Secret History of the Credit Card
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interviews: senator chris dodd
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A senior Democratic member of the Senate Banking Committee, Dodd has tried numerous times to introduce legislation to curb the credit card industry's practices. His most recent proposal calls for more disclosure about the practice of "universal default" and for disclosing to the consumer how long it would take to pay off the balance if making only the minimum monthly payment. Dodd is most concerned about protecting underage consumers who are incurring steep credit card debt. He has pushed for reforms requiring persons under 21 to prove they have the financial capacity to pay, or have a parent co-sign, or take some sort of a financial literacy course. "We lost that. We've lost that every time I've offered it," he says, and attributes the defeats to the opposition of the "very, very powerful" credit card industry. This interview was conducted on June 22, 2004.

Senator ... why have you introduced this legislation? What is it about the industry that you find objectionable?

Well, almost everything, quite candidly. Virtually all credit card holders are being taken advantage of under the present circumstances. If you're a responsible person of middle-class or upper-middle-class means, and you act totally responsibly by paying off your balances every month, doing it on time, you are not being rewarded for that. In fact, you can be penalized for doing that. If you are very poor, if you are older, and if you're very young, very vulnerable, three very vulnerable constituencies, you're being exploited by this process. So virtually everyone who holds a credit card one way or the other, under existing laws today and provisions, can be completely taken advantage of by the credit card industry.

I cant believe Mr. Wriston would be opposed to  telling people what the real fees are. When you hide them, is that the free market at work?

The profits of this industry are three and four times the profits of other financial services in the financial service sectors. And the amount of money that's being owed, consumer debt, we know generally is hovering now [around] $2 trillion; it's consumer debt. According to numbers in October of 2003, of that $2 trillion, and these numbers can move around on you, but I'm not far off to say almost half, almost half, of consumer debt is credit card debt. There are 51 million people who have balances on credit cards that the credit card industry believes that they'll never pay off the full balance. That's 60 percent of all people who own credit cards. So it's an industry that is making huge profits off people who in many cases cannot afford to have these cards. And for those who can't afford them, they're being gouged, in many instances, by the industry.

Having watched some hidden-camera shows that showed the credit card companies dealing with freshmen in college -- now they're dealing with seniors in high school, but when these hidden cameras were working, they'd show freshmen coming into universities and the credit card company saying, "Look, use the money your parents gave you to go out and buy beer; use your credit cards to buy your books and do all these [things] -- incur the debt."

And young people were incurring incredible levels of credit card debt very early on, so we tried a number of years ago to have provisions included in the Bankruptcy Act and other laws that would say that one, if you're a younger person under the age of 21, you've got to have a parent cosign; or [second,] prove that you have the financial capacity to pay; or third, take some sort of an economic or financial literacy course. Any one of the three, and you get the credit card. We lost that. We've lost that every time I've offered it.

Well, the industry is substantially deregulated. There is no cap on interest rates.

That's right. Well, we wrote the OCC, the Office of the Comptroller of the Currency, and basically, [they are] far more interested in getting new bank charters than they are in protecting consumers or protecting people from the abuses that occur. And that's what they ought to be doing. The OCC tried to preempt consumer laws -- federal, state consumer laws -- that would protect consumers. Every one of us Democrats on the Banking Committee several months ago, in fact, wrote the Office of the Comptroller of the Currency and asked them not to do it, to back off that effort. But that gives you an idea of where the regulators are.

What are you trying to do with your bill?

Just very briefly, what we try to do with our bill: One is something called the universal defaults or default clauses. We've banned that now in this proposed legislation. We also ... say that you cannot raise fees and interest rates on those people who want to terminate a credit card or who pay early their balances. There have been a number of instances where banks actually charge people, the so-called responsible credit card holder, they're actually paying higher fees and higher interest rates because they're acting responsibly. They decide to get rid of the credit card, pay off all the balances they have ahead of time, doing things that you would normally reward people for doing; the credit card industry will actually penalize you for doing certain things in that area.

We also require disclosure. You touched on one of them, the California proposal, and that is to say to people, "If you make just the minimum monthly payment of, say, $24 in some cases, let me tell you how much you're going to end up paying for that item you've bought and how long you're going to have to do this in order to meet those obligations." If you let the consumer know at the time they're making the minimum monthly payment how much more it's going to cost them and how long it's going to be before they pay off the obligation, I think you may get better consumer responses to it.

We also have requirements [to] notify what fees are, what interest rates are, what the real fees are, not just the teaser fees. Then we have provisions in there that track what I try to do with younger people, and that is demonstrate that you've got a cosigner of this who's financially capable of paying these bills, demonstrate that you can do it, or take a financial literacy program.

That's basically what the bill does in those four areas. And we're going to propose that in the next few weeks after the July 4 recess, introduce that bill [and] hopefully attract some co-sponsors because of what we see going on out there today. It is really outrageous what's occurring. And in my view, the credit card industry is just taking advantage of everybody here, the responsible consumer as well as the vulnerable consumer. They're going after everyone, and they're making huge profits at the expense of these people.

This is an industry that's been incredibly successful. It's considered an American success story. There are whole states now that are dependent upon it in terms of their biggest employer and so on, and you're saying they're out of control?

I think they are. I think the regulators are paying no attention to it. We merely look at what's happened here. In 1997, credit card debt was around $530 billion; in 2001, it was $730 billion, approaching $1 trillion just in the space of four years. We know, as I've said earlier, that the amount of debt being held by the average person is somewhere around $12,000. Where the highest interest rates on the credit cards are occurring are [for] people who have incomes of $10,000 or less -- $10,000 or less, the highest interest rates.

In fact, if you have an obligation of around, say, $10,000 to $11,000, which I mentioned is the average here, you're going to pay every year, because the average interest rate on that level of debt is 13 percent; that's way above -- what are the interest rates today? The Fed just raised it a little bit. What are you talking, 1 or 2 percent? And yet the credit card interest rates are, what, 12 times that rate. You're going to pay $1,500 on that $12,000, or $12,000, $11,000 worth of balances.

That's just outrageous. That person's never, ever going to get rid of that obligation. And they know it. And they don't want you to get rid of it. In fact, they're providing free cards to people who are demonstrating or have demonstrated an inability to meet their financial obligations because they want someone -- the ideal customer for them is someone who's never going to pay off that balance, going to incur those debts, pay that $1,500 a year, year in and year out. That's just gravy for them. And as a result, of course, that consumer is finding themselves further and further behind, with huge debts accumulating, to the point where I mentioned almost half of all of the consumer debt is credit card debt, and consumer debt is now $2 trillion.

Let me read to you from the dean of the banking industry in the United States, [former Citicorp/Citibank CEO] Walter Wriston. And what he says is: "There's a certain elite in this country that thinks they're smarter than everybody else, and that the average guy needs a lot of help. They think that if it's not regulated, there must be something wrong with it. But as long as you've got competition, [the market] regulates itself." And he's referring to someone like you trying to impose restrictions on this free market.

I'm not arguing about banning credit cards. I'm not suggesting that at all. It has made a difference for people. What we're talking about is responsible behavior. I've been asked to vote year in and year out on a bankruptcy bill around here. I always vote against it, in my view, because it's designed specifically to guarantee that the people we're talking about here, the vulnerable, will never be able to take the Bankruptcy Act and discharge those financial responsibilities because they've gotten themselves into some trouble. The reason ... that's unfair in my view is because there's a lack of balance about it. If you want consumers to be responsible -- and we should, and I certainly believe in that -- then you also have to have the lending institutions be responsible. And they're not being responsible in my view. Charging 13 percent interest on a $12,000 obligation, knowing full well that the person's never going to be able to meet that obligation, and paying $1,500 a year on average as a result of that cost, that's not right. That's wrong in my view. That's morally wrong.

The last time that Congress seriously was going to do something about, let's say, interest rates in the credit card industry was about 13 years ago. Do you remember what happened?

Yeah. I voted for it, in fact. [Former Republican Senator of New York] Al D'Amato was the one who offered the amendment. I think it passed 74-19. But the word was that George Bush, the father, [Bush] 41, was going to veto the bill. So it was taken out of the bill before it went to his desk for signature. And there's been no serious effort, and no one believes today that you can probably impose a cap on interest rates. I might very well like to see one again, but I doubt you're going to see it in the short term.

In the short term, if we can increase financial literacy, if we can prohibit the gouging that goes on, if we can protect people by requiring full disclosure -- and I can't believe Mr. Wriston would be opposed to disclosing what your obligations ought to be, telling people what real fees are. When you hide them, is that the free market at work? Would you have teaser fees and then [have] show up in the tiny little print somewhere that actually that's not the real fee, but the rate is going to be something much higher than that, charging you because you actually meet your responsibilities and pay off your balances? Seems to me that those ideas would do a lot to bring some sanity back to a process here and minimize the necessity for having caps on interest rates.

But in the absence of getting legislation adopted such as we're talking about here, then I think you'll eventually see caps on interest rates, because I think there will be a consumer revolt over this, particularly if the Bush administration or others try to pass a Bankruptcy Act here that would make it impossible for many of these people to get out from under these financial burdens.

Why haven't you or other lawmakers been able to put some regulation into place? Is it their political power?

Every time we've tried to offer legislation, this industry's become very, very powerful, and it's very successful in defeating every legislative attempt that's been made over the last several years to inject some responsibility on the part of this credit card industry.

On both sides of the aisle.

Well, I forget how the votes break down, but it's pretty much they don't discriminate when it comes to trying to win support in opposition to any of these efforts.

The bankruptcy bill you mentioned, I think the last time it came up for a vote it passed. President Clinton ... vetoed it. What's wrong with it if it's so popular?

Well, there are a lot of things that are popular that are wrong and a lot of things that are unpopular that are right. And in my view, I'm not opposed to taking a look at how we can maybe minimize people rushing to bankruptcy courts and all. I understand that. But going back certainly to the beginning of the 20th century, we understood that it was responsible to give people an opportunity to, [who] ended up, in many cases through no fault of their own, lost their jobs, had a serious illness at the family, all of a sudden they find themselves in deep trouble, not because of anything they did wrong, not because they're bad people, but to give them a chance to sort of get going again, to pick up the pieces and get start[ed] again.

And that's what the bankruptcy laws were designed to do, and that's what the overwhelming majority of people do. ... You and I don't know many people -- I know there may be some -- who will go out there and will incur all sorts of financial obligations and don't care about it, because, "Well, no matter what happens, I'll just jump into the bankruptcy court if I have to." Most people don't want that record, personally. So the idea that there are people out there rushing to the bankruptcy courts to avoid their obligations and responsibilities I think is just a lot of baloney, to use the polite word.

And yet I'm willing to accept there may be some things we could do around the bankruptcy laws that would make them more efficient and the like. But the idea that you're going to make it impossible for people to discharge their credit card responsibilities -- in fact, in the initial drafts, they wanted to make it more difficult to discharge your credit card responsibilities. They wanted to make that a superior obligation [to] child support -- (laughing) -- in the initial drafts of that bankruptcy law. So yeah, it passed; it got the votes. But this was designed specifically to assist the credit card industry. I'm now going to send credit cards to people who I know are not likely to pay off their bills, who are vulnerable. And I'm also going to get a bankruptcy law passed which makes it impossible for you to get rid of these obligations and get your life started all over again. That's pretty bad in my view. That's the double whammy, if you will, bad law on top of bad law.

You are, in a sense, Don Quixote. The bill is not going to pass Congress.

Well, there's a growing interest. This is cutting right across all economic lines. I mentioned at the outset of this discussion ... these laws just don't disadvantage one group of people; they disadvantage everyone. Everyone, whether you're an upper-income, middle-income or lower-income person in this country, you're being disadvantaged by this industry. If you're upper income or middle income and meeting your responsibilities, you can be charged more for meeting those responsibilities. When they send out unsolicited cards to people that they know are unlikely to meet their obligations, that's the height of irresponsibility, and they're doing it every day. And so I think we're getting closer to maybe winning some of these battles, because the people being hurt by all of this cut across the economic and political lines that I've mentioned.

Why do these companies, Citibank being one of them, contribute so much money to your political campaigns then?

Well, you ask for contributions and support. There are issues that I agree with them on, I work with them on; there are things I disagree with them on. I've never had anybody say to me yet, "By the way, we're going to help you or not help you based on your particular vote on this issue or the other." I know there are people who think that way, but I've never had that happen in my 24 years here. And there are days when I'll agree with them, and I'll fight for things I think they're right on. When I think they're wrong, I'll oppose them. I think they're wrong about this. I thought they've been wrong about it for many years. And we'll have a disagreement. It's their decision whether or not they want to be financially supportive of a campaign of mine or not. If they don't, I understand that. That's fine with me, too.

I guess my reaction to it would be ... they want to keep you happy; you're on the Banking Committee.

Well, you'd have to ask them what their motivations are.

What we see is, they're very happy about the idea that states are allowed to control interest rates for credit cards and that that can be exported to any other state; that's how they got credit cards rolling. They're very happy about the idea that there have been decisions and legislation that have taken the limit off any fees that they can charge. But for some reason, they're against allowing states to control their practices -- disclosure and so on. What's going on? They want it both ways?

Well, certainly. That's why in the Bush administration, the Office of the Comptroller of the Currency tried to preempt ... state consumer laws and nationally chartered banks that were subsidiaries of those state-chartered institutions, so that they would not have to put up with these kinds of requirements the states were trying to impose. And it's awkward, too. Look, I understand to some degree that if you're a nationally chartered institution doing business in 50 different jurisdictions, you'd like to have, to the extent possible, one set of rules. The problem is the one set of rules they want are the absence of rules here.

But what they say is that to put that on the bill would be misleading, because many people -- and [this is] one of the reasons why credit cards are so democratic -- can decide to pay whatever they want each month, and therefore, the minimum monthly is deceptive.

Yeah. Well, it's not. And also what they do, of course, if you're an hour late -- (laughing) -- and pay, let alone a day late, they've got fees that can exceed the actual minimum monthly payment. I think the average is around $39 [for] the late-fee requirement, and I think the average monthly payments run around $24, so you can actually have a penalty for one hour, being one hour late. So they're not really interested in having you meet that minimum monthly obligation on target. They're not going to be terribly disappointed if you're an hour, a day, or a few days late, because there's another fee that they could hit you with that makes a lot of money for the industry.

But in our examination, it appears that the comptroller of the currency is more interested in the soundness of the banks than in the consumer practices of the institution. And the Federal Trade Commission, we go there and they tell us the market will regulate all of this. So ... where does the consumer go?

Well, as I say, I think coming to Congress to try and get some changes in the law -- and I don't disagree: The Office of the Comptroller of the Currency just has that one obligation. [The desire to get] additional bank charters is certainly not an illegitimate job of the comptroller of the currency. What I object to is the fact they've given up entirely, or it appears to be, on protecting consumers. Protecting credit cards from the gouging that's going on, that's also an obligation of theirs, and while the name is confusing -- and the Office of Consumer Affairs, the Federal Trade Commission and others -- you get the right people in office, then emphasis can shift from protecting the financial institutions to protecting the consumers who use them.

The last time, when Sen. D'Amato introduced his legislation and that vote took place on a Friday -- and apparently the stock market went down 120 points, which was significant in those days. And there was near-panic here in Washington. There were meetings over the weekend. And by Monday, the Speaker of the House Tom Foley had figured out that the bill was dead. That indicates a certain kind of economic impact that regulation of the industry might touch off. There was a cascade of criticism of the idea of putting any cap whatsoever. The market dipped ... because many of these loans are securitized; they're sold on the market, bundled on the market so major investors are locked into these high interest rates that they're making off of these loans. So aren't you threatening the very nature of this industry by trying to regulate it?

No, not with that. And look, there have been other arguments against caps. One of the arguments took the other side of the issue, and they said that by putting an arbitrary limit on interest rates, you're also depriving people who may not be as financially well-off, because institutions are not going to lend them unless they can charge a higher fee. And so you're going to discriminate against people who may not be able to get any line of credit because the cap is too low. That was one of the arguments that was raised at the time.

And I certainly understand to some extent there, but clearly, to suggest somehow that you're going to have great distortions in the marketplace, we're talking about caps that are not unreasonable, where the cap levels we're talking about were relatively high. They were at the level of what most people would assume would violate usury laws (laughing); that allowing people to charge at that level would be tantamount to gouging the consumer. So I always thought that the reactions were way overexaggerated, and after they let things settle down for a few days, I think the markets would have settled down as well, and you wouldn't have had the kind of early reactions that people associated with that decision.

... And also, they're -- well, it also gets into the flexibility issue. Even to the extent you may assume that some of these institutions would be willing to be more flexible, it really deprives them of the flexibility, because as you point out, they lock themselves in a situation, and to meet those obligations ... they've got to go out and solicit again. They're reaching further down and further down into the barrel, if you will, to find people who are going to be able to sustain those monthly payments without ever paying off the balance.

Sounds like the commercial fishing of the ocean.

In a sense, yeah. But you -- there's bottom-fishing here, and that's what they're doing. And I don't know where it ends up at some point here, because it seems to me there's got to be an endgame at some point with all of this.

Well, the theory is that there will be a consumer bubble here that will set off a ... chain reaction of collapses. But let me ask you -- one of the gentlemen we interviewed was a former general counsel of Citibank who was involved in getting the [Smiley v. Citibank] decision in 1996 out of the Supreme Court that got rid of all caps on fees, because states were trying to again regulate locally on national banks. And ... while he was an extreme advocate, he said, of this idea and thinks it was a good idea from an overall point of view, the problem, he says, is we've created a Frankenstein; that the industry has taken this to new extremes. It's turned fees into a revenue source as opposed to a way to punish people who didn't pay. Any way to reverse that?

Part of our legislation, a major part of it, deals with disclosure, letting consumers know what their obligations are going to be should they decide to sign on, enter that contract, with a particular credit card company.

The industry says that the reason that ... these contracts that they send out in the mail with your card, which very few people read, they say they're very complicated contracts because of the laws that Congress has passed -- the Fair Credit Reporting Act and all the other legislation.

Look, this is not brain surgery. They know that if they add a lot more print than necessary in certain areas and the size of the print and so forth, you get the predictable results. You get in clear type -- they know how to market; they know how to advertise. It's not in their interest that you read it. It's not in their interest that you know the difference between a teaser fee and a real fee. They don't really want you to know what your monthly obligations or yearly obligations are going to be. They don't want you to know that, because if you know that, and you decide to pay that off, they lose money. You're then a deadbeat. You and I grew up believing a deadbeat was someone who didn't meet their obligations. In the parlance of the credit card industry, a deadbeat is someone who meets their obligations. You're no longer a viable customer.

The other concept that we run across is that ... by making their money from people who are in economic trouble, people who can only make the minimum payment, there is a great transfer of wealth going on, because those of us who do pay off every month, the credit card industry's deadbeats, get frequent-flier miles, get gifts, get all kinds of things. And we get the convenience of it ... but it's subsidized by this other group.

There's only one thing wrong with that statement you've made: that you're not getting the financial reward; the credit card company is. The idea that there's a transfer of wealth going from the vulnerable to the less vulnerable is a myth. The transfer of wealth is going from the vulnerable to the credit card company. You're getting a toaster or a few frequent-flier miles, but don't kid yourself. You're not getting any great financial reward. The credit card company gets that. That's why they've got record profits, and that's why their profit margins are three and four times the other sectors of the financial services area.

How would you rate their lobby here in Washington?

You know, the First Amendment of the Constitution, the right to petition government and to hire people to do it for you, I have no problem with that. My problem isn't with the lobbyists; my problem is with the people who may respond to them, in a way ... by doing that which is not in the interest of their own consumers.

And this is an area where their lobbyists are very effective. It's a very powerful industry. And there are a lot of powerful industries in Washington; they're not unique in that regard. But in this area, I think it's a confusing subject matter, financial services subject matter generally -- and this could be the subject of another discussion we have sometime -- but it's an area in which many of my colleagues ... find it far less interesting. The language here can glaze over the eyes of the most determined listener. And imagine, if my colleagues have a hard time focusing on the subject matter because it is complicated -- just what you and I have been talking about is complicated -- and then extrapolate from that the person out there who's got two or three kids; they're holding three or four jobs down; they're trying to hold onto the mortgage of their house; they're trying to make sure they've got enough money to educate their kids, put clothes on their backs. There's a credit card system which is good; there's nothing wrong with that.

I hope that I'm not leaving you with the impression that I'm opposed to credit cards. I'm not at all. I realize that's been a great advantage, a great help to many, many people in this country, but you expect for people to help them understand what their obligations are going to be. My problem is that the industry doesn't do that. They're not helping you and I understand what your obligations are.

They're trying to hide what your obligations are. That's what really bothers me about this. They know full well that someone who's making 10 grand a year or less, that's got two or three kids, when they tell them there's a teaser fee in here or something -- "Don't worry; it says zero charge, [zero] interest charge, for the first year or so," whatever -- and then they bury away that if you're late the very first month after the first year, we're going to charge you for the whole previous year.

That's been done. That's what the law is for these guys; that's what they get away with. And they know that; I know that. Why aren't they just honest with people about this? It's a great advantage to help people with credit, but they're taking advantage of people -- that's what really gets me upset about this -- and particularly people who are struggling out there every single day.

Now, when you say this to Citibank, ... one of your supporters, what do they say?

They say, "Senator, you don't understand the business." I think I do understand the business. And I respect them in many ways, but I'm disappointed, in a sense, that there's not a greater sense of behavior here, of responsible behavior: ... How worthwhile is it in the longer run?

The problem is today I've got -- I deal with people every day who think from quarter to quarter. I'm a public servant; I'm a United States senator; I try to think generationally. Now, that may not be a very popular idea. I've got a two-and-a-half-year-old daughter. Someday she's going to ask, "What did you do when you knew these things were going on?," whether it's this specific issue or others, and I'd like to think that most of the people I serve with think generationally. I respect those who have to think from quarter to quarter. That's their job. My job is to try and get them [to] pass laws that will assist us generation from generation. We're not doing that when it comes to this industry.

But isn't this an essential part of a consumer culture? You know that consumer spending was keeping the economy roaring through the '90s when everyone thought it was going to go down.

I'll say it again. I think credit cards are a tremendous advantage for consumers. I have no objection; in fact, I can't imagine how difficult it would be in our marketplace today if we didn't have credit cards. That's not my argument. I'm not opposed to credit cards. I'm opposed to how they're being used, and what we reward and what we penalize for, and who we give them to and how we give them to them, and under what circumstances and what requirements are being asked of people before they get that responsibility. That's all gone out the window. And so it's a good idea gone amok, and it needs to be brought back on track.

Walter Wriston, again, says -- well, credit cards, to Walter Wriston, really got Citibank out of a giant hole. They made the career of John Reed, their chairman. He says it's pure capitalism, and what you're trying to do is interfere with a successful capitalist industry.

Their idea of capitalism is, of course, to eliminate the competition in the marketplace and to be able to charge you anything I want under any set of circumstances I want, and that's the way life is -- tough. They always can play -- Franklin Roosevelt saved capitalism, saved it from itself in many ways. And I certainly am a strong believer in capitalism, but there's a reason why we have regulations to try and keep these wild horses in check, and this is a wild horse, and if we don't get it in check, it's going to undo itself.

Look, I've had a hard time passing this legislation. I want to promise you something today. Keep on defeating me and keep on defeating ideas like this, and you'll look back and wish we had passed this legislation, because I'll tell you, Congress will come along and they'll take steps far more egregious, in their view, than anything I'm suggesting. I'm suggesting disclosure. I'm not even saying that you have to change necessarily in disclosure; just let people know what the deal is. Somebody's going to come along and tell you exactly what the deal is, and they're going to pass it overwhelmingly. And then you're going to have to live with that.

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posted nov. 23, 2004

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