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Our credit system is the envy of the world. Consistent national credit data is the foundation of this system, ensuring that Americans have more access to credit at lower prices than our counterparts around the globe.
Our best credit card customers today enjoy a fixed rate as low as 6.9 percent, with no annual fee. The variety of programs and rewards available simply boggle the mind. These tremendous innovations have saved borrowers billions of dollars.
The FCRA is a vital instrument, preserving the vitality of our credit granting system and equally, a vital instrument in preserving
the vitality of our modern economy. We urge you to reauthorize these provisions and to extend permanently, our national uniform system of credit reporting.
Mr. Chairman, Mr. Congressman, members of the subcommittee, thank you very much for the opportunity to testify before you. I will be happy to answer any questions you have at this time.
[The prepared statement of Scott Hildebrand can be found on page 122 in the appendix.]
Mr. TIBERI. Thank you. I don't think I have seen two panelists in the same panel ever complete their testimony under time. I congratulate both of you.
Let me just begin asking a question relating to something you just said with respect to prescreening, that prescreening lowers the fraud rate. Can you explain why you believe that is or why Capital One believes it is?
Mr. HILDEBRAND. And it is a great question, Congressman. It is true, it is about five to 15 times lower fraud in prescreening, depending on the segment of the population. Primary reason being that this is a known individual. That is that we have a peek into their credit records through prescreening, we offer it out to them, the application comes back to us. In a non-pre-approved environment, we do not have all the checks and balances that prescreening affords us. So it is another data point on the consumer.
Also, there are fraud tools that are available that, when an application comes in, there are certain indications on an application that it may or may not be fraudulent. After looking at millions and millions of applications through prescreening, we have been able to model these, and so when applications come through that look a little bit out of the ordinary, our models squeeze those out and we flag those for fraud. We then proceed to make a verifying phone call to the true name person, to verify that, indeed, they did apply for credit.
Mr. TIBERI. I have heard a little bit more about the use of prescreening being critical of the underwriting and the use of prescreening as a risk management tool. What is your sense of that?
Mr. HILDEBRAND. Oh, it clearly is. Prescreening is indeed an underwriting tool. In effect, what we were doing is we are ensuring that the folks, the consumers that we are going to offer credit to, are credit worthy.
The last thing that we want in our industry is to have people get overburdened, get in trouble, because we have to foot the bill for that. So prescreening affords us the opportunity to pre-select those
customers who we think are most creditworthy and offer them products tailored to their situation.
Mr. TIBERI. And those who would criticize prescreening, as Mr. Hendricks did, your response to that would be?
Mr. HILDEBRAND. Prescreening is much, much more than a marketing tool. It is indeed an underwriting tool.
Mr. TIBERI. And if we didn't have prescreening today, what would be the outcome to Capital One customers, in your judgment?
Mr. HILDEBRAND. Well to our existing customers, no impact. To prospects, I hearken back to Mr. Gambill's testimony earlier today, I believe there would be much, much more mail on America, because we are still going to try to acquire new customers. I believe that–I can't speak for Capital One, because we have not modeled this behavior—the general consensus in the industry is that there would be less credit available. That it would probably be more expensive, because marketing costs would go up dramatically, based on the fact we are trying to reach many more people, not understanding the credit risk behind those folks, as prescreening affords us.
Mr. TIBERI. Thank you. Mr. Wong, you mentioned affiliate sharing from Citicorp's point of view. Can you give some specific examples how affiliate sharing proactively and positively impacts me as a customer?
Mr. WONG. Absolutely, Congressman. Congressman, if you walk down the street into one of our Citibank branches, you may be interested in a variety of financial products. He may be interested in a deposit account, such as a checking account. He may be interested in a credit card, mortgage or even, perhaps, an investment account to purchase a bond. Each of these products are being offered by different affiliates of Citigroup, and if we did not have information sharing, as you open each of these accounts or purchase one of these products, you would have to go to an elaborate opening account process because we couldn't share the information.
Mr. TIBERI. How would you categorize the ability of affiliate sharing to help crack down on identity theft within Citicorp?
Mr. WONG. Very simple example: You, in your pocket, may have two credit cards issued by Citigroup. You may have an American Airlines Citibank credit card, or you may have a Shell card for your gasoline purchases. Those are two different affiliates within Citigroup. If we were to detect a fraud on one of your accounts, unusual spending habits, for example, and it confirmed that it could be a fraud with you, we would then alert all the other affiliates within the Citigroup and could place a fraud alert.
a Mr. TIBERI. If we restrict or eliminate the use of affiliate sharing, what impact would that be to a customer?
Mr. WONG. Tremendous. I think the customer, for one, would not have the ability, in the case of product innovation, to get the benefits that Mr. Hildebrand described in his statement. Annual fees, doing away with annual fees and credit cards mileage programs, all of those things are innovations as a result of affiliate sharing looking at what customers want from a broad spectrum of customers. The seamlessness of conducting business with a customer would go away. It would be painful for a customer to buy more than one product within the Citigroup family of companies.
Mr. TIBERI. Thank you. My time has expired. I will yield time to Mr. Davis.
Mr. DAVIS. (Presiding.) Thank you, Mr. Tiberi. Let me welcome all of you this afternoon. There are three of us who were here that here listening to you. So I apologize for not having a larger crowd than that.
Let me follow up, Dr. Manning, on something that you talked about earlier, and that is the problem, or perhaps it is not a problem from everyone's perspective on the panel, but the issue of college students and then the secondary issue of very low income people being singled out for a lot of the prescreenings, for a lot of the solicitations.
And I will ask you all to educate me a little bit as a matter of economics on this issue. To a lot of us, I think that it is somewhat counterintuitive that two of the groups of people who are singled out are those who are probably least likely in some ways to be durable credit card customers, or if they somehow become durable credit card customers, they are among the most likely people to have default issues or to have difficulties paying their accounts off.
Dr. Manning, some of your data really caught my attention. You said that roughly 60 percent of students who get credit cards, the overwhelming majority of those, I assume get them after some kind of prescreening solicitations, max out during the freshman year. A significant number of those who don't max out are having to use allowance from Mom and Dad or some other source to provide payments, and that, in effect, the first significant debt that a lot of young people incur now is not their student loans, frankly, it is the credit card bills.
Any one of you, I suppose, but in particular Mr. Wong and Mr. Hildebrand, tell me why economically it becomes so beneficial for the credit card companies to solicit people who, on their face, appear to be very high-risk customers, particularly with respect to college students?
Mr. WONG. May I?
Mr. WONG. We believe that the credit card is a important pay. ment tool in society today. Credit cards are needed for a variety of things from getting a reservation in a hotel room to acquiring a ticket online, an airline ticket.
College students, we do lend to college students. Our experience of college students do not suggest at all that this is a population of borrowers that are a greater credit risk to themselves or to us.
Mr. Davis. What is their default rate?
Mr. WONG. The default rate of credit of college students, and I don't have precise numbers, but I will be happy to share that with you. Mr. DAVIS. Do you know that, Mr. Manning? Do any of you know
Davis the default rate for college students?
Mr. MANNING. I would love to. That is information the industry doesn't share with me.
Mr. WONG. But we can tell you that the default rate of college students is no greater than the general population of credit card holders in our customer base. And we obviously tailor the product to college customers to make sure that they are within their affordability in lines of credit. So obviously, it gives them great consideration.
Mr. DAVIS. Dr. Manning, what is your perspective? Obviously, we have the industry's perspective, I assume. That they are tapping a relatively untapped market. What is your perspective on this? Obviously, you have identified it as something you view as something of a social problem that a class of people are being targeted who are assuming a fairly large debt burden as they move into society.
How big a problem is this, in empirical terms?
And number two, what is the practical solution? I mean, presumably no one advocates it. I don't see a vehicle to prevent these companies from prescreening college kids, but they certainly have rights. They are legal adults. But what, from a policy standpoint, would you have this institution do if it wanted to address this matter?
Mr. MANNING. Well, first, there are a couple of issues.
Number one, the very fact that you are a college student is the prescreen, and that the industry puts on its head the underwriting criteria. If you have an 18-year-old that makes $5,000 and is not in college, most likely he or she will get rejected for a credit card. But if you are in college, you are going to get access to multiple thousands of dollars of credit cards during your collegiate career. So point number one is we need consistency for the industry.
Number two, of course, the Citibank now is very active in the student loan market. And in terms of affiliate sharing, we have some very serious issues here, that one affiliate knows that the other affiliate can get paid through this borrowed money.
I want to make it clear I am a very strong supporter of credit cards. I would like to see every student get a credit card with a $500 credit limit, if their parent will not cosign for them. But that limit could not be raised at the end of the year unless there has been prudent use of that credit card.
So I am not trying to discourage use of credit cards. I am trying to promote its effective use.
But I think the data here is unambiguous about the seriousness of the problem. We are no longer talking about marketing seniors who have some degree of economic background or real life experience. As you can see from this representative sample of a major public institution in Virginia, the marketing of college students has shifted from seniors and juniors now to freshman, to even high school students.
I have received quite a few complaints from a Wells Fargo campaign in California, where representatives
Mr. Davis. Let me cut you off for one second, if the Chair will yield me an additional 30 seconds or so.
What is wrong with that? Just from a policy standpoint, in terms of following your analysis, I suspect that the gentlemen on this end, Mr. Wong and Mr. Hildebrand, have the perspective that, well, there is some discrimination in the sense that one class of people are favored over another. But it is not really invidious discrimination. It is discrimination based on favoring people who are likely to be long-term market participants versus those who are not.
I mean, to say that seniors are not targeted, they are obviously not going to be long-term customers. To say that people who aren't in college who are young aren't targeted isn't such a major proposition, I suppose. You are targeting people who are likely to be high-income earners versus people who aren't. I am sure that is the rationale of Mr. Wong and Mr. Hildebrand.
So what is wrong with that? I mean why should we expect this particular market to operate in a more evenhanded way than most markets do in this country?
Mr. MANNING. Well, I think anybody who has found themselves unexpectedly unemployed in this recession would certainly question the expectations of the industry in offering credit to an 18-year-old that their risk assessment model would predict that most of them will get a certain income when they are freshmen, when there is a robust 5 percent unemployment rate, and when they graduate there is an 8 percent unemployment rate, and they are suddenly saddled with $15,000 in credit card debt and $20,000 in student loan debt, with the expectation that they would get a $48,000 job.
Students and people in general assume levels of debt based on their expectations of the future. And students at 18 years old who do not have real life experience, have not had a full time job and have not managed a budget, are making expectations based on a 5 year future, that they don't necessarily have realistic expectations.
Mr. Davis. I think my time is expired, Mr. Chairman. Thank you.
Chairman BACHUS. (Presiding.) Thank you.
Mr. Manning, I was reading different things here, but one thing that you said that you might want to propose is to have parents sign off before a college student can have a credit card?
a Mr. MANNING. No, what I said was that every student, I think, should have a credit card with a $500 credit limit, unless their parents were willing to cosign for a higher limit, if they were unemployed.
Chairman BACHUS. You know, what strikes me is that it would be a pretty big dose of big government, wouldn't it, telling a large segment of our population that they couldn't have credit above $500?
Mr. MANNING. That is only if they don't have an income. If you look at the credit authorization of college students in the late 1980s, the industry standard was that parents.cosigned unless the applicant had a certain income level. I am suggesting that for students that have no income that we should, at least, assure them of a learning curve of a credit card with no more than $500.
Chairman BACHUS. You say parents, unless their parents sign on. You know, some parents refuse to help their children at all while others finance their children's education. So you basically would be taking maybe, let us say you had a young man or woman whose parents either were unwilling to sign on, or weren't willing to help them at all. They might actually benefit from, let's say, $1,000 or $1,500 credit card.
Mr. MANNING. Well, my proposal was one that would increase $500 per year. I was referring to freshmen when they first started