We take a look at how the consumer loan industry continues to squeeze customers. Last year the Federal Reserve Board announced new rules for banks to remove unfair credit card practices, and in May of this year Congress passed the Credit Card Accountability, Responsibility and Disclosure Act of 2009. In a joint FRONTLINE/New York Times investigation, The Card Game, longtime investigative journalist and FRONTLINE correspondent Lowell Bergman talked to industry insiders, lobbyists, politicians and consumer advocates about how to reform the way the consumer loan industry has done business for decades. [includes rush transcript]
AMY GOODMAN: We end today’s show with a look at how the consumer loan industry continues to squeeze customers. Last year the Federal Reserve Board announced new rules for banks to remove unfair credit card practices, and in May of this year Congress passed the Credit Card Accountability, Responsibility and Disclosure Act of 2009. Both will only become effective next February.
But in the meantime, banks have raised interest rates, imposed higher fees, and reduced credit lines on customers before the new rules can take effect. The House voted earlier this month to make the rules effective immediately. Senate Banking Committee Chair Chris Dodd is pushing to freeze interest rates on existing credit card balances until the law takes effect. And this Thursday, the Senate Banking Committee will take up the proposal to create a Consumer Finance Protection Agency.
How will all the new rules change the way banks function? And how much can they protect consumers? That’s the subject of a joint FRONTLINE/New York Times investigation called The Card Game. Longtime investigative journalist and FRONTLINE correspondent Lowell Bergman talked to industry insiders, lobbyists, politicians and consumer advocates about how to reform the way the consumer loan industry has done business for decades.
I’ll be joined in a minute by Lowell Bergman, but first here’s an excerpt of his new documentary, The Card Game. Here Lowell Bergman talks to Nessa Feddis, the vice president of the American Bankers Association, and Shailesh Mehta, the former CEO of Providian Bank. He asks Mehta to look over a solicitation for a credit card from Bank of America.
LOWELL BERGMAN: Open this one for me and tell me what you think. That’s from Bank of America, and on the back it says, “zero percent intro APR.”
SHAILESH MEHTA: Right, but there is an asterisk, or whatever the mark.
LOWELL BERGMAN: Right.
SHAILESH MEHTA: So I have to now read that footnote. I will have to remove my glasses to read it. It says, “For this, see disclosure summary insert for details.” And I have to find the disclosure summary, which is the one here. So, on the outside, it says, “zero percent intro APR”; in here, it says that my APR is 11.9, 15.9 or 19.9, right? And the APR received is determined based on your credit worthiness. So I have no idea which one I’m going to get when they approve me.
LOWELL BERGMAN: So, disclosure, you say, doesn’t work.
SHAILESH MEHTA: As I say, I mean, look how much time it takes for both of us to go through this.
LOWELL BERGMAN: Right, exactly.
SHAILESH MEHTA: I think that your average consumer is not going to be able to translate what the real pricing is.
LOWELL BERGMAN: Now, you put out statements like this for Providian?
SHAILESH MEHTA: Oh, we did. We did. Absolutely.
LOWELL BERGMAN: The complaint that led to this legislation is that the credit card industry was abusing its customers.
NESSA FEDDIS: Well, the vast majority of card holders manage their credit well, but there was a group that was confused, and that’s what Congress and the press were reacting to.
LOWELL BERGMAN: And those people, how many of them are there? Millions?
NESSA FEDDIS: Um —-
LOWELL BERGMAN: The confused? I mean, are those the people going bankrupt?
NESSA FEDDIS: Well, the vast majority -— the vast — well, most of the people who end up in bankruptcy or end up with credit card problems, the underlying problem isn’t the credit card. Most customers manage their credit cards well, understood them, but there was a segment that was confused, and they realized that it had to be addressed.
LOWELL BERGMAN: But Senator Dodd and others have said to us the industry got arrogant. You started using all these practices that created this problem.
NESSA FEDDIS: Well, once Congress and the regulators identified the problems, they’ve addressed it. And the industry is moving on.
AMY GOODMAN: That was Nessa Feddis, the vice president of the American Bankers Association, talking to FRONTLINE correspondent Lowell Bergman, an excerpt from The Card Game, which airs next Tuesday, November 24th, 9:00 p.m. Eastern time on PBS.
Award-winning investigative journalist and FRONTLINE correspondent Lowell Bergman joins us now from University of California, Berkeley, where he teaches at the Graduate School of Journalism.
We welcome you to Democracy Now! This is a follow-up to your Secret History of the Credit Card. Can you take us from there — I don’t think people — well, obviously, they don’t know what it is; you talk about the secret history — right through what you’re looking at today, Professor Bergman?
LOWELL BERGMAN: Well, I guess my initial interest in this subject area came from many years of reporting on organized crime. And a question that I kept asking various prosecutors — I remember interviewing, in fact, in the first documentary then-Attorney General Eliot Spitzer in New York and asked him, “Can you enforce the loan sharking laws in New York when it comes to banks?” And he said yes. And off-camera, his aide told him, “No, you can’t.”
In fact, what happened — and it was a series of unintended consequences thirty years ago — is that the lid came off of interest rates in the United States federally for banks. And what that’s meant is when you see your credit card bills, some people now have had their rates just arbitrarily changed to 30 percent. That’s way above most state usury laws, those traditional laws that kept interest rates down to a level where people could actually pay them. And actually almost every state in the United States has had these caps up until thirty years ago. And so, this began in terms of my trying to understand how this happened.
And the results of all of this — and I say it was unintended consequences thirty years ago about what was going on in the economy — is that we had the birth of the modern credit card industry in the United States, something uniquely American, where people could live beyond their means and eventually got so far beyond their means that the whole business, in a sense, today is in danger of collapse. Credit cards, which were the profit center for banks in the United States, are now great centers of losses. And that’s why you’re experiencing, if you have one — and most people have five in their wallet — you’re noticing that your credit limit is being reduced or your interest rates being raised. That’s because of the great losses that are going on as a result of the economic crisis.
AMY GOODMAN: Talk about Anita Holaday, a ninety-one-year-old woman in Florida.
LOWELL BERGMAN: Well, people are seeing — are opening up their mail and finding out that they may have a credit card balance, and all of a sudden the rate on that balance, the interest rate, which affects your monthly income, has changed. And that’s because traditionally — and this will, by the way — the law that was passed and that President Obama signed last May during Memorial Day weekend, really doesn’t go fully into effect until February, so as a result, the credit card companies, which were already changing their rates and balances, went into full gear and have lifted rates for all kinds of — for all kinds of customers. And in essence, what they’re trying to do is get rid of what they see are potential losses, and they’re desperately trying to get as much income as they can. So that’s affecting people on fixed incomes. That’s affecting any number of people who have been using credit cards for small business purposes, they’re self-employed. And so, it’s costing people more and more money, and the result is people are being pounded, in addition to the problems of getting jobs in this very difficult economy.
AMY GOODMAN: Can you talk about the legislation now on Capitol Hill; about the heavy lobbying that’s going on; the Federal Reserve Board announcing new rules for banks to remove their credit card practices; and in May, Congress passing the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which won’t become effective until, what, next February?
LOWELL BERGMAN: Right. In the documentary, we go through the sort of history, try to reprise some of the history from the prior documentary, and then present you with the situation today. Up until this year, the financial services lobby, which includes the banks in the — 8,000 banks in the United States, and particularly the bigger banks, have been able to lobby Congress so as to stop almost any new regulation. That’s changed this year, because of the sort of upswelling of anger out there of customers as to what was happening to them with their banks. Congress took recommendations that had been made by the Fed, which hadn’t done anything for decades related to the industry, and turned them into this law, which President Obama signed.
The law, however, is very narrow, and there are plenty of loopholes in that law. And so, to make up for that, based upon consumer advocates’ and various people’s proposals that the regulation of credit cards, in particular, but financial consumer lending, in general, needed to be centralized in one place, the administration proposed this past summer a new Consumer Financial Protection Agency that would take the powers from the different sort of alphabet soup of agency that you may have heard the names, like FDIC, OCC, as well as the Federal Reserve, and put them all in one central regulator that would look out for consumers. That’s what the Senate Banking Committee is looking at in debate this week and next week, and possibly the committee will be voting on. It’s something that the House Financial Services Committee has already voted on and taken out of committee. And the banks are furiously both trying to — some banks are trying to and lobbyists are trying to defeat that act, as well — and if they can’t do that, water it down.
I think the larger banks, in the reporting that we’ve done both for the FRONTLINE documentary and the New York Times, are coming to the conclusion that this agency is probably going to exist, so they’re trying to figure out what to do around all of this. And that’s what we’re in the middle of right now is how do we regulate consumer lending going into the future. And one of the key issues that’s going to be discussed, I’m sure, in Congress is how do you do that at the same time that the banks are claiming that they’re in such poor financial health that they can’t afford the losses that are mounting?
Now, let me just explain, back up for a second, and say that the way — what’s turned out, there’s an interesting phenomenon with credit cards, and that is that the loss rate for credit cards normally have been around four percent. That’s what the banks factor in when they charge all these fees and when they set an interest rate. Well, that loss rate usually parallels unemployment. And as we all know, unemployment is now up to almost a — well, the real unemployment rate is at a post-Depression high. Well, the banks’ losses are that high, as well.
So the critical economic question and the thing that’s going to influence all of our lives in terms of consumption is how much regulation can the banks stand? Are the banks making any money in this business anymore? Will they have to get a new business model and develop that? And will credit cards, debit cards and the other things that we use every day change dramatically? It appears it will be. Whether or not in fact there’s any legislation, it looks like it’s going to continue to be not only hard, but much harder to get a consumer loan.
AMY GOODMAN: How have things changed, Lowell Bergman, from The Secret History of Credit Cards, your first documentary on this that has run repeatedly, to the one that is airing on Tuesday, The Card Game?
LOWELL BERGMAN: Well, the big change is, is that the industry basically could do whatever it wanted up until a year, a year and a half ago, when in the midst of the economic crisis and as the unemployment rate started to rise, started to incur great losses in this business. When we first did the first film, most people didn’t know really — if you asked people, “How do credit cards work?” they really don’t know, and still many people don’t know. And the industry, in a sense, liked it like that. You know, they could get away with, for instance, as we explained in the first film, zero percent interest come-ons, various kinds of gimmicks to market with, and get people to take these credit cards and get them into a cycle of debt.
How are things changed now? People are going bankrupt. Credit cards are no longer that, if you will, great a profit center for the industry. And on top of that, it appears that the Congress and the politicians, despite the fact that the industry — the financial services industry pours the most money into Congress and congressional campaigns of any single lobby. So if you understand that they’ve spent, despite the fact that we’re bailing the banks out with hundreds of billions of dollars, that they spent hundreds of millions of dollars this year in Washington for lobbying, even with all of that money, their political clout is, in many ways, getting diluted, because of the objective situation out there and the amount of unhappiness people have with banks. You know, we’re doing a piece for this Sunday, and this is a preview for it. I mean, most of the surveys and most of the studies have shown that banks and credit cards, in particular, are amongst the most unpopular and subject of most complaints of consumers in America. And it’s catching up with them.
AMY GOODMAN: Lowell Bergman, I want to thank you very much for being with us, FRONTLINE correspondent, professor at the Berkeley Graduate School of Journalism. The PBS FRONTLINE documentary The Card Game will air on Tuesday night on PBS.