LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

March 16, 1999, Tuesday

SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 1766 words

HEADLINE: TESTIMONY March 16, 1999 FRANK TORRES LEGISLATIVE COUNSEL CONSUMERS UNION HOUSE JUDICIARY COMMERCIAL AND ADMINISTRATIVE LAW BANKRUPTCY REVISION

BODY:
WRITTEN STATEMENT OF FRANK TORRES LEGISLATIVE COUNSEL CONSUMERS UNION BEFORE THE COMMERCIAL AND ADMINISTRATIVE LAW SUBCOMMITTEE OF THE COMMITTEE ON THE JUDICIARY UNITED STATES HOUSE OF REPRESENTATIVES MARCH 16, 1999 Chairman Gekas, Members of the Committee, my name Frank Torres and I am Legislative Counsel in the Washington office of Consumers Union, the not-for-profit publisher of Consumer Reports magazine. Thank you for this opportunity to speak you about bankruptcy reform, and in particular ways to give consumers the opportunity to better understand the credit offered to them, and get at practices of the credit industry that stack the deck against consumers. Consumers Union, as well as a wide range of other organizations, including groups representing women and children, lower income consumers, labor, the victims of crimes, and the civil rights community, are concerned about the impact of bankruptcy on hardworking Americans. One way to stem the number of bankruptcies is to help people avoid getting into trouble in the first place. Just because American families are using the bankruptcy system, does not mean that they are abusing the system. Rather, these are families facing job loss or downsizing, medical expenses they cannot afford to pay, and in some cases, these are women and children going through divorce. Not all have benefited in the same way from what has been characterized as these good economic times. In fact, many are just now seeing an increase in earnings, and income inequality between the top earners and the rest of the workforce appears to be increasing. A new report from the Federal Reserve Bank of New York concluded that debt burdens among cardholders is the reason for the recent rise in bad debt. New borrowers are riskier (and more profitable for the credit industry as they get charged higher rates) owe substantially more relative to their income, so even small drops in income can cause financial distress. These borrowers are more likely to work in relatively unskilled jobs. Delinquencies are higher among such workers, the report found, because their income is more closely tied to the business cycle. Thus, a mild economic slowdown can trigger a rise in bad debt. It seems disingenuous for creditors to complain about the high number of bankruptcies when their behavior encourages bankruptcies. First, work to raise all boats. Provide hard working American families the tools they need to fully participate in society, including: - Providing for meaningful health care and retirement security. - Ensuring access to appropriate financial products through true marketplace competition and that taxpayer-backed financial institutions offer basic banking, accounts. - Eliminating scams that take money from consumers, and are often targeted at the elderly, minorities and lower income consumers. Second, level the playing field. Credit card issuers can change the terms of the deal at any time. And they have, finding new ways to generate fee income by raising fees and changing other payment terms such as due dates and grace periods. Some may not know how much carrying a balance and making a minimum payment will cost them. Any reform should ensure consumers have adequate information about their choices with respect to consumer credit. responsible debtors are not penalized, and minors are protected. What can be done? Enhance disclosures to consumer about the consequences of making minimum payments. Many lenders encourage minimum payments that do not pay down the loan. Currently, credit card statements, unlike mortgage loans and car loans, do not disclose the amortization rates or the total interest that will be paid the cardholder makes only the minimum monthly payment. Using a typical minimum monthly payment rate on a credit card, it would take '34 years to pay off a $2,500 loan, and total payments would exceed 300 percent of the original principle. Jane Bryant Quinn quote. People don't understand how it works and the credit industry knows it and acts on it. Ensure that no credit cards are provided to minors unless there is demonstrated ability to repay or a parent or other adult cosigns. The credit industry has targeted students and minors with little or no income. Direct solicitation to both college and high school students have intensified. Cards are available to almost any student -- no income, no credit history and no parental signature required. What credit problems mean, continue to pay high interest if late on payment, raise cost of buying a home, etc. "Targeting Teens: You Never Forget Your First Card!" Most teens never forget their first love. Nor do they forget the issuer who dares to accept their application. Their brand loyalty and propensity to spend make consumers in their mid-to late teens priced prospects for many card issuers." Agenda for Card Marketing Conference '98, November 9-11, 1998. Prohibit penalties or card cancellations for consumers who pay the full balance owned on a credit in any month. Another way creditors increase their fee income is by penalizing consumers who pay off their balances. Several companies have instituted charges or even canceled credit cards for customers who pay in full each month, preferring customers with large credit balances who pay minimum monthly payments. Rebecca had a MasterCard account with Mellon Bank for 14 years. She says that she that she had been "diligently paying off debt," so she had not used her card in some time, "and in fact had not been overly, zealous in checking my bill." But last July, shoe looked at her statement and noticed a charge of approximately $50. When She called the bank to ask what the charge was for, she was told that Mellon was charging her for not suing her card in six months. The customer service representative advised her to use her card more often in order to avoid the charge, but Rebecca felt that her "$30 annual fee and interest on her remaining balance should be enough," so she told the representative that she was canceling her account. Though she had been a customer for so many years, no one tried to talk Rebecca out of the cancellation. Require full disclosure of security interests on credit card purchases that could lead to later threats of repossession of household items. Enhance disclosure concerning "teaser" rates. Credit solicitations sometimes offer misleading "teaser rates of interest. Teaser rates are designed to encourage consumers to run up balances when the rate is low, but often the balances will inevitably be paid back at a much higher rate or hidden terms, such as one late payment, triggering higher rates. Third, do something about the abusive practices of debt collectors. People and families trying to work with their creditors to pay down their debts are sometimes turned away. Mr. Larry Nuss, testifying last week for the Credit Union National Association on bankruptcy reform stated that the action of debt collectors is a primary reason why people file for bankruptcy. It is unfair that on the one hand creditors argue that debtors are irresponsible, then shun those that seek to work out payment plans rather than avoid their debt. Moreover, it seems counterproductive to pursue aggressive collection activities that effectively drive those willing to continue to make payments into bankruptcy. "Client rate collection practices as the No. I reason why they file for bankruptcy," according to the National Foundation for Consumer Credit, Dogged by the Debt Collectors: Bankruptcy Often no Protection from Vicious Hounding: Negotiation is Fading Option, USA Today, Christine Dugas, Nov. 20, 1998 Fourth, reexamine the need for reform. The credit community has effectively removed the "stigma" of bankruptcy. Perhaps a Texas court best summed this up: The court recently saw evidence that during the first two years of a five-year Chapter 13 plan; the debtors received 53 credit card solicitation. These actions and frequent advertisements by various creditors that the credit community no longer shuns persons who take bankruptcy, but rather actively solicit their business. The credit community has effectively removed the "stigma" of bankruptcy. Bankruptcy judges and most bankruptcy lawyers have always advocated that bankruptcy be a last resort for those in financial difficulty. By making post-bankruptcy credit readily available, the credit community is encouraging those with financial difficulty to take bankruptcy. The credit community should not complain because its actions were successful and resulted in additional bankruptcy filings. In re Bain, 223 B.R. 343, 344 n2 (Bankr. N.D. Tex. 1998). "Guaranteed Approved" Visa or MasterCard "Regardless of Past Credit History or Bankruptcy." Advertisement for credit cards from the Fair Credit Association. "Have hanks turned their backs on you?" You qualify for a Capital One MasterCard "even if you've been turned down in the past." Advertisement for a Capital One credit card. New information shows that fewer filing for bankruptcy can repay. There is new information from the American Bankruptcy Institute that finds that only three percent of people who file under Chapter 7 can afford to repay their debt. This finding contradicts earlier industry funded studies that contend that a higher percentage of people filing for bankruptcy can repay. There is nothing in the bill that requires that any cost savings from bankruptcy reform be passed on to consumers. Conclusion It is vital to proceed with caution and deliberation. By allowing creditors to collect more debt. bankruptcy reforms could encourage credit card banks to market and extend credit more aggressively. Thus, it is quite possible that the reforms proposed could actually aggravate the problem of consumer financial insolvency. To the extent that there is actual abuse of the system by those who have the ability to repay, perhaps now is the time to aive more discretion to bankruptcy judges. At a minimum, careful consideration should be given to their suggestions as to how to make the system better. It is our understanding that the Committee will be hearing from bankruptcy Judges in another panel. Bankruptcy is complex and there are many other issues and controversies -- child support and alimony, cramdowns, reaffirmations, creditor motions, dischargeability. We will continue to work to resolve these issues in a reasonable way. Once again, I want to thank you for the opportunity to appear before you today. Please let me know if we can be of any further assistance to the Committee.

LOAD-DATE: March 18, 1999