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DEBIT CARDS AND UNSOLICITED LOAN CHECKS
WEDNESDAY, SEPTEMBER 24, 1997
House of Representatives,
Subcommittee on Financial Institutions and Consumer Credit,
Committee on Banking and Financial Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:36 a.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema, [chairwoman of the subcommittee], presiding.
Present: Chairwoman Roukema; Representatives Bereuter, Kelly, Redmond, Vento, LaFalce, C. Maloney of New York, Barrett, Bentsen and Kilpatrick.
Chairwoman ROUKEMA. The hearing will come to order. We are assuming that Mr. Hinchey is en route, but, in any event, we do have our first panelists here, so without further delay, I will open this hearing.
The subcommittee is addressing and reviewing issues that relate to two financial instruments, issues that are becoming of great interest not only to the industry, but certainly to consumers and the press. The debit cards and the unsolicited loan checks, or so-called ''live'' checks. I can't figure out why we call them ''live'' checks, but that's not the important thing. The important thing is how they're used. Debit cards are relatively new, but the so-called ''live'' checks have been around for a while. They claim they've been around for two decades, but both products' availability to consumers has only become high visibility recently, as their use has substantially increased. And that, of course, is the reason that we're having this hearing today—to examine their new products and to examine the regulation of them.
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First, let me inform other subcommittee Members and our guests here today in the audience how this hearing is going to be structured.
Our first panel is comprised of three of our distinguished Banking Committee colleagues. The second panel will be Governor Laurence Meyer from the Federal Reserve, informing us on how these products are regulated. The third panel will focus on debit cards, while our last panel's testimony will be limited to issues regarding loan checks.
The first type of debit cards were the now well-known ATMs, where a consumer could only access their bank account through an online transaction requiring a PIN code. Recently, Visa and MasterCard, in association with banks, started to offer a new type of debit card, one which displays a Visa or a MasterCard logo. These new products look like a credit card and are accepted by merchants the same as a credit card, with signature only. Instead of extending credit and sending a monthly bill, the issuers take money immediately from the user's checking accounts.
Due to their widespread acceptance and versatility, the issuance of debit cards has risen greatly within recent years. According to a New York Times article, to give an idea here, 1.3 million debit cards are being issued each month, while their useage has substantially increased; it's now estimated to be over 1.4 billion transactions in 1996. So you can see we're talking about real money here. It's not an abstraction.
During the same time period, the total dollar amount of the transactions rose from $14.2 billion to $54.5 billion. I won't go into any more of the data. I think the issue has proven itself, both in raw dollars as well as consumer concerns.
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This increase in usage of debit cards carries with it an added risk to the consumer, given that debit cards deduct directly from a consumer's checking account. In addition—and this is something we're focusing on today—the same laws that govern liability for credit cards do not apply to debit cards. For example, under the Truth-in-Lending Act—TILA—a consumer's financial liability for a lost or stolen credit card is capped at $50. This law does not apply to debit cards, however. Instead, debit card liability falls under regulations adopted under the Electronic Funds Transfer Act and the Federal Reserve's Regulation E.
Under those regulations, the consumer's liability is limited to $50 if notice is provided to the bank within 2 days of discovering the unauthorized transaction, not within 2 days—and I repeat—not within 2 days of the actual transaction. Nevertheless, if a consumer fails to report the loss within 2 business days, the consumer's liability can climb to $500, and if not reported within 60 days after the bank's transmittal of the bank statement, the consumer's liability is unlimited.
Regulation E requires a bank to complete its investigation of the claim and recredit the customer's account within 20 days of notice of an unauthorized, offline debit card transaction, as opposed to 10 days for an unauthorized, online ATM transaction. Now I won't go into all the specifics of these differentiations, but I fully expect that our panelists in the questioning will explain their perceptions on the distinctions between the debit card and the ATM and the regulations that require it, and I know that the Fed, in particular, will go into that detail.
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In recognition of the added risk posed to consumers when using the new debit card instrument, MasterCard and Visa recently adopted new company policies designed to protect consumers from unwarranted use. MasterCard tightened its liability standards to conform with the credit card cap limit of $50. Visa then announced that its customers' liability for unauthorized use of the debit cards would be zero if reported within 2 days and would be capped at $50 if reported after 2 days. In addition, Visa shortened the recreditation time period. All of this was voluntary, as we will hear from the industry representatives here today.
As we can see, debit cards offer great versatility and advantages to the consumer, and consumers are obviously enjoying it, but there are greater risks involved with offline debit cards than the traditional online ATMs. The PINs are not required and they are greater risks than credit cards or checks, which is obvious.
I am looking forward to hearing the testimony today regarding debit cards and to learning more about just why debit cards are so popular with the industry. We will also hear testimony regarding the product known as ''live checks'' or ''loan checks.'' I don't know how ''loan checks'' became ''live checks,'' but that's not the important thing. We've had some experience with them since the early 1980's. The unsolicited loan check—unsolicited, I stress—loan check is a valid check sent out by financial institutions to consumers who are responsible for the repayment of the loan if the check is cashed. While loan checks have been in existence for over a decade, financial institutions have only recently increased and put a focus on expanding the issuance of the product. And we'll let them disclose how that business has grown in dollar amounts.
Live checks must conform with the Truth-in-Lending Act and its disclosure requirements. However, while TILA prohibits unsolicited issuance of credit cards, it does not prohibit the unsolicited issuance of loan checks. The Federal Reserve Board is slated, as I understand it—and we'll hear more about that from our representative here today—is slated to review the Truth-in-Lending Act and Regulation Z under its regulatory review planning program, and that review is set for 1998, early in 1998, I hope. At that time, the Fed will determine whether the rules that govern the issuance of credit cards should be applicable to unsolicited loan checks, and certainly we welcome their attention to this matter and we hope to hear further expansion on that thought today.
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Currently, State law, the Uniform Commercial Code, and State common law principles of fraud govern consumers' rights, liabilities, and legal recourse for fraudulent practices related to loan checks and similar instruments. Consumers who are subjected to such fraud are advised to contact their State attorney general or banking commissioner. Under Articles 3 and 4 of the Uniform Commercial Code, if a loan check is fraudulently cashed, the institution which cashed the check is liable, not the intended consumer, because the cashing institution either should, if required, provide identification or had a pre-existing relationship with the customer. Since issuers want the checks to be readily accessible for consumers, the issuer usually accepts the losses for fraudulently cashed loan checks.
The American Financial Services Association has recently adopted, again by their own initiative, new disclosures and safeguards for live check offers. I am certainly anxious to question them today to see how adequate those disclosure procedures and safeguards are.
In any case, this is an area that this subcommittee has an obligation to look into to see whether current laws and voluntary industry standards are adequate and prudent in this expanding market.
So, we should have some interesting commentary here today, and I now turn it over for an opening statement from my colleague, Mr. Vento.
Mr. VENTO. Thank you, Madam Chairwoman. I'd ask unanimous consent that all Members be able to submit statements for the record today, just without objection, Madam Chairwoman.
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Chairwoman ROUKEMA. Without objection, unanimous consent.
Mr. VENTO. And I just would begin by thanking you for last week's hearing on privacy issues. Today's hearing is important because it examines the impacts on consumers of relatively new financial products, or at least the application of them—debit cards and what has been called ''live'' loan checks.
As is so often the case, the new products represent new opportunities in the marketplace for consumers and financial institutions to make life a little more simple and better. They also, of course, represent risks to consumers who are facing a myriad of products with different benefits, different rules, and different protections.
The instruments are probably not so new as the marketing techniques and the fact that consumers and individuals have not asked or initiated the contact with regard to the check or with regard to the offline-type debit card, as an example. But we have in the past initiated legislation broadly that, in fact, put in place affirmative requests on the part of consumers to receive various types of credits. It's clear that these new instruments, the offline credit and the so-called ''live'' checks, are circumventing the intent of Congress and what had been the policy.
It's also clear that these instruments, which before had a distinct personality and character, including credit cards, debit cards, and checks, have now become nearly synonymous. And I think while Congress took appropriate action in providing for an affirmative request for credit cards and certainly for the opening of checking accounts and the initiation of loans, that in fact, we need to probably readdress this, and some commonality, if anything—I had threatened one of the witnesses that I was going to ask them some questions on Regulation Z and E, and ask them to definitively, especially my colleagues who are before us who are, after all, indirectly responsible for writing these laws, we could try to have them lead us through that particular chart. I'm sure that most of us would easily become confused in that process, and I think that points out the concern that we have. I think these instruments should and can be available, but I think we have a responsibility to try to work with the regulators to provide a clarity and to streamline this process; that is, of affirmation of requests for loan checks, debit cards, credit cards, offers online, and to deal with what has become a risk.
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I think many of us in the mail have received dozens of offers for loan extensions, preprinted checks with our name on—it looks pretty good on there. They obviously haven't heard that I'm a poor Member of Congress, or they wouldn't be so liberal in their solicitation of my business.
But, Madam Chairwoman, you've described this. I'm going to put the rest of my statement in the record. I think that this is an area where we should be able to find common ground and common sense in terms of this issue.
The public, frankly, is very concerned about this. I know my first reaction when I receive these solicitations in the mail is to tear them up in about as small of pieces as I can in a minute, to make certain that I'm not liable. If I hadn't done that, I'd probably have about 50 examples here today of these particular types of solicitations.
But I think it's a useful hearing and worthy, and I look forward to hearing from our colleagues who are trying to help us sort through this matter. Thank you, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you. Thank you, Congressman Vento.
And that just reminds me, the one thing I forgot to do in preparation for this hearing today was to ask my husband how many times he's received them and how many he's torn up in small pieces. I don't know that. I forgot to ask him. We may insert that in the record later.
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My colleague from New York, Congresswoman Kelly.
Mrs. KELLY. Thank you, Madam Chairwoman. And I thank Ranking Member Vento for agreeing to hold the hearing on check cards and unsolicited loan checks.
I appreciate the timeliness of today's hearing, since these are two new financial products that are emerging more and more on the marketplace today.
We've come a long way since 1958, 39 years ago this month, when Bank of America dropped its first 60,000 credit cards on Fresno, California. At that time, we were on the verge of a money revolution with products and services that we've now come to depend upon.
Today we can look back at those times and see the mistakes that were made, and we can learn from them. For example, they had assumed that the delinquency rate on the new Bank of America card, BankAmericards, would be 4 percent. Why? Because that was the default rate on installment loans. There was no way to foresee the 22 percent default rate that would hit Bank of America so hard. Similarly, how were they to foresee the rampant fraud, or their other problems that they would have with collections?
One of the problems with America's introduction to the credit card was that these cards were just sent out. There was no application. People opened their mailbox and, lo and behold, there was one in their mailbox. It was referred to as a ''drop.''
In 1967 alone, 32 million credit cards were dropped nationwide. Then, of course, the Chairman of the House Banking Committee, Congressman Wright Patman, who was no fan of credit, held his first hearing on credit cards in November 1967, and later passed legislation that banned the practice of dropping cards with the help of Senator Proxmire.
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As we look back at the new financial tools then, and as we look at these today, I'm going to be keeping the lessons from America's financial services past close at hand; namely, with the debit or check cards, are all of the users of these new cards afforded the same or greater protections that are afforded credit cards? Second, with unsolicited loan checks, what are the default rates? Third, is the consumer able to responsibly handle a new financial tool of this nature? These are my primary concerns.
Madam Chairwoman, I come here with an open mind. I'm not a cosponsor of any legislation that affects these products, but I look forward to the testimony of the individuals who have taken their time to share their insights with us here today.
Chairwoman ROUKEMA. I thank the Congresswoman.
Congressman Bentsen.
Mr. BENTSEN. Thank you, Madam Chairwoman, and I appreciate you and Mr. Vento having this hearing. Had I known you were going to have this hearing earlier, I would have saved the truckload of mail that I have received, and my wife receives, for credit cards and other checks.
I can't speak to 1958, because I wasn't around then, but I think that what we also have to remember are the innovations that have occurred and the fact that expanding credit or access to credit is not necessarily bad. The misuse of credit is bad, and we have to be concerned about it. And I think we have to be particularly concerned as we move forward about the proper disclosure. If you look at a lot of these credit card checks and things that come out and the offers of teaser rates at below prime or half of prime, with the step-up that occurs several months later, we have to make sure that the consumer is adequately informed before they get themselves in a situation where they don't want to be.
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I appreciate the fact that you're having these hearings. I hope that there's a lot we can learn about it. But I agree with my colleague from New York that we should be cautious in our approach as we move forward.
Chairwoman ROUKEMA. Thank you. I appreciate the simplicity and the directness of your statement.
And now we turn to our first panel, and I will introduce them, and then present a question to them. We're beginning our hearing here today with our colleagues on the Banking Committee, three of them, very distinguished Members: Congressman Frank Lucas from Oklahoma, Maurice Hinchey of New York, who will be discussing issues on the unsolicited loan checks and related to those issues. Mr. Hinchey also has a bill—excuse me. Let me point out that they both have strong views and have studied this issue, and Mr. Hinchey has a bill that will prohibit the unsolicited mailing of the checks, among other things.
Mr. Barrett, our colleague from Wisconsin, is also here to talk about the second issue of this hearing: the debit cards. And Mr. Barrett has legislation also, as I understand, which he will go into today, that would limit consumer liability to $50 or less, and he will explain that.
Now the question I have, and I only learned this a few minutes ago, is that Mr. Lucas and Mr. Barrett have markups in other committees. Does that present a problem or will you have time now to go in the order in which I introduced you—Lucas, Hinchey, and Barrett? Yes, that's fine, Mr. Barrett?
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Mr. BARRETT. I may have to sneak out. I'm also on the Government Reform Committee. We're going to be holding a markup.
Chairwoman ROUKEMA. Then perhaps, Mr. Lucas, with your indulgence, can we hear Mr. Barrett's testimony first? Or are you under the same time——
Mr. BARRETT. He has a markup as well.
Chairwoman ROUKEMA. You're on the same time limit? Mr. Lucas, Mr. Barrett, and then Mr. Hinchey will follow. Thank you.
STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OKLAHOMA
Mr. LUCAS. Thank you, Madam Chairwoman and Members of the subcommittee. I want to thank you for holding this hearing to address the concerns surrounding live checks. Of course, in light of the recent media attention and legislation introduced to ban the product, I certainly agree with my colleagues that the hearing is timely, and I hope that we will help to clear up some of the confusion on this issue.
First, I would like to clarify that a ''live'' check, or ''unsolicited loan check,'' as they are also called, are mailed to the consumer, who by signing and cashing the check agrees to certain loan terms incorporated in the offer. It is important to know that these are not the same as ''convenience'' checks, which are issued by credit card companies. ''Convenience'' checks are offered customers who have an existing account with a bank, and the amount of the check shows up on the credit card statement.
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I first became familiar with unsolicited loan checks when a constituent contacted me to express concern that he would be held liable in the event his check was fraudulently cashed. Since I was unfamiliar with the product, I forwarded his letter to the Fed. I learned that in the case that a check was intercepted and fraudulently endorsed, a consumer's rights would be governed by State law, including the Uniform Commercial Code and State common law principles of fraud. The Fed indicated that in the case a consumer was victimized, he or she could contact his State attorney general or State banking commissioner regarding these rights. I have subsequently learned that ultimately, the consumer will not be held liable in the case of fraud.
During this period of time, members of my staff began receiving—or starting, I guess I should say—to take note of these ''live'' checks at their homes, and it became evident that these products were more common than I had initially thought. I decided to look further into these products and began working with the American Financial Services Association, AFSA, which represents consumers—or actually consumer finance companies, many of which provide these products.
I learned that—or actually, I was interested to learn that these products have been in use in various degrees since the 1980's, with the typical consumer being in their mid-forties. I was surprised to learn that industry-wide the products have delinquency rates which are lower than credit cards, and have fraud rates of less than 1/10 of 1 percentage point. Since these products are, in fact, noncollateralized loans, the credit criteria is often more stringent, with many companies requiring established lines of credit in good standing before offering this product.
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Since my main concern was fraud, I was pleased to learn that many companies follow strict policies to reduce fraud. Typically, these checks are not sent to military addresses, P.O. boxes, to identical names, to individuals who are juniors or seniors, or to businesses.
Despite the precautions taken by various companies, I was concerned that there was not an industry-wide standard to protect the consumer. Therefore, I began working with AFSA to draft guidelines which would provide the necessary consumer protections. Just as Visa and MasterCard have stepped forward to provide consumer protection policies for their debit cards, I believe that similar effort could be just as effective for live checks.
The major issues of concern were disclosure, packaging, liability. And let me just very briefly outline these guidelines.
First, the check in these guidelines must contain a statement indicating that by signing and cashing the check, the consumer has activated a loan transaction. Second, since proper packaging of these products would reduce the chance for fraud, the guidelines provide that live checks should be mailed in envelopes with no indication of contents and must be marked to ensure that the check is not forwarded by the Postal Service. Finally, in cases where the check is fraudulently cashed, the responsibility is placed upon the creditor.
I'm aware there's some support for efforts to ban live checks. I do not believe that the facts justify such an approach. These products have not proven to pose safety and soundness problems, and have been the source of relatively few complaints in recent years. Therefore, I believe a ban would be disproportionate to any concerns at this time.
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As Members of the Banking Committee, certainly we have a unique challenge of ensuring the safety and soundness of the financial services industry and providing proper consumer protections, while at the same time creating an environment which fosters innovation and the ability to respond to the needs of the marketplace. I believe these guidelines have been properly adopted by AFSA and address many of the concerns expressed in recent weeks. It is my hope that those companies who have not already adopted these guidelines will seize the opportunity and adopt them in a timely manner.
I believe these guidelines are an example of cooperation which is possible between Congress and the financial services industry. It is my hope that in the future we in Congress look to something other than the legislative route in instances when it may provide an equally effective and a timely solution to the concerns.
I thank you again for holding this hearing. I look forward to the opportunity to answer any questions that the subcommittee may have, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you, Mr. Lucas.
Mr. Barrett, I think we'll have time before we have to recess for the vote. Congressman Barrett.
STATEMENT OF HON. THOMAS M. BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN
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Mr. BARRETT. Thank you, Madam Chairwoman, and thank you for holding this timely hearing, and for giving me the opportunity to testify on issues involving debit cards, also known as ''enhanced ATM cards'' or ''check cards.''
As you have mentioned, there has been a rapidly growing trend toward issuing debit cards, largely as a replacement for ATM cards. According to a July 13 New York Times article, 1.3 million debit cards are being issued each month, and banking experts predict that two-thirds of American households will have one by the year 2000.
Although my comments today will focus primarily on the debit card issue, I believe that the practice of issuing unsolicited loan checks merits the same degree of congressional scrutiny, and I'm pleased that this subcommittee will also examine issues involving unsolicited loan checks. I commend Mr. Hinchey and Mr. Lucas for their efforts to address problems associated with these checks, and I also commend Mr. Schumer for his leadership and for introducing the Dual-Use Debit Cardholder Act, which addresses also issues of liability and disclosure.
As I mentioned earlier, there has been a rapidly growing trend toward issuing debit cards, and they are fastly becoming an accepted alternative to credit cards and cash.
Earlier this year, I had a personal experience using a debit card. In fact, I was issued a debit card and was carrying it around in my pocket without realizing it was a debit card. The card, as you can see, looks almost identical to my credit card and was stamped with the same logo, and I actually used this card to make what I thought was a credit card purchase. Several weeks after doing that, I went to my ATM machine and noticed that there was $303 missing from my checking account, which was obviously used to cover the cost of the purchase. Fortunately, I had enough money in my checking account at that time and was not faced with the unpleasant situation for a Member of Congress of bouncing checks.
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[Laughter.]
But the reality is that thousands, if not millions, of Americans are being issued debit cards and are carrying them around without realizing it, and are unaware of their potential liability in the case of theft or loss.
I introduced the Consumer Debit Card Protection Act, H.R. 2319, to ensure that consumers are better educated about debit cards and to protect them against unwarranted financial risks some of these cards currently pose or could pose.
My bill requires financial institutions to notify consumers in bold type in a prominent location on the card, or on a notice accompanying a card, that they have been issued a debit card that does not require a PIN number or similar means of access to withdraw funds from a consumer account. It also allows a consumer to reject an unsolicited debit card and requires financial institutions to promptly replace an unsolicited debit card with one that requires a PIN number or other form of identification promptly after the consumer rejects a card, such as an ATM-only card or a credit card.
My bill also changes the rules governing debit card liability to match credit card liability. It caps consumer liability at $50, the same ceiling that applies to credit cards.
Another provision of the bill changes the recrediting rules of the Electronic Funds Transfer Act. This section requires that consumers be recredited for their accounts within 3 days while a financial institution investigates a fraud claim.
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Finally, my bill prohibits financial institutions from imposing fees for nonsufficient funds when a checking account is overdrawn as a result of fraud when a debit card is provided without a PIN or similar code to access a consumer's account.
At this time, I would like to submit a copy of my bill and a detailed summary of its major provisions into the report.
Before I end my remarks, Madam Chairwoman, I want to applaud MasterCard and Visa U.S.A. for recently announcing zero liability policies for cardholders who report loss after unauthorized transactions on their debit cards and for instituting other consumer protections. They have made a very strong statement about how important they feel providing consumers with secure debit cards is.
The Members of this subcommittee are being charged with the task of answering the question whether additional steps are necessary to reduce the financial exposure of consumers who carry debit cards. I hope and I'm confident that we will do so.
Banks are motivated to issue these new cards because they make substantially higher profits with debit cards than with the more traditional and secure ATM and credit cards. We should be taking steps to make sure that these cards are also better for consumers.
Thank you again for the opportunity to testify on this important issue, and I'd be more than happy to answer any questions.
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Chairwoman ROUKEMA. All right, I thank my colleagues.
We'll recess for this vote and then resume immediately following. I don't know whether Mr. Lucas and Mr. Barrett can return, but we will begin with Mr. Hinchey's testimony as soon as we resume.
Mr. VENTO. Madam Chairwoman, I don't think that they probably will be able to return. I just wanted to comment that I think that, you know, in terms of talking about financial relations, both of them indicated an interest in where they had had—I don't know if it was Visa or MasterCard that you had, Tom, but Mr. Lucas commented about ''convenience checks,'' and in a sense, I mean, both of these are where you had an existing relationship with a financial institution or with an entity. And the real problem is that as something is like servicing rights, which we have through a mortgage instance, where all of a sudden that servicing right is bought by another third party, and all of a sudden they have a financial relationship with you, and they'll be sending you home equity loan checks.
So, I think there really is a case here where, is there an affirmative consumer request for these particular products? That is not always as clear as might be indicated just through an affiliation with a bank that you might have a relationship with. I just wanted to point that out.
Chairwoman ROUKEMA. And you would be free to submit in writing your reaction to that, if you're not able to return to the panel.
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Thank you so much.
[Recess.]
Chairwoman ROUKEMA. If this hearing can come to order, please.
Is Congressman Hinchey here? No. We'll give Mr. Hinchey another moment. These elevators are not operating properly and it took longer for us—he may be delayed on the elevator. We'll give him another minute, unless we hear to the contrary from his staff.
Evidently, there's been a change here. I'm informed that Mr. Hinchey is on the floor engaging in debate.
[Laughter.]
So we'll go back to our priorities here and I'll call our second panel, please—the second panel who consists of Governor Laurence Meyer of the Federal Reserve Board of Governors.
Governor Meyer, we do welcome you here today and look forward with great anticipation to your testimony. This is a subject on which the Fed has great authority and great experience with both, as I understand it, debit cards and the so-called ''live'' checks under the Truth-in-Lending Act. The debit cards come through the Electronic Funds Transfer Act and Regulation E. What was that other regulation that we were——
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Mr. MEYER. Z.
Chairwoman ROUKEMA. Z, oh, yes, E and Z—I don't know where that comes in, but I'm sure you'll explain it to us.
Mr. MEYER. Yes, I'd be happy to.
Chairwoman ROUKEMA. Thank you. We welcome you here today and look forward to your testimony. We must begin with a basic, full understanding of the legal requirements and have insight as to what your experience in the practical world has demonstrated.
Thank you.
STATEMENT OF HON. LAURENCE H. MEYER, MEMBER, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. MEYER. Thank you. Madam Chairwoman, Members of the subcommittee, I appreciate the opportunity to comment on issues concerning debit cards that can be used without personal identification numbers. These cards are sometimes referred to as check cards.
Cardholders have some consumer protections related to liability, issuance, and disclosure under the Electronic Fund Transfer Act and the Board's Regulation E. I will discuss the existing statutory and regulatory scheme concerning debit card liability and issuance, and comment on the legislative proposals introduced by Representatives Schumer, Gonzalez, and Barrett. I will also comment on issues related to unsolicited loan checks addressed in proposed legislation introduced by Representatives Hinchey and Gonzalez that would amend the Truth-in-Lending Act.
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Over the past year or so, card issuers have been aggressively marketing debit cards that can be used by signing a charge slip rather than entering a PIN, encouraging consumers to use them in place of writing checks. Besides just making them available, many institutions have automatically replaced their customers' existing ATM cards, previously usable only with PINs, with cards that can be used with a PIN at ATMs and electronic point-of-sale terminals and without a PIN at many locations where credit cards are accepted. This development has raised concerns about the potentially greater consumer exposure to losses in the absence of PIN protection.
Both the TILA and EFTA, which govern credit cards and debit cards, respectively, contain provisions on unauthorized use and unsolicited issuance. The TILA limits consumer liability for unauthorized use of credit cards to $50. Under the EFTA, the rules are more complex. Liability for the unauthorized use of a debit card is determined based on when the consumer notifies the financial institution of a lost or stolen card or an unauthorized transaction. If the notice is provided within 2 business days of learning of the loss, the consumer's liability is limited to $50. For the consumer who fails to report the loss or theft of a debit card within 2 business days of learning of the loss or theft, the potential liability increases to $500. This higher limit applies to unauthorized transactions taking place after the 2-business-day period.
If unauthorized transactions appear on the consumer's account statement and the consumer fails to report them within 60 days after the statement is sent, the consumer's potential liability is unlimited for unauthorized transactions occurring after 60 days. The explanation for the more complex rules in the EFTA can be gleaned from the legislative history of the Act which is outlined in the Board's written testimony.
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Regarding card issuance, the Truth-in-Lending Act prohibits outright the unsolicited issuance of credit cards. The Electronic Funds Transfer Act permits the unsolicited issuance of debit cards, but only if disclosures are given and the card is not usable until after the consumer has requested validation and the consumer's identity has been verified. Both laws permit issuing a new card to replace or substitute for an existing card. Regulations Z and E also permit an issuer to add features to a card at the time of substitution.
Without doubt, the issuance of a card that does not require a PIN increases the consumer's risk. The consumer deserves to be informed about this in a very straightforward way. This risk may involve liability for unauthorized transactions or it may simply be the necessity of having to sort out unauthorized activity problems, even if there's no ultimate financial loss.
It also seems appropriate to apply a lower liability limit than that which presently applies. Under current law, adding non-PIN-protected capability to a card does not require special disclosures and subjects the consumer to higher liability than applies to credit cards.
Apart from what the law requires, both Visa and MasterCard have decided to voluntarily limit consumer liability for unauthorized use of debit cards to $50 or less, and this should deal with consumer concern about unwarranted financial risk, although the potential aggravation of demonstrating unauthorized use may remain. Therefore, it seems to us that the question is whether voluntary industry action is sufficient to deal with these concerns, or whether legislation is necessary.
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Now let me turn to the two proposed bills. I will not outline their provisions, but I do have some specific comments.
H.R. 2234, the Dual-Use Debit Cardholder Protection Act, introduced by Representatives Schumer and Gonzalez, addresses liability, disclosures, and issuance. Specifically, the bill would prohibit issuing a debit card that can function without a PIN unless, one, the card is not activated when sent; two, certain disclosures accompany the card, and, three, the card is activated only upon the consumer's request and after verification of the consumer's identity. These latter rules currently govern the initial issuance of a card on an unsolicited basis, but not the replacement card.
There is considerable merit to having card issuers provide a new offline debit card in an unvalidated form when they replace an online card, and only validating the card upon the consumer's request. Requiring validation could be useful for assuring that consumers are not exposed to any additional risk or inconvenience without their consent. It is our understanding that in many cases card issuers already follow, or are planning to adopt security procedures in which they validate a renewal card for use only after the cardholder has expressly confirmed receiving the card and has requested validation. However, this procedure may not generally include a step of confirming the consumer's willingness to accept a debit card that is not PIN-protected.
The question is whether current and emerging industry practices are sufficient, or whether a statutory requirement is needed. Given the positive steps being taken by the industry to deal with the consumer's concerns on a voluntary basis, we're inclined to see how things work before enacting new laws.
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However, the industry should be on notice that it is in everybody's best interest to assure that the public understands the new risks inherent in non-PIN-protected transactions, and that individual consumers can make an informed choice about whether to assume that risk.
H.R. 2319, the Consumer Debit Card Protection Act, introduced by Representative Barrett, limits consumer liability to $50 or less for all unauthorized debit card transactions. This bill contains other consumer safeguards, including a requirement that card issuers provisionally reimburse consumers for claims of unauthorized use within 3 business days.
Currently, for point-of-sale and foreign transactions, Regulation E gives institutions 20 business days to resolve a claim of error, or to recredit an account if the investigation takes longer. The Board is aware that Visa is changing its rules to provide for recrediting within 5 business days, and this suggests that technological improvements in payment systems may permit these consumer claims to be investigated more quickly. We will examine the Board's rule in light of these developments.
The Board also has been asked to comment on the mailing of unsolicited ''loan'' checks to consumers. These credit products are also referred to as ''loans by mail'' or ''live'' checks. The consumer need only sign and cash or deposit the check to obtain a loan. The Truth-in-Lending Act mandates that full disclosure of the credit terms, such as the annual percentage rate and the payment schedule, be included with any mailing, so that consumers can make informed decisions about whether to accept the loan.
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Therefore, the primary concern should not be disclosure, but, rather, the potential for theft and fraud and the consumer inconvenience of refuting a claim of liability. The unsolicited check could be intercepted in the mail by a thief who forges the consumer's name and cashes the check. Although the consumer would not ultimately be liable for the forged instrument, the consumer is, nevertheless, exposed to risk that was not anticipated and inconvenience resulting from the loan check that was not requested.
H.R. 2053, the Unsolicited Loan Consumer Protection Act, introduced by Representatives Hinchey and Gonzalez, would prohibit the unsolicited mailing of loan checks or other negotiable instruments. Within the past two years, the Board has received a dozen or so complaints about unsolicited loan checks that primarily relate to theft and fraud problems. This is not a vast number of complaints, and the issuance of unsolicited loan checks is not as prevalent as the issuance of unsolicited credit cards in the late 1960's that led to the TILA prohibition.
But creditors are increasingly making use of these checks, and the question is whether they pose a significant enough problem to warrant legislation. In answering the question, it seems appropriate to balance any need for consumer protection to combat fraud and other concerns associated with unsolicited checks against unnecessary restrictions on the offering of financial products. Some consumers may appreciate the convenience of obtaining ''instant credit'' without having to make a formal application. In addition, the intended recipient of a loan check generally will not be held liable for the amount of a forged check, although that may be small comfort to an individual who must contend with proving the forgery of the check.
While the Board is mindful of the appearance that consumers are exposed to risks they have not voluntarily assumed, we do not favor an outright prohibition against sending these checks. Absent some evidence of a significant problem, we are inclined to let the market work without the intervention of new legislation.
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A major trade association has issued voluntary standards for its members regarding loan checks. To the extent that some of the concerns expressed by Representative Hinchey and others about loan checks have not been addressed, such as adverse reporting to credit bureaus during the resolution of a dispute and follow-up calls, or other procedures to ensure that checks have been received or cashed by the intended recipient, it would seem appropriate for industry to consider supplementing its guidelines.
This hearing provides a useful forum for the industry, consumer representatives, and others to discuss with lawmakers these important policy matters involving debit cards and loan checks, and we appreciate the opportunity to participate in the discussion. Thank you.
Chairwoman ROUKEMA. I thank you.
I'm going to ask for some clarification. I think we've heard you—or at least I've heard you clearly—indicating that you're inclined to see how things work out, and that there has to be more experience with the voluntary reforms that the industry is putting in, and you do not see large measure of need for additional—or for legislative action at all.
However, I'm a little bit surprised at how declarative you were there. Yes, go ahead.
Mr. MEYER. You're surprised at what?
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Chairwoman ROUKEMA. At how declarative you were about no need for legislation. When do you expect the report that you're working on to come forward, and how nearly completed is that report? And is that the basis for your declaration here today?
Mr. MEYER. Well, I'm not quite sure what report you're talking about.
Chairwoman ROUKEMA. Well, the report that was——
Mr. MEYER. Are you talking about the review of Reg. Z?
Chairwoman ROUKEMA. Yes.
Mr. MEYER. Truth-in-Lending?
Chairwoman ROUKEMA. Yes. Well, but that has overlapping implications here.
Mr. MEYER. Well, it does. There are a couple of layers of consideration here. First, I think we had intended earlier on to take up consideration of Reg. Z some time this year. However, as you know, we're in the midst of working on harmonizing disclosures for home mortgage disclosure under RESPA and TILA, and we've also been requested to take under consideration what ought to be included in the finance charge. So those are what are occupying our attention right now.
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We would anticipate taking under consideration any statutory recommendations with respect to Truth-in-Lending in early 1998, and then later in the year doing a full regulatory review.
Chairwoman ROUKEMA. Well, let me ask the question a little differently. You've indicated your concerns about consumer risks without a PIN and about the consumer's personal responsibility. I think you've also indicated that there should be more notice given. Are there specific recommendations you would now be willing to make to the industry, that they should institute on a voluntary basis? If you included that in your statement, I didn't hear it.
Mr. MEYER. Well, I think it was——
Chairwoman ROUKEMA. I mean, you outlined some of the problems for consumers.
Mr. MEYER. It's at least implicit. I think there are several things. First of all, with respect to liability, we do believe that a lower liability is appropriate relative to what's currently in the law.
Chairwoman ROUKEMA. Yes, you did mention that. All right.
Mr. MEYER. And the industry has responded to that. That is the single most important issue, in my judgment, and we've dealt with that.
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Now the second issue would be disclosure, making sure that consumers are aware when there's a substitution of a card that doesn't have PIN protection for one that was PIN-protected, that that substitution was made, and that it exposes the consumer to a potential additional risk; in addition, to encourage prompt reporting of any loss or theft.
Now I don't see that either of the industry groups have come forward and indicated that they were going to proceed with such a disclosure. On the other hand, it seems to me that once a lower liability is instituted, the industry is bearing more of the risk and it would greatly surprise me if the industry didn't see it is in their great interest to inform the consumer better about the increased risk exposure with non-PIN-protected cards, but that would be something that I would suggest. I would like to see the industry move in that direction of including that disclosure.
The third issue would have to do with recrediting. And in this case, I think some additional study is in order, and I indicated that we want to take a look at this. The technology has changed, and I'm not sure whether the technology has improved to a point that would allow the 3-day limit that is in the Barrett bill, but, clearly, Visa has already indicated that it was prepared to move to a 5-day, as opposed to a 20-day schedule.
Chairwoman ROUKEMA. And your recommendation is, your assessment?
Mr. MEYER. Our recommendation is that we study it and determine what period will allow adequate time for investigation.
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Chairwoman ROUKEMA. All right, thank you. I thank you very much.
Mr. Vento.
Mr. VENTO. Thank you, Madam Chairwoman.
Governor Meyer, there are separate requirements here for credit cards and for debit cards, and of course in changing the nature of the debit card, it takes on some of the character of the credit card in terms of the signed signature. I suppose, even in a case where there is an account, that is an overdraft-type of protection; and in some cases, even managed by the same company, like Visa or MasterCard, I take it.
Are the requirements with regard to the sending out of an unsolicited card the same or, in other words, they fall under the debit card protection in terms of unsolicited and the fact that it's activated by a PIN? If it's activated—if a new feature is added or it's added by a signature, does that require an affirmation or an affirmative-type of validation?
Mr. MEYER. All right, well, there are differences. Of course, credit cards are prohibited———
Mr. VENTO. What I'm asking is, what is the Federal Reserve Board's view with regard to that? In other words, how do you regulate it?
Mr. MEYER. If you ask about the substitution, if you substitute a card, let's say you begin with an ATM card that's PIN-protected and a bank substitutes for that a debit card that allows both PIN-protected and non-PIN-protected use. Then no additional disclosure is required at that time, and it is not required that at that substitution that the card come in an unvalidated form.
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Now having said that, what I just indicated, it seems to me appropriate to have a disclosure, so that the consumer is better informed about the additional risks involved when the card is not PIN-protected.
Mr. VENTO. Well, that's a good answer, but it's not the question I asked.
Mr. MEYER. OK.
Mr. VENTO. I asked about the unsolicited nature. In other words, is that considered unsolicited, in fact, if I have a debit card with a bank and they send me an unsolicited credit card?
Mr. MEYER. Well, they can't send you an unsolicited credit card. Is it unsolicited when they replace an existing card? I really don't understand what's the question.
Mr. VENTO. I said if I have a debit card account with an institution, can they send me an unsolicited credit card?
Mr. MEYER. No.
Mr. VENTO. But they can send me an unsolicited debit card that requires signature? So, in other words, your regulatory view of this is that that's a debit card and it's not a credit card, even though it has some of the characteristics? So the Federal Reserve Board has made a decision on that; is that right?
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Mr. MEYER. Well, no, I wouldn't say that exactly. Many of these decisions are made by Congress in legislation.
Mr. VENTO. Well, I——
Mr. MEYER. They're incorporated——
Mr. VENTO. Yes.
Mr. MEYER.——into rules that we write.
Mr. VENTO. Governor, Governor, I helped write the Electronic Funds Transfer Act, and we did not anticipate this particular change in that law.
Mr. MEYER. Well, we did not take an Act that said that there was a prohibition on unsolicited issuance and change that. There's an express prohibition for unsolicited credit cards.
Mr. VENTO. Yes.
Mr. MEYER. In the case of debit cards, you're allowed to have unsolicited issuance, provided certain validation and disclosure procedures are enforced. But in substitution, there's a difference. In substitution, there is no requirement that there be validation or disclosures.
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Mr. VENTO. But, one might say the fundamental nature of the instrument has changed and the Federal Reserve Board didn't say that.
Mr. MEYER. Right. There's always a question: what's the prerogative of Congress and what's the prerogative of the regulators?
Mr. VENTO. Well, I just want to know how you're administering the law? Do you have adequate—have you had advisory or inquiries with regard to these changes before they occurred? Did the Fed issue guidance prior to the changes that occurred in the marketplace or was this—or are you simply reacting to it?
Mr. MEYER. Well, we had a thorough review of Regulation E, under which debit cards are governed, in 1994, with some changes implemented in April of 1996, and the concerns that are being expressed in these hearings, were not prominent at that time.
Mr. VENTO. In other words, what my question is is, did you anticipate and did you act to, in fact, state what the regulations would be with regard to a change of use of debit cards prior to that being implemented and sent out by those that are advancing that type of instrument? Did the Fed do that prior to that?
Mr. MEYER. We didn't make any change in that.
Mr. VENTO. There were no advisories? There were no inquiries of the Fed so far as you know? You might want to supplement that for the record.
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Mr. MEYER. No, this was out for public comment, and these were—these issues——
Mr. VENTO. Well, I'm not talking about what you did do; I'm talking about what others did and whether or not your advisory, or change of Regulation E anticipated and, in fact, authorized that particular change prior to its being implemented?
Mr. MEYER. No, the kind of substitution that's going on is perfectly valid and legal within the regulations, and we understood that that was going on.
Mr. VENTO. Thank you, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you, Governor Meyer. I believe now we have Mr. Bentsen.
Mr. BENTSEN. Thank you, Madam Chairwoman.
Governor Meyer, if I understand how the debit card works—and I got one; I had an ATM card, and then all of a sudden I got a debit card in the mail that replaced my ATM card and I read the brochure that came with it. And as I understand it both from that and some articles that have been written about this, that if I use the debit card at a place of business in the same form as I might use a credit card, there is not necessarily an instantaneous debit against my checking account. In fact, there is a paper transfer through Visa or MasterCard, and they may not present for payment against my bank account until a day or several days later, much like the way a credit card would operate. Is that correct?
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Mr. MEYER. That's correct. There's typically an electronic authorization which is instantaneous, but there's not an instantaneous debiting of the account.
Mr. BENTSEN. Now the authorization, what does that determine? Does that determine your creditworthiness or your credit limit or your account status or——
Mr. MEYER. It determines, one, that there's a valid account.
Mr. BENTSEN. Right.
Mr. MEYER. Then there is some question about what goes on beyond that, I must say. Some seem to indicate that there are ranges of typical activity that are monitored to make sure that it's a valid transaction. Some in the industry indicate that there may also be a check to see that funds are available in the account.
Mr. BENTSEN. Let me ask what I think is a legal question. If I purchase a lawnmower for $100 at a hardware store using my debit card, and it is not presented for payment against my bank for a couple of days, is that, in effect, an extension of credit?
Mr. MEYER. Well, no more so than when you write a check and hand it to somebody, because in both cases there's a period of time before the payment is processed. The same kind of float, in a sense, would exist, but it's very brief.
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Mr. BENTSEN. OK, so my question is, if it were perceived to be an extension of credit, why wouldn't that trip——
Mr. MEYER. For the same reason that we don't consider a check a credit instrument, we wouldn't consider a debit card a credit instrument.
Mr. BENTSEN. OK, even though, arguably, places of business which might not take personal checks, but would take credit cards, might view it more in terms of a credit card? Or the merchant doesn't look at it that way?
Mr. MEYER. You're not borrowing money; you're making a payment. It is almost identical in that respect to a check or we might make it like an electronic cash payment.
Mr. BENTSEN. And the reason I ask that is whether or not—if it was an extension of credit—whether or not TILA might actually apply, but you all don't see it that way?
Mr. MEYER. No. TILA does not apply.
Mr. BENTSEN. Let me ask a question, because I do think it is a little more gray than a check transaction. Perhaps from a merchant's standpoint—and I can't speak for the merchants, but from a merchant's standpoint, I don't know whether they get greater comfort out of a debit card than they do out of a personal check, and whether having the moniker of Visa or MasterCard makes a difference to them or not? But maybe that's something to explore.
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Let me ask, with respect to the live check question, if I understand the way that it is treated under—and I'm not an expert on these Regs, but under EFTA you have to, once you receive a card, you then have to verify it with the issuer; is that right?
Mr. MEYER. That is correct upon first issuance, but not on substitution.
Mr. BENTSEN. Under TILA, you do not?
Mr. MEYER. Under TILA, you cannot have unsolicited credit cards.
Mr. BENTSEN. OK, but the live checks that are in effect——
Mr. MEYER. It's a bit confusing, because when we call them ''live'' checks, they are a loan instrument.
Mr. BENTSEN. Right.
Mr. MEYER. They are beginning a loan. So that's a credit transaction——
Mr. BENTSEN. Are they covered under——
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Mr. MEYER.——and that comes under TILA.
Mr. BENTSEN. TILA. But they can be sent unsolicited?
Mr. MEYER. That's correct.
Mr. BENTSEN. So that's sort of a quirk that exists in the law?
Mr. MEYER. Yes.
Mr. BENTSEN. The other question I would have, and maybe this is already the case, but for purposes—and this doesn't deal with the disclosure, which is another area, but for purposes of liability to the consumer, which I think is a real concern, do the current regulations provide, or would it make sense for the current regulations to provide, that you have some verification on the consumer's part before the live checks actually become live, much in the same way you would have with the credit card?
Mr. MEYER. Well, I think that's a reasonable issue. It's the Board's view that this is a new and emerging industry, and that it gives consumers greater access to credit to allow issuers to send these out on that unsolicited basis, but there are additional risks that are involved. I think it's a worthy issue to discuss. Our view is that we would not want to prohibit unsolicited issuance of these checks in this emerging market.
Mr. BENTSEN. With the Chair's indulgence—and I'm not necessarily arguing for that, although this is sort of the reverse of the debit card on the credit card side, but all I'm saying is, would it perhaps not be safer if we treated live checks like we treat live credit cards, I guess, or live debit cards, when they come out?
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Mr. MEYER. The difference from debit cards is that with live checks, there is not the easy technological opportunity for a validation procedure. So the issue is whether to require preapproval, to send somebody a notice and say, ''We would like to send you a check in the mail. Would you like us to do that?''
Mr. BENTSEN. Well, why not just send the check and say, ''In order for these checks to be good, you have to call 1–800—whatever and give us your name, give us the number that's on the check, and give us your mother's maiden name,'' just in the same way they do with—I had a credit card I received the other day against a brokerage account that was set up that same way. In order to activate it, I had to give all sorts of information that, presumably, somebody who might have picked it up out of my mailbox would not have had, had they tried to activate that card.
Mr. MEYER. Right. I'm not sure; that might be feasible. When this live check is presented, as it is now, what would happen is that the bank receiving that check would either know the customer or would ask for identification, and then would have no opportunity to know whether or not there was any validation procedure followed. Now, in principle, it would be possible to set up a system whereby a call would have to be made in order to verify. I mean, there's no card or anything to put through a machine for that validation purpose, but one could set up a verication procedure. It would be more time-consuming and more costly to do it, but it's certainly an option.
Mr. BENTSEN. Thank you. Thank you, Madam Chairwoman.
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Chairwoman ROUKEMA. Thank you. If we have time later, I'm going to come back to that subject.
Congresswoman Kilpatrick, please.
Ms. KILPATRICK. Thank you, Madam Chairwoman.
Let's see, where do I want to start here? Governor Meyer, I've found it interesting that you didn't think any of the legislation that's being proposed in any of the three instances should be acted upon at this time; that we should let the market bear, even though we are getting concerns, as Congresspeople, from our constituents about the debit cards, as well as the checks that are being issued to them, many times unsolicited.
Mr. MEYER. Well, let me answer that. I believe that Congress, by raising these concerns, has already generated change in the marketplace. You've accomplished good. I think that all of the questions that you've brought up are legitimate, important ones, and I actually agree in many cases with the motivation. The difference that we have is that it seems to me that voluntary action has either been taken or is being contemplated by the industry, and the question in that case is: Do we need legislation at this time?
Ms. KILPATRICK. And your response is, no, not at this time?
Mr. MEYER. It's a question that I raise that you should think about whether legislation is needed at this time. I wouldn't say that the answer could be given definitively, because there are some additional moves that the industry could make, and I think if you would indicate where you think the industry needs to go with voluntary standards, then you could make a better judgment whether or not you think legislation is still required.
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Ms. KILPATRICK. And the fact that six or more Congresspeople have introduced various pieces of legislation, and have outlined where they think there are problems, it is not enough at this time?
Mr. MEYER. Well, I think it's been excellent, and, indeed, it has generated a lot of action on the part of industry.
Ms. KILPATRICK. OK.
Mr. MEYER. I think it's been excellent. Good public policy is sometimes identifying issues and motivating corrective action. That corrective action does not always require legislation.
Ms. KILPATRICK. We would all agree to that, and that's what we want to see: the corrective actions. We would hope that we would not have to have the legislation in many instances to do that.
I understand the Federal Reserve Board has not been completely staffed or appointed. How many people are on the Board right at this moment?
Mr. MEYER. Five, and nomination hearings are on September 30 for the other two positions.
Ms. KILPATRICK. And do you speak as a position the Board has taken or is that——
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Mr. MEYER. I do.
Ms. KILPATRICK. OK, so that we can go on record as saying that is the position of——
Mr. MEYER. I'm here representing the Board.
Ms. KILPATRICK. OK. As we talk about the issuance of the checks, and so forth, once a person has an ATM card and now it's in a debit card, is there an additional fee associated with that card, and does that person know it at the time receiving the debit card?
Mr. MEYER. Any adverse change in the terms and conditions upon substitution must be disclosed. So if there were an additional fee, it would have to be disclosed. If there's a substitution and there's no change in the terms or no adverse change in the terms, no disclosure is required.
Mr. VENTO. Well, if the gentlewoman would yield.
Ms. KILPATRICK. I would yield.
Mr. VENTO. Just to direct a question, there is a change in terms of the retail store or the merchant accepting the card, because they pay a differential rate.
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Mr. MEYER. That's not a change in the terms that affects the consumer directly, and, therefore, it does not have to be disclosed. I mean, you don't disclose to the consumers the fees that merchants are going to have to pay in order to participate in this. That's never been the role of disclosure. It's disclosure for the consumer.
Ms. KILPATRICK. Who should know it, in my opinion. We believe our consumers should know what those changes are, particularly if it's added to an additional cost that they do not normally have with the ATM card.
Mr. MEYER. You're absolutely right; if there's an additional cost upon substitution, they should definitely be informed of that, and they would have to be informed of that.
Ms. KILPATRICK. And the loan checks, as they are issued without being solicited, are there additional fees associated with it? That's the first question I would have.
Mr. MEYER. Additional? Well, there are no fees associated with the loan checks. The fees are the interest that you have to pay if you activate the loan by signing or depositing the loan check.
Ms. KILPATRICK. And you heard Congressman Barrett give an example of having received a debit card, made a purchase, and I don't remember exactly what he bought, a $300 purchase, and when he received his credit or ATM bill, that $300 was deducted. Was he charged a fee for having used that check or card?
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Mr. MEYER. No, I——
Ms. KILPATRICK. Don't use him; use any——
Mr. MEYER. If there is unauthorized use, let's say for a debit card, any fees that were charged associated with that unauthorized use would have to be refunded.
Ms. KILPATRICK. And how is it determined who gets these loan checks? What information is used, and does the consumer know what's being looked at? And is it from public information?
Mr. MEYER. Well, our understanding of the industry practice is that they will go, for example, to credit bureaus, so they can make a determination about the creditworthiness of the individuals to whom they're sending the checks, and based on certain criteria, decide to whom they're going to send the checks. That would be one approach.
A second approach is that if it were a financial institution that was sending these live checks, they could make a determination whether they want to send it to their own customers.
Ms. KILPATRICK. Which the law allows within affiliations, that they can do that, because they have that information within their structure?
Mr. MEYER. Yes, right.
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Ms. KILPATRICK. Then my question is, is it ever happening where the consumer would not know that their credit information is being shared and then issued either the checks or the debit card?
Mr. MEYER. Well, I believe that when the consumer receives a live check, the consumer would not know why his name was on the list to receive these live checks, whether it was because it came from a credit reporting bureau or from the bank that was issuing them. So there's nothing that would indicate that.
Ms. KILPATRICK. Is that a problem? Is that within the law?
Mr. MEYER. That's within the law. There is an opt-out procedure.
Ms. KILPATRICK. That the consumer must act upon and do?
Mr. MEYER. Yes, upon receiving a loan check, for example, you could opt-out of such solicitations, but it's a very universal procedure. You're opting-out; you're telling credit bureaus not to release your name for either credit cards or live checks across the whole spectrum. So you're not allowed to opt-out just from being solicited for the loan check.
Ms. KILPATRICK. Thank you, Madam Chairwoman.
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Chairwoman ROUKEMA. I believe that Mr. LaFalce was the next person to be recognized. He's been here for a while, and he's a Member of this subcommittee as well.
Mr. LAFALCE. I thank the Chair.
Mr. Meyer, let me make sure I understand what an ''unsolicited loan check'' is, first of all. Would this be something that you get in the mail with respect to credit cards you have, as opposed to debit cards?
Mr. MEYER. No. It looks like a check, but by signing it you're activating a new credit arrangement. And what will happen is that, once that goes in, whoever issued that loan check will send you a booklet that tells you when your payments are due.
Mr. LAFALCE. It has nothing to do with the type of checks that you get from a financial institution that you have a credit card with?
Mr. MEYER. No. Right.
Mr. LAFALCE. What do you call those checks?
Mr. MEYER. Those are sometimes called ''convenience'' checks. So if you wanted to add to your credit card balance by writing one of those checks, you could do so.
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Mr. LAFALCE. So this unsolicited loan check always has a specific dollar amount attached to it? It's worth $1,000; it's worth $1,500, $2,500, whatever it may be; is that correct?
Mr. MEYER. There may be some variable amount on it, but usually up to a certain amount.
Mr. LAFALCE. Now with respect to debit cards, the total universe is pretty much taken up by MasterCard and Visa.
Mr. MEYER. Correct.
Mr. LAFALCE. With respect to these unsolicited loan checks, who comprises the universe of issuers?
Mr. MEYER. Well, it's a much wider universe, and I don't have really a specific number, although the——
Mr. LAFALCE. Well, if you could give me some documentation as to the universe, at least as it presently exists——
Mr. MEYER. Right. I think that there are 400 members of the American Financial Services Association, for example, and I believe that 90 percent of all loan checks are probably issued by the largest 15 members of that association.
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Mr. LAFALCE. Has the Federal Reserve Board ever studied the terms, the rate, length of payment, of the loan checks?
Mr. MEYER. Not to my knowledge, but we don't typically impose limitations on terms.
Mr. LAFALCE. Well, I'm not asking you to impose, I'm just asking if you've studied them, so that we have a feel. I mean, are we talking about a maturity of one year? Are we talking about a maturity of five years? Are we talking about an interest rate slightly above prime? Are we talking about an interest rate of 25 percent?
Mr. MEYER. My understanding is the interest rates run from about 14 to 25 percent; somewhere in the 20 percent range is fairly typical, down to as low as 14 percent.
Mr. LAFALCE. Have we studied the manner in which the consumer is instructed with respect to the important terms of this new loan arrangement?
Mr. MEYER. Absolutely.
Mr. LAFALCE. What is the method of——
Mr. MEYER. There is a disclosure that operates. This is a credit transaction. It operates under the Truth-in-Lending Act, and a detailed disclosure has to be made about the amount that's being financed, the payment schedule, the finance charge.
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Mr. LAFALCE. Is this this disclosure: (a) voluntary; (b) pursuant to regulation; (c) pursuant to law?
Mr. MEYER. No, this is not. My understanding, it's certainly in Regulation Z, and my understanding is it's in Regulation Z, because it's in the Truth-in-Lending Act
Mr. LAFALCE. OK. Let's go back to the debit and credit cards for a second. I have both. Why would I use a debit card as opposed to a credit card? Why would a consumer use a debit card as opposed to a credit card?
Mr. MEYER. Some consumers may prefer not to take on credit, may not want to use credit cards. Some consumers may have credit cards, but they may be up to their limits on credit cards, but they have money in their bank. Some consumers may like the discipline of a debit card because, to use it, you actually have to have money in the bank. That's a pretty good discipline to have.
Mr. LAFALCE. How much grace period usually exists with respect to the use of a debit card? I mean, with a debit card, you could, theoretically, have it posted instantaneously, within a day or two, but it's my understanding that some give a grace period, oh, maybe of 20 days or so. Do you know what the standard practice is?
Mr. MEYER. No, my understanding is that it's within one to three days of posting.
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Mr. LAFALCE. Does it depend on Visa or MasterCard, who make up almost the total universe, or does it depend upon the financial institution that Visa and MasterCard have an arrangement with?
Mr. MEYER. Well, I believe it's partly a question of technology and management, about how fast these things get processed.
Mr. LAFALCE. Assuming the technology and management are not the problem, I mean, I'm just curious, might Merrill Lynch have one policy with respect to their debit cards and might Dean Wittier have another? I mean, assuming they both have debit cards?
Mr. MEYER. I really don't know the answer to that. It's quite possible that the precise number of days involved could differ.
Mr. LAFALCE. Right now we rely upon the voluntary actions of the two companies that make up almost the totality of the universe, but suppose there were to be new entrants into this field of debit cards, and say international entrants. It's my understanding that the use of debit cards is much more prevalent in foreign countries than in the United States. Canada, I understand, uses debit cards the way we use credit cards. I could be incorrect there, but that's what I've heard. But suppose we had some new entrants. Should we just rely upon them to put limitations on liability or should we say, ''Hey, the liability standards that these two companies have come up with are pretty good; we ought to codify them for all people, for all participants''?
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Mr. MEYER. Right. Well, I think that's a question that I'll leave to you. I think the question is, how is your time best spent? If industry practices have evolved to the point where lower liabilities are in place just as you desired—how do you want to use your time, and is it more flexible to have a system where the industry standards evolve to meet current concerns or that we rigidly codify your current concerns?
Mr. LAFALCE. You know, we waste so much time unproductively. I think we could find a little bit of time to pass some very productive legislation.
I thank you.
Chairwoman ROUKEMA. I'm going to conclude this question and indicate to Mrs. Maloney and others that we have a problem here. And Governor Meyer, I hope you're able to stay around. The problem is that, although that shows just one vote up there, and we have to rush over to meet the 15-minute—I'm afraid we're just not going to have time now, Mrs. Maloney, although the problem is we've gone way over time. We'll get there, hopefully, before the vote is called, but, evidently, there is a prospect for one or two more additional votes. It's a parliamentary procedure that's rather confusing, and so I hope that you would be able to stay around so that we can conclude the questioning immediately after these next votes. And I don't know—it will certainly be a good 15 minutes or more.
Mr. MEYER. A good how long?
Chairwoman ROUKEMA. A good 15 minutes or more.
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I'll call back and give the staff as much information as I can get when I get to the floor, and we'll inform you of that. Thank you.
[Recess.]
Chairwoman ROUKEMA. Governor Meyer, I do appreciate your courtesies here, and I know you have a pressing schedule. I don't know—do we know the time that you're absolutely limited to?
Mr. MEYER. Well, I'll tell you, I'm very busy. I would prefer not to——
Chairwoman ROUKEMA. You're busy and we could have left one-half-an-hour ago——
Mr. MEYER. ——as you are.
Chairwoman ROUKEMA. You should have left one-half-an-hour ago?
Mr. MEYER. That's quite true.
Chairwoman ROUKEMA. Oh, Mrs. Maloney is here now. So I will defer to her and give her her 5 minutes of fame, and then we'll see—hopefully, then we can conclude. Mr. Vento may have a follow-up question. Thank you.
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Mrs. MALONEY. Governor Meyer, recently the Federal Reserve proposed to lengthen by one day the time that a bank could take to cash a customer's check, and the Fed claimed that the banks needed that time in order to determine if there were sufficient funds to cover the deposited checks, and they also argued that they needed this time to understand if these checks were fraudulent. Along with Mr. Vento and other Members of this panel on both sides of the aisle, many of us fought this proposal. I contacted several banks and they told me it took them just 24 hours to clear a check, and it seemed not logical that, with new technologies and everyone doing things quicker and faster, that the Fed would be asking for yet another day to hold deposited checks.
And I believe that all of our concern was mainly that of consumers; an additional one-day hold would mean many bounced checks for consumers who are paying their bills the first of the month, only to discover that their deposits were being held an extra day. I am very appreciative that the Federal Reserve backed off of this anti-consumer policy that they earlier suggested.
And my question really is: If the Fed was so worried about fraudulent checks that it sought to impose an extra day's hold on the deposits for the country's consumers, why is the Fed not seriously addressing the fraud that could occur if the Fed gives its OK to the practice of sending unsolicited checks in the mail? And I really am referring to my colleague, Mr. Hinchey's bill. I believe that this is a very shortsighted position on the side of the Fed, and shouldn't the Fed consider supporting legislation which will prevent unsolicited checks from becoming a much larger problem in the future? It would be a huge problem if someone stole these checks. You'd never get it figured out.
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And in your testimony, your closing statement was that you did not feel that the Fed should take any action in this area, and I just would like more clarification and more comment.
Mr. MEYER. Well, that's a very interesting comparison, and I'm delighted to respond to the question specifically about the hold period, because I remember well the discussions within the subcommittee and the Board on this issue. The Electronic Funds Transfer Act is an act written by Congress. You expressed in that Act the importance of ensuring that careful action was taken to minimize fraud, and that that action would require that hold periods were set, so that a significant—and I don't remember the exact language, but a very significant number of checks, in fact, cleared.
Now I think the information that you have about all the checks clearing within the current hold period is incorrect. We looked at that situation carefully, and we found out that we could move from something like one-half to two-thirds of checks being cleared within that period with an extra day on hold. And we believed that our recommendations were sensitive to the intent of the Congress. And that's what we were trying to carry out: the intent of Congress in that regard. Now if we failed to do that, my apologies, but it was certainly our attempt to do that.
But it's an interesting contrast, nevertheless, and I think that you're quite right; we should be concerned with new, emerging products, about the kinds of risks that they impose and their safety, but what we really emphasize here is a couple of things, and one is balance. These new emerging transactions, media, and ways of taking loans with these live checks are clearly popular on the part of consumers. And we are, therefore, reluctant to interfere with the growth of this particular credit practice which is being well-accepted by consumers.
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And that's particularly the case when the evidence of fraud and problems is quite limited in this case. And I would make a contrast between this and the problems that surfaced at the time that Congress prohibited unsolicited credit card issuance, when I believe that the problems were much clearer and much larger.
So the question is, in the absence of a problem that rises to that dimension, should we cut off or seriously interfere with the development of this particular product at this time? And it's our judgment that we shouldn't. But all the concerns that are being expressed have some validity, and I think this is very valuable to do some soul-searching on these issues. I absolutely believe that's the case.
Mr. VENTO. I would think it's—if the gentlewoman would yield—it's valid, but that we're talking about expedited funds transfer, not the electronic funds, but expedited.
Mr. MEYER. Yes. Sorry. Yes, you're right. Sorry.
Mrs. MALONEY. And if I could follow up with one brief question. Is there any compelling reason why we should have different liability for credit cards and debit cards? The liability is different between the two cards. It appears to me, just on the surface, that a debit card would be more problematic if it were stolen or lost. Yet, the liability is much larger on that one than a credit card, and I just wondered—your comments on that?
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Mr. MEYER. Well, the history of the EFTA I think addresses that issue. It's specifically because the risks are greater in the case of a debit card that it was felt that a higher liability would impose on consumers greater incentive to be careful about protecting the information on their PIN, for example, and that was part of the very reason, after all, that Congress decided to impose a higher liability standard in the case of debit cards than they had imposed in the case of credit cards. OK, it wasn't our decision. It was your decision.
Mr. VENTO. The Senate wanted no liability.
[Laughter.]
Mrs. MALONEY. Thank you.
Chairwoman ROUKEMA. Thank you. I believe Mr. Vento has a brief follow-up question.
Mr. VENTO. I was just saying that the Senate wanted no liability. Well, I don't know how brief it is; I hope it's not too long.
Mr. MEYER. Well, both the Senate and the House had different perspectives, but they both wanted to impose some additional risk, and it was a blend of the two that finally ended up in the Act.
Mr. VENTO. Yes, that's correct, and, obviously, we didn't anticipate the signature-type of authorization issue, which—did your staff actually make any findings with regard to that signature issue? I think the answer was that there was not a preliminary approval of it prior to the utilization of the signature debit card by the Federal Reserve Board, but that it was a review after they began to implement that particular program. That was my earlier line of questioning. But did your staff make findings on that, that there was no additional consumer liability or risk or any type of float? What did they do? I mean, what documentation do we have?
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Mr. MEYER. It is true that there was a change in the Electronic Funds Transfer Act to reflect the widespread use at point-of-sale terminals and paper-based approach in 1984, and that's precisely when we went to a 20-day period for recrediting, as opposed to the 10-day period that was in the original Act. That's the only thing I can really——
Mr. VENTO. I think there are two differentiations there between the time, which cuts it in half, I guess, for ATM versus for debit.
Mr. MEYER. That's right.
Mr. VENTO. I don't know that it differentiated between a signature-type approval at that time. I'd be surprised if it did.
But there are 1.3 million debit cards being issued a month. I think later the credit card company—that is, one is going to point out that they have 400 million credit cards out, and I expect that Visa will point out that they have at least twice—again, half again as many as that out. So there are a billion credit cards out there, and these debit cards are with these new features. Does the Federal Reserve Board have adequate authority to, in fact, institute changes in terms of disclosure or procedures or requirements under the law?
Mr. MEYER. Well, with respect to liability, no, you have the authority to change the liability; we don't. With respect to disclosure, I think we do have some authority. I think it could be interpreted to say we have some authority to impose an additional disclosure upon substitution of the PIN-protected card for one which is not PIN-protected. And with respect to recrediting, since we imposed by regulation the 20-day period, we also, presumably, could lower that, although you have the 10-day limit in the Act. So I presume you have some responsibility here.
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Mr. VENTO. There is a melding—I understand that in terms of the liability limits, but there is some melding together here of various instruments in terms of a debit card with a signature or a debit card with a credit extension on a various account, which the Truth-in-Lending Act would then——
Mr. MEYER. No, debit——
Mr. VENTO. ——apply to the debit card or to the original account that extends credit. That there is some melding together that does occur, where there's almost a situation where a debit card with a signature could almost be synonymous with a credit card.
Mr. MEYER. No, we don't see it that way at all. A credit card is a loan transaction that's governed under the Truth-in-Lending Act and Regulation Z, and a debit card is like a check, a payment, and it's governed under the Electronic Funds Transfer and Reg. E. I think those are very separate.
Mr. VENTO. Well, I mean, I understand.
Mr. BENTSEN. Would the gentleman yield on that?
Mr. VENTO. Yes, I would yield, yes.
Mr. BENTSEN. If you had a debit card against an account with an overdraft protection, which is an extension of credit, would that then trigger TILA to the debit card?
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Mr. MEYER. Would that——
Mr. VENTO. That was exactly the type of example I was trying to use, but apparently——
Mr. MEYER. Right. Well, no, what would happen is that, for the use of the debit card, that's still governed under Regulation E. But to the extent that the debit card activates a loan from the bank because of an overdraft facility, the details of that loan arrangement are itself governed under TILA and Regulation Z. So they're both relevant in that situation.
Mr. VENTO. Yes. What's the consumer's liability in that instance then?
Mr. MEYER. What is the consumer's liability? Oh, if there's an overdraft?
Mr. VENTO. With a debit card, a signature debit card.
Mr. MEYER. What happens is, once you activate the Truth-in-Lending with an overdraft, then the limits are the limits in the Truth-in-Lending Act, which are $50.
Mr. VENTO. I just think it's an area here where we need some clarification. I would think that the Fed has—is it—there is a differential in terms of, incidentally, in terms of the responsibility. As I recall writing to the Comptroller with regard to an unsolicited credit card that I had received, the Comptroller of the Currency has some responsibility there, doesn't he, in terms of the unsolicited nature? And does he share—could you know the answer to my question in terms of the difference between debit cards and who shares responsibility here?
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Mr. MEYER. Well, my understanding is that this is explicitly in the Act, how these responsibilities are shared. Obviously, it's a very subtle point, OK, but it is addressed in the Act that the debit card per se, in terms of when it is a debit card that's taking money out of a checking account, it's governed under Reg. E, and when it activates an overdraft facility and involves a credit transaction, the credit transaction itself is governed under Regulation Z. That's the way it is.
Mr. VENTO. So this is the answer to my last question. But what I was asking about was getting back to an earlier topic about the unsolicited credit card/debit card. I know that the Comptroller has a role and plays a key role in regulating the unsolicited credit card, or is that only in reference to where it is issued?
Mr. MEYER. I'm sorry, the unsolicited credit cards are prohibited by Congress, period. Absolutely.
Mr. VENTO. They are, but if there's a violation, who enforces that? The bank regulators?
Mr. MEYER. Yes, the primary regulator of that bank would do it.
Mr. VENTO. So you have that responsibility?
Mr. MEYER. With respect to State member banks and the Comptroller has it with respect to——
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Mr. VENTO. Unsolicited debit card versus credit cards?
Mr. MEYER. With respect to to unsolicited debit card issuance, they can be issued unsolicited, subject to certain requirements.
Mr. VENTO. The studies you referred to, of course, and you point out that there's a very selective group of consumers that are receiving these extensions of unsolicited checks versus convenience checks. But, as I said, that thread may be pretty thin in terms of mortgaging rights or something that someone acquires from you. All of a sudden, they have the right to send out checks based on home equity loans, and so forth.
But, in any case, because of the growth of the debit cards, because of the growth of these instruments, is there any type of ongoing survey that you're doing to make determinations as to the validity of some of the information you're getting back and the magnitude of what this poses as a problem in the future?
Mr. MEYER. We have not seen it as a major problem, and we don't collect data per se on the debit cards.
Mr. VENTO. The checks are basically a regulated issue in terms of checks are—the mosaic of check regulation, you know, is in the 50 States under the Uniform Commercial Code most often. Governor Meyer, does that present some other issues that the Fed would be looking at or making any recommendations to us concerning that? Because we seem as though—to me, as I said, it seems to me these instruments are melding together.
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Mr. MEYER. I'm not quite sure what you mean there. The loan checks——
Mr. VENTO. Well, I think the extension of credit, the float—there are many issues here that are similar in terms of——
Mr. MEYER. Right. Well, one needs to make them a little less similar sometimes. One wants to keep in mind that a loan check is a loan. It's a credit transaction. It is not something that comes out of your checking account. OK? You're entering into a loan agreement with the issuing institution, and as such, it's governed under Regulation Z. It does not meld together, to me at least, with a debit card.
Mr. VENTO. Well, I'm afraid that for most of us, or most consumers and the people we represent, it seems like much of this does meld together. I'd feel a lot better about it not melding together if there had been a little more emphasis in differentiating the signature versus the PIN number debit issuance and some of the other issues, but I think that, quite candidly, I think that many that are issuing these want to simplify these instruments, and I appreciate that for marketing purposes and for other factors in terms of the transactions that take place with the retailer. On the other hand, that does tend to have the effect of smoothing over many of the differences with the consumers that we represent. And we have to understand that, in the real world, how it works; most people are not equipped with the knowledge or background that we have, Governor.
Mr. MEYER. Absolutely. I think that's why disclosures are very, very important, and education is very, very important. We certainly commend any educational efforts that the industry makes to ensure that consumers are better informed about their choices and better understand the differences between the various options.
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Mr. VENTO. Well, I have additional questions. We'll submit them in writing, Madam Chairwoman. Thank you.
Chairwoman ROUKEMA. Yes. Governor Meyer, that is the procedure of the subcommittee, as I'm sure you're aware, that all Members will be submitting or have permission to submit questions to you, and then we would hope that you would respond in writing for the record.
Mr. MEYER. Absolutely.
Chairwoman ROUKEMA. Because we don't have—some Members are in markups today, and I understand that they do have questions that they want to submit. And, again, as I go over this, I may have a more refined question to ask you.
By the way, I should say—and maybe this is an editorial observation on my own part; it's a personal opinion—I don't think any of our questions were meant to infer that the Fed is not properly, under the letter of the law and the spirit of the law, enforcing the Electronic Funds Transfer and Regulation E or Truth-in-Lending. The questions really were meant to get at the issue: Do we have enough transition here and innovation in these products, so that we have to take a new look and see whether or not this legislation is adequate? And you've given us a good start in looking at that.
Mr. MEYER. Good. Right.
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Chairwoman ROUKEMA. Yes?
Mr. MEYER. I would just conclude by saying——
Chairwoman ROUKEMA. Yes, please.
Mr. MEYER. ——that I think a lot of the concerns that this subcommittee has expressed are important concerns, and I think you've already motivated some change in industry practices that are good, and then I think these need further consideration.
Chairwoman ROUKEMA. And these changes, voluntary changes, we're going to explore with an open mind with panelists that will be coming up shortly.
Mr. MEYER. Good.
Chairwoman ROUKEMA. And I am most appreciative of your time and your expertise.
Mr. MEYER. Thank you.
Chairwoman ROUKEMA. Thank you.
And now we're going to back to our colleague, Mr. Hinchey, our colleague from New York and a Member of this subcommittee, and to say to our waiting panel of industry people that Mr. Hinchey was otherwise involved, I guess both in subcommittee as well as activities on the floor. So we do appreciate your being here now, and if you can present us with your testimony, we'll proceed.
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STATEMENT OF HON. MAURICE D. HINCHEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK
Mr. HINCHEY. Well, thank you very much, Madam Chairwoman, Mr. Vento, and Members of the subcommittee.
Chairwoman Roukema, the issue of unsolicited loan checks was first raised at a meeting of the full committee. Without making any preconceived judgments about it, you immediately saw the significance of it and began to schedule these hearings. I think that that was a very good thing to do, and I appreciate it very, very much.
I am pleased to testify in support of H.R. 2053, the Unsolicited Loan Check Consumer Protection Act. It's a bill which I introduced with the committee's Ranking Democrat, Henry Gonzalez. Our bill is aimed at the marketing practices of financial institutions that send unsolicited loan checks through the mail. Companies that offer these products like to tout the convenience of loan checks: ''No lines, no applications, no hassles; just instant credit in the comfort and privacy of your own home.''
However, consumers pay a very high price for this alleged convenience. These loans come with interest rates that run as high as 29 percent, and repayment schedules drawn out as long as 5 years. All of this is disclosed, but in fine print in the middle of a complicated document filled with legalese. When consumer bankruptcies are at all-time high, and when credit card debt and delinquencies are rising, I believe we should not encourage individuals to take on more high-priced debt.
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This issue was brought to my attention by a constituent who received a loan check from an out-of-state bank with whom she had never done any business. She contacted my office when she realized that all she would have to do was sign this check in order to effectuate the loan. Although no one cashed her check, she was concerned at how easy it would have been for someone else to take that check from her mailbox—not to mention the likelihood that it might have been delivered to the wrong address in the first instance—and obligated her to pay a substantial sum at a very high rate of interest.
Not everyone is as lucky as my constituent. NBC News aired a story on the Today Show just yesterday of a family whose experience with a live check was less fortunate. I'd like to ask unanimous consent, if I may, to include a copy of the transcript of that show in the record.
Chairwoman ROUKEMA. Yes, without exception, so moved.
Mr. HINCHEY. Thank you, Madam Chairwoman. In that particular case, a young man received a loan check in the mail. He did not think it unusual that his first name and middle name were switched on the document, as he had received other mail addressed to him previously in the same way. Thinking the check was an answer to his financial problems, he cashed it immediately. When he fell behind on the payments, the financial institution tried to collect from his uncle. The uncle, who had never heard of the debt, was surprised to find a loan from this company listed on his credit report and his failure to pay that loan. He said that when he tried to get the problem cleared up, the company told him he would have to sue his nephew for fraud. Because his nephew had not stolen the check or otherwise misled him, the uncle was reluctant to take that action.
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The Today Show reported that the company eventually corrected the problem, but not until the family had endured a great deal of stress. The show's producer told me that, despite this experience, the nephew recently received another loan check in the mail from the same company.
Congressman Lucas earlier explained the steps the industry has taken to address some of the problems with unsolicited loan checks. I join him in applauding their efforts, but note that these voluntary guidelines do not go far enough to address the fundamental problems with these products.
First, of course, voluntary guidelines do not have the force of law. They can be changed at any moment by those who initiate them.
Second, not all financial institutions that market live checks are AFSA members. In fact, only a small percentage of them actually are.
And, finally, the enhanced disclosure and fraud protection standards do not address the marketing practice of sending live checks in the mail, checks that just need to have a signature on them in order to be turned into cash.
Mine and Mr. Gonzalez' bill, on the other hand, prohibits financial institutions from sending unsolicited checks or other negotiable instruments in the mail. This provision simply adds a step to their marketing process by requiring the consumer to apply for the credit before the check can be sent. Nothing in our bill will prevent banks from filling our mailboxes with offers to obtain high-cost loans by simply filling out the forms and sending them back. Our bill also will protect consumers from liability by placing the burden of proof on financial institutions in cases where a live check is cashed fraudulently.
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Finally, it prevents financial institutions from reporting any information about an unsolicited loan check to credit bureaus. Thus, these provisions will give citizens who never asked to receive a loan in the first place the protection they deserve.
I would like to express my disappointment with the Federal Reserve's position that legislation is not necessary, because they have received only a few complaints in the last two years. Although Governor Meyer expressed sympathy for citizens who have to work out the mess created by a fraudulently cashed loan check, he testified that the Fed favors market forces over consumer protection. It seems that the banking agency charged with writing consumer protection regulations has missed the point of its mission.
Again, Madam Chairwoman, I thank you for holding this hearing and giving us an opportunity to air this issue, and I'd be delighted to answer any questions, if there are any.
Chairwoman ROUKEMA. Thank you, Congressman. I have no direct questions. I will simply observe that, of course, we fully expect that the industry, who will be testifying on the next panel, will be responsive to your questions and explain their own perspective.
I have taken note of the fact that you made reference to non-members who are active in the field, non-members who are in the industry, but not members of AFSA, who are taking these voluntary actions, and that is a significant point to be addressed.
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And with that, I'll turn to Mr. Vento.
Mr. VENTO. Well, I just wanted to commend my colleague and the Ranking Member of the full committee for bringing this matter to the committee. It is a growing practice, and I think one in which there is a great deal of concern on the part of consumers. I expect that, with better surveying, we might find that—and after this practice continues to explode—that this aggressive marketing of this type of check product, and the loans that they ensue, or the credit that they ensue, that it is, I think, an issue where we need an affirmative request on the part of consumers before this type of instrument is sent out from an institution in which there is no financial relationship.
I generally agree with the gentleman and look forward to some of the responses that the financial institutions and other groups have made in terms of trying to safeguard these instruments. But I thank the gentleman. I'm sure he'd be welcome to sit with the subcommittee as we proceed with the panels.
Chairwoman ROUKEMA. Yes, he certainly would.
You know, if we can use your time, Mr. Vento, to come back and make a point that I neglected to make. I listened very carefully to your reference with respect to the assertions on the Today Show, and that you were given permission to include that in the record.
Mr. VENTO. I'd be happy to yield.
Mr. HINCHEY. Yes.
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Chairwoman ROUKEMA. I would also recommend—and I have no way of knowing whether or not the company that's involved here would want to respond to the assertions of the Today Show—but I would assume that I would have unanimous consent that, should the company wish to respond or should AFSA wish to make a specific response for the record, that that would be approved and accepted by the subcommittee. So moved.
Yes, Mr. Bentsen.
Mr. BENTSEN. Thank you, Madam Chairwoman.
Mr. Hinchey, I appreciate your testimony as well.
First of all, your comments and the examples you gave raise the question as to why unsolicited checks, live checks, which do establish a credit contract, are not treated in the same way as unsolicited credit cards, which are prohibited, as the Fed just told us.
But, second of all, I have a question with respect to the gentleman you mentioned who received the unsolicited checks with the reversed first and last name, and then entered into the contract by signing the check and cashing it, or whatever, and then his uncle—somehow a lien was placed on his uncle. Is that the case, that the issuer, the creditor, after not being able to recover from the debtor, then felt they had a lien on his uncle, and how is it that they did that? Was that part of the contract? And how could the uncle have had a lien placed on him without having signed—I assume he would have to sign some documents. It seems like a least a flimsy claim, if nothing else.
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Mr. HINCHEY. Well, I thank the gentleman for asking that question. It is a point of ambiguity that I welcome the opportunity to clear up.
First of all, with regard to the relationship between unsolicited loan checks and credit cards, what our bill does is to build off of that 1970 law which banned the unsolicited mailing of credit cards, and just include now the banning of unsolicited loan checks, because they are, as you have observed, so similar in their operation.
With regard to the example that I gave a few moments ago, which was portrayed on the Today Show, the situation there was this: A young man received an unsolicited loan check in the mail with his first and middle name juxtaposed. He then, thinking nothing of it because he had received a lot of mail, particularly mail of this kind, unsolicited mail with that kind of juxtaposition, his middle name preceding his first name rather than the other way around, he thought the check was addressed to him, and he signed it and cashed it, when in reality the check was addressed to his uncle, who had the same two names but in the opposite order.
Mr. BENTSEN. OK.
Mr. HINCHEY. So, subsequently, the uncle then received dunning bills from the credit company asking him why he had not paid this loan. After all, he'd signed the check and cashed it. He knew nothing about it. It took some time for him to discover that the check had been sent to his nephew. His nephew thought it was his and cashed it before the matter was settled. In the interim period, of course, interest built up; the matter was referred to a credit bureau; his credit rating was put into jeopardy, as a result of this transaction, about which he knew nothing and was not a participant.
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Mr. BENTSEN. It raises questions at least on the laxness of extending of credit and who you're extending it to.
If I might just ask one last thing. Do you know whether or not—and I intend to ask this of the panel; I have to leave for a short time, but I'll be back—do you know whether or not these live check loans are limited only to unsecured credit or do they apply, for instance, to home equity credit or other things like that?
Mr. HINCHEY. I believe that they are just unsolicited lines of credit.
Mr. BENTSEN. Unsecured?
Mr. HINCHEY. Unsecured, rather, lines of credit, yes. And, of course, there is an examination. The companies are not just sending these out willy nilly. They're sending them out in a targeted way. They're targeting people whom they have identified to their own satisfaction as people who have good credit ratings and who are likely, therefore, to pay back a loan.
Now I just would point out that people who fit that description can go to their local bank, if they need a loan, and obtain one very easily at a rate of interest that is, in many instances, a third of that which they're being subjected to in these unsolicited loans.
Mr. BENTSEN. Thank you. I thank my colleague. I thank the Chair.
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Chairwoman ROUKEMA. All right, I thank Congressman Hinchey, and we'll welcome his participation in questioning the next panel.
And now we will have the next panel, that is focusing on the issue of debit cards. Do we have the names up there? Irene Katen, Russell Schrader, Ed Yingling, Kurt Helwig, and Michelle Meier, in that order.
Mr. Vento and I have just consulted, and this is going to be—well, is there anyone on this panel that cannot accommodate a one-half-hour or 25-minute recess of this subcommittee, and then we would expect that we could then resume and take this up in an organized and systematic manner, rather than be back here for a couple of more minutes, and so forth? Can you tolerate a one-half-hour recess? ''Speak now or forever hold your peace,'' Mr. Vento said.
[Laughter.]
Thank you. We appreciate it. And then maybe you can get a bite to eat in that short time, but we will, hopefully, bring down the gavel at 1:00, between 1:00 and 1:05. Thank you.
[Recess.]
Chairwoman ROUKEMA. Can we ask staff to announce to the panelists that we're ready to proceed? Staff, can you help me out here?
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We're looking for Mr. Yingling and Ms. Meier, Michelle Meier. All right, we'll wait. Michelle Meier—we'll wait another minute or so. I understand they are on their way.
All right, we'll open the hearing for this panel. We very much appreciate your being here, and, hopefully, we won't have too many interruptions. I wish I could attest to the fact that these interruptions are constructive ones, but I can't. I'll keep my opinion to myself on that, so we won't be accused of being partisan here.
Irene Katen is testifying on behalf of MasterCard International, where I believe you are Vice President of Business Management and specializes in debit cards, but also some other forms of payment cards as well.
Russell Schrader is here on behalf of Visa U.S.A., and Mr. Schrader is a Senior Counsel and Vice President. Visa, as we've heard, has joined MasterCard and others, and they've been noted in previous testimony as capping the liability to consumers for unauthorized transactions.
Kurt Helwig is the Executive Director of the Electronic Funds Transfer Association. This is a group that is the Nation's leading association dedicated to the advancement of electronic payments and commerce. Mr. Helwig has testified before this subcommittee in the last Congress, and at that time it was on ATM surcharges, as I recall.
Mr. HELWIG. It was, indeed.
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Chairwoman ROUKEMA. Then we have Mr. Ed Yingling. Ed is here on behalf of the American Bankers Association and is the Executive Director of Government Relations. He certainly is no stranger to all of us and has worked closely with all the subcommittee Members on the subject of financial services modernization efforts, and it's my understanding you're still working closely. We're going to see what we can do to put you on the unemployment line as far as that modernization is concerned in the very near future, I would say. Well, we may have another agenda for you very shortly.
Michelle—Meier or Meier?
Ms. MEIER. Meier.
Chairwoman ROUKEMA. Michelle Meier—and I've asked you that question before; I apologize—is Counsel for Government Affairs of Consumers Union, and certainly is well-known as a national consumer advocate and her group is perhaps the best known across the country. Ms. Meier is also no stranger to the subcommittee, and she, too, was before us recently on the subject of ATM surcharges.
So, we welcome you here and we hope that we can get your advice and counsel from the private sector perspective, and, hopefully, you can enlighten us on the problems that consumers have, as well as the perspective of the industry.
Ms. Katen.
STATEMENT OF IRENE KATEN, VICE PRESIDENT OF BUSINESS MANAGEMENT, U.S. DEPOSIT ACCESS, MASTERCARD INTERNATIONAL
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Ms. KATEN. Thank you. Chairwoman Roukema and Members of the subcommittee, my name is Irene Katen. I am Vice President of Business Management at MasterCard International, responsible for U.S. debit programs. And Madam Chairwoman, I'd like to wish you a belated happy birthday last Friday, a birth date we both share.
[Laughter.]
I am pleased to appear before the subcommittee——
Chairwoman ROUKEMA. Well, then, I accept your congratulations and condolences. I accept.
[Laughter.]
Ms. KATEN. I am pleased to appear before the subcommittee this morning. Over the past few years, consumers have embraced debit cards as a convenient alternative to cash and checks, and debit card use has increased dramatically. By the end of June, 19 million MasterCard debit cards were issued by our financial institutions, and we expect that debit card use will continue to grow in the future.
At MasterCard, we have long understood the need to make our payment cards a safe and secure alternative for consumers. In 1994, MasterCard was the first to establish a zero liability cap for lost or stolen credit cards. In June of this year, we again led the industry by being the first to extend this zero liability protection to MasterCard-branded debit cards.
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Under our new rule, no debit MasterCard cardholder will lose more than $50 for unauthorized use of the card. In addition, a debit cardholder can limit liability to zero by reporting the loss or theft of the card within 24 hours. Our new rule represents a substantial strengthening of consumer protection and makes a debit MasterCard one of the safest payment methods that exists today. We are proud that we were the first to provide such a significant protection to consumers.
As part of our efforts in this area, we also examined other possible measures. We considered a shorter deadline for crediting a consumer's account for disputed amounts. We also considered requiring special procedures for activating newly-issued cards. We found, however, that these areas already are adequately addressed through common industry practices, such as stickers like this placed on the card. We also felt a rule dictating particular methodologies might stifle the development of new, possibly more effective, fraud prevention methods. Additionally, our new rule shifts the risk to issuers, incenting them to adopt such effective measures. As a result, we did not see a need to address these issues in our new rule.
Our new rule continues our tradition of consumer protection. For years, MasterCard and our members have combined numerous programs to protect consumers against fraud. These anti-fraud measures include using tools like holograms and tamper-resistant signature panels—all developed and first introduced by MasterCard. Our members have tools like predictive models that monitor consumer transaction patterns to detect fraud.
In addition, MasterCard is extremely active in the area of consumer education. Since 1994, ''Shopping with your ATM Card: A Consumer's Guide to Debit Cards,'' produced by MasterCard, has been made available to consumers through the CIC in Pueblo, Colorado. This guide discusses the types of debit cards, consumer rights, liability limitations, questions to ask your issuers about fees, and safety tips. More recently, we joined with the consumer organization Call for Action to create a new educational brochure which provides tips to consumers on how to protect their debit cards.
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Our efforts to prevent fraud and educate consumers have been highly successful. Last year, of the hundreds of millions of MasterCard debit transactions, less than 2 in 10,000 were fraudulent. Most of those were absorbed by banks, and now consumers are protected by MasterCard's limited liability.
In addition to the protections provided by MasterCard, debit cards are extensively regulated under the Electronic Funds Transfer Act and Regulation E. We believe that our voluntary efforts, combined with the extensive requirements imposed under Federal law, provide consumers with comprehensive protection. We do not believe that any additional regulation is necessary.
Additional regulation may have the unintended effect of inhibiting the kind of rapid response to consumers shown by MasterCard when we recently adopted our new rule. Moreover, any regulation beyond the current scheme may limit the ways competitors can respond to consumers, and thereby curtail the creative forces of the market in a way that may result in fewer choices for consumers.
That concludes my testimony, and I will be happy to answer any questions.
Chairwoman ROUKEMA. Thank you.
Mr. Schrader, please.
STATEMENT OF RUSSELL W. SCHRADER, SENIOR COUNSEL AND VICE PRESIDENT, VISA U.S.A., INC.
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Mr. SCHRADER. Yes, thank you, Madam Chairwoman and Members of the subcommittee. Good afternoon. My name is Russell Schrader, and I'm senior counsel and vice president for Visa U.S.A.
I'm delighted to be here this afternoon to talk to you about Visa debit cards. Visa debit cards are an enormously popular product. They are, in fact, the fastest-growing consumer card in our history. There are now 119 million Visa debit cards, 40 percent more than there were just a year ago. This includes 50 million cards in the United States, and in fact, one in four Visa transactions today is a debit card transaction.
Consumers have embraced debit cards for a number of reasons. First, they like to have convenient access to their checking account funds. Second, they appreciate the wide acceptance by merchants throughout the world. Third, they appreciate the security that is associated with carrying a Visa debit card rather than checks or rather than cash. All of this is without the hassles that are associated with such things.
The fact that debit cards do not require a PIN at the point-of-sale has raised some concern. However, this feature, that you can make a purchase by signing a sales receipt, is what has made 14 million merchants worldwide, including 3 million merchants in the U.S., able to accept the debit card. Most merchants, such as mom-and-pop stores and small businesses, simply do not have the PIN-based technology and would be unable to accept the Visa debit card if that were required.
Some other concern has been over the liability for lost and stolen cards. I am pleased to report that Visa has taken action. Under the new Visa rules, a consumer who reports a debit card lost or stolen within 2 business days has zero liability for unauthorized transactions. Let me repeat: zero liability for prompt reporting of lost or stolen cards. And in other cases, the maximum liability for unauthorized transactions is $50. What's more, we have extended this rule to credit cards. So liability is the same for all Visa cards at the point-of-sale.
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In addition, the consumer will get provisional credit in his or her account for unauthorized check card transactions within 5 business days. In setting this requirement, we've balanced on one hand, the need for a bank to investigate unauthorized transactions, and on the other hand, the need for a consumer to have access to funds in his or her account.
Now these $50 and 5-day requirements are what we consider outside maximum limits. Our members already today often do better for their customers, and we encourage them to do so.
Also, under the new Visa rules, an unsolicited Visa check card cannot be used until the cardholder contacts his or her bank to activate that card.
We believe additional legislation and regulation is not needed to address the unauthorized debit card transaction issues. Visa has longstanding anti-fraud provisions and programs, as well as relationships with law enforcement officials. And Visa's new rules, together with existing Federal and State law, already effectively address these concerns.
Moreover, legislation and regulation in this area could be counterproductive. We have enacted the right rules for debit cards. We're not sure what the best rules will be for other consumer products we'll be developing in the future—smart cards, Internet payments, or secured electronic transactions, or SET, technology. The wrong consumer rules for these emerging products could impede their development or stop them entirely.
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The industry today has responded to consumer concerns. Voluntary actions like these in private industry should be encouraged, and we will continue to earn the trust that Visa has earned over the years through our brand.
I've only been able to touch on a few points, and I have submitted a more detailed written statement. I'd be pleased to address any questions you have on it.
Chairwoman ROUKEMA. I think this is the time to break for this vote. It's a conference report, Mr. Vento, and I have concluded that we have to go over there. If it were simply a motion to adjourn, I would have been tempted to stay here.
[Laughter.]
Thank you. We'll be back very shortly.
[Recess.]
Chairwoman ROUKEMA. We're going to continue with this, so Irene and I are not going to have to share another birthday before this hearing is over.
[Laughter.]
Thank you. Mr. Vento and I decided that we were not going to go and vote on a motion to adjourn. We're more interested in what you have to say for us. So we'll get on with our—I believe Mr. Schrader had concluded; correct?
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Mr. SCHRADER. Yes, I had.
Chairwoman ROUKEMA. Now Mr. Helwig, Executive Director, Electronic Funds Transfer. I think I already introduced you, Mr. Helwig, and we're eager to hear your testimony. Thank you.
STATEMENT OF KURT HELWIG, EXECUTIVE DIRECTOR, ELECTRONIC FUNDS TRANSFER ASSOCIATION
Mr. HELWIG. Thank you. Madam Chairwoman and Members of the subcommittee, my name is Kurt Helwig, and I'm the Executive Director of the Electronic Funds Transfer Association, the Nation's leading inter-industry, nonprofit trade association dedicated to the advancement of electronic payment systems in commerce. I thank you for the opportunity to appear before you this afternoon to discuss the issue of debit cards and applaud the oversight that this subcommittee is exercising.
For ten years, the EFT Association has provided objective information to its members, Congress, and the Executive agencies on market implications of legislative and regulatory policies governing electronic-based payment initiatives.
Working with the Federal Reserve Board, Mr. Vento, and others, in implementing and developing the Electronic Funds Transfer Act, which guarantees protection for the consumer electronic payment transactions that we are addressing today; developing ATM access regulations for the Americans with Disabilities Act, and working with this subcommittee on ATM surcharging and fee disclosure. Our recent work includes testimony earlier this summer, before the Senate Banking Committee, on the issue of ATM surcharging. My hope is that this hearing will be somewhat less contentious than that.
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The EFT Association's diverse membership includes financial institutions, EFT networks, telecommunications providers, bank card associations, retailers, ATM and POS manufacturers, consumers, and executive agencies working together to answer the increasing consumer demand for convenience in the payment systems arena.
While offline debit is a relatively new payment product, it is a growing part of a dynamic and rapidly changing payments industry, offering an array of convenient payment options. These services include electronic commerce, home banking initiatives, smart and stored-value applications, enhanced ATMs, and increased card functionality, such as that found in a debit card.
One may look at an offline debit card as combining certain features of an ATM card and a credit card with that of a check. In examining this issue, it is important to understand the two types of debit cards that currently exist, and the distinctions between them. Online debit cards act as enhanced ATM cards, where money is drawn immediately from your checking account. As we discussed earlier this morning, they require a personal identification number, or PIN, for authentication. Offline debit cards use a model that is more similar to that of a check, in that the verification is signature-based. These cards are widely accepted in merchant locations throughout the country that accept credit cards, and in fact, utilize the same infrastructure. Consumers are shown to enjoy the convenience and ubiquitous access offered by these cards.
Both types of debit cards are currently regulated by the Federal Reserve Board under the very detailed Regulation E of the Electronic Funds Transfer Act, the contents of which Governor Meyer has already described.
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As is often the case with innovative products, there has been some initial confusion in the minds of consumers regarding the rights, risks, and responsibilities of debit card usage. Visa and MasterCard, responding to this need, went beyond the prescribed liability rules of Regulation E; they now offer consumers even greater protection from loss by capping the consumer's liability for unauthorized debit card usage. The protection they afford is at least as good as the credit card model, and in some cases even better.
For example, consumers have no liability for purchases made with a lost or stolen Visa cash card that they report within 2 days. This is an excellent example of the free market doing what it does best, self-regulating and responding to the changing needs of the consumer in order to deliver the best product at the best price.
Both Visa and MasterCard, while fierce competitors, have also initiated a nationwide program to better educate consumers on the different options, risks, and responsibilities associated with these cards. The EFT Association believes that the industry has a responsibility to inform the consumer of these distinctions, firmly believing that an educated public facilitates consumer acceptance to new products and are essential to the success of that product. We intend to work closely with the card associations, our members, and consumer groups to increase this awareness.
While debit cards are relatively new, they are a growing part of a dynamic industry. I would like to offer a few brief statistics to demonstrate the growth of the debit card industry. Offline card issuances are estimated at over 70 million cards, up from 60 million in 1995; offline transactions, approximately 1.2 billion, up 46 percent from 1995; over 120 million online POS transactions weekly, 60 percent more than 1996. These transactions occur at a wide variety of locations that include gas stations, grocery stores, retail outlets, and doctors' offices. Debit cards can be used at nearly 165,000 ATMs nationwide, growing daily, with offsite deployment and nonfinancial institutions aggressively competing in this area.
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As Congress, and specifically this subcommittee, examines these issues, it is important to remember that debit cards are part of a larger payments revolution that has been created by growing customer demand for convenient access to payment options. Technology now enables us to exercise these options at home, work, on vacation—if anybody has time for those anymore—24 hours a day, 7 days a week.
While it is important for this subcommittee to exercise oversight, the subcommittee should recognize—and, as Mr. Barrett said earlier—applaud the very positive self-regulation that has emerged proactively from the bank card associations.
In the best competitive spirit of being consumer-friendly, MasterCard led off with an excellent rule to limit consumer liability, and Visa initiated an even better consumer liability rule. As payment products, including debit cards, evolve and mature, the industry is best positioned to again modify the consumer rules, if need be. A law like the EFT Act, once passed by Congress, provides little or no flexibility. Debit card liability is an area best left to the private sector.
I thank you, Madam Chairwoman, for holding these hearings and for the opportunity to testify before you this afternoon, and would be delighted to answer any questions that you may have.
Chairwoman ROUKEMA. Thank you.
Mr. Yingling from the ABA
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STATEMENT OF EDWARD YINGLING, EXECUTIVE DIRECTOR, GOVERNMENT RELATIONS, AMERICAN BANKERS ASSOCIATION
Mr. YINGLING. Thank you, Madam Chairwoman and Members of the subcommittee. I'm Edward Yingling, Executive Director of Government Relations at the ABA. I apologize, Madam Chairwoman, for my being a last-minute witness. As you know, we generally try to use real bankers as our witnesses, but we had an unavoidable cancellation, and you're stuck with me.
Just commenting on your introduction, I'll assure you that, after 23 years of working on the issue, I would be happy to be put out of business on financial modernization.
[Laughter.]
And I know that this subcommittee would find plenty of other things for me to work on.
Members of this subcommittee and the media have recently raised important questions about debit cards, particularly those that may be used without personal identification numbers, or PINs. It is clear that educational efforts are needed with respect to how these cards are used and what consumer protections are in place. The banking industry is hard at work on that educational effort, and we thank you, Madam Chairwoman, for calling these important hearings to discuss these issues.
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If these cards are going to be successful and accepted by consumers, it is important that consumers understand how the cards are used and also understand their rights, protections, and responsibilities. The ABA, Visa, and MasterCard are taking steps to ensure that consumers fully understand these matters.
The first point I would like to make is that these cards are becoming very popular with millions of consumers. Why? In part, this is because the cards avoid the hassles, delays, and costs associated with writing a check. A debit transaction usually takes less time than a check transaction and requires no identification. In addition, the cards are more universally accepted than checks. As we all know, many retailers do not accept checks, but do take Visa and MasterCard and their debit cards.
Furthermore, consumers who revolve credit card balances can avoid additional interest by paying from their checking account with their debit card rather than using the credit card. Debit cards also offer a convenient payment option for many people who do not have credit cards. And, finally, over time, debit cards will lower the costs of banking transactions for consumers. Simply put, banking institutions have developed a product that consumers are enthusiastically embracing.
Second, I'd like to discuss the consumer protections that are in place today. Notwithstanding their great convenience and popularity, check cards usable without a PIN may be more vulnerable to unauthorized use than cards that require the use of a PIN. A thief or unauthorized user may use the card without a PIN by forging a signature.
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So far, fraudulent use of these cards has been minimal. However, to ensure that consumers are not subjected to unwarranted risks, Visa and MasterCard have adopted policies which provide greater protection for consumers than does current law. Since the other witnesses have already outlined those new initiatives, I won't list them here.
In addition to these bank card association protections, consumers are already well-protected by Federal law, if they report the loss of their card in a timely fashion. Specifically, under the Electronic Funds Transfer Act, liability is limited to $50 if the consumer reports the loss or theft two business days after discovering—and, Madam Chairwoman, I noticed you emphasized that point in your introduction; that it's two business days after you discover, not after the actual loss; that's an additional protection. Most banking institutions have generally waived even this $50. It is also worth noting that the burden of proof in these cases is on the bank, not on the consumer, to show that the transaction was not fraudulent.
As I stated earlier, if these cards are going to be accepted by consumers, it will be necessary for consumers to understand how the cards are used and consumers' rights and protections. Both card associations, as well as the ABA, are taking very aggressive steps to ensure that consumers fully understand these matters. We need to go beyond the legalistic and uniformly unread disclosures required by law and make sure consumers really understand the products and their potential risks. We are committed to doing just that.
Third, we do recommend that further legislation not be enacted at this time. We believe the industry's voluntary measures obviate the need for legislation, and in addition, statutory provisions invariably are inflexible and fail to anticipate every existing or future situation, creating unintended problems. This can be particularly true with new and still evolving products, such as debit cards.
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ABA applauds you, Madam Chairwoman, for calling a hearing on this important matter. You and Members of the Banking Committee have provided a very valuable service in raising the appropriate concerns, and we pledge to keep working with you to make sure these concerns are addressed. We believe that the enthusiastic consumer acceptance of debit cards demonstrates the value of this product. We also think the industry is responding to concerns about liability and other matters with efforts to ensure that consumers are properly informed and protected.
Thank you for this opportunity to testify.
Chairwoman ROUKEMA. I thank you.
And now the consumer voice here, particularly Michelle Meier, Consumers Union.
STATEMENT OF MICHELLE MEIER, COUNSEL FOR GOVERNMENT AFFAIRS, CONSUMERS UNION
Ms. MEIER. Thank you very much. I'm pleased to be here today, and I, too, would like to commend you, Madam Chairwoman, for convening this hearing so quickly after the problems associated with offline debit cards caught the public eye in the later part of the summer.
My organization and other consumer groups are very concerned about the basic design of this product in terms of the security of family savings. Traditionally, our society has placed a lot of value on safeguarding funds held by banks, making sure that they're not only FDIC-insured to a large extent, but also that they are safe and secure from fraudulent access. And, unfortunately, this new development of an offline debit card violates that basic principle and exposes consumer savings to what we view as an unreasonable risk of fraudulent loss.
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We very much support the bills that have been introduced both in the House and recently, as early as yesterday, Senator D'Amato introduced his own approach to addressing this new development and the payment system. We definitely think that this is a new product. It has really turned a corner in terms of the type of electronic payment system design that we're facing that makes a write and overhaul of the Electronic Funds Transfer Act necessary.
As you know, that law was written in the 1970's, when ATMs and electronic transfers were really new, and it has served us very well, I must say. It's one of those laws that has tended to be at the bottom of even the bankers' complaint list. And I certainly have not heard many calls from consumers who felt ripped-off or concerned about the rules governing ATM cards. But with this new card, with its highly unsecure nature, we do think that new protections are needed, and the liability rules, in particular, need to be addressed.
Aside from the design of the product itself, we must express our concern with how these new cards have been marketed. The numbers have been put out already today, that there are now about 70 million cards in circulation in this country, offline debit cards, and many, if not the vast majority of these cards, have been marketed to consumers as replacement ATM cards, or one way or the other, without the consumer's express request for this type of offline product.
We're very concerned that many consumers, like myself, are walking around with these cards, not even realizing that they have one. That was my circumstance. It wasn't until months after I got this card, which was billed to me by my bank as an ATM replacement card, that I realized that I was holding an offline debit card. Unfortunately, we don't think that this type of marketing practice allows consumers to exercise the informed consent to accept this higher risk of lost or stolen funds that we think is really necessary.
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And, finally, I'd like to comment on the question of whether these voluntary efforts, which we applaud, by Visa and MasterCard are enough for consumers. We definitely do not think that is an appropriate response to this really revolutionary turn in electronic payments technology in this country. Everyone knows that operating rules are not enforceable. We already have a problem with confusion among consumers about which law, Reg. Z, Reg. E; now we would have the potential application of Reg. Z, Reg. E, or Visa or MasterCard's operating rules in any individual circumstance.
What we need is greater simplification and clarity about liability, and so forth. So we would hope that, with this not emerging, but actually emerged, technology of offline debit cards, that Congress will update the FTA to respond to the need to greater protect consumers. Thank you.
Chairwoman ROUKEMA. Yes, Mr. Vento, I don't quite know where to begin here.
I think you've made an excellent case—that is, the case of the industry has been consistent, not only in form, but mostly in specifics, with the way the Fed testified, and that gives me more confidence than I had when I came here today, and I came with an open mind. But I am not yet clear, let me give you the opportunity to make the case against needing further legal protections such as informed consent, OK? That's very little to require, it seems to me. Make your case as to why you don't feel there is need for informed consent.
And then I'm not completely conversant on both the mechanics, as well as the legalities of the use of the PIN money, but I did note that Mr. Schrader made some reference to—did I say ''PIN money?'' I didn't mean PIN money—the PIN number use, and why it would not, should not apply to these debit cards, and you mentioned specifically the mom-and-pop shops and the technology necessary.
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I wonder if there are other cases, more defined ways that you can absolve me of the idea that PIN numbers sound very sensible, you know. So if you would go over that again, I'd like to give you the opportunity to be precise, not only with the PIN, but the question of unsolicited distribution or the informed consent, for those that are unsolicited, to getting the debit card.
I don't see at this point in time—I'm not saying I support Mr. Hinchey, but I don't see the overwhelming case against it, although the Fed feels as though it would be premature, given the technology and what we know today and the way they are already able to monitor the situation.
Who would like to be first on it? And we don't have a lot of time, but—yes, Ms. Katen?
Ms. KATEN. Yes. With regard to the PIN and the signature merchant, there are PIN-based programs out there; MasterCard has its Maestro program, but that requires the merchant base to gear up and have PIN-pad technology in place. To date, there's about 200,000 merchant locations in the U.S. that are PIN-capable, but MasterCard is accepted at 14 million places worldwide, over 3 million in the U.S. alone. So by adding the MasterCard logo to an ATM card, the consumers get to use their ATM card to make purchases at all 3 million-plus merchants in the U.S.
Mr. YINGLING. If I could just add something to that——
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Chairwoman ROUKEMA. Yes, Mr. Yingling.
Mr. YINGLING. On that point, to some degree if you said you have to use a PIN, thousands of merchants would say, ''We're not doing it,'' which would——
Chairwoman ROUKEMA. That's where, I guess, Mr. Schrader was—yes, go ahead.
Mr. YINGLING. ——would affect the availability of the card, and you may still have some people using the card, but you have a chicken-and-egg thing here with consumers. If merchants don't accept it, then consumers aren't going to use the card. And there are legitimate concerns expressed about the safety and soundness to the consumer of a debit card, but think of the alternative. There is no payment system that we've come up with yet that doesn't run some risk to the consumer. This is an oversimplification, but, to a large degree, the ability to carry a debit card in your wallet is a substitute for cash. So that if I have a debit card in my wallet, I may not have to carry $200 in cash; I may only have to carry $50 in cash.
Chairwoman ROUKEMA. That's one of the reasons it's so popular and catching on so quickly.
Mr. YINGLING. That's exactly right. Now are you safer as a consumer with cash or with a debit card? Well, if you lose your wallet and lose your cash, unless you have a Good Samaritan, your cash is gone. If you lose the debit card, one, the person who picks it up has to decide that he or she is going to engage in an explicit fraud—not just pocket it. They have to go and use it in order for you to take a hit. And, second, MasterCard and Visa have now said, ''if you call us up and tell us you've lost your card, your liability is zero.'' Now are you safer as a consumer with a debit card or cash? It seems to me that actually you're safer with the debit card. And so I think you have to think of the possible risks involved there.
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Chairwoman ROUKEMA. Well, don't misunderstand; I congratulate the industry for their voluntary efforts; they're very excellent. I just don't know if they're really adequate enough, whether we've looked at all the potential loopholes. And I hate to have an enormous scandal on our hands, where something's gotten out of control, before we respond.
Mr. YINGLING. Just one comment on that.
Chairwoman ROUKEMA. Yes, and then I'll go to Ms. Meier. Yes?
Mr. YINGLING. You know, there are voluntary guidelines and there are voluntary guidelines within industry, but offline debit cards are exclusively MasterCard or Visa, and so, to some degree—and I don't mean this legalistically—these are like self-regulatory bodies, because every bank has to follow these rules. And to that extent, they are enforceable, because if they don't follow the rules, they're out of MasterCard and Visa. So I think they're stronger than what we usually think of in terms of voluntary guidelines.
Chairwoman ROUKEMA. I see. All right. Ms. Meier, I'm sorry, but I think—does Mr. Helwig want to——
Mr. SCHRADER. Mr. Schrader.
Chairwoman ROUKEMA. Oh, Schrader, I'm sorry, and then we'll go to you, Ms. Meier, because I did direct this to the industry representatives initially. Yes?
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Mr. SCHRADER. Here at Visa we look at what's important to consumers and we want them to feel comfortable with our check card product. Now we want it to be widely accepted, and we found that the widest acceptance comes, and what they feel most comfortable with, is the signature-based card. Some merchants do have PINs, as Irene pointed out, but the vast majority do not have PINs, and those are the mom-and-pop and the small businesses. They don't have the technology; they don't want to invest the extra money to trade up. And we would be hurting those businesses, as well as depriving the consumers of the benefit of using the card.
So what did Visa want to do? We wanted to make sure that, regardless of whether the transaction was signature-based or it was PIN-based, that the consumer at the point-of-sale would receive the exact same liability, the maximum of $50. Lost or stolen cards, PIN-based, or signature-based, it doesn't matter; report it within two business days of discovery; zero liability. So our Visa rules have eliminated the need to treat PINs differently from the signature-based.
Again, we have a number of additional anti-fraud programs. Several weeks ago, one of my colleagues, Dennis Brosnan, testified before Senator Bennett, who held extensive hearings on card security and fraud. I'd be happy to make a copy of our statement and transcript available, to be included in the record.
Chairwoman ROUKEMA. Yes, if you would do that, I would appreciate it.
Chairwoman ROUKEMA. And I have been corrected; I made reference to Mr. Hinchey's; that is the question for the next panel, I understand.
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Yes, Ms. Meier.
Ms. MEIER. I had a couple of brief responses to your question and the responses you got. I do think that individual consumers can have different attitudes about this card. I think I would probably represent the type of consumer who feels like she has many alternative payment options available—checks, cash, credit card, online debit card—so that the risk of this offline card is not one I'm personally willing to accept.
I think it's important to make really clear, though, that I don't think anyone is talking about legislating a ban on these cards. What we're talking about is, given the significant new features of these cards, including the fact that they don't require any kind of code to ensure that the user is the authorized user, we probably need to think about some enhanced consumer protections to directly address those increased risks that weren't there when the law was passed in the 1970's. And prime amongst those reforms, I think, is ensuring that the cards are only put in the wallets of consumers who want to bear that risk, rather than market it and mail it out as ATM replacement cards.
Chairwoman ROUKEMA. All right, thank you. Thank you.
Do you have a final comment, Mr. Helwig?
Mr. HELWIG. If you don't mind——
Chairwoman ROUKEMA. If Mr. Vento doesn't mind—I've gone long over my time limit.
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Mr. HELWIG. Well, I just wanted to add one thing, if I may. It is the consumer protections that the card associations have put in place are not only in the interest of the consumer; they're also in the interest of the card associations, because the security that comes with those protections are essential to the overall product security, the product success as well, and that is why they have joined forces with consumer groups to engage in this very widespread education campaign to consumers, to inform them of the differences and of the liabilities that they have.
Mr. SCHRADER. Madam Chairwoman, I'm afraid we didn't answer your question that you asked in your opening question. If you'll grant me 30 seconds, I'll address that one.
Chairwoman ROUKEMA. Thirty seconds, yes.
Mr. SCHRADER. And that was about unsolicited cards and informed consent.
Chairwoman ROUKEMA. Yes, please.
Mr. SCHRADER. In that regard, Visa has undertaken a rule change that will go into effect that any unsolicited card—that is to say, one that a consumer is not expecting in the mail, because he or she has opened an account—will not be valid until that person calls up the bank or otherwise activates that card. So that person will, in fact, be giving an informed consent by turning on that card by contacting the issuer.
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Chairwoman ROUKEMA. Thank you very much.
Mr. Vento.
Mr. VENTO. Thank you, Madam Chairwoman. Good questions.
I appreciate the statement of Mr. Helwig that you made on page 4, because it says, ''One may look at an offline debit card as combining certain features of an ATM card and a credit card with that of a check.'' That was sort of the statement I made to Governor Meyer, and he worked very hard on not trying to agree with me about it. So I don't know that you want to agree with me, but to most of us that's exactly what consumers see. That's what they're seeing.
One of the things I would just suggest to all of you, and that is that the notices, you know, it's in everybody's interest to avoid problems with lost or perhaps stolen cards or cards that are being misused. But I'll tell you that the notices that come out, come out with the initial contract or when the card is reissued for a two-year period, and that's it in terms of who to call and what to do. Although there may be some fine print on the back of my bill, it's that initial notice. And I would just suggest that I think that periodically, along with the other material that I get with these cards in terms of trying to entice me and tempt me into doing various transactions, you might want to share that helpful information more often. I think it would be helpful, because if you're interested, and what we're all interested in is educating the consumer, then one of the main areas is to provide them with the tools, so that they can notify you and prevent the misuse of the cards. And I think if you'd ask most consumers, and you probably have done surveys on this, they probably feel they'd like to have a little reinforcement in terms of that area.
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One of the issues is, since we're kind of moving—I mean, it's clear to me that we're moving from the signature card or from the credit card to the debit card and to now the signature card, is really obviously something that is much more consumer acceptable. I guess that's why we're moving in that direction. Merchants like it. They don't have to—you know, you're sitting at a restaurant or you're off doing something; it's a little inconvenient to bring it over and remember your four or five digits that you have to remember with a PIN number. It doesn't look cool to sit at Antone's putting in numbers; right?
[Laughter.]
You know, it's much better to pull out your fake Montblanc pen and sign.
[Laughter.]
I had a real one once, but, like most pens, I keep losing it. So somebody had quite a find there.
In any case, the issue is, is there some great cost barrier, or is it just social barrier with regard to this point-of-sale? Because I note that's where we're going. Grocery stores have it. It's a lot easier there at the checkout, you know, at Safeway or back home at Cub or something, to sit and punch your numbers in. I don't do it, but I know that a lot of folks do in terms of point-of-sale. So I don't know. Is that point-of-sale, because you have to have an electronic transaction anyway that takes place when you verify that someone has an account with a credit card or with an online or offline debit card, maybe even an online one, I guess, too. You're verifying that there is some money in the account; that they have an account; the card wasn't stolen, I guess. I don't know all the information that comes across. I should work as a clerk for a few weeks and get up to speed on this.
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But is there some big cost differential here between that point-of-sale, or is it more of a social factor or is it a cultural thing that we have with regard to—Mr. Schrader, Mr. Helwig, you know, briefly——
Mr. SCHRADER. Yes, I think that you pointed out, Congressman, the perfect example of the drawback of the PIN transaction. When sitting in a restaurant and presented with the check, you could have a PIN-pad with the world's longest extension cord.
Mr. VENTO. Yes, yes.
Mr. SCHRADER. Or you would have to get up and go to the back and enter a PIN, and that's inconvenient.
Mr. VENTO. Yes.
Mr. SCHRADER. In small shops where there's one or two employees or it's a small mom-and-pop business, once again, they have their Visa card setup right now, and to ask them to incur an additional cost to upgrade that equipment is something that we have to weigh against what their benefit is, and we don't want to discourage them from taking the cards. So we've looked at: How does this impact the consumer? What do we do about the consumer's liability? And that's why we've taken these steps to make it indifferent to the consumer. They don't bear any more liability for signature, or for PIN-based, with unauthorized transactions. So that's something that we've taken voluntarily to eliminate those.
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Mr. VENTO. I want to get back to that in a minute. I heard that and I want to get back to it.
So anyone—I would think most of your answers would be similar to that? Mr. Helwig.
Mr. HELWIG. Yes, it would be similar. There are a vast number of retail outlets that do not have that kind of technology currently, and they would have to ramp up here to make that technology——
Mr. VENTO. But is this a big deal? I mean, a point-of-sale—if a grocery can have it in every single line there—it's a wired deal where you've got a wired thing going to verify someone has an account, and it has to come back. So, you're going to have to have a certain amount of it in terms of—as you said, maybe it's an extension cord; maybe it's a—you know, we're obviously living in a cellular age here. So it isn't necessary to have a cord, I guess.
Mr. HELWIG. But it's one thing for a grocery store, particularly the larger ones that serve this region, to invest in that kind of technology.
Mr. VENTO. Well, what is the investment difference? I guess I'm interested in the facts, if you can get them for us. I think that's meaningful to me, and I think it would be to the subcommittee, to know the difference between verifying an offline or online debit versus with PINs or without.
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Mr. HELWIG. Madam Chairwoman, I would be very happy to include in my written comments some prices of PIN pads and what they cost to install, and telecommunications and the hardware.
Chairwoman ROUKEMA. Yes, we would welcome that.
Mr. VENTO. They're not cellular, I guess, at least not now, but they could be, couldn't they?
Mr. HELWIG. Not yet, not for the most part. Or there are some.
Ms. MEIER. Yes, I'll be interested to see that data, too, and you're asking exactly my question.
Mr. VENTO. Yes, well, I plagiarize a lot.
[Laughter.]
Ms. MEIER. I haven't asked it yet, so you haven't plagiarized.
[Laughter.]
But it was in my mind.
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Mr. VENTO. Oh.
Ms. MEIER. And my, at least tentative answer, is that to some extent we're seeing this technology overcome, at least for the moment, the PIN-based technology at the retail level, almost by coincidence, because there is simultaneously an increasing implementation of PIN-based technology at the retail outlet. In fact, my testimony cites a number from Bank Network News that there was 63 percent growth in the number of point-of-sale debit card terminals that would input the PIN at the grocery or the retail outlet between 1995 and 1996.
So we're seeing a lot of development in the industry and competition over different types of infrastructures and technologies, and it's unclear to me which one is going to be the one that stays.
Mr. VENTO. Well, you've got to enter things like thumbprints, and so forth.
Mr. Yingling.
Mr. YINGLING. Just one comment, and that is, we are probably moving toward more and more merchants having the PIN technology, but there would be times when you might not be able to use it at all; when you call up to make a reservation, for example, and you give your credit card number to the rental car company or the hotel or something like that. We don't have any way to use a PIN for that right now, and debit cards are sometimes used in that instance as well.
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Mr. VENTO. They are. There are different consumer protections. One of the other questions, of course, about this whole voluntary issue, and I think you should be commended for it; I think it's very helpful. But, you know, if a large financial institution like NationsBank or US Bank, or in my area, decides that they're not going to go along with this $50 limit; that's what they decide, that they weren't going to go along with the limits on ATM that MasterCard and Visa decided; at one time there was a court case on it, because it was one of the rules of Visa or MasterCard. I don't remember the details, but these don't really have the legal standing of law. Can you exclude that organization, like these large banks that we have? I mean, it's pretty hard to exclude Nations, wouldn't it be, from being one of your 21,000 or 27,000—I can't remember the number—of financial institutions that you each have arrangements with?
Ms. KATEN. Mr. Vento, I'd like to answer that. When MasterCard announced it, this was voted on by our issuers of the card; they wanted MasterCard to do this and announce it, and it was voted by our U.S. board, which is representative of our member banks. And quickly, after MasterCard did it, NationsBank and Bank of America, which issue Visa check, quickly followed suit. So they understand the importance of giving consumers protection.
Mr. VENTO. But what happens if they decide not to extend it to me? Do I have any legal standing? What's my legal recourse? Do I go to court and force my bank—say that I lost $50 and I want you to make it up, and they say, ''No way, Mr. Vento.''?
Mr. SCHRADER. If that happened, they could not issue a Visa debit card.
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Mr. VENTO. So you would withdraw from NationsBank the account?
Mr. SCHRADER. The rules that are established by Visa apply to all the Visa cards and are adopted, as in the case of MasterCard, in consultation with the board and are approved by the board.
Mr. VENTO. Yes.
Mr. SCHRADER. And in order to issue these cards, you abide by the rules and regulations as well as those of our association.
Mr. VENTO. But wasn't it a rule that banned the—that was banning the—well, didn't you make an effort to ban the ATM fees? And wasn't that overturned in a court case, where they said you have to? I mean, you're obviously subject, if you're doing business in the interstate basis here, you're subject to certain court tests, and so forth, in terms of what type of contract you can enforce. If I have a contract here with you for issuance of these cards, you're changing your rules—you know, you changed them two months ago; maybe you're going to change them in two months more. I mean, I know you can tell me I can't have a Visa if I don't want to go along with the rules, but I don't know that you can do that with the financial institutions that issue them.
Mr. SCHRADER. Well, the majority of—and I believe it was unanimous—Visa members adopted this rule because they understand the importance of protecting the consumers and to continue to earn the trust that Visa has established with our——
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Mr. VENTO. But we run into sometimes truculent financial institutions. I've got one that doesn't think too much of CRA in my area. Most of them do a very good job.
Chairwoman ROUKEMA. I have the feeling Mr. Yingling would like to respond.
Mr. VENTO. Oh, pardon me. I didn't watch.
Mr. YINGLING. Just briefly on the——
Chairwoman ROUKEMA. And then I think we'll have to go on with Mr. Bentsen.
Mr. VENTO. I told him I wouldn't pick on him. So he's volunteering, I want to stipulate.
Mr. YINGLING. I'm volunteering. On the ATM example, I think what really happened there is you had States that passed specific laws that said you couldn't enforce the rules, and so you had a dozen or so States that came in and said: We don't care if you have a rule against ATM access fees; we're telling you you cannot enforce that. So if a State came and passed a law outlawing the ATM—I mean the debit card rule—we might have a problem. I wouldn't think that would happen. So that basically on these rules—everybody using an offline debit card must follow either the MasterCard or the Visa rules—they don't have any choice.
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Mr. VENTO. I think it's probable that some States will probably have the same notion as Members of Congress, that is, plagiarism disease being what it is——
Mr. SCHRADER. Congressman Vento, yes, the ATM surcharge ban that Visa did have in place was, in fact, challenged in the Nevada courts, as you well know, and it was the Nevada State legislature that forbade Visa from enforcing its ban on ATM surcharges. I would hope that State legislatures would not forbid Visa from limiting consumer liability for unauthorized use.
Chairwoman ROUKEMA. Or validation that you referred to?
Mr. SCHRADER. That's right.
Chairwoman ROUKEMA. The 1–800 number.
Mr. SCHRADER. Yes.
Chairwoman ROUKEMA. Which, by the way, how soon do you think that's going into effect?
Mr. SCHRADER. The rule is scheduled to take effect early next fall. It will be mandated across the Visa system. Many issuers are already complying with it today.
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Chairwoman ROUKEMA. Thank you. Mr. Vento, are we going to yield to——
Mr. VENTO. Oh, sure. Oh, I'm sorry.
Chairwoman ROUKEMA. Mr. Bentsen is here. Thank you.
Mr. BENTSEN. Thank you, Madam Chairwoman.
Under the Visa and MasterCard rules which you've now adopted, if there is an unauthorized debit or charge that is made through a merchant, to whom does the liability belong, to the issuing bank? And that is the same as under a credit card, if something shows up on your statement, and you say, ''I didn't buy this lawnmower; I don't know who did.'' So it goes back to the bank. So it's the same in that regard.
First of all, let me say, and I didn't get a chance to mention this. Governor Meyer, before he left, said, in effect, I think, that there was really not that much difference between the ATM card with the PIN and the debit card, and I think that's incorrect in a few respects. Because while, in fact, you have the PIN, that you can utilize the PIN with the debit card, you also have the signature authorization, where there is the potential for fraud to occur. And that would be, again, the same that everybody writes their PIN number on the back of their ATM card, and if somebody writes their PIN number on the back of their ATM card, then they probably deserve what they get. So I think this is a gray area that we're looking at.
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Why is that you chose to—and I appreciate the fact that you have put this new rule in; I think that's very commendable. But why now as opposed to when you first entered the debit card business?
Ms. KATEN. Well, MasterCard decided to institute the limited liability rule because consumers were confused between credit card liability at $50 and debit at $50-plus. They did see the MasterCard brand, and they had come to expect a level of protection with that brand, and they thought the liability was limited to $50. We want consumers to be confident using MasterCard cards, whether they're credit cards or whether they're debit cards, and MasterCard talks to consumers very often on our debit card products; we find consumers like choice. There are some situations where they want to use their PIN; there are other situations where they prefer to use signature. In the Northeast, where I come from, people are standing right on top of you. People are not comfortable putting their PINs in with someone standing right behind them. So what we stand for is consumer choice.
Mr. BENTSEN. Well, I understand that. I'd ask Ms. Meier, now that you have that in place, I'm not sure where the liability is to the consumer. If the same rule applies that applies under TILA, I guess, to credit cards, then what difference does it make whether you use your PIN or, in a case where the merchant doesn't have the capability, that it's a signed authorization? It's the same thing at that point as using your credit card; right?
Ms. MEIER. I want to answer the question, but with a preface of that's exactly the kind of reform that we're asking for; to have an equal legal structure, where there is an unauthorized use, between credit and debit cards.
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Mr. BENTSEN. Which we now have by voluntary rule, but——
Ms. MEIER. I would want it put into EFTA, because I don't want to see a change in a year or two. I'm hoping that if Visa and MasterCard can live with it in an operating rule, they can live with it as a law, too.
But I must point out that, as a practical matter, even with those identical liability structures in law, that there's still a choice, a difficult one, in my opinion, for the consumer in deciding whether to go ahead with this offline product versus a credit card. And that is, with a credit card, if you're victimized by unauthorized use, you don't have to lose a penny. What happens, as a practical matter, is you look at your monthly credit card statement; you see charges that you didn't make, and you let the card issuer know that, and you don't pay that part of your bill. But with a debit card, you're in a position, once victimized, of having to go to your bank, explain the situation, and hope to recover funds that you have lost. You're behind the eight ball and in a position to run after lost funds.
So I think there's a very real question in the consumer's mind, even with that equal liability structure, of whether or not they want to accept that kind of situation, given the increased susceptibility to fraudulent use of an offline system.
Mr. BENTSEN. But if the liability is the same, I mean, doesn't the debit card list on your bank statement or your mutual fund statement the debits that have occurred and where they have occurred?
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Ms. MEIER. Right, but, again, you have to get your money back, and in every case there's a question of whether you're going to be believed. And you have to go make your case and have the bank believe that these weren't authorized transactions, and there's at least uncertainty there about whether you're going to be able to recover your funds.
Mr. BENTSEN. And then I guess, my staff informs me, there's also the question of potential fees if you fall below a certain amount in your checking account perhaps, or if you end up bouncing a check as a result of the unauthorized use, a contingent fee that could occur—I assume? I don't know.
Mr. YINGLING. I'd just point out that under current law, which has been made even tighter under Visa's rules, they have to provisionally recredit you within a certain time period, and usually they do it much faster than current law, and the burden of proof is on the bank. It's not a tossup. The burden of proof is on the bank to prove that somehow or other you, the consumer, were engaged in the fraud.
Mr. BENTSEN. With the Chair's indulgence——
Chairwoman ROUKEMA. For just a short time, only because I'm concerned that we are able to get to conclude this hearing today before we go into another series of votes.
Mr. BENTSEN. Well, I'll wrap three or four questions into one.
[Laughter.]
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Chairwoman ROUKEMA. One in 30 seconds.
Mr. BENTSEN. In 30 seconds.
[Laughter.]
Have you found—and you can provide for the record—have you found that there are merchants, restaurants, for instance, which otherwise would not take a personal check, that are taking this because they feel there is some creditworthiness in the Visa and MasterCard name versus an individual? Second of all, is there a payment differential, both in timing and fees to the merchant, versus a credit card and otherwise a Visa or MasterCard debit?
And, finally, to ABA or the others, if in fact it's the same liability as you have under TILA, or the same liability as credit cards, and because of the concerns that other States could do different things, why not make it part of the Uniform Code? I mean, wouldn't it just be—I realize you're not looking for new laws, but wouldn't it be easier just to do it, so we know what the rules are?
Mr. SCHRADER. If I can address the first part of your question, Congressman. Yes, definitely there are merchants who will accept a Visa check card who will not take a personal check. Senator Dole's commercial that has aired in the past few months is a perfect example of that. They feel very comfortable with the Visa processing, the Visa payment system, and the guaranteed payment that following Visa rules will give them. This eliminates the cost to them and the possibility of a check not being collectible, and eliminates the handling that they have to do in working with the banks. It's much easier for a merchant, as well as being more convenient for a consumer, to have a Visa check card in that wallet instead of a check.
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Ms. KATEN. I would just like to add, there are many merchants that will take MasterCard debit cards that can't equip for PIN pads, as was mentioned before—catalog companies, where now you can order things over the phone with your debit card, as well as restaurants and some others that have been mentioned.
As for timing, fees and procedures at the merchant location, they're the same for all MasterCard cards, whether they're credit or debit. And, again, we just don't think additional legislation is necessary.
Mr. HELWIG. Mr. Bentsen, if I may address your third question. Competitive pressures and the desire to serve the consumer will ensure that Visa and MasterCard do not change these rules. The problem with a strictly drawn legislative remedy is that it is not flexible enough to deal with an evolving payment system, which is what we are in the middle of right now.
Mr. YINGLING. I would agree with that. One of the problems with legislating is—as we were talking about with respect to financial modernization—once you do it, it's real hard to change, even if everybody agrees it ought to be changed.
And just as an example, Visa's gone to five days, and I know they've done a lot of research on it, but I think we don't know if five days is right—it may be three days, but we don't quite know. And once you lock it in, it's locked in, and even if everybody agreed you needed an exception, you can't get it. And the problem is that then criminal elements come in and find out how to game the exact five days, and we find criminal people saying, ''We know exactly what you're going to do. We know exactly what the law is. We know you won't be able to change it. And we're going to game that five days and figure out how to run fraud schemes.''
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So part of our problem is you just lock it in, and if we could all get in a room and change it really quickly, if we found out something was wrong with it, that would be one thing, but we can't.
Mr. BENTSEN. Of course, if you put it under TILA and left it to the discretion of the regulator to make the adjustment, which is how I think it works now, that would at least give the industry some flexibility.
Mr. YINGLING. That's correct.
Mr. BENTSEN. Thank you, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you. I think we've concluded unless——
Mr. VENTO. Well, I have a brief question.
Chairwoman ROUKEMA. Very brief?
Mr. VENTO. I think we need to—the information we have is that there is a differential in terms of what the retail merchant pays on credit cards and debit cards, especially debit cards, on- and offline. In fact, there's some documentation that suggests something like $1.31 versus—for a debit card offline—versus something less than that, one-tenth or two-tenths of-–10 or 20 cents. So I don't know why that difference exists, and so I think you might want to submit that in writing, if it can't be done quickly.
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And the other question is dealing with the check issue that I know this panel isn't specializing in it, but I thought Mr. Yingling might want to respond in terms of these checks, these live checks, they call them. If a financial institution or a retail merchant cashes that check and it's submitted improperly, it's submitted with Bruce Vento's signature, when I have not—in fact, by someone that has picked it up out of my—got my mail or did something, and they cash it? They remain liable; the bank is liable, isn't it?
Mr. YINGLING. Well, first, it's—and I'm not an expert on this, but, first, it's my understanding that the way it works is you must generally take it to your bank and put it in your account. Somebody just can't sign your name to it and put it in their account. The way those checks work, I believe, is, the ones I've seen——
Mr. VENTO. OK, well——
Mr. YINGLING. ——you must put it in your account. But if that happens, you have no liability. No matter what happens, if somebody——
Mr. VENTO. No, I know I don't have any, perhaps any liability, but if a bank or some financial cashes that check and it's cashed improperly, they remain liable, not the issuer of that particular check; is that correct?
Mr. YINGLING. I think if they didn't follow normal business practices, yes, they could be liable.
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Mr. VENTO. It could be in my wallet. They could have picked up the wallet or pick up other identification. So identity, stealing identities today is not uncommon.
Mr. YINGLING. But they still often would have to put it in your account, which makes it a little more——
Mr. VENTO. Well, it makes it a little awkward, yes, I would say so, if in fact that is a limitation on the check. I don't know. Thank you.
Mr. YINGLING. I'll try to get information for you.
Mr. VENTO. Yes. Thank you. Sorry to shoot a wild one at you. Thanks.
Chairwoman ROUKEMA. All right, thank you very much. We appreciate that, and, hopefully, we can now have the final panel on the subject of these so-called ''live'' checks, and I think a far more accurate description is ''loan'' checks.
Mr. Yingling, would you come here a minute, please, just while we're getting this panel together? Come up here.
[Pause.]
Chairwoman ROUKEMA. Thank you. Thank you very much. We have the final panel here, and with any kind of good fortune, we'll conclude this before there is another vote, although we want to go thoroughly into this subject of ''live'' checks or ''loan'' checks. And you probably didn't hear me, but I was saying I think ''loan'' checks is a far more accurate description, but you may refer to them as anything you wish. I think we know the subject we're discussing here.
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Randolph Lively is here, and he will be testifying first. He is President and CEO of the American Financial Services Association. And we all understand, this association is representative of the Nation's largest consumer credit companies and market funding lending institutions. It's a conglomeration of those. You are the private sector in this industry. It's quite extensive, and I believe you have thousands and thousands of offices throughout the United States. We welcome you here today.
And then, finally—I'll introduce you now—Steven Brobeck is Executive Director of the Consumer Federation of America, certainly another consumer advocacy group, and we're very pleased to have you here, Mr. Brobeck.
If you gentlemen will begin. Thank you.
STATEMENT OF H. RANDOLPH LIVELY, JR., PRESIDENT AND CEO, AMERICAN FINANCIAL SERVICES ASSOCIATION
Mr. LIVELY. Madam Chairwoman, my name is Randy Lively, and I'm presenting this testimony on behalf of the American Financial Services Association. AFSA is the trade association that serves a wide variety of nontraditional market-funded providers of financial services to consumers and small businesses. AFSA appreciates the opportunity to express the association's views on the issue of ''live'' checks, also known as ''instant loan'' checks.
A live check refers to a negotiable instrument such as a check, draft, or any other instrument which may be used by a consumer to activate a new loan. Cashing a live check activates a consumer loan for a set dollar amount that includes a fixed finance charge payable in installments over a specific period of time. A live check does not refer to a check form that consumers may receive in the mail that could be used to access an existing line of credit, loan, or their credit card accounts.
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In recent months, a great deal of attention has been paid to the live check product. AFSA and its member companies were made aware of concerns regarding this product by Representative Lucas in February 1997. In order to address Representative Lucas' concerns, and to better serve our customers, AFSA and its member companies developed and adopted a voluntary standard governing the issue of these products. Meanwhile, Congressman Hinchey and Congressman Gonzalez have introduced H.R. 2053, a bill to totally prohibit live check products.
Much of this attention is due to confusion about the live check product. Let me begin by stating that, under the law, consumers are not liable for a live check that is cashed by an unintended third party. Articles 3 and 4 of the Uniform Commercial Code, the UCC, governs the check cashing or paper instrument negotiation process which is designed to minimize check fraud and forgery. Under Article 3, an unauthorized signature makes a check invalid. Article 4 provides that a check with an invalid endorsement is not properly payable. Institutions that cash, deposit, or otherwise handle checks have to follow reasonable banking procedures designed to ferret out check fraud. An institution that does not follow proper procedures risks liability for honoring checks that are fraudulent. It is clear, in any event, that under the law of negotiable instruments, consumers are not liable for live checks that are forged or fraudulently cashed.
Furthermore, consumers do not have to fear that damaging information will be added to their credit reports because of fraud. Under the Fair Credit Reporting Act, creditors are liable if they report inaccurate information to consumer reporting agencies. AFSA's voluntary standard provides that, upon activation of a loan, the creditor will take measures to confirm that the consumer for whom the check was intended actually activated the loan. If the intended consumer did not cash the check, the guidelines contain a procedure to ensure that the creditor is made aware of that circumstance.
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Additionally, under the Fair Credit Reporting Act amendments that take effect next week, consumers will have the ability to opt-out of preapproved offers. In other words, if consumers do not want to receive solicitations by mail, they have the preemptive option not to receive these offers.
Other confusion has dealt with perceived similarities between the live check product and past marketing practices that involve distribution of unsolicited credit cards. The two mediums are very different products. While live checks contain all of the consumer protections under the UCC, as described earlier, a stolen credit card was never governed by negotiable instrument law. Even today, for the purposes of the UCC, credit cards are treated differently. In addition, credit cards can be used by the consumer to obtain cash or to purchase goods at a multitude of locations. When a credit card is used by the consumer at a retail location, the consumer most frequently does not have to prove his or her identity.
Moreover, as with gas pump automated transactions, the consumer interacts with a machine, not a human, and no signature is required. But the transaction is quick and convenient, and as a consumer, I like that.
As a result, checks and credit cards are treated differently under State and Federal law. As many of us know from experience, cashing a check, especially for a substantial sum, is not an easy process, and it involves many additional security checks not present in a typical credit card transaction. We're all familiar with the phrase: ''Know your endorser.''
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From time to time, and for different reasons, problems inevitably occur with all financial products. AFSA and its member companies have a strong record of being proactive in trying to be responsive to our customers and to the Congress. As indicated earlier, AFSA and its member companies recently adopted voluntary guidelines to protect our customers against any liability and to minimize customer inconvenience, should a live check offer fall into the wrong hands.
The voluntary guidelines have been submitted, and I won't go into a discussion of those in detail here. The real debate here today should be about consumer choice. Every day thousands of American consumers are choosing to accept this credit product when they endorse the back of their live check. When they do, they are acknowledging their personal endorsement of the product as well, because it fills a need for each individual consumer.
Consumers endorse the back of these checks because they like the live check product. Consumers like these products for several reasons. The main reason is convenience. Live checks provide immediate cash to fill a need, and consumers do not have to leave the privacy of their own homes to consummate the transaction. In addition, consumers are able to evaluate the offer in the privacy of their home, independent of other environmental considerations.
While the live check product may not fit the needs of every consumer, limiting the choice of those who do like and use the product does not appear to be the right answer. With the enhanced protections contained in AFSA's voluntary standard, FCRA, TILA, and the UCC, it is clear that consumers are not liable for fraudulently-cashed products and will not face any adverse consequences.
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Further, competition in our free market weeds out inferior or poorly conceived products. Our marketplace works well. It has demonstrated this over and over again. Every time Government intervenes in the market, either by reducing consumer choice, limiting credit delivery systems, or establishing what amounts to de facto price controls, there is a real economic impact.
There is not just one way to deliver credit or loans, and consumers are capable of choosing their preferences. Credit grantors who offer live checks either have an existing customer relationship or want to establish one. A live check, like most other financial products, is not a one-time event, but, rather, it provides a convenient vehicle to serve an ongoing relationship or to establish a new relationship with the customer.
With the electronic age just taking root, we will likely see many new products, many new forms of old products, and more complicated hybrid products offered to consumers. By utilizing technology, the marketing and delivery of consumer financial services products will occur at an increasingly rapid rate. Self-policing by industry and better education of consumers, particularly during their student years, before they enter the marketplace, is undoubtedly a more efficient and effective way to protect not only the consumer, but the safety and soundness of our system as a whole.
We look forward to working with the subcommittee to maintain a system where the consumer and the marketplace, based on full disclosure of relevant information, determine which financial products are offered and how they are delivered. Again, I appreciate having the opportunity to discuss the issues of live checks today and will be happy to answer your questions.
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Chairwoman ROUKEMA. All right, thank you.
Mr. Vento and I have determined that, since this is another motion to adjourn, we are going to continue this hearing, but we'll have to go through it rapidly, because there will be a very important vote within one-half-an-hour or so after that. It may take a little more, but we haven't been able to depend on the accuracy of the predictions on the timing of these debates.
So, Mr. Brobeck, we'll go directly to you, Executive Director, Consumer Federation of America.
STATEMENT OF STEVEN BROBECK, EXECUTIVE DIRECTOR, CONSUMER FEDERATION OF AMERICA
Mr. BROBECK. Thank you, Madam Chairwoman, Members of the subcommittee. The Consumer Federation of America very much appreciates the opportunity to testify on the issue of unsolicited loan checks, because this controversial product can harm consumers in several ways.
What loan checks appear to represent is another lender strategy to market unsecured, high-cost credit to consumers. For several years, banks and other lenders have emphasized the marketing of credit cards, but much of that market appears to be saturated. Compared to credit cards, loan checks offer several advantages to lenders. They represent a strategy that bypasses the 1970 congressional prohibition on mailing out unsolicited credit cards. Also, since they represent a loan, not just a credit line, once they are ''cashed,'' the borrower assumes a relatively large debt. And, third, their markets are relatively undeveloped. For all these reasons, we expect the market for loan checks to grow significantly in the future.
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These checks can impose two significant costs on consumers. The first is aggravation, which could be considerable if these checks are cashed by someone other than the intended payee. The relatively large amounts of credit extended in individual checks are likely to attract fraudulent operators. Problems, however, could also result from family members or others who have access to households cashing the checks. Intended payees would then be forced to take the initiative not only to contact the lender, but also, quite possibly, to correct their credit record.
Given the fact that these loans were not sought by consumers, lenders cannot justify any aggravation to consumers who never received checks that are cashed by a third party. Lenders propose to offer consumers an opt-out arrangement whereby future solicitations would be stopped. But why should consumers be subjected to this inconvenience? Moreover, experience with opt-out programs in other industries suggests that they work far from perfectly.
The second cost to consumers is that the loan checks will only compound the problems that have been created by the explosion of unsecured, high-cost credit card debt. This debt has seriously burdened tens of millions of American households and is crushing millions of these family units. Research conducted by the Consumer Federation, which has not been challenged by industry, estimates that between 56 and 60 percent of all U.S. households carry credit card balances, incurring interest charges, and that these balances average $6,000 to $7,000 per household. The growing number of personal bankruptcies represents just the tip of the consumer debt crisis iceberg.
Speaking of bankruptcy, it is significant that the typical Chapter 7 bankrupt, according to research by Purdue's credit research center, now has after-tax income of $19,800, and credit card debts of $17,544. That does not count the additional consumer debt that those households often hold. In general, lenders at the present time should be restricting, not expanding, the availability of this high-cost credit to economically marginal households.
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Creditors claim that they adequately examine credit criteria before offering live checks. The Consumer Federation suggests that this subcommittee request proof from creditors of this assertion. We suspect that loan check lenders are often not targeting credit-worthy households, but, instead, those that have already taken on large, unsecured debts. It would also be useful for industry to provide this subcommittee and others with information about the number and amount of offers and the amount of credit actually granted.
Lenders argue that consumers should not be denied new opportunities to obtain unsecured credit offered by loan checks. That might be the case if the consumer marketplace were not awash in such credit. As of the end of June, there were more than $1.5 trillion in unused bank credit card lines. Creditors continue to bombard most households with both mail and phone solicitations. This year, for example, they will probably mail more than 2 billion credit card solicitations, more than 20 per household.
In sum, loan checks offer additional unsecured credit that consumers do not need, but instead is likely to increase the heavy debt burdens carried by millions of households. In addition, the loans will greatly inconvenience those intended payees whose checks are cashed by others.
Accordingly, CFA believes that the marketing of these unsecured loans should be restricted in the same way that it has been restricted for credit cards—by prohibiting banks from mailing unsolicited credit offers, and that purpose would be accomplished by enactment of H.R. 2053, introduced by Representative Hinchey. We urge this subcommittee to extend the prohibition on sending unsolicited credit cards to loan checks by passing this measure.
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That concludes my testimony. Thank you again, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you.
There's no meeting of the minds here. That's not a surprise to me, but you've both made the strongest positions here, but I don't know quite, Mr. Lively, if our banking people were here, if they would perhaps agree with you in terms of the bank's total responsibility and liability. I just don't know. But I will be asking them to respond to that issue, whether or not they feel from their perspective that there are some other requirements they would make on your industry. And I don't know what they would be, but I think the banks might have a different perspective on how they can, indeed, be responsible in all ways, when these come forward. Perhaps it will prove that they will have to take other actions to limit the use of your live checks or instant loan checks.
You understand the point I'm making. I understand what you're saying, but I'm just wondering how in the case—and I have not seen the tape on the question that the Today Show presented, but I don't know whether or not the bank could have been in a position to know that. And at the same time under any reasonable bank practices, you have the consumers that are going through quite a bit of angst as a result of having to prove themselves as having been fraudulently used. Would you like to respond to that, because you certainly must have some sensitivity to this, because if the consumers then begin to pull away, your business is greatly restricted, and blackened really. Yes?
Mr. LIVELY. Sure. Well, first, I think what we have to realize here is that when we refer to the institution that cashes the check, we're talking about a wide variety of institutions. It may be a grocery store. It could be the bank. It could be a check-cashing outlet. It's the institution that accepts the first endorsement. That's where the primary liability would lie. In reality, the companies in my industry who encounter one of these fraudulent transactions typically absorb and assume the liability for that transaction themselves, unless there was some very egregious breakdown.
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Chairwoman ROUKEMA. With the bank? With the bank or whatever the——
Mr. LIVELY. No, they assume the liability. The lender assumes the liability in the case of a fraud transaction; the consumer is not held liable, and the first endorser may not be held liable if there was no indication of failure to perform. But what I think is most important here is simply that the consumer who is subjected to a potential exposure to fraud is somewhere in this 1/10 of 1 percent of all of the transactions that are out there.
One of my companies, for example, in the past year opened 400,000 new accounts for consumers. The consumers had an average annual income of $48,000. They had absolutely clear credit records, and they had an average age of 40 years. So these are mainstream American consumers. They're not the fringe consumer.
Chairwoman ROUKEMA. But that really wasn't—I'm not talking about who that consumer is. I'm talking about those who have been fraudulently used and then they are in the position of having to, as Mr. Brobeck referred, the aggravation to the consumer, because then they're in the negative position of having to prove that they were innocent and that they were used, and that they were the victims. And, evidently, that takes time, and I don't know how we can——
Mr. LIVELY. Well, under the voluntary standard that AFSA has issued, the consumer would only have to write a note or we would provide a simple statement to the effect that the consumer did not cash that item. In that instance, that item is immediately removed from the consumer's liability; in addition to that, at this stage of the game, there is no opportunity for that to ever have become a part of the credit report.
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Chairwoman ROUKEMA. Excuse me. Of the voluntary standards and the date that they were put into effect—are they on the record for us today?
Mr. LIVELY. Yes.
Chairwoman ROUKEMA. Thank you.
Mr. VENTO. I think we could use a copy of this—if you'd yield, because it says, ''Notification loan agreement must be on the back,'' but it says, ''by endorsing instrument.'' But there also is one provision, apparently, a statement that you send out when there is a suggestion that the check is cashed, and do you have a copy of the statement with you that goes out to that particular consumer, Mr. Lively?
Mr. LIVELY. Which statement is that, sir?
Mr. VENTO. The one that goes out to consumers when a check is improperly or fraudulently cashed.
Chairwoman ROUKEMA. Yes, that would be very helpful.
Mr. LIVELY. Well, yes, that statement would be represented by a whole variety of documents that are provided individually by member companies of AFSA. Basically, what the statement says is: ''I did not cash this check; I did not use this check.'' And that triggers the ability of the company who issued that check, and who is now notified that the check was used fraudulently by an unintended party, to engage law enforcement in pursuing a fraud against the original—the actual perpetrator. But the consumer is out of that loop immediately upon notification.
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Mr. VENTO. Well, I'm just interested in the document that is being sent out. But you're telling us it isn't a single document; it's multiple documents. It depends on the——
Mr. LIVELY. No, it's a very simple statement: ''I did not use or cash this check.'' It's in the form of a simple statement that is provided to the consumer by the company and the consumer is able at that point to express the fact that he or she didn't have responsibility for that transaction. The company immediately takes the necessary steps to clarify the record.
For example, in the case that was cited on the Today Show, the creditor that was involved in that transaction, from the day of the very first indication that there was a problem until the day the matter was totally resolved was 27 days.
Chairwoman ROUKEMA. By the way, you do know, Mr. Lively, that you and the company have the opportunity to present on the record the response to the assertions of the Today Show. I just want to repeat that to you.
Yes, Mr. Brobeck.
Mr. BROBECK. Yes, I'd just like to briefly comment on one piece of information that Mr. Lively just presented to the subcommittee, that the incidence of problems is very low. That low incidence does not surprise me in the least. This is a very new product. History shows it takes time, often several years, for fraudulent operators to figure out how to take advantage of new products. I would expect, as that product expands, not just the absolute level of problems and fraud would expand, but also the ratio.
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Mr. VENTO. Well, the fact is we're talking about voluntary standards. Not all organizations that issue such live checks belong to your association, do they, Mr. Lively?
Mr. LIVELY. Not all the issuers belong to the American Financial Services Association.
Mr. VENTO. So can you give us some idea? We obviously want to get done before the vote, and so I want to try to hurry along. Maybe we'll have a lot of time, but I don't know that we will.
Mr. LIVELY. Well, this is an estimate, but I would propose to you that the top 50 companies of the American Financial Services Association represent very close to 90 percent of all the live checks that are in the marketplace from AFSA member companies.
Mr. VENTO. OK.
Mr. LIVELY. Now there are banks and there are other institutions, and I think that, very likely, those institutions and their representative bodies will also adopt similar standards to those of AFSA.
Mr. VENTO. Well, I don't know. But, I mean, obviously, these are—as you say, standards, but everyone has a different confirmation notice they send out, as an example, and I don't know if it covers—if it's a questionnaire in some cases or it's a simple statement. I mean, I take your representation as to what you know about it, but we don't know exactly, and of course this is obviously a greater inconvenience for someone that is receiving something that is unsolicited. I even think the notion of something that's unsolicited, it suggests that you have no relationship with that particular consumer. But solicited embraces the idea that I may have a—someone has my mortgage servicing rights over here, and so they can send me something, and that somehow is solicited. Well, I took a loan out with a mortgage company that servicing rights were sold, and all of sudden I'm dealing with somebody in Indiana, and that's unsolicited—under the way we're describing it—that ends up being a solicited type of a relationship.
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Mr. LIVELY. If I could answer that. We're talking about unsecured loans in these transactions.
Mr. VENTO. Are all of these unsecured?
Mr. LIVELY. Yes, sir.
Mr. VENTO. You mean that they don't seek any collateral? Can you speak for all of these?
Mr. LIVELY. They're unsecured loans, yes, sir.
Mr. VENTO. They are unsecured? There is no type of collateral provided? There is no home equity implications?
Mr. LIVELY. No, sir. That's a different type of product altogether.
Mr. VENTO. Yes, and those types of checks don't come through the mail for a home equity type of a check; is that right?
Mr. LIVELY. There's an awful lot of work that has to be done in——
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Mr. VENTO. Yes, well, I'm suggesting to you that I receive them, so I don't know what they're implying, but, I mean, I guess I should have kept it. My problem is that most of us get these things and tear them up as fast as we get them, into as small of pieces as we can, for fear that we're going to have a little bit of a problem here.
Mr. LIVELY. Let me make one more brief point. These products are not brand new and they're not just recently in the marketplace.
Mr. VENTO. Oh, I realize that. I can even remember some political parties sending out some things like this from time to time.
Mr. LIVELY. Right.
[Laughter.]
Mr. VENTO. But did you have—I'd be happy to yield, yes.
Chairwoman ROUKEMA. Would you mind?
Mr. VENTO. No, I'd be happy to.
Chairwoman ROUKEMA. Because your question reminded me of something that I neglected to ask you, and I think I know what the answer is, but I want to hear it from you. Remembering Mr. Hinchey's bill, which I know you do not support, and I don't necessarily either think this is necessarily the time for it, but it raises important questions. And that is, what about the credit report or consumer liability resulting from a bad credit report? How do you handle that and protect the consumer from any inferences to their credit rating or their liability when they have had the problem with an unsolicited loan check?
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Mr. LIVELY. The only instance in which the credit report would even become a consideration is in that instance where an unintended recipient cashed the check.
Chairwoman ROUKEMA. Well, but that's the question then. How do you deal with that?
Mr. LIVELY. If that happens, there is a procedure that we would fix all of the attendant issues associated with the transaction, and including the credit report, to ensure that there was no adverse impact on the consumer whatever from that transaction.
Chairwoman ROUKEMA. All right, and that can happen in a relatively small window? The 27 days?
Mr. LIVELY. Well, as in the case that got the national publicity, it all happened within 27 days from the time of the identification of the issue.
Chairwoman ROUKEMA. All right. Do you have any more documentation on that or your procedures, your voluntary procedures? I'd appreciate it for the record.
Mr. LIVELY. We will provide those in detail, and I must tell you as well that our voluntary standard is a living document. These hearings have been very helpful. They have been informative, and, unlike legislation, our standards for best practices in the marketplace can be made flexible and can be improved quickly. And we'll take a lot of what we've heard to heart.
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Chairwoman ROUKEMA. Thank you.
Mr. VENTO. Mr. Brobeck, once a negative statement is in the credit report, and gets corrected, it doesn't always remain corrected, does it?
Mr. BROBECK. No, the best of intentions, even by many creditors and credit reporting agencies, does not solve or prevent every problem. There are so many different potential problems that arise in the course of a year in this large country, and today thousands of consumers every week experience unnecessary, or at least unjustified, aggravation as a result of information that gets put into the major credit reporting agencies, but there are also a number of small reporting agencies as well. It's much easier to clean up inaccurate information in the large agencies than it is in the plethora of smaller agencies, many of which are local or regional.
Mr. VENTO. Well, it's one thing when you are seeking a relationship with an entity or with a financial institution or with others; it's quite another when you haven't sought that and it is, in a sense, unsolicited, unrelated.
The statement was made that you—how many of these checks—I read one statement in the material that was prepared for us by staff that in one month another bank mailed out 675,000 loan checks. Do you have any idea, Mr. Lively, representing, as you said, 90 percent of the volume of these institutions, how many of these checks are mailed out a month?
Mr. LIVELY. No, I don't have a cumulative number. I have some insight obtained from conversations with CEOs of many of the organizations.
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Mr. VENTO. It's sort of proprietary information, I guess.
Mr. LIVELY. Well, it is. It's ''marketplace,'' if you will, private information. However, I'd have to say that, using the one example that I cited—and I was given permission to use those numbers——
Mr. VENTO. I noted that, yes. Yes, sir.
Mr. LIVELY. ——that that company books approximately a billion dollars a year in these transactions, has a performance in that portfolio that is better than their through-the-door portfolio, and are very happy, and their customers, apparently, are very happy with the relationship.
I think what we're dealing with here is a situation in which hundreds of thousands of consumers are being well-served with the availability of these products, and what we're having to contend with here is the exception, that incident in which something goes wrong with the transaction.
Mr. VENTO. Well, you know, one of the other reasons, of course, that it might be more lucrative——
Chairwoman ROUKEMA. Excuse me just one moment.
Mr. VENTO. Yes.
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Chairwoman ROUKEMA. I'm sorry to be so rude, but I do have to get over to the floor, and I wondered if Mr. Vento would take the chair, so that he and Mr. Bentsen can conclude this hearing.
Mr. VENTO. I'll sit here and try to——
Chairwoman ROUKEMA. It's rather important that I be there.
Mr. VENTO. Yes, OK, I'd be happy to do that.
Chairwoman ROUKEMA. All right, thank you.
Mr. VENTO. [presiding]. Thank you for the opportunity to continue our questioning, Madam Chairwoman. And I'll yield to Mr. Bentsen in just a moment.
But I just think one of the major points here, Mr. Lively, that should be noted is that for most types of credit extension, for a credit card or other activities, of course, we put more limits on. They cannot communicate with me in terms of this unsolicited means. I can understand where there's a great advantage that's given to this type of live check. Maybe it should be—I mean, I think your point would be to argue that it should be provided, given the nature of the instrument is substantially different. That's basically what you're arguing. But it is not surprising that there would be great profitability, perhaps even better performance, but you're being given an advantage in a sense; you have an advantage over, for instance, unsolicited credit cards.
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Mr. LIVELY. Well, keep in mind that the basic premise of this product is a closed-end transaction, which under Truth-in-Lending requires a whole litany of pre-opening disclosures be provided to the consumer: the amount of the monthly payment, the total number of payments, the finance charge rate, the aggregate finance charge on the transaction. And that check is made out for a specific amount.
Mr. VENTO. Yes, of course, we're aware of that. I think we are aware, and it is made out for a specific amount, but it does not have to go into a certain bank account, does it? The suggestion here was that that check only could go into a consumer's bank account.
Mr. LIVELY. No, that's not correct. The check can be cashed at any location that would accept that check.
Mr. VENTO. That check, yes. But, of course, as you said, if it's a large amount—we don't know what the amounts of these; some of these may be $2,000; some of them may be $10,000; is that correct?
Mr. LIVELY. That's correct.
Mr. VENTO. Can you give us any range in terms of what that would be?
Mr. LIVELY. I would say that most of these checks are topped at the $10,000 range, and in the $1,000 to $1,200 range at the bottom of the scale. And they carry a wide variety of appeals, I think, to consumers.
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I have a very close associate who is a small entrepreneur in the computer business, and coincidentally with his computer crashing, and literally putting him out of business, was the receipt of one of these live check loans. He used that live check loan to buy the new computer and then subsequently worked out a transaction with another institution for a different schedule of payments and paid off the loan. It was a tremendous convenience to him on that day, and it kept him in business.
Mr. VENTO. It might even have been if he had gone to his bank, he could have got the loan as well. But, in any case, let me recognize or yield to my colleague.
Mr. BENTSEN. I thank the gentleman for yielding.
I had an economics professor in graduate school who was also a Fed staffer, and he always said, if you were unemployed, what you could do is just keep rolling credit cards through the period of time until you became employed and then paid off the balance. I don't know if that was a commentary on the Fed under Volker or how things operate.
There's no question that there are those who can utilize credit and manage credit efficiently, but then there are some who can't. Our goal shouldn't be to define who can and who can't, but try and ensure that everyone has access to the knowledge of what it is they're getting into. And disclosure is terribly important.
But let me ask you a couple of questions, if I might. Do you have the default and delinquency statistics on these types of loans, and how do they compare to traditional credit card loans and other consumer loans?
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Mr. LIVELY. I do have some sampling of data as it relates to performance of the portfolios, and as I mentioned earlier, those particular accounts, because they represent consumers who have been pre-screened and who have demonstrably good credit records, typically perform better than the aggregate of accounts of customers who came in through the front door to apply for a loan.
Mr. BENTSEN. A comparable loan? An unsecured consumer loan?
Mr. LIVELY. Comparable loans, right. All unsecured loans. And that is one of the appeals, I think, that the corporations have in the development of this particular product.
And the other side is the consumer receives this product typically in a very affirmative way.
Mr. BENTSEN. If you might, if you could provide for the record any historical portfolio data on default rates, if it's public information, that would be helpful.
Mr. LIVELY. As the market-funded lending industry representative, I will have to seek some of those data from my member companies. They don't normally publish information about segments of their portfolios in public information releases. But I will endeavor to identify several of the larger of those companies and see if I can provide you with representative data that is projectable to this product in the marketplace.
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Mr. BENTSEN. OK.
Mr. BROBECK. Could I comment?
Mr. BENTSEN. Sure.
Mr. BROBECK. I would suggest the possibility that any data that's presented on default rates would not be comparable to the default rates for credit cards, because of the newness of the loan check product. What we are learning about credit card defaults and consumer bankruptcies is that in most cases it takes years for a person to slide into a situation where they simply cannot continue to maintain that pyramid of debt that has been created, and that's when they finally slide into bankruptcy. That's the typical case.
It would be very useful, for example, if some of Mr. Lively's members had been offering this product for a period of, let's say, four years. I don't know if that's the case. It would be interesting to compare the default rates on those credit offers with, say, those for credit cards.
Mr. BENTSEN. If I might ask—this product—well, let me ask you this, and, Mr. Brobeck, you may know the answer to this, or Mr. Lively. How does the law treat unsolicited lines of credit? Does it treat it similar to unsolicited credit cards, which is you cannot offer an unsolicited automatic line of credit, in the same way you can't send anybody an unsolicited credit card? Do you know?
Mr. BROBECK. No. In fact, that 1970 law prohibits banks from sending a live unsolicited credit card, but does not restrict the ability to send the live checks.
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Mr. BENTSEN. But in between—I'm thinking of a line of credit. Live checks, you immediately draw on the live checks. You don't draw necessarily on the credit card. A line of credit's sort of in between that. And I just don't know if that's a product that's out there or not. I'm just curious if you know how that's governed?
Mr. LIVELY. No. A line of credit is typically a different type of account that is negotiated with the consumer in a completely different way. These live check offers are specific amounts. They're based on the company's evaluation of the consumer's ability to pay, and they are issued in a specific amount for a specific time period with a specific monthly payment, and include a finance charge that is precomputed.
Mr. BENTSEN. Why is that? I mean, understanding all that, and a credit card is issued with a specific credit limit normally, with a specific interest rate, although some may ratchet up over time, but that normally should be disclosed under the law. And while you don't expect the consumer to get the credit card and immediately go out and draw to the maximum credit limit, the consumer, if they wish, once they were approved—why is there that difference? Why should we treat these live checks and credit cards differently?
Mr. LIVELY. I think if you stop and think for a minute about the product itself, the vehicle, and its utility and its exposure, a credit card is capable of being used in virtually every kind of point-of-sale you can imagine. It can be used as a financial intermediary in a telephone transaction. That variability and that wide diversity of points-of-sale make that credit card a much more volatile device than a check that's made out to a specific consumer in a specific amount with a specific set of terms associated with it and full disclosures. It's a one-amount transaction.
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Mr. BENTSEN. But I understand that, but, also, again, once you get the credit card, you don't necessarily max on your credit line, whereas once you sign the check and deposit it in your account, you, thus, have drawn down to the maximum amount that's being extended to you. So you have entered into the loan at that point, whereas the credit card, you could get a credit card with $100,000 limit, and never use it, and just keep it in your wallet the whole time. And I'm not trying to be antagonistic.
Mr. LIVELY. I understand.
Mr. BENTSEN. I'm just curious in what the difference is.
Mr. LIVELY. I think the issue simply is this——
Mr. BENTSEN. And let me follow up with this, if I might: And why wouldn't you come back and say, and send the consumer—''Mr. Bentsen, we think you're such a good credit risk and a good client of Acme National Bank that we are prepared to extend to you instant cash checks totaling $5,000,'' or whatever, ''if you so agree, and here are the terms of the agreement. Fill this out and send it back today, and you'll have them next week.''? Because doesn't that provide you with some protection as well, or is there a marketing advantage of getting this out in front of the consumer right away?
Mr. LIVELY. No, I think that what we're really dealing with here is added cost. Every time you have to handle a transaction you add cost, because you have people involved; you have machines involved; you have postage involved; you have telephones involved. This transaction is a very low-cost transaction to deliver to the consumer, and for consumers it's a very low-cost transaction, because they don't have to get in their car, go to the loan office. They don't have to perhaps go to two or three places to obtain a loan in the context of their need. And so what happens is both the consumer and the company benefit in this transaction because of its simplicity.
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Mr. VENTO. I feel compelled because—but if we can wind it up——
Mr. BENTSEN. OK. But, on the other hand, you had the case with this person on the Today Show, who I understand is from Houston, Texas, which I represent a part of, and I haven't seen that. We were probably watching ''Arthur'' or ''Barney'' or something at that time.
[Laughter.]
The wrong person cashed the check. You had a consumer out there who had this on his credit report. Your member had to get involved with it, and 27 days later he presumably calls the lawyers and everything else, probably involved many postage stamps and long distance calls and billable hours, and things like that. I just wonder whether or not the belts-and-suspenders approach of maybe having a trip-wire early-on by saying, ''If you want this service, fill out this form and send it back.''
The other thing I would just ask is this, and I was talking to Governor Meyer and I don't think he understood what I was saying. But short of something like that, where you have to send something back in, why not have a 1–800 verification thing, like they do for debit cards and credit cards, where Mr. Bentsen has to call back in and say who he is, what his social security number is, whether his mother was left-handed or right-handed, or what other information you have that makes them sure that you know you're talking to the right person? I mean, again, in the long run wouldn't that be more cost saving, so you don't run into these problems like the person in Houston?
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Mr. LIVELY. The problem with that is a paper check with MICR encoding as the transmittal code through the banking system can't be turned on and off like a credit card can, and that's the problem with that.
On the other side of the coin, with respect to your constituent in Houston. Perhaps what was featured in this program, unfortunately, not all of the facts of the situation were put on the table in that particular program. The uncle of the individual who cashed the check had previously lived in the same house at that address, and it was for that reason that a check made out to the uncle was sent to that house. The young man who cashed that check had to have known very clearly that that was a misdirected item to him.
Mr. BENTSEN. But I guess my point on that was—and I don't know all the facts—my point on that was your member probably ended up spending as much money as the check was drawn on, and also had to reimburse that to correct that problem. Maybe having some safety mechanism might have been to their benefit.
Mr. LIVELY. Well, clearly, you hope you don't have those kinds of transactions, and, fortunately, they are in such a small percentage of the total transactions that they don't become monetarily meaningful. Yes, in the case of the individual consumer who gets involved in one of those, it's acknowledged to be a bit of an aggravation, and what we're trying to do as an industry is to minimize those aggravation points to the maximum extent we can, because, after all, these are our customers and we do business with them. We want them to be happy with us and how we present ourselves to them.
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So what you see here is not just words; it's a sincere belief by the members of this association that they want to do everything they possibly can to facilitate the relationship with the consumer and the marketplace.
Mr. BENTSEN. For then record, if I might—and then, Bruce, I'll leave, but will you provide, if you can, how many of these loans are held for the account of the issuer and how many are securitized and sold into the secondary market?
Mr. LIVELY. I would certainly make the inquiry, but I'm not——
Mr. BENTSEN. Whatever you can——
Mr. VENTO. We're relying on information from you. This is an important new phenomena in terms of its growth. Although it's not a new instrument, it is new and I think the issue of opting-in first is opting-out. There are a lot of materials that we receive, especially through the mail, where the opting-out procedure is not very convenient. I don't know how to even begin to do it with regard to some of these solicitations. I think it's very difficult to do.
Mr. Lively.
Mr. LIVELY. I must say that I have to commend the Congress on the work that was done with respect to the recent improvements in the Fair Credit Reporting Act.
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Mr. VENTO. Yes.
Mr. LIVELY. Because what happens now is every one of us, if we don't want to be bothered with mail solicitations, all we have to do is write a simple letter to the credit reporting agency and say, ''I don't want my name utilized in pre-screening transactions,'' and you're out of it. You're not going to get any more mail in this regard.
Mr. VENTO. Well, hopefully, we'll get that information. Maybe we should require that in a disclosure on every one of these checks that comes out: ''If you don't want any further of these, you can help us advertise the Fair Credit Reporting Act by including that in your voluntary standards,'' so your members could explain that. If they do not want these types of solicitations, they could write. I think the real problem here is instant gratification. People get this in the mail; they just go cash it, and then, of course, they face the consequences for the next four years in terms of making the payments. You know, at a time when bankruptcy and other problems are occurring, we certainly need to be concerned about it, and if we're going to do a real study of it, we'd have to look at the same demographic group, the same screening; we'd have to have all of them. We could look at that group versus the group that was pre-screened and selected in terms of the performance of those who took the loans and those that didn't, and that would be the good social science way to do it. We aren't going to get that information probably unless we can get the Federal Reserve Board activated. I mean, that's the only source I know that would be able to get that information, do that type of study. Otherwise, most of you would consider it marketing or proprietary information, and I understand that; I respect it. We are not, and I am not, and I don't think others are trying to save consumers from themselves. I want them to be able to make decisions, but I want them to have the tools that they need in order so that they can make the decisions, make them intelligently. I think today, with the Reg. E to Z, you start putting them together, and it looks like a Greek letter to me.
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Mr. LIVELY. Well, there's one more thing I'd just like to say before we wrap up, and that is, I think there, indeed, is something that Steve and I do most vociferously agree on, and that is the education issue.
Mr. VENTO. Yes.
Mr. LIVELY. And that's part of his charter. It's part of my charter. And we hope that what can happen over the next years is a significant movement to improve the basic skills level, education of young people in high school and in K through 8, so that when these young people come into the marketplace, they're able to understand and manage the transactions that they will be confronted with. The process that's underway now is not going to go away. New products, more technology—and we've got to do something about bringing more savvy consumers into the market.
Mr. VENTO. Right, and I think the Members that are submitting bills here are looking to build some benchmarks, some standards, that will provide for flexibility. You know, you can't save consumers from themselves, but to be given the tools so that they know when they make decisions what the implications are, and I think there is an element in these live checks of, as I said, instant gratification. The real fear is at the end of the day when we begin to look back. It will be one more problem that's adding to the type of credit problems that folks have. It's a great convenience for people to have availability of credit. Our economy, many factors depend upon it. You selected the individual that coincidentally received a check exactly at the right time that he needed it in terms of his computer business.
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Mr. LIVELY. I would like to add something for the record and I'll submit it.
Mr. VENTO. OK.
Mr. LIVELY. And that is a pamphlet that has been produced by the Jump-Start Coalition for Personal Financial Literacy which deals with this whole education issue.
Mr. VENTO. I'm sure there won't be any objection to submitting that to the record.
And with that, I would suggest the hearing ought to come to a conclusion. Thank you, Mr. Lively and Mr. Brobeck, for your testimony.
[Whereupon, at 3:40 p.m., the hearing was adjourned subject to the call of the Chair.]