[Senate Hearing 109-543]
[From the U.S. Government Printing Office]
S. Hrg. 109-543
REGULATORY REQUIREMENTS AND INDUSTRY
PRACTICES OF CREDIT CARD ISSUERS
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
EXAMINING THE CURRENT LEGAL AND REGULATORY REQUIREMENTS AND INDUSTRY
PRACTICES FOR CREDIT CARD ISSUERS WITH RESPECT TO CONSUMER DISCLOSURES
AND MARKETING EFFORTS
MAY 17, 2005
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Mark Oesterle, Counsel
Peggy R. Kuhn, Senior Financial Economist
Martin J. Gruenberg, Democratic Senior Counsel
Lynsey Graham Rea, Democratic Counsel
Patience R. Singleton, Democratic Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
C O N T E N T S
TUESDAY, MAY 17, 2005
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Dole................................................. 2
Senator Johnson.............................................. 8
Prepared statement....................................... 43
Senator Dodd................................................. 14
Prepared statement....................................... 44
Senator Carper............................................... 19
Senator Reed................................................. 21
Senator Sarbanes............................................. 23
Senator Bennett.............................................. 27
Senator Allard............................................... 46
Senator Stabenow............................................. 46
Dianne Feinstein, a U.S. Senator from the State of California.... 3
Prepared statement........................................... 47
Daniel K. Akaka, a U.S. Senator from the State of Hawaii......... 5
Prepared statement........................................... 50
Edward M. Gramlich, Member, Board of Governors of the Federal
Reserve System................................................. 9
Prepared statement........................................... 52
Julie L. Williams, Acting Comptroller of the Comptroller......... 11
Prepared statement........................................... 59
Antony Jenkins, Executive Vice President, Citi Cards............. 30
Prepared statement........................................... 70
Travis B. Plunkett, Legislative Director, Consumer Federation of
Prepared statement........................................... 76
Louis J. Freeh, Vice Chairman and General Counsel, MBNA
Prepared statement........................................... 95
Response to a written question of Senator Sarbanes........... 134
Robert D. Manning, University Professor and Special Assistant to
the Provost, Rochester Institute of Technology................. 34
Prepared statement........................................... 99
Carter Franke, Chief Marketing Officer, Chase Bank U.S.A., N.A... 35
Prepared statement........................................... 111
Response to a written question of Senator Sarbanes........... 136
Edward Mierzwinski, Consumer Program Director, U.S. Public
Interest Research Group........................................ 36
Prepared statement........................................... 113
Marge Connelly, Executive Vice President, Capital One Financial
Prepared statement........................................... 123
Linda Sherry, Editorial Director, Consumer Action................ 39
Prepared statement........................................... 130
EXAMINING THE CURRENT LEGAL AND
REGULATORY REQUIREMENTS AND
INDUSTRY PRACTICES FOR CREDIT CARD
ISSUERS WITH RESPECT TO CONSUMER
DISCLOSURES AND MARKETING EFFORTS
TUESDAY, MAY 17, 2005
Committee on Banking, Housing, and Urban Affairs,
The Committee met at 10:04 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
The purpose of our hearing this morning is to examine
current practices in the credit card industry. As part of this
examination, we will consider the nature of the existing legal
framework, that is the body of laws and regulations, which
govern credit card issuer and consumer interaction. But looking
back to our numerous hearings on the Fair Credit Reporting Act,
it is clear that our credit markets are very competitive and
very dynamic. Innovations on many fronts have greatly affected
the cost and availability of credit. Constant change, however,
has meant less consumer familiarity with the newly available
credit products and terms.
Consumer financial literacy plays a key role in allowing
consumers to keep pace with market developments. We need to
continue to encourage consumer education on this front and, to
this end, I look forward to receiving the Department of the
Treasury's report on the state of financial literacy in this
country. I believe this topic will merit further Committee
consideration when this report is released this summer. In
light of the significant changes in the marketplace, today's
hearing is intended to give the Committee an opportunity to
determine how well the rules are working to provide consumers
the information necessary to make responsible credit-related
decisions, as well as to give us a chance to observe the
direction in which market forces are headed.
In the end, closely considering these matters is very
important due to the unprecedented size and scope of this
industry. Today, about 6,000 financial institutions have issued
over 640 million credit cards to around 145 million Americans.
The impact on the economy is obviously considerable. We look
forward to hearing from our witnesses on this important
I want to announce that we are going to have to move
forward. We are going to have, beginning at 11:30, a series of
stacked votes and then final passage of the transportation
bill. So, I am going to try to move the panels, other than my
I want to welcome my colleagues. Senator Dole, do you have
an opening statement?
Senator Dole. Yes, I do, Mr. Chairman.
Chairman Shelby. Go ahead.
STATEMENT OF SENATOR ELIZABETH DOLE
Senator Dole. Mr. Chairman, a special welcome to my two
colleagues who are with us this morning: Senator Feinstein and
During the proceedings surrounding the recently enacted
bankruptcy bill, a number of issues surfaced related to the
laws and regulations governing the credit card industry. I am
glad that we waited to address these issues separately, so that
we can give them the attention they deserve.
Credit cards have become indispensable financial
instruments in today's society, and for good reason. They allow
people to buy now and pay later, consolidating payments into a
single monthly transaction. They facilitate payments over the
phone and by way of the Internet. Credit cards provide a
measure of safety, reducing the need to carry large amounts of
cash and limiting a person's losses if a wallet or purse is
lost or stolen. They also help to establish credit histories
for consumers who have never before had access to credit. This,
in turn, makes more likely the granting of loans for major
purchases, including homes. For all of these reasons, the
growth in credit card use has transformed the American
financial services landscape.
There are dangers, however, that accompany this progress.
Some of those people who are now able to acquire credit cards
are not prepared to handle the responsibility that goes along
with them. While Americans must take responsibility for their
own finances, it is absolutely imperative that all Americans
are equipped with the best, most clear information possible
when making their decisions. This requires that credit card
companies provide this information with utmost transparency.
There are already many well-intentioned laws that require
credit card companies to fully disclose their policies on
laws, however, is often multiple pages of single-spaced typing
and small-font lettering, filled with sophisticated, legal
terminology. A magnifying glass and an attorney should not be
necessary to understand the credit card user agreement.
Some lending companies are now providing consumers with a
one-page summary of their disclosure information in a format
similar to the nutritional information boxes on products in
your local grocery store. And, Mr. Chairman, that brings back a
lot of memories because that was a project I had the privilege
of working on in the late 1960's. This clear, concise
presentation is easy to read and simple to understand. We
should work on legislation that will require those practices
that allow consumers to quickly comprehend the benefits and
risks associated with credit card use.
We must also continue to require that credit card companies
provide full disclosure regarding fees, interest rates, minimum
payments, and privacy statements. It is imperative that this
information be presented in the most consumer-friendly was
possible. This will benefit not only the consumers, but also
the credit card companies. Credit issuers will reduce losses
due to defaults and decrease the amount of customer service
needed to guide consumers through problems that could be
avoided with more comprehensible applications and monthly
I want to thank you, Chairman Shelby, for holding this
hearing, and I certainly want to thank our witnesses for giving
us their time today to share their knowledge of the industry,
and especially my colleagues in the Senate. Thank you.
Chairman Shelby. We have with us two of our colleagues:
Daniel Akaka, U.S. Senator from Hawaii, and Dianne Feinstein,
U.S. Senator from California. Your written statements will be
made part of the record. You proceed as you wish. Who wants to
Senator Feinstein. However you would like.
Chairman Shelby. I will call on Dianne. Go ahead, Senator.
STATEMENT OF DIANNE FEINSTEIN
A U.S. SENATOR FROM THE STATE OF CALIFORNIA
Senator Feinstein. Thank you very much, Mr. Chairman. Let
me thank you, first of all, for keeping your promise. You said
you would hold this hearing when the bankruptcy bill was on the
floor, and you have held it, and I appreciate that very much.
Chairman Shelby. I think, Senator Feinstein, as I told you
on the floor when you were pushing the amendment, this was an
important issue to hold a hearing on.
Senator Feinstein. Thank you very much. And I also want to
thank Senator Dole for her statement because I think she is
right on, and I think she said it about as well as it can be
I sit on the Judiciary Committee. I participated in the
markup of the bankruptcy bill. And the more we proceeded with
amendments, the more it became apparent, at least to me, that
the bankruptcy bill really heavily favored credit card
companies and did nothing really to make clearer the
responsibility of the person that used the credit card. And in
my personal life, I have seen people really not understand the
impact of the minimum payment on debt. And I think this is
really where we are today.
The average American household now has about $7,300 of
credit card debt. The number of bankruptcies has doubled since
1990. Many of these personal bankruptcies--not all, perhaps not
even a majority, but many are from people who utilized credit
cards. These cards are enormously attractive. I received two
solicitations this past week. Interestingly enough, they were
for renewal of credit cards that I did not have in the first
place. So they were a bit disingenuous.
Unfortunately, individuals making the minimum payment are
witnessing the ugly side of the miracle of compound interest.
After 2 or 3 years, many find that the interest on the debt is
such that they can never repay these cards with the minimum
payment, and they do not know what to do about it, and it
builds and builds, and they go into bankruptcy.
One study determined that 35 million people pay only the
minimum on their credit cards. In a recent poll, 40 percent of
respondents said they pay the minimum or slightly more. So, I
suspect that most people would be surprised to know how quickly
interest multiplies by only paying the minimum.
Take that average household debt of $7,300. In April,
before the most recent Federal Reserve Board increase of the
prime rate, the average credit card interest rate was 16.75
percent. If only the minimum payment of 2 percent is made on
that average debt, it would take the individual 44 years and
$23,373 to pay off that debt. And that is if the family does
not spend another cent on their credit card, which is an
unlikely assumption. In other words, the family will need to
pay over $16,000 in interest to repay just $7,300 of principal.
For individuals or families with more than average debt,
the pitfalls are even greater. Twenty thousand dollars of
credit card debt at the average 16.75 percent interest rate
will take 58 years and $65,415.28 to pay off if only the
minimum payments are made.
Now, what is my point here? My point is I tried to figure
out from the solicitations I got this past week what would
happen if I only paid the minimum payment over a period of
time. I could not figure it out. There is so much small print
that I could not discern one thing from the other. And I
strongly believe that individuals should be told, if they only
make the minimum payment on their credit card, what it means
over a period of time. They must know that really sometimes you
cannot repay the principal of the debt just paying the 2-
percent interest payment.
Yesterday, I introduced, as a bill, the amendment I made on
the floor. Senator Akaka made an amendment. I voted for Senator
Akaka's amendment. It went down. I made an amendment. That
amendment was withdrawn. As part of the agreement that led to
today's hearing I think it is important that this Committee
consider transparency and disclosure to individuals who hold
credit card debt.
I have a college degree. If I cannot figure it out, you can
be sure that a number of other people cannot either.
So yesterday I introduced the Credit Card Minimum Payment
Notification Act. This bill speaks directly to consumers who
are not aware of the consequences of making only the minimum
payments on their credit cards. And there will always be people
who cannot afford to pay more than their minimum payment. But
there are also a large number of consumers who can afford to
pay more but feel comfortable making the minimum payment
because they do not realize the consequences of so doing.
The bottom line is for many the 2-percent minimum payment
is a financial trap, and I believe there should be a
requirement to notify the individual of what that minimum
payment means. Here is what my bill would do:
First, it would require credit card companies to add two
items to each consumer's monthly credit card statement: One, a
notice warning credit card holders that making only the minimum
payment each month will increase the interest they pay and the
amount of time it takes them to repay their debt; and, two,
examples of the amount of time and money required to repay a
credit card debt if only the minimum payment is made; or if the
consumer makes only minimum payments for 6 consecutive months,
the amount of time and money required to repay the individual's
specific credit card debt under the terms of their credit card
Second, the bill also requires a toll-free number be
included on statements, and if the consumer makes only minimum
payments for 6 consecutive months, they would receive a toll-
free number to an accredited counseling service.
The disclosure requirements in this bill would only apply
if the consumer has a minimum payment that is less than 10
percent of the debt on the card or if their balance is greater
than $500. Otherwise, none of these disclosures would be
required on their statement, and the reason for this is to try
to be prudent and provide the least obligation for the credit
These disclosures allow consumers to know exactly what it
means for them to carry a balance and make only minimum
payments so they can make informed decisions on credit card use
Let me just end with a couple of examples of people:
An Ohio resident who tried for 6 years to pay off a $1,900
balance on her Discover card, sending the credit company a
total of $3,492 in monthly payments from 1997 to 2003, yet her
balance grew to $5,564.
A Virginia resident who had a Providian Visa bill increased
to $5,357, even though they used the card for only $218 in
purchases and made monthly payments totaling $3,058.
And an individual from my State, California, who actually
worked a second job to keep up with the $2,000 in monthly
payments she collectively sent to five banks to try to repay
$25,000 in credit card debt. Even though she had not used the
cards to buy anything more, her debt had doubled to $49,574 by
the time she filed for bankruptcy last June.
Now, these stories are not unique, but this is the problem
with the bankruptcy bill. It is making it easier for credit
card companies to send out solicitations, but it does nothing
to provide the kind of information that a minimum payer really
should know when they make that minimum payment. So, I hope the
Committee will remedy that.
Thank you very much.
Chairman Shelby. Thank you, Senator Feinstein.
STATEMENT OF DANIEL K. AKAKA
A U.S. SENATOR FROM THE STATE OF HAWAII
Senator Akaka. Thank you very much, Mr. Chairman, Senator
Dole, and Members of the Committee. I want to thank you very
much for having this hearing and including me today. I also
want to express my deep appreciation not only to you but also
to Senator Sarbanes for working closely with me on a wide range
of financial literacy-related issues, including credit card
Mr. Chairman, revolving debt mostly comprised of credit
card debt, has risen from $54 billion in January 1980 to more
than $800 billion in March 2005. During all of 1980, only
287,570 consumers filed for bankruptcy. In 2004, approximately
1.5 million consumers filed for bankruptcy, keeping pace with
the 2003 record level.
Some of this increased activity can be explained by a
ballooning in consumer debt burdens, particularly revolving
debt, primarily made up of credit card debt. Credit card users
and issuers have a lot of flexibility in settling minimum
monthly payments. Competitive pressures and a desire to
preserve outstanding balances have led to a general easing of
minimum payments requirements in recent years.
The result has been extended repayment programs. Even with
a doubling of minimum monthly payments from 2 to 4 percent by
some of the country's largest credit card issuers, much of that
payment continues to cover only interest and fees.
Meanwhile, other initiatives by large credit card issuers,
such as reducing grace periods, will catch many consumers with
late fees, which will trigger higher default interest rate
It is imperative that we make consumers more aware of the
long-term effects of their financial decisions, particularly in
managing credit cards at early ages, particularly since credit
card companies have been successful with aggressive campaigns
targeted at college students. Universities and alumni
associations across the country have entered into marketing
agreements with credit card companies. More than 1,000
universities and colleges have affinity marketing relationships
with credit card issuers. Affinity relationships are made as
attractive as possible to credit card accountholders through
the offering of various benefits and discounts for using the
credit card with the affinity group receiving a percentage of
the total charge volume from the credit card issuer. Thus,
college students, many already burdened with student loans, are
accumulating credit card debt. I appreciate all the work that
Senator Dodd has done in order to address this situation.
While it is relatively easy to obtain credit, especially on
college campuses, not enough is being done to ensure that
credit is properly managed. Currently, credit card statements
fail to include vital information that would allow individuals
to make fully informed financial decisions. Additional
disclosure is needed to ensure that individuals completely
understand the implications of their credit card use and costs
of only making the minimum payments as determined by credit
I have a long history of seeking to improve financial
literacy in this country, primarily through expanding
educational opportunities for students and adults. Beyond
education, I also believe that consumers need to be made more
aware of the long-term effects of their financial decisions,
particularly in managing their credit card debt so that they
can avoid financial pitfalls.
The bankruptcy reform law includes a requirement that
credit card issuers provide information to consumers about the
consequences of only making minimum monthly payments. However,
this requirement fails to provide the detailed information on
billing statements that consumers need to know to make informed
The bankruptcy law will allow credit card issuers a choice
between disclosure statements. The first option included in the
bankruptcy bill would require a standard minimum payment
warning. The generic warning would state that it would take 88
months to pay off a balance of $1,000 for bank card holders or
24 months to pay off a balance of $300 for retail card holders.
This first option also includes a requirement that a toll-free
number be established that would provide an estimate of the
time it would take to pay off the customer's balance. The
Federal Reserve Board would be required to establish the table
that would estimate the approximate number of months it would
take to pay off a variety of account balances.
There is a second option that the legislation permits. The
second option allows the credit card user to provide a general
minimum payment warning and provide a toll-free number that
consumers could call for the actual number of months to repay
the outstanding balance.
The options available under the bankruptcy reform law are
woefully inadequate. They do not require issuers to provide
their customers with the total amount that they would pay in
interest and principal if they chose to pay off their balance
at the minimum rate. Since the average household with debt
carries a balance of approximately $10,000 to $12,000 in
revolving debt, a warning based on a balance of $1,000 will not
The minimum payment warning included in the first option
estimates the costs of paying a balance off at the minimum
payment. If a family has a credit card debt of $10,000 and the
interest rate is a modest 12.4 percent, it would take more than
10 and a half years to pay off the balance while making minimum
monthly payments of 4 percent.
Along with Senators Sarbanes, Schumer, Durbin, and Leahy, I
introduced the Credit Card Minimum Payment Warning Act and
subsequently offered it as an amendment to the bankruptcy bill.
The legislation would make it very clear what costs consumers
will incur if they make only minimum payments on their credit
cards. If the Credit Card Minimum Payment Warning Act is
enacted, the personalized information consumers would receive
for their accounts would help them make informed choices about
their payments toward reducing outstanding debt.
Our bill requires the minimum payment warning notification
on monthly payments stating that making the minimum payment
will increase the amount of interest that will be paid and
extend the amount of time it will take to repay the outstanding
The legislation also requires companies to inform consumers
of how many years and months it would take to repay their
entire balance if they make only minimum payments. In addition,
the total costs in interest and principal if the consumer pays
only the minimum payment would have to be disclosed. These
provisions will make individuals much more aware of the true
costs of their credit card debts.
The amendment also requires that credit card companies
provide useful information so that people can develop
strategies to free themselves of credit card debt. Consumers
would have to be provided with the amount they need to pay to
eliminate their outstanding balance within 36 months.
Finally, our bill would require that creditors establish a
toll-free number so that consumers can access trustworthy
credit counselors. In order to ensure that consumers are
referred to only trustworthy credit counseling organizations,
these agencies would have to be approved by the Federal Trade
Commission and the Federal Reserve Board as having met
comprehensive quality standards. These standards are necessary
because certain credit counseling agencies have abused the
nonprofit, tax-exempt status and taken advantage of people
seeking assistance in making their debts.
Many people believe, sometimes mistakenly, that they can
place blind trust in nonprofit organizations and that their
fees will be lower than those of other credit counseling
organizations. We must provide consumers with detailed
personalized information to assist them in making better
informed choices about their credit card use and repayment. Our
bill makes clear the adverse consequences of uninformed
choices, such as making only minimum payments, and provides
opportunities to locate assistance to better manage credit card
In response to critics who believe that the Credit Card
Minimum Payment Warning Act disclosures are not feasible, I,
along with Senator Sarbanes and others, have asked the General
Accountability Office to study the feasibility of requiring
credit card issuers to disclose more information to consumers
about the costs associated with making only the minimum monthly
payment. I look forward to reviewing the GAO's conclusions.
Mr. Chairman, I look forward to working with you, Senator
Sarbanes, and all the Members of the Committee to improve
credit card disclosures so that they provide relevant and
useful information that hopefully will bring about positive
behavior change among consumers. Consumers with lower debt
levels will be better able to establish savings plans that
allow them to be in a better position to afford a home, pay for
their child's education, or retire comfortably on their own
Thank you again for including me in this hearing, Mr.
Chairman. I apologize, but due to previous commitments, I must
be excused. Thank you very much, Mr. Chairman.
Chairman Shelby. Senator Feinstein and Senator Akaka, I
just want to commend you for introducing your legislation, for
persevering, because I agree with you that we need transparency
to have an informed consumer. We are all consumers. We all, I
think, basically benefit from the credit card industry, but
only if we know what we are buying, what we are signing up to,
and a lot of people do not. So, I want to thank you for your
testimony, both of you here today, and your legislation.
Senator Feinstein. Thank you very much.
Chairman Shelby. Senator Johnson, do you have any comments
for the Senators?
STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. No, I do not. I apologize for arriving
late. We have competing things going on, including an energy
markup that I am going to have to leave for. But I appreciate
the work that Senators Akaka and Feinstein have done on this
issue. I have an opening statement that I would like to make
part of the record.
Chairman Shelby. Without objection, in its entirety.
Senator Johnson. Thank you, Mr. Chairman.
Chairman Shelby. Senator Dole, do you have any comments?
Senator Dole. No.
Chairman Shelby. We thank our colleagues for appearing
Senator Feinstein. Thanks very much.
Senator Akaka. Thank you very much, Mr. Chairman.
Chairman Shelby. Thank you so much.
For our second panel, we have Edward Gramlich, Member of
the Board of Governors of the Federal Reserve Board, and Ms.
Julie Williams, Acting Comptroller, Office of the Comptroller
of the Currency, if you will make your way up to the podium.
We welcome both of you here today. As regulators, you are
on the firing line in this business. Your written testimonies
will be made part of the record. Governor Gramlich, you may
proceed as you wish.
STATEMENT OF EDWARD M. GRAMLICH, MEMBER,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Gramlich. Thank you very much, Senator. I appreciate
this opportunity to appear before the Committee to discuss
consumer credit card accounts. The Board of Governors of the
Federal Reserve System administers the Truth in Lending Act,
which I will call TILA, the primary law governing disclosures
for consumer credit including credit card accounts. This is all
implemented by the Board's Regulation Z.
The last substantive revision to TILA's credit card
provisions was in 1988, and since then, products and pricing
have become much more complex. Competition has intensified over
the years as advances in technology and the deregulation of
rates and fees have combined to create new business models. As
a result, consumers receive many offers for credit card
accounts, some having terms that are low-priced at the outset
but can become significantly higher-priced, for example, if
penalty terms are triggered.
We, at the Board, recognize the challenges of implementing
consumer protections that are effective and meaningful to the
millions of consumers who use credit cards. In December 2004,
the Board began a review of Regulation Z starting with an
Advance Notice of Proposed Rulemaking on the rules for open-end
or revolving credit such as general purpose credit cards. The
goal of the Board's regulatory review is to improve the
effectiveness and usefulness of TILA's disclosures and
substantive protections given changes in the marketplace.
You have already noted that our written statement is
submitted to the record, and that statement contains a much
more detailed discussion of these issues than I am able to give
this morning. My written testimony discusses in much more
detail the Board's examination and enforcement process for
institutions under its supervision and the importance of
consumer education, which you referred to earlier, as a
complement to consumer protection laws.
In the interest of time on the enforcement issue I will
simply say that we have closely examined the credit card
portfolios of the institutions we supervise for both safety and
soundness and consumer compliance. Only 2 of the more than 900
institutions we supervise have substantial credit card
portfolios, and have taken appropriate supervisory measures we
believe to be warranted.
On the disclosure issue, the first question involves timing
and format. For credit card accounts, disclosures of key terms
must be provided with applications or solicitations using a
highly structured table popularly known as the Schumer box. For
open-end accounts of any kind, more detailed disclosures must
also be provided before an account is opened and periodically
at the end of each billing cycle. Disclosures are generally
required when account terms change, although no disclosure is
required when the triggering events for the change were
previously spelled out in the account agreement. Other than the
table provided with credit card applications, TILA's current
disclosures have few format requirements such as type, size, or
Disclosures provided with credit card applications and at
account opening describe how charges associated with the plan
will be determined. Account-opening disclosures also explain
consumers' rights and responsibilities in the case of
unauthorized transactions or billing disputes. Disclosures on
periodic statements reflect the activity of the account for the
statement period. Transactions that occurred and any interest
or fees imposed during the cycle must be identified on the
statement, along with any time period a consumer may have to
pay an outstanding balance and avoid additional charges.
TILA and Regulation Z's primary cost disclosures are the
finance charge and the annual percentage rate called the APR.
The finance charge is the cost of credit in dollars. It is
broadly defined as any charge payable by the consumer or
imposed by the creditor as a condition of, or incident to, an
extension of credit and includes interest and certain other
fees. Some fees that are not considered a condition of getting
credit, late fees, for example, must also be disclosed as other
charges. The APR disclosed in advertisements, with credit card
account applications, and at account opening is the annualized
periodic rate that would be applied to outstanding balances.
There are two APRs disclosed on periodic statements. In
addition to the periodic rate APR, creditors must also disclose
an effective APR for the billing cycle, which must reflect
certain finance charges imposed in addition to interest.
TILA also provides for creditor investigations of billing
errors on all open-end credit plans. TILA also protects
consumers against unauthorized use of a credit card and allows
cardholders to assert against credit card issuers claims the
cardholder may have against a merchant in a disputed
transaction. TILA also prohibits card issuers from issuing
unsolicited credit cards. Finally, TILA requires creditors to
credit payments promptly and to refund credit balances after 6
The Board's Advance Notice of Proposed Rulemaking asks a
number of questions about the adequacy of Regulation Z's open-
end rules and how the effectiveness of the disclosures might be
improved, given changes that have occurred in the marketplace.
Credit card accounts have become increasingly complex. In
addressing concerns about information overload, the Board must
ensure that the account disclosures are both fair and accurate
without becoming so complex that they become less meaningful.
Moreover, credit card agreements often provide that their terms
are subject to change, including an increase in the APR, and
this can create difficulties for some consumers who use the
account for long-term financing. Accordingly, the Board will
also consider ways to make the short-term nature of the account
agreement more transparent in the disclosures.
We also believe that consumer testing should be used to
test the effectiveness of any proposed revisions and anticipate
publishing proposed revisions to Regulation Z in 2006.
Thank you very much.
Chairman Shelby. Ms. Williams.
STATEMENT OF JULIE L. WILLIAMS
ACTING COMPTROLLER OF THE CURRENCY
Ms. Williams. Thank you. Chairman Shelby, Senator Dodd, and
Senator Johnson, I appreciate the opportunity to appear before
you today to discuss the Office of the Comptroller of the
Currency's perspectives concerning the marketing and disclosure
practices of the U.S. credit card industry. Given the
importance of credit cards to consumers and the U.S. economy,
this is a most timely hearing.
The OCC's supervision of the credit card operations of
national banks includes safety and soundness fundamentals,
compliance with consumer protection laws and regulations, and
fair treatment of consumers. My written statement describes our
activities in those respects in detail.
This morning, I would like to summarize four key points
from that written testimony.
First, it is widely recognized that today's credit card
industry is highly competitive and innovative. Credit card
issuers have responded to increasing market competition with
innovations in card products, marketing strategies, and account
management practices. The primary goals of these product and
marketing innovations have been to gain new customer
relationships and related revenue growth, but in some instances
an important secondary benefit has been expanded access to
credit by consumers with traditionally limited choices.
Unfortunately, not all of the product and marketing
innovations have had a uniformly beneficial impact, and the
account management and marketing practices of credit card
issuers have come in for criticism in recent years from both
consumer protection and safety and soundness standpoints.
In recent years, the OCC has issued supervisory guidance
alerting national banks to our concerns about credit card
account management and loss allowance practices, secured credit
cards, and credit card marketing practices. And, utilizing our
general enforcement authority in combination with the
prohibition on unfair and deceptive practices contained in the
Federal Trade Commission Act, we have taken formal enforcement
actions against several banks--actions that have required those
banks to end unfair and abusive practices and make restitution
to consumers totaling hundreds of millions of dollars.
However--and this is the second point I wish to emphasize--
it is important to appreciate that the OCC does not have
statutory authority to issue regulations defining particular
credit card practices or disclosures by banks as unfair and
deceptive under the Federal Trade Commission Act. Nor do we
have the authority to issue regulations setting standards for
disclosures credit card issuers must make under the Truth in
Lending Act. In both respects, that authority is vested
exclusively in the Federal Reserve Board.
And, that brings me to my third point. The OCC took the
unusual step last month of submitting a comment letter
responding to the Board's Advance Notice of Proposed Rulemaking
on Regulation Z's open-end credit rules implementing the Truth
in Lending Act. My written statement describes the most
important issues raised in our comment letter: The importance
of consumer research and testing, the pitfalls of extensive
prescriptive disclosure rules, and the importance of disclosure
standards keeping apace of industry developments. We also made
clear that if there are ways in which the OCC can support the
Board's efforts in this area, we look forward to doing so.
Finally, my statement stresses that disclosure is at the
heart of our system of consumer protection today. Lately,
however, there has been much criticism of the state of credit
card disclosures and marketing practices, and clearly there is
room for improvement.
My statement highlights several areas where disclosure
issues currently exist, and discusses the need to begin a
serious reexamination of how we go about developing, designing,
implementing, overseeing, and evaluating consumer disclosures
for financial products and services. I urge that we take a new
approach, premised on obtaining input through consumer testing,
to learn what information consumers most want to know and how
to most effectively convey it to them. Quick fixes without
consumer input and issue-by-issue disclosure ``patches'' to
information gaps ultimately are not in the best long-term
interest of consumers.
The direction set by Congress and the experience of the
Food and Drug Administration using input from consumers to
develop the now well-recognized ``Nutrition Facts'' disclosure
for food provides us with some valuable lessons on how to
provide disclosures that are both understandable and useful to
consumers. Why can't we apply these positive lessons to the
design of disclosures for financial products? Why should
consumers today get more effective disclosure when they buy a
bag of potato chips than when they make substantial financial
commitments for financial products and services?
In conclusion, Mr. Chairman, the OCC has addressed many of
the recent changes in credit card practices through our
examination and supervisory processes, enforcement actions
where necessary, and supervisory guidance. But consumers also
depend on high-quality, user-friendly disclosures to help guide
them through the increasing complexities of the credit card
marketplace. The Federal Reserve's review of Regulation Z
disclosures holds promise in this regard, but I respectfully
urge that we need to rethink our approach to disclosures
generally, along the lines I have described. The benefits for
consumers, for marketplace participants, and for our economy
will be well worth it.
Let me again commend the Committee for its interest in
these very important issues, and I look forward to your
Chairman Shelby. Governor, the Federal Reserve has been
involved in this issue for a long time. What is going to
change, in other words, if it is not driven statutorily here by
the Congress. What is required as far as from your viewpoint as
to disclosure? It is obvious to me that as a consumer, one,
there is not enough financial literacy in the country, we know
that, that is a given; and second, to be an informed consumer.
As Senator Feinstein said, my gosh, if you have to run through
page after page with a microscope and interpret something, the
average person will never do this, and it seems to me that it
would be in the best interest of the banking industry to have
informed consumers, in other words, to have good customers.
Mr. Gramlich. Senator, I think everybody agrees with the
basic goals of having disclosure statements that are both
informative and understandable, and they cover all the
Chairman Shelby. Understandable.
Mr. Gramlich. Understandable is key. The Fed has never been
against that, by the way.
As Comptroller Williams said, one thing that we are
thinking about, and we are planning to do, is to use consumer
focus groups. That is a worthwhile innovation and we intend to
Some of the disclosure statements that one gets--and they
are packed with very small print and very complicated
language--are the lenders' response to the statute. On every
one of these statutes we give model disclosure forms, which are
viewed as safe harbor, that is, you could use this and this
would be adequate. But very often the lenders actually go
beyond these safe harbor forms and give statements that cover
various other legal contingencies. So that is an issue.
We will continue to give model forms.
Chairman Shelby. Do you pretest these forms?
Mr. Gramlich. We will do this with the focus groups. We
will be doing that this time.
Chairman Shelby. The focus groups will not be just PhD's in
economics, will it?
Mr. Gramlich. No.
Chairman Shelby. I mean it will be people that----
Mr. Gramlich. People who borrow a lot.
Chairman Shelby. Average Americans.
Mr. Gramlich. Average Americans, yes.
Chairman Shelby. Okay.
Mr. Gramlich. All I can say is that we will try to make
these relevant to the issues facing people and as meaningful
and as informative as possible. But they do have to cover the
various contingencies, and with credit cards, the instrument is
so flexible that some people could make the minimum payment,
some people could go above that, it is very hard to come up
with examples that cover all the circumstances.
Chairman Shelby. Ms. Williams alluded to the powers of the
Mr. Gramlich. The powers, yes, our massive powers.
Chairman Shelby. Do you have enough statutory power to do
what needs to be done as to create an informed consumer or do
you need additional legislation?
Mr. Gramlich. Do what needs to be done to create an
informed consumer? I do not know that anybody has enough
statutory power to do that. The financial education issue is
massive. It is not only that people do not understand
complicated credit terms, but it is also partly that the credit
card companies, the lenders, are always a step ahead. They can
create new instruments and so forth, and it takes the literacy
sector, a while to catch up.
We have enough powers I think. I am not aware of any powers
that we do not have. If I become aware, we will certainly let
But we have to be I think a little humble about what we can
do with financial literacy. It is just a massive job with this
highly innovated financial sector we have. Even if our focus
group were PhD's in economics, it would be hard for them to
keep up with everything.
Chairman Shelby. How would it be hard for the average
consumer if it is shown on the credit card statement that you,
in a block, if you pay the minimum payment you are just
treading water or you are getting deeper in the water?
Mr. Gramlich. In the new bankruptcy bill there are two or
three provisions for those that will be incorporated in our
review of Regulation Z. Whether we have the additional
disclosures that the two Senators previously recommended, one
could question all of that. But the bankruptcy bill already has
a minimum payment provision, and so that will be part of our
regulation from now on.
Chairman Shelby. Governor, do you believe that it is
important for the consumer to know the terms of any agreement
and what is going to happen to them if they do not pay up?
Mr. Gramlich. Absolutely.
Chairman Shelby. The cost and everything that goes with it.
Mr. Gramlich. Absolutely.
Chairman Shelby. And it should be up front?
Mr. Gramlich. Yes.
Chairman Shelby. It should not be hidden, should not be in
something you cannot find unless you are a real lawyer or
something. Ms. Williams, you have a comment?
Ms. Williams. Let me just note that in an area that, Mr.
Chairman, I know is of great interest to you, and that is
privacy, that the agencies are now engaged in a process using
focus groups, consumer interviews, and testing in developing
what we hope will be a much-improved streamlined privacy
notice. Based on just some of the preliminary ideas that I have
seen, I can tell you it does not look anything like the stuff
that consumers have been getting and throwing in their trash,
unfortunately, for the last couple of years. It can be done,
but it takes some time, patience, and working with people who
are experts in consumer communications.
Chairman Shelby. Is this an important area for the Federal
Mr. Gramlich. Yes, absolutely.
Chairman Shelby. Senator Dodd.
STATEMENT OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. Thank you, Mr. Chairman, and my apologies for
being a few minutes late at the opening of the hearing this
morning, but I want to thank you immensely for holding this
hearing. I am aware my colleague from Maryland is doing pretty
well this morning, at least that is the good word, so I am
sorry he is not here with us this morning. But thank you for
doing this and to focus on this issue.
I do not know of another issue that we deal with in this
Committee that affects as directly as many Americans as this
issue does. I mean homeownership affects obviously millions,
and certainly financial services, to a large degree, do
generally speaking. But on credit cards specifically, this
issue probably touches more people in our country than any
other single issue, so I am very grateful to the Chairman for
giving us some time this morning to talk about this, and
inviting a very good group of witnesses to appear before us to
share their thoughts about this issue.
I am going to take a couple of minutes, Mr. Chairman, just
to share some opening comments, and get to some questions here.
Credit cards, as we all know, are one of the most
successful and pervasive financial service products ever
created and have undoubtedly improved access to credit, added
significant measure of convenience to consumers. That needs to
be stated at the outset. Those of us who have been critical
about this are not suggesting that we should be eliminating the
availability of the credit card industry at all. But to put it
in perspective, just to give everyone an idea of how pervasive
the credit card industry is and the staggering role that credit
cards have in our country.
According to the Federal Reserve--and you may have shared
some of these numbers before I arrived--there are 556.3 million
Visa and Master Credit cards in circulation in 2003. Those
credit cards, coupled with Discover and American Express
products indicated today that at least 700 million resolving
credit cards are currently in circulation. Approximately 145
million Americans have at least one credit card. The average
credit card holder in the United States today has 4.8 credit
cards. The total amount of credit card debt is over $800
billion. The total amount of credit extended to cardholders is
over $4 trillion.
With this kind of market presence it is not surprising that
the credit card management reported in May 2004 was the most
profitable year ever for credit cards. With this tremendous
success I believe comes significant responsibility, and I
believe that the credit card industry is failing that test.
Credit card issuers have now become the victims of their own
success and are turning credit cards into nothing less than
wallet-sized predatory loans. In a time when access to credit
is the easiest and cheapest, credit card companies are making
more money than ever. Credit card issuers are charging usurious
rates and fees and engaging, in my view, in a very serious
amount of abusive and deceptive practices, which I believe will
have drastic long-term consequences on our country.
Credit card companies are charging consumers higher fees
than ever before. In 1980, credit card fees alone raised $2.6
billion. In 2004, credit card fees raised over $24.4 billion.
We have been told that the reason the credit card rates and
fees are so high is that more and more consumers are failing to
pay their debts, and as a result, issuers much charge higher
rates and greater fees.
In fact, the opposite is true in our country. Consumer
bankruptcies went down last year by nearly 3 percent, and
default rates actually decreased last year. The truth of the
matter is that this is the best time in history to be in the
credit card business. Last year, over 5 billion solicitations
were sent to American homes, which is nearly twice as many as 8
years ago. Coupled with television and radio ads, intermittent
signs, it is nearly impossible to turn on your television set
or computer or simply walk down the street without being
offered a credit card.
Despite the assertions that the credit card industry is
struggling because of bad consumer behavior, credit card
companies have more money than they know what to do with, and
they are pumping out solicitations in search of new people to
get in debt.
While normally competition lowers cost for consumers, the
exact opposite is happening here. Credit card companies are
finding more and more ways to effectively increase their income
from rates and fees. Abusive practices such as misleading
teaser rates which employ bait-and-switch tactics, hidden fees,
penalties, and universal default provisions buried in the fine
print are standard operating procedures in the credit card
While my statement this morning will not touch on the
entirety of my concerns for the credit card industry, I would
like to highlight, Mr. Chairman, a couple of major abuses
currently employed by the industry at large.
One of these abuses is called the universal default, which
more accurately should be described as a predatory retroactive
interest rate hike. This practice forces a credit card consumer
in good standing, by the way, who is paying his or her credit
card bills on time to have his or her interest rates
retroactively jacked up to 25 to 30 percent because of some
unknown irrelevant change in his or her spending patterns. The
idea that a credit card company can charge an initial interest
rate that would have been in the past outlawed as usurious and
then double or triple that rate for any reason it so chooses,
in my view is just plain wrong.
The industry refers to this practice as ``risk-based
pricing.'' They believe that when a consumer's credit score
goes down they become riskier, and higher interest rates are
levied on them. What is interesting to me is that I can find no
evidence, either anecdotal or empirical, of when a consumer's
credit improves, that a credit card company lowers the interest
rate for that consumer. We should stop this practice completely
in my view, or at least at a minimum make an increase rates
prospective, not retroactive.
Another troubling development in the battle to signh up new
consumers has been the aggressive way in which they have
targeted people under the age of 21, particularly college
students. Solicitations to this age group have become more
intense for a variety of reasons. First, it is one of the few
market segments which there are always new customers to go
after every year. Twenty five to 30 percent of undergraduates
are fresh faces entering their first year of college. Second,
it is also an age group in which brand loyalty can be readily
established. In fact, most people hold on to their first credit
card for up to 15 years, which is probably the amount of time
it takes them to dig out of the mountain of credit card debt
they will incur in their teen years.
A staffer of mine recently opened his 7-year-old's mail,
amazed to find a brand new American Express card. The new card
came as a result of, according to the offer, the elementary
schooler's, ``excellent credit history.''
A brand new potential victim of the credit card industry.
He is 7-years-old. What is next? Are we going to set up credit
card kiosks in hospital maternity wards?
Credit card issuers target vulnerable young people in our
society and extend them large amounts of credit with little if
any consideration of whether or not there is a reasonable
expectation of repayment. As a result, more and more young
people are falling into a financial hole from which they are
unable to escape. One of the fastest-growing segments of our
population forced to declare bankruptcy is in this age group.
Mr. Chairman, I think we have an obligation to protect and
educate our Nation's youth. This generation of American
leaders, this younger generation deserves no less than the
reining in of irresponsible practices of the credit card
industry as many witnesses will mention.
I have introduced legislation designed to force credit card
issuers to stop their more deceptive and abusive practices and
alter the targeting of our most vulnerable customers. This
legislation, the Credit Card Act, should be the first step I
hope in restoring some common decency in the credit card
I obviously look forward to the testimony we are going to
hear this morning.
Let me just say, Mr. Chairman, the industry needs to wake
up to this stuff. I mean they are a very important part of our
financial services sector, but if you do not do this--it may
not happen in this Congress, but it will happen. These
pendulums swing. I have been around long enough to watch them.
And if you pretend it is not going to happen, you are deluding
yourself. These kinds of practices are just flat-out wrong, and
they are unfair to people in this country.
We were not able to get them included as part of the
bankruptcy bill. The bankruptcy bill talks about
responsibility, and it has an important element, making sure
that consumers are responsible. But responsibility goes both
ways. You have to be responsible too, and you are not being
responsible today when you engage in the practices that are
costing so much money to so many people in this country who can
least afford it.
My hope is that as a result of these hearings, Mr.
Chairman, we might get some strong legislation to rein this in,
or you are going to do great damage to an important instrument
that many people need to use.
Let me ask our witnesses a couple of things. I was
interested in your quote here, Dr. Gramlich, and you talked
about that you have enough powers here, that you have the
authority you claim you need. Yet, I have tried to find, when I
worked on my legislation, to get data here, and I was amazed at
how little data was available in terms of how many companies
are, in fact, engaging in some of these practices? How many
students are, in fact, being solicited? And I am not getting
the information. It seems to me that the responsible Federal
agencies, if you have the authority and you have the power, why
are we not getting better information from what is actually
going on in the industry than seems to be available today?
Mr. Gramlich. Senator, I have to look into the data
question. I mean we, like you, are aware that some of these
practices are going on, but I cannot tell you now how prevalent
it is, how many companies have these----
Senator Dodd. Should we not know that? You know, just given
the amount of involvement here, 700 million credit cards out
there, 145 million Americans with them. We know what is going
on in these rates, what is happening to some of these figures.
Twenty five and 30 percent is not a rarity. It happens with
great regularity. Why do we not know more?
Mr. Gramlich. The Board has purchased credit card
information included in credit bureau data, and we are now
processing the numbers, but I cannot go beyond that. But we can
get you some information on exactly what we can get with our
data and what we cannot get.
Senator Dodd. It is not a lack of authority then, the
Chairman's question to you, do you need additional legislative
authority? You are telling us this morning that you have all
the authority you need to get this data that we are talking
Mr. Gramlich. We have purchased credit bureau data. Whether
we need more authority to get more data is something I cannot
answer right now.
Senator Dodd. Where does the credit card data come from?
Mr. Gramlich. It is from a credit bureaus. Let me check
with our lawyers, and I will get you the information on it.
Senator Dodd. I would also like to know whether or not the
Fed has the authority on its own to collect this data.
Mr. Gramlich. Right.
Senator Dodd. You collect data on a lot of areas in our
Mr. Gramlich. Right.
Senator Dodd. You agree with me, this is not a small issue,
Mr. Gramlich. It is not a small issue.
Senator Dodd. In fact, if my numbers are correct, are they
correct about the number of credit cards out there?
Mr. Gramlich. They seem correct, yes.
Senator Dodd. And the amount of debt, $800 billion by
Mr. Gramlich. Right.
Senator Dodd. How much consumer debt is there out there
overall today, about $2.1 trillion? Am I right on that number
roughly, $2.1 trillion? So we are getting precariously close to
half of all consumer debt is in this one area. I would like to
know if you have any questions about whether or not you have
the authority to gather this area of data. I would like to know
about it immediately. I am sure the Chairman would as well, to
determine whether or not we need to do anything.
Let me ask you as well, Ms. Williams, what about the OCC?
Ms. Williams. What we have is information that we could get
on a bank-by-bank basis, Senator. The number of cards
outstanding, the breakdown of the types of card programs that
the banks have, and the number of accounts in particular
programs are data that we would probably be able to obtain, but
we would have to go bank-by-bank to ask it.
Senator Dodd. But that has not been done yet? We do not
know, for instance, on these questions I raised here this
Ms. Williams. With respect to the specific areas, Senator,
that you asked about, we have not done that across the total
spectrum of all of the credit card banks that we supervise.
Senator Dodd. Do you agree with me it should be done?
Ms. Williams. I think that is useful information, sir.
Senator Dodd. Thank you, Mr. Chairman.
Chairman Shelby. Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Thanks, Mr. Chairman. To our witnesses,
thank you for joining us today.
I do not have any statement that I would like to give, but
just have a couple of questions that I would like to ask.
Last week, Ms. Williams, you were good enough to meet with
me for a little while, and we talked about the matter of
minimum payments on credit card balances that are due. I had
expressed some interest in the last Congress, and seeing if we
should amend bankruptcy legislation to change the minimum
payments that are being required in the statements that were
sent out to those of us who have credit cards. I was told at
the time that there was work under way by the regulator, at
least the regulator for national banks, to change through
regulation, not through legislation, the minimum payments that
are required of people who are paying their credit card bills
First of all, let me just ask you to explain to us if you
will why we did not need the legislation and what is taking
place regula-torily? Who is covered, who is not?
Ms. Williams. Without answering the question about whether
the legislation was needed or not, over 2 years ago, on an
interagency basis, the banking agencies adopted account
management guidance. The guidance was focused on a number of
practices that we had noticed developing with credit card
issuers, including the way that credit lines were being managed
and situations where lines were being extended. There were
issues about how certain fees were being accounted for. There
were issues about negative amortization. And, there were issues
about the minimum payments being required in connection with
The concern that we had--and it is both a safety and
soundness and a consumer protection concern--is that there
should be a minimum payment that is sufficient to pay the
interest, pay any fees and charges, and demonstrate some
ability on the part of the customer to begin to pay down the
So what we have been doing for the national banks that we
supervise is, as part of our supervisory process, making sure
that they get into compliance with this account management
guidance. Some credit card issuers have particular customer
segments that may have higher rates, where they cannot do it
right away. It would be too precipitous, and so they are on
plans right now which go through the end of this year. Some may
go into January of next year because of systems conversion
issues, things like that, to get in full compliance with the
account management guidance. What that will do is require,
across the national banking segment of the credit card
industry, that on the monthly cycle the consumer pays the
interest, pays any fees and charges, and pays a minimal amount.
We are looking for--and this is a rule of thumb--at least 1
percent of the principal to be reduced so that you do not see
negative amortization, and you do see at least the beginning of
some reduction in principal.
Senator Carper. So if I owed $5,000 on my credit card. I
had interest payment on that, I had fines on that, I would be
expected to pay an amount of money in my minimum monthly
payment that is consistent with the interest rate that is owed,
any fees that are owed, and 1 percent of $5,000----
Ms. Williams. At a minimum.
Senator Carper. --which I believe is what, $50?
Ms. Williams. The examples that we looked at, following up
on our conversation, were if you had a $5,000 balance at 17
Senator Carper. Let me say to my colleagues that what I had
asked Ms. Williams be prepared to do was to say if a person did
owe $5,000 and they were making a minimum payment of 1 percent
of the principal on a monthly basis, 2 percent and I think 4
percent. I think I asked for those three.
Ms. Williams. I did 1 percent and 4 percent.
Senator Carper. That is fine.
What we are looking for is how long does it take to pay it
Ms. Williams. If you are just doing the 1 percent, with
$5,000 at 17 percent, it is going to take you about 22 years.
Senator Carper. Say that one more time.
Ms. Williams. If you have a balance of $5,000 at 17 percent
interest, assuming no late charges or over-limit fees and 1
percent reduction in principal, it will take you about 22 years
to pay that off. If it is a 4 percent reduction in principal,
it will take you a little over 10 years to pay it off.
Senator Dodd. And how much more would you be paying on that
Ms. Williams. I think I have that.
Senator Dodd. Roughly.
Ms. Williams. You mean the total amount?
Senator Dodd. At 1 percent, 22 years, 17 percent, no fees,
let us just assume straight.
Ms. Williams. The total amount of interest paid then would
be about $6,500.
Chairman Shelby. On an initial debt of what?
Ms. Williams. That is the $5,000.
Chairman Shelby. But what would the initial debt be?
Ms. Williams. It would be $5,000.
Chairman Shelby. And you would pay how much interest?
Ms. Williams. Interest over that 22-year period that it
takes to pay it down would be $6,524.
Senator Carper. Could I ask you to just double-check that
for the record?
Ms. Williams. Certainly.
Senator Carper. Frankly, that seems a bit low, and it may
be right, but if you could just double-check for the record and
let us know.
Ms. Williams. Certainly.
Senator Carper. Thinking out loud, that is a long time at
the 1 percent rate to repay the loan. What I understand is that
initially your inclination is to say maybe by the beginning of
next year the minimum payment should be at least the 1 percent?
Ms. Williams. That is what we have looked at as a rule of
thumb. There is not technically a regulation here, but that is
the minimal amount that we would look for to begin to amortize
the principal. A key issue here is that there are certain
segments of certain credit card issuers' portfolios where it
will be a challenge to make that adjustment, to pay the
interest, any late fees or other charges, and to reduce the
principal by just as little as 1 percent. That is why the
phase-in is very important.
Senator Carper. Talk about the phase-in. Phase in to, what
is the next step?
Are we phasing in to 1 percent?
Ms. Williams. Phasing in to 1 percent, yes.
Senator Carper. Pretty slow phase.
Ms. Williams. I think the participants in the next panel
can speak to what they are doing to get a more rapid rate of
amortizing the principal. Most of the credit card issuers that
I am familiar with, when they are looking at their new
accounts, are in compliance with the account management
guidance. It is just that there are some existing accounts that
have transition issues.
Mr. Gramlich. Senator, if I could say, first off we have
done similar examination of our banks, and we only have two
credit card banks now, but they are both in compliance with the
standard that you just heard about.
The new bankruptcy bill will have how long it takes to
repay the loan under specified conditions like this, so that
information will be going out to consumers, and we are right
now engaged in writing technical regulations on how that can
best be done.
Senator Carper. Is that going to be part of their
Mr. Gramlich. That will be part of them, yes.
Senator Carper. Is it going to be written in a way that
ordinary people can read it and understand it?
Mr. Gramlich. We hope so.
Senator Carper. That is real important.
Mr. Gramlich. Yes. The number is the number. If it takes 22
years, that will be right there.
Senator Carper. Mr. Chairman, has my time expired? I think
it has. Thanks you.
Chairman Shelby. Thank you, Senator.
STATEMENT OF SENATOR JACK REED
Senator Reed. Mr. Chairman, Senator Sarbanes has arrived. I
would be happy to defer to him.
Senator Sarbanes. Go ahead. You have been waiting.
Senator Reed. Thank you. Thank you very much, Ms. Williams
and Dr. Gramlich.
Ms. Williams, given the OCC's experience in supervising
banks' lending risks in terms of safety and soundness, can you
explain how banks determine the credit-worthiness of an 18-
year-old college student, which is apparently one of their key
Ms. Williams. Credit card issuers use a variety of models
to try to assess the risk of certain populations that they will
offer cards to. And, they can look at their experience with
individuals that attend particular types of schools and
individual schools as to what the credit performance has been.
On that basis--and I urge you to ask the next panel for some
more detail here--typically, when they offer a card to an entry
level college student, for example, it is for a very relatively
small amount, say, $500. They will hold that line and watch the
performance of that particular card and will not increase the
credit line unless and until there is demonstration of the
ability of that particular cardholder to handle it.
Senator Reed. How many issuers do that, Ms. Williams, I
mean the banks that you supervise?
Ms. Williams. Offer credit cards to college students?
Senator Reed. Not just offer credit cards to students, but
actually do what you suggest is done in terms of a risk profile
and relating it to the various schools which will probably
relate it in some direction to income of families, and is there
any responsibility for them to do that?
Ms. Williams. Starting with your last question first, I
think there absolutely is a responsibility to determine, based
on some risk evaluation, where they are offering the cards. I
cannot speak to every single national bank credit card issuer.
The large national bank credit card issuers that I do know
offer college card programs do risk modeling, risk evaluation,
and credit line control along the lines of what I described.
Senator Reed. And as part of your supervisory
responsibilities you review their procedures and policies?
Ms. Williams. Yes, we do.
Senator Reed. And you essentially agreed with them that
this is prudent.
Ms. Williams. We review whether they have appropriate risk
evaluation techniques in place, yes, Senator.
Senator Reed. Thank you. With the new bankruptcy law it is
obviously much harder to discharge debt, but there is an area
now of people who have already filed for bankruptcy who might
be subject to solicitation by banks for credit cards, and these
individuals in some respects, since they have been through the
process, have less debt, but they cannot discharge the debt for
another 8 years. Is this post-bankruptcy marketing process a
potential risk for the banks because of the type of individuals
that they would be targeting?
Ms. Williams. Two points on that, Senator. Again, I cannot
speak to every single national bank that issues credit cards,
but the major national bank credit card issuers are not
involved in targeting those that are recently emerging from
What they need to be doing is evaluating the risk profile
of that customer segment and making a decision about whether it
is a sound risk judgment to offer to that customer segment. If
the experience they have indicates that segment, with
appropriate controls on the credit lines, is such that the risk
is of a quantity that is appropriate for them to take on, then
that would be a situation where they might do so.
Senator Reed. Ms. Williams, I have been informed that the
average cost of debt on credit cards is between $2,700 and
$3,000, which would be difficult if the credit line was $500.
Ms. Williams. The average of ?
Senator Reed. The credit card debt of college students.
This is Department of Education information, it suggests that
the average is somewhere between $2,700 and $3,000.
Ms. Williams. I do not think that is how they start out.
The point that I was trying to make--and I apologize if I was
not clear--is that the way in which the cards are typically
offered is with a limited credit line at the outset. It will be
increased based upon the performance of the credit card holder.
Senator Reed. Thank you, Mr. Chairman.
Chairman Shelby. Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman. First
of all, I am sorry I was not here at the outset to hear Senator
Akaka and Senator Feinstein. They have been very interested in
this subject over a long period of time, as of course has
Senator Dodd, who has taken a very strong leadership position
on this issue.
Chairman Shelby, I want to express my appreciation to you
for setting up a hearing which I think provides an opportunity
to all interested parties to present their views to the
Committee. It is obviously important that we do our business
that way, and it has been done so again.
I am not going to take time for questions. I am going to
make a few statements and then ask whether you see anything
that was in the statement that is erroneous or you disagree
with, because one of the problems we have is trying to
understand what is going on out there. Of course, we are going
to hear from a mixed panel here shortly, and I am anxious to
move along so we have that opportunity, but you are the two
prime regulators in this field, and it is important that we
check it out against you.
Given the enormous importance of credit cards, it is
estimated that 80 percent of all American families have at
least one credit card. I mean if I put something out there that
you say is wrong, tell me real quick so we can get back to the
right figures. According to Cardweb.com American households
have an average of 6 bank credit cards and 6 retail credit
cards. I, along with others, think that individuals have to be
responsible in how they use credit. The question is are they
being ensnared or entrapped somehow or other, and being led
into situations that they really cannot handle, and whether
they have been led into those situations through misinformation
or clever statements and so forth and so on, and what does that
throw on the individual?
Only 40 percent of credit card customers, as I understand
it, pay off their balance each month, and the industry is
apparently one of the most profitable in the country.
Let me just briefly discuss a number of practices that have
been brought to our attention and see whether you perceive them
as, one, going on, and as abusive. First, overly aggressive and
misleading direct mail solicitations to vulnerable populations,
college students, on which Senator Dodd has taken such a keen
interest, seniors on fixed incomes, even persons who have
recently had their debts discharged in bankruptcy. We have
these practices of offering offers for low- and fixed-rate
credit cards which are in reality variable rate cards that can
be adjusted upward every time the issuer sends out a change in
It has also been alleged to us, and documented in certain
instances, that issuers engage in bait-and-switch tactics to
lure individuals with blemished credit by offering credit cards
that have low interest, high credit line terms. Unfortunately,
these individuals are then sent cards with terms different and
less attractive than the card for which they applied. I have
the feeling that they are just being manipulated here in a very
skillful way as they become increasingly involved in these
I know one answer is to say, well, they should not have a
credit card. And as I said at the outset, I think people should
be responsible, I feel that very strongly. On the other hand, I
do think they are being lured into this thing.
A second practice is the imposition of excessive penalty
fees. For instance, some issuers charge late fees as high as
$39, double or triple the cardholder's interest rate if a
payment is only a single day late, or in some instances even a
few hours late. I am troubled because these fees do not appear
to necessarily reflect the risk of default posed by a
particular consumer, but are being used to extract larger
profits in an increasingly concentrated and unregulated
We have been told that penalty fees now represent 61
percent of all the fees paid to credit card issuers, just under
$15 billion in 2004. When I turn to you, if you could
specifically address that fact, I would appreciate it.
And then you do have these practices that contribute to
late payments, eliminating the grace period, shortening billing
cycles, varying the payment due date each month, establishing a
cutoff time of 10 a.m. on the date that a payment is due.
Presumably the mail comes in after 10 a.m. I do not know.
A third practice involves the utilization of so-called
``universal default'' clauses in card agreements. These
clauses, which are often buried in the fine print of multipage
credit card agreements, permit a credit card issuer to
retroactively raise a consumer's interest rate for essentially
any reason, even when the consumer has a perfect payment
history with the issuing credit card company. While the name
seems to suggest that the risk pricing is related to defaults
of late payments to other creditors, the issuers also
dramatically increase cardholder interest rates if there is a
change in the FICO score, the cardholder takes on additional
debt, or there are a certain number of inquiries into a
consumer credit report.
And finally, is the failure of credit card issuers to
disclose the cost of minimum payments to consumers, and that
was being covered in the exchanges that took place and earlier
here this morning. But I think it is fair to say most consumers
are not fully aware of the consequences of paying only the
minimum monthly payment, and I commend Senators Feinstein and
Akaka for the leadership they are taking on that.
Now, the OCC has put out an advisory, which I guess is a
first step to identify unfair and deceptive marketing
practices. I feel it is late in coming, but it may well be the
beginning of what could be a very important initiative.
Of course, the Fed has undertaken a review of Regulation Z,
which implements the Truth in Lending Act, the primary Federal
law that regulates the credit card industry. In my own view,
the disclosure requirements of that Act are inadequate, and if
the Fed concludes it has the authority, I would hope they would
revise Regulation Z to mandate that all disclosures are
unambiguous, accurate, apply to the entire term of the
contract, and provide consumers with necessary information to
make informed choices.
Now, these are pretty egregious practices when you think
about them, and their impact is obviously very substantial in
terms of so deeply involving people in a very difficult
circumstance which just preys on their mind, and in many
instances can bring financial ruin. Am I overstating these
practices? These practices go on, I take it. How would you
respond to this?
Ms. Williams. Senator, let me lead off on that because you
referred to the guidance that the OCC put out last fall on
credit card marketing practices.
There are a variety of types of practices and approaches to
disclosure, and you touched on a number of them in the
statement that you just made, that are not necessarily illegal
or prohibited under current law or current regulation, but that
we felt were unacceptable for national banks. What we tried to
do with that credit card marketing guidance is to identify
those practices and to be very clear about the type of
corrective actions that we wanted to see national banks
undertake, and we are working with the banks as a supervisory
matter to get improved disclosures. Some improvements have
already occurred, and some are in the works. You may hear about
some of them with your next panel.
We think it is critical that consumers get the information
they need in order to make informed decisions, information
about opening an account or decisions about their behavior that
is going to affect the terms of their account. If they have
gotten an introductory rate or if they have done a balance
transfer, what circumstances are going to cause that rate to go
up? What circumstances are going to result in a late payment
fee? Exactly when does that money have to come in?
Or, take the case of so-called ``up-to marketing,'' where
there is marketing that goes out to a segment of potential
customers and you see it displayed as ``credit up to $5,000 or
$10,000,'' but the issuer knows, because of the demographic
analysis that they have done, that only a very small portion of
those customers are actually going to qualify for that up-to
amount. We said that was not appropriate. If issuers are doing
an ``up-to marketing'' and they know the likely qualification
criteria of the customers that are receiving the marketing,
there needs to be good disclosure about the likelihood of
whether the customer is going to get that up-to amount that is
So, I think a lot of what you just talked about goes to
areas where there needs to be better disclosure and we need to
figure out how to do it in a way that consumers can understand.
One of the concerns that I spoke about in my opening
statement is that a lot of information is going to consumers,
and these products in some cases are not simple. There are
issues about thresholds of consumer literacy and the extent to
which consumers are sophisticated about the features of the
products, but there are also tremendous issues today about the
kind of information that consumers are being given to disclose
to them the key information about their financial products and
services. We have to figure out a way to do that better. It is
not working well, I agree with you.
Mr. Gramlich. Let me say a couple of things. First of all,
I would like to align with Ms. Williams on the supervisory
issue. As you know, the Fed does not have many credit card
banks, only two. We also, along with FDIC, issued an advisory
on unfair and deceptive practices. We warned our supervisees
that it would be incorporated into our supervisory process, and
we have done that. We also have broader authority in defining
unfair and deceptive practices. Some of the practices you
mentioned sounded like they were getting close. We are actually
examining a number of them. It is a little harder to declare
something unfair and deceptive across the board than if done by
one bank. Let us say they are playing games with when the
letters get in, are they postmarked in time and so forth, you
can more easily do that with one bank than you can do it across
But we are looking at a number of these practices, and as
you mentioned, a number of them come up in Regulation Z and we
are doing a very comprehensive review of that. We are
proceeding as fast as we can, but there are many things to look
at, 2006 is the target date. I think every one of the practices
you mentioned is on the list of things we are looking at under
Senator Sarbanes. Do you all ever take your credit card
statement and turn it over and read all the fine print on the
back of it?
Mr. Gramlich. I am very sympathetic with the people who say
they cannot do that.
Senator Sarbanes. Well, I have tried it, and I reached the
conclusion that the only way to solve this problem is to pay my
credit card every month so I do not fall into any of the traps
that are on the back page.
Mr. Gramlich. That is actually not a bad rule of thumb.
Senator Sarbanes. They have you coming and going.
Mr. Gramlich. That is not a bad rule, the way you do it.
Senator Sarbanes. I know, but a lot of people cannot do
Senator Dodd. I went back, Mr. Chairman, just quickly doing
the numbers here with a $5,000 debt at 2 percent, with 2
percent monthly payments, it will take 482 months. That is 40
years, to pay that off, and the interest paid would be $11,305
over that period of time.
At 1 percent minimum monthly payments at 17 percent
interest, talking about both, you actually get negative
Ms. Williams. The figures I gave were assuming that the
customer is paying the interest, that there are no fees and
charges, and that there is a 1 percent reduction in the
principal. You definitely get a different figure if the
customer does not pay the finance charge at all, but that was
not the example that I was working through.
Senator Dodd. The number that we talked about earlier, that
is a pretty staggering number.
Chairman Shelby. Thank you, Senator Dodd.
Senator Dodd. Thank you.
Chairman Shelby. Senator Bennett.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Thank you very much, Mr. Chairman.
We are a little schizophrenic in this country on this issue
as we look at the various laws that have been passed. We have
laws that say we must have truth in lending, we must have
activities that discourage people from doing this. We get all
upset when people market it, and then we pass the Equal Credit
Opportunity Act that says we must make this device available to
everybody regardless of their race, age, race, color, religion,
national origin, sex, marital status, or receipt of income from
public assistance. And that last phrase is code for people who
are on welfare.
So on the one hand we say, gee, we cannot allow people to
market these in such attractive fashion, and on the other hand
the Congress says, and we must make sure they are available to
people on welfare.
So what we come down to, I think, Ms. Williams, a phrase
you said talking about information, do it in a way customers
understand. And Senator Sarbanes cannot understand the back of
his statement. I do not say that in a pejorative sense. I
cannot understand the back of mine, and I do my best to pay
mine off every month. I have discovered a problem. I pay it off
now by wire transfer on the Internet and I try to do that as
close to the due date as possible so I get the advantage of the
money earning interest in my account before I put it on their
account, and every once in a while I missed it by 24 or 48
hours, and then I get the finance charge and the late charge
and all the rest of that. I should probably be a little more
diligent in my own date planning.
The question is, for the two of you, do you feel you
currently have enough tools as regulators to deal with the
whole credit card phenomenon? We cannot do away with it as the
Equal Credit Opportunity Act indicates. We have gone to great
lengths in the Congress to make sure it is available to
everybody. It may be a joke, but I am not sure that it is:
Someone said ``I am going to pay this bill with cash,'' and
they were told, ``Do you have any form of identification.''
You cannot rent a car without a credit card. You cannot
check into a hotel without a credit card. The old days of
paying for everything with cash are now over, and if you try to
do that you are considered quaint. My father, in his 90's,
decided that to simplify his life he would pay for everything
in cash so that he would not have to keep any other records or
fuss with any other deadlines, and he was viewed as being quite
backward and old-fashioned when he wanted to pay cash and he
did not have a credit card in his pocket.
The question that we as the Congress have to ask you as the
regulators is, do you feel, given your background and
experience in this issue, that you need any action on the part
of Congress? Are you looking for additional powers? Are you
looking for clarification of your authority? Do you feel that
the Congress has been derelict in withholding opportunities for
regulation that you would like to have? Either one or both of
Ms. Williams. Senator, there is one tool that we do not
have that at various times I have wished we did, and that is
the ability to write rules defining unfair and deceptive
practices for purposes of the Federal Trade Commission Act. We
can implement the FTC Act. We can review individual situations
on a case-by-case basis, and we have taken enforcement actions
on a case-by-case basis, including in the credit card area. We
do a lot with supervisory guidance, the guidance that Senator
Sarbanes referred to, and we do a lot through our supervisory
process, but we do not have rule-writing authority. Over the
course of the last couple of years, there have been occasions
where I have said to myself that I wish we had the ability to
write rules under the FTC Act.
Senator Bennett. Dr. Gramlich.
Mr. Gramlich. Senator, as I believe Chairman Shelby asked
me earlier, I am not aware of any legal authority that we need.
Now, I did promise Senator Dodd to write a description of the
data, what data we can get on credit cards and on various
abuses. It may be that we need more authority to get some of
the data that the Senator wanted. That is something we just
have to look into. I cannot answer that sitting here this
morning. But in terms of general authority to deal with the
issue, I do not think our main problem is lack of authority
conferred by the Congress. I think the main problem is just it
is very difficult to deal with some of these issues.
Senator Bennett. If I may, Mr. Chairman, just a quick
personal statement triggered by Senator Sarbanes' comment. I
own a house in the State of Virginia where we live when we are
not in Utah, and therefore I pay Virginia property taxes. And
every year they have said you can pay your property taxes with
a credit card if you want to, and then they have a list of the
charges that are added to the credit card charges if you take
advantage of that. And I look at that list of charges and I
shudder, and I never use the credit card.
This year I got my property tax and it said on the front
you can call this 888-number and pay your property taxes by
credit card, no mention of any fee, and no chart showing what
the fee is. The previous chart said if the property tax is
$1,000 the fee is such and such, if it is $2,000 the fee is
such and such.
On the back it says, these are the ways you can pay, money
order, check, so on, credit card, and repeated the 888-number.
And then it said ``a fee will be added.'' And I thought, well,
they have stopped publishing the amount of the fee because
those of us who read it decided we were not going to pay that,
so now they say ``a fee will be added'' and they give no
number. So, I am going to have to spend another 37 cent stamp
and sent them a check because I am not going to use the
convenience of my credit card. Interestingly, enough, I would
like to put my property taxes on a credit card because then I
earn points on the credit card, and the property taxes would be
a really big addition to my point total, and then I could bring
my kids to Washington on the free airline trips that come from
the points. But I am not going to do it because they have not
disclosed the fees. So back to your comment, do it in a way the
Thank you, Mr. Chairman.
Chairman Shelby. Thank you, Senator.
Mr. Gramlich. Senator, if I could on that example. I think
if this solicitation had come from a credit card company, those
fees would have to be disclosed.
Senator Bennett. Undoubtedly, yes, that is the difference.
Mr. Gramlich. So the problem here is that it comes from the
Senator Bennett. The State of Virginia is trying to make a
little extra money off of me.
Mr. Gramlich. Right.
Senator Bennett. I am not going to let them do it.
Chairman Shelby. Thank you, Senator Bennett.
Senator Dodd. Mr. Chairman, could I just ask the follow-up
question. I ask this not only of the Fed but also the OCC, to
provide the Committee with a detailed account of what
information you do receive and then what you would need to
receive. I think that might be helpful.
Then I think the last response, Ms. Williams, to your
question to Senator Bennett is an important one. And that is
your ability to have any regulatory authority in this area, so
it does not take an act of Congress to get in and say, not in
this particular case but something like it, you have to do
this. And instead of going through the gyrations of introducing
bills, you actually could have the ability to get a handle on
this issue. Mr. Chairman, I think it would be helpful. But I
think if we had some idea of what they are able to get right
now and what you would like to have, that would help.
Chairman Shelby. That would be very helpful. Thank you,
I want to thank the panel. It has been very informative. I
hope we will give you whatever authority you need. Thank you
We are moving toward a vote as 12 o'clock so we are going
to have some problems with our next panel, so we are going to
limit you to--if you will come on up--4 minutes each to make
your statements. Your written statements will be made part of
the record and we are going to enforce the 4-minute rule. We
have no choice.
On our third panel we have: Antony Jenkins, Executive Vice
President, Consumer Value and Growth Markets/International
Cards, Citi Cards; Travis Plunkett, Legislative Director,
Consumer Federation of America; Louis Freeh, Senior Vice
Chairman and General Counsel, MBNA, and we all know him as a
former Director of the FBI; Robert Manning, Special Assistant
to the Provost, Rochester Institute of Technology; Carter
Franke, Executive Vice President of Marketing, JP Morgan Chase
& Company; Edmund Mierzwinski, Consumer Program Director, U.S.
Public Interest Research Group; Marge Connelly, Executive Vice
President, Corporate Relations and Governance, Capital One; and
Linda Sherry, Editorial Director, Consumer Action.
I know you have waited all morning for this, but we have no
control of the floor of the Senate, and we have a problem, so
we are going to enforce the 4-minute rule.
Mr. Jenkins, we will start with you. Remember the 4-minute
rule. We are going to enforce it. We will have to. Your written
testimony will be made part of the record. Again, I want to
reemphasize that. If you have some points to make make them
fast because we do not want you to have to come back here.
Thank you a lot.
STATEMENT OF ANTONY JENKINS
EXECUTIVE VICE PRESIDENT, CITI CARDS
Mr. Jenkins. Good morning, Chairman Shelby and Members of
the Senate Banking Committee. My name is Antony Jenkins, and I
am an Executive Vice President at Citi Cards. I appreciate the
opportunity to speak before you today to discuss the credit
card industry, Citi Cards, and especially our customer
Citi Cards is one of the leading providers of credit cards
in the United States with close to 80 million customers and 119
million accounts. Consumers spend roughly $229 billion annually
through our credit cards. This constitutes about 2 percent of
the Nation's gross domestic product. Citi Cards employs nearly
35,000 people in 30 geographic locations around the country and
we offer a variety of credit card products and services.
We recognize that customer satisfaction is critical to
success in the highly competitive credit card marketplace. A
lost customer is difficult and expensive to replace. At Citi
Cards, we work hard to maintain customer loyalty through
marketing and other business practices. Our research tells us
that customer satisfaction is high. Furthermore, we are
committed to continually improving the customers' experience,
and I will now describe some of our initiatives in this area.
We recognize that an educated customer will be a more
satisfied customer. Accordingly, we take great care to provide
customer education in our communications. Also, I am proud to
mention that Citigroup and the Citigroup Foundation recently
announced a 10-year global commitment of $200 million toward
We use direct mail solicitations to find most of our new
customers. Our selection process includes careful credit bureau
screening for bankruptcy filings, delinquent and written off
accounts, and other credit problems. To this selection process
we then apply additional criteria using our own internal
scoring models before we grant credit to new customers.
To conduct our credit card business in the safe and sound
manner mandated by bank regulation, we use risk-based pricing
to contain and manage the inherent risk of making unsecured and
open-ended credit card loans. The goal of our solicitations is
to assure no surprises for our customers. In this spirit, we
redesigned our solicitation letters to tell consumers in more
detail that their account terms could change and to describe
the types of credit bureau information about them that could
cause us to reprice their accounts.
Today, we reserve the right to adjust a customer's interest
rate automatically for only three events, all of which involve
the customer's relationship with us. These events are: The
failure to make a payment to us when due; exceeding the credit
line; or making a payment to us that is not honored. I should
note though that most of our customers make their payments on
time and stay within their credit limits.
In the past, our cardholder agreements gave us the right to
increase a customer's interest rate automatically in the event
of the customer's delinquency with another creditor, which is
commonly referred to as ``universal default.'' This is no
longer the case. Now before we increase a customer's rate due
to a delinquency with another creditor, we provide prior notice
to the customer explaining why the rate is being increased, and
we give the customer the right to opt-out of that increase.
Customers who opt out may continue to use the card with the
existing rate until the card expires. When the card expires no
new charges are allowed. However, customers may continue to pay
off their balance using the existing rate and payment terms.
As another initiative to improve the customer's experience,
we completely rewrote, reformatted, and simplified our credit
card agreements. In doing so, we added on the first page a
section entitled ``Facts About Rates and Fees.'' This section
highlights and summarizes critical pricing information in a
single place, much like the nutrition labels found on food
products. This section also includes a description of the
reasons we may decide to change rates and fees.
We are also changing our minimum payment formula to ensure
that all customers who regularly pay only the minimum due will
pay off their debt in a reasonable period. This will increase
the minimum due for some of our customers, although I should
emphasize that the vast majority of Citi Cards customers pay
more than the minimum. We are developing strategies to mitigate
the impact of this increase for customers in hardship
situations. We believe that in the long-run the new formula
will save our customers money by accelerating the payments of
outstanding debt and lowering their total interest payments.
Thank you very much.
Chairman Shelby. Thank you. I hate to cut you off.
STATEMENT OF TRAVIS PLUNKETT
LEGISLATIVE DIRECTOR, CONSUMER FEDERATION OF AMERICA
Mr. Plunkett. Chairman Shelby and Members of the Committee,
I applaud you for calling this important hearing on credit card
industry practices. Perhaps no industry in America is more
deserving of such oversight.
According to the U.S. Better Business Bureau, credit card
abuses are the third most common source of all consumer
complaints after cellular phone services and new car dealers.
I would like to make five brief points about the current
marketing, lending, and pricing practices of the credit card
industry. First, credit card companies are expanding efforts to
market and extend credit at a time when Americans have become
more cautious in taking on credit card debt. It is conventional
wisdom to attribute the growth of revolving debt to just over
$800 billion solely to insatiable consumer demand for credit
cards, or to consumer irresponsibility as we have heard today,
or to a lack of consumer financial literacy as we have heard
In fact, our analysis shows that--and we have looked at
credit card lending patterns over the last 15 years--aggressive
and even reckless lending by issuers has played a huge role in
pushing credit card debt to record levels. A couple of facts
here. Since 1997, the extension of credit by issuers has
increased more than twice as fast as credit card debt taken on
by consumers. The amount of credit made available by issuers
now exceeds an astonishing $4.3 trillion or just over $38,000 a
Meanwhile, the number of solicitations mailed by issuers
has increased by more than five-fold since 1990 to 5.23
billion, or 47 per household.
Second point: Creditors have targeted some of this credit
at the least sophisticated, highest risk, and lowest income
families, who have taken on fairly high debt burdens relative
to their incomes and have suffered disproportionate financial
harm. We have heard a lot about that already. I will
reemphasize the point. It is not just college students, it is
also older Americans, minorities, and those with blemished
credit histories. This approach has led to fairly high industry
losses and record profits, which is not as paradoxical as it
seems. The industry now loans money to riskier customers who
are more likely to carry a balance and more likely to pay
penalty fees and interest rates, but the industry charges them
far more, generating extraordinary profits.
We have heard about their profits this year. The credit
card industry is the most profitable by far in the banking
sector, earning a return on assets that is three times greater
than for commercial banks overall. One of the major reasons for
this astonishing profitability are a number of new and very
costly fees and interest rates. We have heard about universal
default, and retroactive interest rate increases. I do not know
of another industry in the country that can charge you more,
that can increase the price on what they have sold you after
you have bought it.
We have not talked about what is often called ``sticky
interest rates.'' According to Federal Reserve data we have
looked at, credit card interest rates during the last few years
dropped by only a third as much as the prime interest rate did,
indicating that consumers still, even in a lower interest
environment, are paying too much in interest rates. This is big
money for issuers. We have heard about fee income over the last
few years. We looked at fee income charged just to consumers,
not to merchants, in 2003, and found that every card-holding
household paid an average of $830 for fees and for interest.
That is a great deal of money.
In response to this concern, we often hear from credit card
issuers, well, we are just pursuing risk-based pricing. We are
charging households that are higher risk, higher rates. Issuers
justify these practices that way.
I will close here and just say that we have extensive
testimony on why this pricing is not risk-based. In fact, it
looks to us to have all the tell-tale signs of being predatory.
Chairman Shelby. Thank you.
STATEMENT OF LOUIS J. FREEH
SENIOR VICE CHAIRMAN AND GENERAL COUNSEL, MBNA
Mr. Freeh. Thank you, Mr. Chairman. It is my pleasure here
to represent MBNA today, and a pleasure to be before the
Committee. I will make just four very brief points.
I do join with the panel members also in thanking the
Committee for this hearing. It is a very important hearing on a
very major industry in our country.
As someone I think mentioned, there are 6,600 issuers in
the United States, and with all industries of that scale, the
vast majority of lenders in the country do grant credit
responsibly, and that the vast majority of the users of that
industry act very responsibly. That does not mean we should not
focus on the exceptions, but we should make sure that we are
not looking at the exceptions to the exclusion of what the norm
is. I think this is an industry that is heavily regulated and
that is working very well.
The four brief points I would like to make, first, with
respect to student marketing, we make every effort at MBNA to
ensure that credit card offers are not sent to anyone under 18
years of age. We also have very unique relationships. We have
affinity relationships with over 700 colleges and universities.
All of our marketing with respect to students has to be
approved by the university, by the alumni directors, and we
have a huge reputational as well as business interest, in
making sure that the lending is responsible.
One fact you may be interested in with respect to our
student marketing, more than 90 percent of the credit cards we
issue through colleges and universities go to alumni, parents,
and staff, not students. We impose a very low credit line for
student accounts. The average credit line for students is about
$700. We stop authorization immediately if they trigger over
the limit restrictions, and call them up if we detect a
problem. We have a very strong and we think beneficial system
for making sure that they use credit responsibly. We have a lot
of credit card literacy education that we do with them. That is
part of the program that we are very proud of.
With respect to repricing, before we lend money to
customers, of course, we must borrow funds, so the ability to
reprice, to do it reasonably and responsibly, pursuant to
regulation, is essential for the health of this marketplace. We
manage the environment by using the affinity model to
differentiate our products. We increase an APR for only one of
two reasons, either our costs have increased or the consumer's
credit-worthiness indicates a higher risk than was established
at the initial pricing.
We do not practice universal default, we never have. We do
not automatically reprice a customer's account without notice
solely because he or she may have missed or been late on a
payment to some other creditor. Absent a specified default on
an MBNA account, we do not reprice, and we always allow our
customers in that situation to just say no, which means they
can reject the reprice by default, pay off the balance at the
old rate, and if they do not use the card again, that account
With respect to minimum payments, very briefly, less than
one-quarter of 1 percent of our customers pay minimum payments
consistently. It is a very small fraction which is why I talked
before about the perspective with respect to focusing only on
the exceptions at the expense of the norm.
Consistent with the OCC guidance, MBNA has agreed to and is
now establishing the 1 percent plus interest plus late fee
calculation. I know there has been a lot of discussion about--
Thank you very much, Senator. I am a trained lawyer, I know
when to stop.
Chairman Shelby. Dr. Manning.
STATEMENT OF ROBERT D. MANNING
UNIVERSITY PROFESSOR AND SPECIAL ASSISTANT
TO THE PROVOST, ROCHESTER INSTITUTE OF TECHNOLOGY
Mr. Manning. Thank you, Chairman Shelby and Members of the
Committee. I certainly appreciate the opportunity to
participate in this long overdue hearing on credit card
policies. Please bear in mind I typically teach 4-hour
seminars, so each minute is basically 1 hour of information.
Chairman Shelby. You would be here by yourself.
Mr. Manning. In framing my remarks and my written
testimony, the focus has been on the deregulation of financial
services, and I want to make a few brief points that
particularly impact on current trends in both marketing and the
financial impact of consumer credit and credit card today.
In particular, what we have seen is a dramatic shift in the
transformation of the industry, the consolidation,
conglomeration, such as the union of wholesale and retail
banking and insurance
corporations, as well as the bifurcation, the emergence of both
first-tier banks as well as second-tier banks, which has
particular implications to the emergence of sub-prime credit
What I think is most important is we have seen a shift from
banking underwriting standards that were risk averse from our
community-based bankers where the best client was somebody who
could repay the loan in a timely fashion.
What we have seen over the last 20 years is that given our
understanding of the tremendous profitability of credit cards,
there has been an enormous transformation and shift from
wholesale to retail banking with particular attention to credit
cards. It is unambiguous, the data is irrefutable that the
tremendous expansion and increase of credit card interest rates
and fees has precipitated an unprecedented growth of consumer
bankruptcies, to the point that we have seen an unprecedented
historical phenomenon where in the late 1990's we saw an
inverse relationship; that is, as unemployment went down,
bankruptcy rates went up, jumping to a high of 1.6 million.
What this has done is put greater pressure then in this new
deregulated environment where the best client is somebody who
could never pay off their debts. What we have seen and what I
have had most experience with is the marketing of new groups of
potential clients, the college students, where 10 years ago--
actually 15 years ago when I first studied the marketing to
college students--we saw that the first entree was the student
who had one foot in the door, the college senior or junior. And
it was very rare in the early 1990's to see college students
with more than $3,000 or $4,000 in debt. Today, what we have
seen is actually a race to the bottom where over 80 percent of
college students who are going to get a credit card have it by
the time they have taken their first midterm exam. What we have
seen now is the whole new redefinition of the starving student,
which credit cards are jokingly referred to as yuppie food
At the same token, the rise of bankruptcy and the
withdrawal of many banks from the central cities has seen a
rise of the most egregious credit card policies, and that is
sub-prime credit cards, particularly marketed to people who
have recently gone through bankruptcy. These are cards with
typically less than $300 lines of credit that have fees that
will account for as much as 80 percent of the outstanding line
I want to conclude by stating then that we have heard some
references about technological innovation here in the United
States, but based on my experience in my research in other
parts of the world, the United States actually lags
tremendously through Western Europe and other parts of the
world, and, in fact, it is a shame to see where we are in terms
of smart-card technology and identity fraud protections and the
role of Government in protecting consumers in terms of the
kinds of credit card policy abuses that we are discussing
Chairman Shelby. I know you did not have 2 hours or 4
hours, but we do appreciate your contribution.
STATEMENT OF CARTER FRANKE
CHIEF MARKETING OFFICER, CHASE BANK U.S.A., N.A.
Ms. Franke. Mr. Chairman, Members of the Committee, good
morning. My name is Carter Franke, and I am the chief marketing
officer of Chase Card Services, a division of Chase Bank U.S.A.
Today, I sit here as a representative of the more than
16,000 Chase employees around the country who support our
credit card services division. Our customers are primarily
those that fall in what we call the ``super-prime'' and
``prime'' categories--the most responsible and the most
knowledgeable credit users in the country. We operate in a
highly competitive industry, one where many customers can
easily vote with their feet. Our customers in particular have
many choices in the marketplace today, and competition is good
Today's credit cards are issued, as we said, to consumers
with exceptionally good credit histories, and as a result, our
business model is built upon consumers making their payments
regularly and on time. All of our pricing decisions are based
on sound economic analysis. However, unsecured credit lending
is a shared responsibility between the lender and the borrower.
Our goal is to provide problem-free access to the credit lines
that we offer and to achieve the highest level of customer
During 2003 and 2004, Chase invested approximately $107
million working with partners across the Nation to voluntarily
fund responsible credit counseling services, create online
financial education, and credit and debt management tools. At
Chase, we value our customers. A missed payment on a non-Chase
card does not drive automatic repricing of any Chase account.
We also realize that in the vast majority of cases, a late
payment on a Chase card is not a sign of increased risk but of
timing--a vacation or other realities of our very busy lives.
For that reason, a late payment will not result in a price
increase for over 90 percent of Chase customers.
A small segment of our customers do have a change in
creditworthiness from time to time, which we deal with fairly
and responsibly. If a customer's overall credit profile
deteriorates materially and, thus, exposes us to an increased
risk of nonpayment, economic considerations may cause us to
raise the interest rate.
In these cases, and in accordance with all of the
applicable laws, we provide the customer an opt-out option.
This enables the customer to reject our change in terms, close
their account, and pay off the balance under their existing
terms. Once closed, the interest rate on a Chase account that
is paid according to its terms will not be changed.
Mr. Chairman, we understand that our business may seem
complicated and even at times unfriendly. I hope this
information I have provided today has offered you some
substantive insights into our practices and an understanding of
our true commitment to fairness for all customers. At times we
are faced with difficult decisions relative to individual card
members and their accounts, and when reviewed on an isolated
basis, these may seem inappropriate. Our decisions are designed
to permit the vast majority of our customers to continue to
receive the best possible rates, service, and access to the
benefits credit cards provide.
We look forward to working with you and with Members of the
Committee to answer your questions and address your concerns.
Chairman Shelby. Thank you.
STATEMENT OF EDMUND MIERZWINSKI
CONSUMER PROGRAM DIRECTOR,
U.S. PUBLIC INTEREST RESEARCH GROUP
Mr. Mierzwinski. Thank you, Senator Shelby, Senator Dodd,
Members of the Committee. On behalf of the Public Interest
Research Groups, it is a privilege to be here for this very
You have heard from the industry that there are 6,000
credit card issuers. There are only 10 that matter. The
industry is extremely concentrated. Those 10 have two-thirds of
the cards, two-thirds of the receivables. Those are the 10 the
Committee should concentrate on.
In terms of getting data from those companies, you should
ask the regulators why they cannot improve call report
reporting. Those are the forms banks provide so that we can
learn more--provide to the regulator so that we can learn more
about how much they are making in fees more easily and compare
the companies better.
When you have a highly concentrated industry or everybody
already has too many cards, even though the companies are
extremely profitable, as we have heard--it is the most
profitable form of banking. The only way you can make more
money and achieve the corporate profit goals that downtown
wants, you have to either get customers from others, which
means deceiving them or offering them more expensive products.
You have to reach out to new constituencies such as college
students or previous bankrupts. Or you have to charge your own
customers more money to make more money on them. And that is
the reason we see all of these unfair practices.
We have a website that describes what consumers can do. It
is called truthaboutcredit.org. Consumers can download a fact
sheet about how to solve the credit card road map of credit
card hazards. We also care a great deal about college students
because we were founded years ago by college students, so we
have our own credit card brochures, charge it to the max
MegaDebt credit card. With our own brochures, we can find out
But the real problem here is that a credit card agreement
is a license to steal. A credit card agreement allows companies
to change terms at any time for any reason, including no
reason. That is unbelievable. That is outrageous. That needs to
Chairman Shelby. Is that the only situation in the banking
industry you know about?
Mr. Mierzwinski. I think that might be the only situation
anywhere, Senator, where the contract is so one-sided that it
can be changed at any time for any reason, including no reason.
The consumer virtually has no rights except to try to get
The second problem, of course, is their use of mandatory
predispute binding arbitration to limit a consumer's rights to
enforce their rights in court.
So we know that these problems that have been described
exist because of preemption theory. With the Marquette decision
and the Smiley decision limiting the authority of States to
regulate interest or fees, the industry has consolidated in a
few States, and the OCC has claimed that the industry is
virtually unregulated by the States. Yet, the States have
attempted to enforce the laws against the credit card
Just this January, Capital One was sued by the Minnesota
Attorney General. Other States have filed because their fixed
rates are not really fixed. Many States have sued the sub-prime
lender Cross Country Bank for its very deceptive and unfair
practices in debt collection. In 2002, 28 States settled a case
with Citibank; 28 States and Puerto Rico settled a case in 2002
with First USA as well. And, of course, the OCC did go after
one big bank, Providian, in 2000, but only after the tiny San
Francisco district attorney and the California Attorney General
showed the way.
The consumer groups jointly have a long list of
recommendations to you that we have all endorsed. It is all in
all of our testimony. Most of our recommendations are
incorporated in Senator Akaka's and Senator Dodd's bills.
Chairman Shelby. Thank you.
STATEMENT OF MARGE CONNELLY
EXECUTIVE VICE PRESIDENT,
CAPITAL ONE FINANCIAL CORPORATION
Ms. Connelly. Good afternoon, Chairman Shelby and Members
of the Committee. My name is Marge Connelly, and on behalf of
Capital One, I also want to thank the Committee for holding
these hearings. And at the outset, I do want to acknowledge
that we do hear the criticisms and concerns, and we are very
sensitive to them.
But without diminishing the challenges associated with
those concerns, I do urge the Committee to really look broadly
at how this industry has evolved over the past 30 years. As we
have noted, today more than three-quarters of American families
rely on credit cards on a daily basis, and these cards enable
almost $2 trillion in transactions every year. So that in and
of itself is really a remarkable success story, but there is
really much more to this evolution than just volume. In my
testimony, I have included a chart, which please feel free to
take a look at, but it just reflects the change in interest
rates. There are a couple. There is one there. It just reflects
the changes in annual percentage rates, the interest rate, and
annual fees that are charged to consumers.
And as you can see, back in 1987 we really had a one-size-
fits-all kind of environment, and virtually all customers were
paying this, 19.8 percent, $20 annual fee, regardless of what
kind of risk that they have. Now, that has changed
significantly. Long-term rates as low as 5 percent are now
available for some of the lowest-risk customers, and on
average, consumers are paying in the range of 13 or 14 percent.
And in most cases, there are no annual fees.
So, based on a study that was cited in a 2003 report from
the Information Policy Institute, this trend has saved
consumers about $30 billion per year. So we think that is,
again, another great part of the evolution of the industry, but
we also can note that access to credit cards has also been
increased significantly. And that means that more consumers can
take advantage of the benefits that this product offers. They
can handle emergencies better. They are safer when shopping
because they do not need to carry cash. And as has been noted,
they can make purchases, like online transactions, like
reserving a hotel room, renting a car, that otherwise they
would find incredibly difficult, if not literally impossible to
Now, these two positive trends--reduced price and increased
access--have really been driven by intense competition and
improvements in credit risk. These two drivers, though, have
increased the complexity and the variations of the products
offered. And they have led to an increased use of fees and
risk-based pricing so that we can better align product terms
with risk. And this is necessary in order to avoid the kind of
subsidization that you could see from past years.
I will say that we do not use universal default as part of
our risk-based pricing policy, but we do indeed find the need
to take actions if there is evidence of risky behavior on our
I think the question, though, is really is this industry
really adequate serving its customers? I would say that we
believe that for the most part it is, but we do acknowledge
that it is a more complex environment, it is more difficult for
consumers to fully understand the structure of some of the
products. And although we think things like the Schumer box
have really taken us a big step forward, a lot has changed and
there are a lot of terms that are now incredibly important to
consumers that are not included in that disclosure regime. We
actually have a second exhibit that we have brought with us
that I am happy to chat about during our questioning that is
our submission to the Fed's advanced regulatory notice. And we
think it is a pretty big step forward in terms of trying to
really portray all of the very important information and to do
so in a way that we think is uniform, can be easily compared by
customers, and is actually done in language that we think is
very clear and easy for customers to understand.
So, again, I want to thank you for holding this hearing. I
want to say that at Capital One we are committed to reearning
our customers' business every single day. Thank you.
Chairman Shelby. Thank you.
STATEMENT OF LINDA SHERRY
EDITORIAL DIRECTOR, CONSUMER ACTION
Ms. Sherry. Thank you. Chairman Shelby and Members of the
Committee, my name is Linda Sherry of Consumer Action. Thank
you for your leadership on this important issue.
Consumer Action for more than 20 years has been conducting
surveys of credit card rate fees and conditions, and our survey
has become a barometer of industry practices. When we survey,
we call as consumers. This gives us the insight into what
people face when they shop for credit cards. In our experience,
getting accurate information from credit card companies is
difficult and exasperating. Application lines are staffed by
salespeople who pressure callers to apply but who often cannot
give even the most basic facts that are available under the
Credit Card Disclosure Act.
Consumer Action receives many complaints from credit card
customers about unfair practices. Penalty rates and universal
default rate hikes top this list. Penalty rates are much higher
interest rates triggered when you pay late, even one time. We
found penalty rates as high as 29.99 in 2004 when the prime
rate was at 4 percent. This year, the highest one we found is
Customers who contact Consumer Action about universal
default report being hit by retroactive default rates that were
double and triple their old rates. It is outrageous that the
credit card companies claim that they are merely protecting
themselves from risk when they hike interest rates. We
challenged the industry to explain how a new car loan or a one-
day-late payment makes a customer so much more risky that it
justifies tripling their rate.
An increased number of card issuers employ universal
default policies. Our 2004 survey found that 44 percent of the
surveyed banks, which include the top 10 banks, by the way, use
universal default. When you are turned down for credit the law,
requires that you get a letter explaining why. But if you are
hit with a universal default repricing, you do not learn about
it until you open your next statement.
A Bastrop, Texas, woman told us: The city AT&T Universal
card just raised our interest rate from 12.9 to 28.74 because
of a late payment they found listed on my husband's credit
report to another credit card company. Our payments to AT&T
have been on time.
Late payments result in higher penalty rates with 85
percent of the issuers surveyed in 2004, with average penalty
rates of 22.91. Of these issuers, 31 percent said a penalty
rate could be triggered by just one late payment.
A Topeka, Kansas, house painter complained: Chase raised my
interest rate from 9 to over 27 percent and told me it was
because I had two 30-day past due payments last year. His
statements showed one payment was posted 2 days late and the
other 7 days late.
A decade ago, the average late fee was $13. The average
late fee surveyed last year was $27.45, with three major banks
charging up to $39.
Tiered late fees, a new trend tied to the outstanding
balance, penalizes people with smaller balances than those with
higher ones. The number of issuers with tiered late fees jumped
from 20 percent in 2003 to 48 percent in 2004.
We have found that 58 percent of surveyed issuers even have
a cutoff time on the due date. If you are even 5 minutes late,
you might have to pay a late fee of up to $39.
Banks must begin to consider postmarks--and thank you for
your leadership on this, Senator Dodd--before they assess late
fees. We have heard from consumers who allowed 7 days to post a
payment, yet they were still charged a late fee. If those are
the rules, no one can hope to comply.
This is a follow-the-leader industry. When one issuer
adopts an anticonsumer practice, others quickly follow. We can
only conclude that the industry is attempting to fundamentally
redefine its business model to shift the risk from lending from
itself onto the backs of its unwitting customers.
Thank you for your diligence in investigating these
practices, and please support all legislation, such as Senator
Dodd's thoughtful legislation, that will help end these unfair
Chairman Shelby. I appreciate all of the hurried-up
testimony here today. I have a number of questions I am going
to submit for the record because this is a very important
I do not believe myself there is any room anywhere in
America to exploit anybody, and we should not do this. If that
is true, 35 percent interest is--if that were true--that is
astounding. Why, the short-loan people, loan sharks, would be
proud of you if you would do that because they would soon be
out of business. I hope this is not true.
On an unrelated subject in a sense, but related very much
to the credit card industry, I have a statement and a question.
On a different thing, I would like to emphasize to our
witnesses here from the credit card industry the important role
that you could play in the very troubling growth of Internet
child pornography, because major credit cards are the easiest
and quickest method of payment on the Internet for commercial
transactions. Many child pornography websites use universally
recognized credit cards to ensure the largest possible customer
base. According to the International Center for Missing and
Exploited Children and the U.S. and international law
enforcement, the size and scope of this worldwide problem is
huge and is growing rapidly.
Because of the large demand and tremendous profitability of
this crime, this content is also becoming more explicit, and
the child victims of these crimes are increasingly younger each
year. I know in your industry there has already been some
effort by the International Center for Missing and Exploited
Children and various law enforcement agencies to work with many
of the financial institutions to find ways to help increase
detection and reporting of child pornography, and I commend
these efforts. And I know, Judge Freeh, you as former FBI
Director, you understand all this well. But it is something
that this industry could really do something good on.
Senator Dodd. Mr. Chairman, we have about a minute left, or
less than that, for these votes on the floor. What I would like
to do is submit some questions in writing, if we could. It is
going to be difficult to get back here. But let me just make
the point I made a while ago, and that is--and I appreciate the
industry standpoint here, I am not suggesting that all credit
card companies do all the same things. But if you do not take a
leadership position on this stuff and get it straightened out,
there should probably be some regulatory moves made anyway.
But, nonetheless, the pendulum moves. I have seen it over my
years. And people who sit back and assume they can do it--we
watched it in the savings and loan industry. We have watched it
in other areas. And it is building and it is building, and I
would strongly urge you to engage in a lot of self-discipline
within the industry on some of these practices, and do not play
follow the leader. I think it is a good analogy. Too often that
is the case because no one seems to be saying anything, and no
one is doing anything about it, so why not continue doing it or
why not try the practice yourself ?
Mr. Chairman, I would hope that we might look at some
legislation that would give some authority to our respective
agencies here so that some additional steps could be taken to
find out exactly what is going on out there. Part of the
difficulty is we are relying on solid information, but an awful
lot of it is not coming from the industry itself.
So, I thank you all for being here.
Chairman Shelby. Thank you.
Senator Carper. To each of our witnesses, thank you for
being here today, and thank you for sharing your comments with
all of us. I apologize that you have had to truncate your
remarks, and I really regret that we do not have the
opportunity to ask questions of each of you.
A comment or two, if I could. I heard during the course of
several of your testimonies policies which I think are
meritorious, commendable, and what I wish we had the
opportunity to go back into to put a spotlight on some of
those--I will call them ``white-hat policies.'' There are a
couple of ways to get the kind of behavior we want, whether it
is financial services entities or others. We can criticize
those who perform badly, or we could put a spotlight and
positive reinforce the good behavior. And I tend to be the guy
who likes to positively reinforce good behavior. For those of
you that are doing the right thing for the right reasons, I
salute you. And I would like to find a way for us to put a
spotlight on those good policies so we can encourage others who
are not following those kinds of policies to begin to adopt
Again, we appreciate your being here today, and thank you
for bearing with me. Mr. Chairman, when you and I are the
Majority Leader of the U.S. Senate, we will not have these
votes to disrupt our hearings in this Committee and
inconvenience these people.
Chairman Shelby. Thank you, Senator Carper.
Dr. Manning, maybe we can get you back sometime and give
you 4 hours, but not 4 days or 4 months.
We thank all of you, and I appreciate your being here
today, and I hope you understand our predicament on the floor
of the Senate. We are late now.
The hearing is adjourned.
[Whereupon, at 12:28 p.m., the hearing was adjourned.]
[Prepared statements and response to written questions
supplied for the record follow:]
PREPARED STATEMENT OF SENATOR TIM JOHNSON
Thank you, Mr. Chairman, for calling today's oversight hearing on
the credit card industry, in particular the regulation and industry
practices with respect to consumer disclosures and marketing. I am
interested in today's hearing given the significant impact the credit
card industry has on consumers and our national economy.
When this Committee considered the reauthorization of the Fair
Credit Reporting Act and during recent floor debate on the bankruptcy
reform legislation, we had preliminary discussions about consumer
notices, risk-based pricing, and interest rates. I look forward to
taking a careful look at these issues in detail again today. My hope is
that today's hearing will not only be useful to the Committee in its
oversight role, but also that the hearing will provide useful
information to the regulators, industry, and consumer groups on where
improvements can be made.
I would guess there are very few individuals in this hearing room
that do not have at least one credit card in their pocket. The credit
card has become an important tool that so many American families depend
on for day-to-day living. Like any other contractual agreement, it is
vital that consumers know the rules of that contract and that both the
consumer and company play by those rules. That is why the regulation of
consumer notices and industry implementation of such notices are so
I must say that simply sending out notice after notice is probably
not the most effective way to disclose the most important information
to consumers. Frankly, we need to do a better job of making sure
consumers are not flooded with notices they do not read, let alone
Just last week, I learned that in my home state of South Dakota,
the Student Federation, representing thousands of students at our
public universities, highlighted the need for more financial literacy,
especially among students. As more and more young people enter the
economy as adult consumers, we need to ensure they have the knowledge
necessary to manage their finances responsibly. Just recently, along
with several of my colleagues, I signed a letter seeking funding for
the Excellence in Economic Education program. This competitive grant
program aims to teach young people the importance of economic and
financial literacy. I am hopeful that with funding for this program,
along with financial literacy efforts by the regulators, industry, and
consumer groups, we can start our young people along the road to sound
personal financial management. The more knowledgeable consumers are
about their finances, the fewer social and economic problems our Nation
and our economy will face.
I understand the difficult balance that must be achieved between
providing consumers with clarity and completeness of information when
it comes to notices that allow consumers to make informed decisions
about their personal finances. That is why I am hopeful that the
financial regulators, along with industry and consumer groups, can come
together and establish guidelines for notices that do not overburden
companies or consumers.
Another issue is that some have criticized the industry for is
risk-based pricing. We had debate about this issue when Congress
reauthorized the expiring provisions of FCRA and when we considered the
bankruptcy reform legislation. One of the hallmarks of our credit
system in the United States is that it opens economic opportunities for
consumers with limited or less than perfect credit histories. When
Congress reauthorized FCRA, we ensured that millions of Americans
continued to have access to affordable credit under a uniform national
standard that included significant new consumer protections. Access to
affordable credit allows many American families to build or restore
their credit history which will help to lower their cost of credit. At
the same time, access to credit gives consumers another tool to help
manage their day-to-day finances.
A study of the consumer credit marketplace shows the growth of
credit card access over the last 30 years, and the results are
striking. In 1970, only 2 percent of families in the lowest income
bracket had a credit card. In 2001, that number stood at 38 percent. In
the highest bracket, the 33 percent of households that had at least one
credit card in 1970 had risen to 95 percent.
Even more striking are the statistics related to access to credit
by race. Between 1983 and 2001, the number of white families who held
credit cards increased by 69 percent. During the same period, the
number of Hispanic families increased by 85 percent, and the number of
African-American families increased by 137 percent.
Credit cards, which often carry higher interest rates than other
types of nonrevolving lines of credit, have seen significant decreases
in cost. The study attributes these decreases largely to the
competition in the market and to prescreening, which is made possible
on a large-scale basis by FCRA. For example, in 1990, only 6 percent of
all credit card balances paid interest rates under 16.5 percent. By
2002, 15 percent of all card balances paid rates below 5.5 percent, and
71 percent of all credit card balances carried interest rates under
16.5 percent. In 1990, while more than 93 percent of all credit card
balances paid interest rates over 16.5 percent, that number had
plummeted to 29 percent in 2002.
While some of these interest rate declines may be due to the
interest rate environment, much surely has to do with companies'
ability to differentiate risk among borrowers and to price credit
accordingly. Credit scoring models have increased in their predictive
power and one result is increasingly competitive cost of credit.
Consumers must have clear information on an ongoing basis to help
manage their credit. At the same time, companies should not have undue
restrictions on their ability to price credit based on risk. The
ability to price credit based on risk allows companies to manage their
financial risk in a safe and sound manner.
I hope the industry, regulators, and consumer groups will work
together on ways to improve consumer awareness without causing
unintended consequences that would limit consumer choice or ability to
obtain credit. And, I hope the industry will continue to work in a
constructive manner to find innovative ways to provide consumers with
timely and useful disclosures. It is good for the public and good for
business to have informed consumers using credit responsibly.
Thank you, Mr. Chairman, and I look forward to today's testimony.
PREPARED STATEMENT OF SENATOR CHRISTOPHER J. DODD
I would like to thank Chairman Shelby and Ranking Member Sarbanes
for holding this important hearing on an issue which impacts tens of
millions of Americans. This Committee continues to focus on issues
which have such a direct impact on so many in our nation. I believe
that the subject matter of the hearing today--credit card issuer
practices--touches the lives of more Americans than any other issue
within this Committee's jurisdiction.
I would also like to thank the witnesses for appearing before the
Committee today. It is my hope that this will not be the last hearing
on this subject matter and the input from the witnesses today is much
needed and greatly appreciated.
Credit cards are one of the most successful and pervasive financial
services products ever created, and have undoubtedly improved access to
credit and added a significant measure of convenience to consumers.
Just to give an idea of the staggering role that credit cards have
in the United States, according to the Federal Reserve, there were
556.3 million Visa and Mastercard credit cards in circulation in 2003.
Those cards coupled with Discover and American Express products
indicate that today at least 700 million revolving credit cards are
currently in circulation.
Approximately 145 million Americans have at least one credit card.
The average cardholder has 4.8 credit cards. The total amount of credit
card debt is over $800 billion, while the total amount of credit
extended to cardholders is over $4 trillion dollars.
With this kind of market presence, it is not surprising that Credit
Card Management reported in May that 2004 was the most profitable year
ever for credit cards.
With this tremendous success, I believe, comes significant
responsibility. And I believe that the credit card industry is failing
Credit card issuers have now become the victims of their own
success and are turning credit cards into nothing less than wallet-size
In a time when access to credit is the easiest and cheapest, credit
card companies are making more money than ever, credit cards issuers
are charging usurious rates and fees and engaging in a series of
abusive and deceptive practices which I believe will have drastic long
term consequences on our Nation.
Credit card companies are charging consumers higher fees than ever
before. In 1980, credit card fees alone raised $2.6 billion. In 2004,
credit card fees raised over $24.4 billion.
We have been told that the reason that credit card rates and fees
are so high is that more and more consumers are failing to pay their
debts, and as a result, issuers must charge higher rates and greater
In fact, the opposite is the truth. Consumer bankruptcies went down
last year by nearly 3 percent. And default rates actually decreased
The truth of the matter is that this is the best time in history to
be in the credit card business. Last year, over 5 billion solicitations
were sent to American homes last year, which is nearly twice as many as
only 8 years ago. Coupled with television ads, radio ads, internet ads
and advertising signs, it is nearly impossible to turn on your TV or
computer or simply walk down the street without being offered a credit
Despite the assertions that the credit industry is struggling
because of bad consumer behavior, credit card companies have more money
than they know what to do with and they are pumping out solicitations
in the search for new people to get in debt.
And while normally competition lowers costs for consumers, the
exact opposite is happening.
Credit card companies are finding more and more ways to effectively
increase their income from rates and fees. Abusive practices such as
misleading teaser rates which employ bait-and-switch tactics, hidden
fees and penalties, and universal defaults provisions buried in the
fine print, are standard operating procedures in the credit card
And while my statement this morning will not touch on the entirety
of my concerns with the credit card industry, I would like to highlight
a couple of major abuses currently employeed by the credit card
One of these abuses is the so called ``Universal Default'' or which
should more accurately described as a predatory retroactive interest
rate hike. This practice forces a credit card consumer in good
standing, who is paying his credit card bills on time, to have his
interest rates retroactively jacked up to 25 percent or 30 percent
because of some unknown irrelevant change in his spending patterns. The
idea that a credit card company can charge an initial interest rate
that would have in the past been outlawed as usurious, and then double
or triple that rate for any reason it so chooses is just plain wrong.
The industry refers to this practice as ``risk-based'' pricing.
They believe that when a consumer's credit score goes down, they become
``riskier'' and higher interest rates are levied on them. What is
interesting to me is that I can find no evidence, either anecdotal or
empirical of when a consumer's credit score improves, a credit card
company lowering an interest rate for a consumer.
We should stop this practice completely or at a minimum make any
increase in interest rates prospective and not retroactive.
Another troubling development in the battle to sign up new
customers, has been the aggressive way in which they have targeted
people under the age of 21, particularly college students.
Solicitations to this age group have become more intense for a
variety of reasons. First, it is one of the few market segments in
which there are always new customers to go after; every year, 25 to 30
percent of undergraduates are fresh faces entering their first year of
college. Second, it is also an age group in which brand loyalty can be
readily established. In fact, most people hold on to their first credit
card for up to 15 years, which is probably the amount of time it takes
them to dig out of the mountain of credit card debt they incurred while
in their teens.
A staffer of mine recently opened his 7 year old son's mail--amazed
to find a brand new American Express card. The new card came as a
result of, according to the offer, the elementary schooler's
``excellent credit history.'' A brand new potential victim of the
credit card industry. He is 7 years old. What's next? Are they going to
set up credit card kiosks in hospital maternity wards?
Credit card issuers target vulnerable young people in our society
and extend them large amounts of credit with little if any
consideration to whether or not there is a reasonable expectation of
repayment. As a result, more and more young people are falling into a
financial hole from which they are unable to escape. One of the fastest
growing segments of the population forced to declare bankruptcy is this
We have an obligation to protect and educate our Nation's youth.
The next generation of American leaders deserve no less than the
reigning in of the irresponsible practices of the credit card industry.
As many of the witnesses will mention, I have introduced
legislation designed to force credit card issuers to stop their more
deceptive and abusive practices and alter the targeting of our most
vulnerable consumers. This legislation, the Credit CARD Act, should be
the first step is restoring some common decency in the credit card
I look forward to the testimony today, particularly from the
regulators of the credit card industry--I must confess I do not know a
great deal about the regulatory and enforcement activities of those
that regulate this industry.
What concerns me is that I fear that my lack of knowledge about
what the regulators dois because they do not do enough to protect
consumers from the predatory practices of the credit card industry. I
look forward to working with them to accomplish the goal of improving
consumer protection in the area of credit cards.
Record fees, record abuses, record profits. And a record number of
Americans are being taken advantage of.
I would like to again thank our witness for appearing before the
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
I would like to thank Chairman Shelby for holding this hearing to
examine the current legal and regulatory framework governing credit
card issuers and business practices in the credit card industry.
Six hundred thousand credit card issuers exist in the market today,
and nearly 145 million Americans use credit cards.
The consumer credit system has provided Americans access to
financing when they need it most. Of course, it is essential that
consumers are responsible with their use of credit cards, and are well
aware of the interest rates, fees, limits and other terms of the
As a proponent of meaningful disclosure, however, I believe there
is a balance to strike when it comes to giving the consumer information
about their credit terms and agreements without becoming so
overwhelming as to be rendered meaningless.
I look forward to hearing from the regulators and industry today on
what changes might be needed in order to improve the current framework
for the ultimate protection of consumers. Thank you to our witnesses
for agreeing to appear before the Committee. I look forward to your
PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
Thank you, Mr. Chairman. I want to welcome both Senator Feinstein
and Senator Akaka to today's hearing.
They are both champions of financial literacy and consumer rights
and they will add significantly to our discussions on the subject of
credit cards and consumer debt.
It is quite fitting that we are taking some time to discuss this
issue again. On the heels of Congress' decision to pass the bankruptcy
bill--a bill that was supported by a broad bipartisan group of
legislators--it is important for us to continue our focus on how we can
improve the disclosures that banks and credit card companies make to
However, we should continue to move forward on increasing financial
Many would agree that education is the silver bullet for us in so
many areas and that is certainly true when it comes to our personal
financial health. I look forward to seeing the Treasury Department's
upcoming report on financial literacy, but we already know that
Congress and the President are not investing the kind of money in this
effort necessary to be successful.
I strongly supported the establishment of a national uniform
standard for our credit system--one that would ensure greater consumer
access to and control over credit information that would provide
enhanced protections against identity theft, and, establish a
groundbreaking new role for the Federal Government in financial
literacy and education promotion.
I was pleased to sponsor Title V--the Financial Literacy component
of the FCRA legislation that we passed more than a year ago.
Because of this Title, there is now a national financial literacy
commission charged with developing a national strategy on financial
literacy, setting up a one-stop consumer website and 800 number, and
guaranteeing that we streamline and coordinate our Government's
financial literacy efforts.
I also authored an FCRA provision that requires the FTC to study
common financial transactions that are not generally reported to credit
reporting agencies and recommend ways to encourage the reporting of
these transactions. This is important because it will help the
Government and credit reporting agencies develop better ways to measure
the creditworthiness of lower-income, working families.
I also want to say that I believe that one thing that has made our
economy more robust over the past 20 years has been the increasing
access that people have to credit.
I am committed to ensuring that people have access to credit and I
am going to continuing working to ensure the heath of our consumer
For one, I am concerned about taking a heavy handed approach to
oversight that may lead to the regulation of interest rates and fees
that ultimately limit the ability of banks to extend credit to higher
That being said, it is important that we make sure that credit
cards companies are treating people fairly.
It disturbs me that there are reports that some companies are
increasingly trapping unwitting consumers in a labyrinth of late fees
and rising interest rates.
We must consider the issue of fair play. People can act rationally
only when they have all the information that they need to make a
decision. Senator Akaka has introduced a bill that would provide
additional information to consumers, information that consumer
advocates are adamant will help consumers understand the high costs of
holding credit card debt.
I supported his amendment on this issue when it was offered to the
bankruptcy bill because I believe that reasonable disclosures can help
bridge the gap between available information about how our credit cards
work and the need to make informed decisions.
Also, I continue to be concerned about credit card marketing to our
college aged kids.
The marketing to our students is not necessarily a bad thing.
Credit cards used by students can be very beneficial. They can provide
students with an opportunity to learn to manage money. And, they can
offer students an opportunity to build good credit ratings.
However, this is not always what happens. Indeed, we are seeing
numerous incidents where the ultimate result is that the students end
up racking up thousands of dollars of debt.
That is why I support Senator Dodd's efforts to ensure that if a
credit card company wants to issue a credit card to a student under the
age of 21, the student must have the ability to repay his or her debts,
must attend a credit counseling course, or must identify an
individual--presumably a parent--who is willing to accept joint
liability for the credit card balances. This is both common sense and
While we have done a significant amount of work to improve
disclosures and transparency there is always room for improvement. I
believe the Committee, however, should be careful that we do not
unintentionally restrict credit to vulnerable segments of our
population when considering our options.
Mr. Chairman, thank you again for calling this hearing and I look
forward to hearing from our witnesses today.
PREPARED STATEMENT OF DIANNE FEINSTEIN
A U.S. Senator from the State of California
May 17, 2005
Thank you, Chairman Shelby and Ranking Member Sarbanes for
scheduling this hearing. I believe that it is important that we explore
the issue of consumer credit card debt.
Today, 144 million Americans utilize credit cards and charge more
debt on those cards than ever before. (Frontline, ``The Secret History
of the Credit Card,'' November 2004.) In 1990, Americans charged $338
billion on credit cards. By 2003, that number had risen to $1.5
Many Americans now own multiple credit cards. In 2003, 841 million
bank-issued credit cards were in circulation in the United States.
(CardWeb.com.) That number becomes nearly 1.4 billion credit cards,
when cards issued by stores and oil companies are factored in. (HSN
Consultants.) That is an average of 5 credit cards per person.
The proliferation of credit cards can be traced, in part, to a
dramatic increase in credit card solicitation. In 1993, credit card
companies sent 1.52 billion solicitations to American homes; in 2001,
they sent over 5 billion. (Mail Monitor, a service of BAIGlobal, Inc.
See also Consumer Federation of America, Press Release, ``Credit Card
Issuers Aggressively Expand Marketing and Lines Of Credit On Eve Of New
Bankruptcy Restrictions,'' February 27, 2001.)
As one would expect, the increase in credit cards has also yielded
an increase in credit card debt. Individuals get six, seven, or eight
different credit cards, pay only the minimum payment required, and many
end up drowning in debt. That happens in case after case.
Since 1990, the debt that Americans carry on credit cards has more
than tripled, going from about $238 billion in 1990 to $755 billion in
2004. (Testimony of Tamara Draut, Director of the Economic Opportunity
Program, Demos, Before The Subcommittee on Financial Institutions and
Consumer Credit Regarding Financial Services Issues: A Consumer's
Perspective, September 15, 2004.)
As a result, the average American household now has about $7,300 of
credit card debt. (Federal Reserve, Release G. 19, ``Consumer
As has been discussed in this Congress, the number of personal
bankruptcies has doubled since 1990. (Testimony of Tamara Draut,
Director of the Economic Opportunity Program, Demos, Before The
Subcommittee on Financial Institutions and Consumer Credit Regarding
Financial Services Issues: A Consumer's Perspective, September 15,
2004) Many of these personal bankruptcies are people who utilize credit
cards. These cards are enormously attractive. However, these individual
credit card holders receive no information on the impact of compounding
interest. They pay just the minimum payment. They pay it for 1 year, 2
years--they make additional purchases, they get another card, and
another, and another.
Unfortunately, these individuals making the minimum payment are
witnessing the ugly side of the ``Miracle of Compound Interest.'' After
2 or 3 years, many find that the interest on the debt is such that they
can never repay these cards, and do not know what to do about it.
Statistics vary about the number of individuals who make only the
minimum payments. One study determined that 35 million pay only the
minimum on their credit cards. (Frontline, ``The Secret History of the
Credit Card,'' November 2004.) In a recent poll, 40 percent of
respondents said that they pay the minimum or slightly more. (Cambridge
Consumer Credit Index Poll, March 2005.) What is certain is that many
Americans pay only the minimum, and that paying only the minimum has
harsh financial consequences.
I suspect that most people would be surprised to know how much
interest can pile up when paying the minimum. Take the average
household, with $7,300 of credit card debt, and the average credit card
interest rate, which in April, before the most recent Federal Reserve
Board increase of the prime rate, was 16.75 percent. (Carddata.com.) If
only the 2 percent minimum payment is made, it will take them 44 years
and $23,373.90 to pay off the card. (All calculations from CardTrak at
Cardweb.com.) And that is if the family does not spend another cent on
their credit cards--an unlikely assumption. In other words, the family
will need to pay over $16,000 in interest to repay just $7,300 of
For individuals or families with more than average debt, the
pitfalls are even greater. Twenty thousand dollars of credit card debt
at the average 16.75 percent interest rate will take an 58 years and
$65,415.28 to pay off if only the minimum payments are made.
And 16.25 percent is only the average interest rate. The prime
rate, despite recent increases, remains relatively low--at 6 percent.
However, interest rates around 20 percent are not uncommon. In fact,
among the 10 banks that are the largest issuers of credit cards, the
top interest rates on credit cards are between 23 and 31 percent--and
that does not factor in various penalties and fees. (Cardweb.com.) When
penalty interest rates are factored in, the highest rates are 41
percent. (Carddata.com.) In 1990, the highest interest rate--even with
penalties, was 22 percent, a little more than half of what they are
Even if we assume only a 20 percent interest rate, a family that
has the average debt of $7,300 at a 20 percent interest rate and makes
the minimum payments will need an incredible 76 years and $41,884 to
pay off that initial $7,300 of debt. That is $34,584 in interest
payments--more than 4 times the original debt. And these examples are
far from extreme.
Moreover, these are not merely statistics, but are reflective of
very real situations for many people. On March 6, The Washington Post
ran a headline story on its front page, entitled ``Credit Card
Penalties, Fees Bury Debtors.'' I would recommend this article to my
colleagues, because it illustrates part of the problem--that credit
card companies, aggressively marketing their products, end up charging
outrageous interest and fees to their customers. I ask that the article
be included in the record. The article highlighted the following
Ohio resident, Ruth Owens tried for 6 years to pay off a
$1,900 balance on her Discover card, sending the credit company a
total of $3,492 in monthly payments from 1997 to 2003. Yet her
balance grew to $5,564.28,
Virginia resident Josephine McCarthy's Providian Visa bill
increased to $5,357 in 2 years, even though McCarthy has used the
card for only $218.16 in purchases and has made monthly payments
Special-education teacher Fatemeh Hosseini, from my state of
California, worked a second job to keep up with the $2,000 in
monthly payments she collectively sent to five banks to try to pay
$25,000 in credit card debt. Even though she had not used the cards
to buy anything more, her debt had nearly doubled to $49,574 by the
time she filed for bankruptcy last June.
Unfortunately, these stories are not unique.
Part of the problem goes back to changes made in the credit card
industry. For a long time, most banks required their customers to pay 5
percent of their credit card balance every month. That was before
Andrew Kahr, a credit card industry consultant, got involved. Mr. Kahr
realized that if customers were able to pay less, they would borrow
more, and he convinced his clients that they should reduce the minimum
payment to just 2 percent. (Frontline, ``The Secret History of the
Credit Card,'' November 2004.)
The PBS program ``Frontline,'' ran a program in November of last
year titled ``The Secret History of the Credit Card'' that examined the
rapid growth of the credit card industry and included an interview with
Mr. Kahr's innovation has been a windfall for the credit card
industry. If consumers are paying a lower percentage of their balance
as the minimum payment, the credit card companies will make more money
over time. In fact, many in the industry refer to individuals who pay
their credit card bills in full as ``deadbeats,'' because they are less
profitable than individuals who carry large balances, who are known as
``revolvers.'' (Frontline, ``The Secret History of the Credit Card,''
And Mr. Kahr's own research showed that just making the minimum
payment eased consumers' anxiety about carrying large amounts of credit
card debt--they believe they are still being financially prudent.
(Frontline, ``The Secret History of the Credit Card,'' November 2004.)
The bill I am proposing speaks directly to those types of
consumers. There will always be people who cannot afford to pay more
than their minimum payments. But, there are also a large number of
consumers who can afford to pay more but feel comfortable paying the
minimum payment because they do not realize the consequences of doing
Now, I am certainly not trying to demonize credit cards or the
credit card industry. Credit cards are an important part of everyday
life. However, I do think that people should understand the dangers of
paying only their monthly minimums. In this way individuals will be
able to act responsibly.
Mr. Chairman, it is not necessarily that people do not understand
the basics of interest. Most of us just do not realize how fast it
compounds or how important it is to do the math to find out what it
means to pay a minimum requirement.
The bottom line is that for many consumers, the 2 percent minimum
payment is a financial trap.
The Credit Card Minimum Payment Notification Act is designed to
ensure that people are not caught in this trap through lack of
information. The bill tracks the language of the amendment originally
proposed to the bankruptcy bill that was cosponsored by Senator Kyl,
Senator Brownback, and myself.
Let me tell you exactly what this bill would do. It would require
credit card companies to add two items to each consumer's monthly
credit card statement:
One, a notice warning credit card holders that making only the
minimum payment each month will increase the interest they pay and the
amount of time it takes to repay their debt; and two, examples of the
amount of time and money required to repay a credit card debt if only
minimum payments are made; or if the consumer makes only minimum
payments for 6-consecutive months, the amount of time and money
required to repay the individual's specific credit card debt, under the
terms of their credit card agreement.
The bill would also require that a toll free number be included on
statements that consumers can call to get an estimate of the time and
money required to repay their balance, if only minimum payments are
And, if the consumer makes only minimum payments for 6-consecutive
months, they will receive a toll free number to an accredited credit
The disclosure requirements in this bill would only apply if the
consumer has a minimum payment that is less than 10 percent of the debt
on the credit card, or if their balance is greater than $500.
Otherwise, none of these disclosures would be required on their
The language of this bill comes from a California law, the
``California Credit Card Payment Warning Act,'' passed in 2001.
Unfortunately, in 2002, this California law was struck down in U.S.
District Court as being preempted by the 1968 Truth in Lending Act. The
Truth in Lending Act was enacted in part because Congress found that,
``The informed use of credit results from an awareness of the cost of
thereof by consumers.'' Consequently, this bill would amend the Truth
in Lending Act, and would also further its core purpose.
These disclosures allow consumers to know exactly what it means for
them to carry a balance and only make minimum payments, so they can
make informed decisions on credit card use and repayment.
The disclosure required by this bill is straightforward--how much
it will cost to pay off the debt if only minimum payments are made, and
how long it will take do it. As for expense, my staff tells me that on
the website Cardweb.com, there is a free interest calculator that does
these calculations in under a second. Moreover, I am told that banks
make these calculations internally to determine credit risk. The
expense would be minimal.
Percentage rates and balances are constantly changing and each
month, the credit card companies are able to assess the minimum
payment, late fees, over-the-limit fees, and finance charges for
millions of accounts.
If the credit card companies can put in their bills what the
minimum monthly payment is, they can certainly figure out how to
disclose to their customers how much it might cost them if they stick
to that minimum payment.
The credit card industry is the most profitable sector of banking,
and last year it made $30 billion in profits. (Carddata.com.) MBNA's
profits alone last year were one-and-a-half times that of McDonald's.
Citibank was more profitable than Microsoft and Wal-mart. (Frontline,
``The Secret History of the Credit Card,'' November 2004.) I do not
think they should have any trouble implementing the requirements of
I believe that this is extraordinarily important and that it will
minimize bankruptcies. With companies charging very substantial
interest rates, they have an obligation to let the credit card holder
know what those minimum payments really mean. I have people close to me
I have watched, with six or seven credit cards, and it is impossible
for them, over the next 10 or 15 years, to pay off the debt if they
continue making just minimum payments.
We now have a bankruptcy bill that has passed into law. I continue
to believe that a bill requiring a limited but meaningful disclosure by
credit cards companies is a necessary accompaniment. I think you will
have people who are more cautious, which I believe is good for the
bankruptcy courts in terms of reducing their caseloads, and also good
for American consumers.
The credit card debt problem facing our Nation is significant. I
believe that this bill is an important step in providing individuals
with the information needed to act responsibly, and it does so with a
minimal burden on the industry.
PREPARED STATEMENT OF DANIEL K. AKAKA
A. U.S. Senator from the State of Hawaii
Thank you Mr. Chairman, I appreciate your including me in this
hearing today. I also want to express my deep appreciation to Senator
Sarbanes for working closely with me on a wide range of financial
literacy related issues, including credit card disclosures.
Mr. Chairman, revolving debt, mostly comprised of credit card debt,
has risen from $54 billion in January 1980 to more than $800 billion in
March 2005. During all of 1980, only 287,570 consumers filed for
bankruptcy. In 2004, approximately 1.5 million consumers filed for
bankruptcy, keeping pace with 2003's record level.
Some of this increased activity can be explained by a ballooning in
consumer debt burdens, particularly revolving debt, primarily made up
of credit card debt. Credit card issuers have a lot of flexibility in
setting minimum monthly payments. Competitive pressures and a desire to
preserve outstanding balances have led to a general easing of minimum
payment requirements in recent years. The result has been extended
repayment programs. Even with the doubling of minimum monthly payments
from 2 to 4 percent by some of the country's largest credit card
issuers, much of that payment continues to cover only interest and
fees. Meanwhile, other initiatives by large credit card issuers, such
as reducing grace periods, will catch many consumers with late fees
which will trigger higher default interest rate charges.
It is imperative that we make consumers more aware of the long-term
effects of their financial decisions, particularly in managing credit
card debt. Obtaining credit has become easier. Students are offered
credit cards at earlier ages, particularly since credit card companies
have been successful with aggressive campaigns targeted at college
students. Universities and alumni associations across the country have
entered into marketing agreements with credit card companies. More than
1,000 universities and colleges have affinity marketing relationships
with credit card issuers. Affinity relationships are made as attractive
as possible to credit card account holders through the offering of
various benefits and discounts for using the credit card, with the
affinity group receiving a percentage of the total charge volume from
the credit card issuer. Thus, college students, many already burdened
with student loans, are accumulating credit card debt. I appreciate all
of the work that Senator Dodd has done in order to address this
While it is relatively easy to obtain credit, especially on college
campuses, not enough is being done to ensure that credit is properly
managed. Currently, credit card statements fail to include vital
information that would allow individuals to make fully informed
financial decisions. Additional disclosure is needed to ensure that
individuals completely understand the implications of their credit card
use and the costs of only making the minimum payments as determined by
credit card companies.
I have a long history of seeking to improve financial literacy in
this country, primarily through expanding educational opportunities for
students and adults. Beyond education, I also believe that consumers
need to be made more aware of the long-term effects of their financial
decisions, particularly in managing their credit card debt, so that
they can avoid financial pitfalls.
The Bankruptcy Reform law includes a requirement that credit card
issuers provide information to consumers about the consequences of only
making the minimum monthly payment. However, this requirement fails to
provide the detailed information on billing statements that consumers
need to know to make informed decisions. The bankruptcy law will allow
credit card issuers a choice between disclosure statements. The first
option included in the bankruptcy bill would require a standard
``Minimum Payment Warning.'' The generic warning would state that it
would take 88 months to pay off a balance of $1,000 for bank card
holders or 24 months to pay off a balance of $300 for retail card
holders. This first option also includes a requirement that a toll-free
number be established that would provide an estimate of the time it
would take to pay off the customer's balance. The Federal Reserve Board
would be required to establish the table that would estimate the
approximate number of months it would take to pay off a variety of
There is a second option that the legislation permits. The second
option allows the credit card issuer to provide a general minimum
payment warning and provide a toll-free number that consumers could
call for the actual number of months to repay the outstanding balance.
The options available under the Bankruptcy Reform law are woefully
inadequate. They do not require issuers to provide their customers with
the total amount they would pay in interest and principal if they chose
to pay off their balance at the minimum rate. Since the average
household with debt carries a balance of approximately $10,000 to
$12,000 in revolving debt, a warning based on a balance of $1,000 will
not be helpful. The minimum payment warning included in the first
option underestimates the costs of paying a balance off at the minimum
payment. If a family has a credit card debt of $10,000, and the
interest rate is a modest 12.4 percent, it would take more than 10 and
a half years to pay off the balance while making minimum monthly
payments of 4 percent.
Along with Senators Sarbanes, Schumer, Durbin, and Leahy, I
introduced the Credit Card Minimum Payment Warning Act and subsequently
offered it as an amendment to the bankruptcy bill. The legislation
would make it very clear what costs consumers will incur if they make
only the minimum payments on their credit cards. If the Credit Card
Minimum Payment Warning Act is enacted, the personalized information
consumers would receive for their accounts would help them make
informed choices about their payments toward reducing outstanding debt.
Our bill requires that a minimum payment warning notification on
monthly statements stating that making the minimum payment will
increase the amount of interest that will be paid and extend the amount
of time it will take to repay the outstanding balance. The legislation
also requires companies to inform consumers of how many years and
months it will take to repay their entire balance if they make only the
minimum payments. In addition, the total cost in interest and
principal, if the consumer pays only the minimum payment, would have to
be disclosed. These provisions will make individuals much more aware of
the true costs of their credit card debts. The bill also requires that
credit card companies provide useful information so that people can
develop strategies to free themselves of credit card debt. Consumers
would have to be provided with the amount they need to pay to eliminate
their outstanding balance within 36 months.
Finally, our bill would require that creditors establish a toll-
free number so that consumers can access trustworthy credit counselors.
In order to ensure that consumers are referred to only trustworthy
credit counseling organizations, these agencies would have to be
approved by the Federal Trade Commission and the Federal Reserve Board
as having met comprehensive quality standards. These standards are
necessary because certain credit counseling agencies have abused their
nonprofit, tax-exempt status and taken advantage of people seeking
assistance in managing their debts. Many people believe, sometimes
mistakenly, that they can place blind trust in nonprofit organizations
and that their fees will be lower than those of other credit counseling
We must provide consumers with detailed personalized information to
assist them in making better informed choices about their credit card
use and repayment. Our bill makes clear the adverse consequences of
uninformed choices, such as making only minimum payments, and provides
opportunities to locate assistance to better manage credit card debt.
In response to critics who believe that the Credit Card Minimum
Payment Warning Act disclosures are not feasible, I, along with Senator
Sarbanes, have asked the General Accountability Office to study the
feasibility of requiring credit card issuers to disclose more
information to consumers about the cost association with making only
the minimum monthly payment. I look forward to reviewing the GAO's
Mr. Chairman, I look forward to working with you, Senator Sarbanes,
and all of the Members of the Committee, to improve credit card
disclosures so that they provide relevant and useful information that
hopefully will bring about positive behavior change among consumers.
Consumers with lower debt levels will be better able to establish
savings plans that allow them to be in a better position to afford a
home, pay for their child's education, or retire comfortably on their
Thank you again for including me in this important hearing, Mr.
PREPARED STATEMENT OF EDWARD M. GRAMLICH
Member, Board of Governors of the Federal Reserve System
May 17, 2005
Chairman Shelby, Senator Sarbanes, and Members of the Committee, I
appreciate the opportunity to appear today to discuss consumer credit
card accounts. The Board of Governors of the Federal Reserve System
administers the Truth in Lending Act (TILA). Enacted in 1968, TILA is
the primary Federal law governing disclosures for consumer credit,
including credit card accounts. It is implemented in the Board's
TILA has distinct rules for two categories of consumer credit:
Open-end (revolving) credit plans, such as credit card accounts and
other lines of credit; and closed-end (installment) transactions, such
as auto loans and home-purchase loans. Amendments targeting specific
loan products or practices have been added over TILA's nearly 40-year
history and the Act was substantially revised by the Truth in Lending
Simplification and Reform Act of 1980.
TILA's purpose is to assure a meaningful disclosure of credit terms
so that consumers can compare more readily the various credit terms
available and avoid the uninformed use of credit. TILA fulfills this
purpose by requiring the uniform disclosure of costs and other terms to
consumers. TILA is also intended to protect consumers against
inaccurate and unfair credit billing and credit card practices, which
the Act seeks to accomplish through procedural and substantive
protections, including special rules for cardholders.
Regulation Z review. Regulation Z and its staff commentary have
been reviewed and updated almost continuously, but not comprehensively
since 1980. In December 2004, the Board began a comprehensive review of
Regulation Z, starting with the publication of an Advance Notice of
Proposed Rulemaking (ANPR) on the rules for open-end credit that is not
home-secured, such as general-purpose credit cards.\1\ The goal of the
review is to improve the effectiveness and usefulness of open-end
disclosures and substantive protections. The public comment period
recently closed, and the Board's staff will be carefully reviewing the
comment letters as they consider possible changes to the regulations.
We also believe that consumer testing should be used to test the
effectiveness of any proposed revisions, and anticipate publishing
proposed revisions to Regulation Z in 2006.
\1\ The Board's Advance Notice of Proposed Rulemaking for
Regulation Z can be found at: www.Federalreserve.gov/boarddocs/press/
We recognize the hard work that is ahead. The landscape of credit
card lending has changed since TILA's disclosure rules for credit card
accounts were first put in place. Products and pricing are complex.
Credit card accounts can be used for purchases, cash advances, and
balance transfers, and each means of access may carry different rates.
Promotional rates and deferred interest plans for limited time periods
are commonly layered onto these basic features. However, under some
credit card agreements, paying late or exceeding a credit limit may
trigger significant fees and a penalty rate that is applied to the
entire outstanding balance, and may trigger higher rates on other
credit card accounts. Moreover, the amount of consumers' payments, how
creditors allocate those payments to outstanding balances, and how the
balances are calculated all affect consumers' overall cost of credit
under open-end plans.
The question is, of course, how might the Board revise its rules
under TILA in a way that will enable consumers to more effectively use
disclosures about the key financial elements of a particular credit
card over the life of the account? Simplifying the content of
disclosures may be one way; finding ways to enhance consumers' ability
to notice and understand disclosures may be another. Reviewing the
adequacy of TILA's substantive protections is a third, and the ANPR
asks questions about each of these areas. As the Regulation Z review
proceeds, the Board will be grappling with the challenge of issuing
clear and simple rules for creditors that both provide consumers with
key information about complicated products (while avoiding so-called
``information overload'') and provide consumers adequate substantive
protections, consistent with TILA. For example, TILA contains
procedures for resolving billing errors on open-end accounts, prohibits
the unsolicited issuance of credit cards, and limits consumers'
liability when a credit card is lost or stolen.
To assist the Committee in its deliberations, I will provide an
overview of TILA's rules affecting open-end credit plans, focusing on
rules for credit card accounts. I will discuss some of the major issues
raised in the ANPR, and commenters' views on these issues. I will also
address compliance and enforcement issues, along with the role of
consumer education in improving consumers' informed use of credit.
Disclosures for Open-end Credit Plans
TILA disclosures for open-end plans are provided to consumers:
On or with credit card applications and solicitations, such as
applications sent by direct mail.
At account opening.
Throughout the account relationship, such as on periodic
statements of account activity and when the account terms change.
Content. Generally, the disclosures provided with credit card
applications, at account-opening and on periodic statements, address
the same aspects of the plan; that is, in each case consumers receive
information about rates, fees, and grace periods to pay balances
without incurring finance charges. The level of detail differs,
Disclosures received with a direct-mail credit card account
application are intended to provide a snapshot to help the consumer
decide whether or not to apply for the credit card account. For
example, revolving open-end accounts involve calculating a balance
against which a rate is applied. The method for calculating that
balance may differ from creditor to creditor, however. Under TILA,
identifying a balance calculation method by title, such as the
``average daily balance method (including new purchases),'' is
sufficient at application. Account-opening disclosures are more
detailed and complex, however, in part because the account-opening
disclosures required under TILA are typically incorporated into the
account agreement. The periodic statement discloses information
specific to the statement cycle. In the case of balance calculation
methods, the disclosure is typically identical to the account-opening
Creditors must also tell consumers about their rights and
responsibilities under the Fair Credit Billing Act, a 1974 amendment to
TILA that I will discuss later, which governs the process for resolving
billing disputes. In addition to explaining these rights in the
account-opening disclosures, creditors must send reminders throughout
the account relationship. Under TILA, a detailed explanation must be
sent about once a year; typically, creditors instead send an
abbreviated reminder on the reverse side of each periodic statement, as
permitted by Regulation Z.
Format. Generally, disclosures must be in writing and presented in
a ``clear and conspicuous'' manner. For credit card application
disclosures, the ``clear and conspicuous'' standard is interpreted to
mean that application disclosures must be ``readily noticeable.''
Disclosures that are printed in a twelve-point type size have a safe
harbor in the regulation under this standard.
Disclosures for direct-mail credit card account applications have
the most regimented format requirements. The disclosures must be
presented in a table with headings substantially similar to those
published in the Board's model forms. Regulation Z's sole type-size
requirement also applies to direct-mail application disclosures; the
annual percentage rate for purchases must be in at least eighteen-point
type size. Format requirements for credit card account applications
available to the general public (take-one's) are quite flexible. At the
card issuer's option, take-one disclosures may be in the form required
for direct-mail applications, an abbreviated narrative, or a simple
statement that costs are involved that provides information about where
details can be obtained.
Compared to application disclosures, account-opening and periodic
statement disclosures are governed by few specific format requirements.
Except in the context of recently enacted amendments to TILA contained
in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(2005 Bankruptcy Act), disclosures need not be presented in any
particular order, nor is there any detailed guidance on the ``clear and
conspicuous'' standard other than a requirement that the terms
``finance charge'' and ``annual percentage rate'' must be more
conspicuous than any other term.
The 2005 Bankruptcy Act contains several amendments to TILA, three
of which are particularly relevant here. The act generally requires
creditors to provide on the front page of periodic statements a warning
about the effects of making minimum payments and a standardized example
of the time it would take to pay off an assumed balance if the consumer
makes only the minimum payment, along with a toll-free telephone number
that consumers can use to obtain estimates of how long it would take to
pay off their actual account balance. In addition, the Act provides
that if a temporary rate is offered on solicitations and applications,
or promotional materials that accompany them, the term ``introductory''
must be ``immediately proximate'' to each listing of the temporary
rate. The expiration date and the rate that will apply when the
introductory rate expires must be ``closely proximate'' to the first
listing of the introductory rate in promotional materials. Under the
Act, the Board must issue guidance regarding a ``clear and
conspicuous'' standard applicable only to these minimum payment and
introductory rate disclosures, including model disclosures.
The Board has published model forms and clauses to ease compliance
for many of TILA's disclosure requirements. Creditors are not required
to use these forms or clauses, but creditors that use them properly are
deemed to be in compliance with the regulation regarding these
disclosures. The Board has published model forms for direct-mail credit
card account application disclosures, but there are no model forms
illustrating account-opening or periodic statement disclosures.
Regulation Z review. Considering how consumers' use of open-end
credit, and credit cards in particular, has grown, and the increased
diversity in credit products and pricing, the Board's ANPR asked a
number of detailed questions about how to improve the effectiveness and
usefulness of TILA's open-end disclosures, including how to address
concerns about ``information overload.'' The Board also invited comment
on how the format of disclosures might be improved, and whether
additional model disclosures would be helpful. The Board announced its
intent to use focus groups and other research to test the effectiveness
of any new disclosures.
In general, commenters representing both consumers and industry
believe that the regimented format requirements for TILA's credit card
account application disclosures have proven useful to consumers,
although a variety of suggestions were made to add or delete specific
disclosure requirements. Many, however, noted that typical account-
opening disclosures are lengthy and complex, and suggested that the
effectiveness of account-opening disclosures could be improved if key
terms were summarized in a standardized format, perhaps in the same
format as TILA's direct-mail application disclosure. These suggestions
are consistent with the views of some members of the Board's Consumer
Advisory Council, who advise the Board on consumer financial services
matters. Industry commenters support the Board's intention to use focus
groups or other consumer research tools to test the effectiveness of
any proposed revisions.
To combat ``information overload,'' many commenters asked the Board
to emphasize only the most important information consumers need at the
time the disclosure is given. They asked the Board to avoid rules that
require the repetitive delivery of complex information, not all of
which is essential to comparison shopping for credit cards, such as a
lengthy explanation of the creditor's method of calculating balances
that is now required at account-opening and on periodic statements.
Commenters suggested that the Board would more effectively promote
comparison shopping by focusing on essential terms in a simplified way.
They believe some information could also be provided to consumers
through educational, nonregulatory methods. Taken together, this
approach could lead to simpler disclosures that consumers might be more
inclined to read and understand.
Truth in Lending's Cost Disclosures for Open-end Credit Plans
As I have indicated, TILA is designed to provide consumers with
information about the costs and terms of a particular form of credit,
to enable consumers to make comparisons among creditors or different
credit programs, or to determine whether they should obtain credit at
Finance charges and other charges. Creditors offering open-end
credit must disclose fees that are ``finance charges'' and ``other
charges'' that are part of the credit plan. A ``finance charge'' is
broadly defined as any charge payable directly or indirectly by the
consumer and imposed directly or indirectly by the creditor, as an
incident to or a condition of the extension of credit. Interest, cash
advance fees, and balance transfer fees are examples of finance
charges. Fees that are not incident to the extension of credit, but are
significant charges imposed as part of an open-end plan must also be
disclosed as ``other charges.'' Late payment fees, application fees,
and recurring periodic membership fees that are payable whether or not
the consumer uses the credit plan (annual fees) are examples of other
Annual percentage rate. Under TILA, the finance charge is also
expressed as an annualized rate, called the Annual Percentage Rate, or
APR. Interestingly, within the Truth in Lending structure, the term
represents three distinct calculations, one under TILA's rules for
closed-end credit and two under the rules for open-end credit.
For closed-end (installment) credit, the APR includes interest and
finance charges other than interest, such as points or origination fees
on mortgage loans. Thus, the APR on closed-end transactions can be
somewhat higher than the interest rate identified in the loan
agreement, whenever other fees are present in the finance charge.
APR's for open-end credit are calculated differently. Interest is
the only component of the APR that can be disclosed on credit card
solicitations and applications, account-opening disclosures, and
advertisements for open-end plans. This is because the actual cost of
credit to the consumer is unknown when these disclosures are provided,
since the amount and timing of advances and the imposition of fees
generally are in the consumer's control.
Periodic statements must also disclose an ``effective'' or
``historic'' APR that reflects interest as well as finance charges
other than interest, such as a cash advance fee, that were imposed
during the past billing cycle. Because noninterest finance charges are
amortized over one billing cycle for purposes of disclosing the
effective APR, such fees can result in a high, double-digit (or
sometimes triple-digit) effective APR on periodic statements. To avoid
a skewed APR that could possibly mislead consumers, nonrecurring loan
fees, points, or similar finance charges related to the opening,
renewing, or continuing of an open-end account are currently excluded
from the effective APR that is disclosed for a particular billing
cycle, under Regulation Z and the Board's official staff commentary.
Regulation Z Review. A major focus of the Board's Regulation Z
review is how to disclose more effectively the cost of open-end credit.
For the industry as a whole, the types of fees charged on open-end
consumer credit accounts have grown in number and variety. To the
extent these fees are not specifically addressed in TILA or Regulation
Z, creditors are sometimes unsure whether the fee should be disclosed
under TILA as a ``finance charge'' or an ``other charge,'' or not
disclosed under TILA at all. The Board asked for comment in the ANPR on
how to provide more certainty in classifying fees, and whether
consumers would benefit from other disclosures that address the cost of
credit, such as how creditors allocate payments.
Commenters provided a variety of views. Some suggested that
creditors should disclose only interest as the ``finance charge'' and
simply identify all other fees and charges. Others suggested that all
fees associated with an open-end plan should be disclosed as the
``finance charge.'' Above all, to mitigate the risks and potential
liability for noncompliance, creditors seek clear rules that allow them
to classify, with confidence, fees as a ``finance charge'' or an
``other charge'' under TILA, or as fees that are disclosed pursuant to
the credit agreement or State law. Under the statute, a creditor's
failure to comply with TILA could trigger a private right of action by
consumers and administrative sanctions by the Federal agency designated
in TILA to enforce its provisions with regard to that creditor.
One of the Board's most difficult challenges in the Regulation Z
review is to address the adequacy of periodic statement APR's. TILA
mandates the disclosure of the effective APR on periodic statements,
but its utility has been controversial. Consumer advocates believe it
is a key disclosure that is helpful, and provides ``shock value'' to
consumers when fees cause the APR to spike for the billing cycle.
Commenters representing industry argued that the effective APR is not
meaningful, confuses consumers, and is difficult to explain. They said
the disclosure distorts the true cost of credit because fees are
amortized over one billing cycle--typically 30 days--when the credit
may be repaid over several months. Several commenters urged the Board
to include in the effective APR calculation only charges that are based
on the amount and duration of credit (interest). In response to the
Board's ANPR, some commenters believe the effective APR might be more
effectively understood if a disclosure on the periodic statement
provided additional context.
Comments received on the merits of requiring creditors to disclose
payment allocation methods illustrate the competing interests in
improving the overall effectiveness of cost disclosures. Some
commenters believe any additional disclosure about payment allocation
methods would be excessive and that many card issuers already make such
disclosures. Others believe such a disclosure could be helpful to
consumers but worry that descriptions might be overly detailed; some
asked the Board to publish model disclosures to ensure clarity and
Rate increases. Credit card account agreements typically allow card
issuers to change interest rates and other fees during the life of the
account. Agreements spell out with specificity some potential changes,
such as that the rate will increase if the consumer pays late. Credit
card agreements also more generally reserve the right to increase
rates, fees, or other terms.
The statute does not address changes in terms to open-end plans.
Regulation Z, however, requires additional disclosures for some
changes. The general rule is that 15 days' advance notice is required
to increase the interest rate (or other finance charge) or an annual
fee. However, advance notice is not required in all cases. A notice is
required, but not in advance, if the interest rate increases due to a
consumer's default or delinquency. And if the creditor specifies in
advance the circumstances under which an increase to the finance charge
or an annual fee will occur, no change-in-terms notice is required when
those circumstances are met before the change is made. This is the
case, for example, when the agreement specifies that the interest rate
will increase if the consumer pays late. Under Regulation Z, because
the card issuer has specified when rates will increase in the account
agreement, the creditor need not provide advance notice of the rate
increase; the new rate will appear on the periodic statement for the
cycle in which the increase occurs.
Regulation Z review. The ANPR asked how consumers were informed
about rate increases or other changed terms to credit card accounts,
and whether the current rules were adequate to allow consumers to make
timely decisions about how to manage their accounts.
Comments were sharply divided on this issue. Some consumers believe
there is not enough advance notice for changes in terms, and believe a
much longer time period is needed to find alternative credit sources.
Creditors generally believe the current rules are adequate. The 15
days' advance notice is sufficient, they stated, because change-in-term
notices are typically sent with periodic statements, which means as a
practical matter consumers receive about a month's notice before the
new term becomes effective. Creditors noted that many States require at
least 30 days' advance notice and allow consumers to ``opt-out'' of the
new terms by closing the account and paying the outstanding balance
under the former terms. For rate (and other) changes not involving a
consumer's default, a number of creditors support a thirty-day notice
rule and a few support a consumer ``opt-out'' right under Regulation Z.
Where triggering events are set forth in the account agreement,
creditors believe there is no need to provide additional notice when
the event occurs; they are not changing a term, they stated, but merely
enforcing the agreement. Some suggested this is a case where consumer
education is the best solution, and that perhaps Board-published model
forms would result in uniformity and greater consumer understanding.
Consumers and consumer groups agreed that change-in-term policies
should be more prominently displayed, including in the credit card
Procedures and Substantive Protections
TILA and Regulation Z provide protections to consumers when a lost
or stolen credit card is used (unauthorized use), when the consumer
believes a charge on a billing statement is in error (billing error),
and when a purchase is made with a credit card and the consumer cannot
resolve with the merchant honoring the card a dispute about the quality
of goods or services (claim or defense). The Fair Credit Billing Act
was enacted, in part, to provide a procedure for resolving disputes
between cardholders and merchants who honor credit cards, and to
allocate to card issuers some responsibility for providing relief to
the consumer if the merchant fails to accommodate the cardholder.
In general, these protections allow the consumer to avoid paying
the disputed amount while the card issuer investigates the matter. The
card issuer cannot assess any finance charge on the disputed amount or
report the amount as delinquent until the investigation is completed.
Depending on the facts, a dispute could trigger one or more of the
protections discussed below. The applicability of a protection can
hinge on timing (when the cardholder notifies the card issuer about the
problem), the outstanding balance (how much of the sale price remains
unpaid at the time the cardholder notifies the card issuer), and
receipt of the good or services (nothing was delivered, or something
was delivered but did not meet the cardholder's expectations).
Unauthorized use of a credit card. A cardholder cannot be held
liable for more than $50 for the unauthorized use of a card. State law
or other applicable law determines whether the cardholder
``authorized'' the use of the card. There are no specific timing or
procedural requirements to trigger this protection (other than
notifying the card issuer). An unauthorized charge may also be raised
as a billing error or a claim or defense.
Billing error. The billing error provisions contain the strictest
timing and procedural requirements of TILA's substantive protections
for open-end plans. For example, the consumer's claim must be in
writing and sent to the address specifically designated for this
purpose. The consumer triggers the billing error rules by notifying the
creditor about the dispute. The notice must be received, and creditors
must respond, within a set time period. If asserted in a timely manner,
a billing error can be asserted even if the consumer previously paid
the charge in full.
Claim or defense for a credit card purchase. Cardholders may assert
against the card issuer any claim or defense they could assert against
the merchant. Cardholders trigger the rule by notifying the card issuer
that they have been unable to resolve a dispute with a merchant about a
sales transaction where a credit card was used. There is no specific
time period within which the cardholder must give notice or the card
issuer must respond. However, the cardholder must try to resolve the
matter with the merchant before involving the card issuer. Unlike the
billing error provision, this remedy is available only if the
cardholder has an unpaid balance on the disputed purchase at the time
notice is given.
Under TILA, the claim or defense remedy cannot be used to assert
tort claims (for example, product liability) against the card issuer.
Also, the remedy is available only for sales exceeding $50 and for
sales that occur in the State the cardholder has designated as his
address or within 100 miles of that address.
Unsolicited issuance. Credit cards may be issued to consumers only
upon request. Nevertheless, credit cards may be issued to cardholders
in renewal of, or substitution for, a previously accepted card
(including supplemental cards for the existing account).
Regulation Z Review. The Board's ANPR asked whether there was a
need to revise the regulations' provisions implementing TILA's
substantive protections, for example, whether the rules need to be
updated to address particular types of accounts or practices or to
address technological changes. To illustrate, TILA requires creditors
to credit payments on open-end plans on the day the payment is
received. Regulation Z permits creditors to set reasonable cut-off
hours, which must be disclosed to consumers. The ANPR solicited comment
on payment process systems, where mail delivery and electronic payments
may be continuous 24 hours a day, 7 days a week, and whether further
guidance was needed on what constitutes a ``reasonable'' cut-off hour.
Most industry commenters stated that cut-off hours vary among
creditors due to a number of internal and external factors, and asked
that creditors' flexibility in processing payments be maintained. The
Board also received suggestions for standardizing cut-off hours in
ranges, such as between 3 p.m. and 5 p.m. for mail delivery and 6 p.m.
and 8 p.m. for electronic payments.
Consumers and some consumer groups suggested that payments be
credited as of the date payments are received regardless of the time.
They asked the Board to consider rules that would provide greater
certainty to consumers with regard to determining when the payment is
received, because creditors more frequently than in the past exercise
their right under the account agreement to impose late fees when a
payment is not received by the due date. Moreover, consumer groups
stated, many credit card agreements allow creditors to increase rates
when the creditor learns the cardholder was late on another account
even if the cardholder makes timely payments to the creditor.
Supervision and Enforcement
As part of the bank supervision process, the Federal Reserve
enforces safe and sound banking practices and compliance with Federal
banking laws, including the Truth in Lending rules, with respect to the
approximately 915 State-chartered banks that are members of the Federal
Reserve System. Other regulators enforce these rules with respect to
other institutions. For the vast majority of State member banks, credit
card lending is not a significant activity. In fact, of the banks
supervised by the Federal Reserve, the issuance of credit cards is the
principal business activity of only two of these banks.
In January 2003, the Federal Reserve, along with the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
and the Office of Thrift Supervision, issued interagency guidance on
credit card account management practices. Federal Reserve supervisory
staff have applied the principles of this guidance through constructive
discussions with bank management about individual institutions'
portfolio management practices. In the limited instances where formal
or informal enforcement actions have proven necessary to ensure sound
management of an institution's credit card portfolio, the Federal
Reserve has appropriately exercised this authority.
The Board also investigates consumer complaints against State
member banks and forwards complaints it receives involving other
creditors to the appropriate enforcement agencies. In 2004, the Board
received approximately 5,100 consumer complaints. Of this number,
approximately 2,300, or 45 percent, were against State member banks,
while about 2,800, or 55 percent, were against other creditors not
under the Board's supervisory authority and were forwarded to the
About 39 percent of the 2,300 complaints against State member banks
processed by the Board were complaints about credit cards. The data
show that complainants' main concerns were about interest rates and
terms, penalty charges and fees such as late fees, over-the-limit fees,
and annual fees. In addition, consumers were concerned that their
credit information was incorrectly reported to consumer reporting
agencies. By way of comparison, industry estimates suggest there are
more than 600 million credit cards in consumers' hands and annual
domestic transactions involving credit cards exceed $1 trillion.
Role for Consumer Financial Education
This detailed description of the issues of concern in our review of
Regulation Z is illustrative of both the complexity of and the growth
in today's consumer credit markets. Technology has significantly
changed consumers' payment options, with the credit card becoming an
accepted payment medium for virtually any consumer good or service. In
addition, credit scoring models, the mathematical formulations lenders
use to predict credit risk, have enabled creditors to price credit more
efficiently, and charge rates of interest commensurate with a
consumer's repayment risk. This technology has contributed to the
expansion of the subprime market, which has significantly increased
access to credit for consumers who, more than likely, would have been
denied credit in the past.
As a result, concerns surrounding consumer protection relate as
much to issues of fair pricing practices as they do to fair access to
credit. In addition, as the industry has become more competitive on
interest rate pricing, it has adopted more complex fee structures that,
if triggered, affect a consumer's overall cost associated with the
The use of disclosure rules as a consumer protection strategy is
predicated on the assumption that consumers have an understanding of
consumer credit and personal financial management principles. By
dictating disclosure requirements, regulators and lawmakers rely on
consumers to be familiar with basic financial principles and to be able
to evaluate personal financial scenarios and options, once they have
access to pertinent financial information. Indeed, this is the
fundamental premise of our free market system, in which information
increases market efficiency. In recent years, however, there has been
an increase in concern that consumers' level of financial literacy has
not kept pace with the increasingly complex consumer financial
marketplace and the expansion of financial service providers and
Lenders, regulators, and consumer and community advocacy groups
have agreed that there is an increased need for consumer financial
education, and have pointed to a variety of factors, including record
personal bankruptcy filings, high consumer debt levels, and low
personal savings rates, to support this assertion. Financial education
could encourage consumers to focus on their credit contracts in
addition to the TILA disclosures, which highlight the key terms of the
contract. Toward this end, many public and private initiatives have
been undertaken at both the local and national level to highlight the
importance of financial education.
As you know, Congress has established the Financial Literacy and
Education Commission and the Financial and Economic Literacy Caucus--
further demonstration of the degree of interest and concern in helping
consumers obtain the knowledge they need to effectively manage their
personal finances. The Federal Reserve System has also been active in
promoting consumer financial education, and is an active participant in
initiatives to further policy, research, and collaboration in this
In closing, I would like to note that disclosure and financial
education work in tandem in the interest of consumer protection, and I
believe that it is important to continue to focus our collective
attention on both fronts.
PREPARED STATEMENT OF JULIE L. WILLIAMS
Acting Comptroller of the Currency
May 17, 2005
Chairman Shelby, Ranking Member Sarbanes, and Members of the
Committee, I appreciate this opportunity to appear before you today to
discuss the Office of the Comptroller of the Currency's (OCC)
perspectives concerning credit card disclosures. The OCC's supervision
of the credit card operations of national banks includes safety and
soundness fundamentals, compliance with consumer protection laws and
regulations, and fair treatment of consumers.
In addition to our ongoing supervision of these institutions, and
our processing of numerous consumer inquiries and complaints relating
to credit cards, we have taken a number of steps--in the form of
enforcement actions and preventive supervisory guidance--to address
safety and soundness and consumer protection issues that have arisen in
connection with the credit card products offered by national banks. It
is important to note, however, that the OCC does not have express
statutory authority to issue regulations that would define particular
credit card practices by banks as unfair or deceptive under the FTC
Act, or regulations governing specific credit card disclosures under
the Truth in Lending Act. Authority to issue regulations in both those
areas has been granted exclusively to the Federal Reserve Board.
The credit card industry is highly competitive, and card issuers
have responded to increasing market competition with innovations in
card products, marketing strategies, and account management practices.
The primary goals of these product and marketing innovations have been
to gain new customer relationships and related revenue growth, but in
some instances an important secondary benefit has been expanded access
to credit by consumers with traditionally limited choices.
Unfortunately, not all of the product and marketing innovations have
had a uniformly beneficial impact, and the marketing practices of
credit card issuers in particular have come in for pointed criticism in
Regulatory concerns arise when these developments carry costs and
risks that are detrimental to consumers and to the safe and sound
operations of the credit card issuing bank. They also arise when
disclosures intended to enable consumer understanding of the costs and
terms of their credit agreements fail to effectively inform consumers
about aspects of the credit relationship that are most important to
them and impose unnecessary burdens on the credit card issuers required
to provide the disclosures.
My statement discusses the need to begin a serious reexamination of
the processes we have followed historically for developing, designing,
implementing, overseeing, and evaluating consumer disclosures for
financial products and services. I urge that we take a new approach.
Credit card disclosures would be a fine place to start.
In my statement, I also describe the OCC's current program for
supervising credit card issuers, enforcement actions we have taken to
address practices we viewed as egregious, and guidance we have issued
to flag practices that concern us and prevent problems from developing
in the future.
Finally, I discuss the recent initiative by the Federal Reserve
Board to review disclosure requirements for credit card issuers under
the Truth in Lending Act (TILA). The OCC is in a somewhat anomalous
position when it comes to credit card disclosures required under TILA,
for, while we supervise many of the credit card issuers, we are not
authorized to participate in writing the rules under TILA governing
their consumer disclosures. Thus, last month, the OCC took the out-of-
the ordinary step of submitting a comment letter responding to the
Board's Advance Notice of Proposed Rulemaking on Regulation Z's open-
end credit rules implementing TILA. My statement describes the most
important issues raised in our comment letter.
The Need for a New Approach to Developing Consumer Disclosures
In evaluating the current state of disclosures for consumer
financial products and services--which I think we can all agree leave
substantial room for improvement--and where we should go in the future,
it is useful to consider the process we have followed in developing
these disclosures. For several decades, disclosures for consumer
financial products have been developed by implementation of statutory
requirements that typically specify particular content of information
to be provided to consumers. These specific requirements have cumulated
over the years. And usually, the regulatory agencies charged with
drafting the rules to implement those requirements are given short
deadlines to finish their work. These approaches may not always have
produced or sustained the positive consumer protection results that
Congress intended, and thus a fundamental change in our approach to
consumer disclosure laws and regulations may be called for.
Compared to the processes we have used to develop consumer
financial disclosures, a very different approach was used by Congress
and the Food and Drug Administration in the development of the
``Nutrition Facts'' box that is possibly the most prevalent and
frequently used consumer disclosure in the marketplace today. The clear
and concise labeling of food nutrition content has not only enabled
consumers to find products with the nutritional characteristics they're
seeking, but it also has influenced food producers to develop products
that consumers want. By this measure, the food nutrition disclosures
have been effective and useful to consumers, whereas I doubt that we
would make a similar statement about many of our current disclosures
for consumer financial products. I describe these issues in more detail
below in connection with the discussion of the Federal Reserve Board's
review of TILA requirements for open-end credit.
The effort that led to the FDA's nutrition labeling began with a
clear statement by Congress of the objective the FDA was charged to
accomplish. While Congress did specify certain nutrition facts to be
disclosed, it also provided the FDA with the flexibility to delete or
add to these requirements in the interest of assisting consumers in
``maintaining healthy dietary practices.'' It left to the FDA's
discretion the design and format of the nutrition label.
Based on the direction and goals set out by Congress, the FDA took
several years, in an effort that involved intensive research not only
by nutritionists, but also by experts who polled focus groups to elicit
ideas on the kind of information consumers thought was most useful,
experimented with dozens of different formats, and tested those formats
with target consumer audiences to determine what actually worked. The
``Nutrition Facts'' box disclosure was the result of painstaking
laboratory and fieldwork, notably including extensive input by
Rather than mandating the precise elements of disclosures, the
approach used by Congress with regard to food nutrition labeling was to
articulate the goals to be achieved through a particular consumer
protection disclosure regime. Congress could follow this model in
legislation affecting disclosures for consumer financial products and
services, and direct regulators on the key goals and objectives
Congress wants particular consumer disclosures to achieve. Applying the
FDA model to these consumer disclosures means that Congress would also
look for opportunities to require, and provide adequate time for,
regulators to include consumer testing as an integral part of the
Quick fixes without consumer input, and issue-by-issue disclosure
``patches'' to information gaps, ultimately are not in the long-term
best interests of consumers. Before bank regulators issue any new
consumer disclosure rules and regulations, we should undertake--or be
directed by statute to undertake--thorough consumer testing to discover
what information consumers most want to know about in connection with a
particular product and how most effectively to communicate that
information to them. And any new process for developing consumer
disclosures for financial products also needs to take into account both
the burden and costs on the industry associated with implementing any
new standards, together with the effectiveness of those disclosures.
We have some important choices to make, and this hearing provides
an excellent opportunity to initiate a discussion about those choices.
We can continue with the current approach to credit card disclosures--
indeed, consumer compliance disclosures generally--of critiquing
particular practices and gaps in information and then requiring
disclosures to address those particular concerns on a piecemeal basis.
Or we can, and I hope we will, recognize that a fundamentally different
approach is called for. The results, I believe, will be well worth it
for consumers and the financial services industry as a whole.
OCC Supervision of Credit Card Issuers
The OCC's comments on these issues are strongly influenced by our
experience as the supervisor of many credit card issuers, as well as by
the information about consumer confusion and complaints that we obtain
through the OCC's Customer Assistance Group. National banks supervised
by the OCC issue a substantial percentage of the credit cards held by
U.S. consumers. (The Board of Governors of the Federal Reserve System
(Board) and the Federal Deposit Insurance Corporation also supervise
major credit card issuers.) The OCC's supervision of these institutions
reflects a comprehensive approach that is designed to ensure safe and
sound operations that comply with applicable laws and regulations and
treat customers fairly. This approach enables the OCC to supervise the
operations of individual banks, to address emerging risks and other
issues on an institution-by-institution or broader basis, and, where
necessary, to require correction of consumer abuse or safety and
soundness problems that we may find. There are four primary tools that
we use to accomplish these objectives: Examinations, complaint
processing, supervisory guidance, and enforcement actions.
Examinations of Credit Card Operations in National Banks
The OCC conducts comprehensive examinations of the business of
national banks, including their credit card operations, and OCC
examinations monitor whether credit card lending is being conducted in
a safe and sound manner and in compliance with consumer protection laws
and regulations. The OCC has a corps of compliance specialists,
including retail and credit card lending specialists, located
throughout the United States, who conduct these examinations of
national banks' credit card operations.
The largest national banks, which include many of the major credit
card issuers, have on-site examination teams continuously supervising
all aspects of the banks' operations. The supervisory time and
attention devoted to credit card banks and operations is directly
related to their level of complexity, the credit spectrum served, and
the risks presented. Thus, our regulatory scrutiny of high risk and
complex credit card issuers that are not the largest banks is rigorous,
and more frequent than that contemplated by the general 12- to 18-month
examination schedule for other banks.
The OCC's supervision of credit card issuers is based on our
assessment of the line of business and the market overall. Examiners
assigned to the largest and most complex, highest risk operations
typically have many years of specialized experience with credit card
Our supervision evaluates whether credit card issuers are operating
in a safe and sound manner, and we consider consumer compliance,
information technology, and capital markets aspects in the overall
safety and soundness assessment of the bank. We seek to determine if
risks that the bank has assumed are acceptable, and that the risks are
appropriately identified, measured, monitored, and controlled.
To make this determination, examiners review the fundamentals such
as the reasonableness of the business model and strategic planning, the
effectiveness of the bank's controls, financial strength, and
compliance with laws, regulations, and relevant supervisory guidance.
They also assess the adequacy of policies and procedures through
reviews of various functions including marketing and pricing,
underwriting, account management, collections, and loss mitigation. In
addition, examiners review the bank's use of credit scoring and other
models, and, as warranted, bring in quantitative specialists to assess
model development and validation. Throughout the supervisory process,
examiners routinely make recommendations for improvement, formally and
informally. Examiners also advise banks about issues that pose undue
credit, compliance, transaction, or reputation risk.
Based on our supervisory experience, we can say that the vast
majority of the credit card issuers supervised by the OCC are focused
on operating responsibly and in a safe and sound manner, and that they
strive to balance their business objectives with customer needs.
However, because the credit card market is a highly competitive and,
arguably, saturated market, issuers can sometimes implement changes to
their products, programs, or practices before fully addressing all of
the implications of those changes.
The OCC can address deficiencies in the credit card operations of
national banks as a part of our supervisory process. National banks
have changed their practices to address specific concerns we raised,
including by suspending or withdrawing certain products, repricing
initiatives, and line increase programs when they have not been
supported by appropriate business analyses and controls, and by
modifying procedures affecting the assessment of penalty fees and the
posting and allocation of payments.
OCC Consumer Complaint Process
Our Customer Assistance Group (CAG) provides assistance to
customers of national banks and their subsidiaries, fielding inquiries
and complaints from these customers--many of which relate to credit
card products. This complaint processing activity not only helps to
resolve individual problems and educate consumers about their financial
relationships, in many cases, but, it also leads to resolution of the
complaints by the bank and secures monetary compensation or other
relief for customers who may not have a more convenient means for
having their grievances addressed.
Consumer complaint data can be used by examiners in the field to
identify risks affecting particular institutions that should be
reviewed as part of the supervisory process. The data also can be used
to identify systemic problems--at a particular bank or in a particular
segment of the industry--that warrant enforcement action, or
supervisory guidance to address emerging problems.
OCC Enforcement Actions Addressing Unfair and Deceptive Credit Card
The OCC also can address significant problems involving individual
credit card issuers through formal enforcement actions. The OCC has
authority to address unsafe and unsound practices and to compel
compliance with any law, rule, or regulation, including the Truth in
Lending Act, the Fair Credit Reporting Act, and the Equal Credit
Opportunity Act--the principal Federal statutes that provide specific
protections for credit card applicants and borrowers. This authority
allows the OCC to require a national bank to cease and desist unsafe or
unsound practices or actions that violate consumer protection laws.
Further, the OCC may seek restitution for affected consumers in these
and other appropriate cases, and assess civil money penalties against
banks and their ``institution-affiliated parties.''
Since 2000, the OCC also has used its general enforcement
authority, in combination with the prohibition in the Federal Trade
Commission Act (FTC Act) against unfair or deceptive acts or practices,
in a number of enforcement actions involving credit card lending. It
should not be overlooked that the OCC's use of Section 5 of the FTC Act
in this respect was groundbreaking, was initially greeted with
skepticism, but is now the uniform position of all the Federal bank
regulatory agencies--although it has yet to be employed by any other
banking agency to gain relief for consumers in a public enforcement
action. Our enforcement actions, described below, have provided
hundreds of millions of dollars in restitution to consumers harmed by
unfair or deceptive credit card practices, and have required the
reformation of a variety of practices. For example:
Providian National Bank, Tilton, New Hampshire (consent
order--June 28, 2000). We required the bank to provide not less
than $300 million in restitution for deceptive marketing of credit
cards and ancillary products, to cease engaging in misleading and
deceptive marketing practices, and to take appropriate measures to
prevent such practices in the future.
Net 1st National Bank, Boca Raton, Florida (consent order--
September 25, 2000). We required the bank to discontinue its
misleading and deceptive advertising of credit cards and to take
appropriate measures to prevent the recurrence of such advertising.
Direct Merchants Credit Card Bank, N.A., Scottsdale, Arizona
(consent order--May 3, 2001). We required the bank to provide
restitution of approximately $3.2 million for deceptive credit card
marketing, to discontinue its misleading and deceptive marketing
practices, and to make substantial changes in marketing practices.
First National Bank of Marin, Las Vegas, Nevada (consent
order--December 3, 2001). We required the bank to provide
restitution of at least $4 million for misleading and deceptive
credit card marketing, to discontinue its misleading and deceptive
advertising practices, and to make substantial changes in its
marketing practices and consumer disclosures.
First National Bank, Ft. Pierre, South Dakota (formal
agreement--July 18, 2002). We required the bank to discontinue its
misleading and deceptive advertising practices, and to take
appropriate actions to prevent deceptive advertising concerning
credit lines and the amount of initial available credit.
First National Bank in Brookings, Brookings, South Dakota
(consent order--January 17, 2003). We required the bank to provide
restitution of at least $6 million for deceptive credit card
marketing practices, to obtain prior OCC approval for marketing
subprime credit cards to noncustomers, to cease engaging in
misleading and deceptive advertising, and to take other actions.
Household Bank (SB), National Association, Las Vegas, Nevada
(formal agreement--March 25, 2003). We required the bank to provide
restitution for deceptive practices in connection with private
label credit cards, resulting in a pay out of more than $6 million
to date, and to make appropriate improvements in its compliance
First Consumers National Bank, Beaverton, Oregon (formal
agreement--July 31, 2003). We required the bank to make restitution
of approximately $1.9 million for deceptive credit card practices.
First National Bank of Marin, Las Vegas, Nevada (consent
order--May 24, 2004). We required the bank to make at least $10
million in restitution for consumers harmed by unfair practices,
and prohibited the bank from offering secured credit cards in which
the security deposit is charged to the consumer's credit card
It is vital to note, however, that the OCC does not have express
statutory authority to issue regulations specific to credit card
disclosure practices. For example, the OCC is not granted authority to
define unfair or deceptive acts or practices by banks under the FTC Act
through regulations. That authority is vested exclusively in the Board.
Similarly, Congress has vested the Board with exclusive authority under
the Truth in Lending Act to issue regulations governing disclosure
practices by all credit card issuers.
Nevertheless, through enforcement actions and supervisory guidance,
the OCC has sshould fill in the gaps and address circumstances in which
existing regulations may not provide specific standards for creditors
in making disclosures and in avoiding unfair and deceptive practices.
As described in more detail below, additional regulatory standards
issued by the Board using its rulemaking authority are needed to
address this uncertainty and lack of uniform compliance standards on a
Recent OCC Supervisory Guidance on Credit Card Practices
An integral component of OCC supervisory activities is the issuance
of guidance to national banks on emerging and systemic risks. We use
joint agency issuances and the OCC's advisory letter process to alert
national banks to practices that pose consumer protection or safety and
soundness risks, and give guidance on how to address these risks and
prevent problems from arising. We follow up on how banks are responding
to issues flagged in guidance through our supervisory processes.
In the past few years, for example, we have issued a number of
supervisory guidelines related to credit card lending, including: \1\
\1\ In March, 2002, the OCC also issued Advisory Letter 2002-3,
Guidance on Unfair or Deceptive Acts or Practices, which includes
guidance on avoiding these practices in connection with credit card
Credit Card Lending: Account Management and Loss Allowance
Guidance (Jan. 3, 2003)
OCC Advisory Letter 2004-4, Secured Credit Cards (April 28,
OCC Advisory Letter 2004-10, Credit Card Practices (Sept. 14,
The following sections discuss this recent guidance.
Account Management and Loss Allowance Practices
In January 2003, the Federal bank and thrift regulatory agencies
issued guidance to address concerns with credit card account management
practices. The interagency guidance, Account Management and Loss
Allowance Guidance, addressed five key areas: Credit line management,
overlimit practices, minimum payment and negative amortization, workout
and forbearance practices, and income recognition and loss allowance
practices. The issues covered by the guidance first surfaced in the
subprime credit card market, but follow-up examinations identified
similar concerns involving several prime credit card lenders.
It may be useful to describe the highlights of these issues in
greater detail. Through the examination process, examiners identified
concerns with practices for assigning the initial credit lines to
borrowers and increasing existing credit lines, particularly for credit
card lenders with subprime portfolios. In some instances, borrower
credit lines were increased, seemingly for purposes of increasing the
size of the loan portfolios, but without the proper underwriting
analysis to support the increases. Some borrowers were unable to make
their payments after their credit lines were increased. The result was
an increase in delinquencies and losses. The guidance describes the
agencies' expectations for banks when they establish initial credit
lines for customers and when they increase those credit lines.
Examiners also observed loan workout and loan forbearance practices
varied widely, and in some instances raised safety and soundness
concerns. These workout programs, whereby lenders typically lower
interest rates and stop assessing fees, were often not effective in
enabling consumers to repay the amounts owed. In particular, some
workout programs had extended repayment periods with modest reduction
on the interest rates being charged. To address this issue, the
agencies reminded the industry that workout programs should be
structured to maximize principal reduction and required that repayment
periods for workout programs not exceed 60 months. In order to meet the
timeline requirement for repayment for workout accounts, it is our
observation that credit card lenders have lowered interest rates on
those accounts, fostering more effective workout programs.
Examiners also identified weaknesses in income recognition and loss
allowance practices. Because of the revolving nature of the credit card
product and low minimum payment requirements, a portion of the interest
and fees due were being added to the balances and recognized as income.
The agencies' guidance reiterated the principle that generally accepted
accounting practices require that loss allowances be established for
any uncollectible finance charges and fees. The agencies also directed
credit card lenders to ensure that loss allowance methodologies covered
the probable losses in high-risk segments of portfolios, such as
workout and overlimit accounts. Based on our observations, the industry
responded quickly to this guidance and increased their loss allowances
Overlimit practices, where a borrower exceeds the credit limit on
the account, raise both safety and soundness and consumer fairness
concerns. Examiners observed that credit card accounts had been allowed
to remain in overlimit status for prolonged periods with recurring
monthly overlimit fees. Negative amortization occurred in accounts
where the minimum payment was insufficient to cover the finance charges
and other fees imposed, including overlimit fees, and consequently the
principal balance increased. To prevent prolonged periods of negative
amortization, the guidance directed banks to strengthen overlimit
management practices to ensure timely repayment of the amounts that
exceed the credit limits. We believe the industry has responded
positively to this guidance by restricting the approval of transactions
that exceed credit limits and limiting the number of overlimit fees
assessed when repayment of the overlimit amount became extended.
Finally, over the past several years, examiners observed declining
minimum payment requirements for credit card accounts. During the same
period, credit lines, account balances, and fees all have increased. As
a result, borrowers who make only minimum payments have been unable to
meaningfully reduce their credit card balances. From a safety-and-
soundness standpoint, reductions in minimum payment requirements can
enable borrowers to finance debts beyond their real ability to repay,
thus increasing credit risk to the bank. Liberalized payment terms also
increased the potential for consumers to accumulate unmanageable debt
loads, and raised their vulnerability to default in cases of even
moderate cashflow disruptions. The guidance required banks to address
these issues through a systematic reevaluation of payment requirements
and fee assessment practices.
From the OCC's perspective, the implementation of this guidance by
national banks has been satisfactory, but is not complete. Most
national banks addressed the credit-line management, workout program,
and loss allowance practices immediately. Issues pertaining to
overlimit practices, minimum payments, and negative amortization are
taking longer because they require changes to customer account
agreements and operating systems. Also, we recognized the need for
changes to be phased-in carefully for certain customer segments, in
order to enable those customers to adjust to changed repayment
expectations. All of the large national bank credit card lenders have
submitted plans to address outstanding issues related to overlimit
practices, prolonged negative amortization, and required minimum
payment amounts for those remaining customer segments. Necessary
changes have been and are in the process of being phased-in during
2005, with implementation largely completed by year-end, and the OCC is
carefully monitoring the phase-in of these changes.
Secured Credit Cards
The OCC also has issued supervisory guidance that focuses on
discrete issues affecting credit card products, such as our guidance on
secured credit cards. Secured credit card programs entail a borrower
pledging collateral as security for the credit. The borrowers who
receive these cards typically are individuals with limited or blemished
credit histories who cannot qualify for an unsecured card. In some
respects, these products can benefit these consumers by allowing them
to establish or improve their credit histories. Traditionally, secured
credit cards have required that borrowers pledge funds in a deposit
account as security for the amounts borrowed under the credit card
account. In the event of default, the deposited funds may be used to
help satisfy the debt.
In recent years, however, some issuers began to offer secured
credit cards that did not require the consumer to pledge separate funds
in a deposit account as collateral in order to open the credit card
account. Instead, the security deposit for the account would be charged
to the credit card itself upon issuance. This newer practice resulted
in a substantial decrease in the amount of credit that was available
for use by the consumer when the account was opened. Unsecured credit
card products also have been offered with similar disadvantages, except
that account opening fees, rather than a security deposit, are charged
to the account and consume the nominal credit line assigned by the
These developments in secured credit card programs--in combination
with marketing programs, targeted at subprime borrowers, that often did
not adequately explain the structure or its likely consequences--meant
consumers were misled about the amount of initial available credit, the
utility of the card for routine transactions, and the cost of the card.
Truth in Lending disclosures generally do not provide information to
consumers about credit limits and initial available credit. Moreover,
while account opening disclosures prescribed by Regulation Z require,
if applicable, a general disclosure pertaining to security interests,
there is no such requirement for credit card solicitations or
advertisements. Thus, these rules omit disclosure of key information
that would provide consumers, at a decision point, a full understanding
of a secured credit card product's cost and terms. They also offer
little guidance to lenders that may have wished to present such
information in a comprehensible manner.
The OCC took enforcement actions involving this type of secured
credit card for violating the FTC Act's prohibition against unfair or
deceptive practices. We reviewed marketing materials and found
significant omissions of material information about the likely effect
that charging security deposits and fees to the account would have on
the low credit line that was typically extended, and about the
consequent impairment of available credit and card utility. These
omissions were accompanied by potentially misleading representations
concerning possible uses of the card, such as helping consumers to ``be
prepared for emergencies.'' While these marketing practices generally
complied with the specific credit cost disclosure requirements of TILA
and Regulation Z, the OCC determined that they constituted deceptive
practices under the FTC Act. The OCC's enforcement actions required
both changes in the issuers' practices and monetary reimbursement to
We also reviewed whether the practice of charging substantial
security deposits and fees to a credit card account and severely
reducing the initial credit availability could also be found to be
unfair within the meaning of the FTC Act. Evidence available to us
indicated that consumers were materially harmed by these practices when
the product received by most consumers fails to provide the card
utility and credit availability for which consumers have applied and
incurred substantial costs. Based on this review, the OCC concluded
that this practice posed considerable compliance risks under the FTC
To address these concerns, the OCC issued Advisory Letter 2004-4,
``Secured Credit Cards.'' The advisory directs national banks not to
offer secured credit card products in which security deposits (and
fees) are charged to the credit card account, if that practice will
substantially reduce the available credit and the utility of the card.
The OCC also advised that national banks should not offer unsecured
credit cards that present similar concerns as a result of initial fees
charged to the card.
Shortly after the OCC issued its advisory, we took enforcement
action against a national bank offering this type of secured credit
card product that required the bank to reimburse affected consumers and
to cease offering products in which the security deposit is charged to
the consumer's credit card account. As a result of our enforcement
actions, advisory letter, and supervisory suasion, we believe that the
significant supervisory concerns we had relating to secured credit card
products offered by national banks have been addressed.
Other Credit Card Practices
Other credit card practices, involving marketing and changes in
terms, also have been the focus of OCC supervisory guidance recently
because of our concern that they could expose national banks to
material compliance and reputation risks. The OCC recently issued
Advisory Letter 2004-10 to advise national banks concerning the risks
that these practices may violate the prohibition in the FTC Act against
unfair or deceptive practices. These practices include:
Catching a consumer's attention in advertising materials with
promotional rates, commonly called ``teaser rates,'' but not
clearly disclosing significant restrictions on the applicability of
Advertising credit limits ``up to'' a maximum dollar amount,
when that credit limit is, in fact, seldom extended; and
Increasing a consumer's rate or other fees when the
circumstances triggering the increase, or the creditor's right to
implement that increase, have not been disclosed fully or
Teaser rate marketing. A common marketing technique used in credit
card solicitations involves ``teaser rates.'' Frequently, teaser rates
are used in promotions seeking to induce new and existing customers to
transfer balances from other credit cards. The promotional rate, almost
always highlighted prominently in the marketing materials, is usually
in effect for a limited period after the account is opened or the
relevant balance is transferred. Other important limitations on the
availability of the promotional rate, or on the consumer's ability to
take advantage of that rate, often apply--although they may not be
disclosed prominently. For instance, the lower, promotional rate may
apply only to balances that are transferred, and a higher rate would
apply to purchases and other credit transactions during the promotional
period. Frequently, a consumer's payments during the promotional period
are applied first to the transferred balance, and only after this low-
rate balance is paid off will payments be applied to balances that are
accruing interest at a higher rate. There also may be other costs, such
as balance transfer fees, that affect whether the consumer will benefit
from accepting a promotional rate offer.
In some circumstances, consumers can lower their credit costs when
they transfer balances to a new account with an introductory rate. The
costs and limitations on these rates and accounts, by themselves, are
not unlawful or inappropriate--provided the consumer has a full
appreciation of the terms of the transaction. Problems arise when
consumers accept offers without knowing the true terms. This, in turn,
can lead to increased complaints and increased exposure to claims of
``bait-and-switch,'' particularly when the consumer accepts these terms
without knowing the circumstances in which the creditor can change the
terms, including unilaterally.
The Federal Reserve Board's Regulation Z governs many aspects of
promotional rate offers. Direct mail credit card solicitations must
display prominently in a tabular format each APR that will apply to
purchases and balance transfers. However, Regulation Z currently does
not restrict the ability of a creditor to highlight only the teaser
rate in other materials included in the mailing without noting any
limitations on the offer (or to do so only in fine print).\2\ Further,
Regulation Z requires no disclosure of the order in which payments will
be applied to various balances. Finally, while balance transfer fees
must be disclosed in solicitations, they are not required to be
disclosed in a ``prominent location,'' even in solicitations expressly
offering the consumer a promotional rate on a balance transfer.
\2\ We note that the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 amends the Truth in Lending Act in several
respects to address disclosures affecting credit card accounts,
including disclosures related to ``introductory rates,'' minimum
payment disclosures, and payment due dates if the creditor may impose a
late payment fee.
The OCC's AL 2004-10 provides guidance on how to ``fill in the
gaps'' in these rules for the responsible use of promotional rate
advertising. The guidance advises national banks to disclose fully and
prominently the categories of balances or charges to which the
promotional rate will not apply. The advisory also states that a
national bank should not fail to disclose fully and prominently other
material limitations, such as the time period the rate will be in
effect and any circumstances that could shorten the promotional rate
period, and related costs. Moreover, if applicable, a national bank
should disclose fully and prominently that payments will be applied
first to promotional rate balances.
Marketing based on maximum credit limits. Another marketing
practice that we have been monitoring concerns promotions based on the
highest attainable credit limit--such as ``you have been preapproved
for credit up to $5,000.'' We became concerned when we observed that
this marketing might be targeting consumers with impaired or limited
credit history, and enticing them to accept a credit card based on an
illusory ``firm offer'' of a specific amount of credit. Instead of
receiving the credit line that is promoted, these consumers may instead
receive a ``default credit line'' (the minimum credit line) that is
significantly lower than the maximum. All too often in marketing of
this type, the possibility that a significantly lower credit line may
be extended is either not disclosed or disclosed only in fine print or
in an obscure location. When high initial fees are charged to the card
in relation to the credit line extended, consumers who accept the offer
will end up with little initial available credit and little card
The OCC has taken enforcement action in three matters involving, at
least in part, marketing to subprime borrowers of credit cards with
limits ``up to'' a specified amount. These enforcement actions involved
products and marketing techniques like those described above: Most
applicants received a default credit line substantially less than the
``up to'' amount featured in the promotion, and security deposits or
fees consumed substantially all of the default credit line, leaving the
consumer with little or no available credit at account opening. For
example, in one program, almost 98 percent of credit card applicants
received the default line, rather than the theoretical maximum credit
line that was promoted. These enforcement actions resulted in consent
orders or formal agreements containing detailed provisions to prevent
misleading or deceptive marketing materials, and restitution for
consumers injured by the bank's marketing practices.
We also addressed ``up-to'' marketing in AL 2004-10. Even
disclosures that may technically comply with Regulation Z remain
subject to the FTC Act if they are unfair or deceptive. It may be
difficult to assess, however, when practices cross the line into
unfairness or deception in a given case. For practices in this gray
area, we determined that guidance was needed to prevent consumer
confusion and assist national banks in avoiding compliance and
The advisory states three general guidelines for managing risks and
avoiding unfair or deceptive practices in these promotions. First, we
advised national banks not to target consumers who have limited or poor
credit histories with solicitations for credit cards advertising a
maximum credit limit far greater than most applicants are likely to
receive. Second, we advised national banks to fully and prominently
disclose the amount of the default credit line and the possibility that
the consumer will receive it, if it is likely that consumers will
receive substantially lower default credit lines. Finally, we advised
national banks not to promote cards on the basis of card utility if the
initial available credit most consumers receive is unlikely to allow
Repricing practices and changes in terms. Coincident with the
marketing of credit cards based on high credit limits and low
introductory interest rates, many credit card issuers have turned to
measures such as penalty pricing, rather than relying solely on the up-
front interest rate, to manage risk. For instance, many credit card
issuers raise the interest rate on a credit card for consumers who do
not make timely payments to the issuer, or even to another creditor.
Card issuers may also raise the interest rate on a credit card to
address other indicators of increased credit risk, such as the
consumer's increased use of credit or failure to make more than the
minimum monthly payment. Some card issuers raise the cost of credit in
other ways, such as shortening due dates for payments and increasing
cash advance, over-the-limit, late payment, or similar fees. These
changes in terms have been the object of significant public attention--
and criticism--recently, and are the source of many consumer complaints
the OCC has received.
It is important to note that Federal law, including the Truth in
Lending Act, does not restrict the ability of creditors to include in
their credit card agreements provisions permitting penalty interest
rates, other changes in interest rates, or other changes in the terms
of the account. However, while penalty rates are required by Regulation
Z to be disclosed in solicitations, the manner of disclosure may not
effectively alert customers to these terms. For example, except in
certain transactions, the disclosure of when penalty rates will apply
is not required to be included in the ``Schumer box'' disclosures, and
need not be as detailed as the explanation later provided in the
initial account disclosures. Moreover, Regulation Z rules contain
anomalies: In contrast to sometimes detailed disclosures provided to
consumers about a credit card's costs, Regulation Z does not require a
disclosure that a creditor has reserved the right to change,
unilaterally, these costs and any other credit terms.
The OCC addressed the compliance and reputation risks that
accompany change in terms practices in AL 2004-10. We made clear that
to avoid consumer misunderstanding and complaints of unfairness,
national banks must do more than merely comply with the technical
requirements in Regulation Z. The OCC guidance states that national
banks should disclose, fully and prominently in promotional materials,
the specific circumstances under which the card agreement permits the
bank to increase the consumer's APR, fees, or other costs (such as for
late payment to another creditor). Additionally, if national banks
reserve the right to change the APR, fees, or other credit terms for
any reason at the bank's discretion, the OCC advisory provides that
this fact should be disclosed fully and prominently in both marketing
materials and account agreements.
The OCC advisory does not restrict the ability of a bank to base
initial credit pricing decisions, and subsequent changes to pricing, on
risk factors. Indeed, default pricing and other changes in terms can be
appropriate ways to manage credit risk in credit card accounts and, as
noted above, the Truth in Lending Act does not prohibit these actions.
But, because of the heightened risks of unfair and deceptive practices
involving repricing, we believe that national banks should always fully
and prominently disclose this material information before a consumer
commits to a credit card contract.
To assist banks in implementing our guidance, we have been
reviewing direct marketing materials and credit agreements from eleven
national banks with credit card operations, including the largest
issuers, to compare how their disclosures on promotional rates and
changes in terms conform to the standards in our advisory letter. In
general, we found that most of the banks surveyed disclosed
restrictions on teaser rates and the possibility of changes in credit
terms, but that the prominence and completeness of these disclosures
could be improved. The materials we reviewed also generally did a good
job of telling the consumer what constitutes a ``default'' that will
give rise to higher default pricing. However, the materials typically
did not warn the consumer about the other types of circumstances--short
of ``default''--under which the terms may change. We have provided
feedback to the banks we surveyed, and we are working with them now on
addressing the issues we identified. In responding to the OCC's
supervisory guidance, some banks have also been considering whether to
make additional improvements to their marketing and account management
procedures to address issues related to change in terms practices.
These initiatives are commendable.
Regulation Z Review
The OCC supervises the credit card operations of national banks
through comprehensive examinations, complaint resolution, supervisory
guidance, and enforcement actions. However, there are limitations on
the extent to which the OCC can ensure effective disclosures, and
otherwise protect credit card customers of national banks, through
these actions. For example, as noted above, the OCC has not been
granted rulemaking authority to address unfair and deceptive practices
by banks under the FTC Act, nor to adopt regulations under the Truth in
Lending Act. Therefore, we encourage and endorse the Federal Reserve
Board's recent undertaking to review disclosure issues relating to all
consumer credit card issuers under Regulation Z under TILA.
As this hearing itself demonstrates, the past few years have
witnessed increasing public concern about the effectiveness of consumer
disclosures, especially in the credit card industry. These increased
concerns coincide with--and possibly reflect--significant changes in
the way credit card accounts are marketed and managed by card issuers.
The Board's initiative is a particularly timely effort. It provides an
important opportunity to address recent industry developments and
related issues addressed in the bankruptcy reform legislation, to
resolve anomalies that have arisen in Regulation Z, and to remedy
sources of consumer confusion and misunderstanding.
The OCC has a strong interest in the issues that are being
addressed in this review. I have discussed my concerns about the
limitations and effectiveness of Regulation Z disclosures, industry
burden, and the lack of uniform standards affecting credit card
issuers, in a number of forums, and last month, the OCC took the
unusual step of submitting a comment letter responding to the Board's
Advance Notice of Proposed Rulemaking on Regulation Z's open-end credit
rules. In addition to pointing out a number of specific anomalies and
other issues that we believe should be considered in the Board's review
of Regulation Z, our comment letter discussed three general themes that
may be relevant to the review.
Consumer Research and Testing
The first general theme relates to consumer research and testing.
As noted above, the OCC believes that consumer testing should precede
regulators' issuing new consumer disclosure rules. Therefore, we
applaud the Board's plans to use consumer focus groups and other
research in developing proposed revisions to the Regulation Z
disclosure rules and the related model forms. We urge the Board to
employ both qualitative and quantitative consumer testing to ensure
that Regulation Z's requirements maximize the effectiveness of consumer
disclosures for credit cards.
Our letter pointed to the development of the Food and Drug
Administration's (FDA's) ``Nutrition Facts'' label as illustrative of
the consumer research needed to produce a highly effective disclosure
document. Precedents for thorough consumer testing also exist elsewhere
in the financial services world. The Financial Services Authority (FSA)
in the United Kingdom used extensive testing in developing revised
disclosure requirements for a variety of financial products, and the
OCC, the Board, and several other Federal agencies are currently
engaged in a multiphase consumer testing project related to financial
institution privacy notices. The agencies have issued an Advance Notice
of Proposed Rulemaking with respect to the privacy notices rules, and
hope to follow it with a proposal for a new, streamlined approach to
privacy notices that reflects the results of that consumer testing.
The results of the earlier FDA and FSA studies are instructive as
to what we might expect to find from consumer testing on credit card
disclosures. In particular, those studies indicate that we should
expect effective disclosures to:
Focus on key information that is central to the consumer's
decisionmaking (with supplementary information provided separately
in a fair and clear manner);
Ensure that this key information is highlighted in such a way
that consumers will notice it and understand its significance;
Employ a standardized disclosure format that consumers can
readily navigate; and
Use simple language and an otherwise user-friendly manner of
Prescriptive Disclosure Rules
A second general theme of our comment letter relates to a
particular approach to consumer disclosure requirements: Detailed,
prescriptive rules specifying (among other things) the content of
information to be provided to consumers. Regulation Z and countless
other consumer protection rules in the financial services arena have
relied predominantly on this approach for decades. While this approach
has been effective, to a certain extent, in informing consumers about
many of the most important features of their credit card accounts, it
also carries significant potential adverse consequences that should not
be ignored as the Board revisits Regulation Z. These include:
The risk of information overload, as well as the risk that
important information will be obscured by the cumulative volume of
required specific disclosures;
The risk of over-inclusion of information that may not be
material for the particular product (or target market), as well as
the risk of under-inclusion of the information consumers most need
about a particular credit card product; and
The risk that any set of specific requirements will not be
flexible enough to adapt to or reflect the inevitable changes in
credit products and industry practices over time.
All of these risks may imperil the effectiveness of disclosure
rules. Moreover, they raise the possibility that the consumer benefit
is insufficient to justify the significant burdens that these detailed
disclosure rules place on creditors. Accordingly, we urged the Board to
consider, as it conducts its review of Regulation Z, whether this
approach is best suited to consumer and industry needs in today's
rapidly evolving consumer credit markets.
The third general theme of our comment letter relates to the need
to ensure that credit disclosure rules keep pace with the evolution of
credit products and industry practices. For example, as mentioned
above, one source of an increasing number of consumer complaints is the
exercise by creditors of change-in-terms provisions to reprice credit
card accounts, and the information that consumers receive about those
practices. Typically, a credit card agreement provides that the
interest rate on the account may increase upon the occurrence of a
``default'' (as that term is defined in the particular credit card
agreement). Card agreements also typically provide for a general
reservation of rights to the issuer that permits it, unilaterally, to
change any term in the agreement, including the interest rate and fees,
and the method of allocating payments, and thereby increase the
We believe it is important that lenders retain the right to close,
reprice, and/or limit further credit advances on accounts due to
factors such as fluctuations in the interest rate environment,
adjustments in business strategy, market developments, or an increased
credit risk associated with an individual consumer or similarly
situated groups of consumers. At the same time, customers need to know
the circumstances under which their rates will be, or may be, changed.
Absent effective disclosure of this information, particular changes in
terms may be not only unexpected, but also perceived by the customer to
be unfair, such as the application of a penalty rate to existing
balances, rather than to only new transactions. Understandably,
consumer confusion and concern about these matters are heightened when
an interest rate increase on an account is not tied to an increase in
general interest rates or to deterioration in the borrower's
performance with the particular credit card.
Amendments to Regulation Z could address some of this confusion and
concern. Although matters relating to repricing may well be more
important to consumers than other information that is currently
disclosed in a prominent or conspicuous manner (for example, balance
computation methods), Regulation Z currently addresses the various ways
in which an account may be repriced in very different--and perhaps
anomalous--ways. For example, the Schumer box disclosure requirements
do not treat all repricing mechanisms the same:
Variable Rates. Specific disclosure is required of the fact
that the rate may vary and an explanation of how the rate will be
determined, as well as detailed rules about the actual numerical
rate that is disclosed.
Promotional Rates. Specific disclosure of the promotional rate
and a large print disclosure of the rate that will apply after
expiration of the promotional rate is required, but no disclosure
is required of the different circumstances under which the
promotional rate will be or may be terminated.
Penalty Rates. Specific disclosure of the increased penalty
rate that may apply upon the occurrence of one or more specific
events is required, but the disclosure of those events is not
required to be particularly detailed, or necessarily prominent, and
no disclosure of the duration of the penalty rate is required.
Reservation of Rights. No disclosure is required of the
issuer's reservation of a unilateral right to increase the interest
rate, fees, or any other terms of the account.
We urged that one objective of the Board's review should be to find
the most effective way to ensure that consumers understand how material
terms may change. We suggested that an approach to explore is the
possibility of an integrated description of potential changes of
pricing and other terms, regardless of the cause or source, that would
permit consumers to understand and readily compare this aspect of
different credit offers. This type of description could also include
disclosure, for example, of whether pricing changes would apply
retroactively to existing balances, and whether and how consumers may
be able to ``opt out'' of the changed terms. In addition, the
disclosure anomalies described above should be carefully reviewed--for
example, the absence of any disclosure requirement with respect to
unilateral reservations of rights (even for accounts advertised as
``fixed rate'' accounts) in contrast with detailed requirements
relating to standard variable rate accounts (as well as certain
required disclosures for promotional and penalty rates). We also
encouraged the Board to address the adequacy of current requirements
relating to penalty rates (especially in light of the rise of cross-
default provisions commonly referred to as ``universal default''
clauses) and promotional rates.
We noted in our letter a number of other areas in which, similarly,
the Board should review Regulation Z to determine whether new
technologies, marketing strategies, or account management practices
warrant changes to existing disclosure requirements or other consumer
protections. These issues point to the general challenge in the pending
review of credit card rules--how to build flexibility into Regulation Z
so it will not be outpaced by rapidly evolving market practices.
Without this flexibility, regulators--and industry, for that matter--
will continue to need to ``fill in the gaps'' to ensure that consumers
have the information they need to understand the terms of their credit
Credit card terms, marketing, and account management practices have
been changing over the past several years in response to intense market
competition. These changes have significant implications for safety and
soundness and consumer protection. The OCC has addressed many of these
concerns through its supervision of national bank credit card
operations, its enforcement actions, and its supervisory guidance.
However, given the tremendous volume of credit card solicitations
in the market today, we remain concerned that consumers are not always
provided information that will be effective in helping them to sort
through these offers and to understand the benefits and material
limitations of the various products being marketed. The Board's review
of the credit card rules in Regulation Z holds promise for a disclosure
regime that is more effective for consumers.
More importantly, we need to rethink our current approach to credit
card disclosures--indeed, consumer compliance disclosures generally--of
critiquing information practices affecting particular issues and then
pushing for correction on a piecemeal basis. We can, and I hope we
will, recognize that fundamental changes to our approach are needed. It
will take time to achieve, but the results, I believe, will be well
worth it for consumers, complementary to a competitive market, and less
burdensome for lenders.
Once again, Mr. Chairman, thank you for the opportunity to present
the OCC's views on these matters.
PREPARED STATEMENT OF ANTONY JENKINS
Executive Vice President, Citi Cards
May 17, 2005
Good morning, Chairman Shelby, Ranking Member Sarbanes, and Members
of the Senate Banking Committee. My name is Antony Jenkins and I am an
Executive Vice President at Citi Cards. I appreciate the opportunity to
speak before you today to discuss the credit card industry, Citi Cards,
and our customer relationships. Our customers are our most valuable
asset and we constantly monitor customer satisfaction and loyalty to
make sure we are serving their evolving needs.
Overview of Citi Cards
``Citi Cards'' is the brand that Citigroup uses to identify our
MasterCard, Visa, and private label credit card business in the United
States and Canada. In my testimony today, I generally will be focusing
on our MasterCard and Visa business in the United States.
Citi Cards is one of the leading providers of credit cards in the
United States with close to 80 million customers and 119 million
accounts. Consumers spend roughly $229 billion annually through our
credit cards, which constitutes about 2 percent of the nation's Gross
Domestic Product (GDP). Citi Cards employs nearly 35,000 people in 30
geographic locations around the country.
We offer a variety of products and services to meet consumers'
diverse needs and preferences. These include a wide array of general-
purpose cards where customers can earn rewards or receive cash back.
Our rewards programs offer consumers a range of options, including
airline miles, gift certificates to major retail stores and
restaurants, and electronics. Examples include the Citi AAdvantage
card, the longest running airline rewards program in the marketplace
today, and our new ThankYou Network rewards program that offers
consumers a broad selection of rewards for their everyday purchases.
The Credit Card Industry
The Benefits of Credit Cards to Consumers and the Economy
Consumer spending is a key component of the U.S. economy,
accounting for a significant portion of the nation's GDP. The credit
card industry facilitates 17 percent of all consumer spending, or the
equivalent of $1.7 trillion. Consumers' use of credit cards is
instrumental to businesses of every size. The use of electronic credit
card payment systems for a significant portion of all store purchases
speeds and organizes payments to merchants throughout the country.
Credit cards have become an integral part of the everyday lives of
consumers, and strong competition in the credit card industry has given
consumers lower interest rates, enhanced services, and a wide variety
Credit cards are the payment method of choice for many consumers.
They are also the primary means to purchase goods and services through
e-commerce in the United States and around the globe. Eighty percent of
U.S. households have credit cards, and consumers often choose to carry
more than one card for the flexibility and choice that comes with
differing card features and rewards.
Credit cards provide consumers with a fast and efficient means of
payment for many types of purchases. They are secure, convenient, and
easy to use. They allow consumers to purchase airline tickets, rent
cars, make hotel reservations, and shop on the Internet from the
comfort of their homes and offices. Credit cards are also instrumental
in establishing a credit history, which plays an essential role in a
consumer's ability to make large purchases such as a home or
automobile, get a job, or even open a bank account.
Credit cards offer customers the flexibility to adjust their
monthly payments to reflect their preferences and monthly cashflow
situation. Some customers choose to pay their cards off in full each
month, basically using their cards exclusively as a convenient way to
make purchases and pay their bills. Other customers choose to revolve
their credit and adjust the amount they pay each month according to
their monthly household budgets. Most Citi Cards customers make their
credit card payments on time. The vast majority of our customers pay
more than the minimum due.
Credit cards provide unique protection features and services not
found in other forms of payment. In our case, we believe protecting our
customers is fundamental to our business. All of our cards provide
security features against fraud and identity theft. Citi Cards and most
other issuers also have zero liability policies for unauthorized
charges on a customer's card to supplement the already strong
protections of current law against liability for unauthorized charges.
Credit Card Industry Lending Model
The lending model for credit cards is unique. The loans we provide
are unsecured and open-ended, and there are significant operational,
funding, and other costs associated with maintaining the infrastructure
that allows consumers to use credit cards anywhere, at any time. There
are many elements that determine the level of profitability for a
company, and well-run companies make profits because of careful
management of the risks involved.
Legal and Regulatory Framework
The credit card industry is heavily regulated.\1\ The bulk of these
regulations were put in place during the 1960's and 1970's, and they
have been continuously updated to keep pace with industry changes. For
example, the Truth in Lending Act (TILA) was amended in 1988 by the
Fair Credit and Charge Card Disclosure Act to add the now well-known
``Schumer box'' to credit card solicitation disclosures. During the
1980's and 1990's, TILA's implementing Regulation Z was periodically
amended with new fee and interest rate disclosures and other
requirements for both traditional direct mail and newer Internet
marketing channels. Even as we meet today, the Federal Reserve Board is
analyzing responses to its recent Advance Notice of Proposed Rulemaking
representing a comprehensive review of Regulation Z's open-end credit
provisions, and the Board is preparing to issue regulations pursuant to
TILA amendments enacted as part of last month's bankruptcy reform
legislation. These amendments require new disclosures regarding the
effect of making minimum payments, enhanced ``introductory rate''
disclosure requirements, new Internet disclosure rules, and other new
\1\ The many laws and regulations that apply to the credit card
industry include: (a) the Truth in Lending Act and the Federal
Reserve's implementing Regulation Z; (b) the Fair Credit Reporting Act;
(c) the Equal Credit Opportunity Act; (d) the Gramm-Leach-Bliley Act,
including the Federal banking agencies' and FTC's privacy and
information security regulations; (e) the unfair or deceptive practices
provisions of the Federal Trade Commission Act; (f) the Fair Debt
Collection Practices Act; (g) the Telemarketing and Consumer Fraud and
Abuse Protection Act; (h) the Telephone Consumer Protection Act; (i)
the Controlling the Assault of Non-Solicited Pornography and Marketing
Act of 2003 (the CAN-SPAM Act); and (j) the Community Reinvestment Act.
In addition, the bank regulatory agencies have taken a series of
new actions regarding unfair and deceptive acts and practices. In 2002,
for example, the Office of the Comptroller of the Currency (OCC) issued
guidance to national banks cautioning that practices can be found
unfair or deceptive despite technical compliance with applicable TILA
and Regulation Z requirements. Last year, the OCC augmented this letter
with specific guidance on various credit card practices, including the
marketing of ``up-to'' credit limits, promotional rate marketing, and
repricing of accounts and other changes in credit card terms. These
advisory letters have supplemented well-publicized OCC enforcement
All U.S. card issuers are subject to Federal or State regulatory
agency oversight. Citi Cards' two card issuers are both national banks
that are subject to regulation, examination, and supervision by the
OCC. We meet formally with the OCC to review the types and trends of
customer complaints that its national Customer Assistance Group
receives about the banks it regulates, including Citi Cards. Like other
banks, we undergo regularly scheduled, extensive consumer compliance
and Community Reinvestment Act (CRA) examinations. We also have full-
time on-site OCC examiners who constantly review our practices and
Citi Cards and Our Customers
Our Goals for Our Customers
In a highly competitive marketplace in which consumers have
numerous payment card choices, we recognize that customer satisfaction
is a driver of business revenue and that a lost customer is difficult
and expensive to replace. We therefore constantly work to meet consumer
demand and maintain customer loyalty. We strive to be responsive to our
customers' needs and concerns.
We recognize that an educated customer will be a more satisfied
customer. Accordingly, we take great care to make sure that we provide
access to consumer education in our communications. We reach out to
educate our customers in a variety of ways. For example, our ``Use
Credit Wisely'' program helps our customers learn to enjoy the
flexibility and convenience of our credit cards without a resulting
burden. Our websites (www.usecreditwisely.com and
www.students.usecreditwisely.com) have important information for
students and other consumers, including rules for using credit
responsibly, tips for gaining financial control, credit education
tests, a glossary of important credit-related terms, and tips to
prevent identity theft.
Financial education is an integral part of the work we do every day
and a major focus of our effort to make a difference in the communities
where we live and work. Recently, Citigroup and the Citigroup
Foundation announced a 10-year global commitment of $200 million toward
financial education and, as part of this commitment, Citigroup
announced the formation of the Office of Financial Education.
Reaching New Customers
We strive to make credit available to consumers as their needs
change throughout their lives. One of the ways new entrants to the
credit market begin to build a credit history is with their first
credit card. We reach out to groups that are new to credit, such as
college students and recent graduates, for whom a credit card
relationship offers a necessary payment tool, security, and means for
them to build a positive credit history.
With new entrants to the credit market, we normally start the
customer with a credit line tailored to his or her individual
circumstances. These new customers, just like our general customer
population, must demonstrate that they can manage their credit
responsibly before we will increase their credit line. Our experience
with college students has shown that they compare favorably with our
general customer population in terms of credit management.
New Customer Solicitations
We use direct mail to find the majority of our new customers. We
mail prescreened offers (which are sometimes referred to as
``preapproved offers'') to consumers who have been selected to receive
the offer. This selection process includes credit bureau screening for
bankruptcy filings, delinquent and written-off accounts above certain
amounts, debt levels above certain amounts, and other credit problems.
The selection process also includes the use of our internal credit
scoring model in order to apply more sophisticated credit criteria
before the offer is mailed. When the consumer responds to the
prescreened offer, we then review his or her actual credit bureau
report and apply the same credit bureau and modeling criteria that we
did in the selection process to make sure that the consumer is still
We also mail offers to consumers without prescreening. When a
consumer responds to this type of offer, we review the consumer's
credit bureau report and apply basically the same credit bureau and
credit score modeling criteria that we use for our prescreened offers.
Recent Revisions to Our Solicitation Materials
Our goal is to assure ``no surprises'' for our customers and to
continually improve upon our practices. In reaching new customers, this
means that all of our written materials must describe our products
clearly, accurately, and fairly.
Citi Cards recently redesigned our solicitation letters to assure
``no surprises'' for our new customers. In doing so, we also made sure
that our new letters were consistent with the OCC Advisory Letter of
September 14, 2004, which requires national bank credit card issuers to
review specified credit card marketing and account management
While we have always disclosed our right to reprice accounts, we
took the Advisory Letter as an opportunity to review our disclosure
practices. As a result, we now tell consumers in more detail at the
time of solicitation that their account terms could change. We specify
that information in the consumer's credit bureau report--such as
failure to make a payment to another creditor when due, amounts owed to
other creditors, number of credit accounts outstanding, or the number
of credit inquiries--could cause us to reprice the account. This is to
help educate consumers about how we use credit bureau information.
Moreover, we tell them that our right to change the terms of our
accounts with them based on credit bureau report information is subject
to their right to prior notice and their right to opt out of the
In addition, we now repeat on page one of our solicitations
selected disclosure information about the terms of credit that
previously appeared only on the second page in the large print
Regulation Z ``Schumer box.'' For example, if a promotional rate
applies to balance transfers and there is a balance transfer fee, that
fee information from the Schumer box is now repeated on page one of the
Our Relationship with Our Existing Customers
Products and Services
Our goal is to make sure our customers know how to use their card
and all of the services available to them. New customers receive a
directory of services with their credit card. The directory of services
is tailored to each of our individual credit products so that it can
explain all the benefits of the card to the new customer. These
benefits include the opportunity for the customer to request that a
photo be put on the front of his or her card for added security, as
well as the other security features that apply to our cards, such as
Citi Identity Theft Solutions. We let them know how to reach us, both
by phone and online, so that they can take advantage of the benefits
that their card offers. We also have a welcome kit that we send to new
customers to make them aware of an array of products and services that
We conduct research on an ongoing basis to understand existing and
prospective customer needs and wants. This research helps us identify
and recommend products, services, and processes that satisfy
marketplace desires and improve the customer experience.
Our call center associates receive extensive classroom training
prior to handling customer contacts. This includes specialized modules
around key ``soft skill'' attributes such as courtesy, empathy, tone,
listening skills, proactive service, and the importance of the customer
We also work very closely with our customers who advise us that
they are having financial difficulties. We offer various options to
these customers, such as reducing minimum payments, reducing interest
rates, waiving fees going forward, or crediting back fees that have
already been billed. In addition, we work with nonprofit consumer
credit counseling agencies and support customer debt management plans.
Risk-Based Pricing Policies
Because credit card loans are unsecured and open-ended, it is
important that we are able to employ various methods of recognizing and
mitigating risk. Constraints on risk-based pricing would lead to less
access to credit for those in need, higher prices for all consumers,
and a less competitive marketplace.
The best indicator as to whether an individual will repay a loan is
his or her payment behavior with us and other lenders. Pricing loans
for risk is a fair and equitable method of compensating lenders for
making loans that carry a higher possibility of default. It is also
consistent with the regulatory and business goal of assuring that we
conduct our business in a safe and sound manner.
If we see indications that a customer is taking on too much debt,
has missed or is late on payments with another creditor, or is
otherwise mishandling his or her personal finances, it is not
unreasonable, as an unsecured lender, to determine that this behavior
poses an increased risk. In the interest of all of our customers and
the safety and soundness of our banks, we adjust a customer's rate to
compensate for that increased risk.
In the past, our agreements with our cardholders provided that a
delinquency with another creditor (referred to as an ``off-us''
delinquency) gave us the right to automatically increase a customer's
interest rate. Now, before we increase a customer's rate due to an off-
us delinquency, we provide prior notice to the customer explaining why
his or her rate is being increased and give the customer the right to
opt out of that increase. If the customer opts out, he or she may
continue to use the card with the existing rate until the card expires.
When the card expires, no new charges are allowed. However, customers
may continue to pay off their balance using the existing rate and
payment terms. The events that allow us to automatically increase the
interest rates are now limited to three types of behavior that relate
to a customer's relationship with us: failure to make a payment to us
when due; exceeding the credit line; or making a payment to us that is
New Change in Terms and Opt Out Notice
We also recently redesigned our change in terms and opt out notice.
Our newly rewritten and reformatted notice is shorter, more concise,
and uses white space and bold headers to ensure that key messages stand
out. To highlight to our customers that they can opt out of a change in
terms, we added the words ``Right to Opt Out'' to the title of the
notice and the paragraph heading. Finally, we added a toll-free
telephone number as an alternative opt out method.
This right to advance notice and opt out affords significant
protections for customers. For example, if we notify a customer that
his or her interest rate will be increased due to adverse information
in a credit bureau report, the specific reasons for the proposed
repricing (for example, failure to make payments to another creditor
when due) are included in the advance notice, and the advance notice
names the credit bureau providing the information so the customer may
challenge the report if he or she thinks the information is inaccurate.
Redesigned Customer Agreements
In a continuous effort to improve our customer communications, a
few months ago we completely rewrote, reformatted, and simplified our
credit card agreements. Then we added on the first page a section
entitled ``Facts About Rates and Fees'' that summarizes critical card
pricing information in a single place, much like the nutritional labels
found on food products. We emphasize this pricing information by
bolding key words and phrases so that it will be more useful to our
customers. This ``Facts About Rates and Fees'' section also includes a
description of the reasons we may use to change the rates and fees
associated with their account.
Citi Cards is committed to protecting our customers from fraud and
identity theft and we are continuously developing new programs to deal
with these problems. We were the first card issuer to have a photo
identification on the credit card in 1992. More recently, in 2003, we
created the Identification Theft Solutions program with an internally
staffed unit dedicated to handling identification theft cases for our
customers even if the identification theft relates to another of their
cards that we did not issue. This year we announced a new collaboration
with the National District Attorneys Association where we work with
State and local prosecutors nationwide to develop new strategies for
the arrest and prosecution of identity thieves. Similarly, for our
Internet channel, we rolled out a program to stop ``phishers'' from
spoofing our customers who use the Internet. We created a special
security box that appears on the top of all emails sent by us to Citi
customers--known as the ``Email Security Zone,'' and we provide
dedicated Internet security specialists to help customers with
questions about suspicious emails and other security issues.
New Minimum Monthly Payment Formula
This year we are changing our minimum payment formula to ensure
that every customer who pays only the minimum monthly payment pays off
his or her debt in a reasonable period. Under this new schedule, a
customer's minimum payment requirement covers interest, late fees, and
1 percent of the balance due. This formula was adopted to meet the
OCC's recent requirement for positive amortization of credit card debt
on an individual customer basis. It will increase the minimum monthly
payment due for some of our customers, and in some instances
dramatically for those whose accounts are at higher interest rates.
Although we recognize that, in the short-run, some customers could be
financially strained meeting these higher monthly payments, we believe
that over the longer-term the new minimum payment policy will be a net
positive for customers as it will accelerate their payment of
outstanding debt, and over time it will result in lower total interest
payments. In the meantime, we are developing strategies to mitigate the
impact of increased monthly payments for customers in hardship
The newly enacted Bankruptcy Abuse Prevention and Consumer
Protection Act amends TILA to require creditors to disclose on the
front of each billing statement an example showing the time it would
take to repay a sample balance if a customer is making minimum payments
only. As an alternative under the new law, if a creditor maintains a
toll free telephone number that provides customers with the actual
number of months it would take to repay the customer's balance, that
creditor is not required to provide the sample on the billing
We are currently looking at ways that we could provide this actual
information to customers in a manner that will not confuse or mislead
them but that will instead be beneficial. We hope to use this
requirement to provide information that is a useful, accurate, and
effective planning tool for our customers who may desire it.
Thank you again for the opportunity to appear before this
Committee. I would be pleased to answer any questions you may have.
PREPARED STATEMENT OF LOUIS J. FREEH
Vice Chairman and General Counsel, MBNA Corporation
May 17, 2005
Good morning, Chairman Shelby and good morning distinguished
Members of the Committee. My name is Louie Freeh and I am here today as
General Counsel of MBNA Corporation. Thank you for this opportunity to
address the Committee and to share with you some observations about how
the American credit card industry, and MBNA in particular, is working
to ensure broad availability of credit, at a fair price in a secure
MBNA is an international financial services company and the third
largest issuer of credit cards in the United States. Our primary
business is making unsecured loans through credit cards, consumer
loans, business credit cards, and other lending products. MBNA is best
known for partnering with thousands of professional organizations,
colleges and universities, conservation groups, and others to deliver
financial products through affinity marketing programs. Under these
programs, millions of customers express their affinity with their alma
mater or profession, and more than 5,000 organizations benefit by
sharing in the proceeds generated when customers use an MBNA credit
card. MBNA products and services are endorsed by organizations like the
National Education Association, Georgetown University, and Ducks
MBNA began business more than 20 years ago with about 100 people in
an abandoned grocery store in a rundown shopping center in Ogletown,
Delaware. Today, MBNA is a Fortune 100 company that employs more than
27,000 people in Delaware, Maryland, Maine, Ohio, Georgia, New Jersey,
New York, Pennsylvania, and Texas, as well as in Canada, the United
Kingdom, Ireland, and Spain. MBNA appears perennially on several
national lists as among the top 100 places to work in America. Our
success has been built on an enduring commitment to provide customers
top quality financial products, backed by world-class service. That
commitment is best expressed by the words, ``Think of Yourself As A
Customer,'' which appear above every door in the company.
At MBNA, we use sophisticated software models to help make credit
decisions, but we also rely on the analysis and judgment of highly
experienced credit analysts. By making what we believe to be more
informed credit decisions, MBNA has built one of the highest performing
loan portfolios in the credit card business. Our loan losses are
significantly lower than the industry average and most of our customers
make more than their minimum payment every month. We also take pride in
the fact that we treat every customer as an individual, and we make
decisions based on an analysis of that individual's credit worthiness
as it evolves over time.
In the larger sense, MBNA is a major participant in an industry
that is a vital part of the American economy. Credit cards are so
ubiquitous that it is easy to forget a time not so long ago when access
to credit was a privilege reserved for the elite. Some of you will
recall a time when, if you wanted a $300 personal loan, it meant
filling out an application, signing countless documents, waiting for
your approval and, if the approval came, submitting to a lecture from
the bank officer before receiving your check and a book of payment
coupons. Today, sophisticated processes allow you to get this done at
The availability of reliable credit information, strong regulatory
protections, and the willingness of companies like MBNA to take
reasonable credit risks have greatly broadened the availability of
credit for the average American. This capital has helped fuel the
growth of our economy and the strength of our Nation. The fact is, our
society would not function as it does without reasonable access to
credit through credit cards.
Yet for all this progress, today's credit card loan is very much
like the personal loan you may have waited several weeks to receive 20
years ago. It is an unsecured loan that the lender grants based largely
on the customer's promise to repay. For example, when a customer uses a
credit card to pay for an airline ticket, he is taking out an unsecured
But the credit card loan is different from the old personal loan in
several important ways. If the credit card customer needs additional
funds or is unable to repay the loan immediately, the lender has agreed
in advance to allow the customer to revolve a balance on the loan,
repaying a portion each month and avoiding the need to apply for a new
loan. So if the airline ticket delivers our customer to Hong Kong, the
credit card lender will make funds available in the local currency. If
there is a problem, the lender will be available 24 hours a day, 7 days
a week to ensure that the customer is satisfied. And if the customer's
card is lost or stolen, the lender will replace the card so that the
customer may return home. And the lender then bears the cost of any
fraudulent use of the card. It is really a remarkable product.
Most of us do not think about the investment in people, technology,
and products required to make this kind of product and service
available wherever and whenever a consumer wants credit. The world of
the old personal loan seems a distant memory. It is as if credit cards
have always been there, and always will be. In fact, the system relies
on the integrity of both parties to live up to their commitments. And
the good news is, the system is working very well.
The vast majority of lenders grant credit responsibly, and the vast
majority of consumers use credit cards responsibly. The result is,
nearly every American today enjoys access to a reasonably priced source
of capital to realize their dreams. Credit is no longer the province of
the wealthy. Credit is now a reasonably priced financial tool available
to nearly every American. MBNA is proud to have played a role in this
There are, of course, always exceptions. Some consumers mis-handle
credit cards, and lenders can always do more to improve the ways in
which they grant and manage credit. But we must not make the mistake
today of focusing solely on the exceptions. As we examine some of the
industry's practices, we must balance our concern for appropriate
safeguards with an interest in preserving access to credit for the
majority of Americans who use it responsibly.
Within this context, let me turn now for a few moments to some
topics the committee is concerned with. I have some observations on the
marketing of credit cards to college students, the practice of
repricing existing accounts and assessing fees, minimum payments,
concerns about disclosures, and data security.
In discussing student marketing, it is important to note that we
make every effort to ensure that credit card offers are not sent to
people under the age of 18.
MBNA does promote its products to college-aged customers by
partnering with more than 700 colleges and universities, primarily
through the college alumni associations. By working closely with school
administrators, we have earned the confidence and trust of most of
America's premier educational institutions.
When we market on campus, we sometimes participate in school events
such as football games and orientation activities. These activities are
conducted within the framework of a multiyear agreement that gives the
school extraordinary control over when, where, and how we are allowed
to market our products, especially to students. While we do issue
credit cards to some college students, you may be surprised to learn
that more than 90 percent of the credit cards we issue through colleges
and universities go to the alumni, parents, and staff, not students.
Alumni groups typically use the funds generated to underwrite academic
and athletic enrichment programs.
Before granting credit to a college student, analysts familiar with
the needs and abilities of college students review each application and
decline more than half. Our experience is that most college student
applicants report a separate income, and that many already have an
established credit history. When evaluating an application, we consider
the college students' projected performance as an alumnus, and when we
grant credit, we typically assign a line of between $500 and $1,000. If
a college student attempts to use his or her card beyond the credit
line, we typically refuse the charge. And we do not reprice these
accounts based on behavior.
Once a college student becomes a cardholder, MBNA delivers its
``Good Credit, Great Future'' brochure in a welcome package. The
brochure highlights sound money management habits, including guidance
on how to handle a credit card responsibly. We also maintain a website
aimed at college-aged consumers, highlighting many of the same tips.
MBNA also conducts on-campus credit education seminars and we provide
articles concerning responsible credit use for student and parent
The performance of our college student portfolio mirrors closely
that of the national experience, as reported in GAO reports and several
independent studies. However, our accounts have much smaller credit
limits and much smaller balances than the norm, our college student
customers utilize their cards less often than the norm, and these
accounts are less likely to incur fees. Our experience has also been
that college students are no more likely to mis-handle their accounts
than any other group of customers.
When we grant a card to a college student, we think of it as the
beginning of what we hope will be a long relationship. As he or she
begins a career, purchases a home and raises a family, MBNA wants to be
the lender of choice. Given this, we have absolutely no interest in
encouraging poor credit habits. In fact, everyone's interest is best
served when college students make responsible use of credit. That is
our goal in every situation, and certainly when dealing with college-
We also appreciate that Congress has mandated a study concerning
credit and college students. We believe this study will bear out what
our experience has indicated and will provide a sound, analytical basis
for determining whether or not additional legislation is necessary.
Re-Pricing and Fees
One topic often discussed is how credit card lenders price--and
sometimes reprice--their products. It is not unusual to hear someone
say that the prime rate is X, that home mortgages are generally priced
close to that number, and that credit cards should be too. Of course
this line of thinking ignores the fact that no consumer loan could have
greater security than a mortgage, which is secured against real
property, while few loans could have less security than a credit card.
MBNA has some 50 million customers. During any given month, 30
percent of our customers revolve a balance and pay us interest for the
use of that money, another 10 percent pay in full without interest, and
60 percent have no balance and do not use their card that month. Before
we lend money to customers, MBNA must itself borrow funds. We must then
pay the marketing costs to attract customers and the operations costs
to service their business. We must also cover the expense of providing
rewards points to customers, compensating our affinity partners,
protecting our customers from fraudulent transactions, and funding
those loans that are charged off because they will never be repaid. And
like any business, we must pay salaries, benefits, facilities expenses,
and taxes. The fact is, before we return a profit to shareholders, we
must earn significantly more than our cost of funds just to cover our
cost of business. And this is in an environment where customers have
come to expect no annual fee, generous rewards points, complete
protection from fraud, 24-hour global service, and a 0 percent APR.
We manage to this environment by using our affinity model to
differentiate our products, by focusing on providing outstanding
products and services, by giving potential customers every good reason
to join MBNA, by maintaining the flexibility to price our products to
reflect the changes in the risk profiles of our customers, and by
applying fees when customers decide to handle their accounts outside
the agreed terms. Our over-riding objective is to ensure the integrity
of the portfolio so that we can continue providing the greatest amount
of credit to the greatest number of qualified customers at the most
competitive rates. I think this goal is entirely consistent with the
committee's fundamental concerns for the American consumer.
When we increase a customer's APR, we do so for one of two reasons:
Either our costs have increased, or the customer's creditworthiness
indicates a higher risk than is supported by the current pricing.
However, MBNA does not practice universal default. We do not
automatically reprice a customer's account without notice solely
because he or she may have missed or been late on a payment to some
The reality is, every lender must have the ability to set and, if
necessary, adjust the pricing on an unsecured revolving loan in order
to reflect the risk inherent in making that loan. Likewise, if a
customer chooses to pay late, exceed his credit limit, or otherwise
handle his account outside the agreed terms, it is not unreasonable
that we would assess a fee to help cover the added risk that this
poses. Without this flexibility, some lenders would simply raise their
rates, forcing all customers to pay a higher rate in order to subsidize
those who present increased risks, others would limit credit access to
all but the most affluent, and some would just find new lines of
At MBNA, we work to balance all of these factors and to price our
products in a way that allows us to attract and retain the best
customers, while also achieving our financial goals.
Absent a default on that specific account, MBNA provides advance
notice to customers when we reprice an account, and we allow customers
to reject a rate increase and to pay the balance at the old rate.
I want to turn now to the subject of minimum payments. Providing
customers with the flexibility of making a low minimum payment is one
of the terrific features of a credit card. For customers whose incomes
may fluctuate over the course of the year, the option of a low minimum
payment can be a flexible tool for managing the monthly budget.
Our experience, however, is that nearly all of MBNA's customers pay
more than their minimum each month and only a fraction of 1 percent of
consistently pay only the minimum. In fact, many of our customers pay
their balance in full each month.
While the minimum payment is meant as a tool or a guideline for
consumers, we recognize that some customers fall into the habit of
repeatedly making the minimum payment. When this happens, a consumer
can begin having problems making a dent in the principle owed. MBNA
identifies those customers whose poor payment practices indicate
financial stress. We reach out to these customers and work with them to
develop payment strategies that suit their circumstances.
MBNA has also announced that it will begin applying a new minimum
monthly payment formula later this year. For most customers who revolve
a balance and currently pay the minimum, the new formula will encourage
them to pay down a larger portion of principle each month. We continue
to work with the OCC and all of the banking regulatory agencies as they
work to improve the effectiveness and efficiency of the system.
Turning for a moment to the topic of disclosure, let me first say
that MBNA is committed to keeping its customers fully and fairly
informed of every aspect of their accounts. However, we believe that
the volume and types of disclosures mandated by Federal and State laws,
regulations, guidelines, and practices, along with the complexity of
the product, have not led to greater clarity. In fact, we think these
measures have often led to greater confusion and frustration for the
consumer. And while we favor better disclosure, we should consider that
better disclosure may not mean more disclosure. Better disclosure may
mean simpler descriptions of key terms and offering consumers a range
of ways to get this information, including websites, toll-free phone
numbers, and simplified documents.
At MBNA, we always provide advance notice of changes in APR's and
we tell customers how to opt-out of these changes. Moreover, in
response to the OCC's September 2004 Advisory Letter regarding credit
card marketing practices, MBNA made a number of improvements in its
marketing materials and agreements. Our goal was to highlight important
terms and conditions relating to fees, rates, payment allocation,
repricing, and how to opt-out of changes in terms. In addition, we
recently provided comment to the Board of Governors of the Federal
Reserve System wherein we support the Board's decision to undertake a
comprehensive review of the Federal Truth In Lending Act and Regulation
Z. We believe this review is necessary because consumer credit markets
and communications technology have changed significantly since the Act
was last revised in 1980. We have further suggested that the Board be
guided by four fundamental principles as it considers revisions to the
First, disclosures must be simple. We know from talking to millions
of customers every year that they are often confused and frustrated by
the dense and lengthy regulatory language that issuers are required to
use in disclosures. Ironically, the language intended to inform
consumers more often overwhelms them. Much of this material ends up in
the household trash. We believe it should be a priority for the Board
to shorten and simplify disclosure language and to focus on the most
relevant terms and conditions that consumers need to understand.
Second, disclosures must be clear. There are several consumer-
tested models for presenting complex information in a clear and
effective manner. We recommend that in addition to containing shorter,
simplified language, disclosures should also be presented in ways that
are understandable and meaningful. Lenders should have the option of
using these consumer-friendly models as a ``safe harbor'' for
In respect of the need to present information simply, clearly, and
effectively, MBNA has begun voluntarily inserting its change-in-terms
notices within what we call a ``wrapper.'' The wrapper presents a top
line summary of the changes in terms, along with hints to customers for
managing their accounts. We also use the wrapper to remind customers of
the things they can do to avoid fees, and we make suggestions on how to
manage payments by mail, by phone, and by Internet. The wrapper is a
step in the direction of clarity, and we are happy to have taken it.
Our third recommendation is that disclosures should be based on
uniform national standards. The goal of greater simplicity and clarity
will never be achieved as long as individual States can impose their
own disclosure requirements. We do not believe that State-specific
disclosures provide any significant benefits, but we know they add to
the complexity of documents that customers tell us are already far too
And fourth, disclosures should not be repetitive. Key terms should
not have to be disclosed in the account application and in the summary
of terms disclosed later.
Our idea is that the Fed Box can be improved. Similar to the
``nutritional facts'' table on the side of all food products, issuers
would disclose the key terms of the credit card agreement in a uniform
way. The table could include a listing of the rates that apply to the
different types of transactions, information on whether the rates are
variable or nonvariable, fees, grace periods, default provisions,
conditions for repricing, duration of promotional rates, and so on. The
major improvement is that this information would be presented in a
consistent, uniform manner. Consumers could compare product features
and benefits, and more easily choose those products that suit their
needs, whether they want to revolve a balance or not.
In 2003, MBNA tested a ``food label-style'' privacy statement with
a small segment of customers. More than 90 percent told us they
preferred the simplified format. The study confirmed that transparency
in disclosures is in MBNA's best interest, and of course the best
interest of consumers. MBNA will work closely with the Board, and all
the appropriate agencies, to contribute to the revision process and to
implement the revised requirements.
Data Security/Identity Theft
Several recent high-profile identity theft incidents underscore the
importance of data security. Before I address how MBNA manages this
risk, it should be said that while credit card information often is the
commodity that identity thieves want, they do not usually get it from
the credit card companies. Typically, they steal this data from
merchant computers, where some retailers retain customer account
information despite industry rules to the contrary. Often it is the
credit card issuer that identifies a pattern of theft, and since the
issuer bears the financial burden when a card is used fraudulently, it
is not surprising that lenders are focused on curbing this problem.
At MBNA, we monitor account activity around the clock in an effort
to prevent fraud. To do this, we apply a unique blend of technology and
human judgment. Some of our most experienced analysts work in our fraud
prevention unit. These people bring years of experience to their
assignments and understand the patterns of behavior to look for when
identifying fraud. They know also that not everything that looks like
it might be fraud actually is fraud. That is an important skill as
well, when one goal is to ensure that customers are not denied the
legitimate use of their card.
Fraud prevention starts when we review applications. Our system of
judgmental lending gives us an edge in this respect, since we stress
the need for direct contact with applicants--especially if we think
there is any discrepancy on the application that might suggest fraud.
When customers are using their cards, MBNA employs neural network
and rules-based fraud strategies to identify high fraud-risk
transactions. If we think we see an issue, we act quickly to mitigate
fraud risk by declining transactions and/or seeking point-of-sale
But these are just a few examples of how we act to prevent fraud
and identity theft. In all, we will spend over $100 million this year
alone preventing and responding to fraud. Over the last 5 years, we
have invested additional millions of capital to upgrade our systems to
meet this growing challenge. One result of all these efforts is that
credit card losses due to fraud, measured as a percent of sales, are
now at historic lows.
Finally on this topic, I want to address the question of customer
notification. We support the standards recently adopted by the Federal
banking agencies. We believe that lenders must have the flexibility of
being able to assess whether or not the circumstances of the breach
pose a genuine risk. Establishing a default requirement where each and
every breach of sensitive information triggers an all-out customer
notification, as some have suggested, will result in a flood of
notifications, nearly all of which will be unnecessarily alarmist.
Consumers will quickly learn to ignore these notices and will become
complacent, even in those instances when the threat is genuine. What we
should strive for is a standard that calls for notification when the
threat is real.
Chairman Shelby and Members of the Committee, this concludes my
prepared remarks. I would again like to thank you for the opportunity
to address some of these important topics and I look forward to
responding to any questions you may have.
PREPARED STATEMENT OF ROBERT D. MANNING
University Professor and Special Assistant to the Provost
Rochester Institute of Technology
September 5, 2002
I would like to thank Chairman Richard Shelby for providing this
opportunity to share my views with the Committee on the increasingly
important issue of deceptive credit card marketing and consumer
contract disclosures during this rapidly changing period of banking
deregulation. This Committee has a long tradition of examining and
protecting consumer rights in the realm of financial services and I
hope that this hearing will produce new relief to financially
distressed and overburdened households as they cope with the
increasingly opaque credit card policies and practices. In this
endeavor, I have had the pleasure of contributing to Senator Paul S.
Sarbanes' investigation of consumer debt among college students and the
lack of financial literacy/education programs for America's financially
vulnerable youth. In addition, I applaud the legislative initiatives of
Senator Christopher Dodd, who has championed credit card marketing
restrictions on college campuses along with critically needed financial
education programs as well as directing greatly needed attention to
ambiguous contract disclosures and deceptive marketing practices. Also,
it is a pleasure to acknowledge the State of New York's senior Senator,
Charles E. Schumer, whose efforts to protect consumers from deceptive
marketing and contract disclosure practices of the credit card industry
has simplified our lives through the summary of our key credit card
contract information in our monthly statements. The twin issues of
rising cost and levels of consumer debt together with shockingly low
levels of financial literacy among our youth and their parents have
grave implications to the continued economic well-being of the Nation--
especially as Americans age into debt and watch the erosion of their
Social Security benefits. For these and many other reasons, I commend
the Committee for accepting the daunting task of examining the
increasingly serious problems that will be addressed today.
As an economic sociologist and faculty member in the Department of
Finance in the College of Business at Rochester Institute of
Technology, I have spent the last 19 years studying the impact of U.S.
industrial restructuring on the standard of living of various groups in
American society. Over the last 12 years, I have been particularly
interested in the role of consumer credit in shaping the consumption
decisions of Americans as well as the role of retail banking in
influencing the profound transformation of the U.S. financial services
industry. In regard to the latter, I have studied the rise of the
credit card industry in general and the emergence of financial services
conglomerates such as Citigroup during the deregulation of the banking
industry beginning in the late 1970's.
In terms of the former, my research includes in-depth interviews
and lengthy survey questionnaires with over 800 respondents in the
1990's and nearly 1,500 in the 2000's. The results of this research are
summarized in my book, CREDIT CARD NATION: America's Dangerous
Addiction to Consumer Credit (Basic Books, 2001) and a forthcoming
series of research articles. More recently, I have begun investigating
the global expansion of deregulated consumer financial services with
particular attention to comparative governmental policies that enforce
consumer rights in Europe, Asia, and Latin America. My next book, GIVE
YOURSELF CREDIT (Alta Mira/Taylor Publishers, 2006), presents an
updated analysis of the deregulation of the credit card industry, major
public policy issues, and practical guidance for consumers for more
prudent use of consumer credit. These interests in public policy and
financial literacy have inspired the development of my own internet-
based financial literacy/education programs at
Banking Deregulation and the Consumer Lending Revolution:
Ascension of the Free Market or Nadir of Consumer Rights?
In mid-2004, the 185 million bank credit cardholders in the United
States possessed an average of almost 7 credit cards (4 bank and 3
retail) and they charged an average of $8,238 during the previous year
(Cardweb.com, 2004a; Card Industry Directory, 2004). In 2004, about 70
million (37.8 percent) were convenience users or what bankers
disparaging refer to as deadbeats because they pay off their entire
credit card balances each month.\1\ In contrast, nearly 3 out of 5
cardholders (62.2 percent) were lucrative debtors or revolvers; 71
million (38.4 percent) typically pay more than the minimum monthly
payment (typically 2 percent of outstanding balance) while 44 million
(23.8 percent) struggle to send the minimum monthly payment
\1\ Over the last 6 months, fueled by increasing popularity of home
equity loans and the uneven economic expansion, the growth of
convenience users has jumped to about 43 percent (CardWeb.com, 2005).
Over the last 10 years, which includes the longest economic
expansion in American history, the total number of bank credit cards
increased 62 percent, total charge volume by 162 percent, and net
outstanding debt by 129 percent (Card Industry Directory, 2004, Ch. 1).
Today, early 2005, approximately three out of five U.S. households
account for almost $685 billion in outstanding, ``net'' bank credit
card debt plus almost another $100 billion in other revolving lines of
credit (Card Industry Directory, 2004; Cardweb.com, 2004a; U.S. Federal
Reserve, 2005). This reflects a meteoric rise in credit card debt--from
less than $60 billion at the onset of banking deregulation in 1980.
Overall, the average outstanding credit card balance (including
bank, retail, and gas) of debtor or ``revolver'' households with at
least two adults has soared to over $12,000 (Card Industry Directory,
2004); approximately 75 percent of U.S. households have a bank credit
card, up from 54 percent in 1989 (Canner and Luckett, 1992;
T3Cardweb.com, 2004a). This is exclusive of ``nonrevolving'' consumer
debt such as auto, home equity, furniture, debt consolidation, and
student loans, which total over $1.3 trillion in 2005, plus over $7.2
trillion in home mortgage loans. The sharp increase in consumer debt
(``revolving'' and ``installment'') over the last 25 years (doubling
over the last 10 years) and the rapid rise of credit card debt-from
19.5 percent of installment debt in 1980 to 43.8 percent in 1990
peaking at 70.4 percent in 1998 and dropping to 61.9 percent in 2004.
In terms of consumer debt levels per capita, each of the more than 295
million residents of the United States owes an average of over $31,000,
which helps to explain how consumer spending accounts for over two-
thirds of U.S. Gross Domestic Product (GDP) or total domestic economic
activity (U.S. Federal Reserve, 2005; U.S. Census, 2005). As
illustrated by these startling statistics, the last two decades have
witnessed the birth of the Credit Card Nation and the ascension of the
debtor society (Manning, 2000; Sullivan, Warren, and Westbrook, 2000;
Warren and Tyagi, 2003; Leicht and Fitzgerald, 2006).
Banking Deregulation and the Ascent of Retail Financial Services:
What's Consumer Debt Got to Do With It?
The debate over the origins of the consumer lending ``revolution''
tend to focus on either the ``supply'' or ``demand'' side of this
extraordinary phenomenon. This section explores how statutory and
regulatory reforms over the last three decades have fundamentally
changed the structure of the U.S. banking industry and the subsequent
``supply'' of financial services. During this period, the institutional
and organizational dynamics of American banking have changed profoundly
as well as the ``supply'' of financial services in terms of their use,
cost, and availability. Indeed, the intensifying economic pressures of
globalization (U.S. industrial restructuring, Third World debt crisis,
downward pressure on U.S. wages) together with new forms of competition
in the U.S. financial services industry (rise of corporate finance
divisions, growth of corporate bond financing, and expansion of
mortgage securitization) precipitated a dramatic shift from
``wholesale'' (corporate, institutional, and government) to ``retail''
or consumer banking (Brown, 1993, Dymski, 1999; Manning, 2000: Ch. 3).
And, as explained later, consumer credit cards played an instrumental
role in this process.
The basic public policy assumption of banking ``deregulation'' is
that reducing onerous and costly Government regulation invariably
unleashes the productive forces of intercompany competition that yield
a profusion of direct benefits to consumers. The most salient are lower
cost services, greater availability of products, increased yields on
investments, product innovation, operational efficiencies, and a more
stable banking system due to enhanced industry profitability (Brown,
1993, GAO, 1994; Rougeau, 1996; Dymski, 1999; Manning, 2000: Ch 3).
This ``free market''-based prescription for miraculously satisfying
both the profit objectives of financial services executives and the
cost/availability interests of consumers belies the inherent political
asymmetries that have militated against the distribution of industry
efficiencies over the last 20 years. It is the intractable conflict
between corporate profit maximizers in the banking industry and
consumer rights advocates that constitutes the focus of this analysis.
According to Jonathan Brown, Research Director of Essential
Information, there are three systemic contradictions of laissez-faire-
driven banking deregulation that limit ``broad-based'' consumer
benefits. In brief, they are  excessive risk-taking by financial
institutions that are facilitated by publicly financed deposit
insurance programs (FDIC) and publicly subsidized corporate
acquisitions of insolvent financial institutions (Savings and Loan
crisis of early 1980's);  increased industry concentration and
oligopoly pricing policies (in the absence of a strong antitrust
policy) that limits cost competition over an extended period of time;
and  diminished access to competitive, ``mainstream'' financial
services for lower-income households as corporations focus their
resources on more affluent urban and suburban communities. Brown
concludes by underscoring the paradox of ``free market''-driven banking
deregulation, ``strong prudential control [by Government and consumer
organizations] becomes even more important because deregulation
increases both the opportunities and the incentives for risk-taking by
banking institutions [in the pursuit of optimizing profits rather than
public use]'' (Brown, 1993: 23). For our current purposes, the latter
two trends merit further discussion.
The first distinguishing feature of the early period of banking
deregulation is the sharp increase in the growth and profitability of
retail banking in comparison to wholesale banking. During the early
1980's, wholesale banking activities experienced a sharp decline in
profitability, especially in the aftermath of the 1982-1983 recession.
These include massive losses on international loans, large real-estate
projects, and energy exploration/extraction companies. Furthermore,
traditional bank lending activities faced new and intensified
competition such as Wall Street securities firms underwriting cheaper
bond issues, corporate finance affiliates offering lower-cost credit
for ``big ticket'' products (automobiles), and the integration of home
mortgage loans into the capital market via the sale of asset-back
securities (mirrored in the explosive growth of Fannie Mae) which
contributed to downward pressures on bank lending margins. In addition,
many consumers with large bank deposits shifted their funds into higher
yield mutual funds that were managed by securities firms. This
increased the cost of bank funds since they were forced to offer
certificates of deposits (CD's) with higher interest rates which
further reduced their profit margins (Brown, 1993; Nocera, 1994;
As astutely noted by Brown, the response of U.S. banks to these
intensifying competitive pressures was predictable, ``[F]inancial
deregulation tends to lower profit margins on wholesale banking
activities . . . where large banks have suffered major losses on their
wholesale banking operations, the evidence suggests that they tend to
increase profit margins on their retail activities in order to offset
their wholesale losses'' (Brown, 1993: 31.) Indeed, corporate borrowers
have been the major beneficiaries of banking deregulation over the last
two decades. This is evidenced by the sharp increase in the cost of
unsecured consumer debt such as bank credit cards; see Manning
(2000:19) for a cost comparison of corporate-consumer lending rates in
the 1980's and 1990's.\2\
\2\ The real cost of ``revolving'' credit card loans, exclusive of
introductory or low ``teaser'' rates and inclusive of penalty fees, has
nearly tripled since the early phase of banking deregulation in the
The magnitude of this shift in interdivisional profitability within
large commercial banks is illustrated during the 1989-1991 recession.
For example, Citicorp reported a net income of $979 million from its
consumer banking operations in 1990 whereas its wholesale banking
operations reported a $423 million loss. Similarly, Chase Manhattan's
retail banking activities produced $400 million in 1990 whereas its
wholesale banking activities yielded a $734 million loss (Brown, 1993:
31). Not unexpectedly, bank credit cards played a central role in
fueling the engine of consumer lending in the 1980's. The average
``revolving'' balance on bank card accounts jumped six-fold--from $395
in 1980 to $2,350 in 1990 (Manning, 2000:11). According to economist
Lawrence Ausubel, in his analysis of bank profitability in the period
1983-1988, pretax return on equity (ROE) for credit card operations
among the largest U.S. commercial banks was 3-5 times greater than the
industry average (1991:64-65). Hence, the ability to increase retail
bank margins in the early 1980's (to be discussed in greater detail)
led to the sharp growth in consumer marketing campaigns and the rapid
expansion of consumer financial services beginning in the mid-1980's
(Mandell, 1990; Nocera, 1994; Manning, 2000).
Not incidentally, the escalating demand for increasingly expensive
consumer credit was not ignored by nonfinancial corporations. Growing
numbers of manufacturers and retailers established their own consumer
finance divisions such as General Motors, General Electric, Circuit
City, Pitney Bowes, and Target. In many cases, like the dual profit
structures of the banking industry, the traditional operations of these
major corporations (manufacturing and retailing) encountered mounting
competitive pressures through globalization and subsequently
experienced sharp declines in their ``core'' operating margins.
Escalating revenues in their financing divisions (especially consumer
credit cards) compensated for these declines and, in especially
aggressive corporations like General Electric, were spun-off into
enormously profitable global subsidiaries such as GE Financial
(Manning, 2000: Ch. 3). In fact, the financing units of Deere & Co. and
General Electric accounted for 21 and 44 percent, respectively, of
corporate earnings in 2004 and all of Ford's pretax profits in 2002 and
2003 (Condon, 2005). Today, financial companies account for 30 percent
of U.S. corporate profits, up from 18 percent in the mid-1990's and
down from its peak of 45 percent in 2002 (Condon, 2005).\3\ As a
result, there is growing concern that shrinking bank profits derived
from commercial loans to corporate borrowers, together with declining
profits from the speculative ``carry trade'' (long-term hedging of
short-term interest rates such mortgage bonds), will exacerbate
pressure to increase profits on retail lending activities and thus
raise the cost of borrowing on consumer credit cards.
\3\ The success of corporate finance operations has led to more
aggressive involvement with high-risk, speculative investments
including ``junk'' bonds. For example, the sharp decline in the Federal
Reserve's ``discount'' interest rate in 2001 led many of these finance
divisions to invest heavily in the ``carry trade'' whereby companies
borrow at low, short-term rates and invest in higher yield, long-term
bonds or asset-backed (for example, mortgages and credit cards)
securities. Today, with interest rates rising, the enormous profits
made from these bond purchases in 2002 and 2003 will soon be replaced
with losses following the decline in this favorable interest rate
``spread.'' As a result, corporate finance affiliates must offset these
losses by increasing the volume of more costly corporate loans which is
problematic with current market conditions. This will increase pressure
to raise lending margins on their consumer financial services.
As the consumer lending revolution shifted into high gear in the
late 1980's, rising profits and rapid market growth (number of clients
and their debt levels) fueled the extraordinary consolidation of
American banking and especially the credit card industry. In 1977,
before the onset of banking deregulation, the top 50 banks accounted
for about one-half of the credit card market (Mandell, 1990). This is
measured by outstanding credit card balances or ``receivables'' of each
card issuing bank. Fifteen years later, 1992, the top 10 card issuers
expanded their control to 57 percent of the market, prompting a formal
U.S. Congressional inquiry into the ``competitiveness'' of the credit
card industry (GAO, 1994). Over the next decade, bank mergers and
acquisitions proceeded at a breakneck pace, propelling the
concentration of the credit card industry to oligopolistic levels.
For example, Banc One's acquisition of credit card giant First USA
in 1997 was followed in 1998 by Citibank's purchase of AT&T's credit
card subsidiary--the eighth largest card issuer. Over the next 18
months, MBNA bought SunTrust and PNC banks, Fleet merged with
BankBoston, Bank One acquired First USA, NationsBank merged with Bank
of America, and Citibank bought Mellon Bank. Today, the ongoing
concentration of the credit card industry features the mergers of
increasingly larger corporate partners. In 2003, Citibank purchased the
troubled $29 billion Sears MasterCard portfolio (Citibank, 2003). This
was followed in 2004 with Bank of America's acquisition of Fleet Bank
(tenth largest U.S. credit card company) and J.P. Morgan Chase's
purchase of Bank One (third largest credit card company). As a result,
the market share of the top 10 banks climbed from 80.4 percent in 2002
to 86.7 percent in 2003 and then to over 91 percent in 2004 (Card
Industry Directory, 2004). Overall, the top three card issuers
(Citibank, MBNA, J.P. Morgan Chase) control over 55 percent of the
market. Not surprisingly, as market expansion and industry
consolidation approaches its limits in the United States, several top
megabanks have begun aggressively promoting their consumer financial
services in international markets through corporate acquisitions,
mergers, and joint ventures. These include Citibank, MBNA, Capitol One,
GE Financial, and HSBC.
Not only has U.S. banking deregulation transformed the market
structure of the US and eventually the global financial services
industry but it has also facilitated the rise of the ``conglomerate''
organizational form. This second distinguishing feature of the recent
deregulated banking era is a profit maximizing response to the
maturation of industry consolidation trends. In brief, the limits of
organizational growth through horizontal integration, even with its
economic efficiencies of scale and oligopolistic pricing power, entails
that future growth can only be sustained by expansion into new product
lines and consumer markets. This multidivisional corporate structure,
guided by ``cross-marketing'' synergies offered by ``one-stop''
shopping via allied subsidiaries for the vast array of consumer
financial services, was initially attempted by Sears and American
Express in the 1970's and 1980's with generally disappointing results
(Nocera, 1994; Manning, 2000).
By the late 1990's, two financial services behemoths sought to
bridge the statutory divide between commercial banking and the
insurance industry by combining their different product lines into a
single corporate entity: Citigroup. Technically, the 1998 merger of
Citibank and Travelers' Insurance Group was an illegal union that
required a special Federal exemption until the enactment of the
Financial Services Modernization Act (FSMA) of 1999 (Manning, 2000: Ch.
3).\4\ With cost-effective technological advances in data management
systems together with U.S. Congressional approval of corporate
affiliate sharing of client information (FSMA) and the continued
erosion of consumer privacy laws (Fair Credit and Reporting Act of
2003), Citigroup became the first trillion dollar U.S. financial
services corporation that offered the ``one-stop'' supermarket model
for all of its clients' financial needs. These include retail and
wholesale banking, stock brokerage (investment) services, and a wide-
array of insurance products for its customers in over 100 countries.
Again, bank credit cards played a crucial role through the collection
of household consumer information, the cross-marketing of Citigroup
products and services, and its high margin cashflow that helped in
offsetting costly merger and integration-related expenses (Manning,
2000: Ch. 3).\5\
\4\ Also referred to as the Gramm-Leach-Biley Act (GLBA) of 1999.
\5\ Citigroup's consumer financial services companies have
outperformed the insurance division in growth and profit margins--
especially after 2001. As a result, Citigroup has retreated from its
one-stop, financial supermarket concept and has agreed to sell its
Travelers Life & Annuity division to Metlife Inc for $11.5 billion in
winter of 2005 (Reuters, 2005b).
A third distinguishing feature of banking deregulation is the
widening institutional gap or bifurcation of the U.S. financial
services system. That is, the distinction between ``First-tier'' or
low-cost mainstream banks and ``Second-tier'' or ``fringe'' banks such
as pawnshops, rent-to-own shops, ``payday'' lenders, car title lenders,
and check-cashers. This widening institutional division between these
consumer financial services sectors has dramatically increased the cost
of credit among immigrants, minorities, working poor, and heavily
indebted urban and increasingly suburban middle-classes (Caskey, 1994;
1997; Hudson, 1996; 2003; Manning, 2000: Ch. 7; Peterson, 2004).
Indeed, the usurious costs of financial services in the second-tier
reflect the ideological zeal of regulatory reformers whose goal is to
rescind interest rate ceilings, loan ``quotas'' imposed on mainstream
banks for disadvantaged communities, and vigorous enforcement of
financial disclosure laws. Shockingly, the cost of credit typically
exceeds 20 percent per month for consumers who often earn poverty-level
incomes and less.
The significance of this trend is two-fold. First, the systematic
withdrawal of First-tier banks from low income communities restricts
the access of these residents to reasonably priced financial services.
Although morally reprehensible, banks frequently justify their actions
in terms of economic efficiencies and profit utility functions that are
arbitrated by ``free-market'' forces. The political reality, however,
it that this policy is a defiant rejection of the affirmative
obligation standard of the Community Reinvestment Act (CRA) of 1977
(Brown, 1993, Fishbein, 2001; Carr, 2002). That is, the banking
industry receives enormous public subsidies through (1) depositor
protection programs/policies, (2) access to low-cost loans through the
Federal Reserve System's lender of last resort facility, and (3)
privileged access to the national payments/transactions system (Brown,
1993). The quid-pro-quo for satisfying this affirmative obligation
standard has been an understanding that banking institutions have a
duty to provide access to financial services to disadvantaged groups
within their local communities, to engage in active marketing programs
for promoting these financial services and products, and, in the
process, to absorb some of the administrative expenses and costs of
their financial products/services. By ignoring their responsibility to
CRA, first-tier financial institutions have invariably increased the
population of ``necessitous'' consumers whose limited resources
exacerbates their reliance on ``second-tier'' financial services and
their vulnerability to predatory lenders.
Second, the tremendous price differential between the two banking
sectors increases the financial incentive for first-tier banks to
abandon low-income and minority communities and return directly or
indirectly through financial relationships with second-tier financial
institutions (Hudson, 1996; 2003; Manning, 2000:Ch 7; Peterson, 2004).
This is becoming an increasingly common practice of the largest banks.
For instance, Citibank purchased First Capital Associates in 2000 which
had been penalized by Federal regulators from the Office of the
Comptroller of the Currency (OCC) for its past predatory lending
policies and was again recently chastized by the Federal Reserve for
originating predatory home mortgages, HSBC's purchase of Household Bank
in 2000 was delayed following the negotiation of a $400 million
predatory lending settlement, and Providian Bank was fined $300 million
by the OCC in 2000 for its unfair and deceptive practices in the
marketing of its ``subprime'' card cards (Manning, 2001; 2003).
As the growth of traditional financial services markets stagnates,
major banks are aggressively promoting ``subprime'' consumer lending
programs with triple digit finance charges (effective APR's) such as
HSBC's partnership with H&R Block's Rapid Advance Loan (RAL's) and
Capital One Bank's fee-laden credit cards such as its ``EZN'' card
which imposes $88 in fees for $112 line of credit. It is the
desperation of consumers who depend on credit for household needs,
especially after personal bankruptcy or an economic calamity (job loss,
medical expenses, or divorce), that leads them to ``trustworthy,''
major financial institutions whom they expect to offer the best
financial rates on consumer loans. However, instead of receiving ``No
Hassle'' credit cards with moderate interest rates, unsuspecting
Capital One customers often receive subprime cards with little credit
and unjustifiably high fees.\6\ In the case of First Premier Bank, the
$250 line of credit at 9.9 percent features $178 in fees.
\6\ See Foster v. Capital One Bank,et al for ongoing class action
lawsuit regarding deceptive marketing and excessive fees for the
``Capital One Visa Permier'' credit card that features 0 percent
introductory APR on all purchases and a variety of fees including $39
annual membership and $49 refundable security deposit.
Not surprisingly, the credit card industry continues to report
record profits this year. In 2003, pretax profit (Return on Investment)
of $17.1 billion climbed 32.4 percent from 2002 even though interest
revenue declined slightly from $66.5 to $65.4 billion (Card Industry
Directory, 2004). According to the June 2003 FDIC report on bank
profits, [First Quarter 2003] ``is the largest quarterly earnings total
ever reported by the [banking] industry. . . [and] the largest
improvement in profitability was registered by credit card lenders
[with] their average Return-On-Assets (ROA) rising to 3.66 percent from
3.22 percent a year earlier;'' The Card Industry Directory (2004)
reports 2003 ROA at 4.02 percent and credit card industry analyst R.K.
Hammer Investment Bankers report it at an even more impressive 4.40
percent. The extraordinary profitability of consumer credit cards is
illustrated by comparing the ROA of credit card issuers with the
overall banking industry. According to the FDIC, the increase in the
ROA for the banking industry rose from 1.19 percent in 1998 to 1.40
percent in 2003 (First Quarter) or 17.6 percent. According to the U.S.
Federal Reserve Board, ROA for the credit card industry was 2.13
percent in 1997 and has risen impressively to 2.87 percent in 1998,
3.34 percent in 1999, 3.14 percent in 2000, 3.24 percent in 2001, 3.5
percent in 2002, and 3.66 percent in 2003. This is largely due to lower
cost of borrowing funds (widening ``spread'' on consumer loans),
decline in net charge-offs ($911 million or 18.5 percent lower in 2003
than 2002),\7\ decline in delinquent accounts ($919 million or 14.3
percent lower in 2003 than 2002), cross-marketing of low-cost insurance
and other financial services, and dramatic increase in penalty and user
\7\ Historically, about 60 percent of bad consumer debt or bank
``charge-offs'' is due to unsecured credit card or ``revolving'' loans.
According to the Card Industry Directory (2004: 11), card industry
``charge-offs'' declined from $35.4 in 2002 to $33.2 billion in 2003 or
less than one-half of total bank charge-offs. This constitutes about 5
percent of net outstanding credit card balances at the end of 2003
(Cardweb.com, 2004). Note, this is not the same as the outstanding loan
principal ``charge-offs'' since banks typically do not classify
delinquent debt as in ``default'' until 90 to 120 days. For example,
based on the following conservative estimates, one-third of this gross
``charge-off '' amount is attributed to: [a] delinquent interest rates
over the last 4 months (about $2.0 billion at 23.9 percent APR) plus
[b] late fees (about $0.9 billion at $35 per month) together with [c]
overlimit and cash advance fees ($0.3 billion at $35 per month and 3
percent per transaction) plus [d] 12 months of interest prior to
delinquency ($4.5 billion at 17.9 percentAPR) and [e] legal/collection
fees ($0.8 billion at $140 per account). In addition, recently
``discharged'' credit card debt is selling for 6.5 to 7.0 percent
``face value'' on the secondary market (Card Industry Directory, 2004:
11). Overall, the data suggest that the ``true'' loss of capital to the
major credit card issuing banks is approximately 60 percent of the
reported ``charge-off '' value. These estimates assume that at over
one-fourth of these ``charge-off '' amounts are due to late fees,
overlimit fees, accrued finance charges, and collection related fees
which are subsequently sold on the secondary market.
One of the most striking features of the deregulation of the U.S.
banking industry is the sharp increase in the cost of ``revolving''
credit (Ausubel, 1991; 1997; Manning, 2000). For instance, the 'real'
cost of borrowing on bank credit cards has more than doubled due to
widening interest rate ``spreads'' (doubled from 1983 to 1992) in
addition to escalating penalty and user fees. The former is a result of
the 1978 US Supreme Court (Marquette National Bank of Minneapolis v.
First National Bank of Omaha) decision that permitted banks to relocate
their corporate headquarters simply to find a ``home'' where they could
essentially ``export'' high interest rates across State boundaries and
effectively evade State usury regulations (GAO, 1994; Rougeau, 1996;
Manning, 2000; Evans, and Schmalensee, 2001; Lander, 2004). The largest
credit card issuers, led by Citibank, swiftly moved to States without
interest rate ceilings. The dramatic increase in fee revenues is
attributed to the 1996 U.S. Supreme Court decision, Smiley v. Citibank,
which ruled that credit card fees are part of the cost of borrowing and
thus invalidated State-imposed fee limits (Macey and Miller, 1998;
Evans, and Schmalensee, 2001). Overall, penalty and cash advance fees
have climbed from $1.7 billion in 1996 to $12.0 billion in 2003--12.4
percent of total credit card revenues in 2003. The average late fee has
jumped from $13 in 1996 to over $30 in today. Incredibly, combined
penalty ($7.7 billion) and cash advance ($4.3 billion) fees exceed the
after-tax profits of the entire credit card industry ($11.13 billion)
In conclusion, banking deregulation has produced an economic boom
for the U.S. financial services industry. In the 1990's, it recorded 8
successive years of record annual earnings (1992-1999) and rebounded
with 5 successive years of record profits since the end of the 2000
recession, (FDIC, 2004; Daly, 2002). In fact, the assets of the 10
largest U.S. banks total $3,552 billion at the end of June 2003--an
astounding increase of $509 billion from 2002 (16.7 percent). Overall,
the assets of the 10 largest U.S. banks exceed the cumulative assets of
the next 150 largest banks (American Banker, 2003). And, this trend
does not appear to be abating. Today, rising interest rates (most
credit cards feature variable interest rates), higher fee schedules,
and improving debt ``quality'' underlie projections for new record
profits for the banking industry (Reuters, 2005a). As will be discussed
in Section Three, the skyrocketing profits of the credit card industry
underlie this trend with increasing capricious pricing policies and
deteriorating customer service.
Seduction, Indulgence, or Desperation?
The Explosion of Consumer Credit and Debt
The increasing societal dependence on consumer credit since the
onset of banking deregulation is staggering. Between November 1980 and
November 2003, revolving ``net'' credit card debt has climbed twelve-
fold, from about $51 billion to over $636 billion. Similarly,
installment debt has jumped from $297 billion in 1980 to $1,264 billion
today. Overall, U.S. household consumer debt (revolving, installment,
and student loan) has soared from $351 billion in 1980 to over $2,100
billion in 2005. Together with home mortgages, total consumer
indebtedness is about $9 trillion at the end of 2003 (Federal Reserve,
2004). This trend is especially significant since the U.S. post-
industrial economy has been fueled by consumer related goods and
services that account for over 2/3 of America's economic activity
(Gross Domestic Product). Indeed, U.S. households have not restrained
their consumption even though real wages have been stagnant (from mid-
1970's to late 1990's and again today), job benefits (health, pension)
have declined, prices of major purchases have increased dramatically
(housing, autos, college), temporary or ``contingent'' work continues
to increase, and over 2.5 million jobs have disappeared over the last 3
Several factors help to explain the record-setting debt burden of
American households--especially middle class families. First, as
measured by share of disposable
income, the 1980's and 1990's feature the unprecedented growth of
consumer debt-from 73.2 percent of personal income in 1979 to a
staggering 114.5 percent in 2001. The overwhelming proportion (75.7
percent) of this new level of debt is due to escalating home mortgages.
Between 1979 and 2001, the share of household income allocated to
housing jumped from 46.1 percent in 1979 to 85.0 percent in 2003
(Mishel, Bernstein, and Allegretto, 2005). This enormous increase in
housing costs has diverted previous discretionary income that was used
for other personal or family needs. Although mortgage debt is the least
expensive consumer loan, this sharp increase has squeezed the ability
of households to pay for other purchases and/or finance unexpected
expenditures such as health care or auto repairs.
Not surprisingly, most American households have steadfastly
responded by maintaining their standard of living and financing their
expenditures with lower personal savings and higher credit card and
installment loans. In fact, as the U.S. personal savings rate fell to
record lows in the late 1990's--near zero in 1998--credit cards became
the financial ``safety net'' for financially distressed and
economically vulnerable households. In 1980, three-fourths (74.5
percent) of nonmortgage consumer debt was financed through installment
loans such as for furniture, appliances, and electronics. During and
immediately after the 1989-1991 recession, revolving credit card debt
soared--from 37.9 percent of installment debt in 1989 to 54.9 percent
in 1992. This was accompanied by mass marketing campaigns that promoted
credit card use for ``needs'' as well as ``wants'' such as groceries,
rent and mortgage payments, and even income taxes. By 1998, outstanding
credit card debt was 70.4 percent of outstanding installment debt. This
proportion has fallen due to new debt consolidation options such as
mortgage refinancings, home equity loans, and aggressive marketing of
low-interest auto loans. Indeed, home equity loans were not even
available to consumers in the late 1980's. By 2003, home equity loans
account for over one-tenth (10.9 percent) of disposable personal
In the decade since the end of the 1989-1991 recession, during the
longest economic expansion in U.S. history, ``net'' credit card debt
surged from about $251 billion in 1992 to over $685 billion at the end
of 2004 while installment debt jumped from $532 billion to $1.3
trillion. Significantly, scholars disagree over whether these new debt
levels can be restrained. Juliet Schor (1998) has received national
attention for asserting that much of this debt is avoidable since the
pressures of competitive consumption are social and thus can be
resisted by embracing traditional values that discourage consumption
such as thrift, frugality, and material simplicity. Hence, she asserts
that ``keeping up with the Jones'' is a voluntary decision that can be
rejected by ``downshifting'' to a simpler, less expensive lifestyle. On
the other hand, Elizabeth Warren and Amelia Warren Tyagi (2003) argue
that the debt arising from the ``two-income trap'' is primarily due to
middle-class necessities such as housing, automobiles, medical care,
education, and insurance. Their highly influential work contends that
households have no recourse but to assume higher debt burdens as a
rational response to increasing economic pressures such as health care,
job loss/interruption, family crises, insurance, and education-related
The role of structural factors in influencing the decision of
middle-class households to assume higher levels of debt is suggestive.
Two other measures of financial distress as measured by the U.S.
Federal Reserve Board are households with high debt burdens (40 percent
or more of household income) and late payment (60 days or more) of
bills. Between 1989 and 1998, the lower income, middle-class reported
the most economic difficulty. For instance, the high debt service
burdens of modest income households ($10,000 to $24,999) rose from 15.0
percent to 19.9 percent while moderate income households ($25,000 to
$49,999) rose from 9.1 percent to 13.8 percent; households with incomes
over $50,000 increased marginally to about 5 percent while those under
$10,000 rose from 28.6 percent to 32.0 percent. Similarly, late
payments increased marginally among households with at least $50,000
annual income to about 4.4 percent (most increase since 1992) while the
$25,000 to $49,999 group nearly doubled from 4.8 percent in 1989 to 9.2
percent in 1998; households with modest income ($10,000 to $24,999)
remained unchanged at 12.3 percent (Mishel, Bernstein, and Boushey,
Since the sharp decline in consumer interest rates beginning in
late 2000, lower finance costs have provided some measurable financial
relief to American households. However, the greatest beneficiaries of
this low interest rate period have been the groups with the highest
family incomes. Between 1992 and 2001, middle-income households
($40,000-$89,000) have experienced an aggregate increase in their debt
service burden (as a share of household income) whereas upper income
households have experienced a significant decline (28.6 percent)--from
11.2 percent to 8.0 percent. Overall, the debt service burden of the
upper income earning households is about one half of the lower- and
middle-income households (8.0 percent versus 16.0 percent). This is
consistent with the cost of credit card debt during the current era of
financial services deregulation whereby convenience users receive free
credit (plus loyalty rewards such as free gifts and cash) and revolvers
pay double-digit interest rates and soaring penalty fees. In
comparison, the working poor have witnessed a modest decline in their
debt service burden, from 15.8 percent in 1992 to 15.3 percent in 2001
(Mishel, Bernstein, and Allegretto, 2005). It is important to note,
moreover, that various important sources of financial liabilities are
not included by the Federal Reserve in its reports on outstanding
nonmortgage consumer debt and thus understates the degree of household
economic distress--especially among lower-income families. These
include car leases, payday loans, pawns, and rent-to-own contracts. As
a result, the data indicate that during the recent decade of robust
economic growth, the lower- and middle-income households utilized
increasing levels of consumer credit while straining to service their
escalating debt levels. This is consistent with the findings of Teresa
Sullivan, Elizabeth Warren, and Jay L. Westbrook (2000) in their
pathbreaking study of consumer bankruptcy in the 1990's.
Not surprisingly, the aggressive marketing of bank and retail
credit cards to traditionally neglected groups, such as college
students and the working poor, encouraged the assumption of new levels
of consumer debt. For example, the Survey of Consumer Finance reports
that the largest increase in consumer credit card debt was among
households with a reported annual income of less than $10,000. Between
1989 and 1998, the average credit card debt among debtor households
soared 310.8 percent for the poorest households and 140.9 percent among
the oldest households (Draught and Silva, 2003.) The overall average
for all debtor households during this period is 66.3 percent.
Similarly, credit card debt jumped sharply among college students and
During the late-1980's, when banks realized that students would use
summer savings, student loans (maximum limits raised in 1992), parental
assistance, part-time employment, and even other credit cards to
service their consumer debts, the spike in college credit limits
contributed to the surge in ``competitive consumption'' across college
campuses that has redefined the lifestyle of the ``starving'' student
and provided an opportunity for college administrators to continue
increasing the cost of higher education (Manning, 1999; 2000: Ch. 6;
Manning and Smith, 2005). Today, credit card issuing banks are
aggressively competing in this new ``race to the bottom'' marketing
campaign as the moral boundary that has traditionally impeded brazen
solicitations of teenagers has been broached with sophisticated
marketing campaigns aimed at high school and even junior high students
(Manning, 2003(b); Mayer, 2004; Manning and Smith, 2005; Ludden, 2005).
Long gone are the days when parents were required to cosign a credit
card account. Instead, banks have learned that students will assume
higher levels of consumer debt at a much faster rate if their
consumptive behavior is shielded from their parents.
Although credit card industry sponsored research has sshould
minimize the social problems associated with rising student consumer
debt levels, typically with flawed quantitative methodologies that are
based on propriety data that ``unfriendly'' researchers are not
permitted to examine (c.f. Barron and Staten, 2004; Manning and
Kirshak, 2005), the growth of consumer debt at younger ages are
undeniable trends among America's youth. For parents and higher
education professionals, this intensifying marketing of credit and gift
cards to high school students provides both an opportunity to
introduce/expand personal financial literacy programs as well as pose a
daunting challenge in confronting college age social problems that are
rapidly expanding into secondary schools. As a result, the marketing of
credit cards to high school seniors and college freshmen suggests that
their debt capacities will be stretched at much earlier ages which will
increase the likelihood of not completing college as well as the
possibility of consumer bankruptcy in their early to mid-20's with its
age-specific biases such as the nondischargeability of student loans.
Recent studies suggest that the fastest growing groups of consumer
bankruptcy filers are those that have previously registered the lowest
rates: Senior citizens and young adults under 25 years old (Sullivan,
Warren, and Westbrook, 2000; Sullivan, Thorne, and Warren; 2001;
Manning and Smith, 2005).
A final factor concerns consumer confidence and perception of
household wealth. Over the last two decades, middle class households
have become active participants in the stock market, either indirectly
through their employer pension portfolios or directly through personal
investment accounts. When consumers are optimistic about the future,
such as their job prospects or accumulation of wealth, they are likely
to spend more financial resources--even if their current economic
situation is unfavorable. As the stock market soared in the late
1990's, especially the Nasdaq, the psychological ``wealth effect''
encouraged many families to assume new financial obligations that
exceeded their household income.
The data is surprising. It reveals that only a small proportion of
the U.S. population has benefited from the enormous wealth that was
generated during the longest economic expansion in U.S. history (Wolff,
2003). For example, between 1989 and 2001, the bottom 40 percent of
American households increased their stock holdings from an average of
only $700 to $1,800 while the next 20 percent (the middle income (41
percent-60 percent) households) increased modestly from $4,000 to
$12,000 or about $667 per year. In comparison, the upper middle income
families (61 percent--80 percent) experienced an increase of from
$9,700 to $41,300 in stock assets. Similarly, most wealth accumulated
by working and middle income households during this period is
attributed to housing appreciation. The bottom 40 percent of American
families witnessed an increase in ``other assets'' from $21,000 to
$26,600 and the middle 20 percent rose from $96,800 to $113,500; the
next 20 percent of American households reported an increase from
$201,500 to $234,600 (Mishel, Bernstein, and Allegretto, 2005).
The most striking trend in the wealth data, for the majority of
U.S. middle-class families, is that the accumulation of consumer debt
exceeds the growth of stock
investments. For the bottom 40 percent, household debt declined
marginally (2.3 percent) while for the next 20 percent of U.S.
households (41 percent-60 percent) consumer debt rose from $37,000 to
$50,500. If U.S. housing prices had not appreciated so sharply over the
last decade, nearly 60 percent of American families-on average--would
not have been able to accumulate any net assets during this period.
Clearly, the economic winners during this period are the most affluent
families; household net worth rose $147,100 (42.9 percent) for the next
top 10 percent (81 percent-90 percent) of American households and a
staggering $635,400 (65.1 percent) for the next top 9 percent (Mishel,
Bernstein, and Allegretto, 2005). In comparison, the financial boom of
the 1990's has become an increasingly costly debt burden for most
American families today.
Assessing the Consumer Lending Revolution:
Rising Tides and Sinking Ships
The distinguishing features of the deregulation of consumer
financial services include: (1) the profound shift in bank lending
activities from corporate to consumer loans, (2) fundamental
transformation of the industry structure (consolidation,
conglomeration), dominant institutional form (conglomerate such as
Citigroup), and geographic location, (3) profound shift from State to
national regulatory system (U.S. Congress, Office of Comptroller of the
Currency) with the ascension of Federal Preemption (Manning, 2003(c)
Furletti, 2004; Lander, 2004), (4) dramatic increase in the aggregate
levels of household debt, (5) sharp increase in the inequality of the
cost of unsecured consumer loans such as credit cards (especially in
comparison to installment loans), (6) institutional pressure to
continue rapid growth of unsecured consumer loans by expanding into new
demographic markets such as students, seniors, and the working poor;
and (7) the historically unprecedented growth of consumer bankruptcies.
First, the soaring growth of unsecured credit card debt takes off
in the mid-1980's and is accompanied by the dramatic increase in
consumer bankruptcies; between 1985 and 1990, consumer bankruptcy
filings more than doubled from 343,099 to 704,518. In the aftermath of
the 1989-1991 recession, consumer bankruptcy filings closely follow the
effect of rising unemployment through 1992 (steadily rising to 946,783)
and then fall moderately with declining unemployment rates through 1995
(843,941). In 1995, however, consumer bankruptcy filings exhibit a
profoundly different relationship with fluctuations in the rate of
unemployment. Indeed, this underscores the second salient feature of
contemporary American bankruptcy filing trends: An inverse correlation
with unemployment levels. That is, the robust economic expansion of the
late 1990's, which generated over 220,000 new jobs each year, produced
a substantial drop in U.S. unemployment AND a sharp increase in U.S.
consumer bankruptcy filings. This historically unprecedented
relationship persisted through 1998 when bankruptcies registered an
all-time high of 1,418,954. Since 1999, the traditional relationship
between macroeconomic conditions and consumer bankruptcy resumed, as
filings fell to 1,376,077 in 2001 and then steadily rose to1,493,461 in
the aftermath of the 2000 recession. Following the sluggish economic
recovery, however, consumer bankruptcies have risen to new record highs
of 1,638,804 in 2003 and 1,624,272 in 2004 while unemployed has dipped
(U.S. Bankruptcy Courts, 2005). The dramatic increase in consumer
bankruptcy rates is underscored when the number of eligible bankruptcy
filers per capita is calculated during this period. Between 1985 and
2004, it soared from less than 200 filings per 100,000 to over 1,000
As previously discussed, the shift from State-chartered community
banks to federally chartered national banks was accompanied by a
fundamental shift in risk tolerance and bank underwriting standards
which led to a profusion of new and more costly consumer financial
services such as revolving credit cards. Indeed, when the last major
reform of the Federal bankruptcy code was enacted in 1978, consumer
installment lending reigned supreme as bank underwriting standards were
relatively rigidly defined by outstanding debt (household liabilities)
to income (household revenues) ratios. Indeed, U.S. bankruptcy law
reflected the reality household debt was largely collateralized
installment loans that linked levels of indebtedness to the existent
level of household income. Hence, Federal law consecrated the
Constitutional right that ``necessitous'' debtors--truly worthy
indigents--could either seek a reasonable repayment plan (Chapter 13)
or discharge their debts (Chapter 7) by liquidating their assets with
only a relatively moderate financial disadvantage to creditors who
received a pro rata distribution of debtors' assets.
Over the last 25 years of banking deregulation, bank underwriting
standards and the cost of unsecured consumer loans have changed
dramatically. Today, household debt ``capacity'' is stretched by
extended repayment schedules (from 15 to 40 year mortgages) and, more
instructively, by multiple sources of household wealth/revenues: Two or
more incomes, asset formation through home ownership (housing equity),
and wealth accumulation through stock market investments. Unlike the
pre-1980 regulated era, American households can leverage three or more
sources of revenue to qualify for secured and unsecured consumer loans.
This explains how aggregate household debt--as measured by its share of
disposable income--has climbed an extraordinary 56.4 percent over this
period: From 73.2 percent in 1979 to 114.5 percent in 2003 (Mishel,
Bernstein, and Allegretto, 2005). The major problem for most families
is that it is easier to secure a loan than it is to generate greater
revenues (with the exception of selling one's home). For households
perilously close to insolvency, both large (job loss, medical care,
divorce) and small (rising interest rates, high energy costs,
medications) economic factors can precipitate a financial collapse.
As the tremendous increase in highly profitable ``revolving'' debt
has transformed ``good'' loans into ``bad'' or unperforming loans, many
households whom can no longer afford the minimum payments on their
financial obligations have resorted to the U.S. bankruptcy court.
Indeed, many financially responsible families have faithfully serviced
their major financial obligations until the financial duress of
unexpected revenue loss/expenses and/or the escalating weight of
unsecured loans force them into an economic abyss.\8\ One of my many
criticisms of the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005, is that it fails to significantly encourage either
responsible lending by creditors or responsible repayment by debtors.
That is, by shifting the cost of administering the process of debt
collection to the bankruptcy filer and the public sector, it indirectly
discourages responsible lending by subsidizing the cost of making loans
to potentially risky clients. In this way, the new law could have the
unintended consequence of increasing future bankruptcy filing rates.
\8\ For those interested in comparative studies of consumer
bankruptcy or whom wish to address the fundamental causes of the U.S.
bankruptcy ``crisis,'' the first step is a major overhaul of the
American health system. Indeed, while the United States has severely
tightened its consumer bankruptcy codes in 2005, the Western European
countries are liberalizing their bankruptcy laws even though their
national health care systems virtually preclude the possibility of
personal financial insolvency due to medical expenses. Furthermore, a
more generous unemployment compensation system entails less European
dependence on the credit card financial ``safety-net.''
Similarly, the failure of Congress to fundamentally reform the
historic Chapter 13/Chapter 7 binary of debtor repayment/discharge has
the unintended consequence of discouraging responsible debt repayment
behavior by overindebted borrowers. That is, the reality of the current
period of banking deregulation is that a small but growing third group
of necessitous debtors has emerged that can not repay all of their
debts through a costly 3-5 year Chapter 13 repayment program and do not
want to evade their financial responsibilities through a Chapter 7
liquidation program. Instead, Congress has been blinded by the demands
of the creditor lobby to effect a truly radical reform of the Federal
bankruptcy code that could serve the interests of both consumers (who
wish to enter into a program of ``responsible debt relief'') and
creditors who currently receive little if any pro rata distribution of
debtor assets through a Chapter 7 liquidation. This situation is
illustrated in Table 10 which compares the traditional 3-year repayment
programs (CCCS, Chapter 13) with an alternative debt negotiation
program. For financially distressed consumers who struggle to make
their minimum credit card payments, column 2 shows the futility of ever
repaying their high cost credit card debts. Overindebted consumers who
wish to be responsible for their financial obligations and enter into a
voluntary CCCS repayment program are shocked when they realize that
nonprofit Consumer Credit Counseling Services are funded by creditors
and their repayment programs are even more costly and difficult to
complete. Chapter 13 reorganization programs, which are the objective
of the ``means testing'' provision of the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005, are a less financially costly than
the CCCS option but with long-term consequences for future consumer
borrowing. Significantly, less than one-fourth of Chapter 13 filers
successfully complete their programs. Ironically, a third informal
option which offers consumers ``responsible debt relief,'' by enabling
debtors to negotiate an informal payoff of between 20 and 45 percent,
satisfies the creditors demands for obtaining a significant payment
from debtors with the economic means to pay some of their financial
obligations while satisfying the desire of debtors to satisfy their
creditors to the best of their ability while avoiding the emotional
devastation of filing for personal bankruptcy. It is my estimate that
approximately 150,000 to 250,000 bankruptcy filers could qualify for
such a program each year which would lessen the demands on the
overburdened bankruptcy system and increase financial distributions to
creditors by $2.5 to $4.0 billion each year. These potential informal
13 participants are those whom fail to complete their Chapter 13
program as well as Chapter 7 filers that would prefer to offer a
negotiated debt settlement in order to avoid filing for bankruptcy.
Policy Recommendations: Consumer Rights Or Privileges
In response to queries as to appropriate regulatory responses to
deceptive marketing and predatory pricing policies of the credit card
industry, I propose the following recommendations:
 Limit lines of credit to college students without an
independent source of income and whose parents/guardians will not
cosign a revolving credit card contract to $500. If the credit card
account is in good standing, then line of credit could be increased an
additional $500 per year up to a maximum of $2,500.
 Exclusive Credit Card Marketing Agreements with public colleges
and universities must be competitively bid and the final contract must
be made available for public review. The criteria for selection of
vender must be specified and the agents of the public college or
university whom negotiated the contract must be identified.
 Respect for personal privacy must be explicitly specified in
the contract with public colleges and universities. The card issuing
banks must adhere to an ``opt-in'' provision whereby personal
identifying information of staff, students, and alumni must not by
obtained without securing permission. This includes student
identification numbers (especially Social Security numbers), phone
numbers, and email addresses.
 Banks should not be allowed to raise interest rates to punitive
levels (over average rates) simply due to the consumer not using the
credit card for a limited period of time. For example, Chase has a
policy of raising interest rates on credit card to over 20.0 percent
APR that have not been recently used in an attempt to induce customers
to close the infrequently used account.
 Consumers should be granted a 60 notice for implementing
``universal default'' provision of their contract which triggers as
sharp increase in the finance charges (for example from 5.9 percent to
22.8 percent) due to reported credit payment patterns on other
accounts. Also, consumers should be informed of the specific reasons
for invoking the ``universal default'' provision and what they have to
do as well as how long it will take to receive the original interest
 When a person sends in a preapproved credit card application
for a specified line of credit and interest rate and is approved for a
credit card with much less favorable terms (for example from $10,000 to
$5,000 line of credit and from 5.9 percent introductory rate APR to
18.9 percent APR), a letter should be sent informing the consumer of
the changes in the expected credit card with the option to cancel the
account before receiving the card. This is a practice commonly known as
``bait and switch.''
 Doubling billing cycles, popularized by MBNA, should be
eliminated and replaced with a single date that is designated for
balance payoffs as well as payment due dates.
 Some credit card companies such as Citibank specify a
particular hour of the day that payment must be received in order not
to incur a late fee. Due to vagaries of postal delivery, the posted
time for incurring a late fee should be 12 pm.
 Fees for subprime credit cards should not exceed 15 percent of
the available line of credit up to a maximum of $100.
 The cost of credit for subprime credit cards should include
mandated fees in calculating the APR in consumer disclosure
 Consumers should have the right to terminate a subprime credit
card without incurring activation fees within 30 days of opening the
credit card account.
PREPARED STATEMENT OF CARTER FRANKE
Chief Marketing Officer, Chase Bank U.S.A., N.A.
May 17, 2005
Mr. Chairman, Senator Sarbanes, Members of the Committee. Good
morning. My name is Carter Franke and I am the Chief Marketing Officer
at the Wilmington, Delaware-based Chase Card Services Division of Chase
Bank U.S.A., N.A.
Today, I sit here as a representative of the more than 16,000 Chase
employees around the country who support our credit card services.
Chase is a significant issuer of MasterCard and Visa credit cards with
more than 94 million cards issued. Our customers are primarily those
that fall in the ``super-prime'' and ``prime'' categories--the most
responsible and most knowledgeable credit users in the country. Our
cardmembers used Chase and Bank One issued cards to spend $282.7
billion on goods and services last year.
In just a few short decades, changing consumer habits and expanding
technologies have established credit cards as an essential part of
American economic life. Consumers rely on credit cards for virtually
every type of purchase imaginable and have rightfully come to expect
that their credit card will be accepted just about everywhere. More
than 25 million merchants worldwide--five million of them in the United
States alone--are part of the credit card payment system. Everything
from small businesses to the world's largest companies rely on this
safe, secure, and efficient payment system, which is made possible by
credit cards. And the economy benefits: In 2004 credit cards financed
an estimated $1.68 trillion in transactions.
Today's Internet commerce would not be possible without credit
cards. Cards and the technologies that they use are directly
responsible for the growth of the mail order business, travel bookings,
online auctions, and hundreds of other transaction types. In addition,
in the long-term, credit cards help consumers build solid credit
histories that ultimately enable them to enhance their family's
All of these benefits are achieved with the assurance that, unlike
cash, all credit card purchases are completed with zero-liability
protection for the consumer should the card be lost or stolen. This
helps makes credit cards safer and more convenient than cash. Consumers
also benefit from built-in dispute resolution should they not be
satisfied with any purchase.
We operate in a highly competitive industry--one where many
customers can easily vote with their feet. Our customers, in
particular, have many choices in the marketplace today and that
competition is good for consumers. This competition also drives us to
offer many products and features, such as cards with travel,
entertainment or cash rewards--all of which are carefully designed to
meet the specific requirements of our customers--to ensure they choose,
and stay with, Chase.
A credit card loan is not like a home or car loan. A credit card
loan is unsecured, meaning that the consumer is not required to post
collateral to back it up. In other words, we extend credit to people
based on their profile of financial responsibility rather than on their
actual assets. In short, the only security we have in our loan is the
customer's promise and his or her ongoing ability to repay the loan.
As I mentioned earlier, Chase's credit card business is focused on
the ``super-prime'' and ``prime'' markets. In other words, Chase credit
cards are issued, for the most part, to consumers with exceptionally
good credit histories. As a result, our business model is built upon
consumers making their payments regularly and on time. All of our
decisions on credit limits, fees, and changes in interest rates, are
based on sound economic analysis, our business experience and the
interests of our customers.
However, unsecured consumer credit is a shared responsibility
between lender and borrower. We enable consumers to purchase, on an
immediate basis, the goods and services provided by millions of
merchants around the country. We track each cardmember's transactions,
provide accurate and clear monthly statements, and process payments
promptly. Of course, our goal is to provide problem free access to the
credit lines that we provide and to achieve the highest level of
customer satisfaction possible. While problems do arise, we provide
ongoing access to Chase representatives so that questions will be
answered immediately and problems can be resolved expeditiously 24-
hours per day. In return, we ask our cardmembers to meet their payment
obligations and report any problems they may be experiencing.
We believe that all consumers, especially those who have opened an
account for the first time, need to understand the nature of their
responsibilities and, more generally, how to use credit responsibly. In
2003-2004 alone, Chase donated more than $5.8 million in financial
literacy grants to nonprofit community-based organizations to help fund
credit education programs. In the same time period, Chase invested
approximately $107 million working with partners across the Nation to
fund voluntarily responsible credit counseling services, create online
financial education and credit and debt management tools. More than
anything, we want to maintain a first-in-wallet position with our
customers and develop a long-term relationship with them.
In short, while we provide consumers with a broad range of choices
in products and features, we recognize that without shared
responsibility and an ongoing commitment to financial literacy we
We at Chase are extremely proud of the fair and responsible way our
company operates and in the relationship we have established with our
tens of millions of cardmembers. Let me cite a few examples:
At Chase we value our customers, and that understanding of value
drives all of our pricing decisions. A missed payment on a nonChase
card does not drive automatic repricing of any Chase account. We also
realize that in the vast majority of cases, a late payment on a Chase
card is not a sign of increased risk, but of timing, vacations or other
realities of busy lives. For that reason, a late payment will not
result in a price increase for over 90 percent of Chase cardmembers.
Chase cardmembers, among the most responsible users of credit in
the industry, are also very responsible when it comes to paying their
accounts. Well over a third of our customers pay their balance in full,
enjoying the convenience of an interest free loan every month. And,
more than 90 percent of our payments are for more than the minimum
A small segment of our customers do have a change in
creditworthiness, which we deal with fairly and responsibly. If a
customer's overall credit profile deteriorates materially, and thus
exposes us to an increased risk of nonpayment, economic considerations
may cause us to raise the interest rate. In these cases, and in
accordance with applicable law, we provide the customer with an ``opt
out'' option. This enables the customer to reject our change in terms,
close their account, and pay off the balance under their existing
terms. Once closed, the interest rate on a Chase account that is paid
according to its terms will not be changed.
Importantly, in today's digitized world, Chase is firmly committed
to protecting our customers' privacy and to ensuring that their
information is secure. On privacy, Chase is of course in compliance
with the requirements of Gramm-Leach-Bliley. And we constantly work to
upgrade our data security to protect our customers from inadvertent or
intentional breach. More than 1,100 people are focused solely on the
detection and prevention of fraud at Chase. We are proud to have some
of the best fraud protection practices and lowest fraud rates in the
industry. And, if there is a fraudulent charge, cardmembers are not
held responsible because of our zero-liability fraud policy for all
Mr. Chairman, we understand that our business may seem complicated
and even, at times, unfriendly. I hope that the information I have
provided today has offered you some substantive insights into our
business and an understanding of our true commitment to fairness for
all of our customers. At times we are faced with difficult decisions
relative to individual cardmembers and their accounts and, when
reviewed on an isolated basis, may seem inappropriate. Our decisions
are designed to permit the vast majority of cardmembers continue to
receive the best possible rates, service, and access to the benefits
credit cards provide. We look forward to working with you and the
Members of the Committee to answer your questions and address your
PREPARED STATEMENT OF EDMUND MIERZWINSKI
Consumer Program Director, U.S. Public Interest Research Group
May 17, 2005
Chairman Shelby, Senator Sarbanes, Members of the Committee, thank
you for the opportunity to offer U.S. PIRG's views on abusive credit
card industry practices. We commend you for having this timely hearing.
I am Edmund Mierzwinski, Consumer Program Director of U.S. PIRG. As you
know, U.S. PIRG serves as the national lobbying office for State Public
Interest Research Groups. PIRG's are nonprofit, nonpartisan public
interest advocacy organizations with offices around the country.
The extremely concentrated credit card industry, in efforts to
increase profitability above already substantial levels, continues to
engage in a growing and wide number of unfair, anticonsumer practices.
These practices are enabled by a pliant Federal bank regulatory
apparatus, which has generally ignored the growing problem while
relying on an unfortunate series of court decisions to expand Federal
preemption and narrow the authority of State enforcers to better
protect their own citizens.
The most common unfair credit card company practices include the
Unfair and deceptive telephone and direct mail solicitation to
existing credit card customers--ranging from misleading teaser
rates to add-ons such as debt cancellation and debt suspension
products, sometimes called ``freeze protection,'' which are merely
the old predatory credit life, health, disability insurance
products wrapped in a new weak regulatory structure to avoid pesky
State insurance regulators; \1\
\1\ See an Office of the Comptroller of the Currency (OCC)
regulatory interpretative letter endorsing debt cancellation and debt
suspension products as part of the business of banking (and exempt from
stricter State insurance regulation) at http://www.occ.treas.gov/
increased use of unfair penalty interest rates ranging as high
as 30 percent APR or more, including, under the widespread practice
of ``universal default,'' the practice of imposing such rates on
consumers who allegedly miss even one payment to any other
creditor, despite a perfect payment history to that credit card
imposing those punitive penalty interest rates retroactively,
that is, on prior or existing balances as well as on future
purchases, further exacerbating the worsening levels of high-cost
credit card debt;
higher late payment fees, now generally $30-$40, which are
often levied in dubious circumstances, even when consumers mail
payments 10-14 days in advance;
aggressive and deceptive marketing to new customer segments,
such as college students with neither a credit history nor an
ability to repay, as well as marketing to persons with previous
poor credit history;
partnerships with telemarketers making deceptive pitches for
over-priced freeze protection and credit life insurance, roadside
assistance, book or travel clubs, and other unnecessary card add-
the increased use of unfair, predispute mandatory arbitration
as a term in credit card contracts to prevent consumers from
exercising their full rights in court; and the concomitant growing
use of these arbitration clauses in unfair debt collection schemes;
the failure of the industry to pass along the benefits of
what, until recently, were several years of unprecedented Federal
Reserve Board interest rate cuts intended to provide economic
stimulus, through the use of unfair floors in variable credit card
contracts. The Fed kept dropping rates, but the card companies did
not, once these floors were reached.
There are two engines that drive this train of unfair practices.
First, the companies include a contract clause that states: Any term
can be changed at any time for any reason, including no reason. Second,
the aforementioned use of one-sided predispute binding mandatory
arbitration clauses \2\ prevents consumers from challenging these
practices in court.
\2\ The consumer organizations testifying today, U.S. PIRG, the
Consumer Federation of America and Consumer Action, are all founding
members of a broad new campaign to educate the public and the Congress
about the need to eliminate one-sided binding mandatory arbitration
(BMA) clauses imposed as contracts of adhesion in consumer contracts,
sometimes merely with a notice of change of terms inserted in a
consumer's bill. See http://www.stopbma.org.
The practices described above can be illustrated with the following
Banks entice consumers to open or continue credit card
accounts with promises of a fixed interest rate on unpaid balances
on purchases. Thereafter, they unilaterally increase the so-called
fixed rate, and may change it to a variable rate.\3\
\3\ It is the bank position that the Truth In Lending Act allows
them to change fixed rates with as little as fifteen days notice and
that a fixed rate is merely a rate that is not variable. A variable
rate is defined as one tied to an index, such as The Wall Street
Journal prime rate as disclosed on a certain date.
Banks bait credit card consumers with teaser offers promising
a low introductory interest rate on additional credit card debt and
the consumer's preexisting (regular) interest rate thereafter. But
after individual consumers accept the offer and increase their
debt, banks unilaterally and without notice raise the consumer's
regular interest rates because now, the individual consumer's debt
is allegedly ``too high.'' Banks also reserve the right to take
regular credit card payments and apply them to the lowest interest
rate debt instead of the highest, in a circumstance where a
consumer has transferred zero percent debt to a card with an
Banks ignore consumers' disputes to charges, which, according
to banks themselves, need not be paid pending resolution. Instead,
banks unilaterally use such nonpayment to charge late fees and
raise interest rates.
Banks reduce credit limits of consumers on their credit card
accounts unilaterally and without advance notice, and do so in such
manner and to such an extent as to intimidate consumers into
abandoning their legitimate objection to charges.
Banks fail to adequately inform consumers in advance of a
proposed increase in interest rate based on the individual
consumer's purportedly high debt or other information in such
consumer's credit report. Thereby, consumers have no opportunity to
avoid the increased interest rate, and are saddled with significant
additional interest payments without advance notice.
Credit card companies use low, short-term ``teaser rate''
introductory APR's to mask higher regular APR's. The introductory
APR is one of the primary tools used to market a card, and it
usually appears in large print on the offer and envelope. In a
recent PIRG study discussed below, of 100 card offers surveyed, 57
advertised a low average introductory APR of 4.13 percent. Within
an average of 6.8 months, the regular APR shot up 264 percent to an
average regular APR of 15.04 percent. The post-introductory APR, as
well as the length of the introductory period, were not prominently
Important information is disclosed only in the fine print of
the offer. For example, the fine print of most offers states that
if an applicant does not qualify for the offered card, s/he will
receive a lower-grade card, which usually has a higher APR and
punitive fees. The fine print is easy to overlook, and as a result,
a consumer may receive a card that s/he did not want.
Free does not mean free. The ``free'' offers that are
advertised with many cards are not usually as impressive as they
appear. Most are ``free-to-pay'' schemes, where the failure to
cancel within 30 days imposes hefty annual fees for tawdry
products. Others include significant restrictions or hidden costs.
Companies are failing to disclose the actual APR's of cards.
Increasingly, credit card companies are quoting a range of APR's in
offers rather than a specific APR, a practice called ``tiered'' or
``risk-based'' pricing. These ranges are frequently so wide as to
be utterly useless to consumers. Even recent directives of the
Office of the Comptroller of the Currency (OCC) have begun to
recognizes some of these practices as unfair.
Fine print fees for cash advances, balance transfers, and
quasi-cash transactions such as the purchase of lottery tickets
significantly raise the cost of these transactions. But the terms
governing these transactions are buried in the fine print, where
consumers can easily miss them. Minimum fees, also stated only in
the fine print, allow credit card companies to guarantee themselves
high fee income regardless of the transaction amount.
Another way to look at these problems is to look at an example: In
a recent court complaint against a credit card company, a consumer
attorney pleaded the following facts:
On June 17, 2002, the balance owed on the consumer's account
was $702.00. On June 18, 2002, the bank added a $59 club
membership fee that caused the consumer's account to exceed his
credit limit by $11 (the balance owed was $761 and the credit
limit was $750). From June 2002 until August 2004, even though
the consumer made timely monthly payments each month, the bank
added $435 in over-limit fees to this account and $495 in late
charges on this account.
This consumer responded to some bank-initiated telemarketing pitch
or bill insert to join some a membership club, then the bank allowed
him to go over his limit to complete the transaction for a purchase it
itself had initiated, then that triggered an ongoing cascade of
repeated late and over-the-limit fees that have caused the consumer to
end up in a cycle of rising debt even though he no longer uses the
card. This example, multiplied by millions of consumers, gives you an
idea of how credit card debts have piled up in this country.
Regulatory Actions and Court Actions Against Credit Card Companies
These views are not merely our own nor merely those of consumer
attorneys. The very worst of the industry's excesses have resulted in
increased regulatory, legislative, and legal scrutiny. Even the
Treasury's Office of the Comptroller of the Currency (OCC), no consumer
protector, has begun to escalate its efforts against unfair credit card
company practices. Although it has not yet taken any public actions
against any well-known major institutions, it has gone after a number
of unknown fringe institutions and one albeit large, but relatively
upstart mono-line credit card bank, Providian. More recently, the OCC
has issued a series of regulatory guidances admonishing banks against
certain common unfair practices and even consolidated these actions
onto one website to make their efforts appear more comprehensive.\4\
Unfortunately, the OCC has not imposed public penalties or sanctions on
any of the current ``Top Ten'' banks, even though most advocates
believe the practices are endemic to the industry.
\4\ Obtain these guidances and copies of recent regulatory actions
at the OCC credit card practices website available at http://
Meanwhile, State Attorneys General Enforce the Law
Of course, State Attorneys General, always the top consumer cops on
the beat, have long been aggressively pursuing crime and other
anticonsumer practices in the credit card suites. Some recent actions
by state Attorneys General and Federal regulators include the
In January 2005, Minnesota Attorney General Mike Hatch filed
an unfair practices suit against Capital One Bank and Capital One
F.S.B. for using false, deceptive, and misleading television
advertisements, direct-mail solicitations, and
customer service telephone scripts to market credit cards with
allegedly ``low'' and ``fixed'' interest rates that, unlike its
competitors' rates, supposedly will never increase. Capital One, of
course, is one of the Nation's largest credit card companies, with
an aggressive advertising campaign urging consumers to put a
Capital One card in their wallet and avoid the other companies,
generally portrayed by Capital One as Vikings, Visigoths, or other
sorts of plundering barbarians. Other States, including West
Virginia, have since announced parallel investigations of Capital
One. West Virginia, this month, had to file suit to enforce its
subpoenas against the bank.\5\
\5\ 9 May 2005, See news release ``ATTORNEY GENERAL DARRELL McGRAW
SUES TO ENFORCE SUBPOENAS INVESTIGATING CAPITAL ONE BANK AND CAPITAL
ONE SERVICES,'' available at http://www.wvs.state.wv.us/wvag.
In the last several years, numerous State Attorneys General,
including Minnesota, Texas, West Virginia, New York, and others
have filed actions against the large sub-prime credit card company
Cross Country Bank for its deceptive and predatory practices when
marketing to consumers with impaired credit histories. The Attorney
General of Minnesota's complaint alleges the bank uses racial,
derogatory, and abusive epithets in the bank's threatening phone
contacts with customers.\6\ The Attorney General of Pennsylvania
had this to say in 2004: ``Instead of helping consumers as
promised, the defendants actually pushed cardholders further into
debt when they used the credit cards. Those who failed to make the
payments, were subjected to a barrage of abusive, harassing
collection practices that included the use of profanity and
multiple calls to consumers' homes or offices.'' \7\
\6\ See ``State Sues Cross Country Bank over Harassing Debt
Collection Practices,'' 3 April 2003, available at the Minnesota
Attorney General's website http://www.ag.state.mn.us/consumer/PR/
pr_CrossC_40303.htm. In November, 2004 the State obtained a temporary
injunction barring the bank's abusive practices. See http://
\7\ 24 June 2004, Press release of Pennsylvania Attorney General's
Office ``AG Pappert takes action against bank and its collection
company in alleged predatory lending/credit card scheme,'' available at
In December, 2002, 28 States and Puerto Rico settled a case
with First USA (a unit of Bank One, which is now part of JP Morgan
Chase after its acquisition of Bank One) ``that will provide new
protections against misleading telemarketing campaigns for more
than 53 million credit card holders. First USA Bank N.A.--the
largest issuer of Visa credit cards--and also known as Bank One
Delaware NA, has agreed to implement broad reforms in its
relationships with third-party vendors to ensure that nondeceptive
marketing campaigns are used in soliciting the bank's credit card
holders. Specifically, under the agreement, First USA must prohibit
vendors from engaging in deceptive solicitations.'' \8\
\8\ 31 December 2002, FIRST USA TO HALT VENDORS' DECEPTIVE
SOLICITATIONS, Press Release of New York Attorney General Eliot
Spitzer, available at http://www.oag.state.ny.us/press/2002/dec/
In February 2002, 27 States negotiated an agreement for
Citibank, then the Nation's largest credit card issuer, to stop
deceptive practices in the marketing of similar tawdry add-on
products. ``The States raised concerns that the marketing practices
of Citibank's business partners were deceptive and often resulted
in consumers being charged for products and services--such as
discount buying clubs, roadside assistance, credit card loss
protection, and dental plans--that they had no idea they agreed to
\9\ 27 Feb 2002, AGREEMENT CURBS TELEMARKETING APPEALS TO BANK
CUSTOMERS, Press Release of New York Attorney General Eliot Spitzer,
available at http://www.oag.state.ny.us/press/2002/feb/feb27b_02.html.
In 2001, the OCC imposed multimillion dollar penalties and a
restitution order against Direct Merchants' Bank for its practice
of ``downselling'' consumers by prominently marketing to consumers
one package of credit card terms, but then approving those
consumers only for accounts with less favorable terms, and touting
the approved account in a fashion designed to mislead the customer
about the fact he or she had been `downsold' \10\.''
\10\ Fact Sheet Regarding Settlement Between the OCC and Direct
Merchants Bank, 3 May 2001.
In 2000, the tiny San Francisco District Attorney and the
California Attorney General \11\ began an investigation later
joined by what many claim was an embarrassed and late to the party
OCC, which resulted in imposition of a minimum of $300 million in
civil penalties and a restitution order against Providian for
deceptive marketing of mandatory credit life insurance, known as
freeze protection, and other violations. The OCC, not generally
known for hyperbole in defense of the consumer, said the following:
``We found that Providian engaged in a variety of unfair and
deceptive practices that enriched the bank while harming literally
hundreds of thousands of its customers.'' \12\
\11\ See ``Providian to Refund $300 Million to Consumers Over
Alleged Abusive Credit Card Practices,'' 28 June 2000 available at
California Attorney General page http://caag.state.ca.us/newsalerts/
\12\ June 28, 2000, Statement of Comptroller of the Currency John
D. Hawke, Jr.
Since 1999, the Minnesota Attorney General and other States
have settled multimillion dollar claims against U.S. Bank for its
practice of allowing telemarketers access to its credit card
customer records for the purpose of deceptively marketing add-on
products including credit life insurance, roadside assistance
packages, and other gimmickry billed to consumers who did not even
give their credit card numbers and had no knowledge that they had
allegedly placed orders or would be billed for any product.
Several private class action lawsuits have been settled
recently against other large banks for abusive practices, such as
charging consumers late fees, even when they pay on time.
The Federal courts have also acted in favor of consumers in
several important cases. In 2003, the 3rd Circuit found that Fleet
Bank had violated the Truth In Lending Act (TILA) when it promised
Paula Rossman a no-annual-fee credit card and changed the terms
immediately, less than a year after she had obtained the card, even
though Rossman had not violated any of the contract's terms by
paying late, going over her limit, or anything else. The court
described the essential problem this way:
A statement, therefore, that a card has ``no annual fee'' made
by a creditor that intends to impose such a fee shortly
thereafter, is misleading. It is an accurate statement only in
the narrowest of senses--and not in a sense appropriate to
consumer protection disclosure statute such as the TILA.
Fleet's proposed approach would permit the use of required
disclosures--intended to protect consumers from hidden costs--
to intentionally deceive customers as to the costs of
\13\ See Rossman v. Fleet Bank (RI) Nat'l Ass'n, 280 F.3d 384, 390-
91 (3d Cir. 2002) available at http://laws.lp.findlaw.com/3rd/
Of course, Rossman highlights one of the critical hypocrisies and
significant flaws in the Federal unregulation of the credit card
marketplace, where credit card contracts are take-it-or-leave contracts
of adhesion imposed on consumers that supposedly allow the bank to make
any changes at any time for any reason. As the court quotes Fleet's
contract in Rossman:
We have the right to change any of the terms of this Agreement
at any time. You will be given notice of a change as required
by applicable law. Any change in terms governs your Account as
of the effective date, and will, as permitted by law and at our
option, apply both to transactions made on or after such date
and to any outstanding Account balance.\14\
\14\ See Rossman v. Fleet Bank (RI) Nat'l Ass'n, 280 F.3d 384, 390-
91 (3d Cir. 2002) available at http://laws.lp.findlaw.com/3rd/
Numerous colleges and universities, as we illustrate below and
as Doctor Manning will indicate in his testimony, have banned or
strictly regulated the marketing of credit cards on campuses, to
address widespread complaints about
Policy Recommendations of U.S. PIRG to Address Abusive
Credit Card Practices
Prohibit Deceptive and Unilaterally Unfair Practices, Including
Retroactive Interest Rate Increases: Enact legislation such as the
omnibus proposal by Senator Dodd, S. 499, a Member of this Committee,
to prohibit a number of unfair practices, starting with the notorious
retroactive interest increase. When banks impose universal default, or
otherwise increase interest rates, they do not merely increase rates on
interest accruing on future purchases, but also on prior balances. This
has the effect of saddling the consumer with massive debt.
Require Real Disclosure of Minimum Payment Warnings: Senator Akaka
of this Committee has proposed legislation, S. 393, (a similar
provision is also included in S. 499) that would require every
consumer's credit card billing statement to include a new disclosure.
The Akaka Minimum Payment Warning is one of the few disclosures that
rises above the clutter and will make a difference, and that is the
reason banks vehemently oppose this proposal. The minimum payment
warning would tell consumers how many actual years it would take to pay
off their specific credit card, at their current balance and interest
rate, if they only made the minimum requested payment and never used
the card again. Each consumer would receive a different, dynamic
disclosure, which would change monthly. We were disappointed when the
Senate rejected the similar Akaka amendment during floor consideration
of the draconian bankruptcy bill, S. 256, successfully and aggressively
sought by the credit card industry and enacted into law at lightning
speed this Congress, despite no evidence of bankruptcy abuse. Instead,
that new bankruptcy act includes yet another virtually worthless
generic disclosure. That disclosure was approved and signed off on by
the industry simply because it will not work to reduce the credit card
debts that cripple many American consumers. In a speech to bankers last
week, Acting OCC Comptroller Julie Williams said ``in order for the
free market to work, consumers need to have the means to make informed
decisions.'' \15\ We urge the OCC to back the Akaka bill. It will work.
\15\ See OCC news release, ``Acting Comptroller Williams Tells
Bankers Disclosures not Working for Consumers,'' 12 May 2005 available
Ban on Late Fee Penalties When Payments Postmarked Before Due Date
and Require a Minimum 30 Days To Pay Bill: In response to uncertainty
over mail delivery following events related to the September 11
terrorist attacks, the OCC issued a 12 September 2001 ``encouragement''
that banks voluntarily work with debtors who may pay bills late,
especially if due to mail disruption.\16\ A better solution in 2005,
after 4 years of ever escalating complaints about ever-escalating late
fees, would be to establish a hard date rule for all consumers. If the
bill is postmarked by the due date, it is considered on time and no
penalties can be imposed. Such a bill would address numerous problems
faced by consumers.
\16\ See OCC Press release NR-2001-79.
First, with the endorsement of the OCC, bills are no longer on time
unless received by a certain time during the due date. Second, attempts
to make overnight deliveries when you do not remember to send your bill
at least 2 weeks in advance result in late payments anyway, because
overnight deliveries are not accepted at the same address. Finally,
some banks have begun using confusing 3 week payment cycles which have
made it harder to make payments on time.
In the past, numerous House Members have proposed hard due date
legislation, where a bill postmarked by the due date would be
considered on time. Others have proposed legislation requiring a
minimum 30 days for bills to be considered on time for the purpose of
avoiding late payment penalties.\17\
\17\ See, eg, bills previously filed by Representatives including
Darlene Hooley, (HR 3477, 1999) and Andy Jacobs, (HR 1537, 1995) and
John McHugh, (HR 1963, also in 1995).
Ban the Universal Default ``Bait-and-Switch:'' We have received
numerous complaints that more and more banks are reviewing credit
reports of existing customers and raising rates due to a decline in
credit score or an alleged one or two late payments to any other
creditor, even if the consumer's payments to the credit card issuer are
timely and the account is in good standing. While we do not disagree
that banks should be able generally to risk-price their products, we do
not believe that universal default is being used as a proportional
response but merely as a tool to increase revenue. We believe the
regulators should be required to come forward with an analysis of the
growing problem. After all, if the banks can offer dozens of different
products to new customers based on their risk, why do not they have
dozens of proportional responses for consumers when their risk
As Representative Sanders has proposed, in the Credit Card Bait and
Switch Act of 2003, HR 2724, the use of universal default should at
least be strictly regulated, and as Senator Dodd has proposed in S. 499
this year, retroactive rate increases should be banned.
Give College Students And Other Young People Only The Credit They
Deserve: Credit card companies issue credit to students without looking
at credit reports (they do not have any) and without regard to ability
to repay. Other Americans must have a good credit report or a cosigner
to obtain credit. College students merely apply. College students and
other young people should be protected from credit card debt hassles by
having to meet similar standards, as S. 499 (Dodd) would provide. The
proposed bill offers several ways for young consumers to qualify to
obtain credit cards.
Further Restrict Pre-Acquired Account Telemarketing: Many of the
deceptive practices described in the state actions above involve banks
sharing customer information with tawdry third-party telemarketers
selling even tawdrier products characterized by overpriced travel clubs
and mediocre health insurance plans. In addition, many institutions
have seized on the identity theft epidemic fueled by their own sloppy
credit granting practices to pitch overpriced credit monitoring add-
ons. In our view, neither the provisions of Gramm-Leach-Bliley dealing
with encrypted credit card numbers nor changes to The Telemarketing
Sales Rule have adequately stopped banks from treating their customers
unfairly due to the lure of massive commissions from their
Cap Interest Rates: Reinstate Federal usury ceiling for credit
cards to prohibit the use of unconscionable penalty interest rates.
Prime plus 10 per cent seems like a reasonable profit.
Ban Mandatory Pre-Dispute Arbitration: The Congress has enacted
legislation protecting car dealers from unfair arbitration clauses in
their contracts with car manufacturers. The Senate has passed
legislation similarly protecting farmers from
arbitration in their contracts with powerful agribusiness concerns. It
is time to enact similar legislation to protect consumers. Bills to ban
predispute mandatory arbitration in consumer credit card contracts have
been proposed in 1999 by Rep. Gutierrez (HR 2258) and in 2000 by Rep.
Schakowsky (HR 4332).
Ban The Use of Arbitration in Debt Collection Schemes: Arbitration
agreements are not only being used in attempts to prevent consumers
victimized by deceptive advertising and interest rate practices to have
their day in court. Increasingly, according to a major new report by
the National Consumer Law Center, major credit card companies,
including First USA and MBNA, are partnering with arbitration firms to
establish debt collection mills that force consumers into paying debts,
including debts they may not even owe:
Now, at least two giant credit-card issuers and one of the
Nation's largest firms arbitrating their consumer disputes have
combined these practices in a disturbing new way: They are
using binding, mandatory arbitration primarily as an offensive
weapon, by fast-tracking disputes over credit-card debt into
rapid arbitration. A number of consumers charge that the banks
often do this with little notice, after long periods of
dormancy for the alleged debt or over consumers' specific
objections--then force those who do not respond swiftly or
adequately into default. The arbitrator often forces the
consumer to also pay for the hefty arbitration costs and the
card issuer's attorney, making the total tab for consumers
several times the original amount owed and many times what it
would have been in more traditional debt settlements. So it is
a neat pathway to turbo-charged profits for both the card
issuer and the arbitrator.\18\
\18\ See 17 February 2005, ``New Trap Door for Consumers: Card
Issuers Use Rubber-Stamp Arbitration to Rush Debts Into Default
Judgments,'' National Consumer Law Center, available at http://
We were disappointed that the Congress recently enacted a one-sided
bankruptcy bill, absent proof of abuse. The bill failed to rein in
these practices. We respectfully urge you to consider our proposals to
rein in the unfair credit card company practices described above that
have exacerbated the growth of credit card debt, which is the real
problem we face, not abuse of the bankruptcy laws. In addition to the
bankruptcy law's general manifest harshness and its intended
elimination of a critical safety net during uncertain economic times,
the bill's nominal credit card disclosures are deficient and
unacceptable, as we pointed out above.
In addition to banning certain practices as above, U.S. PIRG, the
Consumer Federation of America, and others recently joined the National
Consumer Law Center in detailed and comprehensive comments to the
Federal Reserve Board on ways to improve the Truth In Lending Act's
disclosures and other regulations. The comments provide a window on the
way that the industry exploits loopholes and inconsistencies in the Act
to hurt and exploit consumers.\19\ The TILA was supposed to be a
remedial act, a law written to prevent unfair practices, and has often
been correctly interpreted that way in the courts, yet the regulators
have insisted on allowing the industry to carve out nooks and crannies
that allow banks to avoid the spirit of the law. The proposals below
augment and update the disclosures in the important 1988 disclosure
legislation that established what is known as the ``Schumer'' box,
which requires credit card company solicitations to clearly and
prominently disclose all fee and interest related ``trigger terms.''
\19\ See Comments of National Consumer Law Center, U.S. PIRG,
Consumer Federation of America et al ``Regarding Advance Notice of
Proposed Rulemaking: Review of the Open-End (Revolving) Credit Rules of
Regulation Z,'' Federal Reserve System, 12 CFR Part 226, Docket No. R-
1217 available at http://www.consumerlaw.org/initiatives/test_and_comm/
\20\ The Fair Credit and Charge Card Act of 1988's disclosures were
championed by Representative Chuck Schumer, now a Senator and a Member
of this Committee.
Additional key statutory changes recommended in those comments
include the following:
A cap on all other charges, whether considered a finance
charge or not, to an amount the card issuer can show is reasonably
related to cost.
No unilateral change-in-terms allowed.
No retroactive interest rate increases allowed.
No penalties allowed for behavior not directly linked to the
specific card account at issue.
No over limit fees allowed if issuer permits credit limit to
No improvident extensions of credit--require real underwriting
of the consumer's ability to pay.
Meaningful penalties for violating any substantive or
disclosure that provide real incentives to obey the rules.
A private right of action to enforce Section 5 of the Federal
Trade Commission Act, which prohibits unfair or deceptive practices
by businesses, including banks.
Abusive Credit Card Industry Practices on Campus
Having saturated the working adult population with credit card
offers, credit card companies are now banking on a new market: College
students. Under regular credit criteria, many students would not be
able to get a card because they have no credit history and little or no
income. But the market for young people is valuable, as industry
research shows that young consumers remain loyal to their first cards
as they grow older. Nellie Mae, the student loan agency, found that 78
percent of undergraduate students had credit cards in 2000. Credit card
companies have moved on campus to lure college students into obtaining
cards. Their aggressive marketing, coupled with students' lack of
financial experience or education, leads many students into serious
debt. According to a recent PIRG study, the Burden of Borrowing, credit
card debt exacerbates skyrocketing student loan debts. That 2002 study
found that 39 percent of student borrowers now graduate with
unmanageable levels of debt, meaning that their monthly payments are
more than 8 percent of their monthly incomes. The study also found that
student borrowers were student borrowers were even more likely to carry
credit card debt, with 48 percent of borrowers carrying an average
credit card balance of $3,176.\21\
\21\ See ``The Burden of Borrowing,'' the State PIRGs' Higher
Education Project, March 2002, available at http://www.pirg.org/
Campus Marketing: In 2004, Maryland PIRG and the Maryland Consumer
Rights Coalition releasing a shocking study of credit card marketing
practices on the State's college campuses. Among the highlights of
Graduating Into Debt \22\ were the following:
\22\ See ``Graduating Into Debt: Credit Card Marketing on Maryland
College Campuses,'' February 19, 2004, Maryland Consumer Rights
Coalition and Maryland Public Interest Research Group, available at
Credit card vendors are setting up tables on some campuses in
violation of university policies prohibiting or limiting tabling.
At least two schools currently sell their student lists
(names, addresses, and telephone numbers) to credit card issuers.
Several schools have exclusive marketing agreements with one
credit card issuer for which they receive financial compensation.
Only one school that allows on-campus marketing has a
comprehensive written policy specifically governing credit card
Previously, a PIRG study, the Credit Card Trap, released in April
2001, included a detailed study of the worst credit card practices. The
report was released at the same time as we announced a detailed fact
sheet available at a new website truthaboutcredit.org.\23\ Because
Linda Sherry of Consumer Action is releasing more recent survey data, I
will not go into details on the report's survey results. The key
findings of a year 2000 survey of 100 credit card offers included in
``The Credit Card Trap'' are available online.\24\ The report also
included a survey of college student marketing, which we summarize
\23\ ``The Roadmap To Avoid Credit Hazards'' is downloadable at
http://www.truthaboutcredit.org/roadmap.pdf. Numerous other materials
and reports are available at http://www.truthaboutcredit.org.
\24\ See the State PIRG credit card education website http://
Marketing to College Students Is Aggressive
The State PIRG's surveyed 460 college students within the first
month of either the fall or spring semester of 2000-2001. The key
Two-thirds of college students surveyed had at least one
credit card. The average college student had 1.67 credit cards.
50 percent of students obtained their cards through the mail,
15 percent at an on-campus table, and 10 percent over the phone.
50 percent of students with cards always pay their balances in
full, 36 percent sometimes do, and 14 percent never do.
48 percent of students with one or more cards have paid a late
fee, and 7 percent have had a card cancelled due to missed or late
58 percent of students report seeing on-campus credit card
marketing tables for a total of 2 or more days within the first 2
months of the semester. Twenty-five percent report seeing on-campus
tables more than 5 days.
One-third have applied for a credit card at an on-campus
table. Of these, 80 percent cite free gifts as a reason for
Only 19 percent of students are certain that their schools
have resources on the responsible use of credit. Three out of four
of these students (76 percent) have never used these resources.
The State PIRG's have run counter-education campaigns against
credit card marketing on campus. The industry and its vendors set up
tables where hawkers distribute ``free'' t-shirts, Frisbees and candy
to students who apply for cards. They also aggressively post so-called
``take-one'' flyers on bulletin boards in every classroom. PIRG
chapters have set up tables where we distribute credit card education
literature. We also have created our own ``think twice'' take-one
flyers and posted them on campuses. The brochures link to our website,
We believe it is appropriate and proper for colleges and
universities to regulate credit card marketing on campuses, including
consideration of restrictions or bans on credit card tabling and other
marketing. In addition, colleges should improve generally weak
financial literacy, credit card and debt training programs for
students, as should high schools. However, we believe that these
responses are best made by student governments, college administrators
or state legislatures, not the Congress, so we make no specific
Brief Profile of the Credit Card Industry
Our policy changes can be made without hurting the credit card
companies, who have enjoyed a lucrative 10 year run at the expense of
consumers. Credit card lending is the most profitable form of banking,
according to the Federal Reserve's most recent report to Congress in
2004: ``Although profitability for the large credit card banks has
risen and fallen over the years, credit card earnings have been
consistently higher than returns on all commercial bank activities.''
\25\ In recent years, those profits have hovered at or near record
levels. Profits in 2003 were $30 billion according to various sources,
with late and over-the-limit fees adding dramatically to the total.
\25\ ``The Profitability of Credit Card Operations of Depository
Institutions: An Annual Report by the Board of Governors of the Federal
Reserve System, submitted to the Congress pursuant to Section 8 of the
Fair Credit and Charge Card Disclosure Act of 1988,'' June 2004,
available at http://www.Federalreserve.gov/boarddocs/rptcongress/
There may be, as the industry witnesses will trumpet, some 6,000
credit card issuers. But there are only 10 that matter. The actual
marketplace is highly concentrated. The Nation's top 10 bank credit
card issuers grew an average of 6.5 percent during 2003, holding
aggregate card loans of $538.9 billion, approximately 77 percent of the
total U.S. market.
Since 1980, revolving debt, which is largely credit card debt,
increased from just $56 billion to $800 billion, according to the most
recent Federal Reserve postings of May 2005.\26\ Approximately 55
percent of consumers carry balances (the rest are convenience users)
meaning consumers with credit card balances average $10,000-$12,000
each in total credit card and revolving debt.\27\
\26\ See http://www.Federalreserve.gov/releases/g19/Current.
\27\ The banks frequently cite a Federal Reserve analysis of
University of Michigan Survey of Consumer Finances polling data to
allege that only 45 percent of consumers carry a balance. Consumer
group contacts with industry sources indicate that these numbers are
low. If true, of course, average balances would be even higher.
Consumer groups use a conservative figure of 55 percent carrying
balances, with some sources putting the number as high as high as 60
percent or more. For a discussion of our analysis of credit card debt
calculations, see the State PIRG report ``Deflate Your Rate,'' March
2002, available at http://www.truthaboutcredit.org.
Credit card companies have increased profit by increasing the
amount of credit outstanding by decreasing cardholders' minimum monthly
payments, increasing interest rates, and piling on enormous fees. Until
very recently, credit card companies engaged in a practice of
decreasing the minimum percentage of the balance that cardholders must
pay in order to remain in good standing. Today, most companies still
require a minimum monthly payment of only 2 percent or 3 percent of the
outstanding balance. As a result, cardholders who choose to pay only
the minimum each month take longer to pay off their balances, paying
more interest in the process. In its recent guidances, the OCC has
admonished banks to raise these minimum payment levels. ``The required
minimum payment should be sufficient to cover finance charges and
recurring fees and to amortize the principal balance over a reasonable
period of time.'' \28\
\28\ OCC Advisory Letter AL 2004-4, April 28, 2004, available at
According to a U.S. PIRG analysis, a consumer carrying just $5,000
of debt at 16 percent APR would take 26 years to pay off the balance if
she only made the 2 percent requested minimum payment, even if she cut
the card up and never used it again.
An industry source indicates that in 2003, 69 percent of U.S.
households received an average of 4.8 offers per month, or 58 offers/
year. The Federal Reserve also estimates that this has resulted in
American consumers now carrying an average of 4.8 credit cards
each.\29\ During 2004, U.S. households received estimated 5.23 billion
credit card offers, up 22 percent compared to 2003 and exceeding the
previous record of 5.01 billion offers set in 2001.\30\
\29\ ``The Profitability of Credit Card Operations of Depository
Institutions: An Annual Report by the Board of Governors of the Federal
Reserve System, submitted to the Congress pursuant to Section 8 of the
Fair Credit and Charge Card Disclosure Act of 1988,'' June 2004,
available at http://www.Federalreserve.gov/boarddocs/rptcongress/
\30\ According to Mail Monitor, the direct mail tracking service
State Preemption: Another Part of the Problem
Although States have recently aggressively sshould enforce unfair
and deceptive practices laws against credit card companies, the States
have been limited in their enforcement by the growing use of preemption
theory to restrict their regulation of the industry. In 1978, in
Marquette,\31\ the Supreme Court held that States could export
nationally the interest rates of the bank's home State, prompting a
concentration of the industry in a few bank-friendly States, including
Delaware and South Dakota. In 1996, the court in Smiley \32\ extended
the Marquette holding by defining late fees as ``interest,'' allowing a
bank's home State late fee rules to similarly be exported nationally.
\31\ In 1978, the Supreme Court in Marquette v. First Omaha Service
Corp. invalidated State usury laws as they apply to national banks.
Marquette held that under Section 85 of the National Bank Act (NBA) of
1863 national banks could export to any of their customers, no matter
where they lived, the highest interest rate allowed in the bank's home
State, now usually Delaware, Virginia, Nevada, or South Dakota. See
Marquette Nat. Bank. v. First of Omaha Services, 439 US 299 (1978).
\32\ In Smiley, the Supreme Court extended Marquette to allow
exportation of a home State's fees. The court paid deference to a new
OCC rule that added a wide range of fees to the definition of interest
under Section 85 of the National Bank Act, including late fees, over
limit fees, annual fees, and cash advance fees. See Smiley v. Citibank
(South Dakota). 517 US 735 (1996)
These onerous decisions applied only to the regulation of interest
and fees, not to disclosures. In 2002, a U.S. District Court used
National Bank Act preemption theory, backed by the OCC, to overturn an
important new California law requiring a monthly minimum payment
warning, further restricting State authority to protect consumers.\33\
Then, of course, in 2004, the OCC imposed two onerous administrative
rules restricting States from enactment or enforcement against national
banks and their State-licensed operating subsidiaries.\34\
\33\ Since the Federal Truth In Lending Act was nonpreemptive with
respect to certain account statement disclosures, California enacted
legislation (Civil Code Section 1748.13) requiring that monthly credit
card statements disclose information about how long it would take to
pay off a card if you only made the minimum requested monthly payment.
Federal law did not then require this, although a similar, weaker
provision is included in the bankruptcy law recently signed (Public Law
109-8). The law was overturned on summary judgment in American Bankers
Association v. Lockyer, 239 F. Supp. 2d 1000, 1009 (E.D. Cal. 2002).
\34\ See the PIRG OCCWatch website for detailed information on the
OCC's anticonsumer actions, including links to its rules, http://
www.pirg.org/occwatch. Also see ``Preemption Of State Consumer Laws:
Federal Interference Is A Market Failure,'' by U.S. PIRG's Edmund
Mierzwinski, which appeared in the Spring 2004 (Vol. 6, No. 1, pgs. 6-
12) issue of the Government, Law and Policy Journal of the New York
State Bar Association. The article includes a major section on the OCC
rules, available at http://www.pirg.org/consumer/pdfs/
These decisions and actions have aided and abetted the anticonsumer
practices of this industry and deserve careful scrutiny by the
Committee. We remain disappointed that the committee has not reined in
the over-reaching OCC rules, although it did hold an important
oversight hearing in the last Congress.\35\
\35\ 7 April 2004, Review of the National Bank Preemption Rules,
Oversight Hearing of the U.S. Senate Banking Committee, available at
We thank you for holding this important oversight hearing. We urge
the committee to go further and enact legislation protecting consumers
from unfair credit card company practices. We hope that we have
provided you with adequate information to support the need for action
by the Congress to rein in the credit card industry's most unfair and
abusive practices and would be happy to work with your staffs on
PREPARED STATEMENT OF MARGE CONNELLY
Executive Vice President, Capital One Financial Corporation
May 17, 2005
Good morning, my name is Marge Connelly, Executive Vice President,
Capital One Financial Corporation, and I am pleased to appear before
you today to talk about the state of the credit card industry.
Capital One is one of the largest credit card providers in the
world, and a diversified financial services company with over 49
million accounts and $81 billion in managed loans outstanding as of
March 31, 2005. In addition to credit cards, we are one of the nation's
premier auto finance companies, and also offer our customers an array
of other banking and related products and services. We employ nearly
15,000 associates worldwide, with offices around the country and
overseas. Earlier this year, Capital One announced its planned
acquisition of Hibernia Corporation, a financial holding company
headquartered in New Orleans that has over $21 billion in assets and
offers a full range of deposit products and a wide array of financial
services through more than 300 locations in Louisiana and Texas.
Capital One, along with the other companies testifying before the
Committee, has played a leading role in building the national credit
superhighway that, in the past 15 years, has greatly advanced economic
democracy in America. While credit card lending is only a small
percentage of consumer credit--about 4 percent \1\--its real
contribution lies elsewhere. The credit card is now one of the
consumer's main contacts with the payment system,\2\ and has fostered a
vast national transformation that has changed commerce for the
better.\3\ Using payment cards, consumers can conduct everyday
transactions without writing checks and without having to do the
associated recordkeeping. Consumers can shop by telephone or the
internet at a time and in a setting that is convenient for them, saving
both time and money while increasing consumer choice.
\1\ Recent Changes in U.S. Family Finances: Evidence from the 1998
and 2001 Survey of Consumer Finances, Federal Reserve Bulletin, January
2003, Chart 10, page 21.
\2\ Credit Cards: Use and Consumer Attitudes, 1970-2000, Federal
Reserve Bulletin, September 2000.
As with all significant social and economic changes, this
transformation has been accompanied by its share of controversy, and
Capital One is grateful for the opportunity to participate in the
Committee's exploration of the issues surrounding the credit card
industry today. But first, it is necessary to spend some time
understanding payment cards' development and role in society.
Democratization of Credit and the Transformation of Commerce
Developments in information technology and the availability of
consumer credit information spurred major changes in the credit
granting process. The beginnings of a national consumer credit market
were acknowledged in the passage of the Fair Credit Reporting Act
(FCRA) in 1974, updated by this Committee in 1996 and most recently in
2003. Credit became more widely available on a national basis, as
credit bureaus developed large databases that provided lenders with a
more holistic and consistent view of a particular consumer's risk
characteristics. Nevertheless, pricing was still not highly
differentiated, and approximately half of the eligible U.S. population
could still not qualify for a credit card.
Even as late as 1987, the credit card market was mired in a ``one-
size-fits-all'' approach, characterized by uniform interest rates and
Largest Ten Issuers (1987) (percent) (dollars)
Citibank.................................... 19.8 20
Bank of America............................. 19.8 20
Chase Manhattan............................. 19.8 20
First Chicago............................... 19.8 20
Wells Fargo................................. 19.8 20
First Interstate............................ 19.8 20
Manufacturers Hanover....................... 19.8 20
MNC Financial............................... 19.8 20
Marine Midland.............................. 19.8 20
Security Pacific............................ 19.8 20
The market was ripe for innovation, and the founders of Capital One
saw an opportunity to use the information provided by our national
credit reporting system to customize product offerings to customers
based on their particular needs, interests and risk profiles.
Our founders realized that the ``one-size-fits-all'' approach made
little sense when each consumer possessed vastly different needs and
characteristics. While some consumers were risky, many more were less
so--in varying degrees. Without the ability to differentiate one from
another, however, lenders were compelled to raise prices to cover the
cost of higher credit losses, or to cut back on the granting of credit
to reduce the losses. Either way, consumers suffered. The less risky
customers were paying too much, and for the rest, credit was hard to
come by--if available at all.
Capital One was able to use information within the legal framework
provided by the FCRA to make significant advances in underwriting--
better distinguishing the risk characteristics of our customer base.
The benefits of greater access to better information went beyond risk
analysis, however. Capital One and other companies were also able to
use information to create profound innovations in the marketing and
design of credit cards. Our company led the charge with new product
ideas like balance transfers, where customers could shift balances away
from high-priced cards to our lower-priced offerings, and low
introductory rates. The resulting reductions in price and expansion of
credit into traditionally underserved markets sparked a consumer
revolution that can fairly be called the ``democratization of credit.''
\4\ The Fair Credit Reporting Act: Access, Efficiency &
Opportunity, Information Policy Institute, June 2003.
By this decade, the desultory competition and flat pricing
structure of old were no more. In their place came fierce price
competition which has produced billions of dollars in savings for
consumers across the country.
Largest Eight Issuers (March AMF
2005) Lowest Long-Term APR (dollars)
Capital One..................... 4.99 percent Variable 0
Chase/Bank One.................. 7.99 percent Fixed 0
Bank of America................. 5.25 percent Variable 0
MBNA............................ 5.25 percent Variable 0
Providian....................... 7.24 percent Variable 0
American Express................ 8.24 percent Variable 0
Discover........................ 5.99 percent Variable 0
Citibank........................ 7.99 percent Variable 0
These numbers actually do not capture all the savings to consumers
caused by increased competition, because they do not take into
consideration the widespread availability of low introductory and
balance transfer rates.
The last 15 years also saw significant developments in the
pioneering of affinity cards, with benefits for consumers and the
organizations they most value; rewards programs which provide consumers
with value added benefits ranging from airline miles to college savings
plans; and cobranded products, which allow consumers to enjoy discounts
and other privileges at their favorite retail outlets.
The power of this heightened competition has not been lost on
consumers--in just 10 years as an independent company, Capital One has
grown its account base from 5 million to 49 million worldwide--all
without the once vital ``bricks and mortar'' network of branches. We
can give consumers the best deals no matter where they reside--from
mid-town Manhattan to the smallest farm community in Iowa.
For consumers, the benefits are self-evident: Prices for credit
continue to decline and availability to widen--most notably in the
traditionally underserved low- and moderate-income communities.
In addition to the direct economic benefits of lower pricing,
consumers have received an equally significant qualitative benefit from
advances in the payment card industry, and that is the transformation
of everyday commerce. Credit cards serve as a ``payment device in lieu
of cash or checks for millions of routine purchases as well as for many
transactions that would otherwise be inconvenient or perhaps
impossible,'' \5\ such as making retail purchases over the Internet or
by telephone. The explosion in internet commerce, and indeed the
establishment of whole new marketplaces such as Ebay, could not have
occurred without the relatively recent development of payment cards.
With the advent of payment cards in the 1950's, consumer debt has had
two components: Nonrevolving debt, consisting of traditional
installment-purchase type loans for such things as appliance purchases,
and revolving debt, consisting of ``prearranged lines of credit.'' \6\
Since the late-1960's, revolving debt has increasingly replaced
nonrevolving debt, and some of this revolving credit is ``convenience
credit'' that replaces cash and is paid in full every month.\7\ As
noted above, credit card debt composes around 4 percent of all consumer
debt, but it is erroneous to look at this as unqualified new debt for
the reason just cited--the rise in revolving debt since the late 1960's
has been accompanied by a decline in nonrevolving debt (relative to
income) while overall consumer debt has remained fairly constant
relative to income.\8\ This is not to say that a portion of credit card
debt is not new in the sense that it is in addition to, rather than in
replacement of, other debt the consumer would have incurred; but that
new credit does not appear to be a large part relative to income.
Critics of the industry portray credit-card debt as a massive debt
burden for the American consumer, but the size of the debt as a
component of overall consumer indebtedness does not support that
charge. Where payment cards clearly have had a pervasive impact, out of
proportion to the amount of credit that they represent, is in their
economic functionality-as a substitute for cash and checks, and as an
enabler for new marketplaces and forms of commerce.
\5\ Federal Reserve Bulletin, September 2000, page 623.
\6\ Ibid, page 624.
\7\ Ibid, Chart 1"Consumer credit outstanding as a proportion of
disposable income, 1956-1999, page 624.
The Challenges of Successful Competition
As the above discussion helps to emphasize, there is no more
competitive industry. Several thousand financial institutions issue
general purpose credit cards such as MasterCard and Visa, in addition
to those issued by American Express, Discover, and many retailers. As
many as 50 of the largest credit card issuers distribute their cards
nationally, Capital One among them. Obviously, this market is not
dominated by any one issuer. There are few barriers to entry and exit.
In recent years, newcomers such as Juniper Bank and the banking arm of
State Farm Insurance have taken market share from more established
issuers,\9\ contributing to the pressure on all market participants to
focus on products that best serve consumers.
\9\ Credit Cards, 2003, SMR Research.
In the face of this intense competition, each day at Capital One,
our associates work hard to retain our existing customers, acquire
customers new to the market, and attract the customers of our
competitors with better offerings. This nationally competitive
environment has completely displaced the balkanized, localized credit
card markets of 30 years ago--markets that featured high, largely
undifferentiated pricing combined with an onerous and highly subjective
application process and limited availability and access to credit.
As a result, the industry now plays a preeminent role in the day-
to-day lives of consumers. Capital One has 38 million U.S. credit card
accounts, and any one of those customers can drop our product and
immediately get a replacement from any one of at least 10 major
competitors. We live by and for our customers, and we are committed to
There have been many complaints that credit card fees are too
high--in particular, fees for infractions of account rules (late fees,
overlimit fees, returned-check fees). But in fact, the rise in these
fees corresponds with the industry's movement toward lower interest
rates and annual membership fees on accounts generally, as credit card
lenders compete fiercely to offer consumers what they most want.
Consumers have voted for those low-rate and low-membership-fee products
by signing up for them--and leaving those products with higher rates
and membership fees. But in order to offer those low rates, and those
zero-dollar membership fees, it has become critically important for
credit card lenders to manage risk in their accounts more effectively,
including the use of default fees to compensate for the added risk of
those customers who do not abide by the account rules.
Because it is so easy for consumers to switch credit card issuers--
and millions do so every year--credit card companies must take very
seriously any suggestion that our customers are not being treated
fairly. As competition intensifies and credit products become more
complex, it becomes more important to be sure that customers understand
the terms of their accounts and are not surprised by any fees or
charges they may incur, or changes in terms.
In other words, it is not enough to have built the national credit
superhighway with all of its speed and cost benefits, but we must
ensure that it has good road signs and exits--all without impeding
traffic flow or imposing unreasonable tolls. Capital One has some
proposals in that area, but before discussing those, it is vital to
achieve a common understanding of open-end credit and the underwriting
Open-End Credit and the Underwriting Process
Open-end, unsecured credit is just that--it is credit that is
extended in variable amounts over an indefinite period of time with no
collateral to secure the debt. The lender extends or ``underwrites''
this credit solely on its analysis of the consumer's likelihood to
repay. A ``snapshot'' of the consumer's ability and willingness to
repay at a given point in time must support a lending decision that can
have consequences indefinitely into the future. There is no collateral,
as with auto or with mortgage loans. Prior to the development of open-
end credit delivered through credit cards, the consumer would apply for
an installment purchase loan for a particular good or purpose. The loan
was for a fixed period of time. If a consumer purchased a refrigerator,
the lender would assess the likelihood to repay for that particular
item and offer a rate based on the particular risk factors involved.
The credit was extended only in a specific amount for a specific period
of time. The lender's risk was limited to that amount and time period,
and even within that time period, the lender's credit risk declined
over the life of the loan as the customer paid down the loan according
to the prescribed schedule. If the consumer next wanted to buy a
washing machine, the process started all over again, and if the
consumer's risk profile had changed, he or she could get a different
rate, or not be granted credit. With open-end credit, the consumer
receives a prearranged credit line and can make subsequent purchases up
to the credit limit without any further approval process. The lender's
exposure is for an indefinite period during which the borrower's
creditworthiness can fluctuate considerably.
In unsecured lending, if the lender is to make money (or even stay
solvent), every bad loan must be compensated for by many good loans.
And the rate charged on those loans must reflect their risk. To
illustrate why that is so important, consider a simple example.
The example, shown in the chart in Attachment I, consists of two
simple loan portfolios, each containing 100 loans of $1000 apiece. One
portfolio has an interest rate of 19.9 percent, similar to prevailing
credit card interest rates of two decades, ago, the other a rate of 6.9
percent similar to prevailing rates today.
If one loan in the 19.9 percent portfolio defaults, it takes the
interest from 10 performing loans to compensate for the default. But if
one loan in the 6.9 percent portfolio defaults, it takes the interest
from 29 performing loans to compensate for the default.
The importance of accurate underwriting in today's morecompetitive
interest rate environment is obvious. The challenge for every lender is
to fit the maximum number of borrowers into the continuum of rates that
that lender charges while keeping defaults to a minimum. Whoever does
the best job of fitting borrowers to a particular interest rate
attracts the most customers, because that lender can offer the lowest
rate and manage defaults so that the lender still makes money. When a
lender extends open-end credit, it is vital that, to the extent
possible, the lender keeps the consumer in the right credit portfolio
during the life of the credit relationship; otherwise the lender's
underwriting failure unfairly distributes cost to other consumers and
imperils the lender's ability to remain in business. Anything that
enhances this process has obvious consumer benefits, and anything that
disrupts it has equally negative consumer effects.
Because credit-card lending is unsecured, accurate underwriting is
a matter of the lender's financial life and death. And because credit-
card lending is open-ended, it
requires special tools to manage risk over the indefinite future
during which the customer's behavior and creditworthiness may change.
These tools include fees for rule violations, and the ability to modify
credit lines, and suspend or terminate the account, and the ability to
reprice, or reunderwrite, the account. As noted above in the comparison
of closed-end vs. open-end credit, closed-end credit is a discrete
underwriting event where the underwriting can be adjusted with each
purchase, whereas the indefinite nature of open-end credit increases
the risk of meaningful changes in credit quality. The ability to price
for risk in either a closed or open-end context is vital to expanding
access to credit while maintaining an appropriate distribution of rates
for all borrowers.
Proposals for Change
Keeping all of that in mind, let me return to the question how the
industry can improve the signs and exits for the consumer who is
driving along the credit superhighway. First, an example of an
effective sign is the ``Schumer Box'' that currently accompanies credit
card solicitations. It prominently and efficiently discloses a number
of key terms for the consumer. Building on the strengths of the Schumer
Box, we have submitted to the Federal Reserve, pursuant to their
Advance Notice of Proposed Rulemaking for Regulation Z, a proposal to
enhance solicitation disclosures as illustrated by the Fact Sheet in
the poster before you and in Attachment II to my statement.
After listening to consumers whom we gathered in a number of focus
groups (not Capital One cardholders, except by chance), we synthesized
the following principles, which we reflected in the Fact Sheet:
Importance; Comparability; Clarity; Simplicity; and Specificity.
Applying those principles, we produced our Fact Sheet, including a
number of changes from the current disclosure regime:
More prominent and standardized disclosure of events that may
give rise to changes in the customer's interest rate; moving those
disclosures from where they currently appear, in footnotes to the
Schumer Box, into the heart of the Fact Sheet.
Disclosure of the range of credit limits that the customer may
receive (not currently required or permitted to be disclosed in the
Disclosure of certain fees not currently required to be in the
Disclosure of other matters of importance to prospective
customers: We propose disclosing the manner of payment allocation.
We look forward to working with the Federal Reserve Board on their
important project to bring Regulation Z and the credit-card disclosures
that it governs into the 21st century.
To conclude, Capital One wants our customers to be well-informed
and financially literate. Well-informed customers are the most likely
to understand and appreciate our products, and to use them wisely.
Effective, standardized disclosure is key to achieving that goal, and
that is why the Federal Reserve review of Regulation Z is so important.
Capital One looks forward to actively and constructively participating
in this process to bring about meaningful improvements to the industry.
Again, we appreciate this opportunity to present our views to the
PREPARED STATEMENT OF LINDA SHERRY
Editorial Director, Consumer Action
May 17, 2005
Consumer Action (www.consumer-action.org), founded in 1971, is a
San Francisco based nonprofit education and advocacy organization with
offices in Los Angeles and Washington, DC. For more than two decades,
Consumer Action has taken an annual in-depth look at credit card rates
and charges to track trends in the industry and assist consumers in
comparing cards. Our 2004 survey included 140 cards from 45 companies,
including the top 10 issuers. We are currently conducting our 2005
survey and can share a few preliminary findings with you today.
Consumer Action also accepts complaints from consumers nationwide
via phone, post and e-mail in English, Spanish, Cantonese, and
Mandarin. For 9 years, complaints about unfair credit card practices
have topped our list of all complaint categories. In 2004, 38 percent
of the complaints we received were about credit cards.
For our annual credit card survey we call companies' toll-free
numbers as consumers. This gives us insight into what people face when
they shop for credit. The principal focus of our studies is the ability
of consumers to obtain clear and complete facts about credit card rates
and charges--before they apply for credit.
Our experience is that obtaining accurate information from credit
card companies is frequently exasperating and difficult, and the
answers are often lacking in key details about conditions, especially
those relating to fees and other costs, and to the circumstances that
trigger universal default rules. Representatives often are unable to
provide even the basic facts required by the Credit Card Disclosure
Hard to Find Terms and Conditions
There is no place for potential customers to find accurate
information. Credit card companies have call center staff to serve
existing customers and separate personnel to take applications from
potential customers. Non-customers are blocked from calling customer
service because you need an account number to get through. Application
personnel cannot provide accurate information about terms and
conditions. This leaves potential customers in danger of applying for a
card that at best does not suit them and at worse, contains predatory
terms and conditions.
Application lines are staffed by salespeople who attempt to
pressure callers to apply for a card without providing substantive
information. This means applicants often apply for cards with no
concrete knowledge about the terms and conditions.
Outrageous Anticonsumer Practices
Penalty rates and universal default, often cited as a way for
companies to manage risk, top the list of unfair practices.
Penalty rates are much higher interest rates triggered when
you pay your credit card bill late even one time.
Universal default rate hikes are imposed by credit card
companies based on the way customers handle other credit accounts.
What we find outrageous in both instances is that companies claim
that they are merely using risk based pricing when they increase the
interest rate. We challenge the industry to explain how taking out a
new car loan or having a credit card payment arrive 1 day late makes a
customer so much more risky that a doubling or tripling of the interest
rate is justified. If this is really risk-based pricing, why do
companies have a standardized default rate instead of one that reflects
the actual added risk? There is no way that a credit card payment
coming in one day late creates as much risk for a credit card company
as foreclosure on a car loan.
Does it make any sense to increase the interest rate of customers
who are having a hard time with their debt load? No. The real purpose
of these policies is to maximize revenue at the expense of those who
are least able to afford it.
An increasing number of issuers use universal default policies to
hike interest rates based on the way customers handle other credit.
Consumer Action's 2004 survey found that 44 percent of the surveyed
banks use this information to identify so-called risky cardholders and
raise their interest rates, even if they have never made a late
Consumer Action found penalty rates as high as 29.99 percent in
2004, at a time when the prime rate was at 4 percent. Preliminary data
from our 2005 survey shows penalty rates as high as 35 percent.
Consumers who have contacted Consumer Action have reported being hit by
default rates that were double and triple their old rates. Credit card
companies say they must protect themselves against risky customers, but
do they have to resort to usury to do it?
In November, a Bastrop, TX woman complained to Consumer Action
about a universal default rate hike: ``AT&T Universal card just raised
our interest rate from 12.9 percent to a whopping 28.74 percent because
of a late payment they found listed in my husband's credit report to
another credit card company (payments to AT&T have been on time). This
will make it impossible for my husband and I to pay off this card with
a $11,700 balance. Is this legal? AT&T says it is not up for
When you are turned down for credit, the law requires that you
receive a letter explaining why. But if you are hit with a universal
default hike, you do not learn about it until your next statement
arrives. And even then, all you learn is your new higher rate. You are
not told about the specifics that caused the hike.
Note: Thirty-nine examples of recent consumer complaints about
universal default received by Consumer Action are attached to this
Late payments result in higher penalty rates with 85 percent of the
issuers we surveyed in 2004. Consumer Action found average penalty
rates of 22.91 percent-1.38 percentage points higher than the 2003
averages. Of these issuers, 31 percent said a penalty rate could be
triggered by just one late payment.
In January, a Topeka, KS housepainter complained to Consumer Action
that Chase had ``raised our interest rate to 27.24 percent from 9
percent. They said we had two over 30-day past due payments in the last
year. I asked them when and they gave me 2 months, one time we were 2
days late and the other 7 days late, but they said the due date starts
from the time the statement is printed. I told them, How can that be,
when we have not even received the bill? I told them we were going
through hardships, with me being laid off and my wife and I going
through a miscarriage. I cannot work outside the union or I would lose
our health insurance. We have had a Chase card for 10 years and never
had a problem before. Our payment due is $217 and the finance charge is
$216.65. Needless to say, we cannot get anywhere with this debt.''
In 1995 Consumer Action found an average late fee of $13, with no
company charging more than $18. In 2004, the average was $27.45, with
three major banks charging $39 late fees at certain balance levels.
With average monthly minimum payments at 2 percent of the balance, the
late fee on a $2,000 balance would be double the minimum payment. This
is outrageously excessive.
An Indianapolis, IN woman who complained to us in February was
assessed a late fee by MBNA even when she paid early. ``I paid my
credit card bill early, and as I paid before the `closing date' it was
not credited toward the `payment due date,' and I incurred a late fee.
Here's an example: Monthly cycle from 12/04/04-01/04/05; `Closing date'
= 01/04/05; `Payment due date' = 01/28/05. Any payments made early,
from 12/04/04-01/04/05 are not considered payments toward the 01/28/05
payment due date. Only payments from 01/05/05-01/28/05 are considered
payments for the cycle of 12/04/04-01/04/05. Thus a 'late fee' can be
assessed even if payment was made early.''
In 2003, Consumer Action first noted tiered late fees tied to the
balance amount. On a percentage basis, this penalizes people with
smaller balances more than those with greater exposure. The number of
issuers employing the practice jumped from 20 percent in 2003 to 48
percent in 2004. Tiered late fees are a deceptive way of charging
higher-than-average late fees to cardholders with lower balances.
These days, most issuers require that your payment arrive before a
certain hour on the due date or you will be charged to a late fee. Our
2004 survey found that 58 percent of surveyed banks had a cut-off time
on the due date. If you are even 5 minutes past this cut off time, it
can cost you up to $39 even thought your payment arrives on the actual
A Massachusetts man contacted Consumer Action in January to
complain about a rate hike: ``My wife just called me to let me know
that Bank One, one of the credit card companies we use, just raised our
introductory rate of 0 percent to 10.24 percent. When my wife called to
find out why, they told her that the last payment was posted 2 days
late. The bill with the payment was mailed 7 days before the due date
from Massachusetts to Delaware.''
Even people who try to make timely payments will be hit with a late
fee if their payment was delayed in the mail. We hear from many
consumers who allowed 7 days to post a payment, yet still the bank
assessed a late fee. Banks should consider postmarks when posting
payments. If the Internal Revenue Service can do it, why cannot credit
Over Limit Fees
Contrary to what many people believe, a purchase that takes you
over your credit limit will not necessarily be denied. Instead, you
will be stuck with an over limit fee, which can be assessed every month
until your balance is under the limit. The industry should either deny
charges that go above the credit limit or not charge a fee. If they are
going to accept charges over the credit limit they should be happy just
with the added interest and be forbidden from adding on fees.
A Framingham, MA woman wrote this to Consumer Action last year: ``I
can understand a credit card company adding a late fee but what I have
a serious problem with is when the late fee puts you over the limit and
they then add on an over limit fee. This is a vicious cycle that is
hard to stop. Once you have gone over the limit, unless you have enough
money to get it down, what can a consumer do? The over limit fees keep
adding up thus causing everything to go up, interest, etc. Is it really
legal for them to charge you an over limit fee when their late fee
actually put you over the limit? This really needs to be addressed.''
Deceptive Interest Rates Quotes
The annual percentage rate (APR) is one of the most basic facts
that must be disclosed in advance to credit card applicants under the
Truth in Lending Act. But since 1999 Consumer Action has found that an
increasing number of banks fail to quote a firm APR, and instead
provide a meaningless range of rates. This practice defies Federal
credit card disclosure provisions and prevents consumers from comparing
cards. In 1999, only 14 percent of banks failed to quote a firm APR. By
2004, the percentage had more than tripled to 51 percent.
The charges for credit card cash advances have escalated
dramatically in the last decade. In 1995, average charges were 2.2
percent of the amount advanced, with an average maximum limit on the
fee of $17. By 2004, the average fee had jumped to 3 percent-a 36
percent increase, and the average maximum to $30.62, up 80 percent.
More disturbingly, in 2004 only 17 percent of surveyed issuers limited
consumers' costs by capping the fee.
This is a ``follow the leader'' industry. When one issuer steps out
with a new anticonsumer practice, other banks are quick to follow.
Having watched closely as these changes in credit card lending have
transpired, Consumer Action concludes that the industry is in the
process of fundamentally redefining its business model to shift the
risk of lending from itself to unwitting customers.
I thank you for your diligence in investigating credit card
industry practices and I urge you to support legislation to prevent
credit card banks from preying on consumers.
RESPONSE TO A WRITTEN QUESTION OF SENATOR SARBANES
FROM LOUIS J. FREEH
Q.1. The following clause is contained in the credit card
agreements of many issuers: ``We reserve the right to change
the terms at any time for any reason.'' It is my understanding
that current law only requires that a cardholder receive the
change in terms notice 15 days before her interest rate is
increased and that most of the notices do not provide the
specific reason for the increase. The notices also, in some
instances, do not provide a toll-free number for consumers to
call and speak to an individual, as opposed to receiving a
recording, to find out why their rate has been adjusted.
Will your company commit to including a toll-free number on
change-in-term notices so that consumers have a readily
accessible number to call and be able to speak to an individual
to determine why their interest rate has changed?
A.1. Since 1986, MBNA has provided our customers with a toll-
free number available 24 hours a day that connects with live
representatives who are available to answer questions regarding
their accounts, including answering questions about changes in
terms. To further improve this process, in 2003 MBNA created an
additional toll-free number that connects customers to
representatives specially trained to provide detailed answers
about repricing and change in terms notices. MBNA is founded on
the principle of exceptional customer service and we believe
always having representatives available to customers when they
have questions about their accounts is fundamental to that
As I indicated in my testimony, MBNA does not practice
``universal default'' and customers are provided a ``just say
no'' opportunity. In the latter instance, MBNA practices exceed
that required by law.
Finally, the question from Senator Sarbanes raises the
issue of the notices themselves. As I stated at the hearing,
MBNA has long advocated for simpler, more easily understood
notices. Specifically, I testified: ``Turning for a moment to
the topic of disclosure, let me first say that MBNA is
committed to keeping its customers fully and fairly informed of
every aspect of their accounts. However, we believe that the
volume and types of disclosures mandated by Federal and State
laws, regulations, guidelines, and practices, along with the
complexity of the product, have not led to greater clarity. In
fact, we think these measures have often led to greater
confusion and frustration for the consumer. And while we favor
better disclosure, we should consider that better disclosure
may not mean more disclosure. Better disclosure may mean
simpler descriptions of key terms and offering consumers a
range of ways to get this information, including websites,
toll-free phone numbers, and simplified documents.
At MBNA, we always provide advance notice of changes in
APRs and we tell customers how to opt-out of these changes.
Moreover, in response to the OCC's September 2004 Advisory
Letter regarding credit card marketing practices, MBNA made a
number of improvements in its marketing materials and
agreements. Our goal was to highlight important terms and
conditions relating to fees, rates, payment allocation,
repricing, and how to opt-out of changes in terms. In addition,
we recently provided comment to the Board of Governors of the
Federal Reserve System wherein we support the Board's decision
to undertake a comprehensive review of the Federal Truth In
Lending Act and Regulation Z. We believe this review is
necessary because consumer credit markets and communications
technology have changed significantly since the Act was last
revised in 1980. We have further suggested that the Board be
guided by four fundamental principles as it considers revisions
to the Act.
First, disclosures must be simple. We know from talking to
millions of customers every year that they are often confused
and frustrated by the dense and lengthy regulatory language
that issuers are required to use in disclosures. Ironically,
the language intended to inform consumers more often overwhelms
them. Much of this material ends up in the household trash. We
believe it should be a priority for the Board to shorten and
simplify disclosure language and to focus on the most relevant
terms and conditions that consumers need to understand.
Second, disclosures must be clear. There are several
consumer-tested models for presenting complex information in a
clear and effective manner. We recommend that in addition to
containing shorter, simplified language, disclosures should
also be presented in ways that are understandable and
meaningful. Lenders should have the option of using these
consumer-friendly models as a ``safe harbor'' for disclosure.
In respect of the need to present information simply,
clearly, and effectively, MBNA has begun voluntarily inserting
its change-in-terms notices within what we call a ``wrapper.''
The wrapper presents a top line summary of the changes in
terms, along with hints to customers for managing their
accounts. We also use the wrapper to remind customers of the
things they can do to avoid fees, and we make suggestions on
how to manage payments by mail, by phone, and by Internet. The
wrapper is a step in the direction of clarity, and we are happy
to have taken it.
Our third recommendation is that disclosures should be
based on uniform national standards. The goal of greater
simplicity and clarity will never be achieved as long as
individual States can impose their own disclosure requirements.
We do not believe that state-specific disclosures provide any
significant benefits, but we know they add to the complexity of
documents that customers tell us are already far too difficult.
And fourth, disclosures should not be repetitive. Key terms
should not have to be disclosed in the account application and
in the summary of terms disclosed later.
Our idea is that the Fed Box can be improved. Similar to
the ``nutritional facts'' table on the side of all food
products, issuers would disclose the key terms of the credit
card agreement in a uniform way. The table could include a
listing of the rates that apply to the different types of
transactions, information on whether the rates are variable or
nonvariable, fees, grace periods, default provisions,
conditions for repricing, duration of promotional rates, and so
on. The major improvement is that this information would be
presented in a consistent, uniform manner. Consumers could
compare product features and benefits, and more easily choose
those products that suit their needs, whether they want to
revolve a balance or not.
In 2003, MBNA tested a ``food label-style'' privacy
statement with a small segment of customers. More than 90
percent told us they preferred the simplified format. The study
confirmed that transparency in disclosures is in MBNA's best
interest, and of course the best interest of consumers. MBNA
will work closely with the Board, and all the appropriate
agencies, to contribute to the revision process and to
implement the revised requirements.''
RESPONSE TO A WRITTEN QUESTION OF SENATOR SARBANES
FROM CARTER FRANKE
Q.1. The following clause is contained in the credit card
agreements of many issuers: ``We reserve the right to change
the terms at any time for any reason.'' It is my understanding
that current law only requires that a card holder receives the
change in terms notice 15 days before her interest rates is
increased and that most of the notices do not provide the
specific reason for the increase. The notices also, in some
instances, do not provide a toll-free number for consumers to
call and speak to an individual, as opposed to receiving a
recording, to find out why their rate has been adjusted.
Will your company commit to including a toll-free number on
change-in-term notices so that consumers have a readily
accessible number to call and be able to speak to an individual
to determine why their interest rate has changed?
A.1. Currently, when we send a notice to a customer changing
their APR, we generally provide a phone number on that notice
that will allow the customer to call and speak to a
representative regarding the reason(s) the customer's account
In some instances, due to the operational complexity of
managing our various partner relationships and their
requirements for dedicated toll-free phone numbers for their
members, we will occasionally refer the customer to call the
number on the back of the card or on their statement.