Subcommittee on Financial Institutions and Consumer Credit Hearing
Credit Card Practices: Current Consumer and Regulatory Issues
Thursday, April 26, 2007, 10:00 a.m., 2128 Rayburn House Office Building
Witness List & Prepared Testimony: Ms. Cindy Zeldin, Federal Affairs Coordinator, Economic Opportunity Programs, Demos: A Network for Ideas & Action; Mr. Arthur E. Wilmarth, Jr., Professor of Law, George Washington University Law School; Mr. Edward L. Yingling, President and CEO, American Bankers Association; Mr. Todd J. Zywicki, Professor of Law, George Mason University Law School; Mr. Oliver I. Ireland, Morrison and Foerster LLP; Ms. Linda Sherry, Director, National Priorities, Consumer Action.
Opening Statement Rep. Carolyn Maloney Financial Institutions Subcommittee Hearing: “Credit Card Practices: Current Consumer and Regulatory Issues”
This hearing will come to order. The topic of today’s hearing is “Credit Card Practices: Current Consumer and Regulatory Issues.”
First, I would like to thank the witnesses for coming today.
This is the first in a two- part series of hearings on credit card practices.
In our second hearing, to be held the first week in June, we plan to have federal and state regulators to discuss the anticipated revision to the regulations governing disclosure for credit cards by the Federal Reserve. The Fed has informed me that they expect to be issuing this in late May. We also expect to have a panel of consumer and industry representatives to comment on the Fed’s action.
Credit cards may represent the single most successful financial product introduced to our country in the last 50 years. Their benefits are manifest, giving consumers unprecedented convenience and flexibility in both making purchases and in managing their personal finances.
Consumer spending, facilitated in large part by the ease of payments afforded by credit cards, accounts for nearly 2/3 of the annual US economic activity.
And even more dramatically, one can argue that the broad availability of credit cards coupled with advances in technology has helped to create, support and expand an online retail industry that is projected to reach $129 billion in sales this year according to a recent Business Week article.
All told, 145 million people in America (about half the population) own credit cards.
In short, credit cards, like many other tools in our society, have changed from a luxury item available to the few, to a necessity demanded and needed by the many.
But with that great success, with that widespread growth, with that necessity, comes great responsibility.
The credit card industry has been clear about the responsibility imposed on consumers: the responsibility to become financially literate; the responsibility to spend only in accordance with your means; the responsibility to pay your bills on time.
But this spectacular growth in the credit card industry does not seem to have created the same sense of responsibility in the ten issuers that control 90 percent of the market, much less in the other 6,000-plus US credit card issuers.
It is true that competition among issuers has created initial consumer choice and can reward the diligent consumer with lower interest rates and no annual fees.
But the industry has also acted to implement practices that quickly became industry standards – such as double cycle billing, universal default, no-notice interest rate hikes, outsize fees âÂas much as $39 dollars for a late payment -that bring us to our hearing today.
For example, a recent article in Electronic Payments International reported that credit card issuers were expected to rake in a “record $17.1 billion in credit card penalty fees in 2006, a rise of 15.5 percent from 2004, and a tenfold increase from 1996, when card issuers raised $1.7 billion in revenues from fees.”
Did American consumers become ten times less responsible in 2006 than in 1996?
Or did the industry make a concerted and deliberate effort to squeeze even more revenue out of consumers by increasing fees and creating pitfalls and violations of the card agreement that allowed the issuer to penalize even the most responsible consumers?
Credit card issuers hold an enormous amount of power â enshrined in the cardmember agreement: just listen to this section from an April 2007 card agreement of a major card issuer :
“…we may suspend or cancel your Account, any Feature, or any component of your Account, … at our sole discretion at any time, with or without cause, whether or not your Account is in default, and without giving you notice, subject to applicable law.”
From terms like that, it is not hard to see how fee income went up ten fold in the past 10 years!
I have always believed that responsible access to credit is critical to our economy and that access to appropriate credit should be as broad as possible, consistent with the safety and soundness of the financial system.
Similarly, I approach credit card regulation from the point of view that we should both protect consumers and keep responsibly-issued credit available in as many of our communities as possible.
I am generally in favor of market based solutions wherever possible, but in this case, I am not convinced that the industry is going to make the changes that are necessary.
I do want to credit some major issuers who have taken steps to move toward better practices. Citi has announced that it would eliminate “any time for any reason” repricing and universal default. Chase has said it would no longer use double-cycle billing but rather average daily balance. But I don’t yet see the development of “best practices” that industry holds itself to across the board.
For example, in the wake of the key GAO report last September, finding that the increased complexity in rates and fees requires better disclosure, even industry agrees that changes to credit card disclosures are desperately needed, because no one can understand their statement.
Yet industry has not taken comprehensive action on this point.
And if the industry fails to make meaningful changes, if the major issuers continue to lead the way in a race to the bottom rather than a race to improvement, it is my belief that we will see bipartisan legislation coming forward to fix the problems that industry proved itself incapable or unwilling to fix on their own.
I look forward to the testimony
Statement of Congressman Michael N. Castle Financial Institutions Subcommittee Hearing on “Credit Card Practices: Current Consumer and Regulatory Issues”
Thank you Chairwoman Maloney and Ranking Member Gillmor for holding this hearing before the Financial Institutions and Consumer Credit Subcommittee today. Credit cards have become a staple in today’s marketplace. They provide enormous convenience, efficiencies and other benefits to consumers, businesses, and local and national economies. Credit cards have generated more than $2.5 trillion in transactions a year in the United States. Clearly, they have become an indispensable tool of America’s consumer economy.
Today, consumers have a choice between 6,000 credit cards lenders. Although some consumers view the large number of credit options to be daunting, the strong national credit system in the United States has been a driving force that has helped sustain our economy in recent years. Educating consumers and enabling individuals to understand their credit terms is an important task — the review by this Subcommittee today will help us better understand how consumers and the financial services industry can have a more symbiotic relationship.
Certain industry practices related to credit card fees, penalties, and interest rates have received a considerable amount of media attention lately. It is important to note, that in response to increasing concerns, several credit card issuers, such as Citigroup and Chase Card Services, have taken significant steps to improve their practices and ensure that their customers have a better understanding of their accounts. Therefore, Madam Chair, after we hear from consumer organizations, institutions and university professors, I do hope we will take the time to hear from industry regulators so we can keep the scope of these issues in some context.
Madam Chair, I thank you for holding this hearing today and I look forward to hearing from each of our witnesses.
ABA TELLS CONGRESS INDUSTRY IS COMMITTED TO CREDIT CARD IMPROVEMENTS
The American Bankers Association pledged the industry’s commitment to working with Congress to make credit cards better for consumers.
Testifying before the House Financial Services Committee, Ed Yingling, ABA’s president and chief executive officer, explained how competition continues to improve credit card products and described efforts to improve disclosures and enhance consumer education programs.
“For millions of Americans, credit cards provide more services at little or no cost, and with lower interest rates than ever before,” Yingling said. He further elaborated on the many benefits of credit cards, which were reported in a recent Government Accountability Office report.
“But for some individuals, the increased complexity causes confusion and they end up in a difficult financial situation. We take these concerns very seriously and we are working to address them.”
Yingling cited a variety of industry initiatives to make credit card disclosures better and clearer, as the GAO report suggested. Among them are the Federal Reserve’s new disclosures and ABA’s information tools for consumers, which are both currently in development.
“Recently, individual institutions announced important changes to their policies. We see how competition leads to streamlined and simplified practices. We recognize policies that alienate some of its customers, or lead individuals into financial difficulties, are in no one’s interest,” he said.
In his final point, Yingling demonstrated the industry’s ongoing commitment to educating consumers. “Every major credit card issuer has an education program. Now ABA is working to maximize the delivery of these programs to consumers, with a particular emphasis on college-age individuals. These efforts are in addition to the ABA’s Education Foundation events of which several committee members participate,” he said.
The American Bankers Association, on behalf of the more than two million men and women who work in the nation’s banks, brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership-which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks-makes ABA the largest banking trade association in the country.
