[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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Washington, DC 20402-0001
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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