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36–821 PDF 2007

CREDIT CARD PRACTICES: CURRENT

CONSUMER AND REGULATORY ISSUES

HEARING

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

APRIL 26, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–26

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

CAROLYN B. MALONEY, New York, Chairwoman

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

4PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

JULIA CARSON, Indiana 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

PAUL E. GILLMOR, Ohio 

TOM PRICE, Georgia 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

STEVEN C. LATOURETTE, Ohio 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

(V)

C O N T E N T S 

Page 

Hearing held on: 

April 26, 2007 ................................................................................................... 1

Appendix: 

April 26, 2007 ................................................................................................... 29

WITNESSES 

THURSDAY, APRIL 26, 2007

Ireland, Oliver I., Morrison and Foerster LLP ...................................................... 18

Sherry, Linda, Director, National Priorities, Consumer Action .......................... 19

Wilmarth, Arthur E., Jr., Professor of Law, George Washington University 

Law School ............................................................................................................ 12

Yingling, Edward L., President and CEO, American Bankers Association ........ 14

Zeldin, Cindy, Federal Affairs Coordinator, Economic Opportunity Programs, 

Demos: A Network for Ideas & Action ............................................................... 10

Zywicki, Todd J., Professor of Law, George Mason University Law School ....... 15

APPENDIX 

Prepared statements: 

Castle, Hon. Michael N. ................................................................................... 30

Maloney, Hon. Carolyn .................................................................................... 31

Ireland, Oliver I. ............................................................................................... 34

Sherry, Linda .................................................................................................... 44

Wilmarth, Arthur E., Jr. .................................................................................. 64

Yingling, Edward L. ......................................................................................... 84

Zeldin, Cindy ..................................................................................................... 106

Zywicki, Todd J. ................................................................................................ 120

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Baca, Hon. Joe: 

National Council of La Raza Issue Brief entitled, ‘‘Latino Credit Card 

Use: Debt Trap or Ticket to Prosperity’’ ..................................................... 150

Maloney, Hon. Carolyn: 

Letter to Chairwoman Maloney and Ranking Member Gillmor from the 

American Bankers Association providing additional information requested at the hearing .................................................................................. 172

(1)

CREDIT CARD PRACTICES: CURRENT 

CONSUMER AND REGULATORY ISSUES 

Thursday, April 26, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

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

[chairwoman of the subcommittee] presiding. 

Present: Representatives Maloney, Watt, Ackerman, McCarthy, 

Baca, Green, Clay, Cleaver, Hodes, Ellison, Klein, Perlmutter; 

Gillmor, Castle, and Hensarling. 

Also present: Representative Bachus, ex officio 

Chairwoman MALONEY. This hearing will come to order. The 

topic of today’s hearing is ‘‘Credit Card Practices: Current Consumer and Regulatory Issues.’’ First, I would like to thank all of 

the witnesses for coming today and for the testimony they have 

prepared. And I would like to thank the members on this committee who have an interest in this subject, many of whom have 

introduced legislation pertaining to different aspects of it. This is 

the first in a series of hearings on credit card practices. At our second hearing, to be held the first week in June, we plan to have the 

Federal and State regulators discuss the anticipated revision to the 

regulations governing disclosure for credit cards by the Federal Reserve. The Federal Reserve have informed me that they expect to 

be issuing this in late May, and we also expect to have a panel of 

consumers and industry representatives to comment on the Fed’s 

action. 

Credit cards may represent the single most successful financial 

product introduced to our country in the last 50 years. Their benefits are manifest, giving consumers unprecedented convenience and 

flexibility in both making purchases and in managing their personal finances. Consumer spending, facilitated in large part by the 

ease of payments afforded by credit cards, accounts for nearly twothirds of the annual U.S. economic activity. And even more dramatically, one can argue that the broad availability of credit cards, 

coupled with advances in technology, has helped to create and support and expand an online retail industry that is projected to reach 

$129 billion in sales this year according to a recent Business Week 

article. All told, 145 million people in America, about half the population, own credit cards. In short, credit cards, like many other 

2

tools in our society, have changed from a luxury item available to 

the few, to a necessity demanded and needed by the many. 

But with that great success, with that widespread growth, with 

that necessity, comes great responsibility. The credit card industry 

has been clear about the responsibility imposed on consumers: the 

responsibility to become financially literate; the responsibility to 

spend only in accordance with your means; and the responsibility 

to pay your bills on time. But this spectacular growth in the credit 

cards industry does not seem to have created the same sense of responsibility in the 10 credit card issuers that control 90 percent of 

the market, much less the other 6,000-plus U.S. credit card issuers. 

It is true that competition among issuers has created initial consumer choice and can reward the diligent consumer with lower interest rates and no annual fee. But the industry has also acted to 

implement practices that quickly became industry standards, such 

as double cycle billing, universal default, no notice interest rate 

hikes, outside fees as much as $39 for a late payment, that brings 

us to our hearing today. For example, a recent article in Electronic 

Payments International reported that credit card issuers were expected to rake in a record $17.1 billion in credit card penalty fees 

in 2006, a rise of 15.5 percent from 2004, and a tenfold increase 

from 1996 when credit card issuers raised $1.7 billion in revenues 

from fees. 

Did American consumers become 10 times less responsible in 

2006 than in 1996? Or did the industry make a concerted and deliberate effort to squeeze even more revenue out of consumers by 

increasing fees and creating pitfalls in violations of the card agreement that allowed the issuer to penalize even the most responsible 

consumers? 

Credit card issuers hold an enormous amount of power. Enshrined in the card member agreement, just listen to this section 

from an April 2007 card agreement of a major card issuer that was 

sent to my office, and I quote from the card agreement: ‘‘We may 

suspend or cancel your account, any feature or any component of 

your account at our sole discretion at any time with or without 

cause whether or not your account is in default and without giving 

you notice subject to applicable law.’’ From terms like that, it is not 

hard to see how fee income went up tenfold in the past 10 years. 

I have always believed that responsible access to credit is critical 

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

broad as possible, consistent with the safety and soundness of the 

financial system. Similarly, I approach credit card regulation from 

the point of view that we should both protect consumers and keep 

responsibly issued credit available in as many of our communities 

as possible. I am generally in favor of market-based solutions 

whenever possible, but in this case I am not convinced that the industry is going to make the changes that are necessary. I do want 

to credit some major issuers who have taken steps to move toward 

better practices: CitiBank has announced that it will eliminate any 

time for any reason re-pricing and universal default; and Chase 

has said that it will no longer use double cycle billing, but rather 

average daily balance. But I do not see the development of best 

practices that industry holds itself to across the board. For example, in the wake of the key GAO report last September finding that 

3

the increased complexity in rates and fees requires better disclosure, even industry agrees that changes to credit card disclosures 

are desperately needed because no one can understand their statement. Yet industry has not taken comprehensive action on this 

point. And if the industry fails to make meaningful changes, if the 

major issuers continue to lead the way in a race to the bottom rather than in a race to improvement, it is my belief that we will see 

bipartisan legislation coming forward to fix the problems that industry proved itself incapable or unwilling to fix on their own. 

I look forward to the testimony, and I would now like to recognize the ranking member, Mr. Gillmor. He has 15 minutes, and we 

have 15 minutes over here, so we will go back and forth. 

Mr. GILLMOR. I want to thank the Chair for calling this hearing, 

and for yielding. I think this morning’s hearing is going to be a 

very important information-gathering session. At this point, we do 

not know whether legislation is going to come out of this or if it 

does, exactly what form it will take. But I do think it is important 

that whatever we do in this respect, we work together on it, and 

try to get bipartisan support on both sides of the aisle. I think that 

is going to be important not only for the committee, but also for 

the consumer and the industry; I think that is going to be one of 

our mutual goals. 

Americans have access to some of the best financial services in 

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

Consumers are becoming increasingly reliant on electronic forms of 

payment and with the prevalence of the credit card comes some serious policy discussion. The credit card industry has expanded rapidly over the past decade and there are 600,000,000 cards in use 

today. My wife has a large part of those. 

[Laughter] 

Mr. GILLMOR. The popularity of the credit card has allowed for 

an evolution of credit card policies and fees. There are literally 

thousands of products offered by credit card issuers with all different fees, rates, and features. With market competition and innovation, credit card issuers seem to be willing to adjust their products when the consumer dictates a change is necessary. 

Earlier this year, some of the biggest credit card companies voluntarily eliminated some of their controversial policies such as universal default and double cycle billing, and I would expect that 

trend to continue as the consumer with a bad deal can shop around 

with ease. Due to the nature of credit cards, fees are a major component of how an issuer is able to recoup the dangers of extended 

credit with no collateral. It is fair for banks to constantly evaluate 

how best to charge for the risks associated with particular elements 

of borrowers. But what is not acceptable or fair is for the issuers 

to hide fees, policies, or practices from their customers. Disclosure 

is the answer and that is why earlier this year, Ranking Member 

Bachus and I sent a letter to Federal Reserve Chairman Bernanke 

requesting a prompt review of Regulation Z. If consumers are 

aware of how their payments or lack thereof will affect their fees 

and interest rate, the choice is theirs to make. 

So I look forward to working with Chairwoman Maloney and my 

colleagues on both sides of the aisle to address the policy issues in 

consumer credit, and I yield back. 

4

Chairwoman MALONEY. The Chair recognizes my good friend and 

colleague from New York, Gary Ackerman, who has worked long 

and hard on this issue, for 3 minutes, and he has introduced a bill 

on a common fee, which has been called the pay-to-pay fee, where 

consumers are charged $5 to $15 because they have paid their 

credit card bill over the phone. I congratulate him for his interest 

and work on this bill. Gary Ackerman for 3 minutes. 

Mr. ACKERMAN. Thank you, Madam Chairwoman. I just hope 

that the transcriber puts the comma in the right place indicating 

that I have worked hard on this bill, and recognizing me for 3 minutes, rather than that I worked hard on the bill for 3 minutes. 

[Laughter] 

Mr. ACKERMAN. Thank you, Madam Chairwoman, for scheduling 

the hearing. As you know, over the past 10 years, credit card companies have steadily increased financial burdens on American consumers, which in itself could be bad enough, but in addition, credit 

card agreements have become increasingly more complex with teaser rates, universal default, double cycle billing, transfer fees, membership fees, finance fees, over-limit fees, cash advance fees, stoppayment order fees, and the list goes on. Credit card companies 

have absolutely failed to disclose in an honest, straightforward 

manner the real terms of their product to American consumers. 

In a particularly gluttonous practice, some credit card companies, 

having induced customers to pay their bills online, are now charging fees for their customers to pay bills online or by phone. It is 

not just simply for an express payment that posts the same day, 

but a fee simply to pay their bill. It is like having to pay a fee in 

order to pay for your groceries at the check-out counter. Since both 

online and phone method payments would provide the customer the 

ability to quickly make their payments and check to ensure the 

payment will post before the due date, a fee to use these payment 

options is aimed at encouraging credit card customers to pay their 

bills by mail. Naturally, some customers—maybe they are on vacation, maybe their statement got lost in the mail—will make their 

payments too late and have to pay a late fee. One late payment, 

of course, could result in your being tossed into the not-so-tender 

trap of paying a significantly increased rate. 

In what is perhaps one of the most insidious schemes of all, some 

credit card companies are now sending their monthly statements 

out late in the month, giving their customers much less time to 

make their payments without risking a late fee, causing them to 

pay online or by phone only to discover they are being charged a 

fee to pay by phone or online. It is heads, I win; tails, you lose. A 

customer who is on vacation, do not worry, he didn’t leave home 

without his American Express Card, stands no chance of paying his 

credit card bill without being assessed a late fee to pay online or 

by phone. It would be the equivalent of the Federal Government 

mandating that taxes be paid by April 15th but not allowing W–

2 statements to be mailed out until April 6th. You would not receive your W–2 in the mail until maybe April 10th. And when you 

show up at the post office before April 15th, you are told that there 

is a $15 charge to pay by mail. Because of this outrageous predatory tactic, I have introduced, as the Chair mentioned, along with 

her co-sponsorship, legislation that would prohibit credit card comVerDate 0ct 09 2002 18:00 Aug 02, 2007 Jkt 036821 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\36821.TXT HFIN PsN: TERRIE
5

panies from charging a fee to their customers explicitly for paying 

online or by phone. H.R. 873, the Credit Card Payment Fee Act, 

would not deal with express payments or any other of the various 

schemes that credit card companies have undertaken to swindle 

the American public, but would simply protect credit card customers from being entrapped in the vice of their Visa. 

There are of course many other practices within the credit card 

industry that require reform. I would echo the conclusion of a September 2006 Government Accountability Office report that called 

for revised disclosures more clearly emphasizing the terms of a 

credit card agreement that affect cardholder costs, especially those 

actions that will cause a default or result in penalty phases. 

I look forward to hearing from our witnesses this morning. I am 

kind of upset that the credit card companies themselves have provided no witnesses today. I hope that they are not going to squeal 

too much like stuffed pigs if the legislation is going to affect them 

and then claim that they had no input into the system. I thank the 

witnesses who are here today. I thank the Chair and look forward 

to hearing from our panel. 

Chairwoman MALONEY. Thank you. Congressman Bachus, for 5 

minutes. 

Mr. BACHUS. Good morning. Thank you, Congresswoman 

Maloney, for holding this hearing and, Mr. Gillmor, for your interest in this. I think it is important for the committee to gain a better understanding of the current practice of pricing, billing, and 

disclosure practices of the credit card industry and the impact 

those practices are having on consumers. According to the GAO, 

Americans now hold 690 million credit cards, and between 1980 

and 2005, the amount that Americans charged to their credit cards 

grew from an estimated $69 billion per year to more than $1.8 trillion. Not only have credit cards broadened the availability of consumer credit, allowing more Americans access to credit they deserve, they also provide consumers with a safe and effective tool for 

making purchases. Credit cards are very important to our national 

economy and have played a key role in the development of Internet 

commerce. Recently, however, concerns have been expressed over a 

number of credit card practices, including double billing cycles, universal default, late payment fees, over the limit fees, and shortening of grace periods. While I am pleased that some of the large 

credit card issuing financial institutions have been proactive in addressing these concerns, it is still important that we fully examine 

these issues to ensure adequate protection of the American consumer. 

I am particularly concerned about the 55 percent of college students who acquire their first credit card during their first year of 

college, and the 92 percent of college students who acquire at least 

one credit card by their second year of college. A combination of aggressive and targeted marketing by many credit card issuers and 

the lack of financial literacy and immaturity often ends badly for 

college students. The experience of my colleagues may be different 

but a substantial percentage of the complaints I receive from constituents involves the parents of these students. And I might say 

that I could join my other constituents in having legitimate complaints on what I have witnessed in dealing with one or two of my 

6

five children. And I can say without a doubt that the treatment of 

them by the credit card companies was not fair and equitable. 

Credit card disclosures are governed by the Truth in Lending Act 

and Regulation Z administered by the Federal Reserve Board. In 

December 2004, the Federal Reserve began a review of Regulation 

Z requirements concerning the format of open-end credit disclosures and the content of such disclosures and the substantive protections provided to consumers. It is now April 2007 and the Federal Reserve has yet to issue any proposed revisions to Regulation 

Z. Until the Federal Reserve completes its process, it will be difficult to assess whether additional measures will be needed going 

forward. Earlier this year, in an effort to accelerate this process, 

Mr. Gillmor and I wrote to Federal Reserve Chairman Bernanke 

urging the completion of his Regulation Z review, as Mr. Gillmor 

mentioned. In my view, the failure of credit card disclosure requirements to keep pace with market developments has resulted in some 

consumers not adequately understanding their credit card accounts. It is my belief that consumers must be well informed about 

credit card offerings in order to choose a credit card that is best 

suited to their individual needs. I look forward to hearing from today’s panel on current credit card industry practices and the state 

of the Federal credit card disclosure framework. 

Chairwoman MALONEY. The Chair recognizes Congressman 

Cleaver, my friend from Missouri. He has introduced legislation 

and has worked hard on this issue, and I recognize him for 3 minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman. The reality now 

is that there is such a thing as death by plastic and it is becoming 

more and more apparent. I want to express appreciation for you 

holding this hearing with Ranking Member Gillmor. Recently, the 

Federal Reserve reported that inflation adjusted household debt 

grew by over 26 percent from late 2001 to 2004, while income remained flat, and that American families carried credit card balances that rose nearly 16 percent or around an average of $5,100. 

And many of these hard-working people are now experiencing a 

debt crisis while being subjected to onerous credit card terms that 

help to perpetuate this debt crisis. Under your leadership, Madam 

Chairwoman, the subcommittee has an opportunity to address a 

portion of this crisis and to impact credit card companies all over 

this country. I introduced, along with my friend and colleague, 

Congressman Mark Udall, a bill that we believe will be a part of 

the solution to the current debt crisis. The proposal seeks to protect 

consumers from banks and other credit card issuers who unbelievably and unjustly can increase interest rates without notice. And 

talking about an injustice, this is an injustice. H.R. 1461, the Credit Card Accountability Responsibility and Disclosure Act of 2007 

would end credit card practices such as universal default where 

credit card issuers impose a higher interest rate on a credit card 

account if there has been any change in the credit holder’s credit 

history, even if the change is completely unrelated to the credit 

card account, such as being late on a utility bill. There are some 

other changes, Madam Chairwoman, but trying to keep under my 

3-minute limit, the bill requires that credit card holders be given 

clear notice of any fees or changes or charges in interest rates that 

7

would result from late payments. And finally, under H.R. 1461, minors who apply for a credit card would need one of the three 

things: the signature of a parent or guardian willing to take responsibility for the applicant’s debt; information indicating that the 

applicant has some other means of repaying the debt; or a certification that the applicant has completed a credit counseling course 

by a qualified nonprofit budget or credit counseling agency. I perform weddings, Madam Chairwoman, and I have recently suggested to couples who come to me after college wanting to get married that we change the ceremony to say, ‘‘Until debt do us part.’’ 

Thank you, Madam Chairwoman. 

Chairwoman MALONEY. Congressman Castle, for 3 minutes. 

Mr. CASTLE. Thank you, Chairwoman Maloney, and Ranking 

Member Gillmor, for holding this hearing before the Financial Institutions and Consumer Credit Subcommittee today. Credit cards 

have become a staple in today’s marketplace. They provide enormous convenience, efficiency, and other benefits to consumers, businesses, and local and national economies. Credit cards have generated more than $2.5 trillion in transactions a year in the United 

States. Clearly, they have become an indispensable tool of America’s consumer economy. 

Today, consumers have a choice, as we have heard earlier, between 6,000 credit card lenders. Although some consumers view 

the large number of credit options to be daunting, the strong national credit system in the United States has been a driving force 

that has helped sustain our economy in recent years. Educating 

consumers and enabling individuals to understand their credit 

terms is an important task. The review by this subcommittee today 

will help us to better understand how consumers in the financial 

services industry can have a more symbiotic relationship. 

Certain industry practices related to credit card fees, penalties, 

and interest rates have received a considerable amount of media 

attention lately. It is important to note that in response to increasing concerns, several credit card issuers, such as CitiGroup and 

Chase Card Services, have taken significant steps to improve their 

practices and ensure that their customers have a better understanding of their accounts. Therefore, Madam Chairwoman, after 

we hear from consumer organizations, institutions, and university 

professors, I do hope we will take the time to hear from industry 

regulators so that we can keep the scope of these issues in some 

context, and you did mention in your opening statement that we 

would hear from them in the first week of June. 

Madam Chairwoman, I thank you for holding this hearing today, 

and I look forward to hearing from each of our witnesses today. I 

yield back. 

Chairwoman MALONEY. Thank you. I really want to recognize the 

keen interest of the members of the panel in this issue and recognize Congressman Baca for 2 minutes. 

Mr. BACA. Thank you, Madam Chairwoman. First of all, I would 

like to thank you for holding this important hearing here this 

morning. As Chair of the Congressional Spending Caucus, I am 

concerned about the barriers Latino families continue to face in access to affordable credit. Latinos are the fastest growing and largest minority in the country with 45 million people, 17 percent of 

8

the total population, yet they tend to have less personal savings, 

and fewer assets than other American families. Many low-income 

Latino families have an unhealthy reliance on credit cards, which 

can expose them to predators within the financial market. We need 

to have a better understanding of the Latino experience so that we 

can help them avoid accumulating high levels of uninsured debt 

and move them into the American middle class. The National 

Council of La Raza has written and issued a brief which examines 

how credit card industry practices impact Hispanic access to affordable credit. It also provides policy recommendations for empowering and protecting the Hispanic consumers. I would like to ask 

unanimous consent to insert this brief into today’s record. 

Chairwoman MALONEY. Without objection, it will be placed in the 

record. Thank you. 

Mr. BACA. And I appreciate Congressman Bachus talking about 

targeting and marketing students on the credit cards. I am very 

concerned about the impact it has had not on a lot of our college 

kids, but also on a lot of our high school kids. Not only do we need 

to well educate our consumers, but we also need to educate the 

parents, because the parents are unaware that the kids are applying for the credit cards. And when the TRW report comes out, they 

find out that they cannot get credit because they had a credit card 

debt during that period of time. We need to address that; in fact, 

I am having a conference on May 12th to address that. 

With that, Madam Chairwoman, I look forward to hearing the 

witnesses today, and I appreciate your having this hearing. I yield 

back the balance of my time. 

Chairwoman MALONEY. Thank you. Congressman Hensarling is 

recognized for 2 minutes. 

Mr. HENSARLING. Thank you, Madam Chairwoman. I approach 

this hearing as I approach most hearings with the adage running 

through my mind, ‘‘First, do no harm.’’ My guess is a couple of decades ago people might have been gathering in a similar hearing 

wondering why low-income people or people of color were not granted credit and now we have a multiplicity of options for credit for 

people who have never enjoyed it before. We may not always like 

the terms, but credit is available in our society like it has never 

been available before, which for many families is a very good thing. 

It allows them maybe to pay for their groceries, and to buy school 

clothes, where they otherwise might not have been able to do it. I 

think there is a valid question about whether there is effective disclosure; consumers do have a right to know what they are getting 

into. I am curious at some point whether Congress has proven to 

be part of the problem or part of the solution. Because there is so 

much disclosure, I think that occasionally perhaps less would be 

more, and I think that it is good that this committee will look into 

this particular issue. 

I also am reminded, at least according to my reading of the Constitution, that nobody has a constitutional right to borrow money 

from somebody else. If you do not like the terms, you have the 

right to walk away. I myself have done that on a couple of occasions when I did not like the terms or I did not like the service or 

I got tired of speaking to the computerized voice on the other end 

of the 1–800 line. So I always want to make sure consumers have 

9

those options. We know there are at least 10 major players in this 

market and at least 6,000 different companies that are making 

some type of offer to consumers today. There appears to be effective 

competition, so the question in my mind is, is there effective disclosure? 

And so, Madam Chairwoman, I appreciate your holding this 

hearing, and I look forward to hearing more about this. But I am 

concerned that the wrong prescription could lead to a lessening of 

the availability of credit at the margins or perhaps making that 

credit more expensive. Thank you and I yield back. 

Chairwoman MALONEY. Thank you. Congressman Watt for 2 

minutes, and thank him for his leadership and hard work on this 

issue. 

Mr. WATT. Thank you, Madam Chairwoman. I thank the Chair 

for holding this hearing, which for my purposes is very similar to, 

and equally as important as, the hearing that the Chair convened 

on exploding foreclosures and mortgage lending because in both 

areas there are very, very serious problems and probably a need for 

some legislative action. The only way we can determine what legislative action is needed and desirable is to get into the legislative 

record the facts about what is happening. There is the perception 

and I believe the fact that there are real problems in the credit 

card area resulting from teaser rates, increases in rates without 

appropriate notice, exorbitant late payment fees, fees for paying online, a major issue is interchange fees, which I think is the hidden 

charges that really nobody has focused on yet but I hope we will 

get some testimony about in this and subsequent hearings, and the 

general availability of easy credit. Mr. Hensarling is right, there 

was a time when there was no credit available. It may in fact be 

too easy now both in this area and in the mortgage area. And part 

of that is that in this area there is no real definition of what Mr. 

Bachus referred to as fair and equitable. So unless the industry 

itself will set some standards that are acceptable and deemed as 

reasonable to the public, it may be incumbent on us to really more 

aggressively define what that last little phrase in the disclosure notice or contract said when they finally got to the end after saying 

we can do all these things subject to law. Right now, the law is 

murky in a number of these areas and if the industry cannot define 

what is appropriate, then I think it may be necessary for us to do 

it in the legislative process. But we need the background, and today’s hearing, and I hope subsequent hearings where we will hear 

from the regulators and the industry itself and other players, will 

lead to finding the appropriate legislative steps to take. I yield 

back and I again thank the chairwoman for convening the hearing. 

Chairwoman MALONEY. Thank you. Without objection, all members’ opening statements will be made part of the record. 

We have a distinguished panel of witnesses who include both 

consumer and industry representatives as well as academics, and 

I will not attempt to give you a full biography of each but just a 

few highlights. 

Linda Sherry, Consumer Action’s director of national priorities, 

joined the San Francisco-based National Consumer Education and 

Advocacy Group in 1994, from a background as a weekly newspaper reporter in Long Island from my State, New York, and in 

10

California. Sherry, who moved to Washington, D.C., in August of 

2004 to establish an office for Consumer Action, is responsible for 

the organization’s national advocacy work and for the research and 

writing of Consumer Action’s free educational publication and Web 

site content. 

Mr. Arthur E. Wilmarth, Jr. is a professor of law at George 

Washington University Law School. Professor Wilmarth has written extensively about banking regulation, including the role of the 

Federal and State governments in regulating credit cards. 

Mr. Todd J. Zywicki is a professor of law at George Mason University Law School. He served as Director of the Office of Policy for 

the Federal Trade Commission from 2003 to 2004. More recently, 

he has written and testified on consumer credit issues. 

Mr. Edward L. Yingling is president and CEO of the American 

Bankers Association, and is testifying on behalf of the Association. 

Mr. Oliver I. Ireland, formerly Associate General Counsel of the 

Federal Reserve Board, is now at the law firm of Morrison and 

Foerster, where his practice includes representing credit card networks. 

Cindy Zeldin is the Federal affairs coordinator in the economic 

opportunity programs at Demos, a public policy research and advocacy organization that has conducted extensive research on household debt. Most recently, Ms. Zeldin co-authored the Demos Report, 

‘‘Borrowing to Stay Healthy’’, which examined medical debt that accrues on credit cards. I thank all of the witnesses for coming, and 

I would like to recognize Ms. Zeldin first, and then left to right. Ms. 

Zeldin? 

STATEMENT OF CINDY ZELDIN, FEDERAL AFFAIRS COORDINATOR, ECONOMIC OPPORTUNITY PROGRAMS, DEMOS: A 

NETWORK FOR IDEAS & ACTION 

Ms. ZELDIN. Chairwoman Maloney, Ranking Member Gillmor, 

and members of the subcommittee, thank you for inviting me to 

testify today. I am here representing Demos, a nonprofit, nonpartisan research and public policy organization working on issues 

related to economic security. We approach our work on credit card 

debt and lending industry practices through the lens of rising insecurity among low- and middle-income households in a rapidly 

changing economy. Against an economic backdrop simultaneously 

characterized by stagnant incomes at the median and the rapidly 

rising costs of big ticket necessities like housing, health care, and 

education, our Nation has witnessed tremendous growth in credit 

card debt over the past 2 decades. 

At the same time as our economy has undergone major changes, 

the banking and financial industry has been steadily de-regulated. 

While deregulation has expanded access to credit for many people 

who had been denied or excluded from mainstream financial services in the past, this credit has come at a high cost. It is low- and 

moderate-income households whose levels of credit card debt have 

increased the most in recent years and our research indicates that 

these households are increasingly turning to credit cards to manage economic shocks like job loss or a major medical expense or to 

fill in the gap between the cost of basic living expenses and stagnant incomes. 

11

The democratization of credit has in many ways become our modern day safety net, albeit one that comes with high interest rates 

and an endless array of penalty fees that are unleashed upon borrowers in response to just the slightest slip-up. With debt service 

taking a bigger bite of the household budget, there is less left over 

to build savings and assets, quickly trapping families in a cycle of 

debt. Once in debt, the capricious and abusive practices of the lending industry make it exceedingly difficult to climb out. 

Credit card debt has roughly tripled since 1989, with Americans owing more than $800 billion in credit card debt today. Our national savings rate has steadily declined and the number of people 

filing for bankruptcy since 1990 has more than doubled to just over 

2 million in 2005. The average amount of credit card debt among 

all households with credit card debt grew 89 percent between 1989 

and 2004. In particular, low- and moderate-income households, senior citizens, and young adults under age 34 have seen rapid increases in credit card debt. 

To better understand the factors contributing to household indebtedness, Demos and the Center for Responsible Lending commissioned a national household survey of households with credit 

card debt in 2005; 7 out of 10 low- and middle-income households 

reported using their credit cards as a safety net, relying on credit 

cards to pay for car repairs, basic living expenses, medical expenses, or home repairs. The widespread availability of revolving 

credit can indeed help individuals and families weather difficult financial times or manage large unexpected costs, like a major medical expense or car or home repair, by spreading payments over 

time and providing less disruption to the family budget. However, 

all too often, the practices of the credit card industry turn this beneficial credit into a debt trap. 

The credit card market is a broken market. When consumers initially shop for a credit card, the key element of their comparison 

shopping is generally the interest rate on the card, yet the card 

issuer reserves the right to change the terms of the card agreement 

at any time for any reason with a 15-day notice, making competition illusory. A consumer can diligently shop for the best terms and 

conditions out there but then have these terms and conditions unilaterally changed on them. 

The first practice I would like to address is penalty pricing or interest rate hikes and fees for an array of infractions, many of which 

are quite minor and are not necessarily reflective of a cardholder’s 

risk profile. When a payment is late, major card issuers typically 

increase the interest rate on the card to a penalty or default rate. 

Due dates are often listed down to the hour and payments received 

after that time are processed the following day. With payment 

grace periods generally no longer in place, cardholders who submit 

payments that are nominally late are routinely hit with interest 

rate increases that can drastically increase the cost of credit. It is 

also important to note that these penalty interest rates are applied 

retroactively to the entire existing card balance, not simply prospectively to future purchases. Cardholders who are late are also 

slapped with a late fee. Late fees have steadily increased from the 

$5 to $10 range in 1990 to an average of about $34 in 2005. Penalty pricing is also typically invoked when a cardholder exceeds the 

12

credit limit on their card. Rather than denying the purchase, it is 

now routine practice to allow the transaction to go through but to 

apply an over-the-limit fee and then increase the cardholder’s interest rate; over-the-limit fees averaged about $31 in 2005. 

The second practice I would like to highlight is universal default, 

a bait and switch practice whereby card issuers retroactively 

change a cardholder’s interest rate not because of any change in 

behavior with that particular card, but because of a change in the 

cardholder’s credit score or their payment behavior with another 

lender. While some card issuers have halted this policy, others still 

engage in it, and still others increase interest rates because of behavior with other credit rates that institute these increases 

through a change in terms rather than automatically. Other practices, double cycle billing and payment allocation— 

Chairwoman MALONEY. The Chair grants the witness an additional 30 seconds. 

Ms. ZELDIN. In absence of meaningful regulation, credit card 

companies are free to design credit card agreements that are not 

only confusing in their complexity but that once deciphered are 

fundamentally unfair. Despite borrowing money under one set of 

terms and conditions, a borrower can be asked to pay back that 

money under an entirely different set of conditions for being a day 

or two late or for going just over their credit limit even if they are 

attempting to pay back their debt in good faith. Once in penalty 

territory, households are typically paying interest rates of 27 percent. For low- and middle-income households, whose levels of credit 

card have increased the most in recent years, these penalty interest rates drain resources from already tight family budgets, inhibiting the ability of these households to pay down their debt, let 

alone save money to weather future economic shocks. 

Thank you. 

[The prepared statement of Ms. Zeldin can be found on page 106 

of the appendix.] 

Chairwoman MALONEY. Without objection, all of the written 

statements will be made part of the record, and you will each be 

recognized for 5 minutes, so a summary of your testimony for 5 

minutes is requested. Mr. Wilmarth? Thank you. 

STATEMENT OF ARTHUR E. WILMARTH, JR., PROFESSOR OF 

LAW, GEORGE WASHINGTON UNIVERSITY LAW SCHOOL 

Mr. WILMARTH. Chairwoman Maloney, Ranking Member Gillmor, 

and members of the committee, thank you for inviting me to participate in this important hearing. 

Chairwoman MALONEY. Turn on your mike, we cannot hear you. 

Mr. WILMARTH. Pardon me. Chairwoman Maloney, Ranking 

Member Gillmor, and members of the committee, thank you for inviting me to participate in this important hearing. The credit card 

industry has experienced a very rapid and dramatic consolidation 

over the past 2 decades. During that time, the share of the top 10 

issuers has risen from 40 percent to 87 percent. The share of the 

top five issuers has grown from 35 percent to 71 percent. There are 

many technological factors that have contributed to this consolidation. Those factors have created large economies of scale and barriers to entry. The largest federally-charted banks dominate the 

13

credit card industry. Four of the five top credit card issuers and 7 

of the top 10 issuers are national banks. An eighth issuer among 

the top 10 is a federally-charted thrift. Only two are non-banks, 

American Express and Discover, both of which have a longstanding 

presence in the industry. As I will mention, Federal preemption 

helps to explain why so many of the largest issuers are federallycharted depository institutions and why they are also dominant 

players in other segments of the consumer credit industry. For example, seven of the top home mortgage lenders are either nationally-chartered banks or federally-chartered thrifts. 

You have already heard a lot today about fees and profits. As my 

statement points out, the profitability of credit card banks has remained well above that of all other banks over the past 15, if not 

25, years. And these unusually high profits certainly raise questions as to the competitive features of the credit card industry. Average annual non-penalty interest rates of credit card issuers have 

remained above 13 percent in every year between 1994 and 2005 

except for 2003, when the average rate was 12.92 percent. This is 

at a time when we have had historically low interest rates. Of 

course, as you have heard, penalty interest rates have been far 

higher and now are in the range above 24 or 25 percent. You have 

also heard about how credit cards have contributed to the rapidly 

growing debt burdens of U.S. households. 

What I want to focus on in the remainder of my time is the impact of Federal preemption. In 1978, the U.S. Supreme Court gave 

national banks most favored lender status and the right to export 

interest rates across State lines. In 1996, the Supreme Court 

upheld a regulation of the OCC, which defined interest to include 

a wide variety of fees, such as annual fees, over-the-limit fees, late 

payment fees, bad check fees, and cash advance fees, so those fees 

could also be exported across State lines. In 1998, the OCC issued 

a ruling which allowed national banks to export interest rates from 

any State in which they have either their main office or branch. In 

2004, the OCC went much further; it adopted a sweeping set of 

preemption rules which, to put it bluntly, essentially preempts all 

State consumer protection laws from applying to the practices and 

activities of national banks. And just recently, the GAO recommended that the OCC make clear what State laws were preempted or were not preempted. The OCC has not issued any such 

list. So far the OCC has acknowledged only that State fair lending 

laws might apply to national banks but they have given no such 

indication for other types of State consumer protection laws. The 

OCC also issued a regulation in 2004, which gave them the sole 

and exclusive right to enforce all applicable laws, including any 

State laws that might be applicable to national banks so that 

States have no enforcement rule under the OCC’s rules. 

The OCC’s rules have spurred many large, multi-state banks to 

convert to national charter including J.P. Morgan Chase, HSBC, 

and Bank of Montreal. As a result, the share of national banking 

assets has risen from 56 to 67 percent and the share of State assets 

has fallen to 33 percent. Just last year, the Bank of New York, one 

of the largest state-chartered banks, decided to sell all of its retail 

branches to J.P. Morgan Chase, again thereby indicating the powerful impact of Federal preemption. In September 2005, Chairman 

14

Don Powell indicated that unless Congress acted, the dual banking 

system was severely threatened. 

I point out in my testimony that the OCC has had a very 

unimpressive record of enforcing consumer protection laws against 

national banks. A careful search of their Web site and other public 

records indicate only 13 public enforcement orders against national 

banks since January 1, 1995; 11 of those 13 were against small national banks, only two were against large national banks, and in 

each case another agency acted first. In one case, a State prosecutor in California, in another case, the Department of HUD. So 

my bottom line is that the OCC cannot be relied upon to be a vigorous consumer protection authority for the national banking system, which dominates the credit card industry. 

Thank you very much. 

[The prepared statement of Professor Wilmarth can be found on 

page 64 of the appendix.] 

Mr. WATT. [presiding] Mr. Yingling is recognized. 

STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CEO, 

AMERICAN BANKERS ASSOCIATION 

Mr. YINGLING. Thank you Chairwoman Maloney, Ranking Member Gillmor, and members of the subcommittee, for inviting me to 

testify this morning. I would like to take a few minutes at the outset to discuss just what a remarkable product the credit card is. 

For example, we take it for granted, but the processing system for 

cards handles more than 10,000 transactions every second with 

nearly enough communication lines to encircle the globe 400 times. 

As the recent GAO report pointed out, the credit card industry is 

highly competitive and highly innovative. It has changed greatly 

since it began 56 years ago. First, up until around 1990, almost all 

cards had an annual fee of $20 to $50. Today, most cards charge 

no annual fee. In fact, many cards have rewards features such as 

rebates, points, or mileage. Thus for many consumers, most of the 

millions who do not revolve, the card is free or they actually earn 

something when they use it. Second, for those who do take out a 

loan, interest rates, according to the GAO, have declined by 6 percentage points since 1990. Before, almost everyone paid 18 to 20 

percent. For the 28 popular cards the GAO studied, the average 

rate in 2005 was 12.3 percent. Third, and most importantly, more 

low- and moderate-income people have been able to obtain credit 

cards. 

While we recognize there are concerns about debt levels, it is important to note that, according to the Fed, in the last 10 years, 

credit card balances have declined from 3.9 percent to only 3 percent of household debt. I think most people would be amazed that 

credit card debt is only 3 percent of total household debt. 

Credit cards are also very important to small businesses, a fact 

often overlooked. Without them, small businesses would be at a 

huge disadvantage to larger businesses, which could afford their 

own in-house credit programs. Moreover, without cards, commerce 

over the Internet, which means tremendous savings for consumers, 

would be extremely difficult. 

However, as the GAO report laid out, as credit cards have 

evolved, the competition that resulted in no annual fees, lower inVerDate 0ct 09 2002 18:00 Aug 02, 2007 Jkt 036821 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\36821.TXT HFIN PsN: TERRIE
15

terest rates, rewards programs, greater convenience, and more 

availability to more consumers has also led to greater complexity. 

It is this complexity which is understandably raising concerns and 

needs to be addressed. One important issue is that the disclosures 

have not kept up. The ABA and card companies strongly support 

and are working for better, clearer disclosures. We are optimistic 

that the Fed will soon develop better disclosures, and we are glad 

to hear that they are moving quickly, Madam Chairwoman. We are 

also working on additional tools for consumers, such as easily 

accessed explanations and information, to go with these new disclosures. 

A second area of emphasis must be financial education. The ABA 

and the major credit card companies are working together to improve this education with a particular emphasis on college age individuals. We have completed a scan of the available resources and 

found that every major credit card issuer, in addition to the ABA, 

has an education program. Now we are working to maximize the 

delivery of these programs to consumers. We are pleased, Madam 

Chairwoman, that you will be participating in our annual Teach 

Children to Save Day on Monday in New York. Representatives 

Price, Green, Drake, Costa, and Wynn have also participated. In 

October, we will be having our 5th annual Get Smart About Credit 

Day, which raises awareness about credit issues among students. 

Last year, Treasury Secretary Paulson and Members of Congress 

joined us in teaching this program. 

While we work hard to improve disclosures and financial education, we recognize that there are other issues about credit cards 

which are of concern to Members of Congress. As the GAO pointed 

out, for millions of Americans credit cards provide more services at 

low, or more often no cost, and lower interest rates than ever before. However, for others, the increasing complexity has caused 

confusion, with some ending up in difficult financial situations. The 

industry takes these concerns very seriously and is working to address them. Madam Chairwoman, Congressman Gillmor, Congressman Watt, and others who have spoken this morning, we take your 

introductory comments very seriously. We need to address these 

issues, and I want to assure you that we are working very hard, 

we are meeting literally every week to move forward, and we want 

to keep you informed. 

Recently, individual institutions have announced important 

changes in policies. We are seeing that competition is now leading 

to streamlined and simplified practices. The industry recognizes 

that policies that alienate some of its customers or leave individuals in financial difficulty from which they cannot extricate themselves are in no one’s interest. We pledge to work with you in Congress and our customers to address these concerns. 

Thank you. 

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

84 of the appendix.] 

STATEMENT OF TODD J. ZYWICKI, PROFESSOR OF LAW, 

GEORGE MASON UNIVERSITY LAW SCHOOL 

Mr. ZYWICKI. Chairwoman Maloney and members of the subcommittee, credit cards have transformed the ways in which we 

16

shop, travel, and live. Credit card issuers are forced to compete for 

my loyalty every time I pull out my wallet to buy gas or a new 

book for my daughter. In such a competitive environment, issuers 

face relentless competition to retain my loyalty, and I admit I am 

not the slightest bit sentimental about switching to a better deal 

if one comes along. I have four cards and each of them actually pay 

me to use them. I had five until 2 weeks ago, but one did not give 

me a good enough deal so I canceled it. Little wonder in this competitive environment that, according to one Federal Reserve economist, 90 percent of credit card owners reported they are very or 

somewhat satisfied with their credit cards versus only 5 percent 

who are somewhat dissatisfied and only 1 percent, that is 1 out of 

100, who are very dissatisfied. Moreover, two-thirds of respondents 

in a Federal Reserve survey also reported that credit card companies usually provide enough information to enable them to use 

credit cards wisely and 73 percent stated the option to revolve balances on their credit card made it easier to manage their finances 

versus only 10 percent who said it made it more difficult. 

Nonetheless, the myriad uses of credit cards and the increasing 

heterogeneity of credit card owners has spawned increasing complexity in credit card terms and concerns about confusion that this 

may reduce consumer welfare. In particular, three concerns about 

credit cards have been expressed. First, a fear of a rise of consumer 

indebtedness supposedly caused by access to credit cards. Second, 

a concern about unjustifiably high interest rates on credit cards. 

And, third, a growing use by card issuers of so-called hidden fees, 

such as late fees and overdraft fees. 

Although these concerns are often expressed, based on standard 

economic theory and the date we have available today, none of 

these concerns appears to have any merit. I address each of these 

concerns in detail in my written testimony, and I will only briefly 

summarize those findings here. First, the concern that credit cards 

have caused consumer over-indebtedness and financial distress is 

simply based on a faulty understanding of the ways in which consumers use revolving credit. Although credit card use and debt has 

risen substantially over the past 25 years, the data make clear that 

this rise in credit card debt has been the result of a substitution 

by consumers of credit card for other less attractive types of debt 

such as retail store credit, layaway plans, pawn shops, rent-to-own, 

and personal finance companies. Just a generation ago when you 

bought a refrigerator or a bedroom set you bought on time, promising to pay in monthly installments for a term of months. If you 

needed a short-term loan to repair a blown transmission, you might 

have to borrow several thousand dollars on an unsecured basis 

from a personal finance company, a family member, or even your 

local loan shark whose late payment terms were somewhat more 

onerous than those that we see today. Today, a consumer would 

likely use a credit card for each of these transactions and in fact 

many of these traditional types of consumer loans do not even exist 

anymore. Thus, the growth in credit card borrowing, as I show in 

my written testimony, mirrors a near identical decline in consumer 

use of installment consumer credit during that same time. As a result, the debt service ratio for consumer credit has fluctuated in a 

very narrow band over the past 25 years and in fact is approxiVerDate 0ct 09 2002 18:00 Aug 02, 2007 Jkt 036821 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\36821.TXT HFIN PsN: TERRIE
17

mately the same today as it was in 1980. Nor are interest rates on 

credit card unreasonably high when compared to similar loans. In 

fact, the General Accounting Office estimates that approximately 

93 percent of credit cards now have variable interest rates tied to 

the underlying cost of funds and interest rates become both lower 

and more flexible over time. Moreover, the past few decades have 

seen the near complete abolition of annual fees on standard credit 

cards with no rewards programs and this has dramatically reduced 

the cost of using credit and heightened competition. When compared to relevant alternatives, such as payday lenders and personal 

finance companies, credit cards offer extremely competitive interest 

rates and low-fixed costs, especially for lower income and younger 

borrowers with limited credit options. It is not clear to me how the 

lives of lower income families would be improved by making it 

more difficult for them to get credit cards, thus forcing them to rely 

on pawn shops or payday lenders to buy books or sports equipment 

for their children. Nor is it clear how a college student or any other 

young American would be made better off by paternalistically being 

denied a credit card and thus having to furnish their apartment 

through a rent-to-own company. Moreover, given the paucity of attractive credit options available to low-income borrowers, there is 

little wonder that the substitution effect of credit card debt has 

been most pronounced for those families. And, in fact, the Federal 

Reserve reported in the 2004 Survey of Consumer Finances that 

even though credit card ownership has become increasingly widespread, the percentage of lowest income quintile households in financial distress is actually at its lowest level since 1989. 

The past few years have also seen an increase in the use of riskbased penalty fees, such as late fees and overdraft fees. Although 

these fees represent only about 10 percent of issue revenues, they 

have caused great consternation in some quarters. A recent study 

by Massoud, Saunders and Scholnick, however, concluded that 

these fees were risk-based fees based on borrower behavior. Moreover, they found a clear trade-off between the use of these riskbased fees and interest rates. Thus, for instance, a one standard 

deviation reduction on credit card interest rates, 273 basis points, 

was found to be associated with a $2.40 increase in late fees. The 

economic trade-off is clear: the lower and more flexible interest 

rates the past decade have become possible— 

Chairwoman MALONEY. The Chair grants an additional 30 seconds for you to wind up. 

Mr. ZYWICKI. —only because credit card issuers become more efficient at risk-based pricing. Issuers no longer must rely solely on interest rates, which are an attempt to predict before the fact the 

borrower’s risk, but can make greater use of risk-based penalty fees 

for those borrowers who demonstrate their riskiness through their 

actual behavior. Any regulatory efforts to cap late fees or over-limit 

fees would therefore almost certainly lead to increased interest 

rates for all consumers or other offsetting adjustments in credit 

contract terms. This cross-subsidization would be especially unfair 

to low-income but responsible borrowers who would otherwise be 

lumped into the same interest rate category as other borrowers. 

Thank you. 

18

[The prepared statement of Professor Zywicki can be found on 

page 120 of the appendix.] 

Chairwoman MALONEY. Mr. Ireland. 

STATEMENT OF OLIVER I. IRELAND, MORRISON AND 

FOERSTER, LLP 

Mr. IRELAND. Good morning, Chairwoman Maloney, Ranking 

Member Gillmor, and members of the subcommittee. I am a partner in the Washington, D.C., office of Morrison and Foerster. Before coming to Morrison and Foerster, I was an Associate General 

Counsel in the legal division of the Board of Governors of the Federal Reserve System for over 15 years. I have over 30 years experience in banking and financial services, and I am pleased to be here 

today to discuss the important issues involving the credit card industry. 

Today, credit cards are among the most popular and widely accepted forms of consumer payment in the world. Due to the convenience, efficiency, security, and access to credit that they provide, 

credit cards have become a driving force in our economy and new 

markets such as the Internet. Credit cards offer a wide-range of 

benefits in addition to access to credit, including freedom from carrying cash, protection from loss or theft, and preservation of claims 

and defenses that a consumer may have against a merchant. Approximately half of all credit card holders pay their balances in full 

every month and therefore also enjoy an interest-free loan. Although fees and card issuer revenues from fees have increased in 

recent years, consumers also are enjoying lower interest rates and 

wider access to credit. Despite the benefits, credit card practices, 

such as so-called universal default and double cycle billing have 

been criticized as unfair, in part, I think, because they are inconsistent with the consumer’s expectation. These criticisms call into 

question the current credit card disclosure regime. Credit cards are 

subject to extensive disclosure requirements under the Truth in 

Lending Act and Regulation Z implemented by the Federal Reserve 

Board. TILA, or Truth in Lending, requires comprehensive, virtually cradle-to-grave, disclosure. In addition to TILA, the Federal 

bank regulatory agencies have the power under the Federal Trade 

Commission Act to address unfair and deceptive acts and practices 

on a case-by-case basis. 

Simply put, I think the current credit card disclosures are too detailed, complicated, and they focus on the wrong information. Nevertheless, I believe that improved disclosures offer the potential to 

address current concerns about credit card practices. Although 

there could be credit card practices that are so unfair and so resistant to market pressure that they cannot be addressed through an 

improved disclosure regime, it is premature to conclude that improved disclosures cannot resolve these issues. 

New approaches to disclosures may be able to simplify disclosures. For example, there appears to be a broad recognition that 

the Schumer Box disclosure format is effective. Similarly, the Federal banking agencies recently proposed a standardized model 

Gramm-Leach-Bliley Act privacy note that would provide limited 

information in a uniform manner to facilitate consumer understanding. The model emphasizes simplicity as opposed to accuracy 

19

and precision, something that credit card issuers cannot do lest 

they face class action litigation under TILA or over the terms of 

their account agreements. Simplified disclosures could improve the 

ability to comparison shop and avoid surprise late charges and 

other fees. In addition, as Louis Brandeis noted almost a century 

ago, ‘‘Sunlight is said to be the best disinfectant and electric light 

is the best policeman.’’ Simplified disclosures for credit card accounts can lead to changes in credit or practices by fostering market discipline. 

Achieving these goals is not without challenges. First, open-end 

credit accounts are complex and their terms will necessarily reflect 

this complexity. Second, disclosures cannot be the only source of 

education about financial issues. We need improved financial literacy. Third, there is a tension between simple disclosures and 

legal liability. Some sort of a safe harbor for simplified disclosures 

may be necessary. Despite these challenges, I believe that TILA, 

coupled with the banking agencies’ other powers, provide ample authority for addressing current issues. 

I appreciate the opportunity to be here today and would be 

pleased to answer any of your questions. 

[The prepared statement of Mr. Ireland can be found on page 34 

of the appendix.] 

Chairwoman MALONEY. Ms. Sherry? 

STATEMENT OF LINDA SHERRY, DIRECTOR, NATIONAL 

PRIORITIES, CONSUMER ACTION 

Ms. SHERRY. Chairwoman Maloney, Ranking Member Gillmor, 

and members of the subcommittee, my name is Linda Sherry, and 

I am the director of national priorities for Consumer Action. I 

thank you for your leadership on this issue. 

Consumer Action is a nonprofit organization that has served consumers for 36 years. For more than 20 years, we have conducted 

surveys of credit card rates, fees, and conditions, and our survey 

has become a barometer of industry practices. The focus of our 

study was to track the industry and help consumers obtain clear 

and complete facts about rates and charges before they apply for 

credit. I am pleased to share with you some preliminary findings 

from our most recent survey of 83 cards from 20 banks, including 

the top 10 issuers. Our surveyors posed as potential customers and 

this methodology gives us unique insight into what people face 

when they shop for credit cards. It is striking how often customer 

service people cannot provide even the basic facts required by Federal credit card disclosure laws. This leaves potential customers in 

danger of applying for a card that at best does not suit them and 

at worst contains predatory terms and conditions. All top 10 

issuers advertise cards on their Web sites without firm APRs. Instead, they skirt regulations by providing only a meaningless range 

of rates. Cardholders have no way of knowing what the terms on 

that card will actually be until it arrives in the mail. Why should 

cardholders have to wait until the card has been issued to read the 

contract that governs their use of the card? Such practices make 

it difficult, if not impossible, for consumers to shop around to get 

the best deal. Most major issuers deny that they employ universal 

default punitive interest rates based solely on how customers hanVerDate 0ct 09 2002 18:00 Aug 02, 2007 Jkt 036821 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\36821.TXT HFIN PsN: TERRIE
20

dle other credit accounts. However, many still use credit reports as 

a reason to make adverse account changes under change and terms 

provisions. Standard in the vast majority of credit card agreements, 

unilateral change of terms provisions are cited as a way for companies to manage risk. But these take it or leave it contracts of adhesion force cardholders onto an uneven playing field even before 

they actually become customers sometimes. 

Last month, we went to the Web sites of the top 10 issuers to 

review publicly available change of terms disclosures; 9 out of 10 

reserved the right to change APRs and other terms at any time. 

Six banks included specific reference to credit reports or scores or 

other creditors as a reason to change cardholder terms. We asked 

customer service people at 20 issuers, ‘‘Do you raise my interest 

rate because of my credit record with other credit cards or lenders?’’ It appears that half of the surveyed banks would, at the time 

of the survey, raise cardholders’ APRs based on information from 

credit reports and scores. Even if you never paid late on your card, 

you could be subjected to a default APR. The industry has aggressively increased fees and penalty interest rates, fueling profits that 

are up by nearly 80 percent since 2000. We have a right to know 

whether these fees bear any true relation to the bank’s costs. 

Average APR data doesn’t tell the whole story. The spread of 

non-penalty rates is strikingly wide at individual banks. At one top 

10 issuer, rates ranged from 8.25 percent to 25 percent on non-penalty rates. The different rates are often referred to using deceptive 

terms like ‘‘preferred,’’ ‘‘elite,’’ or ‘‘premium.’’ Is there anything premium about a rate of 18.24 percent? 

Residual interest or trailing interest is a deceptive method of calculating credit card interest right up until the day full payment is 

received; 45 percent of surveyed banks employ the practice. Penalty 

rates are as high 32.24 percent. Late payments result in higher 

penalty rates with 85 percent of issuers. Often the increase is automatic and standardized, not tied to any individual performance. 

Late fees have more than doubled in the last decade. The average 

grace period at the top 10 issuers has shrunk by more than 3 days 

since 1995. Cash advance fees have jumped 40 percent in the last 

decade. More disturbingly, 90 percent of the cards have no cap on 

the fee. 

Before closing, I would like to bring to your attention just how 

important credit card reform is to your constituents. In less than 

a year, 12,327 individual constituents have used Consumer Action’s 

Web site to write to you for protection against abusive credit card 

practices. This is a follow-the-leader industry. When one issuer 

steps out with a new anti-consumer practice, other banks are quick 

to follow. When attention is focused on one bad practice, such as 

universal default, issuers jump to say they don’t do it. The problem 

is that lesser known unfair practices continue, such as residual interest allocation of payments to low-interest balances, junk fees on 

foreign transactions, and Sunday and holiday due dates that trigger unjustified late fees. 

I thank you for your diligence in investigating credit card industry practices. Credit cards are an integral part of our lives. We protect people from unsafe products, shouldn’t we also give cardholders an even playing field? 

21

[The prepared statement of Ms. Sherry can be found on page 44 

of the appendix.] 

Chairwoman MALONEY. Thank you very much for your testimony. I would like to begin by asking Ms. Zeldin and Ms. Sherry 

this question. No matter whose statistics that you read or look at, 

the level of consumer credit debt is really quite high. And we know 

that consumers with high credit debt have traditionally moved that 

debt into mortgage debt by taking out home equity loans or refinancing their homes to pay off their cards. And I am concerned 

that we may be confronting a ‘‘perfect storm’’ with the weakening 

of the subprime market. The opportunity to consolidate credit card 

debt into home mortgages or home equity loans is less likely to be 

an available solution. What do your studies find? Is this a realistic 

concern, and I ask for your comments, Ms. Zeldin and Ms. Sherry? 

Ms. ZELDIN. Yes, it is a concern. There was a lot of—I do not 

have the figures in front of me—but the refinancing boom did result in a lot of refinancing of credit cards, not just in the subprime 

market but now that home prices look to be declining in the entire 

housing market and homeowners will have less home value to draw 

upon, we can expect that drawing out home equity lines of credit 

will decrease and that will reduce the availability of consumers to 

refinance and have lines of credit that are at lower interest rates 

than what they may have been paying on their credit cards. 

Chairwoman MALONEY. Ms. Sherry, any comments? 

Ms. SHERRY. Yes, I just think that really points to the desperation of people who are burdened with unsecured credit card debt 

with moving target terms that increases their debt so their interest 

rate would be increased, and that would increase their overall debt 

load. It points to the desperation of these folks that they would actually go and get a home equity loan, which would put their own 

home in jeopardy to get out from under this kind of debt. So, yes, 

I definitely see it as a problem. I see people making unwise moves 

in the past and even as we speak today to move credit card debt 

into home equity debt, not a good move. 

Chairwoman MALONEY. Thank you, and I would like to address 

this question first to Mr. Yingling and Mr. Ireland, as well as anyone else who would like to comment. There seems to be widespread 

agreement that the credit card disclosures are difficult for consumers to understand. I was struck last week when William Syron, 

the head of Freddie Mac, testified, and he said that he used credit 

card disclosure as an example of uselessness in testifying to this 

committee, and that he and his wife spent literally hours trying to 

figure what their credit card statement meant to no avail. And I 

would like to know, can industry take steps to correct that in the 

absence of Federal regulation? And what is industry doing about 

acknowledging the problem with disclosure? And apart from disclosure, are there other issues including, but not limited just to those, 

where you believe regulation or legislation is needed? Do you believe that correcting disclosure will cure the problems with universal default, double cycle billing, or retroactive interest increases? And I first would like Mr. Yingling and Mr. Ireland to 

start and then the consumer advocates and anyone else who would 

like to discuss this. 

22

Mr. YINGLING. First just a comment on your previous question. 

I think it is fairly understandable that people would refinance into 

a home equity loan. They have equity in their home, and if they 

put it into a home equity loan, they get a lower interest rate because it is secured and in many cases, it is also tax deductible. So 

I do not think it is quite a sign of desperation; I think it is fairly 

rational. 

The disclosures do not work. There is, I think, unanimous agreement. At one point, actually I am old enough to remember when 

they were first enacted starting in this very committee, they were 

considered to be model disclosures. But what has happened is that 

the product has gotten more complex. Some of the things that we 

disclose now are really not that important, and we do not disclose 

some of the things that are important, some of the things that are 

of concern to members of this committee. So we are optimistic that 

we will come out with a much, much better disclosure. We cannot 

design it ourselves because it is subject to extensive law and regulation, but we can work with the Fed and work with you in your 

oversight capacity to make sure that basic disclosure is useable. 

And, importantly, you can use that kind of format still, the original 

boxes, maybe even in a clearer fashion, and we have seen some 

banks do that on their own and use common terminology. Then it 

is very easy to take three or four offers and look at them and compare them across lines. One of the difficult things to decide is that 

you cannot have too many things in that box or you undermine the 

consumer usefulness of that box. So in addition to the box, we want 

to be able to have other disclosures behind it and other resources 

behind it so that consumers who want more, will read that box, 

that is the most important thing, and they will compare it, and 

then if they want to know more, they will have more available. We 

are working on that. 

With respect to legislation and regulation, we hear, as I said in 

my oral testimony, the concerns. We hear them very clearly. We 

are working hard on it. It is a not an accident that you are seeing 

some major changes. Interestingly enough, I think card companies 

are starting to compete in ways beyond lowering the annual fee, 

lowering the interest rate. They are trying to compete now on offering simpler products, more easily understood products. You do see 

companies, for example, that now offer cards that have no over-thelimit fees. They have eliminated them. They are offering simplified 

kinds of cards. We also are going to work on issues that we may 

be able to do as an industry. We are working on those. Frankly, 

we have to be very careful because there are anti-trust issues, but 

we are hard at work on it. 

Chairwoman MALONEY. Thank you. My time has expired. Mr. 

Gillmor is recognized for 5 minutes. 

Mr. GILLMOR. Thank you very much. Let me ask on the issue of 

disclosure, which everybody agrees is poor, probably because there 

is too much of it, and it is not understandable. I guess my question 

is, whose fault is that, and how do you correct it? Is it the companies, is it the Federal Reserve which supposedly has the jurisdiction to regulate here? So I guess I would ask the panel does the 

Federal Reserve have adequate authority in the area of disclosure? 

23

And, two, is it their fault that it is all messed up? And if not theirs, 

whose? 

Mr. IRELAND. Mr. Gillmor, the Federal Reserve has very broad 

authority under the Truth in Lending Act to fashion disclosures for 

Regulation Z. In the area of open-end credit, as I indicated in my 

testimony, the overall account and the transactions and disclosing 

those transactions is a complicated issue if only because you have 

constantly moving balances that you are paying interest on but you 

may also have different interest rates, as we have discussed here, 

and fee charges in certain cases. But fees have been around for a 

long time though the levels have changed. And that disclosure is 

sort of inherently a complicated disclosure. The Truth in Lending 

Act itself encourages very precise, very accurate disclosures because it provides for civil liability, including class actions, if you do 

not do it right. So the first challenge that the institution faces is 

getting the disclosure right. Institutions are now working, as Mr. 

Yingling said, on trying to simplify some of their disclosures but 

there are limits as to what they can do within the current statute 

and the current rules. I think the Fed has an ability to contribute 

very substantially toward simplified disclosures. I think they may 

have to think creatively to do it. I also think that they have perhaps waited longer than they should to pick up this issue. As we 

have discussed here, there have been significant changes in the 

credit card industry over the years, and they have not done a comprehensive review of the Truth in Lending and credit card disclosures in a couple of decades. 

Mr. GILLMOR. Mr. Yingling? 

Mr. YINGLING. I would just say that it is the lawyers’ fault. 

Mr. GILLMOR. Well, I am a reformed lawyer. 

Mr. YINGLING. I am, too. 

Mr. ZYWICKI. Congressman, if I may just add briefly, according 

to a study done by Federal Reserve economist Thomas Durkin, to 

keep this in perspective, two-thirds of credit card owners find it 

very easy or somewhat easy to find out information about their 

credit card. Only about 6 percent say it is very difficult. And I 

would call the panel’s attention to some of the key aspects of the 

GAO report where they note that one of the big problems is that 

the old TILA rules require disclosure of increasingly irrelevant 

terms or trivial terms such as the minimum finance charge, such 

as things like method of computing balances, which are too difficult 

to disclose in a very simple sort of way. And what the GAO report 

observes is that focusing on trivial, outdated, or irrelevant disclosures makes it more difficult for consumers to find the information 

they need to get disclosure. And the concern is that this market is 

changing much faster than the regulations and if further disclosure 

is going to be mandated, I think we should keep— 

Mr. GILLMOR. I am running out of time because my time is limited here, and I do have another question I want to ask the panel. 

I think one of the most helpful things you could do is give us an 

answer to that. Mr. Ireland says it is inherently complex. Is it so 

inherently complex we are not going to be able to fix it? But not 

now because I do want ask my other question, but I think that is 

one of the most useful things that could come from this panel is 

an answer as to how to make us have meaningful disclosure. The 

24

other thing I want to ask, we keep hearing about how profitable 

the credit card is, I do not know whether it is or not compared to 

other industries. A lot of industries, you can go look and you can 

find for the auto industry, the drug industry, the banking industry, 

what return on equity is, and what the return on revenues are. 

What are the returns on equity, the returns on revenue in the credit card industry? Certainly there have been some studies. Mr. 

Yingling? 

Mr. YINGLING. Actually, the Fed does a regular study so it is 

available. Credit card company profits compared to most industries 

are actually not very high. The return has been relatively stable for 

the last 20 years. Some of this is in the GAO study by the way. 

And the return on assets is slightly above 3 percent. Just to put 

that into perspective, that is slightly lower than the automobile industry and considerably lower than other industries. It is higher 

than other types of lending but, as the Fed points out, if you adjust 

that back for risk, because credit card lending is unsecured, it is 

within the parameters of what you would expect. Another test is 

if you look at the PE ratios of credit card companies, how the market looks at credit card companies, their price earnings ratio in the 

stock market is lower than the S&P 500 average. So, although you 

hear a lot of talk about how profitable it is, when you look at it 

compared to other industries, it is not all that profitable. 

Chairwoman MALONEY. Thank you. The gentleman’s time is expired. And we have been called for a sequence of votes that may 

take up to an hour. The Chair recognizes Congressman Watt for 5 

minutes. 

Mr. WATT. Thank you, Madam Chairwoman. I will be quick because I am not sure whether we are coming back or not. But let 

me just first go with this notion, Mr. Zywicki, that you advanced 

that you are somehow getting a free credit card and that if we do 

something in this area, we are likely to incentivize cross-subsidization. I am sure you know that somebody is paying for your credit 

card. I know when I get a free ride for whatever period it is that 

I have free interest, no interest, somebody is paying for that. And 

so there is substantial cross-subsidization going on already in this 

market. The half of the people that Mr. Ireland says who are getting free interest are being subsidized by people who are paying on 

the other side very high interest rates, late payment fees, and the 

various other charges that are going on. 

Now, one of those is interchange fees which not a single person 

on this panel has said a word about. Those are the fees that credit 

card issuers charge to retailers for the use of their credit card. I 

am looking at a charge here that suggests that about $30 billion 

in interchange fees are charged, late fees, $16 billion, cash advance 

fees, $5 billion, annual fees on credit cards, $3 billion. So interchange fees, which was not mentioned by a single witness here, is 

the highest part of the cost of credit cards that we all pay at some 

level, even the people who do not use credit cards, the people who 

pay cash, are cross-subsidizing those of us who use credit cards because they are having to pay those interchange fees. And one of the 

concerns I have is that those interchange fees are not really—they 

are not addressing the cost of the transaction because all the studies I have seen suggest that only 17 percent of those fees are going 

25

to actually covering—and I suspect most of it is going to pay for 

all of the mailings that we get in the mail asking us to issue credit 

cards—to buy another credit card. When you say, Ms. Sherry, shop 

for credit cards, there is nobody shopping for credit cards, they are 

readily available to everybody, I guess at least a solicitation a day 

asking me to take out a different kind of credit card. Even from the 

lenders that I already have a credit card from wanting me to upgrade. Now I uniformly throw those things in the wastebasket but 

somebody is paying for those mailings. And the easy credit that is 

available out there is part of the problem. 

Now, having gotten on my platform, let me just go to Mr. 

Yingling. You said that somebody is sitting in a room every week 

trying to solve this problem. Who is it that is trying to solve this? 

And are we going to have to solve it here or is the industry going 

to come up with some satisfactory standards about how to get this 

because if it doesn’t, everybody is unhappy about it except Mr. 

Zywicki, who says that somebody is subsidizing him and he doesn’t 

have to worry about it anymore. Tell me who is meeting to solve 

the problem? 

Mr. YINGLING. We have a group called the Card Policy Council. 

Mr. WATT. Who? 

Mr. YINGLING. The Card Policy Council is a group within the 

ABA, and it consists of the major credit card issuers: MasterCard; 

Visa; American Express; and Discover. 

Mr. WATT. Are you all issuing anything publicly to tell people 

what—have you set a best practices standard? Is there any kind of 

industry standard coming out of this? 

Mr. YINGLING. What we are doing frankly is working our way 

through all the issues, some of which you just talked about, others 

that others have talked about. We are working in the disclosure 

area. We are working in the literacy area. We are working on some 

of these other issues that you all are concerned about. We should 

come up and brief you about it with your concerns, some of which 

you see— 

Mr. WATT. Would you send me something in writing? My time 

is up and we have to go vote, but we never have enough time to 

address these issues. Somebody tell me what the solution to this 

problem is short of our legislating in this area? Anybody on this 

panel who has a solution to it, just give me a short description of 

it in writing if you would. 

Mr. YINGLING. We will. 

Chairwoman MALONEY. All of the members of the committee 

would appreciate that. The Chair recognizes Mr. Castle for 2 minutes and Mr. Ackerman for 2 minutes. We have been called and we 

are on a second bell. We polled the members, and we will not be 

coming back after this hour-long session. Mr. Castle? 

Mr. CASTLE. I have 2 minutes so that eliminates the questions 

I was going to ask each of you very quickly. I would just like to 

second what the chairwoman and Mr. Watt said. I think any suggestions about some of these changes would be very helpful. Mr. 

Wilmarth, very quickly, you had a lot of concerns with the OCC 

and some federalization, etc., what is your recommendation for 

change, if anything, in that area, if you could do that briefly? 

26

Mr. WILMARTH. Well, I have two recommendations at the end of 

my testimony. One is I think this area is closely linked to the mortgage area in my opinion, and I think the Congress needs to look 

at comprehensive, uniform standards of fair lending practices that 

would level the playing field between federally-chartered institutions and state-chartered lenders. My second proposal is, as I have 

said, you cannot rely upon the OCC, 95 percent of whose budget 

is funded by the major banks, to be a completely independent regulator. My opinion is that you need enforcement. The best tool for 

enforcement is the Federal Trade Commission Act. You should give 

the FTC, which is currently barred from bringing unfair and deceptive acts and practices cases against banks, you need to give the 

FTC authority to bring that kind of enforcement action against national banks because State attorneys general are independent enforcement bodies for State banks. There is no independent enforcement body for national banks. 

Mr. CASTLE. Thank you. To Mr. Yingling, and I think to Mr. Ireland as well, you all talked about the disclosures. For me it is pretty simple—if I get a bill from a credit card, I like to know what 

is the real due date on there and what it is going to cost me if I 

do not get it in in that particular time. My God, it is very hard to 

figure out. But I think that is very important. And I think some 

of the banks are already starting to do this, the credit card banks. 

And you both have suggested that other things have to be done in 

that area, and I know it is a little bit uncertain with a particular 

box or whatever it may be. But, first of all, is that happening anyhow in the marketplace? And, secondly, is there real focus on making these changes even before regulations have to be imposed or we 

in Congress have to pass something to make it happen? 

Mr. IRELAND. Well, I can tell you that credit card issuers are devoting major resources to simplifying their disclosures and making 

them easier for consumers to understand. Their ability to do that 

is limited by Federal law. They are going to need some help from 

the Federal Reserve to get to the end of this trail. 

Mr. CASTLE. Thank you. 

Chairwoman MALONEY. Mr. Ackerman? 

Mr. ACKERMAN. Thank you very much, Madam Chairwoman. I do 

not have to do much shopping either, all I have to do is go to my 

mailbox. This is all for me. The past year or so, there was a lot 

more that my wife threw out because she thinks I am getting compulsive about looking at these things. I do not know that I actually 

make money on them, as Mr. Zywicki does, but I do try to read 

most of them and do as good as I could. I am not a law professor; 

I am just a social studies teacher. But I just pulled this one, which 

was on the top and started to highlight it from a bank that has 

been chasing me to open an account. And they offered me this wonderful platinum thing where I can get a 0 percent introductory rate 

until I read it and they tell me about the 7.99 fixed APR thereafter. 

But then I read all the print on the front, which has lots of 0 percents all over the place and frozen things and whatever, and I turn 

to the back and read in the small print, which I can only do without my glasses, and I will round it off to the nearest one-hundredth 

of a percent so you do not get 7.99. There are rates here that they 

offer me and tell me that I am going to be subject to all of these 

27

under different sets of conditions and they are: 0 percent; 8 percent; 13 percent; 14 percent; 16 percent; 20 percent; 21 percent; 24 

percent; and 29 percent. Each of those is one one-hundredth less, 

you understand. And for the benefit of doing all this, paying as 

much as 29 percent after I get sucked in thinking I am paying 0 

percent, it tells me that I have the great pleasure of not having to 

pay an annual fee. I think this 29 percent thing is great. I remember when I was a kid growing up on New Lotts Avenue, Shelly, he 

worked out of the candy store, he went to jail once for doing something like that; 29 percent is not 0 percent. And I would venture 

to say that, and I will paint with a very broad brush, but the people on the lower socio-economic scale of the ladder, those people 

that you run classes for on how to open a bank account, and savings, and all those kinds of things, they are not the people who 

read this. Those are the people who are going to default thinking 

they are getting a better rate, switching from another credit card, 

not knowing about the fine print on the back, getting sucked in, 

and finding out that they are now paying a rate that they cannot 

afford, and they should have stuck with what they had. These are 

the people that we have to be concerned with, not myself or Mr. 

Zywicki. I get a lot of these; they are offering me free money. I took 

one of them. I took several of them as a matter of fact. Some bank 

offered me—some non-bank, forgive me, some non-bank offered me 

$50,000. I said, that is a great deal. I called them up, they said, 

‘‘Yes, we switch it into your account.’’ I am pre-approved. I said, 

‘‘That is wonderful. I will take every nickel you are giving me, and 

I will pay it back by July,’’ whatever it was. The next thing I knew, 

the first statement I got, I had $250 worth of fees because I was 

over my credit limit. I said, ‘‘How could I be over my credit limit, 

I have not missed a payment, it is my first bill?’’ They said, ‘‘Well, 

the first day that you take that $50,000, we add’’ blah, blah, blah. 

I was tough enough to fight that but a lot of people who are not 

sophisticated enough do not know what they are getting into. And 

I think, just being the skeptical social studies teacher that I am, 

that is deliberate. And I think that is what we have to fix. And I 

would, as my friend Mr. Watt said, I would like the industry to sit 

down with us and say, ‘‘Here is how we can fix this. We do not 

have to offer people nine rates, thinking they are not paying any.’’ 

Chairwoman MALONEY. That is a wonderful statement, but we 

may miss a vote. I want to thank the panelists and the members 

for being here for their interest. And the Chair notes that some 

members may have additional questions for the panel, which they 

may wish to submit in writing. Without objection, the hearing 

records will remain open for 30 days for members to submit written 

questions to these witnesses and to place their responses in the 

record. 

And this hearing is adjourned, and I thank everybody for coming. 

[Whereupon, at 11:30 a.m., the hearing was adjourned.] 

(29)

A P P E N D I X

April 26, 2007

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