Senate Floor Speech on Credit Card Reform Legislation

 Mr. LEVIN. Madam President, I am here today to strongly support the Dodd-Shelby substitute to the House bill on credit card reform. Before I proceed with my statement, I wish to say how appreciative I am, and the country will be, for the efforts of CHRIS DODD and SENATOR SHELBY. This has been an effort on the part of Senator Dodd which has been ongoing for a long time. It is a very difficult, complex effort that he has taken under his wing and mastered. When we can get this passed--and hopefully we will by the end of May, as the President has requested--there will be a very strong feeling across this country that, hallelujah, the Congress has finally acted to correct some of the abuses which have cost our consumers so many hundreds of billions of dollars in unfair charges by some credit card companies.

Millions of Americans today are facing the worst economic crisis of their lifetime. Their hardship is being compounded by unfair credit card fees and interest charges. It is long past time for us to do something about it. The Credit Cart Accountability, Responsibility, and Disclosure Act of 2009, which is 414, introduced earlier this year by Senator Dodd, myself, and a number of our colleagues to combat credit card abuses, is the best chance we have to do just that. With this substitute, we are going to be able, I believe, on a bipartisan basis, with hopefully enough support in the Senate, to accomplish our goal.

With home prices falling and unemployment rising, millions of Americans who are still managing to pay their credit card bills on time have nonetheless been subjected to hiked interest rates. They have been hit with a double whammy--hard economic times and abusive credit card interest rates and fees. It is simply wrong for America's banking giants to try to dig themselves out of the hole they put themselves in by putting American families into a deeper hole with fees and sky-high interest charges that are often retroactively applied. Even as the prime rate of interest has gone down, some credit card companies have hiked interest rates on millions of customers who play by the rules. To add insult to injury, banks that received bailouts are frequently the ones that are punishing the very taxpayers they came to for financial rescue.

Credit card companies have used a host of unfair practices. They unilaterally hike the interest rates of cardholders who pay on time and comply with the credit card agreements they entered  into. They impose interest rates as high as 32 percent, and they apply higher interest rates retroactively to existing credit card debt. They pile on excessive fees and then charge interest on those fees, and they engage in a number of other unfair practices that are burying American consumers in a mountain of debt.

I have received thousands of letters from people who have been treated unfairly by their credit card companies and feel they are powerless to do anything about it. The letters come from people from all over the country, from all walks of life; letter after letter, each more poignant than the next.

The President has also heard those voices. He has made clear his support for ending abusive practices which cause so much pain and financial damage to American families, and he has called on Congress to send him a bill by the end of this month.

We can and we should meet that deadline. The House has acted. Their version of this bill passed the House on April 30 by a vote of 357 to 70, garnering support from a majority from both parties. A similar vote in the Senate on the CARD Act will send a strong message that standing up for the American taxpayer and consumer is a bipartisan priority.

Under this bill, card issuers will no longer be able to engage in the abusive business practice of first extending credit at one interest rate, and then unilaterally jacking up the interest rate after the money is owing. Our bill doesn't restrict fair lending; it only affects credit card companies that engage in irresponsible lending practices that bury people unfairly in debt, the sort of debt that the companies often don't even expect to fully recover, but profit from nonetheless, through the extraction of fees and interest.

Some argue that it is the role of regulators, not Congress, to combat unfair lending practices. But for years Federal regulators have not taken up that task. Instead, they stood largely by silently while deceptive and unfair practices became entrenched in the credit card industry. The Federal Reserve, in particular, charged with issuing credit card regulations, failed to take action until congressional hearings and public outrage forced attention on credit card abusers.

Six months ago, the Federal Reserve and other bank regulators finally acted, issuing a regulation last December to stop some of the unfair practices. For example, the new regulation prohibits banks from retroactively raising interest rates on cardholders who meet their obligations, requires banks to mail credit card bills at least 21 days before the payment due date, and forces banks to more fairly apply consumer payments.

But the regulation, regrettably, leaves in place blatantly unfair credit card practices that mire families in debt. It fails to stop, for example, abuses such as charging interest on debt that was paid on time, charging people a fee simply to pay their bills, and hiking interest rates on a credit card because of a misstep on another unrelated debt, a practice known as universal default. It doesn't stop the charging of interest on fees. Legislation is needed not only to end those abusive practices that are not prohibited by the Federal Reserve regulation, but also to provide a statutory foundation for the new credit card regulation so that it cannot be weakened or withdrawn in the future.

The Dodd-Levin bill, as introduced, banned each of these unfair practices that were still allowed by the Federal Reserve rules. The substitute introduced today would not go as far as the Dodd-Levin bill, but offers a good compromise with strong consumer protections that ought to attract widespread support in the Senate. The substitute remains stronger, for example, than both the Federal Reserve credit card regulations and the House credit card bill in a number of ways. For example, it would prohibit retroactive interest hikes for cardholders who pay their bills on time and would allow them only for those who pay more than 60 days late. Even then, if would require banks to restore a lower interest rate for persons who had paid 60 days late but then made 6 months of on-time payments. The bill would also prohibit interest charges for debt that is paid on time, a key consumer protection for which I have been fighting for years. In addition, the bill would put its consumer protections in place 9 months from now instead of the longer regulatory deadline of July 2010 or the 1-year delay in the House bill.

The bill, of course, will not only help protect consumers and ensure their fair treatment, but it will also make certain that credit card companies that are willing to do the right thing are not put at a competitive disadvantage by companies continuing unfair practices.

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

I strongly commend Senator Dodd, chairman of the Banking Committee, for taking action to move our credit card bill through the committee, despite some opposition. I also commend Senator Shelby for joining him in this substitute. Now is the time for the full Senate to act so that we can then resolve any differences with the House, and send the bill to President Obama, who has said he is ready to sign credit card legislation.

For years now, we have been combating abusive credit card practices on our Permanent Subcommittee on Investigations, which I chair. The subcommittee held two investigative hearings in 2007, exposing those practices. I introduced legislation that same year, S. 1395, the Stop Unfair Credit Practices in Credit Cards Act. I am pleased that at that time we had so many cosponsors, including Senators MCCASKILL, LEAHY, DURBIN, BINGAMAN, CANTWELL, WHITEHOUSE, KOHL, BROWN, KENNEDY, and SANDERS. We followed that by introducing the Dodd-Levin bill in this Congress. It incorporated much of the previous Senate bill that I referred to, and it added other important protections as well. The Dodd-Levin bill then provided the foundation for the Dodd-Shelby substitute.

Senator Dodd already outlined most of the important provisions in the CARD Act. I want to highlight three provisions that I believe are critical to delivering relief to American families and returning common sense to the credit card business.

First, the bill will prohibit interest charges on any portion of a credit card debt which the cardholder paid on time during a grace period. Virtually all credit cards provide a grace period, so called, in which a credit card debt can be repaid without incurring interest charges. But what most people don't realize is that the credit card industry restricts this grace period to people who pay off their entire balance in full. If a cardholder repays only part of the balance during the grace period, even though it is more than the minimum amount, the issuer charges interest on the entire balance--even the portion that was repaid on time.

If I charge $5,000 in a month and pay off $2,500 by the due date--again, an amount far more than the minimum payment required--I will still be charged interest on the full $5,000 balance, starting with the first day of the billing period. That policy is unfair, counterintuitive, and it is unknown to a vast majority of cardholders who pay the added interest. The CARD Act will return a commonsense interpretation of the grace period and simply prohibit the charging of interest on debt that is paid on time.

Another key provision would limit the circumstances under which a credit card company can hike the interest rate applicable to a cardholder's existing debt. Right now, credit cards are the only type of loan I know of whose terms can be unilaterally changed after the loan is incurred. Even in the toughest market conditions, for example, car companies cannot increase the interest rate on a car loan, even if a borrower pays late. The credit card companies can unilaterally hike a cardholder's interest rate at any time, for just about any reason, or no reason at all. This patently unfair practice violates accepted practice in the lending field outside of credit cards, and the bill will put an end to that.

The substitute will ban retroactive rate hikes for existing balances except in limited circumstances, the most important of which is that it would ban such interest hikes for cardholders who pay on time and would allow them only for cardholders who pay more than 60 days late. Even then, it will require banks to restore the prior lower rate if the cardholder follows with 6 months of on-time payments. While our Dodd-Levin bill would have gone even further and banned retroactive rate hikes, period, the substitute offers a reasonable compromise that will provide greater protection in this area than the Federal Reserve regulation, or the House bill, both of which would allow retroactive interest rate hikes if a person paid more than 30 days late.

Finally, while the substitute before us does not go as far as our Dodd-Levin bill did to prohibit universal default, the substitute does place important limits on how card companies can raise rates when cardholders have met their obligations and pay their credit card bills on time. Right now, credit card companies can unilaterally hike a cardholder's interest rate if the company receives information indicating that the cardholder is an increased risk of not paying his or her debts, even if the cardholder has a years-long record of on-time payments and has never paid a bill late to that company. The companies can apply the new higher rate to the cardholder's existing debt, as well as future debt.

The substitute would put an end to that practice as it applies to existing balances. It provides that if a cardholder meets the obligation of the card agreement by paying on time and staying under the credit limit, the credit card company must hold its end of the bargain and honor the terms of the agreement. In other words, it cannot raise the interest rate applicable to the cardholder's existing debt. The substitute would, however, allow the credit card company to increase the interest rate applicable to future debt--meaning debt not yet incurred. In addition, under the substitute, if a card company increased an interest rate on a cardholder because of credit risk, or market condition, the company would be required to review the increase after 6 months and reverse it if conditions warrant. While my preference would be to prohibit unilateral rate increases entirely, the compromise is a significant improvement over current law. It would ban unilateral interest rate hikes on existing debt for consumers who play by the rules.

To understand why these protections are needed, here are some examples of the credit card abuses we uncovered and some of the stories that American consumers shared with us during the course of the inquiries carried out by my Permanent Subcommittee on Investigations.

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

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

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

In other words, the interest charges and fees more than tripled the original $3,200 credit card debt, despite payments by the cardholder averaging $1,000 per year. Unfair? Clearly, but our investigation has shown that exhorbitant interest charges and fees are not uncommon in the credit card industry.

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

These high fees are made worse by the industry-wide practice of including fees in a consumer's outstanding balance in a manner that would also incur interest charges. Those interest charges magnify the cost of the fees and can quickly drive a family's credit card debt far beyond the cost of their initial purchases. It is one thing for a bank to charge interest on funds lent to a consumer; charging interest on penalty fees goes too far.

Another troubling case history involves Charles McClune, a 51-year-old Michigan resident who is married with one child. Mr. McClune had a credit card account which he closed in 1998, and has been trying to pay off for more than 10 years. Due to excessive fees and interest rates, and despite paying more than four times his original credit card debt of less than $4,000, Mr. McClune still owes thousands on his credit card, with no end in sight.

Mr. McClune first opened his credit card account while in college, in 1986, through a student-targeted credit promotion at a Michigan bank. After leaving college, the credit limit on his card was increased to $4,000. By 1993, although he had not exceeded the credit limit through purchases, Mr. McClune had missed some payments and was assessed interest and fees that pushed his balance over the $4,000 limit. From 1993 to 1996, he exceeded his limit again, on several occasions, due to interest and fee charges. He stopped making purchases on the credit card in 1995.

In 1996, Mr. McClune's credit card account was purchased by Chase Bank. In 1998, Mr. McClune asked Chase to close the account, and Chase did so. Although he never made a single purchase on his credit card while the account was with Chase, Chase repeatedly increased the interest rate on his account, including after the account was closed. In 2002, for example, his interest rate was about 21 percent; by October 2005, it had climbed to 29.99 percent where it remained for more than two years until March 2008; it then dropped slightly to 29.24 percent. The higher interest rates were applied retroactively to Mr. McClune's closed account balance, increasing the size of his minimum payments and his overall debt.

Chase also assessed Mr. McClune repeated over-the-limit and late fees, which began at $29 and increased over time to $39 per fee. Chase cannot locate statements for Mr. McClune's account prior to February 2001, so there is no record of all the fees he has paid. The records in existence show that, since February 2001, he has paid 64 over-the-limit fees totaling $2,200. Those fees stopped after the March 2007 hearing before my subcommittee, in which Chase promised to stop charging more than three over-the-limit fees for a single violation of a credit card limit. In addition to the 64 over-the-limit fees, since February 2001, Chase has charged Mr. McClune nearly $2,000 in late fees.

The records also show that since 2001, Mr. McClune was contacted on several occasions by Chase representatives seeking payment on his account. If he agreed to make a payment over the telephone, Chase charged him--without notifying him at the time--a fee of $12 to $15 per telephone payment. When asked about these fees, Chase told the subcommittee that the fees were imposed, because on each occasion Mr. McClune had spoken with a ``live advisor.'' Since 2001, he has paid a total of $160 in these pay-to-pay fees.

Altogether, since 2001, Mr. McClune has paid nearly $4,400 in fees on a debt of less than $4,000. If the more than 4 years of missing credit card bills were available from 1996 to 2000, this fee total would be even higher. In addition, each fee was added to Mr. McClune's outstanding credit card balance, and Chase charged him interest on the fee amounts, thereby increasing his debt by thousands of additional dollars.

In February 2001, Chase records show that Mr. McClune's credit card debt totaled nearly $5,200. For the next 7 years, although he did not pay every month, Mr. McClune paid nearly $2,000 per year toward his credit card debt, but was unable to pay it off. At one time, he paid $150 every 2 weeks for several weeks. Those payments did not bring his debt under the $4,000 credit limit, or reduce his interest rate.

In January 2007, Mr. McClune received a letter from Chase stating that if he made his next payment on time, he would receive a $50 credit on his debt. Mr. McClune cashed out his IRA and paid $4,000 on his credit card debt. Because he made this payment in February, however, he did not receive the $50 credit for an on-time payment. Instead, he was assessed a $39 late fee, a $39 over-the-limit fee, and a $14.95 payment fee for making the $4,000 payment over the telephone.

Mr. McClune was never offered a payment plan or a reduced interest rate by Chase to help him pay down his debt. His credit card bills show that from February 2001 to June 2008, he paid Chase a total of $15,800. If the 4 years of missing credit card bills from 1996 to 2000 were available, his total payments would likely exceed $20,000. In June 2008, his credit card bill showed he was charged 29 percent interest and a $39 late fee on a balance of $3,300.

How could Mr. McClune pay $15,000 to $20,000 on credit card purchases of less than $4,000, and still owe $3,300? His credit card statements since 2001 show that he was socked with over $9,700 in interest charges, $2,200 in over-the-limit fees, $2,000 in late fees, and $160 in pay-to-pay fees. All of these interest charges and fees were assessed by Chase while the account was closed and without a single purchase having been made since 1995. Despite his lack of purchases and payments totaling $15,800, Chase records show that, from February 2001 until June 2008, Mr. McClune was able to reduce his credit card balance by only about $1,850.

Mr. McClune is not trying to avoid his debt. He has made years of payments on a closed credit card account that he has not used to make a purchase in 13 years. He has paid thousands and thousands of dollars--four and possibly five times what he originally owed--in an attempt to pay off his credit card account. He is still paying. But his thousands of dollars in payments are not enough for his credit card issuer which is squeezing him for every cent it can, fair or not, for years on end.

Tragically, Mr. McClune and Mr. Wannemacher have a lot of company in their credit card experiences. The many case histories investigated by my subcommittee show that responsible cardholders across the country are being squeezed by unfair credit card lending practices involving excessive fee and interest charges. The current regulatory regime--even with the new Federal Reserve regulation--is insufficient to prevent these ongoing credit card abuses. Legislation is clearly needed.

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

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

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

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

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

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

Now 38 cents isn't much in the big scheme of things. That may be why many consumers don't notice these types of extra interest charges or try to fight them. Even if someone had questions about the amount of interest on a bill, most consumers would be hard pressed to understand how the amount was calculated, much less whether it was incorrect. But by nickel and diming tens of millions of consumer accounts, credit card issuers reap large profits. I think it is indefensible to make consumers pay interest on debt which they pay on time. It is also just plain wrong to charge trailing interest when a bill is paid on time and in full.

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

Janet Hard of Freeland, MI, had accrued over $8,000 in debt on her Discover card. Although she made payments on time and paid at least the minimum due for over 2 years, Discover increased her interest rate from 18 percent to 24 percent in 2006. At the same time, Discover applied the 24 percent rate retroactively to her existing credit card debt, increasing her minimum payments and increasing the amount that went to finance charges instead of the principal debt. The result was that, despite making steady payments totaling $2,400 in 12 months and keeping her purchases to less than $100 during that same year, Janet Hard's credit card debt went down by only $350. Sky-high interest charges, inexplicably increased and unfairly applied, ate up most of her payments.

Millard Glasshof of Milwaukee, WI, a retired senior citizen on a fixed income, incurred a debt of about $5,000 on his Chase credit card, closed the account, and faithfully paid down his debt with a regular monthly payment of $119 for years. In December 2006, Chase increased his interest rate from 15 percent to 17 percent and in February 2007, hiked it again to 27 percent. Retroactive application of the 27 percent rate to Mr. Glasshof's existing debt meant that, out of his $119 payment, about $114 went to pay finance charges and only $5 went to reducing his principal debt. Despite his making payments totaling $1,300 over 12 months, Mr. Glasshof found that, due to high interest rates and excessive fees, his credit card debt did not go down at all. Later, after the subcommittee asked about his account, Chase suddenly lowered the interest rate to 6 percent. That meant, over a 1-year period, Chase had applied four different interest rates to his closed credit card account: 15 percent, 17 percent, 27 percent and 6 percent, which shows how arbitrary those rates are.

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

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

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

The case histories presented at our hearings illustrate only a small portion of the abusive credit card practices going on today. Since early 2007, our subcommittee has received letters and emails from thousands of credit cardholders describing sometimes unbelievable credit card practices and asking for help to stop it. These are more complaints than I have received in any other investigation that we have conducted in that subcommittee, or an earlier subcommittee which I chaired, in more than 30 years now in Congress. The complaints stretch across all income levels, all ages, and all areas of the country.

The bottom line is that these abuses have gone on for far too long. In fact, these practices have been around for so many years that they have, in many cases, become the industry norm. Our investigations have shown that many of the practices are too entrenched, too profitable, and too immune to consumer pressures for us to have confidence that the companies will change them on their own. For these reasons, I hope our colleagues will pass the substitute before us. It is time to return common sense, responsibility, and fairness to the credit card industry.

With thanks and gratitude to the leaders in the Banking Committee, Senators Dodd and Shelby, for the initiative they have taken and the courage they are showing in taking on some very difficult and entrenched practices.

With that, I yield the floor.

I suggest the absence of a quorum.