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76–183 PS 2001

GIVING CONSUMERS CREDIT: HOW IS THE CREDIT

CARD INDUSTRY TREATING ITS CUSTOMERS?

HEARING

BEFORE THE

SUBCOMMITTEE ON

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

NOVEMBER 1, 2001

Printed for the use of the Committee on Financial Services

Serial No. 107–49

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

DAVE WELDON, Florida, Vice Chairman

MARGE ROUKEMA, New Jersey

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

MICHAEL N. CASTLE, Delaware

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

BOB BARR, Georgia

SUE W. KELLY, New York

PAUL E. GILLMOR, Ohio

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

JUDY BIGGERT, Illinois

PATRICK J. TOOMEY, Pennsylvania

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR, New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

LUIS V. GUTIERREZ, Illinois

FRANK MASCARA, Pennsylvania

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

PAUL E. KANJORSKI, Pennsylvania

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BARBARA LEE, California

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

(V)

C O N T E N T S

Page

Hearing held on:

November 1, 2001 ............................................................................................. 1

Appendix:

November 1, 2001 ............................................................................................. 63

WITNESSES

THURSDAY, NOVEMBER 1, 2001

DeMarse, Elisabeth, President and CEO, Bankrate, Inc. .................................... 35

Fischer, L. Richard, Partner, Morrison & Foerster, on behalf of Visa U.S.A. .... 40

Kolish, Elaine, Associate Director, Bureau of Consumer Protection, Division

of Enforcement, Federal Trade Commission ...................................................... 14

Manning, Robert, Professor, Rochester Institute of Technology .......................... 36

Mierzwinski, Edmund, Consumer Program Director, U.S. Public Interest Research Group ........................................................................................................ 33

Peirez, Joshua L., Senior Legislative and Regulatory Counsel, Mastercard

International, Inc. ................................................................................................ 38

Smith, Dolores S., Director, Division of Consumer and Community Affairs,

Board of Governors, Federal Reserve System .................................................... 12

Torres, Frank, Legislative Counsel, Consumers Union ........................................ 30

APPENDIX

Prepared statements:

Bachus, Hon. Spencer ...................................................................................... 64

Oxley, Hon. Michael G. .................................................................................... 66

Smith, Hon. Christopher H. ............................................................................. 67

Fischer, L. Richard ........................................................................................... 153

Kolish, Elaine .................................................................................................... 112

Mierzwinski, Edmund (with attachment) ....................................................... 129

Peirez, Joshua L. .............................................................................................. 148

Smith, Dolores S. (with attachments) ............................................................. 68

Torres, Frank .................................................................................................... 121

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Mierzwinski, Edmund:

Written response to a question from Rep. Spencer Bachus .......................... 145

(1)

GIVING CONSUMERS CREDIT: HOW IS THE

CREDIT CARD INDUSTRY TREATING ITS

CUSTOMERS?

THURSDAY, NOVEMBER 1, 2001

U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT,

COMMITTEE ON FINANCIAL SERVICES,

Washington, DC.

The subcommittee met, pursuant to call, at 10:00 a.m., in room

2128, Rayburn House Office Building, Hon. Spencer Bachus,

[chairman of the subcommittee], presiding.

Present: Chairman Bachus; Representatives Roukema, Oxley,

Bereuter, Castle, Cantor, Grucci, Hart, Tiberi, Waters, C. Maloney

of New York, Ackerman, Sherman, Moore, J. Maloney of Connecticut, Hooley, Carson, Ford, Hinojosa, K. Lucas of Kentucky,

Crowley and LaFalce.

Also present: Rep. Chris Smith.

Chairman BACHUS. We’ll call together the Financial Institutions

Subcommittee of the Financial Services Committee. I hope you all

survived Halloween. The subcommittee meets today to examine

credit card industry practices, particularly as they relate to the

treatment of cardholders.

The ready availability of credit in our country has had many beneficial effects, fueling economic growth and making the American

Dream more accessible to many low and moderate income consumers. But the American Dream has become a nightmare scenario

for many citizens who find themselves and their families overextended and saddled with thousands of dollars in ever-escalating

debt. Particularly as our country struggles to come out of its current economic downturn, it is entirely appropriate that the subcommittee take a hard look at credit card industry practices to ensure that the financial stress that many consumers find themselves

under is not needlessly exacerbated.

Factual evidence paints a powerful story in tracing the growing

reliance of American households on credit cards. Last year alone,

credit card companies extended $3 trillion in credit to American

consumers, nearly double the levels of just 5 years ago. The total

amount of consumer credit card debt now exceeds $500 billion.

Americans are bombarded on almost a daily basis by credit card solicitations which come through the mail, over the internet, and in

those dreaded phone calls at dinner hour, an aggravation that is

mentioned often by my constituents.

2

Like most parents of college-age children, I have a particular interest, financial and otherwise, in the aggressive tactics used to

market credit cards on college campuses. The statistics in this area

are also telling. Almost one-quarter of college students actually get

their first credit card before they even leave high school. Not surprisingly, the past decade has witnessed a 50 percent increase in

the proportion of people under the age of 25 filing for bankruptcy.

I have always subscribed to the view that the Government

should not be in the business of saving its citizens from the consequences of their own bad choices, including the choice of a college

student to rack up large amounts of credit card debt. But there’s

also something to be said for industry self-restraint when it comes

to marketing credit cards to teenagers and other members of society who may not fully understand the hole they’re digging for

themselves through the irresponsible use of credit.

Among the issues that our witnesses have been asked to address

at today’s hearing are the following:

How the credit card industry sets interest rates and how these

rates compare to the cost of other forms of consumer credit.

How credit card companies disclose information to their customers, including changes in terms, teaser rates and fees.

The process and practices of the industry, including the posting

of payments and the handling of customer complaints.

Four, industry compliance with Federal consumer protection laws

and the privacy requirements imposed by Gramm-Leach-Bliley.

Fifth, the response of the credit card industry to the events of

September 11th, including what efforts have been made to assist

law enforcement in disrupting terrorist financing.

On this last point, I want to take the opportunity to commend

those credit card issuers that have taken steps to provide relief in

the form of liberalized interest and fee policies and other accommodations to those customers in New York and Washington directly affected by the terrorist attacks on September 11th.

I hope that the industry will exhibit a similar spirit of forbearance when dealing with customers who have had their mail service

interrupted by the recent anthrax cases along the East Coast. In

that regard, Chris Smith, Representative Smith, who’s had two

mail facilities in New Jersey closed, has actually prepared some

legislation.

I hope that the industry will talk with Representative Smith and

see if some accommodations can be made for those customers.

Let me close by thanking all of our witnesses for agreeing to testify this morning on fairly short notice. We appreciate your attendance. I now recognize Mr. LaFalce for any opening statement that

he would like to make.

[The prepared statement of Hon. Spencer Bachus can be found

on page 64 in the appendix.]

Mr. LAFALCE. Thank you very much, Mr. Chairman. As the

Ranking Member of the Full Committee, I don’t attend too many

subcommittee hearings, but this I consider to be of tremendous import. It’s a hearing that I’ve been seeking for about 7 years, and

I was absolutely delighted when the Chairman of the Full Committee and subcommittee about a week or so ago agreed to have

the hearing.

3

I believe that the credit card industry practices and the growing

problems of consumer credit card debt are extremely important

issues. For years now I have received more letters from my constituents complaining about credit cards than any other consumer

financial issue.

What’s interesting is how these letters have evolved over the

years in response to changing practices of the industry. In the mid1990s, most of these letters complained of the growing numbers of

misleading credit card solicitations. As far as I’m concerned, too

many in the industry are guilty of that.

Of arbitrary interest rate increases. Again, as far as I’m concerned, too many in the industry have been guilty of that.

Of the hidden fees and charges. Absolutely. I mean, what some

institutions are doing is absolutely atrocious.

New penalties for making monthly payments late, and I think

the bills are being sent out later, the grace period has been shortened, the posting is delayed. And then, of course, the penalty, the

fee, somehow they must have come to a consensus about $29 regardless of the fact that the minimum payment due is $10.

And then, of course, the unbelievable proliferation in solicitations

to college students and minors, where I believe—you can correct

me if I’m wrong—that the average college student has about four

credit cards today.

Related to that, I’m extremely concerned about college student

use of credit cards for the purpose of internet gambling on the

laptops in their dormitory rooms, and the credit cards that they

have arriving through their mail at the rate of one or two a week.

A word on internet gambling. We just passed a bill out yesterday. Independently of that bill, and I don’t know what’s going to

happen with it, but I will be writing a letter. I’m in the process of

drafting it now. I just advise you of this—to every referee in bankruptcy telling them that based upon judicial interpretations of existing law, most especially the Wire Act, you are engaged in an illegal activity. And therefore, anybody who has a debt in a bankruptcy court cannot have that debt enforced against them by anybody who aided and abetted them, that is, a financial institution

or a MasterCard, Visa or what have you, and therefore, those debts

should be automatically discharged.

Second, I’ll be writing to every financial regulator telling them

with respect to every financially regulated institution, that if they

permit internet gambling and the use of credit cards, ipso facto,

they are involved in an unsafe and unsound banking practice, and

therefore, they should stop immediately. Just put you on notice.

In response to the problems that were brought to my attention

daily in the mid-1980s, in 1998 I introduced a bill to address the

most unjustifiable of these practices by credit card companies. I reintroduced it in 1999, and again earlier this year as H.R. 1052. And

while the Judiciary Committee has acted on two occasions to incorporate at least five of my credit card proposals—there are roughly

a dozen—within the bankruptcy bill, my particular bill has never

been considered by this subcommittee.

But the problems have evolved. Now there’s a pattern of abuses

and conduct by credit card companies that in my view approach

outright fraud. The same practices have figured prominently in a

4

number of major legal settlements over the past 2 years, including,

and I’ll just tick off a few:

1. A $3.2 million settlement by Direct Merchants Credit Card

Bank to settle OCC charges that the bank regularly engaged in

bait-and-switch schemes in which consumers are marketed

preapproved credit card offers with attractive terms, but receive far

less favorable credit card accounts with undisclosed processing fees.

2. A $45 million agreement by Citibank to settle complaints that

the bank did not credit consumer payments upon receipt and improperly assessed late fees and interest charges.

3. A $300 million agreement by Providian National Bank to settle OCC charges that the bank routinely billed accounts for products and services consumers had not approved, enticed consumers

to transfer balances with inflated claims of cost savings, and imposed annual fees on accounts that advertised no annual membership fees.

4. A $40 million agreement to settle customer complaints that

FirstUSA solicited credit card accounts with initial rates of 6.5 percent that were quickly changed to a floating annual rate above 22

percent and misrepresented payment due dates in billing statements.

I could go on and on and on. Let me also say, a number of these

actors have cleaned their act up, to their credit. But a lot of damage was done.

In all of these and other major settlements, the financial institutions involved all stated publicly that ‘‘we’ve broken no law.’’ And

they all say they settled only to cut legal costs or minimize adverse

customer relations. So, ‘‘we didn’t do anything. We’ll pay you $300

million, but we didn’t do anything wrong.’’ Well, you know, technically they may have been correct, and that’s the problem. There

currently is no clear-cut Federal law that adequately addresses

these consumer abuses.

The Truth in Lending Act was enacted over 30 years ago when

credit cards were first appearing in the marketplace. And TILA is

concerned primarily with disclosure of credit interest rates and

deals only marginally with the administration of credit card accounts. The FTC’s standards for unfair and deceptive business

practices under the FTC Act do not apply by statute to regulated

financial institutions. And the Federal Reserve Board has yet to exercise its long-standing discretionary authority to define unfair acts

or practices in connection with credit cards or other credit transactions.

Mr. Chairman, this is one area where clearly there ought to be

a law.

Chairman BACHUS. I thank the Chairman.

Mr. LAFALCE. I thank you for that designation.

Chairman BACHUS. The Ranking Member.

[Laughter.]

Chairman BACHUS. At this time we’re going to hear from Mr.

Sherman. We’re going to have one more opening statement on each

side. I did it as people requested. But do you have an opening

statement? I’ll recognize the gentleman from New York. Or how

about Mr. Sherman.

5

Mr. SHERMAN. Thank you, Mr. Chairman. I’d like to comment on

the comments of our Chairman. I agree, shame on a credit card

company that is remitting money knowingly to those engaged in

the business of illegal gambling. The problem that I see is how will

a credit card company know that a particular entity based in the

Bahamas—you could call yourself the Bahamanian Sweater Company and claim to your bank that you’re engaged in selling sweaters or bathing suits, or you could call yourself the Bahamanian

Gambling Site. And that’s why I think it’s important that there be

at least an official, and if we can’t get it done officially, at least a

semi-official list of those who are making charges on credit cards,

those who are vendors in the credit card transaction that are not

selling sweaters but rather chances of winning in gambling.

The other point I want to make relates to some legislation that

I’m going to introduce soon that I hope many of those present here

will choose to co-sponsor, and that deals with what’s happening

now. And that is, people are mailing in or trying to mail in their

payments, and it’s not arriving at the credit card office on time.

Now we’re all familiar with late charges and finance fees, and they

can be horrendous. And if we’re really late in sending in the

money, I guess maybe there’s a fairness to it. But when people here

in Washington, DC. try to mail their payment and it’s delayed for

4 or 6 days or the mail is sent to Ohio for irradiation on its way

to credit card payments, that should not be the consumer’s fault

and certainly shouldn’t lead to finance charges.

I’m told that many banks are waiving those charges on request.

It should not be the consumer that has to make that request, and

I know that there are some credit card companies that aren’t waving these fees at all. They’re saying we got your payment late,

we’re assessing the fee. What my bill would do is apply to those payments of less than $10,000, because if you owe somebody

$10,000 on a particular date, maybe you ought to wire them the

money, but rather regular consumer payments on credit cards, regular consumer payments of mortgages, and say that where the

Postmaster General determines that there is a delay in the mail

due to an extraordinary occurrence, whether it be an act of terrorism or whether it be a hurricane or whatever, that consumers

are given an additional grace period.

And I think that a lot of us if we talk to our constituents are

going to find people who are either getting hit with finance charges

that they think are unfair or are calling in in order to get the finance charges reversed.

So I hope to have some support for a bill to provide these additional grace periods when our mail system is interrupted by either

acts of God or acts of man, and I yield back.

Chairman BACHUS. Thank you.

At this time we yield to the Chairman of the Full Committee for

an opening statement.

Mr. OXLEY. Thank you, Mr. Chairman, and I’d like to commend

you for holding this important hearing today. Americans hold more

credit cards and carry more credit debt than ever before. With the

current sluggish economy, problems with the mail, this Subcommittee needs to examine the credit card industry to ensure that

credit card holders are treated fairly.

6

The industry has had problems in the past. The posting of payments, teaser rates and fees. We must ensure that these practices

do not resurface. Of the three types of consumer credit available in

the financial services industry involving bank card credit accounts

for only 10.4 percent of outstanding consumer credit, an amount of

slightly less than $858 billion. Installment loans, car loans, for example, account for 13.9 percent, or $782 billion, and home mortgages account for $4.3 trillion, about 75.7 percent of all outstanding

consumer credit.

While it is the smallest segment of consumer credit, the credit

card industry is a major provider of financial services and a multibillion-dollar industry. Credit cards provide access to credit and

payment conveniences. They provide a means of cashless transactions. They serve as an interest-free loan from the time of purchase until the payment is due.

They provide customers with the ability to receive cash advances

from automated teller machines. They provide customers with the

ability to shop by telephone and on line, and they also provide an

instant source of credit that is available without filling out forms

or undergoing credit checks. Unlike cash, a lost or stolen credit

card can be replaced, and there are liability limits for fraudulent

or unauthorized charges. Credit cards also offer resources in cases

of emergency, such as large repair bill or airfare home during a

family crisis.

However, there are definite disadvantages of credit cards as well,

such as credit card debt. It may be more costly and difficult to

repay than other forms of consumer credit. The convenience of

credit cards may tempt some customers to live beyond their means.

It is also noted that excessive credit card debt and late payments

can impair a cardholder’s credit rating and make it more difficult

and costly to obtain credit in the future.

It seems that an appropriate purpose of this hearing is to assess

how the industry is balancing competing advantages and disadvantages of its product and how it serves its customers.

Mr. Chairman, again, my thanks for this important hearing, and

I look forward to hearing from the witnesses, and I yield back the

balance of my time.

[The prepared statement of Hon. Michael G. Oxley can be found

on page 66 in the appendix.]

Chairman BACHUS. Thank you.

At this time, I recognize the gentleman from New York, Mr. Ackerman.

Mr. ACKERMAN. Thank you very much, Mr. Chairman, and thank

you for holding this very important hearing. I appreciate the opportunity to hear from the witnesses today on a variety of issues having to do with credit cards.

There are several issues that I’d like to see addressed. One of

them are the privacy notices that have gone out and how successful

they’ve been. I know that I was deluged with them. I got about 40-

some-odd different notices, and you could spend a lifetime or a career just reading them, and I think most people don’t bother to

read them, and I’d just like to know what the results have been

so far.

7

I also want to hear about the terms of credit cards. The interest

rates. I know my colleague before said shame on some of the credit

card companies. I want to say hooray for some of the credit card

companies. They have single-handedly put the Mafia out of the

business of making loans at usurious rates.

I would like to know what the credit card companies think the

limits are that they could soak the public for. I’ve gotten I don’t

know how many solicitations that have these once in a lifetime opportunities to borrow money and put it on your credit card. And

you always know what you’re getting into from the start, because

it’s really in very big type, sometimes right on the envelope, taking

up the whole sides of the envelope, like 1.9 percent. This is a limited opportunity kind of offer. And then you read the small print.

And you can’t find the small print.

I’m not going to embarrass anybody today, because my original

thought was to give everybody who was a witness here today, both

panels, one of the solicitations and say find out the month that this

expires, and you can’t find it. I mean, it took me like 12 minutes

to read one of them three times, and I had to get out my magnifying glass, because they have a type so small on the back page

that tells you what the default date is, what the end date is, and

the default rate. But you have to get out your magnifying glass and

it’s in print so small that that size type isn’t even on the chart at

your optometrist’s office when you go for reading glasses.

And then the default rate on some of them that I just saw from

one very prominent bank is 24.9 percent. I’d also like the answers

to questions concerning why there is a different rate for people who

are higher risk for not paying, and that rate is basically spread

over the entire lenders’ base and there’s really very little attempt

made to collect on that because you build that into the excuse for

your next rate increase. And I just want to know what the limit

is going to be and do you think that you’re getting into the position

of being in the area of what is usurious.

And finally, I’d like to know when a credit card company reports

somebody to the credit reporting bureaus why it takes basically 24

hours to get that onto the report, and then you take as long as and

sometimes longer than 3 months if that information was erroneous

to remove it from the report of that agency. How do you explain

that?

These are some tough questions, but I think the public has a

right to know the answers to these and some other questions that

I’ll have later on. And I thank the Chairman.

Chairman BACHUS. Thank the gentleman. Are there any other

Members on the Majority side?

Mr. Cantor.

Mr. CANTOR. Mr. Chairman, I would just like to make an opening statement.

Chairman BACHUS. Or an opening statement.

Mr. CANTOR. Thank you, Mr. Chairman. I would like to thank

you for holding this hearing today on the credit card industry’s

treatment of its customers. As an opening comment, Mr. Chairman,

I’d just like to point out an instance in which a credit card company not only treated its customers fairly, but in light of the events

of the September 11th tragedies and terrorist attacks, went to

8

great lengths to provide assistance to its customers and its community.

A case in point would be, Mr. Chairman, the Capital One Corporation. It happens to be the largest employer in my district. I believe that this company also has instituted policies which I believe

could serve as models for the industry. After the tragedies of September the 11th, Capital One voluntarily took proactive steps to

address the needs of its customers in these difficult times. They

adopted a time standstill policy, charging no interest or fees for an

entire statement cycle and established a hardship policy to allow

for emergency lines of credit increases for people living within a 90-

mile radius of both New York City and Washington, DC. Additionally, they suspended collection calls for two weeks in these areas.

For their other customers, Capital One backdated payments to

compensate for mail delays and granted a higher number of fee

waivers to customers with special needs.

But Capital One’s greatest accomplishments I believe from the

community from which I come in this time of national tragedy was

its involvement in a nationwide telethon that occurred the Friday

after the attacks. They created a 15,000 person call and payment

processing center to handle the high volume of calls which were

staffed by 7,000 Capital One employee volunteers. The company donated $100,000 to the American Red Cross effort, promoted blood

drives at all their locations, and established the Capitol One Cares

Fund which will match employee contributions up to $75,000.

But, Mr. Chairman, besides these acts, the company has worked

very hard to ensure that the customers are satisfied and that there

are many internal programs to improve the relationship with its

customers that I point out could be a model for the industry. These

programs range from Listen Up, which requires company executives to spend time each month listening and observing customer

interactions in order to better understand the customers’ needs.

Customer Connection is a program that offers surveys to clients 24

to 48 hours after dealing with an associate in order to find out

where Capital One needs to improve its services. The current results of this program have indicated that 83 percent of customers

are very satisfied with the company’s services.

In sum, Mr. Chairman, I would think that the efforts of Capital

One in this time of national crisis and its continuing strive to have

good relations with customers are examples of the good deeds and

I think services that the industry is capable of. I’d therefore like

to thank Capital One and the industry and its efforts to improve

relationships with its customers. I am sure, Mr. Chairman, that

out of this hearing we will also hear other ways that we can encourage industry to conduct like policies. I yield back. Thank you,

Mr. Chairman.

Chairman BACHUS. I thank the gentleman from Virginia for

those heartfelt sincere remarks.

At this time I’d recognize the lady from California.

Ms. WATERS. Thank you very much, Mr. Chairman. I’m very

pleased that we’re having this hearing. The full name of this subcommittee is Financial Institutions and Consumer Credit. All too

often, we spend most of the subcommittee’s time on the financial

9

institutions part and not nearly enough time on consumer credit

issues.

This particular hearing, which will examine current practices of

the credit card industry, is long overdue. The credit card industry

is rife with abuses and deceptive practices. Recently the courts and

some regulators have acted to curtail a few of the most egregious

cases. In my home State of California, the OCC imposed $300 million in civil penalties against Providian for deceptive marketing of

mandatory credit protection and other violations. The OCC also imposed penalties against Direct Merchants Bank for downselling

customers. Downselling is the practice of marketing favorable account terms to a customer, often preapproving the customer for

these low interest rate accounts but then approving the customer

for an account with higher rates and fewer benefits without highlighting these changes to the customer.

I am particularly concerned about late payment fees. These fees range from $15 to $35 and are generally imposed whenever a payment is late with no grace period. Reportedly, a number of institutions actually impose late fees even when the payment is received

on the alleged due date because the cardholder agreement indicated that the payment must be received by an early morning hour

of the due date, well before mail delivery is scheduled to arrive.

This is especially troubling in the current environment where

mail delays are becoming increasingly common. While I am aware

that some individual institutions have taken steps to waive fees

and extend due dates in some cases, I believe that it would be appropriate for the regulators to impose a moratorium on late fees

and over-the-limit fees that are likely to result from the delays in

mail that are currently being experienced.

Alternatives to mail delivery are not necessarily better. Many credit card companies charge customers as much as $10 or $15 to

process an electronic payment via phone. Even worse, I understand

that at least one institution, my old friends at Citibank, does not

credit these electronic payments at the time the customer authorizes the payment but delays crediting the account until the payment has been processed. Therefore, if a customer seeks to avoid

a $35 late payment fee by paying $15 for an electronic debit, that

customer may still be hit with the late fee if the bank doesn’t credit

the payment in a timely manner.

Furthermore, these late fees can trigger higher penalty interest

rates, as high as 30 percent. These penalty rates can even be imposed in response to a late payment to another creditor. If this information is obtained from a customer’s credit report, the customer

has no ability to respond or explain the late payment which could

be a disputed debt, a creditor mistake, or a case of identity theft.

Finally, I would like to hear testimony from both the regulators

as well as the industry representatives regarding interest rate

floors that many institutions impose. Every time that legislation is

proposed to cap credit card interest rates, like the bills recently introduced by Congressman Salmon, the industry rails against these

caps, claiming that they must have the flexibility to reflect the cost

of funds in their products. However, now that the Fed has lowered

the cost of funds considerably, many credit card customers are receiving absolutely no benefit from the interest rate reductions beVerDate 11-MAY-2000 08:13 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 76183.TXT HBANK1 PsN: HBANK1
10

cause their accounts have a floor or a minimum interest rate that

will be charged.

Why is it that the industry considers interest rate caps a distortion of the market but imposes interest rate floors in order to prevent their customers from sharing in the lowered cost of funds?

The reason the Fed has been reducing interest rates is to stimulate

the economy. Stimulate the economy. Stimulate the economy. It

seems to me that customers would have more money to spend if

they were realizing the benefits of these lower interest rates. It

seems to me this would be to everybody’s benefit.

Now for those who say, you know, oh you just are attacking the

credit card companies, or you feel Americans hold too much debt

or credit and you would like to do away with the industry, that is

not true. And that is one of the reasons I have introduced H.R.

2969, a bill that reinstates the tax deduction for personal interest,

such as credit card interest and car loan interest. My legislation

currently has 55 co-sponsors including Mr. Bereuter, Mr. Kanjorski

and a number of other Members of the Subcommittee. It is my

hope that even more of my colleagues will co-sponsor this legislation and that we will enact it this session, stimulate the economy

by giving tax relief to consumers while preventing home equity

stripping.

So in my estimation, if the credit card companies realized the

benefit to themselves and to the consumers and this economy, they

would lower these interest rates and support the idea that consumers could deduct the cost of the interest rates as tax deductions.

I would like to thank you, Mr. Chairman. I yield back the balance of my time and look forward to the testimony of the witnesses.

Chairman BACHUS. I thank the Ranking Member. Are there any

other Members who wish to make opening statements? The

gentlelady from New York and then the gentlelady from Indianapolis.

Mrs. MALONEY. Thank you, Mr. Chairman, for calling this hearing on how the credit card industry treats its customers. We are

all sitting here because we have been elected by consumers. And

I truly think we should hold more hearings that specifically address their treatment by financial service providers of all types.

I believe today’s hearing is especially timely, given the events of

September 11th. In the wake of the attacks, U.S. businesses have

responded with an outpouring of charitable support and business

breaks for my constituents in New York. These have included the

waiving of late fees and other considerations by credit card companies. These are fantastic gestures by the companies that have offered them. While these good actors in the industry should be

praised, I do believe that we should consider making the waiving

of such late fees statutory.

As you would expect, my district office and my office here in New

York have been inundated with case work related to the attacks.

To this point, I can personally say that we have not received complaints from victims’ families related to credit cards. In fact, most

people I have talked to have praised the measures taken by financial service providers, especially insurers and individual banks that

11

have worked with victims to extend credit and address their individuals concerns.

I look forward to comments by today’s witnesses on the credit

card industry, and I thank the Chairman for calling this hearing

and I request permission to put the rest of my comments into the

record. Thank you.

Chairman BACHUS. I thank the gentlelady.

Ms. Carson.

Ms. CARSON. Thank you very, very much, Chairman Bachus for

convening this hearing so expeditiously, and I want to welcome all

the panelists who are here today and to assure you that my comments are not combative, they’re not accusatory, they’re simply derived from the kind of constituent inquiries that my office receives

both here and in Indianapolis.

For some years now, consumers have experienced and are experiencing a new system among credit card issuers in which small

print can lead to big debt. Tactics such as penalty pricing, where

fees and penalties have replaced interest earnings as the principal

source of earnings for card issuers, and arbitration clauses and

credit agreements have resulted in customers finding themselves

trapped on a treadmill of debt.

As we move into the 21st century, credit card users are faced

with an ever-growing myriad of hidden clauses which are designed

to catch the consumer unaware. These include sudden changes in

policies and rates, late fees, balance transfer fees, increases in annual percentage rates and mergers that change the rate and term

agreements at a moment’s notice. What these consumers are experiencing is a new system among credit card issuers called penalty

pricing in which fees and penalties have replaced interest earnings

as the principal source of earnings for card users.

Penalty pricing is a gold mine for credit card companies and unfortunately, perfectly legal. Credit card issuers are taking every advantage in current law to hook new customers with misleading promotions about teaser rates that start out low but can be jacked up

as much as 24 percent if a customer is even one day late on a payment. Consumer groups report the grace periods are getting shorter for payment due dates. Many credit card issuers are eliminating

payment leniency periods and slapping record numbers of new fees

and penalties for every possible consumer lapse.

Students at my colleges and my university are saying that they

open up their mail and there was a credit card, $10,000 limit.

They’re naive, immature, go out and run the credit card bill up.

Their parents are being harassed. When they graduate from college, their credit is all screwed up. They can’t do anything about

that.

Finally, Mr. Chairman, let me mention another gimmick that my

constituents complain about, and that is opening up a credit card

bill, finding some company has charged their credit card for items

that they have not received and know nothing about. And the problems that consumers incur trying to remove those bills, those

charges from their credit cards and how the credit cards are making them go to a company that they don’t even know exists to try

to get those kind of charges removed.

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Finally, the kind of sudden mail subscriptions that come to their

doorstep for magazines that they did not order that appear up on

their charge cards for charges.

Those are some of the kind of things that we’re confronted with

as Members of the United States Congress, and I believe that we

can work out a solution that would be palatable both for the profit

margin of the credit card company and be to the fairness and responsibility for the consumers who are credit card holders.

The bankruptcy filings in my district have skyrocketed, and it is

all because of credit card debt.

Thank you very much, Mr. Chairman. I yield back the balance.

Chairman BACHUS. At this time, I’d like to introduce the first

panel. The first panel is made up of regulators. We have Dolores

Smith, who is the Director of the Division of Consumer and Community Affairs for the Board of Governors of the Federal Reserve

System. And Elaine Kolish, she is Assistant Director of the Bureau

of Consumer Protection, Division of Enforcement at the Federal

Trade Commission.

Both our witnesses have testified before us before. Both of them

are highly qualified to testify, and I think they are as informed as

anybody at those two agencies in addressing the issues before us

today.

So at this time I’d like to recognize Director Smith for an opening

statement, followed by Director Kolish. We anticipate having a vote

around 11 o’clock. Hopefully we can have both opening statements

and start the questioning. But if we have a vote during your testimony, then we’ll probably recess for votes. Thank you.

STATEMENT OF DOLORES S. SMITH, DIRECTOR, DIVISION OF

CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM

Ms. SMITH. Chairman Bachus, Representative Waters, Members

of the subcommittee.

Chairman BACHUS. And if you all will sort of pull those mikes

up close.

Ms. SMITH. Thank you for inviting me to appear before you this

morning. The Federal Reserve Board’s Division of Consumer and

Community Affairs carries out the Board’s responsibilities for administering a number of consumer credit protection laws, including

the Truth in Lending Act.

The Truth in Lending Act is the primary law governing credit

cards at the Federal level. Disclosures about costs must be given

with a credit card solicitation, when an account is opened, and with

each billing statement.

Truth in Lending also requires that payments be credited on the

date received. It limits consumers’ liability for unauthorized use of

a credit card, and it provides procedures for resolving billing disputes. Credit cards are also subject to various State laws that may

regulate the terms of the accounts.

My written testimony gives a little background on growth in the

credit card industry and includes attachments relating to a study

entitled ‘‘Credit Cards: Use and Consumer Attitudes, 1970-2000’’, a

study on credit card profitability and our consumer brochure on

shopping for a credit card.

13

My oral remarks will focus on some of what we have learned

from studies about consumers’ attitudes toward credit cards. We’ll

describe recent regulatory changes that we made to improve credit

card solicitations, and we’ll mention the Federal Reserve’s experience with consumer complaints and compliance examinations of

State member banks.

First about consumer attitudes. The Federal Reserve sponsors or

participates in a number of surveys that explore consumers’ attitudes toward credit cards. I’ll mention the most recent, carried out

in January 2000. That survey reveals that consumers have mixed

feelings about credit cards. About 40 percent of those surveyed believed that consumers would be better off without credit cards, and

about 88 percent agreed with a statement that credit card companies make too much credit available to most people.

Consumers may have developed these negative views in part

based on their perception of other consumers’ difficulties rather

than from their own experiences, because when asked, about 90

percent of the consumers with bank-type cards said they were generally satisfied with their own credit card companies and believed

that they were treated fairly. They also believed that they could

easily get a card from another company if they were not treated

well.

The Board also has participated in surveys that looked at consumers perceptions about the ease of obtaining cost information for

credit cards. In a recent survey, about two-thirds of consumers

with bank-type credit cards said that obtaining information on

credit terms is easy. However, many did find card solicitations offering a low introductory rate to be confusing.

I’ll move on to describe our recent rulemaking. In response to

concerns about solicitation disclosures, the Board last year amended the rules that govern solicitations to make them more helpful

to consumers. The changes relate to disclosure requirements under

the Fair Credit and Charge Card Disclosure Act of 1988. This law

requires that the APR and other costs be disclosed in direct mail

and other credit card solicitations. The purpose of the law was to

ensure that consumers received key cost information about credit

and charge cards early enough to permit comparison shopping.

Before 1988, consumers often did not receive cost information

until they opened an account. The Act requires that the disclosures

be given in a table prominently located on or with the solicitation.

Over the years, as the pricing of credit card programs has become

more complex, the cost disclosures provided with credit card solicitations also have become complex, particularly when multiple rates

apply to a single program. And over the years, as the disclosures

became longer, some card issuers chose to compensate by using reduced type sizes instead of allocating more space. In some cases,

it became difficult for consumers to use the disclosure table to

readily identify key costs and terms for comparison shopping.

In contrast, the promotional materials that accompany a credit

card solicitation may highlight a low introductory rate in a large,

easy-to-read type size.

Last year the Board revised its rules for credit card solicitations

to make the required disclosure table more noticeable, simpler, and

easier to use. These changes became effective on a mandatory basis

14

on October 1, 2001, and consumers should now be seeing improved

disclosures with the credit card offers they receive.

Card issuers must disclose the regular APR for purchases in at

least 18-point type so that it is more prominent than any introductory rate. Also, disclosures must be readily noticeable. They automatically meet this standard if they are in at least 12-point type.

To take account of the complex pricing, cash advance and balance

transfer APRs must also be included in the disclosure table.

I’ll close by mentioning our experience with respect to bank examinations and consumer complaint investigations. The Federal

Reserve conducts compliance examinations of about 980 State

member banks. Most are small institutions. For the vast majority,

credit card lending is not a significant activity. Of the banks that

we examine, only three have substantial credit card portfolios representing 50 percent or more of the bank’s total loans.

In our examination of banks that are involved in credit card

lending, we find isolated instances in which the bank has failed to

meet Truth in Lending requirements. We have not found any widespread practices that violate applicable laws or regulations.

The Board investigates consumer complaints against State member banks and forwards complaints about other creditors to the appropriate enforcement agency. The annual volume of complaints

that we receive, including complaints about credit cards, has been

increasing since 1997. Last year there were about 2,400 complaints

filed with us regarding State member banks. Approximately 1,000,

or 40 percent, were about credit cards. Of these 1,000, about 60

percent fell into three categories: disputes about billing errors; concerns about penalty charges, late payment and other fees; and disputes involving alleged errors in reporting consumers’ payment history.

In the vast majority of complaints investigated, the bank was legally correct but made a good will reimbursement or other accommodation to the consumer.

Thank you.

[The prepared statement of Dolores S. Smith can be found on

page 68 in the appendix.]

Chairman BACHUS. Thank you. Director Kolish?

STATEMENT OF ELAINE KOLISH, ASSISTANT DIRECTOR, BUREAU OF CONSUMER PROTECTION, DIVISION OF ENFORCEMENT, FEDERAL TRADE COMMISSION

Ms. KOLISH. Thank you. My name is Elaine Kolish. I am the Associate Director of the Enforcement Division at the FTC.

Chairman BACHUS. If you all would pull those mikes just a little

closer.

Ms. KOLISH. Yes, sir. First I’d like to note that my oral statement

represents my own views and not necessarily the views of the Commission or any individual commissioner. As Mr. LaFalce noted, the

FTC doesn’t have jurisdiction over banks, but we do exercise our

jurisdiction over non-banks to stop deceptive practices very vigorously, bringing dozens of cases against marketers, telemarketers

engaged in deceptive marketing of credit card offers and credit card

protection services to consumers. In fact, just last week, we brought

15

eight cases against people who were misleadingly marketing credit

cost loss protection services.

But I’d really like to focus today on our recent case against Ira

Smolev and a group of companies that he ran that sold memberships to discount buying clubs, known as Triad Discount Buying

Service. The Commission brought this case as part of its overall

crackdown on deceptive negative option marketing and free trial offers, and as part of our ongoing effort to ensure that consumers’ credit cards are only charged for the goods and services that they

want.

This case is particularly important because of the large number of consumers who found their credit cards charged up to $96 for a

buying club they didn’t want. Last week we announced that we’ve

obtained a settlement with Mr. Smolev and his companies to pay

$9 million to the FTC and to the more than 40 State Attorneys

General who joined us in this action.

Although free trial offers can be a great way for consumers to try

a new product or service without making a long-term commitment,

they’re only legal if the marketer is up front and truthfully discloses all the material terms and conditions. What happened in the

Smolev case is that consumers didn’t get the information they

needed, and here’s how it worked. Say you saw a TV commercial

for a chicken rotisserie and decided you simply had to have it, so

you call the toll-free number, provide your credit card number to

pay for the product, and then you’re told, as a thank you for your

purchase, they’d like to give you a special offer—a free trial in a

discount buying club.

These additional pitches are known as upsells, which is the telemarketer’s version of the foot in the door. Getting one, two, three

or even more upsells is becoming very common in telemarketing

calls. Unfortunately, while the telemarketer touted the offer as

free, risk-free, no obligation, the telemarketer failed to tell you adequately that it was your obligation to call before the end of that

30-day trial period to avoid having your credit card charged for a

year’s membership. And in many instances we found consumers got

charged even if they said no to the free trial offer, and other consumers said they never even heard the pitch but they were charged

anyway.

Adding to this injury was that the telemarketer you called transferred your credit card information to a third party, in this case,

the Smolev buying clubs, without your knowledge or agreement.

Under the settlement we’ve reached, as many as 275,000 consumers are going to get refunds of at least a portion of what they

paid and the companies are going to have to dramatically revise

their marketing practices to prevent future deception.

In particular, the order will protect consumers by prohibiting the

defendants first from transferring credit card information to third

parties, and second, from obtaining credit card information from

third parties without consumers’ knowledge and agreement.

The Smolev case is particularly troubling, because it shows that

when marketers already have consumers’ credit card numbers,

they have the ability to place charges on consumers’ accounts without their knowledge and agreement, and they can transfer this information to third parties who can do the same thing.

16

The FTC and the States have already brought a number of cases

involving misleading free offers and dozens of cases involving other

types of misleading sales practices involving credit card offers and

credit card loss protection services. And we continue to actively

monitor this area so that we can stop deceptive practices.

In addition, Chairman Muris just recently announced that as

part of our review of the FTC’s telemarketing sales rule, he will

ask the Commission to consider amendments that would address

abuses concerning pre-acquired account information, to ensure that

such information is not used to bill consumers’ credit cards for

services and goods they do not want.

Let me close by saying that, as we do in all areas, we try to inform consumers about what they need to look out for when they get

free trial offers so they can make informed decisions about whether

to participate, and we encourage consumers who feel they’ve been

misled to file complaints with the FTC. That information is extremely important to us in helping us target our resources on the

worst actors.

Thank you for this opportunity to testify.

[The prepared statement of Elaine Kolish can be found on page

112 in the appendix.]

Chairman BACHUS. Thank you. At this time, we’re going to recess for votes. We anticipate we will reconvene at twenty after.

Thank you.

[Recess.]

Chairman BACHUS. The hearing will come to order. At this time

I’m going to ask unanimous consent from the subcommittee that

we allow one of our colleagues, Representative Chris Smith, to

make a statement. Representative Smith of New Jersey has introduced legislation prohibiting credit card companies and other creditors from imposing late fees, raising interest rates or submitting

adverse information to a credit bureau with respect to any consumer whose mail service has been disrupted due to a biological or

chemical attack on America.

So at this time, without objection, Mr. Smith.

Mr. SMITH. Mr. Chairman, Senator Bachus, Chairman Bachus,

thank you so much for this courtesy, because this is I believe to be

an emergency that’s occurring right now in my district but the potentiality of this happening in anyone’s district or in proximity to

their district is very, very high, so I want to thank you for this very

kind courtesy that you’ve extended to me.

Mr. Chairman, I do appreciate the opportunity to discuss legislation that I’ve introduced which I hope will receive a thorough analysis and quick analysis and consideration by this subcommittee

and the Full Committee. The proposal, H.R. 3175, the Late Fee

Emergency Relief Act of 2001, would protect consumers from late

payment penalties caused by mail delays resulting from acts of biological, chemical or radiological terrorism.

In the event of a terrorist attack that resulted in the disruption

of mail, the legislation would require the Postmaster General to

certify certain zip codes as being disrupted. This designation would

be for a 30-day period, kind of like a grace period. During the period of disruption, consumers would be given 30 additional days to

make their payments or mortgages, and they would be protected

17

from having to pay late fees, higher interest rates, or suffering

from negative credit information being placed in their credit report.

Persons whose principal residence is located in these affected zip

codes would be afforded this modest protection.

Mr. Chairman, I drafted this legislation after learning that several, hundreds of my constituents have already received late payment notices for bills that they had mailed on time but had not

been received due to the crisis at the Hamilton Regional Post Office

located on Route 130 in Hamilton Township, New Jersey. This post

office is a critical hub for mail distribution. As a matter of fact, it

has 44 different feeder sites that feed into it. It is a very large facility, and I’ve seen the trailer that is filled to overflowing with suspect or potentially contaminated mail. There are bills, there are remittances, there are checks that are sitting there that until it is

screened and checked and cleansed will not get out of that trailer.

I believe that with the recent anthrax attacks on our postal system causing disruptions and delays in mail delivery, it is only reasonable that banks and creditors make reasonable accommodations

for customers whose payments are delayed through no fault of

their own.

This legislation is carefully crafted to provide a mechanism for

temporary relief for consumers. It will not allow people to escape

their financial obligations, because the protection from late fees,

higher interest rates, and—and I think very importantly—negative

credit information only lasts for 30 days. Moreover, H.R. 3175

under the provisions, the Postmaster General has the authority to

continue to list affected zip codes if the mail disruptions are not

ended within the 30-day window.

Mr. Chairman, I believe it is a reasonable solution, and I do hope

that you and Members of this important subcommittee will look at

it, and it needs to be marked up and be put on a fast track to help

people like my constituents. Thank you, Mr. Chairman.

Chairman BACHUS. I thank the gentleman.

At this time we’ll go back to our regular order of business. But

Representative Smith, we have before us representatives of the

FTC and the Federal Reserve also who regulate the credit card industry, and also MasterCard and Visa representatives are in the

audience and will be testifying on the second panel. So I think you

had an appropriate forum.

At this time we will turn to questioning our first panel. I want

to read an excerpt from a National Journal article that was published September 8, three days before the terrorist attacks on our

country. It says ‘‘Credit has played an indispensable role in American prosperity, helping to sustain this country through economic

downturns and tide over families threatened by sudden misfortune,

but it has also exacted harsh costs, leaving a third of low-income

people in serous financial trouble and squeezing middle class families as never before. Yet there seems to be no end in sight. U.S.

households continue to pile up more debt each year, dedicating ever

larger shares of their income to keeping up with payments. Huge

industries are being created to facilitate this borrowing and to collect from those who can’t pay.’’

And this is the particular line, and I’m going to use this as a

question to you: ‘‘Meanwhile, as the demand for more credit soars,

18

Government is turning a blind eye to new lending practices that

are worthy of Tony Soprano.’’ Now the gentleman from New York

actually mentioned the Mafia earlier and complimented the credit

card industry by saying that they replaced the Mafia in lending

money to some people and were obviously a much better alternative. But here is at least one leading publication saying that

some of their lending practices are worthy of Tony Soprano.

And Ms. Kolish, I will say to you, you described a flim-flam operation that I think was despicable, which defrauded thousands of

American citizens. The FTC got involved in that. But I’ll tell you

what raised my eyebrows. You said that they were required to pay

back—the consumers got ‘‘some of their money back.’’ My question

to you, why didn’t they get all their money back and punitive damages?

Ms. KOLISH. Our goal would have been to give all the money

back to consumers as redress. Unfortunately, four of the major

corporations——

Chairman BACHUS. And would you pull that mike a little closer?

Ms. KOLISH. Unfortunately, four of the major corporations at

issue in this case filed for bankruptcy, and so we had a very difficult time. You know, we had other creditors competing for this

money as well. But the good news is, the FTC is getting over 50

percent of the bankrupt estate so that we got the most money we

possibly could to give back to consumers.

Chairman BACHUS. Are there any criminal actions being

brought?

Ms. KOLISH. Well, I couldn’t say if there were, but it’s possible

that criminal authorities—we don’t have the jurisdiction to do that

ourselves—could be interested in following up on this, but I’m not

aware of that.

Chairman BACHUS. Do you all work and cooperate with the Justice Department and State Attorneys General when you see lending

practices that you believe really represent criminal—you know, to

me, some of these activities are clearly illegal.

Ms. KOLISH. We absolutely do work with criminal authority and

State Attorneys General. In the Triad case we just brought, we

worked with more than 40 State Attorneys General, and in many

other cases, we’ve worked with State and other Federal authorities

to bring cases which have on occasion led to follow-up criminal actions. Sometimes criminal authorities have used the civil findings

we’ve obtained as a basis for their criminal action so they can get

additional relief.

And although we don’t have jurisdiction over banks, that type of

lenders, because of those concerns that you mentioned about lowincome people being preyed upon when they don’t have any money,

we have brought dozens and dozens of cases against these telemarketers who are offering consumers guaranteed Visas or

MasterCards when, in fact, they end up paying $169 and only get

applications or nothing. So we devote huge amounts of resources to

trying to tackle those types of fraud artists, because they are preying upon low income people who can least afford to lose that

money.

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Chairman BACHUS. In telemarketing, do you all have any guidelines or parameters on what calls are prohibited at what times of

day or night? Is there any Federal law on that?

Ms. KOLISH. Yes. Congress gave us additional authority in the

1990s under the Telemarketing Act, and we issued implementing

regulations known as the Telemarketing Sales Rule, which prohibits sellers from calling consumers before 8:00 a.m. or after 9:00

p.m. And it also specifies that telemarketers when they call you in

outbound calls have to disclose up front the identity of the seller

and the material terms and conditions of the sale.

They are also prohibited, for example, in these lending situations

where they want people to pay a fee in order to get a loan—we call

it advanced fee loan scams—they’re prohibited by law from collecting any money up front when they say they’re going to try to

help people get a loan or repair their credit history. So it’s very

good, clear-cut relief and guidance under the rule that allows us to

go to court and get effective relief from judges.

Chairman BACHUS. I had an experience I think many Americans

have. I have an unlisted telephone number and I received a call on

that unlisted telephone number that I don’t even use on credit applications from really a well-known bank. And I asked them very

nicely, I said, you know, I’m not interested, and I would appreciate

you removing my name from your list. I have now gotten two more

calls from them. They’re very courteous when I tell them to please

not call me again. They then call me again. Are there any requirements on them when I advise them please not to call me again?

Ms. KOLISH. Yes.

Chairman BACHUS. And these calls are coming in at disturbing

hours. I mean, I consider 8:15 in the morning, you know, on a Saturday morning, is not a good time to call me. I don’t really think

on my unlisted telephone number there is a good time to call me.

And I have a listed telephone number that has an answering machine too.

Ms. KOLISH. Right. Unfortunately, they don’t have to use listings

to make calls. They can do automatic dialing. They can reach all

sorts of numbers, listed or not listed. The Telemarketing Sales Rule

does have a provision that says if consumers ask to be put on their

‘‘Do Not Call’’ list, they have to honor that, and they can be liable

for civil penalties under the rule if they don’t observe the customer’s request. So we would be happy to hear about what organization it is that has violated your request that they not call you

in the future.

Chairman BACHUS. Thank you. And it was actually an organization that I took a 1.9 percent loan out on, and willingly, and paid

it, you know, bought a car and then 6 months later, paid it off. But

most people aren’t in a position to use those things. There are some

of us who take advantage of those and get some very low rates.

Ms. KOLISH. Well, with your good credit history, you’ll probably

get more offers.

Chairman BACHUS. But now that I’ve done that, I’m surprised

they’d call me back really. Ms. Smith, let me ask you this question.

And if you’d like to comment on that other one. But let me ask you

a more basic question I think that we’re all concerned about. Can

Americans continue to load up on consumer debt without harmVerDate 11-MAY-2000 08:13 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 76183.TXT HBANK1 PsN: HBANK1
20

ing—it’s harming themselves—but without it harming the U.S.

economy? And I mean, are we there? Are we going to have some

long-term consequences to our economy?

Ms. SMITH. Well, it’s certainly something that we worry about,

particularly in a period when there are rising levels of unemployment. But I really am not in a position to get into the economic

aspects of this. But it is something to be concerned about.

Chairman BACHUS. At the Federal Reserve, do you know of any

actual—how great is the concern? How great that it can fundamentally harm our economy? And are there any serious discussions

about what the policy of the Federal Reserve or the national Government ought to be about growing consumer credit? Which as I

said in my opening statement, a lot of Americans have a lot of

things because there is consumer credit out there, and they’re

choosing, day after day, transaction after transaction, to take on

this credit. So it’s a willingness on the part of them.

Ms. SMITH. It is a willingness on the part of the consumer. I can

speak on the consumer affairs side of it and not on the economic.

But on the consumer side, certainly we worry about whether consumers are cognizant of the difficulties that they can make for

themselves. And one of the things that we have undertaken over

the past year in particular is to focus on financial literacy efforts

in addition to consumer education generally to make sure that consumers have some awareness of the fact that credit offers many advantages but that it also has disadvantages for the consumer and

that it’s important to use credit wisely, whether it’s from credit

cards or other types of credit.

Chairman BACHUS. OK. At this time I yield to Ms. Maloney. Or

actually, I think we were going in order of how people came, to Mr.

Ackerman.

Mr. ACKERMAN. Thank you, Mr. Chairman. Following up on the ‘‘Do Not Call’’ list and unlisted numbers that the Chairman referred to, in New York State we have a law in which people are

allowed to put their name on a list that companies are prohibited

to call anybody on that list, and if they do, there’s a very severe

financial penalty. It seems to be working very well, because that

cut down tremendously and for a while altogether on the calls I

would receive on my unlisted number. But now some of these companies have figured out a way around it. They just move out of

New York State or have the calls made from out of New York

State.

I will be introducing legislation later this week to which any of

our colleagues are welcome to join as original co-sponsors, that

would set this up on a national basis, anybody who doesn’t want

these calls or finds these calls are unwarranted or unwanted can

put their name on a list, and that list would be provided to all of

these boiler shops. What would be your reaction to something like

that on a national basis?

Ms. KOLISH. Well, the Commission has actually been thinking

along similar lines, and that one proposal that is going to be considered during our review of our existing Telemarketing Sales Rule

is to set up a national Do Not Call list. So that’s a proposal we

think will be coming out in the Notice of Proposed Rulemaking

sometime shortly.

21

Mr. ACKERMAN. Thank you. You mentioned, I think it was Ms.

Smith who mentioned in her testimony about the type sizes for the

promotional rate and 18 points versus 12 points, and a lot of people

aren’t familiar with what that is. I marginally am, having been in

the newspaper and typesetting business some time ago. But that

being the case, there is nowhere on these promotional rules that

you have here that you’re coming out with that says how and

where people have to be notified as to which month or how many

months this rate will last. And I get a lot of these. Because I turn

over a couple of cards every couple of months.

But sometimes it takes me a very long time to find out if this

is a 2-month promotion or it ends in September, October, November, whatever it is. And usually that typeface is 2-point type, which

is minuscule. Two-point type, and there’s an asterisk, and usually,

and we learned in school you put on the bottom of the page what

the asterisk refers to. This is on three pieces of paper later on the

back of something on a whole, must be 10,000 words on a 5 by 6

piece of paper to tell you what month it expires in, and sometimes

it’s 3 months later by the time you have this process approved, or

if it’s a longer period of time, the month before it expires—and you

don’t even know when it expires, they send you a whole bunch of

checks attached to a piece of paper and say take advantage of your

current special rate to buy gifts for Christmas or go on a vacation

or whatever, and they give you the checks, and they make it very

easy. And you don’t know that you spend that money at your very

low rate knowing that on your next billing state, that rate is going

to expire. Are you going to have regulations to do something about

that and make them put it on the same page?

Ms. SMITH. You should be seeing improved disclosures if you

haven’t already. I hope that some of these solicitations you are

talking about came—you know, were as the result of earlier solicitations and not anything that is running currently.

I mentioned earlier that the Board had amended the rules having to do with solicitations and under the new rule, the 18-point

disclosure of the interest rate, if it is an introductory rate, also has

to be followed immediately by the expiration date. So that it might

say 1.9 percent until December 31st, 2001.

Mr. ACKERMAN. That’s what I wanted to suggest. It wasn’t in

your testimony. I appreciate that. It’s a very good idea.

Ms. SMITH. It’s in the model forms. Well, it’s in the regulation,

but then we also have model forms setting out how it would look.

Mr. ACKERMAN. I appreciate that. The most recent one I got on

the 1.9 percent, by the way, this one was very good, because it tells

you right up front that it’s until October of 2002, and I guess they

want you to know that because they’re proud of it I guess taking

advantage of the lower rates now.

Ms. SMITH. There are two actual requirements. There’s one for

the box that sets out the disclosures and that is where they have

to use the 18-point——

Mr. ACKERMAN. That will be very helpful. Let me get in one final

question if I may. That answer is very satisfactory. This is a problem that was experienced by somebody in my city, namely, me.

[Laughter.]

22

Mr. ACKERMAN. I signed up for something called Privacy Guard to see what it was, and for $69.95 it saves your life. It does everything for you. It’ll protect your Social Security. It’ll protect creditors

from going after you. It’ll notify you if anything bad is going to

happen. It tells you exactly what to do, you know, where you stand

with the Veterans Administration, if somebody questions your credit, they notify—all sorts of wonderful things. So I signed up for this

to see what it was all about. And after several months, they sent

me nothing. And then I saw it on my credit card statement, $69.95,

which was the only charge I had. Otherwise, it was a zero balance.

Then what happened, I called the credit card company, said I want

to cancel this. They said you have to call Privacy Guard. I called

Privacy Guard and they tell me, well, you know, did you get our

packet? I said I received nothing and I’m not interested in it anymore and I want to cancel it. They said OK. They took all the information. A week later, I received their packet. A month later, I received another statement from my credit card company and I called

them and I said, hey, this $69.95 is supposed to be off. I’ve canceled

it. And they put a $29.60 charge, a $29 late fee and 60 cents for

a cash advance. This goes up to $100, and I still can’t get this

straightened out.

The next thing, I’m in the middle of applying for a recasting of

a mortgage for my home, and I get turned down. I don’t know why,

because I otherwise have a fairly exemplary credit history, and I

get a copy of the credit report and it refers to me to this whole

thing that refers to this Privacy Guard thing. It seems that my

company that was intended to protect me I thought now turned me

in for not paying for a service that I didn’t receive, and when I

called the credit card company, they said they would take it off and

give me a credit for it. They no longer used Privacy Guard. They’ve

had a lot of problems with them. They took it off, and I said would

you call the credit reporting agency, because I’m trying to take advantage of the low rates for the mortgage. If it jumps back up another point or two, it’s going to cost me a lot of money. They said

we’ll take care of that right away. Nothing happens. A month later

and month later, nothing happens. I called the company, the credit

card company, they said, ‘‘Well, we took care of it.’’ I get up to the

president of the company. I usually don’t identify myself by my

title. I want to be treated like everybody else—poorly.

[Laughter.]

Mr. ACKERMAN. Which I was. Nonetheless, I was disappointed. I

spoke to the president of the company. He assured me he was taking care of it. I told him that I was told that it’s going to take another 90 days. He said, ‘‘No. We will take care of it right away.’’

He called me back and he was shocked, shocked, to find that he

couldn’t get it taken off for another 90 days because there’s a cycle.

There’s a cycle. And it can go for 90 days.

Now I’m stuck in this trap of having bad things said about my

credit to everybody who is inquiring about my credit for all this period of time based on something that could have been, if it was corrected in the time that the report was made, which was instantaneously. They report it. Within 24 hours, I got this black mark next

to my name. And it takes I don’t know how many months, but certainly in excess of three or four, to get this remedied. Do you have

23

any regulations in mind to fix this problem? Or somebody who will

handle my mortgage? That was a joke.

Chairman BACHUS. Not only as it deals with his problem, but I

guess all Americans.

Mr. ACKERMAN. Yes. I cite myself as an example knowing that

there are many, many people who cannot reach the president of the

company and find out that he’s shocked.

Ms. KOLISH. I’m very sorry you had such a disappointing and terrible experience. There are Federal credit rules that are designed

to help consumers in that situation. One is the Fair Credit Billing

Dispute Act which, when you have a charge on your credit that is

one you didn’t authorize, you can call and dispute it.

Mr. ACKERMAN. Yes. And they put down, until they figure it out,

they leave it on your credit report and they say this is disputed by

this S.O.B. who’s challenging our authority, and it flashes like a

neon light to anybody knowing that I’m now a troublemaker. So

that becomes problematic, but they don’t take it off. They put that

on right away, but they don’t resolve it for months. And even if

you’re agreed, and all three parties agreed this charge comes off,

they physically couldn’t get the reporting company to do it.

Ms. KOLISH. Yes. Under the Fair Credit Reporting Act, furnishers of credit reports are obligated to investigate and resolve

disputed information within a set time period. I don’t recall offhand

what that time period is, so I don’t know whether they exceeded

the allotted time.

Mr. ACKERMAN. I believe it’s 3 months. But that doesn’t matter.

It was resolved. It was resolved in 3 minutes after everybody

spoke. But physically, they don’t take it off.

Ms. KOLISH. Right. I understand. And unfortunately, the Commission gets lots and lots of complaints about fair credit reporting

agencies.

Mr. ACKERMAN. I believe you do.

Ms. KOLISH. We’ve sued them all, too, unfortunately.

Mr. ACKERMAN. But how do we fix that? If in this computer

world where we all have buzzers and beepers and we’re sitting up

here vibrating and lighting up and shaking and baking and everything, and they can get this on your credit report so the world

knows instantaneously that you missed a payment, why can’t they

be just as quick, when they know that we were wronged, take it

off?

Ms. KOLISH. I certainly don’t want to be defending the credit reporting bureaus, but I might say that I am sure they are getting

thousands of inquiries a day about disputed information.

Mr. ACKERMAN. I feel a lot better.

Ms. KOLISH. It may not be always clear as it is in your case that,

in fact, it should be immediately removed. It may be that they have

so many transactions they need a reasonable period of time to respond to and remove disputes, whether that time period should be

shorter.

Mr. ACKERMAN. Don’t miss my point. There is no longer a dispute.

Ms. KOLISH. I understand.

Mr. ACKERMAN. They made a mistake in putting this on or whatever and they can’t take it off. I’ve abused my time I think.

24

Chairman BACHUS. We’ve almost had a hearing on this one problem. But actually if we have a follow-up hearing we might deal

with this.

Mr. ACKERMAN. Could we have a hearing on this?

Chairman BACHUS. Yes, we might actually have—but I think this

is a wonderful example of how disruptive one of these transactions

can be to a citizen and can cause real problems, even in this case

a citizen who has a high degree of intelligence and sophistication

and ability, as Mr. Ackerman said—— Mr. ACKERMAN. I’m going to put that on my campaign literature.

[Laughter.]

Chairman BACHUS. Yes. With all these problems facing you, it

could be a tough campaign too.

[Laughter.]

Mr. ACKERMAN. If all this gets out. Nobody’s listening to this are

they?

Chairman BACHUS. But what we’ll do, the other thing, that 1.9

til October of next year—— Mr. ACKERMAN. That’s a great deal.

Chairman BACHUS. Don’t throw that away.

[Laughter.]

Chairman BACHUS. Mr. Tiberi.

Mr. TIBERI. Thank you, Mr. Chairman. I won’t take my entire 5

minutes. Just a comment and one quick question because I look

forward to the next panel. I apologize for not being here for the entire time.

With respect to credit cards, just a comment. I received my first

credit card when I was in college many years ago, and I had a wise

man say to me that this isn’t free money. And that wise man was

my father who just got his first credit card about 5 years ago. My

father has a sixth-grade education, is an immigrant to America,

and he said to me, ‘‘now you understand when you use this, if you

don’t pay it off every month, you’re going to be paying a whole lot

more for what you’re using this for?’’

Now it didn’t take a person with a high school degree or a master’s degree, or a doctor’s degree to explain to me the fundamentals

about a credit card and the convenience of a credit card and how

you pay for that convenience. And I am somewhat dumfounded by

some of what we have heard over the past with respect to responsibilities of individuals who get credit cards. I was a freshman in

college when I got that first credit card, and I got that first credit

card, and I used it appropriately per my father’s instructions and

never have had a problem with credit or credit cards.

My question to you is—and I look forward to the second panel

to talk more about that, my question to you two is, Mr. Cantor, in

his opening statement, mentioned something about Capital One

that I hadn’t heard about with respect to the tragedies of September 11th. Are you aware of any other companies doing that as

well, either of you?

Ms. SMITH. Only through the media.

Mr. TIBERI. Several others? Is it standard in the industry or a

few companies?

Ms. SMITH. I wouldn’t be in a position to say. All I know is what

I have read about in the media about some companies that are exVerDate 11-MAY-2000 08:13 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 76183.TXT HBANK1 PsN: HBANK1
25

ercising greater flexibility, perhaps not to the extent that Capital

One seems to be doing, but generally in making efforts to be accommodating to their customers.

Ms. KOLISH. That’s my experience, too, is only what I’ve read in

the media so far.

Mr. TIBERI. OK. Thank you. Thank you, Mr. Chairman.

Chairman BACHUS. Thank you.

Mr. LaFalce.

Mr. LAFALCE. Thank you very much, Mr. Chairman.

Ms. Smith, during the break I told you many of the questions I

was going to ask you and so I’ll try to reiterate them now. Maybe

you’ve been able to talk with counsel. First of all, when did the

Federal Reserve Board get the legal authority to define unfair and

deceptive practices in the banking industry? Second, why hasn’t it

done so up to now? What discussions take place? Would you please

respond?

Ms. SMITH. Yes. The FTC provision that gives the Board authority to prohibit unfair or deceptive acts or practices in commerce

was enacted in 1975. And I would say that we have from time to

time considered whether there are practices that the Board—— Mr. LAFALCE. So over the past 26-some years—— Ms. SMITH. Twenty-six years, right.

Mr. LAFALCE. ——You’ve thought about defining unfair and deceptive practices which you could have done at any time within the

past 26 years?

Ms. SMITH. Yes. I would say that the Board has not done so

largely because the Act does establish a fairly restrictive standard.

The standard for prohibiting specific acts or practices as unfair and

deceptive is one that was established by the courts and then ultimately was incorporated by the Congress into the statute so that

before the Board could adopt a specific prohibition, there would

have to be findings of certain things, including such things as the

act or practices likely to cause substantial injury to consumers.

This is something that would have to be documented, not——

Mr. LAFALCE. Wait a minute now. This sounds like an excuse to

me, Ms. Smith, for negligence in not having acted. I think the Federal Reserve Board has been terribly remiss. If you want to go after

a particular company, you have to have a factual finding, but if you

want to promulgate regulations regarding what would constitute

an unfair and deceptive practice within the industry, you don’t

have to wait until after the fact to make this generally applicable.

You can say these are the type of practices that would be by definition unfair and deceptive.

And if by some strange stretch of the imagination you think that

the law prohibits you from defining the terms of the law, well then

anybody interested in consumer protection would say give me a

change in the law. And I can’t recall any Fed Governor ever recommending a change.

Ms. SMITH. Well, I’ll take note of your concern and then we’ll see

if there is anything that we might recommend for changing the

law. But that’s the way we read it.

Mr. LAFALCE. Besides a change in the law, see if you can’t do it

yourselves. You’ve had 26 years to define an unfair or deceptive

practice. This is not directed at you. I don’t know how long you’ve

26

been the division head. I don’t think that consumer affairs have

traditionally been a very important issue for the Federal Reserve

Board. It’s seldom that we have a representative other than a Governor of the Federal Reserve Board at any issue before this subcommittee. Maybe it’s because they’re not that concerned about this

issue, or maybe they thought, well, this is so important we better

have somebody who’s technically knowledgeable. I’ll let people

make their own judgment as to why that’s the case.

But another option is if the Fed can’t become more aggressive is

to take the authority away from the Fed. And maybe we should.

Maybe the Federal Board should be interested in monetary policy

and maybe the financial soundness of a bank, but maybe they

should have nothing to do with consumer protection. Maybe it’s

just too alien to their large world concepts. And I may be coming

around to that conclusion. I want to see what they do.

There are other financial regulators, though. There’s the OCC,

there’s the OTS, there’s the FDIC. There are State banks. We have

coordinating mechanisms with respect to a lot of banking areas,

safe and sound practices, and so forth. Is there any coordinating

mechanism with respect to consumer abuses?

Ms. SMITH. Our coordinating mechanism is through the Consumer Compliance Task Force of the Federal Financial Institutions

Examination Council, which does take into account enforcement

matters and issues that come—— Mr. LAFALCE. Whoever they are. I mean, is there somebody like

in your office that meets regularly with somebody in the OCC’s office who’s a counterpart?

Ms. SMITH. Yes.

Mr. LAFALCE. Is there a name for this coordinating council?

Ms. SMITH. This is the Consumer Compliance Task Force of the

FFIEC.

Mr. LAFALCE. But who are the members of it?

Ms. SMITH. The members of the FFIEC itself are principals from

each of the agencies.

Mr. LAFALCE. Who is the principal from the Fed?

Ms. SMITH. Governor Meyer is our representative from the Fed.

Jerry Hawke from the OCC, and generally the chairman or director

or the heads of the agencies. The Consumer Compliance Task Force

generally represents the enforcement people. For example, our deputy director is on the Compliance Task Force, and his counterparts

at the other agencies. They meet regularly, usually once a month.

So it is something that is ongoing.

Mr. LAFALCE. Do you have any legal memo which defines the

legal capacity of the Federal Reserve Board to promulgate regulations regarding unfair and deceptive practices in the banking industry? If you do, I would like to request a copy of that legal memo.

Chairman BACHUS. Mr. LaFalce.

Mr. LAFALCE. Yes?

Chairman BACHUS. Let me propose to do one thing. We’re expecting a vote about 12:30. If we can go to Ms. Hooley and then Mr.

Ford, and then I will give you a second round of 5 minutes.

Mr. LAFALCE. Thank you very much, Mr. Chairman.

Chairman BACHUS. I think that will fit in very nicely.

Mr. LAFALCE. That’s more than fair. Thank you.

27

Chairman BACHUS. Thank you.

Ms. Hooley.

Ms. HOOLEY. Thank you, Mr. Chair. I have a couple of questions

and a couple of follow-ups. When Representative Ackerman was

talking about buying this policy that’s supposed to protect you, can

you tell me, do any of those polices really protect you? And do they

do anything more than if we ask the credit reporting companies to

send everyone a credit report once a year?

Ms. KOLISH. I’m not familiar with what this particular company

promised to do for Mr. Ackerman.

Ms. HOOLEY. Well, I’m just talking about there are several companies out there that do this.

Ms. KOLISH. Right. A lot of companies are selling services that

consumers actually could do for themselves, although there’s nothing inherently illegal about a company offering to do it for you for

a fee. And I imagine what these companies would do would be

monitoring your credit report to make certain that there aren’t wild

and wacky charges appearing out of nowhere, and if they were to

appear, to let the consumer know. So they might track for a consumer a variety of sources to let them know what’s happening to

their credit.

Consumers have to decide for themselves whether or not they

want to pay the fees to get this service or do it themselves by requesting a copy of their credit report periodically.

Ms. HOOLEY. Wouldn’t it be easier if we just required the credit

reporting companies to send everyone a copy of their credit report

once a year?

Ms. KOLISH. Well, that would be up to you. I’m sure consumers

would appreciate it.

Ms. HOOLEY. OK.

Ms. Smith, what can consumers do to protect themselves against

negative options and deceptive trial offers and deceptive credit card

practices? What can a consumer do?

Ms. SMITH. Well, I think that some of the things that have

caused problems in the past hopefully will be taken care of through

the privacy regulations, for example, where institutions are having

to inform consumers of their sharing practices with respect to information about the consumer where it’s with unaffiliated third parties and giving consumers the option to opt out of that information

sharing. That is something that should go a long way. I think that

ultimately, consumers also need to just be mindful in their conversations with entities, such as Mr. Ackerman had, to know what

is happening to them.

I think the difficulty sometimes is that no matter how careful the

consumer is, that a company that is bent on taking advantage is

going to do so. And then the consumer is left in the position of having to go back and try to get it corrected.

Ms. HOOLEY. But you don’t plan on doing anything in promulgating rules, right?

Ms. SMITH. I don’t know that we would be writing anything in

this particular area. We are going to be looking at our Truth in

Lending rules in the coming year, and so it could be—I don’t know

whether this will tie into anything that—whether it involves proviVerDate 11-MAY-2000 08:13 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 76183.TXT HBANK1 PsN: HBANK1
28

sions where we might be able to make a change. It isn’t clear to

me at this time that there is.

Ms. HOOLEY. Just one last question for Ms. Kolish.Has the FTC

prosecuted any cases involving identity theft? It is an issue I have

been working on and care a lot about. And have we prosecuted any

of those cases? And if so, can you tell me about any of them?

Ms. KOLISH. We don’t have the authority to prosecute criminally

the people who actually have stolen a person’s identity and run up

charges. Local police departments typically do that. We have

brought cases against people who have provided a mechanism for

that theft to occur by providing, for example, identity templates so

people have all the information, they can download what looks like

a valid license, for example, and substitute somebody else’s name

and address and thereby use their identity. So we have bringing

cases against people who actually provide a means for identity

theft to occur.

Ms. HOOLEY. And how successful have you been? Is that one or

two cases or 100 cases?

Ms. KOLISH. We’ve only brought a couple of cases to date. It’s an

area we’re spending a good deal more time looking at. Under

Congress’s authority, we actually set up an identity theft hotline,

so we now have about 100,000 calls about identity theft and we

provide counseling to victims as requested by Congress. And we’re

actually looking for ways that we can play an active law enforcement role.

Fortunately, there are so many criminal law enforcement authorities who are participating in our Sentinel database, an identity theft database, that we’re able to get out this information to

the authorities who have criminal authority, which would be the

most effective way of tackling this problem, so they can get that information quickly and easily.

Ms. HOOLEY. As you’re looking for ways, have you found any

ways? I mean, you say you’re looking for ways. Have you found

any?

Ms. KOLISH. One of the ways is by looking at the template sellers

so they can’t do that. And also we’re trying to make certain that

people aren’t sharing credit card information with others without

permission, because that could be a means by which identity theft

could occur. So in this case we just brought, one of the things the

defendants are prohibited from doing is from sharing that information with anybody else. They can only use it for the transaction the

consumer authorized. Because we don’t people’s credit card information floating around there without their notice and agreement,

because that makes them more vulnerable to identity theft.

Ms. HOOLEY. This is a huge issue. I mean, literally, you cannot

pick up the paper, you cannot look anywhere anymore and not see

this problem just growing enormously. And it’s something that

hopefully this whole subcommittee and all of us can work together

on.

Thank you. Thank you, Mr. Chair.

Chairman BACHUS. Thank you.

Mr. Ford.

Mr. FORD. Thank you, Mr. Chairman. I won’t be long at all. I

would say to my colleagues on the subcommittee, I apologize for my

29

tardiness, but Ms. Hooley, you raised several interesting and important points regarding credit scores and how consumers can access them. All of us have stories similar to what happened, what

regrettably happened to Mr. Ackerman, including people who are

not on this subcommittee.

The bill that I’ve introduced, and Ms. Roukema last year in the

Banking Committee held a hearing on this matter. I’m not certain

if the FTC or even the Federal Reserve Board were there. I do

share some of the concerns, Ms. Smith, and certainly don’t direct

this at you personally, but I do share some of the concerns raised

by Mr. LaFalce.

We’ve known this problem has existed for some time, and very

little action has been taken to correct it for the majority of the public, the overwhelming majority of the public. But one of the bills,

and there are several circulating. Chris Cannon from Utah has one,

Chairman Bachus and Mr. Schumer on the Senate side has one,

where we seek to provide a free credit report, Ms. Hooley, to every

consumer. We give every consumer the opportunity to not only get

a copy of a free credit report, and hopefully Mr. Bachus will give

an opportunity for a hearing.

But we also allow for people who might have had a skirmish with a creditor for $100 or less to pay that off, to have it removed

from their credit report and they’d be forced to enroll some sort of

financial management class much like the departments of motor

vehicles and public safety all across the country will allow you to

do to mitigate or avoid any type of penalty.

Second, I know that before I got here it was raised by Ms. Waters and I believe one or two of my other colleagues regarding ways

in which we can ensure that consumers don’t face any undue pressure or unnecessary penalty because of the slowness in which the

mail may arrive today. I have introduced something that would extend the grace period for 2 weeks for all consumers, excluding business loans, and we can certainly look to include businesses in this.

I would not be opposed to that at all. But to allow for a 2-week

grace period for the next 6 months that would allow consumers to

avoid facing late fees or additional financing fees to avoid having

their late payment reported to credit reporting agencies, and perhaps more important, to avoid having their rates raised or having

other adverse actions taken against them by a credit company or

a creditor.

It’s my hope, Mr. Chairman, that we obviously are dealing with

and confronting an array of issues here in the Congress, one enormous one later today, and I would urge all my colleagues to support the Senate-passed Aviation Security bill, and obviously we’ll

have to deal with the stimulus package shortly as well, but I do

hope this subcommittee can take up these matters as quickly as

possible and perhaps even allow for the Consumer Late Fee Relief

Act to be considered, or at least to be put before the President before we adjourn for the year. And it looks like we may not adjourn

before late November or early December now.

With that, Mr. Chairman, I yield back the balance of the time

and hope that when we do have this hearing that perhaps Ms.

Kolish and Ms. Smith both can come back and be a part of that

panel. Thank you.

30

Chairman BACHUS. Thank you. At this time the first panel is discharged. The subcommittee is going to stand in recess until one

o’clock. At that time we’ll convene and we’ll put on the second

panel. That will give us an opportunity to have two votes scheduled

at 12:25 on the floor. It will also give our second panel and other

representatives and people in the audience a chance to make some

lunch arrangements. And we will be back at one o’clock. We’ll start

promptly at one o’clock. Thank you.

[Recess.]

Chairman BACHUS. I call the hearing to order. I want to welcome

the second panel. Frank Torres, Legislative Counsel, Consumers

Union; Edward Mierzwinski, U.S. Public Interest Research Group;

Elisabeth DeMarse, CFO, Bankrate Inc.; Robert Manning, Professor at Rochester Institute of Technology; Joshua Peirez, VicePresident and Counsel, Mastercard International; and Richard

Fischer, Attorney at Law, representing Visa International. And

you’re with Morrison & Foerester?

Mr. FISCHER. Correct.

Chairman BACHUS. OK. Thank you.

We’ll start, Mr. Torres, with you.

STATEMENT OF FRANK TORRES, LEGISLATIVE COUNSEL,

CONSUMERS UNION

Mr. TORRES. Mr. Chairman, Members of the subcommittee, we

appreciate the opportunity to be here today to discuss this very important issue for consumers across this country. But first let me

say that, in light of the recent events, we are really grateful for all

that you and this subcommittee and Members of Congress are

doing in these challenging times and under these profound circumstances.

Many of us have friends who work up here on the Hill. We interact with offices every day. And the fact that you all are showing

up to get the business of this country done is a true testament to

all you, and we do appreciate that deeply.

Having said that, and having listened to many Members of Congress and the President and others saying that consumers should

get on with their lives, to help the economy, to spend, to shop, to

go out to restaurants. Many consumers are doing that—using their

credit cards. It is more than appropriate that we have this hearing

now to discuss some of the games that the consumers face every

day in dealing with their credit card companies.

And just as companies are responding, and we heard some examples here today, Americans are also responding to the call, and

they really don’t deserve some of the treatment that they’re getting

from the companies. And unfortunately, it may be coming from the

same companies that are trying to do the right thing during these

tough, difficult times.

But I thought maybe as a way to pull things together and try to

map out some of the issues that have already been discussed earlier today during this hearing, maybe I’ll kind of follow a consumer

through his or her life and their interaction with the credit card

industry, starting with college students, or now perhaps even high

school students, who are getting bombarded with credit card offers,

with little or no underwriting, no parental co-signing required, and

31

little or no financial education about how to handle his or her credit card debt.

We have one example of a credit card seminar that had a panel

discussion on ‘‘you never forget your first love and you never forget

your first credit card.’’ You know, how to target kids to get them

into your brand and keep them loyal to your brand. As far as no

underwriting goes, even the Federal Reserve Board has recognized

that lack of underwriting is an unsafe and unsound practice.

The problem comes when these students get into trouble. The

University of Indiana has said that they lose more students because of credit card debt than they do for academic reasons. You

get into all sorts of trouble. Bankruptcy rates among college students are growing. You can still get that auto loan or that home

mortgage later on, but now if you’re in the subprime market because you’ve been late on a couple of payments and you’ve got some

things on your credit history, those types of loan products are going

to cost you more. So the consequences are very dire indeed.

Once you become an adult, the game really begins. More and

more we’re finding that credit card companies are making the bulk

of their profits from fee income. So they’re doing a lot of things to

game the system to generate more fees, and it’s really not fair to

consumers. I mean, it’s one thing for businesses to make a profit

because they’re operating in a competitive marketplace, they’re trying to beat their competition, and they’re telling consumers what

they need to know and they’re playing fair. Unfortunately, that’s

not what’s going on here in all cases.

They’re shortening grace periods. They’ve got teaser rates going.

Late payment penalties have now reached the level of $35. And it’s

no longer due on the day that it’s supposed to be due, it’s due by

eight o’clock or ten o’clock in the morning. In addition, if you’re late

just once on a credit card, some of them are charging punitive interest rates up to 25 percent supposedly to cover the risk. Well, if

you’re late just once, how does a punitive interest rate of 25 percent that may never come back down again cover the risk for you?

Some credit card companies, they’re charging you that much even

if you’re late on somebody else’s card.

We’ve also argued, along with consumer groups, that credit card

companies should disclose how much credit costs you right on the

statements that you get. A $2,500 balance, if you simply make the

minimum payments, it could take you over 30 years to pay it off

and it would probably cost you somewhere around $5,000 or $6,000

in interest payments alone.

Now at least the Fed has adopted rules to enlarge the fine print,

but better disclosures won’t necessarily stop some of these underlying practices.

Another area that consumers face all the time is when these institutions sell your data. And Capital One does this. They use your

data to try to sell you, to try to upsell you various products. And

they have sold in the past Privacy Guard products, and at one time

sold membership in some of these discount clubs. And under the

Gramm-Leach-Bliley Act, unfortunately, there’s not much consumers can do to really say no because of all the exceptions there.

So consumers really don’t stand a chance.

32

Credit scoring has also been brought up, and that’s something

that we urge Congress to address, because Fannie and Freddie

have found that up to 50 percent of consumers are paying more for

mortgages because of wrong credit scores, and so Congress needs

to take a look at that.

Another issue I’d like to raise in my short amount of time left

is the fact that the Federal Reserve Board has lowered interest

rates nine times since January. Credit card interest rates haven’t

even begun to track the Federal Reserve rates. Many consumers either have fixed rates or preset floors. So this is a huge jackpot for

the credit card industry. The money isn’t filtering down, the help

isn’t filtering down to consumers who could use those funds to help

stimulate the economy. CardWeb says that this could amount up

to a $10 billion windfall for the credit card companies.

Finally, I’d like to bring up the bankruptcy bill, merely because

we really can’t talk about the practices of the credit card industry

without talking about what they’re up in Congress fighting for even

now, and we understand that there might even be a conference on

the bill scheduled for next week. Despite all these practices that

could potentially help contribute to people falling into difficult financial circumstances, pile that onto layoffs, little health care insurance and other things going on in the economy today, the only

advice that we can offer Congress to respond to the urging of the

credit industry to push forward on the bankruptcy bill is to just say

no to it.

And a closing note—and I promise to close, is that there’s been

talk about perhaps some financial education, perhaps, you know,

people just need to understand about their credit more. And I think

consumers understand fully well that they’ve entered into an

agreement with the credit card company. They expect to be charged

an interest rate. They expect maybe to be charged some fees, and

if they’re late on a payment, they should be penalized. But what

the credit industry is doing goes far beyond that. And all of the understanding and all of the consumer financial education in the

world won’t necessarily help consumers avoid some of the tricks

and traps and really deceptive behavior that the credit industry

does.

One example of that is in our magazine, Consumer Reports magazine, found that even if you find the small print—and they don’t

always make it easy to find it, consumers really can’t understand

everything that the credit card company says, because the credit

card companies don’t always tell you what they mean. A spokesperson for Fleet explained how it works to one of our reporters

when she said that a fixed interest rate doesn’t mean it’s fixed forever. Another case against Fleet concerned a no-annual-fee card

that within months carried a $35 annual fee. The reporter actually

compared this to ‘‘Alice in Wonderland.’’ I think it’s worse, because

at least Alice kind of understood that things were a little bit

strange. Here consumers might be unprepared to really fully understand what they’re facing.

So we do appreciate you having this hearing, and I look forward

to answering questions and hopefully, working with you on this

and a whole host of other issues like payday lending and other

things that consumers are facing every day.

33

Thank you.

[The prepared statement of Frank Torres can be found on page

121 in the appendix.]

Chairman BACHUS. Thank you.

Mr. Mierzwinski.

STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, U.S. PUBLIC INTEREST RESEARCH GROUP

Mr. MIERZWINSKI. Thank you, Mr. Chairman. I’m Ed

Mierzwinski, Consumer Program Director with the Public Interest

Research Group’s national office, U.S. PIRG.

We’re pleased to be here to talk about abusive practices in the

credit card industry. We think abusive practices by credit card

companies are on the rise, and we’re very pleased that you’re holding this hearing today.

In April, PIRG released a major report called ‘‘The Credit Card

Trap’’. That report was based on a survey of over 100 credit card

offers, and in that report we document a number of the practices

which have been brought up already today in Ms. Waters’ opening

statement and Mr. Ackerman’s personal story and in some of the

other discussions, so I won’t go into them in detail except to say

that we have a brochure for consumers called ‘‘A Road Map to

Avoiding Credit Card Hazards’’ which I provided to the subcommittee in electronic form and I would like to make copies entered into the record as part of my testimony. It summarizes the

ten worst credit card marketing practices that we are aware of,

ranging from the use of deceptive teaser rates to charging consumers late fees even when they pay their bills 10 to 15 days in

advance, as many of the witnesses have identified as a problem

and also talks about in the report and the brochure the significant

problem of negative option sales.

The FTC witness talked about their consent decree and settlement with Triad which is a very significant case on behalf of the

FTC. I would also respectfully point out that several State Attorneys General have brought cases against regulated financial institutions for very similar practices, most notably the lawsuits against

U.S. Bank first brought by the Minnesota Attorney General.

So rather than talking about the problems, which I think everyone else has brought up, I wanted to quickly summarize our platform for leaning up the credit card industry. And I think this is an

industry that does need cleaning up. By the way, before I start,

this is also available on our website, truthaboutcredit.org.

The recommendations that U.S. PIRG has to enact legislation to

solve some of these problems are the following:

First, we believe very similarly to Congressman Smith of New

Jersey that there should be a moratorium on late fee penalties. I

absolutely think that the Congress should consider, strongly consider legislation to put a freeze on banks imposing late fees and

then jacking up the credit card interest rates of consumers because

of events related to the 9/11 terrorist attacks. And whether their

mail has been intercepted or even whether or not perhaps they

simply forgot to mail a bill, I think there ought to be a better

chance, a second chance for consumers. And we strongly urge the

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Congress to consider some legislation to suspend the use of late

payment information.

And as has been brought out before, you don’t just pay a late fee.

You pay a late fee. Then your credit history is reviewed, and you

could have your interest rate ratcheted up to a punitive interest

rate. Third, you could even have your interest rate raised on other

cards for being late to one card.

Second, we urge Congress to prohibit deceptive practices. And we

have received numerous complaints about the deceptive practice of

raising interest rates on a card because of an alleged late payment

to another card. Therefore, we support H.R. 1060 introduced by

Ranking Member John LaFalce and others to prohibit numerous

deceptive practices by the credit card industry. This bill would also

address the problem of preacquired account telemarketing or negative option marketing which the Minnesota Attorney General case

addresses.

Third, Representative Sandlin of the subcommittee has introduced bills to cap interest rates. If the banks are not going to pass

along Mr. Greenspan’s reductions in interest to consumers, the

Congress should cap interest rates, and Mr. Sandlin has proposed

that in H.R. 3125, capping interest rates of credit cards at 12 percent.

Mr. LaFalce has an omnibus bill, H.R. 1052, to improve credit

card disclosures and improve the marketing of credit cards to

young people. In the past, bills have been proposed to require that

consumers cannot be dunned by a credit card company if their bill

is postmarked in advance of the due date. We think that the Congress should take another look at those bills which have been filed

in past Congresses by Representative Hooley, Representative

McHugh and others. Representative Pascarell has a bill that says

there must be a minimum of 30 days to pay a bill before it is late.

One of the problems we have, consumers are not ripping off the

credit card industry. Consumers are not trying to trick the credit

card industry. Let’s be very clear. The credit card industry is trying

to trick consumers, and they’re using the labyrinth of the Truth in

Lending Act to get around fair treatment of consumers. As Frank

pointed out, they are now saying that you bill is no longer due on

the 30th. It’s due by 10:00 a.m. on the 30th. If Congress is writing

bills that are that unclear that the industry can cure some of the

problems it was having in litigation by simply saying, well, we’ll

say the bills are due by 10:00 a.m. and then we’ll check the mail

at 9:00 a.m. That’s unacceptable to me, and we need to fix the

Truth in Lending Act, and the first step is I think to go after these

deceptive practices.

The final couple of bills that I’d like point out that I think the

Congress should address, Mr. Gutierrez last Congress introduced

legislation to ban mandatory pre-dispute arbitration. Credit card

companies are now sending out amendments to their contracts telling consumers that they no longer have the right to sue the bank.

They no longer have the right to have their day in court if they

have a problem such as the one that Mr. Ackerman so eloquently

described.They’re saying you’ve got to come to our kangaroo court

run by the arbitrator of our choice and you lose your right to have

a class action, you lose your right to go to court. I think that’s unVerDate 11-MAY-2000 08:13 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 76183.TXT HBANK1 PsN: HBANK1
35

acceptable, and I think the subcommittee should hold hearings on

Mr. Guiterrez’s bill from the last Congress.

And finally, of course, we support the proposals by Mr. Ford and

others to require that credit scores be part of credit reports and

that credit reports be provided for free each year.

I appreciate the opportunity to testify before the subcommittee

today and would be happy to take your questions.

[The prepared statement of Edmund Mierzwinski can be found

on page 129 in the appendix.]

STATEMENT OF ELISABETH DeMARSE, PRESIDENT AND CEO,

BANKRATE, INC.

Ms. DEMARSE. Good afternoon, Mr. Chairman and the subcommittee. Thank you for inviting me to testify before you as part

of your exploring these current issues and the trends in the credit

card industry.

My name is Elisabeth DeMarse, and I am President and CEO of

Bankrate, Inc. We are based in New York City and Palm Beach,

Florida. My company is the internet’s leading consumer banking

marketplace. We provide current rates and How To information

and financial literacy to an average of about five million visitors a

month on a range of consumer banking topics.

We survey current interest rates in over 170 U.S. markets, including at least one in every single state, and we ultimately connect those consumers with over 4,500 financial institutions.

Bankrate has 30 researchers who survey 100 different financial

products, including mortgages, auto loans, money market accounts,

CDs, checking and ATM fees, home equity loans, and of course,

credit cards. From 30-year mortgages in Miami to Anchorage, we

can tell you where they are.

In addition, we provide this information to a network of over 70

websites, including America On Line, MSN, Yahoo!, Nasdaq and

AT&T. Our data is distributed through more than 100 national and

local newspapers, including the New York Times, the Wall Street

Journal, and USA Today. And finally, we’ve been recognized for

our efforts by Forbes, U.S. News & World Report, Fortune,

SmartMoney, and many, many other publications.

So having monitored these rates and trends in the credit card industry for over 16 years, we’re in a very unique position to share

our point of view. Weekly, we survey over 800 different credit cards

currently available to the public, including every card issued by the

100 largest issues and the 50 largest credit unions.

Over the last year we’ve noticed several distinct trends. While

rates continue to fall, many variable rate cards have hit a floor, as

has been mentioned several times today, where regardless of the

actions of the tracking rate, they can go no lower. Probably about

70 percent of cards are fixed rate programs, 30 percent are variable

rate programs. Of those 30 percent, 26 percent of the 30 percent

have floors. We believe 19 percent of those cards have hit their

floors. They can go no lower.

Second, card issuers are increasingly relying on punitive fees to

increase revenue and profits. Fee income to the card companies increased from $4.8 billion in 1998 to $5.5 billion in 1999 and is now

about 25 percent of the card company’s bottom line. And in the

36

wake of the 9/11 disaster and attack, these fees are very problematic and very troubling.

Third, the internet continues to level the playing field. It does

allow, in our case, consumers free access to information, and they

do have more ability to search around and find better deals if they

can invest the time, and they have the opportunity if the invest the

time to become better educated about what exactly is involved

when they take on a credit card. Bankrate.com is designed to assist

the consumer in that search, and that is, in fact, what we do.

Once again, thanks for inviting us to appear before you today,

and I would be pleased to answer any questions you have.

Chairman BACHUS. Mr. Manning.

STATEMENT OF ROBERT MANNING, PROFESSOR, ROCHESTER

INSTITUTE OF TECHNOLOGY

Mr. MANNING. Thank you, Mr. Chairman. I appreciate the opportunity to share my research with the subcommittee on what is increasingly important in the banking industry’s policies that are

leading to a segmented structure of the consumer credit markets.

This subcommittee and many of its Members have a distinguished record in terms of addressing and championing the interests of American households. I think it’s important to point out

that in this current period, we’re talking about an unprecedented

era of profitability for the banking industry. Nine out of the ten

last years have recorded record annual profits.

In particular, I’d like to acknowledge the long-standing efforts of

the Member from Buffalo, who due to my new academic appointment in upstate New York, will soon be competing for my vote in

the next electoral campaign. Congressman LaFalce has certainly

been passionate and a persistent advocate for working families and

highlighting the increasingly common excesses and questionable

business practices of the credit card industry.

In this context, I’d like to preface my remarks by saying that I

typically teach seminars of 2 to 3 hours, so this is certainly going

to be a race for me, and I’ve included a much more extended testimony to address the particulars of my testimony.

I’d like to address three particular issues. One is the trends that

are ongoing int he industry that have affected the pricing structure, particularly the point that we are increasingly discussing, the

issue of sticky interest rates. I would like to emphasize what is a

profound change in the new post-industrial economy of the important role of the macro-economic management of the economy and

how major money center banks are now dramatically shifting the

ability of the Federal Reserve to pursue its traditional management

policies.

The third issue I want to address is the issue increasingly referred to as Generation in Debt, and the role in which the marketing of consumer credit cards is playing such a critical role into

the future generations as well as the savings rate of the American

economy.

The last 20 years have featured the deregulation of the banking

industry. And it’s important to understand the promises that were

presented to us: A wider array of services certainly associated with

lower prices. What we’ve seen is a tremendous acceleration of conVerDate 11-MAY-2000 08:13 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 76183.TXT HBANK1 PsN: HBANK1
37

solidation and conglomerate structure of the industry where the top

ten credit card companies control three-fourths of the market. And

we’ve seen this as it relates to the shift in real rates that have been

charged in terms of consumer credit, and I refer you to Figure 2

of my testimony, which shows that real interest rates approximately have nearly doubled over the last 20 years. And it’s important to put this in the context of comparing it to the automobile

rate and the corporate prime rate, which shows you how sticky the

interest rates have been on the one hand on the corporate side and

very fluid and highly elastic on the consumer side.

Also I want to emphasize the emergence of a bifurcated structure, what we are increasingly referring to as a second tier. Issues

such as payday lending, where we’re talking about consumers burdened with 20 percent interest rates per year, we’re talking about

the emergence and increasing integration of markets where consumers are charged 15 to 30 percent for a 2-week loan. And these

are not just small lenders. We’re talking about joint ventures with

Wells Fargo and Cash America, and who would have expected that

the Community Reinvestment Act might possibly be satisfied by

the portfolio of high interest credit cards and maybe even payday

loans that are offered in central cities?

Indeed, what’s profound about the shift in the banking industry

is going away from installment lending at fixed rates at fixed terms

to revolving rates. The real question is, does the increased risk justify the much higher real rates?

Indeed, what I think is critical here is looking at this in the context of the ongoing discussion of the conference committee on the

consumer bankruptcy bill where the emphasis has been on limiting

the ability of Chapter 7 to liquidate unsecured loans. The real issue

has been has the pricing structure of the industry in terms of consumer credit cards already priced in a much higher delinquency

rate? Is this simply another way of price gouging? It’s quite intriguing to me that in the discussion of Federalizing the possibility of

security at the airports, we have not questioned the possibility of

Federalizing debt collection, which is clearly a subsidy to the banking industry during this context of unprecedented profitability.

Also I want to emphasize that when we talk about consumer

debt, it’s not just the magnitude but the terms. And indeed, we

have a real imprecision here where issues such as car leases, payday loans, and so forth, are not directly measured in terms of the

total debt obligations of consumers. Indeed, in 1999, we now have

passed the threshold where the debt levels of the average household exceed 100 percent of their discretionary income.

Let me finish my comments by emphasizing then the fact that

as we’ve increasingly heard, the Federal Reserve’s lowering of the

interest rates has not been reflected in lower interest rates to consumers. What I’m seeing in my more recent research today is that

both the tightening to small businesses, which are the primary

motor of job generation, and also the tightening of households could

further push us into a deeper and more prolonged recession. And

I think this is very critical as we discuss what is the debt burden

and how crushing it may be.

To conclude, the terms of the ‘‘Generation in Debt,’’ what is striking to me is when I first conducted my research over 10 years ago

38

is when we saw the marketing of consumer credit to college students, it was rare to see a student with $2,000 to $3,000 graduating in debt in the early 1990s during the recession. Most of that

debt was attributed to the difficulty of their job search. Today for

the first time, we’re going to see students routinely with $5,000

and $10,000 in credit card debt, which is subsidized by their ability

to rotate it into federally subsidized student loans, who are going

to be entering a job market maxed out before they begin looking

for a job.

What I think is striking about the credit card industry in discussing their efforts to educate and make more savvy consumers,

is there’s no discussion on savings. This, Mr. Chairman, is going

to have a profound impact on the economy and society as we become increasingly dependent on foreign markets for savings, that

the national savings rate as it has achieved a negative rate will

have a tremendous impact on our ability to compete globally and

also impact on asset formation and the ability of future cohorts to

retire in the standard of living they’ve grown accustomed to. Thank

you.

Chairman BACHUS. Mr. Peirez.

STATEMENT OF JOSHUA L. PEIREZ, SENIOR LEGISLATIVE AND

REGULATORY COUNSEL, MASTERCARD INTERNATIONAL INCORPORATED

Mr. PEIREZ. Thank you, Chairman Bachus, Congresswoman Waters, Members of the Subcommittee. I am Joshua Peirez, Senior

Legislative and Regulatory Counsel for MasterCard International

Incorporated. We are a global payments company comprised of over

22,000 financial institutions of all sizes worldwide. I thank the

Subcommittee for taking time today to consider how MasterCard

and its members serve MasterCard cardholders.

When the payments industry started around 35 years ago, consumers had few payment options, primarily cash and checks, but

nothing that could be used worldwide. Today a MasterCard cardholder can virtually travel the world with only a single piece of

plastic and make payments almost anywhere. And people like their

MasterCard cards. Why? Here are just a few of the reasons—convenience, choice and protection.

First, convenience. MasterCard cardholders can use a

MasterCard payment card at millions of merchants. That means

fewer trips to the bank or ATM and no longer having to worry

about carrying the right amount of cash, having it stolen or losing

it. A MasterCard cardholder need not even leave the comfort of

home to shop the globe. It is no overstatement to claim that the

internet would not be such a critical part of our economy were it

not for payment cards.

The second reason, choice. The MasterCard system has also led

to a great deal of choice through the vigorous competition with

other payment systems, other payment forms, and among the thousands of MasterCard member financial institutions. Indeed, because of the innovation of MasterCard and its members, consumers

can choose from literally thousands of card programs, thousands of

flavors of MasterCard, if you will.

39

And third, protection. MasterCard is also pleased to offer its

cardholders outstanding protections. For example, MasterCard has

voluntarily implemented a zero liability policy with respect to the

unauthorized use of U.S.-issued MasterCard consumer cards that

is superior to what is required to law. Specifically, MasterCard provides U.S. MasterCard consumer cardholders with even more protection. A cardholder is generally not liable for any losses at all.

This has greatly enhanced consumer confidence, especially with respect to online shopping.

It’s also important to note that the use of MasterCard payment

cards benefits more than just consumers. Approximately 22 million

merchants worldwide accept MasterCard payment cards. Many

offer discounts, co-branded cards and other incentives for consumers to use MasterCard cards instead of other payment forms.

Why? Acceptance of MasterCard cards is more convenient and safe

and often cheaper than other forms of payment for merchants. Naturally, the acceptance of MasterCard payment cards also increases

the number of payment options available to consumers, thereby increasing overall customer satisfaction.

Importantly, MasterCard acceptance also greatly increases sales

for a variety of reasons.

I stated earlier that people like their MasterCard cards. Well,

they also like the service they get from their card companies. As

discussed earlier in the testimony from the Federal Reserve, the recent Federal Reserve study illustrates this point; and I’d like to

highlight just three of the findings from this study.

First, 91 percent of consumers who have bank-issued payment

cards are generally satisfied in their dealings with their card companies.

Second, 92 percent believe card companies provide a useful service to consumers.

And third, 90 percent of bankcard holders believe they are treated fairly.

How many other industries can claim a customer satisfaction

rate of 90 percent?

MasterCard also provides important consumer education programs, because we believe financial literacy is critical for individuals of all ages. Many of these programs are described in my written testimony.

MasterCard also continues to work with Congress and the Administration to improve consumer financial awareness. For example, MasterCard is a strong supporter of H.R. 61, the Dreier-Pomeroy Youth Financial Education Act, which would authorize the

Secretary of Education to provide grants for youth financial education programs. We are pleased that the House and the Senate

have each incorporated this bill in the larger education reform

measure that currently awaits final action in conference.

MasterCard is proud of its record of offering cardholders and

merchants highly beneficial and convenient payment methods.

Quite simply, we have set high standards for ourselves, and we will

continue to strive to meet them.

Mr. Chairman, thank you again for the opportunity to discuss

MasterCard’s commitment to its cardholders. I would be pleased to

address any questions the subcommittee may have.

40

[The prepared statement of Joshua L. Peirez can be found on

page 148 in the appendix.]

Chairman BACHUS. Thank you.

Mr. Fischer.

STATEMENT OF L. RICHARD FISCHER, ATTORNEY AT LAW,

MORRISON & FOERESTER, ON BEHALF OF VISA U.S.A. INC.

Mr. FISCHER. Thank you, Chairman Bachus, Ranking Member

Waters, Subcommittee Members. My name is Rick Fischer and I’m

here today on behalf of Visa.

Visa is the largest consumer payment system in the world, with

over 800 million Visa-branded cards——

Chairman BACHUS. Push that microphone a little closer, please.

Mr. FISCHER. Yes, sir. Over the years, consumers have really embraced bank cards. In 1970 when I first started practicing on credit

card issues, only 16 percent of U.S. families had bank cards. Today

that number has increased to nearly 70 percent. This dramatic increase is not surprising, given the convenience and benefits these

cards offer to consumers. They make remote transactions like internet purchases possible, and they serve as a flexible substitute for

personal loans.

The credit card business is highly competitive. Card issuers offer

literally thousands of competing card products with a wide variety

of features to satisfy increasingly diverse consumer interests. Indeed, credit cards have become an important facilitator of consumer demand for products and services, and as a result, have

fueled much of our economy in the last few years.

Under the Visa system, each bank establishes its own fees, its

own finance charges, its own credit standards, and its own rewards

programs when they exist. And each bank prepares its own disclosures and develops its own privacy notices. And these activities are

closely regulated by existing Federal laws like those you’ve heard

about earlier today, the Truth in Lending Act, the Electronic Funds

Transfer Act, and the Gramm-Leach-Bliley Privacy Act for disclosure purposes. In fact, there are few activities today that are not

already heavily regulated by existing Federal laws.

The Visa system also puts the choice on how to pay in the hands

of consumers. Visa believes strongly that it is the consumer who

should choose whether to pay with credit cards or debit cards or

by cash or checks.

Card issuers realize that their success depends upon customer

satisfaction, and they compete with each other in every aspect of

the account relationship, including customer service. If a card

issuer fails to meet expectations, cardholders can easily move their

balances to another issuer. In fact, there are many secondary

sources today that help consumers compare and evaluate credit

and related products quickly and easily, term by term and feature

by feature.

Visa also has long recognized that consumers are best served if

they have a solid understanding of personal financial management.

So Visa and its members have developed many programs to provide

financial education to elementary, secondary, and college students

around the country. These financial literacy initiatives, such as

41

‘‘Practical Money Skills for Life,’’ are discussed in my written statement.

And Visa has recently partnered with the Reserve Officers Association to provide helpful information on money management to

military personnel being deployed in Operation Enduring Freedom

and their families.

Visa has also been a leader in combatting fraud, including identity theft, for more than a decade. Fraud prevention protects merchants from fraud losses and protects consumers from higher prices

caused by fraud. So preventing fraud is a top priority at Visa at

its members, and I can report today that fraud in the Visa system

is at an all-time low, even as Visa transaction volume has grown

dramatically.

Most recently, and this was questioned before this panel came up

front, Visa members have worked closely with law enforcement authorities in the aftermath of the September 11th terrorist attacks.

And Visa members have been proactive in assisting customers affected by those attacks. For example, many banks have waived late

fees and interest charges on customer accounts. One bank estimates that it has waived more than $15 million in fees and interest

in the last month alone.

Another bank searched its records to see if any of its cardholders

were victims of the September 11th attacks. For victims identified,

the bank completely forgave the debts, even though it was not required to do so, because the bank wanted to do its part.

Overall, I have found that card issuers today are not asking what

they must do to comply with the law. Instead what they’re asking

is how can they do their part, how can they help without being

asked to do so.

I appreciate the ability to be here today and to participate in this

panel, and I’m happy to answer any questions.

[The prepared statement of L. Richard Fischer can be found on

page 153 in the appendix.]

Chairman BACHUS. Appreciate that. Now we’ll start with questioning.

Mr. Tiberi.

Mr. TIBERI. Thank you, Mr. Chairman, Members of the subcommittee. I think I’m going to start with Mr. Torres and Mr.

Mierzwinski.

I don’t know if you heard earlier when I talked about my father.

My father and mother both are immigrants, and in fact, what I

didn’t tell you before was, my father and mother now use their

credit card, even though they didn’t have one until about 5 or 6

years ago, for about everything. And interestingly enough, my Dad

thinks the credit card companies aren’t very smart. The reason

why he doesn’t think they’re very smart is he pays his bill off every

month, and so he gets a little extended line of credit there, and

then he also gets cash back—no disrespect to Visa or MasterCard.

This is not a plug for Discover. But he gets a couple hundred dollars every year cash back, and he does all his grocery shopping and

his gasoline purchases, everything. And he’s making a little bit of

money.

42

My Dad is an immigrant. My Mom is an immigrant. He has a

sixth grade education. She has a ninth grade education. What am

I missing here, Mr. Torres?

Mr. TORRES. I think that it’s great that your parents are able to

use the system and have a credit card, and some consumers, other

consumers are able to do the same thing. But I don’t think that

that forgives, the ability of some consumers to do that, to understand the terms and the conditions that are imposed upon them,

with the Discover card that your parents have, that doesn’t excuse

some of the other deceptive behavior that the FTC, the Office of the

Comptroller of the Currency and the courts have found go on in the

industry.

I mean, other consumers, not your parents, but other consumers

get duped all the time. It started with teaser rates. We heard Mr.

Ackerman talk about this Privacy Guard product. We’ve seen increases in late payments, not just the interest, not just the fees

themselves.

Mr. TIBERI. Excuse me. I heard your testimony. What I don’t understand is, for me, it’s very simple. If I have a bill that comes in,

a Visa bill that comes in, and I have 15 days to pay that Visa bill,

and I don’t make that payment in 15 days, why shouldn’t I be

charged a late fee?

Mr. TORRES. We’re not saying that you shouldn’t be charged a

late fee, but shouldn’t that late fee be fair in terms of if it’s going

to be—if the idea behind a late fee is to get you to pay your bill

on time, that’s fine. But to go beyond that, to say we’re going to

use this as a profit-generating mechanism, and on top of that, kick

up your interest rate substantially, supposedly to cover risk, which

I question whether or not that actually covers risk or is something

more.

I mean, I think that if all consumers were in the same place as

your parents are, we wouldn’t be having this hearing to talk about

the problems in the credit card industry and the practices that they

impose on consumers.

Mr. TIBERI. And I’m not here to defend the credit card industry,

but isn’t there some responsibility for the cardholder? Can’t you

just say no? Is someone putting a gun to everybody’s head saying

let’s get a credit card? Isn’t it the responsibility for the person who

applies for the credit card?

Mr. TORRES. I think you’re right and I think Ed wants to respond, too. But another example that I didn’t have a chance to get

to was the fact that there’s another credit card company that the

OCC went after called Direct Merchants. They solicited business offering one type of card, and as it turns out, were giving their customers another type of card, charging them a processing fee that

they didn’t disclose that they would be charging, and then on top

of that, when consumers called in to complain, they said, well,

you’ve been upgraded.

Mr. LAFALCE. Would the gentleman yield?

Mr. TIBERI. Mr. Torres, you mentioned three times consumers

can’t understand, consumers can’t say now. And I tell you, the

household that I grew up with, ‘‘No’’ was used quite a bit. And I

don’t understand why the assumption is, is that all consumers are

dumb.

43

Mr. LAFALCE. Would the gentleman yield?

Mr. TIBERI. I take offense to that as a son of immigrants. I will

yield to the distinguished Ranking Member and head of the ItalianAmerican Caucus.

Mr. LAFALCE. I thank the gentleman from Columbus, Ohio. Your

parents are terrific people. There are a lot of terrific people who get

duped. So far, your parents haven’t. But you represent the great

city of Columbus, Ohio, which at one time was the headquarters for

a bank called BankOne that issued a few credit cards and had a

few credit card problems. I suspect that your constituents probably

had more of those credit card problems than most any other Congressional district.

Mr. TIBERI. Well, and again, my point is, is not to defend the

credit card industry, but even my wonderful aunt, who lives in Niagara Falls, New York, has the—— [Laughter.]

Mr. TIBERI. And is a big fan of Mr. LaFalce’s, by the way, pays

off her credit card every month. Now again, she has a fifth grade

education. And Mr. Torres, I still take offense to your remarks that

consumers don’t understand and consumers can’t say no.

Mr. GRUCCI. [Presiding] The gentleman’s time has expired.

Mr. TORRES. Could I respond to that?

Mr. GRUCCI. Please finish your statement. But the gentleman’s

time has expired.

Mr. TORRES. I don’t mean to imply that consumers are dumb.

Most consumers that I know are very bright. But what they’re facing is an industry that might be a little bit smarter and might be

a little bit able to maneuver a little bit better than them, than

those consumers. And not every consumer is in a position to be

able to pay off their credit card balances every month. We wish

that that was different. But especially in these economic times

when we’ve got a lot of workers laid off, a lot of people without

health insurance, they’re facing tough economic times. And it’s my

understanding from having worked on the bankruptcy bill that consumers work very hard. They tap into all of their resources to try

to pay off all of their bills in the terms that they’re given. What

they don’t expect is to be tricked and trapped and perhaps charged

more than they should.

Mr. GRUCCI. Thank you.

At this time we’ll turn to the Ranking Member for the Full Committee, Mr. LaFalce.

Mr. LAFALCE. My parents had less of an education that the gentleman’s from Columbus, Ohio had. I was the first one to graduate

from high school, go to high school in my family. Then I went on

to law school, and so forth. And I have studied law in Philadelphia—a Philadelphia lawyer—and I have an unbelievable difficulty

with so many of the practices. The practices are virtually impossible. They get everybody, no matter how intelligent you are. So

that’s not the issue. That’s a phony issue. That’s a phony argument.

The issue is the practices are designed to trap individuals. You

know, they trap everybody, the most intelligent, and of course, the

least intelligent too. And they’re designed to do that. They’re deliberately crafted that way to make money on human lapses or lack

44

of compliance with technicalities. And sure, they are glad to get individuals to come in and say, ‘‘if you want to pay it off every single

month in toto, and we’ll give you 2 percentage points off at the end

of the year’’ or, you know, ‘‘if you’re a GM card, five points’’ or what

have you, because they know that so many people are going to

make so many lapses that they’re going to make it up in fees and

penalties plus. That’s the strategy. That’s the game plan.

And, you know, we ought to be aware of that. That’s a reality of

life. And there are just certain things that we ought to define as

unfair, certain things we ought to define as deceptive. And we

haven’t done that adequately, either as a Congress or the regulators. And for us to try to just give one example of how a credit

card can be used well, of course, a credit card can be used well.

And I wouldn’t want anybody in my family not to have a credit

card, certainly at least for emergencies if not for the ordinary conveniences of life. But you don’t want it to be abused either, or fall

into the trap.

Now let me focus in on Mr. Peirez and Mr. Fischer for a little

bit. It’s the issuers who make these decisions for the most part as

opposed to MasterCard or Visa. Is that correct?

Mr. FISCHER. That is correct.

Mr. LAFALCE. OK. But do you have any either compacts with

your issuers regarding practices that they should have to adhere to

that would not be unfair or deceptive, or do you have a set of best

practices that you urge upon your issuers?

Mr. FISCHER. There is no compact as such, Mr. LaFalce.

Mr. LAFALCE. So as far as you’re concerned, you let your issuers

do whatever they want to? If they comply with the law, it’s fine.

If they don’t, that’s——

Mr. FISCHER. No.

Mr. LAFALCE. If they have deceptive practices or sort of deceptive, that’s OK?

Mr. FISCHER. There is no way that Visa—and MasterCard can

speak for itself—could possibly condone deceptive practices.

Mr. LAFALCE. I’m not talking about condoning it. I’m talking

about allowing it or trying to do something about it by either including a compact that would be violative of the legal arrangements with you, or at the very least, a model which you would suggest they follow.

Mr. FISCHER. Without any question, the Visa brand is critically

important to the company, and customer satisfaction is very important.

Mr. LAFALCE. Yes, but all these issuers that had enforcement actions brought against them or were found liable in the courts, they

used MasterCard, Visa, Discover, and so forth. You know, I mean,

they don’t really care. How many times have you canceled the ability of an issuer to use MasterCard or Visa because of what you

thought was a deceptive practice? Do you impose any penalties

upon issuers who engage in unfair or deceptive practices?

Mr. FISCHER. Visa does not do that. Visa expects——

Mr. LAFALCE. Does MasterCard do that at all?

Mr. PEIREZ. Congressman, MasterCard issuers are required

under our rules to follow the law and to assure that our system is

45

not utilized for violations of the law or in an illegal fashion. So to

the extent that issuers are——

Mr. LAFALCE. One of the difficulties was is they’ll always say in

any settlement, you know, but we didn’t violate the law. So we settled this in order to just get rid of the nuisance. And that’s why

I said in my opening statement earlier, there ought to be a law, or

at least there ought to be a regulation. And, of course, it’s taken

me 7 years to get this hearing. I assume we’re going to have a

markup of my bills next week, but maybe I’m wrong. You know,

it’s taken 26 years and the Fed still hasn’t promulgated regulations. You know, you can see why I get a little frustrated.

I mean, I think this hearing is basically cosmetic. I mean, this

was a sop to me to be very cooperative with the money laundering

legislation. Of course, that was my legislation, so it was easy for

me to be cooperative with it. And I don’t want something that’s just

cosmetic. I don’t want us to have this hearing today and say, see,

LaFalce, we gave you the hearing. Now what more could you ask

for? A lot more. A lot more. And I’m starting with MasterCard and

Visa.

What do you do about internet gambling? Now a lot of courts

have said that internet gambling is ipso facto—I guess I told a

funny joke there—illegal under the terms of the Wire Act. How

does MasterCard and Visa handle internet gambling? Do you just

permit it at will, or do you think it is illegal, or do you monitor

what you consider to be legal or what you consider to be illegal?

Mr. PEIREZ. What I can tell you is what MasterCard has done.

What MasterCard has done with respect to internet gambling is it

has passed rules requiring notice to the participants of what’s

going on so they can be aware. First it requires that the site which

is engaging in providing a gaming site give notice to the customer

that, in fact, this is a gaming transaction that could be illegal.

The second rule requires the merchant when transmitting that

transaction through our system to flag that transaction as an internet transaction and as a gaming transaction so that when the

issuer then receives a request to authorize that transaction, the

issuer can be aware of that. And MasterCard also, as I said, requires that its issuers not allow the system to be used for illegal

activities. So to the extent that the issuers are able to tell that an

activity is illegal——

Mr. LAFALCE. Some issuers have said, we’re not going permit our

credit card to be used at any time for internet gambling, period, because we think that it is ipso facto illegal. I think Providian, for

example, is one of them. Does Providian use MasterCard or Visa

or both?

Mr. FISCHER. It’s really both, Mr. LaFalce. The difficulty here—

and we’d be happy to sit down with you at any time to talk through

it—is that it’s not possible with technology today to block the transactions at the front end.

Mr. LAFALCE. If you can’t block them at the front end, you can

stop the credit card. You can do this, because some issuers are

doing it. They’re blocking the use of credit cards at internet gambling sites.

46

Mr. FISCHER. Using the codes that have been established, if in

fact the transactions are coded in that fashion, you can block them.

When they come through for authorization, you can block them.

Mr. LAFALCE. Right.

Mr. FISCHER. That assumes they’re coded properly. If they’re not,

you can’t block them.

Mr. LAFALCE. OK. But, you know, if you’ve got 1,500 gambling

sites and you code them all, you can block them all.

Mr. PEIREZ. I would emphasize that at this point in time, the

majority, as far as I’m aware, of these gambling sites actually don’t

accept MasterCard payment cards or Visa payment cards directly

for payment.

Mr. LAFALCE. What do they do?

Mr. PEIREZ. Usually the MasterCard card would be used to fund

an internet account of some sort that can be used for a variety of

purchases, not just internet gambling.

Mr. LAFALCE. So they get around it. You know, but if they can

get around it, there’s a way to figure out how to stop them getting

around it if you’d work with us, if you wanted to do it. I mean, you

know so much more about it than we do. If you wanted to stop it,

if you wanted to ensure compliance with the law, you could. I

mean, I don’t think you’re being very forthcoming here. I think

you’re sort of saying, well, you know, we’re making money on it.

As long as we’re making money on it, you know, and as long as nobody’s coming into court and charging us with anything illegal, you

know, we’ll let them get around the law this way. That’s my interpretation of what you’re doing.

Mr. FISCHER. Congressman, we’ve worked with many Members of

this subcommittee as well as other Members of Congress and plan

to continue to do so to try to find—— Mr. LAFALCE. Good. But nobody has been as active on this issue

as I am, and you’ve never worked with me on this issue, so I don’t

know who else you’ve been working with.

Mr. FISCHER. Well, we’d be happy to work with you on this.

Mr. LAFALCE. OK. I’m wondering who else you’ve been working

with on this issue, because I don’t know of anybody else on this

subcommittee who’s been—maybe Chairman Leach.

Chairman BACHUS. Thank you, Mr. LaFalce.

Mr. Grucci.

Mr. GRUCCI. Thank you, Mr. Chairman. I’d like to address my

comments to Mr. Fischer. Mr. Fischer, are you a member of the

corporate offices of Visa?

Mr. FISCHER. I am not, sir. I’m outside counsel for Visa.

Mr. GRUCCI. OK. And I suspect that you’re here because they

didn’t have anybody to send?

Mr. FISCHER. No. I’ve worked on credit card issues for 30 years,

and there was a broad range of questions that the subcommittee

ask to be addressed, and so they wanted someone here with the experience to come in and answer those questions for you.

Mr. GRUCCI. The questions that I have revolve around several

things. First let me start off by just making an observation which

leads to the question. With the Fed lowering interest rates and interest rates dropping on just about every other kind of consumer

loan that’s out there, from mortgages to automobile loans, why

47

haven’t the interest rates dropped on Visa cards? I wasn’t aware

of this until several people brought it to my attention back in the

district, and then when I looked at my own Visa bills I said, yes,

it’s absolutely right.

The interest rates are still sky high, and it would seem to me

that with all of the reduction in interest that your company ought

to have taken a forward-looking approach and also dropped rates.

Could you respond to that? And if you’re not in a position to respond to any of these, I understand. I would then ask you to bring

this back to those who can make those decisions at corporate since

no one is here to represent them, other than you.

Mr. FISCHER. I’d be happy to try in the first instance to respond,

sir. First, Visa itself sets no rates. There are 21,000 banks that

participate, 14,000 of them in the United States. Each of them operates their own program, so each of them sets their own terms

and fees. So to answer that question, we would have look specifically at the issuers.

In terms of programs that have variable rates that are actually

tied to an index like prime, then of course, they would float. In

other words, they would move up and down with prime. In particular programs, there may be floors and ceilings on them, but, in

fact, subject to that, they would, in fact, float.

Mr. GRUCCI. Has it moved at all, the interest rates on your cards

since the Feds had started lowering interest rates?

Mr. FISCHER. I can’t tell you that, sir.

Mr. GRUCCI. OK. Would you find out from corporate if indeed

that is the case? Also, could you answer the question about the

credit cards that are issued to college students? I have several colleges and universities in my district and the parents are very concerned about the number of credit cards that their children are

able to obtain through the mail simply by opening up their mail

and it’s sent to them with as much as a $3,000 limit on it, and

finding themselves in some very significant problems.

Why would companies like yours send out those types of things

without at least understanding that there are college students who

may not be able repay those types of loans and then perhaps putting their parents in the kind of problem that they may face?

Mr. FISCHER. Well, first, as a parent of three children in college,

I share your concerns perhaps even a little more directly in that

sense. But, issuers cannot send out cards to students. They simply

cannot do so. The Truth in Lending Act prohibits it under the current law. What they can do is send out offers which can be responded to. And I heard a comment earlier that cards were being

sent out with no underwriting—— Mr. GRUCCI. Let me just interrupt you for a moment, because my

son, who is college, got one to my house, where he resides. It was

in his name and it was a $3,000 limit on it and he doesn’t have

a job.

Mr. FISCHER. And he received an actual plastic card?

Mr. GRUCCI. He got a plastic card in the mail, which I quickly

proceeded to take away from him.

Mr. FISCHER. I’m sure that the relevant agency would like to

hear about that, because it is, in fact, an illegal practice under existing law.

48

Mr. GRUCCI. And I’m very concerned about it also. I have one

more question if I may, Mr. Chairman. I see my time is expiring.

The question that I have is that it’s come to my attention that

Bank of America is planning on relieving the victims’ families of

their credit card debt. And the question that I have is dealing with

interest. Do you think it would make sense—and I’ll throw this out

to the panel, whoever wishes to answer it, do you think it would

make sense to add a provision in this package relieving the tax on

interest that credit card companies would have to pay on a debt

that’s being relieved? Anyone wish to answer that?

Mr. FISCHER. Well, if no one wants to step on that, I will. Looking at any particular legislation, obviously, you need to see what’s

going on there. I’ve talked to probably 30 financial institutions

about relief efforts, and none of them, for the most part in any

event, have even asked for publicity, let alone a tax break. In other

words, this is something that they simply wanted to do, given the

special circumstances following September 11th.

If Congress was to turn around in that context and say, well,

now we’ll allow you to deduct it as well, you might find some interest. But I can tell you at least the institutions I’ve talked to are

not asking for that, Congressman.

Mr. GRUCCI. Thank you, Mr. Fischer. I appreciate your being

here and I respect the position that you have, but I wish you would

bring back to your company that I’m a little disturbed that they

wouldn’t have a corporate officer present to be able to respond on

behalf of the company. Thank you for your forthright answers.

Chairman BACHUS. Ms. Waters.

Ms. WATERS. Thank you very much. And I’d like to thank the

members of the panel for being here. Since you have been here, you

have heard a lot of criticism of the credit card industry. And you’ve

been accused of abusive practices, you’ve been accused of all kinds

of tactics which I know you wish to disassociate yourself from.

Have you heard anything here today that would make you change

anything that you’re doing, Visa and Master?

Mr. PEIREZ. Congresswoman, thank you for the question. I guess

my response would be that to some extent, the things that have

been heard here today are no different from things that are said

inaccurately about our industry from time to time. And I believe

that often what gets lost is the great benefits that we bring to the

American consumer.

Ms. WATERS. Have you heard anything that would cause you to

change anything that you’re doing now? I know about your benefits. I heard you talk about them. Have you heard anything here

that would make you change anything you’re doing or not doing?

Mr. PEIREZ. There are certainly things that have been said that

we would like to consider that I will take back and discuss——

Ms. WATERS. Anything in particular?

Mr. PEIREZ. I can’t talk to specifics, but there are certainly

things and we can follow up with you.

Ms. WATERS. OK. All right. Well, I’m glad you’re—sir, what

about you?

Mr. FISCHER. Yes. Without any question, there’s been an emphasis here on deceptive practices. And as I indicated earlier—and you

correctly said—that’s not something we or anyone here is going to

49

condone. What it does emphasize is the importance of educating

not only the consumers, which Visa has spent an awful lot of time

doing, but perhaps the industry as well on these points, and that’s

what we’ll endeavor to do.

Ms. WATERS. Thank you. Have you ever thought about, since you

deal with so many members who are out there—and I guess you

have contracts that you have with them to be a part of your organization—have you thought about standards for them? For example,

some of these members certainly must have some practices that

you don’t approve of. For example, this mandatory insurance for

credit cards that had to be dealt with in the legal system. Did you

know about that kind of thing? I mean, what can you do to eliminate your members from having those kind of practices?

Mr. FISCHER. Well, as you heard earlier, we obviously can tell the

members they must comply with the law. We can attempt to look

at practices that raise questions and risks to the Visa brand. If

you’re dealing in an association like Visa or MasterCard, the one

thing that you cannot do is be involved in pricing.

Ms. WATERS. If you find that one of your members is involved

with deceptive practices, perhaps even illegal, you can tell them

that they should be legal. What else can you do?

Mr. FISCHER. We certainly could tell them, assuming again that

we are aware or believe that the practices they were engaged in

were inappropriate, let’s say even deceptive, that that is not good

for them, it’s not good for Visa, and it’s not good for consumers.

Ms. WATERS. But you wouldn’t tell them you wouldn’t want them

to be a part of your organization and kick them out, would you?

Mr. FISCHER. In a context if they were really violating the law,

that might be a possibility.

Ms. WATERS. Would you like to see a piece of legislation that

would help you? Legislation that would say if you have knowledge

of illegal practices of one of your members and you do not within

30 days make them aware of it and warn them, that you could be

fined, would that help you out?

Mr. FISCHER. I would prefer to invest that effort in education and

also to help people to find issuers that perhaps are not engaged in

those practices. The Federal Reserve Board indicated earlier that

86 percent of consumers understand their ability to move those accounts. I think that that would be the better result.

Ms. WATERS. Well, you know, the reason I asked is, sometimes

it’s difficult in business for people to say to those who add to the

bottom line, change your ways or we don’t want you, and sometimes you need some help. And perhaps we can find some ways to

help you with that. But, of course, when we do that, I know you

don’t like legislation that kind of punishes you if you, you know,

do not do certain things. But of course, some of us who are very

concerned about some of these practices may want to try and help

you out in some ways in accomplishing that.

So I raise the question so that you can be in the leadership in

the forefront of trying to deal with some of these concerns.

Now is there a definition of when late fees start? When do late

fees start? Do you have standards? If you say it’s 15 days, when

does the 15 days begin, when does it end? Is the time of day calVerDate 11-MAY-2000 08:13 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 76183.TXT HBANK1 PsN: HBANK1
50

culated into some of this in some way? What do you know about

this? If I may have unanimous consent for 60 more seconds.

Mr. FISCHER. As the Federal Reserve Board representative indicated earlier—Dolores Smith—there are rules that say that you

have to post payments as of the date they’re received. There also

are rules that say that there are a number of days in advance of

that that that bill must go out. In other words, there must be a

fair opportunity to get the bill out and have it paid. There is no

law that I’m aware of that talks about times of days or any number

of days beyond that minimum, which is about a 2-week minimum.

Ms. WATERS. Practices of member organizations, if the payment

is not in by eight o’clock even though the mail is not received until

12 noon, then that becomes a late day. Do you know about any of

that?

Mr. FISCHER. I do not.

Ms. WATERS. All right. And that’s another area we may be able

to help you. Maybe we need to define what 15 days are, what 10

days are, and maybe we need to decide that, you know, 10 days or

15 days are not enough. Maybe we need to step in here and help

you out a little bit.

And finally, let me just conclude by saying, given the problems

with the mail, could you envision a directive from your organization to your members to say let’s have a moratorium on late fees

for 60 days or 30 days or—what kind of leadership could you give?

Are you desirous of doing that, or just the thought of it is just too

much for you to even think about?

Mr. FISCHER. No. I’m pleased to say that what I heard from Representative Maloney and Representative Cantor is that Visa members are doing that without legislative guidance. In other words,

they’re looking at people who have been affected by this tragedy

and they’re voluntarily making the decisions you’d like to see them

make under those circumstances by themselves.

Ms. WATERS. Some members are. But wouldn’t you feel real patriotic if you were able to send out a big red, white and blue notice

to your members saying we all ought to do this? Wouldn’t that be

nice and patriotic?

Mr. FISCHER. One of the wonderful things about competition is

that when you have organizations who are doing that, their customers are going to remember. They will keep their customers, perhaps others will not.

Ms. WATERS. One of the good things about competition in addition to letting the marketplace work is seeing leadership that respects the marketplace so much that they provide recommendations, suggestions—can’t make them do anything, but it sure looks

good when from the top you’re saying we think this would be a nice

thing to do.

Chairman BACHUS. Mr. Fischer, you seem a little leery of the

Ranking Member’s offer of helpful legislation to assist your industry.

Mr. FISCHER. I’m always happy to sit down and talk with Representative Waters about any legislative proposal.

Chairman BACHUS. Thank you.

Mr. Cantor.

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Mr. CANTOR. Thank you, Mr. Chairman. Mr. Chairman, I would

just like to ask again those representatives from Visa and

MasterCard, you know, my opening comment suggest that I do believe that there are members in the industry who are doing their

part in these difficult times. I also concur with the notion that the

industry provides a significant assistance to consumers who may

not otherwise be able to access credit. I think it’s an integral part

of our economy without a doubt.

Just hearing some of the debate as I came into the second part

of this hearing, I am concerned a little bit about the accusations

and other things that have been stated here. But my emphasis—

I would ask you if you could help us in learning about what the

industry does, about what you know, as was said earlier, you know

the industry better than we do, what has worked? What have your

members done that has worked to promote responsible borrowing?

If you can let us know how that has happened and if there’s any

way that we could learn about that to provide incentives for member companies to act responsibly.

Mr. PEIREZ. I think the primary thing the industry has done is

engage in extensive consumer education efforts. MasterCard has

engaged in many that are highlighted in my written testimony.

Our members have done the same. But also importantly, I think

it’s worth noting that the industry’s underwriting standards are extremely effective. Indeed, approximately only 1 percent of accounts

in a given year default because of bankruptcy, and only another 2

to 3 percent of accounts default for any other reason.

So indeed, that’s around a 96 or 97-percent success rate, which

illustrates that, in fact, consumers who use MasterCard cards or

Visa cards do so in a highly responsible fashion in which they are

able, in fact, to make the payments they have to make.

Mr. FISCHER. Visa believes that education is essential. In fact,

Chairman Greenspan said that in a presentation he gave just this

past week. That’s something that Visa has worked on now for over

a decade. They have one wonderful program that’s developed at

both the elementary and secondary school level. Right now it involves almost 100,000 schools across the country, 37 million students. And ultimately, that is I believe the answer. That you can

look at responses to particular practices that are not acceptable,

but ultimately, it’s education. It’s understanding how to use these

products, enjoy their benefits without getting into difficulty.

Mr. CANTOR. Mr. Chairman, one follow-up. Can you provide any

details on the way that is accomplished? Is it through notice to the

cardholders? Is it through calls? How is that most effectively delivered?

Mr. PEIREZ. I guess there are differing opinions on how education

can be most effectively delivered, but oftentimes it’s through people

who the consumer trusts and knows already—their teachers, their

parents, other students, if it’s a college student education program.

So empowering those entities that are already engaged in education to educate them on financial literacy is probably the most

effective way, and we have been working with Members of Congress as well as with the Administration to try to bring more of

those programs to the classroom and to campuses.

52

Mr. FISCHER. And Visa decided to go directly to the teachers.

They decided if they were going to put something together, they

wanted it to come not from Visa, but from teachers around the

country. So it’s something that’s been tested by teachers, approved

by teachers, and it’s implemented by teachers.

There’s a separate website. It does have at one spot a Visa logo,

but that’s all you’ll see. Twenty-five thousand hits a day in terms

of instruction, and I think that’s very important.

Mr. MIERZWINSKI. Congressman, could I make a brief response to

that?

Mr. CANTOR. Sure.

Mr. MIERZWINSKI. I just want to say, the consumer groups also

support financial education, and we did not make it a priority in

our testimony today to talk in great detail about it. But as I indicated, we have a brochure we’ve distributed thousands of on college

campuses. Mr. Torres’ magazine, Consumer Reports, is the largest

consumer education magazine in the country, and the Consumer

Federation of America has a major financial literacy program.

All that being said, I’m disappointed that the industry, although

they sent their eloquent representatives of Visa and MasterCard

here, that we don’t have representatives of the companies that

have, in fact, been under investigation by the OCC, by the San

Francisco District Attorney, and by some of the other investigatory

agencies around. And I wish, and I hope that the subcommittee

will hold an additional hearing where Jerry Hawke or his litigators

will be here to talk about some of their investigations to talk about

some of the tawdry practices that the industry is engaged in. I

think it’s great they’re engaged in financial literacy, but the fact is,

a lot of the biggest issuers have been sued and have been caught.

Mr. LAFALCE. And some State Attornies General, too.

Mr. MIERZWINSKI. And some State Attornies General, as well.

Mr. CANTOR. I yield back the balance of my time, Mr. Chairman.

Chairman BACHUS. Thank you for those hard-hitting questions.

Mr. Mierzwinski, let me comment on one thing for the record.

Mr. Hawke, we invited them to come to discuss those actions,

legal actions, and I think appropriately, they said that because

there’s litigation ongoing they did not want to discuss the particulars of the case.

Mr. MIERZWINSKI. I’m sorry. I was referring to the settled cases.

Chairman BACHUS. Is that right?

Mr. MIERZWINSKI. If they’re not settled, if they’re ongoing——

Chairman BACHUS. Their response to us was that there was litigation ongoing.

Mr. MIERZWINSKI. OK.

Chairman BACHUS. Obviously, if there’s been a final adjudication, that wouldn’t be a good——

Mr. LAFALCE. Mr. Chairman, if you would yield?

Chairman BACHUS. I yield to the gentleman.

Mr. LAFALCE. I could understand not wanting to discuss the particulars of a case in controversy or if as part of a settlement there’s

an agreement to have a quiet period, but surely we could call in

each and every regulator to discuss what the practices of the industry have been at large with respect to unfair and deceptive practices. Surely we could call them to find out what regulations they

53

have articulated to deal with that, what enforcement mechanisms

they have.

Chairman BACHUS. Sure.

Mr. LAFALCE. Surely we can call them in to find out whether

they think there are some gaps in the law that need filling, and

so forth.

Chairman BACHUS. Well, let me say this.

Mr. LAFALCE. So I would think the next hearing you have on

this, we could have those individuals also to discuss those issues.

Chairman BACHUS. I’m telling you what his response was. Now

if the litigation has concluded, obviously that wouldn’t—and we’ll

go back and explore that further.

Also, as Mr. LaFalce said, they wouldn’t have to discuss the details of the ongoing litigation. They could discuss their efforts. And

I think you bring up a good point and that perhaps would be a good

follow-up hearing.

Mr. MIERZWINSKI. Great.

Chairman BACHUS. Mr. Hinojosa.

Mr. HINOJOSA. Thank you, Mr. Chairman. I want to ask the first

question of Mr. Frank Torres with Consumers Union. What could

be done so that all of the credit card companies would have to

make sure that the people they send the credit card actually in the

mail are not college students nor children in grades K through 12?

I have two young daughters under 10 years of age, both are frequent fliers. And evidently they have their frequent flier card and

their names were bought in some list, and so they received cards

for $3,000 line of credit.

My colleague just talked about him being concerned about his college student son receiving one for $3,000. This is a problem. And

we need to stop it and stop it quickly. So what could we do in Congress to put a stop to it?

Mr. TORRES. Well, one way you could do it very quickly is to

amend the Gramm-Leach-Bliley Act and truly give consumers some

privacy. Because you’re exactly right. Probably the reason why

you’re getting the solicitations is because somebody sold a list to

somebody else and you’re unable to stop that or prevent it at all.

So that’s one of the things that you can do.

The second thing to do to try to stop the solicitations is to really

ratchet down on the marketing practices of the credit card companies. Make them do their homework as to, you know, if they’re

going to be sending out these things to the world, don’t reward

them by passing a bankruptcy bill.

Don’t reward them by not doing anything about some of their deceptive practices. Instead say if a parent comes into the regulator

with one of these solicitations targeted to their kids, because a

credit card company doesn’t want to be responsible for who they’re

sending out all these solicitations to, enable somebody to bring

stuff penalties against those credit card companies. I mean, it’s a

free-for-all out there. And unfortunately, the flip side to this is, I

kind of question whether or not there’s really competition in the

marketplace, so if your son or daughter may be get the solicitation

and they may get it for a low rate, but they may not qualify for

that rate. So, that’s a little bit off the tangent, but I think you get

my point.

54

But the first thing you can do is really protect people’s privacy.

Mr. HINOJOSA. Well, what if we made the first $5,000 or the first

$10,000 of their purchases free so that they wouldn’t have to pay

the credit card company as the penalty?

Mr. TORRES. That certainly would be one——

Mr. HINOJOSA. That would get their attention, wouldn’t it?

Mr. TORRES. That would certainly get their attention.

Mr. HINOJOSA. Thank you. The next question is to Richard Fischer at Visa. I’ve received a number of letters from my constituents

in my Congressional district regarding the extremely high late fees

charged by credit card companies. Apparently in some cases, the

payment due date may fall on a holiday or a weekend, and the customer is assessed a late penalty if payment is not received before

that date. And sometimes the amount of the penalty is greater

than the minimum payment required.

Are there any industry standards that can be set up so that this

doesn’t happen?

Mr. FISCHER. There are no industry standards in the sense of

Visa-set standards. Obviously there are rules, though, in the

exiting law in terms of how you treat payments. And as you heard

earlier, a payment must be processed, it must be handled as of the

date of its receipt. If you have a payment, as I understood your

question, sir, that was received on a Friday and not applied until

the following week, that would be inappropriate under existing law.

I’d be happy to sit down with you, look at the individual complaint, see if we can’t resolve the matter. Visa, of course, would not

have set any of those fees or practices, but if there are issues to

be dealt with with individual members, I’d be happy to intercede

for you.

Mr. HINOJOSA. I would like to invite you to come to my office

when they let us go back into Longworth and sit down with us in

my office so that we can try to be able to answer some of these letters and give them good accurate information.

Mr. FISCHER. Be happy to do that. May I respond to one other

question? In terms of your two daughters, did they actually receive

a card?

Mr. HINOJOSA. There was a card in the envelope. It was instant

approval for their credit.

Mr. FISCHER. Congressman, you have asked the question, what

can Congress do? On that one, Congress has already done. The

practice of sending out a card to somebody who’s not asked for it

is illegal today under existing law. They can send you an invitation

in that particular context, but if they actually sent you a card—or

your daughters a card—that’s illegal under the law today. Congress

has dealt with that already.

In terms of your question about the first $5,000 in balances, if

your daughters—I’m sure they would not do this—but if they were

to go out and use those cards, none of it could be enforced, not the

first $1,000, not the first $5,000, none of it. They’re under age.

They shouldn’t have had the cards in that instance without parental intercession, and in that context, there would be no liability for

them.

Mr. HINOJOSA. Thank you. I have no other questions, Mr. Chair.

55

Mr. LAFALCE. Would the gentleman yield? Could we follow up on

that for a second? Under what law? Does it depend upon the State

law?

Mr. FISCHER. No, no. This is the Federal Truth in Lending Act.

It has a provision in it dealing with the—— Mr. LAFALCE. If they sent the actual card?

Mr. FISCHER. Yes.

Mr. LAFALCE. OK. Good.

Mr. HINOJOSA. Thank you, Mr. Chairman.

Chairman BACHUS. Thank you. Mr. Fischer, you and Mr. Peirez

talked about consumers having a choice, being able to choose between products and that they have the right to go from one bank

to another to choose products. Recently a court found that membership rules of both Visa and MasterCard that prohibit their members from offering other cards violate the Sherman Antitrust Act.

The judge agreed with the Justice Department that as a result

of exclusionary rules, American consumers have been denied the

benefits of credit and charge cards with new and varied features.

The court also concluded that small businesses and other merchants were harmed by the anticompetitive practices of Visa and

MasterCard. Pretty clearly, some of the practices of MasterCard

and Visa restrict competition, do they not?

Mr. FISCHER. We do not believe so, sir. The decision you talk

about is a lengthy one. It’s over 150 pages. It’s very complicated.

We think they got the first half of the decision right. And in that

part of the decision, nearly 70 pages talks about all the competition

in the industry and how valuable it is.

The second half of the decision we think went off in the wrong

direction in terms of membership rules. It’s something that we’re

looking into. The judge has asked for orders, recommendations on

the order. We’ve given those. We’re waiting for a final ruling in the

case, and then we’ll make a decision accordingly.

Chairman BACHUS. Mr. Peirez.

Mr. PEIREZ. I think Mr. Fischer covered most of the points. Certainly the judge’s decision does emphasize the tremendous amount

of competition and does speak to the various types of cards that are

available to consumers as a result of it, and the ability of consumers to switch among cards. And similar to Visa, we are awaiting the judge’s final judgment.

Chairman BACHUS. Both Visa and MasterCard, you tell a bank

if you want to market Visa and MasterCard, you can’t offer other

cards, right?

Mr. PEIREZ. We tell members that if they want to be a member

of MasterCard and be able to issue MasterCard cards that, with a

few exceptions, they are not able to participate in other systems.

Chairman BACHUS. They can’t offer other cards to their customers, right?

Mr. PEIREZ. They are allowed to offer Visa cards.

Chairman BACHUS. But only Visa or MasterCard? Is that right?

Mr. PEIREZ. There are some other exceptions, but in large part,

that’s correct.

Chairman BACHUS. That’s restrictive, I mean, is it not? Whether

you agree with it or not, it’s restrictive. You’re restricting their

right to offer other products to their customers.

56

Mr. PEIREZ. It’s important to remember that these members as

well as MasterCard itself have spent billions of dollars over 30

years developing the MasterCard system, the good-will associated

with it.

Chairman BACHUS. Let me ask you this. What if Coca-Cola spent

billions of dollars developing that product, what if they told grocery

stores they couldn’t offer anything but Coca-Cola products? They

couldn’t offer Pepsi. They would be anticompetitive, wouldn’t it?

Mr. PEIREZ. I don’t believe that there’s a parallel there. I don’t

believe that we do that. We certainly allow merchants to accept

any and all cards. We certainly allow consumers to carry and

use——

Chairman BACHUS. Wait a minute. You allow? Oh, you allow

merchants to accept, but not your client. You don’t really have control on what merchants do.

Mr. PEIREZ. What we ask of our members is that if they want

to participate in the MasterCard system, they have loyalty to that

system, and that they not engage in participating in other systems

that diminish the value of MasterCard.

Chairman BACHUS. You mean you’re asking them in the name of

loyalty, you’re saying you can’t offer other cards?

Mr. PEIREZ. We’re asking them if they want to be a member of

MasterCard, to be a member of MasterCard and to abide by all

MasterCard rules, including the MasterCard competitive programs

policy, which I believe you’re referring to, that limits their ability

to participate in certain other programs.

Chairman BACHUS. Does that have any benefit to the American

consumer?

Mr. FISCHER. We certainly believe it does. What’s important to

recognize is this matter is in the court today. It’s not the first time.

The same rule was dealt with in the 10th Circuit, looked at all of

the practice, found it perfectly appropriate.

Chairman BACHUS. Mr. Fischer, you said you think it does benefit consumers?

Mr. FISCHER. To have a healthy system, a healthy Visa system,

absolutely I think it benefits consumers.

Chairman BACHUS. Oh, have a healthy Visa system?

Mr. FISCHER. Absolutely.

Chairman BACHUS. You think that if they were able to offer

other cards, it would—— Mr. FISCHER. It’s not the issuance of the cards themselves. It is

the entry to the system of someone who is looking only to destroy

it, and that’s the concern. But if you’d like to sit down, Chairman

Bachus, at any time and talk about it, we’d be happy to do that.

Chairman BACHUS. And let me say this. I have tremendous respect for your intellect and your judgment, as a former attorney,

I mean I’ve heard you testify. I’ve heard you testify on privacy.

Very impressed with your grasp of the issues, so I respect your

opinion. I know you’re here on behalf of Visa. But I would be interested in doing that.

Mr. Torres.

Mr. TORRES. Mr. Chairman, may I respond to some of those questions? First of all, we think that the judge’s ruling in the Department of Justice case is very important, especially in the aftermath

57

of Gramm-Leach-Bliley, where the whole idea of that law is to foster competition and allow banks and financial institutions to offer

a wide range of products, and we didn’t see why a bank shouldn’t

be allowed to offer any card product, not just American Express or

Discover or whoever, but some maybe new upstart company that

would compete on the basis of interest rate, that perhaps wouldn’t

do some of these practices that we’ve discussed today.

The other thing—and since the idea of control over what merchants do has been raised, the merchants have filed their own lawsuit against the MasterCard and Visa networks for forcing them to,

in order to continue to accept the Visa and MasterCard credit card

product, also have to—they’re trying to force the merchants to also

have to accept the debit card product or the check card, it’s the

same thing.

The problem there that the merchants are facing is that they’re

being charged the same rates to accept the check card that takes

money directly out of a consumer’s account as they do for the credit

card products, which is up to 2 percent of transaction, from my understanding, which is a tremendous amount that they end up passing along to consumers, so it’s costing them a lot of money. So

they’ve gone to court claiming that’s an anticompetitive practice as

well.

Mr. LAFALCE. Would the Chairman yield?

Chairman BACHUS. I don’t know if that’s the 2nd Circuit Court

of Appeals case.

Mr. FISCHER. It is.

Chairman BACHUS. It is? That’s what we’re referring to?

Mr. LAFALCE. Mr. Chairman, I think we’re getting onto an issue

now that wasn’t the initial focus of the hearing, which were basically credit card abuses, but I think it’s extremely important and

it’s rather amazing to me that I can’t recall in all my days on the

Financial Services Committee a hearing regarding the practices of

MasterCard, Visa, and so forth. We have left it to the courts. I

don’t know that the Judiciary Committee has. Maybe they have.

But I don’t think we have. And I certainly think that it’s worthy

of a future hearing in and of itself. What is the law? What have

the practices been? What have the courts ruled? And what’s the impact on the consumer?

We talk about the issuers of the credit card as opposed to

MasterCard or Visa, but who owns MasterCard and Visa? Who are

the real owners? Are some of the issuers also the owners? I think

that’s a question worthy of pursuit.

Mr. FISCHER. Could I have the opportunity to respond to just one

point so that the mischaracterization isn’t left?

Chairman BACHUS. Certainly.

Mr. FISCHER. This is about the suit that Mr. Torres was talking

about. As I indicated in my oral testimony, one of the fundamental

goals of Visa is choice for consumers. We put a lot of products out

in the marketplace that have the Visa brand on it. We believe the

consumer ought to choose what brand, what product that they use

at a location.

The merchant—we had a lot of discussion about deceptive practices, and I’m not saying that that’s what this is, but the merchant

puts that sign out on the front door, invites me to in to use my

58

Visa card, and when I get up to the checkout stand they say, now

wait a second, you can’t use that Visa card. That’s what that case

is all about. We think that it’s good to get to the merits rather than

the procedural things now, because to take away that consumer

choice. We’ve just been talking about consumer choice right along

in that particular context. If the merchant wants to incent the consumer to use that other card, the credit card, the debt card, as

we’ve heard earlier, in that particular transaction by a cheaper

price, fine. But to say they can’t choose is not something that we

think is appropriate.

Chairman BACHUS. So you’re saying that in the Wal-Mart and

the other retailers which brought that lawsuit, what they were

doing was actually discriminating against certain——

Mr. FISCHER. I’m saying what they’re doing is taking away consumer choice. And any way you look at it, if they’re saying you

can’t use certain payment products with the same brand on it, then

that’s taking away consumer choice.

Chairman BACHUS. And I think that case will go through. But

it’s interesting. I mean, there are always two sides to every story.

Are there any questions from Members? I’ll allow a second round

of questions. We’re going to have a vote in about 5 minutes and

we’ll conclude the hearing upon the calling of that vote or before,

but I’ll let Mr. LaFalce have additional time.

Mr. LAFALCE. Thank you very much, Mr. Chairman. An awful lot

of the questions have been addressed to Mr. Peirez and Mr. Fischer

regarding MasterCard and Visa. And we haven’t really called upon

Mr. Manning, Ms. DeMarse, Mr. Mierzwinski, Mr. Torres. And so

I think the first thing that I want to do is ask the four of you, are

there any issues that we’ve discussed that you would have liked to

have commented on as we went along? Mr. Manning? Professor

Manning, I’ll call upon you first.

Mr. MANNING. First, there has been a lot of lip service about education, and certainly—aside from assessment quality, just like

there’s duplicitous advertising policies with cars, there is also duplicity in terms of what kind of education, whose interest it serves.

I have yet to hear the term ‘‘savings’’ which was the cornerstone

of the Puritan values of the society even being broached here in

consumer credit.

We haven’t at all yet looked at the efficacy of what is to be

taught to young people and why it hasn’t been taught and why

suddenly it should be taught. The whole issue of the Visa Bucks

program which specifically targets 10-, 11- and 12-year-olds, we

have yet to discuss the influence it has in shaping a consumer culture and whether they should even learn the value of savings over

debt.

And particularly surprising is we haven’t addressed at all the

line that’s been crossed of the multi-million dollar contracts that

are now being offered to universities where the yield on those contracts are directly related to the indebtedness of their students and

that there aren’t even any provisions for education that go along

with that contract.

Mr. LAFALCE. Let’s talk about that a little. But I also want, in

connection with that, speaking of education, if a student uses a

59

credit card and incurs some indebtedness, the student will go into

bankruptcy and discharge that debt, correct?

Mr. FISCHER. Of course. Yes, sir.

Mr. LAFALCE. Now suppose it is a Government-guaranteed student loan? Now that’s not dischargeable in bankruptcy is it?

Mr. FISCHER. It is not.

Mr. LAFALCE. What practices does Sallie Mae have with respect

to the issuance of either MasterCards or Visas for the purposes of

consolidating your indebtedness and getting a Government-guaranteed student loan using a MasterCard or Visa?

Mr. FISCHER. I’m aware of no such program.

Mr. LAFALCE. Mr. Peirez.

Mr. PEIREZ. I am also aware of no such program.

Mr. LAFALCE. I’ll not pursue that at this point. But let’s look into

that. Mr. Manning, did you wish to make any further point regarding either the educational institutions and the fact that the payment they get is directly related to the amount of indebtedness incurred by the credit cards that are issued? And of course, they usually enter into exclusive marketing arrangements on campus with

certain either—usually issuers. Is that correct?

Mr. MANNING. Well, I think we’ve seen a lot of lip service paid

that there is less tabling and marketing directly visible on campus,

but ignoring the fact that the marketing that’s occurring is far

more effective in getting credit cards to younger and younger students.

Mr. LAFALCE. Somebody mentioned, gee, we would not permit

Pepsi-Cola or Coca-Cola to have something that’s exclusive of the

other at a grocery store. But in schools, for example, Coca-Cola and

Pepsi-Cola do enter into exclusive arrangements with school districts and they pay them so much so that only their pop can be sold

in a school for the next decade or so, which is a separate issue.

Chairman BACHUS. Actually what they do, they put their machines in there, and because it’s their machines. But they don’t prohibit them from—— Mr. LAFALCE. Well, I think they have exclusive arrangements. In

other words, they give the school districts X dollar amounts if over

the next 10 years no machines other than theirs can be in there.

Chairman BACHUS. Oh, yes. I’m not condoning it.

Mr. MANNING. I would certainly think that it’s striking. I’ve been

using the estimate that I expect by the end of the decade the billion dollar payola of the top 300 schools will be receiving approximately $1 billion per year, and I have yet to see any of those funds

appropriated toward effective educational programming or any

kind of debt refinancing in the context that we know that with the

civil rights movement, with the emergence of a large surge of new

immigration, we have a tremendous increase in first generation college students who are most vulnerable, most susceptible, and least

likely to have parents who have had experience with credit cards

and therefore find themselves at the very margins of the ability to

cope with extra levels of debt and then force themselves out of college.

I think these are critical issues as we talk about a just and better educational system that the role that credit cards are increasingly playing today.

60

Ms. DEMARSE. Thank you very much. I do have a couple of

things I’d like to share. I think we’re in an unprecedented situation

right now because of 9/11 and because of the economy.

Mr. LAFALCE. Because of what? I didn’t hear you.

Ms. DEMARSE. Because of 9/11 and because of the economy.

There have been nine rate cuts this year. It is not following

through. We are not getting the benefit of this economic stimulus

because so many of the cards are fixed-rate cards. Sometimes

they’re 7.5 percent cards, which are good cards, but most of them

are 14 percent or way above the 5.5 percent basis.

And it’s just not trickling down. And it’s going to be worse because of the 9/11 situation. The industry’s reaction to slower mail

and late payments. We’ve interviewed a number of banks as a result of this request, and the consumer is asked to be very proactive.

It’s entirely on a one-time basis. The consumer has to request to

have the late fees waived. It’s initiated by the consumer. You must

seek out help from your lender.

We haven’t come across an institution that has decided to go

across the board and waive the fees. And in fact, what we found

is that the consumer has to be prepared to send in a copy of their

data check to prove that they put it in the mail on time. And who

knows? The check may still be in a post office somewhere mangled

someplace.

So if you could depend on the credit card companies at this

point—— Mr. LAFALCE. The thing that gives me pause, let me just tell you.

One of the things I like to do whenever we have a day when Congress is not in session is just walk in the small little towns in my

district. And I usually try to make a stop at the post office in a

village of 1,000 people where the one postal official will, of course,

in a week, meet everybody in that village.

And I say, H.L., what’s going on? You know, what are they interested about? And they tell me—I’m not making this up now—telling me how irate people are about the fact that they are paying

late penalty fees, around $30. And, you know, a postal officer in a

village of about 1,000 says ‘‘I get about 30 people per week who

come in and want to send something air mail special delivery, return receipt requested, just to avoid a late payment because it’s

cheaper to spend the $5 than the late payment.’’ And he says, ‘‘but

of course, the complaints I get about people who haven’t done that

are enormous.’’ So they usually do that because they incurred a

late payment fee the previous month.

And this is almost a constant. Whenever I go to the post office,

everybody at the post office will recognize me and they’ll come up

to me and they’ll start airing their complaints. And the late fees

are one of the greatest complaints they have. And they’re there for

that purpose, of getting the check in the mail, air mail express, return receipt requested, and so forth, just so they can avoid that

late payment. This is a huge, enormous problem. That’s just one—

one—of the many, many, many problems.

Either the issuers have their heads in the sand—and I don’t

think that’s true. I think they know exactly what they’re doing. It’s

just they’re making money doing it. It’s their way of making

money. And so long as neither the legislators nor the regulators are

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doing anything about it, they’ll bear the burden of a few isolated

complaints as long as they can continue making money.

Chairman BACHUS. I thank the gentleman.

Let me conclude. I’m going to submit a question to you in writing

to the consumer panel. And let me tell you what that question is.

I see Director Smith from the Federal Reserve still in the audience.

The Federal Reserve did a survey and asked American consumers

who had credit cards if they were generally satisfied with their

credit card services that they were receiving. And over 90 percent,

according to their survey, over 90 percent of those with bank-type

cards were generally satisfied with their dealings with their own

credit card companies.

I guess my first question would be, do you agree with those findings? Do you think they’re skewed or do you think they’re wrong?

And if they’re right, how does that square with your assertions that

there is widespread abuse of the American consumer by credit card

companies?

Mr. MIERZWINSKI. Well, I know you have to go vote, so we will

certainly take a look at that Fed study, Mr. Chairman, and we’ll

respond in writing to it. But I can tell you, a lot of those 10 percent

have called me on the phone or sent me a letter. And they’re very,

very angry, as are Mr. LaFalce’s constituents in the little village,

and as the readers of the Bankrate.com website, and as the thousands of students Professor Manning has interviewed personally.

There are significant problems. I want to commend you for holding the first hearing on this industry. It’s a massive industry. I

don’t think there’s been a hearing since Joe Kennedy held a hearing on college credit card marketing in 1994. So I hope you’ll have

additional hearings in this series. Thank you.

Chairman BACHUS. Thank you.

I’m going to wrap it up right now. I do want to say this again

concerning the Internet Gambling Prohibition Act and the provisions in that, because there continues to be things said by people

that, I think, simply do not understand the provisions in the bill.

What that bill will give, it will give financial services companies a

list of specific internet sites, and it will ask them to prohibit payments to specific entities. It will identify those entities. It will identify those locations.

It was again said today that it will be hard for banks to determine whether or not a certain site is being used for internet gambling. Obviously, banks aren’t in the investigative business. What

they will receive under that litigation, the Attorney General, pursuant to court injunction, will simply say to them, you cannot transfer money to specific sites. They’ll give a location and a name of

that site.

I wanted to clarify that again. And it won’t do anything beyond

that. It also will not make any duties on the bank to determine

what is legal or illegal or what site is legal or illegal or how those

sites are operated. It will simply identify those sites and ask that

you not transfer money to those sites.

This concludes the hearing, and I appreciate all the witnesses’

testimony.

[Whereupon, the hearing was adjourned.]

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A P P E N D I X

November 1, 2001

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