On April 2, 2009, the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law held a hearing entitled, “Consumer Debt – Are Credit Cards Bankrupting America?”. Testifying before the Subcommittee were the following witnesses:
- Adam J. Levitin, Associate Professor of Law, Georgetown University Law Center
- David C. John, Senior Research Fellow, The Heritage Foundation
- Edmund Mierzwinski, Senior Fellow, Consumer Program, U.S. Public Interest Research Group
- Brett Weiss, Attorney, on behalf of the National Association of Consumer Bankruptcy Attorneys (NACBA)
Professor Levitin discussed the fact that credit card debt is a major factor in consumer financial distress generally and in bankruptcy specifically. He focused on credit card product design and business models, which he believed encourage credit lending at the “expense of consumers and creditors,” as important factors in the high levels of credit card debt, noting that the bankruptcy code effectively encourages this credit card product design and business model. Mr. Levitin averred that a comprehensive approach is needed for credit card reform legislation, including standardizing cardholder agreement terms and simplifying credit card pricing to increase transparency in the credit card market.
Mr. Mierzwinski answered the question posed in the title for this hearing with a resounding “Yes.” He submitted data that he said demonstrated how credit card issuing and pricing practices have negatively impacted consumers (noting that in some cases, consumers owe as much or more in fees and penalty interest charges as they owe in principal), and how the changes to the bankruptcy code in 2005 have made it harder and more expensive for consumers to find relief through the bankruptcy courts. While Mr. Mierzwinski said he supported the final rules issued by the Federal Reserve this past December as an important first step, the delay in their effectiveness until July 2010 does not provide the assistance needed by consumers today.
Mr. Weiss focused his comments on what he characterized as punitive practices that credit card companies impose on consumers when they are struggling to repay their debts and avoid bankruptcy. Mr. Weiss provided examples of the impact of fees and late charges on specific consumers, concluding that “card companies would prefer to extract as much as they can from borrowers in interest and fees,” rather than work with customers to reduce their debt by curbing excess fees and interest. Mr. Weiss also asserted that many of the fees imposed by credit card companies were originally justified as necessary to “deter undesirable consumer behavior,” but they now serve as a significant source of revenue. Weiss said he believed that congressional action is necessary, and noted that the “NACBA supports S. 257,” the “Credit Card Fairness Act,” which would disallow certain claims resulting from “high cost consumer credit transactions” (defined generally as consumer credit transactions with annual percentage rates in excess of the lesser of 36% and 15% over the yield on 30-year treasury securities).
Mr. John’s testimony focused on the best way to reform the law to put a stop to the credit card abuses discussed by the other panelists. He discussed the potential harm to moderate income borrowers, first time borrowers and those seeking to repair their credit history that could result from a legislative remedy such as S. 257. S. 257 aims to reduce high interest rate lending in an effort to protect the consumer, but in reality it may make it harder for certain populations to find credit and more expensive if they do find it. He also stated that federal regulation through agencies such as the Federal Reserve, Office of Thrift Supervision and National Credit Union Administration can effect change faster and with more pointed results, as seen with the Federal Reserve’s new regulations released this past December, which prohibit certain unfair acts or practices and improve the disclosures consumers receive in connection with credit card accounts and other revolving credit plans.