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50–307 2009

S. HRG. 110–904 

EXAMINING THE BILLING, MARKETING, AND 

DISCLOSURE PRACTICES OF THE CREDIT CARD 

INDUSTRY, AND THEIR IMPACT ON CONSUMERS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

ON 

STRENGTHENING REGULATIONS AND THE RESPONSE BY REGULATORS 

TO AVOID THE UNINFORMED USE OF CREDIT BY CONSUMERS WHILE 

PROTECTING AGAINST INACCURATE AND UNFAIR CREDIT BILLING 

AND CREDIT CARD PRACTICES 

THURSDAY, JANUARY 25, 2007 

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

( 

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


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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

ALEX STERNHELL, Professional Staff 

LYNSEY GRAHAM REA, Counsel 

MARK OSTERLE, Republican Counsel 

JONATHAN V. GOULD, Republican Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE WHITTLE, Editor 


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C O N T E N T S 

THURSDAY, JANUARY 25, 2007 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 4 

Senator Carper ................................................................................................. 5 

Senator Bennett ................................................................................................ 7 

Senator Akaka .................................................................................................. 8 

Senator Allard ................................................................................................... 10 

Senator Brown .................................................................................................. 10 

Senator Crapo ................................................................................................... 11 

Senator Tester .................................................................................................. 12 

Senator Sununu ................................................................................................ 13 

Senator Menendez ............................................................................................ 14 

Senator Casey ................................................................................................... 16 

WITNESSES 

Elizabeth Warren, Leo Gottlieb Professor of Law, Harvard Law School ............ 18 

Prepared statement .......................................................................................... 58 

Robert D. Manning, Ph.D., Research Professor of Consumer Finance, and 

Director, Center for Consumer Financial Services, E. Philip Saunders College of Business, Rochester Institute of Technology ......................................... 21 

Prepared statement .......................................................................................... 66 

John G. Finneran, Jr., General Counsel, Capital One Financial Corporation ... 23 

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

Response to written questions of: 

Senator Dodd ............................................................................................. 174 

Senator Shelby ........................................................................................... 174 

Senator Reed .............................................................................................. 178 

Senator Tester ........................................................................................... 181 

Senator Crapo ............................................................................................ 185 

Carter Franke, Chief Marketing Officer, Chase Bank U.S.A., N.A ..................... 26 

Prepared statement .......................................................................................... 104 

Michael D. Donovan, Partner, Donovan Searles, LLC, also on behalf of The 

National Consumer Law Center and The National Association of Consumer 

Advocates .............................................................................................................. 27 

Prepared statement .......................................................................................... 108 

Richard Vague, Chief Executive Officer, Barclays Bank Delaware ..................... 31 

Prepared statement .......................................................................................... 127 

Response to written questions of: 

Senator Dodd ............................................................................................. 188 

Senator Shelby ........................................................................................... 188 

Senator Reed .............................................................................................. 192 

Senator Tester ........................................................................................... 195 

Tamara Draut, Director, Economic Opportunity Program, Demos ..................... 33 

Prepared statement .......................................................................................... 131 

Travis B. Plunkett, Legislative Director, Consumer Federation of America ...... 35 

Prepared statement .......................................................................................... 151 


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IV 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Robert Berner, BusinessWeek, ‘‘CAP ONE’S CREDIT TRAP; By offering multiple cards, the lender helps land some subprime borrowers in a deep 

hole and boosts its earnings with fee income,’’ article dated November 

6, 2006 ................................................................................................................... 199 

Prepared statement of Edward L. Yingling, on behalf of the American Bankers Association ...................................................................................................... 202 


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EXAMINING THE BILLING, MARKETING, AND 

DISCLOSURE PRACTICES OF THE CREDIT 

CARD INDUSTRY, AND THEIR IMPACT ON 

CONSUMERS 

THURSDAY, JANUARY 25, 2007 

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

The Committee met at 9:34 a.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. 

First, I want to thank our witnesses for being here this morning 

and thank my colleagues for coming out this morning. 

Before we begin this hearing on examining the billing, marketing, and disclosure practices of the credit card industry and 

their impact on consumers, I want to recognize the fact that Senator Shelby, my colleague and friend, the Ranking Member here, 

held an excellent hearing on this subject matter already before, and 

I commend him and thank him for having done that. 

Senator Schumer, who I think will be joining us shortly, is the 

father of the Schumer Box. We recognize his longstanding interest 

and involvement in this. 

Senator Carper, my friend from Delaware, has a strong interest 

in this. He has talked to me repeatedly over the last number of 

days about his interest in this subject matter. 

Dan Akaka has introduced legislation in the past on this, and 

Bob Menendez as well. And, Sherrod, I presume you have had a 

strong interest in this as well in the other body over the years. So 

we thank all of our members here for their interest in this subject 

matter. 

Let me share some opening comments, if I can. I will then turn 

to the Ranking Member for any opening comments he has, and 

then we will turn to our witnesses for some opening statements. 

Let me say in advance that we would like you to try and keep 

your opening comments, if you can, down to 5, 6 minutes or so, so 

we can get through all of you. We have got a crowded panel here 

this morning, and then we will turn to questions, and I will try and 

keep the questions down to about—I will try and do about 7 minutes per member, and really that is tight as it is, because someVerDate Nov 24 2008 02:14 Nov 24, 2009 Jkt 050307 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HR\OC\A307.XXX A307

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times setting up the question takes a few minutes. But we will try 

and move this along so everyone is involved. 

Anyway, today is the first in a series of hearings on the subject 

matter that I believe is of critical importance, that is, the subject 

matter of credit cards. It is my hope that through these hearings 

this Committee, in a careful, thorough, and open manner, will 

begin to examine both the positive and negative impacts that this 

important financial tool plays in the lives of millions of American 

consumers in our Nation’s economy. It is my hope that this hearing, entitled ‘‘Examining the Billing, Marketing, and Disclosure 

Practices of the Credit Card Industry, and Their Impact on Consumers,’’ will help us to better understand the many complex 

issues regarding credit card practices. 

A number of members of this Committee have a strong interest 

in this matter, and I encourage their active participation today and 

in the coming weeks and months. 

At the outset of this hearing, let me say this about credit cards. 

I support them. I strongly believe in the product and its potential 

to give consumers greater convenience and access to capital. They 

are an important component of a financial services industry that is 

the most dynamic and innovative in the world. And that statement 

cannot be stated strongly enough. I believe it very strongly. And I 

support the notion that consumers must share the responsibility to 

better understanding the terms and conditions of their credit card 

agreements and take personal responsibility for their financial decisions. 

Let me add here an aside, if I can. Someone last evening I was 

talking to talked about financial literacy. That is something I hope 

we might encourage our Committees on Education and other 

schools across the country to begin early on with young people and 

to educate them about the importance of the responsibilities in financial matters. 

But this morning I would like to put the credit card industry on 

notice as well, and issuing banks as well, and associations, that if 

you currently engage in any business practice that you would be 

ashamed to discuss before this Committee, then I would strongly 

encourage you to cease and desist that practice. Irrespective of the 

current legality of such practices, you should take a long, hard look 

at how you treat your customers, both in the short term and in the 

long term. 

Credit card use has grown dramatically over recent years. Over 

640 million credit cards are issued by more than 6,000 credit card 

issuers, currently in circulation in this country. Between 1980 and 

2005, the amount that American consumers charged to their credit 

cards grew from $69 billion a year to more than $1.8 trillion per 

year. Credit cards have played an important role in supporting entrepreneurship and have helped to provide consumers in building 

credit histories. But in far too many instances, in my view, they 

can harm, not help, a consumer’s ability to move up the economic 

ladder. 

I would like to outline a few of my concerns regarding credit 

cards that I believe this Committee must examine. One of the 

trends that greatly troubles me is the exponential rise in consumer 

debt and the role that credit cards have played as part of that 


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trend. The recent level of credit card debt in the United States is 

at a record height. Total consumer debt in America is nearly $2.4 

trillion. Out of that, $872 billion is revolving debt, which is essentially credit card debt. 

The average American household—the average American household—has over $9,300 worth of credit card debt. Let me repeat 

that. The average household has more than $9,300 of credit card 

debt. In comparison, the median household income was about 

$46,000 in 2005. 

Additionally, Americans have never paid more in interest, paying 

nearly 15 percent of their disposable income on interest payments 

alone, despite the current historically low interest rate environment. 

Another area which I believe deserves examination is the massive increase in targeting of credit card solicitations. According to 

the Federal Reserve, an estimated 6 billion direct mail solicitations 

were sent by credit card issuers in 2005 alone. Many of the solicitations target students, persons currently on the economic edge, senior citizens on fixed incomes, and persons who have recently had 

their debts discharged in bankruptcy. 

I have long believed that we have an added responsibility to protect the most vulnerable in our society, and I believe that examining the targeting of these groups is critically important. 

I also have concerns with the amount, type, and disclosure of certain fees imposed on consumers. Over the past 2 years alone, the 

amount of money generated by credit card fees has simply skyrocketed. In fact, the term ‘‘skyrocketed’’ may be something of an 

understatement. Banks are expected to collect $17.1 billion from 

credit card penalty fees in 2006, a 15.5–percent rise from 2004. According to R.K. Hammer, a bank advisory firm, this is a tenfold increase from 1996 when credit card companies raised $1.7 billion in 

revenues and fees. In 10 years, $1.7 billion to $17.1 billion. We 

need to take a close look at these fees and how they fundamentally 

impact consumers. 

We must closely examine the current disclosure regime as well. 

The current system of disclosure is outdated. It has not kept pace 

with a variety of credit card practices, and consumers have little 

understanding of the terms and conditions of their credit card contracts. Despite the significant work of many, including a number 

of the Members of this Committee, to provide consumers with clear, 

understandable, and consistent information, consumers are consistently becoming confused and intimidated. 

The Truth in Lending Act is the primary Federal law pertaining 

to the extension of consumer credit. TILA, as it is called, and Regulation Z, which implements the act, require creditors offering openended credit plans, such as credit card accounts, to disclose costs 

and other terms. The purpose of the act is, and I quote the purpose 

of the act here for you, ‘‘to assure a meaningful disclosure of credit 

terms so that the consumer will be able to compare more readily 

the various credit terms available to him in the marketplace and 

avoid the uninformed use of credit; and, two, to protect the consumers against inaccurate and unfair credit billings and credit card 

practices.’’ 


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The Federal Reserve is currently conducting a review of the 

open-ended credit rules of Regulation Z. It is my hope that the review will result in greater clarity and comprehensibility for consumers. Let me also add that the OCC issued an advisory letter in 

September of 2004 to alert the national banks to the agency’s concerns regarding certain credit card marketing and account management practices. The OCC’s letter outlines three credit card practices that, and I quote them, ‘‘may entail unfair or deceptive acts 

or practices and may expose a bank to compliance and reputation 

risks.’’ 

While the OCC has deemed these practices unfair and deceptive, 

the agency has to this point declined to prohibit them. With the increase in the pervasiveness of credit cards and the number of consumers who utilize them, the OCC, in my view, should recommit 

itself to protecting consumers. We must, in my view, redouble our 

efforts to ensure that consumers have a complete and accurate understanding of the debts that they will enter into with credit card 

issuers. Examining the law and regulations that protect consumers 

will be a very important part of this Committee’s oversight work. 

Additionally, there are many credit card practices that the American public has raised significant concerns with, not simply with 

the disclosure but the underlying rationale and justifying them. 

For example, double-cycle billing, universal default, and the methodology of penalty increases and interest rates, and the issuance of 

multiple low-limit cards with exorbitant fees are just some of the 

controversial practices that are pervasive in the industry. 

I would also say here that ‘‘caveat emptor’’ or ‘‘buyer beware’’ 

should not be used, in my view, to defend the myriad of confusing, 

misleading, and in some cases predatory practices which have become standard operating procedures for some in the credit card industry. 

And, last, I would be remiss if I did not mention one issue that 

is not likely to be explored today: credit card interchange fees. 

These fees are imposed on merchants and consumers by banks and 

credit card associations when a credit or debit card is used to pay 

for a purchase. Interchange fees are growing exponentially, and the 

costs associated with these fees are expected to be between $30 and 

$40 billion this year alone. These opaque fees are assessed on merchants and passed on, in part or in whole, to consumers who have 

no knowledge or understanding that a fee is even a part of the cost 

of the bread, milk, or whatever other purchase they make. I believe 

that this is another area that this Committee should examine as 

part of a series of hearings on credit cards, and we will do that. 

With that, I would like to introduce the—I will get to the witnesses in a minute. Let me turn to my colleague from Alabama for 

any opening statement he wants to make, and then I will introduce 

our witnesses. But, again, I thank all of you for being here today, 

and I thank my colleagues for their participation. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. I want to commend 

you for holding this important hearing. You have touched on a lot 

of things. 


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Over the last 30 years, there has been considerable change in our 

Nation’s credit markets. In the past, card issuers offered fixed-rate, 

fee-based cards to consumers with only the best credit ratings. 

Today, the use of risk-based pricing allows issuers to offer a wide 

variety of cards to a greater number of consumers by using different rates, fee structures, and credit limits. 

While it is clear that such innovation has greatly and positively 

affected the cost and availability of credit, it is also clear, Mr. 

Chairman, that these changes have led to some troubling practices 

as well. Generally speaking, more complex credit card products involve more conditions and variables, making it harder for the average consumer to fully understand their rights and their responsibilities. Large numbers of consumers, in fact, do not understand the 

basic terms that can affect rates and fees. 

For example, many are surprised when the rate on their card is 

raised even though they have made every payment in full and on 

time. Through the practice known as universal default, credit card 

issuers maintain the right to raise rates when they discover that 

a consumer was late or missed a payment on any of the consumer’s 

other credit accounts. 

The marketing of credit card products has also changed dramatically in recent years. From the Internet, to college campuses, to the 

mailbox, credit card solicitations are everywhere. The marketing 

campaign does not stop when a consumer already has an issuer’s 

card or even when the cardholder is having trouble making payments. In fact, some issuers extend additional credit to troubled 

borrowers with full knowledge of their credit difficulties. 

At the outset of this hearing, I think we must recognize the integral role credit cards play in the financial lives of almost all adult 

Americans. Nearly half of all Americans use credit cards to conduct 

transactions worth billions of dollars. And with that in mind, this 

Committee has a responsibility to not only identify abuses and 

questionable practices by issuers, but also to highlight the positive 

aspects of the credit card marketplace, while emphasizing the responsibilities of the individual cardholder. 

I believe that credit must not only be used responsibly but extended responsibly as well. The key to achieving both of these goals 

is access to accurate and understandable information. I look forward to hearing from today’s panel on the state of the credit card 

business and how Congress can continue to be a constructive influence in a dynamic and necessary sector of our financial services industry. 

Mr. Chairman, I have an article here that appeared in 

BusinessWeek Magazine, November 6, 2006, and it is entitled 

‘‘CapOne’s Credit Trap.’’ I think it is very instructive, and I ask 

unanimous consent it be made part of the record. 

Chairman DODD. It will be made part of the record. 

Senator SHELBY. Thank you, Mr. Chairman. 

I am going to ask each of our panelists here if they would like 

to make a couple of opening comments. Senator Carper. 

STATEMENT OF SENATOR THOMAS R. CARPER 

Senator CARPER. Let me just start off by saying, Mr. Chairman, 

thanks not only for calling the hearing but also thank you for 


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working with us to make sure we have a fair and balanced hearing 

where all sides can be heard in a respectful way. I am very grateful 

for that. 

I want to thank each of the witnesses for joining us today, and 

some of you have family members here, and I see one 13-year-old 

back there behind Mr. Donovan, and especially welcome to you. 

You are good to miss school today to be here to back up your Dad. 

[Laughter.] 

Chairman DODD. He can help them out with the math, maybe. 

Mr. DONOVAN. He can pass me the notes. 

Senator CARPER. We are going to look carefully, Mr. Donovan, 

and see if we can see your son’s lips move while you speak. 

[Laughter.] 

Senator CARPER. That is the way it is in our family. 

I especially want to welcome Richard Vague, who is here today, 

whom I have known for some 20 years. He came to Delaware a 

number of years ago and created a credit card bank called M Corp. 

It grew into First USA, which was, I think, at the time maybe the 

largest Visa credit card issuer in the world with some 60 million 

credit cards. We were fortunate that he came to our State. He now 

heads up Barclaycard USA, which acquired Juniper Bank, and we 

are just glad that they are in our State on the riverfront. If you 

ever come through Delaware on the train, right by the riverfront 

you will see Barclays Bank, and that is the bank that Richard and 

his colleagues, including Clint Walker, who is here, head up. We 

thank you for coming. 

I say to our witnesses, we just finished last week legislation dealing with ethics, ethics reform. You probably were following it in the 

press. And as it turns out, most of the folks, I think, sitting—well, 

all the people sitting up here on this panel, and even those that 

are not here today, are what I would call ‘‘White Hats’’ in this business. As it turns out, not everybody who happens to serve in the 

U.S. Congress wears a white hat, and one of the reasons why we 

have taken up ethics reform legislation and enacted it in the House 

and in the Senate is because of the misdeeds of a number of our 

colleagues, not in the Senate so much as in the House of Representatives in recent years. And we need to clean up our own act 

and police our own act, and that is what we are endeavoring to do. 

And, by the same token, there are a lot of White Hats in this industry, too. I think they happen to be sitting here at this table, and 

there are others that are not at this table. But we know, by the 

same token, that there are folks who follow practices that are, I 

think, inappropriate, in some cases abusive, and what we need to 

do as a Committee is to put a spotlight on that behavior, on those 

practices, and at the same time put a spotlight on the practices of 

those whose behavior we think is appropriate and commendable. 

I think there is a lot that we agree on in this panel. We agree 

on the need for better disclosure, not just more detailed disclosure, 

but actually disclosure that people can read and understand. Christopher Cox, who is the head of our SEC, comes before us from time 

to time. One of the great virtues that he brings to this witness 

table is he actually speaks in language that we can understand, 

and he is trying to convince the rest of the SEC to speak and write 

in plain English. And we think that kind of approach is needed in 


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a lot of, frankly, the way we probably give speeches and also in the 

way we disclose matters that relate to credit cards that some of you 

issue. 

Financial literacy. We are proud of the work that we are doing 

in Delaware in financial literacy. We need to do a better job in, 

frankly, every State of making sure that the people who receive— 

whether it is a credit card application in the mail or a form dealing 

with refinancing a mortgage, we need to make sure that people understand what they are getting into, and that is a big part of our 

responsibility. 

The last thing I want to say—and I think Senator Shelby may 

have referred to this, but I remember the first credit card I got. I 

was in the Navy. I was a naval flight officer. It was during the 

Vietnam War. I got a credit card, and there was a limit on how 

much I could charge. There was a monthly fee that I had to—or 

an annual fee that I had to pay. I do not think there was an interest rate on what I was charging. And things have certainly 

changed a lot, but it was helpful to me to have that card then. And 

today I think I have three or four credit cards in my wallet. One 

I use for my personal use. Another I use for matters that are official Senate dealings, charges that I make. Another deals with my 

campaign, charges that are reimbursable by my campaign. And it 

is very helpful to me to manage my finances to have those credit 

cards. 

In my State, in Delaware, we used credit cards rather extensively for State employees to provide a paper trail so that we could 

follow the charges that they were making. It was actually quite 

helpful for our auditors to ferret out abuses that might occur. We 

do a similar kind of thing with Federal employees. 

So I would say that as we look at this hearing today and we look 

forward, Mr. Chairman, we all know that there are certainly improvements that can be made. Everything I do I can do better. I 

am sure that is true for this industry. And we hope that today will 

be a good place to start us on that trail to clearing up some of the 

abuses that occur, putting a highlight or a spotlight on those that 

are doing the right thing, and maybe we will all be better for it. 

Thank you. 

Chairman DODD. Thank you very much. 

Senator Bennett. 

STATEMENT OF SENATOR ROBERT F. BENNETT 

Senator BENNETT. Thank you, Mr. Chairman. I appreciate the 

opportunity to be here and look forward to the witnesses. 

Putting it into a little bit of a historic note, I note that back in 

1990 the average interest rate on credit cards was 18 percent, and 

a good percentage of them charged an annual fee. In 2005, the average interest rate is 12 percent, and most of them do not charge 

an annual fee. So the pressures of competition to make it better for 

consumers have produced this kind of change, and I think we 

should recognize that the market does work. The market has produced better situations for consumers. And while I am still troubled about some of the same issues you are, Mr. Chairman—the solicitation issue, the entrapment, if you want to call it that, of people who will have difficulty meeting their credit card charges—I 


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think we need to be careful as we go forward to make sure we do 

not have some of the problems that other countries have had that 

have tried price caps on interchange fees and discovered that the 

result has been the drying up of opportunities for credit cards. 

So I think you have a balanced panel of witnesses here, and I 

look forward to hearing from them. 

Chairman DODD. Thank you very much, Senator. 

Senator Akaka. 

STATEMENT OF SENATOR DANIEL K. AKAKA 

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

happy to be back on the Committee, and I look forward to working 

with you and the Members of the Committee. I also want to welcome our witnesses. Thank you for conducting this important hearing. It is imperative that we make consumers more aware of the 

long-term effects of their financial decisions, particularly in managing credit and debt. 

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

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

vital information that would allow individuals to make fully informed decisions. Additional disclosure is needed to ensure that 

consumers completely understand the implications of their credit 

card use and the costs of only making the minimum payments. 

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

this country, primarily through expanding educational opportunities for students and adults. Beyond education, consumers need to 

be made more aware of the long-term effects of their financial decisions, particularly in managing their credit card debt, so that they 

can avoid financial pitfalls. 

The Bankruptcy Abuse Prevention and Consumer Protection Act 

of 2005 included a requirement that credit card issuers provide information to consumers about the consequences of only making the 

minimum monthly payment. However, this requirement fails to 

provide the detailed information on billing statements that consumers need to know to make informed decisions. 

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

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

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

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

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

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

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

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

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

allows the credit card issuer to provide a general minimum payment warning and provide a toll-free number that consumers could 

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


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The options available under the bankruptcy reform law are woefully inadequate. They do not require issuers to provide their customers with the total amount they would pay in interest and principal if they chose to pay off their balance at the minimum rate. 

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

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

The minimum payment warning included in the first option 

underestimates the costs of paying a balance off at the minimum 

payment. If a family has a credit card debt of $10,000 and the interest rate is a modest 12.4 percent, it would take more than 10– 

1/2 years to pay off the balance while making minimum monthly 

payments of 4 percent. Shortly, I will be introducing the Credit 

Card Minimum Payment Warning Act. The legislation would make 

it very clear what costs consumers will incur if they make only the 

minimum payments on their credit cards. 

If the Credit Card Minimum Payment Warning Act is enacted, 

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

My bill requires a minimum payment warning notification on 

monthly statements stating that making the minimum payment 

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

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

The legislation also requires companies to inform consumers of how 

many years and months it will take to repay their entire balance 

if they make only minimum payments. In addition, the total costs 

in interest and principal, if the consumer pays only the minimum 

payment would have to be disclosed. These provisions will make individuals much more aware of the true costs of their credit card 

debt. 

The bill also requires that credit card companies provide useful 

information so that people can develop strategies to free themselves 

of credit card debt. Consumers would have to be provided with the 

amount they need to pay to eliminate their outstanding balance 

within 36 months. 

Finally, the legislation requires that creditors establish a toll-free 

number so that consumers can access trustworthy credit counselors. In order to ensure that consumers are referred to only trustworthy credit counseling organizations, these agencies would have 

to be approved by the Federal Trade Commission and the Federal 

Reserve Board as having met comprehensive quality standards. 

These standards are necessary because certain credit counseling 

agencies have abused nonprofit tax-exempt status and taken advantage of people seeking assistance in managing their debt. Many 

people believe, sometimes mistakenly, that they can place blind 

trust in nonprofit organizations and that their fees will be lower 

than those of other credit counseling organizations. 

In a report on customized minimum payment disclosures released last April, the Government Accountability Office found that 

consumers who typically carry credit balances found customized 

disclosures very useful and would prefer to receive them in their 

billing statements. We must provide consumers with detailed perVerDate Nov 24 2008 02:14 Nov 24, 2009 Jkt 050307 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 E:\HR\OC\A307.XXX A307

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sonalized information to assist them in making better informed 

choices about their credit card use and repayment. 

Our bill makes clear the adverse consequences of uninformed 

choices such as making only minimum payments and provides opportunities to locate assistance to better manage credit card debt. 

Mr. Chairman, I look forward to working with you and the rest 

of the Committee to improve credit card disclosures so that they 

provide relevant and useful information that hopefully will bring 

about positive behavior change among consumers. Consumers with 

lower debt levels will be better able to purchase homes, pay for 

their child’s education, or retire comfortably on their own terms. 

Mr. Chairman, I thank you for giving me this time, for conducting this hearing, and for your leadership on these issues. 

Thank you very much. 

Chairman DODD. Thank you, Senator Akaka. You have been involved in these issues for a long, long time, and we welcome your 

continued involvement. 

Senator Allard. 

STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. Mr. Chairman, I think at this point most that 

needs to be said has already been said, and so I am going to just 

say that I see a fundamental change in credit card use from a philosophical standpoint. You know, years ago it used to be a matter 

of convenience. And today I think more and more young people and 

young families are looking at it as a way of establishing credit, 

where historically I think consumers used to go to the bank for 

long-term credit and now they are looking for short-term credit 

means, and there are a lot of traps in it. And I applaud you for 

having this hearing to make consumers and lenders, in this case 

many times a credit card, to understand, you know, the traps that 

happen out there. We all need to be made aware of them, and I 

thank you for holding this hearing. 

Chairman DODD. Thank you very much. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, and, Senator Shelby, 

thank you, and thanks to all the panelists, especially Dr. Warren 

and your contribution on all of these issues over many years. 

Thank you for that. 

Ohio State University, the largest university in my State and the 

Nation, tells its students on its financial aid website to ‘‘avoid credit card debt while you are a college student.’’ Yet go to any college 

campus in my State, Bowling Green or Miami or Cincinnati or 

Kent State or Akron U. or Toledo, and almost any campus across 

this country, you see that college students are inundated with credit card applications. 

I question a business model that markets credit card debt to 

young people who do not have the means to pay the debt back. And 

I question the business model that markets lifetime debt to working families and elderly Americans. 

According to a study at Ohio State, more and more retirees are 

struggling with credit card debt that they will simply never be able 


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to fully repay. There is a fine line between sales tactics and scams, 

between product promotion and unrelenting pressure. Of course, 

the goal of this Committee’s work today is not to block consumer 

access or hamstring the credit card industry. The goal is to explore 

how we can set up a better system where informed consumers can 

make the best decisions possible regarding credit card debt. 

I am looking forward to hearing how billing and disclosure practices can empower the American consumer to make the right decision. 

Chairman DODD. Thank you very much, Senator. 

Senator Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Senator. I will try to be 

brief as well. I associate my comments with those of some of my 

colleagues here today who have talked about not only the concerns 

that we look at to make sure that the industry is operating properly and that there are not inappropriate marketing practices, but 

also the value that credit cards and the credit system in the United 

States has brought to the American consumer and to the American 

economy. 

I note that between the years of 1980 and 2005, the amount that consumers utilized in terms of credit cards grew from $69 billion 

to more than $1.8 trillion. And there is a tremendous benefit to 

citizens in the United States and our economy to having such a robust and dynamic system of credit. But we must make sure that 

that system of credit does not create abuses or allow for circumstances of abuse. And I think that is the focus of this hearing. 

You know, I was just listening to Senator Brown talk about the 

college situation. I have got kids in college right now, and I made 

sure every one of them had a credit card, but that they knew how 

to use it. My kids use their credit cards the way I think most consumers use their credit cards, and that is, they pay them off every 

month. But they are able to use that credit card to significantly increase the flexibility of their legitimate consumption needs and to 

participate in a vibrant, dynamic economy. 

So I make that point just to indicate that there is really a balance that we have got to reach here because the utilization of credit in this Nation can be a tremendously strengthening force for our 

economy and an empowerment to our citizens, while at the same 

time if wrongly utilized can be something that drags them down 

into a mire of debt. 

We need to make sure that we in this Nation have a credit system that works to the advantage of our individual citizens and to 

the advantage of our economy, or we will again see a circumstance 

in our Nation where we as a Nation are losing in some of the international competitive strengths that we used to have in our economy. 

So it is that balance that I am going to be looking for, and I appreciate the witnesses’ coming here today to share with us their 

understanding of these different types of issues. 

Chairman DODD. Thank you very much, Senator. That was very 

well said, and I think you will hear all of us make similar statements. This is a very important industry and critically important 


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to consumers, and striking that balance is truly what we want to 

do in these hearings and try to solicit some good information and 

some changes that will assist in achieving that balance that we 

want. 

Senator Tester. 

STATEMENT OF SENATOR JON TESTER 

Senator TESTER. Thank you, Chairman Dodd, Senator Shelby. 

Thank you for having this hearing on this topic that affects millions and millions of Americans’ pocketbooks every day—the billing, marketing, and disclosure practices of the credit card industry. 

And thank you, panelists, for coming today. 

The average American is trying to make ends meet, we all know 

that—providing for their kids, paying for their mortgage, buying 

their prescription drugs, saving for a rainy day, hopefully. They 

have little time at the end of the day to decipher the many inserts 

to their credit card statement and the fine print in the credit card 

solicitations. 

You know, when my wife and I took over the farm, one of the 

ground rules my folks laid out is you are not going to have any 

credit cards, something that, quite frankly, we despised at that 

point in time. That was in the late 1970’s. It was a different time 

than now, but still and all, it would have been handy to have them. 

But as my kids were growing up—and my daughter is 26 and 

married and has two kids, and my son is 21 and in college—I found 

out exactly firsthand why my parents laid those stipulations down. 

Quite frankly, I believe in personal responsibility, but there has to 

be education, there has to be balance, and there has to be fairness. 

And when we put young people’s futures in a position where they 

are going to have a difficult time saving for that rainy day or when 

their kids go to college, we are making a huge mistake. 

I can give you the examples where they went around with credit 

card companies to the point where I took them out of my pocket 

and cut them up myself. Now, in this day and age, you have got 

to have some. When you fill up with gas, sometimes it is tough. 

They do not take cash, so you have to do it. They certainly do not 

take your check. But the fact of the matter is if we do not educate 

our young people and give them the opportunity to know what they 

are stepping into when they get these cards, really as free money— 

I mean, it has been 30 years ago since I graduated from college. 

But if somebody would have sent me a plastic card and said, ‘‘Here, 

you have got 5,000 bucks, go ahead and spend it,’’ I would have 

probably done it because I did not have the personal discipline at 

that point in time to know what it was getting me into. And my 

folks pounded financial security into our heads. 

So I think it is critically important. This is such a critically important issue, and it really troubles me that we are putting our 

young people and our young families behind the eight ball before 

they even get going in life financially. And I cannot tell you how 

much this issue hits to the heart of giving young folks a chance, 

whether they are in college or whether they are out of college raising their families. 

So I am very interested in this hearing and in the testimony 

today from the credit card industry and consumer groups and disVerDate Nov 24 2008 02:14 Nov 24, 2009 Jkt 050307 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 E:\HR\OC\A307.XXX A307

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tinguished scholars. And I know that there are very few issues that 

are black and white, but the fact is I am eager to learn what we 

can do to make the playing field fair and let folks know what they 

are getting into and the ramifications of that before they make the 

wrong step financially and it really does put them in a difficult financial situation for decades, if not their entire life. 

Thank you very much, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Senator Sununu. 

STATEMENT OF SENATOR JOHN E. SUNUNU 

Senator SUNUNU. Thank you, Mr. Chairman. 

I have been on this Committee now for 4 years, and in the 4 

years that I have been here, we have had a number of very good 

hearings, and most of them really bipartisan, dealing with the various aspects of the financial service industry. And we have seen 

people testify—even when they come from different sides of an 

issue, they testify about the growth and opportunity in the industry, competition in the industry, mutual funds, retirement services, 

annuities, insurance products. And with a lot of the reform legislation that was passed in the late 1990’s and in the 2000 timeframe, 

we have seen great growth and competition in those industries. 

And consumers have been well served in those areas by healthy 

and strong competition. 

I think as we begin this series of hearings and look at the credit 

card industry, we want to continue to push for honest practices and 

honest disclosure. And I think if we have those things, consumer 

interests are going to be particularly well served. Where we see 

fraudulent practices, we also need to make sure that we have 

strong, severe penalties for those practices. And I think that is one 

of the things I am interested to hear about today from those that 

have been victims of fraudulent practices, that have seen the impact of fraudulent practices. How did they manifest themselves? 

And what are the appropriate penalties? 

On the other side of the coin, I think we always have to be worried about establishing the proper remedies, because even well-intended remedies for a problem we see in the industry can have unintended consequences. And we have seen that not just in financial 

services, but in so many areas of our legislation where we attempt 

to solve a problem that bothers us and the country and consumers 

a great deal, but it has unintended consequences. Price controls 

and other caps of that nature we have seen in the past, restricting 

innovation, even restricting access to consumers that are intended 

to benefit from the products. 

So I think that is the one thing we need to be aware of. Set the 

right penalties for fraudulent activity. Make sure we have honest 

practices and full, honest disclosure. We all, I think, have credit 

cards or experience with credit cards, and the one thing I find most 

baffling about credit cards are the disclosure statements. They tend 

to be very long. They can be written in legalese—although, ironically, some of those requirements are put on them by us, by Congress, or by the States or by other regulatory bodies. So, you know, 

that probably bears some investigation at this hearing and at subsequent hearings, how to make sure that when we are disclosing 


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information to consumers—not just that it is in the envelope, but 

that it is actually in a form that means something and that connects with the public. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much. 

I would just note—and you may hear this from some of our witnesses—that in 1980 the average contract for a credit card was 

one-page long. Today it is 30 pages, 25 years later. So the average 

consumer is sitting here trying to determine what is going on. 

Senator BENNETT. We have met the enemy, and he is us. 

[Laughter.] 

Senator SHELBY. Mr. Chairman, I wonder how many people read 

a 30–page document. 

Chairman DODD. That is the intention. 

Senator SHELBY. Nobody. 

Chairman DODD. Senator Menendez. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. Thank you, Mr. Chairman. Let me congratulate you. This is the first formal time I have been at the Committee 

with you as the Chair. In your chairmanship of the Committee, we 

look forward to working with you and Ranking Member Shelby in 

the same bipartisan way that Senator Shelby led the Committee 

with Senator Sarbanes. And I appreciated it when he did that, and 

I am sure you will do the same. 

I want to thank both of you for holding this hearing today on the 

credit card industry practices and their impacts on our constituents. I think credit is very important. I think the industry provides 

a great service and lots of opportunity for people to establish credit, 

to have the values that can flow from it. It is obviously in this 

economy a very important economic and financial factor. But there 

are also challenges, and I hope that the industry—above all from 

this hearing, I hope the industry will work with us to meet some 

of those challenges. 

There is another industry, which I will fail to mention but it has 

a great presence in New Jersey, that years ago I raised with them 

before a certain issue before the Congress became an issue, that if 

they, in fact, sought an industry response to some of the rising 

challenges within their industry and the consumer base, that they 

would be much better with an industry response than with a legislative response. And having convened all of them together, they all 

agreed, and then they went and they, for one reason or another, 

failed to have an industry response. And the consequences that 

flowed from that, quite a bit, both in the hundreds of millions of 

dollars they spent on the issue and having a black eye to what was 

a revered industry for producing good products that improved the 

quality of life. 

So I hope if nothing else for today that it is in that spirit that 

the industry will look at this hearing because there are challenges. 

Families across this country face a growing problem of rising credit 

card debt. In 2004, the average American household had about 

$9,300 in credit card debt, up from $3,200 just 12 years earlier. 

More and more Americans are using credit card debt to manage 

daily living expenses as basic living costs, medical bills, house or 


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automotive repairs. And for college students—and this is one of the 

areas that I have the greatest concern, having had two college students—well, still one—the incredible, aggressive solicitation of a 

universe that in many respects does not have the income to ultimately provide the payment for the credit cards that they somehow 

not only are solicited but then take, and the consequences from 

that are very significant. I have talked to families who absorbed 

the debt because they did not want their kids to have bad credit 

early on in their life. And I have talked to families who could not 

absorb the debt, and at the end of the day had their kids start off 

with bad credit. 

Now, I have a stack in my home this high—I should have 

brought it today—of the solicitations my kids received, and the reality is that they were not gainfully employed to be able to pay the 

solicitations. But, in fact, they would have easily, I think, received 

a credit card. 

As a matter of fact, 2 years ago, Augustino Joseph Chairvolotti, 

one of my constituents in New Jersey, received his very first solicitation for a pre-approved credit card at the age of 2. He is my State 

Director’s son. Evidently, if you have a pulse and a Social Security 

number, you can get a credit card offer, at least. 

So the real question is: How do we go about making sure that 

issues like that are dealt with in a way that provides an opportunity for credit for those who can handle it and those who should 

have it, but at the same time deals with the reality that too many 

of our young people are already finding themselves with a history 

of default that will have a real consequence, especially after the 

last bankruptcy law? And at the same time, how do we watch the 

targeting of people who are likely to default, people who are like 

these college students, older Americans, minorities, people who, in 

fact, do not have the wherewithal to provide the payments for the 

credit lines they are given? 

And so we have introduced some legislation, Mr. Chairman, and 

I will just include it for the record. But my hope is that we can actually find a way in which we can work with the industry to deal 

with some of these challenges so that we can balance the interests 

of the industry and the interests of consumers in having access to 

credit—questions of universal default, questions of the incredibly 

aggressive nature of going after college students, those who have 

not the wherewithal to pay, questions of offering a credit card to 

someone under one set of terms and then sending them a totally 

different credit card under another set of terms. These are things 

I think the industry would well be suited to work with us and others to move in a direction that would, in essence, make sure that 

the great positive aspect of the industry is preserved, and at the 

same time balance with the interests of consumers so that we can 

continue to move forward directly. 

It is in that spirit that I come to this issue, Mr. Chairman, and 

I look forward to working with you and others to try to achieve 

some success. 

Chairman DODD. Thank you very much, Senator. I mentioned before you came in your strong interest in the subject matter. I have 

enjoyed working with you on it for many years. 


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Senator Casey, welcome to the Committee once again. Thank you 

for being here. Just a quick opening statement you may have before we—— 

STATEMENT OF SENATOR ROBERT P. CASEY 

Senator CASEY. Mr. Chairman, thank you very much. I will be 

extraordinarily brief. I may be the last today, so we want to get to 

the testimony. But I want to make two points. 

One, to you, Mr. Chairman, and Senator Shelby and the Members of the Committee, I think the fact that we are sitting here 

today about to engage in a very important hearing that involves 

not only families across America, and certainly many of those in 

my home State of Pennsylvania, but the fact that we are here talking about this issue is in many ways testament to your leadership, 

Mr. Chairman, to focus on issues that have real consequences to 

the real lives of real people. And I appreciate that because this 

Committee, the reach of this Committee is so broad and so important that when we have hearings like this that get us into the real 

world, so to speak, we are in your debt for that, and I appreciate 

that. 

As many people here know, we are engaging in the Senate right 

now in a debate about the minimum wage, which, in my judgment, 

is much more simple than some people in Washington want to 

make it. The subject matter of this hearing today is more complicated and more difficult in my judgment. I come from a State 

where we have a very strong financial services sector of our economy, a very strong and significant part of our economy. I also come 

from a State where families have been devastated by the costs in 

their lives. 

I was on the floor the other day talking about the minimum wage 

and talking about it in the context of costs that have gone up in 

the lives of families across America the last decade. That is extraordinary when you look at the costs of education and food and 

home heating oil and health care. Health care costs are up almost 

100 percent in the last 10 years. And the worst thing that could 

happen to a family, as everyone here knows, in addition to confronting all of those cases, is to have their head—and I am being 

figurative here, but to have their head in another vice grip out of 

which they cannot extricate themselves because of the costs that 

they have to bear with regard to credit cards in addition to all 

those other costs. 

So I want to be cognizant of that real-world concern that families 

have, and I think this hearing and the hearings like it will bring 

some light and will hopefully illuminate the problem so that families across America can listen, as we must do as Senators, listen 

and learn even as we might have some conflicts about how to get 

to the solution. 

But, Mr. Chairman, I appreciate this opportunity, and I really 

appreciate this hearing being so early in this new Congress and 

your chairmanship. 

Chairman DODD. Well, thank you very much, Senator, and we 

will turn to our witnesses. And I hope the witnesses—let’s take a 

little time to do this this morning, to hear from—I do not know 

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mittee here. I think there is a value in it. This is an important subject matter, and we have new Members of the Committee, new 

Members of the U.S. Senate, and while we want to hear from you, 

obviously, because you bring a lot of expertise to this, I think the 

conversation is important. 

As I said at the outset, this is one in a series of hearings we will 

have on this subject matter, and, again, I want to underscore the 

point that Senator Menendez has made, and Senator Sununu and 

others have made here this morning, and that is, I do not think 

any of us are interested in necessarily writing legislation unnecessarily here at all. We would rather get something done without 

having to go through all of that process if we can. So it is an invitation as well for ideas and concepts that may actually -we could undertake almost immediately. In fact, some of our witnesses here 

have already made some decisions on their own fairly recently on 

what we will be talking about this morning that I commend them 

for in dealing with some of these issues. And that is the way in a 

sense we can respond to some of these questions. So I thank you. 

I thank all of my colleagues for being here. This is an indication 

of the importance of this issue. Having served on this Committee 

for 25 years, in many cases it is the Chairman and the Ranking 

Member that are at hearings. We may have a good size panel, but 

sometimes the interest in the subject matter may not be as great. 

The fact that so many have turned out here this morning indicates, 

I think, to all of you here as witnesses how important this subject 

matter is. 

With that, let me also point out we are going to have a vote 

starting at some point here fairly quickly. What I am going to do 

is we will rotate out here. I am going to maybe ask my colleagues 

here if they will assume the chair here for a few minutes while I 

run over and vote so we can keep the process moving and not break 

the flow of the testimony. 

Elizabeth, thank you. Elizabeth Warren is—truth in advertising 

here—a friend and someone I admire immensely, and I thank you 

for coming back to the Committee. She is the Leo Gottlieb Professor of Law at Harvard Law School, author of the book ‘‘The Two 

Income Trap: Why Middle Class Mothers and Fathers Are Going 

Broke.’’ The National Law Journal named her one of the 50 most 

influential women lawyers in America, and Harvard students, 

maybe more importantly, have voted her the Sacks-Freund Award 

for Teaching Excellence. So we welcome you back to the Committee 

again, Elizabeth. Thank you once again for your involvement. 

John Finneran is the President of Corporate Reputation and 

Governance of Capital One Financial in McLean, Virginia. We welcome you to the Committee. And let me point out that Mr. 

Finneran—where are you? There you are. We thank you immensely. Capital One offered to be here. We noticed a hearing, and 

they let us know right away they wanted to be here to participate, 

and we welcome your participation, and thank you for your willingness to step up here and be a part of this today. 

Mr. FINNERAN. Thank you, Mr. Chairman. 

Chairman DODD. Robert Manning is Research Professor and Director of the Center for Consumer Financial Services at Rochester 

Institute of Technology, and the author of the widely acclaimed 


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book, ‘‘Credit Card Nation.’’ Dr. Manning’s research is regularly 

cited and quoted in major publications, and he has testified frequently on Capitol Hill, including at this Committee, and we welcome you back as well, Doctor. There you are. 

Carter Franke is the Executive Vice President of Marketing for 

JP Morgan Chase & Company, whose credit card operation is based 

in Wilmington, Delaware. He testified previously before the Committee in 2005 on this issue, and we welcome you back to the Committee. Thank you very much. 

Michael Donovan is the founding member of the firm Donovan & 

Searles, has litigated in a number of very key, significant consumer 

justice cases, including cases in front of the United States Supreme 

Court, the New Jersey Supreme Court, the U.S. Court of Appeals 

for the Third Circuit, and we welcome you to the Committee as 

well. 

Richard Vague is the Chief Executive Officer of Barclaycard US, 

also based in Wilmington, Delaware. We welcome you to the Committee this morning. 

Tamara Draut is the Director of Economic Opportunity Programs 

at Demos, a public policy center based in New York, and the author 

of ‘‘Strapped: Why America’s 20- and 30–Somethings Can’t Get 

Ahead.’’ Her research is often cited in major U.S. publications, and 

she frequently comments on television news programs and magazines. And we welcome you to the Committee. There you are. 

Thank you. Thank you for being with us. 

Travis Plunkett is the Legislative Director of Consumer Federation of America in Washington. The Consumer Federation is a nonprofit association of 300 organizations and a regular witness, I 

might point out, at the Committee hearings. Once again, we welcome your participation. 

We will have you testify in the order that I have introduced you, 

if that is OK, and then also all of your testimony, any documentation you think would be valuable for this Committee to have, I will 

tell you will be included in the record. And to the extent you can 

try and keep your remarks down to—let’s try and make it 5 or 6 

minutes here. I am not going to hold you rigidly to that number, 

but so you keep that in mind to get it out as fast as you can here 

so we can get to the Q&A period. 

Thank you, Elizabeth. 

STATEMENT OF ELIZABETH WARREN, LEO GOTTLIEB 

PROFESSOR OF LAW, HARVARD LAW SCHOOL 

Ms. WARREN. Thank you, Senator Dodd, thank you, Senator 

Shelby, for having me here today. Thank you, Members of the 

Committee. 

I am someone who believes deeply in free markets, but I am here 

today to talk about a market that is not working—at least not 

working for millions of Americans who find themselves on the 

wrong end of a credit card deal. Quite simply, the credit card market is broken. 

The basics of a credit card are pretty simple: Pay by plastic. Get 

a bill. Pay the bill. So why, as Senator Dodd notes, has the average 

credit card agreement gone from about a page long in 1980 to more 

than 30 pages long today? 


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The answer is that these new pages reflect a business model that 

has changed from its earlier simple roots. Card companies still 

make money like they always did, with merchant fees and annual 

fees, a tidy $11 billion last year. Not bad. But they make their bigtime profits from interest and penalties—an astonishing $79 billion 

from people who are paying minimum payments over time. 

Today’s successful credit card company puts its product in the 

hands of as many shoppers as possible, pulling in decent profits on 

each one, but always hoping for the sweet spot: the customer who 

stumbles but does not quite collapse. That is the customer who 

misses a deadline or misses a payment or goes over limit and ends 

up paying 29 percent interest, $39 late fees, $49 over-limit fees, 

and anything else the credit card company wants to pile on. 

Credit card contracts have grown to 30–plus pages to make room 

for tricks and traps that will ensnare anyone who gets into even 

a modest financial problem. After years of on-time payments, a single stumble can create a cascade of credit defaults and trap a customer for years, even a lifetime, as Senator Casey noted, in a cycle 

of payments that will never pay off these debts. 

Some people do not worry about credit card tricks and traps. 

About half of all American families pay off their credit cards in full 

every month, and they rarely notice things like the mysterious fees 

for charges when it takes 9 days for a credit card payment to make 

it across country. Others enter the credit card market as a gladiator once entered battle, looking for leverage and the zero interest 

and grace period floats, and taking pride in their ability to carry 

a credit balance while dancing around the ever present traps. 

But for 51 million American families who are juggling mortgages 

and car payments and health insurance bills and grocery bills, the 

credit card companies are imposing a huge tax. And for the 23 million of those Americans who are making only the minimum monthly payments, and sometimes not that, the tricks and traps keep 

them on the financial ropes, collectively shelling out billions to the 

credit card companies and never quite getting back on their feet. 

This, Senators, is where the market breaks down. In a perfectly 

competitive market, both firms and consumers would be given the 

information they need to make sound economic decisions. Given the 

complexity of today’s credit card terms, 30 pages of incomprehensible text is not the same as understanding the terms of your credit 

card, especially now that the credit card companies routinely reserve the right to change the terms of your credit card on 15 days’ 

notice with another incomprehensible insert into your bill. 

Sorting out safe cards and dangerous cards is almost impossible. 

As one industry expert just explained last month, bank products 

are ‘‘too complex for the average consumer to understand.’’ Senators, I think it is clear. Card agreements are not designed to be 

understood. 

Be clear. This is not about risk-based pricing. A risk-based pricing model is about the lender’s assessment of the likelihood of repayment at the inception of the loan with subsequent calibration 

as more information comes due. Anyone who has a small child, as 

Senator Menendez noted, or a dog or a deceased relative knows 

that the initial pre-approved credit card solicitation is not risk 

based. Instead, the model is based on putting as many credit cards 


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into the hands of as many human beings—and dogs if they will 

take them—and then when any of them stumble, trip, make the 

slightest misstep, load them up with tricks and traps and maximize 

profits at that point. 

Charges for late fees or over-limit fees reflect the price the credit 

card company thinks that it can charge and not have the customer 

cancel the card. That is what it is calibrated to, not to risk assessment. These tricks and traps are profit taking, pure and simple, 

nothing more. 

One of the few bits of protection for consumers was eroded with 

the change in the bankruptcy laws in 2005. Prior to that time, any 

customer who was facing outrageous interest charges or penalty 

fees at least could credibly threaten to file bankruptcy and try to 

initiate a negotiation. This threat had the effect of curtailing at 

least some of the most aggressive practices. 

With the change in bankruptcy laws, however, many consumers 

no longer see bankruptcy as an option. Whether they are right or 

wrong does not matter. What matters is that even though they remain eligible for bankruptcy, some now listen to debt collectors 

who bully them and tell them that bankruptcy has become illegal. 

Others are discouraged by the increases in fees that make it more 

expensive for the poorest Americans to file for bankruptcy. As a result, lenders can sweat them for payments longer, keeping them 

trapped in a monthly cycle that these customers can never pay off. 

After the new bankruptcy law went into effect, a market that was 

already broken got a lot worse for families in trouble. 

Safer cards can turn a handsome profit, but because they give up 

the mega-dollar sweet spot created by the tricks and the traps, 

they will not produce the bloated profits of dangerous cards. If 

more people turned away from such cards, the market would quickly sort itself out. But if the consumer cannot tell a safe card from 

a dangerous one, then the marketplace will not reward safe cards. 

Consumers bear terrible risks today when they use their credit 

cards. Some will do OK, but some will get trapped. It does not have 

to be that way. No one has to be an engineer to buy a toaster in 

America. No one has to be a crash test expert to buy a car. These 

are markets that have soared with innovation over past decades, 

but they have also been supported by national safety standards 

that kept burst-into-flames toasters and crumple-on-impact cars 

out of the marketplace. 

Government and industry joined forces to develop meaningful 

guidelines in other industries. Cheap shortcuts that would boost 

profits but leave consumers at risk have been banned from those 

markets, with the result that competition has intensified for the 

things consumers can readily see, like price and convenience and 

color. And consumers, most importantly, have safer products at 

lower prices. 

It is time for safety regulation in credit cards as well. There are 

51 million American families who need your help, Senators, and 

they do not have much longer to wait. 

Thank you. 

Chairman DODD. Thank you very much, Elizabeth. Thank you 

for your testimony. 


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A vote has started, I say to my colleagues here. What I am going 

to do is introduce our next witness. I want to skip out the door, 

and I will come right back. And, Senator Carper, if you would like 

to take the gavel for 10 minutes, I will try and get back so that 

you can make the vote and others who may want to slip out and 

come right back. I will leave that up to you. 

Bob Manning, Bob, where is he? There you are. Thank you very 

much, Doctor, for being here. I will let you start your testimony, 

and I will come right back. You just continue with your testimony 

so we can move along. 

STATEMENT OF ROBERT D. MANNING, PH.D., RESEARCH PROFESSOR OF CONSUMER FINANCE, AND DIRECTOR, CENTER 

FOR CONSUMER FINANCIAL SERVICES, E. PHILIP SAUNDERS 

COLLEGE OF BUSINESS, ROCHESTER INSTITUTE OF TECHNOLOGY 

Mr. MANNING. Well, thank you, Chairman Dodd and Ranking 

Member Shelby. It is certainly a pleasure to be invited back, and 

I am particularly pleased to hear that there is a growing awareness 

of many larger consequences than rather simply the length of the 

contract that is to be discussed here today. 

I saw my role today as to look at what has happened in terms 

of some pretty profound changes, not only in terms of the role of 

consumer credit cards in Americans’ lives, but also how the change 

in this industry has profoundly exposed and increased the vulnerability not only to our Nation, comprised of millions of distressed 

American consumers, but also in terms of larger global issues. I 

want to conclude with that point about America’s dependence on 

cheap credit. 

I think one of the first issues to emphasize is that there is a real 

misunderstanding about how much consumer credit card debt there 

is and also the pricing structure of the system, what I have referred to as the ‘‘moral divide.’’ We do not have an installment 

lending program where some people pay zero interest, usually the 

most affluent, and those who are most financially distressed essentially pay the financial freight for those who have financial means. 

Similarly, we constantly see an effort to reduce the aggregate 

amount of consumer credit card debt. I have heard the term $9,300 

is the average household debt, but of the three out of five households that actually carry a debt, it is over $13,000. And I presented 

a brief simulation if we did not have such extensive refinancing in 

the housing market, I estimated that it would clearly be at least 

$18,000 today. And it is. It has simply been reclassified because of 

the opportunity to consolidate these debts into home mortgages. 

The other issue that I think is really important to understand is 

that the market has become more segmented in recent years. I 

would identify at least four distinct segments: the high-net-worth 

card that most of us are familiar with, the Amex black card; the 

more traditional card, certainly facing stress in terms of saturating 

its market, its traditional market, going aggressively after more 

marginal consumers, such as college students. My recent work 

shows more aggressive marketing to high school students, those of 

modest financial means where family members know that their 

children can get credit cards and put pressure on them to borrow 


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while they are in college; and also increasing marketing to the 

handicapped, which I find truly extraordinary that there is no debate about the business ethics behind that particular marketing 

campaign. 

We have seen a third tier that has emerged of the private issue 

cards which shows the financial distress of Americans that are willing to pay a 5- to 7–percent interest rate premium on their Home 

Depot or furniture card just to free up some free lines of credit on 

their Visa or MasterCard in case they have that unexpected emergency. 

The fourth tier is the sub-prime market, and I have been involved in several class action lawsuits, and it is extraordinary to 

see that the business model for these firms has revenues based on 

about 70 percent—70 to 75 percent based on fees. And it is disconcerting that these are not the small morally challenged businesses like Cross Country Bank. We are now seeing some major 

companies, such as HSBC with their Orchard Bank, or even Capital One. 

Liz pointed out, of course, the problem now that many Americans 

are finding, that bankruptcy is not an option. And as we had this 

debate over the last 7 years before its enactment, look at the statistics of profitability. In 2004 to 2005, before the law was implemented, the industry had record profitability. Pre-tax profits 

jumped 30 percent, and even though the argument was that consumers were discharging debt they should not, credit card discharge rates actually declined in 2005. 

Clearly, deregulation and access to credit has elevated people’s 

standard of living, but one point we have neglected is to see how 

the fluidity between these categories and the manipulation of pricing of housing just because of interest rates, where we saw the financial laws of gravity defied, where real family income declined 

in the 2000’s, and yet the average metro housing price doubled. 

Many Americans were seduced into refinancing into adjustablerate and interest-only loans, and we are going to see how vulnerable they are when they are exposed to these resets. 

I think what was striking in terms of preparing my research for 

this testimony was that looking at the wealth formation versus 

debt formation of the average American, we are an optimistic society and culture, and most Americans are willing to go in debt 

based on their perception of the future. But if we look at what happened to wealth formation with the correction of the stock market 

after 2000 and now the correction of the housing market, it looks 

like for the bottom 60 percent of Americans, nearly all of their net 

wealth formation will be erased with this housing adjustment. 

Finally, I want to emphasize the fact that we are seeing the 

emergence of what I have called the ‘‘near bankrupt Americans,’’ 

people who do have jobs who are finding themselves in a situation 

where maybe they are eligible for bankruptcy filing, but they find 

themselves caught between a system that says they repay all of 

their debt or none of their debt. And yet in our pilot program in 

Texas, we find that there are Americans that are willing to go into 

a lawyer-supervised partial payment repayment program of anywhere from three-quarters of a percent to one and three-quarters 

of a percent, desperately trying to do the best they can to pay their 


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bills. And yet even with the support of Governor Huntsman in 

Utah and the Utah State Legislature, we are not finding that 

major credit card collection executives are willing to discontinue 

their adversarial debt collection strategies, even when it is in their 

financial interest to seek a partial payment recovery. 

The final point is that with my research on the global deregulation of financial services, we are seeing a very strong association 

that those countries that have deregulated their markets are seeing a sharp decline in their savings rates. And this is going to have 

very severe issues in terms of our ability and our dependence on 

cheap credit, that clearly we are going to be more vulnerable to 

global financial markets, that we certainly cannot expect other 

countries to reduce their standard of living simply to support our 

own, and that with the housing correction we see already what the 

average American’s dependence on cheap credit really means. 

Thank you. 

Senator CARPER [presiding]. Dr. Manning, thank you very much 

for your testimony. 

We began 13 minutes ago a 15–minute vote, which gives me 2 

minutes to get to the Senate floor to vote. I am pretty fast, but I 

do not know that I am that good. In my youth, I probably could 

have made it. They have sort of like a 5–minute extended period 

that we have to use. So if I get there in the next roughly 6 minutes, 

my vote will count. 

What I am going to do, rather than call on Mr. Finneran to begin 

his testimony and have to stop in a minute or so into the testimony, I am just going to suggest that we recess briefly, and my colleagues will begin pouring back in here, and I think our next witness will be Mr. Finneran, and he will be followed by Mr. Donovan. 

So if you will just sit back, relax, have a long cold drink of water, 

we will be right back. Thanks very much. 

[Recess.] 

Chairman DODD. Can I bring you back to the witness table? I 

just saw one of our witnesses scurrying down the hall, but I presume she will be coming back. I hope I did not say anything here 

to cause a witness to go scurrying down the hall. 

I apologize to you, but many of you have been here before, and 

you know this can happen with votes on the floor of the U.S. Senate that we will be interrupted. We try and do this in a way that 

does not break up the flow, but it gets harder each time. And I 

gather now we have, of course, heard from Elizabeth Warren, we 

have heard from Dr. Manning. I am going to turn to John Finneran 

at this point. John, thank you very much. Again, thank you for 

being here. We are very grateful to you, as I said earlier. When we 

first announced these hearings, Capital One—I do not know whether you contacted us or we contacted you, but you agreed immediately that you wanted to be here to be a part of this hearing this 

morning, and we appreciate that very, very much. Very important. 

The floor is yours. 

STATEMENT OF JOHN G. FINNERAN, JR., GENERAL COUNSEL, 

CAPITAL ONE FINANCIAL CORPORATION 

Mr. FINNERAN. Great. Thank you very much, Chairman Dodd 

and Members of the Committee. Good morning, and we do really 


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appreciate the opportunity to be here to address the Committee. I 

would just echo for a few minutes the comments of many of the 

members. We do believe that it is an important dialog and one that 

certainly we as a member of the industry, do not want to shy away 

from. Indeed, we welcome the opportunity to have these kinds of 

conversations. 

Today, the credit card is among the most popular forms of payment in America. It is valued by consumers and merchants alike 

for its convenience, efficiency, and security. As the GAO noted in 

their recent report on this topic, the past decade has seen substantial change in the availability and pricing of credit cards. A little 

over a quarter of a century ago, less than a third of American consumers were able to obtain credit cards. Today, 75 percent have 

them. As recently as the early 1990’s, everyone paid the same high 

interest rate and annual membership fee regardless of their risk 

profile. Today, as the GAO found, interest rates have come down 

significantly for the majority of consumers and most pay no annual 

fees. At the same time, pricing for risk has become more targeted. 

Those consumers who exhibit riskier behavior typically pay higher 

rates than those who do not, or may be charged fees for paying late 

or going over their credit limit. Consumers who choose to pay in 

full each month, as more than half of all credit cardholders do, pay 

no interest. 

Importantly, the GAO also found that during this period of time 

industry profits remained stable, suggesting that changes in credit 

card pricing have indeed reflected changes in how the industry 

prices for risk. 

The benefits of more discrete, targeted, and accurate pricing of 

credit cards have come, however, at a cost, and that is, increased 

complexity. I think that is a topic that has been noted by many in 

this debate. For this reason, Capital One has submitted to the Federal Reserve a proposal that would significantly revise the disclosures required in the Schumer Box to make it easier for consumers 

to both better understand the terms of any particular offer and to 

compare one product to another. A copy of Capital One’s unique 

proposal was included as an attachment to my written testimony. 

While we await these changes from the Federal Reserve, however, Capital One has already implemented a comprehensive new 

set of disclosures, written in plain English, which go substantially 

beyond the legal requirements of the Schumer Box. These include 

a food-label style disclosure and a customer Q&A that present our 

policies in simple terms. These disclosures are included in all of our 

marketing materials. 

The increased complexity of credit cards has also brought rising 

criticism of the industry in recent years. Capital One continuously 

reviews and makes changes to its practices in light of changing 

consumer preferences. One area of change is in repricing where 

Capital One has simplified and strictly limited the circumstances 

in which we may increase a customer’s interest rate if they default 

on the terms of their credit card agreement. 

I want to be very clear. We do not engage in any form of universal default. That has been our longstanding policy. We will not 

reprice a customer if they pay late on another account with us or 

with any other lender or because their credit score goes down for 


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any reason. In addition, Capital One will not reprice customers if 

they go over their limit or bounce a check. There is only one circumstance in which a customer might be subject to default repricing—that is, if they pay us late, more than 3 days late, twice in 

any 12–month period. We clearly disclose all of these policies in our 

marketing materials and provide customers with a prominent 

warning on their statement after their first late payment. 

Even then, the decision to reprice someone is not automatic. For 

many customers, Capital One chooses not to do so. If we do reprice 

someone for paying late twice, we will let them earn back their 

prior rate by paying on time for 12 consecutive months. That process is automatic. 

While introductory or teaser rates can provide substantial benefits to cardholders, they have also come under criticism if they are 

subject to repricing during the introductory period. Capital One has 

adopted strict policies regarding their marketing and treatment. 

Capital One does not reprice introductory rates for any reason, 

even for repeated late payments. The specific period for which 

these rates are in effect is fully disclosed multiple times in our 

marketing materials. We also disclose the long-term rate that will 

take effect if and when the introductory rate expires. 

Similarly, another practice that may cause customer confusion is 

double-cycle billing. Capital One has never used double-cycle billing. 

Senator, I want to address something that Senator Shelby, although he is not here at the moment, mentioned in his opening 

statement. He mentioned a recent article in Business Week Magazine about Capital One. I must admit it, it was not a very flattering article, and I can also admit that if one were to read it, one 

could draw, an understandable conclusion about our business practices. Let me just say a couple things. 

We take very seriously any situation where a customer may be 

experiencing difficulties and constantly evaluate our practices to 

make sure that we do not extend more credit than our customers 

can manage responsibly. This article does not describe our business 

model. It does not describe our policies or our intent. 

Many customers choose to have multiple credit cards for a variety of reasons, as Senator Carper noted himself in his opening 

statement. Some like to have both a Visa and MasterCard. Some 

like to have multiple cards in order to segregate expenses or for security or for different features like rewards. Like our competitors, 

we hope they will choose us to fill those needs. Eighty-five percent 

of our customers have only one card with us, although they may 

very well have cards with our competitors. Less than 4 percent of 

our customers have more than two cards with Capital One. We 

only offer an additional card to a customer if that customer is in 

good standing with respect to his existing card with Capital One. 

And for any customer who has more than one card at Capital One, 

they have the option, if they choose, to consolidate their accounts 

into one card. 

In conclusion, as our industry has changed, so have we. Capital 

One is continuously adapting its practices and policies to keep up 

with consumer demand, the rigors of competition, and the standards of sound banking. We are fortunate to have over 30 million 


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credit card customers, the vast majority of whom have a good experience with our product. When they don’t, we regard that as our 

failure, and we seek to find out why. 

Thank you, and I look forward to answering any questions you 

may have. 

Chairman DODD. Thank you very much, Mr. Finneran. 

Ms. Franke, thank you for being here. This is the order I think 

I introduced you, and I apologize. It is not exactly the order you 

are lined up here, but I promised I would introduce you in that 

order. 

STATEMENT OF CARTER FRANKE, CHIEF MARKETING 

OFFICER, CHASE BANK U.S.A., N.A. 

Ms. FRANKE. Mr. Chairman, Members of the Committee, good 

morning. My name is Carter Franke, and I am the Chief Marketing 

Officer at Chase Card Services in Wilmington, Delaware. I am 

proud to represent today more than 16,000 Chase employees 

around the country who serve the needs of over 100 million Chase 

credit card customers. 

I am also proud to be part of an industry that has become central 

to American life and is one of our economy’s principal engines of 

growth, including growth of business over the Internet. Without 

credit cards, there would virtually be no business over the Internet. 

The relationship between American consumers and businesses, 

both large and small, which has grown through the use of credit 

cards is one of the great economic success stories over the last several decades. 

Before answering any questions you may have this morning, I 

would like to make three important points about the credit card 

business at Chase. 

First, we believe our success, like that of all businesses, is based 

on our relationship with our customers. The great majority of 

Chase customers fall into the ‘‘super-prime’’ and ‘‘prime’’ categories. 

This means that they, regardless of their level of income, are the 

most responsible and knowledgeable credit users in the country. 

We want them to have the best possible experience with Chase and 

have devoted service people and technology to help them understand and manage their accounts. Many of our customers take advantage of our array of services like Chase online access and manage their accounts online with us. 

We also have a really great new product called ‘‘Free Alerts,’’ 

which will send customers an e-mail, a voice-mail, or a text message to let them know it is time for them to make a payment or 

that they are getting near to their credit limit. 

Second, we believe that financial literacy is critical for all Americans, particularly for credit card users. This goes hand in hand 

with financial responsibility, which is a necessity for all credit card 

users. Chase has made well over $100 million in the past 2 years 

in grants and donations to fund financial literacy programs and 

credit counseling services. We want to do our part to support customers’ efforts to be responsible. 

Third, the importance of customer relationships is a key driver 

of many of our business decisions. For example, a missed payment 

on a non-Chase card does not result in any automatic repricing of 


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a Chase account. In reality, as you have heard many times today, 

the American consumer enjoys a credit card offering far more attractive than a generation ago. According to the recent GAO report, 

15 years ago the average interest rate was roughly 20 percent. 

Today, says the GAO report, the average interest rate is 12 percent. And, in addition, nearly 75 percent of credit cards have no annual fees. And the annual fees that exist are there to support the 

rewards that are provided through the credit card such as miles. 

Consistent with the conclusion of the GAO report, Chase believes 

that an important issue facing the credit card industry today is disclosure. Disclosure is one of the keys to a successful credit card relationship, and we are committed to keeping our customers informed of every aspect of their account. We look forward to reviewing the submission of suggested changes that have been made by 

Cap One and working collaboratively to improve the customers’ understanding of their credit card terms and conditions. We would 

welcome the opportunity as well to work with regulators to make 

any significant improvements that are required. 

Mr. Chairman, we look forward to working with you and the 

other Members of the Committee today to answer your questions 

and to address any concerns that you may have. Thank you very 

much for this opportunity. 

Chairman DODD. Thank you very much, Ms. Franke. We appreciate your testimony. 

Mr. Donovan, thank you. 

STATEMENT OF MICHAEL D. DONOVAN, PARTNER, DONOVAN 

SEARLES, LLC 

Mr. DONOVAN. Good morning, Mr. Chairman, Members of the 

Committee. I want to thank you for the opportunity to appear before you to explain some of the current abuses and credit card practices that I have seen and experienced among my clients that I represent in Pennsylvania and elsewhere. I am a lawyer, gentlemen, 

and I represent the real consumers, and I have represented consumers since 1993. I argued the Smiley v. Citibank case before the 

United States Supreme Court and obtained the decision in the 

Rossman v. Fleet Bank, which was rendered by the Third Circuit, 

that held that a credit card issuer cannot change a no-annual-fee 

card to an annual-fee card, at least within the first years after it 

issued that card. 

I want to agree with Professor Warren when she said that this 

credit card market now is broken. The banks, Senator Bennett, 

with respect, no longer compete based upon the annual percentage 

rate, which was the whole shopping mechanism identified in TILA 

on which the banks should be competing. Instead, what the banks 

now do is advertise and solicit based upon low APRs and then employ back-end trip wire pricing, such as high back-end penalties, 

increased booby trap penalty charges, and universal default rates 

that increase from the initially solicited rate to often rates as high 

as 30, 35 percent. All of these booby traps are placed in the cardholder agreements and in small print underneath the Schumer Box 

so that it is almost impossible for any consumer to decipher them. 

Now, I heard Mr. Finneran describe Capital One’s practices, and 

he said that, in fact, they do not reprice for a late payment, they 


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do not reprice for an over-credit-limit, they do not reprice for an instance in which you default on another card that they have issued 

to you. 

Well, in 2006, their disclosures, if I may read them to the Committee, underneath the Schumer Box in their very solicitations— 

and these apply to their existing accounts now. Perhaps their No 

Hassle card is somewhat different, but for all their 30 million accounts now, this is the disclosure that Capital One charges, including to my clients: ‘‘All of your APRs may increase to a variable default rate of up to 18.74 percent plus prime, currently’’—this was 

back in 2006—‘‘24.99 percent, if you fail to make a payment to us 

when due’’—just one payment, that is—‘‘exceed your credit line, or 

your payment is returned for any reason.’’ Now, that is not what 

Mr. Finneran said their current practice is, but this is what applies 

to 30 million accounts currently. ‘‘In addition, default APRs will be 

effective starting the billing period immediately after the occurrence of any of the specified events. Factors considered in determining your default rate may include your general credit profile’’— 

I am not quite sure I know what that means—‘‘existence, seriousness, and timing of the defaults under any card agreement you 

have with us, and other indications of the account usage and performance.’’ 

Gentlemen, the credit card is one of the only contracts throughout the common law of the United States and the common law of 

any country in which the superior bargaining entity has the right 

to change its terms at any time. In fact, the credit card issuers can 

unilaterally change the terms on that agreement any time, any reason. 

Granted, the banks have an interest in protecting themselves 

from interest rate risks. They sold and have sold securities that are 

securitized by these credit card receivables, so they want to protect 

themselves from interest rate increases and spikes in interest 

rates. We all understand that. They deserve to make a profit. I 

think the banks should make a profit because it is a worthwhile 

product. However, they do not have a monopoly on the difference 

between—on protecting themselves from interest rate risks. 

Frankly, my clients, middle-class consumers, have the exact 

same interest in protecting themselves from interest rate spikes 

and interest rate increases. That is why they use the credit cards. 

They have as much interest in it as anyone else does, just as the 

banks do. 

I do not think this is a question of financial literacy, and it will 

never be a question of financial literacy. If, in fact, the more powerful entity always retains for itself the right to unilaterally change 

the terms of a contract, unlike any other contract that we are familiar with, and can impose those terms on the existing balance, 

then that entity, no matter what financial literacy we raise the 

country to, will always have an unfair advantage. And that is 

where we are right now. 

Now, if they wanted to protect themselves from interest rate 

spikes, there are simple solutions. Issue cards with shorter expiration periods. Issue a card that does not expire 5 years from now. 

Issue a card that expires 1 year from now. And when it expires, 

you send out a notice and say, ‘‘We are going to change this. If you 


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do not like it, you do not have to accept a new card from us, and 

you can pay off your balance at the existing terms. If you do want 

another card from us, well, here are the new terms.’’ That is the 

way we deal with businesses. That is the way we deal with leases, 

with cars, with renting anything, with purchasing anything on 

credit, other than with a credit card. 

Let me give you some examples, everyday examples right in my 

back yard in Pennsylvania. Many of the clients I see every week 

come in with a letter, a collection letter, claiming that they owe 

thousands of dollars for delinquent credit card debt. Almost all of 

those clients come in with the same facts as the court examined in 

Discover Bank v. Owens. In that case, an Ohio court found that Ms. 

Owens, an elderly woman who depended on Social Security Disability payments, had more than repaid the principal balance on 

her Discover Card, and yet the bank was suing her to collect $5,000 

in penalty interest, late fees, and other so-called credit protection 

plan charges. Now, this person was on disability. The credit protection plan did not help her at all, yet she was charged that every 

month to the tune of tens of dollars every month, and that built 

up a big part of this balance. The court said it was unconscionable, 

you are not going to collect that amount of money. After all, Ms. 

Owens had paid you back practically double what she borrowed 

principally. So the court found that that was unconscionable. 

Let me give you an example in North Philadelphia. Ms. C. also subsists on a monthly SSI check, $600. She first got a card from 

Providian Bank. Providian Bank is a bank that had been characterized as the ‘‘poster child of abusive lending practices’’ by not me, 

by not anybody else in the consumer group here, but instead by the 

former general counsel of Citigroup’s credit card practices and credit card—North American and European credit card issuing practices. 

Well, in any case, my client, Ms. C., started out with this Providian card, borrowed $1,000 on it. That was her credit limit. 

And guess what else was charged on that card? A credit protection 

fee of up to $47.40 every month. She never knew what it was for. 

I do not know what it is for, particularly when it is issued to somebody who is on SSI. It never pays off. It is some sort of insurance 

that would pay off, arguably, a monthly payment if you lost your 

job, if you had health problems. But the reality of it is this woman 

was already on SSI, so she was never going to have the benefit 

from this charge—$47.40, a lot of money. 

So, in any case, she attempted to keep up with this card and 

three other cards that she has had. As of August 2006, the APR 

on this card, which is now owned by WAMU, Washington Mutual— 

they bought Providian’s accounts. The APR on that account is 31.49 

percent. In August, she had a monthly payment due on that card 

of $247. On her three other cards, she had a monthly payment of 

$67 on one and $80 on the two others. Her monthly SSI check is 

$600. So as of August, $400 was coming due on credit card bills 

that she was receiving, which she attempted to cover with her $600 

SSI check. 

The reality of it is—and we did the calculations—that the vast 

majority of those charges that had accrued on all of those accounts 

were attributable to penalty interest rates that had increased from 


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the original 15 percent on the Providian card, the completely 

worthless credit protection fee, and back-end late fees and overlimit fees because almost all of these cards were up at their limit. 

Now, Ms. C. has not really used these cards for 3 years. Every 

now and then when she gets it underneath the credit limit, she will 

go and use the card to buy prescriptions or to buy gas. And you 

can see it. I looked at her account statements. And then she is 

right back in it. 

So the reality of it is that this is a situation in which universal 

default pricing has basically caused and impoverished somebody, 

and this is the exact same facts that the court found in Discover 

Bank v. Owens. 

Let me give you another example. 

Chairman DODD. Try and get through it. Your time is up. 

Mr. DONOVAN. Real quickly, Your Honor—you can tell I am a litigator. 

[Laughter.] 

Mr. DONOVAN. You knew that was going to happen. 

Chairman DODD. We get called a lot of things, but ‘‘Your Honor’’ 

is not one of them here. 

Mr. DONOVAN. I saw you were called—or maybe it was Senator 

Biden who was called ‘‘President’’ last night. 

Senator SHELBY. Well, he might be Mr. President, but not yet. 

[Laughter.] 

Chairman DODD. Let’s move on here. 

Mr. DONOVAN. In any case, let me just tell you one other story. 

I know that members of this Committee, in fact, have received, because I now represent these clients, many complaints from very sophisticated small businesses, small businessmen. They have received complaints from doctors, they have received complaints from 

lawyers, complaining about the trip wire pricing, the universal defaults, and the basically indecipherable disclosures issued by the 

credit card banks. You know why I know that? Because I, in fact, 

now end up representing some of these people who have written to 

Members of the Committee. 

One person, Mr. S. from York, Pennsylvania, started out with 

two cards—a Chase card and a U.S. Bank card. In March 2005, the 

U.S. Bank unilaterally increased his interest rate from 9.9 percent 

to 21.9 percent. Chase increased his interest rate from 11.9 percent 

to 27.9 percent. Both of these banks explained to my client that the 

reason they increased his interest rate, even though he had never 

paid late ever, never gone over the limit, had been a super-prime 

customer of these banks, was that they had reviewed his FICO 

score and that his FICO score had declined recently, and, therefore, 

he was an increased risk so we are unilaterally increasing your interest rate. 

On top of that, do you know what Chase did? It said, Oh, by the 

way, we are going to cap your credit limit. You are not going to be 

able to charge anymore. This is your credit limit here. They capped 

it at the exact outstanding balance. Well, I do not think you need 

to be Stephen Hawking to realize that if you cap it at the outstanding balance, guess what is going to happen? The next day, 

when you add on the daily finance charge, you, Bank, have unilaterally caused him to go over the limit, on which you impose an 


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over-limit fee. So that Chase in that instance by its own action 

caused him to go over the limit by its unilateral practice. 

Now, the absurd thing about it—— 

Chairman DODD. I am going to stop you right there, OK. 

Mr. DONOVAN. These are some of the practices—— 

Chairman DODD. This is not the Supreme Court here. We are 

going to have to move on. 

[Laughter.] 

Chairman DODD. Very, very good. We will take the rest of your 

testimony. We will come back to you in questions. 

Mr. DONOVAN. Very good. Thank you. 

Chairman DODD. Thank you very much. 

Mr. Vague. 

STATEMENT OF RICHARD VAGUE, CHIEF EXECUTIVE 

OFFICER, BARCLAYS BANK DELAWARE 

Mr. VAGUE. Thank you, Chairman Dodd, Ranking Member Shelby, and Members of the Committee. I serve as CEO of Barclays 

Bank Delaware, a credit card issuer with approximately $4 billion 

in receivables. The majority of our cards are issued in partnership 

with other organizations who license us to use their brands and solicit their members as customers. We partner with a variety of organizations, such as airlines and retail stores. We are the 13th 

largest credit card issuer in the United States and one of the fastest growing. Mr. Chairman, I applaud you and this Committee for 

examining this important issue and for considering ways to improve consumer understanding of credit cards. I also want to thank 

and acknowledge my own Senator, Senator Carper, from the State 

where our business for his leadership on these issues, and thank 

and acknowledge Senator Casey, from the State where I reside. 

It is fair to say that, in the realm of consumer finance, the credit 

card is one of the great developments of this past century. It is 

widely recognized that credit cards represent the democratization 

of credit. Today, consumers can use credit cards around the world 

and on the Internet to make purchases at millions of merchants. 

Not only do credit cards give consumers this purchasing convenience, but consumers also have the option to use their credit cards 

as a mechanism to obtain an interest-free loan simply by paying 

their bill in full each month. Consumers who use credit cards also 

receive enhanced consumer protections compared to cash and 

checks, and a detailed periodic accounting of their spending to boot. 

Given the enormous consumer benefits associated with credit 

cards, it is no surprise that the Federal Reserve Board staff studies 

consistently suggest that 90 percent of consumers are satisfied with 

their credit card issuer. 

It is also important to note that the vast majority of credit cardholders use credit cards responsibly. It is in nobody’s interest to 

provide credit cards to consumers who cannot repay the money 

they have borrowed. For that reason, we and all other issuers 

strive to provide credit cards only to consumers who can handle the 

credit offered to them. Banks that lend indiscriminately to consumers obviously will not be in business for long. 

Having said all this, Mr. Chairman, credit card products have become more diverse over the years because of the intense competiVerDate Nov 24 2008 02:14 Nov 24, 2009 Jkt 050307 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 E:\HR\OC\A307.XXX A307

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tion and wide choice. Most cards are no longer priced with a 19.8– 

percent APR and a $20 annual fee while only being made available 

to consumers at the higher end of the credit spectrum. Credit card 

issuers have become much more sophisticated with respect to providing a wide variety of consumers with cards that have a wide 

availability and variety of features. Now consumers can find credit 

card products with a variety of interest rates, benefits, rewards, 

and fee schedules. Importantly, the average rate has gone down 

over the years. This is a result not only of increased sophistication 

but, as mentioned, also of the intense competition within our industry and from other payment providers. Without a doubt, these innovations are positive developments. With these increased product offerings, however, we agree, Mr. Chairman, comes the need to ensure that consumers understand the features of the various credit 

card products offered to them. 

We believe that credit card disclosures can be greatly improved. 

We think most other credit card issuers agree. And we need to participate and help to make these things happen. Credit card issuers 

must comply today with complicated, detailed, and lengthy regulatory requirements, meaning that disclosures tend to be complicated, detailed, and lengthy. 

In reference to some of the earlier comments, our card member 

agreement is five pages long. It used to be one-page long. Our typical card member agreement is five pages long. Everything that is 

in this agreement we are required to put in there by law. We would 

love, frankly, to simplify this agreement, including putting in something like the Schumer Box, which we think was a tremendous innovation in our industry. 

Every time there is a new litigation, it seems like another legal 

disclosure needs to be added. We need a new, clear, and simple disclosure structure that allows us to draft our disclosures in plain 

English—not lawyerspeak—highlighting the terms consumers find 

important in a manner they find easy to understand. 

A recent updating of disclosure regulations appears to be the sole 

recommendation of the GAO in the context of its broader study of 

credit card disclosure issues. Focusing consumer disclosures on key 

terms is not a new concept. It is the basis for the existing Schumer 

Box disclosures that we mentioned. Card issuers that comply with 

this new structure should also be protected against a barrage of 

new lawsuits and the resulting lawyerspeak that would inevitably 

creep back into the disclosures as a result. 

Mr. Chairman, I firmly believe that effective disclosures are the 

key to ensuring that consumers understand the material terms and 

features of credit card products. An informed consumer can then 

decide whether a credit card is right for him or her. After all, there 

is no shortage of credit card issuers and products from which consumers can choose if the practices of any given issuer, or any of the 

terms of that given issuer, do not meet that consumer’s liking. I 

would caution Congress against the adoption of legislation that 

would have the effect of imposing price controls or similar limitations with respect to credit card products. Price controls do not 

work. They would likely result in an increase in other costs associated with credit cards, reduced benefits, or more probably the reduction of credit availability to those who are on the lower end of 


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the credit spectrum with a corresponding adverse impact on the 

U.S. economy. We do not want to return to the days of relatively 

uniform card offerings available only to a limited number of consumers. 

Mr. Chairman, this concludes my testimony, and I would be 

happy to answer any questions you have. 

Chairman DODD. Thank you very, very much. 

Ms. Draut. 

STATEMENT OF TAMARA DRAUT, DIRECTOR, ECONOMIC 

OPPORTUNITY PROGRAM, DEMOS 

Ms. DRAUT. Thank you, Chairman Dodd and Ranking Member 

Shelby, for holding this hearing and inviting Demos to participate. 

Demos began studying the growth of credit card debt out of an 

overall interest in the economic well-being of low-and middle-income households, many of which are young people just starting out 

their lives. Before I address some of the industry practices, I want 

to give you a sense of the very households that the abusive lending 

industry practices are impacting the greatest. 

In March 2005, Demos conducted a survey of low- and middleincome households who had credit card debt. The goal of the survey 

was to better understand why these households were going into 

debt, how long they have been in debt, and what, if any, impacts 

this debt was having on their economic well-being. What we now 

know is that the average low- and middle-income household with 

credit card debt has been in debt, on average, for 3–1/2 years and 

that they are carrying an average balance of about $8,700. Onethird of low- and middle-income households are actually carrying 

balances greater than $10,000. 

Now, while our pop culture and popular perception often demonize credit card debtors as irresponsible spendthrifts, these images 

are more the stuff of stereotype than reality. To that point, the 

most often cited reasons for going into credit card debt were to pay 

for car repairs, home repair, medical bills, or to deal with a job 

loss. 

In addition to asking about specific expenses that led to these 

households’ credit card debt, we asked if the household had ever in 

the past year used their credit cards to pay for basic living expenses such as the rent, the mortgage, the utilities, or things like 

groceries. 

I am sorry to say that one out of three low- and middle-income 

households reported using credit cards in this manner and doing 

so, on average, 4 out of the last 12 months. In fact, those households that had medical expenses reported significantly higher credit card debt than those who did not. 

Now, of course, we know that using revolving credit can be very 

beneficial. It gives households the ability to pay off large, unexpected expenses over time and allows them to prevent more disruption to their family budget. It also helps during job loss so that indeed families can keep the lights on and food in the fridge. 

The problem is that this beneficial access to credit, which we all 

agree on, becomes all too destructive due to widespread, abusive, 

and capricious industry practices. As households have become more 

reliant on credit cards to make ends meet as a result of the greater 


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instability of our economy and rising costs, the practices of this industry further threaten their economic security. 

I want to focus the rest of my testimony on three of these practices, all of which make it very difficult for these households to pay 

down their debt. 

I also want to say from the outset that Demos fully understands 

and supports the idea of risk-based pricing, but these practices are 

not risk-based pricing, although they often are called such. 

The first one I want to talk about has already been mentioned. 

That is universal default, the practice of raising a cardholder’s interest rate either for being late on a payment with another creditor 

or for some change in their credit history. It is time that we finally 

prohibit this practice. 

The second practice I want to draw your attention to revolves 

around the definition and treatment of late payments. All the 

major issuers today consider a payment late if it arrives past 1 or 

2 p.m. or whatever the specified hour is, even if, as we say, the 

check is in the mail. In our survey, about half of the low- and middle-income households had paid a late fee in the last year and indeed reported being late or missing a payment. 

What happens with this sort of zero tolerance policy about late 

payments is that means that a run-of-the-mill tardy payment can 

result in an average fee that now is anywhere from $32 to $39 and 

a rate increase that is often double or even triple the original APR. 

And, again, it is not unheard of for these penalty rates to top 30 

percent. 

I want to underscore that these rates are being paid by people 

who are not technically in default on their account. They are simply 1 hour, 1 day late. And yet they are often paying the same default rates as those who are 3 months behind on their payments. 

Finally, I want to draw attention to the retroactive application 

of penalty rate increases. Whether a rate is increased because of 

a run-of-the-mill tardy payment or due to universal default, that 

new rate is applied to the cardholder’s existing balance. By applying this higher rate to previous purchases or services made with 

the card, essentially the credit card companies are now raising the 

cost of every item purchased prior to the rate increase. We believe 

that card companies should be held accountable to the original 

terms of their contract and that any rate increases should be applied only going forward from that point. 

These severe default rates levied on customers who are paying 

their bills in good faith, if not always in perfect time, constitute an 

enormous and undue increase in the cost and length of debt repayment. Demos urges Congress to consider much of the recommendations that have been made today and, again, I would like to recognize that there has been legislation introduced by many Members 

of this Committee already, such as Senator Dodd and Senator 

Menendez, that would address many of the practices I cite. 

I will conclude there. Thank you, and I look forward to your 

questions. 

Chairman DODD. Thank you very much, Ms. Draut. 

Mr. Plunkett, you are our last witness here. We thank you. 


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STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE 

DIRECTOR, CONSUMER FEDERATION OF AMERICA 

Mr. PLUNKETT. Good morning. Thank you very much, Chairman 

Dodd, Senator Shelby, and all the Senators who have closely followed this issue. Senator Carper, Senator Menendez, in particular, 

you have shown real leadership on this issue, and we appreciate 

it. 

I am testifying today on behalf of the Consumer Federation of 

America, the national organization Consumer Action, and Consumers Union, the publisher of Consumer Reports. I applaud you 

for calling this important hearing on the impact of credit card industry practices on consumers, and I would agree with statements 

that have been made today about the importance of credit cards to 

consumers, to the economy, and the importance of consumer education. In fact, CFA over the years has worked with a number of 

credit card issuers on consumer education projects. 

But because of what you have heard today, because of the unjustifiable fees, the highly questionable interest rates, and the abusive lending practices you have heard about, there is no industry 

in America that is more deserving of the kind of oversight you are 

providing here. And, I might add, there are very few industries 

that are the subject of more complaints or are held in lower esteem 

by the American public. 

For example, in 2004, the U.S. Better Business Bureau reported 

that problems with credit cards were the third most common 

source of all consumer complaints that they received. A public opinion survey by the polling firm Public Opinion Strategies last year 

found that only 15 percent of all Americans had a favorable opinion 

of credit card companies, putting them in the same league with 

payday lenders and bill collectors—and, by the way, with a far, far 

lower favorability rating than Congress. 

Credit card companies are still aggressively expanding efforts to 

market and extend credit at a time when Americans have actually 

become more cautious in taking on credit card debt. This runs contrary to conventional wisdom, but we document it in our testimony. 

We now have about $873 billion in revolving debt. Our analysis 

shows that aggressive and even reckless lending by issuers has 

played a big role in pushing this debt higher. 

Since 1999, creditor marketing and credit extension—I am talking about the amount of credit that is offered, not the amount of 

credit that is accepted—has increased twice as fast as credit card 

debt taken on by consumers. That is why there is a growing credit 

gap between creditor supply and consumer demand. In fact, the 

amount of credit made available, total credit made available, those 

unused credit lines and used credit lines, now exceeds an astonishing $4.6 trillion, or just over $41,000 per household. Of that 

amount, only 19 percent has been taken on as debt by consumers. 

Meanwhile, as Chairman Dodd pointed out, the number of solicitations mailed by issuers has increased more than sixfold since 

1990, to over 6 billion last year. That is about 50 per household, 

and this massive credit expansion has had a disproportionately 

harmful effect on the least sophisticated, highest-risk, lowest-income families. 


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You have heard about a number of questionable practices today: 

universal default, retroactive interest rate increases, double-cycle 

billing, in which the issuer actually charges interest on balances 

that have already been paid off, high hair trigger fees that can be 

assessed for even minor problems. And let me point out, with fees, 

we are not talking about a small number of Americans who pay 

these fees. The GAO report that has been mentioned said that 35 

percent of all credit card accounts they examined of the six largest 

issuers were assessed a late fee in 2005—just in 2005. You heard 

from Ms. Draut that their survey of low- and moderate-income consumers showed an even higher percentage had paid a late fee. 

Now, if you take that 35 percent and you divide it by the number 

of cards that are out there, that is 242 million cards that paid in 

1 year a late fee. I am not saying that all of these fees were illegitimate. I am pointing out how widespread these payments are. 

A couple of other issues to keep in mind. You have heard about 

interest rates. An important fact that has not been mentioned, 85 

percent plus of all credit cards now are variable rate cards, and the 

interest rates on those cards are significantly higher. Cardweb.com, 

a source for a lot of information that has been put out today, says 

that right now the average interest rate on variable rate cards is 

16.55 percent. Also, let me point out that the GAO report that was 

mentioned, their finding on interest rates, it has not been cited 

that they said that the Federal Reserve, an important Federal Reserve study, identified a significant reason for lower interest rate 

costs, the lower cost of funds. 

Finally, multiple low-balance cards, this has been an issue addressed in regards to Capital One’s practice. Mr. Chairman, Senator Shelby, we agree with you this is a very troubling practice. At 

least based on media reports, it looks like a number of sub-prime 

consumers are getting multiple offers from Capital One of low-balance cards. It looks by all appearances as an attempt to pump up 

fee volume, and that obviously has a negative impact on the finances of these consumers. 

We have often heard from credit card representatives that all of 

these practices are simply risk-based pricing. But the pricing, as 

you have heard, does not appear to be proportional to the risk or 

the costs incurred by issuers. So it is hard to agree with that when 

somebody is hit with a late fee of $35 and a default interest rate 

of 29 percent because of one or even two payments that are a day 

or two late. 

Moreover, for consumers who are truly higher risk, if all of their 

credit card companies are doing the same thing—they are increasing their interest rates, and they are hitting them with late fees— 

obviously, that increases their risk of default and delinquency, and 

it is a serious problem for those consumers financially. 

We also do not see evidence that this so-called risk-based pricing 

moderates, leads to lower interest rates, when underlying costs for 

the issuers decline. For example, in 2006, for three straight quarters, charge-offs—the amount of credit card debt written off by 

issuers—declined. And I have not seen any evidence that there was 

a moderation or decline in interest rates as a result. 

And, finally, retroactive interest rates cannot be justified, as you 

have heard, as risk-based pricing. And I do not know of another 


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business in this country that can get away with raising the price 

on a service or a good after that service or good has been purchased. 

So, Senator Dodd, you put out some quite good legislation during 

the last Congress, Senator Menendez as well, Senator Akaka. We 

hope the Committee will start to examine the specific provisions in 

this legislation and start to consider it because this is an important 

conversation to have this year. 

Thank you. 

Chairman DODD. Thank you very, very much, and let me thank 

all of our witnesses. You have been very, very patient this morning, 

staying a long time, but I am grateful to you for your counsel and 

advice to the Committee, and to my colleagues as well for their patience in all of this. 

What I am going to do is ask the clerk to set the clock here on 

7 minutes on each one of us here so we can kind of move through 

this as quickly as we can here and not tie people up. 

Let me pick up, if I can, to the industry people, on some of the 

comments that Mr. Plunkett has made here. The universal default 

issue and the double-cycle billing, those are two issues that have 

been talked a lot about here this morning. There were other issues, 

but I want to focus on those two in my time, if I can. And I know 

there have been some changes in practices that have occurred. I 

know JP Morgan just in the last few days announced that it was 

no longer—on double-cycle billing, no longer would it engage in 

that practice at all. 

Again, as I understand it—and you correct me if I am wrong— what happens with this in sort of example terms, you owed $1,000, 

you paid off $900 of it, you still owe $100. The fees you were being 

charged were based—even though you had paid off $900 of it, they 

were still based on the $1,000 obligation until the entire amount 

was paid off. Is that roughly a good example how that happened? 

Ms. FRANKE. Yes. The only further explanation to that would be 

it really affected the population that had typically been paying 

their balance in full and then determined that they would like to 

borrow from any issuer going forward. 

Chairman DODD. But you have stopped the practice. 

Ms. FRANKE. That is correct. JP Morgan—— 

Chairman DODD. Why did you stop the practice? It is a good profit-making operation. Why would you stop it? 

Ms. FRANKE. Well, Chairman Dodd, we constantly review the 

pricing policies that we have across our customer base and are continually trying to make sure we are doing the right thing for the 

customer. And we found, back to the disclosure on clarity, that consumers really did not understand this. So as a result, the consumer 

did not understand it—— 

Chairman DODD. How about being unfair? How about being unfair? 

Ms. FRANKE. I believe it is a fair practice, Chairman Dodd. 

Chairman DODD. It is a fair practice? 

Ms. FRANKE. I do believe it is a fair practice. 

Chairman DODD. They charge you an interest rate based on an amount—even if you have paid off $900 of $1,000, you should be 

charged an interest—— 


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Ms. FRANKE. Yes, let me try to explain to you really what it is. 

If you go into a bank and you take a loan, you are charged for that 

loan from the date that you take it out. Interest is accrued from 

the moment that you are charged in that loan. It is nothing different here. You borrowed from us. You decided that you wanted 

to not pay it in full, and it would then be charged interest. I believe 

that is a fair practice. It was confusing to the consumer. As a result 

of that, we decided to no longer do it. 

Chairman DODD. Ms. Warren, do you want to comment on that? 

Ms. WARREN. Well, it is not the same as going to a bank and bor- rowing money. The amount of money that was borrowed was $100, 

and interest was paid on $1,000. It is just that straightforward. 

Consumers were confused because nobody could believe that a reputable business would charge the—— 

Ms. FRANKE. I would like to say one thing. The way this really 

works—and I apologize, because it is a very complicated process, 

which is one of the confusions that consumers have and that these 

ways we calculate finance charges as an industry are complicated. 

But what would happen, and the best way to describe it, is if you 

had a billing cycle that went from July 1st to July 31st, and you 

had always paid your bill in full. You would have had $1,000 that 

you had a balance at the end of July -you had made that purchase 

at July 12th. So the billing period was the 1st to the 31st, and you 

charged $1,000 on July 12th. All of a sudden on August 15th, instead of paying the $1,000 that you had typically done by paying in full, you paid $500. When you 

paid $500, you then had a balance that you were carrying from 

July -whatever I said—12th to August 15th that you needed to pay 

interest on. So you were only being charged interest from the date 

that you made that transaction because you determined to borrow. 

We can certainly, you know, go into greater detail on this, but 

I do believe it is a fair practice. It was a confusing practice, and 

because of that and because we always want to ensure that our 

customer is being treated with all of the clarity that we can, we 

decided to move away from it. And I think that is a very good 

thing, and a good thing JP Morgan Chase did for our customers. 

Chairman DODD. Mr. Finneran, does Capital One engage in double-cycle billing? 

Mr. FINNERAN. Sir, this will be a very short answer. We don’t. 

We never have. 

Chairman DODD. And why not? 

Mr. FINNERAN. For some of the reasons that Ms. Franke just alluded to. It is a challenging thing to explain to a customer exactly 

how the interest rate was calculated, and it just always struck us 

as not the right balance in trying to balance what is good for the 

company versus what is good for the customer. 

Chairman DODD. So you would charge them basically on what 

they owed. 

Mr. FINNERAN. We charge on the average daily balance in the 

month in question. 

Chairman DODD. Logistically, that is not a difficult thing to do 

in terms of the technology that is available today to make the determination as to what a consumer owes. 

Mr. FINNERAN. I am sorry. It is not a difficult thing to—— 


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Chairman DODD. Technologically not difficult for Capital One to 

determine what that consumer owes today. 

Mr. FINNERAN. No, it is not, sir. 

Chairman DODD. All right. How about Barclay’s card, Mr. 

Vague? What is their policy on—— 

Mr. VAGUE. We do not use that policy. 

Chairman DODD. And do you want to explain why? 

Mr. VAGUE. For the very reason that these two individuals have 

suggested. It is a very confusing thing. It is not something that we 

have endeavored to deploy. 

Chairman DODD. Let me ask you about the universal default 

issue here. Again, what is the policy on Barclay’s card with regard 

to universal default? 

Mr. VAGUE. For the vast majority of our customers, we do not 

use universal default. However, I think our first and foremost obligation as a bank is safety and soundness. So for a very small number of our customers, we do look to their credit record, which, by 

virtue of our relationship with them, we have. And if there are 

three instances of adverse behavior with other issuers, we believe 

that that is evidence from our responsibility in safety and soundness to take action to price in the risk that that consumer has exhibited., 

Chairman DODD. And let me ask you the question that was 

raised, and I have raised it a number of times in the past myself. 

Do you then apply that interest rate to previous purchases or to 

new purchases? 

Mr. VAGUE. You apply it on a going-forward basis. 

Chairman DODD. So past contracts, past purchases would not be 

affected by that increased rate. 

Mr. VAGUE. That is right. 

Chairman DODD. Mr. Finneran, what is the policy at Capital 

One? 

Mr. FINNERAN. Again, Mr. Chairman, we do not engage in universal default. 

Chairman DODD. With any of your customers? 

Mr. FINNERAN. With any of our customers. 

If I may just also allude back to some of the comments that Mr. 

Donovan made. I believe Mr. Donovan, that was an old disclosure 

that you read from. We did change our entire file. All customers 

have the repricing policy that I described in my opening statement. 

But just to go back, with respect to universal default, we do not 

engage in universal default. And for us, that means we will not default reprice a customer if they go late on their electric bill or if 

they go late on one of our competitor’s cards. We will not default 

reprice them if they go late on another account that they may have 

with Capital One. It is only the individual account in question. Nor 

will we reprice them by looking at their credit bureau to see whether their FICO or credit score has gone down. 

The only default repricing that we have for our entire file now 

is if a customer pays us late twice, and at least 3 days late in each 

case, twice in a 12–month period. The first time they go late, we 

send them a statement notice indicating that they went late and 

reminding them of the policy that if they go late again they could 

be subject to repricing. 


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Chairman DODD. I heard you say earlier that if, in fact, in the 

coming months they then maintain the timely payments, then 

automatically the rate is reduced? 

Mr. FINNERAN. Yes, if someone is repriced after paying us late 

twice and then have on-time behavior for 12 months, they will go 

back to the prior rate automatically. 

Chairman DODD. I should ask that same question of you, Mr. 

Vague. Is that the policy with those? 

Mr. VAGUE. After 6 months of timely payments, we will make a 

downward modification in their price. 

Chairman DODD. Automatically? 

Mr. VAGUE. Yes, sir. 

Chairman DODD. How about JP Morgan regarding universal default? 

Ms. FRANKE. JP Morgan Chase has a very, as I had described in 

my opening comments, high credit-worthy population. So we have 

a super prime and prime population. 

The vast majority of our customers maintain the same interest 

rate they have over an annual period. 87 percent of our customers 

start the year with one APR and end the year with the same APR. 

5 percent of our customers have their rate go down because we 

have been able to offer them a better value than they currently 

had. 8 percent of our customers have had a deteriorating credit 

profile. As a result of that, we have made changes in their pricing. 

There are two ways we do that. One is what we call penalty pricing, where we clearly disclose that if you are late with us, if you 

do go over your limit, or if you write us a check that there are not 

sufficient funds for, we will increase your rate. 

Now what is interesting to note is that we have the ability to do 

that, but in only 15 percent of the instances where we make that 

decision because we are able to use our intuition, excuse me, our 

insights into what their real credit risk is to limit the times that 

we need to increase their rate. 

We increase their price so that we can continue to provide the 

best value to the majority of consumers. The majority of our customers have very low rates and do not pay penalty fees. Less than 

10 percent of our customers would pay a penalty fee on a monthly 

basis. So we are able to provide—— 

Chairman DODD. Ms. Franke, this is very confusing. 

Ms. FRANKE. I am sorry. 

Chairman DODD. The confusion on my part, and my time is up 

here. But my point is we have all—listening to you, these are very 

confusing practices we are talking about here, for consumers to understand. 

Ms. FRANKE. Let me tell you one thing that we do that we think, 

at Chase, helps a lot. We send out to our customers on a regular 

basis communication that tells them how they can protect their low 

rate and how they can make sure that they avoid penalty fees. 

There are many tools that we provide for them to do that. That is 

providing them free alerts, allowing them to sign up for automatic 

payments, allowing them to pay their bills online. 

So we want our customers to make their payments on time and 

maintain the low rates and avoid penalty fees. 

Chairman DODD. Thank you very much. My time has expired. 


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Senator Shelby. 

Senator SHELBY. Thank you, Senator Dodd. 

I would start out myself believing that the market, not the regulators or the Congress, should set the price of credit or money. But 

having said that, there are some serious issues been raised here 

today of abuse, exploitation of a large segment of our population. 

And that is why we are here. 

Dr. Warren, you were clear, concise, unambiguous and forceful in 

your testimony. You know this issue, as I assume everybody else 

here does. 

Why, in your judgment, would a credit card issuer send me, for 

example, three successive credit cards if I had a balance on one 

that I may have been struggling to pay? Why would they do that? 

And I had not applied for one, or the second one or the third one. 

Ms. WARREN. There can be no reason except to increase the revenues for the credit card. That is all this is about, plain and simple. 

By sending you multiple, low-level, capped cards, they increase the 

odds—— 

Senator SHELBY. They manipulate the system. 

Ms. WARREN [continuing]. That you will run over one of your limits, that you will pay penalty fees if you get into any kind of financial trouble, multiple times. It is just nothing more than a trick to 

increase profits. 

Senator SHELBY. So what Mr. Donovan referred to as the trip 

wire? 

Ms. WARREN. Yes, Senator. 

Mr. DONOVAN. That is one of the trip wires. 

Senator SHELBY. Just one. 

Mr. Plunkett, as part of the Bankruptcy Reform Bill that you are 

very familiar with, the Federal Reserve was directed to make some 

changes in the Truth In Lending Act Regulation Z with respect to 

minimum payment disclosures, teaser rate disclosures, and late 

payment disclosures. It is my understanding that the Federal Reserve is now working on these changes as part of a large review 

of the Truth In Lending Act Regulation Z disclosure. 

What do you believe are the most important aspects of that review? And what changes, if any, do you believe should be made as 

part of that process that would help this situation in the credit 

card industry today? 

Mr. PLUNKETT. Senator, let me start first with the minimum 

payment disclosure. There is a major problem with the law, in my 

opinion. It does not require that the disclosures be personalized— 

that is, specific to the actual balances of the individuals—unless 

that person calls a toll-free number. The truth is that consumers 

are harried and most will not. In fact, most who could probably 

benefit from the information, will not. 

So Senator Akaka mentioned his legislation. It would require the 

kind of targeted personalized disclosure, not only how long it would 

take to pay off at the minimum payment rate, but also the total 

costs. The total costs are not covered, either, even if you call that 

toll-free number to learn about how much would it take me over 

so many years—excuse me, how much would it cost over so many 

years to pay off at the minimum balance? 


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So the first point is that unfortunately, the statute, in our opinion, will not be terribly helpful with that particular disclosure. 

Regarding your question on other disclosures that would be helpful, you have heard, I think, consistently from the consumer folks 

here that disclosure is important. But it is not going to be enough 

to solve the problems that we have identified. But we think there 

needs to be better disclosure in a very concise—— 

Senator SHELBY. Why wouldn’t disclosure, pure unambiguous 

language, simple English and so forth—it might not be enough in 

most instances, but it would certainly help market forces continue 

to work, would it not? 

Mr. PLUNKETT. It would help consumers understand what they 

are getting into. But the problem with this back end fee structure 

that you have heard about, Senator, is that consumers do not shop, 

they do not shop around, based on an assumption that they are 

going to pay a—make a payment a day late. 

They are overly optimistic, and research from behavioral economists has shown this, about their ability to meet their financial obligations. So the market is not constructed so that people shop actively for these back end fees. They look at interest rates. They 

look at annual fees. And it is true that many cards now do not include an annual fee. They do not look at the back end fees. 

Even with better disclosure, I would say some might, but many 

still will not. 

The other issue is you need to level the playing field so some of 

these unjustified back end practices do not provide a competitive 

advantage to certain issuers. It is a good thing that JP Morgan 

Chase is no longer going to do double cycle billing. But others who 

might choose to do so get a competitive advantage and income if 

they decide to keep at it. So two problems there with disclosure. 

We do have, in our testimony though, Senator, several suggestions on more readable disclosure, better disclosure about those 

back end fees and interest rates, and improving the Schumer box, 

improving the information. This is the most widely identifiable part 

of the credit card solicitations and disclosures that consumers see. 

They know about the Schumer box. 

Some of this information needs to be in that Schumer box so that 

people can be aware, before they get a credit card, of these fees and 

interest rates. 

Senator SHELBY. Is the five page legal document that is sent out 

that we all sign or accept, is that mandated by law or regulation 

or both? Or is this just something that lawyers have come up with? 

Mr. PLUNKETT. It is a little of both. As the GAO report points 

out, there are some requirements in TILA that are in these contracts that are incomprehensible and not necessarily relevant to 

the fees and interest rates that consumers pay now. So that is a 

very important issue for you all to evaluate. But there is also language in there to protect issuers from legal liability. It is both problems. 

Senator SHELBY. I think the question before us—I know my time 

is up, Mr. Chairman—would be how do we continue to let the market work? Because the credit card industry is so important, legitimately so, to our economy, to just about every American, without 


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the abuse and the exploitation that we see even today? That is the 

question for us. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much. 

Senator Carper. 

Senator CARPER. Thank you. 

I want to again thank each of our witnesses for taking the time 

out of your lives to be here with us today to give us your thoughts 

on what we all agree is important issues, an important industry, 

an important convenience in which there are abuses. 

Just a little humor to start off with. I am reminded that editorial 

writers have been described as people who come onto the battlefield when the fighting is over and shoot the wounded. When this 

hearing was posted last Thursday, and it is fairly short order, and 

some of you actually agreed to testify, I think, as recently as a day 

or two ago. And you moved things around on your schedules. And 

I just want to say, on behalf of all of us, thank you for doing that 

and for your willingness to sort of put yourself in the position to 

be shot as one of the wounded. 

We hope that has not happened. I do not think that it has. 

I just want to preface my first—I want to go back a little bit and 

talk about the minimum payment requirements and how that has 

affected you and your customers and some of the issues. 

Before I do that, I just want to remind us all that we, as consumers, are exposed to solicitations every minute of every hour of 

every day of the year. One only has to turn on our televisions or 

even to look at our e-mails to be solicited to buy any wide variety 

of foods, any kind of soft drink or beer that is out there, whatever 

restaurants to go to to eat, what kind of car or truck or SUV to 

buy, what airline to fly, what kind of house to buy or rent. 

The enticements, the inducements are out there from all directions. And we all have, as consumers, some responsibility ourselves 

to police our behavior. I would just remind us all of that. 

For our witnesses who are not here on behalf of the industry, I 

want to ask, they have raised a lot of issues, a lot of concerns, some 

of which we have heard before and some of which are new. We 

have heard from some of our industry changes that they have made 

in their own policies, which we applaud. What else should the industry be doing? And particularly, maybe what else have you done? 

I would direct this to our witnesses from JP Morgan, from 

Barclays, and from Capital One. What else should the industry be 

doing? 

Mr. VAGUE. Senator, I would say that there is a lot of good that 

can be done by the disclosure area that we have discussed. Really, 

I think relative to some of the questions that have already been 

asked about this, consumers do respond differently based on what 

is in the disclosure. I mean, we know from our experience over 

many, many years that if the APR is one rate versus another, or 

if the late payment amount is one rate versus another, that consumers will respond more or less to that solicitation. 

So the work this committee has done, and others in the U.S. 

Government have done, relative to the issue of disclosure has, in 

fact, made a difference. And I would respond, relative to any of 


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these issues, that additional disclosure would, in fact, be helpful. 

That is something we have advocated—— 

Senator CARPER. When you say additional disclosure, additional 

pages of disclosure? We already heard a little bit about that. 

Mr. VAGUE. Your point is a good one. The five pages of disclosure 

we have now, we think could be simplified. So clearer disclosure is 

perhaps what we are after, rather than more disclosure. 

And I think it is an important point, too, we have talked a little 

bit about minimum payment disclosure. But I believe the statistic 

is correct that the number of consumers that regularly make minimum payments is only about 1 percent of all customers. So if a 

new set of minimum payment disclosures were put out there, you 

are going to be confusing a whole lot of folks. And in fact, any minimum payment disclosure relative to the time in which something 

would be paid has to be based on assumptions that no one knows. 

Whether you would occasionally make a higher payment, whether 

your APR would be changed, and the like. 

So I think in areas like that we have to move very, very carefully 

so that we do not end up in a situation where we are actually confusing the consumer more, disclosing things to folks that do not 

really—are not really affected by that, creating more expense in 

the system in the way of consumer complaints and calls and the 

like. 

Mr. PLUNKETT. Senator, could I throw in a point of fact on—— 

Senator CARPER. I want to hear from Mr. Finneran. Let me just 

ask you to hold and let me hear from Mr. Finneran. And I want 

to hear from Ms. Franke, as well, on this question, please. If I have 

time, Mr. Plunkett, I will come back. 

Mr. FINNERAN. Thank you, Senator. 

I think there are three things that the industry can do, and I will 

cite a couple of examples under each. The first one, I think, as Mr. 

Vague said, is to continue to work with all interested parties to 

make disclosure better. And here I want to make a distinction between the credit card agreement and the disclosure materials. Capital One has a credit card agreement that is only about four or five 

pages, not the 30 pages that was cited earlier. 

That agreement does not contain the disclosures that are truly 

important, nor does it address the issues that people have been 

talking about today. Those disclosures are found in the marketing 

materials, the Schumer box which is part of the marketing materials, the welcome kit which is also a relatively small set of materials, and then on the back and front of the periodic statement that 

consumers get. 

So the first thing the industry can do, continue to work with the 

Federal Reserve Board as it undergoes its review under Regulation 

Z to improve disclosures. We certainly acknowledge that the industry has changed and the products have become more complex. And 

while as a painter you never want to go back and paint over a masterpiece like the Schumer box, the landscape has changed and it 

is time to really improve the Schumer box. 

Senator CARPER. I just regret that Schumer is not here to hear 

that. 

Mr. FINNERAN. Capital One has been trying to lead the industry 

in how the industry ought to be open to new disclosure. 


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The second thing that we can do is stay ahead of the game. So 

I will give you one example on disclosure, and I am sorry that Senator Akaka is not here. But with respect to minimum payments, we 

are not waiting for the Federal Reserve to come out with new disclosures. What Capital One has done proactively while we wait for 

the Fed, is for any customer who pays only the minimum payment 

three times in a row, we give them a statement notice and draw 

to their attention the consequences of that behavior. We have also 

put up a calculator on our website and we direct them to the 

website. It is very easy to use, so they can plug in their own assumptions. It will tell customers how much interest they will pay 

if they pay so much a month. It will also tell them how long it will 

take to pay it if they do that. 

And I think, also to pick up on a comment—— 

Senator CARPER. I am going to ask you to hold that. I like that 

very much, but my time is about to expire. I just want to give Ms. 

Franke an opportunity. That was a very good point. Thanks. I am 

sorry. 

Ms. FRANKE. I would say I just briefly agree with both of my colleagues and I think we need to do all we can to make sure that 

the customer understands the terms and agreements of their conditions with us. And that is both working with the regulators and the 

other issuers to make sure that the required disclosures are clear, 

as well as doing the things like Chase has done to on our own consistently communicate to the customer what they need to do to 

maintain their low rates and avoid penalty fees. 

We do that on a regular basis to all of our customers and I think 

that is very important. We need to continue to focus on the customer, the consumer, and what their needs are. 

Senator CARPER. My thanks to each of you. My time has expired. 

Chairman DODD. Senator Bennett. 

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

Ms. Draut, I have a statistical question that I am sure you have 

an answer for. But on the surface of it, it looks a little strange. 

You have been quoted in USA Today as saying that the average 

credit card debt among households 65 and older in 2004 was 

$4,907. The Federal Reserve says the mean credit card debt for 

households between 65 and 74 is $2,200. And for those over 75, it 

is $1,000. 

Now is this the difference between average and mean? Can you 

help us understand the discrepancy between the Fed’s figures and 

your figures, because the discrepancy is very large. 

Ms. DRAUT. The discrepancy is easy to explain. When the Fed 

publishes their average balance data, they include all of the households that carry no balance, which leads to a lower figure. When 

we publish our data, we very explicitly say this is the average balance among indebted 65–plus households. 

Senator BENNETT. So you have different universes? 

Ms. DRAUT. Yes. 

Senator BENNETT. I see. USA Today did not make that clear, so 

I think it is essential that we have that. Thank you for that clarification. 

Let me ask the—first, a question for Dr. Warren. 


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You said there is no disclosure between a safe card and—I do not 

remember, did not write down the word you used for the other 

kind. What is your definition of a safe card? 

Ms. WARREN. A card that is not loaded with back end tricks and 

traps, a straightforward card that says here are the terms, here are 

the interest rates, and that does not have these inexplicable twocycle billing, universal defaults, and so on. Things that customer do 

not and cannot read in advance and make the differentiation in 

terms of shopping for this product or that product. 

Senator BENNETT. All right. So if I am in the business of helping 

someone devise a disclosure statement, it would seem to me I 

would want the competitive advantage of saying we do not have X 

and our competitors do. 

The competitive marketing activity has been on APR. You have 

talked about that. That has pretty much disappeared. Everybody 

quotes roughly the same APR. All of the bombardment that I get, 

that we all get, the solicitations, our APR is such-and-such, only 

APR, and the teaser rate. You come in for an APR of 4.3 and it 

will last for 6 months, and then we will go to—so customers are 

familiar with APR. 

So it would seem to me, if I am devising the marketing strategy 

for a credit card company, I would say forget APR because that is 

no longer a differential. Let us get more people on our credit card 

by saying our late fee is only $5, whereas the average late fee for 

the industry is $20, or something of that kind, to get people to use 

my card. 

If the safe card has a significant advantage for a customer, it 

would seem to me if I have a safe card, Mr. Finneran, I would try 

to make that very clear. 

Now this brings me to the core of what I think I hear from today’s conversation. Where do the profits come from? When you are 

running a credit card company, where do you look for your profits? 

Ms. Franke, I think I do understand the double-cycle billing 

thing, because I am a freeloader. I am a perpetual—here I am disclosing things. I have a perpetual interest-free loan on the level of 

several thousand dollars—I will not give you that number, I will 

not disclose that—because I pay off in advance of the due date 100 

percent of the balance, while I am running up the same kind of balance simultaneously. 

So I am taking the bank, if you will, to the tune of my multithousand dollar fee loan in perpetuity. I never pay any interest on 

it at all. And I understand the banks do refer to me as a freeloader. 

That is the technical, legal term of art. 

Ms. FRANKE. Well, we would call you a valued customer. 

Senator BENNETT. All right. 

[Laughter.] 

Senator BENNETT. The reason you do is because you have got 

interchange fees and you have got income on the other end. 

So the fundamental question here is if I am starting up a credit 

card from scratch, and I have to have X amount of profit to keep 

the thing afloat, where do I look for my profit? Do I look for interchange fees? Or do I look for tricks and traps? 

And you witnesses here from the three companies may not be 

competent to answer this question because this is basically a CEO 


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question, but how much do I build into my business model and my 

strategic example tricks and traps? And if it is a deliberate industry practice and strategy to make my money off of tricks and traps, 

then I am with Dr. Warren and Mr. Donovan. But if it is a fallout 

of the overall strategy that some people get caught in this, so that 

Mr. Donovan has clients, that is a very different kind of thing. 

I am not burdened with a legal education, but I do get told by 

my lawyer friends that hard cases make bad law. And Mr. Donovan 

has given us some hard cases. And I want to know whether they 

are, in fact, hard cases and the exception to the overall business 

strategy or if they are caused as part of the business strategy of 

where we are putting. 

I have gone over my time, but can you give me a quick response 

as to where you look for your profits to keep yourselves afloat? 

Mr. FINNERAN. Senator, if I could, I would love to give you a 

quick response. I do not think—well, certainly Capital One and I 

suspect the other long-term credit card issuers, many of whom are 

represented in this room today, we do not build a business model 

on tricks and traps. We are all in the business of trying to attract 

and retain good customers. And it is not in our interest to give people credit that they cannot handle. Nor is it in our interest to set 

people up for disappointment when they figure out what their deal 

was, if they thought it was something else at the time we attracted 

them. 

We work really hard to try to meet those two standards every 

day, because we expect to be in this business for many, many 

years. And if you build your business model on tricks and traps, 

you are not going to last in the marketplace because you are going 

to get outed, whether it is by you folks or by our consumer group 

colleagues here at this table or by litigators or by regulators. We 

are in the business to do a service to our customer with a focus on 

the long-term. 

Ms. FRANKE. I would like—— 

Ms. WARREN. Senator, can I also give a response, 15 seconds? 

Chairman DODD. Go ahead. 

Ms. WARREN. Let us just look at the numbers. The credit card 

industry as a whole, not the three people who come in here today 

representing, as they say, their high-end customers in one case. 

The credit card industry as a whole makes $11 billion in terms of 

the first model you described. That is what they are making from 

the fees from the merchants and so on. 

They made $79 billion last year in interest and fees. 

Senator BENNETT. But interest and late fees are two different 

things. 

Ms. WARREN. That is absolutely true, although—— 

Senator BENNETT. The late fees are the tricks and traps. The interest is a legitimate—— 

Ms. WARREN. A 29 percent interest rate for being a few days late 

is not within the range of legitimate. And what the data seems to 

suggest is that that is where the interest income is coming from. 

Let me just give you return on assets. That is the key part. We 

look at all other forms of consumer lending. Pick Citibank last 

year, and their return on assets was 0.8. 


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But when you look at what they did with credit cards, their return on assets was 6.2. In other words, in terms of building a business model, building a credit card is more profitable than building 

any other kind of consumer lending. And within that, the revenues 

are coming $7 to $1 for building in interest rates and late fees 

where you can snag customers whenever they slip and fall at all. 

It is about tricks and traps. 

Senator BENNETT. We do not have the time to go into that. 

Thank you. 

Ms. FRANKE. I would like just to respond on a couple of points. 

First of all, the credit card is an unsecured loan. It is the only 

consumer tool out there where we lend folks money and we have 

no collateral to collect against it. We are providing a service to the 

consumer to be able to facilitate payments, the vast majority of 

whom use our product for convenience. 

As you respectfully point out, Senator Bennett, there are many, 

many of our customers who pay their bill in full every month and 

appreciate that ability to have that convenience. 

We also have consumers and customers who choose to borrow 

from us. And we charge them a fair interest rate to borrow from 

us. We believe that we are treating customers and providing them 

a service that they want, whether it is a convenience or whether 

it is a loan. And we do try to make sure that we manage our risk 

profile so that we price appropriately for the risk that we are taking. 

And in some instances, we do need to raise rates where the risk 

of the customer has deteriorated from the time that we entered a 

contract with that customer. 

I believe that the credit card is a wonderful tool for the consumer, and at JP Morgan Chase we deal with the very credit worthy consumer who can afford to pay us back and appreciates the 

utility that we are providing them. 

Chairman DODD. Thank you. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Unlike Senator Bennett, I am burdened with a legal education, 

so I want to follow up from where he started, from where he was 

headed. I think it was very relevant. 

Let me ask you, Ms. Franke, you say in your testimony that it 

is the bulk of the business for Chase is super prime and prime. So 

am I to interpret that that super prime and prime is an individual 

who has a good credit history that, in fact, pays their monthly balance on time within that month? 

Ms. FRANKE. That would be correct. 

Senator MENENDEZ. And that is the business that you go after? 

Ms. FRANKE. That is correct. 

Senator MENENDEZ. Now to have that business model, you would 

not go after someone who has no credit history? 

Ms. FRANKE. We do, 1 percent of our customers are students. Listening to your opening comments, I imagine that is something of 

concern to you. It is a very small part of our business, but we do 

believe that there is a place to provide students the credit that they 

need, and really the utility the need for emergencies and to manage their lives. And we manage it with very low lines. And interestVerDate Nov 24 2008 02:14 Nov 24, 2009 Jkt 050307 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 E:\HR\OC\A307.XXX A307

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ingly, have much higher numbers of students paying us in full than 

the adult population. 

Senator MENENDEZ. What is a pre-approved card? 

Ms. FRANKE. A pre-approved card is where, based upon a review 

of the credit bureau, we have determined that someone is credit eligible and worthy of our extending them a line. 

Senator MENENDEZ. So if Augustino Joseph Chairvolotti, who is 

2 years old, got a solicitation for a pre-approved credit card, what 

is his credit history? 

Ms. FRANKE. That would be an error. And we do, as I am sure 

you know, write many, many letters a day. In some instances, the 

data is incorrect, and we constantly are working to refine our processes. We have gotten bad data. If that is the case, we welcome 

anyone to tell us where we have made a mistake because that is 

not within our policies. That is not what we want to do. 

We clearly do not market to minors, nor do we market to dogs, 

as someone has brought up earlier. We want to market to those 

that we believe—— 

Senator MENENDEZ. Well you, in this mistake, marketed to a 

minor. 

Let me ask the rest of the members of the industry, is that the 

same business model, the one in which you are working for prime, 

subprime—I mean, super prime, prime, people who pay? That is 

the model customer, is it not, I would assume? 

Mr. VAGUE. Generally, absolutely. 

Senator MENENDEZ. Is that the bulk of where you are headed on 

your business? 

Mr. VAGUE. That is right. 

Senator MENENDEZ. Mr. Finneran. 

Mr. FINNERAN. Senator, we lend across the entire spectrum. And 

let me also say that that is not unlike many of the large credit card 

issuers in the country. Our portfolio, according to public data, is 

about 30 percent in what is defined as subprime, and that is about 

the same percentage as most of the other big five lenders, according to the data that they file publicly. 

So we market to all Americans. We use the same basic criteria, 

however, which is an assessment as to whether they have the capability to handle that debt and to repay that debt, and principally 

looking—as Ms. Franke described—to the credit bureau information that is available. 

Senator MENENDEZ. Here is where my problem, my legal education, burdens me. And that is the GAO report said that, in fact, 

70 percent of the credit card industry’s revenues come from interest 

payments made by non-model customers, who cannot or simply do 

not repay the entire balance they owe each month. 

And so the question, as a practical matter, if the GAO says 70 

percent of your revenue comes from non-model customers, then 

those are individuals who are not paying their monthly payment on 

a timely basis and therefore invoke some of these different charges 

or higher penalties or late fees or, in fact, higher interest rates. 

So if that is the case, what is the industry’s incentive to undermine—if you ultimately had a fully model customer portfolio for all 

of the industry, eventually you would lose 70 percent of your revVerDate Nov 24 2008 02:14 Nov 24, 2009 Jkt 050307 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 E:\HR\OC\A307.XXX A307

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enue. Now what is the incentive for the industry to lose 70 percent 

of its revenue? 

Mr. FINNERAN. Senator, I am not familiar with the reference to 

the GAO report that you made. But if I was listening carefully, I 

think you defined non-model customers as providing 70 percent of 

the revenue including interest. I mean, someone who may not pay 

their balance in full can be a very, very good customer. That is part 

of the flexibility of the card, that people do use it, as Senator Bennett alluded to, as a transaction vehicle where they pay their balance in full every month. Many people use it as a borrowing vehicle, whether they borrow over long periods of time or whether they 

borrow periodically and then pay it back. 

Senator MENENDEZ. But we have heard how the non-payment 

can, in fact, dramatically increase the rate of interest. And therefore, isn’t that become far beyond what you say is a model customer. It is a customer that is somewhat in bondage. 

Mr. VAGUE. I would just comment, hopefully for clarification, 

most of the folks that we would consider prime customers do not 

pay late to incur the kinds of fees that you are suggesting, but do 

not pay in full either. They would on time make a partial payment. 

So they are actually borrowing. 

And so I suspect the large part of that 70 percent number you 

are referring to is interest received where timely payments are 

made by what we would consider prime customers. 

Senator MENENDEZ. Well, let me ask you, this is the final question that I have. And I would like to explore this with the industry 

more, because 70 percent of your revenue is not insignificant. 

With student loans and the whole question of—I saw the numbers of those students who took tests and clearly were not literate. 

Only 26 percent of 13–to–21–year-olds reported their parents actively taught them how to manage money. And less than a third 

of the 4,000 students who took the Jumpstart Personal Financial 

Survey passed the test. 

Now when we are so aggressively pursuing this class of consumers, isn’t there a responsibility from the industry to be more 

policing of itself in this context? Or in the absence of that, then 

find themselves with a legislative response? 

Mr. VAGUE. There may very well be things that need to be done 

relative to lending credit cards to students. But I would reiterate 

what has been said by others here, and that is we do not currently 

make very many credit card loans to students. But I have from 

time to time in my career. And it has always been my experience 

that the delinquency rates on student programs is lower, is more 

favorable, than that for the general population. And I think there 

are some ABA statistics that bear that out, as well. 

So even if there is something we could do in this area, I would 

love for us to be able to really look at the actual holistic or total 

experience of students as we do that. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman DODD. No, thank you very much. 

Senator MENENDEZ. For the students I have talked to, and their 

parents, I do not know how low the rate is. But there is far more 

than enough. I think one of our witnesses actually testified that, 

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cent of college dropouts occur as a result of consumer debt. That 

is not insignificant. 

Chairman DODD. I will just tell you, from this side of the table, 

I suspect I am going to speak for all of my colleagues. We go back 

to our States and do town meetings and the like. You cannot believe how often this comes up and how many pieces of correspondence and communications we get from constituents. 

Now you are talking about a very small percentage. I heard you 

say that, Ms. Franke. But I will tell you, there is a great deal of 

concern about the over-marketing, what happens, and parents, and 

so for and the like. 

We have got a vote on. I am going to step out and come right 

back. I am going to turn to Senator Casey so he can get his questions in. Then I will come back so you can go vote. We will finish 

up here. 

But that number still, in the last 10 years, to go from roughly $1 billion—and I presume that was fees and interest. In 1995 or 

1996, whatever that percentage was of interest and fees, but today 

that number has jumped to $17.1 billion, and 70 percent of that 

$17.1 billion are penalty fees. That is a massive increase in 10 

years. 

Now that is coming from—this is not coming from your good customer. Penalties like that, they are not the person who pays a percentage off, makes that minimum thing and does that good job 

there. This reaching down in to this constituency that is either 

fixed income or low income and making it impossible, in many 

cases, for them to crawl out and get into the economic condition 

that they would all like to be, and is what greatly, greatly worries 

a lot of us here. 

And I am not suggesting, by the way, you are major, well-respected businesses. And I respect the fact that JP Morgan—I do 

not like your reason, but I am glad you did it, Ms. Franke, for getting rid of the double-cycle billing, and so forth. And I am glad you 

do not do a lot of these default payments, and so forth. A lot do. 

People not at this table. 

And what Senator Menendez said earlier was very, very important. There are 6,000 issuers. We have got three of you here today. 

And just as was mentioned earlier, we know that there are good 

people in this business to do a good job. That is not the point here, 

obviously. Laws are not written for the overwhelming majority of 

people who do the right thing every day. We have to write the laws 

to protect people against, just as Mrs. Warren talked about, the 

Consumer Product Safety Commission, the Food and Drug Administration. 

My colleague from Delaware talked about all these things are 

consumer choices. They do, they have great choices because there 

has been someone around who said by the way, we do not expect 

you to be an engineer and a scientist and a pharmacist when you 

go out. When every one of us this morning got up and we brushed 

our teeth and we took our morning prescriptions, we did not agonize about whether or not we were going to be in trouble as a result of doing it. We have confidence in it. 

And what we want to do is have people have confidence in the 

system that when they engage in a wonderful practice of the extenVerDate Nov 24 2008 02:14 Nov 24, 2009 Jkt 050307 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 E:\HR\OC\A307.XXX A307

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sion of credit, that they are not going to get themselves in deep 

trouble and never get out of it. And too many cases that is happening today. It is happening. We all know it. 

So we need good advice from you on how to pass responsible legislation or to encourage the industry to do the responsible thing so 

we can start to make it possible for these people to begin to move 

up that economic ladder and enjoy the prosperity of our country. 

That is really what we are driving at here. So in a sense—let me 

recess this for a minute. We will recess for 10 minutes and come 

right back. Take a break for 10 minutes. 

[Recess.] 

Chairman DODD. Thank you for your patience here, all of you, 

again. This will be relatively brief here now. We will wrap this up 

for all of you. You have been very generous with your time this 

morning. Very, very valuable, I can tell you, to have your testimony. 

I am going to turn to my colleague from Pennsylvania, a member 

of the committee. Senator Casey, the floor is yours. 

Senator CASEY. Mr. Chairman, thank you very much. And again, 

I want to reiterate how much we appreciate you convening this 

hearing and the importance of it. 

Not only because Mr. Donovan is from Pennsylvania, but that 

helps, I want to direct my first question to him. But I also, and I 

do not mean to artificially create conflict here but there is obviously some conflict in this room and that is important to recognize. 

It has been my experience, and I think the experience of a lot 

of Americans, that when there is conflict in our adversary system, 

in our judicial system, often, in most cases, that leads to some illumination of the truth. So I hope this helps in that regard. 

I was struck by, Mr. Donovan, your testimony and the detail in 

your written testimony about Ms. Owens in Ohio and Mrs. C in 

North Philadelphia. And with the admonition of my distinguished 

colleague from Utah, Senator Bennett, I still think that these particular cases are very important, because they can often explain 

better some complicated issues. 

So here is what I wanted to do. I actually know where North 

Philadelphia is. It is a place that I volunteered, and I know Senator Dodd was a volunteer, as well, and did it overseas. That is 

harder. I only did it in the United States. 

But North Philadelphia, most of North Philadelphia, is very poor, 

as you know. Some is less so, and also I am sure there are middle 

income families. But it is a very tough place to make ends meet, 

and to do that on a $600 a month SSI payment is even more difficult. 

So my question is directed at those here who are representing 

the industry. When you think of some of the detail, and I realize 

that there is a page or so of it, but here is the bottom line, as I 

read it. This is on page three, and I know not everyone has this. 

This is what Mr. Donovan testified to: by August of 2006, in the 

case of Mrs. C in Philadelphia, nearly $400 per month was coming 

due on the card she had, all of which Mrs. C attempted to pay from 

her monthly $600 SSI check. As of August 2006, the APR on her 

WAMU card had increased to a penalty rate of 31.49 percent. 


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The question that I have, and I know that is a long lead up, is 

when you hear that and you hear the other parts of his testimony, 

and other things that have been said today, I realize this is necessarily is not your banks and is not your particular case. But what 

can the industry do to make sure that the Mrs. Cs of the world do 

not have to endure that kind of punishment ever again? 

I realize that anecdotes are not the whole story. But this is one 

woman in my State. And if she had called me, and I just started 

here. But if she had called me this year or next year, I am going 

to be calling you or your counterparts or your colleagues. So I want 

to know, how do we prevent these cases from transpiring? 

I would open it to anyone on the panel? 

Mr. VAGUE. I would be happy to speak to it. I very much 

empathize with you and agree with you the appropriateness of examining situations like this. In our organization, first and foremost, we endeavor strenuously, frankly, to avoid lending into situations where we cause distress. I mean, there is enormous amount 

of effort put onto that. 

But in those situations where we do, such as the one you describe, we very quickly move, as we are going through the collection process, to a program where we will waive interest rates, fees, 

other things, go down to the principal balance. We will also forgive 

portions of the principal balance. 

I think it is our best interest to be proactive in a situation like 

these to create something that is manageable. It does no one any 

good to do repetitive calls in situations where there is not going to 

be successful resolution, as perhaps is the case here. 

In addition to that, there are very responsible consumer credit 

counseling services, and in particular the non-profit Consumer 

Credit Counseling Service itself, where we would very quickly refer 

a program like that. And that institution has historically been very 

responsible in helping an individual like Mrs. C to negotiate with 

a group of lenders simultaneously and get them into a program, 

often create by CCCS, as they are called, to remove some or all of 

the interest rates or fees, create partial payment programs, and the 

like. 

So the continued awareness of those kind of programs, the continued promoting of institutions like CCCS, is something that we 

endorse. 

Senator CASEY. I want to give others a chance and I want to 

have Mr. Donovan—he is the author of this information. 

But the credit protection fee is really what—am I right, sir? That 

is what drove this. 

Anyone else? I have a minute-and-a-half, but I am going to try 

to get it in. 

Chairman DODD. Take a little more time, if you want. 

Senator CASEY. Anyone else? 

Mr. PLUNKETT. Senator, I do have a point on that, as well. I 

think what Mr. Vague was referring to is what is often called a 

workout plan, where the creditor will try to understanding the declining financial situation of the consumer and work out sort of an 

individualized remedy to help them. 

Some creditors do it. Some do a good job of it. Often, very often, 

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tem. It is not cheap to do. I have noticed that workout plans come 

and workout plans go, depending on the underlying financial condition of the issuer. That is, when they are doing better financially, 

they might be more willing to do it, and not. 

As for credit counseling, we have documented extensively that 

creditors have actually made it more difficult for people to lower 

their overall interest rate on all of their cards because they have 

raised the interest rates that they charge people in credit counseling over the last 8 years. Bank of America, for example, used to 

offer a zero percent interest rate for people in credit counseling. We 

applauded them. We thought it was a very responsible approach. 

They have raised it to just under 10 percent. 

So that is the problem with credit counseling these days. 

Senator CASEY. We are all for counseling and workout plans and 

all of that, but I am talking about why this woman was put in that 

position to begin with, with this fee, the credit protection fee. 

But someone else from the industry who wants to respond? But 

I want to make sure I give Mr. Donovan a rebuttal. 

Mr. FINNERAN. Well Senator, I would just add to what has been 

said. I think one of the keys here is in the product design at the 

front end that is offered to—— 

Chairman DODD. I cannot hear you, Mr. Finneran. 

Mr. FINNERAN. I am sorry, Mr. Chairman. 

I said I think one of the keys here is in the product design on 

the front end, and I think we talked about that this morning, about 

the repricing criteria that different participants in the industry 

apply. We have certainly tried to make that much more transparent and simpler for our customers. That may have helped in 

this situation. So I would just add that as a comment. 

Senator CASEY. Mr. Donovan. 

Mr. DONOVAN. Yes, thank you, Senator. I appreciate the opportunity. 

I think one of the problems with the marketplace generally is 

that we now have a very mature, super competitive industry that 

no longer competes based upon the annual percentage rate any 

longer. And it is allowing freeloaders, such as Senator Bennett— 

which used to be accounted for with the annual fee. The annual fee 

was the revenue that the card holders would—that the card issuers 

would anticipate getting from those who would not revolve their 

balances. 

They have given that up in order to balance their portfolios, because they use the super credit worthy in order to balance a portfolio that they securitize and sell to the industry. That is what they 

do. And they give up the annual fee for that. They are losing revenue on him. He is not a really great customer. He is not a super 

prime customer. They use money with him. 

Chairman DODD. I think he is called—is he not called a deadbeat? Isn’t that the word. 

Mr. DONOVAN. That is what they call them. 

But he is a great customer when they go to the securities markets, because he balances that portfolio so it looks like it is performing better than the portfolio really is, because he is not in default. So that they are now, they are getting the revenue from the 

revolvers. And in fact, Duncan McDonald, the former general counVerDate Nov 24 2008 02:14 Nov 24, 2009 Jkt 050307 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 E:\HR\OC\A307.XXX A307

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sel at Citibank, explained this very problem in the American Banker 3 years ago. 

And he said that revolvers are now subsidizing the rich because 

the interest and fees earned from them go to subsidize the frequent 

flier miles and the points and the cash-back programs that we give 

to the so-called non-revolvers, which would ordinarily not be making these companies any money. 

The reality of it is if we got back to a real efficient market, what 

would happen would be those non-revolvers would pay some modest amount, some sort of fee, for having the right to not revolve, 

while the annual percentage rate for the revolvers would not spike 

to default penalty rates. 

And I have the solution for that, and it is not disclosure, Senators. The solution has been long-established at common law in 

this country and from the United Kingdom. And that was penalties 

have to bear a reasonable relation to the risk incurred and the cost 

that you incur from the default. If you have a fairness-based standard, a principal-base approach, the market will work for itself. That 

is the market. 

And this is not something unique. It was the rule with the credit 

card industry before 1996, before penalties were defined as interest, which was absurd. 

But not only that, it is the rule in the United Kingdom and in 

Europe and in Japan, because the Office of Fair Trading, which 

governs credit card issuers in Europe, in the United Kingdom, and 

in fact Japan borrows from, has in fact issued calculating fair default charges in credit card contracts, the statement of the OFT’s 

position. This is an August—an April 2006 statement, and it is enforceable in the EU, in the U.K., and in Japan. Why it is not—and 

in Canada. 

Why it is not, in fact, followed by the industry here is simply because the industry does not want to follow these practices and it 

wants to get its out-sized profits, which it has gotten here. 

That is it. Thank you. 

Ms. FRANKE. I would like to make one point, if I could. 

Senator CASEY. Sure. 

Ms. FRANKE. Several times it has been said today that there is 

no longer any competition around interest rates. And as someone 

who manages the marketing activities for Chase, I would like to 

tell you that it is still a very competitive market on interest rates, 

and consumers are still making many decisions about which product they choose based upon what interest rate they are offered. 

So from those of us that do this day in and day out, I can tell 

you that we very much compete on interest rate, and you will see 

a wide variety of interest rates in the market today. 

And the only follow up comment I would like to make is that we 

very much value those customers like Senator Bennett that spend 

money with us but do not carry a balance. They have very low 

losses. And we do make some money on those customers. And we 

do value them. 

Senator CASEY. I know we are out of time, but I would just make 

one final comment. A lot of what we heard today is very good testimony and very good questions. But a lot of what we heard, I think, 

from the industry troubles me significantly in this sense: there 


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seems to be a sense—and this is a broad stroke, I understand 

that—that one of the big problems is lack of customer or consumer 

understanding. And that is certainly true in any field. 

But if that is going to be the focus of the industry only, in other 

words make sure we explain it better and all of these problems will 

be dealt with or mitigated, in my judgment and I think in the judgment of both sides of the aisle on this committee, that is not 

enough in terms of the attitude that you bring to this discussion. 

So I would urge those on both sides of these issues to think more 

than just better disclosure, better explaining. We have got a lot 

more to do than that to protect people. 

I am six-and-a-half minutes over time, Mr. Chairman. That is a 

rare thing in Washington. Thank you for the time. 

Chairman DODD. Not at all. I thank you immensely, Senator 

Casey, for your questions. They are great questions. 

I thank the witnesses, as well. 

Let me just, if I can, make a couple of comments in wrapping up 

for all of you. It is clear, I think, from the hearing this morning 

and other evidence that we have gathered and will continue to 

gather, but certainly what we have already, that we acknowledge 

that we have some serious problems with a number of the practices 

being used by the industry as a whole. 

Again, I want to emphasize here, the witnesses who have come 

forward, particularly Capital One and so forth, willingness to be at 

this table this morning, and others, Barclaycard and JP Morgan. 

And some of the practices you have changed. The reasons you have 

given I do not necessarily agree with, but nonetheless, I appreciate 

the fact that we are changing some of these things or you are not 

engaged in them at all. 

But again, there are 6,000 issuers here. So we are dealing with 

a large universe. And I want to make clear here that we are talking about some of these practices, I think some of you agree, need 

to be changed, maybe for different reasons. Practices like the universal default and the double-cycle billing which have been part of 

the focus of the hearing are incredibly confusing and misleading to 

consumers at the very, very least. 

In my view these practices, as well as others that we will explore 

in the future, must be eliminated or fundamentally changed if we 

are going to go forward. 

It is also pretty clear to me, and again I think this was sort of 

universally held, although we bring different approaches to it here, 

that we have a broken disclosure system. At least I heard that 

from everybody here this morning. And we need to address that, 

regardless of what side of the chair they are sitting on. And I need 

the expertise of many of you here on how we can do a better job 

of this. 

There is some wonderful, talented people at this table, and others who can offer us some help. 

I was talking to my old and dear friend Ed Yuengling earlier. Ed 

has suggested he wants to sit down and talk, as well, from the 

ABA. And I am deeply appreciative of that offer, Ed, this morning. 

We look forward to that. 

And Elizabeth, we are going to call on you and others to help us 

work our way through this in a way, if we cannot come up with 


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some good ideas fairly soon, so we can help craft a smarter and better way to get information to consumers. I think we all agree that 

that is important. 

And to protect consumers outright from some of the practices 

that may be driving some of them deeper and deeper into debt. As 

I mentioned at the outset of my remarks, that is bed for consumers, it is bad obviously for business, and for our country. 

And last, I would just say that while we have reviewed a number 

of reports over the years, statistical data, some of that can be very 

confusing, even contradictory in some cases. What I would like to 

do is leave the record open for a few days to have my colleagues 

address maybe additional questions that we did not get to this 

morning, to raise some of these issues with you, more detailed 

questions involving some of the data, that we might take advantage of your expertise and not confront you right here at a witness 

table without the ability of going back and talking to people in your 

own shops that can help us get accurate information. 

But again, I thank all of you. This has been a very good hearing. 

This is my second hearing as chairman of this committee. I have 

cared about this issue for a long time, as my colleagues know, 

going back some 20 years when I was sitting about where Bob 

Casey is in this committee. In those days, Jake Garn, I think, was 

sitting here in my first term as the chairman of the committee. 

And then Bill Proxmire and of course Don Riegle and Al D’Amato 

and Dick Shelby, Paul Sarbanes. 

I have sat through seven chairs in this committee and this issue 

has been one that has come up all the time over the years, going 

back to my earliest days on this committee. 

So I am very interested in this subject matter. Obviously, all of 

you are, as well. And this is a matter that does need some serious 

work, in my view. So I am looking forward to the ongoing hearings 

and the ongoing conversations that will make it possible for us to 

make it possible for those 51 million American families you talk 

about, Elizabeth, to make sure they have the opportunity to enjoy 

the prosperity that this country can offer. 

So with that, I thank you all for being here. And until further 

call of the chair, the committee is adjourned. 

[Whereupon, at 1:01 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 


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RESPONSE TO WRITTEN QUESTIONS OF SENATORS DODD AND 

SHELBY FROM JOHN G. FINNERAN, JR. 

On behalf of Capital One, I am pleased to have the opportunity 

to respond to a number of your questions for the record. While 

some of the information is competitively sensitive, every effort was 

made to provide information responsive to the Committee’s requests. 

Please note that references to the U.S. Government Accountability Office (GAO) data are based on information that Capital 

One provided to GAO for its report, ‘‘Increased Complexity in Rates 

and Fees Heightens Need for More Effective Disclosures to Consumers (GAO–06–929)’’ issued in September 2006. 

In response to these questions, I am also attaching for the record 

a copy of Capital One’s ‘‘Fact Sheet’’ and ‘‘Fact Pact’’ referenced 

below in response to questions regarding improved disclosure. 

The ‘‘Fact Sheet’’ was submitted to the Federal Reserve in March 

2005 as part of their request for comments on revising the openend credit provisions of Regulation Z. The ‘‘Fact Sheet’’ was Capital 

One’s proposal developed after consumer testing, as an updated 

and improved version of the current ‘‘Schumer Box,’’ to give consumers clearer and more useful disclosure of credit card rates and 

fees, including the reasons for which rates can be changed. 

The ‘‘Fact Pact’’ disclosures on our credit card solicitations incorporates our own ideas to the extent we are able to do so within the 

framework of the existing Reg Z requirements. These simple, plain 

English disclosures are in a food label style format for easy consumer understanding of key terms. 

Q.1. What percentage of customers pay off their balances in full 

each month? 

A.1. Company specific information on this question is considered 

competitively sensitive; however, the aggregated data provided to 

GAO by the major issuers does address this question. Specifically, 

the data shows that between 2003 and 2005, 47 to 48 percent of 

accounts did not revolve a balance from one billing cycle to the next 

for three or more billing cycles. 

Q.2. What percentage of customers pay just the minimum payment 

each month? 

A.2. Very few Capital One customers choose to pay the minimum 

payment for any prolonged period of time—fewer than 3% pay the 

minimum for three months in a row. For those who do, we provide 

a notice on their statement informing them of the consequences of 

doing so. In this statement, we encourage them to pay more than 

the minimum in order to pay down their balance more quickly. We 

also provide them with a web address for our online calculator 

(www.capitalone.com/calculator), which allows them to enter specific information, customized to their situation, and receive realtime information about how long it will take to pay off their balance. 

Q.3. What percentage of accounts are charged-off? 

A.3. As publicly reported, the 2006 US Consumer Card managed 

charge-off rate for Capital One was 3.37% of managed outstanding 

debt. 


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Q.4 What is the maximum APR that customers are charged? 

A.4. In the past, certain customers who defaulted on their obligations were eligible to be repriced to a maximum rate of Prime 

+20.99%; this corresponds to an APR of 29.24% under the current 

Prime rate. Today, the maximum rate that certain customers have 

as their default rate is Prime + 19.9%. 

Customers who have not defaulted on their payments typically 

enjoy far lower rates. Portfolio-wide, the average APR of all of our 

customers is 13.55%. Among those who have not been repriced, 

vast majority of accounts have rates below 20%, and the average 

APR is only 11.46%. 

Q.5. What is the average balance on a credit card account? 

A.5. At the end of 2006, Capital One’s managed US Consumer 

Card portfolio had 37.6 million accounts with $53.9 billion outstandings, resulting in an average balance of $1,434. 

Q.6. What percentage of cards are subject to double-cycle billing? 

A.6. Capital One does not use double cycle billing on any of our 

customers’ credit cards and has never engaged in this practice. 

Q.7. What is the retention rate of customers in the industry? 

A.7. TNS Global, in their November 2006 ‘‘State of the Card Market’’ report, estimated that, for Visa and MasterCard accounts, 11% 

closed in less than one year, 16–17% closed in 1–2 years, 16% 

closed in 3–4 years, and 56–57% closed in 5 or more years. The average account was open for about 6 years. 

Q.8. What percentage of cardholder agreements contain universal 

default provisions? 

A.8. None. Capital One does not engage in any form of ‘‘universal 

default.’’ 

Q.9. How do you define universal default? 

A.9. We understand ‘‘universal default’’ to mean a practice in which 

any of the following may trigger an automatic interest rate increase on the consumer’s credit card: 

• Changes to information in the consumer’s credit report 

• Changes to the consumer’s credit score 

• Paying late on another account with the same or another lender 

• Charging off on another loan with the same or another lender 

• Any other conduct on another account with the same or another lender 

In short, we define ‘‘universal default’’ as a practice that automatically changes the terms on a given account based on behavior 

on another account. 

Capital One does not engage in any form of ‘‘universal default.’’ 

This has been our long-standing policy. We will not reprice a customer if they pay late on another account with us or any other 

lender, or because their credit score goes down for any reason. As 

we testified before the Senate Banking Committee in January, as 

well as at a previous May 2005 hearing before the Committee, 

‘‘there is only one circumstance in which a customer might be subject to default repricing: if they pay us more than 3 days late twice 

in a 12 month period.’’ Furthermore, we explain our practices clearVerDate Nov 24 2008 02:14 Nov 24, 2009 Jkt 050307 PO 00000 Frm 00179 Fmt 6602 Sfmt 6602 E:\HR\OC\A307.XXX A307

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ly in our marketing materials to our customers that we do not engage in this practice. 

Q.10. Do you conduct any type of interest rate repricing based on 

a cardholder’s transactions or credit worthiness with other creditors or accounts? 

A.10. No. As stated above, Capital One does not engage in any 

form of ‘‘universal default,’’ which we understand to mean a practice in which a late payment or other conduct on another debt may 

trigger an interest rate increase on the consumer’s credit card. We 

testified to this before the Senate Banking Committee in January, 

as well as at a previous May 2005 hearing before the Committee. 

Furthermore, we explain our practices clearly in our marketing 

materials to our customers that we do not engage in this practice. 

Q.11. What percentage of cards use credit scores or adverse information from another creditor or account to increase rates? 

A.11. Zero percent of Capital One cards use credit scores or adverse information from another creditor or account to increase 

rates. 

Q.12. Have industry profits remained constant over time? 

A.12. According to the GAO, ‘‘The largest credit card-issuing banks, 

which are generally the most profitable group of lenders, have not 

greatly increased their profitability over the last 20 years (GAO– 

06–929, page 67).’’ Additionally, aggregated data provided for the 

GAO report showed return on managed assets (ROMA) for the industry from 2003 to 2005 ranged from 2.3 to 2.7 percent. 

Q.13. What percentage of Americans have credit cards? 

A.13 The Federal Reserve has estimated that about 71.5% of families had a least one bank issued credit card in 2004 (Source: Federal Reserve, Report to Congress on Practices of the Consumer 

Credit Industry in Soliciting and Extending Credit and their Effects on Consumer Debt and Insolvency at 3,6). 

Q.14. What percentage of cardholders are paying penalty interest 

rates on their cards? How has that percentage changed over the 

last 20 years? 

A.14. Information regarding penalty interest rate pricing is considered competitively sensitive information; however, as aggregated 

data provided for the GAO report showed only a small number of 

active cardholder accounts, 11% in 2005, had more than a 25% purchase annual percentage rate (APR). Specifically, the GAO cited in 

their report ‘‘Penalty interest rates and fees appear to affect a minority of the largest six issuers’ cardholders. . .a small proportion 

of their active accounts were being assessed interest rates above 25 

percent—which we determined were likely to represent penalty 

rates (GAO–06–929, page 32).’’ 

Q.15. What percentage of profits come from: 

a) non-penalty interest charges; 

b) penalty interest charges; 

c) fees, including: over-limit fees; late fees; annual fees; interchange fees; balance transfer fees; cash advance fees; stop 

payment fees; telephone payment fees; foreign transaction 

fees; and other fees? 


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A.15. US Consumer Card, managed: 

• 2006 Net Income: $1,823MM • 2006 Interest Income: 68% ($6,873MM) (includes past due fees) • 2006 Non-Interest Income: 32% ($3,256MM) (includes all fees 

other than past due) 

This is the break-down that Capital One provides in our public 

disclosures. We do not disclose more detail for competitive reasons. 

Q.16. Please provide the Committee with data on the amount of 

annual revenue generated in each of the last two years from interest payments and the number of cardholders paying interest at 

rates of: 

a) less than 15% APR; 

b) from 15 to 19% APR; 

c) from 20 to 25% APR; 

d) from 26 to 29% APR; and 

e) 30% or greater APR. 

A.16. Capital One does not disclose revenue based on cardholders’ 

interest rates. As noted in question 15, Capital One’s US Consumer 

Card, managed profits were: 

• 2006 Net Income: $1,823MM • 2006 Interest Income: 68% ($6,873MM) (includes past due fees) • 2006 Non-Interest Income: 32% ($3,256MM) (includes all fees 

other than past due) 

This is the break-down that Capital One provides in our public 

disclosures. We do not disclose more detail for competitive reasons. 

Q.17. Please provide the Committee with data on the amount of 

revenue generated in each of the last two years from interest payments due to: 

a) repricing of interest rates due to late payments to the issuer; 

and 

b) repricing of interest rates due to cardholder transactions or 

credit worthiness with other creditors or accounts. 

A.17. 

a) Information regarding revenue due to penalty interest rates is 

considered competitively sensitive information. 

b) Capital One does not reprice accounts due to cardholder 

transactions or credit worthiness with other creditors or accounts. 

Q.18. Please explain how you would ‘‘reprice’’ a customer with a 

‘‘fixed rate’’ credit card. What are the criteria that would determine 

whether a customer is repriced? How do you determine the rate to 

which the customer is repriced? 

A.18. Under Capital One’s current policies, any credit cards marketed with ‘‘fixed’’ rates cannot be repriced during the period for 

which they are ‘‘fixed.’’ For example, a rate marketed as ‘‘fixed for 

life’’ today would not be eligible for any form of repricing for the 

life of the account. Similarly, an introductory rate marketed as 

‘‘fixed until April 2008’’ would not be eligible for any form of repricing until May 2008, at the earliest. Repricing in these instances 

means any rate change as a result of a default (e.g., late payment) 

or change in market conditions (e.g., an increase in interest rates 

generally). 


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It is important to note that the policies outlined above were instituted in 2004 by Capital One of its own accord. The Federal Reserve continues to define ‘‘fixed’’ rates as they relate to credit cards 

simply as any rate that is not variable (i.e., tied to an index). Thus, 

current law continues to permit credit card issuers to market 

‘‘fixed’’ rates that are subject to repricing both as a result of customer default and changes in market conditions. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 

FROM JOHN G. FINNERAN, JR. 

Q.1.a. If issuing a credit card with a low credit line is one of the 

ways to reduce the risk of lending to an ‘‘at risk borrower,’’ doesn’t 

the issuance of multiple cards to the same individual reduce the effectiveness of this practice and actually in some cases increase the 

risk? 

A.1.a. We minimize any increase in risk when issuing multiple 

cards to the same customer by applying strict controls in our marketing and approval decisions. We do not target multiple cards to 

‘‘at risk borrowers.’’ Only customers whose risk level is below a certain threshold and who are currently not over-limit or past due are 

eligible to be marketed a second card. Additionally, customers who 

have charged-off on any of our cards in last 12 months are not eligible, and we currently do not issue more that two cards to any of 

our customers. Lastly, we offer lines that ensure customers are 

only given the amount of credit that they are able to responsibly 

handle, whether or not they already have a Capital One card when 

applying for a new card. 

Q.1.b. What percentage of your customers has more than one of 

your credit cards? 

A.1.b. Customers choose to have multiple credit cards for a variety 

of reasons—to have both a Visa and a MasterCard, to segregate expenses, for security, or for different features like rewards. Like our 

competitors, we hope they will choose us to fill those needs. Eightyfive percent of our customers have only one card with us while less 

than four percent have more than two. We only offer additional 

cards to customers in good standing, as indicated above. For those 

customers, we give them the option to consolidate their accounts 

into one card, if they prefer. 

Q.1.c. How would you describe the typical customer that has a low 

credit line but multiple cards? 

A.1.c. With the great variety of cardholders at Capital One, there 

simply is not a ‘‘typical customer,’’ even within the parameters of 

having multiple accounts and low credit lines. What can be said is 

that customers with lower credit lines tend to have higher risk 

than those with higher credit line. Regarding holding multiple 

cards, customers choose to have multiple credit cards for a variety 

of reasons—to have both a Visa and a MasterCard, to segregate expenses, for security, or for different features like rewards. There is 

nothing particularly notable about the fact that customers have 

more than one credit card, whether with one issuer or different 

issuers. CardWeb reports that Americans carry 6.3 bank credit 

cards per household. Like our competitors, we hope they will 


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choose us to fill those needs when they choose to have a single card 

or multiple cards. 

Q.1.d. What percentage of your customers use multiple credit cards 

to remain current on their other credit card balances that have 

been issued by your companies? 

A.1.d. We do not accept payment from one Capital One card as 

payment for another Capital One card. 

Q.2. How does your company account for the total debt from all of 

the cards issued to one customer? Are these aggregate balances reported to regulators as well? 

A.2. Like other credit card companies, Capital One manages the accounts of customers who have multiple credit cards in accordance 

with the federal banking regulators’ ‘‘Account Management and 

Loss Allowance Guidance’’ published in 2003. That regulatory 

statement, issued by the Comptroller of the Currency, Federal Reserve Board, FDIC, and Office of Thrift Supervision, requires credit 

card companies to have sufficient internal controls and management information systems to aggregate the credit that is extended 

to customers through multiple credit cards and to analyze the performance of customers on their existing accounts before an additional credit card is offered. Credit card companies are subject to 

being examined for their compliance with the Account Management 

Guidance during the regulators’ regular examinations of the companies, which can be held annually or more frequently. 

Q.3. What is the typical minimum monthly payment required for 

credit cards? What percent of the balance represents the minimum 

monthly payment? Do you think this is sufficient? Do most credit 

card companies use a model or an algorithm to establish minimum 

payment? Please describe industry best practices for establishing 

appropriate minimum payment amounts. 

A.3. For the majority of accounts, the minimum payment due is the 

greater of: 

• 3% of the balance (some prime and super-prime accounts are 

2%) 

• Amount over-limit 

• Amount past due 

• $15.00 (some accounts are $10) 

It should be noted, very few, less than 3% of Capital One customers, choose to pay the minimum payment for any prolonged period of time. For those who pay the minimum for three months in 

a row, we provide a notice on their statement informing them of 

the consequences of doing so. In this statement, we encourage them 

to pay more than the minimum in order to pay down their balance 

more quickly. We also provide them with a web address for our online calculator (www.capitalone.com/calculator), which allows them 

to enter specific information, customized to their situation, and receive real-time information about how long it will take to pay off 

their balance. 

Capital One and other credit card issuers follow guidance put 

forth by the Federal banking regulators on minimum payment 

standards. 


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Q.4.a. Why does the industry allow credit card customers to make 

transactions that result in their account being over the limit? 

A.4.a. While we decline more than two-thirds of such transactions, 

we approve transactions that allow a customer to go over-limit in 

certain circumstances. We do so because our research suggests that 

customers value the ability to use more than their credit limit in 

certain situations, as being declined can be both embarrassing and 

inconvenient. In fact, we allow customers to choose not to be authorized to go over-limit. Fewer than 1 percent have chosen to do 

so, even when we have made the offer at the time they are assessed the fee. 

To maintain safety and soundness in our lending, we carefully 

consider the risk of the customer in such circumstances. 

Q.4.b. Does the over-limit fee being charged adequately compensate for the risk incurred by the over-limit amount? 

A.4.b. Because Capital One employs stringent standards on the approval of over-limit transactions, we believe that on a portfolio 

basis the aggregate amount of over-limit fee revenue adequately 

compensates us for the risk incurred in approving selected overlimit transactions. 

Q.4.c. In situations where a customer goes over their limit after 

the line has been lowered due to new risk identified in their credit 

report, how can the fee earned adequately compensate for the risk? 

A.4.c. We have strict controls in place regarding over-limit transactions after a credit line is lowered. 

If the decision is made to lower a credit line, we decline all overlimit transactions for all accounts on which the credit limit has 

been reduced. We monitor these accounts for 60 days after a credit 

limit decrease. 

We still see 3–4% of these accounts going over-limit due to authorizations that are less than the posted transaction amounts 

(e.g., at gas stations), under-floor transactions, and non-network 

authorized transactions. To compensate for this, we credit back any 

and all over-limit fees assessed within 60 days of the credit line decrease. 

Q.4.d. Is there a maximum amount or percentage of the line that 

is generally allowed to be over-limit? 

A.4.d. The maximum amount that an account is allowed to go overlimit varies depending on the risk of the account and other factors. 

We currently have controls in place which ensure that no transactions are approved that would put an account over-limit by the 

smaller of 20% of the credit line or a specific dollar amount (depending on general risk characteristics of the account). These limits 

are seldom reached due to our transaction-specific policies. 

Q4.e. What are known best practices for allowing customers to 

overdraw their accounts and assessing fees for doing so? 

A.4.e. We believe a best-practice over-limit policy is one that takes 

into account the wishes of the customer, the ability of the customer 

to quickly return under limit, and the safety and soundness of the 

lender. Features commonly used to address these items include 

clear disclosure of fees, the ability to opt out of over-limit approvals, and tight controls for risky customers. 


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Q.5. How can disclosures and the delivery of disclosures be improved to ensure customers fully understand the terms of the credit 

card, including cash advance, over-limit, wire transfer and late 

fees? What are the best practices for disclosing information to the 

customer? 

A.5. Our suggestions for improved disclosure are set out in detail 

in the comment letters we submitted to the Federal Reserve in response to the Advance Notices of Proposed Rulemaking that the 

Federal Reserve published in its process of revising the open-end 

credit provisions of Regulation Z (Reg Z) in 2005. 

We proposed a ‘‘Fact Sheet,’’ which we developed after consumer 

testing, as an updated and improved version of the current ‘‘Schumer Box,’’ to give consumers clearer and more useful disclosure of 

credit card rates and fees, including the reasons for which rates 

can be changed. 

We also proposed that an appropriately modified version of this 

Fact Sheet be placed on the reverse of customers’ periodic statements. This would require different treatment of some disclosures 

that are already there, and we suggested to the Fed how those disclosures might be delivered. 

Our belief is that the best thing the government can do for consumers, in light of the changing credit card industry and product 

design, is for the Fed to expedite its review of Reg Z and permit 

the use of our proposed ‘‘Fact Sheet’’ or some other updated disclosure that the Fed believes would be useful. Our understanding is 

that the Fed is working hard on that project and may publish its 

proposals soon. 

In the meantime, we have adopted our own simple, plain English 

disclosures in a food label style format. These ‘‘Fact Pact’’ disclosures on our credit card solicitations incorporates our own ideas to 

the extent we are able to do so within the framework of the existing Reg Z requirements. A sample of our ‘‘Fact Pact’’ is included 

with our response. 

RESPONSE TO WRITTEN QUESTION OF SENATOR TESTER 

FROM JOHN G. FINNERAN, JR. 

Q.1. What portion of your profits comes from interest and what 

portion results from the fees you charge customers? 

A.1. US Consumer Card, managed: 

• 2006 Net Income: $1,823MM 

• 2006 Interest Income: 68% ($6,873MM) (includes past due 

fees) 

• 2006 Non-Interest Income: 32% ($3,256MM) (includes all fees 

other than past due) 

This is the break-down that Capital One provides in our public 

disclosures. We do not disclose more detail for competitive reasons. 

Q.2. I’ve been reading about universal default. It is my understanding that you can increase the interest rate of a customer who 

has a perfect and long-standing credit record with your company 

because of a late payment that he or she has made to another creditor. Is this true? How do you justify it.? 


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A.2. Capital One does not engage in any form of ‘‘universal default.’’ This has been our long-standing policy. We will not reprice 

a customer if they pay late on another account with us or any other 

lender, or because their credit score goes down for any reason. We 

testified to this before the Senate Banking Committee in January, 

as well as at a previous May 2005 hearing before the Committee. 

Furthermore, we explain our practices clearly in our marketing 

materials to our customers that we do not engage in this practice. 

As we testified before the Committee, Capital One has a simple 

default re-pricing policy. There is only one circumstance in which 

a customer might be subject to default re-pricing—if the customer 

pays us 3 or more days late twice in a 12 month period. We clearly 

disclose this policy in our marketing materials, and provide customers with a prominent warning on their statement after their 

first late payment. Moreover, if a customer is re-priced, the customer will automatically be returned to his/her prior rate after 12 

consecutive months of on-time payments. 

Q.3. Assuming we wanted to get all credit card disclosures on 1 

page and want to pick the most salient disclosures, what do you 

think are the most important terms of the agreement to allow your 

customers to make an informed choice about the product and 

whether it works for them? 

A.3. Our one-page version is a ‘‘Fact Sheet’’ that we submitted to 

the Federal Reserve Board as a possible replacement for the current ‘‘Schumer Box.’’ Developed after conducting several consumer 

research sessions, the Fact Sheet (included with our responses) incorporates a consumer-friendly visual layout with no distinction between the table of information and footnotes, unlike the current 

Schumer Box. For example, repricing triggers are prominently displayed in the table rather than being relegated to footnotes as in 

the Schumer Box. Fees are separately broken out, clustered together and prominently displayed. We have also recommended to 

the Federal Reserve Board that a version of the Fact Sheet be 

placed on the back of every periodic statement, so that the customer will have key account terms ready at hand on a regular 

basis. The Federal Reserve Board has been conducting consumer 

research of its own, and we understand it will propose its own 

version of revised credit card disclosures soon. 

Q.4. Didn’t it used to be that if you reached your credit limit on 

your card you were denied the extra credit? But now, as I understand it, credit card companies allow consumers to go over the limit 

and then charge them a fee. What is the justification for this 

trend? 

A.4. Capital One rejects the vast majority of over-limit transactions. Our experience tells us that customers value this flexibility 

as a way to deal with unexpected emergencies or avoid the embarrassment of being turned down at the point of sale. Additionally, 

customers can request that we remove the ability for their account 

to go over-limit. Where we have expressly offered this option, less 

than 1 percent of customers have chosen to remove this ability 

even when we made the offer at the time they were assessed the 

fee. 


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Q.5. Do you think that the average consumer knows they’ll be hit 

with a fee for going over their credit limit rather than being told 

they have exceeded their limit? 

A.5. Yes. Our fees are fully disclosed to our customers. We believe 

that the average customer expects an over-limit fee to be assessed 

when exceeding the credit limit of his or her account. When we 

asked our customers if they wanted us to prevent them from being 

able to go over the limit, less than 1% accepted this offer. 

Q.6. What is an ‘‘ideal customer’’? 

A.6. Capital One seeks to offer credit card products that are customized to the needs of its cardholders across the credit spectrum. 

Our ability to do so has contributed in large measure to our success 

in this industry. This strategy recognizes that there is no single 

‘‘ideal’’ type of customer, but rather a multitude of individuals with 

unique objectives and needs for our products. As such, we offer 

cards to consumers who are seeking the safety and convenience of 

electronic payments, but who pay their balances in full each 

month, as well as to consumers for whom a credit card provides a 

vehicle for short term borrowing needs. Therefore, any customer 

who manages their accounts with us responsibly is an ‘‘ideal customer.’’ 

Q.7. What percentage of your customers are in perpetual debt? 

A.7. While perpetual debt is difficult to measure directly, we have 

observed that very few customers choose to pay only the minimum 

payment for any prolonged period of time—fewer than 3% pay the 

minimum for three months in a row. For those who do, we provide 

a notice on their statement informing them of the consequences of 

doing so. In this statement, we encourage them to pay more than 

the minimum in order to pay down their balance more quickly. We 

also provide them with a web address for our online calculator 

(www.capitalone.com/calculator), which allows them to enter specific information, customized to their situation, and receive realtime information about how long it will take to pay off their balance. 

Q.8. Of those customers, how many would have been helped by 

clearer display of rates? 

A.8. It is difficult to draw a connection between credit-card rate 

disclosures and financial distress of any particular customer, especially since the rates themselves are very prominently displayed in 

the current Schumer Box—that is the main strength of the current 

regulatory regime. Our belief, though, is that for those customers 

who get into financial difficulty, the main cause is not likely to be 

disclosure-related but rather external stresses such as job losses, 

illness or the like. Good disclosures are important to ensure customer satisfaction, that the customer is not surprised by rates or 

terms that he or she had not sufficiently appreciated when signing 

up for the account. For that reason, even without waiting for the 

Federal Reserve Board’s updated disclosure regulations, we have 

changed our own disclosures and have adopted a ‘‘Fact Pact’’ disclosure on our credit card solicitations, which incorporates our own 

ideas to the extent we are able to do so within the framework of 

the existing Reg Z requirements. 


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Q.9. How much information can a customer get on the internet 

about the rates/fees of their policy? 

A.9. All terms and disclosures are available in two places online as 

part of our internet acquisitions process. Customers can scroll 

through the terms and disclosures when looking at our different 

products, and they are displayed again during the application process. The most common terms are displayed throughout the experience. 

Existing customers can see the disclosure information that is 

shown on the back of printed statements when viewing their statements online. The online statements also show the periodic rates 

and corresponding APRs for most accounts enrolled in online account servicing. 

Customers will see any fees incurred on the online statement, 

and all account terms are communicated in print before any fees 

could be assessed. 

Q.10. How many consumers use your internet tools, and what is 

their feedback on it? 

A.10. About 16MM accounts are registered in the online account 

servicing platform that services US Card, Small Business card and 

Canadian card customers. About 10.8MM customers log in onto 

their account at least every 90 days, and we average about 7.2MM 

online payments each month. In addition to the most popular tools 

of viewing up to the past 6 statements and making payments online, we also allow customers to change their contact information, 

view recent transactions, and dispute transactions. 

Recent feedback on our internet tools has been positive. In the 

Keynote Customer Experience Rankings for Credit Card Customers 

released on March 14, 2007, Capital One was ranked as the #1 site, 

with the best overall ranking across the 250+ customer experience 

metrics measured in the study. This survey examines the online experience of more than 1,600 credit card customers as they 

interacted with nine leading credit card Web sites. 

Q.11. Do you expect the average educated consumer to read and 

understand the whole disclosure statement? 

A.11. Capital One has adopted industry-leading practices with respect to disclosure, and is actively encouraging the Federal Reserve 

to simplify disclosure requirements as part of its rewrite of Regulation Z. While we await the Fed’s changes, Capital One has revised 

its own disclosures into a nutrition-label style Fact Pact and Q&A 

format, written in plain English that explains all of our most critical policies. These policies include all circumstances under which 

a customer’s APR may change (if at all), any fees applicable to the 

account, how we allocate payments, how we determine their credit 

line and other information. For legal and regulatory reasons, we 

also provide customers with a Customer Agreement document. It is 

important to note that this document does not contain any information regarding our repricing, fee, payment allocation or other policies discussed in the disclosures described above that in any way 

contradicts or negatively qualifies the information contained in 

these simpler disclosures. 


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RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM JOHN G. FINNERAN, JR. 

Q.1. Thank you for testifying before the Senate Banking Committee on January 25, 2007. As follow-up to an issue raised during 

the hearing related to an article published in BusinessWeek, November 6, 2006, entitled: ‘‘Cap One’s Credit Trap,’’ I would be interested in your submission for the record any response to the article 

provided by Capital One. As with every story, there are usually two 

sides and I would be interested in your response. 

A.1. We appreciate your interest in the article published by 

BusinessWeek. As stated in testimony before the Senate Banking 

Committee in January 2007, it is not our practice, nor our intention, to offer an additional card to customers who are currently delinquent or over-limit on a Capital One card. Within our current 

US portfolio, the vast majority of Capital One customers have only 

one Capital One credit card. And, Capital One customers in good 

standing can choose to consolidate their accounts with us at any 

time. 

Capital One responded to the BusinessWeek piece with a letter 

to the editor that subsequently ran in the magazine—the text of 

our response from Mr. Richard Woods, Senior Vice President of 

Corporate Affairs for Capital One is included below. 

‘‘Last week’s story about Capital One was missing key facts and could have 

left a false impression with your readers. 

First, Capital One rigorously manages credit and our charge-off rate is consistently among the lowest in the industry. It is not in anyone’s interest for 

customers to have access to credit that they can’t handle. 

Second, the vast majority of our customers have only one card with us and 

only a small fraction have more than two. 

Third, there is nothing particularly notable about the fact that customers 

have more than one credit card, whether with one issuer or different 

issuers. CardWeb reports that Americans carry 6.3 bank credit cards per 

household. 

Fourth, absent from your article was the fact that our customers can choose 

to consolidate their Capital One cards if their accounts with us are in good 

standing, except in very limited circumstances relating to specialized cards 

for small business and certain national retail partners. 

Finally, we do not knowingly let customers make payments on one Capital 

One card with another Capital One card. 

We are committed to delivering great products to our tens of millions of 

customers and to helping them manage credit responsibly. If any of our customers are struggling to meet their payment obligations, we will work with 

them to attempt to find a solution and we encourage them to contact us. 

Richard Woods 

SVP, Corporate Affairs’’ 


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RESPONSE TO WRITTEN QUESTIONS OF SENATORS DODD AND 

SHELBY FROM RICHARD VAGUE 

Q.1. What percentage of customers pay off their balances in full 

each month? 

A.1. According to the Government Accountability Office (GAO) in 

its October 11, 2006 report to Congress entitled ‘‘Credit Cards—Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures’’ (‘‘GAO Report’’), approximately 50% of the customers of the six issuers participating in the report pay-off their 

balances in full each month. Similarly, in 2004, the Federal Reserve reported that 55.7% of customers reported paying in full each 

month (See, 2004 Survey of Consumer Finances at A 31). 

Q.2. What percentage of customers pay just the minimum payment 

each month? 

A.2. Although exact figures are hard to come by it is estimated that 

very few customers make only the minimum payment every month. 

For example, a 2005 survey by the American Bankers Association 

(ABA) of 1,000 cardholders showed that only 4% reported that they 

habitually made the minimum payment each month. Also based on 

the results of a Federal Reserve study, cardholders who make minimum payments seem to understand the significance of doing so. Of 

those cardholders who reported that they sometimes or hardly ever 

pay more than the minimum amount due, the study found that 

57.1% also reported that they do not subsequently use their credit 

card after making only the minimum payment. (See Federal Reserve Bulletin—2000, p. 634) 

Consumers understand that making larger payments saves 

money, which is why an increasing percentage of credit card holders pays their bills in full or in amounts larger than the minimum. 

Moreover, the federal banking agencies (or at least the Office of the 

Comptroller of the Currency and the FDIC) have implemented new 

minimum payment requirements to make sure that minimum payment levels are sufficient 1) to eliminate the possibility of negative 

amortization, 2) to pay off balances within a reasonable time assuming minimum payments are made and 3) to provide each cardholder flexibility to decide how much of the balance they want to 

pay each month based on that cardholder’s financial circumstances. 

Q.3. What percentage of accounts are charged-off? 

A.3. The Federal Reserve estimated that in the 4th quarter of 

2006, approximately 3.96% of outstanding balances were chargedoff (See, www.federalreserve.gov/releases/chgllsa.htm). 

Q.4. What is the maximum APR that customers are charged? 

A.4. We are not aware of any official statistics on this. However, 

according to the Federal Reserve, the average annual percentage 

rate for credit cards was 13.3% in the 4th quarter of 2006, down 

approximately 3 percentage points since 2000 and approximately 5 

percentage points since 1990. (www.federalreserve.gov/release/g19/ 

current) 

Q.5. What is the average balance on a credit card account? 

A.5. The report issued by the General Accounting Office in 2006 

noted that based on data from the Federal Reserve Bank’s survey 

of Consumer Finances that their median total household outVerDate Nov 24 2008 02:14 Nov 24, 2009 Jkt 050307 PO 00000 Frm 00192 Fmt 6602 Sfmt 6602 E:\HR\OC\A307.XXX A307

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standing balance on U.S. credit cards was about $2200 in 2004 

among those who carried balances. Please note the reference ‘‘total 

household outstanding balances’’ as opposed to individual credit 

card accounts which would be somewhat smaller. The Federal Reserve has also noted that 1) credit card balances accounted for 3% 

of the total debt held by families in 2004, down from 3.9% in 1995, 

and 2) the ratio of monthly aggregate debt payment to aggregate 

monthly disposable income has remained relatively constant since 

1990 at between 11 and 14 percent. 

Q.6. Question: What percentage of cards are subject to double-cycle 

billing? 

A.6. We are not aware of any statistics indicating the percentage 

of credit cards in the industry that are subject to double-cycle (two 

cycle) billing. We do not use double-cycle billing. 

Q.7. What is the retention rate of customers in the industry? 

A.7. We are not aware of any official statistics industry retention 

rates. We can tell you that at Barclays Bank Delaware we work 

very hard to attract and retain our customers. The credit card industry is a very competitive industry and our competitors are continually trying to solicit our customers away. It is therefore in our 

best interest to provide the best service possible and deliver the 

best product possible. The old adage that it is more expensive to 

acquire a new account than to keep an existing one is true; therefore we do everything we can to please our customers so as to keep 

attrition numbers as low as possible. 

Q.8. What percentage of cardholder agreements contain universal 

default provisions? 

A.8. We are not aware of statistics showing the percentage of cardholder agreements containing universal default provisions. 

Q.9. How do you define universal default? 

A.9. The ability of a creditor to change an interest rate based on 

the cardholder’s default with another creditor where that behavior 

indicates that the cardmember has become a riskier borrower. Pursuant to federal law, if the terms of the account include a universal 

default provision, the default or penalty rate must be included 1) 

in the Schumer Box in the credit card solicitations, 2) the initial 

disclosure statement (which we call the Cardmember Agreement) 

and 3) on the periodic statement sent to the cardholder when the 

rate becomes effective. 

Q.10. Do you conduct any type of interest rate repricing based on 

a cardholder’s transactions or credit worthiness with other creditors or accounts? 

A.10 Any repricing decisions we make are based on the cardholder’s overall creditworthiness rather than on particular behaviors with other creditors. The reality is that these decisions to reprice are made on an individual cardholder basis and the overwhelming majority of our accounts never experience this type of repricing. However, although these repricing efforts typically affect 

only a small portion of our portfolio, they are an important tool in 

managing risk and ensuring that we serve our cardholders by providing them with competitive pricing. If a cardholder’s creditworthiness declines significantly, that cardholder becomes a far 


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riskier, and therefore costlier, proposition. By repricing the cardholder’s account, we are able to ensure that the cardholder pays for 

his or her risk rather than forcing other cardholders in our portfolio to bear the cost of that risk—a risk they did not create. An 

alternative step we take to control risk when a cardholder’s creditworthiness declines is to close the account (i.e., inform the customer he/she can no longer use the card to make purchases). Unfortunately, account closing is the best option in many instances, even 

though we have found that cardholders far prefer our raising rates 

to closing accounts. Importantly, rather than simply spread the 

costs of delinquency and credit losses across the entire portfolio, 

these repricing and account closing steps enable us to keep our 

pricing low for those customers who pay their bills on time, pose 

the lowest risk and therefore cost the least to manage. 

Q.11. What percentage of cards use credit scores or adverse information from another creditor or account to increase rates? 

A.11. We are not aware of any statistics on this issue. As noted 

above, however, our repricing decisions are based on the cardholder’s creditworthiness as a whole. 

Q.12. Have industry profits remained constant over time? 

A.12. According to the Federal Reserve, industry profits have remained relatively stable over time with an average return on assets of 3.11 percent. Similarly, according to the GAO Report, ‘‘the 

largest credit card banks, which are generally the most profitable, 

have not greatly increased their profitability over the last 20 years’’ 

(P. 67). The GAO Report also noted that ‘‘The profits of credit card 

issuing banks...have been stable over the last 7 years’’ (p.75). It 

bears noting that credit card lending is a high risk business in 

which the lender provides an unsecured line of credit to someone 

the lender probably has not met, access to this credit is available 

around the world 24 hours a day, 7 days a week, and at the end 

of the year, if all goes well, the lender gets back $3 for every $100 

credit extended. This return on assets is much less the return on 

assets of the pharmaceuticals, computer services and software, insurance and managed care, entertainment and food and drug store 

industries. 

Q.13. What percentage of Americans have credit cards? 

A.13. The Federal Reserve has estimated that 71.5% of families in 

the United States had at least one bank issued credit card in 2004. 

(See Federal Reserve Report to Congress on Practices of the Consumer Credit Industry in Soliciting and Extending Credit and their 

Effective Consumer Debt and Insolvency at 3,6). 

Q.14. Question: What percentage of cardholders are paying penalty 

interest rates on their cards? How has that percentage changed 

over the last 20 years? 

A.14. We are not aware of statistics showing the percentage of 

cardholders paying penalty interest rates. We do note that as stated previously, approximately 50% of cardholders pay their balance 

in full each month and therefore pay no interest. We also note that 

pricing based on risk, including penalty pricing, has increased consumer choice and has contributed to the lowering of credit card 

rates overall. Rather than give every cardholder the same rate and 


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spread the risk of delinquency and credit losses evenly over the 

portfolio, improvements in technology and credit underwriting have 

enabled issuers to be more granular in how they price for credit 

risk. This enables credit card issuers to keep rates low for cardholders who continue to pay all their bills on time and raise rates 

for those who do not pay all their bills on time and who therefore 

pose the most risk. Of course, if a card issuer misprices a consumer’s risk, that card issuer becomes vulnerable to losing the 

cardholder as a customer because the robust competition in the 

credit card marketplace will likely result in the consumer receiving 

solicitations for products with lower rates. 

Q.15. Question: What percentage of profits comes from: 

a) non-penalty interest charges; 

b) penalty interest charges; 

c) fees, including: over limit fees; late fees; annual fees; interchange fees; balance transfer fees; cash advance fees; stop 

payment fees; telephone payment fees; foreign transaction 

fees; and other fees? 

A.15. Barclays Bank Delaware is a young and growing business 

that has benefited from inward investment over the past few years; 

accordingly it is not yet profitable. According to the GAO report, 

approximately 70% of card issuers’ revenue is derived from interest, 20% from interchange and other non ‘‘penalty’’ fees such as annual fees, and approximately 10% from penalty fees such as late 

fees and returned payment fees. 

Q.16. Please provide the Committee with data on the amount of 

annual revenue generated in each of the last two years from interest payments and the number of cardholders paying interest at 

rates of: 

a) less than 15% APR; 

b) from 15 to 19% APR; 

c) from 20 to 25% APR; 

d) from 26 to 29% APR; and 

e) 30% or greater APR. 

A.16. We are not aware of industry statistics on this point. 

Q.17. Please provide the Committee with data on the amount of 

revenue generated in each of the last two years from interest payments due to: 

a) repricing of interest rates due to late payments to the issuer; 

and 

b) repricing of interest rates due to cardholder transactions or 

credit worthiness with other creditors or accounts. 

A.17. We are not aware of industry statistics on this point. 

Q.18. Please explain how you would ‘‘reprice’’ a customer with a 

‘‘fixed rate’’ credit card. What are the criteria that would determine 

whether a customer is repriced? How do you determine the rate to 

which the customer is repriced? 

A.18. When we offer a ‘‘fixed APR’’ product, we inform consumers 

of the circumstances pursuant to which the APR might change. For 

example, we explain in at least two places in our solicitations for 

credit card accounts carrying a ‘‘fixed APR’’, that the term ‘‘fixed 

APR’’ means an APR which will not vary in concert with changes 


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to an index, such as the US Prime Rate. This is to help consumers 

understand that the term ‘‘fixed’’ is used to distinguish the rate 

from a so called ‘‘variable’’ rate product that fluctuates based on an 

index. If there are circumstances under which the rate may increase, we also make sure to disclose those circumstances as part 

of the solicitation as well. For instance, if the rate may be changed 

if the consumer fails to pay us on time, we disclose both that fact 

and the actual default rate as part of the solicitation disclosures. 

This ensures that the consumer receives notice of the circumstances pursuant to which the rate may change before deciding 

to apply for the account. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 

FROM RICHARD VAGUE 

Q.1. If issuing a credit card with a low credit line is one of the 

ways to reduce the risk of lending to an ‘‘at risk borrower,’’ doesn’t 

the issuance of multiple cards to the same individual reduce the effectiveness of this practice and actually in some cases increase the 

risk? What percentage of your customers has more than one of your 

credit cards? How would you describe the typical customer that has 

a low credit line but multiple cards? What percentage of your customers use multiple credit cards to remain current on their other 

credit card balances that have been issued by your companies? 

A.1. We find that most consumers want multiple cards because 

they use them for different reasons. For instance, a consumer 

might want one card for business purposes and another card for 

personal use; a family may want a separate card for everyday purchases and another card for special projects expenses and on which 

they might carry a balance. I myself have multiple cards which I 

use for different purposes; and virtually everyone I know has multiple cards. When one of our cardholders wants a second card we 

want to be the bank that issues that card as long as the cardholder 

can manage the incremental credit safely. We try to ensure this by 

managing the entire amount of credit extended to the cardholder, 

whether on a single line or on multiple cards. In determining 

whether to issue an additional card, we take into account the cardholder’s existing accounts with us as well as the cardholder’s accounts with other creditors. We work hard to ensure that our customers do not overextend themselves. We routinely deny applications for additional card relationship with us where we determine 

that we are not comfortable extending additional credit to the applicant due to their existing debt burdens and credit history. We 

also have a policy that cardholders cannot use one card with 

Barclays to pay off all or part of a balance on another card of 

Barclays. 

Q.2. How does your company account for the total debt from all of 

the cards issued to one customer? Are these aggregate balances reported to regulators as well? 

A.2. Whenever a consumer applies for an account with Barclays 

Bank Delaware, we look not only at their performance with 

Barclays but also at their entire credit profile. Similarly, when an 

existing customer applies for a credit line increase or we need to 

make a decision concerning an existing cardholder’s credit status, 


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we underwrite the cardmember based on the cardholder’s overall 

relationship with us as well as with all creditors as reported in 

their credit reports. In other words, our credit decisions are not 

simply based on our cardholder’s aggregate balance or exposure to 

us but on the cardholder’s entire credit profile. We are required to 

report to and otherwise make available to regulators extensive information regarding our credit card portfolio. Although these reports do not provide information on a cardholder by cardholder 

basis, the regulators regularly examine how we manage our relationship with our cardholders, including how we manage our relationship with cardholders who have more than one account with us. 

Q.3. What is the typical minimum monthly payment required for 

credit cards? What percent of the balance represents the minimum 

monthly payment? Do you think this is sufficient? Do most credit 

card companies use a model or an algorithm to establish minimum 

payment? Please describe industry best practices for establishing 

appropriate minimum payment amounts. 

A.3. Establishing an appropriate minimum payment amount involves a delicate balance. On the one hand, cardholders typically 

demand that the minimum payment amount should be low enough 

to provide maximum flexibility to enable each cardholder to decide 

how much to repay each month based on that cardholder’s financial 

circumstances. For example a relatively low monthly payment requirement allows cardholders to more easily meet their obligations 

in months where they have an unexpected medical or household expense, or if a seasonal worker, in those months where they are 

without employment. On the other hand, the minimum payment 

amount should be high enough to ensure reasonable amortization 

of the loan balance. In 2003, the federal banking agencies issued 

guidance regarding the required minimum payment on a bank 

issued credit card account. In particular the agency guidelines 

made it clear that the minimum payment amount should be sufficient to ensure that there is no prolonged negative amortization 

and that the balance will be repaid in full over a reasonable period 

of time assuming the minimum amount due is paid each month. It 

is our understanding that in connection with the guidance, the 

OCC and the FDIC have required many of the banks they regulate 

to adopt a minimum payment calculation equal to the amount of 

finance charges, plus late and over limit fees, plus 1% of the balance. 

Q.4. Why does the industry allow credit card customers to make 

transactions that result in their account being over the limit? Does 

the over-limit fee being charged adequately compensate for the risk 

incurred by the over-limit amount? In situations where a customer 

goes over their limit after the line has been lowered due to new 

risk identified in their credit report, how can the fee earned adequately compensate for the risk? Is there a maximum amount or 

percentage of the line that is generally allowed to be over-limit? 

What are known best practices for allowing customers to overdraw 

their accounts and assessing fees for doing so? 

A.4. It is our understanding that most credit card issuers allow 

credit card customers from time to time to make transactions that 

are over the limit because their customers overwhelmingly want 


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them to do so. It is our experience that customers almost invariably 

prefer being allowed to go over their credit limit and being charged 

a fee than to have the transaction denied. A cardholder whose card 

is denied authorization at a restaurant after a meal or at a grocery 

store after food has been bagged is not a happy customer. In other 

words, it is good customer relations to enable the cardmember to 

go over limit in appropriate circumstances. There is increased risk 

with exceeding the credit limit, however, and we find that we must 

decline the majority of over limit transactions because of the added 

risk. Although practices vary from bank to bank, we are aware of 

a number of factors that may be used to determine whether to approve or decline a cardholder’s over-limit transaction request. For 

example, card issuers routinely consider whether the transaction 

would cause the cardmember to go over his/her limit by over a certain amount, whether the cardholder has exceeded his or her limit 

multiple times in the past or if the actual transaction itself is associated with higher risk. In many instances the fees imposed for 

over-limit transactions do not fully compensate for the increased 

risk involved. Instead the fees provide a measure of compensation 

which defrays the risk sufficiently to help justify accommodating 

the cardholder’s request. Finally, one best practice is email alerts. 

If a cardholder gives Barclays Bank Delaware his or her email address and authorizes us to do so, we will alert the cardholder when 

he or she gets close to his or her credit limit. This helps the cardholder better manage the credit line and avoid going over-limit. 

Q.5. How can disclosures and the delivery of disclosures be improved to ensure customers fully understand the terms of the credit 

card, including cash advance, over-limit, wire transfer and late 

fees? What are the best practices for disclosing information to the 

customer? 

A.5. Disclosures could be greatly improved if the regulatory disclosure scheme were modified to ensure that required disclosures 

clearly and conspicuously convey those terms that are truly important to the consumer. We believe that this can be accomplished 

through a federal disclosure scheme based on a careful study of 

consumer behavior and preferences to ensure that the disclosures 

are designed to attract and focus the attention of consumers to key 

information that can be easily read and understood by consumers. 

The Schumer Box is a start, but a disclosure scheme designed by 

marketers and customer service specialists after testing different 

colors, fonts, shapes, etc., will work better than any disclosure 

scheme designed by attorneys. By key information we mean the 

various APRs, important fees (annual fees, late fees, balance transfer fees) and how those APRs and fees could change and any other 

terms consumers regularly consider in making decisions as to 

which cards to apply for. Required disclosures should be limited to 

only those terms most important to the consumer so as to avoid information overload. Finally, a safe harbor must be created so that 

credit card issuers can rely on the new disclosure standards without fear of being sued. In our experience, much of the current disclosures set forth in credit card solicitations are caused by the increasing need to include new or different language to comply with 

the existing regulatory scheme which can become more and more 

complex each time there is a new court case, regulation or law. 


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The Federal Reserve Board is in the process of a large scale revision of the Regulation Z disclosure requirements for credit cards. 

We understand that as part of this effort, the Board is currently 

studying how to provide consumers with the most useful information in the most understandable and noticeable way. We support 

these efforts and it is our hope that those studies will provide useful guidelines as to the types of information consumers believe is 

important information and what type of presentation of that information consumers would find most meaningful without overwhelming the consumer with information overload. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM RICHARD VAGUE 

Q.1. What portion of your profits comes from interest and what 

portion results from the fees you charge customers? 

A.1. At this time, Barclays Bank Delaware is a growing young 

business that has benefited from significant inward investment 

over the past few years; accordingly, is not yet profitable. Based on 

information made available through the GAO Report, approximately 70% of credit card income comes from interest, about 10% 

from penalty fees such as late and over the limit fees and 20% from 

interchange and other fees such as annual fees. 

Q.2. I’ve been reading about universal default. It is my understanding that you can increase the interest rate of a customer who 

has a perfect and long-standing credit record with your company 

because of a late payment that he or she has made to another creditor. Is this true? How do you justify it? 

A.2. Barclays Bank Delaware does not do what you describe. Instead we use process known as risk-based pricing in order to manage our accounts for risk. Under risk-based pricing, riskier borrowers pay more. Over time, customers’ creditworthiness profiles 

change. Some who were low risk at the time their account was 

opened become higher risk. For example, cardmembers who were 

never late on their accounts with us sometimes default on their 

loans and stop paying. For these cardholders, the first sign of trouble is when they simply stop paying—either with us or with others. 

As a result credit card issuers began looking more closely at the 

cardholders’ entire credit profile to determine the cardholder’s risk 

of default and began changing their credit strategy accordingly— 

raising rates on cardholders who, based on a review of the credit 

history as a whole, posed the greatest risk. At Barclays we notify 

all our applicants in our solicitations about our risk-based pricing 

policy before they even apply for a card. It is important to note that 

for sizeable segments of our portfolio, our risk-based pricing policy 

never comes into play because there is no need to reprice them at 

all. 

Although our repricing efforts typically affect only small portions 

of our portfolio, they are an important tool in managing risk and 

ensuring that we can serve our cardholders by providing them with 

competitive pricing. If a cardholder’s creditworthiness declines significantly, that cardholder becomes a far riskier and, therefore, 

costlier proposition. By repricing the cardholder’s account, we are 

able to ensure that the cardholder pays for his or her risk rather 


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than forcing other cardholders in the portfolio to bear the cost of 

that risk—a risk they did not create. An alternative step we take 

to control risk is to close the cardholder’s account (i.e., inform the 

customer he/she can no longer use the card to make purchases) 

when his or her risk profile increases. Unfortunately, account closing is the best option in many instances, even though we have 

found that most cardholders far prefer our raising rates to closing 

accounts. Importantly, rather than simply spread the costs of delinquency and credit losses across the entire portfolio, these repricing 

and account closing steps enable us to keep our pricing low for 

those customers who pay their bills on time, pose the lowest risk 

and cost the least to manage. Importantly, after the rate of a 

cardmember is raised, if they exhibit on time payment performance, we will lower their rate. 

Q.3. Assuming we wanted to get all credit card disclosures on 1 

page and want to pick the most salient disclosures, what do you 

think are the most important terms of the agreement to allow your 

customers to make an informed choice about the product and 

whether it works for them? 

A.3. Our experience with cardholders has led us to believe that 

consumers find that the most important terms are APR, significant 

fees (annual fees, balance transfer fees, late fees) and how their 

terms may be changed. Importantly, the Federal Reserve Board is 

currently testing disclosures with consumers to determine what 

terms consumers believe are most important and how to present 

those terms in a manner that consumers are likely to read and understand those terms. We support that approach. We encourage the 

Board to employ marketing and customer service professionals to 

design the format and style of disclosure—so that it is designed to 

attract the consumer’s attention, it is easy to read and understand 

without overloading the consumer with information that distracts 

the consumer from the key terms. 

Q.4. Didn’t it used to be that if you reached your credit limit on 

your card you were denied the extra credit? But now, as I understand it, credit card companies allow consumers to go over the limit 

and then charge them a fee. What is the justification for this 

trend? 

A.4. It is our understanding that most credit card issuers allow 

credit card customers from time to time to make transactions that 

are over the limit as a courtesy to their customers. It is our experience that, customers almost invariably prefer being allowed to go 

over their credit limit and be charged a fee for that permission to 

go over the limit than to have authorization denied. A cardholder 

whose card is denied authorization at a restaurant after a meal or 

at a grocery store after food has been bagged is not a happy customer. In other words, it is important for customer relations purposes to enable the cardholder to go over limit in appropriate circumstances. There is increased risk associated with exceeding the 

credit limit, however, and we find that we must decline a majority 

of over-limit transactions because of the added risk. Although practices vary from bank to bank, we are aware of a number of factors 

used to determine whether to approve or decline a cardholder’s 

over-limit transaction request. For example, card issuers commonly 


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consider whether the transaction that would cause an account to 

go over the limit by a certain amount, whether the cardholder has 

exceeded the limit multiple times in the past or the transaction 

itself is associated with higher risk. In many instances, the fees imposed for over-limit transactions do not fully compensate for the increased risk involved. Instead, these fees do provide a measure of 

compensation which defrays the risk sufficiently to help justify accommodating the cardholder’s request in appropriate circumstances. Finally, one best practice is email alerts. If the cardholder gives Barclays their email address and authorizes us to do 

so, we will alert the cardholder when he or she gets close to their 

credit limit so the cardholder can better manage his or her exposure to their line and avoid over-limit fees if possible. 

Q.5. Do you think that the average consumer knows they’ll be hit 

with a fee for going over their credit limit rather than being told 

they have exceeded their limit? 

A.5. Yes. As noted above, it is our experience that cardholders generally prefer to be permitted to exceed their credit limit rather 

than having the transaction declined at the cash register. In addition the fees that cardholders pay for exceeding the credit limit are 

well disclosed. Indeed they must be disclosed at least three times: 

1) at or with the Schumer Box provided to the consumer at account 

application; 2) with the disclosures provided at account opening 

and 3) on the monthly billing statement when the fee is imposed. 

Q.6. What is an ‘‘ideal customer’’? 

A.6. A customer who uses their card a lot and pays their bills on 

time. 

Q.7. What percentage of your customers are in perpetual debt? 

A.7. We work extremely hard to ensure that we extend credit only 

in amounts that cardholders can reasonably handle and we believe 

that we are successful in achieving that objective. Almost none of 

our cardholders ‘‘perpetually’’ pay the minimum amount due over 

the life of the loan. Moreover, based on industry information, it is 

our understanding that a very small percentage of cardholders 

pays the minimum amount due every month for twelve months— 

roughly 2–3%. This is consistent with the recent GAO Report that 

roughly half of consumers pay-off their entire balance by the end 

of the month. 

Q.8. Of those customers, how many would have been helped by 

clearer display of rates? 

A.8. As noted above, we fully support the Federal Reserve Board’s 

efforts to improve disclosures. In our experience however, cardholders are well informed about the rates they pay on their accounts. Those rates must be disclosed before the account is opened 

(and consumers know to look for the ‘‘Schumer Box’’ in solicitations), when the account is opened and on the billing statements 

sent each month. As a result, we find that a cardholder’s choice to 

make a minimum payment is generally based on the cardholder’s 

particular financial circumstances that month; we are not aware of 

any role that rate disclosures may play in a cardholder’s decision 

to make a minimum monthly payment. 


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Q.9. How much information can a customer get on the internet 

about the rates/fees of their policy? 

A.9. All information about rates and fees is available to Barclays 

Bank Delaware’s cardholders over the Internet. 

Q.10. How many consumers use your internet tools, and what is 

their feedback on it? 

A.10. Barclays Bank Delaware’s website for its cardmembers has 

been designed to be very user friendly and our cardholders find it 

very helpful. For instance, for consumers who sign up for the service, we send email alerts when their periodic statements are available online, reminder emails a couple days before the payment due 

date, emails when payment has been received and warning emails 

if the cardmember is approaching his or her credit limit. We find 

cardmembers greatly appreciate these email reminders and being 

able to look at all their transactions online. In addition we encourage our cardholders to pay their accounts online without a fee. It 

is notable that 61% of our cardmembers have logged into their accounts in some manner in 2006. 

Q.11. Do you expect the average educated consumer to read and 

understand the whole disclosure statement? 

A.11. It is our strong preference that cardholders read and understand the disclosures we provide to them. It is in our best interest 

and in the cardholder’s best interest that they do so. We recognize, 

however, that the current credit card disclosure regime mandated 

under federal law has become quite complex. Although while we 

find that consumers have gotten accustomed to looking at information in the Schumer Box, it is generally believed that most of the 

other disclosures go unread. We believe that consumers need better 

disclosures not more disclosures. What is needed is simple clear 

disclosures of those terms most important to consumers, drafted in 

a manner likely to attract the attention of consumers; worded in 

a way they are likely to read and understand with a safe harbor 

that provides that by complying with the requirements, the issuer 

can not be sued (so the issuer’s lawyers will not feel compelled to 

complicate disclosures to protect their client every time there is a 

new litigation). 


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ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

CAP ONE’S CREDIT TRAP; BY OFFERING MULTIPLE CARDS, THE LENDER HELPS

LAND SOME SUBPRIME BORROWERS IN A DEEP HOLE AND BOOSTS ITS EARNINGS WITH

FEE INCOME

BusinessWeek, November 6, 2006 

By Robert Berner 

When Brad Kehn received his first credit card from Capital One Financial Corp. 

in 2004, it took him only three months to exceed its $300 credit limit and get socked 

with a $35 over-limit fee. But what surprised the Plankinton (S.D.) resident more 

was that Cap One then offered him another card even though he was over the 

limit—and another and another. By early 2006, he and his wife had six Cap One 

Visa and MasterCards. They were in over their heads. 

The couple was late and over the limit on all six cards, despite occasionally borrowing from one to pay the other. Every month they chalked up $70 in late and 

over-limit fees on each card, for a total of $420, in addition to paying penalty interest rates. The couple fell further behind as their Cap One balances soared. Even 

so, they still received mail offers for more Cap One cards until they sought relief 

at a credit counseling agency this May. ‘‘I didn’t open them,’’ says Kehn, 33, who 

manages a truck stop and runs a carpet-cleaning business on the side. ‘‘I owe these 

people that much damn money and they are willing to give me another credit card? 

This is nuts.’’ 

Credit card experts and counselors who help overextended debtors say there’s 

nothing crazy about it. Cap One, they contend, is simply aiming to maximize fee 

income from debtors who may be less sophisticated and who may not have many 

options because of their credit history. By offering several cards with low limits, instead of one with a larger limit, the odds are increased that cardholders will exceed 

their limits, garnering over-limit fees. Juggling several cards also increases the 

chance consumers may be late on a payment, incurring an additional fee. And if 

cardholders fall behind, they pile up over-limit and late fees on several cards instead 

of just one. ‘‘How many more ways can I fool you?’’ says Elizabeth Warren, a Harvard Law School professor who has written extensively on the card industry. ‘‘That 

is all this is about.’’ 

Consumers may not be the only ones who are unaware of Cap One’s ways. Its 

practice of issuing multiple cards to some borrowers with low credit ratings doesn’t 

appear well-known in the investment community. And just how much Cap One relies on fee income, vs. interest, is a mystery, since, like most lenders, it doesn’t disclose that. All credit card companies have become more reliant on fee income in recent years, but in a report issued in 2002, William Ryan, an investment analyst at 

Portales Partners, warned that Cap One’s earnings could be ‘‘devastated’’ if regulators cracked down on multiple cards or fees. 

That hasn’t happened. For now, Cap One’s approach looks pretty savvy, however 

onerous it may be for some customers. Ronald Mann, a card-industry expert, says 

that by generating so much revenue from late and over-limit fees, as well as interest, Cap One likely more than offsets for the risk of card holders filing for bankruptcy. ‘‘The premise is to make money even if [Cap One] never gets fully repaid,’’ 

says Mann, a law professor at the University of Texas in Austin. (Mann has been 

retained by a party suing Cap One in a business dispute.) 

In a written response to questions, Cap One acknowledges that it offers multiple 

cards. ‘‘Our goal is to offer products that meet our customers’ needs and appropriately reflect their ability to pay,’’ it says. The company also stated: ‘‘Within our 

current U.S. portfolio, the vast majority of Capital One customers have only one 

Capital One credit card with a very small percentage choosing to have three or more 

cards.’’ Spokeswoman Tatiana Stead declined to offer precise numbers or to say 

whether households with three or more cards were concentrated among ‘‘subprime’’ 

borrowers, who have low credit ratings. 

UNDER THE RADAR 

The nation’s fifth-largest credit card issuer, with $49 billion in U.S. credit card 

receivables as of the end of June, McLean (Va.)-based Cap One is a major lender 

to the subprime market. According to Cap One’s regulatory filings, 30% of its credit 

card loans are subprime. Representatives of 32 credit counseling agencies contacted 

by BusinessWeek say that Cap One has long stood out for the number of cards it’s 

willing to give to subprime borrowers. ‘‘In the higher-risk market, no lender is more 

aggressive in offering multiple cards,’’ says Kathryn Crumpton, manager of Consumer Credit Counseling Service of Greater Milwaukee. Other big card-industry 


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players that do subprime lending include Bank of America, Chase, and Citigroup. 

Representatives for Chase and Citigroup say they do not offer multiple cards to 

subprime customers. (BofA did not respond to inquiries.) 

Last year, West Virginia Attorney General Darrell V. McGraw Jr. filed an action 

in state court seeking documents from Cap One related to its issuance of multiple 

cards, as well as other credit practices. Other than that, however, Cap One’s practices do not appear to have drawn regulatory scrutiny. A spokesman for the Federal 

Reserve, Cap One’s primary federal overseer, declined to comment about Cap One, 

but said that in general the regulator doesn’t object to multiple cards. Still, Fed 

guidelines warn multiple-card lenders to analyze the credit risk tied to all the cards 

before offering additional ones. 

If consumers were using one Cap One card to make payments on another, it could 

artificially hold down the company’s delinquency and charge-off rates, metrics investors closely watch because they affect earnings, says Allen Puwalski, senior financial analyst at the Center for Financial Research & Analysis in Rockville, Md. 

In filings with the U.S. Securities and Exchange Commission, Cap One says its 

delinquency and charge-off rates as of Sept. 30 were 3.6% and 2.5%, respectively, 

about middle of the pack for major card lenders. 

In an e-mail, Cap One’s Stead says: ‘‘It is not our practice—nor our intention— 

to offer an additional card to customers who are currently delinquent or over limit 

on a Capital One card.’’ But Daniel Carvajal believes that’s just what Cap One tried 

to get him to do. Carvajal, 38, who is confined to a wheelchair with cerebral palsy 

and lives with his mother in Miami, says he exceeded his $1,500 Cap One credit 

limit last Christmas by several hundred dollars and was late on payments in January and February. In March, he says, a Cap One representative offered him a second card, which he refused. Using the new card to catch up with his first, he suspects, ‘‘is what they wanted me do to.’’ 

Some overextended Cap One customers admit using one card to pay another. In 

mid-2005, Kehn, the South Dakota truck-stop manager, already over the limit on 

three Cap One cards with $300 to $500 limits, received an offer from Cap One for 

another card with a $500 limit. He transferred part of the balances from the first 

three cards to get them under the credit limit. When his wife got a second card in 

early 2006 with a $1,500 cap, the couple took expensive cash advances on it to try 

to help make payments on the five other Cap One cards. ‘‘I robbed Peter to pay 

Paul,’’ Kehn says. 

Christine Garcia, 41, of Orange, Calif., said she and her husband did the same 

when stretched with five Cap One cards between them. So did Bernice Thompson, 

46, of Fort Smith, Ark., who, along with her husband, had seven Cap One cards. 

‘‘We got caught in a circle, and couldn’t get out,’’ says Thompson. 

These examples bring into question Cap One’s public stance on its subprime lending. Analysts, including Carl Neff, ratings director on card securitizations for Standard & Poor’s, say Cap One tells investors that it carefully controls risk by giving 

such borrowers only small lines of credit. Indeed, the largest percentage of Cap 

One’s 28 million credit-card accounts, 43%, have balances of $1,500 or less, according to its SEC filings. But if many borrowers had larger aggregate balances because 

they have multiple accounts, that percentage would be lower, and Cap One’s ‘‘underwriting wouldn’t appear as conservative as it looks,’’ says the Financial Research 

Center’s Puwalski. 

Like other big card companies, Cap One securitizes most of its card receivables 

as bonds, which are rated by credit agencies such as Standard & Poor’s (S&P) is 

a unit of The McGraw-Hill Companies, publisher of BusinessWeek). Cap One’s ratings are strong, allowing it to command a higher price for the bonds. But Neff of 

S&P says he is surprised Cap One would offer riskier borrowers multiple, low-limit 

accounts given what it has told the market. ‘‘If it was a very prevalent practice, that 

would lower [Cap One’s credit] quality in our eyes,’’ Neff says. A sampling of credit 

counseling agencies across the country indicates that about a third of the troubled 

debtors they see with Cap One cards have two or more Cap One accounts. 

Ron Nesbitt, 37, a Macon (Ga.) truck driver, and his wife sought credit counseling 

last year. By the second half of 2004, Nesbitt says, the couple had become consistently late and over limit on six Cap One cards, generating $348 in fees alone each 

month. ‘‘It was out of control,’’ he says. 

Juggling Act: 

How Clyde and Bernice Thompson of Fort Smith, Ark., got in trouble 

— From late 1999 to early 2003, Clyde, 77, and Bernice, 46, were granted seven 

Capital One Visa cards and MasterCards with credit limits ranging from $200 to 

$700. 


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— In April, 2003, Clyde, a Wal-Mart greeter, and his wife, who was on medical disability at the time, missed their monthly payment on all the cards. 

— They were billed $29 a card in late fees, which pushed six cards over the limit. 

That generated an additional $29 over-limit fee and higher interest rates on those 

cards. 

— By late 2003, the Thompsons couldn’t keep up, despite taking cash advances on 

the seventh card to try and pay the first six. They were paying over $400 a month 

in late and over-limit fees alone. 

— The couple kept receiving mail offers for more Cap One cards until February, 

2004. ‘‘I tore them up,’’ says Bernice. 

— Data: Interview with Bernice Thompson 


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