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«Dr. Robert D. Manning Caroline Werner Gannett Professor of Humanities Rochester Institute of Technology Hearing on “The Role of FCRA in the Credit ...»

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Manning, 2000:Ch. 1). The latter is attributed to the 1996 U.S. Supreme Court decision, Smiley v Citibank, which ruled that credit card fees are part of the cost of borrowing and thus invalidated state imposed fee limits. Overall, penalty fee revenue has climbed from $1.7 billion in 1996 to $7.3 billion in 2001. The average late fee has jumped from $13 in 1996 to $30 in 2002. Incredibly, combined penalty ($7.3 billion) and cash advance ($3.8 billion) fees equaled the after-tax profits of the entire credit card industry ($11.13 billion) in 2001. See Table 4.

This dramatic increase in credit card fees following the 1996 Smiley decision is illuminated by information grudgingly released during ongoing litigation with a major credit card issuer concerning alleged abuse of a consumer’s rights under the FCRA. As shown in Table 5, this regional bank’s total, nonfinance-related revenues jumped from $28.98 million in 1994 to $31.57 million in 1996 (new fee structure imposed in second half of the year) and then to $73.03 million in 1997 and then to $76.03 million in 1998 when its acquired by FirstUSA credit card company (Bank One). During this period, late fee revenues nearly tripled from $10.49 to $29.20 million, overlimit penalty fees jumped from $4.93 (1996) to $15.22 million, returned check fees climbed from $0.20 to $2.85 million, and new credit life insurance soared to over $7 million. It is the outrageous imposition of costly credit card fees and the aggressive solicitation of new clients (especially college students, working poor, and seniors) that underlies the “plant, squeeze, and sell” strategy of regional banks whose primary goal is to increase their credit card revenues in order to maximize the eventual sale price of their credit card division to a top ten issuer (Manning, 2004).

Today, the ascension of the Credit Card Nation features the shift from installment to revolving loans where the best bank customers will never repay their high interest credit card balances. Unlike the installment lending system, the most economically disadvantaged (debtors) essentially subsidize the low cost of credit to the most economically advantaged (convenience users). It is this “Moral Divide” that leads banks to refer to ‘deadbeats’ as those clients whom pay off their charges in-full each month.

These largely unprofitable accounts (depending on monthly charge volume and rebate/reward programs) increased substantially in the last decade, from 29 percent in1991 to 37 percent in 1996 and then peaking at 43 percent in 1999 (Manning, 2000). In 2003, less than 40 percent of credit card household pay off their balances in-full. As shown in Table 6, these accounts can be quite costly to banks that are not successfully cross-marketing other financial services products to these customers. For example, based on 2001 account expenses and revenues, a typical grocery store affinity cardholder (average charges of $700 per month) with a 1% cash reward program cost First USA about $51 for the year plus average cost of charge-offs per account in 2001 of $95. A disturbing trend in this period of credit card industry consolidation is the rise of “cherry picking” of profitable accounts. That is, even with the rising proportion of profitable “revolvers,” many banks are seeking to screen out financially responsible “deadbeats” by not renewing their accounts or charging membership fees.

The escalating profits of the credit card industry underlie the increasing dependence of corporate retailers on finance revenues due to shrinking margins on consumer sales. In 2001, for instance, Sears and Circuit City reported that over one-half of their corporate profits were due to finance-related revenues. For instance, most consumers are not aware that “12 months interest free, same as cash” promotions feature a surprise at the beginning of the 13th month—all finances charges are retroactive if the account is not paid in full. See “Ann’s” experiences with Home Depot’s private issue credit card which is provided by Citibank in Appendix B. This is not surprising since credit cards are the most profitable product of the financial services industry. Even during the current recession, pre-tax profits of the credit card industry (measured by Return on Assets) jumped 20% from 2000 to 2001. As reported in Table 2 below, the nearly $18 billion in pre-tax profits is an industry record. Not incidentally, the growing burden of high-cost credit card debt is disproportionately borne by middle-income and working poor families. Among the three out of five “revolver” households in the United States, their average credit card debt is staggering, rising from over $10,000 in 1998 to over $12,000 in 2002. These figures do not include the $1 trillion in outstanding, nonmortgage consumer installment debt, lease contracts (automobiles), and loans from the “Second Tier” financial sector including pawnshops, “payday lenders, and rent-toown stores.

The Deregulation of Financial Services:

The Future of Consumer Rights The current recession, which has elicited President Bush’s patriotic exhortations to spend more time and money in the malls, has highlighted the critical role of consumer spending to the vitality of the U.S. economy. Although government policy-makers have encouraged household spending by reducing interest rates (Federal Funds rate was cut from 6.5% in 2000 to 1.75% at end of 2001), the sharp decline in the cost of borrowing by banks has not been passed on to consumers. For the major credit card companies, the Federal Reserve’s low-interest rate policy has produced a financial windfall since “sticky” credit card rates declined only modestly--from an average of 18% in 2000 to about 16% in 2001 and nearly 15% in 2002. This trend was the focus of this Subcommittee’s hearing “Abusive Credit Card Industry Practices” that was held on November 1, 2001 As shown in Table 2, interest revenues barely dipped from $64.6 billion in 2000 to $64.2 billion in 2001 (with an 8% increase in outstanding debt) whereas bank borrowing costs dropped steeply from $28.6 to $20.5 billion—more than compensating for the $5.2 billion increase in credit card debt charge-offs. And, as illustrated by ongoing litigation, Wells et al v. Chevy Chase F.S.B., any state regulation of credit card interest rate ceilings and fees will be aggressively resisted as well as the requirement of “meaningful notice procedure” for contract amendments. In this case, Maryland-based Chevy Chase Bank promised its credit card clients not to raise the top interest rate above 24%. In 1996, it moved its credit card headquarters to Virginia and raised its interest rate to a high of 28.8%. It also amended the terms of its contract to include higher late fees, a new overlimit fee, and a more costly “daily” calculation of finance charges without proper notification for clients to reject these unfavorable amendments to their existing contracts.





The credit card industry is so determined to protect the high profits derived from its most indebted clients that, in Lockyer et al v. American Banking Association et al (under appeal), it sued to prevent the enactment of a state disclosure statute. The 2002 California law simply requires banks to inform those clients that remit only the minimum credit card payment of the number of years necessary to pay off their outstanding balance (assuming no additional charges) in a notation on their monthly account statement. The goal of the legislation is to educate consumers about the long-term cost of their revolving credit accounts and thus encourage a shorter and less expensive repayment period.

Although banks emphasize the availability of low-interest balance transfers, the most indebted rarely qualify for these promotional programs (‘bait and switch’ offers) or benefit for only a short period of time (two to six months). Furthermore, credit card companies have adopted a stringent policy of imposing punitive financial penalties on promotional interest rates for minor payment infractions or simply due to high outstanding balances on other consumer loan accounts.

In Houston, Texas, for example, Doug received an enticing six month, 1.9% balance transfer offer from Chase MasterCard and shifted $5,000 from his MBNA credit card account. Unfortunately, Doug’s wife mistakenly sent $80 instead of the required $97 for the first month’s minimum payment. Even though it was received two weeks before the due date, his next statement reported $17 past-due plus a $35 late fee. More striking was the increase in the interest rate, from 1.9% to 22.99%, even though he had not had a late payment in over two years. In an attempt to negotiate a lower finance rate, Doug was informed by a Chase customer service representative that he would have to document six consecutive months of on-time payments before his request could be considered. This followed an earlier “bait and switch” from Chase where the 4.9% promotional rate was raised without warning simply because the bank had decided that the cumulative balances on his other credit cards was “too high.” How high is too high is an answer that the banks will not explain.

Some sophisticated “reward” programs lure customers with attractive rebates that are much less generous than implied in the marketing brochures. For example, the Student Visa card issued by Associates National Bank of Delaware (recently acquired by Citibank) proclaims, “Get Up to 3% Cash Back on Purchases.” Rosa, a law student at William and Mary University in Virginia, considered it a potentially prudent choice since she usually pays off her account balance each month. Upon reading the fine print, which

qualified the terms of the agreement, she realized the true cost of Citibank’s benevolence:

“For the times when you carry a balance from statement to statement, we’ll help you by giving you up to 3% cash back on the amount of the net purchase.” Hence, Rosa would rarely qualify for the cash back rebate. And, when she did, Rosa would have to pay an annual finance charge that ranged from 14.74% to 24.74%.

In Orlando, Florida, Jolynn was offered a $10 discount coupon at the Costco Wholesale Club for applying for a co-branded American Express card. The card featured a 0% interest rate on purchases for the first 3 months (1.99% balance transfer for six months) and 12.74% thereafter plus “up to 2% cash back.” The latter was most appealing until she read the tiered structure of the reward program: less than $2,000 annual charges, 0.75% cash back (0.25% without balance), $2,000 to $5,000 annual charges, 1.00% cash back (0.50% without balance), and over $5,000, 2.00% cash back (1.50% without balance). Unless Jolynn carried a monthly balance or charged over $5,000 per year, she would not receive even a 1.0% cash rebate.

An especially egregious policy is the unilateral increase of a consumer’s credit card interest rate because of cumlative balances on other accounts, even when the contract specifies “fixed interest rates for the life of the loan.” For example, Wally, who has an MBA degree and lost his six figure job in the financial services industry in the aftermath of the destruction of 9/11, has three credit cards with a cumulative balance of $17,000. All three cards were obtained through zero “balance transfer offers.” Today, with a $55,000 annual salary and $73,000 in student loans, Wally considers himself an indentured servant with an average annual interest rate of over 23 percent. Even though he has not been late with a credit card payment in over 1 ½ years, the banks ( Chase, Citibank, Discover) refuse to lower his interest rates. In fact, they told him to make an appointment with a consumer counseling agency or file for bankruptcy if he does not want to pay these high finance rates.

The most costly credit cards are marketed to the working poor. In its direct mail solicitation, United Credit National Bank Visa declares, “ACE VISA GUARANTEED ISSUE or we’ll send you $100.00! (See inside for details.)” For John, a 55 year-old African American who lives on public assistance in suburban Maryland near Washington, D.C., the terms of this contract are outrageous, “Initial credit line will be at least $400.00. By accepting this offer, you agree to subscribe to the American Credit Educator Financial and Credit Education Program. The ACE program costs $289.00 plus $11.95 for shipping and handling plus $19.00 Processing Fee a small price to pay compared to the high cost of bad credit! The Annual Card Fee [is] $49.00...

For your convenience, we will charge these costs to your new ACE Affinity VISA card. [They] are considered Finance charges for Truth-In-Lending Act purposes.” For unsuspecting applicants like John, this credit card will cost $369 for a net credit line of only $31 at 19.8 APR. It is no wonder that those households whom are most desperate for consumer credit often give up on the financial services sector after they realize the exploitative terms of these contracts.

The passage of the Financial Services Modernization Act of 1999, which consecrated the Citibank and Traveler’s Group merger, marks the end of Depression-era regulation of retail banking as separate from commercial banking/insurance services. It is the emergence of financial services conglomerates such as Citigroup that was the catalyst for the plethora of recent Wall Street financial scandals. Moreover, the ability to acquire companies across financial services sectors and share client information with corporate subsidiaries underlies the rise of “cross-selling” financial products such as investment services to credit card clients. This explains Citibank’s 1997 purchase of AT&T’s unprofitable credit card company (8th largest), at a substantial premium, with its large number of high income customers. For Citigroup, this corporate synergy produces multiple revenue flows by originating high interest loans through its credit card (Citibank) and subprime lending (First Capital Associates was acquired in 2000) subsidiaries which are then resold through its investment division of Solomon Smith Barney (cf. Hudson, 2003; Manning 2003a).

Not incidentally, access to personal consumer credit information enables predatory lenders to identify highly indebted households that are susceptible to duplicitous debt consolidation solicitations. In Acorn v Household Finance Corporation, a California suit filed in 2002, lists of prospective clients were obtained from affiliated retailers including Best Buy, Wickes Furniture, K-Mart, Costco, and Home Base.



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