Providence, RI – U.S. Senator Sheldon Whitehouse (D-RI) brought a panel of noted national and local experts in lending and bankruptcy law to Rhode Island College today for an official hearing of the Senate Judiciary Committee on credit card reform.
“As I travel around our state and talk with Rhode Islanders, I often hear concerns about out of control credit card rates and fees,” said Whitehouse, who chaired the hearing. “Times are tough in our Ocean State, and people who are unemployed or underemployed still have living expenses – rent or mortgage payments, food and clothes, medicine and tuition. With winter approaching, you can add to that: home heating costs, travel expenses, and holiday gifts for friends and family. All too often, families make ends meet with a credit card – and watch the balance go up, and up, and up.”
About three-quarters of U.S. households have at least one credit card, and 58 percent of those carry a balance. As of 2006, the last year for which data is available, the average credit card balance was almost $8,500. Nearly half of all credit card holders missed payments – and a payment that arrives just one day late costs the user an average of $28, even though the cost to the lender is only pennies.
“Even small setbacks, such as using a credit card for a supply of prescription drugs or to repair a home furnace, can send consumers into a spiral of late fees, over-limit fees and increased interest rates that become impossible to escape,” said John Rao of Newport, who testified at the hearing as a representative of the National Consumer Law Center and the National Association of Consumer Bankruptcy Attorneys. “This is particularly true for older consumers with diminished incomes after retirement or those who unexpectedly lose income due to disability or death in their households.”
At the hearing, which took place in the auditorium in Rhode Island College’s William C. Gaige Hall, witnesses discussed ways in which policymakers could use reforms to the Bankruptcy Code to reduce Americans’ credit costs and encourage credit card companies to keep rates more reasonable.
In particular, the experts assessed Whitehouse’s Consumer Credit Fairness Act (CCFA), which would provide consumers some relief from sky-high interest rates. Under the CCFA (S. 3259), if a consumer enters bankruptcy proceedings, creditors charging excessive interest rates and fees would not receive a single dollar in repayment until all other creditors are paid in full. The bill would also offer additional relief to consumers pushed into bankruptcy as the result of loans carrying excessively high interest rates or fees. Whitehouse unveiled the bill this July at a roundtable discussion at the Urban League of Rhode Island, which counsels people facing credit or repayment problems.
Thomas Small, a witness at the hearing who serves as a federal bankruptcy judge in the Eastern District of North Carolina and testified on behalf of the National Bankruptcy Conference, testified that while high cost credit “may provide benefits to some borrowers and to the economy, its effect on many borrowers and, as we are currently seeing, on the economy generally and therefore on all Americans, can be devastating, resulting in bankruptcy for some borrowers who would have maintained financial health but for the additional, aggressively marketed credit.”
“The math tells us that once debt starts compounding at rates like 36%, the borrower will end up trapped in a vicious cycle of debt spiraling out of control,” said Professor John Chung of Roger Williams University School of Law, who also testified. “The Consumer Credit Fairness Act is needed to restore a more equitable balance between the rights of debtors and creditors.”
The witnesses also discussed other avenues to explore credit card reform through bankruptcy law. Professor Robert M. Lawless of the University of Illinois College of Law, a nationally renowned expert on bankruptcy and consumer law issues, asked that Congress consider taking steps to lower the cost of filing bankruptcy and repeal the means test and pre-bankruptcy credit counseling requirements enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8).
Lawless also recommended that Congress pass the Helping Families Save Their Homes in Bankruptcy Act (S. 2136), which would give homeowners new leverage in staving off foreclosure and keeping their homes in the event of bankruptcy. “This simple change would bust the power of mortgage lenders to extort payments from debtors and benefit consumers widely by giving borrowers increased bargaining leverage to renegotiate mortgages before they got to bankruptcy court,” Lawless said. Senator Whitehouse has cosponsored that measure.
Whitehouse’s statement, the witnesses’ testimony, and other materials will be entered into the official record of the Senate Judiciary Committee.
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