THE CREDIT CARDHOLDERS’ BILL OF RIGHTS:

PROVIDING NEW PROTECTIONS FOR CONSUMERS

HEARING

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MARCH 13, 2008

Printed for the use of the Committee on Financial Services

Serial No. 110–100

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THE CREDIT CARDHOLDERS’ BILL OF RIGHTS:

PROVIDING NEW PROTECTIONS FOR CONSUMERS

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41–731 PDF 2008

THE CREDIT CARDHOLDERS’ BILL OF RIGHTS:

PROVIDING NEW PROTECTIONS FOR CONSUMERS

HEARING

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MARCH 13, 2008

Printed for the use of the Committee on Financial Services

Serial No. 110–100

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

CAROLYN B. MALONEY, New York, Chairwoman

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

4PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JUDY BIGGERT, Illinois 

TOM PRICE, Georgia 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

STEVEN C. LATOURETTE, Ohio 

WALTER B. JONES, JR., North Carolina 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

(V)

C O N T E N T S 

Page 

Hearing held on: 

March 13, 2008 ................................................................................................. 1

Appendix: 

March 13, 2008 ................................................................................................. 71

WITNESSES 

THURSDAY, MARCH 13, 2008

Ausubel, Lawrence M., Professor, Department of Economics, University of 

Maryland ............................................................................................................... 24

Baer, Gregory, Deputy General Counsel, Regulatory and Public Policy, Bank 

of America ............................................................................................................. 18

Finneran, John G., Jr., General Counsel, Capital One ........................................ 22

Franke, Carter, Marketing Executive, JPMorgan Chase ..................................... 25

Ireland, Oliver I., Partner, Morrison & Foerster .................................................. 27

Levitin, Adam J., Associate Professor of Law, Georgetown University Law 

Center .................................................................................................................... 20

Porter, Katherine M., Associate Professor, The University of Iowa College 

of Law .................................................................................................................... 29

Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard Law School ........... 16

APPENDIX 

Prepared statements: 

Brown-Waite, Hon. Ginny ................................................................................ 72

Castle, Hon. Michael N. ................................................................................... 74

Ausubel, Lawrence M. ...................................................................................... 76

Baer, Gregory .................................................................................................... 91

Finneran, John G., Jr. ...................................................................................... 101

Franke, Carter .................................................................................................. 105

Ireland, Oliver I. ............................................................................................... 108

Levitin, Adam J. ............................................................................................... 117

Porter, Katherine M. ........................................................................................ 140

Warren, Elizabeth ............................................................................................ 153

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Maloney, Hon. Carolyn: 

Letter from the National Small Business Association, dated March 11, 

2008 ................................................................................................................ 164

Campbell, Hon. John: 

GAO Report entitled, ‘‘Credit Cards, Increased Complexity in Rates and 

Fees Heightens Need for More Effective Disclosures to Consumers,’’ 

dated September 2006 .................................................................................. 165

Castle, Hon. Michael N.: 

‘‘Table 4: Revenues and Profits of Credit Card Issuers in Card Industry 

Directory per $100 of Credit Card Assets’’ ................................................. 279

Price, Hon. Tom: 

Wall Street Journal article entitled, ‘‘Freedom Means Responsibility,’’ 

by former Senator George McGovern, dated March 7, 2008 ..................... 280

‘‘Credit Controls: 1980’’ .................................................................................... 282

Levitin, Adam J.: 

Slide show presented at hearing ..................................................................... 313

(1)

THE CREDIT CARDHOLDERS’ BILL 

OF RIGHTS: PROVIDING NEW 

PROTECTIONS FOR CONSUMERS 

Thursday, March 13, 2008

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Carolyn B. Maloney 

[chairwoman of the subcommittee] presiding. 

Members present: Representatives Maloney, Watt, Ackerman, 

Sherman, Moore of Kansas, Waters, Green, Clay, Scott, Cleaver, 

Bean, Davis of Tennessee, Hodes, Ellison, Klein, Perlmutter; 

Biggert, Price, Castle, Capito, Feeney, Hensarling, Garrett, 

Neugebauer, Campbell, McCarthy of California, and Heller. 

Ex officio: Representatives Frank and Bachus. 

Also present: Representative Udall. 

Chairwoman MALONEY. I call this hearing to order, and I thank 

everyone for being here, particularly my ranking member, Judy 

Biggert. 

I would first like to ask unanimous consent that Mark Udall, 

who is not a member of this committee, be allowed to sit on the 

panel and be allowed to ask some questions. Is there any objection? 

Hearing none, it is so ordered. 

My colleague, Ms. Biggert, has requested 15 minutes per side, 

and that is fine with our side. And I am pleased that our chairman, 

Barney Frank, is with us. 

Before we start, I want to inform the committee that there have 

been fairness concerns raised about having consumers testify this 

morning without a waiver that allowed their credit card issuers to 

respond publicly. In the interest of having the fairest hearing possible, I have decided to postpone the first panel to a future date. 

We do have our witnesses here, and they are ready to testify. 

They are seated here. They have traveled from across the country 

to be here. However, in order to have a discussion that entirely focuses on the substance and not on process, we are doing everything 

we can to accommodate any concerns that have been raised. It is 

my hope that between now and a future date, we can get consumer 

witnesses here so that the committee can hear real world examples 

of how this credit card bill would help consumers. 

First of all, I would like— 

2

The CHAIRMAN. Would the gentlewoman yield? 

Chairwoman MALONEY. Yes, I would. 

The CHAIRMAN. I appreciate the chairwoman of the subcommittee 

making that accommodation. I just want to say, as Chair of the 

committee, it has been and will be our policy that no testimony will 

be given in any context in which there cannot be a full and free 

response. So I appreciate the chairwoman accommodating us on 

that, and as we go forward, that will be the context in which it 

happens. 

Some aspects of this process are new to us, new to a lot of us. 

We don’t always get everything—you don’t always see all the implications the first time. There has been no bad faith involved, in my 

judgment, on anybody’s part. And this will give us time to comply 

with what I would assume was a universally accepted principle 

that all debate should be conducted in fully fair terms. 

I thank the gentlewoman. 

Chairwoman MALONEY. First of all, I am delighted to welcome 

our witnesses to the first of two legislative hearings on H.R. 5244, 

the Credit Cardholders’ Bill of Rights, which I introduced with 

Chairman Frank last month and which we are glad to say has over 

82 cosponsors to date, including many members of this committee. 

Credit cards may represent the single most successful financial 

product introduced in our country in the last 50 years. They have 

given consumers unprecedented convenience and flexibility in both 

making purchases and in managing their personal finances. 

Over 75 percent of the adult population in America have credit 

cards. Credit cards have become a necessity of daily life without 

which it is almost impossible to travel, make non-cash purchases, 

or do daily business. 

But with that great success, with that huge growth, with that necessity, comes shared responsibility. The credit card industry has 

been clear about the responsibility imposed upon consumers: Make 

your minimum payments on time and stay under your limit. But 

what about the reciprocal responsibility of card companies? What 

about the responsibility to stick to the terms of the deal that the 

customer agreed to? 

Cardholders who pay at least the minimum payment on time 

every month and don’t go over their limit expect that, in return, 

they can count on the card companies not imposing rate hikes or 

penalty fees. They don’t expect the rate on money they already borrowed to go up dramatically, with no notice. They don’t expect their 

monthly payments to double and triple, sending them further and 

further into debt. 

But almost every card agreement allows the card company to do 

just that. And a cardholder who makes one late payment, even if 

the reason has been that they were at the hospital, will soon find 

that their previous history of on-time payment for years and years 

doesn’t make any difference, that one late payment can increase 

their rates, in some cases substantially. 

Even cardholders who are financially responsible and do their 

very best to meet their obligations fall victim to rate hikes that are 

unexplained, totally out of proportion, irreversible, inescapable, and 

which drive them deeper and deeper into debt. 

3

Recently Chairman Bernanke testified to this committee that the 

Fed was going to use its unfair and deceptive practices authority 

to regulate the very same abuses my bill goes after because, he 

said, their authority to regulate disclosure was not enough. 

Ranking Member Biggert asked him, and I quote, ‘‘What would 

consumers need to know to make informed decisions?’’ And he responded, and I quote, ‘‘They need to know the interest rate and 

how it varies over time and what that means to them in terms of 

payments.’’ Well, how can a responsible consumer know their interest rate and what their payments will be if the interest rate 

changes for any time, any reason, and is applied to their existing 

balances? 

This bill aims to bring back some balance to the playing field. It 

attempts to put some of the responsibility for fair dealing back on 

the card companies and give cardholders the tools they need to control their finances and make sure they can pay back their debts responsibly. 

It puts an end to any time/any reason repricing, stops issuers 

from raising rates on existing balances of cardholders who make 

their payments on time, and gives all cardholders faced with any 

rate increase the ability to stop borrowing more and pay off their 

loan on the terms that they agreed to. 

We seem to have forgotten that a credit card agreement is just 

that, an agreement. When the terms change—and the interest rate 

is the most important term for most customers—cardholders should 

have a chance to say no to the new deal and pay off the loan they 

have at the terms that they originally agreed to. 

USA Today called this, and I quote, ‘‘ a sensible bill and muchneeded reform.’’ Unlike other proposals before Congress, our bill 

does not set price controls. It does not set rate caps or limit the 

size of fees. I believe that our bill is a much-needed correction to 

a market that has gotten wildly out of balance. 

I have always believed that responsible access to credit is critical 

to our economy, and that access to appropriate credit should be as 

broad as possible consistent with the safety and soundness of the 

financial system. I believe in free market solutions, but the free 

market only works when consumers have the information they 

need and the ability to make informed choices. 

I think our bill will help cardholders and issuers exercise their 

shared responsibility and promote a sounder economy. And I look 

forward to the testimony of our witnesses. 

I now recognize my good friend, Ranking Member Judy Biggert. 

Mrs. BIGGERT. Thank you. Thank you, Madam Chairwoman. I 

made a mistake, and I would ask unanimous consent to increase 

the time to 20 minutes per side. 

Chairwoman MALONEY. Whatever the ranking member wants. 

Mrs. BIGGERT. Thank you. 

Chairwoman MALONEY. And I yield as much time as she may 

consume. 

Mrs. BIGGERT. Thank you. 

The CHAIRMAN. If the chairwoman would yield, don’t be setting 

any bad precedents here with that. 

[Laughter] 

Chairwoman MALONEY. No, sir. Okay, Mr. Chairman. 

4

Mrs. BIGGERT. Thank you, Madam Chairwoman, for holding this 

hearing on your bill today. Despite our differences on the specifics 

of the bill, I have no doubt that the chairwoman herself believes 

that she has the best interests of the consumers at heart, and I believe that we all do. The borrowers need transparency. They need 

to know what the terms of their contract are simply, clearly, and 

reliably. And on this I agree with Chairwoman Maloney. 

There are a number of us in the room today who remember when 

there was only one credit card, the Diners Club card in the 1950’s, 

a rare commodity for a few lucky individuals. A couple hundred 

customers used the cards at restaurants that were part of the card 

program. 

Within a short time, the card evolved into a travel and entertainment card, and was issued only to high-income, highly creditworthy 

individuals who could immediately pay off their entire bill balance 

upon receipt of the card. Let’s not forget that not much more than 

2 decades ago, interest rates were capped by State regulation. Card 

issuers charged borrowers a sizeable annual fee. And if you didn’t 

pay off the entire balance each month, you faced a 20 percent fixed 

income rate. 

No matter what your income or creditworthiness, it is hard for 

young people today to believe it, but that is what credit cards were 

like in the early days, prizes that were won by people who, when 

you think about it, didn’t especially need them. 

We don’t want to go back to those days, so fast forward to today. 

Innovation, technology, competition, and reduced regulatory restrictions on interest rates have meant that Americans of all income 

levels, ages, and walks of life have access to credit cards and much, 

much cheaper credit cards. According to the Federal Reserve data, 

about three-quarters of American families have at least one credit 

card. 

Would everyone in this room with a credit card please raise their 

hand? 

[Show of hands] 

Mrs. BIGGERT. It is obviously a popular financial tool. But my 

goal is to ensure that everyone who wants and likes their credit 

card is not hurt today in this weakened economy or tomorrow in 

an improved economy by the problems of a few customers or abuses 

of a few issuers. We must first do no harm. 

That having been said, do I believe that each and every cardholder is completely happy with his or her credit card? Of course 

not, no more than every cable TV subscriber or utility company 

customer is completely happy with their service. 

But unlike customers of those companies, credit card borrowers 

have thousands of cards to choose from. They have greater access 

to credit, access to cheaper credit, and access to financial education 

and counseling on financial matters. 

The success story of credit cards, I think, is often overlooked. 

Credit card loans can be used for emergencies, holiday shopping, 

paying bills, taking vacations, buying books for school, and starting 

a business. You can even buy a cup of coffee at Starbucks with a 

credit card. 

Unfortunately, the credit card success story does not bring us 

here today. What brings us here today are the problems that some 

5

borrowers may have with their credit card companies and some 

practices that should be changed. 

As for the facts, I am pleased that Congress tasked the experts 

at the Federal Reserve under the Truth in Lending Act and Federal Trade Commission Act with the job of gathering empirical evidence on all consumers and credit cards. 

Two weeks ago, Federal Reserve Chairman Bernanke testified 

before this committee that the Fed is writing regulations to update 

disclosures and notices as well as rules to address unfair and deceptive practices. He anticipates a final release of both sets of rules 

later this year. 

I am inclined to reserve judgment on the bill, H.R. 5244, until 

we hear the results of what we in Congress authorized the Fed to 

undertake, its revision of Regulation Z, which is the culmination of 

4 years of intensive expert review utilizing consumer focus groups 

and other sound methodology as opposed to anecdotal evidence. 

Do consumers need improved and more helpful disclosures? Do 

they need information so that they have the tools to make more informed decisions about choosing a credit card, about their card, or 

borrowing altogether? Finally, what is the best way to address 

these matters? Is it through education, legislation, regulation, selfregulation—in other words, letting the marketplace and competition work for the consumer—or is updating disclosures and cracking down on unfair and deceptive practices the answer? 

I must say that after reviewing data studies and testimony, at 

this time it appears that regulation and education should at least 

be among the first steps. Should Congress step in on that basis and 

preempt the Fed? I’m not sure that is the answer. 

But with that, I look forward to hearing from today’s witnesses 

and I yield back. 

Chairwoman MALONEY. The Chair recognizes Chairman Frank—

and thanks him for his leadership on this issue and so many others—for as much time as he may consume. 

The CHAIRMAN. I thank the chairwoman. I admire the energy she 

has put into this. 

I would say to my friends in the industry, it is a busy morning, 

and if you want to know whether this is a serious legislative effort, 

look at the membership. I am the chairman, so I am always here 

when there is a full committee hearing. 

Sometimes I am by myself; sometimes there are only one or two 

people; sometimes I have all the Republicans and not many Democrats; sometimes Democrats and not Republicans. Frankly, even by 

ethnicity, the turnout may vary depending on the issue. You have 

the most broadly representative membership of this committee. 

This is an issue that counts. 

For better or worse, credit card practices have engaged the interest of America’s middle class. And this is an issue that has an impact with them. They are more capable of voicing their opinions 

than some other sectors of our economy, so you should know this 

is a serious issue. 

It is also manifested, and the gentlewoman from Illinois mentioned regulation. I am interested to note that two of the financial 

regulators are in fact engaged in this now. When Chairman 

Bernanke testified before us a few weeks ago at the HumphreyVerDate 0ct 09 2002 13:50 Jun 11, 2008 Jkt 041731 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\41731.TXT TERRIE
6

Hawkins hearing, he said something I hadn’t heard in my 28 years 

in this body, a Chairman of the Federal Reserve Board uttering the 

words, ‘‘consumer protection.’’ It had not happened since 1981. I 

have been at every one of the meetings. 

And he is, as you know, in the process of talking about regulations with regard to credit cards that go beyond disclosure, that go 

beyond the Truth in Lending Act into substance. 

Similarly, I have been very pleased to see Mr. Reich, the Director 

of the OTS, going forward with promulgating a code of unfair and 

deceptive practices and including some very specific things here. 

And part of the reason for that is—and, you know, you get sometimes the consequences of what you wish for. 

Many of the bank issuers of credit cards were successful in persuading the Comptroller of the Currency and the Office of Thrift 

Supervision to preempt a great number of State laws so that in 

many cases there are—well, not in many cases—there are virtually 

no State consumer protection laws that would be bank-specific that 

apply to the credit card issuers who are national banks. 

I had differences with that on its own. But it was clearly a problem because it left a vacuum. And the vacuum in regulation, we 

ought to be clear: Nature may abhor a vacuum, but the people who 

used to be regulated are kind of fond of it. 

We now have the need for the Federal regulators to step in and 

fill part of the vacuum that they created. Both the OTS and the 

Federal Reserve are doing this, and the Federal Reserve’s authority 

covers all the other bank authorities. 

Finally, I would say that I believe the gentlewoman’s bill, which 

I am glad to cosponsor, makes some very important distinctions. It 

does not set rates. We are not in the rate-setting business. There 

are people here who would set rates, and I think, frankly, there is 

a lot of support in this body and in the other body for setting rates. 

We are not setting rates. We are saying, however, and I think 

this is one of the guidance principles, that retroactivity is a bad 

idea. My friends in the business community have generally been 

very staunch in pointing out the unfairness of retroactivity. 

I urge them to realize that this is a principle that covers both 

sides of this equation. And retroactive impositions on borrowers, 

that is, things affecting balances already incurred, violate the principle of retroactivity. We need to deal with that. 

I would also advise them—I am not sure, you are a consultant, 

and given the ethics rules, I never will be because it is too much 

trouble later on—but if I were in the business, I would be cognizant 

of the unhappiness. 

I mean, there are people in America who are convinced that you 

have a personal algorithm for each of us that lets you know when 

to send the bill so we are least likely to be able to pay it on time. 

You know when we are sleeping and you know when we are awake 

and you know when we are on vacation and you know when there 

may not be somebody checking the mailbox. I know it is not true, 

but if I were in that position, I would be unhappy if people thought 

that. 

So I urge you to cooperate with us. We are not setting rates. We 

are not going to alter your ability, I hope, if this bill goes through 

7

to do things going forward with a lot of notice. But there is a good 

deal of unhappiness there. 

And the final thing I would say is this: Obviously, the competitive model is an important one. This is a committee that I think 

on both sides has shown its support for the free market system. 

But given the number of credit card issuers, we don’t have an 

equal competitive situation. You cannot rely here wholly on the 

market for the kinds of things we are talking about. And that is 

why I think this legislation should go forward. 

Thank you, Madam Chairwoman. 

Chairwoman MALONEY. Thank you. 

The Chair now yields 4 minutes to the distinguished ranking 

member of the full committee, Representative Bachus. 

Mr. BACHUS. Thank you, Chairwoman Maloney, for holding this 

hearing on your legislation which would restrict certain credit card 

industry practices. Whenever our committee considers bills of this 

magnitude, legislation that has the potential to significantly restructure a market that has benefitted hundreds of millions of 

American consumers and businesses, Members must fully understand the consequences, both intended and inadvertent, of our actions. 

Over the past 30 years, Americans’ use of credit cards to conduct 

their everyday financial transactions, as well as address unexpected financial emergencies, has exploded. The GAO has reported 

that Americans now hold more than 690 million credit cards. So I 

will assume, when Ms. Biggert asked people to raise their hand if 

they had a credit card and two-thirds of the people raised their 

hand, I would assume the other third weren’t listening. 

[Laughter] 

Mr. BACHUS. Because I think we all have a credit card, or two 

or three. 

The GAO also found that between 1980 and 2005, the amount 

that Americans charged to their credit cards grew from an estimated $69 billion per year to more than $1.8 trillion, quite an increase. 

While the legislation covers a wide range of industry practices, 

at its core it is an attempt to impose limitations on creditors’ ability to offer their products according to the risk posed to the individual consumers. As with any government intervention in the free 

market, the bill presents a real danger of restricting the range of 

products and services that credit card issuers currently offer, which 

could result—and I believe will result—in cutting off credit to some 

and raising the price of credit for all. 

Consumers could see increased minimum payments, reduced 

credit limits, and less access to credit cards. And some would say 

that is good. But here in America, we let people make those 

choices, not normally the government. 

The current economic uncertainty and the banks’ need to preserve capital in the face of significant mortgage-related losses has 

already combined to reduce the amount of credit available to consumers and small businesses. That is the complaint we hear most 

often, is lack of credit, lack of availability of credit. We hear almost 

no complaints of too much credit from consumers. No matter how 

8

well-intended, ill-conceived legislation could make a serious credit 

crunch far worse. 

Now, we can all share stories where someone has had a problem 

with a credit card or difficulty as a result of using a credit card. 

With 690 million credit cards, there would have to be problems. 

But think a minute if we suddenly took 200 million of those credit 

cards away, or 300 million. I believe that would present problems 

and difficulties for the American people also. 

And that may be what we are talking about. We may be talking, 

in this bill, about limiting the number of Americans who will be offered credit cards and will certainly increase the amount. Precipitous congressional action could be particularly counterproductive at 

a time when the Federal banking regulators are near completion 

of far-reaching proposals on the very same issues that H.R. 5244 

seeks to address. 

Chairwoman MALONEY. The Chair grants the gentleman an additional minute. 

Mr. BACHUS. I thank you. Two weeks ago, Chairman Bernanke 

updated the committee on the status of the Federal Reserve’s forthcoming revisions on Regulation Z for credit card disclosures. Everyone agrees that disclosures regarding the terms and conditions of 

credit card products are too complex. The Fed’s Regulation Z revisions, once finalized, will go a long way towards alleviating consumer confusion and helping credit card customers make informed 

choices. 

To complement its rewrite of Regulation Z, the Fed announced 

last month that it will soon exercise its authority on the Federal 

Trade Commission to write regulations to root out unfair and deceptive acts or practices in the credit card industry. These proposals from the Fed will be based on extensive consumer testing as 

well as the Fed’s 40 years of experience. 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. BACHUS. I thank the chairwoman for the extra time. 

Chairwoman MALONEY. Thank you. 

The Chair yields 2 minutes to Congressman Ackerman. 

Mr. ACKERMAN. Thank you, Madam Chairwoman, for your leadership on this issue. 

There is little doubt that providing consumers access to credit is 

a critically important component of our economy, particularly now, 

as our economy may have already tipped over into a recession. 

With the sputtering economy, Americans across the country are becoming more dependent upon their credit cards to pay their bills 

and sometimes to just put food on their tables. 

But with practices such as any time/any reason pricing, pay to 

pay fees, universal default, restrictions on paying off high balances, 

and I could go on and on, the consumer credit market seems to be 

unfairly weighted against credit card customers. 

Indeed, as the ramifications of relaxed underwriting standards 

and unrealistic repayment terms within the mortgage industry 

threaten millions of homeowners and our economy as a whole, I believe we in Congress must ask the question: Is practically universal 

access to credit under the present conditions and practices truly 

beneficial to our economy? Or, if we continue along the path of perVerDate 0ct 09 2002 13:50 Jun 11, 2008 Jkt 041731 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\41731.TXT TERRIE
9

mitting credit card companies to keep pushing the bounds of sound 

credit practices, will we soon find ourselves in another credit crisis? 

It strikes me that with all the fees and stipulations attached, 

with eye-bursting fine print, credit cards are becoming like the 

carefully fine-tuned products of the tobacco industry. They have 

just enough nicotine in them to get you hooked, but not enough to 

kill you, at least not right away. 

Ensnarled by unfair and unsound credit practices, American consumers find themselves suffering through years of mounting debt, 

increasing interest rates, and for many, financial ruin. 

It is my contention that credit card users deserve the right to 

know, with sufficient notice, that their interest rate is increasing. 

And they deserve an explanation as to why. Credit card users deserve the right to decide how a bill payment is applied to their account if they have multiple outstanding balances. 

Credit card users deserve the right to pay their bills on time in 

whatever manner they may choose without being charged extra. 

And furthermore, I believe it is critically important to the health 

of our economy to grant credit card customers these rights as well 

as the others included in H.R. 5244 as soon as possible so that we 

may prevent the second— 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. ACKERMAN. I thank the chairwoman for her leadership. 

Chairwoman MALONEY. Thank you. The Chair recognizes Congressman Garrett for 2 minutes. 

Mr. GARRETT. I thank the Chair for holding the hearing today, 

and I welcome all the witnesses and appreciate your coming and 

the testimony that we are about to hear from you. 

You know, as we move now into the 21st Century, the financial 

products that become available to us are rapidly changing and expanding at the same time. Credit cards, as others have said already, really do provide an essential service to millions of Americans. 

The ability to establish credit, borrow money, has basically become fundamental to our economy. So whether it is buying a new 

washing machine or, as I just had to do, putting a new transmission in your car, or maybe, as some other people do, use your 

credit cards to start a home business, literally start up from 

scratch, they allow us to finance needed goods. It also allows us to 

pay it over time, and also, through some of the credit card companies, to track those costs as well on a monthly, quarterly, or at the 

end of the year basis. 

Unfortunately, we have heard a number of instances in news stories—like in today’s paper; I guess they must have known you all 

were going to be here—and some from constituents as well where 

folks feel that they have maybe been misled or just didn’t understand what they were getting into with these cards. 

But I think there are really probably a lot more stories out there 

that are left untold that aren’t in today’s paper of how credit cards 

have significantly helped people through some of their tough times, 

and also helped those people who are trying to start a business. 

So I think we need to sit back and wait a little bit and hear and 

consider. As we push to address the concerns of some of the consumers who have been negatively impacted, we can’t really overVerDate 0ct 09 2002 13:50 Jun 11, 2008 Jkt 041731 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\41731.TXT TERRIE
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react and wind up eliminating credit for those people or raising 

costs for the creditworthy Americans who really do rely on credit 

cards for their daily lives. 

We are in tough economic times right now. We hear talk of recession. We hear talk of credit tightening. So if we pass legislation 

that prevents issuers from beginning to price for risk, I am afraid 

we will either tighten the credit market on the riskier borrowers 

or drive up prices on the rest of Americans. 

And I would just advise this committee to do what the chairman 

of the committee has done with regard to SOX, and to step back 

where another entity, in this case the Federal Reserve, is taking 

action on it. Let’s see how— 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. GARRETT. —they deal with it before we act precipitously. 

And with that, I yield back. 

Chairwoman MALONEY. The Chair recognizes Congressman 

Moore for 2 minutes. 

Mr. MOORE. Thank you, Chairwoman Maloney, for convening 

this hearing and for your leadership in calling attention to this important issue which affects millions of Americans. 

Like many of the members on this committee, I have heard concerns from consumers about a lack of clarity from credit card 

issuers in explaining account features, terms, and pricing on their 

accounts. I believe it is very important that we take the necessary 

steps to improve disclosures and protect consumers from unexpected fees or rate increases. 

I also know that our Nation is experiencing a significant credit 

crunch at this time and that credit cards remain a lifeline for millions of Americans who would otherwise be unable to pay for basic 

services to meet their daily needs. That is why I believe we must 

take a careful, measured approach in addressing this very important issue to ensure that nothing we do here in Congress has unintended consequences for the marketplace or for the consumer. 

I practiced law for 28 years before I came to Congress, and for 

12 of those years, I served as a district attorney. In that time, I 

learned that there are at least two sides to every story, and sometimes many more. The best legal and policy decisions, I believe, are 

made when we have all the facts before we make a decision, and 

all the information is on the table. 

Again, I thank the witnesses for being here today. I look forward 

to hearing your testimony and to talking to you about this issue 

further in the future. Thank you, Madam Chairwoman. 

Chairwoman MALONEY. The Chair recognizes Congressman Price 

for 3 minutes. 

Mr. PRICE OF GEORGIA. I thank the Chair, and I thank you for 

holding this hearing. I want to thank the ranking member for her 

tireless work on this effort as well. I want to thank all the witnesses. 

I read an article last week by former Senator George McGovern—yes, Senator George McGovern—who wrote in the Wall Street 

Journal that, ‘‘The real question for policymakers is how to protect 

those worthy borrowers who are struggling without throwing out a 

system that works fine for the majority of its users.’’ 

11

We all support more clear and transparent disclosure. There is 

no doubt about it. And I don’t have any doubt that the legislation 

that we are discussing today was written with a desire to help borrowers who use credit cards. 

However, not allowing for pricing for risk individually will mean 

a higher cost of credit for every single American. In fact, not allowing pricing for risk individually I believe to be a form of price controls. 

The proposed bill also dictates how card companies must treat 

the payment of multiple balances at different interest rates. This 

will mean American borrowers, all borrowers, can say goodbye to 

low introductory interest rate offers and balance transfers. 

If this legislation were to become law, credit card issuers would 

no longer offer these products. Some of us remember when interest 

rates for credit cards were 18 to 20 percent; that was all you could 

get. Those days will return, I would suggest, if this legislation is 

adopted. 

Fortunately, we don’t operate in a bubble. We can learn lessons 

from our friends in the United Kingdom, where the Office of Fair 

Trading ordered credit card providers to halve penalty fees by setting a maximum charge. An article in the Daily Telegraph then 

said that several companies reintroduced annual fees, a practice 

that is minimal in the United States due to the individually riskbased pricing. 

We can also look back to our own history. In 1980, President 

Carter imposed price controls. In 1990, an analysis of that by the 

Federal Reserve in Richmond said that we learned three lessons 

from that: One, they may not deliver the desired results; two, they 

may have unintended and unforeseen adverse effects; and three, 

polices may tempt policymakers to impose credit controls again despite unfortunate previous experiences with such policies. The 

translation of that is: Americans lost the opportunity for the credit. 

It would be wise for us to learn from our experience in 1980. 

Again, as Senator McGovern pointed out so eloquently, the nature 

of freedom of choice is that some people will misuse their responsibility and hurt themselves in the process. We should do our best 

to educate them, but without diminishing choice for everyone else. 

Madam Chairwoman, I have a copy of Senator McGovern’s complete op-ed, and I commend it for everybody’s reading, and also ask 

unanimous consent that it be included in the record. 

Chairwoman MALONEY. Without objection, it is so ordered. 

Mr. PRICE OF GEORGIA. And I will close, finally, with the quote 

that I began with from Senator McGovern’s article, and that was, 

‘‘The real question for policymakers is how to protect those worthy 

borrowers who are struggling without throwing out a system that 

works fine for the majority of its users.’’ 

I yield back the balance of my time. 

Chairwoman MALONEY. I now recognize Congresswoman Waters 

for 2 minutes. 

Ms. WATERS. Thank you, Madam Chairwoman. 

Let me start by saying that I am proud to be an original cosponsor of H.R. 5244, the Credit Cardholders’ Bill of Rights. This legislation is long overdue in light of some of the outrageous billing 

12

practices that have spread through the credit card industry recently. 

Contrary to the claims of the credit card and banking industry, 

H.R. 5244 is a measured response to these practices. I will say, 

however, that you are indeed brave, Madam Chairwoman, for taking on these lucrative practices of such a powerful industry. 

As chairwoman of the Subcommittee on Housing and Community 

Opportunity, I have certainly felt their wrath in the context of the 

foreclosure crisis. I have heard many of the same ‘‘the sky is falling’’ arguments about why even the most modest regulation can 

drive up the price of credit unacceptably. I don’t buy it, and I am 

glad you, Madam Chairwoman, don’t either. 

Indeed, I think the practices of the credit card industry may even 

be more troubling in some ways than those in the subprime mortgage market. Some have referred to the subprime adjustable rate 

mortgages at the heart of the mortgage crisis as exploding mortgages because of the substantial rate resets that occur after 2 or 

3 years. But at least it was apparent to a borrower that the rate 

would increase even if the loan originator failed to do due diligence 

on its long-term affordability absent significant appreciation in the 

price of the house in question. 

By contrast, I think we could label credit card agreements landmine loans because it is not at all clear to consumers if, how, and 

when their interest rates are going to increase. And yet increase 

they do, for many reasons. 

I join with the chairwoman in believing they should either ban 

outright, or significantly limit such a so-called universal default, 

where companies can penalize a cardholder for payment behavior 

that has nothing to do with their particular card. Similarly, ontime payment is no guarantee against additional fees being imposed through double-cycle billing. 

Finally, the companies do their best to complicate what timely 

payment is, often— 

Chairwoman MALONEY. The gentlewoman’s time has expired. 

Ms. WATERS. Thank you very much. I yield back the balance of 

my time. 

Chairwoman MALONEY. The Chair recognizes Congressman Castle for 2 minutes. And I thank him for his work in a bipartisan way 

with the many meetings and roundtable discussions that we had 

leading up to this bill. Representative Castle. 

Mr. CASTLE. Thank you, Madam Chairwoman. And while I have 

an open mind about reform, I also think it is very important to 

keep some basic facts in our subsequent discussions in perspective. 

We are a nation with about 225 million credit-active Americans. 

According to the Federal Reserve, around 640 million credit cards 

are in circulation in this country. The Fed published a report a few 

years ago that said the average American consumer has 5 credit 

cards; and 1 in 10 consumers has more than 10 credit cards in 

their wallet. I have seen a study that shows that most consumers 

keep their credit cards a minimum of 7 years, and frequently 

much, much longer. 

My point is this: Consumers overall are a pretty savvy group. If 

they find a good deal, they stick with it. If they find a bad deal or 

are treated poorly, they drop that product or service in a heartbeat. 

13

Since the overwhelming majority, about 90 percent of the public, 

pays its credit card bills on time, I worry that well-intended legislative efforts might go too far, especially since the finally updated 

version of Federal Reserve Regulation Z will address many of the 

provisions included in H.R. 5244. And it is scheduled for release 

soon. 

Chairman Bernanke, at our most recent hearing which he attended, when discussing the unfair and deceptive practices, he indicated that other steps are going to be announced in the next couple 

of months that would pertain to this as well. 

Let me be clear so our witnesses and the public can have a better 

appreciation for all that the Federal Reserve has done relative to 

these soon-to-be-released regulations. The professional staff of the 

Federal Reserve has put out for comment several different consumer-tested ideas related to credit cards that were developed in 

part with the help of consumer focus groups. They have been very 

deliberate in their approach to these issues, and have gone so far 

as hiring consumer focus groups to test proposed disclosure and 

billing ideas. 

Subsequently, as this process has unfolded, the Fed has had to 

review over 2,500 comments from banks, consumers, consumer 

groups, lawyers, and so forth concerning these issues and proposed 

solutions. All this work will come to an end later this year, and I 

would prefer to see what final changes are proffered by the Fed before pursuing any legislative proposals. 

Madam Chairwoman, our economy is struggling. And while I 

want to do everything I can to make certain consumers are dealt 

a fair hand and our financial services industry thrives, I look forward to the testimony today and the important work the Federal 

Reserve will release later this year. 

I yield back the balance of my time. 

Chairwoman MALONEY. The Chair now recognizes Congressman 

Hodes for 1.5 minutes. 

Mr. HODES. Thank you, Madam Chairwoman. I am happy to be 

here at this hearing. And I have taken a relatively restrained approach so far to this issue. I am not yet a cosponsor on the bill because I am interested to hear what the representatives here have 

to say and what the testimony divines. 

I will say I am here with—I brought a document which is a 

slightly redacted bill that I got from Bank of America. I would ask 

unanimous consent that after my remarks, this be included in the 

record, Madam Chairwoman. 

This bill shows a charge to me of $16.50, and says it was a purchase and adjustment. But of course, it was a late fee. And the late 

fee was because I posted the payment that was due on the 22nd 

of February—apparently it wasn’t received till the 23rd. So I was 

charged $15. And then $1.50 on top of that is the minimum finance 

charge. And the front of the bill shows that my annual percentage 

rate for the billing is 47.37 percent. What a surprise to me. 

Then when I turned the bill over on the back and read through 

the small print, I found that my payment due date can change any 

time at the whim of the company. And I found that interesting because the discussion that I had with my wife prior to this billing 

14

period was, let’s get our bill in on time and make sure we send it 

early— 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. HODES. —in order to make sure that we don’t get hit with 

these kinds of payments. So I will be very interested to hear the 

testimony from folks about these kinds of practices. 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. HODES. Thank you, Madam Chairwoman. 

Chairwoman MALONEY. The Chair now recognizes Representative Hensarling for 2 minutes. 

Mr. HENSARLING. We are here today to consider H.R. 5244, a distinctly anti-consumer piece of legislation. I believe the bill begins 

to turn back the clock to an era where there was little competition, 

and a third fewer Americans had access to credit cards. And those 

that did paid the same high universal rate regardless of whether 

they paid their bills on time. 

I fear the bill represents another assault on personal economic 

freedom, and will certainly exacerbate the credit crunch that 

threatens our economy already. Instead of attacking risk-based 

pricing and competition, we should be celebrating it. 

Since credit card issuers have adopted risk-based pricing, interest rates have fallen substantially. We have seen the virtual disappearance of consumer-hated annual fees and a flowering of fringe 

benefits, from cash back to product protection to free plane tickets, 

just to mention a few. And I also note that credit cards are a vital 

tool for our Nation’s 26.8 million small businesses, and so testifies 

the SBA. 

Now, I don’t come here today to defend all credit card companies 

and all of their practices. In fact, when I have not liked terms, both 

my wife and I have changed credit cards. And there is one particular company that we refuse to do business with. But competition has allowed this. And so I come here today to defend economic 

liberty, risk-based pricing, consumer empowerment, and a competitive marketplace. 

We should all know the terms of the credit cards that we have. 

If we don’t, I suspect either: One, we were misled by a credit card 

company, in which case there are existing legal recourses, like Regulation Z and the Fair Credit Reporting Act; two, maybe we tried 

to read the terms but we couldn’t understand them because of misguided government mandates that gave us voluminous disclosure 

written in legalese, as opposed to effective disclosure written in 

English; and three, maybe we just didn’t bother to read the terms, 

and have nobody to blame but ourselves. 

I fear again that if we adopt the provisions of this, too many 

Americans will either be denied credit or see their credit card costs 

skyrocket, and no longer be able to pay for the bills they need in 

their everyday lives. 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. HENSARLING. I yield back. 

Chairwoman MALONEY. The Chair recognizes Congressman 

Green for 30 seconds. 

Mr. GREEN. Thank you, Madam Chairwoman. With 30 seconds, 

let me just say that I am eager to hear from the witnesses that we 

15

have assembled. I too have received many comments from persons 

concerning things that are happening in the industry. 

And I will yield back some time to you, Madam Chairwoman. 

Thank you. 

Chairwoman MALONEY. The Chair recognizes Congressman 

Neugebauer for 2 minutes. 

Mr. NEUGEBAUER. Thank you, Madam Chairwoman. 

I would just make a couple of points here. I think when we saw 

a number of people raise their hands a while ago who have credit 

cards, I think we have to understand what credit card credit is. 

One, it is unsecured credit. Basically, it is unsupervised credit. And 

it is unrestricted credit for most of us. 

So I would be interested—and I am not going to do this to you, 

but we saw how many hands that were raised that have credit 

cards. But I wonder how many hands would raise if I said, could 

you call a family member today and say, would you loan me 

$15,000, unsecured, and they asked you, what are you going to do 

with it, and you said, well, I really don’t know, but I might go to 

Las Vegas. Might buy my wife a new— 

And so what it is is these lending institutions are taking on an 

unsupervised, unsecured position. And there are things built into 

those credit card contracts that encourage good behavior, and there 

are things that are built into them that discourage poor behavior, 

because basically they are basically depending on just the desire of 

the person holding that card to pay that card back. 

I think what we have seen and will hear is a lot of people are 

confused. And the question is, today, are we trying to come up with 

some kind of consumer protection? And what are we actually trying 

to protect the consumer from? And I would say— 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. NEUGEBAUER. That was 2 minutes? 

[Laughter] 

Chairwoman MALONEY. Yes. Yes, it was. It was a quality 2 minutes. Thank you. 

The Chair recognizes Congressman Scott for 1 minute and 30 

seconds. 

Mr. SCOTT. Thank you so much, Madam Chairwoman. This is indeed an important hearing, a very timely hearing. We are a credit 

card nation, and have been for some time. 

But this issue is so important now because of the subprime mortgage meltdown. Folks are now using their credit cards just for the 

basic essence of survival. Many are even paying their home mortgages on credit cards. 

So this is very timely. There are issues of major concern that I 

think we need to address. One of major importance is universal default. I think we need to more clearly look at that for an example. 

I think also we have to look at stopping credit card companies from 

making—voluntarily changing the rates on their own. 

And in that regard, I think I ought to take a minute to give a 

tip of the hat to Citigroup, who is already making those changes 

because they see it as being unfair to the consumer. 

I am also very concerned about one major issue: After a customer 

has paid off all their fees, overdraft and the like, why is it so difficult to close the account? When all the debt is paid, why are addiVerDate 0ct 09 2002 13:50 Jun 11, 2008 Jkt 041731 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\41731.TXT TERRIE
16

tional fees added on when there isn’t even any money in the account, and the customer has further requested that it be closed? 

There are a number of very serious practices that the industry 

is doing that certainly need to be stopped. And those of you in the 

industry who are voluntarily moving in this direction certainly 

need to be commended. 

But we have a very serious issue. It is a timely issue. And we 

must look at it with as clear a jaundiced eye as we possibly can. 

The consumers across America are expecting this committee to do 

it. I look forward to your testimonies. 

Chairwoman MALONEY. Thank you. And finally, the Chair recognizes Congressman Udall for 1 minute. 

Mr. UDALL. I thank the chairwoman for letting me sit in on this 

important hearing. And I would ask unanimous consent that my 

entire statement be included in the record. 

And if I might, I just want to acknowledge a fellow Coloradan, 

Susan Wones, who came all the way here to testify, and she will 

not be able to do so. She has a very important story to tell us about 

the treatment she has received from her credit card company, and 

I hope at some point she will be able to be heard because, after all, 

this is about Americans who are using credit in their daily lives. 

I want to commend the chairwoman for holding this hearing, and 

I know we are all going to look forward to working to bring fair 

and real reform that makes sense for consumers and the credit 

card companies alike. Thank you again, Madam Chairwoman, and 

I will yield back any time I have remaining. 

Chairwoman MALONEY. That concludes our opening statements. 

I would like to note that everyone has 5 days to put their opening 

statements in the record. 

I would now like to recognize our distinguished panelists. We 

will begin with Ms. Elizabeth Warren, who is the Leo Gottlieb Professor of Law at Harvard Law School. She will be followed by: Greg 

Baer, deputy general counsel, regulatory and public policy, Bank of 

America; Adam J. Levitin, associate professor of law, Georgetown 

University Law Center; John Finneran, general counsel, Capital 

One; Lawrence Ausubel, professor, Department of Economics, University of Maryland; Carter Franke, Marketing Executive, 

JPMorgan Chase; Oliver I. Ireland, partner, Morrison & Foerster; 

and Katherine M. Porter, associate professor, the University of 

Iowa College of Law. 

Thank you all for coming. Each of you will be recognized for 5 

minutes. Your entire testimony will be part of the official hearing 

record. So please begin, Ms. Warren, and thank all of you for coming here and preparing your testimony today. 

STATEMENT OF ELIZABETH WARREN, LEO GOTTLIEB 

PROFESSOR OF LAW, HARVARD LAW SCHOOL 

Ms. WARREN. Madam Chairwoman, thank you for the opportunity to join in this discussion. 

We are here today to consider modest changes to the rules governing credit cards. In fact, we are here to discuss banning practices that many responsible lenders have already renounced. As a 

result, much of this discussion is about ensuring that all lenders 

17

follow best practices, practices that permit profitability for issuers 

and safety for customers. 

We are not here to regulate credit cards. This is not a hearing 

to discuss interest rate caps, fee regulation, or any restraint on free 

and competitive markets. And, contrary to some of the frenzied lobbying claims, we are most certainly not here to engage in price-fixing. 

Instead, this is a hearing about tricks and traps that undermine 

a competitive market. Lenders employ thousands of lobbyists, lawyers, marketing ad agencies, public relations firms, statisticians, 

and business strategists to help them maximize their profits. 

Customers need a little help, too. They need some basic protection to be certain that the products they buy meet minimum safety 

standards. Personal responsibility will always play a critical role in 

dealing with credit cards. But no family should be brought low by 

schemes designed to prey on the unwary. 

I want to speak for just a minute about the importance of credit 

card reforms in a time of economic uncertainty. The crisis in the 

subprime mortgage market has served as a bitter reminder of what 

can happen when lending terms are not transparent. 

When lenders are careless in screening their customers, when 

customers are unable to evaluate fully the risks associated with 

borrowing, the result is a series of risky loans, raising the eventual 

specter of high levels of default and economic upheaval. 

The events of recent months have reminded us we are all in this 

economic boat together. Credit markets affect everyone, and high 

risk lending can have an impact on prudent lenders and people 

who never borrow. Without careful regulation to support prudent 

lending, we face an increased risk that a credit card bubble will 

further destabilize both families and the larger economy. 

Nearly half of all credit cardholders missed payments in 2006, 

the latest year we have data on. This makes them obvious targets 

for the most aggressive and unfair tactics. Sending in a payment 

that arrives one day late can cost a family an average of $28, when 

the cost to the company is measured in pennies. 

Under the rubric of universal default, customers have been hit 

with huge increases in interest rates, customers who have scrupulously met every single term of their credit card contracts. Anxiety has become a constant companion for Americans struggling 

with debt. 

Listen to these numbers: Today, one in every seven American 

families is dealing with a debt collector. Forty percent of families 

worry whether they can make their payments every month. One in 

five Americans is losing hope, saying they expect to die still owing 

on their bills. 

Credit card contracts have become a dangerous thicket of tricks 

and traps. Part of the problem is that disclosure has become a way 

to obfuscate rather than to inform. According to the Wall Street 

Journal, in the early 1980’s, the typical credit card contract was a 

page long. By the early 2000’s, it was more than 30 pages long. 

The additional language was designed in large part to add unexpected and incomprehensible language that favors the credit card 

companies. H.R. 5244 begins to clear a path through this tangle. 

18

All-purpose cards generated $115 billion in revenues in 2006. Profits were a handsome $18.4 billion, a 45 percent jump from the 

year before. There is, of course, no breakdown in the interest and 

fee categories to explain how much of the industry revenue came 

from universal default, double-cycle billing, and other unscrupulous 

practices. But it is possible to gain some sense of the need for such 

tricks and traps by noting the number of highly profitable card 

issuers who have publicly renounced such practices. 

Companies should be commended for moving in the right direction on credit card terms. It is now the task of this committee to 

move their less ethical competitors into similar practices. Congresswoman Maloney and Chairman Frank and the 39 cosponsors have 

taken an important first step toward ending practices that put both 

families and markets at risk. They deserve our thanks and our 

support. 

[The prepared statement of Professor Warren can be found on 

page 153 of the appendix.] 

Chairwoman MALONEY. I thank the gentlelady. We now have 82 

cosponsors. And we appreciate very much your testimony. 

Mr. Baer. 

STATEMENT OF GREGORY BAER, DEPUTY GENERAL COUNSEL, 

REGULATORY AND PUBLIC POLICY, BANK OF AMERICA 

Mr. BAER. Good morning, Chairwoman Maloney, Ranking Member Biggert, and members of the subcommittee. My name is Greg 

Baer, and I am deputy general counsel at Bank of America. I appreciate the opportunity to present our views today. Let me say a 

few words about risk-based pricing at Bank of America, and then 

turn to H.R. 5244. 

Risk-based pricing is first employed when we receive an application from a consumer and consider FICO score and general credit 

history. That information is useful, but as the years go by, the 

original information tells us less and less about the risks we are 

running. But our ongoing experience with the customer tells us 

quite a lot. We use that information to reprice in two ways. 

First, at Bank of America, we default reprice a customer if the 

customer violates his contract with us by going late or over limit 

not once but twice within a 12-month period. However, not all customers who hit our default triggers are necessarily repriced. We 

look at these customers individually and determine whether the default truly indicates higher risk. 

Second, when we see that a customer is exhibiting other risky behavior, such as maxing out credit lines or defaulting on other loans, 

we may seek to charge the customer a higher rate. But the customer always has notice and choice. The customer can simply decline the higher rate and repay the existing balance under the old 

rate. 

The only thing we ask the customer to do in return is to stop 

making additional charges on the card. This notice and choice is of 

course the distinction between risk-based pricing and universal default, a practice in which Bank of America has never engaged. 

I should note that our experience shows that nothing makes customers angrier than an increase in the interest rate. We have seen 

evidence of that today. At Bank of America, where our goal is to 

19

make a credit card customer a mortgage, a deposit, and a retirement savings customer, we have all the more reason to keep our 

customers satisfied. Thus, looking at our 2007 portfolio, the overwhelming majority of customers—nearly 94 percent—had the same 

or lower rate than they did at the beginning of the year. 

So why would we ever raise rates? First, because for these customers we are confident that we bear real increased risk. Rigorous 

testing shows that our models are extraordinarily predictive of consumer behavior. 

Furthermore, when we reprice customers, we find that many 

manage their credit more wisely, making larger monthly payments 

and paying down their debt faster. Thus, a higher interest rate not 

only allows us to earn income to compensate for greater risk, it can 

actually reduce the risk we are managing. 

There is a third type of repricing known as any time/any reason 

repricing generally done when market interest rates rise or an 

issuer is not earning a sufficient return. Because we use risk-based 

pricing, we believe that Bank of America has been less likely to 

have to use this type of repricing. 

Now let me turn to H.R. 5244. We are very concerned that this 

bill would significantly hinder our ability to price the risks of lending, and would result in less credit being made available to creditworthy borrowers, with generally higher prices for those who do receive credit. Let me highlight two of the concerns described in my 

written testimony. 

First, H.R. 5244 would prohibit risk-based repricing of existing 

debt at any time, even with notice and choice. It is important to 

note that in the great majority of cases, we learn about an increase 

in a customer’s risk after the customer has run up a large balance, 

not before. Thus, the risk lies in that existing balance, not in future 

charges. 

Second, in addition to letting them opt out of risk-based repricing, H.R. 5244 would provide customers the ability to opt out of default repricing, that is, allow customers to breach their credit 

agreement but suffer no consequence for it. The bill thereby would 

take significant steps to reduce the customer’s incentive to manage 

credit wisely. 

Recent experience suggests that this course is not a wise one. 

There is general consensus that a major cause of the mortgage crisis was an originate-to-distribute model where some participants in 

the system had incentives to externalize risk. A clear lesson of the 

past year has been that both lenders and consumers suffer when 

lenders do not sufficiently consider risk. 

Before closing, I would like to react to some testimony suggesting 

that the credit card industry is not competitive on price and does 

not risk-base price. We find this difficult to understand. For example, we have a team of approximately 30 associates who engage 

solely in new account marketing, constantly evaluating new competitive strategies. They offer a variety of products with different 

interest rates, features, and benefits to see how they do. 

In 2007, we sent out approximately 111 million test pieces in 

over 500 tests, of which 36 million were price tests, trying to see 

how changes in rate can affect market share. The same competition 

20

occurs for existing customers. We fight for balance transfers 

through promotional rates and other offers. 

Customers often call us to inform us of an offer from a competitor at a lower rate than they are paying us, and our associates 

have discretion to match those rates when appropriate. And even 

when customers call in for reasons unrelated to rate, our associates 

check to see if they have balances with competitors, and offer them 

price incentives to transfer those balances. 

In short, any legislation premised on this industry not being 

highly competitive on price and terms would be based on a false 

premise. 

That concludes my remarks. I look forward to answering any 

questions that you might have. 

[The prepared statement of Mr. Baer can be found on page 91 of 

the appendix.] 

Chairwoman MALONEY. I thank the gentleman for his testimony, 

and note that both Ms. Warren and Mr. Baer pointed out in their 

testimony that many credit card companies do not engage in universal default and some of the other abuses that we are trying to 

correct in this legislation. 

And Mr. Levitin. 

STATEMENT OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF 

LAW, GEORGETOWN UNIVERSITY LAW CENTER 

Mr. LEVITIN. Madam Chairwoman, members of the subcommittee, I am pleased to testify today in support of the Credit 

Cardholders’ Bill of Rights. I am here to address a major argument 

put forth by the credit card industry against any form of regulation, namely that it would dissipate the benefits of so-called riskbased pricing. 

Credit card issuers contend that since the early 1990’s, they have 

engaged in risk-based pricing and that risk-based pricing has benefitted creditworthy consumers in the form of lower costs of credit 

and subprime consumers in the form of greater availability of credit. Card issuers argue that any regulation of their billing practices 

would negate the benefits of risk-based pricing. 

It is important that the subcommittee understand that there are 

three problems with the card industry’s risk-based pricing story. 

First, credit card pricing is, at best, only marginally risk-based. 

Credit cards have an astounding array of price points—annual fees, 

teaser interest rates, base interest rates, balance transfer interest 

rates, cash advance interest rates, overdraft advance interest rates, 

default interest rates, late fees, overlimit fees, balance transfer 

fees, cash advance fees, international transaction fees, telephone 

payment fees, and so on. I think I missed a few. 

Of this multitude of fees, only a couple—base interest rates and 

late fees—have any relation to consumers’ credit risk. And even 

then, it is not narrowly tailored. Most issuers offer only a couple 

tiers of pricing for base rates and late fees. But consumer credit 

risk does not come just in sizes large and small. 

The majority of credit card pricing has no relation to cardholder 

risk whatsoever. Instead, the pricing is a function of the card 

issuer’s ability to load on fee after fee after fee to customers who 

21

are locked into using the card because of high costs in switching 

cards. 

Not surprisingly, as the graph I have up shows, there is virtually 

no difference in the average effective interest rate for platinum 

cards, gold cards, and standard cards, even though these cards are 

issued to consumers with very different credit profiles. Viewed as 

a whole, credit card pricing is not risk-based. It only reflects risk 

on the margins. 

The second problem with the risk-based pricing story is that it 

cannot be connected to lower costs of credit for creditworthy consumers. It is far from clear that overall credit costs have declined, 

much less that any decline could be attributed to risk-based pricing, since the early 1990’s. 

Credit card pricing has become a game of three-card Monte. Card 

pricing has shifted away from the up-front visible price points, like 

annual fees and base interest rates, and shifted to back-end fees 

that consumers are likely to ignore or underestimate. 

For example, even as base interest rates have fallen, a host of 

new fees have sprouted up, and other fees, like late fees and 

overlimit fees, have soared. According to the GAO, from 1990 to 

2005, late fees have risen an average of 160 percent and overlimit 

fees have risen an average of 115 percent. For creditworthy consumers, many credit card costs have risen since the advent of riskbased pricing. 

The one credit card price point that has declined for creditworthy 

consumers are base interest rates. This decline, however, is not attributable to risk-based pricing. Instead, virtually the entire decline 

is attributable to the decline in card issuers’ cost of funds. The net 

interest margin, displayed on the graph, is the spread between the 

card issuers’ cost of funds and the base interest rate at which they 

lend. 

This rate has remained basically static since the early 1990’s, indicating that base interest rates have declined at roughly the same 

rate as the cost of funds. In other words, the decline in base rates 

is due to the decline in issuers’ cost of funds, not risk-based pricing. 

Even if credit card pricing were actually risk-based in a meaningful way, there is no evidence that connects it to lower pricing 

for creditworthy consumers. The third problem with the risk-based 

pricing story is that there is no evidence that connects it to greater 

availability of credit for subprime consumers. 

The availability of credit for subprime consumers has grown 

since the early 1990’s, but this is a function of securitization rather 

than of risk-based pricing. Several years ago, Alan Greenspan told 

the Senate Banking Committee that, ‘‘Children, dogs, cats, and 

moose are getting credit cards.’’ It is hard to reconcile a story of 

risk-based pricing with cards being issued to toddlers and pets. 

The greater availability of credit is instead a function of 

securitization. Securitization increases lenders’ lending capacity 

and lets them pass off default risk onto capital markets. 

Securitization, not risk-based pricing, is the explanation for growth 

in lending to subprime consumers. 

Even if credit card pricing were truly risk-based, and even if it 

had the benefits claimed by the card industry, nothing in the Credit Cardholders’ Bill of Rights implicates the risk-based pricing 

22

model. The Cardholders’ Bill of Rights is about banning abusive 

and manipulative billing tricks, nothing more and nothing less. It 

does not regulate interest rates or fee amounts, and it leaves card 

issuers with at least five ways of accounting for risk. 

Because the practices banned by the Cardholders’ Bill of Rights 

are at best incidental to issuers’ profitability, we should not expect 

to see the result in higher costs of credit, or lower availability of 

credit, or affect asset-backed securities markets. 

Instead, this legislation will help clarify credit card pricing, 

which is a prerequisite for an efficient, competitive market. H.R. 

5244 will help consumers and will make for a fair and more efficient credit economy, and I strongly urge Congress to pass it into 

law. 

[The prepared statement of Professor Levitin can be found on 

page 117 of the appendix.] 

Chairwoman MALONEY. Thank you. 

Mr. Finneran? 

STATEMENT OF JOHN G. FINNERAN, JR., GENERAL COUNSEL, 

CAPITAL ONE 

Mr. FINNERAN. Thank you, Chairwoman Maloney, Ranking Member Biggert, and members of the subcommittee. I want to thank 

you for inviting me back to testify before the subcommittee, this 

time about pending credit card legislation. 

This subcommittee has played a constructive role in identifying 

problems that consumers have had with their credit cards. Capital 

One has been a willing and active participant in the dialogue about 

how to improve on the remarkable value delivered to millions of 

American consumers by credit card products. 

With respect to the practices that have been central to the debate, Capital One has worked diligently to establish a high standard of customer sensitivity. We do not engage in any form of universal default repricing. We have never done two-cycle billing. 

We have a single clear penalty repricing policy. We will impose 

a penalty rate on a consumer only if the consumer pays late twice, 

by 3 days or more, in a 12-month period with respect to that specific card. We will provide the customer with a prominent warning 

on the billing statement after the first infraction. In many cases, 

we choose not to reprice the customer even if the customer pays us 

late twice in the 12-month period. If a customer is repriced but 

pays us on time for 12 consecutive months, we will take that customer back to the prior rate. This unrepricing is automatic. 

We have supported the Federal Reserve’s proposed 45-day notice 

for penalty repricing, and have gone beyond the Fed’s proposal to 

urge that customers be given the opportunity to reject any repricing, close the account, and pay down the outstanding balance at 

the old rate over time. We provide our customers notice and the 

ability to opt out of overlimit transactions. 

Across our entire portfolio of customers, more than 30 million, we 

work very hard to provide important notices in plain English that 

capture their attention at critical moments. We do so because we 

believe, as Chairman Bernanke said to this committee, that cardholders must understand the terms under which they are borVerDate 0ct 09 2002 13:50 Jun 11, 2008 Jkt 041731 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\41731.TXT TERRIE
23

rowing and be empowered to manage their credit wisely, as the 

overwhelming majority of our customers do. 

Capital One has never been a voice for the status quo. We have 

long advocated for changes in the way credit cards are marketed 

to consumers. We believe that the banking regulators have the 

statutory authority right now to implement an advanced consumer 

choice regime that effectively solves the most critical credit card 

problems identified by this committee with minimal risk of oversteering or unintended consequences. 

Toward that end, we have led the industry in recommending that 

consumers have clear, conspicuous 45-day notice and the right to 

opt out of all types of repricing. And we believe that such a regulatory initiative may be on the horizon. 

But, Madam Chairwoman, we also believe that it is unwise, especially at this time, to enact broad legislation that sets payment formulas in statute, redefines critical product features, and limits the 

tools of risk management for consumer credit. Capital One must 

therefore oppose H.R. 5244, and we do so for three fundamental 

reasons. 

First, the legislation sets multiple statutory limits on a lender’s 

ability to price for the cost of credit. For example, under the heading of eliminating double-cycle billing, the bill actually redefines 

the concept of grace period and arbitrarily expands the degree to 

which all issuers, even those who don’t engage in double-cycle billing, must extend credit interest-free. Other provisions of the bill 

also raise the specter of price controls. 

Second, the consequences of so sweeping a bill would be to force 

the industry to raise the cost of credit for everyone, even those who 

present less risk of default to the lender, and reduce the availability of credit for those consumers who present a greater risk of 

default. 

Third, this result would be exactly the wrong policy prescription, 

particularly in this economic environment. As the mortgage crisis 

has unfolded, we have had a progressive tightening in the credit 

markets, and many believe we are near or in a recession. 

To ease the impact of a slowdown on our economy, the Fed has 

aggressively lowered the Federal funds rate, and Congress has 

passed a bipartisan stimulus package. H.R. 5244 could significantly 

counteract the positive effects of both of those policy initiatives. 

Madam Chairwoman, that would be especially unfortunate since 

the regulators, those policymakers uniquely positioned to evaluate 

the complex and dynamic credit card industry, are poised to address all of the issues targeted by H.R. 5244. 

Under its new Regulation Z rule, the Fed proposes a 45-day notice period for all types of repricing. The new rule also offers improved disclosure requirements for payment allocation, minimum 

payment, and interest rates. And that is just a partial list. 

Equally importantly, Chairman Bernanke has confirmed before 

this committee that the Fed will supplement its Reg Z rule with 

new credit card rules under its UDAP authority. It seems likely 

that those rules will go to the core of the committee’s concerns. We 

believe that such rules may provide the best, safest, and most direct road to reform. 

24

Capital One has publicly called for balanced, reasoned change 

that can be implemented quickly, would improve disclosure, and 

enhance customer choice. We have also sought to work cooperatively with you and the committee. Though we must respectfully 

disagree about the impact of H.R. 5244, I want to thank you again 

for the opportunity to express our views. 

[The prepared statement of Mr. Finneran can be found on page 

101 of the appendix.] 

Chairwoman MALONEY. And thank you very much for your testimony. 

Mr. Ausubel? 

STATEMENT OF LAWRENCE M. AUSUBEL, PROFESSOR, 

DEPARTMENT OF ECONOMICS, UNIVERSITY OF MARYLAND 

Mr. AUSUBEL. Chairwoman Maloney, Ranking Member Biggert, 

and members of the subcommittee, my name is Lawrence Ausubel, 

and I am a professor of economics at the University of Maryland. 

I am honored by the invitation to appear before you today. 

Credit card debt poses a common pool problem. Since it is not secured by any collateral, and since recoveries will be allocated pro 

rata under bankruptcy, each card issuer is motivated to try to collect from the common pool, and the attempt to collect by one issuer 

may pose a negative externality to others. 

When a consumer becomes financially distressed, each credit 

card lender has an incentive to try to become the first to collect. 

A useful explanation of penalty interest rates and universal default 

clauses is that each issuer is seeking to maximize its own individual claim on this common pool of debt. 

To the extent that the financially distressed consumer is still 

able to repay any debt, a high penalty rate, such as 29.9 percent, 

takes advantage of the situation and provides incentives for this 

issuer to be repaid in front of other lenders. And to the extent that 

the consumer repays no debt, the high penalty rate maximizes the 

issuer’s nominal loan balance, and therefore the issuer’s pro rata 

share of recoveries following bankruptcy. 

Since every credit card issuer has this unilateral incentive to 

charge a high penalty rate, the likely outcome is inefficiently high 

penalty rates. As such, this common pool problem may be viewed 

as a market failure, yielding scope for Congress to intervene in useful ways. 

Universal default clauses arise in similar fashion. Each issuer individually has the incentive to impose penalty pricing when a consumer misses a payment to somebody else in order to collect first 

from the common pool. This prisoner’s dilemma-like game has the 

result that all issuers impose universal default, but no issuer is 

any better off if all have it than if none have it. 

Indeed, they may all be made worse off; an overextended consumer suffering a setback is often best dealt with by relaxing the 

terms of the loan and giving the consumer an opportunity to get 

back on his feet. Instead, penalty pricing and universal default create an explosion of finance charges from which it is difficult for the 

consumer to emerge. 

Given the current turmoil in credit markets and in real estate, 

additional pressure on consumers from credit card debt would be 

25

particularly unfortunate. Such pressures could be reduced if the 

proposed bill becomes law in a timely fashion. 

While it is almost axiomatic that consumers who have triggered 

penalty rates are greater risks than consumers who have not, I am 

unaware of any empirical evidence that the magnitude of higher 

rates bears any close relation to the magnitude of enhanced risk. 

Quite to the contrary; it is evident from other aspects of credit card 

pricing that the levels of many fees are based more on the relative 

insensitivity of consumer demand than on any particular relation 

to cost. 

Good examples are the 3 percent surcharges recently imposed by 

most issuers on credit card transactions made in foreign currencies, 

the $39 late fees imposed irrespective of the number of days payment is late, etc. 

As part of my written statement, I have included a new paper, 

co-authored with Professor Amanda Dawsey of the University of 

Montana, developing an economic model of the issue. While our 

analysis is very preliminary and incomplete, the penalty interest 

rate appears to be higher under universal default, and the higher 

interest rate appears to exceed the enhanced credit risk associated 

with missing a payment. 

A second result is that the probability of full repayment after 

missing a minimum payment is lower under universal default. 

Third, it appears that social welfare is frequently lower with universal default than without it. 

Separately from these issues, let me briefly observe that any 

time/any reason repricing would appear to be detrimental to competition in the credit card market. This conclusion comes from 

standard considerations in industrial organizations, such as search 

costs and switch costs. 

How can a consumer comparison shop if all he is told about future pricing is, we may change your APR and fees ‘‘based on information in your credit report, market conditions, business strategies, or for any reason?’’ That is a quote from the current Bank of 

America disclosure. 

Thank you. 

[The prepared statement of Professor Ausubel can be found on 

page 76 of the appendix.] 

Chairwoman MALONEY. Thank you. 

Ms. Franke? 

STATEMENT OF CARTER FRANKE, MARKETING EXECUTIVE, 

JPMORGAN CHASE 

Ms. FRANKE. Madam Chairwoman, and members of the committee, good morning. My name is Carter Franke and I am a senior 

vice president at JPMorgan Chase. I am proud to represent today 

the 20,000 Chase card service employees who serve the needs of 

more than 100 million Chase card customers each and every day. 

Chase believes that building solid customer relationships is the 

best approach to long-term success in the credit card or in any industry, and we have worked to deepen those relationships for a 

number of years. 

Last year we articulated before Congress and in many other 

venues our belief that the appropriate use of credit cards involves 

26

a shared responsibility between banks and their customers. We 

said that credit cardholders need to use their cards responsibly, 

only purchasing what they can afford, never exceeding their credit 

limits, and making their payments on time. 

For banks like Chase, our responsibilities include the need to listen and respond to customer needs, to communicate clearly about 

our products, to make sure customers understand the terms of our 

agreement, and to go further by helping them live up to those 

terms. 

That is why early last year we developed our Clear & Simple 

program, to make sure that customers have clear information and 

to help simplify their relationship with us. Clear & Simple provides 

tools that help customers manage their accounts and use those 

tools and therefore virtually eliminate the possibility of ever paying 

a penalty fee. 

Also last year, after listening to our customers, we decided to 

make a major policy shift. As of March 1st of this year, we no 

longer use credit bureau information to initiate a reset of a customer’s rate with us. We very much appreciated your announcement applauding our change, Madam Chairwoman. We believe that 

both in principle and practice, we share your concerns for consumers who use credit cards. 

However, in order to avoid the unintended consequences of higher interest rates and decreased access to credit for consumers, we 

believe that great caution must be exercised in the process of turning these concerns into complex new legislation. 

Even though Chase does not engage in a number of the practices 

the bill would prohibit—for example, two-cycle billing and bureaubased repricing—we do believe that the overall impact of the legislation would be to lessen our ability to price according to the individual risk profile of our customers, which is the bedrock of the 

competitive credit card industry today. 

Study after reputable study, including those by the GAO, the 

Federal Reserve, and just last month by the Congressional Research Service, have concluded that the ability to measure and 

price according to individual risk has significantly lowered average 

interest rates and brought credit cards to millions of Americans 

who could not have gotten them 15 years ago. 

While the bill has the admirable goal of protecting consumers, it 

seeks to do so through complex, expansive rules and restrictions 

that would micromanage the banks’ ability to charge or change interest rates based on indicators that we know significantly raise a 

customer’s risk of default. At Chase, for example, we know that 30 

percent of customers who are late twice in one year will eventually 

default on their loans, an expensive process that raises cost for 

other customers. 

Without the ability to mitigate risk, banks will have to reduce 

the number of people they are able to make loans to, depriving 

many families access to mainstream credit and possibly driving 

them to subprime markets where interest rates are exorbitant. 

We believe that the Federal Reserve Board’s process to put more 

information and greater control in the hands of consumers, combined with a commitment to ban practices that are unfair or deceptive, is preferable to the legislation currently under discussion, and 

27

that Congress should let the Fed’s process continue to determine 

its effectiveness. 

In summary, let me quote Chairman Bernanke, speaking to the 

committee several weeks ago: ‘‘Onerous regulations that create reductions in credit availability unconnected with the issues of disclosure would be a negative in the current environment.’’ That is our 

point. 

We are concerned that this bill would reduce the availability of 

credit at the very time when Congress is doing all it can to increase 

credit availability and stimulate the economy. 

Thank you very much, and I look forward to your questions. 

[The prepared statement of Ms. Franke can be found on page 105 

of the appendix.] 

Chairwoman MALONEY. Thank you very much. 

We have been called for two votes, and there are 8 minutes left 

in the vote. I did want to note that Chase did voluntarily incorporate some of the best practices that were in our Bill of Rights, 

and we congratulate you for that, and Bank of America, too, for 

those actions. 

But we are going to break now for two votes, and we will be right 

back. Thank you so very, very much, and I apologize for this inconvenience. 

[Recess] 

Chairwoman MALONEY. The hearing will be called to order. Will 

the witnesses please take their seats, and we can resume in a few 

moments with Mr. Oliver I. Ireland. 

STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & 

FOERSTER 

Mr. IRELAND. Chairwoman Maloney, Ranking Member Biggert, 

and members of the subcommittee, I am a partner in the Washington office of Morrison & Foerster. I was an Associate General 

Counsel at the Federal Reserve Board for over 15 years. And I 

have worked on credit card issues since 1975. I am pleased to be 

here today to discuss H.R. 5244, the Credit Cardholders’ Bill of 

Rights Act of 2008. 

The current credit card disclosure regime has not kept up with 

the market. Recognizing this, in June 2007, the Federal Reserve 

Board proposed a comprehensive revision to the credit card provisions of its Regulation Z that address many of the issues raised by 

H.R. 5244. 

In addition, the Board is exploring additional credit card issues 

under its unfair and deceptive acts and practices authority. It is 

premature to address credit card practices in legislation until these 

initiatives are completed, probably later this year. 

The regulation of consumer credit is highly technical, and the 

risks from acting on inadequate information or simply imperfect 

drafting are significant. Unfortunately, I believe that H.R. 5244 reflects some of these problems. 

H.R. 5244 may lead to increased rates and reduce credit availability. For example, H.R. 5244 would limit risk-related increases 

in APRs on existing balances, would prolong the payoff of these 

balances, limit changes in terms generally, and require 45 days’ adVerDate 0ct 09 2002 13:50 Jun 11, 2008 Jkt 041731 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\41731.TXT TERRIE
28

vance notice and an additional 90-day opt-out period for rate increases. 

The Federal Reserve Board’s proposal is far simpler. It would require 45 days’ prior written notice before increasing rates that applies to both changes in terms and default pricing. These prior notices in the Board’s proposal would give a cardholder ample opportunity to seek a better rate elsewhere. 

In addressing double-cycle billing, H.R. 5244 appears to mandate 

grace periods that are not now provided for and to outlaw current 

interest rate calculation practices that are not considered to be 

double-cycle billing. Under the Board’s proposal, double-cycle billing would continue to be disclosed in solicitations and account 

opening disclosures. If this does not fully address concerns, additional disclosures could address the issue without outlawing unrelated practices. 

H.R. 5244 would require pro rata allocation of payments to balances that are subject to different rates, thereby discouraging low 

promotional rates that can help customers to change accounts 

when their rates on existing accounts are increased. Under the 

Board’s proposal, credit card issuers would be required to make a 

new payment allocation disclosure for discounted cash advance or 

balance transfers. This disclosure could be broadened to other circumstances where different rates apply to different unpaid balances. 

H.R. 5244 would require statements to be sent at least 25 calendar days before the due date, a 75 percent increase over current 

Regulation Z requirements. This would discourage grace periods or 

require higher rates to address lost income. The Board’s proposal 

would improve disclosures on due dates, cutoff times, and fees for 

late payments, and therefore, I think, addresses the issue. 

I think H.R. 5244’s impact could go beyond consumer credit. Significantly, America’s small businesses, which account for over 50 

percent of the domestic workforce, rely heavily on credit cards. 

Over 77 percent of small businesses use credit cards to pay business expenses, and nearly 30 percent use cards to help finance 

their business operations. Not only is H.R. 5244 likely to affect 

rates and availability of credit for consumers, but it is also likely 

to raise rates and reduce the availability of credit for small businesses. 

Finally, a significant source of funding for credit cards is derived 

from asset-backed securities. In an environment where market confidence has been shaken, any market perception that the risk profile of credit card receivables is changing could lead to a reduced 

access to this source of funding for card issuers that would require 

issuers to further tighten credit standards and raise rates. 

Thank you for the opportunity to be here today. I would be happy 

to answer any questions. 

[The prepared statement of Mr. Ireland can be found on page 108 

of the appendix.] 

Chairwoman MALONEY. Thank you so much for your testimony. 

And our final witness is Ms. Porter. 

29

STATEMENT OF KATHERINE M. PORTER, ASSOCIATE 

PROFESSOR, THE UNIVERSITY OF IOWA COLLEGE OF LAW 

Ms. PORTER. Madam Chairwoman and members of the subcommittee, my testimony explains two key benefits of enacting 

H.R. 5244. First, it would provide Congress with timely, reliable, 

and complete data about credit card markets. Currently, such information is virtually nonexistent. The second focus of my testimony is explaining the innovative and important ways that this 

bill would empower consumers to responsibly use their cards. 

As Members of Congress, you work to ensure that our laws promote sound financial behavior and encourage positive economic 

growth. Effective lawmaking about credit cards requires knowledge, yet Congress and other agencies have almost no information 

about the actual functioning of credit card markets. 

Even the most powerful regulators or investigative agencies, like 

the OCC or GAO, cannot reliably answer basic, key questions about 

how American families use credit cards. How many households pay 

overlimit fees each month? What is the average actual interest rate 

charged to a revolving account balance? 

Similarly, very little is known about the profit structure of credit 

card issuers. Without such information, it is impossible to guard 

against a credit bubble and to ensure appropriate underwriting. 

Congress cannot rely solely on the card industry, consumer advocates, academic researchers, or Federal agencies to provide the necessary data. 

Such information will be at best only partially complete and at 

worst perhaps self-serving or unreliable. Without the legal mandate for data contained in H.R. 5244, Congress cannot fully understand and monitor credit cards, despite their powerful role in our 

economy. 

This bill would dramatically improve knowledge by gathering 

data on the types of transactions that incur fees or specialized interest rates by measuring how many cardholders pay such fees or 

rates and by documenting how issuers earn their revenue. 

Armed with such data, Congress and Federal regulators can 

monitor the economic wellbeing of American families and the financial stability of card issuers. Congress needs timely and comprehensive data to regulate effectively. Enacting H.R. 5244 would give you 

such information, allowing you to assess whether our credit card 

policies need further reform. 

H.R. 5244 takes a moderate approach. At its core, this bill is 

about ensuring that consumers who try to use their cards in a responsible manner are able to succeed. It empowers cardholders to 

avoid default and to honor the terms of their card agreements. This 

bill would encourage responsible card use in at least three ways. 

First, it would commit consumers to set a firm limit for their 

cards. Issuers would have to honor these limits, and could not 

charge an overlimit fee if they extended additional credit in contravention of a consumer’s express desire. Helping consumers stay 

within their credit limits is a sound financial practice that reduces 

the risks to consumers and issuers. 

The bill also limits issuers to imposing an overlimit fee only one 

time in a billing cycle. Issuers can manage their risk by refusing 

to authorize transactions that would exceed the bill. The law would 

30

merely prevent companies from churning overlimit fees for profit if 

they voluntarily take on additional risk. 

The bill also would reward consumers who do not overspend after 

exceeding the limit because such consumers could only be penalized 

for two subsequent months after initially exceeding a limit. 

The bill also empowers consumers to pay their credit card bills 

on time by creating standardized billing practices. Consumers who 

have the means to pay on time and intend to do so should be able 

to succeed in that goal, and not be tripped up by confusing and 

varying rules. The bill proposes a uniform rule that payment is 

timely if received by 5 p.m., and would prohibit issuers from imposing a late fee if a consumer could show the payment was mailed 

7 days before the due date. 

The final way the bill promotes consumer responsibility is its requirement that the most vulnerable consumers pay the up-front 

costs of obtaining a card. Subprime cards typically have very low 

credit limits of $250. Half or more of this amount is normally subsumed with fees charged at account opening. An annual fee, a program fee, an account setup fee, and a participation fee are all common. 

If such fees exceed 25 percent of the total credit limit, the bill 

would require the consumer to pay these fees before the card may 

be issued. This would prevent vulnerable, high-risk consumers 

from becoming trapped with an inappropriate card they cannot afford. 

By empowering consumers to stay within their credit limits, by 

helping them succeed in paying on time, and by ensuring that consumers can afford the high fees of their cards, H.R. 5244 would 

promote financial responsible practices that would benefit everyone. 

[The prepared statement of Professor Porter can be found on 

page 140 of the appendix.] 

Chairwoman MALONEY. Thank you very much for your testimony. We literally just received an endorsement letter from the 

National Small Business Association in support of the legislation, 

and I would like unanimous consent to place it in the record, along 

with various newspaper editorials in support of the bill. 

Thank you. Thank all of you. And one of the provisions—actually, Ms. Porter touched on it—that is in this bill that I like very 

much because it is simple and I believe it is very needed, as she 

testified, and it is the last provision requiring better data collection. 

We have had trouble getting basic data. For example, I would 

like to ask the issuers and Mr. Ireland and anyone else who would 

like to comment: How much revenue do card issuers make from 

each of the billing practices that H.R. 5244 directly regulates? 

Would any issuer like to comment? 

Mr. BAER. I will just say that I don’t have that data. 

Chairwoman MALONEY. You don’t have it? Well, then, I think it 

is fair to ask, then: How can you say that the bill will have a negative impact on your profits if you don’t have the data? 

Mr. BAER. Chairwoman Maloney, I think our central concern 

with the bill is less directed directly to profits but more just the 

ability to put into practice the risks that we measure and see in 

31

the marketplace. In fact, one could argue that the effect of the bill 

will simply be to change the way banks and issuers make profits. 

But our central concern is whether we can price for risk for customers who are exhibiting higher risk. 

Chairwoman MALONEY. Well, does any other issuer have a comment on this, of having the data? No one? Mr. Ireland? Any academic? No one wants to comment? Mr. Ausubel? 

Mr. AUSUBEL. The only comment that I would make is that the 

last time that I was privy to such things, Visa, the organization, 

collected such numbers, aggregated them over all issuers, and distributed it to their members, including Bank of America. The title 

of the document at the time was the ‘‘Visa Profitability Analysis 

Report,’’ and it gave breakdown according to finance charges versus 

fees. 

Chairwoman MALONEY. Well, thank you. Mr. Levitin? 

Mr. LEVITIN. I do not have direct knowledge of the profitability 

of issuers for any of these practices myself. However, I would bring 

to the committee’s attention that I recently saw a resume from a 

senior vice president at HSBC, and one of the lines on her resume 

was that she previously worked at MBNA, which is now part of 

Bank of America, and she had headed up their risk-based repricing 

initiative. 

The resume boasted that this initiative brought in $52 million of 

net income before tax to MBNA. What I think is interesting about 

it is that this resume did not phrase this in terms of, we were just 

covering loss. Instead, this was seen as—this was being boasted as, 

I am making the bank more profitable, that this is a profit center 

rather than just hedging against risk. 

Chairwoman MALONEY. Well, in response to Mr. Baer’s testimony 

that they were just pricing for—looking at risk-based pricing. And 

I really would like to ask, based really on the testimony that you 

gave, Mr. Levitin, where you said that toddlers and pets are issued 

credit cards, and certainly many parents complain to many of us 

that their teenagers and college students are getting credit cards—

but seriously, what evidence is there that pricing is based on risk 

and that it is done with any competence? 

Senator Levin held a compelling hearing earlier this Congress in 

which he made a good case that credit card companies increase 

rates with no basis in fact. He had witnesses who had multiple 

rates from the same cardholder. And how do multiple rates for the 

same cardholder show any reflection of the risk of the cardholder? 

Again, I ask any issuer or Mr. Ireland or any academic to respond. 

Mr. BAER. Chairwoman Maloney, I would like to respond, I 

guess, to the toddlers and pets point, as I think it represents a fundamental misunderstanding of the difference between marketing 

and credit extension at issuers. 

We send out millions of pieces of mail, obviously, in order to market our credit cards. We purchase lists in order to find out who we 

should be marketing to. That may mean that we end up sending 

a marketing solicitation, for example, to a toddler. Say, for example, a toddler signs up on the Carolina Panthers Web site as a fan. 

If we have a Carolina Panthers card, we may send that toddler a 

card, even more likely if the toddler lies about his or her age. 

32

That is not to say, however, that toddler is ever granted credit. 

The toddler would have to send in an application. That application 

would ask for their age. And then once the application was received, we would check on that toddler’s credit score. We would 

pull a bureau report, we look at their credit history, and we would 

see that they had no credit history. 

So although that toddler or pet might get a mailer, there are 

really three reasons they would not get a card: First, because it is 

illegal; second, because they have no credit history and are unlikely 

to repay; and third, especially with the pets, we find that they have 

trouble pulling the cards out with their little paws. 

[Laughter] 

Chairwoman MALONEY. But then to the more serious point: How 

do multiple rates for the same cardholder show any reflection of 

the risk of the cardholder? That was a point that was made in the 

Levin hearing and other hearings, and that is made really by individuals to our offices. 

Mr. BAER. I will let the other issuers have a turn as well. But 

I think that is reflective of the competition in the industry. A given 

customer might receive a better rate as a result of a promotion, 

which again we are trying to take market share from a competitor. 

If the customer is part of an affiliate group—for example, a Panthers fan or a member of the National Education Association or a 

medical practice group—that affiliation might get them a better 

rate. So it is really a reflection of competition that we will offer different rates based on how someone qualifies for a solicitation. But 

I will let others talk as well. 

Chairwoman MALONEY. Would anyone else like to comment before— 

Mr. IRELAND. Just a short comment, Chairwoman Maloney. The 

analysis of risk is an attempt to predict future behavior, and that 

is necessarily imprecise. And I would be kind of surprised to see 

multiple issuers, for example, agreeing 100 percent on the risk of 

any individual person who wasn’t in bankruptcy or wasn’t, at the 

other end of the scale, in super-prime territory. 

The question is not, it seems to me, whether that works all the 

time. The question ought to be: Is that a good idea, and should people be doing that? And I think, economically, pricing for risk is a 

very sound principle and is a key to market economies. 

Chairwoman MALONEY. Well, the question was on the same cardholder having different cards with the same issuer with different 

rates. I guess another way of asking it is: What data do any issuers 

have to support the argument that repricing is based on risk? Anyone? Any comments from anyone? 

Ms. FRANKE. I would be glad to respond to that, in that we would 

love to share with the committee, for furthering the education of 

everyone, the statistical probability that we see, which is difficult 

to discuss in detail here. But again, we would be more than happy 

to share that information that is indicated by the reasons that a 

customer goes into default with one of our credit card companies. 

And we can assure you that there are indications that a customer is more risky, which will lead us to make a pricing change. 

And at Chase, we only reprice a customer now if they do not live 

up to the terms of their agreement with us. And we can show you 

33

indeed that if a customer defaults on their agreement with us, that 

their risk has increased and that we need to take an appropriate 

price change to cover that risk. 

Chairwoman MALONEY. Mr. Ausubel? And then my time is expired. 

Mr. AUSUBEL. The point that I think is worth emphasizing is 

that there is no reason under economic theory that you would expect that the issuer is simply going to assess the exact amount of 

extra risk and then price equal to that amount. 

Suppose you have a customer whom you believed had a 5 percent 

extra probability of default. But suppose your model told you that 

you could raise their rate by 10 percent and they probably wouldn’t 

leave you. Then you will do it. They are not interested in simply 

coming up with the number and then setting their price equal to 

the cost. 

Chairwoman MALONEY. Yes. That was the point that was made 

in Ms. Warren’s testimony earlier. 

Would you like to augment? 

Okay. Ms. Biggert. 

Mrs. BIGGERT. Thank you, Madam Chairwoman. 

I would like to continue a little bit on this risk issue. Let’s say 

we have—and maybe, first of all, Ms. Franke, because you said you 

don’t include FICO scores or anything as far as looking at somebody’s credit. But let’s say somebody has had a card with one of 

the issuers for a long time. 

One of the cardholders has an income of $45,000. They have just 

defaulted on a car loan. They have defaulted on three other cards. 

And they have not paid their mortgage in 3 months. And the other 

person has maybe—could be the same amount of money, but let’s 

say they have a higher income and they have one card, and they 

always pay the full balance on time. 

Do you think that the risk of the customer paying back the card, 

the one who has defaulted and had all the problems, do you think 

that risk stays the same? Does it go up, or does it go down? 

Ms. FRANKE. We would believe that risk was greater with a customer who has indicated a difficulty in meeting their obligations. 

Mrs. BIGGERT. But you are saying then that that should not be 

taken into account, whether to raise the interest rate? 

Ms. FRANKE. We are saying that at Chase, we believe that the 

best way for us to deal with our customer is to limit our pricing 

actions to those things that the customer understands would cause 

them to be in default with us. And that is missing a payment, exceeding their credit limit, or writing us a check that does not have 

sufficient funds. 

I do believe, however, that as a statistical indicator, that risk 

would be increased if someone is significantly in default on other 

obligations. 

Mrs. BIGGERT. But you would just keep them on the—as long as 

they paid your card, there is no— 

Ms. FRANKE. That is correct. At Chase we believe that we can 

adequately manage the risk based upon their behavior with us. 

Mrs. BIGGERT. Okay. Mr. Ireland, would you comment on that? 

34

Mr. IRELAND. Well, I would like to go back just a moment to Congresswoman Maloney’s example because it shows, I think, part of 

the difficulty with the bill. 

If I am a card issuer and I give multiple cards to the same person and my system is working right, I ought to be charging them 

the same rate on different cards, I think. I think the way the bill 

works, as I read the language of the bill where you make changes 

going forward based only on the performance of that account, that 

the bill would actually create a situation where it is much more 

likely that you would be charging the same cardholder different 

rates on different accounts because you couldn’t consider the performance in another account for the individual account. And to the 

extent that is viewed as a problem, it aggravates that problem. 

Mrs. BIGGERT. Thank you. 

Mr. Baer, what would you do with do with the two separate 

cases? 

Mr. BAER. Sure. I think it is worth noting here that, again, there 

are two different ways where customers primarily get repriced. One 

is through trigger-based default repricing. At Bank of America, we 

will only do that based on two types of events, late or overlimit, 

not bounced check; and we will only do it, again, if they do it twice 

within a 12-month period. And even then, we do an individualized 

risk assessment. 

But I think it is fair to say that is how most people get repriced 

across the industry, is by default repricing. We also—and this is 

one of the reasons we can be more forgiving with respect to default 

repricing—we also do look at someone who is, as you described, defaulting to other issuers. 

Again, 94 percent of our customers for 2007 ended up with a 

lower or the same rate as at the beginning of the year. But there 

were a percentage of customers—I think it was actually 2 to 3 percent—who we risk-based repriced because of behaviors such as defaulting with other issuers, maxing out their credit lines. 

Again, we hesitate to do that because this is a competitive market and we don’t want to lose customers and they don’t like it. But 

in those cases, we feel there is genuine risk that merits that repricing. And I think to Ms. Franke’s point, I mean, our numbers show 

that if you identify that group of people with those risks, they actually default at a 50 percent higher rate than our average customers. 

So that again to us demonstrates the predictability of the models 

and the fact that this is legitimate risk-based pricing. 

Mrs. BIGGERT. What about the customer who always pays the 

minimum balance, never pays off any of it? Doesn’t that exponentially raise the—well, the monthly payments go that it compounds 

interest at such a high rate that eventually they are just going to 

run into their credit limit. 

Mr. Baer? 

Mr. BAER. First let me stress that is an unusual case. I think we 

have looked at our numbers, and we have only about 1 percent of 

our customers who are paying only the minimum payment for, I 

think, 6 months in a row. So that is very unusual behavior. 

And I think most of our customers—in fact, you could say 99 percent of our customers—understand that the responsible way to 

35

manage credit is not just by making the minimum payment every 

month. So that is certainly a risk flag. 

But I think when you look at the way that we model, it would 

be unusual for someone—perhaps even rare—for someone to be repriced on a risk basis solely because they are making minimum 

payments. It is generally going to take a lot more than that. 

Mrs. BIGGERT. Would you be happy if the Fed acts to solve the 

issues of concern? Does it matter to the issuers whether the regulators make changes or Congress? 

Mr. Ireland? 

Mr. IRELAND. Well, my experience is that in technical areas like 

this, the regulators will go in with a scalpel and do it more precisely and with less error. And I think one of the debates that has 

been going on here is how to separate out what some people consider inappropriate practices from dealing with legitimate risks. 

And I think that the regulators have—are better equipped to do 

that than the Congress is. 

Mrs. BIGGERT. Ms. Franke? 

Ms. FRANKE. We believe that the regulatory process should be allowed to continue, and that it will accomplish a great deal of what 

the legislation is attempting to accomplish. 

Mrs. BIGGERT. Mr. Finneran? 

Mr. FINNERAN. Yes, Congresswoman. We agree that the Fed has 

all the power. And in fact, they are three-quarters of the way 

through addressing a lot of these issues in their proposal to revamp 

the disclosure rules on Reg Z. And again, with the latest comments 

by Chairman Bernanke, they are going to take it further and consider taking action under their unfair and deceptive acts and practices authority with respect to some of the problems that we have 

been talking about here with the committee. 

Mrs. BIGGERT. Mr. Baer? 

Mr. BAER. The same. 

Mrs. BIGGERT. And Ms. Warren, would you think that could be 

solved by regulation? 

Ms. WARREN. Well, the problem is, I think, as we heard, they 

haven’t regulated. If you have regulators whose principal responsibility is to ensure the profitability of the banks rather than to protect the customers, then we end up with the circumstances we have 

that Chairman Frank started with. 

And that is we don’t hear the words ‘‘consumer protection’’ spoken by a Federal Reserve Chairman for just about 27 years. And 

I don’t think we can afford to go another 27 years of letting the 

banks make up the rules on what kinds of credit card practices 

they want to engage in. 

Mrs. BIGGERT. But when he said in the testimony this time, it 

was consumer protection. 

Ms. Porter? 

Ms. PORTER. I would just echo Ms. Warren, that he said consumer protection. And he may be the Federal Reserve Chairman 

for another year or 2 years or 3 years or 4 years, but our Congress 

is charged with making laws that endure and stand the test of 

time, and with balancing the rights of consumers and regulators. 

The Federal Reserve’s primary responsibility is to ensure the stability of the banking system. I am glad that Chairman Bernanke 

36

is going to also embrace, for the first time in basically my lifetime, 

the obligation to use the unfair and deceptive practices authority. 

Mrs. BIGGERT. Well, these regulations will be out at the end of 

this year, so I think that will be an issue that will be taken care 

of by then. 

I yield back. 

Chairwoman MALONEY. Mr. Watt? 

Mr. WATT. Thank you, Madam Chairwoman, and thank you for 

this hearing because I think this is a complicated area and the 

need for hearings on the bill extremely important. 

Let me just deal with one thing about the variation changes in 

payment dates, particularly for people like me who pay bills only 

once a month. When somebody changes my payment date, it is a 

major, major problem. 

Is there some business justification for that? I think all three of 

the representatives of companies here testified that your company 

doesn’t do it. That is a different question. But is anybody prepared 

to make a business case, a justification case, for being able to just 

change a payment date? 

Mr. BAER. I guess I would make more of a calendar case than 

a business case. For us, as I understand it—and this gets down 

into the weeds—we basically try to keep a 30-day cycle. But it is—

and it ideally would be the first business day of one month to the 

first business day of the next. The problem arises, though, that you 

have Saturdays and Sundays, and we don’t have them come due 

on Saturdays and Sundays. Same for holidays. 

So depending on what month you are in, how many days there 

are in the month, depending on how many holidays there are in 

that month, it is going to move around a little bit. But we certainly 

don’t try to move it around— 

Mr. WATT. I understand. That is not the question I am asking. 

I am asking, is there some real overwhelming business justification 

for having the right to change a date, a payment date, arbitrarily? 

Well, ‘‘arbitrarily’’ is a bad word, but to change a payment date? 

Mr. BAER. Again, I think the only reason our payment date 

would move around, other than as you might expect it, is for the 

reason I have given. But otherwise, we don’t do that. 

Mr. WATT. All right. Let me see if I can zero in on this Visa report that Mr. Ausubel talked about. 

What year did that cover? Do you remember? 

Mr. AUSUBEL. It was getting published annually, and it may still 

exist. 

Mr. WATT. So is that something you could get access to and provide to the committee to help us evaluate the relative benefits that 

are coming from late payment fees or other kinds of fees versus interest rates? 

Mr. AUSUBEL. My assumption is that you would have to make a 

formal request to a bank that is a member of Visa or a request to 

Visa itself. 

Mr. WATT. Bank of America is a member of Visa. So is that 

something you all could get access to and provide to the committee? 

Mr. BAER. I don’t know about the particular report, but we are 

certainly happy to work with the committee and get that kind of 

information if it is available. 

37

Mr. WATT. On this issue of fees versus rates, the obvious appearance to the whole world is that the credit card industry, everybody 

in it, is making a lot of money on fees versus rates. Is that the case 

or—I mean, you know from your own personal bank’s experience 

surely how much you are making on fees versus actual interest, 

don’t you? 

Mr. BAER. Yes. No, I don’t know the exact— 

Mr. WATT. I am not asking you the exact amount. But you are 

making a profit on late fees, aren’t you? 

Mr. BAER. Actually, if you look at the amount that we gain in 

late and overlimit fees, it is a fraction of the amount that we lose 

in credit losses. So our late and overlimit fees are—I’m just guessing— 

Mr. WATT. But credit losses are supposed to be priced by interest 

rates, aren’t they? 

Mr. BAER. Well, that is what I am saying, is— 

Mr. WATT. I mean, isn’t that the risk-based that—am I missing 

something here? The risk-based analysis is supposed to get you to 

a rate that covers credit losses. Isn’t that right? 

Mr. BAER. Exactly, Congressman. What I am saying is that the 

late and overlimit fees are not sufficient to cover our losses. That 

is why we rely upon interest, including risk-based interest, in order 

to recoup those losses and earn a reasonable risk-adjusted— 

Mr. WATT. I guess the question I am asking is: Should you be 

relying on late payment fees to cover those before you are relying 

on interest rates? You are saying you rely on interest rate adjustments to cover those losses because late payment or other fees 

don’t cover them. Shouldn’t it be the reverse, I guess is the question I am asking. 

Mr. BAER. Well, and again, this speaks to the competitive market. I mean, it would be nice to be able to rely, for example, on annual fees. But what our customers show is that they don’t like high 

late and overlimit fees, and they will change issuers if we charge 

them. So that is why we tend to rely more on interest. There may 

be other dynamics at work, but I think that is one. 

Mr. WATT. My time is up—5 minutes goes so fast—and I have 

a whole list of questions. But I will yield back. 

Chairwoman MALONEY. Mr. Ausubel had his hand up. Did you 

want to make a comment on his testimony? 

Mr. AUSUBEL. I think, to give a fairly direct answer to the questions that Mr. Watt was asking, there is no doubt in my mind that 

issuers have erected an array of policies meant to induce consumers to accidentally miss payment—for example, delaying the 

mailing of statements, and giving a fairly short time for them to 

send checks in. 

I, myself, was subject—I paid a bill one day late last month and 

was assessed a $38 late fee and a finance charge of around $40. 

Mr. WATT. I think that has happened to every single one of us 

at one time or another, including myself in the last month. So I 

don’t think there is any dispute about that, which is one of the 

things that troubles people. And it was as a result of a change in 

the payment date. That is what is troubling to people, I think. 

So I personally don’t have any problem with assessing risk and 

charging interest based on that assessment of risk. But I think 

38

what is troubling here to a lot of people is that the interest rate 

that is being charged is really not reflective of anything any more 

because, to the extent that risks are being covered, they are really 

being covered, as Mr. Baer said, primarily by late payment fees 

rather than having an interest rate that factors in the actual risk 

that is being taken. 

So I am sorry, Madam Chairwoman. I had already yielded back. 

Chairwoman MALONEY. I thank the gentleman. That is an important point, and as you know, the bill sets a specific pay date and 

a specific time so that people will not be tripped up in the future. 

Mr. Castle? 

Mr. CASTLE. Thank you, Madam Chairwoman. 

Let me start by asking for unanimous consent to submit a chart 

that shows revenues and profits of credit card issuers and a card 

industry directory for $100 credit card assets. And this was done 

in October of 2006. It reflects 2004, and it is GAO’s, ‘‘Credit Cards: 

Increased Complexity in Rates and Fees Heightens Need for More 

Effective Disclosures to Consumers,’’ sort of in response to your 

earlier question about some of the numbers which I have. You may 

want to examine it. 

Chairwoman MALONEY. Without objection, it is so ordered. 

Mr. CASTLE. This is sort of an unusual panel as I sit here and 

listen to you and read your testimony. Unfortunately, I had to be 

out while most of you spoke. Generally speaking, the banking institutions represented here seem to have much better practices, if not 

excellent practices, in this area, and perhaps some of these changes 

we are talking about have already been made by many of your institutions. 

There is some disagreement about the best methodology of regulating, and I am going to try to examine this because I am concerned that we are jumping ahead of both Regulation Z and the unfair and deceptive practices policies which the Federal Reserve is 

getting ready to make public in the next couple of months, at least 

according to what Chairman Bernanke told us when he was here. 

I tend to agree with what Mr. Ireland said, that regulators may 

balance interests more precisely and are better equipped to do it 

than we are on some subjects. I worry about broad legislative proposals when perhaps a better way to protect consumers could be 

done by regulation in a more precise way. 

So let me just start, Mr. Ireland, by asking you: Does the Federal 

Reserve Board have sufficient authority to rewrite card disclosures 

to address current concerns? 

Mr. IRELAND. Yes. 

Mr. CASTLE. And Ms. Porter, you mentioned that you are concerned this has gone on for years without regulation. I think we all 

share that concern. I don’t think anyone up here thinks that we 

shouldn’t be doing this. It is a question of how we are going to do 

it. 

But have you factored in that they are looking closely at Regulation Z and what they have said about the unfair and deceptive 

practices at the Federal Reserve? 

Ms. PORTER. I think that it is possible that a Federal regulator 

could attempt to correct many, although not all, of the practices 

covered in H.R. 5244. But those regulations are more easily 

39

changed, and the fundamental focus of the Federal Reserve has not 

been on ensuring consumer protection. 

And indeed, the Federal Reserve, unless it acts—has authority to 

supervise certain kinds of banks. But it also has authority to implement Regulation Z. But its past actions for the last 30 years have 

emphasized disclosure, disclosure, disclosure. And many of the provisions that H.R. 5244 would ban are not related to disclosure. 

Mr. CASTLE. Well, you can’t—I mean, I would imagine, like me, 

you would like to see all this before we go too far. I mean, I just—

you may be right about what you are saying. I don’t know. But I 

am sort of curious as to what is going to be in Regulation Z and 

what is going to be in this unfair and deceptive practices report 

that they are going to give so we can determine if what you are 

saying is correct. It may well be, but I think that is something that 

we need to do. 

Mr. Ireland, can the consumers avoid the fees that many have 

complained about here today? 

Mr. IRELAND. I think generally the answer is yes. If the consumers understand their accounts, pay attention to their accounts, 

and deal with them carefully, I think they can avoid the fees. I personally cannot recall incurring one of those fees, so it is at least 

possible for somebody to do that. And I charge on my credit card 

in preference to any other means of payment because of additional 

rights I get in terms of claims and defenses under the Truth in 

Lending Act. 

Mr. CASTLE. Did you say you personally can’t recall incurring 

any of those fees just now? 

Mr. IRELAND. That is correct. 

Mr. CASTLE. You are probably the only person in this room who 

hasn’t incurred any of those fees somewhere or other. 

The credit card industry believes that the legislation before us, 

as I understand it, is inflexible and micromanages things in a way 

that is likely to increase interest rates for everybody else and reduce the availability of credit. 

Could any of the credit card companies indicate specifically what 

you are concerned about? 

Mr. FINNERAN. Yes. There were several provisions, I think, that 

were mentioned in our various testimony. One was redefining the 

grace period, which extends for all consumers an interest-free period where there would be no interest at all charged with respect 

to the loans that are made under credit cards. This changes the existing practices quite dramatically. 

I believe another provision was the requirement that payments 

be allocated in a particular order, which again is a change from 

most of the practice and indeed something that at least we have 

found that consumers fully understand and have shown themselves 

capable of taking advantage of many of the offers that the competitors in the marketplace make. 

And I believe Mr. Ireland had a few other provisions that he 

mentioned as well. 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. CASTLE. Thank you. 

Chairwoman MALONEY. Unless, Ms. Franke, did you want to 

make a comment on this? 

40

Ms. FRANKE. I was just going to make one comment, which was 

I would like to add to the point of the consumer enjoying the benefit of low rate offers that we do today through what we call balance transfers. And I do think, if we are not permitted to allocate 

those payments to the lowest rate, you will see those offers eliminated in the market. And we would be able to tell you that the consumer would be very disappointed if that were to happen. 

Mr. CASTLE. Thank you. Thank you, Madam Chairwoman. 

Chairwoman MALONEY. Mr. Ackerman? 

Mr. ACKERMAN. Thank you, Madam Chairwoman. 

This whole thing is really a real mess. And the comfort level of 

consumers is not improving any, from what I can see, except for 

some people maybe around the margins, depending on which credit 

card company they might be dealing with. 

But one of our colleagues who expressed some concern earlier in 

saying that he was concerned about supporting this legislation because it would—and I will quote him—he said he ‘‘feared too many 

Americans would be denied credit’’ if we reined in some of the vagaries and uncertainties that consumers face fathoming this. 

To quote the Pope when he spoke at Gdansk to the boatyard 

workers, ‘‘Be not afraid.’’ They will find you and they will give you 

credit. If you can’t afford a house, if you have lost your job, if you 

can’t verify your income, there are people marketing that they are 

going to buy you a house if you sign on the dotted line. 

There is no way that you are not going to get offers of credit. 

Last calendar year, these are solicitations to me and my wife. That 

is last calendar year. At the end of the year, we moved. I can’t tell 

you what that does. But one of the things it does is it triggers everybody—as soon as you pay off a mortgage or apply for a new 

mortgage, every credit card company sees you in the crosshairs and 

you start getting more and more notices. 

I don’t know how they found us so quickly. I couldn’t change my 

address on the GPS, and I got to the mailbox at my new place and 

I had credit card offers up the wazoo. The interesting thing is I get 

some and my wife gets some, sometimes from the same institution, 

offering us different rates on identical word for word until you get 

to the rate part. And if we are both on the hook for the same card, 

I don’t know how that works. 

My mom has been gone for 10 years. They found her now at my 

new address, and you should see: Her credit rating is better in the 

past couple of years than it was for her whole entire life, there are 

so many offers. 

And if you take a look at the confusion that these things have, 

it is absolutely astonishing. I mean, you could pick one out of the 

pile and read the back of it, with asterisks and swords and notes 

and crosses and everything else you could imagine. And you could 

actually read it verbatim one night at the comedy club and walk 

away with first prize. It is astonishing. 

It is a time for raising hands, I guess, earlier in the meeting. 

And I mean, there are people—I try to understand these and I try 

to read it to see if there is a good deal because I like a good deal 

when I can get one. I don’t find it very often. 

But sometimes it is hard to understand what I have to pay in 

these great deals that are advertised all over the envelope in 12 

41

different colors and things. And the zero is always the biggest 

thing on the thing, both on the envelope and in iridescent colors 

and what have you. 

But to figure out what it means and to find out what you are 

really paying is befuddling. Even if you are a Congressman who 

has been elected 13 times, are on the Financial Services Committee, taught mathematics, was an investigative reporter, and 

thought he was an educated consumer, not knowing half as much 

as any of you on the panel, can’t figure out in 5 minutes what he 

would be paying if he borrowed $1,000 on a promotion that ended 

in 3 months, except if you paid one of the checks that they give you 

with your name already printed on it so it is really easy to get into 

this thing. 

And then you take out a cash advance a month later on the same $1,000. You pay half of it by the date the thing expires. With category A, B, C, and D on the back, how much in real interest would 

you be paying if there is a 3 percent transaction fee up front? 

And if any of you sitting there are representing a credit card 

company, I have your notice in here because I read who you are. 

So everybody is represented and then some. So if anybody would 

answer the question that I just posed, I will bring the pile to you, 

pick out one. You can use a calculator and tell me, at the end of 

13 months, what your real interest rate would pay or how much 

in dollars you are paying. You have the balance of my time. Anybody? 

Mr. LEVITIN. I can’t tell you the balance. But you know what? It 

doesn’t matter because even if I could calculate that, there is probably an any time/any reason term change in there. 

Mr. ACKERMAN. Yes. 

Mr. LEVITIN. That means whatever I calculate could be wrong. 

Mr. ACKERMAN. So even if you were a much better consumer 

than me or any other consumer and really understood the legality, 

the fact that they all say, for any reason, if you didn’t pay—if you 

defaulted on your Sears card and didn’t pay for your socks—that 

is not stocks; that is socks—that your whole life starts to change 

on all the credit that you have been issued that you have ever had 

and all the cards that you had. 

So it really doesn’t matter because any time, any place, anywhere, and for almost any reason, as long as you get notified—and 

notified, my goodness, what we have done requiring notification 

and privacy. You get three or four notices for each one of these 

every year as to the privacy. You can’t keep up with the reading. 

And your eyesight doesn’t get better. 

It is a real mess. The question I have, and everybody seems to 

think that for the most part, Regulation Z is a good thing—the 

question is: What good is all this disclosure if all the disclosure 

does is tell you the ways that your credit card company can screw 

you, but it does it in bolder print or puts it in a box? What good 

is the disclosure? Anybody? 

Chairwoman MALONEY. Any comments? 

Mr. ACKERMAN. We need more witnesses or I will yield back the 

balance of my time. 

Ms. FRANKE. I would say that the disclosure— 

Mr. ACKERMAN. I am sorry. Pull your microphone over. 

42

Ms. FRANKE. Excuse me. The disclosure helps the consumer to 

make an informed decision. It is a highly competitive industry. The 

disclosure will allow the customer to understand what product they 

are buying and what features they want to select. 

[Laughter] 

Mr. ACKERMAN. People are chuckling up here and back there. It 

seems that the disclosure is a further attempt to obscure and obfuscate what you are trying to figure out. 

Chairwoman MALONEY. And they always have the any time/any 

reason tied to it. 

Mr. ACKERMAN. Mr. Ausubel? 

Chairwoman MALONEY. Okay. Mr. Ausubel, and then we must go 

to Mr. Garrett. 

Mr. AUSUBEL. Another example that would support what you are 

saying is double-cycle billing. As I understand it, there are proposals— 

Mr. ACKERMAN. I paid one payment 2 months ago, left New York, 

came back to Washington, and had to race back home because my 

wife said we had another bill and it was going to be late. 

Mr. AUSUBEL. There are these proposals to disclose better double-cycle billing. Now, if you are going to do your hand-raising 

question, how many people could sit down with a calculator and 

compute double-cycle billing? Or, for that matter, how many people 

really know what double-cycle billing is in the United States? What 

good would disclosing do? 

So my read of the regulatory history is that the regulators have 

been lax in enacting consumer protections except under the threat 

of legislation. So if I am hearing now that some regulations will be 

promulgated under the threat of legislation, it tells me you need 

legislation. 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. Garrett? 

Mr. ACKERMAN. Let me just say something. I didn’t mean to embarrass anybody here or any of the companies because you are 

among the better that are represented. Thank you. 

Chairwoman MALONEY. Thank you. 

Mr. Garrett? 

Mr. GARRETT. I thank the panel and I thank you for the opportunity. 

Just on the closing notes over here, I presume, just as in your 

contracts there is any time/any reason that you may make those 

changes, there is an any time/any reason that I as a customer can 

just void this contract—or not void this contract, but pay my bill 

and, in essence, be out of it. 

But again, as I said at the very beginning, I appreciate your testimony. I really have found it all interesting from all sides. Mr. 

Levitin, I really found yours quite interesting. I will be reading 

through it a little more so I can follow it all. But everyone here, 

I do appreciate it. 

This issue here with credit cards is really part of a larger issue 

that I referenced before, and that is the overall economic issue and 

the recession and the problems that we face right now. So I am 

going to digress for just a moment to face that larger issue. And 

we have Mr. Baer here that I want to throw out this question from. 

43

We are having a tougher time with credit markets and toughening in the credit lending in general. Can you give me your 

thoughts, your two cents, if you will, on the potential for banks to 

issue something called covered bonds to address this issue? 

My understanding is this is something that is already going on 

over in Europe. It is akin to what we do over here with the GSEs. 

It might be a way to open up some of the market and provide more 

flexibility and get the credit going again. And it does so, if I understand it correctly—and I will close on this—it does so in a way that 

keeps it with the banks, keeps more adjustability by the banks, 

and keeps the capital requirements there with the banks, if I am 

understanding it correctly. But correct me if I am wrong. 

Mr. BAER. Sure, Congressman. I think you have it correct. Covered bonds are actually a $2 trillion market in Europe. They are 

a primary, maybe the primary, means by which mortgage finance 

is financed in Europe. Yet in the United States, there have only actually been two issuers, we being one of them, who have gone to 

market. And there is a legal, almost technical legal obstacle, which 

I will get to. 

Mr. GARRETT. Yes. 

Mr. BAER. But basically, the way cover bonds work is it is issued 

by a bank under its own name, so in that way it is like straight 

corporate debt. However, in the event that the issuer fails, there 

is a cover pool of mortgages that stay on balance sheet but that are 

identified as collateral in the event of failure. 

That makes this a very high credit quality issuance because you 

not only have the bank’s name but then, in the event of default, 

you have the cover pool. It is important to understand it is different from asset-backed securities because with an asset-backed 

security or mortgage-backed security, you are looking to the underlying mortgages to generate the cash flows. But here you are looking to the bank to make the payments just the way it would on corporate debt. And you are only looking at those mortgages in the 

event of insolvency. 

Furthermore, unlike ABS, the issuer is required to refresh that 

pool of mortgages and always keep current, non-prepaid, non-defaulted mortgages in that pool. So it is a very high credit quality 

issuance. 

The only obstacle that we have seen to a large, potentially huge 

market in the United States around this is the question about what 

happens in the event of an issuer default, particularly with respect 

to a 90-day automatic stay that occurs in the event of a receivership in the United States. 

This question is largely up to the FDIC, and I know Chairman 

Bair has indicated that she is taking the lead in looking at this 

issue. I think other regulators—I note Secretary Paulson mentioned it today—have also looked at it. But we understand the 

FDIC has this under advisement and is considering whether some 

guidance in this area would potentially yield a potentially very 

large source of credit for mortgages. 

Mr. GARRETT. Okay. At the beginning of your comments, there 

were impediments to implementing going forward with this. It is 

over at the FDIC. Is there anything that we need to be doing—

first, doing what we are doing here, having a hearing on it in more 

44

detail? And second, is there something congressionally, legislatively, that we should be looking at, or is that just all over there? 

Mr. BAER. Well, in Europe, and I think as of this month in the 

U.K. to the extent it is not part of Europe, there is a legislated covered bond program that is—these bonds are issued pursuant to legislation which the market takes as a good associate that they will 

continue to receive payments in the event of a default, that is, during the resolution of the institution, and that they can still look to 

that mortgage collateral. 

The FDIC could, and may want to just as an initial step, issue 

regulatory guidance on that. They have a fair amount of discretion. 

I won’t speak for them, but they could certainly tell you some discretion about how they would act during an automatic stay period. 

So it may be they want to take a regulatory step before a legislative step and then decide how much legislation is necessary. But 

I would defer to the FDIC with respect to those judgments. 

Mr. GARRETT. And I know we have other—this is a little bit far 

afield, but it is still on the credit issue. There are other economists 

and professors here as well. Is there anyone else that has a 

thought on it? And if not, I appreciate your insight. 

I see the chairman is not here. But does this chairman appreciate consideration for a hearing at some point on the topic? And 

there is that red light. Thank you. I didn’t get into my other—I 

may submit some other questions that I do have for a couple of 

people. So thank you. 

Chairwoman MALONEY. Thank you. The Chair recognizes Mr. 

Sherman, Congressman Sherman. 

Mr. SHERMAN. Thank you, and thank you for putting forward 

this bill. 

I know that there is this kind of Ayn Rand model of the universe 

where you have two equal parties free from government control negotiating their independent contract. The problem you have here is 

that on the issuer’s side, you spend about $5 million—I am making 

up a number—to do the legal research, to figure out your position, 

and to program your computers. 

And then the consumer spends about 25 minutes of time trying 

to figure out which credit card to use. And if we were to value the 

time the consumer can put in by their billing rate as a bookkeeper 

or whatever level of financial experience they have, you may have 

$5 worth of time being invested. And then we are told, well, this 

is an equal bargain, one side putting in $5 million worth of transactions cost, the other one putting in an amount of time worth 

about $5. 

The banks have put forward the idea that somehow, these oppressive provisions—and there are oppressive provisions in some of 

these contracts—benefit other consumers because while rates 

would be higher— 

Chairwoman MALONEY. Excuse me. Congressman, can you take 

the chair? I am going to run and vote and keep the hearing going 

so that we can conserve time. 

Mr. SHERMAN. Okay. Sure. 

Chairwoman MALONEY. Thank you so much. We have been called 

to one vote, but we are going to keep going. 

45

Mr. SHERMAN. [presiding] So the theory is that I won’t be the victim of some sort of rate increase and that I will be the beneficiary 

of it because you will give me lower rates. 

Can someone tell me what is the average rate of interest imposed 

today on those who have balances on their credit cards? I mean, 

I tend to see it as between 15 and 20 percent. Do we have a different number? 

Mr. FINNERAN. I think the GAO report that was issued about 18 

months ago, I believe the figure was somewhere in the 12 percent 

range. 

Mr. SHERMAN. The 12 percent range? So it is—oh, I didn’t see 

you there. 

Ms. PORTER. I would just respond that the GAO report was 

issued 18 months ago, and I think it is important that Congress 

and regulators have more up-to-date information than that; and 

also that the GAO report relied on voluntary disclosures of only select issuers and may not be representative of the entire industry. 

Mr. SHERMAN. Yes. I have seen an awful lot of cards being issued 

at over 25 percent. Yes? 

Mr. LEVITIN. I believe it is also important to note that the GAO 

report, I believe, did not include subprime issuances in its population. So the number is probably inflated. 

Mr. SHERMAN. In any case, it is hard to say that America’s consumers are somehow benefitting from wonderfully low rates because a few of their friends may be paying more into the system 

as a result of some these oppressive provisions. 

One thing that isn’t in the bill that I am thinking of suggesting 

to the author is the idea that every credit card statement on which 

there is a balance should disclose: ‘‘Dear consumer, if you make the 

minimum payment, you will be paying this balance off for this 

amount of time, and you will be paying not only the principal 

amount of X but a total interest of Y. So this is how long it will 

take you, and this is how much interest you are going to pay us—

assuming we don’t change the rate—if you choose to just pay the 

minimum balance.’’ 

Does anybody have a comment on whether that should be included at the bottom of each statement? Yes? 

Ms. WARREN. Congressman, yes, I do. I think consumers want 

this. I think one way we know this, that we have seen it tested, 

is the State of California passed a law requiring precisely this. And 

I think it gives us an insight into now our regulatory agencies in 

Washington have worked. 

Not only did the banks come in, the credit card issuers come in, 

and ask that the bill be overturned, the grounds on which they 

wanted it done was that any attempt to require them to disclose 

any information about whether or not—how much it would cost a 

consumer if they financed over time was preempted. 

And the OCC came in not on behalf of the consumers but on behalf of the credit card issuers to take the position that their nonrequirement of information be the standard for requirement. And 

the Ninth Circuit Court of Appeals bought that argument. 

Mr. SHERMAN. It is rare that the Ninth Circuit—every other circuit would have probably ruled that way. I am surprised at the 

Ninth. But I will point out it does make sense to have a single naVerDate 0ct 09 2002 13:50 Jun 11, 2008 Jkt 041731 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\41731.TXT TERRIE
46

tional rule. It is either good for consumers in California and Texas, 

or it is bad for consumers in California and Texas. 

And what California was responding to was the total failure to 

have good national standards. I mean, I am sure there are quite 

a number of witnesses who could explain how burdensome it would 

be to have 50 different standards of this. But sometimes California 

feels the need to act when the Federal Government doesn’t, perhaps even on greenhouse gases. But that is a different issue. 

I believe my time has expired. Please proceed. 

Mr. HENSARLING. Thank you, Mr. Chairman. Although I have 

only been here for about 6 years and not 10 or 15, I can’t help but 

note the irony of how people are decrying the excess amount of 

credit offerings that exist in America today when I know, I know 

in this very room, 10 to 15 years ago, many of these representatives of credit card companies were hauled before Congress because 

they weren’t giving enough credit out to low- and middle-income 

Americans. And I do wish to note that irony. 

As I look at the historical record, I see where there was a significantly fewer number of Americans who had access to credit, and 

they seemingly paid a universally high rate before the advent of 

competition and risk-based pricing. 

I also note that approximately 20 years ago, the fringe benefits 

that we see today weren’t around. I know today that I have the opportunity to get different rates, different fees, cash back, car rental 

insurance, donations to my favorite charity, frequent flyer miles, 

and, if I pay my bill on time, I get an interest-free, unsecured loan 

from the time of purchase. Such a deal. 

The first question I have is—and anybody who has the answer, 

I would be happy to hear it—how many customers paid the highest 

interest rate 20 years ago, and how many pay it today? Do we have 

anybody on the panel who has knowledge of that? 

[No response] 

Mr. HENSARLING. If not, we will move on. How many customers 

might have paid no transactional cost last year? I would even be 

happy with a ballpark figure. Any takers on that one? 

[No response] 

Mr. HENSARLING. I apparently seem to be stumping the band at 

the moment. Let me move—yes? 

Mr. LEVITIN. On that one, I may not be giving you exactly the 

figure you are looking for, but I can say that I have seen data that 

says about 39 percent of consumers did not consistently revolve a 

balance over the course of 2006. 

Mr. HENSARLING. So a little less than half, then, would be your 

best recollection. Thank you. 

I know that, not unlike a balloon, when you push in on one side, 

something pushes out on the other side. When I look at—I must 

admit, philosophically I have trouble with telling informed consumers, assuming there is proper disclosure, that somehow we are 

going to outlaw consensual commercial transactions. 

But when I look at history before the advent of risk-based pricing, and I look at where we are today, it seems to be a far improved industry. But I notice that in the U.K., they seemingly have 

had a similar experience. In 2006, they decided that credit card deVerDate 0ct 09 2002 13:50 Jun 11, 2008 Jkt 041731 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\41731.TXT TERRIE
47

fault fees were too high and ordered card issuers to cut them or 

face legal action. 

In February 2007, two of the three largest issuers in the U.K. 

promptly imposed annual fees on their cardholders. Nineteen card 

issuers have raised interest rates. And by one estimate, credit 

standards are now so tight that 60 percent of new applicants are 

being rejected. 

Well, if it happened there, it seems to me that it can happen 

here. Would somebody on the panel like to tell me why we are not 

going to have the U.K. experience? Or does somebody fear the U.K. 

experience? I have very few takers on the panel today. 

Ms. WARREN. No, Congressman, I would be glad to. Part of what 

you have to remember here is that they don’t plan to lose money 

on this. Why do you think credit card companies give zero balance 

transfers? It is not because they are in the business of giving away 

money. They give zero balance transfers because they count on the 

fact that there will be some number of people who won’t get it 

right. 

And that is, they will use that credit card after they got a zero 

balance transfer. They will get dinged at 22 percent interest. And 

every payment they make that goes into it will be paying down the 

zero balance transfer. 

Those are profit centers for the issuers. They are not good deals 

for the customers. I would— 

Mr. HENSARLING. Well, I hope they are profit centers. I don’t 

know— 

Ms. FRANKE. I would like to respond to that. 

Mr. HENSARLING. Certainly, Ms. Franke. 

Ms. FRANKE. Because the consumer has the ability to make the 

choice as to whether they want to take low cost credit or not. When 

the consumer makes the decision that they want to take advantage 

of a low cost credit offer, it is to their benefit. And in the vast majority of instances, they are able to enjoy that opportunity. 

We want the consumer to be able to benefit from those things 

that we put in front of them. And I think that if we were not able 

to do that any longer because we were restricted in our ability to 

price for risk, you will indeed see two things happen, an increased 

cost of credit, and reduced access to credit to those people who need 

it most. 

Mr. HENSARLING. With 6,000 credit cards out there, I assume if 

I don’t like my terms, I can reject the terms and I can go and pick 

up somebody else’s credit card. 

Ms. FRANKE. That is exactly correct. 

Mr. HENSARLING. I see I am out of time. Thank you, Mr. Chairman. 

Mr. SHERMAN. Thank you. I will point out that all those freebies 

you get on the credit card aren’t completely free. The merchants 

end up paying for those. And I just want to inform this committee 

that the Judiciary Committee is thinking of hearings on the other 

side of this transaction, which is the relationship between the merchants and the credit cards. Maybe this committee wants to get 

ahead of that or maybe you want to have them take over because 

we don’t really care about our turf. We will see. 

48

With that, let me turn it over to Mr. Moore to ask his questions 

and to serve as temporary chair. 

Mr. MOORE. [presiding] Thank you, Mr. Chairman. And I have 

just one question to ask, and then I am going to have to go vote. 

I understand Chairwoman Maloney is on her way back and should 

be here soon, but I would like to hear your answer, if you have an 

answer, to this question. 

A question for the credit card issuers on the panel with regard 

to what is called universal default: I understand that some issuers 

have voluntarily banned the use of an individual credit score in repricing a card account. As you know, the underlying bill attempts 

to ban the practice of universal default by restricting the ability of 

credit card issuers from raising interest rates based on any information other than how the individual is performing on that particular card account. 

I do have concerns about the lack of clarity that consumers often 

receive regarding account features, terms, and pricing, and I think 

we need to examine how to do a better job of ensuring that consumers don’t get caught with unexpected fees or rate increases. 

But I also have some concerns about how this provision would affect businesses’ ability to accurately price for risk. Given that some 

of you have voluntarily taken this step, can you explain to me what 

are some of the other sources of information you look to in order 

to predict the risk of your customers? And do you believe that the 

way the bill is currently written, it would have any effect on those 

who would offer credit in the future? 

Any responders here? Mr. Baer? 

Mr. BAER. Sure. As we—and I think traditionally the understanding of universal default has been—is basically a default that 

is automatic, no choice, repricing based on off-us behavior, that is, 

not with the issuer. Bank of America has never engaged in universal default. 

What we do do, though, is we will reprice customers with notice 

and choice if we observe an increase, a material increase, in their 

risk profile. That can take various forms. It could include maxing 

out their credit lines with us and other issuers, defaulting on a 

mortgage, defaulting to other issuers, and all types of behavior like 

that that, when you put them together in terms of our internal 

modeling, demonstrate a materially greater risk of charge-off. 

Mr. MOORE. Thank you. Does anyone else wish to respond to this 

question? 

Mr. FINNERAN. Sir, I would just note that I think this really 

highlights one of the issues with the bill. Capital One does not engage in universal default and handles risk based pricing differently 

than Bank of America does. But I think the key is that what Mr. 

Baer is saying is that they only do it with respect to people to 

whom they give appropriate notice and an opportunity to opt out, 

which is exactly what we have been advocating with respect to all 

forms of repricing. 

I think a single targeted fix that can be best done by the Federal 

Reserve will address so many of the issues associated with change 

in terms for customers, that is clearly the way to go. And then you 

don’t have to get into the nuances of trying to define what universal default is and what it isn’t. 

49

Mr. MOORE. Thank you. I am going to—Mr. Ausubel, I am going 

to have to go vote. We have been told that I now have less than 

2 minutes, and I need to run over there. Mr. Perlmutter is going 

to come up and take over the chair here. Is that right? 

Mr. PERLMUTTER. Yes, I will take the chair, and I will behave 

myself. 

Mr. MOORE. And I won’t say the real chair, the regular chair, Ms. 

Maloney, should be back soon. So thank you very much. And I 

will—if you care to respond, I promise you I will look at your response later. Thank you. 

Mr. PERLMUTTER. [presiding] And the last shall be first. 

[Laughter] 

Mr. PERLMUTTER. I always get the chance to bring up the caboose because I have the least seniority of this entire committee. 

And I just want to thank the panel. This has been an outstanding 

panel, both representing the industry as well as representing academia, that has questions about where we have come from. And I 

just want to say a couple of things. 

I think from my point of view, and I think one of the professors 

mentioned this, or a couple, I mean, our job is to give a broad direction and then allow the regulators to work with the industry as to 

the specifics of what a universal default is, what a double-billing 

cycle is, how many fees can be charged, from late fees to annual 

fees and all that sort of stuff. 

I represented, just as disclosure, banks, credit card companies. I 

am a consumer who has suffered, having thought he terminated a 

card. Got an annual fee. Got a penalty on the annual fee. Got penalty interest on the annual fee and the penalty. So coming at it 

from both sides. 

I think we have to make a decision in the broad decision. And 

I think somebody said 27 years ago was the last time there had 

been an effort or consumer protection was brought up. I think the 

bigger question, and the one that is a moral question, is, you know, 

the other side of credit is debt. And do we want more debt? 

And whether it is a biblical kind of an approach or Thomas Jefferson or Teddy Roosevelt or whomever, in 1982, we passed the 

Garn-St Germain Act. I couldn’t remember the name, but our very 

able staff found it for me. It basically loosened regulations and 

gave the industry the ability to work in these areas and to really 

control its fate and develop profit. 

I think the broader question for the Congress is: Where are we 

now? And there have been a number of folks up here who have 

complained about a particular practice or whatever. You know, the 

industry is there to earn profits for its shareholders, and I don’t 

think we can deny that. 

But the question is—I think, Professor Warren, you said that 

rates—should there be limits on rates? You said that was off-limits. 

Well, I am not sure. We used to have usury laws in this country. 

And I certainly don’t want to see that, but I want to give some instruction to the regulators as to, look. Keep an eye on this. Just 

because there has been a democratization of credit, is that good? 

From a societal point of view, is that good? So I do have some questions, and I will stop pontificating. 

50

Mr. Baer, with respect to the customer has notice and choice, 

which is what your testimony was, if that customer has already 

run up a bill—you know, you have given him a $10,000 credit line, 

say, and they have now spent $5,000 against that credit. And you 

now see something—either there was a default or, if there wasn’t 

a default, you see problems in their credit outside. 

When the customer has a notice and choice, is that what you are 

saying, look, we are going to up your rate. You can leave. You can 

pay this off and leave us. Is that what you mean by— 

Mr. BAER. They have two choices. First, they can accept the higher rate, which going forward will be applied to everything they owe 

us because we consider this a new loan every month. Or, alternatively, they can opt out and they can repay the existing balance 

under the original rate, no questions asked. All we ask is that they 

no longer use the card for new purchases. 

Mr. PERLMUTTER. I think a new loan every month, I think that 

is an interesting approach. And it is a 30-day loan or whatever it 

is. But for most people, especially as you—to the lower income stratas or other folks who are using the credit card for their basic stuff, 

they are going to be in real trouble to be able to pay that on a 30 

day/30 day/30 day. 

Mr. BAER. Yes. Actually, I mean, to your larger point, I mean, 

I think we would certainly agree. There are people out there who 

are having trouble managing their finances and who should be borrowing less. 

The difficult question, I think, for this subcommittee and the 

Congress is: Can you identify those people through legislation first, 

without having an overlap effect where you are cutting off credit 

to people who can repay responsibly? And then the second very difficult question is: This bill would only cut off credit card credit to 

those people. So the question is: Would those people stop borrowing, or would they look to payday loans, rent-to-own, installment lending, or other types of much higher rate, much lower 

transparency forms of credit? 

And that is why where we come out on this is because the credit 

card industry is a highly competitive one where you can rest relatively assured that people are getting competitive rates, and because we have the Federal Reserve coming out with a Regulation 

Z that more than ever before is going to allow informed comparison 

shopping, and thereby allow consumers to take advantage of that 

competition—because that is a hallmark of perfect competition; you 

have to have informed consumers—we think when you put those 

two things together, this is a good time to let the market continue 

to work, aided by a disclosure regulation from the Federal Reserve. 

Mr. PERLMUTTER. Professor Warren? 

Ms. WARREN. I just want to say one thing about informed consumers. I think the practices that Bank of America announces, 

where they say they will let people pay off over time, is a good 

practice, and we want to remember that is not the practice of all 

of the issuers. Many issuers say, no, the whole $5,000 is due right 

now if you don’t want to have to pay the elevated interest rate. 

But the question of what constitutes an informed consumer troubles me deeply here. I listen to Bank of America describe how well 

they take account of this, and they measure this, and they weigh 

51

that, and they finally come up with a number. ‘‘We are not going 

to do something we call universal default, but we are going to do 

something out there that is magic.’’ 

I have read my Bank of America statement, and I can’t figure 

out how it is that they make the decision when I will be the one 

who receives the next arrow through the heart, that my interest 

rate has jumped from 11 percent to 29 percent. 

And to describe this as a market that consumers understand, 

low-priced credit that we talk about, I must have two dozen zero 

balance transfer offers in the last couple of months alone. Not one 

says, by the way, here is how we plan to make money off of you 

on this one. And that is the hope that you will use this credit card, 

not understand how the repayment is going to work, and we will 

manage to suck 20 percent interest rates out of you over the period 

of time that you try to pay back this balance. 

So it is fine to say we put a lot of words that are incomprehensible in a credit card statement. But the idea that we have consumers who are fully informed about these obscure practices simply does not represent reality. 

Mr. PERLMUTTER. And I would agree with that. I don’t begrudge 

the industry—first of all, they probably had a lawsuit or two that 

has caused some of the addition of the language. So I respect that. 

I mean, I think again there has been—for the last 27 years the 

conversation has been about the free market and allowing opportunities for profit with people. And that is fine. But I think that the 

conversation now has to move back to debt. Is this something as 

a societal function we want more debt? And consumer protection. 

My time has expired, and I see the gentleman from Tennessee 

has—oh, I am. The gentleman from California. 

Mr. CAMPBELL. Thank you, Mr. Chairman. Before I get to my 

couple of questions, I would like to ask unanimous consent to enter 

the GAO report entitled, ‘‘Credit Cards Increase Complexity in 

Rates and Fees.’’ 

Chairwoman MALONEY. Without objection. 

Mr. CAMPBELL. Thank you, Madam Chairwoman. 

My first question is to the three representatives of the bank’s 

credit card issuers. Mr. Levitin showed a chart that as far as riskbased pricing, that indicated that there was not a lot of price difference or interest rate difference charged based on someone’s credit score, FICO score, or whatever it might be. 

Do you accept that chart? Is that correct? And if it is or it isn’t, 

is there a situation in credit card charging because of what the 

rates are, where people with higher FICO stores, higher credit 

scores, will borrow money from other places because they can get 

it cheaper, and other people with lower credit scores will tend to 

not pay off their credit card every month? Any one of the three of 

you want to take that? 

Mr. FINNERAN. I mean, I will try. I am sorry, I didn’t really get 

a chance to study the specific chart, but I can certainly share with 

you our practice at Capital One. We do differentiate based on credit 

score at the time of account acquisition, and offer varying interest 

rates depending upon the likelihood of those consumers to pay us 

back and handle their credit appropriately. 

Mr. CAMPBELL. Do the rest of you agree with that? 

52

Ms. FRANKE. I would totally agree with that, and would say that 

we would love to be able to put forth the right analysis, with 

enough time to do it, that would show that you would absolutely 

see a decrease substantially in interest rates that much exceeds the 

decrease in cost of funds over the same period of time. 

Chairwoman MALONEY. Mr. Levitin? A response? 

Mr. LEVITIN. The chart I showed is from a subscription data 

source that gathers its data from card issuers directly. It is not representing any particular issuer, so Capital One may be different. 

What it is showing is a composite of the entire credit card industry. 

And while we have some of the prettiest faces in the card industry up here saying that, you know, we don’t do this practice and 

we don’t do that one, it is rather irrelevant because this bill is 

about regulating the worst practices in the industry. And just looking at the best actors in the industry doesn’t tell us what we need 

to know. 

Mr. CAMPBELL. Okay. Then my next question is to the prettiest 

faces of academia, to the academicians that are up there. There has 

been a lot of talk today about the ads for credit cards, whether they 

are on television, whether they are the things you get in the mail, 

whatever, and what would appear to be a pretty intense competitive market for the credit card issuers to issue credit cards and get 

customers on their credit cards. 

Do you all believe, when you take into account the various cost 

aspects of credit cards—all of them, you know, the initial fee, the 

late fees, the interest rates, the bonuses or benefits you get—in 

academia, do you believe that there is price-fixing in the credit card 

industry, or do you believe that the market is working—or that 

there is a market in which there is price competition? I guess first 

Mr. Levitin, and then we will go to you, sir. 

Mr. LEVITIN. Well, let’s start with, I mean, different aspects of 

credit card pricing. On the merchant side, I think there is a very 

good argument that there is price-fixing going on. There is major 

antitrust litigation about this right now pending in the Eastern 

District of— 

Mr. CAMPBELL. On the merchant side relative to Visa and 

MasterCard? 

Mr. LEVITIN. Well, and also the issuers because the issuers are 

part of the—or alleged to be part of the price-fixing conspiracy as 

members of Visa and MasterCard. Really, Visa’s only function— 

Mr. CAMPBELL. Okay. I don’t think that is subject to this bill. 

Mr. LEVITIN. It is not, but there is an important link, Congressman. Merchants are the ones who finance rewards programs, and 

the rewards programs are really the—it is like a Venus flytrap. 

That is the honey that sucks in the flies and then gets them into 

the—consumers into interest rate traps and late fee traps and overlimit traps. And the fixing on the merchant side encourages overuse of credit cards, that more people come into that flytrap. 

Mr. CAMPBELL. Okay. Yes, sir? 

Mr. AUSUBEL. The vast proliferation of offers is an indication of 

high profits for every offer that is accepted. I mean, that is the simple truth of it. If the industry were unprofitable, 4 billion solicitations a year would not be mailed out. And— 

53

Mr. CAMPBELL. But do you believe that there is price competition 

between them in those offers? Do you believe that that is one of 

the ways in which they are competing? 

Mr. AUSUBEL. Here is a quick way of understanding it. There are 

three or four terms of the credit card offer that consumers understand. They understand the introductory rate. I think they probably understand the post-introductory rate. They understand the 

annual fee. 

They have no notion of what double-cycle billing means. They 

have no idea what any reason type thing is. They have absolutely 

no idea what their penalty rate is or the terms that would trigger 

it. They have no notion what happens with their credit score in 

terms of increasing their interest rate. And they don’t pay attention 

to most of the fees. 

So they compete, the issuers compete, on interest rate. But it is 

very profitable because a number of the other relevant terms are 

not salient, and consumers don’t comparison shop. 

Mr. CAMPBELL. And I will yield back, just with a final comment 

that if you look at the volume of advertising for the—I was in the 

retail car business, which does lots and lots of advertising. It is one 

of the smallest margin businesses out there, just slightly ahead of 

food. 

So I think it just indicates that it is a competitive marketplace, 

and that there is business out there, and you are looking for ways 

to get it. I don’t think it necessarily indicates that it is a high profitability—I mean, it is profitable or else people wouldn’t go for the 

business at all. But I don’t think it indicates how much, or not directly correlates. 

Sorry. I yield back, Madam Chairwoman. 

Chairwoman MALONEY. Thank you. And I would like to thank 

the gentleman for submitting the GAO report into the record. And 

I would like to note that this GAO report, as well as a Federal Reserve report of 2005, noted that the number one reason credit card 

interest rates have gone down is because the cost of money has 

gone down. 

I now recognize Mr. Scott. 

Mr. SCOTT. Thank you very much, Madam Chairwoman. And 

again, my compliments to you for having this hearing. It is very, 

very informative and very, very timely, as I said. 

I would like to ask Ms. Franke—is it Franke or Franke? 

Ms. FRANKE. Franke. 

Mr. SCOTT. Franke. Very good. I found your testimony to be very, 

very interesting and intriguing. You said that this bill is complex, 

expansive, and it restrains credit availability. 

I would like for you to tell us exactly how—give us some examples within the bill that this bill does that. And I also want to get 

your opinion, and others may comment on this as well, in light of 

your concerns about the bill, just how we address this practice of 

universal default. 

This is a major, major concern. I would like to know your 

thoughts on that. And would it make sense to consider repricing a 

customer’s interest rate only if they default on the company that 

issued the card instead of penalizing these people because of their 

behavior regarding different financial commitments, their specific 

54

history with other lenders, or information obtained from a credit 

report? 

And if a customer has made a late payment or goes over their 

credit limit, wouldn’t it make sense to ensure that a person receives adequate notice to any changes that are made to that customer’s rate and its status? And furthermore, wouldn’t it be prudent for a credit card company to alert their customers of changes 

in terms? 

That, and also this one also: The concern about the clarity of 

credit card agreements with regard to what little information they 

are currently providing with minimum payments and only paying 

the small amount each month, customers are further penalized as 

the debt continues to balloon so that when a customer logs onto 

their account, why can’t we ensure that the full amount is in the 

payment box instead of the small minimum payment? 

I feel that with this change, it may help encourage the credit 

card user to pay off more of the debt or pay in full each month. 

But by only making a minimum payment, say, on a $1,000 balance, 

as minimum as that, for example, that can lead to a debt that 

could take 15 years to pay off, if not longer. 

So my point is, I wanted to point out those areas where it is obvious there is a problem we need to address. And I wanted you to 

maybe answer that in light of your own opposition to this legislation. Can’t you see some middle ground here where we need to 

move to address these particular concerns? 

Ms. FRANKE. Let me see if I can make an attempt to cover those 

topics. Let me do it in a couple of ways. 

First and foremost, I think we believe that there are changes 

that need to be made in the credit card industry. We believe that 

the regulatory actions that are being taken will be appropriate to 

handle those issues. They will address things such as disclosure, 

and how the customer has a keen understanding of their relationship with the credit card issuer. 

Starting at the end with your minimum payment question, if you 

were to go to the Chase Clear & Simple tools, you would find today 

a minimum pay calculator. We do believe that it is important for 

the consumer to be able to understand the time it will take for 

them to pay off their balance if they simply make the minimum 

payment. 

We don’t believe, however, that should be legislated, and this is 

probably a longer conversation than we have to discuss today, because of what would be required for us to display that on each individual statement. It is quite difficult. 

We do think, though, that we need to promote to the consumer 

how they can easily get that information. So what is really important is that the customer understand how long it would take for 

them to pay their bill if they only make their minimum payment. 

We want to make sure we provide that information to them. 

Why don’t we support this legislation? To us it is very simple. It 

gets to our ability to be able to price for risk. We believe that it 

is critical that we are able to continue to price for risk. And there 

are aspects of this bill that would limit our ability to do that. 

You asked about universal default. Universal default allows folks 

to use bureau-based information that informs their decisions as to 

55

someone who is risky. We at Chase, as we have said many times 

today, no longer believe that is in our customers’ best interest. Our 

customers have told us that they would prefer to understand the 

clear circumstances under which we will raise their rate. And we 

have agreed that we will only do that in three circumstances. 

You did ask, though, about advance notice of that. Because that 

is the only tool we at Chase have today to make sure that we manage risk, it is important that we are able to take that pricing action 

at the time that the customer defaults on their agreement with us. 

If we are not able to do that for 135 days, as is outlined in this 

bill, it will significantly impair our ability to manage that risk, and 

it will therefore limit our ability to offer the vast majority of Americans the lowest rates available, and to offer credit to more Americans. 

So we believe that it is important that we have the permission 

to price for risk and that we are able to do that in a timely fashion. 

Mr. SCOTT. All right. Yes, Mr. Levitin? 

Mr. LEVITIN. I think it is important to point out that H.R. 5244 

does not prohibit all use of external off-us information. The only 

thing that H.R. 5244 prohibits is retroactive increase of interest 

rates based on off-us behavior. 

Section 2(a) of H.R. 5244 still allows issuers to increase rates 

prospectively based on off-us behavior. And the existing balance 

should have already been priced. That is the deal you had with the 

card company when you charged a balance. It shouldn’t be able to 

be repriced retroactively. 

Chairwoman MALONEY. Thank you. And now the Chair recognizes Mr. Bachus, Ranking Member Bachus. 

Mr. BACHUS. Thank you. You might be aware that there was to 

be a panel preceding your panel of consumers who had various 

credit card complaints. The chairman and I discussed this yesterday when our staffs discovered that the credit card companies, 

without a waiver, could not respond because initially the hearing 

was going to be some consumers saying, this is what happened to 

me, and we felt like that the—and he and I agreed that the card 

issuers should have a right to then respond or answer because the 

first panel would actually be making charges against the companies. 

We had that agreement. We had a further agreement that we 

would postpone those hearings because it wouldn’t be fair. And Ms. 

Maloney said this in her opening statement. It would not be fair 

for these customers to come, announce what had happened to 

them, and not have the credit card companies have a right, if they 

were going to be used as examples, to respond. 

I consider that as an agreement, which was really proposed to 

me. I believe if you make an agreement, you ought to keep it. That 

is part of what we have talked about today, what those agreements 

do. Is there a meeting of the minds? 

But unfortunately, we have had a Member release a press release detailing all the complaints that these witnesses had and all 

the charges, and making them available to the press, which really 

goes against the claims that—and I know the chairman, I think, 

is equally chagrined, that we all agreed we wanted a fair process 

where both sides could respond. 

56

And probably the most unfair thing and the most inaccurate 

thing is that some press is reporting that the credit card companies 

insisted that these witnesses did not testify. And I can tell you, as 

ranking member of this committee, that no credit card company—

no credit card company—did that. 

So I hope in the future that when we make agreements—and I 

do not think the chairman is involved in that—but I think when 

we reach across the aisle in a bipartisan way and an arrangement 

is proposed, that it be honored. 

Ms. Warren, you are raising your hand? 

Ms. WARREN. Thank you. I just have a question because I am 

just trying to understand this. I had never heard this before I arrived this morning. 

And the question I have is whether or not those same rules apply 

to the credit card companies. We have heard a lot of information 

today about how Bank of America does its risk-based pricing. We 

have heard many representations about how Chase conducts its 

business and what proportion of customers are paying and what 

proportion of its customers are not paying, and so on. 

That is information that is not publicly available. My testimony 

comes from a set of footnotes. It is all publicly available. The same 

is true for Professor Levitin. The same is true for Professor 

Ausubel. The same is true for Professor Porter. 

If it is a concern about whether or not people can say, all right, 

if you are going to testify about something that is private information, that information should be available to everyone. 

Mr. BACHUS. No. Well, actually— 

Ms. WARREN. I just wanted to know, is that going to be the new 

rule? 

Mr. BACHUS. Yes. Dr. Warren, I think you make a good argument. Let me say this. Their practices, all the three credit card 

issuers here today, they have issued their best practices. And those 

practices are, in fact—and I know in your opening statement you 

acknowledged that most of the major credit card issuers are playing by the rules. In fact, you said several major credit card companies have dropped these practices; they should be commended. You 

pointed out that the majority of credit card issuers are not guilty 

of these practices. 

And what we had intended to do, and what was going to happen 

until this arrangement was proposed, is these witnesses were going 

to testify at the first hearing, and then the credit card companies 

would have been able to respond. 

But because we felt it would be unfair—and no, these credit card 

companies cannot talk about an individual and what happened in 

an individual case without that individual giving a waiver. And 

they were prepared. They were prepared to discuss individuals if 

the individuals had testified and given waivers, as we first anticipated. 

Ms. WARREN. And I cannot discuss the practices of Bank of 

America, Chase, or any other issuer unless they make those data 

available. They come here and get to engage in a game of they 

show a little that reflects the best light. They come to this hearing 

and testify. They have testified in front of this committee that they 

57

do not engage in universal default, and yet they describe a practice 

that many people would describe as universal default. 

Mr. BACHUS. Well, now, it is not a question of that they don’t 

publish that. That is available to you and I both. In fact, in preparation for this hearing, I read what their practices were. And as 

you have said, you said that—you came in and said these tricks 

and traps, that several major issuers weren’t doing that. 

Ms. WARREN. At least we don’t know if they are doing them. 

What we have is we have their testimony, but no revealed information. 

Mr. BACHUS. I agree totally. We didn’t know. And for that reason, we were going to have five people say, this is what they did 

to me. And then— 

Chairwoman MALONEY. Mr. Ausubel would like to testify. 

Mr. BACHUS. And then we were going to have—they were going 

to sign a waiver, and then the credit card companies could have 

said, you know, this is what happened in their case. In other 

words, there would have been an accusation and a chance to defend 

themselves. And that didn’t happen because it was proposed that 

there wasn’t enough time. But that was not our proposal. 

Chairwoman MALONEY. Mr. Ausubel? 

Mr. AUSUBEL. Regardless of whether consumers are allowed to 

testify or not, I think an important point that has to come before 

this hearing is that just as it has been remarked that there are, 

I don’t know, 3 million subprime mortgages that are ticking time 

bombs, there are also millions of credit cards in circulation that 

have universal default clauses in them right now, that have penalty interest rates as high as 29.99 percent in them. And those are 

ticking time bombs as well. 

Mr. BACHUS. And let me say— 

Mr. AUSUBEL. And you can see the contagion effect that could 

have on the economy. And whether the consumers can— 

Chairwoman MALONEY. The gentleman’s time has expired. Mr. 

Cleaver? 

Mr. BACHUS. If I could at least respond. Professor, I will agree 

we hear stories from time to time of people saying, this is what 

happened. So this hearing was designed—all the things you are 

talking about, this hearing was designed for five people or six people to come before the Congress and say, as opposed to anecdotal 

or somebody told me or this thing—for them to come before us and 

testify, this is what happened to me. And then the credit card companies would have—you know, we asked them to appear and explain whether or not this in fact happened. 

And yesterday it was a consensus. In fact, the chairman of the 

committee said it wouldn’t be fair to do what— 

Chairwoman MALONEY. Reclaiming my time, we do want to focus 

on substance and not on process. I now recognize Mr. Cleaver. 

Mr. BACHUS. This is pretty— 

Chairwoman MALONEY. Mr. Cleaver is recognized. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

One of the major credit card companies sent a credit card to Herman, Junior. He is my cousin. I wouldn’t have given him a credit 

card. I would have given him anything but a credit card. He is one 

58

of the most irresponsible people I know. In fact, he is in jail now. 

I hope they took the credit card before they locked him up. 

But we have almost a one point below credit—I am sorry, savings rate in the country. Zero. Which means that we can’t borrow 

money domestically. And it would seem to me that we all have a 

responsibility of trying to reverse that because if we don’t, we are 

damaging unborn generations. We all owe right now about $30,000 

on the U.S. debt, $9 trillion. 

And so is there any redeeming social value in sending credit 

cards to college students or people like Herman, Junior? One of the 

credit card companies. 

Mr. BAER. Well, I had said earlier—I don’t know if you were here 

Congressman— 

Mr. CLEAVER. I am sorry. I have been going back and forth between two committee hearings. 

Mr. BAER. I understand. Two issues. One I think is minors, and 

the other is college students, because I think they are very different cases. 

With respect to minors, while they may receive solicitations in 

the mail because they are on a marketing list, that is not at all to 

say they will actually be granted a card. They will still have to be 

verified that they are age-eligible and that they have sufficient 

credit to receive a card. So it does happen, and it is our loss because we can never finalize a transaction, that we will solicit someone. That doesn’t necessarily mean we grant. 

With respect to— 

Mr. CLEAVER. Excuse me, because my time is limited. So are you 

saying that college students are not receiving credit cards if they 

are not creditworthy? 

Mr. BAER. I started by saying there is a distinction between minors on the one hand and college students on the other. Let me 

now turn to college students. 

We are actually a very large lender to college students. We consider college students potentially our best customers because we 

want to take them from being a credit card customer to a deposit 

customer to a home mortgage to retirement savings 50 years from 

now. We have no incentive with regard to college students for them 

to default because that makes them dislike us. It makes them less 

able to take all those other products for us. 

So what we do with college students, we have a max. We will not 

lend to any college student more than $1,500. The average line for 

a freshman is $500. The average line for a senior is $1,000. What 

we do with college students, and I think we are the largest lender 

to college students, we give them very small lines of credit that we 

think they can manage. 

Furthermore, we provide a phenomenal amount of financial literacy to them in terms of education about how to manage their 

credit. We do not risk-base reprice college students. We are more 

lenient on all of our fees towards college students. In other words, 

we set college students up to succeed when they get a credit card 

from us. 

Mr. CLEAVER. Thank you. I am not finished, no. But there is no 

requirement for the new cardholder to provide information to the 

59

lender that he or she does in fact have a backstop in the event that 

they can’t make the payments? 

Mr. BAER. I am not sure how exactly the credit metrics work. 

But certainly they get some credit for the fact that they are in college. On the other hand, they get very low credit lines. 

Mr. CLEAVER. No, no, no, no. No. Do you require that a college 

student provide information that they can in fact—they have the 

financial wherewithal to make the payments? Is there a person 

with a job someplace who signs off on the credit card and declares 

that he or she will make the payments if the credit cardholder cannot? 

Mr. BAER. Do you mean do we require college students to have 

cosigners for their credit cards? If that is the question, the answer 

is no. 

Mr. CLEAVER. Yes. That is where I was going. 

Mr. BAER. I am sorry. I misunderstood. The answer is no. 

Mr. CLEAVER. Yes. Sometimes I am inarticulate. One of the 

things that I am concerned about is that college students do get 

these cards. It is the antithesis of saving. It is, go get in debt. You 

know, let’s—I mean, right after 9/11, the President said, let’s go 

shopping. 

And so we are just pushing it. Get in debt. A minus .6 savings 

rate in the United States. And do you think that process of sending 

credit cards to students is helping the Nation? 

Mr. BAER. Well, Congressman, we think it is helping those college students because they are being given very low credit lines— 

Mr. CLEAVER. But if you have no job, even if it is 1 percent, you 

can’t pay it. 

Mr. BAER. Well, I think our experience has been that actually, 

college students do not default on their credit cards at any greater 

rate than our general customers. 

Mr. CLEAVER. I apologize for not bringing the article here. It was 

about 3 months ago in the Washington Post, almost a full-page 

story about a woman who did just that, received a credit card in 

college. And I can’t remember how much—she is about $5- to 

$7,000 in debt right now. It was a full-page story, and I am going 

to try and get it before you leave. 

Chairwoman MALONEY. The gentleman’s time has expired. You 

can place this information in the record. And I would like to note 

that the Congressman is the author of a very thoughtful credit card 

reform bill that includes credit cards for college students. 

We now recognize Mr. Feeney. Congressman Feeney. 

Mr. FEENEY. Thank you, Madam Chairwoman. 

You know, this is a little bit of deja vu all over again from my 

perspective. I remember, long before I got to Congress, watching in 

the 1960’s and 1970’s and 1980’s, the lending industry in general 

being beat up because they were denying mortgage loans, for example, to people that were considered to have risky credit behind 

them. 

There were even implications that some of those decisions were 

made not based on profitability or risk, but based on ethnicity or 

race or gender. It seems to me that when you are chasing a profit, 

most capitalists, pure capitalists, anyway, are sort of neutral in 

60

terms of where they earn that profit from in a free society. But I 

suspect some of that happened. 

And there was a great deal of badgering that went on for a period of decades about how we ought to make capital more accessible 

so that everybody could aspire to the American dream of owning 

a home. 

And as a consequence of that, oh, for the last 5 years especially, 

there has been some very easy credit access to people of risky ability to pay back. Some of that has been through no-documentation 

loans. Some of that has been through 100 percent or in excess of 

100 percent financing of the asset. Some of it has been simply because there were a lot of interested investors in getting a good return on their capital. 

But now we had the subprime bubble. That is often what happens, whether because of monetary policy we inflate the currency 

or whether because the credit access caused a stock market bubble. 

In 1929, it took 15 years for this country to recover, largely because 

Congress jumped all over the place to hyper-regulate and hyper-tax 

every productive industry in the country, publicized a lot of formerly private utilities, and so forth. 

And I think we are going down that path. We are going to turn 

a recession into a deep depression if we are not careful, all because 

of the law of unintended consequences. It is not that anybody 

wants to do evil to the consumers out there. It is in the name of 

protecting consumers and protecting small individuals throughout 

the country that we do these abuses. 

I was thrilled. I think it was Congressman Price who mentioned 

earlier that Senator McGovern, not known as a limited government 

radical like some of us are, talked about the forgotten man when 

we regulate based on a policy of how we help half a percent or 2 

or 4 percent of the population. 

And what I am afraid of in this bill is that we are going to—in 

the name of helping a few people, we are going to deny access to 

the best available credit rates to the 95 percent of the population 

who have made great use of this. 

Mr. Baer, I mean, let’s take the other extreme. Supposing we just 

abolished credit cards in this country and everybody had to use 

cash or a debit card or a check. What do you think would be the 

impact on the American economy if we just took this horrible dangerous instrument that people carry around in their wallets with 

them away? We could just go to an all-cash economy. Can you give 

us a rough estimate of what the impact would be to our $13 trillion 

economy? 

Mr. BAER. I don’t think I am qualified to give a numerical estimate. But, I mean, I would say because the vast majority of people 

who use credit cards are doing so responsibly, are using that to 

fund worthwhile purposes, even invest in businesses, that would 

obviously be a tremendous loss. 

And also, even if you abolished credit cards, as I think I had 

mentioned earlier, that is not to say that people would stop borrowing. They may start borrowing through less regulated, higher 

cost, less transparent forms. 

61

Mr. FEENEY. Mr. Ausubel, if you can be brief, I will let you—re- member my question. What would be the impact on a $13 trillion 

economy of going to all debit cards or cash? 

Mr. AUSUBEL. The answer that I would give is that I think the 

various warnings that have been going out are rather alarmist. I 

mean, for example, the Senate bill bans 3 percent foreign transaction— 

Mr. FEENEY. Well, if I can—I don’t mean to be impolite, but I 

have 5 minutes and that is unresponsive. It may be a very interesting collateral observation, but it is unresponsive to the question 

I asked. 

Look. I think we want fair and full disclosure. I think we want 

economic literacy. And I wish some of the do-gooder advocates out 

there who don’t have their own cash on the line making loans 

would be doing more to advance the cause of making sure that 

every single American student got a good education in how to protect himself and herself when they are making financial decisions. 

But when it comes down to what the risk is to our system and 

what the risk is to investors and how they will respond to overzealous regulations, you will forgive me if I believe the capitalists 

and the investors, without which we won’t have any credit when 

they tell me what the potential response. 

All of the panelists today from the private sector have said they 

don’t engage in several of these practices—universal default, twocycle billing, and some of the other abuses. Nonetheless, even 

though their competitors do and they are at a competitive disadvantage, they think it will be foolish for the American economy 

if we regulate things through congressional legislation. 

I happen to at this point buy that argument. With that, I will 

yield back the balance of my time. 

Chairwoman MALONEY. The gentleman’s time has expired. But 

both Ms. Porter and Mr. Ausubel wanted to respond to his comments, so I would like to give them that opportunity. 

Ms. PORTER. I can say that based on a study of five national 

economies that Professor Ronald Mann did, large national economies similar to the U.S. economy, dollar for dollar, moving people 

from credit card spending onto debit card spending, moving people 

from card borrowing onto non-card borrowing, would lower the 

bankruptcy rate. 

Chairwoman MALONEY. Mr. Ausubel, do you have a comment? 

Mr. FEENEY. Well, now, if I can, the chairman has been gracious 

enough, and I am happy to have that response. I didn’t ask about 

the bankruptcy rate. I asked about the effect on a $13 trillion goods 

and services economy. That is—you know, there may be some good 

things that happen as a result of killing your economy. Bankruptcy— 

Chairwoman MALONEY. I would just say, reclaiming my time, 

Congressman, no one is advocating abolishing credit cards. We all 

acknowledge the important tool they are to our economy. And as 

one who represents a great number of retailers, they are absolutely 

essential for commerce in the district that I represent. What we are 

talking about is more notice and allowing cardholders to pay off 

their balances at the rate that they agreed to. 

I now recognize Mr. Davis. 

62

Mr. DAVIS OF TENNESSEE. Madam Chairwoman, thank you very 

much. 

As we engage in this debate and this discussion, it would seem 

to me there is a reason for you folks being here today. If everything 

was apple pie and a pot of gold at the end of the rainbow, and we 

could find it, you wouldn’t be here today. So there is obviously 

something happening in the financial world that the average person who lives in my district has complained about. 

I represent the fourth most rural residential congressional district in America. I have the third highest number of low wage earners and blue collar workers, who have a tough time having health 

care, and paying almost $4 a gallon for gasoline to drive to a job 

that just barely pays more than minimum wage, which we raised 

recently. So when we talk about the issues here today, in my district, we are engaged. We are connected. And we do feel the pain. 

I heard someone say a moment ago that credit card companies 

offer credit unsupervised. I am a farm boy. When we start moving 

cattle from one stall to another or from one field to another or loading them for market, we have a little stick. On the end of it, it 

has—excuse me, those who might not agree with this—it has a little shock on the end of it. And we are able to supervise livestock 

with that. 

A lot of folks in my district feel like they have been shocked by 

the bill that they get from the credit card companies. I am one of 

those, and I will explain in a moment why I feel that way. 

I also like to ride horses, now mainly mules because they are 

more safer to get on. Occasionally I put on a pair of spurs. And 

when I touch that animal in the side, it is to give supervision to 

that animal. A lot of my constituents back home have felt the pain 

of the spur in their ribs and in their wallet. 

Now, you might not follow what I am saying, but folks back 

home understand what I am saying. When we talk about high risk 

credit, those in this room have done more to establish the credit 

rating of most Americans than any other financial institution in 

America, either good or bad. So it seems to me real easy before you 

send out one of those I have heard as many as 8 billion solicitations, all you have to do is check their credit report and see if that 

is a good risk. 

So really, if you are sending high risk out, it is your fault. You 

should know whether or not these folks are good credit risks or not. 

All you have to do is click on—get the report, and then you are not 

taking much risk any more. So for me, I don’t agree with some of 

the statements I am hearing today, and I do believe that it is supervised credit because we have felt some of the stings of it back 

home. 

When I also look at those 8 billion solicitations, or 4, I heard earlier, but I have come to believe that it is 8 billion, if it costs 15 

cents to send those out, including the printing and everything else 

and postage, you are talking about $120 million. Some folks say a 

trillion dollar business; some folks say $2.3 to $2.4 trillion. I don’t 

know what that figure is. Perhaps collectively you all could arrive 

at that. 

That seems like an awful lot. But I will tell you how one of my 

staff members disciplines and supervises credit card companies. 

63

When he gets one of those solicitations—and he just told me this 

earlier—he takes it to the mailbox, tears it open, folds everything 

else back up, and puts it in the return envelope. And it costs 41 

cents for you to get it back. So he is doing the best he can to discipline you all. 

So as we look at this thing, there are a lot of issues that we need 

to talk about, a lot of questions. Everything is not rosy. I wish it 

was. You provide a wonderful service. In the late 1970’s, my wife 

and I got our credit cards, and we cut them up and we burned 

them. As I engaged in business that took me a long way from home 

in 1991, I applied for credit cards. 

I have two credit cards. One of those is listed on it, since 1991. 

I have never paid interest on it. I have never paid a late fee on 

it. I pay it off every month. I have another one that is smaller that 

has absolutely aggravated and wore me out, and that is why I feel 

something has to happen. 

When I called one day after being here, quite frankly, on the smaller amount that I had—it was less than $100—realized I had 

not paid it and it was due the next day, I called to see if I could 

pay it by phone. You can. It is $29. I owed $50-something. It is $29. 

What is the late fee? $29. I am not going to pay you over the 

phone. I will send it to you. 

So when you tell me everything is fine and rosy, it really is not 

for some of us. So what I want to do is be sure that we work in 

a way to where that credit cards continue to be what they have 

been, a source for individuals to be able to use to be a consumer 

in this country. And that is what this hearing is about today. One of the questions I want to ask you is that $29 fee that someone was going to charge me by paying by phone, how much was 

that going to cost you? Because the other one I call in at the end 

of every month, I do it by phone. The phone says, tell me your card 

number. What is your mother’s birthday? Do you want to pay it all 

off or do you want to pay—so in essence, they don’t charge me anything for doing that. 

But most credit card companies do. So how much does it cost you 

to take that automated phone call, and how much should you 

charge for it? Anyone who wants to answer that. 

Ms. FRANKE. I can’t. 

Mr. DAVIS OF TENNESSEE. Do you have an idea what it costs? 

Ms. FRANKE. What I can tell you is that 98 percent of the payments are made for free. There are many, many options to pay 

your bill without ever incurring a charge. And we would always encourage our customers to take advantage of the ways that they can 

pay their bills on time without incurring any penalty fees. And 

again, 98 percent of all of our payments are made for free. 

Mr. DAVIS OF TENNESSEE. I have a college degree. It is in agriculture. And I am a Member of Congress. When I start reading 

what is on the back of that card, before I get angry with it, I tear 

it up and throw it away. I mean, I don’t think anybody reads what 

is on the back of those cards. We trust you. Literally, we trust you 

to be fair and honest with us. And that is what we have always 

done with our banks and others. 

So I don’t want people to start distrusting a valuable source for 

us in this country. So if you could somehow maybe talk with other 

64

folks and see if you can tell me about what it would have cost me, 

had I agreed to pay the $29, what it would cost you to charge me 

$29 on less than a $60 bill. 

Chairwoman MALONEY. Can any of the issuers answer his question, or can any of the academics answer his question, of how much 

does it cost the issuer to take a payment by phone? Can anyone 

answer that in relation to the fee? 

Mr. BAER. I don’t know the exact amount. I do know it is our 

highest cost way of accepting a payment. But I don’t know the relative cost. 

Chairwoman MALONEY. Could you get it back to us in writing 

later after you have analyzed it? 

Mr. BAER. If we have it, we will give it to you. 

Mr. DAVIS OF TENNESSEE. Can I— 

Chairwoman MALONEY. Can all of the issuers respond to his 

question? Sure. 

Mr. DAVIS OF TENNESSEE. I would like to make an announcement. For all folks who have credit cards and you get a request in 

the mail, send them back like my staff does and it costs them 41 

cents. 

Chairwoman MALONEY. Yes. Would any other issuer like to comment? Mr. Ireland first, or—okay. Then the academics. Mr. 

Levitin? 

Mr. LEVITIN. I can’t speak to the issuer’s overhead costs involved 

in accepting a payment by telephone. But they should be able to 

do it through an automated clearinghouse transaction that would 

cost them 5 cents. That is 5 pennies for the automated clearinghouse. 

Chairwoman MALONEY. Can anyone else answer his question? 

Mr. IRELAND. I would just like to comment. Automated clearinghouse transaction, to clear the transaction once you have formatted 

it and put it into the system, the interbank fee is on the order of 

5 cents. 

To actually take in the transaction, link it up with the right account, account for it, and so on in a different environment is going 

to be significantly more than five cents. I don’t know what the actual numbers are, but people have said they will bring them. 

Chairwoman MALONEY. Go ahead. 

Mr. AUSUBEL. There are other nuisance fees that are much easier to trace down the cost of. So like if you take the foreign currency 

fees I think everyone at this table charges, any transaction that is 

paid in foreign currency they surcharge 3 percent. That is on top 

of the conversion fees that Visa and MasterCard assess. So I would 

say that one it is clear the cost is literally zero. 

Mr. BAER. If I may just respond? 

Chairwoman MALONEY. The Chair recognizes the gentleman for 

an additional minute. I do want to note that Mr. Davis is the author of a very comprehensive credit card reform bill, which does include price limits and price fees. 

Go ahead. An additional minute, in recognition of your hard work 

on your own bill. 

Mr. DAVIS OF TENNESSEE. Okay. As you answer those questions 

concerning the fees for a phone call, what does it cost you to process me sending it in through my internet, through an e-mail, where 

65

I actually go online and pay you online? Is there a difference in 

that and an automated phone call? And if I send you a check, in 

comparison for you to take the check out of the envelope, have the 

folks process that and enter that, which of the three would be the 

most expensive and which would be number one, two, and three? 

Mr. FINNERAN. I don’t know the precise numbers, Congressman. 

But I think in order of expense, the cheapest is the internet because that is the most highly automated. I think the second least 

expensive is through the mail, simply because of the volume of people who actually choose to pay in that way. 

And the most expensive by a fair amount, although again I don’t 

have the precise figure, is over the phone because few people 

choose to do it that way, and you have to have the people to take 

the phone call or to make sure that the automated aspects of it 

work and make all the linkages that Mr. Ireland referred to. 

For Capital One, and I know probably the other issuers at the 

table as well, notwithstanding some of the anecdotes that people 

like to pass around regarding billing due dates, we send our bills 

out a good 25 days before the due date. And we certainly encourage 

and provide multiple ways for people to pay on time. We spend a 

lot of time and effort to try to encourage people to not wait for the 

last day. 

Mr. DAVIS OF TENNESSEE. I hate to interrupt you. But how long 

have you had that 25 day period when you send out your bills? Is 

this recently or is it— 

Chairwoman MALONEY. Reclaiming my time, what our bill is approaching is all practices with all credit card companies. Many 

companies have very fine practices that give a great deal of notice, 

the 25-day limit, which many of my colleagues on the other side of 

the aisle requested be placed in the bill. 

I now recognize Mr. Clay for 5 minutes. And he will be followed 

by Mr. Ellison. 

Mr. CLAY. Thank you so much, Madam Chairwoman. 

Since no one in authority will call the current economic straits 

of the country a recession or a depression, I will say that we are 

in an informal recession, that is, a recession that is felt by the millions that are losing all of their wealth, their homes, and in many 

cases their families. 

This has been caused by the outsourcing of jobs overseas, the replacement of workers in this country with cheaper laborers, the 

grand larceny of the housing mortgage community and various 

other credit and payment schemes, criminally high energy costs, 

and a few other economic burdens. 

At what point will it be determined that the consumer cannot 

pay all of the increases in interest rates, the additional fees and 

costs associated with credit? At what point will there be the realization that reasonable profit is better than the destruction of the 

consumer base that it is depending upon for the maximized profits 

that are being sought? 

When will the concept of losing money stop being confused with 

the concept of not meeting profit projections? And I will start right 

here. When do we concede that we must start—or that we must realize that consumers may not be able to pay all of these bills? I will 

start with you, ma’am. 

66

Ms. WARREN. Congressman, I think we should be there right 

now. And I will just say, I will hit just a few of the numbers. One 

in every seven American families is dealing with a debt collector. 

Forty percent of American families worry whether or not they are 

going to be able to make their bills at the end of the month. And 

the one that truly breaks my heart is that one in every five American families says, I believe I will die still owing my bills. 

Congressman, how much worse does it have to get before we 

start taking some action to clean this up? 

Mr. CLAY. And it is about what cost they incur now. People trying to heat their homes, fill their gas tanks up. On top of all of 

that, they are being pursued by companies wanting to collect on 

the debt. 

How about you, Mr. Baer? Any comment? 

Mr. BAER. Sure. Obviously it is a large topic. I mean, I would 

make one point, though, which is that in contrasting credit card 

lending to mortgage lending, there is a rather significant difference, which is credit card lending is wholly unsecured lending. 

So there is a rather significant constraint on our willingness to extend credit to people, namely, that if they do not repay it, there is 

no car. There is no home. There is no security at all. 

And I think that is why—and you may have the wrong group of 

lenders here because I think these are the lenders who are probably managing credit the most responsibly and intelligently and 

why, of course, we are interested in risk-based pricing. 

But we have every incentive not to have customers paying interest rates they can’t repay or levels of debt that they can’t repay because we bear 100 percent of the loss in the event that they don’t 

repay. That is not to say we suffer the anguish, the personal anguish, that they might feel in that case, and the longer term potential bad ramifications of poor credit. But in terms of the immediate 

dollar financial loss, we feel 100 percent of it. 

So you should feel some assurance that at least the issuers 

here— 

Mr. CLAY. Okay. I appreciate the response. But when will the 

concept of losing money stop being confused with the concept of not 

meeting projected profits? How about that? Do you have any response to that? There is a difference, don’t you think? 

Mr. BAER. Yes. Now— 

Mr. CLAY. Losing money compared to projected profits. 

Mr. BAER. I mean, our interest obviously is not in losing money, 

and our interest is in earning a reasonable risk-based return on 

capital, which in this case means lending to people we believe can 

repay it. 

Mr. CLAY. Based on paying out bonuses at the end of the year 

and making sure your values are up in the stock market and all 

that. Correct? 

Mr. BAER. Well, again, if our customers aren’t repaying us and 

we are suffering credit losses, that will not help our stock value. 

Mr. CLAY. How about you, Mr. Levitin? Do you have any comment? 

Mr. LEVITIN. I think it is interesting what you point out about 

executive compensation and bonuses, that they are very often tied 

to short-term profits. And those short-term profits are—a good way 

67

of increasing short-term profits is by squeezing consumers through 

really dirty billing tricks. 

You can bump up profits a little bit in a quarter, and that beats 

the market’s expectation by a penny, and walk away with a large 

golden parachute. And certainly looking at executive compensation 

practices is, I think, part of the picture here, and making sure that 

they are decoupled from things like billing practices and the profits 

generated by them. 

Mr. CLAY. Thank you so much. 

Chairwoman MALONEY. The gentleman’s time has expired. Mr. 

Ellison, and I want to congratulate his hard work throughout four 

different hearings and a roundtable discussion that we had on this 

with issuers. 

Mr. ELLISON. Well, Madam Chairwoman, I just want to thank 

you. I think that your leadership in this area is tremendous. Obviously there are powerful forces who are trying to stop us from protecting the consumers, and I just thank you for your courage and 

commitment. 

How profitable is the credit card business these days, Ms. Warren? 

Ms. WARREN. The most recent data we have available is that 

they made about $18.4 billion in 2006. That was a 45 percent jump 

over the year before. We haven’t seen the 2007 data. 

Mr. ELLISON. $18.4 billion? 

Ms. WARREN. $18.4 billion with a ‘‘B.’’ 

Mr. ELLISON. That is a lot of money. What is the percentage of 

profitability? Does that term—do you understand what I am asking 

you? 

Ms. WARREN. Yes. The revenues were about $115 billion. So you 

can sort of figure it out from that one. Not bad. 

Mr. ELLISON. Yes. And of course, you may not know this and we 

may need to come back for it. How much did the CEO at Capital 

One make? 

Ms. WARREN. Oh, gosh. A lot more than I did. 

Mr. ELLISON. Yes. Does anybody know? 

Ms. WARREN. It is outside my range. 

Mr. ELLISON. Mr. Finneran, do you know that? Your CEO, how 

much did he get? 

Mr. FINNERAN. Our CEO has not taken a salary since 1997. All 

of his compensation is in equity in the company, therefore what he 

makes is entirely dependent upon the success of the company. 

Mr. ELLISON. Mr. Finneran, how much did he get paid last year? 

Mr. FINNERAN. Pardon me? 

Mr. ELLISON. How much did he get paid last year? I am not asking you if it was salary or—I am asking you how much compensation did he receive? 

Mr. FINNERAN. Well, in our most recent proxy disclosure, I believe it was $17 million worth of equity grants. 

Mr. ELLISON. $17 million. And how about the CEO of JPMorgan 

Chase, ma’am? 

Ms. FRANKE. I don’t know. 

Mr. ELLISON. You don’t know that? Well, I will commend you on 

being extremely well-prepared on everything else. Bank of America? 

68

Mr. BAER. I don’t know my CEO’s exact compensation, or even 

his approximate compensation, for that matter. 

Mr. ELLISON. Mr. Baer, come on. 

Mr. BAER. I don’t. 

Mr. ELLISON. Okay. Does anybody else know? 

[No response] 

Mr. ELLISON. You know what? In 1980, the average CEO made 

about 41 times the average worker. In 2005, it was about 411 

times. So it is interesting how—it is too bad folks don’t know what 

their boss made. 

I introduced—well, let me just skip that one. 

Demos has noted in a study that African American and Latino 

credit cardholders with balances are more likely than whites to pay 

interest rates higher than 20 percent. Why do you think that is? 

Well, is it true? And why do you think that might be? Mr. Ausubel, 

have you looked at this? Have you heard about this, Professor Warren? Haven’t heard about that one? 

Ms. WARREN. Oh, yes. No, I cited it in my testimony. 

Mr. ELLISON. Oh, yes. Could you elaborate on that, please? 

Ms. WARREN. Well, they looked at a survey of consumer finance 

data. But I don’t think there is any question about the accuracy of 

the data. 

Mr. ELLISON. Right. 

Ms. WARREN. And they simply analyzed it by race. They also 

looked at the effects on single women. They looked at family income. And the people who are carrying the heavy burdens here are 

disproportionately African American, Latino, single mothers, and 

people in lower income categories. 

Mr. ELLISON. Professor Warren, maybe you could help me with 

this. You know, I am just a simple guy, and I hear these financial 

people using big words like risk-based pricing and stuff like that. 

It sounds really important. 

Are they basically saying that these people are riskier, so we get 

to charge them more? 

Ms. WARREN. They may be saying that, but— 

Mr. ELLISON. But is that what they are saying? 

Ms. WARREN. But in fact, that is not what they are doing. I 

mean, this is the point that Professor Levitin has really emphasized, and I want to be sure to highlight his research on this. 

Mr. ELLISON. Would you please do that? 

Ms. WARREN. Professor Levitin? 

Mr. LEVITIN. Sure. Most of the overall price that you pay on a 

credit card has nothing to do with your individual risk profile. It 

has to do with the cost to the issuer of borrowing money from the 

capital markets. It has nothing to do with whether you are risky 

or whether you are going to pay on time. Only at the very margins 

does it have any impact. 

Mr. ELLISON. Basically, the pricing reflects what they can get 

from a consumer, right? 

Mr. LEVITIN. Very much so. 

Mr. ELLISON. So it is pretty much about just getting money? 

Mr. LEVITIN. This is a—as they note, it is a competitive market 

and they want to squeeze every last drop of profit they can. 

69

Mr. ELLISON. I am glad you said that about the competitive market thing, because I was talking to somebody just yesterday, and 

they told me that, well, I shouldn’t worry about these credit card 

practices that seem so egregious to me because if people don’t like 

it, they can just call somebody else. 

But then have you ever tried to call a credit card company? 

Could you just—Ms. Warren, Professor Levitin, have you tried to 

actually talk to these people and get them on the phone to discuss 

your bill? 

Ms. WARREN. Of course not. That is why we all laugh. That is 

like the punch line to a joke, to call a credit card company. 

Mr. ELLISON. Right. 

Ms. WARREN. But I want to make the point here even so, even 

if you could reach someone, by the time you recognize most of these 

things have happened to you, they have happened to you. 

Mr. ELLISON. Right. 

Ms. WARREN. This is not about understanding in advance, golly, 

I have one of those cards that is going to have a new due date on 

it, or that they are going to switch me every 6 months on the date 

that my payment is due. This is about things that you only know 

you have been bitten after the teeth are well sunk in. And then it 

is too late to do anything about it. 

Mr. ELLISON. Let me ask you this. On this issue of the moving 

target of the payment date, it was pointed out to me yesterday 

that, hey, we don’t want to have— 

Chairwoman MALONEY. The gentleman’s time has expired. And 

the moving target date is one that we end in this legislation that 

is before us today. 

I would like to thank all of my colleagues and the witnesses for 

your testimony today. We are moving forward with legislation. This 

bill is on four previous hearings and roundtable discussions with 

issuers and consumers and academics. And the next hearing will 

be held on April 9th. 

We look forward to passing legislation that will put into place reforms that will enable responsible consumers to better control their 

financial affairs, and will bar some of the most abusive practices 

that drive responsible cardholders further into debt. Our legislation 

is balanced and sensible, and I look forward to our next hearing. 

I do want to note that Members, if they have additional questions, and my colleague Mr. Ellison, can put his additional questions in writing to the panel. Without objection, the hearing will remain open for additional comments and questions for 30 days. 

And again, I want to thank the witnesses and thank everyone 

here. We will get your responses into the record. This meeting is 

adjourned. Thank you. 

[Whereupon, at 2:15 p.m., the hearing was adjourned.] 

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A P P E N D I X

March 13, 2008

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