Hearing of the Administrative Oversight and the Courts Subcommittee of the Senate Judiciary Committee - "Abusive Credit Card Practices and Bankruptcy"

Hearing of the Administrative Oversight and the Courts Subcommittee of the Senate Judiciary Committee - "Abusive Credit Card Practices and Bankruptcy"

CHAIRED BY: SENATOR SHELDON WHITEHOUSE (D-RI)

WITNESSES: DOUGLAS COREY, NORTH SCITUATE, RHODE ISLAND; ROSEMARY GAMBARDELLA, JUDGE, BANKRUPTCY COURT FOR THE DISTRICT OF NEW JERSEY, NEWARK, NEW JERSEY; ADAM LEVITIN, PROFESSOR, GEORGETOWN UNIVERSITY LAW CENTER; MARK SCARBERRY, PROFESSOR OF LAW, PEPPERDINE UNIVERSITY SCHOOL OF LAW; DAVID C. JOHN, SENIOR RESEARCH FELLOW, THOMAS A. ROE INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION

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SEN. WHITEHOUSE: The hearing will come to order. I want to welcome the witnesses who have come. Some have traveled some considerable distance, including all the way from North Scituate, Rhode Island, and I'm honored to be joined by the ranking member of this subcommittee, Senator Sessions.

And what we're going to do is I will make an opening statement. And the ranking member will make an opening statement. And if other senators appear who wish to make an opening statement, they will be invited to do so and then we will proceed through the testimony of the witnesses. I think probably the best way to do it is start with Mr. Corey and just go right across, if Your Honor, doesn't mind not going first.

With the economy deep in recession in this country, unemployment rates climbing, and those teaser rates people got on home mortgages expiring and triggering higher mortgage payments for American families, American consumers are relying more than ever on credit cards to just make ends meet from month to month.

At the same time, banks who lost their shirts in the mortgages speculation and in other areas of business are attempting to squeeze more and more profit out of those credit card customers. The standard credit card agreement gives the lender the power to bleed their customers through evolving and ever more crafty tricks and traps.

The typical credit card agreement, which 20 years ago, was a page in length, is now a formidable 20-page, small-print contract filled with legalese. In substance, it's usually pretty simple. It gives the companies the right to raise interest rates and charge fees and penalties for almost any reason, and in some cases, to raise interest rates for no reason at all.

While interest rates for other types of lending are at historic lows, credit card lenders continue to charge double-digit rates, with average rates around 14 percent, exclusive of fees. At a time when the prime rate is 3.25 percent and the average 30-year fixed mortgage rate is under 5 percent, it is hard to understand why credit card borrowing remains so costly.

Although 14 percent may seem high in comparison with other types of lending, that interest rate may seem like a bargain to a family that has fallen behind on a payment. When families come up short on their credit card payment, they can find a 10 percent or 12 percent annual interest rate morph into a 25 percent or 30 or 40 percent penalty rate.

Add to that late payment and other penalty fees, and falling behind on a credit card can mean financial ruin. When a family struggles to pay its bills, when a parent gets laid off, or unexpected medical expenses arise, that family can enter what Professor Ronald Mann of Columbia Law School has called the "sweat box."

The "sweat box" of credit card debt, like any good trap, has an entrance that is easy to wander into, simply a high credit limit and pretty soon a high credit balance. If you then get into the position where you can't pay that credit balance off at once, they have you, a payment delayed, a minimum not met, and now your interest rate doubles, and fees and penalties pile on.

You can't escape, because you can't pay your way out, and they sweat you with those high rates and fees and penalties. Under this business model, the lender focuses on squeezing out as much revenue as possible in penalty rates and fees, pushing the customer closer and closer to the edge.

When that end finally does come, the lender can recover a portion of the outstanding principal under the bankruptcy plan. I've introduced legislation that would give consumers leverage to negotiate for reasonable rates with their lenders and ban abusive lenders from using the bankruptcy court system to enforce their excessive interest claims.

Under the Consumer Credit Fairness Act, claims in bankruptcy stemming from consumer credit agreements carrying interest above a variable threshold, which would currently be 18.5 percent, would be disallowed. With the leverage of a bankruptcy threat, a consumer struggling under a 30 percent penalty rate could negotiate for more reasonable terms.

In addition, bankruptcy filers with debts carrying effective interest rates above the threshold would be exempt from the so-called means test, a tactic that was enacted in the bank-written 2005 reforms to make it more difficult to enter bankruptcy and by delaying the date of bankruptcy, add a few months to that "sweat box."

In addition to discussing the nexus of abusive credit card terms and bankruptcy in general, I hope that we'll take some time today to explore the Consumer Credit Fairness Act. Following Senator Sessions' opening statement, we will hear from our distinguished panel of witnesses. But I see the distinguished majority whip here. So after Senator Sessions has made his opening statement, Senator Durbin of Illinois will be invited to make an opening statement.

The witnesses are, Douglas Corey, a constituent of mine from North Scituate, Rhode Island, who will share his experiences with his credit card lender. Mr. Corey has worked in sales and marketing and is a graduate of Rhode Island College.

Judge Rosemary Gambardella has served on the Bankruptcy Court for the District of New Jersey since 1985. A native of Newark, she attended Rutgers University and Rutgers Law School. Judge Gambardella is a member of the National Association of Women Judges, the National Conference of Bankruptcy Judges, the American Bankruptcy Institute, and a former member of the Bankruptcy Judges Advisory Group for the Administrative Office of the United States Courts.

Professor Adam Levitin of the Georgetown University Law Center is a nationally regarded expert in bankruptcy and consumer law. He has served as special counsel for mortgage affairs for the Congressional Oversight Panel, as an expert witness for the FTC and FDIC on credit card litigation, and as law clerk for the Honorable Jane Roth of the United States Court of Appeals for the Third Circuit.

A graduate of Harvard, Columbia, and Harvard Law School, I'm grateful that Professor Levitin will be with us.

Professor Mark Scarberry of Pepperdine University School of Law is an expert in bankruptcy and contract law. A graduate of Occidental College and the UCLA School of Law, he is a member of the American Bankruptcy Institute Law Review Advisory Board and Pro Bono Task Force.

At last, David John is a senior research fellow at the Heritage Foundation and specializes in pensions, financial institutions, asset building, and social security reform. Prior to joining the Heritage Foundation, he served on the staff of Representative Mark Sanford of South Carolina. Mr. John has a bachelor and three masters' degrees from the University of Georgia.

We welcome the witnesses, and I now turn to my Ranking Member, Senator Sessions for his opening statement.

SEN. JEFF SESSIONS (R-AL): Thank you, Mr. Chairman. I look forward to the hearing. This is a good panel. I think we'll have a good discussion. I would just recall, a few years ago when we passed the bankruptcy bill. And the final passage was over 80 votes, and one of the critical issues was the question of "means testing" the legislation.

We discussed it at great length. A number of senators raised questions about it. The Senators like Senator Clinton in the end decided that this was good reform and I certainly believe it is.

It simply says that if you make above-median income, you don't automatically get the right to wipe out all your debts in bankruptcy, but that the bankruptcy court can then structure a plan for repayment that part of the debts that you owe that you are able to pay.

And if the debtor is not able to pay all of them, but can pay 60 percent of them, the judge will set up a proposal to do that. And once, of course in bankruptcy, one of the great advantages for our debtors is they can't receive demanding letters, or phone calls, they can't be sued, they can't be harassed in anyway toward paying of those debts.

So we also needed at the time that that bill passed, the overwhelming majority of people, perhaps as high as 80 percent that filed bankruptcy were below median income. So they would get to file under Chapter 7 if they chose to. And many of those above median income as their debts were high enough, I think they could not have to go under Chapter -- they could go under Chapter 7 also.

So I thought that was a good reform. I still believe it is a good reform. We discussed at that time, the question of credit cards. I know Senator Durbin is very educated on this, and very alert to these issues. We didn't always agree. He saw the bad in the credit card sometimes and I saw the good. The truth is somewhere maybe in between.

I don't think it's bad that a poor person who doesn't have the cash, and their transmission falls out of their vehicle that they can't pay that on a credit card. In fact, if credit cards weren't available for poor people, we would be passing laws demanding that poor people be able to have credit cards, and criticizing the big banks for not issuing credit cards.

And I'm not really impressed that they send offers out in the mail offering competitive rates and you can choose between cards that you think best serve your interest. I'm not really offended by that. I do believe that they are a cold-blooded bunch that they do desire to make maximum profits. And I do think that they -- the government has a right to examine this.

I don't think that the people who've issued credit cards are sainted, and that they are out just trying to serve their customers. They are trying to make a profit. And so I think they are entitled of being watched-over. And I just -- for example, my mother who recently passed away, had been ill for some time.

I failed to get her credit card paid on time, a $25 bill and it was $40 penalty. So you know, they say you can call. Well, she wasn't able to write her name at that time. So you get on the phone and they don't answer. And you have to get 15 different recordings, and also I don't like it. In a credit card I've noticed pretty clearly that the total debt is buried down there somewhere and that -- and the minimum payment is more easy to see. And you could actually miss it in the prints.

So I think disclosure of these kinds of form -- of these kinds of issues more clearly, so that a person can know what their real debt is, and what their payments should be, and maybe more clearer warnings about the danger of these high interest rates is appropriate.

What I've learned now in this committee is that's the banking committee's business. And there is a question about the interest rates. I don't know. I don't -- I'm not comfortable on capping interest rates. But I don't think that they are free to go without being evaluated and Congress making a decision about that. But that is a banking committee issue.

And Senator Dodd, and Senator Shelby, and others on those committees are supposed to be dealing with that, although we certainly have right -- anybody has the right to offer legislation. So what we're looking at here is the question of whether or not a lawfully charged rate of interest and debts, how they should be handled in bankruptcy.

I would just say this. In Alabama, we have an unusual situation in which before the bankruptcy bill passed, half the people chose to file bankruptcy under Chapter 13. That's where you pay back a part of your debts. Now, some people seemed to think that forcing people above median income in the Chapter 13 is some sort of evil thing, and that is an oppressive thing, but a large number of people voluntarily choose that.

Birmingham has the Northern District of Alabama, 60 percent of the people were filing under Chapter 13. And lot of advantages and lawyers would tell you why they did that, and they think the rest of the country is behind the time and not using Chapter 13 more.

So under Chapter 13, if an interest rate is on a credit card, a person files a debt and they have a high interest rate, the interest rate is dropped by the bankruptcy judge when the filing occurs. So it does not continue at this extraordinarily high rate, it drops down, and we can talk about more of the details about what is happening now in bankruptcy.

So I guess, I would just say to my colleagues, thank you for discussing this. I look forward to the hearing. There are some things I'd like to learn about it. But I would say that bankruptcy is one of the greatest things that can happen for poor people in America. It relieves them of a debt they're unable to pay. It breaks high interest rates, loans that they may be trapped in, and helps them get out from health care bills and other bills.

But there are certain things that need to occur in a rational, logical way consistent with our heritage of law and consistent with what good economic practice is. Thank you, Mr. Chairman.

SEN. WHITEHOUSE: Thank you, Senator. Just to make one point clear, the assignment of this bill to this committee has been through the parliamentarians. So there is no question that this --

SEN. SESSIONS: It is -- what we're talking about is acting in bankruptcy -- how to use a bankruptcy mechanism to deal with interest rates we don't like. I was just saying the fundamental question, if we cap an interest rate that is an issue before the banking committee.

SEN. WHITEHOUSE: Correct.

Senator Durbin?

SEN. RICHARD J. DURBIN (D-IL): Thank you, Mr. Chairman, and thanks for this hearing, and your bill as well. Senator Sessions and I were here for the bankruptcy debate that went on for a long time. And I found myself sitting in the Senate Judiciary Committee being, as I looked around the table, the expert on bankruptcy by virtue of the fact that I've taken a bankruptcy course at Georgetown Law School 30 years before, and that I'd served as a trustee in bankruptcy in Springfield, Illinois, the failed gas station.

I'd had more experience with bankruptcy than any other member of the Judiciary Committee at the table. That's how it works, Judge, around this place. So I offered an amendment on the floor.

And Senator Sessions may remembered it -- remember it, and it said on your credit card monthly statement when they say here is your minimum monthly payment that I said the credit card companies have to disclose.

If you make the minimum payment, it will take "X" months to payoff the balance and you will pay "X" dollars in interest. I thought that was in the interest of full disclosure. The credit card companies came back to me and said that is impossible to calculate. We have no way of computing or calculating that. That's baloney.

They know how to calculate it. And the reason, the real reason came out later. It's like the Paul -- the late Paul Harvey, "The Rest of the Story." There was a NOVA program, which I recommend to everyone that went into the credit card industry. And they had this man who was the wizard of credit cards, this guru, who was, I guess, concerned about his personal safety, would not disclose the location that he was being broadcast from.

And he was the one who discovered that if you could drop the minimum monthly payment to 2 percent, the person could never payoff the balance. It would go on forever. And he was considered one of the shining lights, the person who brought real profitability to the industry.

That I think tells the story. Poor people caught in this predicament don't understand the minimum monthly payment is a sentence, a life sentence to this debt that they can never get out from under. Now we're talking about what to do about it. And whether or not -- and I think Mr. John raised this question, whether or not we should even get involved?

Let the market do its thing. Have we been watching the market do its thing lately, and what it means to us as individuals, investors, future retirees, savers. You know, that hasn't been all that encouraging, letting the market do its thing.

I think we learned in the AIG boardroom what the market would do, if it could do its thing. I would say to Senator Sessions, we have drawn some lines. We decided as a matter of national policy and national security that we'd had it with the people who were gouging the members of the U.S. military.

We put a limit, 36 percent interest, and said, you can't loan to members of the U.S. military and charge over 36 percent, and we closed a lot of fly-by-night operations around our military bases who were putting our men and women in uniform and their families on hard times.

But we didn't apply the same protection to the rest of America. So I put a bill in for 36 percent cap on the APR interest rate. I would say to my colleagues that if you want to start a reptile farm, you should put this bill in and watch what comes in under the door. Folks literally would sit in front of me and say, wait a minute. We are the good guys and you are going to put us out of business. I'd say, well, what do you charge, what are your interest rates?

And a man -- I have had two of them now, one from the pay day loan industry, one from the installment loan industry, and they would sit there with a straight face and say, oh, we charge between 36 percent and a 158 percent. I said, if you can get those words out of your mouth, you and I don't have anything to talk about. That is what's going on in the real world.

Disclosure isn't enough anymore. We need -- you can't tell folks enough information to protect them. One of the things the bill introduced and I recommend to my colleagues, the financial service product commission, which we put together, we protect consumers. We say when you buy that toy, we'll let you know if it has lead paint; we'll protect you.

But we don't protect them when it comes to credit cards and we don't protect them when it comes to mortgage instruments. We need to have an agency that's looking out for consumers saying, this is a toxic instrument. You shouldn't be allowed to sell this in America. At least give full disclosure to people involved in it.

I don't think there is anything wrong with this. Credit cards are important, I have a wallet full of them too, but I think they are going way too far. They've just abused it, because we are not even watching, let alone, regulating. I have to go give a speech, but I'm coming back.

Thanks, Mr. Chairman.

SEN. WHITEHOUSE: Thank you very much, Senator Durbin.

We will now call on the first witness, Douglas Corey. Thank you, Mr. Corey.

MR. COREY: Thank you. Chairman Whitehouse and Ranking Member Sessions, thank you for the opportunity to testify today about my experience with my credit card lender.

I am a victim of the predatory credit card banking practices that punish honest citizens who work hard every day to make an honest income, payoff their debt, and take care of their families. I have had a Bank of American credit card for six years, and I can't remember missing a payment in that time span.

During most of this period, I received an interest rate of 12.74 percent, and although it was tough making the payments, I did. I set up an automatic monthly payment of $100 to pay down the principal, and each month when I received my bill, I paid the minimum payment.

In August of 2008, I was on vacation and inadvertently paid less than my minimum payment. The following month, I misread my credit card statement. One line on the bill said "minimum payment," another said "pay this." I paid the minimum payment, which was about $125 less than the amount on the line that said "pay this."

With my next statement in October 2008 came the devastating news that my interest rate had skyrocketed to an astonishing 28.99 percent. I went from paying $360 in interest to $792 in one month and I was charged a $39 late payment fee. The following month, I was laid off from my sales representative position of seven years.

Once I realized my rate had increased, I immediately called Bank of America and was repeatedly told that nothing could be done to my rate until I made the minimum payments for six consecutive months. In December I called again, and at this time they credited my account $759.23 in interest.

In January, I called again, but the outcome was much different. I was told no discount could be given again, but was offered the chance to increase my credit limit for a service fee of over $150 a month. I asked the representative why would I do such a thing. She said, "To help pay for any expenses I may have."

Several weeks later, I called Bank of America. Only this time they sent me to a rate adjuster who asked me several questions, one of which was my current work status. With a great deal of embarrassment I explained that I was "unemployed."

He then suggested giving me back $10,000 I had paid in October of 2008, effectively raising my balance by that amount. I explained to him that this would mean I would be paying 28.99 percent on 10,000 more dollars, which would cause my payments to climb well over $1,000 a month and would put me further into debt.

His second option was to create a long-term loan. He explained that he could tell me -- couldn't tell me the rate and terms unless I agreed to the long-term program first. He also explained that my account would be temporarily closed, and once I paid the loan off, my account would be reinstated.

I expressed my concern over the effect that this would have on my credit rating and he suggested it would be fine over time. I asked him why Bank of America was still offering me 3.99 percent on debt transfers, but was imposing such a lethal punishment on those of us who have been keeping them in business for years.

He had no answer. I worried that the credit rating I had worked so hard for over the years could be lost. As of March 13th, I had made six consecutive minimum payments. On March 18th, I enthusiastically called Bank of America, and was told that my reward for making my payments was a $13,000 reduction in my line of credit.

The rate adjuster explained that he would have to do so because I was unemployed.

I told him I was on the brink of starting a new position in the upcoming weeks. He told me that he would call me at this time to see if I had actually started working and what my new compensation was.

He went on to say he could offer me a rate of 24.99 percent, but if he did, it would confuse the computer from "automatically adjusting my rate back from my default rate." He said if he didn't change my rate now, I potentially could get a lower rate in the coming weeks.

I asked whether my rate would be 12.74 percent, and he reiterated that he could not tell me what the rate would be. I told him this was frustrating because I had been assured that if I paid for six consecutive months, my interest rate would go down.

With pride, I can tell you that for the last 19 years I have never missed a credit card payment or auto payment. In 1994, I became a proud homeowner and was living the American dream. Since becoming a homeowner, I have made every mortgage payment up until this year, that all changed seven weeks ago.

I have to admit that for the first time ever, I missed my mortgage payment. But fortunately last Tuesday, I was able to make up the missed payment, and soon would be caught up. As a responsible single father, I quickly restructured my home budget and spending, and I proactively began contacting my debtors to inform them of my situation and to negotiate an amiable resolution.

Senators, I find myself in the same circumstances that many parents are facing today, few job prospects, a stack of bills, and the challenges of facing off against financial goliaths. There are many of us in the middle class, the unemployed, who may have overstepped our budgets, but although we struggle to make our payments, we make them.

Bank of America has come before you asking for help, understanding, and with both hands open, for financial support. Yet, when we the consumers go to these institutions looking for the same help, understanding, and financial support, we get roughed up and receive no compassion.

Rather then negotiating, banks are preying on those of us who have been weakened by circumstances beyond our control. Banks realize that they are holding all the cards and that the consumer is powerless to negotiate with them.

As a salesperson, I understand the importance of making a profit, and banks are entitled to make a profit, but what is enough? Over the six months, I have paid a staggering $1,600 dollars more in interest versus what I would have paid at 12.74 percent. Their policies and actions are having a devastating effect on consumers that are hardest hit by our country's economic hardships.

Last week, I was asked to come here and tell my story. I'm not here asking for anything for myself. I'm simply asking to stop the greed that is fueling banks' predatory behavior. Consumers are looking to you for leadership and to wage war against this greed that has taken over the corporate America.

My hope is that you will consider some form of legislation that levels the playing field and empowers consumers to negotiate with these institutions' strong arming tactics. Thank you for your time.

SEN. WHITEHOUSE: Thank you very much, Mr. Corey, and thank you for coming to Washington to be a part of this hearing. I appreciate it very much.

Our next witness is the Honorable Rosemary Gambardella of the New Jersey Bankruptcy Court.

JUDGE GAMBARDELLA: Chairman Whitehouse, Ranking Member Sessions, Senator Durbin, other senators on this subcommittee, thank you for this opportunity to testify today on the important subject of abusive credit card practices and their relationship to bankruptcy.

I speak today not on behalf of any group of judges or organization, but solely on my own behalf. I've spent the last 23 years serving on the United States Bankruptcy Court in the district of New Jersey. During that time, I have seen firsthand the impact of spiraling debt burdens on ordinary citizens, citizens like Mr. Douglas Corey, who has eloquently testified this morning.

Contrary to popular sentiment, persons filing bankruptcy petitions in this country do not do so to escape debt repayment, but rather as a last resort driven for the most part by circumstances beyond their control, illness, divorce, job loss, income reduction. Many are on the brink of home foreclosure. On the way, these individuals have accumulated significant unsecured credit, the majority of which often is credit card debt.

The current system of bankruptcy laws that concerns individual consumer bankruptcy filers can be assessed in terms of three central concepts, liquidation as embodied through Chapter 7, rehabilitation or reorganization as symbolized by Chapter 13 to -- and to a lesser extent for individuals, Chapter 11, and the ultimate discharge or forgiveness of debt.

These concepts trace their roots directly to the Bible. For instance, the Bible makes it clear that people are generally expected to pay their debts. One can look at Leviticus 25:39. However, this moral and legal obligation to pay just debts must be balanced by such considerations as the need for compassion for the poor, preservation of the family unit, and a call to cancel debts at periodic intervals. Again one can look at Deuteronomy.

The quest to arrive at the perfect balance between compelling persons to repay their debts, and society's obligation to forgive debt and to provide debtors with a fresh start has existed since ancient times. In fact it is this healthy tension that fostered the development of the bankruptcy laws in this country from the early days of bankruptcy referees to the present. It was the pendulum responsible for the 2005 Bankruptcy Amendments that have been spoken about, as well as the proposed Consumer Credit Fairness Act, which we are discussing this morning. High cost consumer credit generally comes in the form of credit cards, payday loans, student loans, refund anticipation loans, and subprime mortgages. Today, I will focus primarily on high interest credit cards.

At least one study has found that nearly 60 percent of credit card holders do not pay their bills in full every month. It was reported that the average interest rate for standard bank credit cards topped 19 percent in March of 2007, and the Federal Reserve has reported at relevant times that some 46.2 percent of all families held credit card balances, with an average credit balance approaching $7,300.

In September of 2006, the Government Accountability Office estimated that in 2005, the number of U.S. credit cards issued to consumers exceeded 691 million. That report stated that, "The increased use of credit cards has contributed to an expansion of household debt, which grew from $59 billion in 1980 to roughly $830 billion by the end of 2005," and is certainly well over a trillion dollars today.

That report estimated that, "The majority, about 70 percent in recent years, of issuer revenues came from interest charges." And estimated penalty fees to account for an estimated additional rather 10 percent of total issuer revenues. That report concluded that disclosures used to provide information about the costs and terms of using credit cards generally had serious weaknesses, which reduced their usefulness.

Professor Elizabeth Warren of Harvard Law School has conducted extensive research on the causes of bankruptcy. In a 2006 article, authored together with Teresa Sullivan and Professor Jay Lawrence Westbrook, the author has argued that "the central characteristic of consumer bankruptcy over the two decades has been increased financial distress marked by rising levels of debt."

And that "from the early 1980's to the present, American debt -- Americans' debt burden compared to their disposable income has risen considerably," while "at the same time, increased layoffs, high divorce rates, lack of medical insurance, income volatility, and rising housing costs have left families even more vulnerable to bankruptcy.

"

Focusing on credit cards, they describe as, which they describe as the dominant form of lending in recent years, the authors indicate that, "Interest rates are often ruinous for a family with a substantial credit card debt, particularly, if the family had missed a beat in making on-time payments, as the combination of late fees, over-limit fees, default rates of interest, and other charges means that credit cards for families in trouble may easily be running at 24 percent interest or more."

The authors speculate that "changes in the credit industry in making money available to troubled borrowers may have changed the calculus that leads to bankruptcy as increased lending offers a way for families, in fact, to delay bankruptcy, but the increased payments, increased so fast that even a small stumble means the borrowers would have to declare bankruptcy or literally never get out of debt."

In a 2006 article by Professor Susan Block-Lieb and Edward J. Janger, they claimed that "the demise of usury laws and the development of national credit reporting and credit score systems and mass marketing techniques permit lenders to create a national market for credit cards available to even the least credit-worthy members of society, but at a price."

Concerning the 2005 reforms, the authors argue that legislation severely limited overleveraged consumer borrowers from obtaining relief from the bankruptcy system and in effect rewards consumer lenders for taking advantage of consumer limitations.

Professor Katherine Porter has also argued that the credit industry seeks to profit from financially distressed and vulnerable consumers by encouraging families to continue to borrow even after bankruptcy.

And Professor Porter speaking regarding the BAPCPA amendments states that, "the credit card industry's lending decisions were not subjected to the same scrutiny as the debtors' borrowing decisions." And that lenders were not "held to the same moral standard as debtors for evaluating the appropriateness of their financial practices."

As was mentioned in the opening statements in 2005, the Bankruptcy Code underwent extensive changes with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. That reform act was meant to address a perceived imbalance in the bankruptcy code, strengthening creditor provisions, encouraging repayment under Chapter 13 rather than liquidation under Chapter 7, by imposing a "means test" on debtors, to test their ability to repay debt.

The proponents of BAPCPA, among them, the banking and credit card industries, car and mortgage loan lenders, advocated that by setting the bar higher for people who could file bankruptcy, the legislation would discourage bankruptcy petitions submitted in attempt to abuse the system by deliberately running up credit card debt and running away from repayment obligations through bankruptcy.

Conversely, consumer advocates strenuously oppose BAPCPA by noting that the vast majority of people filing for relief under the bankruptcy code were not abusers, but families in serious financial trouble due to the various factors outlined in this testimony. And that amending the bankruptcy code to make it more difficult to resort to bankruptcy, they contended, would create more stress, and suffering for middle class families by delaying debt relief.

The implementation of BAPCPA in October of 2005 followed a spike in bankruptcy filings approaching 2 million. After that and it's in my written testimony, the numbers of bankruptcy filings fell. However, according to the latest statistics issued by the Administrative Office of the United States Courts, during 2008, filings by debtors with predominantly non-business debt which accounted for some 96 percent of overall filing. It was on the rise again to over 1 million filings.

The proposed Consumer Credit Fairness Act would disallow on bankruptcy for purposes of distribution, claims arising from a high cost consumer credit transaction which is defined under the Act itself. Essentially, or currently under the standard imposed by the proposed bill, the CCFA would apply to any interest rate higher than 18.5 percent. Additionally, the proposed bill would exclude debtors from debts arising from high cost consumer credit transactions from the so-called "means test."

The articulated purpose of the 2005 amendments to the bankruptcy code was to inject balance into the adjudication of debtor-creditor rights. In fact, the myriad requirements placed on consumer debtors, including the use of means testing, may have created substantial burdens on consumer debtors without the desired result, increased repayment of debt.

It is clear from experience that debtors' use of credit cards as a "family lifeline" to cover basic living expenses such as food, sustenance, utilities, health care, tuition is a trend seen throughout the courts, and the cases before our courts. The proverbial, "robbing Peter to pay Paul" has resulted in spiraling debt that high interest loan, consumer loans, only exacerbate.

The disallowance in bankruptcy of a specific category of high cost loans contemplated by the bill may act as a disincentive to such practices. As well, the specter of disallowance of such claims in bankruptcy may encourage out-of-court settlements. The disallowance of these claims, as opposed to subordination of the claims, may also result in a greater recovery to other unsecured creditors with valid and bona fide claims.

In my experience on the bankruptcy court, it must be emphasized that bankruptcy relief is largely utilized by individuals as a last resort for legitimate, non-abusive purposes. And the fresh start accorded by bankruptcy to individuals suffering under enormous debt loads, particularly in this current economic climate, is a laudable goal.

So that disallowance of certain high-cost credit claims will, in certain instances, substantially decrease the debt burden on debtors, increase the prospects for successful reorganization, and/or repayments through orderly liquidation to bona fide creditors.

While many debtors and their families' income fall below the applicable respective state median income levels and escape the means test, the elimination of means testing for this category of consumer debtors would make the pathway to Chapter 7 relief more available. Again, to the extent that repayment is the goal, such remedy may be an additional disincentive for predatory lending practices.

It is worth noting that while the remedies in this proposed legislation are limited to bankruptcy filings, this does involve a much broader issue of predatory lending practices that reach far beyond the bankruptcy arena.

In closing, I want to thank this committee for according the honor and privilege of testifying today on these important issues. And I stand ready to provide any additional information, senators that you may require. Thank you.

SEN. WHITEHOUSE: Thank you very much, Your Honor. The Ranking Member Senator Sessions and I have been lawyers long enough that far be it from either of us to interrupt a judge --

JUDGE GAMBARDELLA: I went over my time limit, I apologize.

SEN. WHITEHOUSE: But I would appreciate it, because Senator Sessions has a commitment at 11:00 if the subsequent witnesses could be attentive to the time restrictions, so that all the testimony can come in while the ranking member is present.

SEN. SESSIONS: You had your chance to stop a judge after having been stopped many times before. (Laughter.)

That was very valuable, thank you.

SEN. WHITEHOUSE: Professor Levitin?

MR. LEVITIN: Mr. Chairman, Ranking Member Sessions, good morning. My name is Adam Levitin and I'm an Associate Professor of Law at the Georgetown University Law Center, where I teach courses in bankruptcy and commercial law. I am here this morning to testify in favor of S. 257, the Consumer Credit Fairness Act.

I think it's important to start by noting exactly what Senator Sessions said, "credit can be a -- it's a double sword." It can be both a boon and a curse.

Credit is a wonderful thing that can fuel the economy, but when credit is issued beyond a borrower's ability to repay, it becomes a stone or like a -- it becomes an anchor around their neck, dragging them down.

As Congress tries to figure out how to address the problems caused by excessive consumer leverage, there are few possible responses. Senator Sessions suggested that disclosure might be the way to go. And I think there is a general sense that disclosure has not worked well for credit cards in particular.

The problem is, that there is also no evidence that disclosure can work with credit cards. We haven't seen it work yet, and there's no empirical evidence that it will work. There's a lot of reasons to think that absent really drastic restructuring of credit card bill and price structures, disclosure can't work.

First of all, there's simply too much information that -- Senator Whitehouse described the 20-page fine print legalese disclosure. There's no one who reads that and if you read it, you can't understand it, and even if you understand it, your understanding might not be the same as that of the card issuer, and it's going to be their interpretation, not yours that's going to functionally control.

So we have lots of disclosure, but we really have obfuscation by disclosure. Stuff gets hidden in the fine print. It's all disclosed, but that doesn't do the trick. That doesn't make markets work.

We also have a problem that, even if we improve disclosure, and there are definitely moves in that direction. The Federal Reserve has some regulations that are going to go into effect in about 18 months that will improve disclosure, as well as a bill that is pending in the, I believe, the Senate Banking Committee. The Cardholders Bill of Rights -- that even if we manage to improve disclosure, card issuers still have every incentive to restructure their pricing to get around disclosure. So if we say that price points A, B, C have to be prominently and clearly disclosed, card issuers are just going to restructure their pricing to create new fees types D, E, and F.

So there's a lot of reason to think the disclosure regulation just isn't going to do the trick. This makes me think that we need to really look at substantive regulation. Historically, that's how we've regulated credit. Until now -- really until the Supreme Court's Marquette decision in 1978, substantive regulation, usury laws, were the primary form of consumer credit regulation.

S. 257 is a step towards substantive regulation. It is not, however, a usury bill, and I -- well, I think that's very important to be clear about; that S. 257 does not say that a lender cannot make a loan at any particular rate. Rather what S. 257, the Consumer Credit Fairness Act is, is a bankruptcy integrity bill. It is legislation designed to ensure the integrity of the bankruptcy system.

Bankruptcy courts are courts of equity, and the basic principle of equity is that relief will not be granted to a party with unclean hands. Creditors who charge extremely high interest rates do not have clean hands, when it comes to consumer financial distress. High interest rate debt is financial quicksand for consumers.

With high interest rate debt, the interest rates -- the interest in the fees accrued faster than a consumer can reasonably be expected to pay off the loan. Not surprisingly, there's a strong correlation between high interest rate debt and bankruptcy.

Dollar for dollar, credit card debt is the best indicator of a future consumer bankruptcy filing. And even small amounts of high interest rate debt can have a significant impact on bankruptcy filings. For example, a single payday loan of $300 increases the chances of a bankruptcy filing by nearly 3 percent.

The interest rates charged to consumer borrowers are a product of the lender's cost of funds, of the lender's cost of operations, as well as a risk premium, but also they are a function of whatever extra opportunity pricing that the lender thinks the borrower will pay. The precise mix of various byproduct, by lender and by borrower, but it's important to underscore that high interest rates do not necessarily correlate with borrower risk.

They often have a lot to do with inefficient markets, the things like non-transparent pricing of credit cards which results in consumers borrowing at much higher rates than they realize they will be paying. It's also important to note that while high interest rates, to the extent that they are a response to increased consumer risks, they also create risk. That's because many consumers are unable to service high interest rate debt.

Lenders who charge high interest rates are largely shielded from their own self-created default risk by the high rates. But we see this with the so-called "sweat box" model of consumer lending. And I understand my time is up.

So I will simply conclude by saying I urge the Congress to give serious consideration to S. 257, as well as also to true usury law. Thank you.

SEN. WHITEHOUSE: I thank you Professor Levitin, and perhaps, if you become a judge someday, you won't be interrupted, but we do have your complete statement which is very thorough and authoritative, and your complete written statement is a matter of record.

And if I could take one minute and ask unanimous consent that the statement for this hearing of Chairman Patrick Leahy, the Chairman of the Judiciary Committee, be added to the record. It will be done without objection.

And Professor Scarberry?

MR. SCARBERRY: Thank you Mr. Chairman and thank you Ranking Member Sessions for inviting me to testify today. You have my full statement. I won't read it out; I will try to hit the high points.

I tried to look at these issues on their merits. My latest, and I am speaking here of course just for myself, not for Pepperdine University School of Law where I teach, my latest article strongly argues that credit card companies and other unsecured and under- secured creditors should not be able to add to their claim in bankruptcy any amount for attorney's fees or other charges that are incurred after the bankruptcy petition is filed. And I think the Bankruptcy Code calls for that, and I think that's fair. That is in a sense an anti-creditor position, you might say.

In this case, I come down on the other side. I think this bill will not accomplish what it seems to intend to accomplish and that the issues here really, to the extent they need to be addressed, they should be addressed more directly.

The bill because of a single, a high cost consumer debt that may be owed by a debtor who files a bankruptcy petition would exempt that debtor from the, what I call the mechanical means test, the Section 707(b)(2) test, that looks at income levels and looks at expense levels and decides whether it's appropriate for this debtor to use Chapter 7 liquidation bankruptcy.

Now, we can argue about whether the means test ought to be modified in some way. I don't think it's been terribly successful, and it's very complex. And it raises the cost of bankruptcy in some ways and it could perhaps be modified in some ways. But if it makes sense to have a means test, it seems to me that it does not make sense in a lottery sort of style to exempt people from it just on the basis of a single, perhaps small debt, that has a high interest rate. So that it seems to me as a problem with the bill.

An additional problem is that I don't think the bill will change credit card company behavior at all. In most consumer bankruptcies, there's no money to be paid on secured claim holders like credit card companies; they receive nothing. And so to say to them, that there are no asset cases or nominal asset cases, to say to them your claim will be disallowed, so you will receive nothing in bankruptcy. They say, "Well, we weren't going to get anything anyway. Thank you very much." And so I think the chance that this will actually influence the behavior of credit card companies is very small.

If there's a serious problem here -- if there's a serious problem here, address it directly if it needs to be addressed, but the Bankruptcy Code, it seems to me, is not going to be effective in addressing whatever problem needs to be addressed. And it will make the Bankruptcy Code more complex.

Now, another issue, that's actually not in my written testimony, is the question of who is going to do the objecting here. Are we going to say to the trustees in every Chapter 7 bankruptcy case, you must analyze all the credit card debt of every debtor and figure out what their interest rates are for purposes of objecting to the claim when the credit card company is not likely to receive anything anyway.

It seems to me that that's a question that ought to be asked, who is going to object? The debtor typically has no incentive to object. The debtor is going to get a discharge from the debt, and the money that goes to pay, if any does go to pay, it is going to come from the bankruptcy state not from the debtor. Some people say that debtor doesn't even have standing to object in some cases.

I would also encourage the committee to consider whether the 18.5 rate that you are looking at now, is perhaps lower than it should be. Especially if you get a rewards card perhaps with no annual interest, no annual fee, and you typically pay your credit card off without, you know, without carrying a balance. It makes sense to allow perhaps cards with higher rates. But again, I don't think the bill would keep these from being offered. So maybe that's not such a big deal.

Now, I do have a couple of technical points that I want to make. One is that the applicable interest rate under this -- under the Consumer Credit Fairness Act would include fees charged in connection with extension of credit. That could easily be interpreted not to include things like late fees, which are not in -- which are not incurred in connection with extension of the credit. And so, it's -- again it seems to me the bill may not accomplish what it is intended to do.

And in addition, the bill says that there will be disallowance for purposes of distribution. If that's intended to be a limitation so that it's not completely disallowed that may allow some liens for credit card debts to continue through, which I think is contrary to what the committee -- what the bill's intent was. Thank you very much.

SEN. WHITEHOUSE: Thank you very much Professor Scarberry. We will now turn to Mr. John.

MR. JOHN: Thank you very much for having me to testify. Contrary to expectations, I am not here to defend high interest lenders in the slightest. As a matter of fact, I had an experience somewhat similar to Mr. Corey, at a point when I was traveling, and my credit card payment arrived one day late, and I saw my credit card interest rate more than double. They have since brought it down, and I have learned to pay electronically and not to trust the postal service, but still, I have no fond feelings towards them.

Having said that, I think this bill is going to damage some of the very people that I would hope you would be most interested in helping. Because the three groups who most face high interest rate loans and this is not just credit card debt, it is of other types, include low-to-middle income borrowers, and these are borrowers who typically have high rates, because even a small amount of credit exceeds the debt income ratios that, say, upper income borrowers would have.

First time borrowers, who have no credit history and therefore have no record of payment, or repayment, or people with bad credit who are trying to restore their credit balances and their credit histories. This might be people who had filed for bankruptcy or people who had suffered from extended periods of unemployment.

All of these people have much higher than average income or interest rates simply because it is often harder to collect money from them. I had the misfortune to work for three months, between undergrad and grad school, for a finance company. And I found that while of the people who were our borrowers, were fine, upstanding people who simply were not interested -- the banks were not interested in; many others, I had to go out and collect a check once a month, which took a little bit of time and money to do.

The effects of this bill are likely to be very damaging. The demand for credit services will not decline. One of the things we have learned the hard way through various and sundry attempts to put on price ceilings and interest rates ceilings, and usury laws is that the demand is still there, it's just that the good borrowers tend to withdraw from the market.

So to the extent that you have added additional risk to various transactions, what's going to happen is that good borrowers will either cease to serve these communities or what is more likely in this situation, they are going to raise their credit standards, so fewer and fewer people in this population are going to qualify for these credit products.

This is going to drive people into much less reputable borrowers or lenders, excuse me. And what these people will do is to recognize once again that there is a higher risk, so they are going to raise their prices still more, so that they can make sure to collect all their fees before there is any sort of a chance of bankruptcy filing, or something like this.

So the bottom line is price controls don't work. If you want to deal with these lending problems, the proper way to deal with them is to encourage other lenders to enter the market, things like credit unions, and banks, and that sort of things.

Now, one of the problems that we have seen with credit card debt over the years, have -- are precisely the problems that have been raised by people in this hearing. And as a result, the Federal Reserve Board and various other banking regulators issued regulations in December that among other things, achieve Senator Durbin's goal of including something on the credit card interest, the credit card statement, showing how long it will take to repay a credit card if one pays the minimum balance on it.

There are certain other changes that have been made, and both the House Financial Services Committee and the Senate Banking Committee are examining these issues in detail. In other words, this is not something that necessarily needs to be resolved in this committee.

Let me point out one other thing in my last seconds. This bill is drafted far too broadly. Under this bill, a high cost credit consumer transaction is divided, one, where you exceed your cap, quote "at any time while the credit is outstanding."

That means that a traditional 30-year mortgage issued in October of 1981, when the interest rates peaked at 18.45 percent, would fall, and would have fallen under that definition, as of December 2008, when the price of the 30-year T-bill declined rather substantially.

Now, we have not seen high interest for some time, but we cannot expect that we are not going to see this again in an era of economic dislocation and trillion dollar deficits. This bill is, it needs to be substantially corrected, and I would argue that it's going to hurt the very people that you are seeking to help. Thank you.

SEN. WHITEHOUSE: Thank you very much, Mr. John. Out of respect for my colleague's schedule, I will defer my questioning to the ranking member. We will then proceed to Senator Durbin who was here earlier, and then Senator Sanders of Vermont, who I am very proud to say, has joined us.

SEN. SESSIONS: Well, Senator Whitehouse, we are glad that you are in the Senate and being a new member, a new chairman, you are very gracious. Good lesson for some of our older chairmen.

Briefly, Mr. John, summarizing what I understood you to say and it makes perfect sense to me, that if we are going to expose credit card companies to greater and greater possibilities of recovering nothing on their credit card debt when somebody goes into bankruptcy, they will then be more rigorous in denying credit cards to marginal people who would like to get a credit card and may need a credit card, is that correct?

MR. JOHN: That's precisely the case. Plus, this is likely to extend to other types of credit that are offered to the same population.

SEN. SESSIONS: What -- such as?

MR. JOHN: Such as mortgages, such as installment lending, and a variety of other types of --

SEN. SESSIONS: Now, well, frankly I would -- I am not, I mean, there's a -- this thing cuts both ways, as I indicated earlier. You want more people to be able to avail themselves of having short term credit, which a credit card is, but at the same time, if it results in either higher rates for everybody, or a reduction in the number of people who would be able to get a card. Would you agree with that Mr. Scarberry, that fundamental principle?

MR. SCARBERRY: I think there is a tradeoff between wanting to have credit available, but on the other hand wanting people to act responsibly. And, of course, we know -- I mean, as my testimony points out, the massive increase in household debt has really been on the mortgage side rather than the credit card side over the last --

SEN. SESSIONS: Well, I would just say, it's a big deal and I'm not prepared to accept it, that the responsibility for somebody who utilizes that credit card to run up excessive debt is the person who gave them the credit card.

MR. SCARBERRY: I agree with you.

SEN. SESSIONS: Would you agree with that? I mean, unless we have eliminated the concept of individual responsibility totally. And Judge, when you have in bankruptcy, routinely, is it not so that the unsecured credit card people are the ones who get paid last, because the secured creditors are first?

JUDGE GAMBARDELLA: According to the priorities of the Bankruptcy Code they would be in less priority -- they have no security, that's correct.

SEN. SESSIONS: Is it -- you made some criticisms of the means test, I believe, at least test as how it is affected. Do you oppose the concept that persons who make above median income in America run up big credit card debt to at least pay some of that back if they are able to?

JUDGE GAMBARDELLA: No, I believe that people -- I believe in the concept of the honest and good faith debtor so that if there is an ability to repay a portion of one's debt, one should attempt to do that.

The difficulty with the means test, and I know this isn't a committee hearing on the means test, is what obviously some of the other witness testimonies have indicated. It is very burdensome. It is very costly. In most states, it doesn't even apply.

I don't know whether it accomplishes what it set out to do, which is to --

SEN. SESSIONS: Well, I'm open to improving that and I don't want to use up too much of my time. But in the -- when an individual goes and files for bankruptcy, they run out of debt, one of the things lawyers tell them is to put everything on that credit card.

JUDGE GAMBARDELLA: Except the court filing, you see.

SEN. SESSIONS: And we did back up the -- well, they tell them not to pay their rent, to give them their money so they can pay the fee.

But it iterate the --

JUDGE GAMBARDELLA: That's right.

SEN. SESSIONS: They do use credit cards up to the last day and we back a little bit the time that you could do that on some of those debts, but it has to so the credit cards are dumped on it in many ways once a person decides that they are filing bankruptcy. Is that not correct?

JUDGE GAMBARDELLA: I'm sorry, Senator you --

SEN. SESSIONS: Well, in effect, what happens is if you talk to a lawyer and they say you got to file bankruptcy, and the lawyer suggest that you pay your groceries and everything else possible on the credit card, run that up and pay him his fees and pay your family and their debts that you owe your brother-in-law, and then sock it to the credit card company, and they'll lose in bankruptcy.

JUDGE GAMBARDELLA: Let me clear your scenario. Well, I'm sure some of this testimony certainly makes clear that what's happening with the American families is that they are utilizing credit cards for all types of purposes that you or I years ago would not have. So --

SEN. SESSIONS: But I'm trying to figure out how to -- what the right it. Mr. Scarberry, maybe you've looked at this, but a 15 percent plus what the current rate is, 3 (percent), about 18 percent makes this a bit of a risky thing. Do you think it could constrict the availability of credit for consumers and it might increase the interest rates for good creditors?

MR. SCARBERRY: It is possible, Senator. The -- to the extent that you have people with good credit who are getting specialty cards where they get double frequent flyer miles and these sorts of things, and they have high rates on them, and they don't intend to carry a balance, those are people where you might actually have some serious payment. If they end up in financial trouble, they have assets and that the financial trouble going to bankruptcy.

The credit card companies who offer those kind of cards might in fact suffer some serious loses as a result of this bill and it might restrict some of that credit.

In the usual case, there isn't going to be any payment to the credit card company anyway. So disallowing their claim isn't going to hurt them. But in a few cases, it would and it could have some effect.

SEN. SESSIONS: Mr. Chairman, I just like to emphasize one thing. I think what Mr. Scarberry mentioned was that if one credit card is over the interest rate allowed under this bill, and it may be a small one, they are exempted entirely from the means test.

Is that correct?

MR. SCARBERRY: That's correct under this bill, which --

SEN. SESSIONS: And I don't think that is a good policy for sure. Thank you.

SEN. WHITEHOUSE: Senator Durbin.

SEN. DURBIN: Thank you, Mr. Chairman. Back during the debate on the bankruptcy bill, I offered an amendment on the floor which said that if a mortgage lender was guilty of predatory lending practices, they could not recover in a bankruptcy court, similar to what you are doing here, Senator. And I lost that vote on the floor.

During the course of the debate, then Senator Phil Gramm of Texas got up and said if the Durbin amendment passes, it is the end of sub- prime mortgages. I lost by one vote.

It is true that if the Durbin amendment had passed, we would have restricted credit. But I think most of us looking back now would have said, "That might have been a pretty healthy thing to do," because people were doing things, borrowing money under circumstances that made no sense, but there was a willing lender who was willing to take them into debt arrangement and ultimately into a bankruptcy court.

Judge Gambardella, what is the primary reason people come into bankruptcy court now? What kind of debts push them over the edge?

JUDGE GAMBARDELLA: Well, generally, it would be what I referenced in my testimony, would be divorce, loss of income, loss of health insurance, some catastrophic event in their lives that creates the need to file for a bankruptcy.

At least that's what all of the studies that have been done show and I think it bears out.

But -- I mean, it is shocking when you look at bankruptcy petitions and I'm sure people in this panel can bear me off. At the amount of credit card debt that you see on a family's bankruptcy petition, you don't see just one or two credit cards. You can see upwards of 25 credit cards with over $10,000 on each card. I think that is rather shocking.

SEN. DURBIN: Isn't that like the -- isn't that the last gasp? I mean, when everything is falling apart, they max out the credit cards to try to hang on hoping that things may turn around if they can?

JUDGE GAMBARDELLA: Well, that's -- as I say, that's the robbing Peter to pay Paul, you see it. And it is done not, I think, out of bad intentions, I think it done often out of pure desperation.

SEN. DURBIN: And of course, they are facing interest rates with those credit cards, which can be astronomical.

JUDGE GAMBARDELLA: But I did want to raise one issue because it was raised, I believe, by some of the other witnesses here in terms of the need for these high cost loans or credit cards in certain instances.

One of the changes that the 2005 amendment instituted was debtor education. So when parties go into bankruptcy, they have to then take a course.

SEN. DURBIN: The author of that --

JUDGE GAMBARDELLA: That course teaches that --

SEN. DURBIN: The author of the amendment just left, but he'll be back. Okay?

JUDGE GAMBARDELLA: Okay. Well, maybe he'll read this testimony.

And so when debtors go into bankruptcy and then come out, they are being told to borrow money responsibly. So it is -- I guess there is a dichotomy between the bankruptcy courts telling debtors, now they have received discharge, is borrow responsibly.

And together are -- which I think is valid, has validity that if you put too many restrictions on credit, then there may not be available credit even at the most onerous terms. But we are educating our debtors to go back out in the world and for better or worse cut down on their use of credit cards and -- (cross talk) -- because I think the end result is what we've seen, these spiraling of bankruptcy filings.

SEN. DURBIN: Mr. John, did we make a mistake capping the interest rate that could be charged to members of the U.S. military at 36 percent?

MR. JOHN: I don't that you've necessarily made a mistake with the military. However, the problem that you face with overall usury ceilings is that if we go back into a period of high inflation, then you are going to have to deal with situations where normal credit exceeds those usury ceilings.

Back during the '80s, the State of Arkansas --

SEN. DURBIN: Are you using the example of an 18 percent mortgage interest rate?

MR. JOHN: Yes. Well, there was an 18 percent and the State of Arkansas had a constitutional requirement to have a 12 percent interest rate. And they came to Congress every two years to get a waiver through a Congress, but of course they refuse to change their constitution.

SEN. DURBIN: Do you think that the danger of hyperinflation that might call for a change in the law at some point in the future outweighs the benefit of stopping usurious credit practices that are driving people into bankruptcy and the sweatbox situation the chairman described?

MR. JOHN: I think there are other ways to do it other than usury ceilings. I think that there are ways to deal with disclosure. There are ways dealing with consumer education, as the judge has just said. And there are many, many different other manners of handling this. I think that a price ceiling itself, as much as I personally am appalled by the concept of a 36 percent interest rate, is not necessarily the way to deal with it.

SEN. DURBIN: Let me ask you this question. Do you think that the credit card contracts that we are given as consumers are easily understood?

MR. JOHN: Absolutely not. I tried reading one the other day and fell asleep at the end of the third paragraph.

SEN. DURBIN: I think that is the experience most of us would run into and the point I'm trying to get to is that buried within those credit cards agreements are a lot of traps.

Mr. Corey, I read your testimony. You fell into one of those traps and you paid a heavy price for it. And I think what we are dealing with is not an arms length transaction here between the borrowers and the lenders. We have terms that honestly most people can't follow.

MR. JOHN: I see.

SEN. DURBIN: And are occasionally trapped by them as Mr. Corey was and find themselves in a miserable situation with their credit rating shot and deeply in debt, maybe ending up in Judge Gambardella's court if they are not careful.

MR. JOHN: I agree and then I'm hopeful --

SEN. DURBIN: And so do you -- what do you think Congress should do as a result of that? Anything?

MR. JOHN: Well, I think actually the Federal Reserve board and the various banking regulators have already issued regulations addressing some of these more egregious questions, including as I mentioned your goal of having something on the credit card statement saying that if you paid the minimum, here is how long it is going to take you, assuming you can.

Now both the Banking Committee and House Financial Services is looking to see what else needs to be done and I think that's probably the appropriate venue.

SEN. DURBIN: Thank you.

Thanks Mr. Chairman.

SEN. WHITEHOUSE: Thank you, Senator Durbin. It is a pleasure to have you with us. I appreciate very much that you've attended this and shown such interest.

Senator Sanders.

SEN. SANDERS: Mr. Chairman, thank you very much for allowing me to drop into this committee of which I am not a member, and thank you also very much, Mr. Chairman, for co-sponsorship of legislation that I've introduced, which would put a cap on credit card interest rates at 15 percent, unless there were some dire circumstances at which point they could be raised. And that piece of legislation is also co- sponsored by the chairman of the judiciary committee Senator Leahy with Senator Durbin, Senator Levin, Senator Harkin as well.

Let me begin by asking Mr. Corey a question. First simple question and then I want comments from other panelists. You know, the Bible makes a lot of reference to usury and in our country today, you have financial institutions that are charging Americans 30 percent interest rates, 50 percent, 100 percent interest rates.

Mr. Corey, what about the morality of that? Do you think that's a moral thing to be charging people that kind of interest? I know we don't talk about morality too much in the United States Senate, but it is an issue that we might want to touch on.

MR. COREY: No, I don't think it is a moral issue. I mean, folks take on credit cards and they want to pay off of that. I think most people do want to pay off their debts. I think people who I grew up with in the middle class all take these responsibilities very seriously.

And sometimes they extend themselves a little bit more than they should and in a lot of times in situations of hardship and divorce and things beyond your nature, I think it is a very strong moral issue of what is profit and what is --

SEN. SANDERS: Mr. Corey and anybody else can jump in, we all know what loan sharking is. We know mafia and gangsters lend people money at outrageous rates and then they break their knee caps or beat them up if they don't pay it back.

How different is somebody in a three-piece suit charging somebody 50 percent interest rate different from a loan shark?

MR. COREY: I think it is exactly that. I think it is exactly loan sharking. I think it is exactly doing it.

Just for -- in my testimony where I say that, you know, if they are there to work with us, why would you offer me the $10,000 I paid down in October to bring down the principal and then say take it back, and then to bring me deeper back into, and whereas they would make more money on the interest again and charging the 28.99 percent.

SEN. SANDERS: Judge, are we looking at a form of three-piece suit CEO corporate loan sharking here? Well, let me --

JUDGE GAMBARDELLA: Well, I don't know that we have to go that far, but what I think, Senator, is that it is an issue of one person's morality, you know, may be different from another's. I think it is really a question of personal responsibility or maybe institutional responsibility in a broader sense.

You know, we've spoken a lot about concepts of means testing and concepts of debt repayment and concepts of certainly consumers acting responsibly, and I'm all for that. But I think it has to -- you know, it goes both ways.

SEN. SANDERS: It goes both ways.

JUDGE GAMBARDELLA: So the difficulty is certainly that we are perceived -- I am speaking only of in the bankruptcy context, strictly that were perceived in balances that were addressed by --

SEN. SANDERS: I just have floor too to talk about.

JUDGE GAMBARDELLA: -- you know, by legislation. But it hasn't gone far enough.

SEN. SANDERS: All right.

SEN. WHITEHOUSE: Senator, it is just the two of us, so I'm not going to --

SEN. SANDERS: We're going off -- (cross talk) -- yeah. Yes sir.

MR. SCARBERRY: Senator Sanders, I think it is always good to consider what's right and I don't have a problem with that. I would suggest one of the differences --

SEN. SANDERS: You don't have a problem with considering what's right. Boy, that's a good start, we're off --

MR. SCARBERRY: I don't have a problem with the senate considering that. I think it is very important, it is very important. One of the differences between the three-piece suit lender and the loan shark of course is the collection method.

We do have limitations, for example, on garnishments under federal law, and we don't have debtor's presence any more. And also very importantly, we do have the availability of bankruptcy to allow people to get a fresh start and that is very important.

SEN. SANDERS: But all that is true and important. I was being a little bit facetious. But on the other hand, you will not deny, sir, that there are hundreds of thousands of people whose lives have been ruined, whose lives have been ruined with very, very high interest rates and in fact going into bankruptcy.

I do understand that going into bankruptcy is not getting your knee cap broken. But my point is you have --

MR. SCARBERRY: It is not a very nice thing to have to do either.

SEN. SANDERS: Right. All right. Let me ask another question and that is I get in my office, and I'm sure Senator Whitehouse and every senator gets, irate calls from taxpayers in this country who have seen maybe they are loosing their jobs, maybe they are loosing their homes, and at the same time, they are forced to bail out the AIGs of the world, the Citibanks of the world, companies where CEOs made hundreds of millions of dollars.

And then what they get from these same financial institutions are credit cards which are charging them 25 (percent) or 30 percent interest rates. Professor, what about the taxpayers in this country bailing out institutions which then say, "Thank you very much for bailing us out. We'll take the bonuses, and by the way, we are charging you 30 percent interest rate." So you think taxpayers have a right to be a little bit upset about that? No -- yeah, right here.

MR. LEVITIN: Was not sure which professor you were referring to.

SEN. SANDERS: Levitin.

MR. LEVITIN: No, of course taxpayers should be upset about that that right now the federal government is effectively funding credit card loans that the Federal Reserves Term Asset-Backed Securities Loan Facility, better known as TALF, is purchasing credit card-backed securities in the securitization market. And that is giving credit card lenders the funds to make loans.

If the federal government is going to be ultimately the financer of credit card loans, it should have a say in what the terms of those loans look like. And I would also note that having the federal government's role in financing of credit cards really alleviates some of the concerns that Mr. John has suggested about something like the usury law, that -- Mr. John has suggested that if we had something that looked like a usury law, we would have what is known as product substitution and credit rationing.

So people wouldn't be able to get loans from legitimate lenders and they would turn to loan sharks. Having essentially a federal subsidization, which is what we have now, of credit cards lending mitigates that significantly. I mean, it is going to depend on the scope of our subsidization of credit card lending.

But that now that we are in that game, I think that the concerns about usury laws are definitely mitigated.

SEN. SANDERS: Let me throw out my last question, if I can Mr. Chairman.

SEN. WHITEHOUSE: Please.

SEN. SANDERS: Senator Durbin mentioned that the Department of Defense has imposed, I guess, it is 36 percent cap on interest rates charged to people in the military. What is not widely known is that for, I believe, three decades now, credit unions in this country had been mandated not to charge more than 15 percent with some exceptions and in fact some credit unions now charge up to 18 percent.

There was an article a couple of weeks ago in the LA Times where a fellow active in the credit union association in California said their credit union is doing pretty well. Now they have survived under this legislation for -- this regulation for 30 years. Is there any reason that we think why other financial institutions could not survive equally well if we had the same type of cap? Professor?

MR. LEVITIN: I would suggest that if you are thinking about a cap like 15 percent cap, that it should probably be a floating cap, that it should float above some sort of index rate like the federal funds rate. That would alleviate any of the inflation problem that Mr. John raised.

SEN. SANDERS: Well, in fact, that is, I believe, what is the case of the credit union situation.

MR. LEVITIN: Yeah.

SEN. SANDERS: All right. Let me just conclude. Thank you very much Mr. Chairman. I think obviously the American people have had it up to here with financial institutions in general. I think in the last year, the incredible greed, recklessness, illegal behavior on the part of Wall Street has enraged the American people because our economy is tanking under having to bail out the people who caused the problem.

And I think one way that we can move forward, Mr. Chairman, is to in fact put a cap on interest rates. We are proposing something similar to what goes off with credit unions in this country. We look forward to support for that. Thank you very much.

SEN. WHITEHOUSE: Thank you, Senator Sanders. And as a member with you on the Budget Committee also, I've had the opportunity to see the vigor, passion, and relentlessness of your advocacy on this and it is, if you don't mind me using a loaded phrase, credit worthy.

And just for the record, the legislation that I've proposed is a 15 percent limitation riding on top of a 30-year T-Bill rate so that if the circumstance Mr. John was talking about were to arise over dramatic rise in underlying interest costs, this would rise naturally with it with that T-Bill rate.

MR. JOHN: Forgive me, Senator, but your bill says that this would happen at any time when the credit is outstanding, which means that while it is very true that in October of 1981 when this hypothetical mortgage that I mentioned was taken out, that this was the case, over the intervening years, the 30-year T-Bill rate has moved on.

SEN. WHITEHOUSE: I see your point, I see your point.

Mr. Corey, let me ask you just a little bit about -- you seem to be in many respects kind of an ideal customer. You are college educated. You are solidly middle class. Your testimony reflects that for 19 years, you never missed a credit card payment or an auto payment. Until 7 weeks ago, you never missed a mortgage payment.

MR. COREY: Sure.

SEN. WHITEHOUSE: Your testimony here shows how seriously you take these responsibilities. The only thing that went wrong initially was that you inadvertently paid less than your minimum payment one month.

MR. COREY: Right.

SEN. WHITEHOUSE: And then on the following month, they had two things. One said minimum payment, and one said pay this.

MR. COREY: Uh-huh, right.

SEN. WHITEHOUSE: You paid the minimum payment. That was a trap that caught you. So those two things and pitched you into this circumstance which required you to deal with your credit card company.

And the upshot of your dealings with your credit card company is the sentiment that you've expressed here that you are facing off against financial goliaths, that they are out there preying on those of us who have been weakened by circumstances and that you need something to level the playing field to empower you to negotiate with these institutions' strong arming tactics.

MR. COREY: Yeah.

SEN. WHITEHOUSE: I mean, if they are treating you that way --

MR. COREY: I can imagine --

SEN. WHITEHOUSE: You had a pretty rough experience.

MR. COREY: Yeah. It is basically a tightrope walk and now someone is poking sticks at you at the tightrope. And at every turn, that one half step in the wrong direction, you are busy at ending up in the judge's court.

And it is not some place as, like I said, in middle class where we want to be, but it is again -- we are forced down into this sweatbox. And they are relentless and -- I mean, they are trying to get us deeper into debt. So then we really don't get into this.

And to Mr. John's point, as far as --

SEN. WHITEHOUSE: The response to your predicament was to offer to lend you more money.

MR. COREY: Yeah. Give me back like --

SEN. WHITEHOUSE: So that you could put off their exorbitant rates and then beat a deeper hole later on.

MR. COREY: They didn't like the fact that I was paying the principle down clearly, and they did reduce my credit limit down from what it was by over $13,000. And now, they are taking credit away from --

I've asked many friends about their own situations, and people who haven't missed payments are losing credit just for no reason whatsoever. Someone who may have made a minimum payment or less than a minimum payment on another card, not even with that particular company, their rate went up.

Then once they said, why did my rate go up? Well, you were kind of late on this payment. They then said, well, if you want to get it back to that lower rate, close the account. Close the account. And they really don't care about losing your business any longer.

SEN. WHITEHOUSE: Well, your description of this as walking a tightrope while being prodded with sticks is a memorable description. I think a lot of the -- around here we often disagree on things because we disagree on the underlying facts. But it seems to me, I'm seeing quite a significant degree of agreement among all four of the, if you don't mind my saying so, Mr. Corey, the professional witnesses here, about what the credit card industry's business strategy is.

Judge Gambardella refers to, give me a moment, first of all, that the vast majority of people filing for relief under the bankruptcy code are not abusers or out to take unfair advantage. The bankruptcy relief is largely utilized by individuals as a last resort for legitimate non-abusive purposes.

And that, sort of counter to that is the practice of the industry where they increase interest payment so fast that even a small stumble meant either having to declare bankruptcy or be in a situation where you, quote, "literally never get out of debt." And that, in this circumstance, ultimate repayment may not be necessary for the credit card to have a highly profitable transaction.

And that in some circumstances repayment is not even the goal. You used the phrase "to the extent repayment is the goal," which all raises the prospect that there's something different going on than what we ordinarily think of as extending a loan and getting it paid back over time with a reasonable interest rate to reflect the risk.

Professor Levitin, you talk about companies turning people into a perpetual earning asset and distinguishing that from the lender who lends with an eye to getting his principal repaid and making a profit from the interest.

Professor Scarberry, you referred to the damage that is done by high-cost consumer credit and that this is a significant problem.

And Mr. John, you talk about a debt trap, which you define as where customers of high interest lenders find themselves deeper and deeper in debt to the lender as interest rates and fees combine to make it impossible for them to repay their loans. And you say that such a trap may well exist in both specific cases and in general.

So it appears to me that across the board, and among all of the witnesses for really both sides, the ones who were invited by the majority and the ones who were invited by the minority, there is at least a fair degree of consensus that there is a business strategy to some degree/extent in the credit card industry to move people into what I referred to in my opening remarks as a sweatbox, to put them into a place where they can never pay it down because it's too high, where they have been kicked up into these interest rates and they can't escape from those. And now, by making bankruptcy more difficult pursuant to the so-called bankruptcy reform, they extend that time. And then they trigger -- they calculate that minimum payment so it's just enough to keep you in there essentially forever, you know, 40 years or whatever.

It strikes me that we might have more agreement in the Senate on this, if we had more agreement that this was in fact a business strategy that in some circumstances took place in the industry. Does any of you contest that at some level and to some degree that is a business strategy that exists in this industry?

Judge Gambardella?

MS. GAMBARDELLA: I can't comment as to whether or not it's a business strategy, but I think certainly that's the result of these practices. So whether it's intended to be the result or not, I think the conclusions of these studies pretty much speak for themselves.

SEN. WHITEHOUSE: Little hard to imagine that a trillion dollar industry with all these computers and marketing strategies at their disposal would be doing this accidentally. At least that's my perspective.

Professor Levitin?

MR. LEVITIN: The card industry is one of the most sophisticated industries in the world and there is no chance that this is accidental.

SEN. WHITEHOUSE: Mr. Scarberry? Professor Scarberry, I apologize.

MR. SCARBERRY: My expertise is in bankruptcy, I haven't studied the credit card industry directly. It would not surprise me. I do -- I would like --

SEN. WHITEHOUSE: Well, just clarify for me what you meant by your use of the word "damage." You said the damage that's caused by high-cost consumer credit.

MR. SCARBERRY: Yes, the damage --

SEN. WHITEHOUSE: What do you mean by damage?

MR. SCARBERRY: What I meant by the damage is that when people miss payments and their interest rates go way up, and you have -- as other people have mentioned, you have universal default clauses and other sorts of things. When the interest rate goes up and the bills pile up and people can't pay them, there's been damage that's been done.

Now, the difficulty is that this bankruptcy bill isn't going to do anything, I think, to prevent that damage or to remedy it. I would note that I think it was fairly --

SEN. WHITEHOUSE: But you agree that the damage is to some degree systematic?

MR. SCARBERRY: I have not seen the studies that would let me say that as an academic matter. Anecdotally, I mean, certainly there are a lot of people who are in over their heads with credit.

Now, I suppose one issue might be this, that if you were to place fairly draconian limits on interest rates, you might have more credit card companied cutting credit limits very substantially. When people can't pay them off, now they are being -- going to be charged over limit fees and they are not going to be able to borrow the extra money that they may need in these hard economic times.

And so I don't know what the right economic approach to it is. Clearly, there are people who are being harmed substantially. What you should do to deal with it, I don't know.

SEN. WHITEHOUSE: Well, a credit card company can unilaterally lower a credit limit below what somebody's balance is and then charge them over-limit fees?

MR. SCARBERRY: I don't know that, but with the high interest charges, if you lower the limit so that it is still above what's owed, it might be that in a few months, what's owed would go over the limit. And in any case, the person would not have the additional credit available.

And let me just say this; I believe recently there was a requirement that minimum payments on credit cards be increased and in part to deal with this problem. And that could be something Congress could look at as well.

SEN. WHITEHOUSE: And Mr. John, what over -- your testimony about the debt trap and the danger that a consumer gets into a situation where they are -- I remember visiting a diary farm when I was a kid. And they walked the cattle in to the pens and they put their heads through a railing, and then the gate is closed to keep their heads locked in, and then the folks come and hook them up and milk them.

MR. JOHN: Yes.

SEN. WHITEHOUSE: It's probably not as good an analogy as Mr. Corey's about the walking the tightrope prodded with sticks, but one does get the sense that consumers are being lured into these things, that the size of their credit and the tiny measure of the suggested minimum payment and the ease of the trap all combine to put them into a situation not unlike that poor diary cow where their head is trapped by their inability to get out because they can't pay it out, and then they just get milked and milked and milked.

MR. JOHN: Oh, I think that to a large extent that's true. I think one of the things we would agree across this panel is on the problem. I think we might disagree on the proposed solutions.

Now, one quick factual check. Under the credit card regulations, if the credit card company makes a significant change in your credit card, you have the ability to essentially refuse that change, whether it's interest rate or whatever, by simply not using the credit card again and paying off your balance according to the existing or the previous terms of the credit card, which means that if they lowered your interest -- your credit limit to below a certain level, you would have the ability to say, well, sorry, I'm not going to use my credit card anymore. I'm just going to pay it off under the existing contract.

SEN. WHITEHOUSE: And is that the result of the recent Federal Reserve --

MR. JOHN: No, this has actually been the case for many, many years.

Mr. Levitin? Professor Levitin, sorry.

MR. LEVITIN: I think it's important just to spell out a few other pieces of the credit card business model that fit with the sweatbox. So -- and I think when you see those, it's even more -- the business model is even more disturbing.

The credit cards attract consumers. They compete not on the basis really of interest rates. You know, if you look at credit card advertisements, it's not, we have the lowest rate. It's, we have such and such frequent flier miles or some sort of rewards program. And it's teaser rates; it's not your actual -- the actual cost of the card.

So consumers get lured into using cards based on these flashy teasers and promotional items. Once they are using the cards, then we have the sweatbox model. But the card issuers can be very aggressive with the sweatbox because, because of securitization card issuers hold all of the upside.

So if you pay off -- if you're making -- if they squeeze more money out of you at the sweatbox, they get a 100 percent of the upside. But if it turns out to you that they miscalculated and you default, they only have a small percentage of the downside.

This gives them every incentive to credit -- to squeeze harder and to -- and they are able to do that because they are able to change terms retroactively, after the fact. They can lower your credit limit. You know, they can increase the interest rate. They can lard on various late fees, over-limit fees, and so forth. And they can invent whatever fee they want.

And because they have 100 percent of the upside, but only a limited percentage of the downside, and the percentage is going to depend on the particulars of their securitization deal, this gives them -- this really encourages them to squeeze consumers harder.

This is like a water balloon. And if they squeeze it too hard and it pops, it's not so bad for them. They know that most of the water gets on someone else. But if they can squeeze it really hard and it doesn't pop, well, I'm not sure what you get with a water balloon with that, but I think you see my point, that they get all the benefit.

SEN. WHITEHOUSE: Let me go to Mr. Corey first and Professor Scarberry.

MR. COREY: Senator, the situation is also -- I've again, I've talked to a lot of friends about this since it's a very hot topic amongst people in the middle class, but a friend of mine had a 2.9 rate, and they got a notice saying that the rate was going up to 14.99 for no reason whatsoever, just because we can.

And literally she said that the conversation that she had with this person was, she said, well, I'm just going to close my account. She had very little on that particular account. And I'll close and pay it off. And then the woman on the other line said specifically that we really -- if you want to close it, that's fine because we're going to get someone who has a lower credit rating and get them at a higher interest rate. So if you want to leave, go right ahead.

And that's really what's going on, that they don't care with people with good -- they don't want people who are responsible and what not. If you want to leave and go to other business, that's fine. You can take your card and go somewhere else, we don't care.

And they are eliminating again. They are already eliminating credit levels for everyone already. So I'm kind of having a hard time understanding what folks are saying about banks are -- this would eliminate banks from giving out credit, they already are, when people need it.

SEN. WHITEHOUSE: Professor Scarberry?

MR. SCARBERRY: Senator, one of the points that's been made is that this bill would allow consumers to call up a credit card company and negotiate. You know, you've raised my rate because of a default, and I may have to go into bankruptcy. So why don't you lower the rate because if I go into bankruptcy, you're going to -- your claim is not going to be allowed.

Well, one of the problems with the definition of the high-cost consumer debt here is that after the rate for one day goes above the limit, that debt is forever tainted. So a negotiation with the creditor to say, would you please lower the rate, well, they don't have a lot to gain because they can't redeem that debt from -- now being tainted. It was at some point during its life, over the limit. So that's a difficulty. The other difficulty with the negotiation issue --

SEN. WHITEHOUSE: Although, just to be clear, if the customer as a result does not go into bankruptcy, then that so-called taint has no effect.

MR. SCARBERRY: That is correct, that is correct. The other difficulty with negotiating is that if you have multiple credit cards, which people seem to have, it's difficult to do multiparty negotiations where if the point is, well, I can stay out of bankruptcy if you lower it, well, I mean, people can negotiate that already because already the credit card companies aren't going to get much in a bankruptcy.

So I don't know that this bill adds to that leverage. It does taint the debt forever. But when you have multiple credit cards, it's difficult to coordinate a negotiation. And people dealing with economics will talk about difficulties of these multiparty -- the transaction costs go high. So that's an issue.

Now, there's one other technical issue. Suppose the rate goes up above the limit on a credit card balance for a few months, then the debtor makes a lot of payments. Then, okay, the credit card company reduces it.

How do we decide when the taint is gone? Is it after all of the principal balance after principle payments have been made equal to the principal balance at that time? Ten years later, is that credit card account still tainted because at one time for some of the credit that was issued on that credit card the rate was over. How are we going to figure what is the debt on which the credit was over the limit?

And that's a practical question that bankruptcy judges and trustees might have to deal with. And I also wonder if bankruptcy trustees will appreciate having the burden of going through all the credit cards to figure this out. They might have time to, but those are concerns I have about that.

MS. GAMBARDELLA: I want to take up that last point because it was raised, who would have standing to move to disallow these claims, who would have the incentive to review these claims. Certainly, there are many no-asset Chapter 7 cases that just go through the system and there probably is very little incentive there.

But there are certainly in certain districts asset -- (inaudible) -- where there is substantial debt in substantial assets. And I think a vigorous trustee would have an interest in going after certain category of claims that could be disallowed to increase payment to the bona fide unsecured debt in a given case.

And the Chapter 13, which is the repayment plan, I would think that a Chapter 13 trustee who oversees these plans and the debtor's counsel would have equal incentive to review these claims. So I think there are parties withstanding an incentive to investigate and to make hopefully rational decisions about what -- when a motion for disallowance should be brought before a judge and when it shouldn't. That's the one point I wanted to bring up from the testimony prior --

SEN. WHITEHOUSE: Let me make -- ask one last question, and then if anybody has anything final they'd like to add, we'll do that, and then conclude the hearing.

There's been the repeated suggestion in the hearing that by any substantive regulation of interest rates, we risk denying people credit and that -- there's almost a tone as if that this would be some sort of novelty or anomaly.

My understanding is that back to biblical days, interest rates have been substantively regulated, and that from biblical times, until I guess, 1978, when the market position came out, and then a tail after that as the banking industry became aware of the opportunity that the market position provided and began to move its operations to no-protection states and operate out of those so that they could get out from under local usury laws, which I think almost every state had.

Indeed if I recall correctly, some of the states actually got rid of their usury laws as a means of attracting the business of the credit card companies to come to their states, so from there they could launch unrestricted marketing efforts and unrestricted interest rates around the rest of the country, notwithstanding, for instance, the Rhode Island legislatures desire to protect Rhode Islanders. Nothing we can do about it, said this decision.

So it strikes me as if the baseline on this is a multi-thousand year baseline of generally consistent substantive interest rate regulation, and that if there is an anomaly, the anomaly has been the last 30 years -- actually probably less than 30 because it took a while for the banking industry to catch on with the -- to the door that the market position had opened. And that actually we're in the period of anomaly right now. And so to move towards more substantive regulation would be consistent with the entire sort of legal, common law, and regulatory history of our culture dating back to its very earliest days.

MR. JOHN: May I bite on that one? (Laughs.)

SEN. WHITEHOUSE: Please.

MR. JOHN: There are two other factors that come into play here however, which is that prior to -- (inaudible) -- credit was not regularly available to certain groups of consumers. It's one of the reasons, for instance, in Rhode Island they had such a heavy retail presence of credit unions and such a small consumer presence of banks up until relatively recently.

So there has been a result, which is that the groups, the three groups that I talked about, the lower and middle income workers, the first-time borrowers, and those with poor credit histories, they now have much more credit available to them than they would have otherwise.

The other factor which comes into play with Senator Sanders' legislation is that he does talk about what the credit unions do. And I have great respect for credit unions, I am a member of a credit union, I once lobbied for credit unions. However, they are tax exempt. So it seems only fair if he is going to put a 15 percent ceiling on there, that he should also take away the taxes on bank credit activities.

SEN. WHITEHOUSE: I'm sure he'll take that recommendation under consideration. (Laughs.)

Well, if there's nothing further, I just want to express my appreciation to all of the witnesses who have shared from their personal experiences and from their judicial experiences, from their academic experiences and have been, I think, both thoughtful and helpful.

I express my appreciation also to the ranking member. Unfortunately he was called away, but clearly, this is a matter of interest to him, and to the chairman of the judiciary department -- judiciary committee, Chairman Leahy, for his interest in this and his statement, and for our majority rep Senator Durbin and Senator Sanders for their attendance.

The record of this proceeding will be open seven days if anybody seeks to add anything further. And with that, the hearing is now adjourned. (Sounds gavel.)

END.

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