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Reprinted from the June 2005 ABI Journal June 1, 2005

Web posted and Copyright © June 1, 2005, American Bankruptcy Institute.

Senate Committee Examines Credit Card Industry Marketing

enate Banking Committee members criticized a number of credit card industry marketing and fee practices during an oversight hearing on May 17. Several members of the committee, including committee chair Richard Shelby (R-Ala.), expressed concern about very high default and penalty rates of interest. Witnesses critical of the industry addressed hard-to-find and changed terms and conditions, penalty rates and late fees, over-the-limit fees, deceptive interest rate quotes and high cash-advance charges, among other practices.

For example, the average late penalty interest rate was nearly 23 percent, according to a survey by Consumer Action. The group found that late fees have gone from an average of $13 in 1995 to now more than $27, with three major banks charging $39 late fees—even for a payment one day late. Such practices particularly penalize those with small balances and are not reflective of true risk-based pricing, since "a payment coming in one day late cannot create the same risk for a card company as foreclosure on a car loan," according to Linda Sherry of Consumer Action. With average monthly minimum payments at 2 percent of the balance, she pointed out that the late fee on a $2,000 balance would be double the minimum payment.

Greater regulation and more disclosures were advocated. Federal bank regulators from the Comptroller of the Currency and Federal Reserve acknowledged growing consumer complaint levels. Acting Comptroller of the Currency Julie Williams said national banks have engaged in a variety of practices recently that are "unacceptable" but not illegal under current law and regulation. "We believe it is important that lenders retain the right to close, re-price and/or limit further credit advances on accounts due to factors such as fluctuation in the interest-rate environment, adjustments in business strategy, market developments or an increased credit risk associated with an individual. At the same time, customers need to know the circumstances under which their rates will be or may be changed," she said. "Absent effective disclosure of this information, particular changes in terms may be not only unexpected, but also perceived by the customer to be unfair, such as the application of a penalty rate to existing balances, rather than to only new transactions," she added.

The importance of this industry is clear: About 17 percent of all consumer spending is done with credit cards—$1.7 trillion annually—and 80 percent of U.S. households have cards. The new bankruptcy law contains several amendments to the Truth in Lending Act on credit card practices: Creditors must provide on the front page of periodic statements a warning about the effects of making minimum payments and a standardized example of the time it would take to pay off an assumed balance if the consumer makes only the minimum payment, along with a toll-free number to obtain estimates of the pay-off of their balances. In addition, the new law provides that if a temporary rate is offered on solicitations and applications, or promotional materials, the term "introductory" must be "immediately proximate" to each listing of the temporary rate. Under the new law, the Federal Reserve must issue guidance regarding a "clear and conspicuous" standard applicable to these payments and rate disclosures.

Industry witnesses pointed to the intense competition within the industry: As many as 50 issuers distribute their cards nationally, and the rise in fees corresponds with the industry's movement toward lower interest rates overall and elimination of annual membership fees. While the 10 largest issuers followed a "one size fits all" rate policy as recently as 1987, with identical annual fees, today fierce price competition has produced billions of dollars of savings to most customers. Products and pricing are now more complex. New products also expand rewards programs, discounts and privileges for cardholders not seen previously. Meanwhile the spread of access to cards and "convenience credit" have created whole new marketplaces, such as E-bay and web commerce. "But in order to offer those low rates and those zero-dollar membership fees, it has become critically important for credit card lenders to manage risk in their accounts more effectively, including the use of default fees to compensate," said Marge Connelly of Capital One Financial.



 

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