[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
H.R. 627, THE CREDIT CARDHOLDERS'
BILL OF RIGHTS ACT OF 2009; AND
H.R. 1456, THE CONSUMER OVERDRAFT
PROTECTION FAIR PRACTICES ACT OF 2009
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 19, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-17
----------
U.S. GOVERNMENT PRINTING OFFICE
48-870 PDF WASHINGTON : 2009
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
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Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota THADDEUS G. McCOTTER, Michigan
RON KLEIN, Florida KEVIN McCARTHY, California
CHARLES A. WILSON, Ohio BILL POSEY, Florida
ED PERLMUTTER, Colorado LYNN JENKINS, Kansas
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
ANDRE CARSON, Indiana
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
LUIS V. GUTIERREZ, Illinois, Chairman
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELVIN L. WATT, North Carolina J. GRESHAM BARRETT, South Carolina
GARY L. ACKERMAN, New York MICHAEL N. CASTLE, Delaware
BRAD SHERMAN, California PETER T. KING, New York
DENNIS MOORE, Kansas EDWARD R. ROYCE, California
PAUL E. KANJORSKI, Pennsylvania WALTER B. JONES, Jr., North
MAXINE WATERS, California Carolina
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
CAROLYN McCARTHY, New York Virginia
JOE BACA, California SCOTT GARRETT, New Jersey
AL GREEN, Texas JIM GERLACH, Pennsylvania
WM. LACY CLAY, Missouri RANDY NEUGEBAUER, Texas
BRAD MILLER, North Carolina TOM PRICE, Georgia
DAVID SCOTT, Georgia PATRICK T. McHENRY, North Carolina
EMANUEL CLEAVER, Missouri JOHN CAMPBELL, California
MELISSA L. BEAN, Illinois KEVIN McCARTHY, California
PAUL W. HODES, New Hampshire KENNY MARCHANT, Texas
KEITH ELLISON, Minnesota CHRISTOPHER LEE, New York
RON KLEIN, Florida ERIK PAULSEN, Minnesota
CHARLES A. WILSON, Ohio LEONARD LANCE, New Jersey
GREGORY W. MEEKS, New York
BILL FOSTER, Illinois
ED PERLMUTTER, Colorado
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
C O N T E N T S
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Page
Hearing held on:
March 19, 2009............................................... 1
Appendix:
March 19, 2009............................................... 51
WITNESSES
Thursday, March 19, 2009
Albin, Sheila A., Associate General Counsel, Office of General
Counsel, National Credit Union Administration (NCUA)........... 11
Braunstein, Sandra F., Director, Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve
System......................................................... 8
Clayton, Kenneth J., Senior Vice President/General Counsel,
American Bankers Association Card Policy Council............... 28
Echard, Linda, President and CEO, ICBA Bancard, on behalf of the
Independent Community Bankers of America....................... 29
Fecher, Douglas, President and CEO, Wright-Patt Credit Union,
Inc., on behalf of the Credit Union National Association (CUNA) 31
Ireland, Oliver I., Partner, Morrison & Foerster LLP............. 33
McCracken, Todd, President, National Small Business Association
(NSBA)......................................................... 34
Mierzwinski, Edmund, Consumer Program Director, U.S. PIRG........ 36
Plunkett, Travis B., Legislative Director, Consumer Federation of
America........................................................ 38
Yakimov, Montrice Godard, Managing Director, Compliance and
Consumer Protection, Office of Thrift Supervision.............. 10
APPENDIX
Prepared statements:
Marchant, Hon. Kenny......................................... 52
Albin, Sheila A.............................................. 53
Braunstein, Sandra F......................................... 70
Clayton, Kenneth J........................................... 84
Echard, Linda................................................ 107
Fecher, Douglas.............................................. 118
Ireland, Oliver I............................................ 127
McCracken, Todd.............................................. 136
Mierzwinski, Ed.............................................. 145
Plunkett, Travis B........................................... 145
Yakimov, Montrice Godard..................................... 201
Additional Material Submitted for the Record
Castle, Hon. Michael:
Letter to Chairman Gutierrez and Ranking Member Hensarling
from Joe Samuel, Senior Vice President of Public Policy,
First Data Corporation, dated March 18, 2009............... 216
Cleaver, Hon. Emanuel:
Constituent letter........................................... 220
McHenry, Hon. Patrick:
Responses to questions submitted to Sandra Braunstein........ 222
Meeks, Hon. Gregory:
Responses to questions submitted to Sandra Braunstein........ 224
Responses to questions submitted to Linda Echard............. 227
H.R. 627, THE CREDIT CARDHOLDERS'
BILL OF RIGHTS ACT OF 2009; AND
H.R. 1456, THE CONSUMER OVERDRAFT
PROTECTION FAIR PRACTICES ACT OF 2009
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Thursday, March 19, 2009
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:55 p.m., in
room 2128, Rayburn House Office Building, Hon. Luis V.
Gutierrez [chairman of the subcommittee] presiding.
Members present: Representatives Gutierrez, Maloney, Watt,
Moore of Kansas, Waters, Green, Miller of North Carolina,
Scott, Cleaver, Klein; Hensarling, Castle, Royce, Jones,
Neugebauer, Price, Campbell, Marchant, Lee, Paulsen, and Lance.
Ex officio present: Representative Bachus.
Also present: Representative Maffei.
Chairman Gutierrez. This hearing of the Subcommittee on
Financial Institutions and Consumer Credit will come to order.
Thank you to all of the witnesses for appearing before the
subcommittee today.
Today's hearing is a legislative hearing that will examine
two important consumer protection bills: H.R. 627, the Credit
Cardholders' Bill of Rights Act of 2009; and H.R. 1456, the
Consumer Overdraft Protection Fair Practices Act of 2009.
The subcommittee has asked our witnesses to discuss recent
regulatory action in the areas of credit card reform and
overdraft reform and comment on H.R. 627 and H.R. 1456. We will
be limiting opening statements to 12 minutes per side, but
without objection, the record will be open to all members.
Opening statements will be made a part of the record.
I yield myself 4 minutes.
In 2008, this committee led the Congress in adopting tough
but commonsense consumer protection measures for credit card
borrowers. This legislation, appropriately entitled the Credit
Cardholders' Bill of Rights, was approved by the House by a
wide majority, but was not taken up by the Senate. The
reintroduction of this legislation in the form of H.R. 627 in
the 111th Congress is a sign that this Congress is committed to
American consumers who demand commonsense consumer-oriented
laws at a time of economic recession.
Credit cards, when used properly, are an important part of
the American economic system. More than a convenient means of
payment, they can be instrumental in starting a small business,
helping in building a solid credit history, and are even
effective in providing families with capital during times of
economic crisis. Far too often, consumers come to rely on
revolving debt or they are drawn to cards that offer low teaser
rates and other mechanisms designed to create a never-ending
cycle of debt.
Today Americans are suffering from rising unemployment
rates, dramatically declining family wealth, and declining real
wages, all of which make it harder for consumers to pay off
credit card debt. In fact, in 2008, we saw the percentage of
accounts 30 days past due go to an all-time high of 5.6
percent. On average, American families owe 24 percent of their
income in credit card debt. These are daunting figures in an
unstable time, but Congress can and must do something about it
by making sure that unfair credit card practices and fees do
not deter consumers from paying down their debt.
Among its many consumer protections, H.R. 627 would
prohibit unreasonable interest rate increases by preventing
credit card companies from arbitrarily increasing interest
rates on existing balances. Additionally, it would end double-
cycle billing, meaning that credit card companies could not
charge interest on debt consumers have already paid on time.
The legislation also requires fair allocation of consumer
payments, banning the process of crediting a consumer's
payments to low-interest debt first, thus ensuring that the
highest yielding debt for the insurer remains on the books the
longest.
In addition, the Credit Cardholders' Bill of Rights
protects vulnerable consumers from high-fee subprime credit
cards by preventing these fees from being charged to the card
itself. This is an important provision for minority consumers,
many of whom are twice as likely to have an APR over 20
percent.
We set to work on this legislation with the knowledge that
the Federal Reserve Board has mandated new regulations that
mirror many of the protections included in H.R. 627. I applaud
the Board for its work on UDAP and Regulation Z changes.
Today's hearing will also discuss H.R. 1456, the Consumer
Overdraft Fair Protection Act. This bill would provide
consumers with more notice choice regarding overdraft fees.
Among other things, H.R. 1456 would require notice to consumers
when an ATM transaction is about to trigger an overdraft.
Consumers would then have a choice to accept or reject the
overdraft service and the associated fee.
Of course, the Federal Reserve has also proposed new rules
outlining additional consumer protections regarding overdraft
fees, but similar to the credit card issue, I believe Congress
should keep the proverbial legislative heat on the industry.
I am committed to working with the members of the
subcommittee and the full committee to advance this practical
and consumer-friendly legislation. I believe H.R. 627 fits
these criteria as well, and with some work, so will H.R. 1456
soon.
I yield 5 minutes to the ranking member, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman, and thank you for
calling this hearing.
Last year, the House Financial Services Committee approved
what I believe to be a dangerous piece of anti-consumer
legislation that ultimately would restrict the availability of
credit card credit. Instead of giving borrowers more tools to
determine which card best meets their needs, the bill would
outlaw certain practices, set arbitrary payment deadlines, and
create industry mandates that will only make it harder for
companies to use risk-based pricing methods.
The advent of risk-based pricing since 1990 has been a boon
for consumers. Since then, interest rates have fallen
substantially from 20 percent to below 15 percent. Consumer-
hated annual fees on most cards have typically virtually
disappeared and fringe benefit rewards, offers like frequent
flier miles and cash back, have exploded.
Like a lot of people, I am not a fan of some of the
practices and confusing legal manifestoes that credit card
companies employ. In fact, both my wife and I have changed
credit cards on several occasions when we have not liked the
service or the product. And there is one particular credit card
company with which we refuse to do business.
But this bill, instead of empowering consumers with
enhanced competition and effective disclosure, instead
represents another assault on personal economic freedom that
will only exacerbate the credit crunch that already threatens
so many of our citizens.
Let us take a quick look at the facts. According to the
Census Bureau, over half of families almost always pay their
credit card balance while only 24 percent hardly ever pay off
their balance. Furthermore, industry statistics reveal that
more than 19 of 20 credit card borrowers are paying at least
their minimum monthly payment on time.
Discarding risk-based pricing for the sake of that small
group of borrowers who aren't paying their debts on time would
effectively turn the clock back to an era where there was
little competition and a third fewer Americans had access to
credit cards. Those who did paid the same universal high rate
regardless of whether they paid their bills on time or
regardless of their creditworthiness.
Make no mistake about it, if this bill passes, it is going
to be a lot harder for people to access the credit they need to
pay their bills, cover their medical emergencies, or finance a
large purchase. I have heard from several of them in the Fifth
Congressional District of Texas, which I have the honor of
representing in Congress.
I heard from the Blanks family of Fruitvale who wrote me,
``My new business would not be started if not for my credit and
credit cards. I hate to say it, but with a daughter and wife in
college, my credit card is all I have.'' I want to make sure
that the Blanks family of Fruitvale, Texas, do not lose their
credit card.
I heard from the Vian family of Rowlett, Texas: ``In the
fall of 2004, my wife and I were laid off from our jobs at the
same time. We had just moved into our first home together in
July of that year. Needless to say, the layoff was quite a
shock and without access to our credit cards at that time,
frankly, I don't know what we would have done.'' I want to
ensure that the Vian family of Rowlett keeps their credit
cards.
I heard from the Juarez family of Mesquite: ``I oppose this
legislation as I have utilized my credit cards to pay for some
costly oral surgery. I do not want to get penalized by this
legislation for making my payments on time.'' And the
correspondence goes on and on and on.
And don't take my word for what will happen. Listen to the
nonpartisan Congressional Research Service: ``Credit card
issuers could also respond in a variety of ways. They may
increase loan rates across-the-board on all borrowers, making
it more expensive for both good and delinquent borrowers to use
revolving credit. Issuers may also increase minimum monthly
payments, reduce credit limits, or reduce the number of credit
cards issued to people with impaired credit.
Now I believe we already see in the credit crunch, we know
what will happen if we start to restrict credit. We are already
seeing it. And as badly as my friends on this side of the aisle
want to vilify some of those in the credit card company, I
think that most of their vehemence is directed at those in the
payday industry and the pawn industry.
I have an article from the IndyStar, dated February 3rd,
entitled, ``More American Families are Seeking Payday Loans as
Financial Turmoil Mounts.''
I have another one from the Boston Globe, dated July 9th of
last year, entitled, ``Cash-Strapped Consumers Desperate for
Deals are Increasingly Turning to Pawn Shops and Payday Lenders
Instead of the Local Mall and Neighborhood Bank.''
And last but not least, from the Washington Post, from our
friends across the pond in Italy, ``As Italy Banks Tighten
Lending, Desperate Firms Call on the Mafia.''
Those are the choices consumers will be faced with when
they lose their credit cards.
Chairman Gutierrez. Congresswoman Maloney for 4 minutes.
Mrs. Maloney. I would like to thank Chairman Gutierrez and
the ranking member for holding this hearing on the Credit
Cardholders' Bill of Rights and the Consumer Overdraft
Protection Practices Act.
I would say to my good friend on the other side of the
aisle that I agree with his constituent who wrote that she did
not want her credit card fees to go up or interests rates to go
up for any time, any reason. This bill stops some of the most
egregious practices.
It came out of a series of meetings with stakeholders over
2 years, with issuers, with consumers, with those professionals
in financial services. We came up with a set of principles and
drafted the bill in support of those principles. Some financial
institutions voluntarily instituted the gold standards, the
gold practices, but other issuers did not; therefore, they were
at a competitive disadvantage.
This levels the playing field not only for the consumer,
but for financial institutions themselves, so that businesses
that are coming forward with best practices are not penalized
economically for going forward with them.
For too long, the playing field has been tilted against the
American consumer as they have battled against unfair,
deceptive, and anti-competitive practices. These are the words
of the Federal Reserve.
Last fall, we took a major step forward in leveling this
playing field when the House passed the Credit Cardholders'
Bill of Rights by an overwhelming bipartisan vote of 312-112.
This legislation works on the basis that a deal is a deal and
would prohibit a penalty increase of an interest rate on an
existing balance unless the customer is more than 30 days late.
It bans double-cycle billing, charging interest rates on a
balance that has already been paid, and requires all payments
to be posted to account balances in a fair and timely fashion.
Regrettably, this legislation was not considered in the
Senate before the end of this session.
In December, we saw another important step forward for
consumers as the Federal Reserve, the Office of Thrift
Supervision, and the National Credit Union Administration,
after receiving more than 66,000 comments from Americans across
this country, setting a record of support of a rule change,
finalized their rule that tracks the major provisions of this
legislation, labeling these practices unfair, deceptive, and
anti-competitive.
While this final rule will provide significant new consumer
protections, it does not go into effect until July of 2010. And
unless it is codified into law, these new protections can be
changed at any time in the future without the consent of
Congress.
For more than 2 years, I have been working on this
legislation, and during that time, we have garnered the support
of more than 50 major editorial boards from across this Nation
and have earned the endorsement of many respected national
consumer groups, labor unions, and civil rights organizations.
Many of these organizations have made passage of this
legislation their very top priority.
Let me be very clear: credit cards remain a vital tool, a
vital innovation in our economy, a tool that enables consumers
to do everything from paying for an airline ticket or covering
an emergency expense to paying for schoolbooks. However, with
the now-near universal use of credit cards, we need to ensure
that consumers have adequate fair protections.
The other bill before this subcommittee today is the
Consumer Overdraft Protection Fair Practices Act. While I
recognize the great benefits the increase in use in debit cards
have provided American consumers, overdraft fees are becoming
an increasing problem for bank customers.
A November 2008 Federal Deposit Insurance study--
Chairman Gutierrez. The gentlewoman's time has expired.
Mrs. Maloney. Let me just say if I could at the end--both
of these bills give tools to consumers to better manage their
own credit, to allow them to make a choice whether or not they
want to opt in to an overdraft protection. Some consumers have
been charged $150 for having bought three cups of coffee. They
did not know they were going to have an overdraft.
This allows them to better manage their credit during a
time when we are in a credit crisis.
We are helping the financial institutions. We should also
help the consumers. That is what these two bills do, and I
believe it helps our economy and the institutions.
Chairman Gutierrez. Mr. Castle.
Mr. Castle. I ask unanimous consent that this letter from
First Data be submitted.
Chairman Gutierrez. Without objection, it is so ordered.
Mr. Castle. Many of us are aware that in December of 2008,
the Federal Reserve Board announced final rules to improve
consumer understanding and eliminate unfair practices related
to credit cards and other related credit plans. These rules
were carefully crafted after holding rigorous consumer tests
and after taking into consideration over 66,000 comments on the
proposals during the allotted comment period.
After receiving these comments and running these tests, the
Federal Reserve announced that the final list of comprehensive
reforms would be implemented by July 1, 2010. This will allow
18 months for the industry to overhaul their current business
models and to work on improving disclosures to comply with the
new rules.
To the 6,000 companies that issue credit cards, this is no
easy task. It will require planning and assistance in
effectively implementing these rules to ultimately help
consumers. However, this hearing, in part, will address a new
bill that will only give the industry 3 months to implement new
rules.
With any change in business models, there will be costs to
consider and unexpected effects to prepare for, and 3 months is
not enough time to do this.
I believe the new rules take a comprehensive approach to
protecting consumers, and I remain convinced that enacting
legislation that goes well beyond these carefully crafted rules
is not wise.
I yield back the balance of my time, Mr. Chairman.
Chairman Gutierrez. I thank the gentleman.
Mr. Miller is recognized for 2 minutes.
Mr. Miller of North Carolina. For millions of families,
abuse of overdraft fees for debit and checking accounts has
become an unconscionable burden. The problem is not that banks
penalize their consumers who overdraw their checking accounts.
The problem is the manner and frequency with which those fees
are assessed to consumers, and those practices have become
predatory.
In 2007, banks loaned $15.8 billion to cover overdrafts,
and U.S. consumers paid $17.5 billion in overdraft fees. The
typical overdraft transaction was a $20 purchase. The typical
overdraft fee was $34, and about three-quarters of the
overdraft fees were from families who were barely getting by.
Overdraft fees now account for 45 percent of the service
fee revenue for some banks, and the number is rising. And they
game the system. They develop fee harvesting software to
manipulate the sequence in which checks and other debits are
posted to maximize the charges for overdrafts. In some cases,
they consciously do not post the overdrafts so the consumer
will not understand, will not know that they have gone over
their--that they are now overdrafting, so they will rack up
more charges and more penalties.
The result is that consumers are hopelessly in debt and
their next paycheck is largely going to go to their bank, not
to put food on their family's table.
Mr. Hensarling said that they don't have overdraft. If we
make banks reform their practices, they will go to payday
lenders. They would be far better off with payday lenders. The
actual rate of interest for an overdraft fee for a $10--it
works out to a 3,500 20 percent interest rate for overdraft
fees paid in 2 weeks.
This has to be reformed.
Chairman Gutierrez. Thank you. Mr. Price for 2 minutes.
Mr. Price. Thank you, Mr. Chairman.
Mr. Chairman, we are considering this legislation today
against an economic background in our country that is uniquely
challenging. I hear from constituents daily who have been
unable to get loans or renew their lines of credit. I hear from
banks in my district who are suffering under mark-to-market
accounting rules, getting mixed messages from their regulators,
and still wanting to lend to their customers. We ought to be
pursuing every available avenue to loosen up credit.
To that end, this legislation is simply the wrong thing at
the wrong time. As has been mentioned, the Federal Reserve just
issued a 1,200-page rule--1,200-page rule--in December that
completely overhauls the credit cash industry. This bill
appears to be a poor attempt to ``solve'' what the Federal
Reserve is already accomplishing, and I look forward to the
comments of the panelists regarding that issue.
This legislation isn't focused on giving consumers control
over their credit. By imposing significant restrictions and
price controls on creditors, individuals will have fewer
options, not more, fewer options available to choose from.
Consumers need access to key information about credit
products in a concise and a simple manner. Information will
empower them to make their own choices in determining what type
of credit card is right for them. The Congress ought not
restrict the choices that are available, especially in a time
of restrained credit markets.
By statutorily preventing issuers from being able to price
for risk, dictating how they must treat the payment of multiple
balances, and implementing price controls, we will only see
restricted access to credit for those with less-than-perfect
credit histories, and an increase in the cost of credit for
everyone. This means less credit availability.
Every Member of Congress wants to ensure that consumers
have the information they need to make educated decisions about
their credit. I hope that our commitment to ensuring access to
affordable credit for all consumers is equally strong,
especially in this time of strained credit markets.
Chairman Gutierrez. Mr. Paulsen for 1 minute.
Mr. Paulsen. Thank you for holding this important hearing
today.
I also appreciate the diligent work that has been done at
the Fed and NCUA on the credit card rules, and I commend the
collaborative way in which you have worked together and the way
they have been devised. I hope the rules that you have issued
prove to be helpful to the consumer.
However, I have some strong concerns about the proposed
legislation that is going to be before us today, that it may
duplicate not only efforts that you have done, but ask credit
card issuers to implement those changes much, much too quickly.
Giving issuers 3 months to dramatically change the way they do
business could have very adverse consequences, hurting access
to credit, especially in small businesses when they are relying
on credit cards more heavily now than ever before, since many
are unable to access more traditional lines of credit from
banks and other institutions.
So I look forward to your testimony, and I yield back, Mr.
Chairman.
Chairman Gutierrez. Thank you very much.
Ms. Sandra Braunstein is the Director of the Division of
Consumer and Community Affairs for the Board of Governors of
the Federal Reserve System and has appeared before the
subcommittee this week. We welcome you back.
Ms. Yakimov is the Managing Director for Compliance and
Consumer Protection at the Office of Thrift Supervision, and
this is her first time before the subcommittee this year.
Ms. Sheila Albin is the Associate General Counsel for the
National Credit Union Administration, and I would like to
welcome you here before the subcommittee.
You may begin your testimony, Ms. Braunstein.
STATEMENT OF SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF
CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Ms. Braunstein. Thank you, Chairman Gutierrez, Ranking
Member Hensarling, and members of the subcommittee. I
appreciate the opportunity to discuss the Federal Reserve
Board's recent regulatory actions to expand protections for
consumers who use credit cards and overdraft protection plans.
Credit cards provide important benefits for many consumers,
both as a source of credit and as a convenient payment
mechanism. However, in recent years, credit card terms and
features have become more complex, which has reduced
transparency in credit card pricing.
In December 2008, the Board issued comprehensive, sweeping
rules to enhance protections for consumer credit card accounts.
One rule prohibits certain unfair card practices using the
Board's rulemaking authority under the Federal Trade Commission
Act, while a complementary rule improves disclosures for credit
cards under the Truth in Lending Act (TILA).
The two credit card rules were the result of extensive
consumer testing, data analysis, public comment letters, and
outreach to consumer and community groups and industry
representatives.
The final TILA rule includes both content and format
changes to application and solicitation notices, account
opening disclosures, and periodic statements. The rule also
requires that consumers receive 45 days advance notice of rate
increases or changes in other key account terms to ensure that
consumers will not be surprised by unexpected changes and will
have time to explore alternatives.
The data obtained in our consumer testing illustrated the
limitations of disclosures for today's complex financial
products. There are certain key credit card terms that cannot
be explained to consumers in a way that would improve their
ability to make meaningful decisions about credit.
Because improved disclosures alone cannot solve all the
problems consumers face in managing their credit card accounts,
the Board issued a rule prohibiting certain unfair practices.
The Board's final rule includes several key protections for
consumers. First, it ensures that the consumers have an
adequate amount of time to make payments once they receive
their billing statements. Second, the rule requires banks to
allocate payments in a manner that does not maximize interest
charges. Third, the final rule contains several provisions that
restrict the circumstances in which a bank may increase the
interest rate applicable to the consumer's accounts. Fourth,
the final rule prohibits two-cycle billings. And finally, the
rule includes several provisions to protect vulnerable subprime
consumers from products that charge high fees and provide
little available credit.
The combined rules will impact nearly every aspect of
credit card lending. To comply, card issuers must adopt new
business models, pricing strategies, and credit products.
Issuers must revise their marketing materials, application and
solicitation disclosures, credit agreements, and periodic
statements.
These changes will include extensive reprogramming of
automated systems and staff training. Although the Board has
encouraged card issuers to make the necessary changes as soon
as practicable, the 18-month compliance period is consistent
with the nature and scope of the required changes.
In addition to the final credit card rules, the Board also
issued proposed rules for overdraft protection programs. In the
past, overdraft services were provided only for check
transactions. Institutions now have extended that service to
other transaction types, including ATM withdrawals and point-
of-sale debit card purchases. Most institutions have automated
the process for determining whether and to what extent to pay
overdrafts. The Board's proposal contains two alternative
approaches for giving consumers a choice about the use of
overdraft services.
The first approach would prohibit institutions from
assessing any fees on a consumer's account after an institution
authorizes an overdraft unless the consumer is given notice and
a reasonable opportunity to opt out of the institution's
overdraft service.
The second approach would require an institution to obtain
the consumer's affirmative consent or opt in before fees may be
assessed to the consumer account for overdrafts. The proposed
rules would apply to overdrafts for ATM withdrawals and one-
time debit card purchases.
In closing, let me emphasize that the Federal Reserve's
commitment to enhancing the ability of consumers to use credit
cards to their benefit. The Federal Reserve is also committed
to helping consumers better understand the cost of overdraft
services and providing a means to exercise choice regarding the
use of these services.
I am happy to answer questions from the committee.
[The prepared statement of Ms. Braunstein can be found on
page 70 of the appendix.]
Chairman Gutierrez. Thank you.
Ms. Yakimov.
STATEMENT OF MONTRICE GODARD YAKIMOV, MANAGING DIRECTOR FOR
COMPLIANCE AND CONSUMER PROTECTION, OFFICE OF THRIFT
SUPERVISION
Ms. Yakimov. Good afternoon, Chairman Gutierrez, Ranking
Member Hensarling, and members of the subcommittee. I thank you
for the opportunity to present the views of the Office of
Thrift Supervision on the Credit Cardholders' Bill of Rights
Act of 2009, the Consumer Overdraft Protection Fair Practices
Act of 2009, and issues related to credit card lending and
overdraft protection.
We appreciate your leadership on these important elements
of the financial services market, and we share your commitment
to protecting consumers from abusive practices.
My written comments go into detail on the provisions of the
proposed legislation.
In my opening statement, I would like to focus on what the
OTS and other Federal banking regulators have recently achieved
in protecting consumers from unfair credit card practices. I
would also like to emphasize the OTS's position on how best to
approach consumer protection in this area and what
recommendations we can offer for making continued progress.
As you know, the Office of Thrift Supervision, the Federal
Reserve Board, and the National Credit Union Administration
issued the final rule in January 2009 to protect consumers from
unfair credit card practices. The rule was a result of the
process that the OTS initiated in August of 2007 by issuing an
advance notice of proposed rulemaking seeking comments and
suggestions on what credit card practices and overdraft
protection practices should be banned.
Comments in response to that advanced notice urged a
uniform set of rules across the credit card industry, across
the practices we might cover. So the OTS worked with the
Federal Reserve and NCUA to provide consumers with uniform
protections regardless of which financial institutions issued
their product and the industry with a level playing field.
The rule prohibits raising interest rates on existing
credit card balances when consumers are paying their card bills
on time, and generally also prohibits increasing rates on new
balances during the first year of the account.
It requires that consumers receive a reasonable amount of
time to make their credit card payment. It bans double-cycle
billing, prohibits payment allocation methods that unfairly
maximize interest charges, and in the subprime credit card
market, it limits fees that had been significantly reducing the
available credit to the consumer.
As I explain in my written testimony, this will accomplish
the primary goals of H.R. 627, the Credit Cardholders' Bill of
Rights Act.
In general, the OTS believes that using the Agency's
collective rulemaking authorities over these practices provides
greater ability to address unfair practices as they emerge. The
industry has shown remarkable ability to adapt and alter
practices, including unveiling new products.
Consumers have generally benefited from the expansion of
products and certain practices. By exercising their rulemaking
authority, the Agencies can keep pace with these innovations
while ensuring that they do not disadvantage the consumers.
Regarding the overdraft legislation, the OTS shares the
concern that prompted the bill and we see the benefit of many
of its provisions. However, we believe the regulatory
initiatives enacted and in process address several key issues
there. If Congress decides to proceed with legislation and
moves forward with both of these bills, the OTS respectively
requests that they be amended to provide implementing authority
jointly to the Fed, the NCUA, and the OTS.
The history of the rule on unfair credit card practices
demonstrates OTS's leadership in initiating the process to use
the FTC Act rulemaking power to address abusive practices. The
absence of such rulemaking authority would preclude OTS from
providing the kind of policy perspectives that began and
significantly shaped the credit card role and the important
consumer protections it contains.
Additionally, there are other observations in my written
testimony that we would recommend if the Congress should move
forward with this legislation.
Thank you again, Mr. Chairman, for inviting me here today.
I look forward to responding to your questions.
[The prepared statement of Ms. Yakimov can be found on page
201 of the appendix.]
Mr. Gutierrez. Thank you.
Ms. Albin, please, for 5 minutes.
STATEMENT OF SHEILA A. ALBIN, ASSOCIATE GENERAL COUNSEL, OFFICE
OF GENERAL COUNSEL, NATIONAL CREDIT UNION ADMINISTRATION (NCUA)
Ms. Albin. Good afternoon, Chairman Gutierrez, and Ranking
Member Hensarling. Thank you for the opportunity to testify on
behalf of NCUA regarding credit cardholder and consumer
overdraft protection legislation.
NCUA's primary mission is to ensure the safety and
soundness of federally insured credit unions as well as their
compliance with applicable Federal regulations. It examines all
Federal credit unions and participates in the supervision of
federally insured State-chartered credit unions.
As the administrator for the Share Insurance Fund, NCUA
provides oversight and supervision to over 7,800 credit unions,
representing approximately 88 million members. NCUA is
responsible for monitoring and ensuring compliance with most
Federal consumer protection laws and regulations in Federal
credit unions. In State-chartered credit unions, the
appropriate State supervisory authority has regulatory
oversight and enforces State consumer laws and regulations.
In December 2008, NCUA, OTS, and the Federal Reserve Board
jointly issued the UDAP rule, amending each Agency's credit
practices rule to prohibit several questionable credit card
practices. Based on comments received, the Agencies determined
a more comprehensive approach addressing more than just Truth
in Lending Act disclosures was appropriate. Each of the
Agencies oversees financial institutions that engage in the
same type of business. And although practices addressed in the
UDAP rule are not prevalent in the credit union industry, the
NCUA Board recognizes the uniform approach to the topic is
best.
Both total outstanding credit card debt and total loans in
credit unions grew in 2008, albeit at slower rates than at
previous years. This growth at a time when consumers are
finding it difficult to obtain credit demonstrates that credit
unions continue to strive to meet their members' credit needs.
In 2005, NCUA participated with member agencies of the
FFIEC Act in issuing guidance for guarding overdraft protection
programs focusing on automated systems. This guidance included
a discussion of best practices and recommended that
institutions provide consumers with an opt-out notice.
NCUA and the Federal Reserve Board has regulated the
disclosures for overdraft programs using our authority under
the Truth in Savings Act (TISA). NCUA amended its TISA rule in
2006 to address concerns relating to the uniformity and
adequacy of fee disclosures in connection with overdraft
programs. The amendment created a new requirement for credit
unions that promote overdraft payment programs to disclose
their fees and other information to address continued concerns
about overdraft fees. Regulation DD recently extended the
disclosures requirements for overdraft fees to all banks and
now requires disclosure of the periodic and year-to-date totals
for overdraft fees. Today, the NCUA board is proposing a
substantially similar amendment to NCUA's TISA regulations.
The Federal Reserve Board has recently proposed additional
requirements for overdraft protection programs under Regulation
E that will also apply to credit unions. The proposed rule will
limit a financial institution's ability to assess overdraft
fees for ATM withdrawals and one-time debit card transactions.
The proposed rule also offers a right of opt-out or opt-in as
alternative regulatory approaches. Additionally, the proposed
rule would prohibit assessing a fee if an overdraft is caused
solely by a debit hold or funds in a consumer account.
In addition, NCUA's general lending regulation for many
years has required credit unions to establish a written policy
for fees for overdraft protection programs.
In summary, credit cards and overdraft protection programs
are useful member services. Currently, approximately half of
all federally assured credit unions issue credit cards to their
members. Approximately 2,800 federally insured credit unions
offer overdraft protection services.
Overdraft protection programs can benefit both credit
unions and their members if members access the program
infrequently because credit unions receive another source of
fee revenue and members avoid the inconvenience and subsequent
fees associated with returned checks.
NCUA is concerned with regulating overdraft programs under
the Truth in Lending Act because treating overdraft fees as a
finance charge will adversely affect Federal credit unions'
ability to offer overdraft services to their members. This is
because of the statutory limit on interest on lending which is
currently set at 18 percent for Federal credit unions.
Thank you again for the opportunity to appear, and I would
be glad to answer any of your questions.
[The prepared statement of Ms. Albin can be found on page
53 of the appendix.]
Chairman Gutierrez. Thank you very much.
Ms. Braunstein, I don't know if you got this letter when
you were doing your reviews, but there were these great parents
who had this wonderful daughter that they loved very much. When
they sent her to college, they wanted to make sure that she had
access to money, and so they went to the bank and got her a
debit card that she could take to college with her. She would
go to the bank frequently, and when she needed money, if there
were insufficient funds, no problem. The ATM simply would not
give her the money, and she would call these wonderful parents
of hers, who would automatically go online and transfer more
funds to the wonderful daughter.
Except on one occasion, she decided she was a little
thirsty, and she used the ATM card issued by the bank as a
credit card at a coffee shop, and the $1.89 overdraft cost
these wonderful parents, who love their daughter very much,
$185 because there was an initial $35 for the $1.89 overdraft
and then the wonderful bank charged $10 a day for every day
there were insufficient funds in this account, for a total of
$185.
I don't know what the relationship is between $1.89 and
$185, but it makes the payday lenders look really, really good
in this case.
And there was a total of 20 days because, you see, the bank
doesn't just call up and say, ``Hey, you have insufficient
funds.'' They wait until you receive your bank statement at the
end of the month and you see these wonderful charges of $35,
etc., and then you put the money in.
So did anybody ever in your public commentary send a letter
like these two wonderful parents who sent their daughter to
college?
Ms. Braunstein. Congressman, I think we got a number of
letters like that out of the 60,000 letters. We have gotten
lots of letters.
Chairman Gutierrez. I am so happy to know my wife and I are
not alone in this situation.
So let me ask you, in your regulations, did you address it
at all?
Ms. Braunstein. In the proposal that we have out now on
Regulation E, that is one of the reasons why we want to offer
alternatives of either opt-out or opt-in to overdraft programs.
And basically what this would do was, if somebody chose not to
take overdraft, it gives consumers a choice, it means that if
they go to use their debit cards to buy something in a coffee
shop or McDonald's or wherever and there is not sufficient
money in their account, then the purchase should be denied.
And if for some reason the bank pays it anyway, if it goes
through or the merchant authorizes it anyway, what it would do
is prohibit the financial institution from charging a fee.
Chairman Gutierrez. It seems to be different. I remember
when a debit card was a debit card; that is, it was to be used
at ATM machines. And then all of a sudden, one day they became
a debit/credit card; that is to say, now you can use it and
merchants ask you, do you want a debit or do you want this used
as a credit card?
I really think that we should--and hopefully in the
legislation--look at making sure that when a consumer comes in,
and he just wants a debit card, he gets one. If there is not
money in the card, there is not money in the card, and it is
just not used. If you want a credit card, you should get a
credit card because when I use my credit card, they simply--the
Visa is so much lower than on a bank-issued debit card, it is
astronomical almost.
Ms. Braunstein. Just to clarify. It is not that the debit
card turns into a credit card. I understand what you are
saying. Because of the fact that an overdraft is extended, it
has the impact of being a credit card. But it still is a debit
card.
Chairman Gutierrez. But when you go to the ATM machine and
you ask for $20 and there isn't $20 in it, you don't get $20 in
cash. Yet, you can walk over to an establishment, ask for $1.89
for a cup of coffee, and it turns into a financial bonanza for
the issuer of the card.
And so I want to ask you one other question.
When Congresswoman Maloney introduced the Credit Card
Protection Act Bill of Rights, I was very supportive of it, and
continue to be very supportive of it. That is why we are having
a hearing this early in the process so that we can get the work
done and hopefully to the Senate. So I want to commend the
gentlelady from New York on her work and share with her that I
am not an unbiased spectator here.
Now, I noticed as I look, that there was a change, the one
change, and I would like you to comment on it because I think
it is important. In the original, it was 1 year of enactment
for the credit card industry to institute the new practices
under the legislation. And under the new legislation, it says 3
months. You guys came up with about 18 months from the time you
put your regulations out. Did the industry want it to be 18
months? Did you at the Board think it was 18 months? How did
you get to the 18 months? And what do you think about the
changes in the legislation?
I am going to ask unanimous consent that she be allowed to
answer the question.
Ms. Braunstein. Actually, the industry wanted longer than
18 months. It was the Federal Reserve and the other Agencies
(the OTS and the NCUA) that decided on the 18 months. And this
was based on a number of things.
One of the things is that this was a package. There are the
UDAP rules you are talking about that are contained in your
legislation to a large extent. But there is also all the truth
in lending changes which involves all new forms and also new
processes that are involved with that.
So this is one very large, sweeping, comprehensive package
that is going to fundamentally change the way the industry does
its business. And when we looked at, in terms of talking to the
industry, but also looking ourselves at everything that would
be required in order to put everything in place to make this
work well, we felt that 18 months was a reasonable time.
The danger is if you don't give sufficient time to the
industry to get everything in place in a way that has been
tested, that staff is trained, that it is running smoothly, if
there is not sufficient confidence in the new risk models--
which they are going to have to design all new risk models
because of the pricing changes--it could severely hamper the
markets in terms of credit availability.
So we wanted to provide sufficient time so that when this
is implemented, it is implemented correctly, and credit will
flow to consumers and that the market should still work well.
Chairman Gutierrez. I don't want to abuse the chairmanship.
So your basic answer is the industry wanted more but the Fed
thought in order for credit risk and other areas that the
implementation, okay. Thank you very much.
Mr. Hensarling, please, for 5 minutes.
Mr. Hensarling. Thank you, Mr. Chairman. Ms. Braunstein,
does Federal Reserve data indicate that credit card credit for
consumers is contracting within our economy?
Ms. Braunstein. I think that is right, but frankly all
credit is contracted right now. It is very difficult to
differentiate what might be the result of the pending rules
versus what is happening just because of the economic
situation. We are not in normal economic times.
Mr. Hensarling. I believe we all understand that.
And coming up with your rules, and I know they have been, I
believe, 3 years in the making, and I understand you have done
extensive consumer testing, have you also examined other
international models and studied case history?
Ms. Braunstein. I would have to check on that. I am not
sure.
Mr. Hensarling. In 2006, the U.K. decided that credit card
default fees were too high and ordered that credit card issuers
cut them or face legal action. And independent studies have
shown that led to a retrenchment of roughly $2 billion cost to
the credit card industry, which caused them, 2 of the 3 biggest
issuers, to impose annual fees on their cardholders, 19 major
card issuers raised interest rates, and one independent study
showed that credit standards became tighter, and 60 percent of
new applicants were being rejected.
If the Federal Reserve has not had an opportunity to study
the U.K. model--and it is very late in the game--I would
respectfully recommend that you study the U.K. model.
Ms. Braunstein, does the Federal Reserve feel that we have
an uncompetitive marketplace with credit cards? Do you feel
that consumers have inadequate choices or is it more that there
are simply what you would describe as unfair and deceptive
practices?
Ms. Braunstein. I think the market has been very
competitive, but I don't think that there has been the
transparency for consumers that is needed. I think that these
are very complex products and that it is very difficult for
consumers to understand what the terms are, and oftentimes it
is difficult for them to shop and compare because there is such
a wide array of products. And without the increased
transparency, it is hard to compare one against the other.
Mr. Hensarling. Since there is such a wide array of
products, do you observe that there are at least products in
the marketplace that are widely available to most consumers
that do not contain what you would consider to be the unfair
practices which your rules attempt to address?
Ms. Braunstein. I don't know. I can't say that there are
not products already out there.
Mr. Hensarling. In page 2 of your testimony, you talk about
limitations-of-disclosure-based approach, and I believe, if I
am understanding you right, it is the position of the Federal
Reserve that some terms are simply too complex, that consumers
just cannot understand them, cannot fathom them.
I think you have said that double-cycle billing is too
complicated for the average consumer to understand, but if I
read your final rule summary document from December 2008, it
explains both it and its repeal in just 63 words.
Did the Federal Reserve consider using that summary or,
again, are consumers just too dumb to understand?
Ms. Braunstein. Congressman, we did extensive consumer
testing on these new credit card disclosures, and we tested a
wide variety of terms, of which double-cycle billing is one,
but we also tested the explanation of payment allocation and
other terms. And I will tell you, our experience has shown us
that it is not necessarily the number of words, but it is the
explanation of the process. It just--some of these things just
could not--and we tried many different ways. And it wasn't us,
the Fed, you know. We hired experts on this who were trying
many different ways. Some of these terms were not--
Mr. Hensarling. Notwithstanding a competitive marketplace,
notwithstanding a general credit contraction, you still
advocate that consumers need to be protected against themselves
even though potentially that could lead to a loss of their own
credit cards?
Ms. Braunstein. I think that when we decide to write rules
on unfair and deceptive practices, we have to look at the risks
and we have to look at the benefits and the harm. And we
weighed all of that, and we felt these rules are needed in
order to protect the consumer.
Mr. Hensarling. What would happen, Ms. Braunstein--with the
chairman's indulgence, one last question--if your rules,
instead of having to be implemented in 18 months, had to be
implemented within 90 days, what is your impression of the
impact on the consumer credit marketplace?
Ms. Braunstein. Very honestly, I am not sure how that could
even be done. I mean, if legislation came out, we would have to
write rules. The legislation does not quite mirror our rules,
we would have to make adjustments. It also puts it all in TILA.
We are using the FTC Act. We would have to make a lot of
changes. We would have to put that out for public comment. We
would have to get comments back. We would have to put out a
final rule. And then you would have to leave some time for the
industry to comply. I see no way that process could be done in
90 days.
Chairman Gutierrez. The gentlelady from New York, Mrs.
Maloney, is recognized for 5 minutes.
Mrs. Maloney. I want to thank all of my colleagues who have
worked hard on this bill and have supported it, some on both
sides of the aisle, and I want to thank all of the panelists,
not only for your testimony today, but for your extraordinary
work during what has been called the worst economic crisis in
our lifetime.
I wanted to clarify one of the statements by one of my good
friends on the other side of the aisle and place in the record
two reports. This is about the risk-based pricing, and their
claim that this bill would have a negative effect on risk-based
pricing. And I would like to place in the record a GAO study
and a report by the Federal Reserve. Both found that there is
no evidence that risk-based pricing has decreased overall
interest rates. Rather, the decrease in the Federal funds rate
is more likely responsible for the decline in the interest
rates consumers have seen.
I also would like to place in the record testimony before
this committee, before the former head of Freddie Mac. He was
testifying on housing, but then he started talking about credit
cards. And he talked about how he and his wife had sat down at
dinner and tried to figure out their credit card disclosure and
could not figure it out. This is the former head of a very
important financial institution. And I think that says volumes.
Also, the Federal Reserve, in some of the reports,
testified that Reg Z, or transparency, was not enough, that you
needed changes, fundamental changes for unfair, deceptive, and
anti-competitive practices, and I feel strongly that we should
move forward and pass the Credit Card Bill of Rights.
I would like to ask Ms. Braunstein, now that the Federal
Reserve has labeled a number of practices as unfair, deceptive,
and anti-competitive, how in the world can it be justified to
the American people that they should have to wait until July
2010 until they get relief of these practices?
And secondly, you testified that you need roughly 18
months. Are there some aspects of the rule or the legislation
that could be implemented quicker? Possibly there are some that
have form changes which are more difficult, but are there
others that we could implement in a more, I would say,
reasonable timeframe?
Ms. Braunstein. We did look at that. And what we found was
that pretty much everything in there, it is part of a whole
package and there is a lot of overlap between what is going to
be on the new disclosures versus what would be changed in the
pricing models. Everything kind of ties together and is
interconnected, and it made more sense to have one effective
date for everything.
So that is why we did that. We feel that it really is--
there is a lot of interconnection between the different moving
pieces.
Mrs. Maloney. What was your personal recommendation for a
timeframe?
Ms. Braunstein. Eighteen months. The staff's recommendation
was 18 months.
Mrs. Maloney. I have spent so many hours and asked so many
questions on this bill, I am going to give back my time so my
colleagues can have more time to ask their questions.
I just want to conclude that of all of the issues that I
have worked on, this one has generated the most comments. Like
the Fed, it is hard for me to go to the Floor of Congress
without getting a credit card story or to walk into a
supermarket without getting a credit card story or get into the
subway or the bus without strangers coming up and telling me a
story that they feel was unfair and deceptive to them.
And I truly believe that our commerce works better, our
democracy works better when people understand the rules and
make a decision that that is the rule they want to follow.
I am very proud of having authored, along with many of my
colleagues, the ATM disclosure. When you go to get your ATM
money, many people wanted to ban institutions, financial
institutions from getting any type of fee, but if they are
providing a type of service, they are entitled to a fee. It
allows the consumer to say ``yes'' for the convenience to
access my bank account from Washington, I am willing to pay
that fee. But it gives the consumer the power to control their
own financial decisions, and I feel that is what is important.
And I think that is what we tried to accomplish in the bill, to
give consumers more choice and more control in making decisions
about managing their own finances.
I yield back my time.
Ms. Braunstein. Congresswoman?
Mrs. Maloney. Yes.
Ms. Braunstein. Can I just make one really quick comment? I
do want the say in terms of the effective date that we have as
an agency, and including Chairman Bernanke, has made public
comments that we would expect and hope that the industry would
implement pieces as soon as was practicable for them--and I say
that in my testimony--so we could be--we are hopeful that we
will see some implementation before the 18-month deadline.
Mrs. Maloney. I thank you for that, and I would like to
applaud the industries that have voluntarily gone forward and
implemented these improvements.
Chairman Gutierrez. The time of the gentlelady has expired.
Mr. Bachus, you are recognized for 5 minutes.
Mr. Bachus. Ms. Braunstein, back on December 18th, Chairman
Bernanke asked you how long it would take to implement the
Federal rules for credit cards and if it could be implemented
before July 1, 2010, and your response was that card issuers
are going to need to rethink their entire business models. They
are going to have to redesign their marketing materials, their
solicitations, their periodic statements, all of the pieces of
paper that they use, their contracts, all of that is going to
have to be redesigned. And you mentioned several other things
they would have to do. And in fact, I would like to introduce
into the record--these are the Fed rules and regulations that
the credit cards companies have to comply with.
Chairman Gutierrez. Without objection, it is so ordered.
[The documents referred to can be accessed at the following
link: http://www.federalreserve.gov/boarddocs/meetings/2008/
20081218/openmaterials.htm]
Ms. Braunstein. I am glad I didn't have to carry those up
here today.
Chairman Gutierrez. The cost might be prohibitive, but we
are going to introduce it.
Mr. Bachus. Yes, I am not even sure I could read these in
the time allotted. But all that is going to take a lot of time,
so my question to you--and this may be kind of a set-up
question. I mean, you could drive this a long way.
Is it still your belief that the credit card companies will
literally be unable to meet the 90-day deadline in the Maloney
bill?
Ms. Braunstein. Yes. As I have said already, yes, I do
think that would be an almost impossible task for all of us,
not just for the industry but also for the regulators, to have
to conform the rules and do what we need to do.
Mr. Bachus. And with two alternatives the credit card
companies would have if they couldn't comply, they could cut
people loose from their credit. That would be one alternative.
I mean, they would have to just stop--
Ms. Braunstein. I don't know. I can't answer for the
industry as to what they would do. But I know that we, as I
said, we would be concerned that if it was rushed and they
didn't do it correctly, there would not be confidence in the
risk models. And that certainly could have impacts on the flow
of credit in the marketplace.
Mr. Bachus. Right. And if they didn't comply, they could
all be sued, is that correct, for violating the rules? If they
weren't able to comply and they did one little thing wrong that
violated this--
Ms. Braunstein. Well, yes, if the rule--depending on how
you write the legislation, but right now, I think it is under
TILA so there would be private rights of actions.
Mr. Bachus. Okay. That would be something.
I yield the balance of my time to the gentleman from
Delaware, Governor Castle.
Mr. Castle. Thank you for yielding.
Let me ask this question first, Ms. Braunstein. You have
indicated that the Fed has said that the credit card issuers,
6,000 of them, should make their changes as soon as
practicable; they shouldn't wait for the 18 months.
Do you have any evidence of that actually happening? It may
be more anecdotal than will be actual data-wise, but can you
fill us in on that?
Ms. Braunstein. Well, anecdotally, I mean, we are
constantly doing outreach both to the industry and also to
consumer and community groups, and, in some of our
conversations with industry, they have certainly started. I
don't know--I don't have any anecdotal evidence as to what
their timeframe is earlier than the 18-month compliance date,
but we have had conversations where they have developed
flowcharts and that they are trying to put the pieces in place.
So it is underway. It is definitely underway.
Mr. Castle. I am really asking you to do my work when I ask
this next question, I think, and perhaps it is a question for
all of you. But can you explain if there are differences in the
two bills that we are considering today and the regulations
which you have drafted at the Fed, and, if there are, what they
might be?
Ms. Braunstein. There are differences. And one of the
recommendations I would make is, if Congress does move forward
with this bill, if your committee moves forward, is you may
want to take a look at that on both sides. I know that, in
pricing, we changed some things.
I think when the bill was drafted, it was done on the basis
of the proposed rules we had issued in May of 2008. We made
some changes in our final rules, and that was due to the public
comments we received and our analysis of the issues. We
actually went further than the bill does on pricing
restrictions and repricing of existing balances and also making
sure that you cannot change the price for any reason during the
first year of the cards. We went a little further on that.
There are some differences in payment allocation. There are
a few other things. And we would encourage you to, you know,
take a look at those.
Mr. Castle. My time is up, but I may be next anyhow.
Mr. Watt. I don't think so.
Mrs. Maloney. [presiding] Mr. Watt?
Mr. Castle. I mean, not next. After the other side. Excuse
me.
Mrs. Maloney. Mr. Watt, and then we will come back to Mr.
Castle.
Mr. Watt. Am I recognized yet?
Mrs. Maloney. Yes, you are recognized.
Mr. Watt. Thank you.
Actually, I want to follow the same question, but I want to
get more specific. I actually would--I think the committee, the
full committee, would benefit from side-by-side analysis of the
differences from the regulators who drafted the regulations
that are to go into effect.
Ms. Braunstein. We would be happy to have staff come up--
Mr. Watt. Let me be clear on what I am asking for: a side-
by-side analysis and an explanation of why any changes--any
differences, why you chose to go either higher or lower,
because I think that would be very helpful to the committee in
assessing.
I know there are other differences in what you proposed and
what the bill proposes other than just the July 1, I guess,
2010, implementation date is your drop-dead date at this point.
And you have done an outstanding job of explaining why there
are some implementation delays, but I think the committee would
benefit from an explanation of all of the differences and why
you opted for what you did, either greater or lesser than what
the bill does.
And if I could request that in writing, then I would be
happy to yield back all of my time.
Ms. Braunstein. We have that information in-house.
Mr. Watt. Because I think that is the kind of thing that,
really, even if we got it verbally, would probably not be all
that helpful to us.
So I hope I have helped Mr. Castle. Even though he wasn't
next, I kind of picked up on where he was going, and that was
the question that I was planning to ask anyway.
I have an important assignment on a plane, so I am going to
yield back.
Ms. Braunstein. Congressman, can I just say that we have
that information, we have done those kinds of analyses, and we
will be happy to share those with you in writing.
Mrs. Maloney. And share it with the committee.
Ms. Braunstein. Yes.
Mrs. Maloney. Thank you.
Mr. Watt. I know the committee will get one, but, you know,
it takes a while, so I am asking this question for myself. So
at least give the committee, Mr. Castle, and me one--
Ms. Braunstein. Not a problem.
Mr. Watt. --since we are tag-teaming this question. Thank
you.
Mrs. Maloney. Thank you, Congressman.
Congressman Castle?
Mr. Castle. Thank you, Madam Chairwoman.
And I thank Mr. Watt for asking my questions better than I
did, but I also would very much like to see that copy of
whatever these differences are.
And, to me, it is going to come down, to a degree, not
completely, but to a degree, to this time differential and the
ability to be able to put this into effect or not. And I
realize that you are speaking as a regulator, and maybe others
should speak to it, as well. But we have all the issuers, too,
and you spoke for them, to a degree, also.
But, you have the whole problem of passing legislation,
which is going to get even closer to the 18 months left in
yours, and then you are going to have the problem of dealing
with the issuers, as well as whatever dealings you are going to
have to do with the legislation. And, to me, it gets
complicated.
When we first passed the chairwoman's legislation, I forget
whether it was 18 months or not, but I guess it was, but that
was 6 months or so ago or more at this point. And, as that time
narrows, I think it is going to get even more complicated to
complete this task. I think we need to be careful about this.
One thing we need to remember is we do have 6,000 credit
card issuers. They are carrying out a business. They are, in
many instances, in most instances, related to financial
institutions which have had some strains, and I am a little
concerned about how far we can push them at this point.
And I don't know if that is in the form of a question, but
if you want to respond to it, you may, Ms. Yakimov.
Ms. Yakimov. Well, thank you, Congressman Castle.
I think the point about the implementation date, the
effective date, is an important one to try to get right. And
what we tried to balance was our interest in providing
significant new consumer protections while, at the same time,
giving the industry the time that they needed to get it right.
And we certainly didn't want to cause major disruption.
One example to point to is the provisions that deal with
the subprime issuers, where we have said that they cannot
charge a fee in connection with getting the card that takes the
majority of the credit line. And, taking it one step further,
they can't charge more than 25 percent. So they can't charge
more than 50 percent, and they can't charge more than 25
percent during the first month.
Issuers that have built a niche in this space will really
have to think through what is their new business model so that
they can continue to offer credit.
That is just one example of some major changes. The changes
on the limitations to retroactive rate increases will have a
significant impact. These protections are really important, but
we wanted to give the industry time to, as Sandy points out
quite well, comply with TILA changes, do the training, do
testing, do they need new product lines, and all the rest.
Mr. Castle. Well, I appreciate that. I mean, I hate to make
this comparison, but I watched what we did on the Floor today
and how we have been handling some of the TARP money and the
AIG issues or whatever. And sometimes when we rush legislation,
like in the stimulus package, we end up with problems, such as
the bonus situation with AIG.
It just seems to me that the Fed has gotten all these
different 56,000, I guess, inquiries as a result of the
preliminary rules which you have issued. You have now gone
back, and all your Agencies have been involved, and you have
looked at what that should be, and you have come up with a
plan, and it takes a long time to implement it. We are talking
about a lot of credit card issuers.
And I don't in any way discredit the legislation. I happen
to believe that the chairwoman is right in terms of what she is
trying to do. But I am mightily concerned about the ability to
do this. I mean, the credit card companies don't like what you
have done much more than they like the legislation. But they
may be put in a situation where you can't carry out your
responsibilities and they can't carry out their
responsibilities. And that concerns me a great deal.
So my hope is that we could, at some point, agree to just
move forward as rapidly as we can with the regulatory practices
which the Fed has drawn up as just a better way of proceeding
for everybody who is involved with this in getting to the same
end, on which there is general agreement, I think, in this
committee and probably in the Congress, if I had to guess.
And with that, I yield back, Madam Chairwoman.
Mrs. Maloney. I thank the gentleman for his concern, but we
have had well over 4 hearings on this legislation over a 2-year
period and numerous smaller roundtable discussions and meetings
with stakeholders and industry and regulators on it. So it has
been very deliberative.
I now recognize Congressman Moore.
Mr. Moore of Kansas. Thank you, Madam Chairwoman. And I
appreciate your efforts to strengthen consumer protections on
the use of overdraft services. In this time of financial
crisis, we need to do what we can to protect our consumers.
Ms. Braunstein, in your testimony, you note that the Fed
has offered a proposal to, ``give consumers greater control
over the payment of overdrafts.''
I understand the Fed has already issued rules to address
depository institutions' disclosure practices related to
overdraft services that take effect January 1, 2010, and the
public comment period of the Fed's overdraft protection
proposal ends on March 30, 2009.
You also note that, ``After evaluating the comments and
conducting additional consumer testing, we expect to issue a
final rule later this year.''
Ms. Braunstein, when would you expect the Fed to issue that
rule? And do you have any comments on H.R. 1456, the Overdraft
Protection Act, as it relates to the Fed's efforts?
Ms. Braunstein. As you say, our comment period on the Reg.
E proposal we put out ends the end of this month, and we will
look at the comment letters. We are hoping to have final rules
out during the summer. And so, you know, we are moving forward
on that. So we are hoping to have the final rules in the
summer.
Mr. Moore of Kansas. Final rules, that will be?
Ms. Braunstein. For overdraft protection. I am talking
about on the proposal we just issued on giving consumers a
choice.
Mr. Moore of Kansas. Any better estimate as to when,
besides this summer? Is that the best estimate you can give me
right now?
Ms. Braunstein. Yes, I think so, at this point, because we
need to see what comments come in, how long it takes to do the
analysis, and get the final rules completed.
Mr. Moore of Kansas. Thank you.
I yield back, Mr. Chairman.
Chairman Gutierrez. The gentleman yields back. Mr. Lee is
recognized for 5 minutes.
Mr. Lee. Thank you.
I think I am going to try to take this in a slightly
different direction. I actually may be an advocate of what you
are going through because my background was running
manufacturing businesses, and I lived through, firsthand, doing
major implementations of our enterprise system of our business.
And I can attest on some of the difficulties.
But starting off with--I agree with Chairwoman Maloney's
bill in terms of the content of we ultimately want to protect
consumers and that this is an issue that we definitely want to
move forward on. At the same time, I see what the Federal
Reserve has done over the past few years and is painstakingly
taking the time to make sure we get this right, and I do
applaud that.
But my concern is, when we have ever, from a business
perspective, done an implementation on major changes, which
you, Ms. Braunstein, have alluded to, the best case is you can
do that in a year. And, like you, I am concerned about the risk
of trying to push through legislation that, within 90 days,
could have a very detrimental effect.
In one of the implementations we did for our company, when
we ultimately went live, after testing for almost a year, our
go-live scenario almost put our company under, based on the
fact that the system did not work the way we thought it would.
We had thousands of lost records and lost many customers along
the way. So my concern is making sure we do this in a way that
not only protects the consumer but also makes sure that we have
a system put in place that adequately functions.
My question to you is--because, like everyone, we want to
get this implemented as fast as possible--is there any time we
could shave off this, at this point, 18 months if we were
focused?
Ms. Braunstein. I don't know. I really think--I know that
we looked at it very thoroughly when we came up with the 18
months. We knew, frankly, that that was going to be something
that we would get a lot of criticism on from consumer community
groups, from certain Members of Congress. We didn't go into
that blindly.
So we did spend a lot of time looking at that and talking
about that issue and searching it out, and that is where we
came out on this. I think that is a discussion you need to
have, in terms of--or have with the industry and see if you
think it could be done sooner.
Ms. Yakimov. May I add something?
One of the things that we are doing, as we look at the
institutions that offer credit cards within OTS, is checking on
the progress they are making in terms of preparing. In
December, we issued a CEO letter from our principal, saying,
``Look, we are looking for you to implement as soon as you
possibly can.'' Through the exam process in there, we can
continue to monitor that.
The other thing I point to is we just recently, last month,
had a conference call collectively with the Federal Reserve and
NCUA. We had more than 700 institutions participate, 700 lines.
We are hearing from the industry that they are working hard,
they are getting after this. So we will continue to monitor.
Mr. Lee. Would anybody be able to offer up any--if we
flipped the switch in 90 days, which I am dramatically opposed
to, just based on what my historical reference has been on
doing 3 implementations from a software standpoint, could you
name any specific risk that you would see that would come out
of this?
Ms. Braunstein. Well, as I have mentioned a couple of times
today, I think the risk--I am not sure that it is even doable,
but the risk of rushing this would be that the models would not
be fully developed. New funding mechanisms would not be in
place because the risk models would be in doubt, and that could
put some severe constraints on the availability of credit. I
think that is a very real concern.
Mr. Lee. Thank you.
I yield back.
Chairman Gutierrez. Thank you.
Mr. Green, you are recognized for 5 minutes, sir.
Mr. Green. Thank you, Mr. Chairman.
And I thank the witnesses for their testimony.
I, too, am going to pursue this line of questioning with
reference to the timeline. Do you have any empirical evidence
to support the notion that one time is more beneficial than
another, that having 18 months is more beneficial? I understand
that you have beliefs, but what empirical evidence did you
acquire?
Ms. Braunstein. We spent a lot of time talking to industry.
We also have a lot of years' experience with implementation of
other regulations, and we looked at those and how long it took
to put systems in place to get those regulations up and
running.
Mr. Green. Give me an example, if you would, please. I am
looking for the actual empirical evidence, as to opposed to a
commentary about how you approached it.
Ms. Braunstein. Can we get back to you with that
information?
Mr. Green. Well, could you just give me one example of
another industry or some other time that you actually had to do
this and the actual amount of time that it took?
The obvious answer is, yes, you are going to get back to
me, but if you have something today, I would be more than
anxious to hear it.
Ms. Braunstein. Well, I know when we put major TILA
changes, truth-in-lending changes, in place in the past, we
have always had to go out at least 12 months in advance to get
those in place. And this is even more comprehensive than that,
because this is involving several regulations.
Mr. Green. Did you exercise this 12-month rule based on
other empirical evidence, or has this just become custom and
tradition?
Ms. Braunstein. No, as I say, we have talked extensively
about the kinds of systems changes that are needed, you know,
the forms that need to be developed, the time it takes to do
that. I think you could probably get even better data from the
industry, in terms of their workflows.
Mr. Green. Well, my suspicion is that the industry will
give me enough information to help me with my 18-month
conclusion, if that is my end. But what I am trying to do is
actually fairly understand what went into the computations. And
so far I am hearing you say, we have talked and, after talking,
we sort of came to a conclusion.
And I am interested in knowing, for example, it takes ``X''
amount of time to develop the computer program, it takes ``X''
amount of time to run the model. Have you done that kind of
analysis?
Ms. Braunstein. We could get back to you with that
information. I am not prepared to go into that level of detail
today, but we could certainly get back to you.
Mr. Green. Yes, ma'am.
Ms. Yakimov. I would just add, some of the comments that we
got from industry and from some of the vendors that the
industry worked with to process changes, such as 21 days to
make sure that people have a reasonable period of time to make
their payment, those types of systems-based changes that we
have made in the rule. We did get a fair amount of fairly
specific comments from industry and from vendors that are part
of the record. I can't give you rule-specific--
Mr. Green. Would you do this for me? Define ``industry''
for me. When you say ``from industry,'' I think I know what you
are referencing, but why don't you tell us so that we will have
it for the record?
Ms. Yakimov. From some of the major credit card issuers
that commented about the implementation period. They commented
about what, from their experience, they felt they would need to
do in order to comply with the rule as it was proposed. We got
comments from them and from, as I said, vendors that provide
back-room support.
Mr. Green. Is it possible that there may be a hint of--may
be a scintilla of bias associated with that sort of
intelligence coming from what you have defined as the
``industry?''
Ms. Braunstein. Absolutely. That is why, like I said in the
beginning, this was a conclusion we came to. I think the
industry actually requested longer. From what I remember in my
conversations--this was months ago now--but, you know, most of
the industry was telling us they would need a minimum of 2
years or even longer. So, yes, we did put that factor into our
calculations.
Ms. Yakimov. Right.
Mr. Green. Well, just as a parting comment, and I am really
doing some soul searching, but the anecdotal comments that I
get from consumers would connote it can be done right away and
I want it done right now. So consumers have an immediate need,
as they see it, when they talk to me. I understand that
industry has a need, as well, which is why I conclude that
empirical evidence is the best way to arrive at a reasonable
decision. Thank you.
I yield back. Thank you, Mr. Chairman.
Chairman Gutierrez. Congressman Neugebauer, please.
Mr. Neugebauer. Thank you, Mr. Chairman.
One of the problems with getting to the dance late is the
dance card gets filled up. And so, a lot of the questions that
I have were already asked, but I want to go back on a couple of
things.
Ms. Braunstein, one of the things you said was--and I think
Ms. Yakimov--I think you both said that some of these things
the industry is already starting to incorporate into their
business model. And one of the things--I am obviously not in
that credit card business, but this is going to require a lot
of software modifications, a lot of internal operational
procedures, and somebody is not just going to flip a switch in
2010 and say, okay, we are on the new system.
So I have to believe that the industry--and we will have
some of those folks here--but I have to believe that, as I
understand it, they will have to be in compliance by that date,
if I am not mistaken. And so it would appear to me that process
is going to be an evolving process. Am I misreading that?
Ms. Braunstein. No, that is correct.
Ms. Yakimov. That is right.
Mr. Neugebauer. You believe that is true? And, as you said,
in some of the banks that you all have been in, you have begun
to see some of that implementation already taking place?
Ms. Yakimov. We have a group at OTS that specializes in
following credit card issues. We have seen, for example, we
track, are there noncurrent and charge-off--the amount of
noncurrent loans and charge-offs, how is that changing over
time.
This is the group that specializes in collecting a whole
host of data from the institutions through our supervisory
process. And that is the group that we are using to give us
periodic reports on how the industry is preparing, and we will
continue to do that.
Mr. Neugebauer. Because I have some credit cards, and I am
already getting changes in the contract and changes in the
terms that are very consistent with the new regulations. And so
I think some of the credit card companies are already moving in
that direction.
And, of course, I guess I want to continue to be ``Mr.
Disclosure'' to all of you, as Ms. Braunstein knows--she has
appeared before us before. We have to get to a universal
consumer disclosure that is simple and easy to read, because I
think a lot of the issues that are driving a lot of our
consumer complaints and people who are getting into trouble
with their credit, some of that is poor choices that they are
making. And we can't legislate nor can we correct poor choices.
We can fix poor information and poor disclosure.
And I know there are some reforms in this, but I think one
of the things that we almost need to get our consumers used to
is, whenever they are looking at any kind of credit, they are
looking at that same disclosure statement, no matter what type
of credit is, so they get accustomed to seeing that and so they
know what to look for on that, so that we don't have people who
say, ``Oh, I didn't know.''
So I thank these witnesses.
And, with that, I will yield back, Mr. Chairman.
Ms. Braunstein. Congressman, could I just say a word about
disclosures?
Mr. Neugebauer. Yes, please.
Ms. Braunstein. This package includes a complete redesign
of credit card disclosures under the Truth in Lending Act, and
those are all consumer-tested. And we did indeed find, one of
the interesting pieces of that, as you know, years ago Congress
legislated something that is referred to as the ``Schumer Box''
for credit cards that has all kinds of information in the
solicitations in a box. People did recognize that and found
that very useful.
So, in fact, when we redesigned disclosures, we made the
account opening statements consistent with the solicitations,
utilizing a box tabular format, because we found--so what you
are saying is absolutely right. Consumers look for certain
information. And we try to, you know, do that in the redesigned
disclosures. And hopefully we have been--
Mr. Neugebauer. So over at HUD and all of the other
places--
Ms. Braunstein. Well, that was last week's panel.
Mr. Neugebauer. I know, but I find if you say it over and
over and over and over again, eventually maybe it gets done.
So, thank you.
Chairman Gutierrez. Thank you.
Mr. Cleaver, you are recognized for 5 minutes.
Mr. Cleaver. Mr. Chairman, I will forego any questions in
an attempt to bring the next panel up.
Chairman Gutierrez. Thank you so much. With unanimous
consent, we will accept that. Thank you so much, Mr. Cleaver.
I want to thank all of the panelists for their testimony
here this afternoon.
And, Ms. Braunstein, since last week, you know, we are kind
of a little critical about how long it took between the time
the legislation--we really would like to compliment everybody
at the Fed for working so quickly on the new regulations, the
UDAP and the Z regulations, and working on them quickly. You
know, we have to balance ourselves out.
Ms. Braunstein. Thank you so much.
Chairman Gutierrez. Thank you so much to all of the
panelists for being here.
Let me introduce the second panel.
Mr. Kenneth J. Clayton is senior vice president/general
counsel for the American Bankers Association Card Policy
Council.
Ms. Linda Echard is president and CEO of ICBA Bancard and
is testifying on behalf of the Independent Community Bankers of
America.
Mr. Douglas Fecher is the president and CEO of Wright-Patt
Credit Union, Inc., and is testifying on behalf of the Credit
Union National Association.
Mr. Oliver I. Ireland is a partner at Morrison & Foerster,
LLP, here in Washington, D.C., and is testifying on his own
behalf.
Mr. Todd McCracken is the president of the National Small
Business Association.
Mr. Ed Mierzwinski is a senior fellow at the Consumer
Program at U.S. PIRG.
And last, but not least, Mr. Travis Plunkett is the
legislative director of the Consumer Federation of America, who
is appearing before the Financial Services Committee for the
second time this week.
Thank you all for appearing this afternoon.
Mr. Clayton, you may begin your testimony.
STATEMENT OF KENNETH J. CLAYTON, SENIOR VICE PRESIDENT/GENERAL
COUNSEL, AMERICAN BANKERS ASSOCIATION CARD POLICY COUNCIL
Mr. Clayton. Thank you, Mr. Chairman, Mr. Castle, and Mr.
Lee. My name is Kenneth J. Clayton, and I am here on behalf of
the American Bankers Association. I appreciate the opportunity
to testify today on both credit card and overdraft protection
issues.
Credit cards are responsible for more than $2.5 trillion in
transactions a year, and they are accepted at more than 24
million locations worldwide. It is mind-boggling to consider
the systems needed to handle 10,000 card transactions every
second around the world. It is an enormous, complicated, and
expensive structure, all dedicated to delivering the efficient,
safe, and easy payment vehicle that we have all come to enjoy.
They are an integral part of today's economy.
As you have heard today, regulators have taken
unprecedented action in response to consumer concerns over
credit cards. These changes have forced a complete reworking of
the credit card industry's internal operations, pricing models,
and funding mechanisms.
The rule essentially eliminates many controversial card
practices. For example, it eliminates the repricing of the
existing balances, including the use of universal default and
so-called ``any time, any reason'' repricing. It eliminates
changes to interest rates for new balances for the first year
that card is in existence. It eliminates double-cycle billing,
and it eliminates payment allocation methods perceived to
disadvantage consumers.
The rule likewise ensures that consumers will have adequate
time to pay their bills; adequate notice of any interest rate
increases on future balances so they can act appropriately; and
clear information in all card materials that they will notice,
understand, and use to take informed actions in their best
interests.
In sum, the final regulation already covers the core issues
sought to be addressed by H.R. 627.
Card companies are committed to implementing these vast
changes as soon as possible. But policymakers need to
understand that this is an enormous undertaking, requiring
companies to redesign entire risk and operating models that
support hundreds of millions of accounts. And we need to do
this during a time of unprecedented economic turmoil, with
rising delinquencies and locked funding markets that reduce our
ability to make loans, further complicating our task.
Some things to think about: Lenders must rework every piece
of paper, from solicitations to applications to periodic
statements to advertisements; create entirely new business
models that adequately manage investor willingness to fund
lending and regulatory concerns over safety and soundness;
rework, integrate, and test multiple internal systems and
retrain hundreds of thousands of employees so that everything
seamlessly operates together; and subject every step of this
process to detailed legal and regulatory reviews that ensure we
get it right.
Under H.R. 627, we are asked to do all of this in 90 days.
This is extremely difficult. And if such a proposal were
enacted, we would envision three likely outcomes: operational
problems that create billing mistakes and significant confusion
for millions of consumers, while opening ourselves up to
significant legal liability; a significant pullback in
available credit to protect against underwriting risk that we
have not yet had the time to adequately assess; and a potential
for increases in the cost of credit for the very same reason.
Such outcomes will harm consumers, small businesses, and
the broader economy at a time when it can least afford it. We
would urge members to refrain from taking such action.
Let me quickly comment on legislative efforts on overdraft
protection. Overdraft protection provides significant benefits
to millions of consumers every day. It keeps checks from
bouncing and transactions from being denied and avoids the cost
and embarrassment associated with such occurrences. With such
value comes some cost; yet the cost for such protection is
completely manageable. Consumers can take numerous steps to
keep track of their balances and manage the risk associated
with overdrafts in their accounts.
H.R. 1456 would impose operational challenges that are
nearly impossible to implement and that may have the effect of
reducing the availability of this service to consumers, thus
denying them a product in which they find great value. And we
note that legislating in this area may be premature.
The Federal Reserve has a current rulemaking intending to
go at the very issues that are the subject of this legislation.
The comment period for that proposal closes on March 30th; that
is 11 days from now. And the Fed will be poised to act based on
significant input from all interested parties. We urge Congress
to refrain from acting and let the regulatory process be
completed.
Thank you, Chairwoman Maloney. Thank you for the
opportunity to comment on these two legislative proposals. I
will be happy to answer any questions you may have.
[The prepared statement of Mr. Clayton can be found on page
84 of the appendix.]
Mrs. Maloney. [presiding] Thank you very much for your
testimony.
Ms. Linda Echard?
STATEMENT OF LINDA ECHARD, PRESIDENT AND CEO, ICBA BANCARD, ON
BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
Ms. Echard. Thank you, Madam Chairwoman, Ranking Member
Hensarling, and members of the subcommittee. My name is Linda
Echard, and I am president and CEO of ICBA Bancard.
Twenty-five years ago, the Independent Community Bankers of
America hired me to help them leverage the negotiating power of
their members in order to put together a program so they could
afford to be in the credit card business. Today, I work to help
keep their playing field level so the community-bank credit and
debit card issuers can afford to participate and meet the
demands of competing.
I would first like to discuss H.R. 627, the Credit
Cardholders' Bill of Rights Act. While we agree that a small
number of issuers have engaged in practices that are harmful to
consumers, any legislative remedy should focus on transparency,
disclosure, and encouraging consumer choice. The most powerful
force for a change in a market as competitive as credit cards
is the ability of an educated consumer to shop with his or her
feet.
Instead, this measure attempts to prohibit specific
practices, imposing additional costs and burdens on community
bankers who did not contribute to the problems in the industry.
The consequences will cause small lenders to struggle to meet
the credit needs of their consumer and small-business customers
and possibly exit the business entirely. No one benefits if
community banks exit the marketplace.
Throughout my career, I have seen firsthand the
implications of burdensome regulations and mandates, such as
these, on small issuers. At a time when the government is
encouraging efforts by community banks to assist in the
recovery of our economy, passing this bill sends the wrong
message to those who are actually in a position to help.
I would also note that the 25-day statement mailing
requirement and deadline set forth in this legislation for full
compliance are simply not feasible for community banks or their
third-party processors. The mailing requirement does not take
into account statement cycles that fall on or near weekends and
holidays.
Today, community banks can offer credit cards that are
tailored to the needs of their individual consumers, allowing
them to differentiate themselves from the competition. But the
limitation on an issuer's ability to adjust for risks in the
cost of funds in this legislation will fundamentally change the
credit card features that consumers have come to rely on.
I can also see community banks shifting away from fixed-
rate credit card models to variable-rate cards. More broadly,
these restrictions will begin to shift credit cards from an
open-ended, unsecured loan where the consumer largely decides
his or her own repayment schedule to something like the old-
fashioned finance company installment loan.
Shifting to H.R. 1456, the Consumer Overdraft Protection
Fair Practices Act, many community banks offer overdraft
protection programs that are valued by their customers.
Overdraft programs are not all created equal, a fact that gives
community banks the ability to leverage the unique and close
relationship they have with their customers to offer them
competitively priced programs to best meet their needs. This
competitive advantage is an important part of what allows
community banks to serve their communities.
ICBA supports ensuring consumers are fully informed about
the terms and conditions of an overdraft program and are made
fully aware of the choices available to them. However, the
burdens imposed in H.R. 1456 would reduce community banks'
ability to competitively offer these services. This legislation
presents technical and practical difficulties that will serve
to reduce the availability of overdraft coverage to community
bank customers.
Subjecting these programs to regulation under TILA will
likely cause many community banks to do away with discretionary
overdraft programs, leaving consumers only the choices of
linking with another account or qualifying for a line of credit
in order to cover overdrafts. For community bank customers at
the margin, those may not be viable options.
In conclusion, our concerns with these two pieces of
legislation are straightforward: Overly restrictive approaches,
such as H.R. 627 and H.R. 1456, while serving well-intentioned
purposes of addressing questionable practices, will create more
difficulties than they cure.
Community banks want to be able to offer competitive credit
card products and also want to help their customers with
reasonable overdraft programs. Setting rigid parameters under
which a bank may operate a card business or overdraft
protection program will discourage already overly burdened
community banks, pushing them to reduce the number of products
and services they can currently offer.
Thank you for the opportunity to be here today.
[The prepared statement of Ms. Echard can be found on page
107 of the appendix.]
Mrs. Maloney. Thank you.
Mr. Fecher?
STATEMENT OF DOUGLAS FECHER, PRESIDENT AND CEO, WRIGHT-PATT
CREDIT UNION, INC., ON BEHALF OF THE CREDIT UNION NATIONAL
ASSOCIATION (CUNA)
Mr. Fecher. Good afternoon. Thank you for giving me the
opportunity to testify today regarding H.R. 627 and H.R. 1456
on behalf of the Credit Union National Association. My name is
Doug Fecher, and I am president and CEO of Wright-Patt Credit
Union in Fairborn, Ohio.
Wright-Patt Credit Union serves 170,000 everyday Americans
in the Miami Valley, just outside of Dayton, Ohio, including
the airmen and airwomen of Wright-Patterson Air Force Base. Our
philosophy is to help everyday people save more, smartly use
credit, and improve their family's financial wellbeing.
My written testimony goes into greater detail regarding
CUNA's concerns with the two bills under consideration today.
In general, we support what the legislation is trying to do;
however, we do have serious concerns with the approach being
taken by H.R. 1456.
I am a practical thinker and come from the perspective of
the people I serve: Americans who are faced with making daily,
routine financial decisions that are best for their family,
often with limited resources. What matters to them is making
their paycheck last from one payday to the next, how they are
going to pay for the things they need, not to mention the
emergencies that they sometimes face.
The bounce protection legislation being considered is well-
intentioned but, as a practical matter, will limit consumer's
access to legitimate financial services and may be technically
impossible to implement.
I want to be clear: Credit unions support reasonable
changes to laws governing overdraft programs. While we oppose
this legislation in its current form, we would like to work
with supporters to eliminate predatory activity without making
it impossible for responsibly offering these services to
consumers.
We have three suggestions aimed at improving this bill:
First, instead of amending the Truth in Lending Act, we
recommend that the bill be redrafted to amend the Truth in
Savings Act. This gives Congress the opportunity to require
meaningful disclosures to users of these programs, such as the
true dollar cost and the available alternatives.
It would also avoid the problem that the bill in its
current form creates with respect to the Federal credit union
usury ceiling. If this bill were law, it would cause credit
unions offering these programs to exceed the usury ceiling
prescribed by the Federal Credit Union Act, presently 18
percent. Since even a modest fee would exceed this threshold,
as a result, credit unions would no longer be able to offer
these services, driving their members to higher-cost service
providers.
Second, H.R. 1456 has the potential to present significant
operational issues by requiring a written agreement with the
member prior to the extension of any overdraft coverage. CUNA
suggests that the bill provide a change-in-terms disclosure
when overdraft protection is offered and specifically require
that a consumer can fully opt out if he or she so desires.
Finally, the requirement that consumers be notified at an
ATM or point of sale that the transaction will cause an
overdraft represents a compliance burden that we do not believe
can be met, given credit union current technology. There may be
other ways to notify consumers that they are about to trigger
an overdraft event. A sticker or a first-screen general notice
alerting the consumer that a withdrawal from the ATM may
trigger an overdraft may be appropriate.
To the extent that the subcommittee feels that real-time
disclosure is important, we suggest limiting that type of
requirement to disclosure on ATM networks that are controlled
by the financial institution to which the consumer is
affiliated.
To summarize our overdraft concerns, we should not make
legislation that removes choice from the market. Credit unions
offer these services in a way that solves a sometimes serious
problem for consumers. While we should disallow having the
manipulation of accounts done for the sole purpose of
extracting more and higher fee revenue from unaware consumers,
we should not eliminate responsible providers from the market.
We look forward to working with the subcommittee to address
these concerns.
I would like to make a brief comment with respect to H.R.
627, the Credit Cardholders' Bill of Rights Act. We agree with
most provisions of this legislation. However, we do have two
concerns we would like the subcommittee to address and one
suggestion.
Our primary concern is the bill's effective date. Were this
bill to become law, credit unions would have only 90 days to
comply with the same requirements with which they are already
currently adjusting their systems to comply with about 15
months from now. We believe such a requirement would be overly
burdensome and expensive for America's credit unions and
ultimately unnecessary, as the credit unions will be in
compliance in due time.
Our second concern involves the provision prohibiting the
issuance of a credit card to a consumer under the age of 18
unless the consumer has been legally emancipated under State
law. While we agree with this provision, we believe there
should be an exception for cards that are co-signed by a parent
or guardian.
Finally, we ask that the subcommittee include in this
legislation a provision that directs the Government
Accountability Office to study the impact of merchant data
breaches on consumers and financial institutions. When
merchants lose consumers' personal data, including credit card
information, the cost of the breach is borne almost entirely by
the financial institution and the consumer. We believe this
imbalance deserves additional scrutiny and study.
Again, thank you for giving me the opportunity to testify
today. I will be available to answer questions. Thank you very
much.
[The prepared statement of Mr. Fecher can be found on page
118 of the appendix.]
Mrs. Maloney. Thank you.
Mr. Ireland?
STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & FOERSTER
LLP
Mr. Ireland. Good afternoon, Acting Chair Maloney, and
Ranking Member Hensarling. I am a partner in the Washington,
D.C., office of the law firm of Morrison & Foerster. Prior to
joining Morrison & Foerster, I was an Associate General Counsel
at the Board of Governors Federal Reserve System for over 15
years and worked at the Federal Reserve Banks of Boston and
Chicago before that. I have almost 35 years of experience in
banking and financial services, and I am pleased to be able to
appear here before you today to discuss H.R. 627 and H.R. 1456.
Today, American households are experiencing extreme
financial pressure. Equity that households have in their homes
is at an all-time low, and their net worth has fallen 20
percent since the third quarter of 2007. Moreover, unemployment
in February of 2009 was 8.1 percent, the highest since 1983.
As unemployment grows, affected households must
increasingly rely on the ability to borrow to meet day-to-day
expenses. Any congressional regulatory efforts to modify credit
card practices need to pay particular attention to the
potential to unnecessarily limit the availability of this
source of credit for these households.
H.R. 627 would limit credit card practices by credit card
issuers, and H.R. 1456 would limit overdraft practices at
institutions holding consumer deposit accounts. In both cases,
recent or pending Federal Reserve Board rule-writing efforts
would address these policy concerns.
For example, in December of last year, the Board, working
with the OTS and the NCUA, adopted the most sweeping regulatory
changes to credit card practices ever. The Board also is in the
process of addressing fees for overdrafts and consumer
accounts, including whether there should be an opt-in or opt-
out for overdraft fees, the form of the notice to be given, the
treatment of debit holds, and related issues.
At this point in time, adopting either H.R. 627 or H.R.
1456 runs the risk, at best, of creating conflicting statutory
and regulatory regimes. At the extreme, new legislation or
credit card practices could lead to significant limitation on
the availability of credit to American households.
For example, H.R. 627 calls for its provisions to become
effective in 3 months, instead of July 1, 2010, the effective
date for the UDAP and Regulation Z rules. Similarly, the
provisions of H.R. 1456 differ significantly from the Board's
proposal. Some aspects of H.R. 1456, such as the opt-out for
point of sale, are simply unworkable, and others, such as the
opt-in, are likely to lead to a significant disruption in
consumer payments, to the detriment and ire of both consumers
and merchants.
A 3-month effective date in H.R. 627, in particular, would
present serious operational problems and could significantly
curtail access to credit. Credit card issuers will be faced
with enormous changes in highly automated systems. Any effort
to accelerate these automation changes may simply fail or
result in significantly higher levels of processing errors.
Perhaps more significantly, the repricing and payment
allocation provisions would affect as much as $12 billion a
year in revenue for credit card issuers. In order to recover
this lost revenue, as a practical matter, credit card issuers
only have two possible options: raise rates and fees; or reduce
the amount of credit risk in their portfolios.
Early implementation of the repricing limitations, however,
would severely limit the rate option. Credit card issuers would
have no cushion of profitability to absorb the increased costs
and would have no choice but to take steps to reduce risks in
their portfolios. These steps would reduce the amount of credit
available to households significantly when they need it most
for ready access to credit.
I appreciate the opportunity to appear before you here
today and would be pleased to answer any questions.
[The prepared statement of Mr. Ireland can be found on page
127 of the appendix.]
Mrs. Maloney. Thank you very much.
Mr. McCracken?
STATEMENT OF TODD McCRACKEN, PRESIDENT, NATIONAL SMALL BUSINESS
ASSOCIATION (NSBA)
Mr. McCracken. Good afternoon, Madam Chairwoman, Ranking
Member Hensarling, and members of the subcommittee. My name is
Todd McCracken, and I am the president of the National Small
Business Association, America's oldest small-business advocacy
organization.
Historically, small businesses have led America's
resurgence out of periods of economic distress and uncertainty.
Previous small-business-led economic recoveries were based
substantially on the creation of millions of new small firms.
How did these aspiring small-business owners do it? Besides
possessing an entrepreneurial streak, they were able to finance
their dreams through a number of means, most of which are
currently unavailable or restricted. They borrowed from
themselves, often through second mortgages and the like; they
borrowed from their friends and family; or they borrowed from a
bank.
Aspiring business owners would be hard-pressed in the
current environment to self-finance their entrepreneurial
dreams. Home prices are down, and so are the stock portfolios.
The same is true for their friends and families. Banks have
tightened their lending standards, and there has been a drastic
reduction in the number of SBA loans being made. Even those
banks on the receiving end of billions of dollars of taxpayer
dollars have not increased their small-business lending.
Where does this leave the aspiring entrepreneurs who will
lead the Nation out of its recession? Increasingly reliant on
their credit cards. Credit cards are now the most common source
of financing for America's small-business owners.
Although they are increasingly turning to credit cards to
finance their business ventures, more than two-thirds of
surveyed small-business owners report that the terms of their
cards are worsening, however. This is not good news for
America's economy, which is heavily reliant on a robust and
thriving small-business community. The billions of dollars
generated from outlandish retroactive interest rate hikes, the
escalating imposition of undisclosed fees, and unilateral and
unforeseen interest rate increases is money diverted from
economic development.
America's small-business owners are not in the habit of
advocating for the passage of increased Federal regulations, as
I am sure you know, preferring free enterprise and market
solutions. But the current practices of the credit card
industry defy the principles of a competitive market. While
welcoming the enactment of the Unfair and Deceptive Acts or
Practices, UDAP, rule, NSBA believe that it is necessary to
codify these rules and enact them sometime before July 2010.
While NSBA supports the enactment of H.R. 627, there are
two major aspects of credit card reform the bill does not
address. One is interchange fees, and the other is exemption of
small-business cards, and we urge Congress to address both of
these things.
As much as $2 of every $100 in credit or debit card
receipts goes to card issuers through interchange fees, which
have increased over the last decade from being about 13 percent
of card issuer revenue to being about 20 percent, and inflating
the cost of nearly everything consumers buy. In total,
Americans paid more than $42 billion in interchange fees in
2007, about twice as much as they paid in credit card late
fees. NSBA urges Congress to adopt legislation similar to the
Credit Card Fair Fee Act or the Credit Card Interchange Fees
Act of 2008, which were introduced during the 110th Congress.
The largest loophole in H.R. 627 is the absence of explicit
protection for small-business owners who use their cards for
business purposes. Since H.R. 627 amends the Truth in Lending
Act, which, except for a few provisions, does not apply to
business cards, its protections are limited to consumer credit
cards. Although the credit cards of many, if not most, small-
business owners are based on the individual owner's personal
credit history, it is conceivable that issuers could legally
consider them exempt from H.R. 627's vital protections.
TILA defines a ``consumer'' as a natural person who seeks
or acquires goods, services, or money for personal, family, or
household use other than for the purchase of real property.
While a small-business owner who opens a personal credit
account and uses it occasionally for business should be
covered, it is far from clear that this legislation would
protect a small-business owner who used his card exclusively or
even primarily for business purposes.
Although in the past issuers appear largely to have kept
most of their cards in compliance with TILA, there is no
guarantee this convention will continue, especially when one
considers that its basis appears to have been practicality and
not legal obligation. Since issuers were able to subject
consumer cards to the most egregious of practices, there was
little incentive to distinguish between consumer and small-
business cards. An unintended consequence of H.R. 627, if it
remains unamended, is that this legislation could provide just
such an incentive.
Accordingly, NSBA urges Congress to correct this oversight
and extend the protections of TILA, the UDAP rule, and H.R. 627
to business cards of small businesses. It is inconceivable that
Congress would knowingly allow issuers to perpetuate practices
recognized as unfair and deceptive against America's small
businesses, especially given their essential role in the
Nation's economic recovery.
In conclusion, the small-business community is not opposed
to the credit card industry, nor does it begrudge its profits.
In fact, as I previously outlined, the small-business community
is increasing reliant on credit cards for its very existence.
Small business simply asks the credit card industry to play by
the same rules as the rest of us.
Thank you very much.
[The prepared statement of Mr. McCracken can be found on
page 136 of the appendix.]
Mrs. Maloney. Thank you.
And this will be followed by two consumer advocates in
alphabetical order.
Mr. Mierzwinski?
STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR,
U.S. PIRG
Mr. Mierzwinski. Thank you, Madam Chairwoman, Mr.
Hensarling, and members of the committee.
As you will note from my written testimony, Mr. Plunkett
and I are submitting a joint written testimony on behalf of a
dozen organizations, and we will each talk about one of the
bills. I will talk first about the overdraft bill. And all of
our organizations strongly support, Madam Chairwoman, your
introduction of these two bills.
I would say one thing about the consumer credit card bill
of rights. Until your bill passed last year, in the 20 years I
have been here in Washington, no bill ever opposed by the
credit card industry made it through any congressional
committee that I can remember. So that is my point on that.
In terms of overdraft fees and the overdraft bill, H.R.
1456, the invention of so-called bounce protection programs in
the 21st Century is not a sign of the advance of civilization;
it is more a sign of the decline of civilization. I want to
make just a couple of quick points.
First, it is essentially banks making payday loans. It used
to be that banks and credit unions were the good guys. We had
the rent-to-own industry, the payday loan industry, the auto
title pawn industry, and the check cashers who were the bad
guys. This is essentially the banks' entry into predatory
lending, and that is too bad, and it is something that your
bill would stop.
Second, the problems have been exacerbated by two trends.
The first thing is that, in 2004, Congress made it easier for
banks to get access to the checks that were written more
quickly when it enacted Check 21, but Congress hasn't given
consumers faster access to their deposited funds since the
original law was passed in 1987 and took effect in 1988. So
banks hold our checks and deposited funds as long as they can,
and they manipulate our transactions in order to increase fee
income from unfair overdraft programs. The second trend is that
banks have encouraged the use of plastic. Plastic has not just
become a substitute for checks; it has become a substitute for
cash transactions. So both these trends have increased the
ability of banks to make money on this program of bounce
protection, or, as they prefer to call it, courtesy overdraft.
What is good about a program that you don't ask for, that
you don't sign up for, and that costs you more money than it
benefits you? In a word, nothing is good about it. Without
asking for our consent, banks and credit unions unilaterally
permit most customers to borrow money from the banks by writing
a check, withdrawing funds at an ATM, using a debit card, or
preauthorizing electronic payments that overdraw our accounts.
Instead of rejecting purchases that are electronic, they choose
to have the purchases go through so they can make more money.
One important point is that small debit transactions--and,
again, these are not checks; these are small debit
transactions--are a growing source of the income from overdraft
protection accounts. About half of all overdraft fees are
caused by small debit transactions, the $4 latte that costs
$35. In fact, the average debit overdraft is $17. The average
fee is double that, $34.
Consumers want choice. These programs don't give us choice.
Your bill would require the consumer's consent before he or she
participated in this overdraft program. If you have that
consent, you might think about, instead of this bank-friendly
overdraft program, getting a more traditional overdraft program
that costs you a lot less; apply for an overdraft line of
credit; apply for a transfer from your savings account or your
credit card. Eighty percent of consumers would rather have that
sort of choice, and an opt-in is the way to do it. An opt-out
simply won't work.
By the way, 80 percent of consumers also want the choice at
point of sale as to whether or not their transaction would go
through. I am not going to be embarrassed at the Starbucks or
at other coffee shop if they say my card did not work, and I
have to take out a $5 bill. It is absurd for banks to claim
that people want that kind of choice:
``Would you rather pay $35 for that $4 coffee or would you
rather pay for it in cash, Mr. Mierzwinski?'' I would rather
pay for it in cash or walk away.
The fact is that the cost of overdrafts, over $17 billion a
year, is actually more than the so-called ``benefit.'' The
total number of transactions is less than $16 billion a year.
The costs are inordinately borne by lower-income people,
minorities, younger people, and senior citizens on fixed
incomes, many of them receiving government benefits. Many
people on government benefits are receiving their benefits
through prepaid debit cards, and these cards are often subject
to these fees.
By the way, the banks claim, using Federal Reserve data--
first of all, the Federal Reserve says that it is feasible to
provide overdraft protection warnings at point of sale. They
claim it might cost as much as over $1 billion. Well, the most
vulnerable senior citizens pay over $1 billion in overdraft
protection fees every year. All in all, senior citizens pay
over $4 billion in overdraft protection fees.
So this is a program that hurts people who cannot afford
it. It is a program that has nothing to do with choice. Your
bill would fix all the problems. The Fed's program would not.
The Fed's program is narrower, and they are asking, ``Do we
want to opt out,'' which is not really a choice, or ``Do we
want opt in?''
You have already decided on the right choice, opt in.
Sorry. We cannot see the red light.
Mrs. Maloney. Thank you. The gentleman's time has expired.
Thank you for your testimony.
[The joint prepared statement of Mr. Mierzwinski and Mr.
Plunkett can be found on page 145 of the appendix.]
Mrs. Maloney. Mr. Plunkett is recognized for 5 minutes.
STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Plunkett. Congresswoman Maloney, Ranking Member
Hensarling, it is good to be here, and thank you for the
opportunity to testify.
I am going to focus my remarks on the very serious
financial consequences that unfair and deceptive credit card
practices are having on many families in this recession and how
the Credit Cardholders' Bill of Rights Act will help stop these
traps and tricks.
The President spoke yesterday afternoon, actually, on the
need for a credit card bill of rights. He said, ``The truth of
the matter is that the banking industry has used credit cards
and has pushed credit cards on consumers in ways that have been
very damaging.''
First, let me tell you what is in the bill that is
important for consumers, and then I would like to give you
three reasons why it is important to implement credit card
reform on a very timely basis.
We have heard about the 30-day rule. This proposal says no
interest rate increases on existing balances unless you are
more than 30 days in paying your bill. This bill says you can't
allocate payments for debt at different interest rates unfairly
anymore; you have to allow consumers, at the very least, to
write a check and pay off payments at both the higher and the
lower interest rate debt.
It bans deceptive and unfair double-cycle billing. It takes
several steps to stop the assessment for late fees for on-time
payments, and unlike the regulators rule, which is also
substantively good, it will provide timely protection from
these abusive practices to consumers. It takes effect 3 months
after enactment instead of in July 2010, as we have heard.
Also, codifying protections in law has the advantage of
preventing regulators from quietly undoing important
protections at a later date.
So why do we need to do this, and why do we need to do it
fairly quickly?
First, the number of families in trouble with their credit
card loans is approaching historic highs. One often-watched
measure is the monthly credit payoff rate; this is the amount
of money people are paying on their credit card bills. It has
been dropping precipitously for credit cards, and it is now at
one of the lowest levels ever reported, indicating people are
having a harder and harder time affording their bills.
The amount of charge-offs, the amount of debt written off,
is uncollectible, and delinquencies are at their highest levels
since 2002. Most experts are saying they could peak at their
highest levels ever by the end of this year.
Personal bankruptcies are up by a third since this time
last year.
Card issuers share a great deal of responsibility for
putting so many Americans in such a vulnerable financial
position. For 15 years, CFA and many others have been warning
that issuers were irresponsibly pushing consumers to take on
more debt than they can afford; and now, in the recession, we
are seeing the implications of those actions.
Let us just talk about exactly what is happening now, about
some of the practices that credit card issuers are using now in
this recession:
They have added new fees. They have increased the amount of
fees. They have used harmful, rather than responsible, methods
to lower credit lines, and they are hitting people with a lot
of interest rate increases.
Citigroup back-pedaled last fall on promises not to raise
rates at any time for any reason and promptly raised rates for
much of their portfolio. Chase has started charging hundreds of
thousands of cardholders $120 in fees a year while increasing
the minimum monthly payment for cardholders who were promised a
fixed rate for the life of the balance.
Bank of America has used a variety of questionable methods
they claimed were risk-based to raise rates substantially on
many cardholders. Capital One and other issuers are using vague
clauses in their agreements to raise interest rates, often by 5
percent or more, on millions of cardholders with a good credit
history because of market conditions.
So we are now hearing that this bill is somehow going to
lead to a scarcity of credit, lead to interest rate increases
on consumers who shouldn't have interest rate increases and
harm them; and we seem to have missed the major lesson of the
current economic crisis, that poor regulation can harm
consumers and the economy.
I mean, look at what started happening in the credit card
industry before regulation was implemented. Defaults were at
record highs, as I have mentioned. Issuer costs to borrow money
was increasing. Securitization was grinding to a halt, of
credit card loans. Credit was being cut back as we have heard,
and rates for many consumers were increasing. They can't blame
that on regulation; it hasn't taken effect. This was the effect
of a market that had not been properly regulated for 20 years.
So, in closing, what I will say is, we have to have a
discussion that understands what the current situation is and
what the hazards of poor regulation have been, and then we can
have a reasonable discussion about the pros and cons of various
regulatory proposals. Thank you.
[The joint prepared statement of Mr. Plunkett and Mr.
Mierzwinski can be found on page 145 of the appendix.]
Mrs. Maloney. I want to thank all of the panelists for
their very thoughtful presentations.
I just have one question for industry and for consumer
groups. I am sure you were all here for the debate from the Fed
and OTS and NUCA. I just want to ask one question: Putting
aside the debate about implementation, do you support the
regulations that have been finalized on credit cards?
I will start with you, Mr. Clayton. Just a ``yes'' or a
``no.''
Mr. Clayton. I just want to note that the regulations have
the force of law. We are responsible for complying with them,
and we will in a very aggressive manner.
Mrs. Maloney. Okay. Thank you.
Ms. Echard. We, too, support most of the changes, but we
need the time to implement them; and we will be ready in July
2010.
Mrs. Maloney. Well, I just want to respond to her very
important statement, and I just would like to make a statement
about community banks.
They have really come to the forefront during this
financial crisis with loans to individuals and communities, and
you have done a fantastic job. I hear great reports of credit
availability from community banks.
I would like to say that issuers would have yet another 3
months before having to comply. Issuers have already had 3
months since the release of the rules, and it will be a few
months more before this could possibly pass both Houses and be
signed by the President.
These practices that have been labeled by the Federal
Reserve--not by consumers, but by the Federal Reserve, who are
charged with safety and soundness of our financial
institutions--have called them unfair, deceptive and
anticompetitive. Arguing for any delay simply does not match
the needs of consumers.
You know, I just wanted to put that out there. It has been
a long time, and it will probably be a long time before it
finally passes both Houses and is signed.
Mr. Fecher, do you support the Credit Card Bill of Rights?
Mr. Fecher. Most credit unions do not engage in those
practices. So, yes, we do support those.
Mrs. Maloney. Mr. Ireland?
Mr. Ireland. We certainly support compliance with Federal
law.
Mrs. Maloney. Mr. McCracken?
Mr. McCracken. Yes, we do.
Mrs. Maloney. Mr. Mierzwinski?
Mr. Mierzwinski. Yes, of course, Representative Maloney, we
support the bill; and I concur with your comments about why
they really have a lot more time.
Mrs. Maloney. Mr. Plunkett?
Mr. Plunkett. Yes.
Mrs. Maloney. Thank you very much.
I yield to Mr. Hensarling.
Mr. Hensarling. Thank you, Madam Chairwoman.
Ms. Echard, I think I heard in your testimony some
discussion of what you thought community bankers might do if
this would become law.
What would happen to their credit card offerings? Can you
elaborate on what you would anticipate the consequences of the
passage of this legislation to be?
Ms. Echard. Thank you. Yes.
The change-out of the disclosures and of the materials
alone, by a conservative estimate, for our 700 institutions is
probably going to cost them in the neighborhood of--somewhere
from $6 million to $9 million, and that is just covering 200
new applications per branch. That is going to be equivalent to
2 years of their credit card profitability, to 2 to 3 years of
their credit card profitability.
Mr. Hensarling. Do you predict that some banks may drop
credit card offerings, or will they raise interest rates and
fees in other areas to compensate for that loss?
Ms. Echard. I believe that some community banks, even
though they do not engage in any of these practices, will find
the burden of complying, especially getting the implementation
done in 90 days, to be too much, and they will sell their
credit card portfolios.
Mr. Hensarling. In your time and in your familiarity with
the banking industry, if there are consumers who find out that
through the passage of this legislation that ultimately the
credit cards they could have accessed in the past are no longer
available to them and they lose those credit cards, do you have
an opinion on where they may end up going to access credit?
Ms. Echard. With the concentration, they will have the
choice of going to a large financial institution and not with
their local institution. Thousands of community bank customers
may be faced with having their banking in one place and their
credit card elsewhere.
Mr. Hensarling. Again, going back to the timing issue, if
this became law within 90 days, how many community banks might
be able to comply within the 90-day time limit?
Ms. Echard. Not a single one. The 6,000 community banks
that were mentioned, or the 6,000 banks, most of them are small
issuers. They are credit unions, community banks. Most of them
rely on processors.
We have been meeting with our processor and a focus group
of our community bank every single week since implementation
was announced. While it is not as huge as the Y2K project, it
is somewhat on that scale in that we have the communication
bulletins.
If you think of the July 1st enactment date, that means
that all of the statement processing systems have to be done in
June because all of the statements being mailed out beyond that
date have to be correct. So that means testing in May and
April. We have a system freeze so that the cards will operate
smoothly for all merchants and for all consumers; there is no
processing, no changes, nothing. It is a sacred time in the
credit card industry from November to January, so that knocks
out those 3 months.
I mean, we are starting on it now. It is going to take a
huge effort to get this done, and the last thing we will be
doing will be the training of client services, the training of
customer service, the training of bank personnel, and the
completion of the applications in the agreements and the review
of all of that. So it is a tremendous, tremendous undertaking.
Mr. Hensarling. Earlier, with the testimony of the
representative of the Federal Reserve, she offered her opinion
that the credit card industry was a competitive industry. Does
anybody on the panel wish to disagree with that particular
assessment?
Mr. Plunkett hit his button first.
Mr. Plunkett. Well, it is becoming considerably more
concentrated. Nobody wants to impose unnecessary costs on any
bank, especially small banks. But let us just point out that
the 6 largest issuers control approximately 80 percent of the
market; if you look at the top 10, it is approximately 90
percent of the market. So the costs are going to be borne by
the largest companies, which are among the largest banks in the
world.
Mr. Hensarling. Mr. Plunkett, since your organization has
``consumer'' in its title and you speak about a concentration
in the industry, what public policies of your organization
furthered or proposed or endorsed that which would increase
competition within the credit card industry?
Mr. Plunkett. We think this is a competitive proposal. I
mean, I cannot tell you how many times I have had behind-the-
scenes, off-the-record discussions with people in the credit
card industry when they have said, ``You know, we are trying to
do our best, but those guys over there, they are using, you
know, a tactic that we think is reprehensible, but we have no
choice. We are leaving money on the table if we do not do the
same thing.''
This sets a level playing field of fair practices.
Everybody has to comply, and there is plenty of room for
competition and plenty of room to price to risk.
Mr. Hensarling. So your prediction is, there will be more
credit card offerings to consumers after this legislation
passes?
Mr. Plunkett. Well, my prediction is this will not harm
competition.
Mr. Hensarling. Thank you.
My time has expired.
Mrs. Maloney. The Chair recognizes Congresswoman Waters
from California.
Ms. Waters. Thank you very much. I am extremely
appreciative for this hearing that you are holding today and
for all of the work that you have done in taking on one of the
toughest tasks of the last Congress and of this Congress, to
try and get some justice for credit cardholders. I thank you
for your work.
I have been intrigued by the discussion on overdraft abuses
and on the need for overdraft protection. I would like to ask--
Mr. Mierzwinski, is it?
Mr. Mierzwinski. That is correct.
Ms. Waters. Okay. Would you explain to me how a cup of
coffee--was it you who described that?
Mr. Mierzwinski. Sure. Well--
Ms. Waters. --could end up costing what--$30 because of
overdraft abuses? Would you kind of break that down for me?
Mr. Mierzwinski. Sure.
Very simply, as consumers have switched from writing checks
for their bills and using cash for their day-to-day
transactions in stores, they have switched to debit cards, an
ATM card that can be used at point of sale.
Even when the consumer's debit card shows a negative
balance or when the bank reorders the transactions at the end
of the day to increase the number of negative items on that
day, in either case what happens is, you buy something with
your debit card for $4 or for $2, depending on the kind of
coffee you buy, and they accept the transaction. At the end of
the day, they bounce it and charge you $35.
The statistics from the studies that our colleague
organization, the Center for Responsible Lending, has done show
that the average debit card transaction is only about $17, but
the average fee is $35.
Ms. Waters. Wow.
Mr. Clayton, is that what happens with the overdraft abuse
that was just described by Mr. Mierzwinski?
Oh, let's see. You are with the American Bankers
Association Card Policy Council?
Mr. Clayton. That is correct.
Ms. Waters. Is that what happens? Is that what you know
happens or is this just being made up?
Mr. Clayton. No, that is not our understanding of how
things operate in the real world.
Ms. Waters. How does it operate? Tell me how it operates.
Mr. Clayton. As a practical matter--and the Federal Reserve
has done some consumer testing on this--consumers really very
much appreciate the availability of overdraft protection plans
to help them in a bind.
Ms. Waters. No. I just want to know how it works.
Mr. Clayton. Say again?
Ms. Waters. I want to know how it works.
I just had him describe what happens with the overdraft. He
described a cup of coffee at $4 or $2 that, at the end of the
day, is an overdraft because there is no protection for the
consumer in stopping that purchase at the point of purchase.
So tell me what is wrong with what he just described?
Mr. Clayton. There is enormous protection for consumers in
stopping the purchase at purchase time. Consumers have a great
deal more control in this process than people give them credit
for. It is exactly the same as when they were working with
checking accounts for many years.
Ms. Waters. Just tell me how it works.
Mr. Clayton. People keep track of their balances. They can
go online and check out where it is. They can keep cushions--
Ms. Waters. No, but what he said was, you buy a cup of
coffee at Starbucks for $4, I guess, with a debit card or
something, and the card does not have $4 on it; I guess they
only have $2 on the card.
So you use the card. They get the coffee. They drink it.
At the end of the day, it is an overdraft that you charge
$35 for. Is that correct or not?
Mr. Clayton. If they overdraft their accounts, they will be
subject to fees.
Ms. Waters. So what he just described is correct?
Mr. Clayton. If they overdraft their accounts, they will--
Ms. Waters. So what he just described is correct?
Mr. Clayton. Yes.
Ms. Waters. Okay. So, if it is correct, do you think that
that is overdraft abuse? Do you think that that is a practice
that should be discontinued because it is too harsh, because it
is costing too much money and that, if you wanted to, you could
reject the card and avoid the abuse?
Mr. Clayton. Well, first of all, the technology does not
exist to actually do that at the point of sale.
But notwithstanding that--and there are significant costs
that have been talked about here--consumers have a
responsibility to manage what is in their accounts. There are
fees for not complying with what is in their accounts in
overdrafting. So to the extent that you think it is
inappropriate for consumers to get fees for overdrawing on the
amount of money they have, then you can take the position that
the whole process is inappropriate.
From our perspective, we are taking a risk. We are putting
out a convenience and a service to consumers that they seem to
value and that they have a lot of control over, whether they
are going to incur costs or not, so we understand where you are
coming from.
Ms. Waters. Do 18-year-olds and 17-year-olds have access to
these debit cards? Can they use them at Starbucks in the way
that was just described?
Mr. Clayton. Well, you have to have an account, and I think
you have to be an adult to have an account, and you have to be
of voting age, so 18 and above.
Mrs. Maloney. The gentlelady's time has expired.
Ms. Waters. Thank you very much.
Mrs. Maloney. Mr. Lee from New York.
Mr. Lee. Thank you very much.
It was nice to hear the general consensus through both the
first and second panel today. I think everyone is in agreement
that we do need to do modifications to try to protect consumers
and to make it easier for them to understand the contracts and
to try to protect consumers. I do not think I heard from anyone
who was not in agreement with making strides in that regard.
The one thing that I did hear overwhelmingly was the fact
that the timeline is inappropriate and, furthermore, that it
would, in my opinion and from what I have heard, put consumers
at risk.
I used the earlier example because I am a lowly freshman
here, but I came from a manufacturing business where I went
through three occasions, through various businesses that I had
an opportunity to run. We went through major software
implementations, not much different than you would see here
when you are modifying your business systems for a credit card.
I can assure you, a good implementation is doing it in a year.
My concern is--and I would like to hear from some of the
individuals here--what risk we would run if we do rush this;
because I think, at the end of the day, Chairwoman Maloney and
her ideas that she has passed are all good ideas. But what I do
not want to do is jeopardize businesses that are already
struggling, credit card companies, and put them at further
risk, because when you do do an implementation, you need a
large number of people focused on this project.
Right now, we have companies that are cutting back on
staff. I just do not want to see this thing fail when, at the
end of the day, we are trying to do things that are positive
for consumers.
I guess I would start with Mr. Clayton. If you could,
define what specific risks we would see if in 90 days we were
to flip the switch and this were to occur. In your mind, what
specifics to consumers, what negative effects, would they see?
Mr. Clayton. Operationally, we would expect to see mistakes
in billings for millions of consumers. That is the first step.
The second thing is, we do see significant problems in our
ability to manage our risk models in this kind of economically
challenging time. There is a significant amount of delinquency
increase in the marketplace today. There are significant
pressures on funding as witnessed by the TALF program that the
Treasury Department and the Federal Reserve are trying to bring
into place.
With credit card lending, what people do not always notice
is that around one-half of credit card lending is actually
funded by investors who buy securities backed by credit card
receivables, and that market is frozen. If those investors
believe that we cannot adequately gauge risk in this
challenging environment, they will not buy the paper that
supports one-half of the credit card lending in this country.
Mr. Lee. I am sorry. What was the total value of that?
Mr. Clayton. The actual amount currently that the Federal
Reserve has talked about is about $450 billion.
So adequately measuring your risk in this environment and
doing it operationally and in a consistent manner limits
litigation risk. In other words, it is a significant challenge
that you have to not only overcome your internal views on it,
but that you have to overcome the investor community.
So we are very worried that, if you do this, you will
ultimately limit the ability for us to find reasonable cost
funding to loan to consumers, and you will see a significant
contraction of credit in the marketplace.
Mr. Lee. Thank you.
Ms. Echard, could you chime in on that, please?
Ms. Echard. Yes. Thank you.
Potentially, the banks being out of compliance is an issue,
the posting of payments. All of the systems are being examined
right now, including the consumer facing systems like the
actual statement--does that need to be redesigned?
The system that produces that: the billing cycles, the
number of billing cycles, the staffing for those billing
cycles, the Web site that consumers can go on to make their
payment should they choose to pull down their transactions,
every single system--the client services system, the customer
service system--needs to be examined to do that--
Mr. Lee. I know that all too well.
Ms. Echard. --in order that everything gets posted properly
and is handled properly.
Mr. Lee. We saw today even on the House Floor, when
Congress rushes to try to push through legislation, you have
outcomes that are less than desirable.
So, just in closing, I appreciate all of your comments
today. Thank you for the education.
Mrs. Maloney. Thank you, Congressman.
Congressman Cleaver is recognized for 5 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman. Let me express my
appreciation for you and for all of the work that you have done
on this.
Most of the members who could get an airplane out, did; and
I could have gotten one out as well. I did not. I stayed. I sat
through the whole testimony. I only got up once to get some
water.
When I was mayor in Kansas City, I was part of an economic
development effort to help bring one of the credit card
operations into our City. One of the things I have tried to do
today is--I wanted somebody to say something to convince me
that I should go to my colleague and ask her to remove my name
as a cosponsor for the legislation. I wanted desperately to
come to the conclusion that maybe this legislation was ill-
conceived. That has not happened.
I am, frankly, interested in knowing just a couple of other
things.
Mr. Clayton and, I think, Mr. Fecher, maybe the first four
of you mentioned--and maybe Mr. McCracken as well--that the 90-
day timeline was too problematic. So let me ask you--and if you
can, just answer it quickly--if that were changed, would your
organization then submit a letter in support of the
legislation?
Mr. Clayton. Mr. Cleaver, I am afraid not. I mean, the bill
does not match the rules. There are significant differences.
Mr. Cleaver. Okay.
Yes.
Ms. Echard. Normally, I probably would not be agreeing with
the ABA, but in this case, codifying this does not give the
regulators the flexibility to work with the institutions.
Mr. Cleaver. Mr. Fecher?
Mr. Fecher. I think we would strongly consider that,
actually.
As I stated before, most credit unions do not engage in
these practices in the first place, and our significant
objection to the bill is the 90 days. So, assuming a close
reading of the bill does not turn up anything else that is
unsuitable, I think we would tend toward supporting it, yes.
Mr. Cleaver. Okay.
Mr. Ireland?
Mr. Ireland. I have no problem with the idea of codifying
the Federal Reserve rules to make that a statutory law.
I think it is impossible to implement that in 90 days. I
think there are provisions from the bill that are inconsistent
with the Fed rules and that won't work very well.
Mr. Cleaver. But back to my question about the 90 days, you
are saying--
Mr. Ireland. You cannot do it. It is much worse, I think,
than Mr. Clayton suggests.
Mr. Cleaver. Okay.
Mr. McCracken?
Mr. McCracken. I was not one of the people who raised the
concern.
Mr. Cleaver. I am sorry. So let me go back.
Mr. Clayton, give me the one thing that I can amend the
bill with that would then generate your organization's support.
Mr. Clayton. I assume other than the 90-day requirement?
Mr. Cleaver. Yes.
Mr. Clayton. There is more than one thing.
Mr. Cleaver. How many?
Mr. Clayton. Three or four beyond that.
Mr. Cleaver. What are they?
Mr. Clayton. The first one is that you would have to
conform the bill to the Fed rule, and I do not--first, let me
back up.
I cannot tell you whether our industry would support the
bill at that point, but raising concerns about the bill, which
is what--is that what you are asking me to respond to?
Mr. Cleaver. No. No.
What I am trying to find out is if you are just opposed to
the codification, period, if you just do not want to do it. If
that is the case, then in the absence of some compelling
statement that would just cause me or somebody to say, ``Gee,
we need to leave this bill alone,'' then there would be no
choice for me but to support it.
Mr. Clayton. We are not opposed to the codification of the
Federal Reserve rule; although we would note that that takes
away important flexibility that, if you got it wrong, you could
no longer easily adjust in the marketplace, and that could be a
problem for consumers. So we would start with that premise.
Then there were a number of things within the bill that we
think need to be changed.
Mrs. Maloney. The gentleman's time has expired.
Mr. Cleaver. Thank you, Madam Chairwoman.
Mrs. Maloney. Thank you very much. And I congratulate you
on your important amendment to the bill on students.
Congressman Maffei.
Mr. Maffei. Yes. Thank you, Madam Chairwoman, and thank you
for introducing this piece of legislation.
I have been hearing from my constituents who have had their
interest rates raised, even very often when they have not been
late on their bills. Most upsetting to these individuals--and,
I will be frank, to myself as well--is that the companies are
raising rates on the preexisting revolving balances.
I think we all understand that if you raise rates on future
purchases or on future balances, then they have a chance to
just say, ``Well, I will switch to another card,'' or what have
you. But on current existing rates, that gives them only the
choice of trying to find another credit card that would be able
to take their balance over, which they do not have that option,
particularly in this environment; or to pay it off, which
again, given the environment, they do not really have that
option.
So there is really a huge challenge for consumers, and this
is one of the prime reasons I am a sponsor of Mrs. Maloney's
legislation, because what I see is unfair.
I do want to ask everybody on the panel--and maybe I am
incorrect here--do you see raising rates on currently existing
balances as fair or unfair?
A quick answer from everybody on the panel would be great.
I will start with Mr. Plunkett and work to the other side.
Mr. Plunkett. Well, as I said previously, it is very
damaging financially, and most of the time, it is completely
unfair. You are absolutely right. A lot of the rate increases
that are occurring now are not based on the fault of the
borrower at all.
An additional reason to move fast here is that, as we
talked about, many of the largest banks are the largest credit
card issuers, and many of those banks are receiving Federal
money. There are efforts to restart lending on the credit card
front. How can we do that and not have fair terms on those
loans?
Mr. Maffei. All right. Thank you, sir.
Mr. Mierzwinski. We would agree with Mr. Plunkett.
I would just add to his last point that in our testimony we
went into detail, that we believe that all of the recipients of
TALF money should comply with the Fed rules immediately and
with additional consumer protections.
Mr. Maffei. All right. Thank you.
Mr. McCracken?
Mr. McCracken. Yes. Well, it is unfair, but more
importantly, to our small business members, if they are not
sure at what interest rate they are borrowing money, often for
business purposes it is very difficult to make a business
decision about where the best source of capital is for them.
Mr. Maffei. Okay.
Mr. Ireland?
Mr. Ireland. I am going to be a little bit different,
unfortunately.
I think what is unfair depends on what the parties
understand they are doing. If you look at the Federal Reserve's
own discount windows circular, that it lends to banks, it says
they can raise the rate at any time, and they do, and it
applies to existing balances as well as to future balances.
That is a common term in open-end, revolving credit of this
nature; it is not a common term and it is virtually never seen
in closed-end credit.
So the question is, what do people understand they were
doing when they entered into the relationship?
Now, I think what has happened is that people's
understanding and use of credit cards over the last 20 years
has changed and that what used to be retail installment credit
has become revolving credit. So I understand the Federal
Reserve's change in the rules to say, you cannot change it on
existing balances because the credit that used to be could not
be changed on existing balances.
Mr. Maffei. No. No. That is fine. I think--you are not
avoiding the question exactly.
So you see it as fair given the rules that we have been
working under?
Mr. Ireland. Given the rules we have been working under, I
have no problem with the change going forward.
Mr. Maffei. Okay. Mr. Fecher.
Mr. Fecher. We generally see that to be unfair with one
caution. Credit unions tend to be balance sheet lenders. In
other words, the money that they are using to fund the credit
card balances are their members' deposits. If the costs of
those deposits were to go up because of economic conditions,
rising interest rates in the economy, you could face the
position where the cost of the funds to fund the credit union
balances could go above the credit card.
So, with that one caution, raising the rate through no
fault of the borrower, we would believe to be unfair with the
caution of the cost-of-funds issue.
Mr. Maffei. Thank you.
Ms. Echard?
Ms. Echard. Thank you, Congressman.
Community banks are honest brokers. They are not going to
play games with the interest rate. However, they have the same
concerns. If their cost of funds rises, they need the ability
to make an adjustment, or many of them who today offer fixed
rates would convert to a variable rate product.
Mr. Maffei. Okay.
Mr. Clayton?
Mr. Clayton. Let me add to that.
The cost of funds can clearly move, but so does the risk. I
mean, delinquencies are at a significantly higher level than
they have been in a while. There is an unprecedented amount of
economic turmoil. We do not know which borrowers are not going
to pay us back, beforehand.
Mr. Maffei. So you want to raise the rates on all of them?
Mr. Clayton. In order for us to continue to make loans, we
have to get some kind of assurance to manage our risk
appropriately. If we cannot do that, we cannot make loans to
everybody.
So to put a real face on it--and I will put it in a small
business environment--if a small business using a personal
credit card has a small business balance at $25,000 and it
defaults, that takes $25,000 of loan losses right out of our
capital. Because we can lend, essentially, 10 to 1 to that
capital, we can lend $250,000 with just--
Mr. Maffei. Well, I am out of time.
Mr. Clayton. I will be really quick.
The point is, if we lose $25,000 in that one context, we
cannot make loans to 10 other businesses of the same amount;
and that is where the real hurt comes.
Mr. Maffei. I appreciate it, Mr. Clayton. I understand,
sir, where you are coming from. I actually think that is sort
of the fundamental problem here.
Again, it is very, very difficult to--I think if you try to
get outside of yourself, it appears unfair to that borrower,
and they do not really care too much about the future loan.
Thank you very much.
Mrs. Maloney. I now recognize Congressman Cleaver.
Mr. Cleaver. Madam Chairwoman, if there is no objection, I
would like to submit for the record a letter from one of my
constituents where she explains how her interest rates were
raised recently, without her knowledge, from American Express,
Capital One, and Chase.
Mrs. Maloney. Without objection, it is so ordered.
I also would like to ask unanimous consent for a letter
from the president and CEO of the National Association of
Federal Credit Unions to Chairman Gutierrez, and Ranking Member
Hensarling to be entered into the record.
Without objection, it is so ordered.
I want to thank the witnesses and members for their
participation.
The Chair notes that some members may have additional
questions for the witnesses which they may wish to submit in
writing. Therefore, without objection, the hearing record will
remain open for 30 days for members to submit written questions
to the witnesses and to place their responses in the record.
The subcommittee hearing is now adjourned.
[Whereupon, at 5:32 p.m., the hearing was adjourned.]
A P P E N D I X
March 19, 2009
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