It was early 2007, and Michael Roster and Dwane Krumme each viewed the credit card industry with growing dismay.
Each had played a role in its development - Krumme as a banker, and Roster as a prominent industry lawyer. Now, each saw that the business had turned into a trap for unwary consumers dragged down by billions of dollars in tricky fees and sky-high penalty interest rates. Each worried, as Krumme recalls, that lenders' practices "could get a lot of people in trouble and hurt the economy as well."
Yes, they surely did, and most of the damage came well before passage two years later of the Credit Card Act of 2009, whose last provisions take effect Sunday. The recent financial reform promises even bigger change for consumers: the launch of a new Bureau of Consumer Financial Protection, whose goal will be to ensure that new traps are nipped in the bud, not allowed to grow for years unchecked.
This is a good moment to consider a little-known chapter in the overhaul of the U.S. credit card industry: the role played by a Philadelphia institution, the Pew Charitable Trusts, which brought Roster, Krumme, and others together on the side of long-belated change.
Pew's part in the change is partly a story about the value of data and research in the making of public policy, a testament to the words of one of the trusts' founders emblazoned on a wall at Pew's Washington office: "Tell the truth and trust the people."
But it's also a story that yields unexpected lessons about the perils of blindly trusting the market - even the market as leavened by the intervention of wise old heads who want to do the right thing. As Roster, Krumme, and Pew officials all came to realize, sometimes regulators have to set limits and just say no, so competition can take place on a level playing field without harm to innocent bystanders.
To be sure, many had argued strenuously for a credit card overhaul long before Pew, Roster, or Krumme stepped to the plate.
Elizabeth Warren, the Harvard bankruptcy scholar, had been warning for two decades of the perils of easy credit and risky lending. Groups such as the Consumer Federation of America took up the charge in the 1990s, as banks lobbied to make bankruptcy harder and less of a safety valve.
But Pew played a different role - actually, two different roles, in sequence - as it tried to address credit cards as a hidden threat to the health and well-being of ordinary Americans, much as it has more recently focused efforts on pathogens in the nation's food supply.
Pew's part in the story starts in 2007. Seeking to implement Warren's idea of a "clean card" - a credit card with something like the Good Housekeeping Seal of Approval - Pew forged an alliance with the California foundation started by Herb and Marion Sandler, mortgage entrepreneurs who made a fortune as founders of Golden West Financial Corp.
Together, the two foundations funded the Credit Cards Standards Project. And the Sandlers turned to Roster, a longtime friend and adviser with firsthand knowledge of the credit card industry, to help get it rolling.
Roster had once been cochairman of the financial-services practice group at Morrison Foerster, the leading bank-regulatory law firm. He had advised a large number of card issuers, and had helped charter specialized credit card banks.
After a stint as general counsel at Stanford University, Roster took the same position at Golden West in 2000, where he served until its 2006 sale to Wachovia Bank.
Roster joined Warren on the new project's steering committee, though she bowed out of the project a few months later. The committee tapped Krumme, a former client of Roster's, to lead the effort.
Krumme had been in banking since the 1960s and handling cards since the mid-1970s - a time when lending decisions were still made by people, not computers. In the mid-1980s, he was a pioneer in adapting what's now known as FICO credit scoring to general-purpose credit cards.
Now 67 and semiretired in Sun River, Ore., Krumme had watched with mixed feelings, and then a growing distaste, as the industry evolved.
Credit scoring and so-called risk-based-pricing models added fairness and objectivity to lending, he says. But they also eventually became tools to predict just how much money could be squeezed from financially stressed or errant consumers.
Krumme says over-limit fees are a good example of how banks set fees to generate cash while claiming they were controlling risk. "If there's that much risk, why don't you just decline the transaction rather than charge a fee?"
Long credit card contracts served a similar function. Some customers never got in trouble. But others found they faced a penalty rate, perhaps 25 percent or higher, "if you were an hour late with a payment," he says.
"To me, that was simply managing revenues, not managing risk," Krumme says. "Particularly since the late '90s, my view was that the industry just became greedy - that's the bottom line."
Warren's Big Idea at the start, which Pew and Sandler adopted, was voluntary change: First get some major issuers to offer a simpler, more transparent credit card, without the tricks and traps - the "clean card," as Warren called it. Then get some co-branders who profit from pitching cards to customers or members, such as university alumni associations, to endorse it and help market it.
"The theory was that if we could get two or three credit card companies to do this voluntarily, they would be called out and become known as the clean card," says Pew CEO Rebecca Rimel. "To be honest, we failed miserably. We weren't able to get any credit card company to go along."
It wasn't for lack of trying. For more than a year, Krumme and others held the meetings, in person or via conference calls, making use of old contacts and promising confidentiality.
The project also took a step unaffordable to low-budget advocacy groups: Pew hired a bank consulting firm to analyze the effect of safe-card standards, and its report illustrated how costs could be spread around affordably. It showed, for instance, that over-limit fees could be eliminated with a modest across-the-board rate increase.
Still, the bankers and co-branders weren't moved - or at least weren't willing to move first. If change was going to come, some said, it would have to be imposed via new rules on all card issuers.
Nick Bourke, a lawyer who eventually took the project's helm from Krumme, recalls how one banker put it - even after agreeing that the industry had gone astray: "We're not going to go out that far, and make those kinds of changes, unless we know that everybody else in the industry is going to do the same."
Pew officials see themselves as guided by the facts - Rimel likes to quote Thomas Jefferson's exhortation to "follow truth wherever it may lead." In this case, the facts led them to ditch the insiders' game. Relocated to Washington and eventually renamed as the Pew Safe Credit Cards Project, it began sharing its findings and viewpoint with the Federal Reserve and Congress, alongside more traditional advocacy groups.
In December 2008, the Fed declared key credit card practices to be unfair and deceptive, and Congress followed suit with the Credit Card Act the following May.
A great result? Hardly, when you consider that many consumers who suffered from these tricks and traps are still in a financial hole, have diminished nest eggs, or have been pushed into bankruptcy. If those practices were unfair and deceptive in December 2008, they were even worse when they were invented - financial innovation, anyone? - and the media weren't full of warnings about them.
That's why the new consumer-protection bureau is so essential. As Warren has said, "We can't keep legislating in the consumer area by outlawing 10 bad practices, because then they'll move to something else."
Still, Pew helped shine a light on a genuine hazard in everyday life, and the marketplace is a little bit safer for its efforts.