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Press release/statement

STATEMENT: Banks Levy New Extreme Fees and Penalties Despite Credit Card Law; New Independent Consumer Financial Protection Agency Needed Now

Demos Issues Statement on CARD Act and Upcoming Financial Regulation Debate; Publishes Background Paper on Consumer Financial Protection Agency

WASHINGTON — This week, even as the reforms of the CARD Act take effect, reports show that credit card issuers are implementing a wide range of new and excessive fees and penalties that fall outside of the law's restrictions. Today, Demos, which has conducted extensive research on the growth of debt and credit industry practices, published a new briefing paper underscoring the urgent need for an independent Consumer Financial Protection Agency (CFPA) to establish rules against potentially abusive financial products.

The CFPA is the cornerstone of financial regulatory reform legislation soon to be introduced in the Senate Banking Committee. Currently, the U.S. Chamber of Commerce, the Association of Credit and Collection Professionals and other groups are spending hundreds of millions to lobby against CFPA and other crucial reforms.

In the Demos paper, entitled Why We Need an Independent Consumer Financial Protection Agency Now, authors Heather McGhee, Director of Demos' Washington Office, and Tamara Draut, Vice President of Policy and Programs, show that financial industry regulation has historically been essential for protecting families from abusive practices and preventing financial crises. However, financial interests (who increased their campaign contributions eight-fold in a decade), ushered in an era of deregulated lending that has culminated in a financial crisis and a constellation of high-cost financial products.

"The lesson of the CARD Act is clear: we need a Consumer Financial Protection Agency. Banks have already found new ways to abuse consumers, and Congress can't meet every year to legislate against the newest credit card outrage," said McGhee, "New credit card outrages include 79 percent interest rates and enormous establishment fees on so called 'subprime' credit cards; hidden costs on pre-paid cards, and the marketing of specialty cards to cover medical costs. These kind of practices will continue until there is one agency charged with ensuring the safety of financial products used by American families and small business."

In the report, the authors outline how the deregulatory revolution over the last 20 years has allowed lenders to develop products to trap strapped consumers in long-term revolving balances with high fees, interest and penalties. The report shows how the typical American household has, even before and increasingly during this downturned economy, become more indebted and less secure, unable to weather financial shocks without risking bankruptcy or foreclosure. With financial regulatory reform pending, the authors underscore that Congress has the opportunity to rebuild the structures that will prevent another crisis and ensure broad-based economic growth. For American families and small businesses, they write, the most critical structure Congress can create is a Consumer Financial Protection Agency (CFPA).

The authors also report that 75 percent of Americans- and 67 percent of small business owners - support the creation of a strong, independent new Consumer Financial Protection Agency. It also addresses some of the basic questions about the CFPA, including what the bill will and will not do. It will address:

  • How a new "independent" agency would work...independently.
  • Whether the CFPA adds to the regulatory reporting responsibilities of banks.
  • Whether the CFPA creates a new bureaucracy in an already crowded financial oversight field.
  • If the CFPA's rules should preempt state consumer protection laws.
  • If the CFPA would stifle innovation and consumer choice.
  • Whether the CFPA should be an office within an existing regulator or a council of existing regulators.

"Consumer financial products are vital to the household economy. We need to modernize regulation to create a level playing field for families and small business," said Draut. "We have safety standards for our food, and we can have safety standards for our financial products. The CFPA--which is set for debate in upcoming financial regulation legislation-should be the next step."


Statistics on credit card debt from Demos national household survey, published in the 2009 Plastic Safety Net report:

  • The average credit card debt of low- and middle-income indebted households in America is $9,827.
  • The average amount of time that households reported being credit card indebted is 5.1 years.
  • 3 out of 4 low- and middle-income households reported using their credit cards as a safety net--relying on credit to pay for car repairs, house repairs, layoff or job loss, money given or loaned to relatives, college expenses or starting or running a business.
  • More than 1 out of 3 households reported using credit cards to cover basic living expenses, on average for 5 out of the last 12 months.
  • The most important predictor of higher "debt-stress" levels was whether a household relied on credit cards to cover basic living expenses such as rent, mortgage payment, groceries, utilities or insurance.
  • For 1 in 2 households out-of-pocket medical expenses contributed to a families' credit card debt, with an average of $2,194 dollars related to out-of-pocket medical expenses.
  • Senior 65 + experienced the highest increase in debt over a three year period-with a 26% increase.