«Dr. Robert D. Manning Caroline Werner Gannett Professor of Humanities Rochester Institute of Technology Hearing on “The Role of FCRA in the Credit ...»
Homeowners with high credit card and other consumer debts were identified from these lists and contacted by account executives at nearby branches. Potential customers were promised that their debt consolidation loans would save them money after the refinancing of their credit card, consumer loan, and mortgage debts. In the process, the objective of this ‘target practice’ was to deliberately ‘upsell’ loans in amounts so high in relation to the value of the borrowers’ homes that it would be nearly impossible to sell or refinance them in the future. By misrepresenting the total cost of these debt consolidation loans (origination fees, mandatory insurance, high interest rates), Household Finance Corporation generates high profits from the initiation of these loans as well as from their resale in secondary mortgage and securitarized bond markets.
Today, high credit card interest rates are no longer sufficient to satisfy the voracious appetite of the financial services industry. Penalty and transaction fees continue to rise while new fees are imposed such as overdraft transactions, foreign currency conversion, and “double billing” cycles which reduce the payment “grace” period. In addition, banks have begun aggressively marketing financial-related services that offer little practical benefits for their clients including credit protection programs ($9.99 per month from Citibank) that can not prevent identity fraud, unemployment and injury insurance (typically 0.5% of outstanding monthly balance) that provide minimum credit card payments that rarely can exceed premium payments, and other forms of lowvalue term-life and health insurance. The proliferation of these credit information and insurance products yield very high profits for the banks and only modest benefits for consumers.
As for future statutory regulation and other consumer protections, local and state attempts have been aggressively thwarted through the creative use of Federal Preemption.
That is, the U.S. Constitution specifies that public efforts to regulate the operation of a national banking system can only be legislated by the U.S. Congress to the exclusion of local and state jurisdictions. The tremendous political influence of the banking industry on both the Executive Branch (MBNA was the largest contributor to George Bush’s Presidential campaign) and the U.S. Congress (especially Senate Banking and House Financial Services Committees) ensures that there will not be any significant proconsumer bills enacted in the next couple of years. In addition, the credit card industry’s recent imposition of binding arbitration is designed to drastically curtail class action lawsuits. The legality of mandatory arbitration and thus the future of consumer litigation against unfair lending policies by the credit card industry is being challenged with varying degrees of success by several ongoing lawsuits.
Lastly, with the twin threat of statutory regulation and class action litigation greatly diminished, the current focus of the credit card industry is the enactment of the Bankruptcy Reform Act. Vetoed by President Clinton at the end of 2000, versions of this aggressively lobbied pro-banking bill were passed by the U.S. House and Senate during the last Congress. The objective of the bill is to increase the amount of unsecured consumer loans (especially credit card debts) that must be repaid before the approval of a bankruptcy petition. If this bill is enacted into law, it will expand the U.S. government’s role as a de facto debt collector and increase the costs assumed by the public in extending consumer credit to the most risky credit card clients. Hence, it will provide a disincentive for the banks to curtail the marketing of high-cost credit to its most marginal clients. For an industry whose motto is “Greed is Good,” this legislative distortion of the free market system constitutes the final piece of the puzzle for sustaining its record profits and spiraling executive bonuses. As shown in Table 7, this compensation mix is incredibly lucrative for credit card industry executives whose total mean compensation in 2002 averaged $20.23 million, led by Alfred Lerner of MBNA at $195.00 million (Punch, 2003).
Chart 1 _______________________________________________________
Federal Regulation of the Credit Card Industry _____________________________________________________
1978 Marquette National Bank of Minneapolis v. First National Bank of Omaha:
U.S. Supreme Court decision permits national banks to move their headquarters to states with high interest rate ceilings and thus evade federal interstate banking restrictions and state usury laws. By essentially "exporting" high finance rates to states with strong pro-consumer rate protections, a national market for bank credit cards is created. Citibank immediately moves its headquarters from New York City to Sioux Falls, South Dakota. Today, 29 states do not have interest rate caps on credit cards.
1996 Smiley v. Citibank: U.S. Supreme Court voids state regulations on credit card related fees such as late and overlimit penalty fees. The ruling specifies that fees are part of the cost of financing consumer credit and can only be regulated by U.S. Congress. Between 1996 and 2001, credit card penalty fees soar from $1.7 to $7.3 billion.
1999 College Student Credit Card Protection Act: First introduced in 1999, the legislation proposes restrictions on marketing credit cards to college students under 21 years old and to impose low credit limits on students under 21 years old without demonstrable sources of income and whose parents will not co-sign the credit card contract. Bill is denounced by banking industry and is defeated in the U.S. House of Representatives.
1999 Wells et al v. Chevy Chase Bank, FSB (under appeal): Regional Credit Card Company blatantly disregards existing contract with card accountholders by moving its headquarters to Virginia in 1996 and raising interest rates (high of 28.8%), imposing new fees, higher daily interest rate calculation, mandatory arbitration, and purposively fails to provide meaning notice procedure for disclosure of new contract terms. Bank argues that federal preemption denies plaintiffs' the legal right to seek relief.
1999 Financial Services Modernization Act: Essentially ends Depression-era regulation of U.S. banking industry by permitting Citibank to merge with Traveler's Insurance Group into a single conglomerate, Citigroup. The Act rescinds most interstate branch banking restrictions as well as "firewall" protections between retail (consumer services) and wholesale (investment) banking activities. The goal is to facilitate "one-stop" banking and pursue "crossmarketing" strategies. Citibank purchases AT&T credit card company in 1998 and Citigroup acquires First Capital Associates in 2001.
2000 Deaton v. Chevy Chase Bank, FSB (under appeal): Plaintiff is billed five-fold for purchases incurred on a business trip in 1994 even though the merchants verify consumer's claim. Under FCRA, plaintiff's demands corrections to her credit report which are ignored. In 1997, plaintiff's account file is lost" during sale of credit card company to First USA and additional late fees and legal expenses are billed by First USA. The case raises serious questions regarding how banks respond to FCRA obligations and how illegally obtained "other" revenues are deposited and classified for accounting purposes.
2002 Lockyer et. al. v. American Banking Association et. al. (under appeal): Credit Card industry files injunction against enactment of a bill passed by the California state legislature that requires credit card companies to clearly state how many years it will take for a consumer to pay off the outstanding balance if only the minimum payment is submitted. Litigation demonstrates the credit card industry's intent to resist legislative efforts to inform consumers about nonfinance related issues such as disclosure of specific contract terms and payment information.
2003 Acorn v. Household Finance Corporation (pending): The predatory "trolling" for heavily indebted consumers by identifying households with high levels of credit card and other unsecured debt. These consumers are persuaded to consolidate their unsecured debts with existing home mortgages into a single high interest loan. By "upselling" loans above the value of their homes, the consumer is typically unable to seek more favorable refinancing with other banks and unable to sell their home in the future.
2003 Consumer Bankruptcy Reform Act: This bill, which was vetoed by President Clinton in 2000, is primarily promoted by the credit card industry. The goal is to prevent more petitioners from seeking relief through debt liquidation (Chapter 7) by pushing them into a repayment plan (Chapter 13). Debate is still unresolved over the Homestead Exemption provision (five states including Texas permit protection of all home equity) and consumer advocates are seeking to deny banks priority status over personal obligations such as child support and alimony.
Higher cost of filing and administration will deny the most disadvantaged an option to file for bankruptcy. Also, it shifts some of the costs of debt collection to the public and thus limits the banks' financial risk of marketing to low income and highly indebted consumers. Credit card giant MBNA was the largest financial contributor to George W. Bush’s presidential campaign.
aTotal of charges during year (January 1 – December 31, 2001).
bIncludes multiple accounts of same households.
cIncludes American Express charge and credit card (Optima) accounts.
SOURCE: CardWeb.com, Inc available at www.cardweb.com.
SOURCE: University of Michigan Survey of Consumer Finances (SCF), 1989, 1992, 1995, and 1998 as reported in Tamara Draut, “Trying to Make Ends Meet: The Growth of Credit Card Debt,” (New York: Demos Final Report, 2003).
*Data analysis excludes “convenience users” whom are defined as accountholders without any outstanding credit card balances.
TOTALS 100.0% 100.0% 100.0% 100.0%
----------------------------------------------------------------------------------------------------------Includes students who have matriculated at least four or more years.
*Based on 2001 industry averages of 1.7% interchange fee, 4.05% cost of funds, 4.7% combined cost of marketing and operating expenses (as a percentage of managed receivables, and 2001 First USA charge-off rate of 5.5% of managed receivables.
Sources: Standard & Poor’s ExecuComp cited in Linda Punch, “Fading Pay,” Credit Card Management, June 2003, p. 42.
Appendix A CREDIT CARD NATION: Historical Anomalies of Post-Industrial America  More Profitable to Finance Consumption than to Produce/Sell Commodities such as Circuit City (electronics) and GE Finance Corporations.
 The Most Desirable Clients of the Financial Services Industry Are Those Unable To Repay Their Loans. Conversely, Customers That Pay-Off Their Credit Card Charges Each Month Are Least Desirable and called ‘DEADBEATS.’  The lowest Income and most financially Distressed “Revolver” Credit Card Users Subsidize the Most Affluent and Financially Advantaged “Convenience Users” (Moral Divide).
 Banks Prefer to Reject Loans to Small Businesses, the Primary Source of New Jobs, With the Expectation that They Use High Interest Credit Cards; Today, Credit Cards are the Number One Source of Start-Up Capital for Entrepreneurs.
 First Credit Card is More Likely to Be Received Before First Full-Time Job For Most College Students. Hence, Most College Students Perceive Credit Cards as an Entitlement Rather Than an Earned Privilege With Financial Responsibilities.
 Since 1980, the Deregulation of the Banking Industry has Produced High Cost “Financial Products” that Defy Traditional Definitions of Loans (‘Cash Advances,’ ‘Lease Cash’) at Interest Rates of Over 700% APR. Credit Card Finance Charges of 19.9% APR are a Bargain in Comparison to these Usurious Interest Rates.
 More Than One-Half of US Credit Card Debt is Re-Sold as “Securitarized” Bonds (NY, London, Tokyo). This Means Institutional Investors are Purchasing Credit Card Debts to Help Finance Your Future Retirement.
 A 1997 Marketing Campaign by the US Department of Treasury encouraged the Purchase of “Savings Bonds” Over the Internet With Bank Credit Cards; Credit Card Interest Rates Averaged About 18% versus 4.5% for Bonds.
 Banks Routinely Reject Credit Card Applications From Senior Citizens While Inundating Their Grandchildren With Offers--Before Their First Job--in College.
 Over Educated and Under Compensated Recent College Graduates Often Refer to Their Credit Cards as a Form of Social Class Entitlement: “YUPPIE FOOD STAMPS.”
Ann saw the promotional offer in the weekend edition of the Orlando Sentinel newspaper and thought that it sounded almost too good to be true. A Home Depot credit card with a promise of 10% off the first purchase (up to $2000) and zero percent financing and NO PAYMENTS for six months. She called the Home Depot credit approval office—toll free—and received a $1,000 line of instant credit, courtesy of the new “partnership” with Citibank’s private issue credit card subsidiary. Ann thought that with the backsliding of the economy, it was a great opportunity to finally replace the 20 year-old carpet in her home. Although Ann’s local Home Depot store in suburban Orlando, Florida refused to honor the discount coupon, the final sale price of $1,619 with free padding for wall-to-wall carpeting in her two-bedroom house was too good to passup.
After a call to the credit department, which was informed of Ann’s pending purchase by a sales agent, her Home Depot credit card limit was raised to a $10,000.
Hard to believe considering that her current monthly income of about $1200 was dwarfed by the over $21,000 in outstanding credit card balances on her six other credit cards. Ann was surprised and relieved that the exaggerated income that she listed on the application was not checked (she reported $2500 per month).