[Music]
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tonight on Frontline the average
American family has eight 0% for life on
Earth four valences credit cards plastic
money have become both the necessity and
a ticket to a better life a credit card
is an extraordinary unbelievably great
convenience for the consumer but the
credit card industry plays by its own
rules
I don't know any merchant in America who
can change the price after you've bought
the item accept a credit card company
credit card banks earn record profits
and VNA's profits last year one and a
half times that of McDonald's I'm aghast
to to last year but the profits come at
a price now they've raised my rate to
nineteen point nine eight and I have not
been late
ever there are irritated unhappy
dissatisfied customers destined stream
they are the new loan sharks in America
I certainly didn't imagine that someday
we might have ended up creating a
Frankenstein Frankenstein what do you
mean Frankenstein tonight frontline
correspondent Lowell Bergman and the New
York Times investigate the secrets of
your credit card
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this may seem an unlikely place to begin
the modern history of the credit card
more than a thousand miles from Wall
Street on the panelled halls of the
Federal Reserve in Washington but this
is where the credit card business first
began to really take off
[Music]
this is Sioux Falls South Dakota a
modest town of 140,000 known for its
cattle auctions and meatpacking industry
it's a town which boasts a huge post
office big enough to service a city
several times its size every day
millions of pieces of mail pass through
here and from here millions of credit
card solicitations and bills are sent to
mailboxes across America and billions of
dollars in credit card payments come in
from around the world today Sioux Falls
is one of the major credit card
processing centers in the country it all
happened in Sioux Falls because a
quarter of a century ago times were hard
in South Dakota there was a nationwide
recession with double-digit inflation
money was very tight South Dakota banks
were issuing very few mortgages or loans
of any kind interest rates were going
into orbit they were climbing all the
time so Bill Janklow was then the
governor of South Dakota when I became
to the governor's office South Dakota
had very tight historical laws on what
you could charge to borrow in other
words there was one interest rate by law
that they could charge for new cars
another one for used cars
it was highly regulated what interest
rates people could pay what I'm trying
to say is we may have a law that said
you could charge nine percent but money
cost eleven percent so thanks weren't
loaning money to get the banks to issue
loans South Dakota decided to eliminate
its historic cap on interest rates known
as a usury law we had actually changed
some of our laws in 79 and we had
previously introduced legislation and
passed legislation or were passing
legislation to lift the ceilings on
usury so we could free up and get
capital in South Dakota at the same time
across the country in New York City
a legendary banker had his own problems
oh it's very simple we're going and
broke Walter Wriston then chairman of
Citibank had a credit card division that
was hemorrhaging money
new york's usury laws prohibited banks
from charging more than 12% on most
consumer loans an interest rates went up
to 20% and if you are lending money at
12% in paying 20% you don't have to be
Einstein to realize you're out of
business
it was costing Citibank 20% for money
and you were only getting four percent
back certainly because of the limit on
interests yes there was no way that you
could continue so Wriston and Citibank
began looking for a new place to do
business so we made a study of the five
states that had either no usury law or
very high amounts one of them was South
Dakota so he said look we'll bring a
couple of thousand jobs out here in 1981
Citibank moved its credit-card operation
from New York to South Dakota from the
time I met them until we passed our
legislation it was just several weeks I
mean we really moved that that was a
good deal for us it was a hell of a deal
for them what did they get out of us
what Citibank out of it they got to stay
alive but what really attracted Citibank
to South Dakota was an obscure Supreme
Court decision that said a bank could
now export its interest rate to other
states
it was called the Marquette decision the
Marquette Bank decision was a US Supreme
Court the decision that said forget
where the bank is chartered wherever the
credit decision is made in whatever
state that's the place where you can
apply interest wherever you make the
loan in other words the South Dakota had
a 25% ceiling then you could charge 25%
given to a loan in Florida
Janklow realized that the Marquette
decision meant that South Dakota could
become the credit card capital of
America in a very short period of time
matter of a few months I was meeting
with the chairman of the board of Bank
of America with first Chicago of
Illinois Chase Manhattan Bank
manufacturers Hanover Bank Chemical Bank
Bank in New York all the big banks in
America because only South Dakota at
that point in time appeared to be
willing to to move forward to invite
people to come in but soon another state
got into the act
Delaware copied South Dakota's
legislation and Wilmington soon became
the credit card center of the East
luring other New York banks and giving
rise to new companies like MBNA for the
first time in American history there
were no legal restrictions on the
interest rates banks could charge on
credit cards nationwide look at the
Marquette decision and say alright maybe
it took the lid off but what it did was
it had a very egalitarian effect
Duncan McDonald is the former general
counsel of city banks credit card
division
he says the Marquette decision allowed
bankers to charge higher interest rates
to riskier customers the minute
Marquette came along you could jack the
price up a little bit more to cover
those people and as a result tens of
millions of people who were paying
thirty and thirty five percent interest
rates the small loan companies all of a
sudden got the product at 19 percentage
is rate an annual fee of $20 so in that
sense it was very egalitarian and very
good and very good for banking as the
deregulation of interest rates enabled
more people to get credit cards the
industry began to expand
and became the most profitable sector of
banking with 30 billion dollars in
profits last year we wanted to talk to
the executives of the major credit card
banks about their business but were
directed instead to the American Bankers
Association we've asked for interviews
with all the major credit card companies
they won't talk to us why that's our job
they pay us dues to handle these cases
sometimes difficult assignments edie
Yingling is the incoming president of
the American Bankers Association and the
industry's top lobbyist how profitable
is the credit card business the credit
card business is profitable you would
expect the credit card business to be
somewhat more profitable than the rest
of the industry or parts of the industry
because it's riskier it is an unsecured
loan and so you would expect the returns
to be a little higher wasn't last year
record profits for this industry and
they're expected again this year yeah
but compared to what is not an unusually
profitable business compared to other
businesses MBAs profits last year one
and a half times that of McDonald's oh
my god - - last year in the NBA is a big
company citi bank more profitable than
Microsoft Walmart and the executives are
highly paid right these are these are a
really big businesses and they do make
money
today nearly 144 million Americans have
credit cards and they are using their
cards like never before charging 1.5
trillion dollars last year alone credit
cards have become an essential part of
the American economy I really can't say
that I love my credit card but I would
hate to live without it I use it a lot
for work it's easy it's easy access I
can take clients out for dinner I take
advantage of the miles we fly first
class on vacations it's nice to be able
to spend what you don't have can you
imagine living without a credit card in
this society it's hard to imagine we sat
down with a group of credit card
customers to talk about how they use
their cards where consumers American
loves to consume in our blood it is like
an addiction I mean I have this new
credit card in my pocket look at that
great dress so I can do it I really
shouldn't do it I'll just pay it off
later and you do it mm-hmm I don't have
that iPod I'm not cool yeah
so I can charge and pay it off and
christmas is just around the corner
there's always something there just a
gift for the traveler which I am a very
very very frequent traveler indeed is
what I am they are indispensable actor
and author Ben Stein loves the
convenience of using his credit cards
credit cards are an incredible deal for
me I mean I had lots and lots of
different cards I mean my wallet is just
stuffed with cards it's just insane
it's just ridiculous I look like I I
look like I've got a third breast from
my carrying around like wallet with so
many credit cards in it
Stein says he charges thousands of
dollars a month in business expenses on
his credit cards I use all their good
services and they don't make any money
from me
I mean none to speak of oh wait here's a
kind of q1 the credit card companies do
make a percentage on each transaction
but Stein is not their ideal customer
because like 55 million Americans he
pays his bills off every month and
doesn't pay any interest the credit card
companies hate people like me to pay off
our bills every month and I know that
because I ran into a fellow I went to
high school with on the street and he
told me he worked for a credit card
company and I told him about how much I
used credit cards now I paid him off
every month and he said oh we got we
hate you we hate you guys we call you
deadbeats deadbeats in the upside-down
world of the credit card business are
the people like Ben Stein who pay off
their bills on time the industry's best
customers are the 90 million Americans
who don't pay off their credit card debt
they're called the revolvers people in
the industry tell us that their
revolvers people who borrow money
basically with their credit card that's
where the profits are I don't think
that's where all the profits are well I
think it is generally understood that
those that use the revolving part of the
credit card are kind of the sweet spot
today the sweet spot as mr. Yingling
calls it continues to grow and the top
interest rates charged are higher than
ever before according to Robert McKinley
who founded card Webb a research firm
that tracks the industry the top ten is
shorts in the country are charging
interest rates of 25 to 30 percent to
some of their customers and this is in a
market where interest rates are at a
40-year low we have consumers paying
interest rates that would be considered
loan sharks in my day at the same time
Americans with credit card balances are
carrying a record amount of debt how
much credit card debt is the average
American family carrying about $8,000
for those who are carrying some debt
Elizabeth Warren is a Harvard Law
yes sir she has researched the growing
credit-card debt held by middle-class
families and how it can lead to big
trouble and what families are
discovering even with mom and dad in the
workplaces they often can't make it to
the end of the month and so they often
use credit cards to bridge the gap they
borrow to make ends meet and then what
happens is something goes wrong
somebody loses a job somebody gets sick
family breaks apart through death or
divorce
like most Americans Jim and Juanita
Muller managed to pay their credit card
bills each month until they both lost
their jobs we didn't have any emergency
funds set aside so they kind of became
our emergency fund to fund our life
while we were waiting for the employment
to come along so you borrow from the
credit card and pay that month and then
the job doesn't happen so now you got to
borrow more and we just kept digging
deeper and deeper and we started robbing
Peter to pay Paul as the expression goes
you know take money from a credit card
to pay other credit cards and that just
increases it it's then that's where it
really started to snowball as the
Muellers fell behind their credit card
companies began to apply penalty
interest rates and fees to their bills
do you remember when the interest rates
started to rise some of them one late
payment and forget your old interest
deal that you had so I don't forget the
fact that you had the credit card for a
number of years and we're paying on it
regularly we're never late and as soon
as you make what you've missed one
payment it's like all deals are off
everything goes up I mean some of the
credit cards we had were nine percent or
less all of a sudden they're 24 25%
because oh well you're late you've been
late several months and now we're gonna
raise your interest rate and we're
charging you the late fee and now
because the interest rate and late fees
have accumulated now you're over your
limit so as an over-limit fee the
Muellers credit card debt eventually
grew to nearly $80,000 on ten cards
they found that they could no longer
keep up with their payments and had to
file for bankruptcy they were one of a
record seven million families to file in
the last five years it wasn't that we
didn't want to pay off our our credit
cards it's we got the point where it was
impossible it was just I mean short of a
rich relative which neither one of us
have dying and leaving us a hundred
thousand dollars nothing was going to
happen because the credit card companies
weren't they weren't willing to work
with us unless they got all their money
but as fast as possible the main things
that trigger a bankruptcy filing are a
job loss a medical problem or family
breakup without those things most
American families can deal with their
credit card debt but high credit card
debt puts them at much greater risk so
that if they stumble if they get hit by
one of the other blows they get their
feet tangled up in those high interest
rates and they just get sunk 0% for life
on transfer balances and a 3 up to 3%
cashback bonus ironically the Muellers
are still getting offers for more credit
cards you're still getting solicitations
in the mail yesterday from a credit card
company that told me I would never have
credit with them again the last times I
talked with them and told them what our
situation was they said well we're
cancelling your card and you are in
essence blackballed with us for life
you'll never have a credit card from us
ever again
yesterday received a solicitation from
them 0% for life with up to a fifty
thousand dollar line of credit
diapers milk and laundry detergent
$25.00 spend more time with your family
priceless
encouraging Americans to take on credit
card debt is critical to the
profitability of the industry call now
to request the City advantage world
MasterCard and you can earn free award
travel plus get 10,000 bonus mile
making it easier and more attractive to
spend has been the job of Madison Avenue
marketers
tool belt and chrome toolset $126
getting some use out of it priceless
there are some things money can't buy
for Father's Day there's MasterCard but
the success of the industry has also
relied on financial innovators like this
man
Andrew car whose peculiar genius
industry insiders say has helped shape
the way the credit card business works
car a consultant who rarely consents to
interviews only agreed to talk with us
if we did not identify his clients or
where he is currently living give me an
idea of from the time you got involved
late 70s with credit cards the idea is
the innovations that you've come up with
well I convinced the client that instead
of having five percent of the balance as
a minimum payment we should reduce that
to two percent which is a very dramatic
change less than half before Andrew Carr
got involved in the industry most
bankers required that customers pay five
percent of their credit card balance
every month Carr realized that if
customers were able to pay less they
would borrow more you were able to
explain that it was people making low
payments who were the most profitable
having a lower minimum payment allows
you to offer higher credit lines which
first of all makes your card product
more attractive because people judge
even if they don't intend to use the
whole line they would rather have a
higher line the high balance account
will be much more profitable than the
low balance accounts because they're
paying interest because they're paying
interest on a higher balance today cars
2% minimum is a common feature on
millions of credit card bills and every
month some 35 million Americans pay only
the minimum payment by the way while
you're running up balances on your
credit cards we currently have balances
and your credit cards do you have cash
in the bank yeah yeah
I can wipe my debt out so why don't you
do it I felt it's the nest egg you never
know what's gonna happen tomorrow you
might need that money for something else
so even though you're paying
double-digit interest and you could get
rid of the balance or most of it you're
gonna still make those payments and keep
the cash in your bank account all right
Andrew Kars research showed that making
the minimum payment eased consumers
anxiety about carrying large amounts of
credit card debt they believed they were
being financially prudent if you lose
your job or you you know something bad
happens you have to have money and you
don't want to live off of a credit card
so you need to have that money hid you
know saved somewhere in case something
happens in fact the industry was reaping
huge profits from Andrew Carr's
intuition about people's behavior but
then in the late 90s car says he had a
new insight customers were being flooded
with competitive offers for low-interest
cards people were offering 12.9%
interest for the first six months 10.9%
on balance transfers and I convinced a
client to go straight to zero percent as
an introductory rate it gave them
competitive advantage it led to of
course the others also going to 0% car
knew that even though the 0% offer could
easily change people would still be
attracted to the bait when you're
getting something in the mail several
times a week that offers you 0% for 6
months they look at the headlines of the
solicitation of the mail they spend 30
seconds on it and ok I'm going to be
better off at the beginning they're
going to give me something they're gonna
give me 0% rate people believe what they
want to believe 0% APR what does this
mean I mean you're saying that's
meaningless most cases if you were to
sign up for this card the bank will
honor that rate through that period of
time but there's a lot of fine print
that goes with what could happen for
example if you were to miss one payment
this rate will go away immediately
according to McKinley the key to
understanding how credit cards are
marketed lies in the great digital
revolution the amassing of data on
American consumers well there's a
goldmine of information residing out
there in these databases by the consumer
reporting agencies the credit bureaus
they're collecting information about
what kind of accounts you have opened
the balances whether or not you make
those payments on time and that's a huge
reservoir of information there that they
can tap into and be able to get a sense
as to whether or not a consumer is a
revolver someone who doesn't pay the
balance off in full each month so they
can kind of sift those out and and and
today it's really become almost surgical
the ability to surgically target
consumers and track their financial
behavior has become a booming business
dominated by three credit reporting
agencies which gather information all
that data is then crunched by a
little-known company called Fair Isaac
which calculates a number called a FICO
score for almost every American with a
credit history we're not a credit
reporting agency like an Equifax
TransUnion or Experian that's gathering
information daily on consumers and
building up consumer records Tom Quinn
is a spokesman for fair Isaac we simply
work with the credit reporting agencies
and they deploy their data onto our
mathematical formula to create that
score the median FICO score is 720 out
of a possible 850 the riskiest customers
have scores below 600 the score is an
indication of how likely you are to pay
your bills lenders use that score almost
like a thermometer to determine if
they're going to grant credit or not so
the algorithm is an indication of that
consumers feature of risk in terms of
credit behavior algorithm meaning a
mathematical formula math not yes
mathematical formula and how many people
have this number we estimate that
approximately 75% of the US population
that is eligible for credit ie those who
are 18 years or older have a FICO score
at any given time you know your credit
score you're not aware that you have a
cred
SCOR I'm aware that I have one I don't
know what it is right yeah I don't know
what it is I don't know what it is
either so if I said to you the words
FICO score do you know what a FICO score
is I know the terms I'm not clear on
what they are I've never had gotten my
credit score an individual's FICO score
often determines how much interest he
will pay on a credit card the terms and
conditions of the card are laid out in
the fine print of this contract when I
get a credit card there's a contract
that goes along with it what kind of
contract is this because I never read it
have you ever read it when it thank you
I'd have to admit most cases I may have
just glanced at it you know it's filled
with so many legal terms and so many
pages and such small print and it can be
intimidating I think it says that I'm
guarantee the terms of a loan for as
long as I have the card yeah well you
know things that the one unique thing
about the credit card business is that
the issuer can change the terms and
conditions at will without asking my
permission absolutely they can change at
all it only takes 15 days notice to make
those changes I mean you could be
offered a five or six percent interest
rate today and perhaps get it two months
later that could be 30 percent there's
nothing to prevent the issuer from
changing those conditions even professor
Elizabeth Warren an expert on contract
law says she has a hard time deciphering
her contract I've read my credit card
agreement and I can't figure out the
terms
I teach contract law and the underlying
premise of contract law is the two
parties to the contract understand what
the terms are have you ever read the
contract that sent to you with your
credit card yes but I'm a lawyer you
understand it I do understand it I think
it'd be very hard for a lot of people to
understand and I think it's a constant
battle to try to figure out how you make
disclosures and those types of things in
plain English so that somebody will read
them Edie angling says the fact that the
contracts are difficult to understand is
not the industry's fault
our disclosures are very explicitly set
forth in law and in regulation much more
so than in most consumer contracts ours
are heavily regulated they say the
contract contains information even the
typeface that's mandated by law laws
laws that's the point now the laws are
inadequate there's not enough there
these guys have figured out the best way
to compete is to put a smiley face in
your commercials a low introductory rate
and hire a team of MBAs to lay traps in
the fine print one of those traps
according to Warren and other critics is
something called universal default if
you do miss a mortgage payment you do
miss a car payment any other it can
trigger what is called a universal
default they actually have the right to
change it if you miss a payment with
another creditor or in some cases even
if there's a change in your
creditworthiness in fact you don't have
to miss a payment you don't have to go
over your credit limit to be in default
you could for example or maybe your
balances are too high this if you've
seen one of these right before it I want
to read you something from a contract
you're APRs also may vary if you are in
default under this agreement or any
other agreement that you have with us or
any other related companies for any of
the following reasons
you fail to make a payment to another
creditor when do do you understand what
this means you do do you know that it
means that if you fail to make a payment
and are late on anything else that
you're paying on your house your car
anything else they will find out and
they can change your interest rate did
you know that side no I have no idea
this is the first I've ever heard that
why is it we go
well because it's disclosed in the
contract doesn't seem fair even you've
done no harm to the company themselves
you're late with someone else
you haven't affected your standing with
that company no it doesn't seem fair
that they would suddenly say oh now we
can raise a rate they're taking van
if someone who is in that position
that's what andrew guile of Wilmington
Delaware says happened to him
yes I had gotten a letter from MBNA
several months ago that my rate was
going to be increased MBNA raised his
eight point nine percent interest rate
to nineteen point nine percent in DeLand
his minimum monthly payments nearly
doubled they told me the first time that
my rate had been raised because they
found an occasion back in 1998 when I'd
gone sixty days past due on a
competitor's credit card and I asked
them what in the world does that have to
do with MBNA especially being six years
ago I said that has nothing to do with
my account here I mean that absolutely
took my breath away when Kyle protested
he says he was given another reason for
the change
he had become riskier he was told
because his account balances with other
creditors were too high I was a great
customer at MBNA always paid my balances
on time paid more than the minimum
balance you know many times paying it
down completely but I was I was never
late I used the card in a wise and
responsible manner
frontline wanted to ask MBNA about
Kyle's problem but we were told they
never comment on an individual's account
but just two months after our interview
Kyle says he got a call from the office
of the president of MBNA saying they
would move his interest rate back to
eight point nine percent the real
question here is whether or not you can
change the price not for new items you
buy after your credit score has changed
but for old credit that you've already
taken out my mortgage company agreed to
an interest rate and if I lost my job my
mortgage company does not get to double
my mortgage credit card companies can
say remember how you bought the
big-screen TV at 9.8 percent Interest
we've decided we want twenty nine point
nine percent interest and there's not a
darn thing you can do about it right now
the contract allows a credit card
company to change the interest rate
on money you borrow from them after you
borrowed it oh that's some do it depends
on the contract but a lot of them do if
they find out through this information
system that you've been late on your
payment for your automobile they they
can notify you and that you're going to
change the interest rate on the money
they've already lent you and I think
there is a misunderstanding about what
the credit card agreement is my
agreement with you is you've come to me
you have a certain credit score and
based on that credit score I'm going to
charge you 12% if in the future it turns
out that your credit score has
deteriorated and you now are more risky
to me I'm going to charge you the
interest rate I would charge to somebody
that has that credit score is it fair to
change the price of the deal after the
fact the product is not a promise to
somebody that we will lend you that
amount of money forever at that interest
rate it is a very short term revolving
line of credit it's dishonest plain and
simple it's dishonest they may say it's
good business for their financial bottom
line but it is a very poor way to treat
a customer
in 1996 another important Supreme Court
decision opened the door to bigger
profits for the credit card industry and
a raft of new complaints from their
customers that decision Smyly versus
Citibank much like the Marquette
decision before it lifted state
restrictions this time on the fees that
credit card banks could charge we were
working this thing here for a good cause
free market pricing Duncan McDonald was
one of the lawyers who worked on a
smiley case the late fees that were
common across the industry
up until smiley were in the $5 in the
$10 range and the economic thinking was
that there had to be flexibility to
allow up to $15 but one smiley came
along and took the lid off it it went
from 5 to 10 to 15 to 29 and recently
it's gone up to 39
I would guess but it's probably gonna go
up to $50 a year and a half from now I
certainly didn't imagine that someday we
might have ended up creating a
Frankenstein Frankenstein what do you
mean Frankenstein I look at that and I
say to myself is $50 a fair fee plus a
25% interest rate and all these other
fees that are thrown on for folks who
probably not that risky is that fair I
look and I say to myself there's the
Frankenstein we've created something
that that has to be has to be dealt with
since smiley credit card companies have
doubled the amount of revenue they
generate from fees late fees over the
limit fees
return check fees and the like fee
income has gone up much much faster than
interest income in the business so that
the fees are meant as a penalty to make
sure that you pay on time or their
profit stream well they really have
become a profit stream it's not just the
fees that they charge even though
they're three and four times higher than
they were less than 10 years ago that's
the tip of the iceberg when it comes to
the penalty that's inflicted on
consumers with these situations where
they make a late payment it's the
penalty interest rate that really does
the damage your interest rate could
double overnight but just so I
understand that the the interest rates
are not regulated they can change
the interest rate relationship that you
have with them 15 days notice so that's
a major source of profit for them and
the fees are now no longer regulated
that's exactly right it's a that's wide
open we're beginning to see banks do all
this tweaking where they're changing the
interest rates and raising fees adding
new fees all kinds of way they calculate
interest setting the due dates on a
Sunday and a holiday on the hopes that
maybe you'll trip up and get a payment
in late it's become a very anti consumer
marketplace even the industry's top
lobbyist is concerned I think it would
be short-sighted for a credit card
company to have fees that that would
make somebody angry because they're
likely to lose that customer and I think
it's going to cost them more to replace
that customer then they're likely to get
out of the fee you have bankers who
skyrocketed rates from 14% to 25% and
$40 late fees and bad check fees and so
on that fall on the shoulders of the
less well-off yes is something bad has
happened so we need regulation well we
have regulation we have regulation
already the control of currency
regulates all the national banks and
they have very vast powers the Office of
the Comptroller of the currency the OCC
is an obscure Washington agency part of
the Treasury Department and it regulates
the national banks banks like Chase
Citibank and MBNA that issue most of the
credit cards in this country Julie
Williams is the acting Comptroller of
the currency we have three goals to make
sure that the banks don't fail to insure
the integrity of how the banks operate
their their corporate governance and to
make sure that they deal fairly and
honestly with their customers at the
extreme we have the ability to take
enforcement actions and we have done
that we have taken enforcement actions
can you give us an example of how you
have wrought a large institutions attack
well I think the probably the most
conspicuous an example of that would be
the action that we took in connection
with Providian that's not the story they
tell in San Francisco we're in the late
1990s the credit card company Providian
Financial was experiencing double-digit
growth Providian specialized in the
riskiest customers with the lowest
credit scores they were targeting people
with questionable credit or marginal
credit people that couldn't get bank
cards elsewhere that Wallace is the head
of the Better Business Bureau in the San
Francisco area first thing that got our
attention of course were the numbers on
the numbers of complaints Providian was
involved in all kinds of questionable
offers and policies and procedures and
operations complaints about Providian
from around the country came here to
Wallace's office Providian for example
was accepting payments from consumers on
their accounts depositing the checks but
not crediting the account for sometimes
up to several weeks what was the net
result of that invariably the consumer
got a late charge they were holding
payments so that they could charge late
fees and they could charge overdraft
fees and in the central limit fees 50%
of their income or fees not interest on
the money loan well they were pushing
the envelope and they got by with it for
a period of time and they made a lot of
money the Office of the Comptroller of
the currency is the main federal agency
that takes complaints did they come to
your assistance
no they just simply weren't interested
you know the response was well you know
we'll take it from here we'll watch from
here no it's not a problem at this time
for us complaints about Providian were
also coming to June cravette at the san
francisco district attorney's consumer
protection unit and she began to
investigate eventually drawing local
press attention and then a phone call
from
the OCC have you ever heard of the
Office of the Comptroller of the
currency the answer from my perspective
is nope
didn't really know much about it didn't
know exactly what they did and exactly
who they're regulated we've never heard
of them being very active in the area of
consumer litigation or consumer
enforcement actions against the banks
and when the OCC contacted June cravette
she says instead of cooperation they
issued a challenge there were a couple
of meetings where the subject of
preemption was raised preemption yeah
that's where they say because we're the
federal regulator that they have
exclusive authority over the national
banks and therefore we don't have
jurisdiction you San Francisco don't
have jurisdiction yes the San Francisco
District Attorney says to us that they
were told you don't have real
jurisdiction we have real jurisdiction
and indicated to them that they might
want to get out of the case the way that
that worked out was we worked together
with the san francisco district
attorney's office it was a collaborative
process
well they say once you got involved it
was very fruitful what they're telling
us is that the OCC only got involved
once this whole situation became public
that prior to the news publicity that
they were responsible for they had no
contact with the OC city we worked
cooperatively with them when we got
information about what was going on the
joint investigation eventually
culminated in a 300 million dollar
settlement Providian declined to be
interviewed and issued a statement
saying rather than revisit the past the
company is focused on services that
provide real benefits today in
Washington the OCC has been increasingly
asserting its authority and attempting
to curb consumer enforcement actions by
local prosecutors this has sparked a
nationwide bat
led by the attorneys general in all 50
states the OCC is now trying to squeeze
out the state presence to prevent us
from protecting consumers which i think
is ultimately very injurious to
consumers Eliot Spitzer is the Attorney
General of New York State we get
thousands of complaints every year about
credit card issues relating to the major
banks and major card issuers and so we
get these complaints and we try to deal
with the credit card companies but
increasingly over the past number of
years what we have heard back from the
major banks in a variety of contexts is
that we don't need to deal with you
because the OCC has told us indeed has
directed us not to deal with state
enforcement entities isn't this just a
turf battle between the states and a
federal agency it's a one-way turf
battle and by that what I mean is we are
more than happy to acknowledge that the
OCC has jurisdiction across the
financial system when it comes to
certain issues what the OCC is trying to
do is squeeze the states out in the one
area where we have been incredibly
useful which is consumer protection the
state attorneys general mr. Spitzer and
others say that people in our state know
who we are we have a consumer complaint
office and our beef is is that you guys
the OCC want to push them out of the
business of consumer complaints we don't
want to push them out of the business we
are both there protecting consumers what
we have been striving to do is to
individually and
in developing arrangements with the
state's work out the best way to work
cooperatively with them in January of
2004 the OCC declared itself the
exclusive regulator of all the national
banks effectively immunizing the big
credit card issuers from most state
consumer protection laws
the OCC cited the Providian case as
proof of its commitment to consumers I
was dismayed that they used Providian as
the prime example of their ability and
their will to enforce the laws that
pertain to consumers to you they weren't
the white knight who came into San
Francisco and saved consumers from
Providian know we were since the
Providian case the OCC says it has been
more aggressive recently issuing an
advisory admonishing the banks for
misleading the public about practices
like 0% introductory rates and universal
default the OCC itself has acknowledged
that these practices are as they
describe it very troubling but notice
what they didn't do they didn't say and
we're going to prohibit them stop them
those are unfair practices they are
unsafe and unsound and don't do them
instead they said it's a problem look if
they think it's problem then tell the
credit card companies to stop doing it
why don't you simply stop them why don't
you ban those practices when we see
practices that are potentially
problematic we take a variety of actions
so you could tell them to stop and they
would have to do it if we had a basis
for concluding that a bank was involved
in a practice that was unfair or
deceptive if it violated any of the
other many consumer protection standards
that apply to them we can tell them to
stop it immediately
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whatever the occ is doing Pat Wallace
says it hasn't stopped the Better
Business Bureau from being deluge dwith
complaints it's not an accident that the
banking credit card business generates
more complaints nationally across the
country than any other industry now what
does that say to you out of a thousand
industries that we track there number
one I'd say there's a problem here
these things aren't an anomaly all these
complaints have some basis in fact there
are irritated unhappy dissatisfied
customers this industry and we see it
the Better Business Bureau tells us
credit cards and banking and credit
cards together number one problem of all
types of complaints yeah I would have
thought it was like cable satellite
installation I guess you guys use car
deal your members apparently are amongst
that's I would not have thought that
that that was the case critics like
Elizabeth Warren believed that there
would be fewer complaints if the credit
card industry clearly disclosed how its
business works particularly when it
comes to the minimum monthly payment if
people knew that the cost of minimum
monthly payments was that they would
still be paying for yesterday's trip to
the shopping mall for the next 35 years
some people might decide to pay a lot
more than the minimum and the industry
knows that that's why they don't want to
tell you advertising your bills what the
minimum monthly payment is but you don't
tell people how much that might cost you
if you stuck to that minimum daily why
not the disclosure would be wrong
99% of the time because nobody almost
nobody pays exactly the minimum that
minimum every month for the 20 years and
never charges another thing is this
gonna be a hyper-technical expensive
disclosure that nobody would understand
so we are against disclosures that
nobody would understand and that are
wrong we are for disclosures that help
people understand
it's that simple this is a nonsense
argument in the line directly under the
line that says minimum monthly payment
there's a simple sentence that can be
added if you make minimum monthly
payments it will take you how many years
35 years and how many months to pay off
this bill the man who takes credit for
inventing the 2 percent minimum payment
thinks more disclosure is useless this
is a fascination that every now and then
someone with an axe to grind or someone
who thinks he's going to help consumers
has on his mind but if we had a tape and
we ran a computer on transcripts of
10,000 customer service calls with
questions ok I don't think you never
hear that question so I'm kind of
baffled at the artificiality of it I
don't think that's what consumers want
to know because they don't expect to
make minimum payments forever do you
know if you made the minimum payment for
instance on your bill how long it would
take you to pay it off I'm not an RA to
find out I'm just gonna paid off would
you like to know
Arius yeah uh-huh it would inspire me to
put down more it would inspire me and I
think that's probably why they don't put
it down it would inspire a lot more
people to pay more than the minimum
virtually everyone who holds a credit
card one way or the other
under existing laws today and provisions
can be completely taken advantage of by
the credit card industry so there is a
deception going on to get you into the
game once you're in and I've got you in
then if you get out I charge it if you
don't meet your obligations I charge you
move left you move right I've got you so
what are you gonna do about it you know
I've got legislation as I got a bill
there's always a quick answer here and I
don't how far they'll go because I've
tried this in the past I'm not new to
the issue a good deal of the blame for
the crisis of credit card debt we're
seeing in America lies in how the
practices are followed by credit card
companies in the summer of 2004
Senator Dodd introduced a credit card
reform bill that would among other
things require credit card companies to
disclose how long it would take
consumers to pay off their balance but
he is not optimistic that the bill will
pass is many previous attempts to reform
the credit card business have all failed
why haven't you or other lawmakers been
able to put some regulation into place
is it their political power sure there's
no question about it I mean every time
we've tried to offer legislation this
industry has become very very powerful
and and it's very successful in
defeating every legislative attempt
that's been made over the last several
years to inject some responsibility on
the part of this this credit card
industry you critics say that you block
every attempt to pass industry reform or
consumer protection legislation you've
blocked minimum monthly payment
legislation interest cap rates and a ban
on marketing to college students we've
done our best to block bad bills those
are bad bills and we'll continue to do
our best to block them bad for bad for
consumers I want to promise you
something today you know keep on
defeating me and keep on defeating ideas
like this and you look back and wished
we had passed this legislation because
I'll tell you Congress will come along
and they'll take steps far more
egregious in their view than anything
I'm suggesting I'm discussion disclosure
just let people know what the deal is I
think there's a time when the American
consumer it's going to hit the tipping
point on this issue and it's no longer
going to be alright for credit card
companies once they're in financial
trouble to change the interest rates to
load them on with fees and penalties to
just decide that the terms of the
contract they originally signed are no
longer the terms of the contract I think
that day is coming even an industry
insider like Duncan McDonald who worked
at Citibank for nearly 30 years is
deeply concerned I know enough about the
industry and the lawyers in the industry
and there have to be people sitting
there saying we've got to find a way to
deal with it
have we reached that point I don't know
but my guess is there's the debate going
on and I hope there's a debate on what a
tragedy it would be if there isn't the
tragedy would be what the status quo
gets worse the sky squall is bad and
then it gets worse profits keep tin 25%
bed rates become 30% bed rates and late
fees become $50 and $60 in so on back in
South Dakota the man who helped the
industry take off in the 1980s has mixed
feelings about what he helped create he
ever reflect on the fact that this great
success which has been a great benefit
to your state at the same time has
helped create a way of borrowing money
spending money that may have gotten out
of control
I think the answer this yes I mean it's
we become a plastic society we become a
plastic society a lot of times you want
to give people cash they look at you
cash cash you were instrumental in
making this happen in many ways I didn't
think of any of this when it happened
and I'm still glad what would I still
like what we did and I still think it
was a huge opportunity for my state now
if we're talking about the industry and
18 19 20 plus percent interest so I
think that's a healthy thing for human
beings the answer's no I don't think
that's healthy at all
[Music]
this report continues on frontlines
website or you can explore eight things
a credit card users should know special
reports on credit cards and personal
responsibility what's behind that deluge
of credit card offers in your mailbox
and how your own personal credit history
is compiled and reported Plus advice on
how to find your own creditworthiness
score and how to read your credit card
agreement then watch the program again
online and join in our discussion about
credit cards at pbs.org
[Music]
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