 
panel of witnesses, and I would like to extend a very special 
welcome to the three witnesses, Steven Autrey, Susan Wones, and 
Stephen Strachan. They have come to offer the perspective of 
real people, real consumers, on credit card practices; and they 
have a very important point of view.
    We welcome you to the witness table, and I am very glad 
that we have worked in a bipartisan way to create a process for 
these witnesses to testify today, and I would like to thank the 
chairman and the ranking member for their efforts in that 
regard.
    Mrs. Biggert. Madam Chairwoman, I ask unanimous consent 
that a statement from the small community bankers be put into 
the record at this time. I think they play an important role in 
meeting the credit needs of consumers and small businesses; 
however, they are disproportionately affected by any new 
regulation burden Congress decides to impose on the credit card 
industry. So as such, I would like to submit for the record a 
statement by the Independent Bankers of America.
    Chairwoman Maloney. Without objection, it is so ordered. 
The Chair now recognizes Congressman Udall, who has requested 
an opportunity to introduce an important constituent of his who 
is testifying today.
    Mr. Udall. Thank you, Madam Chairwoman, and I am really 
pleased to be here with my fellow Coloradan, Susan Wones. I 
have a formal statement that I would like to submit for the 
hearing record, but I want to be brief so that we can hear from 
our witnesses.
    Like many of us here, I strongly support action to require 
more fair play for people with credit cards. For many 
Americans, consumer credit is more than a convenience, because 
they rely on it for everyday needs. So for them it is a 
necessity. But more and more, they aren't always treated fairly 
by the companies that issue credit cards, and that is the 
reason I have been working to make some commonsense changes in 
the rules for credit card companies.
    I first introduced a bill to do so back in 2006, and 
reintroduced it last year again with my colleague, Mr. Cleaver. 
I am very proud that they won the support of array of consumer 
groups as well as 39 co-sponsors from congressional districts 
across the country. I am very pleased that many of those 
provisions were included in H.R. 5244, the Credit Cardholders' 
Bill of Rights Act, and I am proud to join you, Madam 
Chairwoman, as an original co-sponsor of that bill. It is an 
excellent bill and I want to do all I can to help get it 
enacted.
    With that as a prelude, I now want to introduce Susan 
Wones, who is back with us to testify today and share some of 
her experiences with credit card companies.
    Susan, thank you for traveling a second time to be back 
here with us. The last time Susan was here, she didn't get the 
chance to testify. None of the consumer witnesses before us 
did, and I thought it was really too bad that the regular 
people who come to Washington, the ones who are struggling 
everyday with these issues, were not heard from last month. 
And, Madam Chairwoman, I am very pleased that you brought them 
back. We do need to hear their stories.
    I got to know Susan at the suggestion of some people in 
Colorado who knew of my interest in this subject. What she told 
me was similar to things I had heard from people all over 
Colorado. Like Susan, they were responsible in their use of 
credit cards, following the rules, and paying on time, but did 
not think they were treated fairly by the card companies. So 
while she will be testifying for herself, she will be speaking 
for many others who have had similar experiences.
    Her testimony will show why our bill is needed and how it 
can help people like her who just want to be treated fairly. 
So, again, I want to thank you for including her on the witness 
list, Madam Chairwoman, and for your courtesy in allowing me to 
introduce her this morning.
    Chairwoman Maloney. Thank you, and the Chair recognizes Mr. 
Steven Autrey for 5 minutes to summarize his testimony, and 
then we will go to Ms. Wones and then Mr. Strachan.

      STATEMENT OF STEVEN AUTREY, FREDERICKSBURG, VIRGINIA

    Mr. Autrey. Chairwoman Maloney, Ranking Member Biggert, and 
ladies and gentlemen of the subcommittee, good morning and 
thank you for allowing me to speak before you again.
    I would like to give you a brief recap of some negative 
experiences I have had with one particular credit card issuer. 
Chase, Citibank, GE Moneybank, have engaged in much more 
egregious and unethical behavior. I would like to make you 
aware of some actions of Capital One with regards to a Visa 
card account.
    When a consumer applies for credit with a card issuer, or 
as we did responds to a pre-approved offer, upon establishment 
of an account, a bona fide financial contract exists between 
the consumer and the financial institution. It is because of 
consumer protection laws at the Federal level that the rates, 
rules, and terms of the contract are spelled out in advance of 
the first use of the card. Both the consumer and financial 
institution trust that the other will live up to the terms of 
the agreement.
    Unfortunately, an increasing number of credit card issuers 
are engaging in subethical practices at an alarming rate. 
Unilateral or one-sided changes in the terms of the contract 
most always in favor of the credit card company are becoming 
routine practice. These one-sided changes are bad for 
consumers, bad for our national retail credit health, and 
essentially violate the spirit and letter of Title 15 consumer 
credit protection law.
    My relationship with Capital One goes back to the year 2000 
when I was solicited with an offer for a Visa card with a fixed 
9.9 percent rate. I applied over the phone and was approved. 
The card was used for both purchases and balance transfers, and 
I had a positive relationship with Capital One for over 7 
years, until July of 2007.
    That is when Capital One advised me in a small, loose, 
billing insert that my fixed rate of 9.9 percent was being 
raised to 15.9 percent, a 60 percent increase. No reason or 
explanation was given. This was a unilateral change in the 
terms of the cardholder agreement. Until then, I had been late 
by one day, one time, and months earlier, my finance charges 
alone when added to the billing cycle's closing balance, pushed 
the account $13 over the credit limit. I wanted to find out if 
these were the reasons why my rate was going up.
    In August of 2007, I wrote a letter to Mr. Richard D. 
Fairbank, chairman, president, and CEO of Capital One, at their 
McLean, Virginia, home office. My written statement will 
contain a copy of Capital One's response, which includes this 
line: ``Unfortunately, changes in the interest rate environment 
or other business circumstances may require us to increase, 
even for fixed-rate accounts in good standing.''
    Capital One did offer me the opportunity to maintain my 9.9 
percent rate on my balance and pay it off, but in order to do 
so, there was a cost; I had to close my account. The credit 
industry, in collusion with the Fair, Isaac and Company of 
Minneapolis, Minnesota, have carefully constructed an 
unchallenged scheme where consumers are penalized with a 
declination in their FICO score when they choose to close 
accounts.
    Lower FICO scores yield less than favorable terms on 
existing and future loans, mortgages, even insurance rates. 
Although some of the credit card companies represented here 
today, and some of those who were allowed to bring testimony 
before this committee on March 13th, are now voluntarily taking 
baby steps towards the broader goals of H.R. 5244, random acts 
of change by some are no bellwether of comprehensive compliance 
by all card issuers.
    The playing field must be leveled between consumer and 
creditor. In football, the NFL does not allow one team, in the 
midst of the 4th quarter, to unilaterally move their end zone 
20 yards just because they don't like the point spread. The 
rules are laid out before the kick-off, and the officials 
enforce the same rules for both the home and visiting teams for 
the whole contest.
    It's time for legislation at the Federal level that tells 
the credit card industry game over to unilateral, one-sided 
contract changes. As a registered Republican, it has typically 
been my philosophy that business and commerce flourish and 
perform better with minimal government interference. However, 
when an industry sector proves time and again that it is unable 
to police itself and behave and engage in fair and ethical 
trade practices, legislative intervention is required.
    With some progress in our consumer credit laws and reform 
of the monopolistic credit scoring cartel controlled by the 
Fair Isaac and Company, perhaps once again consumers can have a 
level playing field in doing business with their credit card 
issuers.
    [The prepared statement of Mr. Autrey can be found on page 
90 of the appendix.]
    Chairwoman Maloney. Thank you for your thoughtful 
testimony.
    Ms. Wones?

           STATEMENT OF SUSAN WONES, DENVER, COLORADO

    Ms. Wones. First, I would like to say that I am extremely 
nervous, so please bear with me. Good morning, Madam 
Chairwoman, and members of the subcommittee.
    I am Susan Wones from Denver, Colorado, and I want to 
express my appreciation to the subcommittee for inviting me to 
come to Washington again to share my experience, which I think 
will show a need for this legislation you are considering. I am 
pleased I am able to testify this time.
    Since 2003, I have had three Chase credit cards. First, I 
had a Chase Disney Rewards card. When I signed up, I knew it 
would be going from an introductory rate of 0 percent to 7.9 
percent, but later I discovered it had gone to 14.9 percent. 
And although I tried, I could not get it lowered. It had a 
$6,000 limit.
    Once I got up to around $6,000, though, the rate jumped 
from 14.9 to 25 percent, even though I had never gone over the 
limit and I had always paid on time. So I decided to cancel it 
and pay off the balance. But after I closed the account, the 
credit card company still tried to increase my rate to 25 
percent again. I don't think this is fair, and I think this 
bill would prevent that from happening. After this, I decided 
to open up a new account with Chase, an ASPCA card. The new 
card had an introductory rate offer of 0 percent and had an 
initial credit limit of $2,000.
    During the middle of the month billing cycle, I was $15 
over my limit, and then they raised my interest rate to 23.24 
percent, and charged me a $39 over-the-limit fee, even though 
my beginning and ending balance for that billing cycle were 
under the limit. I knew that I was close to my limit, but I 
figured that once I hit my limit, the charges would not be 
approved. But, in fact, the charges that took me over-the-limit 
were approved, and I think that was because the company wanted 
to be able to charge the fee and raise my interest rate.
    After that, a few months later, the bank told me they were 
raising my interest rate to 32.9 percent, so I closed the 
account. I understand that under H.R. 5244, people would be 
able to set a limit and that they would not be allowed to go 
over.
    I have a third credit card with Chase that is a non-rewards 
credit card. It has a $2,000 limit, and has a 7.9 interest 
rate, which has never been increased. I also have a credit card 
with my union that is at 10 percent. I understand credit card 
interest rates are set based on risk, and if a company is 
charging somebody a higher risk, it is because they think there 
is a higher risk and the cardholder will not pay the bill.
    So it makes no sense to me to have the same bank issue me 
three different cards with different rates: one at 14.9 percent 
that they raised to 24.9 percent; another one at 7.9 percent; 
and a third that had a 0 percent introductory rate and is now 
at 20.99 percent. If they were truly rating me for risk, 
shouldn't the cards have either the same or close to the same 
interest rate? Or, if they think I am over-extended, which they 
stated in a letter they sent me last week, why would they 
continue to issue me new credit cards?
    There is just one me, and just one risk, if I won't pay or 
show not to pay. Furthermore, my credit union posted my FICO 
score of 726 on my account, which I understand to mean my 
credit is in good standing, and there is low risk that I won't 
pay my debts. The bank said in its letter of last week that 
they raised the rate on one of the cards because of the risk 
level. I showed them my credit report.
    Why is the risk for raising my interest rate, if I am, 
according to my FICO score, such a good credit risk?
    H.R. 5244 would end this practice of increasing interest 
rates based on what is going on with my other accounts and 
outside the bank accounts. I think this is a fair thing. In a 
recent letter, the bank offered to discuss payment programs 
with reduced rates and fees, but I still do not agree that I am 
a credit risk or over-extended, because I can pay my bills.
    All I know is I tried to be a good customer, and I don't 
think I'm being treated fairly in return. I don't believe that 
it is fair for me to pay my bills on time and live by the rules 
they set forth and be penalized for that.
    Thank you for letting me speak.
    [The prepared statement of Ms. Wones can be found on page 
347 of the appendix.]
    Chairwoman Maloney. Thank you. Thank you for traveling 
here.
    Mr. Stephen Strachan. Could you bring the microphone closer 
to you and make sure that it is on? We can't hear you.

      STATEMENT OF STEPHEN M. STRACHAN, YORK, PENNSYLVANIA

    Mr. Strachan. Madam Chairwoman, and members of the 
subcommittee, my name is Stephen Strachan and I am a 55-year-
old business owner, currently residing in York, Pennsylvania. I 
want to thank you for this opportunity to testify today. As a 
small business owner, I have been severely impacted by 
predatory practices referred to as universal default and credit 
storing. My testimony is representative of experiences that 
plague millions of small business operators.
    My credit limits were as high as half-a-million dollars and 
my FICO score is currently 782. I was never informed when I was 
granted these credit limits, that any such thing as universal 
default existed. I was never informed that using the lion's 
share of my credit that I had been granted would result in 
``violation of a contract, in violation of an agreement.''
    I had several agreements with several vendors, 140 vendors; 
15 of those vendors were banks. I had one bank, one bank only, 
that decided to violate time after time after time my accounts. 
I recently received--last night at 9 p.m., to be exact, which 
is why I am a little bit nervous today, because it kind of 
threw me for a loop--a 352-page rebuttal. Just a quick cursory 
glance at that 352-page rebuttal yielded--I stopped writing at 
the 11th occurrence. Even the physical exhibits apparently 
don't exist in that rebuttal, if one were to believe that 
rebuttal.
    At any rate, a contract is a contract to me. I experienced 
instances in which employees were laid off. Other employees 
could never even be hired because the budget was not available 
to me anymore. The nature of my business, which is a 
perishables importing, fresh cut flowers, is that of a 
perishable receivable. In other words, banks generally do not 
want week-old flowers as collateral for a loan.
    Meanwhile, having already been granted half-a-million 
dollars in unsecured credit at rates that ranged from 0 percent 
to approximately 10 percent, it was very attractive for me, so 
that is why I went tht way. It was post-9/11. In the year 
following 9/11, there were many instances of mail delays. There 
were instances of cargo delays. It was a very difficult time 
for all of us, and money was just not that easy to get.
    My integrity and my honor, my professional integrity and 
professional honor, have always been uppermost and foremost to 
me. It is for this reason that no matter how difficult things 
got, and regardless of the fact that other people ran to get 
underneath the January cut-off for the old bankruptcy laws, I 
never did that. I had personal debt on credit cards at one 
point of almost $250,000.
    I was a perfect candidate to get into those old bankruptcy 
laws, but I wasn't raised that way. And I took it as a 
challenge in my business. My business plan, I was told, 
``wouldn't succeed because it couldn't succeed.''
    ``You can't run a multi-million dollar business from your 
house with no start-up capital.'' Well, they were wrong. They 
were wrong. Consequently, the same thing exists here. I took 
this challenge of credit card debt to be, well, it was a 
challenge to pay off. The fact that my interest rates were 
doubled, tripled, and quadrupled, up to 400 percent increases, 
I just went ahead and paid the accounts off. And when I paid 
the accounts off, time after time with Chase Bank, universal 
default, universal default, universal default, universal 
default.
    There were several instances in which checks were posted 
late. Other instances in which checks were either not received 
by the bank or never posted at all, I don't want to go into a 
list. I have a whole list of instances here. Some of those were 
outlined in my written testimony, which I highly recommend that 
you read. The nature of small business is the backbone of this 
country, and we employ people.
    I am not going to sit here and complain today about a $29 
late fee or a $35 over-the-limit fee. What I am going to 
complain about is having to lay off people and millions of 
dollars in personal assets that went up in smoke to satisfy 
universal default.
    [The prepared statement of Mr. Strachan can be found on 
page 285 of the appendix.]
    Chairwoman Maloney. Thank you.
    I thank all of the panelists for testifying today.
    Your testimony shows that even consumers who do their very 
best to pay on time and not go over their limit get hit with 
staggering rate increases. I personally think that consumers 
deserve the right to know when their rate changes, and to be 
able to make the decision not to borrow at those rates and not 
have those increased rates retroactively attached to their 
balance. That is the core of my bill.
    I would like to ask each of you, did you think that if you 
paid on time, and did not go over your limit, and were good 
customers that you would be hit with these anytime, any reason, 
rate increases? I invite anyone to answer.
    Mr. Autrey. No. I did not.
    Chairwoman Maloney. Would you like to elaborate on how this 
affected you?
    Mr. Autrey. Well, I assumed that fixed meant fixed. I 
didn't know that there was a caveat somewhere buried in a bunch 
of paperwork that if market circumstances, or as they put it, 
business circumstances, require them to change their rates, I 
mean, what if my business circumstances change. Could I have 
sent the company a notice cutting my rate in half? There seems 
to be a one-sidedness. Only the credit card company can call 
the shots, and that seems to be a little out-of-balance with 
what is American fairness.
    Chairwoman Maloney. Okay. Ms. Wones?
    Ms. Wones. With 30 years of credit history, I have never 
defaulted. I pay on time. I'm a good customer. So why would I 
expect a rate to go up to that ridiculous amount when I am 
following the rules that were set forth by them.
    Chairwoman Maloney. Mr. Strachan?
    Mr. Strachan. Contrary to my delivery of verbal testimony, 
I am very good at my work. I am very accomplished with the 
English language, and when I see the word ``default,'' I know 
what the word ``default'' means. And I will say that had I 
known that there was a different definition of ``default'' for 
banks than there is for the rest of the world, I would have 
never, never, allowed somebody to give me floating rates.
    I sell flowers, and when I quote somebody $9.99, I can't 
bill them $14.99. I have to bill them $9.99 or I'm not even 
going to get paid the $9.99.
    Chairwoman Maloney. Thank you.
    A number of you seem to have had your interest rates 
increased for using too much of your credit and not going over 
your limit but getting near your limit. Do you think it is fair 
to penalize you for getting near to the credit limit that was 
given to you? I again invite Mr. Autrey, Ms. Wones, and Mr. 
Strachan to reply.
    Mr. Autrey. Sure; your credit limit is a finite amount. It 
is printed in black and white on the paper, and essentially 
that is not what is enforced. Your credit limit is a 
mathematical formula of that number minus some concocted score 
of your monthly finance charges, which I don't know how the 2-
foot slide rule and a calculator determine what those monthly 
finance charges are. But, you are not really, in essence, 
allowed to charge up to your credit limit.
    You have to leave room and you have to calculate that 
yourself for the monthly finance charges to be added on. And, 
why would they give you a credit limit if they don't want you 
to use it? It seems to be entrapment.
    Chairwoman Maloney. Ms. Wones?
    Ms. Wones. Well, to reiterate what he said, why did they 
give me that credit limit if I'm not allowed to use it? If they 
feel like that is too much credit, then why did they give me 
such a high limit? Why didn't they give me a lower limit if 
they felt that I could not pay it back?
    Chairwoman Maloney. And when you got near to your credit 
limit, they started imposing higher interest rates? Is that 
correct?
    Ms. Wones. That is true, on the rewards credit cards, they 
did.
    Chairwoman Maloney. Mr. Strachan?
    Mr. Strachan. Well, additionally, there was no disclosure 
ever made that using 80 percent of my credit or 30 percent of 
my credit would make any difference. You know, I see $90,000, 
and $90,000 is $90,000. So to vary that rate with usage, 
because I'm a ``higher risk,'' although my FICO score reflects 
otherwise, creates only higher risk yet. It is very self 
defeating and I think we are kidding ourselves to think that 
somehow that practice was going to get that bill paid off.
    Chairwoman Maloney. Thank you.
    I would like to ask Susan Wones, in your testimony, it is 
my understanding that you had three different credit cards 
issued by the same bank. Is that correct?
    Ms. Wones. Yes, I did. And when I asked them why I had one 
at 7.9 percent, they told me several times that they had not 
gotten around to that credit card.
    Chairwoman Maloney. So, the 3 cards had three different 
interest rates: 14.9 percent; 7.9 percent; and 0 percent?
    Ms. Wones. Right.
    Chairwoman Maloney. You had three different interest rates 
with the same bank?
    Ms. Wones. Yes.
    Chairwoman Maloney. And does it make any sense to you that 
you could have three different accounts with the bank, yet all 
three had different interest rates?
    Ms. Wones. No, and I have yet to get a good explanation for 
that. I have tried several times and I have not gotten anything 
that makes common sense to the average person.
    Chairwoman Maloney. I will tell you that I don't understand 
how you could have three different interest rates at the same 
bank when the bank says that they are doing risk-based pricing. 
It does not make any sense to me whatsoever.
    My time has expired, and I recognize my colleague and good 
friend, Representative Biggert.
    Mrs. Biggert. Thank you, Madam Chairwoman.
    I know particularly in my generation, there were a lot of 
people, when credit cards came into being, who started a 
business based on a credit card. And it was always tough, 
particularly for women. I think sometimes that was the only way 
they could do it, but Mr. Strachan, you were really running 
your business on a credit card. Is that right?
    Mr. Strachan. No, I was running my business on my 
receivables.
    Mrs. Biggert. Okay, but you had had quite a bit of debt on 
your credit card.
    Mr. Strachan. I used my credit cards actively, yes, for 
personal and for business reasons.
    Mrs. Biggert. Did you ever consider going to the bank for 
another type of loan?
    Mr. Strachan. Oh, absolutely; you know, as I explained, in 
the period shortly after 9/11, that is when things kind of 
turned topsy-turvy. Plus, in the flower business, we have 
cyclical downturns. You know, summertime, people go to the 
beach; Christmastime, people buy flowers. So during times of 
seasonal downturn and during times of growth and expansion, 
cash requirements are different.
    Mrs. Biggert. Did you ever consider switching to another 
credit card?
    Mr. Strachan. Switching to another credit card?
    Mrs. Biggert. Yes.
    Mr. Strachan. I have experiences with many credit card 
banks, actual credit cards.
    Mrs. Biggert. Well, a credit card is, you know, an 
unsecured loan. Credit cards are unsecured loans.
    Did you ever think if you went to other banks and couldn't 
get any other type of loan or had equity in your house, or 
anything?
    Mr. Strachan. My equity was in my stocks and bonds 
portfolio and my vintage guitar collection. It was not 
something the bank wanted.
    Mrs. Biggert. Did you submit any comments to the Federal 
Reserve on Regulation Z?
    Mr. Strachan. No. I did not.
    Mrs. Biggert. Okay. Do you think that legislation is the 
way that we should go on this?
    Mr. Strachan. I have not read enough of Regulation Z to 
comment today.
    Mrs. Biggert. Okay. Then, Ms. Wones, you had three cards, 
but did you ever consider switching to another company?
    Ms. Wones. No. Because of the way I was treated with Chase, 
I was almost afraid to go to a different bank.
    Mrs. Biggert. Are you still paying off the credit cards?
    Ms. Wones. On the two higher ones, I'm paying them off. One 
of them is almost paid off.
    Mrs. Biggert. Okay. Then Mr. Autrey, you still owe Capital 
One?
    Mr. Autrey. Yes, that's correct.
    Mrs. Biggert. About how much is that?
    Mr. Autrey. The balance, right now, is about $19,000.
    Mrs. Biggert. Did you consider switching to another credit 
card?
    Mr. Autrey. I'm a resident of the State of Virginia, and 
Capital One is a Virginia company; and, I would prefer to keep 
my business within the State. They actually had a call center 
in the community where I live.
    Mr. Strachan. Might I interject? Could I ask a question?
    Mrs. Biggert. Yes, go ahead.
    Mr. Strachan. Switching to another credit card, it's not 
always that easy. You know, to switch to another credit card, 
are you asking to close?
    Mrs. Biggert. Well, my question was did you consider doing 
it, or did you say, well, you weren't going to do it because it 
wasn't that easy? I mean, that's the answer that you would 
give.
    Mr. Strachan. Well, no. Okay, all right.
    Mrs. Biggert. All right, Mr. Autrey, did you submit your 
comments to the Federal Reserve?
    Mr. Autrey. I wrote a letter, I believe it was to the 
Office of the Comptroller of the Currency, and I don't recall 
ever getting a response,
    Mrs. Biggert. Okay.
    Mr. Autrey. But to answer your previous question, I had 
considered switching cards, but you do get penalized just for 
applying for credit. And I did not want my FICO score to drop 
anymore at the time; my wife and I were looking at moving to a 
new home, which we did do.
    And we were advised by our mortgage broker not to do 
anything with our credit. He said, just keep everything where 
it is, and he explained to me, you know, how the whole FICO 
thing works. I had at that time no idea just what a quiet 
secret of a scoring system that is. It has never been made 
public.
    Mrs. Biggert. Well, right now, we are considering requiring 
mortgages to have a one-page disclosure, so that people would 
understand, and to simplify what they are getting into with the 
RESPA.
    Would you think that would be a good idea for this?
    Mr. Autrey. For mortgages?
    Mrs. Biggert. No.
    Mr. Autrey. For credit cards?
    Mrs. Biggert. Credit cards. Do you think that could be 
boiled down? Do you think people would read it?
    Now I am really concerned about financial literacy and work 
really hard on that. And I think so many times people get into 
things, and not asking the right questions, or not really 
delving into it, but it appears that if you get 42 pages on a 
credit card contract, that might be a little bit difficult.
    Mr. Autrey. Well, you get a slick-gloss envelope in the 
mail and it says ``fixed.'' Sometimes it's ``fixed for life.'' 
That language is on there. You know, why would you want to read 
through 42 pages of literature when they say it is fixed?
    I assume fixed means fixed. I didn't know fixed is until 
they feel like they can change it.
    Mrs. Biggert. Thank you.
    I yield back.
    Chairwoman Maloney. The gentlewoman's time has expired. The 
Chair recognizes Congressman Hodes for 5 minutes.
    Mr. Hodes. Thank you, Madam Chairwoman.
    I appreciate the panel's testimony at this hearing. We 
missed you at the last hearing.
    Mr. Strachan, I would like to ask you some questions. You 
have submitted a lengthy, written testimony in great and 
excruciating detail about your experiences. And one area that I 
would like to just explore a little bit, because it's clear to 
me that you have given great thought to these issues, is the 
interplay between the credit scores and how you have been 
treated by the credit card companies and the relations between 
what you do know, what you don't know, what you can find out, 
and what you can't find out. Directing your attention to the 
issue of your credit scores and in your written testimony I see 
at page 7, number 6, scoring products in CBRA is actively 
engaged partners of lenders.
    You talked about the proprietary technology foisted upon 
cardholders with no regard for veracity supplied by lenders 
themselves; and, I'm curious to know what you think ought to be 
done to give you and other consumers access to information 
about how your credit scores are working that would help solve 
some of the problems you have been through.
    Mr. Strachan. A case in point, since the March testimony 
that was postponed, I have had about another 4 weeks to look 
through my files, and a number of things have jumped out. A 
number of payments have also been made in the meantime on pre-
existing balances, paying down balances, and I notice that as 
my balances get lower, my FICO score gets lower.
    So, curiously, I go back and I pay money. I monitor my FICO 
score every month and I see the FICO score dropping. I pull up 
my credit report to see what happened. Just, was there a bad 
report? I stay on top of this constantly and the person I see 
on that credit report is maybe 20 percent me. I see 80 percent 
other people; or, maybe, some Steve from 12 years ago, or 15 
years ago. It wasn't that long ago that there were still 
references from the 1980's on my credit report; and, sometimes, 
they go away and then they pop back up. Maybe within industry 
consolidation and data dumping, I don't know; that is also 
referred to in my testimony.
    I am very curious as to what goes into that FICO report. I 
can go back as a consumer and I can challenge my written or 
printed Experian, Equifax, TransUnion. I mean, I can challenge 
them. I can write letters. I can make phone calls. I may not 
get anywhere, but at least I have the ability to try.
    When it comes to Fair Isaacs or any of the scoring 
mechanisms, I'll call them, ``the black boxes,'' nobody knows 
what is in those things. Can anybody in this room tell me what 
is in those things?
    Mr. Hodes. Have you made attempts to get behind the paper 
you are receiving, or the score you are seeing, and beyond the 
printed page, which shows you whatever they're going to show 
you?
    Mr. Strachan. Yes.
    Mr. Hodes. Have you tried to get behind that to ask, why am 
I being scored this way? What are the factors? What are you 
basing it on? What is in your database? What is in your 
information?
    Have you tried?
    Mr. Strachan. I have tried with people in this room.
    Mr. Hodes. And what has happened when you have tried to get 
beyond the printed page to get into whatever proprietary 
methods they're using, whatever factors they're considering, 
where their information is coming from.
    What have you been able to penetrate, if anything?
    Mr. Strachan. If I ask three people, I get four answers. 
Nobody knows. It's possible; maybe I shouldn't say ``no one.'' 
I'm sure that someone from Fair Isaacs and someone from Equifax 
knows, with a bunch of degrees on the wall; you know. These are 
mathematical algorithms. I have no idea how they do what they 
do. I probably don't want to know how they do what they do, but 
it affects me.
    So just in light of that, throughout my whole course as a 
borrower, I just find it's easier and it may be fortunate in my 
case, but it has been possible for me to strive for perfection. 
Pay off the bills. If it's 3 percent, fine. If it's 30 percent, 
fine. Just pay it off, because I know once it gets to zero, 
that is about as close to perfection in credit that one can 
achieve. At least that's how it occurs to me. Debt free is debt 
free.
    However, over the past several months, I see my actually 
debt-to-credit ratio standing at approximately 9 percent, but 
then I look at Equifax and they're telling me it's 20, 26. I 
don't really care. I don't care what it says. It doesn't 
reflect on me as a human being, but I honestly don't know how 
to get behind those numbers.
    Transparency is a big issue; and, additionally, the ability 
to use that number, the fact that lenders use that number or 
use that credit report of at best dubious accuracy to make 
these weighty decisions about creditworthiness that affect 
people's jobs, and they affect people's families; and they 
affect people's relationships and their homes. I don't mean to 
give a speech.
    Chairwoman Maloney. The gentleman's time has expired, and 
he has raised some very relevant and important points that we 
should follow up at future hearings.
    Thank you, Mr. Hodes.
    Mr. Hodes. Thank you, Madam Chairwoman. Thank you for your 
indulgence.
    Chairwoman Maloney. The Chair recognizes Ranking Member 
Bachus.
    Mr. Bachus. Thank you.
    Mr. Bachus. Ms. Wohan?
    Ms. Wones. It is pronounced ``Wones,'' like in number one.
    Mr. Bachus. Wones--you can relax--I'm not going to ask you 
any questions, so--
    [Laughter]
    Mr. Bachus. And Mr. Strachan?
    Mr. Strachan. Strachan, yes.
    Mr. Bachus. We got the response at 8 o'clock last night.
    Mr. Strachan. You are a more accomplished speaker than I 
am.
    Mr. Bachus. What I mean is, I just got it at 8 or 9 last 
night, so I'm saying you had the same situation that I had; I 
just hadn't had time to look at it.
    Mr. Strachan. Well, it is a little bit daunting.
    Mr. Bachus. So I'm not going to ask you any questions.
    Mr. Strachan. You are welcome to ask me anything you like, 
Congressman Bachus.
    Mr. Bachus. Now, I will say this to you. We amended the 
Fair Credit Reporting Act about 2 years ago. I was the author 
of that legislation--``author,'' you know--I won't go into all 
that.
    But, there is a lot of frustration out there about things 
getting off the report and popping back up; and, we have made 
some real changes there. If you will give your Member of 
Congress your credit report, also after 7 years, that stuff is 
supposed to be off of there.
    So, I don't question what you are saying. I would like to 
see it, because obviously what's happening, and I take what 
you're saying is accurate, is that something's not working.
    Mr. Strachan. In my case, I don't care if it says 782 or if 
it says 810. It doesn't make that much difference.
    Mr. Bachus. Yes, but I'm saying let us take a look at that, 
okay? Because it's just not supposed to be on there, and you're 
not supposed to be able to clear it off and have it pop back 
up. So let us take a good look at that.
    Mr. Autrey, one thing and I did look at, you know, a week 
or so ago, they sent us your credit report. I'm not going to go 
into detail about it. You know, there's nothing alarming on 
there. And you signed a waiver that I could, but I'm not. But I 
do want to say this, which is, I think you would agree. From 
2000 to 2007, you signed up for 9.9 percent interest.
    Mr. Autrey. Right.
    Mr. Bachus. And at a certain point, after 6 or 7 years, 
they said, we're going to raise your interest rate.
    Mr. Autrey. Sixty percent, yes.
    Mr. Bachus. Well, I understand that, but you said I don't 
want to do that.
    Mr. Autrey. Right, right.
    Mr. Bachus. And so they kept it at 9.9 percent and you're 
still paying it off minimum payments, right?
    Mr. Autrey. I'm making more than the minimum payments. 
Right, you are correct.
    Mr. Bachus. You weren't really harmed by that were you?
    Mr. Autrey. Well, my FICO score--this kind of brings up a 
good point--Capital One does not report your credit limit, even 
for an open account, to the credit bureaus and then your 
balance. They report your balance only and it appears that that 
is your credit limit. So it appears that you're always at your 
limit with a Capital One product on your credit report. But by 
closing my account, that's reducing my available credit; and 
the more available credit you have, the higher your FICO score 
is, at least from what I've been able to gather. So this is 
just less.
    Mr. Bachus. I don't think on a credit report it's just your 
credit limit. I just think it's the balance. Have you looked at 
that?
    Mr. Autrey. Yes.
    Mr. Bachus. And it's your balance; it's not your credit 
limit right now, I mean, on your credit score?
    Mr. Autrey. I believe with Capital One only they report.
    Mr. Bachus. No. I mean, you've seen your credit score. 
You've seen your credit report.
    Mr. Autrey. Sure.
    Mr. Bachus. And I'm not trying.
    Mr. Autrey. Right.
    Mr. Bachus. Does it have your balance?
    Mr. Autrey. For my American Express, it has the balance 
that I'm allowed to go up to and then what I'm utilizing.
    Mr. Bachus. Okay.
    Mr. Autrey. Some of them even have a watermark showing the 
highest I ever went.
    Mr. Bachus. Well, I understand that, and I think that 
demonstrates you paid it down. But I guess what I'm asking is, 
are you saying that your credit report shows that you owe a 
balance higher than you really do or much higher?
    Mr. Autrey. No, it shows that my current balance is my 
credit limit. So to a computer somewhere, that utilizes.
    Mr. Bachus. Well, that's not bad then, is it?
    Mr. Autrey. That is bad.
    Mr. Bachus. Oh, okay, you're at your credit limit?
    Mr. Autrey. Yes, if this is your credit limit, you want a 
large buffer between where you are and your credit limit; and, 
if the company is only reporting this number and never this 
number into the computer, it looks like you're always at 100 
percent.
    Mr. Bachus. But, there were reasons I think you would agree 
why they repriced your rate.
    Mr. Autrey. They told me it was not because of my behavior, 
but interest rate in business circumstances.
    Mr. Bachus. Well, I understand that, but it could have been 
because of some other things that you did.
    Mr. Autrey. Right. I was one day late one time, and another 
time I believe I was $13.58 over my limit when the interest was 
added.
    Mr. Bachus. And I know you mentioned those two things in 
your testimony, but there was something a little more serious 
than that, wasn't there?
    Mr. Autrey. There was. I made a payment electronically and 
I selected on my checking account the wrong account. And that 
wasn't returned like a check. It just wasn't processed, so I 
had to go back in and select the proper account that had the 
money in it.
    Mr. Bachus. Yes, but that happened twice.
    Mr. Autrey. But Capital One is saying that they did not 
reprice or they don't reprice based on those items.
    Mr. Bachus. But, what you're saying is, you had two 
returned payments.
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Autrey. Two returned payments?
    Mr. Bachus. Where you made a payment, but they were 
returned, because, you know, you put the wrong account or 
something.
    Mr. Autrey. Right. I made two payments at one time in order 
to pay extra.
    Mr. Bachus. But they still didn't reprice your rate.
    Mr. Autrey. No, they said they don't do that for that 
activity.
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Bachus. Okay. Thank you.
    Chairwoman Maloney. Mr. Ellison is recognized for 5 
minutes.
    Mr. Ellison. Thank you, Madam Chairwoman.
    Mr. Autrey, let's pick up right where we are. Sir, did you 
ever get a specific answer as to why you were repriced?
    Mr. Autrey. Yes, sir. I actually have the letter right 
here.
    Mr. Ellison. Is it the letter you attached to your 
testimony?
    Mr. Autrey. Yes, sir.
    Mr. Ellison. Right, but it sounds to me in the paragraph 
that I read that there was sort of some possibilities to why 
you were repriced, but there was never a definitive answer 
exactly why.
    Mr. Autrey. Correct.
    Mr. Ellison. To this moment in time, did anybody ever say 
to you, Mr. Autrey, the reason that your interest rate changed 
is exactly because of a specific reason?
    Mr. Autrey. No, sir.
    Mr. Ellison. And you've asked, because we have the letter 
that you wrote to the chairman of the company asking.
    Mr. Autrey. Yes, sir.
    Mr. Ellison. How long ago was it for the record that you 
asked the question?
    Mr. Autrey. I believe I sent the letter in July and I got a 
response in September.
    Mr. Ellison. Of 2007?
    Mr. Autrey. Yes, sir.
    Mr. Ellison. And until this date, have you received a 
specific answer as to why your interest rate was changed?
    Mr. Autrey. No, sir.
    Mr. Ellison. Even though you talked to the top guy of the 
company?
    Mr. Autrey. I'd sent a letter to the top guy and I got a 
reply from a person in Richmond, Virginia. So, I guess, I don't 
know.
    Mr. Ellison. Okay, well, when you signed up for your credit 
card, remember you wrote in here that you called up and said 
``Give me a credit card.'' It was easy to get somebody then, 
wasn't it?
    Mr. Autrey. Absolutely.
    Mr. Ellison. How was it when you tried to work out a 
problem?
    Mr. Autrey. Well, you have to enter your account number. 
Then it reads it back to you. Then it wants to make sure they 
got that right and you wait awhile.
    Mr. Ellison. Is this a person?
    Mr. Autrey. No, sir. This is a computer recording or 
something, not a human being.
    Mr. Ellison. So when they want to get your business, they 
have a person, right?
    Mr. Autrey. Yes, sir.
    Mr. Ellison. But when you want to work out a problem, you 
get some other thing. Am I right about that?
    Mr. Autrey. You have to have patience to get through to a 
person.
    Mr. Ellison. And if you don't have patience?
    Mr. Autrey. If your time is valuable, you don't get through 
to a person.
    Mr. Ellison. And if you have to get the kids to school, and 
if you have to get to work, and if you have to go somewhere, 
you just can't sit on the phone like that. Am I right or wrong?
    Mr. Autrey. That is correct, unless you want to burn your 
cell phone minutes.
    Mr. Ellison. Let me ask you this. Someone asked, why don't 
you just go get a new credit card? What happens when you apply 
for a new credit card to your FICO score?
    Mr. Autrey. It lowers your FICO score every time you apply 
for credit.
    Mr. Ellison. Just asking for a new card impacts your FICO 
score. Is that right?
    Mr. Autrey. Not even asking, responding to a preapproved 
offer where they tell you, you're a great guy, here's a credit 
card. Just call us and activate it.
    Mr. Ellison. And it goes down.
    Mr. Autrey. It does. How much, I don't know. That's a well-
guarded secret.
    Mr. Strachan. About 4 points, from what I understand.
    Mr. Ellison. That's interesting. Thank you, sir.
    Ms. Wones, you have three cards?
    Ms. Wones. Yes.
    Mr. Ellison. Are the three cards in three different 
addresses?
    Ms. Wones. No.
    Mr. Ellison. Three different names? Do you have any aliases 
in there?
    Ms. Wones. No.
    Mr. Ellison. Just you, right?
    Ms. Wones. Yes, there is only one of me.
    Mr. Ellison. How did you get three risks? How did you get 
priced for three different risks if you're just one person?
    Ms. Wones. That's what I'd like to know, and if you can 
find that answer, I'd appreciate it.
    Mr. Ellison. Have you tried to ask anybody about that?
    Ms. Wones. Yes, I have.
    Mr. Ellison. And did you get a straight answer?
    Ms. Wones. No. I did not.
    Mr. Ellison. Now, when you applied for your cards, did you 
talk to a person?
    Ms. Wones. No, I filled out a form.
    Mr. Ellison. But when you called up to get the problem 
straightened out, did you get a person?
    Ms. Wones. Eventually.
    Mr. Ellison. Eventually; what do you mean by that?
    Ms. Wones. Well, like, you have to go through machines.
    Mr. Ellison. Now this is a huge company, right?
    Ms. Wones. Right.
    Mr. Ellison. You would think they'd have a person to try to 
work out a problem with you, right?
    Ms. Wones. Exactly.
    Mr. Ellison. Now, did having to go through all those 
machines diminish your ability to be able to straighten out the 
problem?
    Ms. Wones. No. I kept calling back to get someone.
    Mr. Ellison. I know, but they did put barriers in your way. 
Isn't that true?
    Ms. Wones. Yes.
    Mr. Ellison. And it did make it a little bit more difficult 
for you to straighten out the problem that you had to wait on 
the phone and really couldn't get anybody until eventually you 
got somebody. Am I right?
    Ms. Wones. Right.
    Mr. Ellison. I just want to say this. First of all, I 
believe in financial literacy. I think all three of you are 
extremely intelligent people and probably understand financial 
matters better than most people. I think the issue is not 
financial literacy. It is the Byzantine structure that the 
company set up, and we need to focus on that. And I just want 
to say that as a matter of fact, and I also want to say as well 
that I commend all three of you.
    You are tremendously courageous people. You are exposing 
yourselves and you could just as easily have licked your wounds 
and gone on about your life. By coming here today, you are 
doing a public service, and I want you to know that I thank you 
for it personally. Thank you, one and all.
    Chairwoman Maloney. Thank you. The gentleman's time has 
expired.
    Mr. Hensarling, for 5 minutes.
    Mr. Hensarling. Thank you, Madam Chairwoman.
    Let me pick up where my friend from Minnesota left off. I 
want to thank the panelists for coming here. And I know, Ms. 
Wones, you said you were a little nervous. I'll let you in on a 
little secret. Some of the people before you were probably a 
little nervous as well. But I know it took a lot of time and 
effort on your part and some courage to come here, and I thank 
you. And we all benefit from your testimony.
    I listened to your testimony. Frankly, I haven't looked at 
the other side of the argument. I accept what you say. I have 
no doubt that there are some consumers who didn't understand 
what they were getting into. Maybe they were misled. Maybe the 
system hadn't worked well for them. I don't care to delve into 
your individual cases, but I do have a couple of questions for 
all of you.
    What I thought I heard from each and every one of you is 
that essentially there was a provision in your agreement with 
your credit card company that you did not understand, that 
either wasn't properly disclosed to you or you did not 
understand the interpretation of the credit card company.
    Is that a fair assessment of your testimony? Does anybody 
disagree with that, or was there something in there you just 
didn't understand? Is that correct?
    Mr. Strachan. Apparently, there are multiple definitions 
for one word, for the word ``default,'' for instance.
    Mr. Hensarling. Okay. If you had understood the provisions 
of the credit card agreement, would you have accepted the card? 
Yes or no?
    Mr. Autrey. Yes.
    Mr. Hensarling. You would have gone ahead and accepted the 
card? Ms. Wones, would you have accepted your card?
    Ms. Wones. I would have had to think about the Disney one 
just because I'm a huge Disney lover. That's the only reason I 
got it was for the Disney rewards.
    Mr. Hensarling. Okay.
    Ms. Wones. But with the interest rates, I probably would 
not have charged on it.
    Mr. Hensarling. And Mr. Strachan, would you have accepted 
your card if you understood the provisions?
    Mr. Strachan. I understood the provisions. Had universal 
default been explained to me fully, which it was not--and 
vagaries surrounding FICO and the arbitration clause I was only 
made aware of after I applied for the card that came in the 
cardmember agreement later on--had I known those things going 
in, I would have accepted some of the cards and not accepted 
other cards.
    Mr. Hensarling. I think you were here for the two Senators 
who testified before us and one of the Senators held up, I 
think, he said a 43-page disclosure form; I admit I don't 
understand those forms either. And I think there are probably a 
lot of different guilty parties that lead to a forum that none 
of us can understand. Part of it is probably trial attorney 
driven. People are trying to reduce their liability exposure, 
since we assume to live in a country where more often than not 
we sue our neighbor instead of love our neighbor.
    Probably a full amount of it is driven by the Federal 
Government that seems to have a philosophy for full and 
voluminous disclosure written in legalese as opposed to simple 
and effective disclosure written in English. And my guess is 
the credit card companies may bear some blame, as well, so 
there's probably a lot of blame to go around.
    But my question is, what I think I have heard a couple of 
you say is that even if you understood it, you might go ahead 
and take the card. Yet, under this legislation, certain credit 
cards that are on the market now will be outlawed. Let's assume 
for the moment you understood. Let's assume for the moment your 
neighbor understands. Maybe you don't like the card, but he 
does. Should Congress outlaw a credit card?
    Chairwoman Maloney. For point of information, the 
legislation does not outlaw any card. It is very heavy on 
notice so that people understand their cards. It does not have 
any price controls, nor does it in any way say people cannot 
have a card, for point of information.
    Mr. Hensarling. Okay, well, with all due respect, Madam 
Chairwoman, that is not my interpretation of your legislation. 
And I do not believe it's the interpretation of others. If 
you're going to essentially outlaw certain credit card 
practices, I don't frankly know how you come to any other 
conclusion.
    But my question for the panelist is, if you understand the 
provisions of your card, should Congress outlaw certain credit 
cards, whether it is in the chairwoman's bill or not?
    We'll have that argument at a later time.
    Ms. Wones. I didn't get the fact that it would outlaw any 
credit cards. I agree with her. The way I read the bill, they 
still have every right to issue any type of card, and it's the 
consumers.
    Mr. Hensarling. Well, we'll have the debate on that 
specific legislation, but as a philosophical matter.
    Chairwoman Maloney. The gentleman's time has expired.
    Mr. Udall is recognized for 5 minutes.
    Mr. Udall. I thank the chairwoman for yielding to me.
    I wanted to come back and visit with the panel on this 
question of repricing, and I want to start with Ms. Wones, who 
has done a wonderful job today, I think we would all 
acknowledge. In some of the information that was sent to us by 
your issuer, they point out that you were repriced based on a 
decline in your credit score.
    They also point out that they no longer engage in this 
practice, and I do want to commend them for making the change. 
However, when they reversed the practice, did they reverse the 
increased interest rate on your accounts?
    I am going to let you respond, and I would like to ask the 
other two witnesses if they would be interested in responding 
as well. Ms. Wones.
    Ms. Wones. No. My ASPCA card is still at 23 percent.
    Mr. Udall. So they no longer engage in the practice, but 
your account interest rates did not change one iota.
    Ms. Wones. No, it did not.
    Mr. Udall. Mr. Autrey, would you care to comment?
    Mr. Autrey. Yes, my card is closed. I closed it and it 
stayed at the 9.9 rate until I pay it off. Then it's closed and 
I won't be able to reopen it or use it anymore.
    Mr. Udall. Mr. Strachan, I saw you nodding. Would you like 
to respond?
    Mr. Strachan. I'm bursting at the seams. No. Not only have 
I not had things rolled back, but I have had APRs increase in 
leaps and bounds. Additionally, one account was closed. When I 
paid it off, I paid off $66,000 in about 2 months. My account 
was closed.
    A year later, 16 months later, a card shows up in the mail 
again for the same account, but the bank still says it was 
never closed. It's even in my exhibits. At any rate, no one at 
any time rolled back my interest rates, nor have they offered 
to refund any of the overcharges.
    Mr. Udall. Madam Chairwoman, I think it probably should go 
without saying, but I'm going to say it anyway. I would predict 
that there are many, many thousands more Americans who are in 
the same situation. That card company has changed its 
practices, but it is one thing to just say, we have changed the 
practice, but it's another thing to keep these rates in place 
that aren't sustainable.
    I again thank the chairwoman for holding the hearing, and I 
yield back any time I have remaining.
    Chairwoman Maloney. The gentleman's time has expired, and 
we have no further questions for these panelists. We want to 
thank you very much for coming and testifying before Congress. 
It is not an easy thing to do, and consumers are very 
appreciative of your coming forward and giving your stories. 
You are really speaking for many men and women in this country. 
I thank you on their behalf. Thank you.
    I now call on Ranking Member Biggert, who would like to 
respond to Chairman Frank's earlier statements.
    Mrs. Biggert. Thank you very much, Madam Chairwoman. I 
thought I would put this in the record right now. He was 
talking about preemption by the Fed, but what I was talking 
about is that I think we should look at evidence over 
anecdotes, and that was my point.
    I think the point that Chairman Frank misses is that the 
regulators have the expertise, and Congress directs them to act 
on an issue, not prescribe what and how they do it. So I was 
concerned, as I said in my opening statement, that I want to 
hear the results of what we in Congress authorized the Federal 
Reserve to undertake, and that was a revision of Regulation Z. 
And I think that the Fed's 4 years of extensive expert review 
utilizing consumer focus groups and other sound methodology 
would seem to be just as worthy of our consideration as is 
anecdotal evidence presented by today's witnesses.
    So I don't think that--when we ask somebody to do 
something, I think we should not jump in ahead of the time when 
they have spent 4 years on that. So with that, I thank the 
chairwoman for her indulgence, and I yield back.
    Chairwoman Maloney. The Chair asks for unanimous consent to 
place in the record testimony from the American Financial 
Services Association, and also a statement of John Finneran, 
who is the general counsel of Capital One Financial 
Corporation. Without objection, they will be placed in the 
record.
    Our third panel includes: Martin Gruenberg, Vice Chairman 
of the FDIC; Julie Williams, Chief Counsel and First Senior 
Deputy Comptroller of the OCC; John Bowman, General Counsel of 
the OTS; and Sandra Braunstein, Director of the Division of 
Consumer and Community Affairs of the Federal Reserve.
    I want to welcome these regulators who are here to give us 
their views and an update on their efforts in this area. As 
Chairman Bernanke recently testified to this committee, the Fed 
plans to use its unfair and deceptive practices authority to 
regulate the very same abuses our bill goes after because he 
said the Fed's authority to regulate disclosure was not enough 
to deal with the unfair practices the regulators see.
    And so I look forward to the testimony of all of the 
panelists today. We will start first with you, Mr. Gruenberg.

   STATEMENT OF MARTIN J. GRUENBERG, VICE CHAIRMAN, FEDERAL 
                 DEPOSIT INSURANCE CORPORATION

    Mr. Gruenberg. Thank you very much, Chairwoman Maloney, 
Ranking Member Biggert, and members of the subcommittee. I 
appreciate the opportunity to testify on behalf of the Federal 
Deposit Insurance Corporation regarding credit card practices 
and to provide comments regarding H.R. 5244, the Credit 
Cardholders' Bill of Rights Act of 2008.
    Credit cards have become an important component of everyday 
life, serving as an accessible form of credit that provides 
great convenience to consumers. However, as with all credit 
products, unless provided responsibly and used carefully, they 
hold the potential to cause significant financial hardship.
    By 2004, the most recent year for which aggregate consumer 
data are available, 75 percent of U.S. households had some type 
of credit card, and 46 percent carried a credit card balance. 
Recent growth in credit cards has been especially prevalent in 
lower income households and among young people.
    Credit card lending has proven to be a profitable business 
line that consistently has been more remunerative than other 
banking activities. Even though credit card lending is 
unsecured, the best returns from this activity more than offset 
their higher level of net chargeoffs.
    As you know, credit card lending is generally regulated by 
the Truth in Lending Act and its implementing regulation, 
Regulation Z. The Federal Reserve Board has the authority to 
promulgate regulations to implement TILA, the Truth in Lending 
Act, which focus primarily on disclosure of the cost in terms 
of credit.
    In May 2007, the Federal Reserve proposed amendments to 
Regulation Z that are designed to improve credit card 
disclosures. While improved disclosures are important, it is 
questionable whether even improved disclosures can mitigate the 
harmful effect of some of the most problematic practices.
    Credit card issuers are also subject to the prohibition 
against unfair and deceptive acts and practices under Section 5 
of the Federal Trade Commission Act. The prohibition against 
unfair and deceptive practices provides a powerful supervisory 
tool. However, current law limits FTC rulemaking authority to 
the Federal Reserve, the Office of Thrift Supervision, and the 
National Credit Union Administration, and excludes the Office 
of the Comptroller of the Currency and the FDIC, who are the 
primary Federal regulators of about 7,000 institutions.
    We appreciate this committee's leadership earlier this year 
in the passage of legislation by the House of Representatives, 
H.R. 3526, to amend the FTC Act to grant each Federal banking 
agency the authority to prescribe regulations governing unfair 
or deceptive acts or practices with respect to the institutions 
each agency supervises.
    With regard to H.R. 5244, the Credit Cardholders' Bill of 
Rights Act of 2008, the FDIC views this legislation as a 
balanced and constructive effort to address many of the most 
problematic credit card practices. These practices include 
universal default, double-cycle billing, payment allocation to 
the lowest rate portion of the balance, and inconsistent and 
often nontransparent billing practices.
    For example, in the case of universal default, an issuer 
increases rates on debt when a cardholder fails to make 
payments to other creditors or has an overall decline in his or 
her credit score. The result is that a cardholder who pays on 
time still may be assessed a higher interest rate because the 
cardholder made a late payment to another creditor or has 
incurred a significant amount of additional debt unrelated to 
the credit card.
    Employing this practice may materially worsen a 
cardholder's financial condition, contributing to the 
cardholder's overall level of financial distress and reducing 
incentives to stay current. This has potentially serious 
implications for ultimate debt repayment, and raises risk 
management issues.
    Under double-cycle billing, when a cardholder fails to pay 
the entire balance of new purchases by the due date, the 
issuer, despite the cardholder's having no previous balance, 
computes interest on the entire original balance that had 
previously been subject to an interest-free period, including 
that portion of the balance that the cardholder paid on time.
    These practices and others addressed in the bill, such as 
payment allocation, are so complex that they do not lend 
themselves to clear and concise disclosure that effectively 
communicate usable information to consumers.
    Among other important provisions, the bill seeks to address 
practices often found in subprime credit cards, where they can 
have a particularly harmful impact on consumers already facing 
financial challenges.
    In conclusion, the credit card has been an important 
innovation in consumer finance, allowing consumers greater 
flexibility in accessing credit. Yet like all credit, credit 
cards can create financial hardship if not properly managed or 
if consumers are confused or misled regarding the terms and 
conditions of their use.
    A proper balance needs to be struck. Legislative and 
regulatory changes such as H.R. 5244 can help strike that 
proper balance.
    Madam Chairwoman, that concludes my testimony. I would be 
happy to address any questions the committee might have.
    [The prepared statement of Mr. Gruenberg can be found on 
page 131 of the appendix.]
    Chairwoman Maloney. Thank you very much.
    Ms. Williams?

STATEMENT OF JULIE L. WILLIAMS, CHIEF COUNSEL AND FIRST SENIOR 
 DEPUTY COMPTROLLER, OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Ms. Williams. Chairwoman Maloney, Ranking Member Biggert, 
and members of the subcommittee, I appreciate the opportunity 
to appear before you today to provide the OCC's views on H.R. 
5244, the Credit Cardholders' Bill of Rights Act of 2008.
    In testimony before this subcommittee last year, 
Comptroller Dugan provided extensive information on the credit 
card industry and the OCC's concerns and responses regarding 
current credit card disclosures and marketing practices. He 
also urged certain key principles that should guide any new 
credit card legislation or regulation.
    First, as a matter of safety and soundness, credit card 
lenders need to be able to manage their risks effectively.
    Second, credit card customers should be given meaningful 
notice of the terms and conditions of their credit cards and 
the circumstances under which those terms may change.
    Third, credit card customers also should have meaningful 
choice when faced with certain increases in their credit card 
interest rates.
    My written testimony focuses on these three principles and 
their application to H.R. 5244. I will briefly summarize some 
of the key points.
    It is important to recognize the type of risk presented by 
credit card debt. A credit card is an unsecured revolving open-
end credit, very different from a mortgage or car loan, and 
requiring different credit risk management techniques. As the 
customer pays down the balance of a credit card, the customer 
can make new charges, and the customer is not required to pay 
off the entire balance each month.
    Thus, changes in a customer's creditworthiness affect the 
lender's credit risk in two ways: new extensions of credit for 
new transactions by the customer; and continued extension of 
credit for the customer's existing unpaid balance.
    Because credit card lenders qualify customers for interest 
rate, credit limit, and other terms based on an assessment of 
creditworthiness at a time the account is opened, lenders must 
rely on risk mitigation tools on an ongoing basis to address a 
customer's changing risk profile. These tools include freezing 
or reducing credit lines, closing accounts, and repricing, that 
is, changing the rate of interest charged for outstanding 
balances on an account.
    From a supervisory perspective, we have concerns with 
certain provisions of H.R. 5244 that would deprive credit card 
lenders of some options that are important to effectively 
manage those risks. Specifically, the lender's ability to price 
for changing risks presented by an unpaid balance would be 
limited solely to circumstances where the customer has 
defaulted on the credit card account itself.
    The lender could not use information that is highly 
relevant to its risk exposure, such as defaults on other credit 
or deterioration of a credit score, to adjust its pricing for 
the risk of a credit card balance that a customer has not 
repaid.
    Comptroller Dugan has advocated an alternative approach 
which we believe is consistent with safe and sound credit card 
lending practices and the principles of meaningful notice and 
meaningful choice.
    Under this alternative, if a creditor seeks to increase the 
interest rate on an account balance to address increased credit 
risk due to a deterioration in a customer's credit score or 
default on other debt, the lender must first provide the 
customer with: one, a reasonable advance notice; and two, an 
opportunity to opt out of the changed terms and to pay down the 
outstanding card balance in accordance with the existing terms.
    If the customer opted out of the rate increase, the lender 
could then mitigate its risk on that account by using other 
risk management tools, such as reducing the credit line or 
allowing the customer to wind down the account over a specified 
time.
    An opt-out structured in this manner strikes a fair 
balance, preserving the lender's ability to monitor and respond 
to changes in a customer's creditworthiness while recognizing 
that, from the customer's perspective, certain price 
adjustments should be preceded by advance notice and an 
opportunity for the customer to make alternative credit 
arrangements.
    In closing, let me note that the bulk of the bill's 
provisions do not raise fundamental safety and soundness 
concerns. They do reflect real customer frustrations with the 
adequacy of credit card disclosures and with particular credit 
card practices.
    Yet there may well be tradeoffs between the potential 
benefits and consequences of some of these measures. In this 
complex and competitive business, for example, if credit card 
lenders are restricted in their ability to price particular 
customer segments for the risks and costs they pose, the 
alternative may be to spread those costs over a broader range 
of customers, raising costs for customers who do not pose 
higher levels of risk.
    Provisions of the bill dealing with payment allocation and 
certain billing practices may present similar issues of 
unintended consequences if lenders react to mandated changes by 
making other changes that reduce card features that benefit 
customers.
    Thank you, Chairwoman Maloney, for the opportunity to 
testify on these issues, and I will be happy to respond to any 
questions you might have.
    [The prepared statement of Ms. Williams can be found on 
page 332 of the appendix.]
    Chairwoman Maloney. Thank you.
    Mr. Bowman?

STATEMENT OF JOHN E. BOWMAN, DEPUTY DIRECTOR, GENERAL COUNSEL, 
                  OFFICE OF THRIFT SUPERVISION

    Mr. Bowman. Good afternoon, Chairwoman Maloney, Ranking 
Member Biggert, and members of the subcommittee. Thank you for 
inviting me to present the views of the Office of Thrift 
Supervision on the Credit Cardholders' Bill of Rights Act of 
2008, and to discuss credit card lending in the thrift 
industry. Thank you also for your leadership on this important 
subject.
    We at the OTS share your commitment to protecting consumers 
from abusive credit card practices, and during my testimony 
today I will describe some of the ways we at the OTS are 
honoring that commitment.
    The first way is by responding to consumer complaints and 
following up on trends or patterns that emerge from our 
analysis of those complaints.
    A second way is through the vigilance of our examiners 
during their inspections of our regulated institutions, 
assisted by our team of credit card experts known as the core 
credit card specialty group. This group pays particular 
attention to the 13 thrift institutions that have significant 
credit card operations.
    A third way we play our watchdog role over credit card 
practices is through our enforcement powers, either formally or 
informally. In one recent example, our examiners found evidence 
of a potentially abusive subprime credit card lending program 
in one of our institutions. We directed the institution's board 
of directors to immediately cease new approvals under the 
program and to phase out existing accounts. This action, while 
informal, resulted in the termination of the program in a short 
time frame after the examination.
    We have taken similar actions with our institutions in the 
past. Perhaps the centerpiece of efforts against credit card 
abuses is an upcoming notice of proposed rulemaking on unfair 
and deceptive acts or practices. The OTS issued an advanced 
notice of proposed rulemaking this past August, and after 
reviewing the comments we received from consumer groups, 
industry representatives, members of Congress, and individual 
citizens, we have decided to move forward and will issue the 
formal notice in the immediate future.
    To ensure uniform rules governing such practices across the 
federally regulated financial services industry, we are working 
with the other Federal agencies with rulemaking authority under 
the FTC Act: the Federal Reserve Board; the National Credit 
Union Administration; and the Federal Trade Commission. We have 
also consulted with and briefed the Federal Deposit Insurance 
Corporation and the Office of the Comptroller of the Currency.
    We consider this interagency approach essential for 
ensuring a level playing field for the industry. We also 
support the provision already approved by the House, H.R. 3526, 
to give the OCC and the FDIC the same rulemaking authority as 
the OTS, the Federal Reserve Board, and the NCUA under the FTC 
Act.
    In our proposal, we are planning to adopt principles-based 
standards for unfairness and deception. A practice would be 
considered unfair if it were likely to cause harm, consumers 
could not avoid the injury, and the injury was not outweighed 
by countervailing benefits to consumers or competition. A 
practice would be deemed deceptive if it involved a material 
representation or omission that was likely to mislead a 
consumer acting reasonably.
    We also expect to address certain specific practices that 
have raised concerns, such as retroactive rate increases and 
double cycle billing, in which finance charges are based on 
account balances that existed in the past.
    Although we share some of the same concerns and are 
addressing some of the same issues as your bill, we believe the 
OTS currently has adequate authority to combat abuses by credit 
card lending programs of OTS-regulated thrifts. We prefer an 
agile regulatory approach for OTS to respond to whatever unfair 
or deceptive acts or practices it identifies in the industry or 
on the horizon. We believe the best approach is to continue to 
work under our existing statutory authority to develop 
regulations on an interagency basis.
    That you again, Madam Chairwoman. I look forward to 
responding to your questions.
    [The prepared statement of Mr. Bowman can be found on page 
94 of the appendix.]
    Chairwoman Maloney. Thank you.
    And Ms. Braunstein?

   STATEMENT OF SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF 
   CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS OF THE 
                     FEDERAL RESERVE SYSTEM

    Ms. Braunstein. Thank you. Chairwoman Maloney, Ranking 
Member Biggert, and members of the subcommittee, I appreciate 
the opportunity to discuss the Federal Reserve's ongoing 
efforts to enhance protections for consumers who use credit 
cards.
    In June 2007, the Board proposed substantial revisions to 
the credit card disclosures required under the Truth in Lending 
Act or TILA regulations. Those revisions focused on ensuring 
that consumers have the information they need about credit card 
costs and terms when they need it and in a form they can use.
    Our TILA proposed rules should result in disclosures that 
are more effective for today's credit plans. Those who have 
commented on the proposal have generally agreed. At the same 
time, over 2,000 comments from individual consumers, a growing 
body of behavioral research, and our own consumer testing 
provide evidence that it is increasingly difficult to use 
disclosure alone to help reasonably diligent consumers avoid 
incurring unnecessary costs on their complex credit card plans.
    Careful measures that would restrict credit card terms or 
practices may in some instances be more effective than 
disclosure to prevent particular consumer injuries. Such 
restrictions, however, can have unintended adverse consequences 
for consumers, such as reducing the availability of credit or 
increasing its cost.
    Mindful of the advantages and limitations of both 
disclosure and stricter approaches, this spring, the Board 
plans to utilize its authority under the Federal Trade 
Commission Act to propose rules prohibiting unfair or deceptive 
credit card practices.
    In developing the proposed rules, we have consulted H.R. 
5244, the Credit Cardholders' Bill of Rights Act of 2008. This 
comprehensive bill has helped us to identify areas of concern 
where disclosures alone may not be adequate and stricter 
approaches under the FTC Act may be warranted.
    The potential benefits of disclosure are well-known. More 
effective disclosures make information about terms and pricing 
easier for consumers to obtain and understand. Informed 
consumers are prepared to choose products that offer the best 
combinations of features and pricing to meet their personal 
financial needs. Better dissemination of information about 
credit card terms and pricing also enhances competition among 
credit card issuers, which helps generate products that 
consumers want.
    Along those lines, the Board's June proposal includes 
elements such as an enhanced Schumer box with a more effective 
presentation of rates and fees, including clearer disclosure of 
penalty rates and fees. Penalty cost information is also 
included in the account opening summary table with a reminder 
of late penalty payments on every periodic statement.
    The proposed TILA rules also include a requirement for a 
45-day notice for the imposition of a penalty rate or increase 
in fees, and restrictions on the use of the word ``fixed'' with 
regard to rates in advertisements.
    The Board received over 2,500 comments on the June 2007 
proposal, about 2,100 of them from individual consumers. 
Broadly speaking, commenters generally supported the proposed 
disclosures and the Board's approach to improving disclosure 
through consumer testing. Some commenters offered specific 
suggestions to improve the disclosures or reduce unnecessary 
burden.
    In some cases, the commenters were quite divided over 
whether we had gone far enough, or instead, too far. Industry 
commenters felt that the 45-day notice requirement for a rate 
increase would harm consumers overall by raising credit costs 
or reducing credit availability. Consumers and consumer groups, 
in contrast, felt the requirement was not sufficient to protect 
consumers, and urged stricter approaches, such as giving the 
consumer the right to opt out of a rate increase for existing 
balances, or prohibiting issuers from applying increased rates 
to preexisting balances.
    Consumers and consumer groups also identified other issues 
they believe better disclosure will not resolve, such as 
shortening the time to submit payments, allocating payments 
first to balances with the lowest interest rate, and computing 
interest using the so-called double cycle method. They urged 
stricter approaches for these issues as well, while industry 
commenters contended that disclosure solutions were best for 
consumers and warned that stricter approaches could hurt them.
    The Federal Reserve remains strongly committed to enhancing 
consumers' ability to use credit cards to their benefit. Our 
work is continuing on improving the proposed disclosures 
through additional consumer testing, and this spring we will 
issue proposed rules to address targeted and specific 
practices. We plan to finalize both the TILA disclosure rules 
and the FTC Act unfair and deceptive rules before the end of 
the year.
    Thank you for the opportunity to appear. I will be happy to 
answer any questions from the committee.
    [The prepared statement of Ms. Braunstein can be found on 
page 107 of the appendix.]
    Chairwoman Maloney. Thank you. I thank you and everyone, 
all the panelists, for your testimony before the subcommittee. 
And I know that it has been a very busy time for all of you.
    I would like to commend the Federal Reserve for undertaking 
the significant step of rewriting and updating many of the 
disclosures made to credit card companies under Regulation Z. I 
know that many members of this committee support your efforts, 
and we eagerly await the final rules that will be coming 
forward.
    Additionally, I would like to note that Chairman Bernanke 
announced to us in February that the Federal Reserve, in 
consultation with the other regulators, was starting the 
process of using your authority to regulate unfair and 
deceptive acts and practices. And you stated you would be able 
to release this in the spring or before the end of the year. 
Could you be more definitive? Which month would this be coming 
out?
    Ms. Braunstein. Well, when I was referring to the spring, 
which--in the next few months, we are going to be releasing our 
proposed rules under the FTC Act and some additional pieces of 
TILA. That will be out for public comment. And then after that 
comment period is over, what we plan to do is roll that in with 
the final rules for the TILA proposal we released last year and 
release the final rules for everything all at one time, which 
will be before the end of the year.
    We think that is a better way of doing that, and we have 
also heard that from the industry. The rules, first of all, 
intersect with each other. The FTC rules and the TILA rules 
intersect. And if the industry needs to make a lot of changes 
to their systems and their operations, it is better to do it 
all at the same time. So that is why we are rolling it 
together.
    Chairwoman Maloney. Thank you. An American Banker article 
written soon after the chairman's announcement of the proposed 
use of the unfair and deceptive acts and practices authority 
stated, ``The plan would severely curtail double cycle billing, 
require card companies to let consumers opt out of an interest 
rate hike, and provide guidance on the allocation of 
payments.''
    Each of these proposals is addressed in our legislation. 
Can you expand on some of the specifics you are looking at and 
what particular practices you are proposing to rein in?
    Ms. Braunstein. The practices that are listed--I am not 
sure where the American Banker got that information. But the 
practices that are listed in your bill, as well as things we 
heard about in our comment letters, the comment letters we 
received on TILA, are all things that we are looking at.
    The final decisions have not been made yet, so it would be 
premature for me to say exactly what we are doing. But we are 
certainly looking at things like charging increasing rates on 
existing balances, payment allocation, double cycle billing, 
the timeliness of statements, and giving people adequate time 
to pay. We are looking at all those things, and very seriously, 
in terms of this rulemaking.
    Chairwoman Maloney. Does the Reg Z and Unfair and Deceptive 
Practices Act and authority provide you with all of the tools 
necessary to do everything that my legislation presents?
    Ms. Braunstein. Well, Reg Z doesn't because Reg Z is TILA. 
That is why we are also utilizing--complementary to Reg Z, we 
are utilizing the FTC authority, which is a different 
authority.
    Chairwoman Maloney. Thank you. I would like to return to 
the testimony of Mr. Gruenberg and Ms. Williams. It appears 
from your testimony that the FDIC agrees with some of the 
provisions of our bill which the OCC does not agree with. I 
would like to explore this a little further.
    As I understand it from your testimony, you both agree with 
the bill's core provision, that a cardholder or consumer should 
have notice and choice of any rate increase, and have the 
opportunity to be properly notified, and have the opportunity 
to opt out of the rate increase and pay off the existing 
balance at the agreed-upon contract. Is that correct? You both 
agree with that?
    Mr. Gruenberg. Yes, Madam Chairwoman.
    Chairwoman Maloney. And Ms. Williams?
    Ms. Williams. Yes.
    Chairwoman Maloney. Where you differ is in how to handle 
universal default under the bill. A card company can raise 
rates using universal default or off-account behavior, but only 
going forward. As I understand it, the FDIC agrees with this, 
but the OCC supports the repricing tool, including allowing 
card companies to raise the rate on consumers who are never 
late, never go over their existing balances, and to 
retroactively raise rates on those balances even though they 
pay on time, never go over the limit on their card, but because 
of some outside behavior.
    If you would like to elaborate, both of you, if you would 
explain your positions on this.
    Ms. Williams. Certainly. I would be happy to. As I set out 
in my testimony, we look to three principles in our evaluation 
and assessment of the provisions of your bill, and one of them 
is giving a credit card lender the ability to manage their risk 
effectively.
    There are a variety of circumstances that can be indicative 
of increased credit risk being presented by a customer that are 
events that are not the customer's default on the card itself.
    This could be relevant risk management information to the 
credit card lender that the credit card lender should be able 
to take into account in dealing with the two types of risk that 
I described, both the risk of the continuation of the 
extensions of credit on the existing balance, and the rate that 
the customer is charged on a going-forward basis for new 
charges. To address risk, the credit card lender should retain 
the ability to so-called ``reprice'' the balance, but to do 
that only after giving the customer the opportunity to opt out 
of that increase, to keep their existing rate and to pay down 
the account, and to close out the account over a period of time 
that would be specified by the lender.
    The credit card customer would not be forced to take the 
higher rate. The credit card customer would have the option and 
the ability to opt out of the higher rate.
    Chairwoman Maloney. That is what our bill does. It allows 
them to reprice, but you must notify the customer, the 
consumer, of your rate increase. And it allows the consumer the 
opportunity to opt out and pay off the balance at the existing 
rate.
    As I understand it, you are proposing that the increased 
rate could then revert back to the balance, which would make it 
incredibly hard for the consumer to pay it off. Is that 
correct?
    Ms. Williams. Chairwoman Maloney, your bill would allow 
what we are referring to as repricing, which is raising the 
rate on an existing balance, only in the circumstance where the 
customer has defaulted on the card itself. It would not allow 
the credit card lender to react to other risks that the credit 
card customer presents and to reprice the existing balance 
based on those other risks.
    Where we differ is that we would want to preserve that 
option for the lender, but subject to the customer's ability to 
opt out.
    Chairwoman Maloney. Well, we do differ on that. And I don't 
see how increasing a cardholder's debt retroactively makes them 
more able to manage their debt or pay it off. I would ask Mr. 
Gruenberg to comment on this. As I understand it, you differ 
with the OCC on this provision.
    Mr. Gruenberg. We basically agree with the point you just 
made. The issue here is really the prospective or retrospective 
application in the universal default situation. Under the 
provisions of your bill, as I understand it, if a customer has 
been making their payments and the card issuer evaluates the 
customer based on credit activity unrelated to the card, and 
makes a judgment that based on that unrelated activity, the 
card issuer wants to make an adjustment in the terms, under 
your provision they would be permitted to do that 
prospectively, on debt incurred by the customer going forward.
    On debt that the customer has already incurred that is 
outstanding and that the customer has been making payment on, 
they would not be able to do that. That strikes us as 
reasonable from a standpoint of fair dealing and from a 
perspective of risk management as well. If a customer has 
incurred debt based on certain conditions that the customer 
understood--
    Chairwoman Maloney. Well, thank you for--
    Mr. Gruenberg. --and then that is changed, that in itself 
can present a problem.
    Chairwoman Maloney. Thank you for your testimony. My time 
has expired. I would just like to say that 10 editorial boards 
in our country, regional major editorial boards, agree with the 
position of the FDIC in support of the legislation we are 
considering.
    I thank everyone for their testimony, and I recognize my 
colleague and good friend, Ranking Member Biggert.
    Mrs. Biggert. Thank you, Madam Chairwoman. Before we begin, 
if I might ask unanimous consent to insert into the record 
Section 2845 of the U.S. Master Tax Guide, which deals with 
interest on penalties for the IRS. In one of the panels, it 
came up that nobody else has charged interest on penalties. And 
certainly our beloved IRS does.
    Then, Ms. Braunstein, I just want to wish you a happy 
birthday.
    Ms. Braunstein. Thank you. This is not the way I envisioned 
spending it.
    Mrs. Biggert. That is right. Well, we hope that you have a 
little more time to enjoy the day, and we won't take up too 
much more of your time.
    But could you please describe the studies, comments, and 
testing that the Fed has conducted and for how long as it works 
to update Regulation Z? We have heard from a few consumers here 
today and heard about those who testified at the Senate. So 
based on your testing and studies and comments received on 
Regulation Z, do you think that those positions represent the 
majority of borrowers?
    Ms. Braunstein. Well, first of all, about the testing, we 
engaged in extremely extensive consumer testing to develop our 
proposed credit card disclosures, and that testing process has 
not concluded yet. We are doing more testing now in preparation 
for the final rules. There are still things that we are 
checking out.
    Mrs. Biggert. And by testing, what do you mean?
    Ms. Braunstein. We actually have gone out around the 
country and conducted focus groups with consumers, first of 
all, to find out what kind of information is important to 
consumers in shopping for cards, and what kind of information 
consumers want to know in terms of how to use their cards and 
the terms of their cards and the cost of their cards.
    And then after we hired a professional firm to do this, 
that has done this for many years, and then working with them, 
we designed new disclosures and then went back out and 
conducted more testing, including individual interviews with 
people, to look at the new forms and see if they worked better 
than what existed.
    One of the things that we learned that was very important 
to us was the use of language. One example that I have used 
that is very telling is that most of us in this room probably 
know what is meant when we talk about default pricing on credit 
cards. We know that usually means a higher rate, and it means 
that you did something wrong either on your account or another 
account, and you are getting charged more.
    When we tested that, consumer testing, we found that 
consumers understood the word default the way you would use it 
on your computer, as the default setting, which on a computer 
is the normal or standard setting for that operation, and so 
that consumers actually, when they looked at the old 
disclosures and saw default pricing, many of them thought that 
was the normal price.
    Mrs. Biggert. You must have had a lot of young people that 
you tested.
    Ms. Braunstein. So anyway, but that is just one example 
where, in the newly designed disclosures that we propose, we 
have gotten rid of that term altogether. We now use the term 
penalty pricing, which when we consumer tested was much clearer 
to people. So that is just an example. And we did that on a 
number of different things.
    We are huge believers in this. We think it definitely takes 
time. It is time-consuming. But it definitely results in a much 
better product and clearer information for consumers.
    Mrs. Biggert. So do you think that when you talk to the 
consumers that the positions that we heard today was the 
majority, or were those--
    Ms. Braunstein. Well, I can tell you this, and I mentioned 
this in my opening comments. It is hard for me to say. But one 
thing we did find startling, you know, we do a lot of 
rulemakings and we get a huge number of comments on some of our 
rulemakings. We received over 2,000 comments from individual 
consumers on the credit card rules.
    Now, that is not a record at all, by any means, in terms of 
number of comments. I mean, we have gotten over 5,000 on the 
HOEPA rules. But what was very unique about this comment 
database is the fact that normally when we get large numbers of 
letters, a lot of them, very frankly, are form letters that an 
organization has issued to its membership, and people just sign 
it and send it in, and they all say the same thing.
    We had over 2,000 letters on the credit card proposal from 
individuals that were truly personally, individually written 
about people's personal experiences with their cards. We have 
never had that on any rulemaking before. So I have to tell you 
that did kind of--that resonated with us, and it provided a 
very rich anecdotal database that we have used in working on 
the rules for the FTC Act.
    Mrs. Biggert. Now, you already talked about UDAP. I was 
going to ask you about that, but I won't. Can you just--well, I 
just have one question for Julie Williams of the OCC.
    Can you describe some of the steps that the OCC has taken 
to address concerns that have been raised over the years about 
credit card practices, and have you seen any improvement in 
these practices?
    Ms. Williams. Yes, Congresswoman. We have been very active 
over the years in taking actions and issuing guidance to 
address various types of credit card practices that gave us 
concerns. We took the lead in the development of the 
interagency credit card account management guidance, which 
brought about important reforms in overlimit practices, minimum 
payment requirements, and eliminating negative amortization.
    We have issued separate guidance on particular credit card 
marketing practices, and we have issued separate guidance on 
secured credit cards. Some of the issues that you heard about 
this morning, including the individual who had overlimit fees 
charged 47 times, and clarifying the use of the term ``fixed,'' 
are issues that have been addressed in the various guidances 
that I refer to.
    That said, we heartily support the Fed's rulemaking effort 
here. Uniform, consumer-tested disclosures are critically 
important. This really links very much, Congresswoman Biggert, 
to your concerns about overall financial literacy. We are not 
helping people reach the point of financial literacy with 
respect to credit cards with the types of disclosures that they 
are getting today, and the approach that the Fed is poised to 
implement I think will be enormously constructive in that 
regard.
    Mrs. Biggert. Thank you. Then back to Ms. Braunstein. Could 
you describe for us UDAP, what it is, and what could a new UDAP 
rule mean for consumers and borrowers?
    Ms. Braunstein. Well, UDAP is Unfair and Deceptive Acts or 
Practices, and it is an authority that is granted through the 
Federal Trade Commission Act, and basically allows us to ban or 
restrict practices that we think would harm consumers in cases 
where consumers would have a difficult time avoiding those 
practices, or in some cases would be extremely harmful to 
consumers, or a reasonable consumer, reasonably intelligent 
consumer, could not avoid them, could not figure out how to 
avoid them.
    And there are some practices that we are looking at to see 
whether they are so complicated that even though we are very 
much advocating our approach under TILA for increased 
disclosure, there are some practices that we think may be so 
complex and difficult for consumers to understand that it may 
be important in order to do some targeted banning of those 
practices.
    Chairwoman Maloney. Thank you. The gentlewoman's time is 
over. I now recognize Chairman Watt.
    Mr. Watt. Thank you, Madam Chairwoman. And let me 
congratulate the Chair. I didn't ask the consumer witnesses any 
questions, but I thought it was a wonderful idea to have them 
here to express some of the concerns that we hear regularly in 
our congressional districts about credit cards. That was an 
important ingredient of today's hearing.
    I have a couple of specific questions that I want to try to 
address here. Mr. Gruenberg, in your testimony on page 9, you 
say the strength of the unfair and deceptive acts or practices 
is limited by the need to make case-by-case determinations, and 
then, depending on the problem being addressed, to decide 
appropriate corrective action. While this approach results in 
changes to practices at individual institutions, it does not 
necessarily result in changes industry-wide.
    Ms. Braunstein, is that the way you all are applying this? 
Or are you applying your authority under unfair and deceptive 
trade practices to deal with unfair and deceptive trade 
practices more broadly than his testimony suggests?
    Ms. Braunstein. Through writing rules, we will be applying 
it more broadly. We have applied it the way you just described 
in our supervision process.
    Mr. Watt. Okay, there is not a conflict there, so you are 
going to have a broad set of rules at some point. It sounds 
like in some respects, your rules may be somewhat at odds with 
what the Comptroller's Office and the Thrift Supervision Office 
are talking about.
    How are you all going to reconcile those? Weren't there 
some differences? Because the worst thing we could have at the 
end of the day is a set of conflicting rules out there, some 
from the Fed, some from the other regulators.
    Mr. Gruenberg. Congressman Watt, I think it is important to 
note, as Ms. Braunstein did and I have as well, that what we 
are talking about is an interagency rule by those agencies--the 
Fed, the OTS, the NCUA, and the FTC--that have the current 
authority under the Federal Trade Commission Act to promulgate 
rules that will be applied as you suggest.
    Mr. Watt. I don't understand what you just said. I am 
sorry. What I want to know is: Is there the prospect that we 
will have a different set of rules applying to different 
entities out there that are issuing credit cards? Because I 
think that would be--
    Ms. Braunstein. No. Under what we are doing now is that the 
OTS and the Federal Reserve and the NCUA, which are the three 
agencies that are going to be issuing the proposal, are all 
going to issue pretty much the same proposal, so that way, 
there will be uniformity. And regardless of whether it is a 
bank or a thrift or a credit union, they will all have the same 
rules.
    Mr. Watt. Now, you are saying something different than 
that, Mr. Gruenberg?
    Mr. Gruenberg. No, sir. No, sir, I agree.
    Ms. Williams. Congressman, maybe there is a missing piece 
here, and that is that the Fed has rulemaking authority with 
respect to all banks, all types of banks today. So when we talk 
about the Fed's rulemaking--
    Mr. Watt. I understand. But if you have authority to do it 
with respect to credit unions and other folks, and you all come 
out with two different sets of rules or three different sets--
    Ms. Williams. We don't have rulemaking authority.
    Mr. Watt. Just reassure me that there will be one set of 
rules once you all do--
    Mr. Gruenberg. There will be.
    Ms. Braunstein. Yes. There will be.
    Mr. Watt. Okay. That is all I want to be reassured about.
    Now, the other encouraging thing, since my knowledge of the 
Senate--I am not supposed to say that--my knowledge of the 
other body suggests that even if we did a bill on this side, 
you all are going to have your rules out before we ever get it 
enacted. So that is why I am dwelling on this.
    The encouraging thing is that you have said that you are 
taking Ms. Maloney's legislation into account in drafting your 
rules. I heard you say that.
    Ms. Braunstein. Absolutely.
    Mr. Watt. Okay. And so a lot of the things that are in Ms. 
Maloney's bill you expect--in one form or another, given your 
testing and consumer and stuff--you expect some of that stuff 
to be in there?
    Ms. Braunstein. Yes. I would say that is true.
    Mr. Watt. All right. That is all the questions I have. I 
think we are moving in the right direction, and I am--just to 
reassure the Chair, I am planning to get on her bill. I have 
been looking at it very carefully, and there are some specific 
issues that I want to deal with, but they are not so great that 
I won't be on the bill. So just be reassured that in the next 
week or so, I will be there.
    Chairwoman Maloney. Thank you so much, Chairman Watt, for 
your thoughtful comments.
    The Chair recognizes Ranking Member Bachus.
    Mr. Bachus. Thank you. And if I could ask the Chair, before 
my time starts, if I could have a unanimous consent request to 
introduce--
    Chairwoman Maloney. Absolutely.
    Mr. Bachus. Paul Gillmor, when he was ranking member of the 
Subcommittee on Financial Institutions, he and I in February of 
2007, not 2008, we wrote the Federal Reserve and expressed our 
opinion that they should accelerate the Regulation Z process. I 
got a very prompt answer from Chairman Bernanke at that time 
telling me that they were moving forward. I want to introduce 
those letters into the record.
    One thing we said in our letter to him--and we wrote in 
February; as you know, Mr. Gillmor passed away September 5th of 
last year--is that the Board is to review provisions every 5 
years to update them in light of industry developments and also 
consumer issues.
    But Regulation Z hasn't been subject to a comprehensive 
review since 1982. So we are--it has been very late coming, 
which I think is a shame. I am not saying I am ashamed of it; I 
am just saying that it is unfortunate.
    So I would like to introduce those letters.
    And now, I would like to have my 5 minutes, if I may. Thank 
you.
    My first question, Mr. Gruenfield--Gruenberg, I am sorry--
you said that disclosures are not enough. Is that correct?
    Mr. Gruenberg. [Nods head affirmatively]
    Mr. Bachus. Would you all all agree to that?
    Ms. Williams. Well, Congressman Bachus, as I think some of 
the other panelists have said, there may be some situations 
where a particular practice is very complex. And it is very 
difficult--
    Mr. Bachus. No. And let me say, I don't think disclosures 
are enough.
    Ms. Williams. Independent--and independent of that--
    Mr. Bachus. I think there are situations where if there are 
consumer abuses--
    Ms. Williams. Absolutely. And independent of that--
    Mr. Bachus. --there ought to be more than disclosures.
    Ms. Williams. We have taken enforcement actions in 
situations when we felt that there were unfair or deceptive 
practices that banks were conducting.
    Mr. Bachus. Are we hearing from the regulators that you are 
moving to address those abusive practices? Can I be assured 
that you are?
    Ms. Williams. Absolutely.
    Mr. Gruenberg. Yes.
    Ms. Braunstein. Yes.
    Mr. Bachus. Not just on a case-by-case basis?
    Mr. Gruenberg. No.
    Ms. Braunstein. No. That is the purpose of the rulemaking 
that the OTS and the Federal Reserve are doing.
    Mr. Bachus. Mr. Autrey, the consumer, mentioned something, 
and it is not the first time it has been mentioned, and that is 
reporting credit limit as the--or the current balance as the 
credit limit. I don't know whether that is, in fact, happening. 
But that could be a problem, could it not, for the consumer?
    Ms. Williams. Our position is that the credit limit is what 
should be reported. Regarding the particular institution in 
question, since that incident, it has become a national bank, 
so its practices are changing.
    Mr. Bachus. So if he had a credit limit of $5,000, his 
account was closed because he had the right to close it, then 
as he paid it down--
    Ms. Williams. What the credit bureau would be showing, or 
should be showing for the customer, is what the credit limit 
is, not what the current balance is. His issue was that it was 
just the current balance being reflected, and so all the 
information that was available would indicate that was his 
limit, and that--
    Mr. Bachus. Also, let me ask you this. In the event that a 
consumer says, ``Close my account,'' or he opted to close his 
account, are there instances that, as regulators, you have run 
into where it actually says the institution closed the account 
as opposed to customer requested? Is that--
    Ms. Williams. Congressman Bachus, to make sure I give you 
the correct answer on that, I would like to get back to you on 
that.
    Mr. Bachus. Okay. Let's just suppose that a customer says, 
``I want my account closed.'' He calls a 1-800 number and says, 
``Close my account.'' Then he writes them, and in the interim, 
the institution closes that account. There ought to be some 
accuracy as to--or consumer requested and institution closed, 
or--because apparently, there is a difference in why that 
account was closed. And I think it is very important.
    Ms. Williams. I would be happy to get back to you with 
that.
    Mr. Bachus. Thank you. Mr. Gruenberg says that the FTC 
finds that there are--under UDAP, that there are a lot of 
problematic practices. The bill that we passed last year, H.R. 
3526, giving you--and it actually would give, as I recall, the 
Fed and the OCC--and the Fed and the OTS already have the 
powers. Right?
    Ms. Braunstein. We already have it. Yes.
    Mr. Bachus. So this would be the OCC and the FDIC. Will 
this be a help? I mean, the FDIC is saying it will.
    Mr. Gruenberg. We believe it would, Congressman.
    Mr. Bachus. What?
    Mr. Gruenberg. I said, we very much believe it would, and 
we are strongly supportive and grateful for the legislation 
that the committee and the House acted on.
    Mr. Bachus. Will this allow you to--now, that bill has not 
passed the Senate.
    Ms. Williams. That is correct.
    Mr. Bachus. If that bill were to pass the Senate and go to 
the President and he signed it, would that give you a greater 
ability to protect consumers against abuses?
    Mr. Gruenberg. We believe it would. Let me try to just 
clarify this because it has come up, and this is the issue that 
the bill addresses. Currently, only the Federal Reserve, the 
Office of Thrift Supervision, and the National Credit Union 
Administration have the ability to do rulemaking which would 
apply to all the institutions that they supervise.
    The OCC and the FDIC do not have rulemaking authority. We 
can only enforce on a case-by-case basis, which is a much more 
limited authority. And what your legislation would do would be 
to grant to us the same rulemaking authority that the other 
agencies have. This would expand our ability to address these 
issues across-the-board for the institutions we supervise, and 
would also allow us to engage in joint rulemaking with the 
other agencies to assure we have an across-the-board treatment.
    Mr. Bachus. Thank you.
    Chairwoman Maloney. Thank you. The gentleman's time has 
expired. The Chair recognizes Chairwoman Waters.
    Ms. Waters. Thank you very much, Madam Chairwoman. I have 
had to be in and out, but I have tried to spend as much time as 
I possibly can so I can learn the responsibility of these 
various regulatory agencies.
    It would be very nice if regulation and oversight for 
credit cards could all be combined in one agency. I suspect, 
because these agencies are looking at these various 
institutions in total, it is necessary to look at them not only 
in relationship to the other services that they provide, but 
the credit cards also.
    But only one of you have rulemaking authority. Is that 
correct? Two? Which two?
    Ms. Braunstein. The Federal Reserve and the Office of 
Thrift Supervision.
    Ms. Waters. Well, in the rulemaking that you describe, 
where you will be taking a look at some of the chairwoman's 
proposals in her legislation, who will be responsible for 
taking those recommendations into consideration?
    Ms. Braunstein. We are working together on doing that. 
Because of the way it is structured, there will be two separate 
rules, but the rules should be identical. One would be the OTS 
would issue rules for thrifts, and the rules that we issue at 
the Federal Reserve will cover all banks. And that would 
include banks that are supervised by the OCC and the FDIC.
    Ms. Waters. Who has the responsibility for the creation of 
new products?
    Ms. Braunstein. Creation of new--
    Ms. Waters. New credit card products.
    Ms. Braunstein. Oh, new products.
    Ms. Waters. Who has that responsibility? For example, when 
a credit card companies decides that it is going to have 
retroactive interest rate increases or other practices that we 
have heard here, who has the responsibility for seeing those 
new products before they are introduced to the consumer?
    Ms. Braunstein. The regulatory agencies. That would be 
normal business practice of the financial institutions. 
Certainly their array of products would likely be looked at 
during a supervisory examination. But they don't come to a 
regulatory agency for approval to introduce new products.
    Ms. Waters. Well, I thought somebody had the responsibility 
for protecting the consumer against products that would do them 
harm. Who said that?
    Ms. Williams. Congresswoman Waters, maybe I can jump in 
here a little bit?
    Ms. Waters. Yes.
    Ms. Williams. As part of our regular supervisory process 
and the dialogue that we have with the national banks that are 
credit card issuers, it is fairly customary that we are having 
discussions with them about new products that they are thinking 
of offering, and changes in product features and terms. And 
there is a lot of flexibility under the current law in the 
terms and conditions that can be provided.
    When a product is then offered, if it is offered in a way 
or if it is structured in a way that is inherently unfair or 
deceptive, we have enforcement authority and we have the 
ability, again as part of our regulatory oversight--
    Ms. Waters. May I stop you? May I just stop you at this 
point?
    Ms. Williams. Sure.
    Ms. Waters. I have a great respect for disclosure. But I 
really don't want to be told about something that you have seen 
and you had the ability to determine whether or not it was 
unfair in your discussions. That brings us to where we are now. 
Here we are with the chairwoman of this subcommittee having the 
wisdom and the foresight to take a look at all of these 
deceptive practices and try and place something in law.
    But you have seen all of this before it ever hits the 
public. You have seen it. You have--I am not sure what your 
authority is. You discuss it. And it goes--it is instituted. 
And then maybe we get some disclosure to tell us what it is.
    But what I am interested in is consumer protection. And I 
am not interested in the Congress of the United States having 
to do this kind of work every few years when we have all of 
these regulatory agencies running over each other that are 
supposed to be providing some protection for us.
    Now, that is my feeling. Tell me why I am wrong.
    Ms. Williams. Congresswoman, we are interested in consumer 
protection, too, very much.
    Ms. Waters. Why don't--
    Ms. Williams. And what we do is we take supervisory 
actions, we take enforcement actions, to deal with these 
practices.
    Ms. Waters. Did you see the practice of the interest rate 
increases on unsuspecting customers who had signed a contract 
or gotten involved with a credit card company based on an 
interest rate, only to have it increase maybe one, two, or 
three times after they were into the--did you see that before 
it happened?
    Ms. Williams. We are very, very strongly in favor of 
improved disclosures in this area.
    Ms. Waters. Did you see what--did you see that practice 
before it was introduced to the consumer?
    Ms. Williams. I don't know what particular practice you are 
referring to. But the practices are--
    Ms. Waters. All right. I am talking about the first 
practice in the credit card bill of rights. Do you have a copy 
of that?
    Ms. Williams. I am sorry.
    Ms. Waters. The first practice that is spoken to in the 
credit card bill of rights. Where is that? Somebody hand me the 
credit card bill of rights here so we can all get on the same 
page. Universal default, is that what it is?
    Ms. Williams. Yes.
    Ms. Waters. Did you have an opportunity to discuss 
universal default?
    Ms. Williams. The term universal default is one term that 
is sometimes used for what I have described as risk-based 
pricing.
    Ms. Waters. You don't understand what it is?
    Ms. Williams. And yes, that--
    Ms. Waters. You don't understand what universal default is?
    Ms. Williams. Yes, we do.
    Ms. Waters. Did you see it before it became practice?
    Ms. Williams. That has been a practice for some time, and 
we do see it as it is implemented.
    Ms. Waters. So you did nothing to deem that was an unfair 
practice, an abusive practice, and perhaps would be harmful to 
consumers?
    Ms. Williams. We have taken actions where the nature of 
that practice has not been adequately disclosed to the 
consumers in advance.
    Ms. Waters. So as you see your responsibility, it was to 
disclose it, to let the consumers know that you are going to 
get ripped off, that your interest rates are going to be 
increased, and that is the extent of your authority. Is that 
right?
    Ms. Williams. We don't have rulemaking authority to 
prohibit it in this area. We have the authority to take case-
by-case enforcement action.
    Ms. Waters. All right. Let me ask the whole panel: Who has 
rulemaking authority in this area? Who saw the practice, the 
product, before it was introduced to the consumer, and what did 
you do about it?
    Chairwoman Maloney. After this is answered, the 
gentlewoman's time has expired. But that is an important 
question. And if we could start with you, Mr. Gruenberg, and go 
down the panel. Thank you very much, Congresswoman.
    Ms. Waters. Is it going to be answered?
    Mr. Gruenberg. Yes, ma'am.
    Ms. Waters. All right. Thank you.
    Mr. Gruenberg. Congresswoman, I think the answer is that 
this is the reason, quite frankly, legislation and/or 
regulatory rulemaking is needed, to address practices that have 
not been clear in terms of the application of the Unfair and 
Deceptive Practices Act in the past.
    That is why the proposal, the legislative proposal before 
the subcommittee to address this practice in law is an 
important step. And in addition, as has been discussed, the 
Federal Reserve and the Office of Thrift Supervision have 
current authority to do rulemaking across-the-board to address 
these issues as well. This is what needs to be done.
    Chairwoman Maloney. Ms. Williams, would you like to 
respond?
    Ms. Williams. As I said, we have the ability to take 
actions on a case-by-case basis against unfair or deceptive 
practices, but we don't have rulemaking authority in this area. 
That is something that would be corrected both for the OCC and 
the FDIC with the legislation that this committee has passed.
    Chairwoman Maloney. Mr. Bowman?
    Mr. Bowman. Yes. I think, as Ms. Braunstein may have 
mentioned, there are a number of items in your proposed 
legislation that we are considering, seriously considering, 
dealing with in our proposed unfair and deceptive acts and 
practices regulation.
    Ms. Braunstein. And yes, I would reiterate that this is one 
of the practices that we are concerned about and we are looking 
at very seriously for our rulemaking. But I would also add that 
even though the other agencies do not have rulemaking 
authority, everyone has the authority for enforcement through 
supervision. And had the case been made for unfair and 
deceptive for any practice, the agencies all have the authority 
to take enforcement actions on that.
    Chairwoman Maloney. The Chair grants an additional minute 
to Chairwoman Waters.
    Ms. Waters. Thank you very much. Ms. Braunstein, I would 
like you to speak directly to the question that I was raising 
earlier. Did you see the practice, universal default, did you 
see the practice before it was implemented?
    Ms. Braunstein. I can't speak for the entire agency.
    Ms. Waters. No. I just--
    Ms. Braunstein. For myself personally, before it was 
implemented, no. We became aware of it, obviously, after credit 
card issuers were doing universal default.
    Ms. Waters. Well, what I am trying to determine is, if I 
may, Madam Chairwoman, what good is a regulatory agency with 
the responsibility to see new products, new practices, and see 
that they are unfair, they may be abusive, and you do nothing 
about it until the Congress of the United States implements a 
terribly long procedure in order to correct it? Will this 
chairwoman or this committee have to do that on every unfair 
practice that is implemented, or what are you good for? What do 
you do?
    Chairwoman Maloney. The gentlewoman's time has expired. But 
Ms. Braunstein, if you could respond to her very pointed 
question. She has raised a concern that many Members of 
Congress feel for their constituents.
    Ms. Braunstein. Well, the first step that we took--we have 
been concerned about credit card practices, and the first thing 
that we did was to improve disclosures because we felt that 
that was an important first step in this process. And then we 
have moved forward to address unfair and deceptive practices 
head-on through this UDAP rulemaking, and we are doing that. 
And we are moving forward.
    Chairwoman Maloney. Thank you very much. The gentlelady's 
time has expired, and the Chair recognizes, in the spirit of 
the bipartisan cooperation in this committee, Ms. Biggert, 
Ranking Member Biggert.
    Mrs. Biggert. Thank you very much, Madam Chairwoman. I 
appreciate it.
    I just have one last question for Ms. Braunstein, and that 
is: Could you tell us what are some of the proposals in Reg Z 
that will help consumers better shop for a credit card and will 
protect borrowers? What are some of the things that you are 
looking at?
    Ms. Braunstein. One of the main things that we did through 
redesigning disclosures is to greatly improve and enhance the 
Schumer box, which has been--the Schumer box itself, we found 
in our consumer testing, has been a very successful innovation. 
People actually said, when we talked to consumers and asked 
them, how do you shop for a credit card, many of them said, 
when I open this piece of mail up, I look for the box.
    But what we found is that we thought there could be 
improvements in terms of really making it much clearer what the 
costs are of this card and, in particular, the penalty pricing, 
what conditions would cause that penalty pricing to kick in, so 
that people would have much better information.
    We also have a number of rules around advertising, and one 
of them is that we did see practices in the past of 
institutions advertising fixed rates on credit cards when in 
fact they were not fixed. And so we have added rules along 
those lines to say that you can't use the term ``fixed'' unless 
you are much more specific about for what period of time and 
under what conditions.
    Mrs. Biggert. Anything else?
    Ms. Braunstein. Yes. One of the big ones I want to mention 
is that we do--we also instituted a 45-day waiting period for 
changing terms for any increases in rates or fees, that an 
institution must give a consumer a 45-day notice, which would 
provide that consumer with an opportunity to either go back and 
renegotiate with their card institution or to leave that 
institution and find another product with another institution.
    Mrs. Biggert. What about advertising? Is there anything 
that--
    Ms. Braunstein. Oh, yes. I was mentioning that we put a 
number of restrictions around the use of the term fixed to make 
sure that people understood that credit card rates, for the 
most part, are not fixed, not the way people generally think of 
it.
    Mrs. Biggert. Some people might not know what the Schumer 
box is, but it is a box that is actually--is it in boldface? Is 
it--
    Ms. Braunstein. Yes. We have guidelines around the typeface 
and the array of information. And it is a box that shows up--it 
has always shown up on solicitations. We now not only use it on 
solicitations, but we also have moved it and use it on account 
opening disclosures because we found that people really did 
pick up information much better through a tabular format than 
they do through dense prose.
    Mrs. Biggert. And I don't know if you mentioned this, but 
the cost of the fees, that is in that box?
    Ms. Braunstein. Yes. We increased the--we have improved it 
in terms of highlighting what the fees are, and for penalty 
rates and things like that, and under what conditions they 
would kick in.
    Mrs. Biggert. I yield my remaining time to Ranking Member 
Bachus.
    Mr. Bachus. Thank you. And actually, you had indicated you 
wanted to go to the gentleman, Mr. Cleaver?
    Chairwoman Maloney. Would you like me to go to Mr. Cleaver 
first or to recognize you?
    Mr. Bachus. Well, I just have one question. But I don't 
want to jump in front of Mr. Cleaver.
    Chairwoman Maloney. She is yielding her remaining time.
    Mr. Bachus. All right. We have seen a problem in the 
mortgage lending market restricting credit for borrowers. Is 
there anything in the Maloney bill that causes you concern that 
it may actually restrict credit to consumers who may want and 
need a credit card and it may not be available? I mean, is that 
a concern?
    Ms. Braunstein. Yes. It is a concern, and it is something 
that we always look at, unintended consequences of overly 
restricting credit or even raising the costs of credit. And it 
is something that we are looking at in terms of doing our UDAP 
rules. In terms of the specifics of that, I think you would 
probably have to ask the industry.
    Mr. Bachus. What now?
    Ms. Braunstein. I say in terms of the specifics, I can't 
say for sure how much or what the effects are. You would 
probably have to ask the next panel.
    Mr. Bachus. Yes. And I am not asking you how you ought to 
say that. I am asking just--that is it.
    I have one other question. Of course, earlier, I think I 
pretty strongly took the position that I don't think 
disclosures--well, the whole issue. I think there are deceptive 
practices or abusive practices. And I think what I have heard 
from you is that you are moving against those.
    Everyone agrees that credit cards have become more complex 
and somewhat more confusing. Has part of that complexity 
benefitted customers because they can shop for a product that 
best suits their needs? As you address the complexity, is that 
something you would factor in?
    Ms. Braunstein. Well, yes. Certainly a wide array of 
products offers consumers a lot of choices. But that only works 
if consumers can comprehend what those choices are.
    Mr. Bachus. I agree.
    Ms. Williams. I would completely agree with the way Sandy 
has said it. Complexity equates to options. There are a lot of 
different choices. But if there isn't good disclosure for the 
consumer to understand the consequences of those options, you 
don't get to where you want to be.
    Mr. Bachus. No matter how complex, it ought to be able to 
disclose clearly to a consumer. Thank you.
    Chairwoman Maloney. Thank you. The Chair recognizes 
Congressman Cleaver, and recognizes his hard work. He has 
introduced his own credit card reform bill with Mr. Udall. I 
would also like to note that I have been informed that there 
will be votes at 1:15 p.m..
    Mr. Cleaver.
    Mr. Cleaver. Thank you, Madam Chairwoman. And thank you for 
your work on this legislation.
    I would like to ask four questions. And so, if you would, 
because time is of the essence, if you would be economical in 
your answers, the first, and Ms. Williams, maybe you can help. 
I just need to understand this. The U.S. savings rate is minus 
one percent compared to almost 20 percent for the Japanese, 
and, we are having a credit crunch.
    Can you explain or help me understand how in a situation 
like this where we're really having some credit issues that are 
becoming worldwide, how the credit card industry can make 5.4 
billion offers at a time when people don't have money? They're 
spending money with credit cards that they don't have.
    Ms. Williams. Congressman, very quickly, the credit card 
companies employ some very sophisticated techniques to try to 
identify groups of customers that would be likely candidates 
for their credit cards. And then they make determinations about 
issuing the cards based on that criteria. I suggest you ask the 
industry panel to address that in more detail.
    Mr. Cleaver. I will. In the bill Congressman Udall and I 
have put together, we have a section that deals with underage 
consumers.
    Ms. Braunstein, are you familiar with our legislation?
    Ms. Braunstein. Actually, I'm sorry, no. I'm not.
    Mr. Cleaver. Okay, I'm not offended, but do you think that 
more needs to be done to protect underage consumers? For 
example, our bill would require that no credit cardholder could 
be under 18 unless he or she received a card on the credit of a 
sponsor, a parent or a sibling, who would sign for it. Because 
at 5.3 billion, many of those people are students.
    And you go to colleges and they have a table set up in the 
student union so that kids with no jobs can get credit cards. 
That just seems to me to be really dumb. And if somebody gave 
my son a credit card, they deserve not to be paid. I mean, he 
is in college right now. And when we do the mark-up on this 
bill, hopefully we can do something along those lines.
    But to the regulating agencies, is that something that you 
would think should be a part of the regulations, Mr. Bowman?
    Ms. Braunstein. I think.
    Mr. Cleaver. Either one of you.
    Mr. Bowman. As a parent of a college-age son, I would agree 
with your analysis. It is of great concern. I'll even point out 
that in reviewing some mail that came into my house last week, 
what I thought was a solicitation, actually, ended up being a 
credit card that he apparently had applied for and had 
received.
    I will tell you that it made for a sleepless night on my 
part, and I hope that, in fact I feel fairly confident, that my 
son will make every effort to satisfy whatever obligations he 
incurs, but it is troubling. He is 22 and, I think, financially 
literate. But there are temptations that credit cards do 
provide.
    Mr. Bachus. Can I ask for some clarification just without 
taking the gentleman's time or extending his time?
    Chairwoman Maloney. Does the gentleman yield for point of 
clarification?
    Mr. Cleaver. Yes.
    Mr. Bachus. Is this a blanket prohibition under 18 without 
parents? What if you had a 16- or 17-year-old who didn't have 
parents?
    Mr. Cleaver. Well, the bill would allow for a person with 
means to sign for him or her.
    Mr. Bachus. Yes, okay.
    Mr. Cleaver. I mean, you know, my son is financially 
literate, but he is financially broke. And, so, you know, those 
two things cancel each other out.
    [Laughter]
    Mr. Cleaver. One final question, and any of you can deal 
with this. Late payments hurt the credit cardholder, and we 
heard that from some of our panelists. But, as I analyzed this 
situation, it doesn't hurt the credit card company. And so the 
credit card company receives late fees, and many of the credit 
card companies actually build in late fees as apart of that 
expected revenue. So the consumer gets hurt. The credit card 
company actually does better. Have I analyzed that wrong?
    Chairwoman Maloney. The gentleman's time has expired, but I 
invite all the panelists to respond to his very important 
question.
    Ms. Williams. If I could try a short answer here, the way 
in which the credit card companies price the package of 
features that they design is based on their analysis of the 
likely behavior of the customers that are in that group. The 
particular issues that you raised and the motives of the 
companies, again, I'd suggest that the industry people might be 
better situated to deal with the particulars.
    Chairwoman Maloney. Thank you.
    The Chair recognizes Congressman Castle.
    Mr. Castle. Thank you, Madam Chairwoman.
    I apologize for my absence. I had business on the Floor and 
then I agreed to give a speech off the Hill, which one should 
never do when one is in Congress, I might add.
    I would like to ask Ms. Braunstein a question. You may have 
been asked this already, but can you help us with the dates of 
the proposed changes to UDAP and to Regulation Z?
    Is there anything new or an update on that? We never seem 
to get very solid answers on those questions.
    Ms. Braunstein. Well, I can't give you exact days to circle 
on your calendar, so to speak, but I can tell you that the UDAP 
proposal will be coming forward in the spring. And we're in the 
spring now, so it will be not too long.
    That will be out for public comment, and, once that comment 
period is concluded, then those rules will be finalized in 
conjunction with the Reg Z rules, the truth-in-lending rules 
that are already out in proposed form. And they will all be 
finalized at the same time and that will be done before the end 
of this year.
    Mr. Castle. Thank you.
    Just a general statement; we talk about Regulation Z and we 
talk about this legislation. How much they are going to 
completely overlap, I don't know. But I do know this. Just in 
reading Regulation Z and hearing what the Federal Reserve has 
done in terms of going out and doing further investigative type 
work, plus all the comments they have had, it just seems to me 
that the public and everybody would be best served if we could 
get our hands on that particular document when it is issued in 
final form and make our legislative decisions based on that.
    I am not saying we shouldn't do legislation by saying that. 
I would just sort of like to know; I have a hunch we may get 
into conflict with each other; and, if we knew exactly what 
Regulation Z was going to do, it would be easier to base our 
legislation around that from my point of view.
    Chairman Frank obviously argued that he thinks that the 
legislation takes precedence. I'm not sure in this case that is 
the best way to proceed, and I would hope that we could work 
out a methodology of process here that would be in the best 
interest of dealing with credit cards and dealing with the 
consumers.
    I don't think any of us disagree with many of the points 
that have been made today and before. I don't disagree with the 
chairwoman on a lot of those things, but I am very concerned 
about how we are going about this. And I am always a little 
suspect of what we in Congress do sometimes. So I would hope 
that Regulation Z might help straighten that out, and you are 
welcome to comment on it if you wish. If not, I'll be happy to 
yield back, because I know time is short.
    Ms. Braunstein. Well, we do think that Regulation Z is 
going to be very helpful to consumers, and especially once we 
have the UDAP rules out too, we think the two are complimentary 
and together will provide consumers with a lot more information 
and a lot more protection in regard to these products.
    Mr. Castle. Thank you.
    I yield back, Madam Chairwoman.
    Chairwoman Maloney. The Chair recognizes Melissa Bean.
    Congresswoman Bean?
    Ms. Bean. Thank you, Madam Chairwoman, and thank you to our 
ranking member as well for covering these issues of importance 
relative to consumer credit in a downward economy. It's very 
important that we look at access to credit, not just for small 
businesses, but for our consumers as part of our spending 
engine.
    My question is for Ms. Williams from the OCC. As a 
regulator for the majority of card issuers, what impact would 
the risk pricing restrictions in the bill have on the 
requirements that you place on the banks that you regulate?
    Ms. Williams. I think fundamentally what we would be doing 
is looking at those credit card lenders to see if they're not 
going to be allowed to use one particular risk mitigation 
technique, what other risk mitigation techniques they are going 
to use, and whether they have thought through the challenges 
that that presents.
    Ms. Bean. All right, thank you.
    And I guess, to the panel, relative to Reg Z moving 
forward, what is the timing that you see? And, I apologize if I 
missed some of this earlier, I had another committee mark-up 
that I had to get to.
    What do you see as the real timing and the status overall 
on that moving forward?
    Ms. Braunstein. The Reg Z rules will be finalized before 
the end of this year, along with a proposal we are issuing in 
the next month or so on unfair and deceptive acts and practices 
under the FTC Act. That will be out for comment. Once that 
comment period is over, those rules will be finalized at the 
same time as the Reg Z rules, because there are overlaps, and 
it would be easier for everybody if it is all done in one 
package.
    Ms. Bean. Would anyone else like to comment?
    Mr. Bowman. I would agree with that. I mean, we have the 
UDAP rule and our plan, our target, our goal, and it will 
happen by the end of the year. We will go final with that 
regulation.
    Ms. Bean. No others?
    Thank you. I yield back.
    Chairwoman Maloney. Thank you. We have been called for two 
votes.
    Mr. Bachus. Madam Chairwoman, I would like to compliment 
the panel for their testimony and their written testimony which 
I thought was very informative. I thank you.
    Chairwoman Maloney. Thank you.
    [Recess]
    Chairwoman Maloney. I call this meeting back into order.
    We just had the last vote of the day. I don't know how many 
more members will be coming back, and I really thank you for 
being here all day and for your attention. We have been told by 
the Republicans to proceed with introductions and testimony.
    We will now hear from the witnesses on the fourth panel--
three issuers who have participated in the process that led to 
this bill from the beginning. I am very happy to welcome John 
Carey from Citibank, Larry Sharnak from American Express, and 
Carlos Minetti from Discover. I have appreciated very much 
their companies' input, and in many ways the bill reflects many 
of their contributions.
    We also worked very closely with a group of consumer 
advocates, and three of them are here today to give us their 
views and suggestions for further progress: Travis Plunlett 
from the Consumer Federation, Linda Sherry from Consumer 
Action, and Ed Mierzwinski from U.S. PIRG.
    And we thank you for your dedication and hard work also. 
And we will begin with Mr. Carey, and your comments will be 
part of our official record and we thank you so much for being 
here today and really apologize because it has taken all day to 
get to you.
    Thank you.

 STATEMENT OF JOHN P. CAREY, CHIEF ADMINISTRATIVE OFFICER AND 
      EXECUTIVE VICE PRESIDENT, CITI CARDS, CITIGROUP INC.

    Mr. Carey. Thank you.
    Chairwoman Maloney, members of the subcommittee, my name is 
John Carey, and I am the chief administrative officer of Citi 
Cards. I appreciate the opportunity to appear before you today.
    As a leading credit card provider with more than 45 million 
bank card customers, we understand the concerns motivating 
legislative action. They are real, and they are the same 
concerns that underlie the Fed's reform proposals. There is a 
broad consensus that we need action. The question is, what 
kind?
    Credit cards have become an integral part of the economy. 
Because they are so familiar, it is easy to forget that using a 
credit card means taking out a loan. These loans carry a lot of 
risk for the lender, because they are unsecured and open-ended. 
So lenders need to protect themselves.
    Twenty-five years ago. banks managed that risk by lending 
only to customers with the strongest credit histories, imposing 
across-the-board 20 percent interest rates and charging annual 
fees. In the last 15 years, new technology and more 
sophisticated risk management practices have allowed issuers to 
price credit card loans based on a customer's risk profile. 
This risk-based pricing helps consumers in two ways:
    First, by allocating the cost of risk to individual 
customers, issuers can offer lower costs to customers with 
solid credit histories, while the customer who poses higher 
risks appropriately absorbs that higher cost himself.
    Second, risk-based pricing actually grows the pie, 
providing more creditworthy people with access to regulated 
credit. With more choices, consumers need complete, clear, 
uniformly presented information to make informed decisions. 
Unfortunately, Federal disclosure requirements have not kept 
pace and the industry has not been able to fill the gap. I can 
tell you about this challenge from our own experience.
    Last year, we were one of the first issuers to stop two 
practices that were the focus of widespread customer concern: 
Repricing customers during the term of the card on delinquent 
behavior with other creditors, often referred to as universal 
default; and so-called, ``anytime, any reason repricing.''
    We hoped and expected that this differentiation would leave 
customers to vote with their feet, but we have been 
disappointed in the results so far. So what happened? The 
problem is that customers could not recognize the differences 
between us and our competitors; disclosures industry-wide are 
not providing sufficient, straightforward information to allow 
a lay person to make an apples to apples comparison on key 
terms.
    That is why we applaud the Fed's efforts to modernize the 
disclosure regime for the entire industry. The Fed's proposal 
would require that certain information be provided at each 
stage of the customer's interaction with her credit card 
company in a consistent, readable format. In essence, the 
proposed changes seek to move credit card disclosures to the 
successful model of food labeling where consumers can get all 
the information they need in simple, uniform terms that allow 
them to compare products easily.
    In an effective marketplace, consumers will be the judge, 
and issuers who adopt best practices will enjoy a competitive 
advantage. We agree that change is necessary, but in our view, 
the Fed's approach offers a better path to reform than H.R. 
5244.
    The Fed's thorough, consumer-tested revision of Reg Z is 
expected to be completed before year-end, and we are confident 
that given the chance to work, the revision will largely 
resolve the problems H.R. 5244 is intended to address.
    Moreover, the bill could have important unintended 
consequences that would dramatically affect cardholders. First, 
the bill would significantly limit our ability to price for 
risk. Without the ability to do that, higher-risk customers 
would have fewer ways to get regulated credit, and low-risk 
consumers would face the higher cost of credit. Second, the 
bill would rewrite the terms in which issuers offer a grace 
period, fundamentally altering the way we make credit available 
to customers, potentially leading to the elimination of a grace 
period altogether.
    I believe this legislation is unnecessary in light of the 
targeted regulatory efforts underway to address these concerns, 
and that its unintended consequences would undermine the 
genuine benefits of a risk-based model for consumers and 
threaten to further destabilize the credit markets. Thank you, 
and I look forward to answering your questions.
    [The prepared statement of Mr. Carey can be found on page 
118 of the appendix.]

   STATEMENT OF LARRY SHARNAK, EXECUTIVE VICE PRESIDENT AND 
   GENERAL MANAGER, CONSUMER CARDS, AMERICAN EXPRESS COMPANY

    Mr. Sharnak. Chairwoman Maloney, Congressman Castle, my 
name is Larry Sharnak, and I am executive vice president and 
general manager of consumer cards at American Express.
    I have submitted my full statement for the record. I want 
to summarize a few points from that testimony. As Congress 
considers credit card practices, we believe it is important to 
focus on three key principles: access; choice; and 
accountability.
    Any legislation should create incentives for transparent 
pricing and clear disclosures that will help consumers better 
manage their use of credit. American Express is committed to 
providing choice in the products we offer and clarity in our 
terms and conditions. We have recently launched several 
initiatives to foster even greater transparency, and we believe 
these initiatives along with the efforts by the Federal Reserve 
Board to improve disclosures will significantly benefit 
consumers.
    There are a number of practices we simply do not do. We do 
not increase an individual's interest rate for any reason other 
than the customer's performance on that particular account. We 
do not increase a customer's rate if they are late on another 
account with us, or with another lender. We do not increase a 
cardmember's rate when we issue a renewal card; and we do not 
increase a cardmember's rate if our cost of borrowing 
increases. We do not charge customers a fee to pay their bill. 
We do not engage in double-cycle billing. In addition, we give 
cardmembers at least 72 hours after the payment due date before 
applying any late fees.
    I would like to turn now to H.R. 5244. We support the goals 
of this legislation; however, we are concerned about several 
specific provisions that could negatively impact consumers. The 
legislation treats all rate increases uniformly, whether the 
rate increase was triggered by behavior on the account in 
question or a mispayment with a third party. This provision 
would reduce incentives for consumers to make timely payments.
    For example, consumers can run up a balance on their 
account, make no subsequent payments, and still avoid a rate 
increase by exercising their right to opt out. It would also 
reduce incentives for issuers to be clear and concise with 
their terms and pricing, because all rate increases are treated 
the same. Increases triggered by a customer's performance on 
their account should not be subject to the 45-day advance 
notice and opt-out.
    We are also concerned about requiring credit card companies 
to allocate consumer payments on a pro rata basis. This would 
have a negative impact on consumers, because they will be left 
with fewer choices should they want to change products.
    Many issuers have already curtailed promotional offers in 
the light of the current economic environment. This legislation 
would likely accelerate that trend. Our own research clearly 
demonstrates that consumers significantly reduce their overall 
effective interest rate by taking advantage of a promotional 
offer. In closing, I want to emphasize that any legislation 
focus on preserving consumer's access to credit, enhancing 
choice in the marketplace, and ensuring accountability for both 
issuers and consumers.
    I can't leave today without sharing a few words from one of 
our cardmembers: ``During the past year we have had an 
extremely unfortunate experience. Our 40-year-old son was in an 
accident in Thailand and remains in a coma in a hospital in 
Bangkok. My wife and I have spent 9 of the past 12 months at 
his bedside.
    ``Mrs. Rogers, a customer service representative, went to 
extraordinary measures to assist us. She arranged for us to use 
our card for expenses up to $50,000 and arranged systematically 
for us to make payments by phone from Bangkok. We have 
encountered numerous challenges, and whenever I contacted Mrs. 
Rogers, she was there with charm and resolve.''
    I have been at American Express for 28 years, and stories 
like these and many, many more is why I am proud of every one 
of those years.
    Thank you for the opportunity to testify today.
    [The prepared statement of Mr. Sharnak can be found on page 
246 of the appendix.]
    Chairwoman Maloney. Mr. Minetti?

    STATEMENT OF CARLOS MINETTI, EXECUTIVE VICE PRESIDENT, 
 CARDMEMBER SERVICES AND CONSUMER BANKING, DISCOVER FINANCIAL 
                            SERVICES

    Mr. Minetti. Thank you.
    Madam Chairwoman and members of the subcommittee, on behalf 
of Discover Financial Services, I appreciate the opportunity to 
appear before you to offer Discover's perspective on H.R. 5244. 
Like the subcommittee, Discover believes that increased 
transparency in credit card practices is desirable. I commend 
you for bringing this topic to the forefront.
    When Discover Card was launched, a little over 20 years 
ago, it was a unique credit card, introducing features that 
changed the marketplace. Unlike other cards then available, 
Discover charged no annual fees. Discover pioneered credit card 
reward programs with the groundbreaking Cashback Bonus award. 
This feature today returns more than $700 million to 
Cardmembers annually.
    Discover also introduced a level of service that was 
unknown at the time in the industry: 24/7, toll-free service 
lines, staffed with knowledgeable representatives, empowered to 
respond rapidly to Cardmembers. In fact, we answer over 95 
percent of all the calls in less than 60 seconds.
    We still offer these features and continue to build on 
them. For example, last year we introduced the Discover Motiva 
card, which was recently named the best new card product for 
2007 by a leading industry publication.
    Motiva was another industry first, providing interest rate 
rebates to consumers who pay their bills on time. This 
encourages payment behavior that avoids late fees and interest 
rate increases, while also lowering the balance owed on the 
account.
    We continue to work with our customers to understand what 
they value, and then strive to create products and services 
that meet their needs. There are some things we don't do. We 
don't target subprime borrowers or offer a Discover card to 
everyone who applies. We don't outsource loan origination or 
loan servicing. Every Discover card we issue is underwritten by 
us and serviced by Discover.
    We viewed the customer relationship as a long-term 
commitment, and so do our Cardmembers. In fact, Discover has 
ranked number one in the industry for customer loyalty for 11 
years in a row. We don't outsource customer service. Every 
service call is made or answered in-house by a Discover 
employee in one of our service facilities across the United 
States.
    Last year, our Cardmember services representatives spoke 
with Discover Cardmembers more than 30 million times. We 
believe that the combination of a competitive market, consumer 
choice, personal and corporate responsibility, and sensible 
regulation is the most effective course of action. The majority 
of the practices in H.R. 5244 are the subject of regulatory 
changes that the Federal Reserve Board is expected to finalize 
this year. We believe these developments should be permitted to 
unfold before statutory changes are made and encourage the Fed 
to move swiftly towards this objective.
    A large number of provisions in the bill address interest 
rate changes. Let me start by saying that Discover does not 
engage in the practice of universal default. In fact, we would 
prefer not to increase the interest rates on any of our 
customers. This is why we send them online payment reminders, 
why we call tens of thousands of customers before their bills 
are due, and why we offer free pay-by-phone and pay-by-Internet 
features. These efforts contribute to lower delinquencies and 
prevent unwarranted repricing.
    There are instances, however, where we need to reprice, 
given that the risk profile of the account has worsened. The 
ability to reprice has allowed the industry to offer lower 
rates at the outset, and extend credit to a population who had 
historically been excluded. At Discover, we conduct limited 
default and risk-based repricing. In all repricing occurrences, 
we provide a 45-day advance notice, or clearly communicate the 
default conditions in the Cardmember Agreement.
    Furthermore, we provide Cardmembers with the option to 
cancel their accounts without an increase in the interest rate 
of their outstanding balances.
    The bill also addresses over-the-limit transactions. At 
Discover we charge an over-the-limit fee only if the account 
exceeds its credit limit at the end of the billing period. We 
also provide Cardmembers with online reminders to alert 
customers when they approach the credit limit, and we reach out 
to customers who appear to be having difficulties in keeping 
below their credit limit. Since the inception of this program, 
we have been able to reduce the number of over-the-limit 
accounts by half. We also embrace a concept of offering 
consumer choice with respect to over-the-limit transactions, 
and will soon allow Cardmembers to opt out of going over the 
limit.
    Given the limited time, I would like to address the 
provisions regarding payment allocation. H.R. 5244 requires a 
pro rata allocation of payments on accounts with multiple 
balances at different APRs. This will result in the elimination 
or reduced availability of balance transfer offers, hindering 
competition in the industry, and depriving consumers of 
features that they value and use frequently.
    In closing, we believe that changes being made in the 
marketplace, and through regulatory actions are advancing the 
goals of enhanced protection that H.R. 5244 seeks to achieve. 
We would urge the subcommittee to defer action until these 
developments play out. Congress should be cautious about some 
of the potential unintended consequences at a time when 
consumers are stressed and the need for credit is strong.
    Thank you.
    [The prepared statement of Mr. Minetti can be found on page 
201 of the appendix.]
    Chairwoman Maloney. Thank you.
    Mr. Plunkett?

STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Plunkett. Good afternoon, Madam Chairwoman, and 
Congressman Castle.
    I am Travis Plunkett, the legislative director at the 
Consumer Federation of America. I am testifying today on behalf 
of CFA and Consumer's Union, the publisher of Consumer Reports. 
I appreciate the opportunity to speak today in support of H.R. 
5244, the Credit Cardholders' Bill of Rights, which would curb 
some of the most arbitrary, unfair, and abusive credit card 
lending practices that often trap consumers in a cycle of 
costly and sharply escalating debt.
    It is particularly important that the subcommittee act on 
this bill now, because the signs of economic distress by credit 
card consumers are increasing fast. According to the Federal 
Reserve Board, 30-day credit card delinquencies--a major 
leading indicator of the coming economic storm--are approaching 
historically high levels. In fact, they are at their highest 
peak in 5 years.
    It is not just the declining economy and mortgage crisis 
that are affecting the ability of credit cardholders to pay off 
their bills. Credit card issuers have caused a good deal of 
this economic distress all by themselves through reckless 
lending, especially to financially vulnerable consumers, and by 
hitting cardholders with costly and unjustified interest rates 
and fees that can destabilize a family's finances quickly.
    Since 1999, the marketing and extension of credit by card 
issuers has increased about twice as fast as consumers have 
taken on debt. This means that aggressive marketing and lending 
by creditors, not consumer demand, has been the driving factor 
in pushing credit card debt to about $850 billion. Much of this 
growth has been fueled by loans to new and financially 
vulnerable borrowers, such as students, lower- and middle-
income families, minorities, and older Americans.
    The massive amount of credit card debt that exists in this 
country is not shared equally. Moderate- and lower-income 
families are more likely to carry a balance from month-to-month 
and have a much higher proportion of credit card debt relative 
to their income. The 50 million households that carry credit 
card debt have an average balance of $17,000.
    It is the working families with credit card balances who 
are starting to show signs of economic distress, and they are 
just the households who end up coping with balances that shoot 
up overnight, interest rates and minimum payments that double, 
and large penalty fees. H.R. 5244 would curb many of these 
abusive practices. It would stop unjustifiable interest rate 
increases on existing balances for consumers who are meeting 
their obligations with their credit card company, because of a 
supposed problem with another creditor or a drop in their 
credit score.
    It would end bait-and-switch contract clauses where issuers 
give themselves the right to raise fees or interest rates at 
anytime for any reason. It would prevent issuers from playing 
costly games with consumer payments by requiring them to apply 
payments to both high and low interest rate balances, not just 
the lower rate debt. It would stop billing methods like double 
cycle billing, that require consumers to pay interest on debts 
they have already paid off.
    It also takes several steps to stop the assessment of late 
fees when payments are truly on time. What this bill does not 
do is as significant as what it does do. It doesn't cap 
interest rates and it gives issuers several ways to price for 
risk and protect themselves in the case of higher risk 
customers. They can set the initial rate based on risk for 
cardholders.
    If a cardholder becomes riskier after they get the card, 
and it involves a problem not with the credit card itself, they 
can raise rates on future purchases. If it does involve 
problems with the card, they can raise rates on future and past 
purchases.
    If issuers become concerned about the increasing risk of a 
cardholder, they can also deal with the problem the old-
fashioned way; they can freeze the credit line or lower the 
credit line. This protects them better than anything from 
additional risk, and they can also do a better job of 
developing a workout with cardholders who get into trouble--a 
payment plan that will work for the cardholder and still 
protect the financial risk of the credit card company.
    In conclusion, let me say that we have heard from issuers 
here today and at your last hearing that their ``risk-based 
pricing,'' as they call it, has lowered rates for consumers and 
that this proposal would not allow them to offer the kind of 
risk-based pricing that they have offered in the past. Let me 
say that two Federal studies have examined the question of 
risk-based pricing and have not been able to confirm the 
issuers' contention that what they have been doing since the 
early to mid-1990's has led to substantially lower interest 
rates for consumers.
    So, we would very much like to talk about why this proposal 
actually will allow them to price for risk and also protect 
credit cardholders as well.
    Thank you.
    [The prepared statement of Mr. Plunkett can be found on 
page 223 of the appendix.]
    Chairwoman Maloney. Thank you very much.
    Ms. Sherry?

   STATEMENT OF LINDA SHERRY, DIRECTOR, NATIONAL PRIORITIES, 
                        CONSUMER ACTION

    Ms. Sherry. Chairwoman Maloney, thank you.
    Members of the subcommittee, my name is Linda Sherry and I 
work for Consumer Action, a national nonprofit organization 
that each year surveys credit card rates, terms, and fees to 
track industry developments and assist consumers in comparing 
cards.
    The cardholder bill of rights takes aim at many of the 
unfriendly, even abusive practices. Americans are falling 
deeper into debt at a particularly troubling time in the 
economy when consumer use of revolving credit, mostly credit 
card debt, is growing at rates not seen since 2001. This means 
credit cardholders are sitting ducks for the retroactive 
repricing strategies of card issuers, who increase APRs using 
flimsy excuses like the market conditions loophole already used 
to hike rates at two top issuers.
    The Maloney bill would limit some of the most unfair and 
deceptive tactics, including universal default, anytime any 
reason rate changes, and retroactive interest rates for credit-
based repricing. The industry continues to abruptly and 
unexpectedly change the terms of existing cardholder 
agreements. It won't clean up its act without legislation and 
UDAP regulation.
    It is time for you to enact strong laws to make the credit 
card industry drop its bait-and-switch business model. Don't 
sit by as the industry lures people in at unsustainably low 
interest rates just to jack up rates a couple of months later, 
all the while exposing cardholders to even more punishing rates 
if, God forbid, they pay one day late.
    We believe the issuers when they say revolving credit is a 
risky business. It is risky for cardholders as well as for card 
issuers, yet that business remains immensely profitable. The 
risk should be to the banks, not to the individuals who attempt 
to follow rules written in disappearing ink. Anytime, any 
reason, repricing needs to go. Consumers are taking on more 
debt, which makes them more vulnerable to repricing tricks.
    Change of terms disclosures are just blank checks to hike 
rates. These disclaimers are so broad they seem comic, but this 
is not a laughing matter when you consider the damage these 
policies wreak on struggling families. Universal default or 
risk-based pricing, based on how customers perform with other 
financial institutions may be going, but large conglomerate 
financial institutions assess customer risk across all of their 
products, a practice that could be called in-house, universal 
default. A consumer with a checking account, mortgage, and 
credit card from the same institution is placed in an 
especially precarious position.
    If she bounces a check or pays her mortgage late on other 
in-house accounts, she could get hit with an interest rate hike 
on her credit card. In-house, universal default is a clear 
downside to the often-touted convenience of having all your 
financial services at one institution. We continually hear 
three dubious messages from the industry and its hired 
consultants. These theories have been countered by respected 
academics whose research has been entered in to the record at 
previous subcommittee hearings.
    Message one: Risk-based pricing benefits credit-worthy 
consumers through lower prices. Please consider this: One-size-
fits-all default rates are opportunistic pricing, which bears 
no relation to cardholder risk. The application of predatory 
risk-based rates of 30 percent and higher to existing balances 
can drive cardholders into default and bankruptcy and drive up 
costs for all cardholders.
    Message two: Regulation and legislation would limit access 
to credit cards for low-income households. Please consider 
this: Low- income consumers need and use cards to pay off 
balances over time, which generates reliable interest income 
and makes them desirable customers. Anti-predatory lending 
regulation at the State level has not decimated the market for 
affordable loan products.
    Message three: Risk-based pricing deters irresponsible 
credit use, the moral hazard argument. Please consider this: 
Hiking rates based on a drop in a credit score, a late payment 
or an unrelated account or general economic conditions does 
nothing to deter irresponsible credit use. You can't game the 
system if you don't know the rules.
    Please look beyond these myths and give reckless lending 
its day of reckoning. To date in the 110th Congress alone, 
almost 18,000 individual individuals have visited Consumer 
Action's Web site to write to you for protection from abusive 
credit card practices. This is important to the people you 
represent. Please don't ignore them any longer.
    I thank you for holding this hearing. This is a non-
partisan issue, despite the way this room looks sometimes.
    Please work together to pass the Credit Cardholders' Bill 
of rights today.
    [The prepared statement of Ms. Sherry can be found on page 
276 of the appendix.]
    Chairwoman Maloney. Thank you. Our last panelist, Mr. 
Mierzwinski.

  STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, 
              U.S. PUBLIC INTEREST RESEARCH GROUP

    Mr. Mierzwinski. Thank you, Madam Chairwoman, and members 
of the subcommittee. I am Ed Mierzwinski with the National 
Office of the State Public Interest Research Groups. We take on 
powerful interests on behalf of our members.
    It's a privilege to be before the committee again to talk 
about this important issue. The question is, how did we get to 
where we are today? Very quickly, I would summarize that we 
really have three problems. First, we have the problem of 
preemption by the courts, the Congress, and then the OCC, 
asserting broad preemption first of State rights to protect 
their citizens against the credit card industry; second, taking 
away the rights of State attorneys general to enforce the laws 
when credit card companies break the law.
    Second, as you have heard, these contracts that Senator 
Levin called incomprehensible all include a clause that says we 
can change the rules for any reason at anytime, and including 
no reason. In addition, to that clause, they all include a 
clause that essentially prevents consumers from being able to 
go to court. So attorneys general cannot enforce the law, nor 
can consumers through the binding mandatory arbitration 
provision. We are left with the regulators.
    Contrary to the views expressed by some of the regulators, 
although I want to except the FDIC, which I was pleased to see 
supported your legislation, or at least many parts of it, it is 
not the view of this consumer advocate that the OCC enforces 
the laws. The OCC is primarily a cheerleader for banks. The 
more banks that become national banks, the bigger the budget of 
the OCC under the way the OCC is funded through bank 
contributions, not the regular appropriations process. That 
cheerleader role conflicts with the supervisory role, and may 
be one of the reasons no big bank has been publicly punished 
for breaking a credit card rule since Providian in the year 
2000.
    And that is just the way it is. The regulators don't 
enforce the law. The banks do what they want to do. Consumers 
are left in the situation that we're in today. But if we don't 
have the regulators helping us, we have to rely on the 
Congress.
    Oh, and by the way, in terms of regulators, we also have 
the Fed. I would agree with Senator Levin, who said the Fed's 
deliberations are endless. And maybe they'll finish this rule 
by the end of the year, but then will it be enforced? I don't 
know. It is better to have a law than to wait for the 
regulators.
    And so your bill, as my colleagues, Mr. Plunkett and Ms. 
Sherry, have articulated, does many important things to enforce 
the law and improve the situation.
    First, it says no retroactive application of universal 
default. We prefer no universal default at all. But the worst 
part of it is applying it to the old balances. So that is a 
very strong provision.
    The other provisions of your bill. We strongly support the 
payment allocation provision, and we believe that is a 
reasonable provision that will be fairer to consumers who don't 
understand that if they make a $1,000 payment, it will only 
applied to their lowest balance.
    And the other provisions in your bill are also very 
important. As Mr. Plunkett pointed out, and as I concur in my 
written testimony, your bill doesn't go as far as we would 
like. We would like to put usury ceilings back in place. We 
would like to impose limits on the fees that banks can charge.
    I believe that it is an unfair and deceptive practice of 
banking lobbyists to assert that your bill imposes price 
controls or is a form of price-fixing, because you do not do 
either of these things. Your bill is a moderate approach that 
does not impose price controls in any way. So for that reason, 
we would support it.
    The provision that I would like to talk about now is--we 
talked a little bit about earlier that the banking industry 
makes the most money on credit cards. That's a fact. It's a 
fact documented by the Federal Reserve Board. It is something 
that everybody agrees on. Every year, the Federal Reserve Board 
puts out a report that says credit cards are the most 
profitable form of banking.
    There are three ways the credit card industry makes money. 
The first one is they're imposing greater fees on their 
existing good customers, which is the subject of your bill. 
Second, they try to recruit new customers from existing 
cardholders of other banks. But that's expensive; it costs a 
lot of money to kill the trees that they kill to send out the 
5.7 billion solicitations each year.
    The third thing they do is, they try to recruit new 
customers. And there are really two major populations. But 
there is a third one, the subprime customers, who have 
previously defaulted on cards. They offer them very expensive, 
unfair cards.
    And the two kinds of customers they're going after are 
either immigrant populations who never had cards or students 
who never had cards.
    And in response to Mr. Cleaver's comments earlier, I would 
point out that PIRG is running a 40-campus campaign to educate 
college students about credit card debt; we're handing out at 
our own credit card tables FEESA--it sounds like VISA but it's 
not VISA--FEESA. We're handing out our own credit card 
literature and we're handing out free lollipops that say, 
``Don't be a sucker.''
    We also recently issued a report, ``The Campus Credit Card 
Trap,'' which found that most students--
    Chairwoman Maloney. The gentleman has to wrap up, even 
though these are important points.
    Mr. Mierzwinski. Right. It found that most students support 
strong reforms for the credit card marketing on campus, and we 
would like to work with the committee on improving the bill by 
adding some provisions on campus credit card marketing and 
marketing to youth.
    We appreciate your time.
    [The prepared statement of Mr. Mierzwinski can be found on 
page 186 of the appendix.]
    Chairwoman Maloney. Thank you very much.
    I first of all would like to thank all of the panelists for 
all of their hard work and for participating in what has been a 
very deliberative process, and for participating in the credit 
cardholders' bill of rights, and also our best set of practices 
and values that we came forward with.
    At the last hearing we heard from the Bank of America, 
Capital One, and Chase. And after the testimony today from the 
other issuers, we will have heard from the six largest credit 
card issuers in our country.
    I would like to note that some of the practices that are 
contained in my bill are practices that some of you have 
voluntarily abandoned, and I truly applaud you for these 
efforts.
    A number of these practices I would consider some of the 
best practices in the credit card industry. In my legislation, 
I seek to adopt a number of them uniformly, so that all 
consumers have the protections that they provide.
    I would like to ask the issuers a question that was raised 
by Mr. Plunkett in his testimony, and Ms. Sherry in hers. And 
that is, could you identify which of the practices in my 
legislation you would consider to be the most difficult to live 
by, and in doing so, can you explain why it presents a 
difficulty?
    I refer to their testimony on risk-based pricing. And given 
the studies by the GAO and the Federal Reserve--and I'd like 
unanimous consent to place these studies in the record--and 
hearing no objection, they will go in the record--but these 
studies were not able to confirm that risk-based pricing has 
led to lower interest rates, which of course we would all like 
and support for consumers.
    In fact, it has been shown that the main reason in these 
two reports that rates dropped at the beginning of this decade, 
was because of a lower Federal funds rate. And what evidence 
can you provide that risk-based pricing, as you define it, has 
led to lower interest rates for some or all cardholders? 
Because that has been mentioned in previous testimony.
    I will ask all of you to respond, if you would like to, and 
I will begin with Mr. Carey.
    Mr. Carey. Congresswoman, you had a number of questions 
there, and I'm wondering whether you could break them down for 
me? I apologize.
    Chairwoman Maloney. Basically, the main question is risk-
based pricing, and some issuers have testified that they 
believe that risk-based pricing lowers interest rates. There 
have been two reports--and this was referenced in the testimony 
of Mr. Plunkett and Ms. Sherry--specifically from the GAO and 
the Fed, that have said that it does not lower interest rates. 
And in fact, in those reports said that the lower Federal funds 
rate was the reason that interest rates were lowered.
    So my basic question is, can you provide any facts or 
figures or statistics or analysis that shows that risk-based 
pricing as you define it has led to lower interest rates for 
some or all of your cardholders?
    Mr. Carey. I most certainly can. It was in my testimony, 
but if you go back to a model where we were a number of years 
ago, everybody was at a much, much higher rate. We had very low 
late fees, we had very low over-the-limit fees. And everybody 
had a $35 or $50 annual fee.
    What has happened over time is that banks have been able 
to--in a very, very competitive business--better calibrate the 
risk and do risk-based pricing when they acquire an account, 
and offer very, very competitive rates upfront. And they are 
able to do that because they know that in Citi's example, if 
the customer's credit risk profile changes and the customer 
defaults on their agreement with us, we have the ability to re-
examine the customer's risk profile and re-price it 
accordingly, thus, shifting the cost of the credit risk to 
those that are the most credit-risky, and leaving those that 
are not at this very competitive rate.
    If you look at our portfolio over a number of years, what 
you would see is the actual--the pricing for credit cards, for 
example, this year over last year, is either at the same rate 
or lower than it was the previous year. That was about 90 
percent of the portfolio, and only about 10 percent of the 
portfolio was actually higher.
    So that's the data that I would refer to. I also think the 
Congressional Research Service, which is cited in my testimony, 
actually supports the notion about risk-based pricing.
    Chairwoman Maloney. My time is almost up. Later, I would 
like the consumer groups to respond, but right now, I want to 
recognize my colleague's time.
    Is there any other issue you would like to respond to?
    Mr. Minetti. If I can add one thing to it, which is that I 
think the overall interest rate has remained the same. But one 
fact that the study doesn't mention is that credit cards have 
become much more available to a segment of the population that 
they were not previously available to. So I think if you look 
at the same customers that the credit card companies had 10 
years ago, for those customers, the rates have come down. For 
new customers, some of whom are subprime, the rates are higher. 
The blended rate is the same, but not when you break it down 
into two constituents.
    Chairwoman Maloney. Okay. My time has expired. The Chair 
recognizes Congressman Castle.
    Mr. Castle. Thank you, Congresswoman Maloney. Let me start 
with this. Let me ask Mr. Plunkett and Ms. Sherry and Mr. 
Mierzwinski, have you personally read Regulation Z in its draft 
form that the Federal Reserve has issued? You are nodding your 
heads ``yes.'' You are sure?
    [Chorus of ayes]
    Mr. Castle. Because I want to ask questions about it if you 
have. You all have? Do you have any objection to what is 
included in Regulation Z? And one of you testified--I think it 
was Mr. Mierzwinski--you'd prefer to this a law. I understand 
that. But do you have any concerns in Regulation Z, either in 
terms of omission or in terms of something included with 
respect to addressing many of the issues that have been raised 
at these hearings today?
    I'm asking any of you.
    Ms. Sherry. I'll take the question, initially. I would say 
that they have done a very good job with outlining some new and 
improved disclosures. Disclosures, of, really are not going to 
protect people. Legislation protects people--substantive 
regulation.
    They have also, I think, left out some key things in their 
attempt to tell consumers about fees, etc. They have in the 
fee-inclusive APR idea they have, they have actually left out 
penalty rates, penalty fees. Excuse me. Like late fees and 
over-limit fees. And I think these are a major cost, as, Mr. 
Carey even alluded to, of carrying credit today. So that's one 
thing.
    I also am very glad that they are looking into unfair and 
deceptive practices act type rules under the Federal Trade 
Commission authority, because that is one thing that was 
missing from the Regulation Z to begin with.
    Mr. Castle. Okay. Any comments from either of the other 
two?
    Mr. Plunkett. Congressman, here are three examples to 
buttress Ms. Sherry's point that disclosure, while helpful, 
will not solve some of the underlying problems in the 
marketplace. We have heard criticisms today about the payment 
allocation methods that issuers use, the use of retroactive 
interest rates on existing balances, and of universal default. 
Two of those three practices are used by virtually every issuer 
that I am aware of, so shopping around the marketplace isn't 
going to help you there.
    On universal default, that is what we often call a back-end 
process; that is, you get your card, you get your standard 
interest rate or your teaser rate, and you only deal with it 
after the fact. There is really no evidence that consumers now 
in the marketplace shop based on back-end practices by credit 
card companies. So, shopping doesn't help you much there, 
either. That is why you need substantive regulation on these 
three concerns.
    Mr. Mierzwinski. I would briefly, Mr. Castle, say that 
along with other consumer groups including the National 
Consumer Law Center, our group submitted over 90 pages of 
comments to the Fed. I think I have a footnote linking to them. 
And one of the things that is missing again is we believe the 
Fed has existing authority to do some of the things that are in 
Chairwoman Maloney's bill, such as fixing the due date problem 
and the postmark problem. They simply don't do it; that's why 
we need--
    Mr. Castle. Well, they could do it.
    Mr. Mierzwinski. They could do it.
    Mr. Castle. We don't know what they could do in final form.
    Mr. Mierzwinski. They could do it, but--
    Mr. Castle. They have not done it.
    Mr. Mierzwinski. Because they don't do these things, and 
that is why we're pushing the legislation.
    Mr. Castle. Okay.
    Let me turn to those representing the issuers here. I noted 
this before of the other large issuers. Many of your practices 
have changed, so that you're doing a number of the things that 
have been asked for by the rest of the panel with respect to 
eliminating universal default and a few other areas, the 
anytime pricing, or whatever. Aren't we as consumers and as a 
country best served by having those practices either in a 
Regulation Z or in legislation so that everybody would be in 
the same circumstance? Or do you feel it should be a market 
decision and it should not be regulated or legislated against?
    Mr. Carey. Congressman--no, that's all right, that's fine.
    Mr. Castle. I gave you the volunteers.
    Mr. Carey. I gave the example of what Citi had done.
    Mr. Castle. Right.
    Mr. Carey. That we thought these were significant 
improvements and we thought transformed the business. You 
actually heard from two other companies today about their best 
practices. And frankly, a lot of their best practices I am not 
aware of, because I can't take the time to go through very, 
very complicated disclosures that don't make a lot of sense and 
don't help the average consumer.
    What the changes in Regulation Z are going to do is 
actually be able to outline those differences, so that American 
Express can compete against Citi, and Discover can compete 
against Citi for what are the best practices. I saw no lift, no 
change, in the great things we did for consumers.
    It is because consumers couldn't see it, and that is why I 
am supportive of a much more market-based approach where 
consumers have the power to make decisions and they can vote 
with their feet and go to the issuer that has those best 
practices.
    So I would look to that first, but I do believe there are 
certain practices that are so outrageous, so unfair that they 
should be stopped. And I believe the Fed already currently has 
that authority, either under UDAP or under Reg Z.
    Mr. Castle. I yield back.
    Chairwoman Maloney. Thank you. The Chair recognizes 
Chairwoman Waters.
    Ms. Waters. Thank you very much, Madam Chairwoman.
    Let me start with Mr. Carey, I don't know whether or not 
you have said this already, but do you support Ms. Maloney's 
bill?
    Mr. Carey. Congresswoman, I think the work that 
Congresswoman Maloney and her staff and the other people who 
have worked on it have done is a terrific first step. I 
actually do, however, support credit card reform through the 
tools that the Federal Reserve has presented with the 
amendments to Regulation Z as well as their work in UDAP. I do 
support the direction in which she is going.
    Ms. Waters. Which of the points in the credit cardholders' 
bill of rights do you disagree with? Do you have it before you? 
The nine points of the bill?
    Mr. Carey. I don't have that document before me. I am 
reasonably familiar with it.
    Ms. Waters. Arbitrary interest rate increase?
    Mr. Carey. Again, I think that is something that needs to 
be looked at through a rulemaking process because of the 
consequences that may occur. But I do believe that is something 
that ought to be looked at, and there out to be robust debate 
around that, and I think the regulatory process that the Fed is 
working on will do that.
    Ms. Waters. The second point is that credit cardholders who 
pay on time should not be penalized. Do you think that is a 
good idea?
    Mr. Carey. I am not aware of any issuer who penalizes a 
customer, who--so I support that.
    Ms. Waters. There has been a lot of discussion about due-
date gimmicks.
    Mr. Carey. Well, again, I think from the reputable issuers, 
you wouldn't get a disagreement.
    Ms. Waters. Do you think that the disclosure that is done 
and that is discussed so much today is enough to protect 
consumers, and that there is no need for the Congress to 
produce legislation on all these issues?
    Mr. Carey. I believe that, again, the Federal Reserve has 
the power to first look at all of those issues that people and 
consumers are concerned about, and to come up with a solution 
that makes the most sense for consumers and for consumer 
lending.
    Ms. Waters. They have been looking all of these practices. 
Do you think they have done a good job?
    Mr. Carey. Their first work hasn't been done and they're 
actually in sort of a middle phase; they are, as they announced 
today they are--
    Ms. Waters. Well, I'm talking about historically. As I 
understand it, they see your products before they hit the 
market, and they have an opportunity to discuss them, to talk 
with you about them, and to do disclosure. Do you think that 
they could perhaps engage you a little bit more, and discuss 
why perhaps some of these practices would be harmful to the 
consumer?
    Mr. Carey. I am absolutely convinced, certainly through the 
attention of this committee, that, in fact, will occur.
    Ms. Waters. Mr. Sharnak?
    Mr. Sharnak. Yes.
    Ms. Waters. Which of these points of Ms. Maloney's bill do 
you disagree with?
    Mr. Sharnak. As I said in my testimony, we support the 
goals of the legislation. We don't do universal default. We 
don't raise people's rates for any other reason than if they 
violate their terms and conditions on that specific account.
    We don't change due dates. We don't penalize people who pay 
on time. We don't engage in a lot of those practices, so I'm 
not going to try to defend them.
    Now as I did say, there are a couple of provisions in Ms. 
Maloney's bill that we think need to be amended. There needs to 
be a distinction between what we'll call on-account and off-
account behavior, because it is very different.
    I do think that payment allocation, as I said in my 
testimony, as written, will make credit less available to 
certain groups, low-rate interest to certain people. So those 
are the two provisions, and the one specifically on on-account, 
off-account, the 45-day notice for on-account behavior where it 
has been disclosed upfront in the application process in the 
terms and conditions, we don't think that that should go 
forward.
    Ms. Waters. Do I have any more time, Ms. Maloney? I don't 
want to take more than my time.
    Chairwoman Maloney. Your time is expiring, Chairwoman 
Waters.
    Ms. Waters. Thank you.
    Chairwoman Maloney. But I do want to say that there is a 
distinction in the bill on on-account and off-account behavior. 
And I just want to just point that out.
    Ms. Waters. Does the Chair have the liberty to explain 
that? Because evidently, there is a difference of opinion here.
    Chairwoman Maloney. Well, in the bill on on-account 
behavior, you cannot retroactively put interest rates on the 
actions there. On off-account behavior, you can notify and go 
forward with it. But there is a distinction in the bill.
    The Chair recognizes Ms. Biggert.
    Mrs. Biggert. Thank you, Madam Chairwoman.
    For the issuers, given your broader knowledge of the 
industry as a whole, can you tell me what the consumers this 
morning told us about in their experiences? Is this typical of 
the industry as a whole? Mr. Minetti?
    Mr. Minetti. I think it is unfortunate that it happened to 
those consumers. At Discover, that is fairly atypical. I don't 
mean to imply that we are perfect, but we do the best we can 
for our customers. And as I mentioned before, we get over 30 
million calls a year, and we actually have very, very few 
complaints.
    Mrs. Biggert. Okay.
    Mr. Sharnak?
    Mr. Sharnak. Those individuals, those behaviors they 
described that caused their rates to go up wouldn't happen at 
American Express.
    Mrs. Biggert. Okay.
    Mr. Carey?
    Mr. Carey. Congresswoman, exactly the same--those practices 
are not practices that we engage in at all.
    Mrs. Biggert. Okay.
    Then back to Mr. Minetti. You know, we've heard some talk 
about what happened to Discover in the UK.
    Mr. Minetti. Yes.
    Mrs. Biggert. And that some of the changes that might be 
coming in this bill would cause a problem here in the United 
States?
    Mr. Minetti. Well, what happened in the UK is that the 
regulators limited the amount of fees that could be assessed on 
accounts, among other things, and what it created was an 
environment where the profitability of those businesses no 
longer met the hurdles that we're required to have. And as a 
result, we have pulled out of the UK; we no longer do business 
in the UK.
    Mrs. Biggert. Yes.
    Mr. Minetti. You know, there are some provisions that could 
have unforeseen impacts, and I think we need to look at them 
long and hard before we go forward with them.
    Mrs. Biggert. Okay. Thank you.
    Then, Mr. Carey, has Citi taken any steps to help people 
avoid fees for late payments, or going over their credit limit?
    Mr. Carey. Generally, I mean as this is a business practice 
for us, and we have heard a lot about this, but it is becoming 
increasingly expensive to acquire customers, particularly good 
customers, who pay their pay their bills on time, and use the 
product wisely, all of those things. It is very, very expensive 
to bring customers on because of the intensive competition 
that's in this industry.
    When a customer has trouble, we want our customers to 
engage with us. And if they feel that they have been treated 
unfairly because the check came late, or they were traveling 
away, or there was some explanation to explain why their 
payment was late or why their card would have gone over the 
limit, we want to engage with them.
    Now some customers because of--and again, we only reprice 
when a customer defaults on the agreement between Citi and the 
customer, and then at that point in time we look at the 
customer's overall credit risk profile, and depending upon 
that, we may change the pricing to accompany or tied to risk.
    What we don't want to do is, we don't want to tip that 
customer to the point of default. There is no interest in us 
being able to do that. In most cases when they incur a fee or 
they are default repriced, customers do exactly what you would 
want them to do. They pay off their balances faster, they start 
paying on time, they incent the customer to do the thing you 
would hope that they would do.
    But there is a small set of customers--and I will grant you 
that--that because of the repricing or because of the change, 
we might have--don't know--contributed to that. But, again, it 
is not in our best interests, and we don't get it right all the 
time; we have 45 million customers, and from time to time, I 
hate to say it, but we don't get it right.
    But our goal is not to cause that. There is no incentive 
for me to force a customer to default and not pay on the loan. 
And so we do engage with our customers, and we have a number of 
temporary and work-out programs, depending on where the 
customer is and the problems that they are facing.
    Mrs. Biggert. Would you say that when a customer tries to 
call you, there was some talk this morning that it was very 
difficult to reach a real person. Have credit card companies 
had to put more people on the job to answer their phones?
    Mr. Carey. Well, again, I think there is a little bit of a 
misunderstanding of it. We rate our customer service--we take 
our customer service very seriously--again, we believe it is a 
competitive differentiator--so we have analytics, which I'm 
sure my competitors do as well, called ``average speed of 
answer,'' and we try to drive a performance based on that.
    And so when a customer calls--the first thing virtually 
every issuer does is, you get a recording. Because most 
customers who are calling just want to know what their balance 
is. They key in their account number, they find out their 
balance, they don't talk to a representative. They like that.
    But there are other pieces of the phone tree, where if they 
push ``4,'' they would get a representative, or if they push 
``0,'' they would get a representative.
    Then there is a hold time. The hold time for us and the 
goal for us is certainly under 60 seconds. We try and do that 
the way we manage the business, because we know if it's any 
longer than that, then customers are dissatisfied.
    Again, we want to compete on performance and value and this 
is how we do it, and I'm convinced that my competitors next to 
me have the same thing.
    Chairwoman Maloney. Thank you. The gentlelady's time has 
expired. The Chair recognizes Congressman Cleaver.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    I think I'm probably the last questioner, so I'll try to be 
brief, if you will respond by being brief in your responses. I 
raised the question earlier when some of you were here about 
the late payments. It is my view that the late payments hurt 
the credit cardholder, but they do not hurt the credit card 
company. It seems to me that the credit card companies have 
become addicted to the late fees that are paid, and that it is 
actually a part of the revenue stream that supports the credit 
card company.
    Mr. Carey, am I correct or incorrect? Help the world 
understand this.
    Mr. Carey. There is certainly revenue that comes from the 
fees, but again the goal here is to drive customers not to be 
late. We actually give customers the tools to be able not to be 
late, by having alerts that can go to their e-mail or on their 
cell phone to tell them when their statement is, how many days 
before. We give the customer complete control to avoid any type 
of fee at any time.
    Mr. Cleaver. I want to get Ms. Sherry's or Mr. Plunkett's 
response to that. Just to follow up, though, Mr. Carey, are you 
saying that the revenue from the late fees does not exceed the 
cost of sending out a notice or whatever you do for a late 
payment?
    Mr. Carey. I don't know about the cost, but what I can say 
is that when investors who are in the securitization market 
look at credit quality, one of the things they look at is 
whether the account is delinquent or not. And that affects the 
pricing of how we're able to place those loans. So being late 
is, first, a terrific indicator of increased credit risk, and 
it's a terrific indicator for investors who look at the quality 
of the loan portfolio and say, ``What percentage of those 
customers are delinquent?''
    So it is important. You know, we don't run our business 
that way about the cost of individual--what we want, again, is 
we want customers not to pay late fees; what we want them to do 
is pay on time, and we give them the tools to do that.
    Mr. Cleaver. Mr. Plunkett?
    Mr. Plunkett. Yes. I do think for some issuers that penalty 
fees have been driven by the need for greater income, rather 
than by the need to deter bad behavior on the part of 
borrowers. The GAO reported in 2006 that the size of these 
fees, over-the-limit fees and late fees in particular, had 
grown in the last 10 years far faster than the rate of 
inflation. And you are facing a $35 to $40 late fee now if you 
are late by a single day, with some issuers. But that is 
another issue.
    There doesn't seem to be differentiation by some issuers as 
to whether the consumer is late one time by an hour or a day, 
or late repeatedly. They still get hit with the same one-size-
fits-all fee. So I think there is some evidence that for some 
issuers, the goal has been to drive up revenue, not to deter 
bad behavior.
    Ms. Sherry. And I think the point needs to be made here, 
Mr. Cleaver, is that you know being one day late, that is a 
quite a bit different than a true default, which probably 
investors would be concerned about of a 30-to-60-day late that 
is reported on the credit report. Otherwise, they would have no 
way of knowing about a one-day late that results in a $40 fee.
    Mr. Cleaver. Let me go back. I am having some difficulty. 
One of you represents my credit card company. I only have one 
credit card. I'm having difficulty with the fact that a company 
as successful as those represented at the table are not aware 
of whether or not the fees they receive exceed the cost of the 
administration of late payments. I mean those companies, your 
companies, are some of the top companies on the planet. And I 
can't believe that a dumb Methodist preacher would come up with 
this issue, and the credit card companies had never even 
thought about it.
    Chairwoman Maloney. The gentleman's time has expired, but I 
invite the issuers to respond to his important question.
    Mr. Sharnak. As I said in my testimony, we give consumers 
at least 72 hours before we apply a late fee; that is at least 
3 days. We have many products that don't have late fees. We 
offer choices to our consumers.
    So we have a clear card from American Express that has no 
fees whatsoever, no late fees, no over-limit fees, no bounced 
check fees. So we do give consumers choice. And as was said 
earlier, they do have the ability to get alerts from us when 
their bill is about to go delinquent, so we give consumers many 
different choices and options, including a card that wouldn't 
have late fees.
    Chairwoman Maloney. Okay. Thank you very much. The Chair 
recognizes Ranking Member Bachus.
    Mr. Bachus. I thank the chairwoman. The first thing I would 
say is to the three issuers, you agreed to come here. You 
volunteered to testify. I mean we just didn't arbitrarily say 
to Citi, American Express, and Discover, ``You will be here.'' 
We asked everybody if they would testify. And there may have 
been others too, but the three of you said that you would come.
    That to me indicates something good, indicates you were 
willing to come here, you were willing to sit down, and you 
were willing to say, ``These are our practices.''
    I don't know if the consumer groups would agree, but to me 
that's at least anecdotal evidence that you probably do a very 
good job, or at least a better job than some of your peers.
    I appreciate that. You know, maybe no good deed goes 
unpunished. And you know, you may be in tomorrow's newspapers 
here answering questions, and people won't realize that your 
three organizations volunteered to come. But I thank you.
    Let me just ask this--because I have been in negotiation on 
something else entirely out of this committee for the last 20 
minutes--is there anything you would like to say? I'm just 
going to give each one of you 30 or 40 seconds to respond to, 
you know, anything that has been asked here or anything that 
has been said. You don't have to take that opportunity, but I 
would just go from left to right, starting with Mr. Carey. I 
have enjoyed our visits together in the office, and you're 
certainly knowledgeable. And I know that you are committed as 
American Express and Discover. You have made changes. You know, 
American Express kind of has a different model, so you know 
some of these problems that we talk about have never been a 
problem for American Express customers. And we don't hear--you 
know, I don't recall hearing any complaints about Discover.
    I appreciate the consumer groups for your concern for the 
American people and for being advocates for them.
    Mr. Carey. I appreciate the opportunity. I feel like I have 
been talking a lot already. But I think the one thing that I 
would say is that we believe that there's a terrific 
opportunity to transform the way this business is done. And we 
place a lot of reliance on the work that the Federal Reserve 
has done in their careful analysis in looking at disclosures. 
We believe that when that work is completed, for the first time 
we will see a truly vibrant marketplace where those 
institutions, those credit card issuers will be able to compete 
on a level playing field, and those that truly have the best 
practices will see a competitive advantage against those that 
will not.
    And we think that is the best way to drive change in this 
business. Because the marketplace is not transparent, people 
don't have a true ability to understand how their card is 
different from that of competitors. We don't see those changes. 
You know, as I was commenting earlier, I'm unaware of my 
competitors' best practices, because I can't take the time to 
read through disclosures that simply don't work. And what the 
Fed is trying to do is create something where literally 
consumers can line up the disclosures like cereal boxes in a 
grocery store, and compare the products that give them the most 
value.
    So we look forward to the effort, and we are very much 
engaged in it, as you know. Thank you.
    Mr. Bachus. Sure.
    Mr. Sharnak. First, thank you for taking note that American 
Express hasn't been cited by any of these consumers for 
practices. We haven't had to change any of our practices, and 
we have not changed one practice, because we do believe our 
practices are fair.
    We do support the goals of the legislation and think they 
are noble. And I do want to just throw out that we did win the 
J.D. Power award for customer satisfaction.
    That last thing I want to say is the reason--
    Mr. Bachus. I think that's good. I think that speaks well 
of you.
    Mr. Sharnak. Thank you. The last thing I want to say is 
that Mr. Carey was not aware of some of our practices because 
every day we do things for our customers, and we don't brag 
about it. We just do it in the normal--
    Mr. Bachus. Now I don't think he was talking about you. I 
never got that idea.
    Mr. Sharnak. Well, I think he was talking about 
transparency. So we do lots of things for consumers that we 
don't go around bragging about. We give them extra time to pay 
their bills, and we do lots of things. And we just think it's 
the right thing to do, and we go about it every day.
    Chairwoman Maloney. Thank you.
    Mr. Minetti. I want to thank you for giving me the 
opportunity to speak to the subcommittee. We agree with most of 
the provisions in the bill. As a matter of fact, our practices 
already reflect many of those provisions. There are some that 
we are in the process of changing, for instance, giving 
customers the opportunity to opt out or being over limit, I 
think, is a great practice, and we will implement that.
    And there are some that we believe might have unforeseen or 
unintended consequences, or might be unnecessary. But I think I 
agree with what my competitors have said. The most important 
thing for us is to do what's best for the customer. We are in 
business for the customers, and we want to have them for a long 
time, so we certainly wouldn't do anything to harm them.
    Mr. Bachus. Thank you.
    Mr. Plunkett, you don't have to say anything if you don't 
want to.
    [Laughter]
    Chairwoman Maloney. All right, enough grumbling over there. 
Thank you, Mr. Bachus.
    Mr. Plunkett. Let me say this. I believe Mr. Carey when he 
says that there has been no intent to cause default among 
credit cardholders. And I am talking about the whole industry 
here; I am not talking about just one issuer. But the truth is, 
the last 10 years have been like the Wild West in the credit 
card industry. Underwriting standards were lowered. Loans were 
made that shouldn't have been made. Interest rates, whether 
teaser interest rates or balance transfer interest rates were 
offered, and when they reset at a much higher level, just like 
mortgage loans, the consumers in some cases couldn't afford 
them. These were unsustainable loans, and defaults occurred.
    And then, as we heard from Professor Ausubel at the last 
hearing, the issuers have an interest at that point in trying 
to get as much money from cardholders in trouble as they can, 
as quickly as they can. He called it a ``pooling'' problem, 
which further destabilizes the finances of some cardholders and 
puts them in a bad situation. So that is where we are now, with 
delinquencies rising and charge-offs, or the amount of money 
written off by the credit card companies rising, and a number 
of people in shaky financial condition.
    Thank you.
    Mr. Bachus. Thank you.
    Ms. Sherry. Thank you, Mr. Bachus.
    I would like to make a couple of points actually. One is 
the thing about credit card rates going down. Well, Consumer 
Action surveys we have done since the mid-1980's don't really 
show any major lowering of credit card rates for consumers 
except when the underlying indexes are going down, as the point 
Mrs. Maloney made. So the variable rate cards do go down when 
the indexes like the prime go down, but otherwise, we have seen 
absolutely no kind of direct causality to that over the years 
as we have done our surveys.
    And the other thing is, again Mrs. Maloney mentioned that 
some of the top issuers are stopping unilateral change of terms 
and the rest of it. Well, just last Friday, I went onto the Web 
sites of all five issuers, and I found language about change of 
terms for any reason on all cards offered by those five 
issuers. But the thing I want to point out is that even Citi, 
which does have its very laudable practice of letting people go 
2 years or more without any change of terms, then does actually 
apply a standard of anytime, any reason type of change of terms 
at that point.
    So we are seeing this still.
    Mr. Mierzwinski. Mr. Bachus, I appreciate the question. And 
I would simply say, as I said in my testimony, that any 
marketplace needs rules to be an effective marketplace. To use 
Mr. Carey's example--
    Mr. Bachus. In fact, I think the free market system depends 
on structure, rules.
    Mr. Mierzwinski. Right.
    Mr. Bachus. And--
    Mr. Mierzwinski. And that's really the summary of what I 
was just going to say. To use Mr. Carey's comment about the 
cereal that you choose from, well that's okay, but there's an 
FDA guaranteeing that the cereal is of a high enough quality. 
And to use Mr. Plunkett's analogy of the Wild West, which I 
absolutely agree with, we need a sheriff in this marketplace, 
and the credit cardholders' bill of rights should be the 
sheriff setting minimal standards, and then the best practices 
should go above the minimal standards.
    Mr. Bachus. Thank you.
    Chairwoman Maloney. Thank you very much for your questions 
and for being here with us, and I thank all of the panelists, 
all of whom voluntarily came, and all of whom participated in 
numerous deliberative meetings prior to this hearing.
    I would like to go back to the question of my colleague, 
Congresswoman Biggert, and ask you, Mr. Minetti, you discussed 
how fees were limited in the UK, which required you to pull out 
of that market. Can you point out any part of my bill or the 
bill that we're considering that puts a cap on a fee amount or 
a price cap or does actually anything else that was done in the 
UK? I, for one, respect the free-market system, but I also 
believe very strongly in notice and choice, and purposely did 
not include any fee caps or price limits as many bills before 
this Congress do, but relied heavily on giving adequate notice 
to consumers when there was a fee increase, and letting them 
pay off their existing balance at the agreed-upon contract, 
allowing them if they so chose to go to a higher fee. But our 
bill does not have any fee limits or price controls, as did the 
UK. Can you clarify that? Did you see any price controls in 
this bill? They are not in the bill, so I just wanted you to 
clarify the question for Mrs. Biggert.
    Mr. Minetti. Chairwoman Maloney, I think you have been very 
thoughtful in your bill, and your bill does not contain any 
price restrictions or any price limits. I was answering the 
specific question about the UK and what happened in the UK.
    Chairwoman Maloney. Yes.
    Mr. Minetti. In that case, there were price restrictions 
that were enforced, and we had to pull out of the market, 
because it wasn't profitable for us. I am sure that our pulling 
out of the market was not good for the consumers in the UK.
    Chairwoman Maloney. Okay. I just wanted to say that those 
who are opposed to my bill continually put out memos and 
statements that I have price controls in it. And I purposely do 
not have any price controls or fee limits. Industry is free to 
make their business model, make their decisions, but whatever 
your decision is, I think it's only fair that consumers be told 
what this decision is, and allow them to make their decision if 
the terms of the contract change.
    I would like to ask, going back to the some of the 
testimony from Mr. Sharnak, what evidence can you offer that 
requiring consumers to pay off lower interest rate debt before 
higher interest rate debt, a practice that financial educators 
say is harmful, is financially beneficial to your cardholders?
    I would like to just point out that in my bill or the bill 
that Congressman Frank and I and many Members, 101 Members of 
Congress have been working on, requires that all payments be 
allocated pro-rata when a cardholder has two rates. As you 
know, in Senator Levin's bill and other bills, they require 
that the lower interest rate debt be paid off first, and some 
of our consumer panelists have testified today that they feel 
that is what should be done. I purposely was very balanced, and 
said that it should be allocated between the two rates. But you 
testified earlier that you believe that they have to pay off--
your statement that paying off the higher rate first lowered 
rates. Could you please clarify that for us, or comment further 
with us?
    Mr. Sharnak. Sure. When consumers take one of our low rates 
now, on average, their rate decreases by 2.8 percent on their 
account. So, today it is working for the overwhelming majority 
of the consumers. The new payment allocation that you're 
proposing will raise the cost of doing this, because we cannot 
allocate it to the lowest payments first. All I said is that it 
will limit our offers to many, many consumers. We will not be 
able to make it to as many consumers as we do today. And so 
those who are getting the benefit on average of 2.8 percent, 
there just won't be as many offers in the marketplace.
    Chairwoman Maloney. I would like to--my time is expiring, 
but I would like to invite any of the consumer panelists to 
comment on this provision, and any additional information you 
could provide to the members of the subcommittee?
    Mr. Plunkett. Well, I would just like to say that I think 
it is an important provision. Given the way that this industry 
works, I think it is very likely that we are still going to see 
competition between the issuers to lure customers, especially 
very creditworthy customers, away from each other. And the 
balance transfer offer is a key way to do that. I would like to 
see numbers to show that this provision would somehow lead to 
fewer balance transfer offers.
    It seems hard to fathom, given that is the business model 
for the most significant credit card issuers in this country. 
And I would like to remind the subcommittee how damaging this 
practice can be if somebody ultimately ends up paying a higher 
interest rate, once that balance transfer offer resets, or a 
higher interest rate because their new purchases on the new 
card are at a very high rate. That can be financially damaging, 
so I don't accept Mr. Sharnak's notion that, in all cases, this 
saves customers money. I don't think there is evidence to show 
that.
    Chairwoman Maloney. Thank you. Ms. Sherry, do you--
    Ms. Sherry. Mrs. Maloney, I would just like to add that if, 
in fact, I would even accept what Larry Sharnak has said about 
the fact that overall this leads to lower rates for consumers. 
But in accepting that, I would say that if you're truly 
offering and giving your cardholders a benefit, such as a lower 
rate on balance transfer, why not make that a legitimate rate 
that they can rely on? Why use the bait-and-switch tactic of 
bringing them in at 0 percent, when overall, with payment 
allocation practices, they actually are not going to pay 0 
percent?
    So why not really make it clear from the get-go what they 
really are paying? I think many cardholders would be happy to 
get a lower interest rate on a balance transfer and give up 0 
percent, if they knew that the payment allocations were not 
actually causing them to get deeper and deeper in debt as time 
went on.
    Mr. Mierzwinski. I would just add that in addition to the 
balance transfer offers that I get from other credit card 
companies, my own credit card companies, of course, send me 
more blank checks than I think I have from the credit union 
downstairs in the form of their convenience checks, and those 
of course are at the highest rate. And they're trying to 
encourage me to take on the high-cost debt at the same time as 
other companies are trying to lure me. So I would concur that 
we think your provision is a very important change. We don't 
see any evidence that it will hurt consumers.
    Chairwoman Maloney. Thank you. My time is up. I recognize 
Ranking Member Bachus.
    Mr. Bachus. I yield back my time.
    Chairwoman Maloney. Thank you.
    I would like to ask the consumer panel a question that has 
come up repeatedly today from many members of the committee, 
and some of my colleagues have argued against passing the 
legislation because the regulators will be coming up with 
updated disclosure under Regulation Z. I would add that we have 
been waiting for this update for 4 years. And it has also been 
pointed out repeatedly today that the regulators are about to 
propose regulations using their unfair and deceptive acts and 
practices authority, and the current economic uncertainty that 
we're confronting in our country. Could you please respond to 
these arguments and provide me what you believe is the best 
argument? Do you believe we should wait for the regulators to 
act? Or do you think we should move forward? Could you give me 
your best judgment, please? I will start with Mr. Plunkett and 
go down the line.
    Mr. Plunkett. I would urge the subcommittee and the full 
committee to act as quickly as possible to send guidance to the 
Federal regulators as to exactly how they should proceed on 
these crucial questions. I think that too much is at stake to 
wait. Now, if you did decide to wait, I wouldn't hold your 
breath, because your hearing today has enlightened us as to 
what we might see. It is hard to predict what the Federal 
Reserve might write in the way of rules, but I think you saw 
today what the situation is with the regulators. The Fed writes 
the rules, technically.
    But it is a collaborative decision, as the regulators said. 
And the Office of the Comptroller of the Currency, which 
regulates virtually all of the biggest national credit card 
issuers, does not want to address many of the substantive 
problems that your legislation addresses, such as retroactive 
interest charges, unfair universal default rate hikes, and 
payment allocation problems.
    So, with a very significant regulator opposed to those 
approaches, I think it's very likely that we're not going to 
see strong substantive regulation from the Federal Reserve.
    Ms. Sherry. Mrs. Maloney, I think it's a great question. I 
have been with Consumer Action for 13 years, and I have to tell 
you that for 13 years, ever escalating we have been hearing 
from consumers, cardholders, people who have credit cards, that 
there are abusive practices out there in the industry. I think 
you need to act now quickly, because we can't just let this go 
on forever. There are certain things about the industry that 
they have gotten very entrenched with, certain practices that 
they're not going to let go of easily without Federal 
legislation.
    And as Travis really very well notes, we could wait forever 
for some of the regulations to come down.
    Mr. Mierzwinski. Thank you, Madam Chairwoman. I would 
concur. The regulators have ignored or encouraged many of these 
practices for many years, and again regulation should sit on 
top of strong law. Strong law should form the basis for 
regulation. We shouldn't wait for them. You should act first.
    Chairwoman Maloney. Well, thank you. And I really want to 
thank all of the panelists. It has been a long day, and I thank 
you for being involved in the development of this legislation 
and in our many conferences and meetings, and I congratulate 
the issuers who have come forward with best practices and 
standards that I believe others should follow.
    I would like to note that the hearing record will remain 
open for 30 days so that members may submit written questions 
to these witnesses and place their responses in the record. And 
I would just like to conclude by thanking all of you and 
inviting you as panelists to submit additions that you think 
should be part of this legislation, or if you could inform the 
committee of what you consider the most important aspect of the 
legislation, and what ideas you feel should be added or deleted 
in writing, we will certainly consider it.
    Again I thank you very much for your commitment and your 
time and for being here today. This meeting is adjourned. Thank 
you.
    [Whereupon, at 3:30 p.m., the hearing was adjourned.]





































                            A P P E N D I X



                             April 17, 2008

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