[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:76183.wais]




                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


                            NOVEMBER 1, 2001


       Printed for the use of the Committee on Financial Services

                           Serial No. 107-49

                        U.S. GOVERNMENT PRINTING OFFICE
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                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                    JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice Chair   BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska                 PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana             MAXINE WATERS, California
SPENCER BACHUS, Alabama                 CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware             LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York                 NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California             MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma                GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                     KEN BENTSEN, Texas
BOB BARR, Georgia                       JAMES H. MALONEY, Connecticut
SUE W. KELLY, New York                  DARLENE HOOLEY, Oregon
RON PAUL, Texas                         JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                   BRAD SHERMAN, California
CHRISTOPHER COX, California             MAX SANDLIN, Texas
DAVE WELDON, Florida                    GREGORY W. MEEKS, New York
JIM RYUN, Kansas                        BARBARA LEE, California
BOB RILEY, Alabama                      FRANK MASCARA, Pennsylvania
STEVEN C. LaTOURETTE, Ohio              JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois            JANICE D. SCHAKOWSKY, Illinois
WALTER B. JONES, North Carolina             DENNIS MOORE, Kansas
DOUG OSE, California                    CHARLES A. GONZALEZ, Texas
JUDY BIGGERT, Illinois                  STEPHANIE TUBBS JONES, Ohio
MARK GREEN, Wisconsin                   MICHAEL E. CAPUANO, Massachusetts
PATRICK J. TOOMEY, Pennsylvania         HAROLD E. FORD Jr., Tennessee
JOHN B. SHADEGG, Arizona                KEN LUCAS, Kentucky
VITO FOSSELLA, New York                 RONNIE SHOWS, Mississippi
GARY G. MILLER, California              JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia                   WILLIAM LACY CLAY, Missouri
FELIX J. GRUCCI, Jr., New York          STEVE ISRAEL, New York
MELISSA A. HART, Pennsylvania           MIKE ROSS, Arizona
SHELLEY MOORE CAPITO, West Virginia     
MIKE FERGUSON, New Jersey               BERNARD SANDERS, Vermont

             Terry Haines, Chief Counsel and Staff Director

       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

DAVE WELDON, Florida, Vice Chairman  MAXINE WATERS, California
MARGE ROUKEMA, New Jersey            CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska              MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana          GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware          KEN BENTSEN, Texas
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             MAX SANDLIN, Texas
BOB BARR, Georgia                    GREGORY W. MEEKS, New York
SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio                FRANK MASCARA, Pennsylvania
JIM RYUN, Kansas                     DENNIS MOORE, Kansas
BOB RILEY, Alabama                   CHARLES A. GONZALEZ, Texas
STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois         JAMES H. MALONEY, Connecticut
WALTER B. JONES, North Carolina      DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania      BARBARA LEE, California
ERIC CANTOR, Virginia                HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York        RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
MIKE FERGUSON, New Jersey            JOSEPH CROWLEY, New York

                            C O N T E N T S

Hearing held on:
    November 1, 2001.............................................     1
    November 1, 2001.............................................    63

                       Thursday, November 1, 2001

DeMarse, Elisabeth, President and CEO, Bankrate, Inc.............    35
Fischer, L. Richard, Partner, Morrison & Foerster, on behalf of 
  Visa U.S.A.....................................................    40
Kolish, Elaine, Associate Director, Bureau of Consumer 
  Protection, Division of Enforcement, Federal Trade Commission..    14
Manning, Robert, Professor, Rochester Institute of Technology....    36
Mierzwinski, Edmund, Consumer Program Director, U.S. Public 
  Interest Research Group........................................    33
Peirez, Joshua L., Senior Legislative and Regulatory Counsel, 
  Mastercard International, Inc..................................    38
Smith, Dolores S., Director, Division of Consumer and Community 
  Affairs, Board of Governors, Federal Reserve System............    12
Torres, Frank, Legislative Counsel, Consumers Union..............    30


Prepared statements:
    Bachus, Hon. Spencer.........................................    64
    Oxley, Hon. Michael G........................................    66
    Smith, Hon. Christopher H....................................    67
    Fischer, L. Richard..........................................   153
    Kolish, Elaine...............................................   112
    Mierzwinski, Edmund (with attachment)........................   129
    Peirez, Joshua L.............................................   148
    Smith, Dolores S. (with attachments).........................    68
    Torres, Frank................................................   121

              Additional Material Submitted for the Record

Mierzwinski, Edmund:
    Written response to a question from Rep. Spencer Bachus......   145



                       THURSDAY, NOVEMBER 1, 2001

             U.S. House of Representatives,
            Subcommittee on Financial Institutions 
                               and Consumer Credit,
                           Committee on Financial Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:00 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus, 
[chairman of the subcommittee], presiding.
    Present: Chairman Bachus; Representatives Roukema, Oxley, 
Bereuter, Castle, Cantor, Grucci, Hart, Tiberi, Waters, C. 
Maloney of New York, Ackerman, Sherman, Moore, J. Maloney of 
Connecticut, Hooley, Carson, Ford, Hinojosa, K. Lucas of 
Kentucky, Crowley and LaFalce.
    Also present: Rep. Chris Smith.
    Chairman Bachus. We'll call together the Financial 
Institutions Subcommittee of the Financial Services Committee. 
I hope you all survived Halloween. The subcommittee meets today 
to examine credit card industry practices, particularly as they 
relate to the treatment of cardholders.
    The ready availability of credit in our country has had 
many beneficial effects, fueling economic growth and making the 
American Dream more accessible to many low and moderate income 
consumers. But the American Dream has become a nightmare 
scenario for many citizens who find themselves and their 
families overextended and saddled with thousands of dollars in 
ever-escalating debt. Particularly as our country struggles to 
come out of its current economic downturn, it is entirely 
appropriate that the subcommittee take a hard look at credit 
card industry practices to ensure that the financial stress 
that many consumers find themselves under is not needlessly 
    Factual evidence paints a powerful story in tracing the 
growing reliance of American households on credit cards. Last 
year alone, credit card companies extended $3 trillion in 
credit to American consumers, nearly double the levels of just 
5 years ago. The total amount of consumer credit card debt now 
exceeds $500 billion. Americans are bombarded on almost a daily 
basis by credit card solicitations which come through the mail, 
over the internet, and in those dreaded phone calls at dinner 
hour, an aggravation that is mentioned often by my 
    Like most parents of college-age children, I have a 
particular interest, financial and otherwise, in the aggressive 
tactics used to market credit cards on college campuses. The 
statistics in this area are also telling. Almost one-quarter of 
college students actually get their first credit card before 
they even leave high school. Not surprisingly, the past decade 
has witnessed a 50 percent increase in the proportion of people 
under the age of 25 filing for bankruptcy.
    I have always subscribed to the view that the Government 
should not be in the business of saving its citizens from the 
consequences of their own bad choices, including the choice of 
a college student to rack up large amounts of credit card debt. 
But there's also something to be said for industry self-
restraint when it comes to marketing credit cards to teenagers 
and other members of society who may not fully understand the 
hole they're digging for themselves through the irresponsible 
use of credit.
    Among the issues that our witnesses have been asked to 
address at today's hearing are the following:
    How the credit card industry sets interest rates and how 
these rates compare to the cost of other forms of consumer 
    How credit card companies disclose information to their 
customers, including changes in terms, teaser rates and fees.
    The process and practices of the industry, including the 
posting of payments and the handling of customer complaints.
    Four, industry compliance with Federal consumer protection 
laws and the privacy requirements imposed by Gramm-Leach-
    Fifth, the response of the credit card industry to the 
events of September 11th, including what efforts have been made 
to assist law enforcement in disrupting terrorist financing.
    On this last point, I want to take the opportunity to 
commend those credit card issuers that have taken steps to 
provide relief in the form of liberalized interest and fee 
policies and other accommodations to those customers in New 
York and Washington directly affected by the terrorist attacks 
on September 11th.
    I hope that the industry will exhibit a similar spirit of 
forbearance when dealing with customers who have had their mail 
service interrupted by the recent anthrax cases along the East 
Coast. In that regard, Chris Smith, Representative Smith, who's 
had two mail facilities in New Jersey closed, has actually 
prepared some legislation.
     I hope that the industry will talk with Representative 
Smith and see if some accommodations can be made for those 
    Let me close by thanking all of our witnesses for agreeing 
to testify this morning on fairly short notice. We appreciate 
your attendance. I now recognize Mr. LaFalce for any opening 
statement that he would like to make.
    [The prepared statement of Hon. Spencer Bachus can be found 
on page 64 in the appendix.]
    Mr. LaFalce. Thank you very much, Mr. Chairman. As the 
Ranking Member of the Full Committee, I don't attend too many 
subcommittee hearings, but this I consider to be of tremendous 
import. It's a hearing that I've been seeking for about 7 
years, and I was absolutely delighted when the Chairman of the 
Full Committee and subcommittee about a week or so ago agreed 
to have the hearing.
    I believe that the credit card industry practices and the 
growing problems of consumer credit card debt are extremely 
important issues. For years now I have received more letters 
from my constituents complaining about credit cards than any 
other consumer financial issue.
    What's interesting is how these letters have evolved over 
the years in response to changing practices of the industry. In 
the mid-1990s, most of these letters complained of the growing 
numbers of misleading credit card solicitations. As far as I'm 
concerned, too many in the industry are guilty of that.
    Of arbitrary interest rate increases. Again, as far as I'm 
concerned, too many in the industry have been guilty of that.
    Of the hidden fees and charges. Absolutely. I mean, what 
some institutions are doing is absolutely atrocious.
    New penalties for making monthly payments late, and I think 
the bills are being sent out later, the grace period has been 
shortened, the posting is delayed. And then, of course, the 
penalty, the fee, somehow they must have come to a consensus 
about $29 regardless of the fact that the minimum payment due 
is $10.
    And then, of course, the unbelievable proliferation in 
solicitations to college students and minors, where I believe--
you can correct me if I'm wrong--that the average college 
student has about four credit cards today.
    Related to that, I'm extremely concerned about college 
student use of credit cards for the purpose of internet 
gambling on the laptops in their dormitory rooms, and the 
credit cards that they have arriving through their mail at the 
rate of one or two a week.
    A word on internet gambling. We just passed a bill out 
yesterday. Independently of that bill, and I don't know what's 
going to happen with it, but I will be writing a letter. I'm in 
the process of drafting it now. I just advise you of this--to 
every referee in bankruptcy telling them that based upon 
judicial interpretations of existing law, most especially the 
Wire Act, you are engaged in an illegal activity. And 
therefore, anybody who has a debt in a bankruptcy court cannot 
have that debt enforced against them by anybody who aided and 
abetted them, that is, a financial institution or a MasterCard, 
Visa or what have you, and therefore, those debts should be 
automatically discharged.
    Second, I'll be writing to every financial regulator 
telling them with respect to every financially regulated 
institution, that if they permit internet gambling and the use 
of credit cards, ipso facto, they are involved in an unsafe and 
unsound banking practice, and therefore, they should stop 
immediately. Just put you on notice.
    In response to the problems that were brought to my 
attention daily in the mid-1980s, in 1998 I introduced a bill 
to address the most unjustifiable of these practices by credit 
card companies. I reintroduced it in 1999, and again earlier 
this year as H.R. 1052. And while the Judiciary Committee has 
acted on two occasions to incorporate at least five of my 
credit card proposals--there are roughly a dozen--within the 
bankruptcy bill, my particular bill has never been considered 
by this subcommittee.
    But the problems have evolved. Now there's a pattern of 
abuses and conduct by credit card companies that in my view 
approach outright fraud. The same practices have figured 
prominently in a number of major legal settlements over the 
past 2 years, including, and I'll just tick off a few:
    1. A $3.2 million settlement by Direct Merchants Credit 
Card Bank to settle OCC charges that the bank regularly engaged 
in bait-and-switch schemes in which consumers are marketed 
preapproved credit card offers with attractive terms, but 
receive far less favorable credit card accounts with 
undisclosed processing fees.
    2. A $45 million agreement by Citibank to settle complaints 
that the bank did not credit consumer payments upon receipt and 
improperly assessed late fees and interest charges.
    3. A $300 million agreement by Providian National Bank to 
settle OCC charges that the bank routinely billed accounts for 
products and services consumers had not approved, enticed 
consumers to transfer balances with inflated claims of cost 
savings, and imposed annual fees on accounts that advertised no 
annual membership fees.
    4. A $40 million agreement to settle customer complaints 
that FirstUSA solicited credit card accounts with initial rates 
of 6.5 percent that were quickly changed to a floating annual 
rate above 22 percent and misrepresented payment due dates in 
billing statements.
    I could go on and on and on. Let me also say, a number of 
these actors have cleaned their act up, to their credit. But a 
lot of damage was done.
    In all of these and other major settlements, the financial 
institutions involved all stated publicly that ``we've broken 
no law.'' And they all say they settled only to cut legal costs 
or minimize adverse customer relations. So, ``we didn't do 
anything. We'll pay you $300 million, but we didn't do anything 
wrong.'' Well, you know, technically they may have been 
correct, and that's the problem. There currently is no clear-
cut Federal law that adequately addresses these consumer 
    The Truth in Lending Act was enacted over 30 years ago when 
credit cards were first appearing in the marketplace. And TILA 
is concerned primarily with disclosure of credit interest rates 
and deals only marginally with the administration of credit 
card accounts. The FTC's standards for unfair and deceptive 
business practices under the FTC Act do not apply by statute to 
regulated financial institutions. And the Federal Reserve Board 
has yet to exercise its long-standing discretionary authority 
to define unfair acts or practices in connection with credit 
cards or other credit transactions.
    Mr. Chairman, this is one area where clearly there ought to 
be a law.
    Chairman Bachus. I thank the Chairman.
     Mr. LaFalce. I thank you for that designation.
    Chairman Bachus. The Ranking Member.
    Chairman Bachus. At this time we're going to hear from Mr. 
Sherman. We're going to have one more opening statement on each 
side. I did it as people requested. But do you have an opening 
statement? I'll recognize the gentleman from New York. Or how 
about Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman. I'd like to comment 
on the comments of our Chairman. I agree, shame on a credit 
card company that is remitting money knowingly to those engaged 
in the business of illegal gambling. The problem that I see is 
how will a credit card company know that a particular entity 
based in the Bahamas--you could call yourself the Bahamanian 
Sweater Company and claim to your bank that you're engaged in 
selling sweaters or bathing suits, or you could call yourself 
the Bahamanian Gambling Site. And that's why I think it's 
important that there be at least an official, and if we can't 
get it done officially, at least a semi-official list of those 
who are making charges on credit cards, those who are vendors 
in the credit card transaction that are not selling sweaters 
but rather chances of winning in gambling.
    The other point I want to make relates to some legislation 
that I'm going to introduce soon that I hope many of those 
present here will choose to co-sponsor, and that deals with 
what's happening now. And that is, people are mailing in or 
trying to mail in their payments, and it's not arriving at the 
credit card office on time. Now we're all familiar with late 
charges and finance fees, and they can be horrendous. And if 
we're really late in sending in the money, I guess maybe 
there's a fairness to it. But when people here in Washington, 
DC. try to mail their payment and it's delayed for 4 or 6 days 
or the mail is sent to Ohio for irradiation on its way to 
credit card payments, that should not be the consumer's fault 
and certainly shouldn't lead to finance charges.
    I'm told that many banks are waiving those charges on 
request. It should not be the consumer that has to make that 
request, and I know that there are some credit card companies 
that aren't waving these fees at all. They're saying we got 
your payment late, we're assessing the fee. What my bill would 
do is apply to those payments of less than $10,000, because if 
you owe somebody $10,000 on a particular date, maybe you ought 
to wire them the money, but rather regular consumer payments on 
credit cards, regular consumer payments of mortgages, and say 
that where the Postmaster General determines that there is a 
delay in the mail due to an extraordinary occurrence, whether 
it be an act of terrorism or whether it be a hurricane or 
whatever, that consumers are given an additional grace period.
    And I think that a lot of us if we talk to our constituents 
are going to find people who are either getting hit with 
finance charges that they think are unfair or are calling in in 
order to get the finance charges reversed.
    So I hope to have some support for a bill to provide these 
additional grace periods when our mail system is interrupted by 
either acts of God or acts of man, and I yield back.
    Chairman Bachus. Thank you.
    At this time we yield to the Chairman of the Full Committee 
for an opening statement.
    Mr. Oxley. Thank you, Mr. Chairman, and I'd like to commend 
you for holding this important hearing today. Americans hold 
more credit cards and carry more credit debt than ever before. 
With the current sluggish economy, problems with the mail, this 
Subcommittee needs to examine the credit card industry to 
ensure that credit card holders are treated fairly.
    The industry has had problems in the past. The posting of 
payments, teaser rates and fees. We must ensure that these 
practices do not resurface. Of the three types of consumer 
credit available in the financial services industry involving 
bank card credit accounts for only 10.4 percent of outstanding 
consumer credit, an amount of slightly less than $858 billion. 
Installment loans, car loans, for example, account for 13.9 
percent, or $782 billion, and home mortgages account for $4.3 
trillion, about 75.7 percent of all outstanding consumer 
    While it is the smallest segment of consumer credit, the 
credit card industry is a major provider of financial services 
and a multi-billion-dollar industry. Credit cards provide 
access to credit and payment conveniences. They provide a means 
of cashless transactions. They serve as an interest-free loan 
from the time of purchase until the payment is due.
    They provide customers with the ability to receive cash 
advances from automated teller machines. They provide customers 
with the ability to shop by telephone and on line, and they 
also provide an instant source of credit that is available 
without filling out forms or undergoing credit checks. Unlike 
cash, a lost or stolen credit card can be replaced, and there 
are liability limits for fraudulent or unauthorized charges. 
Credit cards also offer resources in cases of emergency, such 
as large repair bill or airfare home during a family crisis.
    However, there are definite disadvantages of credit cards 
as well, such as credit card debt. It may be more costly and 
difficult to repay than other forms of consumer credit. The 
convenience of credit cards may tempt some customers to live 
beyond their means. It is also noted that excessive credit card 
debt and late payments can impair a cardholder's credit rating 
and make it more difficult and costly to obtain credit in the 
    It seems that an appropriate purpose of this hearing is to 
assess how the industry is balancing competing advantages and 
disadvantages of its product and how it serves its customers.
    Mr. Chairman, again, my thanks for this important hearing, 
and I look forward to hearing from the witnesses, and I yield 
back the balance of my time.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 66 in the appendix.]
    Chairman Bachus. Thank you.
    At this time, I recognize the gentleman from New York, Mr. 
    Mr. Ackerman. Thank you very much, Mr. Chairman, and thank 
you for holding this very important hearing. I appreciate the 
opportunity to hear from the witnesses today on a variety of 
issues having to do with credit cards.
    There are several issues that I'd like to see addressed. 
One of them are the privacy notices that have gone out and how 
successful they've been. I know that I was deluged with them. I 
got about 40-some-odd different notices, and you could spend a 
lifetime or a career just reading them, and I think most people 
don't bother to read them, and I'd just like to know what the 
results have been so far.
    I also want to hear about the terms of credit cards. The 
interest rates. I know my colleague before said shame on some 
of the credit card companies. I want to say hooray for some of 
the credit card companies. They have single-handedly put the 
Mafia out of the business of making loans at usurious rates.
    I would like to know what the credit card companies think 
the limits are that they could soak the public for. I've gotten 
I don't know how many solicitations that have these once in a 
lifetime opportunities to borrow money and put it on your 
credit card. And you always know what you're getting into from 
the start, because it's really in very big type, sometimes 
right on the envelope, taking up the whole sides of the 
envelope, like 1.9 percent. This is a limited opportunity kind 
of offer. And then you read the small print. And you can't find 
the small print.
    I'm not going to embarrass anybody today, because my 
original thought was to give everybody who was a witness here 
today, both panels, one of the solicitations and say find out 
the month that this expires, and you can't find it. I mean, it 
took me like 12 minutes to read one of them three times, and I 
had to get out my magnifying glass, because they have a type so 
small on the back page that tells you what the default date is, 
what the end date is, and the default rate. But you have to get 
out your magnifying glass and it's in print so small that that 
size type isn't even on the chart at your optometrist's office 
when you go for reading glasses.
    And then the default rate on some of them that I just saw 
from one very prominent bank is 24.9 percent. I'd also like the 
answers to questions concerning why there is a different rate 
for people who are higher risk for not paying, and that rate is 
basically spread over the entire lenders' base and there's 
really very little attempt made to collect on that because you 
build that into the excuse for your next rate increase. And I 
just want to know what the limit is going to be and do you 
think that you're getting into the position of being in the 
area of what is usurious.
    And finally, I'd like to know when a credit card company 
reports somebody to the credit reporting bureaus why it takes 
basically 24 hours to get that onto the report, and then you 
take as long as and sometimes longer than 3 months if that 
information was erroneous to remove it from the report of that 
agency. How do you explain that?
    These are some tough questions, but I think the public has 
a right to know the answers to these and some other questions 
that I'll have later on. And I thank the Chairman.
    Chairman Bachus. Thank the gentleman. Are there any other 
Members on the Majority side?
    Mr. Cantor.
    Mr. Cantor. Mr. Chairman, I would just like to make an 
opening statement.
    Chairman Bachus. Or an opening statement.
    Mr. Cantor. Thank you, Mr. Chairman. I would like to thank 
you for holding this hearing today on the credit card 
industry's treatment of its customers. As an opening comment, 
Mr. Chairman, I'd just like to point out an instance in which a 
credit card company not only treated its customers fairly, but 
in light of the events of the September 11th tragedies and 
terrorist attacks, went to great lengths to provide assistance 
to its customers and its community.
    A case in point would be, Mr. Chairman, the Capital One 
Corporation. It happens to be the largest employer in my 
district. I believe that this company also has instituted 
policies which I believe could serve as models for the 
industry. After the tragedies of September the 11th, Capital 
One voluntarily took proactive steps to address the needs of 
its customers in these difficult times. They adopted a time 
standstill policy, charging no interest or fees for an entire 
statement cycle and established a hardship policy to allow for 
emergency lines of credit increases for people living within a 
90-mile radius of both New York City and Washington, DC. 
Additionally, they suspended collection calls for two weeks in 
these areas.
    For their other customers, Capital One backdated payments 
to compensate for mail delays and granted a higher number of 
fee waivers to customers with special needs.
    But Capital One's greatest accomplishments I believe from 
the community from which I come in this time of national 
tragedy was its involvement in a nationwide telethon that 
occurred the Friday after the attacks. They created a 15,000 
person call and payment processing center to handle the high 
volume of calls which were staffed by 7,000 Capital One 
employee volunteers. The company donated $100,000 to the 
American Red Cross effort, promoted blood drives at all their 
locations, and established the Capitol One Cares Fund which 
will match employee contributions up to $75,000.
    But, Mr. Chairman, besides these acts, the company has 
worked very hard to ensure that the customers are satisfied and 
that there are many internal programs to improve the 
relationship with its customers that I point out could be a 
model for the industry. These programs range from Listen Up, 
which requires company executives to spend time each month 
listening and observing customer interactions in order to 
better understand the customers' needs. Customer Connection is 
a program that offers surveys to clients 24 to 48 hours after 
dealing with an associate in order to find out where Capital 
One needs to improve its services. The current results of this 
program have indicated that 83 percent of customers are very 
satisfied with the company's services.
    In sum, Mr. Chairman, I would think that the efforts of 
Capital One in this time of national crisis and its continuing 
strive to have good relations with customers are examples of 
the good deeds and I think services that the industry is 
capable of. I'd therefore like to thank Capital One and the 
industry and its efforts to improve relationships with its 
customers. I am sure, Mr. Chairman, that out of this hearing we 
will also hear other ways that we can encourage industry to 
conduct like policies. I yield back. Thank you, Mr. Chairman.
    Chairman Bachus. I thank the gentleman from Virginia for 
those heartfelt sincere remarks.
    At this time I'd recognize the lady from California.
    Ms. Waters. Thank you very much, Mr. Chairman. I'm very 
pleased that we're having this hearing. The full name of this 
subcommittee is Financial Institutions and Consumer Credit. All 
too often, we spend most of the subcommittee's time on the 
financial institutions part and not nearly enough time on 
consumer credit issues.
    This particular hearing, which will examine current 
practices of the credit card industry, is long overdue. The 
credit card industry is rife with abuses and deceptive 
practices. Recently the courts and some regulators have acted 
to curtail a few of the most egregious cases. In my home State 
of California, the OCC imposed $300 million in civil penalties 
against Providian for deceptive marketing of mandatory credit 
protection and other violations. The OCC also imposed penalties 
against Direct Merchants Bank for downselling customers. 
Downselling is the practice of marketing favorable account 
terms to a customer, often preapproving the customer for these 
low interest rate accounts but then approving the customer for 
an account with higher rates and fewer benefits without 
highlighting these changes to the customer.
    I am particularly concerned about late payment fees. These 
fees range from $15 to $35 and are generally imposed whenever a 
payment is late with no grace period. Reportedly, a number of 
institutions actually impose late fees even when the payment is 
received on the alleged due date because the cardholder 
agreement indicated that the payment must be received by an 
early morning hour of the due date, well before mail delivery 
is scheduled to arrive.
    This is especially troubling in the current environment 
where mail delays are becoming increasingly common. While I am 
aware that some individual institutions have taken steps to 
waive fees and extend due dates in some cases, I believe that 
it would be appropriate for the regulators to impose a 
moratorium on late fees and over-the-limit fees that are likely 
to result from the delays in mail that are currently being 
    Alternatives to mail delivery are not necessarily better. 
Many credit card companies charge customers as much as $10 or 
$15 to process an electronic payment via phone. Even worse, I 
understand that at least one institution, my old friends at 
Citibank, does not credit these electronic payments at the time 
the customer authorizes the payment but delays crediting the 
account until the payment has been processed. Therefore, if a 
customer seeks to avoid a $35 late payment fee by paying $15 
for an electronic debit, that customer may still be hit with 
the late fee if the bank doesn't credit the payment in a timely 
    Furthermore, these late fees can trigger higher penalty 
interest rates, as high as 30 percent. These penalty rates can 
even be imposed in response to a late payment to another 
creditor. If this information is obtained from a customer's 
credit report, the customer has no ability to respond or 
explain the late payment which could be a disputed debt, a 
creditor mistake, or a case of identity theft.
    Finally, I would like to hear testimony from both the 
regulators as well as the industry representatives regarding 
interest rate floors that many institutions impose. Every time 
that legislation is proposed to cap credit card interest rates, 
like the bills recently introduced by Congressman Salmon, the 
industry rails against these caps, claiming that they must have 
the flexibility to reflect the cost of funds in their products. 
However, now that the Fed has lowered the cost of funds 
considerably, many credit card customers are receiving 
absolutely no benefit from the interest rate reductions because 
their accounts have a floor or a minimum interest rate that 
will be charged.
    Why is it that the industry considers interest rate caps a 
distortion of the market but imposes interest rate floors in 
order to prevent their customers from sharing in the lowered 
cost of funds? The reason the Fed has been reducing interest 
rates is to stimulate the economy. Stimulate the economy. 
Stimulate the economy. It seems to me that customers would have 
more money to spend if they were realizing the benefits of 
these lower interest rates. It seems to me this would be to 
everybody's benefit.
    Now for those who say, you know, oh you just are attacking 
the credit card companies, or you feel Americans hold too much 
debt or credit and you would like to do away with the industry, 
that is not true. And that is one of the reasons I have 
introduced H.R. 2969, a bill that reinstates the tax deduction 
for personal interest, such as credit card interest and car 
loan interest. My legislation currently has 55 co-sponsors 
including Mr. Bereuter, Mr. Kanjorski and a number of other 
Members of the Subcommittee. It is my hope that even more of my 
colleagues will co-sponsor this legislation and that we will 
enact it this session, stimulate the economy by giving tax 
relief to consumers while preventing home equity stripping.
    So in my estimation, if the credit card companies realized 
the benefit to themselves and to the consumers and this 
economy, they would lower these interest rates and support the 
idea that consumers could deduct the cost of the interest rates 
as tax deductions.
    I would like to thank you, Mr. Chairman. I yield back the 
balance of my time and look forward to the testimony of the 
    Chairman Bachus. I thank the Ranking Member. Are there any 
other Members who wish to make opening statements? The 
gentlelady from New York and then the gentlelady from 
    Mrs. Maloney. Thank you, Mr. Chairman, for calling this 
hearing on how the credit card industry treats its customers. 
We are all sitting here because we have been elected by 
consumers. And I truly think we should hold more hearings that 
specifically address their treatment by financial service 
providers of all types.
    I believe today's hearing is especially timely, given the 
events of September 11th. In the wake of the attacks, U.S. 
businesses have responded with an outpouring of charitable 
support and business breaks for my constituents in New York. 
These have included the waiving of late fees and other 
considerations by credit card companies. These are fantastic 
gestures by the companies that have offered them. While these 
good actors in the industry should be praised, I do believe 
that we should consider making the waiving of such late fees 
    As you would expect, my district office and my office here 
in New York have been inundated with case work related to the 
attacks. To this point, I can personally say that we have not 
received complaints from victims' families related to credit 
cards. In fact, most people I have talked to have praised the 
measures taken by financial service providers, especially 
insurers and individual banks that have worked with victims to 
extend credit and address their individuals concerns.
    I look forward to comments by today's witnesses on the 
credit card industry, and I thank the Chairman for calling this 
hearing and I request permission to put the rest of my comments 
into the record. Thank you.
    Chairman Bachus. I thank the gentlelady.
    Ms. Carson.
    Ms. Carson. Thank you very, very much, Chairman Bachus for 
convening this hearing so expeditiously, and I want to welcome 
all the panelists who are here today and to assure you that my 
comments are not combative, they're not accusatory, they're 
simply derived from the kind of constituent inquiries that my 
office receives both here and in Indianapolis.
    For some years now, consumers have experienced and are 
experiencing a new system among credit card issuers in which 
small print can lead to big debt. Tactics such as penalty 
pricing, where fees and penalties have replaced interest 
earnings as the principal source of earnings for card issuers, 
and arbitration clauses and credit agreements have resulted in 
customers finding themselves trapped on a treadmill of debt.
    As we move into the 21st century, credit card users are 
faced with an ever-growing myriad of hidden clauses which are 
designed to catch the consumer unaware. These include sudden 
changes in policies and rates, late fees, balance transfer 
fees, increases in annual percentage rates and mergers that 
change the rate and term agreements at a moment's notice. What 
these consumers are experiencing is a new system among credit 
card issuers called penalty pricing in which fees and penalties 
have replaced interest earnings as the principal source of 
earnings for card users.
    Penalty pricing is a gold mine for credit card companies 
and unfortunately, perfectly legal. Credit card issuers are 
taking every advantage in current law to hook new customers 
with misleading promotions about teaser rates that start out 
low but can be jacked up as much as 24 percent if a customer is 
even one day late on a payment. Consumer groups report the 
grace periods are getting shorter for payment due dates. Many 
credit card issuers are eliminating payment leniency periods 
and slapping record numbers of new fees and penalties for every 
possible consumer lapse.
    Students at my colleges and my university are saying that 
they open up their mail and there was a credit card, $10,000 
limit. They're naive, immature, go out and run the credit card 
bill up. Their parents are being harassed. When they graduate 
from college, their credit is all screwed up. They can't do 
anything about that.
    Finally, Mr. Chairman, let me mention another gimmick that 
my constituents complain about, and that is opening up a credit 
card bill, finding some company has charged their credit card 
for items that they have not received and know nothing about. 
And the problems that consumers incur trying to remove those 
bills, those charges from their credit cards and how the credit 
cards are making them go to a company that they don't even know 
exists to try to get those kind of charges removed.
    Finally, the kind of sudden mail subscriptions that come to 
their doorstep for magazines that they did not order that 
appear up on their charge cards for charges.
    Those are some of the kind of things that we're confronted 
with as Members of the United States Congress, and I believe 
that we can work out a solution that would be palatable both 
for the profit margin of the credit card company and be to the 
fairness and responsibility for the consumers who are credit 
card holders.
    The bankruptcy filings in my district have skyrocketed, and 
it is all because of credit card debt.
    Thank you very much, Mr. Chairman. I yield back the 
    Chairman Bachus. At this time, I'd like to introduce the 
first panel. The first panel is made up of regulators. We have 
Dolores Smith, who is the Director of the Division of Consumer 
and Community Affairs for the Board of Governors of the Federal 
Reserve System. And Elaine Kolish, she is Assistant Director of 
the Bureau of Consumer Protection, Division of Enforcement at 
the Federal Trade Commission.
    Both our witnesses have testified before us before. Both of 
them are highly qualified to testify, and I think they are as 
informed as anybody at those two agencies in addressing the 
issues before us today.
    So at this time I'd like to recognize Director Smith for an 
opening statement, followed by Director Kolish. We anticipate 
having a vote around 11 o'clock. Hopefully we can have both 
opening statements and start the questioning. But if we have a 
vote during your testimony, then we'll probably recess for 
votes. Thank you.


    Ms. Smith. Chairman Bachus, Representative Waters, Members 
of the subcommittee.
    Chairman Bachus. And if you all will sort of pull those 
mikes up close.
    Ms. Smith. Thank you for inviting me to appear before you 
this morning. The Federal Reserve Board's Division of Consumer 
and Community Affairs carries out the Board's responsibilities 
for administering a number of consumer credit protection laws, 
including the Truth in Lending Act.
    The Truth in Lending Act is the primary law governing 
credit cards at the Federal level. Disclosures about costs must 
be given with a credit card solicitation, when an account is 
opened, and with each billing statement.
    Truth in Lending also requires that payments be credited on 
the date received. It limits consumers' liability for 
unauthorized use of a credit card, and it provides procedures 
for resolving billing disputes. Credit cards are also subject 
to various State laws that may regulate the terms of the 
    My written testimony gives a little background on growth in 
the credit card industry and includes attachments relating to a 
study entitled ``Credit Cards: Use and Consumer Attitudes, 
1970-2000'', a study on credit card profitability and our 
consumer brochure on shopping for a credit card.
    My oral remarks will focus on some of what we have learned 
from studies about consumers' attitudes toward credit cards. 
We'll describe recent regulatory changes that we made to 
improve credit card solicitations, and we'll mention the 
Federal Reserve's experience with consumer complaints and 
compliance examinations of State member banks.
    First about consumer attitudes. The Federal Reserve 
sponsors or participates in a number of surveys that explore 
consumers' attitudes toward credit cards. I'll mention the most 
recent, carried out in January 2000. That survey reveals that 
consumers have mixed feelings about credit cards. About 40 
percent of those surveyed believed that consumers would be 
better off without credit cards, and about 88 percent agreed 
with a statement that credit card companies make too much 
credit available to most people.
    Consumers may have developed these negative views in part 
based on their perception of other consumers' difficulties 
rather than from their own experiences, because when asked, 
about 90 percent of the consumers with bank-type cards said 
they were generally satisfied with their own credit card 
companies and believed that they were treated fairly. They also 
believed that they could easily get a card from another company 
if they were not treated well.
    The Board also has participated in surveys that looked at 
consumers perceptions about the ease of obtaining cost 
information for credit cards. In a recent survey, about two-
thirds of consumers with bank-type credit cards said that 
obtaining information on credit terms is easy. However, many 
did find card solicitations offering a low introductory rate to 
be confusing.
    I'll move on to describe our recent rulemaking. In response 
to concerns about solicitation disclosures, the Board last year 
amended the rules that govern solicitations to make them more 
helpful to consumers. The changes relate to disclosure 
requirements under the Fair Credit and Charge Card Disclosure 
Act of 1988. This law requires that the APR and other costs be 
disclosed in direct mail and other credit card solicitations. 
The purpose of the law was to ensure that consumers received 
key cost information about credit and charge cards early enough 
to permit comparison shopping.
    Before 1988, consumers often did not receive cost 
information until they opened an account. The Act requires that 
the disclosures be given in a table prominently located on or 
with the solicitation. Over the years, as the pricing of credit 
card programs has become more complex, the cost disclosures 
provided with credit card solicitations also have become 
complex, particularly when multiple rates apply to a single 
program. And over the years, as the disclosures became longer, 
some card issuers chose to compensate by using reduced type 
sizes instead of allocating more space. In some cases, it 
became difficult for consumers to use the disclosure table to 
readily identify key costs and terms for comparison shopping.
    In contrast, the promotional materials that accompany a 
credit card solicitation may highlight a low introductory rate 
in a large, easy-to-read type size.
    Last year the Board revised its rules for credit card 
solicitations to make the required disclosure table more 
noticeable, simpler, and easier to use. These changes became 
effective on a mandatory basis on October 1, 2001, and 
consumers should now be seeing improved disclosures with the 
credit card offers they receive.
    Card issuers must disclose the regular APR for purchases in 
at least 18-point type so that it is more prominent than any 
introductory rate. Also, disclosures must be readily 
noticeable. They automatically meet this standard if they are 
in at least 12-point type.
    To take account of the complex pricing, cash advance and 
balance transfer APRs must also be included in the disclosure 
    I'll close by mentioning our experience with respect to 
bank examinations and consumer complaint investigations. The 
Federal Reserve conducts compliance examinations of about 980 
State member banks. Most are small institutions. For the vast 
majority, credit card lending is not a significant activity. Of 
the banks that we examine, only three have substantial credit 
card portfolios representing 50 percent or more of the bank's 
total loans.
    In our examination of banks that are involved in credit 
card lending, we find isolated instances in which the bank has 
failed to meet Truth in Lending requirements. We have not found 
any widespread practices that violate applicable laws or 
    The Board investigates consumer complaints against State 
member banks and forwards complaints about other creditors to 
the appropriate enforcement agency. The annual volume of 
complaints that we receive, including complaints about credit 
cards, has been increasing since 1997. Last year there were 
about 2,400 complaints filed with us regarding State member 
banks. Approximately 1,000, or 40 percent, were about credit 
cards. Of these 1,000, about 60 percent fell into three 
categories: disputes about billing errors; concerns about 
penalty charges, late payment and other fees; and disputes 
involving alleged errors in reporting consumers' payment 
    In the vast majority of complaints investigated, the bank 
was legally correct but made a good will reimbursement or other 
accommodation to the consumer.
    Thank you.
    [The prepared statement of Dolores S. Smith can be found on 
page 68 in the appendix.]
    Chairman Bachus. Thank you. Director Kolish?


    Ms. Kolish. Thank you. My name is Elaine Kolish. I am the 
Associate Director of the Enforcement Division at the FTC.
    Chairman Bachus. If you all would pull those mikes just a 
little closer.
    Ms. Kolish. Yes, sir. First I'd like to note that my oral 
statement represents my own views and not necessarily the views 
of the Commission or any individual commissioner. As Mr. 
LaFalce noted, the FTC doesn't have jurisdiction over banks, 
but we do exercise our jurisdiction over non-banks to stop 
deceptive practices very vigorously, bringing dozens of cases 
against marketers, telemarketers engaged in deceptive marketing 
of credit card offers and credit card protection services to 
consumers. In fact, just last week, we brought eight cases 
against people who were misleadingly marketing credit cost loss 
protection services.
    But I'd really like to focus today on our recent case 
against Ira Smolev and a group of companies that he ran that 
sold memberships to discount buying clubs, known as Triad 
Discount Buying Service. The Commission brought this case as 
part of its overall crackdown on deceptive negative option 
marketing and free trial offers, and as part of our ongoing 
effort to ensure that consumers' credit cards are only charged 
for the goods and services that they want.
    This case is particularly important because of the large 
number of consumers who found their credit cards charged up to 
$96 for a buying club they didn't want. Last week we announced 
that we've obtained a settlement with Mr. Smolev and his 
companies to pay $9 million to the FTC and to the more than 40 
State Attorneys General who joined us in this action.
    Although free trial offers can be a great way for consumers 
to try a new product or service without making a long-term 
commitment, they're only legal if the marketer is up front and 
truthfully discloses all the material terms and conditions. 
What happened in the Smolev case is that consumers didn't get 
the information they needed, and here's how it worked. Say you 
saw a TV commercial for a chicken rotisserie and decided you 
simply had to have it, so you call the toll-free number, 
provide your credit card number to pay for the product, and 
then you're told, as a thank you for your purchase, they'd like 
to give you a special offer--a free trial in a discount buying 
    These additional pitches are known as upsells, which is the 
telemarketer's version of the foot in the door. Getting one, 
two, three or even more upsells is becoming very common in 
telemarketing calls. Unfortunately, while the telemarketer 
touted the offer as free, risk-free, no obligation, the 
telemarketer failed to tell you adequately that it was your 
obligation to call before the end of that 30-day trial period 
to avoid having your credit card charged for a year's 
membership. And in many instances we found consumers got 
charged even if they said no to the free trial offer, and other 
consumers said they never even heard the pitch but they were 
charged anyway.
    Adding to this injury was that the telemarketer you called 
transferred your credit card information to a third party, in 
this case, the Smolev buying clubs, without your knowledge or 
agreement. Under the settlement we've reached, as many as 
275,000 consumers are going to get refunds of at least a 
portion of what they paid and the companies are going to have 
to dramatically revise their marketing practices to prevent 
future deception.
    In particular, the order will protect consumers by 
prohibiting the defendants first from transferring credit card 
information to third parties, and second, from obtaining credit 
card information from third parties without consumers' 
knowledge and agreement.
    The Smolev case is particularly troubling, because it shows 
that when marketers already have consumers' credit card 
numbers, they have the ability to place charges on consumers' 
accounts without their knowledge and agreement, and they can 
transfer this information to third parties who can do the same 
    The FTC and the States have already brought a number of 
cases involving misleading free offers and dozens of cases 
involving other types of misleading sales practices involving 
credit card offers and credit card loss protection services. 
And we continue to actively monitor this area so that we can 
stop deceptive practices.
    In addition, Chairman Muris just recently announced that as 
part of our review of the FTC's telemarketing sales rule, he 
will ask the Commission to consider amendments that would 
address abuses concerning pre-acquired account information, to 
ensure that such information is not used to bill consumers' 
credit cards for services and goods they do not want.
    Let me close by saying that, as we do in all areas, we try 
to inform consumers about what they need to look out for when 
they get free trial offers so they can make informed decisions 
about whether to participate, and we encourage consumers who 
feel they've been misled to file complaints with the FTC. That 
information is extremely important to us in helping us target 
our resources on the worst actors.
    Thank you for this opportunity to testify.
    [The prepared statement of Elaine Kolish can be found on 
page 112 in the appendix.]
    Chairman Bachus. Thank you. At this time, we're going to 
recess for votes. We anticipate we will reconvene at twenty 
after. Thank you.
    Chairman Bachus. The hearing will come to order. At this 
time I'm going to ask unanimous consent from the subcommittee 
that we allow one of our colleagues, Representative Chris 
Smith, to make a statement. Representative Smith of New Jersey 
has introduced legislation prohibiting credit card companies 
and other creditors from imposing late fees, raising interest 
rates or submitting adverse information to a credit bureau with 
respect to any consumer whose mail service has been disrupted 
due to a biological or chemical attack on America.
    So at this time, without objection, Mr. Smith.
    Mr. Smith. Mr. Chairman, Senator Bachus, Chairman Bachus, 
thank you so much for this courtesy, because this is I believe 
to be an emergency that's occurring right now in my district 
but the potentiality of this happening in anyone's district or 
in proximity to their district is very, very high, so I want to 
thank you for this very kind courtesy that you've extended to 
    Mr. Chairman, I do appreciate the opportunity to discuss 
legislation that I've introduced which I hope will receive a 
thorough analysis and quick analysis and consideration by this 
subcommittee and the Full Committee. The proposal, H.R. 3175, 
the Late Fee Emergency Relief Act of 2001, would protect 
consumers from late payment penalties caused by mail delays 
resulting from acts of biological, chemical or radiological 
    In the event of a terrorist attack that resulted in the 
disruption of mail, the legislation would require the 
Postmaster General to certify certain zip codes as being 
disrupted. This designation would be for a 30-day period, kind 
of like a grace period. During the period of disruption, 
consumers would be given 30 additional days to make their 
payments or mortgages, and they would be protected from having 
to pay late fees, higher interest rates, or suffering from 
negative credit information being placed in their credit 
report. Persons whose principal residence is located in these 
affected zip codes would be afforded this modest protection.
    Mr. Chairman, I drafted this legislation after learning 
that several, hundreds of my constituents have already received 
late payment notices for bills that they had mailed on time but 
had not been received due to the crisis at the Hamilton 
Regional Post Office located on Route 130 in Hamilton Township, 
New Jersey. This post office is a critical hub for mail 
distribution. As a matter of fact, it has 44 different feeder 
sites that feed into it. It is a very large facility, and I've 
seen the trailer that is filled to overflowing with suspect or 
potentially contaminated mail. There are bills, there are 
remittances, there are checks that are sitting there that until 
it is screened and checked and cleansed will not get out of 
that trailer.
    I believe that with the recent anthrax attacks on our 
postal system causing disruptions and delays in mail delivery, 
it is only reasonable that banks and creditors make reasonable 
accommodations for customers whose payments are delayed through 
no fault of their own.
    This legislation is carefully crafted to provide a 
mechanism for temporary relief for consumers. It will not allow 
people to escape their financial obligations, because the 
protection from late fees, higher interest rates, and--and I 
think very importantly--negative credit information only lasts 
for 30 days. Moreover, H.R. 3175 under the provisions, the 
Postmaster General has the authority to continue to list 
affected zip codes if the mail disruptions are not ended within 
the 30-day window.
    Mr. Chairman, I believe it is a reasonable solution, and I 
do hope that you and Members of this important subcommittee 
will look at it, and it needs to be marked up and be put on a 
fast track to help people like my constituents. Thank you, Mr. 
    Chairman Bachus. I thank the gentleman.
    At this time we'll go back to our regular order of 
business. But Representative Smith, we have before us 
representatives of the FTC and the Federal Reserve also who 
regulate the credit card industry, and also MasterCard and Visa 
representatives are in the audience and will be testifying on 
the second panel. So I think you had an appropriate forum.
    At this time we will turn to questioning our first panel. I 
want to read an excerpt from a National Journal article that 
was published September 8, three days before the terrorist 
attacks on our country. It says ``Credit has played an 
indispensable role in American prosperity, helping to sustain 
this country through economic downturns and tide over families 
threatened by sudden misfortune, but it has also exacted harsh 
costs, leaving a third of low-income people in serous financial 
trouble and squeezing middle class families as never before. 
Yet there seems to be no end in sight. U.S. households continue 
to pile up more debt each year, dedicating ever larger shares 
of their income to keeping up with payments. Huge industries 
are being created to facilitate this borrowing and to collect 
from those who can't pay.''
    And this is the particular line, and I'm going to use this 
as a question to you: ``Meanwhile, as the demand for more 
credit soars, Government is turning a blind eye to new lending 
practices that are worthy of Tony Soprano.'' Now the gentleman 
from New York actually mentioned the Mafia earlier and 
complimented the credit card industry by saying that they 
replaced the Mafia in lending money to some people and were 
obviously a much better alternative. But here is at least one 
leading publication saying that some of their lending practices 
are worthy of Tony Soprano.
    And Ms. Kolish, I will say to you, you described a flim-
flam operation that I think was despicable, which defrauded 
thousands of American citizens. The FTC got involved in that. 
But I'll tell you what raised my eyebrows. You said that they 
were required to pay back--the consumers got ``some of their 
money back.'' My question to you, why didn't they get all their 
money back and punitive damages?
    Ms. Kolish. Our goal would have been to give all the money 
back to consumers as redress. Unfortunately, four of the major 
    Chairman Bachus. And would you pull that mike a little 
    Ms. Kolish. Unfortunately, four of the major corporations 
at issue in this case filed for bankruptcy, and so we had a 
very difficult time. You know, we had other creditors competing 
for this money as well. But the good news is, the FTC is 
getting over 50 percent of the bankrupt estate so that we got 
the most money we possibly could to give back to consumers.
    Chairman Bachus. Are there any criminal actions being 
    Ms. Kolish. Well, I couldn't say if there were, but it's 
possible that criminal authorities--we don't have the 
jurisdiction to do that ourselves--could be interested in 
following up on this, but I'm not aware of that.
    Chairman Bachus. Do you all work and cooperate with the 
Justice Department and State Attorneys General when you see 
lending practices that you believe really represent criminal--
you know, to me, some of these activities are clearly illegal.
    Ms. Kolish. We absolutely do work with criminal authority 
and State Attorneys General. In the Triad case we just brought, 
we worked with more than 40 State Attorneys General, and in 
many other cases, we've worked with State and other Federal 
authorities to bring cases which have on occasion led to 
follow-up criminal actions. Sometimes criminal authorities have 
used the civil findings we've obtained as a basis for their 
criminal action so they can get additional relief.
    And although we don't have jurisdiction over banks, that 
type of lenders, because of those concerns that you mentioned 
about low-income people being preyed upon when they don't have 
any money, we have brought dozens and dozens of cases against 
these telemarketers who are offering consumers guaranteed Visas 
or MasterCards when, in fact, they end up paying $169 and only 
get applications or nothing. So we devote huge amounts of 
resources to trying to tackle those types of fraud artists, 
because they are preying upon low income people who can least 
afford to lose that money.
    Chairman Bachus. In telemarketing, do you all have any 
guidelines or parameters on what calls are prohibited at what 
times of day or night? Is there any Federal law on that?
    Ms. Kolish. Yes. Congress gave us additional authority in 
the 1990s under the Telemarketing Act, and we issued 
implementing regulations known as the Telemarketing Sales Rule, 
which prohibits sellers from calling consumers before 8:00 a.m. 
or after 9:00 p.m. And it also specifies that telemarketers 
when they call you in outbound calls have to disclose up front 
the identity of the seller and the material terms and 
conditions of the sale.
    They are also prohibited, for example, in these lending 
situations where they want people to pay a fee in order to get 
a loan--we call it advanced fee loan scams--they're prohibited 
by law from collecting any money up front when they say they're 
going to try to help people get a loan or repair their credit 
history. So it's very good, clear-cut relief and guidance under 
the rule that allows us to go to court and get effective relief 
from judges.
    Chairman Bachus. I had an experience I think many Americans 
have. I have an unlisted telephone number and I received a call 
on that unlisted telephone number that I don't even use on 
credit applications from really a well-known bank. And I asked 
them very nicely, I said, you know, I'm not interested, and I 
would appreciate you removing my name from your list. I have 
now gotten two more calls from them. They're very courteous 
when I tell them to please not call me again. They then call me 
again. Are there any requirements on them when I advise them 
please not to call me again?
    Ms. Kolish. Yes.
    Chairman Bachus. And these calls are coming in at 
disturbing hours. I mean, I consider 8:15 in the morning, you 
know, on a Saturday morning, is not a good time to call me. I 
don't really think on my unlisted telephone number there is a 
good time to call me. And I have a listed telephone number that 
has an answering machine too.
    Ms. Kolish. Right. Unfortunately, they don't have to use 
listings to make calls. They can do automatic dialing. They can 
reach all sorts of numbers, listed or not listed. The 
Telemarketing Sales Rule does have a provision that says if 
consumers ask to be put on their ``Do Not Call'' list, they 
have to honor that, and they can be liable for civil penalties 
under the rule if they don't observe the customer's request. So 
we would be happy to hear about what organization it is that 
has violated your request that they not call you in the future.
    Chairman Bachus. Thank you. And it was actually an 
organization that I took a 1.9 percent loan out on, and 
willingly, and paid it, you know, bought a car and then 6 
months later, paid it off. But most people aren't in a position 
to use those things. There are some of us who take advantage of 
those and get some very low rates.
    Ms. Kolish. Well, with your good credit history, you'll 
probably get more offers.
    Chairman Bachus. But now that I've done that, I'm surprised 
they'd call me back really. Ms. Smith, let me ask you this 
question. And if you'd like to comment on that other one. But 
let me ask you a more basic question I think that we're all 
concerned about. Can Americans continue to load up on consumer 
debt without harming--it's harming themselves--but without it 
harming the U.S. economy? And I mean, are we there? Are we 
going to have some long-term consequences to our economy?
    Ms. Smith. Well, it's certainly something that we worry 
about, particularly in a period when there are rising levels of 
unemployment. But I really am not in a position to get into the 
economic aspects of this. But it is something to be concerned 
    Chairman Bachus. At the Federal Reserve, do you know of any 
actual--how great is the concern? How great that it can 
fundamentally harm our economy? And are there any serious 
discussions about what the policy of the Federal Reserve or the 
national Government ought to be about growing consumer credit? 
Which as I said in my opening statement, a lot of Americans 
have a lot of things because there is consumer credit out 
there, and they're choosing, day after day, transaction after 
transaction, to take on this credit. So it's a willingness on 
the part of them.
    Ms. Smith. It is a willingness on the part of the consumer. 
I can speak on the consumer affairs side of it and not on the 
economic. But on the consumer side, certainly we worry about 
whether consumers are cognizant of the difficulties that they 
can make for themselves. And one of the things that we have 
undertaken over the past year in particular is to focus on 
financial literacy efforts in addition to consumer education 
generally to make sure that consumers have some awareness of 
the fact that credit offers many advantages but that it also 
has disadvantages for the consumer and that it's important to 
use credit wisely, whether it's from credit cards or other 
types of credit.
    Chairman Bachus. OK. At this time I yield to Ms. Maloney. 
Or actually, I think we were going in order of how people came, 
to Mr. Ackerman.
    Mr. Ackerman. Thank you, Mr. Chairman. Following up on the 
``Do Not Call'' list and unlisted numbers that the Chairman 
referred to, in New York State we have a law in which people 
are allowed to put their name on a list that companies are 
prohibited to call anybody on that list, and if they do, 
there's a very severe financial penalty. It seems to be working 
very well, because that cut down tremendously and for a while 
altogether on the calls I would receive on my unlisted number. 
But now some of these companies have figured out a way around 
it. They just move out of New York State or have the calls made 
from out of New York State.
    I will be introducing legislation later this week to which 
any of our colleagues are welcome to join as original co-
sponsors, that would set this up on a national basis, anybody 
who doesn't want these calls or finds these calls are 
unwarranted or unwanted can put their name on a list, and that 
list would be provided to all of these boiler shops. What would 
be your reaction to something like that on a national basis?
    Ms. Kolish. Well, the Commission has actually been thinking 
along similar lines, and that one proposal that is going to be 
considered during our review of our existing Telemarketing 
Sales Rule is to set up a national Do Not Call list. So that's 
a proposal we think will be coming out in the Notice of 
Proposed Rulemaking sometime shortly.
    Mr. Ackerman. Thank you. You mentioned, I think it was Ms. 
Smith who mentioned in her testimony about the type sizes for 
the promotional rate and 18 points versus 12 points, and a lot 
of people aren't familiar with what that is. I marginally am, 
having been in the newspaper and typesetting business some time 
ago. But that being the case, there is nowhere on these 
promotional rules that you have here that you're coming out 
with that says how and where people have to be notified as to 
which month or how many months this rate will last. And I get a 
lot of these. Because I turn over a couple of cards every 
couple of months.
    But sometimes it takes me a very long time to find out if 
this is a 2-month promotion or it ends in September, October, 
November, whatever it is. And usually that typeface is 2-point 
type, which is minuscule. Two-point type, and there's an 
asterisk, and usually, and we learned in school you put on the 
bottom of the page what the asterisk refers to. This is on 
three pieces of paper later on the back of something on a 
whole, must be 10,000 words on a 5 by 6 piece of paper to tell 
you what month it expires in, and sometimes it's 3 months later 
by the time you have this process approved, or if it's a longer 
period of time, the month before it expires--and you don't even 
know when it expires, they send you a whole bunch of checks 
attached to a piece of paper and say take advantage of your 
current special rate to buy gifts for Christmas or go on a 
vacation or whatever, and they give you the checks, and they 
make it very easy. And you don't know that you spend that money 
at your very low rate knowing that on your next billing state, 
that rate is going to expire. Are you going to have regulations 
to do something about that and make them put it on the same 
    Ms. Smith. You should be seeing improved disclosures if you 
haven't already. I hope that some of these solicitations you 
are talking about came--you know, were as the result of earlier 
solicitations and not anything that is running currently.
    I mentioned earlier that the Board had amended the rules 
having to do with solicitations and under the new rule, the 18-
point disclosure of the interest rate, if it is an introductory 
rate, also has to be followed immediately by the expiration 
date. So that it might say 1.9 percent until December 31st, 
    Mr. Ackerman. That's what I wanted to suggest. It wasn't in 
your testimony. I appreciate that. It's a very good idea.
    Ms. Smith. It's in the model forms. Well, it's in the 
regulation, but then we also have model forms setting out how 
it would look.
    Mr. Ackerman. I appreciate that. The most recent one I got 
on the 1.9 percent, by the way, this one was very good, because 
it tells you right up front that it's until October of 2002, 
and I guess they want you to know that because they're proud of 
it I guess taking advantage of the lower rates now.
    Ms. Smith. There are two actual requirements. There's one 
for the box that sets out the disclosures and that is where 
they have to use the 18-point----
    Mr. Ackerman. That will be very helpful. Let me get in one 
final question if I may. That answer is very satisfactory. This 
is a problem that was experienced by somebody in my city, 
namely, me.
    Mr. Ackerman. I signed up for something called Privacy 
Guard to see what it was, and for $69.95 it saves your life. It 
does everything for you. It'll protect your Social Security. 
It'll protect creditors from going after you. It'll notify you 
if anything bad is going to happen. It tells you exactly what 
to do, you know, where you stand with the Veterans 
Administration, if somebody questions your credit, they 
notify--all sorts of wonderful things. So I signed up for this 
to see what it was all about. And after several months, they 
sent me nothing. And then I saw it on my credit card statement, 
$69.95, which was the only charge I had. Otherwise, it was a 
zero balance. Then what happened, I called the credit card 
company, said I want to cancel this. They said you have to call 
Privacy Guard. I called Privacy Guard and they tell me, well, 
you know, did you get our packet? I said I received nothing and 
I'm not interested in it anymore and I want to cancel it. They 
said OK. They took all the information. A week later, I 
received their packet. A month later, I received another 
statement from my credit card company and I called them and I 
said, hey, this $69.95 is supposed to be off. I've canceled it. 
And they put a $29.60 charge, a $29 late fee and 60 cents for a 
cash advance. This goes up to $100, and I still can't get this 
straightened out.
    The next thing, I'm in the middle of applying for a 
recasting of a mortgage for my home, and I get turned down. I 
don't know why, because I otherwise have a fairly exemplary 
credit history, and I get a copy of the credit report and it 
refers to me to this whole thing that refers to this Privacy 
Guard thing. It seems that my company that was intended to 
protect me I thought now turned me in for not paying for a 
service that I didn't receive, and when I called the credit 
card company, they said they would take it off and give me a 
credit for it. They no longer used Privacy Guard. They've had a 
lot of problems with them. They took it off, and I said would 
you call the credit reporting agency, because I'm trying to 
take advantage of the low rates for the mortgage. If it jumps 
back up another point or two, it's going to cost me a lot of 
money. They said we'll take care of that right away. Nothing 
happens. A month later and month later, nothing happens. I 
called the company, the credit card company, they said, ``Well, 
we took care of it.'' I get up to the president of the company. 
I usually don't identify myself by my title. I want to be 
treated like everybody else--poorly.
    Mr. Ackerman. Which I was. Nonetheless, I was disappointed. 
I spoke to the president of the company. He assured me he was 
taking care of it. I told him that I was told that it's going 
to take another 90 days. He said, ``No. We will take care of it 
right away.'' He called me back and he was shocked, shocked, to 
find that he couldn't get it taken off for another 90 days 
because there's a cycle. There's a cycle. And it can go for 90 
    Now I'm stuck in this trap of having bad things said about 
my credit to everybody who is inquiring about my credit for all 
this period of time based on something that could have been, if 
it was corrected in the time that the report was made, which 
was instantaneously. They report it. Within 24 hours, I got 
this black mark next to my name. And it takes I don't know how 
many months, but certainly in excess of three or four, to get 
this remedied. Do you have any regulations in mind to fix this 
problem? Or somebody who will handle my mortgage? That was a 
    Chairman Bachus. Not only as it deals with his problem, but 
I guess all Americans.
    Mr. Ackerman. Yes. I cite myself as an example knowing that 
there are many, many people who cannot reach the president of 
the company and find out that he's shocked.
    Ms. Kolish. I'm very sorry you had such a disappointing and 
terrible experience. There are Federal credit rules that are 
designed to help consumers in that situation. One is the Fair 
Credit Billing Dispute Act which, when you have a charge on 
your credit that is one you didn't authorize, you can call and 
dispute it.
    Mr. Ackerman. Yes. And they put down, until they figure it 
out, they leave it on your credit report and they say this is 
disputed by this S.O.B. who's challenging our authority, and it 
flashes like a neon light to anybody knowing that I'm now a 
troublemaker. So that becomes problematic, but they don't take 
it off. They put that on right away, but they don't resolve it 
for months. And even if you're agreed, and all three parties 
agreed this charge comes off, they physically couldn't get the 
reporting company to do it.
    Ms. Kolish. Yes. Under the Fair Credit Reporting Act, 
furnishers of credit reports are obligated to investigate and 
resolve disputed information within a set time period. I don't 
recall offhand what that time period is, so I don't know 
whether they exceeded the allotted time.
    Mr. Ackerman. I believe it's 3 months. But that doesn't 
matter. It was resolved. It was resolved in 3 minutes after 
everybody spoke. But physically, they don't take it off.
    Ms. Kolish. Right. I understand. And unfortunately, the 
Commission gets lots and lots of complaints about fair credit 
reporting agencies.
    Mr. Ackerman. I believe you do.
    Ms. Kolish. We've sued them all, too, unfortunately.
    Mr. Ackerman. But how do we fix that? If in this computer 
world where we all have buzzers and beepers and we're sitting 
up here vibrating and lighting up and shaking and baking and 
everything, and they can get this on your credit report so the 
world knows instantaneously that you missed a payment, why 
can't they be just as quick, when they know that we were 
wronged, take it off?
    Ms. Kolish. I certainly don't want to be defending the 
credit reporting bureaus, but I might say that I am sure they 
are getting thousands of inquiries a day about disputed 
    Mr. Ackerman. I feel a lot better.
    Ms. Kolish. It may not be always clear as it is in your 
case that, in fact, it should be immediately removed. It may be 
that they have so many transactions they need a reasonable 
period of time to respond to and remove disputes, whether that 
time period should be shorter.
    Mr. Ackerman. Don't miss my point. There is no longer a 
    Ms. Kolish. I understand.
    Mr. Ackerman. They made a mistake in putting this on or 
whatever and they can't take it off. I've abused my time I 
    Chairman Bachus. We've almost had a hearing on this one 
problem. But actually if we have a follow-up hearing we might 
deal with this.
    Mr. Ackerman. Could we have a hearing on this?
    Chairman Bachus. Yes, we might actually have--but I think 
this is a wonderful example of how disruptive one of these 
transactions can be to a citizen and can cause real problems, 
even in this case a citizen who has a high degree of 
intelligence and sophistication and ability, as Mr. Ackerman 
    Mr. Ackerman. I'm going to put that on my campaign 
    Chairman Bachus. Yes. With all these problems facing you, 
it could be a tough campaign too.
    Mr. Ackerman. If all this gets out. Nobody's listening to 
this are they?
    Chairman Bachus. But what we'll do, the other thing, that 
1.9 til October of next year----
    Mr. Ackerman. That's a great deal.
    Chairman Bachus. Don't throw that away.
    Chairman Bachus. Mr. Tiberi.
    Mr. Tiberi. Thank you, Mr. Chairman. I won't take my entire 
5 minutes. Just a comment and one quick question because I look 
forward to the next panel. I apologize for not being here for 
the entire time.
    With respect to credit cards, just a comment. I received my 
first credit card when I was in college many years ago, and I 
had a wise man say to me that this isn't free money. And that 
wise man was my father who just got his first credit card about 
5 years ago. My father has a sixth-grade education, is an 
immigrant to America, and he said to me, ``now you understand 
when you use this, if you don't pay it off every month, you're 
going to be paying a whole lot more for what you're using this 
    Now it didn't take a person with a high school degree or a 
master's degree, or a doctor's degree to explain to me the 
fundamentals about a credit card and the convenience of a 
credit card and how you pay for that convenience. And I am 
somewhat dumfounded by some of what we have heard over the past 
with respect to responsibilities of individuals who get credit 
cards. I was a freshman in college when I got that first credit 
card, and I got that first credit card, and I used it 
appropriately per my father's instructions and never have had a 
problem with credit or credit cards.
    My question to you is--and I look forward to the second 
panel to talk more about that, my question to you two is, Mr. 
Cantor, in his opening statement, mentioned something about 
Capital One that I hadn't heard about with respect to the 
tragedies of September 11th. Are you aware of any other 
companies doing that as well, either of you?
    Ms. Smith. Only through the media.
    Mr. Tiberi. Several others? Is it standard in the industry 
or a few companies?
    Ms. Smith. I wouldn't be in a position to say. All I know 
is what I have read about in the media about some companies 
that are exercising greater flexibility, perhaps not to the 
extent that Capital One seems to be doing, but generally in 
making efforts to be accommodating to their customers.
    Ms. Kolish. That's my experience, too, is only what I've 
read in the media so far.
    Mr. Tiberi. OK. Thank you. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. LaFalce.
    Mr. LaFalce. Thank you very much, Mr. Chairman.
    Ms. Smith, during the break I told you many of the 
questions I was going to ask you and so I'll try to reiterate 
them now. Maybe you've been able to talk with counsel. First of 
all, when did the Federal Reserve Board get the legal authority 
to define unfair and deceptive practices in the banking 
industry? Second, why hasn't it done so up to now? What 
discussions take place? Would you please respond?
    Ms. Smith. Yes. The FTC provision that gives the Board 
authority to prohibit unfair or deceptive acts or practices in 
commerce was enacted in 1975. And I would say that we have from 
time to time considered whether there are practices that the 
    Mr. LaFalce. So over the past 26-some years----
    Ms. Smith. Twenty-six years, right.
    Mr. LaFalce. ----You've thought about defining unfair and 
deceptive practices which you could have done at any time 
within the past 26 years?
    Ms. Smith. Yes. I would say that the Board has not done so 
largely because the Act does establish a fairly restrictive 
standard. The standard for prohibiting specific acts or 
practices as unfair and deceptive is one that was established 
by the courts and then ultimately was incorporated by the 
Congress into the statute so that before the Board could adopt 
a specific prohibition, there would have to be findings of 
certain things, including such things as the act or practices 
likely to cause substantial injury to consumers. This is 
something that would have to be documented, not----
    Mr. LaFalce. Wait a minute now. This sounds like an excuse 
to me, Ms. Smith, for negligence in not having acted. I think 
the Federal Reserve Board has been terribly remiss. If you want 
to go after a particular company, you have to have a factual 
finding, but if you want to promulgate regulations regarding 
what would constitute an unfair and deceptive practice within 
the industry, you don't have to wait until after the fact to 
make this generally applicable. You can say these are the type 
of practices that would be by definition unfair and deceptive.
    And if by some strange stretch of the imagination you think 
that the law prohibits you from defining the terms of the law, 
well then anybody interested in consumer protection would say 
give me a change in the law. And I can't recall any Fed 
Governor ever recommending a change.
    Ms. Smith. Well, I'll take note of your concern and then 
we'll see if there is anything that we might recommend for 
changing the law. But that's the way we read it.
    Mr. LaFalce. Besides a change in the law, see if you can't 
do it yourselves. You've had 26 years to define an unfair or 
deceptive practice. This is not directed at you. I don't know 
how long you've been the division head. I don't think that 
consumer affairs have traditionally been a very important issue 
for the Federal Reserve Board. It's seldom that we have a 
representative other than a Governor of the Federal Reserve 
Board at any issue before this subcommittee. Maybe it's because 
they're not that concerned about this issue, or maybe they 
thought, well, this is so important we better have somebody 
who's technically knowledgeable. I'll let people make their own 
judgment as to why that's the case.
    But another option is if the Fed can't become more 
aggressive is to take the authority away from the Fed. And 
maybe we should. Maybe the Federal Board should be interested 
in monetary policy and maybe the financial soundness of a bank, 
but maybe they should have nothing to do with consumer 
protection. Maybe it's just too alien to their large world 
concepts. And I may be coming around to that conclusion. I want 
to see what they do.
    There are other financial regulators, though. There's the 
OCC, there's the OTS, there's the FDIC. There are State banks. 
We have coordinating mechanisms with respect to a lot of 
banking areas, safe and sound practices, and so forth. Is there 
any coordinating mechanism with respect to consumer abuses?
    Ms. Smith. Our coordinating mechanism is through the 
Consumer Compliance Task Force of the Federal Financial 
Institutions Examination Council, which does take into account 
enforcement matters and issues that come----
    Mr. LaFalce. Whoever they are. I mean, is there somebody 
like in your office that meets regularly with somebody in the 
OCC's office who's a counterpart?
    Ms. Smith. Yes.
    Mr. LaFalce. Is there a name for this coordinating council?
    Ms. Smith. This is the Consumer Compliance Task Force of 
the FFIEC.
    Mr. LaFalce. But who are the members of it?
    Ms. Smith. The members of the FFIEC itself are principals 
from each of the agencies.
    Mr. LaFalce. Who is the principal from the Fed?
    Ms. Smith. Governor Meyer is our representative from the 
Fed. Jerry Hawke from the OCC, and generally the chairman or 
director or the heads of the agencies. The Consumer Compliance 
Task Force generally represents the enforcement people. For 
example, our deputy director is on the Compliance Task Force, 
and his counterparts at the other agencies. They meet 
regularly, usually once a month. So it is something that is 
    Mr. LaFalce. Do you have any legal memo which defines the 
legal capacity of the Federal Reserve Board to promulgate 
regulations regarding unfair and deceptive practices in the 
banking industry? If you do, I would like to request a copy of 
that legal memo.
    Chairman Bachus. Mr. LaFalce.
    Mr. LaFalce. Yes?
    Chairman Bachus. Let me propose to do one thing. We're 
expecting a vote about 12:30. If we can go to Ms. Hooley and 
then Mr. Ford, and then I will give you a second round of 5 
    Mr. LaFalce. Thank you very much, Mr. Chairman.
    Chairman Bachus. I think that will fit in very nicely.
    Mr. LaFalce. That's more than fair. Thank you.
    Chairman Bachus. Thank you.
    Ms. Hooley.
    Ms. Hooley. Thank you, Mr. Chair. I have a couple of 
questions and a couple of follow-ups. When Representative 
Ackerman was talking about buying this policy that's supposed 
to protect you, can you tell me, do any of those polices really 
protect you? And do they do anything more than if we ask the 
credit reporting companies to send everyone a credit report 
once a year?
    Ms. Kolish. I'm not familiar with what this particular 
company promised to do for Mr. Ackerman.
    Ms. Hooley. Well, I'm just talking about there are several 
companies out there that do this.
    Ms. Kolish. Right. A lot of companies are selling services 
that consumers actually could do for themselves, although 
there's nothing inherently illegal about a company offering to 
do it for you for a fee. And I imagine what these companies 
would do would be monitoring your credit report to make certain 
that there aren't wild and wacky charges appearing out of 
nowhere, and if they were to appear, to let the consumer know. 
So they might track for a consumer a variety of sources to let 
them know what's happening to their credit.
    Consumers have to decide for themselves whether or not they 
want to pay the fees to get this service or do it themselves by 
requesting a copy of their credit report periodically.
    Ms. Hooley. Wouldn't it be easier if we just required the 
credit reporting companies to send everyone a copy of their 
credit report once a year?
    Ms. Kolish. Well, that would be up to you. I'm sure 
consumers would appreciate it.
    Ms. Hooley. OK.
    Ms. Smith, what can consumers do to protect themselves 
against negative options and deceptive trial offers and 
deceptive credit card practices? What can a consumer do?
    Ms. Smith. Well, I think that some of the things that have 
caused problems in the past hopefully will be taken care of 
through the privacy regulations, for example, where 
institutions are having to inform consumers of their sharing 
practices with respect to information about the consumer where 
it's with unaffiliated third parties and giving consumers the 
option to opt out of that information sharing. That is 
something that should go a long way. I think that ultimately, 
consumers also need to just be mindful in their conversations 
with entities, such as Mr. Ackerman had, to know what is 
happening to them.
    I think the difficulty sometimes is that no matter how 
careful the consumer is, that a company that is bent on taking 
advantage is going to do so. And then the consumer is left in 
the position of having to go back and try to get it corrected.
    Ms. Hooley. But you don't plan on doing anything in 
promulgating rules, right?
    Ms. Smith. I don't know that we would be writing anything 
in this particular area. We are going to be looking at our 
Truth in Lending rules in the coming year, and so it could be--
I don't know whether this will tie into anything that--whether 
it involves provisions where we might be able to make a change. 
It isn't clear to me at this time that there is.
    Ms. Hooley. Just one last question for Ms. Kolish.Has the 
FTC prosecuted any cases involving identity theft? It is an 
issue I have been working on and care a lot about. And have we 
prosecuted any of those cases? And if so, can you tell me about 
any of them?
    Ms. Kolish. We don't have the authority to prosecute 
criminally the people who actually have stolen a person's 
identity and run up charges. Local police departments typically 
do that. We have brought cases against people who have provided 
a mechanism for that theft to occur by providing, for example, 
identity templates so people have all the information, they can 
download what looks like a valid license, for example, and 
substitute somebody else's name and address and thereby use 
their identity. So we have bringing cases against people who 
actually provide a means for identity theft to occur.
    Ms. Hooley. And how successful have you been? Is that one 
or two cases or 100 cases?
    Ms. Kolish. We've only brought a couple of cases to date. 
It's an area we're spending a good deal more time looking at. 
Under Congress's authority, we actually set up an identity 
theft hotline, so we now have about 100,000 calls about 
identity theft and we provide counseling to victims as 
requested by Congress. And we're actually looking for ways that 
we can play an active law enforcement role.
    Fortunately, there are so many criminal law enforcement 
authorities who are participating in our Sentinel database, an 
identity theft database, that we're able to get out this 
information to the authorities who have criminal authority, 
which would be the most effective way of tackling this problem, 
so they can get that information quickly and easily.
    Ms. Hooley. As you're looking for ways, have you found any 
ways? I mean, you say you're looking for ways. Have you found 
    Ms. Kolish. One of the ways is by looking at the template 
sellers so they can't do that. And also we're trying to make 
certain that people aren't sharing credit card information with 
others without permission, because that could be a means by 
which identity theft could occur. So in this case we just 
brought, one of the things the defendants are prohibited from 
doing is from sharing that information with anybody else. They 
can only use it for the transaction the consumer authorized. 
Because we don't people's credit card information floating 
around there without their notice and agreement, because that 
makes them more vulnerable to identity theft.
    Ms. Hooley. This is a huge issue. I mean, literally, you 
cannot pick up the paper, you cannot look anywhere anymore and 
not see this problem just growing enormously. And it's 
something that hopefully this whole subcommittee and all of us 
can work together on.
    Thank you. Thank you, Mr. Chair.
    Chairman Bachus. Thank you.
    Mr. Ford.
    Mr. Ford. Thank you, Mr. Chairman. I won't be long at all. 
I would say to my colleagues on the subcommittee, I apologize 
for my tardiness, but Ms. Hooley, you raised several 
interesting and important points regarding credit scores and 
how consumers can access them. All of us have stories similar 
to what happened, what regrettably happened to Mr. Ackerman, 
including people who are not on this subcommittee.
    The bill that I've introduced, and Ms. Roukema last year in 
the Banking Committee held a hearing on this matter. I'm not 
certain if the FTC or even the Federal Reserve Board were 
there. I do share some of the concerns, Ms. Smith, and 
certainly don't direct this at you personally, but I do share 
some of the concerns raised by Mr. LaFalce.
    We've known this problem has existed for some time, and 
very little action has been taken to correct it for the 
majority of the public, the overwhelming majority of the 
public. But one of the bills, and there are several 
circulating. Chris Cannon from Utah has one, Chairman Bachus 
and Mr. Schumer on the Senate side has one, where we seek to 
provide a free credit report, Ms. Hooley, to every consumer. We 
give every consumer the opportunity to not only get a copy of a 
free credit report, and hopefully Mr. Bachus will give an 
opportunity for a hearing.
    But we also allow for people who might have had a skirmish 
with a creditor for $100 or less to pay that off, to have it 
removed from their credit report and they'd be forced to enroll 
some sort of financial management class much like the 
departments of motor vehicles and public safety all across the 
country will allow you to do to mitigate or avoid any type of 
    Second, I know that before I got here it was raised by Ms. 
Waters and I believe one or two of my other colleagues 
regarding ways in which we can ensure that consumers don't face 
any undue pressure or unnecessary penalty because of the 
slowness in which the mail may arrive today. I have introduced 
something that would extend the grace period for 2 weeks for 
all consumers, excluding business loans, and we can certainly 
look to include businesses in this. I would not be opposed to 
that at all. But to allow for a 2-week grace period for the 
next 6 months that would allow consumers to avoid facing late 
fees or additional financing fees to avoid having their late 
payment reported to credit reporting agencies, and perhaps more 
important, to avoid having their rates raised or having other 
adverse actions taken against them by a credit company or a 
    It's my hope, Mr. Chairman, that we obviously are dealing 
with and confronting an array of issues here in the Congress, 
one enormous one later today, and I would urge all my 
colleagues to support the Senate-passed Aviation Security bill, 
and obviously we'll have to deal with the stimulus package 
shortly as well, but I do hope this subcommittee can take up 
these matters as quickly as possible and perhaps even allow for 
the Consumer Late Fee Relief Act to be considered, or at least 
to be put before the President before we adjourn for the year. 
And it looks like we may not adjourn before late November or 
early December now.
    With that, Mr. Chairman, I yield back the balance of the 
time and hope that when we do have this hearing that perhaps 
Ms. Kolish and Ms. Smith both can come back and be a part of 
that panel. Thank you.
    Chairman Bachus. Thank you. At this time the first panel is 
discharged. The subcommittee is going to stand in recess until 
one o'clock. At that time we'll convene and we'll put on the 
second panel. That will give us an opportunity to have two 
votes scheduled at 12:25 on the floor. It will also give our 
second panel and other representatives and people in the 
audience a chance to make some lunch arrangements. And we will 
be back at one o'clock. We'll start promptly at one o'clock. 
Thank you.
    Chairman Bachus. I call the hearing to order. I want to 
welcome the second panel. Frank Torres, Legislative Counsel, 
Consumers Union; Edward Mierzwinski, U.S. Public Interest 
Research Group; Elisabeth DeMarse, CFO, Bankrate Inc.; Robert 
Manning, Professor at Rochester Institute of Technology; Joshua 
Peirez, Vice-President and Counsel, Mastercard International; 
and Richard Fischer, Attorney at Law, representing Visa 
International. And you're with Morrison & Foerester?
    Mr. Fischer. Correct.
    Chairman Bachus. OK. Thank you.
    We'll start, Mr. Torres, with you.


    Mr. Torres. Mr. Chairman, Members of the subcommittee, we 
appreciate the opportunity to be here today to discuss this 
very important issue for consumers across this country. But 
first let me say that, in light of the recent events, we are 
really grateful for all that you and this subcommittee and 
Members of Congress are doing in these challenging times and 
under these profound circumstances.
    Many of us have friends who work up here on the Hill. We 
interact with offices every day. And the fact that you all are 
showing up to get the business of this country done is a true 
testament to all you, and we do appreciate that deeply.
    Having said that, and having listened to many Members of 
Congress and the President and others saying that consumers 
should get on with their lives, to help the economy, to spend, 
to shop, to go out to restaurants. Many consumers are doing 
that--using their credit cards. It is more than appropriate 
that we have this hearing now to discuss some of the games that 
the consumers face every day in dealing with their credit card 
    And just as companies are responding, and we heard some 
examples here today, Americans are also responding to the call, 
and they really don't deserve some of the treatment that 
they're getting from the companies. And unfortunately, it may 
be coming from the same companies that are trying to do the 
right thing during these tough, difficult times.
    But I thought maybe as a way to pull things together and 
try to map out some of the issues that have already been 
discussed earlier today during this hearing, maybe I'll kind of 
follow a consumer through his or her life and their interaction 
with the credit card industry, starting with college students, 
or now perhaps even high school students, who are getting 
bombarded with credit card offers, with little or no 
underwriting, no parental co-signing required, and little or no 
financial education about how to handle his or her credit card 
    We have one example of a credit card seminar that had a 
panel discussion on ``you never forget your first love and you 
never forget your first credit card.'' You know, how to target 
kids to get them into your brand and keep them loyal to your 
brand. As far as no underwriting goes, even the Federal Reserve 
Board has recognized that lack of underwriting is an unsafe and 
unsound practice.
    The problem comes when these students get into trouble. The 
University of Indiana has said that they lose more students 
because of credit card debt than they do for academic reasons. 
You get into all sorts of trouble. Bankruptcy rates among 
college students are growing. You can still get that auto loan 
or that home mortgage later on, but now if you're in the 
subprime market because you've been late on a couple of 
payments and you've got some things on your credit history, 
those types of loan products are going to cost you more. So the 
consequences are very dire indeed.
    Once you become an adult, the game really begins. More and 
more we're finding that credit card companies are making the 
bulk of their profits from fee income. So they're doing a lot 
of things to game the system to generate more fees, and it's 
really not fair to consumers. I mean, it's one thing for 
businesses to make a profit because they're operating in a 
competitive marketplace, they're trying to beat their 
competition, and they're telling consumers what they need to 
know and they're playing fair. Unfortunately, that's not what's 
going on here in all cases.
    They're shortening grace periods. They've got teaser rates 
going. Late payment penalties have now reached the level of 
$35. And it's no longer due on the day that it's supposed to be 
due, it's due by eight o'clock or ten o'clock in the morning. 
In addition, if you're late just once on a credit card, some of 
them are charging punitive interest rates up to 25 percent 
supposedly to cover the risk. Well, if you're late just once, 
how does a punitive interest rate of 25 percent that may never 
come back down again cover the risk for you? Some credit card 
companies, they're charging you that much even if you're late 
on somebody else's card.
    We've also argued, along with consumer groups, that credit 
card companies should disclose how much credit costs you right 
on the statements that you get. A $2,500 balance, if you simply 
make the minimum payments, it could take you over 30 years to 
pay it off and it would probably cost you somewhere around 
$5,000 or $6,000 in interest payments alone.
    Now at least the Fed has adopted rules to enlarge the fine 
print, but better disclosures won't necessarily stop some of 
these underlying practices.
    Another area that consumers face all the time is when these 
institutions sell your data. And Capital One does this. They 
use your data to try to sell you, to try to upsell you various 
products. And they have sold in the past Privacy Guard 
products, and at one time sold membership in some of these 
discount clubs. And under the Gramm-Leach-Bliley Act, 
unfortunately, there's not much consumers can do to really say 
no because of all the exceptions there. So consumers really 
don't stand a chance.
    Credit scoring has also been brought up, and that's 
something that we urge Congress to address, because Fannie and 
Freddie have found that up to 50 percent of consumers are 
paying more for mortgages because of wrong credit scores, and 
so Congress needs to take a look at that.
    Another issue I'd like to raise in my short amount of time 
left is the fact that the Federal Reserve Board has lowered 
interest rates nine times since January. Credit card interest 
rates haven't even begun to track the Federal Reserve rates. 
Many consumers either have fixed rates or preset floors. So 
this is a huge jackpot for the credit card industry. The money 
isn't filtering down, the help isn't filtering down to 
consumers who could use those funds to help stimulate the 
economy. CardWeb says that this could amount up to a $10 
billion windfall for the credit card companies.
    Finally, I'd like to bring up the bankruptcy bill, merely 
because we really can't talk about the practices of the credit 
card industry without talking about what they're up in Congress 
fighting for even now, and we understand that there might even 
be a conference on the bill scheduled for next week. Despite 
all these practices that could potentially help contribute to 
people falling into difficult financial circumstances, pile 
that onto layoffs, little health care insurance and other 
things going on in the economy today, the only advice that we 
can offer Congress to respond to the urging of the credit 
industry to push forward on the bankruptcy bill is to just say 
no to it.
    And a closing note--and I promise to close, is that there's 
been talk about perhaps some financial education, perhaps, you 
know, people just need to understand about their credit more. 
And I think consumers understand fully well that they've 
entered into an agreement with the credit card company. They 
expect to be charged an interest rate. They expect maybe to be 
charged some fees, and if they're late on a payment, they 
should be penalized. But what the credit industry is doing goes 
far beyond that. And all of the understanding and all of the 
consumer financial education in the world won't necessarily 
help consumers avoid some of the tricks and traps and really 
deceptive behavior that the credit industry does.
    One example of that is in our magazine, Consumer Reports 
magazine, found that even if you find the small print--and they 
don't always make it easy to find it, consumers really can't 
understand everything that the credit card company says, 
because the credit card companies don't always tell you what 
they mean. A spokesperson for Fleet explained how it works to 
one of our reporters when she said that a fixed interest rate 
doesn't mean it's fixed forever. Another case against Fleet 
concerned a no-annual-fee card that within months carried a $35 
annual fee. The reporter actually compared this to ``Alice in 
Wonderland.'' I think it's worse, because at least Alice kind 
of understood that things were a little bit strange. Here 
consumers might be unprepared to really fully understand what 
they're facing.
    So we do appreciate you having this hearing, and I look 
forward to answering questions and hopefully, working with you 
on this and a whole host of other issues like payday lending 
and other things that consumers are facing every day.
    Thank you.
    [The prepared statement of Frank Torres can be found on 
page 121 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Mierzwinski.


    Mr. Mierzwinski. Thank you, Mr. Chairman. I'm Ed 
Mierzwinski, Consumer Program Director with the Public Interest 
Research Group's national office, U.S. PIRG.
    We're pleased to be here to talk about abusive practices in 
the credit card industry. We think abusive practices by credit 
card companies are on the rise, and we're very pleased that 
you're holding this hearing today.
    In April, PIRG released a major report called ``The Credit 
Card Trap''. That report was based on a survey of over 100 
credit card offers, and in that report we document a number of 
the practices which have been brought up already today in Ms. 
Waters' opening statement and Mr. Ackerman's personal story and 
in some of the other discussions, so I won't go into them in 
detail except to say that we have a brochure for consumers 
called ``A Road Map to Avoiding Credit Card Hazards'' which I 
provided to the subcommittee in electronic form and I would 
like to make copies entered into the record as part of my 
testimony. It summarizes the ten worst credit card marketing 
practices that we are aware of, ranging from the use of 
deceptive teaser rates to charging consumers late fees even 
when they pay their bills 10 to 15 days in advance, as many of 
the witnesses have identified as a problem and also talks about 
in the report and the brochure the significant problem of 
negative option sales.
    The FTC witness talked about their consent decree and 
settlement with Triad which is a very significant case on 
behalf of the FTC. I would also respectfully point out that 
several State Attorneys General have brought cases against 
regulated financial institutions for very similar practices, 
most notably the lawsuits against U.S. Bank first brought by 
the Minnesota Attorney General.
    So rather than talking about the problems, which I think 
everyone else has brought up, I wanted to quickly summarize our 
platform for leaning up the credit card industry. And I think 
this is an industry that does need cleaning up. By the way, 
before I start, this is also available on our website, 
    The recommendations that U.S. PIRG has to enact legislation 
to solve some of these problems are the following:
    First, we believe very similarly to Congressman Smith of 
New Jersey that there should be a moratorium on late fee 
penalties. I absolutely think that the Congress should 
consider, strongly consider legislation to put a freeze on 
banks imposing late fees and then jacking up the credit card 
interest rates of consumers because of events related to the 9/
11 terrorist attacks. And whether their mail has been 
intercepted or even whether or not perhaps they simply forgot 
to mail a bill, I think there ought to be a better chance, a 
second chance for consumers. And we strongly urge the Congress 
to consider some legislation to suspend the use of late payment 
    And as has been brought out before, you don't just pay a 
late fee. You pay a late fee. Then your credit history is 
reviewed, and you could have your interest rate ratcheted up to 
a punitive interest rate. Third, you could even have your 
interest rate raised on other cards for being late to one card.
    Second, we urge Congress to prohibit deceptive practices. 
And we have received numerous complaints about the deceptive 
practice of raising interest rates on a card because of an 
alleged late payment to another card. Therefore, we support 
H.R. 1060 introduced by Ranking Member John LaFalce and others 
to prohibit numerous deceptive practices by the credit card 
industry. This bill would also address the problem of 
preacquired account telemarketing or negative option marketing 
which the Minnesota Attorney General case addresses.
    Third, Representative Sandlin of the subcommittee has 
introduced bills to cap interest rates. If the banks are not 
going to pass along Mr. Greenspan's reductions in interest to 
consumers, the Congress should cap interest rates, and Mr. 
Sandlin has proposed that in H.R. 3125, capping interest rates 
of credit cards at 12 percent.
    Mr. LaFalce has an omnibus bill, H.R. 1052, to improve 
credit card disclosures and improve the marketing of credit 
cards to young people. In the past, bills have been proposed to 
require that consumers cannot be dunned by a credit card 
company if their bill is postmarked in advance of the due date. 
We think that the Congress should take another look at those 
bills which have been filed in past Congresses by 
Representative Hooley, Representative McHugh and others. 
Representative Pascarell has a bill that says there must be a 
minimum of 30 days to pay a bill before it is late.
    One of the problems we have, consumers are not ripping off 
the credit card industry. Consumers are not trying to trick the 
credit card industry. Let's be very clear. The credit card 
industry is trying to trick consumers, and they're using the 
labyrinth of the Truth in Lending Act to get around fair 
treatment of consumers. As Frank pointed out, they are now 
saying that you bill is no longer due on the 30th. It's due by 
10:00 a.m. on the 30th. If Congress is writing bills that are 
that unclear that the industry can cure some of the problems it 
was having in litigation by simply saying, well, we'll say the 
bills are due by 10:00 a.m. and then we'll check the mail at 
9:00 a.m. That's unacceptable to me, and we need to fix the 
Truth in Lending Act, and the first step is I think to go after 
these deceptive practices.
    The final couple of bills that I'd like point out that I 
think the Congress should address, Mr. Gutierrez last Congress 
introduced legislation to ban mandatory pre-dispute 
arbitration. Credit card companies are now sending out 
amendments to their contracts telling consumers that they no 
longer have the right to sue the bank. They no longer have the 
right to have their day in court if they have a problem such as 
the one that Mr. Ackerman so eloquently described.They're 
saying you've got to come to our kangaroo court run by the 
arbitrator of our choice and you lose your right to have a 
class action, you lose your right to go to court. I think 
that's unacceptable, and I think the subcommittee should hold 
hearings on Mr. Guiterrez's bill from the last Congress.
    And finally, of course, we support the proposals by Mr. 
Ford and others to require that credit scores be part of credit 
reports and that credit reports be provided for free each year.
    I appreciate the opportunity to testify before the 
subcommittee today and would be happy to take your questions.
    [The prepared statement of Edmund Mierzwinski can be found 
on page 129 in the appendix.]


    Ms. DeMarse. Good afternoon, Mr. Chairman and the 
subcommittee. Thank you for inviting me to testify before you 
as part of your exploring these current issues and the trends 
in the credit card industry.
    My name is Elisabeth DeMarse, and I am President and CEO of 
Bankrate, Inc. We are based in New York City and Palm Beach, 
Florida. My company is the internet's leading consumer banking 
marketplace. We provide current rates and How To information 
and financial literacy to an average of about five million 
visitors a month on a range of consumer banking topics.
    We survey current interest rates in over 170 U.S. markets, 
including at least one in every single state, and we ultimately 
connect those consumers with over 4,500 financial institutions. 
Bankrate has 30 researchers who survey 100 different financial 
products, including mortgages, auto loans, money market 
accounts, CDs, checking and ATM fees, home equity loans, and of 
course, credit cards. From 30-year mortgages in Miami to 
Anchorage, we can tell you where they are.
    In addition, we provide this information to a network of 
over 70 websites, including America On Line, MSN, Yahoo!, 
Nasdaq and AT&T. Our data is distributed through more than 100 
national and local newspapers, including the New York Times, 
the Wall Street Journal, and USA Today. And finally, we've been 
recognized for our efforts by Forbes, U.S. News & World Report, 
Fortune, SmartMoney, and many, many other publications.
    So having monitored these rates and trends in the credit 
card industry for over 16 years, we're in a very unique 
position to share our point of view. Weekly, we survey over 800 
different credit cards currently available to the public, 
including every card issued by the 100 largest issues and the 
50 largest credit unions.
    Over the last year we've noticed several distinct trends. 
While rates continue to fall, many variable rate cards have hit 
a floor, as has been mentioned several times today, where 
regardless of the actions of the tracking rate, they can go no 
lower. Probably about 70 percent of cards are fixed rate 
programs, 30 percent are variable rate programs. Of those 30 
percent, 26 percent of the 30 percent have floors. We believe 
19 percent of those cards have hit their floors. They can go no 
    Second, card issuers are increasingly relying on punitive 
fees to increase revenue and profits. Fee income to the card 
companies increased from $4.8 billion in 1998 to $5.5 billion 
in 1999 and is now about 25 percent of the card company's 
bottom line. And in the wake of the 9/11 disaster and attack, 
these fees are very problematic and very troubling.
    Third, the internet continues to level the playing field. 
It does allow, in our case, consumers free access to 
information, and they do have more ability to search around and 
find better deals if they can invest the time, and they have 
the opportunity if the invest the time to become better 
educated about what exactly is involved when they take on a 
credit card. Bankrate.com is designed to assist the consumer in 
that search, and that is, in fact, what we do.
    Once again, thanks for inviting us to appear before you 
today, and I would be pleased to answer any questions you have.
    Chairman Bachus. Mr. Manning.


    Mr. Manning. Thank you, Mr. Chairman. I appreciate the 
opportunity to share my research with the subcommittee on what 
is increasingly important in the banking industry's policies 
that are leading to a segmented structure of the consumer 
credit markets.
    This subcommittee and many of its Members have a 
distinguished record in terms of addressing and championing the 
interests of American households. I think it's important to 
point out that in this current period, we're talking about an 
unprecedented era of profitability for the banking industry. 
Nine out of the ten last years have recorded record annual 
    In particular, I'd like to acknowledge the long-standing 
efforts of the Member from Buffalo, who due to my new academic 
appointment in upstate New York, will soon be competing for my 
vote in the next electoral campaign. Congressman LaFalce has 
certainly been passionate and a persistent advocate for working 
families and highlighting the increasingly common excesses and 
questionable business practices of the credit card industry.
    In this context, I'd like to preface my remarks by saying 
that I typically teach seminars of 2 to 3 hours, so this is 
certainly going to be a race for me, and I've included a much 
more extended testimony to address the particulars of my 
    I'd like to address three particular issues. One is the 
trends that are ongoing int he industry that have affected the 
pricing structure, particularly the point that we are 
increasingly discussing, the issue of sticky interest rates. I 
would like to emphasize what is a profound change in the new 
post-industrial economy of the important role of the macro-
economic management of the economy and how major money center 
banks are now dramatically shifting the ability of the Federal 
Reserve to pursue its traditional management policies.
    The third issue I want to address is the issue increasingly 
referred to as Generation in Debt, and the role in which the 
marketing of consumer credit cards is playing such a critical 
role into the future generations as well as the savings rate of 
the American economy.
    The last 20 years have featured the deregulation of the 
banking industry. And it's important to understand the promises 
that were presented to us: A wider array of services certainly 
associated with lower prices. What we've seen is a tremendous 
acceleration of consolidation and conglomerate structure of the 
industry where the top ten credit card companies control three-
fourths of the market. And we've seen this as it relates to the 
shift in real rates that have been charged in terms of consumer 
credit, and I refer you to Figure 2 of my testimony, which 
shows that real interest rates approximately have nearly 
doubled over the last 20 years. And it's important to put this 
in the context of comparing it to the automobile rate and the 
corporate prime rate, which shows you how sticky the interest 
rates have been on the one hand on the corporate side and very 
fluid and highly elastic on the consumer side.
    Also I want to emphasize the emergence of a bifurcated 
structure, what we are increasingly referring to as a second 
tier. Issues such as payday lending, where we're talking about 
consumers burdened with 20 percent interest rates per year, 
we're talking about the emergence and increasing integration of 
markets where consumers are charged 15 to 30 percent for a 2-
week loan. And these are not just small lenders. We're talking 
about joint ventures with Wells Fargo and Cash America, and who 
would have expected that the Community Reinvestment Act might 
possibly be satisfied by the portfolio of high interest credit 
cards and maybe even payday loans that are offered in central 
    Indeed, what's profound about the shift in the banking 
industry is going away from installment lending at fixed rates 
at fixed terms to revolving rates. The real question is, does 
the increased risk justify the much higher real rates?
    Indeed, what I think is critical here is looking at this in 
the context of the ongoing discussion of the conference 
committee on the consumer bankruptcy bill where the emphasis 
has been on limiting the ability of Chapter 7 to liquidate 
unsecured loans. The real issue has been has the pricing 
structure of the industry in terms of consumer credit cards 
already priced in a much higher delinquency rate? Is this 
simply another way of price gouging? It's quite intriguing to 
me that in the discussion of Federalizing the possibility of 
security at the airports, we have not questioned the 
possibility of Federalizing debt collection, which is clearly a 
subsidy to the banking industry during this context of 
unprecedented profitability.
    Also I want to emphasize that when we talk about consumer 
debt, it's not just the magnitude but the terms. And indeed, we 
have a real imprecision here where issues such as car leases, 
payday loans, and so forth, are not directly measured in terms 
of the total debt obligations of consumers. Indeed, in 1999, we 
now have passed the threshold where the debt levels of the 
average household exceed 100 percent of their discretionary 
    Let me finish my comments by emphasizing then the fact that 
as we've increasingly heard, the Federal Reserve's lowering of 
the interest rates has not been reflected in lower interest 
rates to consumers. What I'm seeing in my more recent research 
today is that both the tightening to small businesses, which 
are the primary motor of job generation, and also the 
tightening of households could further push us into a deeper 
and more prolonged recession. And I think this is very critical 
as we discuss what is the debt burden and how crushing it may 
    To conclude, the terms of the ``Generation in Debt,'' what 
is striking to me is when I first conducted my research over 10 
years ago is when we saw the marketing of consumer credit to 
college students, it was rare to see a student with $2,000 to 
$3,000 graduating in debt in the early 1990s during the 
recession. Most of that debt was attributed to the difficulty 
of their job search. Today for the first time, we're going to 
see students routinely with $5,000 and $10,000 in credit card 
debt, which is subsidized by their ability to rotate it into 
federally subsidized student loans, who are going to be 
entering a job market maxed out before they begin looking for a 
    What I think is striking about the credit card industry in 
discussing their efforts to educate and make more savvy 
consumers, is there's no discussion on savings. This, Mr. 
Chairman, is going to have a profound impact on the economy and 
society as we become increasingly dependent on foreign markets 
for savings, that the national savings rate as it has achieved 
a negative rate will have a tremendous impact on our ability to 
compete globally and also impact on asset formation and the 
ability of future cohorts to retire in the standard of living 
they've grown accustomed to. Thank you.
    Chairman Bachus. Mr. Peirez.


    Mr. Peirez. Thank you, Chairman Bachus, Congresswoman 
Waters, Members of the Subcommittee. I am Joshua Peirez, Senior 
Legislative and Regulatory Counsel for MasterCard International 
Incorporated. We are a global payments company comprised of 
over 22,000 financial institutions of all sizes worldwide. I 
thank the Subcommittee for taking time today to consider how 
MasterCard and its members serve MasterCard cardholders.
    When the payments industry started around 35 years ago, 
consumers had few payment options, primarily cash and checks, 
but nothing that could be used worldwide. Today a MasterCard 
cardholder can virtually travel the world with only a single 
piece of plastic and make payments almost anywhere. And people 
like their MasterCard cards. Why? Here are just a few of the 
reasons--convenience, choice and protection.
    First, convenience. MasterCard cardholders can use a 
MasterCard payment card at millions of merchants. That means 
fewer trips to the bank or ATM and no longer having to worry 
about carrying the right amount of cash, having it stolen or 
losing it. A MasterCard cardholder need not even leave the 
comfort of home to shop the globe. It is no overstatement to 
claim that the internet would not be such a critical part of 
our economy were it not for payment cards.
    The second reason, choice. The MasterCard system has also 
led to a great deal of choice through the vigorous competition 
with other payment systems, other payment forms, and among the 
thousands of MasterCard member financial institutions. Indeed, 
because of the innovation of MasterCard and its members, 
consumers can choose from literally thousands of card programs, 
thousands of flavors of MasterCard, if you will.
    And third, protection. MasterCard is also pleased to offer 
its cardholders outstanding protections. For example, 
MasterCard has voluntarily implemented a zero liability policy 
with respect to the unauthorized use of U.S.-issued MasterCard 
consumer cards that is superior to what is required to law. 
Specifically, MasterCard provides U.S. MasterCard consumer 
cardholders with even more protection. A cardholder is 
generally not liable for any losses at all. This has greatly 
enhanced consumer confidence, especially with respect to online 
    It's also important to note that the use of MasterCard 
payment cards benefits more than just consumers. Approximately 
22 million merchants worldwide accept MasterCard payment cards. 
Many offer discounts, co-branded cards and other incentives for 
consumers to use MasterCard cards instead of other payment 
forms. Why? Acceptance of MasterCard cards is more convenient 
and safe and often cheaper than other forms of payment for 
merchants. Naturally, the acceptance of MasterCard payment 
cards also increases the number of payment options available to 
consumers, thereby increasing overall customer satisfaction.
    Importantly, MasterCard acceptance also greatly increases 
sales for a variety of reasons.
    I stated earlier that people like their MasterCard cards. 
Well, they also like the service they get from their card 
companies. As discussed earlier in the testimony from the 
Federal Reserve, the recent Federal Reserve study illustrates 
this point; and I'd like to highlight just three of the 
findings from this study.
    First, 91 percent of consumers who have bank-issued payment 
cards are generally satisfied in their dealings with their card 
    Second, 92 percent believe card companies provide a useful 
service to consumers.
    And third, 90 percent of bankcard holders believe they are 
treated fairly.
    How many other industries can claim a customer satisfaction 
rate of 90 percent?
    MasterCard also provides important consumer education 
programs, because we believe financial literacy is critical for 
individuals of all ages. Many of these programs are described 
in my written testimony.
    MasterCard also continues to work with Congress and the 
Administration to improve consumer financial awareness. For 
example, MasterCard is a strong supporter of H.R. 61, the 
Dreier-Pomeroy Youth Financial Education Act, which would 
authorize the Secretary of Education to provide grants for 
youth financial education programs. We are pleased that the 
House and the Senate have each incorporated this bill in the 
larger education reform measure that currently awaits final 
action in conference.
    MasterCard is proud of its record of offering cardholders 
and merchants highly beneficial and convenient payment methods. 
Quite simply, we have set high standards for ourselves, and we 
will continue to strive to meet them.
    Mr. Chairman, thank you again for the opportunity to 
discuss MasterCard's commitment to its cardholders. I would be 
pleased to address any questions the subcommittee may have.
    [The prepared statement of Joshua L. Peirez can be found on 
page 148 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Fischer.


    Mr. Fischer. Thank you, Chairman Bachus, Ranking Member 
Waters, Subcommittee Members. My name is Rick Fischer and I'm 
here today on behalf of Visa.
    Visa is the largest consumer payment system in the world, 
with over 800 million Visa-branded cards----
    Chairman Bachus. Push that microphone a little closer, 
    Mr. Fischer. Yes, sir. Over the years, consumers have 
really embraced bank cards. In 1970 when I first started 
practicing on credit card issues, only 16 percent of U.S. 
families had bank cards. Today that number has increased to 
nearly 70 percent. This dramatic increase is not surprising, 
given the convenience and benefits these cards offer to 
consumers. They make remote transactions like internet 
purchases possible, and they serve as a flexible substitute for 
personal loans.
    The credit card business is highly competitive. Card 
issuers offer literally thousands of competing card products 
with a wide variety of features to satisfy increasingly diverse 
consumer interests. Indeed, credit cards have become an 
important facilitator of consumer demand for products and 
services, and as a result, have fueled much of our economy in 
the last few years.
    Under the Visa system, each bank establishes its own fees, 
its own finance charges, its own credit standards, and its own 
rewards programs when they exist. And each bank prepares its 
own disclosures and develops its own privacy notices. And these 
activities are closely regulated by existing Federal laws like 
those you've heard about earlier today, the Truth in Lending 
Act, the Electronic Funds Transfer Act, and the Gramm-Leach-
Bliley Privacy Act for disclosure purposes. In fact, there are 
few activities today that are not already heavily regulated by 
existing Federal laws.
    The Visa system also puts the choice on how to pay in the 
hands of consumers. Visa believes strongly that it is the 
consumer who should choose whether to pay with credit cards or 
debit cards or by cash or checks.
    Card issuers realize that their success depends upon 
customer satisfaction, and they compete with each other in 
every aspect of the account relationship, including customer 
service. If a card issuer fails to meet expectations, 
cardholders can easily move their balances to another issuer. 
In fact, there are many secondary sources today that help 
consumers compare and evaluate credit and related products 
quickly and easily, term by term and feature by feature.
    Visa also has long recognized that consumers are best 
served if they have a solid understanding of personal financial 
management. So Visa and its members have developed many 
programs to provide financial education to elementary, 
secondary, and college students around the country. These 
financial literacy initiatives, such as ``Practical Money 
Skills for Life,'' are discussed in my written statement.
    And Visa has recently partnered with the Reserve Officers 
Association to provide helpful information on money management 
to military personnel being deployed in Operation Enduring 
Freedom and their families.
    Visa has also been a leader in combatting fraud, including 
identity theft, for more than a decade. Fraud prevention 
protects merchants from fraud losses and protects consumers 
from higher prices caused by fraud. So preventing fraud is a 
top priority at Visa at its members, and I can report today 
that fraud in the Visa system is at an all-time low, even as 
Visa transaction volume has grown dramatically.
    Most recently, and this was questioned before this panel 
came up front, Visa members have worked closely with law 
enforcement authorities in the aftermath of the September 11th 
terrorist attacks. And Visa members have been proactive in 
assisting customers affected by those attacks. For example, 
many banks have waived late fees and interest charges on 
customer accounts. One bank estimates that it has waived more 
than $15 million in fees and interest in the last month alone.
    Another bank searched its records to see if any of its 
cardholders were victims of the September 11th attacks. For 
victims identified, the bank completely forgave the debts, even 
though it was not required to do so, because the bank wanted to 
do its part.
    Overall, I have found that card issuers today are not 
asking what they must do to comply with the law. Instead what 
they're asking is how can they do their part, how can they help 
without being asked to do so.
    I appreciate the ability to be here today and to 
participate in this panel, and I'm happy to answer any 
    [The prepared statement of L. Richard Fischer can be found 
on page 153 in the appendix.]
    Chairman Bachus. Appreciate that. Now we'll start with 
    Mr. Tiberi.
    Mr. Tiberi. Thank you, Mr. Chairman, Members of the 
subcommittee. I think I'm going to start with Mr. Torres and 
Mr. Mierzwinski.
    I don't know if you heard earlier when I talked about my 
father. My father and mother both are immigrants, and in fact, 
what I didn't tell you before was, my father and mother now use 
their credit card, even though they didn't have one until about 
5 or 6 years ago, for about everything. And interestingly 
enough, my Dad thinks the credit card companies aren't very 
smart. The reason why he doesn't think they're very smart is he 
pays his bill off every month, and so he gets a little extended 
line of credit there, and then he also gets cash back--no 
disrespect to Visa or MasterCard. This is not a plug for 
Discover. But he gets a couple hundred dollars every year cash 
back, and he does all his grocery shopping and his gasoline 
purchases, everything. And he's making a little bit of money.
    My Dad is an immigrant. My Mom is an immigrant. He has a 
sixth grade education. She has a ninth grade education. What am 
I missing here, Mr. Torres?
    Mr. Torres. I think that it's great that your parents are 
able to use the system and have a credit card, and some 
consumers, other consumers are able to do the same thing. But I 
don't think that that forgives, the ability of some consumers 
to do that, to understand the terms and the conditions that are 
imposed upon them, with the Discover card that your parents 
have, that doesn't excuse some of the other deceptive behavior 
that the FTC, the Office of the Comptroller of the Currency and 
the courts have found go on in the industry.
    I mean, other consumers, not your parents, but other 
consumers get duped all the time. It started with teaser rates. 
We heard Mr. Ackerman talk about this Privacy Guard product. 
We've seen increases in late payments, not just the interest, 
not just the fees themselves.
    Mr. Tiberi. Excuse me. I heard your testimony. What I don't 
understand is, for me, it's very simple. If I have a bill that 
comes in, a Visa bill that comes in, and I have 15 days to pay 
that Visa bill, and I don't make that payment in 15 days, why 
shouldn't I be charged a late fee?
    Mr. Torres. We're not saying that you shouldn't be charged 
a late fee, but shouldn't that late fee be fair in terms of if 
it's going to be--if the idea behind a late fee is to get you 
to pay your bill on time, that's fine. But to go beyond that, 
to say we're going to use this as a profit-generating 
mechanism, and on top of that, kick up your interest rate 
substantially, supposedly to cover risk, which I question 
whether or not that actually covers risk or is something more.
    I mean, I think that if all consumers were in the same 
place as your parents are, we wouldn't be having this hearing 
to talk about the problems in the credit card industry and the 
practices that they impose on consumers.
    Mr. Tiberi. And I'm not here to defend the credit card 
industry, but isn't there some responsibility for the 
cardholder? Can't you just say no? Is someone putting a gun to 
everybody's head saying let's get a credit card? Isn't it the 
responsibility for the person who applies for the credit card?
    Mr. Torres. I think you're right and I think Ed wants to 
respond, too. But another example that I didn't have a chance 
to get to was the fact that there's another credit card company 
that the OCC went after called Direct Merchants. They solicited 
business offering one type of card, and as it turns out, were 
giving their customers another type of card, charging them a 
processing fee that they didn't disclose that they would be 
charging, and then on top of that, when consumers called in to 
complain, they said, well, you've been upgraded.
    Mr. LaFalce. Would the gentleman yield?
    Mr. Tiberi. Mr. Torres, you mentioned three times consumers 
can't understand, consumers can't say now. And I tell you, the 
household that I grew up with, ``No'' was used quite a bit. And 
I don't understand why the assumption is, is that all consumers 
are dumb.
    Mr. LaFalce. Would the gentleman yield?
    Mr. Tiberi. I take offense to that as a son of immigrants. 
I will yield to the distinguished Ranking Member and head of 
the Italian-American Caucus.
    Mr. LaFalce. I thank the gentleman from Columbus, Ohio. 
Your parents are terrific people. There are a lot of terrific 
people who get duped. So far, your parents haven't. But you 
represent the great city of Columbus, Ohio, which at one time 
was the headquarters for a bank called BankOne that issued a 
few credit cards and had a few credit card problems. I suspect 
that your constituents probably had more of those credit card 
problems than most any other Congressional district.
    Mr. Tiberi. Well, and again, my point is, is not to defend 
the credit card industry, but even my wonderful aunt, who lives 
in Niagara Falls, New York, has the----
    Mr. Tiberi. And is a big fan of Mr. LaFalce's, by the way, 
pays off her credit card every month. Now again, she has a 
fifth grade education. And Mr. Torres, I still take offense to 
your remarks that consumers don't understand and consumers 
can't say no.
    Mr. Grucci. [Presiding] The gentleman's time has expired.
    Mr. Torres. Could I respond to that?
    Mr. Grucci. Please finish your statement. But the 
gentleman's time has expired.
    Mr. Torres. I don't mean to imply that consumers are dumb. 
Most consumers that I know are very bright. But what they're 
facing is an industry that might be a little bit smarter and 
might be a little bit able to maneuver a little bit better than 
them, than those consumers. And not every consumer is in a 
position to be able to pay off their credit card balances every 
month. We wish that that was different. But especially in these 
economic times when we've got a lot of workers laid off, a lot 
of people without health insurance, they're facing tough 
economic times. And it's my understanding from having worked on 
the bankruptcy bill that consumers work very hard. They tap 
into all of their resources to try to pay off all of their 
bills in the terms that they're given. What they don't expect 
is to be tricked and trapped and perhaps charged more than they 
    Mr. Grucci. Thank you.
    At this time we'll turn to the Ranking Member for the Full 
Committee, Mr. LaFalce.
    Mr. LaFalce. My parents had less of an education that the 
gentleman's from Columbus, Ohio had. I was the first one to 
graduate from high school, go to high school in my family. Then 
I went on to law school, and so forth. And I have studied law 
in Philadelphia--a Philadelphia lawyer--and I have an 
unbelievable difficulty with so many of the practices. The 
practices are virtually impossible. They get everybody, no 
matter how intelligent you are. So that's not the issue. That's 
a phony issue. That's a phony argument.
    The issue is the practices are designed to trap 
individuals. You know, they trap everybody, the most 
intelligent, and of course, the least intelligent too. And 
they're designed to do that. They're deliberately crafted that 
way to make money on human lapses or lack of compliance with 
technicalities. And sure, they are glad to get individuals to 
come in and say, ``if you want to pay it off every single month 
in toto, and we'll give you 2 percentage points off at the end 
of the year'' or, you know, ``if you're a GM card, five 
points'' or what have you, because they know that so many 
people are going to make so many lapses that they're going to 
make it up in fees and penalties plus. That's the strategy. 
That's the game plan.
    And, you know, we ought to be aware of that. That's a 
reality of life. And there are just certain things that we 
ought to define as unfair, certain things we ought to define as 
deceptive. And we haven't done that adequately, either as a 
Congress or the regulators. And for us to try to just give one 
example of how a credit card can be used well, of course, a 
credit card can be used well. And I wouldn't want anybody in my 
family not to have a credit card, certainly at least for 
emergencies if not for the ordinary conveniences of life. But 
you don't want it to be abused either, or fall into the trap.
    Now let me focus in on Mr. Peirez and Mr. Fischer for a 
little bit. It's the issuers who make these decisions for the 
most part as opposed to MasterCard or Visa. Is that correct?
    Mr. Fischer. That is correct.
    Mr. LaFalce. OK. But do you have any either compacts with 
your issuers regarding practices that they should have to 
adhere to that would not be unfair or deceptive, or do you have 
a set of best practices that you urge upon your issuers?
    Mr. Fischer. There is no compact as such, Mr. LaFalce.
    Mr. LaFalce. So as far as you're concerned, you let your 
issuers do whatever they want to? If they comply with the law, 
it's fine. If they don't, that's----
    Mr. Fischer. No.
    Mr. LaFalce. If they have deceptive practices or sort of 
deceptive, that's OK?
    Mr. Fischer. There is no way that Visa--and MasterCard can 
speak for itself--could possibly condone deceptive practices.
    Mr. LaFalce. I'm not talking about condoning it. I'm 
talking about allowing it or trying to do something about it by 
either including a compact that would be violative of the legal 
arrangements with you, or at the very least, a model which you 
would suggest they follow.
    Mr. Fischer. Without any question, the Visa brand is 
critically important to the company, and customer satisfaction 
is very important.
    Mr. LaFalce. Yes, but all these issuers that had 
enforcement actions brought against them or were found liable 
in the courts, they used MasterCard, Visa, Discover, and so 
forth. You know, I mean, they don't really care. How many times 
have you canceled the ability of an issuer to use MasterCard or 
Visa because of what you thought was a deceptive practice? Do 
you impose any penalties upon issuers who engage in unfair or 
deceptive practices?
    Mr. Fischer. Visa does not do that. Visa expects----
    Mr. LaFalce. Does MasterCard do that at all?
    Mr. Peirez. Congressman, MasterCard issuers are required 
under our rules to follow the law and to assure that our system 
is not utilized for violations of the law or in an illegal 
fashion. So to the extent that issuers are----
    Mr. LaFalce. One of the difficulties was is they'll always 
say in any settlement, you know, but we didn't violate the law. 
So we settled this in order to just get rid of the nuisance. 
And that's why I said in my opening statement earlier, there 
ought to be a law, or at least there ought to be a regulation. 
And, of course, it's taken me 7 years to get this hearing. I 
assume we're going to have a markup of my bills next week, but 
maybe I'm wrong. You know, it's taken 26 years and the Fed 
still hasn't promulgated regulations. You know, you can see why 
I get a little frustrated.
    I mean, I think this hearing is basically cosmetic. I mean, 
this was a sop to me to be very cooperative with the money 
laundering legislation. Of course, that was my legislation, so 
it was easy for me to be cooperative with it. And I don't want 
something that's just cosmetic. I don't want us to have this 
hearing today and say, see, LaFalce, we gave you the hearing. 
Now what more could you ask for? A lot more. A lot more. And 
I'm starting with MasterCard and Visa.
    What do you do about internet gambling? Now a lot of courts 
have said that internet gambling is ipso facto--I guess I told 
a funny joke there--illegal under the terms of the Wire Act. 
How does MasterCard and Visa handle internet gambling? Do you 
just permit it at will, or do you think it is illegal, or do 
you monitor what you consider to be legal or what you consider 
to be illegal?
    Mr. Peirez. What I can tell you is what MasterCard has 
done. What MasterCard has done with respect to internet 
gambling is it has passed rules requiring notice to the 
participants of what's going on so they can be aware. First it 
requires that the site which is engaging in providing a gaming 
site give notice to the customer that, in fact, this is a 
gaming transaction that could be illegal.
    The second rule requires the merchant when transmitting 
that transaction through our system to flag that transaction as 
an internet transaction and as a gaming transaction so that 
when the issuer then receives a request to authorize that 
transaction, the issuer can be aware of that. And MasterCard 
also, as I said, requires that its issuers not allow the system 
to be used for illegal activities. So to the extent that the 
issuers are able to tell that an activity is illegal----
    Mr. LaFalce. Some issuers have said, we're not going permit 
our credit card to be used at any time for internet gambling, 
period, because we think that it is ipso facto illegal. I think 
Providian, for example, is one of them. Does Providian use 
MasterCard or Visa or both?
    Mr. Fischer. It's really both, Mr. LaFalce. The difficulty 
here--and we'd be happy to sit down with you at any time to 
talk through it--is that it's not possible with technology 
today to block the transactions at the front end.
    Mr. LaFalce. If you can't block them at the front end, you 
can stop the credit card. You can do this, because some issuers 
are doing it. They're blocking the use of credit cards at 
internet gambling sites.
    Mr. Fischer. Using the codes that have been established, if 
in fact the transactions are coded in that fashion, you can 
block them. When they come through for authorization, you can 
block them.
    Mr. LaFalce. Right.
    Mr. Fischer. That assumes they're coded properly. If 
they're not, you can't block them.
    Mr. LaFalce. OK. But, you know, if you've got 1,500 
gambling sites and you code them all, you can block them all.
    Mr. Peirez. I would emphasize that at this point in time, 
the majority, as far as I'm aware, of these gambling sites 
actually don't accept MasterCard payment cards or Visa payment 
cards directly for payment.
    Mr. LaFalce. What do they do?
    Mr. Peirez. Usually the MasterCard card would be used to 
fund an internet account of some sort that can be used for a 
variety of purchases, not just internet gambling.
    Mr. LaFalce. So they get around it. You know, but if they 
can get around it, there's a way to figure out how to stop them 
getting around it if you'd work with us, if you wanted to do 
it. I mean, you know so much more about it than we do. If you 
wanted to stop it, if you wanted to ensure compliance with the 
law, you could. I mean, I don't think you're being very 
forthcoming here. I think you're sort of saying, well, you 
know, we're making money on it. As long as we're making money 
on it, you know, and as long as nobody's coming into court and 
charging us with anything illegal, you know, we'll let them get 
around the law this way. That's my interpretation of what 
you're doing.
    Mr. Fischer. Congressman, we've worked with many Members of 
this subcommittee as well as other Members of Congress and plan 
to continue to do so to try to find----
    Mr. LaFalce. Good. But nobody has been as active on this 
issue as I am, and you've never worked with me on this issue, 
so I don't know who else you've been working with.
    Mr. Fischer. Well, we'd be happy to work with you on this.
    Mr. LaFalce. OK. I'm wondering who else you've been working 
with on this issue, because I don't know of anybody else on 
this subcommittee who's been--maybe Chairman Leach.
    Chairman Bachus. Thank you, Mr. LaFalce.
    Mr. Grucci.
    Mr. Grucci. Thank you, Mr. Chairman. I'd like to address my 
comments to Mr. Fischer. Mr. Fischer, are you a member of the 
corporate offices of Visa?
    Mr. Fischer. I am not, sir. I'm outside counsel for Visa.
    Mr. Grucci. OK. And I suspect that you're here because they 
didn't have anybody to send?
    Mr. Fischer. No. I've worked on credit card issues for 30 
years, and there was a broad range of questions that the 
subcommittee ask to be addressed, and so they wanted someone 
here with the experience to come in and answer those questions 
for you.
    Mr. Grucci. The questions that I have revolve around 
several things. First let me start off by just making an 
observation which leads to the question. With the Fed lowering 
interest rates and interest rates dropping on just about every 
other kind of consumer loan that's out there, from mortgages to 
automobile loans, why haven't the interest rates dropped on 
Visa cards? I wasn't aware of this until several people brought 
it to my attention back in the district, and then when I looked 
at my own Visa bills I said, yes, it's absolutely right.
    The interest rates are still sky high, and it would seem to 
me that with all of the reduction in interest that your company 
ought to have taken a forward-looking approach and also dropped 
rates. Could you respond to that? And if you're not in a 
position to respond to any of these, I understand. I would then 
ask you to bring this back to those who can make those 
decisions at corporate since no one is here to represent them, 
other than you.
    Mr. Fischer. I'd be happy to try in the first instance to 
respond, sir. First, Visa itself sets no rates. There are 
21,000 banks that participate, 14,000 of them in the United 
States. Each of them operates their own program, so each of 
them sets their own terms and fees. So to answer that question, 
we would have look specifically at the issuers.
    In terms of programs that have variable rates that are 
actually tied to an index like prime, then of course, they 
would float. In other words, they would move up and down with 
prime. In particular programs, there may be floors and ceilings 
on them, but, in fact, subject to that, they would, in fact, 
    Mr. Grucci. Has it moved at all, the interest rates on your 
cards since the Feds had started lowering interest rates?
    Mr. Fischer. I can't tell you that, sir.
    Mr. Grucci. OK. Would you find out from corporate if indeed 
that is the case? Also, could you answer the question about the 
credit cards that are issued to college students? I have 
several colleges and universities in my district and the 
parents are very concerned about the number of credit cards 
that their children are able to obtain through the mail simply 
by opening up their mail and it's sent to them with as much as 
a $3,000 limit on it, and finding themselves in some very 
significant problems.
    Why would companies like yours send out those types of 
things without at least understanding that there are college 
students who may not be able repay those types of loans and 
then perhaps putting their parents in the kind of problem that 
they may face?
    Mr. Fischer. Well, first, as a parent of three children in 
college, I share your concerns perhaps even a little more 
directly in that sense. But, issuers cannot send out cards to 
students. They simply cannot do so. The Truth in Lending Act 
prohibits it under the current law. What they can do is send 
out offers which can be responded to. And I heard a comment 
earlier that cards were being sent out with no underwriting----
    Mr. Grucci. Let me just interrupt you for a moment, because 
my son, who is college, got one to my house, where he resides. 
It was in his name and it was a $3,000 limit on it and he 
doesn't have a job.
    Mr. Fischer. And he received an actual plastic card?
    Mr. Grucci. He got a plastic card in the mail, which I 
quickly proceeded to take away from him.
    Mr. Fischer. I'm sure that the relevant agency would like 
to hear about that, because it is, in fact, an illegal practice 
under existing law.
    Mr. Grucci. And I'm very concerned about it also. I have 
one more question if I may, Mr. Chairman. I see my time is 
expiring. The question that I have is that it's come to my 
attention that Bank of America is planning on relieving the 
victims' families of their credit card debt. And the question 
that I have is dealing with interest. Do you think it would 
make sense--and I'll throw this out to the panel, whoever 
wishes to answer it, do you think it would make sense to add a 
provision in this package relieving the tax on interest that 
credit card companies would have to pay on a debt that's being 
relieved? Anyone wish to answer that?
    Mr. Fischer. Well, if no one wants to step on that, I will. 
Looking at any particular legislation, obviously, you need to 
see what's going on there. I've talked to probably 30 financial 
institutions about relief efforts, and none of them, for the 
most part in any event, have even asked for publicity, let 
alone a tax break. In other words, this is something that they 
simply wanted to do, given the special circumstances following 
September 11th.
    If Congress was to turn around in that context and say, 
well, now we'll allow you to deduct it as well, you might find 
some interest. But I can tell you at least the institutions 
I've talked to are not asking for that, Congressman.
    Mr. Grucci. Thank you, Mr. Fischer. I appreciate your being 
here and I respect the position that you have, but I wish you 
would bring back to your company that I'm a little disturbed 
that they wouldn't have a corporate officer present to be able 
to respond on behalf of the company. Thank you for your 
forthright answers.
    Chairman Bachus. Ms. Waters.
    Ms. Waters. Thank you very much. And I'd like to thank the 
members of the panel for being here. Since you have been here, 
you have heard a lot of criticism of the credit card industry. 
And you've been accused of abusive practices, you've been 
accused of all kinds of tactics which I know you wish to 
disassociate yourself from. Have you heard anything here today 
that would make you change anything that you're doing, Visa and 
    Mr. Peirez. Congresswoman, thank you for the question. I 
guess my response would be that to some extent, the things that 
have been heard here today are no different from things that 
are said inaccurately about our industry from time to time. And 
I believe that often what gets lost is the great benefits that 
we bring to the American consumer.
    Ms. Waters. Have you heard anything that would cause you to 
change anything that you're doing now? I know about your 
benefits. I heard you talk about them. Have you heard anything 
here that would make you change anything you're doing or not 
    Mr. Peirez. There are certainly things that have been said 
that we would like to consider that I will take back and 
    Ms. Waters. Anything in particular?
    Mr. Peirez. I can't talk to specifics, but there are 
certainly things and we can follow up with you.
    Ms. Waters. OK. All right. Well, I'm glad you're--sir, what 
about you?
    Mr. Fischer. Yes. Without any question, there's been an 
emphasis here on deceptive practices. And as I indicated 
earlier--and you correctly said--that's not something we or 
anyone here is going to condone. What it does emphasize is the 
importance of educating not only the consumers, which Visa has 
spent an awful lot of time doing, but perhaps the industry as 
well on these points, and that's what we'll endeavor to do.
    Ms. Waters. Thank you. Have you ever thought about, since 
you deal with so many members who are out there--and I guess 
you have contracts that you have with them to be a part of your 
organization--have you thought about standards for them? For 
example, some of these members certainly must have some 
practices that you don't approve of. For example, this 
mandatory insurance for credit cards that had to be dealt with 
in the legal system. Did you know about that kind of thing? I 
mean, what can you do to eliminate your members from having 
those kind of practices?
    Mr. Fischer. Well, as you heard earlier, we obviously can 
tell the members they must comply with the law. We can attempt 
to look at practices that raise questions and risks to the Visa 
brand. If you're dealing in an association like Visa or 
MasterCard, the one thing that you cannot do is be involved in 
    Ms. Waters. If you find that one of your members is 
involved with deceptive practices, perhaps even illegal, you 
can tell them that they should be legal. What else can you do?
    Mr. Fischer. We certainly could tell them, assuming again 
that we are aware or believe that the practices they were 
engaged in were inappropriate, let's say even deceptive, that 
that is not good for them, it's not good for Visa, and it's not 
good for consumers.
    Ms. Waters. But you wouldn't tell them you wouldn't want 
them to be a part of your organization and kick them out, would 
    Mr. Fischer. In a context if they were really violating the 
law, that might be a possibility.
    Ms. Waters. Would you like to see a piece of legislation 
that would help you? Legislation that would say if you have 
knowledge of illegal practices of one of your members and you 
do not within 30 days make them aware of it and warn them, that 
you could be fined, would that help you out?
    Mr. Fischer. I would prefer to invest that effort in 
education and also to help people to find issuers that perhaps 
are not engaged in those practices. The Federal Reserve Board 
indicated earlier that 86 percent of consumers understand their 
ability to move those accounts. I think that that would be the 
better result.
    Ms. Waters. Well, you know, the reason I asked is, 
sometimes it's difficult in business for people to say to those 
who add to the bottom line, change your ways or we don't want 
you, and sometimes you need some help. And perhaps we can find 
some ways to help you with that. But, of course, when we do 
that, I know you don't like legislation that kind of punishes 
you if you, you know, do not do certain things. But of course, 
some of us who are very concerned about some of these practices 
may want to try and help you out in some ways in accomplishing 
    So I raise the question so that you can be in the 
leadership in the forefront of trying to deal with some of 
these concerns.
    Now is there a definition of when late fees start? When do 
late fees start? Do you have standards? If you say it's 15 
days, when does the 15 days begin, when does it end? Is the 
time of day calculated into some of this in some way? What do 
you know about this? If I may have unanimous consent for 60 
more seconds.
    Mr. Fischer. As the Federal Reserve Board representative 
indicated earlier--Dolores Smith--there are rules that say that 
you have to post payments as of the date they're received. 
There also are rules that say that there are a number of days 
in advance of that that that bill must go out. In other words, 
there must be a fair opportunity to get the bill out and have 
it paid. There is no law that I'm aware of that talks about 
times of days or any number of days beyond that minimum, which 
is about a 2-week minimum.
    Ms. Waters. Practices of member organizations, if the 
payment is not in by eight o'clock even though the mail is not 
received until 12 noon, then that becomes a late day. Do you 
know about any of that?
    Mr. Fischer. I do not.
    Ms. Waters. All right. And that's another area we may be 
able to help you. Maybe we need to define what 15 days are, 
what 10 days are, and maybe we need to decide that, you know, 
10 days or 15 days are not enough. Maybe we need to step in 
here and help you out a little bit.
    And finally, let me just conclude by saying, given the 
problems with the mail, could you envision a directive from 
your organization to your members to say let's have a 
moratorium on late fees for 60 days or 30 days or--what kind of 
leadership could you give? Are you desirous of doing that, or 
just the thought of it is just too much for you to even think 
    Mr. Fischer. No. I'm pleased to say that what I heard from 
Representative Maloney and Representative Cantor is that Visa 
members are doing that without legislative guidance. In other 
words, they're looking at people who have been affected by this 
tragedy and they're voluntarily making the decisions you'd like 
to see them make under those circumstances by themselves.
    Ms. Waters. Some members are. But wouldn't you feel real 
patriotic if you were able to send out a big red, white and 
blue notice to your members saying we all ought to do this? 
Wouldn't that be nice and patriotic?
    Mr. Fischer. One of the wonderful things about competition 
is that when you have organizations who are doing that, their 
customers are going to remember. They will keep their 
customers, perhaps others will not.
    Ms. Waters. One of the good things about competition in 
addition to letting the marketplace work is seeing leadership 
that respects the marketplace so much that they provide 
recommendations, suggestions--can't make them do anything, but 
it sure looks good when from the top you're saying we think 
this would be a nice thing to do.
    Chairman Bachus. Mr. Fischer, you seem a little leery of 
the Ranking Member's offer of helpful legislation to assist 
your industry.
    Mr. Fischer. I'm always happy to sit down and talk with 
Representative Waters about any legislative proposal.
    Chairman Bachus. Thank you.
    Mr. Cantor.
    Mr. Cantor. Thank you, Mr. Chairman. Mr. Chairman, I would 
just like to ask again those representatives from Visa and 
MasterCard, you know, my opening comment suggest that I do 
believe that there are members in the industry who are doing 
their part in these difficult times. I also concur with the 
notion that the industry provides a significant assistance to 
consumers who may not otherwise be able to access credit. I 
think it's an integral part of our economy without a doubt.
    Just hearing some of the debate as I came into the second 
part of this hearing, I am concerned a little bit about the 
accusations and other things that have been stated here. But my 
emphasis--I would ask you if you could help us in learning 
about what the industry does, about what you know, as was said 
earlier, you know the industry better than we do, what has 
worked? What have your members done that has worked to promote 
responsible borrowing? If you can let us know how that has 
happened and if there's any way that we could learn about that 
to provide incentives for member companies to act responsibly.
    Mr. Peirez. I think the primary thing the industry has done 
is engage in extensive consumer education efforts. MasterCard 
has engaged in many that are highlighted in my written 
testimony. Our members have done the same. But also 
importantly, I think it's worth noting that the industry's 
underwriting standards are extremely effective. Indeed, 
approximately only 1 percent of accounts in a given year 
default because of bankruptcy, and only another 2 to 3 percent 
of accounts default for any other reason.
    So indeed, that's around a 96 or 97-percent success rate, 
which illustrates that, in fact, consumers who use MasterCard 
cards or Visa cards do so in a highly responsible fashion in 
which they are able, in fact, to make the payments they have to 
    Mr. Fischer. Visa believes that education is essential. In 
fact, Chairman Greenspan said that in a presentation he gave 
just this past week. That's something that Visa has worked on 
now for over a decade. They have one wonderful program that's 
developed at both the elementary and secondary school level. 
Right now it involves almost 100,000 schools across the 
country, 37 million students. And ultimately, that is I believe 
the answer. That you can look at responses to particular 
practices that are not acceptable, but ultimately, it's 
education. It's understanding how to use these products, enjoy 
their benefits without getting into difficulty.
    Mr. Cantor. Mr. Chairman, one follow-up. Can you provide 
any details on the way that is accomplished? Is it through 
notice to the cardholders? Is it through calls? How is that 
most effectively delivered?
    Mr. Peirez. I guess there are differing opinions on how 
education can be most effectively delivered, but oftentimes 
it's through people who the consumer trusts and knows already--
their teachers, their parents, other students, if it's a 
college student education program. So empowering those entities 
that are already engaged in education to educate them on 
financial literacy is probably the most effective way, and we 
have been working with Members of Congress as well as with the 
Administration to try to bring more of those programs to the 
classroom and to campuses.
    Mr. Fischer. And Visa decided to go directly to the 
teachers. They decided if they were going to put something 
together, they wanted it to come not from Visa, but from 
teachers around the country. So it's something that's been 
tested by teachers, approved by teachers, and it's implemented 
by teachers.
    There's a separate website. It does have at one spot a Visa 
logo, but that's all you'll see. Twenty-five thousand hits a 
day in terms of instruction, and I think that's very important.
    Mr. Mierzwinski. Congressman, could I make a brief response 
to that?
    Mr. Cantor. Sure.
    Mr. Mierzwinski. I just want to say, the consumer groups 
also support financial education, and we did not make it a 
priority in our testimony today to talk in great detail about 
it. But as I indicated, we have a brochure we've distributed 
thousands of on college campuses. Mr. Torres' magazine, 
Consumer Reports, is the largest consumer education magazine in 
the country, and the Consumer Federation of America has a major 
financial literacy program.
    All that being said, I'm disappointed that the industry, 
although they sent their eloquent representatives of Visa and 
MasterCard here, that we don't have representatives of the 
companies that have, in fact, been under investigation by the 
OCC, by the San Francisco District Attorney, and by some of the 
other investigatory agencies around. And I wish, and I hope 
that the subcommittee will hold an additional hearing where 
Jerry Hawke or his litigators will be here to talk about some 
of their investigations to talk about some of the tawdry 
practices that the industry is engaged in. I think it's great 
they're engaged in financial literacy, but the fact is, a lot 
of the biggest issuers have been sued and have been caught.
    Mr. LaFalce. And some State Attornies General, too.
    Mr. Mierzwinski. And some State Attornies General, as well.
    Mr. Cantor. I yield back the balance of my time, Mr. 
    Chairman Bachus. Thank you for those hard-hitting 
questions. Mr. Mierzwinski, let me comment on one thing for the 
    Mr. Hawke, we invited them to come to discuss those 
actions, legal actions, and I think appropriately, they said 
that because there's litigation ongoing they did not want to 
discuss the particulars of the case.
    Mr. Mierzwinski. I'm sorry. I was referring to the settled 
    Chairman Bachus. Is that right?
    Mr. Mierzwinski. If they're not settled, if they're 
    Chairman Bachus. Their response to us was that there was 
litigation ongoing.
    Mr. Mierzwinski. OK.
    Chairman Bachus. Obviously, if there's been a final 
adjudication, that wouldn't be a good----
    Mr. LaFalce. Mr. Chairman, if you would yield?
    Chairman Bachus. I yield to the gentleman.
    Mr. LaFalce. I could understand not wanting to discuss the 
particulars of a case in controversy or if as part of a 
settlement there's an agreement to have a quiet period, but 
surely we could call in each and every regulator to discuss 
what the practices of the industry have been at large with 
respect to unfair and deceptive practices. Surely we could call 
them to find out what regulations they have articulated to deal 
with that, what enforcement mechanisms they have.
    Chairman Bachus. Sure.
    Mr. LaFalce. Surely we can call them in to find out whether 
they think there are some gaps in the law that need filling, 
and so forth.
    Chairman Bachus. Well, let me say this.
    Mr. LaFalce. So I would think the next hearing you have on 
this, we could have those individuals also to discuss those 
    Chairman Bachus. I'm telling you what his response was. Now 
if the litigation has concluded, obviously that wouldn't--and 
we'll go back and explore that further.
    Also, as Mr. LaFalce said, they wouldn't have to discuss 
the details of the ongoing litigation. They could discuss their 
efforts. And I think you bring up a good point and that perhaps 
would be a good follow-up hearing.
    Mr. Mierzwinski. Great.
    Chairman Bachus. Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman. I want to ask the 
first question of Mr. Frank Torres with Consumers Union. What 
could be done so that all of the credit card companies would 
have to make sure that the people they send the credit card 
actually in the mail are not college students nor children in 
grades K through 12? I have two young daughters under 10 years 
of age, both are frequent fliers. And evidently they have their 
frequent flier card and their names were bought in some list, 
and so they received cards for $3,000 line of credit.
    My colleague just talked about him being concerned about 
his college student son receiving one for $3,000. This is a 
problem. And we need to stop it and stop it quickly. So what 
could we do in Congress to put a stop to it?
    Mr. Torres. Well, one way you could do it very quickly is 
to amend the Gramm-Leach-Bliley Act and truly give consumers 
some privacy. Because you're exactly right. Probably the reason 
why you're getting the solicitations is because somebody sold a 
list to somebody else and you're unable to stop that or prevent 
it at all. So that's one of the things that you can do.
    The second thing to do to try to stop the solicitations is 
to really ratchet down on the marketing practices of the credit 
card companies. Make them do their homework as to, you know, if 
they're going to be sending out these things to the world, 
don't reward them by passing a bankruptcy bill.
    Don't reward them by not doing anything about some of their 
deceptive practices. Instead say if a parent comes into the 
regulator with one of these solicitations targeted to their 
kids, because a credit card company doesn't want to be 
responsible for who they're sending out all these solicitations 
to, enable somebody to bring stuff penalties against those 
credit card companies. I mean, it's a free-for-all out there. 
And unfortunately, the flip side to this is, I kind of question 
whether or not there's really competition in the marketplace, 
so if your son or daughter may be get the solicitation and they 
may get it for a low rate, but they may not qualify for that 
rate. So, that's a little bit off the tangent, but I think you 
get my point.
    But the first thing you can do is really protect people's 
    Mr. Hinojosa. Well, what if we made the first $5,000 or the 
first $10,000 of their purchases free so that they wouldn't 
have to pay the credit card company as the penalty?
    Mr. Torres. That certainly would be one----
    Mr. Hinojosa. That would get their attention, wouldn't it?
    Mr. Torres. That would certainly get their attention.
    Mr. Hinojosa. Thank you. The next question is to Richard 
Fischer at Visa. I've received a number of letters from my 
constituents in my Congressional district regarding the 
extremely high late fees charged by credit card companies. 
Apparently in some cases, the payment due date may fall on a 
holiday or a weekend, and the customer is assessed a late 
penalty if payment is not received before that date. And 
sometimes the amount of the penalty is greater than the minimum 
payment required.
    Are there any industry standards that can be set up so that 
this doesn't happen?
    Mr. Fischer. There are no industry standards in the sense 
of Visa-set standards. Obviously there are rules, though, in 
the exiting law in terms of how you treat payments. And as you 
heard earlier, a payment must be processed, it must be handled 
as of the date of its receipt. If you have a payment, as I 
understood your question, sir, that was received on a Friday 
and not applied until the following week, that would be 
inappropriate under existing law.
    I'd be happy to sit down with you, look at the individual 
complaint, see if we can't resolve the matter. Visa, of course, 
would not have set any of those fees or practices, but if there 
are issues to be dealt with with individual members, I'd be 
happy to intercede for you.
    Mr. Hinojosa. I would like to invite you to come to my 
office when they let us go back into Longworth and sit down 
with us in my office so that we can try to be able to answer 
some of these letters and give them good accurate information.
    Mr. Fischer. Be happy to do that. May I respond to one 
other question? In terms of your two daughters, did they 
actually receive a card?
    Mr. Hinojosa. There was a card in the envelope. It was 
instant approval for their credit.
    Mr. Fischer. Congressman, you have asked the question, what 
can Congress do? On that one, Congress has already done. The 
practice of sending out a card to somebody who's not asked for 
it is illegal today under existing law. They can send you an 
invitation in that particular context, but if they actually 
sent you a card--or your daughters a card--that's illegal under 
the law today. Congress has dealt with that already.
    In terms of your question about the first $5,000 in 
balances, if your daughters--I'm sure they would not do this--
but if they were to go out and use those cards, none of it 
could be enforced, not the first $1,000, not the first $5,000, 
none of it. They're under age. They shouldn't have had the 
cards in that instance without parental intercession, and in 
that context, there would be no liability for them.
    Mr. Hinojosa. Thank you. I have no other questions, Mr. 
    Mr. LaFalce. Would the gentleman yield? Could we follow up 
on that for a second? Under what law? Does it depend upon the 
State law?
    Mr. Fischer. No, no. This is the Federal Truth in Lending 
Act. It has a provision in it dealing with the----
    Mr. LaFalce. If they sent the actual card?
    Mr. Fischer. Yes.
    Mr. LaFalce. OK. Good.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. Mr. Fischer, you and Mr. Peirez 
talked about consumers having a choice, being able to choose 
between products and that they have the right to go from one 
bank to another to choose products. Recently a court found that 
membership rules of both Visa and MasterCard that prohibit 
their members from offering other cards violate the Sherman 
Antitrust Act.
    The judge agreed with the Justice Department that as a 
result of exclusionary rules, American consumers have been 
denied the benefits of credit and charge cards with new and 
varied features.
    The court also concluded that small businesses and other 
merchants were harmed by the anticompetitive practices of Visa 
and MasterCard. Pretty clearly, some of the practices of 
MasterCard and Visa restrict competition, do they not?
    Mr. Fischer. We do not believe so, sir. The decision you 
talk about is a lengthy one. It's over 150 pages. It's very 
complicated. We think they got the first half of the decision 
right. And in that part of the decision, nearly 70 pages talks 
about all the competition in the industry and how valuable it 
    The second half of the decision we think went off in the 
wrong direction in terms of membership rules. It's something 
that we're looking into. The judge has asked for orders, 
recommendations on the order. We've given those. We're waiting 
for a final ruling in the case, and then we'll make a decision 
    Chairman Bachus. Mr. Peirez.
    Mr. Peirez. I think Mr. Fischer covered most of the points. 
Certainly the judge's decision does emphasize the tremendous 
amount of competition and does speak to the various types of 
cards that are available to consumers as a result of it, and 
the ability of consumers to switch among cards. And similar to 
Visa, we are awaiting the judge's final judgment.
    Chairman Bachus. Both Visa and MasterCard, you tell a bank 
if you want to market Visa and MasterCard, you can't offer 
other cards, right?
    Mr. Peirez. We tell members that if they want to be a 
member of MasterCard and be able to issue MasterCard cards 
that, with a few exceptions, they are not able to participate 
in other systems.
    Chairman Bachus. They can't offer other cards to their 
customers, right?
    Mr. Peirez. They are allowed to offer Visa cards.
    Chairman Bachus. But only Visa or MasterCard? Is that 
    Mr. Peirez. There are some other exceptions, but in large 
part, that's correct.
    Chairman Bachus. That's restrictive, I mean, is it not? 
Whether you agree with it or not, it's restrictive. You're 
restricting their right to offer other products to their 
    Mr. Peirez. It's important to remember that these members 
as well as MasterCard itself have spent billions of dollars 
over 30 years developing the MasterCard system, the good-will 
associated with it.
    Chairman Bachus. Let me ask you this. What if Coca-Cola 
spent billions of dollars developing that product, what if they 
told grocery stores they couldn't offer anything but Coca-Cola 
products? They couldn't offer Pepsi. They would be 
anticompetitive, wouldn't it?
    Mr. Peirez. I don't believe that there's a parallel there. 
I don't believe that we do that. We certainly allow merchants 
to accept any and all cards. We certainly allow consumers to 
carry and use----
    Chairman Bachus. Wait a minute. You allow? Oh, you allow 
merchants to accept, but not your client. You don't really have 
control on what merchants do.
    Mr. Peirez. What we ask of our members is that if they want 
to participate in the MasterCard system, they have loyalty to 
that system, and that they not engage in participating in other 
systems that diminish the value of MasterCard.
    Chairman Bachus. You mean you're asking them in the name of 
loyalty, you're saying you can't offer other cards?
    Mr. Peirez. We're asking them if they want to be a member 
of MasterCard, to be a member of MasterCard and to abide by all 
MasterCard rules, including the MasterCard competitive programs 
policy, which I believe you're referring to, that limits their 
ability to participate in certain other programs.
    Chairman Bachus. Does that have any benefit to the American 
    Mr. Fischer. We certainly believe it does. What's important 
to recognize is this matter is in the court today. It's not the 
first time. The same rule was dealt with in the 10th Circuit, 
looked at all of the practice, found it perfectly appropriate.
    Chairman Bachus. Mr. Fischer, you said you think it does 
benefit consumers?
    Mr. Fischer. To have a healthy system, a healthy Visa 
system, absolutely I think it benefits consumers.
    Chairman Bachus. Oh, have a healthy Visa system?
    Mr. Fischer. Absolutely.
    Chairman Bachus. You think that if they were able to offer 
other cards, it would----
    Mr. Fischer. It's not the issuance of the cards themselves. 
It is the entry to the system of someone who is looking only to 
destroy it, and that's the concern. But if you'd like to sit 
down, Chairman Bachus, at any time and talk about it, we'd be 
happy to do that.
    Chairman Bachus. And let me say this. I have tremendous 
respect for your intellect and your judgment, as a former 
attorney, I mean I've heard you testify. I've heard you testify 
on privacy. Very impressed with your grasp of the issues, so I 
respect your opinion. I know you're here on behalf of Visa. But 
I would be interested in doing that.
    Mr. Torres.
    Mr. Torres. Mr. Chairman, may I respond to some of those 
questions? First of all, we think that the judge's ruling in 
the Department of Justice case is very important, especially in 
the aftermath of Gramm-Leach-Bliley, where the whole idea of 
that law is to foster competition and allow banks and financial 
institutions to offer a wide range of products, and we didn't 
see why a bank shouldn't be allowed to offer any card product, 
not just American Express or Discover or whoever, but some 
maybe new upstart company that would compete on the basis of 
interest rate, that perhaps wouldn't do some of these practices 
that we've discussed today.
    The other thing--and since the idea of control over what 
merchants do has been raised, the merchants have filed their 
own lawsuit against the MasterCard and Visa networks for 
forcing them to, in order to continue to accept the Visa and 
MasterCard credit card product, also have to--they're trying to 
force the merchants to also have to accept the debit card 
product or the check card, it's the same thing.
    The problem there that the merchants are facing is that 
they're being charged the same rates to accept the check card 
that takes money directly out of a consumer's account as they 
do for the credit card products, which is up to 2 percent of 
transaction, from my understanding, which is a tremendous 
amount that they end up passing along to consumers, so it's 
costing them a lot of money. So they've gone to court claiming 
that's an anticompetitive practice as well.
    Mr. LaFalce. Would the Chairman yield?
    Chairman Bachus. I don't know if that's the 2nd Circuit 
Court of Appeals case.
    Mr. Fischer. It is.
    Chairman Bachus. It is? That's what we're referring to?
    Mr. LaFalce. Mr. Chairman, I think we're getting onto an 
issue now that wasn't the initial focus of the hearing, which 
were basically credit card abuses, but I think it's extremely 
important and it's rather amazing to me that I can't recall in 
all my days on the Financial Services Committee a hearing 
regarding the practices of MasterCard, Visa, and so forth. We 
have left it to the courts. I don't know that the Judiciary 
Committee has. Maybe they have. But I don't think we have. And 
I certainly think that it's worthy of a future hearing in and 
of itself. What is the law? What have the practices been? What 
have the courts ruled? And what's the impact on the consumer?
    We talk about the issuers of the credit card as opposed to 
MasterCard or Visa, but who owns MasterCard and Visa? Who are 
the real owners? Are some of the issuers also the owners? I 
think that's a question worthy of pursuit.
    Mr. Fischer. Could I have the opportunity to respond to 
just one point so that the mischaracterization isn't left?
    Chairman Bachus. Certainly.
    Mr. Fischer. This is about the suit that Mr. Torres was 
talking about. As I indicated in my oral testimony, one of the 
fundamental goals of Visa is choice for consumers. We put a lot 
of products out in the marketplace that have the Visa brand on 
it. We believe the consumer ought to choose what brand, what 
product that they use at a location.
    The merchant--we had a lot of discussion about deceptive 
practices, and I'm not saying that that's what this is, but the 
merchant puts that sign out on the front door, invites me to in 
to use my Visa card, and when I get up to the checkout stand 
they say, now wait a second, you can't use that Visa card. 
That's what that case is all about. We think that it's good to 
get to the merits rather than the procedural things now, 
because to take away that consumer choice. We've just been 
talking about consumer choice right along in that particular 
context. If the merchant wants to incent the consumer to use 
that other card, the credit card, the debt card, as we've heard 
earlier, in that particular transaction by a cheaper price, 
fine. But to say they can't choose is not something that we 
think is appropriate.
    Chairman Bachus. So you're saying that in the Wal-Mart and 
the other retailers which brought that lawsuit, what they were 
doing was actually discriminating against certain----
    Mr. Fischer. I'm saying what they're doing is taking away 
consumer choice. And any way you look at it, if they're saying 
you can't use certain payment products with the same brand on 
it, then that's taking away consumer choice.
    Chairman Bachus. And I think that case will go through. But 
it's interesting. I mean, there are always two sides to every 
story. Are there any questions from Members? I'll allow a 
second round of questions. We're going to have a vote in about 
5 minutes and we'll conclude the hearing upon the calling of 
that vote or before, but I'll let Mr. LaFalce have additional 
    Mr. LaFalce. Thank you very much, Mr. Chairman. An awful 
lot of the questions have been addressed to Mr. Peirez and Mr. 
Fischer regarding MasterCard and Visa. And we haven't really 
called upon Mr. Manning, Ms. DeMarse, Mr. Mierzwinski, Mr. 
Torres. And so I think the first thing that I want to do is ask 
the four of you, are there any issues that we've discussed that 
you would have liked to have commented on as we went along? Mr. 
Manning? Professor Manning, I'll call upon you first.
    Mr. Manning. First, there has been a lot of lip service 
about education, and certainly--aside from assessment quality, 
just like there's duplicitous advertising policies with cars, 
there is also duplicity in terms of what kind of education, 
whose interest it serves. I have yet to hear the term 
``savings'' which was the cornerstone of the Puritan values of 
the society even being broached here in consumer credit.
    We haven't at all yet looked at the efficacy of what is to 
be taught to young people and why it hasn't been taught and why 
suddenly it should be taught. The whole issue of the Visa Bucks 
program which specifically targets 10-, 11- and 12-year-olds, 
we have yet to discuss the influence it has in shaping a 
consumer culture and whether they should even learn the value 
of savings over debt.
    And particularly surprising is we haven't addressed at all 
the line that's been crossed of the multi-million dollar 
contracts that are now being offered to universities where the 
yield on those contracts are directly related to the 
indebtedness of their students and that there aren't even any 
provisions for education that go along with that contract.
    Mr. LaFalce. Let's talk about that a little. But I also 
want, in connection with that, speaking of education, if a 
student uses a credit card and incurs some indebtedness, the 
student will go into bankruptcy and discharge that debt, 
    Mr. Fischer. Of course. Yes, sir.
    Mr. LaFalce. Now suppose it is a Government-guaranteed 
student loan? Now that's not dischargeable in bankruptcy is it?
    Mr. Fischer. It is not.
    Mr. LaFalce. What practices does Sallie Mae have with 
respect to the issuance of either MasterCards or Visas for the 
purposes of consolidating your indebtedness and getting a 
Government-guaranteed student loan using a MasterCard or Visa?
    Mr. Fischer. I'm aware of no such program.
    Mr. LaFalce. Mr. Peirez.
    Mr. Peirez. I am also aware of no such program.
    Mr. LaFalce. I'll not pursue that at this point. But let's 
look into that. Mr. Manning, did you wish to make any further 
point regarding either the educational institutions and the 
fact that the payment they get is directly related to the 
amount of indebtedness incurred by the credit cards that are 
issued? And of course, they usually enter into exclusive 
marketing arrangements on campus with certain either--usually 
issuers. Is that correct?
    Mr. Manning. Well, I think we've seen a lot of lip service 
paid that there is less tabling and marketing directly visible 
on campus, but ignoring the fact that the marketing that's 
occurring is far more effective in getting credit cards to 
younger and younger students.
    Mr. LaFalce. Somebody mentioned, gee, we would not permit 
Pepsi-Cola or Coca-Cola to have something that's exclusive of 
the other at a grocery store. But in schools, for example, 
Coca-Cola and Pepsi-Cola do enter into exclusive arrangements 
with school districts and they pay them so much so that only 
their pop can be sold in a school for the next decade or so, 
which is a separate issue.
    Chairman Bachus. Actually what they do, they put their 
machines in there, and because it's their machines. But they 
don't prohibit them from----
    Mr. LaFalce. Well, I think they have exclusive 
arrangements. In other words, they give the school districts X 
dollar amounts if over the next 10 years no machines other than 
theirs can be in there.
    Chairman Bachus. Oh, yes. I'm not condoning it.
    Mr. Manning. I would certainly think that it's striking. 
I've been using the estimate that I expect by the end of the 
decade the billion dollar payola of the top 300 schools will be 
receiving approximately $1 billion per year, and I have yet to 
see any of those funds appropriated toward effective 
educational programming or any kind of debt refinancing in the 
context that we know that with the civil rights movement, with 
the emergence of a large surge of new immigration, we have a 
tremendous increase in first generation college students who 
are most vulnerable, most susceptible, and least likely to have 
parents who have had experience with credit cards and therefore 
find themselves at the very margins of the ability to cope with 
extra levels of debt and then force themselves out of college.
    I think these are critical issues as we talk about a just 
and better educational system that the role that credit cards 
are increasingly playing today.
    Ms. DeMarse. Thank you very much. I do have a couple of 
things I'd like to share. I think we're in an unprecedented 
situation right now because of 9/11 and because of the economy.
    Mr. LaFalce. Because of what? I didn't hear you.
    Ms. DeMarse. Because of 9/11 and because of the economy. 
There have been nine rate cuts this year. It is not following 
through. We are not getting the benefit of this economic 
stimulus because so many of the cards are fixed-rate cards. 
Sometimes they're 7.5 percent cards, which are good cards, but 
most of them are 14 percent or way above the 5.5 percent basis.
    And it's just not trickling down. And it's going to be 
worse because of the 9/11 situation. The industry's reaction to 
slower mail and late payments. We've interviewed a number of 
banks as a result of this request, and the consumer is asked to 
be very proactive. It's entirely on a one-time basis. The 
consumer has to request to have the late fees waived. It's 
initiated by the consumer. You must seek out help from your 
    We haven't come across an institution that has decided to 
go across the board and waive the fees. And in fact, what we 
found is that the consumer has to be prepared to send in a copy 
of their data check to prove that they put it in the mail on 
time. And who knows? The check may still be in a post office 
somewhere mangled someplace.
    So if you could depend on the credit card companies at this 
    Mr. LaFalce. The thing that gives me pause, let me just 
tell you. One of the things I like to do whenever we have a day 
when Congress is not in session is just walk in the small 
little towns in my district. And I usually try to make a stop 
at the post office in a village of 1,000 people where the one 
postal official will, of course, in a week, meet everybody in 
that village.
    And I say, H.L., what's going on? You know, what are they 
interested about? And they tell me--I'm not making this up 
now--telling me how irate people are about the fact that they 
are paying late penalty fees, around $30. And, you know, a 
postal officer in a village of about 1,000 says ``I get about 
30 people per week who come in and want to send something air 
mail special delivery, return receipt requested, just to avoid 
a late payment because it's cheaper to spend the $5 than the 
late payment.'' And he says, ``but of course, the complaints I 
get about people who haven't done that are enormous.'' So they 
usually do that because they incurred a late payment fee the 
previous month.
    And this is almost a constant. Whenever I go to the post 
office, everybody at the post office will recognize me and 
they'll come up to me and they'll start airing their 
complaints. And the late fees are one of the greatest 
complaints they have. And they're there for that purpose, of 
getting the check in the mail, air mail express, return receipt 
requested, and so forth, just so they can avoid that late 
payment. This is a huge, enormous problem. That's just one--
one--of the many, many, many problems.
    Either the issuers have their heads in the sand--and I 
don't think that's true. I think they know exactly what they're 
doing. It's just they're making money doing it. It's their way 
of making money. And so long as neither the legislators nor the 
regulators are doing anything about it, they'll bear the burden 
of a few isolated complaints as long as they can continue 
making money.
    Chairman Bachus. I thank the gentleman.
    Let me conclude. I'm going to submit a question to you in 
writing to the consumer panel. And let me tell you what that 
question is. I see Director Smith from the Federal Reserve 
still in the audience. The Federal Reserve did a survey and 
asked American consumers who had credit cards if they were 
generally satisfied with their credit card services that they 
were receiving. And over 90 percent, according to their survey, 
over 90 percent of those with bank-type cards were generally 
satisfied with their dealings with their own credit card 
    I guess my first question would be, do you agree with those 
findings? Do you think they're skewed or do you think they're 
wrong? And if they're right, how does that square with your 
assertions that there is widespread abuse of the American 
consumer by credit card companies?
    Mr. Mierzwinski. Well, I know you have to go vote, so we 
will certainly take a look at that Fed study, Mr. Chairman, and 
we'll respond in writing to it. But I can tell you, a lot of 
those 10 percent have called me on the phone or sent me a 
letter. And they're very, very angry, as are Mr. LaFalce's 
constituents in the little village, and as the readers of the 
Bankrate.com website, and as the thousands of students 
Professor Manning has interviewed personally.
    There are significant problems. I want to commend you for 
holding the first hearing on this industry. It's a massive 
industry. I don't think there's been a hearing since Joe 
Kennedy held a hearing on college credit card marketing in 
1994. So I hope you'll have additional hearings in this series. 
Thank you.
    Chairman Bachus. Thank you.
    I'm going to wrap it up right now. I do want to say this 
again concerning the Internet Gambling Prohibition Act and the 
provisions in that, because there continues to be things said 
by people that, I think, simply do not understand the 
provisions in the bill. What that bill will give, it will give 
financial services companies a list of specific internet sites, 
and it will ask them to prohibit payments to specific entities. 
It will identify those entities. It will identify those 
    It was again said today that it will be hard for banks to 
determine whether or not a certain site is being used for 
internet gambling. Obviously, banks aren't in the investigative 
business. What they will receive under that litigation, the 
Attorney General, pursuant to court injunction, will simply say 
to them, you cannot transfer money to specific sites. They'll 
give a location and a name of that site.
    I wanted to clarify that again. And it won't do anything 
beyond that. It also will not make any duties on the bank to 
determine what is legal or illegal or what site is legal or 
illegal or how those sites are operated. It will simply 
identify those sites and ask that you not transfer money to 
those sites.
    This concludes the hearing, and I appreciate all the 
witnesses' testimony.
    [Whereupon, the hearing was adjourned.]

                            A P P E N D I X

                            November 1, 2001