[Senate Hearing 110-904]
[From the U.S. Government Publishing Office]
S. Hrg. 110-904
EXAMINING THE BILLING, MARKETING, AND
DISCLOSURE PRACTICES OF THE CREDIT CARD INDUSTRY, AND THEIR IMPACT ON
CONSUMERS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
STRENGTHENING REGULATIONS AND THE RESPONSE BY REGULATORS TO AVOID THE
UNINFORMED USE OF CREDIT BY CONSUMERS WHILE PROTECTING AGAINST
INACCURATE AND UNFAIR CREDIT BILLING AND CREDIT CARD PRACTICES
__________
THURSDAY, JANUARY 25, 2007
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate /
senate05sh.html
----------
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho
SHERROD BROWN, Ohio JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania ELIZABETH DOLE, North Carolina
JON TESTER, Montana MEL MARTINEZ, Florida
Shawn Maher, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Alex Sternhell, Professional Staff
Lynsey Graham Rea, Counsel
Mark Osterle, Republican Counsel
Jonathan V. Gould, Republican Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George Whittle, Editor
C O N T E N T S
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THURSDAY, JANUARY 25, 2007
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 4
Senator Carper............................................... 5
Senator Bennett.............................................. 7
Senator Akaka................................................ 8
Senator Allard............................................... 10
Senator Brown................................................ 10
Senator Crapo................................................ 11
Senator Tester............................................... 12
Senator Sununu............................................... 13
Senator Menendez............................................. 14
Senator Casey................................................ 16
WITNESSES
Elizabeth Warren, Leo Gottlieb Professor of Law, Harvard Law
School......................................................... 18
Prepared statement........................................... 58
Robert D. Manning, Ph.D., Research Professor of Consumer Finance,
and Director, Center for Consumer Financial Services, E. Philip
Saunders College of Business, Rochester Institute of Technology 21
Prepared statement........................................... 66
John G. Finneran, Jr., General Counsel, Capital One Financial
Corporation.................................................... 23
Prepared statement........................................... 99
Response to written questions of:
Senator Dodd............................................. 174
Senator Shelby........................................... 174
Senator Reed............................................. 178
Senator Tester........................................... 181
Senator Crapo............................................ 185
Carter Franke, Chief Marketing Officer, Chase Bank U.S.A., N.A... 26
Prepared statement........................................... 104
Michael D. Donovan, Partner, Donovan Searles, LLC, also on behalf
of The National Consumer Law Center and The National
Association of Consumer Advocates.............................. 27
Prepared statement........................................... 108
Richard Vague, Chief Executive Officer, Barclays Bank Delaware... 31
Prepared statement........................................... 127
Response to written questions of:
Senator Dodd............................................. 188
Senator Shelby........................................... 188
Senator Reed............................................. 192
Senator Tester........................................... 195
Tamara Draut, Director, Economic Opportunity Program, Demos...... 33
Prepared statement........................................... 131
Travis B. Plunkett, Legislative Director, Consumer Federation of
America........................................................ 35
Prepared statement........................................... 151
Additional Material Supplied for the Record
Robert Berner, BusinessWeek, ``CAP ONE'S CREDIT TRAP; By offering
multiple cards, the lender helps land some subprime borrowers
in a deep hole and boosts its earnings with fee income,''
article dated November 6, 2006................................. 199
Prepared statement of Edward L. Yingling, on behalf of the
American Bankers Association................................... 202
EXAMINING THE BILLING, MARKETING, AND DISCLOSURE PRACTICES OF THE
CREDIT CARD INDUSTRY, AND THEIR IMPACT ON CONSUMERS
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THURSDAY, JANUARY 25, 2007
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:34 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Christopher J. Dodd (Chairman
of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order.
First, I want to thank our witnesses for being here this
morning and thank my colleagues for coming out this morning.
Before we begin this hearing on examining the billing,
marketing, and disclosure practices of the credit card industry
and their impact on consumers, I want to recognize the fact
that Senator Shelby, my colleague and friend, the Ranking
Member here, held an excellent hearing on this subject matter
already before, and I commend him and thank him for having done
that.
Senator Schumer, who I think will be joining us shortly, is
the father of the Schumer Box. We recognize his longstanding
interest and involvement in this.
Senator Carper, my friend from Delaware, has a strong
interest in this. He has talked to me repeatedly over the last
number of days about his interest in this subject matter.
Dan Akaka has introduced legislation in the past on this,
and Bob Menendez as well. And, Sherrod, I presume you have had
a strong interest in this as well in the other body over the
years. So we thank all of our members here for their interest
in this subject matter.
Let me share some opening comments, if I can. I will then
turn to the Ranking Member for any opening comments he has, and
then we will turn to our witnesses for some opening statements.
Let me say in advance that we would like you to try and
keep your opening comments, if you can, down to 5, 6 minutes or
so, so we can get through all of you. We have got a crowded
panel here this morning, and then we will turn to questions,
and I will try and keep the questions down to about--I will try
and do about 7 minutes per member, and really that is tight as
it is, because sometimes setting up the question takes a few
minutes. But we will try and move this along so everyone is
involved.
Anyway, today is the first in a series of hearings on the
subject matter that I believe is of critical importance, that
is, the subject matter of credit cards. It is my hope that
through these hearings this Committee, in a careful, thorough,
and open manner, will begin to examine both the positive and
negative impacts that this important financial tool plays in
the lives of millions of American consumers in our Nation's
economy. It is my hope that this hearing, entitled ``Examining
the Billing, Marketing, and Disclosure Practices of the Credit
Card Industry, and Their Impact on Consumers,'' will help us to
better understand the many complex issues regarding credit card
practices.
A number of members of this Committee have a strong
interest in this matter, and I encourage their active
participation today and in the coming weeks and months.
At the outset of this hearing, let me say this about credit
cards. I support them. I strongly believe in the product and
its potential to give consumers greater convenience and access
to capital. They are an important component of a financial
services industry that is the most dynamic and innovative in
the world. And that statement cannot be stated strongly enough.
I believe it very strongly. And I support the notion that
consumers must share the responsibility to better understanding
the terms and conditions of their credit card agreements and
take personal responsibility for their financial decisions.
Let me add here an aside, if I can. Someone last evening I
was talking to talked about financial literacy. That is
something I hope we might encourage our Committees on Education
and other schools across the country to begin early on with
young people and to educate them about the importance of the
responsibilities in financial matters.
But this morning I would like to put the credit card
industry on notice as well, and issuing banks as well, and
associations, that if you currently engage in any business
practice that you would be ashamed to discuss before this
Committee, then I would strongly encourage you to cease and
desist that practice. Irrespective of the current legality of
such practices, you should take a long, hard look at how you
treat your customers, both in the short term and in the long
term.
Credit card use has grown dramatically over recent years.
Over 640 million credit cards are issued by more than 6,000
credit card issuers, currently in circulation in this country.
Between 1980 and 2005, the amount that American consumers
charged to their credit cards grew from $69 billion a year to
more than $1.8 trillion per year. Credit cards have played an
important role in supporting entrepreneurship and have helped
to provide consumers in building credit histories. But in far
too many instances, in my view, they can harm, not help, a
consumer's ability to move up the economic ladder.
I would like to outline a few of my concerns regarding
credit cards that I believe this Committee must examine. One of
the trends that greatly troubles me is the exponential rise in
consumer debt and the role that credit cards have played as
part of that trend. The recent level of credit card debt in the
United States is at a record height. Total consumer debt in
America is nearly $2.4 trillion. Out of that, $872 billion is
revolving debt, which is essentially credit card debt.
The average American household--the average American
household--has over $9,300 worth of credit card debt. Let me
repeat that. The average household has more than $9,300 of
credit card debt. In comparison, the median household income
was about $46,000 in 2005.
Additionally, Americans have never paid more in interest,
paying nearly 15 percent of their disposable income on interest
payments alone, despite the current historically low interest
rate environment.
Another area which I believe deserves examination is the
massive increase in targeting of credit card solicitations.
According to the Federal Reserve, an estimated 6 billion direct
mail solicitations were sent by credit card issuers in 2005
alone. Many of the solicitations target students, persons
currently on the economic edge, senior citizens on fixed
incomes, and persons who have recently had their debts
discharged in bankruptcy.
I have long believed that we have an added responsibility
to protect the most vulnerable in our society, and I believe
that examining the targeting of these groups is critically
important.
I also have concerns with the amount, type, and disclosure
of certain fees imposed on consumers. Over the past 2 years
alone, the amount of money generated by credit card fees has
simply skyrocketed. In fact, the term ``skyrocketed'' may be
something of an understatement. Banks are expected to collect
$17.1 billion from credit card penalty fees in 2006, a 15.5-
percent rise from 2004. According to R.K. Hammer, a bank
advisory firm, this is a tenfold increase from 1996 when credit
card companies raised $1.7 billion in revenues and fees. In 10
years, $1.7 billion to $17.1 billion. We need to take a close
look at these fees and how they fundamentally impact consumers.
We must closely examine the current disclosure regime as
well. The current system of disclosure is outdated. It has not
kept pace with a variety of credit card practices, and
consumers have little understanding of the terms and conditions
of their credit card contracts. Despite the significant work of
many, including a number of the Members of this Committee, to
provide consumers with clear, understandable, and consistent
information, consumers are consistently becoming confused and
intimidated.
The Truth in Lending Act is the primary Federal law
pertaining to the extension of consumer credit. TILA, as it is
called, and Regulation Z, which implements the act, require
creditors offering open-ended credit plans, such as credit card
accounts, to disclose costs and other terms. The purpose of the
act is, and I quote the purpose of the act here for you, ``to
assure a meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the various
credit terms available to him in the marketplace and avoid the
uninformed use of credit; and, two, to protect the consumers
against inaccurate and unfair credit billings and credit card
practices.''
The Federal Reserve is currently conducting a review of the
open-ended credit rules of Regulation Z. It is my hope that the
review will result in greater clarity and comprehensibility for
consumers. Let me also add that the OCC issued an advisory
letter in September of 2004 to alert the national banks to the
agency's concerns regarding certain credit card marketing and
account management practices. The OCC's letter outlines three
credit card practices that, and I quote them, ``may entail
unfair or deceptive acts or practices and may expose a bank to
compliance and reputation risks.''
While the OCC has deemed these practices unfair and
deceptive, the agency has to this point declined to prohibit
them. With the increase in the pervasiveness of credit cards
and the number of consumers who utilize them, the OCC, in my
view, should recommit itself to protecting consumers. We must,
in my view, redouble our efforts to ensure that consumers have
a complete and accurate understanding of the debts that they
will enter into with credit card issuers. Examining the law and
regulations that protect consumers will be a very important
part of this Committee's oversight work.
Additionally, there are many credit card practices that the
American public has raised significant concerns with, not
simply with the disclosure but the underlying rationale and
justifying them. For example, double-cycle billing, universal
default, and the methodology of penalty increases and interest
rates, and the issuance of multiple low-limit cards with
exorbitant fees are just some of the controversial practices
that are pervasive in the industry.
I would also say here that ``caveat emptor'' or ``buyer
beware'' should not be used, in my view, to defend the myriad
of confusing, misleading, and in some cases predatory practices
which have become standard operating procedures for some in the
credit card industry.
And, last, I would be remiss if I did not mention one issue
that is not likely to be explored today: credit card
interchange fees. These fees are imposed on merchants and
consumers by banks and credit card associations when a credit
or debit card is used to pay for a purchase. Interchange fees
are growing exponentially, and the costs associated with these
fees are expected to be between $30 and $40 billion this year
alone. These opaque fees are assessed on merchants and passed
on, in part or in whole, to consumers who have no knowledge or
understanding that a fee is even a part of the cost of the
bread, milk, or whatever other purchase they make. I believe
that this is another area that this Committee should examine as
part of a series of hearings on credit cards, and we will do
that.
With that, I would like to introduce the--I will get to the
witnesses in a minute. Let me turn to my colleague from Alabama
for any opening statement he wants to make, and then I will
introduce our witnesses. But, again, I thank all of you for
being here today, and I thank my colleagues for their
participation.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman. I want to commend
you for holding this important hearing. You have touched on a
lot of things.
Over the last 30 years, there has been considerable change
in our Nation's credit markets. In the past, card issuers
offered fixed-rate, fee-based cards to consumers with only the
best credit ratings. Today, the use of risk-based pricing
allows issuers to offer a wide variety of cards to a greater
number of consumers by using different rates, fee structures,
and credit limits.
While it is clear that such innovation has greatly and
positively affected the cost and availability of credit, it is
also clear, Mr. Chairman, that these changes have led to some
troubling practices as well. Generally speaking, more complex
credit card products involve more conditions and variables,
making it harder for the average consumer to fully understand
their rights and their responsibilities. Large numbers of
consumers, in fact, do not understand the basic terms that can
affect rates and fees.
For example, many are surprised when the rate on their card
is raised even though they have made every payment in full and
on time. Through the practice known as universal default,
credit card issuers maintain the right to raise rates when they
discover that a consumer was late or missed a payment on any of
the consumer's other credit accounts.
The marketing of credit card products has also changed
dramatically in recent years. From the Internet, to college
campuses, to the mailbox, credit card solicitations are
everywhere. The marketing campaign does not stop when a
consumer already has an issuer's card or even when the
cardholder is having trouble making payments. In fact, some
issuers extend additional credit to troubled borrowers with
full knowledge of their credit difficulties.
At the outset of this hearing, I think we must recognize
the integral role credit cards play in the financial lives of
almost all adult Americans. Nearly half of all Americans use
credit cards to conduct transactions worth billions of dollars.
And with that in mind, this Committee has a responsibility to
not only identify abuses and questionable practices by issuers,
but also to highlight the positive aspects of the credit card
marketplace, while emphasizing the responsibilities of the
individual cardholder.
I believe that credit must not only be used responsibly but
extended responsibly as well. The key to achieving both of
these goals is access to accurate and understandable
information. I look forward to hearing from today's panel on
the state of the credit card business and how Congress can
continue to be a constructive influence in a dynamic and
necessary sector of our financial services industry.
Mr. Chairman, I have an article here that appeared in
BusinessWeek Magazine, November 6, 2006, and it is entitled
``CapOne's Credit Trap.'' I think it is very instructive, and I
ask unanimous consent it be made part of the record.
Chairman Dodd. It will be made part of the record.
Senator Shelby. Thank you, Mr. Chairman.
I am going to ask each of our panelists here if they would
like to make a couple of opening comments. Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Let me just start off by saying, Mr.
Chairman, thanks not only for calling the hearing but also
thank you for working with us to make sure we have a fair and
balanced hearing where all sides can be heard in a respectful
way. I am very grateful for that.
I want to thank each of the witnesses for joining us today,
and some of you have family members here, and I see one 13-
year-old back there behind Mr. Donovan, and especially welcome
to you. You are good to miss school today to be here to back up
your Dad.
[Laughter.]
Chairman Dodd. He can help them out with the math, maybe.
Mr. Donovan. He can pass me the notes.
Senator Carper. We are going to look carefully, Mr.
Donovan, and see if we can see your son's lips move while you
speak.
[Laughter.]
Senator Carper. That is the way it is in our family.
I especially want to welcome Richard Vague, who is here
today, whom I have known for some 20 years. He came to Delaware
a number of years ago and created a credit card bank called M
Corp. It grew into First USA, which was, I think, at the time
maybe the largest Visa credit card issuer in the world with
some 60 million credit cards. We were fortunate that he came to
our State. He now heads up Barclaycard USA, which acquired
Juniper Bank, and we are just glad that they are in our State
on the riverfront. If you ever come through Delaware on the
train, right by the riverfront you will see Barclays Bank, and
that is the bank that Richard and his colleagues, including
Clint Walker, who is here, head up. We thank you for coming.
I say to our witnesses, we just finished last week
legislation dealing with ethics, ethics reform. You probably
were following it in the press. And as it turns out, most of
the folks, I think, sitting--well, all the people sitting up
here on this panel, and even those that are not here today, are
what I would call ``White Hats'' in this business. As it turns
out, not everybody who happens to serve in the U.S. Congress
wears a white hat, and one of the reasons why we have taken up
ethics reform legislation and enacted it in the House and in
the Senate is because of the misdeeds of a number of our
colleagues, not in the Senate so much as in the House of
Representatives in recent years. And we need to clean up our
own act and police our own act, and that is what we are
endeavoring to do.
And, by the same token, there are a lot of White Hats in
this industry, too. I think they happen to be sitting here at
this table, and there are others that are not at this table.
But we know, by the same token, that there are folks who follow
practices that are, I think, inappropriate, in some cases
abusive, and what we need to do as a Committee is to put a
spotlight on that behavior, on those practices, and at the same
time put a spotlight on the practices of those whose behavior
we think is appropriate and commendable.
I think there is a lot that we agree on in this panel. We
agree on the need for better disclosure, not just more detailed
disclosure, but actually disclosure that people can read and
understand. Christopher Cox, who is the head of our SEC, comes
before us from time to time. One of the great virtues that he
brings to this witness table is he actually speaks in language
that we can understand, and he is trying to convince the rest
of the SEC to speak and write in plain English. And we think
that kind of approach is needed in a lot of, frankly, the way
we probably give speeches and also in the way we disclose
matters that relate to credit cards that some of you issue.
Financial literacy. We are proud of the work that we are
doing in Delaware in financial literacy. We need to do a better
job in, frankly, every State of making sure that the people who
receive--whether it is a credit card application in the mail or
a form dealing with refinancing a mortgage, we need to make
sure that people understand what they are getting into, and
that is a big part of our responsibility.
The last thing I want to say--and I think Senator Shelby
may have referred to this, but I remember the first credit card
I got. I was in the Navy. I was a naval flight officer. It was
during the Vietnam War. I got a credit card, and there was a
limit on how much I could charge. There was a monthly fee that
I had to--or an annual fee that I had to pay. I do not think
there was an interest rate on what I was charging. And things
have certainly changed a lot, but it was helpful to me to have
that card then. And today I think I have three or four credit
cards in my wallet. One I use for my personal use. Another I
use for matters that are official Senate dealings, charges that
I make. Another deals with my campaign, charges that are
reimbursable by my campaign. And it is very helpful to me to
manage my finances to have those credit cards.
In my State, in Delaware, we used credit cards rather
extensively for State employees to provide a paper trail so
that we could follow the charges that they were making. It was
actually quite helpful for our auditors to ferret out abuses
that might occur. We do a similar kind of thing with Federal
employees.
So I would say that as we look at this hearing today and we
look forward, Mr. Chairman, we all know that there are
certainly improvements that can be made. Everything I do I can
do better. I am sure that is true for this industry. And we
hope that today will be a good place to start us on that trail
to clearing up some of the abuses that occur, putting a
highlight or a spotlight on those that are doing the right
thing, and maybe we will all be better for it.
Thank you.
Chairman Dodd. Thank you very much.
Senator Bennett.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Thank you, Mr. Chairman. I appreciate the
opportunity to be here and look forward to the witnesses.
Putting it into a little bit of a historic note, I note
that back in 1990 the average interest rate on credit cards was
18 percent, and a good percentage of them charged an annual
fee. In 2005, the average interest rate is 12 percent, and most
of them do not charge an annual fee. So the pressures of
competition to make it better for consumers have produced this
kind of change, and I think we should recognize that the market
does work. The market has produced better situations for
consumers. And while I am still troubled about some of the same
issues you are, Mr. Chairman--the solicitation issue, the
entrapment, if you want to call it that, of people who will
have difficulty meeting their credit card charges--I think we
need to be careful as we go forward to make sure we do not have
some of the problems that other countries have had that have
tried price caps on interchange fees and discovered that the
result has been the drying up of opportunities for credit
cards.
So I think you have a balanced panel of witnesses here, and
I look forward to hearing from them.
Chairman Dodd. Thank you very much, Senator.
Senator Akaka.
STATEMENT OF SENATOR DANIEL K. AKAKA
Senator Akaka. Thank you very much, Mr. Chairman. I am
happy to be back on the Committee, and I look forward to
working with you and the Members of the Committee. I also want
to welcome our witnesses. Thank you for conducting this
important hearing. It is imperative that we make consumers more
aware of the long-term effects of their financial decisions,
particularly in managing credit and debt.
While it is relatively easy to obtain credit, especially on
college campuses, not enough is being done to ensure that
credit is properly managed. Currently, credit card statements
fail to include vital information that would allow individuals
to make fully informed decisions. Additional disclosure is
needed to ensure that consumers completely understand the
implications of their credit card use and the costs of only
making the minimum payments.
I have a long history of seeking to improve financial
literacy in this country, primarily through expanding
educational opportunities for students and adults. Beyond
education, consumers need to be made more aware of the long-
term effects of their financial decisions, particularly in
managing their credit card debt, so that they can avoid
financial pitfalls.
The Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005 included a requirement that credit card issuers provide
information to consumers about the consequences of only making
the minimum monthly payment. However, this requirement fails to
provide the detailed information on billing statements that
consumers need to know to make informed decisions.
The bankruptcy law will allow credit card issuers a choice
between disclosure statements. The first option included in the
bankruptcy bill would require a standard minimum payment
warning. The generic warning would state that it would take 88
months to pay off a balance of $1,000 for bank cardholders or
24 months to pay off a balance of $300 for retail cardholders.
This first option also includes a requirement that a toll-free
number be established that would provide an estimate of the
time it would take to pay off the customer's balance. The
Federal Reserve Board would be required to establish a table
that would estimate the approximate number of months it would
take to pay off a variety of account balances.
There is a second option that the law permits. The second
option allows the credit card issuer to provide a general
minimum payment warning and provide a toll-free number that
consumers could call for the actual number of months to repay
the outstanding balance.
The options available under the bankruptcy reform law are
woefully inadequate. They do not require issuers to provide
their customers with the total amount they would pay in
interest and principal if they chose to pay off their balance
at the minimum rate. Since the average household with debt
carries a balance of approximately $10,000 to $12,000 in
revolving debt, a warning based on a balance of $1,000 will not
be helpful.
The minimum payment warning included in the first option
underestimates the costs of paying a balance off at the minimum
payment. If a family has a credit card debt of $10,000 and the
interest rate is a modest 12.4 percent, it would take more than
10-1/2 years to pay off the balance while making minimum
monthly payments of 4 percent. Shortly, I will be introducing
the Credit Card Minimum Payment Warning Act. The legislation
would make it very clear what costs consumers will incur if
they make only the minimum payments on their credit cards.
If the Credit Card Minimum Payment Warning Act is enacted,
the personalized information consumers would receive for their
accounts would help them make informed choices about their
payments toward reducing outstanding debt.
My bill requires a minimum payment warning notification on
monthly statements stating that making the minimum payment will
increase the amount of interest that will be paid and extend
the amount of time it will take to repay the outstanding
balance. The legislation also requires companies to inform
consumers of how many years and months it will take to repay
their entire balance if they make only minimum payments. In
addition, the total costs in interest and principal, if the
consumer pays only the minimum payment would have to be
disclosed. These provisions will make individuals much more
aware of the true costs of their credit card debt.
The bill also requires that credit card companies provide
useful information so that people can develop strategies to
free themselves of credit card debt. Consumers would have to be
provided with the amount they need to pay to eliminate their
outstanding balance within 36 months.
Finally, the legislation requires that creditors establish
a toll-free number so that consumers can access trustworthy
credit counselors. In order to ensure that consumers are
referred to only trustworthy credit counseling organizations,
these agencies would have to be approved by the Federal Trade
Commission and the Federal Reserve Board as having met
comprehensive quality standards. These standards are necessary
because certain credit counseling agencies have abused
nonprofit tax-exempt status and taken advantage of people
seeking assistance in managing their debt. Many people believe,
sometimes mistakenly, that they can place blind trust in
nonprofit organizations and that their fees will be lower than
those of other credit counseling organizations.
In a report on customized minimum payment disclosures
released last April, the Government Accountability Office found
that consumers who typically carry credit balances found
customized disclosures very useful and would prefer to receive
them in their billing statements. We must provide consumers
with detailed personalized information to assist them in making
better informed choices about their credit card use and
repayment.
Our bill makes clear the adverse consequences of uninformed
choices such as making only minimum payments and provides
opportunities to locate assistance to better manage credit card
debt.
Mr. Chairman, I look forward to working with you and the
rest of the Committee to improve credit card disclosures so
that they provide relevant and useful information that
hopefully will bring about positive behavior change among
consumers. Consumers with lower debt levels will be better able
to purchase homes, pay for their child's education, or retire
comfortably on their own terms.
Mr. Chairman, I thank you for giving me this time, for
conducting this hearing, and for your leadership on these
issues. Thank you very much.
Chairman Dodd. Thank you, Senator Akaka. You have been
involved in these issues for a long, long time, and we welcome
your continued involvement.
Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Mr. Chairman, I think at this point most
that needs to be said has already been said, and so I am going
to just say that I see a fundamental change in credit card use
from a philosophical standpoint. You know, years ago it used to
be a matter of convenience. And today I think more and more
young people and young families are looking at it as a way of
establishing credit, where historically I think consumers used
to go to the bank for long-term credit and now they are looking
for short-term credit means, and there are a lot of traps in
it. And I applaud you for having this hearing to make consumers
and lenders, in this case many times a credit card, to
understand, you know, the traps that happen out there. We all
need to be made aware of them, and I thank you for holding this
hearing.
Chairman Dodd. Thank you very much.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, and, Senator
Shelby, thank you, and thanks to all the panelists, especially
Dr. Warren and your contribution on all of these issues over
many years. Thank you for that.
Ohio State University, the largest university in my State
and the Nation, tells its students on its financial aid website
to ``avoid credit card debt while you are a college student.''
Yet go to any college campus in my State, Bowling Green or
Miami or Cincinnati or Kent State or Akron U. or Toledo, and
almost any campus across this country, you see that college
students are inundated with credit card applications.
I question a business model that markets credit card debt
to young people who do not have the means to pay the debt back.
And I question the business model that markets lifetime debt to
working families and elderly Americans.
According to a study at Ohio State, more and more retirees
are struggling with credit card debt that they will simply
never be able to fully repay. There is a fine line between
sales tactics and scams, between product promotion and
unrelenting pressure. Of course, the goal of this Committee's
work today is not to block consumer access or hamstring the
credit card industry. The goal is to explore how we can set up
a better system where informed consumers can make the best
decisions possible regarding credit card debt.
I am looking forward to hearing how billing and disclosure
practices can empower the American consumer to make the right
decision.
Chairman Dodd. Thank you very much, Senator.
Senator Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Senator. I will try to
be brief as well. I associate my comments with those of some of
my colleagues here today who have talked about not only the
concerns that we look at to make sure that the industry is
operating properly and that there are not inappropriate
marketing practices, but also the value that credit cards and
the credit system in the United States has brought to the
American consumer and to the American economy.
I note that between the years of 1980 and 2005, the amount
that consumers utilized in terms of credit cards grew from $69
billion to more than $1.8 trillion. And there is a tremendous
benefit to citizens in the United States and our economy to
having such a robust and dynamic system of credit. But we must
make sure that that system of credit does not create abuses or
allow for circumstances of abuse. And I think that is the focus
of this hearing.
You know, I was just listening to Senator Brown talk about
the college situation. I have got kids in college right now,
and I made sure every one of them had a credit card, but that
they knew how to use it. My kids use their credit cards the way
I think most consumers use their credit cards, and that is,
they pay them off every month. But they are able to use that
credit card to significantly increase the flexibility of their
legitimate consumption needs and to participate in a vibrant,
dynamic economy.
So I make that point just to indicate that there is really
a balance that we have got to reach here because the
utilization of credit in this Nation can be a tremendously
strengthening force for our economy and an empowerment to our
citizens, while at the same time if wrongly utilized can be
something that drags them down into a mire of debt.
We need to make sure that we in this Nation have a credit
system that works to the advantage of our individual citizens
and to the advantage of our economy, or we will again see a
circumstance in our Nation where we as a Nation are losing in
some of the international competitive strengths that we used to
have in our economy.
So it is that balance that I am going to be looking for,
and I appreciate the witnesses' coming here today to share with
us their understanding of these different types of issues.
Chairman Dodd. Thank you very much, Senator. That was very
well said, and I think you will hear all of us make similar
statements. This is a very important industry and critically
important to consumers, and striking that balance is truly what
we want to do in these hearings and try to solicit some good
information and some changes that will assist in achieving that
balance that we want.
Senator Tester.
STATEMENT OF SENATOR JON TESTER
Senator Tester. Thank you, Chairman Dodd, Senator Shelby.
Thank you for having this hearing on this topic that affects
millions and millions of Americans' pocketbooks every day--the
billing, marketing, and disclosure practices of the credit card
industry. And thank you, panelists, for coming today.
The average American is trying to make ends meet, we all
know that--providing for their kids, paying for their mortgage,
buying their prescription drugs, saving for a rainy day,
hopefully. They have little time at the end of the day to
decipher the many inserts to their credit card statement and
the fine print in the credit card solicitations.
You know, when my wife and I took over the farm, one of the
ground rules my folks laid out is you are not going to have any
credit cards, something that, quite frankly, we despised at
that point in time. That was in the late 1970's. It was a
different time than now, but still and all, it would have been
handy to have them.
But as my kids were growing up--and my daughter is 26 and
married and has two kids, and my son is 21 and in college--I
found out exactly firsthand why my parents laid those
stipulations down. Quite frankly, I believe in personal
responsibility, but there has to be education, there has to be
balance, and there has to be fairness. And when we put young
people's futures in a position where they are going to have a
difficult time saving for that rainy day or when their kids go
to college, we are making a huge mistake.
I can give you the examples where they went around with
credit card companies to the point where I took them out of my
pocket and cut them up myself. Now, in this day and age, you
have got to have some. When you fill up with gas, sometimes it
is tough. They do not take cash, so you have to do it. They
certainly do not take your check. But the fact of the matter is
if we do not educate our young people and give them the
opportunity to know what they are stepping into when they get
these cards, really as free money--I mean, it has been 30 years
ago since I graduated from college. But if somebody would have
sent me a plastic card and said, ``Here, you have got 5,000
bucks, go ahead and spend it,'' I would have probably done it
because I did not have the personal discipline at that point in
time to know what it was getting me into. And my folks pounded
financial security into our heads.
So I think it is critically important. This is such a
critically important issue, and it really troubles me that we
are putting our young people and our young families behind the
eight ball before they even get going in life financially. And
I cannot tell you how much this issue hits to the heart of
giving young folks a chance, whether they are in college or
whether they are out of college raising their families.
So I am very interested in this hearing and in the
testimony today from the credit card industry and consumer
groups and distinguished scholars. And I know that there are
very few issues that are black and white, but the fact is I am
eager to learn what we can do to make the playing field fair
and let folks know what they are getting into and the
ramifications of that before they make the wrong step
financially and it really does put them in a difficult
financial situation for decades, if not their entire life.
Thank you very much, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Senator Sununu.
STATEMENT OF SENATOR JOHN E. SUNUNU
Senator Sununu. Thank you, Mr. Chairman.
I have been on this Committee now for 4 years, and in the 4
years that I have been here, we have had a number of very good
hearings, and most of them really bipartisan, dealing with the
various aspects of the financial service industry. And we have
seen people testify--even when they come from different sides
of an issue, they testify about the growth and opportunity in
the industry, competition in the industry, mutual funds,
retirement services, annuities, insurance products. And with a
lot of the reform legislation that was passed in the late
1990's and in the 2000 timeframe, we have seen great growth and
competition in those industries. And consumers have been well
served in those areas by healthy and strong competition.
I think as we begin this series of hearings and look at the
credit card industry, we want to continue to push for honest
practices and honest disclosure. And I think if we have those
things, consumer interests are going to be particularly well
served. Where we see fraudulent practices, we also need to make
sure that we have strong, severe penalties for those practices.
And I think that is one of the things I am interested to hear
about today from those that have been victims of fraudulent
practices, that have seen the impact of fraudulent practices.
How did they manifest themselves? And what are the appropriate
penalties?
On the other side of the coin, I think we always have to be
worried about establishing the proper remedies, because even
well-intended remedies for a problem we see in the industry can
have unintended consequences. And we have seen that not just in
financial services, but in so many areas of our legislation
where we attempt to solve a problem that bothers us and the
country and consumers a great deal, but it has unintended
consequences. Price controls and other caps of that nature we
have seen in the past, restricting innovation, even restricting
access to consumers that are intended to benefit from the
products.
So I think that is the one thing we need to be aware of.
Set the right penalties for fraudulent activity. Make sure we
have honest practices and full, honest disclosure. We all, I
think, have credit cards or experience with credit cards, and
the one thing I find most baffling about credit cards are the
disclosure statements. They tend to be very long. They can be
written in legalese--although, ironically, some of those
requirements are put on them by us, by Congress, or by the
States or by other regulatory bodies. So, you know, that
probably bears some investigation at this hearing and at
subsequent hearings, how to make sure that when we are
disclosing information to consumers--not just that it is in the
envelope, but that it is actually in a form that means
something and that connects with the public.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much.
I would just note--and you may hear this from some of our
witnesses--that in 1980 the average contract for a credit card
was one-page long. Today it is 30 pages, 25 years later. So the
average consumer is sitting here trying to determine what is
going on.
Senator Bennett. We have met the enemy, and he is us.
[Laughter.]
Senator Shelby. Mr. Chairman, I wonder how many people read
a 30-page document.
Chairman Dodd. That is the intention.
Senator Shelby. Nobody.
Chairman Dodd. Senator Menendez.
STATEMENT OF SENATOR ROBERT MENENDEZ
Senator Menendez. Thank you, Mr. Chairman. Let me
congratulate you. This is the first formal time I have been at
the Committee with you as the Chair. In your chairmanship of
the Committee, we look forward to working with you and Ranking
Member Shelby in the same bipartisan way that Senator Shelby
led the Committee with Senator Sarbanes. And I appreciated it
when he did that, and I am sure you will do the same.
I want to thank both of you for holding this hearing today
on the credit card industry practices and their impacts on our
constituents. I think credit is very important. I think the
industry provides a great service and lots of opportunity for
people to establish credit, to have the values that can flow
from it. It is obviously in this economy a very important
economic and financial factor. But there are also challenges,
and I hope that the industry--above all from this hearing, I
hope the industry will work with us to meet some of those
challenges.
There is another industry, which I will fail to mention but
it has a great presence in New Jersey, that years ago I raised
with them before a certain issue before the Congress became an
issue, that if they, in fact, sought an industry response to
some of the rising challenges within their industry and the
consumer base, that they would be much better with an industry
response than with a legislative response. And having convened
all of them together, they all agreed, and then they went and
they, for one reason or another, failed to have an industry
response. And the consequences that flowed from that, quite a
bit, both in the hundreds of millions of dollars they spent on
the issue and having a black eye to what was a revered industry
for producing good products that improved the quality of life.
So I hope if nothing else for today that it is in that
spirit that the industry will look at this hearing because
there are challenges. Families across this country face a
growing problem of rising credit card debt. In 2004, the
average American household had about $9,300 in credit card
debt, up from $3,200 just 12 years earlier. More and more
Americans are using credit card debt to manage daily living
expenses as basic living costs, medical bills, house or
automotive repairs. And for college students--and this is one
of the areas that I have the greatest concern, having had two
college students--well, still one--the incredible, aggressive
solicitation of a universe that in many respects does not have
the income to ultimately provide the payment for the credit
cards that they somehow not only are solicited but then take,
and the consequences from that are very significant. I have
talked to families who absorbed the debt because they did not
want their kids to have bad credit early on in their life. And
I have talked to families who could not absorb the debt, and at
the end of the day had their kids start off with bad credit.
Now, I have a stack in my home this high--I should have
brought it today--of the solicitations my kids received, and
the reality is that they were not gainfully employed to be able
to pay the solicitations. But, in fact, they would have easily,
I think, received a credit card.
As a matter of fact, 2 years ago, Augustino Joseph
Chairvolotti, one of my constituents in New Jersey, received
his very first solicitation for a pre-approved credit card at
the age of 2. He is my State Director's son. Evidently, if you
have a pulse and a Social Security number, you can get a credit
card offer, at least.
So the real question is: How do we go about making sure
that issues like that are dealt with in a way that provides an
opportunity for credit for those who can handle it and those
who should have it, but at the same time deals with the reality
that too many of our young people are already finding
themselves with a history of default that will have a real
consequence, especially after the last bankruptcy law? And at
the same time, how do we watch the targeting of people who are
likely to default, people who are like these college students,
older Americans, minorities, people who, in fact, do not have
the wherewithal to provide the payments for the credit lines
they are given?
And so we have introduced some legislation, Mr. Chairman,
and I will just include it for the record. But my hope is that
we can actually find a way in which we can work with the
industry to deal with some of these challenges so that we can
balance the interests of the industry and the interests of
consumers in having access to credit--questions of universal
default, questions of the incredibly aggressive nature of going
after college students, those who have not the wherewithal to
pay, questions of offering a credit card to someone under one
set of terms and then sending them a totally different credit
card under another set of terms. These are things I think the
industry would well be suited to work with us and others to
move in a direction that would, in essence, make sure that the
great positive aspect of the industry is preserved, and at the
same time balance with the interests of consumers so that we
can continue to move forward directly.
It is in that spirit that I come to this issue, Mr.
Chairman, and I look forward to working with you and others to
try to achieve some success.
Chairman Dodd. Thank you very much, Senator. I mentioned
before you came in your strong interest in the subject matter.
I have enjoyed working with you on it for many years.
Senator Casey, welcome to the Committee once again. Thank
you for being here. Just a quick opening statement you may have
before we----
STATEMENT OF SENATOR ROBERT P. CASEY
Senator Casey. Mr. Chairman, thank you very much. I will be
extraordinarily brief. I may be the last today, so we want to
get to the testimony. But I want to make two points.
One, to you, Mr. Chairman, and Senator Shelby and the
Members of the Committee, I think the fact that we are sitting
here today about to engage in a very important hearing that
involves not only families across America, and certainly many
of those in my home State of Pennsylvania, but the fact that we
are here talking about this issue is in many ways testament to
your leadership, Mr. Chairman, to focus on issues that have
real consequences to the real lives of real people. And I
appreciate that because this Committee, the reach of this
Committee is so broad and so important that when we have
hearings like this that get us into the real world, so to
speak, we are in your debt for that, and I appreciate that.
As many people here know, we are engaging in the Senate
right now in a debate about the minimum wage, which, in my
judgment, is much more simple than some people in Washington
want to make it. The subject matter of this hearing today is
more complicated and more difficult in my judgment. I come from
a State where we have a very strong financial services sector
of our economy, a very strong and significant part of our
economy. I also come from a State where families have been
devastated by the costs in their lives.
I was on the floor the other day talking about the minimum
wage and talking about it in the context of costs that have
gone up in the lives of families across America the last
decade. That is extraordinary when you look at the costs of
education and food and home heating oil and health care. Health
care costs are up almost 100 percent in the last 10 years. And
the worst thing that could happen to a family, as everyone here
knows, in addition to confronting all of those cases, is to
have their head--and I am being figurative here, but to have
their head in another vice grip out of which they cannot
extricate themselves because of the costs that they have to
bear with regard to credit cards in addition to all those other
costs.
So I want to be cognizant of that real-world concern that
families have, and I think this hearing and the hearings like
it will bring some light and will hopefully illuminate the
problem so that families across America can listen, as we must
do as Senators, listen and learn even as we might have some
conflicts about how to get to the solution.
But, Mr. Chairman, I appreciate this opportunity, and I
really appreciate this hearing being so early in this new
Congress and your chairmanship.
Chairman Dodd. Well, thank you very much, Senator, and we
will turn to our witnesses. And I hope the witnesses--let's
take a little time to do this this morning, to hear from--I do
not know how many Senators we have heard from, but almost the
full Committee here. I think there is a value in it. This is an
important subject matter, and we have new Members of the
Committee, new Members of the U.S. Senate, and while we want to
hear from you, obviously, because you bring a lot of expertise
to this, I think the conversation is important.
As I said at the outset, this is one in a series of
hearings we will have on this subject matter, and, again, I
want to underscore the point that Senator Menendez has made,
and Senator Sununu and others have made here this morning, and
that is, I do not think any of us are interested in necessarily
writing legislation unnecessarily here at all. We would rather
get something done without having to go through all of that
process if we can. So it is an invitation as well for ideas and
concepts that may actually -we could undertake almost
immediately. In fact, some of our witnesses here have already
made some decisions on their own fairly recently on what we
will be talking about this morning that I commend them for in
dealing with some of these issues. And that is the way in a
sense we can respond to some of these questions. So I thank
you. I thank all of my colleagues for being here. This is an
indication of the importance of this issue. Having served on
this Committee for 25 years, in many cases it is the Chairman
and the Ranking Member that are at hearings. We may have a good
size panel, but sometimes the interest in the subject matter
may not be as great. The fact that so many have turned out here
this morning indicates, I think, to all of you here as
witnesses how important this subject matter is.
With that, let me also point out we are going to have a
vote starting at some point here fairly quickly. What I am
going to do is we will rotate out here. I am going to maybe ask
my colleagues here if they will assume the chair here for a few
minutes while I run over and vote so we can keep the process
moving and not break the flow of the testimony.
Elizabeth, thank you. Elizabeth Warren is--truth in
advertising here--a friend and someone I admire immensely, and
I thank you for coming back to the Committee. She is the Leo
Gottlieb Professor of Law at Harvard Law School, author of the
book ``The Two Income Trap: Why Middle Class Mothers and
Fathers Are Going Broke.'' The National Law Journal named her
one of the 50 most influential women lawyers in America, and
Harvard students, maybe more importantly, have voted her the
Sacks-Freund Award for Teaching Excellence. So we welcome you
back to the Committee again, Elizabeth. Thank you once again
for your involvement.
John Finneran is the President of Corporate Reputation and
Governance of Capital One Financial in McLean, Virginia. We
welcome you to the Committee. And let me point out that Mr.
Finneran--where are you? There you are. We thank you immensely.
Capital One offered to be here. We noticed a hearing, and they
let us know right away they wanted to be here to participate,
and we welcome your participation, and thank you for your
willingness to step up here and be a part of this today.
Mr. Finneran. Thank you, Mr. Chairman.
Chairman Dodd. Robert Manning is Research Professor and
Director of the Center for Consumer Financial Services at
Rochester Institute of Technology, and the author of the widely
acclaimed book, ``Credit Card Nation.'' Dr. Manning's research
is regularly cited and quoted in major publications, and he has
testified frequently on Capitol Hill, including at this
Committee, and we welcome you back as well, Doctor. There you
are.
Carter Franke is the Executive Vice President of Marketing
for JP Morgan Chase & Company, whose credit card operation is
based in Wilmington, Delaware. He testified previously before
the Committee in 2005 on this issue, and we welcome you back to
the Committee. Thank you very much.
Michael Donovan is the founding member of the firm Donovan
& Searles, has litigated in a number of very key, significant
consumer justice cases, including cases in front of the United
States Supreme Court, the New Jersey Supreme Court, the U.S.
Court of Appeals for the Third Circuit, and we welcome you to
the Committee as well.
Richard Vague is the Chief Executive Officer of Barclaycard
US, also based in Wilmington, Delaware. We welcome you to the
Committee this morning.
Tamara Draut is the Director of Economic Opportunity
Programs at Demos, a public policy center based in New York,
and the author of ``Strapped: Why America's 20- and 30-
Somethings Can't Get Ahead.'' Her research is often cited in
major U.S. publications, and she frequently comments on
television news programs and magazines. And we welcome you to
the Committee. There you are. Thank you. Thank you for being
with us.
Travis Plunkett is the Legislative Director of Consumer
Federation of America in Washington. The Consumer Federation is
a nonprofit association of 300 organizations and a regular
witness, I might point out, at the Committee hearings. Once
again, we welcome your participation.
We will have you testify in the order that I have
introduced you, if that is OK, and then also all of your
testimony, any documentation you think would be valuable for
this Committee to have, I will tell you will be included in the
record. And to the extent you can try and keep your remarks
down to--let's try and make it 5 or 6 minutes here. I am not
going to hold you rigidly to that number, but so you keep that
in mind to get it out as fast as you can here so we can get to
the Q&A period.
Thank you, Elizabeth.
STATEMENT OF ELIZABETH WARREN, LEO GOTTLIEB PROFESSOR OF LAW,
HARVARD LAW SCHOOL
Ms. Warren. Thank you, Senator Dodd, thank you, Senator
Shelby, for having me here today. Thank you, Members of the
Committee.
I am someone who believes deeply in free markets, but I am
here today to talk about a market that is not working--at least
not working for millions of Americans who find themselves on
the wrong end of a credit card deal. Quite simply, the credit
card market is broken.
The basics of a credit card are pretty simple: Pay by
plastic. Get a bill. Pay the bill. So why, as Senator Dodd
notes, has the average credit card agreement gone from about a
page long in 1980 to more than 30 pages long today?
The answer is that these new pages reflect a business model
that has changed from its earlier simple roots. Card companies
still make money like they always did, with merchant fees and
annual fees, a tidy $11 billion last year. Not bad. But they
make their big-time profits from interest and penalties--an
astonishing $79 billion from people who are paying minimum
payments over time.
Today's successful credit card company puts its product in
the hands of as many shoppers as possible, pulling in decent
profits on each one, but always hoping for the sweet spot: the
customer who stumbles but does not quite collapse. That is the
customer who misses a deadline or misses a payment or goes over
limit and ends up paying 29 percent interest, $39 late fees,
$49 over-limit fees, and anything else the credit card company
wants to pile on.
Credit card contracts have grown to 30-plus pages to make
room for tricks and traps that will ensnare anyone who gets
into even a modest financial problem. After years of on-time
payments, a single stumble can create a cascade of credit
defaults and trap a customer for years, even a lifetime, as
Senator Casey noted, in a cycle of payments that will never pay
off these debts.
Some people do not worry about credit card tricks and
traps. About half of all American families pay off their credit
cards in full every month, and they rarely notice things like
the mysterious fees for charges when it takes 9 days for a
credit card payment to make it across country. Others enter the
credit card market as a gladiator once entered battle, looking
for leverage and the zero interest and grace period floats, and
taking pride in their ability to carry a credit balance while
dancing around the ever present traps.
But for 51 million American families who are juggling
mortgages and car payments and health insurance bills and
grocery bills, the credit card companies are imposing a huge
tax. And for the 23 million of those Americans who are making
only the minimum monthly payments, and sometimes not that, the
tricks and traps keep them on the financial ropes, collectively
shelling out billions to the credit card companies and never
quite getting back on their feet.
This, Senators, is where the market breaks down. In a
perfectly competitive market, both firms and consumers would be
given the information they need to make sound economic
decisions. Given the complexity of today's credit card terms,
30 pages of incomprehensible text is not the same as
understanding the terms of your credit card, especially now
that the credit card companies routinely reserve the right to
change the terms of your credit card on 15 days' notice with
another incomprehensible insert into your bill.
Sorting out safe cards and dangerous cards is almost
impossible. As one industry expert just explained last month,
bank products are ``too complex for the average consumer to
understand.'' Senators, I think it is clear. Card agreements
are not designed to be understood.
Be clear. This is not about risk-based pricing. A risk-
based pricing model is about the lender's assessment of the
likelihood of repayment at the inception of the loan with
subsequent calibration as more information comes due. Anyone
who has a small child, as Senator Menendez noted, or a dog or a
deceased relative knows that the initial pre-approved credit
card solicitation is not risk based. Instead, the model is
based on putting as many credit cards into the hands of as many
human beings--and dogs if they will take them--and then when
any of them stumble, trip, make the slightest misstep, load
them up with tricks and traps and maximize profits at that
point.
Charges for late fees or over-limit fees reflect the price
the credit card company thinks that it can charge and not have
the customer cancel the card. That is what it is calibrated to,
not to risk assessment. These tricks and traps are profit
taking, pure and simple, nothing more.
One of the few bits of protection for consumers was eroded
with the change in the bankruptcy laws in 2005. Prior to that
time, any customer who was facing outrageous interest charges
or penalty fees at least could credibly threaten to file
bankruptcy and try to initiate a negotiation. This threat had
the effect of curtailing at least some of the most aggressive
practices.
With the change in bankruptcy laws, however, many consumers
no longer see bankruptcy as an option. Whether they are right
or wrong does not matter. What matters is that even though they
remain eligible for bankruptcy, some now listen to debt
collectors who bully them and tell them that bankruptcy has
become illegal. Others are discouraged by the increases in fees
that make it more expensive for the poorest Americans to file
for bankruptcy. As a result, lenders can sweat them for
payments longer, keeping them trapped in a monthly cycle that
these customers can never pay off. After the new bankruptcy law
went into effect, a market that was already broken got a lot
worse for families in trouble.
Safer cards can turn a handsome profit, but because they
give up the mega-dollar sweet spot created by the tricks and
the traps, they will not produce the bloated profits of
dangerous cards. If more people turned away from such cards,
the market would quickly sort itself out. But if the consumer
cannot tell a safe card from a dangerous one, then the
marketplace will not reward safe cards.
Consumers bear terrible risks today when they use their
credit cards. Some will do OK, but some will get trapped. It
does not have to be that way. No one has to be an engineer to
buy a toaster in America. No one has to be a crash test expert
to buy a car. These are markets that have soared with
innovation over past decades, but they have also been supported
by national safety standards that kept burst-into-flames
toasters and crumple-on-impact cars out of the marketplace.
Government and industry joined forces to develop meaningful
guidelines in other industries. Cheap shortcuts that would
boost profits but leave consumers at risk have been banned from
those markets, with the result that competition has intensified
for the things consumers can readily see, like price and
convenience and color. And consumers, most importantly, have
safer products at lower prices.
It is time for safety regulation in credit cards as well.
There are 51 million American families who need your help,
Senators, and they do not have much longer to wait.
Thank you.
Chairman Dodd. Thank you very much, Elizabeth. Thank you
for your testimony.
A vote has started, I say to my colleagues here. What I am
going to do is introduce our next witness. I want to skip out
the door, and I will come right back. And, Senator Carper, if
you would like to take the gavel for 10 minutes, I will try and
get back so that you can make the vote and others who may want
to slip out and come right back. I will leave that up to you.
Bob Manning, Bob, where is he? There you are. Thank you
very much, Doctor, for being here. I will let you start your
testimony, and I will come right back. You just continue with
your testimony so we can move along.
STATEMENT OF ROBERT D. MANNING, PH.D., RESEARCH PROFESSOR OF
CONSUMER FINANCE, AND DIRECTOR, CENTER FOR CONSUMER FINANCIAL
SERVICES, E. PHILIP SAUNDERS COLLEGE OF BUSINESS, ROCHESTER
INSTITUTE OF TECHNOLOGY
Mr. Manning. Well, thank you, Chairman Dodd and Ranking
Member Shelby. It is certainly a pleasure to be invited back,
and I am particularly pleased to hear that there is a growing
awareness of many larger consequences than rather simply the
length of the contract that is to be discussed here today.
I saw my role today as to look at what has happened in
terms of some pretty profound changes, not only in terms of the
role of consumer credit cards in Americans' lives, but also how
the change in this industry has profoundly exposed and
increased the vulnerability not only to our Nation, comprised
of millions of distressed American consumers, but also in terms
of larger global issues. I want to conclude with that point
about America's dependence on cheap credit.
I think one of the first issues to emphasize is that there
is a real misunderstanding about how much consumer credit card
debt there is and also the pricing structure of the system,
what I have referred to as the ``moral divide.'' We do not have
an installment lending program where some people pay zero
interest, usually the most affluent, and those who are most
financially distressed essentially pay the financial freight
for those who have financial means.
Similarly, we constantly see an effort to reduce the
aggregate amount of consumer credit card debt. I have heard the
term $9,300 is the average household debt, but of the three out
of five households that actually carry a debt, it is over
$13,000. And I presented a brief simulation if we did not have
such extensive refinancing in the housing market, I estimated
that it would clearly be at least $18,000 today. And it is. It
has simply been reclassified because of the opportunity to
consolidate these debts into home mortgages.
The other issue that I think is really important to
understand is that the market has become more segmented in
recent years. I would identify at least four distinct segments:
the high-net-worth card that most of us are familiar with, the
Amex black card; the more traditional card, certainly facing
stress in terms of saturating its market, its traditional
market, going aggressively after more marginal consumers, such
as college students. My recent work shows more aggressive
marketing to high school students, those of modest financial
means where family members know that their children can get
credit cards and put pressure on them to borrow while they are
in college; and also increasing marketing to the handicapped,
which I find truly extraordinary that there is no debate about
the business ethics behind that particular marketing campaign.
We have seen a third tier that has emerged of the private
issue cards which shows the financial distress of Americans
that are willing to pay a 5- to 7-percent interest rate premium
on their Home Depot or furniture card just to free up some free
lines of credit on their Visa or MasterCard in case they have
that unexpected emergency.
The fourth tier is the sub-prime market, and I have been
involved in several class action lawsuits, and it is
extraordinary to see that the business model for these firms
has revenues based on about 70 percent--70 to 75 percent based
on fees. And it is disconcerting that these are not the small
morally challenged businesses like Cross Country Bank. We are
now seeing some major companies, such as HSBC with their
Orchard Bank, or even Capital One.
Liz pointed out, of course, the problem now that many
Americans are finding, that bankruptcy is not an option. And as
we had this debate over the last 7 years before its enactment,
look at the statistics of profitability. In 2004 to 2005,
before the law was implemented, the industry had record
profitability. Pre-tax profits jumped 30 percent, and even
though the argument was that consumers were discharging debt
they should not, credit card discharge rates actually declined
in 2005.
Clearly, deregulation and access to credit has elevated
people's standard of living, but one point we have neglected is
to see how the fluidity between these categories and the
manipulation of pricing of housing just because of interest
rates, where we saw the financial laws of gravity defied, where
real family income declined in the 2000's, and yet the average
metro housing price doubled.
Many Americans were seduced into refinancing into
adjustable-rate and interest-only loans, and we are going to
see how vulnerable they are when they are exposed to these
resets.
I think what was striking in terms of preparing my research
for this testimony was that looking at the wealth formation
versus debt formation of the average American, we are an
optimistic society and culture, and most Americans are willing
to go in debt based on their perception of the future. But if
we look at what happened to wealth formation with the
correction of the stock market after 2000 and now the
correction of the housing market, it looks like for the bottom
60 percent of Americans, nearly all of their net wealth
formation will be erased with this housing adjustment.
Finally, I want to emphasize the fact that we are seeing
the emergence of what I have called the ``near bankrupt
Americans,'' people who do have jobs who are finding themselves
in a situation where maybe they are eligible for bankruptcy
filing, but they find themselves caught between a system that
says they repay all of their debt or none of their debt. And
yet in our pilot program in Texas, we find that there are
Americans that are willing to go into a lawyer-supervised
partial payment repayment program of anywhere from three-
quarters of a percent to one and three-quarters of a percent,
desperately trying to do the best they can to pay their bills.
And yet even with the support of Governor Huntsman in Utah and
the Utah State Legislature, we are not finding that major
credit card collection executives are willing to discontinue
their adversarial debt collection strategies, even when it is
in their financial interest to seek a partial payment recovery.
The final point is that with my research on the global
deregulation of financial services, we are seeing a very strong
association that those countries that have deregulated their
markets are seeing a sharp decline in their savings rates. And
this is going to have very severe issues in terms of our
ability and our dependence on cheap credit, that clearly we are
going to be more vulnerable to global financial markets, that
we certainly cannot expect other countries to reduce their
standard of living simply to support our own, and that with the
housing correction we see already what the average American's
dependence on cheap credit really means.
Thank you.
Senator Carper [presiding]. Dr. Manning, thank you very
much for your testimony.
We began 13 minutes ago a 15-minute vote, which gives me 2
minutes to get to the Senate floor to vote. I am pretty fast,
but I do not know that I am that good. In my youth, I probably
could have made it. They have sort of like a 5-minute extended
period that we have to use. So if I get there in the next
roughly 6 minutes, my vote will count.
What I am going to do, rather than call on Mr. Finneran to
begin his testimony and have to stop in a minute or so into the
testimony, I am just going to suggest that we recess briefly,
and my colleagues will begin pouring back in here, and I think
our next witness will be Mr. Finneran, and he will be followed
by Mr. Donovan.
So if you will just sit back, relax, have a long cold drink
of water, we will be right back. Thanks very much.
[Recess.]
Chairman Dodd. Can I bring you back to the witness table? I
just saw one of our witnesses scurrying down the hall, but I
presume she will be coming back. I hope I did not say anything
here to cause a witness to go scurrying down the hall.
I apologize to you, but many of you have been here before,
and you know this can happen with votes on the floor of the
U.S. Senate that we will be interrupted. We try and do this in
a way that does not break up the flow, but it gets harder each
time. And I gather now we have, of course, heard from Elizabeth
Warren, we have heard from Dr. Manning. I am going to turn to
John Finneran at this point. John, thank you very much. Again,
thank you for being here. We are very grateful to you, as I
said earlier. When we first announced these hearings, Capital
One--I do not know whether you contacted us or we contacted
you, but you agreed immediately that you wanted to be here to
be a part of this hearing this morning, and we appreciate that
very, very much. Very important. The floor is yours.
STATEMENT OF JOHN G. FINNERAN, JR., GENERAL COUNSEL, CAPITAL
ONE FINANCIAL CORPORATION
Mr. Finneran. Great. Thank you very much, Chairman Dodd and
Members of the Committee. Good morning, and we do really
appreciate the opportunity to be here to address the Committee.
I would just echo for a few minutes the comments of many of the
members. We do believe that it is an important dialog and one
that certainly we as a member of the industry, do not want to
shy away from. Indeed, we welcome the opportunity to have these
kinds of conversations.
Today, the credit card is among the most popular forms of
payment in America. It is valued by consumers and merchants
alike for its convenience, efficiency, and security. As the GAO
noted in their recent report on this topic, the past decade has
seen substantial change in the availability and pricing of
credit cards. A little over a quarter of a century ago, less
than a third of American consumers were able to obtain credit
cards. Today, 75 percent have them. As recently as the early
1990's, everyone paid the same high interest rate and annual
membership fee regardless of their risk profile. Today, as the
GAO found, interest rates have come down significantly for the
majority of consumers and most pay no annual fees. At the same
time, pricing for risk has become more targeted. Those
consumers who exhibit riskier behavior typically pay higher
rates than those who do not, or may be charged fees for paying
late or going over their credit limit. Consumers who choose to
pay in full each month, as more than half of all credit
cardholders do, pay no interest.
Importantly, the GAO also found that during this period of
time industry profits remained stable, suggesting that changes
in credit card pricing have indeed reflected changes in how the
industry prices for risk.
The benefits of more discrete, targeted, and accurate
pricing of credit cards have come, however, at a cost, and that
is, increased complexity. I think that is a topic that has been
noted by many in this debate. For this reason, Capital One has
submitted to the Federal Reserve a proposal that would
significantly revise the disclosures required in the Schumer
Box to make it easier for consumers to both better understand
the terms of any particular offer and to compare one product to
another. A copy of Capital One's unique proposal was included
as an attachment to my written testimony.
While we await these changes from the Federal Reserve,
however, Capital One has already implemented a comprehensive
new set of disclosures, written in plain English, which go
substantially beyond the legal requirements of the Schumer Box.
These include a food-label style disclosure and a customer Q&A
that present our policies in simple terms. These disclosures
are included in all of our marketing materials.
The increased complexity of credit cards has also brought
rising criticism of the industry in recent years. Capital One
continuously reviews and makes changes to its practices in
light of changing consumer preferences. One area of change is
in repricing where Capital One has simplified and strictly
limited the circumstances in which we may increase a customer's
interest rate if they default on the terms of their credit card
agreement.
I want to be very clear. We do not engage in any form of
universal default. That has been our longstanding policy. We
will not reprice a customer if they pay late on another account
with us or with any other lender or because their credit score
goes down for any reason. In addition, Capital One will not
reprice customers if they go over their limit or bounce a
check. There is only one circumstance in which a customer might
be subject to default repricing--that is, if they pay us late,
more than 3 days late, twice in any 12-month period. We clearly
disclose all of these policies in our marketing materials and
provide customers with a prominent warning on their statement
after their first late payment.
Even then, the decision to reprice someone is not
automatic. For many customers, Capital One chooses not to do
so. If we do reprice someone for paying late twice, we will let
them earn back their prior rate by paying on time for 12
consecutive months. That process is automatic.
While introductory or teaser rates can provide substantial
benefits to cardholders, they have also come under criticism if
they are subject to repricing during the introductory period.
Capital One has adopted strict policies regarding their
marketing and treatment. Capital One does not reprice
introductory rates for any reason, even for repeated late
payments. The specific period for which these rates are in
effect is fully disclosed multiple times in our marketing
materials. We also disclose the long-term rate that will take
effect if and when the introductory rate expires.
Similarly, another practice that may cause customer
confusion is double-cycle billing. Capital One has never used
double-cycle billing.
Senator, I want to address something that Senator Shelby,
although he is not here at the moment, mentioned in his opening
statement. He mentioned a recent article in Business Week
Magazine about Capital One. I must admit it, it was not a very
flattering article, and I can also admit that if one were to
read it, one could draw, an understandable conclusion about our
business practices. Let me just say a couple things.
We take very seriously any situation where a customer may
be experiencing difficulties and constantly evaluate our
practices to make sure that we do not extend more credit than
our customers can manage responsibly. This article does not
describe our business model. It does not describe our policies
or our intent.
Many customers choose to have multiple credit cards for a
variety of reasons, as Senator Carper noted himself in his
opening statement. Some like to have both a Visa and
MasterCard. Some like to have multiple cards in order to
segregate expenses or for security or for different features
like rewards. Like our competitors, we hope they will choose us
to fill those needs. Eighty-five percent of our customers have
only one card with us, although they may very well have cards
with our competitors. Less than 4 percent of our customers have
more than two cards with Capital One. We only offer an
additional card to a customer if that customer is in good
standing with respect to his existing card with Capital One.
And for any customer who has more than one card at Capital One,
they have the option, if they choose, to consolidate their
accounts into one card.
In conclusion, as our industry has changed, so have we.
Capital One is continuously adapting its practices and policies
to keep up with consumer demand, the rigors of competition, and
the standards of sound banking. We are fortunate to have over
30 million credit card customers, the vast majority of whom
have a good experience with our product. When they don't, we
regard that as our failure, and we seek to find out why.
Thank you, and I look forward to answering any questions
you may have.
Chairman Dodd. Thank you very much, Mr. Finneran.
Ms. Franke, thank you for being here. This is the order I
think I introduced you, and I apologize. It is not exactly the
order you are lined up here, but I promised I would introduce
you in that order.
STATEMENT OF CARTER FRANKE, CHIEF MARKETING OFFICER, CHASE BANK
U.S.A., N.A.
Ms. Franke. Mr. Chairman, Members of the Committee, good
morning. My name is Carter Franke, and I am the Chief Marketing
Officer at Chase Card Services in Wilmington, Delaware. I am
proud to represent today more than 16,000 Chase employees
around the country who serve the needs of over 100 million
Chase credit card customers.
I am also proud to be part of an industry that has become
central to American life and is one of our economy's principal
engines of growth, including growth of business over the
Internet. Without credit cards, there would virtually be no
business over the Internet. The relationship between American
consumers and businesses, both large and small, which has grown
through the use of credit cards is one of the great economic
success stories over the last several decades.
Before answering any questions you may have this morning, I
would like to make three important points about the credit card
business at Chase.
First, we believe our success, like that of all businesses,
is based on our relationship with our customers. The great
majority of Chase customers fall into the ``super-prime'' and
``prime'' categories. This means that they, regardless of their
level of income, are the most responsible and knowledgeable
credit users in the country. We want them to have the best
possible experience with Chase and have devoted service people
and technology to help them understand and manage their
accounts. Many of our customers take advantage of our array of
services like Chase online access and manage their accounts
online with us.
We also have a really great new product called ``Free
Alerts,'' which will send customers an e-mail, a voice-mail, or
a text message to let them know it is time for them to make a
payment or that they are getting near to their credit limit.
Second, we believe that financial literacy is critical for
all Americans, particularly for credit card users. This goes
hand in hand with financial responsibility, which is a
necessity for all credit card users. Chase has made well over
$100 million in the past 2 years in grants and donations to
fund financial literacy programs and credit counseling
services. We want to do our part to support customers' efforts
to be responsible.
Third, the importance of customer relationships is a key
driver of many of our business decisions. For example, a missed
payment on a non-Chase card does not result in any automatic
repricing of a Chase account. In reality, as you have heard
many times today, the American consumer enjoys a credit card
offering far more attractive than a generation ago. According
to the recent GAO report, 15 years ago the average interest
rate was roughly 20 percent. Today, says the GAO report, the
average interest rate is 12 percent. And, in addition, nearly
75 percent of credit cards have no annual fees. And the annual
fees that exist are there to support the rewards that are
provided through the credit card such as miles.
Consistent with the conclusion of the GAO report, Chase
believes that an important issue facing the credit card
industry today is disclosure. Disclosure is one of the keys to
a successful credit card relationship, and we are committed to
keeping our customers informed of every aspect of their
account. We look forward to reviewing the submission of
suggested changes that have been made by Cap One and working
collaboratively to improve the customers' understanding of
their credit card terms and conditions. We would welcome the
opportunity as well to work with regulators to make any
significant improvements that are required.
Mr. Chairman, we look forward to working with you and the
other Members of the Committee today to answer your questions
and to address any concerns that you may have. Thank you very
much for this opportunity.
Chairman Dodd. Thank you very much, Ms. Franke. We
appreciate your testimony.
Mr. Donovan, thank you.
STATEMENT OF MICHAEL D. DONOVAN, PARTNER, DONOVAN SEARLES, LLC
Mr. Donovan. Good morning, Mr. Chairman, Members of the
Committee. I want to thank you for the opportunity to appear
before you to explain some of the current abuses and credit
card practices that I have seen and experienced among my
clients that I represent in Pennsylvania and elsewhere. I am a
lawyer, gentlemen, and I represent the real consumers, and I
have represented consumers since 1993. I argued the Smiley v.
Citibank case before the United States Supreme Court and
obtained the decision in the Rossman v. Fleet Bank, which was
rendered by the Third Circuit, that held that a credit card
issuer cannot change a no-annual-fee card to an annual-fee
card, at least within the first years after it issued that
card.
I want to agree with Professor Warren when she said that
this credit card market now is broken. The banks, Senator
Bennett, with respect, no longer compete based upon the annual
percentage rate, which was the whole shopping mechanism
identified in TILA on which the banks should be competing.
Instead, what the banks now do is advertise and solicit based
upon low APRs and then employ back-end trip wire pricing, such
as high back-end penalties, increased booby trap penalty
charges, and universal default rates that increase from the
initially solicited rate to often rates as high as 30, 35
percent. All of these booby traps are placed in the cardholder
agreements and in small print underneath the Schumer Box so
that it is almost impossible for any consumer to decipher them.
Now, I heard Mr. Finneran describe Capital One's practices,
and he said that, in fact, they do not reprice for a late
payment, they do not reprice for an over-credit-limit, they do
not reprice for an instance in which you default on another
card that they have issued to you.
Well, in 2006, their disclosures, if I may read them to the
Committee, underneath the Schumer Box in their very
solicitations--and these apply to their existing accounts now.
Perhaps their No Hassle card is somewhat different, but for all
their 30 million accounts now, this is the disclosure that
Capital One charges, including to my clients: ``All of your
APRs may increase to a variable default rate of up to 18.74
percent plus prime, currently''--this was back in 2006--``24.99
percent, if you fail to make a payment to us when due''--just
one payment, that is--``exceed your credit line, or your
payment is returned for any reason.'' Now, that is not what Mr.
Finneran said their current practice is, but this is what
applies to 30 million accounts currently. ``In addition,
default APRs will be effective starting the billing period
immediately after the occurrence of any of the specified
events. Factors considered in determining your default rate may
include your general credit profile''--I am not quite sure I
know what that means--``existence, seriousness, and timing of
the defaults under any card agreement you have with us, and
other indications of the account usage and performance.''
Gentlemen, the credit card is one of the only contracts
throughout the common law of the United States and the common
law of any country in which the superior bargaining entity has
the right to change its terms at any time. In fact, the credit
card issuers can unilaterally change the terms on that
agreement any time, any reason.
Granted, the banks have an interest in protecting
themselves from interest rate risks. They sold and have sold
securities that are securitized by these credit card
receivables, so they want to protect themselves from interest
rate increases and spikes in interest rates. We all understand
that. They deserve to make a profit. I think the banks should
make a profit because it is a worthwhile product. However, they
do not have a monopoly on the difference between--on protecting
themselves from interest rate risks.
Frankly, my clients, middle-class consumers, have the exact
same interest in protecting themselves from interest rate
spikes and interest rate increases. That is why they use the
credit cards. They have as much interest in it as anyone else
does, just as the banks do.
I do not think this is a question of financial literacy,
and it will never be a question of financial literacy. If, in
fact, the more powerful entity always retains for itself the
right to unilaterally change the terms of a contract, unlike
any other contract that we are familiar with, and can impose
those terms on the existing balance, then that entity, no
matter what financial literacy we raise the country to, will
always have an unfair advantage. And that is where we are right
now.
Now, if they wanted to protect themselves from interest
rate spikes, there are simple solutions. Issue cards with
shorter expiration periods. Issue a card that does not expire 5
years from now. Issue a card that expires 1 year from now. And
when it expires, you send out a notice and say, ``We are going
to change this. If you do not like it, you do not have to
accept a new card from us, and you can pay off your balance at
the existing terms. If you do want another card from us, well,
here are the new terms.'' That is the way we deal with
businesses. That is the way we deal with leases, with cars,
with renting anything, with purchasing anything on credit,
other than with a credit card.
Let me give you some examples, everyday examples right in
my back yard in Pennsylvania. Many of the clients I see every
week come in with a letter, a collection letter, claiming that
they owe thousands of dollars for delinquent credit card debt.
Almost all of those clients come in with the same facts as the
court examined in Discover Bank v. Owens. In that case, an Ohio
court found that Ms. Owens, an elderly woman who depended on
Social Security Disability payments, had more than repaid the
principal balance on her Discover Card, and yet the bank was
suing her to collect $5,000 in penalty interest, late fees, and
other so-called credit protection plan charges. Now, this
person was on disability. The credit protection plan did not
help her at all, yet she was charged that every month to the
tune of tens of dollars every month, and that built up a big
part of this balance. The court said it was unconscionable, you
are not going to collect that amount of money. After all, Ms.
Owens had paid you back practically double what she borrowed
principally. So the court found that that was unconscionable.
Let me give you an example in North Philadelphia. Ms. C.
also subsists on a monthly SSI check, $600. She first got a
card from Providian Bank. Providian Bank is a bank that had
been characterized as the ``poster child of abusive lending
practices'' by not me, by not anybody else in the consumer
group here, but instead by the former general counsel of
Citigroup's credit card practices and credit card--North
American and European credit card issuing practices.
Well, in any case, my client, Ms. C., started out with this
Providian card, borrowed $1,000 on it. That was her credit
limit. And guess what else was charged on that card? A credit
protection fee of up to $47.40 every month. She never knew what
it was for. I do not know what it is for, particularly when it
is issued to somebody who is on SSI. It never pays off. It is
some sort of insurance that would pay off, arguably, a monthly
payment if you lost your job, if you had health problems. But
the reality of it is this woman was already on SSI, so she was
never going to have the benefit from this charge--$47.40, a lot
of money.
So, in any case, she attempted to keep up with this card
and three other cards that she has had. As of August 2006, the
APR on this card, which is now owned by WAMU, Washington
Mutual--they bought Providian's accounts. The APR on that
account is 31.49 percent. In August, she had a monthly payment
due on that card of $247. On her three other cards, she had a
monthly payment of $67 on one and $80 on the two others. Her
monthly SSI check is $600. So as of August, $400 was coming due
on credit card bills that she was receiving, which she
attempted to cover with her $600 SSI check.
The reality of it is--and we did the calculations--that the
vast majority of those charges that had accrued on all of those
accounts were attributable to penalty interest rates that had
increased from the original 15 percent on the Providian card,
the completely worthless credit protection fee, and back-end
late fees and over-limit fees because almost all of these cards
were up at their limit.
Now, Ms. C. has not really used these cards for 3 years.
Every now and then when she gets it underneath the credit
limit, she will go and use the card to buy prescriptions or to
buy gas. And you can see it. I looked at her account
statements. And then she is right back in it.
So the reality of it is that this is a situation in which
universal default pricing has basically caused and impoverished
somebody, and this is the exact same facts that the court found
in Discover Bank v. Owens.
Let me give you another example.
Chairman Dodd. Try and get through it. Your time is up.
Mr. Donovan. Real quickly, Your Honor--you can tell I am a
litigator.
[Laughter.]
Mr. Donovan. You knew that was going to happen.
Chairman Dodd. We get called a lot of things, but ``Your
Honor'' is not one of them here.
Mr. Donovan. I saw you were called--or maybe it was Senator
Biden who was called ``President'' last night.
Senator Shelby. Well, he might be Mr. President, but not
yet.
[Laughter.]
Chairman Dodd. Let's move on here.
Mr. Donovan. In any case, let me just tell you one other
story. I know that members of this Committee, in fact, have
received, because I now represent these clients, many
complaints from very sophisticated small businesses, small
businessmen. They have received complaints from doctors, they
have received complaints from lawyers, complaining about the
trip wire pricing, the universal defaults, and the basically
indecipherable disclosures issued by the credit card banks. You
know why I know that? Because I, in fact, now end up
representing some of these people who have written to Members
of the Committee.
One person, Mr. S. from York, Pennsylvania, started out
with two cards--a Chase card and a U.S. Bank card. In March
2005, the U.S. Bank unilaterally increased his interest rate
from 9.9 percent to 21.9 percent. Chase increased his interest
rate from 11.9 percent to 27.9 percent. Both of these banks
explained to my client that the reason they increased his
interest rate, even though he had never paid late ever, never
gone over the limit, had been a super-prime customer of these
banks, was that they had reviewed his FICO score and that his
FICO score had declined recently, and, therefore, he was an
increased risk so we are unilaterally increasing your interest
rate.
On top of that, do you know what Chase did? It said, Oh, by
the way, we are going to cap your credit limit. You are not
going to be able to charge anymore. This is your credit limit
here. They capped it at the exact outstanding balance. Well, I
do not think you need to be Stephen Hawking to realize that if
you cap it at the outstanding balance, guess what is going to
happen? The next day, when you add on the daily finance charge,
you, Bank, have unilaterally caused him to go over the limit,
on which you impose an over-limit fee. So that Chase in that
instance by its own action caused him to go over the limit by
its unilateral practice.
Now, the absurd thing about it----
Chairman Dodd. I am going to stop you right there, OK.
Mr. Donovan. These are some of the practices----
Chairman Dodd. This is not the Supreme Court here. We are
going to have to move on.
[Laughter.]
Chairman Dodd. Very, very good. We will take the rest of
your testimony. We will come back to you in questions.
Mr. Donovan. Very good. Thank you.
Chairman Dodd. Thank you very much.
Mr. Vague.
STATEMENT OF RICHARD VAGUE, CHIEF EXECUTIVE OFFICER, BARCLAYS
BANK DELAWARE
Mr. Vague. Thank you, Chairman Dodd, Ranking Member Shelby,
and Members of the Committee. I serve as CEO of Barclays Bank
Delaware, a credit card issuer with approximately $4 billion in
receivables. The majority of our cards are issued in
partnership with other organizations who license us to use
their brands and solicit their members as customers. We partner
with a variety of organizations, such as airlines and retail
stores. We are the 13th largest credit card issuer in the
United States and one of the fastest growing. Mr. Chairman, I
applaud you and this Committee for examining this important
issue and for considering ways to improve consumer
understanding of credit cards. I also want to thank and
acknowledge my own Senator, Senator Carper, from the State
where our business for his leadership on these issues, and
thank and acknowledge Senator Casey, from the State where I
reside.
It is fair to say that, in the realm of consumer finance,
the credit card is one of the great developments of this past
century. It is widely recognized that credit cards represent
the democratization of credit. Today, consumers can use credit
cards around the world and on the Internet to make purchases at
millions of merchants. Not only do credit cards give consumers
this purchasing convenience, but consumers also have the option
to use their credit cards as a mechanism to obtain an interest-
free loan simply by paying their bill in full each month.
Consumers who use credit cards also receive enhanced consumer
protections compared to cash and checks, and a detailed
periodic accounting of their spending to boot. Given the
enormous consumer benefits associated with credit cards, it is
no surprise that the Federal Reserve Board staff studies
consistently suggest that 90 percent of consumers are satisfied
with their credit card issuer.
It is also important to note that the vast majority of
credit cardholders use credit cards responsibly. It is in
nobody's interest to provide credit cards to consumers who
cannot repay the money they have borrowed. For that reason, we
and all other issuers strive to provide credit cards only to
consumers who can handle the credit offered to them. Banks that
lend indiscriminately to consumers obviously will not be in
business for long.
Having said all this, Mr. Chairman, credit card products
have become more diverse over the years because of the intense
competition and wide choice. Most cards are no longer priced
with a 19.8-percent APR and a $20 annual fee while only being
made available to consumers at the higher end of the credit
spectrum. Credit card issuers have become much more
sophisticated with respect to providing a wide variety of
consumers with cards that have a wide availability and variety
of features. Now consumers can find credit card products with a
variety of interest rates, benefits, rewards, and fee
schedules. Importantly, the average rate has gone down over the
years. This is a result not only of increased sophistication
but, as mentioned, also of the intense competition within our
industry and from other payment providers. Without a doubt,
these innovations are positive developments. With these
increased product offerings, however, we agree, Mr. Chairman,
comes the need to ensure that consumers understand the features
of the various credit card products offered to them.
We believe that credit card disclosures can be greatly
improved. We think most other credit card issuers agree. And we
need to participate and help to make these things happen.
Credit card issuers must comply today with complicated,
detailed, and lengthy regulatory requirements, meaning that
disclosures tend to be complicated, detailed, and lengthy.
In reference to some of the earlier comments, our card
member agreement is five pages long. It used to be one-page
long. Our typical card member agreement is five pages long.
Everything that is in this agreement we are required to put in
there by law. We would love, frankly, to simplify this
agreement, including putting in something like the Schumer Box,
which we think was a tremendous innovation in our industry.
Every time there is a new litigation, it seems like another
legal disclosure needs to be added. We need a new, clear, and
simple disclosure structure that allows us to draft our
disclosures in plain English--not lawyerspeak--highlighting the
terms consumers find important in a manner they find easy to
understand.
A recent updating of disclosure regulations appears to be
the sole recommendation of the GAO in the context of its
broader study of credit card disclosure issues. Focusing
consumer disclosures on key terms is not a new concept. It is
the basis for the existing Schumer Box disclosures that we
mentioned. Card issuers that comply with this new structure
should also be protected against a barrage of new lawsuits and
the resulting lawyerspeak that would inevitably creep back into
the disclosures as a result.
Mr. Chairman, I firmly believe that effective disclosures
are the key to ensuring that consumers understand the material
terms and features of credit card products. An informed
consumer can then decide whether a credit card is right for him
or her. After all, there is no shortage of credit card issuers
and products from which consumers can choose if the practices
of any given issuer, or any of the terms of that given issuer,
do not meet that consumer's liking. I would caution Congress
against the adoption of legislation that would have the effect
of imposing price controls or similar limitations with respect
to credit card products. Price controls do not work. They would
likely result in an increase in other costs associated with
credit cards, reduced benefits, or more probably the reduction
of credit availability to those who are on the lower end of the
credit spectrum with a corresponding adverse impact on the U.S.
economy. We do not want to return to the days of relatively
uniform card offerings available only to a limited number of
consumers.
Mr. Chairman, this concludes my testimony, and I would be
happy to answer any questions you have.
Chairman Dodd. Thank you very, very much.
Ms. Draut.
STATEMENT OF TAMARA DRAUT, DIRECTOR, ECONOMIC OPPORTUNITY
PROGRAM, DEMOS
Ms. Draut. Thank you, Chairman Dodd and Ranking Member
Shelby, for holding this hearing and inviting Demos to
participate.
Demos began studying the growth of credit card debt out of
an overall interest in the economic well-being of low-and
middle-income households, many of which are young people just
starting out their lives. Before I address some of the industry
practices, I want to give you a sense of the very households
that the abusive lending industry practices are impacting the
greatest.
In March 2005, Demos conducted a survey of low- and middle-
income households who had credit card debt. The goal of the
survey was to better understand why these households were going
into debt, how long they have been in debt, and what, if any,
impacts this debt was having on their economic well-being. What
we now know is that the average low- and middle-income
household with credit card debt has been in debt, on average,
for 3-1/2 years and that they are carrying an average balance
of about $8,700. One-third of low- and middle-income households
are actually carrying balances greater than $10,000.
Now, while our pop culture and popular perception often
demonize credit card debtors as irresponsible spendthrifts,
these images are more the stuff of stereotype than reality. To
that point, the most often cited reasons for going into credit
card debt were to pay for car repairs, home repair, medical
bills, or to deal with a job loss.
In addition to asking about specific expenses that led to
these households' credit card debt, we asked if the household
had ever in the past year used their credit cards to pay for
basic living expenses such as the rent, the mortgage, the
utilities, or things like groceries.
I am sorry to say that one out of three low- and middle-
income households reported using credit cards in this manner
and doing so, on average, 4 out of the last 12 months. In fact,
those households that had medical expenses reported
significantly higher credit card debt than those who did not.
Now, of course, we know that using revolving credit can be
very beneficial. It gives households the ability to pay off
large, unexpected expenses over time and allows them to prevent
more disruption to their family budget. It also helps during
job loss so that indeed families can keep the lights on and
food in the fridge.
The problem is that this beneficial access to credit, which
we all agree on, becomes all too destructive due to widespread,
abusive, and capricious industry practices. As households have
become more reliant on credit cards to make ends meet as a
result of the greater instability of our economy and rising
costs, the practices of this industry further threaten their
economic security.
I want to focus the rest of my testimony on three of these
practices, all of which make it very difficult for these
households to pay down their debt.
I also want to say from the outset that Demos fully
understands and supports the idea of risk-based pricing, but
these practices are not risk-based pricing, although they often
are called such.
The first one I want to talk about has already been
mentioned. That is universal default, the practice of raising a
cardholder's interest rate either for being late on a payment
with another creditor or for some change in their credit
history. It is time that we finally prohibit this practice.
The second practice I want to draw your attention to
revolves around the definition and treatment of late payments.
All the major issuers today consider a payment late if it
arrives past 1 or 2 p.m. or whatever the specified hour is,
even if, as we say, the check is in the mail. In our survey,
about half of the low- and middle-income households had paid a
late fee in the last year and indeed reported being late or
missing a payment.
What happens with this sort of zero tolerance policy about
late payments is that means that a run-of-the-mill tardy
payment can result in an average fee that now is anywhere from
$32 to $39 and a rate increase that is often double or even
triple the original APR. And, again, it is not unheard of for
these penalty rates to top 30 percent.
I want to underscore that these rates are being paid by
people who are not technically in default on their account.
They are simply 1 hour, 1 day late. And yet they are often
paying the same default rates as those who are 3 months behind
on their payments.
Finally, I want to draw attention to the retroactive
application of penalty rate increases. Whether a rate is
increased because of a run-of-the-mill tardy payment or due to
universal default, that new rate is applied to the cardholder's
existing balance. By applying this higher rate to previous
purchases or services made with the card, essentially the
credit card companies are now raising the cost of every item
purchased prior to the rate increase. We believe that card
companies should be held accountable to the original terms of
their contract and that any rate increases should be applied
only going forward from that point.
These severe default rates levied on customers who are
paying their bills in good faith, if not always in perfect
time, constitute an enormous and undue increase in the cost and
length of debt repayment. Demos urges Congress to consider much
of the recommendations that have been made today and, again, I
would like to recognize that there has been legislation
introduced by many Members of this Committee already, such as
Senator Dodd and Senator Menendez, that would address many of
the practices I cite.
I will conclude there. Thank you, and I look forward to
your questions.
Chairman Dodd. Thank you very much, Ms. Draut.
Mr. Plunkett, you are our last witness here. We thank you.
STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Plunkett. Good morning. Thank you very much, Chairman
Dodd, Senator Shelby, and all the Senators who have closely
followed this issue. Senator Carper, Senator Menendez, in
particular, you have shown real leadership on this issue, and
we appreciate it.
I am testifying today on behalf of the Consumer Federation
of America, the national organization Consumer Action, and
Consumers Union, the publisher of Consumer Reports. I applaud
you for calling this important hearing on the impact of credit
card industry practices on consumers, and I would agree with
statements that have been made today about the importance of
credit cards to consumers, to the economy, and the importance
of consumer education. In fact, CFA over the years has worked
with a number of credit card issuers on consumer education
projects.
But because of what you have heard today, because of the
unjustifiable fees, the highly questionable interest rates, and
the abusive lending practices you have heard about, there is no
industry in America that is more deserving of the kind of
oversight you are providing here. And, I might add, there are
very few industries that are the subject of more complaints or
are held in lower esteem by the American public.
For example, in 2004, the U.S. Better Business Bureau
reported that problems with credit cards were the third most
common source of all consumer complaints that they received. A
public opinion survey by the polling firm Public Opinion
Strategies last year found that only 15 percent of all
Americans had a favorable opinion of credit card companies,
putting them in the same league with payday lenders and bill
collectors--and, by the way, with a far, far lower favorability
rating than Congress.
Credit card companies are still aggressively expanding
efforts to market and extend credit at a time when Americans
have actually become more cautious in taking on credit card
debt. This runs contrary to conventional wisdom, but we
document it in our testimony. We now have about $873 billion in
revolving debt. Our analysis shows that aggressive and even
reckless lending by issuers has played a big role in pushing
this debt higher.
Since 1999, creditor marketing and credit extension--I am
talking about the amount of credit that is offered, not the
amount of credit that is accepted--has increased twice as fast
as credit card debt taken on by consumers. That is why there is
a growing credit gap between creditor supply and consumer
demand. In fact, the amount of credit made available, total
credit made available, those unused credit lines and used
credit lines, now exceeds an astonishing $4.6 trillion, or just
over $41,000 per household. Of that amount, only 19 percent has
been taken on as debt by consumers.
Meanwhile, as Chairman Dodd pointed out, the number of
solicitations mailed by issuers has increased more than sixfold
since 1990, to over 6 billion last year. That is about 50 per
household, and this massive credit expansion has had a
disproportionately harmful effect on the least sophisticated,
highest-risk, lowest-income families.
You have heard about a number of questionable practices
today: universal default, retroactive interest rate increases,
double-cycle billing, in which the issuer actually charges
interest on balances that have already been paid off, high hair
trigger fees that can be assessed for even minor problems. And
let me point out, with fees, we are not talking about a small
number of Americans who pay these fees. The GAO report that has
been mentioned said that 35 percent of all credit card accounts
they examined of the six largest issuers were assessed a late
fee in 2005--just in 2005. You heard from Ms. Draut that their
survey of low- and moderate-income consumers showed an even
higher percentage had paid a late fee.
Now, if you take that 35 percent and you divide it by the
number of cards that are out there, that is 242 million cards
that paid in 1 year a late fee. I am not saying that all of
these fees were illegitimate. I am pointing out how widespread
these payments are.
A couple of other issues to keep in mind. You have heard
about interest rates. An important fact that has not been
mentioned, 85 percent plus of all credit cards now are variable
rate cards, and the interest rates on those cards are
significantly higher. Cardweb.com, a source for a lot of
information that has been put out today, says that right now
the average interest rate on variable rate cards is 16.55
percent. Also, let me point out that the GAO report that was
mentioned, their finding on interest rates, it has not been
cited that they said that the Federal Reserve, an important
Federal Reserve study, identified a significant reason for
lower interest rate costs, the lower cost of funds.
Finally, multiple low-balance cards, this has been an issue
addressed in regards to Capital One's practice. Mr. Chairman,
Senator Shelby, we agree with you this is a very troubling
practice. At least based on media reports, it looks like a
number of sub-prime consumers are getting multiple offers from
Capital One of low-balance cards. It looks by all appearances
as an attempt to pump up fee volume, and that obviously has a
negative impact on the finances of these consumers.
We have often heard from credit card representatives that
all of these practices are simply risk-based pricing. But the
pricing, as you have heard, does not appear to be proportional
to the risk or the costs incurred by issuers. So it is hard to
agree with that when somebody is hit with a late fee of $35 and
a default interest rate of 29 percent because of one or even
two payments that are a day or two late.
Moreover, for consumers who are truly higher risk, if all
of their credit card companies are doing the same thing--they
are increasing their interest rates, and they are hitting them
with late fees--obviously, that increases their risk of default
and delinquency, and it is a serious problem for those
consumers financially.
We also do not see evidence that this so-called risk-based
pricing moderates, leads to lower interest rates, when
underlying costs for the issuers decline. For example, in 2006,
for three straight quarters, charge-offs--the amount of credit
card debt written off by issuers--declined. And I have not seen
any evidence that there was a moderation or decline in interest
rates as a result.
And, finally, retroactive interest rates cannot be
justified, as you have heard, as risk-based pricing. And I do
not know of another business in this country that can get away
with raising the price on a service or a good after that
service or good has been purchased.
So, Senator Dodd, you put out some quite good legislation
during the last Congress, Senator Menendez as well, Senator
Akaka. We hope the Committee will start to examine the specific
provisions in this legislation and start to consider it because
this is an important conversation to have this year.
Thank you.
Chairman Dodd. Thank you very, very much, and let me thank
all of our witnesses. You have been very, very patient this
morning, staying a long time, but I am grateful to you for your
counsel and advice to the Committee, and to my colleagues as
well for their patience in all of this.
What I am going to do is ask the clerk to set the clock
here on 7 minutes on each one of us here so we can kind of move
through this as quickly as we can here and not tie people up.
Let me pick up, if I can, to the industry people, on some
of the comments that Mr. Plunkett has made here. The universal
default issue and the double-cycle billing, those are two
issues that have been talked a lot about here this morning.
There were other issues, but I want to focus on those two in my
time, if I can. And I know there have been some changes in
practices that have occurred. I know JP Morgan just in the last
few days announced that it was no longer--on double-cycle
billing, no longer would it engage in that practice at all.
Again, as I understand it--and you correct me if I am
wrong--what happens with this in sort of example terms, you
owed $1,000, you paid off $900 of it, you still owe $100. The
fees you were being charged were based--even though you had
paid off $900 of it, they were still based on the $1,000
obligation until the entire amount was paid off. Is that
roughly a good example how that happened?
Ms. Franke. Yes. The only further explanation to that would
be it really affected the population that had typically been
paying their balance in full and then determined that they
would like to borrow from any issuer going forward.
Chairman Dodd. But you have stopped the practice.
Ms. Franke. That is correct. JP Morgan----
Chairman Dodd. Why did you stop the practice? It is a good
profit-making operation. Why would you stop it?
Ms. Franke. Well, Chairman Dodd, we constantly review the
pricing policies that we have across our customer base and are
continually trying to make sure we are doing the right thing
for the customer. And we found, back to the disclosure on
clarity, that consumers really did not understand this. So as a
result, the consumer did not understand it----
Chairman Dodd. How about being unfair? How about being
unfair?
Ms. Franke. I believe it is a fair practice, Chairman Dodd.
Chairman Dodd. It is a fair practice?
Ms. Franke. I do believe it is a fair practice.
Chairman Dodd. They charge you an interest rate based on an
amount--even if you have paid off $900 of $1,000, you should be
charged an interest----
Ms. Franke. Yes, let me try to explain to you really what
it is. If you go into a bank and you take a loan, you are
charged for that loan from the date that you take it out.
Interest is accrued from the moment that you are charged in
that loan. It is nothing different here. You borrowed from us.
You decided that you wanted to not pay it in full, and it would
then be charged interest. I believe that is a fair practice. It
was confusing to the consumer. As a result of that, we decided
to no longer do it.
Chairman Dodd. Ms. Warren, do you want to comment on that?
Ms. Warren. Well, it is not the same as going to a bank and
borrowing money. The amount of money that was borrowed was
$100, and interest was paid on $1,000. It is just that
straightforward. Consumers were confused because nobody could
believe that a reputable business would charge the----
Ms. Franke. I would like to say one thing. The way this
really works--and I apologize, because it is a very complicated
process, which is one of the confusions that consumers have and
that these ways we calculate finance charges as an industry are
complicated. But what would happen, and the best way to
describe it, is if you had a billing cycle that went from July
1st to July 31st, and you had always paid your bill in full.
You would have had $1,000 that you had a balance at the end of
July -you had made that purchase at July 12th. So the billing
period was the 1st to the 31st, and you charged $1,000 on July
12th.
All of a sudden on August 15th, instead of paying the
$1,000 that you had typically done by paying in full, you paid
$500. When you paid $500, you then had a balance that you were
carrying from July -whatever I said--12th to August 15th that
you needed to pay interest on. So you were only being charged
interest from the date that you made that transaction because
you determined to borrow.
We can certainly, you know, go into greater detail on this,
but I do believe it is a fair practice. It was a confusing
practice, and because of that and because we always want to
ensure that our customer is being treated with all of the
clarity that we can, we decided to move away from it. And I
think that is a very good thing, and a good thing JP Morgan
Chase did for our customers.
Chairman Dodd. Mr. Finneran, does Capital One engage in
double-cycle billing?
Mr. Finneran. Sir, this will be a very short answer. We
don't. We never have.
Chairman Dodd. And why not?
Mr. Finneran. For some of the reasons that Ms. Franke just
alluded to. It is a challenging thing to explain to a customer
exactly how the interest rate was calculated, and it just
always struck us as not the right balance in trying to balance
what is good for the company versus what is good for the
customer.
Chairman Dodd. So you would charge them basically on what
they owed.
Mr. Finneran. We charge on the average daily balance in the
month in question.
Chairman Dodd. Logistically, that is not a difficult thing
to do in terms of the technology that is available today to
make the determination as to what a consumer owes.
Mr. Finneran. I am sorry. It is not a difficult thing to--
--
Chairman Dodd. Technologically not difficult for Capital
One to determine what that consumer owes today.
Mr. Finneran. No, it is not, sir.
Chairman Dodd. All right. How about Barclay's card, Mr.
Vague? What is their policy on----
Mr. Vague. We do not use that policy.
Chairman Dodd. And do you want to explain why?
Mr. Vague. For the very reason that these two individuals
have suggested. It is a very confusing thing. It is not
something that we have endeavored to deploy.
Chairman Dodd. Let me ask you about the universal default
issue here. Again, what is the policy on Barclay's card with
regard to universal default?
Mr. Vague. For the vast majority of our customers, we do
not use universal default. However, I think our first and
foremost obligation as a bank is safety and soundness. So for a
very small number of our customers, we do look to their credit
record, which, by virtue of our relationship with them, we
have. And if there are three instances of adverse behavior with
other issuers, we believe that that is evidence from our
responsibility in safety and soundness to take action to price
in the risk that that consumer has exhibited.,
Chairman Dodd. And let me ask you the question that was
raised, and I have raised it a number of times in the past
myself. Do you then apply that interest rate to previous
purchases or to new purchases?
Mr. Vague. You apply it on a going-forward basis.
Chairman Dodd. So past contracts, past purchases would not
be affected by that increased rate.
Mr. Vague. That is right.
Chairman Dodd. Mr. Finneran, what is the policy at Capital
One?
Mr. Finneran. Again, Mr. Chairman, we do not engage in
universal default.
Chairman Dodd. With any of your customers?
Mr. Finneran. With any of our customers.
If I may just also allude back to some of the comments that
Mr. Donovan made. I believe Mr. Donovan, that was an old
disclosure that you read from. We did change our entire file.
All customers have the repricing policy that I described in my
opening statement.
But just to go back, with respect to universal default, we
do not engage in universal default. And for us, that means we
will not default reprice a customer if they go late on their
electric bill or if they go late on one of our competitor's
cards. We will not default reprice them if they go late on
another account that they may have with Capital One. It is only
the individual account in question. Nor will we reprice them by
looking at their credit bureau to see whether their FICO or
credit score has gone down.
The only default repricing that we have for our entire file
now is if a customer pays us late twice, and at least 3 days
late in each case, twice in a 12-month period. The first time
they go late, we send them a statement notice indicating that
they went late and reminding them of the policy that if they go
late again they could be subject to repricing.
Chairman Dodd. I heard you say earlier that if, in fact, in
the coming months they then maintain the timely payments, then
automatically the rate is reduced?
Mr. Finneran. Yes, if someone is repriced after paying us
late twice and then have on-time behavior for 12 months, they
will go back to the prior rate automatically.
Chairman Dodd. I should ask that same question of you, Mr.
Vague. Is that the policy with those?
Mr. Vague. After 6 months of timely payments, we will make
a downward modification in their price.
Chairman Dodd. Automatically?
Mr. Vague. Yes, sir.
Chairman Dodd. How about JP Morgan regarding universal
default?
Ms. Franke. JP Morgan Chase has a very, as I had described
in my opening comments, high credit-worthy population. So we
have a super prime and prime population.
The vast majority of our customers maintain the same
interest rate they have over an annual period. 87 percent of
our customers start the year with one APR and end the year with
the same APR. 5 percent of our customers have their rate go
down because we have been able to offer them a better value
than they currently had. 8 percent of our customers have had a
deteriorating credit profile. As a result of that, we have made
changes in their pricing.
There are two ways we do that. One is what we call penalty
pricing, where we clearly disclose that if you are late with
us, if you do go over your limit, or if you write us a check
that there are not sufficient funds for, we will increase your
rate.
Now what is interesting to note is that we have the ability
to do that, but in only 15 percent of the instances where we
make that decision because we are able to use our intuition,
excuse me, our insights into what their real credit risk is to
limit the times that we need to increase their rate.
We increase their price so that we can continue to provide
the best value to the majority of consumers. The majority of
our customers have very low rates and do not pay penalty fees.
Less than 10 percent of our customers would pay a penalty fee
on a monthly basis. So we are able to provide----
Chairman Dodd. Ms. Franke, this is very confusing.
Ms. Franke. I am sorry.
Chairman Dodd. The confusion on my part, and my time is up
here. But my point is we have all--listening to you, these are
very confusing practices we are talking about here, for
consumers to understand.
Ms. Franke. Let me tell you one thing that we do that we
think, at Chase, helps a lot. We send out to our customers on a
regular basis communication that tells them how they can
protect their low rate and how they can make sure that they
avoid penalty fees. There are many tools that we provide for
them to do that. That is providing them free alerts, allowing
them to sign up for automatic payments, allowing them to pay
their bills online.
So we want our customers to make their payments on time and
maintain the low rates and avoid penalty fees.
Chairman Dodd. Thank you very much. My time has expired.
Senator Shelby.
Senator Shelby. Thank you, Senator Dodd.
I would start out myself believing that the market, not the
regulators or the Congress, should set the price of credit or
money. But having said that, there are some serious issues been
raised here today of abuse, exploitation of a large segment of
our population. And that is why we are here.
Dr. Warren, you were clear, concise, unambiguous and
forceful in your testimony. You know this issue, as I assume
everybody else here does.
Why, in your judgment, would a credit card issuer send me,
for example, three successive credit cards if I had a balance
on one that I may have been struggling to pay? Why would they
do that? And I had not applied for one, or the second one or
the third one.
Ms. Warren. There can be no reason except to increase the
revenues for the credit card. That is all this is about, plain
and simple. By sending you multiple, low-level, capped cards,
they increase the odds----
Senator Shelby. They manipulate the system.
Ms. Warren [continuing]. That you will run over one of your
limits, that you will pay penalty fees if you get into any kind
of financial trouble, multiple times. It is just nothing more
than a trick to increase profits.
Senator Shelby. So what Mr. Donovan referred to as the trip
wire?
Ms. Warren. Yes, Senator.
Mr. Donovan. That is one of the trip wires.
Senator Shelby. Just one.
Mr. Plunkett, as part of the Bankruptcy Reform Bill that
you are very familiar with, the Federal Reserve was directed to
make some changes in the Truth In Lending Act Regulation Z with
respect to minimum payment disclosures, teaser rate
disclosures, and late payment disclosures. It is my
understanding that the Federal Reserve is now working on these
changes as part of a large review of the Truth In Lending Act
Regulation Z disclosure.
What do you believe are the most important aspects of that
review? And what changes, if any, do you believe should be made
as part of that process that would help this situation in the
credit card industry today?
Mr. Plunkett. Senator, let me start first with the minimum
payment disclosure. There is a major problem with the law, in
my opinion. It does not require that the disclosures be
personalized--that is, specific to the actual balances of the
individuals--unless that person calls a toll-free number. The
truth is that consumers are harried and most will not. In fact,
most who could probably benefit from the information, will not.
So Senator Akaka mentioned his legislation. It would
require the kind of targeted personalized disclosure, not only
how long it would take to pay off at the minimum payment rate,
but also the total costs. The total costs are not covered,
either, even if you call that toll-free number to learn about
how much would it take me over so many years--excuse me, how
much would it cost over so many years to pay off at the minimum
balance?
So the first point is that unfortunately, the statute, in
our opinion, will not be terribly helpful with that particular
disclosure.
Regarding your question on other disclosures that would be
helpful, you have heard, I think, consistently from the
consumer folks here that disclosure is important. But it is not
going to be enough to solve the problems that we have
identified. But we think there needs to be better disclosure in
a very concise----
Senator Shelby. Why wouldn't disclosure, pure unambiguous
language, simple English and so forth--it might not be enough
in most instances, but it would certainly help market forces
continue to work, would it not?
Mr. Plunkett. It would help consumers understand what they
are getting into. But the problem with this back end fee
structure that you have heard about, Senator, is that consumers
do not shop, they do not shop around, based on an assumption
that they are going to pay a--make a payment a day late.
They are overly optimistic, and research from behavioral
economists has shown this, about their ability to meet their
financial obligations. So the market is not constructed so that
people shop actively for these back end fees. They look at
interest rates. They look at annual fees. And it is true that
many cards now do not include an annual fee. They do not look
at the back end fees.
Even with better disclosure, I would say some might, but
many still will not.
The other issue is you need to level the playing field so
some of these unjustified back end practices do not provide a
competitive advantage to certain issuers. It is a good thing
that JP Morgan Chase is no longer going to do double cycle
billing. But others who might choose to do so get a competitive
advantage and income if they decide to keep at it. So two
problems there with disclosure.
We do have, in our testimony though, Senator, several
suggestions on more readable disclosure, better disclosure
about those back end fees and interest rates, and improving the
Schumer box, improving the information. This is the most widely
identifiable part of the credit card solicitations and
disclosures that consumers see. They know about the Schumer
box.
Some of this information needs to be in that Schumer box so
that people can be aware, before they get a credit card, of
these fees and interest rates.
Senator Shelby. Is the five page legal document that is
sent out that we all sign or accept, is that mandated by law or
regulation or both? Or is this just something that lawyers have
come up with?
Mr. Plunkett. It is a little of both. As the GAO report
points out, there are some requirements in TILA that are in
these contracts that are incomprehensible and not necessarily
relevant to the fees and interest rates that consumers pay now.
So that is a very important issue for you all to evaluate. But
there is also language in there to protect issuers from legal
liability. It is both problems.
Senator Shelby. I think the question before us--I know my
time is up, Mr. Chairman--would be how do we continue to let
the market work? Because the credit card industry is so
important, legitimately so, to our economy, to just about every
American, without the abuse and the exploitation that we see
even today? That is the question for us.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much.
Senator Carper.
Senator Carper. Thank you.
I want to again thank each of our witnesses for taking the
time out of your lives to be here with us today to give us your
thoughts on what we all agree is important issues, an important
industry, an important convenience in which there are abuses.
Just a little humor to start off with. I am reminded that
editorial writers have been described as people who come onto
the battlefield when the fighting is over and shoot the
wounded. When this hearing was posted last Thursday, and it is
fairly short order, and some of you actually agreed to testify,
I think, as recently as a day or two ago. And you moved things
around on your schedules. And I just want to say, on behalf of
all of us, thank you for doing that and for your willingness to
sort of put yourself in the position to be shot as one of the
wounded.
We hope that has not happened. I do not think that it has.
I just want to preface my first--I want to go back a little
bit and talk about the minimum payment requirements and how
that has affected you and your customers and some of the
issues.
Before I do that, I just want to remind us all that we, as
consumers, are exposed to solicitations every minute of every
hour of every day of the year. One only has to turn on our
televisions or even to look at our e-mails to be solicited to
buy any wide variety of foods, any kind of soft drink or beer
that is out there, whatever restaurants to go to to eat, what
kind of car or truck or SUV to buy, what airline to fly, what
kind of house to buy or rent.
The enticements, the inducements are out there from all
directions. And we all have, as consumers, some responsibility
ourselves to police our behavior. I would just remind us all of
that.
For our witnesses who are not here on behalf of the
industry, I want to ask, they have raised a lot of issues, a
lot of concerns, some of which we have heard before and some of
which are new. We have heard from some of our industry changes
that they have made in their own policies, which we applaud.
What else should the industry be doing? And particularly, maybe
what else have you done? I would direct this to our witnesses
from JP Morgan, from Barclays, and from Capital One. What else
should the industry be doing?
Mr. Vague. Senator, I would say that there is a lot of good
that can be done by the disclosure area that we have discussed.
Really, I think relative to some of the questions that have
already been asked about this, consumers do respond differently
based on what is in the disclosure. I mean, we know from our
experience over many, many years that if the APR is one rate
versus another, or if the late payment amount is one rate
versus another, that consumers will respond more or less to
that solicitation.
So the work this committee has done, and others in the U.S.
Government have done, relative to the issue of disclosure has,
in fact, made a difference. And I would respond, relative to
any of these issues, that additional disclosure would, in fact,
be helpful. That is something we have advocated----
Senator Carper. When you say additional disclosure,
additional pages of disclosure? We already heard a little bit
about that.
Mr. Vague. Your point is a good one. The five pages of
disclosure we have now, we think could be simplified. So
clearer disclosure is perhaps what we are after, rather than
more disclosure.
And I think it is an important point, too, we have talked a
little bit about minimum payment disclosure. But I believe the
statistic is correct that the number of consumers that
regularly make minimum payments is only about 1 percent of all
customers. So if a new set of minimum payment disclosures were
put out there, you are going to be confusing a whole lot of
folks. And in fact, any minimum payment disclosure relative to
the time in which something would be paid has to be based on
assumptions that no one knows. Whether you would occasionally
make a higher payment, whether your APR would be changed, and
the like.
So I think in areas like that we have to move very, very
carefully so that we do not end up in a situation where we are
actually confusing the consumer more, disclosing things to
folks that do not really--are not really affected by that,
creating more expense in the system in the way of consumer
complaints and calls and the like.
Mr. Plunkett. Senator, could I throw in a point of fact
on----
Senator Carper. I want to hear from Mr. Finneran. Let me
just ask you to hold and let me hear from Mr. Finneran. And I
want to hear from Ms. Franke, as well, on this question,
please. If I have time, Mr. Plunkett, I will come back.
Mr. Finneran. Thank you, Senator.
I think there are three things that the industry can do,
and I will cite a couple of examples under each. The first one,
I think, as Mr. Vague said, is to continue to work with all
interested parties to make disclosure better. And here I want
to make a distinction between the credit card agreement and the
disclosure materials. Capital One has a credit card agreement
that is only about four or five pages, not the 30 pages that
was cited earlier.
That agreement does not contain the disclosures that are
truly important, nor does it address the issues that people
have been talking about today. Those disclosures are found in
the marketing materials, the Schumer box which is part of the
marketing materials, the welcome kit which is also a relatively
small set of materials, and then on the back and front of the
periodic statement that consumers get.
So the first thing the industry can do, continue to work
with the Federal Reserve Board as it undergoes its review under
Regulation Z to improve disclosures. We certainly acknowledge
that the industry has changed and the products have become more
complex. And while as a painter you never want to go back and
paint over a masterpiece like the Schumer box, the landscape
has changed and it is time to really improve the Schumer box.
Senator Carper. I just regret that Schumer is not here to
hear that.
Mr. Finneran. Capital One has been trying to lead the
industry in how the industry ought to be open to new
disclosure.
The second thing that we can do is stay ahead of the game.
So I will give you one example on disclosure, and I am sorry
that Senator Akaka is not here. But with respect to minimum
payments, we are not waiting for the Federal Reserve to come
out with new disclosures. What Capital One has done proactively
while we wait for the Fed, is for any customer who pays only
the minimum payment three times in a row, we give them a
statement notice and draw to their attention the consequences
of that behavior. We have also put up a calculator on our
website and we direct them to the website. It is very easy to
use, so they can plug in their own assumptions. It will tell
customers how much interest they will pay if they pay so much a
month. It will also tell them how long it will take to pay it
if they do that.
And I think, also to pick up on a comment----
Senator Carper. I am going to ask you to hold that. I like
that very much, but my time is about to expire. I just want to
give Ms. Franke an opportunity. That was a very good point.
Thanks. I am sorry.
Ms. Franke. I would say I just briefly agree with both of
my colleagues and I think we need to do all we can to make sure
that the customer understands the terms and agreements of their
conditions with us. And that is both working with the
regulators and the other issuers to make sure that the required
disclosures are clear, as well as doing the things like Chase
has done to on our own consistently communicate to the customer
what they need to do to maintain their low rates and avoid
penalty fees.
We do that on a regular basis to all of our customers and I
think that is very important. We need to continue to focus on
the customer, the consumer, and what their needs are.
Senator Carper. My thanks to each of you. My time has
expired.
Chairman Dodd. Senator Bennett.
Senator Bennett. Thank you very much, Mr. Chairman.
Ms. Draut, I have a statistical question that I am sure you
have an answer for. But on the surface of it, it looks a little
strange.
You have been quoted in USA Today as saying that the
average credit card debt among households 65 and older in 2004
was $4,907. The Federal Reserve says the mean credit card debt
for households between 65 and 74 is $2,200. And for those over
75, it is $1,000.
Now is this the difference between average and mean? Can
you help us understand the discrepancy between the Fed's
figures and your figures, because the discrepancy is very
large.
Ms. Draut. The discrepancy is easy to explain. When the Fed
publishes their average balance data, they include all of the
households that carry no balance, which leads to a lower
figure. When we publish our data, we very explicitly say this
is the average balance among indebted 65-plus households.
Senator Bennett. So you have different universes?
Ms. Draut. Yes.
Senator Bennett. I see. USA Today did not make that clear,
so I think it is essential that we have that. Thank you for
that clarification.
Let me ask the--first, a question for Dr. Warren.
You said there is no disclosure between a safe card and--I
do not remember, did not write down the word you used for the
other kind. What is your definition of a safe card?
Ms. Warren. A card that is not loaded with back end tricks
and traps, a straightforward card that says here are the terms,
here are the interest rates, and that does not have these
inexplicable two-cycle billing, universal defaults, and so on.
Things that customer do not and cannot read in advance and make
the differentiation in terms of shopping for this product or
that product.
Senator Bennett. All right. So if I am in the business of
helping someone devise a disclosure statement, it would seem to
me I would want the competitive advantage of saying we do not
have X and our competitors do.
The competitive marketing activity has been on APR. You
have talked about that. That has pretty much disappeared.
Everybody quotes roughly the same APR. All of the bombardment
that I get, that we all get, the solicitations, our APR is
such-and-such, only APR, and the teaser rate. You come in for
an APR of 4.3 and it will last for 6 months, and then we will
go to--so customers are familiar with APR.
So it would seem to me, if I am devising the marketing
strategy for a credit card company, I would say forget APR
because that is no longer a differential. Let us get more
people on our credit card by saying our late fee is only $5,
whereas the average late fee for the industry is $20, or
something of that kind, to get people to use my card.
If the safe card has a significant advantage for a
customer, it would seem to me if I have a safe card, Mr.
Finneran, I would try to make that very clear.
Now this brings me to the core of what I think I hear from
today's conversation. Where do the profits come from? When you
are running a credit card company, where do you look for your
profits?
Ms. Franke, I think I do understand the double-cycle
billing thing, because I am a freeloader. I am a perpetual--
here I am disclosing things. I have a perpetual interest-free
loan on the level of several thousand dollars--I will not give
you that number, I will not disclose that--because I pay off in
advance of the due date 100 percent of the balance, while I am
running up the same kind of balance simultaneously.
So I am taking the bank, if you will, to the tune of my
multi-thousand dollar fee loan in perpetuity. I never pay any
interest on it at all. And I understand the banks do refer to
me as a freeloader. That is the technical, legal term of art.
Ms. Franke. Well, we would call you a valued customer.
Senator Bennett. All right.
[Laughter.]
Senator Bennett. The reason you do is because you have got
interchange fees and you have got income on the other end.
So the fundamental question here is if I am starting up a
credit card from scratch, and I have to have X amount of profit
to keep the thing afloat, where do I look for my profit? Do I
look for interchange fees? Or do I look for tricks and traps?
And you witnesses here from the three companies may not be
competent to answer this question because this is basically a
CEO question, but how much do I build into my business model
and my strategic example tricks and traps? And if it is a
deliberate industry practice and strategy to make my money off
of tricks and traps, then I am with Dr. Warren and Mr. Donovan.
But if it is a fallout of the overall strategy that some people
get caught in this, so that Mr. Donovan has clients, that is a
very different kind of thing.
I am not burdened with a legal education, but I do get told
by my lawyer friends that hard cases make bad law. And Mr.
Donovan has given us some hard cases. And I want to know
whether they are, in fact, hard cases and the exception to the
overall business strategy or if they are caused as part of the
business strategy of where we are putting.
I have gone over my time, but can you give me a quick
response as to where you look for your profits to keep
yourselves afloat?
Mr. Finneran. Senator, if I could, I would love to give you
a quick response. I do not think--well, certainly Capital One
and I suspect the other long-term credit card issuers, many of
whom are represented in this room today, we do not build a
business model on tricks and traps. We are all in the business
of trying to attract and retain good customers. And it is not
in our interest to give people credit that they cannot handle.
Nor is it in our interest to set people up for disappointment
when they figure out what their deal was, if they thought it
was something else at the time we attracted them.
We work really hard to try to meet those two standards
every day, because we expect to be in this business for many,
many years. And if you build your business model on tricks and
traps, you are not going to last in the marketplace because you
are going to get outed, whether it is by you folks or by our
consumer group colleagues here at this table or by litigators
or by regulators. We are in the business to do a service to our
customer with a focus on the long-term.
Ms. Franke. I would like----
Ms. Warren. Senator, can I also give a response, 15
seconds?
Chairman Dodd. Go ahead.
Ms. Warren. Let us just look at the numbers. The credit
card industry as a whole, not the three people who come in here
today representing, as they say, their high-end customers in
one case. The credit card industry as a whole makes $11 billion
in terms of the first model you described. That is what they
are making from the fees from the merchants and so on.
They made $79 billion last year in interest and fees.
Senator Bennett. But interest and late fees are two
different things.
Ms. Warren. That is absolutely true, although----
Senator Bennett. The late fees are the tricks and traps.
The interest is a legitimate----
Ms. Warren. A 29 percent interest rate for being a few days
late is not within the range of legitimate. And what the data
seems to suggest is that that is where the interest income is
coming from.
Let me just give you return on assets. That is the key
part. We look at all other forms of consumer lending. Pick
Citibank last year, and their return on assets was 0.8.
But when you look at what they did with credit cards, their
return on assets was 6.2. In other words, in terms of building
a business model, building a credit card is more profitable
than building any other kind of consumer lending. And within
that, the revenues are coming $7 to $1 for building in interest
rates and late fees where you can snag customers whenever they
slip and fall at all. It is about tricks and traps.
Senator Bennett. We do not have the time to go into that.
Thank you.
Ms. Franke. I would like just to respond on a couple of
points.
First of all, the credit card is an unsecured loan. It is
the only consumer tool out there where we lend folks money and
we have no collateral to collect against it. We are providing a
service to the consumer to be able to facilitate payments, the
vast majority of whom use our product for convenience.
As you respectfully point out, Senator Bennett, there are
many, many of our customers who pay their bill in full every
month and appreciate that ability to have that convenience.
We also have consumers and customers who choose to borrow
from us. And we charge them a fair interest rate to borrow from
us. We believe that we are treating customers and providing
them a service that they want, whether it is a convenience or
whether it is a loan. And we do try to make sure that we manage
our risk profile so that we price appropriately for the risk
that we are taking.
And in some instances, we do need to raise rates where the
risk of the customer has deteriorated from the time that we
entered a contract with that customer.
I believe that the credit card is a wonderful tool for the
consumer, and at JP Morgan Chase we deal with the very credit
worthy consumer who can afford to pay us back and appreciates
the utility that we are providing them.
Chairman Dodd. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Unlike Senator Bennett, I am burdened with a legal
education, so I want to follow up from where he started, from
where he was headed. I think it was very relevant.
Let me ask you, Ms. Franke, you say in your testimony that
it is the bulk of the business for Chase is super prime and
prime. So am I to interpret that that super prime and prime is
an individual who has a good credit history that, in fact, pays
their monthly balance on time within that month?
Ms. Franke. That would be correct.
Senator Menendez. And that is the business that you go
after?
Ms. Franke. That is correct.
Senator Menendez. Now to have that business model, you
would not go after someone who has no credit history?
Ms. Franke. We do, 1 percent of our customers are students.
Listening to your opening comments, I imagine that is something
of concern to you. It is a very small part of our business, but
we do believe that there is a place to provide students the
credit that they need, and really the utility the need for
emergencies and to manage their lives. And we manage it with
very low lines. And interestingly, have much higher numbers of
students paying us in full than the adult population.
Senator Menendez. What is a pre-approved card?
Ms. Franke. A pre-approved card is where, based upon a
review of the credit bureau, we have determined that someone is
credit eligible and worthy of our extending them a line.
Senator Menendez. So if Augustino Joseph Chairvolotti, who
is 2 years old, got a solicitation for a pre-approved credit
card, what is his credit history?
Ms. Franke. That would be an error. And we do, as I am sure
you know, write many, many letters a day. In some instances,
the data is incorrect, and we constantly are working to refine
our processes. We have gotten bad data. If that is the case, we
welcome anyone to tell us where we have made a mistake because
that is not within our policies. That is not what we want to
do.
We clearly do not market to minors, nor do we market to
dogs, as someone has brought up earlier. We want to market to
those that we believe----
Senator Menendez. Well you, in this mistake, marketed to a
minor.
Let me ask the rest of the members of the industry, is that
the same business model, the one in which you are working for
prime, subprime--I mean, super prime, prime, people who pay?
That is the model customer, is it not, I would assume?
Mr. Vague. Generally, absolutely.
Senator Menendez. Is that the bulk of where you are headed
on your business?
Mr. Vague. That is right.
Senator Menendez. Mr. Finneran.
Mr. Finneran. Senator, we lend across the entire spectrum.
And let me also say that that is not unlike many of the large
credit card issuers in the country. Our portfolio, according to
public data, is about 30 percent in what is defined as
subprime, and that is about the same percentage as most of the
other big five lenders, according to the data that they file
publicly.
So we market to all Americans. We use the same basic
criteria, however, which is an assessment as to whether they
have the capability to handle that debt and to repay that debt,
and principally looking--as Ms. Franke described--to the credit
bureau information that is available.
Senator Menendez. Here is where my problem, my legal
education, burdens me. And that is the GAO report said that, in
fact, 70 percent of the credit card industry's revenues come
from interest payments made by non-model customers, who cannot
or simply do not repay the entire balance they owe each month.
And so the question, as a practical matter, if the GAO says
70 percent of your revenue comes from non-model customers, then
those are individuals who are not paying their monthly payment
on a timely basis and therefore invoke some of these different
charges or higher penalties or late fees or, in fact, higher
interest rates.
So if that is the case, what is the industry's incentive to
undermine--if you ultimately had a fully model customer
portfolio for all of the industry, eventually you would lose 70
percent of your revenue. Now what is the incentive for the
industry to lose 70 percent of its revenue?
Mr. Finneran. Senator, I am not familiar with the reference
to the GAO report that you made. But if I was listening
carefully, I think you defined non-model customers as providing
70 percent of the revenue including interest. I mean, someone
who may not pay their balance in full can be a very, very good
customer. That is part of the flexibility of the card, that
people do use it, as Senator Bennett alluded to, as a
transaction vehicle where they pay their balance in full every
month. Many people use it as a borrowing vehicle, whether they
borrow over long periods of time or whether they borrow
periodically and then pay it back.
Senator Menendez. But we have heard how the non-payment
can, in fact, dramatically increase the rate of interest. And
therefore, isn't that become far beyond what you say is a model
customer. It is a customer that is somewhat in bondage.
Mr. Vague. I would just comment, hopefully for
clarification, most of the folks that we would consider prime
customers do not pay late to incur the kinds of fees that you
are suggesting, but do not pay in full either. They would on
time make a partial payment. So they are actually borrowing.
And so I suspect the large part of that 70 percent number
you are referring to is interest received where timely payments
are made by what we would consider prime customers.
Senator Menendez. Well, let me ask you, this is the final
question that I have. And I would like to explore this with the
industry more, because 70 percent of your revenue is not
insignificant.
With student loans and the whole question of--I saw the
numbers of those students who took tests and clearly were not
literate. Only 26 percent of 13-to-21-year-olds reported their
parents actively taught them how to manage money. And less than
a third of the 4,000 students who took the Jumpstart Personal
Financial Survey passed the test.
Now when we are so aggressively pursuing this class of
consumers, isn't there a responsibility from the industry to be
more policing of itself in this context? Or in the absence of
that, then find themselves with a legislative response?
Mr. Vague. There may very well be things that need to be
done relative to lending credit cards to students. But I would
reiterate what has been said by others here, and that is we do
not currently make very many credit card loans to students. But
I have from time to time in my career. And it has always been
my experience that the delinquency rates on student programs is
lower, is more favorable, than that for the general population.
And I think there are some ABA statistics that bear that out,
as well.
So even if there is something we could do in this area, I
would love for us to be able to really look at the actual
holistic or total experience of students as we do that.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Dodd. No, thank you very much.
Senator Menendez. For the students I have talked to, and
their parents, I do not know how low the rate is. But there is
far more than enough. I think one of our witnesses actually
testified that, I think it was Professor Manning, that
approximately 7 to 10 percent of college dropouts occur as a
result of consumer debt. That is not insignificant.
Chairman Dodd. I will just tell you, from this side of the
table, I suspect I am going to speak for all of my colleagues.
We go back to our States and do town meetings and the like. You
cannot believe how often this comes up and how many pieces of
correspondence and communications we get from constituents.
Now you are talking about a very small percentage. I heard
you say that, Ms. Franke. But I will tell you, there is a great
deal of concern about the over-marketing, what happens, and
parents, and so for and the like.
We have got a vote on. I am going to step out and come
right back. I am going to turn to Senator Casey so he can get
his questions in. Then I will come back so you can go vote. We
will finish up here.
But that number still, in the last 10 years, to go from
roughly $1 billion--and I presume that was fees and interest.
In 1995 or 1996, whatever that percentage was of interest and
fees, but today that number has jumped to $17.1 billion, and 70
percent of that $17.1 billion are penalty fees. That is a
massive increase in 10 years.
Now that is coming from--this is not coming from your good
customer. Penalties like that, they are not the person who pays
a percentage off, makes that minimum thing and does that good
job there. This reaching down in to this constituency that is
either fixed income or low income and making it impossible, in
many cases, for them to crawl out and get into the economic
condition that they would all like to be, and is what greatly,
greatly worries a lot of us here.
And I am not suggesting, by the way, you are major, well-
respected businesses. And I respect the fact that JP Morgan--I
do not like your reason, but I am glad you did it, Ms. Franke,
for getting rid of the double-cycle billing, and so forth. And
I am glad you do not do a lot of these default payments, and so
forth. A lot do. People not at this table.
And what Senator Menendez said earlier was very, very
important. There are 6,000 issuers. We have got three of you
here today. And just as was mentioned earlier, we know that
there are good people in this business to do a good job. That
is not the point here, obviously. Laws are not written for the
overwhelming majority of people who do the right thing every
day. We have to write the laws to protect people against, just
as Mrs. Warren talked about, the Consumer Product Safety
Commission, the Food and Drug Administration.
My colleague from Delaware talked about all these things
are consumer choices. They do, they have great choices because
there has been someone around who said by the way, we do not
expect you to be an engineer and a scientist and a pharmacist
when you go out. When every one of us this morning got up and
we brushed our teeth and we took our morning prescriptions, we
did not agonize about whether or not we were going to be in
trouble as a result of doing it. We have confidence in it.
And what we want to do is have people have confidence in
the system that when they engage in a wonderful practice of the
extension of credit, that they are not going to get themselves
in deep trouble and never get out of it. And too many cases
that is happening today. It is happening. We all know it.
So we need good advice from you on how to pass responsible
legislation or to encourage the industry to do the responsible
thing so we can start to make it possible for these people to
begin to move up that economic ladder and enjoy the prosperity
of our country.
That is really what we are driving at here. So in a sense--
let me recess this for a minute. We will recess for 10 minutes
and come right back. Take a break for 10 minutes.
[Recess.]
Chairman Dodd. Thank you for your patience here, all of
you, again. This will be relatively brief here now. We will
wrap this up for all of you. You have been very generous with
your time this morning. Very, very valuable, I can tell you, to
have your testimony.
I am going to turn to my colleague from Pennsylvania, a
member of the committee. Senator Casey, the floor is yours.
Senator Casey. Mr. Chairman, thank you very much. And
again, I want to reiterate how much we appreciate you convening
this hearing and the importance of it.
Not only because Mr. Donovan is from Pennsylvania, but that
helps, I want to direct my first question to him. But I also,
and I do not mean to artificially create conflict here but
there is obviously some conflict in this room and that is
important to recognize.
It has been my experience, and I think the experience of a
lot of Americans, that when there is conflict in our adversary
system, in our judicial system, often, in most cases, that
leads to some illumination of the truth. So I hope this helps
in that regard.
I was struck by, Mr. Donovan, your testimony and the detail
in your written testimony about Ms. Owens in Ohio and Mrs. C in
North Philadelphia. And with the admonition of my distinguished
colleague from Utah, Senator Bennett, I still think that these
particular cases are very important, because they can often
explain better some complicated issues.
So here is what I wanted to do. I actually know where North
Philadelphia is. It is a place that I volunteered, and I know
Senator Dodd was a volunteer, as well, and did it overseas.
That is harder. I only did it in the United States.
But North Philadelphia, most of North Philadelphia, is very
poor, as you know. Some is less so, and also I am sure there
are middle income families. But it is a very tough place to
make ends meet, and to do that on a $600 a month SSI payment is
even more difficult.
So my question is directed at those here who are
representing the industry. When you think of some of the
detail, and I realize that there is a page or so of it, but
here is the bottom line, as I read it. This is on page three,
and I know not everyone has this. This is what Mr. Donovan
testified to: by August of 2006, in the case of Mrs. C in
Philadelphia, nearly $400 per month was coming due on the card
she had, all of which Mrs. C attempted to pay from her monthly
$600 SSI check. As of August 2006, the APR on her WAMU card had
increased to a penalty rate of 31.49 percent.
The question that I have, and I know that is a long lead
up, is when you hear that and you hear the other parts of his
testimony, and other things that have been said today, I
realize this is necessarily is not your banks and is not your
particular case. But what can the industry do to make sure that
the Mrs. Cs of the world do not have to endure that kind of
punishment ever again?
I realize that anecdotes are not the whole story. But this
is one woman in my State. And if she had called me, and I just
started here. But if she had called me this year or next year,
I am going to be calling you or your counterparts or your
colleagues. So I want to know, how do we prevent these cases
from transpiring?
I would open it to anyone on the panel?
Mr. Vague. I would be happy to speak to it. I very much
empathize with you and agree with you the appropriateness of
examining situations like this. In our organization, first and
foremost, we endeavor strenuously, frankly, to avoid lending
into situations where we cause distress. I mean, there is
enormous amount of effort put onto that.
But in those situations where we do, such as the one you
describe, we very quickly move, as we are going through the
collection process, to a program where we will waive interest
rates, fees, other things, go down to the principal balance. We
will also forgive portions of the principal balance.
I think it is our best interest to be proactive in a
situation like these to create something that is manageable. It
does no one any good to do repetitive calls in situations where
there is not going to be successful resolution, as perhaps is
the case here.
In addition to that, there are very responsible consumer
credit counseling services, and in particular the non-profit
Consumer Credit Counseling Service itself, where we would very
quickly refer a program like that. And that institution has
historically been very responsible in helping an individual
like Mrs. C to negotiate with a group of lenders simultaneously
and get them into a program, often create by CCCS, as they are
called, to remove some or all of the interest rates or fees,
create partial payment programs, and the like.
So the continued awareness of those kind of programs, the
continued promoting of institutions like CCCS, is something
that we endorse.
Senator Casey. I want to give others a chance and I want to
have Mr. Donovan--he is the author of this information.
But the credit protection fee is really what--am I right,
sir? That is what drove this.
Anyone else? I have a minute-and-a-half, but I am going to
try to get it in.
Chairman Dodd. Take a little more time, if you want.
Senator Casey. Anyone else?
Mr. Plunkett. Senator, I do have a point on that, as well.
I think what Mr. Vague was referring to is what is often called
a workout plan, where the creditor will try to understanding
the declining financial situation of the consumer and work out
sort of an individualized remedy to help them.
Some creditors do it. Some do a good job of it. Often, very
often, people fall through the cracks because it is not an
automated system. It is not cheap to do. I have noticed that
workout plans come and workout plans go, depending on the
underlying financial condition of the issuer. That is, when
they are doing better financially, they might be more willing
to do it, and not.
As for credit counseling, we have documented extensively
that creditors have actually made it more difficult for people
to lower their overall interest rate on all of their cards
because they have raised the interest rates that they charge
people in credit counseling over the last 8 years. Bank of
America, for example, used to offer a zero percent interest
rate for people in credit counseling. We applauded them. We
thought it was a very responsible approach. They have raised it
to just under 10 percent.
So that is the problem with credit counseling these days.
Senator Casey. We are all for counseling and workout plans
and all of that, but I am talking about why this woman was put
in that position to begin with, with this fee, the credit
protection fee.
But someone else from the industry who wants to respond?
But I want to make sure I give Mr. Donovan a rebuttal.
Mr. Finneran. Well Senator, I would just add to what has
been said. I think one of the keys here is in the product
design at the front end that is offered to----
Chairman Dodd. I cannot hear you, Mr. Finneran.
Mr. Finneran. I am sorry, Mr. Chairman.
I said I think one of the keys here is in the product
design on the front end, and I think we talked about that this
morning, about the repricing criteria that different
participants in the industry apply. We have certainly tried to
make that much more transparent and simpler for our customers.
That may have helped in this situation. So I would just add
that as a comment.
Senator Casey. Mr. Donovan.
Mr. Donovan. Yes, thank you, Senator. I appreciate the
opportunity.
I think one of the problems with the marketplace generally
is that we now have a very mature, super competitive industry
that no longer competes based upon the annual percentage rate
any longer. And it is allowing freeloaders, such as Senator
Bennett--which used to be accounted for with the annual fee.
The annual fee was the revenue that the card holders would--
that the card issuers would anticipate getting from those who
would not revolve their balances.
They have given that up in order to balance their
portfolios, because they use the super credit worthy in order
to balance a portfolio that they securitize and sell to the
industry. That is what they do. And they give up the annual fee
for that. They are losing revenue on him. He is not a really
great customer. He is not a super prime customer. They use
money with him.
Chairman Dodd. I think he is called--is he not called a
deadbeat? Isn't that the word.
Mr. Donovan. That is what they call them.
But he is a great customer when they go to the securities
markets, because he balances that portfolio so it looks like it
is performing better than the portfolio really is, because he
is not in default. So that they are now, they are getting the
revenue from the revolvers. And in fact, Duncan McDonald, the
former general counsel at Citibank, explained this very problem
in the American Banker 3 years ago.
And he said that revolvers are now subsidizing the rich
because the interest and fees earned from them go to subsidize
the frequent flier miles and the points and the cash-back
programs that we give to the so-called non-revolvers, which
would ordinarily not be making these companies any money.
The reality of it is if we got back to a real efficient
market, what would happen would be those non-revolvers would
pay some modest amount, some sort of fee, for having the right
to not revolve, while the annual percentage rate for the
revolvers would not spike to default penalty rates.
And I have the solution for that, and it is not disclosure,
Senators. The solution has been long-established at common law
in this country and from the United Kingdom. And that was
penalties have to bear a reasonable relation to the risk
incurred and the cost that you incur from the default. If you
have a fairness-based standard, a principal-base approach, the
market will work for itself. That is the market.
And this is not something unique. It was the rule with the
credit card industry before 1996, before penalties were defined
as interest, which was absurd.
But not only that, it is the rule in the United Kingdom and
in Europe and in Japan, because the Office of Fair Trading,
which governs credit card issuers in Europe, in the United
Kingdom, and in fact Japan borrows from, has in fact issued
calculating fair default charges in credit card contracts, the
statement of the OFT's position. This is an August--an April
2006 statement, and it is enforceable in the EU, in the U.K.,
and in Japan. Why it is not--and in Canada.
Why it is not, in fact, followed by the industry here is
simply because the industry does not want to follow these
practices and it wants to get its out-sized profits, which it
has gotten here.
That is it. Thank you.
Ms. Franke. I would like to make one point, if I could.
Senator Casey. Sure.
Ms. Franke. Several times it has been said today that there
is no longer any competition around interest rates. And as
someone who manages the marketing activities for Chase, I would
like to tell you that it is still a very competitive market on
interest rates, and consumers are still making many decisions
about which product they choose based upon what interest rate
they are offered.
So from those of us that do this day in and day out, I can
tell you that we very much compete on interest rate, and you
will see a wide variety of interest rates in the market today.
And the only follow up comment I would like to make is that
we very much value those customers like Senator Bennett that
spend money with us but do not carry a balance. They have very
low losses. And we do make some money on those customers. And
we do value them.
Senator Casey. I know we are out of time, but I would just
make one final comment. A lot of what we heard today is very
good testimony and very good questions. But a lot of what we
heard, I think, from the industry troubles me significantly in
this sense: there seems to be a sense--and this is a broad
stroke, I understand that--that one of the big problems is lack
of customer or consumer understanding. And that is certainly
true in any field.
But if that is going to be the focus of the industry only,
in other words make sure we explain it better and all of these
problems will be dealt with or mitigated, in my judgment and I
think in the judgment of both sides of the aisle on this
committee, that is not enough in terms of the attitude that you
bring to this discussion.
So I would urge those on both sides of these issues to
think more than just better disclosure, better explaining. We
have got a lot more to do than that to protect people.
I am six-and-a-half minutes over time, Mr. Chairman. That
is a rare thing in Washington. Thank you for the time.
Chairman Dodd. Not at all. I thank you immensely, Senator
Casey, for your questions. They are great questions.
I thank the witnesses, as well.
Let me just, if I can, make a couple of comments in
wrapping up for all of you. It is clear, I think, from the
hearing this morning and other evidence that we have gathered
and will continue to gather, but certainly what we have
already, that we acknowledge that we have some serious problems
with a number of the practices being used by the industry as a
whole.
Again, I want to emphasize here, the witnesses who have
come forward, particularly Capital One and so forth,
willingness to be at this table this morning, and others,
Barclaycard and JP Morgan. And some of the practices you have
changed. The reasons you have given I do not necessarily agree
with, but nonetheless, I appreciate the fact that we are
changing some of these things or you are not engaged in them at
all.
But again, there are 6,000 issuers here. So we are dealing
with a large universe. And I want to make clear here that we
are talking about some of these practices, I think some of you
agree, need to be changed, maybe for different reasons.
Practices like the universal default and the double-cycle
billing which have been part of the focus of the hearing are
incredibly confusing and misleading to consumers at the very,
very least.
In my view these practices, as well as others that we will
explore in the future, must be eliminated or fundamentally
changed if we are going to go forward.
It is also pretty clear to me, and again I think this was
sort of universally held, although we bring different
approaches to it here, that we have a broken disclosure system.
At least I heard that from everybody here this morning. And we
need to address that, regardless of what side of the chair they
are sitting on. And I need the expertise of many of you here on
how we can do a better job of this.
There is some wonderful, talented people at this table, and
others who can offer us some help.
I was talking to my old and dear friend Ed Yuengling
earlier. Ed has suggested he wants to sit down and talk, as
well, from the ABA. And I am deeply appreciative of that offer,
Ed, this morning. We look forward to that.
And Elizabeth, we are going to call on you and others to
help us work our way through this in a way, if we cannot come
up with some good ideas fairly soon, so we can help craft a
smarter and better way to get information to consumers. I think
we all agree that that is important.
And to protect consumers outright from some of the
practices that may be driving some of them deeper and deeper
into debt. As I mentioned at the outset of my remarks, that is
bed for consumers, it is bad obviously for business, and for
our country.
And last, I would just say that while we have reviewed a
number of reports over the years, statistical data, some of
that can be very confusing, even contradictory in some cases.
What I would like to do is leave the record open for a few days
to have my colleagues address maybe additional questions that
we did not get to this morning, to raise some of these issues
with you, more detailed questions involving some of the data,
that we might take advantage of your expertise and not confront
you right here at a witness table without the ability of going
back and talking to people in your own shops that can help us
get accurate information.
But again, I thank all of you. This has been a very good
hearing. This is my second hearing as chairman of this
committee. I have cared about this issue for a long time, as my
colleagues know, going back some 20 years when I was sitting
about where Bob Casey is in this committee. In those days, Jake
Garn, I think, was sitting here in my first term as the
chairman of the committee. And then Bill Proxmire and of course
Don Riegle and Al D'Amato and Dick Shelby, Paul Sarbanes.
I have sat through seven chairs in this committee and this
issue has been one that has come up all the time over the
years, going back to my earliest days on this committee.
So I am very interested in this subject matter. Obviously,
all of you are, as well. And this is a matter that does need
some serious work, in my view. So I am looking forward to the
ongoing hearings and the ongoing conversations that will make
it possible for us to make it possible for those 51 million
American families you talk about, Elizabeth, to make sure they
have the opportunity to enjoy the prosperity that this country
can offer.
So with that, I thank you all for being here. And until
further call of the chair, the committee is adjourned.
[Whereupon, at 1:01 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTIONS OF SENATORS DODD AND SHELBY FROM
JOHN G. FINNERAN, JR.
On behalf of Capital One, I am pleased to have the
opportunity to respond to a number of your questions for the
record. While some of the information is competitively
sensitive, every effort was made to provide information
responsive to the Committee's requests.
Please note that references to the U.S. Government
Accountability Office (GAO) data are based on information that
Capital One provided to GAO for its report, ``Increased
Complexity in Rates and Fees Heightens Need for More Effective
Disclosures to Consumers (GAO-06-929)'' issued in September
2006.
In response to these questions, I am also attaching for the
record a copy of Capital One's ``Fact Sheet'' and ``Fact Pact''
referenced below in response to questions regarding improved
disclosure.
The ``Fact Sheet'' was submitted to the Federal Reserve in
March 2005 as part of their request for comments on revising
the open-end credit provisions of Regulation Z. The ``Fact
Sheet'' was Capital One's proposal developed after consumer
testing, as an updated and improved version of the current
``Schumer Box,'' to give consumers clearer and more useful
disclosure of credit card rates and fees, including the reasons
for which rates can be changed.
The ``Fact Pact'' disclosures on our credit card
solicitations incorporates our own ideas to the extent we are
able to do so within the framework of the existing Reg Z
requirements. These simple, plain English disclosures are in a
food label style format for easy consumer understanding of key
terms.
Q.1. What percentage of customers pay off their balances in
full each month?
A.1. Company specific information on this question is
considered competitively sensitive; however, the aggregated
data provided to GAO by the major issuers does address this
question. Specifically, the data shows that between 2003 and
2005, 47 to 48 percent of accounts did not revolve a balance
from one billing cycle to the next for three or more billing
cycles.
Q.2. What percentage of customers pay just the minimum payment
each month?
A.2. Very few Capital One customers choose to pay the minimum
payment for any prolonged period of time--fewer than 3% pay the
minimum for three months in a row. For those who do, we provide
a notice on their statement informing them of the consequences
of doing so. In this statement, we encourage them to pay more
than the minimum in order to pay down their balance more
quickly. We also provide them with a web address for our online
calculator (www.capitalone.com/calculator), which allows them
to enter specific information, customized to their situation,
and receive real-time information about how long it will take
to pay off their balance.
Q.3. What percentage of accounts are charged-off?
A.3. As publicly reported, the 2006 US Consumer Card managed
charge-off rate for Capital One was 3.37% of managed
outstanding debt.
Q.4 What is the maximum APR that customers are charged?
A.4. In the past, certain customers who defaulted on their
obligations were eligible to be repriced to a maximum rate of
Prime +20.99%; this corresponds to an APR of 29.24% under the
current Prime rate. Today, the maximum rate that certain
customers have as their default rate is Prime + 19.9%.
Customers who have not defaulted on their payments
typically enjoy far lower rates. Portfolio-wide, the average
APR of all of our customers is 13.55%. Among those who have not
been repriced, vast majority of accounts have rates below 20%,
and the average APR is only 11.46%.
Q.5. What is the average balance on a credit card account?
A.5. At the end of 2006, Capital One's managed US Consumer Card
portfolio had 37.6 million accounts with $53.9 billion
outstandings, resulting in an average balance of $1,434.
Q.6. What percentage of cards are subject to double-cycle
billing?
A.6. Capital One does not use double cycle billing on any of
our customers' credit cards and has never engaged in this
practice.
Q.7. What is the retention rate of customers in the industry?
A.7. TNS Global, in their November 2006 ``State of the Card
Market'' report, estimated that, for Visa and MasterCard
accounts, 11% closed in less than one year, 16-17% closed in 1-
2 years, 16% closed in 3-4 years, and 56-57% closed in 5 or
more years. The average account was open for about 6 years.
Q.8. What percentage of cardholder agreements contain universal
default provisions?
A.8. None. Capital One does not engage in any form of
``universal default.''
Q.9. How do you define universal default?
A.9. We understand ``universal default'' to mean a practice in
which any of the following may trigger an automatic interest
rate increase on the consumer's credit card:
Changes to information in the consumer's credit
report
Changes to the consumer's credit score
Paying late on another account with the same or
another lender
Charging off on another loan with the same or
another lender
Any other conduct on another account with the
same or another lender
In short, we define ``universal default'' as a practice
that automatically changes the terms on a given account based
on behavior on another account.
Capital One does not engage in any form of ``universal
default.'' This has been our long-standing policy. We will not
reprice a customer if they pay late on another account with us
or any other lender, or because their credit score goes down
for any reason. As we testified before the Senate Banking
Committee in January, as well as at a previous May 2005 hearing
before the Committee, ``there is only one circumstance in which
a customer might be subject to default repricing: if they pay
us more than 3 days late twice in a 12 month period.''
Furthermore, we explain our practices clearly in our marketing
materials to our customers that we do not engage in this
practice.
Q.10. Do you conduct any type of interest rate repricing based
on a cardholder's transactions or credit worthiness with other
creditors or accounts?
A.10. No. As stated above, Capital One does not engage in any
form of ``universal default,'' which we understand to mean a
practice in which a late payment or other conduct on another
debt may trigger an interest rate increase on the consumer's
credit card. We testified to this before the Senate Banking
Committee in January, as well as at a previous May 2005 hearing
before the Committee. Furthermore, we explain our practices
clearly in our marketing materials to our customers that we do
not engage in this practice.
Q.11. What percentage of cards use credit scores or adverse
information from another creditor or account to increase rates?
A.11. Zero percent of Capital One cards use credit scores or
adverse information from another creditor or account to
increase rates.
Q.12. Have industry profits remained constant over time?
A.12. According to the GAO, ``The largest credit card-issuing
banks, which are generally the most profitable group of
lenders, have not greatly increased their profitability over
the last 20 years (GAO-06-929, page 67).'' Additionally,
aggregated data provided for the GAO report showed return on
managed assets (ROMA) for the industry from 2003 to 2005 ranged
from 2.3 to 2.7 percent.
Q.13. What percentage of Americans have credit cards?
A.13 The Federal Reserve has estimated that about 71.5% of
families had a least one bank issued credit card in 2004
(Source: Federal Reserve, Report to Congress on Practices of
the Consumer Credit Industry in Soliciting and Extending Credit
and their Effects on Consumer Debt and Insolvency at 3,6).
Q.14. What percentage of cardholders are paying penalty
interest rates on their cards? How has that percentage changed
over the last 20 years?
A.14. Information regarding penalty interest rate pricing is
considered competitively sensitive information; however, as
aggregated data provided for the GAO report showed only a small
number of active cardholder accounts, 11% in 2005, had more
than a 25% purchase annual percentage rate (APR). Specifically,
the GAO cited in their report ``Penalty interest rates and fees
appear to affect a minority of the largest six issuers'
cardholders. . .a small proportion of their active accounts
were being assessed interest rates above 25 percent--which we
determined were likely to represent penalty rates (GAO-06-929,
page 32).''
Q.15. What percentage of profits come from:
a) non-penalty interest charges;
b) penalty interest charges;
c) fees, including: over-limit fees; late fees; annual
fees; interchange fees; balance transfer fees; cash advance
fees; stop payment fees; telephone payment fees; foreign
transaction fees; and other fees?
A.15. US Consumer Card, managed:
2006 Net Income: $1,823MM
2006 Interest Income: 68% ($6,873MM) (includes
past due fees)
2006 Non-Interest Income: 32% ($3,256MM)
(includes all fees other than past due)
This is the break-down that Capital One provides in our
public disclosures. We do not disclose more detail for
competitive reasons.
Q.16. Please provide the Committee with data on the amount of
annual revenue generated in each of the last two years from
interest payments and the number of cardholders paying interest
at rates of:
a) less than 15% APR;
b) from 15 to 19% APR;
c) from 20 to 25% APR;
d) from 26 to 29% APR; and
e) 30% or greater APR.
A.16. Capital One does not disclose revenue based on
cardholders' interest rates. As noted in question 15, Capital
One's US Consumer Card, managed profits were:
2006 Net Income: $1,823MM
2006 Interest Income: 68% ($6,873MM) (includes
past due fees)
2006 Non-Interest Income: 32% ($3,256MM)
(includes all fees other than past due)
This is the break-down that Capital One provides in our
public disclosures. We do not disclose more detail for
competitive reasons.
Q.17. Please provide the Committee with data on the amount of
revenue generated in each of the last two years from interest
payments due to:
a) repricing of interest rates due to late payments to the
issuer; and
b) repricing of interest rates due to cardholder
transactions or credit worthiness with other creditors or
accounts.
A.17.
a) Information regarding revenue due to penalty interest
rates is considered competitively sensitive information.
b) Capital One does not reprice accounts due to cardholder
transactions or credit worthiness with other creditors or
accounts.
Q.18. Please explain how you would ``reprice'' a customer with
a ``fixed rate'' credit card. What are the criteria that would
determine whether a customer is repriced? How do you determine
the rate to which the customer is repriced?
A.18. Under Capital One's current policies, any credit cards
marketed with ``fixed'' rates cannot be repriced during the
period for which they are ``fixed.'' For example, a rate
marketed as ``fixed for life'' today would not be eligible for
any form of repricing for the life of the account. Similarly,
an introductory rate marketed as ``fixed until April 2008''
would not be eligible for any form of repricing until May 2008,
at the earliest. Repricing in these instances means any rate
change as a result of a default (e.g., late payment) or change
in market conditions (e.g., an increase in interest rates
generally).
It is important to note that the policies outlined above
were instituted in 2004 by Capital One of its own accord. The
Federal Reserve continues to define ``fixed'' rates as they
relate to credit cards simply as any rate that is not variable
(i.e., tied to an index). Thus, current law continues to permit
credit card issuers to market ``fixed'' rates that are subject
to repricing both as a result of customer default and changes
in market conditions.
------ --
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM JOHN G. FINNERAN, JR.
Q.1.a. If issuing a credit card with a low credit line is one
of the ways to reduce the risk of lending to an ``at risk
borrower,'' doesn't the issuance of multiple cards to the same
individual reduce the effectiveness of this practice and
actually in some cases increase the risk?
A.1.a. We minimize any increase in risk when issuing multiple
cards to the same customer by applying strict controls in our
marketing and approval decisions. We do not target multiple
cards to ``at risk borrowers.'' Only customers whose risk level
is below a certain threshold and who are currently not over-
limit or past due are eligible to be marketed a second card.
Additionally, customers who have charged-off on any of our
cards in last 12 months are not eligible, and we currently do
not issue more that two cards to any of our customers. Lastly,
we offer lines that ensure customers are only given the amount
of credit that they are able to responsibly handle, whether or
not they already have a Capital One card when applying for a
new card.
Q.1.b. What percentage of your customers has more than one of
your credit cards?
A.1.b. Customers choose to have multiple credit cards for a
variety of reasons--to have both a Visa and a MasterCard, to
segregate expenses, for security, or for different features
like rewards. Like our competitors, we hope they will choose us
to fill those needs. Eighty-five percent of our customers have
only one card with us while less than four percent have more
than two. We only offer additional cards to customers in good
standing, as indicated above. For those customers, we give them
the option to consolidate their accounts into one card, if they
prefer.
Q.1.c. How would you describe the typical customer that has a
low credit line but multiple cards?
A.1.c. With the great variety of cardholders at Capital One,
there simply is not a ``typical customer,'' even within the
parameters of having multiple accounts and low credit lines.
What can be said is that customers with lower credit lines tend
to have higher risk than those with higher credit line.
Regarding holding multiple cards, customers choose to have
multiple credit cards for a variety of reasons--to have both a
Visa and a MasterCard, to segregate expenses, for security, or
for different features like rewards. There is nothing
particularly notable about the fact that customers have more
than one credit card, whether with one issuer or different
issuers. CardWeb reports that Americans carry 6.3 bank credit
cards per household. Like our competitors, we hope they will
choose us to fill those needs when they choose to have a single
card or multiple cards.
Q.1.d. What percentage of your customers use multiple credit
cards to remain current on their other credit card balances
that have been issued by your companies?
A.1.d. We do not accept payment from one Capital One card as
payment for another Capital One card.
Q.2. How does your company account for the total debt from all
of the cards issued to one customer? Are these aggregate
balances reported to regulators as well?
A.2. Like other credit card companies, Capital One manages the
accounts of customers who have multiple credit cards in
accordance with the federal banking regulators' ``Account
Management and Loss Allowance Guidance'' published in 2003.
That regulatory statement, issued by the Comptroller of the
Currency, Federal Reserve Board, FDIC, and Office of Thrift
Supervision, requires credit card companies to have sufficient
internal controls and management information systems to
aggregate the credit that is extended to customers through
multiple credit cards and to analyze the performance of
customers on their existing accounts before an additional
credit card is offered. Credit card companies are subject to
being examined for their compliance with the Account Management
Guidance during the regulators' regular examinations of the
companies, which can be held annually or more frequently.
Q.3. What is the typical minimum monthly payment required for
credit cards? What percent of the balance represents the
minimum monthly payment? Do you think this is sufficient? Do
most credit card companies use a model or an algorithm to
establish minimum payment? Please describe industry best
practices for establishing appropriate minimum payment amounts.
A.3. For the majority of accounts, the minimum payment due is
the greater of:
3% of the balance (some prime and super-prime
accounts are 2%)
Amount over-limit
Amount past due
$15.00 (some accounts are $10)
It should be noted, very few, less than 3% of Capital One
customers, choose to pay the minimum payment for any prolonged
period of time. For those who pay the minimum for three months
in a row, we provide a notice on their statement informing them
of the consequences of doing so. In this statement, we
encourage them to pay more than the minimum in order to pay
down their balance more quickly. We also provide them with a
web address for our online calculator (www.capitalone.com/
calculator), which allows them to enter specific information,
customized to their situation, and receive real-time
information about how long it will take to pay off their
balance.
Capital One and other credit card issuers follow guidance
put forth by the Federal banking regulators on minimum payment
standards.
Q.4.a. Why does the industry allow credit card customers to
make transactions that result in their account being over the
limit?
A.4.a. While we decline more than two-thirds of such
transactions, we approve transactions that allow a customer to
go over-limit in certain circumstances. We do so because our
research suggests that customers value the ability to use more
than their credit limit in certain situations, as being
declined can be both embarrassing and inconvenient. In fact, we
allow customers to choose not to be authorized to go over-
limit. Fewer than 1 percent have chosen to do so, even when we
have made the offer at the time they are assessed the fee.
To maintain safety and soundness in our lending, we
carefully consider the risk of the customer in such
circumstances.
Q.4.b. Does the over-limit fee being charged adequately
compensate for the risk incurred by the over-limit amount?
A.4.b. Because Capital One employs stringent standards on the
approval of over-limit transactions, we believe that on a
portfolio basis the aggregate amount of over-limit fee revenue
adequately compensates us for the risk incurred in approving
selected over-limit transactions.
Q.4.c. In situations where a customer goes over their limit
after the line has been lowered due to new risk identified in
their credit report, how can the fee earned adequately
compensate for the risk?
A.4.c. We have strict controls in place regarding over-limit
transactions after a credit line is lowered.
If the decision is made to lower a credit line, we decline
all over-limit transactions for all accounts on which the
credit limit has been reduced. We monitor these accounts for 60
days after a credit limit decrease.
We still see 3-4% of these accounts going over-limit due to
authorizations that are less than the posted transaction
amounts (e.g., at gas stations), under-floor transactions, and
non-network authorized transactions. To compensate for this, we
credit back any and all over-limit fees assessed within 60 days
of the credit line decrease.
Q.4.d. Is there a maximum amount or percentage of the line that
is generally allowed to be over-limit?
A.4.d. The maximum amount that an account is allowed to go
over-limit varies depending on the risk of the account and
other factors. We currently have controls in place which ensure
that no transactions are approved that would put an account
over-limit by the smaller of 20% of the credit line or a
specific dollar amount (depending on general risk
characteristics of the account). These limits are seldom
reached due to our transaction-specific policies.
Q4.e. What are known best practices for allowing customers to
overdraw their accounts and assessing fees for doing so?
A.4.e. We believe a best-practice over-limit policy is one that
takes into account the wishes of the customer, the ability of
the customer to quickly return under limit, and the safety and
soundness of the lender. Features commonly used to address
these items include clear disclosure of fees, the ability to
opt out of over-limit approvals, and tight controls for risky
customers.
Q.5. How can disclosures and the delivery of disclosures be
improved to ensure customers fully understand the terms of the
credit card, including cash advance, over-limit, wire transfer
and late fees? What are the best practices for disclosing
information to the customer?
A.5. Our suggestions for improved disclosure are set out in
detail in the comment letters we submitted to the Federal
Reserve in response to the Advance Notices of Proposed
Rulemaking that the Federal Reserve published in its process of
revising the open-end credit provisions of Regulation Z (Reg Z)
in 2005.
We proposed a ``Fact Sheet,'' which we developed after
consumer testing, as an updated and improved version of the
current ``Schumer Box,'' to give consumers clearer and more
useful disclosure of credit card rates and fees, including the
reasons for which rates can be changed.
We also proposed that an appropriately modified version of
this Fact Sheet be placed on the reverse of customers' periodic
statements. This would require different treatment of some
disclosures that are already there, and we suggested to the Fed
how those disclosures might be delivered.
Our belief is that the best thing the government can do for
consumers, in light of the changing credit card industry and
product design, is for the Fed to expedite its review of Reg Z
and permit the use of our proposed ``Fact Sheet'' or some other
updated disclosure that the Fed believes would be useful. Our
understanding is that the Fed is working hard on that project
and may publish its proposals soon.
In the meantime, we have adopted our own simple, plain
English disclosures in a food label style format. These ``Fact
Pact'' disclosures on our credit card solicitations
incorporates our own ideas to the extent we are able to do so
within the framework of the existing Reg Z requirements. A
sample of our ``Fact Pact'' is included with our response.
------ --
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RESPONSE TO WRITTEN QUESTION OF SENATOR TESTER FROM JOHN G.
FINNERAN, JR.
Q.1. What portion of your profits comes from interest and what
portion results from the fees you charge customers?
A.1. US Consumer Card, managed:
2006 Net Income: $1,823MM
2006 Interest Income: 68% ($6,873MM) (includes
past due fees)
2006 Non-Interest Income: 32% ($3,256MM)
(includes all fees other than past due)
This is the break-down that Capital One provides in our
public disclosures. We do not disclose more detail for
competitive reasons.
Q.2. I've been reading about universal default. It is my
understanding that you can increase the interest rate of a
customer who has a perfect and long-standing credit record with
your company because of a late payment that he or she has made
to another creditor. Is this true? How do you justify it.?
A.2. Capital One does not engage in any form of ``universal
default.'' This has been our long-standing policy. We will not
reprice a customer if they pay late on another account with us
or any other lender, or because their credit score goes down
for any reason. We testified to this before the Senate Banking
Committee in January, as well as at a previous May 2005 hearing
before the Committee. Furthermore, we explain our practices
clearly in our marketing materials to our customers that we do
not engage in this practice.
As we testified before the Committee, Capital One has a
simple default re-pricing policy. There is only one
circumstance in which a customer might be subject to default
re-pricing--if the customer pays us 3 or more days late twice
in a 12 month period. We clearly disclose this policy in our
marketing materials, and provide customers with a prominent
warning on their statement after their first late payment.
Moreover, if a customer is re-priced, the customer will
automatically be returned to his/her prior rate after 12
consecutive months of on-time payments.
Q.3. Assuming we wanted to get all credit card disclosures on 1
page and want to pick the most salient disclosures, what do you
think are the most important terms of the agreement to allow
your customers to make an informed choice about the product and
whether it works for them?
A.3. Our one-page version is a ``Fact Sheet'' that we submitted
to the Federal Reserve Board as a possible replacement for the
current ``Schumer Box.'' Developed after conducting several
consumer research sessions, the Fact Sheet (included with our
responses) incorporates a consumer-friendly visual layout with
no distinction between the table of information and footnotes,
unlike the current Schumer Box. For example, repricing triggers
are prominently displayed in the table rather than being
relegated to footnotes as in the Schumer Box. Fees are
separately broken out, clustered together and prominently
displayed. We have also recommended to the Federal Reserve
Board that a version of the Fact Sheet be placed on the back of
every periodic statement, so that the customer will have key
account terms ready at hand on a regular basis. The Federal
Reserve Board has been conducting consumer research of its own,
and we understand it will propose its own version of revised
credit card disclosures soon.
Q.4. Didn't it used to be that if you reached your credit limit
on your card you were denied the extra credit? But now, as I
understand it, credit card companies allow consumers to go over
the limit and then charge them a fee. What is the justification
for this trend?
A.4. Capital One rejects the vast majority of over-limit
transactions. Our experience tells us that customers value this
flexibility as a way to deal with unexpected emergencies or
avoid the embarrassment of being turned down at the point of
sale. Additionally, customers can request that we remove the
ability for their account to go over-limit. Where we have
expressly offered this option, less than 1 percent of customers
have chosen to remove this ability even when we made the offer
at the time they were assessed the fee.
Q.5. Do you think that the average consumer knows they'll be
hit with a fee for going over their credit limit rather than
being told they have exceeded their limit?
A.5. Yes. Our fees are fully disclosed to our customers. We
believe that the average customer expects an over-limit fee to
be assessed when exceeding the credit limit of his or her
account. When we asked our customers if they wanted us to
prevent them from being able to go over the limit, less than 1%
accepted this offer.
Q.6. What is an ``ideal customer''?
A.6. Capital One seeks to offer credit card products that are
customized to the needs of its cardholders across the credit
spectrum. Our ability to do so has contributed in large measure
to our success in this industry. This strategy recognizes that
there is no single ``ideal'' type of customer, but rather a
multitude of individuals with unique objectives and needs for
our products. As such, we offer cards to consumers who are
seeking the safety and convenience of electronic payments, but
who pay their balances in full each month, as well as to
consumers for whom a credit card provides a vehicle for short
term borrowing needs. Therefore, any customer who manages their
accounts with us responsibly is an ``ideal customer.''
Q.7. What percentage of your customers are in perpetual debt?
A.7. While perpetual debt is difficult to measure directly, we
have observed that very few customers choose to pay only the
minimum payment for any prolonged period of time--fewer than 3%
pay the minimum for three months in a row. For those who do, we
provide a notice on their statement informing them of the
consequences of doing so. In this statement, we encourage them
to pay more than the minimum in order to pay down their balance
more quickly. We also provide them with a web address for our
online calculator (www.capitalone.com/calculator), which allows
them to enter specific information, customized to their
situation, and receive real-time information about how long it
will take to pay off their balance.
Q.8. Of those customers, how many would have been helped by
clearer display of rates?
A.8. It is difficult to draw a connection between credit-card
rate disclosures and financial distress of any particular
customer, especially since the rates themselves are very
prominently displayed in the current Schumer Box--that is the
main strength of the current regulatory regime. Our belief,
though, is that for those customers who get into financial
difficulty, the main cause is not likely to be disclosure-
related but rather external stresses such as job losses,
illness or the like. Good disclosures are important to ensure
customer satisfaction, that the customer is not surprised by
rates or terms that he or she had not sufficiently appreciated
when signing up for the account. For that reason, even without
waiting for the Federal Reserve Board's updated disclosure
regulations, we have changed our own disclosures and have
adopted a ``Fact Pact'' disclosure on our credit card
solicitations, which incorporates our own ideas to the extent
we are able to do so within the framework of the existing Reg Z
requirements.
Q.9. How much information can a customer get on the internet
about the rates/fees of their policy?
A.9. All terms and disclosures are available in two places
online as part of our internet acquisitions process. Customers
can scroll through the terms and disclosures when looking at
our different products, and they are displayed again during the
application process. The most common terms are displayed
throughout the experience.
Existing customers can see the disclosure information that
is shown on the back of printed statements when viewing their
statements online. The online statements also show the periodic
rates and corresponding APRs for most accounts enrolled in
online account servicing.
Customers will see any fees incurred on the online
statement, and all account terms are communicated in print
before any fees could be assessed.
Q.10. How many consumers use your internet tools, and what is
their feedback on it?
A.10. About 16MM accounts are registered in the online account
servicing platform that services US Card, Small Business card
and Canadian card customers. About 10.8MM customers log in onto
their account at least every 90 days, and we average about
7.2MM online payments each month. In addition to the most
popular tools of viewing up to the past 6 statements and making
payments online, we also allow customers to change their
contact information, view recent transactions, and dispute
transactions.
Recent feedback on our internet tools has been positive. In
the Keynote Customer Experience Rankings for Credit Card
Customers released on March 14, 2007, Capital One was ranked as
the #1 site, with the best overall ranking across the 250+
customer experience metrics measured in the study. This survey
examines the online experience of more than 1,600 credit card
customers as they interacted with nine leading credit card Web
sites.
Q.11. Do you expect the average educated consumer to read and
understand the whole disclosure statement?
A.11. Capital One has adopted industry-leading practices with
respect to disclosure, and is actively encouraging the Federal
Reserve to simplify disclosure requirements as part of its
rewrite of Regulation Z. While we await the Fed's changes,
Capital One has revised its own disclosures into a nutrition-
label style Fact Pact and Q&A format, written in plain English
that explains all of our most critical policies. These policies
include all circumstances under which a customer's APR may
change (if at all), any fees applicable to the account, how we
allocate payments, how we determine their credit line and other
information. For legal and regulatory reasons, we also provide
customers with a Customer Agreement document. It is important
to note that this document does not contain any information
regarding our repricing, fee, payment allocation or other
policies discussed in the disclosures described above that in
any way contradicts or negatively qualifies the information
contained in these simpler disclosures.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO FROM JOHN G.
FINNERAN, JR.
Q.1. Thank you for testifying before the Senate Banking
Committee on January 25, 2007. As follow-up to an issue raised
during the hearing related to an article published in
BusinessWeek, November 6, 2006, entitled: ``Cap One's Credit
Trap,'' I would be interested in your submission for the record
any response to the article provided by Capital One. As with
every story, there are usually two sides and I would be
interested in your response.
A.1. We appreciate your interest in the article published by
BusinessWeek. As stated in testimony before the Senate Banking
Committee in January 2007, it is not our practice, nor our
intention, to offer an additional card to customers who are
currently delinquent or over-limit on a Capital One card.
Within our current US portfolio, the vast majority of Capital
One customers have only one Capital One credit card. And,
Capital One customers in good standing can choose to
consolidate their accounts with us at any time.
Capital One responded to the BusinessWeek piece with a
letter to the editor that subsequently ran in the magazine--the
text of our response from Mr. Richard Woods, Senior Vice
President of Corporate Affairs for Capital One is included
below.
``Last week's story about Capital One was missing key facts and
could have left a false impression with your readers.
First, Capital One rigorously manages credit and our charge-off
rate is consistently among the lowest in the industry. It is
not in anyone's interest for customers to have access to credit
that they can't handle.
Second, the vast majority of our customers have only one card
with us and only a small fraction have more than two.
Third, there is nothing particularly notable about the fact
that customers have more than one credit card, whether with one
issuer or different issuers. CardWeb reports that Americans
carry 6.3 bank credit cards per household.
Fourth, absent from your article was the fact that our
customers can choose to consolidate their Capital One cards if
their accounts with us are in good standing, except in very
limited circumstances relating to specialized cards for small
business and certain national retail partners.
Finally, we do not knowingly let customers make payments on one
Capital One card with another Capital One card.
We are committed to delivering great products to our tens of
millions of customers and to helping them manage credit
responsibly. If any of our customers are struggling to meet
their payment obligations, we will work with them to attempt to
find a solution and we encourage them to contact us.
Richard Woods
SVP, Corporate Affairs''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
------
RESPONSE TO WRITTEN QUESTIONS OF SENATORS DODD AND SHELBY FROM
RICHARD VAGUE
Q.1. What percentage of customers pay off their balances in
full each month?
A.1. According to the Government Accountability Office (GAO) in
its October 11, 2006 report to Congress entitled ``Credit
Cards--Increased Complexity in Rates and Fees Heightens Need
for More Effective Disclosures'' (``GAO Report''),
approximately 50% of the customers of the six issuers
participating in the report pay-off their balances in full each
month. Similarly, in 2004, the Federal Reserve reported that
55.7% of customers reported paying in full each month (See,
2004 Survey of Consumer Finances at A 31).
Q.2. What percentage of customers pay just the minimum payment
each month?
A.2. Although exact figures are hard to come by it is estimated
that very few customers make only the minimum payment every
month. For example, a 2005 survey by the American Bankers
Association (ABA) of 1,000 cardholders showed that only 4%
reported that they habitually made the minimum payment each
month. Also based on the results of a Federal Reserve study,
cardholders who make minimum payments seem to understand the
significance of doing so. Of those cardholders who reported
that they sometimes or hardly ever pay more than the minimum
amount due, the study found that 57.1% also reported that they
do not subsequently use their credit card after making only the
minimum payment. (See Federal Reserve Bulletin--2000, p. 634)
Consumers understand that making larger payments saves
money, which is why an increasing percentage of credit card
holders pays their bills in full or in amounts larger than the
minimum. Moreover, the federal banking agencies (or at least
the Office of the Comptroller of the Currency and the FDIC)
have implemented new minimum payment requirements to make sure
that minimum payment levels are sufficient 1) to eliminate the
possibility of negative amortization, 2) to pay off balances
within a reasonable time assuming minimum payments are made and
3) to provide each cardholder flexibility to decide how much of
the balance they want to pay each month based on that
cardholder's financial circumstances.
Q.3. What percentage of accounts are charged-off?
A.3. The Federal Reserve estimated that in the 4th quarter of
2006, approximately 3.96% of outstanding balances were charged-
off (See, www.federalreserve.gov/releases/chgllsa.htm).
Q.4. What is the maximum APR that customers are charged?
A.4. We are not aware of any official statistics on this.
However, according to the Federal Reserve, the average annual
percentage rate for credit cards was 13.3% in the 4th quarter
of 2006, down approximately 3 percentage points since 2000 and
approximately 5 percentage points since 1990.
(www.federalreserve.gov/release/g19/current)
Q.5. What is the average balance on a credit card account?
A.5. The report issued by the General Accounting Office in 2006
noted that based on data from the Federal Reserve Bank's survey
of Consumer Finances that their median total household
outstanding balance on U.S. credit cards was about $2200 in
2004 among those who carried balances. Please note the
reference ``total household outstanding balances'' as opposed
to individual credit card accounts which would be somewhat
smaller. The Federal Reserve has also noted that 1) credit card
balances accounted for 3% of the total debt held by families in
2004, down from 3.9% in 1995, and 2) the ratio of monthly
aggregate debt payment to aggregate monthly disposable income
has remained relatively constant since 1990 at between 11 and
14 percent.
Q.6. Question: What percentage of cards are subject to double-
cycle billing?
A.6. We are not aware of any statistics indicating the
percentage of credit cards in the industry that are subject to
double-cycle (two cycle) billing. We do not use double-cycle
billing.
Q.7. What is the retention rate of customers in the industry?
A.7. We are not aware of any official statistics industry
retention rates. We can tell you that at Barclays Bank Delaware
we work very hard to attract and retain our customers. The
credit card industry is a very competitive industry and our
competitors are continually trying to solicit our customers
away. It is therefore in our best interest to provide the best
service possible and deliver the best product possible. The old
adage that it is more expensive to acquire a new account than
to keep an existing one is true; therefore we do everything we
can to please our customers so as to keep attrition numbers as
low as possible.
Q.8. What percentage of cardholder agreements contain universal
default provisions?
A.8. We are not aware of statistics showing the percentage of
cardholder agreements containing universal default provisions.
Q.9. How do you define universal default?
A.9. The ability of a creditor to change an interest rate based
on the cardholder's default with another creditor where that
behavior indicates that the cardmember has become a riskier
borrower. Pursuant to federal law, if the terms of the account
include a universal default provision, the default or penalty
rate must be included 1) in the Schumer Box in the credit card
solicitations, 2) the initial disclosure statement (which we
call the Cardmember Agreement) and 3) on the periodic statement
sent to the cardholder when the rate becomes effective.
Q.10. Do you conduct any type of interest rate repricing based
on a cardholder's transactions or credit worthiness with other
creditors or accounts?
A.10 Any repricing decisions we make are based on the
cardholder's overall creditworthiness rather than on particular
behaviors with other creditors. The reality is that these
decisions to reprice are made on an individual cardholder basis
and the overwhelming majority of our accounts never experience
this type of repricing. However, although these repricing
efforts typically affect only a small portion of our portfolio,
they are an important tool in managing risk and ensuring that
we serve our cardholders by providing them with competitive
pricing. If a cardholder's creditworthiness declines
significantly, that cardholder becomes a far riskier, and
therefore costlier, proposition. By repricing the cardholder's
account, we are able to ensure that the cardholder pays for his
or her risk rather than forcing other cardholders in our
portfolio to bear the cost of that risk--a risk they did not
create. An alternative step we take to control risk when a
cardholder's creditworthiness declines is to close the account
(i.e., inform the customer he/she can no longer use the card to
make purchases). Unfortunately, account closing is the best
option in many instances, even though we have found that
cardholders far prefer our raising rates to closing accounts.
Importantly, rather than simply spread the costs of delinquency
and credit losses across the entire portfolio, these repricing
and account closing steps enable us to keep our pricing low for
those customers who pay their bills on time, pose the lowest
risk and therefore cost the least to manage.
Q.11. What percentage of cards use credit scores or adverse
information from another creditor or account to increase rates?
A.11. We are not aware of any statistics on this issue. As
noted above, however, our repricing decisions are based on the
cardholder's creditworthiness as a whole.
Q.12. Have industry profits remained constant over time?
A.12. According to the Federal Reserve, industry profits have
remained relatively stable over time with an average return on
assets of 3.11 percent. Similarly, according to the GAO Report,
``the largest credit card banks, which are generally the most
profitable, have not greatly increased their profitability over
the last 20 years'' (P. 67). The GAO Report also noted that
``The profits of credit card issuing banks...have been stable
over the last 7 years'' (p.75). It bears noting that credit
card lending is a high risk business in which the lender
provides an unsecured line of credit to someone the lender
probably has not met, access to this credit is available around
the world 24 hours a day, 7 days a week, and at the end of the
year, if all goes well, the lender gets back $3 for every $100
credit extended. This return on assets is much less the return
on assets of the pharmaceuticals, computer services and
software, insurance and managed care, entertainment and food
and drug store industries.
Q.13. What percentage of Americans have credit cards?
A.13. The Federal Reserve has estimated that 71.5% of families
in the United States had at least one bank issued credit card
in 2004. (See Federal Reserve Report to Congress on Practices
of the Consumer Credit Industry in Soliciting and Extending
Credit and their Effective Consumer Debt and Insolvency at
3,6).
Q.14. Question: What percentage of cardholders are paying
penalty interest rates on their cards? How has that percentage
changed over the last 20 years?
A.14. We are not aware of statistics showing the percentage of
cardholders paying penalty interest rates. We do note that as
stated previously, approximately 50% of cardholders pay their
balance in full each month and therefore pay no interest. We
also note that pricing based on risk, including penalty
pricing, has increased consumer choice and has contributed to
the lowering of credit card rates overall. Rather than give
every cardholder the same rate and spread the risk of
delinquency and credit losses evenly over the portfolio,
improvements in technology and credit underwriting have enabled
issuers to be more granular in how they price for credit risk.
This enables credit card issuers to keep rates low for
cardholders who continue to pay all their bills on time and
raise rates for those who do not pay all their bills on time
and who therefore pose the most risk. Of course, if a card
issuer misprices a consumer's risk, that card issuer becomes
vulnerable to losing the cardholder as a customer because the
robust competition in the credit card marketplace will likely
result in the consumer receiving solicitations for products
with lower rates.
Q.15. Question: What percentage of profits comes from:
a) non-penalty interest charges;
b) penalty interest charges;
c) fees, including: over limit fees; late fees; annual
fees; interchange fees; balance transfer fees; cash advance
fees; stop payment fees; telephone payment fees; foreign
transaction fees; and other fees?
A.15. Barclays Bank Delaware is a young and growing business
that has benefited from inward investment over the past few
years; accordingly it is not yet profitable. According to the
GAO report, approximately 70% of card issuers' revenue is
derived from interest, 20% from interchange and other non
``penalty'' fees such as annual fees, and approximately 10%
from penalty fees such as late fees and returned payment fees.
Q.16. Please provide the Committee with data on the amount of
annual revenue generated in each of the last two years from
interest payments and the number of cardholders paying interest
at rates of:
a) less than 15% APR;
b) from 15 to 19% APR;
c) from 20 to 25% APR;
d) from 26 to 29% APR; and
e) 30% or greater APR.
A.16. We are not aware of industry statistics on this point.
Q.17. Please provide the Committee with data on the amount of
revenue generated in each of the last two years from interest
payments due to:
a) repricing of interest rates due to late payments to the
issuer; and
b) repricing of interest rates due to cardholder
transactions or credit worthiness with other creditors or
accounts.
A.17. We are not aware of industry statistics on this point.
Q.18. Please explain how you would ``reprice'' a customer with
a ``fixed rate'' credit card. What are the criteria that would
determine whether a customer is repriced? How do you determine
the rate to which the customer is repriced?
A.18. When we offer a ``fixed APR'' product, we inform
consumers of the circumstances pursuant to which the APR might
change. For example, we explain in at least two places in our
solicitations for credit card accounts carrying a ``fixed
APR'', that the term ``fixed APR'' means an APR which will not
vary in concert with changes to an index, such as the US Prime
Rate. This is to help consumers understand that the term
``fixed'' is used to distinguish the rate from a so called
``variable'' rate product that fluctuates based on an index. If
there are circumstances under which the rate may increase, we
also make sure to disclose those circumstances as part of the
solicitation as well. For instance, if the rate may be changed
if the consumer fails to pay us on time, we disclose both that
fact and the actual default rate as part of the solicitation
disclosures. This ensures that the consumer receives notice of
the circumstances pursuant to which the rate may change before
deciding to apply for the account.
------ --
----
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM RICHARD VAGUE
Q.1. If issuing a credit card with a low credit line is one of
the ways to reduce the risk of lending to an ``at risk
borrower,'' doesn't the issuance of multiple cards to the same
individual reduce the effectiveness of this practice and
actually in some cases increase the risk? What percentage of
your customers has more than one of your credit cards? How
would you describe the typical customer that has a low credit
line but multiple cards? What percentage of your customers use
multiple credit cards to remain current on their other credit
card balances that have been issued by your companies?
A.1. We find that most consumers want multiple cards because
they use them for different reasons. For instance, a consumer
might want one card for business purposes and another card for
personal use; a family may want a separate card for everyday
purchases and another card for special projects expenses and on
which they might carry a balance. I myself have multiple cards
which I use for different purposes; and virtually everyone I
know has multiple cards. When one of our cardholders wants a
second card we want to be the bank that issues that card as
long as the cardholder can manage the incremental credit
safely. We try to ensure this by managing the entire amount of
credit extended to the cardholder, whether on a single line or
on multiple cards. In determining whether to issue an
additional card, we take into account the cardholder's existing
accounts with us as well as the cardholder's accounts with
other creditors. We work hard to ensure that our customers do
not overextend themselves. We routinely deny applications for
additional card relationship with us where we determine that we
are not comfortable extending additional credit to the
applicant due to their existing debt burdens and credit
history. We also have a policy that cardholders cannot use one
card with Barclays to pay off all or part of a balance on
another card of Barclays.
Q.2. How does your company account for the total debt from all
of the cards issued to one customer? Are these aggregate
balances reported to regulators as well?
A.2. Whenever a consumer applies for an account with Barclays
Bank Delaware, we look not only at their performance with
Barclays but also at their entire credit profile. Similarly,
when an existing customer applies for a credit line increase or
we need to make a decision concerning an existing cardholder's
credit status, we underwrite the cardmember based on the
cardholder's overall relationship with us as well as with all
creditors as reported in their credit reports. In other words,
our credit decisions are not simply based on our cardholder's
aggregate balance or exposure to us but on the cardholder's
entire credit profile. We are required to report to and
otherwise make available to regulators extensive information
regarding our credit card portfolio. Although these reports do
not provide information on a cardholder by cardholder basis,
the regulators regularly examine how we manage our relationship
with our cardholders, including how we manage our relationship
with cardholders who have more than one account with us.
Q.3. What is the typical minimum monthly payment required for
credit cards? What percent of the balance represents the
minimum monthly payment? Do you think this is sufficient? Do
most credit card companies use a model or an algorithm to
establish minimum payment? Please describe industry best
practices for establishing appropriate minimum payment amounts.
A.3. Establishing an appropriate minimum payment amount
involves a delicate balance. On the one hand, cardholders
typically demand that the minimum payment amount should be low
enough to provide maximum flexibility to enable each cardholder
to decide how much to repay each month based on that
cardholder's financial circumstances. For example a relatively
low monthly payment requirement allows cardholders to more
easily meet their obligations in months where they have an
unexpected medical or household expense, or if a seasonal
worker, in those months where they are without employment. On
the other hand, the minimum payment amount should be high
enough to ensure reasonable amortization of the loan balance.
In 2003, the federal banking agencies issued guidance regarding
the required minimum payment on a bank issued credit card
account. In particular the agency guidelines made it clear that
the minimum payment amount should be sufficient to ensure that
there is no prolonged negative amortization and that the
balance will be repaid in full over a reasonable period of time
assuming the minimum amount due is paid each month. It is our
understanding that in connection with the guidance, the OCC and
the FDIC have required many of the banks they regulate to adopt
a minimum payment calculation equal to the amount of finance
charges, plus late and over limit fees, plus 1% of the balance.
Q.4. Why does the industry allow credit card customers to make
transactions that result in their account being over the limit?
Does the over-limit fee being charged adequately compensate for
the risk incurred by the over-limit amount? In situations where
a customer goes over their limit after the line has been
lowered due to new risk identified in their credit report, how
can the fee earned adequately compensate for the risk? Is there
a maximum amount or percentage of the line that is generally
allowed to be over-limit? What are known best practices for
allowing customers to overdraw their accounts and assessing
fees for doing so?
A.4. It is our understanding that most credit card issuers
allow credit card customers from time to time to make
transactions that are over the limit because their customers
overwhelmingly want them to do so. It is our experience that
customers almost invariably prefer being allowed to go over
their credit limit and being charged a fee than to have the
transaction denied. A cardholder whose card is denied
authorization at a restaurant after a meal or at a grocery
store after food has been bagged is not a happy customer. In
other words, it is good customer relations to enable the
cardmember to go over limit in appropriate circumstances. There
is increased risk with exceeding the credit limit, however, and
we find that we must decline the majority of over limit
transactions because of the added risk. Although practices vary
from bank to bank, we are aware of a number of factors that may
be used to determine whether to approve or decline a
cardholder's over-limit transaction request. For example, card
issuers routinely consider whether the transaction would cause
the cardmember to go over his/her limit by over a certain
amount, whether the cardholder has exceeded his or her limit
multiple times in the past or if the actual transaction itself
is associated with higher risk. In many instances the fees
imposed for over-limit transactions do not fully compensate for
the increased risk involved. Instead the fees provide a measure
of compensation which defrays the risk sufficiently to help
justify accommodating the cardholder's request. Finally, one
best practice is email alerts. If a cardholder gives Barclays
Bank Delaware his or her email address and authorizes us to do
so, we will alert the cardholder when he or she gets close to
his or her credit limit. This helps the cardholder better
manage the credit line and avoid going over-limit.
Q.5. How can disclosures and the delivery of disclosures be
improved to ensure customers fully understand the terms of the
credit card, including cash advance, over-limit, wire transfer
and late fees? What are the best practices for disclosing
information to the customer?
A.5. Disclosures could be greatly improved if the regulatory
disclosure scheme were modified to ensure that required
disclosures clearly and conspicuously convey those terms that
are truly important to the consumer. We believe that this can
be accomplished through a federal disclosure scheme based on a
careful study of consumer behavior and preferences to ensure
that the disclosures are designed to attract and focus the
attention of consumers to key information that can be easily
read and understood by consumers. The Schumer Box is a start,
but a disclosure scheme designed by marketers and customer
service specialists after testing different colors, fonts,
shapes, etc., will work better than any disclosure scheme
designed by attorneys. By key information we mean the various
APRs, important fees (annual fees, late fees, balance transfer
fees) and how those APRs and fees could change and any other
terms consumers regularly consider in making decisions as to
which cards to apply for. Required disclosures should be
limited to only those terms most important to the consumer so
as to avoid information overload. Finally, a safe harbor must
be created so that credit card issuers can rely on the new
disclosure standards without fear of being sued. In our
experience, much of the current disclosures set forth in credit
card solicitations are caused by the increasing need to include
new or different language to comply with the existing
regulatory scheme which can become more and more complex each
time there is a new court case, regulation or law.
The Federal Reserve Board is in the process of a large
scale revision of the Regulation Z disclosure requirements for
credit cards. We understand that as part of this effort, the
Board is currently studying how to provide consumers with the
most useful information in the most understandable and
noticeable way. We support these efforts and it is our hope
that those studies will provide useful guidelines as to the
types of information consumers believe is important information
and what type of presentation of that information consumers
would find most meaningful without overwhelming the consumer
with information overload.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM RICHARD
VAGUE
Q.1. What portion of your profits comes from interest and what
portion results from the fees you charge customers?
A.1. At this time, Barclays Bank Delaware is a growing young
business that has benefited from significant inward investment
over the past few years; accordingly, is not yet profitable.
Based on information made available through the GAO Report,
approximately 70% of credit card income comes from interest,
about 10% from penalty fees such as late and over the limit
fees and 20% from interchange and other fees such as annual
fees.
Q.2. I've been reading about universal default. It is my
understanding that you can increase the interest rate of a
customer who has a perfect and long-standing credit record with
your company because of a late payment that he or she has made
to another creditor. Is this true? How do you justify it?
A.2. Barclays Bank Delaware does not do what you describe.
Instead we use process known as risk-based pricing in order to
manage our accounts for risk. Under risk-based pricing, riskier
borrowers pay more. Over time, customers' creditworthiness
profiles change. Some who were low risk at the time their
account was opened become higher risk. For example, cardmembers
who were never late on their accounts with us sometimes default
on their loans and stop paying. For these cardholders, the
first sign of trouble is when they simply stop paying--either
with us or with others. As a result credit card issuers began
looking more closely at the cardholders' entire credit profile
to determine the cardholder's risk of default and began
changing their credit strategy accordingly--raising rates on
cardholders who, based on a review of the credit history as a
whole, posed the greatest risk. At Barclays we notify all our
applicants in our solicitations about our risk-based pricing
policy before they even apply for a card. It is important to
note that for sizeable segments of our portfolio, our risk-
based pricing policy never comes into play because there is no
need to reprice them at all.
Although our repricing efforts typically affect only small
portions of our portfolio, they are an important tool in
managing risk and ensuring that we can serve our cardholders by
providing them with competitive pricing. If a cardholder's
creditworthiness declines significantly, that cardholder
becomes a far riskier and, therefore, costlier proposition. By
repricing the cardholder's account, we are able to ensure that
the cardholder pays for his or her risk rather than forcing
other cardholders in the portfolio to bear the cost of that
risk--a risk they did not create. An alternative step we take
to control risk is to close the cardholder's account (i.e.,
inform the customer he/she can no longer use the card to make
purchases) when his or her risk profile increases.
Unfortunately, account closing is the best option in many
instances, even though we have found that most cardholders far
prefer our raising rates to closing accounts. Importantly,
rather than simply spread the costs of delinquency and credit
losses across the entire portfolio, these repricing and account
closing steps enable us to keep our pricing low for those
customers who pay their bills on time, pose the lowest risk and
cost the least to manage. Importantly, after the rate of a
cardmember is raised, if they exhibit on time payment
performance, we will lower their rate.
Q.3. Assuming we wanted to get all credit card disclosures on 1
page and want to pick the most salient disclosures, what do you
think are the most important terms of the agreement to allow
your customers to make an informed choice about the product and
whether it works for them?
A.3. Our experience with cardholders has led us to believe that
consumers find that the most important terms are APR,
significant fees (annual fees, balance transfer fees, late
fees) and how their terms may be changed. Importantly, the
Federal Reserve Board is currently testing disclosures with
consumers to determine what terms consumers believe are most
important and how to present those terms in a manner that
consumers are likely to read and understand those terms. We
support that approach. We encourage the Board to employ
marketing and customer service professionals to design the
format and style of disclosure--so that it is designed to
attract the consumer's attention, it is easy to read and
understand without overloading the consumer with information
that distracts the consumer from the key terms.
Q.4. Didn't it used to be that if you reached your credit limit
on your card you were denied the extra credit? But now, as I
understand it, credit card companies allow consumers to go over
the limit and then charge them a fee. What is the justification
for this trend?
A.4. It is our understanding that most credit card issuers
allow credit card customers from time to time to make
transactions that are over the limit as a courtesy to their
customers. It is our experience that, customers almost
invariably prefer being allowed to go over their credit limit
and be charged a fee for that permission to go over the limit
than to have authorization denied. A cardholder whose card is
denied authorization at a restaurant after a meal or at a
grocery store after food has been bagged is not a happy
customer. In other words, it is important for customer
relations purposes to enable the cardholder to go over limit in
appropriate circumstances. There is increased risk associated
with exceeding the credit limit, however, and we find that we
must decline a majority of over-limit transactions because of
the added risk. Although practices vary from bank to bank, we
are aware of a number of factors used to determine whether to
approve or decline a cardholder's over-limit transaction
request. For example, card issuers commonly consider whether
the transaction that would cause an account to go over the
limit by a certain amount, whether the cardholder has exceeded
the limit multiple times in the past or the transaction itself
is associated with higher risk. In many instances, the fees
imposed for over-limit transactions do not fully compensate for
the increased risk involved. Instead, these fees do provide a
measure of compensation which defrays the risk sufficiently to
help justify accommodating the cardholder's request in
appropriate circumstances. Finally, one best practice is email
alerts. If the cardholder gives Barclays their email address
and authorizes us to do so, we will alert the cardholder when
he or she gets close to their credit limit so the cardholder
can better manage his or her exposure to their line and avoid
over-limit fees if possible.
Q.5. Do you think that the average consumer knows they'll be
hit with a fee for going over their credit limit rather than
being told they have exceeded their limit?
A.5. Yes. As noted above, it is our experience that cardholders
generally prefer to be permitted to exceed their credit limit
rather than having the transaction declined at the cash
register. In addition the fees that cardholders pay for
exceeding the credit limit are well disclosed. Indeed they must
be disclosed at least three times: 1) at or with the Schumer
Box provided to the consumer at account application; 2) with
the disclosures provided at account opening and 3) on the
monthly billing statement when the fee is imposed.
Q.6. What is an ``ideal customer''?
A.6. A customer who uses their card a lot and pays their bills
on time.
Q.7. What percentage of your customers are in perpetual debt?
A.7. We work extremely hard to ensure that we extend credit
only in amounts that cardholders can reasonably handle and we
believe that we are successful in achieving that objective.
Almost none of our cardholders ``perpetually'' pay the minimum
amount due over the life of the loan. Moreover, based on
industry information, it is our understanding that a very small
percentage of cardholders pays the minimum amount due every
month for twelve months--roughly 2-3%. This is consistent with
the recent GAO Report that roughly half of consumers pay-off
their entire balance by the end of the month.
Q.8. Of those customers, how many would have been helped by
clearer display of rates?
A.8. As noted above, we fully support the Federal Reserve
Board's efforts to improve disclosures. In our experience
however, cardholders are well informed about the rates they pay
on their accounts. Those rates must be disclosed before the
account is opened (and consumers know to look for the ``Schumer
Box'' in solicitations), when the account is opened and on the
billing statements sent each month. As a result, we find that a
cardholder's choice to make a minimum payment is generally
based on the cardholder's particular financial circumstances
that month; we are not aware of any role that rate disclosures
may play in a cardholder's decision to make a minimum monthly
payment.
Q.9. How much information can a customer get on the internet
about the rates/fees of their policy?
A.9. All information about rates and fees is available to
Barclays Bank Delaware's cardholders over the Internet.
Q.10. How many consumers use your internet tools, and what is
their feedback on it?
A.10. Barclays Bank Delaware's website for its cardmembers has
been designed to be very user friendly and our cardholders find
it very helpful. For instance, for consumers who sign up for
the service, we send email alerts when their periodic
statements are available online, reminder emails a couple days
before the payment due date, emails when payment has been
received and warning emails if the cardmember is approaching
his or her credit limit. We find cardmembers greatly appreciate
these email reminders and being able to look at all their
transactions online. In addition we encourage our cardholders
to pay their accounts online without a fee. It is notable that
61% of our cardmembers have logged into their accounts in some
manner in 2006.
Q.11. Do you expect the average educated consumer to read and
understand the whole disclosure statement?
A.11. It is our strong preference that cardholders read and
understand the disclosures we provide to them. It is in our
best interest and in the cardholder's best interest that they
do so. We recognize, however, that the current credit card
disclosure regime mandated under federal law has become quite
complex. Although while we find that consumers have gotten
accustomed to looking at information in the Schumer Box, it is
generally believed that most of the other disclosures go
unread. We believe that consumers need better disclosures not
more disclosures. What is needed is simple clear disclosures of
those terms most important to consumers, drafted in a manner
likely to attract the attention of consumers; worded in a way
they are likely to read and understand with a safe harbor that
provides that by complying with the requirements, the issuer
can not be sued (so the issuer's lawyers will not feel
compelled to complicate disclosures to protect their client
every time there is a new litigation).
Additional Material Submitted for the Record
CAP ONE'S CREDIT TRAP; By offering multiple cards, the lender helps
land some subprime borrowers in a deep hole and boosts its earnings
with fee income
BusinessWeek, November 6, 2006
By Robert Berner
When Brad Kehn received his first credit card from Capital One
Financial Corp. in 2004, it took him only three months to exceed its
$300 credit limit and get socked with a $35 over-limit fee. But what
surprised the Plankinton (S.D.) resident more was that Cap One then
offered him another card even though he was over the limit--and another
and another. By early 2006, he and his wife had six Cap One Visa and
MasterCards. They were in over their heads.
The couple was late and over the limit on all six cards, despite
occasionally borrowing from one to pay the other. Every month they
chalked up $70 in late and over-limit fees on each card, for a total of
$420, in addition to paying penalty interest rates. The couple fell
further behind as their Cap One balances soared. Even so, they still
received mail offers for more Cap One cards until they sought relief at
a credit counseling agency this May. ``I didn't open them,'' says Kehn,
33, who manages a truck stop and runs a carpet-cleaning business on the
side. ``I owe these people that much damn money and they are willing to
give me another credit card? This is nuts.''
Credit card experts and counselors who help overextended debtors
say there's nothing crazy about it. Cap One, they contend, is simply
aiming to maximize fee income from debtors who may be less
sophisticated and who may not have many options because of their credit
history. By offering several cards with low limits, instead of one with
a larger limit, the odds are increased that cardholders will exceed
their limits, garnering over-limit fees. Juggling several cards also
increases the chance consumers may be late on a payment, incurring an
additional fee. And if cardholders fall behind, they pile up over-limit
and late fees on several cards instead of just one. ``How many more
ways can I fool you?'' says Elizabeth Warren, a Harvard Law School
professor who has written extensively on the card industry. ``That is
all this is about.''
Consumers may not be the only ones who are unaware of Cap One's
ways. Its practice of issuing multiple cards to some borrowers with low
credit ratings doesn't appear well-known in the investment community.
And just how much Cap One relies on fee income, vs. interest, is a
mystery, since, like most lenders, it doesn't disclose that. All credit
card companies have become more reliant on fee income in recent years,
but in a report issued in 2002, William Ryan, an investment analyst at
Portales Partners, warned that Cap One's earnings could be
``devastated'' if regulators cracked down on multiple cards or fees.
That hasn't happened. For now, Cap One's approach looks pretty
savvy, however onerous it may be for some customers. Ronald Mann, a
card-industry expert, says that by generating so much revenue from late
and over-limit fees, as well as interest, Cap One likely more than
offsets for the risk of card holders filing for bankruptcy. ``The
premise is to make money even if [Cap One] never gets fully repaid,''
says Mann, a law professor at the University of Texas in Austin. (Mann
has been retained by a party suing Cap One in a business dispute.)
In a written response to questions, Cap One acknowledges that it
offers multiple cards. ``Our goal is to offer products that meet our
customers' needs and appropriately reflect their ability to pay,'' it
says. The company also stated: ``Within our current U.S. portfolio, the
vast majority of Capital One customers have only one Capital One credit
card with a very small percentage choosing to have three or more
cards.'' Spokeswoman Tatiana Stead declined to offer precise numbers or
to say whether households with three or more cards were concentrated
among ``subprime'' borrowers, who have low credit ratings.
UNDER THE RADAR
The nation's fifth-largest credit card issuer, with $49 billion in
U.S. credit card receivables as of the end of June, McLean (Va.)-based
Cap One is a major lender to the subprime market. According to Cap
One's regulatory filings, 30% of its credit card loans are subprime.
Representatives of 32 credit counseling agencies contacted by
BusinessWeek say that Cap One has long stood out for the number of
cards it's willing to give to subprime borrowers. ``In the higher-risk
market, no lender is more aggressive in offering multiple cards,'' says
Kathryn Crumpton, manager of Consumer Credit Counseling Service of
Greater Milwaukee. Other big card-industry players that do subprime
lending include Bank of America, Chase, and Citigroup. Representatives
for Chase and Citigroup say they do not offer multiple cards to
subprime customers. (BofA did not respond to inquiries.)
Last year, West Virginia Attorney General Darrell V. McGraw Jr.
filed an action in state court seeking documents from Cap One related
to its issuance of multiple cards, as well as other credit practices.
Other than that, however, Cap One's practices do not appear to have
drawn regulatory scrutiny. A spokesman for the Federal Reserve, Cap
One's primary federal overseer, declined to comment about Cap One, but
said that in general the regulator doesn't object to multiple cards.
Still, Fed guidelines warn multiple-card lenders to analyze the credit
risk tied to all the cards before offering additional ones.
If consumers were using one Cap One card to make payments on
another, it could artificially hold down the company's delinquency and
charge-off rates, metrics investors closely watch because they affect
earnings, says Allen Puwalski, senior financial analyst at the Center
for Financial Research & Analysis in Rockville, Md.
In filings with the U.S. Securities and Exchange Commission, Cap
One says its delinquency and charge-off rates as of Sept. 30 were 3.6%
and 2.5%, respectively, about middle of the pack for major card
lenders.
In an e-mail, Cap One's Stead says: ``It is not our practice--nor
our intention--to offer an additional card to customers who are
currently delinquent or over limit on a Capital One card.'' But Daniel
Carvajal believes that's just what Cap One tried to get him to do.
Carvajal, 38, who is confined to a wheelchair with cerebral palsy and
lives with his mother in Miami, says he exceeded his $1,500 Cap One
credit limit last Christmas by several hundred dollars and was late on
payments in January and February. In March, he says, a Cap One
representative offered him a second card, which he refused. Using the
new card to catch up with his first, he suspects, ``is what they wanted
me do to.''
Some overextended Cap One customers admit using one card to pay
another. In mid-2005, Kehn, the South Dakota truck-stop manager,
already over the limit on three Cap One cards with $300 to $500 limits,
received an offer from Cap One for another card with a $500 limit. He
transferred part of the balances from the first three cards to get them
under the credit limit. When his wife got a second card in early 2006
with a $1,500 cap, the couple took expensive cash advances on it to try
to help make payments on the five other Cap One cards. ``I robbed Peter
to pay Paul,'' Kehn says.
Christine Garcia, 41, of Orange, Calif., said she and her husband
did the same when stretched with five Cap One cards between them. So
did Bernice Thompson, 46, of Fort Smith, Ark., who, along with her
husband, had seven Cap One cards. ``We got caught in a circle, and
couldn't get out,'' says Thompson.
These examples bring into question Cap One's public stance on its
subprime lending. Analysts, including Carl Neff, ratings director on
card securitizations for Standard & Poor's, say Cap One tells investors
that it carefully controls risk by giving such borrowers only small
lines of credit. Indeed, the largest percentage of Cap One's 28 million
credit-card accounts, 43%, have balances of $1,500 or less, according
to its SEC filings. But if many borrowers had larger aggregate balances
because they have multiple accounts, that percentage would be lower,
and Cap One's ``underwriting wouldn't appear as conservative as it
looks,'' says the Financial Research Center's Puwalski.
Like other big card companies, Cap One securitizes most of its card
receivables as bonds, which are rated by credit agencies such as
Standard & Poor's (S&P) is a unit of The McGraw-Hill Companies,
publisher of BusinessWeek). Cap One's ratings are strong, allowing it
to command a higher price for the bonds. But Neff of S&P says he is
surprised Cap One would offer riskier borrowers multiple, low-limit
accounts given what it has told the market. ``If it was a very
prevalent practice, that would lower [Cap One's credit] quality in our
eyes,'' Neff says. A sampling of credit counseling agencies across the
country indicates that about a third of the troubled debtors they see
with Cap One cards have two or more Cap One accounts.
Ron Nesbitt, 37, a Macon (Ga.) truck driver, and his wife sought
credit counseling last year. By the second half of 2004, Nesbitt says,
the couple had become consistently late and over limit on six Cap One
cards, generating $348 in fees alone each month. ``It was out of
control,'' he says.
Juggling Act:
How Clyde and Bernice Thompson of Fort Smith, Ark., got in trouble
-- From late 1999 to early 2003, Clyde, 77, and Bernice, 46, were
granted seven Capital One Visa cards and MasterCards with credit limits
ranging from $200 to $700.
-- In April, 2003, Clyde, a Wal-Mart greeter, and his wife, who was on
medical disability at the time, missed their monthly payment on all the
cards.
-- They were billed $29 a card in late fees, which pushed six cards
over the limit. That generated an additional $29 over-limit fee and
higher interest rates on those cards.
-- By late 2003, the Thompsons couldn't keep up, despite taking cash
advances on the seventh card to try and pay the first six. They were
paying over $400 a month in late and over-limit fees alone.
-- The couple kept receiving mail offers for more Cap One cards until
February, 2004. ``I tore them up,'' says Bernice.
-- Data: Interview with Bernice Thompson
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