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Report to Congressional Requesters:

April 2006:

Credit Cards:

Customized Minimum Payment Disclosures Would Provide More Information 
to Consumers, but Impact Could Vary:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-434]:

GAO Highlights:

Highlights of GAO-06-434, a report to congressional requesters.

Why GAO Did This Study:

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 
requires that credit card issuers (issuers) include in all cardholder 
billing statements a generic warning, or “disclosure,” about the 
potential financial consequences of consistently making only the 
minimum payment due on a credit card. However, some have urged that 
consumers should instead receive “customized” disclosures in their 
billing statements that use cardholders’ actual balances and the 
applicable interest rates on their accounts to show the consequences of 
making only minimum payments, such as estimates of the time required to 
repay balances and the total interest amount resulting from continual 
minimum payments. 

In response to a congressional request, this report assesses the (1) 
feasibility and cost of requiring issuers to provide cardholders with 
customized minimum payment information, (2) usefulness of providing 
customized information to cardholders, and (3) options for providing 
cardholders with customized or other information about the financial 
consequences of making minimum payments.

What GAO Found:

Representatives of credit card issuers and processors that handle 
billing and other operations for issuers said they have the 
technological capability to provide cardholders with customized minimum 
payment information. The calculations that would be included in such 
disclosures require various assumptions, including that no more charges 
are made on the account, and decisions on how to address other issues, 
such as balances subject to multiple interest rates, that would affect 
the estimates’ precision. Issuers and processors estimated that the 
most significant costs of providing customized disclosures would be for 
additional postage, computer programming, and customer service. 
Although uncertain about exactly what calculations would be required, 
the estimates that issuers provided for total implementation costs 
ranged from $9 million to $57 million. 

In GAO’s interviews with 112 cardholders, most who typically carry 
credit card balances (revolvers) found customized disclosures very 
useful and would prefer to receive them in their billing statements. 
These consumers liked that customized disclosures would be specific to 
their accounts, would change based on their transactions, and would 
provide more information than generic disclosures. However, cardholders 
who pay their balances in full each month were generally satisfied with 
receiving generic disclosures or none at all. Consumer groups, 
financial educators, and others indicated that customized disclosures 
could reduce cardholders’ tendency to make minimum payments; 
conversely, issuers foresaw limited impact because few cardholders make 
minimum payments and not all can afford to pay more. 

Alternatives for providing customized disclosures include providing 
them only to revolvers, providing them less frequently, or in a 
location other than the first page of billing statements. While such 
alternatives could lower issuer costs, they could also decrease the 
customized disclosures’ potential impact. 

Views of Credit Card Revolvers that GAO Interviewed on Customized 
Minimum Payment Disclosure:

[See PDF for Image]

[End of Figure]

To view the full product, including the scope and methodology, click on 
the link above. To view selected results of the cardholder interviews, 
go to [Hyperlink=http://www.gao.gov/cgi-bin/getrpt?GAO-06-611sp]. For 
more information, contact David G. Wood at (202) 512-8678 or 
woodd@gao.gov.

[End of Section]

Contents:

Letter:

Background:

Results in Brief:

Providing Cardholders with Customized Information Seen as Feasible but 
Doing So Would Increase Costs for Issuers:

Customized Disclosure Was Seen as Useful, but Its Impact on Cardholders 
May Vary:

Various Options Exist for Providing Information on Consequences of 
Minimum Payments:

Observations:

Agency Comments and Our Evaluation:

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Comments from the National Credit Union Administration:

Appendix III: GAO Contact and Staff Acknowledgments:

Tables:

Table 1: Comparison of Disclosures Required under the Bankruptcy Act 
and a Potential Customized Disclosure:

Table 2: Demographic Characteristics of Cardholders Interviewed:

Figures:

Figure 1: Extent to Which 74 Credit Card Revolvers Preferred and Found 
Useful a Customized Minimum Payment Disclosure:

Figure 2: Extent to Which 38 Credit Card Convenience Users Preferred 
and Found Useful a Customized Minimum Payment Disclosure:

Abbreviations:

FACT: Fair and Accurate Credit Transaction Act:

TILA: Truth in Lending Act:

Letter: 
April 21, 2006:

The Honorable Paul S. Sarbanes: 
Ranking Minority Member: 
Committee on Banking, Housing and Urban Affairs: 
United States Senate:

The Honorable Daniel K. Akaka: 
United States Senate:

Making only the minimum payment due on a credit card can greatly 
increase the time required to pay off the entire balance and increase 
the total amount of interest paid by a consumer. With more than 292 
million credit cards in use in the United States and a growth in 
personal bankruptcies, many financial educators see an increasing need 
for consumers to become more educated about the cost of using credit 
cards. As one way of achieving this, Section 1301 of the Bankruptcy 
Abuse Prevention and Consumer Protection Act of 2005 (Bankruptcy Act), 
passed in April 2005, amends the Truth in Lending Act (TILA) to require 
that a generic warning, or "disclosure," be printed on all cardholders' 
billing statements about the potential financial consequences of making 
only the minimum payment due.[Footnote 1]

The provision also requires that cardholders' billing statements 
provide a toll-free telephone number for obtaining individualized 
information about how making minimum payments would affect their 
accounts. However, some lawmakers and others believe that these 
requirements are not extensive enough to educate consumers about the 
effects of making only minimum payments on credit cards. They argue 
that the generic disclosures required by the law will not adequately 
inform cardholders of their situation in today's credit environment, in 
which interest rates on credit card debt can exceed 30 percent. 
Instead, they believe that a "customized disclosure"--that is, one that 
uses cardholders' actual balances and the applicable interest rates on 
their accounts to calculate how long a given balance would take to pay 
off if only minimum payments are made--would allow cardholders to make 
more informed credit decisions.

This report responds to your April 25, 2005, request that we study the 
feasibility of requiring credit card issuers (issuers) to provide 
customized information to cardholders about the consequences of making 
minimum payments, as well as the usefulness of this information to 
cardholders. Specifically, our objectives were to (1) determine the 
feasibility and cost of requiring issuers to provide cardholders with 
customized minimum payment information, (2) assess the usefulness of 
providing customized information to cardholders, and (3) identify 
options for providing cardholders with customized or other information 
about the financial consequences of making minimum payments.

To determine the feasibility and cost of requiring issuers to provide 
customized information to cardholders on billing statements, we met 
with staff members of six major credit card issuers and one mid-size 
issuer. We determined that these issuers account for about 67 percent 
of actively used credit card accounts as of year-end 2005.[Footnote 2] 
We asked each of the issuers about how they could implement the 
requirement and their estimates of the costs they would incur in doing 
so. We also obtained cost estimates for three other large issuers from 
court documents that were associated with a California lawsuit 
challenging a state statute that required issuers to include minimum 
payment disclosures on billing statements sent to California 
cardholders. In addition, we discussed the feasibility and cost of 
additional requirements with the staff of two external credit card 
processors (processors) that produce billing statements for thousands 
of large and small issuers, and a representation of industry, legal, 
academic, government, and consumer entities. To assess the usefulness 
of customized disclosures, we interviewed 112 cardholders in Boston, 
Chicago, and San Francisco to gather data on their preferences for and 
opinions on the utility of statements about making minimum payments. 
This sample of cardholders was not designed to be statistically 
representative of all cardholders, and thus our results cannot be 
generalized to the population of all U.S. cardholders. Our efforts to 
identify options for increasing consumer awareness of minimum payment 
issues involved interviews with representatives of credit card issuers 
and processors, consumer interest groups, a credit counseling agency, 
as well as federal financial regulators and the Director of the federal 
Financial Literacy and Education Commission.[Footnote 3] We also 
reviewed comment letters provided to the Board of Governors of the 
Federal Reserve System (Federal Reserve) in connection with the Federal 
Reserve's recent advance notices of proposed rulemaking regarding its 
open-end (revolving) credit rules of Regulation Z, which implements 
TILA.[Footnote 4] A more detailed description of our methodology is 
presented in appendix I. Additionally, a copy of the survey instrument 
we used to interview cardholders, along with summarized results, can be 
found in GAO-06-611SP. We conducted our study between June 2005 and 
April 2006 in Boston, Chicago, San Francisco, and Washington, D.C., in 
accordance with generally accepted government auditing standards.

Background:

The credit card industry is composed of issuers, processors, and card 
networks. Typically banks, thrifts, and credit unions are the 
organizations that issue credit cards and underwrite the credit that is 
provided to consumers. The issuance of credit cards is highly 
concentrated, with the eight largest issuers representing 88 percent of 
all outstanding consumer credit card balances reported by CardWeb.com, 
Inc., as of year-end 2005. Processors provide a wide range of services 
for thousands of issuers, including card production, transaction 
processing, and production and mailing of billing statements. The level 
of services provided by processors can differ depending on a specific 
issuer's needs. For example, some issuers handle all billing 
calculations and maintain all related data within the organization and 
rely on processors solely for printing and mailing billing statements. 
Other issuers, including many of the smaller issuers, use processors to 
perform all necessary services related to their credit cards. Finally, 
credit card networks facilitate payment transactions between 
cardholders and merchants by transferring information and funds between 
a merchant and a cardholder.

Credit card users can be characterized into two groups--those who use 
their cards for purchases but consistently pay their outstanding 
balance in full every month (convenience users) and those who carry a 
balance on their cards (revolvers). Different data sources report that 
in 2004 revolvers represented between approximately 46 and 55 percent 
of cardholders. Various data sources indicate that the proportion of 
cardholders that pay only the minimum payment or slightly more than the 
minimum payment at any given time ranged from about 7 and 40 percent 
between 1999 and 2005, while issuers indicated that a small percentage 
of their cardholders (from less than 1 percent and up to 10 percent) 
make multiple consecutive minimum payments. According to a survey 
conducted by the Federal Reserve in 2004, the median balance for U.S. 
families that carried balances on bank-type credit cards was $2,200, 
and the average balance was $5,100.[Footnote 5]

Each issuer determines the minimum payments that cardholders must pay 
each billing cycle to keep an account in good standing. Issuers 
calculate minimum payment amounts in a variety of ways, including as a 
set percentage of a cardholder's outstanding balance, or the sum of all 
interest and fees to be paid as well as some portion of the principal 
balance, among other ways. For example, some issuers calculate minimum 
payments as 1 percent of the outstanding balance plus any finance 
charges and fees (such as late fees or over-the-limit fees) incurred 
for that billing period.

Historically, required minimum payments generally averaged about 5 
percent of the outstanding balance, but these amounts declined to about 
2 percent in the last decade. The decrease in minimum payment rates 
lowered a cardholder's monthly payment obligation, but also further 
delayed a cardholder's repayment of principal. In some cases, the 
amount required for the minimum payment was not sufficient to cover all 
incurred interest or other transaction charges, which increased the 
outstanding balance. Concerns about such increases--known as negative 
amortization--as well as other practices compelled four federal banking 
regulators to issue guidance in January 2003 that stated that issuers 
should require minimum repayment amounts so that cardholders' current 
balances would be paid off--amortize--over a reasonable period of 
time.[Footnote 6] The guidance was designed to discourage minimum 
payment formulas that result in prolonged negative amortization of 
accounts, a practice viewed by regulators as raising safety and 
soundness concerns. However, it is possible that a bank could satisfy a 
regulator's expectations by requiring minimum payment amounts that 
represent less than the 5 percent of outstanding principal that 
previously was customary in the industry. According to a representative 
of the Office of the Comptroller of the Currency, by year-end 2005, 
nearly all the issuers that it oversees (which includes the largest 
issuers in the United States) had controls in place to address concerns 
regarding negative amortization of credit card accounts.

As part of the Bankruptcy Act, issuers will be required to provide 
cardholders with information about the consequences of making minimum 
payments on outstanding credit card balances. More specifically, the 
act requires creditors to print on the billing statements of revolving 
credit products (of which credit cards are a form) a generic disclosure 
that "making only the minimum payment will increase the interest you 
pay and the time it takes to repay your balance."[Footnote 7] In 
addition to the generic disclosure, the law requires creditors to 
choose from two options for providing additional information to 
cardholders: (1) providing a toll-free telephone number that 
cardholders could use to obtain the actual number of months that it 
would take to repay their outstanding balance if they made only minimum 
payments or (2) providing an example of the length of time required to 
pay off a sample balance at an interest rate of 17 percent and a toll- 
free telephone number cardholders could call to get an estimate of the 
time required to repay their balances.[Footnote 8] These requirements 
are intended to increase consumer awareness of the consequences of 
these types of payments. The Federal Reserve is currently establishing 
regulations to implement the new law, which it expects to complete in 
2007.[Footnote 9] The minimum payment disclosure requirements will take 
effect 12 months after the final regulations are published.[Footnote 10]

While the Bankruptcy Act mandated that generic disclosures be made to 
consumers on their billing statements, some lawmakers had sought to 
require additional and more customized disclosures that would have 
provided each cardholder with customized information about the costs 
and time involved in paying off credit card balances resulting from 
habitually making only minimum payments. Amendments that would have 
mandated these customized disclosures failed to pass prior to the 
passage of the Bankruptcy Act. While the details vary, five bills were 
pending in Congress as of March 2006 that would mandate that issuers 
provide customized disclosures to consumers.[Footnote 11]

Table 1 illustrates the differences between the disclosure options that 
issuers will be required to implement as a result of the Bankruptcy Act 
and an example of the type of customized disclosures that have been 
envisioned as part of various legislative proposals.

Table 1: Comparison of Disclosures Required under the Bankruptcy Act 
and a Potential Customized Disclosure:

Elements of Disclosure: Minimum Payment warning;
Information required to appear on cardholder billing statements under 
the Bankruptcy Act[A]: Generic disclosures: Minimum Payment Warning 
Statement Option: "Making only the minimum payment will increase the 
interest you pay and the time it takes to repay your balance.";
Information required to appear on cardholder billing statements under 
the Bankruptcy Act[A]: Generic disclosures: Minimum Payment Warning 
With An Example Option: "Minimum Payment Warning: Making only the 
minimum payment will increase the interest you pay and the time it 
takes to repay your balance.";
Information that Could Appear on cardholder billing statements with a 
customized disclosure: Customized Disclosure: "Minimum Payment Warning: 
Making only the minimum payment will increase the amount of interest 
paid and the length of time to repay the outstanding balance."

Elements of disclosure: Length of repayment;
Information required to appear on cardholder billing statements under 
the Bankruptcy Act[A]: Generic disclosures: Minimum Payment Warning 
Statement Option: "For more information, call this toll-free number: 
____________.". The information required to be provided is the actual 
number of months that it will take the cardholder to repay his/ or her 
outstanding balance.
Information required to appear on cardholder billing statements under 
the Bankruptcy Act[A]: Generic disclosures: Minimum Payment Warning 
With An Example Option: "For example, making only the typical 2% 
minimum monthly payment on a balance of $1,000 at an interest rate of 
17% would take 88 months to repay the balance in full." "For an 
estimate of the time it would take to repay your balance, making only 
the minimum payments, call this toll-free number: _______________.[B];
Information that Could Appear on cardholder billing statements with a 
customized disclosure: Customized Disclosure: "For example, your 
balance of [XX][C] will take [XX] months to pay off…".

Elements of disclosure: Total cost in principal and interest;
Information required to appear on cardholder billing statements under 
the Bankruptcy Act[A]: Generic disclosures: Minimum Payment Warning 
Statement Option: N/A;
Information required to appear on cardholder billing statements under 
the Bankruptcy Act[A]: Generic disclosures: Minimum Payment Warning 
With An Example Option: N/A;
Information that Could Appear on cardholder billing statements with a 
customized disclosure: Customized Disclosure: "…at a total cost of [XX] 
in principal and [XX] in interest if only the minimum monthly payments 
were made."

Elements of disclosure: Monthly payment amount to pay off balance over 
a prescribed period;
Information required to appear on cardholder billing statements under 
the Bankruptcy Act[A]: Generic disclosures: Minimum Payment Warning 
Statement Option: N/A;
Information required to appear on cardholder billing statements under 
the Bankruptcy Act[A]: Generic disclosures: Minimum Payment Warning 
With An Example Option: N/A;
Information that Could Appear on cardholder billing statements with a 
customized disclosure: Customized Disclosure: "To pay off your balance 
in 3 years, you would need to pay [XX] monthly."

Sources: Bankruptcy Act and GAO.

[A] The Bankruptcy Act allows issuers to provide one of the two options 
in cardholder statements.

[B] The statutory sample calculations for the repayment period and the 
principal balance will vary depending on whether issuers (1) require a 
minimum payment of 4 percent or less, (2) require a minimum payment of 
more than 4 percent, or, (3) are regulated by the Federal Trade 
Commission with respect to compliance with TILA.

[C] XX would contain a cardholder's actual balance, number of months 
required to pay balance in full, and the total cost in principal and 
interest if only minimum payments were made. This customized disclosure 
would also include the monthly payment amount needed to repay balance 
in full in 3 years. These figures would be calculated using a 
cardholder's actual balance, applicable interest rate(s), and other 
variables.

[End of table]

An attempt to mandate customized disclosures on the consequences of 
making minimum payments also was made at the state level. In 2001, 
California enacted a law that required issuers to provide the state's 
cardholders with more detailed information about making minimum 
payments.[Footnote 12] Issuers were required to provide one of two 
disclosure options. Both options required the issuer to provide a 
minimum payment warning. In addition to the minimum payment warning, 
one option required issuers to print an example of the length of time 
required to pay off a sample balance amount using a sample interest 
rate. Further, issuers were required to provide cardholders, via a toll-
free telephone number, with information about both the length of time 
required and total cost of paying an outstanding balance if only 
minimum payments were made. The second option, which was mandated if a 
cardholder did not pay more than the minimum payment for 6 consecutive 
months, required issuers to print on the billing statement 
individualized information indicating an estimate of the number of 
years and months and the approximate total cost to pay off the total 
balance due, based on the terms of the credit agreement, if the holder 
were to make only the minimum payment. The disclosure also included a 
toll-free telephone number to a credit counseling referral service. In 
December 2002, the U.S. District Court for the Eastern District of 
California held that the state statute was preempted by federal law and 
determined that the law was inapplicable to all federally chartered 
banks, savings associations and credit unions.[Footnote 13] According 
to a staff attorney for the California Attorney General's office 
involved in the case, the judge effectively invalidated the law for all 
issuers because federally chartered issuers held more than 95 percent 
of credit card debt in the state at the time, thereby compelling the 
state for fairness reasons to relieve all issuers from compliance with 
the law.

Results in Brief:

Credit card issuers and data processors appear capable of providing 
cardholders with customized information on the consequences of making 
only minimum payments, but adding such disclosures to cardholders' 
statements would increase issuers' costs. Representatives of credit 
card issuers and processors said they have the technological capability 
and data in their information systems to calculate estimates of the 
time that would be needed to repay balances and other information that 
would use cardholders' actual balances and interest rates. These 
estimates would incorporate various assumptions, including that no 
additional transactions would occur on a cardholder's account. 
Calculations necessary for customized disclosures could also require 
choices about how to account for other variables that can affect the 
precision of the estimates produced, such as how to address cardholder 
balances that are subject to multiple interest rates. Because the 
calculations would involve these various assumptions and decisions, 
issuers said that any requirement to provide such disclosures should 
include legal protections against potential lawsuits about the 
"precision" of the calculations. The issuers and processors from which 
we obtained data were not able to provide precise estimates of costs 
for various reasons, including uncertainty about how the calculations 
would be required to be made and how the disclosures would be 
formatted. However, issuers and processors estimated that the three 
most significant costs for producing customized minimum payment 
disclosures would be the additional postage for mailing longer billing 
statements, computer programming necessary for the calculations, and 
handling of the increased number of cardholder telephone calls about 
such disclosures. Postage appears to be the largest cost. Estimates of 
the total first-year costs to implement customized disclosures varied 
widely across issuers, with one large issuer expecting to incur at 
least $9 million but another issuer expecting as much as $57 million. 
Because issuers already are obligated to bear some of these costs as 
part of implementing the minimum payment disclosures required by the 
Bankruptcy Act, the incremental costs of providing customized 
disclosures likely would be less than these estimates. Further, an 
industry analyst saw these costs as being very small in terms of the 
income and expenses of the largest issuers.

Cardholders and others generally found customized disclosures on the 
consequences of making minimum payments useful; however, opinions on 
the extent to which the disclosures would influence cardholders' 
payment behavior varied. Among the 112 cardholders we interviewed, when 
offered a choice of receiving either a customized disclosure, the 
generic disclosures of the Bankruptcy Act, or no disclosure at all, 57 
percent of the revolver cardholders--who typically carry balances on 
their cards and thus would be most likely to find information on 
minimum payment consequences useful--preferred to receive customized 
disclosures. While several convenience users--who pay their balances in 
full each month--also preferred the customized disclosure, the majority 
(60 percent) said they would be satisfied with receiving either generic 
disclosures or none at all. Among the reasons that cardholders who 
preferred customized disclosures found them useful were that the 
information would be specific to their accounts, change based on their 
transactions, and provide more information than a generic disclosure. 
The cardholders who did not prefer customized disclosures told us that 
they did not need such information, for example, because they already 
understood the consequences of making minimum payments or because they 
paid their credit card balances in full each month. Although generally 
seen as useful by many of the cardholders, the impact of customized 
disclosures on cardholder payment behavior could vary. Consumer groups, 
financial educators, and many of the cardholders with whom we spoke 
indicated that customized disclosures would influence cardholders to 
make larger payments or change how they use their credit cards because 
such disclosures would be more noticeable than generic ones. However, 
customized disclosures might not affect the behavior of cardholders who 
make minimum payments because they may be financially unable to do 
otherwise. In addition, issuers' representatives stated that providing 
customized disclosures to all cardholders would have limited impact for 
various reasons; for example, they saw only a small impact because the 
number of cardholders that routinely made only minimum payments on 
their accounts is small.

Issuers, consumer groups, and others suggested various alternatives to 
providing all cardholders with information on the consequences of 
making only minimum payments on each monthly billing statement. 
Alternatives included providing customized disclosures only to 
cardholders who revolve balances or make minimum or slightly higher 
payments; in a location other than the first page of the billing 
statement; or less frequently (such as quarterly or annually). Each of 
the alternatives presents various advantages and disadvantages for 
issuers and cardholders. For example, providing customized disclosures 
only to cardholders who revolve balances or make minimum or slightly 
higher payments could more effectively target persons who are more 
likely to need the information and reduce issuers' postage costs. In 
addition, providing customized disclosures in a location other than the 
first page of the billing statement or providing such disclosures less 
frequently could lower programming and other implementation costs. 
However, these alternatives also could decrease the extent to which 
such disclosures affect cardholders' behavior, because fewer 
cardholders would receive the information or could fail to notice it if 
the disclosure were removed from the first page of the billing 
statement. Other options included not providing customized disclosures 
but rather making greater use of generic examples or increasing 
financial education efforts. For example, issuers could provide generic 
examples (of the time required to pay off a balance and other 
information) for a range of balance amounts and present cardholders 
with the example that most accurately reflected their account. A final 
suggestion was to improve consumer awareness of the consequences of 
making minimum payments through greater financial education; for 
example, by including general information about the consequences of 
only making minimum payments in solicitation letters or the 
introductory package cardholders receive with credit cards.

We provided a draft of this report to the Federal Deposit Insurance 
Corporation, the Federal Reserve, the Federal Trade Commission, the 
National Credit Union Administration, the Office of the Comptroller of 
the Currency, and the Office of Thrift Supervision for comment. The 
Federal Reserve, the Federal Trade Commission, and the Office of the 
Comptroller of the Currency provided technical comments that we 
incorporated where appropriate. The National Credit Union 
Administration provided written comments that agreed with our findings. 
This regulator also noted that costs of implementing customized 
disclosures could be significant for some small institutions and that 
considering options in how to implement such disclosures would be 
important.

Providing Cardholders with Customized Information Seen as Feasible but 
Doing So Would Increase Costs for Issuers:

According to credit card issuers and others we interviewed, providing 
customized estimates to cardholders would be feasible. However, the 
precision of these estimates would depend upon the assumptions 
incorporated in the calculations needed to produce this information, 
which can vary based on decisions about how various factors are 
included. Issuers also said providing such information could expose 
them to legal liability and suggested a variety of regulatory actions 
to address these concerns. Although uncertainty about format and 
content prevented issuers and processors from providing precise cost 
estimates, they told us the largest individual cost components for 
large and small issuers appeared to be ongoing postage and call center 
operations, as well as one-time programming costs. Total projected 
costs to implement customized disclosures varied widely. However, 
issuers already are going to bear some of these costs to implement 
Bankruptcy Act disclosures; and, according to an industry analyst, the 
costs appear very small when compared with large issuers' net income.

Issuers and Others Stated That Providing Customized Estimates Is 
Feasible but Could Increase Issuers' Legal Liability:

Issuers and others familiar with the proposed minimum payment 
disclosure indicated to us that providing cardholders with estimates of 
various consequences of making minimum payments would be possible. 
Representatives for all six large credit card issuers whom we 
interviewed acknowledged that their computer systems could be 
programmed to use individual cardholder account information to 
calculate estimates of the information envisioned to be disclosed. 
These calculations would include the amount of time required to pay off 
a cardholder's specific balance if only the minimum payment were made, 
the total amount of interest incurred over that time, and the amount a 
cardholder would be required to pay each billing cycle to pay off an 
outstanding balance over a given period. Some credit card issuers and 
processors already had successfully developed the capability to produce 
tailored estimates for their cardholders as a result of customized 
minimum payment disclosures that had been required in California in 
2002. One of these issuers developed this capability internally, while 
another used a third-party processor that developed this functionality 
for all its issuer clients to use.

Besides noting that they could produce customized disclosures, some 
issuers said they would prefer to provide customized rather than 
generic information to cardholders. For example, representatives for 
one large issuer told us they would prefer the Bankruptcy Act option 
that would require them to produce actual repayment times for 
cardholders, obtainable by calling a toll-free telephone number 
provided in billing statements. In a comment letter responding to the 
Federal Reserve's advance notice of proposed rulemaking, a 
representative for another large issuer said that existing disclosure 
provisions should be implemented in such a way as to encourage issuers 
to provide customized information to cardholders. These two large 
issuers said they supported providing customized information to their 
cardholders because they believe cardholders would find it more 
relevant than generic information. A representative for one of these 
issuers also said the issuer would benefit because providing customized 
information over the telephone would require the shortest statement to 
be printed on a billing statement of the two options under the 
Bankruptcy Act and could be printed anywhere on a billing statement, 
which could be easier to implement.

Although generally having fewer resources than larger issuers, small 
banks that issue credit cards also could likely implement customized 
disclosures, but such a requirement could represent a larger burden for 
those that do not use third-party processors. A representative of a 
trade association representing community banks told us customized 
estimates would be feasible for small institutions because the work to 
implement such a requirement would be done largely by the third-party 
processors already used to manage cardholder data and process billing 
statements.[Footnote 14] According to staff of the National Credit 
Union Administration and the Federal Deposit Insurance Corporation who 
were familiar with the operations of smaller financial institutions 
offering credit cards, most small issuers use third-party processors to 
assist with card operations because the small issuers lack the 
resources to provide such a product themselves. For example, small 
issuers typically assign only one or two people to manage their credit 
card programs that, according to representatives of a third-party 
processor, would not be adequate for managing the technical, legal, and 
compliance issues that would be required to provide the proposed 
customized disclosure. However, small institutions benefit from 
economies of scale by working through third-party processors. For 
example, a representative for a third-party processor with thousands of 
small-bank clients told us that the processor requires all small 
institutions to use the same billing statement format or template. 
Therefore, changes made by the third-party processor to the billing 
statement template would apply to all clients using that template. In 
this case, the processor's costs to modify the template would be spread 
across its client base. A representative from a federal banking 
regulator told us that if issuers discontinue a credit card program 
upon the implementation of new disclosure requirements, it would likely 
be because the program had been marginally profitable or unprofitable 
even before the requirements took effect.

Assumptions and Calculation Methods Can Affect the Precision of 
Customized Estimates:

Issuers and others told us the calculations needed to produce 
customized information require the incorporation of certain 
assumptions, and their precision can vary depending on various choices 
that can be made as part of these calculations. The calculations needed 
to produce customized information require assumptions about future 
cardholder behavior or changes in account terms. For example, an 
estimate of the time required to pay off a cardholder's current balance 
would assume that the cardholder does not make more purchases with the 
card. Any subsequent increase to a cardholder's outstanding balance 
would lengthen the repayment period and also likely increase the total 
amount of interest to be paid for a cardholder making minimum payments. 
Additionally, the estimates produced would assume that a consumer 
continuously paid exactly the minimum payment and that payments would 
be made by the due date. Other assumptions would address potential 
changes in account terms. For example, calculations would assume that 
the interest rate applied to the cardholder's balance remained 
constant. However, changes in future interest rates are likely, and 
such changes could affect the time required to fully repay a given 
balance. Similarly, the estimates produced would assume that the 
formulas issuers use to allocate payments to the various balances 
subject to different interest rates, among other things, also would 
stay the same.

In addition to these assumptions, the choices that lawmakers, 
regulators or issuers make about calculation methods also affect the 
precision of the customized estimates.[Footnote 15] These choices 
include how issuers compute minimum payment amounts or finance charges, 
among other things. For example:

* Minimum payment formulas vary among issuers and each issuer could 
have as many as six different methods for determining the minimum 
payment on a single account. Some card issuers calculate minimum 
payment amounts as a set percentage of a cardholder's outstanding 
balance, while others include all interest and fees to be paid as well 
as some amount of the principal balance. Further, issuers differ in 
their absolute minimum payment amounts (e.g., $10, $15, $20). Estimates 
based on each firm's actual formula for calculating minimum payments 
therefore would differ from estimates calculated using a standard 
formula for all issuers.

* Many issuers have credit cards that charge different rates for 
different types of transactions, such as purchases, cash advances, or 
balance transfers from other credit cards. Estimates that require 
issuers to incorporate the various interest rates that apply to their 
cardholders' outstanding balances would differ from those based on 
formulas that assume a single interest rate, including ones using a 
composite rate.

As a result, if lawmakers or regulators mandated use of a standardized 
calculation to prepare customized minimum payment estimates, 
cardholders could receive less precise estimates. In contrast, 
requiring issuers to calculate estimates using actual interest rates-- 
including cases in which multiple interest rates apply to different 
portions of a total balance--and include other information that 
specifically reflects each issuer's own terms and practices likely 
would lead to more precise estimates.

Because some issuers saw the assumptions that must be incorporated into 
the calculations for customized minimum payment disclosures as 
unrealistic, they and others questioned whether such disclosures 
provided useful information. For example, some issuer representatives 
noted that the customized disclosures presented estimates that would be 
accurate only as long as cardholders did not make further purchases and 
the interest rate on the card remained constant. However, issuers said 
that such situations were not representative of most cardholders' 
behavior or today's credit environment. Some issuers mentioned that, 
for these reasons, the Bankruptcy Act disclosure options were a good 
compromise between Congress and the industry. As a result, issuers and 
others stated that these disclosures deserve a chance to work before 
further, more detailed disclosures are required.

Issuers See Shelter from Legal Liability as Important for Providing 
Customized Disclosures:

According to some issuers and a third-party processor, providing 
customized estimates to cardholders could expose card issuers to 
increased legal risk. Because of the imprecise nature of customized 
minimum payment estimates, some issuers expressed concerns about facing 
lawsuits. For example, some issuer representatives told us that issuers 
were concerned about being held responsible for adverse consequences 
experienced by cardholders who misinterpreted the estimates, which 
incorporate certain assumptions and calculation choices that affect 
their precision. Issuers and others said litigation (e.g., class action 
lawsuits) could arise out of such misinterpretations and subject 
issuers to significant legal costs, even if they took reasonable 
actions under the guidance to provide cardholders with customized 
information. A representative of a trade association for community 
banks told us the threat of legal liability would be more onerous for 
small issuers.

The extent to which requiring customized disclosures would increase 
issuers' legal risk is not certain because cardholders' ability to sue 
can vary. For example, under TILA provisions, class action lawsuits are 
not available to cardholders with grievances under the minimum payment 
disclosure requirement added by the Bankruptcy Act.[Footnote 16] 
However, TILA provides cardholders with a private right of action 
against issuers, which could make issuers that failed to comply with 
the minimum payment disclosure requirements liable for actual losses 
incurred by cardholders.[Footnote 17] In addition, an Office of the 
Comptroller of the Currency official told us that the possibility 
exists that a cardholder may have a private right of action against an 
issuer for erroneous disclosures under a state's consumer protection 
law.

Although various "safe harbor" provisions in TILA already protect 
issuers from unintentional errors resulting from good-faith efforts to 
comply with rules and regulations, organizations we interviewed 
suggested a variety of additional legal protections if disclosure 
requirements were to change. For example, a representative for an 
issuer suggested that issuers could use calculation methods previously 
deemed acceptable to the Federal Reserve. Issuers that performed 
calculations according to the approved methods would be considered in 
compliance with the disclosure requirements. Also, issuer 
representatives and a representative of a consumer interest group said 
that the estimates that issuers calculate could be subject to a 
tolerance test, which would give issuers a margin of error (e.g., a few 
months) within which the estimates could be deemed accurate. Another 
legal protection could involve determining whether issuers followed 
required steps--according to defined assumptions and calculation 
methodologies--to calculate the customized information. For example, 
regulation could establish parameters for the calculations, such as how 
to treat accounts with multiple interest rates. However, a 
representative of a consumer interest group and credit card processor 
cautioned that while a higher level of standardization of the 
calculations could help protect issuers from lawsuits because 
expectations would be clearer, standardized calculations might not be 
sufficient to reflect variation in the terms and conditions of various 
credit card products.

Issuers Identified Three Significant Costs to Implement Customized 
Disclosures, but Estimates of Total Costs Varied Widely:

Although not certain about the form and content of a customized minimum 
payment disclosure, issuer and processor representatives were able to 
identify the implementation components that likely would be the most 
costly, including postage, computer programming, and call center 
operations. However, the estimates of the total implementation costs 
varied widely. Further, issuers already would incur some portion of the 
costs to provide customized disclosures in providing the Bankruptcy Act 
disclosures; thus, not all of the cost estimates we obtained represent 
the cost of customized disclosures exclusively.

Credit card issuers and processors--the entities with the best data 
about the cost to implement customized disclosures--were unable to 
provide precise cost estimates for a variety of reasons. First, factors 
affecting actual paper and postage costs cannot be determined until a 
law requiring a customized disclosure is enacted and implementing 
regulations issued. Such factors could include how customized 
disclosures would be formatted (e.g., font size, spacing) and where 
such disclosures would be required to be placed in the billing 
statement (e.g., front page, leaflet). Second, decisions about 
calculation methods and the treatment of variables could affect 
estimates for programming computers. For example, representatives for 
two large issuers told us that if issuers had to make complex 
calculations, actual programming costs could be as much as four to five 
times higher than if simpler calculations were required. Third, some 
issuers were uncertain of the costs that would be incurred outside 
their own organizations, for example, by third-party processors. 
Accordingly, some issuers generated estimates based on previous 
experiences (such as implementing similar requirements) or by making 
assumptions about implementation requirements, such as the required 
location and length of a disclosure.

Increased Postage Represents One of the Largest Cost Components:

Two large issuers and two third-party processors provided us with 
estimates of postage costs, which they said would be potentially the 
highest cost item to implement a customized disclosure. Postage cost 
increases could occur if adding the disclosure also added an additional 
page to the monthly statement. This added weight could move the 
statement into a higher postage category. Adding a page to billing 
statements could increase postage costs because, as one large issuer 
explained, issuers generally manage the amount of information they 
include in their mailings to meet a 1-ounce limit, which according to a 
representative of a third-party processor costs on average $0.30 per 
statement to mail. The incremental cost of moving from a 1-ounce bulk 
postage rate to a 2-ounce rate would be on average about $0.23, or 
almost an 80 percent increase, according to representatives for two 
third-party processors. However, requiring that additional information 
be included in a billing statement would not necessarily push all 
billing statements into a higher postage category because issuers add 
and remove information (such as advertising) from statements to meet 
weight limits, according to representatives for some issuers. According 
to representatives of a third-party processor, postage rates for small 
issuers that mail statements through third-party processors would be 
relatively the same as for large issuers. A representative of another 
third-party processor told us small issuers get the same bulk postage 
rates as large issuers because their mailings are combined. Postage 
rates decline as more statements make up a mailing. However, postage 
costs for small issuers that mail statements at retail rates would be 
higher. We were unable to determine the proportion of small issuers 
that use retail postage rates.

According to issuers and processors, additional postage arising from 
implementing customized minimum payment disclosures for a large issuer 
could be as high as about $14 million annually. We obtained postage 
cost estimates from representatives for two large issuers that mail up 
to 50 million statements each month.

* According to one of these issuers, annual postage costs could 
increase up to about $5 million if all cardholders were required to 
receive the customized information envisioned in a proposed disclosure 
on the first page of every billing statement. We estimated this to be 
an increase of about 5 percent to annual postage costs for mailing 
billing statements.[Footnote 18]

* Representatives for the other issuer told us their postage costs 
could increase by as much as about $14 million annually to implement 
customized disclosures on the first page of billing statements. We 
estimated this to represent about an 8 percent increase to the issuer's 
annual postage costs to mail billing statements. The representatives 
estimated these disclosures to be twice the length of a generic 
disclosure, thereby forcing more than 20 percent of statements to 
require an additional page.

Differences in these estimates are attributable to the number of 
billing statements that the issuers estimated would require additional 
postage, which differs across issuers depending on the format of their 
statements and the assumptions they made about formatting for the 
proposed disclosure.

Although estimated postage cost increases appear to constitute the 
largest component of projected implementation costs, issuers usually 
incur much higher postage costs for other purposes. For example, a 
credit card industry analyst told us postage costs for mailing 
statements are insignificant when compared with the expense per issuer 
of mailing about 4-5 billion solicitations each year, a typical amount 
for the largest card issuers. In contrast--based on our analysis of 
CardWeb.com, Inc., data--we estimate that even the largest issuers mail 
less than 1 billion statements per year. Also, postage costs could 
decline as the number of cardholders receiving billing statements in 
electronic formats increases. Representatives for some issuers told us 
that the proportion of cardholders receiving statements in an 
electronic format is small, but growing. According to representatives 
of one large issuer, between 2002 and 2004, electronic statement use 
among their cardholders increased about 85 percent, and 6 to 12 percent 
received statements electronically. Representatives for a smaller 
issuer told us that about 10 percent of its cardholders used the 
issuer's Web site to get information about their card accounts.

Programming Modifications Are Also Likely to Be a Major Implementation 
Cost Component:

According to issuers and others, expenses related to programming 
computer systems to develop tailored estimates would be another major 
cost of implementing customized disclosures. Programming costs are one- 
time costs for designing, testing, and implementing computer code. Once 
in place, the new or revised programs would use cardholder account data 
to provide estimates of the repayment period, total interest costs, and 
monthly payment amount to pay off a balance if only minimum payments 
were to be made. Issuers' programming costs would arise from the time 
their own information technology staff spend making systems 
modifications or from the increased expenses from the use of third- 
party processors, which maintain information systems that store 
issuers' cardholder account data as well as develop, print, and mail 
billing statements.

Estimates for programming generally were $1 million or less and 
depended on the complexity of the required calculations and issuers' 
information systems. For example, representatives of a large issuer and 
a card processor representing over one thousand large and small issuers 
told us the up-front costs to develop and program computer code for a 
customized disclosure would cost about $500,000 but could cost as much 
as $1 million for more complex calculations. In providing us with 
estimates, we asked issuers and third-party processors to assume that 
calculations would reflect issuers' actual account terms and practices 
at the time the information was produced, including interest rates, 
account balances, and methods for calculating finance charges and 
minimum payments. However, representatives for the same large issuer 
told us programming costs could be as much as $5 million for the most 
complex calculations--for example, a calculation that would require 
issuers to factor in such situations as temporary zero percent 
promotional interest rates. We obtained estimates from others for 
programming under the Bankruptcy Act provisions, which only require one 
calculation to estimate a cardholder's repayment period. These 
estimates were generally less than $500,000. For example, one lender 
stated in a comment letter to the Federal Reserve that such programming 
would cost about $412,500.

Estimated programming costs for smaller issuers that use third-party 
processors were lower than for large issuers. We obtained estimates for 
programming the customized provisions under the Bankruptcy Act from a 
processor and a medium-sized issuer. A representative of the processor 
estimated it would cost about $300,000 to modify information systems to 
accommodate the Bankruptcy Act disclosure option requiring issuers to 
provide an estimate of the repayment time. According to the 
representative, this cost would be spread across the processor's small- 
and medium-size issuer client base of about 5,000 issuers. In addition, 
representatives for a medium-sized issuer told us it would cost the 
issuer $5,000 to $10,000 to have its third-party processor modify its 
information systems to accommodate customized provisions contained in 
the Bankruptcy Act. They further noted that it would cost about $150 
per hour to hire a processor to program the other two messages that are 
envisioned to be included in customized disclosures.

Costs for programming would vary depending on the level of precision 
that would be required and the complexity of an issuer's account 
practices. Some issuers have more complex pricing schemes that could 
increase the programming required to develop estimates that more 
closely reflect a cardholder's situation. For example, as noted above, 
many large issuers engage in transaction-based pricing, in which 
different rates of interest apply to balances originating from 
different transactions (such as purchases, cash advances, or balance 
transfers). Programming a calculation that accounts for a variety of 
balances at different interest rates, while more precise, is more 
complex than a calculation that uses one balance and one interest rate. 
Adding further to the complexity, with multiple balances and interest 
rates, decisions would need to be made about the order in which to 
allocate cardholder payments to the outstanding balances.

A smaller portion of the programming estimates we received was for 
reformatting billing statements to accommodate the text of the 
disclosure. Issuers use various formats or templates to present 
cardholders with information about their accounts, including 
transactions, payment due dates, and rewards program information. 
Issuers may also use different templates for different card programs, 
such as cards with rewards (e.g., cash-back or travel benefits) or 
private-label cards associated with major retailers. The issuers use an 
average of three statement templates, with the smallest issuers using 
just one and the largest issuers using as many as 100 templates, 
according to representatives of third-party processors serving large 
and small issuers. One representative estimated one-time costs of about 
$13,500 per issuer, assuming three templates required revision. 
Programming costs for small issuers would generally be the same on a 
per-unit (statement template) basis. However, a representative of 
another third-party processor told us reformatting costs would be 
substantially lower for small issuers because the processor requires 
all small issuers to use the same statement template, thereby spreading 
reformatting costs across the thousands of institutions using that 
statement.

Need for Expanded Customer Service Resources Would Also Increase Issuer 
Costs:

Issuers estimated that call-center costs would increase following the 
implementation of customized disclosures because the centers would 
receive more and longer telephone calls from customers. One large 
issuer told us its costs could increase by about $3 million in the 
first few months following implementation of customized disclosures. 
However, this issuer said these calls likely would taper off after 
cardholders became familiar with the customized information. In 
addition, an issuer in a comment letter to the Federal Reserve noted 
that the Bankruptcy Act requirements would increase call volume and 
duration, which could increase its expense for servicing customer calls 
by about $900,000 monthly. As part of preparing to implement the 
California disclosure requirements, six large issuers estimated 
incurring expenses averaging about $680,000 monthly to operate a 
telephone bank upon implementing minimum payment disclosures in 
California.

Estimates of Total Implementation Cost Varied Widely:

Perhaps reflecting the uncertainties and range of assumptions noted 
above, the estimates that we obtained of total first-year costs ranged 
from $9 million to $57 million for large issuers. For example, 
representatives of one issuer estimated that postage, programming, and 
customer service costs could total approximately $9 million, but also 
noted that the issuer could incur additional costs, such as training 
staff and retaining legal services to keep abreast of regulatory 
changes and court decisions that could affect compliance.

Not all issuers from whom we obtained data were able to provide total 
estimates based on individual implementation cost components. Instead, 
these issuers provided us with only aggregated estimates based on their 
experiences in implementing California's minimum payment disclosure 
requirements; and these estimates generally were higher than those 
provided by another issuer and two processors that estimated individual 
component costs. For example, representatives of one large issuer 
estimated the company would have spent a total of $57 million in the 
first year following implementation had it implemented the California 
requirements, which roughly resembled portions of the customized 
disclosure we studied. The issuer separated this estimate into two 
categories of one-time, start-up costs and ongoing costs. The one-time 
costs would be about $30 million, which would include programming 
computer systems and modifications to customer service systems, among 
other things. Ongoing costs would be about $27 million annually, 
including postage and handling a higher number of calls from 
cardholders, among other things. In documents filed with a federal 
district court, three large issuers estimated it would cost them about 
$41 million each in the first year to implement California's customized 
disclosure requirements.[Footnote 19] Of this amount, about $18 million 
would pay for one-time, start-up costs with the remaining $23 million 
for ongoing costs.

Issuers Already Slated to Incur Some of These Costs, Which Are Small 
Relative to Net Income:

As noted above, impending minimum payment disclosure requirements under 
the Bankruptcy Act could soon require issuers to make programming and 
billing statement changes that could consequently reduce estimated 
costs to implement any additional customized disclosures. For example, 
one Bankruptcy Act option would require issuers to produce actual 
information about a cardholder's repayment period if only minimum 
payments were made and make this information available to cardholders 
over the telephone. Programming expenses made up front to meet that 
requirement could reduce the programming costs for implementing 
customized disclosures. Also, estimated increases to postage costs 
associated with a new customized disclosure requirement may be 
overstated in that they do not account for increased postage costs 
issuers will already have incurred for implementing the Bankruptcy Act 
requirements.

Because the cost estimates we obtained were not comprehensive, it is 
not possible to ascertain how additional customized minimum payment 
disclosure requirements would affect issuers' overall profitability. 
However, the costs of implementing customized disclosures do not appear 
to be significant in terms of large issuers' net income. According to a 
credit card industry analyst, estimates for implementing the customized 
minimum payment disclosures are insignificant to issuers and easily 
would be absorbed. The analyst noted that estimates for start-up and 
ongoing costs in the first year would be so small that they would be 
the equivalent of a rounding error in terms of net income.

Comparing these estimated implementation costs with issuers' operating 
expenses also indicated that such costs might not significantly 
increase their operating expenses. To determine how estimates of the 
costs to implement customized disclosures--which ranged from $9 million 
to $57 million--would affect the operating expense of the issuers that 
provided us with these estimates, we identified operating expenses and 
amounts in outstanding credit card loans from financial reports and 
data the issuers provided to us.[Footnote 20] By adding the estimates 
of total implementation costs to the amount each issuer reported in 
operating expenses, we found that the ratio of their operating expenses 
to their outstanding credit card loans--a metric commonly used by 
industry analysts--would stay the same or increase slightly.[Footnote 
21] For example, we found that the issuer that provided us with a $9 
million estimate for total implementation costs for the first year 
would experience no change to its operating expense ratio. The issuer 
that provided us with a $57 million estimate would experience an 
increase in current ratio from approximately 3.3 percent to about 3.5 
percent. According to CardWeb.com, Inc., monthly operating expense 
ratios for the 150 issuers that it monitors generally averaged between 
4.2 and approximately 6.0 percent from January 2001 to December 
2005.[Footnote 22]

Customized Disclosure Was Seen as Useful, but Its Impact on Cardholders 
May Vary:

Most of the revolver cardholders--those that carry a balance on their 
credit cards--who we interviewed preferred to receive a customized 
disclosure on minimum payment consequences. Although some convenience 
users also preferred a customized disclosure, most saw generic 
disclosures or no disclosure at all as sufficient for their needs. 
Those preferring the customized disclosure did so because it would be 
cardholder-specific, change each month based on account transactions, 
and provide more information than the two Bankruptcy Act options. 
However, opinions as to how the customized disclosure would influence 
cardholder behavior varied, with some believing that such a disclosure 
would have a great impact and others believing that it would have 
little impact.

Revolvers Preferred Customized Disclosures:

To assess the usefulness of providing a customized disclosure to 
cardholders, we interviewed 112 adult cardholders and asked for their 
preferences for three disclosure statements--the two generic disclosure 
options from the Bankruptcy Act and an example of a proposed customized 
disclosure--or no disclosure at all. We categorized the cardholders 
into two groups, of 38 convenience users and 74 revolvers, based on 
their responses to questions about their credit card payment 
behaviors.[Footnote 23] The cardholders recruited for the interviews 
did not form a random, statistically representative sample of the U.S. 
population. As described in table 1 (in the background section), the 
two generic disclosure options shown to cardholders include one that 
contains a minimum payment warning statement only, and another that 
contains a minimum payment warning statement and an example of the 
amount of time needed to pay off a sample balance. Table 1 also 
includes an example of a customized disclosure, similar to the one that 
cardholders were shown.

Revolvers generally preferred to receive a customized disclosure about 
the consequences of making minimum payments. Specifically, more than 
half of the revolvers (42 out of 74) choose to receive the customized 
disclosure over the two Bankruptcy Act disclosure options or no 
disclosure at all (see fig. 1).

Figure 1: Extent to Which 74 Credit Card Revolvers Preferred and Found 
Useful a Customized Minimum Payment Disclosure:

[See PDF for image]

Note: Percentages may not total to 100 percent due to rounding.

[End of figure]

As figure 1 shows, the revolvers--including some for whom the 
customized disclosure was not the preferred option--also generally 
found the information contained in the customized disclosure to be 
useful. Sixty-eight percent (50 out of 74) of the revolvers found the 
customized disclosure either extremely or very useful, while 23 percent 
(17 out of 74) found the customized disclosure slightly useful or not 
useful at all.

Although Several Convenience Users Also Preferred a Customized 
Disclosure, Most Did Not Believe They Needed to Receive Such 
Information:

Although more convenience users preferred the customized disclosure to 
either of the generic ones, the majority (60 percent) were satisfied 
with receiving a generic disclosure or no disclosure at all. The number 
of convenience users preferring the customized disclosure (15 out of 
38) was equal to the total number who preferred the generic disclosures.

Figure 2: Extent to Which 38 Credit Card Convenience Users Preferred 
and Found Useful a Customized Minimum Payment Disclosure:

[See PDF for image]

Note: Percentages may not total to 100 percent due to rounding. The 
individual percentages for the two generic disclosures also do not 
total to the combined percentage due to rounding.

[End of figure]

As shown in figure 2, while 37 percent (14 out of 38) of convenience 
users found the customized disclosures extremely or very useful, 55 
percent (21 out of 38) found it slightly useful or not useful at all.

Revolvers and Convenience Users Cited Similar Reasons for Preferring 
the Customized Disclosure, but Not All Cardholders Wanted This 
Information:

The reasons given by both revolvers and convenience users for 
preferring the customized disclosure generally were similar. Many of 
the cardholders who preferred the customized disclosure or thought that 
it was more useful than a generic disclosure said they did so because 
the information provided would be specific to their account and change 
each month, based on their transactions. For example, if issuers were 
providing a customized disclosure, the information on the monthly 
billing statements would take into account any changes in customers' 
accounts that occurred since the previous billing cycle, including new 
purchases, payments received, changes in interest rates, and any fees 
that might have been assessed. The customized disclosure, therefore, 
would provide cardholders with a new "snapshot" of their account each 
month, as of the date the bill was calculated. Many of the cardholders 
noted that, even if the information was outdated by the time they 
received it (e.g., if they had made additional purchases), just having 
an idea of the payments needed to pay off their balances would be 
helpful. One respondent noted that she found the customized disclosure 
more useful than the generic example in the Bankruptcy Act disclosure 
because, even though her issuer cannot anticipate future purchases or 
changes in her interest rate, the customized disclosure still would be 
closer to reality. Some respondents also found the dynamic nature of 
the disclosure helped them understand the consequences of making 
minimum payments more than the generic examples because they would be 
better able to see how purchases or payments made on their account 
affected their repayment estimates.

Additionally, some respondents noted that because the customized 
disclosure would be updated each month they could track their account 
and use the information for budgeting or financial planning purposes. 
Although issuers and others stated that the information would not be 
practical for cardholders because the estimates would assume no 
activity on the account, we did not find that the cardholders we 
interviewed believed this limited the usefulness of the customized 
information. In fact, after we explained to cardholders that the 
customized disclosure would represent only a point-in-time estimate and 
that the information would change if there were additional activity on 
their account, 79 percent (89 of 112 cardholders) found the customized 
disclosure more useful than the generic example in one of the 
Bankruptcy Act options.

Customized Disclosures Provide Cardholders with Additional Information:

Cardholders also preferred a customized disclosure because such a 
disclosure provided them with new and additional information. We found 
that the majority of cardholders already demonstrated a basic 
understanding of the consequences of making only minimum payments. For 
example, 68 percent of the cardholders could explain that both the 
length of time and amount of interest they would pay would increase if 
they made only minimum payments. An additional 29 percent of 
respondents could name at least one of these two consequences. Because 
many cardholders already understood that making only minimum payments 
could be harmful to their financial condition, the information provided 
by either of the Bankruptcy Act disclosures would not be new to the 
cardholder. One cardholder told us that he preferred the customized 
disclosure because he already understood the concept addressed in both 
Bankruptcy Act disclosure options; however, the customized disclosure 
provided him with personalized details that he found helpful. Another 
cardholder mentioned that the customized disclosure gave him a "plan," 
whereas the other two options were "merely warnings" and would not tell 
him anything he did not already know.

In addition to providing cardholder-specific information on the length 
of repayment, a customized disclosure also could include information on 
the total amount of interest a cardholder would pay if only minimum 
payments were made, and the monthly payment amount needed to repay the 
balance over some time period (e.g., 3 years). During our interviews, 
several cardholders told us that seeing such information would be 
useful to them. For example, some cardholders told us they found the 
information on the monthly amounts needed to repay the balance over a 
time period to be the most useful part of the disclosure because it 
provided them with a plan for how to pay off their balances.

The majority of cardholders we interviewed (57 percent) indicated that 
they were unlikely to take the initiative to call the toll-free 
telephone numbers required by the Bankruptcy Act, and many indicated 
that they had not calculated the information on their own to obtain 
individualized information. Therefore, if the customized disclosure 
were not provided directly on their billing statement, they would be 
unlikely to receive any individualized information at all. In fact, 
many cardholders mentioned that they liked the customized disclosure 
because it eliminated the need for them to calculate the information on 
their own or call a toll-free telephone number. Additionally, most of 
the cardholders were not aware of or using existing tools such as 
amortization calculators that are available on the Internet. Only 41 
percent of cardholders were aware of these calculators, and only 33 
percent of those who were aware of the tools had used them. Also, 
according to financial educators, it is important to provide customized 
disclosures because most cardholders are not able to calculate 
amortization periods and total interest payments correctly.

Some Cardholders Saw Limited Need to Receive Customized Disclosures:

Not all of the cardholders chose to receive the customized disclosure 
or found the information that it contained useful. As shown in figures 
1 and 2, 30 percent (22 of 74) of the revolvers and 39 percent (15 of 
38) of the convenience users preferred to receive one of the two 
Bankruptcy Act options. Some of these cardholders explained that they 
thought the generic disclosures mandated by this act were simpler and 
easier to understand. Others indicated that the example provided in one 
of the Bankruptcy Act options gave them a good understanding of the 
consequences of making minimum payments, without having to see specific 
estimated numbers based on personal account information. Other 
cardholders specifically stated that they found the customized 
disclosure confusing, and some noted that having the option to call the 
toll-free number if they wanted additional information was sufficient.

Finally, some cardholders preferred not to receive any disclosure on 
the consequences of making minimum payments, primarily because they 
already understood the consequences of making minimum payments. Some 
cardholders were concerned that issuers would pass on to them the costs 
associated with providing customized disclosures. Other cardholders 
told us they probably would not pay attention to the disclosure or that 
they would not read it because they did not read their credit card 
statements.

This report does not contain all the results from the interviews. The 
interview guide and a more complete tabulation of the results can be 
viewed at GAO-06-611SP.

Customized Disclosures' Impact on Cardholders May Vary:

Opinions varied on how effective customized disclosures would be in 
influencing cardholder behavior. Consumer groups, financial educators, 
and many of the cardholders we interviewed indicated that considerable 
benefits might result from providing cardholders with customized 
disclosures. Such benefits could include cardholders making larger 
payments or otherwise changing how they use their credit cards.

Customized disclosures might have greater impact because they would be 
more noticeable than other disclosures. For example, a consumer group 
representative and financial educator told us that cardholders 
generally are more likely to notice a customized disclosure over a 
generic one. They compared providing the generic Bankruptcy Act 
disclosures on cardholders' billing statements to providing smokers 
with the Surgeon General's Warning on a cigarette pack, and noted that 
once cardholders become familiar with a generic minimum payment 
disclosure, they are likely to ignore it and not be influenced by the 
information that it contains. The risk of a repeated and identical 
disclosure being ignored appears real, as some of the cardholders we 
interviewed said that after seeing the generic Bankruptcy Act 
disclosures a few times they probably would stop reading them. In 
contrast, cardholders told us that that they would be more likely to 
notice customized information each month. Representatives from some 
consumer groups and other organizations told us that, because the 
example contained in one of the generic Bankruptcy Act disclosures 
contains a sample balance and interest rate that is not reflective of 
most cardholders' accounts, cardholders likely would dismiss it 
entirely because they would assume it did not apply to them.

Customized disclosures also were seen as having a potentially 
significant impact on cardholder behavior because they would provide 
information that changes as the cardholder's situation changes. For 
example, one representative of a third-party credit card processor told 
us that she believes that if cardholders were shown information that 
changed each month according to the actions they took, they then would 
be more likely to change their behavior. Many of the cardholders also 
indicated that a customized disclosure would be more influential than a 
generic disclosure in causing them to consider increasing monthly 
payments. For example, one respondent said that during the months when 
she might not pay her full balance, seeing the customized disclosure 
would make her want to "scrape together more money from savings" to 
make a larger payment. Additionally, another respondent noted that the 
customized disclosure would influence him to take disposable income and 
put it toward his credit card balance. Another said that seeing the 
amount of interest he was paying would make him want to pay off the 
balance sooner. Additionally, two of the cardholders we interviewed 
told us that seeing new information every month would help them make 
decisions for the future and might change the way in which they used 
their credit cards.

However, others, including issuer representatives and industry 
researchers, indicated that customized disclosures might not be 
effective in changing consumer behavior. They noted that not all 
cardholders need the information provided in the customized disclosure. 
For example, while customized disclosures could provide convenience 
users with illustrative information, the cardholders--by paying their 
balances in full each month--already are modeling behavior that 
customized information was designed to promote. As a result, these 
cardholders would appear not to need this additional disclosure. Many 
of the convenience users we interviewed--who preferred not to receive a 
customized disclosure--explained that they paid their balance in full 
each month, already understood the consequences of making only minimum 
payments, and therefore did not need the additional reminder. Instead, 
most of the convenience users told us that they would rather receive 
information on the first page of their billing statement that would be 
more useful to them, such as information on a credit card reward 
program. Additionally, because a customized disclosure would assume 
that only the exact minimum amount would be paid, representatives of 
some issuers told us that such disclosures would be of limited use to 
the large number of cardholders who, although not fully paying the 
balance each month, do pay more than the minimum amount due.

Some organizations also said that customized disclosures might have a 
limited impact on cardholder behavior overall because the number of 
cardholders that make consecutive minimum payments appears to be small. 
According to issuers, minimum payment disclosures, whether customized 
or generic, are useful only to the cardholder population that revolves 
balances--specifically, the smaller subset of that population that 
habitually makes minimum payments. According to six of the issuers we 
contacted, the percentage of their customers who make minimum payments 
is small.[Footnote 24] As a result, most issuers questioned the value 
of implementing customized disclosures that would benefit such a small 
percentage of their customers. Additionally, representatives of one 
large issuer told us that their firm had implemented the minimum 
payment disclosures required under the California law for 3 months and, 
while acknowledging that these disclosures were in place for a brief 
period, indicated that they did not notice a difference in the number 
of cardholders making minimum payments. As a result of this experience, 
the representatives said that they did not expect the proposed 
customized disclosure to have much of an impact either.

Customized disclosures also might have little impact on cardholder 
behavior because some cardholders are not able to make larger than 
minimum payments. Many of the cardholders we interviewed who made 
minimum payments told us that they did so because they could not afford 
to pay more. Competing expenses and a lack of additional disposable 
income were the primary reasons these cardholders gave for making at 
least one minimum payment within the last year. A representative from a 
large issuer also told us that cardholders who make minimum payments 
lack the ability to regularly pay more.

Various Options Exist for Providing Information on Consequences of 
Minimum Payments:

Issuers, consumer groups, and others that we interviewed suggested 
alternatives for providing cardholders with customized information on 
the consequences of making minimum payments. Among the alternatives 
mentioned were targeting customized disclosures to only certain 
cardholders or not requiring the disclosure to appear on the first page 
of cardholders' billing statements. While these alternatives might make 
it easier and less costly for issuers to implement customized 
disclosures, they also may reduce the desired impact of the disclosure 
because fewer cardholders would receive the information or notice the 
disclosure. Rather than providing customized disclosures, some 
suggested that government agencies, issuers, financial educators, and 
consumer groups expand general financial education efforts on the 
consequences of making minimum payments.

Suggested Alternatives Included Fewer Recipients, Flexible Formatting, 
and Online Delivery:

Consumer groups, issuers, and others suggested that the population of 
cardholders that would receive customized disclosures could be 
narrowed. For example, a consumer group representative suggested the 
information could be targeted only to cardholders most likely to need 
it, such as revolvers. A representative of another consumer group told 
us that such information ought to be provided to any cardholders that 
paid the minimum amount or close to the minimum amount in any given 
month. Some issuer representatives asserted that the population 
receiving customized disclosures ought to be even narrower, such as 
cardholders who have made minimum payments for several consecutive 
months.

Limiting the number of cardholders who receive customized disclosures 
offers some advantages to issuers and some disadvantages to 
cardholders. For example, providing customized information to a more 
limited number of cardholders would lower issuer costs, such as paper 
and postage, by reducing the number of billing statements that might 
require an additional page. However, limiting customized disclosures to 
cardholders who pay only the minimum could preclude other cardholders 
from benefiting from such information. For example, many of the 
cardholders we interviewed identified themselves as paying "a lot more 
than the minimum payment," "almost their entire balance," or their 
"entire balance" each month, yet found the customized disclosure to be 
either extremely or very useful. Some of these cardholders noted that 
even though they do not typically make minimum payments or close to the 
minimum payment, the disclosure still provided them with useful 
information in case they ever experienced a time when they would need 
to make minimum payments. Some of the convenience users who found the 
customized disclosure useful explained that the information served as a 
good reminder on the consequences of making minimum payments.

A second alternative that issuers and others identified would be to 
place the disclosure in a location other than the first page of the 
billing statement. For example, issuers could be allowed to print the 
customized disclosure on either the back side of a statement page or on 
a subsequent page. One regulatory official noted that issuers could 
provide text on the first page that informs cardholders that customized 
information is available elsewhere in the statement. Issuers and a card 
processor told us that space on the first page of the billing statement 
is at a premium because it typically contains a lot of important 
information, such as messages on the status of an account (e.g., over- 
the-limit notices).

Providing the customized minimum payment disclosures to cardholders in 
a location other than the first page of the billing statement would 
offer issuers some cost advantages, but a disadvantage of such a change 
could include less impact on cardholder behavior. Not being required to 
place the disclosure on the first page of billing statements could make 
implementing the disclosure easier and less costly for issuers because 
they might not need to reformat their statement templates. However, 
according to consumer groups and others, not placing the information on 
the first page of the statement would reduce its prominence and likely 
its influence on cardholder behavior. For example, one representative 
told us that cardholders might be less likely to notice the disclosure 
if it was not prominently positioned on their billing statement. An 
industry expert confirmed that the primary tool issuers use to 
communicate with their cardholders is the monthly billing statement. 
Therefore, removing the customized minimum payment disclosure from the 
billing statement entirely could decrease the number of cardholders who 
read it at all.

A third suggestion that could reduce the cost of customized disclosures 
would involve providing the information electronically or online. 
According to an issuer and a consumer group we contacted, customized 
information could be provided to cardholders in electronic statements 
sent by issuers. Cardholders also could access such information 
directly on issuers' Web sites. For example, issuers could provide 
online calculators in which cardholders could enter their balances, 
applicable interest rates, and payment amounts to obtain repayment and 
other estimates specific to their accounts. At a credit card industry 
symposium held in June 2005, participants advocated increasing the 
reliance on technology for delivering more useful consumer 
disclosures.[Footnote 25] One issuer that we interviewed already has 
implemented an online calculator to provide its customers with 
customized information, while another issuer told us they were 
currently developing one.

Making customized disclosures available online, rather than in monthly 
statements, could prevent cardholders from receiving outdated 
information and allow cardholders to access the information when they 
need it, rather than limit them to a monthly statement. Online 
availability also presents cardholders with the ability to receive only 
the information they prefer. Online disclosures also could give 
cardholders the flexibility to obtain the information they deemed most 
useful to them. For example, some cardholders found customized 
disclosures only slightly useful, because they made more than the 
minimum payment every month. Additionally, one cardholder said that he 
would rather see the calculation that showed the monthly payment amount 
that would be required to pay his balance off in 1 year, rather than 
some longer period.

However, an exclusively online presentation could also reduce the 
impact of the disclosure. Removing the disclosure from the billing 
statements could greatly decrease the number of cardholders that see 
such information, because not all cardholders have easy access to the 
Internet. Some cardholders we interviewed mentioned that although they 
were aware of online calculators to help them estimate credit card 
payoff times, they had not used them because they did not have easy 
access to the Internet. In addition, even cardholders with the ability 
to obtain such information online might not utilize it. For example, 
only two of the 43 cardholders with whom we spoke that identified 
themselves as typically paying "the minimum amount" or "more than the 
minimum amount, but not much more than the minimum," had used an online 
credit card calculator. Some of these cardholders were not comfortable 
with using the Internet for personal finance. In addition, the 
consumers we interviewed generally greatly preferred receiving minimum 
payment disclosures in their billing statements. Of the 112 cardholders 
we interviewed, 73 percent preferred to receive such information on 
their monthly billing statement, while about 11 percent preferred 
receiving the information via the Internet.

A fourth alternative for providing customized information on minimum 
payment consequences to cardholders would be to do so less often than 
monthly. For example, issuers could provide the information to 
cardholders quarterly or annually. Several of the cardholders we 
interviewed (about 24 percent) were amenable to receiving the 
disclosure less frequently than monthly. This alternative could reduce 
both postage and paper costs for issuers because additional pages to 
print the disclosure would be needed less frequently.

However, if cardholders received the information less frequently, they 
would not be reminded of the consequences of making minimum payments in 
the months they did not receive the disclosure. For example, one 
cardholder we interviewed who typically made only slightly more than 
minimum payments said that she "just doesn't really think about it when 
she makes the payment," but with a customized disclosure "in front of 
her, she would think about it more." Another noted, "Having it [the 
customized disclosure] in front of you with your specific information 
makes it easier to keep in the back of your mind that you should be 
quick to pay your balance off sooner."

Options Besides Customized Disclosures Were also Identified:

Consumer groups, federal regulators, and others identified options for 
improving the information cardholders receive on the consequences of 
making minimum payments that would not entail providing customized 
information. For example, one issuer representative advocated expanding 
the generic example in one of the Bankruptcy Act options by developing 
a wider range of balance amounts and interest rates. With several 
different examples available, issuers could provide cardholders with a 
disclosure that contained a sample balance and interest rate that would 
be closer to those in the cardholder's actual account, without having 
to incur the expense of producing disclosures using the exact amounts. 
While this approach would not provide cardholders with estimates as 
specific to their situation as a customized disclosure, it likely would 
provide better information to cardholders whose balances and interest 
rates were not similar to those currently used in the example contained 
in the Bankruptcy Act disclosure.

Finally, instead of providing customized disclosures, federal 
regulators, educators, and consumer groups mentioned that consumer 
awareness could be improved by requiring issuers and others to increase 
financial education efforts tailored to minimum payment messages. 
Issuers could do this by including information about the consequences 
of making only minimum payments in solicitation letters or the 
introductory packages consumers receive when they obtain a new credit 
card. Government agencies and financial education providers could make 
additional use of advertisements in various media to underline messages 
about the consequences of making minimum payments.

Observations:

Our work indicates that credit card issuers and processors have the 
necessary data and systems capabilities to provide customized minimum 
payment disclosures--that is, to include customized information in 
billing statements that would show the length of time required to pay 
off each cardholder's actual balance and the additional interest that 
would be incurred if only the minimum payment is made each month, as 
well as the monthly payment required to pay off an outstanding balance 
in a given time period. However, such disclosures are only point-in- 
time estimates that would fluctuate as cardholders make additional 
purchases or increase their payment amount. Credit card issuers and 
processors would incur initial costs, estimated to be from less than $1 
million to up to several million dollars, to revise their systems to 
make these calculations. They would also likely incur additional costs 
resulting from higher postal charges--if including such disclosures 
increases the size of cardholder statements--and from increased 
customer service expenses, as they respond to account holder questions 
about these disclosures. While these additional costs could increase 
the ongoing expenses of producing and mailing billing statements, card 
issuers are already obligated to bear some portion of these costs as 
they implement the minimum payment disclosures mandated by the 
Bankruptcy Act. While we cannot estimate the incremental costs of 
providing customized disclosures, the known estimated costs appear to 
be small relative to the income of the largest issuers, which account 
for the vast majority of cardholder accounts. Further, the costs to the 
thousands of small card issuers would be minimal because of their use 
of third-party processors.

While most of the revolver cardholders whom we spoke with found 
customized disclosures very useful, the impact that they might have on 
cardholder payment behavior could vary. Many of the consumers that we 
interviewed told us that customized disclosures provided more useful 
information than the generic disclosures mandated by the Bankruptcy 
Act, with the majority of revolvers preferring to receive customized 
disclosures. However, the majority of convenience users, while finding 
some value in the information contained in customized disclosures, were 
satisfied with receiving either the generic disclosures or no 
additional disclosure at all. While cardholders told us that such 
disclosures could strongly influence their decisions about making 
minimum payments, not all cardholders' financial circumstances would 
allow them to increase their payment amounts. Therefore, the ultimate 
impact of providing additional disclosures could vary.

While providing cardholders with additional disclosures about the 
consequences of making only minimum payments on their credit cards 
would appear to provide them with useful information, such disclosures 
would raise issuer costs and whether the impact on consumer behavior 
would be large or small is not known. However, various options, which 
have both advantages and disadvantages, for providing such information 
exist. For example, providing customized information only to those 
cardholders who revolve credit card balances or by providing it to all 
cardholders but on a less frequent basis or in another location besides 
the first page of the monthly billing statement could make it easier 
and less costly for issuers to implement customized disclosures. These 
options, however, could lessen the potential impact of the customized 
disclosure because fewer cardholders would receive, or be likely to 
notice, the information.

Agency Comments and Our Evaluation:

We provided a draft of this report to the Federal Deposit Insurance 
Corporation, the Federal Reserve, the Federal Trade Commission, the 
National Credit Union Administration, the Office of the Comptroller of 
the Currency, and the Office of Thrift Supervision for their review and 
comment. In a letter from the National Credit Union Administration, the 
Chairman notes that the Administration agrees with the findings of our 
report, including that customized disclosures for consumers could 
feasibly be required of card issuers at a potentially significant but 
relatively reasonable cost and such disclosures could be useful and 
desirable for some consumers despite the uncertainty of their impact. 
The Chairman also notes that, collectively, the potential impact on 
credit unions of requiring card issuers to provide customized 
disclosures to consumers should be minimal, particularly since many use 
third-party processors. However, the Chairman's letter also notes that 
the financial impact of customized disclosure requirements could still 
be significant for these small issuers and even more significant for 
moderate sized financial institutions servicing their own credit card 
portfolios, particularly in institutions where credit card interest 
margins are already low. The letter also notes that considering the 
incremental costs of customized disclosures is important because such 
costs will ultimately be passed on to consumers through increased fees 
or higher interest rates, which could result in a negative impact on 
the same consumers whom the disclosures are meant to help. As a result, 
the Chairman indicates that some of the alternatives to providing 
customized disclosures that are mentioned in our report could be more 
economically efficient than implementing customized disclosures to 
increase consumer awareness of the consequences of making minimum 
payments.

We also received technical comments from the Federal Reserve, the 
Federal Trade Commission, and the Office of the Comptroller of the 
Currency, which we incorporated as appropriate. The Federal Deposit 
Insurance Corporation and the Office of Thrift Supervision did not 
provide any comments.

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
after the date of this report. At that time, we will send copies of 
this report to the Chairman, Federal Deposit Insurance Corporation; the 
Chairman, Federal Reserve; the Chairman, Federal Trade Commission; the 
Chairman, National Credit Union Administration; the Comptroller of the 
Currency; and the Director, Office of Thrift Supervision and to 
interested congressional committees. We will also make copies available 
to others upon request. The report will be available at no charge on 
the GAO Web site at [Hyperlink, http://www.gao.gov]. The results of the 
interviews will also be available on the GAO Web site at GAO-06-611SP.

If you or your staff have any questions regarding this report, please 
contact me at (202) 512-8678 or wood@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
listed in appendix III.

Signed by:

David G. Wood:
Director, Financial Markets and Community Investment:

[End of section]

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

Our objectives were to (1) determine the feasibility and cost of 
requiring credit card issuers (issuers) to provide cardholders with 
customized minimum payment information, (2) assess the usefulness of 
providing customized information to cardholders, and (3) identify 
options for providing cardholders with customized or other information 
about the financial consequences of making minimum payments.

To determine the feasibility and cost of providing cardholders with 
customized minimum payment information, we reviewed current and 
proposed disclosure requirements, including Title XIII of the 
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 
(Bankruptcy Act), which amended the Truth in Lending Act (TILA) to 
require issuers to make disclosures regarding the consequences of 
making only the minimum payment. We also reviewed the advance notices 
of proposed rulemaking that the Board of Governor's of the Federal 
Reserve System (Federal Reserve) issued. The proposed rulemaking is 
associated with the Federal Reserve's self-initiated comprehensive 
review of the open-end (revolving) credit rules in Regulation Z, which 
implements TILA, as well as the implementation of the minimum payment 
disclosure requirements of the Bankruptcy Act. We also reviewed 
California's Civil Code, section 1748.13, which had also mandated that 
consumers receive disclosures regarding minimum payment consequences. 
We discussed the feasibility and cost of providing customized 
information to cardholders with the staff of six major issuers and one 
mid-size issuer. We determined that these issuers account for about 67 
percent of actively used credit card accounts as of year-end 2005. We 
provided issuers with a list of 16 cost items to facilitate discussions 
of the costs to implement customized minimum payment disclosures.

We also met with the staff of two third-party credit card processors 
(processors) that manage card account data and produce billing 
statements for thousands of large and small issuers, who provided us 
with cost estimates and technical information about implementing 
customized disclosures. In addition, we obtained cost estimates for 
another three large issuers from court documents associated with a 
constitutional challenge of a California statute that required issuers 
to include minimum payment disclosures on billing statements sent to 
California cardholders. We supplemented our interview data with a 
review of 17 comment letters that issuers, processors, and trade 
associations submitted to the Federal Reserve that addressed the 
implementation of minimum payment disclosure provisions contained in 
the Bankruptcy Act. We reviewed two studies about costs of regulatory 
reforms and used them to shape our approach with issuers and processors 
to study the costs to implement customized minimum payment 
disclosures.[Footnote 26]

To better understand how producing customized disclosures could affect 
issuer costs, we also discussed issuer operations and profitability 
with two broker-dealer research analysts that monitor credit card 
issuing banks and industry developments. We also met with 
representatives of federal banking regulators--the Federal Reserve, 
Office of the Comptroller of the Currency, Federal Deposit Insurance 
Corporation, Office of Thrift Supervision, and National Credit Union 
Administration--that oversee financial institutions offering credit 
cards, and met with representatives of the Federal Trade Commission, 
which oversees nonbank credit card issuing entities. We also attended a 
roundtable hosted by the McDonough School of Business at Georgetown 
University where representatives of credit card issuers, industry trade 
associations, law firms, federal regulatory agencies, and a consumer 
interest group addressed implementation issues relating to the 
provision of customized minimum payment disclosures.

To assess the usefulness of providing customized disclosures to 
cardholders, we conducted in-depth interviews with a total of 112 adult 
cardholders in three locations: Boston, Chicago, and San Francisco, in 
December 2005. We contracted with OneWorld Communications, Inc., to 
recruit a sample of cardholders that generally resembled the 
demographic makeup of the U.S. population in terms of age, education 
levels, and income. However, the cardholders recruited for the 
interviews did not form a random, statistically representative sample 
of the U.S. population. Cardholders had to speak English and meet 
certain other conditions: having owned at least one general-purpose 
credit card for at least the last 12 months prior to the interview, and 
not have participated in more than one focus group or similar in-person 
study in the 12 months prior to the interview. We selected 
proportionally more people who typically carried balances on their 
credit card (revolvers) rather than those who regularly paid off their 
balances (convenience users)--compared with their actual proportions in 
the U.S. population--because we judged revolvers as likely more in need 
of the information provided in the customized disclosure. See table 2 
for the demographic information on the cardholders we interviewed.

Table 2: Demographic Characteristics of Cardholders Interviewed:

Category: Age[A]: 18-24;
Number of cardholders: 12;
Percent of total: 10.8%.

Category: Age[A]: 25-34;
Number of cardholders: 19;
Percent of total: 17.1%.

Category: Age[A]: 35-44;
Number of cardholders: 27;
Percent of total: 24.3%.

Category: Age[A]: 45-54;
Number of cardholders: 23;
Percent of total: 20.7%.

Category: Age[A]: 55-64;
Number of cardholders: 13;
Percent of total: 11.7%.

Category: Age[A]: 65 and older;
Number of cardholders: 17;
Percent of total: 15.3%.

Category: Household income: Less than $25,000;
Number of cardholders: 16;
Percent of total: 14.3%.

Category: Household income: $25,000 - $44,999;
Number of cardholders: 25;
Percent of total: 22.3%.

Category: Household income: $45,000 - $64,999;
Number of cardholders: 24;
Percent of total: 21.4%.

Category: Household income: $65,000 - $100,000;
Number of cardholders: 24;
Percent of total: 21.4%.

Category: Household income: Over $100,000;
Number of cardholders: 23;
Percent of total: 20.5%.

Category: Education level: Some high school;
Number of cardholders: 15;
Percent of total: 13.4%.

Category: Education level: High school graduate;
Number of cardholders: 32;
Percent of total: 28.6%.

Category: Education level: Some college;
Number of cardholders: 18;
Percent of total: 16.1%.

Category: Education level: College graduate;
Number of cardholders: 27;
Percent of total: 24.1%.

Category: Education level: Graduate school;
Number of cardholders: 15;
Percent of total: 13.4%.

Category: Education level: Other;
Number of cardholders: 5;
Percent of total: 4.5%.

Category: Type of cardholder;
Number of cardholders: [Empty];
Percent of total: [Empty].

Category: Convenience user;
Number of cardholders: 38;
Percent of total: 33.9%.

Category: Revolver;
Number of cardholders: 74;
Percent of total: 66.1%.

Source: GAO.

Note: Percentages may not total to 100 percent due to rounding.

[A] One interviewee did not report age, so the total represented for 
this category is 111 cardholders.

[End of table]

During these consumer interviews, we obtained cardholders' opinions to 
assess the usefulness of the customized disclosure by asking them a 
number of open-and closed-ended questions, and asking them more 
tailored follow-up questions as necessary to more fully understand 
their answers. All cardholders were asked questions to determine their 
typical credit card payment behavior and elicit what they already knew 
about the consequences of making only minimum payments. To determine 
their preferences for various disclosures, we showed each participant 
three sample disclosure statements. Two of these sample disclosure 
statements contained the language and generic example mandated by the 
Bankruptcy Act minimum payment disclosure provisions. The other 
disclosure presented an example of language incorporating the 
components of the proposed customized disclosure we studied. The sample 
disclosure statements we showed to cardholders can be found in GAO-06- 
611SP.

Each of the cardholders we interviewed was asked a series of questions 
about each of the three disclosure statements, including how 
"understandable," "influential," "useful," and "helpful" each 
disclosure was to their understanding of the consequences of making 
minimum payments. After seeing the three statements, cardholders also 
were asked to compare the statements and choose the statement they 
would prefer to receive. Additionally, cardholders were asked how they 
would prefer to receive such information, and how frequently they would 
like to receive it. Narrative answers to open-ended questions were 
categorized into various themes based on the cardholders' responses. 
The reliability of the coding scheme was assessed by comparing the 
answers of a second, independent coder with a number of the answers. 
The interview instrument that was used to interview cardholders, as 
well as the results to the closed-ended questions can be found in GAO-
06-611SP.

The data collected through our in-depth cardholder interviews are 
subject to certain limitations. For example, the data cannot be 
generalized to the entire U.S. population of credit cardholders. In 
addition, our sample distribution between convenience users and 
revolvers was not reflective of the estimates of the proportion of such 
cardholders in the overall U.S. cardholding population because we 
purposely oversampled revolvers. Additionally, the self-reported data 
we obtained from cardholders are based on their opinions and memories, 
which may be subject to error and may not predict their future behavior.

We gathered additional information on the usefulness of providing 
customized disclosures to cardholders by reviewing existing academic 
research on consumer protection disclosures and applicable public 
comment letters on the Federal Reserve's advance notices of proposed 
rulemaking. We also interviewed credit card issuers and processors, and 
a variety of industry, academic, government, consumer interest, and 
financial education organizations for their opinions on the usefulness 
of customized disclosures.

To identify other ways of providing cardholders with customized or 
other information about the financial consequences of making minimum 
payments, during our interviews we asked issuers and processors, as 
well as a variety of academic, government, consumer interest, and 
financial education organizations for suggestions and alternative 
options to providing customized disclosures. We discussed some 
suggestions with issuers and processors to determine their feasibility. 
We also asked the 112 cardholders for their opinions on other ways to 
communicate the financial consequences of minimum payments.

We conducted our study between June 2005 and April 2006 in Boston, 
Chicago, San Francisco, and Washington, D.C., in accordance with 
generally accepted government auditing standards.

[End of section]

Appendix II: Comments from the National Credit Union Administration:

National Credit Union Administration:

Office of the Chairman:

April 3, 2006:

Cody Goebel, Assistant Director:
United States Government Accountability Office: 
Washington, D.C. 20548:

Re: Draft GAO Report 06-434:

Dear Mr. Goebel:

Thank you for the opportunity to review and comment on GAO's draft 
report entitled Customized Minimum Payment Disclosures Would Provide 
More Information to Consumers, but Impact Could Vary. NCUA appreciates 
the importance and timeliness of this study and draft report, 
particularly given the "disclosure" or consumer warning statement 
requirements for card issuers in the recently enacted Bankruptcy 
Protection Act of 2005. We commend the thoroughness of your staff in 
addressing this issue. Our comments below address the potential impact 
on credit unions and their members if card issuers are required to 
offer customized disclosures to consumers.

Potential Financial Impact on Credit Unions:

Collectively, the potential impact on credit unions of requiring card 
issuers to provide customized disclosures to consumers should be 
minimal. At $23.9 billion, outstanding credit card balances comprise 
only 3.5% of total credit union assets. The report indicates the cost 
of customized disclosures may be significant for card issuers. As noted 
in the report, many small institutions, including many credit unions, 
utilize third-party processors to manage card operations and servicing. 
Since these third parties generally deal with many issuers, the 
financial impact on smaller institutions may be lessened through 
economies of scale. We believe this will be the case for most credit 
unions offering credit cards. However, we feel it is important to note 
that the financial impact of customized disclosure requirements could 
still be significant for these small issuers and even more significant 
for moderate sized financial institutions servicing their own credit 
card portfolios, particularly in institutions where credit card 
interest margins are already low.

Potential Financial Impact on Credit Union Members:

The report notes that the consumers in the study preferred customized 
disclosures over generic disclosures and that consumers carrying a 
balance on card accounts found the customized disclosures to be most 
useful. The report also aptly notes that while the disclosures may be 
desirable and useful, there is no way to know what impact they might 
actually have on consumer behavior. Since consumers who continually pay 
minimum payments represent a small portion of all card holders and may 
lack the financial wherewithal to make a larger payment, it is 
important to consider that the cost of implementing customized 
disclosures may not be as economically efficient as some of the other 
alternatives mentioned in the report. It is also important to consider 
that the added incremental costs of customized disclosures will 
ultimately be passed on to consumers through increased fees or higher 
interest rates. To that end, the cost of customized disclosures could 
have a negative impact on the same consumers who the disclosures are 
meant to help.

We concur with the draft report's findings and feel this draft report 
fairly demonstrates the facts that: 1) customized disclosures for 
consumers could feasibly be required of card issuers at a potentially 
significant but relatively reasonable cost; 2) such disclosures could 
be useful and desirable for some consumers despite the uncertainty of 
their impact; and 3) numerous options exist at varying costs to 
heighten consumer awareness of the consequences of making only minimum 
payments on credit card accounts. NCUA supports the concept of raising 
consumer awareness about the consequences of making only minimum 
payments on credit card accounts. We further concur with the idea that 
alternatives to providing customized disclosures for all consumers may 
be more cost effective and helpful to those who need the information 
the most.

Thank you again for the opportunity to comment on the draft report. If 
you have any questions or need further information, please feel free to 
contact NCUA Executive Director J. Leonard Skiles at (703) 518-6321.

Sincerely,

Signed by:

JoAnn M.Johnson: 
Chairman:

[End of section]

Appendix III: GAO Contact and Staff Acknowledgments:

GAO Contact:

Dave Wood (202) 512-6878:

Staff Acknowledgments:

In addition to those named above, Cody Goebel, Assistant Director; 
Christine Houle; John C. Martin; Marc Molino; Carl Ramirez; Omyra 
Ramsingh; Barbara Roesmann; and Kathryn Supinski made key contributions 
to this report.

(250252):

FOOTNOTES

[1] Pub. L. No. 109-8, 119 Stat. 23, 204-14 (2005) and Pub. L. No. 90- 
321, title I, 82 Stat. 146-157 (1968) (codified at 15 U.S.C. §§ 1601 et 
seq.)

[2] Based on data from Cardweb.com, Inc., an online publisher of 
information pertaining to the payment card industry, and self-reported 
data from two issuers, we determined that the seven issuers with whom 
we spoke represent approximately 231 million active credit card 
accounts as of year-end 2005. 

[3] Fair and Accurate Credit Transaction (FACT) Act of 2003 § 513, 20 
U.S.C. § 9702. Title V of the FACT Act, referred to as the Federal 
Literacy and Education Improvement Act, established the Financial 
Literacy and Education Commission with the purpose of improving 
financial literacy and education of persons in the United States.

[4] In addition to being charged with implementing TILA, the Federal 
Reserve is the agency responsible for overseeing state member banks for 
compliance with TILA. Compliance with TILA by other depository 
institutions is overseen by the appropriate federal bank supervisor: 
Federal Deposit Insurance Corporation, the National Credit Union 
Administration, the Office of the Comptroller of the Currency, or the 
Office of Thrift Supervision. Any nonbank card issuers are overseen by 
the Federal Trade Commission for compliance with TILA.

[5] The Federal Reserve's Survey of Consumer Finances is a triennial 
survey of the balance sheet, pension, income, and other demographic 
characteristics of U.S. families. The 2004 survey was released in 
February 2006. 

[6] Credit Card Lending: Account Management and Loss Allowance Guidance 
(January 2003), joint guidance issued under the auspices of the Federal 
Financial Institutions Examination Council by the Office of the 
Comptroller of the Currency (OCC Bulletin 2003-1), Federal Reserve 
(Supervisory Letter SR-03-1), Federal Deposit Insurance Corporation 
(Financial Institution Letter, FIL-2-2003), and Office of Thrift 
Supervision (OTS Release 03-01).

[7] Bankruptcy Act § 1301, 15 U.S.C. §1637(b).

[8] The specified balance is either $300 or $1,000, depending upon the 
size of the minimum payment required by the creditor (see also table 
1). A creditor may elect to use an interest rate greater than 17 
percent for purposes of the sample calculation.

[9] According to Federal Reserve staff, the agency is conducting the 
rulemaking process for minimum payment disclosures in combination with 
its wholesale review of its open-end credit rules of Regulation Z, 
resulting in a longer time frame to issue the final regulations on 
minimum payment disclosures.

[10] Section 1301(b) of the Bankruptcy Act provides that the minimum 
payment disclosure requirements will take effect the later of October 
20, 2006, or 12 months after the publication of final rules 
implementing the requirements by the Federal Reserve. However, as noted 
above, the Federal Reserve does not anticipate publishing final rules 
until after October 20, 2006.

[11] S. 393, 109TH Cong. (2005), S. 499, 109TH Cong. (2005), S. 1040, 
109TH Cong. (2005), H.R. 3492, 109TH Cong. (2005) and H.R. 3852, 109TH 
Cong. (2005).

[12] California Assembly Bill No. 865 was approved by the Governor on 
October 10, 2001, with instructions to become effective July 1, 2002. 
The law was codified at California Civ. Code §1748.13.

[13] See American Bankers Assoc. et al. v. Lockyer, 239 F. Supp. 2d 
1000 (E.D. Cal. 2002). 

[14] Community banks are independent, locally owned and operated 
institutions with assets ranging from less than $10 million to 
multibillion dollar institutions.

[15] The regulatory approach as to how to produce customized 
information has yet to be determined. As of April 2006, the Federal 
Reserve was in the process of determining how issuers should implement 
provisions of the Bankruptcy Act requiring them to provide consumers 
with information over the telephone that would be customized to their 
accounts about the length of time required to repay an outstanding 
balance if only minimum payments were made.

[16] See 15 U.S.C. 1640(a).

[17] See TILA §130, 15 U.S.C. 1640.

[18] To calculate percentage changes, we first estimated the issuer's 
current mailing costs by multiplying the number of statements the 
issuer mailed each month by 12 to determine the total number of 
statements mailed each year, and then multiplied this number by the 
average postage rate of $0.30 for a 1-ounce mailing. We divided the 
issuer's estimated increase in postage cost by the total annual postage 
cost that we calculated to arrive at the percentage increase that could 
occur to implement a customized disclosure.

[19] Although court documents contained cost estimates for six large 
issuers, we relied on the court documents to represent cost data for 
just three issuers because we obtained more recent cost estimates for 
the other three issuers mentioned in the documents.

[20] We obtained financial data from 10-K statements filed with the 
U.S. Securities and Exchange Commission for calendar year 2004, as well 
as from the Federal Deposit Insurance Corporation's Call Report 
database.

[21] Operating expenses include items such as credit processing, call 
center servicing, billing, collections, fraud management, and card 
issuance.

[22] CardWeb.com, Inc., data for operating expense ratios are derived 
from a database of approximately 150 active issuers representing 97 
percent of total credit card loans held by issuers.

[23] Revolvers represented 66 percent of the cardholders we interviewed 
and convenience users represented 34 percent. This distribution does 
not represent, nor was it intended to reflect, the overall U.S. 
population of cardholders.

[24] The other issuer does not track data on the proportion of its 
cardholders who consistently pay the minimum amount due.

[25] On June 10, 2005, the Payment Cards Center of the Federal Reserve 
Bank of Philadelphia hosted "Federal Consumer Protection Regulation: 
Disclosures and Beyond."

[26] Gregory Elliehausen, "The Cost of Bank Regulation: A Review of the 
Evidence," Staff Study 171 (Washington, D.C.: Board of Governors of the 
Federal Reserve System, April 1998) and Gregory Elliehausen and Barbara 
R. Lowrey, "The Costs of Implementing Regulatory Changes: The Truth in 
Savings Act," Journal of Financial Services Research 17, no. 2 (2000): 
165-179.

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