[Senate Hearing 109-543]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 109-543
 
                  REGULATORY REQUIREMENTS AND INDUSTRY
                    PRACTICES OF CREDIT CARD ISSUERS

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

 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

                               __________

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


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                            senate05sh.html




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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

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, MAY 17, 2005

                                                                   Page

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

                               WITNESSES

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 
  America........................................................    31
    Prepared statement...........................................    76
Louis J. Freeh, Vice Chairman and General Counsel, MBNA 
  Corporation....................................................    33
    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 
  Corp...........................................................    38
    Prepared statement...........................................   123
Linda Sherry, Editorial Director, Consumer Action................    39
    Prepared statement...........................................   130

                                 (iii)


                    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

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    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 
subject.
    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 
two colleagues.
    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 
Senator Akaka.
    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 
rates, payments, and terms of use. The tangible result of these 
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 
statements.
    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 
go first?
    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 
said.
    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 
agreement.
    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 
card company.
    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 
and repayment.
    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.
    Senator Akaka.

                  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 
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 
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 
charges.
    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 
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 minimum monthly payments. 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 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 
be helpful.
    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 
balance.
    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 
debt.
    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 
terms.
    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 
here.
    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 
location.
    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 
months.
    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 
questions.
    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 
contingencies.
    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 
pursue it.
    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 
Federal Reserve.
    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 
you know.
    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 
Reserve, Governor?
    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 
industry.
    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.''
    [Laughter.]
    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 
industry.
    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 
about?
    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 
economy.
    Mr. Gramlich. Right.
    Senator Dodd. You agree with me, this is not a small issue, 
is it?
    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 
consumers?
    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 
morning?
    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 
every month.
    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 
credit cards.
    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 
principal.
    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 
percent APR----
    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 
off.
    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 
$5,000?
    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 
statements?
    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.
    Senator Reed.

                 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 
targets?
    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 
bankruptcy.
    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 
terms notice.
    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 
practices.
    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 
industry environment.
    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 
prominently featured.
    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 
the board.
    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 
Regulation Z.
    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 
that.
    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 
amortization.
    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.''
    [Laughter.]
    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 
you.
    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 
customers understand.
    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 
tax authorities.
    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.
    [Laughter.]
    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, 
Senator Dodd.
    I want to thank the panel. It has been very informative. I 
hope we will give you whatever authority you need. Thank you 
very much.
    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.
    Mr. Jenkins.

                  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 
relationships.
    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 
financial education.
    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.
    Mr. Plunkett.

                  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 
today.
    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 
household.
    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.
    Judge Freeh.

                  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 
is closed.
    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.
    [Laughter.]
    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.
    [Laughter.]
    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 
cards.
    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 
stamps.
    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 
of credit.
    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 
today.
    Thank you.
    Chairman Shelby. I know you did not have 2 hours or 4 
hours, but we do appreciate your contribution.
    Ms. Franke.

                   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 
for consumers.
    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 
satisfaction possible.
    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. 
Thank you.
    Chairman Shelby. Thank you.
    Mr. Mierzwinski.

                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 
important hearing.
    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 
more.
    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 
be changed.
    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 
another card.
    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 
companies.
    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.
    Thank you.
    Chairman Shelby. Thank you.
    Ms. Connelly.

                  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 
make.
    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 
accounts.
    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.
    Ms. Sherry.

                   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 
35 percent.
    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 
anticonsumer practices.
    Thank you.
    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 
hearing.
    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.
    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.
    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 
them.
    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.
    Thank you.
    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.
    [Laughter.]
    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 
important.
    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 
understand.
    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 
that test.
    Credit card issuers have now become the victims of their own 
success and are turning credit cards into nothing less than wallet-size 
predatory loans.
    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 
fees.
    In fact, the opposite is the truth. 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 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 
card.
    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 
industry today.
    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 
industry.
    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 
age-group.
    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 
industry.
    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 
Committee today.
                               ----------
               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 
accounts.
    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 
testimony.
                               ----------
             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 
their costumers.
    However, we should continue to move forward on increasing financial 
literacy.
    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 
credit markets.
    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 
risk consumers.
    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 
good underwriting.
    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 
trillion. (Carddata.com.)
    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 
Credit.'')
    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 
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 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 
today. (Carddata.com.)
    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 
stories:

 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 
    totaling $3,058.
 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.
    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,'' 
November 2004.)
    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 
so.
    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 
made.
    And, if the consumer makes only minimum payments for 6-consecutive 
months, they will receive a toll free number to an accredited credit 
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 credit card, or if their balance is greater than $500. 
Otherwise, none of these disclosures would be required on their 
statement.
    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 
this bill.
    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 
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 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 
account balances.
    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 
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 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 
conclusions.
    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 
own terms.
    Thank you again for including me in this important hearing, Mr. 
Chairman.
                               ----------
                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 
Regulation Z.
    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/
bcreg/2004/20041203.
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    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, 
however.
    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 
disclosure.
    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 
all.
    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 
charges.
    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 
uniformity.
    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 
application disclosures.
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 
appropriate agencies.
    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 
credit card.
    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 
products.
    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 
area.
    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
Introduction
    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 
recent years.
    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 
consumers.
    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 
rulemaking processes.
    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 
products.
    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 
        Practices
    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 
    program.
 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 
    account.
    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 
comprehensive basis.
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 
products.

 Credit Card Lending: Account Management and Loss Allowance 
    Guidance (Jan. 3, 2003)
 OCC Advisory Letter 2004-4, Secured Credit Cards (April 28, 
    2004)
 OCC Advisory Letter 2004-10, Credit Card Practices (Sept. 14, 
    2004)

    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 
where needed.
    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 
issuer.
    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 
consumers.
    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 
Act.
    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 
    those rates;
 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 
    prominently.

    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 
utility.
    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 
reputation risks.
    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 
those uses.
    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 
    disclosure.
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.
Industry Developments
    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 
consumer's costs.
    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 
card accounts.
Conclusion
    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 
of choices.
    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 
disclosures.
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    \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.
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    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 
actions.
    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 
policies.
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
Credit Availability
    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 
creditworthy.
    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 
practices.
    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 
change.
    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 
solicitation.
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 
are available.
Customer Satisfaction
    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 
experience.
    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 
not honored.
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.
Anti-Fraud Initiatives
    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 
situations.
    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 
statement.
    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 
environment.
    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 
Unlimited.
    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 
an ATM.
    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 
loan.
    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 
progress.
    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.
Student Marketing
    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 
publications.
    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-
aged customers.
    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 
other creditor.
    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 
business.
    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.
Minimum Payments
    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.
Disclosures/Transparency
    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 
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.
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 
customer identification.
    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 
www.creditcardnation.com.
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 
(Cardweb.com, 2004a).
---------------------------------------------------------------------------
    \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 [1] 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); [2] 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 [3] 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; 
Manning, 2000).
    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 
1980's.
---------------------------------------------------------------------------
    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\
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    \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 
fees.
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    \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.
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    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 2001.
    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 
years.
    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 
income.
    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 
costs.
    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, 
2003).
    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 
young adults.
    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 
per 100,000.
    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.
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    \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.''
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    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:
    [1] 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.
    [2] 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.
    [3] 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.
    [4] 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.
    [5] 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 
rate
    [6] 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.''
    [7] 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.
    [8] 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.
    [9] Fees for subprime credit cards should not exceed 15 percent of 
the available line of credit up to a maximum of $100.
    [10] The cost of credit for subprime credit cards should include 
mandated fees in calculating the APR in consumer disclosure 
information.
    [11] 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 
financial security.
    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 
cannot succeed.
    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 
payment.
    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 
customers.
    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 
concerns.
                               ----------
                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.
Introduction
    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 
following:

 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\
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    \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/
interp/jan01/int903.doc.
---------------------------------------------------------------------------
 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 
    company;
 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-
    ons;
 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.
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    \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.
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    The practices described above can be illustrated with the following 
examples:

 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\
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    \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 
    existing balance.
 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 
    disclosed.
 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://
www.occ.treas.gov/Consumer/creditcard.htm.
---------------------------------------------------------------------------
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 
following.

 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://
www.ag.state.mn.us/consumer/PDF/CrossCountryBank.pdf.
    \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 
http://www.attorneygeneral.gov/press/pr.cfm.
---------------------------------------------------------------------------
 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/
dec31a_02.html.
---------------------------------------------------------------------------
 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 
    purchase.'' \9\
---------------------------------------------------------------------------
    \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/
2000/00-098.htm.
    \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 
        credit.\13\
---------------------------------------------------------------------------
    \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/
011094.html.

    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/
011094.html.

 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 
    tawdry practices.
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 
http://www.occ.treas.gov/scripts/newsrelease.aspx?Doc=Z1J2IZ9.xml.
---------------------------------------------------------------------------
    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 
increases?
    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 
telemarketing partners.
    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://
www.consumerlaw.org/initiatives/model/content/ArbitrationNAF.pdf.

    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.'' 
\20\
---------------------------------------------------------------------------
    \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/
content/open_end_final.pdf.
    \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 
    be exceeded.
 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/
highered/highered.asp?id2=7972.
---------------------------------------------------------------------------
    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 
http://marypirg.org/MD.asp?id2=12264&id3=MD&.

 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 
    marketing.

    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 
here.
---------------------------------------------------------------------------
    \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://
www.truthaboutcredit.org.
---------------------------------------------------------------------------
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 
findings include:

 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 
    payments.
 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 
    applying.
 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, 
truthaboutcredit.org.
    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 
recommendations here.
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/
creditcard/2004/ccprofit.pdf.
---------------------------------------------------------------------------
    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 
http://www.occ.treas.gov/ftp/advisory/2004-4.txt.
---------------------------------------------------------------------------
    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/
creditcard/2004/ccprofit.pdf.
    \30\ According to Mail Monitor, the direct mail tracking service 
from Synovate.
---------------------------------------------------------------------------
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/
mierzwinskiarticlefinalnysba.pdf.
---------------------------------------------------------------------------
    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 
http://banking.senate.gov.
---------------------------------------------------------------------------
Conclusion
    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 
proposed legislation.
                  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.
Overview
    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.
    \3\ Ibid.
---------------------------------------------------------------------------
    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 
annual fees.

------------------------------------------------------------------------
                                                   APR           AMF
         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\
---------------------------------------------------------------------------
    \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.
    \8\ Ibid.
---------------------------------------------------------------------------
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 
retaining them.
    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 
process.
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 
    Schumer Box).
 Disclosure of certain fees not currently required to be in the 
    Schumer Box.
 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.
Conclusion
    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 
Committee.




                   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 
Act.
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.
High-Pressure Sales
    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.
Universal Default
    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 
payment.
    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 
discussion.''
    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 
testimony.
Penalty Rates
    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.''
Late Fees
    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.
Due Dates
    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 
due date.
    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 
card issuers?
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.
Cash Advances
    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 
premise.
    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 
was repriced.
    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.