[Senate Hearing 111-323]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 111-323

              ABUSIVE CREDIT CARD PRACTICES AND BANKRUPTCY

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

                                HEARING

                               before the

        SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 24, 2009

                               __________

                          Serial No. J-111-11

                               __________

         Printed for the use of the Committee on the Judiciary












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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin                 ARLEN SPECTER, Pennsylvania
DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         JON KYL, Arizona
RICHARD J. DURBIN, Illinois          JEFF SESSIONS, Alabama
BENJAMIN L. CARDIN, Maryland         LINDSEY O. GRAHAM, South Carolina
SHELDON WHITEHOUSE, Rhode Island     JOHN CORNYN, Texas
RON WYDEN, Oregon                    TOM COBURN, Oklahoma
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
            Bruce A. Cohen, Chief Counsel and Staff Director
              Nicholas A. Rossi, Republican Chief Counsel
                                 ------                                

        Subcommittee on Administrative Oversight and the Courts

               SHELDON WHITEHOUSE, Rhode Island Chairman
DIANNE FEINSTEIN, California         JEFF SESSIONS, Alabama
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         JON KYL, Arizona
BENJAMIN L. CARDIN, Maryland         LINDSEY O. GRAHAM, South Carolina
EDWARD E. KAUFMAN, Delaware
                 Sam Goodstein, Majority Chief Counsel
                   Matt Miner, Minority Chief Counsel













                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Durbin, Hon. Richard J., a U.S. Senator from the State of 
  Illinois.......................................................     5
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................    96
Sessions, Hon. Jeff, a U.S. Senator from the State of Alabama....     3
Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode 
  Island.........................................................     1
    prepared statement...........................................   103

                               WITNESSES

Corey, Douglas, North Scituate, Rhode Island.....................     7
Gambardella, Rosemary, Judge, U.S. Bankruptcy Court for the 
  District of New Jersey, Newark, New Jersey.....................     9
John, David C., Senior Research Fellow, Thomas A. Roe Institute 
  for Economic Policy Studies, The Heritage Foundation, 
  Washington, D.C................................................    17
Levitin, Adam J., Associate Professor of Law, Georgetown 
  University Law Center, Washington, D.C.........................    15
Scarberry, Mark S., Professor of Law, Pepperdine University 
  School of Law, Malibu, California..............................    13

                         QUESTIONS AND ANSWERS

Responses of Rosemary Gambardella to questions submitted by 
  Senator Sessions...............................................    34
Responses of Adam J. Levitin to questions submitted by Senator 
  Feinstein......................................................    35
Responses of Mark S. Scarberry to questions submitted by Senator 
  Sessions.......................................................    39
Questions submitted by Senator Sessions to David C. John (Note: 
  Responses to questions were not received as of the time of 
  printing, March 31, 2010)......................................    45

                       SUBMISSIONS FOR THE RECORD

American bankers Association, Kenneth J. Clayton, Senior Vice 
  President and General Counsel, Washington, D.C., statement.....    46
Corey, Douglas, North Scituate, Rhode Island, statement..........    48
Gambardella, Rosemary, Judge, U.S. Bankruptcy Court for the 
  District of New Jersey, Newark, New Jersey, statement and 
  attachment.....................................................    51
John, David C., Senior Research Fellow, Thomas A. Roe Institute 
  for Economic Policy Studies, The Heritage Foundation, 
  Washington, D.C., statement....................................    78
Levitin, Adam J., Associate Professor of Law, Georgetown 
  University Law Center, Washington, D.C., statement.............    84
Scarberry, Mark S., Professor of Law, Pepperdine University 
  School of Law, Malibu, California, statement...................    97

 
              ABUSIVE CREDIT CARD PRACTICES AND BANKRUPTCY

                              ----------                              


                        TUESDAY, MARCH 24, 2009

                                       U.S. Senate,
                             Subcommittee on Administrative
                                  Oversight and the Courts,
                                        Committee on the Judiciary,
        Washington, D.C.
    The Subcommittee met, pursuant to notice, at 10:03 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Sheldon 
Whitehouse, Chairman of the Subcommittee, presiding.
    Present: Senators Whitehouse and Sessions.
    Also Present: Senators Durbin and Sanders.

 OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. SENATOR 
                 FROM THE STATE OF RHODE ISLAND

    Chairman Whitehouse. The hearing will come to order.
    I want to welcome the witnesses who have come. Some have 
traveled some considerable distance, including all the way from 
North Scituate, Rhode Island, and I am honored to be joined by 
the Ranking Member of this Subcommittee, Senator Sessions.
    What we are going to do is I will make an opening 
statement, and the Ranking Member will make an opening 
statement, and if other Senators appear who wish to make an 
opening statement, they will be invited to do so, and then we 
will proceed through the testimony of the witnesses. I think 
that probably the best way to do it is start with Mr. Corey and 
just go right across, if Your Honor does not mind not going 
first.
    With the economy deep in recession in this country, 
unemployment rates climbing, and those teaser rates people got 
on home mortgages expiring and triggering higher mortgage 
payments for American families, American consumers are relying 
more than ever on credit cards to just make ends meet from 
month to month. At the same time, banks who lost their shirts 
in the mortgage speculation and in other areas of business are 
attempting to squeeze more and more profit out of those credit 
card customers.
    The standard credit card agreement gives the lender the 
power to bleed their customers through evolving and ever more 
crafty tricks and traps. The typical credit card agreement, 
which 20 years ago was a page in length, is now a formidable 
20-page, small-print contract filled with legalese. In 
substance, it is usually pretty simple. It gives the companies 
the right to raise interest rates and charge fees and penalties 
for almost any reason, and in some cases to raise interest 
rates for no reason at all.
    While interest rates for other types of lending are at 
historic lows, credit card lenders continue to charge double-
digit rates, with average rates around 14 percent, exclusive of 
fees. At a time when the prime rate is 3.25 percent and the 
average 30-year fixed mortgage rate is under 5 percent, it is 
hard to understand why credit card borrowing remains so costly.
    Although 14 percent may seem high in comparison with other 
types of lending, that interest rate may seem like a bargain to 
a family that has fallen behind on a payment. When families 
come up short on their credit card payment, they can find a 10-
percent or 12-percent annual interest rate morph into a 25-
percent or 30- or 40-percent penalty rate. Add to that late 
payment and other penalty fees, and falling behind on a credit 
card can mean financial ruin.
    When a family struggles to pay its bills, when a parent 
gets laid off, or unexpected medical expenses arise, that 
family can enter what Professor Ronald Mann of Columbia Law 
School has called the ``sweat box.'' The sweat box of credit 
card debt, like any good trap, has an entrance that is easy to 
wander into: simply, a high credit limit and pretty soon a high 
credit balance. If you then get into the position where you 
cannot pay that credit balance off at once, they have you: a 
payment delayed, a minimum not met, and now your interest rate 
doubles, and fees and penalties pile on. You cannot escape 
because you cannot pay your way out, and they sweat you with 
those high rates and fees and penalties.
    Under this business model, the lender focuses on squeezing 
out as much revenue as possible in penalty rates and fees, 
pushing the customer closer and closer to the edge. When that 
end finally does come, the lender can recover a portion of the 
outstanding principal under the bankruptcy plan.
    I have introduced legislation that would give consumers 
leverage to negotiate for reasonable rates with their lenders 
and ban abusive lenders from using the bankruptcy court system 
to enforce their excessive interest claims. Under the Consumer 
Credit Fairness Act, claims in bankruptcy stemming from 
consumer credit agreements carrying interest above a variable 
threshold--which would currently be 18.5 percent--would be 
disallowed. With the leverage of a bankruptcy threat, a 
customer struggling under a 30-percent penalty rate could 
negotiate for more reasonable terms. In addition, bankruptcy 
filers with debts carrying effective interest rates above the 
threshold would be exempt from the so-called means test, a 
tactic that was enacted in the bank-written 2005 reforms to 
make it more difficult to enter bankruptcy, and by delaying the 
date of bankruptcy, add a few months to that sweat box.
    In addition to discussing the nexus of abusive credit card 
terms and bankruptcy in general, I hope that we will take some 
time today to explore the Consumer Credit Fairness Act. 
Following Senator Sessions' opening statement, we will hear 
from our distinguished panel of witnesses, but I see the 
distinguished Majority Whip here, so after Senator Sessions has 
made his opening statement, Senator Durbin of Illinois will be 
invited to make an opening statement.
    The witnesses are: Douglas Corey, a constituent of mine 
from North Scituate, Rhode Island, who will share his 
experiences with his credit card lender. Mr. Corey has worked 
in sales and marketing and is a graduate of Rhode Island 
College.
    Judge Rosemary Gambardella has served on the Bankruptcy 
Court for the District of New Jersey since 1985. A native of 
Newark, she attended Rutgers University and Rutgers Law School. 
Judge Gambardella is a member of the National Association of 
Women Judges, the National Conference of Bankruptcy Judges, the 
American Bankruptcy Institute, and a former member of the 
Bankruptcy Judges Advisory Group for the Administrative Office 
of the United States Courts.
    Professor Adam Levitin of the Georgetown University Law 
Center is a nationally regarded expert in bankruptcy and 
consumer law. He has served as Special Counsel for Mortgage 
Affairs for the Congressional Oversight Panel, as an expert 
witness for the FTC and FDIC on credit card litigation, and as 
a law clerk for the Honorable Jane Roth of the United States 
Court of Appeals for the Third Circuit. A graduate of Harvard, 
Columbia, and Harvard Law School, we are grateful that 
Professor Levitin will be with us.
    Professor Mark Scarberry of Pepperdine University School of 
Law is an expert in bankruptcy and contract law. A graduate of 
Occidental College and the UCLA School of Law, he is a member 
of the American Bankruptcy Institute Law Review Advisory Board 
and Pro Bono Task Force.
    And, last, David John is a Senior Research Fellow at the 
Heritage Foundation and specializes in pensions, financial 
institutions, asset building, and Social Security reform. Prior 
to joining the Heritage Foundation, he served on the staff of 
Representative Mark Sanford of South Carolina. Mr. John has a 
bachelor's and three master's degrees from the University of 
Georgia.
    We welcome the witnesses, and I now turn to my Ranking 
Member, Senator Sessions, for his opening statement.

STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM THE STATE 
                           OF ALABAMA

    Senator Sessions. Thank you, Mr. Chairman. I look forward 
to the hearing. This is a good panel. I think we will have a 
good discussion.
    I would just recall a few years ago when we passed the 
bankruptcy bill, the final passage was over 80 votes, and one 
of the critical issues was the question of means testing in the 
legislation. We discussed it at great length. A number of 
Senators raised questions about it, and Senators like Senator 
Clinton in the end decided that this was good reform, and I 
certainly believe it is. It simply says that if you make above 
median income, you do not automatically get the right to wipe 
out all your debts in bankruptcy, but that the bankruptcy court 
can then structure a plan for repayment of that part of the 
debts that you owe that you are able to pay. And if the debtor 
is not able to pay all of them but can pay 60 percent of them, 
the judge will set up a proposal to do that. And once, of 
course, in bankruptcy, one of the great advantages for our 
debtors is they cannot receive demanding letters or phone 
calls; they cannot be sued; they cannot be harassed in any way 
toward paying of those debts.
    We also knew at the time that bill passed the overwhelming 
majority of people, perhaps as high as 80 percent, that filed 
bankruptcy were below median income. So they would get to file 
under Chapter 7 if they chose. And many of those above median 
income, if their debts were high enough, I think they could not 
have to go under Chapter 13--they could go into Chapter 7 also.
    So I thought that was a good reform. I still believe it is 
a good reform. We discussed at that time the question of credit 
cards. I know Senator Durbin is very educated on this and very 
alert to these issues, and we did not always agree. He saw the 
bad in the credit card sometimes, and I saw the good. The truth 
is somewhere maybe in between. I do not think it is bad that a 
poor person who does not have the cash and their transmission 
falls out of their vehicle that they can pay that on a credit 
card. In fact, if credit cards were not available for poor 
people, we would be passing laws demanding that poor people be 
able to have credit cards and criticizing the big banks for not 
issuing credit cards. And I am not really offended that they 
send offers out in the mail offering competitive rates and you 
can choose between cards that you think best serve your 
interest. I am not really offended by that.
    I do believe that they are a cold-blooded bunch, that they 
do desire to make maximum profits, and I do think that the 
Government has a right to examine this. I do not think that the 
people who issue credit cards are sainted, and that they are 
out just trying to serve their customers. They are trying to 
make a profit. And so I think they are entitled to be watched 
over.
    For example, my mother, who recently passed away, had been 
ill for some time. I failed to get her credit card paid on 
time, a $25 bill, and it was a $40 penalty. So, you know, they 
say you can call. Well, she was not able to write her name at 
the time. You get on the phone and they do not answer, and you 
have to get 15 different recordings. Also, I do not like it--on 
her credit card I noticed pretty clearly--that the total debt 
is buried down there somewhere and the minimum payment is more 
easy to see. And you could actually miss it in the print.
    So I think disclosure of these kinds of issues more 
clearly, so that a person can know what their real debt is, and 
what their payment should be, and maybe more, clearer warnings 
about the danger of these high interest rates is appropriate. 
But I have learned, though, that that is the Banking 
Committee's business. And there is a question about the 
interest rates. I do not know. I am not comfortable capping 
interest rates, but I do not think that they are free to go 
without being evaluated and Congress making a decision about 
that. But that is a Banking Committee issue, and Senator Dodd 
and Senator Shelby and others on that Committee are supposed to 
be dealing with that, although we certainly have a right, 
anybody has a right to offer legislation. So, what we are 
looking at here is the question of whether or not a lawfully 
charged rate of interest and debts, how they should be handled 
in bankruptcy.
    I would just say this: In Alabama, we have an unusual 
situation in which, before the bankruptcy bill passed, half the 
people chose to file bankruptcy under Chapter 13. That is where 
you pay back a part of your debts. Now, some people seem to 
think that forcing people above median income into Chapter 13 
is some sort of evil thing and that it is an oppressive thing, 
but a large number of people voluntarily chose that. In 
Birmingham, the Northern District of Alabama, 60 percent of the 
people were filing under Chapter 13. There are a lot of 
advantages, and lawyers would tell you why they did that, and 
they think the rest of the country is behind the times in not 
using Chapter 13 more.
    So, under Chapter 13, if an interest rate on a credit 
card--a person files a debt and they have a high interest rate, 
the interest rate is dropped by the bankruptcy judge when the 
filing occurs. So it does not continue at this extraordinarily 
high rate. It drops down. And we can talk about more of the 
details about what is happening now in bankruptcy.
    I guess I would just say to my colleagues thank you for 
discussing this. I look forward to the hearing. There are some 
things I would like to learn about it. But I would say that 
bankruptcy is one of the greatest things that can happen for 
poor people in America. It relieves them of debt they are 
unable to pay. It breaks high interest rate loans that they may 
be trapped in. It helps them get out from health care bills and 
other bills. But there are certain things that need to occur in 
a rational, logical way, consistent with our heritage of law 
and consistent with what good economic practice is.
    Thank you, Mr. Chairman.
    Chairman Whitehouse. Thank you, Senator.
    Just to make one point clear, the assignment of this bill 
to this Committee has been through the parliamentarian, so 
there is no question that----
    Senator Sessions. It is. What we are talking about is 
acting in bankruptcy--how to use a bankruptcy mechanism to deal 
with interest rates we do not like. I am just saying the 
fundamental question, if we cap an interest rate, that is an 
issue before the Banking Committee.
    Chairman Whitehouse. Correct.
    Senator Durbin.

 STATEMENT OF RICHARD J. DURBIN, A U.S. SENATOR FROM THE STATE 
                          OF ILLINOIS

    Senator Durbin. Thank you, Mr. Chairman, and thanks for 
this hearing, and your bill as well.
    Senator Sessions and I were here for the bankruptcy debate, 
and it went on for a long time, and I found myself sitting in 
the Senate Judiciary Committee being, as I looked around the 
table, the expert on bankruptcy by virtue of the fact that I 
had taken a bankruptcy course at Georgetown Law School 30 years 
before, and that I had served as a trustee in bankruptcy in 
Springfield, Illinois, of a failed gas station. I had had more 
experience with bankruptcy than any other member of the 
Judiciary Committee at the table. That is how it works, Judge, 
around this place.
    So I offered an amendment on the floor, and Senator 
Sessions may remember it, and it said that on your credit card 
monthly statement, when they say here is your minimum monthly 
payment, I said the credit card companies have to disclose if 
you make the minimum payment, it will take X months to pay off 
the balance and you will pay X dollars in interest. I thought 
that was in the interest of full disclosure.
    The credit card companies came back to me and said, ``That 
is impossible to calculate. We have no way of computing or 
calculating that.''
    That is baloney. They know how to calculate it, and the 
reason, the real reason came out later. It is like the late 
Paul Harvey: ``The rest of the story.'' There was a Nova 
program, which I recommend to everyone, that went into the 
credit card industry, and they had this man who was the wizard 
of credit cards, this guru who was, I guess, concerned about 
his personal safety, would not disclose the location that he 
was being broadcast from. And he was the one who discovered 
that if you could drop the minimum monthly payment to 2 
percent, the person could never pay off the balance. It would 
go on forever. And he was considered one of the shining lights, 
the person that brought real profitability to the industry.
    That I think tells the story. Poor people caught in this 
predicament do not understand the minimum monthly payment is a 
sentence, a life sentence, to this debt that they can never get 
out from under. Now we are talking about what to do about it 
and whether or not--and I think Mr. John will raise this 
question--whether or not we should even get involved. Let the 
market do its thing. Have we been watching the market do its 
thing lately and what it means to us as individuals, investors, 
future retirees, savers?
    You know, it has not been all that encouraging letting the 
market do its thing. I think we learned in the AIG boardroom 
what the market would do if it could do its thing.
    I would say to Senator Sessions, we have drawn some lines. 
We decided as a matter of national policy and national security 
that we had had it with the people who were gouging the members 
of the U.S. military. We put a limit, 36 percent interest, and 
said you cannot loan to members of the U.S. military and charge 
over 36 percent. And we closed a lot of fly-by-night operations 
around our military bases who were putting our men and women in 
uniform and their families on hard times. But we did not apply 
the same protection to the rest of America.
    So I put a bill in for a 36-percent cap on the APR interest 
rate. I would say to my colleagues that if you want to start a 
reptile farm, you should put this bill in and watch what comes 
in under the door. Folks literally would sit in front of me and 
say, ``Wait a minute. We are the good guys, and you are going 
to put us out of business.'' I said, ``Well, what do you 
charge? What are your interest rates? '' And a man--I have had 
two of them now, one from the payday loan industry, one from 
the installment loan industry, and they would sit there with a 
straight face and say, ``Oh, we charge between 36 percent and 
158 percent.'' I said, ``If you can get those words out of your 
mouth, you and I do not have anything to talk about.''
    That is what is going on in the real world. Disclosure is 
not enough anymore. You cannot tell folks enough information to 
protect them.
    One of the things the bill introduced and I recommend to my 
colleagues is the Financial Service Product Commission, which 
we put together. We protect consumers. We say when you buy that 
toy, we will let you know if it had lead paint, we will protect 
you. But we do not protect them when it comes to credit cards, 
and we do not protect them when it comes to mortgage 
instruments. We need to have an agency that is looking out for 
consumers, saying this is a toxic instrument, you should not be 
allowed to sell this in America. At least give full disclosure 
to people involved in it. I do not think there is anything 
wrong with this.
    Credit cards are important, I have a wallet full of them, 
too. But I think they have gone way too far. They have just 
abused it because we are not even watching, let alone 
regulating.
    I have to go give a speech, but I am coming back. Thanks, 
Mr. Chairman.
    Chairman Whitehouse. Thank you very much, Senator Durbin.
    We will now call on the first witness, Douglas Corey. Thank 
you, Mr. Corey.

    STATEMENT OF DOUGLAS COREY, NORTH SCITUATE, RHODE ISLAND

    Mr. Corey. Thank you. Chairman Whitehouse and Ranking 
Member Sessions, thank you for the opportunity to testify today 
about my experience with my credit card lender.
    I am a victim of the predatory credit card banking 
practices that punish honest citizens who work hard every day 
to make an honest income, pay off their debt, and take care of 
their families.
    I have had a Bank of America credit card for 6 years, and I 
can't remember missing a payment in that time span. During most 
of this period, I received an interest rate of 12.74 percent, 
and although it was tough making the payments, I did. I set up 
an automatic monthly payment of $100 to pay down the principal, 
and each month when I received my bill, I paid the minimum 
payment.
    In August of 2008, I was on vacation and inadvertently paid 
less than my minimum payment. The following month, I misread my 
credit card statement. One line on the bill said ``minimum 
payment''; another said ``pay this.'' I paid the minimum 
payment, which was about $125 less than the amount on the line 
that said ``pay this.''
    With my next statement in October 2008 came the devastating 
news that my interest rate had skyrocketed to an astonishing 
28.99 percent. I went from paying $360 in interest to $792 in 1 
month, and I was charged a $39 late payment fee. The following 
month, I was laid off from my sales representative position of 
7 years.
    Once I realized my rate had increased, I immediately called 
Bank of America and was repeatedly told that nothing could be 
done to my rate until I made the minimum payments for 6 
consecutive months. In December, I called again and at this 
time they credited my account $759.23 in interest.
    In January, I called again, but the outcome was much 
different. I was told no discount could be given again but was 
offered the chance to increase my credit limit for a service 
fee of over $150 a month. I asked the representative why I 
would do such a thing. She said to help pay for any expenses I 
may have.
    Several weeks later, I called Bank of America, only this 
time they sent me to a rate adjuster who asked me several 
questions, one of which was my current work status. With a 
great deal of embarrassment, I explained that I was unemployed. 
He then suggested giving me back $10,000 I had paid in October 
of 2008, effectively raising my balance by that amount. I 
explained to him that this would mean I would be paying 28.99 
percent on ten thousand more dollars, which would cause my 
payments to climb well over $1,000 a month and would put me 
further into debt.
    His second option was to create a long-term loan. He 
explained that he couldn't tell me the rate and terms unless I 
agreed to the long-term program first. He also explained that 
my account would be temporarily closed, and once I paid the 
loan off, my account would be reinstated. I expressed my 
concern over the effect this would have on my credit rating and 
he suggested it would be fine over time.
    I asked him why Bank of America was still offering me 3.99 
percent on debt transfers but was imposing such lethal 
punishment on those of us who have been keeping them in 
business for years. He had no answer. I worried that the credit 
rating I had worked so hard for over the years could be lost.
    As of March 13th, I had made six consecutive minimum 
payments. On March 18th, I enthusiastically called Bank of 
America and was told that my reward for making my payments was 
a $13,000 reduction in my line of credit. The rate adjuster 
explained that he would have to do so because I was unemployed. 
I told him I was on the brink of starting a new position in the 
upcoming weeks. He told me that he would call me at that time 
to see if I had actually started working and what my new 
compensation was.
    He went on to say he could offer me a rate of 24.99 
percent, but if he did, it would confuse the computer from 
``automatically adjusting my rate back from my default rate.'' 
He said if he didn't change my rate now, I potentially could 
get a lower rate in the coming weeks. I asked whether my rate 
would be 12.74 percent, and he reiterated that he could not 
tell me what the rate would be. I told him this was frustrating 
because I had been assured that if I paid for 6 consecutive 
months, my interest rate would go down.
    With pride, I can tell you that for the last 19 years I 
have never missed a credit card payment or auto payment. In 
1994, I became a proud homeowner and was living the American 
dream. Since becoming a homeowner, I have made every mortgage 
payment up until this year. That all changed 7 weeks ago. I 
have to admit that for the first time ever I missed my mortgage 
payment. But, fortunately, last Tuesday I was able to make up 
the missed payment and soon will be caught up.
    As a responsible single father, I quickly restructured my 
home budget and spending, and I proactively began contacting my 
debtors to inform them of my situation and to negotiate an 
amicable resolution.
    Senators, I find myself in the same circumstances that many 
parents are facing today: few job prospects, a stack of bills, 
and the challenge of facing off against financial Goliaths. 
There are many of us in the middle class--the unemployed--who 
may have overstepped our budgets, but although we struggle to 
make our payments, we make them.
    Bank of America has come before you asking for help, 
understanding, and, with both hands open, for financial 
support. Yet when we the consumers go to these institutions 
looking for the same help, understanding, and financial 
support, we get roughed up and receive no compassion. Rather 
than negotiating, banks are preying on those of us who have 
been weakened by circumstances beyond our control. Banks 
realize that they are holding all the cards and that the 
consumer is powerless to negotiate with them.
    As a salesperson, I understand the importance of making a 
profit, and banks are entitled to make a profit. But what is 
enough? Over the 6 months, I have paid a staggering $1,600 more 
in interest versus what I would have paid at 12.74 percent. 
Their policies and actions are having a devastating effect on 
consumers that are hardest hit by our country's economic 
hardships.
    Last week, I was asked to come here and tell my story. I am 
not here asking for anything for myself. I am simply asking to 
stop the greed that is fueling banks' predatory behavior. 
Consumers are looking to you for leadership and to wage war 
against this greed that has taken over corporate America. My 
hope is that you will consider some form of legislation that 
levels the playing field and empowers consumers to negotiate 
with these institutions' strong-arming tactics.
    Thank you for your time.
    [The prepared statement of Mr. Corey appears as a 
submission for the record.]
    Chairman Whitehouse. Thank you very much, Mr. Corey, and 
thank you for coming to Washington to be a part of this 
hearing. I appreciate it very much.
    Our next witness is the Honorable Rosemary Gambardella of 
the New Jersey Bankruptcy Court.

   STATEMENT OF HONORABLE ROSEMARY GAMBARDELLA, JUDGE, U.S. 
 BANKRUPTCY COURT FOR THE DISTRICT OF NEW JERSEY, NEWARK, NEW 
                             JERSEY

    Judge Gambardella. Chairman Whitehouse, Ranking Member 
Sessions, Senator Durbin, other Senators on this Subcommittee, 
thank you for this opportunity to testify today on the 
important subject of abusive credit card practices and their 
relationship to bankruptcy.
    I speak today not on behalf of any group of judges or 
organization, but solely on my own behalf. I have spent the 
last 23 years serving on the United States Bankruptcy Court in 
the District of New Jersey. During that time I have seen 
firsthand the impact of spiraling debt burdens on ordinary 
citizens--citizens like Mr. Douglas Corey, who has eloquently 
testified this morning.
    Contrary to popular sentiment, persons filing bankruptcy 
petitions in this country do not do so to escape debt repayment 
but, rather, as a last resort, driven for the most part by 
circumstances beyond their control: illness, divorce, job loss, 
income reduction. Many are on the brink of home foreclosure. On 
the way, these individuals have accumulated significant 
unsecured credit, the majority of which often is credit card 
debt.
    The current system of bankruptcy laws that concern 
individual consumer bankruptcy filers can be assessed in terms 
of three central concepts: liquidation, as embodied through 
Chapter 7; rehabilitation or reorganization as symbolized by 
Chapter 13 and, to a lesser extent for individuals, Chapter 11; 
and the ultimate discharge or forgiveness of debt. These 
concepts trace their roots directly to the Bible.
    For instance, the Bible makes it clear that people are 
generally expected to pay their debts. One can look at 
Leviticus 25:39. However, this moral and legal obligation to 
pay just debts must be balanced by such considerations as the 
need for compassion for the poor, preservation of the family 
unit, and a call to cancel debts at periodic intervals. Again, 
one can look to Deuteronomy.
    The quest to arrive at the perfect balance between 
compelling persons to repay their debts and society's 
obligation to forgive debt and to provide debtors with a fresh 
start has existed since ancient times. In fact, it is this 
healthy tension that fostered the development of the bankruptcy 
laws in this country from the early days of bankruptcy referees 
to the present. It was the pendulum responsible for the 2005 
bankruptcy amendments that have been spoken about, as well as 
the proposed Consumer Credit Fairness Act, which we are 
discussing this morning.
    High-cost consumer credit generally comes in the form of 
credit cards, payday loans, student loans, refund anticipation 
loans, and subprime mortgages. Today, I will focus primarily on 
high-interest credit cards.
    At least one study has found that nearly 60 percent of 
credit card holders do not pay their bills in full every month. 
It was reported that the average interest rate for standard 
bank credit cards topped 19 percent in March of 2007. And the 
Federal Reserve has reported at relevant times that some 46.2 
percent of all families held credit card balances with an 
average credit balance approaching $7,300.
    In September of 2006, the Government Accountability Office 
estimated that in 2005 the number of U.S. credit cards issued 
to consumers exceeded 691 million. That report stated that 
``[T]he increased use of credit cards has contributed to an 
expansion in household debt, which grew from $59 billion in 
1980 to roughly $830 billion by the end of 2005.'' And it is 
certainly well over $1 trillion today.
    That report estimated that ``the majority--about 70 percent 
in recent years--of issuer revenues came from interest 
charges,'' and estimated penalty fees to account for an 
additional 10 percent of total issuer revenues. That report 
concluded that disclosures used to provide information about 
the costs and terms of using credit cards generally had serious 
weaknesses which reduced their usefulness.
    Professor Elizabeth Warren of Harvard Law School has 
conducted extensive research on the causes of bankruptcy. In a 
2006 article authored together with Teresa Sullivan and 
Professor Jay Lawrence Westbrook, the authors argued that ``the 
central characteristic of consumer bankruptcy over two decades 
has been increasing financial distress marked by rising levels 
of debt,'' and that ``from the early 1980's to the present, 
Americans' debt burden compared with their disposable income 
has risen considerably,'' while ``at the same time, increased 
layoffs, high divorce rates, lack of medical insurance, income 
volatility, and rising housing costs have left families even 
more vulnerable to bankruptcy.'' Focusing on credit cards which 
they describe as the dominant form of lending in recent years, 
the authors indicate that ``interest rates are often ruinous 
for a family with substantial credit card debt, particularly if 
the family had missed a beat in making on-time payments,'' as 
``the combination of late fees, over-limit fees, default rates 
of interest and other charges means that credit cards for 
families in trouble may easily be running at 24 percent 
interest or more.''
    The authors speculate that changes in the credit industry 
in making money available to troubled borrowers may have 
changed the calculus that leads to bankruptcy, as increased 
lending offers a way for families, in fact, to delay 
bankruptcy, but the interest payments increased so fast that 
even a small stumble meant that borrowers would have to declare 
bankruptcy or literally never get out of debt.
    In a 2006 article by Professors Susan Block-Lieb and Edward 
Janger, they claimed that ``the demise of usury laws and the 
development of national credit reporting and credit score 
systems and mass marketing techniques permitted lenders to 
create a national market for credit cards available to even the 
least creditworthy members of society, but at a price.
    Concerning the 2005 reforms, the authors argued that 
legislation severely limited overleveraged consumer borrowers 
from obtaining relief in the bankruptcy system and, in effect, 
rewards consumer lenders for taking advantage of consumer 
limitations.
    Professor Katherine Porter has also argued that the credit 
industry seeks to profit from financially distressed and 
vulnerable consumers by encouraging families to continue to 
borrow even after bankruptcy. And Professor Porter, speaking 
regarding the BAPCPA amendments states that ``the credit card 
industry's lending decisions were not subjected to the same 
scrutiny as the scrutiny of debtors' borrowing decisions,'' and 
that lenders were not ``held to the same moral standard as 
debtors for evaluating the appropriateness of their financial 
practices.''
    As was mentioned in the opening statements, in 2005 the 
Bankruptcy Code underwent extensive changes with the enactment 
of the Bankruptcy Abuse Prevention and Consumer Protection Act 
of 2005. That reform act was meant to address a perceived 
imbalance in the Bankruptcy Code, strengthening creditor 
provisions, encouraging repayment under Chapter 13 rather than 
liquidation under Chapter 7 by imposing a means test on debtors 
to test their ability to repay debt.
    The proponents of BAPCPA, among them the banking and credit 
card industries, car and mortgage loan lenders, advocated that 
by setting the bar higher for people who could file bankruptcy, 
the legislation would discourage bankruptcy petitions submitted 
in an attempt to abuse ``the system by deliberately running up 
credit card debt and running away from repayment obligations 
through the bankruptcy process.'' Conversely, consumer 
advocates strenuously opposed BAPCPA by noting that the vast 
majority of people filing for relief under the Bankruptcy Code 
were not abusers, but families in serious financial trouble due 
to the various factors outlined in this testimony, and that 
amending the Bankruptcy Code to make it more difficult to 
resort to bankruptcy, they contended, would create more stress 
and suffering for middle class families by delaying debt 
relief.''
    The implementation of BAPCPA in October of 2005 followed a 
spike in bankruptcy filings approaching 2 million. After that--
and it is in my written testimony--the numbers of bankruptcy 
filings fell. However, according to the latest statistics 
issued by the Administrative Office of the United States 
Courts, during 2008 filings by debtors with predominantly non-
business debt, which accounted for some 96 percent of overall 
filings, was on the rise again to over 1 million filings.
    The proposed Consumer Credit Fairness Act would disallow in 
bankruptcy for purposes of distribution claims arising from a 
``high-cost consumer credit transaction,'' which is defined 
under the act itself. Currently under the standard imposed by 
the proposed bill, the CCFA would apply to any interest rate 
higher than 18.5 percent. Additionally, the proposed bill would 
exclude debtors from any debts arising from high-cost consumer 
credit transactions from the so-called means test.
    The articulated purpose of the 2005 amendments to the 
Bankruptcy Code was to inject balance into the adjudication of 
debtor-creditor rights. In fact, the myriad requirements placed 
on consumer debtors, including the use of means testing, may 
have created substantial burdens on consumer debtors without 
the desired result--increased repayment of debt. It is clear 
from experience that debtors' use of credit cards as a family 
lifeline to cover basic living expenses such as food, 
sustenance, utilities, health care, and tuition is a trend that 
is seen throughout the cases before our courts. The proverbial 
``robbing Peter to pay Paul'' has resulted in spiraling debt 
that high interest consumer loans only exacerbate. The 
disallowance in bankruptcy of a specific category of high-cost 
loans contemplated by the bill may act as a disincentive to 
such practices. As well, the specter of disallowance of such 
claims in bankruptcy may encourage out-of-court settlements. 
The disallowance of the claims, as opposed to subordination of 
the claims, may also result in a greater recovery to other 
unsecured creditors with valid and bona fide claims. In my 
experience on the bankruptcy court, it must be emphasized that 
bankruptcy relief is largely utilized by individuals as a last 
resort for legitimate, non-abusive purposes. And the fresh 
start afforded by bankruptcy to individuals suffering under 
enormous debt loads, particularly in the current economic 
climate, is a laudable goal. So the disallowance of certain 
high-cost credit claims will, in certain instances, 
substantially decrease the debt burden on debtors, increasing 
the prospects for successful reorganization and/or repayments 
through orderly liquidation to bona fide creditors.
    While many debtors and their families' income fall below 
the applicable respective State median income level and escape 
the means test, the elimination of means testing for this 
category of consumer debtors would make the pathway to Chapter 
7 relief more available. Again, to the extent that repayment is 
the goal, such a remedy may be an additional disincentive for 
predatory lending practices.
    It is worth noting that while the remedies in this proposed 
legislation are limited to bankruptcy filings, this does 
involve a much broader issue of predatory lending practices 
that reach far beyond the bankruptcy arena.
    In closing, I want to thank this Committee for according me 
the honor and privilege of testifying today on these important 
issues, and I stand ready to provide any additional 
information, Senators, that you may require.
    Thank you.
    [The prepared statement of Judge Gambardella appears as a 
submission for the record.]
    Chairman Whitehouse. Thank you very much, Your Honor.
    The Ranking Member, Senator Sessions, and I have been 
lawyers long enough that far be it from either of us to 
interrupt a judge.
    Judge Gambardella. I went over my time limit. I apologize.
    Chairman Whitehouse. But I would appreciate it, because 
Senator Sessions has a commitment at 11 o'clock, if the 
subsequent witnesses could be more attentive to the time 
restrictions so that all the testimony can come in while the 
Ranking Member is present. I thank you.
    Senator Sessions. You had your chance to stop a judge after 
having been stopped many times before.
    [Laughter.]
    Senator Sessions. No, that was very valuable. Thank you.
    Chairman Whitehouse. Professor Levitin.

   STATEMENT OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF LAW, 
       GEORGETOWN UNIVERSITY LAW CENTER, WASHINGTON, D.C.

    Mr. Levitin. Mr. Chairman, Ranking Member Sessions, good 
morning. My name is Adam Levitin, and I am an associate 
professor of law at the Georgetown University Law Center, where 
I teach courses in bankruptcy and commercial law. I am here 
this morning to testify in favor of S. 257, the Consumer Credit 
Fairness Act.
    I think it is important to start by noting exactly what 
Senator Sessions said. Credit can be a double-edged sword. It 
can be both a boon and a curse.
    Credit is a wonderful thing that can fuel the economy, but 
when credit is issued beyond a borrower's ability to repay, it 
becomes a stone around--it becomes an anchor around their neck, 
dragging them down.
    As Congress tries to figure out how to address the problems 
caused by excessive consumer leverage, there are a few possible 
responses. Senator Sessions suggested that disclosure might be 
a way to go, and I think there is a general sense that 
disclosure has not worked well for credit cards in particular.
    The problem is that there is also no evidence that 
disclosure can work with credit cards. We have not seen it work 
yet, and there is no empirical evidence that it will work. 
There are a lot of reasons to think that, absent really drastic 
restructuring of credit card price structures, disclosure can 
work.
    First of all, there is simply too much information. Senator 
Whitehouse described a 20-page, fine-print legalese disclosure. 
There is no one who reads that, and if you read it, you cannot 
understand it. And even if you understand it, your 
understanding might not be the same as that of the card issuer, 
and it is going to be their interpretation, not yours, that is 
going to functionally control. So we have lots of disclosure, 
but we really have obfuscation by disclosure. Stuff gets hidden 
in the fine print. It is all disclosed, but that does not do 
the trick. That does not make markets work.
    We also have a problem that even if we improve disclosure--
and there are definitely moves in that direction. The Federal 
Reserve has some regulations that are going to go into effect 
in about 18 months that will improve disclosure, as well as a 
bill that is pending in, I believe, the Senate Banking 
Committee, the Card Holder's Bill of Rights. Even if we manage 
to improve disclosure, card issuers still have every incentive 
to restructure their pricing to get around disclosure.
    So if we say that price points A, B, and C have to be 
prominently and clearly disclosed, card issuers are just going 
to restructure their pricing to create new fees, types D, E, 
and F. So there is a lot of reason to think that disclosure 
regulation just is not going to do the trick. This makes me 
think that we need to really look at substantive regulation. 
Historically, that is how we have regulated credit. Really 
until the Supreme Court's Marquette decision in 1978, 
substantive regulation, usury laws, were the primary form of 
consumer credit regulation. S. 257 is a step toward substantive 
regulation. It is not, however, a usury bill, and I think that 
is very important to be clear on, that S. 257 does not say that 
a lender cannot make a loan at any particular rate. Rather, 
what S. 257, the Consumer Credit Fairness Act, is is a 
bankruptcy integrity bill. It is legislation designed to ensure 
the integrity of the bankruptcy system.
    Bankruptcy courts are courts of equity, and a basic 
principle of equity is that relief will not be granted to a 
party with unclean hands. Creditors who charge extremely high 
interest rates do not have clean hands when it comes to 
consumer financial distress.
    High-interest-rate debt is financial quicksand for 
consumers. With high-interest-rate debt, the interest and the 
fees accrue faster than a consumer can reasonably be expected 
to pay off the loan. Not surprisingly, there is a strong 
correlation between high-interest-rate debt and bankruptcy. 
Dollar for dollar, credit card debt is the best indicator of a 
future consumer bankruptcy filing. And even small amounts of 
high-interest-rate debt can have a significant impact on 
bankruptcy filings. For example, a single payday loan of $300 
increases the chances of a bankruptcy filing by nearly 3 
percent.
    The interest rates charged to consumer borrowers are a 
product of the lender's cost of funds, the lender's cost of 
operations, as well as a risk premium, but also they are a 
function of whatever extra opportunity pricing that the lender 
thinks the borrower will pay. The precise mix varies by 
product, by lender, and by borrower, but it is important to 
underscore that high interest rates do not necessarily 
correlate with borrower risk. They often have a lot to do with 
inefficient markets, things like nontransparent pricing of 
credit cards which results in consumers borrowing at much 
higher rates than they realized they will be paying.
    It is also important to note that while high interest 
rates, to the extent that they are a response to increased 
consumer risk, they also create risk. That is because many 
consumers are unable to service high-interest-rate debt. 
Lenders who charge high interest rates are largely shielded 
from their own self-created default risk by the high rates. But 
we see this with the so-called sweat box model of consumer 
lending. And I understand my time is up, so I will simply 
conclude by saying I urge Congress to give serious 
consideration to S. 257 as well as also to a true usury law.
    Thank you.
    [The prepared statement of Mr. Levitin appears as a 
submission for the record.]
    Chairman Whitehouse. I thank you, Professor Levitin, and 
perhaps if you become a judge someday, you will not be 
interrupted. But we do have your complete statement, which is 
very thorough and authoritative, and your complete written 
statement is a matter of record.
    If I could take 1 minute and ask unanimous consent that the 
statement for this hearing of Chairman Patrick Leahy, the 
Chairman of the Judiciary Committee, be added to the record, it 
will be done, without objection.
    Professor Scarberry.

 STATEMENT OF MARK S. SCARBERRY, PROFESSOR OF LAW, PEPPERDINE 
          UNIVERSITY SCHOOL OF LAW, MALIBU, CALIFORNIA

    Mr. Scarberry. Thank you, Mr. Chairman, and thank you, 
Ranking Member Sessions, for inviting me to testify today. You 
have my full statement. I will not read it. I will try to hit 
the high points.
    I try to look at these issues on their merits, and I am 
speaking here, of course, just for myself, not for Pepperdine 
University School of Law, where I teach. My latest article 
strongly argues that credit card companies and other unsecured 
and undersecured creditors should not be able to add to their 
claim in bankruptcy any amount for attorney's fees or other 
charges that are incurred after the bankruptcy petition is 
filed. I think the Bankruptcy Code calls for that result, and I 
think that it is fair. That is, in a sense, an anti-creditor 
position, you might say.
    In this case, I come down on the other side. I think this 
bill will not accomplish what it seems to intend to accomplish, 
and that the issues here really, to the extent they need to be 
addressed, should be addressed more directly.
    The bill, because of a single, high-cost consumer debt that 
may be owed by a debtor who files a bankruptcy petition, would 
exempt that debtor from what I call the mechanical means test, 
the Section 707(b)(2) test that looks at income levels and 
looks at expense levels and decides whether it is appropriate 
for this debtor to use Chapter 7 liquidation bankruptcy.
    Now, we can argue about whether the means test ought to be 
modified in some way. I do not think it has been terribly 
successful, and it is very complex, and it raises the cost of 
bankruptcy in some ways. It could perhaps be modified in some 
ways.
    But if it makes sense to have a means test, it seems to me 
it does not make sense in a lottery sort of style to exempt 
people from it just on the basis of a single, perhaps small 
debt that has a high interest rate. So that, it seems to me, is 
a problem with the bill.
    An additional problem is that I do not think the bill will 
change credit card company behavior at all. In most consumer 
bankruptcies, there is no money to be paid to unsecured claim 
holders like credit card companies. They receive nothing. And 
so to say to them that--there are no-asset cases or nominal-
asset cases. If you say to them, ``Your claim will be 
disallowed so you will receive nothing in bankruptcy,'' they 
will say, ``Well, we were not going to get anything anyway, 
thank you very much.'' And so I think the chance that this will 
actually influence the behavior of credit card companies is 
very small.
    If there is a serious problem here, address it directly if 
it needs to be addressed. But the Bankruptcy Code, it seems to 
me, is not going to be effective in addressing whatever problem 
needs to be addressed, and the bill will simply make the 
Bankruptcy Code more complex.
    Now, another issue that is actually not in my written 
testimony is the question of who is going to do the objecting 
here. Are we going to say to the trustees in every Chapter 7 
bankruptcy case, ``You must analyze all the credit card debt of 
every debtor and figure out what their interest rates are for 
purposes of objecting to the claim'' when the credit card 
company is not likely to receive anything, anyway? It seems to 
me that that is a question that ought to be asked. Who is going 
to object? The debtor typically has no incentive to object. The 
debtor is going to get a discharge from the debt. And the money 
that goes to pay it, if any does goes to pay it, is going to 
come from the bankruptcy estate, not from the debtor. Some 
people say the debtor does not even have standing to object in 
some cases.
    I would also encourage the Committee to consider whether 
the 18.5-percent rate that you are looking at now is perhaps 
lower than it should be, especially for someone who gets a 
rewards card, perhaps with no annual fee, and who typically 
pays the credit card off without carrying a balance. It makes 
sense to allow, perhaps, cards with higher rates. But, again, I 
do not think the bill would keep these from being offered, so 
maybe that is not such a big deal.
    Now, I do have a couple of technical points that I want to 
make. One is that the applicable interest rate under the 
Consumer Credit Fairness Act would include fees charged in 
connection with extension of credit. That could easily be 
interpreted not to include things like late fees, which are not 
incurred in connection with extension of the credit. And so, 
again, it seems to me the bill may not accomplish what it is 
intended to do.
    In addition, the bill says that there will be disallowance 
for purposes of distribution. If that is intended to be a 
limitation so that the claim is not completely disallowed, it 
may allow some liens for credit card debts to continue through, 
which I think is contrary to the bill's drafter's intent.
    Thank you very much.
    [The prepared statement of Mr. Scarberry appears as a 
submission for the record.]
    Chairman Whitehouse. Thank you very much, Professor 
Scarberry.
    We will now turn to Mr. John.

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

    Mr. John. Thank you very much for having me to testify. 
Contrary to expectations, I am not here to defend high-interest 
lenders in the slightest. As a matter of fact I had an 
experience somewhat similar to Mr. Corey at a point when I was 
traveling and my credit card payment arrived one day late, and 
I saw my credit card interest rate more than double. They have 
since brought it down, and I have learned to pay electronically 
and not to trust the Postal service. But, still, I have no fond 
feelings toward them.
    Having said that, I think this bill is going to damage some 
of the very people that I would hope you would be most 
interested in helping, because the three groups who most face 
high-interest-rate loans--and this is not just credit card 
debt; it is of other types--include low- to middle-income 
borrowers, and these are borrowers who typically have high 
rates because even a small amount of credit exceeds the debt-
to-income ratios that, say, upper-income borrowers would have; 
first-time borrowers who have no credit history and, therefore, 
have no record of payment or repayment; or people with bad 
credit who are trying to restore their credit balances and 
their credit histories. This might be people who had filed for 
bankruptcy or people who had suffered from extended periods of 
unemployment.
    All of these people have much higher than average interest 
rates simply because it is often harder to collect money from 
them. I had the misfortune to work for 3 months between 
undergrad and grad school for a finance company, and I found 
that while many of the people who were our borrowers were fine, 
upstanding people who simply were not interested--the banks 
were not interested in, many others I had to go out and collect 
a check once a month, which took a little bit of time and money 
to do.
    The effects of this bill are likely to be very damaging. 
The demand for credit services will not decline. One of the 
things we have learned the hard way through various and sundry 
attempts to put on price ceilings and interest rate ceilings 
and usury laws is that the demand is still there; it is just 
that the good borrowers tend to withdraw from the market.
    So, to the extent that you have added additional risk to 
various transactions, what is going to happen is that good 
borrowers will either cease to serve these communities, or what 
is more likely in this situation, they are going to raise their 
credit standards so fewer and fewer people in this population 
are going to qualify for these credit products.
    This is going to drive people into much less reputable 
borrowers--or lenders, excuse me, and what these people will do 
is to recognize once again that there is a higher risk, so they 
are going to raise their prices still more so that they can 
make sure to collect all their fees before there is any sort of 
a chance of bankruptcy filing or something like this.
    So the bottom line is price controls do not work. If you 
want to deal with these lending problems, the proper way to 
deal with them is to encourage other lenders to enter the 
market, things like credit unions and banks and that sort of 
thing.
    Now, one of the problems that we have seen with credit card 
debt over the years are precisely the problems that have been 
raised by people in this hearing. And as a result, the Federal 
Reserve Board and various other banking regulators issued 
regulations in December that, among other things, achieved 
Senator Durbin's goal of including something on the credit card 
statement showing how long it will take to repay a credit card 
if one pays the minimum balance on it. There are certain other 
changes that have been made, and both the House Financial 
Services Committee and the Senate Banking Committee are 
examining these issues in detail. In other words, this is not 
something that necessarily needs to be resolved in this 
Committee.
    Let me point out one other thing in my last seconds. This 
bill is drafted far too broadly. Under this bill, a high-cost 
credit consumer transaction is defined as one where you exceed 
your cap ``at any time while the credit is outstanding.'' That 
means that a traditional 30-year mortgage issued in October 
1981, when the interest rates peaked at 18.45 percent, would 
fall and would have fallen under that definition as of December 
2008 when the price of the 30-year T-bill declined rather 
substantially.
    Now, we have not seen high interest for some time, but we 
cannot expect that we are not going to see this again in an era 
of economic dislocation and trillion-dollar deficits. This bill 
needs to be substantially corrected, and I would argue that it 
is going to hurt the very people that you are seeking to help.
    Thank you.
    [The prepared statement of Mr. John appears as a submission 
for the record.]
    Chairman Whitehouse. Thank you very much, Mr. John.
    Out of respect for my colleagues' schedule, I will defer my 
questioning to the Ranking Member. We will then proceed to 
Senator Durbin, who was here earlier, and then Senator Sanders 
of Vermont, whom I am very proud to say has joined us.
    Senator Sessions. Well, Senator Whitehouse, we are glad 
that you are in the Senate, and being a new member, a new 
Chairman, you are very gracious. A good lesson for some of our 
older Chairmen.
    Briefly, Mr. John, summarizing what I understood you to 
say--and it makes perfect sense to me--if we are going to 
expose credit card companies to greater and greater 
possibilities of recovering nothing on their credit card debt 
when somebody goes into bankruptcy, they will then be more 
rigorous in denying credit cards to marginal people who would 
like to get a credit card and may need a credit card.
    Mr. John. That is precisely the case, plus this is likely 
to extend to other types of credit that are offered to the same 
population.
    Senator Sessions. Such as?
    Mr. John. Such as mortgages, such as installment lending, 
and a variety of other types of----
    Senator Sessions. Well, frankly, this thing cuts both ways, 
as I indicated earlier. You want more people to be able to 
avail themselves of having short-term credit, which a credit 
card is. But at the same time, it results in either higher 
rates for everybody or a reduction in the number of people who 
would be able to get a card. Would you agree with that, Mr. 
Scarberry, that fundamental principle?
    Mr. Scarberry. I think there is a tradeoff between wanting 
to have credit available but, on the other hand, wanting people 
to act responsibly. And, of course, we know--I mean, as my 
testimony points out, the massive increase in household debt 
has really been on the mortgage side rather than the credit 
card side over the----
    Senator Sessions. Well, I would just say it is a big deal--
and I am not prepared to accept it--that the responsibility for 
somebody who utilizes that credit card to run up excessive debt 
is the person who gave them the credit card. Would you agree 
with that? I mean, unless we have eliminated the concept of 
individual responsibility totally.
    And, Judge, when you have--in bankruptcy, routinely is it 
not so that the unsecured credit card people are the ones who 
get paid last because secured creditors are first?
    Judge Gambardella. Under the priorities of the Bankruptcy 
Code, they would be unless--if they have no security, that is 
correct.
    Senator Sessions. You made some criticisms of the means 
test, I believe, at least as how it is affected. Do you oppose 
the concept that persons who make above median income in 
America and run up big credit card debt ought to at least pay 
some of that back if they are able to?
    Judge Gambardella. No, I believe that people--I believe in 
the concept of the honest and good-faith debtor, so that if 
there is an ability to repay a portion of one's debt, one 
should attempt to do that. The difficulty with the means test--
and I know this is not a Committee hearing on the means test--
is what obviously some of the other witness testimonies have 
indicated. It is very burdensome. It is very costly. In most 
States, it does not even apply.
    I do not know whether it accomplishes what it set out to 
do, which is to increase repayment.
    Senator Sessions. Well, I am open to improving that, and I 
do not want to use up too much of my time. But when an 
individual files for bankruptcy, they have run up debt, one of 
the things lawyers tell them is to put everything on their 
credit card.
    Judge Gambardella. Except the court filing fee.
    Senator Sessions. And we did back up the--well, they tell 
them not to pay their rent, to give them their money so they 
can pay the fee. But, at any rate, they do use credit cards up 
to the last day, and we backed back a little bit the time that 
you could do that on some of those debts. So the credit cards 
are dumped on in many ways once a person decides that they are 
filing bankruptcy. Is that not correct?
    Judge Gambardella. I am sorry, Senator.
    Senator Sessions. Well, in effect, what happens is if you 
talk to a lawyer and they say you are going to file bankruptcy, 
and the lawyer suggests that you pay your groceries and 
everything else possible on the credit card and run that up and 
pay him his fees and pay your family and their debts----
    Judge Gambardella. That would be a scenario----
    Senator Sessions.--that you owe your brother-in-law, and 
then sock it to the credit card company and they will lose in 
bankruptcy.
    Judge Gambardella. Well, I am sure--some of this testimony 
certainly makes clear that what is happening with American 
families is that they are utilizing credit cards for all types 
of purposes that you or I years ago would not have.
    Senator Sessions. I am trying to figure out how to--what 
the rate is. Mr. Scarberry, maybe you have looked at this, but 
at 15 percent plus what the current rate is, 3, about 18 
percent, makes this a bit of a risky thing. You think it could 
constrict the availability of credit for consumers and might 
increase the interest rates for good creditors?
    Mr. Scarberry. It is possible, Senator. To the extent that 
you have people with good credit who are getting specialty 
cards, where they get double frequent flyer miles and these 
sorts of things and they have high rates on them and they do 
not intend to carry a balance, those are people where you might 
actually have some serious payment if they end up in financial 
trouble--they have assets--and due to the financial trouble go 
into bankruptcy. The credit card companies who offer those 
kinds of cards might, in fact, suffer some serious losses as a 
result of this bill, and it might restrict some of that credit.
    In the usual case, there is not going to be any payment to 
the credit card company, anyway, so disallowing their claim is 
not going to hurt them. But in a few cases it would, and it 
could have some effect.
    Senator Sessions. Mr. Chairman, I would just like to 
emphasize, one thing I think Mr. Scarberry mentioned was that 
if one credit card is over the interest rate allowed under this 
bill--and it may be a small one--they are exempted entirely 
from the means test. Is that----
    Mr. Scarberry. That is correct under this bill which----
    Senator Sessions. I do not think that is a good policy for 
sure. Thank you.
    Chairman Whitehouse. Senator Durbin.
    Senator Durbin. Thank you, Mr. Chairman.
    Back during the debate on the bankruptcy bill, I offered an 
amendment on the floor which said that if a mortgage lender was 
guilty of predatory lending practices, they could not recover 
in a bankruptcy court, similar to what you are doing here, 
Senator. And I lost that vote on the floor.
    During the course of the debate, then-Senator Phil Gramm of 
Texas got up and said, ``If the Durbin amendment passes, it is 
the end of subprime mortgages.'' I lost by one vote.
    It is true that if the Durbin amendment had passed, we 
would have restricted credit. But I think most of looking back 
now would have said, ``That might have been a pretty healthy 
thing to do,'' because people were doing things, borrowing 
money under circumstances that made no sense, but there was a 
willing lender who was willing to take them into a debt 
arrangement and ultimately into a bankruptcy court.
    Judge Gambardella, what is the primary reason people come 
into bankruptcy court now? What kind of debts push them over 
the edge?
    Judge Gambardella. Well, generally it would be what I 
reference in my testimony--a divorce, loss of income, loss of 
health insurance, some catastrophic event in their lives that 
creates the need to file for bankruptcy. At least that is what 
all of the studies that have been done show, and I think it 
bears out.
    But it is shocking when you look at bankruptcy petitions--
and I am sure people on this panel can bear me out--at the 
amount of credit card debt that you see on a family's 
bankruptcy petition. You do not see just one or two credit 
cards. You can see upwards of 25 credit cards with over $10,000 
on each card. I think that is rather shocking.
    Senator Durbin. Isn't that the last gasp? I mean, when 
everything is falling apart, they max out the credit cards to 
try to hang on, hoping that things may turn around if they 
cannot?
    Judge Gambardella. As I say, that is robbing Peter to pay 
Paul. You see it. And it is done not, I think, out of bad 
intentions. I think it is done often out of pure desperation.
    Senator Durbin. And, of course, they are facing interest 
rates with those credit cards which can be astronomical.
    Judge Gambardella. But I did want to raise one issue 
because it was raised, I believe, by some of the other 
witnesses here in terms of the need for these high-cost loans 
or credit cards in certain instances.
    One of the changes that the 2005 amendments instituted was 
debtor education, so when parties go into bankruptcy, they have 
to then take a course. That course teaches that----
    Senator Durbin. The author of the amendment just left, but 
he will be back.
    Judge Gambardella. Okay. Well, maybe he will read this 
testimony. And so when debtors go into bankruptcy and then come 
out, they are being told to borrow money responsibly. So I 
guess there is a dichotomy between the bankruptcy court's 
telling debtors now they have received discharges, borrow 
responsibly, and the other argument, which I think is valid, 
has validity, that if you put too many restrictions on credit, 
then there may not be available credit even at the most onerous 
terms.
    But we are educating our debtors to go back out in the 
world and, for better or worse, cut down on their use of credit 
cards, because I think the end result is what we have seen, 
these spiraling bankruptcy filings.
    Senator Durbin. Mr. John, did we make a mistake capping the 
interest rate that could be charged to members of the U.S. 
military at 36 percent?
    Mr. John. I do not know that you have necessarily made a 
mistake with the military. However, the problem that you face 
with overall usury ceilings is that if we go back into a period 
of high inflation, then you are going to have to deal with 
situations where normal credit exceeds those usury ceilings.
    Back during the 1980's, the State of Arkansas----
    Senator Durbin. You used the example of an 18-percent 
mortgage interest rate?
    Mr. John. Yes. Well, there was an 18 percent--and the State 
of Arkansas has a constitutional requirement to have a 12-
percent interest rate. And they came to Congress every 2 years 
to get a waiver through Congress. Of course, they refused to 
change their Constitution.
    Senator Durbin. Do you think that the danger of 
hyperinflation that might call for a change in the law at some 
point in the future outweighs the benefit of stopping usurious 
credit practices that are driving people into bankruptcy and 
the sweat-box situation the Chairman described?
    Mr. John. I think there are other ways to do it other than 
usury ceilings. I think that there are ways to deal with 
disclosure. There are ways dealing with consumer education, as 
the judge has just said. And there are many, many different 
other manners of handling this.
    I think that a price ceiling itself, as much as I 
personally am appalled by the concept of a 36-percent interest 
rate, is not necessarily the way to deal with it.
    Senator Durbin. Let me ask you this question: Do you think 
that the credit card contracts that we are given as consumers 
are easily understood?
    Mr. John. Absolutely not. I tried reading one the other day 
and fell asleep at the end of the third paragraph.
    [Laughter.]
    Senator Durbin. I think that is an experience most of us 
would run into, and the point I am trying to get to is that 
buried within those credit card agreements are a lot of traps.
    Mr. Corey, I read your testimony. You fell into one of 
those traps, and you paid a heavy price for it.
    I think what we are dealing with is not an arm's-length 
transaction here between the borrowers and the lenders. We have 
terms that honestly most people cannot follow and occasionally 
trapped by them, as Mr. Corey was, and find themselves in a 
miserable situation with their credit rating shot and deeply in 
debt, maybe ending up in Judge Gambardella's court if they are 
not careful.
    Mr. John. I agree, and I am hopeful----
    Senator Durbin. What do you think Congress should do as a 
result of that? Anything?
    Mr. John. Well, I think actually the Federal Reserve Board 
and the various banking regulators have already issued 
regulations addressing some of these more egregious questions, 
including, as I mentioned, your goal of having something on the 
credit card statement saying that if you pay the minimum, here 
is how long it is going to take you, assuming you can.
    Now, both the Banking Committee and House Financial 
Services is looking to see what else needs to be done, and I 
think that is probably the appropriate venues.
    Senator Durbin. Thank you.
    Thanks, Mr. Chairman.
    Chairman Whitehouse. Thank you, Senator Durbin. It is a 
pleasure to have you with us. I appreciate very much that you 
have attended this and shown such interest.
    Senator Sanders.
    Senator Sanders. Mr. Chairman, thank you very much for 
allowing me to drop into this Committee of which I am not a 
member, and thank you also very much, Mr. Chairman, for 
cosponsorship of legislation that I have introduced which would 
put a cap on credit card interest rates at 15 percent unless 
there were some dire circumstances, at which point it could be 
raised. And that piece of legislation is also cosponsored by 
the Chairman of the Judiciary Committee, Senator Leahy, Senator 
Durbin, Senator Levin, Senator Harkin as well.
    Let me begin by asking Mr. Corey a question. A very simple 
question, and then I want comments from other of our panelists. 
You know, the Bible makes a lot of reference to usury, and in 
our country today, you have financial institutions that are 
charging Americans 30-percent interest rates, 50-percent, 100-
percent interest rates. Mr. Corey, what about the morality of 
that? Do you think that is a moral thing to be charging people 
that kind of interest? I know we do not talk about morality too 
much in the U.S. Senate, but it is an issue that we might want 
to touch on.
    Mr. Corey. No, I don't think it is a moral issue. I mean, 
folks take on credit cards, and they want to pay off the debt. 
I think most people do want to pay off their debts. I think 
people who I grew up with in the middle class all take these 
responsibilities very seriously. And sometimes they extend 
themselves a little bit more than they should, and a lot of 
times in situations of hardship and divorce and things beyond 
your nature, I think it is a very strong moral issue of what is 
profit and what is----
    Senator Sanders. Mr. Corey--and anybody else can jump in--
we all know what loan sharking is. We know Mafia and gangsters 
lend people money at outrageous rates, and then they break 
their kneecaps or beat them up if they do not pay it back.
    How different is somebody in a three-piece suit charging 
somebody 50-percent interest rate different from a loan shark?
    Mr. Corey. I think it is exactly that. I think it is 
exactly loan sharking. I think that is exactly doing that. Just 
in my testimony where I say that, you know, if they are there 
to work with us, why would you offer me the $10,000 I paid down 
in October to bring down the principal and then say take it 
back and then to bring me deeper back into--and whereas they 
would make more money on the interest again and charging the 
28.99 percent.
    Senator Sanders. Are we looking at a form of three- piece-
suit CEO corporate loan sharking here?
    Judge Gambardella. I don't think that we have to go that 
far, but what I think, Senator, is it is an issue--one person's 
morality, you know, may be different from another's. I think it 
is really a question of personal responsibility or maybe 
institutional responsibility in a broader sense.
    You know, we have spoken a lot about concepts of means 
testing and concepts of debt repayment and concepts of 
certainly consumers acting responsibly, and I am all for that. 
But I think it has to, it goes both ways.
    Senator Sanders. It goes both ways.
    Judge Gambardella. The difficulty is certainly there were 
perceived--and here I am speaking only in the bankruptcy 
context strictly. There were perceived imbalances that were 
addressed by----
    Senator Sanders. I just have a short period of time.
    Judge Gambardella. By legislation, but it has not gone far 
enough.
    Chairman Whitehouse. Senator, it is just the two of us, so 
I am not going to----
    Senator Sanders. Oh, we can go on for hours. Okay.
    Yes, sir?
    Mr. Scarberry. Senator Sanders, I think it is always good 
to consider what is right, and I don't have a problem with 
that. I would suggest one of the differences----
    Senator Sanders. You do not have a problem with considering 
what is right. All right. That is a good start. We are off----
    [Laughter.]
    Mr. Scarberry. I don't have a problem with the Senate 
considering that. I think it is very important. It is very 
important.
    One of the differences between a three-piece-suit lender 
and a loan shark, of course, is the collection method. We do 
have limitations, for example, on garnishments under Federal 
law. And we don't have debtor's prisons anymore. And also, very 
importantly, we do have the availability of bankruptcy to allow 
people to get a fresh start, and that is very important.
    Senator Sanders. All that is true and important, and I was 
being a little bit facetious. But, on the other hand, you will 
not deny, sir, that there are hundreds of thousands of people 
whose lives have been ruined--whose lives have been ruined with 
very, very high interest rates and, in fact, going into 
bankruptcy. I do understand that going into bankruptcy is not 
getting your kneecap broken. But my point is you----
    Mr. Scarberry. That is not a very nice thing to have to do 
either.
    Senator Sanders. Right. All right. Let me ask another 
question, and that is, I get in my office--and I am sure 
Senator Whitehouse and every Senator gets--irate calls from 
taxpayers of this country who have seen--maybe they are losing 
their jobs. Maybe they are losing their homes. And at the same 
time, they are forced to bail out the AIGs of the world, the 
Citibanks of the world, companies where CEOs made hundreds of 
millions of dollars. And then what they get from these same 
financial institutions are credit cards which are charging them 
25 or 30 percent interest rates.
    Professor, what about the taxpayers of this country bailing 
out institutions which then say, ``Thank you very much for 
bailing us out. We will take the bonuses, and by the way, we 
are charging you a 30-percent interest rate'' ? Do you think 
taxpayers have a right to be a little bit upset about that? 
Right here.
    Mr. Levitin. I was not sure which professor you were 
referring to.
    Of course, taxpayers have--should be upset about that. 
Right now, the Federal Government is effectively funding credit 
card loans that the Federal Reserve Term Asset-Backs Security 
Loan Facility, better known as TALF, is purchasing credit card-
backed securities in the securitization market. And that is 
giving credit card lenders the funds to make loans. If the 
Federal Government is going to be ultimately the financer of 
credit card loans, it should have a say in what the terms of 
those loans look like.
    I would also note that having the Federal Government's role 
in financing of credit cards really alleviates some of the 
concerns that Mr. John has suggested about something like a 
usury law, that Mr. John has suggested that if we had something 
that looked like a usury law, we would have what is known as 
product substitution and credit rationing. So people would not 
be able to get loans from legitimate lenders, and they would 
turn to loan sharks.
    Having essentially a Federal subsidization--which is what 
we have now--of credit card lending mitigates that 
significantly. It is going to depend on the scope of our 
subsidization of credit card lending. But now that we are in 
that game, I think that the concerns about usury laws are 
definitely mitigated.
    Senator Sanders. Let me throw out my last question, if I 
can, Mr. Chairman.
    Chairman Whitehouse. Please.
    Senator Sanders. Senator Durbin mentioned that the 
Department of Defense has imposed a 36-percent cap on interest 
rates charged to people in the military. What is not widely 
known is that for, I believe, three decades now, credit unions 
in this country have been mandated not to charge more than 15 
percent, with some exceptions, and, in fact, some credit unions 
now charge up to 18 percent.
    There was an article a couple of weeks ago in the L.A. 
Times where a fellow active in the Credit Union Association in 
California said their credit union was doing pretty well. They 
have survived under this legislation, this regulation for 30 
years. Is there any reason we think why other financial 
institutions could not survive equally well if we had the same 
type of cap? Professor?
    Mr. Levitin. I would suggest that if you are thinking about 
a cap, like a 15-percent cap, it should really be a floating 
cap, that it should float above some sort of index rate, like 
the Federal funds rate. That would alleviate any of the 
inflation problems that Mr. John raises.
    Senator Sanders. Well, in fact, that is, I believe, what is 
the case in the credit union situation.
    All right. Let me just conclude. Thank you very much, Mr. 
Chairman. I think obviously the American people have had it up 
to here with financial institutions in general. I think in the 
last year the incredible greed, recklessness, illegal behavior 
on the part of Wall Street has enraged the American people 
because our economy is tanking and they are having to bail out 
the people who caused the problem. And I think one way that we 
can move forward, Mr. Chairman, is to, in fact, put a cap on 
interest rates. We are proposing something similar to what goes 
on with credit unions in this country, and we look forward to 
support for that.
    Thank you very much.
    Chairman Whitehouse. Thank you, Senator Sanders. And as a 
member with you on the Budget Committee also, I have had the 
opportunity to see the vigor, passion, and relentlessness of 
your advocacy on this, and it is, if you do not mind me using a 
loaded phrase, ``creditworthy.''
    [Laughter.]
    Chairman Whitehouse. Just for the record, the legislation 
that I have proposed is a 15-percent limitation riding on top 
of a 30-year T-bill rate, so that if the circumstance Mr. John 
was talking about were to arise of a dramatic rise in 
underlying interest costs, this would rise naturally with it 
with that T-bill rate.
    Mr. John. Forgive me, Senator, but your bill says that this 
would happen at any time when the credit is outstanding, which 
means that while it is very true that in October 1981 when this 
hypothetical mortgage that I mentioned was taken out, this was 
the case. Over the intervening years, the 30-year T-bill rate 
has declined.
    Chairman Whitehouse. I see your point.
    Mr. Corey, let me ask you just a little bit about--you seem 
to be in many respects kind of an ideal customer. You are 
college educated, you are solidly middle class. Your testimony 
reflects that for 19 years you never missed a credit card 
payment or an auto payment. Until 7 weeks ago, you had never 
missed a mortgage payment.
    Mr. Corey. True.
    Chairman Whitehouse. Your testimony here shows how 
seriously you take these responsibilities. The only thing that 
went wrong initially was that you inadvertently paid less than 
your minimum payment 1 month.
    Mr. Corey. Right.
    Chairman Whitehouse. And then in the following month, they 
had two things: one said ``minimum payment'' and one said ``pay 
this.'' You paid the minimum payment. That was a trap, they 
caught you, so those two things then pitched you into this 
circumstance, which required you to deal with your credit card 
company, and the upshot of your dealings with your credit card 
company is the sentiment that you have expressed here that you 
are facing off against financial Goliaths, that they are out 
there preying on those of us who have been weakened by 
circumstances, and that you need something to level the playing 
field to empower you to negotiate with these institutions' 
strong-arming tactics.
    If they are treating you that way, you have had a pretty 
rough experience.
    Mr. Corey. It is basically a tightrope walk, and now 
someone is poking sticks at you at the tightrope. And at every 
turn, that one-half step in the wrong direction, you are 
basically ending up in the judge's court. And it is not 
someplace, like I said, in the middle class where we want to 
be. But, again, we are forced down into this sweat box, and 
they are relentless. And they are trying to get us deeper into 
debt so then we really do not get into this.
    To Mr. John's point as far as----
    Chairman Whitehouse. The response to your predicament was 
to offer to lend you more money so you could pay off their 
exorbitant rates and then be in a deeper hole later on.
    Mr. Corey. They did not like the fact that I was paying the 
principal down, clearly, and they did reduce my credit limit 
down from what it was by over $13,000. So now they are taking 
credit away from me. I have asked many friends about their own 
situations, and people who have not missed payments are losing 
credit just for no reason whatsoever. Someone who may have made 
a minimum payment or less than a minimum payment on another 
card, not even with that particular company, their rate went 
up. And when they said, ``Why did my rate go up? '', ``Well, 
you were kind of late on this payment.''
    They then said, ``Well, if you want to get it back to that 
lower rate, close the account.'' Close the account, they really 
don't care about losing your business any longer.
    Chairman Whitehouse. Your description of this is walking a 
tightrope while being prodded with sticks is a memorable 
description.
    I think a lot of the--around here we often disagree on 
things because we disagree on the underlying facts. But it 
seems to me I am seeing quite a significant degree of agreement 
among all four, if you do not mind my saying so, Mr. Corey, the 
professional witnesses here about what the credit card 
industry's business strategy is.
    Judge Gambardella refers to, first of all, that the vast 
majority of people filing for relief under the Bankruptcy Code 
are not abusers or out to take unfair advantage, that 
bankruptcy relief is largely utilized by individuals as a last 
resort for legitimate, non-abusive purposes. And the sort of 
counter to that is the practice of the industry where they 
increase interest payments so fast that even a small stumble 
meant either having to declare bankruptcy or be in a situation 
where you ``literally never get out of debt''; and that in this 
circumstance, ultimate repayment may not be necessary for the 
credit card to have a highly profitable transaction; and that 
in some circumstances repayment is not even the goal. You used 
the phrase ``to the extent repayment is the goal,'' which all 
raises the prospect that there is something different going on 
than what we ordinarily think of as extending a loan and 
getting it paid back over time with a reasonable interest rate 
to reflect the risk.
    Professor Levitin, you talk about companies turning people 
into a perpetual earning asset and distinguishing that from the 
lender who lends with an eye to getting its principal repaid 
and making a profit from the interest.
    Professor Scarberry, you refer to the damage that is done 
by high-cost consumer credit and that this is a significant 
problem.
    And, Mr. John, you talk about a ``debt trap,'' which you 
define as ``where customers of high-interest lenders find 
themselves deeper and deeper in debt to the lender as interest 
rates and fees combine to make it impossible for them to repay 
their loans.'' And you say that, ``Such a trap may well exist 
in both specific cases and in general.''
    So it appears to me that across the board and among all of 
the witnesses for really both sides, the ones who were invited 
by the majority and the ones who were invited by the minority, 
there is at least a fair degree of consensus that there is a 
business strategy to some degree extant in the credit card 
industry to move people into what I referred to in my opening 
remarks as a ``sweat box,'' to put them into a place where they 
can never pay it down because it is too high, where they have 
been kicked up into these interest rates and they cannot escape 
from those. And now by making bankruptcy more difficult, 
pursuant to the so-called bankruptcy reform, they extend that 
time, and then they calculate that minimum payment so it is 
just enough to keep you in there essentially forever, you know, 
40 years or whatever.
    It strikes me that we might have more agreement in the 
Senate on this if we had more agreement that this was, in fact, 
a business strategy that in some circumstances took place in 
the industry.
    Do any of you contest that at some level and to some degree 
that is a business strategy that exists in this industry? Judge 
Gambardella?
    Judge Gambardella. I cannot comment as to whether or not it 
is a business strategy, but I think certainly that is the 
result of these practices. So whether it is intended to be the 
result or not, I think that the conclusions of these studies 
pretty much speak for themselves.
    Chairman Whitehouse. It would be a little hard to imagine 
that a $1 trillion industry with all these computers and 
marketing strategists at their disposal would be doing this 
accidentally. At least that is my perspective.
    Professor Levitin.
    Mr. Levitin. The card industry is one of the most 
sophisticated industries in the world, and there is no chance 
that this is accidental.
    Chairman Whitehouse. Mr. Scarberry? Professor Scarberry. I 
apologize.
    Mr. Scarberry. My expertise is in bankruptcy. I have not 
studied the credit card industry directly. It would not 
surprise me. I would like----
    Chairman Whitehouse. Describe for a minute what you meant 
by your use of the word ``damage.'' You said the ``damage 
caused by high-cost consumer credit.'' What do you mean by 
``damage'' ?
    Mr. Scarberry. What I meant by the damage is that when 
people miss payments and their interest rates go way up--and as 
other people have mentioned, you have universal default clauses 
and other sorts of things. When the interest rate goes up and 
the bills pile up and people cannot pay them, there has been 
damage that has been done.
    Now, the difficulty is that this bankruptcy bill is not 
going to do anything, I think, to prevent that damage or to 
remedy it. I would note that I think it was fairly----
    Chairman Whitehouse. Would you agree that the damage is to 
some degree systematic?
    Mr. Scarberry. I have not seen the studies that would let 
me say that as an academic matter. Anecdotally, certainly there 
are a lot of people who are in over their heads with credit.
    Now, I suppose one issue might be this: that if you were to 
place fairly Draconian limits on interest rates, you might have 
more credit card companies cutting credit limits very 
substantially. When people cannot pay them off, now they are 
going to be charged over-limit fees, and they are not going to 
be able to borrow the extra money that they may need in these 
hard economic times.
    So I don't know what the right economic approach to it is. 
Clearly, there are people who are being harmed substantially. 
What we should do to deal with it, I don't know.
    Chairman Whitehouse. A credit card company can unilaterally 
lower a credit limit below what somebody's balance is and then 
charge them over-limit fees?
    Mr. Scarberry. I don't know that, but with the high 
interest charges, if you lower the limit so that it is still 
above what is owed, it might be that in a few months what is 
owed would go over the limit. And, in any case, the person 
would not have the additional credit available.
    Let me just say this: I believe recently there was a 
requirement that minimum payments on credit cards be increased, 
in part to deal with this problem. And that could be something 
Congress could look at as well.
    Chairman Whitehouse. Mr. John, what of your testimony about 
the debt trap and the danger that a consumer gets into a 
situation where they are--I remember visiting a dairy farm when 
I was a kid, and they walked the cattle into the pens, and they 
put their heads through a railing, and then the gates closed to 
keep their heads locked in, and then the folks come and hook 
them up and milk them. It is probably not as good an analogy as 
Mr. Corey's about walking the tightrope prodded with sticks, 
but one does get the sense that consumers are being lured into 
these things, that the size of their credit and the tiny 
measure of the suggested minimum payment and the ease of the 
trap all combine to put them into a situation not unlike that 
poor dairy cow where their head is trapped by their inability 
to get out, because they cannot pay out, and then they just get 
milked and milked and milked.
    Mr. John. Oh, I think that to a large extent that is true. 
I think one of the things we would agree across this panel is 
on the problem. I think we might disagree on the proposed 
solutions.
    Now, one quick factual check. Under the credit card 
regulations, if the credit card company makes a significant 
change in your credit card, you have the ability to essentially 
refuse that change, whether it is interest rate or whatever, by 
simply not using the credit card again and paying off your 
balance according to the previous terms of the credit card, 
which means that if they lowered your credit limit to below a 
certain level, you would have the ability to say, well, sorry, 
I am not going to use my credit card anymore, I am just going 
to pay it off under the existing contract.
    Chairman Whitehouse. And is that the result of the recent 
Federal Reserve----
    Mr. John. No. This has actually been the case for many, 
many years.
    Chairman Whitehouse. Okay. Mr. Levitin? Professor Levitin. 
Sorry.
    Mr. Levitin. I think it is important just to spell out a 
few other pieces of the credit card business model that fit 
with the sweat box. And I think when you see those, the 
business model is even more disturbing.
    Credit cards attract consumers. They compete not on the 
basis really of interest rates. If you look at credit card 
advertisements, it is not ``We have the lowest rate.'' It is 
``We have such-and-such frequent flyer miles,'' or some sort of 
rewards program, and it is teaser rates. It is not the actual 
cost of the card. So consumers get lured into using cards based 
on these flashy teasers and promotional items.
    Once they are using the cards, then we have the sweat box 
model, but card issuers can be very aggressive with the sweat 
box because, because of securitization, card issuers hold all 
of the upside. So if you pay off--if they squeeze more money 
out of you at the sweat box, they get 100 percent of the 
upside. But if it turns out that they miscalculated and you 
default, they only have a small percentage of the downside. 
This gives them every incentive to squeeze harder, and they are 
able to do that because they are able to change terms 
retroactively, after the fact. They can lower your credit 
limit. They can increase the interest rate. They can lard on 
various late fees, over-limit fees, and so forth. They can 
invent whatever fee they want.
    And because they have 100 percent of the upside but only a 
limited percentage of the downside--and the percentage is going 
to depend on the particulars of their securitization deal--this 
really encourages them to squeeze consumers harder. This is 
like a water balloon, and if they squeeze it too hard and it 
pops, it is not so bad for them. Most of the water gets on 
someone else. But if they can squeeze it really hard and it 
does not pop--well, I am not sure what you get with a water 
balloon with that. But I think you see my point, that they get 
all the benefit.
    Chairman Whitehouse. Let me go to Mr. Corey first and then 
Professor Scarberry.
    Mr. Corey. The situation is--again, I have talked to a lot 
of friends about this since it is a very hot topic amongst 
people in the middle class. But a friend of mine had a 2.9 
rate, and they got a notice saying that their rate was going up 
to 14.99 for no reason whatsoever, just because we can. And 
literally she said that the conversation that she had with this 
person was, she said, ``Well, I am just going to close my 
account.'' She has very little on that particular account. 
``I'll close it and pay it off.'' And the woman on the other 
line said specifically that we really--``If you want to close 
it, that is fine, because we are going to get someone who has a 
lower credit rating and get them at a higher interest rate. So 
if you want to leave, go right ahead.'' And that is really what 
is going on. They don't care for people with good--they don't 
want people who are responsible and whatnot. If you want to 
leave and go to another business, that is fine. You can take 
your card and go somewhere else, we don't care.
    Then they are eliminating--again, they are already 
eliminating credit levels for everyone already. So I am kind of 
having a hard time understanding what folks are saying about 
banks are--this would eliminate banks from giving out credit. 
They already are--when people need it.
    Chairman Whitehouse. Professor Scarberry.
    Mr. Scarberry. Senator, one of the points that has been 
made is that this bill would allow consumers to call up the 
credit card company and negotiate. You know, ``You have raised 
my rate because of a default, and I may have to go into 
bankruptcy, so why don't you lower the rate? Because if I go 
into bankruptcy, your claim is not going to be allowed.''
    Well, one of the problems with the definition of the high-
cost consumer debt here is that after the rate goes above the 
limit for 1 day, that debt is forever tainted. So in a 
negotiation with the creditor, if you say, ``Would you please 
lower the rate? '' well, they do not have a lot to gain, 
because they cannot redeem that debt from now being tainted. It 
was at some point during its life over the limit. So that is a 
difficulty.
    The other difficulty with the negotiation issue----
    Chairman Whitehouse. Although, just to be clear, if the 
customer as a result does not go into bankruptcy, then that so-
called taint has no effect.
    Mr. Scarberry. That is correct. That is correct.
    The other difficulty with negotiating is that if you have 
multiple credit cards, which people seem to have, it is 
difficult to do multi-party negotiations. If the point is, 
``well, I can stay out of bankruptcy if you will lower it, 
people can negotiate that already, because already the credit 
card companies are not going to get much in a bankruptcy. So I 
don't know that this bill adds to that leverage. It does taint 
the debt forever.
    But when you have multiple credit cards, it is difficult to 
coordinate a negotiation, and people who do law and economics 
will talk about difficulties of these multi-party negotations--
the transaction costs are high. So that is an issue.
    Now, there is one other technical issue. Suppose the rate 
goes up above the limit on a credit card balance for a few 
months. Then the debtor makes a lot of payments and the credit 
card company reduces the rate. How do we decide when the taint 
is gone? Is it after all of the principal balance is paid?--
after principal payments have been made equal to the principal 
balance at that time? Ten years later, is that credit card 
account still tainted because at one time for some of the 
credit that was issued on that credit card the rate was over 
the limit? How are we going to figure what is the debt on which 
the credit was over the limit? That is a practical question 
that bankruptcy judges and trustees might have to deal with.
    I also wonder if bankruptcy trustees will appreciate having 
the burden of going through all the credit cards to figure this 
out. They might have time to, but those are concerns I have 
about that.
    Judge Gambardella. Well, I want to take up that last point 
because it was raised who would have standing to move to 
disallow these claims, who would have the incentive to review 
these claims. Certainly there are many no-asset Chapter 7 cases 
that just go through the system, and there probably is very 
little incentive there. But there are certainly, in certain 
district, asset 7s where there is substantial debt and 
substantial assets. And I think a vigorous trustee would have 
an interest in going after a certain category of claims that 
could be disallowed to increase payment to the bona fide 
unsecured debt in a given case.
    In a Chapter 13, which is the repayment plan, I would think 
that a Chapter 13 trustee who oversees plans and the debtor's 
counsel would have equal incentive to review these claims.
    So I think there are parties with standing and incentive to 
investigate and to make hopefully rational decisions about when 
a motion for disallowance should be brought before a judge and 
when it should not. That is the one point I wanted to bring up 
from the testimony prior.
    Chairman Whitehouse. Let me ask one last question, and then 
if anybody has anything final they would like to add, we will 
do that and then conclude the hearing.
    There has been the repeated suggestion in the hearing that 
by any substantive regulation of interest rates, we risk 
denying people credit and that there is almost a tone as if 
this would be sort of a novelty or anomaly.
    My understanding is that back to, you know, biblical days, 
interest rates have been substantively regulated and that from 
biblical times until, I guess, 1978 when the Marquette decision 
came out, and then a tail after that as the banking industry 
became aware of the opportunity that the Marquette decision 
provided and began to move its operations to no-protection 
States and operate out of those so that they could get out from 
under local usury laws, which I think almost every State had. 
Indeed, if I recall correctly, some of the States actually got 
rid of their usury laws as a means of attracting the business 
of the credit card companies to come to their State. So from 
there they could launch unrestricted marketing efforts and 
unrestricted interest rates around the rest of the country, 
notwithstanding, for instance, the Rhode Island Legislature's 
desire to protect Rhode Islanders. ``Nothing we can do about 
it,'' said this decision.
    So it strikes me as if the baseline on this is a multi-
thousand-year baseline of generally consistent, substantive 
interest rate regulation, and that if there is an anomaly, the 
anomaly has been the last 30 years--actually, probably less 
than 30 because it took a while for the banking industry to 
catch on to the door that the Marquette decision had opened, 
and that actually we are in the period of anomaly right now. 
And so to move toward more substantive regulation would be 
consistent with the entire sort of legal common law and 
regulatory history of our culture dating back to its very 
earliest days.
    Mr. John. May I bite on that one?
    Chairman Whitehouse. Please.
    Mr. John. There are two other factors that come into play 
here, however, which is that prior to Marquette, credit was not 
regularly available to certain groups of consumers. It is one 
of the reasons, for instance, in Rhode Island they had such a 
heavy retail presence of credit unions and such a small 
consumer presence of banks up until relatively recently. So 
there has been a result, which is that the three groups that I 
talked about--the lower-and middle-income workers, the first-
time borrowers, and those with poor credit histories--now have 
much more credit available to them than they would have 
otherwise.
    The other factor which comes into play with Senator 
Sanders' legislation is that he does talk about what the credit 
unions do. And I have great respect for credit unions. I am a 
member of a credit union. I once lobbied for credit unions. 
However, they are tax-exempt, so it seems only fair, if he is 
going to put a 15-percent ceiling on there, he should also take 
away the taxes on bank credit activities.
    Chairman Whitehouse. I am sure he will take that 
recommendation into consideration.
    Well, if there is nothing further, I just want to express 
my appreciation to all of the witnesses who have shared from 
their personal experiences and from their judicial experiences, 
from their academic experiences, and have been, I think, both 
thoughtful and helpful. I express my appreciation also to the 
Ranking Member--unfortunately, he was called away, but clearly 
this is a matter of interest to him--and to the Chairman of the 
Judiciary Committee, Chairman Leahy, for his interest in this 
and his statement, and for our Majority Whip, Senator Durbin, 
and Senator Sanders for their attendance.
    The record of this proceeding will be open 7 days if 
anybody seeks to add anything further, and with that, the 
hearing is now adjourned.
    [Whereupon, at 11:45 a.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions follow.]


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