Statement of Senator Carl Levin on the Introduction of “The Credit Card Accountability Responsibility and Disclosure Act”

Mr. President, I am pleased today to join my friend and colleague Senator Dodd in introducing comprehensive legislation to combat credit card abuses that have been hurting American consumers for far too long. With all the economic hardship facing Americans today, from falling home prices to rising gasoline and food costs, it is more important than ever for Congress to act now to stop credit card abuses and protect American families from unfair credit card practices.

Credit card companies regularly use a host of unfair practices. They hike the interest rates of cardholders who pay on time and comply with their credit card agreements. They impose interest rates as high as 32%, charge interest for debt that was paid on time, and apply higher interest rates retroactively to existing credit card debt. They pile on excessive fees and then have the gall to charge interest on those fees. They apply consumer payments first to the debt with the least expensive interest rate, saving the higher interest debt to be paid off last. And they engage in a number of other unfair practices that are burying American consumers in a mountain of debt. It’s long past time to enact legislation to protect American consumers.

The bill we have introduced today will not only help protect consumers but it will also help to ensure that credit card companies willing to do the right thing are not put at a competitive disadvantage by companies continuing unfair practices.

Some argue that Congress doesn’t need to ban unfair credit card practices; they contend that improved disclosure alone will empower consumers to seek out better deals. Sunlight can be a powerful disinfectant, but credit cards have become such complex financial products that even improved disclosure will frequently not be enough to curb the abuses. Some practices are so confusing that consumers can’t easily understand them. Additionally, better disclosure does not always lead to greater market competition, especially when essentially an entire industry is using and benefiting from practices that unfairly hurt consumers.

Credit card issuers like to say that they are engaged in a risky business, lending unsecured debt to millions of consumers, but it is clear that they have learned to price credit card products in ways that produce enormous profit. For the last decade, credit card issuers have maintained their position as the most profitable sector in the consumer lending field, and reported consistently higher rates of return than commercial banks.

In 2006, Americans used 700 million credit cards to buy about $2 trillion in goods and services. The average family now has 5 credit cards. Credit cards are being used to pay for groceries, mortgage payments, even taxes. And they are saddling U.S. consumers, from college students to seniors, with a mountain of debt. The latest figures show that U.S. credit card debt is now approaching $1 trillion. These consumers are routinely being subjected to unfair practices that squeeze them for ever more money, sinking them further into debt.

While the remaining legislative days in this Congress are dwindling, there is still time to enact strong credit card reform legislation. Too many American families are being hurt by too many unfair credit card practices to delay action any longer. I commend Senator Dodd for tackling credit card reform and look forward to Congress taking the steps needed this session to ban unfair practices that are causing so much pain and financial damage to American families today.

Credit card abuses are a topic, as Senator Dodd mentioned, that I have been deeply involved with over the past several years through our bipartisan investigations in the Permanent Subcommittee on Investigations. We held two Subcommittee hearings in 2007, and based on our investigative hearings, I introduced legislation – the Stop Unfair Practices in Credit Cards Act, S. 1395 – to ban the outrageous credit card abuses documented in the hearings. I am pleased that Senators McCaskill, Leahy, Durbin, Bingaman, Cantwell, Whitehouse, Kohl, Brown, Kennedy, and Sanders joined as co-sponsors. This Dodd-Levin bill introduced today incorporates almost all of S. 1395, and adds other important protections as well. It is the strongest credit card bill yet in this Congress.

Mr. President, I would like to add to the record a detailing of the provisions of this new legislation. Our bill includes the following provisions that were also included in the bill I introduced last year with Senator McCaskill and others:

• No Interest on Debt Paid on Time. Prohibit interest charges on any portion of a credit card debt which the card holder paid on time during a grace period.

• Prohibition on Universal Default. Prohibit credit card issuers from increasing interest rates on cardholders in good standing for reasons unrelated to the cardholder’s behavior with respect to that card.

• Apply Interest Rate Increases Only to Future Debt. Require increased interest rates to apply only to future credit card debt, and not to debt incurred prior to the increase.

• No Interest on Fees. Prohibit the charging of interest on credit card transaction fees, such as late fees and over-the-limit fees.

• Restrictions on Over-Limit Fees. Prohibit the charging of repeated over-limit fees for a single instance of exceeding a credit card limit.

• Prompt and Fair Crediting of Card Holder Payments. Require payments to be applied first to the credit card balance with the highest rate of interest, and to minimize finance charges.

• Fixed Credit Limits. Require that card issuers must offer consumers the option of operating under a fixed credit limit that cannot be exceeded.

• No Pay-to-Pay Fees. Prohibit charging a fee to allow a credit card holder to make a payment on a credit card debt, whether payment is by mail, telephone, electronic transfer, or otherwise.

The Dodd-Levin bill also adds the following important protections:

• Requires issuers to lower penalty rates that have been imposed on a cardholder after 6 months if the cardholder commits no further violations.

• Enhances protection against unfair and deceptive practices. Gives each federal banking agency the authority to prescribe regulations governing unfair or deceptive practices by banks and savings and loan institutions.

• Improved disclosure requirements. For example, requires issuers to provide individual consumer account information and to disclose the period of time and total interest it will take to pay off the card balance if only minimum monthly payments are made.

• Protections for young consumers from credit card solicitations.

Mr. President, I would also like to add to the record an overview of the most prevalent abuses that we uncovered and some of the stories that American consumers shared with us during the course of the inquiries carried out by my Permanent Subcommittee on Investigations. I ask Unanimous Consent that my full statement be inserted in the record.

Excessive Fees

The first case history we examined illustrates the fact that major credit card issuers today impose a host of fees on their cardholders, including late fees and over-the-limit fees that are not only substantial in themselves but can contribute to years of debt for families unable to immediately pay them.

Wesley Wannemacher of Lima, Ohio, testified at our March 2007 hearing. In 2001 and 2002, Mr. Wannemacher used a new credit card to pay for expenses mostly related to his wedding. He charged a total of about $3,200, which exceeded the card’s credit limit by $200. He spent the next six years trying to pay off the debt, averaging payments of about $1,000 per year. As of February 2007, he’d paid about $6,300 on his $3,200 debt, but his billing statement showed he still owed $4,400.

How is it possible that a man pays $6,300 on a $3,200 credit card debt, but still owes $4,400? Here’s how. On top of the $3,200 debt, Mr. Wannemacher was charged by the credit card issuer about $4,900 in interest, $1,100 in late fees, and $1,500 in over-the-limit fees. He was hit 47 times with over-limit fees, even though he went over the limit only 3 times and exceeded the limit by only $200. Altogether, these fees and the interest charges added up to $7,500, which, on top of the original $3,200 credit card debt, produced total charges to him of $10,700.

In other words, the interest charges and fees more than tripled the original $3,200 credit card debt, despite payments by the cardholder averaging $1,000 per year. Unfair? Clearly, I think, but our investigation has shown that sky-high interest charges and fees are not uncommon in the credit card industry. While the Wannemacher account happened to be at Chase, penalty interest rates and fees are also employed by other major credit card issuers.

The week before the March hearing, Chase decided to forgive the remaining debt on the Wannemacher account, and while that was great news for the Wannemacher family, that decision doesn’t begin to resolve the problem of excessive credit card fees and sky-high interest rates that trap too many hard-working families in a downward spiral of debt.

These high fees are made worse by the industry-wide practice of including all fees in a consumer’s outstanding balance so that they incur interest charges. It is one thing for a bank to charge interest on funds lent to a consumer; charging interest on penalty fees goes too far.

Charging Interest for Debt Paid on Time

Another galling practice featured in our March hearing involves the fact that credit card debt that is paid on time routinely accrues interest charges, and credit card bills that are paid on time and in full are routinely inflated with what I call “trailing interest.” Every single credit card issuer contacted by the Subcommittee engaged in both of these unfair practices which squeeze additional interest charges from responsible cardholders.

Here’s how it works. Suppose a consumer who usually pays his account in full, and owes no money on December 1st, makes a lot of purchases in December, and gets a January 1 credit card bill for $5,020. That bill is due January 15. Suppose the consumer pays that bill on time, but pays $5,000 instead of the full amount owed. What do you think the consumer owes on the next bill?

If you thought the bill would be the $20 past due plus interest on the $20, you would be wrong. In fact, under industry practice today, the bill would likely be twice as much. That’s because the consumer would have to pay interest, not just on the $20 that wasn’t paid on time, but also on the $5,000 that was paid on time. In other words, the consumer would have to pay interest on the entire $5,020 from the first day of the new billing month, January 1, until the day the bill was paid on January 15, compounded daily. So much for a grace period! In addition, the consumer would have to pay the $20 past due, plus interest on the $20 from January 15 to January 31, again compounded daily. In this example, using an interest rate of 17.99% (which is the interest rate charged to Mr. Wannamacher), the $20 debt would, in one month, rack up $35 in interest charges and balloon into a debt of $55.21.

You might ask – hold on – why does the consumer have to pay any interest at all on the $5,000 that was paid on time? Why does anyone have to pay interest on the portion of a debt that was paid by the date specified in the bill – in other words, on time? The answer is, because that’s how the credit card industry has operated for years, and they have gotten away with it.

There’s more. You might think that once the consumer gets gouged in February, paying $55.21 on a $20 debt, and pays that bill on time and in full, without making any new purchases, that would be the end of it. But you would be wrong again. It’s not over.

Even though, on February 15, the consumer paid the February bill in full and on time – all $55.21 – the next bill has an additional interest charge on it, for what we call “trailing interest.” In this case, the trailing interest is the interest that accumulated on the $55.21 from February 1 to 15, which is time period from the day when the bill was sent to the day when it was paid. The total is 38 cents. While some issuers will waive trailing interest if the next month’s bill is less than $1, if a consumer makes a new purchase, a common industry practice is to fold the 38 cents into the end-of-month bill reflecting the new purchase.

Now 38 cents isn’t much in the big scheme of things. That may be why many consumers don’t notice these types of extra interest charges or try to fight them. Even if someone had questions about the amount of interest on a bill, most consumers would be hard pressed to understand how the amount was calculated, much less whether it was incorrect. But by nickel and diming tens of millions of consumer accounts, credit card issuers reap large profits.

I think it is indefensible to make consumers pay interest on debt which they pay on time. It is also just plain wrong to charge trailing interest when a bill is paid on time and in full.

Unfair Interest Rate Hikes

My Subcommittee’s second hearing focused on another set of unfair credit card practices involving unfair interest rate increases. Cardholders who had years-long records of paying their credit card bills on time, staying below their credit limits, and paying at least the minimum amount due, were nevertheless socked with substantial interest rate increases. Some saw their credit card interest rates double or even triple. At the hearing, three consumers described this experience.

Janet Hard of Freeland, Michigan, had accrued over $8000 in debt on her Discover card. Although she made payments on time and paid at least the minimum due for over two years, Discover increased her interest rate from 18% to 24% in 2006. At the same time, Discover applied the 24% rate retroactively to her existing credit card debt, increasing her minimum payments and increasing the amount that went to finance charges instead of the principal debt. The result was that, despite making steady payments totaling $2,400 in twelve months and keeping her purchases to less than $100 during that same year, Janet Hard’s credit card debt went down by only $350. Sky-high interest charges, inexplicably increased and unfairly applied, ate up most of her payments.

Millard Glasshof of Milwaukee, Wisconsin, a retired senior citizen on a fixed income, incurred a debt of about $5,000 on his Chase credit card, closed the account, and faithfully paid down his debt with a regular monthly payment of $119 for years. In December 2006, Chase increased his interest rate from 15% to 17%, and in February 2007, hiked it again to 27%. Retroactive application of the 27% rate to Mr. Glasshof’s existing debt meant that, out of his $119 payment, about $114 went to pay finance charges and only $5 went to reducing his principal debt. Despite his making payments totaling $1,300 over twelve months, Mr. Glasshof found that, due to high interest rates and excessive fees, his credit card debt did not go down at all. Later, after the Subcommittee asked about his account, Chase suddenly lowered the interest rate to 6%. That meant, over a one year period, Chase had applied four different interest rates to his closed credit card account: 15%, 17%, 27%, and 6%, which shows how arbitrary those rates are.

Then there is Bonnie Rushing of Naples, Florida. For years, she had paid her Bank of America credit card on time, providing at least the minimum amount specified on her bills. Despite her record of on-time payments, in 2007, Bank of America nearly tripled her interest rate from 8 to 23%. The Bank said that it took this sudden action because Ms. Rushing’s FICO credit score had dropped. When we looked into why it had dropped, it was apparently because she had opened Macy’s and J.Jill credit cards to get discounts on purchases. Despite paying both bills on time, the automated FICO system had lowered her credit rating, and Bank of America had followed suit by raising her interest rate by a factor of three. Ms. Rushing closed her account and complained to the Florida Attorney General, my Subcommittee, and her card sponsor, the American Automobile Association. Bank of America eventually restored the 8% rate on her closed account.

In addition to these three consumers who testified at the hearing, the Subcommittee presented case histories for five other consumers who experienced substantial interest rate increases despite complying with their credit card agreements.

I’d also like to note that, in each of these cases, the credit card issuer told our Subcommittee that the cardholder had been given a chance to opt out of the increased interest rate by closing their account and paying off their debt at the prior rate. But each of these cardholders denied receiving an opt-out notice, and when several tried to close their account and pay their debt at the prior rate, they were told they had missed the opt-out deadline and had no choice but to pay the higher rate. Our Subcommittee examined copies of the opt-out notices and found that some were filled with legal jargon, were hard to understand, and contained procedures that were hard to follow. When we asked the major credit card issuers what percentage of persons offered an opt-out actually took it, they told the Subcommittee that 90% did not opt out of the higher interest rate – a percentage that is contrary to all logic and strong evidence that current opt-out procedures don’t work.

The case histories presented at our hearings illustrate only a small portion of the abusive credit card practices going on today. Since early 2007, the Subcommittee has received letters and emails from thousands of credit card cardholders describing unfair credit card practices and asking for help to stop them, more complaints than I have received in any investigation I’ve conducted in more than 25 years in Congress. The complaints stretch across all income levels, all ages, and all areas of the country. The bottom line is that these abuses have gone on for too long. In fact, these practices have been around for so many years that they have in many cases become the industry norm, and our investigation has shown that many of the practices are too entrenched, too profitable, and too immune to consumer pressure for the companies to change them on their own.

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