[Congressional Record Volume 151, Number 64 (Monday, May 16, 2005)]
[Senate]
[Pages S5225-S5228]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. FEINSTEIN:
  S. 1040. A bill to amend the Truth in Lending Act to provide for 
enhanced disclosure under an open end credit plan; to the Committee on 
Banking, Housing, and Urban Affairs.
  Mrs. FEINSTEIN. Mr. President, I rise to introduce the Credit Card 
Minimum Payment Notification Act.
  Today, 144 million Americans utilize credit cards and charge more 
debt on those cards than ever before. In 1990, Americans charged $338 
billion on credit cards. By 2003, that number had risen to $1.5 
trillion.
  Many Americans now own multiple credit cards. In 2003, 841 million 
bank-issued credit cards were in circulation in the U.S. That number 
becomes nearly 1.4 billion credit cards, when cards issued by stores 
and oil companies are factored in. That's an average of 5 credit cards 
per person.
  The proliferation of credit cards can be traced, in part, to a 
dramatic increase in credit card solicitation. In 1993, credit card 
companies sent 1.52 billion solicitations to American homes; in 2001, 
they sent over 5 billion.
  As one would expect, the increase in credit cards has also yielded an 
increase in credit card debt. Individuals get 6, 7, or 8 different 
credit cards, pay only the minimum payment required, and many end up 
drowning in debt. That happens in case after case.
  Since 1990, the debt that Americans carry on credit cards has more 
than tripled, going from about $238 billion in 1990 to $755 billion in 
2004.
  As a result, the average American household now has about $7,300 of 
credit card debt.
  As has been discussed much in this Congress, the number of personal 
bankruptcies has doubled since 1990. Many of these personal 
bankruptcies are people who utilize credit cards. These cards are 
enormously attractive. However, these individual credit card holders 
receive no information on the impact of compounding interest. They pay 
just the minimum payment. They pay it for 1 year, 2 years--they make 
additional purchases, they get another card, and another, and another.
  Unfortunately, these individuals making the minimum payment are 
witnessing the ugly side of the ``Miracle of Compound Interest.'' After 
2 or 3 years, many find that the interest on the debt is such that they 
can never repay these cards, and do not know what to do about it.
  Statistics vary about the number of individuals who make only the 
minimum payments. One study determined that 35 million pay only the 
minimum on their credit cards. In a recent poll, 40 percent of 
respondents said that they pay the minimum or slightly more. What is 
certain is that many Americans pay only the minimum, and that paying 
only the minimum has harsh financial consequences.
  I suspect that most people would be surprised to know how I much 
interest can pile up when paying the minimum. Take the average 
household, with $7,300 of credit card debt, and the average credit card 
interest rate, which in April, before the most recent Federal Reserve 
Board increase of the prime rate, was 16.75 percent. If only the 2 
percent minimum payment is made, it will take them 44 years and 
$23,373.90 to pay off the card. And that is if the family doesn't spend 
another cent on their credit cards--an unlikely assumption. In other 
words, the family will need to pay over $16,000 in interest to repay 
just $7,300 of principal.
  For individuals or families with more than average debt, the pitfalls 
are even greater. $20,000 of credit card debt at the average 16.75 
percent interest rate will take 58 years and $65,415.28 to pay off if 
only the minimum payments are made.
  And 16.25 is percent only the average interest rate. The prime rate, 
despite recent increases, remains relatively low--at 6 percent. 
However, interest rates around 20 percent are not uncommon. In fact, 
among the 10 banks that are the largest issuers of credit cards, the 
top interest rates on credit cards are between 23 and 31 percent--and 
that does not factor in various penalties and fees. When penalty 
interest rates are factored in, the highest rates are 41 percent. In 
1990, the highest interest rate--even with penalties, was 22 percent, a 
little more than half of what they are today.
  Even if we assume only a 20 percent interest rate, a family that has 
the average debt of $7,300 at a 20 percent interest rate and makes the 
minimum payments will need an incredible 76 years and $41,884 to pay 
off that initial $7,300 of debt. That's $34,584 in interest payments--
more than 4 times the original debt. And these examples are far from 
extreme.
  Moreover, these are not merely statistics, but are reflective of very 
real situations for many people. On March 6, the Washington Post ran a 
headline story on its front page, entitled ``Credit Card Penalties, 
Fees Bury Debtors.'' I would recommend this article to my colleagues, 
because it illustrates part of the problem--that credit card companies, 
aggressively marketing their products, end up charging outrageous 
interest and fees to their customers. I ask unanimous consent that the 
article be included in the Record. The article highlighted the 
following stories:
  Ohio resident, Ruth Owens tried for 6 years to pay off a $1,900 
balance on her

[[Page S5226]]

Discover card, sending the credit company a total of $3,492 in monthly 
payments from 1997 to 2003. Yet her balance grew to $5,564.28.
  Virginia resident Josephine McCarthy's Providian Visa bill increased 
to $5,357 in 2 years, even though McCarthy has used the card for only 
$218.16 in purchases and has made monthly payments totaling $3,058.
  Special-education teacher Fatemeh Hosseini, from my state of 
California, worked a second job to keep up with the $2,000 in monthly 
payments she collectively sent to five banks to try to pay $25,000 in 
credit card debt. Even though she had not used the cards to buy 
anything more, her debt had nearly doubled to $49,574 by the time she 
filed for bankruptcy last June.
  Unfortunately, these stories are not unique.
  Part of the problem goes back to changes made in the credit card 
industry. For a long time, most banks required their customers to pay 5 
percent of their credit card balance every month. That was before 
Andrew Kahr, a credit card industry consultant, got involved. Mr. Kahr 
realized that if customers were able to pay less, they would borrow 
more, and he convinced his clients that they should reduce the minimum 
payment to just 2 percent.
  The PBS program ``Frontline'', ran a program in November of last year 
titled ``The Secret History of the Credit Card'' that examined the 
rapid growth of the credit card industry and included an interview with 
Mr. Kahr.
  Mr. Kahr's innovation has been a windfall for the credit card 
industry. If consumers are paying a lower percentage of their balance 
as the minimum payment, the credit card companies will make more money 
over time. In fact, many in the industry refer to individuals who pay 
their credit card bills in full as ``deadbeats'', because they are less 
profitable than individuals who carry large balances, who are known as 
``revolvers.''
  And Mr. Kahr's own research showed that just making the minimum 
payment eased consumers' anxiety about carrying large amounts of credit 
card debt--they believe they are still being financially prudent.
  The bill I am proposing speaks directly to those types of consumers. 
There will always be people who cannot afford to pay more than their 
minimum payments. But, there are also a large number of consumers who 
can afford to pay more but feel comfortable paying the minimum payment 
because they don't realize the consequences of doing so.
  Now I am certainly not trying to demonize credit cards or the credit 
card industry. Credit cards are an important part of everyday life. 
However, I do think that people should understand the dangers of paying 
only their monthly minimums. In this way individuals will be able to 
act responsibly.
  It's not necessarily that people don't understand the basics of 
interest. Most of us just don't realize how fast it compounds or how 
important it is to do the math to find out what it means to pay a 
minimum requirement.
  The bottom line is that for many consumers, the 2 percent minimum 
payment is a financial trap.
  The Credit Card Minimum Payment Notification Act is designed to 
ensure that people are not caught in this trap through lack of 
information. The bill tracks the language of the amendment originally 
proposed to the Bankruptcy bill that was co-sponsored by Senator Kyl, 
Senator Brownback, and myself.
  Let me tell you exactly what this bill would do. It would require 
credit card companies to add two items to each consumer's monthly 
credit card statement: 1. A notice warning credit card holders that 
making only the minimum payment each month will increase the interest 
they pay and the amount of time it takes to repay their debt; and 2. 
Examples of the amount of time and money required to repay a credit 
card debt if only minimum payments are made; OR if the consumer makes 
only minimum payments for six-consecutive months, the amount of time 
and money required to repay the individual's specific credit card debt, 
under the terms of their credit card agreement.
  The bill would also require that a toll free number be included on 
statements that consumers can call to get an estimate of the time and 
money required to repay their balance, if only minimum payments are 
made.
  And, if the consumer makes only minimum payments for six consecutive 
months, they will receive a toll free number to an accredited credit 
counseling service.
  The disclosure requirements in this bill would only apply if the I 
consumer has a minimum payment that is less than 10 percent of the debt 
on the credit card, or if their balance is greater than $500. 
Otherwise, none of these disclosures would be required on their 
statement.
  The language of this bill comes from a California law, the 
``California Credit Card Payment Warning Act,'' passed in 2001. 
Unfortunately, in 2002, this California law was struck down in U.S. 
District Court as being preempted by the 1968 Truth in Lending Act. The 
Truth in Lending Act was enacted in part because Congress found that, 
``The informed use of credit results from an awareness of the cost of 
thereof by consumers.'' Consequently, this bill would amend the Truth 
in Lending Act, and would also further its core purpose.
  These disclosures allow consumers to know exactly what it means for 
them to carry a balance and only make minimum payments, so they can 
make informed decisions on credit card use and repayment.
  The disclosure required by this bill is straightforward how much it 
will cost to pay off the debt if only minimum payments are made, and 
how long it will take to do it. As for expense, my staff tells me that 
on the website Cardweb.com, there is a free interest calculator that 
does these calculations in under a second. Moreover, I am told that 
banks make these calculations internally to determine credit risk. The 
expense would be minimal.
  Percentage rates and balances are constantly changing and each month, 
the credit card companies are able to assess the minimum payment, late 
fees, over-the-limit fees and finance charges for millions of accounts.
  If the credit card companies can put in their bills what the minimum 
monthly payment is, they can certainly figure out how to disclose to 
their customers how much it might cost them if they stick to that 
minimum payment.
  The credit card industry is the most profitable sector of banking, 
and last year it made $30 billion in profits. MBNA's profits alone last 
year were one-and-a-half times that of McDonald's. Citibank was more 
profitable than Microsoft and Walmart. I don't think they should have 
any trouble implementing the requirements of this bill.
  I believe that this is extraordinarily important and that it will 
minimize bankruptcies. With companies charging very substantial 
interest rates, they have an obligation to let the credit card holder 
know what those minimum payments really mean. I have people close to me 
I have watched, with 6 or 7 credit cards, and it is impossible for 
them, over the next 10 or 15 years, to pay off the debt if they 
continue making just minimum payments.
  We now have a bankruptcy bill that has passed into law. I continue to 
believe that a bill requiring a limited but meaningful disclosure by 
credit cards companies is a necessary accompaniment. I think you will 
have people who are more cautious, which I believe is good for the 
bankruptcy courts in terms of reducing their caseloads, and also good 
for American consumers.
  The credit card debt problem facing our Nation is significant. I 
believe that this bill is an important step in providing individuals 
with the information needed to act responsibly, and it does so with a 
minimal burden on the industry.
  I urge my colleagues to support this legislation.
  There being no objection, the article was ordered to be printed in 
the Record, as follows:

                [From the Washington Post, Mar. 6, 2005]

   Credit Card Penalties, Fees Bury Debtors; Senate Nears Action on 
                            Bankruptcy Curbs

                (By Kathleen Day and Caroline E. Mayer)

       For more than two years, special-education teacher Fatemeh 
     Hosseini worked a second job to keep up with the $2,000 in 
     monthly payments she collectively sent to five banks to try 
     to pay $25,000 in credit card debt.
       Even though she had not used the cards to buy anything 
     more, her debt had nearly doubled to $49,574 by the time the 
     Sunnyvale,

[[Page S5227]]

     Calif., resident filed for bankruptcy last June. That is 
     because Hosseini's payments sometimes were tardy, triggering 
     late fees ranging from $25 to $50 and doubling interest rates 
     to nearly 30 percent. When the additional costs pushed her 
     balance over her credit limit, the credit card companies 
     added more penalties.
       ``I was really trying hard to make minimum payments,'' said 
     Hosseini, whose financial problems began in the late 1990s 
     when her husband left her and their three children. ``All of 
     my salary was going to the credit card companies, but there 
     was no change in the balances because of that interest and 
     those penalties.''
       Punitive charges--penalty fees and sharply higher interest 
     rates after a payment is late--compound the problems of many 
     financially strapped consumers, sometimes making it 
     impossible for them to dig their way out of debt and pushing 
     them into bankruptcy.
       The Senate is to vote as soon as this week on a bill that 
     would make it harder for individuals to wipe out debt through 
     bankruptcy. The Senate last week voted down several 
     amendments intended to curb excessive fees and other 
     practices that critics of the industry say are abusive. House 
     leaders say they will act soon after that, and President Bush 
     has said he supports the bill.
       Bankruptcy experts say that too often, by the time an 
     individual has filed for bankruptcy or is hauled into court 
     by creditors, he or she has repaid an amount equal to their 
     original credit card debt plus double-digit interest, but 
     still owes hundreds or thousands of dollars because of 
     penalties.
       ``How is it that the person who wants to do right ends up 
     so worse off?'' Cleveland Municipal Judge Robert J. Triozzi 
     said last fall when he ruled against Discover in the 
     company's breach-of-contract suit against another struggling 
     credit cardholder, Ruth M. Owens.
       Owens tried for six years to payoff a $1,900 balance on her 
     Discover card, sending the credit company a total of $3,492 
     in monthly payments from 1997 to 2003. Yet her balance grew 
     to $5,564.28, even though, like Hosseini, she never used the 
     card to buy anything more. Of that total, over-limit penalty 
     fees alone were $1,158.
       Triozzi denied Discover's claim, calling its attempt to 
     collect more money from Owens ``unconscionable.''
       The bankruptcy measure now being debated in Congress has 
     been sought for nearly eight years by the credit card 
     industry. Twice in that time, versions of it have passed both 
     the House and Senate. Once, President Bill Clinton refused to 
     sign it, saying it was unfair, and once the House reversed 
     its vote after Democrats attached an amendment that would 
     prevent individuals such as antiabortion protesters from 
     using bankruptcy as a shield against court-imposed fines.
       Credit card companies and most congressional Republicans 
     say current law needs to be changed to prevent abuse and make 
     more people repay at least part of their debt. Consumer-
     advocacy groups and many Democrats say people who seek 
     bankruptcy protection do so mostly because they have fallen 
     on hard times through illness, divorce or job loss. They also 
     argue that current law has strong provisions that judges can 
     use to weed out those who abuse the system.
       Opponents also argue that the legislation is unfair because 
     it ignores loopholes that would allow rich debtors to shield 
     millions of dollars during bankruptcy through expensive homes 
     and complex trusts, while ignoring the need for more 
     disclosure to cardholders about rates and fees and curbs on 
     what they say is irresponsible behavior by the credit card 
     industry. The Republican majority, along with a few 
     Democrats, has voted down dozens of proposed amendments to 
     the bill, including one that would make it easier for the 
     elderly to protect their homes in bankruptcy and another that 
     would require credit card companies to tell customers how 
     much extra interest they would pay over time by making only 
     minimum payments.
       No one knows how many consumers get caught in the spiral of 
     ``negative amoritization,'' which is what regulators call it 
     when a consumer makes payments but balances continue to 
     grow because of penalty costs. The problem is widespread 
     enough to worry federal bank regulators, who say nearly 
     all major credit card issuers engage in the practice.
       Two years ago regulators adopted a policy that will require 
     credit card companies to set monthly minimum payments high 
     enough to cover penalties and interest and lower some of the 
     customer's original debt, known as principal, so that if a 
     consumer makes no new charges and makes monthly minimum 
     payments, his or her balance will begin to decline.
       Banks agreed to the new rules after, in the words of one 
     top federal regulator, ``some arm-twisting.'' But bank 
     executives persuaded regulators to allow the higher minimum 
     payments to be phased in over several years, through 2006, 
     arguing that many customers are so much in debt that even 
     slight increases too soon could push many into financial 
     disaster.
       Credit card companies declined to comment on specific cases 
     or customers for this article, but banking industry 
     officials, speaking generally, said there is a good reason 
     for the fees they charge.
       ``It's to encourage people to pay their bills the way they 
     said they would in their contract, to encourage good 
     financial management,'' said Nessa Feddis, senior federal 
     counsel for the American Bankers Association. ``There has to 
     be some onus on the cardholder, some responsibility to manage 
     their finances.''
       High fees ``may be extreme cases, but they are not the 
     trend, not the norm,'' Feddis said.
       ``Banks are pretty flexible,'' she said. ``If you are a 
     good customer and have an occasional mishap, they'll waive 
     the fees, because there's so much competition and it's too 
     easy to go someplace else.'' Banks are also willing to work 
     out settlements with people in financial difficulty, she 
     said, because ``there are still a lot of options even for 
     people who've been in trouble.''
       Many bankruptcy lawyers disagree. James S.K. ``Ike'' 
     Shulman, Hosseini's lawyer, said credit card companies 
     hounded her and did not live up to several promises to work 
     with her to cut mounting fees.
       Regulators say it is appropriate for lenders to charge 
     higher-risk debtors a higher interest rate, but that negative 
     amortization and other practices go too far, posing risks to 
     the banking system by threatening borrowers' ability to repay 
     their debts and by being unfair to individuals.
       U.S. Bankruptcy Judge David H. Adams of Norfolk, who is 
     also the president of the National Conference of Bankruptcy 
     Judges, said many debtors who get in over their heads ``are 
     spending money, buying things they shouldn't be buying.'' 
     Even so, he said, ``once you add all these fees on, the 
     amount of principal being paid is negligible. The fees and 
     interest and other charges are so high, they may never be 
     able to pay it off.''
       Judges say there is little they can do by the time cases 
     get to bankruptcy court. Under the law, ``the credit card 
     company is legally entitled to collect every dollar without a 
     distinction'' whether the balance is from fees, interest or 
     principal, said retired U.S. bankruptcy judge Ronald 
     Barliant, who presided in Chicago. The only question for the 
     courts is whether the debt is accurate, judges and lawyers 
     say.
       John Rao, staff attorney of the National Consumer Law 
     Center, one of many consumer groups fighting the bankruptcy 
     bill, says the plight consumers face was illustrated last 
     year in a bankruptcy case filed in Northern Virginia.
       Manassas resident Josephine McCarthy's Providian Visa bill 
     increased to $5,357 from $4,888 in two years, even though 
     McCarthy has used the card for only $218.16 in purchases and 
     has made monthly payments totaling $3,058. Those payments, 
     noted U.S. Bankruptcy Judge Stephen S. Mitchell in 
     Alexandria, all went to ``pay finance charges (at a whopping 
     29.99%), late charges, over-limit fees, bad check fees and 
     phone payment fees.'' Mitchell allowed the claim ``because 
     the debtor admitted owing it.'' McCarthy, through her lawyer, 
     declined to be interviewed.
       Alan Elias, a Providian Financial Corp. spokesman, said: 
     'When consumers sign up for a credit card, they should 
     understand that it's a loan, no different than their mortgage 
     payment or their car payment, and it needs to be repaid. And 
     just like a mortgage payment and a car payment, if you are 
     late you are assessed a fee.'' The 29.99 percent interest 
     rate, he said, is the default rate charged to consumers ``who 
     don't meet their obligation to pay their bills on time'' and 
     is clearly disclosed on account applications.
       Feddis, of the banker's association, said the nature of 
     debt means that interest will often end up being more than 
     the original principal. ``Anytime you have a loan that's 
     going to extend for any period of time, the interest is going 
     to accumulate. Look at a 30-year-mortgage. The interest is 
     much, much more than the principal.''
       Samuel J. Gerdano, executive director of the American 
     Bankruptcy Institute, a nonpartisan research group, said that 
     focusing on late fees is ``refusing to look at the elephant 
     in the room, and that's the massive levels of consumer debt 
     which is not being paid. People are living right up to the 
     edge,'' failing to save so when they lose a second job or 
     overtime, face medical expense or their family breaks up, 
     they have no money to cope.
       ``Late fees aren't the cause of debt,'' he said.
       Credit card use continues to grow, with an average of 6.3 
     bank credit cards and 6.3 store credit cards for every 
     household, according to Cardweb.com Inc., which monitors the 
     industry. Fifteen years ago, the averages were 3.4 bank 
     credit cards and 4.1 retail credit cards per household.
       Despite, or perhaps because of, the large increase in 
     cards, there is a ``fee feeding frenzy,'' among credit card 
     issuers, said Robert McKinley, Cardweb's president and chief 
     executive. ``The whole mentality has really changed over the 
     last several years,'' with the industry imposing fees and 
     increasing interest rates if a single payment is late.
       Penalty interest rates usually are about 30 percent, with 
     some as high as 40 percent, while late fees now often are $39 
     a month, and over-limit fees, about $35, McKinley said. ``If 
     you drag that out for a year, it could be very damaging,'' he 
     said. ``Late and over-limit fees alone can easily rack up 
     $900 in fees, and a 30 percent interest rate on a $3,000 
     balance can add another $1 ,000, so you could go from $2,000 
     to $5,000 in just one year if you fail to make payments.''
       According to R.K. Hammer Investment Bankers, a California 
     credit card consulting firm, banks collected $14.8 billion in 
     penalty fees last year, or 10.9 percent of revenue, up

[[Page S5228]]

     from $10.7 billion, or 9 percent of revenue, in 2002, the 
     first year the firm began to track penalty fees.
       The way the fees are now imposed, ``people would be better 
     off if they stopped paying'' once they get in over their 
     heads, said T. Bentley Leonard, a North Carolina bankruptcy 
     attorney. Once you stop paying, creditors write off the debt 
     and sell it to a debt collector. ``They may harass you, but 
     your balance doesn't keep rising. That's the irony.''
                                 ______