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CONSUMER DEBT: ARE CREDIT CARDS

BANKRUPTING AMERICANS?

HEARING

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

APRIL 2, 2009

Serial No. 111–9

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://judiciary.house.gov 

(II)

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR.,

Georgia 

PEDRO PIERLUISI, Puerto Rico 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

CHARLES A. GONZALEZ, Texas 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

DEBBIE WASSERMAN SCHULTZ, Florida 

DANIEL MAFFEI, New York 

[Vacant] 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM ROONEY, Florida 

GREGG HARPER, Mississippi

PERRY APELBAUM, Majority Staff Director and Chief Counsel 

SEAN MCLAUGHLIN, Minority Chief of Staff and General Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

STEVE COHEN, Tennessee, Chairman 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

DANIEL MAFFEI, New York 

ZOE LOFGREN, California 

HENRY C. ‘‘HANK’’ JOHNSON, JR.,

Georgia 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

JOHN CONYERS, JR., Michigan 

TRENT FRANKS, Arizona 

JIM JORDAN, Ohio 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

HOWARD COBLE, North Carolina 

STEVE KING, Iowa

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III)

C O N T E N T S 

APRIL 2, 2009

Page 

OPENING STATEMENTS 

The Honorable Steve Cohen, a Representative in Congress from the State 

of Tennessee, and Chairman, Subcommittee on Commercial and Administrative Law ........................................................................................................... 1

The Honorable John Conyers, Jr., a Representative in Congress from the 

State of Michigan, Chairman, Committee on the Judiciary, and Member, 

Subcommittee on Commercial and Administrative Law .................................. 2

The Honorable William D. Delahunt, a Representative in Congress from 

the State of Massachusetts, and Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 3

The Honorable Trent Franks, a Representative in Congress from the State 

of Arizona, and Ranking Member, Subcommittee on Commercial and Administrative Law .................................................................................................. 4

WITNESSES 

Mr. Adam J. Levitin, Associate Professor of Law, Georgetown University 

Law Center 

Oral Testimony ..................................................................................................... 8

Prepared Statement ............................................................................................. 11

Mr. David C. John, Senior Research Fellow, Thomas A. Roe Institute for 

Economic Policy Studies, The Heritage Foundation 

Oral Testimony ..................................................................................................... 23

Prepared Statement ............................................................................................. 25

Mr. Brett Weiss, Attorney, Greenbelt, MD, on behalf of the National Association of Consumer Bankruptcy Attorneys 

Oral Testimony ..................................................................................................... 32

Prepared Statement ............................................................................................. 34

Mr. Edmund Mierzwinski, Consumer Program Director, U.S. Public Interest 

Research Group 

Oral Testimony ..................................................................................................... 41

Prepared Statement ............................................................................................. 43

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Material Submitted for the Hearing by the Honorable Trent Franks, a Representative in Congress from the State of Arizona, and Ranking Member, 

Subcommittee on Commercial and Administrative Law .................................. 5

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Response to Post-Hearing Questions from Adam J. Levitin, Associate Professor of Law, Georgetown University Law Center ........................................... 88

Response to Post-Hearing Questions from Brett Weiss, Attorney, Greenbelt, 

MD ......................................................................................................................... 90

Response to Post-Hearing Questions from Edmund Mierzwinski, Consumer 

Program Director, U.S. Public Interest Research Group .................................. 91

(1)

CONSUMER DEBT: ARE CREDIT CARDS 

BANKRUPTING AMERICANS? 

THURSDAY, APRIL 2, 2009

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 3 p.m., in room 

2141, Rayburn House Office Building, the Honorable Steve Cohen 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Cohen, Conyers, Delahunt, Maffei, 

Franks, Coble, and Forbes. 

Staff Present: James Park, Majority Counsel; Michone Johnson, 

Majority Chief Counsel; and Daniel Flores, Minority Counsel. 

Mr. COHEN. This hearing of the Committee on the Judiciary, 

Subcommittee on Commercial and Administrative Law, no longer 

known as CAL for that reminds me of Calipari, amongst other 

things, will now come to order. 

Without objection, the Chair will be authorized to declare a recess of the hearing if necessary. I will recognize myself for a short 

statement. 

Today’s hearing on credit card practices and bankruptcy is the 

first in a series of hearings that the subcommittee plans to hold on 

how America has reached the present economic crisis that we are 

in today and whether our Nation’s bankruptcy system is prepared 

to help us weather this crisis, and whether it contributed to the crisis as well. 

Americans’ credit card debt has grown exponentially over the 

past two decades. In 1990 the average American household’s credit 

card was $2,966, approximately $3,000. By 2007 that number has 

jumped to $9,840, almost $10,000. That is 3,000 to 10,000, and that 

is 33 percent. 

Moreover, Americans are finding it harder to pay down their 

credit card debt. Charge-off rates, the amount of debt determined 

uncollectible by the original creditor, divided by the average outstanding credit card balances owed to the issuer were 40 percent 

higher in January 2009 than they were in the year before. And 

credit card debt that was at least 30 days late totaled 17.6 in October, 2007. That was up 26 percent from the previous year. And of 

course as unemployment goes up and the economy gets worse, 

these rates will get worse, too. 

2

There are many reasons why people accumulate credit card debt. 

Many attribute personal debt to overspending or living beyond 

one’s means. However, credit card debt often results because of 

household bills that accumulate due to a loss of job or colossal medical bills. Increasingly, predatory lending tactics and irresponsible 

lending is a large contributor to climbing credit card debt we have 

in this country. 

This hearing of the subcommittee will examine some of the more 

abusive credit card lending practices that may exacerbate the burden borne by credit card debtors. Such practices include excessive 

penalty fees and interest rates, aggressive marketing to financially 

vulnerable groups, hidden charges, changes to credit limits, and 

unilateral change-in-terms provisions. 

We will explore how well the bankruptcy system is protecting 

debtors who have been pushed into bankruptcy due to credit card 

debt. Part of this inquiry will include an examination of post-bankruptcy conduct by credit card lenders and debt buyers and how 

that conduct might be subverting the purpose of the bankruptcy 

law to provide debtors with a ‘‘fresh start.’’

The subcommittee will also touch upon how the 2005 amendments to the Bankruptcy Code, particularly, are affecting such 

debtors and whether those changes deny bankruptcy relief to those 

who need and deserve it the most. 

Accordingly, I look forward to today’s testimony. And I would if 

Mr. Franks was here recognize him for his opening remarks. I recognize the distinguished Chairman, the venerable John Conyers. 

Mr. CONYERS. Thank you, Chairman Cohen. This is an important 

hearing. One of the things that we are going to look at is credit 

card practices that have pushed people to the brink of bankruptcy, 

aggressive marketing to financially vulnerable borrowers. 

Do any of you witnesses want to guess how many credit cards 

my son in his first year at Morehouse has received that I don’t 

know about? I can tell you the ones that I have intercepted, but 

there are probably some others out there. 

Over-aggressive marketing, exorbitant penalty fees and interest 

rates, that is a scandal in itself. Unilateral changes in terms of the 

credit card agreements frequently without notice to the borrower. 

And then I think that the subcommittee, number 5, can appropriately look at the bankruptcy changes as applies to consumers 

that were wrought in 2005. You can’t hold the Chairman responsible for those. 

Means tests indiscriminately blocking debtors from relief without 

successfully weeding out abuse. Means tests. 

Credit counseling requiring added costs, according to the GAO, 

and may not be all that effective anyway. 

Increased filing fees that put bankruptcies out of reach for the 

very people that might need it. 

And finally, can the bankruptcy system handle credit card users 

who now have unsustainable debt that are hitting the courts in 

record numbers in the face of a decreased number of bankruptcy 

judges. 

And then finally, the U.S. trustees who should be weeding out 

creditor abuse with greater effectiveness than they seem to be. 

So we welcome you witnesses here. 

3

Mr. COHEN. Thank you, Mr. Chairman. If other Members have 

statements we will have——

Mr. DELAHUNT. I have a statement. 

Mr. COHEN. Yes, sir, the distinguished vice Chairman and Congressman from the Cape is recognized. 

Mr. DELAHUNT. The Cape and the islands. 

Mr. COHEN. Pardon my sleight. 

Mr. DELAHUNT. Chairman Conyers’ recount of the problems that 

currently exist really runs contrary to what was represented to this 

Committee when the Bankruptcy so-called Reform Act of 2005 was 

passed. We were told that interest rates would be lowered. We 

were told a whole variety of practices would no longer occur, and 

yet that is really not the case. 

There was a Business Week magazine story in 2008 that found 

that the Bank of America sent letters notifying responsible cardholders that it would more than double their rates to as high as 

28 percent without providing an explanation for the increase, and 

to opt out of the card borrowers had to write—the burden was imposed on them to write to the Bank of America that they planned 

to no longer use their card and instead to pay off the balance at 

the old rate. In other words, if you read that piece of paper that 

nobody reads when it comes from the credit card company, you 

would be aware of that. And when making the decision to raise 

rates, Bank of America used internal criteria that it didn’t make 

available to the public. How did it happen? And yet when pressed, 

no information was forthcoming. Talk about opaque, talk about 

lack of transparency. 

As the Chairman knows, I sat with him during the course of 

multiple hearings over a 6-year period and despite our opposition 

the Bankruptcy Reform Act passed. And yet nothing has changed 

except there is more debt on people who can ill afford it. I had 

hoped that in that agreement, not in the agreement but in the contract of terms and conditions there would have eliminated the provision that says that the credit card issuer can change their terms, 

other conditions, at any time they want for any reason. Just do it 

on their own because of some whim or maybe the need for significantly increased products. 

So I went out and took a look at a Bank of America contract—

not a contract, but the terms and conditions because you can’t find 

the contract. I will get into that later. You have to get the card before they will give you a copy of the contract. It is a new theory. 

It must be a brand new legal theory. I went to law school many, 

many years ago, and my memory is, and somebody can correct me, 

that it required a meeting of the minds. That is very simple. But 

I did well in contract law and I—you know, things must have 

changed. But this is recent, and what does it say? This is at the 

very end of the terms and conditions. My eyesight of course is 

going, too, along with my memory. 

‘‘All account terms are governed by the credit card agreement account, and agreement terms are not guaranteed for any period of 

time.’’ You have got to remember now this is at the end. This is 

at the bottom of a lengthy number of pages. ‘‘Are not guaranteed 

for any period of time, all terms, including the APRs and fees, may 

change in accordance with the agreement and applicable law.’’ 

4

Now, this is really interesting: ‘‘We may change them based on information in your credit report, market conditions, business strategies or,’’ and I had this done in red, ‘‘or for any reason.’’ Or for any 

reason. 

Let me suggest, Mr. Chairman and Mr. Conyers and to my 

friends on the other side of the aisle, this is not a good business 

practice. This is not treating the American consumer in a way that 

is fair and equitable, and I would submit that it is time and I hope 

you, Mr. Chairman, with the support of Mr. Conyers and other 

Members, all of us on both sides of the aisle, take a good hard look 

at the bankruptcy law and reform the Reform Act of 2005. 

With that, I yield back. Thank you. 

Mr. COHEN. Thank you. I appreciate it. We now have Mr. Franks 

here, the distinguished Ranking Member from Arizona, and I recognize him for his opening remarks. 

Mr. FRANKS. Thank you, Mr. Chairman. I appreciate the use of 

the microphone. Without objection, I would like to place the letter 

from the American Bankers Association in the record would. That 

be all right? 

Mr. COHEN. Without objection. 

[The information referred to follows:]

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Mr. FRANKS. Mr. Chairman, I apologize for being late. I was dutifully and on time waiting for the hearing to begin in the wrong 

hearing room. So I appreciate your allowing me to go ahead and 

give a statement. 

I want to welcome our witnesses here and I look forward to an 

informative hearing. 

I have to say sincerely that the title of this hearing strikes me 

as a little curious. Quote: ‘‘Are credit cards bankrupting Americans?’’ is the title and I am tempted to check my calendar and 

make sure April Fool’s really has passed here because if we are 

going to believe that credit cards are bankrupting America, I don’t 

know what we won’t believe. Credit cards don’t bankrupt Americans. They don’t. It is that simple. I know that there are accusations that some credit card companies have engaged in some aggressive practices, and, for example, I have heard reports of credit 

card companies imposing high default interest rates once a credit 

cardholder has missed a single payment, and I want to hear about 

credit card company excesses if they are occurring. I think that is 

a very appropriate topic. 

But by and large, the effect of a credit card of the credit card 

holder is in the credit cardholders hands, literally. It is up to the 

cardholder in every instance whether to use a credit card to make 

a purchase. As long as the purchase is within the credit cardholder’s credit limit, who is to fault the credit card company for approving the purchase? And once that bridge has been crossed, the 

cardholder of course owes back the money. If paying back the 

money is not possible, who is to blame? The credit card company 

that relied on the cardholder’s good faith or the cardholders who 

knew they were going over the line as they swiped a card, awaited 

the authorization, and completed the sale? What else are we to do 

honestly other than to hold a credit cardholder responsible for his 

or her own decisions? 

Should the credit card companies simply not grant credit cards 

to anyone below a certain income level? Should the credit card companies grant the cards but set everyone’s credit limit so low that 

no one can ever possibly get in trouble? Should they grant cards, 

set reasonable limits, but then revoke the card at the slightest hint 

of trouble, demanding immediate payment? Should they leave limits in revocation terms where they are now but make sure that the 

interest rates, including default interests rates, accurately reflect 

the risk? Or should they just issue cards under terms that provide 

them with no protection against risk and stand idly by letting cardholders charge until they file for chapter 7 bankruptcy, watching 

cardholders pass the chapter 7 means test, and watching bankruptcy courts wipe out the cardholder’s unsecured credit card debt? 

I mean these are—I am afraid these are the options. And in all 

seriousness, what are the credit card companies to do and still offer 

credit cards to cardholders? If that is the last option, I can pretty 

much tell you that we have seen the end of the days of consumer 

credit in America. 

Now, our distinguishing Ranking Member on the Judiciary Committee, Mr. Smith, has a saying that characterizes the approach of 

too many lawmakers to too many economic issues these days. He 

said, it is ‘‘punish the successful, tax the rich, and hold no one acVerDate 0ct 09 2002 11:43 Jun 05, 2009 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 H:\WORK\COMM\040209\48440.000 HJUD1 PsN: 48440
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countable.’’ I don’t know if anything could better summarize what 

appears to be the effect of the hearing. 

So I have to with that, Mr. Chairman, yield back my time. 

Mr. COHEN. Thank you, Mr. Franks. I am now pleased to introduce the witnesses, and we look forward to your testimony. I thank 

everybody for participating in today’s hearing. Without objection, 

your written statements will be placed in the record and we ask 

that you limit your oral statements to 5 minutes. I think there is 

a lighting system in this room. Do we have a lighting system? Do 

you see a green light? There is supposed to be one. Green says you 

are on for 5 minutes, yellow says you have got a minute left, and 

red says you are supposed to be finished by then. 

After each witness has presented his or her testimony, the subcommittee Members will be allowed to ask you questions subject to 

the same 5-minute limitation. 

Our first witness is Mr. Adam Levitin. Professor Levitin specializes in bankruptcy and commercial law. Before joining the Georgetown faculty, Professor Levitin practiced in the business finance 

and restructuring department of Weil, Gotshal & Manges, limited 

partnership, in New York. He also served as Special Counsel for 

Mortgage Affairs for the Congressional Oversight Panel and as 

Law Clerk to the Honorable Jane Richards Roth on the U.S. Court 

of Appeals for the Third Circuit. 

Professor Levitin’s research focuses on financial institutions and 

their role in the consumer and business credit economy, including 

credit card regulation, mortgage lending, identity theft, DIP financing, and bankruptcy claims trading. 

Thank you, Professor. I appreciate your testimony and I allow 

you to go forward. 

TESTIMONY OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF 

LAW, GEORGETOWN UNIVERSITY LAW CENTER 

Mr. LEVITIN. Good afternoon. My name is Adam Levitin, and I 

am, as you said, an associate professor of law at Georgetown University Law Center, and a lot of my research focuses on credit 

cards and bankruptcy. 

The first point I wish to make today is that credit card debt is 

a major factor in consumer financial distress and bankruptcy. 

While there are good questions, as Representative Franks raised, 

about why consumers have so much credit card debt, there is no 

question that credit card debt plays an important role in consumer 

bankruptcies. The average consumer bankruptcy filer has something on the nature of seven times as much credit card debt as the 

typical consumer. 

To be sure, some of this debt is a function of the macroeconomic 

problems of the American family. The cost of housing, the cost of 

health care, the cost of education, these are things that are squeezing American families, and as American families get squeezed and 

have less and less ability to pay out of their salaries, which have 

been stagnant, credit card debt is undoubtedly becoming a form of 

consumer financing. 

That said, it is important to know that the relationship between 

card issuers and consumers is not simply one of the card issuer 

making a fair offer to the consumer and the consumer having the 

9

ability to take the offer or not. It is not—as Congressman Delahunt 

was pointing out, this does not look like the traditional contract 

law meeting of the minds situation; that we have a cardholder 

agreement that doesn’t look anything like one in a law school class 

would teach as a contract; that if you were to present this to a 

classroom of first-year law students taking contract law, they 

would say no, this isn’t a contract, this is an illusory agreement, 

that the cardholder hasn’t agreed to anything. They have agreed to 

whatever the card issuer wants. They can be changed at any time 

for any reason and even in many cases applied retroactively. 

That is not a contract. This cardholder agreement, the form of it, 

is an essential part of the credit card business model, and the credit card lending business model is not like the traditional lending 

model, and this is very important. The traditional lender lends out 

money and expects to get the principal repaid and to make a profit 

from the interest, and that is a model we have had for thousands 

of years. We know how it works and it is a core part of capitalism, 

and it is a model that we should want to see. 

The credit card industry has come up with a new and really 

much more problematic lending model. It is what Ronald Mann at 

Columbia Law School terms the ‘‘sweat box.’’ And the sweat box 

model does not aim to have the principal repaid. Instead, the sweat 

box lender lends out some money, the principal, and is hoping to 

make back enough money in interest and fees that even if the consumer defaults and never pays back that principal, that principal 

gets discharged in bankruptcy, the lender has still made a profit. 

If you are able to do sweat box lending, you need to do it with having high interest rates and high fees and by keeping the consumer 

in that sweat box as long as possible. The longer you can keep him 

in the sweat box, the more profitable it will be. 

And for sweat box lending, you don’t have to be super careful 

about who you lend to. You can lend to people who you know will 

not be able to repay the principal. And this explains a lot of what 

we see with indiscriminate credit card lending. That credit card 

lenders—every credit card loan is a liar loan. We worry about liar 

loans in the mortgage context, and we have seen what that has 

wrought. Every credit card loan is a liar loan. There is virtually no 

income verification for credit cards. Credit cards check—and when 

you apply for a card, they are going to check your FICO score or 

something like that, but that only indicates whether you have paid 

your past bills on time. That doesn’t say anything about your assets. It doesn’t say anything about your income. It doesn’t really 

tell them much about your future ability to repay. 

So we have an industry that is making liar loans, and they are 

able to do this in part because of the sweat box model, in part because of things like interchange fees, which they get an up-front fee 

on every transaction; so that is going to cut away on some of the 

losses on defaults; and in part because securitization structures in 

credit cards give the issuer all of the upside and only a fraction of 

the downside risk. 

Where does this fit with bankruptcy? The 2005 bankruptcy 

amendments. One of the chief things about the means test was 

that it imposed delay on bankruptcy filings, and delay is key because for the sweat box lending it means that the consumer is in 

10

the sweat box lending longer and that means that the card issuer 

is able to milk out a few more payments and that just adds to the 

profit even if the principal is never repaid. 

So how does the means test add to delay? Well, first of all, the 

means test means that if you are going to file for bankruptcy you 

have to have pretty extensive documentation of your income, and 

that can be a problem for a lot of consumers. A lot of consumers 

don’t keep good records. I am willing to bet that most of the people 

in this room don’t keep extensive past financial records. Yet that 

is what you need to have if you want to go before a court and get 

your way and file for chapter 7. 

Additionally, and I see that my time is up, the means test adds 

cost and cost adds delay; that most people when—new research is 

showing that when people file for bankruptcy it is determined by 

when they are able to save up enough money to file. And by adding 

cost and delay, the means test benefits card issuers and supports 

a lending model that encourages lending to consumers who cannot 

realistically repay. So the 2005 bankruptcy amendments unfortunately are supporting predatory lending. 

[The prepared statement of Mr. Levitin follows:]

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PREPARED STATEMENT OF ADAM J. LEVITIN


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Mr. COHEN. Thank you, Mr. Levitin. 

Our second witness is Mr. David John. I understand Mr. John 

and Mr. Mierzwinski have to leave a little early? Mr. Weiss? Okay. 

Thanks. I hope it is not because you have to get to the post office 

to get your credit card paid, but whatever it is. 

Our second witness is Mr. David John. Mr. John is a Senior Research Fellow, Thomas A. Roe Institute for Economic Policy Studies 

of the Heritage Foundation. He has been published and quoted extensively in many major publications. He has also appeared on 

many other national and syndicated and radio and television shows 

regarding Social Security reform and retirement issues. 

Mr. John came to the Heritage Foundation from the Office of 

Representative Mark Sanford of South Carolina. He was the lead 

author of Sanford’s plan to reform Social Security by setting up a 

system of personal retirement accounts. His Capitol Hill service 

also includes stints in the offices of Representatives Matt Rinaldo 

of New Jersey and Doug Barnard, Jr. of Georgia. In the private 

sector he was Vice President at the Chase Manhattan Bank in New 

York, specializing in public policy development. In addition, he 

worked for 3 years as Director of Legislative Affairs at the National 

Association of Federal Credit Unions and worked as a Senior Legislative Consultant for the Washington law firm of Manatt, Phelps 

& Phillips. 

Thank you, sir. 

TESTIMONY OF DAVID C. JOHN, SENIOR RESEARCH FELLOW, 

THOMAS A. ROE INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION 

Mr. JOHN. Thank you for having me. I am not here to defend 

credit card companies. As a matter of fact, I have had my own bad 

experiences with them. I was overseas a few years ago and was 24 

hours late on a payment and got hit by a whopping fee and a rather substantial increase in my credit card rate. So this has not been, 

shall we say, a universally delightful relationship with my credit 

card company, and I only carry one. 

However, there are ways to deal with the issue and there are 

some proposals out there which actually would make things worse 

and would tentatively hurt the very individuals that I believe that 

most of the Members of this Committee most want to help achieve 

financial stability. 

Credit cards are expensive to operate. They are incredibly complex. Last Monday or 3 days ago I was at Heathrow in London flying on my way back to the U.S. and, needing a book for the flight, 

I went into a bookstore, pulled out my Visa card, and the transaction was approved in about 3 seconds or so. The intricate hardware necessary for such a transaction, not to mention billing me, 

et cetera, and it has already shown up on my record, is not something you can put together very quickly or very easily. I would 

argue that most of the problems that we are going to hear and 

have heard about have actually already been dealt with. They have 

been dealt with by regulations the Federal Reserve Board issued 

in December of this last year. They were also issued by the Office 

of Thrift Supervision and the National Credit Union Administration. And what these changes do is, among other things, make very 

24

comprehensive changes to the credit card statements, not the least 

of which making it very clear how long an individual will pay to 

pay off their balance if they only pay the minimum. It will also include a series of new consumer protections. It will include limitations on up-front fees, a longer period between the time that the 

statements are mailed and the payments are due, a 45-day notice 

period before higher rates come into effect, et cetera. And it bans 

explicitly certain of the practices that have been most a problem 

with the credit card industry. These include increasing rates on 

current balances and certain future balances, the idea that you 

would be paying off lower interest rate credit before you would be 

paying off higher interest rate credit, double billing cycles, et 

cetera, et cetera, et cetera. 

Now, these regulations which were developed extensively after 

long discussions with consumers and testing with consumers, and 

the like, are specifically aimed at solving the problems that the 

credit card industry has faced. And I believe that if you look at 

them, you will find that they basically answer virtually all of the 

problems that you are going to have raised today. However, there 

has been some complaint by the fact that they won’t go into effect 

for 18 months or so, and the reason for that is very simple, because 

it takes a long time to reprogram computers, retrain staff, et 

cetera. The last thing that you would want given the fact that 

there are penalties of up to a million dollars a day for violating 

those regs is to have someone on your staff give somebody the 

wrong information and therefore find yourself liable for that penalty. 

If you look at the bankruptcy laws that have been passed in 

2005, for instance, you can look at the means test, and one proposal that came out would basically exempt anyone from the means 

test who has one high interest loan. What I am most worried about 

here is the fact that lower income customers, first-time borrowers, 

and people who have impaired credit histories need to rebuild their 

history. If you build the cost of the credit card industry too much, 

these are people who are going to simply find themselves closed out 

of new credit and they are going to be forced to go to the check 

cashing agency down the street or some other low reputable borrower—or lender. Excuse me. This would be a serious mistake. The 

last thing you want to do is to take some sort of action that makes 

the problem worse for the very people that you should be interested 

in helping. 

Thank you. 

[The prepared statement of Mr. John follows:]

25

PREPARED STATEMENT OF DAVID C. JOHN


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Mr. COHEN. Thank you, sir. I am going to move to Mr. Weiss just 

in case there is a time limit. 

Mr. Brett Weiss is our next witness. He currently heads the 

Bankruptcy and Insolvency Group at Joseph, Greenwald & Laake, 

a Greenbelt, Maryland firm founded in 1968. He has experience in 

chapter 7, 11, 13, and chapter 11 for business reorganizations. He 

has represented individual and corporate debtors and creditors in 

all phases of bankruptcy. He has received international media attention in connection with the bankruptcy cases that he has been 

involved in. He is an experienced litigator, having been involved in 

a number of cases of first impression concerning debtor and creditor rights. 

Mr. Weiss, I appreciate your testimony. 

TESTIMONY OF BRETT WEISS, ATTORNEY, GREENBELT, MD, 

ON BEHALF OF THE NATIONAL ASSOCIATION OF CONSUMER 

BANKRUPTCY ATTORNEYS 

Mr. WEISS. Thank you. Chairman Cohen, Mr. Franks, Mr. Conyers, Members of the Subcommittee,good afternoon. I am Brett 

Weiss, a bankruptcy attorney from Greenbelt, Maryland. I appear 

today on behalf of the National Association of Consumer Bankruptcy Attorneys, NACBA, which is the only organization dedicated 

to serving the needs of consumer bankruptcy attorneys and protecting the rights of consumer debtors in bankruptcy. NACBA currently has more than 3,700 members in all 50 States and Puerto 

Rico. 

I appreciate the opportunity to speak with you about an issue I 

hear about a lot from my clients: unfair and abusive credit card 

practices that drive them into bankruptcy. As a bankruptcy attorney, I have been helping people with money problems for over 25 

years. I have seen thousands of honest, hardworking, smart people 

fall into hard times due to three main reasons: medical issues, job 

problems, and divorce. These people don’t charge big screen TVs 

and expensive vacations to their credit cards. They charge medicine 

and food and gas to get to work and then find that the deal they 

thought they had with Visa or MasterCard was built on sand and 

the tide is coming in. 

Unlike virtually every other type of consumer debt, mortgages, 

car loans, bank loans, even payday loans, the small print on credit 

cards lets them change interests rates, payment terms, and fees 

after you borrowed money. By changing the rules in the middle of 

the game, credit card companies make sure they are the big winners, leaving consumers holding the short end of the stick. 

You have heard a lot about universal default. Miss one payment 

to one creditor and all of your credit cards jack up the interest rate, 

slash your credit line, and raise your minimum payment. 

A couple I spoke with on Monday was doing fine until the husband’s employer cut his salary in half. He missed one payment on 

one credit card, and the interest rate on another one went from 7 

percent to 24 percent. His credit line was cut by 80 percent, and 

his monthly payment tripled. The result: I have a new bankruptcy 

client. Good for me but bad for his family, the credit card companies, and the economy. 

33

If you think of credit card companies as manufacturers, the cost 

of their raw material, the money that they lend people who charge 

things, normally is the Federal funds rate, which is near zero. They 

take this nearly free money and loan it out at 7 percent if you have 

good credit, 18 percent if you don’t, and 30 percent or more if you 

miss a payment. Credit card companies are entitled to a fair return, not the excessive earnings from these high interest rates. 

But this isn’t enough. Fees generate huge profits for credit card 

companies. They represent 39 percent of revenue, up from 28 percent in 2000. Make a payment after the due date, pay a fee. Go 

above your credit limit even if the fee is what pushes you over, pay 

another fee. And how about those annual membership fees, cash 

advance fees, convenience check fees, balance transfer fees, additional card fees, payment fees, telephone inquiry fees, et cetera? 

One credit card company even charged a fee if you wanted to cancel your account. The result: Industry profits rose from $27.4 billion in 2003 to $40.7 billion in 2007. 

We know from research and experience that there is a strong 

link between bankruptcy and credit card debt. By the time most of 

my clients see me about filing for bankruptcy, they have already 

paid back all the money they originally charged, an equal amount 

in interest and fees, and they are working hard to try to pay down 

the third and fourth multiplier of their original purchase. 

I met with a client yesterday who stopped using her credit card 

3 years ago, has been making payments religiously since, and now 

owes more than she did when she started. This situation is far 

from unique, and I see it almost every day in my practice. 

We are encouraged that key Committees in both the House and 

the Senate considered legislation this week to stop the worst of 

these abusive practices and urge Congress to pass a bill and send 

it to the President for his signature. 

NACBA also supports S. 257, the Consumer Credit Fairness Act. 

Abusive credit card terms have always been unfair, but in a time 

of economic crisis when consumers can least afford it, these practices can devastate financially vulnerable families. Congress should 

take steps to stop these abuses. 

Thank you. 

[The prepared statement of Mr. Weiss follows:]

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PREPARED STATEMENT OF BRETT WEISS


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Mr. COHEN. Thank you, Mr. Weiss. I appreciate it. 

Mr. Mierzwinski. I have known Ed for some time. He is a consumer advocate and often testifies for Congress and State legislatures and with me at one time in Nashville on a panel I think on 

the Freedom Center; was it? 

Mr. MIERZWINSKI. Right. 

Mr. COHEN. He is the U.S. PIRG Consumer Program Director, 

consumer advocate with the National Association of State Public 

Interest Research Groups since 1989. He has co-authored numerous reports on consumer issues, ranging from the failure of cable 

television deregulation to privacy, identity theft, bank fees, predatory lending, and unfair practices, and product safety. He is often 

quoted in the national press and has appeared on network TV, 

NBC, Crossfire, ABC, et cetera. 

Mr. Mierzwinski is active in international consumer protection 

efforts and is a founding member of the Trans Atlantic Consumer 

Dialogue. 

We appreciate your being here, and would you please go forward 

with your testimony? 

TESTIMONY OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, U.S. PUBLIC INTEREST RESEARCH GROUP 

Mr. MIERZWINSKI. Thank you, Chairman Cohen, Mr. Franks, 

Chairman Conyers, Members of the Committee. It is a privilege to 

come here and talk to you about this important issue, and I am 

glad the Committee is holding this hearing. 

The credit card industry business model essentially is a license 

to steal. As has been pointed out by Mr. Delahunt and others, you 

can change the rules at any time for any reason, including no reason. You can change the rules even though you have got a 40-page 

contract. And credit card companies have ratcheted down the 

thumb screws on consumers since passage of the bankruptcy bill. 

As you pointed out, I started at U.S. PIRG in 1989. Just before 

I came to Washington, Congress passed the Truth in Lending 

amendment that resulted in the Schumer box, and that is legislation on credit card disclosure. After that bill passed, until the 

Maloney Credit Cardholders’ Bill of Rights passed the House last 

Congress, no bill opposed by the credit card industry even moved 

out of the Committee, was even voted on in a Banking Committee 

of the Congress from 1989 until 2008. At the same time, there was 

no legitimate regulation of the credit card industry. The OCC, the 

Office of the Comptroller of the Currency, as the industry consolidated and the biggest companies took over most of the business—

eight companies now control well over 80 percent of the credit card 

industry—the OCC has taken a lax attitude toward regulation. I 

am not—if I were a credit card company I would not be afraid of 

these million dollar penalties that are written into the banking 

laws. The OCC has not imposed a penalty on a big credit card company since the year 2000 and has never imposed a public penalty 

on Citibank, Chase, or Bank of America. So the credit card companies can do what they will. The OCC has preempted State Attorney 

General enforcement. And there is one other clause in credit card 

contracts, and that is the clause that says you are forced to go to 

42

mandatory arbitration even if you do have a problem. So they have 

taken away private enforcement. 

So again the credit card industry is a very powerful industry. 

The profits of the credit card industry have been very substantial. 

They are larger than the profits for any other line of banking, and 

that is according to Federal Reserve reports, not according to consumer group reports. 

The issue of whether or not changing credit card company rules 

would affect credit available to lower income and moderate income 

Americans is one that we disagree with. We believe that the credit 

card industry does not make its decisions based on risk. In fact, it 

makes its decisions based on profits and the ability to extract large 

profits over time from its customers, as Professor Levitin pointed 

out, and we concur in our testimony, with Professor Mann’s sweat 

box model. People are paying money to the credit card industry for 

a very long time that prevents them from ever getting out of the 

sweat box. The company makes money even if you don’t pay off the 

principal. 

So it is a very serious problem that was exacerbated by passage 

of the bankruptcy amendments of 2005, which keep people in the 

sweat box longer, which make it harder and more expensive to file 

for bankruptcy, and make it virtually impossible for many consumers to achieve a chapter 7 fresh start. They are forced into 

chapter 13 repayment. And in many cases they have to pay off the 

credit card unsecured debt as well. They don’t ever get their feet 

back underneath them. 

So the written testimony that I provided goes into extensive detail on the issues. 

I would point out that everybody thought that after passage of 

the bankruptcy bill, Mr. Chairman, that the industry would change 

its ways. They got what they wanted, that they would stop making 

things unfair to consumers. But, in fact, they increased pressure on 

consumers: Universal default clauses where they not only changed 

the rules for no reason but they changed the rules based on market 

conditions or anything that they want. 

So there are some real problems with credit cards. There are a 

number of things that the Committee could do or that the Congress 

could do. And the fact that the Federal Reserve Board has even 

proposed and will eventually in July, 2010, make credit card practices illegal shows you that there is a real problem out there. It 

isn’t just consumer advocates saying that some of these practices 

are unfair; it is the Federal Reserve Board. 

And in my testimony I outline some of the things that could be 

done. Obviously, the Maloney bill, the Credit Cardholders’ Bill of 

Rights, is a better version of the Federal Reserve rules. You should 

pass in this Committee the Arbitration Fairness Act proposed by 

Mr. Johnson and we believe is a critical part of reform. On the 

bankruptcy bill itself, there are a number of changes that we recommend to make it easier for consumers to file for bankruptcy and 

get out of the sweat box, and we should impose a usury sealing of 

36 percent on consumer loans as we did for military families. 

And although it is not in my written testimony, I would like to 

recognize that Mr. Delahunt has recently introduced a very important piece of legislation to provide consumers with a single reguVerDate 0ct 09 2002 11:43 Jun 05, 2009 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6601 H:\WORK\COMM\040209\48440.000 HJUD1 PsN: 48440
43

lator that imposes—that regulates all consumer credit products. 

Just as we have a CPSC so your toaster doesn’t explode, we would 

have a Financial Products Safety Commission to protect you 

against unfair credit card practices. 

So these are some of the proposals that we think the Congress 

should go forward with. 

[The prepared statement of Mr. Mierzwinski follows:]

PREPARED STATEMENT OF EDMUND MIERZWINSKI


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Mr. COHEN. Thank you, sir. 

We have completed our testimony. We have one vote. Mr. 

Delahunt is going to be our scout and get there and let them know 

we are coming. Thank you. Kit Carson. Then we are going to resume downstairs in 2141, our normal hearing room. Mr. John and 

Mr. Weiss, will you be able to rejoin us? It shouldn’t be more than 

20 or 30 minutes at the most. 

Thank you very much. We are in recess. 

[Recess.] 

Mr. COHEN. Mr. Franks, thank you. We are back in session. I 

thank you for coming back on this opportunity for questioning. 

First, I would like to ask Mr. John, and I had a little trouble 

hearing in the other room, you were saying something about time, 

and about having to reset computers or something. Was that about 

the date that the regulations go into effect? 

Mr. JOHN. It was, yes. 

Mr. COHEN. The regulations go into effect I think in—is it July 

of 2010? 

Mr. JOHN. It was an 18-month delay from the December 2008 

issuing. 

Mr. COHEN. Do the banks use the first computers ever made? 

Are these something like the Flintstones computers? 

Mr. JOHN. Well, not to my knowledge, actually. The computers 

are highly complex. And one of the——

Mr. COHEN. Temperamental. 

Mr. JOHN. Well, all computers I think by definition are temperamental, at least mine is. But the thing is that this is an incredibly 

complex network. And the regulations are very extensive and will 

require severe changes to the way the industry does business. And 

as a result, it is not just a matter of redoing computers, it is a matter of retraining staff, it is a matter of reprinting disclosure forms 

and a variety of other things. 

Mr. COHEN. Let me ask you this, following up on what Mr. 

Delahunt had for us; when they can change for any reason, and 

they do often change the cutoff dates, the due dates, et cetera, do 

they take 18 months before they implement those things? 

Mr. JOHN. Well, I seriously doubt it. But when it comes down to 

it, that is a fairly simple change as far as dates and interest rates. 

This is a much more extensive change that has to go through the 

entire system. 

Mr. DELAHUNT. Would the Chair yield? 

Mr. COHEN. I would yield to the distinguished vice Chairman. 

Mr. DELAHUNT. With the new rules that have been promulgated, 

would one of those rules eliminate the I-can-do-whatever-I-wantwhenever-I-want-it provision? 

Mr. JOHN. Pretty much. 

Mr. DELAHUNT. It would. Okay. I would like to see a copy of that. 

I thank the gentleman. 

Mr. MIERZWINSKI. Could I add to that response? 

Mr. DELAHUNT. Please. 

Mr. MIERZWINSKI. It is our understanding that it would do it 

retroactively on your existing balances. The Federal rules, however, 

would not affect future use of your card. So if they raised your rate 

and they said your new rate is 39 percent APR because you did 

71

something bad, it wouldn’t apply to your retroactive balance, but 

it would apply to your future use of your card in many circumstances. 

Mr. JOHN. But may I point out that even under existing law, a 

consumer who gets a change and decides that they don’t want to 

accept that can simply stop using the card and pay off the balances 

under the existing contract. 

Mr. COHEN. Mr. Levitin. 

Mr. LEVITIN. That is true, but this is not like an antidrug campaign, it is not so easy to just say no if you are a cardholder. Applying for a new card takes some time, that it affects your credit if 

you close one card line and open another, that affects your credit 

score. So that is going to mean that, even if you have done nothing 

wrong, the cost of credit in the future will go up. So this is not 

costless. 

Professor Larry Ausubel at the University of Maryland has a 

study that estimates that, given the point at which consumers actually will switch, they have to incur something like $150 worth of 

additional interest costs before they will switch cards. That is a 

pretty hefty amount of interest there. 

Mr. COHEN. When you say it is not like drug use, do you think—

and I know you are not a psychologist, but aren’t some people kind 

of addicted to purchasing and shopping and consumerism? 

Mr. LEVITIN. It is like drug use in this sense; there is definitely 

an addictive quality to credit. I am not in any position qualified to 

say whether it is psychologically addictive or somehow chemically 

addictive. I can’t say that. But there definitely are parallels between the way consumers use credit and what we see with addictive products. 

And to that extent, there is also another analogy that works. The 

relationship between the cardholder and the card issuer is a little 

bit like addict and pusher. It is a codependent relationship, and 

you do need to have both. Consumers don’t just spend freely, they 

need an issuer who is willing to extend them credit. 

And when we have consumers who get into problems with credit, 

often if you look at bankruptcy filers, they don’t just have one card 

where they spent this $10,000, they will have 20 cards and multiple cards from the same bank and with $5,000, $10,000 on each 

of these cards. And you have to ask yourself, the last bank in the 

door, what were they thinking extending more credit to this consumer? A consumer who is earning 70,000 or $40,000 a year and 

they have already a $100,000 in credit card debt, what is the lender thinking? Where do they think this is going to end up? 

Mr. COHEN. Well, it may be, Mr. Levitin, that they have got 

these old computers. I bought my home in 1988, and the late Sally 

Glass and the late El Sigurber lived in my home before their demise in 1980. In 1996, they got several credit card opportunities because of their good credit rating. Now, it is true that in the 16 

years since their death they had not had a bad debt, but it was also 

kind of amazing that they should get such a solicitation. And I 

used to get enumerables. 

Mr. DELAHUNT. Would the Chair yield for a moment? 

Mr. COHEN. Yes. 

72

Mr. DELAHUNT. And I don’t mean to distract you, but I live here 

in Washington with three other gentlemen, Members of the House 

and the Senate, and I found interesting that there was a solicitation that was sent to that same residence for a gentleman by the 

name of Wilbur Mills. Now, I think that maybe Mr. Conyers actually would have served with him in his youth. 

Mr. CONYERS. He got me on Judiciary. 

Mr. DELAHUNT. He got you on Judiciary. That is good to know. 

But Mr. Mills had been dead at the time as well. There is something faulty with these computers. And I think this Committee 

ought to examine the need to update the computers that are used 

in our financial services systems because it is becoming very problematic. 

Mr. COHEN. Does any one of the panelists agree with my basic 

theory, that 18 months waiting to implement these regulations is 

beyond what is necessary for computer—I have got to think Bill 

Gates could have done quicker than this. 

Mr. MIERZWINSKI. Mr. Chairman, I think all of the consumer 

groups that are working on this legislation agree with your perception that 18 months is too long. They changed the rules on us in 

1 day. We have asked, as Representative Speier in a markup yesterday said, we asked General Motors and the other car companies 

to change their entire business models in 60 days, why did the 

credit card companies need 18 months? 

We are very pleased that the Federal Reserve identified practices 

that it decided should be made illegal under the Federal Trade 

Commission Unfair and Deceptive Practices Act authority that the 

Fed has. But to wait 18 months to stop the illegal activity is astonishing, and it is just notacceptable. And we don’t think it is needed 

for computers or any other reason. 

Mr. COHEN. Thank you. I am going to yield to Chairman Conyers 

or to Mr. Delahunt, whoever wants to go next. 

Mr. CONYERS. This is just an informal discussion here between 

us late in the afternoon, last day before we go into recess. 

Mr. John, in 2005, did you happen to testify in the bankruptcy 

revision proceedings? 

Mr. JOHN. I did not. 

Mr. CONYERS. You didn’t. Did you write anything on the—I see 

you have done numerous work in public relations and media. 

Mr. JOHN. Not to my knowledge. I actually was involved, when 

I was with the National Association of Federal Credit Unions, in 

an earlier revision of the bankruptcy bill, which would have been 

in the early nineties. And I was involved strictly peripherally when 

I was with Representative Sanford’s office. 

Mr. CONYERS. Okay. Now you heard the introductory statements 

of Chairman Cohen. Did he say anything that, in your lengthy experience, struck you as something that you would like to put any 

finishing touches or modifications on? 

Mr. JOHN. I would never assume that I can improve on a Chairman’s opening statement. 

Mr. CONYERS. Not even Chairman Cohen. 

Mr. JOHN. Very definitely not, especially not as long as he is sitting there. 

73

Let’s just say that there would probably be certain aspects of it 

that I would be in more agreement on than others. 

Mr. CONYERS. Now, what about Chairman Delahunt’s ranting 

and raving, Vice Chairman Delahunt, certainly you saw some openings for further discussion in that regard, didn’t you? 

Mr. JOHN. Oh, I am sure there are many openings for discussion. 

But having worked on the Hill for many years, I would be hesitant 

to challenge a vice Chairman, also. 

Mr. CONYERS. What about just an ordinary Member of the Committee like myself? I mean, what about some of the things that we 

said that you—look, we can’t have all four of you coming here and 

sitting here telling us that everything is okay with everything we 

said. Reticence is not becoming to witnesses; we need you to come 

in here and lay it out, good, bad or indifferent. 

Mr. JOHN. My personal opinion would be that you have identified 

some very serious problems. I would also suggest that the Federal 

Reserve, whether you like the 18 months or not, has actually done 

some very extensive work in trying to deal with those problems, 

and in particular with redesigning the statements in ways that will 

be very useful for consumers. 

Now, nothing is going to be perfect, but when it comes right 

down to it, further legislation—and legislation did pass the Senate 

Banking Committee by one vote yesterday on this subject—is not 

necessarily going to be the best approach to dealing with these 

problems for the simple reason that you are going to be up 

against—you are going to be explicitly banning or attempting to 

ban certain practices, and you are going to have some exceedingly 

high-paid attorneys and financial professionals who are going to be 

on the other side trying to find a loophole to get around it. And to 

the extent these are put into legislation, as opposed to leaving 

them to the regulators to deal with, with some very clear instructions, you are going to find basically that you are always going to 

be running to catch up. And I don’t necessarily think that is going 

to be your major goal. 

Plus, as I said, one of my key concerns—because I do a fair 

amount of work in the whole issue of asset building in lower and 

middle-income families—is the fact that there is no costless reform 

to this, and I am very concerned that the very people who most 

need to start building themselves up the credit ladder are going to 

be the ones who find themselves shut out as a result. 

Mr. CONYERS. As a result of what? 

Mr. JOHN. As a result of practices that will sharply reduce the 

profitability of credit cards, sharply reduce the circumstances 

under which they are issued, et cetera. We are already seeing 

changes in credit standards, credit standards being sharply 

strengthened now due to perceived risk and other things. This is 

especially hitting the lower and middle-income community. The 

last thing we need to do is to set something up that has the completely unintentional result of making it harder for these people to 

find credit and, therefore, forcing them into the hands of even more 

check cashing agencies, or something along that line. 

Mr. CONYERS. Could I get a little more time, Mr. Chairman, to 

pursue this, please? 

Mr. COHEN. Sure. 

74

Mr. CONYERS. Thank you very much. 

How can correcting the existing practices that have pushed people to the brink of bankruptcy make things worse for them than 

they already are? 

Mr. JOHN. The problem that we run into is that typically new 

borrowers, lower, middle-income borrowers, et cetera, have a much 

higher debt-to-income ratio just pretty much by definition because 

they have got less income there. Typically these are both higher 

risk loans, and these are loans that require a great deal more dayto-day work to collect. And that increase in cost by making it still 

harder to issue certain of these—and again, I am not defending the 

practices that the Fed found to be reprehensible here. But even in 

the case of what the Senate dealt with yesterday, two of the Democratic Senators expressed very strong reservations about what was 

being done, specifically because they were concerned that it was 

going to deny credit to the populations I have been mentioning. 

Mr. CONYERS. Well, look, let’s put this on a very ordinary level; 

look what happened to you. 

Mr. JOHN. Yes. 

Mr. CONYERS. I mean, this wouldn’t be made more complicated 

if we correct the practices that brought it on. 

Mr. JOHN. It is not those practices. I am very comfortable with 

the way the Fed has approached this and the proposals that the 

Fed has come up with. What I am concerned about is the effects 

of going beyond the Fed, whether that is some of the proposals like 

S. 257, the bill that was discussed in the Senate Judiciary about 

a week ago, or whether some of the other potential changes that 

would affect this. 

Mr. CONYERS. The Durbin bill. 

Mr. JOHN. The Durbin bill, yes. 

Mr. CONYERS. Let me see what Professor Levitin would add to 

this before my time is snatched back. 

Mr. LEVITIN. Thank you very much, Chairman Conyers. 

I think the first point to make is that, while the Federal Reserve’s proposed regulations are good, they don’t cover everything. 

They certainly do not cover all of the problematic credit card billing 

tricks and traps. There is also the question of the 18 months. And 

while certainly I don’t think that banks can implement these regulations overnight flawlessly, 18 months does seem rather long. But 

I think something that Mr. John said really gets to the heart of the 

issue. 

Mr. John said the card industry has lots of well-paid, smart attorneys—I used to be one of them—or at least I will go with well 

paid—who their job is to figure out ways to do end runs around 

regulations. And inevitably, whether it is Congress or the Federal 

Reserve—and this is the Federal Reserve which has not issued any 

regulations on this for years—Congress or the Fed are going to be 

playing catch up. It is going to be a game of whak-a-mole, that as 

soon as Congress or the Fed puts the kibosh on one particular 

problematic practice, the card industry is just going to redesign 

around this. 

I think the solution really has to be flipping the whole model of 

card regulation on its head. Our current model of regulation is disclose, disclose, disclose, and do whatever you want as long as you 

75

disclose it. And now we are moving toward disclose, do whatever 

you want except for really bad practices, A, B and C. But if you 

can come up with practices D, E and F, as long as you disclose, 

that is fine. 

This is a model that doesn’t work. We have to flip it around. And 

the way to do this is to say you can’t do anything except for A, B 

and C. And this is a reasonably easy thing to do. Credit cards, 

their core functions are pretty simple, you lend out money and then 

charge an interest rate. That is the core function of credit cards. 

It is possible to drastically simplify credit cards. Most of the complexity of credit cards is not to serve any particular consumer desire and need; maybe there are a few niche desires. Instead, credit 

cards are complicated for complication’s sake, just like credit card 

cardholder agreements are complicated for their own sake. The 

whole point of the complication is to make it harder for the consumer to know what this is going to cost to use. And if the consumer can’t figure out what it is going to cost to resolve the balance in the future on the credit card, the consumer can’t figure out 

if the consumer should be using their credit card or which card the 

consumer should use. It may be smart to use a card, but you have 

to be able to also distinguish between cards. 

So I think that really Congress should start thinking about approaching the credit card regulation in a different manner. It is 

good to ban the really bad practices, but this is going to be a catchup game. 

Mr. CONYERS. David John, do you find that that is not an unreasonable analysis? 

Mr. JOHN. I actually find that that would be quite problematical, 

because what that does is to make it very hard to implement any 

sort of innovations that actually would benefit the consumer. 

We have seen in the field of insurance regulation, which is handled at the States, that in a number of States, when an insurance 

company proposes a new product that would change its market 

share by being very popular with consumers, that in certain States 

these products are blocked or changed simply to protect the market 

shares of some of the people who are already in there. What you 

are doing with that kind of a regulatory standpoint is to make it 

well worth the while to block innovation so that you can protect 

your own situation. 

Mr. CONYERS. Do you think Senator Durbin’s proposal may go in 

that direction? 

Mr. JOHN. I think Senator Durbin’s proposal is aimed at bankruptcy and how credit card and high-interest debt is treated in 

bankruptcy. 

Mr. CONYERS. Now, surely the panel is in agreement on this 

overaggressive marketing of cards. We are still searching my boy’s 

belongings to find out how many credit cards he got from Morehouse this semester already. 

Mr. MIERZWINSKI. Chairman Conyers, if I could respond to that, 

all of the consumer groups concur with that. In fact, we have published reports, which I could enter into the record, on the marketing of cards to young people. The National Council of La Raza 

has published reports on marketing to Latino families. And all of 

the major civil rights groups, by the way, support all these strong 

76

reforms. They want cards to be offered to their members, but they 

want those cards to be offered on a fair basis. 

And although Mr. Delahunt has stepped out, I would point out 

that he has a bill, which Mr. Durbin has a companion bill, that 

would get at what Professor Levitin has proposed, and that is his 

Financial Product Safety Commission bill, which would be to have 

these are the safe ways to market a credit card, and start from 

there. So we would concur, and all the major consumer groups support that as well. 

Mr. WEISS. The other issue, if I may, is not only the availability 

of credit, particularly to the subprime market, but what type of 

credit is available to that market. If all that is available is predatory lending, high interest rate, high fees, that is not good. And 

that type of credit needs to be sharply restricted. And yet it is that 

type of credit that is one of the biggest money makers for the credit 

card industry. The subprime market makes more money than does 

people such as are sitting up on the dais. That is where they make 

their money, from the high interest rates, from the high fees. That 

is where they are getting their money, and that is what they want 

to keep doing because it is so profitable.

Mr. LEVITIN. Mr. Chairman, I would like to amplify something 

that Mr. Mierzwinski said. 

Mr. Mierzwinski pointed out that Senator Durbin’s bill, and I believe Congressman Delahunt’s analogous bill in the House for a 

Consumer Financial Product Safety Commission, would, I agree, 

create a Federal regulator with the ability to say only the following 

practices are permitted. 

Now, Mr. John rightly raises the question of whether this would 

inhibit innovation. I would submit to you that we have not seen 

any innovation in the card industry that has been beneficial to consumers in recent memory. And innovation is not all good, there can 

be positive and negative innovation. 

But given the possibility of future beneficial innovation for consumers, the way to handle that is to have a regulatory agency that 

can respond to industry requests to allow new products, but this 

needs to be an industry with much, much more regulation. 

Mr. CONYERS. Thank you for your generosity, Mr. Chairman. 

Mr. COHEN. You are welcome, sir. 

Mr. Franks, the Ranking Member, is recognized. 

Mr. FRANKS. Well, thank you, Mr. Chairman. 

Mr. Chairman, Professor Levitin argued that consumers with 

higher credit card debt were more likely to file bankruptcy, and I 

am having difficulty as to why that should surprise us. I am wondering if it couldn’t mean that people who prefer to make their purchases in cash, whenever possible, are maybe more financially responsible. I think you can make the argument that jails probably 

have a higher incidence of having bank robbers in them than grade 

schools as well, but I feel like that is almost an argument here that 

would take us in a different direction. 

Mr. John, I guess I would ask you the first question. What economic evils would befall this system, our financial system, if the 

pricing of consumer credit were divorced completely from accurate 

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or responsibility and accountability? What would happen to the 

credit market? 

Mr. JOHN. Well, what we have seen in the case of certain aspects 

in the housing market and other areas is that the credit would be 

primarily available to the best quality customers. 

One of the things that we have seen, and this is true in pretty 

much all of the consumer groups, except for the very highest, is 

that typically an individual will start out at a relatively high-cost 

credit card or other debt, and as they pay that and as they establish an appropriate credit history, which indicates a lower risk, 

they either qualify for lower rates or they can move on to other 

credit cards with lower rates and better terms. 

It is really not all that difficult to find a new card once you have 

gotten a decent credit rating. If you completely divorce that process, then it is going to be much, much harder for mainly three 

groups; I have mentioned the middle and lower-income worker, but 

also the first-time borrower, the kids who are first coming out of—

in particular, school, they are not coming necessarily out of college—and people who are trying to reestablish their credit after 

some sort of a problem, to get back on the ladder and build themselves back up. 

Mr. FRANKS. Well, Mr. John, I guess that is my concern. If we 

divorce ourselves from cause and effect, a lot of times, especially in 

this situation, I think we end up oftentimes hurting the ones that 

we are ostensibly trying to help here more than we do anybody 

else. And I am always amazed. I think it goes back to Congress’ 

attitude that sometimes we can repeal law’s mathematics here and 

we make things even worse when we try. 

Well, let me ask you this, then, since amendments to the Bankruptcy Code have the potential to distort market decisions and actually increase hazard, wouldn’t it be better for us to wait to consider any changes to that code until the Financial Services Committee and the regulators have had a chance to complete their 

work? What is your perspective? 

Mr. JOHN. It strikes me that it would be a much better course 

to figure out what you are going to be dealing with in the future 

before you necessarily make any changes. One of the problems that 

we saw, for instance, in S. 257, in the Senate bill by Senator Durbin, was the idea that if an individual had a single high-cost credit 

transaction, that they could be completely exempted from the 

means test. And of course it wouldn’t be too hard to imagine a situation where a client went to a lawyer who had a connection with 

a high-credit lender and suggested that maybe they would like to 

go out and borrow from a particularly check cashing agency or 

something along that line so that they could get themselves out of 

the means test. Now, I would suggest that that would probably end 

up lowering respect both for the bankruptcy law and of course for 

the legal profession. 

Mr. WEISS. It is also currently prohibited under the 2005 act. 

Mr. FRANKS. Mr. John, is there anything that you know that limits the House Financial Services Committee, that prevents it right 

now from legislating controls on abusive practices that the regulators, for whatever reason, decided not to regulate? 

78

Mr. JOHN. No. Absolutely. They have complete jurisdiction in this 

area. 

Mr. FRANKS. Well, Mr. Chairman, I am going to yield back with 

a few seconds left. That is a rarity. 

Mr. COHEN. Mr. Weiss, let me ask you this; the Federal Reserve 

has some reforms, 18 months, but are there other reforms you 

think that need to be adopted that the Federal Reserve did not address? 

Mr. WEISS. Well, the 18-month period obviously has been discussed fairly extensively today, and there are serious problems 

with it. While the provisions are good, I think they are a good first 

step, I think that there is more that needs to be done. I am seeing 

daily in my practice debtors who have just been slammed by these 

fees. And while the proposed regulations will remove some of them, 

as Mr. John mentioned, there is some very talented and highly 

paid people whose job it is to figure out ways around them so that 

they can resume charging the very fees that amount to 39 percent 

of their profits. 

So I think that Mr. Levitin’s comments about possibly needing to 

reverse the standard instead of saying these are prohibited acts, 

let’s look at what is allowed, may be a very good way of stopping 

the ingenuity of the lawyers who will be looking at this and trying 

to find loopholes. 

Mr. COHEN. Does Professor Levitin or Mr. Mierzwinski have suggestions of things that the Fed didn’t go far enough on that should 

have been changed? 

Mr. MIERZWINSKI. Well, first of all, the Federals, many of their 

changes only apply to your existing balance. The use of your card 

in the future would be subject to whatever higher rates they would 

impose on you. Now, I would respectively disagree, I think, with 

some comments that Mr. John may have made earlier that it is 

easy for you to go out and get a new card. For the people that are 

in trouble, it is not easy to go out and get a new card. So we need 

to prevent the practices, both on a backward basis and on a going 

forward basis, for the people that are locked in with that one company. 

Mr. Dodd’s bill in the Senate—the House bill largely tracks the 

Federal rules, but amends the Truth in Lending Act rather than 

the Federal Trade Commission Act. The Senate bill goes further, 

would ban universal defaults completely, and would make it easier 

for consumers to avoid some of these practices. 

In the jurisdiction of this Committee, we strongly believe that 

the Arbitration Fairness Act should be enacted to get rid of the 

provision in the card contract that prevents consumers from enforcing their own disputes with credit card companies in court. And 

that would be a major step forward as well. 

Mr. COHEN. Professor. 

Mr. LEVITIN. I would agree with all of those points. I would also 

add in that I think the Federal regulations address double cycle 

billing, they do not touch its kissing cousin, which is called residual 

or trailing interest. They say nothing about interchange fees. I 

think it is crucial that they do not eliminate all universal cross default. They still allow teaser rates. They allow a bundling of reVerDate 0ct 09 2002 11:43 Jun 05, 2009 Jkt 000000 PO 00000 Frm 00082 Fmt 6633 Sfmt 6601 H:\WORK\COMM\040209\48440.000 HJUD1 PsN: 48440
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wards programs that have nothing to do with extensions of credit 

and that are funded by interchange fees. 

But I also want to make sure that I did not misstate something 

to Mr. Franks. You are exactly right, that there is nothing particularly surprising about high credit card debt correlating with bankruptcy, that people who are in bankruptcy have debt. What is important to note is that, dollar for dollar, credit card debt has a 

much higher correlation with bankruptcy than any other type of 

debt. So a consumer who has $100,000 worth of credit card debt 

is going to be far more likely to file for bankruptcy than a consumer with $100,000 of any other type of debt. 

Mr. COHEN. Mr. Weiss, are there changes you would recommend 

in the bankruptcy law that pertain either to credit card debt, or 

any other particular changes besides—and I am not sure if you addressed this or not—the counseling section and the means test? 

Mr. WEISS. I mean, counseling and means test, frankly, are 

largely useless. If you want to have counseling, the time for it is 

before debt is incurred rather than before you have to file for bankruptcy as sort of a gatekeeper function. It doesn’t educate, it 

doesn’t change things, and it really doesn’t do anything other than 

push up the price of bankruptcy. 

The means test was I think very accurately described by a friend 

of mine; if under the old law what we did was wash your car, under 

the new law, because of the means test, not only do we have to 

wash your car, we also have to run around your house three times. 

It has about the same amount to do with washing your car as the 

means test has to do with preventing abuse in the bankruptcy system. But it delays things, it costs more money, and it doesn’t accomplish the goal that was set, which is preventing abuse. 

Additionally, frankly, most of the changes that were made in the 

2005 act did little to prevent abuse or help debtors. It did significantly increase the cost of bankruptcy and delay the filing. And as 

was noted earlier, that, with the sweat box model, is exactly what 

was intended. The longer that people are delayed from filing, the 

more money is made by the credit card issuers in particular. And 

that seems to have been one of the goals of the 2005 act. 

Mr. COHEN. My time has expired. I am going to yield to Mr. 

Delahunt. And if you have a question of Mr. John, I think he needs 

to go, and possibly Mr. Weiss. So maybe you can direct those questions to them first. And don’t miss your plane or don’t miss getting 

your bill paid. 

Mr. DELAHUNT. Well, they get to stand up because if I don’t have 

sufficient time, I am going to request a second round. 

I hear what you all say, but I am gravitating toward what Mr. 

Levitin says about a real fundamental shift in terms of how the 

credit card industry is viewed and how the rules of the marketplace 

should play. Because we can continue to tweak the edges, we can 

continue to address—and I think this goes with you, too, Mr. 

John—we can address the obvious practices that I don’t think anyone here would encourage. But what you were just saying, Mr. 

Weiss, in terms of the sweat box and the delay advantaging the 

credit card companies, I believe that is really indisputable when 

you examine it. But I think what we fail to understand, not only 

does it enhance, if you will, the pain for the bankrupt, but it disVerDate 0ct 09 2002 11:43 Jun 05, 2009 Jkt 000000 PO 00000 Frm 00083 Fmt 6633 Sfmt 6601 H:\WORK\COMM\040209\48440.000 HJUD1 PsN: 48440
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advantages other unsecured creditors and hurts the retailer because they are receiving a diminished pro-rata share. 

Could you expand on that? Am I correct, first of all? Because if 

you are interested in the retailer in America, if you are interested 

in commerce in America, you have got to take and put this issue 

into this equation. It isn’t just about the credit card industry, it is 

about business in America. 

Mr. WEISS. By definition, money that is paid pre-bankruptcy is 

unavailable post-bankruptcy to pay other creditors. While in most 

chapter 7 cases there are no distributions to any creditors, in chapter 13 in particular, where the unsecured creditors are typically 

put in a pool, there those payments can seriously disadvantage 

creditors that don’t charge these fees, that don’t charge exorbitant 

interest rates. 

Mr. DELAHUNT. Such as? 

Mr. WEISS. Such as Bloomingdale’s, such as Macy’s, such as 

dearly lamented Hecht’s, or Garfinkel’s, or Raleigh’s. These businesses will typically not charge these types of fees. And when a 

proof of claim comes in in a chapter 13 case for Chase or Bank of 

America, you have got all of these fees, you have got all of these 

costs added, artificially inflating the amount of money that they 

are claiming. And, therefore, they get a much larger pro-rata share 

than the other creditors. 

Mr. DELAHUNT. Professor Levitin. 

Mr. LEVITIN. I would add to that, it is not just the Bloomingdales 

and the Hechts of the world that are disadvantaged, it is also really the small businesses. It is the general contractor who did work 

on my house before I filed, it is my doctor or my dentist. They are 

small businesses, and they are going to have their pro-rata claim 

diminished relative to the card issuer. It is going to be tort victims. 

It is going to be the Federal Government, to the extent that it has 

nonpriority tax claims. It is going to be the local and State governments. 2005 amendments benefited the credit card industry at the 

expense of all other unsecured creditors. But what is even worse, 

it benefited the credit card industry at the expense of a homeowner’s ability to avoid foreclosure. 

To the extent, in chapter 13, you have less disposable income 

available, that you are forced into 13, that is going to—so the 

means test is going to force more people into 13. And it is going 

to mean that your disposable income in 13 is going to be tied up. 

If you had been able to file for chapter 7, your disposal income 

would have been available to reach a deal on the outside with your 

mortgage lender or to do a reaffirmation. That is much more difficult for people to do now after 2005. 

Mr. WEISS. And additionally, they also do not have the ability, 

when in a chapter 13, to be able to go out and resume spending, 

resume contributing to the economy in that fashion because their 

credit is tied up, their income is tied up in the bankruptcy court. 

Mr. DELAHUNT. You know, Mr. John talks about the Federal Reserve, you all do talk about the rules that have been promulgated 

but are going to take 18 months to implement because of computer 

problems. And yet, you know, the Federal Reserve, tell me if I am 

inaccurate, was conferred the power back in 1994 to deal with the 

deceptive practices in mortgages and never exercised that authorVerDate 0ct 09 2002 11:43 Jun 05, 2009 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6601 H:\WORK\COMM\040209\48440.000 HJUD1 PsN: 48440
81

ity, didn’t implement it. And when you begin to trace back how we 

arrived at the financial crisis which we see all around us, the socalled subprime problem, the ability to enforce, the authority was 

there, and it didn’t happen. 

I mean, I am not really comfortable relying on the regulator that 

doesn’t regulate for whatever reason. Maybe it is under-resourced. 

Maybe it is because of a particular perspective. But relying on the 

Federal Reserve has not produced a benefit to the American financial service system as far as I can determine, because it was clear 

in 1994 they had the authority, and if they had exercised it we 

wouldn’t be in the mess that we are in now. 

Comments? 

Mr. MIERZWINSKI. Mr. Delahunt, I would totally agree with you. 

The fact is I would have to add a couple of other agencies to your 

list. 

Mr. DELAHUNT. Add them. 

Mr. MIERZWINSKI. I totally agree first though that the Fed 

missed the opportunity to issue HOPA regulations that they were 

given the authority do in 1994 until after the consequences of the 

meltdown had already hit us. And then the regulations they put 

out just a year or two ago are too weak and unacceptable. 

But the failure of the Office of the Comptroller of the Currency 

and the Office of Thrift Supervision to regulate their entities and 

the taking away of State Attorney General authority over these national banks and the companies that were actually State-chartered 

institutions but were affiliated with national banks, the preemption 

was extended there. So we have a combination of taking away the 

State enforcer’s lax regulation at the Federal level, the inability of 

consumers to do private enforcement, the concentration of the industry into just eight companies, and the regulatory arbitrage that 

the companies are allowed to switch the charter in order to get a 

regulator that is a better deal for them, has all contributed to this 

crisis. And it is why all the consumer groups are supporting your 

proposal, the Financial Products Safety Commission, one regulator 

for consumer protection. We also want to reinstate State Attorney 

General authority over the financial system. And that is a big fight 

that we are having. 

It used to be that the industry talked about the trial lawyers as 

bad people. Now they refer to rogue Attorneys Generals, and Attorneys General are the best consumer cops on our beat in many ways 

case—in fact, in almost all the cases I can think of, And we need 

to change that mindset. We need to reinstate their authority, too. 

Mr. DELAHUNT. Mr. Chairman, I am going to ask for a second 

round because I would like to get into the issue of the underwriting 

criteria of credit card issuers, as well as high interest issues as far 

as credit card issuers are concerned. But I know some of you have 

to leave. And I know Mr. Franks——

Mr. COHEN. Mr. Franks has generously consented that you go on 

because you missed the first round. You don’t know, but you are 

in the second round. 

Mr. DELAHUNT. It is always good to be here in the last round. 

Mr. COHEN. I remember a few prize fighters that didn’t realize 

it was second round. 

Mr. DELAHUNT. Some have suggested that. 

82

We all have those anecdotes about credit cards going to dead people. My daughter, along with Chairman Conyers’, about 10 years 

ago received a check in the mail for $2,500—I think it was 

Providian—have a good spring break. Thank God I caught it or she 

would have had one hell of a spring break. We talk about addiction. 

I mean, we are trying to regulate tobacco. I think there is some 

analogies here. 

But anybody, anybody can get a credit card. I mean, I know people that are in bankruptcy that were getting credit cards while in 

bankruptcy. Talk about an Alice in Wonderland world. I mean, 

they were just pushing this garbage out, okay, it didn’t make any 

difference. And I understand in the credit card industry it is transaction-based and it is high interest rates. And I think the concept 

of the sweat box really kind of says it all. They don’t care about 

the principle, just give me all of the different fees. You have to 

have a mainframe computer to calculate the fees. That is where the 

money is. 

And Mr. Chairman, Mr. Franks, neither one of you were here, 

but I can remember filing a bill—so that is the underwriting—

where we were going to cap interest rates, much like the Durbin 

bill, but we were willing to do it at 100 percent, 100 percent. And 

the credit card industry said no, we can’t accept that; 100 percent. 

I used to be a prosecutor before I came here. We used to refer to 

that as ‘‘the dig.’’ If you did organized crime investigations into 

loan sharking, you know, I never ran across 100 percent, plus all 

of the penalties that were implicated. 

So I guess I have a disagreement with you, Mr. John. In real life 

there has to be some parameters and some boundaries. So if all of 

you could take a shot at, what do they do in terms of underwriting? 

How do they get to it? Do they have any underwriting at all? 

Mr. WEISS. What you used to call loan sharking, the credit card 

companies now call a good business model. I get clients all the time 

who come to see me and tell me that, by the way, I just got—and 

they are incredulous—yesterday I got a pre-approved credit card 

with a $25,000 limit; what should I do with it? Because it is sort 

of like, well, I may be able to make this work if I had a little bit 

of money and a little bit more time. There is virtually no underwriting that is done. 

When you look at the subprime market in particular, it is a free 

fall zone. It is, we will give you a card because the risk that you 

won’t pay is more than covered by the fees and the interest and 

the cards. 

Mr. DELAHUNT. But Mr. Weiss, by doing that, what they are 

doing is they are eroding the economy. They have created the debacle, that mindset that we currently have to deal with that has put 

the global economy at risk, just let it rip, no rules, no regulations. 

It is more than the Wild West. I mean, it is really, really dangerous. This is not just protecting the consumer, this is protecting 

every taxpayer, every single American business that does business 

in a way that is based upon recovering the principle, producing a 

product, and getting paid for it—and, yes, making a good profit. 

But how did this all happen? How did this happen? 

Mr. WEISS. It happened because there is no oversight and no regulation. 

83

Mr. DELAHUNT. Would the Ranking Member want me to yield to 

him? 

Mr. FRANKS. Go ahead and finish. 

Mr. DELAHUNT. Okay. Mr. Levitin. 

Mr. LEVITIN. I think the first step in this happening, we would 

have to go all the way back to 1978. That is when the Supreme 

Court handed down the decision in Marquette. Marquette dealt 

with the question of whether a federally chartered bank could export the interest rates of its home State to another State. So if a 

federally chartered bank was based in Massachusetts and Massachusetts chose not to regulate interest rates, could that bank then 

export interest rates to Arizona, and what ability would Arizona 

have to protect its consumers in its wisdom against the Massachusetts bank? 

The Supreme Court ruling on—not on any particular policy matter, but rather ruling on the language of the 1863 National Bank 

Act—this was the legislation that Abraham Lincoln used to finance 

the Civil War—ruling on the particular statutory language there, 

which was dealing with a world where there were usury laws and 

just a different world altogether, the Supreme Court said yes, federally chartered banks can export their interest rates to other 

States. That is why we see most credit card issuing banks basing 

themselves in Delaware or South Dakota. 

Mr. DELAHUNT. South Dakota, right. 

Mr. LEVITIN. Incidentally, the two Senators on the Senate Banking Committee who voted against Senator Dodd’s legislation yesterday are from Delaware and South Dakota. That is why we see 

banks flocking to centers of lax regulation and then exploiting their 

interest rates to States that actually do want to regulate. This goes 

against the whole principle of federalism, that States should be 

able to protect their own citizens how they see fit. And if one State 

wants to do it differently than another, it should be allowed to do 

that. 

Mr. DELAHUNT. Mr. John, let me just ask you a question. Would 

you agree there ought to be a cap on interest involving a credit 

card? 

Mr. JOHN. No. 

Mr. DELAHUNT. You would disagree with my amendment way 

back when, when I had dark hair and was as articulate as Mr. 

Cohen, and tried to cap the interest rate at 100 percent? You would 

say no, you can’t do that? 

Mr. JOHN. I would say no, and I would assume that the banks 

said no because they realized that once you have established the 

principal at 100 percent, the next step will be to reduce it to 50, 

and the next one will be to lose, et cetera, et cetera, et cetera. And 

that has already been proven in many, many situations. 

As a matter of fact, I used to work around the corner in the 

Banking Committee, and at the time there was high interest rates 

in the Jimmy Carter regime. We had the State of Arkansas coming 

in every 2 years so that we would lift the cap that was within their 

State Constitution because it didn’t fit. 

It is one thing to talk about something in normal times, but 

when you had a mortgage interest rate for a 30-year conforming 

84

mortgage in October 1981, I believe it is, or somewhere in that 

neighborhood, that reached slightly over 18 and a half percent——

Mr. DELAHUNT. I am talking 100 percent. 

Mr. JOHN. I understand that. But as I say, once you establish the 

principal, then you start to get into that. 

Now, I must apologize. I have a 6-year-old who wants me to read 

stories to her tonight. 

Mr. DELAHUNT. That is far more important than listening to me 

rant. 

Mr. JOHN. I live in West Virginia, and I can’t miss my train. So 

I apologize for that. 

Mr. DELAHUNT. Thank you so much. 

Mr. COHEN. Thank you, sir. And Mr. John, thank you for coming. 

Mr. Brian Nolan was here earlier, he has left. He is the head of 

your Board of Regents for West Virginia and as fine a public official as I have ever met. You are lucky to have him. 

Read your daughter a nice story. 

Mr. Franks, you are recognized. 

Mr. FRANKS. Thank you, Mr. Chairman. And thank you, Mr. 

John. 

Mr. Chairman, I have just been thinking here a little bit. You 

know, there has been a lot of talk about how this economy got to 

where it is, and I know that there are sincere opinions that diverge 

pretty significantly. But I am going to at least submit that the core 

reason why we are in trouble today is irresponsible borrowing and 

spending. And I actually believe that government, this Congress, 

created some incentives out there some years ago for people to borrow and spend irresponsibly, and even put pressure on lending institutions to make those loans. I will give you one example, that 

being the Community Reinvestment Act. And of course the goal 

was to help those who couldn’t get loans very easily, to try to make 

the playing field a little easier for them to deal with. And I applaud 

the goal. But once again, it divorced financial transactions from responsibility. 

Chase Bank was sued because they weren’t making enough 

subprime loans, and they finally acquiesced and said, okay, we will 

make those subprime loans. And anybody can make the case that 

the regulator should have caught this irresponsible borrowing and 

spending—a lot of people will—but it certainly does not alter the 

fact that this government created direct incentives for that to 

occur. It doesn’t alter the fact that if the regulators had caught it, 

that they would have been dealing in an environment of pressure 

from the Congress. 

Not long ago, this Congress believed that the credit markets, 

keeping credit available to people, was so important that we voted 

on a $700 billion bailout for the credit market, essentially, because 

we believed that that was important, we believed it was important 

to happen. And my concern here is that, once again at the core, the 

heart of it, is that we have the actual crucible matrix, if you will, 

irresponsible borrowing and spending. And I am afraid that once 

again here in the credit card situation we are trying to divorce responsibility from transaction. If we don’t somehow give the lender, 

whoever they are, whatever their motivations are, if there isn’t 

some ability to match that transaction with risk, if there isn’t some 

85

ability to gauge whether or not this will be paid back, if there isn’t 

some effort to make sure that the borrower is held responsible, 

then the entire process becomes unbalanced. 

The Chairman here mentioned that people sometimes have addictions to buying and things like that, and I believe he is right. 

I believe the same thing happens with gambling and things like 

that. But if we take away the responsibility in that process, I think 

we only exacerbate those things. And I hope in the process here—

what I see is us going in the wrong direction in general. I think 

we are bailing out the credit markets and we are bailing out those 

who have made bad borrowing and spending decisions. And now, 

in order to facilitate that, we are now, as a government, borrowing 

and spending irresponsibly. 

And ultimately, try as we will, we will not repeal the law’s mathematics or that fundamental need to balance our transactions with 

responsibility because ultimately somebody has to pay for it. 

And I thought Margaret Thatcher put it best: ‘‘The problem with 

socialism is that soon enough you run out of other people’s money.’’ 

And I think that is where we are going. I am concerned, as I apply 

that to this hearing here, that we are going in the same direction 

with the credit card. We are saying to people that make bad—

maybe they were sold a bill of goods, maybe people were sold the 

wrong house, maybe the brokers did it. But when people aren’t 

held ultimately responsible, then in the final analysis the whole 

system breaks down and it actually creates an incentive for people 

to abuse the process. 

And what was the final result? The final result is that in this 

economy, the poorest of the people, those that we ostensibly were 

trying to help in the first place, are the ones that are being 

crushed. And I would submit that credit card availability has 

helped a lot of poor people make purchases that they never could 

have otherwise. I think it has helped so many of them in a huge 

way. And if we are not careful here, we will make their access to 

credit impossible because we simply cannot repeal the laws of 

mathematics or divorce responsibility from financial transaction. 

And that is more of a speech than it is a question. So I am going 

to stop right there because my light is red. Thank you. 

Mr. COHEN. Thank you, Mr. Franks. Thank you, Mr. Delahunt, 

for your contributions. I would like to thank all the witnesses for 

their testimony. 

Without objection, Members have 5 legislative days to submit 

any additional written questions which we will forward to the witnesses and ask you to answer as promptly as you can to be made 

part of the record. 

One of my questions I will send you—and I will just give it to 

you orally—is I would like each of you to give me a brief little 

paper on what you think should be changed in the bankruptcy laws 

and what should be changed in the credit card laws. And if you 

would submit those, we will make that part of the record. 

Without objection, the record will remain open for 5 legislative 

days for the submission of any other additional materials. 

Again, I thank everyone for their time and patience. The hearing 

of the Subcommittee on Commercial and Administrative Law is adjourned. 

86

[Whereupon, at 5:10 p.m., the subcommittee was adjourned.] 

(87)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

88

RESPONSE TO POST-HEARING QUESTIONS FROM ADAM J. LEVITIN,

ASSOCIATE PROFESSOR OF LAW, GEORGETOWN UNIVERSITY LAW CENTER


2-1.eps
89

f


2-2.eps
90

RESPONSE TO POST-HEARING QUESTIONS FROM BRETT WEISS,

ATTORNEY, GREENBELT, MD

f


4.eps
91

RESPONSE TO POST-HEARING QUESTIONS FROM EDMUND MIERZWINSKI,

CONSUMER PROGRAM DIRECTOR, U.S. PUBLIC INTEREST RESEARCH GROUP

Æ


3.eps