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29–643 PDF 2006

S. HRG. 109–543

REGULATORY REQUIREMENTS AND INDUSTRY

PRACTICES OF CREDIT CARD ISSUERS

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

ON

EXAMINING THE CURRENT LEGAL AND REGULATORY REQUIREMENTS

AND INDUSTRY PRACTICES FOR CREDIT CARD ISSUERS WITH RESPECT TO CONSUMER DISCLOSURES AND MARKETING EFFORTS

MAY 17, 2005

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

MEL MARTINEZ, Florida

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

ROBERT MENENDEZ, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

MARK OESTERLE, Counsel

PEGGY R. KUHN, Senior Financial Economist

MARTIN J. GRUENBERG, Democratic Senior Counsel

LYNSEY GRAHAM REA, Democratic Counsel

PATIENCE R. SINGLETON, Democratic Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

TUESDAY, MAY 17, 2005

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Dole ...................................................................................................... 2

Senator Johnson ............................................................................................... 8

Prepared statement ................................................................................... 43

Senator Dodd .................................................................................................... 14

Prepared statement ................................................................................... 44

Senator Carper ................................................................................................. 19

Senator Reed ..................................................................................................... 21

Senator Sarbanes .............................................................................................. 23

Senator Bennett ................................................................................................ 27

Senator Allard ................................................................................................... 46

Senator Stabenow ............................................................................................. 46

WITNESSES

Dianne Feinstein, a U.S. Senator from the State of California ........................... 3

Prepared statement .......................................................................................... 47

Daniel K. Akaka, a U.S. Senator from the State of Hawaii ................................. 5

Prepared statement .......................................................................................... 50

Edward M. Gramlich, Member, Board of Governors of the Federal Reserve

System ................................................................................................................... 9

Prepared statement .......................................................................................... 52

Julie L. Williams, Acting Comptroller of the Comptroller ................................... 11

Prepared statement .......................................................................................... 59

Antony Jenkins, Executive Vice President, Citi Cards ........................................ 30

Prepared statement .......................................................................................... 70

Travis B. Plunkett, Legislative Director, Consumer Federation of America ...... 31

Prepared statement .......................................................................................... 76

Louis J. Freeh, Vice Chairman and General Counsel, MBNA Corporation ....... 33

Prepared statement .......................................................................................... 95

Response to a written question of Senator Sarbanes .................................... 134

Robert D. Manning, University Professor and Special Assistant to the Provost, Rochester Institute of Technology ............................................................. 34

Prepared statement .......................................................................................... 99

Carter Franke, Chief Marketing Officer, Chase Bank U.S.A., N.A. .................... 35

Prepared statement .......................................................................................... 111

Response to a written question of Senator Sarbanes .................................... 136

Edward Mierzwinski, Consumer Program Director, U.S. Public Interest Research Group ........................................................................................................ 36

Prepared statement .......................................................................................... 113

Marge Connelly, Executive Vice President, Capital One Financial Corp. .......... 38

Prepared statement .......................................................................................... 123

Linda Sherry, Editorial Director, Consumer Action ............................................. 39

Prepared statement .......................................................................................... 130

(III)

(1)

EXAMINING THE CURRENT LEGAL AND

REGULATORY REQUIREMENTS AND

INDUSTRY PRACTICES FOR CREDIT CARD

ISSUERS WITH RESPECT TO CONSUMER

DISCLOSURES AND MARKETING EFFORTS

TUESDAY, MAY 17, 2005

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

The Committee met at 10:04 a.m., in room SD–538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The hearing will come to order.

The purpose of our hearing this morning is to examine current

practices in the credit card industry. As part of this examination,

we will consider the nature of the existing legal framework, that

is the body of laws and regulations, which govern credit card issuer

and consumer interaction. But looking back to our numerous hearings on the Fair Credit Reporting Act, it is clear that our credit

markets are very competitive and very dynamic. Innovations on

many fronts have greatly affected the cost and availability of credit. Constant change, however, has meant less consumer familiarity

with the newly available credit products and terms.

Consumer financial literacy plays a key role in allowing consumers to keep pace with market developments. We need to continue to encourage consumer education on this front and, to this

end, I look forward to receiving the Department of the Treasury’s

report on the state of financial literacy in this country. I believe

this topic will merit further Committee consideration when this report is released this summer. In light of the significant changes in

the marketplace, today’s hearing is intended to give the Committee

an opportunity to determine how well the rules are working to provide consumers the information necessary to make responsible

credit-related decisions, as well as to give us a chance to observe

the direction in which market forces are headed.

In the end, closely considering these matters is very important

due to the unprecedented size and scope of this industry. Today,

about 6,000 financial institutions have issued over 640 million

credit cards to around 145 million Americans. The impact on the

economy is obviously considerable. We look forward to hearing from

our witnesses on this important subject.

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I want to announce that we are going to have to move forward.

We are going to have, beginning at 11:30, a series of stacked votes

and then final passage of the transportation bill. So, I am going to

try to move the panels, other than my two colleagues.

I want to welcome my colleagues. Senator Dole, do you have an

opening statement?

Senator DOLE. Yes, I do, Mr. Chairman.

Chairman SHELBY. Go ahead.

STATEMENT OF SENATOR ELIZABETH DOLE

Senator DOLE. Mr. Chairman, a special welcome to my two colleagues who are with us this morning: Senator Feinstein and Senator Akaka.

During the proceedings surrounding the recently enacted bankruptcy bill, a number of issues surfaced related to the laws and

regulations governing the credit card industry. I am glad that we

waited to address these issues separately, so that we can give them

the attention they deserve.

Credit cards have become indispensable financial instruments in

today’s society, and for good reason. They allow people to buy now

and pay later, consolidating payments into a single monthly transaction. They facilitate payments over the phone and by way of the

Internet. Credit cards provide a measure of safety, reducing the

need to carry large amounts of cash and limiting a person’s losses

if a wallet or purse is lost or stolen. They also help to establish

credit histories for consumers who have never before had access to

credit. This, in turn, makes more likely the granting of loans for

major purchases, including homes. For all of these reasons, the

growth in credit card use has transformed the American financial

services landscape.

There are dangers, however, that accompany this progress. Some

of those people who are now able to acquire credit cards are not

prepared to handle the responsibility that goes along with them.

While Americans must take responsibility for their own finances,

it is absolutely imperative that all Americans are equipped with

the best, most clear information possible when making their decisions. This requires that credit card companies provide this information with utmost transparency.

There are already many well-intentioned laws that require credit

card companies to fully disclose their policies on rates, payments,

and terms of use. The tangible result of these laws, however, is

often multiple pages of single-spaced typing and small-font lettering, filled with sophisticated, legal terminology. A magnifying

glass and an attorney should not be necessary to understand the

credit card user agreement.

Some lending companies are now providing consumers with a

one-page summary of their disclosure information in a format similar to the nutritional information boxes on products in your local

grocery store. And, Mr. Chairman, that brings back a lot of memories because that was a project I had the privilege of working on

in the late 1960’s. This clear, concise presentation is easy to read

and simple to understand. We should work on legislation that will

require those practices that allow consumers to quickly comprehend the benefits and risks associated with credit card use.

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We must also continue to require that credit card companies provide full disclosure regarding fees, interest rates, minimum payments, and privacy statements. It is imperative that this information be presented in the most consumer-friendly was possible. This

will benefit not only the consumers, but also the credit card companies. Credit issuers will reduce losses due to defaults and decrease

the amount of customer service needed to guide consumers through

problems that could be avoided with more comprehensible applications and monthly statements.

I want to thank you, Chairman Shelby, for holding this hearing,

and I certainly want to thank our witnesses for giving us their time

today to share their knowledge of the industry, and especially my

colleagues in the Senate. Thank you.

Chairman SHELBY. We have with us two of our colleagues: Daniel Akaka, U.S. Senator from Hawaii, and Dianne Feinstein, U.S.

Senator from California. Your written statements will be made part

of the record. You proceed as you wish. Who wants to go first?

Senator FEINSTEIN. However you would like.

Chairman SHELBY. I will call on Dianne. Go ahead, Senator.

STATEMENT OF DIANNE FEINSTEIN

A U.S. SENATOR FROM THE STATE OF CALIFORNIA

Senator FEINSTEIN. Thank you very much, Mr. Chairman. Let

me thank you, first of all, for keeping your promise. You said you

would hold this hearing when the bankruptcy bill was on the floor,

and you have held it, and I appreciate that very much.

Chairman SHELBY. I think, Senator Feinstein, as I told you on

the floor when you were pushing the amendment, this was an important issue to hold a hearing on.

Senator FEINSTEIN. Thank you very much. And I also want to

thank Senator Dole for her statement because I think she is right

on, and I think she said it about as well as it can be said.

I sit on the Judiciary Committee. I participated in the markup

of the bankruptcy bill. And the more we proceeded with amendments, the more it became apparent, at least to me, that the bankruptcy bill really heavily favored credit card companies and did

nothing really to make clearer the responsibility of the person that

used the credit card. And in my personal life, I have seen people

really not understand the impact of the minimum payment on debt.

And I think this is really where we are today.

The average American household now has about $7,300 of credit

card debt. The number of bankruptcies has doubled since 1990.

Many of these personal bankruptcies—not all, perhaps not even a

majority, but many are from people who utilized credit cards.

These cards are enormously attractive. I received two solicitations

this past week. Interestingly enough, they were for renewal of credit cards that I did not have in the first place. So they were a bit

disingenuous.

Unfortunately, individuals making the minimum payment are

witnessing the ugly side of the miracle of compound interest. After

2 or 3 years, many find that the interest on the debt is such that

they can never repay these cards with the minimum payment, and

they do not know what to do about it, and it builds and builds, and

they go into bankruptcy.

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One study determined that 35 million people pay only the minimum on their credit cards. In a recent poll, 40 percent of respondents said they pay the minimum or slightly more. So, I suspect that

most people would be surprised to know how quickly interest multiplies by only paying the minimum. Take that average household debt of $7,300. In April, before the

most recent Federal Reserve Board increase of the prime rate, the

average credit card interest rate was 16.75 percent. If only the

minimum payment of 2 percent is made on that average debt, it

would take the individual 44 years and $23,373 to pay off that

debt. And that is if the family does not spend another cent on their

credit card, which is an unlikely assumption. In other words, the

family will need to pay over $16,000 in interest to repay just

$7,300 of principal.

For individuals or families with more than average debt, the pitfalls are even greater. Twenty thousand dollars of credit card debt

at the average 16.75 percent interest rate will take 58 years and

$65,415.28 to pay off if only the minimum payments are made.

Now, what is my point here? My point is I tried to figure out

from the solicitations I got this past week what would happen if

I only paid the minimum payment over a period of time. I could

not figure it out. There is so much small print that I could not discern one thing from the other. And I strongly believe that individuals should be told, if they only make the minimum payment on

their credit card, what it means over a period of time. They must

know that really sometimes you cannot repay the principal of the

debt just paying the 2-percent interest payment.

Yesterday, I introduced, as a bill, the amendment I made on the

floor. Senator Akaka made an amendment. I voted for Senator

Akaka’s amendment. It went down. I made an amendment. That

amendment was withdrawn. As part of the agreement that led to

today’s hearing I think it is important that this Committee consider transparency and disclosure to individuals who hold credit

card debt.

I have a college degree. If I cannot figure it out, you can be sure

that a number of other people cannot either.

So yesterday I introduced the Credit Card Minimum Payment

Notification Act. This bill speaks directly to consumers who are not

aware of the consequences of making only the minimum payments

on their credit cards. And there will always be people who cannot

afford to pay more than their minimum payment. But there are

also a large number of consumers who can afford to pay more but

feel comfortable making the minimum payment because they do

not realize the consequences of so doing.

The bottom line is for many the 2-percent minimum payment is

a financial trap, and I believe there should be a requirement to notify the individual of what that minimum payment means. Here is

what my bill would do:

First, it would require credit card companies to add two items to

each consumer’s monthly credit card statement: One, a notice

warning credit card holders that making only the minimum payment each month will increase the interest they pay and the

amount of time it takes them to repay their debt; and, two, examples of the amount of time and money required to repay a credit

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card debt if only the minimum payment is made; or if the consumer makes only minimum payments for 6 consecutive months,

the amount of time and money required to repay the individual’s

specific credit card debt under the terms of their credit card agreement.

Second, the bill also requires a toll-free number be included on

statements, and if the consumer makes only minimum payments

for 6 consecutive months, they would receive a toll-free number to

an accredited counseling service.

The disclosure requirements in this bill would only apply if the

consumer has a minimum payment that is less than 10 percent of

the debt on the card or if their balance is greater than $500. Otherwise, none of these disclosures would be required on their statement, and the reason for this is to try to be prudent and provide

the least obligation for the credit card company.

These disclosures allow consumers to know exactly what it

means for them to carry a balance and make only minimum payments so they can make informed decisions on credit card use and

repayment.

Let me just end with a couple of examples of people:

An Ohio resident who tried for 6 years to pay off a $1,900 balance on her Discover card, sending the credit company a total of

$3,492 in monthly payments from 1997 to 2003, yet her balance

grew to $5,564.

A Virginia resident who had a Providian Visa bill increased to

$5,357, even though they used the card for only $218 in purchases

and made monthly payments totaling $3,058.

And an individual from my State, California, who actually

worked a second job to keep up with the $2,000 in monthly payments she collectively sent to five banks to try to repay $25,000 in

credit card debt. Even though she had not used the cards to buy

anything more, her debt had doubled to $49,574 by the time she

filed for bankruptcy last June.

Now, these stories are not unique, but this is the problem with

the bankruptcy bill. It is making it easier for credit card companies

to send out solicitations, but it does nothing to provide the kind of

information that a minimum payer really should know when they

make that minimum payment. So, I hope the Committee will remedy that.

Thank you very much.

Chairman SHELBY. Thank you, Senator Feinstein.

Senator Akaka.

STATEMENT OF DANIEL K. AKAKA

A U.S. SENATOR FROM THE STATE OF HAWAII

Senator AKAKA. Thank you very much, Mr. Chairman, Senator

Dole, and Members of the Committee. I want to thank you very

much for having this hearing and including me today. I also want

to express my deep appreciation not only to you but also to Senator

Sarbanes for working closely with me on a wide range of financial

literacy-related issues, including credit card disclosures.

Mr. Chairman, revolving debt mostly comprised of credit card

debt, has risen from $54 billion in January 1980 to more than $800

billion in March 2005. During all of 1980, only 287,570 consumers

6

filed for bankruptcy. In 2004, approximately 1.5 million consumers

filed for bankruptcy, keeping pace with the 2003 record level.

Some of this increased activity can be explained by a ballooning

in consumer debt burdens, particularly revolving debt, primarily

made up of credit card debt. Credit card users and issuers have a

lot of flexibility in settling minimum monthly payments. Competitive pressures and a desire to preserve outstanding balances have

led to a general easing of minimum payments requirements in recent years.

The result has been extended repayment programs. Even with a

doubling of minimum monthly payments from 2 to 4 percent by

some of the country’s largest credit card issuers, much of that payment continues to cover only interest and fees.

Meanwhile, other initiatives by large credit card issuers, such as

reducing grace periods, will catch many consumers with late fees,

which will trigger higher default interest rate charges.

It is imperative that we make consumers more aware of the longterm effects of their financial decisions, particularly in managing

credit cards at early ages, particularly since credit card companies

have been successful with aggressive campaigns targeted at college

students. Universities and alumni associations across the country

have entered into marketing agreements with credit card companies. More than 1,000 universities and colleges have affinity marketing relationships with credit card issuers. Affinity relationships

are made as attractive as possible to credit card accountholders

through the offering of various benefits and discounts for using the

credit card with the affinity group receiving a percentage of the

total charge volume from the credit card issuer. Thus, college students, many already burdened with student loans, are accumulating credit card debt. I appreciate all the work that Senator Dodd

has done in order to address this situation.

While it is relatively easy to obtain credit, especially on college

campuses, not enough is being done to ensure that credit is properly managed. Currently, credit card statements fail to include

vital information that would allow individuals to make fully informed financial decisions. Additional disclosure is needed to ensure that individuals completely understand the implications of

their credit card use and costs of only making the minimum payments as determined by credit card companies.

I have a long history of seeking to improve financial literacy in

this country, primarily through expanding educational opportunities for students and adults. Beyond education, I also believe that

consumers need to be made more aware of the long-term effects of

their financial decisions, particularly in managing their credit card

debt so that they can avoid financial pitfalls.

The bankruptcy reform law includes a requirement that credit

card issuers provide information to consumers about the consequences of only making minimum monthly payments. However,

this requirement fails to provide the detailed information on billing

statements that consumers need to know to make informed decisions.

The bankruptcy law will allow credit card issuers a choice between disclosure statements. The first option included in the bankruptcy bill would require a standard minimum payment warning.

7

The generic warning would state that it would take 88 months to

pay off a balance of $1,000 for bank card holders or 24 months to

pay off a balance of $300 for retail card holders. This first option

also includes a requirement that a toll-free number be established

that would provide an estimate of the time it would take to pay off

the customer’s balance. The Federal Reserve Board would be required to establish the table that would estimate the approximate

number of months it would take to pay off a variety of account balances.

There is a second option that the legislation permits. The second

option allows the credit card user to provide a general minimum

payment warning and provide a toll-free number that consumers

could call for the actual number of months to repay the outstanding balance.

The options available under the bankruptcy reform law are woefully inadequate. They do not require issuers to provide their customers with the total amount that they would pay in interest and

principal if they chose to pay off their balance at the minimum

rate. Since the average household with debt carries a balance of approximately $10,000 to $12,000 in revolving debt, a warning based

on a balance of $1,000 will not be helpful.

The minimum payment warning included in the first option estimates the costs of paying a balance off at the minimum payment.

If a family has a credit card debt of $10,000 and the interest rate

is a modest 12.4 percent, it would take more than 10 and a half

years to pay off the balance while making minimum monthly payments of 4 percent.

Along with Senators Sarbanes, Schumer, Durbin, and Leahy, I

introduced the Credit Card Minimum Payment Warning Act and

subsequently offered it as an amendment to the bankruptcy bill.

The legislation would make it very clear what costs consumers will

incur if they make only minimum payments on their credit cards.

If the Credit Card Minimum Payment Warning Act is enacted, the

personalized information consumers would receive for their accounts would help them make informed choices about their payments toward reducing outstanding debt.

Our bill requires the minimum payment warning notification on

monthly payments stating that making the minimum payment will

increase the amount of interest that will be paid and extend the

amount of time it will take to repay the outstanding balance.

The legislation also requires companies to inform consumers of

how many years and months it would take to repay their entire

balance if they make only minimum payments. In addition, the

total costs in interest and principal if the consumer pays only the

minimum payment would have to be disclosed. These provisions

will make individuals much more aware of the true costs of their

credit card debts.

The amendment also requires that credit card companies provide

useful information so that people can develop strategies to free

themselves of credit card debt. Consumers would have to be provided with the amount they need to pay to eliminate their outstanding balance within 36 months.

Finally, our bill would require that creditors establish a toll-free

number so that consumers can access trustworthy credit counVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 29643.TXT SBANK4 PsN: SBANK4
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selors. In order to ensure that consumers are referred to only trustworthy credit counseling organizations, these agencies would have

to be approved by the Federal Trade Commission and the Federal

Reserve Board as having met comprehensive quality standards.

These standards are necessary because certain credit counseling

agencies have abused the nonprofit, tax-exempt status and taken

advantage of people seeking assistance in making their debts.

Many people believe, sometimes mistakenly, that they can place

blind trust in nonprofit organizations and that their fees will be

lower than those of other credit counseling organizations. We must

provide consumers with detailed personalized information to assist

them in making better informed choices about their credit card use

and repayment. Our bill makes clear the adverse consequences of

uninformed choices, such as making only minimum payments, and

provides opportunities to locate assistance to better manage credit

card debt.

In response to critics who believe that the Credit Card Minimum

Payment Warning Act disclosures are not feasible, I, along with

Senator Sarbanes and others, have asked the General Accountability Office to study the feasibility of requiring credit card issuers

to disclose more information to consumers about the costs associated with making only the minimum monthly payment. I look forward to reviewing the GAO’s conclusions.

Mr. Chairman, I look forward to working with you, Senator Sarbanes, and all the Members of the Committee to improve credit

card disclosures so that they provide relevant and useful information that hopefully will bring about positive behavior change among

consumers. Consumers with lower debt levels will be better able to

establish savings plans that allow them to be in a better position

to afford a home, pay for their child’s education, or retire comfortably on their own terms.

Thank you again for including me in this hearing, Mr. Chairman.

I apologize, but due to previous commitments, I must be excused.

Thank you very much, Mr. Chairman.

Chairman SHELBY. Senator Feinstein and Senator Akaka, I just

want to commend you for introducing your legislation, for persevering, because I agree with you that we need transparency to have

an informed consumer. We are all consumers. We all, I think, basically benefit from the credit card industry, but only if we know

what we are buying, what we are signing up to, and a lot of people

do not. So, I want to thank you for your testimony, both of you here

today, and your legislation.

Senator FEINSTEIN. Thank you very much.

Chairman SHELBY. Senator Johnson, do you have any comments

for the Senators?

STATEMENT OF SENATOR TIM JOHNSON

Senator JOHNSON. No, I do not. I apologize for arriving late. We

have competing things going on, including an energy markup that

I am going to have to leave for. But I appreciate the work that Senators Akaka and Feinstein have done on this issue. I have an opening statement that I would like to make part of the record.

Chairman SHELBY. Without objection, in its entirety.

Senator JOHNSON. Thank you, Mr. Chairman.

9

Chairman SHELBY. Senator Dole, do you have any comments?

Senator DOLE. No.

Chairman SHELBY. We thank our colleagues for appearing here.

Senator FEINSTEIN. Thanks very much.

Senator AKAKA. Thank you very much, Mr. Chairman.

Chairman SHELBY. Thank you so much.

For our second panel, we have Edward Gramlich, Member of the

Board of Governors of the Federal Reserve Board, and Ms. Julie

Williams, Acting Comptroller, Office of the Comptroller of the Currency, if you will make your way up to the podium.

We welcome both of you here today. As regulators, you are on the

firing line in this business. Your written testimonies will be made

part of the record. Governor Gramlich, you may proceed as you

wish.

STATEMENT OF EDWARD M. GRAMLICH, MEMBER,

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Mr. GRAMLICH. Thank you very much, Senator. I appreciate this

opportunity to appear before the Committee to discuss consumer

credit card accounts. The Board of Governors of the Federal Reserve System administers the Truth in Lending Act, which I will

call TILA, the primary law governing disclosures for consumer

credit including credit card accounts. This is all implemented by

the Board’s Regulation Z.

The last substantive revision to TILA’s credit card provisions was

in 1988, and since then, products and pricing have become much

more complex. Competition has intensified over the years as advances in technology and the deregulation of rates and fees have

combined to create new business models. As a result, consumers receive many offers for credit card accounts, some having terms that

are low-priced at the outset but can become significantly higherpriced, for example, if penalty terms are triggered.

We, at the Board, recognize the challenges of implementing consumer protections that are effective and meaningful to the millions

of consumers who use credit cards. In December 2004, the Board

began a review of Regulation Z starting with an Advance Notice of

Proposed Rulemaking on the rules for open-end or revolving credit

such as general purpose credit cards. The goal of the Board’s regulatory review is to improve the effectiveness and usefulness of

TILA’s disclosures and substantive protections given changes in the

marketplace.

You have already noted that our written statement is submitted

to the record, and that statement contains a much more detailed

discussion of these issues than I am able to give this morning. My

written testimony discusses in much more detail the Board’s examination and enforcement process for institutions under its supervision and the importance of consumer education, which you referred to earlier, as a complement to consumer protection laws.

In the interest of time on the enforcement issue I will simply say

that we have closely examined the credit card portfolios of the institutions we supervise for both safety and soundness and consumer compliance. Only 2 of the more than 900 institutions we supervise have substantial credit card portfolios, and have taken appropriate supervisory measures we believe to be warranted.

10

On the disclosure issue, the first question involves timing and

format. For credit card accounts, disclosures of key terms must be

provided with applications or solicitations using a highly structured

table popularly known as the Schumer box. For open-end accounts

of any kind, more detailed disclosures must also be provided before

an account is opened and periodically at the end of each billing

cycle. Disclosures are generally required when account terms

change, although no disclosure is required when the triggering

events for the change were previously spelled out in the account

agreement. Other than the table provided with credit card applications, TILA’s current disclosures have few format requirements

such as type, size, or location.

Disclosures provided with credit card applications and at account

opening describe how charges associated with the plan will be determined. Account-opening disclosures also explain consumers’

rights and responsibilities in the case of unauthorized transactions

or billing disputes. Disclosures on periodic statements reflect the

activity of the account for the statement period. Transactions that

occurred and any interest or fees imposed during the cycle must be

identified on the statement, along with any time period a consumer

may have to pay an outstanding balance and avoid additional

charges.

TILA and Regulation Z’s primary cost disclosures are the finance

charge and the annual percentage rate called the APR. The finance

charge is the cost of credit in dollars. It is broadly defined as any

charge payable by the consumer or imposed by the creditor as a

condition of, or incident to, an extension of credit and includes interest and certain other fees. Some fees that are not considered a

condition of getting credit, late fees, for example, must also be disclosed as other charges. The APR disclosed in advertisements, with

credit card account applications, and at account opening is the

annualized periodic rate that would be applied to outstanding balances. There are two APRs disclosed on periodic statements. In addition to the periodic rate APR, creditors must also disclose an effective APR for the billing cycle, which must reflect certain finance

charges imposed in addition to interest.

TILA also provides for creditor investigations of billing errors on

all open-end credit plans. TILA also protects consumers against unauthorized use of a credit card and allows cardholders to assert

against credit card issuers claims the cardholder may have against

a merchant in a disputed transaction. TILA also prohibits card

issuers from issuing unsolicited credit cards. Finally, TILA requires

creditors to credit payments promptly and to refund credit balances

after 6 months.

The Board’s Advance Notice of Proposed Rulemaking asks a

number of questions about the adequacy of Regulation Z’s open-end

rules and how the effectiveness of the disclosures might be improved, given changes that have occurred in the marketplace. Credit card accounts have become increasingly complex. In addressing

concerns about information overload, the Board must ensure that

the account disclosures are both fair and accurate without becoming so complex that they become less meaningful. Moreover, credit

card agreements often provide that their terms are subject to

change, including an increase in the APR, and this can create difVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 29643.TXT SBANK4 PsN: SBANK4
11

ficulties for some consumers who use the account for long-term financing. Accordingly, the Board will also consider ways to make

the short-term nature of the account agreement more transparent

in the disclosures.

We also believe that consumer testing should be used to test the

effectiveness of any proposed revisions and anticipate publishing

proposed revisions to Regulation Z in 2006.

Thank you very much.

Chairman SHELBY. Ms. Williams.

STATEMENT OF JULIE L. WILLIAMS

ACTING COMPTROLLER OF THE CURRENCY

Ms. WILLIAMS. Thank you. Chairman Shelby, Senator Dodd, and

Senator Johnson, I appreciate the opportunity to appear before you

today to discuss the Office of the Comptroller of the Currency’s perspectives concerning the marketing and disclosure practices of the

U.S. credit card industry. Given the importance of credit cards to

consumers and the U.S. economy, this is a most timely hearing.

The OCC’s supervision of the credit card operations of national

banks includes safety and soundness fundamentals, compliance

with consumer protection laws and regulations, and fair treatment

of consumers. My written statement describes our activities in

those respects in detail.

This morning, I would like to summarize four key points from

that written testimony.

First, it is widely recognized that today’s credit card industry is

highly competitive and innovative. Credit card issuers have responded to increasing market competition with innovations in card

products, marketing strategies, and account management practices.

The primary goals of these product and marketing innovations

have been to gain new customer relationships and related revenue

growth, but in some instances an important secondary benefit has

been expanded access to credit by consumers with traditionally limited choices.

Unfortunately, not all of the product and marketing innovations

have had a uniformly beneficial impact, and the account management and marketing practices of credit card issuers have come in

for criticism in recent years from both consumer protection and

safety and soundness standpoints.

In recent years, the OCC has issued supervisory guidance alerting national banks to our concerns about credit card account management and loss allowance practices, secured credit cards, and

credit card marketing practices. And, utilizing our general enforcement authority in combination with the prohibition on unfair and

deceptive practices contained in the Federal Trade Commission

Act, we have taken formal enforcement actions against several

banks—actions that have required those banks to end unfair and

abusive practices and make restitution to consumers totaling hundreds of millions of dollars.

However—and this is the second point I wish to emphasize—it

is important to appreciate that the OCC does not have statutory

authority to issue regulations defining particular credit card practices or disclosures by banks as unfair and deceptive under the

Federal Trade Commission Act. Nor do we have the authority to

12

issue regulations setting standards for disclosures credit card

issuers must make under the Truth in Lending Act. In both respects, that authority is vested exclusively in the Federal Reserve

Board.

And, that brings me to my third point. The OCC took the unusual step last month of submitting a comment letter responding

to the Board’s Advance Notice of Proposed Rulemaking on Regulation Z’s open-end credit rules implementing the Truth in Lending

Act. My written statement describes the most important issues

raised in our comment letter: The importance of consumer research

and testing, the pitfalls of extensive prescriptive disclosure rules,

and the importance of disclosure standards keeping apace of industry developments. We also made clear that if there are ways in

which the OCC can support the Board’s efforts in this area, we look

forward to doing so.

Finally, my statement stresses that disclosure is at the heart of

our system of consumer protection today. Lately, however, there

has been much criticism of the state of credit card disclosures and

marketing practices, and clearly there is room for improvement.

My statement highlights several areas where disclosure issues

currently exist, and discusses the need to begin a serious reexamination of how we go about developing, designing, implementing,

overseeing, and evaluating consumer disclosures for financial products and services. I urge that we take a new approach, premised

on obtaining input through consumer testing, to learn what information consumers most want to know and how to most effectively

convey it to them. Quick fixes without consumer input and issueby-issue disclosure ‘‘patches’’ to information gaps ultimately are not

in the best long-term interest of consumers.

The direction set by Congress and the experience of the Food and

Drug Administration using input from consumers to develop the

now well-recognized ‘‘Nutrition Facts’’ disclosure for food provides

us with some valuable lessons on how to provide disclosures that

are both understandable and useful to consumers. Why can’t we

apply these positive lessons to the design of disclosures for financial products? Why should consumers today get more effective disclosure when they buy a bag of potato chips than when they make

substantial financial commitments for financial products and services?

In conclusion, Mr. Chairman, the OCC has addressed many of

the recent changes in credit card practices through our examination and supervisory processes, enforcement actions where necessary, and supervisory guidance. But consumers also depend on

high-quality, user-friendly disclosures to help guide them through

the increasing complexities of the credit card marketplace. The

Federal Reserve’s review of Regulation Z disclosures holds promise

in this regard, but I respectfully urge that we need to rethink our

approach to disclosures generally, along the lines I have described.

The benefits for consumers, for marketplace participants, and for

our economy will be well worth it.

Let me again commend the Committee for its interest in these

very important issues, and I look forward to your questions.

Chairman SHELBY. Governor, the Federal Reserve has been involved in this issue for a long time. What is going to change, in

13

other words, if it is not driven statutorily here by the Congress.

What is required as far as from your viewpoint as to disclosure?

It is obvious to me that as a consumer, one, there is not enough

financial literacy in the country, we know that, that is a given; and

second, to be an informed consumer. As Senator Feinstein said, my

gosh, if you have to run through page after page with a microscope

and interpret something, the average person will never do this, and

it seems to me that it would be in the best interest of the banking

industry to have informed consumers, in other words, to have good

customers.

Mr. GRAMLICH. Senator, I think everybody agrees with the basic

goals of having disclosure statements that are both informative and

understandable, and they cover all the contingencies.

Chairman SHELBY. Understandable.

Mr. GRAMLICH. Understandable is key. The Fed has never been

against that, by the way.

As Comptroller Williams said, one thing that we are thinking

about, and we are planning to do, is to use consumer focus groups.

That is a worthwhile innovation and we intend to pursue it.

Some of the disclosure statements that one gets—and they are

packed with very small print and very complicated language—are

the lenders’ response to the statute. On every one of these statutes

we give model disclosure forms, which are viewed as safe harbor,

that is, you could use this and this would be adequate. But very

often the lenders actually go beyond these safe harbor forms and

give statements that cover various other legal contingencies. So

that is an issue.

We will continue to give model forms.

Chairman SHELBY. Do you pretest these forms?

Mr. GRAMLICH. We will do this with the focus groups. We will be

doing that this time.

Chairman SHELBY. The focus groups will not be just PhD’s in economics, will it?

Mr. GRAMLICH. No.

Chairman SHELBY. I mean it will be people that——

Mr. GRAMLICH. People who borrow a lot.

Chairman SHELBY. Average Americans.

Mr. GRAMLICH. Average Americans, yes.

Chairman SHELBY. Okay.

Mr. GRAMLICH. All I can say is that we will try to make these

relevant to the issues facing people and as meaningful and as informative as possible. But they do have to cover the various contingencies, and with credit cards, the instrument is so flexible that

some people could make the minimum payment, some people could

go above that, it is very hard to come up with examples that cover

all the circumstances.

Chairman SHELBY. Ms. Williams alluded to the powers of the

Federal Reserve.

Mr. GRAMLICH. The powers, yes, our massive powers.

Chairman SHELBY. Do you have enough statutory power to do

what needs to be done as to create an informed consumer or do you

need additional legislation?

Mr. GRAMLICH. Do what needs to be done to create an informed

consumer? I do not know that anybody has enough statutory power

14

to do that. The financial education issue is massive. It is not only

that people do not understand complicated credit terms, but it is

also partly that the credit card companies, the lenders, are always

a step ahead. They can create new instruments and so forth, and

it takes the literacy sector, a while to catch up.

We have enough powers I think. I am not aware of any powers

that we do not have. If I become aware, we will certainly let you

know.

But we have to be I think a little humble about what we can do

with financial literacy. It is just a massive job with this highly innovated financial sector we have. Even if our focus group were

PhD’s in economics, it would be hard for them to keep up with everything.

Chairman SHELBY. How would it be hard for the average consumer if it is shown on the credit card statement that you, in a

block, if you pay the minimum payment you are just treading

water or you are getting deeper in the water?

Mr. GRAMLICH. In the new bankruptcy bill there are two or three

provisions for those that will be incorporated in our review of Regulation Z. Whether we have the additional disclosures that the two

Senators previously recommended, one could question all of that.

But the bankruptcy bill already has a minimum payment provision,

and so that will be part of our regulation from now on.

Chairman SHELBY. Governor, do you believe that it is important

for the consumer to know the terms of any agreement and what is

going to happen to them if they do not pay up?

Mr. GRAMLICH. Absolutely.

Chairman SHELBY. The cost and everything that goes with it.

Mr. GRAMLICH. Absolutely.

Chairman SHELBY. And it should be up front?

Mr. GRAMLICH. Yes.

Chairman SHELBY. It should not be hidden, should not be in

something you cannot find unless you are a real lawyer or something. Ms. Williams, you have a comment?

Ms. WILLIAMS. Let me just note that in an area that, Mr. Chairman, I know is of great interest to you, and that is privacy, that

the agencies are now engaged in a process using focus groups, consumer interviews, and testing in developing what we hope will be

a much-improved streamlined privacy notice. Based on just some of

the preliminary ideas that I have seen, I can tell you it does not

look anything like the stuff that consumers have been getting and

throwing in their trash, unfortunately, for the last couple of years.

It can be done, but it takes some time, patience, and working with

people who are experts in consumer communications.

Chairman SHELBY. Is this an important area for the Federal Reserve, Governor?

Mr. GRAMLICH. Yes, absolutely.

Chairman SHELBY. Senator Dodd.

STATEMENT OF SENATOR CHRISTOPHER J. DODD

Senator DODD. Thank you, Mr. Chairman, and my apologies for

being a few minutes late at the opening of the hearing this morning, but I want to thank you immensely for holding this hearing.

I am aware my colleague from Maryland is doing pretty well this

15

morning, at least that is the good word, so I am sorry he is not

here with us this morning. But thank you for doing this and to

focus on this issue.

I do not know of another issue that we deal with in this Committee that affects as directly as many Americans as this issue

does. I mean homeownership affects obviously millions, and certainly financial services, to a large degree, do generally speaking.

But on credit cards specifically, this issue probably touches more

people in our country than any other single issue, so I am very

grateful to the Chairman for giving us some time this morning to

talk about this, and inviting a very good group of witnesses to appear before us to share their thoughts about this issue.

I am going to take a couple of minutes, Mr. Chairman, just to

share some opening comments, and get to some questions here.

Credit cards, as we all know, are one of the most successful and

pervasive financial service products ever created and have undoubtedly improved access to credit, added significant measure of

convenience to consumers. That needs to be stated at the outset.

Those of us who have been critical about this are not suggesting

that we should be eliminating the availability of the credit card industry at all. But to put it in perspective, just to give everyone an

idea of how pervasive the credit card industry is and the staggering

role that credit cards have in our country.

According to the Federal Reserve—and you may have shared

some of these numbers before I arrived—there are 556.3 million

Visa and Master Credit cards in circulation in 2003. Those credit

cards, coupled with Discover and American Express products indicated today that at least 700 million resolving credit cards are currently in circulation. Approximately 145 million Americans have at

least one credit card. The average credit card holder in the United

States today has 4.8 credit cards. The total amount of credit card

debt is over $800 billion. The total amount of credit extended to

cardholders is over $4 trillion.

With this kind of market presence it is not surprising that the

credit card management reported in May 2004 was the most profitable year ever for credit cards. With this tremendous success I believe comes significant responsibility, and I believe that the credit

card industry is failing that test. Credit card issuers have now become the victims of their own success and are turning credit cards

into nothing less than wallet-sized predatory loans. In a time when

access to credit is the easiest and cheapest, credit card companies

are making more money than ever. Credit card issuers are charging usurious rates and fees and engaging, in my view, in a very serious amount of abusive and deceptive practices, which I believe

will have drastic long-term consequences on our country.

Credit card companies are charging consumers higher fees than

ever before. In 1980, credit card fees alone raised $2.6 billion. In

2004, credit card fees raised over $24.4 billion. We have been told

that the reason the credit card rates and fees are so high is that

more and more consumers are failing to pay their debts, and as a

result, issuers much charge higher rates and greater fees.

In fact, the opposite is true in our country. Consumer bankruptcies went down last year by nearly 3 percent, and default rates

actually decreased last year. The truth of the matter is that this

16

is the best time in history to be in the credit card business. Last

year, over 5 billion solicitations were sent to American homes,

which is nearly twice as many as 8 years ago. Coupled with television and radio ads, intermittent signs, it is nearly impossible to

turn on your television set or computer or simply walk down the

street without being offered a credit card.

Despite the assertions that the credit card industry is struggling

because of bad consumer behavior, credit card companies have

more money than they know what to do with, and they are pumping out solicitations in search of new people to get in debt.

While normally competition lowers cost for consumers, the exact

opposite is happening here. Credit card companies are finding more

and more ways to effectively increase their income from rates and

fees. Abusive practices such as misleading teaser rates which employ bait-and-switch tactics, hidden fees, penalties, and universal

default provisions buried in the fine print are standard operating

procedures in the credit card industry.

While my statement this morning will not touch on the entirety

of my concerns for the credit card industry, I would like to highlight, Mr. Chairman, a couple of major abuses currently employed

by the industry at large.

One of these abuses is called the universal default, which more

accurately should be described as a predatory retroactive interest

rate hike. This practice forces a credit card consumer in good

standing, by the way, who is paying his or her credit card bills on

time to have his or her interest rates retroactively jacked up to 25

to 30 percent because of some unknown irrelevant change in his or

her spending patterns. The idea that a credit card company can

charge an initial interest rate that would have been in the past

outlawed as usurious and then double or triple that rate for any

reason it so chooses, in my view is just plain wrong.

The industry refers to this practice as ‘‘risk-based pricing.’’ They

believe that when a consumer’s credit score goes down they become

riskier, and higher interest rates are levied on them. What is interesting to me is that I can find no evidence, either anecdotal or empirical, of when a consumer’s credit improves, that a credit card

company lowers the interest rate for that consumer. We should

stop this practice completely in my view, or at least at a minimum

make an increase rates prospective, not retroactive.

Another troubling development in the battle to signh up new consumers has been the aggressive way in which they have targeted

people under the age of 21, particularly college students. Solicitations to this age group have become more intense for a variety of

reasons. First, it is one of the few market segments which there are

always new customers to go after every year. Twenty five to 30 percent of undergraduates are fresh faces entering their first year of

college. Second, it is also an age group in which brand loyalty can

be readily established. In fact, most people hold on to their first

credit card for up to 15 years, which is probably the amount of time

it takes them to dig out of the mountain of credit card debt they

will incur in their teen years.

A staffer of mine recently opened his 7-year-old’s mail, amazed

to find a brand new American Express card. The new card came

17

as a result of, according to the offer, the elementary schooler’s, ‘‘excellent credit history.’’

[Laughter.]

A brand new potential victim of the credit card industry. He is

7-years-old. What is next? Are we going to set up credit card kiosks

in hospital maternity wards?

Credit card issuers target vulnerable young people in our society

and extend them large amounts of credit with little if any consideration of whether or not there is a reasonable expectation of repayment. As a result, more and more young people are falling into a

financial hole from which they are unable to escape. One of the

fastest-growing segments of our population forced to declare bankruptcy is in this age group.

Mr. Chairman, I think we have an obligation to protect and educate our Nation’s youth. This generation of American leaders, this

younger generation deserves no less than the reining in of irresponsible practices of the credit card industry as many witnesses will

mention.

I have introduced legislation designed to force credit card issuers

to stop their more deceptive and abusive practices and alter the

targeting of our most vulnerable customers. This legislation, the

Credit Card Act, should be the first step I hope in restoring some

common decency in the credit card industry.

I obviously look forward to the testimony we are going to hear

this morning.

Let me just say, Mr. Chairman, the industry needs to wake up

to this stuff. I mean they are a very important part of our financial

services sector, but if you do not do this—it may not happen in this

Congress, but it will happen. These pendulums swing. I have been

around long enough to watch them. And if you pretend it is not

going to happen, you are deluding yourself. These kinds of practices are just flat-out wrong, and they are unfair to people in this

country.

We were not able to get them included as part of the bankruptcy

bill. The bankruptcy bill talks about responsibility, and it has an

important element, making sure that consumers are responsible.

But responsibility goes both ways. You have to be responsible too,

and you are not being responsible today when you engage in the

practices that are costing so much money to so many people in this

country who can least afford it.

My hope is that as a result of these hearings, Mr. Chairman, we

might get some strong legislation to rein this in, or you are going

to do great damage to an important instrument that many people

need to use.

Let me ask our witnesses a couple of things. I was interested in

your quote here, Dr. Gramlich, and you talked about that you have

enough powers here, that you have the authority you claim you

need. Yet, I have tried to find, when I worked on my legislation,

to get data here, and I was amazed at how little data was available

in terms of how many companies are, in fact, engaging in some of

these practices? How many students are, in fact, being solicited?

And I am not getting the information. It seems to me that the responsible Federal agencies, if you have the authority and you have

18

the power, why are we not getting better information from what is

actually going on in the industry than seems to be available today?

Mr. GRAMLICH. Senator, I have to look into the data question. I

mean we, like you, are aware that some of these practices are going

on, but I cannot tell you now how prevalent it is, how many companies have these——

Senator DODD. Should we not know that? You know, just given

the amount of involvement here, 700 million credit cards out there,

145 million Americans with them. We know what is going on in

these rates, what is happening to some of these figures. Twenty

five and 30 percent is not a rarity. It happens with great regularity. Why do we not know more?

Mr. GRAMLICH. The Board has purchased credit card information

included in credit bureau data, and we are now processing the

numbers, but I cannot go beyond that. But we can get you some

information on exactly what we can get with our data and what we

cannot get.

Senator DODD. It is not a lack of authority then, the Chairman’s

question to you, do you need additional legislative authority? You

are telling us this morning that you have all the authority you

need to get this data that we are talking about?

Mr. GRAMLICH. We have purchased credit bureau data. Whether

we need more authority to get more data is something I cannot answer right now.

Senator DODD. Where does the credit card data come from?

Mr. GRAMLICH. It is from a credit bureaus. Let me check with

our lawyers, and I will get you the information on it.

Senator DODD. I would also like to know whether or not the Fed

has the authority on its own to collect this data.

Mr. GRAMLICH. Right.

Senator DODD. You collect data on a lot of areas in our economy.

Mr. GRAMLICH. Right.

Senator DODD. You agree with me, this is not a small issue, is

it?

Mr. GRAMLICH. It is not a small issue.

Senator DODD. In fact, if my numbers are correct, are they correct about the number of credit cards out there?

Mr. GRAMLICH. They seem correct, yes.

Senator DODD. And the amount of debt, $800 billion by consumers?

Mr. GRAMLICH. Right.

Senator DODD. How much consumer debt is there out there overall today, about $2.1 trillion? Am I right on that number roughly,

$2.1 trillion? So we are getting precariously close to half of all consumer debt is in this one area. I would like to know if you have

any questions about whether or not you have the authority to gather this area of data. I would like to know about it immediately. I

am sure the Chairman would as well, to determine whether or not

we need to do anything.

Let me ask you as well, Ms. Williams, what about the OCC?

Ms. WILLIAMS. What we have is information that we could get on

a bank-by-bank basis, Senator. The number of cards outstanding,

the breakdown of the types of card programs that the banks have,

and the number of accounts in particular programs are data that

19

we would probably be able to obtain, but we would have to go

bank-by-bank to ask it.

Senator DODD. But that has not been done yet? We do not know,

for instance, on these questions I raised here this morning?

Ms. WILLIAMS. With respect to the specific areas, Senator, that

you asked about, we have not done that across the total spectrum

of all of the credit card banks that we supervise.

Senator DODD. Do you agree with me it should be done?

Ms. WILLIAMS. I think that is useful information, sir.

Senator DODD. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Thanks, Mr. Chairman. To our witnesses, thank

you for joining us today.

I do not have any statement that I would like to give, but just

have a couple of questions that I would like to ask.

Last week, Ms. Williams, you were good enough to meet with me

for a little while, and we talked about the matter of minimum payments on credit card balances that are due. I had expressed some

interest in the last Congress, and seeing if we should amend bankruptcy legislation to change the minimum payments that are being

required in the statements that were sent out to those of us who

have credit cards. I was told at the time that there was work under

way by the regulator, at least the regulator for national banks, to

change through regulation, not through legislation, the minimum

payments that are required of people who are paying their credit

card bills every month.

First of all, let me just ask you to explain to us if you will why

we did not need the legislation and what is taking place regulatorily? Who is covered, who is not?

Ms. WILLIAMS. Without answering the question about whether

the legislation was needed or not, over 2 years ago, on an interagency basis, the banking agencies adopted account management

guidance. The guidance was focused on a number of practices that

we had noticed developing with credit card issuers, including the

way that credit lines were being managed and situations where

lines were being extended. There were issues about how certain

fees were being accounted for. There were issues about negative

amortization. And, there were issues about the minimum payments

being required in connection with credit cards.

The concern that we had—and it is both a safety and soundness

and a consumer protection concern—is that there should be a minimum payment that is sufficient to pay the interest, pay any fees

and charges, and demonstrate some ability on the part of the customer to begin to pay down the principal.

So what we have been doing for the national banks that we supervise is, as part of our supervisory process, making sure that

they get into compliance with this account management guidance.

Some credit card issuers have particular customer segments that

may have higher rates, where they cannot do it right away. It

would be too precipitous, and so they are on plans right now which

go through the end of this year. Some may go into January of next

year because of systems conversion issues, things like that, to get

20

in full compliance with the account management guidance. What

that will do is require, across the national banking segment of the

credit card industry, that on the monthly cycle the consumer pays

the interest, pays any fees and charges, and pays a minimal

amount. We are looking for—and this is a rule of thumb—at least

1 percent of the principal to be reduced so that you do not see negative amortization, and you do see at least the beginning of some

reduction in principal.

Senator CARPER. So if I owed $5,000 on my credit card. I had interest payment on that, I had fines on that, I would be expected

to pay an amount of money in my minimum monthly payment that

is consistent with the interest rate that is owed, any fees that are

owed, and 1 percent of $5,000——

Ms. WILLIAMS. At a minimum.

Senator CARPER. —which I believe is what, $50?

Ms. WILLIAMS. The examples that we looked at, following up on

our conversation, were if you had a $5,000 balance at 17 percent

APR——

Senator CARPER. Let me say to my colleagues that what I had

asked Ms. Williams be prepared to do was to say if a person did

owe $5,000 and they were making a minimum payment of 1 percent of the principal on a monthly basis, 2 percent and I think 4

percent. I think I asked for those three.

Ms. WILLIAMS. I did 1 percent and 4 percent.

Senator CARPER. That is fine.

What we are looking for is how long does it take to pay it off.

Ms. WILLIAMS. If you are just doing the 1 percent, with $5,000

at 17 percent, it is going to take you about 22 years.

Senator CARPER. Say that one more time.

Ms. WILLIAMS. If you have a balance of $5,000 at 17 percent interest, assuming no late charges or over-limit fees and 1 percent

reduction in principal, it will take you about 22 years to pay that

off. If it is a 4 percent reduction in principal, it will take you a little over 10 years to pay it off.

Senator DODD. And how much more would you be paying on that

$5,000?

Ms. WILLIAMS. I think I have that.

Senator DODD. Roughly.

Ms. WILLIAMS. You mean the total amount?

Senator DODD. At 1 percent, 22 years, 17 percent, no fees, let us

just assume straight.

Ms. WILLIAMS. The total amount of interest paid then would be

about $6,500.

Chairman SHELBY. On an initial debt of what?

Ms. WILLIAMS. That is the $5,000.

Chairman SHELBY. But what would the initial debt be?

Ms. WILLIAMS. It would be $5,000.

Chairman SHELBY. And you would pay how much interest?

Ms. WILLIAMS. Interest over that 22-year period that it takes to

pay it down would be $6,524.

Senator CARPER. Could I ask you to just double-check that for

the record?

Ms. WILLIAMS. Certainly.

21

Senator CARPER. Frankly, that seems a bit low, and it may be

right, but if you could just double-check for the record and let us

know.

Ms. WILLIAMS. Certainly.

Senator CARPER. Thinking out loud, that is a long time at the 1

percent rate to repay the loan. What I understand is that initially

your inclination is to say maybe by the beginning of next year the

minimum payment should be at least the 1 percent?

Ms. WILLIAMS. That is what we have looked at as a rule of

thumb. There is not technically a regulation here, but that is the

minimal amount that we would look for to begin to amortize the

principal. A key issue here is that there are certain segments of

certain credit card issuers’ portfolios where it will be a challenge

to make that adjustment, to pay the interest, any late fees or other

charges, and to reduce the principal by just as little as 1 percent.

That is why the phase-in is very important.

Senator CARPER. Talk about the phase-in. Phase in to, what is

the next step?

Are we phasing in to 1 percent?

Ms. WILLIAMS. Phasing in to 1 percent, yes.

Senator CARPER. Pretty slow phase.

Ms. WILLIAMS. I think the participants in the next panel can

speak to what they are doing to get a more rapid rate of amortizing

the principal. Most of the credit card issuers that I am familiar

with, when they are looking at their new accounts, are in compliance with the account management guidance. It is just that there

are some existing accounts that have transition issues.

Mr. GRAMLICH. Senator, if I could say, first off we have done

similar examination of our banks, and we only have two credit card

banks now, but they are both in compliance with the standard that

you just heard about.

The new bankruptcy bill will have how long it takes to repay the

loan under specified conditions like this, so that information will be

going out to consumers, and we are right now engaged in writing

technical regulations on how that can best be done.

Senator CARPER. Is that going to be part of their statements?

Mr. GRAMLICH. That will be part of them, yes.

Senator CARPER. Is it going to be written in a way that ordinary

people can read it and understand it?

Mr. GRAMLICH. We hope so.

Senator CARPER. That is real important.

Mr. GRAMLICH. Yes. The number is the number. If it takes 22

years, that will be right there.

Senator CARPER. Mr. Chairman, has my time expired? I think it

has. Thanks you.

Chairman SHELBY. Thank you, Senator.

Senator Reed.

STATEMENT OF SENATOR JACK REED

Senator REED. Mr. Chairman, Senator Sarbanes has arrived. I

would be happy to defer to him.

Senator SARBANES. Go ahead. You have been waiting.

Senator REED. Thank you. Thank you very much, Ms. Williams

and Dr. Gramlich.

22

Ms. Williams, given the OCC’s experience in supervising banks’

lending risks in terms of safety and soundness, can you explain

how banks determine the credit-worthiness of an 18-year-old college student, which is apparently one of their key targets?

Ms. WILLIAMS. Credit card issuers use a variety of models to try

to assess the risk of certain populations that they will offer cards

to. And, they can look at their experience with individuals that attend particular types of schools and individual schools as to what

the credit performance has been. On that basis—and I urge you to

ask the next panel for some more detail here—typically, when they

offer a card to an entry level college student, for example, it is for

a very relatively small amount, say, $500. They will hold that line

and watch the performance of that particular card and will not increase the credit line unless and until there is demonstration of the

ability of that particular cardholder to handle it.

Senator REED. How many issuers do that, Ms. Williams, I mean

the banks that you supervise?

Ms. WILLIAMS. Offer credit cards to college students?

Senator REED. Not just offer credit cards to students, but actually do what you suggest is done in terms of a risk profile and relating it to the various schools which will probably relate it in some

direction to income of families, and is there any responsibility for

them to do that?

Ms. WILLIAMS. Starting with your last question first, I think

there absolutely is a responsibility to determine, based on some

risk evaluation, where they are offering the cards. I cannot speak

to every single national bank credit card issuer. The large national

bank credit card issuers that I do know offer college card programs

do risk modeling, risk evaluation, and credit line control along the

lines of what I described.

Senator REED. And as part of your supervisory responsibilities

you review their procedures and policies?

Ms. WILLIAMS. Yes, we do.

Senator REED. And you essentially agreed with them that this is

prudent.

Ms. WILLIAMS. We review whether they have appropriate risk

evaluation techniques in place, yes, Senator.

Senator REED. Thank you. With the new bankruptcy law it is obviously much harder to discharge debt, but there is an area now

of people who have already filed for bankruptcy who might be subject to solicitation by banks for credit cards, and these individuals

in some respects, since they have been through the process, have

less debt, but they cannot discharge the debt for another 8 years.

Is this post-bankruptcy marketing process a potential risk for the

banks because of the type of individuals that they would be targeting?

Ms. WILLIAMS. Two points on that, Senator. Again, I cannot

speak to every single national bank that issues credit cards, but

the major national bank credit card issuers are not involved in targeting those that are recently emerging from bankruptcy.

What they need to be doing is evaluating the risk profile of that

customer segment and making a decision about whether it is a

sound risk judgment to offer to that customer segment. If the experience they have indicates that segment, with appropriate controls

23

on the credit lines, is such that the risk is of a quantity that is appropriate for them to take on, then that would be a situation where

they might do so.

Senator REED. Ms. Williams, I have been informed that the average cost of debt on credit cards is between $2,700 and $3,000,

which would be difficult if the credit line was $500.

Ms. WILLIAMS. The average of?

Senator REED. The credit card debt of college students. This is

Department of Education information, it suggests that the average

is somewhere between $2,700 and $3,000.

Ms. WILLIAMS. I do not think that is how they start out. The

point that I was trying to make—and I apologize if I was not

clear—is that the way in which the cards are typically offered is

with a limited credit line at the outset. It will be increased based

upon the performance of the credit card holder.

Senator REED. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you very much, Mr. Chairman. First

of all, I am sorry I was not here at the outset to hear Senator

Akaka and Senator Feinstein. They have been very interested in

this subject over a long period of time, as of course has Senator

Dodd, who has taken a very strong leadership position on this

issue.

Chairman Shelby, I want to express my appreciation to you for

setting up a hearing which I think provides an opportunity to all

interested parties to present their views to the Committee. It is obviously important that we do our business that way, and it has

been done so again.

I am not going to take time for questions. I am going to make

a few statements and then ask whether you see anything that was

in the statement that is erroneous or you disagree with, because

one of the problems we have is trying to understand what is going

on out there. Of course, we are going to hear from a mixed panel

here shortly, and I am anxious to move along so we have that opportunity, but you are the two prime regulators in this field, and

it is important that we check it out against you.

Given the enormous importance of credit cards, it is estimated

that 80 percent of all American families have at least one credit

card. I mean if I put something out there that you say is wrong,

tell me real quick so we can get back to the right figures. According

to Cardweb.com American households have an average of 6 bank

credit cards and 6 retail credit cards. I, along with others, think

that individuals have to be responsible in how they use credit. The

question is are they being ensnared or entrapped somehow or

other, and being led into situations that they really cannot handle,

and whether they have been led into those situations through misinformation or clever statements and so forth and so on, and what

does that throw on the individual?

Only 40 percent of credit card customers, as I understand it, pay

off their balance each month, and the industry is apparently one

of the most profitable in the country.

24

Let me just briefly discuss a number of practices that have been

brought to our attention and see whether you perceive them as,

one, going on, and as abusive. First, overly aggressive and misleading direct mail solicitations to vulnerable populations, college

students, on which Senator Dodd has taken such a keen interest,

seniors on fixed incomes, even persons who have recently had their

debts discharged in bankruptcy. We have these practices of offering

offers for low- and fixed-rate credit cards which are in reality variable rate cards that can be adjusted upward every time the issuer

sends out a change in terms notice.

It has also been alleged to us, and documented in certain instances, that issuers engage in bait-and-switch tactics to lure individuals with blemished credit by offering credit cards that have low

interest, high credit line terms. Unfortunately, these individuals

are then sent cards with terms different and less attractive than

the card for which they applied. I have the feeling that they are

just being manipulated here in a very skillful way as they become

increasingly involved in these practices.

I know one answer is to say, well, they should not have a credit

card. And as I said at the outset, I think people should be responsible, I feel that very strongly. On the other hand, I do think they

are being lured into this thing.

A second practice is the imposition of excessive penalty fees. For instance, some issuers charge late fees as high as $39, double or

triple the cardholder’s interest rate if a payment is only a single

day late, or in some instances even a few hours late. I am troubled

because these fees do not appear to necessarily reflect the risk of

default posed by a particular consumer, but are being used to extract larger profits in an increasingly concentrated and unregulated

industry environment.

We have been told that penalty fees now represent 61 percent of all the fees paid to credit card issuers, just under $15 billion in

2004. When I turn to you, if you could specifically address that

fact, I would appreciate it.

And then you do have these practices that contribute to late payments, eliminating the grace period, shortening billing cycles, varying the payment due date each month, establishing a cutoff time

of 10 a.m. on the date that a payment is due. Presumably the mail

comes in after 10 a.m. I do not know.

A third practice involves the utilization of so-called ‘‘universal default’’ clauses in card agreements. These clauses, which are often

buried in the fine print of multipage credit card agreements, permit

a credit card issuer to retroactively raise a consumer’s interest rate

for essentially any reason, even when the consumer has a perfect

payment history with the issuing credit card company. While the

name seems to suggest that the risk pricing is related to defaults

of late payments to other creditors, the issuers also dramatically

increase cardholder interest rates if there is a change in the FICO

score, the cardholder takes on additional debt, or there are a certain number of inquiries into a consumer credit report.

And finally, is the failure of credit card issuers to disclose the

cost of minimum payments to consumers, and that was being covered in the exchanges that took place and earlier here this morning. But I think it is fair to say most consumers are not fully aware

25

of the consequences of paying only the minimum monthly payment,

and I commend Senators Feinstein and Akaka for the leadership

they are taking on that.

Now, the OCC has put out an advisory, which I guess is a first

step to identify unfair and deceptive marketing practices. I feel it

is late in coming, but it may well be the beginning of what could

be a very important initiative.

Of course, the Fed has undertaken a review of Regulation Z,

which implements the Truth in Lending Act, the primary Federal

law that regulates the credit card industry. In my own view, the

disclosure requirements of that Act are inadequate, and if the Fed

concludes it has the authority, I would hope they would revise Regulation Z to mandate that all disclosures are unambiguous, accurate, apply to the entire term of the contract, and provide consumers with necessary information to make informed choices.

Now, these are pretty egregious practices when you think about

them, and their impact is obviously very substantial in terms of so

deeply involving people in a very difficult circumstance which just

preys on their mind, and in many instances can bring financial

ruin. Am I overstating these practices? These practices go on, I

take it. How would you respond to this?

Ms. WILLIAMS. Senator, let me lead off on that because you referred to the guidance that the OCC put out last fall on credit card

marketing practices.

There are a variety of types of practices and approaches to disclosure, and you touched on a number of them in the statement that

you just made, that are not necessarily illegal or prohibited under

current law or current regulation, but that we felt were unacceptable for national banks. What we tried to do with that credit card

marketing guidance is to identify those practices and to be very

clear about the type of corrective actions that we wanted to see national banks undertake, and we are working with the banks as a

supervisory matter to get improved disclosures. Some improvements have already occurred, and some are in the works. You may

hear about some of them with your next panel.

We think it is critical that consumers get the information they

need in order to make informed decisions, information about opening an account or decisions about their behavior that is going to affect the terms of their account. If they have gotten an introductory

rate or if they have done a balance transfer, what circumstances

are going to cause that rate to go up? What circumstances are

going to result in a late payment fee? Exactly when does that

money have to come in?

Or, take the case of so-called ‘‘up-to marketing,’’ where there is

marketing that goes out to a segment of potential customers and

you see it displayed as ‘‘credit up to $5,000 or $10,000,’’ but the

issuer knows, because of the demographic analysis that they have

done, that only a very small portion of those customers are actually

going to qualify for that up-to amount. We said that was not appropriate. If issuers are doing an ‘‘up-to marketing’’ and they know the

likely qualification criteria of the customers that are receiving the

marketing, there needs to be good disclosure about the likelihood

of whether the customer is going to get that up-to amount that is

prominently featured.

26

So, I think a lot of what you just talked about goes to areas

where there needs to be better disclosure and we need to figure out

how to do it in a way that consumers can understand.

One of the concerns that I spoke about in my opening statement

is that a lot of information is going to consumers, and these products in some cases are not simple. There are issues about thresholds of consumer literacy and the extent to which consumers are

sophisticated about the features of the products, but there are also

tremendous issues today about the kind of information that consumers are being given to disclose to them the key information

about their financial products and services. We have to figure out

a way to do that better. It is not working well, I agree with you.

Mr. GRAMLICH. Let me say a couple of things. First of all, I

would like to align with Ms. Williams on the supervisory issue. As

you know, the Fed does not have many credit card banks, only two.

We also, along with FDIC, issued an advisory on unfair and deceptive practices. We warned our supervisees that it would be incorporated into our supervisory process, and we have done that. We

also have broader authority in defining unfair and deceptive practices. Some of the practices you mentioned sounded like they were

getting close. We are actually examining a number of them. It is

a little harder to declare something unfair and deceptive across the

board than if done by one bank. Let us say they are playing games

with when the letters get in, are they postmarked in time and so

forth, you can more easily do that with one bank than you can do

it across the board.

But we are looking at a number of these practices, and as you

mentioned, a number of them come up in Regulation Z and we are

doing a very comprehensive review of that. We are proceeding as

fast as we can, but there are many things to look at, 2006 is the

target date. I think every one of the practices you mentioned is on

the list of things we are looking at under Regulation Z.

Senator SARBANES. Do you all ever take your credit card statement and turn it over and read all the fine print on the back of

it?

Mr. GRAMLICH. I am very sympathetic with the people who say

they cannot do that.

Senator SARBANES. Well, I have tried it, and I reached the conclusion that the only way to solve this problem is to pay my credit

card every month so I do not fall into any of the traps that are on

the back page.

Mr. GRAMLICH. That is actually not a bad rule of thumb.

Senator SARBANES. They have you coming and going.

Mr. GRAMLICH. That is not a bad rule, the way you do it.

Senator SARBANES. I know, but a lot of people cannot do that.

Senator DODD. I went back, Mr. Chairman, just quickly doing the

numbers here with a $5,000 debt at 2 percent, with 2 percent

monthly payments, it will take 482 months. That is 40 years, to

pay that off, and the interest paid would be $11,305 over that period of time.

At 1 percent minimum monthly payments at 17 percent interest,

talking about both, you actually get negative amortization.

Ms. WILLIAMS. The figures I gave were assuming that the customer is paying the interest, that there are no fees and charges,

27

and that there is a 1 percent reduction in the principal. You definitely get a different figure if the customer does not pay the finance charge at all, but that was not the example that I was working through.

Senator DODD. The number that we talked about earlier, that is

a pretty staggering number.

Chairman SHELBY. Thank you, Senator Dodd.

Senator DODD. Thank you.

Chairman SHELBY. Senator Bennett.

STATEMENT OF SENATOR ROBERT F. BENNETT

Senator BENNETT. Thank you very much, Mr. Chairman.

We are a little schizophrenic in this country on this issue as we

look at the various laws that have been passed. We have laws that

say we must have truth in lending, we must have activities that

discourage people from doing this. We get all upset when people

market it, and then we pass the Equal Credit Opportunity Act that

says we must make this device available to everybody regardless

of their race, age, race, color, religion, national origin, sex, marital

status, or receipt of income from public assistance. And that last

phrase is code for people who are on welfare.

So on the one hand we say, gee, we cannot allow people to market these in such attractive fashion, and on the other hand the

Congress says, and we must make sure they are available to people

on welfare.

So what we come down to, I think, Ms. Williams, a phrase you

said talking about information, do it in a way customers understand. And Senator Sarbanes cannot understand the back of his

statement. I do not say that in a pejorative sense. I cannot understand the back of mine, and I do my best to pay mine off every

month. I have discovered a problem. I pay it off now by wire transfer on the Internet and I try to do that as close to the due date

as possible so I get the advantage of the money earning interest

in my account before I put it on their account, and every once in

a while I missed it by 24 or 48 hours, and then I get the finance

charge and the late charge and all the rest of that. I should probably be a little more diligent in my own date planning.

The question is, for the two of you, do you feel you currently have

enough tools as regulators to deal with the whole credit card phenomenon? We cannot do away with it as the Equal Credit Opportunity Act indicates. We have gone to great lengths in the Congress

to make sure it is available to everybody. It may be a joke, but I

am not sure that it is: Someone said ‘‘I am going to pay this bill

with cash,’’ and they were told, ‘‘Do you have any form of identification.’’

[Laughter.]

You cannot rent a car without a credit card. You cannot check

into a hotel without a credit card. The old days of paying for everything with cash are now over, and if you try to do that you are considered quaint. My father, in his 90’s, decided that to simplify his

life he would pay for everything in cash so that he would not have

to keep any other records or fuss with any other deadlines, and he

was viewed as being quite backward and old-fashioned when he

wanted to pay cash and he did not have a credit card in his pocket.

28

The question that we as the Congress have to ask you as the regulators is, do you feel, given your background and experience in

this issue, that you need any action on the part of Congress? Are

you looking for additional powers? Are you looking for clarification

of your authority? Do you feel that the Congress has been derelict

in withholding opportunities for regulation that you would like to

have? Either one or both of you.

Ms. WILLIAMS. Senator, there is one tool that we do not have

that at various times I have wished we did, and that is the ability

to write rules defining unfair and deceptive practices for purposes

of the Federal Trade Commission Act. We can implement the FTC

Act. We can review individual situations on a case-by-case basis,

and we have taken enforcement actions on a case-by-case basis, including in the credit card area. We do a lot with supervisory guidance, the guidance that Senator Sarbanes referred to, and we do

a lot through our supervisory process, but we do not have rule-writing authority. Over the course of the last couple of years, there

have been occasions where I have said to myself that I wish we had

the ability to write rules under the FTC Act.

Senator BENNETT. Dr. Gramlich.

Mr. GRAMLICH. Senator, as I believe Chairman Shelby asked me

earlier, I am not aware of any legal authority that we need. Now,

I did promise Senator Dodd to write a description of the data, what

data we can get on credit cards and on various abuses. It may be

that we need more authority to get some of the data that the Senator wanted. That is something we just have to look into. I cannot

answer that sitting here this morning. But in terms of general authority to deal with the issue, I do not think our main problem is

lack of authority conferred by the Congress. I think the main problem is just it is very difficult to deal with some of these issues.

Senator BENNETT. If I may, Mr. Chairman, just a quick personal

statement triggered by Senator Sarbanes’ comment. I own a house

in the State of Virginia where we live when we are not in Utah,

and therefore I pay Virginia property taxes. And every year they

have said you can pay your property taxes with a credit card if you

want to, and then they have a list of the charges that are added

to the credit card charges if you take advantage of that. And I look

at that list of charges and I shudder, and I never use the credit

card.

This year I got my property tax and it said on the front you can

call this 888-number and pay your property taxes by credit card,

no mention of any fee, and no chart showing what the fee is. The

previous chart said if the property tax is $1,000 the fee is such and

such, if it is $2,000 the fee is such and such.

On the back it says, these are the ways you can pay, money

order, check, so on, credit card, and repeated the 888-number. And

then it said ‘‘a fee will be added.’’ And I thought, well, they have

stopped publishing the amount of the fee because those of us who

read it decided we were not going to pay that, so now they say ‘‘a

fee will be added’’ and they give no number. So, I am going to have

to spend another 37 cent stamp and sent them a check because I

am not going to use the convenience of my credit card. Interestingly, enough, I would like to put my property taxes on a credit

card because then I earn points on the credit card, and the propVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 29643.TXT SBANK4 PsN: SBANK4
29

erty taxes would be a really big addition to my point total, and

then I could bring my kids to Washington on the free airline trips

that come from the points. But I am not going to do it because they

have not disclosed the fees. So back to your comment, do it in a

way the customers understand.

Thank you, Mr. Chairman.

Chairman SHELBY. Thank you, Senator.

Mr. GRAMLICH. Senator, if I could on that example. I think if this

solicitation had come from a credit card company, those fees would

have to be disclosed.

Senator BENNETT. Undoubtedly, yes, that is the difference.

Mr. GRAMLICH. So the problem here is that it comes from the tax

authorities.

Senator BENNETT. The State of Virginia is trying to make a little

extra money off of me.

Mr. GRAMLICH. Right.

Senator BENNETT. I am not going to let them do it.

[Laughter.]

Chairman SHELBY. Thank you, Senator Bennett.

Senator DODD. Mr. Chairman, could I just ask the follow-up

question. I ask this not only of the Fed but also the OCC, to provide the Committee with a detailed account of what information

you do receive and then what you would need to receive. I think

that might be helpful.

Then I think the last response, Ms. Williams, to your question

to Senator Bennett is an important one. And that is your ability

to have any regulatory authority in this area, so it does not take

an act of Congress to get in and say, not in this particular case but

something like it, you have to do this. And instead of going through

the gyrations of introducing bills, you actually could have the ability to get a handle on this issue. Mr. Chairman, I think it would

be helpful. But I think if we had some idea of what they are able

to get right now and what you would like to have, that would help.

Chairman SHELBY. That would be very helpful. Thank you, Senator Dodd.

I want to thank the panel. It has been very informative. I hope

we will give you whatever authority you need. Thank you very

much.

We are moving toward a vote as 12 o’clock so we are going to

have some problems with our next panel, so we are going to limit

you to—if you will come on up—4 minutes each to make your statements. Your written statements will be made part of the record

and we are going to enforce the 4-minute rule. We have no choice.

On our third panel we have: Antony Jenkins, Executive Vice

President, Consumer Value and Growth Markets/International

Cards, Citi Cards; Travis Plunkett, Legislative Director, Consumer

Federation of America; Louis Freeh, Senior Vice Chairman and

General Counsel, MBNA, and we all know him as a former Director of the FBI; Robert Manning, Special Assistant to the Provost,

Rochester Institute of Technology; Carter Franke, Executive Vice

President of Marketing, JP Morgan Chase & Company; Edmund

Mierzwinski, Consumer Program Director, U.S. Public Interest Research Group; Marge Connelly, Executive Vice President, Corporate

30

Relations and Governance, Capital One; and Linda Sherry, Editorial Director, Consumer Action.

I know you have waited all morning for this, but we have no control of the floor of the Senate, and we have a problem, so we are

going to enforce the 4-minute rule.

Mr. Jenkins, we will start with you. Remember the 4-minute

rule. We are going to enforce it. We will have to. Your written testimony will be made part of the record. Again, I want to reemphasize

that. If you have some points to make make them fast because we

do not want you to have to come back here. Thank you a lot.

Mr. Jenkins.

STATEMENT OF ANTONY JENKINS

EXECUTIVE VICE PRESIDENT, CITI CARDS

Mr. JENKINS. Good morning, Chairman Shelby and Members of

the Senate Banking Committee. My name is Antony Jenkins, and

I am an Executive Vice President at Citi Cards. I appreciate the

opportunity to speak before you today to discuss the credit card industry, Citi Cards, and especially our customer relationships.

Citi Cards is one of the leading providers of credit cards in the

United States with close to 80 million customers and 119 million

accounts. Consumers spend roughly $229 billion annually through

our credit cards. This constitutes about 2 percent of the Nation’s

gross domestic product. Citi Cards employs nearly 35,000 people in

30 geographic locations around the country and we offer a variety

of credit card products and services.

We recognize that customer satisfaction is critical to success in

the highly competitive credit card marketplace. A lost customer is

difficult and expensive to replace. At Citi Cards, we work hard to

maintain customer loyalty through marketing and other business

practices. Our research tells us that customer satisfaction is high.

Furthermore, we are committed to continually improving the customers’ experience, and I will now describe some of our initiatives

in this area.

We recognize that an educated customer will be a more satisfied

customer. Accordingly, we take great care to provide customer education in our communications. Also, I am proud to mention that

Citigroup and the Citigroup Foundation recently announced a 10-

year global commitment of $200 million toward financial education.

We use direct mail solicitations to find most of our new customers. Our selection process includes careful credit bureau screening for bankruptcy filings, delinquent and written off accounts, and

other credit problems. To this selection process we then apply additional criteria using our own internal scoring models before we

grant credit to new customers.

To conduct our credit card business in the safe and sound manner mandated by bank regulation, we use risk-based pricing to contain and manage the inherent risk of making unsecured and openended credit card loans. The goal of our solicitations is to assure

no surprises for our customers. In this spirit, we redesigned our solicitation letters to tell consumers in more detail that their account

terms could change and to describe the types of credit bureau information about them that could cause us to reprice their accounts.

31

Today, we reserve the right to adjust a customer’s interest rate

automatically for only three events, all of which involve the customer’s relationship with us. These events are: The failure to make

a payment to us when due; exceeding the credit line; or making a

payment to us that is not honored. I should note though that most

of our customers make their payments on time and stay within

their credit limits.

In the past, our cardholder agreements gave us the right to increase a customer’s interest rate automatically in the event of the

customer’s delinquency with another creditor, which is commonly

referred to as ‘‘universal default.’’ This is no longer the case. Now

before we increase a customer’s rate due to a delinquency with another creditor, we provide prior notice to the customer explaining

why the rate is being increased, and we give the customer the right

to opt-out of that increase. Customers who opt out may continue

to use the card with the existing rate until the card expires. When

the card expires no new charges are allowed. However, customers

may continue to pay off their balance using the existing rate and

payment terms.

As another initiative to improve the customer’s experience, we

completely rewrote, reformatted, and simplified our credit card

agreements. In doing so, we added on the first page a section entitled ‘‘Facts About Rates and Fees.’’ This section highlights and

summarizes critical pricing information in a single place, much like

the nutrition labels found on food products. This section also includes a description of the reasons we may decide to change rates

and fees.

We are also changing our minimum payment formula to ensure

that all customers who regularly pay only the minimum due will

pay off their debt in a reasonable period. This will increase the

minimum due for some of our customers, although I should emphasize that the vast majority of Citi Cards customers pay more than

the minimum. We are developing strategies to mitigate the impact

of this increase for customers in hardship situations. We believe

that in the long-run the new formula will save our customers

money by accelerating the payments of outstanding debt and lowering their total interest payments.

Thank you very much.

Chairman SHELBY. Thank you. I hate to cut you off.

Mr. Plunkett.

STATEMENT OF TRAVIS PLUNKETT

LEGISLATIVE DIRECTOR, CONSUMER FEDERATION OF

AMERICA

Mr. PLUNKETT. Chairman Shelby and Members of the Committee, I applaud you for calling this important hearing on credit

card industry practices. Perhaps no industry in America is more

deserving of such oversight.

According to the U.S. Better Business Bureau, credit card abuses

are the third most common source of all consumer complaints after

cellular phone services and new car dealers.

I would like to make five brief points about the current marketing, lending, and pricing practices of the credit card industry.

First, credit card companies are expanding efforts to market and

32

extend credit at a time when Americans have become more cautious in taking on credit card debt. It is conventional wisdom to attribute the growth of revolving debt to just over $800 billion solely

to insatiable consumer demand for credit cards, or to consumer irresponsibility as we have heard today, or to a lack of consumer financial literacy as we have heard today.

In fact, our analysis shows that—and we have looked at credit

card lending patterns over the last 15 years—aggressive and even

reckless lending by issuers has played a huge role in pushing credit

card debt to record levels. A couple of facts here. Since 1997, the

extension of credit by issuers has increased more than twice as fast

as credit card debt taken on by consumers. The amount of credit

made available by issuers now exceeds an astonishing $4.3 trillion

or just over $38,000 a household.

Meanwhile, the number of solicitations mailed by issuers has increased by more than five-fold since 1990 to 5.23 billion, or 47 per

household.

Second point: Creditors have targeted some of this credit at the

least sophisticated, highest risk, and lowest income families, who

have taken on fairly high debt burdens relative to their incomes

and have suffered disproportionate financial harm. We have heard

a lot about that already. I will reemphasize the point. It is not just

college students, it is also older Americans, minorities, and those

with blemished credit histories. This approach has led to fairly

high industry losses and record profits, which is not as paradoxical

as it seems. The industry now loans money to riskier customers

who are more likely to carry a balance and more likely to pay penalty fees and interest rates, but the industry charges them far

more, generating extraordinary profits.

We have heard about their profits this year. The credit card industry is the most profitable by far in the banking sector, earning

a return on assets that is three times greater than for commercial

banks overall. One of the major reasons for this astonishing profitability are a number of new and very costly fees and interest rates.

We have heard about universal default, and retroactive interest

rate increases. I do not know of another industry in the country

that can charge you more, that can increase the price on what they

have sold you after you have bought it.

We have not talked about what is often called ‘‘sticky interest

rates.’’ According to Federal Reserve data we have looked at, credit

card interest rates during the last few years dropped by only a

third as much as the prime interest rate did, indicating that consumers still, even in a lower interest environment, are paying too

much in interest rates. This is big money for issuers. We have

heard about fee income over the last few years. We looked at fee

income charged just to consumers, not to merchants, in 2003, and

found that every card-holding household paid an average of $830

for fees and for interest. That is a great deal of money.

In response to this concern, we often hear from credit card

issuers, well, we are just pursuing risk-based pricing. We are

charging households that are higher risk, higher rates. Issuers justify these practices that way.

33

I will close here and just say that we have extensive testimony

on why this pricing is not risk-based. In fact, it looks to us to have

all the tell-tale signs of being predatory.

Chairman SHELBY. Thank you.

Judge Freeh.

STATEMENT OF LOUIS J. FREEH

SENIOR VICE CHAIRMAN AND GENERAL COUNSEL, MBNA

Mr. FREEH. Thank you, Mr. Chairman. It is my pleasure here to

represent MBNA today, and a pleasure to be before the Committee.

I will make just four very brief points.

I do join with the panel members also in thanking the Committee

for this hearing. It is a very important hearing on a very major industry in our country.

As someone I think mentioned, there are 6,600 issuers in the

United States, and with all industries of that scale, the vast majority of lenders in the country do grant credit responsibly, and that

the vast majority of the users of that industry act very responsibly.

That does not mean we should not focus on the exceptions, but we

should make sure that we are not looking at the exceptions to the

exclusion of what the norm is. I think this is an industry that is

heavily regulated and that is working very well.

The four brief points I would like to make, first, with respect to

student marketing, we make every effort at MBNA to ensure that

credit card offers are not sent to anyone under 18 years of age. We

also have very unique relationships. We have affinity relationships

with over 700 colleges and universities. All of our marketing with

respect to students has to be approved by the university, by the

alumni directors, and we have a huge reputational as well as business interest, in making sure that the lending is responsible.

One fact you may be interested in with respect to our student

marketing, more than 90 percent of the credit cards we issue

through colleges and universities go to alumni, parents, and staff,

not students. We impose a very low credit line for student accounts. The average credit line for students is about $700. We stop

authorization immediately if they trigger over the limit restrictions, and call them up if we detect a problem. We have a very

strong and we think beneficial system for making sure that they

use credit responsibly. We have a lot of credit card literacy education that we do with them. That is part of the program that we

are very proud of.

With respect to repricing, before we lend money to customers, of

course, we must borrow funds, so the ability to reprice, to do it reasonably and responsibly, pursuant to regulation, is essential for the

health of this marketplace. We manage the environment by using

the affinity model to differentiate our products. We increase an

APR for only one of two reasons, either our costs have increased

or the consumer’s credit-worthiness indicates a higher risk than

was established at the initial pricing.

We do not practice universal default, we never have. We do not

automatically reprice a customer’s account without notice solely because he or she may have missed or been late on a payment to

some other creditor. Absent a specified default on an MBNA account, we do not reprice, and we always allow our customers in

34

that situation to just say no, which means they can reject the reprice by default, pay off the balance at the old rate, and if they do

not use the card again, that account is closed.

With respect to minimum payments, very briefly, less than onequarter of 1 percent of our customers pay minimum payments consistently. It is a very small fraction which is why I talked before

about the perspective with respect to focusing only on the exceptions at the expense of the norm.

Consistent with the OCC guidance, MBNA has agreed to and is

now establishing the 1 percent plus interest plus late fee calculation. I know there has been a lot of discussion about——

Thank you very much, Senator. I am a trained lawyer, I know

when to stop.

[Laughter.]

Chairman SHELBY. Dr. Manning.

STATEMENT OF ROBERT D. MANNING

UNIVERSITY PROFESSOR AND SPECIAL ASSISTANT

TO THE PROVOST, ROCHESTER INSTITUTE OF TECHNOLOGY

Mr. MANNING. Thank you, Chairman Shelby and Members of the

Committee. I certainly appreciate the opportunity to participate in

this long overdue hearing on credit card policies. Please bear in

mind I typically teach 4-hour seminars, so each minute is basically

1 hour of information.

Chairman SHELBY. You would be here by yourself.

[Laughter.]

Mr. MANNING. In framing my remarks and my written testimony, the focus has been on the deregulation of financial services,

and I want to make a few brief points that particularly impact on

current trends in both marketing and the financial impact of consumer credit and credit card today.

In particular, what we have seen is a dramatic shift in the transformation of the industry, the consolidation, conglomeration, such

as the union of wholesale and retail banking and insurance

corporations, as well as the bifurcation, the emergence of both firsttier banks as well as second-tier banks, which has particular implications to the emergence of sub-prime credit cards.

What I think is most important is we have seen a shift from

banking underwriting standards that were risk averse from our

community-based bankers where the best client was somebody who

could repay the loan in a timely fashion.

What we have seen over the last 20 years is that given our understanding of the tremendous profitability of credit cards, there

has been an enormous transformation and shift from wholesale to

retail banking with particular attention to credit cards. It is unambiguous, the data is irrefutable that the tremendous expansion and

increase of credit card interest rates and fees has precipitated an

unprecedented growth of consumer bankruptcies, to the point that

we have seen an unprecedented historical phenomenon where in

the late 1990’s we saw an inverse relationship; that is, as unemployment went down, bankruptcy rates went up, jumping to a high

of 1.6 million.

What this has done is put greater pressure then in this new deregulated environment where the best client is somebody who could

35

never pay off their debts. What we have seen and what I have had

most experience with is the marketing of new groups of potential

clients, the college students, where 10 years ago—actually 15 years

ago when I first studied the marketing to college students—we saw

that the first entree was the student who had one foot in the door,

the college senior or junior. And it was very rare in the early 1990’s

to see college students with more than $3,000 or $4,000 in debt.

Today, what we have seen is actually a race to the bottom where

over 80 percent of college students who are going to get a credit

card have it by the time they have taken their first midterm exam.

What we have seen now is the whole new redefinition of the starving student, which credit cards are jokingly referred to as yuppie

food stamps.

At the same token, the rise of bankruptcy and the withdrawal of

many banks from the central cities has seen a rise of the most

egregious credit card policies, and that is sub-prime credit cards,

particularly marketed to people who have recently gone through

bankruptcy. These are cards with typically less than $300 lines of

credit that have fees that will account for as much as 80 percent

of the outstanding line of credit.

I want to conclude by stating then that we have heard some references about technological innovation here in the United States,

but based on my experience in my research in other parts of the

world, the United States actually lags tremendously through Western Europe and other parts of the world, and, in fact, it is a shame

to see where we are in terms of smart-card technology and identity

fraud protections and the role of Government in protecting consumers in terms of the kinds of credit card policy abuses that we

are discussing today.

Thank you.

Chairman SHELBY. I know you did not have 2 hours or 4 hours,

but we do appreciate your contribution.

Ms. Franke.

STATEMENT OF CARTER FRANKE

CHIEF MARKETING OFFICER, CHASE BANK U.S.A., N.A.

Ms. FRANKE. Mr. Chairman, Members of the Committee, good

morning. My name is Carter Franke, and I am the chief marketing

officer of Chase Card Services, a division of Chase Bank U.S.A.

Today, I sit here as a representative of the more than 16,000

Chase employees around the country who support our credit card

services division. Our customers are primarily those that fall in

what we call the ‘‘super-prime’’ and ‘‘prime’’ categories—the most

responsible and the most knowledgeable credit users in the country. We operate in a highly competitive industry, one where many

customers can easily vote with their feet. Our customers in particular have many choices in the marketplace today, and competition is good for consumers.

Today’s credit cards are issued, as we said, to consumers with exceptionally good credit histories, and as a result, our business

model is built upon consumers making their payments regularly

and on time. All of our pricing decisions are based on sound economic analysis. However, unsecured credit lending is a shared responsibility between the lender and the borrower. Our goal is to

36

provide problem-free access to the credit lines that we offer and to

achieve the highest level of customer satisfaction possible. During 2003 and 2004, Chase invested approximately $107 million working with partners across the Nation to voluntarily fund

responsible credit counseling services, create online financial education, and credit and debt management tools. At Chase, we value

our customers. A missed payment on a non-Chase card does not

drive automatic repricing of any Chase account.

We also realize that in the vast majority of cases, a late payment

on a Chase card is not a sign of increased risk but of timing—a vacation or other realities of our very busy lives. For that reason, a

late payment will not result in a price increase for over 90 percent

of Chase customers.

A small segment of our customers do have a change in creditworthiness from time to time, which we deal with fairly and responsibly. If a customer’s overall credit profile deteriorates materially and, thus, exposes us to an increased risk of nonpayment, economic considerations may cause us to raise the interest rate.

In these cases, and in accordance with all of the applicable laws,

we provide the customer an opt-out option. This enables the customer to reject our change in terms, close their account, and pay

off the balance under their existing terms. Once closed, the interest

rate on a Chase account that is paid according to its terms will not

be changed.

Mr. Chairman, we understand that our business may seem complicated and even at times unfriendly. I hope this information I

have provided today has offered you some substantive insights into

our practices and an understanding of our true commitment to fairness for all customers. At times we are faced with difficult decisions relative to individual card members and their accounts, and

when reviewed on an isolated basis, these may seem inappropriate.

Our decisions are designed to permit the vast majority of our customers to continue to receive the best possible rates, service, and

access to the benefits credit cards provide.

We look forward to working with you and with Members of the

Committee to answer your questions and address your concerns.

Thank you.

Chairman SHELBY. Thank you.

Mr. Mierzwinski.

STATEMENT OF EDMUND MIERZWINSKI

CONSUMER PROGRAM DIRECTOR,

U.S. PUBLIC INTEREST RESEARCH GROUP

Mr. MIERZWINSKI. Thank you, Senator Shelby, Senator Dodd,

Members of the Committee. On behalf of the Public Interest Research Groups, it is a privilege to be here for this very important

hearing.

You have heard from the industry that there are 6,000 credit

card issuers. There are only 10 that matter. The industry is extremely concentrated. Those 10 have two-thirds of the cards, twothirds of the receivables. Those are the 10 the Committee should

concentrate on.

In terms of getting data from those companies, you should ask

the regulators why they cannot improve call report reporting.

37

Those are the forms banks provide so that we can learn more—provide to the regulator so that we can learn more about how much

they are making in fees more easily and compare the companies

better.

When you have a highly concentrated industry or everybody already has too many cards, even though the companies are extremely profitable, as we have heard—it is the most profitable form

of banking. The only way you can make more money and achieve

the corporate profit goals that downtown wants, you have to either

get customers from others, which means deceiving them or offering

them more expensive products. You have to reach out to new constituencies such as college students or previous bankrupts. Or you

have to charge your own customers more money to make more

money on them. And that is the reason we see all of these unfair

practices.

We have a website that describes what consumers can do. It is

called truthaboutcredit.org. Consumers can download a fact sheet

about how to solve the credit card road map of credit card hazards.

We also care a great deal about college students because we were

founded years ago by college students, so we have our own credit

card brochures, charge it to the max MegaDebt credit card. With

our own brochures, we can find out more.

But the real problem here is that a credit card agreement is a

license to steal. A credit card agreement allows companies to

change terms at any time for any reason, including no reason. That

is unbelievable. That is outrageous. That needs to be changed.

Chairman SHELBY. Is that the only situation in the banking industry you know about?

Mr. MIERZWINSKI. I think that might be the only situation anywhere, Senator, where the contract is so one-sided that it can be

changed at any time for any reason, including no reason. The consumer virtually has no rights except to try to get another card.

The second problem, of course, is their use of mandatory

predispute binding arbitration to limit a consumer’s rights to enforce their rights in court.

So we know that these problems that have been described exist

because of preemption theory. With the Marquette decision and the

Smiley decision limiting the authority of States to regulate interest

or fees, the industry has consolidated in a few States, and the OCC

has claimed that the industry is virtually unregulated by the

States. Yet, the States have attempted to enforce the laws against

the credit card companies.

Just this January, Capital One was sued by the Minnesota Attorney General. Other States have filed because their fixed rates are

not really fixed. Many States have sued the sub-prime lender Cross

Country Bank for its very deceptive and unfair practices in debt

collection. In 2002, 28 States settled a case with Citibank; 28

States and Puerto Rico settled a case in 2002 with First USA as

well. And, of course, the OCC did go after one big bank, Providian,

in 2000, but only after the tiny San Francisco district attorney and

the California Attorney General showed the way.

The consumer groups jointly have a long list of recommendations

to you that we have all endorsed. It is all in all of our testimony.

38

Most of our recommendations are incorporated in Senator Akaka’s

and Senator Dodd’s bills.

Thank you.

Chairman SHELBY. Thank you.

Ms. CONNELLY.

STATEMENT OF MARGE CONNELLY

EXECUTIVE VICE PRESIDENT,

CAPITAL ONE FINANCIAL CORPORATION

Ms. CONNELLY. Good afternoon, Chairman Shelby and Members

of the Committee. My name is Marge Connelly, and on behalf of

Capital One, I also want to thank the Committee for holding these

hearings. And at the outset, I do want to acknowledge that we do

hear the criticisms and concerns, and we are very sensitive to

them.

But without diminishing the challenges associated with those

concerns, I do urge the Committee to really look broadly at how

this industry has evolved over the past 30 years. As we have noted,

today more than three-quarters of American families rely on credit

cards on a daily basis, and these cards enable almost $2 trillion in

transactions every year. So that in and of itself is really a remarkable success story, but there is really much more to this evolution

than just volume. In my testimony, I have included a chart, which

please feel free to take a look at, but it just reflects the change in

interest rates. There are a couple. There is one there. It just reflects the changes in annual percentage rates, the interest rate,

and annual fees that are charged to consumers.

And as you can see, back in 1987 we really had a one-size-fitsall kind of environment, and virtually all customers were paying

this, 19.8 percent, $20 annual fee, regardless of what kind of risk

that they have. Now, that has changed significantly. Long-term

rates as low as 5 percent are now available for some of the lowestrisk customers, and on average, consumers are paying in the range

of 13 or 14 percent. And in most cases, there are no annual fees.

So, based on a study that was cited in a 2003 report from the

Information Policy Institute, this trend has saved consumers about

$30 billion per year. So we think that is, again, another great part

of the evolution of the industry, but we also can note that access

to credit cards has also been increased significantly. And that

means that more consumers can take advantage of the benefits

that this product offers. They can handle emergencies better. They

are safer when shopping because they do not need to carry cash.

And as has been noted, they can make purchases, like online transactions, like reserving a hotel room, renting a car, that otherwise

they would find incredibly difficult, if not literally impossible to

make.

Now, these two positive trends—reduced price and increased access—have really been driven by intense competition and improvements in credit risk. These two drivers, though, have increased the

complexity and the variations of the products offered. And they

have led to an increased use of fees and risk-based pricing so that

we can better align product terms with risk. And this is necessary

in order to avoid the kind of subsidization that you could see from

past years.

39

I will say that we do not use universal default as part of our

risk-based pricing policy, but we do indeed find the need to take

actions if there is evidence of risky behavior on our accounts.

I think the question, though, is really is this industry really adequate serving its customers? I would say that we believe that for

the most part it is, but we do acknowledge that it is a more complex environment, it is more difficult for consumers to fully understand the structure of some of the products. And although we think

things like the Schumer box have really taken us a big step forward, a lot has changed and there are a lot of terms that are now

incredibly important to consumers that are not included in that

disclosure regime. We actually have a second exhibit that we have

brought with us that I am happy to chat about during our questioning that is our submission to the Fed’s advanced regulatory notice. And we think it is a pretty big step forward in terms of trying

to really portray all of the very important information and to do so

in a way that we think is uniform, can be easily compared by customers, and is actually done in language that we think is very clear

and easy for customers to understand.

So, again, I want to thank you for holding this hearing. I want

to say that at Capital One we are committed to reearning our customers’ business every single day. Thank you.

Chairman SHELBY. Thank you.

Ms. Sherry.

STATEMENT OF LINDA SHERRY

EDITORIAL DIRECTOR, CONSUMER ACTION

Ms. SHERRY. Thank you. Chairman Shelby and Members of the

Committee, my name is Linda Sherry of Consumer Action. Thank

you for your leadership on this important issue.

Consumer Action for more than 20 years has been conducting

surveys of credit card rate fees and conditions, and our survey has

become a barometer of industry practices. When we survey, we call

as consumers. This gives us the insight into what people face when

they shop for credit cards. In our experience, getting accurate information from credit card companies is difficult and exasperating.

Application lines are staffed by salespeople who pressure callers to

apply but who often cannot give even the most basic facts that are

available under the Credit Card Disclosure Act.

Consumer Action receives many complaints from credit card customers about unfair practices. Penalty rates and universal default

rate hikes top this list. Penalty rates are much higher interest

rates triggered when you pay late, even one time. We found penalty

rates as high as 29.99 in 2004 when the prime rate was at 4 percent. This year, the highest one we found is 35 percent.

Customers who contact Consumer Action about universal default

report being hit by retroactive default rates that were double and

triple their old rates. It is outrageous that the credit card companies claim that they are merely protecting themselves from risk

when they hike interest rates. We challenged the industry to explain how a new car loan or a one-day-late payment makes a customer so much more risky that it justifies tripling their rate.

An increased number of card issuers employ universal default

policies. Our 2004 survey found that 44 percent of the surveyed

40

banks, which include the top 10 banks, by the way, use universal

default. When you are turned down for credit the law, requires that

you get a letter explaining why. But if you are hit with a universal

default repricing, you do not learn about it until you open your

next statement.

A Bastrop, Texas, woman told us: The city AT&T Universal card

just raised our interest rate from 12.9 to 28.74 because of a late

payment they found listed on my husband’s credit report to another

credit card company. Our payments to AT&T have been on time.

Late payments result in higher penalty rates with 85 percent of

the issuers surveyed in 2004, with average penalty rates of 22.91.

Of these issuers, 31 percent said a penalty rate could be triggered

by just one late payment.

A Topeka, Kansas, house painter complained: Chase raised my

interest rate from 9 to over 27 percent and told me it was because

I had two 30-day past due payments last year. His statements

showed one payment was posted 2 days late and the other 7 days

late.

A decade ago, the average late fee was $13. The average late fee surveyed last year was $27.45, with three major banks charging up

to $39.

Tiered late fees, a new trend tied to the outstanding balance, penalizes people with smaller balances than those with higher ones.

The number of issuers with tiered late fees jumped from 20 percent

in 2003 to 48 percent in 2004.

We have found that 58 percent of surveyed issuers even have a

cutoff time on the due date. If you are even 5 minutes late, you

might have to pay a late fee of up to $39.

Banks must begin to consider postmarks—and thank you for

your leadership on this, Senator Dodd—before they assess late fees.

We have heard from consumers who allowed 7 days to post a payment, yet they were still charged a late fee. If those are the rules,

no one can hope to comply.

This is a follow-the-leader industry. When one issuer adopts an

anticonsumer practice, others quickly follow. We can only conclude

that the industry is attempting to fundamentally redefine its business model to shift the risk from lending from itself onto the backs

of its unwitting customers.

Thank you for your diligence in investigating these practices, and

please support all legislation, such as Senator Dodd’s thoughtful

legislation, that will help end these unfair anticonsumer practices.

Thank you.

Chairman SHELBY. I appreciate all of the hurried-up testimony

here today. I have a number of questions I am going to submit for

the record because this is a very important hearing.

I do not believe myself there is any room anywhere in America

to exploit anybody, and we should not do this. If that is true, 35

percent interest is—if that were true—that is astounding. Why, the

short-loan people, loan sharks, would be proud of you if you would

do that because they would soon be out of business. I hope this is

not true.

On an unrelated subject in a sense, but related very much to the

credit card industry, I have a statement and a question. On a different thing, I would like to emphasize to our witnesses here from

41

the credit card industry the important role that you could play in

the very troubling growth of Internet child pornography, because

major credit cards are the easiest and quickest method of payment

on the Internet for commercial transactions. Many child pornography websites use universally recognized credit cards to ensure

the largest possible customer base. According to the International

Center for Missing and Exploited Children and the U.S. and international law enforcement, the size and scope of this worldwide

problem is huge and is growing rapidly.

Because of the large demand and tremendous profitability of this

crime, this content is also becoming more explicit, and the child

victims of these crimes are increasingly younger each year. I know

in your industry there has already been some effort by the International Center for Missing and Exploited Children and various

law enforcement agencies to work with many of the financial institutions to find ways to help increase detection and reporting of

child pornography, and I commend these efforts. And I know,

Judge Freeh, you as former FBI Director, you understand all this

well. But it is something that this industry could really do something good on.

Senator Dodd.

Senator DODD. Mr. Chairman, we have about a minute left, or

less than that, for these votes on the floor. What I would like to

do is submit some questions in writing, if we could. It is going to

be difficult to get back here. But let me just make the point I made

a while ago, and that is—and I appreciate the industry standpoint

here, I am not suggesting that all credit card companies do all the

same things. But if you do not take a leadership position on this

stuff and get it straightened out, there should probably be some

regulatory moves made anyway. But, nonetheless, the pendulum

moves. I have seen it over my years. And people who sit back and

assume they can do it—we watched it in the savings and loan industry. We have watched it in other areas. And it is building and

it is building, and I would strongly urge you to engage in a lot of

self-discipline within the industry on some of these practices, and

do not play follow the leader. I think it is a good analogy. Too often

that is the case because no one seems to be saying anything, and

no one is doing anything about it, so why not continue doing it or

why not try the practice yourself?

Mr. Chairman, I would hope that we might look at some legislation that would give some authority to our respective agencies here

so that some additional steps could be taken to find out exactly

what is going on out there. Part of the difficulty is we are relying

on solid information, but an awful lot of it is not coming from the

industry itself.

So, I thank you all for being here.

Chairman SHELBY. Thank you.

Senator Carper.

Senator CARPER. To each of our witnesses, thank you for being

here today, and thank you for sharing your comments with all of

us. I apologize that you have had to truncate your remarks, and

I really regret that we do not have the opportunity to ask questions

of each of you.

42

A comment or two, if I could. I heard during the course of several

of your testimonies policies which I think are meritorious, commendable, and what I wish we had the opportunity to go back into

to put a spotlight on some of those—I will call them ‘‘white-hat

policies.’’ There are a couple of ways to get the kind of behavior we

want, whether it is financial services entities or others. We can

criticize those who perform badly, or we could put a spotlight and

positive reinforce the good behavior. And I tend to be the guy who

likes to positively reinforce good behavior. For those of you that are

doing the right thing for the right reasons, I salute you. And I

would like to find a way for us to put a spotlight on those good policies so we can encourage others who are not following those kinds

of policies to begin to adopt them.

Again, we appreciate your being here today, and thank you for

bearing with me. Mr. Chairman, when you and I are the Majority

Leader of the U.S. Senate, we will not have these votes to disrupt

our hearings in this Committee and inconvenience these people.

Thank you.

Chairman SHELBY. Thank you, Senator Carper.

Dr. Manning, maybe we can get you back sometime and give you

4 hours, but not 4 days or 4 months.

[Laughter.]

We thank all of you, and I appreciate your being here today, and

I hope you understand our predicament on the floor of the Senate.

We are late now.

The hearing is adjourned.

[Whereupon, at 12:28 p.m., the hearing was adjourned.]

[Prepared statements and response to written questions supplied

for the record follow:]

43

PREPARED STATEMENT OF SENATOR TIM JOHNSON

Thank you, Mr. Chairman, for calling today’s oversight hearing on the credit card

industry, in particular the regulation and industry practices with respect to consumer disclosures and marketing. I am interested in today’s hearing given the significant impact the credit card industry has on consumers and our national economy.

When this Committee considered the reauthorization of the Fair Credit Reporting

Act and during recent floor debate on the bankruptcy reform legislation, we had preliminary discussions about consumer notices, risk-based pricing, and interest rates.

I look forward to taking a careful look at these issues in detail again today. My hope

is that today’s hearing will not only be useful to the Committee in its oversight role,

but also that the hearing will provide useful information to the regulators, industry,

and consumer groups on where improvements can be made.

I would guess there are very few individuals in this hearing room that do not

have at least one credit card in their pocket. The credit card has become an important tool that so many American families depend on for day-to-day living. Like any

other contractual agreement, it is vital that consumers know the rules of that contract and that both the consumer and company play by those rules. That is why

the regulation of consumer notices and industry implementation of such notices are

so important.

I must say that simply sending out notice after notice is probably not the most

effective way to disclose the most important information to consumers. Frankly, we

need to do a better job of making sure consumers are not flooded with notices they

do not read, let alone understand.

Just last week, I learned that in my home state of South Dakota, the Student

Federation, representing thousands of students at our public universities, highlighted the need for more financial literacy, especially among students. As more and

more young people enter the economy as adult consumers, we need to ensure they

have the knowledge necessary to manage their finances responsibly. Just recently,

along with several of my colleagues, I signed a letter seeking funding for the Excellence in Economic Education program. This competitive grant program aims to

teach young people the importance of economic and financial literacy. I am hopeful

that with funding for this program, along with financial literacy efforts by the regulators, industry, and consumer groups, we can start our young people along the road

to sound personal financial management. The more knowledgeable consumers are

about their finances, the fewer social and economic problems our Nation and our

economy will face.

I understand the difficult balance that must be achieved between providing consumers with clarity and completeness of information when it comes to notices that

allow consumers to make informed decisions about their personal finances. That is

why I am hopeful that the financial regulators, along with industry and consumer

groups, can come together and establish guidelines for notices that do not overburden companies or consumers.

Another issue is that some have criticized the industry for is risk-based pricing.

We had debate about this issue when Congress reauthorized the expiring provisions

of FCRA and when we considered the bankruptcy reform legislation. One of the

hallmarks of our credit system in the United States is that it opens economic opportunities for consumers with limited or less than perfect credit histories. When Congress reauthorized FCRA, we ensured that millions of Americans continued to have

access to affordable credit under a uniform national standard that included significant new consumer protections. Access to affordable credit allows many American

families to build or restore their credit history which will help to lower their cost

of credit. At the same time, access to credit gives consumers another tool to help

manage their day-to-day finances.

A study of the consumer credit marketplace shows the growth of credit card access over the last 30 years, and the results are striking. In 1970, only 2 percent

of families in the lowest income bracket had a credit card. In 2001, that number

stood at 38 percent. In the highest bracket, the 33 percent of households that had

at least one credit card in 1970 had risen to 95 percent.

Even more striking are the statistics related to access to credit by race. Between

1983 and 2001, the number of white families who held credit cards increased by 69

percent. During the same period, the number of Hispanic families increased by 85

percent, and the number of African-American families increased by 137 percent.

Credit cards, which often carry higher interest rates than other types of nonrevolving lines of credit, have seen significant decreases in cost. The study attributes these decreases largely to the competition in the market and to

prescreening, which is made possible on a large-scale basis by FCRA. For example,

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in 1990, only 6 percent of all credit card balances paid interest rates under 16.5 percent. By 2002, 15 percent of all card balances paid rates below 5.5 percent, and 71

percent of all credit card balances carried interest rates under 16.5 percent. In 1990,

while more than 93 percent of all credit card balances paid interest rates over 16.5

percent, that number had plummeted to 29 percent in 2002.

While some of these interest rate declines may be due to the interest rate environment, much surely has to do with companies’ ability to differentiate risk among borrowers and to price credit accordingly. Credit scoring models have increased in their

predictive power and one result is increasingly competitive cost of credit.

Consumers must have clear information on an ongoing basis to help manage their

credit. At the same time, companies should not have undue restrictions on their

ability to price credit based on risk. The ability to price credit based on risk allows

companies to manage their financial risk in a safe and sound manner.

I hope the industry, regulators, and consumer groups will work together on ways

to improve consumer awareness without causing unintended consequences that

would limit consumer choice or ability to obtain credit. And, I hope the industry will

continue to work in a constructive manner to find innovative ways to provide consumers with timely and useful disclosures. It is good for the public and good for

business to have informed consumers using credit responsibly.

Thank you, Mr. Chairman, and I look forward to today’s testimony.

—————

PREPARED STATEMENT OF SENATOR CHRISTOPHER J. DODD

I would like to thank Chairman Shelby and Ranking Member Sarbanes for holding this important hearing on an issue which impacts tens of millions of Americans.

This Committee continues to focus on issues which have such a direct impact on

so many in our nation. I believe that the subject matter of the hearing today—credit

card issuer practices—touches the lives of more Americans than any other issue

within this Committee’s jurisdiction.

I would also like to thank the witnesses for appearing before the Committee

today. It is my hope that this will not be the last hearing on this subject matter

and the input from the witnesses today is much needed and greatly appreciated.

Credit cards are one of the most successful and pervasive financial services products ever created, and have undoubtedly improved access to credit and added a significant measure of convenience to consumers.

Just to give an idea of the staggering role that credit cards have in the United

States, according to the Federal Reserve, there were 556.3 million Visa and

Mastercard credit cards in circulation in 2003. Those cards coupled with Discover

and American Express products indicate that today at least 700 million revolving

credit cards are currently in circulation.

Approximately 145 million Americans have at least one credit card. The average

cardholder has 4.8 credit cards. The total amount of credit card debt is over $800

billion, while the total amount of credit extended to cardholders is over $4 trillion

dollars.

With this kind of market presence, it is not surprising that Credit Card Management reported in May that 2004 was the most profitable year ever for credit cards.

With this tremendous success, I believe, comes significant responsibility. And I believe that the credit card industry is failing that test.

Credit card issuers have now become the victims of their own success and are

turning credit cards into nothing less than wallet-size predatory loans.

In a time when access to credit is the easiest and cheapest, credit card companies

are making more money than ever, credit cards issuers are charging usurious rates

and fees and engaging in a series of abusive and deceptive practices which I believe

will have drastic long term consequences on our Nation.

Credit card companies are charging consumers higher fees than ever before. In

1980, credit card fees alone raised $2.6 billion. In 2004, credit card fees raised over

$24.4 billion.

We have been told that the reason that credit card rates and fees are so high is

that more and more consumers are failing to pay their debts, and as a result,

issuers must charge higher rates and greater fees.

In fact, the opposite is the truth. Consumer bankruptcies went down last year by

nearly 3 percent. And default rates actually decreased last year.

The truth of the matter is that this is the best time in history to be in the credit

card business. Last year, over 5 billion solicitations were sent to American homes

last year, which is nearly twice as many as only 8 years ago. Coupled with television ads, radio ads, internet ads and advertising signs, it is nearly impossible to

45

turn on your TV or computer or simply walk down the street without being offered

a credit card.

Despite the assertions that the credit industry is struggling because of bad consumer behavior, credit card companies have more money than they know what to

do with and they are pumping out solicitations in the search for new people to get

in debt.

And while normally competition lowers costs for consumers, the exact opposite is

happening.

Credit card companies are finding more and more ways to effectively increase

their income from rates and fees. Abusive practices such as misleading teaser rates

which employ bait-and-switch tactics, hidden fees and penalties, and universal defaults provisions buried in the fine print, are standard operating procedures in the

credit card industry today.

And while my statement this morning will not touch on the entirety of my concerns with the credit card industry, I would like to highlight a couple of major

abuses currently employeed by the credit card industry.

One of these abuses is the so called ‘‘Universal Default’’ or which should more accurately described as a predatory retroactive interest rate hike. This practice forces

a credit card consumer in good standing, who is paying his credit card bills on time,

to have his interest rates retroactively jacked up to 25 percent or 30 percent because

of some unknown irrelevant change in his spending patterns. The idea that a credit

card company can charge an initial interest rate that would have in the past been

outlawed as usurious, and then double or triple that rate for any reason it so chooses is just plain wrong.

The industry refers to this practice as ‘‘risk-based’’ pricing. They believe that

when a consumer’s credit score goes down, they become ‘‘riskier’’ and higher interest

rates are levied on them. What is interesting to me is that I can find no evidence,

either anecdotal or empirical of when a consumer’s credit score improves, a credit

card company lowering an interest rate for a consumer.

We should stop this practice completely or at a minimum make any increase in

interest rates prospective and not retroactive.

Another troubling development in the battle to sign up new customers, has been

the aggressive way in which they have targeted people under the age of 21, particularly college students.

Solicitations to this age group have become more intense for a variety of reasons.

First, it is one of the few market segments in which there are always new customers

to go after; every year, 25 to 30 percent of undergraduates are fresh faces entering

their first year of college. Second, it is also an age group in which brand loyalty can

be readily established. In fact, most people hold on to their first credit card for up

to 15 years, which is probably the amount of time it takes them to dig out of the

mountain of credit card debt they incurred while in their teens.

A staffer of mine recently opened his 7 year old son’s mail—amazed to find a

brand new American Express card. The new card came as a result of, according to

the offer, the elementary schooler’s ‘‘excellent credit history.’’ A brand new potential

victim of the credit card industry. He is 7 years old. What’s next? Are they going

to set up credit card kiosks in hospital maternity wards?

Credit card issuers target vulnerable young people in our society and extend them

large amounts of credit with little if any consideration to whether or not there is

a reasonable expectation of repayment. As a result, more and more young people

are falling into a financial hole from which they are unable to escape. One of the

fastest growing segments of the population forced to declare bankruptcy is this agegroup.

We have an obligation to protect and educate our Nation’s youth. The next generation of American leaders deserve no less than the reigning in of the irresponsible

practices of the credit card industry.

As many of the witnesses will mention, I have introduced legislation designed to

force credit card issuers to stop their more deceptive and abusive practices and alter

the targeting of our most vulnerable consumers. This legislation, the Credit CARD

Act, should be the first step is restoring some common decency in the credit card

industry.

I look forward to the testimony today, particularly from the regulators of the credit card industry—I must confess I do not know a great deal about the regulatory

and enforcement activities of those that regulate this industry.

What concerns me is that I fear that my lack of knowledge about what the regulators dois because they do not do enough to protect consumers from the predatory

practices of the credit card industry. I look forward to working with them to accomplish the goal of improving consumer protection in the area of credit cards.

46

Record fees, record abuses, record profits. And a record number of Americans are

being taken advantage of.

I would like to again thank our witness for appearing before the Committee today.

—————

PREPARED STATEMENT OF SENATOR WAYNE ALLARD

I would like to thank Chairman Shelby for holding this hearing to examine the

current legal and regulatory framework governing credit card issuers and business

practices in the credit card industry.

Six hundred thousand credit card issuers exist in the market today, and nearly

145 million Americans use credit cards.

The consumer credit system has provided Americans access to financing when

they need it most. Of course, it is essential that consumers are responsible with

their use of credit cards, and are well aware of the interest rates, fees, limits and

other terms of the accounts.

As a proponent of meaningful disclosure, however, I believe there is a balance to

strike when it comes to giving the consumer information about their credit terms

and agreements without becoming so overwhelming as to be rendered meaningless.

I look forward to hearing from the regulators and industry today on what changes

might be needed in order to improve the current framework for the ultimate protection of consumers. Thank you to our witnesses for agreeing to appear before the

Committee. I look forward to your testimony.

—————

PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

Thank you, Mr. Chairman. I want to welcome both Senator Feinstein and Senator

Akaka to today’s hearing.

They are both champions of financial literacy and consumer rights and they will

add significantly to our discussions on the subject of credit cards and consumer debt.

It is quite fitting that we are taking some time to discuss this issue again. On

the heels of Congress’ decision to pass the bankruptcy bill—a bill that was supported by a broad bipartisan group of legislators—it is important for us to continue

our focus on how we can improve the disclosures that banks and credit card companies make to their costumers.

However, we should continue to move forward on increasing financial literacy.

Many would agree that education is the silver bullet for us in so many areas and

that is certainly true when it comes to our personal financial health. I look forward

to seeing the Treasury Department’s upcoming report on financial literacy, but we

already know that Congress and the President are not investing the kind of money

in this effort necessary to be successful.

I strongly supported the establishment of a national uniform standard for our

credit system—one that would ensure greater consumer access to and control over

credit information that would provide enhanced protections against identity theft,

and, establish a groundbreaking new role for the Federal Government in financial

literacy and education promotion.

I was pleased to sponsor Title V—the Financial Literacy component of the FCRA

legislation that we passed more than a year ago.

Because of this Title, there is now a national financial literacy commission

charged with developing a national strategy on financial literacy, setting up a onestop consumer website and 800 number, and guaranteeing that we streamline and

coordinate our Government’s financial literacy efforts.

I also authored an FCRA provision that requires the FTC to study common financial transactions that are not generally reported to credit reporting agencies and

recommend ways to encourage the reporting of these transactions. This is important

because it will help the Government and credit reporting agencies develop better

ways to measure the creditworthiness of lower-income, working families.

I also want to say that I believe that one thing that has made our economy more

robust over the past 20 years has been the increasing access that people have to

credit.

I am committed to ensuring that people have access to credit and I am going to

continuing working to ensure the heath of our consumer credit markets.

For one, I am concerned about taking a heavy handed approach to oversight that

may lead to the regulation of interest rates and fees that ultimately limit the ability

of banks to extend credit to higher risk consumers.

47

That being said, it is important that we make sure that credit cards companies

are treating people fairly.

It disturbs me that there are reports that some companies are increasingly trapping unwitting consumers in a labyrinth of late fees and rising interest rates.

We must consider the issue of fair play. People can act rationally only when they

have all the information that they need to make a decision. Senator Akaka has introduced a bill that would provide additional information to consumers, information

that consumer advocates are adamant will help consumers understand the high

costs of holding credit card debt.

I supported his amendment on this issue when it was offered to the bankruptcy

bill because I believe that reasonable disclosures can help bridge the gap between

available information about how our credit cards work and the need to make informed decisions.

Also, I continue to be concerned about credit card marketing to our college aged

kids.

The marketing to our students is not necessarily a bad thing. Credit cards used

by students can be very beneficial. They can provide students with an opportunity

to learn to manage money. And, they can offer students an opportunity to build good

credit ratings.

However, this is not always what happens. Indeed, we are seeing numerous incidents where the ultimate result is that the students end up racking up thousands

of dollars of debt.

That is why I support Senator Dodd’s efforts to ensure that if a credit card company wants to issue a credit card to a student under the age of 21, the student must

have the ability to repay his or her debts, must attend a credit counseling course,

or must identify an individual—presumably a parent—who is willing to accept joint

liability for the credit card balances. This is both common sense and good underwriting.

While we have done a significant amount of work to improve disclosures and

transparency there is always room for improvement. I believe the Committee, however, should be careful that we do not unintentionally restrict credit to vulnerable

segments of our population when considering our options.

Mr. Chairman, thank you again for calling this hearing and I look forward to

hearing from our witnesses today.

—————

PREPARED STATEMENT OF DIANNE FEINSTEIN

A U.S. SENATOR FROM THE STATE OF CALIFORNIA

MAY 17, 2005

Thank you, Chairman Shelby and Ranking Member Sarbanes for scheduling this

hearing. I believe that it is important that we explore the issue of consumer credit

card debt.

Today, 144 million Americans utilize credit cards and charge more debt on those

cards than ever before. (Frontline, ‘‘The Secret History of the Credit Card,’’ November 2004.) In 1990, Americans charged $338 billion on credit cards. By 2003, that

number had risen to $1.5 trillion. (Carddata.com.)

Many Americans now own multiple credit cards. In 2003, 841 million bank-issued

credit cards were in circulation in the United States. (CardWeb.com.) That number

becomes nearly 1.4 billion credit cards, when cards issued by stores and oil companies are factored in. (HSN Consultants.) That is an average of 5 credit cards per

person.

The proliferation of credit cards can be traced, in part, to a dramatic increase in

credit card solicitation. In 1993, credit card companies sent 1.52 billion solicitations

to American homes; in 2001, they sent over 5 billion. (Mail Monitor, a service of

BAIGlobal, Inc. See also Consumer Federation of America, Press Release, ‘‘Credit

Card Issuers Aggressively Expand Marketing and Lines Of Credit On Eve Of New

Bankruptcy Restrictions,’’ February 27, 2001.)

As one would expect, the increase in credit cards has also yielded an increase in

credit card debt. Individuals get six, seven, or eight different credit cards, pay only

the minimum payment required, and many end up drowning in debt. That happens

in case after case.

Since 1990, the debt that Americans carry on credit cards has more than tripled,

going from about $238 billion in 1990 to $755 billion in 2004. (Testimony of Tamara

Draut, Director of the Economic Opportunity Program, Demos, Before The SubVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00051 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
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committee on Financial Institutions and Consumer Credit Regarding Financial

Services Issues: A Consumer’s Perspective, September 15, 2004.) As a result, the average American household now has about $7,300 of credit card

debt. (Federal Reserve, Release G. 19, ‘‘Consumer Credit.’’)

As has been discussed in this Congress, the number of personal bankruptcies has

doubled since 1990. (Testimony of Tamara Draut, Director of the Economic Opportunity Program, Demos, Before The Subcommittee on Financial Institutions and

Consumer Credit Regarding Financial Services Issues: A Consumer’s Perspective,

September 15, 2004) Many of these personal bankruptcies are people who utilize

credit cards. These cards are enormously attractive. However, these individual credit card holders receive no information on the impact of compounding interest. They

pay just the minimum payment. They pay it for 1 year, 2 years—they make additional purchases, they get another card, and another, and another.

Unfortunately, these individuals making the minimum payment are witnessing

the ugly side of the ‘‘Miracle of Compound Interest.’’ After 2 or 3 years, many find

that the interest on the debt is such that they can never repay these cards, and

do not know what to do about it.

Statistics vary about the number of individuals who make only the minimum payments. One study determined that 35 million pay only the minimum on their credit

cards. (Frontline, ‘‘The Secret History of the Credit Card,’’ November 2004.) In a recent poll, 40 percent of respondents said that they pay the minimum or slightly

more. (Cambridge Consumer Credit Index Poll, March 2005.) What is certain is that

many Americans pay only the minimum, and that paying only the minimum has

harsh financial consequences.

I suspect that most people would be surprised to know how much interest can pile up when paying the minimum. Take the average household, with $7,300 of credit

card debt, and the average credit card interest rate, which in April, before the most

recent Federal Reserve Board increase of the prime rate, was 16.75 percent.

(Carddata.com.) If only the 2 percent minimum payment is made, it will take them 44 years and $23,373.90 to pay off the card. (All calculations from CardTrak at

Cardweb.com.) And that is if the family does not spend another cent on their credit

cards—an unlikely assumption. In other words, the family will need to pay over

$16,000 in interest to repay just $7,300 of principal.

For individuals or families with more than average debt, the pitfalls are even

greater. Twenty thousand dollars of credit card debt at the average 16.75 percent

interest rate will take an 58 years and $65,415.28 to pay off if only the minimum

payments are made.

And 16.25 percent is only the average interest rate. The prime rate, despite recent

increases, remains relatively low—at 6 percent. However, interest rates around 20

percent are not uncommon. In fact, among the 10 banks that are the largest issuers

of credit cards, the top interest rates on credit cards are between 23 and 31 percent—and that does not factor in various penalties and fees. (Cardweb.com.) When

penalty interest rates are factored in, the highest rates are 41 percent.

(Carddata.com.) In 1990, the highest interest rate—even with penalties, was 22 percent, a little more than half of what they are today. (Carddata.com.)

Even if we assume only a 20 percent interest rate, a family that has the average debt of $7,300 at a 20 percent interest rate and makes the minimum payments will

need an incredible 76 years and $41,884 to pay off that initial $7,300 of debt. That

is $34,584 in interest payments—more than 4 times the original debt. And these examples are far from extreme.

Moreover, these are not merely statistics, but are reflective of very real situations

for many people. On March 6, The Washington Post ran a headline story on its front

page, entitled ‘‘Credit Card Penalties, Fees Bury Debtors.’’ I would recommend this

article to my colleagues, because it illustrates part of the problem—that credit card

companies, aggressively marketing their products, end up charging outrageous interest and fees to their customers. I ask that the article be included in the record.

The article highlighted the following stories:

• Ohio resident, Ruth Owens tried for 6 years to pay off a $1,900 balance on her

Discover card, sending the credit company a total of $3,492 in monthly payments

from 1997 to 2003. Yet her balance grew to $5,564.28, • Virginia resident Josephine McCarthy’s Providian Visa bill increased to $5,357 in

2 years, even though McCarthy has used the card for only $218.16 in purchases

and has made monthly payments totaling $3,058.

• Special-education teacher Fatemeh Hosseini, from my state of California, worked

a second job to keep up with the $2,000 in monthly payments she collectively sent

to five banks to try to pay $25,000 in credit card debt. Even though she had not

used the cards to buy anything more, her debt had nearly doubled to $49,574 by

the time she filed for bankruptcy last June.

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Unfortunately, these stories are not unique.

Part of the problem goes back to changes made in the credit card industry. For

a long time, most banks required their customers to pay 5 percent of their credit

card balance every month. That was before Andrew Kahr, a credit card industry

consultant, got involved. Mr. Kahr realized that if customers were able to pay less,

they would borrow more, and he convinced his clients that they should reduce the

minimum payment to just 2 percent. (Frontline, ‘‘The Secret History of the Credit

Card,’’ November 2004.)

The PBS program ‘‘Frontline,’’ ran a program in November of last year titled ‘‘The

Secret History of the Credit Card’’ that examined the rapid growth of the credit card

industry and included an interview with Mr. Kahr.

Mr. Kahr’s innovation has been a windfall for the credit card industry. If consumers are paying a lower percentage of their balance as the minimum payment,

the credit card companies will make more money over time. In fact, many in the

industry refer to individuals who pay their credit card bills in full as ‘‘deadbeats,’’

because they are less profitable than individuals who carry large balances, who are

known as ‘‘revolvers.’’ (Frontline, ‘‘The Secret History of the Credit Card,’’ November

2004.)

And Mr. Kahr’s own research showed that just making the minimum payment

eased consumers’ anxiety about carrying large amounts of credit card debt—they believe they are still being financially prudent. (Frontline, ‘‘The Secret History of the

Credit Card,’’ November 2004.)

The bill I am proposing speaks directly to those types of consumers. There will

always be people who cannot afford to pay more than their minimum payments.

But, there are also a large number of consumers who can afford to pay more but

feel comfortable paying the minimum payment because they do not realize the consequences of doing so.

Now, I am certainly not trying to demonize credit cards or the credit card industry. Credit cards are an important part of everyday life. However, I do think that

people should understand the dangers of paying only their monthly minimums. In

this way individuals will be able to act responsibly.

Mr. Chairman, it is not necessarily that people do not understand the basics of

interest. Most of us just do not realize how fast it compounds or how important it

is to do the math to find out what it means to pay a minimum requirement.

The bottom line is that for many consumers, the 2 percent minimum payment is

a financial trap.

The Credit Card Minimum Payment Notification Act is designed to ensure that

people are not caught in this trap through lack of information. The bill tracks the

language of the amendment originally proposed to the bankruptcy bill that was cosponsored by Senator Kyl, Senator Brownback, and myself.

Let me tell you exactly what this bill would do. It would require credit card companies to add two items to each consumer’s monthly credit card statement:

One, a notice warning credit card holders that making only the minimum payment each month will increase the interest they pay and the amount of time it takes

to repay their debt; and two, examples of the amount of time and money required

to repay a credit card debt if only minimum payments are made; or if the consumer

makes only minimum payments for 6-consecutive months, the amount of time and

money required to repay the individual’s specific credit card debt, under the terms

of their credit card agreement.

The bill would also require that a toll free number be included on statements that

consumers can call to get an estimate of the time and money required to repay their

balance, if only minimum payments are made.

And, if the consumer makes only minimum payments for 6-consecutive months,

they will receive a toll free number to an accredited credit counseling service.

The disclosure requirements in this bill would only apply if the consumer has a

minimum payment that is less than 10 percent of the debt on the credit card, or

if their balance is greater than $500. Otherwise, none of these disclosures would be

required on their statement.

The language of this bill comes from a California law, the ‘‘California Credit Card

Payment Warning Act,’’ passed in 2001. Unfortunately, in 2002, this California law

was struck down in U.S. District Court as being preempted by the 1968 Truth in

Lending Act. The Truth in Lending Act was enacted in part because Congress found

that, ‘‘The informed use of credit results from an awareness of the cost of thereof

by consumers.’’ Consequently, this bill would amend the Truth in Lending Act, and

would also further its core purpose.

These disclosures allow consumers to know exactly what it means for them to

carry a balance and only make minimum payments, so they can make informed decisions on credit card use and repayment.

50

The disclosure required by this bill is straightforward—how much it will cost to

pay off the debt if only minimum payments are made, and how long it will take

do it. As for expense, my staff tells me that on the website Cardweb.com, there is

a free interest calculator that does these calculations in under a second. Moreover,

I am told that banks make these calculations internally to determine credit risk.

The expense would be minimal.

Percentage rates and balances are constantly changing and each month, the credit

card companies are able to assess the minimum payment, late fees, over-the-limit

fees, and finance charges for millions of accounts.

If the credit card companies can put in their bills what the minimum monthly

payment is, they can certainly figure out how to disclose to their customers how

much it might cost them if they stick to that minimum payment.

The credit card industry is the most profitable sector of banking, and last year

it made $30 billion in profits. (Carddata.com.) MBNA’s profits alone last year were

one-and-a-half times that of McDonald’s. Citibank was more profitable than Microsoft and Wal-mart. (Frontline, ‘‘The Secret History of the Credit Card,’’ November

2004.) I do not think they should have any trouble implementing the requirements

of this bill.

I believe that this is extraordinarily important and that it will minimize bankruptcies. With companies charging very substantial interest rates, they have an obligation to let the credit card holder know what those minimum payments really

mean. I have people close to me I have watched, with six or seven credit cards, and

it is impossible for them, over the next 10 or 15 years, to pay off the debt if they

continue making just minimum payments.

We now have a bankruptcy bill that has passed into law. I continue to believe

that a bill requiring a limited but meaningful disclosure by credit cards companies

is a necessary accompaniment. I think you will have people who are more cautious,

which I believe is good for the bankruptcy courts in terms of reducing their caseloads, and also good for American consumers.

The credit card debt problem facing our Nation is significant. I believe that this

bill is an important step in providing individuals with the information needed to act

responsibly, and it does so with a minimal burden on the industry.

—————

PREPARED STATEMENT OF DANIEL K. AKAKA

A. U.S. SENATOR FROM THE STATE OF HAWAII

Thank you Mr. Chairman, I appreciate your including me in this hearing today.

I also want to express my deep appreciation to Senator Sarbanes for working closely

with me on a wide range of financial literacy related issues, including credit card

disclosures.

Mr. Chairman, revolving debt, mostly comprised of credit card debt, has risen

from $54 billion in January 1980 to more than $800 billion in March 2005. During

all of 1980, only 287,570 consumers filed for bankruptcy. In 2004, approximately 1.5

million consumers filed for bankruptcy, keeping pace with 2003’s record level.

Some of this increased activity can be explained by a ballooning in consumer debt

burdens, particularly revolving debt, primarily made up of credit card debt. Credit

card issuers have a lot of flexibility in setting minimum monthly payments. Competitive pressures and a desire to preserve outstanding balances have led to a general easing of minimum payment requirements in recent years. The result has been

extended repayment programs. Even with the doubling of minimum monthly payments from 2 to 4 percent by some of the country’s largest credit card issuers, much

of that payment continues to cover only interest and fees. Meanwhile, other initiatives by large credit card issuers, such as reducing grace periods, will catch many

consumers with late fees which will trigger higher default interest rate charges.

It is imperative that we make consumers more aware of the long-term effects of

their financial decisions, particularly in managing credit card debt. Obtaining credit

has become easier. Students are offered credit cards at earlier ages, particularly

since credit card companies have been successful with aggressive campaigns targeted at college students. Universities and alumni associations across the country

have entered into marketing agreements with credit card companies. More than

1,000 universities and colleges have affinity marketing relationships with credit

card issuers. Affinity relationships are made as attractive as possible to credit card

account holders through the offering of various benefits and discounts for using the

credit card, with the affinity group receiving a percentage of the total charge volume

from the credit card issuer. Thus, college students, many already burdened with stuVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00054 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
51

dent loans, are accumulating credit card debt. I appreciate all of the work that Senator Dodd has done in order to address this situation.

While it is relatively easy to obtain credit, especially on college campuses, not

enough is being done to ensure that credit is properly managed. Currently, credit

card statements fail to include vital information that would allow individuals to

make fully informed financial decisions. Additional disclosure is needed to ensure

that individuals completely understand the implications of their credit card use and

the costs of only making the minimum payments as determined by credit card companies.

I have a long history of seeking to improve financial literacy in this country, primarily through expanding educational opportunities for students and adults. Beyond

education, I also believe that consumers need to be made more aware of the longterm effects of their financial decisions, particularly in managing their credit card

debt, so that they can avoid financial pitfalls.

The Bankruptcy Reform law includes a requirement that credit card issuers provide information to consumers about the consequences of only making the minimum

monthly payment. However, this requirement fails to provide the detailed information on billing statements that consumers need to know to make informed decisions.

The bankruptcy law will allow credit card issuers a choice between disclosure statements. The first option included in the bankruptcy bill would require a standard

‘‘Minimum Payment Warning.’’ The generic warning would state that it would take

88 months to pay off a balance of $1,000 for bank card holders or 24 months to pay

off a balance of $300 for retail card holders. This first option also includes a requirement that a toll-free number be established that would provide an estimate of the

time it would take to pay off the customer’s balance. The Federal Reserve Board

would be required to establish the table that would estimate the approximate number of months it would take to pay off a variety of account balances.

There is a second option that the legislation permits. The second option allows

the credit card issuer to provide a general minimum payment warning and provide

a toll-free number that consumers could call for the actual number of months to

repay the outstanding balance.

The options available under the Bankruptcy Reform law are woefully inadequate.

They do not require issuers to provide their customers with the total amount they

would pay in interest and principal if they chose to pay off their balance at the minimum rate. Since the average household with debt carries a balance of approximately $10,000 to $12,000 in revolving debt, a warning based on a balance of $1,000

will not be helpful. The minimum payment warning included in the first option

underestimates the costs of paying a balance off at the minimum payment. If a family has a credit card debt of $10,000, and the interest rate is a modest 12.4 percent,

it would take more than 10 and a half years to pay off the balance while making

minimum monthly payments of 4 percent.

Along with Senators Sarbanes, Schumer, Durbin, and Leahy, I introduced the

Credit Card Minimum Payment Warning Act and subsequently offered it as an

amendment to the bankruptcy bill. The legislation would make it very clear what

costs consumers will incur if they make only the minimum payments on their credit

cards. If the Credit Card Minimum Payment Warning Act is enacted, the personalized information consumers would receive for their accounts would help them make

informed choices about their payments toward reducing outstanding debt.

Our bill requires that a minimum payment warning notification on monthly statements stating that making the minimum payment will increase the amount of interest that will be paid and extend the amount of time it will take to repay the outstanding balance. The legislation also requires companies to inform consumers of

how many years and months it will take to repay their entire balance if they make

only the minimum payments. In addition, the total cost in interest and principal,

if the consumer pays only the minimum payment, would have to be disclosed. These

provisions will make individuals much more aware of the true costs of their credit

card debts. The bill also requires that credit card companies provide useful information so that people can develop strategies to free themselves of credit card debt.

Consumers would have to be provided with the amount they need to pay to eliminate their outstanding balance within 36 months.

Finally, our bill would require that creditors establish a toll-free number so that

consumers can access trustworthy credit counselors. In order to ensure that consumers are referred to only trustworthy credit counseling organizations, these agencies would have to be approved by the Federal Trade Commission and the Federal

Reserve Board as having met comprehensive quality standards. These standards are

necessary because certain credit counseling agencies have abused their nonprofit,

tax-exempt status and taken advantage of people seeking assistance in managing

their debts. Many people believe, sometimes mistakenly, that they can place blind

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1The Board’s Advance Notice of Proposed Rulemaking for Regulation Z can be found at:

www.Federalreserve.gov/boarddocs/press/bcreg/2004/20041203.

trust in nonprofit organizations and that their fees will be lower than those of other

credit counseling organizations.

We must provide consumers with detailed personalized information to assist them

in making better informed choices about their credit card use and repayment. Our

bill makes clear the adverse consequences of uninformed choices, such as making

only minimum payments, and provides opportunities to locate assistance to better

manage credit card debt.

In response to critics who believe that the Credit Card Minimum Payment Warning Act disclosures are not feasible, I, along with Senator Sarbanes, have asked the

General Accountability Office to study the feasibility of requiring credit card issuers

to disclose more information to consumers about the cost association with making

only the minimum monthly payment. I look forward to reviewing the GAO’s conclusions.

Mr. Chairman, I look forward to working with you, Senator Sarbanes, and all of

the Members of the Committee, to improve credit card disclosures so that they provide relevant and useful information that hopefully will bring about positive behavior change among consumers. Consumers with lower debt levels will be better able

to establish savings plans that allow them to be in a better position to afford a

home, pay for their child’s education, or retire comfortably on their own terms.

Thank you again for including me in this important hearing, Mr. Chairman.

—————

PREPARED STATEMENT OF EDWARD M. GRAMLICH

MEMBER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

MAY 17, 2005

Chairman Shelby, Senator Sarbanes, and Members of the Committee, I appreciate

the opportunity to appear today to discuss consumer credit card accounts. The

Board of Governors of the Federal Reserve System administers the Truth in Lending Act (TILA). Enacted in 1968, TILA is the primary Federal law governing disclosures for consumer credit, including credit card accounts. It is implemented in the

Board’s Regulation Z.

TILA has distinct rules for two categories of consumer credit: Open-end (revolving) credit plans, such as credit card accounts and other lines of credit; and closedend (installment) transactions, such as auto loans and home-purchase loans.

Amendments targeting specific loan products or practices have been added over

TILA’s nearly 40-year history and the Act was substantially revised by the Truth

in Lending Simplification and Reform Act of 1980.

TILA’s purpose is to assure a meaningful disclosure of credit terms so that consumers can compare more readily the various credit terms available and avoid the

uninformed use of credit. TILA fulfills this purpose by requiring the uniform disclosure of costs and other terms to consumers. TILA is also intended to protect consumers against inaccurate and unfair credit billing and credit card practices, which

the Act seeks to accomplish through procedural and substantive protections, including special rules for cardholders.

Regulation Z review. Regulation Z and its staff commentary have been reviewed

and updated almost continuously, but not comprehensively since 1980. In December

2004, the Board began a comprehensive review of Regulation Z, starting with the

publication of an Advance Notice of Proposed Rulemaking (ANPR) on the rules for

open-end credit that is not home-secured, such as general-purpose credit cards.1 The

goal of the review is to improve the effectiveness and usefulness of open-end disclosures and substantive protections. The public comment period recently closed, and

the Board’s staff will be carefully reviewing the comment letters as they consider

possible changes to the regulations. We also believe that consumer testing should

be used to test the effectiveness of any proposed revisions, and anticipate publishing

proposed revisions to Regulation Z in 2006.

We recognize the hard work that is ahead. The landscape of credit card lending

has changed since TILA’s disclosure rules for credit card accounts were first put in

place. Products and pricing are complex. Credit card accounts can be used for purchases, cash advances, and balance transfers, and each means of access may carry

different rates. Promotional rates and deferred interest plans for limited time periods are commonly layered onto these basic features. However, under some credit

card agreements, paying late or exceeding a credit limit may trigger significant fees

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and a penalty rate that is applied to the entire outstanding balance, and may trigger higher rates on other credit card accounts. Moreover, the amount of consumers’

payments, how creditors allocate those payments to outstanding balances, and how

the balances are calculated all affect consumers’ overall cost of credit under openend plans.

The question is, of course, how might the Board revise its rules under TILA in

a way that will enable consumers to more effectively use disclosures about the key

financial elements of a particular credit card over the life of the account? Simplifying the content of disclosures may be one way; finding ways to enhance consumers’ ability to notice and understand disclosures may be another. Reviewing the

adequacy of TILA’s substantive protections is a third, and the ANPR asks questions

about each of these areas. As the Regulation Z review proceeds, the Board will be

grappling with the challenge of issuing clear and simple rules for creditors that both

provide consumers with key information about complicated products (while avoiding

so-called ‘‘information overload’’) and provide consumers adequate substantive protections, consistent with TILA. For example, TILA contains procedures for resolving

billing errors on open-end accounts, prohibits the unsolicited issuance of credit

cards, and limits consumers’ liability when a credit card is lost or stolen.

To assist the Committee in its deliberations, I will provide an overview of TILA’s

rules affecting open-end credit plans, focusing on rules for credit card accounts. I

will discuss some of the major issues raised in the ANPR, and commenters’ views

on these issues. I will also address compliance and enforcement issues, along with

the role of consumer education in improving consumers’ informed use of credit.

Disclosures for Open-end Credit Plans

TILA disclosures for open-end plans are provided to consumers:

• On or with credit card applications and solicitations, such as applications sent by

direct mail.

• At account opening.

• Throughout the account relationship, such as on periodic statements of account

activity and when the account terms change.

Content. Generally, the disclosures provided with credit card applications, at account-opening and on periodic statements, address the same aspects of the plan;

that is, in each case consumers receive information about rates, fees, and grace periods to pay balances without incurring finance charges. The level of detail differs,

however.

Disclosures received with a direct-mail credit card account application are intended to provide a snapshot to help the consumer decide whether or not to apply

for the credit card account. For example, revolving open-end accounts involve calculating a balance against which a rate is applied. The method for calculating that

balance may differ from creditor to creditor, however. Under TILA, identifying a balance calculation method by title, such as the ‘‘average daily balance method (including new purchases),’’ is sufficient at application. Account-opening disclosures are

more detailed and complex, however, in part because the account-opening disclosures required under TILA are typically incorporated into the account agreement.

The periodic statement discloses information specific to the statement cycle. In the

case of balance calculation methods, the disclosure is typically identical to the account-opening disclosure.

Creditors must also tell consumers about their rights and responsibilities under

the Fair Credit Billing Act, a 1974 amendment to TILA that I will discuss later,

which governs the process for resolving billing disputes. In addition to explaining

these rights in the account-opening disclosures, creditors must send reminders

throughout the account relationship. Under TILA, a detailed explanation must be

sent about once a year; typically, creditors instead send an abbreviated reminder

on the reverse side of each periodic statement, as permitted by Regulation Z.

Format. Generally, disclosures must be in writing and presented in a ‘‘clear and

conspicuous’’ manner. For credit card application disclosures, the ‘‘clear and conspicuous’’ standard is interpreted to mean that application disclosures must be

‘‘readily noticeable.’’ Disclosures that are printed in a twelve-point type size have

a safe harbor in the regulation under this standard.

Disclosures for direct-mail credit card account applications have the most regimented format requirements. The disclosures must be presented in a table with

headings substantially similar to those published in the Board’s model forms. Regulation Z’s sole type-size requirement also applies to direct-mail application disclosures; the annual percentage rate for purchases must be in at least eighteen-point

type size. Format requirements for credit card account applications available to the

general public (take-one’s) are quite flexible. At the card issuer’s option, take-one

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disclosures may be in the form required for direct-mail applications, an abbreviated

narrative, or a simple statement that costs are involved that provides information

about where details can be obtained.

Compared to application disclosures, account-opening and periodic statement disclosures are governed by few specific format requirements. Except in the context of

recently enacted amendments to TILA contained in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (2005 Bankruptcy Act), disclosures need

not be presented in any particular order, nor is there any detailed guidance on the

‘‘clear and conspicuous’’ standard other than a requirement that the terms ‘‘finance

charge’’ and ‘‘annual percentage rate’’ must be more conspicuous than any other

term.

The 2005 Bankruptcy Act contains several amendments to TILA, three of which

are particularly relevant here. The act generally requires creditors to provide on the

front page of periodic statements a warning about the effects of making minimum

payments and a standardized example of the time it would take to pay off an assumed balance if the consumer makes only the minimum payment, along with a

toll-free telephone number that consumers can use to obtain estimates of how long

it would take to pay off their actual account balance. In addition, the Act provides

that if a temporary rate is offered on solicitations and applications, or promotional

materials that accompany them, the term ‘‘introductory’’ must be ‘‘immediately proximate’’ to each listing of the temporary rate. The expiration date and the rate that

will apply when the introductory rate expires must be ‘‘closely proximate’’ to the

first listing of the introductory rate in promotional materials. Under the Act, the

Board must issue guidance regarding a ‘‘clear and conspicuous’’ standard applicable

only to these minimum payment and introductory rate disclosures, including model

disclosures.

The Board has published model forms and clauses to ease compliance for many

of TILA’s disclosure requirements. Creditors are not required to use these forms or

clauses, but creditors that use them properly are deemed to be in compliance with

the regulation regarding these disclosures. The Board has published model forms for

direct-mail credit card account application disclosures, but there are no model forms

illustrating account-opening or periodic statement disclosures.

Regulation Z review. Considering how consumers’ use of open-end credit, and

credit cards in particular, has grown, and the increased diversity in credit products

and pricing, the Board’s ANPR asked a number of detailed questions about how to

improve the effectiveness and usefulness of TILA’s open-end disclosures, including

how to address concerns about ‘‘information overload.’’ The Board also invited comment on how the format of disclosures might be improved, and whether additional

model disclosures would be helpful. The Board announced its intent to use focus

groups and other research to test the effectiveness of any new disclosures.

In general, commenters representing both consumers and industry believe that

the regimented format requirements for TILA’s credit card account application disclosures have proven useful to consumers, although a variety of suggestions were

made to add or delete specific disclosure requirements. Many, however, noted that

typical account-opening disclosures are lengthy and complex, and suggested that the

effectiveness of account-opening disclosures could be improved if key terms were

summarized in a standardized format, perhaps in the same format as TILA’s directmail application disclosure. These suggestions are consistent with the views of some

members of the Board’s Consumer Advisory Council, who advise the Board on consumer financial services matters. Industry commenters support the Board’s intention to use focus groups or other consumer research tools to test the effectiveness

of any proposed revisions.

To combat ‘‘information overload,’’ many commenters asked the Board to emphasize only the most important information consumers need at the time the disclosure

is given. They asked the Board to avoid rules that require the repetitive delivery

of complex information, not all of which is essential to comparison shopping for credit cards, such as a lengthy explanation of the creditor’s method of calculating balances that is now required at account-opening and on periodic statements. Commenters suggested that the Board would more effectively promote comparison shopping by focusing on essential terms in a simplified way. They believe some information could also be provided to consumers through educational, nonregulatory methods. Taken together, this approach could lead to simpler disclosures that consumers

might be more inclined to read and understand.

Truth in Lending’s Cost Disclosures for Open-end Credit Plans

As I have indicated, TILA is designed to provide consumers with information

about the costs and terms of a particular form of credit, to enable consumers to

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make comparisons among creditors or different credit programs, or to determine

whether they should obtain credit at all.

Finance charges and other charges. Creditors offering open-end credit must disclose fees that are ‘‘finance charges’’ and ‘‘other charges’’ that are part of the credit

plan. A ‘‘finance charge’’ is broadly defined as any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor, as an incident to or a condition of the extension of credit. Interest, cash advance fees, and

balance transfer fees are examples of finance charges. Fees that are not incident to

the extension of credit, but are significant charges imposed as part of an open-end

plan must also be disclosed as ‘‘other charges.’’ Late payment fees, application fees,

and recurring periodic membership fees that are payable whether or not the consumer uses the credit plan (annual fees) are examples of other charges.

Annual percentage rate. Under TILA, the finance charge is also expressed as an

annualized rate, called the Annual Percentage Rate, or APR. Interestingly, within

the Truth in Lending structure, the term represents three distinct calculations, one

under TILA’s rules for closed-end credit and two under the rules for open-end credit.

For closed-end (installment) credit, the APR includes interest and finance charges

other than interest, such as points or origination fees on mortgage loans. Thus, the

APR on closed-end transactions can be somewhat higher than the interest rate identified in the loan agreement, whenever other fees are present in the finance charge.

APR’s for open-end credit are calculated differently. Interest is the only component of the APR that can be disclosed on credit card solicitations and applications,

account-opening disclosures, and advertisements for open-end plans. This is because

the actual cost of credit to the consumer is unknown when these disclosures are provided, since the amount and timing of advances and the imposition of fees generally

are in the consumer’s control.

Periodic statements must also disclose an ‘‘effective’’ or ‘‘historic’’ APR that reflects interest as well as finance charges other than interest, such as a cash advance

fee, that were imposed during the past billing cycle. Because noninterest finance

charges are amortized over one billing cycle for purposes of disclosing the effective

APR, such fees can result in a high, double-digit (or sometimes triple-digit) effective

APR on periodic statements. To avoid a skewed APR that could possibly mislead

consumers, nonrecurring loan fees, points, or similar finance charges related to the

opening, renewing, or continuing of an open-end account are currently excluded

from the effective APR that is disclosed for a particular billing cycle, under Regulation Z and the Board’s official staff commentary.

Regulation Z Review. A major focus of the Board’s Regulation Z review is how to

disclose more effectively the cost of open-end credit. For the industry as a whole,

the types of fees charged on open-end consumer credit accounts have grown in number and variety. To the extent these fees are not specifically addressed in TILA or

Regulation Z, creditors are sometimes unsure whether the fee should be disclosed

under TILA as a ‘‘finance charge’’ or an ‘‘other charge,’’ or not disclosed under TILA

at all. The Board asked for comment in the ANPR on how to provide more certainty

in classifying fees, and whether consumers would benefit from other disclosures that

address the cost of credit, such as how creditors allocate payments.

Commenters provided a variety of views. Some suggested that creditors should

disclose only interest as the ‘‘finance charge’’ and simply identify all other fees and

charges. Others suggested that all fees associated with an open-end plan should be

disclosed as the ‘‘finance charge.’’ Above all, to mitigate the risks and potential liability for noncompliance, creditors seek clear rules that allow them to classify, with

confidence, fees as a ‘‘finance charge’’ or an ‘‘other charge’’ under TILA, or as fees

that are disclosed pursuant to the credit agreement or State law. Under the statute,

a creditor’s failure to comply with TILA could trigger a private right of action by

consumers and administrative sanctions by the Federal agency designated in TILA

to enforce its provisions with regard to that creditor.

One of the Board’s most difficult challenges in the Regulation Z review is to address the adequacy of periodic statement APR’s. TILA mandates the disclosure of

the effective APR on periodic statements, but its utility has been controversial. Consumer advocates believe it is a key disclosure that is helpful, and provides ‘‘shock

value’’ to consumers when fees cause the APR to spike for the billing cycle. Commenters representing industry argued that the effective APR is not meaningful, confuses consumers, and is difficult to explain. They said the disclosure distorts the

true cost of credit because fees are amortized over one billing cycle—typically 30

days—when the credit may be repaid over several months. Several commenters

urged the Board to include in the effective APR calculation only charges that are

based on the amount and duration of credit (interest). In response to the Board’s

ANPR, some commenters believe the effective APR might be more effectively understood if a disclosure on the periodic statement provided additional context.

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Comments received on the merits of requiring creditors to disclose payment allocation methods illustrate the competing interests in improving the overall effectiveness of cost disclosures. Some commenters believe any additional disclosure about

payment allocation methods would be excessive and that many card issuers already

make such disclosures. Others believe such a disclosure could be helpful to consumers but worry that descriptions might be overly detailed; some asked the Board

to publish model disclosures to ensure clarity and uniformity.

Rate increases. Credit card account agreements typically allow card issuers to

change interest rates and other fees during the life of the account. Agreements spell

out with specificity some potential changes, such as that the rate will increase if

the consumer pays late. Credit card agreements also more generally reserve the

right to increase rates, fees, or other terms.

The statute does not address changes in terms to open-end plans. Regulation Z,

however, requires additional disclosures for some changes. The general rule is that

15 days’ advance notice is required to increase the interest rate (or other finance

charge) or an annual fee. However, advance notice is not required in all cases. A

notice is required, but not in advance, if the interest rate increases due to a consumer’s default or delinquency. And if the creditor specifies in advance the circumstances under which an increase to the finance charge or an annual fee will

occur, no change-in-terms notice is required when those circumstances are met before the change is made. This is the case, for example, when the agreement specifies

that the interest rate will increase if the consumer pays late. Under Regulation Z,

because the card issuer has specified when rates will increase in the account agreement, the creditor need not provide advance notice of the rate increase; the new rate

will appear on the periodic statement for the cycle in which the increase occurs.

Regulation Z review. The ANPR asked how consumers were informed about rate

increases or other changed terms to credit card accounts, and whether the current

rules were adequate to allow consumers to make timely decisions about how to manage their accounts.

Comments were sharply divided on this issue. Some consumers believe there is

not enough advance notice for changes in terms, and believe a much longer time

period is needed to find alternative credit sources. Creditors generally believe the

current rules are adequate. The 15 days’ advance notice is sufficient, they stated,

because change-in-term notices are typically sent with periodic statements, which

means as a practical matter consumers receive about a month’s notice before the

new term becomes effective. Creditors noted that many States require at least 30

days’ advance notice and allow consumers to ‘‘opt-out’’ of the new terms by closing

the account and paying the outstanding balance under the former terms. For rate

(and other) changes not involving a consumer’s default, a number of creditors support a thirty-day notice rule and a few support a consumer ‘‘opt-out’’ right under

Regulation Z.

Where triggering events are set forth in the account agreement, creditors believe

there is no need to provide additional notice when the event occurs; they are not

changing a term, they stated, but merely enforcing the agreement. Some suggested

this is a case where consumer education is the best solution, and that perhaps

Board-published model forms would result in uniformity and greater consumer understanding. Consumers and consumer groups agreed that change-in-term policies

should be more prominently displayed, including in the credit card application disclosures.

Procedures and Substantive Protections

TILA and Regulation Z provide protections to consumers when a lost or stolen

credit card is used (unauthorized use), when the consumer believes a charge on a

billing statement is in error (billing error), and when a purchase is made with a

credit card and the consumer cannot resolve with the merchant honoring the card

a dispute about the quality of goods or services (claim or defense). The Fair Credit

Billing Act was enacted, in part, to provide a procedure for resolving disputes between cardholders and merchants who honor credit cards, and to allocate to card

issuers some responsibility for providing relief to the consumer if the merchant fails

to accommodate the cardholder.

In general, these protections allow the consumer to avoid paying the disputed

amount while the card issuer investigates the matter. The card issuer cannot assess

any finance charge on the disputed amount or report the amount as delinquent until

the investigation is completed.

Depending on the facts, a dispute could trigger one or more of the protections discussed below. The applicability of a protection can hinge on timing (when the cardholder notifies the card issuer about the problem), the outstanding balance (how

much of the sale price remains unpaid at the time the cardholder notifies the card

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issuer), and receipt of the good or services (nothing was delivered, or something was

delivered but did not meet the cardholder’s expectations).

Unauthorized use of a credit card. A cardholder cannot be held liable for more

than $50 for the unauthorized use of a card. State law or other applicable law determines whether the cardholder ‘‘authorized’’ the use of the card. There are no specific

timing or procedural requirements to trigger this protection (other than notifying

the card issuer). An unauthorized charge may also be raised as a billing error or

a claim or defense.

Billing error. The billing error provisions contain the strictest timing and procedural requirements of TILA’s substantive protections for open-end plans. For example, the consumer’s claim must be in writing and sent to the address specifically

designated for this purpose. The consumer triggers the billing error rules by notifying the creditor about the dispute. The notice must be received, and creditors must

respond, within a set time period. If asserted in a timely manner, a billing error

can be asserted even if the consumer previously paid the charge in full.

Claim or defense for a credit card purchase. Cardholders may assert against the

card issuer any claim or defense they could assert against the merchant. Cardholders trigger the rule by notifying the card issuer that they have been unable to

resolve a dispute with a merchant about a sales transaction where a credit card was

used. There is no specific time period within which the cardholder must give notice

or the card issuer must respond. However, the cardholder must try to resolve the

matter with the merchant before involving the card issuer. Unlike the billing error

provision, this remedy is available only if the cardholder has an unpaid balance on

the disputed purchase at the time notice is given.

Under TILA, the claim or defense remedy cannot be used to assert tort claims (for

example, product liability) against the card issuer. Also, the remedy is available

only for sales exceeding $50 and for sales that occur in the State the cardholder has

designated as his address or within 100 miles of that address.

Unsolicited issuance. Credit cards may be issued to consumers only upon request.

Nevertheless, credit cards may be issued to cardholders in renewal of, or substitution for, a previously accepted card (including supplemental cards for the existing

account).

Regulation Z Review. The Board’s ANPR asked whether there was a need to revise the regulations’ provisions implementing TILA’s substantive protections, for example, whether the rules need to be updated to address particular types of accounts

or practices or to address technological changes. To illustrate, TILA requires creditors to credit payments on open-end plans on the day the payment is received. Regulation Z permits creditors to set reasonable cut-off hours, which must be disclosed

to consumers. The ANPR solicited comment on payment process systems, where

mail delivery and electronic payments may be continuous 24 hours a day, 7 days

a week, and whether further guidance was needed on what constitutes a ‘‘reasonable’’ cut-off hour.

Most industry commenters stated that cut-off hours vary among creditors due to

a number of internal and external factors, and asked that creditors’ flexibility in

processing payments be maintained. The Board also received suggestions for standardizing cut-off hours in ranges, such as between 3 p.m. and 5 p.m. for mail delivery

and 6 p.m. and 8 p.m. for electronic payments.

Consumers and some consumer groups suggested that payments be credited as of

the date payments are received regardless of the time. They asked the Board to consider rules that would provide greater certainty to consumers with regard to determining when the payment is received, because creditors more frequently than in the

past exercise their right under the account agreement to impose late fees when a

payment is not received by the due date. Moreover, consumer groups stated, many

credit card agreements allow creditors to increase rates when the creditor learns the

cardholder was late on another account even if the cardholder makes timely payments to the creditor.

Supervision and Enforcement

As part of the bank supervision process, the Federal Reserve enforces safe and

sound banking practices and compliance with Federal banking laws, including the

Truth in Lending rules, with respect to the approximately 915 State-chartered

banks that are members of the Federal Reserve System. Other regulators enforce

these rules with respect to other institutions. For the vast majority of State member

banks, credit card lending is not a significant activity. In fact, of the banks supervised by the Federal Reserve, the issuance of credit cards is the principal business

activity of only two of these banks.

In January 2003, the Federal Reserve, along with the Office of the Comptroller

of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift

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Supervision, issued interagency guidance on credit card account management practices. Federal Reserve supervisory staff have applied the principles of this guidance

through constructive discussions with bank management about individual institutions’ portfolio management practices. In the limited instances where formal or informal enforcement actions have proven necessary to ensure sound management of

an institution’s credit card portfolio, the Federal Reserve has appropriately exercised this authority.

The Board also investigates consumer complaints against State member banks

and forwards complaints it receives involving other creditors to the appropriate enforcement agencies. In 2004, the Board received approximately 5,100 consumer complaints. Of this number, approximately 2,300, or 45 percent, were against State

member banks, while about 2,800, or 55 percent, were against other creditors not

under the Board’s supervisory authority and were forwarded to the appropriate

agencies.

About 39 percent of the 2,300 complaints against State member banks processed

by the Board were complaints about credit cards. The data show that complainants’

main concerns were about interest rates and terms, penalty charges and fees such

as late fees, over-the-limit fees, and annual fees. In addition, consumers were concerned that their credit information was incorrectly reported to consumer reporting

agencies. By way of comparison, industry estimates suggest there are more than 600

million credit cards in consumers’ hands and annual domestic transactions involving

credit cards exceed $1 trillion.

Role for Consumer Financial Education

This detailed description of the issues of concern in our review of Regulation Z

is illustrative of both the complexity of and the growth in today’s consumer credit

markets. Technology has significantly changed consumers’ payment options, with

the credit card becoming an accepted payment medium for virtually any consumer

good or service. In addition, credit scoring models, the mathematical formulations

lenders use to predict credit risk, have enabled creditors to price credit more efficiently, and charge rates of interest commensurate with a consumer’s repayment

risk. This technology has contributed to the expansion of the subprime market,

which has significantly increased access to credit for consumers who, more than

likely, would have been denied credit in the past.

As a result, concerns surrounding consumer protection relate as much to issues

of fair pricing practices as they do to fair access to credit. In addition, as the industry has become more competitive on interest rate pricing, it has adopted more complex fee structures that, if triggered, affect a consumer’s overall cost associated with

the credit card.

The use of disclosure rules as a consumer protection strategy is predicated on the

assumption that consumers have an understanding of consumer credit and personal

financial management principles. By dictating disclosure requirements, regulators

and lawmakers rely on consumers to be familiar with basic financial principles and

to be able to evaluate personal financial scenarios and options, once they have access to pertinent financial information. Indeed, this is the fundamental premise of

our free market system, in which information increases market efficiency. In recent

years, however, there has been an increase in concern that consumers’ level of financial literacy has not kept pace with the increasingly complex consumer financial

marketplace and the expansion of financial service providers and products.

Lenders, regulators, and consumer and community advocacy groups have agreed

that there is an increased need for consumer financial education, and have pointed

to a variety of factors, including record personal bankruptcy filings, high consumer

debt levels, and low personal savings rates, to support this assertion. Financial education could encourage consumers to focus on their credit contracts in addition to

the TILA disclosures, which highlight the key terms of the contract. Toward this

end, many public and private initiatives have been undertaken at both the local and

national level to highlight the importance of financial education.

As you know, Congress has established the Financial Literacy and Education

Commission and the Financial and Economic Literacy Caucus—further demonstration of the degree of interest and concern in helping consumers obtain the knowledge they need to effectively manage their personal finances. The Federal Reserve

System has also been active in promoting consumer financial education, and is an

active participant in initiatives to further policy, research, and collaboration in this

area.

In closing, I would like to note that disclosure and financial education work in

tandem in the interest of consumer protection, and I believe that it is important to

continue to focus our collective attention on both fronts.

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PREPARED STATEMENT OF JULIE L. WILLIAMS

ACTING COMPTROLLER OF THE CURRENCY

MAY 17, 2005

Introduction

Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee, I

appreciate this opportunity to appear before you today to discuss the Office of the

Comptroller of the Currency’s (OCC) perspectives concerning credit card disclosures.

The OCC’s supervision of the credit card operations of national banks includes safety and soundness fundamentals, compliance with consumer protection laws and regulations, and fair treatment of consumers.

In addition to our ongoing supervision of these institutions, and our processing

of numerous consumer inquiries and complaints relating to credit cards, we have

taken a number of steps—in the form of enforcement actions and preventive supervisory guidance—to address safety and soundness and consumer protection issues

that have arisen in connection with the credit card products offered by national

banks. It is important to note, however, that the OCC does not have express statutory authority to issue regulations that would define particular credit card practices

by banks as unfair or deceptive under the FTC Act, or regulations governing specific

credit card disclosures under the Truth in Lending Act. Authority to issue regulations in both those areas has been granted exclusively to the Federal Reserve Board.

The credit card industry is highly competitive, and card issuers have responded

to increasing market competition with innovations in card products, marketing

strategies, and account management practices. The primary goals of these product

and marketing innovations have been to gain new customer relationships and related revenue growth, but in some instances an important secondary benefit has

been expanded access to credit by consumers with traditionally limited choices. Unfortunately, not all of the product and marketing innovations have had a uniformly

beneficial impact, and the marketing practices of credit card issuers in particular

have come in for pointed criticism in recent years.

Regulatory concerns arise when these developments carry costs and risks that are

detrimental to consumers and to the safe and sound operations of the credit card

issuing bank. They also arise when disclosures intended to enable consumer understanding of the costs and terms of their credit agreements fail to effectively inform

consumers about aspects of the credit relationship that are most important to them

and impose unnecessary burdens on the credit card issuers required to provide the

disclosures.

My statement discusses the need to begin a serious reexamination of the processes we have followed historically for developing, designing, implementing, overseeing, and evaluating consumer disclosures for financial products and services. I

urge that we take a new approach. Credit card disclosures would be a fine place

to start.

In my statement, I also describe the OCC’s current program for supervising credit

card issuers, enforcement actions we have taken to address practices we viewed as

egregious, and guidance we have issued to flag practices that concern us and prevent problems from developing in the future.

Finally, I discuss the recent initiative by the Federal Reserve Board to review disclosure requirements for credit card issuers under the Truth in Lending Act (TILA).

The OCC is in a somewhat anomalous position when it comes to credit card disclosures required under TILA, for, while we supervise many of the credit card issuers,

we are not authorized to participate in writing the rules under TILA governing their

consumer disclosures. Thus, last month, the OCC took the out-of-the ordinary step

of submitting a comment letter responding to the Board’s Advance Notice of Proposed Rulemaking on Regulation Z’s open-end credit rules implementing TILA. My

statement describes the most important issues raised in our comment letter.

The Need for a New Approach to Developing Consumer Disclosures

In evaluating the current state of disclosures for consumer financial products and

services—which I think we can all agree leave substantial room for improvement—

and where we should go in the future, it is useful to consider the process we have

followed in developing these disclosures. For several decades, disclosures for consumer financial products have been developed by implementation of statutory requirements that typically specify particular content of information to be provided to

consumers. These specific requirements have cumulated over the years. And usually, the regulatory agencies charged with drafting the rules to implement those requirements are given short deadlines to finish their work. These approaches may

not always have produced or sustained the positive consumer protection results that

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Congress intended, and thus a fundamental change in our approach to consumer

disclosure laws and regulations may be called for.

Compared to the processes we have used to develop consumer financial disclosures, a very different approach was used by Congress and the Food and Drug Administration in the development of the ‘‘Nutrition Facts’’ box that is possibly the

most prevalent and frequently used consumer disclosure in the marketplace today.

The clear and concise labeling of food nutrition content has not only enabled consumers to find products with the nutritional characteristics they’re seeking, but it

also has influenced food producers to develop products that consumers want. By this

measure, the food nutrition disclosures have been effective and useful to consumers,

whereas I doubt that we would make a similar statement about many of our current

disclosures for consumer financial products. I describe these issues in more detail

below in connection with the discussion of the Federal Reserve Board’s review of

TILA requirements for open-end credit.

The effort that led to the FDA’s nutrition labeling began with a clear statement

by Congress of the objective the FDA was charged to accomplish. While Congress

did specify certain nutrition facts to be disclosed, it also provided the FDA with the

flexibility to delete or add to these requirements in the interest of assisting consumers in ‘‘maintaining healthy dietary practices.’’ It left to the FDA’s discretion the

design and format of the nutrition label.

Based on the direction and goals set out by Congress, the FDA took several years,

in an effort that involved intensive research not only by nutritionists, but also by

experts who polled focus groups to elicit ideas on the kind of information consumers

thought was most useful, experimented with dozens of different formats, and tested

those formats with target consumer audiences to determine what actually worked.

The ‘‘Nutrition Facts’’ box disclosure was the result of painstaking laboratory and

fieldwork, notably including extensive input by consumers.

Rather than mandating the precise elements of disclosures, the approach used by

Congress with regard to food nutrition labeling was to articulate the goals to be

achieved through a particular consumer protection disclosure regime. Congress

could follow this model in legislation affecting disclosures for consumer financial

products and services, and direct regulators on the key goals and objectives Congress

wants particular consumer disclosures to achieve. Applying the FDA model to these

consumer disclosures means that Congress would also look for opportunities to require, and provide adequate time for, regulators to include consumer testing as an

integral part of the rulemaking processes.

Quick fixes without consumer input, and issue-by-issue disclosure ‘‘patches’’ to information gaps, ultimately are not in the long-term best interests of consumers. Before bank regulators issue any new consumer disclosure rules and regulations, we

should undertake—or be directed by statute to undertake—thorough consumer testing to discover what information consumers most want to know about in connection

with a particular product and how most effectively to communicate that information

to them. And any new process for developing consumer disclosures for financial

products also needs to take into account both the burden and costs on the industry

associated with implementing any new standards, together with the effectiveness of

those disclosures.

We have some important choices to make, and this hearing provides an excellent

opportunity to initiate a discussion about those choices. We can continue with the

current approach to credit card disclosures—indeed, consumer compliance disclosures generally—of critiquing particular practices and gaps in information and then

requiring disclosures to address those particular concerns on a piecemeal basis. Or

we can, and I hope we will, recognize that a fundamentally different approach is

called for. The results, I believe, will be well worth it for consumers and the financial services industry as a whole.

OCC Supervision of Credit Card Issuers

The OCC’s comments on these issues are strongly influenced by our experience

as the supervisor of many credit card issuers, as well as by the information about

consumer confusion and complaints that we obtain through the OCC’s Customer Assistance Group. National banks supervised by the OCC issue a substantial percentage of the credit cards held by U.S. consumers. (The Board of Governors of the Federal Reserve System (Board) and the Federal Deposit Insurance Corporation also supervise major credit card issuers.) The OCC’s supervision of these institutions reflects a comprehensive approach that is designed to ensure safe and sound operations that comply with applicable laws and regulations and treat customers fairly.

This approach enables the OCC to supervise the operations of individual banks, to

address emerging risks and other issues on an institution-by-institution or broader

basis, and, where necessary, to require correction of consumer abuse or safety and

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soundness problems that we may find. There are four primary tools that we use to

accomplish these objectives: Examinations, complaint processing, supervisory guidance, and enforcement actions.

Examinations of Credit Card Operations in National Banks

The OCC conducts comprehensive examinations of the business of national banks,

including their credit card operations, and OCC examinations monitor whether credit card lending is being conducted in a safe and sound manner and in compliance

with consumer protection laws and regulations. The OCC has a corps of compliance

specialists, including retail and credit card lending specialists, located throughout

the United States, who conduct these examinations of national banks’ credit card

operations.

The largest national banks, which include many of the major credit card issuers,

have on-site examination teams continuously supervising all aspects of the banks’

operations. The supervisory time and attention devoted to credit card banks and operations is directly related to their level of complexity, the credit spectrum served,

and the risks presented. Thus, our regulatory scrutiny of high risk and complex

credit card issuers that are not the largest banks is rigorous, and more frequent

than that contemplated by the general 12- to 18-month examination schedule for

other banks.

The OCC’s supervision of credit card issuers is based on our assessment of the

line of business and the market overall. Examiners assigned to the largest and most

complex, highest risk operations typically have many years of specialized experience

with credit card products.

Our supervision evaluates whether credit card issuers are operating in a safe and

sound manner, and we consider consumer compliance, information technology, and

capital markets aspects in the overall safety and soundness assessment of the bank.

We seek to determine if risks that the bank has assumed are acceptable, and that

the risks are appropriately identified, measured, monitored, and controlled.

To make this determination, examiners review the fundamentals such as the reasonableness of the business model and strategic planning, the effectiveness of the

bank’s controls, financial strength, and compliance with laws, regulations, and relevant supervisory guidance. They also assess the adequacy of policies and procedures through reviews of various functions including marketing and pricing, underwriting, account management, collections, and loss mitigation. In addition, examiners review the bank’s use of credit scoring and other models, and, as warranted,

bring in quantitative specialists to assess model development and validation.

Throughout the supervisory process, examiners routinely make recommendations for

improvement, formally and informally. Examiners also advise banks about issues

that pose undue credit, compliance, transaction, or reputation risk.

Based on our supervisory experience, we can say that the vast majority of the

credit card issuers supervised by the OCC are focused on operating responsibly and

in a safe and sound manner, and that they strive to balance their business objectives with customer needs. However, because the credit card market is a highly competitive and, arguably, saturated market, issuers can sometimes implement changes

to their products, programs, or practices before fully addressing all of the implications of those changes.

The OCC can address deficiencies in the credit card operations of national banks

as a part of our supervisory process. National banks have changed their practices

to address specific concerns we raised, including by suspending or withdrawing certain products, repricing initiatives, and line increase programs when they have not

been supported by appropriate business analyses and controls, and by modifying

procedures affecting the assessment of penalty fees and the posting and allocation

of payments.

OCC Consumer Complaint Process

Our Customer Assistance Group (CAG) provides assistance to customers of national banks and their subsidiaries, fielding inquiries and complaints from these

customers—many of which relate to credit card products. This complaint processing

activity not only helps to resolve individual problems and educate consumers about

their financial relationships, in many cases, but, it also leads to resolution of the

complaints by the bank and secures monetary compensation or other relief for customers who may not have a more convenient means for having their grievances addressed.

Consumer complaint data can be used by examiners in the field to identify risks

affecting particular institutions that should be reviewed as part of the supervisory

process. The data also can be used to identify systemic problems—at a particular

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bank or in a particular segment of the industry—that warrant enforcement action,

or supervisory guidance to address emerging problems.

OCC Enforcement Actions Addressing Unfair and Deceptive Credit Card Practices

The OCC also can address significant problems involving individual credit card

issuers through formal enforcement actions. The OCC has authority to address unsafe and unsound practices and to compel compliance with any law, rule, or regulation, including the Truth in Lending Act, the Fair Credit Reporting Act, and the

Equal Credit Opportunity Act—the principal Federal statutes that provide specific

protections for credit card applicants and borrowers. This authority allows the OCC

to require a national bank to cease and desist unsafe or unsound practices or actions

that violate consumer protection laws. Further, the OCC may seek restitution for

affected consumers in these and other appropriate cases, and assess civil money

penalties against banks and their ‘‘institution-affiliated parties.’’

Since 2000, the OCC also has used its general enforcement authority, in combination with the prohibition in the Federal Trade Commission Act (FTC Act) against

unfair or deceptive acts or practices, in a number of enforcement actions involving

credit card lending. It should not be overlooked that the OCC’s use of Section 5 of

the FTC Act in this respect was groundbreaking, was initially greeted with skepticism, but is now the uniform position of all the Federal bank regulatory agencies—

although it has yet to be employed by any other banking agency to gain relief for

consumers in a public enforcement action. Our enforcement actions, described below,

have provided hundreds of millions of dollars in restitution to consumers harmed

by unfair or deceptive credit card practices, and have required the reformation of

a variety of practices. For example:

• Providian National Bank, Tilton, New Hampshire (consent order—June 28, 2000).

We required the bank to provide not less than $300 million in restitution for deceptive marketing of credit cards and ancillary products, to cease engaging in misleading and deceptive marketing practices, and to take appropriate measures to

prevent such practices in the future. • Net 1st National Bank, Boca Raton, Florida (consent order—September 25, 2000).

We required the bank to discontinue its misleading and deceptive advertising of

credit cards and to take appropriate measures to prevent the recurrence of such

advertising. • Direct Merchants Credit Card Bank, N.A., Scottsdale, Arizona (consent order—

May 3, 2001). We required the bank to provide restitution of approximately $3.2

million for deceptive credit card marketing, to discontinue its misleading and deceptive marketing practices, and to make substantial changes in marketing practices. • First National Bank of Marin, Las Vegas, Nevada (consent order—December 3,

2001). We required the bank to provide restitution of at least $4 million for misleading and deceptive credit card marketing, to discontinue its misleading and deceptive advertising practices, and to make substantial changes in its marketing

practices and consumer disclosures.

• First National Bank, Ft. Pierre, South Dakota (formal agreement—July 18, 2002).

We required the bank to discontinue its misleading and deceptive advertising

practices, and to take appropriate actions to prevent deceptive advertising concerning credit lines and the amount of initial available credit.

• First National Bank in Brookings, Brookings, South Dakota (consent order—January 17, 2003). We required the bank to provide restitution of at least $6 million

for deceptive credit card marketing practices, to obtain prior OCC approval for

marketing subprime credit cards to noncustomers, to cease engaging in misleading and deceptive advertising, and to take other actions.

• Household Bank (SB), National Association, Las Vegas, Nevada (formal agreement—March 25, 2003). We required the bank to provide restitution for deceptive

practices in connection with private label credit cards, resulting in a pay out of

more than $6 million to date, and to make appropriate improvements in its compliance program.

• First Consumers National Bank, Beaverton, Oregon (formal agreement—July 31,

2003). We required the bank to make restitution of approximately $1.9 million for

deceptive credit card practices.

• First National Bank of Marin, Las Vegas, Nevada (consent order—May 24, 2004).

We required the bank to make at least $10 million in restitution for consumers

harmed by unfair practices, and prohibited the bank from offering secured credit

cards in which the security deposit is charged to the consumer’s credit card account.

It is vital to note, however, that the OCC does not have express statutory authority to issue regulations specific to credit card disclosure practices. For example, the

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1 In March, 2002, the OCC also issued Advisory Letter 2002–3, Guidance on Unfair or Deceptive Acts or Practices, which includes guidance on avoiding these practices in connection with

credit card products.

OCC is not granted authority to define unfair or deceptive acts or practices by banks

under the FTC Act through regulations. That authority is vested exclusively in the

Board. Similarly, Congress has vested the Board with exclusive authority under the

Truth in Lending Act to issue regulations governing disclosure practices by all credit card issuers.

Nevertheless, through enforcement actions and supervisory guidance, the OCC

has sshould fill in the gaps and address circumstances in which existing regulations

may not provide specific standards for creditors in making disclosures and in avoiding unfair and deceptive practices. As described in more detail below, additional regulatory standards issued by the Board using its rulemaking authority are needed

to address this uncertainty and lack of uniform compliance standards on a comprehensive basis.

Recent OCC Supervisory Guidance on Credit Card Practices

An integral component of OCC supervisory activities is the issuance of guidance

to national banks on emerging and systemic risks. We use joint agency issuances

and the OCC’s advisory letter process to alert national banks to practices that pose

consumer protection or safety and soundness risks, and give guidance on how to address these risks and prevent problems from arising. We follow up on how banks

are responding to issues flagged in guidance through our supervisory processes.

In the past few years, for example, we have issued a number of supervisory guidelines related to credit card lending, including: 1

• Credit Card Lending: Account Management and Loss Allowance Guidance (Jan.

3, 2003)

• OCC Advisory Letter 2004–4, Secured Credit Cards (April 28, 2004)

• OCC Advisory Letter 2004–10, Credit Card Practices (Sept. 14, 2004)

The following sections discuss this recent guidance.

Account Management and Loss Allowance Practices

In January 2003, the Federal bank and thrift regulatory agencies issued guidance

to address concerns with credit card account management practices. The interagency guidance, Account Management and Loss Allowance Guidance, addressed

five key areas: Credit line management, overlimit practices, minimum payment and

negative amortization, workout and forbearance practices, and income recognition

and loss allowance practices. The issues covered by the guidance first surfaced in

the subprime credit card market, but follow-up examinations identified similar concerns involving several prime credit card lenders.

It may be useful to describe the highlights of these issues in greater detail.

Through the examination process, examiners identified concerns with practices for

assigning the initial credit lines to borrowers and increasing existing credit lines,

particularly for credit card lenders with subprime portfolios. In some instances, borrower credit lines were increased, seemingly for purposes of increasing the size of

the loan portfolios, but without the proper underwriting analysis to support the increases. Some borrowers were unable to make their payments after their credit lines

were increased. The result was an increase in delinquencies and losses. The guidance describes the agencies’ expectations for banks when they establish initial credit

lines for customers and when they increase those credit lines.

Examiners also observed loan workout and loan forbearance practices varied widely, and in some instances raised safety and soundness concerns. These workout programs, whereby lenders typically lower interest rates and stop assessing fees, were

often not effective in enabling consumers to repay the amounts owed. In particular,

some workout programs had extended repayment periods with modest reduction on

the interest rates being charged. To address this issue, the agencies reminded the

industry that workout programs should be structured to maximize principal reduction and required that repayment periods for workout programs not exceed 60

months. In order to meet the timeline requirement for repayment for workout accounts, it is our observation that credit card lenders have lowered interest rates on

those accounts, fostering more effective workout programs.

Examiners also identified weaknesses in income recognition and loss allowance

practices. Because of the revolving nature of the credit card product and low minimum payment requirements, a portion of the interest and fees due were being

added to the balances and recognized as income. The agencies’ guidance reiterated

the principle that generally accepted accounting practices require that loss allowVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00067 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
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ances be established for any uncollectible finance charges and fees. The agencies

also directed credit card lenders to ensure that loss allowance methodologies covered

the probable losses in high-risk segments of portfolios, such as workout and

overlimit accounts. Based on our observations, the industry responded quickly to

this guidance and increased their loss allowances where needed.

Overlimit practices, where a borrower exceeds the credit limit on the account,

raise both safety and soundness and consumer fairness concerns. Examiners observed that credit card accounts had been allowed to remain in overlimit status for

prolonged periods with recurring monthly overlimit fees. Negative amortization occurred in accounts where the minimum payment was insufficient to cover the finance charges and other fees imposed, including overlimit fees, and consequently

the principal balance increased. To prevent prolonged periods of negative amortization, the guidance directed banks to strengthen overlimit management practices to

ensure timely repayment of the amounts that exceed the credit limits. We believe

the industry has responded positively to this guidance by restricting the approval

of transactions that exceed credit limits and limiting the number of overlimit fees

assessed when repayment of the overlimit amount became extended.

Finally, over the past several years, examiners observed declining minimum payment requirements for credit card accounts. During the same period, credit lines,

account balances, and fees all have increased. As a result, borrowers who make only

minimum payments have been unable to meaningfully reduce their credit card balances. From a safety-and-soundness standpoint, reductions in minimum payment requirements can enable borrowers to finance debts beyond their real ability to repay,

thus increasing credit risk to the bank. Liberalized payment terms also increased

the potential for consumers to accumulate unmanageable debt loads, and raised

their vulnerability to default in cases of even moderate cashflow disruptions. The

guidance required banks to address these issues through a systematic reevaluation

of payment requirements and fee assessment practices.

From the OCC’s perspective, the implementation of this guidance by national

banks has been satisfactory, but is not complete. Most national banks addressed the

credit-line management, workout program, and loss allowance practices immediately. Issues pertaining to overlimit practices, minimum payments, and negative

amortization are taking longer because they require changes to customer account

agreements and operating systems. Also, we recognized the need for changes to be

phased-in carefully for certain customer segments, in order to enable those customers to adjust to changed repayment expectations. All of the large national bank

credit card lenders have submitted plans to address outstanding issues related to

overlimit practices, prolonged negative amortization, and required minimum payment amounts for those remaining customer segments. Necessary changes have

been and are in the process of being phased-in during 2005, with implementation

largely completed by year-end, and the OCC is carefully monitoring the phase-in of

these changes.

Secured Credit Cards

The OCC also has issued supervisory guidance that focuses on discrete issues affecting credit card products, such as our guidance on secured credit cards. Secured

credit card programs entail a borrower pledging collateral as security for the credit.

The borrowers who receive these cards typically are individuals with limited or

blemished credit histories who cannot qualify for an unsecured card. In some respects, these products can benefit these consumers by allowing them to establish or

improve their credit histories. Traditionally, secured credit cards have required that

borrowers pledge funds in a deposit account as security for the amounts borrowed

under the credit card account. In the event of default, the deposited funds may be

used to help satisfy the debt.

In recent years, however, some issuers began to offer secured credit cards that

did not require the consumer to pledge separate funds in a deposit account as collateral in order to open the credit card account. Instead, the security deposit for the

account would be charged to the credit card itself upon issuance. This newer practice resulted in a substantial decrease in the amount of credit that was available

for use by the consumer when the account was opened. Unsecured credit card products also have been offered with similar disadvantages, except that account opening

fees, rather than a security deposit, are charged to the account and consume the

nominal credit line assigned by the issuer.

These developments in secured credit card programs—in combination with marketing programs, targeted at subprime borrowers, that often did not adequately explain the structure or its likely consequences—meant consumers were misled about

the amount of initial available credit, the utility of the card for routine transactions,

and the cost of the card. Truth in Lending disclosures generally do not provide inforVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00068 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
65

mation to consumers about credit limits and initial available credit. Moreover, while

account opening disclosures prescribed by Regulation Z require, if applicable, a general disclosure pertaining to security interests, there is no such requirement for

credit card solicitations or advertisements. Thus, these rules omit disclosure of key

information that would provide consumers, at a decision point, a full understanding

of a secured credit card product’s cost and terms. They also offer little guidance to

lenders that may have wished to present such information in a comprehensible

manner.

The OCC took enforcement actions involving this type of secured credit card for

violating the FTC Act’s prohibition against unfair or deceptive practices. We reviewed marketing materials and found significant omissions of material information

about the likely effect that charging security deposits and fees to the account would

have on the low credit line that was typically extended, and about the consequent

impairment of available credit and card utility. These omissions were accompanied

by potentially misleading representations concerning possible uses of the card, such

as helping consumers to ‘‘be prepared for emergencies.’’ While these marketing practices generally complied with the specific credit cost disclosure requirements of

TILA and Regulation Z, the OCC determined that they constituted deceptive practices under the FTC Act. The OCC’s enforcement actions required both changes in

the issuers’ practices and monetary reimbursement to consumers.

We also reviewed whether the practice of charging substantial security deposits

and fees to a credit card account and severely reducing the initial credit availability

could also be found to be unfair within the meaning of the FTC Act. Evidence available to us indicated that consumers were materially harmed by these practices

when the product received by most consumers fails to provide the card utility and

credit availability for which consumers have applied and incurred substantial costs.

Based on this review, the OCC concluded that this practice posed considerable compliance risks under the FTC Act.

To address these concerns, the OCC issued Advisory Letter 2004–4, ‘‘Secured

Credit Cards.’’ The advisory directs national banks not to offer secured credit card

products in which security deposits (and fees) are charged to the credit card account,

if that practice will substantially reduce the available credit and the utility of the

card. The OCC also advised that national banks should not offer unsecured credit

cards that present similar concerns as a result of initial fees charged to the card.

Shortly after the OCC issued its advisory, we took enforcement action against a

national bank offering this type of secured credit card product that required the

bank to reimburse affected consumers and to cease offering products in which the

security deposit is charged to the consumer’s credit card account. As a result of our

enforcement actions, advisory letter, and supervisory suasion, we believe that the

significant supervisory concerns we had relating to secured credit card products offered by national banks have been addressed.

Other Credit Card Practices

Other credit card practices, involving marketing and changes in terms, also have

been the focus of OCC supervisory guidance recently because of our concern that

they could expose national banks to material compliance and reputation risks. The

OCC recently issued Advisory Letter 2004–10 to advise national banks concerning

the risks that these practices may violate the prohibition in the FTC Act against

unfair or deceptive practices. These practices include:

• Catching a consumer’s attention in advertising materials with promotional rates,

commonly called ‘‘teaser rates,’’ but not clearly disclosing significant restrictions

on the applicability of those rates;

• Advertising credit limits ‘‘up to’’ a maximum dollar amount, when that credit limit

is, in fact, seldom extended; and

• Increasing a consumer’s rate or other fees when the circumstances triggering the

increase, or the creditor’s right to implement that increase, have not been disclosed fully or prominently.

Teaser rate marketing. A common marketing technique used in credit card solicitations involves ‘‘teaser rates.’’ Frequently, teaser rates are used in promotions seeking to induce new and existing customers to transfer balances from other credit

cards. The promotional rate, almost always highlighted prominently in the marketing materials, is usually in effect for a limited period after the account is opened

or the relevant balance is transferred. Other important limitations on the availability of the promotional rate, or on the consumer’s ability to take advantage of

that rate, often apply—although they may not be disclosed prominently. For instance, the lower, promotional rate may apply only to balances that are transferred,

and a higher rate would apply to purchases and other credit transactions during the

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2We note that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

amends the Truth in Lending Act in several respects to address disclosures affecting credit card

accounts, including disclosures related to ‘‘introductory rates,’’ minimum payment disclosures,

and payment due dates if the creditor may impose a late payment fee.

promotional period. Frequently, a consumer’s payments during the promotional period are applied first to the transferred balance, and only after this low-rate balance

is paid off will payments be applied to balances that are accruing interest at a higher rate. There also may be other costs, such as balance transfer fees, that affect

whether the consumer will benefit from accepting a promotional rate offer.

In some circumstances, consumers can lower their credit costs when they transfer

balances to a new account with an introductory rate. The costs and limitations on

these rates and accounts, by themselves, are not unlawful or inappropriate—provided the consumer has a full appreciation of the terms of the transaction. Problems

arise when consumers accept offers without knowing the true terms. This, in turn,

can lead to increased complaints and increased exposure to claims of ‘‘bait-andswitch,’’ particularly when the consumer accepts these terms without knowing the

circumstances in which the creditor can change the terms, including unilaterally.

The Federal Reserve Board’s Regulation Z governs many aspects of promotional

rate offers. Direct mail credit card solicitations must display prominently in a tabular format each APR that will apply to purchases and balance transfers. However,

Regulation Z currently does not restrict the ability of a creditor to highlight only

the teaser rate in other materials included in the mailing without noting any limitations on the offer (or to do so only in fine print).2 Further, Regulation Z requires

no disclosure of the order in which payments will be applied to various balances.

Finally, while balance transfer fees must be disclosed in solicitations, they are not

required to be disclosed in a ‘‘prominent location,’’ even in solicitations expressly offering the consumer a promotional rate on a balance transfer.

The OCC’s AL 2004–10 provides guidance on how to ‘‘fill in the gaps’’ in these

rules for the responsible use of promotional rate advertising. The guidance advises

national banks to disclose fully and prominently the categories of balances or

charges to which the promotional rate will not apply. The advisory also states that

a national bank should not fail to disclose fully and prominently other material limitations, such as the time period the rate will be in effect and any circumstances that

could shorten the promotional rate period, and related costs. Moreover, if applicable,

a national bank should disclose fully and prominently that payments will be applied

first to promotional rate balances.

Marketing based on maximum credit limits. Another marketing practice that we

have been monitoring concerns promotions based on the highest attainable credit

limit—such as ‘‘you have been preapproved for credit up to $5,000.’’ We became concerned when we observed that this marketing might be targeting consumers with

impaired or limited credit history, and enticing them to accept a credit card based

on an illusory ‘‘firm offer’’ of a specific amount of credit. Instead of receiving the

credit line that is promoted, these consumers may instead receive a ‘‘default credit

line’’ (the minimum credit line) that is significantly lower than the maximum. All

too often in marketing of this type, the possibility that a significantly lower credit

line may be extended is either not disclosed or disclosed only in fine print or in an

obscure location. When high initial fees are charged to the card in relation to the

credit line extended, consumers who accept the offer will end up with little initial

available credit and little card utility.

The OCC has taken enforcement action in three matters involving, at least in

part, marketing to subprime borrowers of credit cards with limits ‘‘up to’’ a specified

amount. These enforcement actions involved products and marketing techniques like

those described above: Most applicants received a default credit line substantially

less than the ‘‘up to’’ amount featured in the promotion, and security deposits or

fees consumed substantially all of the default credit line, leaving the consumer with

little or no available credit at account opening. For example, in one program, almost

98 percent of credit card applicants received the default line, rather than the theoretical maximum credit line that was promoted. These enforcement actions resulted

in consent orders or formal agreements containing detailed provisions to prevent

misleading or deceptive marketing materials, and restitution for consumers injured

by the bank’s marketing practices.

We also addressed ‘‘up-to’’ marketing in AL 2004–10. Even disclosures that may

technically comply with Regulation Z remain subject to the FTC Act if they are unfair or deceptive. It may be difficult to assess, however, when practices cross the

line into unfairness or deception in a given case. For practices in this gray area,

we determined that guidance was needed to prevent consumer confusion and assist

national banks in avoiding compliance and reputation risks.

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The advisory states three general guidelines for managing risks and avoiding unfair or deceptive practices in these promotions. First, we advised national banks not

to target consumers who have limited or poor credit histories with solicitations for

credit cards advertising a maximum credit limit far greater than most applicants

are likely to receive. Second, we advised national banks to fully and prominently

disclose the amount of the default credit line and the possibility that the consumer

will receive it, if it is likely that consumers will receive substantially lower default

credit lines. Finally, we advised national banks not to promote cards on the basis

of card utility if the initial available credit most consumers receive is unlikely to

allow those uses.

Repricing practices and changes in terms. Coincident with the marketing of credit

cards based on high credit limits and low introductory interest rates, many credit

card issuers have turned to measures such as penalty pricing, rather than relying

solely on the up-front interest rate, to manage risk. For instance, many credit card

issuers raise the interest rate on a credit card for consumers who do not make timely payments to the issuer, or even to another creditor. Card issuers may also raise

the interest rate on a credit card to address other indicators of increased credit risk,

such as the consumer’s increased use of credit or failure to make more than the

minimum monthly payment. Some card issuers raise the cost of credit in other

ways, such as shortening due dates for payments and increasing cash advance, overthe-limit, late payment, or similar fees. These changes in terms have been the object

of significant public attention—and criticism—recently, and are the source of many

consumer complaints the OCC has received.

It is important to note that Federal law, including the Truth in Lending Act, does

not restrict the ability of creditors to include in their credit card agreements provisions permitting penalty interest rates, other changes in interest rates, or other

changes in the terms of the account. However, while penalty rates are required by

Regulation Z to be disclosed in solicitations, the manner of disclosure may not effectively alert customers to these terms. For example, except in certain transactions,

the disclosure of when penalty rates will apply is not required to be included in the

‘‘Schumer box’’ disclosures, and need not be as detailed as the explanation later provided in the initial account disclosures. Moreover, Regulation Z rules contain anomalies: In contrast to sometimes detailed disclosures provided to consumers about a

credit card’s costs, Regulation Z does not require a disclosure that a creditor has

reserved the right to change, unilaterally, these costs and any other credit terms.

The OCC addressed the compliance and reputation risks that accompany change

in terms practices in AL 2004–10. We made clear that to avoid consumer misunderstanding and complaints of unfairness, national banks must do more than merely

comply with the technical requirements in Regulation Z. The OCC guidance states

that national banks should disclose, fully and prominently in promotional materials,

the specific circumstances under which the card agreement permits the bank to increase the consumer’s APR, fees, or other costs (such as for late payment to another

creditor). Additionally, if national banks reserve the right to change the APR, fees,

or other credit terms for any reason at the bank’s discretion, the OCC advisory provides that this fact should be disclosed fully and prominently in both marketing materials and account agreements.

The OCC advisory does not restrict the ability of a bank to base initial credit pricing decisions, and subsequent changes to pricing, on risk factors. Indeed, default

pricing and other changes in terms can be appropriate ways to manage credit risk

in credit card accounts and, as noted above, the Truth in Lending Act does not prohibit these actions. But, because of the heightened risks of unfair and deceptive

practices involving repricing, we believe that national banks should always fully and

prominently disclose this material information before a consumer commits to a credit card contract.

To assist banks in implementing our guidance, we have been reviewing direct

marketing materials and credit agreements from eleven national banks with credit

card operations, including the largest issuers, to compare how their disclosures on

promotional rates and changes in terms conform to the standards in our advisory

letter. In general, we found that most of the banks surveyed disclosed restrictions

on teaser rates and the possibility of changes in credit terms, but that the prominence and completeness of these disclosures could be improved. The materials we

reviewed also generally did a good job of telling the consumer what constitutes a

‘‘default’’ that will give rise to higher default pricing. However, the materials typically did not warn the consumer about the other types of circumstances—short of

‘‘default’’—under which the terms may change. We have provided feedback to the

banks we surveyed, and we are working with them now on addressing the issues

we identified. In responding to the OCC’s supervisory guidance, some banks have

also been considering whether to make additional improvements to their marketing

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and account management procedures to address issues related to change in terms

practices. These initiatives are commendable.

Regulation Z Review

The OCC supervises the credit card operations of national banks through comprehensive examinations, complaint resolution, supervisory guidance, and enforcement actions. However, there are limitations on the extent to which the OCC can

ensure effective disclosures, and otherwise protect credit card customers of national

banks, through these actions. For example, as noted above, the OCC has not been

granted rulemaking authority to address unfair and deceptive practices by banks

under the FTC Act, nor to adopt regulations under the Truth in Lending Act. Therefore, we encourage and endorse the Federal Reserve Board’s recent undertaking to

review disclosure issues relating to all consumer credit card issuers under Regulation Z under TILA.

As this hearing itself demonstrates, the past few years have witnessed increasing

public concern about the effectiveness of consumer disclosures, especially in the

credit card industry. These increased concerns coincide with—and possibly reflect—

significant changes in the way credit card accounts are marketed and managed by

card issuers. The Board’s initiative is a particularly timely effort. It provides an important opportunity to address recent industry developments and related issues addressed in the bankruptcy reform legislation, to resolve anomalies that have arisen

in Regulation Z, and to remedy sources of consumer confusion and misunderstanding.

The OCC has a strong interest in the issues that are being addressed in this review. I have discussed my concerns about the limitations and effectiveness of Regulation Z disclosures, industry burden, and the lack of uniform standards affecting

credit card issuers, in a number of forums, and last month, the OCC took the unusual step of submitting a comment letter responding to the Board’s Advance Notice

of Proposed Rulemaking on Regulation Z’s open-end credit rules. In addition to

pointing out a number of specific anomalies and other issues that we believe should

be considered in the Board’s review of Regulation Z, our comment letter discussed

three general themes that may be relevant to the review.

Consumer Research and Testing

The first general theme relates to consumer research and testing. As noted above,

the OCC believes that consumer testing should precede regulators’ issuing new consumer disclosure rules. Therefore, we applaud the Board’s plans to use consumer

focus groups and other research in developing proposed revisions to the Regulation

Z disclosure rules and the related model forms. We urge the Board to employ both

qualitative and quantitative consumer testing to ensure that Regulation Z’s requirements maximize the effectiveness of consumer disclosures for credit cards.

Our letter pointed to the development of the Food and Drug Administration’s

(FDA’s) ‘‘Nutrition Facts’’ label as illustrative of the consumer research needed to

produce a highly effective disclosure document. Precedents for thorough consumer

testing also exist elsewhere in the financial services world. The Financial Services

Authority (FSA) in the United Kingdom used extensive testing in developing revised

disclosure requirements for a variety of financial products, and the OCC, the Board,

and several other Federal agencies are currently engaged in a multiphase consumer

testing project related to financial institution privacy notices. The agencies have

issued an Advance Notice of Proposed Rulemaking with respect to the privacy notices rules, and hope to follow it with a proposal for a new, streamlined approach

to privacy notices that reflects the results of that consumer testing.

The results of the earlier FDA and FSA studies are instructive as to what we

might expect to find from consumer testing on credit card disclosures. In particular,

those studies indicate that we should expect effective disclosures to:

• Focus on key information that is central to the consumer’s decisionmaking (with

supplementary information provided separately in a fair and clear manner);

• Ensure that this key information is highlighted in such a way that consumers will

notice it and understand its significance;

• Employ a standardized disclosure format that consumers can readily navigate;

and

• Use simple language and an otherwise user-friendly manner of disclosure.

Prescriptive Disclosure Rules

A second general theme of our comment letter relates to a particular approach

to consumer disclosure requirements: Detailed, prescriptive rules specifying (among

other things) the content of information to be provided to consumers. Regulation Z

and countless other consumer protection rules in the financial services arena have

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relied predominantly on this approach for decades. While this approach has been

effective, to a certain extent, in informing consumers about many of the most important features of their credit card accounts, it also carries significant potential adverse consequences that should not be ignored as the Board revisits Regulation Z.

These include:

• The risk of information overload, as well as the risk that important information

will be obscured by the cumulative volume of required specific disclosures;

• The risk of over-inclusion of information that may not be material for the particular product (or target market), as well as the risk of under-inclusion of the

information consumers most need about a particular credit card product; and

• The risk that any set of specific requirements will not be flexible enough to adapt

to or reflect the inevitable changes in credit products and industry practices over

time.

All of these risks may imperil the effectiveness of disclosure rules. Moreover, they

raise the possibility that the consumer benefit is insufficient to justify the significant burdens that these detailed disclosure rules place on creditors. Accordingly, we

urged the Board to consider, as it conducts its review of Regulation Z, whether this

approach is best suited to consumer and industry needs in today’s rapidly evolving

consumer credit markets.

Industry Developments

The third general theme of our comment letter relates to the need to ensure that

credit disclosure rules keep pace with the evolution of credit products and industry

practices. For example, as mentioned above, one source of an increasing number of

consumer complaints is the exercise by creditors of change-in-terms provisions to reprice credit card accounts, and the information that consumers receive about those

practices. Typically, a credit card agreement provides that the interest rate on the

account may increase upon the occurrence of a ‘‘default’’ (as that term is defined in

the particular credit card agreement). Card agreements also typically provide for a

general reservation of rights to the issuer that permits it, unilaterally, to change

any term in the agreement, including the interest rate and fees, and the method

of allocating payments, and thereby increase the consumer’s costs.

We believe it is important that lenders retain the right to close, reprice, and/or

limit further credit advances on accounts due to factors such as fluctuations in the

interest rate environment, adjustments in business strategy, market developments,

or an increased credit risk associated with an individual consumer or similarly situated groups of consumers. At the same time, customers need to know the circumstances under which their rates will be, or may be, changed. Absent effective

disclosure of this information, particular changes in terms may be not only unexpected, but also perceived by the customer to be unfair, such as the application of

a penalty rate to existing balances, rather than to only new transactions. Understandably, consumer confusion and concern about these matters are heightened

when an interest rate increase on an account is not tied to an increase in general

interest rates or to deterioration in the borrower’s performance with the particular

credit card.

Amendments to Regulation Z could address some of this confusion and concern.

Although matters relating to repricing may well be more important to consumers

than other information that is currently disclosed in a prominent or conspicuous

manner (for example, balance computation methods), Regulation Z currently addresses the various ways in which an account may be repriced in very different—

and perhaps anomalous—ways. For example, the Schumer box disclosure requirements do not treat all repricing mechanisms the same:

• Variable Rates. Specific disclosure is required of the fact that the rate may vary

and an explanation of how the rate will be determined, as well as detailed rules

about the actual numerical rate that is disclosed.

• Promotional Rates. Specific disclosure of the promotional rate and a large print

disclosure of the rate that will apply after expiration of the promotional rate is

required, but no disclosure is required of the different circumstances under which

the promotional rate will be or may be terminated.

• Penalty Rates. Specific disclosure of the increased penalty rate that may apply

upon the occurrence of one or more specific events is required, but the disclosure

of those events is not required to be particularly detailed, or necessarily prominent, and no disclosure of the duration of the penalty rate is required.

• Reservation of Rights. No disclosure is required of the issuer’s reservation of a

unilateral right to increase the interest rate, fees, or any other terms of the account.

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We urged that one objective of the Board’s review should be to find the most effective way to ensure that consumers understand how material terms may change. We

suggested that an approach to explore is the possibility of an integrated description

of potential changes of pricing and other terms, regardless of the cause or source,

that would permit consumers to understand and readily compare this aspect of different credit offers. This type of description could also include disclosure, for example, of whether pricing changes would apply retroactively to existing balances, and

whether and how consumers may be able to ‘‘opt out’’ of the changed terms. In addition, the disclosure anomalies described above should be carefully reviewed—for example, the absence of any disclosure requirement with respect to unilateral reservations of rights (even for accounts advertised as ‘‘fixed rate’’ accounts) in contrast

with detailed requirements relating to standard variable rate accounts (as well as

certain required disclosures for promotional and penalty rates). We also encouraged

the Board to address the adequacy of current requirements relating to penalty rates

(especially in light of the rise of cross-default provisions commonly referred to as

‘‘universal default’’ clauses) and promotional rates.

We noted in our letter a number of other areas in which, similarly, the Board

should review Regulation Z to determine whether new technologies, marketing

strategies, or account management practices warrant changes to existing disclosure

requirements or other consumer protections. These issues point to the general challenge in the pending review of credit card rules—how to build flexibility into Regulation Z so it will not be outpaced by rapidly evolving market practices. Without this

flexibility, regulators—and industry, for that matter—will continue to need to ‘‘fill

in the gaps’’ to ensure that consumers have the information they need to understand

the terms of their credit card accounts.

Conclusion

Credit card terms, marketing, and account management practices have been

changing over the past several years in response to intense market competition.

These changes have significant implications for safety and soundness and consumer

protection. The OCC has addressed many of these concerns through its supervision

of national bank credit card operations, its enforcement actions, and its supervisory

guidance.

However, given the tremendous volume of credit card solicitations in the market

today, we remain concerned that consumers are not always provided information

that will be effective in helping them to sort through these offers and to understand

the benefits and material limitations of the various products being marketed. The

Board’s review of the credit card rules in Regulation Z holds promise for a disclosure

regime that is more effective for consumers.

More importantly, we need to rethink our current approach to credit card disclosures—indeed, consumer compliance disclosures generally—of critiquing information

practices affecting particular issues and then pushing for correction on a piecemeal

basis. We can, and I hope we will, recognize that fundamental changes to our approach are needed. It will take time to achieve, but the results, I believe, will be

well worth it for consumers, complementary to a competitive market, and less burdensome for lenders.

Once again, Mr. Chairman, thank you for the opportunity to present the OCC’s

views on these matters.

—————

PREPARED STATEMENT OF ANTONY JENKINS

EXECUTIVE VICE PRESIDENT, CITI CARDS

MAY 17, 2005

Good morning, Chairman Shelby, Ranking Member Sarbanes, and Members of the

Senate Banking Committee. My name is Antony Jenkins and I am an Executive

Vice President at Citi Cards. I appreciate the opportunity to speak before you today

to discuss the credit card industry, Citi Cards, and our customer relationships. Our

customers are our most valuable asset and we constantly monitor customer satisfaction and loyalty to make sure we are serving their evolving needs.

Overview of Citi Cards

‘‘Citi Cards’’ is the brand that Citigroup uses to identify our MasterCard, Visa,

and private label credit card business in the United States and Canada. In my testimony today, I generally will be focusing on our MasterCard and Visa business in

the United States.

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1The many laws and regulations that apply to the credit card industry include: (a) the Truth

in Lending Act and the Federal Reserve’s implementing Regulation Z; (b) the Fair Credit Reporting Act; (c) the Equal Credit Opportunity Act; (d) the Gramm-Leach-Bliley Act, including

Continued

Citi Cards is one of the leading providers of credit cards in the United States with

close to 80 million customers and 119 million accounts. Consumers spend roughly

$229 billion annually through our credit cards, which constitutes about 2 percent

of the nation’s Gross Domestic Product (GDP). Citi Cards employs nearly 35,000

people in 30 geographic locations around the country.

We offer a variety of products and services to meet consumers’ diverse needs and

preferences. These include a wide array of general-purpose cards where customers

can earn rewards or receive cash back. Our rewards programs offer consumers a

range of options, including airline miles, gift certificates to major retail stores and

restaurants, and electronics. Examples include the Citi AAdvantage card, the longest running airline rewards program in the marketplace today, and our new

ThankYou Network rewards program that offers consumers a broad selection of rewards for their everyday purchases.

The Credit Card Industry

THE BENEFITS OF CREDIT CARDS TO CONSUMERS AND THE ECONOMY

Consumer spending is a key component of the U.S. economy, accounting for a significant portion of the nation’s GDP. The credit card industry facilitates 17 percent

of all consumer spending, or the equivalent of $1.7 trillion. Consumers’ use of credit

cards is instrumental to businesses of every size. The use of electronic credit card

payment systems for a significant portion of all store purchases speeds and organizes payments to merchants throughout the country.

Credit cards have become an integral part of the everyday lives of consumers, and

strong competition in the credit card industry has given consumers lower interest

rates, enhanced services, and a wide variety of choices.

Credit cards are the payment method of choice for many consumers. They are also

the primary means to purchase goods and services through e-commerce in the

United States and around the globe. Eighty percent of U.S. households have credit

cards, and consumers often choose to carry more than one card for the flexibility

and choice that comes with differing card features and rewards.

Credit cards provide consumers with a fast and efficient means of payment for

many types of purchases. They are secure, convenient, and easy to use. They allow

consumers to purchase airline tickets, rent cars, make hotel reservations, and shop

on the Internet from the comfort of their homes and offices. Credit cards are also

instrumental in establishing a credit history, which plays an essential role in a consumer’s ability to make large purchases such as a home or automobile, get a job,

or even open a bank account.

Credit cards offer customers the flexibility to adjust their monthly payments to

reflect their preferences and monthly cashflow situation. Some customers choose to

pay their cards off in full each month, basically using their cards exclusively as a

convenient way to make purchases and pay their bills. Other customers choose to

revolve their credit and adjust the amount they pay each month according to their

monthly household budgets. Most Citi Cards customers make their credit card payments on time. The vast majority of our customers pay more than the minimum

due.

Credit cards provide unique protection features and services not found in other

forms of payment. In our case, we believe protecting our customers is fundamental

to our business. All of our cards provide security features against fraud and identity

theft. Citi Cards and most other issuers also have zero liability policies for unauthorized charges on a customer’s card to supplement the already strong protections

of current law against liability for unauthorized charges.

CREDIT CARD INDUSTRY LENDING MODEL

The lending model for credit cards is unique. The loans we provide are unsecured

and open-ended, and there are significant operational, funding, and other costs associated with maintaining the infrastructure that allows consumers to use credit cards

anywhere, at any time. There are many elements that determine the level of profitability for a company, and well-run companies make profits because of careful management of the risks involved.

LEGAL AND REGULATORY FRAMEWORK

The credit card industry is heavily regulated.1 The bulk of these regulations were

put in place during the 1960’s and 1970’s, and they have been continuously updated

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the Federal banking agencies’ and FTC’s privacy and information security regulations; (e) the

unfair or deceptive practices provisions of the Federal Trade Commission Act; (f) the Fair Debt

Collection Practices Act; (g) the Telemarketing and Consumer Fraud and Abuse Protection Act;

(h) the Telephone Consumer Protection Act; (i) the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the CAN-SPAM Act); and (j) the Community Reinvestment Act.

to keep pace with industry changes. For example, the Truth in Lending Act (TILA)

was amended in 1988 by the Fair Credit and Charge Card Disclosure Act to add

the now well-known ‘‘Schumer box’’ to credit card solicitation disclosures. During the

1980’s and 1990’s, TILA’s implementing Regulation Z was periodically amended

with new fee and interest rate disclosures and other requirements for both traditional direct mail and newer Internet marketing channels. Even as we meet today,

the Federal Reserve Board is analyzing responses to its recent Advance Notice of

Proposed Rulemaking representing a comprehensive review of Regulation Z’s openend credit provisions, and the Board is preparing to issue regulations pursuant to

TILA amendments enacted as part of last month’s bankruptcy reform legislation.

These amendments require new disclosures regarding the effect of making minimum

payments, enhanced ‘‘introductory rate’’ disclosure requirements, new Internet disclosure rules, and other new disclosures.

In addition, the bank regulatory agencies have taken a series of new actions regarding unfair and deceptive acts and practices. In 2002, for example, the Office of

the Comptroller of the Currency (OCC) issued guidance to national banks cautioning

that practices can be found unfair or deceptive despite technical compliance with applicable TILA and Regulation Z requirements. Last year, the OCC augmented this

letter with specific guidance on various credit card practices, including the marketing of ‘‘up-to’’ credit limits, promotional rate marketing, and repricing of accounts

and other changes in credit card terms. These advisory letters have supplemented

well-publicized OCC enforcement actions.

All U.S. card issuers are subject to Federal or State regulatory agency oversight.

Citi Cards’ two card issuers are both national banks that are subject to regulation,

examination, and supervision by the OCC. We meet formally with the OCC to review the types and trends of customer complaints that its national Customer Assistance Group receives about the banks it regulates, including Citi Cards. Like other

banks, we undergo regularly scheduled, extensive consumer compliance and Community Reinvestment Act (CRA) examinations. We also have full-time on-site OCC

examiners who constantly review our practices and policies.

Citi Cards and Our Customers

OUR GOALS FOR OUR CUSTOMERS

In a highly competitive marketplace in which consumers have numerous payment

card choices, we recognize that customer satisfaction is a driver of business revenue

and that a lost customer is difficult and expensive to replace. We therefore constantly work to meet consumer demand and maintain customer loyalty. We strive

to be responsive to our customers’ needs and concerns.

We recognize that an educated customer will be a more satisfied customer. Accordingly, we take great care to make sure that we provide access to consumer education in our communications. We reach out to educate our customers in a variety

of ways. For example, our ‘‘Use Credit Wisely’’ program helps our customers learn

to enjoy the flexibility and convenience of our credit cards without a resulting burden. Our websites (www.usecreditwisely.com and www.students.usecreditwisely.com)

have important information for students and other consumers, including rules for

using credit responsibly, tips for gaining financial control, credit education tests, a

glossary of important credit-related terms, and tips to prevent identity theft.

Financial education is an integral part of the work we do every day and a major

focus of our effort to make a difference in the communities where we live and work.

Recently, Citigroup and the Citigroup Foundation announced a 10-year global commitment of $200 million toward financial education and, as part of this commitment,

Citigroup announced the formation of the Office of Financial Education.

REACHING NEW CUSTOMERS

Credit Availability

We strive to make credit available to consumers as their needs change throughout

their lives. One of the ways new entrants to the credit market begin to build a credit history is with their first credit card. We reach out to groups that are new to credit, such as college students and recent graduates, for whom a credit card relationship offers a necessary payment tool, security, and means for them to build a positive credit history.

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With new entrants to the credit market, we normally start the customer with a

credit line tailored to his or her individual circumstances. These new customers, just

like our general customer population, must demonstrate that they can manage their

credit responsibly before we will increase their credit line. Our experience with college students has shown that they compare favorably with our general customer

population in terms of credit management.

New Customer Solicitations

We use direct mail to find the majority of our new customers. We mail

prescreened offers (which are sometimes referred to as ‘‘preapproved offers’’) to consumers who have been selected to receive the offer. This selection process includes

credit bureau screening for bankruptcy filings, delinquent and written-off accounts

above certain amounts, debt levels above certain amounts, and other credit problems. The selection process also includes the use of our internal credit scoring model

in order to apply more sophisticated credit criteria before the offer is mailed. When

the consumer responds to the prescreened offer, we then review his or her actual

credit bureau report and apply the same credit bureau and modeling criteria that

we did in the selection process to make sure that the consumer is still creditworthy.

We also mail offers to consumers without prescreening. When a consumer responds to this type of offer, we review the consumer’s credit bureau report and

apply basically the same credit bureau and credit score modeling criteria that we

use for our prescreened offers.

Recent Revisions to Our Solicitation Materials

Our goal is to assure ‘‘no surprises’’ for our customers and to continually improve

upon our practices. In reaching new customers, this means that all of our written

materials must describe our products clearly, accurately, and fairly.

Citi Cards recently redesigned our solicitation letters to assure ‘‘no surprises’’ for

our new customers. In doing so, we also made sure that our new letters were consistent with the OCC Advisory Letter of September 14, 2004, which requires national bank credit card issuers to review specified credit card marketing and account

management practices.

While we have always disclosed our right to reprice accounts, we took the Advisory Letter as an opportunity to review our disclosure practices. As a result, we now

tell consumers in more detail at the time of solicitation that their account terms

could change. We specify that information in the consumer’s credit bureau report—

such as failure to make a payment to another creditor when due, amounts owed to

other creditors, number of credit accounts outstanding, or the number of credit inquiries—could cause us to reprice the account. This is to help educate consumers

about how we use credit bureau information. Moreover, we tell them that our right

to change the terms of our accounts with them based on credit bureau report information is subject to their right to prior notice and their right to opt out of the

change.

In addition, we now repeat on page one of our solicitations selected disclosure information about the terms of credit that previously appeared only on the second

page in the large print Regulation Z ‘‘Schumer box.’’ For example, if a promotional

rate applies to balance transfers and there is a balance transfer fee, that fee information from the Schumer box is now repeated on page one of the solicitation.

OUR RELATIONSHIP WITH OUR EXISTING CUSTOMERS

Products and Services

Our goal is to make sure our customers know how to use their card and all of

the services available to them. New customers receive a directory of services with

their credit card. The directory of services is tailored to each of our individual credit

products so that it can explain all the benefits of the card to the new customer.

These benefits include the opportunity for the customer to request that a photo be

put on the front of his or her card for added security, as well as the other security

features that apply to our cards, such as Citi Identity Theft Solutions. We let them

know how to reach us, both by phone and online, so that they can take advantage

of the benefits that their card offers. We also have a welcome kit that we send to

new customers to make them aware of an array of products and services that are

available.

Customer Satisfaction

We conduct research on an ongoing basis to understand existing and prospective

customer needs and wants. This research helps us identify and recommend products, services, and processes that satisfy marketplace desires and improve the customer experience.

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Our call center associates receive extensive classroom training prior to handling

customer contacts. This includes specialized modules around key ‘‘soft skill’’ attributes such as courtesy, empathy, tone, listening skills, proactive service, and the

importance of the customer experience.

We also work very closely with our customers who advise us that they are having

financial difficulties. We offer various options to these customers, such as reducing

minimum payments, reducing interest rates, waiving fees going forward, or crediting back fees that have already been billed. In addition, we work with nonprofit

consumer credit counseling agencies and support customer debt management plans.

Risk-Based Pricing Policies

Because credit card loans are unsecured and open-ended, it is important that we

are able to employ various methods of recognizing and mitigating risk. Constraints

on risk-based pricing would lead to less access to credit for those in need, higher

prices for all consumers, and a less competitive marketplace.

The best indicator as to whether an individual will repay a loan is his or her payment behavior with us and other lenders. Pricing loans for risk is a fair and equitable method of compensating lenders for making loans that carry a higher possibility of default. It is also consistent with the regulatory and business goal of assuring that we conduct our business in a safe and sound manner.

If we see indications that a customer is taking on too much debt, has missed or

is late on payments with another creditor, or is otherwise mishandling his or her

personal finances, it is not unreasonable, as an unsecured lender, to determine that

this behavior poses an increased risk. In the interest of all of our customers and

the safety and soundness of our banks, we adjust a customer’s rate to compensate

for that increased risk.

In the past, our agreements with our cardholders provided that a delinquency

with another creditor (referred to as an ‘‘off-us’’ delinquency) gave us the right to

automatically increase a customer’s interest rate. Now, before we increase a customer’s rate due to an off-us delinquency, we provide prior notice to the customer

explaining why his or her rate is being increased and give the customer the right

to opt out of that increase. If the customer opts out, he or she may continue to use

the card with the existing rate until the card expires. When the card expires, no

new charges are allowed. However, customers may continue to pay off their balance

using the existing rate and payment terms. The events that allow us to automatically increase the interest rates are now limited to three types of behavior that relate to a customer’s relationship with us: failure to make a payment to us when due;

exceeding the credit line; or making a payment to us that is not honored.

New Change in Terms and Opt Out Notice

We also recently redesigned our change in terms and opt out notice. Our newly

rewritten and reformatted notice is shorter, more concise, and uses white space and

bold headers to ensure that key messages stand out. To highlight to our customers

that they can opt out of a change in terms, we added the words ‘‘Right to Opt Out’’

to the title of the notice and the paragraph heading. Finally, we added a toll-free

telephone number as an alternative opt out method.

This right to advance notice and opt out affords significant protections for customers. For example, if we notify a customer that his or her interest rate will be

increased due to adverse information in a credit bureau report, the specific reasons

for the proposed repricing (for example, failure to make payments to another creditor when due) are included in the advance notice, and the advance notice names

the credit bureau providing the information so the customer may challenge the report if he or she thinks the information is inaccurate.

Redesigned Customer Agreements

In a continuous effort to improve our customer communications, a few months ago

we completely rewrote, reformatted, and simplified our credit card agreements.

Then we added on the first page a section entitled ‘‘Facts About Rates and Fees’’

that summarizes critical card pricing information in a single place, much like the

nutritional labels found on food products. We emphasize this pricing information by

bolding key words and phrases so that it will be more useful to our customers. This

‘‘Facts About Rates and Fees’’ section also includes a description of the reasons we

may use to change the rates and fees associated with their account.

Anti-Fraud Initiatives

Citi Cards is committed to protecting our customers from fraud and identity theft

and we are continuously developing new programs to deal with these problems. We

were the first card issuer to have a photo identification on the credit card in 1992.

More recently, in 2003, we created the Identification Theft Solutions program with

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an internally staffed unit dedicated to handling identification theft cases for our customers even if the identification theft relates to another of their cards that we did

not issue. This year we announced a new collaboration with the National District

Attorneys Association where we work with State and local prosecutors nationwide

to develop new strategies for the arrest and prosecution of identity thieves. Similarly, for our Internet channel, we rolled out a program to stop ‘‘phishers’’ from

spoofing our customers who use the Internet. We created a special security box that

appears on the top of all emails sent by us to Citi customers—known as the ‘‘Email

Security Zone,’’ and we provide dedicated Internet security specialists to help customers with questions about suspicious emails and other security issues.

New Minimum Monthly Payment Formula

This year we are changing our minimum payment formula to ensure that every

customer who pays only the minimum monthly payment pays off his or her debt

in a reasonable period. Under this new schedule, a customer’s minimum payment

requirement covers interest, late fees, and 1 percent of the balance due. This formula was adopted to meet the OCC’s recent requirement for positive amortization

of credit card debt on an individual customer basis. It will increase the minimum

monthly payment due for some of our customers, and in some instances dramatically for those whose accounts are at higher interest rates. Although we recognize

that, in the short-run, some customers could be financially strained meeting these

higher monthly payments, we believe that over the longer-term the new minimum

payment policy will be a net positive for customers as it will accelerate their payment of outstanding debt, and over time it will result in lower total interest payments. In the meantime, we are developing strategies to mitigate the impact of increased monthly payments for customers in hardship situations.

The newly enacted Bankruptcy Abuse Prevention and Consumer Protection Act

amends TILA to require creditors to disclose on the front of each billing statement

an example showing the time it would take to repay a sample balance if a customer

is making minimum payments only. As an alternative under the new law, if a creditor maintains a toll free telephone number that provides customers with the actual

number of months it would take to repay the customer’s balance, that creditor is

not required to provide the sample on the billing statement.

We are currently looking at ways that we could provide this actual information

to customers in a manner that will not confuse or mislead them but that will instead be beneficial. We hope to use this requirement to provide information that is

a useful, accurate, and effective planning tool for our customers who may desire it.

Thank you again for the opportunity to appear before this Committee. I would be

pleased to answer any questions you may have.

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PREPARED STATEMENT OF LOUIS J. FREEH

VICE CHAIRMAN AND GENERAL COUNSEL, MBNA CORPORATION

MAY 17, 2005

Good morning, Chairman Shelby and good morning distinguished Members of the

Committee. My name is Louie Freeh and I am here today as General Counsel of

MBNA Corporation. Thank you for this opportunity to address the Committee and

to share with you some observations about how the American credit card industry,

and MBNA in particular, is working to ensure broad availability of credit, at a fair

price in a secure environment.

MBNA is an international financial services company and the third largest issuer

of credit cards in the United States. Our primary business is making unsecured

loans through credit cards, consumer loans, business credit cards, and other lending

products. MBNA is best known for partnering with thousands of professional organizations, colleges and universities, conservation groups, and others to deliver financial products through affinity marketing programs. Under these programs, millions

of customers express their affinity with their alma mater or profession, and more

than 5,000 organizations benefit by sharing in the proceeds generated when customers use an MBNA credit card. MBNA products and services are endorsed by organizations like the National Education Association, Georgetown University, and

Ducks Unlimited.

MBNA began business more than 20 years ago with about 100 people in an abandoned grocery store in a rundown shopping center in Ogletown, Delaware. Today,

MBNA is a Fortune 100 company that employs more than 27,000 people in Delaware, Maryland, Maine, Ohio, Georgia, New Jersey, New York, Pennsylvania, and

Texas, as well as in Canada, the United Kingdom, Ireland, and Spain. MBNA appears perennially on several national lists as among the top 100 places to work in

America. Our success has been built on an enduring commitment to provide customers top quality financial products, backed by world-class service. That commitment is best expressed by the words, ‘‘Think of Yourself As A Customer,’’ which appear above every door in the company.

At MBNA, we use sophisticated software models to help make credit decisions,

but we also rely on the analysis and judgment of highly experienced credit analysts.

By making what we believe to be more informed credit decisions, MBNA has built

one of the highest performing loan portfolios in the credit card business. Our loan

losses are significantly lower than the industry average and most of our customers

make more than their minimum payment every month. We also take pride in the

fact that we treat every customer as an individual, and we make decisions based

on an analysis of that individual’s credit worthiness as it evolves over time.

In the larger sense, MBNA is a major participant in an industry that is a vital

part of the American economy. Credit cards are so ubiquitous that it is easy to forget a time not so long ago when access to credit was a privilege reserved for the

elite. Some of you will recall a time when, if you wanted a $300 personal loan, it

meant filling out an application, signing countless documents, waiting for your approval and, if the approval came, submitting to a lecture from the bank officer before receiving your check and a book of payment coupons. Today, sophisticated processes allow you to get this done at an ATM.

The availability of reliable credit information, strong regulatory protections, and

the willingness of companies like MBNA to take reasonable credit risks have greatly

broadened the availability of credit for the average American. This capital has

helped fuel the growth of our economy and the strength of our Nation. The fact is,

our society would not function as it does without reasonable access to credit through

credit cards.

Yet for all this progress, today’s credit card loan is very much like the personal

loan you may have waited several weeks to receive 20 years ago. It is an unsecured

loan that the lender grants based largely on the customer’s promise to repay. For

example, when a customer uses a credit card to pay for an airline ticket, he is taking out an unsecured loan.

But the credit card loan is different from the old personal loan in several important ways. If the credit card customer needs additional funds or is unable to repay

the loan immediately, the lender has agreed in advance to allow the customer to

revolve a balance on the loan, repaying a portion each month and avoiding the need

to apply for a new loan. So if the airline ticket delivers our customer to Hong Kong,

the credit card lender will make funds available in the local currency. If there is

a problem, the lender will be available 24 hours a day, 7 days a week to ensure

that the customer is satisfied. And if the customer’s card is lost or stolen, the lender

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will replace the card so that the customer may return home. And the lender then

bears the cost of any fraudulent use of the card. It is really a remarkable product.

Most of us do not think about the investment in people, technology, and products

required to make this kind of product and service available wherever and whenever

a consumer wants credit. The world of the old personal loan seems a distant memory. It is as if credit cards have always been there, and always will be. In fact, the

system relies on the integrity of both parties to live up to their commitments. And

the good news is, the system is working very well.

The vast majority of lenders grant credit responsibly, and the vast majority of

consumers use credit cards responsibly. The result is, nearly every American today

enjoys access to a reasonably priced source of capital to realize their dreams. Credit

is no longer the province of the wealthy. Credit is now a reasonably priced financial

tool available to nearly every American. MBNA is proud to have played a role in

this progress.

There are, of course, always exceptions. Some consumers mis-handle credit cards,

and lenders can always do more to improve the ways in which they grant and manage credit. But we must not make the mistake today of focusing solely on the exceptions. As we examine some of the industry’s practices, we must balance our concern

for appropriate safeguards with an interest in preserving access to credit for the majority of Americans who use it responsibly.

Within this context, let me turn now for a few moments to some topics the committee is concerned with. I have some observations on the marketing of credit cards

to college students, the practice of repricing existing accounts and assessing fees,

minimum payments, concerns about disclosures, and data security.

Student Marketing

In discussing student marketing, it is important to note that we make every effort

to ensure that credit card offers are not sent to people under the age of 18.

MBNA does promote its products to college-aged customers by partnering with

more than 700 colleges and universities, primarily through the college alumni associations. By working closely with school administrators, we have earned the confidence and trust of most of America’s premier educational institutions.

When we market on campus, we sometimes participate in school events such as

football games and orientation activities. These activities are conducted within the

framework of a multiyear agreement that gives the school extraordinary control over

when, where, and how we are allowed to market our products, especially to students. While we do issue credit cards to some college students, you may be surprised

to learn that more than 90 percent of the credit cards we issue through colleges and

universities go to the alumni, parents, and staff, not students. Alumni groups typically use the funds generated to underwrite academic and athletic enrichment programs.

Before granting credit to a college student, analysts familiar with the needs and

abilities of college students review each application and decline more than half. Our

experience is that most college student applicants report a separate income, and

that many already have an established credit history. When evaluating an application, we consider the college students’ projected performance as an alumnus, and

when we grant credit, we typically assign a line of between $500 and $1,000. If a

college student attempts to use his or her card beyond the credit line, we typically

refuse the charge. And we do not reprice these accounts based on behavior.

Once a college student becomes a cardholder, MBNA delivers its ‘‘Good Credit,

Great Future’’ brochure in a welcome package. The brochure highlights sound

money management habits, including guidance on how to handle a credit card responsibly. We also maintain a website aimed at college-aged consumers, highlighting many of the same tips. MBNA also conducts on-campus credit education

seminars and we provide articles concerning responsible credit use for student and

parent publications.

The performance of our college student portfolio mirrors closely that of the national experience, as reported in GAO reports and several independent studies.

However, our accounts have much smaller credit limits and much smaller balances

than the norm, our college student customers utilize their cards less often than the

norm, and these accounts are less likely to incur fees. Our experience has also been

that college students are no more likely to mis-handle their accounts than any other

group of customers.

When we grant a card to a college student, we think of it as the beginning of what

we hope will be a long relationship. As he or she begins a career, purchases a home

and raises a family, MBNA wants to be the lender of choice. Given this, we have

absolutely no interest in encouraging poor credit habits. In fact, everyone’s interest

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is best served when college students make responsible use of credit. That is our goal

in every situation, and certainly when dealing with college-aged customers.

We also appreciate that Congress has mandated a study concerning credit and college students. We believe this study will bear out what our experience has indicated

and will provide a sound, analytical basis for determining whether or not additional

legislation is necessary.

Re-Pricing and Fees

One topic often discussed is how credit card lenders price—and sometimes reprice—their products. It is not unusual to hear someone say that the prime rate is

X, that home mortgages are generally priced close to that number, and that credit

cards should be too. Of course this line of thinking ignores the fact that no consumer

loan could have greater security than a mortgage, which is secured against real

property, while few loans could have less security than a credit card.

MBNA has some 50 million customers. During any given month, 30 percent of our

customers revolve a balance and pay us interest for the use of that money, another

10 percent pay in full without interest, and 60 percent have no balance and do not

use their card that month. Before we lend money to customers, MBNA must itself

borrow funds. We must then pay the marketing costs to attract customers and the

operations costs to service their business. We must also cover the expense of providing rewards points to customers, compensating our affinity partners, protecting

our customers from fraudulent transactions, and funding those loans that are

charged off because they will never be repaid. And like any business, we must pay

salaries, benefits, facilities expenses, and taxes. The fact is, before we return a profit

to shareholders, we must earn significantly more than our cost of funds just to cover

our cost of business. And this is in an environment where customers have come to

expect no annual fee, generous rewards points, complete protection from fraud, 24-

hour global service, and a 0 percent APR.

We manage to this environment by using our affinity model to differentiate our

products, by focusing on providing outstanding products and services, by giving potential customers every good reason to join MBNA, by maintaining the flexibility to

price our products to reflect the changes in the risk profiles of our customers, and

by applying fees when customers decide to handle their accounts outside the agreed

terms. Our over-riding objective is to ensure the integrity of the portfolio so that

we can continue providing the greatest amount of credit to the greatest number of

qualified customers at the most competitive rates. I think this goal is entirely consistent with the committee’s fundamental concerns for the American consumer.

When we increase a customer’s APR, we do so for one of two reasons: Either our

costs have increased, or the customer’s creditworthiness indicates a higher risk than

is supported by the current pricing. However, MBNA does not practice universal default. We do not automatically reprice a customer’s account without notice solely because he or she may have missed or been late on a payment to some other creditor.

The reality is, every lender must have the ability to set and, if necessary, adjust

the pricing on an unsecured revolving loan in order to reflect the risk inherent in

making that loan. Likewise, if a customer chooses to pay late, exceed his credit

limit, or otherwise handle his account outside the agreed terms, it is not unreasonable that we would assess a fee to help cover the added risk that this poses. Without

this flexibility, some lenders would simply raise their rates, forcing all customers

to pay a higher rate in order to subsidize those who present increased risks, others

would limit credit access to all but the most affluent, and some would just find new

lines of business.

At MBNA, we work to balance all of these factors and to price our products in

a way that allows us to attract and retain the best customers, while also achieving

our financial goals.

Absent a default on that specific account, MBNA provides advance notice to customers when we reprice an account, and we allow customers to reject a rate increase

and to pay the balance at the old rate.

Minimum Payments

I want to turn now to the subject of minimum payments. Providing customers

with the flexibility of making a low minimum payment is one of the terrific features

of a credit card. For customers whose incomes may fluctuate over the course of the

year, the option of a low minimum payment can be a flexible tool for managing the

monthly budget.

Our experience, however, is that nearly all of MBNA’s customers pay more than

their minimum each month and only a fraction of 1 percent of consistently pay only

the minimum. In fact, many of our customers pay their balance in full each month.

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While the minimum payment is meant as a tool or a guideline for consumers, we

recognize that some customers fall into the habit of repeatedly making the minimum payment. When this happens, a consumer can begin having problems making

a dent in the principle owed. MBNA identifies those customers whose poor payment

practices indicate financial stress. We reach out to these customers and work with

them to develop payment strategies that suit their circumstances.

MBNA has also announced that it will begin applying a new minimum monthly

payment formula later this year. For most customers who revolve a balance and currently pay the minimum, the new formula will encourage them to pay down a larger

portion of principle each month. We continue to work with the OCC and all of the

banking regulatory agencies as they work to improve the effectiveness and efficiency

of the system.

Disclosures/Transparency

Turning for a moment to the topic of disclosure, let me first say that MBNA is

committed to keeping its customers fully and fairly informed of every aspect of their

accounts. However, we believe that the volume and types of disclosures mandated

by Federal and State laws, regulations, guidelines, and practices, along with the

complexity of the product, have not led to greater clarity. In fact, we think these

measures have often led to greater confusion and frustration for the consumer. And

while we favor better disclosure, we should consider that better disclosure may not

mean more disclosure. Better disclosure may mean simpler descriptions of key

terms and offering consumers a range of ways to get this information, including

websites, toll-free phone numbers, and simplified documents.

At MBNA, we always provide advance notice of changes in APR’s and we tell customers how to opt-out of these changes. Moreover, in response to the OCC’s September 2004 Advisory Letter regarding credit card marketing practices, MBNA

made a number of improvements in its marketing materials and agreements. Our

goal was to highlight important terms and conditions relating to fees, rates, payment allocation, repricing, and how to opt-out of changes in terms. In addition, we

recently provided comment to the Board of Governors of the Federal Reserve System

wherein we support the Board’s decision to undertake a comprehensive review of the

Federal Truth In Lending Act and Regulation Z. We believe this review is necessary

because consumer credit markets and communications technology have changed significantly since the Act was last revised in 1980. We have further suggested that

the Board be guided by four fundamental principles as it considers revisions to the

Act.

First, disclosures must be simple. We know from talking to millions of customers

every year that they are often confused and frustrated by the dense and lengthy

regulatory language that issuers are required to use in disclosures. Ironically, the

language intended to inform consumers more often overwhelms them. Much of this

material ends up in the household trash. We believe it should be a priority for the

Board to shorten and simplify disclosure language and to focus on the most relevant

terms and conditions that consumers need to understand.

Second, disclosures must be clear. There are several consumer-tested models for

presenting complex information in a clear and effective manner. We recommend

that in addition to containing shorter, simplified language, disclosures should also

be presented in ways that are understandable and meaningful. Lenders should have

the option of using these consumer-friendly models as a ‘‘safe harbor’’ for disclosure.

In respect of the need to present information simply, clearly, and effectively,

MBNA has begun voluntarily inserting its change-in-terms notices within what we

call a ‘‘wrapper.’’ The wrapper presents a top line summary of the changes in terms,

along with hints to customers for managing their accounts. We also use the wrapper

to remind customers of the things they can do to avoid fees, and we make suggestions on how to manage payments by mail, by phone, and by Internet. The wrapper

is a step in the direction of clarity, and we are happy to have taken it.

Our third recommendation is that disclosures should be based on uniform national

standards. The goal of greater simplicity and clarity will never be achieved as long

as individual States can impose their own disclosure requirements. We do not believe that State-specific disclosures provide any significant benefits, but we know

they add to the complexity of documents that customers tell us are already far too

difficult.

And fourth, disclosures should not be repetitive. Key terms should not have to be

disclosed in the account application and in the summary of terms disclosed later.

Our idea is that the Fed Box can be improved. Similar to the ‘‘nutritional facts’’

table on the side of all food products, issuers would disclose the key terms of the

credit card agreement in a uniform way. The table could include a listing of the

rates that apply to the different types of transactions, information on whether the

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rates are variable or nonvariable, fees, grace periods, default provisions, conditions

for repricing, duration of promotional rates, and so on. The major improvement is

that this information would be presented in a consistent, uniform manner. Consumers could compare product features and benefits, and more easily choose those

products that suit their needs, whether they want to revolve a balance or not.

In 2003, MBNA tested a ‘‘food label-style’’ privacy statement with a small segment

of customers. More than 90 percent told us they preferred the simplified format. The

study confirmed that transparency in disclosures is in MBNA’s best interest, and

of course the best interest of consumers. MBNA will work closely with the Board,

and all the appropriate agencies, to contribute to the revision process and to implement the revised requirements.

Data Security/Identity Theft

Several recent high-profile identity theft incidents underscore the importance of

data security. Before I address how MBNA manages this risk, it should be said that

while credit card information often is the commodity that identity thieves want,

they do not usually get it from the credit card companies. Typically, they steal this

data from merchant computers, where some retailers retain customer account information despite industry rules to the contrary. Often it is the credit card issuer that

identifies a pattern of theft, and since the issuer bears the financial burden when

a card is used fraudulently, it is not surprising that lenders are focused on curbing

this problem.

At MBNA, we monitor account activity around the clock in an effort to prevent

fraud. To do this, we apply a unique blend of technology and human judgment.

Some of our most experienced analysts work in our fraud prevention unit. These

people bring years of experience to their assignments and understand the patterns

of behavior to look for when identifying fraud. They know also that not everything

that looks like it might be fraud actually is fraud. That is an important skill as well,

when one goal is to ensure that customers are not denied the legitimate use of their

card.

Fraud prevention starts when we review applications. Our system of judgmental

lending gives us an edge in this respect, since we stress the need for direct contact

with applicants—especially if we think there is any discrepancy on the application

that might suggest fraud.

When customers are using their cards, MBNA employs neural network and rulesbased fraud strategies to identify high fraud-risk transactions. If we think we see

an issue, we act quickly to mitigate fraud risk by declining transactions and/or seeking point-of-sale customer identification.

But these are just a few examples of how we act to prevent fraud and identity theft. In all, we will spend over $100 million this year alone preventing and responding to fraud. Over the last 5 years, we have invested additional millions of

capital to upgrade our systems to meet this growing challenge. One result of all

these efforts is that credit card losses due to fraud, measured as a percent of sales,

are now at historic lows.

Finally on this topic, I want to address the question of customer notification. We

support the standards recently adopted by the Federal banking agencies. We believe

that lenders must have the flexibility of being able to assess whether or not the circumstances of the breach pose a genuine risk. Establishing a default requirement

where each and every breach of sensitive information triggers an all-out customer

notification, as some have suggested, will result in a flood of notifications, nearly

all of which will be unnecessarily alarmist. Consumers will quickly learn to ignore

these notices and will become complacent, even in those instances when the threat

is genuine. What we should strive for is a standard that calls for notification when

the threat is real.

Chairman Shelby and Members of the Committee, this concludes my prepared remarks. I would again like to thank you for the opportunity to address some of these

important topics and I look forward to responding to any questions you may have.

—————

PREPARED STATEMENT OF ROBERT D. MANNING

UNIVERSITY PROFESSOR AND SPECIAL ASSISTANT TO THE PROVOST

ROCHESTER INSTITUTE OF TECHNOLOGY

SEPTEMBER 5, 2002

I would like to thank Chairman Richard Shelby for providing this opportunity to

share my views with the Committee on the increasingly important issue of deceptive

credit card marketing and consumer contract disclosures during this rapidly changVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00103 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
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1Over the last 6 months, fueled by increasing popularity of home equity loans and the uneven

economic expansion, the growth of convenience users has jumped to about 43 percent

(CardWeb.com, 2005).

ing period of banking deregulation. This Committee has a long tradition of examining and protecting consumer rights in the realm of financial services and I hope

that this hearing will produce new relief to financially distressed and overburdened

households as they cope with the increasingly opaque credit card policies and practices. In this endeavor, I have had the pleasure of contributing to Senator Paul S.

Sarbanes’ investigation of consumer debt among college students and the lack of financial literacy/education programs for America’s financially vulnerable youth. In

addition, I applaud the legislative initiatives of Senator Christopher Dodd, who has

championed credit card marketing restrictions on college campuses along with critically needed financial education programs as well as directing greatly needed attention to ambiguous contract disclosures and deceptive marketing practices. Also, it

is a pleasure to acknowledge the State of New York’s senior Senator, Charles E.

Schumer, whose efforts to protect consumers from deceptive marketing and contract

disclosure practices of the credit card industry has simplified our lives through the

summary of our key credit card contract information in our monthly statements.

The twin issues of rising cost and levels of consumer debt together with shockingly

low levels of financial literacy among our youth and their parents have grave implications to the continued economic well-being of the Nation—especially as Americans

age into debt and watch the erosion of their Social Security benefits. For these and

many other reasons, I commend the Committee for accepting the daunting task of

examining the increasingly serious problems that will be addressed today.

As an economic sociologist and faculty member in the Department of Finance in

the College of Business at Rochester Institute of Technology, I have spent the last

19 years studying the impact of U.S. industrial restructuring on the standard of living of various groups in American society. Over the last 12 years, I have been particularly interested in the role of consumer credit in shaping the consumption decisions of Americans as well as the role of retail banking in influencing the profound

transformation of the U.S. financial services industry. In regard to the latter, I have

studied the rise of the credit card industry in general and the emergence of financial

services conglomerates such as Citigroup during the deregulation of the banking industry beginning in the late 1970’s.

In terms of the former, my research includes in-depth interviews and lengthy survey questionnaires with over 800 respondents in the 1990’s and nearly 1,500 in the

2000’s. The results of this research are summarized in my book, CREDIT CARD

NATION: America’s Dangerous Addiction to Consumer Credit (Basic Books, 2001)

and a forthcoming series of research articles. More recently, I have begun investigating the global expansion of deregulated consumer financial services with particular attention to comparative governmental policies that enforce consumer rights

in Europe, Asia, and Latin America. My next book, GIVE YOURSELF CREDIT

(Alta Mira/Taylor Publishers, 2006), presents an updated analysis of the deregulation of the credit card industry, major public policy issues, and practical guidance

for consumers for more prudent use of consumer credit. These interests in public

policy and financial literacy have inspired the development of my own internetbased financial literacy/education programs at www.creditcardnation.com.

Banking Deregulation and the Consumer Lending Revolution:

Ascension of the Free Market or Nadir of Consumer Rights?

In mid-2004, the 185 million bank credit cardholders in the United States possessed an average of almost 7 credit cards (4 bank and 3 retail) and they charged

an average of $8,238 during the previous year (Cardweb.com, 2004a; Card Industry

Directory, 2004). In 2004, about 70 million (37.8 percent) were convenience users

or what bankers disparaging refer to as deadbeats because they pay off their entire

credit card balances each month.1 In contrast, nearly 3 out of 5 cardholders (62.2

percent) were lucrative debtors or revolvers; 71 million (38.4 percent) typically pay

more than the minimum monthly payment (typically 2 percent of outstanding balance) while 44 million (23.8 percent) struggle to send the minimum monthly payment (Cardweb.com, 2004a).

Over the last 10 years, which includes the longest economic expansion in American history, the total number of bank credit cards increased 62 percent, total

charge volume by 162 percent, and net outstanding debt by 129 percent (Card Industry Directory, 2004, Ch. 1). Today, early 2005, approximately three out of five

U.S. households account for almost $685 billion in outstanding, ‘‘net’’ bank credit

card debt plus almost another $100 billion in other revolving lines of credit (Card

Industry Directory, 2004; Cardweb.com, 2004a; U.S. Federal Reserve, 2005). This reVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00104 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
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flects a meteoric rise in credit card debt—from less than $60 billion at the onset

of banking deregulation in 1980.

Overall, the average outstanding credit card balance (including bank, retail, and

gas) of debtor or ‘‘revolver’’ households with at least two adults has soared to over

$12,000 (Card Industry Directory, 2004); approximately 75 percent of U.S. households have a bank credit card, up from 54 percent in 1989 (Canner and Luckett,

1992; T3Cardweb.com, 2004a). This is exclusive of ‘‘nonrevolving’’ consumer debt

such as auto, home equity, furniture, debt consolidation, and student loans, which

total over $1.3 trillion in 2005, plus over $7.2 trillion in home mortgage loans. The

sharp increase in consumer debt (‘‘revolving’’ and ‘‘installment’’) over the last 25

years (doubling over the last 10 years) and the rapid rise of credit card debt-from

19.5 percent of installment debt in 1980 to 43.8 percent in 1990 peaking at 70.4 percent in 1998 and dropping to 61.9 percent in 2004. In terms of consumer debt levels

per capita, each of the more than 295 million residents of the United States owes

an average of over $31,000, which helps to explain how consumer spending accounts

for over two-thirds of U.S. Gross Domestic Product (GDP) or total domestic economic

activity (U.S. Federal Reserve, 2005; U.S. Census, 2005). As illustrated by these

startling statistics, the last two decades have witnessed the birth of the Credit Card

Nation and the ascension of the debtor society (Manning, 2000; Sullivan, Warren,

and Westbrook, 2000; Warren and Tyagi, 2003; Leicht and Fitzgerald, 2006).

Banking Deregulation and the Ascent of Retail Financial Services:

What’s Consumer Debt Got to Do With It?

The debate over the origins of the consumer lending ‘‘revolution’’ tend to focus on

either the ‘‘supply’’ or ‘‘demand’’ side of this extraordinary phenomenon. This section

explores how statutory and regulatory reforms over the last three decades have fundamentally changed the structure of the U.S. banking industry and the subsequent

‘‘supply’’ of financial services. During this period, the institutional and organizational dynamics of American banking have changed profoundly as well as the ‘‘supply’’ of financial services in terms of their use, cost, and availability. Indeed, the intensifying economic pressures of globalization (U.S. industrial restructuring, Third

World debt crisis, downward pressure on U.S. wages) together with new forms of

competition in the U.S. financial services industry (rise of corporate finance divisions, growth of corporate bond financing, and expansion of mortgage securitization)

precipitated a dramatic shift from ‘‘wholesale’’ (corporate, institutional, and government) to ‘‘retail’’ or consumer banking (Brown, 1993, Dymski, 1999; Manning, 2000:

Ch. 3). And, as explained later, consumer credit cards played an instrumental role

in this process.

The basic public policy assumption of banking ‘‘deregulation’’ is that reducing onerous and costly Government regulation invariably unleashes the productive forces

of intercompany competition that yield a profusion of direct benefits to consumers.

The most salient are lower cost services, greater availability of products, increased

yields on investments, product innovation, operational efficiencies, and a more stable banking system due to enhanced industry profitability (Brown, 1993, GAO, 1994;

Rougeau, 1996; Dymski, 1999; Manning, 2000: Ch 3). This ‘‘free market’’-based prescription for miraculously satisfying both the profit objectives of financial services

executives and the cost/availability interests of consumers belies the inherent political asymmetries that have militated against the distribution of industry efficiencies

over the last 20 years. It is the intractable conflict between corporate profit maximizers in the banking industry and consumer rights advocates that constitutes the

focus of this analysis.

According to Jonathan Brown, Research Director of Essential Information, there

are three systemic contradictions of laissez-faire-driven banking deregulation that

limit ‘‘broad-based’’ consumer benefits. In brief, they are [1] excessive risk-taking by

financial institutions that are facilitated by publicly financed deposit insurance programs (FDIC) and publicly subsidized corporate acquisitions of insolvent financial

institutions (Savings and Loan crisis of early 1980’s); [2] increased industry concentration and oligopoly pricing policies (in the absence of a strong antitrust policy)

that limits cost competition over an extended period of time; and [3] diminished access to competitive, ‘‘mainstream’’ financial services for lower-income households as

corporations focus their resources on more affluent urban and suburban communities. Brown concludes by underscoring the paradox of ‘‘free market’’-driven banking deregulation, ‘‘strong prudential control [by Government and consumer organizations] becomes even more important because deregulation increases both the opportunities and the incentives for risk-taking by banking institutions [in the pursuit

of optimizing profits rather than public use]’’ (Brown, 1993: 23). For our current

purposes, the latter two trends merit further discussion.

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2The real cost of ‘‘revolving’’ credit card loans, exclusive of introductory or low ‘‘teaser’’ rates

and inclusive of penalty fees, has nearly tripled since the early phase of banking deregulation

in the 1980’s. 3The success of corporate finance operations has led to more aggressive involvement with

high-risk, speculative investments including ‘‘junk’’ bonds. For example, the sharp decline in the

Federal Reserve’s ‘‘discount’’ interest rate in 2001 led many of these finance divisions to invest

heavily in the ‘‘carry trade’’ whereby companies borrow at low, short-term rates and invest in

higher yield, long-term bonds or asset-backed (for example, mortgages and credit cards) securities. Today, with interest rates rising, the enormous profits made from these bond purchases

in 2002 and 2003 will soon be replaced with losses following the decline in this favorable interThe first distinguishing feature of the early period of banking deregulation is the

sharp increase in the growth and profitability of retail banking in comparison to

wholesale banking. During the early 1980’s, wholesale banking activities experienced a sharp decline in profitability, especially in the aftermath of the 1982–1983

recession. These include massive losses on international loans, large real-estate

projects, and energy exploration/extraction companies. Furthermore, traditional

bank lending activities faced new and intensified competition such as Wall Street

securities firms underwriting cheaper bond issues, corporate finance affiliates offering lower-cost credit for ‘‘big ticket’’ products (automobiles), and the integration of

home mortgage loans into the capital market via the sale of asset-back securities

(mirrored in the explosive growth of Fannie Mae) which contributed to downward

pressures on bank lending margins. In addition, many consumers with large bank

deposits shifted their funds into higher yield mutual funds that were managed by

securities firms. This increased the cost of bank funds since they were forced to offer

certificates of deposits (CD’s) with higher interest rates which further reduced their

profit margins (Brown, 1993; Nocera, 1994; Manning, 2000).

As astutely noted by Brown, the response of U.S. banks to these intensifying competitive pressures was predictable, ‘‘[F]inancial deregulation tends to lower profit

margins on wholesale banking activities . . . where large banks have suffered major

losses on their wholesale banking operations, the evidence suggests that they tend

to increase profit margins on their retail activities in order to offset their wholesale

losses’’ (Brown, 1993: 31.) Indeed, corporate borrowers have been the major beneficiaries of banking deregulation over the last two decades. This is evidenced by the

sharp increase in the cost of unsecured consumer debt such as bank credit cards;

see Manning (2000:19) for a cost comparison of corporate-consumer lending rates in

the 1980’s and 1990’s.2

The magnitude of this shift in interdivisional profitability within large commercial

banks is illustrated during the 1989–1991 recession. For example, Citicorp reported

a net income of $979 million from its consumer banking operations in 1990 whereas

its wholesale banking operations reported a $423 million loss. Similarly, Chase

Manhattan’s retail banking activities produced $400 million in 1990 whereas its

wholesale banking activities yielded a $734 million loss (Brown, 1993: 31). Not unexpectedly, bank credit cards played a central role in fueling the engine of consumer

lending in the 1980’s. The average ‘‘revolving’’ balance on bank card accounts

jumped six-fold—from $395 in 1980 to $2,350 in 1990 (Manning, 2000:11). According

to economist Lawrence Ausubel, in his analysis of bank profitability in the period

1983–1988, pretax return on equity (ROE) for credit card operations among the largest U.S. commercial banks was 3–5 times greater than the industry average

(1991:64–65). Hence, the ability to increase retail bank margins in the early 1980’s

(to be discussed in greater detail) led to the sharp growth in consumer marketing

campaigns and the rapid expansion of consumer financial services beginning in the

mid-1980’s (Mandell, 1990; Nocera, 1994; Manning, 2000).

Not incidentally, the escalating demand for increasingly expensive consumer credit was not ignored by nonfinancial corporations. Growing numbers of manufacturers

and retailers established their own consumer finance divisions such as General Motors, General Electric, Circuit City, Pitney Bowes, and Target. In many cases, like

the dual profit structures of the banking industry, the traditional operations of

these major corporations (manufacturing and retailing) encountered mounting competitive pressures through globalization and subsequently experienced sharp declines in their ‘‘core’’ operating margins. Escalating revenues in their financing divisions (especially consumer credit cards) compensated for these declines and, in especially aggressive corporations like General Electric, were spun-off into enormously

profitable global subsidiaries such as GE Financial (Manning, 2000: Ch. 3). In fact,

the financing units of Deere & Co. and General Electric accounted for 21 and 44

percent, respectively, of corporate earnings in 2004 and all of Ford’s pretax profits

in 2002 and 2003 (Condon, 2005). Today, financial companies account for 30 percent

of U.S. corporate profits, up from 18 percent in the mid-1990’s and down from its

peak of 45 percent in 2002 (Condon, 2005).3 As a result, there is growing concern

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est rate ‘‘spread.’’ As a result, corporate finance affiliates must offset these losses by increasing

the volume of more costly corporate loans which is problematic with current market conditions.

This will increase pressure to raise lending margins on their consumer financial services. 4 Also referred to as the Gramm-Leach-Biley Act (GLBA) of 1999.

that shrinking bank profits derived from commercial loans to corporate borrowers,

together with declining profits from the speculative ‘‘carry trade’’ (long-term hedging

of short-term interest rates such mortgage bonds), will exacerbate pressure to increase profits on retail lending activities and thus raise the cost of borrowing on

consumer credit cards.

As the consumer lending revolution shifted into high gear in the late 1980’s, rising profits and rapid market growth (number of clients and their debt levels) fueled

the extraordinary consolidation of American banking and especially the credit card

industry. In 1977, before the onset of banking deregulation, the top 50 banks accounted for about one-half of the credit card market (Mandell, 1990). This is measured by outstanding credit card balances or ‘‘receivables’’ of each card issuing bank.

Fifteen years later, 1992, the top 10 card issuers expanded their control to 57 percent of the market, prompting a formal U.S. Congressional inquiry into the ‘‘competitiveness’’ of the credit card industry (GAO, 1994). Over the next decade, bank

mergers and acquisitions proceeded at a breakneck pace, propelling the concentration of the credit card industry to oligopolistic levels.

For example, Banc One’s acquisition of credit card giant First USA in 1997 was

followed in 1998 by Citibank’s purchase of AT&T’s credit card subsidiary—the

eighth largest card issuer. Over the next 18 months, MBNA bought SunTrust and

PNC banks, Fleet merged with BankBoston, Bank One acquired First USA,

NationsBank merged with Bank of America, and Citibank bought Mellon Bank.

Today, the ongoing concentration of the credit card industry features the mergers

of increasingly larger corporate partners. In 2003, Citibank purchased the troubled

$29 billion Sears MasterCard portfolio (Citibank, 2003). This was followed in 2004

with Bank of America’s acquisition of Fleet Bank (tenth largest U.S. credit card

company) and J.P. Morgan Chase’s purchase of Bank One (third largest credit card

company). As a result, the market share of the top 10 banks climbed from 80.4 percent in 2002 to 86.7 percent in 2003 and then to over 91 percent in 2004 (Card Industry Directory, 2004). Overall, the top three card issuers (Citibank, MBNA, J.P.

Morgan Chase) control over 55 percent of the market. Not surprisingly, as market

expansion and industry consolidation approaches its limits in the United States,

several top megabanks have begun aggressively promoting their consumer financial

services in international markets through corporate acquisitions, mergers, and joint

ventures. These include Citibank, MBNA, Capitol One, GE Financial, and HSBC.

Not only has U.S. banking deregulation transformed the market structure of the

US and eventually the global financial services industry but it has also facilitated

the rise of the ‘‘conglomerate’’ organizational form. This second distinguishing feature of the recent deregulated banking era is a profit maximizing response to the

maturation of industry consolidation trends. In brief, the limits of organizational

growth through horizontal integration, even with its economic efficiencies of scale

and oligopolistic pricing power, entails that future growth can only be sustained by

expansion into new product lines and consumer markets. This multidivisional corporate structure, guided by ‘‘cross-marketing’’ synergies offered by ‘‘one-stop’’ shopping via allied subsidiaries for the vast array of consumer financial services, was

initially attempted by Sears and American Express in the 1970’s and 1980’s with

generally disappointing results (Nocera, 1994; Manning, 2000).

By the late 1990’s, two financial services behemoths sought to bridge the statutory

divide between commercial banking and the insurance industry by combining their

different product lines into a single corporate entity: Citigroup. Technically, the

1998 merger of Citibank and Travelers’ Insurance Group was an illegal union that

required a special Federal exemption until the enactment of the Financial Services

Modernization Act (FSMA) of 1999 (Manning, 2000: Ch. 3).4 With cost-effective technological advances in data management systems together with U.S. Congressional

approval of corporate affiliate sharing of client information (FSMA) and the continued erosion of consumer privacy laws (Fair Credit and Reporting Act of 2003),

Citigroup became the first trillion dollar U.S. financial services corporation that offered the ‘‘one-stop’’ supermarket model for all of its clients’ financial needs. These

include retail and wholesale banking, stock brokerage (investment) services, and a

wide-array of insurance products for its customers in over 100 countries. Again,

bank credit cards played a crucial role through the collection of household consumer

information, the cross-marketing of Citigroup products and services, and its high

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5 Citigroup’s consumer financial services companies have outperformed the insurance division

in growth and profit margins—especially after 2001. As a result, Citigroup has retreated from

its one-stop, financial supermarket concept and has agreed to sell its Travelers Life & Annuity

division to Metlife Inc for $11.5 billion in winter of 2005 (Reuters, 2005b). 6See Foster v. Capital One Bank,et al for ongoing class action lawsuit regarding deceptive

marketing and excessive fees for the ‘‘Capital One Visa Permier’’ credit card that features 0 permargin cashflow that helped in offsetting costly merger and integration-related expenses (Manning, 2000: Ch. 3).5

A third distinguishing feature of banking deregulation is the widening institutional gap or bifurcation of the U.S. financial services system. That is, the distinction between ‘‘First-tier’’ or low-cost mainstream banks and ‘‘Second-tier’’ or ‘‘fringe’’

banks such as pawnshops, rent-to-own shops, ‘‘payday’’ lenders, car title lenders,

and check-cashers. This widening institutional division between these consumer financial services sectors has dramatically increased the cost of credit among immigrants, minorities, working poor, and heavily indebted urban and increasingly suburban middle-classes (Caskey, 1994; 1997; Hudson, 1996; 2003; Manning, 2000: Ch.

7; Peterson, 2004). Indeed, the usurious costs of financial services in the second-tier

reflect the ideological zeal of regulatory reformers whose goal is to rescind interest

rate ceilings, loan ‘‘quotas’’ imposed on mainstream banks for disadvantaged communities, and vigorous enforcement of financial disclosure laws. Shockingly, the cost

of credit typically exceeds 20 percent per month for consumers who often earn poverty-level incomes and less.

The significance of this trend is two-fold. First, the systematic withdrawal of

First-tier banks from low income communities restricts the access of these residents

to reasonably priced financial services. Although morally reprehensible, banks frequently justify their actions in terms of economic efficiencies and profit utility functions that are arbitrated by ‘‘free-market’’ forces. The political reality, however, it

that this policy is a defiant rejection of the affirmative obligation standard of the

Community Reinvestment Act (CRA) of 1977 (Brown, 1993, Fishbein, 2001; Carr,

2002). That is, the banking industry receives enormous public subsidies through (1)

depositor protection programs/policies, (2) access to low-cost loans through the Federal Reserve System’s lender of last resort facility, and (3) privileged access to the

national payments/transactions system (Brown, 1993). The quid-pro-quo for satisfying this affirmative obligation standard has been an understanding that banking

institutions have a duty to provide access to financial services to disadvantaged

groups within their local communities, to engage in active marketing programs for

promoting these financial services and products, and, in the process, to absorb some

of the administrative expenses and costs of their financial products/services. By ignoring their responsibility to CRA, first-tier financial institutions have invariably increased the population of ‘‘necessitous’’ consumers whose limited resources exacerbates their reliance on ‘‘second-tier’’ financial services and their vulnerability to

predatory lenders.

Second, the tremendous price differential between the two banking sectors increases the financial incentive for first-tier banks to abandon low-income and minority communities and return directly or indirectly through financial relationships

with second-tier financial institutions (Hudson, 1996; 2003; Manning, 2000:Ch 7; Peterson, 2004). This is becoming an increasingly common practice of the largest

banks. For instance, Citibank purchased First Capital Associates in 2000 which had

been penalized by Federal regulators from the Office of the Comptroller of the Currency (OCC) for its past predatory lending policies and was again recently chastized

by the Federal Reserve for originating predatory home mortgages, HSBC’s purchase

of Household Bank in 2000 was delayed following the negotiation of a $400 million

predatory lending settlement, and Providian Bank was fined $300 million by the

OCC in 2000 for its unfair and deceptive practices in the marketing of its

‘‘subprime’’ card cards (Manning, 2001; 2003).

As the growth of traditional financial services markets stagnates, major banks are

aggressively promoting ‘‘subprime’’ consumer lending programs with triple digit finance charges (effective APR’s) such as HSBC’s partnership with H&R Block’s

Rapid Advance Loan (RAL’s) and Capital One Bank’s fee-laden credit cards such as

its ‘‘EZN’’ card which imposes $88 in fees for $112 line of credit. It is the desperation of consumers who depend on credit for household needs, especially after personal bankruptcy or an economic calamity (job loss, medical expenses, or divorce),

that leads them to ‘‘trustworthy,’’ major financial institutions whom they expect to

offer the best financial rates on consumer loans. However, instead of receiving ‘‘No

Hassle’’ credit cards with moderate interest rates, unsuspecting Capital One customers often receive subprime cards with little credit and unjustifiably high fees.6

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cent introductory APR on all purchases and a variety of fees including $39 annual membership

and $49 refundable security deposit. 7 Historically, about 60 percent of bad consumer debt or bank ‘‘charge-offs’’ is due to unsecured

credit card or ‘‘revolving’’ loans. According to the Card Industry Directory (2004: 11), card industry ‘‘charge-offs’’ declined from $35.4 in 2002 to $33.2 billion in 2003 or less than one-half of

total bank charge-offs. This constitutes about 5 percent of net outstanding credit card balances

at the end of 2003 (Cardweb.com, 2004). Note, this is not the same as the outstanding loan principal ‘‘charge-offs’’ since banks typically do not classify delinquent debt as in ‘‘default’’ until 90

to 120 days. For example, based on the following conservative estimates, one-third of this gross

‘‘charge-off’’ amount is attributed to: [a] delinquent interest rates over the last 4 months (about

$2.0 billion at 23.9 percent APR) plus [b] late fees (about $0.9 billion at $35 per month) together

with [c] overlimit and cash advance fees ($0.3 billion at $35 per month and 3 percent per transaction) plus [d] 12 months of interest prior to delinquency ($4.5 billion at 17.9 percentAPR) and

[e] legal/collection fees ($0.8 billion at $140 per account). In addition, recently ‘‘discharged’’ credit card debt is selling for 6.5 to 7.0 percent ‘‘face value’’ on the secondary market (Card Industry

Directory, 2004: 11). Overall, the data suggest that the ‘‘true’’ loss of capital to the major credit

card issuing banks is approximately 60 percent of the reported ‘‘charge-off’’ value. These estimates assume that at over one-fourth of these ‘‘charge-off’’ amounts are due to late fees,

overlimit fees, accrued finance charges, and collection related fees which are subsequently sold

on the secondary market.

In the case of First Premier Bank, the $250 line of credit at 9.9 percent features

$178 in fees.

Not surprisingly, the credit card industry continues to report record profits this year. In 2003, pretax profit (Return on Investment) of $17.1 billion climbed 32.4 percent from 2002 even though interest revenue declined slightly from $66.5 to $65.4

billion (Card Industry Directory, 2004). According to the June 2003 FDIC report on

bank profits, [First Quarter 2003] ‘‘is the largest quarterly earnings total ever reported by the [banking] industry. . . [and] the largest improvement in profitability

was registered by credit card lenders [with] their average Return-On-Assets (ROA)

rising to 3.66 percent from 3.22 percent a year earlier;’’ The Card Industry Directory

(2004) reports 2003 ROA at 4.02 percent and credit card industry analyst R.K. Hammer Investment Bankers report it at an even more impressive 4.40 percent. The extraordinary profitability of consumer credit cards is illustrated by comparing the

ROA of credit card issuers with the overall banking industry. According to the

FDIC, the increase in the ROA for the banking industry rose from 1.19 percent in

1998 to 1.40 percent in 2003 (First Quarter) or 17.6 percent. According to the U.S.

Federal Reserve Board, ROA for the credit card industry was 2.13 percent in 1997

and has risen impressively to 2.87 percent in 1998, 3.34 percent in 1999, 3.14 percent in 2000, 3.24 percent in 2001, 3.5 percent in 2002, and 3.66 percent in 2003.

This is largely due to lower cost of borrowing funds (widening ‘‘spread’’ on consumer

loans), decline in net charge-offs ($911 million or 18.5 percent lower in 2003 than

2002),7 decline in delinquent accounts ($919 million or 14.3 percent lower in 2003

than 2002), cross-marketing of low-cost insurance and other financial services, and

dramatic increase in penalty and user fees.

One of the most striking features of the deregulation of the U.S. banking industry

is the sharp increase in the cost of ‘‘revolving’’ credit (Ausubel, 1991; 1997; Manning,

2000). For instance, the ’real’ cost of borrowing on bank credit cards has more than

doubled due to widening interest rate ‘‘spreads’’ (doubled from 1983 to 1992) in addition to escalating penalty and user fees. The former is a result of the 1978 US Supreme Court (Marquette National Bank of Minneapolis v. First National Bank of

Omaha) decision that permitted banks to relocate their corporate headquarters simply to find a ‘‘home’’ where they could essentially ‘‘export’’ high interest rates across

State boundaries and effectively evade State usury regulations (GAO, 1994;

Rougeau, 1996; Manning, 2000; Evans, and Schmalensee, 2001; Lander, 2004). The

largest credit card issuers, led by Citibank, swiftly moved to States without interest

rate ceilings. The dramatic increase in fee revenues is attributed to the 1996 U.S.

Supreme Court decision, Smiley v. Citibank, which ruled that credit card fees are

part of the cost of borrowing and thus invalidated State-imposed fee limits (Macey

and Miller, 1998; Evans, and Schmalensee, 2001). Overall, penalty and cash advance fees have climbed from $1.7 billion in 1996 to $12.0 billion in 2003—12.4 percent of total credit card revenues in 2003. The average late fee has jumped from

$13 in 1996 to over $30 in today. Incredibly, combined penalty ($7.7 billion) and

cash advance ($4.3 billion) fees exceed the after-tax profits of the entire credit card

industry ($11.13 billion) in 2001.

In conclusion, banking deregulation has produced an economic boom for the U.S.

financial services industry. In the 1990’s, it recorded 8 successive years of record

annual earnings (1992–1999) and rebounded with 5 successive years of record profits since the end of the 2000 recession, (FDIC, 2004; Daly, 2002). In fact, the assets

of the 10 largest U.S. banks total $3,552 billion at the end of June 2003—an asVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00109 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
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tounding increase of $509 billion from 2002 (16.7 percent). Overall, the assets of the

10 largest U.S. banks exceed the cumulative assets of the next 150 largest banks

(American Banker, 2003). And, this trend does not appear to be abating. Today, rising interest rates (most credit cards feature variable interest rates), higher fee

schedules, and improving debt ‘‘quality’’ underlie projections for new record profits

for the banking industry (Reuters, 2005a). As will be discussed in Section Three, the

skyrocketing profits of the credit card industry underlie this trend with increasing

capricious pricing policies and deteriorating customer service.

Seduction, Indulgence, or Desperation?

The Explosion of Consumer Credit and Debt

The increasing societal dependence on consumer credit since the onset of banking

deregulation is staggering. Between November 1980 and November 2003, revolving

‘‘net’’ credit card debt has climbed twelve-fold, from about $51 billion to over $636

billion. Similarly, installment debt has jumped from $297 billion in 1980 to $1,264

billion today. Overall, U.S. household consumer debt (revolving, installment, and

student loan) has soared from $351 billion in 1980 to over $2,100 billion in 2005.

Together with home mortgages, total consumer indebtedness is about $9 trillion at

the end of 2003 (Federal Reserve, 2004). This trend is especially significant since

the U.S. post-industrial economy has been fueled by consumer related goods and

services that account for over 2/3 of America’s economic activity (Gross Domestic

Product). Indeed, U.S. households have not restrained their consumption even

though real wages have been stagnant (from mid-1970’s to late 1990’s and again

today), job benefits (health, pension) have declined, prices of major purchases have

increased dramatically (housing, autos, college), temporary or ‘‘contingent’’ work continues to increase, and over 2.5 million jobs have disappeared over the last 3 years.

Several factors help to explain the record-setting debt burden of American households—especially middle class families. First, as measured by share of disposable

income, the 1980’s and 1990’s feature the unprecedented growth of consumer debtfrom 73.2 percent of personal income in 1979 to a staggering 114.5 percent in 2001.

The overwhelming proportion (75.7 percent) of this new level of debt is due to escalating home mortgages. Between 1979 and 2001, the share of household income allocated to housing jumped from 46.1 percent in 1979 to 85.0 percent in 2003 (Mishel,

Bernstein, and Allegretto, 2005). This enormous increase in housing costs has diverted previous discretionary income that was used for other personal or family

needs. Although mortgage debt is the least expensive consumer loan, this sharp increase has squeezed the ability of households to pay for other purchases and/or finance unexpected expenditures such as health care or auto repairs.

Not surprisingly, most American households have steadfastly responded by maintaining their standard of living and financing their expenditures with lower personal savings and higher credit card and installment loans. In fact, as the U.S. personal savings rate fell to record lows in the late 1990’s—near zero in 1998—credit

cards became the financial ‘‘safety net’’ for financially distressed and economically

vulnerable households. In 1980, three-fourths (74.5 percent) of nonmortgage consumer debt was financed through installment loans such as for furniture, appliances, and electronics. During and immediately after the 1989–1991 recession, revolving credit card debt soared—from 37.9 percent of installment debt in 1989 to

54.9 percent in 1992. This was accompanied by mass marketing campaigns that promoted credit card use for ‘‘needs’’ as well as ‘‘wants’’ such as groceries, rent and

mortgage payments, and even income taxes. By 1998, outstanding credit card debt

was 70.4 percent of outstanding installment debt. This proportion has fallen due to

new debt consolidation options such as mortgage refinancings, home equity loans,

and aggressive marketing of low-interest auto loans. Indeed, home equity loans were

not even available to consumers in the late 1980’s. By 2003, home equity loans account for over one-tenth (10.9 percent) of disposable personal income.

In the decade since the end of the 1989–1991 recession, during the longest economic expansion in U.S. history, ‘‘net’’ credit card debt surged from about $251 billion in 1992 to over $685 billion at the end of 2004 while installment debt jumped

from $532 billion to $1.3 trillion. Significantly, scholars disagree over whether these

new debt levels can be restrained. Juliet Schor (1998) has received national attention for asserting that much of this debt is avoidable since the pressures of competitive consumption are social and thus can be resisted by embracing traditional values

that discourage consumption such as thrift, frugality, and material simplicity.

Hence, she asserts that ‘‘keeping up with the Jones’’ is a voluntary decision that can

be rejected by ‘‘downshifting’’ to a simpler, less expensive lifestyle. On the other

hand, Elizabeth Warren and Amelia Warren Tyagi (2003) argue that the debt arising from the ‘‘two-income trap’’ is primarily due to middle-class necessities such as

housing, automobiles, medical care, education, and insurance. Their highly influenVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00110 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
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tial work contends that households have no recourse but to assume higher debt burdens as a rational response to increasing economic pressures such as health care,

job loss/interruption, family crises, insurance, and education-related costs.

The role of structural factors in influencing the decision of middle-class households to assume higher levels of debt is suggestive. Two other measures of financial

distress as measured by the U.S. Federal Reserve Board are households with high

debt burdens (40 percent or more of household income) and late payment (60 days

or more) of bills. Between 1989 and 1998, the lower income, middle-class reported

the most economic difficulty. For instance, the high debt service burdens of modest

income households ($10,000 to $24,999) rose from 15.0 percent to 19.9 percent while

moderate income households ($25,000 to $49,999) rose from 9.1 percent to 13.8 percent; households with incomes over $50,000 increased marginally to about 5 percent

while those under $10,000 rose from 28.6 percent to 32.0 percent. Similarly, late

payments increased marginally among households with at least $50,000 annual income to about 4.4 percent (most increase since 1992) while the $25,000 to $49,999

group nearly doubled from 4.8 percent in 1989 to 9.2 percent in 1998; households

with modest income ($10,000 to $24,999) remained unchanged at 12.3 percent

(Mishel, Bernstein, and Boushey, 2003).

Since the sharp decline in consumer interest rates beginning in late 2000, lower

finance costs have provided some measurable financial relief to American households. However, the greatest beneficiaries of this low interest rate period have been

the groups with the highest family incomes. Between 1992 and 2001, middle-income

households ($40,000–$89,000) have experienced an aggregate increase in their debt

service burden (as a share of household income) whereas upper income households

have experienced a significant decline (28.6 percent)—from 11.2 percent to 8.0 percent. Overall, the debt service burden of the upper income earning households is

about one half of the lower- and middle-income households (8.0 percent versus 16.0

percent). This is consistent with the cost of credit card debt during the current era

of financial services deregulation whereby convenience users receive free credit (plus

loyalty rewards such as free gifts and cash) and revolvers pay double-digit interest

rates and soaring penalty fees. In comparison, the working poor have witnessed a

modest decline in their debt service burden, from 15.8 percent in 1992 to 15.3 percent in 2001 (Mishel, Bernstein, and Allegretto, 2005). It is important to note, moreover, that various important sources of financial liabilities are not included by the

Federal Reserve in its reports on outstanding nonmortgage consumer debt and thus

understates the degree of household economic distress—especially among lower-income families. These include car leases, payday loans, pawns, and rent-to-own contracts. As a result, the data indicate that during the recent decade of robust economic growth, the lower- and middle-income households utilized increasing levels of

consumer credit while straining to service their escalating debt levels. This is consistent with the findings of Teresa Sullivan, Elizabeth Warren, and Jay L.

Westbrook (2000) in their pathbreaking study of consumer bankruptcy in the 1990’s.

Not surprisingly, the aggressive marketing of bank and retail credit cards to traditionally neglected groups, such as college students and the working poor, encouraged the assumption of new levels of consumer debt. For example, the Survey of

Consumer Finance reports that the largest increase in consumer credit card debt

was among households with a reported annual income of less than $10,000. Between

1989 and 1998, the average credit card debt among debtor households soared 310.8

percent for the poorest households and 140.9 percent among the oldest households

(Draught and Silva, 2003.) The overall average for all debtor households during this

period is 66.3 percent. Similarly, credit card debt jumped sharply among college students and young adults.

During the late-1980’s, when banks realized that students would use summer savings, student loans (maximum limits raised in 1992), parental assistance, part-time

employment, and even other credit cards to service their consumer debts, the spike

in college credit limits contributed to the surge in ‘‘competitive consumption’’ across

college campuses that has redefined the lifestyle of the ‘‘starving’’ student and provided an opportunity for college administrators to continue increasing the cost of

higher education (Manning, 1999; 2000: Ch. 6; Manning and Smith, 2005). Today,

credit card issuing banks are aggressively competing in this new ‘‘race to the bottom’’ marketing campaign as the moral boundary that has traditionally impeded

brazen solicitations of teenagers has been broached with sophisticated marketing

campaigns aimed at high school and even junior high students (Manning, 2003(b);

Mayer, 2004; Manning and Smith, 2005; Ludden, 2005). Long gone are the days

when parents were required to cosign a credit card account. Instead, banks have

learned that students will assume higher levels of consumer debt at a much faster

rate if their consumptive behavior is shielded from their parents.

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Although credit card industry sponsored research has sshould minimize the social

problems associated with rising student consumer debt levels, typically with flawed

quantitative methodologies that are based on propriety data that ‘‘unfriendly’’ researchers are not permitted to examine (c.f. Barron and Staten, 2004; Manning and

Kirshak, 2005), the growth of consumer debt at younger ages are undeniable trends

among America’s youth. For parents and higher education professionals, this intensifying marketing of credit and gift cards to high school students provides both an

opportunity to introduce/expand personal financial literacy programs as well as pose

a daunting challenge in confronting college age social problems that are rapidly expanding into secondary schools. As a result, the marketing of credit cards to high

school seniors and college freshmen suggests that their debt capacities will be

stretched at much earlier ages which will increase the likelihood of not completing

college as well as the possibility of consumer bankruptcy in their early to mid-20’s

with its age-specific biases such as the nondischargeability of student loans. Recent

studies suggest that the fastest growing groups of consumer bankruptcy filers are

those that have previously registered the lowest rates: Senior citizens and young

adults under 25 years old (Sullivan, Warren, and Westbrook, 2000; Sullivan,

Thorne, and Warren; 2001; Manning and Smith, 2005).

A final factor concerns consumer confidence and perception of household wealth.

Over the last two decades, middle class households have become active participants

in the stock market, either indirectly through their employer pension portfolios or

directly through personal investment accounts. When consumers are optimistic

about the future, such as their job prospects or accumulation of wealth, they are

likely to spend more financial resources—even if their current economic situation is

unfavorable. As the stock market soared in the late 1990’s, especially the Nasdaq,

the psychological ‘‘wealth effect’’ encouraged many families to assume new financial

obligations that exceeded their household income.

The data is surprising. It reveals that only a small proportion of the U.S. population has benefited from the enormous wealth that was generated during the longest economic expansion in U.S. history (Wolff, 2003). For example, between 1989

and 2001, the bottom 40 percent of American households increased their stock holdings from an average of only $700 to $1,800 while the next 20 percent (the middle

income (41 percent–60 percent) households) increased modestly from $4,000 to

$12,000 or about $667 per year. In comparison, the upper middle income families

(61 percent—80 percent) experienced an increase of from $9,700 to $41,300 in stock

assets. Similarly, most wealth accumulated by working and middle income households during this period is attributed to housing appreciation. The bottom 40 percent of American families witnessed an increase in ‘‘other assets’’ from $21,000 to

$26,600 and the middle 20 percent rose from $96,800 to $113,500; the next 20 percent of American households reported an increase from $201,500 to $234,600

(Mishel, Bernstein, and Allegretto, 2005).

The most striking trend in the wealth data, for the majority of U.S. middle-class

families, is that the accumulation of consumer debt exceeds the growth of stock

investments. For the bottom 40 percent, household debt declined marginally (2.3

percent) while for the next 20 percent of U.S. households (41 percent–60 percent)

consumer debt rose from $37,000 to $50,500. If U.S. housing prices had not appreciated so sharply over the last decade, nearly 60 percent of American families-on

average—would not have been able to accumulate any net assets during this period.

Clearly, the economic winners during this period are the most affluent families;

household net worth rose $147,100 (42.9 percent) for the next top 10 percent (81

percent–90 percent) of American households and a staggering $635,400 (65.1 percent) for the next top 9 percent (Mishel, Bernstein, and Allegretto, 2005). In comparison, the financial boom of the 1990’s has become an increasingly costly debt burden for most American families today.

Assessing the Consumer Lending Revolution:

Rising Tides and Sinking Ships

The distinguishing features of the deregulation of consumer financial services include: (1) the profound shift in bank lending activities from corporate to consumer

loans, (2) fundamental transformation of the industry structure (consolidation, conglomeration), dominant institutional form (conglomerate such as Citigroup), and geographic location, (3) profound shift from State to national regulatory system (U.S.

Congress, Office of Comptroller of the Currency) with the ascension of Federal Preemption (Manning, 2003(c) Furletti, 2004; Lander, 2004), (4) dramatic increase in

the aggregate levels of household debt, (5) sharp increase in the inequality of the

cost of unsecured consumer loans such as credit cards (especially in comparison to

installment loans), (6) institutional pressure to continue rapid growth of unsecured

consumer loans by expanding into new demographic markets such as students, senVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00112 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
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8For those interested in comparative studies of consumer bankruptcy or whom wish to address the fundamental causes of the U.S. bankruptcy ‘‘crisis,’’ the first step is a major overhaul

of the American health system. Indeed, while the United States has severely tightened its consumer bankruptcy codes in 2005, the Western European countries are liberalizing their bankContinued

iors, and the working poor; and (7) the historically unprecedented growth of consumer bankruptcies.

First, the soaring growth of unsecured credit card debt takes off in the mid-1980’s

and is accompanied by the dramatic increase in consumer bankruptcies; between

1985 and 1990, consumer bankruptcy filings more than doubled from 343,099 to

704,518. In the aftermath of the 1989–1991 recession, consumer bankruptcy filings

closely follow the effect of rising unemployment through 1992 (steadily rising to

946,783) and then fall moderately with declining unemployment rates through 1995

(843,941). In 1995, however, consumer bankruptcy filings exhibit a profoundly different relationship with fluctuations in the rate of unemployment. Indeed, this underscores the second salient feature of contemporary American bankruptcy filing

trends: An inverse correlation with unemployment levels. That is, the robust economic expansion of the late 1990’s, which generated over 220,000 new jobs each

year, produced a substantial drop in U.S. unemployment AND a sharp increase in

U.S. consumer bankruptcy filings. This historically unprecedented relationship persisted through 1998 when bankruptcies registered an all-time high of 1,418,954.

Since 1999, the traditional relationship between macroeconomic conditions and consumer bankruptcy resumed, as filings fell to 1,376,077 in 2001 and then steadily

rose to1,493,461 in the aftermath of the 2000 recession. Following the sluggish economic recovery, however, consumer bankruptcies have risen to new record highs of

1,638,804 in 2003 and 1,624,272 in 2004 while unemployed has dipped (U.S. Bankruptcy Courts, 2005). The dramatic increase in consumer bankruptcy rates is underscored when the number of eligible bankruptcy filers per capita is calculated during

this period. Between 1985 and 2004, it soared from less than 200 filings per 100,000

to over 1,000 per 100,000.

As previously discussed, the shift from State-chartered community banks to federally chartered national banks was accompanied by a fundamental shift in risk tolerance and bank underwriting standards which led to a profusion of new and more

costly consumer financial services such as revolving credit cards. Indeed, when the

last major reform of the Federal bankruptcy code was enacted in 1978, consumer

installment lending reigned supreme as bank underwriting standards were relatively rigidly defined by outstanding debt (household liabilities) to income (household revenues) ratios. Indeed, U.S. bankruptcy law reflected the reality household

debt was largely collateralized installment loans that linked levels of indebtedness

to the existent level of household income. Hence, Federal law consecrated the Constitutional right that ‘‘necessitous’’ debtors—truly worthy indigents—could either

seek a reasonable repayment plan (Chapter 13) or discharge their debts (Chapter

7) by liquidating their assets with only a relatively moderate financial disadvantage

to creditors who received a pro rata distribution of debtors’ assets.

Over the last 25 years of banking deregulation, bank underwriting standards and

the cost of unsecured consumer loans have changed dramatically. Today, household

debt ‘‘capacity’’ is stretched by extended repayment schedules (from 15 to 40 year

mortgages) and, more instructively, by multiple sources of household wealth/revenues: Two or more incomes, asset formation through home ownership (housing equity), and wealth accumulation through stock market investments. Unlike the

pre-1980 regulated era, American households can leverage three or more sources of

revenue to qualify for secured and unsecured consumer loans. This explains how aggregate household debt—as measured by its share of disposable income—has

climbed an extraordinary 56.4 percent over this period: From 73.2 percent in 1979

to 114.5 percent in 2003 (Mishel, Bernstein, and Allegretto, 2005). The major problem for most families is that it is easier to secure a loan than it is to generate greater revenues (with the exception of selling one’s home). For households perilously

close to insolvency, both large (job loss, medical care, divorce) and small (rising interest rates, high energy costs, medications) economic factors can precipitate a financial collapse.

As the tremendous increase in highly profitable ‘‘revolving’’ debt has transformed

‘‘good’’ loans into ‘‘bad’’ or unperforming loans, many households whom can no

longer afford the minimum payments on their financial obligations have resorted to

the U.S. bankruptcy court. Indeed, many financially responsible families have faithfully serviced their major financial obligations until the financial duress of unexpected revenue loss/expenses and/or the escalating weight of unsecured loans force

them into an economic abyss.8 One of my many criticisms of the Bankruptcy Abuse

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ruptcy laws even though their national health care systems virtually preclude the possibility of

personal financial insolvency due to medical expenses. Furthermore, a more generous unemployment compensation system entails less European dependence on the credit card financial ‘‘safety-net.’’

Prevention and Consumer Protection Act of 2005, is that it fails to significantly encourage either responsible lending by creditors or responsible repayment by debtors.

That is, by shifting the cost of administering the process of debt collection to the

bankruptcy filer and the public sector, it indirectly discourages responsible lending

by subsidizing the cost of making loans to potentially risky clients. In this way, the

new law could have the unintended consequence of increasing future bankruptcy filing rates.

Similarly, the failure of Congress to fundamentally reform the historic Chapter

13/Chapter 7 binary of debtor repayment/discharge has the unintended consequence

of discouraging responsible debt repayment behavior by overindebted borrowers.

That is, the reality of the current period of banking deregulation is that a small but

growing third group of necessitous debtors has emerged that can not repay all of

their debts through a costly 3–5 year Chapter 13 repayment program and do not

want to evade their financial responsibilities through a Chapter 7 liquidation program. Instead, Congress has been blinded by the demands of the creditor lobby to

effect a truly radical reform of the Federal bankruptcy code that could serve the interests of both consumers (who wish to enter into a program of ‘‘responsible debt

relief’’) and creditors who currently receive little if any pro rata distribution of debtor assets through a Chapter 7 liquidation. This situation is illustrated in Table 10

which compares the traditional 3-year repayment programs (CCCS, Chapter 13)

with an alternative debt negotiation program. For financially distressed consumers

who struggle to make their minimum credit card payments, column 2 shows the futility of ever repaying their high cost credit card debts. Overindebted consumers

who wish to be responsible for their financial obligations and enter into a voluntary

CCCS repayment program are shocked when they realize that nonprofit Consumer

Credit Counseling Services are funded by creditors and their repayment programs

are even more costly and difficult to complete. Chapter 13 reorganization programs,

which are the objective of the ‘‘means testing’’ provision of the Bankruptcy Abuse

Prevention and Consumer Protection Act of 2005, are a less financially costly than

the CCCS option but with long-term consequences for future consumer borrowing.

Significantly, less than one-fourth of Chapter 13 filers successfully complete their

programs. Ironically, a third informal option which offers consumers ‘‘responsible

debt relief,’’ by enabling debtors to negotiate an informal payoff of between 20 and

45 percent, satisfies the creditors demands for obtaining a significant payment from

debtors with the economic means to pay some of their financial obligations while

satisfying the desire of debtors to satisfy their creditors to the best of their ability

while avoiding the emotional devastation of filing for personal bankruptcy. It is my

estimate that approximately 150,000 to 250,000 bankruptcy filers could qualify for

such a program each year which would lessen the demands on the overburdened

bankruptcy system and increase financial distributions to creditors by $2.5 to $4.0

billion each year. These potential informal 13 participants are those whom fail to

complete their Chapter 13 program as well as Chapter 7 filers that would prefer

to offer a negotiated debt settlement in order to avoid filing for bankruptcy.

Policy Recommendations: Consumer Rights Or Privileges

In response to queries as to appropriate regulatory responses to deceptive marketing and predatory pricing policies of the credit card industry, I propose the following recommendations:

[1] Limit lines of credit to college students without an independent source of income and whose parents/guardians will not cosign a revolving credit card contract

to $500. If the credit card account is in good standing, then line of credit could be

increased an additional $500 per year up to a maximum of $2,500.

[2] Exclusive Credit Card Marketing Agreements with public colleges and universities must be competitively bid and the final contract must be made available for

public review. The criteria for selection of vender must be specified and the agents

of the public college or university whom negotiated the contract must be identified.

[3] Respect for personal privacy must be explicitly specified in the contract with

public colleges and universities. The card issuing banks must adhere to an ‘‘opt-in’’

provision whereby personal identifying information of staff, students, and alumni

must not by obtained without securing permission. This includes student identification numbers (especially Social Security numbers), phone numbers, and email addresses.

111

[4] Banks should not be allowed to raise interest rates to punitive levels (over average rates) simply due to the consumer not using the credit card for a limited period of time. For example, Chase has a policy of raising interest rates on credit card

to over 20.0 percent APR that have not been recently used in an attempt to induce

customers to close the infrequently used account.

[5] Consumers should be granted a 60 notice for implementing ‘‘universal default’’

provision of their contract which triggers as sharp increase in the finance charges

(for example from 5.9 percent to 22.8 percent) due to reported credit payment patterns on other accounts. Also, consumers should be informed of the specific reasons

for invoking the ‘‘universal default’’ provision and what they have to do as well as

how long it will take to receive the original interest rate

[6] When a person sends in a preapproved credit card application for a specified

line of credit and interest rate and is approved for a credit card with much less favorable terms (for example from $10,000 to $5,000 line of credit and from 5.9 percent introductory rate APR to 18.9 percent APR), a letter should be sent informing

the consumer of the changes in the expected credit card with the option to cancel

the account before receiving the card. This is a practice commonly known as ‘‘bait

and switch.’’

[7] Doubling billing cycles, popularized by MBNA, should be eliminated and replaced with a single date that is designated for balance payoffs as well as payment

due dates.

[8] Some credit card companies such as Citibank specify a particular hour of the

day that payment must be received in order not to incur a late fee. Due to vagaries

of postal delivery, the posted time for incurring a late fee should be 12 pm.

[9] Fees for subprime credit cards should not exceed 15 percent of the available

line of credit up to a maximum of $100.

[10] The cost of credit for subprime credit cards should include mandated fees in

calculating the APR in consumer disclosure information.

[11] Consumers should have the right to terminate a subprime credit card without

incurring activation fees within 30 days of opening the credit card account.

—————

PREPARED STATEMENT OF CARTER FRANKE

CHIEF MARKETING OFFICER, CHASE BANK U.S.A., N.A.

MAY 17, 2005

Mr. Chairman, Senator Sarbanes, Members of the Committee. Good morning. My

name is Carter Franke and I am the Chief Marketing Officer at the Wilmington,

Delaware-based Chase Card Services Division of Chase Bank U.S.A., N.A.

Today, I sit here as a representative of the more than 16,000 Chase employees

around the country who support our credit card services. Chase is a significant

issuer of MasterCard and Visa credit cards with more than 94 million cards issued.

Our customers are primarily those that fall in the ‘‘super-prime’’ and ‘‘prime’’ categories—the most responsible and most knowledgeable credit users in the country.

Our cardmembers used Chase and Bank One issued cards to spend $282.7 billion

on goods and services last year.

In just a few short decades, changing consumer habits and expanding technologies

have established credit cards as an essential part of American economic life. Consumers rely on credit cards for virtually every type of purchase imaginable and have

rightfully come to expect that their credit card will be accepted just about everywhere. More than 25 million merchants worldwide—five million of them in the

United States alone—are part of the credit card payment system. Everything from

small businesses to the world’s largest companies rely on this safe, secure, and efficient payment system, which is made possible by credit cards. And the economy

benefits: In 2004 credit cards financed an estimated $1.68 trillion in transactions.

Today’s Internet commerce would not be possible without credit cards. Cards and

the technologies that they use are directly responsible for the growth of the mail

order business, travel bookings, online auctions, and hundreds of other transaction

types. In addition, in the long-term, credit cards help consumers build solid credit

histories that ultimately enable them to enhance their family’s financial security.

All of these benefits are achieved with the assurance that, unlike cash, all credit

card purchases are completed with zero-liability protection for the consumer should

the card be lost or stolen. This helps makes credit cards safer and more convenient

than cash. Consumers also benefit from built-in dispute resolution should they not

be satisfied with any purchase.

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We operate in a highly competitive industry—one where many customers can easily vote with their feet. Our customers, in particular, have many choices in the marketplace today and that competition is good for consumers. This competition also

drives us to offer many products and features, such as cards with travel, entertainment or cash rewards—all of which are carefully designed to meet the specific requirements of our customers—to ensure they choose, and stay with, Chase.

A credit card loan is not like a home or car loan. A credit card loan is unsecured,

meaning that the consumer is not required to post collateral to back it up. In other

words, we extend credit to people based on their profile of financial responsibility

rather than on their actual assets. In short, the only security we have in our loan

is the customer’s promise and his or her ongoing ability to repay the loan.

As I mentioned earlier, Chase’s credit card business is focused on the ‘‘superprime’’ and ‘‘prime’’ markets. In other words, Chase credit cards are issued, for the

most part, to consumers with exceptionally good credit histories. As a result, our

business model is built upon consumers making their payments regularly and on

time. All of our decisions on credit limits, fees, and changes in interest rates, are

based on sound economic analysis, our business experience and the interests of our

customers.

However, unsecured consumer credit is a shared responsibility between lender

and borrower. We enable consumers to purchase, on an immediate basis, the goods

and services provided by millions of merchants around the country. We track each

cardmember’s transactions, provide accurate and clear monthly statements, and

process payments promptly. Of course, our goal is to provide problem free access to

the credit lines that we provide and to achieve the highest level of customer satisfaction possible. While problems do arise, we provide ongoing access to Chase representatives so that questions will be answered immediately and problems can be

resolved expeditiously 24-hours per day. In return, we ask our cardmembers to meet

their payment obligations and report any problems they may be experiencing.

We believe that all consumers, especially those who have opened an account for

the first time, need to understand the nature of their responsibilities and, more generally, how to use credit responsibly. In 2003–2004 alone, Chase donated more than

$5.8 million in financial literacy grants to nonprofit community-based organizations

to help fund credit education programs. In the same time period, Chase invested approximately $107 million working with partners across the Nation to fund voluntarily responsible credit counseling services, create online financial education and

credit and debt management tools. More than anything, we want to maintain a

first-in-wallet position with our customers and develop a long-term relationship with

them.

In short, while we provide consumers with a broad range of choices in products

and features, we recognize that without shared responsibility and an ongoing commitment to financial literacy we cannot succeed.

We at Chase are extremely proud of the fair and responsible way our company

operates and in the relationship we have established with our tens of millions of

cardmembers. Let me cite a few examples:

At Chase we value our customers, and that understanding of value drives all of

our pricing decisions. A missed payment on a nonChase card does not drive automatic repricing of any Chase account. We also realize that in the vast majority of

cases, a late payment on a Chase card is not a sign of increased risk, but of timing,

vacations or other realities of busy lives. For that reason, a late payment will not

result in a price increase for over 90 percent of Chase cardmembers.

Chase cardmembers, among the most responsible users of credit in the industry,

are also very responsible when it comes to paying their accounts. Well over a third

of our customers pay their balance in full, enjoying the convenience of an interest

free loan every month. And, more than 90 percent of our payments are for more

than the minimum payment.

A small segment of our customers do have a change in creditworthiness, which

we deal with fairly and responsibly. If a customer’s overall credit profile deteriorates

materially, and thus exposes us to an increased risk of nonpayment, economic considerations may cause us to raise the interest rate. In these cases, and in accordance

with applicable law, we provide the customer with an ‘‘opt out’’ option. This enables

the customer to reject our change in terms, close their account, and pay off the balance under their existing terms. Once closed, the interest rate on a Chase account

that is paid according to its terms will not be changed.

Importantly, in today’s digitized world, Chase is firmly committed to protecting

our customers’ privacy and to ensuring that their information is secure. On privacy,

Chase is of course in compliance with the requirements of Gramm-Leach-Bliley. And

we constantly work to upgrade our data security to protect our customers from inadvertent or intentional breach. More than 1,100 people are focused solely on the deVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00116 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
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1See an Office of the Comptroller of the Currency (OCC) regulatory interpretative letter endorsing debt cancellation and debt suspension products as part of the business of banking (and

exempt from stricter State insurance regulation) at http://www.occ.treas.gov/interp/jan01/

int903.doc.

tection and prevention of fraud at Chase. We are proud to have some of the best

fraud protection practices and lowest fraud rates in the industry. And, if there is

a fraudulent charge, cardmembers are not held responsible because of our zero-liability fraud policy for all customers.

Mr. Chairman, we understand that our business may seem complicated and even,

at times, unfriendly. I hope that the information I have provided today has offered

you some substantive insights into our business and an understanding of our true

commitment to fairness for all of our customers. At times we are faced with difficult

decisions relative to individual cardmembers and their accounts and, when reviewed

on an isolated basis, may seem inappropriate. Our decisions are designed to permit

the vast majority of cardmembers continue to receive the best possible rates, service,

and access to the benefits credit cards provide. We look forward to working with you

and the Members of the Committee to answer your questions and address your concerns.

—————

PREPARED STATEMENT OF EDMUND MIERZWINSKI

CONSUMER PROGRAM DIRECTOR, U.S. PUBLIC INTEREST RESEARCH GROUP

MAY 17, 2005

Chairman Shelby, Senator Sarbanes, Members of the Committee, thank you for

the opportunity to offer U.S. PIRG’s views on abusive credit card industry practices.

We commend you for having this timely hearing. I am Edmund Mierzwinski, Consumer Program Director of U.S. PIRG. As you know, U.S. PIRG serves as the national lobbying office for State Public Interest Research Groups. PIRG’s are nonprofit, nonpartisan public interest advocacy organizations with offices around the

country.

Introduction

The extremely concentrated credit card industry, in efforts to increase profitability

above already substantial levels, continues to engage in a growing and wide number

of unfair, anticonsumer practices. These practices are enabled by a pliant Federal

bank regulatory apparatus, which has generally ignored the growing problem while

relying on an unfortunate series of court decisions to expand Federal preemption

and narrow the authority of State enforcers to better protect their own citizens.

The most common unfair credit card company practices include the following:

• Unfair and deceptive telephone and direct mail solicitation to existing credit card

customers—ranging from misleading teaser rates to add-ons such as debt cancellation and debt suspension products, sometimes called ‘‘freeze protection,’’

which are merely the old predatory credit life, health, disability insurance products wrapped in a new weak regulatory structure to avoid pesky State insurance

regulators; 1

• increased use of unfair penalty interest rates ranging as high as 30 percent APR

or more, including, under the widespread practice of ‘‘universal default,’’ the practice of imposing such rates on consumers who allegedly miss even one payment

to any other creditor, despite a perfect payment history to that credit card company;

• imposing those punitive penalty interest rates retroactively, that is, on prior or

existing balances as well as on future purchases, further exacerbating the worsening levels of high-cost credit card debt;

• higher late payment fees, now generally $30–$40, which are often levied in dubious circumstances, even when consumers mail payments 10–14 days in advance;

• aggressive and deceptive marketing to new customer segments, such as college

students with neither a credit history nor an ability to repay, as well as marketing to persons with previous poor credit history;

• partnerships with telemarketers making deceptive pitches for over-priced freeze

protection and credit life insurance, roadside assistance, book or travel clubs, and

other unnecessary card add-ons;

• the increased use of unfair, predispute mandatory arbitration as a term in credit

card contracts to prevent consumers from exercising their full rights in court; and

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2The consumer organizations testifying today, U.S. PIRG, the Consumer Federation of America and Consumer Action, are all founding members of a broad new campaign to educate the

public and the Congress about the need to eliminate one-sided binding mandatory arbitration

(BMA) clauses imposed as contracts of adhesion in consumer contracts, sometimes merely with

a notice of change of terms inserted in a consumer’s bill. See http://www.stopbma.org. 3 It is the bank position that the Truth In Lending Act allows them to change fixed rates with

as little as fifteen days notice and that a fixed rate is merely a rate that is not variable. A variable rate is defined as one tied to an index, such as The Wall Street Journal prime rate as disclosed on a certain date.

the concomitant growing use of these arbitration clauses in unfair debt collection

schemes;

• the failure of the industry to pass along the benefits of what, until recently, were

several years of unprecedented Federal Reserve Board interest rate cuts intended

to provide economic stimulus, through the use of unfair floors in variable credit

card contracts. The Fed kept dropping rates, but the card companies did not, once

these floors were reached.

There are two engines that drive this train of unfair practices. First, the companies include a contract clause that states: Any term can be changed at any time for

any reason, including no reason. Second, the aforementioned use of one-sided

predispute binding mandatory arbitration clauses 2 prevents consumers from challenging these practices in court.

The practices described above can be illustrated with the following examples:

• Banks entice consumers to open or continue credit card accounts with promises

of a fixed interest rate on unpaid balances on purchases. Thereafter, they unilaterally increase the so-called fixed rate, and may change it to a variable rate.3

• Banks bait credit card consumers with teaser offers promising a low introductory

interest rate on additional credit card debt and the consumer’s preexisting (regular) interest rate thereafter. But after individual consumers accept the offer and

increase their debt, banks unilaterally and without notice raise the consumer’s

regular interest rates because now, the individual consumer’s debt is allegedly

‘‘too high.’’ Banks also reserve the right to take regular credit card payments and

apply them to the lowest interest rate debt instead of the highest, in a circumstance where a consumer has transferred zero percent debt to a card with an

existing balance.

• Banks ignore consumers’ disputes to charges, which, according to banks themselves, need not be paid pending resolution. Instead, banks unilaterally use such

nonpayment to charge late fees and raise interest rates.

• Banks reduce credit limits of consumers on their credit card accounts unilaterally

and without advance notice, and do so in such manner and to such an extent as

to intimidate consumers into abandoning their legitimate objection to charges.

• Banks fail to adequately inform consumers in advance of a proposed increase in

interest rate based on the individual consumer’s purportedly high debt or other

information in such consumer’s credit report. Thereby, consumers have no opportunity to avoid the increased interest rate, and are saddled with significant additional interest payments without advance notice.

• Credit card companies use low, short-term ‘‘teaser rate’’ introductory APR’s to

mask higher regular APR’s. The introductory APR is one of the primary tools used

to market a card, and it usually appears in large print on the offer and envelope.

In a recent PIRG study discussed below, of 100 card offers surveyed, 57 advertised

a low average introductory APR of 4.13 percent. Within an average of 6.8 months,

the regular APR shot up 264 percent to an average regular APR of 15.04 percent.

The post-introductory APR, as well as the length of the introductory period, were

not prominently disclosed.

• Important information is disclosed only in the fine print of the offer. For example,

the fine print of most offers states that if an applicant does not qualify for the

offered card, s/he will receive a lower-grade card, which usually has a higher APR

and punitive fees. The fine print is easy to overlook, and as a result, a consumer

may receive a card that s/he did not want.

• Free does not mean free. The ‘‘free’’ offers that are advertised with many cards

are not usually as impressive as they appear. Most are ‘‘free-to-pay’’ schemes,

where the failure to cancel within 30 days imposes hefty annual fees for tawdry

products. Others include significant restrictions or hidden costs.

• Companies are failing to disclose the actual APR’s of cards. Increasingly, credit

card companies are quoting a range of APR’s in offers rather than a specific APR,

a practice called ‘‘tiered’’ or ‘‘risk-based’’ pricing. These ranges are frequently so

wide as to be utterly useless to consumers. Even recent directives of the Office

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4Obtain these guidances and copies of recent regulatory actions at the OCC credit card practices website available at http://www.occ.treas.gov/Consumer/creditcard.htm. 5 9 May 2005, See news release ‘‘ATTORNEY GENERAL DARRELL McGRAW SUES TO ENFORCE SUBPOENAS INVESTIGATING CAPITAL ONE BANK AND CAPITAL ONE SERVICES,’’ available at http://www.wvs.state.wv.us/wvag.

of the Comptroller of the Currency (OCC) have begun to recognizes some of these

practices as unfair. • Fine print fees for cash advances, balance transfers, and quasi-cash transactions

such as the purchase of lottery tickets significantly raise the cost of these transactions. But the terms governing these transactions are buried in the fine print,

where consumers can easily miss them. Minimum fees, also stated only in the fine

print, allow credit card companies to guarantee themselves high fee income regardless of the transaction amount.

Another way to look at these problems is to look at an example: In a recent court

complaint against a credit card company, a consumer attorney pleaded the following

facts:

On June 17, 2002, the balance owed on the consumer’s account was $702.00.

On June 18, 2002, the bank added a $59 club membership fee that caused the

consumer’s account to exceed his credit limit by $11 (the balance owed was $761

and the credit limit was $750). From June 2002 until August 2004, even though

the consumer made timely monthly payments each month, the bank added $435

in over-limit fees to this account and $495 in late charges on this account.

This consumer responded to some bank-initiated telemarketing pitch or bill insert

to join some a membership club, then the bank allowed him to go over his limit to

complete the transaction for a purchase it itself had initiated, then that triggered

an ongoing cascade of repeated late and over-the-limit fees that have caused the

consumer to end up in a cycle of rising debt even though he no longer uses the card.

This example, multiplied by millions of consumers, gives you an idea of how credit

card debts have piled up in this country.

Regulatory Actions and Court Actions Against Credit Card Companies

These views are not merely our own nor merely those of consumer attorneys. The

very worst of the industry’s excesses have resulted in increased regulatory, legislative, and legal scrutiny. Even the Treasury’s Office of the Comptroller of the Currency (OCC), no consumer protector, has begun to escalate its efforts against unfair

credit card company practices. Although it has not yet taken any public actions

against any well-known major institutions, it has gone after a number of unknown

fringe institutions and one albeit large, but relatively upstart mono-line credit card

bank, Providian. More recently, the OCC has issued a series of regulatory guidances

admonishing banks against certain common unfair practices and even consolidated

these actions onto one website to make their efforts appear more comprehensive.4

Unfortunately, the OCC has not imposed public penalties or sanctions on any of the

current ‘‘Top Ten’’ banks, even though most advocates believe the practices are endemic to the industry.

Meanwhile, State Attorneys General Enforce the Law

Of course, State Attorneys General, always the top consumer cops on the beat,

have long been aggressively pursuing crime and other anticonsumer practices in the

credit card suites. Some recent actions by state Attorneys General and Federal regulators include the following.

• In January 2005, Minnesota Attorney General Mike Hatch filed an unfair practices suit against Capital One Bank and Capital One F.S.B. for using false, deceptive, and misleading television advertisements, direct-mail solicitations, and

customer service telephone scripts to market credit cards with allegedly ‘‘low’’ and

‘‘fixed’’ interest rates that, unlike its competitors’ rates, supposedly will never increase. Capital One, of course, is one of the Nation’s largest credit card companies,

with an aggressive advertising campaign urging consumers to put a Capital One

card in their wallet and avoid the other companies, generally portrayed by Capital

One as Vikings, Visigoths, or other sorts of plundering barbarians. Other States,

including West Virginia, have since announced parallel investigations of Capital

One. West Virginia, this month, had to file suit to enforce its subpoenas against

the bank.5

• In the last several years, numerous State Attorneys General, including Minnesota, Texas, West Virginia, New York, and others have filed actions against the

large sub-prime credit card company Cross Country Bank for its deceptive and

predatory practices when marketing to consumers with impaired credit histories.

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6See ‘‘State Sues Cross Country Bank over Harassing Debt Collection Practices,’’ 3 April 2003,

available at the Minnesota Attorney General’s website http://www.ag.state.mn.us/consumer/

PR/prlCrossCl40303.htm. In November, 2004 the State obtained a temporary injunction barring the bank’s abusive practices. See http://www.ag.state.mn.us/consumer/PDF/

CrossCountryBank.pdf. 7 24 June 2004, Press release of Pennsylvania Attorney General’s Office ‘‘AG Pappert takes

action against bank and its collection company in alleged predatory lending/credit card scheme,’’

available at http://www.attorneygeneral.gov/press/pr.cfm. 8 31 December 2002, FIRST USA TO HALT VENDORS’ DECEPTIVE SOLICITATIONS, Press

Release of New York Attorney General Eliot Spitzer, available at http://www.oag.state.ny.us/

press/2002/dec/dec31al02.html. 9 27 Feb 2002, AGREEMENT CURBS TELEMARKETING APPEALS TO BANK CUSTOMERS, Press Release of New York Attorney General Eliot Spitzer, available at http://

www.oag.state.ny.us/press/2002/feb/feb27bl02.html. 10Fact Sheet Regarding Settlement Between the OCC and Direct Merchants Bank, 3 May

2001. 11See ‘‘Providian to Refund $300 Million to Consumers Over Alleged Abusive Credit Card

Practices,’’ 28 June 2000 available at California Attorney General page http://caag.state.ca.us/

newsalerts/2000/00–098.htm. 12 June 28, 2000, Statement of Comptroller of the Currency John D. Hawke, Jr.

The Attorney General of Minnesota’s complaint alleges the bank uses racial, derogatory, and abusive epithets in the bank’s threatening phone contacts with customers.6 The Attorney General of Pennsylvania had this to say in 2004: ‘‘Instead

of helping consumers as promised, the defendants actually pushed cardholders

further into debt when they used the credit cards. Those who failed to make the

payments, were subjected to a barrage of abusive, harassing collection practices

that included the use of profanity and multiple calls to consumers’ homes or offices.’’ 7

• In December, 2002, 28 States and Puerto Rico settled a case with First USA (a

unit of Bank One, which is now part of JP Morgan Chase after its acquisition of

Bank One) ‘‘that will provide new protections against misleading telemarketing

campaigns for more than 53 million credit card holders. First USA Bank N.A.—

the largest issuer of Visa credit cards—and also known as Bank One Delaware

NA, has agreed to implement broad reforms in its relationships with third-party

vendors to ensure that nondeceptive marketing campaigns are used in soliciting

the bank’s credit card holders. Specifically, under the agreement, First USA must

prohibit vendors from engaging in deceptive solicitations.’’ 8

• In February 2002, 27 States negotiated an agreement for Citibank, then the Nation’s largest credit card issuer, to stop deceptive practices in the marketing of

similar tawdry add-on products. ‘‘The States raised concerns that the marketing

practices of Citibank’s business partners were deceptive and often resulted in consumers being charged for products and services—such as discount buying clubs,

roadside assistance, credit card loss protection, and dental plans—that they had

no idea they agreed to purchase.’’ 9

• In 2001, the OCC imposed multimillion dollar penalties and a restitution order

against Direct Merchants’ Bank for its practice of ‘‘downselling’’ consumers by

prominently marketing to consumers one package of credit card terms, but then

approving those consumers only for accounts with less favorable terms, and touting the approved account in a fashion designed to mislead the customer about the

fact he or she had been ‘downsold’ 10.’’ • In 2000, the tiny San Francisco District Attorney and the California Attorney

General 11 began an investigation later joined by what many claim was an embarrassed and late to the party OCC, which resulted in imposition of a minimum of

$300 million in civil penalties and a restitution order against Providian for deceptive marketing of mandatory credit life insurance, known as freeze protection, and

other violations. The OCC, not generally known for hyperbole in defense of the

consumer, said the following: ‘‘We found that Providian engaged in a variety of

unfair and deceptive practices that enriched the bank while harming literally

hundreds of thousands of its customers.’’ 12

• Since 1999, the Minnesota Attorney General and other States have settled multimillion dollar claims against U.S. Bank for its practice of allowing telemarketers

access to its credit card customer records for the purpose of deceptively marketing

add-on products including credit life insurance, roadside assistance packages, and

other gimmickry billed to consumers who did not even give their credit card numbers and had no knowledge that they had allegedly placed orders or would be

billed for any product.

• Several private class action lawsuits have been settled recently against other

large banks for abusive practices, such as charging consumers late fees, even

when they pay on time.

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13See Rossman v. Fleet Bank (RI) Nat’l Ass’n, 280 F.3d 384, 390–91 (3d Cir. 2002) available

at http://laws.lp.findlaw.com/3rd/011094.html.

14See Rossman v. Fleet Bank (RI) Nat’l Ass’n, 280 F.3d 384, 390–91 (3d Cir. 2002) available

at http://laws.lp.findlaw.com/3rd/011094.html.

15See OCC news release, ‘‘Acting Comptroller Williams Tells Bankers Disclosures not Working for Consumers,’’ 12 May 2005 available http://www.occ.treas.gov/scripts/

newsrelease.aspx?Doc=Z1J2IZ9.xml.

• The Federal courts have also acted in favor of consumers in several important

cases. In 2003, the 3rd Circuit found that Fleet Bank had violated the Truth In

Lending Act (TILA) when it promised Paula Rossman a no-annual-fee credit card

and changed the terms immediately, less than a year after she had obtained the

card, even though Rossman had not violated any of the contract’s terms by paying

late, going over her limit, or anything else. The court described the essential problem this way:

A statement, therefore, that a card has ‘‘no annual fee’’ made by a creditor that

intends to impose such a fee shortly thereafter, is misleading. It is an accurate

statement only in the narrowest of senses—and not in a sense appropriate to

consumer protection disclosure statute such as the TILA. Fleet’s proposed approach would permit the use of required disclosures—intended to protect consumers from hidden costs—to intentionally deceive customers as to the costs of

credit.13

Of course, Rossman highlights one of the critical hypocrisies and significant flaws

in the Federal unregulation of the credit card marketplace, where credit card contracts are take-it-or-leave contracts of adhesion imposed on consumers that supposedly allow the bank to make any changes at any time for any reason. As the

court quotes Fleet’s contract in Rossman:

We have the right to change any of the terms of this Agreement at any time.

You will be given notice of a change as required by applicable law. Any change

in terms governs your Account as of the effective date, and will, as permitted

by law and at our option, apply both to transactions made on or after such date

and to any outstanding Account balance.14

• Numerous colleges and universities, as we illustrate below and as Doctor Manning will indicate in his testimony, have banned or strictly regulated the marketing of credit cards on campuses, to address widespread complaints about

tawdry practices.

Policy Recommendations of U.S. PIRG to Address Abusive

Credit Card Practices

Prohibit Deceptive and Unilaterally Unfair Practices, Including Retroactive Interest Rate Increases: Enact legislation such as the omnibus proposal by Senator Dodd,

S. 499, a Member of this Committee, to prohibit a number of unfair practices, starting with the notorious retroactive interest increase. When banks impose universal

default, or otherwise increase interest rates, they do not merely increase rates on

interest accruing on future purchases, but also on prior balances. This has the effect

of saddling the consumer with massive debt.

Require Real Disclosure of Minimum Payment Warnings: Senator Akaka of this

Committee has proposed legislation, S. 393, (a similar provision is also included in

S. 499) that would require every consumer’s credit card billing statement to include

a new disclosure. The Akaka Minimum Payment Warning is one of the few disclosures that rises above the clutter and will make a difference, and that is the reason

banks vehemently oppose this proposal. The minimum payment warning would tell

consumers how many actual years it would take to pay off their specific credit card,

at their current balance and interest rate, if they only made the minimum requested

payment and never used the card again. Each consumer would receive a different,

dynamic disclosure, which would change monthly. We were disappointed when the

Senate rejected the similar Akaka amendment during floor consideration of the draconian bankruptcy bill, S. 256, successfully and aggressively sought by the credit

card industry and enacted into law at lightning speed this Congress, despite no evidence of bankruptcy abuse. Instead, that new bankruptcy act includes yet another

virtually worthless generic disclosure. That disclosure was approved and signed off

on by the industry simply because it will not work to reduce the credit card debts

that cripple many American consumers. In a speech to bankers last week, Acting

OCC Comptroller Julie Williams said ‘‘in order for the free market to work, consumers need to have the means to make informed decisions.’’ 15 We urge the OCC

to back the Akaka bill. It will work.

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16See OCC Press release NR–2001–79. 17See, eg, bills previously filed by Representatives including Darlene Hooley, (HR 3477, 1999)

and Andy Jacobs, (HR 1537, 1995) and John McHugh, (HR 1963, also in 1995).

Ban on Late Fee Penalties When Payments Postmarked Before Due Date and Require a Minimum 30 Days To Pay Bill: In response to uncertainty over mail delivery

following events related to the September 11 terrorist attacks, the OCC issued a 12

September 2001 ‘‘encouragement’’ that banks voluntarily work with debtors who

may pay bills late, especially if due to mail disruption.16 A better solution in 2005,

after 4 years of ever escalating complaints about ever-escalating late fees, would be

to establish a hard date rule for all consumers. If the bill is postmarked by the due

date, it is considered on time and no penalties can be imposed. Such a bill would

address numerous problems faced by consumers.

First, with the endorsement of the OCC, bills are no longer on time unless received by a certain time during the due date. Second, attempts to make overnight

deliveries when you do not remember to send your bill at least 2 weeks in advance

result in late payments anyway, because overnight deliveries are not accepted at the

same address. Finally, some banks have begun using confusing 3 week payment cycles which have made it harder to make payments on time.

In the past, numerous House Members have proposed hard due date legislation,

where a bill postmarked by the due date would be considered on time. Others have

proposed legislation requiring a minimum 30 days for bills to be considered on time

for the purpose of avoiding late payment penalties.17

Ban the Universal Default ‘‘Bait-and-Switch:’’ We have received numerous complaints that more and more banks are reviewing credit reports of existing customers

and raising rates due to a decline in credit score or an alleged one or two late payments to any other creditor, even if the consumer’s payments to the credit card

issuer are timely and the account is in good standing. While we do not disagree that

banks should be able generally to risk-price their products, we do not believe that

universal default is being used as a proportional response but merely as a tool to

increase revenue. We believe the regulators should be required to come forward with

an analysis of the growing problem. After all, if the banks can offer dozens of different products to new customers based on their risk, why do not they have dozens

of proportional responses for consumers when their risk increases?

As Representative Sanders has proposed, in the Credit Card Bait and Switch Act

of 2003, HR 2724, the use of universal default should at least be strictly regulated,

and as Senator Dodd has proposed in S. 499 this year, retroactive rate increases

should be banned.

Give College Students And Other Young People Only The Credit They Deserve:

Credit card companies issue credit to students without looking at credit reports

(they do not have any) and without regard to ability to repay. Other Americans

must have a good credit report or a cosigner to obtain credit. College students merely apply. College students and other young people should be protected from credit

card debt hassles by having to meet similar standards, as S. 499 (Dodd) would provide. The proposed bill offers several ways for young consumers to qualify to obtain

credit cards.

Further Restrict Pre-Acquired Account Telemarketing: Many of the deceptive practices described in the state actions above involve banks sharing customer information with tawdry third-party telemarketers selling even tawdrier products characterized by overpriced travel clubs and mediocre health insurance plans. In addition,

many institutions have seized on the identity theft epidemic fueled by their own

sloppy credit granting practices to pitch overpriced credit monitoring add-ons. In our

view, neither the provisions of Gramm-Leach-Bliley dealing with encrypted credit

card numbers nor changes to The Telemarketing Sales Rule have adequately

stopped banks from treating their customers unfairly due to the lure of massive

commissions from their telemarketing partners.

Cap Interest Rates: Reinstate Federal usury ceiling for credit cards to prohibit the

use of unconscionable penalty interest rates. Prime plus 10 per cent seems like a

reasonable profit.

Ban Mandatory Pre-Dispute Arbitration: The Congress has enacted legislation

protecting car dealers from unfair arbitration clauses in their contracts with car

manufacturers. The Senate has passed legislation similarly protecting farmers from

arbitration in their contracts with powerful agribusiness concerns. It is time to

enact similar legislation to protect consumers. Bills to ban predispute mandatory arbitration in consumer credit card contracts have been proposed in 1999 by Rep.

Gutierrez (HR 2258) and in 2000 by Rep. Schakowsky (HR 4332).

Ban The Use of Arbitration in Debt Collection Schemes: Arbitration agreements

are not only being used in attempts to prevent consumers victimized by deceptive

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18See 17 February 2005, ‘‘New Trap Door for Consumers: Card Issuers Use Rubber-Stamp Arbitration to Rush Debts Into Default Judgments,’’ National Consumer Law Center, available at

http://www.consumerlaw.org/initiatives/model/content/ArbitrationNAF.pdf. 19See Comments of National Consumer Law Center, U.S. PIRG, Consumer Federation of

America et al ‘‘Regarding Advance Notice of Proposed Rulemaking: Review of the Open-End (Revolving) Credit Rules of Regulation Z,’’ Federal Reserve System, 12 CFR Part 226, Docket No.

R–1217 available at http://www.consumerlaw.org/initiatives/testlandlcomm/content/

openlendlfinal.pdf. 20The Fair Credit and Charge Card Act of 1988’s disclosures were championed by Representative Chuck Schumer, now a Senator and a Member of this Committee.

advertising and interest rate practices to have their day in court. Increasingly, according to a major new report by the National Consumer Law Center, major credit

card companies, including First USA and MBNA, are partnering with arbitration

firms to establish debt collection mills that force consumers into paying debts, including debts they may not even owe:

Now, at least two giant credit-card issuers and one of the Nation’s largest firms

arbitrating their consumer disputes have combined these practices in a disturbing new way: They are using binding, mandatory arbitration primarily as

an offensive weapon, by fast-tracking disputes over credit-card debt into rapid

arbitration. A number of consumers charge that the banks often do this with

little notice, after long periods of dormancy for the alleged debt or over consumers’ specific objections—then force those who do not respond swiftly or adequately into default. The arbitrator often forces the consumer to also pay for

the hefty arbitration costs and the card issuer’s attorney, making the total tab

for consumers several times the original amount owed and many times what it

would have been in more traditional debt settlements. So it is a neat pathway

to turbo-charged profits for both the card issuer and the arbitrator.18

We were disappointed that the Congress recently enacted a one-sided bankruptcy

bill, absent proof of abuse. The bill failed to rein in these practices. We respectfully

urge you to consider our proposals to rein in the unfair credit card company practices described above that have exacerbated the growth of credit card debt, which

is the real problem we face, not abuse of the bankruptcy laws. In addition to the

bankruptcy law’s general manifest harshness and its intended elimination of a critical safety net during uncertain economic times, the bill’s nominal credit card disclosures are deficient and unacceptable, as we pointed out above.

In addition to banning certain practices as above, U.S. PIRG, the Consumer Federation of America, and others recently joined the National Consumer Law Center

in detailed and comprehensive comments to the Federal Reserve Board on ways to

improve the Truth In Lending Act’s disclosures and other regulations. The comments provide a window on the way that the industry exploits loopholes and inconsistencies in the Act to hurt and exploit consumers.19 The TILA was supposed to

be a remedial act, a law written to prevent unfair practices, and has often been correctly interpreted that way in the courts, yet the regulators have insisted on allowing the industry to carve out nooks and crannies that allow banks to avoid the spirit

of the law. The proposals below augment and update the disclosures in the important 1988 disclosure legislation that established what is known as the ‘‘Schumer’’

box, which requires credit card company solicitations to clearly and prominently disclose all fee and interest related ‘‘trigger terms.’’ 20

Additional key statutory changes recommended in those comments include the following:

• A cap on all other charges, whether considered a finance charge or not, to an

amount the card issuer can show is reasonably related to cost. • No unilateral change-in-terms allowed. • No retroactive interest rate increases allowed. • No penalties allowed for behavior not directly linked to the specific card account

at issue. • No over limit fees allowed if issuer permits credit limit to be exceeded.

• No improvident extensions of credit—require real underwriting of the consumer’s

ability to pay.

• Meaningful penalties for violating any substantive or disclosure that provide real

incentives to obey the rules.

• A private right of action to enforce Section 5 of the Federal Trade Commission

Act, which prohibits unfair or deceptive practices by businesses, including banks.

Abusive Credit Card Industry Practices on Campus

Having saturated the working adult population with credit card offers, credit card

companies are now banking on a new market: College students. Under regular credVerDate 11-MAY-2000 16:24 Sep 07, 2006 Jkt 025856 PO 00000 Frm 00123 Fmt 6621 Sfmt 6621 29643.TXT SBANK4 PsN: SBANK4
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21See ‘‘The Burden of Borrowing,’’ the State PIRGs’ Higher Education Project, March 2002,

available at http://www.pirg.org/highered/highered.asp?id2=7972. 22See ‘‘Graduating Into Debt: Credit Card Marketing on Maryland College Campuses,’’ February 19, 2004, Maryland Consumer Rights Coalition and Maryland Public Interest Research

Group, available at http://marypirg.org/MD.asp?id2=12264&id3=MD&. 23 ‘‘The Roadmap To Avoid Credit Hazards’’ is downloadable at http://

www.truthaboutcredit.org/roadmap.pdf. Numerous other materials and reports are available at

http://www.truthaboutcredit.org. 24See the State PIRG credit card education website http://www.truthaboutcredit.org.

it criteria, many students would not be able to get a card because they have no credit history and little or no income. But the market for young people is valuable, as

industry research shows that young consumers remain loyal to their first cards as

they grow older. Nellie Mae, the student loan agency, found that 78 percent of undergraduate students had credit cards in 2000. Credit card companies have moved

on campus to lure college students into obtaining cards. Their aggressive marketing,

coupled with students’ lack of financial experience or education, leads many students into serious debt. According to a recent PIRG study, the Burden of Borrowing,

credit card debt exacerbates skyrocketing student loan debts. That 2002 study found

that 39 percent of student borrowers now graduate with unmanageable levels of

debt, meaning that their monthly payments are more than 8 percent of their monthly incomes. The study also found that student borrowers were student borrowers

were even more likely to carry credit card debt, with 48 percent of borrowers carrying an average credit card balance of $3,176.21

Campus Marketing: In 2004, Maryland PIRG and the Maryland Consumer Rights

Coalition releasing a shocking study of credit card marketing practices on the

State’s college campuses. Among the highlights of Graduating Into Debt 22 were the

following:

• Credit card vendors are setting up tables on some campuses in violation of university policies prohibiting or limiting tabling.

• At least two schools currently sell their student lists (names, addresses, and telephone numbers) to credit card issuers.

• Several schools have exclusive marketing agreements with one credit card issuer

for which they receive financial compensation.

• Only one school that allows on-campus marketing has a comprehensive written

policy specifically governing credit card marketing.

Previously, a PIRG study, the Credit Card Trap, released in April 2001, included

a detailed study of the worst credit card practices. The report was released at the

same time as we announced a detailed fact sheet available at a new website

truthaboutcredit.org.23 Because Linda Sherry of Consumer Action is releasing more

recent survey data, I will not go into details on the report’s survey results. The key

findings of a year 2000 survey of 100 credit card offers included in ‘‘The Credit Card

Trap’’ are available online.24 The report also included a survey of college student

marketing, which we summarize here.

Marketing to College Students Is Aggressive

The State PIRG’s surveyed 460 college students within the first month of either

the fall or spring semester of 2000–2001. The key findings include:

• Two-thirds of college students surveyed had at least one credit card. The average

college student had 1.67 credit cards.

• 50 percent of students obtained their cards through the mail, 15 percent at an

on-campus table, and 10 percent over the phone.

• 50 percent of students with cards always pay their balances in full, 36 percent

sometimes do, and 14 percent never do.

• 48 percent of students with one or more cards have paid a late fee, and 7 percent

have had a card cancelled due to missed or late payments.

• 58 percent of students report seeing on-campus credit card marketing tables for

a total of 2 or more days within the first 2 months of the semester. Twenty-five

percent report seeing on-campus tables more than 5 days.

• One-third have applied for a credit card at an on-campus table. Of these, 80 percent cite free gifts as a reason for applying.

• Only 19 percent of students are certain that their schools have resources on the

responsible use of credit. Three out of four of these students (76 percent) have

never used these resources.

The State PIRG’s have run counter-education campaigns against credit card marketing on campus. The industry and its vendors set up tables where hawkers distribute ‘‘free’’ t-shirts, Frisbees and candy to students who apply for cards. They also

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25 ‘‘The Profitability of Credit Card Operations of Depository Institutions: An Annual Report

by the Board of Governors of the Federal Reserve System, submitted to the Congress pursuant

to Section 8 of the Fair Credit and Charge Card Disclosure Act of 1988,’’ June 2004, available

at http://www.Federalreserve.gov/boarddocs/rptcongress/creditcard/2004/ccprofit.pdf.

26See http://www.Federalreserve.gov/releases/g19/Current. 27The banks frequently cite a Federal Reserve analysis of University of Michigan Survey of

Consumer Finances polling data to allege that only 45 percent of consumers carry a balance.

Consumer group contacts with industry sources indicate that these numbers are low. If true,

of course, average balances would be even higher. Consumer groups use a conservative figure

of 55 percent carrying balances, with some sources putting the number as high as high as 60

percent or more. For a discussion of our analysis of credit card debt calculations, see the State

PIRG report ‘‘Deflate Your Rate,’’ March 2002, available at http://www.truthaboutcredit.org. 28OCC Advisory Letter AL 2004–4, April 28, 2004, available at http://www.occ.treas.gov/ftp/

advisory/2004–4.txt. 29 ‘‘The Profitability of Credit Card Operations of Depository Institutions: An Annual Report

by the Board of Governors of the Federal Reserve System, submitted to the Congress pursuant

Continued

aggressively post so-called ‘‘take-one’’ flyers on bulletin boards in every classroom.

PIRG chapters have set up tables where we distribute credit card education literature. We also have created our own ‘‘think twice’’ take-one flyers and posted

them on campuses. The brochures link to our website, truthaboutcredit.org.

We believe it is appropriate and proper for colleges and universities to regulate

credit card marketing on campuses, including consideration of restrictions or bans

on credit card tabling and other marketing. In addition, colleges should improve

generally weak financial literacy, credit card and debt training programs for students, as should high schools. However, we believe that these responses are best

made by student governments, college administrators or state legislatures, not the

Congress, so we make no specific recommendations here.

Brief Profile of the Credit Card Industry

Our policy changes can be made without hurting the credit card companies, who

have enjoyed a lucrative 10 year run at the expense of consumers. Credit card lending is the most profitable form of banking, according to the Federal Reserve’s most

recent report to Congress in 2004: ‘‘Although profitability for the large credit card

banks has risen and fallen over the years, credit card earnings have been consistently higher than returns on all commercial bank activities.’’ 25 In recent years, those profits have hovered at or near record levels. Profits in 2003 were $30 billion

according to various sources, with late and over-the-limit fees adding dramatically

to the total.

There may be, as the industry witnesses will trumpet, some 6,000 credit card

issuers. But there are only 10 that matter. The actual marketplace is highly concentrated. The Nation’s top 10 bank credit card issuers grew an average of 6.5 percent during 2003, holding aggregate card loans of $538.9 billion, approximately 77

percent of the total U.S. market.

Since 1980, revolving debt, which is largely credit card debt, increased from just $56 billion to $800 billion, according to the most recent Federal Reserve postings

of May 2005.26 Approximately 55 percent of consumers carry balances (the rest are convenience users) meaning consumers with credit card balances average $10,000–

$12,000 each in total credit card and revolving debt.27

Credit card companies have increased profit by increasing the amount of credit

outstanding by decreasing cardholders’ minimum monthly payments, increasing interest rates, and piling on enormous fees. Until very recently, credit card companies

engaged in a practice of decreasing the minimum percentage of the balance that

cardholders must pay in order to remain in good standing. Today, most companies

still require a minimum monthly payment of only 2 percent or 3 percent of the outstanding balance. As a result, cardholders who choose to pay only the minimum

each month take longer to pay off their balances, paying more interest in the process. In its recent guidances, the OCC has admonished banks to raise these minimum payment levels. ‘‘The required minimum payment should be sufficient to cover

finance charges and recurring fees and to amortize the principal balance over a reasonable period of time.’’ 28

According to a U.S. PIRG analysis, a consumer carrying just $5,000 of debt at 16

percent APR would take 26 years to pay off the balance if she only made the 2 percent requested minimum payment, even if she cut the card up and never used it

again.

An industry source indicates that in 2003, 69 percent of U.S. households received

an average of 4.8 offers per month, or 58 offers/year. The Federal Reserve also estimates that this has resulted in American consumers now carrying an average of 4.8

credit cards each.29 During 2004, U.S. households received estimated 5.23 billion

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to Section 8 of the Fair Credit and Charge Card Disclosure Act of 1988,’’ June 2004, available

at http://www.Federalreserve.gov/boarddocs/rptcongress/creditcard/2004/ccprofit.pdf.

30 According to Mail Monitor, the direct mail tracking service from Synovate. 31 In 1978, the Supreme Court in Marquette v. First Omaha Service Corp. invalidated State

usury laws as they apply to national banks. Marquette held that under Section 85 of the National Bank Act (NBA) of 1863 national banks could export to any of their customers, no matter

where they lived, the highest interest rate allowed in the bank’s home State, now usually Delaware, Virginia, Nevada, or South Dakota. See Marquette Nat. Bank. v. First of Omaha Services,

439 US 299 (1978). 32 In Smiley, the Supreme Court extended Marquette to allow exportation of a home State’s

fees. The court paid deference to a new OCC rule that added a wide range of fees to the definition of interest under Section 85 of the National Bank Act, including late fees, over limit fees,

annual fees, and cash advance fees. See Smiley v. Citibank (South Dakota). 517 US 735 (1996) 33Since the Federal Truth In Lending Act was nonpreemptive with respect to certain account

statement disclosures, California enacted legislation (Civil Code Section 1748.13) requiring that

monthly credit card statements disclose information about how long it would take to pay off a

card if you only made the minimum requested monthly payment. Federal law did not then require this, although a similar, weaker provision is included in the bankruptcy law recently

signed (Public Law 109–8). The law was overturned on summary judgment in American Bankers

Association v. Lockyer, 239 F. Supp. 2d 1000, 1009 (E.D. Cal. 2002). 34See the PIRG OCCWatch website for detailed information on the OCC’s anticonsumer actions, including links to its rules, http://www.pirg.org/occwatch. Also see ‘‘Preemption Of State

Consumer Laws: Federal Interference Is A Market Failure,’’ by U.S. PIRG’s Edmund

Mierzwinski, which appeared in the Spring 2004 (Vol. 6, No. 1, pgs. 6–12) issue of the Government, Law and Policy Journal of the New York State Bar Association. The article includes a

major section on the OCC rules, available at http://www.pirg.org/consumer/pdfs/

mierzwinskiarticlefinalnysba.pdf. 35 7 April 2004, Review of the National Bank Preemption Rules, Oversight Hearing of the U.S.

Senate Banking Committee, available at http://banking.senate.gov.

credit card offers, up 22 percent compared to 2003 and exceeding the previous

record of 5.01 billion offers set in 2001.30

State Preemption: Another Part of the Problem

Although States have recently aggressively sshould enforce unfair and deceptive

practices laws against credit card companies, the States have been limited in their

enforcement by the growing use of preemption theory to restrict their regulation of

the industry. In 1978, in Marquette,31 the Supreme Court held that States could

export nationally the interest rates of the bank’s home State, prompting a concentration of the industry in a few bank-friendly States, including Delaware and

South Dakota. In 1996, the court in Smiley 32 extended the Marquette holding by

defining late fees as ‘‘interest,’’ allowing a bank’s home State late fee rules to similarly be exported nationally.

These onerous decisions applied only to the regulation of interest and fees, not

to disclosures. In 2002, a U.S. District Court used National Bank Act preemption

theory, backed by the OCC, to overturn an important new California law requiring

a monthly minimum payment warning, further restricting State authority to protect

consumers.33 Then, of course, in 2004, the OCC imposed two onerous administrative

rules restricting States from enactment or enforcement against national banks and

their State-licensed operating subsidiaries.34

These decisions and actions have aided and abetted the anticonsumer practices

of this industry and deserve careful scrutiny by the Committee. We remain disappointed that the committee has not reined in the over-reaching OCC rules, although it did hold an important oversight hearing in the last Congress.35

Conclusion

We thank you for holding this important oversight hearing. We urge the committee to go further and enact legislation protecting consumers from unfair credit

card company practices. We hope that we have provided you with adequate information to support the need for action by the Congress to rein in the credit card industry’s most unfair and abusive practices and would be happy to work with your staffs

on proposed legislation.

PREPARED STATEMENT OF MARGE CONNELLY

EXECUTIVE VICE PRESIDENT, CAPITAL ONE FINANCIAL CORPORATION

MAY 17, 2005

Good morning, my name is Marge Connelly, Executive Vice President, Capital

One Financial Corporation, and I am pleased to appear before you today to talk

about the state of the credit card industry.

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1 Recent Changes in U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances, Federal Reserve Bulletin, January 2003, Chart 10, page 21. 2 Credit Cards: Use and Consumer Attitudes, 1970–2000, Federal Reserve Bulletin, September

2000. 3 Ibid.

Overview

Capital One is one of the largest credit card providers in the world, and a diversified financial services company with over 49 million accounts and $81 billion in

managed loans outstanding as of March 31, 2005. In addition to credit cards, we

are one of the nation’s premier auto finance companies, and also offer our customers

an array of other banking and related products and services. We employ nearly

15,000 associates worldwide, with offices around the country and overseas. Earlier

this year, Capital One announced its planned acquisition of Hibernia Corporation,

a financial holding company headquartered in New Orleans that has over $21 billion in assets and offers a full range of deposit products and a wide array of financial services through more than 300 locations in Louisiana and Texas.

Capital One, along with the other companies testifying before the Committee, has

played a leading role in building the national credit superhighway that, in the past

15 years, has greatly advanced economic democracy in America. While credit card

lending is only a small percentage of consumer credit—about 4 percent 1—its real

contribution lies elsewhere. The credit card is now one of the consumer’s main contacts with the payment system,2 and has fostered a vast national transformation

that has changed commerce for the better.3 Using payment cards, consumers can

conduct everyday transactions without writing checks and without having to do the

associated recordkeeping. Consumers can shop by telephone or the internet at a

time and in a setting that is convenient for them, saving both time and money while

increasing consumer choice.

As with all significant social and economic changes, this transformation has been

accompanied by its share of controversy, and Capital One is grateful for the opportunity to participate in the Committee’s exploration of the issues surrounding the

credit card industry today. But first, it is necessary to spend some time understanding payment cards’ development and role in society.

Democratization of Credit and the Transformation of Commerce

Developments in information technology and the availability of consumer credit

information spurred major changes in the credit granting process. The beginnings

of a national consumer credit market were acknowledged in the passage of the Fair

Credit Reporting Act (FCRA) in 1974, updated by this Committee in 1996 and most

recently in 2003. Credit became more widely available on a national basis, as credit

bureaus developed large databases that provided lenders with a more holistic and

consistent view of a particular consumer’s risk characteristics. Nevertheless, pricing

was still not highly differentiated, and approximately half of the eligible U.S. population could still not qualify for a credit card.

Even as late as 1987, the credit card market was mired in a ‘‘one-size-fits-all’’ approach, characterized by uniform interest rates and annual fees.

Largest Ten Issuers (1987) APR

(percent)

AMF

(dollars)

Citibank ............................................................................................... 19.8 20

Bank of America ................................................................................. 19.8 20

Chase Manhattan ............................................................................... 19.8 20

First Chicago ....................................................................................... 19.8 20

Wells Fargo ......................................................................................... 19.8 20

First Interstate ................................................................................... 19.8 20

Manufacturers Hanover ..................................................................... 19.8 20

MNC Financial ................................................................................... 19.8 20

Marine Midland .................................................................................. 19.8 20

Security Pacific ................................................................................... 19.8 20

The market was ripe for innovation, and the founders of Capital One saw an opportunity to use the information provided by our national credit reporting system

to customize product offerings to customers based on their particular needs, interests and risk profiles.

Our founders realized that the ‘‘one-size-fits-all’’ approach made little sense when

each consumer possessed vastly different needs and characteristics. While some consumers were risky, many more were less so—in varying degrees. Without the ability

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4The Fair Credit Reporting Act: Access, Efficiency & Opportunity, Information Policy Institute, June 2003. 5Federal Reserve Bulletin, September 2000, page 623.

6 Ibid, page 624.

7 Ibid, Chart 1′′Consumer credit outstanding as a proportion of disposable income, 1956–1999,

page 624.

to differentiate one from another, however, lenders were compelled to raise prices

to cover the cost of higher credit losses, or to cut back on the granting of credit to

reduce the losses. Either way, consumers suffered. The less risky customers were

paying too much, and for the rest, credit was hard to come by—if available at all.

Capital One was able to use information within the legal framework provided by

the FCRA to make significant advances in underwriting—better distinguishing the

risk characteristics of our customer base. The benefits of greater access to better information went beyond risk analysis, however. Capital One and other companies

were also able to use information to create profound innovations in the marketing

and design of credit cards. Our company led the charge with new product ideas like

balance transfers, where customers could shift balances away from high-priced cards

to our lower-priced offerings, and low introductory rates. The resulting reductions

in price and expansion of credit into traditionally underserved markets sparked a

consumer revolution that can fairly be called the ‘‘democratization of credit.’’ 4

By this decade, the desultory competition and flat pricing structure of old were

no more. In their place came fierce price competition which has produced billions

of dollars in savings for consumers across the country.

Largest Eight Issuers (March 2005) Lowest Long-Term APR AMF

(dollars)

Capital One ..................................................................... 4.99 percent Variable 0

Chase/Bank One ............................................................. 7.99 percent Fixed 0

Bank of America ............................................................. 5.25 percent Variable 0

MBNA .............................................................................. 5.25 percent Variable 0

Providian ......................................................................... 7.24 percent Variable 0

American Express ........................................................... 8.24 percent Variable 0

Discover ........................................................................... 5.99 percent Variable 0

Citibank ........................................................................... 7.99 percent Variable 0

These numbers actually do not capture all the savings to consumers caused by

increased competition, because they do not take into consideration the widespread

availability of low introductory and balance transfer rates.

The last 15 years also saw significant developments in the pioneering of affinity

cards, with benefits for consumers and the organizations they most value; rewards

programs which provide consumers with value added benefits ranging from airline

miles to college savings plans; and cobranded products, which allow consumers to

enjoy discounts and other privileges at their favorite retail outlets.

The power of this heightened competition has not been lost on consumers—in just

10 years as an independent company, Capital One has grown its account base from

5 million to 49 million worldwide—all without the once vital ‘‘bricks and mortar’’

network of branches. We can give consumers the best deals no matter where they

reside—from mid-town Manhattan to the smallest farm community in Iowa.

For consumers, the benefits are self-evident: Prices for credit continue to decline

and availability to widen—most notably in the traditionally underserved low- and

moderate-income communities.

In addition to the direct economic benefits of lower pricing, consumers have received an equally significant qualitative benefit from advances in the payment card

industry, and that is the transformation of everyday commerce. Credit cards serve

as a ‘‘payment device in lieu of cash or checks for millions of routine purchases as

well as for many transactions that would otherwise be inconvenient or perhaps impossible,’’ 5 such as making retail purchases over the Internet or by telephone. The

explosion in internet commerce, and indeed the establishment of whole new marketplaces such as Ebay, could not have occurred without the relatively recent development of payment cards. With the advent of payment cards in the 1950’s, consumer

debt has had two components: Nonrevolving debt, consisting of traditional installment-purchase type loans for such things as appliance purchases, and revolving

debt, consisting of ‘‘prearranged lines of credit.’’ 6 Since the late-1960’s, revolving

debt has increasingly replaced nonrevolving debt, and some of this revolving credit

is ‘‘convenience credit’’ that replaces cash and is paid in full every month.7 As noted

above, credit card debt composes around 4 percent of all consumer debt, but it is

erroneous to look at this as unqualified new debt for the reason just cited—the rise

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8 Ibid.

9 Credit Cards, 2003, SMR Research.

in revolving debt since the late 1960’s has been accompanied by a decline in nonrevolving debt (relative to income) while overall consumer debt has remained fairly

constant relative to income.8 This is not to say that a portion of credit card debt

is not new in the sense that it is in addition to, rather than in replacement of, other

debt the consumer would have incurred; but that new credit does not appear to be

a large part relative to income. Critics of the industry portray credit-card debt as

a massive debt burden for the American consumer, but the size of the debt as a

component of overall consumer indebtedness does not support that charge. Where

payment cards clearly have had a pervasive impact, out of proportion to the amount

of credit that they represent, is in their economic functionality-as a substitute for

cash and checks, and as an enabler for new marketplaces and forms of commerce.

The Challenges of Successful Competition

As the above discussion helps to emphasize, there is no more competitive industry. Several thousand financial institutions issue general purpose credit cards such

as MasterCard and Visa, in addition to those issued by American Express, Discover,

and many retailers. As many as 50 of the largest credit card issuers distribute their

cards nationally, Capital One among them. Obviously, this market is not dominated

by any one issuer. There are few barriers to entry and exit. In recent years, newcomers such as Juniper Bank and the banking arm of State Farm Insurance have

taken market share from more established issuers,9 contributing to the pressure on

all market participants to focus on products that best serve consumers.

In the face of this intense competition, each day at Capital One, our associates

work hard to retain our existing customers, acquire customers new to the market,

and attract the customers of our competitors with better offerings. This nationally

competitive environment has completely displaced the balkanized, localized credit

card markets of 30 years ago—markets that featured high, largely undifferentiated

pricing combined with an onerous and highly subjective application process and limited availability and access to credit.

As a result, the industry now plays a preeminent role in the day-to-day lives of

consumers. Capital One has 38 million U.S. credit card accounts, and any one of

those customers can drop our product and immediately get a replacement from any

one of at least 10 major competitors. We live by and for our customers, and we are

committed to retaining them.

There have been many complaints that credit card fees are too high—in particular, fees for infractions of account rules (late fees, overlimit fees, returned-check

fees). But in fact, the rise in these fees corresponds with the industry’s movement

toward lower interest rates and annual membership fees on accounts generally, as

credit card lenders compete fiercely to offer consumers what they most want. Consumers have voted for those low-rate and low-membership-fee products by signing

up for them—and leaving those products with higher rates and membership fees.

But in order to offer those low rates, and those zero-dollar membership fees, it has

become critically important for credit card lenders to manage risk in their accounts

more effectively, including the use of default fees to compensate for the added risk

of those customers who do not abide by the account rules.

Because it is so easy for consumers to switch credit card issuers—and millions do

so every year—credit card companies must take very seriously any suggestion that

our customers are not being treated fairly. As competition intensifies and credit

products become more complex, it becomes more important to be sure that customers understand the terms of their accounts and are not surprised by any fees

or charges they may incur, or changes in terms.

In other words, it is not enough to have built the national credit superhighway

with all of its speed and cost benefits, but we must ensure that it has good road

signs and exits—all without impeding traffic flow or imposing unreasonable tolls.

Capital One has some proposals in that area, but before discussing those, it is vital

to achieve a common understanding of open-end credit and the underwriting process.

Open-End Credit and the Underwriting Process

Open-end, unsecured credit is just that—it is credit that is extended in variable

amounts over an indefinite period of time with no collateral to secure the debt. The

lender extends or ‘‘underwrites’’ this credit solely on its analysis of the consumer’s

likelihood to repay. A ‘‘snapshot’’ of the consumer’s ability and willingness to repay

at a given point in time must support a lending decision that can have consequences

indefinitely into the future. There is no collateral, as with auto or with mortgage

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loans. Prior to the development of open-end credit delivered through credit cards,

the consumer would apply for an installment purchase loan for a particular good

or purpose. The loan was for a fixed period of time. If a consumer purchased a refrigerator, the lender would assess the likelihood to repay for that particular item

and offer a rate based on the particular risk factors involved. The credit was extended only in a specific amount for a specific period of time. The lender’s risk was

limited to that amount and time period, and even within that time period, the lender’s credit risk declined over the life of the loan as the customer paid down the loan

according to the prescribed schedule. If the consumer next wanted to buy a washing

machine, the process started all over again, and if the consumer’s risk profile had

changed, he or she could get a different rate, or not be granted credit. With openend credit, the consumer receives a prearranged credit line and can make subsequent purchases up to the credit limit without any further approval process. The

lender’s exposure is for an indefinite period during which the borrower’s creditworthiness can fluctuate considerably.

In unsecured lending, if the lender is to make money (or even stay solvent), every

bad loan must be compensated for by many good loans. And the rate charged on

those loans must reflect their risk. To illustrate why that is so important, consider

a simple example.

The example, shown in the chart in Attachment I, consists of two simple loan portfolios, each containing 100 loans of $1000 apiece. One portfolio has an interest

rate of 19.9 percent, similar to prevailing credit card interest rates of two decades,

ago, the other a rate of 6.9 percent similar to prevailing rates today.

If one loan in the 19.9 percent portfolio defaults, it takes the interest from 10 performing loans to compensate for the default. But if one loan in the 6.9 percent portfolio defaults, it takes the interest from 29 performing loans to compensate for the

default.

The importance of accurate underwriting in today’s morecompetitive interest rate

environment is obvious. The challenge for every lender is to fit the maximum number of borrowers into the continuum of rates that that lender charges while keeping

defaults to a minimum. Whoever does the best job of fitting borrowers to a particular interest rate attracts the most customers, because that lender can offer the

lowest rate and manage defaults so that the lender still makes money. When a lender extends open-end credit, it is vital that, to the extent possible, the lender keeps

the consumer in the right credit portfolio during the life of the credit relationship;

otherwise the lender’s underwriting failure unfairly distributes cost to other consumers and imperils the lender’s ability to remain in business. Anything that enhances this process has obvious consumer benefits, and anything that disrupts it

has equally negative consumer effects.

Because credit-card lending is unsecured, accurate underwriting is a matter of the

lender’s financial life and death. And because credit-card lending is open-ended, it

requires special tools to manage risk over the indefinite future during which the

customer’s behavior and creditworthiness may change. These tools include fees for

rule violations, and the ability to modify credit lines, and suspend or terminate the

account, and the ability to reprice, or reunderwrite, the account. As noted above in

the comparison of closed-end vs. open-end credit, closed-end credit is a discrete underwriting event where the underwriting can be adjusted with each purchase,

whereas the indefinite nature of open-end credit increases the risk of meaningful

changes in credit quality. The ability to price for risk in either a closed or openend context is vital to expanding access to credit while maintaining an appropriate

distribution of rates for all borrowers.

Proposals for Change

Keeping all of that in mind, let me return to the question how the industry can

improve the signs and exits for the consumer who is driving along the credit superhighway. First, an example of an effective sign is the ‘‘Schumer Box’’ that currently

accompanies credit card solicitations. It prominently and efficiently discloses a number of key terms for the consumer. Building on the strengths of the Schumer Box,

we have submitted to the Federal Reserve, pursuant to their Advance Notice of Proposed Rulemaking for Regulation Z, a proposal to enhance solicitation disclosures

as illustrated by the Fact Sheet in the poster before you and in Attachment II to

my statement.

After listening to consumers whom we gathered in a number of focus groups (not

Capital One cardholders, except by chance), we synthesized the following principles,

which we reflected in the Fact Sheet: Importance; Comparability; Clarity; Simplicity; and Specificity.

Applying those principles, we produced our Fact Sheet, including a number of

changes from the current disclosure regime:

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• More prominent and standardized disclosure of events that may give rise to

changes in the customer’s interest rate; moving those disclosures from where they

currently appear, in footnotes to the Schumer Box, into the heart of the Fact

Sheet.

• Disclosure of the range of credit limits that the customer may receive (not currently required or permitted to be disclosed in the Schumer Box).

• Disclosure of certain fees not currently required to be in the Schumer Box.

• Disclosure of other matters of importance to prospective customers: We propose

disclosing the manner of payment allocation.

We look forward to working with the Federal Reserve Board on their important

project to bring Regulation Z and the credit-card disclosures that it governs into the

21st century.

Conclusion

To conclude, Capital One wants our customers to be well-informed and financially

literate. Well-informed customers are the most likely to understand and appreciate

our products, and to use them wisely. Effective, standardized disclosure is key to

achieving that goal, and that is why the Federal Reserve review of Regulation Z is

so important. Capital One looks forward to actively and constructively participating

in this process to bring about meaningful improvements to the industry. Again, we

appreciate this opportunity to present our views to the Committee.

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129

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PREPARED STATEMENT OF LINDA SHERRY

EDITORIAL DIRECTOR, CONSUMER ACTION

MAY 17, 2005

Consumer Action (www.consumer-action.org), founded in 1971, is a San Francisco

based nonprofit education and advocacy organization with offices in Los Angeles and

Washington, DC. For more than two decades, Consumer Action has taken an annual

in-depth look at credit card rates and charges to track trends in the industry and

assist consumers in comparing cards. Our 2004 survey included 140 cards from 45

companies, including the top 10 issuers. We are currently conducting our 2005 survey and can share a few preliminary findings with you today.

Consumer Action also accepts complaints from consumers nationwide via phone,

post and e-mail in English, Spanish, Cantonese, and Mandarin. For 9 years, complaints about unfair credit card practices have topped our list of all complaint categories. In 2004, 38 percent of the complaints we received were about credit cards.

For our annual credit card survey we call companies’ toll-free numbers as consumers. This gives us insight into what people face when they shop for credit. The

principal focus of our studies is the ability of consumers to obtain clear and complete facts about credit card rates and charges—before they apply for credit.

Our experience is that obtaining accurate information from credit card companies

is frequently exasperating and difficult, and the answers are often lacking in key

details about conditions, especially those relating to fees and other costs, and to the

circumstances that trigger universal default rules. Representatives often are unable

to provide even the basic facts required by the Credit Card Disclosure Act.

Hard to Find Terms and Conditions

There is no place for potential customers to find accurate information. Credit card

companies have call center staff to serve existing customers and separate personnel

to take applications from potential customers. Non-customers are blocked from calling customer service because you need an account number to get through. Application personnel cannot provide accurate information about terms and conditions. This

leaves potential customers in danger of applying for a card that at best does not

suit them and at worse, contains predatory terms and conditions.

High-Pressure Sales

Application lines are staffed by salespeople who attempt to pressure callers to

apply for a card without providing substantive information. This means applicants

often apply for cards with no concrete knowledge about the terms and conditions.

Outrageous Anticonsumer Practices

Penalty rates and universal default, often cited as a way for companies to manage

risk, top the list of unfair practices.

• Penalty rates are much higher interest rates triggered when you pay your credit

card bill late even one time. • Universal default rate hikes are imposed by credit card companies based on the

way customers handle other credit accounts.

What we find outrageous in both instances is that companies claim that they are

merely using risk based pricing when they increase the interest rate. We challenge

the industry to explain how taking out a new car loan or having a credit card payment arrive 1 day late makes a customer so much more risky that a doubling or

tripling of the interest rate is justified. If this is really risk-based pricing, why do

companies have a standardized default rate instead of one that reflects the actual

added risk? There is no way that a credit card payment coming in one day late creates as much risk for a credit card company as foreclosure on a car loan.

Does it make any sense to increase the interest rate of customers who are having

a hard time with their debt load? No. The real purpose of these policies is to maximize revenue at the expense of those who are least able to afford it.

Universal Default

An increasing number of issuers use universal default policies to hike interest

rates based on the way customers handle other credit. Consumer Action’s 2004 survey found that 44 percent of the surveyed banks use this information to identify socalled risky cardholders and raise their interest rates, even if they have never made

a late payment.

Consumer Action found penalty rates as high as 29.99 percent in 2004, at a time

when the prime rate was at 4 percent. Preliminary data from our 2005 survey

shows penalty rates as high as 35 percent. Consumers who have contacted Consumer Action have reported being hit by default rates that were double and triple

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their old rates. Credit card companies say they must protect themselves against

risky customers, but do they have to resort to usury to do it?

In November, a Bastrop, TX woman complained to Consumer Action about a universal default rate hike: ‘‘AT&T Universal card just raised our interest rate from

12.9 percent to a whopping 28.74 percent because of a late payment they found listed in my husband’s credit report to another credit card company (payments to

AT&T have been on time). This will make it impossible for my husband and I to

pay off this card with a $11,700 balance. Is this legal? AT&T says it is not up for

discussion.’’

When you are turned down for credit, the law requires that you receive a letter

explaining why. But if you are hit with a universal default hike, you do not learn

about it until your next statement arrives. And even then, all you learn is your new

higher rate. You are not told about the specifics that caused the hike.

Note: Thirty-nine examples of recent consumer complaints about universal default

received by Consumer Action are attached to this testimony.

Penalty Rates

Late payments result in higher penalty rates with 85 percent of the issuers we

surveyed in 2004. Consumer Action found average penalty rates of 22.91 percent–

1.38 percentage points higher than the 2003 averages. Of these issuers, 31 percent

said a penalty rate could be triggered by just one late payment.

In January, a Topeka, KS housepainter complained to Consumer Action that

Chase had ‘‘raised our interest rate to 27.24 percent from 9 percent. They said we

had two over 30-day past due payments in the last year. I asked them when and

they gave me 2 months, one time we were 2 days late and the other 7 days late,

but they said the due date starts from the time the statement is printed. I told

them, How can that be, when we have not even received the bill? I told them we

were going through hardships, with me being laid off and my wife and I going

through a miscarriage. I cannot work outside the union or I would lose our health

insurance. We have had a Chase card for 10 years and never had a problem before.

Our payment due is $217 and the finance charge is $216.65. Needless to say, we

cannot get anywhere with this debt.’’

Late Fees

In 1995 Consumer Action found an average late fee of $13, with no company charging more than $18. In 2004, the average was $27.45, with three major banks

charging $39 late fees at certain balance levels. With average monthly minimum

payments at 2 percent of the balance, the late fee on a $2,000 balance would be double the minimum payment. This is outrageously excessive.

An Indianapolis, IN woman who complained to us in February was assessed a late

fee by MBNA even when she paid early. ‘‘I paid my credit card bill early, and as

I paid before the ‘closing date’ it was not credited toward the ‘payment due date,’

and I incurred a late fee. Here’s an example: Monthly cycle from 12/04/04–01/04/05;

‘Closing date’ = 01/04/05; ‘Payment due date’ = 01/28/05. Any payments made early,

from 12/04/04–01/04/05 are not considered payments toward the 01/28/05 payment

due date. Only payments from 01/05/05–01/28/05 are considered payments for the

cycle of 12/04/04–01/04/05. Thus a ’late fee’ can be assessed even if payment was

made early.’’

In 2003, Consumer Action first noted tiered late fees tied to the balance amount.

On a percentage basis, this penalizes people with smaller balances more than those

with greater exposure. The number of issuers employing the practice jumped from

20 percent in 2003 to 48 percent in 2004. Tiered late fees are a deceptive way of

charging higher-than-average late fees to cardholders with lower balances.

Due Dates

These days, most issuers require that your payment arrive before a certain hour

on the due date or you will be charged to a late fee. Our 2004 survey found that

58 percent of surveyed banks had a cut-off time on the due date. If you are even

5 minutes past this cut off time, it can cost you up to $39 even thought your payment arrives on the actual due date.

A Massachusetts man contacted Consumer Action in January to complain about

a rate hike: ‘‘My wife just called me to let me know that Bank One, one of the credit

card companies we use, just raised our introductory rate of 0 percent to 10.24 percent. When my wife called to find out why, they told her that the last payment was

posted 2 days late. The bill with the payment was mailed 7 days before the due date

from Massachusetts to Delaware.’’

Even people who try to make timely payments will be hit with a late fee if their

payment was delayed in the mail. We hear from many consumers who allowed 7

days to post a payment, yet still the bank assessed a late fee. Banks should consider

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postmarks when posting payments. If the Internal Revenue Service can do it, why

cannot credit card issuers?

Over Limit Fees

Contrary to what many people believe, a purchase that takes you over your credit

limit will not necessarily be denied. Instead, you will be stuck with an over limit

fee, which can be assessed every month until your balance is under the limit. The

industry should either deny charges that go above the credit limit or not charge a

fee. If they are going to accept charges over the credit limit they should be happy

just with the added interest and be forbidden from adding on fees.

A Framingham, MA woman wrote this to Consumer Action last year: ‘‘I can understand a credit card company adding a late fee but what I have a serious problem

with is when the late fee puts you over the limit and they then add on an over limit

fee. This is a vicious cycle that is hard to stop. Once you have gone over the limit,

unless you have enough money to get it down, what can a consumer do? The over

limit fees keep adding up thus causing everything to go up, interest, etc. Is it really

legal for them to charge you an over limit fee when their late fee actually put you

over the limit? This really needs to be addressed.’’

Deceptive Interest Rates Quotes

The annual percentage rate (APR) is one of the most basic facts that must be disclosed in advance to credit card applicants under the Truth in Lending Act. But

since 1999 Consumer Action has found that an increasing number of banks fail to

quote a firm APR, and instead provide a meaningless range of rates. This practice

defies Federal credit card disclosure provisions and prevents consumers from comparing cards. In 1999, only 14 percent of banks failed to quote a firm APR. By 2004,

the percentage had more than tripled to 51 percent.

Cash Advances

The charges for credit card cash advances have escalated dramatically in the last

decade. In 1995, average charges were 2.2 percent of the amount advanced, with an

average maximum limit on the fee of $17. By 2004, the average fee had jumped to

3 percent-a 36 percent increase, and the average maximum to $30.62, up 80 percent.

More disturbingly, in 2004 only 17 percent of surveyed issuers limited consumers’

costs by capping the fee.

This is a ‘‘follow the leader’’ industry. When one issuer steps out with a new

anticonsumer practice, other banks are quick to follow. Having watched closely as

these changes in credit card lending have transpired, Consumer Action concludes

that the industry is in the process of fundamentally redefining its business model

to shift the risk of lending from itself to unwitting customers.

I thank you for your diligence in investigating credit card industry practices and

I urge you to support legislation to prevent credit card banks from preying on consumers.

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RESPONSE TO A WRITTEN QUESTION OF SENATOR SARBANES

FROM LOUIS J. FREEH

Q.1. The following clause is contained in the credit card agreements of many issuers: ‘‘We reserve the right to change the terms

at any time for any reason.’’ It is my understanding that current

law only requires that a cardholder receive the change in terms notice 15 days before her interest rate is increased and that most of

the notices do not provide the specific reason for the increase. The

notices also, in some instances, do not provide a toll-free number

for consumers to call and speak to an individual, as opposed to receiving a recording, to find out why their rate has been adjusted.

Will your company commit to including a toll-free number on

change-in-term notices so that consumers have a readily accessible

number to call and be able to speak to an individual to determine

why their interest rate has changed?

A.1. Since 1986, MBNA has provided our customers with a toll-free

number available 24 hours a day that connects with live representatives who are available to answer questions regarding their accounts, including answering questions about changes in terms. To

further improve this process, in 2003 MBNA created an additional

toll-free number that connects customers to representatives specially trained to provide detailed answers about repricing and

change in terms notices. MBNA is founded on the principle of exceptional customer service and we believe always having representatives available to customers when they have questions about their

accounts is fundamental to that premise.

As I indicated in my testimony, MBNA does not practice ‘‘universal default’’ and customers are provided a ‘‘just say no’’ opportunity. In the latter instance, MBNA practices exceed that required

by law.

Finally, the question from Senator Sarbanes raises the issue of

the notices themselves. As I stated at the hearing, MBNA has long

advocated for simpler, more easily understood notices. Specifically,

I testified: ‘‘Turning for a moment to the topic of disclosure, let me

first say that MBNA is committed to keeping its customers fully

and fairly informed of every aspect of their accounts. However, we

believe that the volume and types of disclosures mandated by Federal and State laws, regulations, guidelines, and practices, along

with the complexity of the product, have not led to greater clarity.

In fact, we think these measures have often led to greater confusion and frustration for the consumer. And while we favor better

disclosure, we should consider that better disclosure may not mean

more disclosure. Better disclosure may mean simpler descriptions

of key terms and offering consumers a range of ways to get this information, including websites, toll-free phone numbers, and simplified documents.

At MBNA, we always provide advance notice of changes in APRs

and we tell customers how to opt-out of these changes. Moreover,

in response to the OCC’s September 2004 Advisory Letter regarding credit card marketing practices, MBNA made a number of improvements in its marketing materials and agreements. Our goal

was to highlight important terms and conditions relating to fees,

rates, payment allocation, repricing, and how to opt-out of changes

in terms. In addition, we recently provided comment to the Board

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of Governors of the Federal Reserve System wherein we support

the Board’s decision to undertake a comprehensive review of the

Federal Truth In Lending Act and Regulation Z. We believe this review is necessary because consumer credit markets and communications technology have changed significantly since the Act was

last revised in 1980. We have further suggested that the Board be

guided by four fundamental principles as it considers revisions to

the Act.

First, disclosures must be simple. We know from talking to millions of customers every year that they are often confused and frustrated by the dense and lengthy regulatory language that issuers

are required to use in disclosures. Ironically, the language intended

to inform consumers more often overwhelms them. Much of this

material ends up in the household trash. We believe it should be

a priority for the Board to shorten and simplify disclosure language

and to focus on the most relevant terms and conditions that consumers need to understand.

Second, disclosures must be clear. There are several consumertested models for presenting complex information in a clear and effective manner. We recommend that in addition to containing

shorter, simplified language, disclosures should also be presented

in ways that are understandable and meaningful. Lenders should

have the option of using these consumer-friendly models as a ‘‘safe

harbor’’ for disclosure.

In respect of the need to present information simply, clearly, and

effectively, MBNA has begun voluntarily inserting its change-interms notices within what we call a ‘‘wrapper.’’ The wrapper presents a top line summary of the changes in terms, along with hints

to customers for managing their accounts. We also use the wrapper

to remind customers of the things they can do to avoid fees, and

we make suggestions on how to manage payments by mail, by

phone, and by Internet. The wrapper is a step in the direction of

clarity, and we are happy to have taken it.

Our third recommendation is that disclosures should be based on

uniform national standards. The goal of greater simplicity and clarity will never be achieved as long as individual States can impose

their own disclosure requirements. We do not believe that statespecific disclosures provide any significant benefits, but we know

they add to the complexity of documents that customers tell us are

already far too difficult.

And fourth, disclosures should not be repetitive. Key terms should

not have to be disclosed in the account application and in the summary of terms disclosed later.

Our idea is that the Fed Box can be improved. Similar to the

‘‘nutritional facts’’ table on the side of all food products, issuers

would disclose the key terms of the credit card agreement in a uniform way. The table could include a listing of the rates that apply

to the different types of transactions, information on whether the

rates are variable or nonvariable, fees, grace periods, default provisions, conditions for repricing, duration of promotional rates, and

so on. The major improvement is that this information would be

presented in a consistent, uniform manner. Consumers could compare product features and benefits, and more easily choose those

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products that suit their needs, whether they want to revolve a balance or not.

In 2003, MBNA tested a ‘‘food label-style’’ privacy statement with

a small segment of customers. More than 90 percent told us they

preferred the simplified format. The study confirmed that transparency in disclosures is in MBNA’s best interest, and of course the

best interest of consumers. MBNA will work closely with the

Board, and all the appropriate agencies, to contribute to the revision process and to implement the revised requirements.’’

RESPONSE TO A WRITTEN QUESTION OF SENATOR SARBANES

FROM CARTER FRANKE

Q.1. The following clause is contained in the credit card agreements of many issuers: ‘‘We reserve the right to change the terms

at any time for any reason.’’ It is my understanding that current

law only requires that a card holder receives the change in terms

notice 15 days before her interest rates is increased and that most

of the notices do not provide the specific reason for the increase.

The notices also, in some instances, do not provide a toll-free number for consumers to call and speak to an individual, as opposed

to receiving a recording, to find out why their rate has been adjusted.

Will your company commit to including a toll-free number on

change-in-term notices so that consumers have a readily accessible

number to call and be able to speak to an individual to determine

why their interest rate has changed?

A.1. Currently, when we send a notice to a customer changing their

APR, we generally provide a phone number on that notice that will

allow the customer to call and speak to a representative regarding

the reason(s) the customer’s account was repriced.

In some instances, due to the operational complexity of managing

our various partner relationships and their requirements for dedicated toll-free phone numbers for their members, we will occasionally refer the customer to call the number on the back of the card

or on their statement.