Secret History of the Credit Card
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interviews: edmund mierzwinski
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The consumer program director of the U.S. Public Interest Research Group (U.S. PIRG), Mierzwinski has authored many reports on credit cards and credit reporting. Here, he talks about the 10 banks that dominate the credit card industry, the power of its lobby in Washington, why the industry doesn't want the states to have any regulatory power, and the different bills the industry has helped kill over the years that would have protected consumers from unfair practices. He also discusses how the Office of the Comptroller of the Currency -- the agency charged with overseeing some of the biggest credit card banks -- has failed to protect consumers. "I don't see any advertising by the OCC to consumers," he says. "I don't see any aggressive attempt by the OCC to do outreach to consumers. When have they last been on television saying, 'We want to hear from you if your bank has misled you or deceived you?'" This interview was conducted on Oct. 17, 2004.

The credit cards companies [and] the banking industry have a very powerful presence in Washington. Can you tell me what kind of influence they have?

Congress has been afraid to deal with any kind of bad credit card company practices for years. Three years ago, they held a hearing on credit card practices, but they did nothing. Since then, Congress hasn't done anything about credit card companies' unfair practices because the credit card companies have enormous power and sway with the Congress. There are lobbyists for each of the big credit card companies. Then there are lobbyists for the bank associations. And the bank associations and the credit card companies have political action committees. They made soft money donations when they were legal, and they also have a large lobbying budget.

Credit card companies have power over the entire Congress. Absolutely. The banking committees are usually dominated by members from the states where the credit card companies and the other banks do business.

So essentially the Congress and the courts took away the right of the states to do anything about the credit card industry years ago. We've got the credit card companies saying Congress shouldn't do anything, and they inoculate themselves against that with a massive lobbying push. When we have a hearing on any issue in Congress, the credit card companies fill the room. The consumer advocates -- less than five of us usually at any hearing. …

And this is all throughout Congress? It's not like the Democrats or the Republicans are in favor with the credit card industry?

Credit card companies have power over the entire Congress. Absolutely. The banking committees are usually dominated by members from the states where the credit card companies and the other banks do business. ...

The consumer advocates against the credit card industry is really David vs. Goliath. We're David, with our little bag of rocks, and Goliath is crushing and influence peddling. They're massively powerful compared to the few consumer advocates. And not only the credit card companies, we've [also] got to look at the banks who are ripping people off by charging them bounced-check fees; we've got to look at the rent-to-own stores, the mortgage scams and everything else. So the credit card companies are only one of the industries that a very small number of consumer groups try to fend off on a daily basis. And again, none of the consumer groups make any political influence peddling through political contributions, so we've got one hand tied behind our backs to start with.

So you're saying you're not being listened to in Washington?

Actually, I really do think, as a consumer advocate, I wouldn't do this if I didn't believe I was making a difference, that we make a difference, that the people in the communities listen to us. The stories in the newspapers and on television are normally accurate. I think that when we speak we're listened to, but the problem is, when 10 credit card guys then speak, even though the Congressman or her staff might think, "Oh, it's a little sketchy whatever they're saying, and I'm not really clear that that makes sense," ... when 10 credit card company lobbyists all say the same thing, and there's only one consumer advocate saying it, it's simply -- we're overwhelmed. We become white noise in the background compared to their very powerful message.

The credit card companies buy television ads, they buy newspaper ads, and they buy tickets to political events. All the consumer groups do is testify before Congress and talk to the press whenever we get the chance, and we talk to the members of Congress. But again, we just don't have the numbers. That's the difference.

Are they getting bad laws passed?

It's partly that some bad laws are being passed, but it's more with this particular industry, credit cards, they have managed to prevent Congress from investigating and conducting the oversight that Congress is supposed to do of their practices. … The courts and the regulators have taken away the right of the states to investigate or regulate the credit card companies, but Congress has fallen down on the job. So first, Congress is doing nothing about the problems in the credit card industry.

Second, the credit card industry wants new laws, such as the bankruptcy law, the outrageous, unfair bankruptcy law, and they've come very close to enacting it. They have bipartisan support. [It] would be shocking to the public to realize how many members of Congress backed the credit card industry's attempt to put Americans in debtors' prison without regulating the unfair practices of the credit card industry at the same time, even if you agreed that we needed to change the bankruptcy laws, which most people don't.

What, in your view, are the problems of the credit card industry?

Well, I think people should understand the credit card industry is a very concentrated pyramid. There are a few very large companies that dominate the business. Maybe 10 companies have 90 percent of all credit card accounts; all credit card payments owed are owed to 10 companies. Doesn't matter that 6,000 credit unions and tiny banks might offer a credit card -- these 10 companies control the business.

The main practices of the credit card industry that hurt consumers: First, many of them are doubling or tripling your interest rate if you miss one payment or if your credit score declines, even if you miss a payment to a different company, they could increase your interest rate. So first, penalty interest rates for missing one payment. Second, deceptive and misleading offers of zero percent interest or $100,000 limits on a titanium card that nobody qualifies for. And third, they lie to us about how much it costs to have a credit card. The credit card companies refuse to tell us that if we only make the minimum payment that they request, that it could take seven to 15 years to pay off even a $1,000 balance, even if we never use the card again. ...

What about the American Bankers Association? What do they do?

The credit card industry has several associations that back its play; they may have coalitions. The American Bankers Association is the largest and most powerful. It claims to represent all the banks, big and small, in America. They lobby on the Hill. They're there every single day. Some of the credit card companies might not have a full-time office in Washington. The Bankers Association represents them and has many lobbyists, many PR flacks, many people out there putting out this message that credit cards are good. ...

So the Bankers Association functions as a trade association. It runs its own political action committee. It's the eyes and the ears on the ground for the entire banking industry. It's unfortunately a very powerful lobby that has a lot of sway over the banking committees. ...

If you talk to the industry, or if you talk to the ABA, they'll say: "Have you ever looked at your credit card agreement? All of that fine print is required by law to be in there." They'll say they are the most regulated industry out there. How much more regulation can you possibly have?

Credit card loans are open-ended loans. They don't tell us how much it really costs to have one. If you only make the minimum payment, you end up paying much more in interest than you actually owe them in things that you've purchased. The credit card industries' long disclosure statements are meaningless in many ways. First of all, they don't give us the right to sue them, since they have mandatory arbitration clauses that say you've got to come to a kangaroo court that is dominated by former industry lawyers who may be magistrates in these arbitration agreements.

But mostly the credit card laws are disclosure laws, and they're meaningless, because you go to arbitration instead of court, and they don't tell you the most important thing, which is how long it will take to pay off your card if you make only the minimum payment. And the industry has fought state and federal attempts to enact legislation to require that disclosure. It's meaningless that they have these contracts. They're not highly regulated. They operate in a cowboy economy with the loosest regulation that I could possibly think of. The Office of the Comptroller of the Currency is an agency no one has ever heard of that regulates all national banks, which is most credit card companies. The OCC says, "If you can make money, do it; we don't care." They've only gone after one credit card company ever. ...

There is one exception they like to talk about. The credit card company Providian told its customers that they had no annual fee if they got this card. Guess what? There was a $14-a-month monthly fee that totaled $168-a-year annual fee. After the district attorney of San Francisco, a tiny agency, probably smaller than U.S. PIRG, and the California attorney general went after Providian, the OCC came in third to the party, and they slapped Providian around. Big deal. One credit card company out of all the others that are doing the same kinds of things, misleading consumers, has been slapped around by the OCC, and they act like they are some powerful, aggressive regulator. They're asleep at the switch. They only act when they're shamed into acting. ...

Do consumers know about this agency? One of the missions of the agency, as I understand it, is to protect consumers. How are consumers supposed to complain to the agency if they don't know it exists?

Most consumers complain to the Federal Trade Commission or to Alan Greenspan of the Federal Reserve, and then they forward their complaints to the OCC. The OCC has 40 customer relations specialists somewhere in a little backwater office down in Texas that are supposedly supposed to help consumers. Mostly they just say, "We talked to the bank, and the bank said it was OK what they did, and so we're going to hold that the bank was doing the right thing, and you the consumer have no case."

I don't see any advertising by the OCC to consumers. I don't see any aggressive attempt by the OCC to do outreach to consumers. When have they last been on television saying, "We regulate the banks; we want to hear from you if your bank has misled you or deceived you"? They have never required the banks to include an insert in their mailings. They've never required the banks to do any advertising that if you have a complaint, go to the OCC.

The OCC prides itself in being a captive regulator that serves the banking industry. They don't serve consumers; they don't look at consumers as their constituency. They don't look at their job as balancing the public interest between the banks and customers who are consumers. They look at their job as protecting banks from assaults by consumer advocates. That's really what they look at their job as: "We want banks to be able to do whatever they can to make as much money as they can." If a few consumers get harmed in the process, if a few thousand consumers get harmed in the process, well, it really doesn't matter. ...

None of the banks will talk to us. Will they talk to you?

The banks occasionally reach out to the consumer groups. The trade associations ask me to speak occasionally at their conferences. There may be some other consumer advocates they speak to more. Basically the banks hide behind the curtain of their trade associations. ... The banks use the bank trade associations as their bad cop. The good cop is the banks; you know, "We're the good guys." And then if there has to be a bad-cop thing that goes on, then they just leave that to the trade associations to do their dirty work. ...

California's new financial privacy law was a big fight for four years. The financial privacy law that was finally negotiated had a 12-hour negotiation that involved several of the biggest banks in California; several of the biggest insurance companies in California and nationally [also] participated in the negotiations. At the end of the day, some of the biggest banks and insurance companies said, "This California financial privacy law compromise is OK; we'll live with it; we'll deal with it; it's a good compromise." Then, a couple of months later, they simply hid behind their trade associations, and the American Bankers Association filed suit. Not the banks who did the negotiations, but the ABA filed suit to overturn the tough new California financial privacy law.

So this brings us to states' rights.

... Congress rarely acts to protect consumers unless the states act first or there is a scandal. …

So consumer groups believe that federal law only functions well when the states are coming up with new ideas to make federal law better. Congress is a very big ball to push up a hill, and it's easier to get a push on it if we have several state ideas pushing as well. If you take away the right of the states to enact stronger laws, you almost guarantee that Congress will do nothing and will become captive to the regulated industries. The industry argues that the states, if they're allowed to pass different laws, will pass different laws, and we'll have 50 laws even though we have a national marketplace. That's absurd. All the states do is come up with new ideas.

California is a real hotbed of new consumer laws, for example. If California passes a new privacy law, other states copy the exact California law. What is the reason that they would pass a different privacy law? It makes more sense to say: "Here's a good one that California passed. We'll pass the same one." …

The California privacy law, what does it call for?

Congress in 1999 passed a law that allowed banks to merge with insurance companies and stock brokerages and create massive financial supermarkets. Thousands of companies could be owned under one company's umbrella. But there were many privacy invasions going on at the time, privacy nightmares that scared some members of Congress, so that Congress also said in that law: "Let's have some privacy disclosures. Tell people your privacy policy, or you cannot share information with either other affiliated companies or with third-party companies." But the Congress at the time knew it didn't do enough with that law, so it said, for once, "Let the states pass stronger laws."

California and other states tried to enact laws that gave consumers the right to control sharing of their personal information for secondary uses. We're not against sharing to make our credit card or our ATM card work, or so that we only have to call the bank once if we move and have a new address but have six accounts. We're not against that kind of sharing. We're against banks making unregulated decisions about our credit qualifications. We're against banks sharing information with telemarketers who then make junk offers pretending that they are part of the bank when they're not. ...

California passed a law that said banks can't share information with affiliated companies unless they ask us our permission and give us the right to say no, and they can't then share information with third-party companies unless we say yes in advance. Federal law says banks can share information with either affiliated companies or most third parties, even if we say no. . ... Jackie Speier is the California state senator. The Speier law, known as SB 1, gives consumers financial privacy rights in California. Before a bank can share information with affiliated companies, it has to give us the right to say no or opt out. Before it can share information with third-party companies, it has to ask our permission, and we have to say yes. Federal law gives us no rights in most of those circumstances. We only have the limited right to say no when they want to share with some third-party telemarketers. ...

In Europe and most of the world, your privacy rights are protected in almost every transaction that you make. In the United States, your strongest privacy rights actually have to do with the names of the videos that you rent. No company can share the names of the videos that you rent without your express permission. But your bank can share the confidential details of all of your transactions, where you use your credit card, how much money you have in any of your accounts, who are the cosigners of your accounts, whether you have written checks to this company or that company, any information about stocks, pensions that you have with affiliated companies. If you fill out applications with the bank, all the information that they can collect on you can be shared no matter what your choice is under federal law. California did something about that, and the OCC backed the American Bankers Association in trying to defeat the law. It's now before the appellate courts where the banks are trying to overturn the law, because the district court said this law stands.

Fair credit protection last year was the issue for the banks. Why was it the issue for the banks, and did they get what they wanted?

The banks got what they wanted in the Fair Credit Reporting Act. They got permanent limits on state authority to enact stronger laws in some areas of credit reporting. Credit reports are financial résumés collected by third-party companies that are used for credit decision making. In the 1996 Congress, the law was strengthened because of a lot of mistakes the companies were making. And for eight years after 1996, states were limited in some ways. Last year Congress limited the states permanently from enacting stronger laws in a number of areas. ... It was a major, major campaign by every bank, every trade association, every car finance company, every mortgage company, every insurance company. The entire financial industry, not only the credit card companies, lobbied for permanent limits on state authority to enact stronger credit reporting laws.

So what does that mean for the credit card industry? What does fair credit reporting do?

The law that allows the banks to market credit card solicitations to us -- "You have been preapproved for this credit card because of your excellent credit rating" -- is the Fair Credit Reporting Act. So the limits on state authority prevent the states from enacting any law that restricts the deceptive marketing of credit card offers to consumers or gives consumers greater rights to prevent credit card marketing to them. It also limits the authority of states to regulate credit card companies that make mistakes to the credit bureaus, and it prevents the states from ordering the credit card companies not to deceive the credit bureaus.

Some credit card companies have not only made mistakes in the information that they provide the credit bureaus about the quality of my credit or your credit; some have also intentionally deceived the credit bureaus so that they can protect their customers from being marketed to by other credit card companies. If you say that your customer is a bad risk, no one else wants to market to him. But that is what some credit card companies have decided is the right thing to do: Let's protect our customer base by only telling the credit bureaus part of the truth.

So the credit card industry got a tremendous boost when they got limits on state authority to regulate the Fair Credit Reporting Act. First of all, all their marketing to consumers can't be regulated by the states, and if they make mistakes in credit reports, the states can't aggressively sue them. The states have very limited authority to pass new laws, primarily in the area of identity theft. Even Congress realized that sloppy credit card company and credit bureau practices led to this new problem of identity theft that 10 million American were subjected to last year. ...

The Fair Credit Reporting Act was a success for the entire financial industry. The Treasury Department was behind the preemption of state authority to enact stronger laws. Consumer groups got some of our longstanding demands into that law, but the price was unacceptable. ... Although we were able to get consumers a free credit report and some identity theft protections, the main goal of the industry was to permanently limit states' rights, even though the states are the laboratories where democracy happens. Virtually every protection for consumers in the area of privacy, identity theft, or any other area of credit has been in the states, but the OCC and Congress have taken away our right to enact stronger laws to protect consumers. ...

So the credit card industry has more power with Congress than it does with the states?

The credit card industry has power with Congress. It doesn't want the states to have any power whatsoever. The industry actually, after a court case back in the 1970s and a Congressional decision back in the very early 1980s, has moved most of its operations to a couple of states where it has immense power, Delaware and South Dakota primarily. Those states give the industry the right to do whatever it wants. You can have the highest interest rates, the highest fees, the least consumer protections. So they've moved their operations to Delaware and South Dakota. California, on the other hand, and many other states would like to regulate the industry. Those states have no authority.


The states have pretty much zero authority after the Fair Credit Reporting Act and the limits on usury ceilings and the limits on late fees. States are prevented from enacting usury limits; states are prevented from enacting limits on late fees. To be exactly precise, a credit card company is only subject to the usury limits and interest rate limits and late-fee limits of the state where it is based. So customers in California can't ask their state for stronger protections. They're subject to the laws of South Dakota and Delaware, and California's legislature cannot do anything about it. ...

Didn't you guys in Washington join with the industry in endorsing the Fair Credit Reporting Act?

We never endorsed the Fair Credit Reporting Act. We supported some of the parts of the Fair Credit Reporting Act. We said, however, that it's unacceptable to take away the rights of the states to enact stronger laws.

...We were crushed. Our views were crushed by the industry's views. Consumer groups thought it was unacceptable to take away states' rights. The states are laboratories of democracy. All the good ideas in the new credit reporting law came from the states. But the industry's juggernaut crushed us and prevented Congress from even considering preserving states' rights. The way that the Fair Credit Reporting Act negotiations went, the industry got the Treasury Department and the OCC to support permanent limits on states' rights. Bush -- supposedly in favor of states' rights, supposedly in favor of privacy -- his Treasury Department, his OCC and the Congress went along [with] massive, overwhelming votes against state authority to protect their consumers better. ...

Can you give us a list of what they've killed?

The new Fair Credit Reporting Act says prevent identity theft; give consumers the right to a free credit report; regulate the industry to prevent errors in credit reports. States can't regulate the industry to prevent errors in credit reports; states can't regulate the marketing of credit cards to consumers, these misleading brochures you get in the mail; states can't protect the privacy of consumers in many ways. States can't go further than what Congress did. Congress set a low bar for consumer protection. States, in most cases, cannot give consumers the right to sue credit card companies that make mistakes in credit reports. And a mistake in your credit report leads to you paying more for credit, more for your mortgage.

The industry says that the reason why they want this preemption is that this is a national business, and the rules have to be standard. The industry comes up with this crazy balkanization theory that 50 states are stupid enough to pass 50 different laws. The way it really works is that one or two states come up with a great idea to make things better, and then a couple of other states copy those first states that had the good idea, [and] then Congress finally enacts a good law. But if we don't have the states pushing the Congress, we have to wait for Enron or some other disaster. ...

You've got a credit card?


You've gotten a contract in the mail?

I've gotten a contract in the mail for my credit card, and I know that they all look pretty much the same.

Did you read it?

I did read it once, a long time ago, and I know that it limits my rights to go to court, and it gives the credit card company the right to change my rate for any reason at any time. It's known in the legal business as a one-sided contract or a contract of adhesion. That is where one side of the contract is a little tiny person, and the other side of the contract is a big, powerful company. We have no choice with these credit card companies. There are only 10 companies that have virtually the entire market, and they all have pretty much the same contract. None of them give us the rights that we deserve, and the OCC has not insisted that they give us rights. So if you want a credit card, you've got to accept the contract. That's the problem. ...

Is there anything good about credit cards?

I think credit cards offer the American consumer convenience. You've got to be careful; you've got to read your bill every month, make sure they didn't make any mistakes. Pay your bill well in advance of the due date, because they might make a mistake and try to bill you a late fee, in some cases raise your interest rate. Credit card companies make it possible to travel around the world and do all kinds of things. The problem is they're overpriced, and the companies deceive people into maintaining balances that keep them on a debt treadmill. So I like credit cards. Consumer advocates think credit cards offer convenience, the necessity of having a credit card in many transactions. Why can't the companies treat us fairly? They're all making a ton of money. They could make just a little bit less money, [and] they would still be rich, but they'd be treating us more fairly. That's all we ask. The OCC hasn't done a good job of regulating them.

One of the financial innovators for the credit card industry said that their studies show that if they were to design a card that probably would make you happy, with a fixed interest rate, with few late fees, with less flexibility -- you would call it a more responsible card -- they say people don't want that. People want the ability to make a 2 percent minimum payment, have a high credit balance, the greatest flexibility and choice they can get, and rewards, and that's what they're going to service. If there was a market for what you want, they'd provide it.

If the credit card companies educated consumers about how much they're paying in credit card debt due to the minimum payment scam, I think that consumers would change their votes in the focus group, and they would say, "I want a card that treats me fairly." The industry has refused to tell consumers the information they need to know. So of course the results they get [are] what they expect.

And when they say, with their advertising campaign, that they're protecting your identity, they're protecting you from fraud, is that a fraud?

It's absurd for any of the big credit card companies to claim that they're protecting you from fraud. They're trying to get you to buy their card; they're trying to get you to buy overpriced fraud protection services. In fact, the best part of the credit card industry regulations, the so-called Truth in Lending Act, is the part that says your liability by law is limited to only $50. That forces the companies, all of them, to do a good job fighting fraud, because they have to eat it. The consumer is protected from most forms of fraud by the law. ... If you're using a credit card and you're a victim of fraud, in nearly every case you only owe $50, and the companies usually waive that. ...

The credit card industry really took off and grew when Congress limited consumer liability, because consumers didn't trust these credit card companies, and we still don't. What protects you on the Internet is not some powerful credit card company. What protects you when you use your card at some small merchant is the law, and the $50 limit is what caused the credit card industry to grow so much, because it gave consumers trust. …

You say that they've killed a whole bunch of different laws. Give me a list.

… Whether it's protecting college students, whether it's requiring minimum payment disclosures, whether it's reinstating the usury ceilings on credit card interest rates, whether it's preventing the bait and switch, raising your interest rate when you're late to some other company, the industry has killed all of those other proposals easily, and prevented most from having votes.

Are you concerned about the large amount of credit card debt in this country?

Credit card debt has grown astronomically in the last 25 years to $750 billion. About half of Americans carry credit card debt: The families average $8,000; the individuals average $10,000 to $12,000. So people who carry credit card debt -- families average $8,000; individuals average $10,000 to $12,000 -- for many people that's a crippling burden. And it's mostly focused on the lower middle class and the middle class. The upper middle class uses credit cards for convenience, uses credit cards for the miles. They can afford to do that. Too many Americans, however, are using credit cards for purchases to just get by in life. They're the ones accumulating the massive debts. If they have a family emergency, if somebody gets laid off or gets sick, that debt becomes a crippling burden. Then they miss a payment and the interest rate is jacked up, it gets worse.

It's only 7 percent of the debt of the average American household.

Credit cards were supposed to be for convenience. You're not building up equity in anything; you're not gaining a car; you're not gaining a home. And it's enough to put people over the edge; it's enough to be the straw that breaks the camel's back. It's very difficult for people who have a life crisis, a layoff or somebody gets sick to pay off these credit card debts. Young people entering the job market who might have gotten in trouble with a credit card find they can't get another one, and so they can't rent a car when they travel on business or whatever. People that try to pay down their credit card debts, it's just an enormous amount of money. It may only be 7 percent, but that's nothing; you're not getting anything for it.

It's something that is a difficult problem for consumers to deal with, because if you're only making the minimum payment on your credit card debt, if you're unable to pay it down, then that debt becomes something that just is a millstone around your neck; it's something that you carry for the rest of your life. It's in addition to making the mortgage payment, in addition to making the car payment, in addition to buying food, you've got this $10,000 burden all the time.

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posted nov. 23, 2004

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