[Senate Hearing 110-769]
[From the U.S. Government Publishing Office]
S. Hrg. 110-769
CREDIT CARDS AND BANKRUPTCY: OPPORTUNITIES FOR REFORM
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HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
DECEMBER 4, 2008
__________
Serial No. J-110-125
__________
Providence, Rhode Island
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York LINDSEY GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
Bruce A. Cohen, Chief Counsel and Staff Director
Stephanie A. Middleton, Republican Staff Director
Nicholas A. Rossi, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode
Island......................................................... 1
WITNESSES
Chung, John, Associate Professor of Law, Roger Williams
University, Bristol, Rhode Island.............................. 9
Lawless, Robert M., Professor of Law, University of Illinois
College of Law, Champaign, Illinois............................ 4
Rao, John, Attorney, National Consumer Law Center, Boston,
Massachusetts.................................................. 12
Small, A. Thomas, U.S. Bankruptcy Judge, Eastern District of
North Carolina, on behalf of the National Bankruptcy
Conference, Wilson, North Carolina............................. 7
SUBMISSIONS FOR THE RECORD
Chung, John, Associate Professor of Law, Roger Williams
University, Bristol, Rhode Island, statement................... 21
Lawless, Robert M., Professor of Law, University of Illinois
College of Law, Champaign, Illinois, statement................. 25
Rao, John, Attorney, National Consumer Law Center, Boston,
Massachusets, statement........................................ 39
Small, A. Thomas, U.S. Bankruptcy Judge, Eastern District of
North Carolina, on behalf of the National Bankruptcy
Conference, Wilson, North Carolina, statement.................. 52
CREDIT CARDS AND BANKRUPTCY: OPPORTUNITIES FOR REFORM
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THURSDAY, DECEMBER 4, 2008
U.S. Senate,
Committee on the Judiciary,
Washington, D.C.
The Committee met, pursuant to notice, at 2:09 p.m., in the
William C. Gaige Hall Auditorium, Rhode Island College,
Providence, Rhode Island, Hon. Sheldon Whitehouse, presiding.
Present: Senator Whitehouse.
OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. SENATOR
FROM THE STATE OF RHODE ISLAND
Senator Whitehouse. The hearing will come to order.
Before we begin, I would like to thank Rhode Island College
for this official field hearing of the United States Senate
Judiciary Committee. I would also like to welcome and thank the
students who have joined us for today's events. Young people
are most likely to start signing up for credit cards in their
college years, so this topic has particular significance to
them.
As I have traveled around our State and talked with Rhode
Islanders, I have so often heard concerns about outof-control
credit card rates and fees. With each passing year, two things
seem to happen: one, the credit card companies get cleverer;
and, two, the consumer gets the result. What was a one-page
credit agreement just two decades ago is now a 20-page, booby-
trap-filled, small-print legal document. Hidden behind the
legalese in these documents are snares that lenders have set
for consumers, including in some cases the right to raise
interest rates for any reason, or in some cases no reason at
all. With things economically as bad as they are today, those
problems hit home harder. Rhode Island's unemployment rate is
9.3 percent, tied with Michigan, as the Nation's highest.
Times are tough in our Ocean State, and the people who are
unemployed or who are underemployed still have living
expenses--rent, mortgage, food, clothes, tuition, medicine.
With winter approaching, you can add to that heating oil,
higher electricity bills, and, of course, holiday gifts for
friends and family. All too often, families make these ends
meet with a credit card and watch the balance go up and up and
up.
About three-quarters of U.S. households have at least one
credit card, and 58 percent of those carry a balance. As of
2006, which is the last year that we have got information for,
the average credit card balance was almost $8,500. Given what
has happened to the economy between 2006 and now, you can bet
that average balance is well above $8,500 now. And,
unfortunately, the practice of the credit card industry is to
kick consumers when they are down.
An $8,500 balance at a fair rate paid on time each month
might be a manageable debt load for an average family over
time. But if that same family falls behind, a 10-percent
interest rate can morph into 30 percent or 40 percent or more,
making full repayment virtually impossible. A payment that is
1-day late results in an average penalty fee of $28, even
though the cost to the credit card company is negligible.
And as the banks feel economic pressure, things gets worse.
Citibank had promised that it wouldn't increase credit card
rates without cause, but earlier this month it reversed its
promise, citing the need to make up for revenues lost in the
mortgage market and elsewhere. The practices of the credit card
industry are unfair. I think they are also unsustainable, and I
believe these practices could lead to further financial
collapse unless Congress acts.
There are several things we can could do in Congress.
Senator Chris Dodd of Connecticut, our neighbor, has the Credit
Card Accountability, Responsibility, and Disclosure Act, which
I have cosponsored. This would outlaw some of the most
egregious credit card practices, including so-called universal
default, where if you default on a different obligation this
credit card punishes you for that other default; and then, of
course, those ``rate increases at any time for any reason''
provisions.
I have also cosponsored Senator Dick Durbin of Illinois'
Protecting Consumers from Unreasonable Credit Rates Act, which
would set a national interest rate cap of, if you can believe
it, 36 percent, inclusive of fees. Think for a minute about a
world in which Congress has to consider capping interest rates
at 36 percent.
I would be remiss if I did not also mention Senator
Durbin's Helping Families Save Their Homes in Bankruptcy Act, a
critical bill that will help stop people losing their homes to
foreclosure. This bill would correct an anomaly in the
bankruptcy law whereby a first primary residential home
mortgage is not allowed to be adjusted in bankruptcy to have
the principal reduced, unlike essentially every other loan
agreement that exists. It is unique that way. I hope the 111th
Congress will pass this change in January and President-elect
Obama will then sign it into law.
In addition to the bills I have mentioned, I also plan to
introduce legislation to restore to individual States the
ability to protect their own citizens from out-of-State
lenders. As Professor Lawless will explain in his testimony, a
Supreme Court case a generation ago, in what appeared to be a
technical matter, stripped States of their historic rights to
enforce such protections.
I am a member of the Judiciary Committee. This is a
Judiciary Committee field hearing. The Judiciary Committee has
jurisdiction over the bankruptcy system, so this hearing is
focusing on using bankruptcy law to protect those who fall prey
to abusive credit card interest rates, with particular
reference to the Consumer Credit Fairness Act, which I am proud
to say Senator Durbin, our Deputy Majority Leader in the
Senate, joined me in introducing this past summer. It would
amend the Bankruptcy Code to disfavor abusive lenders and
thereby encourage reasonable interest rates.
Under the Consumer Credit Fairness Act, claims stemming
from credit card agreements with interest rates above a cap of
15 percent above the Treasury yield, which is currently 4.4
percent, would move to the tail end of a bankruptcy proceeding,
would get paid last, do not get paid unless everybody else gets
paid. In the vast majority of cases, as a result, these lenders
would recover nothing at all if their customers entered
bankruptcy.
I hope that this will work on three levels: it will protect
the consumer in bankruptcy by improving their status; it will
protect the consumers short of bankruptcy by giving them
additional negotiating leverage with the credit card companies;
and it will send a message back up into the credit card
industry that these abusive interest rates are no longer a
successful business model.
Additionally, my bill would waive the so-called means test
from the banking industry-sponsored 2005 so-called bankruptcy
reforms, which created a costly and burdensome process that
bankruptcy filers must undergo to be eligible to discharge
their debts, and it prevents some filers from receiving a
discharge at all.
I would now like to introduce our distinguished panel of
witnesses. We are fortunate they are able to be with us this
afternoon to share their expertise in these matters.
First is Professor Robert Lawless of the University of
Illinois College of Law. He is a nationally renowned expert on
bankruptcy and consumer law issues. In addition to testifying
before our Committee on recent Supreme Court cases this past
June, Professor Lawless has published articles in numerous
academic publications and has been featured on CNN and CNBC. He
has the privilege of teaching at the University of Illinois
College of Law, his alma mater.
Professor John Chung, from our own Roger Williams
University School of Law across the bay in Bristol, is an
expert in bankruptcy law. Prior to beginning his teaching
career, Professor Chung worked on the United Nations
Compensation Commission, which was formed to process claims and
award compensation for losses resulting from Iraq's invasion
and occupation of Kuwait in 1990. Professor Chung is a graduate
of Washington University and the Harvard Law School.
The Honorable Judge A. Thomas Small has served on the
Bankruptcy Court of the Eastern District of North Carolina
since 1982 and has twice held the role of chief judge on that
court. Judge Small is familiar with banks, having worked in the
industry for 13 years prior to joining the bench. He is a
graduate of Duke University and the Wake Forest University
School of Law. Judge Small is here today in his capacity as a
member of the National Bankruptcy Conference, the Nation's
premier organization of bankruptcy experts. His written
testimony today represents the official position of the
National Bankruptcy Conference.
Finally, John Rao of Newport, Rhode Island, is an attorney
with the National Consumer Law Center, who focuses on consumer
credit and bankruptcy issues. The National Consumer Law Center
performs research and trains attorneys who serve low-income
consumers. Mr. Rao was appointed by Chief Justice Roberts to
serve on the Federal Judicial Conference Advisory Committee on
Bankruptcy Rules. Mr. Rao earned his degree from Boston
University and the University of California Hastings College of
Law.
I would also like to take a brief moment to thank Professor
Elizabeth Warren of Harvard Law School for her tireless efforts
in fighting for consumer protections and her help in drafting
my legislation. Professor Warren was originally scheduled to be
a witness here today, but she had to cancel because she was
appointed to chair the Congressional Oversight Panel of the
United States Treasury Bailout Program. You read of her work in
Tuesday's New York Times, and I wish her the best as she
oversees and audits the bailout program.
I would also take a moment to recognize a State Senator who
is present, Rhode Island State Senator Juan Pichardo, and the
very distinguished bankruptcy judge of Rhode Island, Judge
Votolato. Nice to have you with us, Your Honor. Haven't seen
you in a while.
Following the witnesses' opening statements, which I ask
them to limit to 7 minutes, I will ask questions on their
testimony; and after we have concluded the formal hearing, the
witnesses have kindly agreed to join me in taking questions
from the audience in a general panel. If any of you have a
story or an experience you would like to share or a question
that we can answer, I hope you will stay around after the
hearing concludes to take part in this session.
And now I turn the hearing over to Professor Lawless for
his testimony.
One final piece of business. Before everybody begins, may I
please ask you to stand and be sworn. Do you affirm that the
testimony you are about to give before the Committee will be
the truth, the whole truth, and nothing but the truth, so help
you God?
Mr. Lawless. I do.
Judge Small. I do.
Mr. Chung. I do.
Mr. Rao. I do.
Senator Whitehouse. Thank you all very much. Professor
Lawless, please proceed.
STATEMENT OF ROBERT M. LAWLESS, PROFESSOR OF LAW, UNIVERSITY OF
ILLINOIS COLLEGE OF LAW
Mr. Lawless. Thank you, Senator Whitehouse. Thank you for
inviting me to testify today to the Senate Committee on the
Judiciary.
It is no longer a lot of work to get people's attention
about the explosion of consumer credit. The graph I have put up
on the screen shows the growth in consumer credit over the last
50 years. Even after controlling for inflation and population
growth in the United States, we owe five times as much as we
did 50 years ago on our household debt and almost twice as much
as we did just one decade ago.
There has been a huge run-up in the amount of consumer
credit outstanding. Over the last 10 years, mortgage debt was
substituted for credit card debt. Some of that mortgage debt
came in the form of home equity lines of credit. But we now owe
more than we do in our national personal income.
One way to look at consumer credit is to compare it to the
amount of our National personal income for 1 year. As you can
see, from time to time they both rose together, but in the last
decade, the amount of consumer credit rose much more
dramatically than household income. We now owe more in
household debt than our National personal income for one year.
One way to think about that is if we took 1 year and we did
not pay for housing, food, utilities, or any of the other
necessities of life, it still would not be enough to retire
just our National personal household debt.
One of the key events, as you mentioned, Senator, was the
1978 decision in Marquette National Bank. The 1978 Supreme
Court decision in Marquette National Bank, while not alone
responsible for the rise in consumer credit, was one of the
necessary preconditions to the explosive growth we have seen
over the last few decades.
In Marquette National Bank, a Nebraska bank wanted to
charge 18 percent interest to Minnesota customers, although the
State of Minnesota judged that the legal rate should be no
higher than 12 percent. The Supreme Court interpreted the
National Bank Act of 1864, an act passed in the midst of the
chaos of the Civil War to establish a stable national banking
system. The Supreme Court interpreted this then 114-year-old
statute to let the Nebraska bank export Nebraska law into the
State of Minnesota. A law that had been passed as a shield to
protect nationally chartered banks from burdensome State
regulation, because of the Marquette National Bank, decision
became a sword that national banks could use to export State
law--unprotected State laws into other States whose legislature
had made judgments to the contrary.
What happened after Marquette National Bank was that banks
rushed to States with lax usury regulation or, indeed, in some
instances were able to prevail upon some States to repeal their
usury statute altogether. The result was an effective national
deregulation of interest rates. Banks could relocate in these
States with no usury statutes, with no interest rate cap, and
then export those rules across the entire country.
Consumer credit took off. The chart that I just showed owes
its origins in the 1978 decision of Marquette National Bank,
and I think one thing that should not be lost on the Committee,
Senator, is that this was a decision of the United States
Supreme Court interpreting a 114-year-old statute. It was not a
decision made by our elected legislative branch. It was not
even a decision made by the executive branch. Rather, because
of some arcane rules in a 114-year-old statute, we have ended
up with a consumer credit system that is completely unregulated
as to interest rates.
I want to talk a little bit, though, about high-cost credit
in bankruptcy, which is the topic of today's hearing.
Consumer credit is about consumer bankruptcy. As I show in
my paper called ``The Paradox of Consumer Credit,'' bankruptcy
rates rise with increases in consumer credit. Bankruptcy rates
have plummeted in the immediate wake of the 2005 law, but they
are back on track to reach 1.1 million bankruptcy filings in
the 2008 calendar year.
There is a paradox here. Decreases in the amount of
consumer credit lead to a short-term bump in the amount of
bankruptcy filings. Just yesterday, I learned that we went over
5,000 bankruptcies per day in the month of November, and that
was the first time since 2005. And the reason for the short-
term rise we have seen in bankruptcy filings for the past 4
months is likely because of the tightening of consumer credit
that we read so much about today in the headlines. People are
hurting, and it is beginning to show up in the bankruptcy
courts. So let me talk a little bit about what some of our
research shows about the people who are showing up in
bankruptcy courts.
I am part of a research project called the Consumer
Bankruptcy Project, including Professor Elizabeth Warren, and
what we do is we go out and we talk to people, we survey
people, we interview people, we collect the court records of
people who file bankruptcy. The 2007 cohort of the Consumer
Bankruptcy Project shows that people of modest means show up in
the bankruptcy courts. The myth of bankruptcy being a free ride
for high spenders and high-income earners is just that--a myth.
The typical person in bankruptcy court shows up with just
$27,000 in income and only $53,000 in assets. Against these
modest resources, the typical person is $69,800 in debt. Over
time, we are also seeing people show up in bankruptcy courts in
worse condition but with the same resources.
The Consumer Bankruptcy Project has research cohorts in
1981, 1991, 2001, and 2007, and as you can see from the slide,
income levels have been relatively constant throughout this
period, yet debt is continuing to increase. People are showing
up in bankruptcy court in worse financial shape every time we
go back into the field to do our research. The 2005 laws did
not sort out the ``can pays.'' We were told in 2005 we were
going to get a bankruptcy law that was going to get rid of the
high-income people who were abusing the bankruptcy system. If
that was true, we would have expected to see income drop after
the 2005 bankruptcy law. Instead, it is virtually identical.
The 2005 bankruptcy law did not work. The only thing that
has happened is that we have forced people who need the
bankruptcy courts out of the system, and the people who are
showing up in bankruptcy court now are in worse shape, with
higher ratios of debt to their personal household income.
Another way this shows up is in the questions we ask people
during the surveys. In both 2001 and 2007, we asked people the
same question: How long have you been struggling before you
filed bankruptcy? Forty-four percent now say that they
financially struggled more than 2 years before they filed
bankruptcy. That was the most common response of our survey
respondents. More than 2 years before filing bankruptcy most
people suffer before they end up in bankruptcy court.
Bankruptcy is not a free ride. People do anything to avoid it.
There are a number of fixes that we can have for the
consumer bankruptcy system, Senator. The Consumer Credit
Fairness Act that you are sponsoring is a very good step in the
right direction. As you mentioned, it would subordinate high-
cost credit transactions; it would exempt from the means test
bankruptcies that were caused by high-cost credit transactions;
and the Act would serve as a statement that our Federal
bankruptcy courts will not be used as a collection system for
abusive and predatory loans.
Another improvement that could be made to the bankruptcy
laws is to take steps that would lower the cost of filing. Get
the bankruptcy laws off the consumer bankruptcy attorneys'
backs so that will lead to lower attorneys' fees and increase
accessibility to the bankruptcy courts.
The means test could be repealed in its entirety. The means
test, which is meant to shuffle out the ``can pay'' debtors, we
have seen is a failure. It should be repealed in its entirety.
We should eliminate pre-bankruptcy credit counseling. The
post-bankruptcy credit counseling is our best chance to change
debtors' behavior after filing bankruptcy. The pre-bankruptcy
credit counseling is nothing but a hassle and a little bit more
cost before people can get to bankruptcy courts. It serves as
another hurdle before people can get the relief they need.
And, finally, I recommend that we give bankruptcy judges
the power to write down mortgages in Chapter 13, as the Helping
Families Save Their Homes in Bankruptcy Act would. This would
restore to bankruptcy judges the power they had before the 1993
Supreme Court decision called Nobelman. I encourage Congress to
pass that law.
Thank you, Senator. Thank you again.
[The prepared statement of Mr. Lawless appears as a
submission for the record.]
Senator Whitehouse. Thanks, Professor Lawless. We very much
appreciate your being here and having come all this distance.
I would now turn to Hon. Judge Small.
STATEMENT OF HON. A. THOMAS SMALL, U.S. BANKRUPTCY JUDGE,
EASTERN DISTRICT OF NORTH CAROLINA, ON BEHALF OF THE NATIONAL
BANKRUPTCY CONFERENCE
Judge Small. Senator Whitehouse, thank you for giving us,
the National Bankruptcy Conference, the opportunity to comment
on the Consumer Credit Fairness Act. We strongly support your
efforts to address the effects of high-cost consumer credit.
Generally, it is not the Conference's policy to support
amendments to the Bankruptcy Code that address non-bankruptcy
problems such as the problem of high-cost consumer credit. And
the Conference prefers and recommends a broader approach to
this problem such as a national usury law. But, clearly, high-
cost credit does contribute directly to the filing of many
bankruptcy cases and has an unfair and adverse effect on other
creditors. The Conference, therefore, believes that bankruptcy
legislation would be helpful if a broader solution to high-cost
consumer credit is not possible.
The bill is a strong start, but we would like to point out
a few problems and suggest some ways the bill might be
improved. The bill in its current form does not capture some of
the more serious credit abuses. Also, the bill, while providing
relief for creditors, does not provide relief for consumer
debtors and in some circumstances could have detrimental,
unintended consequences for some Chapter 13 debtors.
Now, credit often becomes high-cost consumer credit not
when the credit is first established but, rather, in the months
preceding bankruptcy. As consumers fall behind on their credit
cards, their payday loans, their rent-to-own contracts, and
other consumer purchases, or exceed their credit limits, they
are faced with an avalanche of default rates, late fees, and
other additional charges that can cause their balances to
skyrocket. Neither the Truth in Lending definition of annual
percentage rate nor the bill's reference to the costs and fees
incurred at the outset of the loan includes these damaging
later-added costs.
And we would suggest that the definition of ``high-cost
consumer credit'' be expanded to cover charges such as late
fees and default interest rates so that the definition reflects
the actual cost of credit to the borrower. Specifically, we
suggest that including the cost of credit imposed within the 6-
month period before filing would improve the bill.
A second problem is that by subordinating high-interest
claims but not disallowing those claims, the bill helps
creditors but not debtors. Subordination solves the problem of
high-cost creditors obtaining a disproportionate payment of
their claims in bankruptcy, but it really does nothing to help
debtors. Subordination reorders which creditors get paid first,
but it does not reduce the overall amount that has to be paid.
Instead of subordinating high-cost consumer claims, we
recommend that they be disallowed. Non-high-cost creditors
would actually receive the same distribution if the claims are
disallowed or if they are subordinated. But debtors would be
greatly benefitted by disallowance in large-asset Chapter 7
cases, and in full-payout Chapter 13 cases, because the
disallowed claims for high-cost consumer credit would be
discharged without having to be paid. But I think it is
important to keep in mind that in most consumer cases, it
really will make no difference to the debtor whether the claims
are subordinated or disallowed because most consumer cases,
over 90 percent, are no-asset cases in which creditors, whether
they are high-interest creditors, low-interest creditors, or
no-interest creditors, really receive nothing. The same is true
in Chapter 13 where, under means testing, there are more and
more zero-payout Chapter 13 plans.
A third problem is that the bill as currently drafted may
leave Chapter 13 debtors who do not complete their plans, and
consequently have their cases dismissed, with heavier debt
loads than when they filed their bankruptcy petitions. This
problem would exist whether the high-cost credit claims were
subordinated or disallowed. And that is because the effect of
subordination or disallowance in a Chapter 13 case is to permit
payment of regular claims but not the payment of high-cost
consumer credit claims. If the case is dismissed, no debts are
discharged, and the high-cost consumer credit claims remain
outstanding in greater amounts with the high-interest that
accrued while the case was pending. The end result, of course,
is that the debtor will owe substantially more than if the
high-cost debt had not been subordinated or disallowed.
The solution to that problem is to discharge all fees
related to high-cost consumer claims that accrue or are
incurred post-petition in a Chapter 13 case in which a plan has
been confirmed. This change could be easily implemented by
adding a new section to Section 1328.
Finally, although the Conference believes that the current
means test is a cumbersome, unnecessarily complex, and
ineffective method of determining a debtor's ability to repay
unsecured debt, we do not recommend an exclusion from means
testing for debtors involved in high-cost consumer credit
transactions, as contemplated in the bill. The definition of
these transactions is likely to be complex, and the
computations necessary to determine an exclusion from means
testing based on high-cost consumer credit would turn the
already complicated means test forms into an even higher hurdle
for individual debtors. Excluding means testing for those
debtors in our opinion simply is not worth the considerable
trouble it would entail.
In conclusion, the Conference believes that this bill
offers a real opportunity to facilitate greater fairness to
creditors and debtors and provides a real deterrent to abusive
lending practices. The bill is coming along at precisely the
right time, and the National Bankruptcy Conference would be
happy to provide any other information and to assist in
formulating a draft proposals if the Judiciary Committee would
find that helpful.
Thank you, Senator.
[The prepared statement of Judge Small appears as a
submission for the record.]
Senator Whitehouse. Your Honor, thank you for your
testimony, and let me just take this opportunity to thank both
you and the National Conference for the clearly careful and
thoughtful way that you have examined the bill and for the
recommendations you have made. They are all very much in the
spirit of what we are trying to accomplish. We look forward to
working with you on the technical draftsmanship issues to get
these technical aspects of it more clearly right than they were
in the first draft, and it is very helpful that you have
provided this input.
Judge Small. We are glad to assist in any way.
Senator Whitehouse. Professor Chung?
STATEMENT OF JOHN CHUNG, ASSOCIATE PROFESSOR OF LAW, ROGER
WILLIAMS UNIVERSITY
Mr. Chung. Senator Whitehouse, thank you for inviting me to
speak before the Judiciary Committee at this field hearing on
this important subject.
I would like to start by presenting a question about
compound interest that I ask my students. I do so before this
Committee not in the vein of presuming that I am teaching
anyone anything new, but with the purpose of directing
attention to one of the major problems of high-cost consumer
credit. My question is this: At an annual rate of interest of
36 percent, compounded daily--which is how my credit card
works--how long does it take for a debt of $1,000 to double?
When I ask my students, I usually use 25 percent as an example.
I ask this question in every bankruptcy class. My experience
has been many students do not know the answer. At the rate of
36 percent, the answer is that the debt doubles in just under 2
years. When I tell my students the answer--and the answer for
25 percent is approximately 3 years--I hear audible gasps of
surprise. I then ask, ``Where do you see interest rates like 25
percent in the real world? '', and they quickly identify their
credit cards.
My point is that, from my experience, many law students do
not know how quickly debt grows and compounds at rates like 25
percent or 36 percent. I hold my students in the highest
regard, and I want to remind the general audience that these
are college graduates who had to achieve a certain grade point
average and standardized test score to be in my classroom. If
some law students are surprised by the answer, I wonder if the
typical consumer debtor understands the destructive effect of
these interest rates.
And the problem is, of course, that compounded interest of
36 percent does not stop after 2 years. The debt continues to
grow. It grows from $1,000 to $2,000 in the first 2 years, then
from $2,000 to $4,000 in the next 2 years, then from $4,000 to
$8,000, and so on and so on. The growth rate in debt is
exponential. Income and asset growth, however, is not--at least
for most people.
Once a debtor falls into the trap of exponential debt
growth, can such a person ever climb his or her way out? I
highly doubt it. Perhaps we are witnessing the 21st century
equivalent of the company store where the debtor is just
another day older and deeper in debt because he has sold his
soul to his credit card issuer.
Given the destructive impact of high-cost consumer credit
on borrowers, I believe there is a strong need for the proposed
Consumer Credit Fairness Act. The math tells us that once debt
starts compounding at rates like 36 percent, the borrower will
end up trapped in a vicious cycle of debt spiraling out of
control. Laws against usury were designed centuries ago to
address this problem, but modern lenders have managed to avoid
the application of those laws. The Consumer Credit Fairness Act
is needed to restore a more equitable balance between the
rights of debtors and creditors. The reference to usury laws is
also helpful because it points out that the Act is a measured,
sober response to the problem of excessively high interest
rates and is based on long-established debtor-creditor
principles. The legal history of England and the United States
recognized the need to prohibit excessively high interest
rates. Blackstone's Commentaries on the Laws of England,
printed in 1765, discussed usury laws. I make this point to
rebut the anticipated, but weak, argument by lenders that the
proposed Act would upset their expectations and constitute a
drastic upheaval in the debtor-creditor relationship. The need
to address the problem of excessively high interest rates is
well established, and the fundamental purpose of the proposed
Act stands on firm legal and historical ground.
In addition to restoring more balance to the historical
debtor-creditor relationship, I believe that the proposed Act
deserves praise because it addresses more contemporary
problems--problems created by the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005. In particular, I am
referring to the famous--or infamous--means test. The proposed
Act's exemption of certain debtors from the means test is a
welcome attempt to provide relief to borrowers in need of
protection from crushing interest rates.
I would like to make one general observation about the
recent changes in consumer bankruptcy law. I think it is highly
likely that the next generation of legal historians will see
some significance in the fact that the Bankruptcy Code was
amended in 2005. 2005 was at or near the peak of the subprime-
fueled housing bubble. I understand that the amendments were
years in the making, but the fact that the reforms finally
passed that year is probably not just coincidence. In the mania
of that bubble, anyone could become a multi-millionaire just by
buying a house, or two or three. The frenzied spirit of the
times questioned the intelligence of anyone who was not making
a fortune. It appears there was a sentiment that there was
something wrong about someone if he or she was not getting
rich. This led to and fed the conclusion that there was
something really wrong if someone filed for bankruptcy
protection. This line of thinking concluded that in an era of
easy and instant riches, the people filing bankruptcy must be
doing so to game the system. That meant drastic reform was
necessary to stop all those abusers of the system. In
hindsight, it appears that the people who needed to be reined
in by legislative reform were those who were facilitating and
gaming the bubble. It is my hope that the proposed Act
represents just one attempt to roll back the 2005 amendments.
The proposed Act deserves support, and this Committee
should be applauded for considering this legislation. With
regard to the text of the proposed Act, I raise two issues. I
raise these issues in the spirit of seeking clarification.
First, the proposed legislation seeks to amend Section
707(b) by adding subparagraph (8), which states that
``Paragraph (2) [the means test] shall not apply if the
debtor's petition resulted from a high cost consumer credit
transaction.'' The issue I raise is whether 707(b)(8) applies
if a debtor files a petition because of high-cost consumer
credit and other debt, like a large hospital bill. One could
envision a situation where a debtor is injured, incurs hospital
bills, and loses income due to an inability to work. Such a
debtor would probably turn to his or her credit cards to pay
living expenses. The combination of the medical bills and
credit card debt would lead to bankruptcy. The creditors would
likely raise the issue whether the proposed language applies if
the petition results from other debt in addition to high-cost
consumer debt.
My second comment is based on my concern with certain
language in another provision of the Bankruptcy Code which
provides that certain types of consumer debts are
nondischargeable. In Section 523(a)(2) there is language that
states: ``cash advances aggregating more than $825 that are
extensions of consumer credit under an open end credit plan
obtained by an individual debtor on or within 70 days before
the order for relief under this title, are presumed to be
nondischargeable.''
If a debtor has high-cost consumer debt that falls within
this language, then subordination of such debt through the
proposed amendment of Section 510 will provide little relief
because the debt will not be discharged. If the Committee is of
the view that there is a need to address the discharge issue,
one way to address it would be by amending Section 523 so that
debts resulting from high-cost consumer credit transactions are
treated as nondischargeable.
Again, I raise these issues as someone who believes in the
need for legislation addressing high-cost consumer debt and as
someone who supports the proposed Act.
Thank you for the opportunity to present my remarks.
[The prepared statement of Mr. Chung appears as a
submission for the record.]
Senator Whitehouse. Thank you, Professor Chung. I
appreciate it. Once again, the thoroughness of your inquiry
demonstrates the careful look you have taken at it, and I
appreciate your advice, and we will work with you to
incorporate it.
Attorney Rao?
STATEMENT OF JOHN RAO, ATTORNEY, NATIONAL CONSUMER LAW CENTER
Mr. Rao. Senator Whitehouse, thank you for the opportunity
to testify here today and to consider ways to improve our
bankruptcy laws to encourage reform of credit card practices. I
testify here today on behalf of the low-income clients of the
National Consumer Law Center and the National Association of
Consumer Bankruptcy Attorneys.
My testimony is based on over 25 years of experience
representing consumers and consulting with other attorneys in
debt collection, bankruptcy, and foreclosure defense matters,
initially as an attorney with Rhode Island Legal Services. In
fact, some of that time was before Judge Votolato, who I am so
pleased to see here today.
In my experience, I have found that many consumers use
credit cards as a safety net, to make essential purchases that
they are unable to pay in full on a cash basis. Living paycheck
to paycheck for some of these consumers, they often lack
savings to cover unexpected expenses. In a recent national
survey of indebted low- and middle-income consumers, seven out
of ten said that they use credit cards to pay for important
things like car repairs, home repairs, medical expenses. Of
course, in our current economic situation, even more consumers
can be expected to rely on credit cards to get through the
difficult times that we see now.
It is also my experience that few consumers borrow money on
credit without intending to repay. Their plans to repay,
however, easily change, often due to unforeseen circumstances
such as adverse events like illness or divorce. Other consumers
fall into traps set by credit card companies. Even small
setbacks, like using a credit card to pay for some prescription
drugs or to repair a home furnace, can send consumers into a
spiral of late fees, over-limit fees, and increased interest
rates that become impossible to escape. And this is
particularly true for some older consumers with diminished
incomes after they retire.
There is no question that credit cards provide a great
convenience for many consumers. The dangers come from the
borrowing features of these cards and can get consumers into
deep financial trouble.
Some of these practices of credit card companies such as
deceptive marketing, confusing payment allocation rules,
retroactive rate increases on existing balances, and universal
default, such as you mentioned earlier, Senator Whitehouse,
hopefully will be addressed by a pending rulemaking proceeding
before Federal agencies and by bills pending in Congress. And
while many of those practices alone or in combination can lead
a consumer into financial trouble, my focus today will be on
the punitive practices of credit card companies once they get
into trouble and once they are trying to get out of financial
trouble by repaying their debts and avoiding bankruptcy.
Rather than try to help payment troubled consumers with an
affordable monthly payment that would reduce the balance owed,
card companies do the opposite and jack up interest rates to a
penalty rate, usually as soon as the consumer makes a late
payment or exceeds the credit limit. These penalty interest
rates can be as high as 30 to 40 percent.
Another real contributing factor to this snowballing effect
is all of the additional punitive fees like wire transfer fees,
cash balance over-limit fees. Rather than assist borrowers who
honestly seek to repay their debts, card companies really
prefer to extract as much as they can during this period of
time just before filing bankruptcy. As Professor Lawless said,
in this 2-year period where they are struggling to repay their
debts, they are actually being imposed with more fees.
The chief counsel of the Comptroller of the Currency
described this business model as, ``The focus for lenders is
not so much on consumer loans being repaid, but on the loan as
a perpetual earning asset.'' I would like to give you some
examples of these that demonstrate this.
One example is a Rhode Island senior who recently passed
away, who went to Rhode Island Legal Services for advice on
credit card problems. He was concerned because although he was
paying more than half of his income each month on several
credit cards, he seemed to be getting nowhere in paying off the
payments, the balances. A review of his card statements
confirmed his concern. At some point after he had stopped using
his cards, excessive interest rates and other fees absorbed all
of his payments and actually were increasing his balance.
For example, his credit card statement in December 2006
showed that he had made a $200 payment in November of that
year, 2006. However, an interest charge of $272.87 based on a
32.24-percent APR had been assessed, as well as a $39 late fee.
Not only did his $200 payment not cover the periodic interest
charges for the month, but it left him further behind by
$111.97. You may ask why would anyone pay $200 only to get more
than $100 behind. He eventually stopped making payments on his
credit cards after realizing that repayment was impossible. He
spent the last years of his life responding to collection
actions.
One widely publicized case in Ohio was very similar,
almost--really even worse. This consumer had a balance of
$1,963. She decided that she was not going to use the card
anymore, and over the next 6 years paid to her credit card
company $3,492 in payments. One might assume that would have
paid off her debt completely.
During the 6-year period before her account was sent to
collection, not one penny of the $3,492 in payments went to
reduce her debt. She was charged during that time $9,056 in
interest, late fees, and over-limit fees. Amazingly, after
paying almost $3,500 on a $1,963 debt, her balance grew by
another $5,564.
There are many other examples of these, especially when
claims are filed in bankruptcy, and we have examples of large
portions, as much as 50 percent of the claims that are filed in
Chapter 13 cases on credit cards, consist of interest, late
fees, and over-limit fees.
The current economic crisis has made it even more
impossible for many consumers to repay debts. Declining
property values and the home foreclosure crisis have eliminated
the option many consumers previously used to repay credit by
cashing in on their home equity. Now more than ever, Congress
should enact laws which encourage credit card companies to work
with payment troubled consumers and, most importantly, to limit
excessive interest and fees. Therefore, we strongly support the
Consumer Credit Fairness Act, and thank you, Senator
Whitehouse, for introducing that bill. It is a strong step in
the right direction.
Thank you again.
[The prepared statement of Mr. Rao appears as a submission
for the record.]
Senator Whitehouse. Thank you very much for your testimony,
and thank you also for your work on behalf of consumers who are
caught in this--the words that have been used include ``trap,''
``spiral,'' ``snowball.'' It implies a very dynamic process in
which the credit card companies are working pretty actively to
keep consumers in--you described it as sort of that 2-year
period.
Professor Lawless, before the hearing, you told me about a
colleague of yours who used the phrase ``sweat box'' to
describe this. Would you describe for the record that term and
how it is used?
Mr. Lawless. Sure. That term comes from a law review
article in the University of Illinois Law Review, ironically
enough, called ``The Sweat Box of Credit Card Debt,'' by
Professor Ronald Mann, now at Columbia University. And his
point is that the credit card companies, as John Rao has just
pointed out, no longer use this model of lending and getting
paid back. The old ``It's a Wonderful Life,'' of getting repaid
and making a little bit of money off the interest, that is
gone. That time is gone. That is not the way consumer lenders
work anymore.
What was the phrase that was used? We want a perpetual
asset--
Mr. Rao. Perpetual earning asset.
Mr. Lawless. Asset producing perpetual revenue. And that is
the idea, the sweat box idea, is that when the credit card
companies make the most money off of borrowers is when people
are not in good enough shape that they are paying on time, but
they are not in bad enough shape that they can file bankruptcy
or need to file bankruptcy. Credit card companies make the most
money when consumers are in the sweat box, as Professor Mann
put it, when they are piling up the huge interest rates, piling
up the big penalty fees. The longer the credit card companies
can keep people in that sweat box, the more money the credit
card companies are going to make. And the effect of the 2005
bankruptcy law--you know, we talk about the means test--but the
real big effect of the 2005 bankruptcy law was to raise the
cost of filing in terms of money and time and hassle. When you
raise the cost of something, people are going to use less of
it. And what happened is that we pushed back the amount of time
before someone is going to be desperate enough to file
bankruptcy and keeping people in that sweat box longer. That
has been the effect of the 2005 bankruptcy law. That is what I
think the consumer credit industry wanted, and from our data, I
think that is what they got.
Senator Whitehouse. Judge Small, one of the points that you
made in your testimony was that pre-bankruptcy credit
counseling, which was something that the banks argued for in
the 2005 so-called reform, has not been effective and has the
effect of delaying the day when they can get into the court and
seek your protection.
In the context of this revenue-producing asset model, in
the context of this sweat box model, would it be fair to look
at the mandatory pre-bankruptcy, pre-filing credit counseling
as a time period that extends this sweat box in which they work
the consumer?
Judge Small. I think so. I think credit counseling has
proven not to work at all. It is just another obstacle that
debtors face to getting into bankruptcy. And I think the more
obstacles you can take away, the better.
Senator Whitehouse. The card companies are not
unsophisticated about this stuff. They must realize that credit
counseling pre-filing does not work, so presumably there is
another motive. Does it make sense to you that keeping
consumers in this so-called sweat box is that motive?
Judge Small. It could very well be. It certainly has that
effect. You might ask, why would a debtor stay in this sweat
box for a couple years when he has got all this debt that he
really cannot pay, even at the regular interest rates? We see
debtors all the time that have $30,000, $40,000, $50,000,
$60,000 in credit card debt. Sometimes that is what their
annual income is. At 18 percent, how are they ever going to pay
that off? Well, probably they cannot.
But people believe in paying their debts. There is a
misperception that debtors are abusing the bankruptcy system.
Well, I can tell you that the debtors that come into my court
do not want to be there. That is the last place they want to
be. They want to stay away from bankruptcy. They want to pay
their debts. And most of them are walking the tightrope. They
are making the minimum payments. They are doing the best they
can to meet their obligations and not get into bankruptcy. Then
they get behind on one payment, and under a universal default,
then their interest rate goes from 18 percent up to 29 percent,
and that can be on all their credit cards. Then at that point I
think they realize that there really is no way I am going to be
able to make it, and they go into bankruptcy.
There is another factor here, too. These people are
proceeding in good faith, trying to pay their debts, and once
they get hit with all these late charges, the universal default
fees, they feel like, well, gee, why am I doing this? Why am I
killing myself trying to pay all this debt when they are not
helping me at all, in fact, they are working against me?
Senator Whitehouse. One of the explanations for some of
this, Professor Chung, that I have heard--and I would love to
hear your comment on this observation--is that different credit
card companies are aggressive to different degrees, but that
the worst of them, the ones who are most aggressive, the one
who comes up with the most clever and diabolical traps, have
the effect of increasing their revenues and, in effect, driving
the market, and that other credit card companies that may not
have wished to take that step now feel obliged to match the
market and follow along, and that there is sort of a bad-actor,
follow-the-leader phenomenon that is taking place. And the
further observation that was made to me about that is that
there is no logical end in sight to that unless somebody steps
in and does something. I would like your observation on that.
Mr. Chung. Well, I agree with that last observation
completely. Until someone intervenes--and by ``someone,'' I
mean the Federal Government--I do not see an end to these sorts
of practices.
I wish I knew how the inner mechanisms of the credit card
industry worked, but I am sure it works along the line of
viewing these loans as this perpetual revenue-generating asset.
That is the only way it makes sense in terms of why they do
these things. And as Professor Lawless mentioned, it has really
gotten past the point of--the lenders do not even seem to care
if the principal is ever paid back.
I think what is motivating lenders is that as long as some
sort of payment is being made on the loan, then it does not
have to go into a special category as a delinquent asset or
become some sort of special asset. As long as they can keep it
on their books as a good asset, that is all they care about.
My guess is that they do not care about the amount of the
indebtedness. All they care is that there is some sort of
partial debt service going on. And, in fact, in terms of the
examples of Mr. Rao, you have this increasing debt load, but
instead of it being a problem loan--I think a common-sense line
of thinking would say, Well, isn't that a problem if the debt
just keeps going up? Well, yes, if you ask the average person
common sense-wise, yes, that seems like a problem. But from the
credit card issuer's perspective, that is not a problem. That
is exactly what they want because that is where the money is.
And so I think the credit card issuers are following each
other's business models, and really the maximization of profit
lies in the people who are unable to pay down the debt but are
able to service part of it. And they do not really care how
long, or if ever, that principal is outstanding because they
can always record these as being good assets on the books with
income coming in every year, and to the extent that the
principal grows, that means our assets are growing. So,
actually, from their balance sheet perspective, it is actually
a good thing if the credit card debt keeps going up.
So if that is how the business model works, then, you have
some really, I think, unwise incentives--I mean in terms of
societal incentives--regarding debt growth. The government
should step in to unwind or to undo these really unwise
incentives because no private participant will do on its own.
Senator Whitehouse. If you go back to Mrs. Owens, she is a
good illustration of that. She owed $1,963. Over 6 years she
paid back $3,492. In your testimony, you calculated that that
would be payment of 100 percent of principal and an effective
interest rate of 21 percent, which is a pretty good return to a
lender. And yet at the end of that exchange, the effect was not
that Mrs. Owens had paid off her debt and the lender had made
21 percent and everybody was happy. It was that she still
owed--what was it?--$5,564 that I suppose the credit card
company, in addition to having made 21 percent, could then
write off as a loss on that account.
Mr. Rao. That is right. As Professor Mann has shown, that
model works so well because they have essentially recovered all
of--all of the charges that Ms. Owens made have been paid. So
everything essentially after a certain point is just absolutely
pure profit, especially when you look--and what he looks at in
his work, which is very interesting, is that the cost of
borrowing, especially over the past 5 years or so, has been
really quite low. For the credit card companies, they are
borrowing their own at 3 percent, and they are now charging 30
percent to the borrower. So, clearly, this is a model that
works very well for them in terms of the profit.
Judge Small also mentioned that a lot of times when
consumers file, they may have $30,000 or $40,000 in credit card
debt. And when you look actually at how much--and to a lot of
the individuals in the audience who may think, Well, how could
it get that large? Why could someone have $30,000, $40,000 in
unsecured credit card debt? In many of these cases, if you look
at each card, it may be that there is only about $4,000 or
$5,000 of actual charges on them. These debts grow quickly at
these interest rates.
In the case of the Rhode Islander that I mentioned, when he
stopped paying his credit card, it then had increased to about
$9,000. Within a year and a half, it had been transferred to
several debt collection companies and had grown to $15,000.
Just in a year and a half, it had grown that much. So, you
know, when you look at a bill and you say, well, that is
$14,000, it may only be $5,000 of actual card use.
Senator Whitehouse. You are in this market in Rhode Island
day to day. As the economic stress that we are experiencing
nationally has really focused hard in Rhode Island and made it
so hard on families, what are you seeing in your practice? Are
you seeing a change?
Mr. Rao. Well, actually, my practice is more actually now
based on where I work in Boston, but I do work with the
attorneys at the Rhode Island Legal Services. Certainly the
biggest problem right now is the home foreclosure problem. That
is the thing especially what they are dealing with quite a bit.
But there is a relationship between the credit card problem and
the foreclosure. There are some very important reasons why we
are in the foreclosure problem that we have. But for some
consumers, they have gotten into this problem because they have
used their house as a way to deal with credit card debt. They
have gotten home equity. They have borrowed on their house to
pay off credit card debt over the past 10 years. And, in fact,
even after they get these mortgages, sometimes they will be
paying--they will be diverting payments that should be going to
the mortgage to pay credit card companies at these 30-percent
interest rates and falling into default on mortgages.
So all of this credit problem picture is very much tied
together, and it is hard to look at one without the effect on
the other.
Senator Whitehouse. And it appears to be expanding.
Mr. Rao. Absolutely.
Senator Whitehouse. Walk me through the steps that take
somebody up to one of these exorbitant interest rates. You get
the solicitation in the mail. It says, I do not know, 10.9-
percent APR in great big print. It has got a 20-page contract
behind it. You sign it, you send it off, and before you know
it, you are paying an effective interest rate of 30, 40, 50
percent once you put in late penalties and fees.
How does that happen? Walk me through a sort of generic
scenario of Joe Debtor getting clobbered.
Mr. Rao. Well, sadly, Senator, I wish it were a long story
in which there was a lot to really describe. But again, sadly,
the scenario is something that can be described very quickly.
In that situation--you know, for a lot of consumers who
actually do not use a credit card for convenience purposes and
pay off their balances, there is not a problem. But for the
consumers who are struggling, a lot of the lower- and middle-
income families, they will get that credit card. It might be
fine for 2 or 3 months, 6 months if they are lucky. But as soon
as there is a late payment, that is it. All it can simply take
is being late with a payment. And even there, there are so many
tricks in terms of late payment.
We were involved in a case where we were able to show that
the credit card company had had a policy in which your--let's
say your payment was due on the 17th of the month, and you
posted it in a way so that it would be received on the 17th of
the month. It would be late if it was received by the credit
company at 11 a.m. that day because their cutoff time was 10
a.m. that day. Now, most consumers would think I have until the
end of the business day, 5 o'clock or 6 o'clock, to make that
payment. Well, those are the kinds of practices that get
consumers to get behind, and all it takes is that one late
payment, and now they are being jacked up to a much higher
interest rate.
So I wish there was a much longer description of what it
takes to get into trouble, but sometimes it really does not
take much at all.
Senator Whitehouse. Is there a list of these various tricks
and traps that you have assembled? I mean, that is pretty
inventive, to have a 10 o'clock in the morning cutoff. They
have probably figured out when the mail is delivered, which is
at 11:00.
Mr. Rao. Actually, I have to say that the Federal Reserve
Board and the other agencies are trying to crack down on those
very policies. And, in fact, there is a proceeding pending
right now which will try to prevent that kind of thing from
happening. But, yes, there are many of those kinds of examples
of different types of--
Senator Whitehouse. Professor Lawless, you wanted to add
something?
Mr. Lawless. Yes. You started off with a 10-percent APR.
That is not what the solicitation is going to say. It is going
to say zero-percent APR. These traps and tricks are trade
secrets in the consumer credit industry. Elizabeth Warren, a
name we have invoked a few times here today, has estimated that
the consumer credit industry does 400 to 500 experiments a year
to try to figure out what makes people sign up for these credit
solicitations. The consumer credit industry knows better than
you or I do how we are going to use our credit cards. So the
deck is already stacked before that envelope is opened.
Senator Whitehouse. How much disclosure is there of all of
that?
Mr. Lawless. Well, there is the same disclosure we all see,
which is a couple of pages of very fine print that you need a
magnifying glass to read and that even a law professor often
cannot understand. I have tried to read these credit agreements
myself, and it takes me 45 minutes to try to decipher it. The
idea that disclosure is going to solve the problem is a myth,
is a fairy tale. It is not going to--
Senator Whitehouse. But I mean in terms of their research
and their product, that is all proprietary and they will not
let any of that--
Mr. Lawless. Oh, the disclosure of that, those are all
trade secrets. We have no idea. One thing you mentioned
earlier--it would be a great help to university researchers and
people trying to study this. We had a conference at the
University of Illinois last May. We assembled scholars from all
over the world that work on consumer debt, and this was where
this point was made about 400 to 500 experiments being run by
the consumer credit companies. We were celebrating people that
had run a couple experiments a year. We need more disclosure
from the consumer credit industry about what they are charging
to people, how much people are paying.
We do not know, for example, right now what the average
rate is that is being paid on credit cards. Data is reported to
the Federal Reserve, but only in the aggregate. So we do not
know these slices of the very high default rates. And one of
the things I would encourage Congress to take a look at is
forcing more disclosure on the consumer credit industry so
people like myself, people at universities, people who are not
paid by either side, can look at these data and try to make
sound policy prescriptions.
Senator Whitehouse. Let me ask one last question, and then
open it to any public comment or question that we may have, and
that is, there has been--we have kicked around in Washington a
certain amount the idea of a Financial Product Safety
Commission along the lines of the Consumer Product Safety
Commission. If a toaster is defective, the Consumer Product
Safety Commission will have something to say about it, and yet
these highly complex, as you have described, financial
instruments that even lawyers have trouble understanding are
marketed across the country to people who have no real way to
look into it themselves. And there really does not seem to be
an institution that can attach a warning to it and say, look,
here is the real deal, this is not approved, this is not
legitimate, this is a dangerous product, you will face these
consequences if you enter into it.
Do you think that sort of an idea makes sense?
Mr. Lawless. Well, I guess I have to respectfully disagree
on that one. I see the same problems that have led the
proponents of that sort of commission to propose it, but for
the same reasons that disclosure is not working now, I think
sticking a warning label on something is not going to work.
Instead, I think ideas like your Consumer Credit Fairness Act
that gets in and gets at the root of the problem, which is the
price that is being put on the consumer credit, would be a
better way to go. I think substantive regulation that cracks
down on these practices in the long run will be more effective
than another regulatory commission that is going to be battling
the consumer credit industry. It is going to be a stacked deck
if you are going to have a government agency against one of the
Nation's largest industries that is one of the Nation's best
industries at tricking consumers into signing up for their
high-cost products.
Senator Whitehouse. Well, with that, let me call the
official part of the hearing to a conclusion. I thank the
witnesses for their testimony and remind them that the hearing
remains technically open for another week if anybody wishes to
supplement their testimony in any way.
We are now officially adjourned.
[Whereupon, at 3:14 p.m., the Committee was adjourned.]
[The submissions for the record follows.]
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