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Wednesday, September 15, 2004
U.S. House of Representatives,
Subcommittee on Financial Institutions and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 10:03 a.m., in Room 2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding.
    Present: Representatives Bachus, Castle, Kelly, Gillmor, Ryun, Biggert, Toomey, Capito, Tiberi, Kennedy, Feeney, Hensarling, Brown-Waite, Sanders, Maloney, Sherman, Meeks, Moore, Ross, Davis, Baca, and Bell.
    Chairman BACHUS. [Presiding.] The Committee on Financial Services, Financial Institutions, has come to order.
    Mr. Castle is recognized.
    Mr. CASTLE. Thank you, Chairman Bachus. I thank you very much for holding this hearing, which covers a panoply of subjects of interest to all of us.
    Now more than ever we live in a world that has become increasingly complicated when it comes to personal financial matters. A generation ago, a basic knowledge of balancing a checkbook and maintaining a savings account was adequate.
    However, in today's complex world, many Americans are faced with difficult decisions, such as determining what type of loan they need, whether to invest in stocks or bonds, how to best manage credit, and how soon to start planning for family education needs and their retirement.
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    There are approximately 40,000 different credit card products available—an intimidating thought to the most educated consumer. Unfortunately, large numbers of consumers never learn the basics of maintaining their personal finances and may struggle unnecessarily with choices leading to financial freedom.
    Today, our nation's youth are bombarded with a multitude of financial options at an increasingly young age. Yet many are ill equipped to make informed decisions about financial matters.
    According to a 2001 Teenage Research Unlimited survey, teenagers spend, rather than save, 98 percent of their money—a total of $172 billion in 2002.
    Various public and private organizations have developed programs to promote public knowledge of basic finances. Many of these organizations are working with elementary and secondary students to provide them with a strong education in money management and provide teacher training on how they can integrate basic financial education principles in the curriculum.
    For example, in my home State of Delaware, MBNA opened a financial advisory service, FAS, over 10 years ago which offers professional advice to MB&A people and their immediate family members.
    Since the service was established, MBNA has extended the service into the community and into the local school systems to the facilitation of basic credit and money management curriculums to all grade levels in elementary, high schools and colleges throughout the country.
    FAS has educated nearly 1,500 students in Delaware, 14,000 students throughout the country since 1995.
    I think all of the organizations offering financial literacy programs to our communities should be applauded.
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    Although some consumers view the large number of credit options to be daunting, the strong national credit system in the United States has been a driving force. It has helped sustain our economy in recent years.
    That system is supported by the Fair Credit Reporting Act, which this committee reauthorized last year, and ensures that factual information is available on which to base the extension of credit, employment or insurance.
    Virtually every business in this nation and every consumer who has ever used credit depends on this system. Without this strong national system, consumers would pay higher costs for credit.
    Educating consumers and enabling individuals to understand all of their financial options and opportunities is a daunting task. The review by the subcommittee today will help us better understand how consumers in the financial services industry can have a more symbiotic relationship.
    Mr. Chairman, I do thank you for holding this hearing today, and I look forward to hearing from each of our witnesses.
    I yield back the balance of my time.
    [The prepared statement of Hon. Michael N. Castle can be found on page 53 in the appendix.]
    Chairman BACHUS. Thank you.
    Mr. Sherman, we welcome you to the hearing. Would you like to make an opening statement?
    Mr. SHERMAN. I would, unless the chairman would like to give one first.
    Chairman BACHUS. I will let you proceed and then I will reserve mine.
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    Mr. SHERMAN. Okay.
    Mr. Chairman, thank you for holding these hearings. We need to take a balanced approach toward protecting consumers on the one hand and allowing access to credit on the other.
    We could, as a national policy, say, we are not going to allow anybody to pay any more for credit than those who have the very best credit records. The effect would be to deny the opportunity to borrow to most people who really need it.
    At the other extreme, we could lift all the standards, lift all the rules and allow consumers to live in a world where their State legislatures cannot protect them and this Congress refuses to do so as well.
    In evaluating the credit opportunities facing consumers, there is sometimes a tendency to express everything as an annual percentage rate, which makes sense if one is borrowing thousands of dollars for months or years. But when I go to use the ATM machine, I found the bank where I only pay $1, and I withdraw $40.
    I think that is a good deal in one respect, and that is, there are many times in my life when having $40 is worth a dollar. I don't need government to tell me that I am paying 20,000 percent interest, or infinity percent interest, to get my own money and therefore should be denied the opportunity to get $40 when I need it.
    Likewise, we have payday lenders—and there are a lot of reasons to provide some significant regulations in that area. But to express everything as a percentage ignores the real human circumstance where your car is in the shop and you cannot get it out unless you give the mechanic $300.
    Now, we can always tell people, ''Go rent a car for the next two weeks and that way we will protect you from a $40 charge or a $20 charge or whatever,'' or we can recognize that sometimes a charge by a bank or a financial institution of $10 or $20 or $30 or $40 needs to be looked at as a charge rather than as an annual percentage rate, whether it is convenience or whether it is bailing somebody out of a jam.
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    This Bush administration has done worse than zero in protecting consumers. If they just did nothing, well, okay.
    But instead, we have the OCC—and I may have to leave these hearings for a bit, Mr. Chairman, to go speak on the floor on this; I know that we have an amendment coming up on the floor—decides that Congress should be irrelevant, State legislatures should be irrelevant, and we should strip away all State protections, and we should do so not by congressional action but by runaway regulators, and we should do this only for national banks.
    So what we are saying is: Those lenders who choose not to be national banks, ''You don't live in a free market economy; you live in a tilted economy where different rules apply, depending upon where you get your charter.''
    We are turning to bank regulators and saying, ''It is time to compete. Throw the doors open.''
    The state regulators and the federal regulators should be in a race to the bottom to try to get hand-out charters and get business in an entrepreneurial spirit to capture financial institution market share.
    We are turning to Congress and saying, ''We don't need you. We will just do it at the administration level.'' And we are, of course, turning to consumers and saying, ''Not only will the federal government do nothing, we will make sure the States do nothing to protect you as well.''
    And then finally, I believe we have—what?—maybe eight or nine people that is the complaint department at the OCC for the entire country, because you are going to call for the firing of all State consumer protectors since they won't be able to do anything with regard to national banks.
    This regulation is absolutely absurd. It is an attack on democracy and an attack on consumers.
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    Likewise, the decision of this administration, who without congressional involvement tell banks that ''it is not enough that you have Gramm-Leach-Bliley, we are going to going to give you something extra and not go through Congress'' is also an attack on consumers.
    So I look forward to protecting consumers, to having national standards where we need them, and to make sure that whatever national standards or preemptions are called for are decided through a legislative process, balanced process.
    And I thank the chairman.
    Chairman BACHUS. Thank you, Mr. Sherman.
    At this time I will give my opening statement.
    I want to welcome our panelists.
    This hearing supplements the numerous hearings that this committee has held over the past 2 years, hearings which in many instances have focused on how we can improve the regulation of our financial services markets for the benefit of consumers.
    For example, consumer benefits with a focus of our extensive hearings on the Fair Credit Reporting Act last year, you will recall President Bush proposed and signed into law the Fair and Accurate Credit Transactions Act of 2003, historic legislation to ensure that citizens are treated fairly when they apply for credit.
    Consumers will now have a right to receive their credit reports free of charge every year as part of a national financial literacy campaign.
    In addition, the legislation creates important new tools to address the growing problem of identify theft by establishing a nationwide fraud alert system.
    On our committee, Mr. LaTourette and Shadegg have, along with Ms. Biggert and Ms. Kelly and Ms. Moore and Ms. Hooley, played I think a very important role in this.
    But I commend the Treasury Department and the administration as well as this committee for that fine work on that legislation.
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    Also, I think what some people have said is one of the most important consumer pieces of legislation was signed into law by President Bush on June 27th, 2003, when he—well, actually he helped to launch the do-not-call registry with the chairman of the Federal Trade Commission and the Federal Communications Commission. Over 54 million phone numbers have been registered on the national list, protecting millions of Americans from most unwanted telephone solicitations.
    And I would say to anyone listening now: If you have not called, you can call 1-888-382-1222. And there is also a Web site: www.donotcall.gov.
    Also, legislation has recently been signed—although it has been tied up in the court by some civil libertarians—protecting consumers from unsolicited commercial e-mail, including nonsolicited pornography and other offensive matters. I think the Bush administration is working through the courts to try to enact that.
    Also, I think an important thing that this committee and also the administration has done is to work very hard to promote financial education. I know Mr. Ney, on our subcommittee, has promoted this in the sub-crime lending area.
    I mentioned I thank Congresswomen Biggert and Kelly in their important work in this area.
    Other legislation, achieving the American dream of owning a home, important legislation where approximately 40,000 low-to moderate-income families per year will be able to purchase their first home. And in doing so, they will strengthen America's housing market and every community in which those homes are located.
    The average assistant grant will be $5,000 per family, with the down payment and closing costs. A member of this committee, Ms. Katherine Harris, or Congressman Katherine Harris of Florida, was the main sponsor of that.
    There are also several other programs.
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    But let me just depart by that to say in general in the minute that I have remaining that consumers in America—in reviewing fair credit reporting, we found out we have more choices as Americans than people in any other country for credit. More credit is available to us. And those that have enjoyed, over the last 20 years, the greatest increase and access to credit have been minorities and low-income citizens.
    The growth in home ownership and credit extension to our minorities is truly amazing in this country. Where countries like France have an average of three or four credit card choices, we have over 1,000.
    That is not to say we don't have problems.
    One problem that Mr. Sanders and I championed last year was efforts to end what we considered unfair practices in the bait-and-switch areas. Unfortunately, Mr. Sanders and I only garnered 22 votes in this full committee, actually, this full committee, on our legislation.
    Forty-four of our colleagues, the majority of our colleagues, by far voted against this legislation. We offered a similar amendment on the floor and we only had 142 votes there; 272 of our colleagues, including a majority in both parties, voted against our legislation.
    But we have regulation proposed.
    And this committee did then go back and substituted an amendment, which I think was a good amendment, to address this issue, but the Senate saw fit to strip that amendment out.
    I will close simply by saying that members have told me that we have a religious holiday later in the day for many of our members, and they have asked that we speed these hearings up. We expect votes on the House floor and we want to hear from our panelists.
    But also, members have asked that they be allowed to make opening statements and have urged me and I think it is important that they have that opportunity.
    At this time I will recognize Mr. Sanders for any opening statement he may wish to make.
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    [The prepared statement of Hon. Spencer Bachus can be found on page 48 in the appendix.]
    Mr. SANDERS. Thank you very much, Mr. Chairman.
    And as you have indicated, the issues that we are dealing with today is of enormous importance to the American people. So I thank you very much for holding this hearing.
    And I thank all of our guests for being with us today.
    I especially want to welcome Tamara Draut, the director of Economic Opportunity Program at DEMOS, and Jean Ann Fox from the Consumer Federation of America for being with us.
    But thank you all very much.
    Mr. Chairman, as a result of what I would consider to be the collapse of the middle class: the fact that we have lost many decent paying jobs, that many people are working longer hours for low wages, new jobs being created paying low wages and the jobs that are being lost, what we are seeing in our country is that consumers are now being crushed with a record-breaking $2 trillion in debt, which has more than doubled in the last decade.
    A lot of folks out there are deeply in debt and under a lot of economic pressure. In fact, a record-breaking 1.6 million families went bankrupt last year alone, an increase of more than 125 percent since 1989.
    And tragically, as Harvard University Professor Elizabeth Warren and others have noted, it is the children—children are more likely to suffer through their parents' bankruptcy than through a divorce.
    And you made the point, Mr. Chairman, that in France those poor folks there only have four credit cards and we have 1,000. I know that, because I get those 1,000 people sending me their applications every other day.
    In fact, in a given year a credit card company sent out some 5 billion—this is true—5 billion credit card solicitations, and usually targeting young people who don't know enough about financial management.
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    Credit card issuers made a record-breaking $7.3 billion in profits by charging excessive late fees last year. And total credit card fees have increased from $8.3 billion in 1995 to an astounding $21 billion last year, accounting for 35 percent of total credit card profits.
    And, Mr. Chairman, I know that you share some of these concerns.
    This is an issue we have to deal with.
    The bottom line is that the American consumer is being ripped off big time by credit card companies who are charging usurious—usurious—rates.
    We all know that interest rates for the last couple of years have been almost historically low. And yet you have hard-pressed families who are paying 25, 28 percent interest rate on their credit card. And this is an issue that we have to address in a multifaceted way.
    The chairman correctly mentioned that he and I worked together trying to address this issue and we did not have the votes.
    Mr. Chairman, you also remember that on the day we brought it forth, this place was loaded with lobbyists from banks and credit card companies putting excessive pressure on members, not only on this committee but on Congress. And that is the way it goes.
    That is part of the political problem that we have in America because these guys who have huge sums of money want to make sure that Congress does not represent consumers, that we allow a process to continue by which they make excessive profits by ripping off millions of people through outrageously high interest rates on their credit cards, and this is an issue that has to be addressed.
    Let me just mention, going into a little bit of depth about what I call this bait-and-switch scam—and it is a scam. And it is a scam that this Congress should not allow to continue.
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    Here is the deal: Folks, you are going to get today—go to your mailbox, especially if you have a kid in college, you are likely to get a couple of these cards: zero interest rate, 2.66, guaranteed. And then three months from now, after your son or daughter fills this out or you fill it out, what you will find is you are paying 13 percent, 18 percent, 25 percent. ''Well, how did that happen?''
    They promised you zero interest rate. Well, read line 65. Get out your magnifying glass, read line 65 on page 18, which tells you that the big front-page story about zero interest rates is totally meaningless because they can raise rates anytime they want.
    Now, some of the justification that they use for raising interest rates—we did some research and we found that 3 years ago you were late paying off a college loan, or you were late on a mortgage payment, you are now ''a financial risk'' and ''we are raising your rates.'' That is one reason.
    Despite the fact that every single month you paid your bill to that credit card company on time, that is irrelevant. Or they don't need any reason at all.
    A fellow I know saw his interest rates jump significantly. He called up the credit card company and they said, ''Oh, you caught us. We will lower your rates.''
    Chairman BACHUS. Thank you.
    Mr. SANDERS. But, Mr. Chairman, you took a little bit of time extra. Let me have just that——
    Chairman BACHUS. With unanimous consent, the gentleman——
    Mr. SANDERS. Just a little bit.
    This is a scandal. It is a scandal, and Congress has got to stand up to these lobbyists and these credit card companies and these banks who are ripping off the American people, because they are causing a lot of damage. The people who are hurt the most are people who go through divorces, who loose their jobs, who need to use the credit card for daily needs. And we cannot accept that.
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    So I would hope, Mr. Chairman, that you and I and others will have the courage to stand up to the banks and substantially lower credit card interest rates in this country.
    Thank you very much.
    Chairman BACHUS. I thank the gentleman.
    Mr. Hensarling?
    Mr. HENSARLING. Thank you, Mr. Chairman.
    The title of this hearing is rather wide-ranging: Financial Services Issues, A Consumer's Perspective. Well, I happen to be a consumer, my family is consumers, some of my best friends are consumers. So I think I bring a consumer's perspective to this particular hearing.
    It has been my observation over several decades of life that the best consumer protection we can have is a competitive marketplace providing a wide variety of goods and services to consumers at competitive prices.
    We had many, many hearings on the extension of the Fair Credit Reporting Act, and we had testimony after testimony—which I thought was very persuasive—that in America we enjoy the widest range of financial services at the most competitive prices.
    We have credit offerings today that people could only dream about decades before.
    I don't know who writes these memorandums for the members, but I certainly agree that benefits generated in today's marketplace also derive from the ability of financial services providers to segregate risk and price, financial products accordingly.
    Years ago, a bank may have had only one or two loan products for which a consumer either qualified or did not. And that was true decades ago. And now we have extended credit to those who previously have not had it. And what we have enjoyed?
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    Among other things, we have enjoyed the highest rate of home ownership in the entire history of the republic. We have seen a booming economy here recently, enjoying some of the greatest economy growth in almost 20 years, and part of that is due to access to credit.
    Some people will want to say, ''Okay, well, maybe we have access to a lot of different products but the cost is still too high.''
    Well, I don't know. To me, I see a lot of signs of a very effective marketplace. I just had my staff go to something called bankrate.com that examines different credit card offerings.
    The best I can tell, Mr. Chairman, as a consumer in America, I have hundreds of credit cards I can choose from with interest rates ranging anywhere from 17.88 percent at something called Bath National Bank, and here is 8.95 percent at Simmons First National Bank and everything in between with all kinds of different terms. To me, that looks like pretty effective competition.
    In addition, I come from Dallas, Texas, if you want to pull out the yellow pages and see who will compete for payday loans, there are 110 different offerings. They are about as ubiquitous as the convenience stores and 7-Elevens. To me, that seems to indicate, again, there is effective competition.
    I read where 30 years ago only 2 percent of low income people had access to credit cards. Today, it is 28 percent. We have had an explosion of ATMs, credit card offerings.
    All in all, I believe the American consumer is far better off today when it comes to the accessibility and the cost of credit products, than he was 30 years ago, and I believe the free enterprise system has a lot to do with it.
    I did not even see the yellow light, Mr. Chairman. I am already out of time?
    Chairman BACHUS. You still do have additional time.
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    Mr. HENSARLING. Okay, well, I just saw the red light come on.
    Chairman BACHUS. Your time has been exceeded. But you are doing very good.
    Mr. HENSARLING. I would just leave, if I could, Mr. Chairman, and take 30 seconds extra.
    I believe if there are those in this committee who believe that somehow consumers are being wronged, I would hearken back to something our Founding Fathers wrote, Jefferson in particular, when it came to our political democracy, and that is, ''I know no safe depository of the ultimate powers of the society but the people themselves. And if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them but to inform their discretion by education. We should not outlaw freedom, we should not outlaw competition; we should help educate with financial literacy the members of our society.''
    Thank you, Mr. Chairman.
    Chairman BACHUS. Thank you, Mr. Hensarling.
    Mr. Meeks?
    Mr. MEEKS. Thank you, Mr. Chairman.
    And I want to thank the chairman and ranking member for organizing this hearing. Too often issues of dealing with consumers are put on the back burner. And we have to make sure they are on the front burner.
    But also, too often sometimes we like to pit one against the other. I want to be clear that I am not in opposition to the financial services industry. In fact, the financial services industry is very important to me and the State of New York.
    Many of my constituents not only rely upon the credit that they can get through financial services, but they are employed by them. And so, therefore, I think that we need to make sure that we have a meeting of the minds and are able to work collectively to get together for the benefit of both the consumers as well as financial institutions.
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    But we don't often here. I mean, when you talk about issues that Mr. Sanders talked about, and yet we don't get the votes, and we should keeping working them, bait and switch, something is just apparently just wrong and we need to make sure.
    I go by my life experiences sometimes. And to say that some of the interest rates are not usury and some people not taken advantage of, if we shut our eyes to that, then we are just dead wrong.
    I can just go by just a personal experience myself, and that is, visiting my 78-year-old dad.
    You know, he did not have a lot of education, et cetera, and I just happened to go to review some of his accounts. And I looked at some of the credit cards that he had. So that in many of them, he was being charged a 25 and a 26 percent interest rate, apparently because he did not even know.
    So I instantly called some of these cards and they dropped them down to 9 and 8 percent. But they were doing it simply because they could do it. That is wrong. And we must stop that. And we must put that on the front burner and not ignore that.
    Ultimately somebody is going to have to pay. I mean, when he does not pay the bills, then somebody is going to pay it anyway, whether it is going to be the consumer or the financial institution or some insurance company. It has to be paid.
    So we might as well look at it and try to come with some best practices that is good for the consumers and the people as opposed to taking advantage. Because we cannot let people take advantage of those simply because they can.
    One of the keys to this is financial literacy, particularly for the young. We must educate individuals because that is the quickest way to put this out of business. But until we can do that, we have to act and hold accountable those in the industry to make sure that they are not taking advantage of those that are vulnerable.
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    Then on the other side, we have to make sure we don't throw the baby out with bath water. For example, we take payday lending. We have to make sure that those who offer payday lending, who are payday lenders, adhere to best practices of the industry and are not providing customers with multiple or rollover loans.
    At the same time, we have to acknowledge the fact that many payday lenders do adhere to the rules.
    And at the same time, I—again, using myself and my family as an example—can talk about times where payday lending was utilized so that my family—in particular, I could talk about one of my sisters now—could avoid excessive late payments or bouncing a check, that they understood what it was and it was with a reputable company. So we cannot eliminate the industry.
    We have to work to make sure that we have people who follow the best-practice rules. I think that is the key here.
    That is why this hearing is so important, because we have to balance the two, that we make sure that we don't throw the baby out with the bath water, we hold people accountable who are taking advantage of others, but then we just don't simply brand an industry bad when in fact it does offer alternative means to individuals so they can avoid late fees and excessive interest rates and bouncing checks.
    And so I hope and thank the panel for being here and look forward to working closely together so that we can have a balanced argument that benefits both the consumer as well as not put individuals out of business and thereby limiting choice the consumers may have.
    Thank you, and I yield back.
    Chairman BACHUS. Thank you, Mr. Meeks.
    At this time I recognize Ms. Biggert.
    I would like to commend Ms. Biggert for your work on financial literacy, which some of the members have noted.
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    Mrs. BIGGERT. Thank you very much, Mr. Chairman. And thank you for holding this hearing today, which does cover a broad range of financial services issues.
    But this morning I would like briefly to highlight the progress that our country has made in one specific consumer protection initiative, financial literacy, which has been mentioned several times, but I think it is so important.
    Chairman BACHUS. What I am saying they mentioned is your work——
    Mrs. BIGGERT. Oh, thank you, thank you very much.
    The House Financial Services Committee and Congress and our federal agencies and private-sector advocates I think have made great strides toward achieving our goal to help Americans, especially young Americans, become literate in finance so that they can make informed decisions about their financial future.
    In December 2003, as part of the Fair and Accurate Credit Transactions Act, Congress authorized the Financial Literacy and Education Commission, FLEC. The commission has taken an important step recently by asking the public for its input on the development of a national strategy. And I would urge my colleagues to consider providing their thoughts as the commission's efforts to develop a national strategy will be a key focus of the federal government's efforts in this area.
    So I think that the commission would benefit from the views of the members of Congress as it designs the national strategy.
    Secondly, financial literacy is certainly a lifelong process, which ideally begins in grade school with a solid foundation in economics. And the importance of K through 12 economics as the cornerstone of a lifelong financial literacy program is one of the reasons why I support the Excellence of Economic Education program, the EEE program that will develop competitive grants for innovative success-oriented programs that deliver economics to our schools.
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    If our schools don't teach the ABCs of finance and economics, our children are likely to fall into that behind in life, especially in today's global competitive economy.
    And thirdly, Congress continues to take an active role in ensuring that our citizens of all ages and walks of life have access to objective financial education.
    Just last week in the Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, we held a hearing entitled: GI Finances, Protecting Those Who Protect Us. And during this hearing it was revealed that our military may not be as objectively educated as they could be about finance.
    So since our military personnel often have unique financial needs and opportunities, perhaps this is a new opportunity for us to examine how both the public and private sectors can effectively coordinate to help educate our service men and women about financial services.
    And then I might note, Mr. Lively, in your written testimony you mentioned your organization's commitment to financial literacy and your involvement in FLEC. I want to thank you for your dedication to our cause and encourage you, as well as the other witnesses, to expound on your recent efforts with FLEC and provide your ideas to them as they develop a national strategy for financial literacy.
    So thank you very much.
    And thank you, Mr. Chairman. I yield back.
    Chairman BACHUS. Thank you, Ms. Biggert.
    Mr. Ross?
    Mr. ROSS. Thank you, Mr. Chairman.
    And I cannot think of a more appropriate time to be holding this hearing than this time in our nation's history. I was a little surprised when I heard one of those who spoke earlier and before me today talk about this robust economy. In the country I live in, we have 9 million people out of work. We have lost a million jobs to China. We have 44 million people without health insurance and one in five children living in poverty.
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    We have the largest budget deficit ever in our nation's history for the second year in a row. Our government today is spending $900,000 more than is taken in every 60 seconds.
    And because of this, Mr. Chairman, we are seeing more and more people who need financial help. And that is why I believe this hearing is so timely today.
    I want to thank you, Mr. Chairman, and Ranking Member Sanders for having this important hearing to discuss various consumer perspectives about products and practices within the financial services industry.
    With the increase in competition and innovation that has occurred in the marketplace, the American consumer is able to obtain a variety of products suited to their needs. I am concerned that existing federal law has not kept pace with the speed of the marketplace. I encourage this committee to continue its review of these laws and update them when necessary.
    I urge the consumer groups to work with industry to ensure that those who utilize credit products receive adequate protection while having access to these services.
    Again, thank you for convening this hearing, and I look forward to the testimony of our witnesses in continuing to work with the interested parties on these important issues.
    I cut my statement short in deference to time, Mr. Chairman, but I would like to submit the entire statement for the record.
    [The prepared statement of Hon. Mike Ross can be found on page 57 in the appendix.]
    Chairman BACHUS. I thank you.
    Mr. Ross, if you would permit me, you mentioned the unemployment rate and the job growth. And I simply point out to you—I think maybe there is a misconception—the unemployment right now is 5.4 percent. During the 1990s, it averaged 5.8 percent. During the 1980s it averaged 7 percent. And that was sort of skewed somewhat by the last year of the Jimmy Carter administration when it reached unbelievable heights, and that sort of skews the whole 1980s.
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    During the 1970s it was 6 percent.
    So actually they are basically at 30-year lows.
    And as for job growth, this year—you talked about this year—from January to July, the job growth is 62.1 percent.
    During the Clinton administration the first time, it was 60 percent, the second time it was 63.
    So it actually is growing faster than that mean.
    And I know for every person out of work it is a tragedy. But I think that there is some debate there. I know now is not the time to do that.
    I would like to recognize at this time Mr. Feeney—oh, I am sorry, I apologize. I did not know you had a response.
    Mr. ROSS. Absolutely, Mr. Chairman. And if it was not such a serious matter it would be funny.
    Chairman BACHUS. We can for the record, because I don't want to do this to you, I will introduce my things from the Department of Labor and vice versa.
    Mr. ROSS. You want to talk numbers that say that the unemployment rate is down compared to the 1990s, you know, I can talk numbers about the worst job growth record since Herbert Hoover. All these things mean one thing: Consumers need credit and they need access to credit where there are consumer protections and safeguards in place.
    We can talk statistics all day long, Mr. Chairman. What I am concerned about is real working families.
    I was with a lady in her 50s, a woman who is in her 50s, in Queen, Arkansas, just a week ago who that day lost her job, a job she had held for 25 years. What complicates it even more is that she was told that she could keep her health care for $800 a month under a COBRA plan. Her unemployment benefits won't even be $800 a month.
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    These are serious times. These are difficult times for a lot of working families all across America. And I would hope that we could work in a bipartisan way, not by pointing to this number or that number, but work to truly try to restore this economy and put people back to work.
    Unfortunately until that happens, we need to make sure that our consumers are well protected when it comes to being able to acquire the money they need to put clothes on the backs of their children and feed their families, and oftentimes in my district simply be able to afford their manufactured home payment.
    These are tough times. And I hope this hearing today will go a long way toward providing the kind of protections that our consumers need when they go to the bank or utilize a credit card or a payday loan.
    And with that, Mr. Chairman, I thank you.
    Chairman BACHUS. I thank you. I think working in a bipartisan way is always the best way.
    At this time I would like to recognize Mr. Feeney for an opening statement.
    Mr. FEENEY. Well, thank you, Mr. Chairman. I appreciate the hearing. Access to credit for all Americans is important.
    One of the concerns I have is that at the State level in Florida—and I know some 30-some other States have dealt with the issue surrounding payday lending. These are sort of unusual loans that fill a niche that traditional lenders are not interested in.
    And I hope we do as we did in Florida, which is to take a rational approach to this so that we don't, as the gentleman said earlier, throw the baby out with the bath water.
    There are a lot of do-gooders in the media and elsewhere that would like to make sure that every American, regardless of creditworthiness or access to assets for security for a loan, has low-interest loans, and that would be a very ideal situation. But very few of them are interested in investing their own capital to make those low-interest loans, people that have no assets and no creditworthiness.
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    The fact of the matter is that there are alternatives to people that do not have access to credit who have very little assets or no assets and do not have established credit. Some of them are not pleasant—going to a loan shark and going to a skylark over time was something traditionally done in the streets of America. Others are even less pleasant perhaps—selling drugs or prostitution, other illegal activities. You have to make that week's rent payment.
    Appropriate regulations, like usury laws, are something that I fully support. I think a lot of the responsible states have done the right thing. But they have recognized that if there was a huge windfall profit in this area of lending money to people with little or no assets and little or no creditworthiness, that the way free markets deal with that is for people that see the problem to invest their own capital in it and go out and make those low-interest loans to people that cannot get traditional loans at traditional lenders.
    So I hope we will approach the payday issue as responsible States like Florida have done in the past.
    Chairman BACHUS. Thank you.
    Mr. Baca?
    Mr. BACA. Thank you very much, Mr. Chairman, for hosting this hearing that I feel is very important as we look at protecting our consumers in terms of credit.
    I would like to state a little bit in reference to—as we look at the unemployment. I know that you have touched base, and I want to retaliate a little bit in response.
    Because when we look at 9 million people unemployed right now and we look at the average salary being at $9,000 less than we—and we have done more of the outsourcing, that is why, in terms of technology, credit reporting and everything else is so important, because a lot of the work really is going outsourcing.
    So it is important to know the new technology, the new knowledge, and protection of individuals and consumers is very important, and that is what people should know.
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    And then the majority of the jobs, when you look at those jobs that are created, it is not new jobs that are created; it is people that are doing two or three or four different jobs and we are counting twice the number, too, as well, and that is why the numbers seem to be high when in reality they are a little bit lower.
    But we can debate that even further in reference to that.
    But all in this area, I think it is important because we need to protect our consumers.
    Today, consumers confront a host of modern technologies such as electronic banking, remittance, electronic payments that no one dreamed of just 10 years ago. But the law has not kept pace. Consumer protection may be too outdated to protect against consumer abuse.
    And we need to make sure that our consumers have trust, faith and change their attitudes and behavior of how we deal today with technology in banking. And that is part of the education, the literacy, that needs to go on.
    But people have to have faith and trust. Once we develop that kind of faith and the trust and the literacy that goes on and the technology—and changing attitudes, because amongst the elderly, it is always so hard to change their attitude. ''I like the way we did banking in the past.'' When we change it, it is like, ''Do we really have trust in it?''
    So we must ensure that consumers have proper information, that they are not subject to bait-and-switch tactics, that they are not defrauded and that their funds and nest eggs are protected from criminal and scam artists.
    We must ensure that the consumers are safe and that they enjoy the best access they can to properly give them to our banking system.
    I thank the witnesses for coming today and I look forward to asking them questions later on, too, as well.
    And thank you very much for having this hearing today.
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    Chairman BACHUS. Thank you, Mr. Baca.
    At this time I recognize the gentleman from Pennsylvania, Mr. Toomey.
    Mr. TOOMEY. Thank you, Mr. Chairman. And I just, too, briefly want to commend you and the ranking member for holding this hearing. I think this is a useful exercise.
    I hope we are going to hear about how and why the United States financial services industry has simply become by far and away that industry which provides the most extensive, most efficient, most widespread availability of credit to its population in the entire world. There is no other country that is close.
    And it has been a big part of why our economy has outperformed the rest of the world, why our standard of living is the highest in the world, and why our prospects for a strong economic growth continue to be terrific.
    I hope we will also talk about how and why it is that the best consumer protection out there is the marketplace, is the fact that consumers have a choice, is the fact that there is a competitive industry in all aspects of providing credit, and therefore every player in that industry has to be concerned about losing customers and therefore providing the best possible services for that customer. That is how our economy works, that is how this industry works.
    I hope that we can avoid the greatest danger to the continued growth and availability of credit, which would be excessive and inappropriate regulation coming out of Washington.
    So I hope we are going to learn more about these things today.
    I want to thank you for holding this hearing, Mr. Chairman.
    Chairman BACHUS. I thank the gentleman.
    Mr. Davis from Alabama?
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    Mr. DAVIS. Thank you, Mr. Chairman. And given our time constraints, I will be brief.
    Let me just make two separate points.
    The first one, I want to make sure I give the Chair of this subcommittee an enormous amount of credit. One of the things that makes this committee I think unique among a lot of the standing committees in the House is that we have a real capacity to occasionally get things done on this committee. We have a real capacity to occasionally find a common ground, as I sit here somewhere near the middle of this room, we have the capacity to make things happen on this committee.
    I was enormously impressed by the work of my friend and my colleague from Alabama, who is the Chair today, of a work that he did in leading us to a bipartisan, effective Fair Credit Reporting Act last year.
    When I came to this institution in early 2003, some very strong mindset that fair credit reporting would go the way of bankruptcy reform, an idea that a lot of us would embrace but that there would be significant partisan backbite around the issue.
    There has been the mindset that, well, it will clear the House, would not go anywhere in the Senate.
    One of the reasons that we have passed that legislation, the signing of the law by the president about a year ago, is because of the leadership we share on this subcommittee.
    And that capacity to get something done across the aisle is a mindset that I hope we bring to this set of issues.
    Make no mistake, it is very easy for us to talk about these things in theory. It is very easy for us to talk about these things in the abstract. The reality is that, particularly for those of us on this side of the aisle, a lot of our constituents are unbanked, a lot of our constituents are outside the reach and the protection of the conventional financial services industry.
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    And we can do one or two things with those folks: We can be so concerned about them in theory that we don't help them in practice, or we can sit back and condone practices that are occasionally abusive.
    You know, we have to find the middle ground I think between those two things.
    The realities of these final weeks, so we are not going to get much done at any level. But I am hoping that when we come back here in January, the 109th Congress, that we will have a real ability to steer toward the kind of middle ground on payday lending, on the small lending practices that will begin to address the real gaps we have in this country.
    One final point: One of the most amazing statistics in America today is the wealth gap between African Americans and Caucasians. The average assets, when you subtract out the debt, for an African American family is less than $20,000. It is over $120,000 for Caucasians. That is a 6 to 1 gap that is not based on any law that we can change tomorrow, it is not based on the old kind of segregation or discriminatory practices, but it is ingrained in our society. We have to combat it. And I have the mindset that maybe this committee can be a part of that process.
    I yield back the balance of my time.
    Chairman BACHUS. I thank the gentleman. I appreciate those kind words.
    Mr. Davis is a Harvard graduate. I am beginning to like Harvard more and more.
    At this time, I would like to—are there any other members that have an opening statement?
    If not, we will proceed to the introduction of the panel.
    Testifying today will be Michael McEneney, a partner in the Washington, DC, office of the law firm of Sidley Austin Brown and Wood. His practice focuses primarily on regulatory and legislative issues impacting financial institutions with special emphasis on consumer issues. He is a frequent speaker and writer on financial services issues and has testified before Congress on behalf of a number of financial services organizations.
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    We welcome Mr. McEneney.
    And actually he is representing the Consumer Banking Association here today.
    We will also hear from Mr. Randy Lively, president and CEO of the American Financial Services Association. That is a Boston-based trade association representing market-funding financial services firms that provide credit to consumers and small businesses.
    His extensive background includes 22 years with Sears Roebuck. He also, in 1981, joined Zale Corporation, a national retail jewelry chain based in Irving, Texas. He is a graduate of LSU and is on the board of trustees for the National Foundation for Consumer Credit advisory board for Georgetown University.
    We welcome you.
    Our third panelist is Ms. Jean Fox, director of consumer protection for the CFA. Ms. Fox is an advocate for consumer protection for the Consumer Federation of America, a nonprofit association of 300 consumer groups established in 1968 to advance the consumer industry research, education and advocacy. She specializes in financial services, electronic commerce and consumer protection issues.
    She is the co-author of many reports and articles on payday lending. I won't go through—it is a long list.
    She is also a co-author of a series of annual reports on refund anticipation loans. And I know that some of our members have expressed a particular interest in that—a very extensive and long background.
    I think Mr. Sanders particularly requested that we have your testimony because he has talked about refund anticipation loans on many occasions.
    Our third panelist is Ms. Tamara Draut. She is the director of economic opportunity program for A Network for Ideas and Action, New York, New York. Is that correct?
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    Ms. DRAUT. Demos.
    Chairman BACHUS. Okay, Demos, A Network For Ideas and Action, thank you.
    They manage the development and execution of all research related to economic security issues, including research on credit card debt trends, a principal investigator for a national household survey research project to study the nature and scope of credit card debt among low-and moderate-income households.
    And she has authored several reports and publications including ''The Growth of Debt Among Young Americans,'' something this committee has concerns about, ''The Growth of Debt Among Older Americans'' and several other publications.
    She is a graduate of the Columbia University School of International and Public Affairs and Ohio University EW Scripps School of Journalism.
    We welcome all four of our witnesses.
    At this time we will start with Mr. Lively. We will go from my left to right.
    Welcome, you all.
    Mr. LIVELY. Mr. Chairman, Representative Sanders and members of the subcommittee, I am Randy Lively, president and chief executive officer of the American Financial Services Association.
    AFSA is a national trade association whose 300 member companies include consumer and commercial finance companies, captive auto finance companies, credit card issuers, mortgage lenders and other financial services firms that lend to consumers and small businesses.
    I thank you, Mr. Chairman, for conducting this hearing, given the importance of consumers' credit in driving our economy.
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    As of July 2004, outstanding consumer credit was over $2 trillion, according to seasonally adjusted figures from the Federal Reserve. Census Bureau figures for the second quarter of 2004 show a homeownership rate of 69.2 percent, meaning there are more homeowners in America than at any time in history.
    Credit availability also enables people to buy vehicles that transport them to work, pay for education and training that qualifies them for jobs and to start or expand small businesses.
    AFSA members are proud of their role in helping create advancement opportunities for many Americans and sustaining growth for our nation's economy. As you know, we supported the committee's successful effort that led to last year's enactment of the Fair and Accurate Credit Transactions Act.
    We thank you for your leadership, Mr. Chairman, in crafting balanced legislation that preserves our nation's consumer credit system.
    The FACT Act assures uniformity in our national credit-granting system and maintains creditors' ability to offer a variety of products and services to meet borrowers' financial needs.
    In recent weeks, the subject of consumer credit has emerged on another front with the announcement of the Kerry-Edwards plan to protect Americans from abusive financial deals. A fact sheet on this plan says that Senators Kerry and Edwards are committed to ensuring that responsible consumers continue to gain access to credit and that companies must be responsible and must play fair.
    AFSA agrees with both of these objectives, but when it comes to the plan's recommendations on how to reduce lending abuse, we have an entirely different point of view.
    In the short time I have today, I would like to touch upon two things that we are doing in this area.
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    The first is our members' code of ethics which includes voluntary standards in a number of areas, such as mortgage lending, arbitration agreements and the collection of past-due accounts. AFSA and its members believe the interest of the public can be well served by conducting business in a way which builds and fosters public trust and confidence in the industry. Each AFSA member is expected to review our code and establish and enforce their own policies to carry out the letter and the spirit of these standards.
    The second thing to mention is our long-time involvement in consumer education initiatives for both adults and youth.
    The AFSA Education Foundation is a founding partner of the Jump$tart Coalition for Personal Financial Literacy, whose nearly 140 partners include government agencies, associations, educational institutions and consumer organizations all working together to improve financial understanding in grades K through 12 and on into college.
    As the chairman of the Jump$tart Coalition, I am very proud of its accomplishments and its success in drawing attention to the need for youth financial education in this country.
    Our other major education initiative is MoneySKILL, a free, online personal finance curriculum from the AFSA Education Foundation that is aimed at the millions of high school students who graduate each year without understanding credit use, budgeting, retirement, or other money management basics.
    To date, teachers in 45 states as well as in Canada, Guam, China, Germany, Malaysia, New Zealand and South Africa have registered to use the program.
    We continue to explore opportunities to reach more students with MoneySKILL, including possible partnerships that will allow the curriculum to become available to higher-risk youth.
    MoneySKILL consists of 34 modules that students complete in about 40 minutes each. Within the course's general content areas—which include income, expenses, assets, liabilities and risk management—students receive unbiased information on a number of fundamentals. These include the effect of income taxes on take-home pay, understanding interest when borrowing, using credit cards responsibly, how buying a car compares with leasing one, and understanding different types of insurance and the costs and benefits of borrowing, to name a few.
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    Mr. Chairman, we certainly appreciate and welcome Senators Kerry and Edwards' interest in reducing abusive lending, a practice that has long been condemned by the association and its members. And we agree that the industry should take a leadership role in addressing the problems, which is in part why we are involved in programs like MoneySKILL and coalitions like Jump$tart.
    At the same time, we are concerned about the impact of these plans on the functioning of the consumer credit market. When limits are placed on a creditor's ability to use performance-based pricing, responsible consumers who pay their bills on time inevitably bear the burden of higher costs generated by those who fail to properly manage their use of debt.
    As noted by Federal Reserve Board Chairman Alan Greenspan, credit-scoring technologies have served as the foundation for the development of our national markets for consumer and mortgage credit, allowing lenders to build highly diversified loan portfolios that substantially mitigate credit risk.
    Over the past 80 years, the U.S. financial services system has evolved into the most efficient in the world and one that serves more of its population than any other.
    Proposals to tinker with the underpinning of this system should not be taken lightly.
    The good news is that we already have laws in existence to get at the unscrupulous lenders who are defrauding people, and we ought to do everything possible to enforce those laws to their fullest extent.
    Ultimately, however, the most effective way to deal with both excessive use of consumer debt and abusive lending is through education.
    Chairman BACHUS. Thank you.
    Mr. Lively, if you could wrap up.
    Mr. LIVELY. Yes, sir.
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    Chairman BACHUS. Is that a convenient point?
    Mr. LIVELY. It is.
    Correct choices by the consumers represent the behavioral solutions to many of the problems that are being discussed. We believe equipping people with the knowledge to make decisions that benefit them, and avoid those that don't, will greatly improve their financial situations while making our economy even stronger.
    Thank you very much for the opportunity.
    [The prepared statement of Randy Lively can be found on page 103 in the appendix.]
    Chairman BACHUS. Thank you.
    Mr. McEneney, we welcome you to the committee.
    Mr. MCENENEY. Thank you very much, Mr. Chairman.
    Chairman Bachus, Ranking Member Sanders and members of the Subcommittee, my name is Michael McEneney, and I am a partner in the law firm of Sidley Austin Brown and Wood.
    It is my pleasure to appear before you this morning on behalf of the Consumer Bankers Association
    Today's hearing is focused on financial products and services from the consumer's perspective. There is no doubt that today's financial marketplace looks quite good from the consumer's perspective.
    The financial services marketplace offers consumers a wider variety of financial products and services than ever before. Not only can consumers choose from a wide range of products, but they can obtain them over the phone, using the Internet, or through personal interaction at the financial institutions' offices.
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    Our financial marketplace is truly a success story. However, the success did not develop overnight or by accident. In fact, it was not too long ago when retail banking services looked much different than they do today.
    Back then many people had to carry cash or checks at all times because credit cards as we know them did not exist. And to get that cash, people had to spend time going to the bank branch and standing in line for a teller because there was no such thing as an ATM.
    Visiting the bank branch in person was also necessary to get a loan, and in many instances you had to have an account with the bank to get that loan. The approval process could last for weeks, and fewer people qualified for loans than would qualify today.
    There are obviously a number of reasons for the spectacular evolution of the financial services industry and the ever-expanding choices available to consumers. However, I believe that most of these reasons relate to providing financial institutions with the flexibility to compete fiercely with one another to provide a better product to consumers at lower costs.
    I would like to use a few examples to illustrate my point.
    First, the process by which consumers obtain home mortgages has been simplified and made more efficient through increased competition in the marketplace. Today, consumers benefit from lenders across the country competing with one another to provide consumers with home loan opportunities wherever they may reside. Decisions are often made almost instantaneously, and lenders are able to offer loans that meet a variety of consumer needs.
    Given the number of lenders and types of mortgages available, creditworthy borrowers are likely to have several choices when choosing how to finance their homeownership.
    Second, I think we may take for granted that a consumer today can obtain a credit card that suits his or her individual needs. The credit card may offer frequent flyer miles, the logo of the consumer's charity, or a rebate on purchases made with the credit card.
    The consumer can also shop for low interest rates and cards that do not have any annual fees. There once was a time when annual fees were common and consumers obtained few ancillary benefits for using the cards.
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    Today, most people can find an offer for a card without an annual fee or for a card that offers benefits simply by reading their mail.
    Third, the ability of financial institutions to price their products in a more precise manner has resulted in enormous benefits for all consumers.
    Thanks to our national credit reporting systems, successful lenders are able to use the increasing amounts of information available to them to evaluate and manage risk that allows them to lower the cost of credit to those consumers that have good credit history.
    But consumers with good histories are not the only ones who benefit.
    Now, instead of a bank offering a one-size-fits-all loan product to only those consumers with above-average credit histories, the bank can use risk-based pricing to offer more consumers access to credit at a variety of risk-based prices. That means more home mortgages, more college education loans and more auto loans for safe transportation for consumers of all walks of life, not just the wealthy or those with perfect credit histories.
    Competition in the market place also means an expanding pie where those who have been traditionally underserved can enter the mainstream of our economy.
    CBA's members continue to develop and expand product offerings to satisfy the demands of an increasingly diverse market. This includes efforts to bank the so-called unbanked through use of payroll cards, stored value products and remittance services in addition to offering low-cost traditional banking products, such as checking accounts. For example, CBA is hosting a Hispanic banking forum later this month to highlight bank activities in this area and provide an opportunity for banks to share their knowledge and experience.
    Mr. Chairman, current law ensures that consumers receive valuable disclosures with respect to financial products. But it is also important to note that our financial marketplace is a complex system that relies on providing consumers with choice.
    Disclosure laws are important, but they can only do so much in the absence of fundamental financial literacy on the part of consumers.
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    Banks have long understood this point, and that is why banks have been in the forefront of efforts to expand financial education.
    In April 2004, in fact, CBA published a survey regarding the progress made in the financial literacy of consumers as a result of banks' educational efforts. The results of the survey evidence an increase in banks that participate in consumer financial literacy education.
    In fact, of those banks that responded, a full 100 percent of the institutions participate in at least one of the eight areas of concentration.
    Although the entire survey can be found at www.cbanet.org, I would to be able to submit a copy of the survey for the record.
    In conclusion, Mr. Chairman, I would like to assure you that CBA's members are committed to ensuring that consumers receive the information they need, including three information disclosures and financial education materials and opportunities.
    Thank you again for inviting me to appear before you today. I would be pleased to answer any questions.
    [The prepared statement of Michael F. McEneney can be found on page 109 in the appendix.]
    Mr. TIBERI. [Presiding.] Thank you, sir. Thanks for your testimony.
    Ms. Fox?
    Ms. FOX. Representative Tiberi, Ranking Member Sanders and members of the committee, I am Jean Ann Fox, director of consumer protection for Consumer Federation of America.
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    I am testifying today also on behalf of Consumers Union, the Center for Responsible Lending, the National Consumer Law Center, on behalf of their low-income clients, and the U.S. Public Industry Search Group. The National Community Reinvestment Coalition has asked to join our comments as well.
    We thank you for holding this hearing to look into financial services from a consumer perspective. And I have to tell you, from our perspective, the financial marketplace looks quite different than you have heard so far this morning.
    The trends that we are seeing include explosive growth of quick-cash credit products offered at exorbitant interest rates and under unfair terms, including payday loans, bounced-check loans, which banks call courtesy overdrafts, tax refund loans and other financial products.
    Besides seeing an explosive growth in high-cost, quick-cash credit being marketed to consumers, we have also noted that there is targeting of cash-strapped and credit-constrained consumers—minorities, members of the military and the working poor—for these high-cost financial services.
    And we also note the misuse of bank powers to undercut state authority to regulate the credit market and protect consumers at the State level.
    Besides developments in the credit market, we also have a lot of developments in the financial services market, with electronic products coming on the market without upgrading the consumer protections that should apply to these new ways of carrying and spending money so that consumers can have confidence in things such as payroll cards or pre-paid debit cards, other forms of electronic money. The rules have not kept up with the developments in the market, and we urge your attention to that issue.
    I would like to speak briefly about a few of the high-cost credit products that we have concentrated on in the last few years. But I am interested in answering your questions on any other aspect of our testimony.
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    Payday lending has been mentioned by several of you. This is a very big market. There are $40 billion in loans made per year. Consumers are paying about $6 billion to borrow money in $300-or-so increments, paying $15 to $30 per $100 for loans that are due and payable in full on their next payday, or the check that they have left behind with the payday lender will bounce, setting off another cascade of financial problems.
    These are small loans subject to state small-loan regulation and covered by federal credit law, including Truth in Lending, according to the Federal Reserve and a series of court decisions.
    We have noted that competition does not effectively protect consumers at this end of the market. If competition did discipline prices, consumers in Chicago would be paying the lowest rates for payday loans rather than the highest—typically 520 percent annual interest for loans in Illinois.
    We also note that the payday loan industry best-practices do not adequately regulate this product. The trade association best practices say nothing about the cost of the loans. They don't prevent repeat borrowing, which is one of the serious problems with this product. For example, in Iowa the average payday-loan customer at a single lender will have over 12 loans per year, which is a continuous borrowing experience, not an occasional quick-cash transaction.
    States have dealt with payday lending in a variety of ways. There are 33 states that have authorized it, two where it is not prevented by state law, 15 states where it is currently not legal.
    The industry has not been content to stick to the States where they have legal authorization to make their loans. These companies have partnered with banks located in states without usury limits and claim the right to make payday loans in states where it is not authorized, such as in North Carolina or New York or Georgia.
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    The Georgia legislature took action this year to stop that practice. They enacted an anti-rent-a-bank payday loan law signed by Governor Perdue, that has been upheld so far in federal court challenges.
    But payday lenders also partner with banks to do business in ways that exceed the limits of states where the state law makes it legal to do payday lending. For example, in Texas, the rules under the Texas Finance Commission allow payday lending, but under terms that are covered by the state's small-loan law. So almost all of the payday lending in Texas is done through rent-a-bank arrangements at much higher rates than Texas rules allow.
    The same problem exists in New York, North Carolina, Pennsylvania and Michigan.
    We have not come before you to ask you to outlaw payday lending. We think that is an issue at the State level, although we do think Congress should be concerned that financial institutions are encouraging consumers to write checks without money in the bank, and are doing that through FDIC-insured banks.
    But we do urge your immediate attention to the problem of rent-a-bank payday lending. The FDIC is the only federal regulator that allows banks under its supervision to partner with storefront lenders to undercut the ability of states to enforce their laws, and we ask your attention to that problem.
    We are also concerned about the explosive growth in ''courtesy overdraft'' bank bounce loans, a product which we believe is the bankers' response to how much money the payday lenders are making by encouraging people to write checks without money in the bank.
    And this is not your old-fashioned overdraft protection that you apply for and have to be creditworthy to get and get a contract that the bank will in fact cover any of your checks that overdraw your account. These are ''courtesy'' programs where the banks advertise that it is okay to write a check without money in the bank but do not promise to cover those overdrafts. Banks charge their penalty fee as if you have done something wrong rather than something they have given you permission to do.
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    And besides covering the checks, these bounce loans also apply when you put your ATM card in to withdraw cash and you are allowed to withdraw more money than you have on deposit without being given a warning of that, asked for your permission, or given any disclosures on what those cash advances are going to cost.
    We conducted a poll this summer to ask consumers what they think about key features of bank bounced-check loans, and 68 percent of them said that they think it is unfair for banks to permit overdrafts without their affirmative consent. An even greater majority, 82 percent, said that it is unfair for banks to permit overdrafts at the ATM without notice or warning on the screen about asking for their consent to advance the funds and impose a fee.
    We have urged the Federal Reserve to modify their proposed rules in order to address some of the fundamental problems with bounced-check loans, but we do note for your consideration that if that is not done, that we need Congress to change explicitly Truth in Lending so it is clear that cash advances done at the ATM and by banks that give you permission to overdraw your bank account is credit that deserves the Truth in Lending disclosures that every other form of lender has to abide by.
    We also note there has been a big growth in the refund anticipation loan market. This is another form of quick-cash loan to consumers who are having trouble making ends meet. This is a bank loan based on your tax return so that you get money in a day or two rather than waiting a couple of weeks for the IRS to direct deposit your tax refund into your own bank account, which is available to consumers for free.
    Consumers paid $1.14 billion in loan fees and an additional $406 million in filing fees in 2002 to get quick-cash loans based on their tax refunds. And again, banks are partnering with tax-prep firms in order to export their home state deregulated interest rate so that a state like Massachusetts that has a small loan interest rate cap has difficulty enforcing that in this situation.
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    Chairman BACHUS. [Presiding.] Ms. Fox, if you could wrap up. We appreciate your testimony.
    Ms. FOX. Thank you, and I will be glad to answer questions on any of these other subjects.
    On the question of the credit card universal default, we think that that should be prohibited. There are so many reasons why a consumer's credit score could change that have nothing to do with whether they are paying their bills on time. It is just fundamentally unfair to change a consumer's interest rate at one lender because of a change in their credit score of their experience with another lender. We appreciate your concern about that matter.
    And I would be glad to answer your questions, and thank you for the opportunity.
    [The prepared statement of Jean Ann Fox can be found on page 77 in the appendix.]
    Chairman BACHUS. Thank you.
    Ms. Draut?
    Ms. DRAUT. Good morning, Chairman Bachus, Ranking Member Sanders and members of the committee. I want to thank you for holding this hearing and asking Demos to participate.
    As noted, Demos, which takes its name from the Greek word for people, is a national public policy organization. We are nonpartisan and nonprofit, based in New York.
    As director of the Economic Opportunity Program, I oversee the organization's research and policy efforts on issues related to economic security.
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    Demos began studying the growth of debt out of our overall interest in the economic well-being of working families. I very briefly want to share with you one or two key findings about the growth of credit card debt from our research.
    Our research shows that credit card debt has grown most rapidly among three segments of the population: older Americans, young adults and the middle class.
    Between 1992 and 2001, credit card debt among those aged 65 to 69, presumably the newly retired, rose 217 percent to an average balance of nearly $6,000. Older Americans are now in more credit card debt than the average household.
    Young adults' credit card debt more than doubled over the same time period. And middle-income families saw an increase in their credit card debt of 75 percent.
    I want to be clear from the outset that Demos believes the availability of credit is beneficial to households. Using revolving credit to pay off large, unexpected expenses, like car repairs, allows families to spread payments over time, providing less disruption to the family budget.
    Using credit to supplement a family's income during a job loss can help ensure the family stays afloat and devote precious income to maintaining the mortgage, rent, or keeping the lights on.
    However, beneficial access to credit becomes all too destructive due to widespread, abusive and capricious industry practices.
    I would like to focus the rest of my testimony on three of these practices, all of which ensure many households never get a fair chance to pay down their debt.
    I also want to say from the outset that we fully support risk-based pricing, the practice of charging less creditworthy customers more for their credit. I do not think the following policies fit this criteria.
    As Ranking Member Sanders and Chairman Bachus both mentioned briefly, I want to just touch as well on bait-and-switch or universal default practices in which credit card companies routinely raise the interest rate on a card holder for being late with another creditor.
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    The resulting rate increase is often double the original rate and typically ranges from 24.99 APR to 30 percent. Demos believes this practice unduly punishes many responsible debtors.
    The second practice I would like to talk about is the treatment and definition of late payments. All the major issuers now consider a payment to be late if it arrives after 1 or 2 p.m. on the due date, even if, as they say, the check is in the mail. This zero tolerance policy also penalizes responsible debtors.
    A run-of-the-mill tardy payment now results in a late fee that averages $31 and a rate increase that is typically double or even triple the original APR—again, these penalty APRs range from 24.99 percent to 30 percent.
    I want to underscore that these rates are being paid by cardholders who are not typically considered delinquent or in default. They may be 1 minute, 1 hour or 1 day late on a payment. And yet they are paying the same penalty rates that they would pay if they were behind by a month or more.
    Finally, I want to draw attention to the retroactive application of penalty rates.
    Whether a rate increase results from a run-of-the-mill tardy payment or is due to bait-and-switch practices, this new rate is applied to all of the cardholder's existing balances.
    By applying the higher rate to previous purchases means that credit card companies are essentially changing the terms retroactively on consumers and in essence raising the price of every item or every service purchased previously with the card.
    We believe this is a violation of the account terms on which the cardholder and company agreed upon and which issuers should be held accountable.
    These severe default rates levied on customers who are paying their bills in good faith, if not always in perfect time, constitute an enormous and undue increase in the cost and length of debt repayment.
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    Indebted families need protection from these punitive rate hikes and penalties. We urge Congress to consider the following actions: One, to limit interest rate increases to future purchases only; two, to prohibit bait-and-switch practices; three, we support limiting the amount a cardholder's rate can be raised to an amount no higher than 50 percent of the original rate. For example, if the original APR is 9 percent, the rate can only be raised to 13.5 percent.
    Finally, we believe it is imperative that a late payment grace period of three to five days is allowed to ensure that responsible debtors are not unduly penalized.
    While other reforms are certainly necessary, we believe these modest protections would help give families a fair chance to pay down their debt and get back on the path to savings and financial stability.
    I appreciate your time today and will be happy to answer any questions.
    [The prepared statement of Tamara Draut can be found on page 58 in the appendix.]
    Chairman BACHUS. Thank you.
    That concludes our panelists' testimony.
    I am going to reserve my questions at this time.
    Mr. Sanders?
    Mr. SANDERS. Thank you, Mr. Chairman.
    This has been a very interesting hearing. The testimony has also been illuminating.
    I think Mr. Lively mentioned his concerns about Kerry's proposal. Raising that issue reminds me a little bit of what Senator Edwards calls the two Americas. And that is what we are hearing today, two Americas.
    We have heard from some of our Republican friends that the economy has never been so good, that financial services are providing all of these opportunities, we have the highest standard of living in the world—everything is just rosy, peachy.
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    And then we hear from other people who are talking about the decline of good paying jobs, the growing gap between the rich and the poor, the increase in poverty, the fact that 45 million Americans have no health insurance, that people who are desperate are borrowing money at exorbitant interest rates.
    So let me start off by asking my friends from the banking community here, let me just ask you—you will excuse me, maybe being a little personal here, but let me ask you a question about morality.
    Somebody works hard, they lose their jobs. We have lost close to 2.7 million manufacturing jobs in the last few years. It happens everyday to somebody. They borrow money. They have to go to their credit card to pay their mortgage or their rent or their kids' student loans. And then out of nowhere, for no particular reason, having paid their credit card loans to the company on time, every month, their rates go up from 9 percent to 25 percent. That happens in America today.
    Do you think that is moral, Mr. Lively? Do you think that is moral behavior, something that we should be proud of?
    Mr. LIVELY. I don't think what we are talking about here—I don't know that I can discuss this in the context of morality. I think what we are talking about here is creditors are taking risk in the marketplace. They are the ones whose money is at——
    Mr. SANDERS. If you lend me money and I pay you back on time every month, and you double my interest rates for any reason that you want, and I have lost my job and I need to borrow money—I am asking you a question, a personal question.
    We hear a lot about morality in America. Is that a moral act, in your judgment? Should that be something that we should condone? Should the people of America condone when somebody gets divorced or loses their job, having to pay twice the interest rates that they originally agreed to, when they paid their bill every single month? Have you ever thought of the morality of that?
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    Mr. LIVELY. You know, I just don't think I can go to the question of morality in a financial——
    Chairman BACHUS. What if you just substituted the word ''ethical business practice'' in a——
    Mr. SANDERS. I mean, you can ask that question, a good question.
    Chairman BACHUS. I was trying to assist you.
    Mr. SANDERS. No, no, no, no, because I think—you know, what we hear more and more, there are some people out there talking good versus evil, ''I am moral, you are not moral.''
    I think the way we behave publicly has something to do with morality. There is Biblical phraseology dealing with usurious rates.
    Let me rephrase it: Is it usury when a rich person today can go to the bank and borrow money at 4.5 percent and a working person pays 28 percent? Is that usury in your judgment?
    Mr. LIVELY. No, sir, it is not usury in my judgment. It is the function of risk-relationships applying to the cost of the services that are being provided.
    Mr. SANDERS. It is not usury.
    Mr. McHenry, is that usury in your judgment?
    Mr. MCENENEY. McEneney.
    Mr. SANDERS. I am sorry.
    Mr. MCENENEY. Well, actually, if I could, I would like to comment on both questions.
    Mr. SANDERS. Start with usury, because I am interested in that one.
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    Mr. MCENENEY. Well, actually, it is not usury, quite clearly.
    Mr. SANDERS. Charging 28 percent is not usury when the prime rate is 4.5 percent?
    Mr. MCENENEY. Well, I think it has to be taken in that broader context that you asked the question of morality. I am one of those people who thinks that all people, including businesses like banks, should conduct themselves ethically and with a moral basis.
    One of the ways that banks do that is by making credit available to people of all economic walks of life, to people across the economic spectrum——
    Mr. SANDERS. We don't have a lot of time, I apologize.
    Mr. MCENENEY. And I think——
    Mr. SANDERS. But you did not answer my question. My question is that you lend me money, I pay you back every month on time. I fulfilled my end of the deal and you double or triple my interest rates. Do you think that is ethical?
    Mr. MCENENEY. Well, what happens is—what we are talking about is risk-based practices.
    Mr. SANDERS. No, no, you are putting the term on it. I am saying I pay you back every single month on time. I fulfilled my end. You have doubled or tripled my interest rates. Is that ethical?
    Mr. MCENENEY. The circumstances under which I am aware that that happens is quite ethical——
    Mr. SANDERS. Okay, thank you, thank you. Let me go to Ms. Fox. We don't have a lot of time.
    Ms. Fox, is it ethical if I pay back my loan to you every single month and you double or triple my interest rate?
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    Ms. FOX. No, it is not ethical. No, I don't believe that is ethical and it is not good public policy, and it has an unintended consequence of putting consumers in a position where they are less likely to be able to repay everyone else, and it puts consumers in a downward spiral of unaffordable debt.
    Mr. SANDERS. Ms. Draut, do you think it is ethical that some people borrow money at 4.5 percent, and working people who have fulfilled their end of the bargain, paying off what they are supposed to pay off every month, on time, are paying 15 or 20 percent? Do you think that is ethical or good practices?
    Ms. DRAUT. Absolutely not.
    And I would like to add that this is not about a difference in creditworthiness; this is about a difference in need and use of credit. And working families need and use credit more often, and as a result are paying a much higher price than their wealthier counterpart.
    Mr. SANDERS. Ms. Draut, do you have any figures as to how many millions of people today are using their credit cards to buy food or to take care of basic necessities?
    Ms. DRAUT. Well, unfortunately there is very little data out there about why people go into debt, how long they stay in debt and what they are using their credit cards for.
    I can tell you that I would hope to be able to answer your question in about four months from now when we complete our own household survey asking those very questions.
    I will tell you that in interviewing hundreds of people through my research at Demos, credit cards have become a Band-Aid for the family budget. When somebody loses a job, when there is an unexpected expense, the credit card makes up the slack. It could be groceries, it can be car repairs.
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    But most of the people we talk to are going into credit card debt to cover the mundane, everyday basics of life, not to get a luxury vacation or designer sneakers or new jewelry.
    Mr. SANDERS. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman BACHUS. Thank you, Mr. Sanders.
    Ms. Biggert?
    Mrs. BIGGERT. Thank you very much, Mr. Chairman.
    My first question is for Mr. Lively: How important is financial literacy to improving consumer experiences in the financial services marketplace?
    Mr. LIVELY. In the scheme of things, financial literacy is one of the greatest challenges we have as a society in dealing with the complexities of our marketplace. And if we are successful in achieving an improved level of understanding of how to manage money in today's marketplace on the part of our majority of our citizens, everyone will benefit from that.
    Mrs. BIGGERT. Then, Mr. McEneney, from what we have heard there certainly is a marketplace for products such as the payday lending and refund anticipation loans. Would regulating these products reduce consumer choices?
    Second of all, should we focus our efforts on educating the American consumer so that they, not the government, can choose whether or not to engage in such transactions?
    Mr. MCENENEY. Well, first of all, there is no question that if price were regulated, that is, if the fees were limited for these products, that many consumers buy and provide a convenience, many consumers find are extremely important when they have an emergency need for cash.
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    There is no question that if you regulate fees, then those services and loans are going to go away to a significant extent, particularly for lower-and moderate-income families. That is obviously an impact that nobody wants.
    They are regulated, though, in terms of disclosures. For example, refund anticipation loans are subject to the Truth in Lending Act and consumers are provided disclosures up front. But after receiving those disclosures, the consumers decide that they really do want the loan.
    And in fact, refund anticipation loans are quite popular with a lot of consumers. I think the numbers I saw were something in the neighborhood of 60 percent of refund anticipation loan customers are repeat customers.
    Now, having said all that, all these folks get disclosures. The key is helping them understand what those disclosures mean and also understanding how to conduct their financial lives in a way so that they don't get into trouble. And that really goes to financial literacy.
    The importance of that issue I think is reflected in the fact that organizations like CBA and its members are devoting enormous resources to try and to get out there and really help people understand how to manage their finances. Because after all, the folks who manage their finances well make the best customers, including for banks.
    Mrs. BIGGERT. Well, we have seen that very few families are actually saving money, or saving it for a rainy day, when they have problems. Would a financial literacy education help that?
    Mr. MCENENEY. Absolutely.
    Mrs. BIGGERT. Will they know how much money to put away?
    Mr. MCENENEY. Absolutely. You know, one of the keys is helping people understand how much money is coming into the household, how much money goes out for basic expenses, how much money they have left to save and how much money they can really afford to borrow.
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    I think all creditors would agree that consumers that understand how to manage their debt in a way so that they only borrow the amount that they can actually repay is better for everyone. It is the sort of fundamental cornerstone of successful lending. People have to pay you back, and the more education you can do in terms of ensuring that people don't get in over their heads, the better off you are.
    Mrs. BIGGERT. Thank you.
    Mr. Lively, Ms. Draut's testimony I think paints a pretty bleak picture with respect to credit card debt. Do you have any comment on that? Is that the way the marketplace is really reacting?
    Mr. LIVELY. Actually, the vast majority of American consumers manage their debt quite well. The problem is that in the last 25 years, we have brought into the marketplace, through the advances in technology, the capacity to understand through scoring algorithms how to price for risk.
    We are now extending credit to a whole new generation of people who were not there 20 years ago. And many of these people also grew up during the period of time when we stopped basically preparing people with life skills to go into the marketplace.
    And the consequence of that is twofold: One, we have a lot of folks who now have access to credit who are less skilled in managing the process.
    And so as time goes on, we are going to catch up with the power curve we got behind through the advances in technology.
    It is unfortunate that we have these issues. But at the same time, these issues are growing out of a hugely successful economic system that continues to grow and embrace more and more citizens.
    Mrs. BIGGERT. Thank you, thank you very much.
    I yield back, Mr. Chairman.
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    Chairman BACHUS. Thank you.
    Mr. Sherman?
    Mr. SHERMAN. Thank you. I have a lot of comments, and then I promise a question at the end.
    This idea of a financial literacy—wonderful thing. But it is like the Band-Aid, like, ''Let's engage in all the unfair practices possible, protect us from all State regulation, and don't worry about it because we will send out pamphlets to people that will tell them not to buy the unfair products that we are selling.''
    The idea that the average consumer is managing their credit well means that many consumers are in debt $5,000, $10,000, $15,000 at 15, 20, 25 percent interest, but as long as they don't default so the banks gets the 15 or 25 percent interest, that is managing their credit well.
    The fact is that the average American family does not have any savings at all or very little for retirement, and many, many are paying outrageous interest rates month after month.
    Let me endanger my own re-election by criticizing my bosses, namely the people I represent, and reflect on one thing and that is, we do have consumers making bad decisions because we live in a have-it-now, spend-it-now, a nonsaving-oriented culture.
    And financial literacy may be a part of that answer, but a change in the culture to one more akin to Japan or Europe, where people save for retirement and they can tap upon that savings for a rainy day, sure beats a situation where you max out your credit cards in ordinary life and you need a payday loan when a crisis comes up.
    I realize that is difficult to say because we in Congress make more money and should have less difficulty running our financial lives than many of our constituents.
    As to sub-prime loans, which we have talked about very little here, we are in this bizarre circumstance where if you are a national bank, you have no regulation whatsoever. I am surprised the whole country is not up in arms over that. But if you are not a national bank, then the lender is subject to perhaps thousands of different regulations, and if they make even one mistake in one city regulation, they get subject to some big class action lawsuit.
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    Clearly, we would benefit by having a set of national standards that is not a lowest common denominator, and I think—and this is not just a home state thing—should be patterned after the California standards that are working quite well if it was not for the OCC screwing them up by lifting them off the—by causing half the lenders in the state not to be subject to them.
    So I look forward to this committee taking a look at some prime lending with the idea of making sure that all consumers in the country get basic protections, good protections, even if they cannot be everything that some of our panelists would suggest. That is a much better alternative to having half the lenders totally exempt from state regs and other half of the citizens of the country living in states with inadequate state regulation.
    I would like now to turn to Mr. Lively.
    I have a bill. The bill says if there is a national disaster and the president declares it, and often postal service is out, that if you are late, by just a length of the national disaster, in paying your bill, which you typically pay by mail, that you don't get hit with a late penalty.
    And basically your organization, as much as any, is the reason that bill is not going anywhere. And it occurs to me that maybe you could look in the camera—because there are people in hotel rooms right now in northern Mississippi, northern Alabama, they have just fled the hurricane. Maybe they don't have anything better to do than to watch C-SPAN.
    And maybe you can tell them why you think that unless they happen to have some brother-in-law who's a lawyer who can get on the phone and yell with one of your service representatives, why the average person fleeing this hurricane is going to get hit with late charges and why you are here to defend that as a national practice.
    Mr. LIVELY. Virtually every one of the companies who provide services in the marketplace have specific policies to deal with the kind of national——
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    Mr. SHERMAN. And you know, sir, what those policies are. If you are smart enough and savvy enough and you tell it to the right person and you use just the right words, then they will lift it. But if you are an ordinary consumer, bang, use the hurricane in order to impose penalties.
    Why are you opposed to simply having a statute that says, ''no penalty for people who are mailing their checks from an area of a national disaster for the length of time of that presidentially declared national disaster''?
    Mr. LIVELY. We have a program in the education foundation of AFSA that provides consumers with information on how to interface with their creditors in the event of one of these kinds of disasters.
    Mr. SHERMAN. So get an MBA or get——
    Mr. LIVELY. Sir, excuse me, but the companies stand tall at the end of the day because they do indeed look after their customers.
    Mr. SHERMAN. The fact is, the vast majority of those people who are fleeing this hurricane are going to get hit with late penalties, they are not going to read your pamphlet, you have not given them the pamphlet, they have better things to do than to read your pamphlet. The pamphlet won't tell them exactly how to deal with each and every lender.
    And lenders who are members of your organization don't want a simple computerized rule that says if you have a presidentially declared disaster, that should not be a profit center for the bank.
    I yield back.
    Chairman BACHUS. Thank you.
    Mr. McEneney—did you want him to answer?
    Mr. MCENENEY. I was just going to ask if I could comment on this whole issue of the national disaster and the late fees. I think one of the things that Mr. Lively was referring to is that there is actually a history here in the credit card industry of dealing with these sorts of issues in a way that I think meets the objectives of your bill.
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    For example, I know Chairman Bachus, at one point in the not too distant past, worked with folks in the credit card industry in connection with some of the mail disruptions that occurred post-9/11. What the industry did was voluntarily to go ahead and ensure that people were not imposed late——
    Mr. SHERMAN. Only if you call, only if you say the right words, only if you are savvy. And why are you opposed to a national standard that will apply even if the disaster happens to a constituency whose member of Congress does not work out a special deal, because you are looking for a profit centered out of the hurricanes. Shame on you.
    Chairman BACHUS. Mr. Sherman, actually they waive their fees in all cases.
    Mr. SHERMAN. On a case-by-case basis.
    Chairman BACHUS. No, I mean on the 9/11. The industry——
    Mr. SHERMAN. When the pressure gets hot, when the member of Congress is able to shame them on a particular disaster. But the fact is, they have got no policy for this hurricane. Nobody here can say, as an automatic rule in the computer—not when you call, but in the computer—that the victims of this hurricane are not going to get hit with late charges.
    Now, 9/11, under tremendous political pressure they decided 9/11 would not be a profit center.
    Chairman BACHUS. I think it would be tremendously complex and the national disaster does not have a time period, for one thing.
    Mr. SHERMAN. I have a bill. If we have the markup of that bill, I assure you that the practical problems will be worked out. It is a short bill. We can certainly provide—or we could just say two weeks, and that would solve this for an awful lot of people. The bill is 2549, and I am looking for co-sponsors.
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    Chairman BACHUS. And certainly one thing we are doing with this hearing today is bringing these things out. I welcome you pointing that out.
    Mr. Toomey?
    Mr. TOOMEY. Thank you, Mr. Chairman.
    Just to follow up on this idea, my thought on this is: There are lots of nice things, tangentially related services, that businesses can offer their consumers, their customers, including banks, credit card providers, others. It is a very long list. And some do and some don't.
    I think the question here is: who ought to drive that process. Should it be consumers making choices amongst competing firms that are offering different services—that is what you call a market economy, that is what you call economic freedom, that is what you call the system that is generated the most wealth and opportunity in the history of the world—or should we sit here and dictate it and issue fiats and say, ''We don't really care what consumers prefer, we don't really care what businesses want to offer, what business model makes sense. We are simply going to demand that you provide certain set of services or benefits that we will dictate.'' That is really the choice.
    I, for one, think that as much as possible we ought to stick with the former model, because that is the one that clearly has been much, much more successful everywhere in the world it has been tried.
    As for one specific issue I would like to touch on, it has to do with this idea that is characterized in Ms. Draut's testimony as the bait-and-switch tactic. And I just have to comment and then I will have a question about this.
    First of all, I was in the financial services industry for a few years in a capacity in which in some respects we extended credit in the area that I was in. I have also been a small business owner, and in that capacity I have been a borrower. So I have been receiving credit.
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    Now, every loan document that I ever saw, whether I was with a bank or whether I was in my restaurant business, every one that I can ever remember had a provision in there that says, ''Notwithstanding whether you are current on the loan that you have either lent or borrow,'' as the case may be, ''if you default on another obligation that you have somewhere else, then this loan,'' on which you are not in default—or I should say not in a payment default—''this loan will be considered to be in default as well.''
    And there is an obvious and simple reason for this, and that is because if somehow I have become unable to make my obligations with respect to another lender, it is pretty reasonable to assume that my creditworthiness has diminished, and that is why I am in default to this other lender, whoever he may be.
    Mr. SANDERS. Would the gentleman yield?
    Mr. TOOMEY. Let me finish my point. This obviously addresses something.
    But I have to be very honest with you. It never ever occurred to me, on either side of this transaction as a lender or a borrower, that it was somehow unethical for a financial institution to acknowledge that my creditworthiness has changed and therefore the circumstances under which I am borrowing money has changed and therefore—in fact, in the cases that I am alluding to, it was not a question of an increase in interest rates; the lender had the full authority to accelerate the loan and demand full repayment immediately, and if I failed to do that, I could be put into bankruptcy.
    I, to this day, believe that is an extremely reasonable, perfectly ethical arrangement. It seems to me that is about evaluating risk and pricing it accordingly.
    Now, you could take the view that we should not price-risk, that we should have a uniform standard, sort of socialistic model that says, ''Regardless of your ability to repay, regardless of the change in your circumstances to repay, we are going to have a single uniform rate.'' You could do that. It would result in an extremely inefficient allocation of capital, it would result in higher prices being paid by people who are not in default, who are paying their bills, and I would not advocate that we go in that direction.
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    So my question is—after my question I will be happy to yield to the gentleman from Vermont—but my question is: This provision by which a rate goes up when someone is in default on another obligation, I would just like to ask you folks whether you consider that to be a matter of adjusting prices for risk.
    And if you could just sort of go down the row, I would appreciate it.
    Mr. MCENENEY. Yes, sir, it is.
    The only circumstances in which I see the types of changes that you are talking about are clearly circumstances where you are pricing for risk, and it is also clear that it is ethical if it is done the right way.
    Consumers receive disclosures, being told that this could happen. And unless those disclosures are made, it is not only unacceptable from an ethical standpoint, it is against the law.
    Ms. FOX. We think it is simply an unfair business practice to change the price on debt that consumers have already incurred under an agreed-upon rate when they are not behind in paying that particular creditor.
    Mr. TOOMEY. Do you agree that the failure to make a payment on another obligation is a reflection or certainly can be a reflection on the change in the creditworthiness of the borrower?
    Ms. FOX. It could mean that another creditor made a mistake, it could mean they are counting you as late because payment came in at 2 o'clock and not 1 o'clock——
    Mr. TOOMEY. And could it be that there is a change in the creditworthiness?
    Ms. FOX. It could, but a creditor can adjust to that by, for example, on a credit card, lowering the credit limit rather than raising the price. There are other things that can be done without turning this into a profit center that consumers view as a gotcha.
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    Mr. TOOMEY. Do you think it also should be forbidden in the corporate environment? If it is unethical to do this with the consumers, is it unethical to do this with a small business owner?
    Ms. FOX. Well, I try to represent consumer protection issues, and I don't speak to what happens with businesses. I would think that a business owner would be much more likely to be on a more level playing field with a lender, whereas the consumer credit contracts, these are contracts of adhesion. They are not negotiated between the consumer and the credit card bank; they are take-it-or-leave-it agreements. They don't have the same leverage that you would have as a business owner.
    Ms. DRAUT. One of the additional issues with the bait-and-switch practices is that credit card defaults, or default with another credit card, is not the only reason why a person's credit score would fluctuate or decrease, or go down in point. Oftentimes that may happen because they have actually taken on what I think most people would agree as productive debt: a new mortgage, maybe a new auto loan.
    So it is not just about penalizing cardholders for being——
    Mr. TOOMEY. Are you prepared to acknowledge that taking on additional debt is often an indication of diminished creditworthiness?
    Again, going back to my little experience, one of the other provisions in these loan agreements was always that before you took on additional debt, you had to get an approval from the bank that was lending money in the first place because obviously too much debt diminishes your creditworthiness.
    See, every way you look at it, it seems to me this is very often a reflection of risk.
    Chairman BACHUS. Mr. Sanders?
    Mr. SANDERS. I appreciate my friend's remarks. But in your opening thoughts, you used the word default, which I understand it means that you are late for 90 days and not paying your loan off. Do you see that as the same thing as somebody paying their loan at 5 o'clock in the afternoon rather than 2 o'clock being one day late—that is number one.
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    And the second issue: As you well know, credit card companies are substantially raising interest rates for no reason whatsoever. They tell you that they are going to charge you 7 percent and they double it for no reason at all. Do you think that that is appropriate?
    Mr. TOOMEY. I think that if credit cards come out of the clear blue for no reason and double their rates, they are going to find they are losing a lot of customers and it is not a sustainable business practice.
    So I think that the market is going to just prevent that from happening in a whimsical fashion.
    Mr. SANDERS. I would disagree. Credit card companies are making huge profits. And as you know, in a busy world not everybody looks at their interest rates. Right? You know that. What they are looking at is they owe $50 at the end of the day.
    I would hope that my friend would acknowledge that there is a lot of rip-off and unethical behavior going on here.
    Chairman BACHUS. Let me interject. I actually taught this course in law school. It is an extremely complex issue.
    Years ago we had divided courts of law and equity, and people would go into the equity court many times when debts were accelerated and the equity court enjoined that acceleration.
    There are numerous exceptions being able to accelerate them. There would have to be reasonable causes.
    What happens in a consumer standpoint is, they cannot go in and litigate each one of these where a business can.
    It is not an altogether simple matter.
    With credit cards today, you know, you have 20 pages of small print, and they do have the contractual right to do it.
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    There are laws on the books, however, but who is going to go into court over $100 and advance those laws.
    Ms. FOX. Mr. Chairman, could I point to that as well?
    These are retroactive rate increases. Consumers have obligated themselves for debt on their credit card at a certain price that they think they can afford. And if that interest rate is increased after the fact, and it applies to their total balance, now you have a purchase at a higher price that you did not budget for, that you don't have the capacity to pay.
    And these are open-end credit transactions, not a closed-in loan that would accelerate if there were some change. We just think this is unfair to consumers, it undermines consumer confidence in the market, and it needs to be stopped.
    Chairman BACHUS. It is an extremely complex issue. There is impairment of credit.
    As Mr. Toomey said, I think in a lot of these cases, what allows them to do that is that there is something in the contract which says you have to receive permission. And that is true of almost—and that is why most of your business loans are accelerated because there are provisions in the original loan saying you are impairing credit.
    And credit cards, I am not sure that that—in fact, in mortgages, in certain type, you know, State laws and federal laws actually prohibit acceleration.
    I will say in defense of this committee, this committee almost overwhelmingly—Ms. Maloney offered an amendment, Mr. Sanders and I offered one, and there was a substitute by Ms. Maloney, and it overwhelmingly passed this committee in an attempt at least find a middle ground, and I think 90 percent of the members on this committee, if not 100 percent, it may have been unanimous, to address this issue.
    It went to the House; it passed unanimously. And it went over to the Senate, and I am not blaming the other body, but when fair credit reporting came back to us, it was not on there.
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    This is a very emotional issue. I know there are members of this committee that have switched their opinion after they were—at least one high-ranking member of this committee that voted against Mr. Sanders' and my amendment, after he felt like he was bait-and-switched, he switched sides.
    Obviously the problem with it is, there are obvious cases of tremendous abuse where people abuse it, get a lot of credit cards and they milk the system.
    It is an issue that is with us, and hopefully in the future we will continue to look at it.
    In defense of this whole committee, we came to a common ground in the House as to at least, you know, I think an appropriate thing.
    Mr. Ross?
    Mr. ROSS. On the issue of credit cards: You know, every week, just like every other member of Congress, I drive 2 hours to the airport—I guess some don't have it quite this bad—but I drive 2 hours to the airport, get there an hour early, and then fly to Memphis and wait and hour and a half and then fly to D.C., and then a few days later do it all over again in reverse.
    On the trip, the 2-hour trip from the airport to home each week, I go through my week's worth of personal mail. And I have been keeping a tally. On average—some weeks are more, some weeks are less; this tally has been going on for, well, approaching a year now—on average I will receive eight credit card applications per week.
    My first question is: How many credit card companies are there? Can anyone answer that for me?
    Mr. MCENENEY. I think there is something, like, in the U.S. 10,000-or-so different banks that issue credit cards.
    Mr. ROSS. So eight times 50, so it is about 400, I am hearing from about 400 of them a year. So I have a ways to go.
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    You know, and I cannot help but think—I can remember when my wife and I were both in college and literally getting by on $400 a month. And thinking back to those days, you know, when you need new tires or your transmission breaks down or your washing machine breaks, for a lot of families that are barely getting by and for a lot of families that are living paycheck to paycheck, you know, maybe that first, second and third credit card application in the mail, they just throw away because they know they cannot afford to make the payments on it, they know they cannot afford the interest rates that come with it, they know that if they ever start using that card they will never get caught back up.
    But by the time that sixth, seventh or eighth credit card application rolls around and they have a sick child or they have a car broke down, a lot of them are filling them out. And they are building up a debt, a debt that has now reached epidemic proportions, as is evidenced by the mass, a huge number, exorbitant number of bankruptcies that we see in this country today.
    Now, granted a lot of those bankruptcies are coming from the 44 million people in this country who cannot afford health insurance. But a lot of them are coming from credit card debt.
    And that troubles me. And I understand there has got to be some personal responsibility there and people have to think for themselves and make decisions for themselves.
    But, folks, you know, when you get eight applications a week, sooner or later the enticement is going to be there. You know, when you are down on your luck and you need the money to go ahead and go for it, and then you spend the next few years trying to get out of debt, and when you cannot do it, then you file bankruptcy, which is certainly not good for anyone in this economy that we live in today.
    What I am confused about—and I don't who at this table can answer this question.
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    I own a small business back home. I have 12 employees, so I know what it is like to meet a payroll every Friday.
    I had an employee not too long ago that had run up one of these huge credit card debts and they were charging him 20-something percent. Just a low-to middle-class worker, working hard to support his kids. And he showed me one day, you know, and I look at it, and it was, like, in excess of 20 percent interest, and there was no way he was ever going to get caught up.
    So I picked up the phone and I called the credit card company, did not tell them I was a member of Congress, I was just, you know, Joe Smith off the street. And I was able to negotiate a settlement for him to where if he paid it off—he paid something like, I want to say it was 35 cents on the dollar.
    I mean, if credit card companies are able to take those kind of hits, there is got to be a lot of profit in this somewhere. And if I am just not following this thing—you all help me, whichever one of you think you are smartest on this issue, speak up, please.
    Ms. DRAUT. I would like to answer that question.
    I think you raised two questions.
    I want to go back to your original question about how many credit card companies are there, because this has come up many, many times during this hearing, this issue of competition, free market, choice for consumers.
    And I just want to point out to the committee that there are about 10 issuers of credit cards that control close to 80 percent of the market. Of those 10, we just had four merge into two. So we are going to have even less market competition in the credit card industry.
    There really are not that many choices for consumers, because all of the major issuers follow each other's lead and engage in the same practices.
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    And now I am forgetting the last question you had that I volunteered to answer. I apologize.
    Chairman BACHUS. Just ask the question over again, Mr. Ross.
    Mr. ROSS. What I am trying to find out is, if you can settle for 35 cents on the dollar, then there must be a lot of profit somewhere in this business.
    Ms. DRAUT. I wanted to mention that not every card company will agree to negotiate or to bring the card member's rate back down. It really depends on the luck of the draw. If you happen to get with a company that is open to helping you out, you are very lucky.
    We have talked to a lot of people—and Mr. Meeks shared his personal experience, I want to share mine.
    I have been penalized for a 1-minute late payment, called the creditor, said, ''Why am I paying 27.99 percent?'' No negotiation. ''That is the rate, Ms. Draut, I am sorry.''
    So it is not across-the-board policy that card companies will in fact work with their customers to help them pay down the debt.
    Mr. ROSS. Would you suggest that before people file bankruptcy that they reach out to these credit card companies and try to negotiate a settlement?
    Ms. DRAUT. Absolutely.
    Mr. ROSS. And again, I think that gets back to the basics we need: financial literacy.
    You know, we have kids graduating from high school today that can do math I could not do in college and I cannot do it today. But they don't know how to balance a checkbook. They don't understand that when you borrow money you got to pay it back.
    We need financial literacy in the classroom today, I believe.
    Mr. MCENENEY. Congressman?
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    Mr. ROSS. Yes?
    Mr. MCENENEY. Could I just add something to the answer?
    You talked about the applications coming in. That is a reflection of the competition, the fierce competition, amongst these various players that really helps drive the cost of credit down, including credit card credit, and make it more widely available to all sorts of folks.
    Now, on your question of, you know, can you take 35 cents on the dollar. The truth is, you cannot take 35 cents on the dollar too many times. But one of the only ways you take 35 cents on the dollar in the situation you talked about is if you are able to price for risk.
    What that credit card issuer was able to do is determine that a certain number of people are going to default and to set the interest rate, the price, at the appropriate level so it could accommodate——
    Mr. ROSS. Well, with a 21 percent interest rate, they must have been thinking a lot of people were going to default.
    Mr. Chairman, I have one other very important——
    Chairman BACHUS. And actually, Mr. Davis, if you—what we will do is, I will give you an additional—actually we have two other members that have not——
    Mr. ROSS. We can come back.
    Chairman BACHUS. Mr. Davis?
    Mr. DAVIS. Thank you, Mr. Chairman.
    The panelists should know the one way to get us inside the 5-minute rules is for votes to be called. So that is what happened. So it may make us all a little bit briefer.
    Let me try to pose several quick questions. Let me start with Mr. Lively and McEneney.
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    One of the goals of this hearing has been to try to flesh out and identify possible areas of reform, possible things this institution can do that might create a fair and more equitable lending world.
    Are there any institutional changes or any pieces of legislation, are there any reforms that are not on the books today that either of you would embrace, that you think would be salutary and would be helpful for the industry.
    If you could each mention maybe one or two each.
    Mr. MCENENEY. From my perspective, the key would be to focus the folks that are having difficulty repaying their debts, really come up with a solution that focuses on them.
    You cannot restrict rates. If you restrict rates, you reduce credit availability to all sorts of people who pay their debts on time.
    So I think the solutions have to focus on the people who are struggling. What is it that is going on with those folks that we could possibly help them with?
    And I think the biggest issue, and probably the biggest thing we can do, is find ways to provide financial education so that they understand the economic consequences of the choices they make when they take on debt, and they can understand how much debt they can and cannot afford, and also to quite honestly drive them to develop habits to promote savings.
    Focusing on financial education I think is the one most important thing we can do.
    Mr. DAVIS. Is your answer essentially the same, Mr. Lively?
    Mr. LIVELY. Just a little more meat on that answer, and that is, we have ourselves confronted with a conundrum here in terms of the basics of communication about all of this stuff.
    On the one hand we have disclosures that are intended to inform and educate that are fairly extensive. In every agreement, you have just got a lot of disclosure.
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    One of the problems with that disclosure is the lack of understanding of financial issues causes the consumer not to pay attention to the disclosures. So when they get confronted with a change of terms that is arisen out of an agreement that is in the contract, they get very upset about it. And the fundamental is that circumstances that were previously agreed to have been imposed because of the change in the consumer's behavior and capacity, and that leads us into a cry for more disclosure or for some other remedial action.
    The fact of the matter, if we can get people better educated in the scope of managing their personal financial affairs, they will avoid a lot of these things because they will have thought them through and they will understand better how to manage their affairs.
    Mr. DAVIS. In the interest of time, let me ask a slightly different question to you all: Are there any institutional changes or proposed reforms that either of you think might potentially—speaking to Ms. Draut and Ms. Fox now—that either of you think might potentially go too far, that either of you think might have the perverse effect of constraining the availability of credit?
    Ms. DRAUT. Well, that is a good question. And I don't think we have enough information, really, to answer that question accurately.
    I don't think that we can just take opponents of some re-regulatory steps' word for it. I think that is the easy answer and the easy fear to put out there, that we will shut off access to the credit market. I think we need a lot more research and understanding. We need to model the effects of certain regulatory steps and see what the real effect may be.
    Mr. DAVIS. One quick question, because our time is running down, and I want to certainly give Ms. Maloney adequate time to ask questions.
    As far as the payday lending institutions go, I understand that in an ideal world you probably would favorite it if they did not exist at all, but it is not the world that we live in. They exist in a number of states.
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    If you had to design two characteristics that would make payday lending institutions more equitable and more responsible, what would those two characteristics be?
    Ms. FOX. That they not be allowed to ask consumers to write checks without funds on deposit to secure the loan, and that the rate and repayment terms be affordable so that consumers can actually manage to pay off the loans without getting caught in a debt cycle in order to keep their checks from bouncing so they can pay off these loans.
    It is the single balloon payment and the very high rate and the fact that they are holding your check that turns what should be a regulated small loan into a debt trap.
    Chairman BACHUS. Thank you.
    Ms. Maloney?
    Mrs. MALONEY. Thank you very much. I would like to thank you and the ranking member for your leadership on consumer protection issues and other items before this committee.
    As was mentioned earlier, we all worked together on the bait-and-switch. It was my compromise on the floor, that at least should be notified of any change in rate. It was removed from the bill in the conference committee.
    But I would like to hear your feelings on notice for cash advances. A lot of times you will have a credit card at 6 percent or 7 percent, yet the cash advance jumps dramatically to 19, 20 percent. And I certainly think there should at least be notice, that people understand that.
    I remember I put one bill before this body that there was a great deal of opposition to. And it merely required for notice for ATM machines, that if you are going to charge a fee, then at least let the consumer know that the fee is being charged and let them make that decision.
    I gladly pay my ATM fee because of the convenience of being able to get to my checking account here in Washington or wherever.
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    But I think at very least, there should be notice and I would like your comments on that.
    But I want to ask you a question about an item that was actually on the floor today and debated on the floor today, and it was on the floor this morning, and it was basically the efforts of the OCC to preempt State banking regulators.
    A number of us on this committee are concerned that the result will be to deprive our constituents possibly of the consumer protections that they have at present in their localities and States. We are not sure that OCC has the resources or the knowledge to duplicate the efforts of the 50 states.
    Legislation has been introduced by one of our colleagues, Congressman Gutierrez, to address this problem. It was on the floor today in the form of an amendment. But this subcommittee has not addressed it yet, and I hope they will.
    But I would like to ask the witnesses about the OCC's letter yesterday—I don't know if you have had a chance to see it—in which they advised that certain credit practices are not acceptable for national banks. And is that effort enough? How does that effort compare to State regulation on bait-and-switch and other areas? Do you have a view on the OCC's preemptive efforts?
    Mr. MCENENEY. I would be happy to respond to that.
    First, I have heard that folks may be concerned that the OCC's preemption efforts may reduce consumer protection in some way. But I think when you step back and look at the extraordinary powers that the OCC has—and the letter is an example of that, which I will come to in a second—to regulate the banks that are within their jurisdiction, it really is extraordinary.
    They have the authority to regulate, which is to tell the banks what they can and cannot do; they have the authority to examine them, which is to come in and figure out whether the banks are doing that or not; and to supervise them, which is to say, if they don't like the direction a bank is heading in, they can stand over the bank's shoulder and say, ''We would like you to go in this direction.'' And if they still don't like the way it is going, they can take the wheel and direct the bank more firmly.
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    What that enables the OCC to do is to issue things like this advisory letter—now, some folks say, ''Well, it is just an advisory letter.'' I can tell you, advising national banks, there is no such thing as just an advisory letter.
    What this letter means, if you are a national bank, is, you better pay attention.
    And I can tell you, across the country over the next few days and weeks, national banks will be looking at that letter, going back to their practices, figuring out whether any of their practices raise issues under that letter, and if they do, change them. And if they don't change them—which I think would be the exception—examiners will come in and change it for them.
    It is extraordinary power, and what it results in is this extremely efficient mechanism that the banking agencies have, like the comptroller, to impact behavior simply by having access to a word processor.
    They send out this notice, it impacts behavior throughout the country, and that is far more efficient in terms of regulating and addressing abusive practice than any other mechanism I am aware of.
    Mrs. MALONEY. Any other comments?
    Ms. FOX. Mr. Chairman, may I respond also to this question?
    We think that the committee needs to finish its action on curbing the sweeping preemption of state law that the OCC has attempted. We did have a chance to look at the advisory that was issued yesterday, and we think that draws attention to the issues that you have been discussing. Some of the requirements are going to be quite helpful.
    But simply disclosing the markup of interest rates because of a change in the consumer's creditworthiness, this does not go far enough. This needs to be prohibited, not just disclosed.
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    Mrs. MALONEY. Thank you.
    Would anybody else like to comment?
    I cannot walk as fast as the chairman, so I have to run to go vote. He beats me to the floor every time.
    Thank you for your testimony and your work.
    Chairman BACHUS. Thank you.
    I am going to close out the questioning. I will ask any other committee members that if they have questions, we want to give everybody plenty of time. This is an important issue, consumer issues.
    And I will ask, Mr. McEneney, does the federal government—whether that be Congress or the Federal Reserve—have a role in the regulation of interchange fees, particularly in the movement of so many transactions from cash or checks from which the regulatory role is very clear to debit or credit transactions?
    Mr. MCENENEY. Mr. Chairman, I would be happy to answer that.
    I should probably quickly point out, though, that I don't represent the companies that are involved in the interchange process on that issue, but I would be happy to respond based on my general knowledge of the industry.
    Chairman BACHUS. That would be helpful.
    Mr. MCENENEY. You know, I think when you take a look at what interchange fees are, they are fees that are charged to banks that are parties to a payment card transaction, and the fees are set among those banks, commercial enterprises.
    And so I think point number one is, it is not a consumer fee; it is a fee that is set amongst commercial enterprises. And I think typically Congress and the federal agencies would not get involved in that sort of fee arrangement.
    The other thing I would point out is that given the competition that exists in this arena, with checks and cash and all sorts of payment cards, a wide variety of different payment methodologies competing, it would not seem that there would be a need to get involved in that issue on that basis as well.
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    And the final point I would make is that I think there are real distinctions between the federal regulators' involvement in cash and checks—which obviously are heavily dependent on the federal government, if not exclusively dependent on the federal government—to effectuate—either issue those payment methods, in the case of cash or to process the payments in the case of checks, I think those types of payment methodologies are totally distinguished from these private-sector organizations through negotiations with different commercial enterprises—set the prices.
    And I really think for the federal government to get involved in that arena, it would be unprecedented, and I think probably have consequences potentially that would cause more harm than good.
    Chairman BACHUS. Thank you.
    Ms. FOX. Mr. Chairman, could I raise a related point?
    These new forms of payment that depend on the electronic system that are developing outside the consumer protection laws have given consumers confidence in using credit, and to a lesser extent debit cards, for a long time.
    And we do note that this week the Federal Reserve announced proposed changes to reg E, which implements the Electronic Funds Transfer Act, to apply those protections to the payroll cards. That does not go far enough. It needs to apply to all these new forms, a debit card that effectively takes the place of a consumer having a bank account note.
    We don't have the liability limit, we don't have the dispute process, we don't have the disclosure requirements. We don't even know if FDIC insurance applies to the pool that store value cards draw from in all cases.
    This is an area that we would urge this committee to examine as you go forward next year of harmonizing the consumer protections that apply to all forms of consumer payment mechanisms so that consumers don't have to know that there are three different ways their check can be processed, for example, depending on whether it goes through as paper, if it goes through the check-21 process, or if it is done through lockbox conversion at the place where you sent your mortgage payment.
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    Consumers have no control over that, but they don't know what the rules are because they are different every way that payments are processed. We really need to address that.
    Chairman BACHUS. Thank you.
    I will just close with a comment, if other members don't have questions.
    This committee has tried to take a multiple approach to this whole issue of credit, availability of credit, creditworthiness and consumers and their rights and obligations under what is widespread availability of credit, which creates many opportunities but problems.
    One of the things we have done is try to encourage them to migrate or utilize your credit unions, banks, more mainstream, get them into more mainstream financial institutions where the costs are less than, say, some of the, you know, check cashers, payday lenders, things of this nature.
    Secondarily, we do think financial literacy is very important. You know, for many young Americans, financial literacy is getting overextended on a credit card. That is how they learn.
    Unfortunately, what sometimes is available to the upper class and the upper middle class, income-wise, is a whole different world for those who don't have the resources to learn in a painless experience. For instance, if an upper middle class or upper class child from those families gets overextended on a credit card, it probably means a visit to mother or dad and they bail them out, and then they caution them not to let that happen again.
    With low-income kids, with low-wage earners, that is simply not possible.
    Plus, financial literacy only—I think when you say financial literacy, know who you are dealing with, know what the contract is.
    I think with the credit cards, okay, what is the rate? The rate is going to be that way for a year, okay. And you would have to read 25 pages and really have a law degree to figure out that that payment could change without you ever missing a payment.
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    And what I have done, I have actually—in 10 years I have had interest rates change on me, to my surprise. What I am able to do is write—I won't mention names. But other people, what they have done is simply paid it off and gone on. Well, pay it off and get another credit—you know.
    That is not available to some people. They don't have $3,500 in the bank, see that their rate has gone up, get annoyed, write a $3,500 check and pay it off, or $1,500. It just simply—that is not an option for them.
    So sometimes our own experiences—members of Congress on a salary of $160,000 is really not the experience of the average American in coping with these changes.
    So these are difficult issues. This is why we had this hearing today.
    And we welcome your testimony today. I think one benefit of it will be to read over your testimony closer in the weeks to come and hopefully come to some consensus. Because we do have, among young people in particular—Mr. Draut, you mentioned certain at-risk populations. It is an unmanageable problem for them in many respects.
    We have to be, as Mr. Hensarling and Mr. Toomey said, we have to—in our system there is just a certain amount of paternalistic things. Government cannot be mom and dad. It cannot be the rich uncle.
    But we appreciate your testimony. We appreciate all your testimony.
    At this time our committee stands adjourned.
    [Whereupon, at 12:40 p.m., the subcommittee was adjourned.]