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S. HRG. 110–769 

CREDIT CARDS AND BANKRUPTCY: 

OPPORTUNITIES FOR REFORM 

HEARING 

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

DECEMBER 4, 2008 

Serial No. J–110–125 

Providence, Rhode Island 

Printed for the use of the Committee on the Judiciary 

( 

(II) 

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

ARLEN SPECTER, Pennsylvania 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

JEFF SESSIONS, Alabama 

LINDSEY GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

STEPHANIE A. MIDDLETON, Republican Staff Director 

NICHOLAS A. ROSSI, Republican Chief Counsel 

(III) 

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page 

Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode Island ...... 1 

WITNESSES 

Chung, John, Associate Professor of Law, Roger Williams University, Bristol, 

Rhode Island ......................................................................................................... 9 

Lawless, Robert M., Professor of Law, University of Illinois College of Law, 

Champaign, Illinois .............................................................................................. 4 

Rao, John, Attorney, National Consumer Law Center, Boston, Massachusetts 12 

Small, A. Thomas, U.S. Bankruptcy Judge, Eastern District of North Carolina, on behalf of the National Bankruptcy Conference, Wilson, North Carolina ........................................................................................................................ 7 

SUBMISSIONS FOR THE RECORD 

Chung, John, Associate Professor of Law, Roger Williams University, Bristol, 

Rhode Island, statement ...................................................................................... 21 

Lawless, Robert M., Professor of Law, University of Illinois College of Law, 

Champaign, Illinois, statement ........................................................................... 25 

Rao, John, Attorney, National Consumer Law Center, Boston, Massachusets, 

statement .............................................................................................................. 39 

Small, A. Thomas, U.S. Bankruptcy Judge, Eastern District of North Carolina, on behalf of the National Bankruptcy Conference, Wilson, North Carolina, statement ..................................................................................................... 52 

(1) 

CREDIT CARDS AND BANKRUPTCY: 

OPPORTUNITIES FOR REFORM 

THURSDAY, DECEMBER 4, 2008 

U.S. SENATE, COMMITTEE ON THE JUDICIARY, WASHINGTON, D.C. 

The Committee met, pursuant to notice, at 2:09 p.m., in the William C. Gaige Hall Auditorium, Rhode Island College, Providence, 

Rhode Island, Hon. Sheldon Whitehouse, presiding. 

Present: Senator Whitehouse. 

OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. 

SENATOR FROM THE STATE OF RHODE ISLAND 

Senator WHITEHOUSE. The hearing will come to order. 

Before we begin, I would like to thank Rhode Island College for 

this official field hearing of the United States Senate Judiciary 

Committee. I would also like to welcome and thank the students 

who have joined us for today’s events. Young people are most likely 

to start signing up for credit cards in their college years, so this 

topic has particular significance to them. 

As I have traveled around our State and talked with Rhode Islanders, I have so often heard concerns about outof-control credit card rates and fees. With each passing year, two 

things seem to happen: one, the credit card companies get cleverer; 

and, two, the consumer gets the result. What was a one-page credit 

agreement just two decades ago is now a 20-page, booby-trap-filled, 

small-print legal document. Hidden behind the legalese in these 

documents are snares that lenders have set for consumers, including in some cases the right to raise interest rates for any reason, 

or in some cases no reason at all. With things economically as bad 

as they are today, those problems hit home harder. Rhode Island’s 

unemployment rate is 9.3 percent, tied with Michigan, as the Nation’s highest. 

Times are tough in our Ocean State, and the people who are unemployed or who are underemployed still have living expenses— 

rent, mortgage, food, clothes, tuition, medicine. With winter approaching, you can add to that heating oil, higher electricity bills, 

and, of course, holiday gifts for friends and family. All too often, 

families make these ends meet with a credit card and watch the 

balance go up and up and up. 

About three-quarters of U.S. households have at least one credit 

card, and 58 percent of those carry a balance. As of 2006, which 

is the last year that we have got information for, the average credit 

card balance was almost $8,500. Given what has happened to the 

2 

economy between 2006 and now, you can bet that average balance 

is well above $8,500 now. And, unfortunately, the practice of the 

credit card industry is to kick consumers when they are down. 

An $8,500 balance at a fair rate paid on time each month might 

be a manageable debt load for an average family over time. But if 

that same family falls behind, a 10-percent interest rate can morph 

into 30 percent or 40 percent or more, making full repayment virtually impossible. A payment that is 1-day late results in an average penalty fee of $28, even though the cost to the credit card company is negligible. 

And as the banks feel economic pressure, things gets worse. 

Citibank had promised that it wouldn’t increase credit card rates 

without cause, but earlier this month it reversed its promise, citing 

the need to make up for revenues lost in the mortgage market and 

elsewhere. The practices of the credit card industry are unfair. I 

think they are also unsustainable, and I believe these practices 

could lead to further financial collapse unless Congress acts. 

There are several things we can could do in Congress. Senator 

Chris Dodd of Connecticut, our neighbor, has the Credit Card Accountability, Responsibility, and Disclosure Act, which I have cosponsored. This would outlaw some of the most egregious credit 

card practices, including so-called universal default, where if you 

default on a different obligation this credit card punishes you for 

that other default; and then, of course, those ‘‘rate increases at any 

time for any reason’’ provisions. 

I have also cosponsored Senator Dick Durbin of Illinois’ Protecting Consumers from Unreasonable Credit Rates Act, which 

would set a national interest rate cap of, if you can believe it, 36 

percent, inclusive of fees. Think for a minute about a world in 

which Congress has to consider capping interest rates at 36 percent. 

I would be remiss if I did not also mention Senator Durbin’s 

Helping Families Save Their Homes in Bankruptcy Act, a critical 

bill that will help stop people losing their homes to foreclosure. 

This bill would correct an anomaly in the bankruptcy law whereby 

a first primary residential home mortgage is not allowed to be adjusted in bankruptcy to have the principal reduced, unlike essentially every other loan agreement that exists. It is unique that way. 

I hope the 111th Congress will pass this change in January and 

President-elect Obama will then sign it into law. 

In addition to the bills I have mentioned, I also plan to introduce 

legislation to restore to individual States the ability to protect their 

own citizens from out-of-State lenders. As Professor Lawless will 

explain in his testimony, a Supreme Court case a generation ago, 

in what appeared to be a technical matter, stripped States of their 

historic rights to enforce such protections. 

I am a member of the Judiciary Committee. This is a Judiciary 

Committee field hearing. The Judiciary Committee has jurisdiction 

over the bankruptcy system, so this hearing is focusing on using 

bankruptcy law to protect those who fall prey to abusive credit card 

interest rates, with particular reference to the Consumer Credit 

Fairness Act, which I am proud to say Senator Durbin, our Deputy 

Majority Leader in the Senate, joined me in introducing this past 

3 

summer. It would amend the Bankruptcy Code to disfavor abusive 

lenders and thereby encourage reasonable interest rates. 

Under the Consumer Credit Fairness Act, claims stemming from 

credit card agreements with interest rates above a cap of 15 percent above the Treasury yield, which is currently 4.4 percent, 

would move to the tail end of a bankruptcy proceeding, would get 

paid last, do not get paid unless everybody else gets paid. In the 

vast majority of cases, as a result, these lenders would recover 

nothing at all if their customers entered bankruptcy. 

I hope that this will work on three levels: it will protect the consumer in bankruptcy by improving their status; it will protect the 

consumers short of bankruptcy by giving them additional negotiating leverage with the credit card companies; and it will send a 

message back up into the credit card industry that these abusive 

interest rates are no longer a successful business model. 

Additionally, my bill would waive the so-called means test from 

the banking industry-sponsored 2005 so-called bankruptcy reforms, 

which created a costly and burdensome process that bankruptcy filers must undergo to be eligible to discharge their debts, and it prevents some filers from receiving a discharge at all. 

I would now like to introduce our distinguished panel of witnesses. We are fortunate they are able to be with us this afternoon 

to share their expertise in these matters. 

First is Professor Robert Lawless of the University of Illinois College of Law. He is a nationally renowned expert on bankruptcy and 

consumer law issues. In addition to testifying before our Committee 

on recent Supreme Court cases this past June, Professor Lawless 

has published articles in numerous academic publications and has 

been featured on CNN and CNBC. He has the privilege of teaching 

at the University of Illinois College of Law, his alma mater. 

Professor John Chung, from our own Roger Williams University 

School of Law across the bay in Bristol, is an expert in bankruptcy 

law. Prior to beginning his teaching career, Professor Chung 

worked on the United Nations Compensation Commission, which 

was formed to process claims and award compensation for losses 

resulting from Iraq’s invasion and occupation of Kuwait in 1990. 

Professor Chung is a graduate of Washington University and the 

Harvard Law School. 

The Honorable Judge A. Thomas Small has served on the Bankruptcy Court of the Eastern District of North Carolina since 1982 

and has twice held the role of chief judge on that court. Judge 

Small is familiar with banks, having worked in the industry for 13 

years prior to joining the bench. He is a graduate of Duke University and the Wake Forest University School of Law. Judge Small 

is here today in his capacity as a member of the National Bankruptcy Conference, the Nation’s premier organization of bankruptcy 

experts. His written testimony today represents the official position 

of the National Bankruptcy Conference. 

Finally, John Rao of Newport, Rhode Island, is an attorney with 

the National Consumer Law Center, who focuses on consumer credit and bankruptcy issues. The National Consumer Law Center performs research and trains attorneys who serve low-income consumers. Mr. Rao was appointed by Chief Justice Roberts to serve 

on the Federal Judicial Conference Advisory Committee on BankVerDate Nov 24 2008 10:41 Apr 03, 2009 Jkt 048088 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\48088.TXT SJUD1 PsN: CMORC
4 

ruptcy Rules. Mr. Rao earned his degree from Boston University 

and the University of California Hastings College of Law. 

I would also like to take a brief moment to thank Professor Elizabeth Warren of Harvard Law School for her tireless efforts in fighting for consumer protections and her help in drafting my legislation. Professor Warren was originally scheduled to be a witness 

here today, but she had to cancel because she was appointed to 

chair the Congressional Oversight Panel of the United States 

Treasury Bailout Program. You read of her work in Tuesday’s New 

York Times, and I wish her the best as she oversees and audits the 

bailout program. 

I would also take a moment to recognize a State Senator who is 

present, Rhode Island State Senator Juan Pichardo, and the very 

distinguished bankruptcy judge of Rhode Island, Judge Votolato. 

Nice to have you with us, Your Honor. Haven’t seen you in a while. 

Following the witnesses’ opening statements, which I ask them 

to limit to 7 minutes, I will ask questions on their testimony; and 

after we have concluded the formal hearing, the witnesses have 

kindly agreed to join me in taking questions from the audience in 

a general panel. If any of you have a story or an experience you 

would like to share or a question that we can answer, I hope you 

will stay around after the hearing concludes to take part in this 

session. 

And now I turn the hearing over to Professor Lawless for his testimony. 

One final piece of business. Before everybody begins, may I 

please ask you to stand and be sworn. Do you affirm that the testimony you are about to give before the Committee will be the truth, 

the whole truth, and nothing but the truth, so help you God? 

Mr. Lawless. I do. 

Judge Small. I do. 

Mr. Chung. I do. 

Mr. Rao. I do. 

Senator WHITEHOUSE. Thank you all very much. Professor Lawless, please proceed. 

STATEMENT OF ROBERT M. LAWLESS, PROFESSOR OF LAW, 

UNIVERSITY OF ILLINOIS COLLEGE OF LAW 

Mr. LAWLESS. Thank you, Senator Whitehouse. Thank you for inviting me to testify today to the Senate Committee on the Judiciary. 

It is no longer a lot of work to get people’s attention about the 

explosion of consumer credit. The graph I have put up on the 

screen shows the growth in consumer credit over the last 50 years. 

Even after controlling for inflation and population growth in the 

United States, we owe five times as much as we did 50 years ago 

on our household debt and almost twice as much as we did just one 

decade ago. 

There has been a huge run-up in the amount of consumer credit 

outstanding. Over the last 10 years, mortgage debt was substituted 

for credit card debt. Some of that mortgage debt came in the form 

of home equity lines of credit. But we now owe more than we do 

in our national personal income. 

5 

One way to look at consumer credit is to compare it to the 

amount of our National personal income for 1 year. As you can see, 

from time to time they both rose together, but in the last decade, 

the amount of consumer credit rose much more dramatically than 

household income. We now owe more in household debt than our 

National personal income for one year. 

One way to think about that is if we took 1 year and we did not 

pay for housing, food, utilities, or any of the other necessities of 

life, it still would not be enough to retire just our National personal 

household debt. 

One of the key events, as you mentioned, Senator, was the 1978 

decision in Marquette National Bank. The 1978 Supreme Court decision in Marquette National Bank, while not alone responsible for 

the rise in consumer credit, was one of the necessary preconditions 

to the explosive growth we have seen over the last few decades. 

In Marquette National Bank, a Nebraska bank wanted to charge 

18 percent interest to Minnesota customers, although the State of 

Minnesota judged that the legal rate should be no higher than 12 

percent. The Supreme Court interpreted the National Bank Act of 

1864, an act passed in the midst of the chaos of the Civil War to 

establish a stable national banking system. The Supreme Court interpreted this then 114-year-old statute to let the Nebraska bank 

export Nebraska law into the State of Minnesota. A law that had 

been passed as a shield to protect nationally chartered banks from 

burdensome State regulation, because of the Marquette National 

Bank, decision became a sword that national banks could use to export State law—unprotected State laws into other States whose 

legislature had made judgments to the contrary. 

What happened after Marquette National Bank was that banks 

rushed to States with lax usury regulation or, indeed, in some instances were able to prevail upon some States to repeal their usury 

statute altogether. The result was an effective national deregulation of interest rates. Banks could relocate in these States with no 

usury statutes, with no interest rate cap, and then export those 

rules across the entire country. 

Consumer credit took off. The chart that I just showed owes its 

origins in the 1978 decision of Marquette National Bank, and I 

think one thing that should not be lost on the Committee, Senator, 

is that this was a decision of the United States Supreme Court interpreting a 114-year-old statute. It was not a decision made by our 

elected legislative branch. It was not even a decision made by the 

executive branch. Rather, because of some arcane rules in a 114- 

year-old statute, we have ended up with a consumer credit system 

that is completely unregulated as to interest rates. 

I want to talk a little bit, though, about high-cost credit in bankruptcy, which is the topic of today’s hearing. 

Consumer credit is about consumer bankruptcy. As I show in my 

paper called ‘‘The Paradox of Consumer Credit,’’ bankruptcy rates 

rise with increases in consumer credit. Bankruptcy rates have 

plummeted in the immediate wake of the 2005 law, but they are 

back on track to reach 1.1 million bankruptcy filings in the 2008 

calendar year. 

There is a paradox here. Decreases in the amount of consumer 

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ings. Just yesterday, I learned that we went over 5,000 bankruptcies per day in the month of November, and that was the first 

time since 2005. And the reason for the short-term rise we have 

seen in bankruptcy filings for the past 4 months is likely because 

of the tightening of consumer credit that we read so much about 

today in the headlines. People are hurting, and it is beginning to 

show up in the bankruptcy courts. So let me talk a little bit about 

what some of our research shows about the people who are showing 

up in bankruptcy courts. 

I am part of a research project called the Consumer Bankruptcy 

Project, including Professor Elizabeth Warren, and what we do is 

we go out and we talk to people, we survey people, we interview 

people, we collect the court records of people who file bankruptcy. 

The 2007 cohort of the Consumer Bankruptcy Project shows that 

people of modest means show up in the bankruptcy courts. The 

myth of bankruptcy being a free ride for high spenders and highincome earners is just that—a myth. The typical person in bankruptcy court shows up with just $27,000 in income and only 

$53,000 in assets. Against these modest resources, the typical person is $69,800 in debt. Over time, we are also seeing people show 

up in bankruptcy courts in worse condition but with the same resources. 

The Consumer Bankruptcy Project has research cohorts in 1981, 

1991, 2001, and 2007, and as you can see from the slide, income 

levels have been relatively constant throughout this period, yet 

debt is continuing to increase. People are showing up in bankruptcy court in worse financial shape every time we go back into 

the field to do our research. The 2005 laws did not sort out the 

‘‘can pays.’’ We were told in 2005 we were going to get a bankruptcy law that was going to get rid of the high-income people who 

were abusing the bankruptcy system. If that was true, we would 

have expected to see income drop after the 2005 bankruptcy law. 

Instead, it is virtually identical. 

The 2005 bankruptcy law did not work. The only thing that has 

happened is that we have forced people who need the bankruptcy 

courts out of the system, and the people who are showing up in 

bankruptcy court now are in worse shape, with higher ratios of 

debt to their personal household income. 

Another way this shows up is in the questions we ask people 

during the surveys. In both 2001 and 2007, we asked people the 

same question: How long have you been struggling before you filed 

bankruptcy? Forty-four percent now say that they financially struggled more than 2 years before they filed bankruptcy. That was the 

most common response of our survey respondents. More than 2 

years before filing bankruptcy most people suffer before they end 

up in bankruptcy court. Bankruptcy is not a free ride. People do 

anything to avoid it. 

There are a number of fixes that we can have for the consumer 

bankruptcy system, Senator. The Consumer Credit Fairness Act 

that you are sponsoring is a very good step in the right direction. 

As you mentioned, it would subordinate high-cost credit transactions; it would exempt from the means test bankruptcies that 

were caused by high-cost credit transactions; and the Act would 

7 

serve as a statement that our Federal bankruptcy courts will not 

be used as a collection system for abusive and predatory loans. 

Another improvement that could be made to the bankruptcy laws 

is to take steps that would lower the cost of filing. Get the bankruptcy laws off the consumer bankruptcy attorneys’ backs so that 

will lead to lower attorneys’ fees and increase accessibility to the 

bankruptcy courts. 

The means test could be repealed in its entirety. The means test, 

which is meant to shuffle out the ‘‘can pay’’ debtors, we have seen 

is a failure. It should be repealed in its entirety. 

We should eliminate pre-bankruptcy credit counseling. The postbankruptcy credit counseling is our best chance to change debtors’ 

behavior after filing bankruptcy. The pre-bankruptcy credit counseling is nothing but a hassle and a little bit more cost before people can get to bankruptcy courts. It serves as another hurdle before 

people can get the relief they need. 

And, finally, I recommend that we give bankruptcy judges the 

power to write down mortgages in Chapter 13, as the Helping Families Save Their Homes in Bankruptcy Act would. This would restore to bankruptcy judges the power they had before the 1993 Supreme Court decision called Nobelman. I encourage Congress to 

pass that law. 

Thank you, Senator. Thank you again. 

[The prepared statement of Mr. Lawless appears as a submission 

for the record.] 

Senator WHITEHOUSE. Thanks, Professor Lawless. We very much 

appreciate your being here and having come all this distance. 

I would now turn to Hon. Judge Small. 

STATEMENT OF HON. A. THOMAS SMALL, U.S. BANKRUPTCY 

JUDGE, EASTERN DISTRICT OF NORTH CAROLINA, ON BEHALF OF THE NATIONAL BANKRUPTCY CONFERENCE 

Judge SMALL. Senator Whitehouse, thank you for giving us, the 

National Bankruptcy Conference, the opportunity to comment on 

the Consumer Credit Fairness Act. We strongly support your efforts to address the effects of high-cost consumer credit. Generally, 

it is not the Conference’s policy to support amendments to the 

Bankruptcy Code that address non-bankruptcy problems such as 

the problem of high-cost consumer credit. And the Conference prefers and recommends a broader approach to this problem such as 

a national usury law. But, clearly, high-cost credit does contribute 

directly to the filing of many bankruptcy cases and has an unfair 

and adverse effect on other creditors. The Conference, therefore, believes that bankruptcy legislation would be helpful if a broader solution to high-cost consumer credit is not possible. 

The bill is a strong start, but we would like to point out a few 

problems and suggest some ways the bill might be improved. The 

bill in its current form does not capture some of the more serious 

credit abuses. Also, the bill, while providing relief for creditors, 

does not provide relief for consumer debtors and in some circumstances could have detrimental, unintended consequences for 

some Chapter 13 debtors. 

Now, credit often becomes high-cost consumer credit not when 

the credit is first established but, rather, in the months preceding 

8 

bankruptcy. As consumers fall behind on their credit cards, their 

payday loans, their rent-to-own contracts, and other consumer purchases, or exceed their credit limits, they are faced with an avalanche of default rates, late fees, and other additional charges that 

can cause their balances to skyrocket. Neither the Truth in Lending definition of annual percentage rate nor the bill’s reference to 

the costs and fees incurred at the outset of the loan includes these 

damaging later-added costs. 

And we would suggest that the definition of ‘‘high-cost consumer 

credit’’ be expanded to cover charges such as late fees and default 

interest rates so that the definition reflects the actual cost of credit 

to the borrower. Specifically, we suggest that including the cost of 

credit imposed within the 6-month period before filing would improve the bill. 

A second problem is that by subordinating high-interest claims 

but not disallowing those claims, the bill helps creditors but not 

debtors. Subordination solves the problem of high-cost creditors obtaining a disproportionate payment of their claims in bankruptcy, 

but it really does nothing to help debtors. Subordination reorders 

which creditors get paid first, but it does not reduce the overall 

amount that has to be paid. 

Instead of subordinating high-cost consumer claims, we recommend that they be disallowed. Non-high-cost creditors would actually receive the same distribution if the claims are disallowed or 

if they are subordinated. But debtors would be greatly benefitted 

by disallowance in large-asset Chapter 7 cases, and in full-payout 

Chapter 13 cases, because the disallowed claims for high-cost consumer credit would be discharged without having to be paid. But 

I think it is important to keep in mind that in most consumer 

cases, it really will make no difference to the debtor whether the 

claims are subordinated or disallowed because most consumer 

cases, over 90 percent, are no-asset cases in which creditors, 

whether they are high-interest creditors, low-interest creditors, or 

no-interest creditors, really receive nothing. The same is true in 

Chapter 13 where, under means testing, there are more and more 

zero-payout Chapter 13 plans. 

A third problem is that the bill as currently drafted may leave 

Chapter 13 debtors who do not complete their plans, and consequently have their cases dismissed, with heavier debt loads than 

when they filed their bankruptcy petitions. This problem would 

exist whether the high-cost credit claims were subordinated or disallowed. And that is because the effect of subordination or disallowance in a Chapter 13 case is to permit payment of regular claims 

but not the payment of high-cost consumer credit claims. If the 

case is dismissed, no debts are discharged, and the high-cost consumer credit claims remain outstanding in greater amounts with 

the high-interest that accrued while the case was pending. The end 

result, of course, is that the debtor will owe substantially more 

than if the high-cost debt had not been subordinated or disallowed. 

The solution to that problem is to discharge all fees related to 

high-cost consumer claims that accrue or are incurred post-petition 

in a Chapter 13 case in which a plan has been confirmed. This 

change could be easily implemented by adding a new section to 

Section 1328. 

9 

Finally, although the Conference believes that the current means 

test is a cumbersome, unnecessarily complex, and ineffective method of determining a debtor’s ability to repay unsecured debt, we do 

not recommend an exclusion from means testing for debtors involved in high-cost consumer credit transactions, as contemplated 

in the bill. The definition of these transactions is likely to be complex, and the computations necessary to determine an exclusion 

from means testing based on high-cost consumer credit would turn 

the already complicated means test forms into an even higher hurdle for individual debtors. Excluding means testing for those debtors in our opinion simply is not worth the considerable trouble it 

would entail. 

In conclusion, the Conference believes that this bill offers a real 

opportunity to facilitate greater fairness to creditors and debtors 

and provides a real deterrent to abusive lending practices. The bill 

is coming along at precisely the right time, and the National Bankruptcy Conference would be happy to provide any other information 

and to assist in formulating a draft proposals if the Judiciary Committee would find that helpful. 

Thank you, Senator. 

[The prepared statement of Judge Small appears as a submission 

for the record.] 

Senator WHITEHOUSE. Your Honor, thank you for your testimony, 

and let me just take this opportunity to thank both you and the 

National Conference for the clearly careful and thoughtful way that 

you have examined the bill and for the recommendations you have 

made. They are all very much in the spirit of what we are trying 

to accomplish. We look forward to working with you on the technical draftsmanship issues to get these technical aspects of it more 

clearly right than they were in the first draft, and it is very helpful 

that you have provided this input. 

Judge SMALL. We are glad to assist in any way. 

Senator WHITEHOUSE. Professor Chung? 

STATEMENT OF JOHN CHUNG, ASSOCIATE PROFESSOR OF 

LAW, ROGER WILLIAMS UNIVERSITY 

Mr. CHUNG. Senator Whitehouse, thank you for inviting me to 

speak before the Judiciary Committee at this field hearing on this 

important subject. 

I would like to start by presenting a question about compound 

interest that I ask my students. I do so before this Committee not 

in the vein of presuming that I am teaching anyone anything new, 

but with the purpose of directing attention to one of the major 

problems of high-cost consumer credit. My question is this: At an 

annual rate of interest of 36 percent, compounded daily—which is 

how my credit card works—how long does it take for a debt of 

$1,000 to double? When I ask my students, I usually use 25 percent 

as an example. I ask this question in every bankruptcy class. My 

experience has been many students do not know the answer. At the 

rate of 36 percent, the answer is that the debt doubles in just 

under 2 years. When I tell my students the answer—and the answer for 25 percent is approximately 3 years—I hear audible gasps 

of surprise. I then ask, ‘‘Where do you see interest rates like 25 

10 

percent in the real world? ’’, and they quickly identify their credit 

cards. 

My point is that, from my experience, many law students do not 

know how quickly debt grows and compounds at rates like 25 percent or 36 percent. I hold my students in the highest regard, and 

I want to remind the general audience that these are college graduates who had to achieve a certain grade point average and standardized test score to be in my classroom. If some law students are 

surprised by the answer, I wonder if the typical consumer debtor 

understands the destructive effect of these interest rates. 

And the problem is, of course, that compounded interest of 36 

percent does not stop after 2 years. The debt continues to grow. It 

grows from $1,000 to $2,000 in the first 2 years, then from $2,000 

to $4,000 in the next 2 years, then from $4,000 to $8,000, and so 

on and so on. The growth rate in debt is exponential. Income and 

asset growth, however, is not—at least for most people. 

Once a debtor falls into the trap of exponential debt growth, can 

such a person ever climb his or her way out? I highly doubt it. Perhaps we are witnessing the 21st century equivalent of the company 

store where the debtor is just another day older and deeper in debt 

because he has sold his soul to his credit card issuer. 

Given the destructive impact of high-cost consumer credit on borrowers, I believe there is a strong need for the proposed Consumer 

Credit Fairness Act. The math tells us that once debt starts 

compounding at rates like 36 percent, the borrower will end up 

trapped in a vicious cycle of debt spiraling out of control. Laws 

against usury were designed centuries ago to address this problem, 

but modern lenders have managed to avoid the application of those 

laws. The Consumer Credit Fairness Act is needed to restore a 

more equitable balance between the rights of debtors and creditors. 

The reference to usury laws is also helpful because it points out 

that the Act is a measured, sober response to the problem of excessively high interest rates and is based on long-established debtorcreditor principles. The legal history of England and the United 

States recognized the need to prohibit excessively high interest 

rates. Blackstone’s Commentaries on the Laws of England, printed 

in 1765, discussed usury laws. I make this point to rebut the anticipated, but weak, argument by lenders that the proposed Act 

would upset their expectations and constitute a drastic upheaval in 

the debtor-creditor relationship. The need to address the problem 

of excessively high interest rates is well established, and the fundamental purpose of the proposed Act stands on firm legal and historical ground. 

In addition to restoring more balance to the historical debtorcreditor relationship, I believe that the proposed Act deserves 

praise because it addresses more contemporary problems—problems created by the Bankruptcy Abuse Prevention and Consumer 

Protection Act of 2005. In particular, I am referring to the famous—or infamous—means test. The proposed Act’s exemption of 

certain debtors from the means test is a welcome attempt to provide relief to borrowers in need of protection from crushing interest 

rates. 

I would like to make one general observation about the recent 

changes in consumer bankruptcy law. I think it is highly likely 

11 

that the next generation of legal historians will see some significance in the fact that the Bankruptcy Code was amended in 2005. 

2005 was at or near the peak of the subprime-fueled housing bubble. I understand that the amendments were years in the making, 

but the fact that the reforms finally passed that year is probably 

not just coincidence. In the mania of that bubble, anyone could become a multi-millionaire just by buying a house, or two or three. 

The frenzied spirit of the times questioned the intelligence of anyone who was not making a fortune. It appears there was a sentiment that there was something wrong about someone if he or she 

was not getting rich. This led to and fed the conclusion that there 

was something really wrong if someone filed for bankruptcy protection. This line of thinking concluded that in an era of easy and instant riches, the people filing bankruptcy must be doing so to game 

the system. That meant drastic reform was necessary to stop all 

those abusers of the system. In hindsight, it appears that the people who needed to be reined in by legislative reform were those 

who were facilitating and gaming the bubble. It is my hope that 

the proposed Act represents just one attempt to roll back the 2005 

amendments. 

The proposed Act deserves support, and this Committee should 

be applauded for considering this legislation. With regard to the 

text of the proposed Act, I raise two issues. I raise these issues in 

the spirit of seeking clarification. 

First, the proposed legislation seeks to amend Section 707(b) by 

adding subparagraph (8), which states that ‘‘Paragraph (2) [the 

means test] shall not apply if the debtor’s petition resulted from a 

high cost consumer credit transaction.’’ The issue I raise is whether 

707(b)(8) applies if a debtor files a petition because of high-cost 

consumer credit and other debt, like a large hospital bill. One could 

envision a situation where a debtor is injured, incurs hospital bills, 

and loses income due to an inability to work. Such a debtor would 

probably turn to his or her credit cards to pay living expenses. The 

combination of the medical bills and credit card debt would lead to 

bankruptcy. The creditors would likely raise the issue whether the 

proposed language applies if the petition results from other debt in 

addition to high-cost consumer debt. 

My second comment is based on my concern with certain language in another provision of the Bankruptcy Code which provides 

that certain types of consumer debts are nondischargeable. In Section 523(a)(2) there is language that states: ‘‘cash advances aggregating more than $825 that are extensions of consumer credit 

under an open end credit plan obtained by an individual debtor on 

or within 70 days before the order for relief under this title, are 

presumed to be nondischargeable.’’ 

If a debtor has high-cost consumer debt that falls within this language, then subordination of such debt through the proposed 

amendment of Section 510 will provide little relief because the debt 

will not be discharged. If the Committee is of the view that there 

is a need to address the discharge issue, one way to address it 

would be by amending Section 523 so that debts resulting from 

high-cost consumer credit transactions are treated as nondischargeable. 

12 

Again, I raise these issues as someone who believes in the need 

for legislation addressing high-cost consumer debt and as someone 

who supports the proposed Act. 

Thank you for the opportunity to present my remarks. 

[The prepared statement of Mr. Chung appears as a submission 

for the record.] 

Senator WHITEHOUSE. Thank you, Professor Chung. I appreciate 

it. Once again, the thoroughness of your inquiry demonstrates the 

careful look you have taken at it, and I appreciate your advice, and 

we will work with you to incorporate it. 

Attorney Rao? 

STATEMENT OF JOHN RAO, ATTORNEY, NATIONAL CONSUMER 

LAW CENTER 

Mr. RAO. Senator Whitehouse, thank you for the opportunity to 

testify here today and to consider ways to improve our bankruptcy 

laws to encourage reform of credit card practices. I testify here 

today on behalf of the low-income clients of the National Consumer 

Law Center and the National Association of Consumer Bankruptcy 

Attorneys. 

My testimony is based on over 25 years of experience representing consumers and consulting with other attorneys in debt 

collection, bankruptcy, and foreclosure defense matters, initially as 

an attorney with Rhode Island Legal Services. In fact, some of that 

time was before Judge Votolato, who I am so pleased to see here 

today. 

In my experience, I have found that many consumers use credit 

cards as a safety net, to make essential purchases that they are 

unable to pay in full on a cash basis. Living paycheck to paycheck 

for some of these consumers, they often lack savings to cover unexpected expenses. In a recent national survey of indebted low- and 

middle-income consumers, seven out of ten said that they use credit cards to pay for important things like car repairs, home repairs, 

medical expenses. Of course, in our current economic situation, 

even more consumers can be expected to rely on credit cards to get 

through the difficult times that we see now. 

It is also my experience that few consumers borrow money on 

credit without intending to repay. Their plans to repay, however, 

easily change, often due to unforeseen circumstances such as adverse events like illness or divorce. Other consumers fall into traps 

set by credit card companies. Even small setbacks, like using a 

credit card to pay for some prescription drugs or to repair a home 

furnace, can send consumers into a spiral of late fees, over-limit 

fees, and increased interest rates that become impossible to escape. 

And this is particularly true for some older consumers with diminished incomes after they retire. 

There is no question that credit cards provide a great convenience for many consumers. The dangers come from the borrowing 

features of these cards and can get consumers into deep financial 

trouble. 

Some of these practices of credit card companies such as deceptive marketing, confusing payment allocation rules, retroactive rate 

increases on existing balances, and universal default, such as you 

mentioned earlier, Senator Whitehouse, hopefully will be addressed 

13 

by a pending rulemaking proceeding before Federal agencies and 

by bills pending in Congress. And while many of those practices 

alone or in combination can lead a consumer into financial trouble, 

my focus today will be on the punitive practices of credit card companies once they get into trouble and once they are trying to get 

out of financial trouble by repaying their debts and avoiding bankruptcy. 

Rather than try to help payment troubled consumers with an affordable monthly payment that would reduce the balance owed, 

card companies do the opposite and jack up interest rates to a penalty rate, usually as soon as the consumer makes a late payment 

or exceeds the credit limit. These penalty interest rates can be as 

high as 30 to 40 percent. 

Another real contributing factor to this snowballing effect is all 

of the additional punitive fees like wire transfer fees, cash balance 

over-limit fees. Rather than assist borrowers who honestly seek to 

repay their debts, card companies really prefer to extract as much 

as they can during this period of time just before filing bankruptcy. 

As Professor Lawless said, in this 2-year period where they are 

struggling to repay their debts, they are actually being imposed 

with more fees. 

The chief counsel of the Comptroller of the Currency described 

this business model as, ‘‘The focus for lenders is not so much on 

consumer loans being repaid, but on the loan as a perpetual earning asset.’’ I would like to give you some examples of these that 

demonstrate this. 

One example is a Rhode Island senior who recently passed away, 

who went to Rhode Island Legal Services for advice on credit card 

problems. He was concerned because although he was paying more 

than half of his income each month on several credit cards, he 

seemed to be getting nowhere in paying off the payments, the balances. A review of his card statements confirmed his concern. At 

some point after he had stopped using his cards, excessive interest 

rates and other fees absorbed all of his payments and actually were 

increasing his balance. 

For example, his credit card statement in December 2006 showed 

that he had made a $200 payment in November of that year, 2006. 

However, an interest charge of $272.87 based on a 32.24-percent 

APR had been assessed, as well as a $39 late fee. Not only did his 

$200 payment not cover the periodic interest charges for the 

month, but it left him further behind by $111.97. You may ask why 

would anyone pay $200 only to get more than $100 behind. He 

eventually stopped making payments on his credit cards after realizing that repayment was impossible. He spent the last years of his 

life responding to collection actions. 

One widely publicized case in Ohio was very similar, almost— 

really even worse. This consumer had a balance of $1,963. She decided that she was not going to use the card anymore, and over the 

next 6 years paid to her credit card company $3,492 in payments. 

One might assume that would have paid off her debt completely. 

During the 6-year period before her account was sent to collection, not one penny of the $3,492 in payments went to reduce her 

debt. She was charged during that time $9,056 in interest, late 

14 

fees, and over-limit fees. Amazingly, after paying almost $3,500 on 

a $1,963 debt, her balance grew by another $5,564. 

There are many other examples of these, especially when claims 

are filed in bankruptcy, and we have examples of large portions, 

as much as 50 percent of the claims that are filed in Chapter 13 

cases on credit cards, consist of interest, late fees, and over-limit 

fees. 

The current economic crisis has made it even more impossible for 

many consumers to repay debts. Declining property values and the 

home foreclosure crisis have eliminated the option many consumers 

previously used to repay credit by cashing in on their home equity. 

Now more than ever, Congress should enact laws which encourage 

credit card companies to work with payment troubled consumers 

and, most importantly, to limit excessive interest and fees. Therefore, we strongly support the Consumer Credit Fairness Act, and 

thank you, Senator Whitehouse, for introducing that bill. It is a 

strong step in the right direction. 

Thank you again. 

[The prepared statement of Mr. Rao appears as a submission for 

the record.] 

Senator WHITEHOUSE. Thank you very much for your testimony, 

and thank you also for your work on behalf of consumers who are 

caught in this—the words that have been used include ‘‘trap,’’ ‘‘spiral,’’ ‘‘snowball.’’ It implies a very dynamic process in which the 

credit card companies are working pretty actively to keep consumers in—you described it as sort of that 2-year period. 

Professor Lawless, before the hearing, you told me about a colleague of yours who used the phrase ‘‘sweat box’’ to describe this. 

Would you describe for the record that term and how it is used? 

Mr. LAWLESS. Sure. That term comes from a law review article 

in the University of Illinois Law Review, ironically enough, called 

‘‘The Sweat Box of Credit Card Debt,’’ by Professor Ronald Mann, 

now at Columbia University. And his point is that the credit card 

companies, as John Rao has just pointed out, no longer use this 

model of lending and getting paid back. The old ‘‘It’s a Wonderful 

Life,’’ of getting repaid and making a little bit of money off the interest, that is gone. That time is gone. That is not the way consumer lenders work anymore. 

What was the phrase that was used? We want a perpetual 

asset— 

Mr. RAO. Perpetual earning asset. 

Mr. LAWLESS. Asset producing perpetual revenue. And that is the 

idea, the sweat box idea, is that when the credit card companies 

make the most money off of borrowers is when people are not in 

good enough shape that they are paying on time, but they are not 

in bad enough shape that they can file bankruptcy or need to file 

bankruptcy. Credit card companies make the most money when 

consumers are in the sweat box, as Professor Mann put it, when 

they are piling up the huge interest rates, piling up the big penalty 

fees. The longer the credit card companies can keep people in that 

sweat box, the more money the credit card companies are going to 

make. And the effect of the 2005 bankruptcy law—you know, we 

talk about the means test—but the real big effect of the 2005 bankruptcy law was to raise the cost of filing in terms of money and 

15 

time and hassle. When you raise the cost of something, people are 

going to use less of it. And what happened is that we pushed back 

the amount of time before someone is going to be desperate enough 

to file bankruptcy and keeping people in that sweat box longer. 

That has been the effect of the 2005 bankruptcy law. That is what 

I think the consumer credit industry wanted, and from our data, 

I think that is what they got. 

Senator WHITEHOUSE. Judge Small, one of the points that you 

made in your testimony was that pre-bankruptcy credit counseling, 

which was something that the banks argued for in the 2005 socalled reform, has not been effective and has the effect of delaying 

the day when they can get into the court and seek your protection. 

In the context of this revenue-producing asset model, in the context of this sweat box model, would it be fair to look at the mandatory pre-bankruptcy, pre-filing credit counseling as a time period 

that extends this sweat box in which they work the consumer? 

Judge SMALL. I think so. I think credit counseling has proven not 

to work at all. It is just another obstacle that debtors face to getting into bankruptcy. And I think the more obstacles you can take 

away, the better. 

Senator WHITEHOUSE. The card companies are not unsophisticated about this stuff. They must realize that credit counseling prefiling does not work, so presumably there is another motive. Does 

it make sense to you that keeping consumers in this so-called 

sweat box is that motive? 

Judge SMALL. It could very well be. It certainly has that effect. 

You might ask, why would a debtor stay in this sweat box for a 

couple years when he has got all this debt that he really cannot 

pay, even at the regular interest rates? We see debtors all the time 

that have $30,000, $40,000, $50,000, $60,000 in credit card debt. 

Sometimes that is what their annual income is. At 18 percent, how 

are they ever going to pay that off? Well, probably they cannot. 

But people believe in paying their debts. There is a 

misperception that debtors are abusing the bankruptcy system. 

Well, I can tell you that the debtors that come into my court do 

not want to be there. That is the last place they want to be. They 

want to stay away from bankruptcy. They want to pay their debts. 

And most of them are walking the tightrope. They are making the 

minimum payments. They are doing the best they can to meet their 

obligations and not get into bankruptcy. Then they get behind on 

one payment, and under a universal default, then their interest 

rate goes from 18 percent up to 29 percent, and that can be on all 

their credit cards. Then at that point I think they realize that there 

really is no way I am going to be able to make it, and they go into 

bankruptcy. 

There is another factor here, too. These people are proceeding in 

good faith, trying to pay their debts, and once they get hit with all 

these late charges, the universal default fees, they feel like, well, 

gee, why am I doing this? Why am I killing myself trying to pay 

all this debt when they are not helping me at all, in fact, they are 

working against me? 

Senator WHITEHOUSE. One of the explanations for some of this, 

Professor Chung, that I have heard—and I would love to hear your 

comment on this observation—is that different credit card compaVerDate Nov 24 2008 10:41 Apr 03, 2009 Jkt 048088 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\48088.TXT SJUD1 PsN: CMORC
16 

nies are aggressive to different degrees, but that the worst of them, 

the ones who are most aggressive, the one who comes up with the 

most clever and diabolical traps, have the effect of increasing their 

revenues and, in effect, driving the market, and that other credit 

card companies that may not have wished to take that step now 

feel obliged to match the market and follow along, and that there 

is sort of a bad-actor, follow-the-leader phenomenon that is taking 

place. And the further observation that was made to me about that 

is that there is no logical end in sight to that unless somebody 

steps in and does something. I would like your observation on that. 

Mr. CHUNG. Well, I agree with that last observation completely. 

Until someone intervenes—and by ‘‘someone,’’ I mean the Federal 

Government—I do not see an end to these sorts of practices. 

I wish I knew how the inner mechanisms of the credit card industry worked, but I am sure it works along the line of viewing 

these loans as this perpetual revenue-generating asset. That is the 

only way it makes sense in terms of why they do these things. And 

as Professor Lawless mentioned, it has really gotten past the point 

of—the lenders do not even seem to care if the principal is ever 

paid back. 

I think what is motivating lenders is that as long as some sort 

of payment is being made on the loan, then it does not have to go 

into a special category as a delinquent asset or become some sort 

of special asset. As long as they can keep it on their books as a 

good asset, that is all they care about. 

My guess is that they do not care about the amount of the indebtedness. All they care is that there is some sort of partial debt 

service going on. And, in fact, in terms of the examples of Mr. Rao, 

you have this increasing debt load, but instead of it being a problem loan—I think a common-sense line of thinking would say, Well, 

isn’t that a problem if the debt just keeps going up? Well, yes, if 

you ask the average person common sense-wise, yes, that seems 

like a problem. But from the credit card issuer’s perspective, that 

is not a problem. That is exactly what they want because that is 

where the money is. 

And so I think the credit card issuers are following each other’s 

business models, and really the maximization of profit lies in the 

people who are unable to pay down the debt but are able to service 

part of it. And they do not really care how long, or if ever, that 

principal is outstanding because they can always record these as 

being good assets on the books with income coming in every year, 

and to the extent that the principal grows, that means our assets 

are growing. So, actually, from their balance sheet perspective, it 

is actually a good thing if the credit card debt keeps going up. 

So if that is how the business model works, then, you have some 

really, I think, unwise incentives—I mean in terms of societal incentives—regarding debt growth. The government should step in to 

unwind or to undo these really unwise incentives because no private participant will do on its own. 

Senator WHITEHOUSE. If you go back to Mrs. Owens, she is a good illustration of that. She owed $1,963. Over 6 years she paid 

back $3,492. In your testimony, you calculated that that would be 

payment of 100 percent of principal and an effective interest rate 

of 21 percent, which is a pretty good return to a lender. And yet 

17 

at the end of that exchange, the effect was not that Mrs. Owens 

had paid off her debt and the lender had made 21 percent and everybody was happy. It was that she still owed—what was it?— 

$5,564 that I suppose the credit card company, in addition to having made 21 percent, could then write off as a loss on that account. 

Mr. RAO. That is right. As Professor Mann has shown, that 

model works so well because they have essentially recovered all 

of—all of the charges that Ms. Owens made have been paid. So everything essentially after a certain point is just absolutely pure 

profit, especially when you look—and what he looks at in his work, 

which is very interesting, is that the cost of borrowing, especially 

over the past 5 years or so, has been really quite low. For the credit 

card companies, they are borrowing their own at 3 percent, and 

they are now charging 30 percent to the borrower. So, clearly, this 

is a model that works very well for them in terms of the profit. 

Judge Small also mentioned that a lot of times when consumers file, they may have $30,000 or $40,000 in credit card debt. And 

when you look actually at how much—and to a lot of the individuals in the audience who may think, Well, how could it get that 

large? Why could someone have $30,000, $40,000 in unsecured 

credit card debt? In many of these cases, if you look at each card, 

it may be that there is only about $4,000 or $5,000 of actual 

charges on them. These debts grow quickly at these interest rates. 

In the case of the Rhode Islander that I mentioned, when he 

stopped paying his credit card, it then had increased to about 

$9,000. Within a year and a half, it had been transferred to several 

debt collection companies and had grown to $15,000. Just in a year 

and a half, it had grown that much. So, you know, when you look 

at a bill and you say, well, that is $14,000, it may only be $5,000 

of actual card use. 

Senator WHITEHOUSE. You are in this market in Rhode Island 

day to day. As the economic stress that we are experiencing nationally has really focused hard in Rhode Island and made it so hard 

on families, what are you seeing in your practice? Are you seeing 

a change? 

Mr. RAO. Well, actually, my practice is more actually now based 

on where I work in Boston, but I do work with the attorneys at the 

Rhode Island Legal Services. Certainly the biggest problem right 

now is the home foreclosure problem. That is the thing especially 

what they are dealing with quite a bit. But there is a relationship 

between the credit card problem and the foreclosure. There are 

some very important reasons why we are in the foreclosure problem that we have. But for some consumers, they have gotten into 

this problem because they have used their house as a way to deal 

with credit card debt. They have gotten home equity. They have 

borrowed on their house to pay off credit card debt over the past 

10 years. And, in fact, even after they get these mortgages, sometimes they will be paying—they will be diverting payments that 

should be going to the mortgage to pay credit card companies at 

these 30-percent interest rates and falling into default on mortgages. 

So all of this credit problem picture is very much tied together, 

and it is hard to look at one without the effect on the other. 

Senator WHITEHOUSE. And it appears to be expanding. 

18 

Mr. RAO. Absolutely. 

Senator WHITEHOUSE. Walk me through the steps that take 

somebody up to one of these exorbitant interest rates. You get the 

solicitation in the mail. It says, I do not know, 10.9-percent APR 

in great big print. It has got a 20-page contract behind it. You sign 

it, you send it off, and before you know it, you are paying an effective interest rate of 30, 40, 50 percent once you put in late penalties and fees. 

How does that happen? Walk me through a sort of generic scenario of Joe Debtor getting clobbered. 

Mr. RAO. Well, sadly, Senator, I wish it were a long story in 

which there was a lot to really describe. But again, sadly, the scenario is something that can be described very quickly. In that situation—you know, for a lot of consumers who actually do not use a 

credit card for convenience purposes and pay off their balances, 

there is not a problem. But for the consumers who are struggling, 

a lot of the lower- and middle-income families, they will get that 

credit card. It might be fine for 2 or 3 months, 6 months if they 

are lucky. But as soon as there is a late payment, that is it. All 

it can simply take is being late with a payment. And even there, 

there are so many tricks in terms of late payment. 

We were involved in a case where we were able to show that the 

credit card company had had a policy in which your—let’s say your 

payment was due on the 17th of the month, and you posted it in 

a way so that it would be received on the 17th of the month. It 

would be late if it was received by the credit company at 11 a.m. 

that day because their cutoff time was 10 a.m. that day. Now, most 

consumers would think I have until the end of the business day, 

5 o’clock or 6 o’clock, to make that payment. Well, those are the 

kinds of practices that get consumers to get behind, and all it takes 

is that one late payment, and now they are being jacked up to a 

much higher interest rate. 

So I wish there was a much longer description of what it takes 

to get into trouble, but sometimes it really does not take much at 

all. 

Senator WHITEHOUSE. Is there a list of these various tricks and 

traps that you have assembled? I mean, that is pretty inventive, 

to have a 10 o’clock in the morning cutoff. They have probably figured out when the mail is delivered, which is at 11:00. 

Mr. RAO. Actually, I have to say that the Federal Reserve Board 

and the other agencies are trying to crack down on those very policies. And, in fact, there is a proceeding pending right now which 

will try to prevent that kind of thing from happening. But, yes, 

there are many of those kinds of examples of different types of— 

Senator WHITEHOUSE. Professor Lawless, you wanted to add 

something? 

Mr. LAWLESS. Yes. You started off with a 10-percent APR. That 

is not what the solicitation is going to say. It is going to say zeropercent APR. These traps and tricks are trade secrets in the consumer credit industry. Elizabeth Warren, a name we have invoked 

a few times here today, has estimated that the consumer credit industry does 400 to 500 experiments a year to try to figure out what 

makes people sign up for these credit solicitations. The consumer 

credit industry knows better than you or I do how we are going to 

19 

use our credit cards. So the deck is already stacked before that envelope is opened. 

Senator WHITEHOUSE. How much disclosure is there of all of 

that? 

Mr. LAWLESS. Well, there is the same disclosure we all see, 

which is a couple of pages of very fine print that you need a magnifying glass to read and that even a law professor often cannot understand. I have tried to read these credit agreements myself, and 

it takes me 45 minutes to try to decipher it. The idea that disclosure is going to solve the problem is a myth, is a fairy tale. It is 

not going to— 

Senator WHITEHOUSE. But I mean in terms of their research and 

their product, that is all proprietary and they will not let any of 

that— 

Mr. LAWLESS. Oh, the disclosure of that, those are all trade secrets. We have no idea. One thing you mentioned earlier—it would 

be a great help to university researchers and people trying to study 

this. We had a conference at the University of Illinois last May. We 

assembled scholars from all over the world that work on consumer 

debt, and this was where this point was made about 400 to 500 experiments being run by the consumer credit companies. We were 

celebrating people that had run a couple experiments a year. We 

need more disclosure from the consumer credit industry about what 

they are charging to people, how much people are paying. 

We do not know, for example, right now what the average rate 

is that is being paid on credit cards. Data is reported to the Federal 

Reserve, but only in the aggregate. So we do not know these slices 

of the very high default rates. And one of the things I would encourage Congress to take a look at is forcing more disclosure on the 

consumer credit industry so people like myself, people at universities, people who are not paid by either side, can look at these 

data and try to make sound policy prescriptions. 

Senator WHITEHOUSE. Let me ask one last question, and then 

open it to any public comment or question that we may have, and 

that is, there has been—we have kicked around in Washington a 

certain amount the idea of a Financial Product Safety Commission 

along the lines of the Consumer Product Safety Commission. If a 

toaster is defective, the Consumer Product Safety Commission will 

have something to say about it, and yet these highly complex, as 

you have described, financial instruments that even lawyers have 

trouble understanding are marketed across the country to people 

who have no real way to look into it themselves. And there really 

does not seem to be an institution that can attach a warning to it 

and say, look, here is the real deal, this is not approved, this is not 

legitimate, this is a dangerous product, you will face these consequences if you enter into it. 

Do you think that sort of an idea makes sense? 

Mr. LAWLESS. Well, I guess I have to respectfully disagree on 

that one. I see the same problems that have led the proponents of 

that sort of commission to propose it, but for the same reasons that 

disclosure is not working now, I think sticking a warning label on 

something is not going to work. Instead, I think ideas like your 

Consumer Credit Fairness Act that gets in and gets at the root of 

the problem, which is the price that is being put on the consumer 

20 

credit, would be a better way to go. I think substantive regulation 

that cracks down on these practices in the long run will be more 

effective than another regulatory commission that is going to be 

battling the consumer credit industry. It is going to be a stacked 

deck if you are going to have a government agency against one of 

the Nation’s largest industries that is one of the Nation’s best industries at tricking consumers into signing up for their high-cost 

products. 

Senator WHITEHOUSE. Well, with that, let me call the official 

part of the hearing to a conclusion. I thank the witnesses for their 

testimony and remind them that the hearing remains technically 

open for another week if anybody wishes to supplement their testimony in any way. 

We are now officially adjourned. 

[Whereupon, at 3:14 p.m., the Committee was adjourned.] 

[The submissions for the record follows.] 

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