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January 30, 2008
Hillary
Clinton’s Fair Credit For Families Agenda:
A
Comprehensive Plan To Address Credit Card Abuses, Promote Fair Lending,
And Expand Access To Fair Credit
With American families falling further into debt than
ever before, Hillary Clinton unveiled a comprehensive plan to ensure fair
access to credit on reasonable terms and to help Americans get back on
their feet. Today, families across America are struggling to cope
with spiraling household debt. Households in poverty face a vicious
credit cycle, suffering abusive rates and penalties as they struggle with
mounting debt. And middle-class Americans dealing with resetting
mortgages and rising health care, college, and energy costs are depending
more and more on credit cards just to stay afloat:
- Americans have a record $940 billion in revolving
debt, and the average person carries up to nine different credit cards.
[Federal Reserve, 2007]
- The average family carries thousands in credit
debt; over 10% of credit card users carry a balance of $10,000 or more.
[Fair Isaac, 2007]
- Credit cardholders in the bottom two income
quintiles – already paying on average the highest starting interest
rates – are more than twice as likely to pay penalty interest rates as
those in the top two income quintiles. Cracking down on predatory
credit card companies is an important step in lifting American families
out of poverty. [Demos, 2007]
For three decades now, credit card companies and
major banks have been subject to less and less regulation. Most
state regulations today do not apply to credit card companies, and federal
law sets few restrictions on what they can do. To help reverse these
trends and protect American families, Hillary’s Fair Credit for Families
Agenda will:
- Immediately impose a 30 percent cap on annual
interest rates for credit cards and work toward a lower cap.
- Prevent credit card companies from unfairly
increasing interest rates, or charging interest in unfair or
unreasonable ways.
- Require that credit card companies provide clear,
easy-to-understand information about credit card terms and
fees.
- Create a new Financial Product Safety Commission to
police credit products.
- Crack down on abusive payday lenders and refund
anticipation loan providers.
- Empower communities to help families control their
own financial destiny through improved financial literacy and better
borrowing opportunities.
* * * *
*
ENDING CREDIT CARD
LENDING ABUSES
1. Immediately impose an annual interest rate
cap of 30% and work toward a lower cap. According to a Government Accountability Office
survey of 28 credit cards issued by the nation’s leading banks, up to a
quarter of them charged penalty rates over 30%. And African
Americans, Hispanics, single women, and low-income families are most
likely to be saddled with high interest rates. To rein in already
extreme rates — and to ensure that rates climb no higher — Hillary’s plan
will immediately impose a national annual interest rate cap of 30% on all
credit cards. Such a cap would cover not just the stated credit card
interest rate, but the effective rate. This rate cap will also apply
to abuses in the payday lending and refund anticipation loan arena.
She will then direct the Office of the Comptroller of the Currency to make
recommendations on a lower interest rate cap linked to a standard
benchmark, plus a margin to provide for a reasonable profit. This
cap would not preempt lower state law caps.
2. Create a Financial Product Safety Commission
to crack down on lending abuses and to protect consumers who use credit
cards, car loans, home mortgages, and a number of other financial
products. Professor
Elizabeth Warren notes that credit products are “regulated by a tattered
patchwork of federal and state laws that have failed to adapt to changing
markets.” And there is currently minimal enforcement against abusive
practices. In 2004, consumers filed 17,000 complaints about credit
cards with the Better Business Bureau. But the OCC, the FDIC, and
the Office of Thrift Supervision have undertaken only a handful of
enforcement actions relating to unfair or deceptive lending
practices. To ensure that the government is fulfilling its
responsibility to protect the public from predatory financial products,
Hillary will establish a Financial Product Safety Commission as a
counterpart to the Consumer Product Safety Commission. The new
agency will oversee lending banks and financial institutions, establish a
set of fair rules and guidelines for financial products – including
disclosure and reporting rules – and develop new protections against
predatory and abusive lending practices. It will have a hand in
shaping and implementing the rules described in this agenda. Hillary
will streamline federal oversight and enforcement beyond the FPSC, and
give states concurrent enforcement authority against national banks for
violations of federal law.
3. Work with the new FPSC to prevent credit
card companies from unfairly increasing interest rates, or charging
interest in unreasonable ways.
- Credit card companies cannot raise your interest
rate because of an unrelated change in your credit score or because of a
missed payment to a different creditor. Even when you have always made your credit
card payments on time, these so-called
“universal default” clauses allow lenders to suddenly raise your rate
for unrelated reasons. For example, your credit score could change
because you have fallen behind on your home payments — and for that
alone, your credit card interest rate could skyrocket
overnight.
- Credit card companies cannot raise your interest
rate without your affirmative written consent. Many
credit card deals include clauses that allow lenders to raise rates “at
any time for any reason,” so long as they give 15 days notice to the
consumer. Hillary will require lenders to obtain written consent
from a borrower before any rate increases or change in terms become
effective.
- Credit card companies cannot apply new interest
rates to your old transactions. Hillary will stop lenders from raising your
interest rate and then applying that higher rate to money you borrowed
before at a lower rate.
- Credit card companies can only charge interest on
the money they loan, not on the fees they impose. Some credit card companies collect interest
on late penalties, over-limit fees, and other hidden charges.
Hillary’s plan will make sure you only pay interest on the money you
borrow.
- Credit card companies can only collect interest on
the unpaid portion of the previous month’s bill. Under some credit card practices, you could
pay off your $500 balance completely, but still be liable the next month
for interest on that $500 balance. Hillary will put an end to this
practice of “double-cycle billing.”
- Credit card companies should automatically apply
payments to the portion of the outstanding balance with the highest
interest rate. If half of a
credit card balance is subject to a 10% rate and the other half is
subject to a 25% rate, monthly payments should pay down the half subject
to the 25% rate.
3. Establish fair and uniform rules for when
credit card companies can charge late fees. Credit card late charges have nearly tripled
since 1994, and the industry’s revenues from late fees grew from $1.7
billion in 1996 to $12 billion in 2006. Fair and simple rules are
needed so hardworking Americans do not fall victim to heavy penalties just
because a deadline wasn’t clear. Hillary’s plan will develop uniform
rules for credit card payment deadlines. For example, customers
should not be unfairly penalized if their payments are postmarked by the
due date the lender provides. Hillary will also guarantee a grace
period before penalty rates apply.
4. Require clear disclosure of the terms
of the credit card that is actually issued to the consumer, and of the
consequences of making only minimum payments. American families received an estimated 8
billion credit card solicitations in 2006, many making false promises of
affordable loans. During the same time, the credit card industry
reportedly collected $97 billion in interest charges and $18 billion in
penalty fees. [CardTrak, 2008]
- Terms. Right now, some companies promise low “fixed rates”
in their advertising only to then issue cards that have rates that
skyrocket if the borrower makes a payment even a few hours late.
Hillary will require an easy-to-read table in the credit card agreement
and in early bills to make sure Americans understand the true terms of
the card they receive, not the card they were promised in the
mail.
- Repayment consequences. By some estimates, over 40 percent of
Americans with credit card debt are only making the minimum payment or
less each month. To ensure that consumers understand the costs
and consequences of paying only the minimum – and to encourage
them to make larger payments when they can – Hillary’s plan will insist
that every credit card bill include the same easy-to-read table spelling
out exactly how much it will cost and how long it will take to pay off
their balance by making minimum payments, compared with larger payments.
ADDRESSING PAYDAY
LENDING AND REFUND ANTICIPATION LOAN ABUSES
We
have seen a rise in exploitative credit products such as payday and refund
anticipation loans (“RALs”). A refund anticipation loan gives a
taxpayer a short-term cash advance, using the person’s anticipated federal
tax refund as collateral. In 2005,
payday lenders earned $4.2 billion in excessive loan fees, and Americans
paid $960 million in finance charges associated with refund anticipation
loans. [Center for Responsible Lending, 2006; Consumer Federation,
2005]
Many middle-class and low-income families –
especially those without access to basic financial services – have fallen
victim to a thriving trade that reaps profits by lending Americans their
own money at high interest rates. To address this challenge, Hillary
will:
Ensure that payday lenders do not evade more
stringent state laws. States have enacted a variety of limits on payday
lenders. For example, Florida stops borrowers from taking more than
one payday loan at a time, and it enforces this law through a central data
reporting system that lenders must use; Illinois insists on a waiting
period before additional payday loans may be issued. However, some
payday stores argue that federal law allows them to avoid complying
with these state rules. Hillary will once and for all stop
payday lenders from circumventing state consumer protection
laws.
Impose stricter limits on refund anticipation
loans. Americans paid an
estimated $960 million in fees in 2005 for refund anticipation loans
(RALs). These are loans based on your federal tax refund, where the
effective interest rate is often in triple-digits, sometimes as high as
700%. Low-income Americans are hardest hit. According to the
IRS, in 2005, 83% of RAL users had incomes of less than $35,000. In
2006, over 60% of RAL consumers were recipients of the Earned Income Tax
Credit (EITC), even though EITC beneficiaries comprised only 17% of all
taxpayers. To curb the proliferation of RAL loans, Hillary will:
- Require clear, common-sense disclosure so consumers
understand the true total costs of obtaining a RAL loan, and are not
misled by a list of unbundled fees.
- Prohibit tax preparers from charging RAL
application or account initiation fees for EITC recipients.
PROMOTING FINANCIAL
LITERACY AND BETTER BORROWING
Improve financial literacy at all
ages. In a 2004 survey on
personal financial literacy, high school seniors answered only half the
questions correctly; two-thirds of them failed the exam. Nor does
financial literacy seem to improve later in life: the average American
scored 42% on a personal finance quiz, and less than 10% answered more
than three-quarters of the questions correctly.
- Hillary will provide competitive federal grants to
encourage states to design model curricula and to develop successful
public-private partnerships that incorporate financial literacy courses
into the basic curriculum of area high schools. From Buffalo, New
York to San Antonio, Texas, pilot schools have already begun to offer
these kinds of classes.
- She will also expand funding to promote adult
financial literacy and debt counseling programs for middle-class and
low-income families. By 2007, for example, over 800,000 people had
participated in financial education classes based on the FDIC’s
Money Smart curriculum. A majority of those who were
surveyed reported an increase in personal savings and a decrease in
debt.
Help “unbanked” Americans access safe affordable
banking services. In
2002, 56 million Americans – including, by some estimates, a full quarter
of low-income families – did not have either a checking or savings
account. Families today spend $8 billion a year obtaining basic
financial services that many Americans take for granted. Minorities
are especially hard hit by payday lenders and cash-checking
operators. In California, for example, a full quarter of Latino and
African-American households lack a checking account. To promote
greater access to basic financial services and help families trapped in a
vicious cycle of credit card debt, Hillary will:
- Commit federal agencies to help guide and
coordinate ongoing efforts by city and state governments, which have
already begun to form regional alliances and public-private partnerships
to assist the unbanked enter the financial mainstream.
- Provide $50 million in funding to reinvigorate
First Accounts pilot programs in all fifty states. Under President
Clinton, the Treasury Department launched a pilot initiative to expand
access to mainstream financial services. Early results were
encouraging, but the Bush administration stopped funding the program in
2002. Hillary will ensure that this promising program is fully
funded and implemented in low-income communities across the
country.
- Promote fair, low-interest lending through
community banks and support accredited non-profit debt settlement
services to help struggling families deal with existing
debt.
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