[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
         CONSUMER DEBT: ARE CREDIT CARDS BANKRUPTING AMERICANS? 

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 2, 2009

                               __________

                            Serial No. 111-9

                               __________

         Printed for the use of the Committee on the Judiciary


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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
MAXINE WATERS, California            DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida               STEVE KING, Iowa
STEVE COHEN, Tennessee               TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr.,      LOUIE GOHMERT, Texas
  Georgia                            JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico         TED POE, Texas
LUIS V. GUTIERREZ, Illinois          JASON CHAFFETZ, Utah
BRAD SHERMAN, California             TOM ROONEY, Florida
TAMMY BALDWIN, Wisconsin             GREGG HARPER, Mississippi
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
[Vacant]

       Perry Apelbaum, Majority Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                    STEVE COHEN, Tennessee, Chairman

WILLIAM D. DELAHUNT, Massachusetts   TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina       JIM JORDAN, Ohio
BRAD SHERMAN, California             DARRELL E. ISSA, California
DANIEL MAFFEI, New York              J. RANDY FORBES, Virginia
ZOE LOFGREN, California              HOWARD COBLE, North Carolina
HENRY C. ``HANK'' JOHNSON, Jr.,      STEVE KING, Iowa
  Georgia
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel






































                            C O N T E N T S

                              ----------                              

                             APRIL 2, 2009

                                                                   Page

                           OPENING STATEMENTS

The Honorable Steve Cohen, a Representative in Congress from the 
  State of Tennessee, and Chairman, Subcommittee on Commercial 
  and Administrative Law.........................................     1
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, Chairman, Committee on the 
  Judiciary, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................     2
The Honorable William D. Delahunt, a Representative in Congress 
  from the State of Massachusetts, and Member, Subcommittee on 
  Commercial and Administrative Law..............................     3
The Honorable Trent Franks, a Representative in Congress from the 
  State of Arizona, and Ranking Member, Subcommittee on 
  Commercial and Administrative Law..............................     4

                               WITNESSES

Mr. Adam J. Levitin, Associate Professor of Law, Georgetown 
  University Law Center
  Oral Testimony.................................................     8
  Prepared Statement.............................................    11
Mr. David C. John, Senior Research Fellow, Thomas A. Roe 
  Institute for Economic Policy Studies, The Heritage Foundation
  Oral Testimony.................................................    23
  Prepared Statement.............................................    25
Mr. Brett Weiss, Attorney, Greenbelt, MD, on behalf of the 
  National Association of Consumer Bankruptcy Attorneys
  Oral Testimony.................................................    32
  Prepared Statement.............................................    34
Mr. Edmund Mierzwinski, Consumer Program Director, U.S. Public 
  Interest Research Group
  Oral Testimony.................................................    41
  Prepared Statement.............................................    43

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Material Submitted for the Hearing by the Honorable Trent Franks, 
  a Representative in Congress from the State of Arizona, and 
  Ranking Member, Subcommittee on Commercial and Administrative 
  Law............................................................     5

                                APPENDIX
               Material Submitted for the Hearing Record

Response to Post-Hearing Questions from Adam J. Levitin, 
  Associate Professor of Law, Georgetown University Law Center...    88
Response to Post-Hearing Questions from Brett Weiss, Attorney, 
  Greenbelt, MD..................................................    90
Response to Post-Hearing Questions from Edmund Mierzwinski, 
  Consumer Program Director, U.S. Public Interest Research Group.    91


         CONSUMER DEBT: ARE CREDIT CARDS BANKRUPTING AMERICANS?

                              ----------                              


                        THURSDAY, APRIL 2, 2009

              House of Representatives,    
                     Subcommittee on Commercial    
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 3 p.m., in 
room 2141, Rayburn House Office Building, the Honorable Steve 
Cohen (Chairman of the Subcommittee) presiding.
    Present: Representatives Cohen, Conyers, Delahunt, Maffei, 
Franks, Coble, and Forbes.
    Staff Present: James Park, Majority Counsel; Michone 
Johnson, Majority Chief Counsel; and Daniel Flores, Minority 
Counsel.
    Mr. Cohen. This hearing of the Committee on the Judiciary, 
Subcommittee on Commercial and Administrative Law, no longer 
known as CAL for that reminds me of Calipari, amongst other 
things, will now come to order.
    Without objection, the Chair will be authorized to declare 
a recess of the hearing if necessary. I will recognize myself 
for a short statement.
    Today's hearing on credit card practices and bankruptcy is 
the first in a series of hearings that the subcommittee plans 
to hold on how America has reached the present economic crisis 
that we are in today and whether our Nation's bankruptcy system 
is prepared to help us weather this crisis, and whether it 
contributed to the crisis as well.
    Americans' credit card debt has grown exponentially over 
the past two decades. In 1990 the average American household's 
credit card was $2,966, approximately $3,000. By 2007 that 
number has jumped to $9,840, almost $10,000. That is 3,000 to 
10,000, and that is 33 percent.
    Moreover, Americans are finding it harder to pay down their 
credit card debt. Charge-off rates, the amount of debt 
determined uncollectible by the original creditor, divided by 
the average outstanding credit card balances owed to the issuer 
were 40 percent higher in January 2009 than they were in the 
year before. And credit card debt that was at least 30 days 
late totaled 17.6 in October, 2007. That was up 26 percent from 
the previous year. And of course as unemployment goes up and 
the economy gets worse, these rates will get worse, too.
    There are many reasons why people accumulate credit card 
debt. Many attribute personal debt to overspending or living 
beyond one's means. However, credit card debt often results 
because of household bills that accumulate due to a loss of job 
or colossal medical bills. Increasingly, predatory lending 
tactics and irresponsible lending is a large contributor to 
climbing credit card debt we have in this country.
    This hearing of the subcommittee will examine some of the 
more abusive credit card lending practices that may exacerbate 
the burden borne by credit card debtors. Such practices include 
excessive penalty fees and interest rates, aggressive marketing 
to financially vulnerable groups, hidden charges, changes to 
credit limits, and unilateral change-in-terms provisions.
    We will explore how well the bankruptcy system is 
protecting debtors who have been pushed into bankruptcy due to 
credit card debt. Part of this inquiry will include an 
examination of post-bankruptcy conduct by credit card lenders 
and debt buyers and how that conduct might be subverting the 
purpose of the bankruptcy law to provide debtors with a ``fresh 
start.''
    The subcommittee will also touch upon how the 2005 
amendments to the Bankruptcy Code, particularly, are affecting 
such debtors and whether those changes deny bankruptcy relief 
to those who need and deserve it the most.
    Accordingly, I look forward to today's testimony. And I 
would if Mr. Franks was here recognize him for his opening 
remarks. I recognize the distinguished Chairman, the venerable 
John Conyers.
    Mr. Conyers. Thank you, Chairman Cohen. This is an 
important hearing. One of the things that we are going to look 
at is credit card practices that have pushed people to the 
brink of bankruptcy, aggressive marketing to financially 
vulnerable borrowers.
    Do any of you witnesses want to guess how many credit cards 
my son in his first year at Morehouse has received that I don't 
know about? I can tell you the ones that I have intercepted, 
but there are probably some others out there.
    Over-aggressive marketing, exorbitant penalty fees and 
interest rates, that is a scandal in itself. Unilateral changes 
in terms of the credit card agreements frequently without 
notice to the borrower.
    And then I think that the subcommittee, number 5, can 
appropriately look at the bankruptcy changes as applies to 
consumers that were wrought in 2005. You can't hold the 
Chairman responsible for those.
    Means tests indiscriminately blocking debtors from relief 
without successfully weeding out abuse. Means tests.
    Credit counseling requiring added costs, according to the 
GAO, and may not be all that effective anyway.
    Increased filing fees that put bankruptcies out of reach 
for the very people that might need it.
    And finally, can the bankruptcy system handle credit card 
users who now have unsustainable debt that are hitting the 
courts in record numbers in the face of a decreased number of 
bankruptcy judges.
    And then finally, the U.S. trustees who should be weeding 
out creditor abuse with greater effectiveness than they seem to 
be.
    So we welcome you witnesses here.
    Mr. Cohen. Thank you, Mr. Chairman. If other Members have 
statements we will have----
    Mr. Delahunt. I have a statement.
    Mr. Cohen. Yes, sir, the distinguished vice Chairman and 
Congressman from the Cape is recognized.
    Mr. Delahunt. The Cape and the islands.
    Mr. Cohen. Pardon my sleight.
    Mr. Delahunt. Chairman Conyers' recount of the problems 
that currently exist really runs contrary to what was 
represented to this Committee when the Bankruptcy so-called 
Reform Act of 2005 was passed. We were told that interest rates 
would be lowered. We were told a whole variety of practices 
would no longer occur, and yet that is really not the case.
    There was a Business Week magazine story in 2008 that found 
that the Bank of America sent letters notifying responsible 
cardholders that it would more than double their rates to as 
high as 28 percent without providing an explanation for the 
increase, and to opt out of the card borrowers had to write--
the burden was imposed on them to write to the Bank of America 
that they planned to no longer use their card and instead to 
pay off the balance at the old rate. In other words, if you 
read that piece of paper that nobody reads when it comes from 
the credit card company, you would be aware of that. And when 
making the decision to raise rates, Bank of America used 
internal criteria that it didn't make available to the public. 
How did it happen? And yet when pressed, no information was 
forthcoming. Talk about opaque, talk about lack of 
transparency.
    As the Chairman knows, I sat with him during the course of 
multiple hearings over a 6-year period and despite our 
opposition the Bankruptcy Reform Act passed. And yet nothing 
has changed except there is more debt on people who can ill 
afford it. I had hoped that in that agreement, not in the 
agreement but in the contract of terms and conditions there 
would have eliminated the provision that says that the credit 
card issuer can change their terms, other conditions, at any 
time they want for any reason. Just do it on their own because 
of some whim or maybe the need for significantly increased 
products.
    So I went out and took a look at a Bank of America 
contract--not a contract, but the terms and conditions because 
you can't find the contract. I will get into that later. You 
have to get the card before they will give you a copy of the 
contract. It is a new theory. It must be a brand new legal 
theory. I went to law school many, many years ago, and my 
memory is, and somebody can correct me, that it required a 
meeting of the minds. That is very simple. But I did well in 
contract law and I--you know, things must have changed. But 
this is recent, and what does it say? This is at the very end 
of the terms and conditions. My eyesight of course is going, 
too, along with my memory.
    ``All account terms are governed by the credit card 
agreement account, and agreement terms are not guaranteed for 
any period of time.'' You have got to remember now this is at 
the end. This is at the bottom of a lengthy number of pages. 
``Are not guaranteed for any period of time, all terms, 
including the APRs and fees, may change in accordance with the 
agreement and applicable law.'' Now, this is really 
interesting: ``We may change them based on information in your 
credit report, market conditions, business strategies or,'' and 
I had this done in red, ``or for any reason.'' Or for any 
reason.
    Let me suggest, Mr. Chairman and Mr. Conyers and to my 
friends on the other side of the aisle, this is not a good 
business practice. This is not treating the American consumer 
in a way that is fair and equitable, and I would submit that it 
is time and I hope you, Mr. Chairman, with the support of Mr. 
Conyers and other Members, all of us on both sides of the 
aisle, take a good hard look at the bankruptcy law and reform 
the Reform Act of 2005.
    With that, I yield back. Thank you.
    Mr. Cohen. Thank you. I appreciate it. We now have Mr. 
Franks here, the distinguished Ranking Member from Arizona, and 
I recognize him for his opening remarks.
    Mr. Franks. Thank you, Mr. Chairman. I appreciate the use 
of the microphone. Without objection, I would like to place the 
letter from the American Bankers Association in the record 
would. That be all right?
    Mr. Cohen. Without objection.
    [The information referred to follows:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    


                              ----------                              

    Mr. Franks. Mr. Chairman, I apologize for being late. I was 
dutifully and on time waiting for the hearing to begin in the 
wrong hearing room. So I appreciate your allowing me to go 
ahead and give a statement.
    I want to welcome our witnesses here and I look forward to 
an informative hearing.
    I have to say sincerely that the title of this hearing 
strikes me as a little curious. Quote: ``Are credit cards 
bankrupting Americans?'' is the title and I am tempted to check 
my calendar and make sure April Fool's really has passed here 
because if we are going to believe that credit cards are 
bankrupting America, I don't know what we won't believe. Credit 
cards don't bankrupt Americans. They don't. It is that simple. 
I know that there are accusations that some credit card 
companies have engaged in some aggressive practices, and, for 
example, I have heard reports of credit card companies imposing 
high default interest rates once a credit cardholder has missed 
a single payment, and I want to hear about credit card company 
excesses if they are occurring. I think that is a very 
appropriate topic.
    But by and large, the effect of a credit card of the credit 
card holder is in the credit cardholders hands, literally. It 
is up to the cardholder in every instance whether to use a 
credit card to make a purchase. As long as the purchase is 
within the credit cardholder's credit limit, who is to fault 
the credit card company for approving the purchase? And once 
that bridge has been crossed, the cardholder of course owes 
back the money. If paying back the money is not possible, who 
is to blame? The credit card company that relied on the 
cardholder's good faith or the cardholders who knew they were 
going over the line as they swiped a card, awaited the 
authorization, and completed the sale? What else are we to do 
honestly other than to hold a credit cardholder responsible for 
his or her own decisions?
    Should the credit card companies simply not grant credit 
cards to anyone below a certain income level? Should the credit 
card companies grant the cards but set everyone's credit limit 
so low that no one can ever possibly get in trouble? Should 
they grant cards, set reasonable limits, but then revoke the 
card at the slightest hint of trouble, demanding immediate 
payment? Should they leave limits in revocation terms where 
they are now but make sure that the interest rates, including 
default interests rates, accurately reflect the risk? Or should 
they just issue cards under terms that provide them with no 
protection against risk and stand idly by letting cardholders 
charge until they file for chapter 7 bankruptcy, watching 
cardholders pass the chapter 7 means test, and watching 
bankruptcy courts wipe out the cardholder's unsecured credit 
card debt?
    I mean these are--I am afraid these are the options. And in 
all seriousness, what are the credit card companies to do and 
still offer credit cards to cardholders? If that is the last 
option, I can pretty much tell you that we have seen the end of 
the days of consumer credit in America.
    Now, our distinguishing Ranking Member on the Judiciary 
Committee, Mr. Smith, has a saying that characterizes the 
approach of too many lawmakers to too many economic issues 
these days. He said, it is ``punish the successful, tax the 
rich, and hold no one accountable.'' I don't know if anything 
could better summarize what appears to be the effect of the 
hearing.
    So I have to with that, Mr. Chairman, yield back my time.
    Mr. Cohen. Thank you, Mr. Franks. I am now pleased to 
introduce the witnesses, and we look forward to your testimony. 
I thank everybody for participating in today's hearing. Without 
objection, your written statements will be placed in the record 
and we ask that you limit your oral statements to 5 minutes. I 
think there is a lighting system in this room. Do we have a 
lighting system? Do you see a green light? There is supposed to 
be one. Green says you are on for 5 minutes, yellow says you 
have got a minute left, and red says you are supposed to be 
finished by then.
    After each witness has presented his or her testimony, the 
subcommittee Members will be allowed to ask you questions 
subject to the same 5-minute limitation.
    Our first witness is Mr. Adam Levitin. Professor Levitin 
specializes in bankruptcy and commercial law. Before joining 
the Georgetown faculty, Professor Levitin practiced in the 
business finance and restructuring department of Weil, Gotshal 
& Manges, limited partnership, in New York. He also served as 
Special Counsel for Mortgage Affairs for the Congressional 
Oversight Panel and as Law Clerk to the Honorable Jane Richards 
Roth on the U.S. Court of Appeals for the Third Circuit.
    Professor Levitin's research focuses on financial 
institutions and their role in the consumer and business credit 
economy, including credit card regulation, mortgage lending, 
identity theft, DIP financing, and bankruptcy claims trading.
    Thank you, Professor. I appreciate your testimony and I 
allow you to go forward.

   TESTIMONY OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF LAW, 
                GEORGETOWN UNIVERSITY LAW CENTER

    Mr. Levitin. Good afternoon. My name is Adam Levitin, and I 
am, as you said, an associate professor of law at Georgetown 
University Law Center, and a lot of my research focuses on 
credit cards and bankruptcy.
    The first point I wish to make today is that credit card 
debt is a major factor in consumer financial distress and 
bankruptcy. While there are good questions, as Representative 
Franks raised, about why consumers have so much credit card 
debt, there is no question that credit card debt plays an 
important role in consumer bankruptcies. The average consumer 
bankruptcy filer has something on the nature of seven times as 
much credit card debt as the typical consumer.
    To be sure, some of this debt is a function of the 
macroeconomic problems of the American family. The cost of 
housing, the cost of health care, the cost of education, these 
are things that are squeezing American families, and as 
American families get squeezed and have less and less ability 
to pay out of their salaries, which have been stagnant, credit 
card debt is undoubtedly becoming a form of consumer financing.
    That said, it is important to know that the relationship 
between card issuers and consumers is not simply one of the 
card issuer making a fair offer to the consumer and the 
consumer having the ability to take the offer or not. It is 
not--as Congressman Delahunt was pointing out, this does not 
look like the traditional contract law meeting of the minds 
situation; that we have a cardholder agreement that doesn't 
look anything like one in a law school class would teach as a 
contract; that if you were to present this to a classroom of 
first-year law students taking contract law, they would say no, 
this isn't a contract, this is an illusory agreement, that the 
cardholder hasn't agreed to anything. They have agreed to 
whatever the card issuer wants. They can be changed at any time 
for any reason and even in many cases applied retroactively.
    That is not a contract. This cardholder agreement, the form 
of it, is an essential part of the credit card business model, 
and the credit card lending business model is not like the 
traditional lending model, and this is very important. The 
traditional lender lends out money and expects to get the 
principal repaid and to make a profit from the interest, and 
that is a model we have had for thousands of years. We know how 
it works and it is a core part of capitalism, and it is a model 
that we should want to see.
    The credit card industry has come up with a new and really 
much more problematic lending model. It is what Ronald Mann at 
Columbia Law School terms the ``sweat box.'' And the sweat box 
model does not aim to have the principal repaid. Instead, the 
sweat box lender lends out some money, the principal, and is 
hoping to make back enough money in interest and fees that even 
if the consumer defaults and never pays back that principal, 
that principal gets discharged in bankruptcy, the lender has 
still made a profit. If you are able to do sweat box lending, 
you need to do it with having high interest rates and high fees 
and by keeping the consumer in that sweat box as long as 
possible. The longer you can keep him in the sweat box, the 
more profitable it will be.
    And for sweat box lending, you don't have to be super 
careful about who you lend to. You can lend to people who you 
know will not be able to repay the principal. And this explains 
a lot of what we see with indiscriminate credit card lending. 
That credit card lenders--every credit card loan is a liar 
loan. We worry about liar loans in the mortgage context, and we 
have seen what that has wrought. Every credit card loan is a 
liar loan. There is virtually no income verification for credit 
cards. Credit cards check--and when you apply for a card, they 
are going to check your FICO score or something like that, but 
that only indicates whether you have paid your past bills on 
time. That doesn't say anything about your assets. It doesn't 
say anything about your income. It doesn't really tell them 
much about your future ability to repay.
    So we have an industry that is making liar loans, and they 
are able to do this in part because of the sweat box model, in 
part because of things like interchange fees, which they get an 
up-front fee on every transaction; so that is going to cut away 
on some of the losses on defaults; and in part because 
securitization structures in credit cards give the issuer all 
of the upside and only a fraction of the downside risk.
    Where does this fit with bankruptcy? The 2005 bankruptcy 
amendments. One of the chief things about the means test was 
that it imposed delay on bankruptcy filings, and delay is key 
because for the sweat box lending it means that the consumer is 
in the sweat box lending longer and that means that the card 
issuer is able to milk out a few more payments and that just 
adds to the profit even if the principal is never repaid.
    So how does the means test add to delay? Well, first of 
all, the means test means that if you are going to file for 
bankruptcy you have to have pretty extensive documentation of 
your income, and that can be a problem for a lot of consumers. 
A lot of consumers don't keep good records. I am willing to bet 
that most of the people in this room don't keep extensive past 
financial records. Yet that is what you need to have if you 
want to go before a court and get your way and file for chapter 
7.
    Additionally, and I see that my time is up, the means test 
adds cost and cost adds delay; that most people when--new 
research is showing that when people file for bankruptcy it is 
determined by when they are able to save up enough money to 
file. And by adding cost and delay, the means test benefits 
card issuers and supports a lending model that encourages 
lending to consumers who cannot realistically repay. So the 
2005 bankruptcy amendments unfortunately are supporting 
predatory lending.
    [The prepared statement of Mr. Levitin follows:]
                 Prepared Statement of Adam J. Levitin

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                               __________
    Mr. Cohen. Thank you, Mr. Levitin.
    Our second witness is Mr. David John. I understand Mr. John 
and Mr. Mierzwinski have to leave a little early? Mr. Weiss? 
Okay. Thanks. I hope it is not because you have to get to the 
post office to get your credit card paid, but whatever it is.
    Our second witness is Mr. David John. Mr. John is a Senior 
Research Fellow, Thomas A. Roe Institute for Economic Policy 
Studies of the Heritage Foundation. He has been published and 
quoted extensively in many major publications. He has also 
appeared on many other national and syndicated and radio and 
television shows regarding Social Security reform and 
retirement issues.
    Mr. John came to the Heritage Foundation from the Office of 
Representative Mark Sanford of South Carolina. He was the lead 
author of Sanford's plan to reform Social Security by setting 
up a system of personal retirement accounts. His Capitol Hill 
service also includes stints in the offices of Representatives 
Matt Rinaldo of New Jersey and Doug Barnard, Jr. of Georgia. In 
the private sector he was Vice President at the Chase Manhattan 
Bank in New York, specializing in public policy development. In 
addition, he worked for 3 years as Director of Legislative 
Affairs at the National Association of Federal Credit Unions 
and worked as a Senior Legislative Consultant for the 
Washington law firm of Manatt, Phelps & Phillips.
    Thank you, sir.

 TESTIMONY OF DAVID C. JOHN, SENIOR RESEARCH FELLOW, THOMAS A. 
    ROE INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE 
                           FOUNDATION

    Mr. John. Thank you for having me. I am not here to defend 
credit card companies. As a matter of fact, I have had my own 
bad experiences with them. I was overseas a few years ago and 
was 24 hours late on a payment and got hit by a whopping fee 
and a rather substantial increase in my credit card rate. So 
this has not been, shall we say, a universally delightful 
relationship with my credit card company, and I only carry one.
    However, there are ways to deal with the issue and there 
are some proposals out there which actually would make things 
worse and would tentatively hurt the very individuals that I 
believe that most of the Members of this Committee most want to 
help achieve financial stability.
    Credit cards are expensive to operate. They are incredibly 
complex. Last Monday or 3 days ago I was at Heathrow in London 
flying on my way back to the U.S. and, needing a book for the 
flight, I went into a bookstore, pulled out my Visa card, and 
the transaction was approved in about 3 seconds or so. The 
intricate hardware necessary for such a transaction, not to 
mention billing me, et cetera, and it has already shown up on 
my record, is not something you can put together very quickly 
or very easily. I would argue that most of the problems that we 
are going to hear and have heard about have actually already 
been dealt with. They have been dealt with by regulations the 
Federal Reserve Board issued in December of this last year. 
They were also issued by the Office of Thrift Supervision and 
the National Credit Union Administration. And what these 
changes do is, among other things, make very comprehensive 
changes to the credit card statements, not the least of which 
making it very clear how long an individual will pay to pay off 
their balance if they only pay the minimum. It will also 
include a series of new consumer protections. It will include 
limitations on up-front fees, a longer period between the time 
that the statements are mailed and the payments are due, a 45-
day notice period before higher rates come into effect, et 
cetera. And it bans explicitly certain of the practices that 
have been most a problem with the credit card industry. These 
include increasing rates on current balances and certain future 
balances, the idea that you would be paying off lower interest 
rate credit before you would be paying off higher interest rate 
credit, double billing cycles, et cetera, et cetera, et cetera.
    Now, these regulations which were developed extensively 
after long discussions with consumers and testing with 
consumers, and the like, are specifically aimed at solving the 
problems that the credit card industry has faced. And I believe 
that if you look at them, you will find that they basically 
answer virtually all of the problems that you are going to have 
raised today. However, there has been some complaint by the 
fact that they won't go into effect for 18 months or so, and 
the reason for that is very simple, because it takes a long 
time to reprogram computers, retrain staff, et cetera. The last 
thing that you would want given the fact that there are 
penalties of up to a million dollars a day for violating those 
regs is to have someone on your staff give somebody the wrong 
information and therefore find yourself liable for that 
penalty.
    If you look at the bankruptcy laws that have been passed in 
2005, for instance, you can look at the means test, and one 
proposal that came out would basically exempt anyone from the 
means test who has one high interest loan. What I am most 
worried about here is the fact that lower income customers, 
first-time borrowers, and people who have impaired credit 
histories need to rebuild their history. If you build the cost 
of the credit card industry too much, these are people who are 
going to simply find themselves closed out of new credit and 
they are going to be forced to go to the check cashing agency 
down the street or some other low reputable borrower--or 
lender. Excuse me. This would be a serious mistake. The last 
thing you want to do is to take some sort of action that makes 
the problem worse for the very people that you should be 
interested in helping.
    Thank you.
    [The prepared statement of Mr. John follows:]
                  Prepared Statement of David C. John

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                               __________
    Mr. Cohen. Thank you, sir. I am going to move to Mr. Weiss 
just in case there is a time limit.
    Mr. Brett Weiss is our next witness. He currently heads the 
Bankruptcy and Insolvency Group at Joseph, Greenwald & Laake, a 
Greenbelt, Maryland firm founded in 1968. He has experience in 
chapter 7, 11, 13, and chapter 11 for business reorganizations. 
He has represented individual and corporate debtors and 
creditors in all phases of bankruptcy. He has received 
international media attention in connection with the bankruptcy 
cases that he has been involved in. He is an experienced 
litigator, having been involved in a number of cases of first 
impression concerning debtor and creditor rights.
    Mr. Weiss, I appreciate your testimony.

TESTIMONY OF BRETT WEISS, ATTORNEY, GREENBELT, MD, ON BEHALF OF 
   THE NATIONAL ASSOCIATION OF CONSUMER BANKRUPTCY ATTORNEYS

    Mr. Weiss. Thank you. Chairman Cohen, Mr. Franks, Mr. 
Conyers, Members of the Subcommittee,good afternoon. I am Brett 
Weiss, a bankruptcy attorney from Greenbelt, Maryland. I appear 
today on behalf of the National Association of Consumer 
Bankruptcy Attorneys, NACBA, which is the only organization 
dedicated to serving the needs of consumer bankruptcy attorneys 
and protecting the rights of consumer debtors in bankruptcy. 
NACBA currently has more than 3,700 members in all 50 States 
and Puerto Rico.
    I appreciate the opportunity to speak with you about an 
issue I hear about a lot from my clients: unfair and abusive 
credit card practices that drive them into bankruptcy. As a 
bankruptcy attorney, I have been helping people with money 
problems for over 25 years. I have seen thousands of honest, 
hardworking, smart people fall into hard times due to three 
main reasons: medical issues, job problems, and divorce. These 
people don't charge big screen TVs and expensive vacations to 
their credit cards. They charge medicine and food and gas to 
get to work and then find that the deal they thought they had 
with Visa or MasterCard was built on sand and the tide is 
coming in.
    Unlike virtually every other type of consumer debt, 
mortgages, car loans, bank loans, even payday loans, the small 
print on credit cards lets them change interests rates, payment 
terms, and fees after you borrowed money. By changing the rules 
in the middle of the game, credit card companies make sure they 
are the big winners, leaving consumers holding the short end of 
the stick.
    You have heard a lot about universal default. Miss one 
payment to one creditor and all of your credit cards jack up 
the interest rate, slash your credit line, and raise your 
minimum payment.
    A couple I spoke with on Monday was doing fine until the 
husband's employer cut his salary in half. He missed one 
payment on one credit card, and the interest rate on another 
one went from 7 percent to 24 percent. His credit line was cut 
by 80 percent, and his monthly payment tripled. The result: I 
have a new bankruptcy client. Good for me but bad for his 
family, the credit card companies, and the economy.
    If you think of credit card companies as manufacturers, the 
cost of their raw material, the money that they lend people who 
charge things, normally is the Federal funds rate, which is 
near zero. They take this nearly free money and loan it out at 
7 percent if you have good credit, 18 percent if you don't, and 
30 percent or more if you miss a payment. Credit card companies 
are entitled to a fair return, not the excessive earnings from 
these high interest rates.
    But this isn't enough. Fees generate huge profits for 
credit card companies. They represent 39 percent of revenue, up 
from 28 percent in 2000. Make a payment after the due date, pay 
a fee. Go above your credit limit even if the fee is what 
pushes you over, pay another fee. And how about those annual 
membership fees, cash advance fees, convenience check fees, 
balance transfer fees, additional card fees, payment fees, 
telephone inquiry fees, et cetera? One credit card company even 
charged a fee if you wanted to cancel your account. The result: 
Industry profits rose from $27.4 billion in 2003 to $40.7 
billion in 2007.
    We know from research and experience that there is a strong 
link between bankruptcy and credit card debt. By the time most 
of my clients see me about filing for bankruptcy, they have 
already paid back all the money they originally charged, an 
equal amount in interest and fees, and they are working hard to 
try to pay down the third and fourth multiplier of their 
original purchase.
    I met with a client yesterday who stopped using her credit 
card 3 years ago, has been making payments religiously since, 
and now owes more than she did when she started. This situation 
is far from unique, and I see it almost every day in my 
practice.
    We are encouraged that key Committees in both the House and 
the Senate considered legislation this week to stop the worst 
of these abusive practices and urge Congress to pass a bill and 
send it to the President for his signature.
    NACBA also supports S. 257, the Consumer Credit Fairness 
Act. Abusive credit card terms have always been unfair, but in 
a time of economic crisis when consumers can least afford it, 
these practices can devastate financially vulnerable families. 
Congress should take steps to stop these abuses.
    Thank you.
    [The prepared statement of Mr. Weiss follows:]
                   Prepared Statement of Brett Weiss

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                               __________
    Mr. Cohen. Thank you, Mr. Weiss. I appreciate it.
    Mr. Mierzwinski. I have known Ed for some time. He is a 
consumer advocate and often testifies for Congress and State 
legislatures and with me at one time in Nashville on a panel I 
think on the Freedom Center; was it?
    Mr. Mierzwinski. Right.
    Mr. Cohen. He is the U.S. PIRG Consumer Program Director, 
consumer advocate with the National Association of State Public 
Interest Research Groups since 1989. He has co-authored 
numerous reports on consumer issues, ranging from the failure 
of cable television deregulation to privacy, identity theft, 
bank fees, predatory lending, and unfair practices, and product 
safety. He is often quoted in the national press and has 
appeared on network TV, NBC, Crossfire, ABC, et cetera.
    Mr. Mierzwinski is active in international consumer 
protection efforts and is a founding member of the Trans 
Atlantic Consumer Dialogue.
    We appreciate your being here, and would you please go 
forward with your testimony?

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

    Mr. Mierzwinski. Thank you, Chairman Cohen, Mr. Franks, 
Chairman Conyers, Members of the Committee. It is a privilege 
to come here and talk to you about this important issue, and I 
am glad the Committee is holding this hearing.
    The credit card industry business model essentially is a 
license to steal. As has been pointed out by Mr. Delahunt and 
others, you can change the rules at any time for any reason, 
including no reason. You can change the rules even though you 
have got a 40-page contract. And credit card companies have 
ratcheted down the thumb screws on consumers since passage of 
the bankruptcy bill.
    As you pointed out, I started at U.S. PIRG in 1989. Just 
before I came to Washington, Congress passed the Truth in 
Lending amendment that resulted in the Schumer box, and that is 
legislation on credit card disclosure. After that bill passed, 
until the Maloney Credit Cardholders' Bill of Rights passed the 
House last Congress, no bill opposed by the credit card 
industry even moved out of the Committee, was even voted on in 
a Banking Committee of the Congress from 1989 until 2008. At 
the same time, there was no legitimate regulation of the credit 
card industry. The OCC, the Office of the Comptroller of the 
Currency, as the industry consolidated and the biggest 
companies took over most of the business--eight companies now 
control well over 80 percent of the credit card industry--the 
OCC has taken a lax attitude toward regulation. I am not--if I 
were a credit card company I would not be afraid of these 
million dollar penalties that are written into the banking 
laws. The OCC has not imposed a penalty on a big credit card 
company since the year 2000 and has never imposed a public 
penalty on Citibank, Chase, or Bank of America. So the credit 
card companies can do what they will. The OCC has preempted 
State Attorney General enforcement. And there is one other 
clause in credit card contracts, and that is the clause that 
says you are forced to go to mandatory arbitration even if you 
do have a problem. So they have taken away private enforcement.
    So again the credit card industry is a very powerful 
industry. The profits of the credit card industry have been 
very substantial. They are larger than the profits for any 
other line of banking, and that is according to Federal Reserve 
reports, not according to consumer group reports.
    The issue of whether or not changing credit card company 
rules would affect credit available to lower income and 
moderate income Americans is one that we disagree with. We 
believe that the credit card industry does not make its 
decisions based on risk. In fact, it makes its decisions based 
on profits and the ability to extract large profits over time 
from its customers, as Professor Levitin pointed out, and we 
concur in our testimony, with Professor Mann's sweat box model. 
People are paying money to the credit card industry for a very 
long time that prevents them from ever getting out of the sweat 
box. The company makes money even if you don't pay off the 
principal.
    So it is a very serious problem that was exacerbated by 
passage of the bankruptcy amendments of 2005, which keep people 
in the sweat box longer, which make it harder and more 
expensive to file for bankruptcy, and make it virtually 
impossible for many consumers to achieve a chapter 7 fresh 
start. They are forced into chapter 13 repayment. And in many 
cases they have to pay off the credit card unsecured debt as 
well. They don't ever get their feet back underneath them.
    So the written testimony that I provided goes into 
extensive detail on the issues.
    I would point out that everybody thought that after passage 
of the bankruptcy bill, Mr. Chairman, that the industry would 
change its ways. They got what they wanted, that they would 
stop making things unfair to consumers. But, in fact, they 
increased pressure on consumers: Universal default clauses 
where they not only changed the rules for no reason but they 
changed the rules based on market conditions or anything that 
they want.
    So there are some real problems with credit cards. There 
are a number of things that the Committee could do or that the 
Congress could do. And the fact that the Federal Reserve Board 
has even proposed and will eventually in July, 2010, make 
credit card practices illegal shows you that there is a real 
problem out there. It isn't just consumer advocates saying that 
some of these practices are unfair; it is the Federal Reserve 
Board.
    And in my testimony I outline some of the things that could 
be done. Obviously, the Maloney bill, the Credit Cardholders' 
Bill of Rights, is a better version of the Federal Reserve 
rules. You should pass in this Committee the Arbitration 
Fairness Act proposed by Mr. Johnson and we believe is a 
critical part of reform. On the bankruptcy bill itself, there 
are a number of changes that we recommend to make it easier for 
consumers to file for bankruptcy and get out of the sweat box, 
and we should impose a usury sealing of 36 percent on consumer 
loans as we did for military families.
    And although it is not in my written testimony, I would 
like to recognize that Mr. Delahunt has recently introduced a 
very important piece of legislation to provide consumers with a 
single regulator that imposes--that regulates all consumer 
credit products. Just as we have a CPSC so your toaster doesn't 
explode, we would have a Financial Products Safety Commission 
to protect you against unfair credit card practices.
    So these are some of the proposals that we think the 
Congress should go forward with.
    [The prepared statement of Mr. Mierzwinski follows:]
                Prepared Statement of Edmund Mierzwinski

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________
    Mr. Cohen. Thank you, sir.
    We have completed our testimony. We have one vote. Mr. 
Delahunt is going to be our scout and get there and let them 
know we are coming. Thank you. Kit Carson. Then we are going to 
resume downstairs in 2141, our normal hearing room. Mr. John 
and Mr. Weiss, will you be able to rejoin us? It shouldn't be 
more than 20 or 30 minutes at the most.
    Thank you very much. We are in recess.
    [Recess.]
    Mr. Cohen. Mr. Franks, thank you. We are back in session. I 
thank you for coming back on this opportunity for questioning.
    First, I would like to ask Mr. John, and I had a little 
trouble hearing in the other room, you were saying something 
about time, and about having to reset computers or something. 
Was that about the date that the regulations go into effect?
    Mr. John. It was, yes.
    Mr. Cohen. The regulations go into effect I think in--is it 
July of 2010?
    Mr. John. It was an 18-month delay from the December 2008 
issuing.
    Mr. Cohen. Do the banks use the first computers ever made? 
Are these something like the Flintstones computers?
    Mr. John. Well, not to my knowledge, actually. The 
computers are highly complex. And one of the----
    Mr. Cohen. Temperamental.
    Mr. John. Well, all computers I think by definition are 
temperamental, at least mine is. But the thing is that this is 
an incredibly complex network. And the regulations are very 
extensive and will require severe changes to the way the 
industry does business. And as a result, it is not just a 
matter of redoing computers, it is a matter of retraining 
staff, it is a matter of reprinting disclosure forms and a 
variety of other things.
    Mr. Cohen. Let me ask you this, following up on what Mr. 
Delahunt had for us; when they can change for any reason, and 
they do often change the cutoff dates, the due dates, et 
cetera, do they take 18 months before they implement those 
things?
    Mr. John. Well, I seriously doubt it. But when it comes 
down to it, that is a fairly simple change as far as dates and 
interest rates. This is a much more extensive change that has 
to go through the entire system.
    Mr. Delahunt. Would the Chair yield?
    Mr. Cohen. I would yield to the distinguished vice 
Chairman.
    Mr. Delahunt. With the new rules that have been 
promulgated, would one of those rules eliminate the I-can-do-
whatever-I-want-whenever-I-want-it provision?
    Mr. John. Pretty much.
    Mr. Delahunt. It would. Okay. I would like to see a copy of 
that. I thank the gentleman.
    Mr. Mierzwinski. Could I add to that response?
    Mr. Delahunt. Please.
    Mr. Mierzwinski. It is our understanding that it would do 
it retroactively on your existing balances. The Federal rules, 
however, would not affect future use of your card. So if they 
raised your rate and they said your new rate is 39 percent APR 
because you did something bad, it wouldn't apply to your 
retroactive balance, but it would apply to your future use of 
your card in many circumstances.
    Mr. John. But may I point out that even under existing law, 
a consumer who gets a change and decides that they don't want 
to accept that can simply stop using the card and pay off the 
balances under the existing contract.
    Mr. Cohen. Mr. Levitin.
    Mr. Levitin. That is true, but this is not like an antidrug 
campaign, it is not so easy to just say no if you are a 
cardholder. Applying for a new card takes some time, that it 
affects your credit if you close one card line and open 
another, that affects your credit score. So that is going to 
mean that, even if you have done nothing wrong, the cost of 
credit in the future will go up. So this is not costless.
    Professor Larry Ausubel at the University of Maryland has a 
study that estimates that, given the point at which consumers 
actually will switch, they have to incur something like $150 
worth of additional interest costs before they will switch 
cards. That is a pretty hefty amount of interest there.
    Mr. Cohen. When you say it is not like drug use, do you 
think--and I know you are not a psychologist, but aren't some 
people kind of addicted to purchasing and shopping and 
consumerism?
    Mr. Levitin. It is like drug use in this sense; there is 
definitely an addictive quality to credit. I am not in any 
position qualified to say whether it is psychologically 
addictive or somehow chemically addictive. I can't say that. 
But there definitely are parallels between the way consumers 
use credit and what we see with addictive products.
    And to that extent, there is also another analogy that 
works. The relationship between the cardholder and the card 
issuer is a little bit like addict and pusher. It is a 
codependent relationship, and you do need to have both. 
Consumers don't just spend freely, they need an issuer who is 
willing to extend them credit.
    And when we have consumers who get into problems with 
credit, often if you look at bankruptcy filers, they don't just 
have one card where they spent this $10,000, they will have 20 
cards and multiple cards from the same bank and with $5,000, 
$10,000 on each of these cards. And you have to ask yourself, 
the last bank in the door, what were they thinking extending 
more credit to this consumer? A consumer who is earning 70,000 
or $40,000 a year and they have already a $100,000 in credit 
card debt, what is the lender thinking? Where do they think 
this is going to end up?
    Mr. Cohen. Well, it may be, Mr. Levitin, that they have got 
these old computers. I bought my home in 1988, and the late 
Sally Glass and the late El Sigurber lived in my home before 
their demise in 1980. In 1996, they got several credit card 
opportunities because of their good credit rating. Now, it is 
true that in the 16 years since their death they had not had a 
bad debt, but it was also kind of amazing that they should get 
such a solicitation. And I used to get enumerables.
    Mr. Delahunt. Would the Chair yield for a moment?
    Mr. Cohen. Yes.
    Mr. Delahunt. And I don't mean to distract you, but I live 
here in Washington with three other gentlemen, Members of the 
House and the Senate, and I found interesting that there was a 
solicitation that was sent to that same residence for a 
gentleman by the name of Wilbur Mills. Now, I think that maybe 
Mr. Conyers actually would have served with him in his youth.
    Mr. Conyers. He got me on Judiciary.
    Mr. Delahunt. He got you on Judiciary. That is good to 
know. But Mr. Mills had been dead at the time as well. There is 
something faulty with these computers. And I think this 
Committee ought to examine the need to update the computers 
that are used in our financial services systems because it is 
becoming very problematic.
    Mr. Cohen. Does any one of the panelists agree with my 
basic theory, that 18 months waiting to implement these 
regulations is beyond what is necessary for computer--I have 
got to think Bill Gates could have done quicker than this.
    Mr. Mierzwinski. Mr. Chairman, I think all of the consumer 
groups that are working on this legislation agree with your 
perception that 18 months is too long. They changed the rules 
on us in 1 day. We have asked, as Representative Speier in a 
markup yesterday said, we asked General Motors and the other 
car companies to change their entire business models in 60 
days, why did the credit card companies need 18 months?
    We are very pleased that the Federal Reserve identified 
practices that it decided should be made illegal under the 
Federal Trade Commission Unfair and Deceptive Practices Act 
authority that the Fed has. But to wait 18 months to stop the 
illegal activity is astonishing, and it is just notacceptable. 
And we don't think it is needed for computers or any other 
reason.
    Mr. Cohen. Thank you. I am going to yield to Chairman 
Conyers or to Mr. Delahunt, whoever wants to go next.
    Mr. Conyers. This is just an informal discussion here 
between us late in the afternoon, last day before we go into 
recess.
    Mr. John, in 2005, did you happen to testify in the 
bankruptcy revision proceedings?
    Mr. John. I did not.
    Mr. Conyers. You didn't. Did you write anything on the--I 
see you have done numerous work in public relations and media.
    Mr. John. Not to my knowledge. I actually was involved, 
when I was with the National Association of Federal Credit 
Unions, in an earlier revision of the bankruptcy bill, which 
would have been in the early nineties. And I was involved 
strictly peripherally when I was with Representative Sanford's 
office.
    Mr. Conyers. Okay. Now you heard the introductory 
statements of Chairman Cohen. Did he say anything that, in your 
lengthy experience, struck you as something that you would like 
to put any finishing touches or modifications on?
    Mr. John. I would never assume that I can improve on a 
Chairman's opening statement.
    Mr. Conyers. Not even Chairman Cohen.
    Mr. John. Very definitely not, especially not as long as he 
is sitting there.
    Let's just say that there would probably be certain aspects 
of it that I would be in more agreement on than others.
    Mr. Conyers. Now, what about Chairman Delahunt's ranting 
and raving, Vice Chairman Delahunt, certainly you saw some 
openings for further discussion in that regard, didn't you?
    Mr. John. Oh, I am sure there are many openings for 
discussion. But having worked on the Hill for many years, I 
would be hesitant to challenge a vice Chairman, also.
    Mr. Conyers. What about just an ordinary Member of the 
Committee like myself? I mean, what about some of the things 
that we said that you--look, we can't have all four of you 
coming here and sitting here telling us that everything is okay 
with everything we said. Reticence is not becoming to 
witnesses; we need you to come in here and lay it out, good, 
bad or indifferent.
    Mr. John. My personal opinion would be that you have 
identified some very serious problems. I would also suggest 
that the Federal Reserve, whether you like the 18 months or 
not, has actually done some very extensive work in trying to 
deal with those problems, and in particular with redesigning 
the statements in ways that will be very useful for consumers.
    Now, nothing is going to be perfect, but when it comes 
right down to it, further legislation--and legislation did pass 
the Senate Banking Committee by one vote yesterday on this 
subject--is not necessarily going to be the best approach to 
dealing with these problems for the simple reason that you are 
going to be up against--you are going to be explicitly banning 
or attempting to ban certain practices, and you are going to 
have some exceedingly high-paid attorneys and financial 
professionals who are going to be on the other side trying to 
find a loophole to get around it. And to the extent these are 
put into legislation, as opposed to leaving them to the 
regulators to deal with, with some very clear instructions, you 
are going to find basically that you are always going to be 
running to catch up. And I don't necessarily think that is 
going to be your major goal.
    Plus, as I said, one of my key concerns--because I do a 
fair amount of work in the whole issue of asset building in 
lower and middle-income families--is the fact that there is no 
costless reform to this, and I am very concerned that the very 
people who most need to start building themselves up the credit 
ladder are going to be the ones who find themselves shut out as 
a result.
    Mr. Conyers. As a result of what?
    Mr. John. As a result of practices that will sharply reduce 
the profitability of credit cards, sharply reduce the 
circumstances under which they are issued, et cetera. We are 
already seeing changes in credit standards, credit standards 
being sharply strengthened now due to perceived risk and other 
things. This is especially hitting the lower and middle-income 
community. The last thing we need to do is to set something up 
that has the completely unintentional result of making it 
harder for these people to find credit and, therefore, forcing 
them into the hands of even more check cashing agencies, or 
something along that line.
    Mr. Conyers. Could I get a little more time, Mr. Chairman, 
to pursue this, please?
    Mr. Cohen. Sure.
    Mr. Conyers. Thank you very much.
    How can correcting the existing practices that have pushed 
people to the brink of bankruptcy make things worse for them 
than they already are?
    Mr. John. The problem that we run into is that typically 
new borrowers, lower, middle-income borrowers, et cetera, have 
a much higher debt-to-income ratio just pretty much by 
definition because they have got less income there. Typically 
these are both higher risk loans, and these are loans that 
require a great deal more day-to-day work to collect. And that 
increase in cost by making it still harder to issue certain of 
these--and again, I am not defending the practices that the Fed 
found to be reprehensible here. But even in the case of what 
the Senate dealt with yesterday, two of the Democratic Senators 
expressed very strong reservations about what was being done, 
specifically because they were concerned that it was going to 
deny credit to the populations I have been mentioning.
    Mr. Conyers. Well, look, let's put this on a very ordinary 
level; look what happened to you.
    Mr. John. Yes.
    Mr. Conyers. I mean, this wouldn't be made more complicated 
if we correct the practices that brought it on.
    Mr. John. It is not those practices. I am very comfortable 
with the way the Fed has approached this and the proposals that 
the Fed has come up with. What I am concerned about is the 
effects of going beyond the Fed, whether that is some of the 
proposals like S. 257, the bill that was discussed in the 
Senate Judiciary about a week ago, or whether some of the other 
potential changes that would affect this.
    Mr. Conyers. The Durbin bill.
    Mr. John. The Durbin bill, yes.
    Mr. Conyers. Let me see what Professor Levitin would add to 
this before my time is snatched back.
    Mr. Levitin. Thank you very much, Chairman Conyers.
    I think the first point to make is that, while the Federal 
Reserve's proposed regulations are good, they don't cover 
everything. They certainly do not cover all of the problematic 
credit card billing tricks and traps. There is also the 
question of the 18 months. And while certainly I don't think 
that banks can implement these regulations overnight 
flawlessly, 18 months does seem rather long. But I think 
something that Mr. John said really gets to the heart of the 
issue.
    Mr. John said the card industry has lots of well-paid, 
smart attorneys--I used to be one of them--or at least I will 
go with well paid--who their job is to figure out ways to do 
end runs around regulations. And inevitably, whether it is 
Congress or the Federal Reserve--and this is the Federal 
Reserve which has not issued any regulations on this for 
years--Congress or the Fed are going to be playing catch up. It 
is going to be a game of whak-a-mole, that as soon as Congress 
or the Fed puts the kibosh on one particular problematic 
practice, the card industry is just going to redesign around 
this.
    I think the solution really has to be flipping the whole 
model of card regulation on its head. Our current model of 
regulation is disclose, disclose, disclose, and do whatever you 
want as long as you disclose it. And now we are moving toward 
disclose, do whatever you want except for really bad practices, 
A, B and C. But if you can come up with practices D, E and F, 
as long as you disclose, that is fine.
    This is a model that doesn't work. We have to flip it 
around. And the way to do this is to say you can't do anything 
except for A, B and C. And this is a reasonably easy thing to 
do. Credit cards, their core functions are pretty simple, you 
lend out money and then charge an interest rate. That is the 
core function of credit cards.
    It is possible to drastically simplify credit cards. Most 
of the complexity of credit cards is not to serve any 
particular consumer desire and need; maybe there are a few 
niche desires. Instead, credit cards are complicated for 
complication's sake, just like credit card cardholder 
agreements are complicated for their own sake. The whole point 
of the complication is to make it harder for the consumer to 
know what this is going to cost to use. And if the consumer 
can't figure out what it is going to cost to resolve the 
balance in the future on the credit card, the consumer can't 
figure out if the consumer should be using their credit card or 
which card the consumer should use. It may be smart to use a 
card, but you have to be able to also distinguish between 
cards.
    So I think that really Congress should start thinking about 
approaching the credit card regulation in a different manner. 
It is good to ban the really bad practices, but this is going 
to be a catch-up game.
    Mr. Conyers. David John, do you find that that is not an 
unreasonable analysis?
    Mr. John. I actually find that that would be quite 
problematical, because what that does is to make it very hard 
to implement any sort of innovations that actually would 
benefit the consumer.
    We have seen in the field of insurance regulation, which is 
handled at the States, that in a number of States, when an 
insurance company proposes a new product that would change its 
market share by being very popular with consumers, that in 
certain States these products are blocked or changed simply to 
protect the market shares of some of the people who are already 
in there. What you are doing with that kind of a regulatory 
standpoint is to make it well worth the while to block 
innovation so that you can protect your own situation.
    Mr. Conyers. Do you think Senator Durbin's proposal may go 
in that direction?
    Mr. John. I think Senator Durbin's proposal is aimed at 
bankruptcy and how credit card and high-interest debt is 
treated in bankruptcy.
    Mr. Conyers. Now, surely the panel is in agreement on this 
overaggressive marketing of cards. We are still searching my 
boy's belongings to find out how many credit cards he got from 
Morehouse this semester already.
    Mr. Mierzwinski. Chairman Conyers, if I could respond to 
that, all of the consumer groups concur with that. In fact, we 
have published reports, which I could enter into the record, on 
the marketing of cards to young people. The National Council of 
La Raza has published reports on marketing to Latino families. 
And all of the major civil rights groups, by the way, support 
all these strong reforms. They want cards to be offered to 
their members, but they want those cards to be offered on a 
fair basis.
    And although Mr. Delahunt has stepped out, I would point 
out that he has a bill, which Mr. Durbin has a companion bill, 
that would get at what Professor Levitin has proposed, and that 
is his Financial Product Safety Commission bill, which would be 
to have these are the safe ways to market a credit card, and 
start from there. So we would concur, and all the major 
consumer groups support that as well.
    Mr. Weiss. The other issue, if I may, is not only the 
availability of credit, particularly to the subprime market, 
but what type of credit is available to that market. If all 
that is available is predatory lending, high interest rate, 
high fees, that is not good. And that type of credit needs to 
be sharply restricted. And yet it is that type of credit that 
is one of the biggest money makers for the credit card 
industry. The subprime market makes more money than does people 
such as are sitting up on the dais. That is where they make 
their money, from the high interest rates, from the high fees. 
That is where they are getting their money, and that is what 
they want to keep doing because it is so profitable. 
    Mr. Levitin. Mr. Chairman, I would like to amplify 
something that Mr. Mierzwinski said.
    Mr. Mierzwinski pointed out that Senator Durbin's bill, and 
I believe Congressman Delahunt's analogous bill in the House 
for a Consumer Financial Product Safety Commission, would, I 
agree, create a Federal regulator with the ability to say only 
the following practices are permitted.
    Now, Mr. John rightly raises the question of whether this 
would inhibit innovation. I would submit to you that we have 
not seen any innovation in the card industry that has been 
beneficial to consumers in recent memory. And innovation is not 
all good, there can be positive and negative innovation.
    But given the possibility of future beneficial innovation 
for consumers, the way to handle that is to have a regulatory 
agency that can respond to industry requests to allow new 
products, but this needs to be an industry with much, much more 
regulation.
    Mr. Conyers. Thank you for your generosity, Mr. Chairman.
    Mr. Cohen. You are welcome, sir.
    Mr. Franks, the Ranking Member, is recognized.
    Mr. Franks. Well, thank you, Mr. Chairman.
    Mr. Chairman, Professor Levitin argued that consumers with 
higher credit card debt were more likely to file bankruptcy, 
and I am having difficulty as to why that should surprise us. I 
am wondering if it couldn't mean that people who prefer to make 
their purchases in cash, whenever possible, are maybe more 
financially responsible. I think you can make the argument that 
jails probably have a higher incidence of having bank robbers 
in them than grade schools as well, but I feel like that is 
almost an argument here that would take us in a different 
direction.
    Mr. John, I guess I would ask you the first question. What 
economic evils would befall this system, our financial system, 
if the pricing of consumer credit were divorced completely from 
accurate assessment of risk, or if we divorced it from the 
insistence on debtor responsibility and accountability? What 
would happen to the credit market?
    Mr. John. Well, what we have seen in the case of certain 
aspects in the housing market and other areas is that the 
credit would be primarily available to the best quality 
customers.
    One of the things that we have seen, and this is true in 
pretty much all of the consumer groups, except for the very 
highest, is that typically an individual will start out at a 
relatively high-cost credit card or other debt, and as they pay 
that and as they establish an appropriate credit history, which 
indicates a lower risk, they either qualify for lower rates or 
they can move on to other credit cards with lower rates and 
better terms.
    It is really not all that difficult to find a new card once 
you have gotten a decent credit rating. If you completely 
divorce that process, then it is going to be much, much harder 
for mainly three groups; I have mentioned the middle and lower-
income worker, but also the first-time borrower, the kids who 
are first coming out of--in particular, school, they are not 
coming necessarily out of college--and people who are trying to 
reestablish their credit after some sort of a problem, to get 
back on the ladder and build themselves back up.
    Mr. Franks. Well, Mr. John, I guess that is my concern. If 
we divorce ourselves from cause and effect, a lot of times, 
especially in this situation, I think we end up oftentimes 
hurting the ones that we are ostensibly trying to help here 
more than we do anybody else. And I am always amazed. I think 
it goes back to Congress' attitude that sometimes we can repeal 
law's mathematics here and we make things even worse when we 
try.
    Well, let me ask you this, then, since amendments to the 
Bankruptcy Code have the potential to distort market decisions 
and actually increase hazard, wouldn't it be better for us to 
wait to consider any changes to that code until the Financial 
Services Committee and the regulators have had a chance to 
complete their work? What is your perspective?
    Mr. John. It strikes me that it would be a much better 
course to figure out what you are going to be dealing with in 
the future before you necessarily make any changes. One of the 
problems that we saw, for instance, in S. 257, in the Senate 
bill by Senator Durbin, was the idea that if an individual had 
a single high-cost credit transaction, that they could be 
completely exempted from the means test. And of course it 
wouldn't be too hard to imagine a situation where a client went 
to a lawyer who had a connection with a high-credit lender and 
suggested that maybe they would like to go out and borrow from 
a particularly check cashing agency or something along that 
line so that they could get themselves out of the means test. 
Now, I would suggest that that would probably end up lowering 
respect both for the bankruptcy law and of course for the legal 
profession.
    Mr. Weiss. It is also currently prohibited under the 2005 
act.
    Mr. Franks. Mr. John, is there anything that you know that 
limits the House Financial Services Committee, that prevents it 
right now from legislating controls on abusive practices that 
the regulators, for whatever reason, decided not to regulate?
    Mr. John. No. Absolutely. They have complete jurisdiction 
in this area.
    Mr. Franks. Well, Mr. Chairman, I am going to yield back 
with a few seconds left. That is a rarity.
    Mr. Cohen. Mr. Weiss, let me ask you this; the Federal 
Reserve has some reforms, 18 months, but are there other 
reforms you think that need to be adopted that the Federal 
Reserve did not address?
    Mr. Weiss. Well, the 18-month period obviously has been 
discussed fairly extensively today, and there are serious 
problems with it. While the provisions are good, I think they 
are a good first step, I think that there is more that needs to 
be done. I am seeing daily in my practice debtors who have just 
been slammed by these fees. And while the proposed regulations 
will remove some of them, as Mr. John mentioned, there is some 
very talented and highly paid people whose job it is to figure 
out ways around them so that they can resume charging the very 
fees that amount to 39 percent of their profits.
    So I think that Mr. Levitin's comments about possibly 
needing to reverse the standard instead of saying these are 
prohibited acts, let's look at what is allowed, may be a very 
good way of stopping the ingenuity of the lawyers who will be 
looking at this and trying to find loopholes.
    Mr. Cohen. Does Professor Levitin or Mr. Mierzwinski have 
suggestions of things that the Fed didn't go far enough on that 
should have been changed?
    Mr. Mierzwinski. Well, first of all, the Federals, many of 
their changes only apply to your existing balance. The use of 
your card in the future would be subject to whatever higher 
rates they would impose on you. Now, I would respectively 
disagree, I think, with some comments that Mr. John may have 
made earlier that it is easy for you to go out and get a new 
card. For the people that are in trouble, it is not easy to go 
out and get a new card. So we need to prevent the practices, 
both on a backward basis and on a going forward basis, for the 
people that are locked in with that one company.
    Mr. Dodd's bill in the Senate--the House bill largely 
tracks the Federal rules, but amends the Truth in Lending Act 
rather than the Federal Trade Commission Act. The Senate bill 
goes further, would ban universal defaults completely, and 
would make it easier for consumers to avoid some of these 
practices.
    In the jurisdiction of this Committee, we strongly believe 
that the Arbitration Fairness Act should be enacted to get rid 
of the provision in the card contract that prevents consumers 
from enforcing their own disputes with credit card companies in 
court. And that would be a major step forward as well.
    Mr. Cohen. Professor.
    Mr. Levitin. I would agree with all of those points. I 
would also add in that I think the Federal regulations address 
double cycle billing, they do not touch its kissing cousin, 
which is called residual or trailing interest. They say nothing 
about interchange fees. I think it is crucial that they do not 
eliminate all universal cross default. They still allow teaser 
rates. They allow a bundling of rewards programs that have 
nothing to do with extensions of credit and that are funded by 
interchange fees.
    But I also want to make sure that I did not misstate 
something to Mr. Franks. You are exactly right, that there is 
nothing particularly surprising about high credit card debt 
correlating with bankruptcy, that people who are in bankruptcy 
have debt. What is important to note is that, dollar for 
dollar, credit card debt has a much higher correlation with 
bankruptcy than any other type of debt. So a consumer who has 
$100,000 worth of credit card debt is going to be far more 
likely to file for bankruptcy than a consumer with $100,000 of 
any other type of debt.
    Mr. Cohen. Mr. Weiss, are there changes you would recommend 
in the bankruptcy law that pertain either to credit card debt, 
or any other particular changes besides--and I am not sure if 
you addressed this or not--the counseling section and the means 
test?
    Mr. Weiss. I mean, counseling and means test, frankly, are 
largely useless. If you want to have counseling, the time for 
it is before debt is incurred rather than before you have to 
file for bankruptcy as sort of a gatekeeper function. It 
doesn't educate, it doesn't change things, and it really 
doesn't do anything other than push up the price of bankruptcy.
    The means test was I think very accurately described by a 
friend of mine; if under the old law what we did was wash your 
car, under the new law, because of the means test, not only do 
we have to wash your car, we also have to run around your house 
three times. It has about the same amount to do with washing 
your car as the means test has to do with preventing abuse in 
the bankruptcy system. But it delays things, it costs more 
money, and it doesn't accomplish the goal that was set, which 
is preventing abuse.
    Additionally, frankly, most of the changes that were made 
in the 2005 act did little to prevent abuse or help debtors. It 
did significantly increase the cost of bankruptcy and delay the 
filing. And as was noted earlier, that, with the sweat box 
model, is exactly what was intended. The longer that people are 
delayed from filing, the more money is made by the credit card 
issuers in particular. And that seems to have been one of the 
goals of the 2005 act.
    Mr. Cohen. My time has expired. I am going to yield to Mr. 
Delahunt. And if you have a question of Mr. John, I think he 
needs to go, and possibly Mr. Weiss. So maybe you can direct 
those questions to them first. And don't miss your plane or 
don't miss getting your bill paid.
    Mr. Delahunt. Well, they get to stand up because if I don't 
have sufficient time, I am going to request a second round.
    I hear what you all say, but I am gravitating toward what 
Mr. Levitin says about a real fundamental shift in terms of how 
the credit card industry is viewed and how the rules of the 
marketplace should play. Because we can continue to tweak the 
edges, we can continue to address--and I think this goes with 
you, too, Mr. John--we can address the obvious practices that I 
don't think anyone here would encourage. But what you were just 
saying, Mr. Weiss, in terms of the sweat box and the delay 
advantaging the credit card companies, I believe that is really 
indisputable when you examine it. But I think what we fail to 
understand, not only does it enhance, if you will, the pain for 
the bankrupt, but it disadvantages other unsecured creditors 
and hurts the retailer because they are receiving a diminished 
pro-rata share.
    Could you expand on that? Am I correct, first of all? 
Because if you are interested in the retailer in America, if 
you are interested in commerce in America, you have got to take 
and put this issue into this equation. It isn't just about the 
credit card industry, it is about business in America.
    Mr. Weiss. By definition, money that is paid pre-bankruptcy 
is unavailable post-bankruptcy to pay other creditors. While in 
most chapter 7 cases there are no distributions to any 
creditors, in chapter 13 in particular, where the unsecured 
creditors are typically put in a pool, there those payments can 
seriously disadvantage creditors that don't charge these fees, 
that don't charge exorbitant interest rates.
    Mr. Delahunt. Such as?
    Mr. Weiss. Such as Bloomingdale's, such as Macy's, such as 
dearly lamented Hecht's, or Garfinkel's, or Raleigh's. These 
businesses will typically not charge these types of fees. And 
when a proof of claim comes in in a chapter 13 case for Chase 
or Bank of America, you have got all of these fees, you have 
got all of these costs added, artificially inflating the amount 
of money that they are claiming. And, therefore, they get a 
much larger pro-rata share than the other creditors.
    Mr. Delahunt. Professor Levitin.
    Mr. Levitin. I would add to that, it is not just the 
Bloomingdales and the Hechts of the world that are 
disadvantaged, it is also really the small businesses. It is 
the general contractor who did work on my house before I filed, 
it is my doctor or my dentist. They are small businesses, and 
they are going to have their pro-rata claim diminished relative 
to the card issuer. It is going to be tort victims. It is going 
to be the Federal Government, to the extent that it has 
nonpriority tax claims. It is going to be the local and State 
governments. 2005 amendments benefited the credit card industry 
at the expense of all other unsecured creditors. But what is 
even worse, it benefited the credit card industry at the 
expense of a homeowner's ability to avoid foreclosure.
    To the extent, in chapter 13, you have less disposable 
income available, that you are forced into 13, that is going 
to--so the means test is going to force more people into 13. 
And it is going to mean that your disposable income in 13 is 
going to be tied up. If you had been able to file for chapter 
7, your disposal income would have been available to reach a 
deal on the outside with your mortgage lender or to do a 
reaffirmation. That is much more difficult for people to do now 
after 2005.
    Mr. Weiss. And additionally, they also do not have the 
ability, when in a chapter 13, to be able to go out and resume 
spending, resume contributing to the economy in that fashion 
because their credit is tied up, their income is tied up in the 
bankruptcy court.
    Mr. Delahunt. You know, Mr. John talks about the Federal 
Reserve, you all do talk about the rules that have been 
promulgated but are going to take 18 months to implement 
because of computer problems. And yet, you know, the Federal 
Reserve, tell me if I am inaccurate, was conferred the power 
back in 1994 to deal with the deceptive practices in mortgages 
and never exercised that authority, didn't implement it. And 
when you begin to trace back how we arrived at the financial 
crisis which we see all around us, the so-called subprime 
problem, the ability to enforce, the authority was there, and 
it didn't happen.
    I mean, I am not really comfortable relying on the 
regulator that doesn't regulate for whatever reason. Maybe it 
is under-resourced. Maybe it is because of a particular 
perspective. But relying on the Federal Reserve has not 
produced a benefit to the American financial service system as 
far as I can determine, because it was clear in 1994 they had 
the authority, and if they had exercised it we wouldn't be in 
the mess that we are in now.
    Comments?
    Mr. Mierzwinski. Mr. Delahunt, I would totally agree with 
you. The fact is I would have to add a couple of other agencies 
to your list.
    Mr. Delahunt. Add them.
    Mr. Mierzwinski. I totally agree first though that the Fed 
missed the opportunity to issue HOPA regulations that they were 
given the authority do in 1994 until after the consequences of 
the meltdown had already hit us. And then the regulations they 
put out just a year or two ago are too weak and unacceptable.
    But the failure of the Office of the Comptroller of the 
Currency and the Office of Thrift Supervision to regulate their 
entities and the taking away of State Attorney General 
authority over these national banks and the companies that were 
actually State-chartered institutions but were affiliated with 
national banks, the preemption was extended there. So we have a 
combination of taking away the State enforcer's lax regulation 
at the Federal level, the inability of consumers to do private 
enforcement, the concentration of the industry into just eight 
companies, and the regulatory arbitrage that the companies are 
allowed to switch the charter in order to get a regulator that 
is a better deal for them, has all contributed to this crisis. 
And it is why all the consumer groups are supporting your 
proposal, the Financial Products Safety Commission, one 
regulator for consumer protection. We also want to reinstate 
State Attorney General authority over the financial system. And 
that is a big fight that we are having.
    It used to be that the industry talked about the trial 
lawyers as bad people. Now they refer to rogue Attorneys 
Generals, and Attorneys General are the best consumer cops on 
our beat in many ways case--in fact, in almost all the cases I 
can think of, And we need to change that mindset. We need to 
reinstate their authority, too.
    Mr. Delahunt. Mr. Chairman, I am going to ask for a second 
round because I would like to get into the issue of the 
underwriting criteria of credit card issuers, as well as high 
interest issues as far as credit card issuers are concerned. 
But I know some of you have to leave. And I know Mr. Franks----
    Mr. Cohen. Mr. Franks has generously consented that you go 
on because you missed the first round. You don't know, but you 
are in the second round.
    Mr. Delahunt. It is always good to be here in the last 
round.
    Mr. Cohen. I remember a few prize fighters that didn't 
realize it was second round.
    Mr. Delahunt. Some have suggested that.
    We all have those anecdotes about credit cards going to 
dead people. My daughter, along with Chairman Conyers', about 
10 years ago received a check in the mail for $2,500--I think 
it was Providian--have a good spring break. Thank God I caught 
it or she would have had one hell of a spring break. We talk 
about addiction. I mean, we are trying to regulate tobacco. I 
think there is some analogies here.
    But anybody, anybody can get a credit card. I mean, I know 
people that are in bankruptcy that were getting credit cards 
while in bankruptcy. Talk about an Alice in Wonderland world. I 
mean, they were just pushing this garbage out, okay, it didn't 
make any difference. And I understand in the credit card 
industry it is transaction-based and it is high interest rates. 
And I think the concept of the sweat box really kind of says it 
all. They don't care about the principle, just give me all of 
the different fees. You have to have a mainframe computer to 
calculate the fees. That is where the money is.
    And Mr. Chairman, Mr. Franks, neither one of you were here, 
but I can remember filing a bill--so that is the underwriting--
where we were going to cap interest rates, much like the Durbin 
bill, but we were willing to do it at 100 percent, 100 percent. 
And the credit card industry said no, we can't accept that; 100 
percent. I used to be a prosecutor before I came here. We used 
to refer to that as ``the dig.'' If you did organized crime 
investigations into loan sharking, you know, I never ran across 
100 percent, plus all of the penalties that were implicated.
    So I guess I have a disagreement with you, Mr. John. In 
real life there has to be some parameters and some boundaries. 
So if all of you could take a shot at, what do they do in terms 
of underwriting? How do they get to it? Do they have any 
underwriting at all?
    Mr. Weiss. What you used to call loan sharking, the credit 
card companies now call a good business model. I get clients 
all the time who come to see me and tell me that, by the way, I 
just got--and they are incredulous--yesterday I got a pre-
approved credit card with a $25,000 limit; what should I do 
with it? Because it is sort of like, well, I may be able to 
make this work if I had a little bit of money and a little bit 
more time. There is virtually no underwriting that is done.
    When you look at the subprime market in particular, it is a 
free fall zone. It is, we will give you a card because the risk 
that you won't pay is more than covered by the fees and the 
interest and the cards.
    Mr. Delahunt. But Mr. Weiss, by doing that, what they are 
doing is they are eroding the economy. They have created the 
debacle, that mindset that we currently have to deal with that 
has put the global economy at risk, just let it rip, no rules, 
no regulations. It is more than the Wild West. I mean, it is 
really, really dangerous. This is not just protecting the 
consumer, this is protecting every taxpayer, every single 
American business that does business in a way that is based 
upon recovering the principle, producing a product, and getting 
paid for it--and, yes, making a good profit. But how did this 
all happen? How did this happen?
    Mr. Weiss. It happened because there is no oversight and no 
regulation.
    Mr. Delahunt. Would the Ranking Member want me to yield to 
him?
    Mr. Franks. Go ahead and finish.
    Mr. Delahunt. Okay. Mr. Levitin.
    Mr. Levitin. I think the first step in this happening, we 
would have to go all the way back to 1978. That is when the 
Supreme Court handed down the decision in Marquette. Marquette 
dealt with the question of whether a federally chartered bank 
could export the interest rates of its home State to another 
State. So if a federally chartered bank was based in 
Massachusetts and Massachusetts chose not to regulate interest 
rates, could that bank then export interest rates to Arizona, 
and what ability would Arizona have to protect its consumers in 
its wisdom against the Massachusetts bank?
    The Supreme Court ruling on--not on any particular policy 
matter, but rather ruling on the language of the 1863 National 
Bank Act--this was the legislation that Abraham Lincoln used to 
finance the Civil War--ruling on the particular statutory 
language there, which was dealing with a world where there were 
usury laws and just a different world altogether, the Supreme 
Court said yes, federally chartered banks can export their 
interest rates to other States. That is why we see most credit 
card issuing banks basing themselves in Delaware or South 
Dakota.
    Mr. Delahunt. South Dakota, right.
    Mr. Levitin. Incidentally, the two Senators on the Senate 
Banking Committee who voted against Senator Dodd's legislation 
yesterday are from Delaware and South Dakota. That is why we 
see banks flocking to centers of lax regulation and then 
exploiting their interest rates to States that actually do want 
to regulate. This goes against the whole principle of 
federalism, that States should be able to protect their own 
citizens how they see fit. And if one State wants to do it 
differently than another, it should be allowed to do that.
    Mr. Delahunt. Mr. John, let me just ask you a question. 
Would you agree there ought to be a cap on interest involving a 
credit card?
    Mr. John. No.
    Mr. Delahunt. You would disagree with my amendment way back 
when, when I had dark hair and was as articulate as Mr. Cohen, 
and tried to cap the interest rate at 100 percent? You would 
say no, you can't do that?
    Mr. John. I would say no, and I would assume that the banks 
said no because they realized that once you have established 
the principal at 100 percent, the next step will be to reduce 
it to 50, and the next one will be to lose, et cetera, et 
cetera, et cetera. And that has already been proven in many, 
many situations.
    As a matter of fact, I used to work around the corner in 
the Banking Committee, and at the time there was high interest 
rates in the Jimmy Carter regime. We had the State of Arkansas 
coming in every 2 years so that we would lift the cap that was 
within their State Constitution because it didn't fit.
    It is one thing to talk about something in normal times, 
but when you had a mortgage interest rate for a 30-year 
conforming mortgage in October 1981, I believe it is, or 
somewhere in that neighborhood, that reached slightly over 18 
and a half percent----
    Mr. Delahunt. I am talking 100 percent.
    Mr. John. I understand that. But as I say, once you 
establish the principal, then you start to get into that.
    Now, I must apologize. I have a 6-year-old who wants me to 
read stories to her tonight.
    Mr. Delahunt. That is far more important than listening to 
me rant.
    Mr. John. I live in West Virginia, and I can't miss my 
train. So I apologize for that.
    Mr. Delahunt. Thank you so much.
    Mr. Cohen. Thank you, sir. And Mr. John, thank you for 
coming. Mr. Brian Nolan was here earlier, he has left. He is 
the head of your Board of Regents for West Virginia and as fine 
a public official as I have ever met. You are lucky to have 
him.
    Read your daughter a nice story.
    Mr. Franks, you are recognized.
    Mr. Franks. Thank you, Mr. Chairman. And thank you, Mr. 
John.
    Mr. Chairman, I have just been thinking here a little bit. 
You know, there has been a lot of talk about how this economy 
got to where it is, and I know that there are sincere opinions 
that diverge pretty significantly. But I am going to at least 
submit that the core reason why we are in trouble today is 
irresponsible borrowing and spending. And I actually believe 
that government, this Congress, created some incentives out 
there some years ago for people to borrow and spend 
irresponsibly, and even put pressure on lending institutions to 
make those loans. I will give you one example, that being the 
Community Reinvestment Act. And of course the goal was to help 
those who couldn't get loans very easily, to try to make the 
playing field a little easier for them to deal with. And I 
applaud the goal. But once again, it divorced financial 
transactions from responsibility.
    Chase Bank was sued because they weren't making enough 
subprime loans, and they finally acquiesced and said, okay, we 
will make those subprime loans. And anybody can make the case 
that the regulator should have caught this irresponsible 
borrowing and spending--a lot of people will--but it certainly 
does not alter the fact that this government created direct 
incentives for that to occur. It doesn't alter the fact that if 
the regulators had caught it, that they would have been dealing 
in an environment of pressure from the Congress.
    Not long ago, this Congress believed that the credit 
markets, keeping credit available to people, was so important 
that we voted on a $700 billion bailout for the credit market, 
essentially, because we believed that that was important, we 
believed it was important to happen. And my concern here is 
that, once again at the core, the heart of it, is that we have 
the actual crucible matrix, if you will, irresponsible 
borrowing and spending. And I am afraid that once again here in 
the credit card situation we are trying to divorce 
responsibility from transaction. If we don't somehow give the 
lender, whoever they are, whatever their motivations are, if 
there isn't some ability to match that transaction with risk, 
if there isn't some ability to gauge whether or not this will 
be paid back, if there isn't some effort to make sure that the 
borrower is held responsible, then the entire process becomes 
unbalanced.
    The Chairman here mentioned that people sometimes have 
addictions to buying and things like that, and I believe he is 
right. I believe the same thing happens with gambling and 
things like that. But if we take away the responsibility in 
that process, I think we only exacerbate those things. And I 
hope in the process here--what I see is us going in the wrong 
direction in general. I think we are bailing out the credit 
markets and we are bailing out those who have made bad 
borrowing and spending decisions. And now, in order to 
facilitate that, we are now, as a government, borrowing and 
spending irresponsibly.
    And ultimately, try as we will, we will not repeal the 
law's mathematics or that fundamental need to balance our 
transactions with responsibility because ultimately somebody 
has to pay for it.
    And I thought Margaret Thatcher put it best: ``The problem 
with socialism is that soon enough you run out of other 
people's money.'' And I think that is where we are going. I am 
concerned, as I apply that to this hearing here, that we are 
going in the same direction with the credit card. We are saying 
to people that make bad--maybe they were sold a bill of goods, 
maybe people were sold the wrong house, maybe the brokers did 
it. But when people aren't held ultimately responsible, then in 
the final analysis the whole system breaks down and it actually 
creates an incentive for people to abuse the process.
    And what was the final result? The final result is that in 
this economy, the poorest of the people, those that we 
ostensibly were trying to help in the first place, are the ones 
that are being crushed. And I would submit that credit card 
availability has helped a lot of poor people make purchases 
that they never could have otherwise. I think it has helped so 
many of them in a huge way. And if we are not careful here, we 
will make their access to credit impossible because we simply 
cannot repeal the laws of mathematics or divorce responsibility 
from financial transaction.
    And that is more of a speech than it is a question. So I am 
going to stop right there because my light is red. Thank you.
    Mr. Cohen. Thank you, Mr. Franks. Thank you, Mr. Delahunt, 
for your contributions. I would like to thank all the witnesses 
for their testimony.
    Without objection, Members have 5 legislative days to 
submit any additional written questions which we will forward 
to the witnesses and ask you to answer as promptly as you can 
to be made part of the record.
    One of my questions I will send you--and I will just give 
it to you orally--is I would like each of you to give me a 
brief little paper on what you think should be changed in the 
bankruptcy laws and what should be changed in the credit card 
laws. And if you would submit those, we will make that part of 
the record.
    Without objection, the record will remain open for 5 
legislative days for the submission of any other additional 
materials.
    Again, I thank everyone for their time and patience. The 
hearing of the Subcommittee on Commercial and Administrative 
Law is adjourned.
    [Whereupon, at 5:10 p.m., the subcommittee was adjourned.]



















                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

       Response to Post-Hearing Questions from Adam J. Levitin, 
      Associate Professor of Law, Georgetown University Law Center

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


         Response to Post-Hearing Questions from Brett Weiss, 
                        Attorney, Greenbelt, MD

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


      Response to Post-Hearing Questions from Edmund Mierzwinski, 
     Consumer Program Director, U.S. Public Interest Research Group

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 
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