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37–552 PDF 2007

IMPROVING CREDIT CARD CONSUMER

PROTECTION: RECENT INDUSTRY

AND REGULATORY INITIATIVES

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

FIRST SESSION

JUNE 7, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–36

(

(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 

JULIA CARSON, Indiana 

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 

ALBIO SIRES, New Jersey 

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 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

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

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 

JULIA CARSON, Indiana 

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 

PAUL E. GILLMOR, Ohio 

TOM PRICE, Georgia 

RICHARD H. BAKER, Louisiana 

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 

JUDY BIGGERT, Illinois 

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 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 7, 2007 ...................................................................................................... 1

Appendix: 

June 7, 2007 ...................................................................................................... 79

WITNESSES 

THURSDAY, JUNE 7, 2007

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation .......... 16

Carey, John P., Chief Administrative Officer, Citi Cards .................................... 46

Caywood, William, Senior Consumer Credit Risk and Compliance Officer, 

Bank of America ................................................................................................... 47

Dugan, Hon. John C,, Comptroller of the Currency, Office of the Comptroller 

of the Currency ..................................................................................................... 14

Finneran, John G., Jr., General Counsel, Capital One ........................................ 50

Huizinga, James A., Sidley Austin LLP ................................................................ 44

Johnson, JoAnn M., Chairman, National Credit Union Administration ............ 19

Keest, Kathleen E., Senior Policy Counsel, Center for Responsible Lending ..... 43

Landis, Marilyn, Basic Business Concepts, Inc., Pittsburgh, PA, on behalf 

of the National Small Business Association ...................................................... 52

Mierzwinski, Edmund, Consumer Program Director, United States Public 

Interest Research Group ...................................................................................... 54

Mishkin, Hon. Frederic S., Governor, Board of Governors of the Federal 

Reserve System .................................................................................................... 13

Neiman, Richard H., Superintendent, New York State Banking Department, 

on behalf of the Conference of State Banking Supervisors (CSBS) ................. 20

Reich, Hon. John M., Director, Office of Thrift Supervision ................................ 17

APPENDIX 

Prepared statements: 

Brown-Waite, Hon. Ginny ................................................................................ 80

Carson, Hon. Julia ............................................................................................ 82

Gillmor, Hon. Paul E. ....................................................................................... 83

Bair, Hon. Sheila C. ......................................................................................... 85

Carey, John P. .................................................................................................. 108

Caywood, William ............................................................................................. 123

Dugan, Hon. John C. ........................................................................................ 131

Finneran, John G., Jr. ...................................................................................... 175

Huizinga, James A. .......................................................................................... 181

Johnson, JoAnn M. ........................................................................................... 185

Keest, Kathleen E. ............................................................................................ 208

Landis, Marilyn ................................................................................................ 226

Mierzwinski, Edmund ...................................................................................... 233

Mishkin, Hon. Frederic S. ................................................................................ 249

Neiman, Richard H. .......................................................................................... 266

Reich, Hon. John M. ......................................................................................... 281

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Maloney, Hon. Carolyn: 

Letter from the National Association of Federal Credit Unions .................. 295

Statement of the New York State Consumer Protection Board ................... 297

Watt, Hon. Melvin L.: 

Written response to question submitted to Hon. Sheila Bair ....................... 309

(1)

IMPROVING CREDIT CARD CONSUMER 

PROTECTION: RECENT INDUSTRY 

AND REGULATORY INITIATIVES 

Thursday, June 7, 2007

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 a.m., in room 

2128, Rayburn House Office Building, Hon. Carolyn Maloney 

[chairwoman of the subcommittee] presiding. 

Present: Representatives Maloney, Watt, Ackerman, Moore, Waters, Carson, Hinojosa, McCarthy, Baca, Green, Clay, Scott, Cleaver, Bean, Hodes, Ellison, Perlmutter; Gillmor, Price, Castle, 

Biggert, Capito, Feeney, Hensarling, and Davis of Kentucky. 

Ex officio: Representative Bachus. 

Chairwoman MALONEY. Welcome. The hearing will come to 

order. This hearing, entitled, ‘‘Improving Credit Card Consumer 

Protection: Recent Industry and Regulatory Initiatives,’’ is the second hearing in a series that this subcommittee is holding on credit 

card practices. 

There is no question that credit cards are an essential part of 

American lives. And in our increasingly electronic banking system, 

credit cards have replaced cash and checks for daily shopping, travel expenditures, business needs, and even paying big bills, such as 

college tuition. 

The average American family has five credit cards. The availability of credit has proven good for our economy. Consumers spent 

over $1.8 trillion in 2005, using credit cards. In our society, a person without a credit card cannot rent a car, buy plane tickets at 

the Internet discount rate, get an advance movie ticket online, 

make hotel reservation, or engage in other transactions that many 

of us take for granted. 

In many cases, the ability to pay with a credit card enables a 

consumer to make a purchase that they would not otherwise have 

been able to make at that time, or to pay an emergency bill that 

they were not prepared for. 

As a New Yorker, I know that the credit card industry is a 

strong engine, not only of our national economy, but of local economies, by providing jobs and getting small businesses access to credit. 

2

On the other hand, the use of credit cards has contributed to the 

increase of consumer debt to record levels. Among households that 

carry a balance, the average household carries over $13,000. That 

number is expected to rise dramatically, as consumers confront the 

fact that in the falling housing market, they can no longer refinance their home to pay off their credit cards or other debt. 

I am concerned that we will see a perfect storm in consumer 

credit as these pressures converge on Americans and that the ripple effect will be felt throughout our entire economy. 

Even though credit cards are indispensable to most working 

Americans, credit card complaints far outnumber all other complaints about banks filed with Federal regulators in recent years. 

In the wake of our first credit card hearing last month, this subcommittee has received a flood of correspondence from individuals 

with credit card complaints. 

The complaints we received center on what consumers see as: arbitrary and unfairly high interest rates and penalty fees; confusing 

practices that constantly change in the issuer’s favor; and impossible barriers to getting help to sort through a problem, even when 

the issuer has caused the problem. 

Many people, myself included, believe that improved disclosure 

would help consumers avoid these pitfalls. For this reason, we set 

this hearing shortly after the Federal Reserve released its new Reg 

Z for public comment. As the first revision of Reg Z in over 25 

years, it is long overdue, and much awaited. 

I think it represents a considerable improvement over the 

present situation, in which a long outdated rule struggles to keep 

up with an electronic financial universe it was not designed for. 

I must say, a very moving part of a hearing that we had was 

when the Federal Reserve chairman testified that he and his wife 

could not understand their credit card statement, and spent hours 

reading it. So this reform is long overdue. 

Among the major improvements in the proposal are: a 45-day notice period for increases in interest rates; display of the Schumer 

Box, not only at solicitation, but at account opening; and as 

changes in terms prohibiting the use of the term ‘‘fixed rate’’ for 

rates that are not fixed, to name a few. 

I personally like the new section that shows consumers all of the 

interest and all of the fees accrued for the month, and gives consumers a running total for the year-to-date. I welcome these improvements, and look forward to hearing the analysis and comments of our witnesses, starting with Fed Governor Mishkin, on 

this very big and important new development. 

But I am not sure that even the best disclosure will be enough 

to resolve some of the issues that we are confronting. In our previous hearing, we explored some of the abusive practices that have 

attracted the most criticism: universal default; double-cycle billing; 

trailing interest; retroactive rate increases; and limitless over-limit 

fees, among others. 

Some of these, such as double-cycle billing, are just too complex 

for disclosure, to make it fair. And if you doubt that, ask one of 

your issuer witnesses to explain it to you, using the numbers. It 

is very complicated. 

3

More systematically, I doubt that disclosure can be enough to 

protect consumers when the issuer can change any of the terms of 

the contract at any time, and in any way. That is the case for a 

surprisingly large number of cards, in which consumers are completely at the mercy of issuers. Many issuers can and do change 

the interest rate, the penalties, overlimit fees, how rates are calculated, the payment date, and many other features. 

Under the new rule, they will have to tell consumers about most 

of these changes in advance. But that really does not help even the 

most savvy customer, unless they move to a card with safe and stable terms. 

Consumer advocates argue that some common practices, like 

any-time and any-reason increases in rate, are just unsafe and unfair. At our last hearing, industry participants pointed out that several of the large issuers have recently taken steps to eliminate 

some of these abuses from their own products. I am happy to say 

that, on our second panel, we have several issuers who have announced such steps, and will explain what they have done to develop best practices, and to get rid of bad ones. 

Several large issuers have announced that they no longer use 

universal default. Others have announced reform of payment allocation, so that payments are applied to higher-rate accounts first. 

Some have said that they will abandon any-time, any-reason repricing. 

As a supporter of market-based solutions where possible, I welcome these steps. Perhaps the spotlight of congressional attention 

has helped to produce these commendable reforms. Yet I worry 

that as competitive pressures grow, issuers will go back to the most 

profitable modes of doing business, or issuers who adopt the best 

practices will simply lose business to those who have not. 

To discuss these issues and others, I am planning a credit card 

summit. I am delighted to say that the issuers testifying today—

Citibank, Bank of America, Capital One, as well as J.P. Morgan 

Chase, and many consumer groups—have all agreed to participate. 

Among the results I want to achieve from this meeting is a way 

to use private forces to encourage best practices. For example, what 

if industry, working with consumer advocates, developed a gold 

standard for credit cards, and certified that certain of their products met this standard? 

Cards with this—the gold standard—might have easy-to-understand terms, a hotline to resolve complaints, no fees for paying online, no use of universal default, or whatever feature the group determines represents best practices. Regulators could enforce this 

pledge that the issuers have made. 

Right now, the Federal Reserve is the only regulator with power 

to issue regulations banning unfair and deceptive practices under 

the Truth in Lending Act. It has not done much in that area. If 

other regulators had similar powers, perhaps we would see more 

regulatory monitoring of bad practices. 

Even more basically, I would like to encourage the regulators to 

enforce the laws that already exist. For example, the regulations 

governing processing of payment are disregarded by issuers who 

process payments in a way that results in many payments being 

late, even though they were mailed a week ahead of time. We have 

4

regulations to deal with this, but they are not adequately enforced, 

as the many letters complaining about unfair payment date practices attest to. 

The Federal banking agencies have done a great deal of work effectively on safety and soundness, but they have not put the same 

type of attention and focus on consumer protections, and we need 

to improve those efforts. This is the first congressional hearing on 

these new proposed disclosure regulations, which aim to give credit 

card customers clear and accurate information, and eliminate the 

‘‘gotcha’’ moment, when people are hit with a charge they did not 

expect, and do not understand. 

More remains to be done, but this proposal is a long-awaited and 

very welcome first step. Thank you. I reserve the balance of my 

time, and call on Mr. Gillmor. 

Mr. GILLMOR. Thank you, Madam Chairwoman. If I might, I 

would like Ranking Member Bachus to go first on our side, and I 

will go second. 

Mr. BACHUS. Thank you. First of all, Madam Chairwoman, I 

want to thank you for having the hearing, and I would also like 

to associate myself with your remarks. 

As the ranking member of the Financial Services Committee, 

many other members refer their constituents to me, or they will 

come to me, and they will describe a credit card practice that has 

occurred to one of their constituents, or sometimes a family member. 

And not only that, but recently—probably in the last 2 years—

more and more, I have constituents who come to me, like a young 

man whose wife had a premature baby. He was at the hospital for 

2 months, which is a hardship case, but that doesn’t excuse him 

from honoring his obligations, and he was paying his credit card 

on time. 

He realized it was the last day to pay his mortgage payment, so 

he called his mortgage company up, and they said, ‘‘Well, you can 

use your credit card,’’ so he said, ‘‘Great.’’ He used his credit card. 

When his credit card bill came in, he noticed that not 8.5 percent 

interest was charged on that, but 24.9 percent interest on the mortgage payment. 

So, he said, ‘‘Oh, my gosh,’’ you know, so he called his credit card 

company, and he said, ‘‘I want to pay that off today, I am going 

to send you a check,’’ so they said, ‘‘Okay.’’ He sent that check in, 

plus his minimum payment for the month, and they applied it to 

his lowest balance. 

Now, here is a young man who would have never come into my 

office; he probably didn’t have time. He saw me in a restaurant, 

and he came up to me and he basically said, ‘‘Congressman, I don’t 

think that’s right.’’ And, quite frankly, I don’t, either. 

Now, he explained to me that he called them back and said, 

‘‘Where was I told that if I use my credit card, you know, to pay 

my mortgage payment, where was I told this?’’ They sent him 

something. And he said, ‘‘I have it at home. I would like to send 

it to you.’’ 

He sent it to me. I read it. It said, ‘‘If you make a cash payment,’’ 

but he wrote on his note that he paid his tuition using a credit card 

some 6 months before, and what was the difference? I mean, if that 

5

wasn’t a cash payment, why was a mortgage payment? He said 

they explained, ‘‘Well, you know, you can either pay with a credit 

card, or you can write a check. And when you do something like 

writing a check with the credit card, that’s a cash payment.’’ He 

said, ‘‘I don’t understand that.’’ 

Another example ia a businessman who came to me. I know him. 

He is worth millions of dollars. He owes nobody anything. He has 

perfect credit. He has two credit cards, and he uses them for convenience. And here is a guy who has 200 employees, and he has 

time to be outraged. He has time to get a lawyer. So what he does, 

around Christmas, he has two credit cards, one $15,000, one 

$30,000, and he goes to Europe and spends $20,000. He doesn’t go 

over his limit; he is very careful not to do that. 

But in March, he suddenly looked at his credit card, and it had 

gone from 8.5 percent to 20-something percent. What in the world? 

So, he called his bank and his bank said, ‘‘Well, we don’t do that, 

we have referred that to another company. We referred that to another—our bank no longer does this, we farmed it out.’’ 

He has a lot of money with this bank, does business with them. 

They say, ‘‘You need to call these people.’’ He calls them and he 

says, ‘‘What in the world are you doing? I have perfect credit. What 

is this about?’’ ‘‘Well, you either did one of these six or seven 

things.’’ So, he doesn’t know what he has done. 

They tell him he has to write somebody else, so he writes a letter. He gets a form, which he brings in and shows me. It is two 

pages: ‘‘Thank you for your inquiry as to why your credit rate went 

up. Here are the various reasons it could have gone up.’’ He then 

gets his lawyer to write and say, ‘‘Could you please tell him, in this 

case, why it went up?’’ He got another form-generated answer. 

But he has looked at all those reasons, and he thinks what happens is he had two credit cards. And one of the things that it actually said in there is, ‘‘If you have our credit card, and there are 

other credit cards you have, and you approach your credit limit, we 

can up your’’—and that’s the only thing that could have possibly 

happened, because it was around Christmas. 

By the way, you know he never saw the notice. But do you know 

when they mailed the notice, which was a form-generated thing, 

which said, ‘‘Important document enclosed,’’ like we all get every 

day? They mailed it on December 19th. And here is a sophisticated 

guy who has hundreds of employees, he has lawyers at his disposal, and he still can’t find out what happened to him. 

Now, of course, what did he do? He immediately paid off that 

credit card. He immediately wrote a check and sent it in. And 

Americans every day are getting outraged by this. They get another credit card. And yes, you can do that. But that still doesn’t 

make all of this right. 

I am very happy that when I met with Citigroup a few weeks 

ago, and I talked about universal default, they said, ‘‘We don’t do 

that.’’ Capital One has told me, ‘‘We don’t do that any more.’’ I am 

very glad they’re responding to that. If they don’t start responding 

to this thing about where consumers can pay on their highest interest rate, I do believe that this Congress will take a run at it. 

I can’t speak for all the members of the minority, but I can tell 

you that I have a file, and there are 28 Republicans who have writVerDate 0ct 09 2002 16:27 Oct 18, 2007 Jkt 037552 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\37552.TXT HFIN PsN: TERRIE
6

ten me letters complaining about stuff, and saying, ‘‘You need to 

do something about this.’’ 

I have talked with the Federal Reserve, and they have limited 

duties, as you know. They have to respond to truth in limit and 

disclosures. And they say certain abusive practices, even if we 

think they’re abusive, even if the GAO thinks they’re abusive, even 

if we have 40,000 letters from people saying they don’t think this 

is right, we really can’t do anything about that. If anything is to 

be done, the Congress will have to do it. And they have actually 

said, ‘‘That’s your watch, not ours.’’ 

I am interested in hearing from all of you. I am going to read 

your testimony. But I will tell you that, as the chairwoman said, 

90 percent—you know, subprime lending, it’s a problem, and people 

have lost their housing. But the number of people—and I have had 

people in my district lose their houses—but the outrage over just 

a few of these practices is just something. 

The day it came out in the Birmingham News, I’d been appointed 

ranking member—and, regrettably, in that article it said that we 

did credit cards—I received 12 calls, 12 calls from people who said, 

‘‘I want to come in and talk to you.’’ That’s in my district. Thank 

you for being here. 

Chairwoman MALONEY. Thank you for your statement. Mr. Ackerman for 3 minutes; he has been a very strong advocate for 

change in this area. 

Mr. ACKERMAN. I thank the chairwoman and the ranking member, and I want to associate myself with their statements. And 

thank you for the 3 minutes, and I hope you don’t cut me off as 

I approach my 3 minutes. 

[Laughter] 

Mr. ACKERMAN. Be careful driving today, because as you approach the speed limit, maybe you could get a ticket. 

Consumer credit card issuers, consumers, regulators, certainly 

members of this subcommittee, should all agree that the Federal 

Reserve Board’s recent proposed rule changes to Regulation Z are 

long overdue. 

Presenting potential credit card customers with easy-to-read, 

clear, and understandable disclosure statements that plainly summarize the terms, fees, and interest rates that come with a particular card is more than just a good idea. It’s a good idea that 

should have been implemented a long time ago, and without the 

necessity for Federal involvement. 

Such a requirement is not only ridiculously obvious, it is profitable. Informed consumers are not only happier people, they are better long-term customers. 

Over the past 15 years, credit card issuers have increased the 

number of solicitations sent to consumers by more than 500 percent. Consumer protection has, sadly, not kept pace. 

When finalized, the proposed changes to Regulation Z will allow 

millions of Americans to put away their magnifying glasses, legal 

dictionaries, and crystal balls when combing through the piles of 

credit card offers they receive every month. Unfortunately, however, they will still need their life jackets and umbrellas to keep 

them from getting soaked by some of the more sinister credit industry practices that have, sadly, become commonplace. 

7

Perhaps the most infamous of these practices is universal default, a practice that substantially increases a consumer’s annual 

interest rate because, just once, they forgot or failed to pay any 

other creditor on time. 

There is also double-cycle billing, a system under which a card 

issuer assesses interest retroactively on debts that may be partially 

or almost completely paid off. 

Then, of course, there are so-called pay-to-pay fees, under which 

the credit card consumer is charged simply for the opportunity to 

pay their bill online or by phone, bills that are deliberately sent 

late in the month. 

Each of these practices are legal; none of them are fair. None of 

them are necessary. There is no question that the consumer credit 

industry is critical to our economy, and that our credit cards have 

been a boon to millions of American households. But the protection 

of consumers is not the credit card industry’s job, it is ours. And 

it is past time for consumer interests to get a boost. 

As a small contribution to this rebalancing of interest, I have already introduced legislation that addresses the pay-to-pay problem. 

I am looking forward to hearing from our witnesses about industry 

plans to correct some of these and other egregious practices. It is 

my hope that they will be able to tell us about their plans to pursue more responsible, consumer-friendly business practices, and 

how quickly they plan on doing so. 

But I am not quite ready to give up my crystal ball. Thank you 

very much, Madam Chairwoman. 

Chairwoman MALONEY. Thank you. Ranking Member Gillmor, 

for 5 minutes. 

Mr. GILLMOR. Thank you, Madam Chairwoman, for calling this 

hearing today. And I also appreciate your comments on the issues 

in your opening remarks. 

Americans today have access to the best financial services in the 

world, and a critical part of those services is the credit card. The 

credit card industry has expanded rapidly over the past decade. We 

now have close to 700 million cards in use, and if my mailman is 

right, there are a few thousand more. 

The popularity of the credit card as a payment option has allowed for an evolution of credit card policies and fees. There are literally thousands of products offered by credit card issuers, all with 

different fees, rates, and features. 

With market competition and innovation, credit card issuers 

seem to be willing to adjust their products when consumers demand that a change is necessary. 

Recently, some of the largest credit card companies voluntarily 

modified some of their risk-based pricing policies, such as doublecycle billing. And I would expect this trend to continue, as a consumer with a bad deal can now shop around with more ease. 

Due to the nature of credit cards, fees are a major component of 

how an issuer is able to recoup the dangers of extended credit with 

no collateral. It is fair for banks to constantly evaluate how best 

to charge for the risks associated with particular segments of borrowers. What is unacceptable is for issuers to hide fees, policies, or 

practices from their customers. 

8

Disclosure is a major part of the answer, and that’s why earlier 

this year Ranking Member Bachus and I sent a letter to Fed Chairman Bernanke requesting a prompt review of Regulation Z. I am 

pleased with the work of the Federal Reserve, in putting out this 

proposal, by completing overhauling the notices presented to perspective and active credit card customers. Consumers should be in 

a better position to evaluate their terms and to shop around. 

In particular, I was pleased to see the Federal Reserve attempt 

to simplify the disclosure of fees and interest. By presenting the 

customer with a box detailing their interest rate charges and fees 

for the year, the periodic statement will become a wake-up call for 

some Americans who have experienced the problems of reckless 

spending. 

From this exercise, and extensive consumer testing, the Fed 

hopefully has a clear picture of what the average credit card customer understands about their account, and what they do not. I 

look forward to closely examining the comments offered by the witnesses today, and to further revisions to this proposal. I yield back 

the balance of my time. 

Chairwoman MALONEY. Thank you. Congressman Scott, for 1 

minute. 

Mr. SCOTT. Thank you very much, Madam Chairwoman. Again, 

this is certainly a very, very timely hearing. It is a very, very important hearing for us, and credit cards have a great purpose, but 

we have some tremendous problems. 

And more needs to be done, such as: eliminating unfair retroactive penalty rate hikes; requiring card issuers to apply consumer 

payments to a portion of their debt with the highest interest rates; 

and prohibiting over-limit fees from being repeated for a single 

over-the-limit purchase. 

We have to do more focusing on the fundamental problems in 

credit card marketing that allow these issuers to change the rules 

at any time, and impose retroactive interest rate increases. 

Now, I understand that we cannot and we will not, put all the 

blame on the card issuers, as some people just have bad credit. We 

know that. They make mistakes. However, it seems to me that 

many of these banks are simply not straightforward about their 

varying and confusing charges and rates. The so-called practice of 

universal default is of major, major concern. 

And, in conclusion, Madam Chairwoman, I would just like to say 

that credit cards do serve a purpose. And as we said, we are not 

here to cast blame upon them. We need them. We just need them 

to be right, and to treat the American people right, because it is 

a fact that significant and aggressive changes have been made by 

the industry over the past decade, at the expense of their customers. I believe it is of utmost importance that these issues are 

addressed. Thank you, Madam Chairwoman. 

Chairwoman MALONEY. Congressman Castle, for 5 minutes. 

Mr. CASTLE. Thank you, Madam Chairwoman. I will submit a 

statement for the record, and I will try to do this relatively briefly. 

I am one who believes that credit cards are indispensable to our 

consumer economy in America today. I doubt if there is anybody in 

this room who does not use credit cards. My father is probably the 

last person not to use credit cards, if I had to guess. They are just 

9

a fact of life. Probably most people in this room are carrying more 

than one credit card, if I had to guess. 

I believe that it is absolutely vital that we have transparency 

here, that people understand what they are dealing with. A lot of 

the confusion—I am from Delaware, where we have a lot of credit 

cards—but a lot of the confusion that comes into play happens because people simply don’t understand what the ground rules are. 

They understand that they are going to have to pay interest. 

They understand that they are going to have to pay late charges. 

They understand, perhaps, fees for a card, or whatever it may be, 

and there are certain practices which I think you all are addressing, and some of the bigger credit card issuers are addressing 

themselves, but there are a lot of little things that I think fall into 

the category of non-transparency. 

I think it is very hard to read some of the so-called disclosures, 

or even the bills and the forms, and understand exactly what it is 

you are supposed to do. I can tell you in my own case, I never know 

when I am supposed to pay my credit card payment by; it is usually very hard to determine that. 

So, I think exposing that, and making it as public as we can is 

vitally important. Whether or not we should do that by legislation 

or regulation, or working with the credit card issuers is something 

I am not as sure about, but I am doggone sure that needs to happen. 

I think there are practices which are questionable. Some of the 

fees which are charged, the universal charges, some of the other 

things that we have seen, which are very questionable, should be 

looked at carefully, as far as credit cards are concerned. 

I also think that the consumers themselves, all of us who are 

consumers, need to be paying attention to this, as well. I mean, it’s 

sort of burying your head in the sand to say that, ‘‘The credit card 

companies sent me 20 credit cards. They are at fault. I accepted 10 

of them, and I spent this amount of money, and now I am in serious debt.’’ It’s like saying a bartender kept filling your glass, when 

you asked him to fill your glass. There has to be some understanding by the consumers of what their responsibilities are, as 

well. 

But I just sense this lack of connection between what is happening in the marketplace, and what people understand of what 

their responsibilities are. And I think that we should, as a group, 

work together to attempt to make all of that as clear as possible, 

be it the box or some other methodology, to make absolutely sure 

that there is a clear understanding of what we are dealing with. 

With that, I think we would resolve a lot of the problems, and 

that way, individuals who are saying, ‘‘We didn’t understand what 

was happening,’’ will no longer be able to use that excuse, and 

maybe they can’t pay their credit cards for a variety of reasons, but 

the excuse won’t be they didn’t comprehend or understand what 

the circumstances are. 

I would hope that all of you in the various agencies would work 

very hard towards this end. We started to see some of that, and 

I think that’s positive. And I think our committee is going to be vitally concerned about it. 

10

I would like to associate myself with practically all the segments 

I heard here today by each of the members. I believe that we have 

identified what a number of the problems are, and what we have 

to do for solutions. And, hopefully, we can do it in a way that will 

benefit everybody, and not be too Draconian. With that, I yield 

back. 

Chairwoman MALONEY. Congressman Cleaver, for 3 minutes; he 

has offered an important bill on this subject. 

Mr. CLEAVER. Thank you, Madam Chairwoman. I would also like 

to express appreciation to Congressman Ackerman and Congressman Ellison, who, along with you and the ranking member, are extremely interested in, and committed to doing something about this 

issue. 

Fortuitously, today’s Washington Post carries a very, very sad 

story about a woman by the name of Erica Bermudo, who left college last year with $5,000 in credit card debt. There is no way in 

the world she should have ever gotten a credit card in the first 

place. 

And Congressman Udall and I drafted legislation based on what 

we had seen, and the complaints received like those from Ranking 

Member Bachus. And they ought to: require advance notice of interest rate increases, unless they reflect the end of an introductory 

rate for new accounts, or indexation to rate; require letting card 

holders avoid paying a higher rate by canceling the card in time; 

require card holders paying by mail to be told the date on which 

a mail payment must be postmarked, in order to avoid fees charged 

or increased interest rates; require that if a card issuer accepts 

payments made in person, a payment made at least one day before 

the due date would mean no late payment penalties; bar changing 

fees or other penalties because a credit card holder pays more than 

the monthly premium, or pays in full an existing account balance; 

bars imposing fees for charges that put a card over the credit limit 

if the issuer has authorized that charge, either in advance or at the 

time of the purchase. And it also requires that if a college student 

without employment is issued a card, that the parent or someone 

with a job assume responsibility for that card. 

The last time we held a hearing on this subject, as I began to 

talk about this, one of my colleagues mentioned that the representative of the credit card industry was shaking his head, which has 

inspired me, because I know, then, that we must be going in the 

right direction. 

We are representatives of the people of this country, and we get 

complaints over and over and over again with what is going on in 

the credit card industry. This means that change is needed. And 

change does not roll in on the wheels of inevitability. This means 

that we must make the changes, and I am prepared to do so. 

I yield back the balance of my time. Thank you, Madam Chairwoman. 

Chairwoman MALONEY. Congressman Hodes, for 1 minute. 

Mr. HODES. Thank you, Madam Chairwoman. I want to thank 

you for holding this important hearing, and to associate myself 

with the remarks of my colleagues, especially those of Mr. Cleaver. 

11

I am very concerned about credit card practices in this country, 

and the impact that these practices are having on my constituents 

in New Hampshire. 

Frankly, we are a nation in debt, and a nation of individual debtors. Credit cards have given consumers unprecedented buying 

power, and help to propel our economy. But easy credit and confusing credit card company practices have come with a very high 

price for many consumers. 

Experian Consumer Direct, a division of one of the major credit 

reporting agencies, issued a study in February of this year stating 

that the average person in this country has four credit cards. The 

report also found that 14 percent of consumers have 10 or more 

credit cards. New Hampshire is one of two States with the highest 

percentage of residents with that many cards. 

So while, clearly, credit cards are a valuable fixture of our economy, the high fees that the consumers face, and the way that disclosures and practices work, are of deep concern. I appreciate the 

proposal on Regulation Z as a first step. It’s a good first step. And 

as you can hear, the tone of Members of Congress is very moderate. 

I have been subject to enough craziness with credit cards on my 

own, as the average everyday consumer, to come to Congress without any patience. I have no patience for the credit card industry, 

and I intend to join with my colleagues to protect my constituents, 

and the consumers of this country. 

Thank you very much, Madam Chairwoman. I yield back. 

Chairwoman MALONEY. Congresswoman Biggert, for 1 minute. 

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

wasn’t going to make an opening statement, but I think there is 

one piece of information that we are missing here, or has not been 

talked about, and that is financial literacy. 

And Congressman Hinojosa and I have been working on this. We 

have a financial literacy caucus here, in the House, and I think 

that what we found is that kids, middle school kids, didn’t even 

know the difference between a check, credit card, and cash. And I 

think that we not only, you know, do—the credit card companies—

and I congratulate all of those who have really worked on financial 

literacy. But to take up—the public agencies have been working on 

financial literacy, and a lot of the private industry. And I think 

that we are making some gains in the education. 

But if we start with the premise that the kids don’t know that, 

and then they get to college, where they are given all of these credit cards without any education, I think it is part of our responsibility, as a public entity, and the private entities, to really increase 

the education, and start probably in the schools. 

And I have been working with schools that have so many programs that are working with the private. So I think that we are 

moving ahead, and it’s not all doom and gloom, that—but it’s amazing that—the lack of financial literacy that people in this day and 

age don’t have, and we need to improve our education on that. I 

yield back. 

Chairwoman MALONEY. Congressman Ellison, for 1 minute. 

Mr. ELLISON. Madam Chairwoman, thank you for allowing me to 

weigh in at this point. I do have a statement I would like to submit 

for the record, but just briefly, I would like to say that this conVerDate 0ct 09 2002 16:27 Oct 18, 2007 Jkt 037552 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\37552.TXT HFIN PsN: TERRIE
12

versation takes place within the context of flat or declining real 

wages for working people, rising health care costs, stricter bankruptcy rules, and a generally difficult time for the working and 

middle-class people of the United States. 

So, where do credit cards fit into this profile? Some of the practices just make things worse. And I would just like to urge the industry to remember that we cannot kill the goose that laid the 

golden egg. When the American working person, who is also the 

American consumer, begins to feel the pinch too severely, it’s not 

long before the corporate structure will begin to feel that same 

pain. Just as we have seen foreclosures in the subprime market, 

we have now seen the difficulties for people on Wall Street. 

So, I commend those parts of the industry that have said that, 

‘‘We are not going to engage in universal default, double-cycle billing, pay-to-pay,’’ but I agree that when the pressure of competition 

comes down, we need to keep good lenders good. I am in favor of 

banning these practices, because I want our financial industry to 

maintain a good reputation among American consumers, and I 

think it has suffered a lot under some of these questionable, unethical practices. 

I just want to say, as I wrap up my remarks, that there is something known as a dram shop action. That means if you’re sitting 

in a bar, and they keep on pouring, and you keep on asking, that, 

yes, the consumer may have responsibility, but the bar will, too. 

But the bar will, too. 

So, I think it’s important for us all to bear in mind, that while 

financial literacy is important, and while disclosure is important, 

responsibility of the industry cannot be misdirected or sent away. 

Thank you. 

Chairwoman MALONEY. And, finally, Congressman Hinojosa, for 

1 minute. 

Mr. HINOJOSA. Thank you, Madam Chairwoman. I want to thank 

you, and express my sincere appreciation to you for holding this 

important hearing on credit cards today. I look forward to participating in future hearings on this issue. 

I understand that credit cards are used by credit bureaus and 

others to help determine credit worthiness of those seeking to purchase goods and services. And so I say that it is extremely important for me to identify myself with the other members who have 

expressed concerns on what is happening in this industry. 

However, I must stress in the 1 minute given to me by the chairwoman, to express concerns that I have with college education and 

savings, as it refers to credit cards. We are trying to reauthorize 

the Higher Education Act this year. And in all the hearings, we 

hear about how difficult it is on the two things that we talk about, 

and that is accessibility to higher education, and affordability. 

Credit cards are being used to address the need for affordability 

to buy books, to pay for college tuition, and many things like that. 

Why? Because savings in this country are now negative, compared 

to the 3 percent we used to save 10 years ago. And credit cards are 

contributing to this problem of negative savings, and the negative 

problems in being able to afford college education. 

I invite you to join our coalition of Jump Start. Judy Biggert and 

I have worked with financial literacy education being available to 

13

students and parents at the 9th, 10th, 11th, and 12th grades, and 

in other groups, not just the high school students. 

But there is a serious problem, and if we can’t work together to 

address it, then you force Congress to then make it very difficult 

to use a credit card for the purposes that I have expressed my concerns. So I invite you to dialogue with us, so that we don’t have 

to go so far beyond what is necessary to prevent use of cards as 

it refers to college education. With that, I yield back, Madam 

Chairwoman. 

Chairwoman MALONEY. Thank you very much. And any other 

statement can be put in the record. 

We are very fortunate today to have an all-star cast testifying: 

the Honorable Frederic Mishkin, Governor, Board of Governors of 

the Federal Reserve System; the Honorable John Dugan, Comptroller, Office of the Comptroller of the Currency; the Honorable 

Sheila Bair, Chairman, Federal Deposit Insurance Corporation; the 

Honorable John Reich, Director, Office of Thrift Supervision; the 

Honorable JoAnn Johnson, chairman, National Credit Administration; and the Honorable Richard Neiman, superintendent of the 

New York State Banking Department, who is representing the 

Conference of State Banking Supervisors. 

Thank you all for coming, and we look forward to your testimony. 

Governor Mishkin. 

STATEMENT OF THE HONORABLE FREDERIC S. MISHKIN, GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. MISHKIN. Chairwoman Maloney, Ranking Member Gillmor, 

and members of the subcommittee, I appreciate the opportunity to 

discuss the Federal Reserve Board’s May 23rd proposal to make 

credit card disclosures more effective. 

In the last 25 years, credit cards have gone from being fairly 

common to being nearly ubiquitous. At the same time, credit cards 

have become more complicated, with more features and more complex pricing. Their complexities have bred concerns about the fairness and transparency of marketing practices, and account terms. 

The Federal Reserve Board believes our proposal helps to address many of these concerns. Our proposal seeks to ensure that 

consumers receive key information about the cost of credit cards in 

ways they can understand, in formats they can use, and at times 

when it is most helpful. 

It is our belief that more effective disclosure will make consumers less likely to fall into traps for the unwary, and better able 

to choose suitable products and to use them wisely. Better disclosures should also enhance competition among credit card issuers, 

and competition is usually the best cure for unfairness. 

As we developed new disclosures, we considered what individual 

consumers themselves had to say about them by conducting extensive consumer testing. In one-on-one interviews, consumers told us 

what information they find useful when making credit card decisions, and what information they ignore. We learned which words 

and formats for presenting information promote understanding, 

and which do not. 

14

These lessons are reflected in a myriad of preliminary judgements we have made about the appropriate content, format, and 

timing of disclosures. I want to highlight some of the improvements 

our proposal would make. 

Advertisements of so-called fixed rates would be restricted to 

rates that are truly not subject to change, either for the life of the 

account, or for a clearly disclosed period. 

The Schumer Box, currently required only with credit card solicitations and applications, would be updated to more effectively 

present information about rates and fees. 

Summary tables, similar to the Schumer Box, would accompany 

the lengthy, complex credit agreements that consumers receive at 

account opening, and when terms change. Penalty rates and fees 

would be highlighted in the Schumer Box, and in the other summary tables, and a reminder of late payment penalties would appear on every periodic statement. 

A consumer would be sent notice 45 days before a penalty rate 

was imposed, or the rate was increased for other reasons. 

Fees would be highlighted on the periodic statement. Fees would 

be grouped together in a prominent location. Fees would also be totaled for the billing cycle, and for the year-to-date. 

Another way of disclosing the cost of credit, the effective APR, is 

the subject of two alternative proposals: One, to try to make it 

more meaningful; and two, to eliminate it if a meaningful disclosure is not reasonably attainable. 

A warning about the higher cost of making only the minimum 

payment would appear on the periodic statement, as the Bankruptcy Act requires. The proposal seeks to fulfill the spirit, not just 

the letter, of the Act. It would provide creditors incentives to base 

their estimate of the time to repay the balance on actual account 

terms, and to place that estimate directly on the periodic statement, rather than ask the consumer to call a toll-free telephone 

number. 

We expect that these and other aspects of our proposal would 

help consumers and improve competition, without imposing unwarranted burdens on credit card issuers. We have detailed the reasons for this expectation at great length, so that the public can 

evaluate our proposal, and tell us how we can do better. 

Madam Chairwoman, I look forward to our continuing efforts to 

ensure that consumers with credit are well informed, and consumer 

credit markets are well functioning. I am happy to address any 

questions you and the members of the subcommittee might have. 

Thank you. 

[The prepared statement of Governor Mishkin can be found on 

page 249 of the appendix.] 

THE HONORABLE JOHN C. DUGAN, COMPTROLLER OF THE 

CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. DUGAN. Chairwoman Maloney, Ranking Member Gillmor, 

and members of the subcommittee, I appreciate this opportunity to 

discuss the effectiveness of credit card disclosures and related 

issues. 

15

The credit card is, in many ways, a remarkable success, evolving 

from a novelty to an essential payment device for roughly threefourths of American households. Credit card terms, marketing, and 

account management practices have also been evolving, in response 

to intense competition for customers and revenue. 

This competition has led to the virtual elimination of annual 

fees, lower interest rates for most consumers, and increased credit 

availability for more Americans. But competition has also led to 

more complex and aggressive pricing structures, as issuers seek to 

more effectively target customers, generate additional revenue, and 

manage their risks. 

Indeed, from a lender’s perspective, credit card loans are perhaps 

the riskiest form of consumer credit. Unlike a home mortgage, a 

credit card loan is unsecured and open-ended. That means the borrower can increase the loan amount at any time, up to a specified 

limit, and the borrower can keep large balances outstanding for 

long periods. 

As a result, credit card accounts require substantial ongoing risk 

management, because a borrower’s creditworthiness can deteriorate 

over time. One way that card issuers mitigate this risk is through 

changes in pricing, whether through increased interest rates or 

fees. 

Such risk-based pricing can be an important risk management 

tool. But the practice has also generated sharp criticism and numerous complaints, especially from consumers who were unaware 

that the cost of their credit could increase. 

This last point implicates the key focus of this hearing, the effectiveness of disclosures. As the GAO noted last year in its comprehensive report, disclosures are the primary means under Federal law for protecting consumers against inaccurate and unfair 

credit card practices. 

Unfortunately, disclosures plainly have not kept pace with the 

changes and complexities in credit card practices. Neither has disclosure regulation. In particular, such practices as universal default and double-cycle billing have been especially difficult for consumers to understand, given current disclosure rules. 

The OCC does not have the legal authority to issue regulations 

under the primary consumer protection statutes that govern credit 

card lending. Nevertheless, we do supervise many, but not all, of 

the largest credit card issuers. As described in detail in my written 

testimony, the OCC has a comprehensive risk-based program for 

oversight of credit card lending by national banks, using four primary tools: examination; complaint analysis; supervisory guidance; 

and enforcement. 

But there are limits to what the OCC can accomplish alone to 

reform disclosure practices, and that is why the Federal Reserve 

undertaking to revise its disclosure rules is so important. Changes 

to Regulation Z would set new standards that apply to all participants in the credit card industry. 

And improved effective disclosure of credit card terms can have 

three fundamental benefits for consumers: first, informed consumer 

choice; second, enhanced issuer competition to provide consumers 

the terms they want; and, third, greater transparency that will 

hold the most aggressive credit card practices up to the glare of 

16

public scrutiny and criticism, making issuers think long and hard 

about the cost of such practices before implementing them. 

Our preliminary reaction to the Board’s proposal is very positive, 

as it incorporates many of the approaches to effective consumer disclosures that we previously recommended. Nevertheless, we do expect to provide additional suggestions during the comment period. 

A lingering question, of course, is this: Can improved disclosure 

be sufficient to address the fundamental issues raised by current 

credit card practices? We certainly hope so, and we believe changes 

to Reg Z show real promise for addressing a number of these 

issues. 

Moreover—and this, frankly, is partly due to public criticism 

raised by members of this subcommittee and others—most national 

bank issuers have already moved away from such practices as universal default and double-cycle billing. 

In addition, there are potential costs associated with going beyond disclosure. For example, proposals to restrict risk-based pricing could have unintended consequences regarding banks’ ability to 

manage risks, or on the availability and affordability of credit 

cards, more generally. 

As Congress continues to weigh these issues, the OCC stands 

ready to provide additional information that the subcommittee may 

need, based on our supervision of national banks. Thank you very 

much. 

[The prepared statement of Comptroller Dugan can be found on 

page 131 of the appendix.] 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Chairwoman Maloney, Congressmen Castle and Bachus, and members of the subcommittee, I appreciate the opportunity 

to testify on credit card practices. 

Today, more American households are using credit cards than 

ever before. Three in four households have some type of credit card. 

Nearly half carry a month-to-month balance, despite the high 

APRs. And the size of that debt burden for the typical household 

has increased by two-thirds since 1989. 

Recent growth in credit card debt is notably significant among 

lower-income people and young people, a trend I find troubling. 

FDIC-supervised banks have about 15 percent of the total credit 

card debt for all banks. That amounts to $104 billion of reported 

credit card receivables, with most of that consolidated in the two 

largest FDIC-supervised credit card banks. 

Bank credit card practices are examined as part of both our safety and soundness examination and our compliance examination. 

This coordinated approach is especially important in supervising 

credit card banks, where safety and soundness and consumer protection issues overlap considerably. 

Last month, as you know, the Federal Reserve Board proposed 

amendments to Reg Z, the rule that implements the Truth in Lending Act, which governs credit card lending and other forms of credit. These new rules would make important changes to the format, 

timing, and content requirements for billing statements and other 

notices given to consumers about their credit cards. These changes 

17

should significantly improve the quality of credit card disclosures 

and are a highly positive step forward. 

TILA is, for the most part, a disclosure-based statute, as it applies to open-end credit. This may not be the best vehicle for prohibiting certain controversial practices, many of which were identified in the recent Government Accountability Office report. Some of 

these problematic practices are very complex, and difficult to explain. I am not convinced that full disclosure will completely address them. 

I would also like to note that while practices in the prime market 

have raised many concerns, we often see more egregious practices 

in the subprime credit card market. These include deceptive marketing, inadequate account disclosures, and accounts that have little or no credit left after opening fees and other charges are imposed. 

We use our supervisory authority to address unfair and deceptive 

practices by the banks and thrifts that we supervise. However, the 

FDIC does not have rulemaking authority under the Truth in 

Lending law, or the FTC Act. 

The FDIC is reviewing to what extent troubling credit card practices can be adequately addressed by supervisory action, or if some 

of the practices can be addressed through our safety and soundness 

rulemaking authority. It may be that some of these practices would 

best be addressed through rulemaking under unfair and deceptive 

acts and practices. 

Let me end by saying that growth and innovation in the credit 

card industry has had many positive effects on the economy and 

consumer access to credit. However, current industry practices and 

increasingly complex product innovations pose major challenges in 

maintaining a balance between bank profitability and consumer interest. Thank you very much. 

[The prepared statement of Chairman Bair can be found on page 

85 of the appendix.] 

STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, 

OFFICE OF THRIFT SUPERVISION 

Mr. REICH. Good morning, Madam Chairwoman, Ranking Member Bachus, and members of the subcommittee. Thank you for the 

opportunity to address current issues with credit card lending by 

the thrift industry. 

By statute, thrifts must maintain 70 percent of their assets in 

mortgages and mortgage-related assets. However, this requirement 

makes accommodation for certain retail lending activities of thrifts, 

including credit card lending. This benefits consumers by increased 

competition among lenders, and promotes asset diversification and 

balance in a thrift operation, by avoiding exposure to a narrowlyfocused lending strategy. 

The authority for Federal thrifts to issue credit cards is subject 

to OTS authority to supervise this activity. OTS authority includes 

the ability to examine, regulate, and limit the credit card operations of a Federal thrift to protect the institution and its customers. 

In addition to monitoring the performance and capital of thrift 

credit card lenders, we monitor the marketing, pricing, fee, and 

18

servicing practices of these programs. An important component of 

this is overseeing compliance with consumer protection laws, and 

institution account management and collection activities. 

We are particularly mindful of reputation risks that could undermine the safety and soundness of an institution and/or the Federal 

thrift charter out of which an institution conducts its credit card 

operations. 

In connection with our examination approach, we regularly conduct combined exams for safety and soundness and compliance 

with Federal consumer protection laws, including the Fair Lending 

Act, the Equal Credit Opportunity Act, and the Truth in Lending 

Act. 

We also examine for compliance with our regulations that prohibit discrimination and misrepresentations in advertising. 

We also track individual institution consumer complaints relating to various potential regulatory violations, including credit card 

lending programs. 

I should also mention that we hope to soon finalize an agreement 

with the Conference of State Bank Supervisors that will be a 

framework for sharing consumer complaint information with the 

States. 

Consumer complaint records play a significant role in our examinations, in assessing an institution’s compliance management program, and in pursuing corrective action that may be appropriate to 

address programmatic weaknesses or deficiencies. 

We follow up with institutions on all consumer complaints filed 

with the Agency. This process is subject to stringent review timeframes, and we strive to provide timely and complete responses to 

consumers in all matters. We encourage institutions to resolve complaints directly, but we intervene when necessary to resolve a dispute. 

Fundamental to our oversight is ensuring that institutions conduct their activities in a manner consistent with sound consumer 

protection. If an institution’s lending programs are potentially 

predatory, or lack adequate controls to support responsible lending, 

there are numerous options we can take to eliminate these risks. 

These include formal and informal supervisory approaches. While 

we often find informal actions to be sufficient and effective, we do 

not hesitate to use our formal enforcement authority when it is appropriate to do so. 

With respect to the Fed’s proposed revision to Regulation Z, the 

proposal provides consumers with more time, better practical disclosures, and more comparative information upon which to make 

important credit decisions. 

I support these modifications, and encourage the Fed to consider 

all practical solutions to minimize potential regulatory burdens, 

particularly on smaller institutions under the proposal. 

The OTS will continue to work with our institutions to ensure 

safe and sound underwriting standards, and strong consumer protections. Thank you, Madam Chairwoman, and the members of the 

subcommittee, for holding this hearing, and for the opportunity to 

present OTS’s views on these issues. 

[The prepared statement of Director Reich can be found on page 

281 of the appendix.] 

19

STATEMENT OF JOANN M. JOHNSON, CHAIRMAN, NATIONAL 

CREDIT UNION ADMINISTRATION 

Ms. JOHNSON. Good morning. Thank you for giving me the opportunity to testify today regarding improving credit card consumer 

protections. This is a timely and important subject that merits congressional oversight, and I commend you for your interest in improving the rules available to help consumers as they face a crowded landscape of credit card options. 

The Fed implements truth in lending through Reg Z, which applies to both Federal and state-chartered credit unions. NCUA is 

responsible for enforcement of Reg Z for Federal charters, while the 

FTC has responsibility for enforcement in state-chartered credit 

unions. 

Additionally, Federal credit unions are subject to further requirements specified in the Federal Credit Union Act. Regardless of the 

source of regulatory authority, NCUA places a priority on ensuring 

that credit unions make clear and concise disclosures to members, 

and also work to protect consumers against inaccurate or unfair 

billing practices. 

NCUA uses regulatory alerts, letters to credit unions, and legal 

opinion letters to inform credit unions of their responsibilities to 

consumers under Reg Z. This regime has created a solid basis for 

credit union compliance with the law, and has promoted a system 

where credit card services are provided to members in a fair and 

understandable manner. 

Before I discuss specifics of NCUA oversight of credit unions, I 

would like to describe the industry’s participation in credit card 

services. As of March of this year, just over one-half of all federallyinsured credit unions offered credit cards to their members. Credit 

unions hold roughly 3 percent of the credit card market. Credit 

card loan growth in credit unions has averaged 4.2 percent over the 

last 5 years, and credit card balances represent 5 percent of total 

credit union loans. 

I want to underscore the fact that Federal credit unions are subject to an 18 percent cap on loan rates imposed by NCUA regulation. This cap has been in place since 1987. NCUA’s policy is to include any credit fees as finance charges for purposes of the 18 percent cap, if those fees would be defined as a finance charge under 

Reg Z. 

The average outstanding credit card balance at year-end 2006 

was just over $2,000, with an average interest rate of slightly more 

than 11 percent. These rates are lower than the national average 

for credit cards issued by other providers. 

I also note a 2005 Woodstock Institute study that found pure 

complexities and more consumer-friendly terms offered by the 10 

largest credit union issuers, versus other large issuers. 

Another issue relevant to the credit card discussion is that of 

Federal pre-emption of State law. NCUA has narrowly exercised its 

authority to pre-empt State laws, pre-empting only those laws affecting rates, terms, and conditions of loans offered by Federal 

credit unions, and other laws affecting certain fees. 

NCUA does not pre-empt State consumer disclosure laws, particularly those that emphasize plain-English descriptions that help 

20

consumers gain a better understanding of terms, or laws pertaining 

to insurance, collections, contracts, or attorneys’ fees. 

While our general observation is that States in the areas of disclosure have taken steps in the right direction to protect consumers 

from harmful practices, NCUA believes having Federal requirements is beneficial for two reasons: One, it means a consistent, national practice, so that consumers in one State will get the same 

disclosures as those in another State; and, two, it clarifies the rules 

for financial institutions with locations in more than one State. 

I now want to turn to oversight, and enforcement of Reg Z. 

Through its examination and complaint monitoring process, NCUA 

plays a significant role in making certain that consumers are appropriately protected. 

During its safety and soundness exams, NCUA also clearly communicates to the credit union its responsibilities for complying with 

consumer protection rules, including Reg Z. We also communicate 

penalties that could result from violations. When a violation is 

noted, corrective actions are taken. 

During the almost 8,000 exams completed in Federal credit 

unions in 2006, NCUA noted 305 violations of Reg Z; 17 of those 

violations were specific to credit cards, and were addressed through 

the examination process, or other NCUA methods, such as documents of resolution or examiner findings. All of these can adversely 

affect the credit union’s CAMEL rating. 

NCUA also maintains a structured consumer complaint resolution process. Our agency’s Web site features a complaint center 

where consumers can directly contact our regional directors to register complaints or problems. Complaint logs since 2004 show few 

complaints about credit card practices. The 80 that specifically pertained to credit cards focused on misunderstandings of terms and 

payment disputes, and they were resolved by our regional staff. 

The Fed is in the midst of an extensive review of Reg Z, and we 

are assessing these changes, and are pleased with many of the 

changes we see. 

In closing, I would like to say that although it’s not a panacea, 

financial education, in concert with effective regulation and responsibility, can play a key role in improving consumers—empowering 

consumers to make the right choices. And we look forward to working with you to make these changes. Thank you. 

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

185 of the appendix.] 

STATEMENT OF RICHARD H. NEIMAN, SUPERINTENDENT, NEW 

YORK STATE BANKING DEPARTMENT, ON BEHALF OF THE 

CONFERENCE OF STATE BANKING SUPERVISORS (CSBS) 

Mr. NEIMAN. Good morning, Madam Chairwoman, and members 

of the subcommittee. I am Richard Neiman, superintendent of 

banks for the State of New York, testifying today on behalf of 

CSBS. 

I am pleased to be here today to share our views on the need to 

improve disclosures and protections for users of bank-issued credit 

cards. Being here also has a special meaning to me, personally, because this is where my introduction to Federal financial institutions and legislation began. 

21

As a congressional intern, I worked my way through college for 

the then-House Banking Committee under Chairman Wright Patman, and staff director, Dr. Paul Nelson. Who would have predicted that I would return to the same committee, over 30 years 

later, only now as superintendent to address this important issue? 

So, I thank you again, and I am very honored to be here. 

Although CSBS has not formalized any Federal policy recommendations, the question of how to best protect credit card borrowers is a priority for State bank regulators, and one with broadreaching implications for State authority, for pre-emption, and the 

balance of our dual banking system. 

Today, I would like to highlight three areas that I believe need 

to be acknowledged and acted upon: one, the most troubling credit 

card practices we have identified in New York; two, the need for 

a Federal response to address abusive practices, and ensure that 

consumers receive meaningful information about credit card terms; 

and three, the important role States have played, and should continue to play, in protecting consumers. 

Credit cards are a major source of complaints for State law enforcement authorities and regulators. In 2006 alone, the New York 

attorney general received 4,000 credit card complaints, second only 

to the number of complaints about the Internet. 

According to the GAO, credit card issues are the largest source 

of complaints for the OCC, the Federal Reserve, and the FDIC. 

In New York, we have identified a number of credit card issuer 

practices that can be misleading or abusive, including those relating to universal default, double-cycle billing, unilateral changes in 

terms, deceptive promotion, and certain excessive penalty rates, 

overlimit, and late fees. 

However, OCC and OTS pre-emption of State laws has significantly limited a State authority to address these issues. A series 

of court decisions over the past 30 years has essentially eliminated 

a State’s ability to protect consumers from abusive lending practices by lenders other than those lenders we directly charter. 

We believe that the public is best served by a system that provides effective and balanced dual Federal/State regulation. The 

Federal Reserve Board’s recently proposed changes to Regulation Z 

are an important step in ensuring that consumers receive meaningful disclosures of credit card terms. 

However, credit card issuers should not perceive that simply by 

complying with required disclosures, they may continue to engage 

in practices that confuse and mislead consumers. Better disclosures, while important, are not a panacea. 

In considering solutions to the problems in the credit card industry, Congress should look at and support the role that States have 

played, and we hope will continue to play, in protecting consumers: 

first, through enforcement actions, such as those brought by the 

New York attorney general against subprime credit card lenders 

for deceptive practices; and second, through regulatory and legislative solutions that can serve as models for Federal regulation. New 

York and other States have pioneered initiatives in all aspects of 

consumer protection that can serve as Federal models. 

Third, through information gathering and monitoring compliance. On the State/Federal front, the regulatory landscape postVerDate 0ct 09 2002 16:27 Oct 18, 2007 Jkt 037552 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\37552.TXT HFIN PsN: TERRIE
22

Wachovia demands more, not less, interaction. One example of 

inter-governmental partnership is the MOU that New York, as the 

first State, entered into with the OCC this past November, to enhance the resolution of consumer complaints. 

States are also in a position to provide valuable public information about credit card practices, and the cost of credit. The availability of credit to Americans across income lines has undeniable 

benefits to individuals, to households, and to the economy. Lending 

practices that have the effect of destroying a borrower’s credit rating and financial future, however, fly in the face of our shared goal, 

which is to make the widest possible range of safe and sound banking services available to consumers. 

We look forward to sharing our views with the Federal Reserve, 

as it continues in the process of amending Reg Z, and we also seek 

additional opportunities to work with the Federal banking agencies 

to share best practices on monitoring compliance and consumer 

protection laws. 

Thank you for inviting me here today, and I would be happy to 

answer questions at the end. Thank you. 

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

266 of the appendix.] 

Chairwoman MALONEY. Thank you for all of your testimony. 

I would like to ask Governor Mishkin, while this proposal is very 

important and a very major, long-awaited updating of credit card 

disclosure, other regulators and consumer advocates believe that it 

is not enough to crack down on abusive practices that my colleagues and I have been talking about today. 

As I understand it, the Fed is the only regulator that has authority to regulate substantive credit card abuses. And I would like to 

ask you if that is correct. And if so, are you planning to use that 

power to regulate the abuses we have been talking about today? 

Mr. MISHKIN. Thank you, Madam Chairwoman. We believe that 

the very key step, in terms of getting markets to work well, and 

to benefit consumers, is that they get sufficient information to 

make decisions that will do two things. One is they can make the 

right decisions, but also, that they encourage people who are providing them with the products to actually give them a product that 

is a good product. 

And our view is that this step that we have taken, in terms of 

this disclosure, is actually a very important step in exactly that direction. 

In terms of whether this will completely solve the problem, we 

don’t know. And surely we will consider whether, in fact, other 

steps might have to be taken. But we also do have to be aware that 

when you write regulations, it’s not easy to do, and you don’t want 

to have unintended consequences that you will find after the fact 

are undesirable. 

So we do feel that this is an important step, in terms of disclosures, that we think that this will have a big impact on the markets, and we are hoping that, in fact, we can get comments on this 

disclosure proposal, and in fact, then take it from there. Thank 

you. 

Chairwoman MALONEY. Well, then, let me move on to the other 

regulators. Would you support a legislative change that granted 

23

you similar authority to that of the Fed, to regulate substantive 

abuses by credit card issuers whom you have the authority to supervise? 

You testified earlier, Mr. Dugan, that you did not have that 

power. Would you support such a legislative change? 

Mr. DUGAN. Chairwoman Maloney, I take it you’re asking about 

regulations to establish unfair and deceptive practice— 

Chairwoman MALONEY. Right, exactly. 

Mr. DUGAN.—more generally, which could be credit cards, could 

be something else. 

Chairwoman MALONEY. Yes. 

Mr. DUGAN. And as I have previously written to the committee, 

I do think that is something that could be useful for, not just the 

OCC, but for other banking regulators to have. 

And the reason why I mention the others is that not only is it 

a useful tool, but so much of the time—credit cards are a good example, mortgage lending is another—you really have to do this on 

an across-the-board basis, and I think sometimes that each of the 

regulators could bring more of a perspective to bear, based on the 

institutions that they specifically regulate. 

And so, that is something that I have supported, but I think it 

should be done across-the-board, and something that should be considered as a way to jointly regulate where that is appropriate. 

Chairwoman MALONEY. Governor Mishkin, would you support 

such a change? 

Mr. MISHKIN. I don’t have a position on that issue. 

Chairwoman MALONEY. Chairman Bair? 

Ms. BAIR. Yes, the FDIC does—we do think it would be helpful 

to have rulemaking authority under the unfair and deceptive acts 

and practices authority, as it would apply to our own banks. 

I agree with John. I think, as a practical matter, that it would 

be done and should be done on an inter-agency basis. If we were 

given rulemaking authority, that would increase our ability to have 

a seat at the table, if you will, to initiate such rulemaking. 

Chairwoman MALONEY. Director Reich? 

Mr. REICH. Well, I agree with the comments that Chairwoman 

Bair just made about the rulemaking authority on an inter-agency 

basis. 

I also agree with a comment that you made in your opening 

statement, that market-based solutions are a very important part 

of, hopefully, resolving many of the practices which we’re talking 

about today. I think, clearly, there is a demonstrated need for the 

development of a set of best practices. 

And my own preference would be that many of the problem areas 

that we’re talking about would be resolved through the adoption—

through letting the market work, the adoption of market-based 

practices, rather than attempting to pass regulations to deal with 

every single area of perceived difficulty. 

Chairwoman MALONEY. And Ms. Johnson? 

Ms. JOHNSON. Yes. If given that authority, we would work with 

our inter-agency colleagues to implement. 

Chairwoman MALONEY. And I would like to ask the regulators, 

and Mr. Neiman, what abusive practices would you start cracking 

down on first? What would you target? 

24

Mr. NEIMAN. Well, I would—because the State’s hands are tied, 

I would look at many of the abusive practices which can be the 

most troubling practices that you have talked about today: universal default; double-cycle billing; and late fees after credit limits 

are exceeded. 

I would look to restoring the balance, either returning power to 

the States to address these issues, but we would also support a national standard, whether through a legislative approach, or working with our colleagues at the regulatory level. 

Chairwoman MALONEY. My time is up, and I—Mr. Castle, or Mr. 

Bachus? Who is—Mr. Bachus? 

Mr. BACHUS. Thank you. Governor Mishkin, in your statement 

you say, ‘‘Further, there are concerns that issuers’ methods of calculating interest, such as the ways they choose to allocate customers’ payments to different balances, are confusing or not clearly 

disclosed.’’ 

And what you are referring to is what I mentioned in my opening 

statement, where the credit card issuers charge different interest 

rates for different purchases or cash transactions. 

And you go on to say, ‘‘The presence in the market of terms 

seemingly unfavorable to the consumer.’’ Now, it would obviously 

be always unfavorable to the consumer to target that to the balance where there is either no interest rate, or where there is a low 

interest rate instead of the high interest rate. That is never going 

to be anything but unfavorable to the consumer, or unfair. 

You say here, ‘‘The presence in the market of terms seemingly 

unfavorable to consumers appears to indicate that the market is 

not fully competitive.’’ Is that one of the practices that you were referring to? 

Mr. MISHKIN. In terms of getting a market to be competitive, 

consumers have to have the information that actually lets them 

make an informed decision. And one of the things that our proposal 

does is it makes it much clearer—and also, for me, in much larger 

print, which is a great help, in terms of getting older, and not being 

able to see as well—that it makes it much clearer that, in fact, this 

is the way that the payments will be allocated. 

Mr. BACHUS. Right. 

Mr. MISHKIN. I think the benefit of that is that competition then 

can start to work. That, in fact, if one credit card issuer is not giving a consumer as good a deal, then consumers, if they know this, 

can actually shop around and get a better product. 

And, in fact, the information that we see being provided about 

this, including congressional hearings like this, are actually helping 

to change industry practices in a positive way. 

Mr. BACHUS. Yes. You know, all of you are regulators, and part 

of your duty is to listen to consumers, those that utilize your institutions. When they come to you with a complaint that their payments are going to their balance with the lowest interest rates, 

which is always unfavorable to them, is there any public interest 

argument that you can give them, why that would be so? 

Or even say this: Is there a risk-based reason that a card issuer 

would not allow their customers to pay off the amounts on their 

higher interest balances first? It seems to me that it’s a safety and 

soundness issue. Any time they applied on the low interest rate, 

25

they increase the likelihood that the consumer will default, and increase the difficulty of them paying their obligation. But— 

Mr. DUGAN. Mr. Bachus, this is an issue, in terms of disclosure, 

that the OCC did address in its guidance with respect to national 

banks, in the sense that we did not feel that national banks were 

adequately disclosing when they were always making the payments 

to the lower balances first. 

And so, we have directed, through our guidance, that we expect 

our banks to make that disclosure clear. And we are gratified that, 

in the proposed change to Reg Z, everybody may— 

Mr. BACHUS. Yes. Let’s say even if you say, ‘‘Make that clear,’’ 

but that still doesn’t—even if they make it clear, these disclosures—even the Fed’s proposal, and what they are going to do, I 

mean, that is better than now. But it is still pretty complex. 

But I guess I would ask each and every one of you, does applying 

it to the low interest balance increase the likelihood of them defaulting or not? 

You know, one of the things that you all are trying to do is encourage people to pay off their credit card debts. We all agree that 

credit card debt in this country is problematic. It seems to me that 

this practice just increases default rates, and increases consumer 

debt loads. I mean, even in the Fed statement, you say that it is 

certainly unfavorable to consumers. 

Is there any safety and soundness or risk-based reason to do 

that? Or is it just to increase your profits? That is the only thing 

to me, the only justification to me is just to increase—there is nothing favorable about it. 

Mr. DUGAN. Mr. Bachus, I think that is a question you should 

ask the issuers on the issuer panel. But as to whether it is a safety 

and soundness risk, we do monitor, from a safety and soundness 

perspective, how issuers are managing their accounts more generally. We look very carefully at those kinds of rules. And we believe they have been able to manage the risk associated, even with 

payments like that. 

We do think it’s important that they disclose it correctly. But 

going beyond that is not something that we felt that we had the 

authority to address. 

Mr. BACHUS. Okay. 

Ms. BAIR. Well, I would say, with regard to the specific instance 

that you mentioned, I would have a hard time seeing a public policy basis for that type of allocation. 

It sounds like there were two problems: one, the consumer wasn’t 

given adequate notice that this payment was going to be treated 

as a cash advance at the higher interest payment; and then, two, 

to add insult to injury, when he made the payment, it was applied 

to a lower interest balance. 

We are carefully looking at this. I would say one argument—now, 

I am fact finding, but one argument that has been made to me with 

regard to the question of the zero balance transfers—is that when 

you have a zero balance transfer situation, and the payments are 

applied there first, the economics of that helps facilitate providing 

the zero balance transfer deals. 

Now, whether that outweighs some of the other issues, I don’t 

know. But that is one situation where a public policy argument has 

26

been made to me that this type of tiered payment allocation facilitates these very low interest transfers to consumers. 

Chairwoman MALONEY. Time has expired. Mr. Watt, for 5 minutes. 

Mr. WATT. Thank you, Madam Chairwoman. Ms. Bair, there are 

two parts of your written testimony that I want to focus on, because they are very troubling. 

One is on page 6, where you talk about the 27 institutions the 

FDIC has identified as credit card lending specialists. First of all, 

before I forget it, would you provide a list of those institutions to 

the committee? 

Ms. BAIR. Yes, I would be happy to. 

Mr. WATT. And you go on to say that credit card lenders—those 

27, I presume—had a return on assets of 3.7 percent in the first 

quarter of 2007, while the banking industry, overall, had a return 

on assets of 1.21 percent. 

And in the first quarter of 2007, the ratio of non-interest income, 

which includes fee income, the average assets was 9.61 percent for 

those 27 credit card specialists, versus 2.09 percent for all insured 

banks and thrifts. 

Ms. BAIR. Yes. 

Mr. WATT. Then, on page 17 of your written testimony, you introduce a concept that I really hadn’t focused on, this subprime credit 

card. I never really had made a distinction between prime and 

subprime credit card lenders. We make that distinction in the 

mortgage field all the time. 

Are these 27 institutions that you identify on page 6 the primary 

subprime credit card lenders that you’re talking about on page 17? 

Ms. BAIR. No. 

Mr. WATT. Or are they two different groups of people that you 

are talking about? 

Ms. BAIR. No, I believe—I will check with our economist—this is 

for the industry, as a whole. We went to— 

Mr. WATT. Okay, how many subprime credit card lenders have 

you all identified, and could you provide the committee a list of 

those— 

Ms. BAIR. Yes, I would be happy to do that. 

Mr. WATT.—subprime credit card lenders, if it is different than 

the credit card lending specialists? 

Ms. BAIR. It would be a different group, and yes, I would be 

happy to provide— 

Mr. WATT. Okay. There would be some overlap, I presume. 

Ms. BAIR. Yes, yes. On page six, we are talking about the industry as a whole, those who specialize in— 

Mr. WATT. Okay. Now, the question I want to ask is are you telling me that the FDIC does not have any authority to address that 

kind of disparity in returns? 

You are talking about 9.6 percent of a credit card specialist income coming from fees or non-interest. I mean, it seems to me that 

there is something wrong with that picture. 

And so, my question is, is there anything that you have done, or 

can do, to address that kind of disparity? 

And can you have a set of rules that is more aggressive for 

subprime lenders, just like we are talking about in the mortgage 

27

area, this notion that we have to have one set of rules that fits everybody, when the violations don’t seem to square up on both sides 

of the ledger, it seems to me to be a misconception. 

Do you have anything that you can do to those people who seem 

to be abusing the system? 

Ms. BAIR. Well, first of all, I would like to say this is for the industry, as a whole. FDIC-supervised institutions are only about 15 

percent of the market. And— 

Mr. WATT. So, then that is in Mr. Mishkin’s territory, is what 

you are saying. And what I keep hearing all of you saying is that 

the Fed hasn’t done squat to really deal with this problem, and 

doesn’t seem to be doing squat to deal with it, even though they 

are the only ones that have the authority to do it. 

So I am going to—I have 1 more minute, and I have my soap box 

here, and you got me on it. Let me talk about my other primary 

complaint, which is you all talk about risk-based pricing. I have absolutely no problem with risk-based pricing. The problem that I see 

is that nobody is assessing the risk out there. 

When I see my father, after he died, getting all of these solicitations, I mean, I would not have given my father credit on a credit 

card. I am serious. It is not your assessment of risk, you have to 

assess some risk before you can do risk-based pricing. Isn’t that 

right? 

Is anybody assessing risk in the credit card industry any more, 

or are they just mailing out and sending the credit card to whomever will fill out an application and send it back in, unsolicited? 

Mr. DUGAN. Mr. Watt, they are assessing the risk. I mean, if 

they are not, they would have a fundamental problem with us, because— 

Mr. WATT. Well, we have a fundamental problem here, because 

there is—you know, these people are just sending out credit cards 

and making money on fees, rather than interest. 

I don’t have any problem with people making money on interest. 

At least that is a fair way that has been disclosed to everybody. 

But when they are not assessing the risk, and they are just building those defaults into—and charging everybody else who is paying 

for it, without any distinction, that is where I get really troubled 

about the practices that are going on here. 

Mr. DUGAN. If I could just follow up on the subprime point that 

you had before, there are—the OCC has had a number of institutions in the past that were engaged in subprime credit card lending. We found a number of problems on the unfair and deceptive 

side that rose to the level where we took a number of strong enforcement actions that resulted in quite a lot of—multi-hundreds of 

millions of dollars—returned to consumers. 

The fact is, now, as it is the same with subprime lending in the 

mortgage business, we don’t have a lot of subprime credit card 

lending, because we have not been— 

Mr. WATT. Well, somebody does. 

Mr. DUGAN. And that may— 

Mr. WATT. Who has it? 

Mr. DUGAN. I cannot answer that question. I can only speak 

for— 

Mr. WATT. Maybe the Fed can tell us. 

28

Chairwoman MALONEY. We are going to break for 10 minutes to 

run for votes, and I am going to ask the panelists to come back. 

Many people have more questions. Thank you very much. 

[Recess] 

Chairwoman MALONEY. I would like to ask Governor Mishkin. 

We have heard everyone on this panel, on both sides of the aisle, 

talk about the challenge that we face, the really—almost a crisis 

in the credit card industry. And many people have testified that 

you are the only one that has the authority at this point to do anything about it. 

I want to compliment the Fed for the truly outstanding leadership that you put forward in the subprime guidance. It was tremendously measured, helpful. It is being implemented, it is correcting the problem. Why are you not moving forward with guidance on credit cards? 

You have the authority to do it. Everyone is testifying there is 

a problem. From your prior testimony, it sounds like you have no 

intention of coming forward with guidance or regulation in this 

area. 

Mr. MISHKIN. I would not characterize it to say we have no intention of going further, that we— 

Chairwoman MALONEY. I am pleased to— 

Mr. MISHKIN. We do want to make sure that we take the appropriate steps at the right time. And we are very open to thinking 

hard about these problems in order to make this market work better. 

The credit card market is incredibly important to the American 

consumer. And, in fact, we very much want to have a situation 

where the markets work well, and that the consumer is actually 

being served well. 

So we feel that our disclosure proposal is a major step in the 

right direction. I think it is a very great improvement over what 

was there before, and we certainly will keep an open mind to try 

to make this market work as well as it possibly can. 

Chairwoman MALONEY. Well, my colleagues join me in thanking 

you for the Reg Z. It is a major step forward. But we are hearing 

from all of the regulators today, and the members on both sides of 

the aisle, that it does not correct abusive practices. I would urge 

the Fed to consider coming forward with guidance, and taking further steps in that direction. 

I will now call on my good friend and colleague from the great 

State of New York, Gary Ackerman. 

Mr. ACKERMAN. I thank the chairwoman, and again, thank you 

for calling this very important hearing. 

You are the people who do the regulating, and the overseeing, 

and the supervising of the industry, which certainly needs all of 

that. And it is very frustrating to hear of all the abuses and things 

that are going on that just seem outright unfair and confusing and 

misleading, very often, to so many consumers. 

It was said this morning during the testimony that competition 

is good for fairness, and, indeed, hopefully it is. But sometimes, all 

the competition is to see who can one-up the other on coming up 

with some kind of complicated scheme that does not put all the information out in front of the public. 

29

And there has been some information to make a decision is absolutely essential for consumers getting a better deal. And that is 

true, also. But in practice, it is highly questionable as to what is 

really happening out there. 

I was actually going to do this with the next panel. But thinking 

about it, I seem to have a credit card, or been doing business with 

everybody that is representing one firm or another. So I thought 

otherwise. So you are stuck with this. 

This is stuff that I get. This is just me. These are just solicitations, every one of them a credit card. I’m a member of the Financial Services Committee, and I used to teach mathematics, and I 

was going to ask this of the next panel, because all this stuff, all 

the information is in every one of them. They disclose everything, 

and you really do need a magnifying glass with some of the type, 

and it is impossible to find, but sometimes there is an asterisk. You 

know, there are footnotes, and then you can’t find the footnotes for 

three pages. And tell me if anybody is going to read this. 

But you are all smart people, and you are regulating the industry, so I am going to give you, as my grandmother used to say, ‘‘a 

for-instance.’’ So, if you have a pencil and paper, that would be 

good. If you have a calculator or a—one of those Black Berrys with 

a calculator in it, that’s fair. Anything you want, a computer, you 

can consult with a friend, call anybody on your cell phone. You can 

poll the audience and come up with— 

[Laughter] 

Mr. ACKERMAN. But here is the question that I face, all right? 

I have a credit card with a limit of $7,500, and I owe $4,200 on 

that credit card, and I am paying a great rate of 6.5 percent. 

And I get this offer, you see, and the offer gives me this—right 

on the envelope, tells me all sorts of things, and then tells me some 

other things and different things, and it offers me a great interest 

rate, some of us call it a sucker rate, but it is a come-on kind of 

a rate of 3.99 percent for a new credit card for 6 months. And then, 

after that, they tell me I am going to have to pay 8.74 percent interest. 

There is also a transaction fee in small print on the next page 

of 3 percent. Now, those transaction fees don’t figure into interest 

rates, so they really change the name. This is one of those New 

York, you know, shell games, where you can’t figure out what’s 

going on, because it’s happening so quick. 

So, the transition rate is not considered an interest rate, so you 

all don’t take into consideration. I have to figure out, because I 

have to pay it in cold cash, whatever they call it. 

But I do know that if you charge me a 3 percent transition fee, 

and I pay it off quick—let’s say in one day—I know that 3 percent, 

if it was on an annualized basis, would be 3 times 365 days in a 

year, which, in a non-leap-year year of 365 days would be 1,095 

percent, almost 1,100 percent if I paid it off. And the quicker I pay 

it off, the more money it is. 

So, if I pay it off slower to amortize that 3 percent fee, I get a 

better deal on an annualized rate, if it was a rate. But then again, 

I get trapped into when they jack the rate up to 8.74 percent, and 

I was only paying 6.5 percent. 

30

So, my question is, if I take one full year to pay it off, and pay 

it off 100 percent after the first year, having transferred my balance of $4,200 at 65 percent at the rate of 3.99 for 6 months, and 

then paid the 8.74 for the rest of the year, what interest rate would 

I be paying? Anybody? I only have 5 minutes. 

[Laughter] 

Mr. ACKERMAN. Time is running out. Would I be paying more at 

the end of that, than if I left it at my original 6.5 percent? And that 

is the dilemma. I withdraw the question. 

[Laughter] 

Mr. ACKERMAN. I didn’t want to embarrass the people who have 

all this power over me, and send me all this great information to 

help me make these informed decisions, because they’re my good 

friends. I know that because they write me so often. 

[Laughter] 

Mr. ACKERMAN. But therein lies the dilemma. What is a poor 

consumer to do? There is something wrong with the interest industry. 

Take underwear, for example. Some people think it is not an option. So you go and buy it in a place like Sears. And you go in 

there, and they are selling underwear. But someone comes over to 

you with a clipboard and says, ‘‘If you take out our credit card, you 

get 15 percent off today, everything you buy.’’ 

So, you fill out the form, and they approve your credit really 

quick, because they do this great investigation of you, and you are 

worthy of having underwear, at least, and they charge you an interest rate of 24.9 percent. You got 15 percent off of the total price, 

but you are still paying 24.9 percent. 

How much do you think they make on the underwear? It is something obscene when you are making more money on the charge 

card than you are on the underwear. It seems that the retail business has caught on that there is more money in the interest, in the 

credit card industry, than in the retail business. 

The underwear is an excuse to charge you interest. They are not 

selling underwear; they are selling credit. And, unfortunately, in 

today’s retail industry, you are going to be paying interest long 

after that underwear wears out. 

Chairwoman MALONEY. I grant the gentleman 60 additional seconds. 

[Laughter] 

Mr. ACKERMAN. Well, I thank the generosity of the—I bought the 

underwear anyway, so don’t be concerned. 

Does anybody have a response to what is going on? And this is 

not a way to inform a consumer. There is no way, when you have 

a system of fees that is not put into the structure, and everybody 

comes up with it’s a 3-month deal, or it’s a 6-month deal, or no interest for a year, and there is no correlation. 

I am introducing legislation that would say, basically, that you 

have to divulge what the annualized rate would be, as if it were 

all interest when you charge a transaction fee. Is there any response to that? 

[No response] 

Mr. ACKERMAN. You all are not regulating that, it seems to me. 

31

Mr. MISHKIN. Let me just add that I think one of the very key 

things we did in this proposal is to actually make it very clear 

what the fees are. And our consumer testing indicated to us— 

Mr. ACKERMAN. What the fees are, but it is clear what the fees 

are. The fees are 3 percent, if you have a magnifying glass, usually. 

A lot of institutions are capping it now, at a specific dollar amount. 

But there is no way for the average consumer to translate that, 

as we did with mortgages, and say, ‘‘Everything has to be expressed in an annualized way so that people can compare apples 

to apples,’’ and there were—we all know about points and this and 

that, that don’t seem to fit into the—but is there going to be an 

addressing of this, or do we have to do that? Because the regulatory industry is not. 

Chairwoman MALONEY. Mr. Mishkin? 

Mr. MISHKIN. One of the things that our consumer testing found 

is that consumers really reacted very strongly to information about 

fees, and that, in fact, the sticker shock from getting information 

about the fees really did have a big impact on their understanding 

of the cost of using credit. 

And this is one of the reasons why we felt that focusing on a separate box on fees, which was a change from what was before—and 

also, on periodic statements, making it clear to people what the 

fees have been, and accumulating it for them—actually can make 

a big difference, in terms of them understanding— 

Mr. ACKERMAN. If the Chair would just indulge me another— 

Chairwoman MALONEY. So granted. 

Mr. ACKERMAN. If you completely divulge it in, you know, 72 

point, bold, chartreuse type, it still doesn’t help the consumer, because each of the credit card companies will inform them, but one 

will give the deal for 3 months, one for 6 months, one for 9 months, 

and nobody annualizes it. 

And just as you were not able to, and I am not able to—unless 

we had a lot of time on our hands—figure out, there is no way to 

compare it. You know, 3 months at 3 percent, or 6 months at 2 percent, or a year—you know, what does it boil down to for me in dollars is really what consumers need to know. 

And it would be a simple thing to do that, because they have 

come up with these methods of expressing and divulging so that 

you can’t figure it out and compare it quickly. But if everybody had 

to express it in the same term, ‘‘This is what it costs you for a year 

for this money, fees and everything, on an annualized basis, whether you take it out for 3 months or a year, or forever,’’ that’s what 

you should be doing. 

Chairwoman MALONEY. Is there any response? And then Mr. 

Green. 

[No response] 

Mr. ACKERMAN. Thank you very much for your interest. 

[Laughter] 

Chairwoman MALONEY. Mr. Green? 

Mr. GREEN. Thank you, Madam Chairwoman, and I also thank 

the ranking member, and, in his absence, Ranking Member Bachus 

for his comments. I too will associate myself with the comments 

that have been made this morning. 

32

It appears that there really is bipartisanship on this committee, 

especially as it relates to the concerns that are being raised today. 

Let me start by asking if everyone agrees with the recommendations of Mr. Mishkin. Am I pronouncing your name correctly, sir? 

Mr. Mishkin, of the Board of Governors? Does everybody agree 

with his recommendations? Is there someone who is of the opinion 

that he has gone too far, or that he hasn’t gone far enough? 

Mr. DUGAN. It is an 800-page proposal, and it came out last 

week. We have looked at it preliminarily, and we like many of the 

things in it, but— 

Mr. GREEN. That is typically the way we do business here. 

[Laughter] 

Mr. DUGAN. I think that we are likely to recommend some other 

additional changes, as we have done in the past. But that is one 

of the things we are studying right now. 

For example, we have talked, as I talked about in my testimony, 

I think we would like to see the Federal Reserve explore the possibility—to the extent that rate changes are made, and they are applied to existing balances, most issuers—or at least most large national bank issuers—provide an opt-out to consumers, and now you 

have 45 days to look at that. 

But not all do; it is not required. I think it would be a question 

about whether that would be something to apply across-the-board, 

to put more of an element of fairness across-the-board. So it’s that 

kind of thing. There are a couple of other things. 

But, generally, this is a very positive proposal, not just for what 

was required to be disclosed, but the way in which it is required 

to be disclosed, in a simpler, more standardized format. 

Mr. GREEN. The opt-out provision, is that something that everyone finds acceptable? Who has a concern with an opt-out provision? 

Anyone? 

Ms. BAIR. No, I think that would be a good addition, to make 

sure that if consumers do want to opt out, if they are given advance notice of a rate change, that they can continue making minimum payments to pay off that balance. I think that is actually 

crucial for the opt-out to be meaningful. So I think that is an excellent suggestion by OCC. 

Mr. GREEN. Is there any aspect of this, including the universal 

default, the retroactive application of increased rates, the doublecycle billing, paying late by paying on the same day but not within 

a certain timeframe on the same day, is there any aspect of this 

that you find abhorrent, to the extent that it is invidious, to the 

extent that you think it shouldn’t exist? 

Mr. REICH. There may be situations where credit card lenders 

may be justified in taking an action that may look something like 

universal default. And that might involve bankruptcy, situations 

where a bankruptcy occurs, or a mortgage foreclosure occurs, that 

a credit card company may be justified in making an immediate 

rate adjustment, based on information that becomes known to 

them. 

And that might look like a universal default situation, and it 

makes me a little bit nervous when we start talking about prohibitions, blanket prohibitions, that we may be initiating a situation 

where there would be unintended consequences. 

33

Mr. GREEN. If you have multiple credit cards, conceivably you 

could have multiple—and all of your payments would be on the 

same date—conceivably, you could have different times on the 

same date to make your payments. I assume that everyone agrees 

with this premise: multiple cards; same date to pay, but you could 

have different times on the same date. 

Would it be helpful to at least have a certain time on the date 

that the payment is due? Such that if you have five cards, you 

don’t find yourself with five different dates. Maybe not likely, but 

it conceivably could happen. 

Is there any way for the industry to do some introspection and 

conclude that maybe this is something that we can work together 

on, so that we don’t have people who are Internet-savvy, who like 

to do things on the Internet, they do it on the last day, and it is 

understandable now, people do this on the last day, they pay. And 

they think that they paid timely, but they find out that there is a 

certain time on that date that you must pay within. Any comments, 

please. 

Mr. MISHKIN. In our proposal, we actually do have a requirement 

that the time of day is actually specified, so it does address the 

issue that you have been talking about. 

Mr. GREEN. Specified? Give me a little bit more information, 

please. 

Mr. MISHKIN. It says when payment is due; it tells you exactly 

the time, as well. 

Mr. GREEN. This is for each card—each card issuer would have 

a specified date that would be made available and known to the 

consumer? 

Mr. MISHKIN. Yes. 

Mr. GREEN. Here is the dilemma, if there is one. It is this: You 

have—some people have 10 credit cards. I don’t advise it. In my 

opinion, if you have one, you probably have about all you need, for 

me anyway, in my— 

Chairwoman MALONEY. I grant the gentleman 60 more seconds. 

Mr. GREEN. Thank you, and I will wrap it up quickly. But would 

it not be helpful if we—if everybody agreed that at a certain time 

on a certain date, that this would be a good thing, to have the card 

holder pay by, as opposed to 12:00, 5:00, 8:00, 11:00, all on the 

same day? Do you follow me? 

Because you can give the time, but if everybody gets a different 

time, I think that that does cause a little bit of confusion with the 

consumer, and it would be great—most consumers, by the way, 

think that midnight is probably the time. If I can pay it by midnight on the date that it is due, I have paid timely. Most don’t realize that there is another time. 

Thank you, Madam Chairwoman. You have been generous with 

the time. I yield back. 

Chairwoman MALONEY. Any comment? 

[No response] 

Chairwoman MALONEY. Okay. Mr. Gillmor? 

Mr. GILLMOR. Thank you, Madam Chairwoman. Mr. Mishkin, I 

think the Fed has done very good work here. I have a question on 

the list of fees, and I think that is good to have that specific list. 

34

But concerns have been raised that the list is exclusive. And 

could a side effect of this be generation of a lot of imaginative new 

fees that don’t have to go on there? Will you comment on that concern? 

Mr. MISHKIN. We had specified the types of fees that do have to 

be disclosed, because it is clear that these are fees that are extremely common in the industry. 

One issue is we never know what kind of innovation we are 

going to have in the financial industry. It is extraordinary, what 

has happened in terms of who could imagine paying bills the way 

we pay them now, using the Internet, for example? 

The problem is that we may not know what the actual new product is that is going to be provided. What we do want to make sure 

of is that when a person actually uses a new product, that the fee 

is disclosed to them at that time. 

In fact, one concern we have is that if the only time that you get 

the fee disclosed to you is in writing is when you actually get the 

credit card, and 3 years later you are actually going to do something because you didn’t think about it before, but you want to 

think about doing it now, we want to make sure that you get the 

fee disclosed to you at that time, so that you can make an informed 

decision at that time. 

Mr. GILLMOR. Thank you. Mr. Neiman, you said that competition 

among credit card issuers has lowered average interest rates, but 

at the same time it has encouraged the expansion of fee-based profit. 

Do you want to explain why you think that is happening? Is that 

because people can figure out the interest rate easier than they can 

figure out the fees? 

Mr. NEIMAN. I don’t remember the reference in the testimony you 

are referring to, but I think one of the concerns—and I think with 

the over-expansion—the greater competition—and I think Comptroller Dugan talked about the expansion of credit cards as a result 

of risk-based pricing, as well as the securitization process. 

But I think that the flip side of that is a greater responsibility 

on the issuance of those cards by the issuers, both with respect to 

an increased responsibility, and, I think, with respect to the ability 

of the borrower to pay. This is very similar to some of the issues 

that you are already addressing in the area of the subprime issue 

in the area, but I think it is critical, as well, in the expansion of 

credit card opportunities. 

Mr. GILLMOR. Thank you. And, Chairwoman Bair, in your written testimony you noted a 40 percent decline in consumer complaints regarding credit cards over the past few years. Do you have 

any thoughts as to why? 

Ms. BAIR. Well, those are just FDIC-received complaints. It is 

still a healthy percentage. Credit cards still generate a healthy percentage of our complaints. We think some of that may be charter 

transfers, that we don’t have as many credit card issuers as we 

used to have. But because we don’t track it, that is a guess. We 

are not really sure. 

Mr. GILLMOR. Okay, thank you. I yield back. 

Chairwoman MALONEY. Thank you. Congresswoman Waters. 

35

Ms. WATERS. Thank you very much, Madam Chairwoman. I have 

to apologize. We had a Judiciary Subcommittee hearing going on 

at the same time, and so I have been back and forth. And the question that I truly wanted to ask should have been asked of the first 

panel, but— 

Chairwoman MALONEY. This is the first panel. 

Ms. WATERS. Oh. 

Chairwoman MALONEY. The regulators. 

Ms. WATERS. Is this still the first panel? 

Chairwoman MALONEY. Yes, it is. 

Ms. WATERS. Oh, this is who I wanted to ask a question. Okay, 

this is who I wanted. 

Credit cards are an absolute almost-necessity. You cannot rent a 

car, you cannot make hotel reservations, and you cannot make 

flight reservations. You can get on the airplane, but if you pay cash 

you are profiled, and you are suspect. That is one of the indicators 

for those who think that they should take a closer look at people 

who are traveling, they may be traveling for criminal purposes, etc. 

So, credit cards are pretty essential for daily life. And since they 

have evolved to that point, I really do think there should be more 

regulation. 

And I am very, very concerned about this whole subprime credit 

card lending. Just as we have the problem with mortgages, and the 

defaults that we are looking at now, it seems as if we have these 

subprime credit card lenders who charge all kind of fees, and it 

seems to me there should be some regulation, or there should be 

some ceilings. 

Okay, we know that no one is going to talk about a ceiling on 

interest rates, you can do what you want. But then, we get into 

late fees, and how late fees are charged. And this business about 

paying—your interest rate is going up if you are one day late, and 

all of that, I just really think we ought to look very closely at some 

of these fees, and start to talk about regulating fees. 

For example, I think there perhaps should be regulation on the 

yearly fees that are charged. I think that if there are monthly 

fees—which there shouldn’t be, but I understand that there are 

some lenders who have monthly kind of maintenance fees. And I 

do think that there should be a limit on how much you can increase the interest rates when you have determined that there is 

some additional risk involved. 

Now, having said that, I would like to get some response. Who 

would like to talk about why there should or should not be more 

attention paid to this proliferation of fees, and perhaps some discussion about regulation? Let me start with—well, anybody. Who 

would like to respond? 

[No response] 

Ms. WATERS. Board of Governors, Mr. Frederic Mishkin? 

Mr. MISHKIN. I think the issue of fees is very important. 

Ms. WATERS. I cannot hear you. 

Mr. MISHKIN. The issue of fees is very important. This is one of 

the reasons why, in our proposal, we stressed so much clear information about fees. We found, in our consumer testing, that this is 

something that really does have an impact on consumers’ understanding of what is going on, and also in terms of their actions. 

36

Ms. WATERS. I am maintaining that, even though you are moving 

to look at this, do something about it, I am going a bit further. I 

am talking about creating some discussion about the regulation of 

fees, above and beyond the basic interest rates that are charged. 

Mr. MISHKIN. The only comment I would have here is that the 

issue about regulation, setting prices or maximum prices, is that 

we have to think very hard about the unintended consequences, 

and that in that context, something that first sounds like it will be 

very helpful could actually end up either—may mean the people 

who would like to get credit couldn’t get it, or whether there would 

be other sorts of problems, or that markets that eventually could 

be very beneficial might not develop. 

Ms. WATERS. But have you, Mr. Dugan, taken a look at the proliferation of the creation of fees? 

It seems to me that there is a whole new business that is being 

offered to banks and financial institutions about the creation of 

new fees, how they can make more money. 

And somewhere, I think I read that there were some financial institutions making more on fees than on their basic products. Have 

you given any thought to what we can do to slow down this proliferation of fees, or to contain them? And what do you think about 

the idea of regulating fees? 

Mr. DUGAN. Ms. Waters, I would say a couple of things. One is, 

picking up on a question of Mr. Gillmor, I do think that the simpler 

disclosure of interest rates that this committee—this Schumer Box 

that showed interest rates—did have an effect over the years, in 

having a lot of competition and lowering the average rates. 

And I think there hasn’t been as good a disclosure, because we 

haven’t updated Reg Z in 25 years, to show what these fees are. 

I think that’s part of the benefit of this proposal, is that when we 

see them, they are clearly shown. They are shown not just in the 

initial thing, but in your periodic statements, and how much you 

have done each year. 

I am hopeful, and I believe it will be the case, that there will be 

more competition about fees that consumers will have— 

Ms. WATERS. Where do they show them, when they have decided 

that, despite the fact you started out as a good risk, that now you 

missed a day or two, and whatever their criteria is, they are going 

to increase those interest rates automatically? Where is that 

shown? 

Mr. DUGAN. I don’t think there is any requirement to—in the 

proposal—to show the reasons for it. They will show what the fees 

are that are being charged. 

Ms. WATERS. You don’t have to show the reasons for it, but Ms. 

Jones has been paying 15 percent, and then on her next billing she 

is now paying 20 percent or 30 percent. There has been no additional notice, no recall of anything that was told the person in the 

very beginning that, ‘‘Should you miss 5 days, or if you are 5 days 

late, you are going to get a late fee, plus we are going to increase 

your interest rates.’’ 

Nobody explains that. And all of a sudden, there is this increase. 

Mr. DUGAN. Well— 

Ms. WATERS. How do you deal with that? 

37

Mr. DUGAN. Well, I think it is a real fundamental issue you are 

raising. And it partly is dealt with in the new proposal, in— 

Ms. WATERS. How? 

Mr. DUGAN. They have to give advance notice for any change in 

the fee, and it has to be 45 days, which is more than the 15 days 

under current law. 

And, as I was saying earlier, most of the large issuers now will 

allow you to opt out of that increase, and close your account, and 

pay it off over time and go to get another credit card. So there is 

something that does address that directly. 

Mr. NEIMAN. May I also respond to Congresswoman Waters—

pick up on your point on the subprime offerings and the fees? 

One of the earliest actions that New York took against a 

subprime credit issuer—remember, we only have a limited number 

of credit card issuers over which we have the ability to bring enforcement actions—but it was a case where they were—had issued 

a pre-approved premium card to a select group of borrowers, saying 

that, ‘‘You have been pre-approved for up to $2,500 in credit.’’ 

In reality, most of the borrowers had a credit limit of $300, and 

that was reduced by $150 in fees. An action was brought, and settled for $9 million in fines. And it just kind of highlights the types 

of concerns, and we share your concerns about having the ability 

to address those deceptive practices, as well as to bring enforcement actions. 

And States often are in the best position to act quickly, as the 

industry changes and develops new products. 

Chairwoman MALONEY. The gentlewoman’s time has expired. 

Ms. WATERS. Thank you. 

Chairwoman MALONEY. Mr. Scott. 

Mr. SCOTT. Thank you very much, Madam Chairwoman. This is 

truly a very, very revealing hearing, and it is much more serious 

than I thought. This borders on sophisticated predatory lending by 

a highly respected segment of our financial services industry with 

a product that certainly, without any equivocation—represents the 

actual key to life. 

The credit card now is a key to life in our community. And credit 

card issuers are now bordering on being sophisticated predators. 

Let me just explain to you why I come to this conclusion. 

First of all, we are dealing with a sophisticated way of building 

up penalty interest that hovers right now at an average of over 30 

percent. That is number one. 

Number two, companies are now applying payments to the least 

costly debt, thus forcing customers to pay more in interest. For example, a way of an industry practice that includes charging interest on debt that has already been paid. Let me give you an example. 

If you go—and this is a common practice, this is why it is predatory, this is why it is deceptive and unfair, and down right low 

down—if you take—and here is a consumer who goes out and 

pays—and has a price of a product of $4,000, and he pays $3,000 

of it right out, they charge the interest on the complete $4,000. 

That is unmercifully pathetic, with this industry, to—when they 

pay their bill on time, you charge the interest on the entire amount 

38

when he has already paid most of it. When the interest should be 

on just the $1,000, it is charged on the $4,000. 

Now, you say the Fed has done something. What the Fed has 

done with this 15 to 45-day extension is absolutely insignificant, 

when you look at the depth of the abuses and the aggressive marketing and pricing packages that are done. 

So what do we do about this? I would like to ask each of you—

because I think that we need some serious regulation—I need Congress to reach in real deep and do some serious regulation of the 

industry, because again, the credit card is the key to life. We don’t 

use cash any more; we are a credit card society. Everything is 

based on that, and we need them for emergencies. 

So, I think we should do these things. I think we should cap penalty interest rate increases. Don’t you agree? Good. 

I think you should prohibit—we should prohibit—interest from 

being charged on late fees, or over-the-limit fees, and prohibit the 

late fees if a card issuer delays crediting a payment. Does that not 

make sense? Does that not get to it? What is this? This is a complicated language of a whole—almost worse than a foreign language. 

I don’t even understand it. Nobody reads that. All the people 

want is that credit card. You think they read that fine point? They 

don’t read the big point. I don’t know what it says and what it 

does. But I know this. You do. And your industry knows, and your 

industry knows that you are taking advantage of this. 

You are taking advantage of the opportunities that are presented 

in a free enterprise system, where everybody is out here to make 

a profit. And how do you make a profit on this? You make a profit 

on the interest you charge on the credit. But where you’re really 

making your money is in these late fees, and in these penalty fees. 

And so, it just seems to me to be a pattern of doing these kinds 

of things. So I would like to get your comment. I mean, because if 

you do—if you—if we can bar companies—and again, like I said at 

the very beginning, I know many people in this industry, and they 

are good and decent people, and I really think that you are going 

to provide the leadership within your industry to clean this up, but 

it is our job to lay it out, examine it— 

Chairwoman MALONEY. The Chair grants an additional 60 seconds. 

Mr. SCOTT. Thank you so much, Madam Chairwoman. So I think 

that these are the things we need to do. 

Ms. WATERS. Will the gentleman yield for 1 second? Over here, 

Mr. Scott? Will you please ask them to answer your questions 

about paying on the $4,000— 

Mr. SCOTT. Oh, yes. 

Ms. WATERS. The interest rates after you have paid already 

$3,000 of it. I really want to hear their answer. 

Chairwoman MALONEY. Yes, let’s hear their answer. 

Mr. SCOTT. But I still need my 60 seconds, please. Go ahead. 

[Laughter] 

Mr. MISHKIN. People usually referred to this practice as doublecycle billing. One of the good things is that when light is shed on 

this, it creates a problem for the people who are doing it. 

39

What we are seeing is that more and more—in fact, there are 

fewer and fewer credit card issuers who are actually doing this. 

The major credit card issuers have been dropping exactly this practice, because of the fact that it doesn’t smell right to people. 

So, I think that one of the key issues here is that the role of Congress is to shed light on this. We are trying to shed light on this 

through these disclosures. That actually helps make it possible for 

consumers to say, ‘‘We’re not going to use a credit card that has 

this feature.’’ And, indeed, then the industry actually starts providing better products. 

Mr. SCOTT. That is why I say this is predatory, sophisticated 

predatory, because you know, by the very nature of your answer— 

Chairwoman MALONEY. The gentleman’s— 

Mr. SCOTT. May I get my 60 second, please? Because I think 

that, number one, we have to bar companies from charging interest 

on debt paid by the due date. And you all agree with that. Any disagreement? 

[No response] 

Mr. SCOTT. We can include that? That would be very helpful. 

Then, we need to cap the penalty interest rate increases. Any 

problem with that? 

[No response] 

Mr. SCOTT. Okay. Then, we need to prohibit interest from being 

charged on late fees, or over-the-limit fees, and prohibit late fees 

if a card issuer delays crediting a payment. I think those are things 

that we need to incorporate in the legislation. And I think that we 

will— 

Chairwoman MALONEY. Thank you so much. 

Mr. SCOTT. And I thank the chairwoman. 

Chairwoman MALONEY. Mr. Cleaver, for 5 minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman. I apologize for 

being late. I am doing the graduation tomorrow for the pages, so 

I stopped by the desk to chat with them, and told them that I had 

to go off to the committee, and told them what committee it was, 

and what we were talking about. 

A young page, 17 years old, just told me that he has already received letters and applications for a credit card. Seventeen years 

old. He is a page. He gets a card every day to go downstairs to get 

a free meal. He can’t pay a credit card. He said he just decided he 

didn’t want to send it in. I just wanted to—I have the spirit of 

sharing, so I just wanted to share that. 

My question is to OCC. Have you investigated, or taken any enforcement actions against a top-10 credit card issuer since the 

Providian case? And have you taken any action against a credit 

card issuer for a consumer-related problem since 2003? 

Mr. DUGAN. The answer to your question is we have taken a 

number of enforcement actions for unfair and deceptive practices in 

the credit card industry, generally, particularly on the subprime 

side. And the—as a result of the enforcement actions that we have 

taken, which is on consumer issues, not on safety and soundness 

issues, there are very few subprime credit card lenders left in the 

national banking system. 

In terms of large bank issuers, our actions have tended to be 

more through the process of supervision and through our account 

40

management guidance, and through—for example, the agencies got 

together and found that consumers were not being charged—were 

being charged very small minimum payments, to the point where 

it wasn’t covering the interest each month, and the debt was growing, even though they would make a minimum payment. They 

would get deeper in debt after they made a required minimum payment. 

We believe that raised both safety and soundness and consumer 

protection problems. And so, the agencies issued guidance to stop 

that. It took a while for the industry to adjust to it, and we felt 

the need to go out and demand that each of our issuers pay all finance charges, plus 1 percent of principal, so that a consumer, 

when they made a payment, would move his way out of debt—his 

or her way out of debt—and not get deeper into debt. 

Mr. CLEAVER. Okay, thank you. So the answer is no? 

Mr. DUGAN. Well, to which question? 

Mr. CLEAVER. Well, actually, to both of them. You know— 

Mr. DUGAN. We have taken enforcement action since 2003. 

Mr. CLEAVER. Against? Against? 

Mr. DUGAN. And we have— 

Mr. CLEAVER. Against one of the top 10 credit card— 

Mr. DUGAN. Not against the top 10, not a formal enforcement action. The answer is no to that question. 

Mr. CLEAVER. Okay. The—do you have any reason for not having 

done so? 

I mean, you mention the subprime credit, and we all have problems with them. I think what you are hearing is that there are 

problems with some of the non-subprime credit card lenders. And 

I think for us to pile on the subprime lenders is not quite at least 

where I am coming from. 

I want to know about—I mean, this young kid, I won’t call the 

name, he didn’t get an application from, ‘‘Come Get it Credit Company,’’ you know, it was one of the top 10. 

Mr. DUGAN. Mr. Cleaver, we, in fact, have taken a number of informal actions, and we have a range of tools, as I tried to lay out 

in our testimony, where we address practices, and try to get 

changes made through the supervisory process, through informal 

actions, through matters requiring attention, through so-called 

safety and soundness orders, which is a little bit of a misnomer, 

because it includes consumer protection issues, as well. 

So, we have taken a range of action, with respect to our large 

credit card providers, all of which are outlined in the testimony. 

And even though we haven’t gone to the last resort of taking a formal enforcement action, it does not mean that we haven’t had a 

rigorous supervisory program to address practices consistent with 

the law that is in place, with what is required in the Reg Z and 

the consumer protection responsibilities. 

And when we see a practice that rises to an unfair and deceptive 

action, even though we don’t have rulemaking authority, we do not 

hesitate to take enforcement action in the area, and we have done 

so. 

Mr. CLEAVER. Thank you very kindly. I will yield back the balance of my time. 

Chairwoman MALONEY. Thank you. Mr. Ellison? 

41

Mr. ELLISON. Madam Chairwoman, thank you for your calling 

this hearing together. It is excellent. 

Ms. Bair, could you tell me, if credit cards are being sent to everyone—or not everyone, but a lot of people, including my 19-yearold son—how can it be that the industry can sort of claim that they 

have to increase rates in order to adjust for risk? I mean, it seems 

like it’s self-imposed risk, when you make credit cards so available 

to everybody. Can you help me understand that? 

Ms. BAIR. I think that is a good question, and it is something 

that we are evaluating, as well. I will tell that when my son was 

9 years old, he once got a credit card application, so I am there 

with you. 

Mr. ELLISON. I am not surprised. 

Ms. BAIR. And I used to teach at the University of Massachusetts, and I saw my students getting solicitations and getting in 

over their head on credit card debt. So I do think it is troubling. 

And, clearly, the business model has been to make it widely 

available, and risk-base price it, and we have run into some problems with young people and others who do not have a lot of financial history of dealing with financial matters getting themselves 

into trouble. 

So, I do not have an answer, but I share your concern. 

Mr. ELLISON. Yes. I appreciate you saying that, because I mean, 

I think that for an industry to say, ‘‘Well, we have to have these 

rates because it’s so risky,’’ and then they send cards everywhere, 

it’s just sort of disingenuous. 

Let me also ask this question. Is part of the problem lax enforcement? I was somewhat surprised to hear that the top 10 have not 

received any enforcement action. Do you feel that, as regulators, 

you have enough resources to really hold the top 10 credit card 

companies accountable for questionable practices like double-cycle 

billing, you know, universal default, all these kinds of things? Do 

you have enough resources to do your job? 

Mr. DUGAN. Yes, I think—well, speaking for the OCC, I— 

Mr. ELLISON. Well, thank you, because I am now shocked that 

you are not doing it. 

Mr. DUGAN. Well, you mentioned double-cycle billing. That is 

lawful. 

Mr. ELLISON. Well, I mean, let me ask you this. Do you think 

that there are practices that are, in fact, technically lawful, but 

sort of stretch the spirit of the law? 

I mean, if you are there to protect the industry and protect consumers as well, I mean, there might be some things that are lawful, but still, kind of beyond the pale. I mean, there is a— 

Mr. DUGAN. I absolutely agree with that. I think that is what I 

was trying to describe— 

Mr. ELLISON. Okay, okay. Please. Because I only have 5 minutes, 

that is why I am— 

Mr. DUGAN. I understand that. But what I was trying to get at 

before is, for example, this minimum payment requirement that I 

talked about. 

Mr. ELLISON. Right. 

Mr. DUGAN. That was something that we imposed—‘‘we,’’ on an 

inter-agency basis, wasn’t strictly required specifically in the law. 

42

We believed it was an inappropriate practice, both for the consumer, and from a safety and soundness perspective. We took direct action, had plenty of resources to do it. That is number one. 

Number two, I think it is a mistake to think only in terms of enforcement actions. What we do and how we achieve change, with 

respect to the providers goes through the entire supervisory process, and— 

Mr. ELLISON. And I don’t— 

Mr. DUGAN.—there are many, many things that we bring— 

Mr. ELLISON. Forgive me for jumping in, but I appreciate that. 

We shouldn’t think only in terms of enforcement actions, but it 

seems to me that we should at least sometimes think in terms of 

enforcement actions. 

And what I have heard is that there really haven’t been any for 

the top 10, which creates certain interesting points of view, because 

it’s like, wow, I mean, if you are a small credit card company doing 

sort of questionable practices, you are going to get scrutiny, and if 

you are a big one, you are not. So, I just— 

Mr. DUGAN. I disagree with that. 

Mr. ELLISON. Well, I mean— 

Mr. DUGAN. Because they get plenty of scrutiny— 

Mr. ELLISON. Well, wait a minute. Wait a minute. You said there 

were enforcement actions on the little guys, but not the big ones. 

Mr. DUGAN. Not because they are little or big, it is because of 

what practices they engage in, where— 

Mr. ELLISON. Excuse me. The next question I have is about preemption. I don’t like Federal pre-emption, because I want more 

eyes on the problem, and I think that State attorneys general can 

help bring forth a level of accountability that sometimes our Federal Government doesn’t think—well, I won’t even say if that is the 

case—but for one reason or another, it doesn’t provide. 

Mr. Neiman, do you have any views on this subject? 

Mr. NEIMAN. Yes, I certainly do. I mean, I question whether Federal regulators would ever have sufficient resources—or sometimes 

incentives—to take the actions that are necessary to—with respect 

to enforcement, and even the number of resources necessary to 

handle customer complaints. 

I do strongly feel that the States are in a much better position 

to address these at a local level. That is why we have local police 

forces, and don’t rely on county and State and Federal police, because local police are closer to the community. They understand 

the issues better, and they can react more quickly. 

Mr. ELLISON. So— 

Mr. NEIMAN. I think there are other models out there, like the 

FTC, as well as the EPA, where both Federal and State regulators— 

Mr. ELLISON. I think the dual system of regulation is a good one, 

and I would be a very strong proponent of allowing the States to 

stay in the game, here, and in fact, expanding State ability to protect consumers in the area of financial services. 

Chairwoman MALONEY. You raised some very important points, 

and your time has expired. And I would like to note, for the record, 

that there will be a hearing next week on June 13th on Federal 

pre-emption, so we can raise this issue and discuss it further. 

43

I do have more questions, but in the interest of time, I am going 

to be placing them in writing to the panelists. I thank them for 

their time, and their testimony. I urge my colleagues to likewise 

place their additional questions in writing. And without objection, 

the hearing record will remain open for 30 days for members to 

submit written questions to these witnesses, and to place additional comments that they would like into the official record. 

This panel is closed. We thank you for your testimony, your time. 

And the second panel is called. Thank you. 

[Recess] 

Chairwoman MALONEY. I would like to recognize and introduce 

the second panel: Kathleen Keest, from the Center for Responsible 

Lending; James Huizinga, from Sidley Austin; John Carey, chief 

administrative officer of Citi Cards; William Caywood, senior consumer credit risk and compliance officer for Bank of America; John 

Finneran, general counsel for Capital One; Marilyn Landis, vice 

chair of the National Small Business Association; and Ed 

Mierzwinski, consumer program director for the United States Public Interest Research Group. 

I thank you all for coming, and for your testimony. And would 

you please begin, Ms. Keest? Thank you. 

STATEMENT OF KATHLEEN E. KEEST, SENIOR POLICY 

COUNSEL, CENTER FOR RESPONSIBLE LENDING 

Ms. KEEST. Thank you for inviting me to talk today about the 

rules that the Fed has proposed to govern the disclosures in this 

marketplace that you have made very clear affects all of your constituents today to the tune of about $800 billion. 

And I wanted to start with a reminder that truth in lending 

was—at the time it was enacted—enacted as a complement to substantive consumer protection regulations, not as a substitute for it. 

And the rules—as much of an improvement as they are—that have 

been proposed by the Fed don’t offer that adequate substitute. 

In looking over the rules, we looked at three questions. One was 

how are the disclosures going to be made? And we give the Board 

very high marks for that. The improvements in the way that the 

disclosures are going to be made are a vast improvement, and we 

commend them for it. 

We also commend them for adding the 45-day advance notice to 

the imposition of the penalty fees. Although, as you have all highlighted, that certainly doesn’t solve the problem. 

The second question was, what is to be disclosed under the new 

regulation? And we have a lot of more concerns about that. As everybody has recognized, there is extraordinary pricing complexity 

here that challenged the ability of disclosures to handle the problem. There are opaque and complicated accounting systems, and 

there is a proliferation of fees. 

And, as we found out today, that is a serious problem now, and 

that was the problem 40 years ago, when Truth in Lending was enacted. What we feel is the problem with the regulation is that—the 

regulation that has been proposed—is that, 40 years ago, Truth in 

Lending was enacted to standardize the price tag so that people 

could make order out of the chaotic pricing. And what we feel has 

44

happened is that the Board has given in to the pricing chaos, rather than reigning it in. 

The accounting problems that people have all talked about that 

are unfair—and there is a law against unfairness now—have not 

been dealt adequately with in the regulations, although with some 

of them there are some improvements. But with some of them, not 

at all. In fact, like the double-cycle billing, they basically just threw 

up their hands and said, ‘‘We can’t deal with this, this way.’’ 

With respect to the problems that were enacted with that comparative price tag that you need, the Board is offering two alternatives. One is, again, simply to give it up as too complex. And that 

certainly is not an adequate alternative, and is certainly not going 

to solve the problem. 

The other, as they recognized, if you actually paid a little attention to coming up with something that is consistent and descriptive, people can use it, and they propose that as an alternative, but 

we fear that they aren’t going to—we fear that they don’t favor 

that alternative. 

And that brings us to the last question, which most of you have 

been focusing on already today, which is whether it is enough. 

Duncan MacDonald, who was a former city executive, has written in, ‘‘The American Banker,’’ that this is an industry that has 

lost its way, and the regulators haven’t helped it regain its way. 

We heard many times today about the unintended consequences 

of regulation. But unintended consequences flow from insufficient 

regulation, as well. And we fear that the Fed, with as much improvement as it has had, by its refusal to go further and using its 

unfairness regulatory authority, is leaving Congress with the job of 

curing some of these abuses that we have seen today. Thank you. 

[The prepared statement of Ms. Keest can be found on page 208 

of the appendix.] 

Chairwoman MALONEY. Thank you very much. 

Mr. Huizinga? 

STATEMENT OF JAMES A. HUIZINGA, SIDLEY AUSTIN LLP 

Mr. HUIZINGA. Good afternoon, Chairwoman Maloney, Ranking 

Member Gillmor, and members of the subcommittee. My name is 

Jim Huizinga, and I am a partner in the Washington, D.C., office 

of Sidley Austin. It is my pleasure to appear before you today to 

discuss the evolution of the credit card industry, and the revisions 

to Regulation Z recently proposed by the Board of Governors of the 

Federal Reserve System. 

Congress enacted the Truth in Lending Act, or TILA, almost 40 

years ago to provide consumer protection in the developing consumer credit marketplace. The Board has regulatory authority to 

implement TILA through its Regulation Z. Regulation Z requires 

comprehensive cost disclosures for consumers so they can shop for 

credit, which facilitates competition among creditors. 

Standardized disclosure, under Regulation Z, fosters competition 

among credit card issuers on the basis of key account terms, such 

as interest rates and fees. Competition based on these disclosures 

is especially effective in the credit card industry, because there is 

wide availability of credit card offerings and balance transfer feaVerDate 0ct 09 2002 16:27 Oct 18, 2007 Jkt 037552 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\37552.TXT HFIN PsN: TERRIE
45

tures, allowing consumers to move easily from one card issuer to 

another. 

The credit card industry has evolved significantly over the years, 

including through the development of risk-based pricing, and debundling of prices. However, Regulation Z’s basic methods of protecting consumers can be just as effective today as when Regulation Z was first enacted. The key is to update and improve Regulation Z disclosures to ensure that consumers can shop effectively for 

credit cards in today’s marketplace. 

As you know, the Board recently released significant proposed revisions to Regulation Z. The Board’s proposal is a major undertaking to increase the understandability and usefulness of Regulation Z disclosures. Although it is likely that both industry and consumer groups will seek many changes to the proposal, I believe 

there is a consensus that credit card disclosures need to be improved. I also believe the proposal is, generally, a major step in the 

right direction. 

I think it is critically important that, for the most part, the proposal avoids price controls and similar restrictions. Price controls 

seldom work, and it would be far preferable to allow the fierce competition in the marketplace to drive the future developments of 

credit card products. 

Significantly, the Board’s proposal is based on actual consumer 

testing. The Board has attempted to determine what consumers 

want to see in disclosures, and not necessarily what consumer 

groups, the industry, or the Board itself might assume consumers 

want. 

The Board’s proposal contains very significant changes. Broadly 

speaking, the Board proposes: number one, to improve and increase 

disclosures relating to newer pricing methods, including penalty 

pricing; number two, to expand the use of standardized charts to 

facilitate easy and quick review of credit terms; and number three, 

to use terminology that consumers understand, such as ‘‘interest 

rates and fees,’’ instead of legal terms that have little meaning to 

consumers. 

The Board’s proposal also would adopt a significant substantive 

protection to facilitate the ability of consumers to move credit card 

balances to a new creditor, because of an interest rate increase. In 

particular, Regulation Z would expand the advance notice period 

for interest rate increases from 15 to 45 days, and, for the first 

time, apply that longer notice period before penalty interest rates 

can be imposed. 

These changes are designed to better allow a consumer to shop 

for a new credit card, and transfer an existing balance to a new 

creditor, if the consumer qualifies for a better rate. 

As I mentioned, I believe the Board may need to consider some 

changes to its proposal. Some of the items included in the proposal 

appear at first blush to impose significant costs on the industry, 

without providing counterbalancing benefits to consumers. The net 

result may be increased credit costs to consumers without appreciable consumer benefits. 

For example, the expectation that certain disclosures would be 

provided on long, legal-sized paper may be a costly proposition. 

Furthermore, the proposal to completely redesign periodic stateVerDate 0ct 09 2002 16:27 Oct 18, 2007 Jkt 037552 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\37552.TXT HFIN PsN: TERRIE
46

ments will cause substantial resources to be allocated by card 

issuers, which may or may not be justified, in light of the fact that 

periodic statements have not tended to be confusing for consumers. 

In conclusion, I believe that the underlying approach of TILA to 

consumer protection for credit cards is just as effective today as 

when Regulation Z was originally adopted. Given the significant 

competition in the credit card marketplace, a well-informed consumer has, literally, dozens of options when choosing a credit card. 

The Board has done an admirable job in proposing necessary 

changes to Regulation Z, to ensure that consumers do, in fact, receive information they need to shop effectively in today’s credit 

card marketplace. Thank you again, Chairwoman Maloney, for the 

opportunity to appear before the subcommittee. I would be happy 

to answer any questions you may have. 

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

181 of the appendix.] 

STATEMENT OF JOHN P. CAREY, CHIEF ADMINISTRATIVE 

OFFICER, CITI CARDS 

Mr. CAREY. Good afternoon, Chairwoman Maloney, Ranking 

Member Gillmor, and members of the subcommittee. My name is 

John Carey, and I am the chief administrative officer of Citi Cards. 

I appreciate the opportunity to appear before you today to discuss 

the credit card business, and how we serve our customers. 

Citi Cards is one of the leading providers of credit cards in the 

United States, employing 33,000 people in 28 locations across 20 

States. Credit cards have become an integral part of our Nation’s 

economy, providing meaningful benefits to merchants and consumers alike. Merchants enjoy the prompt payment, security, and 

efficiency of credit cards. For consumers, credit cards are a safe 

and convenient alternative to cash, making everyday purchases 

more efficient, making online shopping possible, and helping them 

track and manage their spending. 

I understand that the subcommittee’s primary focus today is on 

the initiatives in the credit card industry that affect consumers, including the Federal Reserve Board’s new proposed revision to Regulation Z. Let me turn to the Fed’s proposal first, and then describe 

what we have been doing at Citi in recent years, including new initiatives implemented to improve our customers’ experience. 

Two weeks ago, the Fed issued a comprehensive proposal to revise Reg Z, focusing on disclosure and other practices. This lengthy 

proposal will, of course, require a detailed study. But let me state 

in no uncertain terms that we applaud what the Fed has done, and 

believe it can foster significant improvements for consumers. 

The new proposal is aimed at enhancing the clarity of disclosures, improving customer understanding of key credit card terms 

and conditions, and maximizing transparency. In effect, the proposed changes seek to move credit card disclosures towards the 

successful model of food labeling, where consumers can get all the 

information they need in simple, uniform terms, that allow them 

to readily compare one product to another. 

Consumers should be able to do this in the credit card world, relying on consistent presentation of important information when applying for credit, when opening an account, when receiving their 

47

statement, and when the terms of the account change. This is the 

right approach, and we strongly support it. 

Our own efforts to make credit card disclosures clear and understandable are entirely consistent with the approach taken by the 

Fed. Indeed, all of the effective and simpler-to-read disclosures 

cited by the GAO in its September 2006 report on credit cards were 

Citi disclosures. Our work in this area intensified in 2005, following a public call from the OCC for improved credit card disclosures, and has continued right to the present. 

Citi was one of the first card issuers to revise its solicitation letters, promotional materials, and card member agreements, to more 

prominently disclose the important pricing terms in the product. 

Today we are continuing to improve and simplify our Schumer Box, 

and implement major redesign of our customer statements. 

In short, we want consumers to understand clearly what we are 

offering and what our competitors are offering, so that they can 

make informed choices. We are confident that we can compete on 

quality, service, and value, and that it will be good for customers 

and good for Citi. 

But improving disclosures isn’t the end of the discussion. Citi has 

also recently adopted two major initiatives that represent a change 

in the industry, and that we hope other issuers will adopt, as well. 

First, Citi was among the first issuers to eliminate repricing for 

what we call off-us credit behavior. Not just automatic repricing, 

known by some as universal default, but any repricing. 

Second, we eliminated what is commonly known as any-time, 

any-reason increases to the rates and fees of our customers’ accounts, for example, to respond to general market conditions or 

credit history. Once a card is issued, we will not voluntarily increase the rates or fees on the account until the card expires and 

a new card is issued, which is generally 2 years. 

Further, to assist customers to pay on time and avoid exceeding 

their credit limit, we have established an alert system with consumers that they can tailor to meet their individual needs to notify 

them in advance about key dates and information related to their 

bills. 

Moreover, Citi is an industry leader in financial education and 

literacy, and we have put in place numerous programs to encourage and promote responsible borrowing. 

Finally, we are also a leader in protecting our consumers from 

identity theft and fraud, and in offering immediate, effective help, 

regardless of the card which was affected by this identity theft. 

Madam Chairwoman, we are working on a daily basis to enhance 

the products and services we offer our customers. This job is never 

finished. We know that there is always room for improvement. I 

look forward to answering any questions that you or the subcommittee may have. 

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

of the appendix.] 

STATEMENT OF WILLIAM CAYWOOD, SENIOR CONSUMER 

CREDIT RISK AND COMPLIANCE OFFICER, BANK OF AMERICA 

Mr. CAYWOOD. Thank you. Good afternoon, Chairwoman 

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48

committee. My name is Bill Caywood, and I am the operational 

risk and compliance officer for Bank of America, with a scope that 

includes credit cards. The committee has asked us for our views on 

the Federal Reserve Board’s proposal to substantially revise its 

Regulation Z. 

As you have heard today, the job of describing how the credit 

card works has become complex. Certainly, card agreements were 

simpler when the product was offered only to wealthier customers 

who paid an annual fee, and were required to repay the balance 

in full each month. But the current system has expanded access to 

credit, and made the credit card a more useful instrument for more 

consumers than ever before. 

Our initial review of the new Reg Z suggests that the proposed 

revisions are an improvement on the existing regulation. It will 

provide customers meaningful disclosures in an even clearer format, and it will facilitate comparison shopping, and better allow 

consumers to modify their behavior, potentially reducing their cost 

of credit. 

In its proposal, the Board has amended several of the required 

disclosures to provide a useful tabular summary. Furthermore, 

transactions, interest charges, and fees will be grouped together in 

a new way that we think will be more easily understood by customers. We believe that the revised statement will quickly and 

more clearly provide customers relevant information about their accounts, and assist them to better understand the cause of any credit-related fees incurred during the previous cycle. 

While our overall reaction to the proposal is favorable, the proposed changes to Reg Z would require issuers to expend considerable time and resources to rewrite the vast majority of our communications with our customers, and to change the ways that these 

communications are delivered. It would also require substantial 

time to prepare and test, and it will be important for the Board to 

allow sufficient time for that to occur. 

We have also identified one area in the proposal described in my 

written testimony, where we believe it can be improved. Our review between now and October, when the comment period ends, 

may identify others, and we will include those in a comprehensive 

comment to the Board. 

Some specific credit card practices have been the focus of recent 

criticism and discussion here today. We believe it is important to 

reiterate Bank of America’s position on these issues. 

Bank of America has never engaged in double-cycle billing. 

Bank of America has never engaged in universal default. That is, 

automatically repricing a customer, without further notice or consent, based only on the customer’s default with another lender. 

Bank of America limits the frequency of risk-based repricing by 

amendment. In addition, when we determine that an account’s risk 

has increased, and propose an increased interest rate, the customer 

can opt out of the proposed change in terms and pay down the account over time under the existing terms. We call this, ‘‘Just Say 

No.’’ 

Bank of America limits the number of consecutive over-limit fees. 

We have a hard stop at three. 

49

I am proud to say that we arrived at these policies some time 

ago, by listening to our customers, and implementing practices designed to meet their financial needs and concerns. More recently, 

we have modified our default repricing, to be based on two events: 

late payments or overlimit transactions. 

We think it is fair to give customers a second chance. And when 

customers with increased rates pay us on time for 6 months, and 

stay within their credit limit, they can qualify for a rate reduction, 

or a ‘‘cure.’’ 

It was also from listening to our customers that we learned that 

they have a growing desire for improved information and more control over their finances. This is why we offer easy-to-use tools to 

help our customers manage their accounts responsibly. Online 

banking allows customers to view information about their credit 

card and other accounts. Customers can track activity, transfer 

funds, and pay bills any time, anywhere they have Internet access. 

Alerts are messages that we send to computers, PDAs, or mobile 

phones to inform or protect our customers. They can warn a customer when he or she is approaching a credit limit, or has an upcoming payment due date. Our alerts go by e-mail or text message, 

or both. Customers love this option. We have more than 1.3 million 

enrolled to receive alerts already. 

We have also gone beyond the required disclosures to provide 

customers with brochures that describe, in plain language, how 

credit cards work, and how to avoid fees. One example is called, 

‘‘Credit Cards and You,’’ which I have a copy of here, which provides clear information about interest rates, grace periods, and how 

cash advances and balance transfers are treated, how payments are 

allocated among outstanding balances, and the importance of paying on time and staying within your credit limit. 

In addition, Bank of America believes that financial literacy is 

best taught early. That is why we sponsor basic money management programs for high school and college students with our partner, Monster.com. Between August 2006 and March 2007, we made 

nearly 240 presentations to more than 13,000 students on college 

campuses. 

Why are we engaged in these financial education efforts? Our research shows that customers who are empowered with this information are more satisfied and more likely to look to us for a deposit or mortgage account. 

Second, our business does best when our customers manage their 

credit responsibly. One of the great myths that we hear is that 

credit card companies prefer customers to default on their obligation, so that we can earn higher fees. That’s simply not the case. 

Our credit losses exceed by a wide margin our revenue from late 

and overlimit fees. We want informed customers, and that is why 

we have not only undertaken our own efforts to educate them, but 

we support the efforts of the Board. 

In conclusion, thank you for this opportunity to address the subcommittee, and I would be happy to respond to any questions the 

members may have. 

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

123 of the appendix.] 

50

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

CAPITAL ONE 

Mr. FINNERAN. Good afternoon Chairwoman Maloney, Ranking 

Member Gillmor, and members of the subcommittee. My name is 

John Finneran, and I am the general counsel of Capital One Financial Corporation. I want to thank you for this opportunity to address the subcommittee this afternoon. 

Today the credit card is among the most popular forms of payment in America. It is valued by consumers and merchants alike 

for its convenience, efficiency, and security. But credit cards have 

also become more complex, with a variety of benefits and terms. 

The current disclosure regime under the Truth in Lending Act, as 

implemented by Regulation Z, did not contemplate this complexity. 

As well as meeting the current requirements of Reg Z, in recent 

years, Capital One has implemented a dynamic disclosure regime, 

focused on simple and timely communication of critical information 

to our customers, as well as our prospective customers. 

We at Capital One want to join those who have praised the Federal Reserve Board for the depth and thoroughness of its proposed 

changes to Reg Z. Capital One commented in advance of the rule 

with its own recommendations for comprehensive change, and were 

pleased to find in this proposal by the Fed new rules that incorporate many of our recommendations. 

For years, Capital One has been focused on two critical priorities 

which we believe to be integral to the empowerment of our customers, and the health of our industry—good disclosure and default 

repricing practice. Although we haven’t had the time to assess the 

full implications of the Fed’s proposal, we believe that the Board 

is focused appropriately on these issues, as well. 

The Fed’s proposal, if adopted, would transform the basic concept 

of disclosure, altogether. It would move to a targeted regime of 

plain English notices that are delivered to customers at the moment when they are most relevant to them. We strongly support 

the Board’s proposal in this regard. 

As importantly, the Federal Reserve’s proposal has identified 

what Capital One believes to be the most challenging practice in 

the industry today, and that is aggressive default repricing. Requiring card issuers to notify customers 45 days prior to default repricing is a bold proposal. Capital One has already addressed this issue 

in a different way, with a single, simple default repricing policy 

that provides our customers with a warning before we will consider 

taking any action. 

Our policy is simple: Capital One will not default reprice any 

customer unless they pay 3 or more days late twice in a 12-month 

period. After the first infraction, customers are provided with a 

prominent statement on their monthly bill, alerting them that they 

may be default repriced if they pay late again. 

Furthermore, the decision to default reprice someone is not automatic. For many customers, Capital One chooses not to do so. If we 

do default reprice someone after being late twice, we will let them 

earn back their prior rate by paying us on time for 12 consecutive 

months. This process of unrepricing is automatic. 

To be clear, Capital One does not practice any form of universal 

default. That has been our long-standing policy. We will not reprice 

51

a customer if they pay late on another account with us or any other 

lender, or because their credit score goes down for any reason. In 

addition, Capital One will not reprice customers if they go over 

their credit limit or bounce a check. 

While the Federal Reserve offers a different approach, we share 

the same goal, ensuring the customers receive a warning before 

they’re repriced, and an opportunity to learn about the potential 

consequences of their behavior before they are repriced in any manner. We hope the Federal Reserve will consider the merits of our 

current approach, and determine whether some additional flexibility in the final rule is warranted. 

Although the optimal means of eliminating aggressive default repricing may be the subject of some debate this afternoon, Capital 

One recommends that the Federal Reserve go one step further. 

Issuers should be required to tell customers the exact type of infraction that caused the change in their interest rates. 

Today, when a customer is repriced for breaking a contractual 

rule, such as paying late, going over the limit, or defaulting on another account, the issuer is under no obligation to explain why. We 

believe that disclosing the infraction that caused the repricing will 

create a teachable moment, and will enable customers to gain the 

full benefits of greater transparency. 

As issuers, however, we have an obligation to ensure the customers not only understand the products we offer, but that our 

practices meet the standards of reasonableness and fairness our 

customers expect. 

Consistent with the Board’s proposal, Capital One has adopted 

strict policies regarding the marketing and treatment of fixed 

rates. Our fixed rates are not subject to any form of repricing during the specific period for which they are promised. In addition, 

Capital One has never engaged in double-cycle billing. 

The overwhelming majority of Capital One’s customers use their 

accounts responsibly, and enjoy the many benefits this form of payment offers. Capital One looks for early indications, however, that 

a particular customer may be experiencing challenges. For example, any customer who pays us only the minimum for three consecutive months receives a notice on their statement that emphasizes the consequences of this practice, and encourages them to pay 

down their balance more quickly. 

While we support the Federal Reserve’s efforts to provide more 

information in this regard, we believe that our current approach, 

providing notice only to those who actually routinely pay the minimum, enhances the relevancy of the disclosure, and better advances the Federal Reserve’s stated objective of developing more 

targeted and dynamic disclosure regime. 

In conclusion, we believe that the Federal Reserve’s proposal represents an important step forward for consumers and our industry. 

At Capital One, however, we do not view it as a substitute for continuously adapting our practices and policies to keep up with consumer demand, the rigors of competition, and the standards of 

sound banking. I thank you, and I look forward to answering your 

questions. 

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

175 of the appendix.] 

52

STATEMENT OF MARILYN LANDIS, BASIC BUSINESS CONCEPTS, INC., PITTSBURGH, PA, ON BEHALF OF THE NATIONAL SMALL BUSINESS ASSOCIATION 

Ms. LANDIS. Congresswoman Maloney, and Ranking Member 

Gillmor, thank you for inviting me here today to discuss the impact 

that various credit card practices are having on America’s small 

business community. 

My name is Marilyn Landis, and I am representing the National 

Small Business Association. I am also the owner of Basic Business 

Concepts, a consulting and financial management company serving 

small businesses. Prior to starting Basic Business Concepts, I spent 

30 years working for and with commercial lenders, banks, and 

small businesses throughout western Pennsylvania. 

Access to capital is one of the largest obstacles facing America’s 

small businesses. Many small and start-up businesses lack the assets necessary for traditional bank loans. Ongoing bank consolidation has resulted in fewer community banks and fewer characterbased loans. Into this access-to-capital vacuum, a new capital issue 

has sprung to the forefront, an increased reliance on credit cards. 

Rapidly growing businesses that are not traditional brick and 

mortar like mine have neither equity and hard assets, nor historic 

cash flow to support their loan requests. We are forced to use bank 

credit lines which, if not secured with equity in our home, are increasingly credit card accounts. These businesses do not want to 

rely on credit card debt; they are forced to. 

According to a nationwide survey of small and mid-sized small 

business owners recently commissioned by NSBA, credit cards are 

a primary source of financing for America’s small businesses. In 

fact, 44 percent of small business owners identified credit cards as 

a source of financing that their company had used in the prior 12 

months, more than any other source of financing. 

In 1993, only 16 percent of small business owners identified credit cards as a source of funding they had used in the prior 12 

months. Of the small business owners who use credit cards as a 

source of funding, 71 percent report carrying a balance month to 

month, and 36 percent are carrying a balance of more than 

$10,000. 

It is important to note that small business owners are not turning to credit cards to finance their businesses because they think 

they are getting a good deal. In fact, among those using credit 

cards, 53 percent say that the terms of their credit have gotten 

worse over the last 5 years. 

Why should the small business community’s increased reliance 

on credit cards and their sense of worsening credit terms be of interest to this subcommittee? Put simply, small businesses are the 

engine of the U.S. economy, and the backbone of the communities 

you represent. 

The billions of dollars in retroactive interest rate hikes, escalating and possession of undisclosed fees, and unilateral and unforeseen interest rate increases is money diverted from economic 

development. A third of small and mid-sized businesses say that 

they would hire additional employees if more capital were available. 

53

In order to address the practices that make running a small business increasingly difficult, and hinder the economic development of 

the Nation’s small businesses, NSBA supports credit card reform. 

NSBA supports the enactment of the new credit card regulations 

recently proposed by the Federal Reserve, improved disclosure, 

which must not be construed as simply more disclosure, is of paramount importance to the small business community. We are business people, more than capable of playing by the rules. But the 

rules must be made known, and they must be consistent and predictable. 

Let me detail a personal incident that demonstrates the inconsistent and unpredictable nature of current credit card practices. I 

have an Advanta credit card, for which I carry an average daily 

balance of around $5,000, at 2.99 percent. In November of 2006, I 

took a cash advance, paid the fee, paid the interest on the fee, and 

secured an additional $14,000 at 11.4 percent. There was no activity for the next month, and I made my payment on time. 

Therefore, the following month, I was surprised to see my cash 

advance interest rate had gone from 11.49 to 20.01 percent. Equally surprising was that my average daily balance, which I was paying previously 2.9 percent, had dropped by about $4,000, while the 

rest of my outstanding balance, which was now at 19.99, had 

jumped by that $4,000, with no explanation. 

One can imagine how difficult it is to adhere to a business plan 

with this sort of unpredictability lurking in an expenditure. My 

Bank of America card, on the other hand, had an interesting payment feature. The due dates have never stayed the same, fluctuating by 5 days in the last 7 months, and the statement cut-off 

date has stayed the same. 

The same can be true of my MBNA card, which was purchased 

by Bank of America. Previously, the due date was the 27th. But between December of 2006, and April of 2007, the due dates for the 

card have fluctuated greatly. Again, the statement date has stayed 

the same. It is this unpredictability that makes it very difficult to 

plan. 

While Regulation Z and the Truth in Lending Act requires that 

affected card holders should be notified in writing of any proposed 

change in rates at terms of 15 days before change, the Federal Reserve proposed increasing this notification to 45 days. This opt-out 

option does little to help small businesses who are carrying large 

month-to-month balances. Most small business owners are forced to 

use credit cards to finance a capital expenditure or an expansion 

of their business. 

Further, as exorbitant as the penalty rates most credit card 

issuers may appear, the small business members of NSBA do not 

advocate a cap on rates. NSBA does support eliminating the retroactive application of penalty rates. This effectively increases the 

purchase price of the goods. 

In conclusion, America’s small business community is not opposed to the credit card industry, nor is it in the habit of advocating the passage of increased Federal regulation, preferring free 

enterprise and market solutions. NSBA strongly encourages both 

the Administration and Congress to fully support small businesses 

as a true center of growth in the U.S. economy, and take the lead 

54

in ensuring credit card practices are not restricting small business 

growth. 

I thank you for your time, and welcome any questions. 

[The prepared statement of Ms. Landis can be found on page 226 

of the appendix.] 

Chairwoman MALONEY. Mr. Mierzwinski? 

STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, UNITED STATES PUBLIC INTEREST RESEARCH GROUP 

Mr. MIERZWINSKI. Thank you, Chairwoman Maloney, Ranking 

Member Gillmor, and members of the committee. I am Ed 

Mierzwinski, and on behalf of the State Public Interest Research 

Groups, I appreciate the opportunity to testify before the committee. 

Owning a credit card company is a license to steal. You can 

change the rules at any time, for any reason, including no reason, 

and you are allowed to operate nationwide, from any State that 

forms a safe harbor for you. We believe, as a consumer advocacy 

organization, that the Federal Reserve disclosure proposals are a 

first small step toward reform of this industry. 

If you look at this industry, and you look at the marketplace, you 

say, ‘‘How do we ensure that a marketplace is disciplined?’’ First, 

there must be competition. Well, in competition, we have a number 

of rules for competition. One of those rules is that you have to have 

a lot of players and easy entry. We have a tight oligopoly in this 

industry. The top 10 players dominate the industry. 

Second, consumers don’t have adequate information. They don’t 

have the ability to make choices. Their contract can be changed at 

any time, they have no opportunity to fix their contract. It’s a onesided contract of adhesion. And many of the terms in it are too 

complex, even for financial literacy classes, which we support to 

improve. 

The problem is, you have a choice of law terms, you have these 

various contractual complexities, you have the ability to calculate 

interest in four or five different legal ways. It is impossible to address the problems. 

So, second, if you don’t have a marketplace that is competitive, 

you have regulation. What kinds of regulation do you have? I would 

say there are three levels of regulation. 

First, there is private enforcement. There is virtually no ability 

of private consumers to police this marketplace, due to mandatory 

arbitration clauses that limit their ability to go to court. We need 

to get rid of the mandatory arbitration clauses that restrict consumers’ ability to privately enforce their credit card contracts. 

The second level of protection is State enforcers. As you have 

heard, and as you will be hearing next week, we will discuss the 

State enforcers have been defanged by the OCC pre-emption rules. 

Because the OCC regulates 9 of the 10 largest credit card companies, it effectively is the de facto policer of the entire industry. 

As this committee pointed out in a bipartisan vote several years 

ago, the OCC is inadequate, in terms of its enforcement ability, and 

its number of enforcers, its number of consumer complaint handlers to protect consumers against the industry. 

55

As we also know, neither the OCC, nor the Fed, which regulates 

the other large issuers, has taken any formal enforcement action 

against any of the large issuers in the last 5 years or so. That does 

not send a clear message that we are on top of our game. 

So, when you have no private enforcement, when you have a 

defanging of the State enforcers, and when you have the Federal 

enforcers asleep at the switch, asleep at the wheel, you have a system that is out of control. That’s where all these unfair practices 

are coming from. 

Now, your questions earlier, Madam Chairwoman, I commend 

you for your questions to the Federal Reserve. The consumer 

groups, in our comments to the Fed, the joint comments that the 

NCLC, Center for Responsible Lending, CFA, Consumers Union 

and others provided, we said the Fed should go further than disclosure changes. Let me just make one point that gets to some of the 

questions that Mr. Cleaver and others were asking. 

We believe that the Fed has the authority to order the banks to 

do exactly what the IRS has as its rule. If a bill is postmarked on 

the date due, the bill is timely. Why doesn’t the Fed go further, and 

do that? 

We believe that the problems of this industry, where you are 

making just incredible amounts of money, but you want to make 

more money so you come up with unfair fees, the second way you 

make more money—the problem with this industry are now reaching out to new populations. And I got into details on this in my testimony. 

I would commend to you a report that I cite from the National 

Council of La Raza on the problems Latino customers are facing 

with credit card issues. And I would also point out that the programs founded on college campuses were very concerned about the 

aggressive marketing on campuses, where you get trinkets, 

frisbees, or bottles of soda in return for filling out credit applications. 

We have set up our own counter-programming on campus, where 

we hand out anti-credit card company marketing brochures. So, 

this one is the, ‘‘Charge it to the Max Credit Card.’’ In return for 

filling out the credit card application, we will give you a free 

skateboard key ring. I’m not exactly sure what a free skateboard 

key ring is, but in terms of the kinds of junk that they’re handing 

out on campus, we are very concerned about it. 

In our testimony, we outline a number of the bills which we 

would support, and other consumer groups would support. Most of 

the provisions in them have been articulated in the members’ questions. 

So, again, I appreciate the opportunity to testify before you 

today, and I encourage you to remember that the real solution is 

not disclosure. The solution is to ban the unfair practices, to reinstate the authority of State enforcers, and to give consumers a 

right to enforce the laws themselves, by eliminating mandatory arbitration clauses in credit card contracts. 

[The prepared statement of Mr. Mierzwinski can be found on 

page 233 of the appendix.] 

Chairwoman MALONEY. Thank you. First, I will call on my colleague, Mr. Gillmor. 

56

Mr. GILLMOR. Thank you very much, Madam Chairwoman. First, 

I will call on Mr. Huizinga. I want to ask you a question about 

profitability in the industry. 

Going back over the last, say, 10 or 15 years, what is the level 

of profitability now, compared to then? And the other—as part of 

that question, there has been some thought that while interest 

rates may have come down, fee income has gone up. 

So, two questions. One, what is your overall level of profitability 

over that period of time? And what is the component of that profitability, in terms of interest versus fees? 

Mr. HUIZINGA. The GAO did a comprehensive study of the credit 

card industry, and released their report last October; I think they 

addressed those issues in their report. I believe that GAO found 

the profitability of the major credit card issuers has remained relatively constant over the last 5- to 10-year period. 

What has changed—which I think leads to your second question—is the method by which credit cards have been priced. We can 

all remember, many years ago, when all credit cards essentially 

had an annual fee and a 20 percent interest rate. And what has 

evolved over the last several years has been more individualized, 

tailored pricing, many times referred to as risk-based pricing, 

where more favorable rates are offered to consumers with better 

credit records, and higher interest rates are typically charged to 

those with less favorable credit records. 

There also has been a de-bundling of prices, which I think I alluded to briefly in my testimony, where there are more fees that 

are imposed for particular services that consumers may want. 

So, I think that in terms of the overall pricing, what we have 

seen is more of a change in the method of pricing and allocation 

of pricing, as opposed to increases in pricing. In fact, I think what 

the GAO study found was that, overall, many consumers have benefitted from the more tailored pricing models. 

Mr. GILLMOR. Yes, but the question was, what’s the mix? I mean, 

if it was 90 percent interest/10 percent fees 15 years ago, is it 50/

50 now? Or is there data on that? 

Mr. HUIZINGA. I am not sure about the actual mix. 

Mr. GILLMOR. Yes. 

Mr. HUIZINGA. There has been an increase in the fees. I think 

the Fed has addressed that, and we are seeing—I think we mentioned earlier the fact that Regulation Z is being updated, if you 

will. 

And I think one of the things that the regulation does is take account of that. In the proposal, there is an increased emphasis on 

disclosure of fees. That’s both in the tables, as well as, importantly, 

on the periodic statement. When those fees are actually imposed, 

the Fed has greatly improved the disclosures, so the consumers will 

understand the fees that are being charged. 

Mr. GILLMOR. Let me go to Mr. Mierzwinski. You talked in your 

written testimony about the fine print. I think we all agree there 

is lots of fine print there, nobody reads it, nobody understands it. 

But we have a problem here of coming up with some kind of balance. I mean, a lot of that fine print is there because the government requires it, and the regulators say you have to do it. So, I 

guess, what is your answer to how we find the balance of what has 

57

to be disclosed, and how you get it distilled in a form that people 

will read and will understand? 

Mr. MIERZWINSKI. Well, thank you, Mr. Gillmor. The fine print, 

or the mice type, as I sometimes call it, is a significant problem. 

And the fact that it can change at any time is an additional problem. 

We are still examining the Fed’s proposals. The fact is that there 

can be some important disclosures that are made in bigger print, 

and that are the required disclosures, but the real problem is that 

they are allowed to charge as many fees as they want, they can use 

four different methods of balance calculation— 

Mr. GILLMOR. Yes, but that is not— 

Mr. MIERZWINSKI. They can reach back— 

Mr. GILLMOR. I understand. That is not responsive to my— 

Mr. MIERZWINSKI. Well, what is responsive is— 

Mr. GILLMOR.—to the question. 

Mr. MIERZWINSKI. I would be happy to get back to you in detail 

in writing, then, Mr. Gillmor, with some ideas. But, obviously, we 

want to calculate the true cost of credit as accurately as possible. 

We don’t think the Fed’s rules will do all of it. 

Mr. GILLMOR. Okay. No, I appreciate that. But one of the concerns—this isn’t necessarily directed at you at all—but one of the 

concerns I have is that a lot of us in government, we complain 

about fine print, and then we introduce bills that require more fine 

print. And so that’s a problem I think we have to deal with. 

Chairwoman MALONEY. Mr. Gillmor? 

Mr. GILLMOR. I yield back. 

Chairwoman MALONEY. Thank you. I would like to ask unanimous consent to place into the record two documents: First, a letter 

that the National Association of Federal Credit Unions sent to the 

members of the subcommittee; and second, testimony from the New 

York State Consumer Protection Board. Without objection, these 

documents will be made part of the official record. 

We have been called for a series of votes. So in the interest of 

time, I would like to ask the panelists to get back to me and the 

committee members in writing what you would recommend for best 

practices for reforming the system. 

And I now yield to my colleague from the great State of New 

York, Gary Ackerman. 

Mr. ACKERMAN. I thank the chairwoman. I had a meeting scheduled during this time, but I was trying to arrange a meeting with 

Mr. Carey afterwards, so that I could ask him a question and not 

have to do it here, at the committee, about a practice that 

Citibank—I thought perhaps we could do it in my office, but you 

didn’t seem to have time, so I came back down and rescheduled my 

other meeting. 

Here is the question. We just found a new first, I think. My chief 

of staff on another committee went home the other day, and got a 

notice from Citibank. He and his wife are customers, and they 

have, I believe, a Visa card, which they are content with. They got 

a notice about a new product that Citi was offering, which was an 

American Express card. And for their reasons, whatever they were, 

they weren’t interested, and they threw the notice away. This was 

a short while ago. 

58

Yesterday, they got a notice from Citibank, thanking them for 

changing from the credit card that they had, which was a Visa 

card, to an American Express card that they didn’t want. They 

didn’t say they wanted it; they threw it away. 

So, after getting stuck in voicemail hell for a while, they got a 

real person, and after a protracted period of time, were able to explain to them that they didn’t want it, they didn’t order it. And it 

was explained to them that somewhere in the language of whatever 

it was that Citibank—embarrassingly, in my opinion—sent them, 

it said somewhere that, ‘‘If you don’t respond to us, we are switching your credit card,’’ so that no response became the response that 

triggered them getting a new credit card, which they don’t want. 

After a while, they got it straightened out. But I would venture 

to guess that more people—and the older you are, the more predisposed you are of doing this—don’t read all those things, and 

don’t bother to change it. And suddenly, the product that they did 

know about, that they ordered, that they were happy with, gets 

changed. 

Don’t you think that it is unfair, if you get no response, to take 

an affirmative action, and assume that somebody wants to make a 

change, when most people think that if they throw something 

away, they’re with the status quo? 

Shouldn’t they have to affirmatively respond, rather than just 

taking the—what I assume to be the majority of people, who don’t 

know what’s happening to them, and just switching their credit 

cards with different terms and conditions? 

Mr. CAREY. Congressman, I think your point is a very good point. 

I can certainly take that back to my business area, and we can review that. I understand the concern. I would say that the card that 

was offered was certainly equivalent, if not better, than the card 

that they had previously, and— 

Mr. ACKERMAN. I am not arguing. I have both. 

Mr. CAREY. Okay. 

Mr. ACKERMAN. So I am—you know, I have no personal dog in 

that fight. But people are entitled to make decisions, and not have 

somebody swap—making the decisions. 

If we are in favor of people making their own choices based on 

information, then that choice shouldn’t be taken away from them. 

Mr. CAREY. You are absolutely correct. I agree with that. 

Mr. ACKERMAN. I do have some other issues, but I will—hopefully, we can talk about them when you have the opportunity to 

meet. 

Mr. CAREY. I look forward to it. 

Mr. ACKERMAN. I yield back the balance of my time. 

Chairwoman MALONEY. We are going to adjourn for 10 minutes 

for votes. Thank you. And we will be coming back. 

[Recess] 

Chairwoman MALONEY. The meeting will be called to order. Congressman Gillmor suggested that I begin without him, as he has 

a conflict, but he will try to get back. 

And I now recognize Congresswoman Bean, from the great State 

of Illinois. 

59

Ms. BEAN. Thank you, Madam Chairwoman. I wanted to direct 

my question to Mr. Carey regarding what someone with the Federal Reserve has proposed, on the reworking of Reg Z. 

I know in your testimony, and I believe some of the other testimonies, there was discussion of how repricing practices could 

change, particularly if the 45-day notice period is implemented. 

What type of changes would you anticipate? 

Mr. CAREY. The Fed’s rule around the 45 days, I think, is centered around the concept that when customers apply for credit, 

they have an expectation that the rate that they applied for is 

something that they can rely on. And what the Fed has done with 

their 45-day rule is that they have, I think, provided some level of 

reliance for that. 

Now, what we have done at Citi is a little bit different from how 

the Fed has approached this. We have abandoned the practice of 

any-time, any-reason. So, if your credit behavior changes with 

other creditors, or if market conditions change, we would not 

change your rate for the life of the credit card, which is approximately 2 years, because we think it centers on the proposal that, 

‘‘Look, this is what I applied for, this is what my terms are, and 

in essence, a deal is a deal.’’ 

So, that is the approach we have taken. I think the Fed is on the 

right track with it. And we—you know, there are pieces of it we 

have to look at, but we generally think that this is the right approach towards dealing with most repricing issues. 

Ms. BEAN. Okay. And the other question I would ask you—and 

there might be other panelists who may wish to respond, as well—

is, clearly, looking back over the years where there was more average rates that were charged, and now there is more risk-based pricing, but also providing credit to a lot more folks in the process, if 

the industry moves far away from risk-based pricing, is there then 

the risk that overall rates go up for the broader pool of credit card 

holders to cover those where we might lose practices that charge 

those who have worsening credit ratings, so that the whole pool of 

credit card holders aren’t hit? 

Will that spread it, and is there also risk that average rates go 

up for the broader pool? 

Mr. CAREY. I think that is a terrific question. You know, if you 

go back and look at the industry, the average credit card rates of 

15 or 20 years ago were around 19 percent, on average, and it really didn’t matter whether you were high risk or not. Everybody got 

the same price. 

Ms. BEAN. Same rate. 

Mr. CAREY. And what has happened over time is that the rates 

in the industry have gone down. Overall, they have gone down. 

And so, the people who have the best credit record in a risk-based 

credit system get the best pricing, and those who are higher risk 

pay a higher price for the credit. 

But what has also happened is that there is more access. People 

who would not have qualified for a credit card 20 years ago, now 

have an opportunity to apply for a credit card, and be approved for 

credit, and be able to use a credit card. 

So, we think that pricing would go up, and that the availability 

of the product would not— 

60

Ms. BEAN. Go down. 

Mr. CAREY. No, be as universal as it is now. 

Ms. BEAN. Any other panelists, if I have time, who wish to comment on that? 

Mr. MIERZWINSKI. If I may? 

Ms. BEAN. Yes. 

Mr. MIERZWINSKI. Very briefly, Congresswoman, I would simply 

say that we would be happy to try to provide you with more information, which I don’t have in my written testimony, about one of 

the reasons that the cost of credit has declined—and a point that 

I don’t think has been made—is that the bank’s cost of money declined dramatically over that period, as well. 

And second, we would point out that the use of risk-based pricing 

is something that the consumer groups don’t necessarily directly 

oppose, but we do oppose using it as a cover for unfair practices. 

When they claim that, ‘‘Oh, we had to do this because of risk-based 

pricing,’’ well, obviously, now that everybody is stopping doing certain things, we think it really wasn’t risk-based pricing. 

Ms. BEAN. That is similar to recent hearings we have done in the 

broader committee on the subprime lending market. We don’t want 

to discourage liquidity and access to mortgages to people with less 

than perfect credit. We certainly want that availability. But we 

don’t want to go so overboard that we charge everybody for those 

who are in a higher risk pool, yes. 

That is all I have. I yield back. 

Chairwoman MALONEY. The Chair recognizes Mr. Ellison. 

Mr. ELLISON. Yes, I would like to follow up on this question of 

the price of money over the last 30 years. I think in 1979 we had 

high inflation and high interest rates. 

But I mean, the Fed engages in monetary policy, and they pursued the monetary policy that brought interest rates down. Isn’t 

that correct, as a matter of American monetary policy? This is not 

a function of the credit card industry. 

Mr. CAREY. It really depends upon the period of time which you 

are speaking about. I am talking about a period of time between 

1995 and today. 

Mr. ELLISON. Okay. 

Mr. CAREY. And, again, I would have to go back and look at the 

cost of funds. But my understanding is that the cost of funds 

wasn’t substantially different than it is today. 

Mr. ELLISON. Any thoughts on that, Mr. Mierzwinski? 

Mr. MIERZWINSKI. My recollection is that the Fed lowered rates 

to historically low rates in the early part of this century, and rates 

for auto loans, rates for home loans, all kinds of rates declined to 

very low levels, as everyone knows, but credit card rates did not 

decline as much. 

Mr. ELLISON. I would also like to ask some questions about riskbased pricing. Could you help me understand? Risk-based pricing 

is, I guess, a pricing scheme that ties the price of money to—or access to it—to the amount of risk associated with loaning that 

money. 

And if risk-based pricing is actually how the credit card companies do pricing, how could a congressional hearing shining light on 

things like double-cycle billing, universal default, how could just a 

61

congressional hearing actually get those sort of practices to be dispensed with voluntarily by the company? You understand my 

point? Maybe you don’t. Mr. Caywood? 

Mr. CAYWOOD. I understand your point, and I would just say, on 

behalf of Bank of America, that didn’t happen. 

Mr. ELLISON. Okay. 

Mr. CAYWOOD. That we did not engage in universal default, or 

double-cycle billing well, well before any of the hearings began. 

Mr. ELLISON. Right. 

Mr. CAYWOOD. So, because we listened to our customers, and decided those were not practices we would engage in. 

Mr. ELLISON. And, Mr. Caywood, I think you are making my 

point, exactly. If somebody says we have to do these things because 

of the risk, then how do you explain what Citigroup, Bank of America, and some of the—and I think half of the top 10 have voluntarily dispensed with the practice? 

So, it seems to me that the practices of double-cycle billing and 

universal default cannot be rationally tied to risk-based pricing. 

Am I right or wrong? 

Mr. CAYWOOD. I think those practices are different than riskbased pricing. 

Mr. ELLISON. Right, you’re right. They are different, but don’t 

they, in fact, reflect the idea that these—that some of these credit 

card holders actually are—I mean, that these practices can be justified by greater risk? Because credit cards are a higher risk form 

of money. So they’re justified by saying, ‘‘Well, they are higher risk, 

so we can do these things.’’ Am I right about that? 

Mr. CAYWOOD. I think there are ways to do risk-based pricing 

without engaging in universal default. 

Mr. ELLISON. Yes. 

Mr. CAYWOOD. But— 

Mr. ELLISON. And I think you and I agree on that, but I guess 

I am curious to know the other side of the coin. For companies that 

do it, how do they justify doing it? Do they justify it because credit 

cards are riskier? 

Mr. CAYWOOD. I don’t— 

Mr. ELLISON. You don’t do it that— 

Mr. CAYWOOD. No, we don’t. Sorry. 

Mr. ELLISON. Mr. Mierzwinski, do you have any thoughts on it? 

Mr. MIERZWINSKI. I do, but Kathleen, I think, has some points. 

Mr. ELLISON. Oh, I didn’t see. Sorry about that. 

Ms. KEEST. Well, I am afraid there is a—I think it is kind of a 

little bit of the, ‘‘We can do it,’’ ‘‘What we can get away with, we 

will do.’’ 

Mr. ELLISON. I think you are right. 

Ms. KEEST. I mean, if you look at the way the penalty rates went 

up after the Smiley decision, which basically said all bets are off 

around the time the Smiley decision came down in 1995, I think 

the penalty rates—sorry, not the penalty rates, but the penalty 

fees—were about $1.7 billion, and in 2005 they were $17 billion, reflecting 10 years of the effect of Smiley. 

And just in terms of sort of what people are thinking, I just put 

a Chase application that I got in the mail regarding the payment 

allocation system, and they just stuck in there, ‘‘You authorize us 

62

to allocate your payments and credits in a way that is most favorable to us.’’ 

Mr. ELLISON. That sounds like a good deal. 

Ms. KEEST. Yes, who could argue? So I think there is a lot of 

that, ‘‘Hey, let us just push the limit, and see what we can get 

away with.’’ 

Mr. ELLISON. And, in that case, isn’t there an important role for 

Congress to play? 

Ms. KEEST. Well, I think there are a lot of people who think that. 

Mr. ELLISON. Yes. My next question is this. I have heard—there 

were some folks on the earlier panel who—we talked about this one 

practice of universal default. Can you help me understand what legitimate economic basis the practice of universal default might 

have, as it relates to, say, risk? 

Chairwoman MALONEY. The Chair grants the gentleman an additional 60 seconds. 

Mr. ELLISON. Thank you, Madam Chairwoman, I will be quick. 

Chairwoman MALONEY. To get this answer. 

Mr. ELLISON. Other than Ms. Keest’s point, which is getting as 

much as you can, is there any risk-based rationale for this practice? 

Mr. HUIZINGA. I think that, as has been mentioned, many creditors have moved away from it. I think I have heard the argument 

made that if a consumer defaults on one loan, that may be an indication that they may be likely to default on another loan. It may 

be an indication that there has been a difficulty in their credit situation, or the like, and it may evidence a higher risk on another 

loan, even though they haven’t defaulted on that loan yet. 

Chairwoman MALONEY. Okay— 

Mr. MIERZWINSKI. I would just add, Mr. Ellison, that the regulators came out with a guidance where they said that if you were 

going to risk reprice, it must really be based on risk. And so, clearly, so many people getting rid of it, it is probably not based on risk. 

Chairwoman MALONEY. The gentleman’s time has expired, and 

the chairwoman recognizes herself to follow up with a question to 

Ms. Keest. 

You mentioned that after the Smiley decision, the fees went up. 

What do you think the effect of the Wachovia decision on business 

practices will be? The recent decision. 

Ms. KEEST. Well, it would be interesting to see what the folks 

from the banks here—I would say, on the fees, probably not a 

whole lot, for the simple reason that the credit card issuers are 

mostly being issued directly by the banks, anyway, rather than the 

operating—is that correct? 

Chairwoman MALONEY. Would anyone else like to comment? 

[No response] 

Chairwoman MALONEY. No? No comment? Okay. The Chair recognizes Mr. Bachus for 5 minutes. 

Mr. BACHUS. Thank you. There has been a lot of talk about universal default. Now, I can certainly identify with a company that 

is extending credit, that all of a sudden sees a change in the consumer, or the credit card holder, that indicates that he may be 

going to have a difficulty. In fact, we have—our credit ratings now 

63

can pick up on some of these trends, although not always accurately. 

But let me ask you about this. I have a credit card. I have been 

told that I purchase stuff, and the interest rate will be 8 percent, 

and I make $10,000 worth of purchases. Now, all of a sudden I default on maybe not your credit card, but on somebody else’s, or my 

credit score goes down. And that indicates to you, ‘‘I am not sure 

that I want to keep loaning this person money at 8 percent.’’ 

I can actually see the equity in saying, ‘‘I am not going to loan 

you any more money at 8 percent,’’ but I don’t see the justice or 

the fairness in saying, ‘‘The money I loaned you at 8 percent, all 

of a sudden, I am loaning you that at 22 percent.’’ 

What is your policy on that? Do you suddenly change the rules? 

And you are going to protect yourself, you don’t want to loan any 

more money to this person. But what is the justification for going 

back and changing what was an agreement that you had? 

Now, you can say, ‘‘Well, on page 32 of the small print, we said 

we could go back and do that,’’ but you know, when you say a rate 

is fixed for 6 months or a year, you know, to me that indicates—

I’m a law school graduate—a contract. I will just start with 

Citigroup. 

Mr. CAREY. Congressman, that is not a practice that we engage 

in at all. So, if the customer has a problem with another creditor, 

and becomes viewed with very high risk, we don’t change the rate. 

Mr. BACHUS. What if they even defaulted on your credit card? 

Now, do you change the rate, right? 

Mr. CAREY. We would change the rate, yes. 

Mr. BACHUS. But is it just on new purchases, or do you go back 

on everything they have borrowed before, and— 

Mr. CAREY. No, we would change the pricing. Again, these are 

in specific circumstances, depending upon the particular credit risk 

of the individual customer. We might reprice— 

Mr. BACHUS. Yes. You know, the thing— 

Mr. CAREY.—if they violated an agreement, yes. 

Mr. BACHUS. I am going to say this, Mr. Carey. The thing I see 

about that is that when he is a credit risk, he doesn’t pay you, 

that’s right. When you increase his interest rate from 8 percent to 

22 percent, he really becomes a credit risk, not only to you, but to 

other people who have loaned him money. 

Mr. CAREY. I understand. 

Mr. BACHUS. You know, he probably has a car loan on a fixed 

rate. He may have a mortgage. And when you suddenly increase 

his borrowing costs by several hundred dollars a month, you make 

him a threat, not only to default on your payment, but on other 

people’s. 

And then, if he decides to go into bankruptcy, 4 years ago we sort 

of shut that door, because credit card companies said to us, ‘‘We 

have a problem. People are, you know, we are loaning them money, 

and they are going into bankruptcy.’’ 

Mr. CAREY. I understand. 

Mr. BACHUS. And it really has caused a lot of us to say, ‘‘What 

did we do 4 years ago?’’ 

Mr. CAREY. I understand, Congressman. 

64

Mr. BACHUS. But I just don’t see the justification. You can 

change the rules going forward, and I am with you on this. There 

is more of a justification if he misses a payment. I am not talking 

if he is 3 days late, but if he is 60 days late, there is more of a 

justification. 

But still, what we are talking about—and I get handed these 

things all the time, unfortunately. As ranking member, it is the 

most unpleasant thing, since I have been ranking member. But I 

do not understand that. 

Another thing I do not understand. You loan money and your primary—I think—obligation and also intent is to get paid, is for 

somebody to reimburse you at whatever interest rate you charge 

them. But if you charge them 8 percent, but then if they make a 

mortgage payment—do you all charge them a different—like, if 

they make a mortgage payment with their credit card? 

I don’t know if you all heard the story of the young man who—

I relayed in my opening statement—used his credit card to make 

a mortgage payment. All of a sudden, that was 22 percent. So he 

tried to not only make a minimum payment and pay that off, but 

he was told that he had to pay all $4,000 or $5,000 at the low interest rate, they applied it to the low interest rate, first, which is 

obviously to your benefit, I guess—or not you, personally, but the 

bank. 

But it is obviously the most detrimental thing to him, the most 

unfavorable thing you could do to your customer, and something 

that he would never agree to with a— 

Chairwoman MALONEY. The Chair grants the gentleman an additional 60 seconds. 

Mr. BACHUS. I would just maybe ask Citigroup or Capital One, 

or—and I appreciate you all being here, but what— 

Mr. CAREY. I agree with you, Congressman. 

Mr. BACHUS. Do you all do that? Do you all apply it to the lowest 

of the—if he has some money you have agreed at 0 percent or 5 

percent or 10 percent, do you apply it to the lowest first, and make 

them pay all that before you—do you know what you all— 

Mr. CAREY. At Citi, we do apply it to the most inexpensive balance. 

Mr. BACHUS. Which then, actually, causes his expense to go up, 

his cost to go up. Does it not? 

Mr. CAREY. Yes, it might. 

Mr. BACHUS. So you are concerned about being paid, but you are 

increasing his cost, which—doesn’t that just make him more likely 

to default? 

Mr. CAREY. I think you make a very good point about payment 

allocation, and the overall fairness with that. I believe that that is 

an area that ought to be looked at, and there ought to be an industry-wide solution to that problem, I agree with you. 

Mr. BACHUS. Yes— 

Chairwoman MALONEY. The gentleman’s time has expired, thank 

you. Mr. Moore? 

Mr. MOORE. Thank you, Madam Chairwoman. Mr. Carey, you 

said in your testimony that without the ability to differentiate risk, 

less creditworthy consumers would have fewer appropriate means 

of accessing credit, relatively risk-free consumers would face a 

65

higher cost of credit, and bank lending strategies would be significantly curtailed. 

My question, and I would like, I guess, your comment, your 

thoughts on this, Mr. Carey, is Citi and some other card companies 

made the decision to eliminate universal default and so-called anytime, any-reason repricing. Could you talk a little bit more about 

what the rationale was, and what factors led Citi to eliminate those 

practices, number one? 

And, number two, do you believe those practices should be eliminated across the industry? 

Mr. CAREY. Congressman, I would be glad to respond. First of all, 

we spent a great deal of time talking to consumers on the telephone. We receive 150 million calls a year. We receive over—we 

have communications with—over 100 million pieces of communication every year. We engage in focus groups, we reach out to customers. We are very—from the customer complaints we receive 

from the OCC, we react to those accordingly. 

We also reach out to many of the community and consumer 

groups. Some of them are at this table, where we work with them 

to understand what their concerns are. And also, we have what I 

would say is a terrific legislative affairs group that works very 

closely with Members on the Hill, and with State government. And 

we take that information, and we try to adopt our practices based 

on transparency, based on fairness, and then based on providing 

customers the tools to make informed decisions about their lending. 

So, you know, I think that answers both your questions, but I am 

not certain. 

Mr. MOORE. No, it doesn’t. What about— 

Mr. CAREY. Oh, on the individual practices? Oh, no. I agree with 

you. I think that universal default, I think, is a fundamentally unfair practice, and that is not a practice that we do. We looked at 

it. 

In fact, we looked at it long ago, and we gave customers back in 

2005 the opportunity to opt out and still use the card, which was—

you know, universal default is the idea that it automatically 

switches, and you can’t opt out, and you can’t use the card. 

Mr. MOORE. Well, the second question, though, was beyond Citi. 

And I appreciate what you have said, and I appreciate the decision 

you all made. Beyond Citi, should these practices be eliminated 

throughout the industry? 

Mr. CAREY. I think Congresswoman Maloney has come across, I 

think, a terrific idea, which is this concept of a summit, where we 

can gather together to drive best practices within the industry. And 

we fully endorse that, we think it is a terrific way to solve a lot 

of these issues, short of legislation. 

Mr. MOORE. She has good ideas, and I would endorse that, as 

well. Thank you. 

Chairwoman MALONEY. Mr. Hensarling, for 5 minutes. 

Mr. HENSARLING. I thank you, Madam Chairwoman. Well, along 

with some of my colleagues, I must admit there are some practices 

of the credit card companies that don’t absolutely thrill me. I 

haven’t quite concluded in my role as legislator, that it is my prerogative to outlaw them. 

66

I will observe, particularly as I reach the ripe young age of 50, 

I reflect back upon when I attempted to get my first credit card, 

that very few people would offer me a credit card. Credit wasn’t 

available. And I think 20, 30 years ago, people probably in this 

very room were debating, ‘‘What are we going to do to get more 

credit to consumers?’’ And now, to some extent we debate isn’t 

there too much consumer credit out there? 

When I finally did get a credit card, one, it had an annual membership fee I had to pay, and the interest rate, compared to today, 

was exceedingly high. As time has gone by, I observe now there is 

a dizzying array of offers in my mailbox, practically on a daily 

basis, from a wide variety of banks. The interest rates are much 

lower. I can actually get cash back at the end of the year. I can 

get car rental insurance. I can get frequent flyer miles. I can get 

donations to my favorite charities. And, if I am able to pay on time, 

I get interest-free loans from the time of purchase. 

Such a deal. I think it should at least be noted that, in a competitive marketplace, good things can be yielded to the consumer. 

And I can think of no greater consumer protection than a competitive marketplace. 

So, I tend to focus on, number one, as I look at these types of 

issues, is the marketplace effective? And although I did not hear 

every bit of testimony today, I have not seen a lot of credible evidence telling me that there is not an effective competitive marketplace. 

So, typically, I would want to focus on is there effective disclosure? I know some speak of unfair practices, or—and deceptive 

practices. I care about deceptive practices. But if there is full disclosure, I am not sure there is a lot of commercial transactions between fully informed consenting adults that I care to outlaw, and 

I continue to be concerned about whether the cure is going to be 

worse than the ill, in that if we over-legislate, whether credit will 

become less available, and at higher cost, particularly to those who 

need it. 

But to the more effective disclosure—I shouldn’t say more disclosure, but more effective—we have an all-new and improved Regulation Z. I will be the first to admit I haven’t poured through all 800 

pages of it. But it seems to—and at least in the view of the Fed—

takes care of a lot of the challenges that we have today, and perhaps is very prospective in scope, and hopefully, will be in place for 

years to come. 

And, forgive me, I did miss much of the testimony. But to the 

extent people have managed to review the new Regulation Z, what 

is it that you would have us legislate that you do not see in the 

new Regulation Z? And anybody who wants that softball, I will let 

you have it. 

Ms. KEEST. That was actually my assignment to talk about, and 

so I did talk about it in the written testimony. 

Mr. HENSARLING. Forgive me. 

Ms. KEEST. What we focused on was the regulation, the proposed 

regulations, are a considerable improvement, certainly in the formatting, and the understandable stuff. But the problem is with the 

price complexity—and I will let Ed answer your question about 

whether or not we have a competitive market with as much market 

67

concentration as we have—that the pricing complexity is really 

only dealt with by an effective way to sort of try to bring some 

order to the chaos, to the pricing chaos. 

And there are a couple of significant respects where even the Fed 

has thrown up its hands and said it is too complicated. 

And, you know, the cost of credit is principal times interest times 

time equals dollar signs. And we have all focused on, you know, the 

rate, which gets messed up with additional charges that complicate 

the things. And then you also have, mucking around with accounting principles, where they are mucking around with the principle 

and the time. And the Fed has, actually in a couple of cases, said, 

‘‘This is too complicated to deal with’’— 

Mr. HENSARLING. I see my time is about to run out. The tax code 

is very complicated, as well. Somehow Americans manage to plod 

through that each year. 

I would also have a fear, though, that if we try to homogenize 

this product, then the innovation from the marketplace might leave 

us—with that, I see the red light has come on, Madam Chairwoman. 

Chairwoman MALONEY. Thank you. The chairwoman recognizes 

herself, following up on his questioning on the disclosure. 

In discussions with some banks, they have cited to me anti-trust 

concerns as a reason for not amending their disclosures and making them clear, and help consumers understand them more. 

I would like to ask the issuers, with the new Reg Z, does that 

take care of the concerns? Some banks have told me, ‘‘The reason 

we hand out 30 pages worth of information on this is because our 

lawyers tell us to, and we need to.’’ But with the new Reg Z, well, 

do you see the industry voluntarily following the recommendations 

that the Fed has come out with, even though there is a comment 

period that extends until October with the clear stating of fees and 

so forth? Do you see any change now? 

I would like to start with Mr. Carey. And if there are issuers—

anyone who would like to comment, but I would like to hear from— 

Mr. HUIZINGA. I can address that question. 

Chairwoman MALONEY. Okay, sure. 

Mr. HUIZINGA. In terms of litigation, I think one of the things 

that issuers have struggled with is that these credit card products 

can be complicated. And there has been a lot of litigation over the 

years by consumers, challenging that the terms were not clear 

enough. 

And many times, the response to that has been to make them 

longer, to get into the detail. If someone didn’t understand a particular point, to write a paragraph on that. And then, when somebody else didn’t understand another point, to write a paragraph on 

that. And we ended up with very long disclosures, which I think 

everyone admits are not as effective as they should be. And I think 

the Fed’s approach in Reg Z, really, is designed to address that. 

The Fed has tried to distill the key points that are important to 

consumers in shopping for credit, and to try to put them in a table, 

and in a way that can be easily understood. So, I think that is 

being addressed, in terms of moving from densely written disclosures that are very difficult to understand, to tables and sumVerDate 0ct 09 2002 16:27 Oct 18, 2007 Jkt 037552 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 K:\DOCS\37552.TXT HFIN PsN: TERRIE
68

maries that have limited the information, hopefully in a more manageable way, so that people can shop better. 

Chairwoman MALONEY. Not only can people shop better, we have 

heard testimony from very sophisticated people—including the 

head of Freddie Mac—that he could not understand his credit card 

disclosure form. 

But I would like to ask Mr. Carey and Mr. Caywood and Mr. 

Finneran with the new Reg Z, what impact does that have on you? 

Will you be changing your disclosures? Will you be making any 

changes because of Reg Z, or— 

Mr. CAREY. Oh, yes. I mean, the—what is terrific about the Reg 

Z proposal is that, really for the first time, there is uniformity 

about format, type face, language, they have provided amount of 

language, designed to allow customers to truly understand the 

products that they—or services—that they want to acquire. 

And what is also good about it is that it is at each stage of the 

customer’s interaction with the lender. So, when you are applying 

for a card, there are certain rates that are very important for you 

to know, very key things you need to know. That is important. 

When you get your card agreement and your credit card, they are 

laid out very much like the food labels. 

Chairwoman MALONEY. Yes. 

Mr. CAREY. The American public have gotten used to the food labels— 

Chairwoman MALONEY. So you see industry conforming to 

what— 

Mr. CAREY. Yes, yes, I do. 

Chairwoman MALONEY. Great. The Chair recognizes Mr. Clay. 

Mr. CLAY. Thank you, Madam Chairwoman. I have two examples 

of true experiences in my district of adverse dealings with credit 

cards. And this example and question are for Mr. Carey, Mr. 

Caywood, and Mr. Finneran. 

An 87-year-old female constituent was a caretaker for her sister. 

Ms. Mary Cutty dutifully paid her bills without always auditing 

the statements, as she was involved with her sister, and was trusting of the system. Her sister was recently transferred to a care facility, as the task got to be too much for Ms. Cutty. 

During the time that her sister was with her, there were two incomes in the home, and although bills increased, timely payments 

were made. Once the sister’s income was given to the care facility, 

Ms. Cutty was very meticulous with her bills, because she had 

more time and less money. 

She was shocked to discover that her interest rate had increased 

to over 30 percent. She called my office as a last resort. And in distress, she tearfully explained her situation and said that she simply would never be able to pay off the debt at that percent rate. 

Now, she was in complete despair. She said that she is considering 

bringing her sister back home, because they may not be able to afford to live apart. 

Do we have to make money off the backs of Americans in their 

golden years with these cloaked methods of raising rates? If the intent is not predatory, surely the result is. How do we assist the Ms. 

Cuttys of this country? Can anyone try to tackle that? 

69

Mr. CAREY. Congressman, what you describe is, I think, a terrible situation. That is not—it is awful. I agree with you. I think 

that it is not the right thing to do for individuals. 

And if it is our customer, we would—we want to talk to this customer, we want to engage with this customer, we want to help this 

customer. Generally, we find if we can talk to customers who are 

actually in true financial distress, we can work those things out. 

And we want to encourage people to engage with us. 

We are not interested in throwing people over the edge, throwing 

them out of the life boat. That is not what we do, that is not a 

practice that we want to do. People do find, through life circumstances, that terrible things happen to them. And when that 

happens, at least the company that I work for steps up and says, 

‘‘We have to make it right.’’ 

Mr. CLAY. Mr. Carey, I am encouraged to hear that. Let me give 

you one other example. 

Consumers are often shocked by the impact of penalty payments 

and fluctuating interest rates. A true example was given to me by 

a student in my district, and the student happens to be here today, 

interning for me. 

This student purchased three cups of coffee that sent her beyond 

her credit limit each time. Because the penalty charges are $35 for 

each transaction, the student ended up $120 in debt for the three 

$5 charges at Starbuck’s, plus the overage penalty payment. 

Would it not make more sense to lower penalty payments? 

Wouldn’t it be a simple procedure for the credit card company to 

just decline the sale? How do we get away from this culture of 

force-feeding cards to students, knowing full well their limited incomes and the likelihood of overcharging—since it was a Bank of 

America charge, Mr. Caywood, can you address it? 

Mr. CAYWOOD. I would be happy to address it. First, I can tell 

you that in any given month, you can’t get more than one overlimit 

fee from Bank of America. So, the three cups of coffee, for that to 

occur, would have to be in three different months, which is possible. But we do cap the number of consecutive over-limit fees for 

any customer at three. 

So, we are very careful to make sure that we have that policy 

in place, and that we don’t have repeated over-limit charges just 

continuing to occur on a customer that is stuck over their credit 

limit. 

Mr. CLAY. Thank you for that response. And Mr. Finneran, Mr. 

Mierzwinski talked about due dates. Can consumers ask and receive a change in due date? 

Mr. FINNERAN. Yes, sir. They can. 

Mr. CLAY. And what is the procedure, just to call? 

Mr. FINNERAN. Yes, the procedure is to call us, and we can adjust 

the due date and change their billing cycle to fit their particular 

circumstances. 

I would also note that with respect to due dates, we actually 

have, at Capital One, one of the longest cycle periods in the industry, the effect of which is to give people more time to pay their bill 

after they receive it, and still be on time. 

70

Mr. CLAY. Okay. How do you feel about accepting the postmark 

date as the time of payment, in order for the customer to avoid the 

late payment? 

Mr. FINNERAN. I think it has a lot of operational complexities 

with it. We do provide to our customers multiple ways to pay their 

bill. In addition to getting the bill out on time, we certainly encourage them to pay on time and we seek to help them out as much 

as we can, as circumstances warrant. 

Mr. CLAY. Well, Mr. Finneran, you know that most billing operations do accept the postmark date of the U.S. mail that is sent to 

those offices. Why would credit card companies have such difficulty? 

Mr. FINNERAN. Well, with all due respect, sir, I am not sure that 

is right. I believe most people expect to receive a payment by the 

time of the due date, and that business practice is with more than 

just credit cards. 

Mr. CLAY. It is the custom of most billing— 

Chairwoman MALONEY. The Chair extends 60 seconds. 

Mr. CLAY.—of most billing departments to accept the postmark 

date. And I mean, I think that is only reasonable. If someone intends to get the payment there on time, I don’t see why the company cannot honor that intent. 

Chairwoman MALONEY. And the gentleman’s time is expired. Mr. 

Davis of Kentucky? 

Mr. DAVIS OF KENTUCKY. Thank you, Madam Chairwoman. 

That— 

Mr. BACHUS. Madam Chairwoman, could I—I have to leave for 

a few minutes, but could I ask unanimous consent that after he 

gets through, Mr. Price could go, so— 

Chairwoman MALONEY. Sure, absolutely. 

Mr. BACHUS. Thank you. 

Mr. DAVIS OF KENTUCKY. I think that Congressman Clay brings 

up an interesting area of interest—no pun intended. But the—

when looking at hardship situations that can occur, you can get 

into a cycle with the numbers and make it, you know, very problematic. 

And one of the questions in my mind, as coming to this committee as a business owner, you can hit a point on attempting to 

collect a debt that the cost of the collection actually will vastly outweigh the principal at the end of the day, and there comes a business cost that is somewhat problematic for someone who is already 

in a financial hardship situation, especially if you have a senior citizen who perhaps gets into a situation where they may be confused 

later in life, dealing with illness, or other things that might occur. 

And I was wondering if you might comment for a moment on 

how you deal with hardship situations. Maybe start with Mr. 

Carey. 

Mr. CAREY. Well, sir, actually, I think it is a terrific program. In 

many ways, when customers come to us, and they say they are 

having difficulty paying their bills on time, we have a number of 

programs where we will work with the customer on an individual 

basis, either in a temporary program—say, for example, there is a 

loss of job, a temporary loss of job, or a temporary illness. 

71

I mean, we will go to the point of, in essence, extending interestfree lending, suspending minimum payments, or lowering minimum payments, in many ways, to try and accommodate the customer’s individual need. 

Sometimes an individual is in way over their head, and there 

isn’t an ability to dig out. We will work with those customers to 

try and find an arrangement that makes the most sense. 

So, I think your point is exactly right, that at some point it 

doesn’t make a lot of sense to do it. It’s also probably not the right 

thing to do, anyway. 

Mr. DAVIS OF KENTUCKY. In context—and perhaps Mr. Finneran 

can follow on the same line—if you get into a situation—for example, I will go back to the senior citizen situation, where just a family member—I ended up walking through this process with them, 

and watching this occur, firsthand—they come to you. You recognize the situation. 

At what point do you make the decision, you know, both from a 

business and a moral decision, to actually write that down, write 

that credit off, absorb the loss, based on, you know, how you have 

already managed risk and you have assessed risk? 

Mr. FINNERAN. Sir, maybe I will go first. I think our program is 

similar to the one that Mr. Carey described. I think we try to work 

with each individual customer, based on their individual facts and 

circumstances. 

I think the key here is that we do try to encourage people to let 

us know when they are having difficulties, so that we can engage 

in that dialogue and see if we can come up with a solution that 

works for both parties. 

Mr. DAVIS OF KENTUCKY. At what point do you move from—what 

triggers, causes you to move from an increasing interest rate to, 

let’s say, more of an act of grace towards that customer? 

Mr. FINNERAN. I’m sorry, sir, I’m not sure I follow the question. 

Mr. DAVIS OF KENTUCKY. Well, you know, having watched some 

of these situations occur, where debt will mount up, or payments 

are missed, and obviously something is wrong at some point, at 

what point does the company, in the dialogue with the customer, 

when a collection action is in process, make the point to go to another track, recognizing that collection is not going to be an effective activity? 

Mr. FINNERAN. It could be at multiple points in the dialogue with 

the individual customer, sir. It just depends upon the facts and circumstances of each individual case. 

Mr. DAVIS OF KENTUCKY. Yes, I have to just say for the record, 

I was actually pleasantly surprised in a situation that we saw at 

a distance with a senior citizen who—I am not going to name the 

company at the time—but that actually, I think, did something 

very humanitarian, in terms of helping an elderly person manage 

their way out of a problem that was very significant, actually discouraged payment because of fixed income implications, and things 

like that, that, you know, it’s part of the story that doesn’t get told. 

Although, at the same time, I think we are dealing with interest 

rates that can be prohibitive in certain cases for individuals. But 

that leads me into another question. 

72

There is always kind of a yin and yang balance that we run into 

here in dealing with the availability of credit as we push that floor 

downward, and how you effectively measure risk, and regulation. 

And, certainly, we want to have a very strong advocate for protecting consumers, particularly things, legislation I have personally 

worked on since I have been in Congress for our military personnel, 

to protect them from predatory lending practices and other sorts of 

schemes. 

But to Mr. Mierzwinski, and Ms. Keest, one question that I have 

is, you know, can we go too far, in a regulatory environment, to create a situation that causes credit to be pulled back from those who 

may, in fact, be in that need, at the same time providing an adequate balance for consumer protection? 

Mr. MIERZWINSKI. Mr. Davis, if I could answer your previous 

question to the bank witnesses first, I would just point out to the 

committee that while the programs of these banks may be good 

programs for dealing with mitigating the risk of payments that 

people in hardship can face, I would also point out that the regulators have issued guidance requiring all banks to have programs 

like that, and it may be useful for the committee to ask further 

questions of the regulators, as to how did they enforce, and how do 

they know about how, significantly, all the banks are providing 

those hardship-based functions. 

Because that is one of the real problems out there, when a consumer calls a bank, does the bank just say, ‘‘You better pay, or 

else,’’ or does the bank say, ‘‘We would like to work it out,’’ and 

they are supposed to have special work-out programs. 

On your other question, obviously, it’s always the issue. I personally don’t think the Congress can go too far. I think you need to 

go further than where the Fed went. 

And I would encourage you that banning unfair practices is not 

going to eliminate the availability of credit. I think banks want 

new customers, banks are trying to find new customers, and they 

are trying to make credit available. And banning unfair and grotesque practices, you can still make a lot of money in this business. 

The problem is, they are making money with unfair practices on 

top of the good money that they deserve to make. 

Mr. DAVIS OF KENTUCKY. And you mentioned, you know, grotesquely unfair practices. What do you think is the most egregious 

one that you point to? And, again, I come back to the— 

Chairwoman MALONEY. The Chair grants an additional 60 seconds. 

Mr. DAVIS OF KENTUCKY. Thank you. 

Mr. MIERZWINSKI. Well, first, universal default, retroactive balance, being charged two penalty interest rates, changing the rules 

without notice, and the practice that Mr. Bachus talked a great 

deal about, which is to have your payment applied to the lowest 

portion interest of your entire bill. 

I could go on and on, but it is all outlined in detail in my testimony. 

Chairwoman MALONEY. The time is expired. Mr. Cleaver, for 5 

minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman. I have just a 

couple of questions. Would all of you support a measure that would 

73

bar the issuance of credit cards to people under 18, unless they 

have a signature of a parent or guardian who would assume responsibility for the charges, or prove that they have means to repay 

the debt? 

Would all of you support—well, maybe who would not support 

that? Who thinks that is a bad idea? 

Mr. FINNERAN. I believe that is already the law in almost every 

State. 

Mr. CLEAVER. It can’t be. 

Mr. FINNERAN. For people under 18. 

Mr. CAYWOOD. It is certainly already our practice at Bank— 

Mr. FINNERAN. It is certainly the practice of Capital One, and it 

is certainly the law in the State of Virginia, where we issue from. 

Mr. CAREY. It is our practice, at Citi, as well. 

Mr. CLEAVER. So, then, what we need to do is move it up to college-age students who are unemployed? 

Ms. KEEST. I think most people think that loans should be made 

where there is ability to repay them, which means underwriting 

your loans. 

Mr. CLEAVER. I am sorry? 

Ms. KEEST. I said I think most people think that a loan should 

be made where there is ability to repay them, which means that 

they should be underwriting the loans. 

Mr. CLEAVER. Yes. I call your attention to the article that I 

showed earlier today that was in the Washington Post today, with 

a young woman who—although she is 28 years old now, she was 

in college, and left college with a $5,000 credit card debt. 

And my son, who is in college in California, he is over 18, but that is about the amount of money he has, $.18. And he comes 

home with a credit card, you know, from school. And I don’t believe 

in violence. He had only put $60 on it, on the credit card, but I 

could not imagine who would send Evan Cleaver a credit card. 

I mean, he is my son, I—you know, I feel uneasy putting money 

in his account while he is in college. And so the problem is when 

students are still in college, maybe they are 20, maybe they are 

over 18, but there is still a problem. Don’t you agree? 

[No response] 

Mr. CLEAVER. Do any of you agree? Do any of you have children 

in college? 

Mr. CAREY. I have a child in college, and actually, my son is 

here. And he does have a credit card, which he applied for, because 

he has some income, and he is able to manage his credit wisely. 

I was not able to get a credit card when I was his age, and so 

therefore, I couldn’t have access to the services that he is able to 

have access to. 

Mr. CLEAVER. I was in the same situation, but you just hit it on 

the head. The issue is he has a job. He is able to pay his credit 

card debt. But there are students who receive the credit card while 

they are in college who are not employed. And I mean, it is in today’s newspaper. 

Mr. MIERZWINSKI. Mr. Cleaver, you are raising a very fair point, 

and we have looked at this, and a number of bills, I believe, that 

have been considered say that a young person should be treated as 

anyone else. You either have to have a credit report that has a 

74

good score, or you have to have a job, or you have to have a cosigner. Or, in some of the bills that have been proposed, you at 

least have to have taken some sort of financial management course. 

And— 

Mr. CLEAVER. That is in the bill I have introduced. 

Mr. MIERZWINSKI. Right. So the issue is right now they are just 

giving them away like candy, without any of that, because they are 

relying on the fact that they can make a debt collector call to the 

consumer and suggest you are going to have 7 years’ bad luck. 

Maybe your parents ought to pay, even though they are not cosigners. 

Mr. CLEAVER. I paid the $60. I mean, nobody else was going to 

pay it, he was going to go to jail. I do not believe in, you know, 

in violence, but I was going to shoot him in the leg if it had been 

higher. 

But the point I am making, which nobody wants to agree with, 

when you are sending credit cards to students in college, you know, 

there ought to be some evaluation of their capacity to pay. And you 

are going to say that there is, and I am telling you that all you 

have to do is go and talk to college students. They are getting credit cards, and they are being solicited. 

Chairwoman MALONEY. The Chair grants an additional 60 seconds for an answer, and then calls upon Mr. Price. 

Ms. LANDIS. I am not a credit card issuer, but if I could make 

one statement that is a concern from small business, I appreciate 

the fact that you ought to be able to repay it to get the credit card. 

What concerns me is if a regulation or a law were passed that 

said I had to prove income. What would I, as the owner of the company, be required to send in to prove income, that I could get the 

credit card to finance my business? 

So, that has been the concern, as I am listening to much of this 

testimony. Keep in mind that there are two groups of folks who use 

credit cards. There are individuals who use them for their personal 

purposes, and would pay that with their salary, and then there are 

businesses who use it to finance capital expansion of their business, and they are repaying that from the funds of their business. 

Mr. CLEAVER. Okay, I have a response, but I will wait. Thank 

you. 

Chairwoman MALONEY. Thank you. Mr. Price? 

Mr. PRICE. Thank you, Madam Chairwoman. I appreciate that. 

And just let the record show that I agreed that Mr. Cleaver ought 

to go before me on the previous questioning. 

I want to thank the panelists for being here. Somebody—I was 

trying to remember who said it. Somebody once said that Congress 

does two things well: nothing; and over-react. We have done a lot 

of nothing for a long time regarding this issue. My concern and my 

fear is that we may be about to over-react. 

I am struck by the importance of financial literacy. Many of us 

have supported the need for financial literacy, and for a general 

education of our young people about the—what it means to take on 

credit, and take on debt. 

And I am also struck by the lack of mention of any personal responsibility in this discussion. It strikes me as curious that—and 

I don’t mean to cast aspersions on the individual in the WashVerDate 0ct 09 2002 16:27 Oct 18, 2007 Jkt 037552 PO 00000 Frm 00080 Fmt 6633 Sfmt 6633 K:\DOCS\37552.TXT HFIN PsN: TERRIE
75

ington Post article, I haven’t seen that, but it strikes me that she 

ought to have, at some point, recognized that $5,000, or getting to 

that point, was more than she was going to be able to repay. 

And I know that is heartless and cold, but I have experienced 

that myself, years ago, longer than I care to admit. I was an undergraduate and received a credit card, and charged too much, and 

learned a wonderful lesson. And that was that when you charge 

something, it comes due. And so, I suspect that I am a more wise 

consumer and individual, as it relates to gaining credit now, because of that experience. 

I have a couple of questions. Ms. Keest, the 2006 GAO report—

and just, in general—I think it talked about the percent of debt as 

a percent of income in our Nation, as it relates to history, and it 

is approximately, as I recall, the same as in the 1980’s, I think, as 

in terms of overall household debt. 

And I wonder if you would comment on that, as it relates to the 

degree of problem that we have. Or, am I inferring an incorrect 

conclusion? 

Ms. KEEST. I don’t recall that specific statistic. I don’t think that 

is correct. It is my understanding that we are at—in terms of debt 

compared to disposable income—at historic highs, and that revolving credit, the growth of revolving credit, has added a lot to that. 

Mr. PRICE. So—and ‘‘revolving,’’ you mean credit card debt? 

Ms. KEEST. Yes. 

Mr. PRICE. So, credit card debt you believe to be a significant increase in percentage of overall debt that we have right now, is that 

correct? 

Ms. KEEST. I believe so. 

Mr. PRICE. Okay. 

Ms. KEEST. I would have to go back and check. But I think in 

some of the other hearings that Congress has held this year, there 

have been some charts on that. 

Mr. PRICE. Okay. I have to go back and look at that report. I appreciate that. 

Does anybody use universal default? Anybody here use universal 

default? I didn’t think so. 

I want to talk a little bit about interchange fees. There is growing attention being brought to the use of interchange fees. And I 

am interested in anybody on the panel’s comments regarding—my 

understanding is that there is no true regulation of interchange 

fees right now. I think Mr. Greenspan spoke last year, or the year 

before, about the Fed taking a look at that, or gaining more interest in that. I wonder if anybody might comment about the role of 

governmental regulation as it relates to interchange fees, support 

for that, and potential consequences. 

I must have missed some testimony. Mr. Huizinga? 

Mr. HUIZINGA. I could briefly answer that. An interchange is 

compensation that is paid by one bank to another bank in the bank 

card system. 

Mr. PRICE. Right. 

Mr. HUIZINGA. It is paid by the bank that provides the merchant 

services to the bank that issues the card. 

Merchants, in turn, will pay a merchant discount to their merchant bank, which many times will include—or typically does inVerDate 0ct 09 2002 16:27 Oct 18, 2007 Jkt 037552 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 K:\DOCS\37552.TXT HFIN PsN: TERRIE
76

clude—the interchange. Currently, the merchant discount is paid 

by the merchant, in exchange for the merchant receiving services 

or benefits— 

Mr. PRICE. Do we need regulation? 

Mr. HUIZINGA. I don’t believe so. 

Mr. PRICE. Anybody think we need regulation of interchange 

fees? 

Mr. MIERZWINSKI. Mr. Price, the consumer groups have testified 

on this matter in other committees, and we are very, very concerned about the fact that everybody pays more at the pump, including people who pay with cash, because the interchange issue 

is a problem. 

Now, it may be resolved through the litigation that is occurring 

in the private anti-trust matters, but we are still looking at it very 

closely. 

Mr. PRICE. Ms. Landis, do you have any comment about interchange fees, and how they relate to small business? 

Ms. LANDIS. Interchange fees are a big cost for small business, 

there is no question about it. And it comes back to many of the 

things we have talked about here today. 

Business understands a contract, as several of you have said. If 

we enter a contract, we know clearly what we are getting into, and 

what our costs are. We can deal with it. It is the changes, the unpredictability that small business can’t absorb fast enough in its 

pricing. 

Mr. PRICE. Thank you very much. My time is expired. I appreciate your testimony. 

Chairwoman MALONEY. Mr. Perlmutter. 

Mr. PERLMUTTER. Thank you, Madam Chairwoman. And mine is 

more of a statement, I guess, than questions, because I missed so 

much of the panel’s testimony. We were working on a stem cell bill 

which we believe affects about 110 million or 115 million people, 

potentially has promise for that many people. 

Based on what I heard initially, credit cards probably touch 200 

million people. And I was in our State senate, I have been here—

I probably voted 10,000 times or more, and on Iraq, on immigration, on everything. And I will tell you the one type of vote that 

affects most people directly is on credit cards. 

And you know, my background is as a lawyer, representing 

banks and credit unions and financial services companies. There is 

a populist movement out there, concerned not so much about, you 

know, the boxes and, you know, the exact language of the disclosure, but by the rates and the fees themselves. 

And I think, you know, what we see from the poorest, who take 

advantage of credit cards, because it provides a great service, to the 

wealthiest—and it was Mr. Bachus who really struck the chord 

right out of the box, he had a businessman who kept getting different charges, he couldn’t understand them, and finally he just 

paid it off. 

And then, we had the Governor from the Federal Reserve Bank 

talk about risk-based lending. Well, I’m not really sure what that 

means. I think this is profit-center-based lending. 

My concern is I have people in my district, business men and 

women, who want to establish usury limits, outlaw fees, outlaw, 

77

you know, a whole variety of things. That is against my sort of button-down nature. But that feeling out there is growing, and we get 

complaints day after day after day about credit cards. 

So, you know, I am just looking at the fees outlined in the proposed Reg Z boxes, you know. You think that you closed your account, then you get stuck with a $60 closed account fee, or a maintenance fee. You don’t pay that, then you get a late charge on it. 

And pretty soon, either you have to deal with all the people on the 

phone to get them to eliminate that, or you pay it, just to be done 

with it. 

So, you know, my question is, I am looking at the—to anybody 

on the panel, in the fee box, if you have it in front of you, the applications and solicitations, sample credit card boxes, are all those—

do any of you have—and I guess I am asking the credit card folks—

do you have any fees that aren’t listed in that box? Like a telephone fee, if you pay your account over the phone, do you get 

charged for that? 

Mr. CAREY. We have a number of fees that are not. 

Mr. PERLMUTTER. Listed? 

Mr. CAREY. No, no. They are here that we don’t have. 

Mr. PERLMUTTER. Okay. But those that you do are listed? 

Mr. CAREY. As best as I can tell right here. 

Mr. PERLMUTTER. You know, really, my concern again just goes 

to what people believe. Again, I think Mr. Ellison said it early on, 

you know. People in the middle are getting squeezed. And there is 

a belief that, you know, that you get nicked here, and you get 

nicked there, and you get nicked here, and you get nicked there. 

And there is a point where folks revolt and rebel. 

And, you know, obviously, people have a choice to use credit 

cards or not, but people are in a desperate mode, and desperate 

people do desperate things. They will use the credit cards. 

And if we go to risk-based lending and bankruptcy, the bankruptcy code was changed to favor—to assist lenders and credit card 

issuers. I don’t know, and maybe you all could tell me, was there 

any reduction in interest rates or fees, because there was the elimination of a bankruptcy risk, or the reduction of a bankruptcy risk? 

Do we see that in sort of this risk-based lending? Anybody? 

[No response] 

Mr. PERLMUTTER. Okay. I mean, my stuff is rhetorical. I guess 

I am just saying Senator Dodd suggested that everybody take a 

good look at their practices, take a good look at—I am saying you 

take a good look at the spread, you know, over the discount rate, 

and what you’re earning on these things, and you know, help us 

out voluntarily, if you can, because Dr. Price is right. 

You know, there hasn’t been real oversight of this area for a long 

time, and I don’t want us to over-react. I don’t want us to take a 

blunderbuss, and start passing usury laws, and things like that, 

that really do tighten the credit, hurt people we don’t intend to 

hurt, but to try to act because we have so many people who are 

feeling squeezed by these different things. 

And Madam Chairwoman, that is all I wanted to say. Thank you. 

Chairwoman MALONEY. Thank you for your question, and I 

thank all the panelists. We have been called to a vote, and the 

Chair notes that some members may have additional questions for 

78

the panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit those questions, and to enter the responses into the 

record. 

I thank you very much for coming. The meeting is adjourned. 

Thank you. 

[Whereupon, at 3:09 p.m., the hearing was adjourned.] 

(79)

A P P E N D I X

June 7, 2007

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