[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


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                            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

                              ----------                              

                       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

                              ----------                              


                       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.
                                ------                                --
----


         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.
                                ------                                --
----


  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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