As credit card companies face rising public anger, new regulation from Washington and staggering new rates of default and bankruptcy, FRONTLINE correspondent Lowell Bergman investigates the future of the massive consumer loan industry and its impact on a fragile national economy.
In The Card Game, a follow-up to the Secret History of the Credit Card and a joint project with The New York Times, Bergman and the Times talk to industry insiders, lobbyists, politicians and consumer advocates as they square off over attempts to reform the way the industry has done business for decades.
"The card issuers could do anything they want," Robert McKinley, CEO of CardWeb.com, tells FRONTLINE of the industry's unchecked power over consumers. "They could change your interest rate. They could impose an annual fee. They could close your account." High interest rates along with more and more penalty fees drove up profits for the industry, Bergman finds, as the banks followed the lead of an aggressive upstart: Providian Bank. In an exclusive interview with FRONTLINE, former Providian CEO Shailesh Mehta tells Bergman how his company successfully targeted vulnerable low-income customers whom Providian called "the unbanked."
"They're lower-income people-bad credits, bankrupts, young credits, no credits," Mehta says. Providian also innovated by offering "free" credit cards that carried heavy hidden fees. "I used to use the word 'penalty pricing' or 'stealth pricing,'" Mehta tells FRONTLINE. "When people make the buying decision, they don't look at the penalty fees because they never believe they'll be late. They never believe they'll be over limit, right? ... Our business took off. ... We were making a billion dollars a year."
It took the economic collapse in the fall of 2008 to set the stage for potentially historic change in the consumer credit business. President Obama and his team pushed through a credit card reform bill in May, and they're now looking to establish a new Consumer Financial Protection Agency. But the banking and financial services industries contribute huge amounts of money to Congress -- and the jury is still out on whether the new regulations can pass. "It's a step in the right direction, but it's a modest step," says Harvard law professor Elizabeth Warren. "It's a set of very discrete new laws. And the credit industry instantly set to work on how they could run around them. By itself, that set of rules won't change the game."
"It's hard for them to get a bill through the U.S. Senate when the industry is pouring money into Washington," says Martin Eakes of the Center for Responsible Lending of the banks' political clout. "As Sen. [Dick] Durbin from Chicago recently said, 'the banks, even as unpopular as they are right now in this crisis, still own this place.'"