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55–466 PDF 2010

S. HRG. 111–323 

ABUSIVE CREDIT CARD PRACTICES AND 

BANKRUPTCY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT 

AND THE COURTS 

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 24, 2009 

Serial No. J–111–11 

Printed for the use of the Committee on the Judiciary 

( 

(II) 

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

RON WYDEN, Oregon 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

ARLEN SPECTER, Pennsylvania 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

NICHOLAS A. ROSSI, Republican Chief Counsel 

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS

SHELDON WHITEHOUSE, Rhode Island Chairman 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

BENJAMIN L. CARDIN, Maryland 

EDWARD E. KAUFMAN, Delaware 

JEFF SESSIONS, Alabama 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

LINDSEY O. GRAHAM, South Carolina 

SAM GOODSTEIN, Majority Chief Counsel 

MATT MINER, Minority Chief Counsel 

(III) 

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page 

Durbin, Hon. Richard J., a U.S. Senator from the State of Illinois .................... 5 

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, prepared 

statement .............................................................................................................. 96 

Sessions, Hon. Jeff, a U.S. Senator from the State of Alabama .......................... 3 

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

prepared statement .......................................................................................... 103 

WITNESSES 

Corey, Douglas, North Scituate, Rhode Island ...................................................... 7 

Gambardella, Rosemary, Judge, U.S. Bankruptcy Court for the District of 

New Jersey, Newark, New Jersey ...................................................................... 9 

John, David C., Senior Research Fellow, Thomas A. Roe Institute for Economic Policy Studies, The Heritage Foundation, Washington, D.C. ................ 17 

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

Center, Washington, D.C. .................................................................................... 15 

Scarberry, Mark S., Professor of Law, Pepperdine University School of Law, 

Malibu, California ................................................................................................ 13 

QUESTIONS AND ANSWERS 

Responses of Rosemary Gambardella to questions submitted by Senator Sessions ...................................................................................................................... 34 

Responses of Adam J. Levitin to questions submitted by Senator Feinstein ..... 35 

Responses of Mark S. Scarberry to questions submitted by Senator Sessions ... 39 

Questions submitted by Senator Sessions to David C. John (Note: Responses 

to questions were not received as of the time of printing, March 31, 2010) ... 45 

SUBMISSIONS FOR THE RECORD 

American bankers Association, Kenneth J. Clayton, Senior Vice President 

and General Counsel, Washington, D.C., statement ......................................... 46 

Corey, Douglas, North Scituate, Rhode Island, statement ................................... 48 

Gambardella, Rosemary, Judge, U.S. Bankruptcy Court for the District of 

New Jersey, Newark, New Jersey, statement and attachment ....................... 51 

John, David C., Senior Research Fellow, Thomas A. Roe Institute for Economic Policy Studies, The Heritage Foundation, Washington, D.C., statement ...................................................................................................................... 78 

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

Center, Washington, D.C., statement ................................................................. 84 

Scarberry, Mark S., Professor of Law, Pepperdine University School of Law, 

Malibu, California, statement ............................................................................. 97 

(1) 

ABUSIVE CREDIT CARD PRACTICES AND 

BANKRUPTCY 

TUESDAY, MARCH 24, 2009 

U.S. SENATE, SUBCOMMITTEE ON ADMINISTRATIVE

OVERSIGHT AND THE COURTS, Committee on the Judiciary, 

WASHINGTON, D.C. 

The Subcommittee met, pursuant to notice, at 10:03 a.m., in 

room SD–226, Dirksen Senate Office Building, Hon. Sheldon 

Whitehouse, Chairman of the Subcommittee, presiding. 

Present: Senators Whitehouse and Sessions. 

Also Present: Senators Durbin and Sanders. 

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

SENATOR FROM THE STATE OF RHODE ISLAND 

Chairman WHITEHOUSE. The hearing will come to order. 

I want to welcome the witnesses who have come. Some have 

traveled some considerable distance, including all the way from 

North Scituate, Rhode Island, and I am honored to be joined by the 

Ranking Member of this Subcommittee, Senator Sessions. 

What we are going to do is I will make an opening statement, 

and the Ranking Member will make an opening statement, and if 

other Senators appear who wish to make an opening statement, 

they will be invited to do so, and then we will proceed through the 

testimony of the witnesses. I think that probably the best way to 

do it is start with Mr. Corey and just go right across, if Your Honor 

does not mind not going first. 

With the economy deep in recession in this country, unemployment rates climbing, and those teaser rates people got on home 

mortgages expiring and triggering higher mortgage payments for 

American families, American consumers are relying more than ever 

on credit cards to just make ends meet from month to month. At 

the same time, banks who lost their shirts in the mortgage speculation and in other areas of business are attempting to squeeze more 

and more profit out of those credit card customers. 

The standard credit card agreement gives the lender the power 

to bleed their customers through evolving and ever more crafty 

tricks and traps. The typical credit card agreement, which 20 years 

ago was a page in length, is now a formidable 20-page, small-print 

contract filled with legalese. In substance, it is usually pretty simple. It gives the companies the right to raise interest rates and 

charge fees and penalties for almost any reason, and in some cases 

to raise interest rates for no reason at all. 

2 

While interest rates for other types of lending are at historic 

lows, credit card lenders continue to charge double-digit rates, with 

average rates around 14 percent, exclusive of fees. At a time when 

the prime rate is 3.25 percent and the average 30-year fixed mortgage rate is under 5 percent, it is hard to understand why credit 

card borrowing remains so costly. 

Although 14 percent may seem high in comparison with other 

types of lending, that interest rate may seem like a bargain to a 

family that has fallen behind on a payment. When families come 

up short on their credit card payment, they can find a 10-percent 

or 12-percent annual interest rate morph into a 25-percent or 30- 

or 40-percent penalty rate. Add to that late payment and other 

penalty fees, and falling behind on a credit card can mean financial 

ruin. 

When a family struggles to pay its bills, when a parent gets laid 

off, or unexpected medical expenses arise, that family can enter 

what Professor Ronald Mann of Columbia Law School has called 

the ‘‘sweat box.’’ The sweat box of credit card debt, like any good 

trap, has an entrance that is easy to wander into: simply, a high 

credit limit and pretty soon a high credit balance. If you then get 

into the position where you cannot pay that credit balance off at 

once, they have you: a payment delayed, a minimum not met, and 

now your interest rate doubles, and fees and penalties pile on. You 

cannot escape because you cannot pay your way out, and they 

sweat you with those high rates and fees and penalties. 

Under this business model, the lender focuses on squeezing out 

as much revenue as possible in penalty rates and fees, pushing the 

customer closer and closer to the edge. When that end finally does 

come, the lender can recover a portion of the outstanding principal 

under the bankruptcy plan. 

I have introduced legislation that would give consumers leverage 

to negotiate for reasonable rates with their lenders and ban abusive lenders from using the bankruptcy court system to enforce 

their excessive interest claims. Under the Consumer Credit Fairness Act, claims in bankruptcy stemming from consumer credit 

agreements carrying interest above a variable threshold—which 

would currently be 18.5 percent—would be disallowed. With the leverage of a bankruptcy threat, a customer struggling under a 30- 

percent penalty rate could negotiate for more reasonable terms. In 

addition, bankruptcy filers with debts carrying effective interest 

rates above the threshold would be exempt from the so-called 

means test, a tactic that was enacted in the bank-written 2005 reforms to make it more difficult to enter bankruptcy, and by delaying the date of bankruptcy, add a few months to that sweat box. 

In addition to discussing the nexus of abusive credit card terms 

and bankruptcy in general, I hope that we will take some time 

today to explore the Consumer Credit Fairness Act. Following Senator Sessions’ opening statement, we will hear from our distinguished panel of witnesses, but I see the distinguished Majority 

Whip here, so after Senator Sessions has made his opening statement, Senator Durbin of Illinois will be invited to make an opening 

statement. 

The witnesses are: Douglas Corey, a constituent of mine from 

North Scituate, Rhode Island, who will share his experiences with 

3 

his credit card lender. Mr. Corey has worked in sales and marketing and is a graduate of Rhode Island College. 

Judge Rosemary Gambardella has served on the Bankruptcy 

Court for the District of New Jersey since 1985. A native of Newark, she attended Rutgers University and Rutgers Law School. 

Judge Gambardella is a member of the National Association of 

Women Judges, the National Conference of Bankruptcy Judges, the 

American Bankruptcy Institute, and a former member of the Bankruptcy Judges Advisory Group for the Administrative Office of the 

United States Courts. 

Professor Adam Levitin of the Georgetown University Law Center is a nationally regarded expert in bankruptcy and consumer 

law. He has served as Special Counsel for Mortgage Affairs for the 

Congressional Oversight Panel, as an expert witness for the FTC 

and FDIC on credit card litigation, and as a law clerk for the Honorable Jane Roth of the United States Court of Appeals for the 

Third Circuit. A graduate of Harvard, Columbia, and Harvard Law 

School, we are grateful that Professor Levitin will be with us. 

Professor Mark Scarberry of Pepperdine University School of 

Law is an expert in bankruptcy and contract law. A graduate of 

Occidental College and the UCLA School of Law, he is a member 

of the American Bankruptcy Institute Law Review Advisory Board 

and Pro Bono Task Force. 

And, last, David John is a Senior Research Fellow at the Heritage Foundation and specializes in pensions, financial institutions, 

asset building, and Social Security reform. Prior to joining the Heritage Foundation, he served on the staff of Representative Mark 

Sanford of South Carolina. Mr. John has a bachelor’s and three 

master’s degrees from the University of Georgia. 

We welcome the witnesses, and I now turn to my Ranking Member, Senator Sessions, for his opening statement. 

STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM 

THE STATE OF ALABAMA 

Senator SESSIONS. Thank you, Mr. Chairman. I look forward to 

the hearing. This is a good panel. I think we will have a good discussion. 

I would just recall a few years ago when we passed the bankruptcy bill, the final passage was over 80 votes, and one of the critical issues was the question of means testing in the legislation. We 

discussed it at great length. A number of Senators raised questions 

about it, and Senators like Senator Clinton in the end decided that 

this was good reform, and I certainly believe it is. It simply says 

that if you make above median income, you do not automatically 

get the right to wipe out all your debts in bankruptcy, but that the 

bankruptcy court can then structure a plan for repayment of that 

part of the debts that you owe that you are able to pay. And if the 

debtor is not able to pay all of them but can pay 60 percent of 

them, the judge will set up a proposal to do that. And once, of 

course, in bankruptcy, one of the great advantages for our debtors 

is they cannot receive demanding letters or phone calls; they cannot be sued; they cannot be harassed in any way toward paying of 

those debts. 

4 

We also knew at the time that bill passed the overwhelming majority of people, perhaps as high as 80 percent, that filed bankruptcy were below median income. So they would get to file under 

Chapter 7 if they chose. And many of those above median income, 

if their debts were high enough, I think they could not have to go 

under Chapter 13—they could go into Chapter 7 also. 

So I thought that was a good reform. I still believe it is a good 

reform. We discussed at that time the question of credit cards. I 

know Senator Durbin is very educated on this and very alert to 

these issues, and we did not always agree. He saw the bad in the 

credit card sometimes, and I saw the good. The truth is somewhere 

maybe in between. I do not think it is bad that a poor person who 

does not have the cash and their transmission falls out of their vehicle that they can pay that on a credit card. In fact, if credit cards 

were not available for poor people, we would be passing laws demanding that poor people be able to have credit cards and criticizing the big banks for not issuing credit cards. And I am not really offended that they send offers out in the mail offering competitive rates and you can choose between cards that you think best 

serve your interest. I am not really offended by that. 

I do believe that they are a cold-blooded bunch, that they do desire to make maximum profits, and I do think that the Government 

has a right to examine this. I do not think that the people who 

issue credit cards are sainted, and that they are out just trying to 

serve their customers. They are trying to make a profit. And so I 

think they are entitled to be watched over. 

For example, my mother, who recently passed away, had been ill for some time. I failed to get her credit card paid on time, a $25 

bill, and it was a $40 penalty. So, you know, they say you can call. 

Well, she was not able to write her name at the time. You get on 

the phone and they do not answer, and you have to get 15 different 

recordings. Also, I do not like it—on her credit card I noticed pretty 

clearly—that the total debt is buried down there somewhere and 

the minimum payment is more easy to see. And you could actually 

miss it in the print. 

So I think disclosure of these kinds of issues more clearly, so that 

a person can know what their real debt is, and what their payment 

should be, and maybe more, clearer warnings about the danger of 

these high interest rates is appropriate. But I have learned, 

though, that that is the Banking Committee’s business. And there 

is a question about the interest rates. I do not know. I am not comfortable capping interest rates, but I do not think that they are free 

to go without being evaluated and Congress making a decision 

about that. But that is a Banking Committee issue, and Senator 

Dodd and Senator Shelby and others on that Committee are supposed to be dealing with that, although we certainly have a right, 

anybody has a right to offer legislation. So, what we are looking at 

here is the question of whether or not a lawfully charged rate of 

interest and debts, how they should be handled in bankruptcy. 

I would just say this: In Alabama, we have an unusual situation 

in which, before the bankruptcy bill passed, half the people chose 

to file bankruptcy under Chapter 13. That is where you pay back 

a part of your debts. Now, some people seem to think that forcing 

people above median income into Chapter 13 is some sort of evil 

5 

thing and that it is an oppressive thing, but a large number of people voluntarily chose that. In Birmingham, the Northern District of 

Alabama, 60 percent of the people were filing under Chapter 13. 

There are a lot of advantages, and lawyers would tell you why they 

did that, and they think the rest of the country is behind the times 

in not using Chapter 13 more. 

So, under Chapter 13, if an interest rate on a credit card—a person files a debt and they have a high interest rate, the interest rate 

is dropped by the bankruptcy judge when the filing occurs. So it 

does not continue at this extraordinarily high rate. It drops down. 

And we can talk about more of the details about what is happening 

now in bankruptcy. 

I guess I would just say to my colleagues thank you for discussing this. I look forward to the hearing. There are some things 

I would like to learn about it. But I would say that bankruptcy is 

one of the greatest things that can happen for poor people in America. It relieves them of debt they are unable to pay. It breaks high 

interest rate loans that they may be trapped in. It helps them get 

out from health care bills and other bills. But there are certain 

things that need to occur in a rational, logical way, consistent with 

our heritage of law and consistent with what good economic practice is. 

Thank you, Mr. Chairman. 

Chairman WHITEHOUSE. Thank you, Senator. 

Just to make one point clear, the assignment of this bill to this 

Committee has been through the parliamentarian, so there is no 

question that—— 

Senator SESSIONS. It is. What we are talking about is acting in 

bankruptcy—how to use a bankruptcy mechanism to deal with interest rates we do not like. I am just saying the fundamental question, if we cap an interest rate, that is an issue before the Banking 

Committee. 

Chairman WHITEHOUSE. Correct. 

Senator Durbin. 

STATEMENT OF RICHARD J. DURBIN, A U.S. SENATOR FROM 

THE STATE OF ILLINOIS 

Senator DURBIN. Thank you, Mr. Chairman, and thanks for this 

hearing, and your bill as well. 

Senator Sessions and I were here for the bankruptcy debate, and 

it went on for a long time, and I found myself sitting in the Senate 

Judiciary Committee being, as I looked around the table, the expert 

on bankruptcy by virtue of the fact that I had taken a bankruptcy 

course at Georgetown Law School 30 years before, and that I had 

served as a trustee in bankruptcy in Springfield, Illinois, of a failed 

gas station. I had had more experience with bankruptcy than any 

other member of the Judiciary Committee at the table. That is how 

it works, Judge, around this place. 

So I offered an amendment on the floor, and Senator Sessions 

may remember it, and it said that on your credit card monthly 

statement, when they say here is your minimum monthly payment, 

I said the credit card companies have to disclose if you make the 

minimum payment, it will take X months to pay off the balance 

6 

and you will pay X dollars in interest. I thought that was in the 

interest of full disclosure. 

The credit card companies came back to me and said, ‘‘That is 

impossible to calculate. We have no way of computing or calculating that.’’ 

That is baloney. They know how to calculate it, and the reason, 

the real reason came out later. It is like the late Paul Harvey: ‘‘The 

rest of the story.’’ There was a Nova program, which I recommend 

to everyone, that went into the credit card industry, and they had 

this man who was the wizard of credit cards, this guru who was, 

I guess, concerned about his personal safety, would not disclose the 

location that he was being broadcast from. And he was the one who 

discovered that if you could drop the minimum monthly payment 

to 2 percent, the person could never pay off the balance. It would 

go on forever. And he was considered one of the shining lights, the 

person that brought real profitability to the industry. 

That I think tells the story. Poor people caught in this predicament do not understand the minimum monthly payment is a sentence, a life sentence, to this debt that they can never get out from 

under. Now we are talking about what to do about it and whether 

or not—and I think Mr. John will raise this question—whether or 

not we should even get involved. Let the market do its thing. Have 

we been watching the market do its thing lately and what it means 

to us as individuals, investors, future retirees, savers? 

You know, it has not been all that encouraging letting the market do its thing. I think we learned in the AIG boardroom what the 

market would do if it could do its thing. 

I would say to Senator Sessions, we have drawn some lines. We 

decided as a matter of national policy and national security that we 

had had it with the people who were gouging the members of the 

U.S. military. We put a limit, 36 percent interest, and said you 

cannot loan to members of the U.S. military and charge over 36 

percent. And we closed a lot of fly-by-night operations around our 

military bases who were putting our men and women in uniform 

and their families on hard times. But we did not apply the same 

protection to the rest of America. 

So I put a bill in for a 36-percent cap on the APR interest rate. 

I would say to my colleagues that if you want to start a reptile 

farm, you should put this bill in and watch what comes in under 

the door. Folks literally would sit in front of me and say, ‘‘Wait a 

minute. We are the good guys, and you are going to put us out of 

business.’’ I said, ‘‘Well, what do you charge? What are your interest rates? ’’ And a man—I have had two of them now, one from the 

payday loan industry, one from the installment loan industry, and 

they would sit there with a straight face and say, ‘‘Oh, we charge 

between 36 percent and 158 percent.’’ I said, ‘‘If you can get those 

words out of your mouth, you and I do not have anything to talk 

about.’’ 

That is what is going on in the real world. Disclosure is not 

enough anymore. You cannot tell folks enough information to protect them. 

One of the things the bill introduced and I recommend to my colleagues is the Financial Service Product Commission, which we put 

together. We protect consumers. We say when you buy that toy, we 

7 

will let you know if it had lead paint, we will protect you. But we 

do not protect them when it comes to credit cards, and we do not 

protect them when it comes to mortgage instruments. We need to 

have an agency that is looking out for consumers, saying this is a 

toxic instrument, you should not be allowed to sell this in America. 

At least give full disclosure to people involved in it. I do not think 

there is anything wrong with this. 

Credit cards are important, I have a wallet full of them, too. But 

I think they have gone way too far. They have just abused it because we are not even watching, let alone regulating. 

I have to go give a speech, but I am coming back. Thanks, Mr. 

Chairman. 

Chairman WHITEHOUSE. Thank you very much, Senator Durbin. 

We will now call on the first witness, Douglas Corey. Thank you, 

Mr. Corey. 

STATEMENT OF DOUGLAS COREY, NORTH SCITUATE, RHODE 

ISLAND 

Mr. COREY. Thank you. Chairman Whitehouse and Ranking 

Member Sessions, thank you for the opportunity to testify today 

about my experience with my credit card lender. 

I am a victim of the predatory credit card banking practices that 

punish honest citizens who work hard every day to make an honest 

income, pay off their debt, and take care of their families. 

I have had a Bank of America credit card for 6 years, and I can’t 

remember missing a payment in that time span. During most of 

this period, I received an interest rate of 12.74 percent, and although it was tough making the payments, I did. I set up an automatic monthly payment of $100 to pay down the principal, and 

each month when I received my bill, I paid the minimum payment. 

In August of 2008, I was on vacation and inadvertently paid less 

than my minimum payment. The following month, I misread my 

credit card statement. One line on the bill said ‘‘minimum payment’’; another said ‘‘pay this.’’ I paid the minimum payment, 

which was about $125 less than the amount on the line that said 

‘‘pay this.’’ 

With my next statement in October 2008 came the devastating 

news that my interest rate had skyrocketed to an astonishing 28.99 

percent. I went from paying $360 in interest to $792 in 1 month, 

and I was charged a $39 late payment fee. The following month, 

I was laid off from my sales representative position of 7 years. 

Once I realized my rate had increased, I immediately called 

Bank of America and was repeatedly told that nothing could be 

done to my rate until I made the minimum payments for 6 consecutive months. In December, I called again and at this time they 

credited my account $759.23 in interest. 

In January, I called again, but the outcome was much different. 

I was told no discount could be given again but was offered the 

chance to increase my credit limit for a service fee of over $150 a 

month. I asked the representative why I would do such a thing. 

She said to help pay for any expenses I may have. 

Several weeks later, I called Bank of America, only this time 

they sent me to a rate adjuster who asked me several questions, 

one of which was my current work status. With a great deal of emVerDate Nov 24 2008 08:04 Mar 31, 2010 Jkt 055466 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55466.TXT SJUD1 PsN: CMORC
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barrassment, I explained that I was unemployed. He then suggested giving me back $10,000 I had paid in October of 2008, effectively raising my balance by that amount. I explained to him that 

this would mean I would be paying 28.99 percent on ten thousand 

more dollars, which would cause my payments to climb well over 

$1,000 a month and would put me further into debt. 

His second option was to create a long-term loan. He explained 

that he couldn’t tell me the rate and terms unless I agreed to the 

long-term program first. He also explained that my account would 

be temporarily closed, and once I paid the loan off, my account 

would be reinstated. I expressed my concern over the effect this 

would have on my credit rating and he suggested it would be fine 

over time. 

I asked him why Bank of America was still offering me 3.99 percent on debt transfers but was imposing such lethal punishment on 

those of us who have been keeping them in business for years. He 

had no answer. I worried that the credit rating I had worked so 

hard for over the years could be lost. 

As of March 13th, I had made six consecutive minimum payments. On March 18th, I enthusiastically called Bank of America 

and was told that my reward for making my payments was a 

$13,000 reduction in my line of credit. The rate adjuster explained 

that he would have to do so because I was unemployed. I told him 

I was on the brink of starting a new position in the upcoming 

weeks. He told me that he would call me at that time to see if I 

had actually started working and what my new compensation was. 

He went on to say he could offer me a rate of 24.99 percent, but 

if he did, it would confuse the computer from ‘‘automatically adjusting my rate back from my default rate.’’ He said if he didn’t change 

my rate now, I potentially could get a lower rate in the coming 

weeks. I asked whether my rate would be 12.74 percent, and he reiterated that he could not tell me what the rate would be. I told 

him this was frustrating because I had been assured that if I paid 

for 6 consecutive months, my interest rate would go down. 

With pride, I can tell you that for the last 19 years I have never 

missed a credit card payment or auto payment. In 1994, I became 

a proud homeowner and was living the American dream. Since becoming a homeowner, I have made every mortgage payment up 

until this year. That all changed 7 weeks ago. I have to admit that 

for the first time ever I missed my mortgage payment. But, fortunately, last Tuesday I was able to make up the missed payment 

and soon will be caught up. 

As a responsible single father, I quickly restructured my home 

budget and spending, and I proactively began contacting my debtors to inform them of my situation and to negotiate an amicable 

resolution. 

Senators, I find myself in the same circumstances that many parents are facing today: few job prospects, a stack of bills, and the 

challenge of facing off against financial Goliaths. There are many 

of us in the middle class—the unemployed—who may have overstepped our budgets, but although we struggle to make our payments, we make them. 

Bank of America has come before you asking for help, understanding, and, with both hands open, for financial support. Yet 

9 

when we the consumers go to these institutions looking for the 

same help, understanding, and financial support, we get roughed 

up and receive no compassion. Rather than negotiating, banks are 

preying on those of us who have been weakened by circumstances 

beyond our control. Banks realize that they are holding all the 

cards and that the consumer is powerless to negotiate with them. 

As a salesperson, I understand the importance of making a profit, and banks are entitled to make a profit. But what is enough? 

Over the 6 months, I have paid a staggering $1,600 more in interest versus what I would have paid at 12.74 percent. Their policies 

and actions are having a devastating effect on consumers that are 

hardest hit by our country’s economic hardships. 

Last week, I was asked to come here and tell my story. I am not 

here asking for anything for myself. I am simply asking to stop the 

greed that is fueling banks’ predatory behavior. Consumers are 

looking to you for leadership and to wage war against this greed 

that has taken over corporate America. My hope is that you will 

consider some form of legislation that levels the playing field and 

empowers consumers to negotiate with these institutions’ strongarming tactics. 

Thank you for your time. 

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

for the record.] 

Chairman WHITEHOUSE. Thank you very much, Mr. Corey, and 

thank you for coming to Washington to be a part of this hearing. 

I appreciate it very much. 

Our next witness is the Honorable Rosemary Gambardella of the 

New Jersey Bankruptcy Court. 

STATEMENT OF HONORABLE ROSEMARY GAMBARDELLA, 

JUDGE, U.S. BANKRUPTCY COURT FOR THE DISTRICT OF 

NEW JERSEY, NEWARK, NEW JERSEY 

Judge GAMBARDELLA. Chairman Whitehouse, Ranking Member 

Sessions, Senator Durbin, other Senators on this Subcommittee, 

thank you for this opportunity to testify today on the important 

subject of abusive credit card practices and their relationship to 

bankruptcy. 

I speak today not on behalf of any group of judges or organization, but solely on my own behalf. I have spent the last 23 years 

serving on the United States Bankruptcy Court in the District of 

New Jersey. During that time I have seen firsthand the impact of 

spiraling debt burdens on ordinary citizens—citizens like Mr. 

Douglas Corey, who has eloquently testified this morning. 

Contrary to popular sentiment, persons filing bankruptcy petitions in this country do not do so to escape debt repayment but, 

rather, as a last resort, driven for the most part by circumstances 

beyond their control: illness, divorce, job loss, income reduction. 

Many are on the brink of home foreclosure. On the way, these individuals have accumulated significant unsecured credit, the majority 

of which often is credit card debt. 

The current system of bankruptcy laws that concern individual 

consumer bankruptcy filers can be assessed in terms of three central concepts: liquidation, as embodied through Chapter 7; rehabilitation or reorganization as symbolized by Chapter 13 and, to a lessVerDate Nov 24 2008 08:04 Mar 31, 2010 Jkt 055466 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55466.TXT SJUD1 PsN: CMORC
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er extent for individuals, Chapter 11; and the ultimate discharge 

or forgiveness of debt. These concepts trace their roots directly to 

the Bible. 

For instance, the Bible makes it clear that people are generally 

expected to pay their debts. One can look at Leviticus 25:39. However, this moral and legal obligation to pay just debts must be balanced by such considerations as the need for compassion for the 

poor, preservation of the family unit, and a call to cancel debts at 

periodic intervals. Again, one can look to Deuteronomy. 

The quest to arrive at the perfect balance between compelling 

persons to repay their debts and society’s obligation to forgive debt 

and to provide debtors with a fresh start has existed since ancient 

times. In fact, it is this healthy tension that fostered the development of the bankruptcy laws in this country from the early days 

of bankruptcy referees to the present. It was the pendulum responsible for the 2005 bankruptcy amendments that have been spoken 

about, as well as the proposed Consumer Credit Fairness Act, 

which we are discussing this morning. 

High-cost consumer credit generally comes in the form of credit 

cards, payday loans, student loans, refund anticipation loans, and 

subprime mortgages. Today, I will focus primarily on high-interest 

credit cards. 

At least one study has found that nearly 60 percent of credit card 

holders do not pay their bills in full every month. It was reported 

that the average interest rate for standard bank credit cards 

topped 19 percent in March of 2007. And the Federal Reserve has 

reported at relevant times that some 46.2 percent of all families 

held credit card balances with an average credit balance approaching $7,300. 

In September of 2006, the Government Accountability Office estimated that in 2005 the number of U.S. credit cards issued to consumers exceeded 691 million. That report stated that ‘‘[T]he increased use of credit cards has contributed to an expansion in 

household debt, which grew from $59 billion in 1980 to roughly 

$830 billion by the end of 2005.’’ And it is certainly well over $1 

trillion today. 

That report estimated that ‘‘the majority—about 70 percent in recent years—of issuer revenues came from interest charges,’’ and estimated penalty fees to account for an additional 10 percent of total 

issuer revenues. That report concluded that disclosures used to provide information about the costs and terms of using credit cards 

generally had serious weaknesses which reduced their usefulness. 

Professor Elizabeth Warren of Harvard Law School has conducted extensive research on the causes of bankruptcy. In a 2006 

article authored together with Teresa Sullivan and Professor Jay 

Lawrence Westbrook, the authors argued that ‘‘the central characteristic of consumer bankruptcy over two decades has been increasing financial distress marked by rising levels of debt,’’ and 

that ‘‘from the early 1980’s to the present, Americans’ debt burden 

compared with their disposable income has risen considerably,’’ 

while ‘‘at the same time, increased layoffs, high divorce rates, lack 

of medical insurance, income volatility, and rising housing costs 

have left families even more vulnerable to bankruptcy.’’ Focusing 

on credit cards which they describe as the dominant form of lendVerDate Nov 24 2008 08:04 Mar 31, 2010 Jkt 055466 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55466.TXT SJUD1 PsN: CMORC
11 

ing in recent years, the authors indicate that ‘‘interest rates are 

often ruinous for a family with substantial credit card debt, particularly if the family had missed a beat in making on-time payments,’’ as ‘‘the combination of late fees, over-limit fees, default 

rates of interest and other charges means that credit cards for families in trouble may easily be running at 24 percent interest or 

more.’’ 

The authors speculate that changes in the credit industry in 

making money available to troubled borrowers may have changed 

the calculus that leads to bankruptcy, as increased lending offers 

a way for families, in fact, to delay bankruptcy, but the interest 

payments increased so fast that even a small stumble meant that 

borrowers would have to declare bankruptcy or literally never get 

out of debt. 

In a 2006 article by Professors Susan Block-Lieb and Edward 

Janger, they claimed that ‘‘the demise of usury laws and the development of national credit reporting and credit score systems and 

mass marketing techniques permitted lenders to create a national 

market for credit cards available to even the least creditworthy 

members of society, but at a price. 

Concerning the 2005 reforms, the authors argued that legislation 

severely limited overleveraged consumer borrowers from obtaining 

relief in the bankruptcy system and, in effect, rewards consumer 

lenders for taking advantage of consumer limitations. 

Professor Katherine Porter has also argued that the credit industry seeks to profit from financially distressed and vulnerable consumers by encouraging families to continue to borrow even after 

bankruptcy. And Professor Porter, speaking regarding the BAPCPA 

amendments states that ‘‘the credit card industry’s lending decisions were not subjected to the same scrutiny as the scrutiny of 

debtors’ borrowing decisions,’’ and that lenders were not ‘‘held to 

the same moral standard as debtors for evaluating the appropriateness of their financial practices.’’ 

As was mentioned in the opening statements, in 2005 the Bankruptcy Code underwent extensive changes with the enactment of 

the Bankruptcy Abuse Prevention and Consumer Protection Act of 

2005. That reform act was meant to address a perceived imbalance 

in the Bankruptcy Code, strengthening creditor provisions, encouraging repayment under Chapter 13 rather than liquidation under 

Chapter 7 by imposing a means test on debtors to test their ability 

to repay debt. 

The proponents of BAPCPA, among them the banking and credit 

card industries, car and mortgage loan lenders, advocated that by 

setting the bar higher for people who could file bankruptcy, the legislation would discourage bankruptcy petitions submitted in an attempt to abuse ‘‘the system by deliberately running up credit card 

debt and running away from repayment obligations through the 

bankruptcy process.’’ Conversely, consumer advocates strenuously 

opposed BAPCPA by noting that the vast majority of people filing 

for relief under the Bankruptcy Code were not abusers, but families in serious financial trouble due to the various factors outlined 

in this testimony, and that amending the Bankruptcy Code to 

make it more difficult to resort to bankruptcy, they contended, 

12 

would create more stress and suffering for middle class families by 

delaying debt relief.’’ 

The implementation of BAPCPA in October of 2005 followed a 

spike in bankruptcy filings approaching 2 million. After that—and 

it is in my written testimony—the numbers of bankruptcy filings 

fell. However, according to the latest statistics issued by the Administrative Office of the United States Courts, during 2008 filings 

by debtors with predominantly non-business debt, which accounted 

for some 96 percent of overall filings, was on the rise again to over 

1 million filings. 

The proposed Consumer Credit Fairness Act would disallow in 

bankruptcy for purposes of distribution claims arising from a ‘‘highcost consumer credit transaction,’’ which is defined under the act 

itself. Currently under the standard imposed by the proposed bill, 

the CCFA would apply to any interest rate higher than 18.5 percent. Additionally, the proposed bill would exclude debtors from 

any debts arising from high-cost consumer credit transactions from 

the so-called means test. 

The articulated purpose of the 2005 amendments to the Bankruptcy Code was to inject balance into the adjudication of debtorcreditor rights. In fact, the myriad requirements placed on consumer debtors, including the use of means testing, may have created substantial burdens on consumer debtors without the desired 

result—increased repayment of debt. It is clear from experience 

that debtors’ use of credit cards as a family lifeline to cover basic 

living expenses such as food, sustenance, utilities, health care, and 

tuition is a trend that is seen throughout the cases before our 

courts. The proverbial ‘‘robbing Peter to pay Paul’’ has resulted in 

spiraling debt that high interest consumer loans only exacerbate. 

The disallowance in bankruptcy of a specific category of high-cost 

loans contemplated by the bill may act as a disincentive to such 

practices. As well, the specter of disallowance of such claims in 

bankruptcy may encourage out-of-court settlements. The disallowance of the claims, as opposed to subordination of the claims, may 

also result in a greater recovery to other unsecured creditors with 

valid and bona fide claims. In my experience on the bankruptcy 

court, it must be emphasized that bankruptcy relief is largely utilized by individuals as a last resort for legitimate, non-abusive purposes. And the fresh start afforded by bankruptcy to individuals 

suffering under enormous debt loads, particularly in the current 

economic climate, is a laudable goal. So the disallowance of certain 

high-cost credit claims will, in certain instances, substantially decrease the debt burden on debtors, increasing the prospects for successful reorganization and/or repayments through orderly liquidation to bona fide creditors. 

While many debtors and their families’ income fall below the applicable respective State median income level and escape the 

means test, the elimination of means testing for this category of 

consumer debtors would make the pathway to Chapter 7 relief 

more available. Again, to the extent that repayment is the goal, 

such a remedy may be an additional disincentive for predatory 

lending practices. 

It is worth noting that while the remedies in this proposed legislation are limited to bankruptcy filings, this does involve a much 

13 

broader issue of predatory lending practices that reach far beyond 

the bankruptcy arena. 

In closing, I want to thank this Committee for according me the 

honor and privilege of testifying today on these important issues, 

and I stand ready to provide any additional information, Senators, 

that you may require. 

Thank you. 

[The prepared statement of Judge Gambardella appears as a submission for the record.] 

Chairman WHITEHOUSE. Thank you very much, Your Honor. 

The Ranking Member, Senator Sessions, and I have been lawyers 

long enough that far be it from either of us to interrupt a judge. 

Judge GAMBARDELLA. I went over my time limit. I apologize. 

Chairman WHITEHOUSE. But I would appreciate it, because Senator Sessions has a commitment at 11 o’clock, if the subsequent 

witnesses could be more attentive to the time restrictions so that 

all the testimony can come in while the Ranking Member is 

present. I thank you. 

Senator SESSIONS. You had your chance to stop a judge after 

having been stopped many times before. 

[Laughter.] 

Senator SESSIONS. No, that was very valuable. Thank you. 

Chairman WHITEHOUSE. Professor Levitin. 

STATEMENT OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF 

LAW, GEORGETOWN UNIVERSITY LAW CENTER, WASHINGTON, D.C. 

Mr. LEVITIN. Mr. Chairman, Ranking Member Sessions, good 

morning. My name is Adam Levitin, and I am an associate professor of law at the Georgetown University Law Center, where I 

teach courses in bankruptcy and commercial law. I am here this 

morning to testify in favor of S. 257, the Consumer Credit Fairness 

Act. 

I think it is important to start by noting exactly what Senator 

Sessions said. Credit can be a double-edged sword. It can be both 

a boon and a curse. 

Credit is a wonderful thing that can fuel the economy, but when 

credit is issued beyond a borrower’s ability to repay, it becomes a 

stone around—it becomes an anchor around their neck, dragging 

them down. 

As Congress tries to figure out how to address the problems 

caused by excessive consumer leverage, there are a few possible responses. Senator Sessions suggested that disclosure might be a way 

to go, and I think there is a general sense that disclosure has not 

worked well for credit cards in particular. 

The problem is that there is also no evidence that disclosure can 

work with credit cards. We have not seen it work yet, and there 

is no empirical evidence that it will work. There are a lot of reasons to think that, absent really drastic restructuring of credit card 

price structures, disclosure can work. 

First of all, there is simply too much information. Senator Whitehouse described a 20-page, fine-print legalese disclosure. There is 

no one who reads that, and if you read it, you cannot understand 

it. And even if you understand it, your understanding might not be 

14 

the same as that of the card issuer, and it is going to be their interpretation, not yours, that is going to functionally control. So we 

have lots of disclosure, but we really have obfuscation by disclosure. Stuff gets hidden in the fine print. It is all disclosed, but that 

does not do the trick. That does not make markets work. 

We also have a problem that even if we improve disclosure—and 

there are definitely moves in that direction. The Federal Reserve 

has some regulations that are going to go into effect in about 18 

months that will improve disclosure, as well as a bill that is pending in, I believe, the Senate Banking Committee, the Card Holder’s 

Bill of Rights. Even if we manage to improve disclosure, card 

issuers still have every incentive to restructure their pricing to get 

around disclosure. 

So if we say that price points A, B, and C have to be prominently 

and clearly disclosed, card issuers are just going to restructure 

their pricing to create new fees, types D, E, and F. So there is a 

lot of reason to think that disclosure regulation just is not going 

to do the trick. This makes me think that we need to really look 

at substantive regulation. Historically, that is how we have regulated credit. Really until the Supreme Court’s Marquette decision 

in 1978, substantive regulation, usury laws, were the primary form 

of consumer credit regulation. S. 257 is a step toward substantive 

regulation. It is not, however, a usury bill, and I think that is very 

important to be clear on, that S. 257 does not say that a lender 

cannot make a loan at any particular rate. Rather, what S. 257, the 

Consumer Credit Fairness Act, is is a bankruptcy integrity bill. It 

is legislation designed to ensure the integrity of the bankruptcy 

system. 

Bankruptcy courts are courts of equity, and a basic principle of 

equity is that relief will not be granted to a party with unclean 

hands. Creditors who charge extremely high interest rates do not 

have clean hands when it comes to consumer financial distress. 

High-interest-rate debt is financial quicksand for consumers. 

With high-interest-rate debt, the interest and the fees accrue faster 

than a consumer can reasonably be expected to pay off the loan. 

Not surprisingly, there is a strong correlation between high-interest-rate debt and bankruptcy. Dollar for dollar, credit card debt is 

the best indicator of a future consumer bankruptcy filing. And even 

small amounts of high-interest-rate debt can have a significant impact on bankruptcy filings. For example, a single payday loan of 

$300 increases the chances of a bankruptcy filing by nearly 3 percent. 

The interest rates charged to consumer borrowers are a product 

of the lender’s cost of funds, the lender’s cost of operations, as well 

as a risk premium, but also they are a function of whatever extra 

opportunity pricing that the lender thinks the borrower will pay. 

The precise mix varies by product, by lender, and by borrower, but 

it is important to underscore that high interest rates do not necessarily correlate with borrower risk. They often have a lot to do 

with inefficient markets, things like nontransparent pricing of credit cards which results in consumers borrowing at much higher 

rates than they realized they will be paying. 

It is also important to note that while high interest rates, to the 

extent that they are a response to increased consumer risk, they 

15 

also create risk. That is because many consumers are unable to 

service high-interest-rate debt. Lenders who charge high interest 

rates are largely shielded from their own self-created default risk 

by the high rates. But we see this with the so-called sweat box 

model of consumer lending. And I understand my time is up, so I 

will simply conclude by saying I urge Congress to give serious consideration to S. 257 as well as also to a true usury law. 

Thank you. 

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

for the record.] 

Chairman WHITEHOUSE. I thank you, Professor Levitin, and perhaps if you become a judge someday, you will not be interrupted. 

But we do have your complete statement, which is very thorough 

and authoritative, and your complete written statement is a matter 

of record. 

If I could take 1 minute and ask unanimous consent that the 

statement for this hearing of Chairman Patrick Leahy, the Chairman of the Judiciary Committee, be added to the record, it will be 

done, without objection. 

Professor Scarberry. 

STATEMENT OF MARK S. SCARBERRY, PROFESSOR OF LAW, 

PEPPERDINE UNIVERSITY SCHOOL OF LAW, MALIBU, CALIFORNIA 

Mr. SCARBERRY. Thank you, Mr. Chairman, and thank you, 

Ranking Member Sessions, for inviting me to testify today. You 

have my full statement. I will not read it. I will try to hit the high 

points. 

I try to look at these issues on their merits, and I am speaking 

here, of course, just for myself, not for Pepperdine University 

School of Law, where I teach. My latest article strongly argues that 

credit card companies and other unsecured and undersecured creditors should not be able to add to their claim in bankruptcy any 

amount for attorney’s fees or other charges that are incurred after 

the bankruptcy petition is filed. I think the Bankruptcy Code calls 

for that result, and I think that it is fair. That is, in a sense, an 

anti-creditor position, you might say. 

In this case, I come down on the other side. I think this bill will 

not accomplish what it seems to intend to accomplish, and that the 

issues here really, to the extent they need to be addressed, should 

be addressed more directly. 

The bill, because of a single, high-cost consumer debt that may 

be owed by a debtor who files a bankruptcy petition, would exempt 

that debtor from what I call the mechanical means test, the Section 

707(b)(2) test that looks at income levels and looks at expense levels and decides whether it is appropriate for this debtor to use 

Chapter 7 liquidation bankruptcy. 

Now, we can argue about whether the means test ought to be 

modified in some way. I do not think it has been terribly successful, and it is very complex, and it raises the cost of bankruptcy in 

some ways. It could perhaps be modified in some ways. 

But if it makes sense to have a means test, it seems to me it does 

not make sense in a lottery sort of style to exempt people from it 

16 

just on the basis of a single, perhaps small debt that has a high 

interest rate. So that, it seems to me, is a problem with the bill. 

An additional problem is that I do not think the bill will change 

credit card company behavior at all. In most consumer bankruptcies, there is no money to be paid to unsecured claim holders 

like credit card companies. They receive nothing. And so to say to 

them that—there are no-asset cases or nominal-asset cases. If you 

say to them, ‘‘Your claim will be disallowed so you will receive 

nothing in bankruptcy,’’ they will say, ‘‘Well, we were not going to 

get anything anyway, thank you very much.’’ And so I think the 

chance that this will actually influence the behavior of credit card 

companies is very small. 

If there is a serious problem here, address it directly if it needs 

to be addressed. But the Bankruptcy Code, it seems to me, is not 

going to be effective in addressing whatever problem needs to be 

addressed, and the bill will simply make the Bankruptcy Code 

more complex. 

Now, another issue that is actually not in my written testimony 

is the question of who is going to do the objecting here. Are we 

going to say to the trustees in every Chapter 7 bankruptcy case, 

‘‘You must analyze all the credit card debt of every debtor and figure out what their interest rates are for purposes of objecting to 

the claim’’ when the credit card company is not likely to receive 

anything, anyway? It seems to me that that is a question that 

ought to be asked. Who is going to object? The debtor typically has 

no incentive to object. The debtor is going to get a discharge from 

the debt. And the money that goes to pay it, if any does goes to 

pay it, is going to come from the bankruptcy estate, not from the 

debtor. Some people say the debtor does not even have standing to 

object in some cases. 

I would also encourage the Committee to consider whether the 

18.5-percent rate that you are looking at now is perhaps lower than 

it should be, especially for someone who gets a rewards card, perhaps with no annual fee, and who typically pays the credit card off 

without carrying a balance. It makes sense to allow, perhaps, cards 

with higher rates. But, again, I do not think the bill would keep 

these from being offered, so maybe that is not such a big deal. 

Now, I do have a couple of technical points that I want to make. 

One is that the applicable interest rate under the Consumer Credit 

Fairness Act would include fees charged in connection with extension of credit. That could easily be interpreted not to include things 

like late fees, which are not incurred in connection with extension 

of the credit. And so, again, it seems to me the bill may not accomplish what it is intended to do. 

In addition, the bill says that there will be disallowance for purposes of distribution. If that is intended to be a limitation so that 

the claim is not completely disallowed, it may allow some liens for 

credit card debts to continue through, which I think is contrary to 

the bill’s drafter’s intent. 

Thank you very much. 

[The prepared statement of Mr. Scarberry appears as a submission for the record.] 

Chairman WHITEHOUSE. Thank you very much, Professor 

Scarberry. 

17 

We will now turn to Mr. John. 

STATEMENT OF DAVID C. JOHN, SENIOR RESEARCH FELLOW, 

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

Mr. JOHN. Thank you very much for having me to testify. Contrary to expectations, I am not here to defend high-interest lenders 

in the slightest. As a matter of fact I had an experience somewhat 

similar to Mr. Corey at a point when I was traveling and my credit 

card payment arrived one day late, and I saw my credit card interest rate more than double. They have since brought it down, and 

I have learned to pay electronically and not to trust the Postal 

service. But, still, I have no fond feelings toward them. 

Having said that, I think this bill is going to damage some of the 

very people that I would hope you would be most interested in 

helping, because the three groups who most face high-interest-rate 

loans—and this is not just credit card debt; it is of other types— 

include low- to middle-income borrowers, and these are borrowers 

who typically have high rates because even a small amount of credit exceeds the debt-to-income ratios that, say, upper-income borrowers would have; first-time borrowers who have no credit history 

and, therefore, have no record of payment or repayment; or people 

with bad credit who are trying to restore their credit balances and 

their credit histories. This might be people who had filed for bankruptcy or people who had suffered from extended periods of unemployment. 

All of these people have much higher than average interest rates 

simply because it is often harder to collect money from them. I had 

the misfortune to work for 3 months between undergrad and grad 

school for a finance company, and I found that while many of the 

people who were our borrowers were fine, upstanding people who 

simply were not interested—the banks were not interested in, 

many others I had to go out and collect a check once a month, 

which took a little bit of time and money to do. 

The effects of this bill are likely to be very damaging. The demand for credit services will not decline. One of the things we have 

learned the hard way through various and sundry attempts to put 

on price ceilings and interest rate ceilings and usury laws is that 

the demand is still there; it is just that the good borrowers tend 

to withdraw from the market. 

So, to the extent that you have added additional risk to various 

transactions, what is going to happen is that good borrowers will 

either cease to serve these communities, or what is more likely in 

this situation, they are going to raise their credit standards so 

fewer and fewer people in this population are going to qualify for 

these credit products. 

This is going to drive people into much less reputable borrowers—or lenders, excuse me, and what these people will do is to 

recognize once again that there is a higher risk, so they are going 

to raise their prices still more so that they can make sure to collect 

all their fees before there is any sort of a chance of bankruptcy filing or something like this. 

So the bottom line is price controls do not work. If you want to 

deal with these lending problems, the proper way to deal with 

18 

them is to encourage other lenders to enter the market, things like 

credit unions and banks and that sort of thing. 

Now, one of the problems that we have seen with credit card 

debt over the years are precisely the problems that have been 

raised by people in this hearing. And as a result, the Federal Reserve Board and various other banking regulators issued regulations in December that, among other things, achieved Senator Durbin’s goal of including something on the credit card statement 

showing how long it will take to repay a credit card if one pays the 

minimum balance on it. There are certain other changes that have 

been made, and both the House Financial Services Committee and 

the Senate Banking Committee are examining these issues in detail. In other words, this is not something that necessarily needs 

to be resolved in this Committee. 

Let me point out one other thing in my last seconds. This bill is 

drafted far too broadly. Under this bill, a high-cost credit consumer 

transaction is defined as one where you exceed your cap ‘‘at any 

time while the credit is outstanding.’’ That means that a traditional 

30-year mortgage issued in October 1981, when the interest rates 

peaked at 18.45 percent, would fall and would have fallen under 

that definition as of December 2008 when the price of the 30-year 

T-bill declined rather substantially. 

Now, we have not seen high interest for some time, but we cannot expect that we are not going to see this again in an era of economic dislocation and trillion-dollar deficits. This bill needs to be 

substantially corrected, and I would argue that it is going to hurt 

the very people that you are seeking to help. 

Thank you. 

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

the record.] 

Chairman WHITEHOUSE. Thank you very much, Mr. John. 

Out of respect for my colleagues’ schedule, I will defer my questioning to the Ranking Member. We will then proceed to Senator 

Durbin, who was here earlier, and then Senator Sanders of 

Vermont, whom I am very proud to say has joined us. 

Senator SESSIONS. Well, Senator Whitehouse, we are glad that 

you are in the Senate, and being a new member, a new Chairman, 

you are very gracious. A good lesson for some of our older Chairmen. 

Briefly, Mr. John, summarizing what I understood you to say— 

and it makes perfect sense to me—if we are going to expose credit 

card companies to greater and greater possibilities of recovering 

nothing on their credit card debt when somebody goes into bankruptcy, they will then be more rigorous in denying credit cards to 

marginal people who would like to get a credit card and may need 

a credit card. 

Mr. JOHN. That is precisely the case, plus this is likely to extend 

to other types of credit that are offered to the same population. 

Senator SESSIONS. Such as? 

Mr. JOHN. Such as mortgages, such as installment lending, and 

a variety of other types of—— 

Senator SESSIONS. Well, frankly, this thing cuts both ways, as I 

indicated earlier. You want more people to be able to avail themselves of having short-term credit, which a credit card is. But at 

19 

the same time, it results in either higher rates for everybody or a 

reduction in the number of people who would be able to get a card. 

Would you agree with that, Mr. Scarberry, that fundamental principle? 

Mr. SCARBERRY. I think there is a tradeoff between wanting to 

have credit available but, on the other hand, wanting people to act 

responsibly. And, of course, we know—I mean, as my testimony 

points out, the massive increase in household debt has really been 

on the mortgage side rather than the credit card side over the—— 

Senator SESSIONS. Well, I would just say it is a big deal—and I 

am not prepared to accept it—that the responsibility for somebody 

who utilizes that credit card to run up excessive debt is the person 

who gave them the credit card. Would you agree with that? I mean, 

unless we have eliminated the concept of individual responsibility 

totally. 

And, Judge, when you have—in bankruptcy, routinely is it not so 

that the unsecured credit card people are the ones who get paid 

last because secured creditors are first? 

Judge GAMBARDELLA. Under the priorities of the Bankruptcy 

Code, they would be unless—if they have no security, that is correct. 

Senator SESSIONS. You made some criticisms of the means test, 

I believe, at least as how it is affected. Do you oppose the concept 

that persons who make above median income in America and run 

up big credit card debt ought to at least pay some of that back if 

they are able to? 

Judge GAMBARDELLA. No, I believe that people—I believe in the 

concept of the honest and good-faith debtor, so that if there is an 

ability to repay a portion of one’s debt, one should attempt to do 

that. The difficulty with the means test—and I know this is not a 

Committee hearing on the means test—is what obviously some of 

the other witness testimonies have indicated. It is very burdensome. It is very costly. In most States, it does not even apply. 

I do not know whether it accomplishes what it set out to do, 

which is to increase repayment. 

Senator SESSIONS. Well, I am open to improving that, and I do 

not want to use up too much of my time. But when an individual 

files for bankruptcy, they have run up debt, one of the things lawyers tell them is to put everything on their credit card. 

Judge GAMBARDELLA. Except the court filing fee. 

Senator SESSIONS. And we did back up the—well, they tell them 

not to pay their rent, to give them their money so they can pay the 

fee. But, at any rate, they do use credit cards up to the last day, 

and we backed back a little bit the time that you could do that on 

some of those debts. So the credit cards are dumped on in many 

ways once a person decides that they are filing bankruptcy. Is that 

not correct? 

Judge GAMBARDELLA. I am sorry, Senator. 

Senator SESSIONS. Well, in effect, what happens is if you talk to 

a lawyer and they say you are going to file bankruptcy, and the 

lawyer suggests that you pay your groceries and everything else 

possible on the credit card and run that up and pay him his fees 

and pay your family and their debts—— 

Judge GAMBARDELLA. That would be a scenario—— 

20 

Senator SESSIONS.—that you owe your brother-in-law, and then 

sock it to the credit card company and they will lose in bankruptcy. 

Judge GAMBARDELLA. Well, I am sure—some of this testimony 

certainly makes clear that what is happening with American families is that they are utilizing credit cards for all types of purposes 

that you or I years ago would not have. 

Senator SESSIONS. I am trying to figure out how to—what the 

rate is. Mr. Scarberry, maybe you have looked at this, but at 15 

percent plus what the current rate is, 3, about 18 percent, makes 

this a bit of a risky thing. You think it could constrict the availability of credit for consumers and might increase the interest rates 

for good creditors? 

Mr. SCARBERRY. It is possible, Senator. To the extent that you 

have people with good credit who are getting specialty cards, where 

they get double frequent flyer miles and these sorts of things and 

they have high rates on them and they do not intend to carry a 

balance, those are people where you might actually have some serious payment if they end up in financial trouble—they have assets—and due to the financial trouble go into bankruptcy. The 

credit card companies who offer those kinds of cards might, in fact, 

suffer some serious losses as a result of this bill, and it might restrict some of that credit. 

In the usual case, there is not going to be any payment to the 

credit card company, anyway, so disallowing their claim is not 

going to hurt them. But in a few cases it would, and it could have 

some effect. 

Senator SESSIONS. Mr. Chairman, I would just like to emphasize, 

one thing I think Mr. Scarberry mentioned was that if one credit 

card is over the interest rate allowed under this bill—and it may 

be a small one—they are exempted entirely from the means test. 

Is that—— 

Mr. SCARBERRY. That is correct under this bill which—— 

Senator SESSIONS. I do not think that is a good policy for sure. 

Thank you. 

Chairman WHITEHOUSE. Senator Durbin. 

Senator DURBIN. Thank you, Mr. Chairman. 

Back during the debate on the bankruptcy bill, I offered an 

amendment on the floor which said that if a mortgage lender was 

guilty of predatory lending practices, they could not recover in a 

bankruptcy court, similar to what you are doing here, Senator. And 

I lost that vote on the floor. 

During the course of the debate, then-Senator Phil Gramm of 

Texas got up and said, ‘‘If the Durbin amendment passes, it is the 

end of subprime mortgages.’’ I lost by one vote. 

It is true that if the Durbin amendment had passed, we would 

have restricted credit. But I think most of looking back now would 

have said, ‘‘That might have been a pretty healthy thing to do,’’ because people were doing things, borrowing money under circumstances that made no sense, but there was a willing lender who 

was willing to take them into a debt arrangement and ultimately 

into a bankruptcy court. 

Judge Gambardella, what is the primary reason people come into 

bankruptcy court now? What kind of debts push them over the 

edge? 

21 

Judge GAMBARDELLA. Well, generally it would be what I reference in my testimony—a divorce, loss of income, loss of health insurance, some catastrophic event in their lives that creates the 

need to file for bankruptcy. At least that is what all of the studies 

that have been done show, and I think it bears out. 

But it is shocking when you look at bankruptcy petitions—and 

I am sure people on this panel can bear me out—at the amount of 

credit card debt that you see on a family’s bankruptcy petition. You 

do not see just one or two credit cards. You can see upwards of 25 

credit cards with over $10,000 on each card. I think that is rather 

shocking. 

Senator DURBIN. Isn’t that the last gasp? I mean, when everything is falling apart, they max out the credit cards to try to hang 

on, hoping that things may turn around if they cannot? 

Judge GAMBARDELLA. As I say, that is robbing Peter to pay Paul. 

You see it. And it is done not, I think, out of bad intentions. I think 

it is done often out of pure desperation. 

Senator DURBIN. And, of course, they are facing interest rates 

with those credit cards which can be astronomical. 

Judge GAMBARDELLA. But I did want to raise one issue because 

it was raised, I believe, by some of the other witnesses here in 

terms of the need for these high-cost loans or credit cards in certain instances. 

One of the changes that the 2005 amendments instituted was 

debtor education, so when parties go into bankruptcy, they have to 

then take a course. That course teaches that—— 

Senator DURBIN. The author of the amendment just left, but he 

will be back. 

Judge GAMBARDELLA. Okay. Well, maybe he will read this testimony. And so when debtors go into bankruptcy and then come out, 

they are being told to borrow money responsibly. So I guess there 

is a dichotomy between the bankruptcy court’s telling debtors now 

they have received discharges, borrow responsibly, and the other 

argument, which I think is valid, has validity, that if you put too 

many restrictions on credit, then there may not be available credit 

even at the most onerous terms. 

But we are educating our debtors to go back out in the world 

and, for better or worse, cut down on their use of credit cards, because I think the end result is what we have seen, these spiraling 

bankruptcy filings. 

Senator DURBIN. Mr. John, did we make a mistake capping the 

interest rate that could be charged to members of the U.S. military 

at 36 percent? 

Mr. JOHN. I do not know that you have necessarily made a mistake with the military. However, the problem that you face with 

overall usury ceilings is that if we go back into a period of high inflation, then you are going to have to deal with situations where 

normal credit exceeds those usury ceilings. 

Back during the 1980’s, the State of Arkansas—— 

Senator DURBIN. You used the example of an 18-percent mortgage interest rate? 

Mr. JOHN. Yes. Well, there was an 18 percent—and the State of 

Arkansas has a constitutional requirement to have a 12-percent interest rate. And they came to Congress every 2 years to get a waivVerDate Nov 24 2008 08:04 Mar 31, 2010 Jkt 055466 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55466.TXT SJUD1 PsN: CMORC
22 

er through Congress. Of course, they refused to change their Constitution. 

Senator DURBIN. Do you think that the danger of hyperinflation 

that might call for a change in the law at some point in the future 

outweighs the benefit of stopping usurious credit practices that are 

driving people into bankruptcy and the sweat-box situation the 

Chairman described? 

Mr. JOHN. I think there are other ways to do it other than usury 

ceilings. I think that there are ways to deal with disclosure. There 

are ways dealing with consumer education, as the judge has just 

said. And there are many, many different other manners of handling this. 

I think that a price ceiling itself, as much as I personally am appalled by the concept of a 36-percent interest rate, is not necessarily the way to deal with it. 

Senator DURBIN. Let me ask you this question: Do you think that 

the credit card contracts that we are given as consumers are easily 

understood? 

Mr. JOHN. Absolutely not. I tried reading one the other day and 

fell asleep at the end of the third paragraph. 

[Laughter.] 

Senator DURBIN. I think that is an experience most of us would 

run into, and the point I am trying to get to is that buried within 

those credit card agreements are a lot of traps. 

Mr. Corey, I read your testimony. You fell into one of those traps, 

and you paid a heavy price for it. 

I think what we are dealing with is not an arm’s-length transaction here between the borrowers and the lenders. We have terms 

that honestly most people cannot follow and occasionally trapped 

by them, as Mr. Corey was, and find themselves in a miserable situation with their credit rating shot and deeply in debt, maybe ending up in Judge Gambardella’s court if they are not careful. 

Mr. JOHN. I agree, and I am hopeful—— 

Senator DURBIN. What do you think Congress should do as a result of that? Anything? 

Mr. JOHN. Well, I think actually the Federal Reserve Board and 

the various banking regulators have already issued regulations addressing some of these more egregious questions, including, as I 

mentioned, your goal of having something on the credit card statement saying that if you pay the minimum, here is how long it is 

going to take you, assuming you can. 

Now, both the Banking Committee and House Financial Services 

is looking to see what else needs to be done, and I think that is 

probably the appropriate venues. 

Senator DURBIN. Thank you. 

Thanks, Mr. Chairman. 

Chairman WHITEHOUSE. Thank you, Senator Durbin. It is a 

pleasure to have you with us. I appreciate very much that you have 

attended this and shown such interest. 

Senator Sanders. 

Senator SANDERS. Mr. Chairman, thank you very much for allowing me to drop into this Committee of which I am not a member, 

and thank you also very much, Mr. Chairman, for cosponsorship of 

legislation that I have introduced which would put a cap on credit 

23 

card interest rates at 15 percent unless there were some dire circumstances, at which point it could be raised. And that piece of legislation is also cosponsored by the Chairman of the Judiciary Committee, Senator Leahy, Senator Durbin, Senator Levin, Senator 

Harkin as well. 

Let me begin by asking Mr. Corey a question. A very simple 

question, and then I want comments from other of our panelists. 

You know, the Bible makes a lot of reference to usury, and in our 

country today, you have financial institutions that are charging 

Americans 30-percent interest rates, 50-percent, 100-percent interest rates. Mr. Corey, what about the morality of that? Do you think 

that is a moral thing to be charging people that kind of interest? 

I know we do not talk about morality too much in the U.S. Senate, 

but it is an issue that we might want to touch on. 

Mr. COREY. No, I don’t think it is a moral issue. I mean, folks 

take on credit cards, and they want to pay off the debt. I think 

most people do want to pay off their debts. I think people who I 

grew up with in the middle class all take these responsibilities very 

seriously. And sometimes they extend themselves a little bit more 

than they should, and a lot of times in situations of hardship and 

divorce and things beyond your nature, I think it is a very strong 

moral issue of what is profit and what is—— 

Senator SANDERS. Mr. Corey—and anybody else can jump in—we 

all know what loan sharking is. We know Mafia and gangsters lend 

people money at outrageous rates, and then they break their 

kneecaps or beat them up if they do not pay it back. 

How different is somebody in a three-piece suit charging somebody 50-percent interest rate different from a loan shark? 

Mr. COREY. I think it is exactly that. I think it is exactly loan 

sharking. I think that is exactly doing that. Just in my testimony 

where I say that, you know, if they are there to work with us, why 

would you offer me the $10,000 I paid down in October to bring 

down the principal and then say take it back and then to bring me 

deeper back into—and whereas they would make more money on 

the interest again and charging the 28.99 percent. 

Senator SANDERS. Are we looking at a form of three- piece-suit 

CEO corporate loan sharking here? 

Judge GAMBARDELLA. I don’t think that we have to go that far, 

but what I think, Senator, is it is an issue—one person’s morality, 

you know, may be different from another’s. I think it is really a 

question of personal responsibility or maybe institutional responsibility in a broader sense. 

You know, we have spoken a lot about concepts of means testing 

and concepts of debt repayment and concepts of certainly consumers acting responsibly, and I am all for that. But I think it has 

to, it goes both ways. 

Senator SANDERS. It goes both ways. 

Judge GAMBARDELLA. The difficulty is certainly there were perceived—and here I am speaking only in the bankruptcy context 

strictly. There were perceived imbalances that were addressed 

by—— 

Senator SANDERS. I just have a short period of time. 

Judge GAMBARDELLA. By legislation, but it has not gone far 

enough. 

24 

Chairman WHITEHOUSE. Senator, it is just the two of us, so I am 

not going to—— 

Senator SANDERS. Oh, we can go on for hours. Okay. 

Yes, sir? 

Mr. SCARBERRY. Senator Sanders, I think it is always good to 

consider what is right, and I don’t have a problem with that. I 

would suggest one of the differences—— 

Senator SANDERS. You do not have a problem with considering 

what is right. All right. That is a good start. We are off—— 

[Laughter.] 

Mr. SCARBERRY. I don’t have a problem with the Senate considering that. I think it is very important. It is very important. 

One of the differences between a three-piece-suit lender and a 

loan shark, of course, is the collection method. We do have limitations, for example, on garnishments under Federal law. And we 

don’t have debtor’s prisons anymore. And also, very importantly, 

we do have the availability of bankruptcy to allow people to get a 

fresh start, and that is very important. 

Senator SANDERS. All that is true and important, and I was 

being a little bit facetious. But, on the other hand, you will not 

deny, sir, that there are hundreds of thousands of people whose 

lives have been ruined—whose lives have been ruined with very, 

very high interest rates and, in fact, going into bankruptcy. I do 

understand that going into bankruptcy is not getting your kneecap 

broken. But my point is you—— 

Mr. SCARBERRY. That is not a very nice thing to have to do either. 

Senator SANDERS. Right. All right. Let me ask another question, 

and that is, I get in my office—and I am sure Senator Whitehouse 

and every Senator gets—irate calls from taxpayers of this country 

who have seen—maybe they are losing their jobs. Maybe they are 

losing their homes. And at the same time, they are forced to bail 

out the AIGs of the world, the Citibanks of the world, companies 

where CEOs made hundreds of millions of dollars. And then what 

they get from these same financial institutions are credit cards 

which are charging them 25 or 30 percent interest rates. 

Professor, what about the taxpayers of this country bailing out 

institutions which then say, ‘‘Thank you very much for bailing us 

out. We will take the bonuses, and by the way, we are charging you 

a 30-percent interest rate’’ ? Do you think taxpayers have a right 

to be a little bit upset about that? Right here. 

Mr. LEVITIN. I was not sure which professor you were referring 

to. 

Of course, taxpayers have—should be upset about that. Right 

now, the Federal Government is effectively funding credit card 

loans that the Federal Reserve Term Asset-Backs Security Loan 

Facility, better known as TALF, is purchasing credit card-backed 

securities in the securitization market. And that is giving credit 

card lenders the funds to make loans. If the Federal Government 

is going to be ultimately the financer of credit card loans, it should 

have a say in what the terms of those loans look like. 

I would also note that having the Federal Government’s role in 

financing of credit cards really alleviates some of the concerns that 

Mr. John has suggested about something like a usury law, that Mr. 

25 

John has suggested that if we had something that looked like a 

usury law, we would have what is known as product substitution 

and credit rationing. So people would not be able to get loans from 

legitimate lenders, and they would turn to loan sharks. 

Having essentially a Federal subsidization—which is what we 

have now—of credit card lending mitigates that significantly. It is 

going to depend on the scope of our subsidization of credit card 

lending. But now that we are in that game, I think that the concerns about usury laws are definitely mitigated. 

Senator SANDERS. Let me throw out my last question, if I can, 

Mr. Chairman. 

Chairman WHITEHOUSE. Please. 

Senator SANDERS. Senator Durbin mentioned that the Department of Defense has imposed a 36-percent cap on interest rates 

charged to people in the military. What is not widely known is that 

for, I believe, three decades now, credit unions in this country have 

been mandated not to charge more than 15 percent, with some exceptions, and, in fact, some credit unions now charge up to 18 percent. 

There was an article a couple of weeks ago in the L.A. Times 

where a fellow active in the Credit Union Association in California 

said their credit union was doing pretty well. They have survived 

under this legislation, this regulation for 30 years. Is there any 

reason we think why other financial institutions could not survive 

equally well if we had the same type of cap? Professor? 

Mr. LEVITIN. I would suggest that if you are thinking about a 

cap, like a 15-percent cap, it should really be a floating cap, that 

it should float above some sort of index rate, like the Federal funds 

rate. That would alleviate any of the inflation problems that Mr. 

John raises. 

Senator SANDERS. Well, in fact, that is, I believe, what is the 

case in the credit union situation. 

All right. Let me just conclude. Thank you very much, Mr. Chairman. I think obviously the American people have had it up to here 

with financial institutions in general. I think in the last year the 

incredible greed, recklessness, illegal behavior on the part of Wall 

Street has enraged the American people because our economy is 

tanking and they are having to bail out the people who caused the 

problem. And I think one way that we can move forward, Mr. 

Chairman, is to, in fact, put a cap on interest rates. We are proposing something similar to what goes on with credit unions in this 

country, and we look forward to support for that. 

Thank you very much. 

Chairman WHITEHOUSE. Thank you, Senator Sanders. And as a 

member with you on the Budget Committee also, I have had the 

opportunity to see the vigor, passion, and relentlessness of your advocacy on this, and it is, if you do not mind me using a loaded 

phrase, ‘‘creditworthy.’’ 

[Laughter.] 

Chairman WHITEHOUSE. Just for the record, the legislation that 

I have proposed is a 15-percent limitation riding on top of a 30-year 

T-bill rate, so that if the circumstance Mr. John was talking about 

were to arise of a dramatic rise in underlying interest costs, this 

would rise naturally with it with that T-bill rate. 

26 

Mr. JOHN. Forgive me, Senator, but your bill says that this 

would happen at any time when the credit is outstanding, which 

means that while it is very true that in October 1981 when this 

hypothetical mortgage that I mentioned was taken out, this was 

the case. Over the intervening years, the 30-year T-bill rate has declined. 

Chairman WHITEHOUSE. I see your point. 

Mr. Corey, let me ask you just a little bit about—you seem to be 

in many respects kind of an ideal customer. You are college educated, you are solidly middle class. Your testimony reflects that for 

19 years you never missed a credit card payment or an auto payment. Until 7 weeks ago, you had never missed a mortgage payment. 

Mr. COREY. True. 

Chairman WHITEHOUSE. Your testimony here shows how seriously you take these responsibilities. The only thing that went 

wrong initially was that you inadvertently paid less than your minimum payment 1 month. 

Mr. COREY. Right. 

Chairman WHITEHOUSE. And then in the following month, they 

had two things: one said ‘‘minimum payment’’ and one said ‘‘pay 

this.’’ You paid the minimum payment. That was a trap, they 

caught you, so those two things then pitched you into this circumstance, which required you to deal with your credit card company, and the upshot of your dealings with your credit card company is the sentiment that you have expressed here that you are 

facing off against financial Goliaths, that they are out there preying on those of us who have been weakened by circumstances, and 

that you need something to level the playing field to empower you 

to negotiate with these institutions’ strong-arming tactics. 

If they are treating you that way, you have had a pretty rough 

experience. 

Mr. COREY. It is basically a tightrope walk, and now someone is 

poking sticks at you at the tightrope. And at every turn, that onehalf step in the wrong direction, you are basically ending up in the 

judge’s court. And it is not someplace, like I said, in the middle 

class where we want to be. But, again, we are forced down into this 

sweat box, and they are relentless. And they are trying to get us 

deeper into debt so then we really do not get into this. 

To Mr. John’s point as far as—— 

Chairman WHITEHOUSE. The response to your predicament was 

to offer to lend you more money so you could pay off their exorbitant rates and then be in a deeper hole later on. 

Mr. COREY. They did not like the fact that I was paying the principal down, clearly, and they did reduce my credit limit down from 

what it was by over $13,000. So now they are taking credit away 

from me. I have asked many friends about their own situations, 

and people who have not missed payments are losing credit just for 

no reason whatsoever. Someone who may have made a minimum 

payment or less than a minimum payment on another card, not 

even with that particular company, their rate went up. And when 

they said, ‘‘Why did my rate go up? ’’, ‘‘Well, you were kind of late 

on this payment.’’ 

27 

They then said, ‘‘Well, if you want to get it back to that lower 

rate, close the account.’’ Close the account, they really don’t care 

about losing your business any longer. 

Chairman WHITEHOUSE. Your description of this is walking a 

tightrope while being prodded with sticks is a memorable description. 

I think a lot of the—around here we often disagree on things because we disagree on the underlying facts. But it seems to me I am 

seeing quite a significant degree of agreement among all four, if 

you do not mind my saying so, Mr. Corey, the professional witnesses here about what the credit card industry’s business strategy 

is. 

Judge Gambardella refers to, first of all, that the vast majority 

of people filing for relief under the Bankruptcy Code are not abusers or out to take unfair advantage, that bankruptcy relief is largely utilized by individuals as a last resort for legitimate, non-abusive purposes. And the sort of counter to that is the practice of the 

industry where they increase interest payments so fast that even 

a small stumble meant either having to declare bankruptcy or be 

in a situation where you ‘‘literally never get out of debt’’; and that 

in this circumstance, ultimate repayment may not be necessary for 

the credit card to have a highly profitable transaction; and that in 

some circumstances repayment is not even the goal. You used the 

phrase ‘‘to the extent repayment is the goal,’’ which all raises the 

prospect that there is something different going on than what we 

ordinarily think of as extending a loan and getting it paid back 

over time with a reasonable interest rate to reflect the risk. 

Professor Levitin, you talk about companies turning people into 

a perpetual earning asset and distinguishing that from the lender 

who lends with an eye to getting its principal repaid and making 

a profit from the interest. 

Professor Scarberry, you refer to the damage that is done by 

high-cost consumer credit and that this is a significant problem. 

And, Mr. John, you talk about a ‘‘debt trap,’’ which you define 

as ‘‘where customers of high-interest lenders find themselves deeper and deeper in debt to the lender as interest rates and fees combine to make it impossible for them to repay their loans.’’ And you 

say that, ‘‘Such a trap may well exist in both specific cases and in 

general.’’ 

So it appears to me that across the board and among all of the 

witnesses for really both sides, the ones who were invited by the 

majority and the ones who were invited by the minority, there is 

at least a fair degree of consensus that there is a business strategy 

to some degree extant in the credit card industry to move people 

into what I referred to in my opening remarks as a ‘‘sweat box,’’ 

to put them into a place where they can never pay it down because 

it is too high, where they have been kicked up into these interest 

rates and they cannot escape from those. And now by making 

bankruptcy more difficult, pursuant to the so-called bankruptcy reform, they extend that time, and then they calculate that minimum 

payment so it is just enough to keep you in there essentially forever, you know, 40 years or whatever. 

28 

It strikes me that we might have more agreement in the Senate 

on this if we had more agreement that this was, in fact, a business 

strategy that in some circumstances took place in the industry. 

Do any of you contest that at some level and to some degree that 

is a business strategy that exists in this industry? Judge 

Gambardella? 

Judge GAMBARDELLA. I cannot comment as to whether or not it 

is a business strategy, but I think certainly that is the result of 

these practices. So whether it is intended to be the result or not, 

I think that the conclusions of these studies pretty much speak for 

themselves. 

Chairman WHITEHOUSE. It would be a little hard to imagine that 

a $1 trillion industry with all these computers and marketing 

strategists at their disposal would be doing this accidentally. At 

least that is my perspective. 

Professor Levitin. 

Mr. LEVITIN. The card industry is one of the most sophisticated 

industries in the world, and there is no chance that this is accidental. 

Chairman WHITEHOUSE. Mr. Scarberry? Professor Scarberry. I 

apologize. 

Mr. SCARBERRY. My expertise is in bankruptcy. I have not studied the credit card industry directly. It would not surprise me. I 

would like—— 

Chairman WHITEHOUSE. Describe for a minute what you meant 

by your use of the word ‘‘damage.’’ You said the ‘‘damage caused 

by high-cost consumer credit.’’ What do you mean by ‘‘damage’’ ? 

Mr. SCARBERRY. What I meant by the damage is that when people miss payments and their interest rates go way up—and as 

other people have mentioned, you have universal default clauses 

and other sorts of things. When the interest rate goes up and the 

bills pile up and people cannot pay them, there has been damage 

that has been done. 

Now, the difficulty is that this bankruptcy bill is not going to do 

anything, I think, to prevent that damage or to remedy it. I would 

note that I think it was fairly—— 

Chairman WHITEHOUSE. Would you agree that the damage is to 

some degree systematic? 

Mr. SCARBERRY. I have not seen the studies that would let me 

say that as an academic matter. Anecdotally, certainly there are a 

lot of people who are in over their heads with credit. 

Now, I suppose one issue might be this: that if you were to place 

fairly Draconian limits on interest rates, you might have more 

credit card companies cutting credit limits very substantially. 

When people cannot pay them off, now they are going to be charged 

over-limit fees, and they are not going to be able to borrow the 

extra money that they may need in these hard economic times. 

So I don’t know what the right economic approach to it is. Clearly, there are people who are being harmed substantially. What we 

should do to deal with it, I don’t know. 

Chairman WHITEHOUSE. A credit card company can unilaterally 

lower a credit limit below what somebody’s balance is and then 

charge them over-limit fees? 

29 

Mr. SCARBERRY. I don’t know that, but with the high interest 

charges, if you lower the limit so that it is still above what is owed, 

it might be that in a few months what is owed would go over the 

limit. And, in any case, the person would not have the additional 

credit available. 

Let me just say this: I believe recently there was a requirement 

that minimum payments on credit cards be increased, in part to 

deal with this problem. And that could be something Congress 

could look at as well. 

Chairman WHITEHOUSE. Mr. John, what of your testimony about 

the debt trap and the danger that a consumer gets into a situation 

where they are—I remember visiting a dairy farm when I was a 

kid, and they walked the cattle into the pens, and they put their 

heads through a railing, and then the gates closed to keep their 

heads locked in, and then the folks come and hook them up and 

milk them. It is probably not as good an analogy as Mr. Corey’s 

about walking the tightrope prodded with sticks, but one does get 

the sense that consumers are being lured into these things, that 

the size of their credit and the tiny measure of the suggested minimum payment and the ease of the trap all combine to put them 

into a situation not unlike that poor dairy cow where their head 

is trapped by their inability to get out, because they cannot pay 

out, and then they just get milked and milked and milked. 

Mr. JOHN. Oh, I think that to a large extent that is true. I think 

one of the things we would agree across this panel is on the problem. I think we might disagree on the proposed solutions. 

Now, one quick factual check. Under the credit card regulations, 

if the credit card company makes a significant change in your credit card, you have the ability to essentially refuse that change, 

whether it is interest rate or whatever, by simply not using the 

credit card again and paying off your balance according to the previous terms of the credit card, which means that if they lowered 

your credit limit to below a certain level, you would have the ability to say, well, sorry, I am not going to use my credit card anymore, I am just going to pay it off under the existing contract. 

Chairman WHITEHOUSE. And is that the result of the recent Federal Reserve—— 

Mr. JOHN. No. This has actually been the case for many, many 

years. 

Chairman WHITEHOUSE. Okay. Mr. Levitin? Professor Levitin. 

Sorry. 

Mr. LEVITIN. I think it is important just to spell out a few other 

pieces of the credit card business model that fit with the sweat box. 

And I think when you see those, the business model is even more 

disturbing. 

Credit cards attract consumers. They compete not on the basis 

really of interest rates. If you look at credit card advertisements, 

it is not ‘‘We have the lowest rate.’’ It is ‘‘We have such-and-such 

frequent flyer miles,’’ or some sort of rewards program, and it is 

teaser rates. It is not the actual cost of the card. So consumers get 

lured into using cards based on these flashy teasers and promotional items. 

Once they are using the cards, then we have the sweat box 

model, but card issuers can be very aggressive with the sweat box 

30 

because, because of securitization, card issuers hold all of the upside. So if you pay off—if they squeeze more money out of you at 

the sweat box, they get 100 percent of the upside. But if it turns 

out that they miscalculated and you default, they only have a small 

percentage of the downside. This gives them every incentive to 

squeeze harder, and they are able to do that because they are able 

to change terms retroactively, after the fact. They can lower your 

credit limit. They can increase the interest rate. They can lard on 

various late fees, over-limit fees, and so forth. They can invent 

whatever fee they want. 

And because they have 100 percent of the upside but only a limited percentage of the downside—and the percentage is going to depend on the particulars of their securitization deal—this really encourages them to squeeze consumers harder. This is like a water 

balloon, and if they squeeze it too hard and it pops, it is not so bad 

for them. Most of the water gets on someone else. But if they can 

squeeze it really hard and it does not pop—well, I am not sure 

what you get with a water balloon with that. But I think you see 

my point, that they get all the benefit. 

Chairman WHITEHOUSE. Let me go to Mr. Corey first and then 

Professor Scarberry. 

Mr. COREY. The situation is—again, I have talked to a lot of 

friends about this since it is a very hot topic amongst people in the 

middle class. But a friend of mine had a 2.9 rate, and they got a 

notice saying that their rate was going up to 14.99 for no reason 

whatsoever, just because we can. And literally she said that the 

conversation that she had with this person was, she said, ‘‘Well, I 

am just going to close my account.’’ She has very little on that particular account. ‘‘I’ll close it and pay it off.’’ And the woman on the 

other line said specifically that we really—‘‘If you want to close it, 

that is fine, because we are going to get someone who has a lower 

credit rating and get them at a higher interest rate. So if you want 

to leave, go right ahead.’’ And that is really what is going on. They 

don’t care for people with good—they don’t want people who are responsible and whatnot. If you want to leave and go to another business, that is fine. You can take your card and go somewhere else, 

we don’t care. 

Then they are eliminating—again, they are already eliminating 

credit levels for everyone already. So I am kind of having a hard 

time understanding what folks are saying about banks are—this 

would eliminate banks from giving out credit. They already are— 

when people need it. 

Chairman WHITEHOUSE. Professor Scarberry. 

Mr. SCARBERRY. Senator, one of the points that has been made 

is that this bill would allow consumers to call up the credit card 

company and negotiate. You know, ‘‘You have raised my rate because of a default, and I may have to go into bankruptcy, so why 

don’t you lower the rate? Because if I go into bankruptcy, your 

claim is not going to be allowed.’’ 

Well, one of the problems with the definition of the high-cost consumer debt here is that after the rate goes above the limit for 1 

day, that debt is forever tainted. So in a negotiation with the creditor, if you say, ‘‘Would you please lower the rate? ’’ well, they do 

not have a lot to gain, because they cannot redeem that debt from 

31 

now being tainted. It was at some point during its life over the 

limit. So that is a difficulty. 

The other difficulty with the negotiation issue—— 

Chairman WHITEHOUSE. Although, just to be clear, if the customer as a result does not go into bankruptcy, then that so-called 

taint has no effect. 

Mr. SCARBERRY. That is correct. That is correct. 

The other difficulty with negotiating is that if you have multiple 

credit cards, which people seem to have, it is difficult to do multiparty negotiations. If the point is, ‘‘well, I can stay out of bankruptcy if you will lower it, people can negotiate that already, because already the credit card companies are not going to get much 

in a bankruptcy. So I don’t know that this bill adds to that leverage. It does taint the debt forever. 

But when you have multiple credit cards, it is difficult to coordinate a negotiation, and people who do law and economics will talk 

about difficulties of these multi-party negotations—the transaction 

costs are high. So that is an issue. 

Now, there is one other technical issue. Suppose the rate goes up 

above the limit on a credit card balance for a few months. Then the 

debtor makes a lot of payments and the credit card company reduces the rate. How do we decide when the taint is gone? Is it after 

all of the principal balance is paid?—after principal payments have 

been made equal to the principal balance at that time? Ten years 

later, is that credit card account still tainted because at one time 

for some of the credit that was issued on that credit card the rate 

was over the limit? How are we going to figure what is the debt 

on which the credit was over the limit? That is a practical question 

that bankruptcy judges and trustees might have to deal with. 

I also wonder if bankruptcy trustees will appreciate having the 

burden of going through all the credit cards to figure this out. They 

might have time to, but those are concerns I have about that. 

Judge GAMBARDELLA. Well, I want to take up that last point because it was raised who would have standing to move to disallow 

these claims, who would have the incentive to review these claims. 

Certainly there are many no-asset Chapter 7 cases that just go 

through the system, and there probably is very little incentive 

there. But there are certainly, in certain district, asset 7s where 

there is substantial debt and substantial assets. And I think a vigorous trustee would have an interest in going after a certain category of claims that could be disallowed to increase payment to the 

bona fide unsecured debt in a given case. 

In a Chapter 13, which is the repayment plan, I would think that 

a Chapter 13 trustee who oversees plans and the debtor’s counsel 

would have equal incentive to review these claims. 

So I think there are parties with standing and incentive to investigate and to make hopefully rational decisions about when a motion for disallowance should be brought before a judge and when 

it should not. That is the one point I wanted to bring up from the 

testimony prior. 

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

if anybody has anything final they would like to add, we will do 

that and then conclude the hearing. 

32 

There has been the repeated suggestion in the hearing that by 

any substantive regulation of interest rates, we risk denying people 

credit and that there is almost a tone as if this would be sort of 

a novelty or anomaly. 

My understanding is that back to, you know, biblical days, interest rates have been substantively regulated and that from biblical 

times until, I guess, 1978 when the Marquette decision came out, 

and then a tail after that as the banking industry became aware 

of the opportunity that the Marquette decision provided and began 

to move its operations to no-protection States and operate out of 

those so that they could get out from under local usury laws, which 

I think almost every State had. Indeed, if I recall correctly, some 

of the States actually got rid of their usury laws as a means of attracting the business of the credit card companies to come to their 

State. So from there they could launch unrestricted marketing efforts and unrestricted interest rates around the rest of the country, 

notwithstanding, for instance, the Rhode Island Legislature’s desire 

to protect Rhode Islanders. ‘‘Nothing we can do about it,’’ said this 

decision. 

So it strikes me as if the baseline on this is a multi-thousandyear baseline of generally consistent, substantive interest rate regulation, and that if there is an anomaly, the anomaly has been the 

last 30 years—actually, probably less than 30 because it took a 

while for the banking industry to catch on to the door that the 

Marquette decision had opened, and that actually we are in the period of anomaly right now. And so to move toward more substantive regulation would be consistent with the entire sort of legal 

common law and regulatory history of our culture dating back to 

its very earliest days. 

Mr. JOHN. May I bite on that one? 

Chairman WHITEHOUSE. Please. 

Mr. JOHN. There are two other factors that come into play here, 

however, which is that prior to Marquette, credit was not regularly 

available to certain groups of consumers. It is one of the reasons, 

for instance, in Rhode Island they had such a heavy retail presence 

of credit unions and such a small consumer presence of banks up 

until relatively recently. So there has been a result, which is that 

the three groups that I talked about—the lower-and middle-income 

workers, the first-time borrowers, and those with poor credit histories—now have much more credit available to them than they 

would have otherwise. 

The other factor which comes into play with Senator Sanders’ 

legislation is that he does talk about what the credit unions do. 

And I have great respect for credit unions. I am a member of a 

credit union. I once lobbied for credit unions. However, they are 

tax-exempt, so it seems only fair, if he is going to put a 15-percent 

ceiling on there, he should also take away the taxes on bank credit 

activities. 

Chairman WHITEHOUSE. I am sure he will take that recommendation into consideration. 

Well, if there is nothing further, I just want to express my appreciation to all of the witnesses who have shared from their personal 

experiences and from their judicial experiences, from their academic experiences, and have been, I think, both thoughtful and 

33 

helpful. I express my appreciation also to the Ranking Member— 

unfortunately, he was called away, but clearly this is a matter of 

interest to him—and to the Chairman of the Judiciary Committee, 

Chairman Leahy, for his interest in this and his statement, and for 

our Majority Whip, Senator Durbin, and Senator Sanders for their 

attendance. 

The record of this proceeding will be open 7 days if anybody 

seeks to add anything further, and with that, the hearing is now 

adjourned. 

[Whereupon, at 11:45 a.m., the Subcommittee was adjourned.] 

[Questions and answers and submissions follow.] 

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