PAGENO="0001" CONSUMER CREDIT PROTECTION ACT HEARINGS BEFORE THE SUBCOMMITTEE ON CONSUMER AFFAIRS OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES NINETIETH CONGRESS FIRST SESSION ON H.R. 11601 A BILL TO SAFEGUARD THE CONSUMER IN CONNECTION WITH THE UTILIZATION OF CREDIT BY REQUIRING FULL DISCLOSURE OF THE TERMS AND CONDITIONS OF FINANCE CHARGES IN CREDIT TRANS ACTIONS OR IN OFFERS TO EXTEND CREDIT BY ESTABLISHING MAXI MUM RATES OF FINANCE CHARGES IN CREDIT TRANSACTIONS BY AUTHORIZING THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TO ISSUE REGULATIONS DEALING WITH THE EXCESSIVE USE OF CREDIT FOR THE PURPOSE OF TRAIYING IN COMMODITY FUTURES CONTRACTS AFFECTING CONSUMER PRICES BY ESTABLISHING MA CHINERY FOR THE USE DURING PERIODS OF NATIONAL EMERGENCY OF TEMPORARY CONTROLS OVER CREDIT TO PREVENT INFLATIONARY SPIRALS; BY PROHIBITING THE GARNISHMENT OF WAGES; BY CRE- ATING THE NATIONAL COMMISSION ON CONSUMER FINANCE TO STUDY AND MAKE RECOMMENDATIONS ON THE NEED FOR FURTHER REGU LATION OF THE CONSUMER FINANCE INDUSTRY AND FOR OTHER PURPOSES AND RELATED BILLS PART 1 AUGUST 7, 8, ~, 10, 11, AND 14, 1967 Printed for the use of the Committee on Banking and Currency 0 U.S. GOVERNMENT PRINTING OFFICE 83-3400 WASHINGTON: 1967 PAGENO="0002" ABRAHAM J. MUtTER, New York WILLIAM A. BARRETT, Pennsylvania LEONOR K. SULLIVAN, Missouri HENRY S. REUSS, Wisconsin THOMAS L. ASHLEY, Ohio WILLIAM S. MOORHEAD, Pennsylvania ROBERT G. STEPHENS, JR., Georgia FERNAND J. ST GERMAIN, Rhode Island HENRY B. GONZALEZ, Texas JOSEPH G. MI&ISH, New Jersey RICHARD T. H~NNA, California TOM S. GETTYS, South Carolina FRANK ANNUNZIO, Illinois THOMAS M. REES, California JONATHAN B. BINGHAM, New York NICK GALIFIANAKIS, North Carolina TOM BEVILL, Alabama ROBERT G. STEPHENS, Ja., Georgia HENRY B. GONZALEZ, Texas JOSEPH G. MINISH, New Jersey RICHARD T. HANNA, California FRANK ANNUNZIO, Illinois JONATI1~AN B. BINGHAM, New York U WILLIAM B. WIDNALL, New Jersey PAUL A. FINO, New York FLORENCE P. DWYER, New Jersey `SEYMOUR HALPERN, New York W. E. (BILL) BROCK, Tennessee DEL CLAWSON, California ALBERT W. JOHNSON, Pennsylvania J. WILLIAM STANTON, Ohio CHESTER L. MIZE, Kansas SHERMAN P. LIJOYD, Utah BENJAMIN B. BLACKBURN, Georgia GARRY BROWN, Michigan LAWRENCE G. WILLIAMS, Pennsylvania CHALMERS P. WYLIE, Ohio FLORENCE P. DWYER, N~w Jersey PAUL A. FINO, New York SEYMOUR HALPERN, New York CHALMERS P. WYLIE, Ohio LAWRENCE G. WILLIAMS, Pennsylvania OdMMITPEE ON BANKING AND CURRENCY WRIGHT PATMAN, Texas, Chairman PAUL NELSON, Clerk and Staff Director ALvIN LEE MORSE, Coun8el CURTIS A. PaINS, Chief Investigator NORMAN L. IfOLMES, Counse' BENET D. GELLMAN, Investigative Coiinsei ORMAN S. FINK, Minority Staff Member CHARLES B. HOLSTEIN, Profe8sionai Staff Member SUBCOMMITTEE ON CONSUMER AFFAIRs LEONOR K. SULLIVAN, Missouri, Chairman PAGENO="0003" A CONTENTS (The same table of contents appears in both parts 1 and 2) Text of: Page H.R.11601 3 H.R.11602 45 STATEMENTS Abel, I. W., president, United Steelworkers of America, accompanied by John J. Sheehan, legislative director 749 Barber, Stanley R., president, Independent Bankers Association of America, accompanied by Howard Bell, executive director, and Horace R. Hansen, counsel 798 Barr, Hon. Joseph W., Under Secretary, Department of the Treasury - - 74 Biemiller, Andrew J., director, Department of Legislation, AFL-CIO, accompanied by Miss Anne Draper, economist, AFL-CIO 181 Brownstein, Hon. Philip N., Assistant Secretary for Mortgage Credit, and Federal Housing Commissioner, Department of Housing and Urban Development 303 Bryant, Hon. Farris, Director, Office of Emergency Planning, accompanied by Mordecai M. Merker, General Counsel, and Leonard Skubal, Chief, Economic Stabilization Division 778 Caldwell, Hon. Alex C., Administrator, Commodity Exchange Authority, USDA 602 Caplovitz, David, New York, N.Y., author of the book "The Poor Pay More" 661 Carstenson, Blue A., assistant legislative director, National Farmers Union 448 Countryman, Vern, professor of law, Harvard Law School 718 DeShazor, Ashley D., vice president of credit, Montgomery Ward & Co., Inc., Chicago, Ill., accompanied by Joseph Garcia, credit manager, Federated Department Stores, Cincinnati, Ohio, and Dr. James Wooley, of Touche, Ross, Bailey & Smart, New York, N.Y 208 Dixon, Hon. Paul Rand, Chairman, Federal Trade Commission 272 Douglas, Hon. Paul H., Chairman, National Commission on Urban Problems, accompanied by Stanley D. Heckman 158 Edelman, John W., National Council of Senior Citizens, Inc., and William R. Hutton, executive director 679 Ellis, Clyde T., general manager, National Rural Electric Cooperative Association, Inc., accompanied by Mrs. Erma Angevine, Women's Activities Coordinator for National Rural Electric Cooperative Associa- tion,Inc 462 Farbstein, Hon. Leonard, a Representative in Congress from the 19th Congressional District of the State of New York 849 Furness, Hon. Betty, Special Assistant to the President for Consumer Affairs 87 Gray, Roger W., professor, Stanford University, California, accompanied by Willis C. Theis, president, Board of Trade of Kansas City, Mo.; William F. Brooks, on behalf of the National Grain Trade Council; Maurice Mound, Esq., of Rein, Mound & Cotton, New York, N.Y.; J. S. Chartrand, executive vice president, Kansas City Board of Trade; F. Marion Rhodes, president, New York Cotton Exchange; Llewellyn Watts, Jr., chairman of the board, New York Mercantile Exchange 602 Greathouse, Pat, vice president, United Automobile, Aerospace & Agricul- tural Implement Workers of America, AFL-CIO, and for the Industrial Union Department of the AFL-CIO, accompanied by Daniel S. Bedell, legal representative; Paul Wagner, legal representative; and William Dodds, deputy director, Legal Department, UAW 803 III PAGENO="0004" IV CONTENTS Jackson, Royal E., chief, Bankruptcy Division, Administrative Office, U.S. Courts, accompanied by James E. Moriarty, referee in bankruptcy, U.S. District Court, Central District of California; Olive W. Bare, referee in bankruptcy, eastern district of Tennessee; Estes Snedecor, referee in bankruptcy, U.S. District Court, Portland, Oreg.; and Elmore Whitehurst, referee in bankruptcy, Northern District of Texas, Dallas, Page Tex 414 Keeney, Eugene A., executive vice president, American Retail Federation - 208 Kelly, Hon. Edtia F., a Representative in Congress from the 12th. Con- gressional Di~trict of the State of New York 204 Keyserling, Leon H., Washington, D.C., former Chairman, Council of Economic Advisers, consulting economist and attorney, and president, Conference on Economic Progress 675 Kimball, George H., president, Kimball's Store, Portsmouth, N.H., repre- senting the National Retail Merchants Association, accompanied by James Wooley of Touche, Ross, Bailey & Smart, accountants, New York, N.Y 667 Klein, Robert, economics editor, Consumer Reports magazine 545 Magnuson, Hon. Warren G., Senator from the State of Washington, and chairman, Senate Committee on Commerce 837 Margolius, Sicjney, Port Washington, N.Y 494 Matsunaga, Hon. Spark M., a Representative in Congress from the State of Hawaii 840 McEwen, Rev. Robert J., S.J., chairman, Department of Economics, Boston College, Chestnut Hill, Mass 363 Meade, Robert L., assistant attorney general, Commonwealth of Massa- chusetts, and chief, Consumer Protection Division, Department of the Attorney General 567 Moot, Hon. Robert C., Administrator, Small Business Administration, pre- sented by Howard Greenberg, Deputy Administrator 278 Morse, Richard L. D., professor of family economics, Kansas State Uni- versity, Manhattan, Kans 507 Newman, Mrs. Sarah H., general secretary, National Consumers League- 682 O'Conor, Herbert R., Baltimore, Md 796 Reuter, Ralph R., chairman, Metropolitan New York Consumer Council- 786 Robertson, lion. James L., Vice Chairman, Board of Governors, Federal Reserve System; accompanied by Charles Partee, Associate Director, Division of Research; and Robert Cardon, legislative counsel, Federal ReserveBoard 124 Rosepthal, Hon. Benjamin S., a Representative in Congress from the Eighth Congressional District of the State of New York 842 Rothschild, Louis, executive director, Menswear Retailers of America_ - - 593 Ryan, Hon. William F., a Representative in Congress from the 20th Congressional District of the State of New York 845 Scheuer, Hon. James H., a Representative in Congress from the 21st Congressional District of the State of New York 847 Shriver, Hoti. R. Sargent, Director, Office of Economic Opportunity; ac- companied by Bertrand M. Harding, Deputy Director, Office of Economic Opportunity 239 Smith, Will~t, credit manager, Lechmere Sales Co 569 Stapp, Charles D., president, Koos Bros., Rahway, N.J., and president, National Retail Furniture Association 704 Stone, Julius, chairman, Legal and Legislative Committee, CUNA Inter- national, Inc 470 Trowbridge, Hon. Alexander B., Secretary, Department of Commerce; accompanied by James L. Parris, Acting General Counsel 246 Walker, Charls E., executive vice president, American Bankers Associa- tion, accompanied by Thomas L. Bailey, Marine Midland Corp. of New York; and John F. Roiph, American Bankers Association 346 Weaver, Hon. Robert C., Secretary, Department of Housing and Urban Development, accompanied by Hon. Philip N.Brownstein, Assistant Sec- retary 1~or Mortgage Credit and Federal Housing Commissioner 302 Willett, E~1ward R., chairman, Consumers' . Council of the Commonwealth of Massachusetts 563 Wirtz, Hon. W. Willard, Secretary, Department of Labor, accompanied by Hon. Esther Peterson, Assistant Secretary for Labor Standards~ - - 734 Wolff, Hon. Lester L., a Representative in Congress from the Third Congressional District of the State of New York 850 Wooley, J. W., New York, N.Y 689 PAGENO="0005" CONTENTS V ADDITIONAL INFORMATION SUBMITTED FOR THE RECORD Abel, I. W.: "Bank in the Billfold-More Consumers Pay Local Shopping Bills With Bank Credit Cards-Lenders Don't Set Minimum Income Requirement; Plans Cheered by Small Retailers-'Just Like the Page Rich People'," article by George Nickolaieff, Wall Street JournaL - 762 "Dirty Deal in Small Loans," article by James Ridgeway 760 Letter from George A. Ranney, vice president and general counsel, Inland Steel Co., to Hon. Frank Annunzio, August 3, 1967 769 "Review and Outlook-The Virtue of Profligacy," article from the Wall Street Journal 768 "Seizing Pay-Unions, Firms, Lawyers Seek To Curb Garnishing as Its Incidence Rises-It Leads to Bankruptcy, Firing, and Relief Rolls, They Say; Auto Worker Kills Himself-Deducting $500,000 at Inland," article by James P. Gannon, Wall Street Journal 765 "Senate Unit Investigates Charges That Credit Insurance Is `Tied In' to Consumer Loans" 758 "Special Report: Discharge for Garnishment" 769 Annunzio, Hon. Frank: Letter from: Ranney, George A., vice president and general counsel, Inland Steel Co., August 3, 1967 70 Robertson, Hon. J. L., Federal Reserve Board, in reply to question on adequacy of tolerances permitted on figuring of annual interest rates 154 "Seizing Pay-Unions, Firms, Lawyers Seek To Curb Garnishing as Its Incidence Rises-It Leads to Bankruptcy, Firing, and Relief Rolls, They Say; Auto Worker Kills Himself; Deducting $500,000 at Inland," article from the Wall Street Journal, March 15, 1966 71 Barr, Hon. Joseph W.: Alternatives to the actuarial method (U.S. rule) 105 Brief historical sketch of credit life insurance 84 FHA statements pertaining to costs incident to closing on real estate_ 80 "Interest Rates Charged on Installment Purchases," reprint of article from the Accounting Review, October 1955 106 Percentage of transactions that would be ç~xcluded uder the $10 rule 98 Biemiller, Andrew J.: Statement of the AFL-CIO Executive Council on con- sumer legislation 190 Bingham, Hon. Jonathan B.: Riggs National Bank brochure on the educa- tion loan program 402 Hearing at New York, N.Y 1157 Brooks, William F.: Prepared statement ~f the National Grain Trade Council 642 Brownstein, Hon. Philip N.: Appraisal form used by FHA for insured mortgages under the National Housing Act 330 Credit application form used for property improvement loan 331 "FHA Home and Mortgage Insurance," consumer bulletin published by the Federal Housing Administration 307 "Three Ways To Finance Home Improvements Through FHA," HUD Consumer Bulletin 319 Countryman, Vern: National Conference of Commissioners on Uniform State Laws- Uniform consumer credit code 729 Personal bankruptcies per 100,000 population 719 1)eShazor, Ashley D.: Appendix A.-An actual customer account from a department store demonstrating calculation of annual service charge rate 233 Appendix B.-Legislative analysis re pending credit bills 233 Dixon, Hon. Paul Rand: Estimated cost of enforcing advertising provision of H.R. 11601 if assigned to Federal Trade Commission 292 Reply of Federal Trade Commission on interpretation of "5-year" language of S.5 - -- - 296 Ellis, Clyde T.: "Tight-Money Crisis-A Call for Decisive Action" - -- - 462 Gonzalez, Hon. Henry B.: Excerpts from a letter by Attorney Gilbert D. Lopez, Fresno, Calif 100 PAGENO="0006" VI CONTENTS Gray, Roger W.: Page Disposition of margin deposits- 631 Prepared statement of the Grain & Feed Dealers National Association 610 Ilalpern, Hon. Seymour: Hearing at New York, N.Y~ 1157 Questions directed to Hon. Joseph W. Barr, Under Secretary of the Treasury 96 Keeney, Eugene A.: Letter to Chairman Sullivan enclosing table showing six methods of computing P4-percent monthly service charges 523 Kimball, George H.: Sample billing statement of Kimball's Store showing charge for eredit 674 Statement of National Retail Merchants Association supporting the exemption of credit service charges of less than $10 from disclosure in terms of an annual rate 673 Klein, Robert: Appendix A.-Revolving Credit Billing Systems 558 Appendix B.-Letters written to Consumers Union complaining about revolving credit billing methods 559 Comments on proposed language revision of Richard L. D. Morse con- cerning disclosure of annual percentage rate on open end credit plans 577 Consun~ers Union exhibit-Service charges and interest rates on a purchase of $100-Sears, Roebuck, Montgomery Ward, and J. C. Penney 562 Meade, Robert L.: Comparison between Massachusetts truth-in-credit laws and H.R. 11601 891 Morse, Richard L. D.: Reply to Mr. Williams' question on why merchants should not have the protection of garnishment 539 Response to questions of Mrs. Sullivan on whether 11/2 percent per month is the same as 18 percent per year and if H.R. 11601 allows sufficient leeway to Federal Reserve Board to issue regulations on disclosure of differences in identical annual rates .543 McEwen, Rev. Robert J., S.J.: Supplementary statement on credit life in- surance 408 Newman, Sarah: S. Klein billing card 682 Rhodes, F. Marion: Prepared statement of the New York Cotton Ex- change 646 Rothschild, Louis: Letter to Hon. Henry B. Gonzalez in answer to question of Federal controls on purely intrastate businesses, August 17, 1967 - - 598 Small Business Administration reply on interpretation of "5-year" lan- guage of S. 5~ 296 Stone, Julius: "Managing Your Family's Credit," article by Lucile Ketehum, extension specialist in home management, Michigan State University 471 Sullivan, Hon. Leonor K.: Article pertaining to speculation in futures market- - - - - - - - 151 Consumer Affairs Subcommittee analysis of American Retail Federa- tion submission: Appendix A.-An Actual Customer Account - - - 236 "Emergency Jumble-Presidential Crisis Powers Are Irrational and Full of Gaps," article from the Wall Street Journal - - 783 "How To Cut Costs on Your Mortgage," article by Sylvia Porter, from the Washington Evening Star 816 Letters from: American Life Convention and Life Insurance Association of America, exchange of letters with Mrs. Sullivan, on real estate mortgage loan features of the bill 890 Baker, Rex G., Jr., president, National League of Insured Savings Associations -~ 884 Barber, Stanley R., president, Independent Bankers Association of America, August 29, 1967 : -- 802 Berg, C. R., managing director, New York Produce Exchange, August 11, 1967 651 Blake, William Henry, executive vice president, International Consumer Credit Association, August 18, 1967 860 Bliss, George L., president, C~uncil of Mutual Savings Institu- tions 889 PAGENO="0007" CONTENTS VII Sullivan, Hon. Leonor K.-Continued Letters from-Continued Buerger, Alfred A., chairman, National Conference of Commis- sioners on Uniform State Laws, enclosing statement on H. R. ~ 11601, including suggested revisions 861 Cheyney, W. J., executive vice president, National Foundation for Consumer Credit 883 Edwards, Hon. Don, Member of Congress, August 25, 1967 852 Freeman, Hon. Orville L., Secretary of Agriculture, regarding regulation of commodity futures margins 641 Funston, G. Keith, president, New York Stock.Exchange 601 Gilliland, John A., president, Mortgage Bankers Association of America, August 10, 1967, enclosing proposed amendment to H.R. 11601 858 Greck, Clifford P., director, Washington office, American Book Publishers Council, Inc., and American Textbook Publishers Institute 887 Harris, Everett B., president, Chicago Mercantile Exchange - - - 658 Haugen, Borghild, consumer consultant, California Farmer- Consumer Information Committee 886 Houston, John, research director, Neighborhood Legal Services Centers, Detroit, Mich 888 Hunt, James H., commissioner, Department of Banking and Insurance, State of Vermont, August 10, 1967 886 Lefkowitz, Louis F., attorney general, State of New York, August 10, 1967 834 Moore, Perry, of Robert Moore & Co., enclosing position state- ment on H.R. 11601 657 Runkle, Walter D., general counsel, Consumer Credit Insurance Association, enclosing statement 881 Sard, Edward L., executive director, National Association of House to House Installment Cos., Inc 884 Wilkens, George, executive vice president, Minneapolis Grain Exchange 658 Willier, William F., professor of law, Boston College Law School, Brighton, Mass., August 5, 1967 570 Young, J. Banks, Washington representative, National Cotton Council of America 656 News f~lease from the Office of Assistant Secretary of Defense (Public Affairs) regarding copper market disturbances 632 Statement of: American Association of University Women 880 American Industrial Bankers Association 873 American Textile Manufacturers Institute, Inc 655 Brooks, William F., president, National Grain Trade CounciL - - 642 Chamber of Commerce of the United States 853 Farm and Industrial Equipment Institute 855 Fox, Matthew S., president, Commodity Exchange, Inc., New York, N.Y 645 Knell, Frank, president, Wool Associates, New York Cotton Exchange, Inc 655 Krebs, Paul J., executive director, Office of Consumer Protec- tion, Department of Law and Public Safety, State of New Jersey 869 Martin, Robert L., chairman, Chicago Board of Trade 653 National Automobile Dealers Association 874 National Council of the Churches of Christ in the U.S.A 856 National Federation of Settlements and Neighborhood Centers, New York, N.Y 531 New York Coffee & Sugar Exchange, Inc 652 Rhodes, F. Marion, president, New York Cotton Exchange 646 U.S. Savings & Loan League 852 Watts, Llewellyn, Jr., chairman of the board, New York Mer- cantile Exchange 648 Unsolicited form letter and application of the First National Bank of Washington received by member of the committee staff 831 "Your Real Estate Problem Solved-True Interest Rate Often Hard To Figure," article from the Boston (Mass.) Herald, August 12, 1967, by Bernard C. Meltzer 818 PAGENO="0008" VIII CONTENTS Theis, Willis C.: Appendb A-Margin requirements in commodity futures transac- ~ge tions_~_ 615 Prepared statement of the Kansas City Board of Trade 614 Trowbridge, Hon. Alexander B.: Letter to Chairman Sullivan regarding proper agency to administer advertising provisions of H.R. 11601 268 Walker, Ch~rls E.: Response f ABA to question of Mr. Bingham on credit life insur- ance~ 409 Supplesne. ta~y comments and recommendations `of the American Bankers Association 352 Watts, Liewellyn, Jr.: Prepared statement of the New York Mercantile Exchange 648 Willett, Edward R.: Advertisement of the Provident Institution for Savings showing monthly payments and interest rates for loans of various amounts and repayment periods 565 Letter from Malcolm C. Webber, chairman, Massachusetts Commis- sion Against Discrimination, to Dermot Shea, executive secretary, Consumers' Council, August 1, 1967 565 Williams, Hon. Lawrence G.: Letter from Eugene B. Sydnor, Jr., president, Southern Department Storøs, Inc., regarding the authenticity of customer account used as exhibit by Dr. James Wooley 220 Reply of Roger W. Gray regarding disposition of margin deposits- - - - 631 APPENDIX A Agency reports on H.R. 11601: Agriculture Department 896 Committee on Consumer Interests 897 Federal Home Loan Bank Board 903 Federal Reserve Board 895 Health, Education, and Welfare Department 899 Justice Department 902 Labor Department 901 Office of Emergency Planning 900 Securities and Exchange Commission 893 Small Business Administration 897 Treasury Department 893 Annunzio, Hon. Frank: Amount of earning exempted from garnishment under State laws- - - - 935 Letter from Jerome Schur, special assistant to Chief Judge Boyle for Consumer Credit, to Hon. Richard J. Daley, mayor, Chicago, Ill., and to Hon. John S. Boyle, chief judge of the Circuit Court of Cook County, Ill., enclosing a study of credit litigation in the Circuit Court of Cook County 1133 Barr, Hon. Joseph W.: Defini~ions of terms used in Under Secretary Barr's statement 910 Department of Defense table for computii~g approximate annual per- centage rate for level monthly payment plans (Opposite page 910) Examples illustrating the npplicability of the Department of Defense rate table to H.R. 11601 905 Bare, Clive W. "Credit Men Here Alarmed by High Bankruptcy Rate-Association Analyzes System-Doctor Bills Lead in Uncollected Debts, Court Suits With Loan Companies Second," article from the Chattanooga Times, October 2,1960 Proceedings in the Court of Appeals for the Eastern Section of Tennes- see regarding usury 971 Proceedings in the U.S. District Court for the Eastern DiStrict of Tennessee regarding usury 962 Bingham, ~Ton. Jonathan B.: "Senate Unit Studying New York Banks' Allegedly Excessive Loan Instirance Fees," article by Stanford N. Sesser, from the Wall Street Journal 925 Statement of James H. Hunt, commissioner of banking and insurance, State of Vermont, before the Senate Antitrust and Monopoly Sub- committee 914 PAGENO="0009" CONTENTS IX Countryman, Vent: "Wage Garnishment in California: A Study and Rec- ommendations," article by George Brunn, From the California Law Re- Page view 1093 Douglas, Hon. Paul H.: Classified ads from several newspapers, not showing information that would be required by H. R. 11601 928 MeEwen, Rev. Robert J., S.J.: "Economic Issues in State Regulation of Consumer Credit," article by Rev. Robert J. McEweri, S.J., reprinted from the Boston College Industrial and Commercial Law Review 939 Minish, Hon. Joseph G.: Correspondence between family in New Jersey and debt consolidation firm in Rhode Island - 1152 Moriarty, James E.: Amount of wages exempted from garnishment, by State 1021 Analysis of civil court filings of Los Angeles municipal court 1035 Assembly bill 457, bill introduced in the California Legislature by Assemblywoman Yvonne Brathwàite, relating to attachment of wages 1011 "Bankruptcy Bill Battle-Wage Garnishment Curb Urged To Ease Hardship," article by Leonard Greenwood 1016 California Civil Code-Automobile Sales Finance Act 991 California Civil Code-Credit sales 1002 California Code of Civil Procedure 998 California Financial Code 980 California Labor Code-Assignment of wages 1010 "Installment Credit Problems Among Public Welfare Recipients," article by Milton J. Huber, associate professor, Center for Consumer Affairs 1027 Letters and notices sent to debtors by various creditors, threatening litigation 1025 Letter from: Huber, Milton J., associate professor, Center for Consumer Affairs, to Joseph Baldwin, director, Milwaukee County De- partment of Public Welfare 1032 Nickel, George D., regional public relations director, Beneficial Management Corp. of America, to Hon. Richard J. Dolwig, chairman, Insurance and Financial Institutions Committee, California State Senate 1024 Turner, Marjorie S., chairman, Department of Economics, San Diego State College, California, to Hon. Richard J. Dolwig, State senator, Sacramento, Calif., enclosing report on assembly bill 457 1019 Type and frequency of attachment and execution levies in 100 munici- pal court cases 1024 "Wage Garnishment," article on garnishment as treated in various States 1018 Morse, Richard L. D.: An actual customer account from a department store demonstrating calculation of annual service charge rate 1060 Comparison of Senate truth-in-lending bills 1062 "Consumer Council's Morse-Power Behind the Probe," article from House and Home magazine, August 1964 1077 Glossary of terms 1084 "How Much Your Mortgage Really Costs-These Tables Show What Rate You Actually Pay When You're Charged Interest Plus Points," article from Changing Times, June 1967 1076 Letter submitting report of Louise Leonard on DOD directive on creditors bordering Fort Riley 1088 Letter to Mrs. Sullivan enclosing material relative to truth-in-lending hearings 1058 Memorandum to Kenneth A. McLean re reply to Vancil testimony - 1060 "Probe Asked on High Cost of Credit," article from the Washington Daily News, June 11, 1964 1075 Statement by Mrs. Esther Peterson, Special Assistant to the President for Consumer Affairs 1070 Suggested amendments to title II of H.R. 11601 1072 "The Penny Way," response to statement of W. M. Batten before the Subcommittee on Financial Institutions, Senate Banking and Currency Committee 1066 PAGENO="0010" X CONTENTS Moi~se, Richard L. ~.-Continuec1 "Thirty-six Percent Too Much? Too Little?" article from the Kansas Page Consumer Credit Journal, summer 1967 1079 "Truthin Lending," pamphlet prepared by Richard L. D. Morse for the council on Consumer Information 1080 Multer, Hoti. Abraham J.: "The Big Hole in Truth-in-Lending," article from Con~umer Reports magazine, September 1967 1146 Whitehurst, Elmore: "Consumer Bankruptcy: A Continuing Problem," article from the National Conference of Referees in Bankruptcy, January 1966 - - - 1050 "Referee Clive Bare Excises Usury From Small Loan Company Claim in Chapter XIII Proceeding," article from the National Conference of Referees in Bankruptcy, October 1966 1049 "Schlockmeister's Jubilee: Bankruptcy for the Poor," article from the Journal of the National Conference of Referees in Bankruptcy, July 1966 1037 Wirtz, Hon. W. Willard: Response to written questions on garnishment - 793 APPENDIX B (Cotiference held in New York City by Congressmen Jonathan B Bingham and Seymour H~dpern, members of the Subcommittee on Consumer Affairs) STATEMENTS Abrams, Robert, assemblyman, 81st District of New YorL 1191 Baker, Waverly, former director of the credit union, Sperry Gyroscope 1218 Brewer, Guy R., assistant to the borough president of Queens 1162 Canaris, George, representing the Young Voters League of the Lower East Side 1218 Costello, Timothy W., deputy mayor-city administrator, city of New York, and chairman, Council on Consumer Affairs 1157 Crawford, Morris D., Jr., chairman of the board, Bowery Savings Bank - 1183 Dubrow, Mrs. Evelyn, ILGWU 1164 Finestone, Leona, director, Chelsea Conservation Project, Hudson Guilth - - 1191 Harris, Jeannette H., attorney, chairman, Committee on Workmen's Compensation 1199 HARYOU-ACT Neighborhood Boards 1221 Home, Edward, representing the Insurance Premium Finance Association of the State of New York 1219 Kennedy, Hon. Robert E., Senator from the State of New York 1175 Kronberg, Shirley, director, Neighborhood Services Council, Hotel, Motel and Club Employees Union 1172 Lefkowitz, Louis J., attorney general, State of New York 1220 Noz, Fre~1, Association of Commercial and Professional Attorneys 1207 Panarello, Edward, representative of District 20, Retail Clerks Union 1200 Ross, David, majority leader, New York City Council 1180 Rubel, Frank, executive secretary and general counsel, New York State Credit Union 1201 Rubien, Gerel, International Ladies Garment Workers Union, accom- panied by Carmen Rolon and Anna Zayas 1171 Sampson, Michael, vice president, New York City Central Labor Trades Council 1196 Sutton, Percy E., president of the Borough of Manhattan 1166 Tarcher, Mary, director, Legal Aid Society 1185 Taub, Jack, practicing attorney 1216 Taylor, William J., first vice president, Local 1199, DrugS and Hospital Employees Union, RWDSU, accompanied by several members of his union 1188 Watts, ~Robert E., executive manager, Installment Credit Division, New York State Bankers Association 1192 PAGENO="0011" CONSUMER CREDIT PROTECTION ACT MONDAY, AUGUST 7, 1967 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CONSUMER AFFAIRS OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to notice, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. Leonor K. Sullivan (chair- man of~the subcommittee) presiding. Members of the subcommittee present: Representatives Sullivan, Stephens, Gonzalez, Minish, Hanna, Annunzio, Bingham, Dwyer, Hal- pern, Wylie, and Williams. Also present : Representative Widnall. Mrs. SULLIVAN. This morning the Subcommittee on Consumer Af- fairs begins the most important set of hearings we have undertaken since this subcommittee was established. Some of us on the subcom- mittee have been introducing truth-in-lending bills for a number of years-I first introduced the Douglas bill in 1963-but as long as the Senate Banking and Currency Committee was not acting on the meas- ure despite the dedicated efforts of its originator, Senator Paul H. Douglas, there was very little to be gained in taking up the bill on the House side. Now the situation is changed, of course. Senator William Proxmire, with great skill, was successful in pushing a truth-in-lending bill through the Senate committee and achieved the remarkable accom- plishment of having it passed by the Senate on July 11 on a rollcall vote of 92-0. That bill, S. 5, is now pending before us along with numerous other credit disclosure bills. We also have before us a com- prehensive consumer credit protection bill, H.R. 11601, which I have introduced on behalf of half of the members of this subcommittee and which has been cosponsored in separate bills by 19 other Members of the House. I think nearly every member of this subcommittee, on both sides of the aisle, is committed to the passage of some form of credit disclosure legislation through the sponsorship of one or another of the many bills now pending. I do not want to take the time of the members and of our distinguished witnesses this morning to make a speech on the relative merits of the various bills. The purpose of our hearings is to analyze and evaluate all of the issues involved in this legislation so that we will have a basis for making informed judgments and recom- mendations to the full committee on the legislation to be recom- mended to the House. We consider `ourselves most fortunate that former Senator Douglas, whose name is synonymous with the concept of full disclosure of credit costs, and who has been fighting for this ob- 1 PAGENO="0012" 2 CONSUMER CREDIT PROTECTION ACT jective for many years, will be a witness at our hearing tomorrow morning. I am sure everyone looks forward to his testimony. Because of the far-reaching nature of the legislation pending before us, we have attempted to provide an opportunity to as many interest groups as possible which want to be heard to testify at our hearings. It will be impossible to hear every spokesman for every organization which has members who would be affected by the legislation, and we are certainly not going to attempt that. However, to the fullest extent possible, we will make time available to organizations which have distinctive problems arising out of this legislation or which repre- sent wide groups of Americans who would be concerned or interested. But I do want to emphasize that we have no intention of permitting the hearings to go on endlessly as a means of delaying action on con- sumer credit legislation. Our objective is to get a good bill out of this subcommittee and into the full committee, and a good bill out of the full committee and onto the House floor. As I pointed out, virtually every member of this subcommittee is committed by the sponsorship of legislation to the passage of a bill which would require most enter- prises in the United States which extend credit to give to their cus- tomers a clear statement of the costs of that credit. No one on this subcommittee is against the intelligent utilization of credit by American consumers-our entire economy is based on the widespread availability and use of credit. But we are all concerned over the misuse, and frequently the excessive use of credit and also the inability of most consumers to know the real costs, in meaningful terms, of the multitude of credit transactions in which they engage each year. Because we are hoping to provide time to as many witnesses as possible, we are planning to hold afternoon sessions whenever it is practical for us to do so, but our success in holding afternoon sessions will depend upon the business on the House floor each day and there may be complications. So, of necessity, our witness schedule will have to be somewhat flexible. Before we begin the testimony, we will place in the record the texts of H.R. 11601, the Consumer Credit Protection Act, followed by H.R. 11602, which is identical, I believe, to the "truth-in-lending" bill passed by the Senate as S. 5. (The bills referred to follow:) PAGENO="0013" 90TH CONGRESS ls~ SESSION 1 1 601 IN THE HOUSE OF REPRESENTATIVES JULY 20, 1967 Mrs. SULLIVAN (for herself, Mr. GONZALEZ, Mr. MINISH, Mr. ANNUNZIO, Mr. BINGHAM, and Mr. HALPERN) introduced the following bill; which was referred to the Committee on Banking and Currency A BILL To safeguard the consumer in connection with the utilization of credit by requiring full disclosure of the terms and con- ditions of finance charges in credit transactions or in offers to extend credit; by establishing maximum rates of finance charges in credit transactions; by authorizing the Board of Governors of the Federal Reserve System to issue regula- tions dealing with the excessive use of credit for the purpose of trading in commodity futures contracts affecting consumer prices; by establishing machinery for the use during periods of national emergency of temporary controls over credit to prevent inflationary spirals; by prohibiting the garnishment of wages; by creating the National Commission on Consumer Finance to study and make recommendations on the need for further regulation of the consumer finance industry; and for other purposes. I 3 PAGENO="0014" 4 CONSUMER CREDIT PROTECTION ACT 2 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 SECn0N 1. This Act may be cited as the "Consumer 4 Credit Protection Act". 5 TITLE I-CREDIT TRANSACTIONS 6 SEC. 101. (a) The Federal Reserve Act is amended 7 by striking: the first section and inserting: 8 "TITLE I-TIlE FEDE~AL RESERVE SYSTEM 9 "SECTION 1. This title may be cited as the Federal 10 Reserve Act." 11 (b) Title I of the Federal Reserve Act is amended by 12 changing "Act", wherever that word is used with reference 13 to title I of the Federal Reserve Act (as so designated by 14 subsection (a) of this section) to read "title". 15 (c) The Federal Reserve Act is amended by adding 16 at the etid: 17 "TITLE IT-CREDIT TRANSACTIONS 18 "DECLARATION OF PURPOSE 19 "SEc. 201. (a) The Congress finds that economic 20 stabilization would be enhanced and that competition among 21 the various financial institutions and other firms engaged in 22 the extension of consumer credit would be strengthened by 23 the informed use of credit. Significant segments of the popu- 24 lation are misled by the manner in which the terms and con- 25 ditions of credit are offered and contracted for, as well as by PAGENO="0015" CONStTMER CREDIT PROTECTION ACT 5 3 1 advertising in or affecting commerce, which fail adequately 2 to disclose the credit terms offered to buyers in making pur- 3 chases, or obtaining loans, payable in installments or offered 4 under open end credit plans. Such failure of adequate dis- 5 closure tends to increase the uninformed and untimely use of 6 credit by the public, thereby adversely affecting economic 7 stabilization, increasing inflationary pressures, and decreas-. 8 ing the stability of the value of our currency. The informed 9 use of credit results from an awareness of the cost thereof by 10 consumers. It is the purpose of this title to assure a mean- 11 ingful disclosure of credit terms so that the consumer will 12 be able to compare more readily the various credit terms 13 available to him and avoid the uninformed use of credit. 14 "(b) Congress further finds that the stabilization of 15 consumer prices would be enhanced by the regulation of 16 speculation in, and the excessive use of credit for, the creation, 17 carrying or trading in commodity futures contracts, as well 18 as the establishment of standby authority for the emergency 19 control of consumer credit. 20 "DEFINITIONS 21 "SEC. 202. For the purposes of this title 22 "(a) `Board' means the Board of Governors of the Fed- 23 eral Reserve System. 24 "(b) `credit' means the right granted by a creditor to 25 a person other than an organization to defer payment of PAGENO="0016" 6 CONSUMER CREDIT PROTECTION ACT 4 1 debt or to incur debt and defer its payment, where the debt 2 is contracted by the obligor primarily for personal, family, 3 household, or agricultural purposes. The term does not in- 4 elude any contract in the form of a bailment or lease except 5 to the extent specifically included within the term `consumer 6 credit sale'. 7 "(c) `consumer credit sale' means a transaction in which 8 credit is granted by a seller in connection with the sate of 9 goods or services, if such seller regularly engages in credit 10 transactions as a seller, and such goods or services are pur- 11 chased primarily for a personal, family, household, or agri- 12 cultural purpose. The term does not include any contract in 13 the form of a bailmeut or lease unless the obligor contracts to 14 pay as compensation for use a sum substantially equivalent to 15 or in excess of the value of the goods or services involved, 16 and unless it is agreed that the obligor is bound to become, or 17 for no other or a merely nominal consideration has the op- 18 tion of becoming, the owner of the goods upon full compli- 19 ance with the provisions of the contract. 20 "(d) `finance charge' means the sum of all the charges 21 imposed directly or indireètly by a creditor, and payable 22 directly or indirectly by an obligor, as an incident to the 23 extension of credit, including loan fees, service and carrying 24 charges, discounts, interest, time price differentials, investi- 25 gators' fees, costs of any guarantee or insurance protecting the PAGENO="0017" CONSUMER CREDIT PROTECTION ACT 7 5 1 creditor against the obligor's default or other credit loss, and 2 any amount payable under a point, discount, or other system 3 of additional charges, except that 4 "(1) if itemized and disclosed under section 203, 5 the term `finance charge' does not include amounts col- 6 lected by a creditor, or included in the credit, for 7 "(A) fees and charges prescribed by law which 8 actually are or will be paid to public officials for 9 determining the existence of or for perfecting or 10 releasing or satisfying any security related to a credit 11 transaction; or 12 "(B) taxes; and 13 "(2) where credit is secured in whole or in part by 14 an interest in real property, the term does not include, 15 in addition to the duly itemized and disclosed costs 16 referred to in clauses (A) and (B) of paragraph (1), 17 the costs of 18 "(A) title examination, title insurance, or cor- 19 responding procedures; 20 "(B) preparation of the deed, settlement state- 21 ment, or other documents; 22 "(0) escrows for future payments of taxes and 23 insurance; 24 "(B) notarizing the deed and other documents; 25 "(E) appraisal fees; or 83-340 0-67-pt. 1-2 PAGENO="0018" 8 CONSUMER CREDIT PROTECTION ACT 6 1 "(F) credit reports. 2 "(e) `creditor' means any individual, or any partner- 3 ship, corporation, association, cooperative, or other entity, 4 including the United States or any agency or instrumentality 5 thereof, or any other government or political subdivision or 6 agency or instrumentality thereof, if such individual or en- 7 tity regularly engages in credit transactions, whether in con- 8 nection with the sale of goods and services or otherwise, and 9 extends credit for which the payment of a finance charge is 10 required. 11 "(1) (1) `annual percentage rate' means, for the pur- 12 poses of sections 203 (b) and 203 (c), the nominal annual 13 rate determined by the actuarial method (United States 14 rule). For purposes of this calculation it may be assumed 15 that: 16 "(A) The total time for repayment of the total 17 amount to be financed is the time from the date of the 18 transaction to the date of the final scheduled payment. 19 "(B) All payments are equal if every scheduled 20 payment in the series of payments is equal except one 21 which may not be more than double any other scheduled 22 payment in the series. 23 "(0) All payments are scheduled at equal inter- 24 vals, if all payments are so scheduled except the first 25 payment which may be scheduled to be paid before, on. PAGENO="0019" CONSUMER CREDIT PROTECTION ACT 9 7 i or after one period from the date of the transaction. A 2 period of time equal to one-half or more of a payment 3 period may be considered one full period. 4 "(2) The Board may prescribe methods other than the 5 actuarial method, if the Board determines that the use of ~ such other methods will materially simplify computation 7 while retaining reasonable accuracy as compared with the 8 rate determined under the actuarial method. 9 "(3) For the purposes of section 203 (d), the tenn 10 `equivalent annual percentage rate' means the rate or rates ii computed by multiplying the rate or rates used to compute 12 the finance charge for any period by the number of periods 13 in a year. 14 "(4) Where a creditor imposes the same finance charge 15 for all balances within a specified range, the annual percent- 16 age rate or equivalent annual percentage rate shall be corn- 17 puted on the median balance within the range for the pur- 18 poses of sections 203 (b), 203 (c), and 203 (d). 19 "(g) `open end credit plan' means a plan prescribing 20 the terms of credit transactions which may be made there- 21 under from time to time and under the terms of which a 22 finance charge may be computed on the outstanding unpaid 23 balance from time to time thereunder. 24 "(h) `organization' means a corporation, government PAGENO="0020" 10 CONSUMER CREDIT PROTECTION ACT 8 1 or governmental subdivision or agency, business or other 2 trust, estate, partnership, or association. 3 "(i) `advertisement in interstate commerce or afiecting 4 interstate commerce' includes, but is not limited to, 5 "(1) the advertising of goods, services, loans, or 6 open end credit plans through any means or instru- 7 mentality of interstate commerce; and 8 "(2) the advertising 9 "(A) of any goods which are made in whole 10 or in part of any item which has been shipped and 11 received in interstate commerce, 12 "(B) of any service which is to be performed 13 using any item which was shipped and received in 14 interstate commerce, or 15 "(0) of any loan or of any extension of credit 16 under an open end credit plan which is to be made 17 in whole or in part in interstate commerce. 18 "(j) `State' means any State, the Commonwealth of 19 Puerto Rico, or the District of Columbia. 20 "DISCLOSURE OF FINANCE CIIARGES; ADVERTISING 21 "SEc. 203. (a) Each creditor shall furnish to each per- 22 son to whom credit is extended and upon whom a finance 23 charge is or may be imposed the information required by 24 this section, in accordance with regulations prescribed by the 25 Board. PAGENO="0021" CONSUMER CREDIT PROTECTION ACT 11 9 1 "(b) This subsection applies ~o consumer credit sales 2 other than sales under an open end credit plan. For each 3 such sale the creditor shall disclose, to the extent applicable, 4 "(1) the cash price of the property or service pur- 5 chased; 6 "(2) the sum of any amounts credited as down- 7 payment (including any trade-in); 8 "(3) ~he difference between the amounts set forth 9 in paragraphs (1) and (2); 10 "(4) all other charges, individually itemized, which 11 are included in the amount of the credit extended but 12 which are not part of the finance charge; 13 "(5) the total amount to be financed (the sum of 14 the amounts disclosed under (3) and (4) above); 15 "(6) the amount of the finance charge (such charge, 16 or a portion of such charge, may be designated as a 17 time-price differential or as a similar term to the extent 18 applicable) 19 "(7) the finance charge expressed as an annual 20 percentage rate; 21 "(8) the number, amount, and due dates or periods 22 of payments scheduled to repay the indebtedness; and 23 "(9) the default, delinquency, or similar charges 24 payable in the event of late payments. PAGENO="0022" 12 CONSUMER CREDIT PROTECTION ACT 10 1 Except as otherwise hereinafter provided, the disclosure re- 2 quired by this subsection shall be made before the credit is 3 extended. Compliance may be attained by disclosing such in- 4 formation in the contract or other evidence of indebtedness to 5 be signed by the obligor. Where a seller receives a purchase 6 order by mail or telephone without personal solicitation by a 7 representative of the seller and the cash price and deferred 8 payment price and the terms of financing, including the an- 9 nual percentage rate, are set forth in the seller's catalog or 10 other printed material distributed to the public, the disclosure 11 shall be made on or before the date the first payment is due. 12 "(c) This subsection applies to extensio1~s of credit 13 other than consumer credit sales or transactions under an 14 open end credit plan. Any creditor making a loan or other- 15 wise extending credit under this subsection shall disclose, to 16 the extent applicable, 17 "(1) the amount of credit of which the obligor will 18 have the actual use, or which is or will be paid to him or 19 for his account or to another person on his behalf; 20 "(2) all charges, individually itemized, which are 21 included in the amount of the credit extended but which 22 are not part of the finance charge; 23 "(3) the total amount to be financed (the sum of 24 items (1) and (2) above) 25 "(4) the amount of the finance charge; PAGENO="0023" CONSUMER CREDIT PROTECTION ACT 13 :1.1 1 "(5) the finance charge expressed as an annual per- 2 centage rate; 3 "(6) the number, amount, and due dates or periods 4 of payments scheduled to repay the indebtedness; and 5 "(7) the default, delinquency, or similar charges 6 payable in the event of late payments. 7 Except as otherwise hereinafter provided, the disclosure re- 8 quired by this subsection shall be made before the credit is 9 extended. Compliance may be attained by disclosing such in- 10 formation in the note or other evidence of indebtedness to be 11 signed by the obligor. Where a creditor receives a request for 12 an extension of credit by mail or telephone without personal 13 solicitation by a representative of the creditor and the terms 14 of financing, including the annual percentage rate for repre- 15 sentative amounts of credit, are set forth in the creditor's 16 printed material distributed to the public, or in the contract 17 of loan or other printed material delivered to the obligor, 18 the disclosure shall be made on or before the date the first 19 payment is due. 20 "(d) (1) This subsection applies to open end credit 21 plans. 22 "(2) Before opening any account under an open end 23 credit plan, the creditor shall, to the extent applicable, dis- 24 close to the person to whom credit is to be extended- 25 "(A) the conditions under which a finance charge PAGENO="0024" 14 CONSUMER CREDIT PROTECTION ACT 12 1 may be imposed, including the time period, if any, within 2 which any credit extended may be repaid without incur- 3 ring a finance charge; 4 "(B) flue method of determining the balance upon 5 which a finance charge will be imposed; 6 "(0) the method of determining the amount of the 7 finance charge (including any minimum or fixed amount 8 imposed as a finance charge), the annual percentage 9 rate of the finance charge to be imposed if any, and, 10 in the case of an installment open end credit plan, the 11 equivalent annual percentage rate; and 12 "(D) the conditions under which any other charges 13 may be imposed, and the method by which they will be 14 determined. 15 "(3) For each billing cycle at the end of which there is 16 an outstanding balance under any such account, the creditor 17 shall disclose, to the extent applicable, 18 "(A) the outstanding balance in the account at 19 the beginning of the billing period; 20 "(B) the amount and date of each extension of 21 credit during the period and, if a purchase was involved, 22 a brief identification (unless previously furnished) of 23 the goods or services purchased; 24 "(0) the total amount credited to the account 25 during the period; PAGENO="0025" CONSUMER CREDIT PROTECTION ACT 15 1') I ) I "(D) the amount of aiiy finance charge added to 2 the account during the period, itemized to show the 3 amount, if any, due to the application of a percentage 4 rate and the amount, if any, imposed as a minimum or 5 fixed charge; 6 "(E) the finance charge expressed as an annual per- 7 centage rate; 8 "(F) the balance on which the finance charge 9 was computed and a statement of how the balance was 10 determined; 11 "(G) the outstanding balance in the account at 12 the end of the period; and 13 "(II) the date by which, or the period (if any) 14 within which, payment must be made to avoid addi- 15 tional finance charges. 16 "(4) If a creditor adds to this billing under an open end 17 credit plan one or more installments of other indebtedness 18 from the same obligor, the creditor is iiot required to dis- 19 close under this subsection any information which has been 20 disclosed previously in compliance with subsection (b) or 21 (c). 22 "(e) Written acknowledgment of receipt by a person to 23 whom a statement is required to be given pursuant to this 24 section shall be conclusive proof of the delivery thereof and, 25 unless the violation is apparent on the face of, the statement, PAGENO="0026" 16 CONSUMER CREDIT PROTECTION ACT 14 1 of compliance with this section in any action or proceeding 2 by or against an assignee of the original creditor without 3 knowledge to the contrary by such assignee when he acquires 4 the obligation. Such acknowledgment shall not affect the 5 rights of the obligor in any action against the original creditor. 6 "(f) If there is more than one obligor, a creditor may 7 furnish a statement of required information to only one of 8 them. Required information need not be given in the sequence 9 or order set forth in this section. Additional information or 10 explanations may be included. So long as it conveys sub- 11 stantially the same meaning, a creditor may use language or 12 terminology in any required statement different from that 13 prescribed by this title. 14 "(g) If applicable State l~w requires disclosure of items 15 of information substantially similar to those required by this 16 title, then a creditor who complies with such State law may 17 comply with this title by disclosing oniy the additional items 18 of information required l)y this title. 19 "(Ii) If information disclosed in accordaiice with this 20 section and any regulations prescribed by the Board is sub- 21 sequently rendered inaccurate as the result of a prepayment, 22 late payment, adjustment, or amendment of the credit agree- 23 ment through mutual consent of the parties or as permitted 24 by law, or as the result of any act or occurrence subsequent ~ to the delivery of the required disclosures, the inaccuracy re- LJJ PAGENO="0027" CONSUMER CREDIT PROTECTION ACT 17 15 S 1 suiting therefrom shall not constitute a violation of this 2 section. 3 "(i) (1) Prior to July 1, 19(38, whenever an annual 4 percentage rate is required to be disclosed by this section, the 5 rate may be expressed either as a percentage rate per year, 6 or as a dollars per hundred per year rate of the average 7 unpaid balance. 8 "(2) After June 30, 1968, all rates required to be dis- 9 closed by this section shall be expressed as percentage rates. 10 "(j) No creditor, in order to aid, promote, or assist, 11 directly or indirectly, any consumer credit sale, extension of 12 credit, or open end credit plan, may state or otherwise repre- 13 sent in any advertisement in interstate commerce or affecting 14 interstate commerce 15 "(1) that specific credit terms are available with 16 the purchase of goods or services or the obtaining of 17 a loan, unless the advertisement clearly and conspicuously 18 sets forth 19 "(A) ~he cash sale price, 20 "(B) the number, amount, and period of each 21 installment payment, 22 "(C) the downpayment, if any, 23 "(B) the time sale price, and 24 "(E) the finance charge, expressed as an an- 25 nual percentage rate; PAGENO="0028" 18 CONSUMER CREDIT PROTECTION ACT 16 1 "(2) that a specified periodic credit amount or in- 2 stailment amount can be arranged, unless the creditor 3 usually and customarily arranges credit payments or in- 4 stailments for that period and in that amount; or 5 "(3) that a specified dowupayrnent is required, 6 unless the creditor usually and customarily arranges 7 downpayments in that amount. 8 "(k) No creditor, in order to aid, promote, or assist, 9 directly or indirectly, the extension of credit under an open 10 end credit plan, may state or otherwise represent in any 11 advertisement in interstate commerce or affecting interstate 12 commerce any of the specific terms of such plan unless the 13 advertisement clearly and conspicuously sets forth 14 "(1) the conditions under which a finance charge 15 may be imposed, including the time period, if any, 16 within which any credit extended may be repaid without 17 incurring a finance charge; 18 "(2) the method of determining the balance upon 19 which a finance charge will be imposed; 20 "(3) the niethod of determining the amount of the 21 finance charge (including any minimum or fixed amount 22 imposed as a finance charge), and the percentage rate 23 per period and the annual percentage rate of the finance 24 charge to be imposed; and PAGENO="0029" CONSUMER CREDIT PROTRCT!ON ACT 19 17 1 "(4) the conditions under which any other charges 2 may be imposed, and the method by which they will be 3 determined. 4 "(1) No creditor may demand or accept any finance 5 charge in connection with any extension of credit to a 6 natural person which exceeds 7 "(1) the maximum rate or amount permitted under 8 the applicable State law, or 9 "(2) 18 per centum per annum, 10 whichever is less. 11 "(m) No creditor may demand or accept in connection 12 with any extension of credit any note or other document 13 authorizing the confession of judgment against the debtor. 14 "(n) The provisions of this section shall not apply to 15 "(1) credit transactions involving extensions of 16 credit for business or commercial purposes, or to gov- 17 ernments or governmental agencies or instrumentalities, 18 or to organizations; 19 "(2) transactions in securities or commodities in 20 accounts by a broker-dealer registered with the Securities 21 and Exchange Oommission; or 22 "(3) credit transactions, other than real property 23 transactions, in which the total amount to be financed 24 exceeds $25,000. PAGENO="0030" 20 CONSUMER CREDIT PROTECTION ACT 18 1 "REGULATIONS 2 "SEC. 204. (a) The Board shall prescribe regulations 3 to carry out section 203, including provisions 4 "(1) describing the methods which may be used in 5 determining annual percentage rates under section 203, 6 including, but not limited to, the use of any rules, charts, 7 tables, or devices by creditors to convert to an annual 8 percentage rate any add-on, discount, or other method of 9 computing a finance charge; 10 "(2) prescribing procedures to insure that the in- 11 formation required to be disclosed under section 203 is 12 set forth clearly and conspicuously; and 13 "(3) prescribing reasonable tolerances of accuracy 14 with respect to disclosing information under section 203. 15 "(b) In prescribing regulations with respect to reason- 16 aWe tolerances of accuracy as required by subsection (a) (3), 17 the Board shall observe the following limitations: 18 "(1) The annual percentage rate may be rounded 19 to the nearest quarter of 1 per centum for credit transac- 20 tions payable in substantially equal installments when 21 a creditor determines the total finance charge on the 22 basis of a single add-on, discount, periodic, or other 23 rate, and such rates are converted into an annual 24 percentage rate under procedures prescribed by the 25 Board. PAGENO="0031" CONSUMER CREDIT PROTECTION ACT 21 19 1 "(2) The use of rate tables or charts may be authot- 2 ized in cases where the total finance charge is determined 3 in a manner other than that specified in parag~aph 4 (1). Such tables or charts may provide for the dlis- 5 closure of annual percentage rates which vary up to 8 6 per centum of the rate as defined by section 202 (f). 7 However, any creditor who willfully and knowingly uses 8 such tables or charts in such a manner so as tO con- 9 sistently understate the annual percentage rate, as defined 10 by section 202 (f), shall be liable for criminal penalties 11 under section 206 (b) of this title. 12 "(3) Tn the case of creditors determining the annual 13 percentage rate in a manner other than as described in paragraph (1) or (2), the Board may authorize 15 other reasonable tolerances. 16 "(4) In order to simplify compliance where irreg- 17 ular payments are involved, the Board may authorize 18 tolerances greater than those specified in paragraph (2). 19 "(c) Any regulation prescribed under this section may 20 contain such classifications and differentiations and may pro- 21 vide for such adjustments and exceptions for any class of 22 transactions as in the judgment of the Board are necessary 23 or proper to effectuate the purposes of section 203 or to pre- 24 vent circumvention or evasion of, or to facilitate compliance PAGENO="0032" 22 CONSUMER CREDIT PROTECTION ACT 20 1 by creditors with, section 203 or any regulation issued under 2 this section. In prescribing exceptions, the Board may con- 3 sider, among other things, whether any class of transactions 4 ~s subject to any State law or regulation which requires dis- 5 closures substantially similar to those required by section 6 203. 7 "(d) In the exercise of its powers under this title, the 8 Board may request the views of other Federal agencies 9 which in its judgment exercise regulatory functions with 10 respect to any class of creditors, and such agencies shall 11 furnish such views upon request of the Board. 12 "(e) The Board shall establish an advisory committee, 13 to advise and conduct with ~t in the exercise of~its functions 14 with' respect to section 203 and this section. In appointing 15 the members of the committee, the Board shall seek to 16 achieve a fair representation of the interests of sellers of 17 merchandise -on credit, lenders, and the public. The com- 18 mittee shall meet from time' to time at the call of the 19 Board, and members thereof shall be paid transportation 20 expenses and not to exceed $100 per diem. 21 , "EP~ECT ON STATE LAWS 22 "Si~o. 205. (a) This title shall not be construed to 23 annul, alter or affect, or to exempt any creditor from comply- 24 ing with, the laws of any State relating to the disclosure of 25 infonnation in connection with credit transactions, except PAGENO="0033" CONSTJMER CREDIT PROTECTION ACT 23 21 1 to the extent that such laws are inconsistent with the provi- 2 sions of this title, or regulations issued thereunder, and then 3 only to the extent of the inconsistency. This title shall not 4 otherwise be construed to annul, alter or affect in any manner 5 the meaning, scope or applicability of the laws of any 6 State, including, but not limited to, laws relating to the 7 types, amounts or rates of charges, or any element or ele- 8 ments of charges, permissible under such laws in connection 9 with the extension or use of credit, nor to extend the appli- 10 cability of such laws to any class of persons or transactions to 11 which such laws would not otherwise apply, nor shall the dis- 12 closure of the annual percentage rate in connection with any 13 consumer credit sale as required by this title be evidence in 14 any action or proceeding that such sale was a loan or any 15 transaction other than a credit sale. 16 "(b) The Board shall by regulation exempt from the 17 requirements of section 203 any class of credit transactions 18 which it determines are subject to State law or regulation 19 substantially similar to the requirements under that section, 20 with adequate provision for enforcement. 21 "(c) Except as specified in section 206, section 203 and 22 the regulations issued thereunder do not affect the validity 23 or enforcibility of any contract or obligation under State or 24 Federal law~ 83-3400-67-pt. 1-3 PAGENO="0034" 24 CONSUMER CREDIT PROTECTION ACT 22 ii "CIVIL AND CRIMINAL PENALTIES 2 "SEC. 206. (a) (1) Any creditor who, in connection 3 with any credit transaction, knowingly fails in violation of 4 section 203, or any regulation issued thereunder, to disclose 5 any information to any person to whom such information is 6 required to be given shall be liable to such person in the 7 amount of $100, or in any amount equal to twice the finance 8 charge required by such creditor in connection with such 9 transaction, whichever is the greater, except that such lia- 10 bility shall not exceed $1,000 on any credit transaction. 11 "(2) In any action brought under this subsection in which 12 it is shown that the creditor disclosed a percentage rate or 13 amount less than that required to be disclosed by section 203 14 or regulations prescribed by the Board (after taking into 15 account permissible tolerances), or failed to disclose informa- 16 tion so required, there shall be a rebuttable presumption 17 that such violation was made knowingly. The presumption 18 is rebutted if the creditor shows by a preponderance 19 of evidence that the violation was not intentional and re- 20 salted from a bona tide error notwithstanding the mainte- 21 nance of procedures reasonably adapted to avoid any such 22 error. A creditor has no liability under this subsection 23 if within fifteen days after discovering the error, and prior 24 to the institution of an action hereunder or the receipt of 25 written notice of the error, the creditor notifies the person PAGENO="0035" CONSUMER CREDIT PROTECTION ACT 25 23 1 concerned of the error and makes whatever adjustments in 2 the appropriate account as are necessary to insure that the 3 person will not be required to pay a finance charge in excess 4 of the amount or percentage rate so disclosed. 5 "(3) Any action under this subsection may be brought 6 in any United States district court, or in any other court of 7 competent jurisdiction, within one year from the date of 8 the occurrence of the violation. In any such action in which 9 a person is entitled to recover a penalty as prescribed in 10 paragraph (1), the defendant is also liable for reasonable 11 attorneys' fees and court costs as determined by the court. 12 "(b) Any person who knowingly and willfully gives 13 false or inaccurate information or fails to provide informs~ 14 tion required to be disclosed under the provisions of this title 15 or any regulation issued thereunder, or who otherwise know- 16 ingly and willfully violates any provision of this title or any 17 regulation issued thereunder, shall be fined not more than 18 $5,000 or imprisoned not more than one year, or both. The 19 Attorney General shall enforce this subsection. 20 "(c) No punishment or penalty provided for a viola- 21 tion of section 203 or any regulation issued under section 22 204 applies to the United States, or any agency thereof, or to 23 any State, any political subdivision thereof, or any agency 24 of any Sta.te or political subdivision. 25 "(d) No person is subject to punishment or penalty PAGENO="0036" 26 CONSUMER CREDIT PROTECTION ACT 24 1 under this section solely as the result of the disclosure 2 of a finance charge or percentage which is greater than the 3 amount of such charge or percentage required to be disclosed 4 by such person under section 203, or regulations prescribed 5 by the Board. 6 "REGULATION OF CREDIT FOR COMMODITY FUTURES 7 TRADING 8 "SEc. 207. For the purpose of preventing the excessive 9 speculation in and the excessive use of credit for the creation, 10 carrying, or trading in commodity futures contracts having 11 the effect of inflating consumer prices, the Board of Governors 12 of the Federal Reserve System shall prescribe regulations 13 governing the amount of credit that may be extended or main- 14 tamed on any such contract. The regulations may define the 15 tenns used in this section, may exempt such transactioiis as 16 the Board may deem unnecessary to regulate in order to 17 carry out the purpose of this section, and may make such 18 differentiations among commodities, transactions, borrowers, 19 lenders, as the Board may deem appropriate. 20 "EMERGENCY CONTROL OF CONSUMER CREDIT 21 "SEC. 208. (a) Whenever the President determines that 22 a national emergency exists which necessitates such action, 23 the Board shall issue regulations, which may include defini- 24 tions of terms used in this section, to control, to such extent 25 as the Board determines appropriate, PAGENO="0037" CONSUMER CREDIT PROTECTION ACT 27 25 1 "(1) the extension of consumer credit, by means of 2 any prohibitions, restrictions, or requirements relating to 3 "(A) the amounts in which and the purposes 4 for which credit may be extended to any person, 5 "(B) the maximum maturity or other require- 6 ments as to the repayment or liquidation of any 7 extension of consumer credit, 8 "(0) where consumer credit is used for the 9 purchase of identifiable property, maximum loan-to- 10 value ratios, 11 "(B) the terms of any arrangement for the 12 lease or rental of personal property, and 13 "(E) such other elements in any extension of 14 credit as may, in his judgment, require regulation in 15 order to carry out the purposes of this title. 16 "(2) the extension of credit to finance directly or 17 indirectly the extension of consumer credit. Oontrols 18 imposed pursuant to this paragraph may be related to 19 the borrower's financial history, or to the lender's other 20 loans and investments, or to such other factors as the 21 Board may deem appropriate. 22 "(3) in the case of any lender engaged both in the 23 extension of consumer credit and in other types of 24 financing, the proportion of such lender's assets which PAGENO="0038" 28 CONSUMER CREDIT PROTECTION ACT 26 1 may be devoted to the extension of any type of con- 2 sumer credit. 3 This section does not apply to extensions of credit to finance 4 the acquisition of real property. 5 "ADMINISTRATIVE ENFORCEMENT 6 "SEc. 209. (a) Whenever the Board has reason to be- ~ lieve that any person has engaged, is engaged, or is about to 8 engage in a violation of this title, and it appears to the Board 9 that a proceeding by it in respect thereof would be in the 10 public interest, it shall serve upon that person a complaint 11 stating its charges and containing a notice of a hearing upon 12 a day and at a place therein fixed at least thirty days after 13 the service of the complaint. The person so complained of 14 shall have the right to appear in opposition to the charges set 15 forth in the complaint. The Board may upon good cause 16 shown allow any person to intervene by counsel or in person 17 in such a proceeding. The testimony in any such proceeding 18 shall be reduced to writing and filed in the office of the 19 Board. If upon the hearing the Board is of the opinion that 20 the person charged in the complaint has violated, is violat- 21 ing, or is about to violate this title, the Board shall state its 22 findings of fact in writing and shall issue and serve an order 23 requiring the person not to engage in the violation. Until 24 the expiration of the time allowed for filing a petition for 25 review, if no such petition has been duly filed within such PAGENO="0039" CONSUMER CREDIT PROTECTION ACT 29 27 1 time, or, if a petition for review has been filed within such 2 time then until the record in the proceeding has been filed 3 in a court of appeals of the United States, as hereinafter 4 provided, the Board may at any time, upon such notice and 5 in such manner as it shall deem proper, modify or set aside, 6 in whole or in part, any report or any order made or issued 7 by it under this section. After the expiration of the time 8 allowed for filing a petition for review, if no such petition 9 has been duly filed within such time, the Board may at any 10 time, after notice and opportunity for hearing, reopen `and 11 alter, modify, or set aside, in whole or in part, any report or 12 order made or issued by it under this section, whenever in 13 the opinion of the Board conditions of fact or of law have 14 so changed as to require such action or if the public interest 15 shall so require. The person subject to the order may, within 16 sixty days after service of the report or order entered after 17 such a reopening, obtain a review thereof in the appropriate 18 court of appeals of the United States, in the manner provided 19 in subsection (b') of this section. 20 "(b) REVIEW OF ORDER; REHEARING.-Any person 21 required by an order of the Board not to engage in a violation 22 of this title may obtain a review of such order in the court of 23 appeals of the United States, within any circuit where the act 24 or practice in question was used or where such' person resides 25 or carries on business, by filing in the court, within sixty PAGENO="0040" 30 CONSUMER CREDIT PROTECTION ACT 28 1 days from the date of the service of such order, a written 2 petition praying that the order of the Board be set aside. 3 A copy of such petition shall be forthwith transmitted by 4 the clerk of the court to the Board, and thereupon the 5 Board shall file in the court the record in the proceeding, 6 as provided in section 2112 of title 28. Upon such filing 7 of the petition the court shall have jurisdiction of the pro- 8 ceeding and of the question determined therein concurrently 9 with the Board until the filing of the record and shall have 10 power to make and enter a decree affirming, modifying, 11 or setting aside the order of the Board, and enforcing the 12 same to the extent that such order is aflinned and to issue 13 such writs as are ancillary tO its jurisdiction or are neces- 14 sary in its judgment to prevent injury to the public or to 15 competitors pendente lite. The findings of the Board as 16 to the facts, if supported by evidence, shall be conclusive. 17 To the extent that the order of the Board is affirmed, the 18 court shall thereupon issue its own order cornmandinsg 19 obedience to the terms of such order of the Board. If either 20 party shall apply to the court for leave to adduce addi- 21 tional evidence, and shall show to the satisfaction of the 22 court that such additional evidence is material and that 23 there were reasonable grounds for the failure to adduce 24 such evidence in the proceeding before the Board, the court 25 may order such additional evidence to be taken before the PAGENO="0041" CONSUMER CREDIT PROTECTION ACT 31 29 1 Board and to be adduced upon the hearing in such manner 2 and upon such terms and conditions as to the court may 3 seem proper. The Board may modify its findings as to the 4 facts, or make new findings, by reason of the additional 5 evidence so taken, and it shall file such modified or new 6 findings, which, if supported by evidence, shall be conclu- 7 SiVe, and its recommendation, if any, for the modification 8 or setting aside of its original order, with the return of ~ such additional evidence. The judgment and decree of the 10 court shall be final, except that the same shall be subject 11 to review by the Supreme Court upon certiorari, as pro- 12 vided in section 347 of title 28 of the United States Code. 13 "(c) JURISDICTION OF COURT.-Upon the filing of the 14 record with it the jurisdiction of the court of appeals of the 15 United States to affirm, enforce, modify, or set aside orders 16 of the Board shall be exclusive. 17 "(d) SERvIcE OF COMPLAINTS, ORDERS, AND OTHER 18 PROCESSES; RETURN.-Ciomplaints, orders, and other proc- 19 esses of the Board under this section may be served by 20 anyone duly authorized by the Board, either (1) by de- 21 livering a copy thereof to the person to be served, or to a 22 member of the partnership to be served, or the president, 23 secretary, or other executive Officer or a director of the cor- 24 poration to be served; or (2) `by leaving a copy thereof at 25 the residence or the principal office or place of business of PAGENO="0042" 32 CONSUMER CREDIT PROTECTION ACT 30 1 such person; or (3) by mailing a copy thereof by registered 2 mail or by certified mail addressed to such person at his or ~ its residence or principal office or place of business. The ~ verified return by the person so serving said complaint, ~ order, or other process setting forth the manner of said serv- 6 ice shall be proof of the same, and the return post office ~ receipt for said complaint, order, or other process mailed by 8 registered mail or by certified mail as aforesaid shall be ~ proof of the service of the same. 10 "(e) FiNALITY OF ORDER.-An order of the Board to cease and desist shall become final 12 "(1) upon the expiration of the time allowed for 13 filing a petition for review, if no such petition has been duly filed within such time; but the Board may there- 15 after modify or set aside its order to the extent provided 16 in the last sentence of subsection (a) ; or 17 "(2) upon the expiration of the time allowed for 18 filing a petition for certiorari, if the order of the Board 19 has been affirmed, or the petition for review dismissed by 20 the court of appeals, and no petition for certiorari has een uy e ;or 22 "(3) upon the denial of a petition for certiorari, if 23 the order of the Board has been affirmed or the petition 24 for review dismissed by the court of appeals; or 25 "(4) upon the expiration of thirty days from the PAGENO="0043" CONSUMER CREDIT PROTECTION ACT 33 31 1 date of issuance of the mandate of the Supreme Court, if 2 such Court directs that the order of the Board be affirmed 3 or the petition for review dismissed. 4 "(f) SAME; ORDER MODIFIED OR SET AS1~DE BY Su- 5 PREME COURT.-If the Supreme Court directs that the 6 order of the Board be modified or set aside, the order of the 7 Board rendered in accordance with the mandate of the 8 Supreme Court shall become final upon the expiration of 9 thirty days from the time it was rendered, unless within 10 such thirty days either party has instituted proceedings to 11 have such order corrected to accord with the mandate, in 12 which event the order of the Board shall become final when 13 so corrected. 14 "(g) SAME; ORDER MODIFIED OR SET ASIDE BY COURT 15 OF APPEALS.-Jf the order of the Board is modified or set 16 aside by the court of appeals, and if (1) the time allowed 17 for filing a petition for certiorari has expired and no such 18 petition has been duly filed, or (2) the petition for certiorari 19 has been denied, or (3) the decision of the court has been 20 affirmed by the Supreme Court, then the order of the Board 21 rendered in accordance with the mandate of the court of 22 appeals shall become final on the expiration of thirty days 23 from the time such order of the Board was rendered, unless 24 within such thirty days either party has instituted proceed- 25 ings to have such order corrected so that it will accord with PAGENO="0044" 34 CONSUMER CREDIT PROTECTION ACT 32 1 the mandate, in which event the order of the Board shall 2 become final when so corrected. 3 "(h) SAME; REHEARING UPON ORDER OR REMAND.- 4 If the Supreme Court orders a rehearing; or if the case is 5 remanded by the court of appeals to the Board for a rehear- 6 ing, and if (1) time time allowed for filing a petition for 7 certiorari has expired, and no such petition has been duly 8 ~1Ied, or (2) the petition for certiorari has been denied, or 9 (3) the decision of the court has beeen affirmed by the 10 Supreme Court, then the order of time Board rendered upon 11 such rehearing shall become final in the same manner as 12 though no prior order of the Board bad been rendered. 13 "(j) DEFINITION OF MANDATE.-AS used in this sec- 14 tion the term `mandate~, in case a mandate has been recalled 15 prior to the expiration of thirty days from the date of issu- 16 ance thereof, means the final mandate. 17 "(k) PENALTY FOR VIOLATION OF OiwEim.-Any 18 person who violates an order of the Board to cease and 19 desist after it has become final, and while such order is in 20 effect, shall forfeit and pay to the United States a civil 21 penalty of not more than $5,000 for each violation, which 22 shall accrue to the United States and may be recovered in 23 a civil action brought by the United States. Each separate 24 violation of such an order shall be a separate offense, ex- 25 cept that in the case of a violation through continuing PAGENO="0045" CONSUMER CREDIT PROTECTION ACT 35 33 1 failure or neglect to obey a final order of the Board each 2 day of continuance of such failure or neglect shall be deemed 3 a separate offense. 4 "REPORTS 5 "Si~c. 210. Not later than January 3 of each year corn- 6 mencing after the effective date of this title, the Board of 7 Governors of the Federal Reserve System and the Attorney 8 General shall, respectively, make reports to the Congress con- 9 cerning the administration of their functions under this title, 10 including such recommendations as the Board and the Attor- 11 ney General, respectively, deem necessary or appropriate. 12 In addition, reports of the Board of Governors of the Federal 13 Reserve System shall include the Board's assessment of the 14 extent to which compliance with the provisions of this title, 15 and regulations prescribed thereunder, is being achieved. 16 "EFFECTIVE DATE 17 "SEc. 211. The provisions of this title shall take effect 18 July 1, 1968." 19 TITLE TI-PROHIBITION OF GARNISHMENT OF 20 WAGES 21 SEc. 201. The Congress finds that garnishment of wages 22 is frequently an essential element in predatory extensions of 23 credit and that the resulting disruption of employment, pro- 24 duction, and consumption constitutes a substantial burden 25 upon interstate commerce. PAGENO="0046" 36 CONSUMER CREDIT PROTECTION ACT 34 1 SEC. 202. (a) No person may attach or garnish wages 2 or salary due an employee, or pursue in any court any similar 3 legal or equitable remedy which has the effect of stopping 4 or diverting the payment of wages or salary due an employee. 5 (b) Whoever violates subsection (a) of this section 6 shall be fined not more than $1,000, or imprisoned not more 7 than one year, or both. 8 TITLE ITT-COMMISSION ON CONSUMER FINANCE 9 SEC. 301. ESPABLISHMENT.-There is established a bi- 10 partisan National Commission on Consumer Finance (re- 11 ferred to in this title as the "Commission"). 12 SEC. 302. MEMBERsHIP OF TIlE; COMMISSION.- (a) 13 The Commission shall be composed of nine members, of 14 whom- 15 (1) three are Members of the Senate appointed 16 by the President of the Senate; 17 (2) three are Members of the House of Representa- 18 tives appointed by the Speaker of the House of Repre- 19 *sentatives; and 20 (3) three are persons not employed in a full-time 21 capacity by the United States appointed by the Presi- 22 dent, one of whom he shall designate as Chairman. 23 (b) A vacancy in the Commission does not affect its 24 powers and may be filled in the same manner as the original 25 appointment. PAGENO="0047" CONSUMER CREDIT PROTECTION ACT 37 35 (c) Five members of the Commission constitute a 2 quorum. 3 SEC. 303. COMPENSATION OF MEMBERS.- (a) Mem- ~ bers of Congress who are members of the Commission shall serve without compensation in addition to that received for 6 their services as Members of Congress; but they shall be ~ reimbursed for travel, subsistence, and other necessary ex- 8 penses incurred by them in the performance of the duties ~ vested in the Commission. 10 (b) Each member of the Commission who is appointed 11 by the President may receive compensation at a rate of 12 $100 for each day he is engaged upon work of the Corn- 13 mission, and shall be reimbursed for travel expenses, includ- 14 ing per diem in lieu of subsistence as authorized by law 15 (5 U.S.C. 5703) for persons in the Government service 16 employed intermittently. 17 SEc. 304. DuTIEs OF THE COMMISSION.- (a) The 18 Commission shall study and appraise the functioning and 19 structure of the consumer finance industry. The Commission, 20 in its report and recommendations to the Congress, shall 21 include treatment of the following topics: 22 (1) The adequacy of existing arrangements to pro- 23 vide consumer financing at reasonable rates. 24 ~ (2) The adequacy of existing supervisory and reg- PAGENO="0048" 38 CONSUMER CREDIT PROTECTION ACT 36 1 ulatory mechanisms to protect the public from unfair 2 practices. 3 (3) The desirability of Federal chartering of con- 4 sumer finance companies, or other Federal regulatory 5 measures. 6 (b) The Commission may make interim reports, and 7 shall make a final report of its findings, recommendations, 8 and conclusions to the President and to the Congress by 9 December 31, 1969. 10 SEc. 305. PoWERS OF THE CoMMIsSIoN.- (a) The 11 Commission, or any three members thereof as authorized 12 by the Commission, may conduct hearings anywhere in 13 the United States or otherwise secure data and expres- 14 sions of opinions pertinent to the study. In connection there- 15 with the Commission is authorized by majority vote 16 (1) to require, by special or general orders, cor- 17 porations, business firms, and individuals to submit in 18 writing such reports and answers to questions as the 19 Commission may prescribe; such submission shall be 20 made within such reasonable period and under oath or 21 otherwise as the Commission may determine; 22 (2) to administer oaths; 23 (3) to require by subpena the attendance and testi- 24 mony of witnesses and the production of all documentary 25 evidence relating to the execution of its duties; PAGENO="0049" CONSUMER CREDIT PROTECTION ACT 39 37 1 (4) in the case of disobedience to a subpena or 2 order issued under paragraph (a) of this section to 3 invoke the aid of any district court of the United States 4 in requiring compliance with such subpena or order; 5 (5) in any proceeding or investigation to order 6 testimony to be taken by deposition before any person 7 who is designated by the Commission and has the power 8 to administer oaths, and in such instances to compel 9 testimony and the production of evidence in the same 10 maimer as authorized tinder subparagraphs (3) and (4) 11 above; and 12 (6) to pay witnesses the same fees and mileage as 13 are paid in like circumstances in the courts of the United 14 States. 15 (b) Any district court of the United States within the 16 jurisdiction of which an inquiry is carried on may, in case 17 of refusal to obey a subpena or order of the Commission 18 issued under paragraph (a) of this section, issue an order 19 requiring compliance therewith; and any failure to obey 20 the order of the court may be punished by the court as a 21 contempt thereof. 22 (c) The Commission is authorized to require directly 23 from the head of any Federal executive department or 24 independent agency available information deemed useful in 25 the discharge of its duties. All departments and independent 83-340 0 - 67 - pt. 1 - 4 PAGENO="0050" 40 CONSUMER CREDIT PROTECTION ACT 38 1 agencies of the Government are hereby authorized and di- 2 rected to cooperate with the Commission and to furnish 3 all information requested by the Commission to the extent 4 permitted by law. 5 (d) The Commission is authorized to enter into con- 6 tracts with Federal or State agencies, private firms, in- 7 stitutions, and individuals for the conducting of research 8 or surveys, the preparation of reports, and other activities 9 necessary to the discharge of its duties. 10 (e) When the Commission finds that publication of 1~ any information obtained by it is in the public interest and 12 would not give an unfair competitive advantage to any 13 person, it is authorized to publish such information in the 14 form and manner deemed best adapted for public use, 15 except that data and information which would separately 16 disclose the business transactions of any person, trade 17 secrets, or names of customers shall be held confidential 18 and shall not be disclosed by the Commission or its staff. 19 The Commission shall permit business finns or individuals 20 reasonable access to documents furnished by them for the 21 purpose of obtaining or copying such documents as need 22 may arise. 23 (f) The Commission is authorized to delegate any of 24 its functions to individual members of the Commission or to PAGENO="0051" CONSUMER CREDIT PROTECTION ACT 41 39 1. designated individuals on its staff and to make such rules 2 and regulations as are necessary for the conduct of its busi- 3 ness, except as herein otherwise provided. 4 Sec. 306. ADMINISTRATIVE ARRANGEMENTS.- (a) 5 The Commission is authorized, without regard to the pro- 6 visions of title 5, United States Code, relating to appoint- 7 ments in the competitive service or to classification and 8 General Schedule pay rates, to appoint and fix the compen- 9 sation of an executive director and the executive director, 10 with the approval of the Commission, shall employ and fix 11 the compensation of such additional personnel as may be 12 necessary to carry out the functions of the Commission, but 13 no individual so' appointed shall receive compensation in 14 excess of the rate authorized for GS-18 under the General 15 Schedule. (b) The executive director, with the approval of the 17 Commission, is authorized to obtain services in accordance 18 with the provisions of section 3109 of title 5 of the United 19 States Code, but at rates for individuals not to exceed $100 20 per diem. 21 (c) The head `of any executive department or independ- 22 ent agency of the Federal Government is authorized to de- 23 tail, on a reimbursable basis, any of its personnel to assist 24 the Commission in carrying out its work. PAGENO="0052" 42 CONSUMER CREDIT PROTECTION ACT 40 1 (d) Financial and administrative services (including 2 those related to budgeting and accounting, financial report- 3 ing, personnel, and procurement) shall be provided the Corn- 4 mission by the General Services Administration, for which 5 payment shall be made in advance, or by reimbursement, 6 from funds of the Commission in such amounts as may be 7 agreed upon by the Chairman of the Commission and the 8 Administrator of General Services. The regulations of the 9 General Services Administration for the collection of in- 10~ debtedness of personnel resulting from erroneous payments 11 shall apply to the collection of erroneous payments made to 12 or on behalf of a Commission employee, and regulations of 13 said Administrator for the administrative control of funds 14 shall apply to appropriations of the Commission. The Com- 15 mission shall not be required to prescribe such regulations. 16 (e) Ninety days after submission of its final report, as 17 provided in section 304 (b), the Commission shall cease to 18 exist. 19 SEC. 307. AUTH01UZATI0N OF APPROPRIATIONS.- 20 There is hereby authorized to be appropriated such sums not 21 in excess of $1,500,000 as may be necessary to carry out the 22 provisions of this title. Any money appropriated pursuant 23 hereto shall remain available to the Commission until the 24 date of its expiration, as fixed by section 306 (e). PAGENO="0053" CONSUMER CREDIT PROTECTION ACT 43 41 1 TITLE TV-SEVERABILITY 2 SEc. 401. If any provision of this Act is judicially held 3 to be invalid, that holding does not necessarily affect the 4 validity of any other provision of this Act. PAGENO="0054" PAGENO="0055" 90'rH CONGRESS 1ST ~ H. . 1 1 602 IN THE HOUSE OF REPRESENTATIVES JULY 20, 1967 Mr. WIDNALL (for himself, Mr. FIN0, Mrs. Dwviu~, Mr. STANTON, Mr. LLOYD, Mr. BLACKBURN, Mr. WILLIAMS of Pennsylvania, and Mr. Wmin) intro- duced the following bill; which was referred to the Committee on Banking and Currency A BILL To assist in the promotion of economic stabilization by requir- ing the disclosure of finance charges in connection with extension of credit. 1 Be it enacted by the Senate and House of Representa. 2 tives of the United States of A merica in Congress assembled, 3 That this Act may be cited as the "Truth in Lending Act". 4 DECLARATION OF PURPOSE 5 SEC. 2. The Congress finds and declares that economic 6 stabilization would be enhanced and that competition among 7 the various financial institutions and other firms engaged in 8 the extension of consumer credit would be strengthened by 9 the informed use of credit. The informed use of credit results 10 from an awareness of the costs thereof by consumers. It is I-o 45. PAGENO="0056" 46 CONSUMER CREDIT PROTECTION ACT 2 1 the purpose of. this Act to assure a full disclosure of such 2 costs with a view to promoting the informed use of consumer 3 credit to the benefit of the national economy. 4 DEFINITIONS 5 SEC. 3. For the purposes of this Act- 6 (a) "Board" means the Board of Governors of the 7 Federal Reserve System. 8 (b) "Credit" means the right granted by a creditor to 9 a person other than an organization to defer payment of 10 debt or to incur debt and defer its payment, where the debt 11 is contracted by the obligor primarily for personal, family, 12 household, or agricultural purposes. The term does not in- 13 elude any contract in the form of a bailment or lease except 14 to the extent specifically included within the term "consumer 15 credit sale". 16 (c) "Consumer credit sale" means a transaction in 17 which credit is granted by a seller in connection with the sale 18 of goods or services, if such seller regularly engages in credit 19 transactions as a seller, and such goods or services are pur- 20 chased primarily for a personal, family, household, or agri- 21 cultural purpose. The term does not iiiehide any contract in 22 the form of a bailment or lease unless the obligor contracts to 23 pay as compensation for use a sum substantially equivalent to 24 or in excess of the value of the goods or services involved, and 25 unless it is agreed that the obligor is bound to become, or for PAGENO="0057" CONSUMER CREDIT PROTECTION ACT 47 3 1 no other or a merely nominal consideration has the option of 2 becoming, the owner of the goods upon full compliance with 3 the provisions of the contract. 4 (d) (1) "Finance charge" means the sum of all the 5 charges imposed directly or indirectly by a creditor, and pay- 6 able directly or indirectly by an obligor, as an incident to the 7 extension of credit, including loan fees, service and carrying 8 charges, discounts, interest, time price differentials, investi- 9 gators' fees, costs of any guarantee or insurance protecting 10 the creditor against the obligor's default or other credit loss, 11 and any amount payable under a point, discount, or other 12 system of additional charges. 13 (2) If itemized and disclosed under section 4, the term 14 does not include amounts collected by a creditor, or included 15 in the credit, for (A) fees and charges prescribed by law 16 which actually are or will be paid to public officials for deter- 17 mining the existence of or for perfecting or releasing or satis- 18 fying any security related to a credit transaction; (B) taxes; 19 (0) charges or premiums for insurance against loss of or 20 damage to property related to a credit transaction or against 21 liability arising out of the o~'nership or use of such property; 22 and (D) charges or premiums for credit life and accident 23 and health insurance. 24 (3) Where credit -is secured in whole or in part by an 25 interest in real property, the term does not include, in addi- PAGENO="0058" 48 CONSUMER CREDIT PROTECTION ACT 4 1 tion to the duly itemized and disclosed costs referred to in 2 clauses (A), (B), (C), a~nd (B) of paragraph (2), the 3 costs of (i) title examination, title insurance, or correspond- 4 ing procedures; (ii) preparation of the deed, settlement 5 statement, or other documents; (iii) escrows for future pay- 6 ments of taxes and insurance; (iv) notarizing the deed and 7 other documents; (v) appraisal fees; and (vi) credit 8 reports. 9 (e) "Creditor" means any individual, or any partner- 10 ship, corporation, association,, cooperative, or other entity, 11 hicluding the United States or any agency or instrumentality 12 thereof, or any other government or political subdivision or 13 agency or instrumentality thereof, if such individual or en- 14 tity regularly engages in credit transactions, whether in 15 connection with the sale of goods and services or otherwise, 16 ~nd extends credit for which the payment of a finance 17 charge is required. 18 (f) (1) "Annual percentage rate" means, for the pur- 19 poses of sections 4 (b) and 4 (c), the nominal annual rate 20 determined by the actuarial method (United States rule). 21 For purposes of this calculation it may be assumed that: 22 (A) The total time for repayment of the total 23 amount to be financed is the time from the date of the 24 transaction to the date of the final scheduled payment. (B) All payments are equal if every scheduled pay- PAGENO="0059" CONSUMER CREDIT PROTECTION ACT 49 5 1 ment in the series of payments is equal except one which 2 may not be more than double any other scheduled pay- 3 ment in the series. 4 (0) All payments are scheduled at equal intervals, 5 if all payments are so scheduled except the first payment 6 which may be scheduled to be paid before, on, or after 7 one period from the date of the transaction. A period of 8 time equal to one-half or more of a payment period may 9 be considered one full period. 10 (2) The Board may prescribe methods other than the ~1 actuarial method, if the Board determines that the use of 12 such other methods will materially simplify computation Th while retaining reasonable accuracy as compared with the 14 rate determined under the actuarial method. 15 (3) For the purposes of section 4 (d), the term "equiv- 16 alent annual percentage rate" means the rate or rates corn- 17 puted by multiplying the rate or rates used to compute the 18 finance charge for any period by the number of periods in 19 a year. 20 (4) Where a creditor imposes the same finance charge 21 for all balances within a specified range, the annual percent- 22 age rate or equivalent annual percentage rate shall be corn- 23 puted on the median balance within the range for the pur- 24 poses of sections 4 (b), 4 (c), and 4 (d). 25 (g) "Open-end credit plan" means a plan prescribing PAGENO="0060" 50 CONSUMER CREDIT PROTECTION ACT 6 1 the terms of credit transactiois which irlay he iiiade there- 2 under from time to time and under the tern'is of which a 3 finance charge niay be computed on the outstanding unpaid 4 balance from time to time thereunder. 5 (h) "Installment open-end credit plan" means an open- 6 end credit plan which has one or more of the following 7 characteristics: (1) creates a security iiiterest in, or provides 8 for a lien on, or retention of title to. any property (whether 9 real or personal, tallgil)le or ifltallgil)le) , (2) provides for 10 a repayment schedule pursuant to which less than 60 per 11 centum of the unpaid balance at any time outstanding under 12 the plan is required to be paid within twelve months, or 13 (3) provides that amounts in excess of required payments 14 under the repayment schedule are applied to future pay- 15 ments in the order of their respective due dates. 16 (i) "First mortgage" means such classes of first liens as 17 are commonly given to secure advances on, or the unpaid 18 purchase price of, real estate under the laws of the State in 19 which the real estate is located. 20 (j) "Organization" means a corporation, government 21 or governmental subdivision or agency, business or other 22 trust, estate, partnership, or association. 23 DISCLOSURE OF FINANCE CHARGES 24 SEC. 4. (a) Each creditor shall furnish to each person 25 to whom credit is extended and upon whom a finance charge PAGENO="0061" CONSUMER CREDIT PROTECTION ACT 51 7 1 is or may be imposed the information required by this 2 sectioii, in accordance with regulations prescribed by the 3 Board. 4 (b) This subsection applies to consumer credit sales 5 other than sales under an open-end credit plan. For each 6 such sale the creditor shall disclose, to the extent applicable- 7 (1) the cash price of the property or service pur- 8 chased; 9 (2) the sum of any amounts credited as down- 10 payment (including any trade-in) 11 (3) the difference between the amounts set forth in 12 paragraphs (1) and (2) 13 (4) all other charges, individually itemized, which 14 are included in the amount of the credit extended but 15 which are not part of the finance charge; 16 (5) the total amount to be financed (the sum of 17 the amounts disclosed under (3) and (4) above) 18 (6) the amount of the finance charge (such charge, 19 or a portion of such charge, may be designated as a 20 time-price differential or as a similar term to the extent 21 applicable) 22 (7) the finance charge expressed as an annual 23 percentage rate, if the amount of such charge is $10.00 24 or more; PAGENO="0062" 52 CONSUMER CREDIT PROTECTION ACT 8 1 (8) the number, amount, and due dates or periods 2 of payments scheduled to repay the indebtedness; and 3 (9) the default, delinquency, or similar charges pay- 4 able in the event of late payments. 5 Except as otherwise hereinafter provided, the disclosure re- 6 quired by this subsection shall be made before the credit is 7 extended. Compliance may be attained by disclosing such ~ information in the contract or other evidence of indebtedness 9 to be signed by the obligor. Where a seller receives a purr 10 chase order by mail or telephone without personal solicitation 11 by a representative of the seller and the cash price~and de- 12 ferred payment price and the terms of financing, including the 13 annual percentage rate, are set forth in the seller's catalog or 14 other printed material distributed to the public, the disclosure 15 shall be made on or before the date the first payment is due. 16 (c) This subsection applies to extensions of credit other I? than consumer credit sales or transactions under an open-end 18 credit plan. Any creditor making a loan or otherwise extend- 19 ing credit under this subsection shall disclose, to the extent 20 applicable- 21 (1) the amount of credit of which the obligor will 22 have the actual use, or which is or will be paid to him or 23 for his account or to another person on his behalf; 24 (2) all charges, individually itemized, which are PAGENO="0063" CONSUMER CREDIT PROTECTION ACT 53 9 1 included in the amount of the credit extended but which 2 are not part of the finance charge; 3 (3) the total amount to be financed (the sum of 4 items (1) and (2) above) 5 (4) the amount of the finance charge; 6 (5) the finance charge -expressed as an annual per- 7 centage rate, if the amount of such charge is $10.00 or 8 more; 9 (6) the number, amount, and due dates or periods 10 of payments scheduled to repay the indebtedness; and 11 (7) the default, delinquency, or similar charges 12 payable in the event of late payments. 13 Except as otherwise hereinafter provided, the disclosure re- 14 quired by this subsection shall be made before the credit is 15 extended. Compliance may be attained by disclosing such in- 16 formation in the note or other evidence of indebtedness to be 17 signed by the obligor. Where a c~'editor receives a request for 18 an extension of credit by mail or telephone without personal 19 solicitation by a representative of the creditor and the terms 20 of financing, including the annual percentage rate for repre- 21 sentative amounts of credit, are set forth in the creditor's 22 printed material distributed to the public, or in the contract 23 of loan or other printed material delivered to the obligor, PAGENO="0064" 54 CONSUMER CREDIT PROTECTION ACT 10 1 the disclosure shall be made on or before the date the first 2 payment is due. 3 (d) (1) This subsection applies to open-end credit plans. 4 (2) Before opening any account under an open-end 5 credit plan, the creditor shall, to the extent applicable, dis- 6 close to the person to whom credit is to be extended- 7 (A) the conditions under which a finance charge 8 may be imposed, including the time period, if any, 9 within which any credit extended may be repaid with- 10 out incurring a finance charge; ii (B) the method of determining the balance upon 12 which a finance charge will be imposed; 13 (0) the method of determining the amount of the 14 finance charge (including any minimum or fixed amount 15 imposed as a finance charge), the percentage rate per 116 period of the finance cha.rge to be imposed if any, and, 17 in the case of an installment open-end credit plan, the 18 equivalent annual percentage rate; and 19 (B) the conditions under which any other charges 20 may be imposed, and the method by which they will be 21 determined. 22 (3) For each billing cycle at the end of which there is 23 an outstanding balance under any such account, the creditor 24 shall disclose to the extent applicable- PAGENO="0065" CONSUMER CREDIT PROTECTION ACT 55 11 1 (A) the outstanding balance in the account at the 2 beginning of the billing period; 3 (B) the amount and date of each extension of credit 4 during the period and, if a purchase was involved, a 5 brief identification (unless previously furnished) of the 6 goods or services purchased; 7 (0) the total amount credited to the account during 8 the period; 9 (D) the amount of any finance charge added to the 10 account during the period, itemized to show the amount, 11 if any, due to the application of a percentage rate and 12 the amount, if any, imposed as a minimum or fixed 13 charge; 14 (E) the balance on which the finance charge was 15 computed and a statement of how the balance was de- 16 termined; 17 (F) the rate, if any, used in computing the finance 18 charge and, in the case of an installment open-end credit 19 plan, the equivalent annual percentage rate; 20 (G) the outstanding balance in the account at the 21 end of the period; and 22 (II) the date by which, or the period (if any) with- 23 in which, payment must be made to avoid additional 24 finance charges. 83-340 0 - 87 - pt. 1 - 5 PAGENO="0066" 56 CONSUMER CREDIT PROTECTION ACT 12 1 (4) If a creditoi adds to this billing under an open-end 2 credit plan one or more installments of other indebtedness 3 from the same obhgor, the creditor is not required to dis- 4 close under this susbection any information which has been 5 disclosed previously in compliance with subsection (b) or 6 (e) 7 (e) Written acknowledgment of receipt by a person to 8 whom a statement is required to be given pursuant to this 9 section shall be conclusive proof of the delivery thereof and, 10 unless the violation is apparent on the face of the statement, 11 of compliance with this section in any action or proceedmg 12 by or against an assignee of the original creditor without 13 knowledge to the contrary by such assignee when he acquires 14 the obligation Such acknowledgment shall not affect the 15 rights of the obligor in any action against the original 16 creditor 17 (f) If there is more than one obhgor, a creditor may 18 furnish a statement of required information to only one of 19 them Required information need not be given in the sequence 20 or order set forth m this section Additional information or 21 explanations may be included So long as it conveys sub- 22 stantially the same meaning, a creditor may use language or 23 terminology in any required statement different from that 24 prescribed by this Act PAGENO="0067" CONSUMER CREDIT PROTECTION ACT 57 13 1 (g) If applicable State law requires disclosure of items 2 of information substantially similar to those required by this 3 Act then a creditor who complies with such State law may 4 comply with this Act by disclosing only the additional items 5 of information required by this Act 6 (li) If information disclosed in accordance with this 7 section and any regulations prescribed by the Board is sub- 8 sequently rendered inaccurate as the result of a prepayment, 9 late payment, adjustment, or amendment of the credit agree- 10 ment through mutual consent of the parties or as permitted 11 by law, or as the result of any act or occurrence subsequent 12 to the delivery of the required disclosures, the inaccuracy re- 13 sulting therefrom shall not constitute a violation of this sec- 14 15 (i) (1) Subject to paragraph (2) - 16 (A) whenever an annual percentage rate is re- 17 quired to be disclosed by this section, such rate may be 18 expressed &~ither as a percentage rate per year, or as a 19 dollars per hundred per year rate of the average unpaid 20 balance, and 21 (B) whenever a rate other than an annual rate is 22 used to compute a finance charge and is required to be 23 disclosed under subsection (d), such rate may be ex- PAGENO="0068" 58 CONSUMER CREDIT PROTECTION ACT 14 1 pressed either as a percentage rate per period of the bal- 2 ance upon which the finance charge is computed, or as a 3 dollars per hundred per period rate of such balance. 4 (2) On and after January 1, 1972, all rates required ~ to be disclosed by this section shall be expressed as percent- 6 age rates. 7 REGULATIONS 8 SEc. 5. (a) The Board shall prescribe regulations to carry out this Act, including provisions- 10 (1 ~ describing the methods which may be used in 11 determining annual percentage rates under section 4, 12 including, but not limited to, the use of any rules, charts, 13 tables, or devices by creditors to convert to an annual 14 percentage rate any add-on, discount or other method of 15 computing a finance charge; 16 (2) prescribing procedures to ensure that the in- 17 formation required to be disclosed under section 4 is set 18 forth clearly and conspicuously; and 19 (3) prescribing reasonable tolerances of accuracy 20 with respect to disclosing information under section 4. 21 (b) In prescribing regulations with respect to reason- 22 able tolerances of accuracy as required by subsection 23 (a) (3), the Board shall observe the following limitations: 24 (1) The annual percentage rate may be rounded 25 to the nearest quarter of 1 per centum for credit transac- PAGENO="0069" CONSUMER CREDIT PROTECTION ACT 59 15 1 tions payable in substantially equal installments when 2 a creditor determines the total finance charge on the 3 basis of a single add-on, discount, periodic, or other 4 rate, and such rates are converted into an annual 5 percentage rate under procedures prescribed by the 6 Board. 7 (2) The use of rate tables or charts may be author- 8 ized in cases where the total finance charge is determined 9 in a manner other than that specified in paragraph 10 (1). Such tables or charts may provide for the dis- 111 closure of annual percentage rates which vary up to 8 12 per centum of the rate as defined by section 3 (f). How- 13 ever, any creditor who willfully and knowingly uses 14 such tables or charts in such a manner so as to con- 15 sistently understate the annual percentage rate, as defined 16 by section 3 (f), shall be liable for criminal penalties 17 under section 7 (b) of this Act. 18 (3) In the case of creditors determining the annual 19 percentage rate in a manner other than as described 20 in paragraph (1) or (2), the Board may authorize 21 other reasonable tolerances. 22 (4) In order to simplify compliance where irreg- 23 ular payments are involved, the Board may authorize 24 tolerances greater than those specified in paragraph (2). 25 (c) Any regulation prescribed hereunder may contain PAGENO="0070" 60 CONSUMER CREDIT PROTECTION ACT 16 1 such classifications and differentiations and may provide for 2 such adjustments and exceptions from this Act or the regli- 3 latioris thereunder for any class of transactions, as in the 4 judgment of the Board are necessary or pioper to effectuate 5 the purposes of this Act or to prevent circumvention oi 6 evasion of, or to facilitate compliance by creditors with, 7 this Act or any regulation issued hereunder. In prescribing 8 exceptions, the Board shall consider, among other things, 9 whether any class of transactions is subject to any Federal 10 or State law or regulation which requires disclosures sub- 11 stantially similar to those required by section 4. 12 (d) In the exercise of its powers under this Act, the 13 Board may request the views of other Federal agencies which 14 in its judgment exercise regulatorsr functions with respect 15 to any class of creditors, and such agencies shall furnish 16 such views upon request of the Board. 17 (e) The Board shall establish an advisory committee, 18 to advise and consult with it in the exercise of its powers 19 under this Act. In appointing such members to such corn- 20 mittee the Board shall seek to achieve a fair representation 21 of the interests of sellers of merchandise on credit, lenders, 22 and the public. Such committee shall meet from time to time 23 at the call of the Board, and members thereof shall be paid 24 transportation expenses and not to exceed $100 per diem PAGENO="0071" CONSUMER CREDIT PROTECTION ACT 61 17 1 EFFECT ON STATE LAWS 2 SEc. 6. (a) This Act shall not be construed to annul, 3 alter or affect, or to exempt any creditor from complying 4 with, the laws of any State relating to the disclosure of 5 information in connection with credit transactions, except 6 to the extent that such laws are inconsistent with the provi- 7 sions of this Act, or regulations issued thereunder, and then 8 only to the extent of the inconsistency. This Act shall not 9 otherwise be construed to annul, alter or affect in any man- 10 ner the meaning, scope or applicability of the laws of any 11 State, including, but not limited to, laws relating to the 12 types, amounts or rates of charges, or any element or ele- 13 ments of charges, permissible under such laws in connection 14 with the extension or use of credit, nor to extend the appli- 15 cability of such laws to any class of persons or transactions to 16 which such laws would not otherwise apply, nor shall the dis- 17 closure of the annual percentage rate in connection with any 18 consumer credit sale as required by this Act be evidence in 19 any action or proceeding that such sale was a loan or any 20 transaction other than a credit sale. 21 (b) The Board shall by regulation exempt from the 22 requirements of this Act any class of credit transactions which 23 it determines are subject to any State law or regulation which 24 requires disclosures substantially similar to those required PAGENO="0072" 62 CONSUMER CREDIT PROTECTION ACT 18 1 by section 4, and contains adequate provisions for enforce- 2 ment, 3 (c) Except as specified in section 7, nothing contained 4 in this Act or any regulations issued thereunder shall affect 5 the validity or enforcibility of any contract or obligation 6 under State or Federal law. 7 CIVIL AND CRIMINAL PENALTIES 8 SEC. 7. (a) (1) Any creditor who, in connection with 9 any credit transaction, knowingly fails in violation of this 10 Act, or any regulation issued thereunder, to disclose any 11 information to any person to whom such information is 12 required to be given shall be liable to such person in the 13 amount of $100, or in any amount equal to twice the finance 14 charge required by such creditor in connection with such 15 transaction, whichever is the greater, except that such ha- 16 bility shall not exceed $1,000 on any credit transaction. 17 (2) In any action brought under this subsection in which 18 it is shown that the creditor disclosed a percentage rate or 19 amount less than that required to be disclosed by section 4 or 20 regulations prescribed by the Board (after taking into ac- 21 count permissible tolerances), or failed to disclose information 22 so required, there shall be a rebuttable presumption that such 23 violation was made knowingly. Such presumption shall be 24 rebutted if the creditor shows by a preponderance of evidence 25 that the violation was not intentional and resulted from a PAGENO="0073" CONSTJMER CREDIT PROTECTION ACT 63 19 1 bona fide error notwithstanding the maintenance of proce- 2 dures reasonably adapted to avoid any such error: Provided, 3 That a creditor shall have no liability under this subsection if 4 within fifteen days after discovering the error, and prior to 5 the institution of an action hereunder or the receipt of writ- 6 ten notice of the error, the creditor notifies the person con- 7 cerned of the error and makes whatever adjustments in the 8 appropriate account as are necessary to ensure that such 9 person will not be required to pay a finance charge in excess 10 of the amount or percentage rate so disclosed. 11 (3) Any action under this subsection may be brought in 12 any court of competent jurisdiction within one year from the 13 date of the occurrence of the violation. In any such action in 14 which a person is entitled to recover a penalty as prescribed ~ in paragraph (1), the defendant shall also be liable for 16 reasonable attorneys' fees and court costs as determined by 17 the court. 18 (4) As used in this subsection, the term "court of corn- 19 petent jurisdiction" means either any Federal court of corn- 20 petent jurisdiction regardless of the amount in controversy, 21 or any State court of competent jurisdiction. 22 (b) Any person who knowingly and willfully gives 23 false or inaccurate information or fails to provide informa- 24 tion required to be disclosed under the provisions of this Act 25 or any regulation issued thereunder, or who otherwise know- PAGENO="0074" 64 CONSUMER CREDIT PROTECTION ACT 20 1 ingly and willfully violates any provision of this Act or any 2 regulation issued thereunder, shall be fined not more than 3 $5,000 or imprisoned not more than one year, or both The 4 responsibility for enforcing this subsection is hereby assigned 5 to the Attorney General 6 (c) No punishment or penalty provided by this Act shall 7 apply to the United. States, or any agency thereof, or to any 8 State, any pohtical subdivision thereof, or any agency of any 9 State or political subdivision 10 (d) No person shall be subject to pumshment or penalty 11 under this Act solely as the result of the disclosure of a 12 finance charge or percentage which is greater than the 13 amount of such charge or percentage required to be disclosed 14 by such person under section 4, or regulations prescribed by 15 the Board 16 EXCEPTIONS SEC 8 The provisions of this Act shall not apply to- IS (1) credit transactions involving extensions of credit 1 q for business or commercial purposes, or to governments 20 or governmental agencies or instrumentalities, or to orga- 1 nizations, PAGENO="0075" CONSUMER CREDIT PROTECTION ACT 65 21 1 (2) transactions in securities or commodities in ac- 2 counts by a broker-dealer registered with the Securities 3 and Exchange Commission; 4 (3) credit transactions, other than real property 5 transactions, in which the total amount to be financed 6 exceeds $25,000; or 7 (4) transactions involving extensions of credit se- 8 cured by first mortgages on real estate. REPORTS 10 SEc. 9. Not later than January 3 of each year corn- 11 mencing after the effective date of this Act, the Board of 12 Governors of the Federal Reserve System and the Attorney 13 General shall, respectively, make reports to the Congress con- 14 cerning the administration of their functions under this Act, 15 including' such recommendations as the Board and the Attor- 16 ney General, respectively, deem necessary or appropriate. 17 in addition, reports of the Board of Governors of the Federal 18 Reserve System shall include the Board's assessment of the 19 extent to which compliance with the provisions of this Act, 20 and regulations prescribed thereunder, is being achieved. PAGENO="0076" 66 CONSUMER CREDIT PROTECTION ACT 22 1 EFFECTIVE DATE 2 SEC. 10. The provisions of this Act shall take effect upon 3 July 1, 1969; except that section 5 shall take effect immedi- 4 ately upon enactment. PAGENO="0077" CONSUMER CREDIT PROTECTION ACT 67 Mrs. SULLIVAN. Instead of including the texts of the other bills on this subject, we will list the names of the sponsors and the nature of the bill-that is, whether it is the comprehensive measure, or one limited to credit disclosure. Then we will place in the record the de- partmental reports and the other relevant data of this nature. Typical of many of the bills pending before the subcommittee is H.IR. 1319, a bill which I have been introducing since 1963 as a com- panion House measure to the bill introduced in the Senate by Senator Douglas. Some modifications in the old Douglas bill were made this year by Senator Proxmire in introducing the original S. 5. Most of the truth-in-lending bills introduced in the House prior to the July 20 introduction of H.R. 11601 and H.R. 11602 are identical either to the Douglas-Sullivan bill, or the original Proxmire bill, and a full list of those bills, and their sponsors, is as follows: H.R. 949, Mr. Multer; H.R. 1025, Mr. Ottinger; H.R. 1101, Mr. Pucinski; H.R. 1256, Mr. Ryan; H.R. 1319, Mrs. Sullivan; H.R. 1995, Mr. Hicks; H.R. 2059, Mr. Corman; H.R. 2083, Mr. William D. Ford; H.R. 2086, Mr. Halpern; H.R. 2418, Mr. Helstoski; H.R. 2639, Mr. Howard; H.R. 3963, Mr. Joelson; H.R. 4485, Mrs. Kelly; H.R. 5078, Mr. Minish; H.R. 5099, Mr. Roybal; H.R. 7007, Mr. Tunney; H.R. 7059, Mr. Blatnik; H.R. 7152, Mr. Corbett; H.R. 7733, Mr. Bingham; H.R. 8118, Mr. Eilberg; and H.R. 9641, Mr. Feighan. Then, in addition to H.R. 11601 sponsored by myself, Mr. Gonzalez, Mr. Minish, Mr. Annunzio, Mr. Bingham, and Mr. Halpern, and H.R. 11602, sponsored by Mr. Widnall, Mr. Fino, Mrs. Dwyer, Mr. Stanton, Mr. Lloyd, Mr. Blackburn, Mr. Williams of Pennsylvania, and Mr. Wylie, both of which are now in the record, there are H.R. 11666 by Mr. Morris and H.R. 11753 by Mr. Stephens, both similar to the Senate-passed S. 5 and H.R. 11602. Then, identical to H.R. 11601, there is H.R. 11806. That was intro- duced by Mr. Multer, Mr. Barrett, Mr. Rodino, Mr. Reuss, Mr. Farb- stein, Mr. Pucinski, Mr. Ryan, Mr. St Germain, Mr. Rosenthal, Mr. Leggett, Mr. Matsunaga, Mr. Howard, Mr. Vigorito, Mrs. Mink, Mr. Resnick, Mr. Scheuer, and Mr. Brasco. Other bills identical to H.R. 1160 are H.R. 12029 by Mr. Eilberg, and H.R. 12063 by Mr. Helstos- ki; also H.R. 12269 by Mr. KaStenmeier, which is limited to title I of H.R. 11601. And, to complete this catalog of bills now before the Subcommittee on Consumer Credit, there is H.R. 12100 by Mr. Hanna, which is iden- tical to 5. 5 and H. R. 11602 except that it modifies the $10 exemption in the Senate-passed bill and also includes provisions for regulating the advertising of credit, as H.R. 11601 would do, but under the Fed- eral Trade Commission rather than the Federal Reserve Board. We are privileged this morning to have the Under Secretary of the Treasury, the Honorable Joseph W. Barr, who has received the assign- ment from the President of the United States to coordinate administra- tion efforts in behalf of "truth-in-lending" legislation. Secretary Barr is, I might add, a former very valued member of the Committee on Banking and Currency, and we are always delighted to have him ap- pear before us. Another treat in store for us this morning is the first appearance before this subcommittee of Miss Betty Furness, Special Assistant to the President for Consumer Affairs, one of the best-known PAGENO="0078" 68 CONSUMER CREDIT PROTECTION ACT women in the United States and an extremely capable one. This after- noon we will hear Vice Chairman J. L. Robertson of the Board of Gov- ernors of the Federal Reserve System which will have primary ad- ministrative responsibility for the credit disclosure feature of the legislation pending before us. Now, Mr. Barr and Miss Furness: We welcome you to start our hearing on this most important issue confronting the American people. Before we call you, Mr. Barr and Miss Furness, Mrs. T)wyer has a statement. Mrs. DWYER. We have two bills before us for our consideration, the Senate-passed 5. 5, introduced in the House by Congressman Widnall, myself, and six other members of this committee, and FLR. 11601, introduced by Mrs. Sullivan, the distinguished chairman of our sub- committee, and others. At the outset, judging from the number of bills introduced by both Democratic and Republican members of our committee, it is apparent that we're agreed on the need for consumer credit legislation, and that in some form or another the President will have a bill before him for his signature sometime during the 90th Congress. It seems equally apparent to me, regardless of the final form or authorship of the legislation, that we must keep the best interests of the American consumer uppermost in our minds. We must not allow ourselves to become preoccupied with punitive measures that could jeopardize both our Nation's economy and, more particularly, desirable use of consumer credit. In short, for 6 years the Congress has had before it an issue but failed in its efforts to secure legislation. I know that all members of this subcommittee share my view that we can best serve the public in disposing of the issue by passing an effective bill. Those of us who introduced the unanimously passed Senate bill had this thought in mind when we decided on our course of action. This is not to say, however, that we have closed minds on the issues confronting us. It is possible that our final product may represent a compromise between the two bills before us or it may be that an en- tirely new approach outside the reach of both versions may be the best answer to such controversial points as revolving credit accounts and various exemptions to disclosure requirements. Hopefully, these hear- ings will equip us with the knowledge necessary to make the wisest choice. Nevertheless, while we are impressed that both forms of the legis- lation represent the product of congressional rather than executive department initiative, we are aware that in the final analysis various arms of the executive branch or the Federal Reserve Board will be charged with the ultimate responsibility of administering the final law. For tha;t reason, we will be anxious to learn of the Johnson ad- ministration's specific preferences on the differing features of the Sul- livan and Senate-passed bills. We will be interested, for instance, in being advised of the official administration position on the following provisions of the Sullivan bill which significantly depart from the Senate-passed bill: 1. First mortgages; 2. Revolving charge annual rate; 3. No $10 exemption; PAGENO="0079" CONSUMER CREDIT PROTECTION ACT 69 4. Eighteen percent national usury limit; 5. Prohibition of garnishment; 6. Standby consumer credit controls; 7. CommOdity margins; 8. Effective date-July 1, 1968, for Sullivan bill; July 1, 1969, for S. 5; and 9. Credit advertising controls. In the final analysis, as I have indicated, our concern must be the welfare of the American consumer, his right to full information and to protection against what is deceptive and misleading, and to this end I am confident all our efforts will be directed. Mrs. SULLIVAN. Mr. Stephens? Mr. STEPHENS. Thank you, Madam Chairman. I have a statement to make initially. First, I am happy we are hav- ing a comprehensive series of hearings in our committee on the bill that has been introduced and passed in the Senate and with the features of H.R. 11601 and H.R 11602. There are a lot of things in H.R. 11601 that I personally do not agree with, but I agree with two things. First of all, something must be done to aid in the matter of truth in lending, and the second thing is that your bill, H.R. 11601, and the one Spon- sored by several of the Members offer us an opportunity for full and comprehensive hearings. `However, as you are aware, I `have introduced a bill that is identical with S. 5. I felt like I could not introduce `a bill that would be as com- prehensive as yours because I have believed that when I introduce a bill everybody at home expects me to be endorsing everything in it. Also I want to point out that during the time I was in the legisla- ture of the State of Georgia we passed a truth-in-lending bill involv- ing the small loan companies. It was debated for about 6 years during the time that I was in the Georgia Legislature, and we came up with a bill for small lending companies that actually makes them disclose fully all the charges that are in the borrower's bill when he goes to pay it per month. So I am interested in the truth-in-lending bill. I appreciate our chairman making it possible for us to have these comprehensive hearings by introducing her bill even if I would not be able to support it. Mrs. SULLIVAN. Mr. Wylie? Mr. WYLIE. Thank you. I will yield my time to hearing from our witnesses. Mrs. SULLIVAN. Mr. Annunzio? Mr. ANNUNZIO. Before we begin testimony on truth-in-lending leg- islation, I would like to make a short statement regarding the need for strong consumer protection legislation. As a cosponsor of H.R. 11601, along with our distinguished chair- woman and other members of the subcommittee, it is my desire that this subcommittee report the strongest possible credit protection meas- ure. One of the most important provisions of H.R. 11601 is a proposal which would prohibit garnishments in connection with collection of debts. I will not argue that at one time garnishment was a legitimate legal device to protect the merchants and lenders from unscrupulous buyers and borrowers. However, many merchants and lenders now use garnishments as a sword, rather than a shield, and, in fact, they extend PAGENO="0080" 70 CONSUMER CREDIT PROTECTION ACT credit or money to poor credit risks simply becituse the person is em- ployed and sub~ject to garnishment. Madam Chairman, the question of garnishment has a sigrnficant importance for me. The Wall Street Journal of March 15, 1966, re- ported that one of the largest steel companies in the world-Inland Steel Co.-headquartered in my district, has about 2,000 employees whose wages are garnished each payday, and that annually, Inland pays out more than a half million dollars of withheld wages to credi- tors. I would like to point out here that Inland does not discharge employees for garnishments, but rather seeks to help them work their way out of financial difficulties. The same article reported that the Cook County Circuit Court of Illinois issued more than 84,000 gar- nishments last year, 15 percent more than in 1964 and 72 percent more than in 1961. The marshals of the municipal courts of Los Angeles County, Calif., served nearly 15,000 wage garnishments in the fiscal year ending June 30, 1966, up 6 percent from the prior year, and garnishments there this year are running at an annual rate of 122,000. The article added that court officials in New York, Cleveland, and other big cities also cite rising garnishment totals. With this in mind, I was more than happy to cosponsor this legisla- tion containing a garnishment prohibition section, Shortly after the bill was introduced, I wrote to Inland Steel, asking for their comments on the bill, as well as the garnishment section. 1 ask unanimous con- sent that the reply from Inland Steel be placed in the record at this point. (The material above referred to follows:) INLAND STEEL Co., August 3, 1967. Hon. FRANK ANNUNZIO, House of Representatives, $ubcommittee on Consumer Affairs, Committee on Banking and Currency, House Office Building, Washington, D.C. DEAR CONGRESSMAN ANNUNzI0: Mr. Joseph L. Block, Chairman of Inland Steel Company, has asked me to reply to your letter of July 29, 1967 concerned with H.R. 11601, the proposed Consumer Credit Prqtection Act, of which you are a cosponsor in the House of Representatives. You were good enough to enclose a copy of the proposed legislation along with a summary of it. The provisions of the proposed bill which have a direct relationship to our operation are those requiring full disclosure of credit terms and prohibiting the garnishments of wages. We are in favor of both of these provisions in the bill. While we are aware that it may be contended that full disclosure of credit terms may often fall on deaf ears, we believe that many wage earners for the first time will learn the full extent of the cost to them of credit extended and consequently may be less inclined to assume additional credit obligations that they cannot reasonably carry. Certainly full disclosure of credit terms can do no harm to the buying public. Probably we cannot assess the full advantage of disclosure until we have experienced it in practice. Wage garnishments constitute a heavy and costly administrative burden for this Company. In fact in your above-mentioned letter you referred to certain statistics about Inland that appeared in a Wall $trcet Journal article of last year. For your information we do not pursue a policy of discharging employees on account of garnishment actions or even in the case of repeated or excessive garnishments. Quite apart from the administrative burden that garnishments impose on any large-size company, we believe that this repayment device may well lead to the extension of credit to wage earners in situations where credit more reasonably might be withheld and in fact serves to enhance the credit problems to which many employees find themselves subject. Perhaps also should be added the observation that garnishment actions con- stitute an undue burden for our courts which are already severely taxed by other kinds of litigation. PAGENO="0081" CONSUMER CREDIT PROTECTION ACT 71 We hope the foregoing comments may be helpful to you in your consideration of the proposed legislation. Needless to say we are grateful to you for your thoughtful letter in soliciting such observations as we might care to make. Sincerely yours, GEORGE A. RANNEY, Vice President and General Counsel. [From the Wall Street Journal, Tuesday, Mar. 15, 1066} SEIZING PAY-UNIONS, FIRMS, LAWYERS Suni~ To CURB GARNISHING AS ITS INCI- DENCE RISES-IT LEADS TO BANKRUPTCY, FIRING AND RELIEF ROLLS, THEY SAY; AUTO WORKER KILLs HIMSELF; DEDUCTING $500,000 AT INLAND (By James P. Gannon) CHICAGO.-One payday in January, auto worker Carl W. Clark discovered his entire week's take-home pay of $112.39 had been turned over to the state of Indiana for delinquent state income taxes. Beset by debts, he asked officials at Ford Motor OQ.'S plant in suburban Chicago Heights, Ill., for his accrued vacation pay to tide him over. Next payday, he learned Indiana-khe state where he used to live-thad re- ceived $208.84 out of his $363.93 in wages and vacation pay. The 24-year-old father of a young boy, not knowing how much he owed Indiana tax collectors, (the two deductions actually satisfied the claim) became despondent over the pay loss. Two days later, Carl Clark placed a .22 calibre rifle under his chin and shot a bullet into his brain. This suicide has spurred anew wide-ranging inquiries into the consequences of consumer debt problems. Under special scrutiny is the rising number of wage garnishments and other forms of pay seizure by creditors, including state and Federal tax collectors. The spotlight on pay attachment also has illuminated a misery-multiplying debtor's course that runs from garnishment and loss of job to bankruptcy and going on relief. The activity on pay-seizure problems is intensifying on several fronts. Labor unions are campaigning to restrict wage garnishment laws in many states. Legal experts are drafting a uniform consumer credit code that they hope will be enacted in each state. An Illinois Congressman is seeking legislation limiting the amount of wages that can be taken at one time to pay back taxes. And business and financial interests, anxious to avoid any image-blackening, are accelerating joint efforts to aid overburdened debtors. BUY NOW, PAY LATER The cause of the wage-attachment problem is overuse of credit, easy to find in America's debt-fueled economy. Consumer debt outstanding rose to $86 billion in 1965, up 12% from 1964 and 50% from 1961. A convenience to most people, readily available credit is a curse to many others, who can't or won't use it wisely. They're the ones facing garnishment troubles. Because wage garnishments are issued by thousands of local courts, there aren't any national statistics on their volume. But checks of big courts in some metro- politan areas indicate more and more workers are finding part of their wages con- fiscated to pay overdue debts. In Chicago, the Cook County Circuit Court issued 84,513 garnishments last year, 15% more than in 1964 and 72% more than in 1961. The marshal of the municipal courts of Los Angeles County served 114,972 wage garnishments in the fiscal year ended last June 30, up 6% from the prior year, and garnishments there this year are running at an annual rate of 122,000. Court officials in New York, Cleveland and other big cities also cite rising garnishment totals. The figures don't disclose the full extent of pay impounding. They don't include the huge volume of wage "Assignments," which are legally distinct but similar in effect to garnishments. Under a wage assignment, a debtor pledges his future wages to repay the debt if he defaults; execution of the wage assignment doesn't normally require a court judgment, as a garnishment usually does. The garnish- ment figures also don't include tax levies, such as that in the Carl Clark case. 83-340 0-67-pt. 1-6 PAGENO="0082" 72 ~ CONSUMER CREDIT PROTECTION ACT MR. I~EED'S PLIGHT The ieeerds of Inland Steel C~ indicate how widespread wage attachment an be. Each payday the company makes such deductions from the paychecks of about 2 000 of it~ 22 000 production employees in the Chicago area says Dorothy A. Lascoe, who handles this chore. Inland annually pays out more than $500,()OO of withheld wages to creditors, she adds. Who are the people behind the statistics? Most often, they are working men like Franchot Tone Reed a 29 year old tire mounter for a Chicago area truck manu facturer, who learned of garnishment the hard way. In 1964 Mr Reed traded his 19~S6 Plymouth in on a 1950 Cadillac and signed an installment sales contract to pay $1 200 for the aging car in 48 weekly payments of $25. After he defaulted, the dealer repossessed the car and had Mr. Reed's wages attached to pay off the contract. The deduction took 15% of his pay, the legal limit on garnishments in Illinois. To "get cut loose" from his debts and the garnishment, Mr. Reed filed bank- ruptcy late in 1964. Last year, Federal bankruptcy court in Chicago discharged Mr Reed of $2 195 in debts including bills for jewelry and clothing as well as the costly old Cadillac. TRIGGERING BANKRUPTCY As this case suggests there is a connection between mounting garnishments and the steady rise in the number of personal bankruptcies in recent years Garnishment frequently triggers bankruptcy says Linn K Twinem chairman of the American Bar Association s comm~ttee on consumer bankruptcy A record 180 323 bankruptcy cases were filed in Federal courts in the fiscal year ended last June 30 up from 171 719 in the prior year and 110 034 five yeirs earlier. Bankruptcy filings this year are expected to top 200,000. Personal bank- ruptcy filings account for 91% of the total. Mr. Twinem says there is a ~`c1ose relationship" between the severity of a state's garnishment law and its bankruptcies. California, which has a relatively tough garnishment law led in bankruptcy filings in fiscal 1905 with 33656 At the other extreme three populous states that don t allow garnishments have dramatically lower bankruptcy filing totals Pennsylvania bad 1 133 Florida 958 and Texas 661 Garnishment often causes workers to lose their jobs. Many employers fire employes Whose debt problems lead to excessive wage attachments argrnng that company handling of garnislhment paperwork and court appearances by employes are costly and lame consuming The Cook County Credit Bureau in Chicago surveyed 1 100 employers in 1964 and found that processing a single garnishm nt costs .a company from $15 to $35; the estimated cost of garnishments to the sur- veyed employers totaled $12 million annually. Few companies will discuss the firing of workers for garnishments. A personnel official at one General Motors Corp. plant nea:r Chicago confirms union reports that 45 men were discharged at the plant for that reason last year. Another Chicago manufacturer admits firing 25 or 30 men for garnishments Union officials liken the practice of firing debt burdened workers to the medieval custom of looking debtors in prison Under both practices the debtor has a harder time paying his bills says one Most companies say they try to keep a man as long as he is making sincere efforts to straighten out his debts Employes fired for debt problems often wind up on relief rolls social work rs say In a study of 827 persons applying for general assistance relief the Cook County Department of Public Aid found that about 9% of the applicants had been fired from their jobs due to garnishments REFORM MOVEMENTS Organized labor campaigns annually to ease the impact of garnishment laws on debtors and this year the drive is picking up steam Unions are pushing h g islators in many states to increase the amount of wages exempt from garniih ment These exemptions vary widely at present from 50% in California to 9~Y% in New York in some states the exemption is a fiat amount such as $100 a month for a family head in Mississippi In Illinois where Gov Otto Kerner is considering calling a special legislative session this year the state AFL-~CIIO wants the wage exemption raised from 85% to 90% with the minimum amount safe from attachment set at $65 weekly rather than the present $45 Unions in Illinois also want abolition of wage as signments PAGENO="0083" CONSUMER CREDIT PROTECTION ACT 73 Unions in Ohio, Connecticut, Colorado and other states also are seeking legisla- tion to increase the amount of pay shielded from attachment. Recent efforts seem to be showing results. Seven states amended their garnishment laws last year, generally lifting the exemption; this was considerably more activity than in other recent years, says the ABA's Mr. Twinem, because "more and more atten- tion is being focused on garnishment" And last week Kentucky's house of repre* sentatives passed a measure backed by both labor and business groups raising the exemption from garnishment to 75% of wages from the 55-year-old limit of $16.87 a week. The bill is before the state senate, where backers predict early passage. Another union goal in several states is a ban on firing an employe for garnish- ments. New York's legislature passed such a measure last year, but Gov. Nelson Rockefeller vetoed it on the ground it was unenforceable. A bill modified to over- come this objection has been introduced this year. In New Jersey, antifiring bills have failed in past years but a recently introduced measure is given a better chance this year because control has passed from Republicans to Democrats in the state senate, where earlier bills died. The Clark suicide also has touched off efforts to protect delinquent taxpayers from total wage seizure. The AFL-CIO's cominbnlty services department is surveying the attorneys general of all 50 states to determine which ones permit 100% pay withholding for delinquent state taxes. "Depending on what we find, if the situation looks bad our department of legislation will communicate with the central labor bodies in the states to seek changes in the laws," says an AFL-CIO spokesman. On the Federal level, Rep. Sidney Yates (D.-Ill.) plans to introduce a bill next week limiting the amount Federal tax collectors could take from a paycheck of a delinquent taxpayer. His draft bill calls for limiting Federal tax levies on wages to 10% of the first $200 in monthly earnings, 20% of earnings from $200 to $500 and 50% of earnings over $500. "This would protect against the total taking of the paycheck, which is presently the pattern," he says. A much broader effort to modernize and unify all state laws regulating con- sumer credit is under way. The National Conference of Commissioners on Uni- form State Laws, comprised of representatives of each state, ~urrently is drafting a uniform consumer credit code. The model law is expected to cover all aspects of consumer credit from "adver- tising and sales solicitation through the sales contract to collectiOn and default problems, including garnishment," says Allison Dunham, executive director of the organization. When completed and approved by the conference, the code will be presented to each state legislature. Numerous other uniform codes have been enacted by most states. Present state laws regulating consumer credit are "very much a hodgepodge" with an unusual amount of state-to-state variation because most were developed piecemeal in response to specific problems, says Mr. Dunham. A uniform code would benefit businesses dealing in consumer credit in numerous states, he con- tends. Because of the lengthy conference procedure, however, the credit code couldn't be ready for state legislatures before 1968, he says. THE ROLE OF BUSINESS Businessmen, meanwhile, are accelerating a debtors-aid program of their own. Consumer credit counseling services designed to aid overburdened debtors were set up in 15 cities last year under a program sponsored by the National Fou!nda- tion for Obnsumer Credit, a trade association. Since 1962, more than 30 such counseling centers have been established, largely supported by contributions from merchants, banks, loan companies and others. The foundation plans to set up "one or two a month" in 190G. The centers offer two services: Financial counseling for debtors who are over- extended but can meet obligations by careful budgeting, and "proration" services, or debt-pooling, for more serious cases. Under the latter, the center works out a repayment-stretchout plan with creditors, regularly collects a portion of the debtor's income and parcels it o'ut among creditors as agreed. In Salt Lake City, for example, the Cbnsumer Credit Counseling Service of Utah, Inc., last year aided 433 families, collecting and paying to creditors $426,- 000. "It would have been necesisary for at least 75% of the 433 families we were servicing to have taken bankruptcy bad our service not been available," says Charles El. Williams, president. Generally, the business-supported counseling services don't charge fees. PAGENO="0084" 74 CONSUMER CREDIT PROTECTION ACT Mr. ANNUNZIO. I would also like to read a few paragraphs from ibhe letter to indicate how one of the Nation's largest steel companies feels about H.R. 11601. The letter, in part, reads: The provisions of the proposed bill which have a direct relationship to our operation are those requiring full disclosure of credit terms and prohibiting the garnishment of wages. We are in favor of both of these provisions in the bill. * * * * * * * `Wage garnishments constitute a heavy and costly administrative burden for this Company. In fact in your above-mentioned letter you referred to certain statistics about Inland that appeared in a Wall Street Journal article of last year. For your information we do not pursue a policy of discharging employees on account of garnishment actions or even in the case of repeated or excessive garnishments. Quite apart from the administrative burden that garnishments im- pose on any large-size company, we believe that this repayment device may well lead to the extension of credit to wage earners in situations where credit more reasonably might be withheld and in fact serves to enhance the credit problems to which many employees find themselves subject. Perhaps also should be added the observation that garnishment actions con- stitute an undue burden for our courts which are already severely taxed by ot:her kinds of litigation. Madam Chairman, I believe `that this letter is an endorsement for a strong truth-in-lending bill. Legislation that will merely inform the consumer that he is being overcharged for credit is not enough. We must make certain that the legislation reported by this committee pre- vents the consumer from being overcharged for credit. Mrs. SULLIVAN. Thank you, Mr. Armunzio. Mr. Bingham, do you wish to make an opening statement? Mr. BINGHAM. Thank you, no, other than to say that I am most in- terested in these hearings. Mrs. SULLIVAN. I just want to say again that all of the members- all 12 members-of the subcommittee have introduced bills on con- sumer credit. Six of us are joined in my bill, H.R. 11601, five have introduced a bill identical to 5. 5 as it passed the Senate, and one has introduced a modified form of 5. 5 to try to deal with the $10 exemp- tion in the Senate bill but which also includes the idea in H.R. 11601 for regulation of credit advertising. So with that, we will turn this over `to Under Secretary Barr and Miss Furness. Do you want to read your statement, Mr. Secretary? Mr. BARR. I will probably skip a few portions of ~t, Madam Chair- man, but in essence I will track through most of it just in an attempt to get the committee started on what we are dealing with. STATEMENT OP HON. JOSEPH W. BARR, UNDER SECRETARY OP THE TREASURY Mr. BARR. Madam Chairman and members of the committee, I am very pleased to have this opportunity to appear before you to testify on }LR. 11601, the "Consumer Credit Protection Act." Madam Chairman, I would like to say at the outset that I think it is particularly fortunate for the United States, as we approach these hearings, that the people who are most concerned are addressing them- selves to this problem. By that I mean it is particularly fortunate that we have the chairman of the subcommittee, Mrs. Sullivan, the senior minority member, Mrs. Dwyer, and the President's adviser on con- sumer affairs, Miss Furness. In our society, as I am sure you are all PAGENO="0085" CONSuMER CREDIT PROTECTION ACT 75 aware, it is the ladies who spend most of the money. They are the ones who are particularly concerned. We now have the ladies addressing themselves to the problem, and I am completely confident of the outcome. I might add, Madam Chairman, that we in the Treasury think that we have something to contribute here, too. The U.S. Treasury has probably borrowed more money than any other institution in the his- tory of the world. I might add that we probably have borrowed it at a lower cost than anyone else. We have the best credit rating in the world. The first Treasury credit transaction, just to refresh your memory, was made by Alexander Hamilton in 1789. He agreed with a group of New York banks to borrow money to pay the expenses of the Congress and the President of the United States before the Congress was ever organized. That was the first unauthorized credit transaction by the U.S. Treasury, and the only one in its history. Since that time, we have have had a lot of experience with credit, and I believe that we can bring something to these hearings. Thank you, Madam Chairman, and I will proceed with my prepared statement. As you know, the President on February 16, 1967, in his message to the Congress on consumer protection, recommended the enactment of legislation which would require lenders and credit sellers to provide consumers with full and complete information on the cost of credit. The President said: I recommend the Truth-in-Lending Act of 1967 to assure that, when the con- sumer shops for credit he will be presented with a price tag that will tell him the percentage rate per year that is being charged on his borrowing. We can make an important advance by incorporating the wisdom of past dis- cussions on how the cost of credit can best be expressed. As a result of these discussions, I recommend legislation to assure- Full and accurate information to the borrower; and Simple and routine calculations for the lender. The objectives set forth by the President have been sought for many years in the Senate-but until this year, without success. Former Senator Paul Douglas led a 6-year fight for truth-in-lending legisla- tion, and ironically, only this session, after the distinguished Senator from Illinois had left the Senate, did the Senate finally proceed to act on the measure. 5. 5, the truth-in-lending bill, was reported unani- mously out of the Senate subcommittee and the full Senate Banking and Currency Committee, and passed the Senate by a vote of 92 toO on July 11, 1967. These events provide this committee with a unique opportunity to take a maj or step toward improving our consumer credit system. If this committee and the full House see fit to agree, effective truth- in-lending legislation can become law this year. I believe there can be no doubt as to the importance of a truth-in- lending law, or the need for one. Consumer credit is essential to the American economic system. It finances a large proportion of all dur- able goods purchases and a sizable part of purchases of nondurable goods and services. Last year, outstanding consumer credit, excluding mortgage credit, totaled $95 billion. Since new installment credit ex- tended in a year roughly equals the amount outstanding, it appears that consumer credit financed about $100 billion of individuals' pur- PAGENO="0086" 76 CONSUMER CREDIT PROTECTION ACT chases in 1966 This is more than one fifth of total personal consurnp tion expenditures as recorded in the national income accounts Again leaving `~side mortgage credit, hst ye'~r interest `~nd other credit charges paid by consumers for the use of consumer cn dit totaled approximately $13 billion This is a large sum It is approxi mately as large as the interest payments on over $300 billion of Fed ral debt It is more than consumers spent for men's and boys' clothing- for furniture and appliances-for electricity, gas, and water-for dioc tor and dentist bills-or for alcoholic beverages It is almost as much as they spent for gasoline and oil-over half of what was spent on women's and children's clothing-and about half of new and used automobile purchases It is clear that, while the consumer has some knowledge of the goods and services he is buying, and in almost all cases knows the price, few consumers are really aware either of the dollar cost or of the annual percentage rate paid for the use of credit This lack of knowledge has certainly contributed to the abuse of credit For evidence of this, we need only look to the rising tide of employee bankruptcies-cases filed in U S disti ict courts in 1965 were 66 percent above tht numbei in 1960 and ovei ~0() percent above 1950 As you know, the President in 1967 in his message to the Congi ess on consumer protection recommended the enactment of legislation which would require lenders and credit sellers to provide consumers with full and complete information on the cost of credit The consumer now finds it impossible to select from all the crc dit sources available that one which is cheapest or best for his needs Be cause of the wide array of lending practices he is unable to make a rational choice among the alternatives There is abundant evidence on this point This is an area in our economy that has grown so I ast it has created its own language Much of that language is beyond corn prehension for most consumers Evell those sophisticated in finance find difficulty in distinguishing "add ons," "discounts," "precompute," "rule of 78's," "service charges," "finance charges," "interest," "term price differentials," "sales prices versus cash prices," and so forth The variety of rate quotations is beyond belief and sometimes ridiculous. Even a financial expert, who knows the ins and outs of credit, can find the correct solution difficult in the absence of uniform standards foi disclosure Such confusion in a $13 billion consumer purchase category is not in the national interest The truth in lending provisions of H R 11601 are designed to meet this problem Their most important feature, the requirement to state the finance charge as an annual percentage rate, in addition to its state ment in dollars and cents, will provide for uniform disclosure of finance charges for the first time in this Nation's history This purpose is clearly within the tradition of our economic syst m, vihich relies on the discretion of informed consumers to express their preferences in the market. Our free enterprise system is weakened by poorly informed consumers, or even well informed consumers who are unable to communicate effectively in the market because of jumbled terminology These provisions will give the American consumer the information he needs to compare the costs of credit from different sources and to PAGENO="0087" CONSUMER CREDIT PROTECTION ACT 77 make an intelligent credit decision. Equally important, he can make a comparison with what he can earn on his savings. Disclosure could be handled in a number of ways if comparing credit charges from one source with another source were the only objective. But many consumers also have another choice-they can borrow the money or they can use existing savings. In the latter case, consumers need a means of comparing the costs of credit with the earnings on their savings. In financial practice the earning power of savings is traditionally expressed as a percent per annum. Thus, it is reasonable to apply this same standard of comparison to consumer credit, to have the total cost of credit-including interest and other credit charges- expressed as a percent per annum on the unpaid balance. This is ex- actly the basis called for in H.R. 11601. For years, businessmen have been accustomed to dealing with an annual percentage rate of return in making their own financial deci- sions. This bill would simply extend this principle to the area of consumer credit-and enable the American consumer to make in- formed choices in his use of credit. The practical application of the annual rate requirement has been studied at length, and we have concluded that this. requirement will impose no significant burden or difficulty with respect to the over- whelming majority of credit transactions in the United States. In fact, standardizing credit terminology will facilitate credit transactions. We have had our Treasury staff prepare a set of tables that can be used to determine the annual percentage rate with a high degree of accuracy for even the most complicated credit transactions. In fact, given the reasonable tolerances of accuracy permitted by this bill, a simple one-page table will suffice for all but the most extreme cases. Such a table is already in use under credit regulations issued by the Department of Defense, and we have prepared a set of examples illus- trating its applicability to H.R. 11601. Moreover, testimony before the Senate committee assures us that tables can be produced in quan- tity for widespread use by the credit industry once this legislation is enacted. After I complete my prepared statement, I would be delighted to run through a few of these examples for the committee. Then, if you wish, I will take any credit transaction the committee would like to suggest and show how the annual percentage rate can be found in these tables. I am confident that this commitee, like the Senate com- mittee, will agree with me that if this ex-Congressman can figure the annual percentage rate, then there is simply no basis for the assertion that the provisions of this bill are unworkable. There also is no justification for the claim that the annual rate dis- closure requirement would prejudice lenders under State usury laws. The disclosure provisions of H.R. 11601 deal only with the annual rate of finance charges, not with interest rates. In fact the finance charge is defined to include many charges which clearly cannot be clas- sified as "interest." In addition, the disclosure requirements would not change the legal status of existing credit charge practices. Credit charges which now are lawful under State usury laws would not be- come unlawful simply by reason of being disclosed to the consumer. The truth-in-lending provisions of H.R. 11601 differ from S. 5, the bill passed by the Senate, in several respects. The Senate bill provides PAGENO="0088" 78 CONSUMER CREDIT PROTECTION ACT' exemptions from the disclosure requirement for small credit trans- actions and first mortgages, and also exempts credit insurance from inclusion in the finance charge. In addition, the Senate bill permits the rate on regular revolving credit accounts to be stated on a monthly rather than an annual basis. As we advised the committee in our report on H.R. 11601, we believe that all types of creditors and all credit transactions should be treated equally and impartially to the greatest extent possible. We therefore support the provisions of ELR. 11601 which would eliminate these special exemptions. The bill before this committee also would extend the disclosure re- quirement to cover advertising of credit. This would more fully im- plement the President's recommendations, and would more effectively inform consumers of the comparative costs of different types of credit. We therefore also support this provision of H.R. 11601. There are a number of other proposals included in H.R. 11601. These include an 18-percent limitation on credit charges; a prohibition against "confession of judgment" notes; an authorization for regula- tion of credit for commodity futures contracts; authority to restrict consumer credit~ during national emergencies; and a prohibition against garnishment of wages. Finally, the bill would establish a Na- tional Commission on Consumer Finance. The issues presented by these proposed provisions are many and complex. Unlike the disclosure requirements I discussed earlier, these issues have not yet been subjected to the careful study they merit. We are dealing here-in the area of credit-with a subject that vitally affects the successful operation of our Nation's economy. I therefore believe that these major new issues should receive a good deal of ex- ploration before any final action is taken. Whether this study is con- ducted by the Congress, by an existing agency of the executive branch, or by the proposed new Commission, I am certain that this committee will avoid precipitous action in this important area. Moreover, I hope that the committee will not permit the need for study of these other issues to delay action on the truth-in-lend:ing portions of H.R. 11601. After long years of effort, and longer years of need, we should postpone no further providing the American con- sumer with the information he needs to make intelligent use of our vital consumer credit system. Mrs. SULLIVAN. We will have witnesses, Mr. Secretary, who will testify on all of the various provisions of the bill, and I hope we can estwbhsh a good case for some of the new provisions. * Mr. BARR. Thank you, Madam Chairman. Madam Chairman, to move into the specific provisions of the bill, I can read through this portion of the statement or stop here. If you think that your committee is adequately informed on the provisions of the bill, I would stop. I will be guided by your judgment. Mrs. SULLIVAN. I believe, Mr. Secretary, since you are the first witness, it would be good to go through these provisions. Mr. BARR. Thank you, Madam Chairman. I will be glad to do so. H.R. 11601 would- (1) Require every individual or firm engaged in the business of extending credit to furnish every prospective consinner of credit PAGENO="0089" CONSUMER CREDIT PROTECTION ACT 79 a clear, written statement of the amount of the finance charge to be paid for the extension or use of credit both in dollars and cents `and as an approximate annual percentage rate. (2) Require `equivalent disclosure in advertising the terms on which credi't is available. There `are, however, basic exemptions for: (1) Business credit. (2) Credit transactions involving the purchase and sale of stocks, bonds, and other securities whi'ch are already under the jurisdiction of the securities law. "Credit" is clearly defined to mean consumer credit and credit for agricultural purposes. As a rough rule, this would mean that credit incurred in `the purchase of "depreciable property," except for agri- cultural purposes, as interpreted `by the Internal Revenue Service, would be `exempt. The bill also exempts credit with Government agen- cies, and their instrumentalities and credit transactions with a broker- dealer `registered with the SEC. "Finance charges" includes most of the charges which result from the consumer's use of credit and from which he would `be free if he had paid cash or not `borrowed from the lender. The general guideline-to which I would subscribe-is that finance charges include all of the charges that accompany credit and which the consumer becomes liable for if he borrow's or buy's on credit. Two areas of concern are credit life insurance and housing closing costs: With respect to insurance, some creditors carry this risk at no direct cost to the individual borrower. Until 1955, for example, small loan companies, operating under the Russell Sage philosophy that the cus- tomer should be quoted one credit charge only-to eliminate any temptation to hide the cost of credit in an underbrush of additional charges-were expressly prohibited from making ~dditional charges, including any charges for insurance. Mrs. SulLIvAN. Mr. Secretary, could you tell me why this was stopped? You say "until 1955." Mr. BARR. I will have to consult with counsel here. I am informed that there was a change in the law of the legislature of the State of Kansas that prompted this change in this practice of credit o'f small loan companies. Credit unions typically insure their borrowers for life and disabil- ity; the cost is included in the interest rate paid by the borrower. Some other financial institutions also follow this practice of carry- ing blanket policies. Others, however, give consumers the option of carrying insurance. And a third group makes the insurance coverage a condition of t.he loan extension. Clearly the latter class of creditors should include premiums in the finance charge. In those cases where insurance is clearly optional or, as stated in the Department of Defense directive, neither the vendor nor lender has a direct interest in the sale of the insurance, then the in- surance premiums would not be part of the finance charge. What re- mains, admittedly, is a gray area which would bear further study of prevailing practices to determine their rightful placement. I would like to add that this is a confusing area and I think all of us can profit from the hearings on which you are embarking. PAGENO="0090" 80 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. Thank you. Mr BARR With regard to housing costs, I submit for the record the t~ o statements supplied by the Federal Housing Administration which satisfy me that guidelines are sufficiently clear for the idministrative agency to prescribe rules and regulations which would be within the intent of the bill and would be welcome by the housing finance industry. (The material referred to follows ) FHA STATEMENTS PERTAINING fO COSTS INCIDENT To CLosING ON REAL FSTATE Incident Not incident Items to extension to extension of credit of credit 1 Lender s fee X 2 Title examination (or continuation of abstract or attorney $ opinion) X 3 Survey (physical viewing by lender) X 4 Appraisal X 5. Construction loans-inspection and escrow company charges X 6. Property inspection X 7. Title insurance: Coverage of mortgage amount X Coverage of mortgagor s equity X 8. Preparation of instruments: Deed Mortgage X 9. Settlement charge (assuming this is a fee for preparing the settlement statement and re- X lated services other than attorney's). 10. Recording costs: Mortgage Deed 11. Apportionment of taxes and assessments X 12 Apportionment of initial premium for fire and casualty insurance X 13. Broker's fee (if broker obtains financing for borrower or some service of that nature)_. - X 14. Escrows for future payments of taxes, insurance (including both casualty and life of X borrower). 15. Adjustmeflts of purchase price resulting from supplemental agreements between vendor X and vefldee, or vendee and others (additions to or subtractions from purchase price because of inclusion or exclusion of items, such as drapes or carpeting). 16. Local transfer or ad valorem taxes X 17. Notary fee: Mortgage Deed 18. Revenue stamps 19.Creditreport 20. Points or discounts1 X 21. FHA insurance 22. Insuranca on property over terms of mortgage X 23. Maintenance and repairs X I FHA and VA do not permit home purchasers to pay discounts I hope that this information will he of assistance to your committee in its consideration of the ~ruth4n-lending bili. Sincerely yours, MILTON P. SEMEn, General Counsel. Senator BENNETT Just for the record some of these charges which we agree are incident are not included in the statement that you have made are not in eluded in the printed form that Mr Hardy presented to us They are outside it There is just one other area on which I would like to build a very brief record. Mr SEMER Senator Bennett if you are going to turn to something else I think it might be helpful on this point to show What should a roster of items be to which your question should be directed'? I think that is- Senator BENNIITT That is what I am trying to get at Mr SIiMER Because you have a closing sheet therb which might have some local jargon in it which might not be typical SenatOr BENNETT Right I am just interested in a general list which can be generally applicable Mr SEMEit Yes In response to a question in a letter that Senator Douglas sent us on De comber 21 of last year What kinds of charges are permitted under State laws'? Th~s is what we were referring to earlier- PAGENO="0091" CONSUMER CREDIT PROTECTION ACT 81 3. DIFFERENCES IN THE TYPES AND COSTS OF FEES AND CHARGES LEVIED BY DIFFERENT TYPES OF INSTITUTIONS EXTENDING HOUSING CREDIT No information is available on the types and amounts of fees and charges levied by different types of institutions in making mortgage loans. It should be noted in this connection, however, that many of the charges paid at `the time of the loan closing are not under the control of the lender and are not collected by or for him, such as for title insurance, property survey, Federal and State stamps on deeds, recording of mortgage and deed. Some of the other charges made may reflect work performed by empJoyees of `the lender or by outsiders, such as, the appraisal of the property. The mortgagee's initial Service charge, however, is under the control of the leader. Credit Union3 Oredit unions are limited, under the Federal Oredit Union Act, `to a maximum interest rate of 1 percent per month on unpaid balances, and this rate must include all charges incident to making the loan. We understand that FCdera'l credit unions make very few mortgage loans, probably because the maximum 5-year maturity permitted on loans they may make limits their operations in this respect. The following information provided by the Bureau of Federal Credit Unions, Department of~ Health, Education, and Welfare, explains the specific charges which are included or excluded from the 1 percent per month ra'te. None of the following costs incident to making a loan may be charged to the borrower if it results in a total cost of more than 1 percent per month (or 12 percent per annum) on unpaid balances': 1. Inspecting and appraising real or personal property. 2. Recording of chattel mortgages, real estate mortgages, or ether lien instru- ments. 3. Title search. 4. Bringing abstract of title to real estate up to date. 5. Attorney's opinion as to title and validity of credit union's lien. 6. Title insurance. 7. Title certificate. 8. Preparing deeds of trust, mortgages, or other lien instruments. 9. Chattel lien nonfiling insurance. 10. Credit investigation and credit reports. 11. Credit life (borrower's protection), disability, health, or accident insurance. 12. Filing assignments of personal property such as life insurance policies, mortgages, etc. Items of cost related to the following have been held to be outside the limitation of interest charges, and the borrower may be required to pay them: 1. Preparing release of mortgage or other lien instrument. 2. Recording release of lien. 3. Hazard insurance on the property, such as fire, `theft, liability, collision, windstorm, or other casualties. 4. Restoring clear title to borrower. 4. Fi~ss OR OHARGES PAID BY THE Bonnowna ON A "HOUSING" CREDIT TRANSACTION WHICH SHOULD BE REGARDED AS INCIDENT TO THE CREDIT TRANSAOTION While some of these individual items may be considered as incident to the credit transaction, and some may not, there are others which may fall in either category or be divided between the two categories, depending upon the particular circumstances involved. The listing presented below represents an attempt to classify into the categories desired, the individual items of loan closing costs which appear in table 4 in the information provided in answer to question 2. It should be noted that many of these charges, which are paid at the time of loan closing, are not under the con- trol of the lender and are not collected by the lender. 1. Items which may be considered as incident to the credit transaction: PHA eXamination fee Photos Mortgagee initial service fee Mortgage tax (in the nature of stamp Mortgagee appraisal fee tax, etc.) Credit report Survey (of property) PAGENO="0092" 82 CONSUMER CREDIT PROTECTION ACT 2. Items which may not be considered as incident to the credit transaction: rUitle search. Title abstract. Escrow fee (usually a charge by an attorney to hold moneys involved in the settlement, such as for paying off an existing second mortgage or other liens, and thereby assures clear title). Revenue stamps (on the deed). Title transfer tax. (Prepaid items, such as for real estate taxes, special assessments. ground rents, hazard insurance premiums, and the initial FHA mortgage insurance premium are excluded from these PHA data, as was previously explained in the infor- mation presented in answer to question 2.) Title insurance. Where required solely for the benefit of the lender and in amount equal to the mortgage amount, the charge should be included in category 1 above. Where the insurance is also provided for the protection of the owner and may also be extended to cover his equity in the property, part of the charge should be included in category 2 above. Preparation of deed and documents. Would include preparation of the deed and mortgage, and therefore should be divided between categories 1 and 2. Attorney's fees. Practices appear to differ among communities in the way this item appears on the settlement statements at loan closing. In some areas, the attorney's fee may also include title search if conducted by him and possibly preparation of the deed and the mortgage. Thus., part of this fee may be included un'der category 1 and part under category 2, depending upon what items are covered. Closing fee. Attorney services for the borrower at closing. Generally, this does not include preparation of deed and mortgage, but in some cases may include this. Probably should be divided in some manner between categories 1 and 2. Notary fees (for mortgage and deed). Should be divided between categories 1 and 2. Recording fees (for mortgage and deed). Should be divided between. categories 1 and 2. Broker's commission. Under FHA regulations this is optional with the bor- rower. He may, if he so desires, negotiate with a broker to arrange financing or to represent his interests at closing. This charge occurs infrequently, but to the extent it does, it belongs in category 1 or 2 depending upon the circumstances involved. Adjusted interest. This adjustment for interest is made to cover the interest for the period between the time the loan is closed and the date of the first monthly payment on the mortgage. This represents, in effect, a prepayment of interest on the loan and would represent part of the total interest to be paid over the life of the loan. Mr. BARR. "Annual percentage rate" means the nominal annual rate determined by the actuarial method. I would like to emphasize that this annual rate becomes real and true as it is actually applied to the periodic credit balances. As each payment is made, this rate is applied to determine the portion of the payment that is applied to the finance charge, with any remainder of the payment used to reduce the princá- pal. This procedure is strictly in accordance with t.he U.S. Supreme Court decision in 1839 and is generally known in consumer finance as the U.S. rule. It is the rate used throughout the financial world and in Government transactions. On page 11 of my statement there is a table which was prepared by the General Counsel of the FHA indicating FHA's opinion as to which charges are incident to the extension of credit and which are not. I will admit that this is a bit of philosophical judgment. But I would like the committee to keep one thing in mind as they move into this area of first mortgages; this is another area that is contentious and on which reasonable men disagree. I believe that one of the greatest areas of confusion is the first- mortgage area. The interest rate charge is clearly stated as a cost and PAGENO="0093" CONSUMER CREDIT PROTECTION ACT 83 most people understand this. It is a simple annual interest rate. What are confusing are the differences from one State to another across the country-and I want everybody to bear in mind that this is a mobile Nation, where 20 percent of the people move every year. As you move from one part of the Nation to another, you find there is no standard- ized practice on the charging of fees. Consequently, there is an area of great confusion for the average homebuyer. The charges that he would pay in one State may or may not be the charges he would pay in an- other State. Somebody is going to have to set up standards here, even if they are somewhat arbitrary. The creation of standards, which I believe can be done efficiently and soundly by the Federal Reserve Board, it seems to me, would be a great advantage to the Nation. It would be a great advantage if consumers and homebuyers, as they move from one area to another, were to be confronted by roughly the same charges-not by a whole galaxy of conflicting charges. Mr. HANNA. Would the chairman yield? Mrs. SnLLIVAN. Mr. }Ilanna. Mr. HANNA. Would you agree also that there is an additional prob- lem in this field of discounts~-insofar as I have been able to observe the fact that we have inflexible interest rates, for instance in FHA and in some instances VA, we have brought into being the point dis- count system which gives the buyer a lot of problems. But, in the money market, pressures make the points necessary. It seems to me, before we go into this thing on the interest basis solely, we have got to come to some kind of accommodation to the problems that have given birth to the points. Mr. BARR. No question about that, Mr. Hanna. The point problem would not be with us in this country if we did not have usury laws in the States and if we did not have limitations on the FHA and VA. 1 would like to state, however, Mr. Hanna, that I'm sure you are aware that this is one of the most confusing areas for the average homebuyer, and one of the most irritating. Mr. STEPHENS. Would the gentleman yield for a question? Is it not true that if points are to be considered we must remember there are some areas where there is a greater demand for capital than others, and that has something to do with points, not just the fact that points are charged? Isn't that confusing when we seek to analyze points? Mr. BARR. That's correct, no question about that, Mr. Stephens. Traditionally, the western and southwestern portions of this coun- try have had a greater demand for capital than they can generate. So you had a flow from the East and Middle West to the West and South- west to meet these demands, but you also had a pattern of traditionally high interest rates which contributed to this whole issue. Mr. STEPHENS. That is what I mean by the issue being very con- fusing. Mr. BARR. It is. You will find that reasonable men disagree. It is not as clear cut in this particular area of credit life insurance, which is confusing, and mortgages, which is very confusing. I want to bring out what I have experienced-what my own and what the Treasury's opinion is-that there would be a great advantage to the country, in this enormous homebuilding industry, if when a man buys a home, PAGENO="0094" 84 CONSUMER CREDIT PROTECTION ACT whether he is in California, New Jersey or Missouri, he is confronted by a fairly standardized system of charges which is not going to come as a big shock to him and on which he c'in make ~ reasonable ~udg ment Perhaps I have a personal bias in this area Mrs. SULLIVAN. Mr. Secretary, before you go on- Mr BARR The record will show that Mrs SULLIVAN Before you go on with the rest of your statement- going back to page 10 where I questioned you as to why this practice was stopped, of including all charges as part of the cost of a loan, would you please provide the subcommittee with some further mfor mation for the record on the reasons this practice ~ as stopped and how it was done Mr BARR I will be delighted to do that, Madam Chairman (The material referred to follows ) BRIEF HISTORICAL SKETCH OF CREDIT Lint INSURANCE The Uniform Small Loan Law commonly known as the Russell Sage Act limited the charges to those specified in the law which did not ]nclude the sale of credit life insurance Furthermore the licensee under Section 12 of the Act was prohibited from conducting the business of making loans within any office in which any other business was solicited or engaged in Some major small loan companies carried credit life insurance as a service to their customers and to avoid the embarrassment of collecting debt from the estate The cost of bç~aring this insurance and the potential for the profitable sale of such insurance built up pressure for the modification of state laws Kansas one of the few states without a Small Loan Act enacted such legisla tion in 1955 after much debate National attention focused on Kansas as it struggled with the advocates of the old Russell Sage philosophy of no extra charges and those who wished to give licensees the opportunity to charge for credit life iiisurance The break through in Kansas reflected the ascendency of new leadership in the small loan field who wished to discard the Russell Sage philosophy They pressed for amendments successfully in the various state legislatures and as a result most states allow a separate charge for credit life insurance Credit unions continue to absorb this in their single rate Oretdit life insurance has been profitable for those making the extra charge, according to testimony re- cently presented to the Senate Anti-Trust Committee. Mr BARR We can `ump over to page 15 now Mr WILLIAMS Madam Chairman, may I m'~ke a suggestion that Mr Barr also send the additional information to each member of the subcommittee so we can have it at the conclusion of the statement ~ Mr BARR I will be delighted to do so,Mi Williams We can go to page 15 of my statement now The intervening sections theb are rather technical discussions of why certain charges are in eluded as incident to the lending and why others are excluded At this point, Madam Chairman, it might be useful if I take a simple example to show you what we mean by this actuarial rate that the Government has used since 1789 and that is used by all banking institutions and in most large financial institutions If you will just take a pencil and your pad, let us assume th'it you have an obligation with a $100 balance, 6 percent simple annuil interest rite You are going to make a $10 monthly payment on th'Lt balance All right-the first thing that you must determine is how much of that $10 is in terest, how much is principal A 6 percent annu'tl rate figures out to a half of 1 percent monthly rate which would be a half of 1 percent times $100, or 50 cents So 50 cents out of that total of $10 monthly PAGENO="0095" CONSUMER CREDIT PROTECTION ACT 85 payment would go to interest, $9.50 would be credited against princi- pal, so your balance at the end of that transaction would be $90.50. That is all we are talking about. Every subsequent transaction will be treated in precisely the same way. This is the U.S. rule. As I say, it has been supported by a Supreme Court decision, going all the way back to 1839. It is one that we use in the Treasury, it is the one that is used in all major financial transactions. The bill recognizes the two major forms of credit: closed-end or contract credit, and open-end or revolving credit. Contract or closed-end credit is characterized by a schedule of pay- ments as specified in the contract. The disclosure requirements for this type of credit are clearly set forth in se~tions 203 (b) and (c). We esti- mate that for 95 percent of these cases there is no practical problem whatever in determining the annual rate. Mr. Gushee, of the Financial Publishing Co. of Boston, in testifying before the Senate committee, estimated that less than 1 percent of these transactions could not be handled routinely. With respect to open-end credit, section 203 (d) seems to me to be straightforward. I appreciate the fact that many creditors now quoting a monthly rate of 11/2 percent would prefer not to quote 18 percent. But if this is a requirement for all, its impact on any one creditor will be fair. It does not grant favored treatment to a particular class of creditor or a particular type of transaction. I am not convinced by the argument that this higher rate disclosure will affect their sales. So far as I know, there is no evidence that full disclosure requirements in any area have adversely affected the interests of legitimate busi- nesses engaged in that area. Nor do I believe that quoting the annual rate leads to any inaccuracy. We, in Treasury, are regularly quoting annual rates on 90-day bills and other instruments that are never in- tended to run a full year. So we see no problem with quoting 18 percent on revolving credit accounts which charge 11/2 percent per month. Of course, if the 11/2 percent is inaccurate, so also would be the 18 percent. But that is entirely another matter. The bill goes into this only to the extent of requiring the creditor to specify clearly the balance on which the charge is imposed and how it is imposed. Attached to my statement are copies of the one-page Defense De- partment rate table as well as examples illustrating its applicability to all types of consumer contract credit. I also have available a limited supply of the Treasury Department annual rate tables and matching sets of examples. I would be happy to go through these examples with you. Or, if you wish, I will illustrate how these tables can be used to compute the rate for any type of credit transaction suggested by the committee. In conclusion I would like to urge this committee to proceed without delay on the truth-in-lending provisions of H.R. 11601. As I said be- fore, I believe this legislation is needed and needed now. (The table and examples referred to may be found in the appen- dix, p. 905.) Mrs. SULLIVAN. Before we go on to Miss Furness, I just wondered- taking that last `table and the example that you were speaking of-is there any businessman who cannot do this, or who could not easily get quick help from his bank or the local Small Business Administra- PAGENO="0096" 86 CONSUMER CREDIT PROTECTION ACT tion office or someone in his community in order to do that without difficulty? Mr. BARR. Madam Chairman, it is really quite simple. I should point out, however, these tables are illustrative more than anything else. I think that if this legislation is enacted the financial publishing houses, as they have said they would do, will prepare tables for prac- tically every contingency. For any kind of consumer credit transaction that you can envision, they would have tables-for automobiles, for appliance dealers, for anything you can imagine. They will prepare them. It is not expensive. They will prepare them from the informa- tion we have here. Or probably more specifically from information in the bluebooks which we have furnished to you. They will prepare these tables and the businessman who is handling a credit transaction will simply decide the number of payments and the pattern of pay- ments. He knows what he wants to charge, and he will look up to the top and the rate specified in the legislation will be printed in a big number at the top of the table. He wouldn't have to go through all these computations if this legislation passes. Mrs. Dwmi. I notice from the testimony you gave in the Senate that the other body was rather confused about some of the tables and they questioned whether an ordinary individual could understand them. I thought that your statement this morning about an ex-Con- gressman was no different than anybody else after becoming Under Secretary of the Treasury was really the understatement of the year. I hope my distinguished chairlady will ask you for some examples to see if we understand what you are asking other people to understand. Mr. BARR. I think that is only fair, and I will be delighted to work through these transactions at any point in the hearings you would like. I would like to emphasize, however, Mrs. Dwyer, that these tables are mostly illustrative. If this legislation is enacted and there is a demand for these tables, the demand will be met by the financial pub- lishing houses who currently put out tables that are in use by most people who deal in consumer credit. Mr. Si'm'HEN. Along the lines of what the witness said, I believe you can get the interest rate and the amount of money that you would pay in interest each month and the payment from one of these finan- cial publishing companies for $1. Mr. BARR. Yes, that's correct. The only thing they do not have is the rate at the top of the table, and it is not indicated, Mr. Stephens, how- Mr. STEPHEN. Is how to get the money to pay them. Mr. BARR. They don't have that and they don't have the annual percentage rate that is called for in this bill. They could put it at the top of many of these tables. The annual percentage rate that you are asking for in this legislation could be put there. Mrs. SuuavAN. Thank you, Mr. Secretary. Before we start the questioning, I think it might be best to have Miss Furness read her statement and then we can question both of you as we go along. Miss FURNESS. Thank you, Madam Chairman. I will be delighted. It is `a great honor to be here today. PAGENO="0097" CONSUMER CREDIT PROTECTION ACT 87 STATEMENT OP HON. BETTY PURNESS, SPECIAL ASSISTANT TO THE PRESIDENT FOR CONSUMER AFFAIRS Mrs. SULLIVAN. You may proceed. Miss FURNESS. Madam Chairman, members of the subcommittee, I am grateful for the opportunity to be here today, to express my strong support for H.R. 11601. This bill is of vital importance to the consumer. It affects him where he is most sensitive-in the pocket- book. And if it is enacted, I think it will strengthen not only the bor- rower, but the marketplace as a whole. I am on record in support of the original Senate bill, S. 5, and I am glad to see that you have, in the House bill, restored some of the provisions which were struck from 5. 5. I continue to believe that provisions for full disclosure are ab- solutely essential. At a time when our lives are run more and more on credit, the least we can do is permit a person to know exactly how much he will be paying for an item. Clearly, that is not the case now. The number of personal bank- ruptcies, the number of unintentional defaults on payment, indicate that many people cannot manage credit as it is now constituted. With full disclosure often cloudy or nonexistent, the consumer is unable to determine precisely how much debt he can safely carry. The creditor knows exactly how much n~oney he will be receiving. It doesn't seem too much to ask that he reveal that figure to the man who will be paying him. We want the average consumer to be able to wisely and knowledgeably select the best creditor for him. Even a consumer who tried very hard to be a good comparison shopper for merchandise is now unable to cope with the complexities of comparison shopping for crc~dit. I think, Madam Chairman, that you have improved upon the Senate version of truth-in-lending in several respects, and I'd like to mention some of them. Yo~i have asked that insurance charges levied on consumer credit be included in the total charge disclosed to the purchaser. This is indeed necessary if th~ true cost of credit is to be known. There have been reports in the press, as well as testimony before Congress, which indicate that excessive premiums can amount to a substantial addi- tional cost, and it's only fair that they be revealed to the prospective buyer. You have asked that revolving credit not be excluded from the legis- lation, as it is in the Senate bill. I think the argument that revolving credit represents only a small part of consumer debt is based on specious logic. First, it is growing rapidly. Second, it affects those least able to bear the burden of excessive debt, the small purchaser. Third, if revolving credit is excluded, more and more businesses might switch t.o it as a loophole for avoiding full disclosure. You have also helped the small purchaser by refusing to exclude credit charges of less than $10. This is the area where the poor are subject to the most abuse. We shouldn't discriminate against the man who purchases a small powersaw, and who pays only $8 interest, in favor of the family that buys a $700 set of furniture and pays $100 interest. 83-340 0-67-pt. 1-7 PAGENO="0098" 88 CONSUMER CREDIT PROTECTION ACT And if sales taxes can be readily computed on small amounts, so can finance charges. You have-rightly, I believ&-restored a provision demanding full disclosure of charges on first mortgages. Abuse in this area is especially damaging to the poor and uneducated. Finally, I am particularly pleased with your provision requiring advertisements for consumer credit sales to include-as an annual percentage figure-the cost of finance charges. This will allow pro- spective buyers to begin shopping for credit at home, instead of on the spot. It will encourage families to ground themselves in the differences between credit plans in the privacy of their own homes, rather than under the gun of a sales pitch. It will then lead to wiser selection. And with any luck, the ethical ads of the low-cost lenders will ulti- mately drive down the rates of the higher priced lenders. There are some sections of the bill, Madam Chairman, which I feel would be better served by being deferred for further study. One, the question of garnishment of wages as a means of collection-is already under study. I am aware that garnishment is an expensive, painful procedure which can cost a man his job, disru.pt his family, and inconvenience his employer. But there are cases in which it prevents inequities against the creditor, and I do not feel, at present, that we can issue a blanket rule against it. It is currently being studied by the Attorney General, the Secretary of Labor, and the Director of the Office of Economic Opportunity. Similarly, I do not think we are ready for a national usury law. Such a law would put a ceiling on all consumer credit, without regard for individual circumstances. Its ramifications would be so enormous- affecting such a large part of our economy-that I think intensive study is necessary. Lastly, I think that the provision outlawing confession of judgment is premature. The full implications of it, too, have not yet been evalu- ated, and further study is indicated before a law is passed. Rather than deal with these controversial subjects in the current bill, I feel that our immediate concern is for passage of the basic truth-in-lending legislation during this session. Also, despite my enthusiasm for the objectives of title 3 of the bill, referring to a National Commission on Consumer Finance, I think it should be separated from the current bill. I would like to see the work done, and the studies made. They would be invaluable in areas such as deficiency judgments, unconscionable contracts, licensing requirements, and debtors' remedies. But I think that before establishing such a commission, we should first determine whether such studies could be better and more economically conducted by existing organizations and agencies. And again, since the passage of a full disclosure bill is my first con- cern, I wish you would consider treating the questions of the commis- sion and the other matters not related to disclosure, separately. If I may generalize for a final moment on this bill, I think it is a tribute to the concern and awareness of the new American consumer. Only a few years ago, our consumers were a placid lot-resigned to mal- PAGENO="0099" CONSUMER CREDIT PROTECTION ACT 89 treatment, oblivious of injustice, and fatalistic about the way they were treated in the marketplace This is no longer true The bills that are being introduced and the re forms that are being sought are all a testimony to ~ public that has finally decided to assert-and vocally, I might add-its rights We are becoming an affluent society of sophisticated consumers, and we are demanding new standards-standards that will differentiate be tween the fraudulent and the fair, between the legally permissible and the ethically wrong I think the disclosure portions of this bill provide an excellent ex ample of those demands being met They do not demand the unreason able, only the fair I am happy to give them my support Thank you Mrs SULLIVAN Thank you, Miss Furness It is an excellent state ment, and expresses the need for this kind of bill I have a few questions that I would like to put both to Secretary Barr and to Miss Furness I am going to use my prerogative of chairman to take perhaps a little longer than 5 minutes, and then we will go under the 5 minute rule so that we can all have an opportunity to question, and then come back for a second round if there is time Mr Barr, you made a good case for full disclosure of finance charges in consumer credit But I would like to take you back to 5 5 as it passed the Senate and see if we understand exactly what the bill would do or would not do First, it would leave out first mortgages-the biggest credit trans action most families ever experience, and one which most families now do experience-and would require no disclosure on the percentage rate of finance costs Bight ~ Mr BARR Correct Mrs SULLIVAN Next, it would exempt from an annual percentage rate disclosure requirement any purchase or credit transaction on which the credit charge is $9 99 or less-meaning, usually, items costing up to or around $100, is that not right ~ Mr BAlm That is correct Mrs SULLIVAN Third, it would not require an annual percentage rate disclosure on open end credit plans such as department store revolving charges and gasoline or other credit card plans Is that not right? Mr BARR That is correct Mrs SULLIVAN And fourth, it would leave only large ticket items- large ticket item installment transactions such as automobiles, color television, sizable loans, second or third mortgages, and so forth But none of those would have to give an annual percentage rate until July of 19~, which is 5 years away So who would be covered and what would be covered that would mean anything to anyone for 5 years? Mr BARR Madam Chairman, if I can take these exemptions and express my opinion on them seriatim First of all, the exclusion of first mortgage credit As I indicated, it seems to me that this area is rather fully-the disclosure of the annual interest rate charge is rather fully covered at the moment This is not an area of confusion The area of confusion, Madam Chair man, is in the variety and diversity of charges that are added on PAGENO="0100" 90 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. You mean like the closing costs ~ Mr. BAmI. The closing costs. They are added on and the divergence in practice between different areas in the country. That I think should be cleaned up and I believe it can be cdeaned up. That is the biggest advantage to be gained. I would like the committee to know, however, that I don't believe it can be claimed that in the simple disclosure of interest rate there is any confusion; most of the confusion comes in the closing costs. The second item, Madam Chairman, is the question of the exemption of credit transactions involving credit charges of $10 or less. In the Senate it was decided that this item should be excluded to make it easier on small business. This committee is confronted with a decision as to whether or not this should be given priority or whether the disclosure to the consumer should be given priority. I have indicated in my testimony that I would give the priority to the consumer. This is a subject that is going to be open for discussion in this committee. The third question is revolving credit. Madam Chairman, this is another area that frankly very often gets very confused. The argu- ment you have here, as retailers appear before this committee, seems to revolve around the question of when does that, credit start. Pos- sibly because of our long years of borrowing money in the Treasury, we take the very hardheaded opinion that the credit charge starts when they say it starts and when you compute it-if it is a 1~-percent monthly rate, you multiply that by 12 and that is a 18-percent annual rate. It starts 30 days after the transaction-if you get a free ride for 30 days and it starts at 11/2 percent at the end of that time, we say you are being charged an 18-percent annual rate. You obviously have a choice during that time and you should know that. You have the choice of taking it out of your savings account-you don't have to incur the 1i~-percent charge if you don't want to at the end of the 30 days. You can take it out of your savings account, or at least many people can, and extinguish that debt and not incur the charge. Conse- quently I think the omission of the revolving credit was serious. You will find that this is a very, very controversial subject and I would urge you to listen carefully. Maybe we at the Treasury are being too tough about this. But it just seems to us rather open and shut that the credit transaction starts when the lender says it starts, and he should apply the multiplier of 12 to the monthly rate, which gives an annual rate. I don't know what all the shouting is about. Mrs. SULLIVAN. On that particular question also, is dollars per hun- dred on the average unpaid balance the same as an annual percentage rate which they will have to show after 1972 ~ Mr. BAlm. It is precisely the same number, Madam Chairman; $5 per hundred per year on the unpaid balance is the same as a 5-percent annual rate. We really have not much objection to that. I would think that practically anyone could figure out or could easily be informed that $5 per hundred per year on the unpaid balance is 5 percent. And if that makes it easier for the lenders to get around the question of these State usury laws-these are troublesome, for you don't know what some of the courts are going to do-I would have no objection to that. As far as I am concerned it can go on until 1972. This doesn't PAGENO="0101" CONSUMER CREDIT PROTECTION ACT 91 get me very excited, because I think it is very simple. It is precisely the same thing. So the 1972 date does not overly excite the U.S. Treas- ury. The two methods of quoting finance charges are the same. This provision would give the States where there might be trouble under the usury law time to change their laws. In those States where they need a constitutional change, it usually takes two sessions of the legis- lature, or 4 years; that would be the maximum. You asked me who would be covered under these provisions. Madam Chairman, at the moment there is $95 billion of consumer credit outstanding, if you set aside mortgage credit. Of that $95 billion, there is $7 billion in depart- ment store credit, open-end credit. We don't know how much of that is revolving credit, but I have been informed that, as a guess, as much as $4 to $5 billion of that $7 billion total is revolving credit. So I would say that the Senate bill-and I am guessing, but I don't think I am far off-covers $90 billion out of the $95 billion outstanding That is where I think you are or would be by 1968 when H.R. 11601 would become effective. Mrs. SULLIVAN. Miss Furness, I first want to congratulate you on an excellent statement. You have taken on one of the most difficult, one of the most challenging, and most important assignment in Govern- ment, and I will tell you that what you have done takes real courage. Your predecessor did an outstanding job in pioneering this assign- ment, and I am sure you will now build a fine record of accomplish- ment on that foundation. Let us just hope that this legislation on which we are now working will really accomplish something. May I ask you, have you ever purchased a car or other item on time? Miss FURNESS. I certainly have, Madam Chairman. Mrs. SULLIVAN. If you did so today, what would you look for in a credit deal? What would you want to know? Miss FURNESS. Let me tell you that if I did it teday I would react very differently than I would have reacted 3 months ago. Three months ago I would have assumed if I bought an automobile that the man who sold me the automobile was doing whatever it was he had to do. I would have known enough to know that I could pay for it in cash if I had the cash. But assuming that I did not want to release my own cash, there would be some kind of percentage for credit and I would have assumed it would be about 6 percent on the loan. When he then wrote down those extra charges below it I would have assumed that he knew what he was doing. I would not have known what I was doing. In the 3 months since I have had this job I have become much more sophisticated about all of this business of borrowing and buying on time. I have been employed for 35 years. I care about my money. I there- fore should be more sophisticated than I turn out to be. If I could make the naive error that I just outlined-I would have signed at the bottom of that contract and I would have sent the money in and I would not have known what the car would cost me eventually. If I could make this mistake, having been a working woman for 35 years, I am terrified at the thought of the size of the error that my own daughter could make, never having worked. I think that some of the people borrowing money or buying on time assume that the lender knows what he is doing and there is some vague area of prescribed PAGENO="0102" 92 CONSUMER CREDIT PROTECTION ACT rules that he is following The borrowers do not know that there are not prescribed rules, that they are different on this corner of the street from the other corner of the street I do think people are very fearful of expressing their own ignorance Nobody wants to feel like a fool So I think a lot of people don't say, "What does this mean, ~what does it really cost me, are your ch'trging me the same as someone else would ~" People don't want to feel like fools, and the less educated the person is, the less he wants to reveal his l'tck of education Therefore I think that this bill is of vital im portance to the people who don't know what is being done to them I gave you more of an answer than you asked for I got carried away Mrs SULLIVAN This is why I think hearings like this-if they are reported widely enough so that people can read what we are trying to do-will give the public an education in buying on credit I think what you have said about people not wanting to show their ignorance on these things is absolutely true I have tried to help many of my constituents, particularly some of `the older people, that have dome to me about their problems on closing costs in the purchase of a home-- and also, and this is usually much more serious, about the papers they have signed in obtaining repairs on their homes. If `the home has been paid off over the years, they often find they have signed some sort of first mortgage that is absolutely out of this world as far as charges are concerned. If you know what you are reading and you know what the figures mean you can protect yourself, but most of these people do not know and the results are often tragic. One other question: Would you knowingly pay 18 percent for credit if you were not desperate ~ Miss FTJRNESS. No, I wouldn't, certainly not, absolutely not. I `think what Mr. Barr referred to is important. We do know what we get from our savings accounts. That is fairly clear. Why on earth would I pay 18 percent when 1 can take the money out of there and save roughly 14 percent? Mrs. SULLIVAN. Millions of Americans pay that much or far more than that because they do not know the rate, or, if they do know, nevertheless feel they have to have the product, whatever its cost, `~s long as they think they can swing the monthly payments and pay it back. Others go into these credit deals not really caring if they can pay it back, saying, "Let the car go, let it be repossessed" Are these practices not a drain on the economy which adversely affect all con- sumers in the prices that they must pay for goods and for credit? Miss FURNESS. Absolutely. I think it is marvelous that the credit system works as widely as it does today and it has great value for people of all income brackets But I hate to see money wasted I don't like to waste anything, least of all money And it does seem to me that when people are paying more for credit than they understand they `tre paying, and they make errors because they are not shopping for credit, they are putting out money to some stranger they don't care `ibout and they don't have the `idvantage of being able to use the money in some other area of the economy that would give them pleasure They may not be taking a trip or buying a hat, or doing whatever it is that you would do with money that you have left over If people want to get money for credit, if they want to buy things on time, that PAGENO="0103" CONSUMER CREDIT PROTECTION ACT 93 is certainly their business But I hate to see them spend more than they have to, simply because they don't understand I am sure `i lady would rather have a hat Mrs SULLIVAN Thank you I have taken up too much time Mrs. Dwyer? Mrs DWYER I again want to congratulate Miss Furness for her very fine statement and for accepting this very responsible position in Government I am always happy to see people like this join our Government agencies I ~ ould like to ask you one question, Miss Furness Judging from ~ hat you have said, can you be sure if it is Westinghouse? Miss FTJPNESS Mrs Dwyer, I always was sure if it was Westinghouse and I would like to feel that if I bought a Westinghouse product on credit today I could be sure of what I was paying for it on credit Mrs DWYER I asked you that because of the advertising provisions in the Sullivan bill Now, Mr Barr, as I said in my opening statement, judging from the unanimous `Lction in the Senate in the pending bill before this corn rnittee, it seems apparent that ~s e will enact consumer protection legis lation during this Congress The strongest differences of opinion, however, surround the different treatments of the revolving credit accounts Judging from the 90 to 0 vote in the Senate, any substantial change in the House will involve revolving credit accounts and will ran into difficulty in Congress But let me ask you this, first Is the administration satisfied that annualizing the typical 11/2 percent per month charge to 18 percent in monthly bills, accurately would reflect the consumer is being charged when such a company claimed that their typical revolving charge account customer pays far less `than 18 percent? With regard to those department stores who work from the adjusted balance system, is it not a fact that converting 11/2 percent a month to 18 percent results in a substantial distortion by the so called 30 day free period2 Mr BARR Mrs Dwyer, some way or other the retailers and the U S Treasury are just not communicating We frankly don't understand each other in this area You will hear a lot of disagreement here I might add in direct answer to your question, that the U S Treasury and the administration are confident that annualizing these monthly rates is the correct way to do it You will find no such agreement among the retailers, I might add Here is the way we argue our case, Mrs Dwyer You go to the store and you buy $100 worth of pants and shirts and shoes and things like that for the children If you pay that bill in 30 days there is no credit charge But after the 30 day period runs out there is a 1½ percent per month charge that is levied on that credit Now, the difference between the Treasury and the retailer is this The retailers obviously assume that the charge for the credit starts the day of the transaction If we assume that, you went in there and bought on July 1 this $100 worth of merchandise and there is no credit charge until July 31, we say, `ill right, there is no credit charge But then, start ing on August 1 there is `i 1½ percent charge that is `tdded to th'tt basic $100 balance We say that is where the credit transaction starts, not on July 1, but on August 1, and if you just make that little assump tion you come out at 18 percent. We make `that assumption, the retail- PAGENO="0104" 94 CONSUMER CREDIT PROTECTION ACT ers don't. Frankly, as I say, obviously we are not communicating with each other in this particular area. Mrs. DWYER. What does the IRS do about this as far as billing the 1st to the 30th for tax purposes? Mr. BARR. Internal Revenue? Mrs. DWYER. For tax purposes, accounts receivable? Mr. BARR. Mrs. Dwyer, these credit charges are figured into the total profits of all these concerns. Now, I would imagine that IRS would have to, of necessity say, well, there is a 30-day grace period in there. Consequently it wouldn't figure out to an 18-percent return that they are getting for the use of this money. The store makes this credit charge after determining that 30 days is free, more or less. Mr. WILLIAMS. Would the gentlewoman yield? Mrs. DWYER. I yield. Mr. WILLIAMS. Do I understand you to be saying that even though the stores on these revolving accounts state this li/2-percent rate, that they are making that charge for the first month? Mr. BARR. That is where we differ as to what the rate really is, Mr. Williams. If you make the assumption that the credit transaction starts on the date when the sale is made, we disagree. We say they have told the customers that for the first 30 days there isn't any charge. Mr. WILLIAMS. Even though theytold the customers that they still charge from the first day? Mr. BARR. That is correct, that is the argument. Mr. WILLIAMS. From your familiarity with credit transactions is there any additional expense connected with these revolving accounts that could conceivably justify an 18-percent annual interest rate? Mr. BARR. I don't believe that is an exorbitant rate. These are fre- quently small accounts and I am not saying that revolving credit is a bad thing. I think it is a great thing. It is the charge account principle that was once limited to a rather few affluent people and has now moved across the whole economy. But when you have millions of small credit transactions-with bookkeeping charges and credit examina- tions and other costs-I doubt that you can make money at much less than 18 percent. Mr. WILLIAMS. Thank you, Mrs. Dwyer. Mrs. DWYER. I just want to say in conclusion that I would prefer Mr. Barr, sometime during the course of his testimony, to give us some of these examples that he is talking about. Mr. BARR. I would be delighted to any time the chairman indicates. Mrs. SULLIVAN. Mr. Stephens? Mr. STEPHENS. Mr. Barr, along the line of the questioning just pur- sued, how does Internal Revenue Service look at the financial charges that are paid; is it part of the cost of the item, or can you take it off as an interest charge? Mr. BARR. We will have to go through some of these. If you look at page 11-there would be a distinction here as to whether this was a farmer buying a farm or a consumer buying a home. Which one do you want to take, Mr. Stephens? Mr. STEPHENS. I was basically thinking about buying a king-size bed. How much would it be by the month? How much could I take off on income tax for interest payments if I bought a bed by the month? Or is that just the cost of the bed? PAGENO="0105" CONSUMER CREDIT PROTECTION ACT 95 Miss FURNESS. I just bought a home. I cannot wait to hear the answer. Mr. BARR. Mr. Stephens, I am advised that if this legislation goes into effect, IRS would consider whether the total of these finance charges should be allowed as interest deductions. Mr. STEPHENS. That is the answer to that question. Thank you. Now, the next thing I would like to ask you is this: When you come to your mortgage gentleman and he points out the closing cost-is it not true that you are going to get into the professional field of what lawyers can charge for closing out a loan and for title examinations? In other words, if we should try to set some closing costs, we would be running into what the lawyer says is his professional prerogative and decide whether they can charge 1½ percent of the value, and so forth. Is that one of the difficulties? Mr. BARR. That is one of the difficulties. It is not the subject of our discourse today, but what I think, and what many people believe, is that an archiac system of practices has grown up around real estate. For instance, if you buy a home today, you pay for a title search. If you own that home a year or 6 months and sell it again, the next per- son who buys it is going to pay the same for title examination as you did. I am not going to argue with the lawyers, but it is a source of personal irritation. I have been involved several times myself in this area. Mr. STEPHENS. That is how you come to the conclusion that you will try to arrive at in making your mortgage loans-more or less standard charges on the closing costs. Mr. BARR. Mr. Stephens, I hope my statement was not misinter- preted. I do not recommend that this committee get into this area of standard charges. All I meant to say was that specific items could be included and clearly set forth as incident to the extension of credit while other items are not nearly that closely related. If there could be a national standard on the items that should be included as credit charges, people wouldn't get confused by being hit in one State with costs that don't apply in another. I know the Congress is deeply interested in homebuilding; the administration has been engaged for over a year in attempting to devise some kind of mortgage or real estate instrument that can be traded widely as a U.S. GOvernment security is traded widely-just as a stock listed on the New York Stock Exchange is traded widely. Unless we clean up some of these areas we are not going to have an instrument that is going to be traded that widely. Mr. STEPHENS. I have one other question. From time to time as we proceed in this hearing we are going to run across terminology like you have used here in your page 4. Mr. BAirn. Yes, sir. Mr. STEPHENS. I wondered if someone in the Treasury Department could define some of the things like we have listed here-let us have those within the next week, because we have to have some definitions that I know we are going to use continuously and will be used con- tinuously by people who will appear before us. We have on page 4 what you call add-ens and you point out that they are sophisticated and confusing. Precompute, rule of 78's, service charges, finance charges, what is called interest-if you could get us some ideas-some PAGENO="0106" 96 CONSUMER CREDIT PROTECTION ACT definitions, it will certainly be helpful to have some definitions that we may have questions on. Mr. BAlm. We would be delighted to suppiy a glossary of the jargon of the trade. Mr. STEPHENS. My time is up. (The material referred to may be found in the appendix, p. 910.) Mrs. SULLIVAN. Mr. Halpern? Mr. HALPERN. Thank you. I first want to commend our distinguished witnesses, Secretary Barr, a distinguished, knowledgeable and out- standing public servant who has always contributed to the work of this committee whether on this side of the dais as a member of the committee or on the other side as one of the able representt~tives of thc Treasury Department. Miss F'urness, in her brief affiliation in public service has so dis- tinguished herself most creditably and has won the admiration of so many of her colleagues in our Government. I wish to commend her for her forthright statement and I feel she has contributed greatly to an effective and meaningful consumer credit legislation. I have many questions, Madam Chairman, but unfortunately we are limited by time and I am sure with your permission and with the consent of the committee that we can submit these questions in writing to the witnesses with the view that their answering be included as part of this testimony. Mrs. SULLIVAN. Yes, I am sure the Secretary will do that. (The following material was subsequently submitted for the record:) CONGRESS OF THE UNITED STATES, HOUSE OF REPRESENTATIVES, Washington, DXL, August 9, 1967. Hon. JOSEPH W. BARR, Under ~5ecretary of the Treasury, Washington, DXI. DEAR MR. SECRETARY: During your appearance before the Consumer Affairs Subcommittee on Monday, August 7, time limits did not allow the posing of all the questions pertinent to your testimony on the consumer protection legislation. Hence, I am taking the liberty of submitting the following questions and solicit your responses which, with the permission of the subcommittee, will be entered into the record of the hearings. 1. On page 3, you point to the rising tide of bankruptcies as evidence of how lack of knowledge of credit costs had contributed to the abuse of credit. Do you have specific evidence to suggest that this ignorance of credit costs is di- rectly correlated to these increasing bankruptcies, or might the major factor merely be the expanding availability of credit to consumers, particularly in light of the fact that a large segment of the consuming sector seems relatively insensi- tive to the level of finance rates? 2. Given indications of lack of consumer sensitivity to finance rates (which, admittedly, may partly be the result of the myriad of chaotic terms on which credit is offered), can you truly foresee, as you suggest on page 4, an upsurge of competitive activity in our free enterprise economy as a result of clearer dis- closure of credit terms? 3. Is it true that the annual percentage rate stated on a retail credit trans- action would be completely comparable to the annual rate on savings accounts, since interest on savings accounts is generally compounded periodically, and calculated on the lowest balance of the period? 4. In both the Senate bill, and the legislation currently under consideration here, business credit has been exempted from the requirements for business transactions, particularly in the realm of small, family-owned businesses, where the distinction between personal and business transactions may become some- PAGENO="0107" CONSUMER CREDIT PROTECTION ACT 97 what hazy (for example, in the use of an automobile, home-improvement where the business is in the home, etc.)? 5. What would be your response to the following suggestion as a solution to the revolving credit bottleneck: instead of being required to state that the an- nual rate by which resolving account charges are caloalate'd is 18 percent per annum, disclosure would involve statement of a range of rates which are actually paid, with 18 percent per annum specified as the outer limit or ma~vinuan rate which might be imposed on the account if payment is delayed a full 12 months beyond the initial imposition of credit charges. (This disclosure would both take account of the benefit of the "free-ride" period and provide the consumer with a basis of comparison in terms of annual rates). I certainly enjoyed your testimony on Monday, and appreciate your offer to respond to my additional questions. With best wishes, I am, Sincerely, SEYMOUR HALPERN, Member of Congress. THE UNDER SECRETARY OF THE TREASURY, Washington, D.C., August 18, 1967. Hon. SEYMOUR HALPERN, House of Representativds, Washington, D.C. DRAB Sy: Let me try to give you some brief answers to your questions on my testimony- of last Monday, August 7, on H.R. 11601. 1. I certainly wouldn't want to attribute the rising tide of bankruptcies entirely to lack of consumer information on credit costs. I don't know that there is any statistical information bearing on this, but it seems pretty evident to me that an uniformed consumer is more likely to overextend himself and get into a bankruptcy situation than a consumer who knows what the cost of credit is. I think, as came out before the subcommittee, that a good deal of the bankruptcy problem comes from consumer credit that is sold to the consumer as "instant money" without any disclosure of the price tag. 2. I don't know whether there are indications that consumers are as insensi- tive to finance charges as has sometimes been supposed. I think a good deal of this supposed insensitivity is due simply to the sometimes deliberately con- fusing ways in which credit costs are revealed or concealed. I do have reason- able confidence that the disclosure provisions will enhance competition and help to reduce credit costs to as low as possible a level, and I think the advertis- ing provisions are likely to be important in achieving that result. 3. I think the consumer would generally compare the annual rate stated on a retail credit transaction and the annual rate on a savings account and would get substantially the right kind of answer, even though the two rates are not strictly comparable. Under the terms of H.R. 11601 the annual rate stated on the credit transaction might be closer to a conceptually exact rate, but the rate paid by the consumer could differ because of early payments. The rate quoted by a savings institution is an exact rate, usually, only if you put your money in on the 1st of the month and keep it on deposit until the dividend date. You can beat this by taking advantage of grace periods, and, of course, you can lose interest by putting in money after the grace period or by taking money out before the end of the interest period. But again, what we are get- ting at on a reasonably comparable basis are the terms that are offered to the consumer whether he is a borrower or a lender. 4. I think that in most cases small, family-owned businesses are likely to get most of the benefits of the truth-in-lending disclosure provisions, even if they are not specifically covered. I rather doubt that a credit seller, in particu- lar, w~uld not provide the required information, even though technically lie might not be liable to do so, especially where consumer-type goods are concerned. 5. I really think that the proper answer to this question is that the lender should be obliged to state the annual rate as twelve times the monthly rate. I tried to make this point also: if the annual rate at which credit charges are levied is not correct, the monthly rate advocated by the stores is also not correct by the same logic. I don't, however, see anything in the bill that would prevent a credit seller from informing his patrons that on the average he earned 8, 9, or 10 percent, or whatever the figure might be, on his charge accounts, but PAGENO="0108" 98 CONSUMER CREDIT PROTECTION ACT I would tend to think that on second thought he might not want to make this knowledge available to his competitors. I hope these comments will be helpful in your consideration of the bill. With best regards. Sincerely, JOSEPH W. BARR. Mr. HALPERN. With respect to the exemption of small transactions, we have had quite a discussion on that, Mr. Secretary. Do you have any figures on the importance of these transactions relative to the total pie- ture of consumer credit outstanding? Mr. BAlm. We will supply that for the record. (The information referred to follows:) Percentage of transactio'as that wo~uld be e~ueluded under the $10 rule Neither the Federal Reserve Board npr the Department of Commerce are able to provide statistic's on the percentage of installment purchases which fall below $100 (estimiated to be approximately the size purchase for which the finance charge is $10). Disclosure for a large share of small purchases, of course, is re- quired under the revolving credit provisions of both 5. 5 and HR. 11601. Mr. HALPERN. Have you considered the possibility that the result of inclusion of small transactions might place such a burden on the lenders that this type of credit will be dispensed with altogether to the detriment of the consumer? Mr. BAlm. We have considered that, Mr. Halpern. As I said there are several priorities you have to consider here. We just decided that this is so important to the consumer that we think it should be dis- closed. We also pursued it on the assumption, Mr. 1-lalpern, that even if some of these charges would go to 100 to 150 percent, and some might, we don't believe this would affect the retail sales in the United States. In these small areas you are going to have to charge. You cannot get it on the books for much less than $10. There is a bookkeeping and ac- counting cost. I don't think anybody is going to object to it. Every- body is going to be confronted with the same proposition. Mr. HALPERN. If there are such exemptions, and they are permitted to exist, is it likely that a person making purchases in the department store, or we will say buying a set of furniture, that they would buy the pieces, or the store would sell the pieces to them individually, and, therefore, they would be exempt under the provisions of this bill? Mr. BAlm. That is possible. Mr. HALPERN. With respect to revolving credit charges, do you think the situation will be accurately resolved if the retailer would be per- mitted to state the 18 percent as the maximum and supplement this information with a schedule of the lower annual rates that would be paid if prepayment were made before the 12 months following the beginning of credit charges? In other words, do you feel that if, along with disclosure of an annual rate the creditor in the case of revolving credit accounts issued a schedule showing how by early payment the borrower could avoid paying the annual rate of say 18 percent-in the case of charges of 11/2 percent a month-that is, if he pays after 60 days he is paying an annual rate of 9 percent, if he pays after 90 days he is paying at the annual rate of 12 percent and so forth, and only 12 months after credit charges begin will he be paying the low of 18 percent? PAGENO="0109" CONSUMER CREDIT PROTECTION ACT 99 Mr. BARR. As I mentioned, Mr. Halpern, we get very confused in this area. It all goes back to when the credit transaction starts. If it starts at the day of the sale you are right, he would be paying 9 percent. Mr. HALPERN. In other words, you would like to see a schedule stipulating that? Mr. BARR. On the assumption he would be paying 9 percent. If you assume, as we do, that the credit transaction starts when they say it starts, the annual rate is 18 percent, so you get right back to the basic assumption. The Federal Reserve Board has taken the position-I think that there is merit to it-let the retailer state the assumptions on which he is extending the credit and then state the charge. Mr. HALPERN. That is my point. Now may I ask Miss Furness: On page 2 you suggest that one reason for not approving the Senate exemption of revolving credit under the disclosure provisions of this legislation is the extent to which the activity of this type credit source affects the small borrower. Do you apply the same reasoning with the same conclusion to the exemption of credit transactions with finance charges of less than $10? Miss FURNESS. Yes, I do. I would like to see all credit or finance charges covered by a requirement for disclosure through the annual percentage rate method. The smaller the transactions get the larger the number of bewildered people you are 1~ouching and I care most about the bewildered people. Mr. HALPERN. In discussing the various problems of credit con- sumers there is another segment of our consuming population-a vanishing breed-whom we seem to have ignored and that is the cash buyer. One hears of discrimination against cash buyers by salesmen and other representatives of retailing organizations which reap a large portion of their profits from the credit facets of their transactions. Have you run across many complaints of this nature and have you contemplated any remedies in this area? Mi'ss FURNESS. I have not had such complaints in my office. I have on a personal level. I would suggest that the remedy here would be better consumer education to notify buyers, that `there is no earthly reason why they should be talked into a credit purchase if they don't want to make `it. But it is not my priority to worry about the people who have all this cash on hand. Mr. BARR. I haven't had `a chance to complain to Miss Furness be- cause this is a subject of great irritation to me. The cash buyer gets no advantage today. Mrs. SULLIVAN. I want to ask some of the witnesses from the retail industry as they come before us, if the old rule of allowing 90 days for cash is out of style. I still believe if I am buying `a large article and pay for it within 90 days, that I am paying cash and should not have to pay credit. But I do not hear them talking about this any more. Mr. Gonzalez? Mr. GONZALEZ. Thank you, Madam Chairman. First, I wish Miss Furness well in her appointment as Special Adviser. I have a couple of questions or comments as well. On page 4 of your testimony you state: I am aware that garnishment is an expensive, painful procedure which can cost a man his job, disrupt his family, and inconvenience his employer. But there are cases in which it prevents inequities against the creditor, and I do feel, at present, PAGENO="0110" 100 CONSUMER CREDIT PROTECTION ACT that we can issue a blanket rule against it It is currently being studied by the Attorney General, the Secretary of Labor, and the Director of the Office of Eco- nomic Opportunity Similarly I do not think we are ready for a national usury law Such a law would put a ceiling on all consumer credit without regard for individual circumstances Its ramifications would be so enormous-affecting such a large part of our economy-that I think intensive study is necessary. In that connection, my State, for instance, by constitutional inhibi tion forbids the garnishment of salaries I have a letter here from a lawyer in Fresno, Calif, Attorney Gilbert D Lopez, who is the chair man of the Mexican American Political Association in that area and he addresses this letter to `the committee through the chairlady He says I am informed and aware of the fact that on or about the 7th of August 1967 committee hearings will begin concerning Truth in Lending bill H R 11601 I have read with a great deal of interest your release dated July 2 1967 on "Truth-in-Lending" which release was made by the Subcommittee on Consumer Affairs. lie then goes on and says: As an attorney in the Fresno area, State of California, I can recollect innumer- able instances where the consumer has been subjected to what amounts to almost pure fraud in the obtainment of credit and financing by many of these consumer lending organizations. All too often have I heard the story that I borrowed $300, and have been paying for 5 years and the amount is still the same In addition the factor concerning garnishment of wages is an important fact especially in this area where many of our consumers are poor people living off agricultural work. In many of these instances I have found that unscrupulous judges knowing full well that the moneys sought to be garmshed are the sole source of food for a family of six seven or eight and which sums are below the minimal required for sustaining such a family, have still insisted and allowed one- half the wages to be garnished by the creditors. Certainly an investigation into consumer lending in our area would of neces- sity make a person who is conscious of injustices wreaked upon these poor people support your action. In behalf of all the members of our organization and in behalf of the many people who have come to my office seeking help, I strongly urge you and all the Membei~s of Congress to introduce appropriate safeguards and legislation for the protection of these people I believe your action is in proper form and should be given strenuous support by Members of Oongress so that a justifiable conclusion can be had for these people I know that this would be true in my State except for the constitu tional inhibition Since Texas and other States will prohibit it, why should there be such a reluctance ~ Why should we have to wait until we have studies to tell us what I think is so obvious, Miss Furness ~ Is there not any hope that we can get a positive recommendation for a Federal level type of legislation to at least inhibit the garnishment of wages~ Miss FURNESS I think that is a very realistic goal, Mr Gonzalez It was only my suggestion that this be eliminated from the considera tion of this particular bill pending the further and comprehensive study It has been pointed out to me that while prohibiting garnish ment would protect the people that I just said I cared the most about, which would indeed be your Mexican American farmhands `md so forth, there are people who are making $20,000 a year who overextend their credit and really have no business in so doing and should be able to handle their credit picture Garnishment may indeed be quite fair in such cases PAGENO="0111" CONSUMER CREDIT PROTECTION ACT 101 As you have noted, I have only requested further study into this so that all of us will understand the true picture of garnishment more clearly than we now do. Mr. GONZALEZ. The President requested this study better than 5 months ago. Can you tell us what progress was made in respect to the study, that I am sure has resulted as a result of his request? Miss FURNESS. No, sir; I cannot. I know only the existence of the study. Mr. GONZALEZ. With respect to our national usury law, one of the big battles-I did not have much success in waging it-with the former Comptroller of the Currency was an edict or rule, or what- ever you want to call it, in which he said as an administrator he was decreeing that the national banks under what he interpreted to be the law were empowered to charge the highest possible interest as per- mitted by State regulatory agencies. Now, if that were to be carried out, and there will be some attempt to do so, the State of Wisconsin I understand has tried it-a national bank in our State could charge as much as 300 percent interest in some cases. In the first, I challenge the Comptroller and his study of the law. The debates in the Congress in the Reconstruction period do not reflect that he is right in inter- preting the law, as I am sure did his legal assistants. Do you not feel on the Federal level on this position you are occupy- ing that it would be helpful to debate this point first, with the Federal- level administrators who are attempting to foist this? When I came up from the State to the Congress I knew that my State had this rather undesirable name of being the "Loan Shark Capital of the Country." And when I got here I saw the same tracks and I figured it was the same animal, and I think what we have done here has been to federalize the loan sharks and it is going to take Federal-level action to control, not nationalize the loan sharks. I think we ought to start with our own agency such as the Comptroller. Therefore, in connection with your statement here as to the need of a national usury law, may I suggest that perhaps an inquiry to the present Comptroller to find out if he agrees with the former Comptroller is a helpful start in this question of a national usury law? Miss FURNESS. I think that is a very good suggestion. Mr. GONZALEZ. The only problem there, as I understand this last legislation, they extended this privilege that was limited only to cer- tain lending institutions, to the banks and savings and loan institu- tions, which of course means that you are going into the area of long- term mortgages. In other words, we are legalizing what hitherto has been usurious and this is, too, on Federal level and starting with the Comptroller himself we ought to see he does not get the virus. Thank you very much. Miss FURNESS. Thank you. Mrs. SULLIVAN. Mr. Wylie? Mr. WYLIE. I would like to associate myself with the remarks of Mr. Halpern which were very complimentary to both of you, and thank you for your appearance here this morning. You made excel- lent statements. PAGENO="0112" 102 CONSUMER CREDIT PROTECTION ACT I would like to go back to a question by Mr. Stephens concerning the deduction of interest on the income tax return, and apropos of that, I notice in the Internal Revenue regulations the provision re- lating to the deduction of interest is as `follows: Now, I suppose that the reason for fixing the deduction at 6 percent is because it is hard t.o determine what the actual annual interest rate might be under a credit plan. Would you recommend a change in the IRS regulations to include 18 percent interest as a deduction if this bill is passed? Mr. BARR. If this legislation passes, I think we would have to con- sider whether to conform IRS regulations to this statute. In other words, what this committee says is the interest payment perhaps should be the interest payment we would allow as a deduction. Mr. Wmri~. Would there be a way of determining how much that might cost as far as the amount of income taxes which would be collected? Mr. BARR. I would say, Mr. Wylie there would be some loss in this area. Mr. W~IE. All right. Now, I would like to- Mr. BARR. Mr. Wylie, I am advised by my general counsel that there might be a distinction here. We would have to check the code, the tax statutes, and see whether they refer to the interest or finance charges. We are dealing here with finance charges. It may be that there will be a question of changing the income tax statute to conform the deductible charge with this committee's and the Congress defini- tion in this bill. I would think they possibly should be reconciled to avoid forcing to break out the interest from the credit charge. That would be a burden. Mr. WmIE. In changing the language, it is my hope that a tax in- crease will not result. You mentioned FHA and 11 loans, and I have had some experience in this area in closings, as a closing attorney, and I have not encoun- tered anything in the area of credit financing that has caused more heartache at the closing table. Is there something we can do about this? For instance, I have encountered many situations where the points were determined in advance on an FHA loan, say one point, and at the time of closing we found that the points were increased by 2 percent to three points. The seller had decided he was going to take whatever balance he received from the transaction, whatever money he had left and purchase a new home. After the points were added he did not in fact have enough money left to carry out his plan. Is there an area here of disclosure that we should get into? Is this an area where we can limit the amount of the points or set the number of points to a particu- lar period? Mr. BARR. I think that any limitation, any ceiling, inevitably be- comes counterproductive and costs the cor~ umer money. We have a vast market here in the United States. This market is an informed market and if the people who are in the market know the facts, I think this is the best that can be done. Attempts to set rate ceilings inevitably are counterproductive. We have a 41/4-percent ceiling on our Govern- ment obligations. It costs the taxpayer more money because we are forced to finance in the short-term area. I am not saying anything here PAGENO="0113" CONSUMER CREDIT PROTECTION ACT 103 we have not said again and again before the Ways and Means Com- mittee and the~Finance Committee. This ceiling, in effect, attempts to make us run counter to a market. I think the 6-percent ceiling on FIETA and VA has ended up costing the consumer money. I am speaking per- sonally, Mr. Wylie-this is not necessarily an administration opin- ion-but my belief is that ceilings on the amounts that can be charged are counterproductive; the real way to attack the problem in this area is by what you are trying to do here today; that is, by adequate, com- plete information. You can't force a man to lend his money at less than the market rate. You can't do it. There are two sides to the equation. There are people who save and who lend, and there are people who borrow. Sometimes they are the same people. But you cannot force a man to lend money at a rate which he thinks is below the market. Mr. WYLIE. Do you think the practice of FETA in not insuring a loan above 6 percent is the way to fix the cost of FRA money? Mr. BARR. From my standpoint, I would say "No." Mr. WYLIE. My time has expired. Mrs. SULLIVAN. Mr. Annunzio? Mr. ANNUNzI0. Thank you, Madam Chairman. I, too, would like to join my colleagues in expressing our deep appreciation to Mr. Barr and Miss Furness for the worthwhile and instructive statements. At the beginning of the hearings I read a statement on garnishment of wages. Mr. Barr, what do you think of the garnishment of wages, national exemption of garnishment of wages? Mr. BARR. I am sorry Mr. Gonzalez is not here. Mr. Gonzalez is a resident of a State that has experience with this. Mr. ANNUNZIO. Texas, Pennsylvania, and Florida have lays that exempt garnishments. Mr. BARR. We have not been directly involved in the study which Miss Furness mentioned. I can only admit it is a confusing area. I am concerned about it, and I convened a little group in the Treasury to discuss this. We got into a tremendous row. I agree with Inland Steel. I will admit a bias. It is a terrible load on an employer, especially if you are in a business like steel production, where you can't see that your output of steel is going to be affected by any garnishment procedures. Mr. WIDNALL. Will the gentleman yield? Mr. ANNUNzIO. I yield. Mr. WIDNALL. Does not the Treasury garnishee wages for unpaid bills? Mr. BARR. I was going to come to this. Mr. ANNUNzIO. That is one of the questions that I was going to ask, which I asked before. I think Mr. Yates has introduced a bill to pre- vent the Internal Revenue Service from garnishing wages. Mr. BARR. The other side of the issue is the question whether this would reduce the availability of credit to the consumer. This is an open question. I was going to remark, Mr. Widnall, that the Treasury is in a poor position to argue this because we are one of the greatest garnishers in the country, through the IRS. So you had better get yourself another witness. 83-340 0-67-pt. 1-8 PAGENO="0114" 104 CONSUMER CREDIT PROTECTION ACT Mr ANNUNZIO I would like to point out, Mr Barr, that Federal employees, as you know, cannot have their wages garnished Miss Furness, in your statement where you say `t study is being con ducted in order to give us more answers to this problem, I would like to point out to you and say that garnishment is an expensive, painful procedure which can cost a man's job. This has come to the attention of this committee and many other Members of Congress. The reports on the riots in Watts, Chicago, and other cities, indicate that it costs people their lives We have no statistics, but there are many, many people who have committed suicide because their wages have been garnisheed and they have no way in which they can cope with this problem. I ~ ould also like to point out to you when I read my statement, the untold thousands-millions, I'll go that far-of dollars it is cost- ing local governments, local courts like Chicago, Cook County, Los Angeles and Los Angeles County, the judges that have to be paid, the process servers, the bailiffs, bringing these people before the court, hay ing government take a part in settling these credit problems is `t very, very costly procedure. I do not think we can wait forever for a new study I do think that some of the people who speak for the adminis tration by this time, after 5 months of study, are being made to come to this committee with a positive statement as to whether or not they are in favor of a national garnishment law My time has expired and I w'Lnt to get to you on the national usury rate law. But we will do that some other time. Mrs. SULLIVAN. If it is all right with the committee, we have only two more members waiting to question the Secretary and Miss Furness, so unless the bells ring for a quorum call, we will just go on. In case we may not finish with you today, and in view of the fact that you are handling this legislation for the administration, we may want to call you back before this hearing is completed, Mr Sec retary Mr. Bingham? Mr BINOHAM Thank you, Madam Chairman I, too, would like to extend a welcome and compliments to Secretary Barr and Miss Furness and wish Miss Furness well in her very considerable re sponsibilities. I noticed, Secretary Barr, that you did not comment on the pro ~ isions of H R 11601 for administrative enforcement, that is, section 209 of the bill Do you have a comment on that at this time ~ Mr BARR Mr Bingham, the Federal Reserve Board has a position with which I am in sympathy to some extent, but I have not gone into it deeply I think they have the position that they would be delighted to draw up the regulations, and I can think of no agency of this Government who would be better qualified to draw up these regulations Whether or not they should create the administrative machinery to q dminister is another question I think th'it ~ e c'tn discuss this with the committee and I would be delighted to do so at a kter date I think the Fed believes, and with some justification, that rathei than hiring `i lot of people themselves, they c'tn let the FDIC do it for State banks, let the Home Loan Bank Board do it for the savings and PAGENO="0115" CONSUMER CREDIT PROTECTION ACT 105 loans, let the credit unions take care of it in their own particuhr bailiwick, and let the Federal Trade Commission handle their par ticular area Personally this appeals to me I hate to see a whole ness enforcement agency created if we can get by with splitting up the idministration among these `~gencies Frankly, Mr Bingham, I think there is going to be a large element of self enforcement It ~ ill be self enforcing in large measure Mr BINGHAM Is it not unrealistic, though, particularly for the small buyer, to think that he can take his problems to court or `my thing of that sort? Mr BARR I agree that is unre'ilistic, but as I say, it will have to be the forces of competition that will enforce this legislatioii. Wit:hout getting into the creation of an enormous administrative machinery, I am frankly puzzled as to how you could administer it any other way than the Fed suggested Mr BINGHAM Does the Treasury have a position on section 207, the proposed regulation of commodity futures trading? Mr BARR We do not I am very vague as to what we are trying to `tocomplish here We were silent on this because we are just not cer tam and until it is more closely studied, we are not in a position to comment Mr BINOHAM On the matter of revolving credit charges would it be fair to say that, if the position is sound, that an 18-percent-per- year figure is not accurate, then 11/2 percent per month cannot be accurate either ~ Mr. BARR. That is correct. That is absolutely correct. That is the heart of the matter. Mr BINGLIAM If we are going to allow the interest rate to be stated on a monthly basis, perhaps we ought to require the savings banks and other savings institutions to state the interest they pay on `i monthly basis. Mr. BARR. I think you would run into a storm there. Mr BINGHAM One more question You have spoken of the U S rule For the information of the committee, what is the alternative? The U S rule looks like a commonsense approach What other ap proach is there? Mr BARR May I supply that for the record, Mr Bingham? It is a rather scholarly area in which there are still philosophical differ ences I will supply it for the record (The information requested follows ) HR 11601 [SECTIoN 202 (F) (1)j ALTERNATIVES TO THE ACTUARIAL METHOD (U S RULE) In addition to the actuarial method there are at least 6 other methods for determining the annual percentage rate as indicated by the attached article reproduced from the 1961 Truth in Lending hearings Of these methods the constant ratio method and the Rule of 78ths are the only practical contenders However t~he constant ratio method always overstates the true rate The Rule of 78ths on the other hand gives rates which are very close to the true rate It is the position ef the Treasury Department that no method is very easy without the use of prepared tables and with the use of tables all methods are equally easy Therefore we recommend the actuarial method which gives the true rate PAGENO="0116" 106 CONSUMER CREDIT PROTECTION ACT Reprinted from The Accounting Review Vol. XXX, No. 4, October, 1955 RETAIL SELLING on the installment p)an is a widely accepted practice. Yet few buyers know the interest- rate equivalent of the carrying charges they pay for installment credit. That it is usually relatively high no one denies. This situation has led to suggestions from some quarters that sellers be required to specify on their sales contracts the interest-rate equivalent of their service charges, so that buyers will be better able to determine whether they are paying "too much" for the privilege of using installment credit. By the end of 1950, 12 states had passed laws to control installment financing in various ways; but no state requires that the finance charge be stated as an annual interest rate.' Perhaps one reason why state laws have not required the posting of equivalent annual interest rates is that several methods of computing rates are in use and all are apparently recognized as valid. This creates a confusing situation. It is desirable, therefore, to review some of the more commonly used methods of com- puting equivalent rates and try to deter- mine whether certain of them should be favored over others. The following problem is taken as a basis for discussion: equivalent annual rate is charged if it is bought on time? The symbols described below are used. Their values for the illustrative problem are shown in the column on the right. Description Em- I or d Equivalent annual interest or dis- count rate ? ~s p se C D ~n Number of payments Periodic (monthly) payment Pay7ment periods in one year Cash price. . . also equal to the cash received when money is borrowed Down payment. . . always equals zero when money is borrowed Sum of future installments-C--D +1 8 $20 12 $200 $50 $160 I' Interest and service, or carrying charge. . . equals pn+D-C $10 Cash price-C Carrying charge-I Eight methods of computing the rate equivalent of the service charge in the il- lustrative problem may be considered. These methods may be grouped into two broad categories, as shown in table 1. First is a group of four methods which apparently were developed from various practices of sellers or lenders in crediting the service charge on installment contracts to income.' These are shown under the heading "Accounting Approach." Second is another group of four methods, all of which are derived by methods of comput- ing the present value of future payments. They appear under the het~ding "Present- Value_Approach." `For further discussion, see the Inslailment Mathe- malice Handbook, M. V. Ayres (Ronald Press, New York, 1946). INTEREST RATES CHARGED ON INSTALLMENT PURCHASES' RALPH R. Borrs A»=~I FRED L. GARLOCK Agricultural Economists, U. S. Department of Agriculture 1 8 monthsX$20-pn Down payment - D $160 50 210 200 10 An article advertised for $200 cash may be bought on time for $50 down and $20 a month for 8 months. What `The authors are indebted to Hugh E. Stelson, Michigan State College, Ralph W. Snyder of Ceo. S. Olive & Co. and Wm. H. Rowe, of the U.S. bept. of Ag- riculture, for helpful suggestions and criticisms. `For further discussion, see articles by W. P. More, in the January and April issues, 1943, and in the Octo- ber, 1950, and January 1951 issues of the Journal of Business. Also see article by Johnson and Gregory, in the April, 1953 Issue oI the same Journal. PAGENO="0117" CONSuMER CREDIT PROTRCTION ACT Month BaJa,we outstanding at beginning of month Accounting approach ~------ Present-value approach Priority plan Constant- ratio plan' Direct- ratio plan Residuary plan Simple- discount plan' Simple- interest plan Small-loan and present- value plans4 (1) (2) (3) (4 (5 (6) (7) (8) 1 2 3 4 5 6 7 8 Dollars 150 140' 120 100 80 60 40 20 Dollars 150.00 131.25 112.50 93.75 75.00 56.25 37.50 18.75 Dollars 150.00 132.22' 114.16 95.83 77.22 58.33 39.16 19.72 Dollars 150 130 110 90 70 50 30 10' Dollars 160 140 120 100 80 60 40 20 Dollars 150.00 130.30 110.88 91.74 72.88 54.28 35.94 17.85 Dollars 150.00 132.19 114.12 95.78 77.18 58.30 39.15 19.72 Total 710 675.00 686.64 640 720 663.87 686.44 Equivalent annuatrate' .169 .178 .175 .1875 .167 .181 .175' Cash price of article $200. On time, it may be bought for $50 down and $20 a month for 8 months. Carrying charge is equal to $10 or $50+(8X$20)-$200. `Finance charge distributed over the 8 months at rate of $1.25 per month; therefore principal is reduced by only $18.75 per month. `The finance charge of $10 is added to cash price ($200) less the down payment ($50), making the beginning balance $160. The latter figure is also 8X$20. This plan is also known as the "Series-of-payments" plan. `Monthly rate of 1.457 per cent applied to outstanding balance. Interest for 6 rst month is $2.19 (or 0.01457 X$lSO), leaving $17.81 for reduction of principal. `Finance charge of $10 is deducted from first payment of $20, leaving $10 for reduction of principal; therefore the balance at beginning of second month is $150-$10 or $140. * The sum of the digits from 1 to 8 (the number of payments) is 36; therefore 8/36 of the finance charge, or $2.22, is taken from first payment, leaving only $17.78 to be applied toward principal. During the second month, 7/36 of the $10 or $1.94 is earned, leaving $18.06 for reduction of principal. All the finance charge ($10) is taken out of last payment, leaving only $10 for reduction of principal. * Finance charge (of $10) divided by one-twelfth of total shown just above annual rate, except for present-value plan (see footnote 9). For example, one-twelfth of $710=$59.17 and $lO÷$59.17=0.l69 or 16.9 per cent for the Priority Plan. This rate (0.175) is for the small-loan plan. It is 12X0.01457. It may also be obtained by dividing $10 by one- twelfth of $686.44. The rate for the present-value plan is 0.190. The only difference between the small-loan and present-value plans is that under the latter the monthly rate (0.01457) -is converted to an effective annual rate, that is, (1.01457)11_i -~~0.1896 or approximately 19 per cent. As shown, the monthly balances are the same under both plans. 107 TABLE 1 BALANCES OUTSTANDING, av MONTRS, AND ANNUAL RATE EQUIVALENTS ov THE CARRYING CHARGE' THE ACCOUNTING APPROACH The group of methods described by the heading "Accounting Approach" includes the following: The priority, or yield-minimum, plan, under which the finance charge is considered to be deducted from the first payment. If this charge is more than the periodic payment, the excess is deducted from the second payment before the remainder is applied toward reduction of prin- cipal. The constant-ratio, or uniform, plan, - under which the finance charge is considered as being divided equally over the installment period; that is, the seller or lender cre~1its his income account with an equal part of each installment.4 The direct-ratio, or 12/78, plan, under which the finance charge is considered as being appor- tioned over the installment term in decreasing amounts; that is, the seller or lender credits a decreasing proportion of the periodic payment to his income account. The residuary, yield-maximum, or Merchant's, plan, under which the finance charge is-considered `Snyder's Essential Business Mathematks (1947 edI- tion), pp. 182-183- also Cassidy and Robusto's Busi,sess Mathematics (1951 edition), p. 98. PAGENO="0118" Beginning of month End of month Balance Mont/s outitand- lug' . ~`~* ~ prsncspaP Payment on finance charge3 Total paid (1) (2) (3) (4) (5) DOllars Dollars Dollars Dollars Priority meth od 1 2 3 8 150 140 120 20 10 20 20 20 10 0 0 0 20 20 20 20 Constant-ratio method 1 2 3 8 150.00 131.25 112.50 18.75 18.75 18.75 18.75 18.75 1.25 1.25 1.25 1.25 20 20 20 20 Direct-ratio method 1 2 3 8 `150.00 132.22 114.16 19.72 17.78 18.06 18.33 19.72 2.22 1.94 1.67 0.28 20 20 20 20 Residuary method 1 2 3 8 150 130 110 10 20 20 20 10 0 0 0 10 20 20 20 20 Simple-discount method 1 2 3 8 160 140 120 20 - - - - - - - - 20 20 20 20 Simple-interest method 1 2 3 8 150.00 130.30 110.88 17.85 19.70 19.42 19.14 17.85 0.30 .58 .86 2.15 20 20 20 20 Small-loan and present-value methods 1 2 3 8 150.00 132.19 114.12 19.72 17.81 18.07 18.34 19.72 2.19 1.93 1.66 0.29 to be deducted from the final payment or, if it amounts to more than the periodic payment, any excess is deducted from the next-to-last payment.' Under this plan, the seller or lender therefore credits his income account out of the last install- ment(s). By `each of these methods, the service charge is considered to be $10 in the illus- trative problem. In each case, the account balance of the purchaser is considered to start at $130 and to be reduced monthly during the term of the contract as shown in table 1. However, the amounts by which the account balances are reduced vary ac- cording to the method used in taking the payments into income, as shown in table 2. From the total of the account balances (table 1) and the service charge, the rates according to the four methods' described above may be computed as follows: $10 Priority $710x1/120169 Constant ratio - $1 =0.178 $675X 1/12 Direct ratio $68664X1/120173 $10 Residuary $o4oxi/i201875 Formulas for the computation of these rates and those for the other four methods are shown in table 3. Use of these formulas makes it unnecessary to construct a table of beginning of the month balances in computing a rate although the latter pro cedure may sometimes be as easy as the use of formulas, particularly for the shorter installment terms. These formulas are ap- plicable only for the common case in which all installments are equal in amount `Richtmeyer and Foust's Business Mathematics (1950 edition), p. 213. 20 20 `Except for simple-discosfnt method, the payments 20 on principal shown in this column add to $150. 20 $ Except for simple-discount method, the payments on the finance charge shown in this column add to $10 5 balances in this column a~e shown in table 1 For each method, the monthly payments In this for each month, by methods. column total $160. 108 CONSUMER CREDIT PROTECTION ACT TABLE 2 BALANCE OC-rSTANDING AND DISTRIBUTION OF MONTHLY PAYMENT, FIRST 3 MoNTHS AND LAST MONTH OF INSTALLMENT PERIOD, BASED ON ILLUSTRATIVE EXAMPLE PAGENO="0119" Method Formula/or or d Rate/or example Priority' 2m1 pn(n+1)-21 Constant ratio 2m! (C-D)(n+1) Direct ratio 6m! [3pn(n+1)J-21(n+2) Residuary' 2m! [2(C-D)-ph](h+1) Simple discount Or Set eS-Of-pa)fliwlltS 2m1 pn(,s+1) Simple interest 1 1 1 1 C-D ~+_i+T~+'~ ~ Small loan C-D a~, All values known except r. After solving for r, then i- 12r Present value Same as small-loan method except i-(1+r)"--l 1 Accurate in the typical case where amount of carr7ing charge! is less than the periodic payment p. A formula applicable when I is greater than p is given by Ayres in "Installment Mathematics Handbook." h-7~ It represents the integral number of times p is contained in the cash balance C-D. In the example, C-D 150 since ----7.5. p 20 As indicated in footnote 1 to table 3, one tions given below, we find that the service of the formulas gives a precise answer only charge of $10 is deducted from both sides when the finance charge amounts to less of each equation, thus causing aggregate than the periodic payment. payments of only $150 to be discounted The rates shown above can be computed to a present value of $140. As shown in the by simple-discount methods if the service next section, true simple discount requires charge is omitted from the payments to that all of the payments totaling $160 be be discounted. Solving for d in the equa- discounted to a present value of $150. Priority method $150- [$10(l.-d/12)+$1O]+$20(1-2d/12)+~ +$20(1-8d/12) Constant-ratio method $150- [$18.75(1-d/12)+$1 .25)+[$18.75(l-2d/12)+$1.251+ + [$18. 75(1-8d/12)+$1.251 Direct-ratio method $150- [$17.78(1-d/12)+$2.22]+[$18.06(12d/12)+$1.941+'' +[$19.72(l-8d/12)+0.28) Residuary method $150-$20(l--d/12)+ +$20(1-ld/12)+- . .+[$1O(1-8d/12)+$lOJ CONSUMER CREDIT PROTECTION ACT 109 TABLE 3 Foueuias pot CoMPUTING TEE INTEREST-RATE EQUIVALENT OF CARRYING CRARORE ON INSTALLMENT SAI.ES ox BoRRow~ Moiety (All installments equal in amount) 0.169 .178 .175 .1875 .167 181 .175 .190 PAGENO="0120" 110 CONSUMER CREDIT PROTECTION ACT The four methods of rate computation described under "Accounting Approach" are relatively easy to apply. As stated earlier, they apparently were developed from various practices of sellers or lenders in crediting to income their service charges on installment and loan contracts. On the same contract, the rates computed depend on the accounting practices used. It seems obvious that all of these rates cannot be accurate from a mathematical standpoint. For that reason, attention is now turned to the methods grouped under the present approach, which are based-not on ac- counting procedures-but on mathemat- ical concepts. THE PRESENT-VALUE APPROACH A true discount (or interest) rate would appear to be one that will make the two purchase plans offered by the seller equiv- alent at the date of sale. A buyer may ob- tain the article for $200 cash or he may buy it on time by paying $50 down and $20 a month for 8 months. Basically, the problem appears to be, "At what rate of discount (or interest) can 8 monthly in- stallments of $20 each be made equal to the difference between the cash price ($200) and the down payment ($50)?" SIMPLE-DISCOUNT METHOD A rough but easy approach to this problem of discounting future install- ments to equal the difference between the case price C and the down payment D is to set up an equation using the simple- discount rate d as follows: $200= $50+$20(1 -d/12)+$20(1 -2d/12) + ... +$20(1-7d/12) +$20(1 -8d/12). Solving for d gives 16.7 per cent. This is the rate shown in column 6 of table 1. There it was obtained by dividing the finance charge ($10) by one-twelfth of the sum of the assumed beginning-of-the- month balances, starting with $160 for the first month.' It appears that the sim- ple-discount rate can be obtained from the sum of the beginning-of-the-month balances only by including the finance charge as part of the beginning balance. The simple-discount method, also called the series-of-payments method, is easy to apply. However, rate equivalents com- puted by this method are not interest rates. For example, the present value of a future installment, at simple discount, cannot be treated as an amount that will "grow" at the same percentage rate to an amount equal to the periodic payment when it be- comes due. Discount rates are based on maturity values (amounts to be paid), whereas a present value that is computed by simple or compound-interest methods will grow to its maturity value at the com- puted rate. Rates computed by the simple- discount method are less than comparable rates computed at simple or compound interest.7 The latter, however, are more difficult to determine. The general formula for a simple-dis- count rate equivalent 2rn1 pn(n-f- 1) may be derived by solving the following equation for d C'-D+p(1-d/tn)+p(1-2d/rn)+ +p(1 -nd/rn). It may also be obtained by dividing the See table 2 for details with respect to the first three and last months. The equivalent of this method is given in Rosenberg's Business Mathematics (fourth edition), p. 323; in Richtmeyer and Foust's Business Mathe- matics (1930 edition, p. 212; and in Van Tuyl's Business. Arithmetic (1947 edition), p. 341. It is, however, called an interest rate. `In an article in the July, 1952 issue of this Raviaw (p. 366), Stelson shows that the results of four of the methods are arrayed, from lowest to highest, as follows: (Simple discount)<(SmaIl loan)<(Constant ratio) <(Residuary) PAGENO="0121" CONSUMER CREDIT PROTECTION ACT MonI/e.r before installment is due Present value of future installments Discount or finance charge Amount of installment payable at due dais Number 1 2 3 4 3 6 7 8 Dollars 19.72 19.44 19.17 18.89 18.61 18.33 18.06 17.78 Dollars 0.28 .56 .83 1.11 1.39 1.67 1.94 2.22 Dollars 20 20 20 20 20 20 20 20 Total 150.00 10.00 160 1 Discount rate 161 per cent a year; installment term, 8 months; periodic payment, $20. `Collected as installments are paid. Figures in this column are the same as for the direct-ratio method ex- cept that they are in reverse order. carrying charge I by 1/rn times the sum of the assumed beginning-of-the-month balances, starting with pie for the first month. This sum also includes a balance of pie--p for the second month, pn-2p for the third month, and pn-p(n---1) for the last month. The sum of these balances is pn(n+1)/2. Multiplied by 1/rn, the re- suit is pn(n+1)/2m, and ______ 2rn1 2rn pn(n+1) A discount rate equivalent based on assumed beginning-of-the-month balances must include the finance charge in the first month's balance, that is, the begin- ning month's balance must include or be the sum of all future payments, because discount is figured on maturity values rather than present values. SIMPLE INTEREST The viewpoint might be taken that the seller has "loaned" the buyer the differ- ence between the cash price and the down payment. This amount (C-D) might be considered as the sum of the present values, at simple interest, of the respective future payments. The question, then, is.. . At what simple-interest rate would these amounts "grow" to the amount of each monthly payment by the time it becomes due? In the example 1 +20 1 ~l $150=20[j_j~,12j L-f-2i7i~i +".20L L1+8i/12 By substituting successive values of I in the simplified equation, the summation of thereciprocal series is found to be 0.625 1607 when 1=0.180. For 1=0.181, it is found to be 0.6249478. So, by interpolation, the required value of I is 0.180756, or 18.0756 per cent. In table 5, the $150 "borrowed" is made up of the amounts shown in column 3. The $19.70 for the first month "grows" to $20 at the end of the first month at an annual rate of 0.180756, or a monthly rate of 0.015063. At that time, it is paid to the "lender." The $19.43 "grows" to the $20 that is paid at the end of two months, and so on.8 The distribution of the finance charge, by months, is shown in column 4. The annual rate at simple interest also may be verified by dividing the finance charge ($10) by one-twelfth of the sum of the beginning-of-the-month balances ($663.87). From the preceding discussion, it can be seen that the computation of an equiva- lent annual rate at simple interest is very complex. A rate so computed is compa- rable to one computed on money borrowed from a lender who charges interest on the `If interest at 0.015063 per month were collected on the unpaid balance, compound interest would be charged and the last payment of $20 would lack 36 cents of canceling the debt. It takes a monthly rate of only 0.01456 to exactly amortize the $150 in 8 months at $20 a month. (See small-loan and present-value meth- ods.) TABLE 4 Sruptx-Dsscotywr METE0D: BREAKDOWN OP PRESENT VALUE OF FUTURE INSTALLMENTS AND Auouur or DISCOUNT, BY MONTHS, BASED ON EXAMPLE' 111 PAGENO="0122" CONSUMER CREDIT PROTECTION ACT 112 TABLa S SnrLx-IirrEa~ST MaTuoD: Bawocxs OUTSTANDING si MONTnS AND DlsnuntrrloN OF MONTISLY PAYMENT BETWEEN PstINcn'AL AND FinANcE CUARGE, BASED ON ExAMI'LE Beginning of month End of month Month Balance outrtanó.- ~ . Paid on f'rsncif'al Paid on finance charge Total P'"'~ (1) (2) (3) (4) (5) Number 1 2 3 4 5 6 7 8 Dollars 150.00 130.30 110.88 91.74 72.88 54.28 35.94 17.85 Dollars 19.70 19.42 19.14 18.86 18.60 18.34 18.09 17.85 Dollars 0.30 .58 .86 1.14 1.40 1.66 1.91 2.15 Dollars 20 20 20 20 20 20 20 20 Total 663.87 150.00 10.00 160 loan at its maturity date As applied to installment credit, the simple-interest method may be thought of as a series of individual loans at the beginning of tile installment term. Each is equal to the present value, at simple interest, of a fu- ture installment. Their total is equal to the difference between the cash price C and the down payment D. Each will grow to meet a periodic payment in the allotted time~ at the computed rate. The interest is therefOre collected at maturity date out of the maturity value (periodic payment). The complexity of the calculations in- volved is, however, an insurmountable argument against extensive use of the method.° ~OMPøUND INTEREST At compound interest, the cash price ($200) must equal the down payment `The relation between a simple-discount rate and a simple-interest rate for a series of payments is... 2m~ ri 1 1 ~ so-sn I +-;+~~~ n(n+1) L.m+s m+2e m+ns The formulas d-i/1+ni and i-d/1--nd donotapply In converting from s to d or from d to I when asenes of payments is involved. ($50) plus the present value, at the monthly rate r, of the series of $20 pay- ments to be made for 8 months in the future. After solving for r, this monthly rate may then be converted to an equiva- lent effective annual rate i. For example, in the equation $200=$50+$20(1+r)'+$20(1+r)'+ as~r= 7.5. By interpolation in tables showing the present value of an annuity of $1 per period, r=0.01457. But since 1+in (1.01457)22, by logarithms, 1=0.190 og 19 per cent.1° The reasoning behind the compound- interest method is the same as for the simple-interest method: What rate will. make the present value of future install- ments equal to the difference between the cash price C and the down payment D? This present value for each installment may then be brought forward to the due date at the required rate, at which time, with interest, it exactly equals the amount of the installment. The following tabula- tion shows, on this basis, the present val- ues of the respective installments, and the amounts of interest included in each: Interest due at maturity date Dollars 0.29 .57 .85 1.12 1.39 1.66 1.93 2.19 10.00 The computed monthly rate (0.01457) also may be used to amortize the debt ($150) by payments of $20 a month for 8 10 See table 2 and column 8 of table 1. The nominal rate by the small-loan and direct-ratio methods is 12r or 12X0.01475, which equals 17.5 per cent. Present value at beginning of installment term Dollars 19.71 19.43 19.15 18.88 18.61 18.34 18.07 17.81 150.00 PAGENO="0123" CONSUMER CREDIT PROTECTION ACT months, as shown in tables 1 and 2. If this procedure is followed the order of magnitude of the interest payments is re- versed from that shown above The begin ning balance of $150 draws $2.19 interest for one month, so that $17.81 is left for reduction of principal out of the first in- stallment (table 2). The balance at the beginning of the second month ($132.19) draws $1.93 interest, and $18.07 is left for reduction of principal. The balance at the beginning of the third month is therefore $114.12. At the beginning of the eighth month, the balance outstanding is $19.72. At the end of the eighth month, the inter- est on $19.72 at 0.01457 is 29 cents. The last payment of $20 therefore pays off the debt. Under the small-loan method, the monthly rate r is computed at compound interest, as above, but the annual rate quoted is a nominal one, or 12 times the monthly rate. Under the preseni-value or present-worth method, the same monthly rate is converted to an effective annual rate by compounding itmonthlyfora year; that is, the effective annual rate 113 mitting the full amortization of the "loan" by the periodic payments within the specified time. VALIDITY OP METHODS From the standpoint of a buyer who merely wants to determine whether better terms are offered by seller A or seller B, it makes little difference which method of computing rates is used-provided the same method is used throughout. Each method wifi identify the higher or the lower rate of charge on installment con- tracts. However, relatively few consumers know how to apply even the simplest of these methods, and several of the methods do not provide an accurate measure of the differences between rates. Any method recommended for general use, including use by sellers, should be accurate and as easy as possible to compute. By this standard, the direct-ratio method appears preferable to any of the other methods. It is highly accurate and relatively easy to use." The three other methods described under "Accounting Approach" and the simple-discount meth- i- `i+r"2- 1 od described under "Present-Value Ap- -` / proach," have little mathematical validity. The compounding of interest may occur As stated previously, the simple-interest either in the accumulation of a sinking method is too complex to be of practical fund or in the amortization of a debt. (See value to either buyers or sellers. footnote 8.) If interest is collected monthly In summary, it can be stated that of the eight as in the example, from periodic install- methods described, the compound-interest (small- ments before the remainders are applied loan and present-value) methods and the direct- toward reduction of principal the result- ratio method give the same monthly rate. This monthly rate is the only one by which the terms ing effective annual rate is more than 12 offered on an installment purchase contract can times the monthly rate used. The higher be compared precisely with the cost of an install- the monthly rate, the greater the differ- ment loan having the usual provision for monthly ence between the nominal and effective payments of interest on unpaid balances carried rates. From this standpoint, the present- "while compound-interest methods provide a cri- value method is more accurate and there- tenon of accuracy in all calculations pertaining to inter- fore superior to the small-loan method. ~t te; th~dine~ra~i~ met~~od mont rate In other words, the computed monthly by compound-interest me~°o~. In the example, the rate may be applied to monthly balances, ~~J8 ~t~o ~ ~nd~jec~-ratI~O thus earning interest on interest, yet per- reached. PAGENO="0124" 000% %J% ~. ~3 -0 `C 00 40% Ci~ ~ 03 0 C a E C ~CD ~ ~ CD~ ~ `rio o-3 00~ 0 ~ ~ CD CD0~ CD CD° k (.% 4 ~ 0oi .i -~ 003 0~ - -1 03 -~ i' ~ + ~0 00 (0-0 ~ ± .0' 0 00 0 =0 ~ ill ti~. £1 `-0 *000 I 0% 030o- (4 -~ (~ P3 ~ 0 4~ Co Co (do Co -4 Op 0 `C~ioOooo0-(ooQo 004'0-4'O (do (4-40% 00-40 (do 03 ~ 0 (~ (do - - - 0304 ~ (do Q0 -4 `0-03 Qo 0 (do 0304 (do 03 (do (40303 ~ (4-4 ~4 (MOO 00-4 - 400304 ~ (do 0% -0 \0' ~ 00030000 00(3 (do 03000(4000% 00 (do 0403(3 J ii -3 I 0 toO (do 0% (40 `C `C - - - 0% `C ( ~ CoO 0 z 02 C) 0 C) 0 C) CoOP `C 00303 ~ (do 0000- ~o 00(3030% `-00000 (do 0-30 `CO (900-3-'-'-' 00 `C -0 (4(40-300 (do t3~ (4 `-0 (do `-P (do 030% 0000 0O-OO0O0'C~~ P3'Co-'C~000~00-3 0$ (do Co Co -0-400 `C `C 0-3 ~ 0% 00 ~ 0-000030% 00% 33000 0~ ioOPOPtoi PAGENO="0125" CONSUMER CREDIT PROTECTION ACT 115 ratio rate is 17.5 per cent. If interpolation in the table is necessary, it is accurate. One twelfth of this rate is precise as a monthly rate. It will amortize the debt in exactly 8 months. The nominal rate (twelve times the monthly rate) shown in the table also would serve buyers in decid- ing between the competing offers of retail merchants. It should be remembered, how- ever, that the rates shown in table 6 are nominal and not effective rates. To obtain the latter, one-twelfth of the rate shown in table 6 must be compounded for a year, as shown for the present-value method. This additional step is not necessary to serve the purpose of most buyers or bor- rowers. Table 6 also may be used for computing the direct-ratio rate equivalent on install- ment loans. For example, if a finance company offers to loan $100 on repayment terms of $7.75 per month for 15 months, the finance charge is $16.25 (or 1SX$7.75 minus $100). The ratio of $100 to $16.25 is 6.154. By interpolation in table 6, it can be determined that the contract involves a (nominal) rate of 23.3 per cent.14 "23.8-O.154(23.8--20.6)-23.3. PAGENO="0126" 116 CONSUMER CREDIT PROTECTION ACT Mr. BINGHAM. Finally, I would like to say, along with some of my colleagues, that I do feel a certain disappointment that the administra- tion has not been able to come up with any meaningful comments on the new substantive provisions of H.R. 11601 other than to say that they need further study. I think this is a disappointment to those of us who have introduced this bill. We expected to have discussions during these hearings on the merits of these new provisions and it seems to me we are entitled to know what the administration's thoughts are on the merits. Mr. BARR. I quite agree, and before these hearings are concluded I will personally make every effort to see that the administration's position on these provisions is transmitted to this committee. You are making a substantive effort and you should have an opinion. The Treasury, however, I might add, Mr. Bingham, is not in a very good position to comment. Mr. STEPHENS. I understand clearly, though, the position of the Treasury is that you favor the truth-in-lending provisions--there is no question, about the truth-in-lending provisions, of full disclosure of the charges. Mr. BARR. That is correct. If I may rephrase your statement, it is not serious doubts about the other provisions, it is lack of information. We simnly don't know. Mrs. SULLIVAN. We have with us this morning the ranking minority member of the Committee on Banking and Currency who is not a mem- ber of the subcommittee but is very interested in this legislation and introduced H.R. 11601. Mr. Widnail, I know you wanted to ask some questions, and you are, of course, with Chairman Patman, an ex officio member of our subcommittee. Mr. WIDNALL. I, too, want to thank the witnesses and compliment you on your remarks. Joe, you are an old hand before the committee and a former colleague, and you are doing a fine job in the Treasury. Miss Furness, I want to comment on your testimony, too. You said something about the purchase of an automobile. Do you think it ought to be disclosed to every purchaser the minute he buys that car that it depreciates 25 percent? Miss FURNESS. I don't know if we are ready to hear that. Mr. WIDNALL. Just try to get your money back. Mr. Secretary, you did not testify on how you felt about the effec- tive date of these proposals. The bill that has been submitted by the chairman has an effective date of July 1, 1968, and the Senate bill, similar to H.R. 11602 which I introduced, had an effective date of July 1, 19~9. Has the Treasury taken a position on this? Mr. BARR. Mr. Widnall, I am not trying to duck this issue. I believe the administering agency, the Federal Reserve Board, would be in a better position to give you adequate testimony on this issue. I would say this. I would like to see it go into effect as quickly as possible. The question is, can they get the regulations out, can they decide the ques- tion of who is going to administer the legislation so that it can go into effect in an orderly way. That is the only issue, and I have not examined that issue. I think the Fed can give you a better answer. I would defer to the Federal Reserve Board, because they have the responsibility. PAGENO="0127" CONSUMER CREDIT PROTECTION ACT 117 Mr. WIDNALL. I certainly feel we should have testimony on that. It is quite import&nt. Mrs. SULLIVAN. Mr. Secretary, can the Federal Reserve Board speak for the administration on that? Mr. BAlm. They are going to be administering this law, Madam Chairman, and I think we would have to defer of necessity to them. If they say they can't do it by June 30, 1968, or that they suggest another date, since they have the responsibility to administer it, I think we in the administration must defer to them. Mrs. SULLIVAN. They probably would not like to administer it. Mr. BARR. I am sure that is true. They are very clear on that. It is like handing them a pet rattlesnake. Mr. WIDNALL. It is also important to give time to the States to adjust to the changes that are going to be made. There are four things that you mentioned-four things that were mentioned by you indirectly that you want further study on, the 18- percent national limit, standby consumer credit controls, and com- modity margins, is that correct? Mr. BARR. That's correct. Mr. WIDNALL. Do you support Federal advertising controls? Mr. BARR. Yes, sir. Mr. WIDNALL. I would like to ask you a serious question. Do you think when income tax forms are mailed out to the American consumer and taxpayer that the Treasury should say they are paying 10 percent interest on their tax bill? Ten percent national interest, do you think they should say that? Mr. BARR. I don't know. We would equate it not with the budget but with the amount of money we owe as a nation. Mr. WIDNALL. I think they should know that just as well as the dis- closure in another direction. Ten percent of their money is gthng to pay interest on debt, and it might be well also to have the Treasury disclose how much they are not disclosing to the American public that they owe through the purchase of participation sales and certificates. Mr. BARR. We owe that, Mr. Widnall, no question about that. We disclose-in the budget of the United States, which is rather extensively passed around this country-th~ precise amount of interest we are going to pay, the precise amount of the contingent liability of the United States, including PC's, and including a lot of other things, too, as you know, Mr. Widnall. Mr. WIDNALL. I think the American public reads the Peanuts cartoon more than they read that disclosure. Mr. BARR. The budget is rather widely read in the Congress of the United States, I might say. And through them it is disseminated rather broadly to the American people. Mr. WIDNALL. There are some areas of disclosure we have not touched on that have already interested me when it comes to credit. If you go to a restaurant and pay cash you dispose of the whole situation. If you have an American Express card or Diners Club or something similar, the restaurant itself is paying 7 percent to those agencies. The cash customer is not getting out for less than the person paying credit is getting at the regular cost. I wish there could be some kind of dis- closure as to how the person paying cash is being hooked. PAGENO="0128" 118 CONSUMER CREDIT PROTECTION ACT Mr. BARR. This is not an administration position, but I already have volunteered my personal thought that cash buyers are discriminated against. I intend to discuss this with Miss Furness. Mr. WIDNALL. I can remember not many years ago when you obtained any substantial credit you had to have a real credit disclosure. Today you sit home aiid all of a sudden you receive in the mail, without even asking for it, credit cards to a grocery chain, to department stores, to purchase gas and the like. I think some day we are going to have to look into the indiscriminate sending out of credit cards to people and then the consequent revolving charges that evolve after the use of that credit. Part of the credibility in this country has been through the actual mailing out without anybody looking into the background of the person, of the credit card, and it has helped to build up higher costs to the consumer-food, meat, and everything else that you pur- chase in the stores. Somewhere along the line is a place where we must investigate. Miss FURNESS. May I interrupt, Mr. Widnall? I got a card this weekend from a bank in New York which they call the Everything Credit Card and I read a press release about it. You do not have to have money deposited with that bank, they are just sending them out and saying, "Come on fellows, spend," and I bitterly resent having the card. I dia not ask for it, I do not want the card, and when you think of the unwise hands those cards fall into, it is a shocking thing. Mr. WIDNALL. Whoever thought it up, thought of a great gimmick for the American public and one that I think a lot of people will want, but we are going to live to the day when we rue anything in connection with it and everything in connection with it. Mr. STEPHENS. Mr. Widnall, will you yield for a minute ~ Mr. WIDNALLP. I will yield. Mr. STEPHENS. Credit cards are now what people think of as "instant money." Mrs. SULLIVAN, Mr. Secretary, I want to go back to the question of delay in making this law effective. In your statement on page 6 you mention that there is no justification for the claim that the annual rate disclosure requirement of the bill will prejudice lenders under State usury laws. In addition, you say the disclosure requirement would not change the legal status of existing credit charge practices whi are in the State laws. So there really is not any reason why this has to be postponed, is there ~ Mr. BARR. This is what we say in `the Treasury. I think you are going to find a few people who disagree. We don't claim `to know the situation in every State. This is the Treasury's position and I will stand by it. This is the way we think a reasonable man would look at it. The committee can decide whether the Treasury is right. I would like to get our position clear. We would like to get the truth-in-lending law on the books as quickly as possible. Mrs. SULLIVAN. I would like to go back to the issue of the $10 ex- emption in the Senate `bill. Many people think this applies only to items costing $1 `~ or less, rather than to a credit charge of $10. But as you pointed ou' it means items costing up to $100 or so, on which the finance charge is less than $10. Do you have any idea what proportion PAGENO="0129" CONSUMER CREDIT PROTECTION A~T 119 or percentage of the purchases made by the family, the average family amount to less than $100? Mr. BAiu~. We will supply that, Madam Ohairnan. (The information may be found on p. 98.) Mrs. SULLIVAN. I was just looking at one of the `ads in yesterday's paper-and I am not going to mention whose ad this is, but they have a furniture supplement in the Sunday paper, 12 pages in color-and most of the items in it are priced at less than $100. I `am sure this was' not an attempt in advance to avoid or evade or get around the Senate bill, but here is a cover page of bedroom items, each. listed separately at $39.88. Of course, `in the back of it somewhere they talk about open stock. They have the night stand listed separately, `they have the `bed listed separately, they have the regular chest listed se~arateiy, and they have a bachelor chest listed separately, and then on other pages they list dining room pieces, all priced individually, and so on This is one of the thin~s that we fear. If there is an exemption'of all items on which the credit charge is less than' $10, it would ~be so easy to evade the real meaning of this bill so as not to require disclosure on `most of the items people buy. Mr. BARR. This is one item where we concur completely. Mrs. SULLIVAN. Mrs. Dwyer, did you have `any further questions? Mrs. DWYRR. Oneother question. I wouldlike to go back to that `1$~ percent national usury. I am snrprised-I am told that approximately 44 percent of the large merchandising industries employ an adjust~ balance system on its revolving charge accounts which that industry claims results in an effective~ annual interest charge on the average account of far less than 18 percent. If the entire industry which uses 11/2 or 1 percent a month on either the adjusted balance system or the opening balance system is required to annualize and convert out to 18 percent, are you not really risking and encouraging all merchandisers to reprogram their systems so that their finance charges yield as close to 18 percent as possible? And in this manner are we not risking rnil~. lions being added to the amount paid by consumers to their revolving charge accounts? Mr, BARR. Mrs. Dwyer, I don't think so. As I said several times to- day and I said it in the Senate, it seems we and the retailers just don't communica~te. There is Only one philosophical judgment you have to make hers; that is, when is the date that this credit transaction starts? If it starts on the date of the sale, then any of these assumptions they are making would be correct. If it starts on the date they impose the credit charge then we are right. So it just boils down to that. Mrs. Dwyer, I believe that this is an extremely competitive country. I `can't believe everybody would increase their rates. I just can't be- lieve it. Mrs. DWYEn. Do you feel `that the consumer really shops around competitively for credit in this country? Mr. BARR. I don't believe he does today. I think if this legislation were enacted, and especially with the advertising provisions in the bill, I think you are going to see a lot more shopping than has been characteristic hi the United States. Mrs. DWYER. If this provision prevails, will it not be difficult to communicate to the consumer that we are not really advocating 18-per- cent interest? 83-84O--f~7---~pt. 1-9 PAGENO="0130" 120 ÔONSUMER CREDIT PROTECTION ACT Mr. BARR. Are you talking about the 18-percent usury limitation? Some retailers might well decide that they can cut their rate down. They will go to 1~ percent, 13 percent, 14 percent, whatever their costs would be. I am sure competition will take care of that and I am de- lighted to let it take care of it. As far as the usury law is concerned, as I indicated, I have strong reservations on any limitation on rates. Let the market determine it. Mrs. DWYER~ Are not most of the abuses though in the field of advertising? Mr. BARR. I think so. I quite concur. I think that's the strongest part of the bill in this whole area of advertising. Mrs. DWYER. Not on the monthly statements? Mr. BARR. Well, if you are going to have advertising, you are going to be advertising these rates, I think. The advertising, to be meaning- ful, must be standardized. I think that the fellow who is going to ad~ vertise a monthly rate has the advantage over the man who is forced to state an annual rate. So I would say that we should come to a stand- ard that is meaningful for all credit purchases, and then let the con- sumer do his informed shopping. Mrs. SULLIVAN. There is one other thing that I woi3ld like to clear up, Mr. Secretary. I may get twisted in explaining this to you. I want to know why it was necessary to put in the Senate bill the provision that the' annual percentage rate does not have to begin until July 1972, and that until then they can use `the dollars per `hundred on the average unpaid balance. I asked you before if the dollars per hundred on the average unpaid balance is the same thing exactly as the annual percent- age rate that they will have to show after 1972, and you say yes, it is. Mr. BA*R. That's right-dollars per hundred per year on the average unpaid balance as in H.R. 11601. Mrs. SULLIVAN. But still we have this provision in the Senate bill that they have 5 years in which to do this, hut ~tre they not doing it already when they use the dollars per hundred on the average unpaid balance? Mr. BARR. That's correct, the same thing. Mrs, SULLIVAN. So it does not seem to mean anything in the Senate bill at all, does it? Mr. BARR. It does not mean anything to us in the Treasury, Madam Chairman. You can hear the testimony Qf the lenders ~who will be com- ing before you and you can be guided by that. Tous itlneans nothing; it is the same thing. Mrs. SULLIVAN. Is there not a danger of it being misinterpreted? Mr. BARR. Very probably. Mrs. SULLIVAN. Before we finish, you have not shown us your table. Mr. BARR. I'd be delighted to. Mrs. SULLIVAN. If you can give us an example of how that table would be used. Mr. BARR. I'd be delighted to. Mrs. S~JLLIVAN. And used also on revolving credit dharges. Mr. BARR. Revolving credit charge-revolving credit is very simpTe. Just wh~tever monthly rate they establish, multiplied by 12. Mrs. SULLIVAN. How would the table that you have devised be used? Mr. BARR. If you turn back to the back of my statement you will find this big table here at the back. You might like to take that off, and if you will turn to example 1 which follows the back of my statement. PAGENO="0131" CONSUMER CREDIT PROTECTION ACT 121 This example is the purchase of an automobile for $2,000. The finance charge is $419.92. What you would be paying is $2,419.92. The monthly payments are $67.22 each for 36 months. What is the annual rate of finance charge? We have this little form prepared and you just follow through on the steps. The first step is to move the decimal in the amount to be financed-that is $2,000-wait a minute, I made a mistake-it is not $2,419.92, it is $2,000 to be financed, and $419.92 is the finance charge. Mrs. SULLIVAN. Where is the $2,000 on the table? Mr. BAlm. I will come to that. You move the decimal place on that $2,000 to be financed two places to the left. That gives you $20. You divide $419.92, the finance charge, by $20, and that gives you a figure of $20.99 or $21. That is the finance charge per hundred. Your step 2, if you have all these installment transactions which are uniform, the first payment is due 30 days after the transaction. If you have an unusual transaction you use 2(a). If it is 2.1 days or if it is 3 months, then you use that step 2(a). This isn't anything unusual, there isn't anything unusual about this so you ignore it. So you have 36 payments. You have the finance charge of $21 per hundred, you take this big table here, you read down the left-hand column, the number of level monthly payments until you find 36. You run across until you get as close as you can to $21. You see that falls between $20.43 and $22.17. You read right up that line and it says 13 percent and that's it. They don't usually come out quite that easy. There is usually an odd figure on the end. But unless the odd figure on the final repayment is more than twice the average level payments, you just treat it as normal-treat it as precisely as you did the first example. This TV set, purchased for $395 pius a finance charge of $39.50. It is to be financed by 17 payments of $24 each plus a final payment of $26.50. What is the annual rate? You move the decimal point two places to the left in that $395, you divide that into $39.50 and you ~`et $10. That is the finance charge per hundred. There is no gimmick on the first payment, perfectly normal, level. So you use the total number of payments, 17 plus 1, and that is 18 payments. You find 18 in the Defense Department, DOD table, you find 18, run it across until you get as close as you can to $10, you see that that fails between $9.35 and $10.19. You run it up to that column and you come out to 12 percent. Here is equal pay payments plus deferment on a loan for $200. The finance charge is $16; 12 payments of $18 each, but the first payment is not due for 3 months and 24 days. You find this especially with farm- ers aud schoolteachers who don't want to start payment on a loan until after the summer. Sometimes you find it with construction workers who get laid off in the wintertime. You've got the $200, you move the decimal point two places to the left, it gives you $2. Your finance charge is $16; you divide 16 by 2, it gives you a finance charge of $8 per $100. You have to go through a little mathematical computation, but what you do on that first payment, convert it to level payments, is to double the initial payment period, 3 months and 24 days. You mul- tiply that by 2, it gives you 6 months and 48 days, or 7 months and 18 days-18 days is more than half, a month so you round it off to the nearest month and that gives you 8. You subtract 2. The reason you subtract 2 is just the way the mathematics works out. That gives you PAGENO="0132" 122 CONSUMER CREDIT PROTECTION ACT 6. You acid that to the total number of payments-12--which gives you 18 level payments. You take 18 level payments in the left-hand column and you ri4n it across until you find $8 and you look up the table and it gives you 10 percent. Mrs. StTLLLVAN. In other words, these are for household items, or loans, or cars-anything? Mr. BAEIL You can figure out pra~tiealiy anything. I want to ~m- phasize that this shows you it can be done. The way this will actually work out is that the seller, will be furnished a set of tables by th~ fi- nancial publishing houses, who say this can be dohe. All these things have to be computed at the moment. The same computation has to be clone at the moment on any of these transactions to figure the contract- how inucl~ you `age going to pay each month. Welt at the top of that card that they are currently using, there wfll be in lig letters, "annual rate," if you pass this legislation. YQU might have to hare special instructiqns ~or a~pproximately 1 percent of the total transactions, like the case Of that deferred payment or in the ease of sothe complIcated transaction like skipped payments. Mrs. SçrLLIv~N. I notice in the 1411 that under the section dealing' with regulations it says the annual percentage rate may be rounded to the nearest quarter qf I percent. Mr. BARL That's right. Mrs. S~wv~. Thank you. Mrs. Dwriai. I would like to comment on this and say this is com- plicated for the average pe~son, and I just do not think the American people are geared thi~ way to studying charts such as this. Mr. BAi~, Mr~, D~yer,, `they have to do it today. You take any of these transactions that I mentioned. Somebody has t~ draw up a credit contract, how lo they draw up the contract? They are drawn up by high school graduates, sometimes less than high school graduates. They are drawn up simply from tables which are furnished by every retailer. The retailer has to determine what kind of rate of interest does he want on this transaction. It is usually 18, 20 ~ietcent. He will take the set of tables that he~ needs for that rate. There is no place on these tables today that indicites the annual percentage rate. He will use the same tab1es~ but at the head of it there will be a state- ment as to what the annual percentage rate is. lie will take something off the top of that table. Mrs. Dwma. Did the other body, in their hearings, feel this was going to be simple or did they feel it was confusing from the testi- monyl have heard, e~pecinily when you were using that rule? Mr. BARR. I was using a very accurate set of tables. I might add these illustrations and these examples and these tables were developed because there are no financial tables available. But the testimony they got from the financial publishing houses indicated that if they would use our data, the data that we prepared and simplified, so the average person, will only go to a set of tables, he `will not go through any of these transactions I mentioned. This is purely illustrative of how it works. Mr. S'rsPIIENS. What you have designed there is for the use by the creditor, not the person who is getting the credit. PAGENO="0133" CONSUMER CREDIT PROTECTION ACT 123 Mr. BAlm. That's correct. It is primarily designed to show the finan- cial publishing houses how to prepare the tables. Mrs SULLIVAN Before we adjourn I want to repeat and empha- size that we certainly appreciate your coming here. We will start this: afternoon's hearings at 1:30 and begin tomorrow morning at 9:30 so that we can give everyone who wants to appear a chance to be heard, and to give members a chance to ask questions. Miss FURNESS. Madam Ohairman, I really don't want to part with- out thanking you very much for the kind remarks that you and Mrs. Dwyer especially made, not about my testifying today, but about my new position in the Government. I am sure you know how very thrilled I `am to have it and what a great responsibility I know that it is. But I thank you both, especially for welcoming me, and I want to tell you it is a great privilege to join women such as you in the Government. Mrs. SULLIVAN. Thank you very much. The committee will be in recess until 1:30. (Whereupon, at 12:35 p.m., the subcommittee recessed, to recon- vene at 1:30 p.m., the same day.) AFTERNOON SESSION Mrs. SULLIVAN. The subcommittee will come to order. This afternoon we are continuing our hearings begun this morning on truth-in-lending and on the other provisions of the bill introduced by six of us on the subcommittee which goes beyond truth-in-lending disclosure requirements in what we call the Consumer Credit Protec- tion Act. The two major bills before us, the disclosure bill as passed by the Senate and the bill that we introduced here in the House on consumer protection are very different, and we hope `through these hearings to establish the facts on both of them. Our witness this `afternoon is the Vice Chairman of the Board of Governors of the Federal Reserve System, Mr. James L. Robertson, who has appeared often before the Committee on Banking and Cur- rency and who is making his first appearance before this subcommittee. We welcome you, Mr. Robertson. We know we will learn much from your knowledge of this subject of the consumer credit and its opera- tions. In scheduling these afternoon sessions we always run a risk that the House will reach into our proceedings with a call for a vote, and with that in mind I want to apologize in advance, in case we have to interrupt your testimony in order to go across to the Capitol and be recorded. We have permission to ~it this afternoon, but there is no such thing in the House as absentee voting. So we must be present if the bell should ring. I know you will understand. Mr. Robertson, do you prefer to read your testimony, or would you rather submit it for the record and then `summarize it? Mr. ROBERTSON. I have no preference, Madam Chairman. I will do it in any way that suits the convenience of the committee I think that it is briefed down to the point where I would take less time reading it than I would to discuss it. Mrs. SULLIVAN. `Please go ahead in your own way. PAGENO="0134" 124 CONSUMER CREDIT PROTECTION ACT STATEMENT OF HON. JAMES L. ROBERTSON, VICE CHAIRMAN, BOARD OF GOVERNORS OF THE PEDEEAL RESERVE SYSTEM; AC- COMPANIED BY CHARLES PARTEE, ASSOCIATE DIRECTOR, DIVI- SIGN OP RESEARCH, FEDERAL RESERVE BOARD; AND ROBERT CARDO1~, LEGISLATIVE COUNSEL, FEDERAL RESERVE BOARD Mr. ROBERTSON. I appreciate this opportunity to present the views of the Board of Governors on H.R. 11601, the "Consumer Credit Protec- tion Act," and the related bills being considered by this committee. I have with me Charles Partee, who is Associate Director of the Di- vision of Research, and Mr. Robert Cardon, Legislative Counsel. The Board believes that important social as well as economic benefits may be expected to flow from a more effective disclosure of credit costs to consumers. As reasonable and workable ways are found to accom- plish this objective, the market system should function more efficiently. Existing trade practices generally fall short of the kind of disclosure that is necessary to enable potential borrowers to make informed judg- ments about the use of consumer credit. Providing consumers with the basic information they need to compare alternative credit plans and to compare credit costs with returns on their savings should not only help them in managing their money to better advantage, but should also strengthen competition, with resultant benefits for the economy. The price system is a fundamental attribute of a free enterprise, com- petitive economy. The sale of goods and services in exchange for money is the met~hod by which the vast majority of transactions are consum- mated, and permits a degree of specialization-with its resulting effi- ciencies-that otherwise would be impossible. And for this system to function most effectively, it is necessary that the prices at which goods and services are available be stated by the seller, and known to the buyer, in standardized, meaningful terms. It is in this way that the buyer can be informed of his options-among both competing sellers and competing services-so that he may use his purchasing power in what to him is the most desirable way. Prices of goods and services are usually stated in money terms, but a meaningful priëe comparison requires also some knowledge about the service to be acquired; namely, quantity and, where applicable, quality and durattion of use. When the service to be acquired is the use of con- sumer credit, quantity and duration of use are the important variables. Duration of use is the period for which the credit is extended, of course, and quantity is the amount of credit used on average over this period. It is customary in finance to standardize the time-period variable by stating price in terms of charge per year, and the quantity variable by stating price per hundred dollars. Now it would be possible to meet this price specification standard by stating the price of credit as dollars and cents per hundred dollars borrowed on average per year. But this is a complex form of state- ment, an~ it produces exactly the same result as the use of a percentage rate; that is, on a 1-year loan of $1,000, payable in equal monthly in- stallments and carrying a charge of $60 (a so-called 6-percent add- on loan), the charge per annum on the average amount of loan avail- able to the borrower may be stated at the standardized rate of either $10.90 per hundred dollars or 10.9 percent. PAGENO="0135" CONSUMER CREDIT PROTECTION ACT 125 The important point here is that `the borrower has available for use, over the life of the loan, not $1,000 but an average of $542, because each monthly payment includes repayment `of principal as well as interest. The Board believes that to state the standardized charge as `applying to anything other than the average amount of credit available to the borrower would distort the true relationship between cost `and benefit received. The Board is also convinced `that it is preferable to state the charge in percen'tage rather than dollar terms, `and on an annual basis rather than for some other peri'od. This would facilitate comparison with other financial prices, such `as the percentage charge on single- payment loans, the interest rate paid on savings `accounts, and the yield available to investors on Government bonds and other securities. Thus, we are in basic agreement with the provisions of H.R. 11601 in these respects. This year, for the first time since Senator Douglas introduced his initial "truth in lending" bill in 1960, the Senate has approved a credit cost disclosure bill. The objective of 5. 5, a's p'assed by the Senate, is to see that the consumer is provided with the information that he needs to make up his own mind about whether to borrow, and if so, where. It does not purport to impose rate \ceilrngs or any other restraints on terms and condi'tions, but only to `assure full disclosure. The B'oard agrees w'ith this `approach, and favors enactment of S. 5, although in one important respect we believe `that the disclosure provisions of H.R. 11601 are preferable. The provisions of ILR 11601 relating to open-end credit plans- revolving credit-offer important advantages, we believe, over the comparable provisions of 5. 5. Under the Senate bill, `an annual per- cç~ntage rate need not be disclosed for most revolving credit plans; al- `though the percentage rate per period must be disclosed. T'o guard against the possibility that existing forms of ordinary installment credit might be converted `to revolving credit in order to escape dis- closure of `an `annual percentage rate, the Senate bill's exemption for revolving credit is limited to plans that meet three tests. To qualify for exemption `a plan must require payment of at least 60 percent of the amount of the credit within 1 year, must not involve retention by the creditor Of `a security `interest in property, `and must provide for crediting ~repayments immediately `to reduce the balance due. These cOmpromise provisions were adopted in response to criticism by representatives of a segment `of the retail industry, who `argued that it would be unfair to require disclosure of `~n 18-percent `annual per- centage rate for revolving credit plans under which a monthly charge of 11/2 percent was imposed, because `that would ignore the "free ride" period `between the `date the sale w'as made and the last date `on which the bill could be p'aid without imposition of any finance charge. In- clusion `of the "free ride" period-t'hat is, calculation of the annual percentage rate from the d'ate of purchase rather than' the date on which payment must be made to avoid a finance charg&-would, it is true, produce annual rates below 18 percent where a monthly charge of 11/2 percent is imposed. But an 18-percent annu'al rate is the exact equivalent of a 1'/2-percent monthly rate `and is a fair and meaning- liii figure if one' assumes that the credit begin's at the end of the "free ride" period. We believe that this is the significant date from the point PAGENO="0136" 126 CONSUMER CREDIT PROTECTION ACT of view of a customer whO is considering whether to pay the entire hal- ance and avoid any finance charge.. Tn elimir~ating the revolving credit exemption, the sponsors of H.R~ 11601 have recognized the importance of providing consumers with a standardized method of comparing credit costs, and have avoided giv- ing one type of creditor an unfair competitive advantage over another. In addition to rate information, knowledge of the specific account- ing practices employed by the store is necessary for accurate compari- son of credit costs in the case of open-end credits. Though it is impos- sible to calculate in advance the influence of such differing practices. on effective finance charges, the consumer should at least be alerted in clear and unambiguous language to the differences that may exist. Thus, the Board has recommended, and both the Senate bill and H.R. 11601 require, that information disclosed on all open-end credit plans must include the duration of any free period allowed, the method of computing the balance against which the finance charge is imposed, and minimum or special charges-if any. Such inf~rmation would be disclosed in some detail when the ac- count is opened, and, in addition, a brief disclosure of the essentials would be required in the monthly bill. We believe that this information would give the credit user a pic~ ture that ls. fair to the store, informative to the customer, useful in comparing charges from store to store, and broadly comparable to other rat~ charged for credit or paid on savings. With the exception of the provisions on revolving credit, however,. the Board believes that the Senate-passed bill is preferable to. H.R. 11601. As we see it, the major differences, insofar as disclosure is con- cerned, relate to real estate credit, inSurance premiums, transactions involving small finance charges, and effective date. We believe first-mortgage loans on real estate should be exempt, as provided in S. 5, because there is already reasonable disclosure in this field and disclosure requirements developed for relatively short-term credit are inappropriate for loans with maturities of 20 to 30 years. To require that the annual percentage rate be recomputed to reflect costs incidental to the extension of credit would involve particularly troublesome questions in first mortgage lending because of the number and variety of the costs assessed at closing, many of which would be incurred, in whole or in part, by a prudent cash buyer if no credit was extended. While it would be possible to spread discounts and other credit-related costs over the life of the contract as a part of the annual rate of finance charge, we feel that this might tend to mislead the borrower. Such charges are in the nature of "sunk cost" and are borne in full by the borrower whether the loan is repaid in 1 year or 30. To require disclosure of total dollar finance charge, including interest payable over the whole life of the contract, might be more misleading~ than helpful. The present value of a dollar of interest to be paid 20t to 30 ye~rs hence is substantially less than 1 dollar, and relatively few first-mortgage contracts appear to be carried all the way to ma- turity. The Board does believe, however, that second mortgage loans, land purchase contracts, and similar transactions should be covered. Such credits typically are extended for much shorter terms than first mort- PAGENO="0137" CONSITh~tER CREDIT PROTECTION ACT 127 gages, and discounts, fees, and charges can make up a much larger proportion of total finance charges. Moreover, second mortgage credit is often obtained for purposes such as home modernization, durabie goods purchases, and debt consQlidatiqn-consumer transactions of the type usually financed with consumer installment credit. One of the issues that has proved troublesome during consideration of disclosure legislation has been the question of how to treat insur- ance premiums on policies taken out by borrowers as a condition of, and covering the amount of, the credit contract. If such insurance is required, the borrower bears a cost which probably would not have been incurred if no credit were obtained. Moreover, exclusion of in- surance from the finance charge creates a potential area of abuse, since some lenders may be encouraged to promote high-cost insurance to compensate for a somewhat lower finance charge. The fact remains, however, that inclusion in the finance charge of premiums for insurance that provides a benefit to the borrower over and above the use of credit would overstate the actual charge for credit. Therefore, we think that such premiums are not properly re- garded as part of the finance charge, and should be specifically ex- eluded, as provided in S. 5. We do believe, however, that the dollar amount of any such premiums included in the credit extended should be itemized and disclosed, again as provided in S. 5. Another provision of S. 5 that is omitted from H.R. 11601 relates to ~ transactions involving small amounts. Presumably no one wants to press disclosure of credit costs to the point where borrowers are denied access to credit at any price. ~ut to require disclosure of an annual percentage rate in small closed end credit transactions might have just that result. For credit of this kind, a high effective rate may be justified to compensate the creditor for the relatively high out-of-pocket costs of handling the transac- tion. However, he may be understandably reluctant to disclose a high annual percentage rate, and might decide instead simply to discontinue this type of credit. S. 5 would exempt transactions involving a finance charge of less than $10 from the requirement of disclosure of an annual percentage rate, although other disclosure requirements would still apply. We believe that some such exemption is needed. Turning to the question of effective date, the Board believes that in order to allow sufficient time for consultation, preparation, and pub. lication of regulations by the Board as well as time for those subject to the regulations to study their provisions, procure rate tables, and train their personnel In the new procedures, disclosure requirements ~hould not take effect prior to 1 year after enactment. The Senate bill provides for additional time, so that State legislatures may have time to make any necessary amendments to their existing statutes and to pass similar disclosure legislation. The Board shares the hope expressed by the Senate committee that enactment of Federal disclosure legislation will prompt the States "to pass similar legislation so that after a period of years the nesd for any Federal legislation will have been reduced to a minimum"- Senate Report 39~, page 8. In addition to the trnthin4ending provisions just discussed, H.R. 11601 embodies provisions regulating credit advertising that affects PAGENO="0138" 128 ~0NSUMER CREDIT PROTECTION ACT interstate commerce. Since the information available to the Board in this area is extremely limited, we have little basis for comment on these provisions. On their face, they would seem in effect to prohibit advertisers from specifying rates or other credit terms on radio or television, since it would be impracticable to make the detailed dis- closures that would then be required. Perhaps it is desirable to limit this kind of advertising to generalities such as "easy credit available," but such a restriction might also operate to prevent creditors who offer lower rates or other advantages from advertising that fact on the air, thus inhibiting comp~tition. The bill would also prohibit creditors from advertising "that a specified periodic credit amount or installment amount can be ar- ranged, unless the creditor usually and customarily arranges credit payments or installments for that period and in that amount." A determination of what terms are customarily and usually offered by a creditor would pose considerable problems of investigation and en- forcement, and perhaps for that reason provisions are included in the bill-section 209-for administrative enforcement which closely parallel those now provided in section 5 of the Federal Trade Com- mission Act. No such provisions are included in S. 5; the Senate com- mittee report on the bill stated that the "committee has not recom- mended investigative or enforcement machinery at the Federal level, largely on the assumption that the civil penalty section will secure substantial compliance with the act"-Senate Report 392, page 9. The bills b'ef ore you provide for civil actions, in which a creditor who fails to comply with the disclosure requirements would be liable to the debtor for $100 or twice the finance charge, whichever is greater- but not more than $1,000-plus attorneys' fees and court costs. The Board hopes that these civil remedies, supplemented as they are by criminal sanctions, will prove adequate to assure compliance with truth-in-lending requirements. Self-enforcement is probably less effective, however, in the field of advertising. An individual borrower could hardly be expected to prove in a private lawsuit, for example, that a creditor did not cus- tomarily and usually offer particular credit terms. If you determine that regulation of advertising is needed, we urge that you place this responsibi~ity in the Federal Trade Commission, which has the benefit of years of experience in regulating advertising, and has an investiga- tive staff and established administrative procedures for effective enforcement. One provision of H.R. 11601, not included in the bill that passed the Senate, prohibits any creditor, in extending credit to an individ- ual, from demanding or accepting any finance charge in excess of (1) the limit under State law, if any, or (2) 18 percent per year, which- ever is less. The Board is sympathetic with the apparent purpose of this provision, which is to prevent lenders from overcharging their customers. Nevertheless, we strongly urge that it be deleted from the bill. Our objections to a statutory interest rate ceiling relate principally to its inflexibility. A single ceiling cannot take account of the widely varying circumstances surrounding individual credit transactions, such as amount of credit, costs of handling, purpose of loan, quality PAGENO="0139" CONSUMER CREDIT PROTECTION ACT 12~ of collateral, and credit standing of the borrower. Hence we fear that potential borrowers, with legitimate and often compelling needs for credit, would be refused accommodation within the rate ceiling set by law. The selection of an appropriate ceiling rate also would pose very serious problems for the Congress. A maximum of 18 percent might seem generous-overly so, in the view of many-but it probably would not cover lender costs in some types of transactions. For a small loan, the finance charge may need to be very high-expressed in per- centage terms-since many costs incident to the transaction are more or less fixed, regardless of the size of the loan. Moreover, collection costs can be very substantial on some classes of loans and these, too, bear little relation to the amount of credit extended. Indeed, almost all States now have special small loan laws, in recognition of the impos-~ sibility of providing some types of credit to consumers within the ordinary usury ceiling. For companies chartered under these laws, permissible finance rates run as high as 42 percent per annum in some States. Effective enforcement of a ceiling finance charge also could be very difficult to achieve. There is a strong possibility that many consumers, refused credit from legitimate sources within the statutory ceiling, would turn to illegal lenders-the so-called loan sharks-and other unethical sources of credit. Some retail merchants, dependent chiefly on credit business, would be tempted to avoid the ceiling simply by inflating the price of goods sold. Under-the-counter agreements and devices to conceal part of the finance charge would flourish. As is often the case, the stronger the incentives to circumvent a restriction, the more difficult it is to enforce. And, as you know, in some situations there is a tendency for ceilings to become floors as well. I am sure none of us would like to see a Federal ceiling rate operate to raise borrowing costs. For all of these reasons, the Board strongly urges deletion of this provision. We prefer to see the problem attacked through the dis- closure requirements of the bill, in the belief that informed consumers will be in a better position to choose among the various financing options available to them in their particular circumstances. H.R. 11GO1 contains sections not in the Senate bill that prohibit garnisbme~nt of wages and use of any documents, in connection with the extension of credit, authorizing the confession of judgment against the debtor. It is abundantly clear that both procedures are subject to seribus abuse in the hands of unscrupulous creditors. An unwary con- sumer can sign away most of his rights to legal defense against creditor claims and, upon failure to make a payment, may find his wages at- tached without prior notice. Indeed, in many States he may be de- prived of the major share of his current income, with obvious con- sequences for the continued well-being of his family, and often the `fact of garnishment may jeopardize his job. These considerations raise serious questions as to whether such practices should be condoned from the standpoint of public policy. The Board is not `prepared to comment on the legal points at issue, or on the social consequences involved in continuation or prohibition of these practices. But we should bear in mind that these devices, `by PAGENO="0140" 130 CONSVMER CREDIT P~0TEcTI0N A~T increasing the security of the creditor,, make him willing to extend `credit to borrowers that he otherwise might not accommodate. We* have no estimate of the number of credit contracts that would not be made in the absence of wage garnishment and confessions of judgment. But it is obvious that there must be many small borrowers with rela- tively poor credit records who have little in the way of security to offer the lender other than the right to quick legal action and attachment of wages. As you know, the President has directed the Attorney General, in consultation with the Secretary of Labor and the Director of the Omce of Economic Opportunity, to make a comprehensive study of the problems of wage garnishment. The Board believes that a decision on this matter, and on the related problems of confessions of ~udg- ment, should be deferred until the Attorney General's report and recommendations become available for your consideration. Section 207 of the bill assigns the Board broad authority to pre- scribe regulations governing the extension and maintenance of margin requirements on commodity futures contracts. It is stated that the purpose of such regulation is to prevent excessive speculation in, and use of credit for, trading in such contracts with undesirable effects on prices. There may well be need to attempt through regulation to dampen some of the s~ecuiative movements in commodity futures markets, with their possible repercussions on spot commodity prices. The Board recognizes that the futures markets perform a valuable economic func- tion in permitting producers and users of commodities to hedge their operations against near-term price changes, and that speculators are an essential part of the futures market in balancing the supply of and demand for futures contracts. But we also recognize that speculative sentiment at times can `be so massive and one-sided that it constitutes ~ disruptive force in the functioning of markets. In any event, however, `we feel that the Department of Agriculture, i'ather than the Board, would `be much the more appropriate agency to administer any such commodity market legislation. The formulation of workable regulations, as well, as their administration~ requires close and continuing contact with the futures markets and a knowledge of present and prospective demand-and-supply conditions in the spot commodity markets underlying them, which the Board simply does not have. Furthermore, the principal concern of the Federal Reserve is with credit conditions, and it is our belief that relatively little credit is used in connection with futures trading. The margin in such trades, as we understand it, is in the nature of "earnest money" assuring com- pletion of the contract by buyer and seller at a later date. Unlike the stock market, title to property does not change hands; there is no immediate payment and hence no need for credit. The statutory purpose of margin regulation as applied to stocks is to prevent the excessive use `of credit in stock market trading. Since rapid growth of credit-financed margin purchases can contribute to destabilizing speculative advances in stock prices, one indication that use of stock market credit may be becoming excessive is a rapid growth in margin credit coincident with sharp increases in stock trading ac- PAGENO="0141" CONSUMER CREDIT PROTECTION ACT 131 tivity, and substantial gains in the stock price averages. At such times the Federal Reserve may increase margin requirements in order to slow the rate of stock market credit expansion. But the governing purpose is not to affect stock price movements, either for individual stocks, groups of stocks, or the market in general. Regulation of stook market credit, not stock prices, lathe goal. We understand that the Department of Agriculture is currently studying the advisability of applying margin requirements to~ trading in those commodity futures markets under the general supervision of the Commodity futures markets under the general supervision, of the Commodity Exchange Authority. The Board would like to reserve j~udgment on this matter pending completion of the Department's study. Section 208 of the bill would give the Board, upon a presidential determination that a national emergency exists~ authority to impose selective controls on the use of consumer credit. This could be done either directly, by li~niting the terms on which credit is made available tc~ individual borrowers, or helirectly, by limiting the use of funds by creditors to finance consumer credit operations. There is clearly no need to activate s~ich controls at present, in our view, but it is possible to' visualize a combination of economic circumstances in~ which this awtherity couhi prove a useful supplement to om~ general instruments of monetary and credit control. We do question, however, whether an. authorization for standby selective credit controls p~rcperly belongs in. an act intended to provide greater protection for consumers in their use of credit. Standby credit controls would only remotely- and fortuitously-protect the consumer in this individual use of credit. The object of such controls, activated only in a national emergency, would beth limit the~ consumer's recourse to credit for purposes of national economic stabilization. The Board cannot conceive of the use of these controls to protect the consumer against himself by denying' him overly liberal credit terms or exces- sive use of credit relative to his means. The use of selective credit controls is a controversial matter. There are always bound to be differenceè cf opinion as to when `such control should be invoked', how broad their coverage should be, how they should be admiciistered, and~ when they should be suspended. Furthermore, there is some question as to the desirability of singling out this one area for standby authority, rather than considering the whole array of special actions that might prove necessary or desirable in a national emergency. We therefore respectfully suggest to the committee that it would be preferable to consider the question of selective consumer' credit controls in a broader context and to delete this provision from the pending bill. In summary, let me express the hopes that your committee will act~ favorably on S. ~, with an amendment eliminating the revolving credit exemption. The Board of Governors believes there is a need for this. legislation, and while we have no special qualifications for the function. of writing regulations to implement it, we will do our best to carry' out this responsibility if the Congress assigns it'to us. If, however, you determine that there is a need for additional measures, such as regula-. tion of advertising or trading in commodity futures, to protect con- PAGENO="0142" CONSUMER CREDIT PRO'1?ECTIO~N ACT 132 sumers, resp4rnsibility for their administration and enforcement should be assigned elsewhere. Thank you very much, Madam Chairman. I would be glad to at- tempt to answer any questions. Mrs. SULLIVAN. Thank you, Mr. Robertson. I will ask just a few questions and then pass it on to the other members. First, I wanted to ask you, do your views represent the unanimous action of the Board? Mr. RoBElrrsoN. All of my associates are in accord with the views I have expressed. Mrs. SULEIVAN. Governor, in your testimony you stressed your oppo- sition to inclusion of credit life insurance charges~ in the finance charge when such insurance charges are imposed by the creditor. Are you familiar with the credit life insurance hearings being condttcted by the Senate Antitrust Subcommittee `and of the abuses that have been revealed? Mr. ROBERTSON. I have not read any of those hearings, Madam Chairman. I do know that this does exist, but I have no specific knowledge with respect to it. Mrs. SULLIVAN. You stated on page 8 of your statement that credit life insurance provides a benefit to the borrower over and above the use of credit. In testifying before the Senate, however, Mr. Charles W. Campbell, chief insurance commissipner of South Carolina, stated: Only the hopelessly naive or the utterly cynical would contend that consumer credit insurahCe exists for the purpose of distribution of risk of loss among borrowers as opposed to enhancement of the lender's interest rate and profit on the loan. Would you be able to comment? Mr. ROBERTSON. No; I may be one of those naive people. Mrs. SULLIVAN. Governor, in your Senate testimony you stated that to require disclosure of total dollar finance charges, including interest payable over the whole life of the contract might be more misleading than helpful. How would the disclosure of the truth be misleading? Mr. ROBERTSON, Because although it would be truth it would b~ a truth that is misleading in that if you take the dollar which you are paying now-and this is only on first mortgage loans-the long- term 20 to 30 years-if you spread that out over the whole life of the 20- or 30-year loan it looks much smaller than `it actually is. And those costs you are going to incur are going to be incurred by the borrower immediately, whether you pay ofT that loan or at the end of 1 year, or at the end of 30 years. So that you state the truth, but it may be misleading just the same. Even the truth can be misleading at times, depending entirely on the context in which it is used. Mrs. SULLIVAN. Well, I know that in previous years Secretary Weaver, the Administrator of HHFA, particularly endorsed the cov- erage of first mortgages, and I think such disclosure is specifically needed to deal with unscrupulous real estate developers who entice young couples into the purchase of homes with catch phrases such as "Low cost financing," "Financing arranged," "No downpayment," when in reality many hidden charges are contained in the transaction which would have to be given if proper disclosure had been provided. Mr. ROBERTSON. I am sure, Mr. Weaver knows a lot more about the PAGENO="0143" CONSUMER CREDIT PROTECTION ACT 133 subject than I do. I am sure of it, and if he says there are abuses 1 take his word for it. It seems to me that the first mortgage area isn't the area in which the great abuses exist, because traditionally in this country closing costs are disclosed-they are simply not put on an annual percentage basis. Mrs. SULLIVAN. There is another way in which first mortgages are really being abused, and that is in the case where a homeowner has already paid for the house and it needs expensive repairs, and in order to pay for those repairs they have to sign a paper which becomes a first mortgage-this is where I think most of us have seen the greatest abuses. Mr. ROBERTSON. And I would agree completely, these are abuses. But let me say just one word. I do not think this bill is going to cover all of the abuses in the credit field. It cannot. It is merely a start in the right direction. As it is experimented with and worked on for 2 or 3 years you may find areas in which it should be expanded. We are required to submit a report annually and so is the Attorney Gen- eral and I assume if we concluded that there were areas of abuse we would come back to the Congress and recommend a change. Now, also, I would like to say that this is an area in which we do not profess to be experts. It is not an area in which we have studied as many others have studied. We have gotten into this only recently, and then at- tempted to go back over all of the testimony. But still we cannot be considered to be experts. There may be areas of abuse which the Con- gress will want to cover, in which case it should be done. We would think your judgment on this is better than ours. Mrs. SULLIVAN. But I am curious as to why the Board, after all these years, is apparently taking the position that first mortgage loans should be exempt from the bill's coverage. Is this position consistent with the position taken by the Board in endorsing this legislation in previous years? Mr. ROBERTSON. In previous years we have more or less stood aside from this legislation because it was not in our bailiwick, really. We had only the interest of a layman because this is not a function which the Federal Reserve has had anything to do with. Our job is that of monetary policy, not this field. Consequently, although we did approve the objective of the legislation from the, very beginning, we felt that it should be administered by another agency, and we did not go into it sufficiently to differentiate between the areas of severe abuse, average abuse, and less abuse. So that this represents no change in our position. Mrs. SULLIVAN. Governor, the thing that I think this committee is endeavoring to find out is how we can cure, or point up and give people knowledge about these abuses in some of the first mortgages. I agree that in a normal home purchase transaction, a person would buy at the going rate of interest, whether it be through a savings and loan or through a bank, particularly under FHA or VA, and the interest is generally known and fully described. What we discussed this morning are all of tl~.e other costs that go into it-all of the closing costs that are not uniform all over, and it is very difficult to know what is ex- pected. Then, in the case of large repairs, we have a different problem, and also when the unscrupulous real estate operators have shown very bad practices. We are trying to find out some way to cover those things PAGENO="0144" 134 OONStMER CR~DIT PEOTECTION ACT in th~ law. Frankly, I do not know how we can cover everything which might happen, so we are seeking guidai~ce. Mr. RoBrnTsoN. I don't, either. It may be that the housing authori- ties, Mr. Weaver, for example, would be in a better position to advise you on this than I would. Also, insofar as the closing costs are concerned, we think they should be disciosed and by everyone-first mortgage, second mortgage, or any- one else. This should be done. Mrs. SnI1LWAN. Thank you, Mr. Stephens? Mr. SThPm~NS. Thank you, Madam Ohairinan. We appr~ciate your coming before us and making the statement that. you have. I have one or two questions or comments. I am interested in the con- sistency of the Federal Reserve in not wanting to set any interest ceil- ings. I think that has been my feeling about setting interest rates. But I want to ask you this: You have in your statement here suggested that we delete from the bill the quest~~ion of credit control. I have felt that one of the functions of the Federal Reserve in making money available in times when it is needed, and when it looks as if the economy is getting too out of hand, that you exercise certain controls in the economy. This would be some o~reriapping perhaps if ~ou had a sepa- rate board to set up separate controls? Mr. Ron~RTsoN. We are not contending here or anywhere else that consumer credit controls would not at times, and especially in times of national emergency, be good supplements to the general credit con- trols that we have now. But we merely take the position that this is a ver~~ controversial matter. It ought to be looked at from the point of view of all sectors of the economy which will be involved in a national emergency and treated by itself rather than brooght in as a part of a bill which relates to protection of consumers. Mr. STEPHENS. In respect to the commodity exchange~, your recom- mendation there is that it not be necessarily deleted from considera- tion, but that you feel, as I understand your testimony here, that action should be postponed because of other studies and if nothing has transpired from these studies by the time we come back on this bill it should be deleted ~ Mr. RoBERTsoN. I hope if you do enact legislation of this kind, that you place that not in the Federal Reserve but in th~ Department of Agriculture where it belongs. We have no knowledge which equips us from any point of view to administer such legislation. Mr. ST~p~IENs. You recommend we delete the Federal Reserve on commodity credit controls? Mr. ROBERTSON. That is right. We simplyare not expert enough to give you any real advice as to what is needed in that particular area. Mr. STEPHENS. You would be opposed-you are môt making a state- ment that you would be opposed to the legislation. Mr. ROBERTSON. We do not know enough. Mrs. SULLIVAN. Will the gentleman yield? Mr. STEPHENS. I yield. Mrs. SULLIVAN. Are you people in the Federal Reserve experts in the stock market? You set margins on stock transactions. Mr ROBERTSON A very different situation We are regulating the amount of credit that goes into ;the stock market. Here you are not PAGENO="0145" CONSUMER CREDIT PROTECTION ACT 135 proposing to regulate credit. You are attempting to effect prices. They do not use credit in futures trading. Mrs. SULLIVAN. I do not think we are attempting to effect prices on this. I think we are attempting- Mr. ROBERTSON. I thought that is what it said. Mrs. SULLIVAN. We are attempting to stop some of the excessive speculation such as happened in sugar and coffee, and which led to very substantial price changes, on very low margin. We know something about that because we studied it in this corn ittee. Mr. ROBERTSON. I am sure you do because I looked at some of your hearings and it merely showed me how little I know. But this is not a matter of credit where we have an interest which enables us to know something about the subject. We do know something about margin requirements on stock transactions, we know nothing of the other kind of margin requirements on commodity futures contracts. Mrs. SULLIVAN. We found that you only needed a few hundred dol- lars to play with thousands of dollars worth of commodity futui~s. I think it is time somebody set some sort of margin controls m this area. I will read this one part: Regulation of Credit for Commodity Futures Trading. For the purpose `of pre~ venting the excessive speculation in and the excessive use of credit for, the creation, carrying, or trading in commodity futures contracts having the effect of inflating consumer prices, the Board of Governors of the Federal Reserve system shall prescribe regulations governing the amount of credit that may be extended or mah~tained on any such contract. Mr. STEPHENS. As I understand your position on this, it is not a question of credit, that even if we put it in the bill as credit, it is not that? Mr. EQeERTSON. It is not credit in the sense that we use the term. It is earnest money, really. Mr. STEPHENS. The feeling that I have frmn your statement in gen- eral-see if it is correct-that you, as a representative of the Federal Reserve, agree that we ought to more or less pass a bill that will deal with the regulation to the consumer of what he is paying. Mr. ROBERTSON. That is right. Mr. STEPHENS. And beyond that, part of it you say that you `have no knowledge really of making an opinion on and the other, that you do not think we should take it up at the present time-basically the two items that I mentioned? Mr. ROBERTSON. That is right. Mr. STEPHENS. Thank you very much. Mrs. SULLIVAN. Mrs. Dwyer? Mrs. DWYER. Thank you, Madam Chairman. I want to congratulate you for a very, very fine statement. I have just two questions. We have talked about the so-called 6 per- cent so many times. If we go to the Senate-passed bill route, are we not in a danger of creating a new myth of 1 or 11/2 percent per month or 18 percent per annum? Mr. ROBERTSON. It is possible, but you sees we are working against the background where various segments of lenders and creditors have used different bases for stating their charges. Banks in rural sections have always used a 6 or ~`½ percent, or whatever `it is, annual rate. Some other creditors have used 11/2 or 1 percent a month. What we are 83-340-67-pt. 1-10 PAGENO="0146" 136 CONSUMER CREDIT PROTECTION ACT seeking here is a standardized percentage rate which everyone will use and therefore the consumer will be in a position to pick and choose between those who are seeking his business or seeking to extend credit to him. So that I would be the last to say what will actually come out of this, but I would hope what will come out of it will be a better understanding on the part of consumers as to the rates that they are paying. Mrs. DWYER. In your statement at page 13, you say, in some situa- tions there is a tendency for ceilings to become floors as well. I am sure none of us would like to see a Federal ceiling rate operate to raise borrowing costs. You say this here. Mr. ROBERTSON. That is right. You see, this has to do with enacting uFederal usury law. That is really what it is, and yet it is unrelated, in my opinion, to the particular costs in small and medium-size and large transactions and to the particular conditions under which the credit is extended. I think it is very difficult for the Federal Government to set one rate, just one 18-percent rate ceiling and have it apply clear across the board. I think it cannot be done with impunity. I think there will be great difficulties involved in it and it may deprive a great many people, needy people, of needed credit. Mrs. Dw~v~R. We will continue most charge accounts-are they not every month at 11/2 percent? Mr. ROi3ERTSON. Many charge accounts are. It is hard to generalize in this field. But it is very difficult to say that any particular group will use one basis of setting their costs, but it is true that on many install- ment credits it is based on a 11/2 percent a month or less-could be 1 percent a month. But on a monthly periodic basis. Mrs. DWYER. Would not people begin thinking of 18 percent? Mr. RoBERTsoc~. I do not believe so. But I would hope not. Mrs. DWYER. Would this 18 percent be a proper rate? Mr. ROBERTSON. No, I would hope not. Because really it would depend upon the type of credit. Competition should result in a much Tiower annual percentage rate for some kinds of consumer credit. Mr. Wi~r4n~. Would the gentlelady yield? Mrs. DWYER. Yes. Mr. WYLIE. What you are saying is that under the present system we are not required to disclose the interest. But if we require the disclosure of a specific interest rate, isn't everyone going to disclose the same interest? Mr. ROBERTSON. I think the competition takes care of this pretty well. I think that there are people in the business who are seeking to increase their percentage of business and they will attempt to quote a lower rate than the next one. So that I think really, `if you look to com~ petition to correct this problem, this problem will be correcte'd. Mr. WYLIE. One result of competition is lower interest rates on con- `sumer purchases. Competition would be more likely to be reflected under the present system, would it not? Mr. ROBERTSON. Well, you see, today if you are stating interest on a monthly basis it sounds like it `is almost nothing. If it is 11/2 percent a month it sounds ridiculously low but it does not happen to be low. If you stated 6 percent per annum on a 1-year loan, this is 6 percent. Mr. Wn~i~. But there is more than one firm in the community which is quoting an interest rate. PAGENO="0147" CONSUMER CREDIT PROTECTION ACT 137 Mr. ROBERTSON. That is right. Mr. WYLIE. So there is an opportunity now for retail businesses to compete by quoting interest charges? Mr. ROBERTSON. For the sophisticated person there is no difficulty even today. The sophisticated person can determine what he is actually paying. Mr. WYLIE. That is right. Mr. ROBERTSON. What we are trying to do is protect the unsophis- ticated, the ordinary users. Mr. WYLIE. I think that is another point Mrs. Dwyer is trying to make. You are saying you do not think there is a danger that all merchants will fix interest rates at 18 percent if this bill passes. I am not sure that I think so, either. You did say in your statement that sometimes ceilings have ways of becoming floors as well. Mr. ROBERTSON. That is right. Mr. WYLIE. I think we want to guard against that. Mr. ROBERTSON. Here we are having no ceiling whatsoever. Our proposal-in our proposal you have no ceiling at all. Mr. WYLIE. And you would not limit the rate to 18 percent or 11/2 per month. Mr. ROBERTSON. No; we oppose a limitation. Mr. WYLIE. I thank the gentlelady for yielding. Mrs. DWYEE. One more question, Madam Chairman. This may be a little involved. I am advised that approximately 40 percent of the large merchandis- ing industries employ an adjusted balance system on its revolving charge accounts which that industry claims result in an effective an- nual interest charge on the average account of far less than 18 per- cent. If the entire industry which uses 11/2 or 1 percent a month on either the adjusted balance system or the opening balance system is re- quired to annualize and convert out to 18 percent, are we really not risking and encouraging all merchandisers to reprogram their sys- tems so that their finance charges yield as close to 18 percent as possible? In this manner are we not risking millions being added. to the amount paid by consumers to their revolving charge accounts? Mr. ROBERTSON. I think this is a very faulty criticism that is being made. All we are trying to do as I see it, that is all those who have sponsored the legislation on either side, and all of the people who have testified, is to see to it that the truth is stated so that the consumer can determine what he is being charged for. Now, problems have been thrown up about whether you start with a transaction as of the date of purchase or the transaction as of the date of the first payment. But the customer also needs to know what balance is to be used. This bill provides-in both the House and Senate versions-that the creditor must state the balance that is going to be used for the purpose of determining the finance charge. This I think is merely getting to the truth of what is actually done and if this gives rise to competition as between sellers, so much the better for the consumer. Mrs. Dw~i~n. That will be all. Thank you. Mrs. SULLIVAN. May I just state that I think that most people read- ing about this bill and learning that there is a provision in it to set PAGENO="0148" 138 CONSUMER CREDIT PROTECTION ACT a ceiling rate of 18 percent on interest or finance charges will be shocked because they do not believe they are paying that kind of in~ terest. They think of it in terms of 6 percent or in the case of revolving accounts in the store, a figure such as 1½ or 2 percent, which sounds very low. Frankly, I think sometimes we need to shock them a bit. Mr. RoBERTsoN. As a matter of fact, many are paying much more than 18 percent today. Mrs. SULLIVAN. The small loan companies charge far more than that, because they are taking bigger risks than the department stores are. I think this 18 percent will make some people sit up and ask, "What are we really paying?" Mr. ROnERTSO~. That is right. Mrs. SULLIVAN. Mr. Minish? Mr. Miwisn. Governor Robertson, its nice to have you here. You said earlier H.R. 11601 would not cover all abuses in credit. Do you care to elaborate on that point where you feel this legislation may be missing out? Mr. ROBERTSON. Not where this legislation is missing out, but an area this won't cover is the case, for example, where a seller merely increases the price of his goods and then quotes a lower rate of finance charge. This bill is not going to correct any gouging that takes place in that fashion. And I do not see how you can do it. There may be many other areas in which there are defects. But I must say, as T did be- fore, I am not an expert in this field and I cannot tell you ways in which I would improve this legislation at this time. I would hope, however, that after we have gone through the real job of drafting regulations and see how this works, we ought to be able to come back and answer your question. Mr. MINI5H. Do you see a close connection between the mushroom- bag of bat~k credit cards and the fact that the Senate passed the truth- in-lending bill, that it contains an exemption? Mr. ROBERTSON. I don't believe so, because the bank credit plans started long before. I don't really think there is any connection what- soever between them. Mr. MINISH. Why do you oppose disclosing charges ~on first mort- gages in dollars? Mr. RoBERTsoN. In dollars-as against percentage rate? Mr. Miwisu. Yes. Mr. RoB~nTsoN. It seems to me I don't- Mr. MINISH. You said in your statement that requiring disclosure of total finance charges including interest paid during the whole life of the contract might be more misleading than helpful. Mr. ROBERTSON. We are suggesting that the specific charges-any settlemen,t costs involved-should be disclosed in dollar amounts. But you could not, without misleading the customer as to his cost, spread that over a 20- or 30-year period and put it on an annual percentage rate. In the typical situation, that would mean disclosing a rate that is too low. Mr. MINISIL Why would this misleading? I have a mortgage on my property in New ~ersey and I can look at the contract and know exactly what I am paying in dollars every month in interest and the principal or by the year. PAGENO="0149" CONSUMER c~tEDIT PROTECTION ACT 139 Mr~ Ro~so~. All you need to do, whether it is a first mortgage or second ni~ortgage is to mske sure that you are disclosing everything that the borrower needs to kilow in Order to determine whether he is getting his credit as cheaply as he can get it. That' is all. Mr. MINISH. I do not disagree with that. Is it not easier to do it in dollars rather than percentages? Mr. ROBERTSON. It will be done in dollars rather than percentages because they are being excluded. Mr. MINISH. You say here they might be misleading if you disclose it in dollars. Mr. ROBERTSON. No. Mr. MINISH. I am just quoting from your testimony. You say it might be more misleading than helpful. Mr. ROBERTSON. Look at that same sentence and underscore, if you would, the words "charge" at the end of the first line of that sentence, "To require disclosure of total dollar 6nance charge, including interest payable." Perhaps I have not stated this very well, but what I am try- ing to relay-you see, in the first-mortgage field everyone borrows, say, at a 6-percent or 7-percent annual rate. Where the difficulty comes is with the additional charges, additional costs, the closing costs, and so forth. Mr. MINISH. And such extras as points and whatever else they add on. Mr. ROBERTSON. Whatever they are. Those are the things that I think ought to be set out just as they are in the dollar amount rather than spread over a whole life of the loan in an annual percentage rate. Mr. MINI5H. Thank you. That is all. Mrs. SULLIVAN. Mr. Halpern? Mr. HALPERN. Thank you very much. Governor Robertson, do you think that the disagreement about inclusion of revolving credit ac- counts under the disclosure provision might accurately be resolved by allowing the creditors to state their annual rates, say 18 percent, as a maximum rate per annum? Mr. ROBERTSON. I don't think so. I would hope that this bill would not attempt to get into the field of ceilings. Once you do that-~attempt to put it on a national basis-I think you get into all sorts of problems. These problems have been specifically dealt with in the laws of many States-all States, I venture to say-where higher rates have been au- thorized in the light of given conditions, such as the amount of credit, the collateral behind the credit. All of these have been taken into consideration in arriving at given ceilings that are different from the ceiling that you would apply on an overall basis. I think it would be very unwise to have ceilings in this bill anyway. Mr. HALPERN. Governor, do you have any way of forecasting whether sizable efforts will have to be made to set up the administrative struc- ture necessary to enforce such requirement? Mr. ROBERTSON. If you were to set up an administrative structure to enforce H.R. 11~O1 I would be inclined to retire from the Federal Re- serve Board. I think it would be a very difficult job. I would prefer the approach of S. 5, which is really that this bill shall be a self-enforcing bill. Civil remedies plus the criminal sanction of S.5 should be adequate to obtain compliance. PAGENO="0150" 140 CONSUMER CREDIT PROTECTION ACT Mr. HALPERN. Considering only the basic truth-in-lending aspects of the legislation such as in S. 5, what do you see as the ideal way of administering and enforcing these requirements with respect, of course,~ to banks, savings and Joan associations, finance companies, retail stores, and so forth? Mr. ROBERTSON. This is a difficult-this is a different problem. I mis- understood before. With respect to the concept of truth in lending as it is in S. 5 supplemented as I would like to see it in the House bill, I would contemplate that each supervisory agency, whether it is the Comp- troller of the Currency, FDIC, Federal Home Loan Bank Board or whatnot, would undertake to see to it that the creditors under its su- pervision understand the nature of the bill and the regulations and that there would be no other enforcement agency at all. That leaves aside the criminal cases, of which there will be some, I suspect-the flagrant cases that will come under the bill. There will be actions brought by individuals, the so-called self-enforcing aspects of this, and I think that will be adequate. Insofar as educating the public, however, and edu- cating the lenders and creditors, I think this is a job for any agency of Government which has any part of the public under its supervision, just as I think it is their present job to encourage compliance with all laws applicable to those institutions. Mr. HALPERN. One more question, Governor. By eliminating the $10 exclusion who do you feel will be most hurt or most helped? Mr. ROBERTSON. The one I hate to see hurt is going to be the very small man who needs $100 for a month and he needs it badly and he isn't going to be able to get it. Now, be can pay or is willing to pay $10 for that, and this is a terrific interest charge if you look at it on an annual percentage basis, but he still needs that $100. I am afraid he is not going to get it if you don't make some sort of an exemption where you have a small amount of finance charge involved. Hard as it seems, I think it is better that he get credit than not being able to get credit at all. Mrs. SULLIvAN. Mr. Haipern, will you yield at that point? Mr. HALPERN. I yield. Mrs. SULLIVAN. If he is so hard-pressed, where is he going to get the $10 to pay the additional credit charge? Mr. ROBERTSON. If he is in a position to pay this back and needs it? Mrs. SULLIVAN. You know what the answer is, do you not, Gov- ernor? They just go deeper and deeper and deeper into the hole, using this kind of credit because they never get paid up. Mr. ROBERTSON. This happens and I don't like to see this. But if you do have it confined to a small amount of finance charge, and it is a one-time transaction, I think it is better to have credit available, not- withstanding the problems clearly involved, than it is to prevent him from getting any credit at all. Mrs. SULLIVAN. This is going to result in a poor credit risk bor- rowing a little bit at a time here and there and the rate will nev~r have to be disclosed and he will never get himself out of debt; he will never know what the dickens he is paying. Mr. ROBERTSON. This troubles me as much as it troubles you. Mrs. SULLIVAN. This is why I am adamant about taking out this exemption. PAGENO="0151" CONSUMER CREDIT PROTECTION ACT 141 Mr. WILLIAMS. Will the gentleman yield? Mr. HALPERN. Yes, I yield. Mr. WILLIAMS. Mrs. Sullivan, is not what you are really saying is that the hypothetical case you are using, the person should not get credit? Mrs. SULLIVAN. It is not a hypothetical. This is true in a great many instances involving small loans. Mr. WILLIAMS. What you are saying is that this person should not receive credit. Mrs. SULLIVAN. He needs money so he is going to agree to any terms in order to get it. Mr. HALPERN. I should point out, and I certainly would like to make this point now, and if you perhaps have any comment on it, I would appreciate it. From what I understand, the best experience that credit unions enjoy is with the small loans made by the lowest income groups. Are you familiar with that? Mr. ROBERTSON. Oh, yes. Mr. HALPEJiN. Low income, I should say. Their experience has been~ very good. Mr. ROBERTSON. Their experience has been very good. Mr. HALPERN. That is all. Mrs. SULLIVAN. Mr. Annunzio. Mr. ANNUNZIO. Governor Robertson, you stated in the statement read before the committee that the other members of the Board have' approved the statement and also that it involves the 18-percent in- terest on loans charged to customers? Mr. ROBERTSON. Could I correct my statement? Because I may have misled you. They have not all approved the statement, the words that I have used. They have approved unanimously the positions that I have taken. Mr. ANNUNZIO. They have approved your position-the Board has approved the position that the 18-percent' rate ceilings as advocated un- der our bill 11602 should be eliminated? Mr. ROBERTSON. That is right. Mr. ANNUNZIO. Now, on the other hand, the Federal Reserve Board firmly supports the 5-percent ceiling on consumer time deposits. They support a 4-percent ceiling on savings d~posits. They support a zero ceiling on demand deposits. Do you see any inconsistency here in favor of lenders, with every- body ganging up against the bank borrower and bank depositor?' Is it fair to have a ceiling on what banks can pay on interest but not on what they can charge the average person? The average person liv- ing in my district would read this statement, and would get the feel- ling that the Government was not on their side, but on the side of the lending institutions. If you feel that this 18 percent should be eliminated, I would like to know in your opinion what a usurious rate of interest is-24 percent? 36 percent? 48 percent? I was on the sub- committee that investigated the rates of interest being charged to' servicemen. This Banking and Currency Committee uncovered interest rates that ran as high as 100 percent. We have made great advances in correcting that situation involving servicemen. PAGENO="0152" 142 CONSUMER CREDIT PROTECTION ACT I would like your opinion. What is a rate of interest that is too high? This is what you should be able to tell the American people. Mr. ROBERTSON. This is what I am trying to get Congress not to tell the American people. I would dislike to see the Federal Government specify a single rate ceiling which is deemed to be usurious without regard to the variety of transactions or conditions or circumstances involved. This is a matter that States have acted upon from time to time. Mr. ANNUNZIO. if I sit here all afternoon, I will never get you to make an admission ns to 24 percent, 36 percent, 48? Mr. ROBERTSON. You certainly won't. You are right about that be- cause I don't happen to know. I do not know what is a proper ceil- ing in any given situation. Mr. ANNUNZIO. I could ask any uneducated or unsophisticated per- son in my district and they would know that 25 percent was too damned high to pay. Mr. ROBERTSON. This may be so. And it may be that 25 percent is. But I don't happen to know what is the right ceiling for the peo- ple in your State or in any other State, and they may be very dif- ferent, depending entirely on the circumstances involved. Now, I think I should answer- Mr. ANNUNzIO. One more question. We are on the 5-minute time basis. Mr. ROBERTSON. I would like to answer the first part of your ques- tion. I will do it another time. Mr. ANNUNZIO. Are you ready to tell me what, in your opinion- Mr. ROBERTSON. You cannot press me that way, Mr. Congressman. Mr. ANNUNZI0. What do you think is too high as a member of the Federal Reserve Board? Mr. ROBERTSON. I would not undertake to tell you what is too high unless you will give me exactly the circumstances and conditions, the kind of ~redit conditions involved, and then I will tell you what I myself would think too high; but 1 still would say you should not set a Federal ceiling. Mr. ANNUNZIO. A man goes out and buys a television set and the television set costs $150 and when he gets through paying for the set he has paid $300 for it. Mr. ROBERTSON. That is too much. Mr. ANNUNzI0. I am making some progress. I got one admission. I notice in your testimony here that you apparently do not endorse the elimination of the exemption contained in the Senate bill with re- gard to applying the requirements of disclosure to transactions where the finance charge is under $10. You originally, I believe, made this recommendation in your testimo y before the Senate. In that testimony you stated that transactions involving the small amount-~-perhaps under $100, and small finance charges, perhaps under $10, should be exempted from the disclosure requirements. Now, Governor, the Senate bill whose provisions you apparently endorses in this regard states that the exemptions apply for each trans- action. This would mean, as I see it, that an individual could make purchases under $100 where the finance charges would be less than $10. Let us understand ourselves. This could mean a $95 purchase PAGENO="0153" CONSUMER CREDIT PROTECTION ACT 1431 where the finance charge was $9.90 and ob;tain absolutely no disclosure at all. Furthermore, the individual could make 10 or 100 purchases in a day-one of the loopholes-~and if each purchase under $100 was deemed to be a separate sale, there would be no disclosure. But to most people in this country $100 is a lot of money. For most people in this country a transaction involving the purchase of an item costing close to $100 is not a small transaction. Is it your view and the view of the Federal Reserve Board that the purchase of an item costing $98 or $95 is `a small transaction? Can you give us any information as to what the average amount of consumer credit transactions involve? Certainly, a majority of `consumer credit transaction's are amounts less than $100. When the family prepares to buy clothing for children in the fall, in September of this year, I am certain that many transaction's are involved-each comprised of less than $100 and which, under the language of the Senate bill would not be covered. Similarly, individual items of furniture, small appliances, area rugs, dinnerware, would involve purchases of less than $100 and, there- fore, would not be covered by the Senate bill. Are these not the very transactions which should be covered under this legislation if we are to provide protection for the pEople who need it most? Mr. ROBERTSON. If there were a number of small purchases, they might well be made under revolving `credit plans and so would be covered. I am just as concerned as you that the small borrower get all the advantages that this bill would provide. And I hope that you will, on the basis of the expert advice that you get from others, find some way of accomplishing this end while not depriving some r~ecessitous small borrower from getting credit. If I could think of a way to do that, I would certainly come forth with it. I do not know how to do it. I am just a's concerned that the small man get the benefit of this legislation as ~yone could be. I sim- ply don't know how you would do it without hurting other people who need `credit. Perhaps the committee will be able to come up with some way of doing it. Or maybe they will decide that the harm~ ~that is done to the necessitous small borrower is not sufficient to offset the b~neflts on the other side. Mrs. SULLIVAN. Mr. Wylie? Mr. WmIE. Thank you, Governor, for your testimony. I would like to pursue this matter of fixing an interest rate `again. I have read your statement on this and I do not want to be repeti- tious. I just want to lay a foundation for a question. You are opposed, as I understand it, to an interest rate ceiling. Is that a fair state~nent? Mr. ROBERTSON. That is right. Mr. WYLIE. Your theory on that is, as I understand it, that com- petition will establish the proper rate in the community? Mr. ROBERTSON. Or the local laws, of course. The local laws, which would still be applicable, and they set the ceilings. Mr. WYLIE. ~~`at you are saying now is that- Mr. Ro~RTsoN. The Federal Government should not intervene and set another ceiling. Mr. WYLIE. That we should not get into the practice of passing a Federal usury law? PAGENO="0154" 144 CONSUMER CREDIT PROTECTION ACT Mr. ROBERTSON. That is right. Mr. WYLIE. Maybe you cannot answer this question. What is the theory of fixing the 18-percent limit in the bill's? Mr. ROBERTSON. I don't know. I wouldn't do this. I wouldn't put an 18-percent limit in the bill. That is what we have opposed. Mr. WYLIE. I see. Is it fair to say that if an 18-percent limit is effected, that that might become the established rate? Mr. RO~ERTSON. It might become a floor. Everyone might push right up to it. Mr. W~IE. Competition in the community now fixes rates which are lower than 18 percent? Mr. ROBERTSON. In some instances, on some kinds of transactions, it does. On others, it will go up to 42 percent. In six' States it will go up to 42 percent on some kinds of loans. Mr. WYLIE. A good example is in the area of auto loans, which have an interest rate of considerably less than 18 percent now. Mr. ROBERTSON. That is right. Mr. WILIE. The commercial banks have gotten into the business of financing automobiles. Mr. ROBERTSON. In those, it could be less than 18 percent but not the 4 or 5 percent, as is sometimes advertised. Mr. WmIE. Is there any fear on your part that auto loans which now carry an interest rate of considerably less than 18 percent might `be lifted up to this ceiling of 18 percent? Mr. ROBERTSON. I thmk the competition for the sale of automo- biles is such that it may be unlikely. Mr. WYLIE. You do not think the banks might get together and `say, "Let us all charge 18 percent?" Mr. ROBERTSON. I feel that under the antitrust laws that kind of price fixing it will not happen. Mr. WYLIE. It will not happen? Mr. ROBERTSON. No. Mr. WYLIE. Is there any chance that it might happen in the retail ~field? Mr. ROBERTSON. I don't think so. Mr. WmIE. Thank you very much. Mrs. SULLIVAN. Mr. Bingham? Mr. BINOHAM. Thank you, Madam Chairman. Mr. Robertson, I would like to concentrate at this moment on the problem of credit life insurance. I do not know if you are familiar with the testimony given on the Senate side by Mr. James Hunt, Com- missioner of Banking and Insurance of Vermont. He said creditors are profiting excessively from credit life insurance to the tune of $175 million annually in this country. I also have here an article in the Wall Street Journal of July 14, 1967, dealing with some of the facts in this area, from which it ap- pears that in many States the standard credit life charge is $1 per $100 for life insurance-for the life insurance part of it, whereas the actual charge that should be made according to State insurance regulations is 44 cei~its. Now, if these statements are even partly true, if in fact the finance industry is profiting very substantially from these credit life insurance add-ons, is that not reason for requiring that there be ~the type of regulation in this area that is provided for' in our bill? PAGENO="0155" CONSUMER CREDIT PROTECTION ACT 145 Mr. ROBERTSON. I would say that if these statements are true, and it may very well be-I am certain there are some abuses-then this is a question of regulating the premiums and this is a matter of State law-there are State agencies to do this sort of job. But if they don't do it, I would say the Federal Government ought to step in, and there may `be a way to do it even within the context of this legislation, if this committee, on the basis of that kind of testimony, concludes it is appropriate. Mr. BINGHAM. What did you mean by saying in your testimony, "The fact remains, however, that inclusion in the finance charge of premiums for insurance that provides a benefit to the borrower over and above the use of credit would overstate the actual charge for credit"? Mr. ROBERTSON. They may very well-there are all kinds of in- surance. If it is solely life insurance, it certainly does provide bene- fits over and above the use of credit `because his family is protected to that extent. If it is the kind of insurance which would pay off the credit just in the event of default, this is solely for the benefit of the creditor and there, I think, this ought to be taken into consideration and is contained in one provision of the bill-of both bills. That is appro- priate. But if it is the kind of insurance which does provide addi- tional benefits to the borrower, then I would- Mr. BINGHAM. You mean life insurance benefits over and above the amount of the unpaid balance? Mr. ROBERTSON. No, if this is a benefit to the family in the event `of his death, that insurance premiums pays it off. Then I would say that is a benefit to him. Mr. BINOHAM. Isn't that a credit charge in the sense that, if he were not buying on time, he would not have to pay that charge? Mr. ROBERTSON. That is right. A's I pointed out, there are abuses in that area, and he may be paying out premiums for insurance he otherwise would not get at all. It seems to me you have to weigh bene- fits on the one side against the detriments on the other. They ought to be disclosed. And the actual dollar cost ought to be disclosed. But whether it should be taken into consideration in the annual percent- age rate, is an entirely different thing. Mr. BINOHAM. Governor Robertson, on another matter, would you comment briefly on what the Board's responsibility was or is under regulation W and regulation X, in connection with the administra- tive side of the bill? Mr. ROBERTSON. Yes. We had that job, as you know. And we drafted the regulations. We attempted to administer them. We had all sorts of problems, I must tell you, because it meant that we had to get into areas that we knew nothing about. We were delighted to see the period end when those controls had to be used. Mr. BINOHAM. What, in effect, did yo~u do under those regulations? Mr. ROBERTSON. Regulation W covered consumer credit-except for one period, installment credit only. Regulation X covered real estate construction credit. Whtat we did was to prescribe the permissible maximum maturities and `amounts. Mr. I3INGHAM. Do you feel this operation was a success? PAGENO="0156" 146 CONSUMER CREDIT PROTECTION ACT Mr. ROBERTSON. Yes and no. I feel sure that it served ~ purpose dur- ing the period when it was not possible to use general credit coutroi~,. during the war period. But the evidence is inconclusive, and it is very difficult to get selective controls out of the way once the need for them has expired. I personally have a great reluctance to use selective con- trols. I do not mind using them when needed. I think they should be there on a standby basis. But I avoid them whenever possible, because you must pick and choose, then, between equities. Mr. BINOHAM. Finally, Governor Roberston, with regard to the matter of administrative enforcement, I understand from your testi- mony that you do not want this responsibility. But does your position go beyond tha;t? Are you saying that you do not feel that administra- tive enforcement is needed? Mr. ROBERTSON. I think it will not be needed. I think that it is very likely that the self-enforcement features of this legislation, plus the' criminal sanctions, will be enough, because this is really an educational measure. 1~ou are trying to educate consumers. And I think if you `suc- ceed, it will be self-enforcing. I do not think any other measures will be necessary. If they are necessary we ought to be able to tell after' we have experimented for a year or so with `it, and we will know whether it is necessary to have some sort of administrative procedure, `and if so, we would come back `and recommend that you authorize some `administrative procedure, and place it in an agency that was equipped to handle it. Mr. BINGITAM. Wouldn't you agree that the very poor people, the ones who need the protection the most, `are going to be the ones that are least likely to know enough to try `to `enforce their rights themselves.. Mr. RO]~ERTSON. It is possible. But I think there will be enough others, however, who are in this busines~, who are watching out for their own interests, to get the lenders `and the creditors in line, so that their' practices-~---they cannot `afford to vary their practices from day to day. They must do it on a standardized basis. And once you get the stand- ardization principle adopted, I think your battle is nine-tenths won. Mr. BINGHAM. Thank you. Mrs. SULLIVAN. Mr. Williams. Mr. WILLIAMs. Governor Robertson, I want to apologize fo'r being late today, and not hearing your presentation. I will read your pre- pared statement, however. On page 18, where you do make the recommendation that you would like to st~y away from a ceiling on interest charges-I can understand your reasoning, that different merchants will have a different experi- ence. Some merchants will have a greater incidence of loss than others, and they have got to makeup this loss in some way. But relating this to your statement about the automobile dealers, where there is such terrific competition, that the competition controls' in effect the interest rate charged on automobile financing-I believe that the same t'hing is true of the general department store operation, where y~u have a number of department stores in the same vicinity,. where y~u do have these department stores engaging in high-pressure advertising campaigns, and the same competition that controls their price structure, it seems to me, would also control the interest rate that they are charging. PAGENO="0157" CONSUMER CREDIT PROTECTION ACT 147 Now, let us assume that we do reach the conclusion that some interest rate should be the maximum. Your theory is that this ceiling can very rapidly become the floor. And. I fail to see how the competition can control the interest rate in such a thing as the automobile business, and yet would not have the same control over the department store opera- tion. Mr. ROBFmTSON. I would answer that this way: If, for example, this connnittee were to pick a figure, like 42 percent, which is the highest rate that I know of that is authorized in any State for small loans, I am sure that that would never become a universal floor. But if a rate were picked down in the area which is the effective rate today on most of the revolving credit plans, of 1½ percent a month, which does come to 18 percent a year, and that 18 percent were the ceiling, I suspect that you would see a gradual lifting up of other rates as close as they could get to 18 percent, and still get the business. I cannot tell what actually will happen, what will result. And there may be some inconsistency between the two propositions you stated. But I have a feeling that there could be a tendency, if you get a ceiling that is down low enough, for it to become a floor, and I would `hate to see that. But in any event, quite aside from that, I think that it is unwise for Congress to attempt to set a `ceiling which would be in its judgment applicable to the kind of transaction you arO thinking of but have it actually apply to all transuctions clear across the board in all States of the Union. Mr. WnLIAM5. This may have some bearing on this point. We have been talking here about full disclosure of interest rates. We have been talking here today as to having a statement on your monthly bill, 1½ percent, for instance, on the unpaid balance. But isn't it time to educate the public, to do the greatest amount of good for the publie+-~-isn't that time before the actual contract is signed? we have httd some t~lk here today about the stores including in their ads the interest rate that they are going to charge on these revolving charge accounts. And of course we all know that nioi~ and more stores are `turning to these revolving charge `accounts-whereas many many years ago they were virtually unkncswm-not too many years ago. Now, if these interest charges were disclosed in advance to educate the public at the time it ±5 going to do them the most good, before they actually sign `the contract, ~rouldn't this stimulate the cornpeitition among the `stores to offer the lowest interest rate possible, along with the lowest price possible? Mr. BOBEUTSON. I would think so. Mr. WILLIAMS. And this might, then, prevent the ceiling from be- coming a floor? Mr. Roi~nPsoN. Might very ~s'ell. Mr. WILLIAMS. Thank you, Madam Chairman. Mrs. SULLIVAN. Thank you. Wouldn't it have been a lot easier for all of these department stores if they had assessed their credit charges in a little different way? I have no time for the people who are going to buy `and buy and buy, PAGENO="0158" 148 CONSUMER CREDIT PROTECTION ACT and then let somebody else hold the bag instead of paying up their bills. But for instance, we have our gas service in St. Louis. Our bills are due a certain day each month. And if we do not pay the bill that day, there is a charge added to it. And it is told to you right there on the bill that you have to pay this charge if you are delinquent. I `think the same thing could be true on `the charge accounts. Now, I still hold that payment in 90 days is cash. If you have to buy an item you cannot pay for in 1 month, you should be able to make arrangements to pay it in 3 months, and have that considered as cash. But if I don't pay it in that period, then for every month that bilE is not paid up, let them. put a penalty on it. But I don't think the re- volving charge, was put into effect for that purpose. The revolving charge, I think, is just a come-on to get people to buy more, and pay when you want. It is a good thing when properly used, but it is a temptation for those who cannot resist it. Mr. WTLLIAMS. Will the Congresswoman yield. I am not familiar specifically with the gas company practices in St. Louis, but the way this works in other parts of the country is that you get a certain dis- count for prompt payment. And if that is the case, then this cannot be compared tO interest charges on purchases. Mrs. SULLIVAN. They call it a discount, but it is actually a penalty. Mr. S'riuni~s. If the gentleman would yield on that proposition- we used to have that in my hometown on the water bill. If you paid by a specific time you got 1 percent discount. And everybody just had a terrific upheaval when instead of getting the 1 percent discount, if you did not pay it by the 10th of the month, you got 1 percent added. And you would have thought that they had committeed murder in city hail. That 1 percent add-on made a whole lot more difference than 1 percent discount. Mrs. SULLIVAN. Mr. Robertson, I was disappointed in the Fed's report on the provision of H.R. 11601 dealing with standby credit con- trols in times of national emergency. The Federal Reserve Board report says this authority would be useful to have on the books, but it is not needed now. Well, no one' proposes it for now-just for an emergency situation when we would perhaps need it badly. It is all right to point out that the idea is controversial, as was shown by `what happened in the House last year on an amendment of this nature on the Defense Production Act extension bill. But one reason we were defeated then on standby credit controls for use in a national emergency was that we had held no hearings on this proposal. So this is the reason we are holding some hearings on it now. Since this bill deals with all aspects of credit, there is no reason why we should not bring it up in this bill. We want to know what would be needed to protect the economy from credit inflation in times of scarcities related to a national emer- gency, and we want to know how to correct any deficiencies in previous authorizations of this kind-what kind of a bill should we have, and who is going to draft one for us ~ Can we get some help from you on this, or must we wait until we are defending our own soil in a war before the agencies which have the responsibility for economic stability even begin to think about the problem? We want to have something on the books which could work if necessary, and be instantly available, PAGENO="0159" CONSUMER CREDIT PROTECTION ACT 149 and not have to wait then for the agencies to come to Congress, and then delay for months getting the authorization enacted. Mr. ROBERTSON. I could not agree with you more. But it seems to me that it ought to be considered in the light of all the sectors that you need to deal with, and as I understand it, the Office of Emergency Planning is right now in the process of formulating its views to give to you with respect to this. Mrs. SULLWAN. So they were last year, too, but we have never gotten their answer. The point is, in this bill we are talking about credit. We do not want to bring this issue up by itself, because then it would look as if we were already in an emergency, and we are not. But to give the Fed the standby controls to use, only when the President announces a national emergency-this is what we have been trying to do. Mr. ROBERTSON. Well, I must state that I am in complete agreement that we should not wait until the emergency takes place before we prepare ourselves for it. And we will be very glad to do anything we can to help you in this regard. I would hope, however, that that matter would not be inserted into the legislation if it is to have the effect of preventing the passage of truth in lending legislation. Mrs SULLIVAN We did not put it in this bill in order to defeat truth in lending. We placed it in this bill ii~ order to have the witnesses cover it in their testimony. We were accused last year of trying to enact it without hearings. I think almost everyone recognizes it is only a ~tandby authorization. We do not need it now; the President has not asked for it; and that day that we were defeated last year, this is what we got from 90 percent of the Members-"Well, the President hasn't asked for it and you haven't had hearings on it, so why should we pass it now?" This is why We are having hearings on it now. There is one other thing I would like to bring up. This goes back to the commodity futures issue. You now exercise restraints over stock market credit. But according to the New York Times yesterday, a lot of money is quietly being lent for stock purchase in evasion of margin requirements for stock spec- ulation. Are you concerned about that? Mr. ROBERTSON. Yes, verymuch concerned. Mrs. SULLIVAN. But at least you have some control over margins on stocks. But what about the tremendous speculation in commodities? Isn't this potentially extremely inflationary-and completely exempt from any kind of governmental restraint I Mr. ROBERTSON. It may very well be. And I do not deny that it is a real problem. But it is not a problem within the area of the Federal Reserve, as I see it. It is not an area which we know anything about. You could not find a single man working for the Federal Reserve today who could claim to be an expert in this field. But the Depart- ment of Agriculture is. And it is considering this very matter at this time, as you know. And therefore it seems to me that that is the proper place to get the advice. Mrs. SULLIVAN. You say the Department of Agriculture should regulate margins on commodities. Do you think they should regulate the stock market margins on the stock of General Foods or other food companies? PAGENO="0160" 150 CONSUMER CREDIT PROTECTION ACT Mr. ROBERPSON. I would say that they probably are as ill equipped to deal with margins on stocks as we are to deal with'margins on com- modity futures contracts. Mrs. SULLIVAN. What would the Agriculture Department know about trading in copper, lead, zinc, silver, platinum, and all the other unreguiat4d commodities which are not agricultural commodities? Mr. ROBERTSON. There is no use asking me questions about that, Madam Chairman, because I simply do not know. Mrs. StTLLIVAN. But they do not know anything about them either.' And yet it is being suggested here that we let Agriculture take over these things. Mr. WILLIAMS. Would Madam Chairman yield for a moment? Mrs. SULLIVAN. Yes. Mr. WILLIAMS. I appreciate your comments about what the Prési- dent would like to have. I would like to say I do not believe there is any more justification in the' President requesting the type of controls which appear in H.R. 11601, any more than there is for the President to request standby prices and'wage controls. But I think we should approach this problem not being influenced too greatly by what is desired by the executive branch. And if we feel. additional powers are necessary in other fields, we should consider that as Members of Congress. Mrs. SULLIVAN. I would like to tell the distinguished gentleman from Pennsylvania, who was not here last year when this was debated on the floor, that we did not think we on this committee should wait, either, for the President to send a recommendation on this, because we were trying to set this issue out at a time when there was not an emergency-we wanted to get it considered without the excitement of a nationaJ emergency. This is why we put it in the Defense Pro- duction Act extension bill. Mr. WILLIAMS. This is certainly the type of approach I would ap- prove of. Mrs. SULLIVAN. If the President were to ask for this, then I think the whole country and the whole world would have `the feeling that things were getting tight, and he had to have the controls. So he cannot ask for it. But I think we should give it to him. Mr. WILLIAMS. I understood he had some of these standby powers. Mrs. StYLLIVAN. No. He has not, not on credit. Governor, there was another story in the New York Times business section which you may have seen yesterday. The headline says "For Commodities-Time of Ferment. Change in Futures Markets Stirs Trading Interest." It shows the great activity in futures trading-which is not subject to regulation. I think it is something that simply has to be discussed in the con- text of this legislation because excessive speculation can throw these commodities, and especially those which are unregulated, into a spiral that directly affects the entire economy, and most of it is done on very little cash-mostly credit. (The article referred to follows:) PAGENO="0161" CONSUMER CREDIT PROTECTION ACT 151 [From the New york Times~ Aug. 6, 1067] Fon COMMODITIES, TIME OF FERMENT-CHANGE IN FITTIJRE5 MARKETS STIES TRADING INPEE~~~ J3~ Elizabeth M. Fowler Changes in commodity tharkets have been coining on the heels of one an- other. And almost all indicate `an increasing interest in futures trading, now at a record pace. Last week the New York Mercantile Exchange set a definite date-Aug. 21- for the start of trading in silver dollars on a spot basis. The exchalige has been working on the project `a long time, hoping to cash in on the ever-Increasing speculative interest in silver due to the worldwide shortage. Not to be caught napping, The New York Institute of Finance has taken cognizance of the growing interest and record trading in commodities, The in- stitute, which calls itself the place "where Wall Street goes to school," has just announced a new course. Its title: Commodities Futures Trading. The 15-session course scheduled for Tuesday evenings is for trainees, registered representatives and "knowledgeable" speculators and hedgers. It starts Sept. 12. In June, Arthur Raltano, assistant manager of Walston & Co.'s commodity research department, left the big brokerage house for such a department `at the First Hanover Corporation, a brokerage company with 11 offices. Besides staff- ing the house with analysts and traders, Mr. Raitano, who is 28 years odl, will write weekly comments and issue depth studies from time to time. He has the title of assistant vice president and department manager, On March 1, Stanley I~rol1, 33 years old and a product of Merrill Lynch, Pierce, Fenner & Smith's training program, opened his own firm `at 25 Broad Street, to specialize in commodity futures. The firm, Kroll, Dalon & Co., Inc., has seven traders and three clerks who work in front of a large clicking commodity quota- tion hoard. The office has direct wires to Chicago. "Back in 1960, I anticipated that commodity futures would grow in volume and not many people would be in the field," Mr. Kroll commented. OTHER NEWCOMERS Other relative newcomers include concerns such as M. E. Green & Co., Inc., also a specialist in commodity trading. Several weeks ago, the Commodity Exchange, Inc., center for trading in metals such as copper and silver announced plans to open trading for the first time in liquid propane gas futures sometime after Labor Day. The gasi is familiar in rural areas where it is used widely for cooking and heating, and it also has industrial uses. Recently, an offering circular made the rounds for a new company called the Grain Vine Futures Corporation, a commodity mutual fund. In the circular the founders were frank, as required by the Securities and Exchange Commission: "Investment in commodities carries extremely high risk. The commodities market is much more volatile than the regular securities market," the circular said, and then it added: "The issuer is newly formed, has never engaged, in bt~siness, has no office space of its own or full-time personnel and has only $1,000 in the bank." Another new fund is called Pennsylvania Commodity Fund, Inc. An unusual gimmick is that Grain Vine plans to dissolve on June 15, 1970, and thereupon redeem the shares at net asset value at the time, but unlike an ordinary mutual funds, the shares `are not redeemable before that date. Further- more, no dividends will be paid. 83-340-67-pt. 1-11 PAGENO="0162" 152 CONSTJMEE CREDIT PROTECTION ACT ACTION IN LONDON In London recently, a group announced plans to begin the first European- market offerjng of futures contracts in soybean oil. Once this is In operation, it expects to add trading in other food oils such as sunflower and rapeseed and then soybean meal. Trading will start with 33 members in Plantation House on Mincing Lane, which is in the middle of London's financial district. About the same time, the London Metals Exchange said it was studying a plan to add futures trading in aluminum, and possibly mercury and tungsten later. The exchange presently concentrates on copper, tin, lead and zinc. In this country, the aluminum contract on the Commodity Exchange, Inc., has not caught public or producer interest yet, and trading in mercury, begun in January, has had hardly enough time for it to attract a large following. The Gov- ernment dorginates the mercury market through monthly auction sales, it was noted. From John Pepion, president of the Association of Commodity Exchange Firms, Inc., came the latest figures on trading in all futures. The total for the exchanges in this country was 4,922,900 contracts, up more than 3 per cent, in the January-June period this year, compared with the level in the 196G period. Last year was a record-breaking year, with 10,460,144 contracts traded. SEAT SOLD FOR $19,500 Recently, Everette Harris, president of the Chicago Mercantile Exchange, announced a sale of a membership at $19,500, a record, and quite a contrast to the situation a few years ago when the seats could be picked up' for a couple of tl~ousand `dollars. Mr. Harrjis also offered this comment: "The price (of memberships) has grown steadily with the volume of trade." To add a literary note, at least two' commodity brokers and one college pro- fessor are writing books on futures trading. Why all the interest? In recent years, some commodities have shown some spectacular changes in their supply-demand outlook that aroused speculative interest. Belief that a supply-demand situation may change creates interest, and interest feeds on itself, rousing more followers. Generally, speculators' like a fast-swinging market moving upward. MATTER OF SOPHISTICATION But a su'~tler reason is that investors have become somewhat more sophisti- cated. That became evident last year when, during a lull in stock market trading, milch speculative money moved out of securities and into' commodity futures. Perhaps another factor is that a new' generation, of young stock brokers, trained to kno'w about commodity futu'r~es~, has been showing more' interest. In fact, some of them specialize in commodity futures with the big Wall Street brokerage houses. They have been working to increase hedging interest in the markets by producers, as well as attracting speculators'. For tomorrow, the constantly reiterated fact is that the world needs more food. The Ohase Manhattan Bank, in an economic study, stressed that today the nation has 80 per' cent more farm output than in 1929 and the work is being done by 60 per cent fewer persons. That indicates a ipu'c'h larger use of farm equipment an'd fertilizer, along with large, efficient farm units. PAGENO="0163" CONSUMER CREDIT PROTECTION ACT 153 Mr. STEPHENS. I would like to say something that has worried me for a long time. Why is it that in America that a man buys a commodity for $75, and he sells it for $150 on the market-that is a hundred percent markup-and we do not say anything much about it. But then we buy a commodity called money, and add 6 percent to it or 7 percent to it, we get real excited. It is a commodity just like the other. You are switching dollars for the other commodity.I never have under- stood why we make the differentiation. Money nowadays is as much a commodity as a television set. And we get real excited talking about 18 percent interest and actually the markup which is comparable is a hundred percent when the merchant converts the money into some- thing else besides dollars. Mr. ROBERTSON. Money in many respects is a commodity. We do, however, on the basis of history, at least, find that people have to have money in order to live, and so we put ceiling rates on it in the form of usury rates. And this is a matter that has grown up over the years. Mr. STEPHENS. Food is also a necessary commodity. We can mark food up a hundred percent, and we cannot mark the money to buy the food up with but 7 percent. Mr. ROBERTSON. I cannot give you an answer that is better than the question itself. Mr. STEPHENS. I did not mean for you to try to answer. It was just an observation; thank you. Mrs. SULLIVAN. Mr. Halpern. Mr. HALPERN. Yes, Madam Chairman. Governor, with regard to revolving credit disclosure, when I sug- gested a statement of the 18 percent as a maximum, I did not mean this to be a statutory limit, or ceiling, as I believe you interpreted my point. I was trying to address myself to the question of how to accurately state revolving credit charges on an annual basis. Now, considering the complaint of the revolving credit people that often the charges for their credit do not amount to 18 percent, could we permit them to state that they will be charging 1½ percent a month, which at a maximum, that is 1 year after finance charges are levied, will amount to a charge of 18 percent per annum? Mr. ROBERTSON. They should be able to state whatever they are doing, so long as it is true, provided, in my view, you have some standardized rate which would be an annual percentage rate, which could be used by the consumer as a basis for comparing his costs. `Whether, in addition, he says this is at the rate of 1½ per a month, this does not bother me at all-I do not care what he says, if it is true- provided you do adopt some standardized ruler by which to measure the cost. Mr. HALPERN. Thaiik you. That is all. Mr. BINOHAM. Madam Chairman, I do not have additional ques- tions, but in my questions earlier I referred to a statement and to an article in the Wall Street Journal. I wonder if I could ask unanimous consent that they be included in the record at this point. One is a statement made to the Senate Antitrust and Monopoly Subcommittee regarding credit life and health insurance by James Hunt, Commis- sioner of Banking and Insurance for the State of Vermont, and the PAGENO="0164" 154 CONSUMER CREDIT PROTECTION ~CT other is an article in the Wall Street Journal for July 14, 1967. Will it be agreeable to have those in the record? Mrs. SULLIVAN. Yes; if there is no objection, we will have those inserted. I have a letter from Mr. Hunt (see p. 886). Any other questions? (The material referred to may be found in the appendix, p. 914.) Mr. WYLIE. Madam Chairman, I just want to pin this down. I am very much interested in the annual rate for revolving credit. You say you do not think there should be a ceiling on it. On revolving credit, what would you think of the proposition of having the interest rate stated on ~n annual basis in the contract, as you enter into the arrange- ment pric~r to the purchase of the item? For instance, state a 10 percent interest and that equals an amount in cash, so that it would be added onto the price, and you can see the actual interest which is charged on it, plus the amount of money. Mr. RoBERTsoN. This is perfectly in accord with all the good prin- ciples I know. If you state an annual perecntage rate, what else you say in the way of showing the actual dollars of additional cost-is perfectly appropriate. No one can object to this. There would be noth- ing in this legislation which would preclude it. Mr. W~ui~. Do you think it is really important, if you do that, that you include the interest rate on a monthly basis on revolving credit on the monthly statement? Mr. ROBERTSON. Let me understand it. If you use an annual per~ centage rate, this would amount to 18 percent, and in addition what you do is to say-this amounts to 1½ percent a month- Mr. Wmm. Do you think it is important to say the interest amounts to li/2 percent per month on each monthly statement? Mr. ROBERTSON. I do not. You could if you wanted, and not if you did not. Mr. Wu~rn. Yes. Thank you very much. Mrs. StTLLIVAN. Any further questions? Goverflor, we appreciate your coming. You have done a beautiful job. We have tried to get you to say things you do not want `to say. Mr. ROBERTSON. It is a real pleasure to be here. Mrs. SuI~LIvAN. We appreciate having your associates here also, in- cluding Mr. Cardon, who was, at one time, the clerk of the Banking Committee, and a very good one. If any of the subcommittee members would like to submit additional questions to the Governor they can do so within 24 hours, and we will give them to him. And he can reply for the record, if that is all right with you, Governor. (The following letter was received in reply to a question of Mr. Annunzio:) BOARD OF GovERNoRs or THE FEDERAL RESEiWE SYSTEM, Washington, D.C., August 17, 1967. Hon. FRANK ANNuNzIo, Congress of the United States, House of Representatives, Washington~, D.C. DEAR Mu. ANNuNulo: This is in response to your letter of August 8, inquiring as to the adequacy of the tolerances permitted in computing annual percentage rates of finance charge as provided for in H.R. 11601. The Board is very much PAGENO="0165" CONSTJMER CREDIT PROTECTION ACT 155 aware of this problem, since we recognize that tolerances must be allowed if rate charts and tables are to be used in many types of finance computation and if the burden on lenders and merchants is to be left within reasonable bounds. Indeed this is one of the reasons for our suggestion that the effective date of this legislation be delayed for at least one year after its enactment. Through staff work and consultations with the Advisory Committee (provided for by the bill), the industry and others, we hope to work out procedures specifying the use of rate tables and charts, or of other methods ~f computation, that will go as far as possible to simplify compliance with this aspect of tile bill. It is theoretically possible to reduce all computational problems to solutions by use of one elaborate set of tables, such as have been prepared by the Govern- nient Actuary of the Office of the Secretary of the Treasury, to a rate tolerance accurate to within 1/4 of 1 percent. But such a procedure, though technically feasible, seems to us to present too complicated a task to be proposed for general use in the millions of consumer credit transactions handled by clerical personnel with widely varying skills. The Department of Defense table to which you refer is much simpler. Partly this is because the tolerances of accuracy a~e widened to 1/2 percentage point for effective rates between 5 and 8 percent, 1 percentage point for rates between S and 16 percent, and 2 percentage points or more for rates above 16 percent. But more important to the simplification is the fact that the table applies only to ordinary installment credits, i.e., contracts involving equal payments and equal time periods from payment to payment. We are inclined at this point to think that it would be better to provide for a series of tables to be used in different situations. In an ordinary installment credit transaction, for example, If the lender knows the discount or add-on rate he wishes to charge, it is possible to convert this rate directly and without error (tolerance) to an effective rate by use of a simple table. This assumes that the amounts and timing of scheduled repayments are equal (within the definitions included in the bill) and that fees charged (in addition to the finance rate) are not significant. But if there are substantial fees so that the lender knows only the total finance charge, this too can be determined by use of a conversion table, accurate generally to within 1/4 of 1 percentage point. Conversely, if the lender knows the effective rate of finance he wants to disclose, the associated total finance charge can be found by use of a table. Such tables are provided for use In Nova Scotia by the Financial Publishing Company of Boston, and should be readily adaptible to the needs of lenders in compliance with H.R. 11601. When the terms of the installment contract are irregular in size of payments, repayment intervals, or rates charged from time to time, the computaion prob- lem is more difficult. There is no mathematical bar to compliance, so far as we are aware, but the necessary computations may be quite complex. Presum- ably, special-purpose tables can be developed for the more common kinds of irregular credits, but it seems likely also that considerable tolerances as to accuracy may be needed if compliance is to be achieved in all such transactions. Both H.R. 11601 and S. 5 appear to provide ample latitude for tolerances as to accuracy in meeting rate disclosure requirements. For most regular trans- actions, involving a single known rate, a tolerance of 1/4 percentage point is permitted; in actuality, such rates may readily be converted to disclosed rates with little or no error. For credits where the finance charge (rather than the rate) is known, the permitted range of tolerance is 8 per cent, which on a credit involving a 12 per cent effective annual rate would amount to about 1 percentage point, plus or minus; this appears ample. And for credits Involving irregulari- ties, HR. 11601 states that "the Board may authorize tolerances greater than those specified in paragraph (2)," I.e., more than 8 per cent. We are far from expert in regard to trade practices in the consumer credit field, and there probably are many variations in the computation of finance charges with which we are not acquainted. But If credit cost disclosure legisla- tmn is enlcted and the Board Is named to administer It, we will do our best to identify and study the various problems and to issue regulations that deal with them as equitably and simply as possible. Sincerely, J. L. flomrwrsoN, Vice Chairman. PAGENO="0166" 156 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. The committee will recess until 9:30 tomorrow morning, when we will have former Senator Douglas, followed by Mr. Andrew J. Biemiller of the AFL-CIO, and then witnesses from the American Retail Federation, and Consumers Union, going into the aftern~on if we can. Thank you. (`Whereupon, at 3:25 p.m. the subcommittee was recessed. to rw.on* veiie at 9 :~0 a.m.~ Tuesday, August 8, 1967.) PAGENO="0167" CONSUMER CREDIT PROTECTION ACT TUESDAY, AUGUST 8, 1967 HOUSE or REPRESENTATIVES, SUBCOMMITTEE ON CONSUMER AFFAIRS OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to recess, at 9: 33 a.m., in room 2128, Rayburn House Office Building, Hon. Leonor K. Sullivan (chair- man of the subcommittee) presiding. Members of the subcommittee present: Representatives Sullivan, Stephens, Gonzalez, Minish, Hanna, Annunzio, Bingham, Dwyer, Halpern, Wylie, and Williams. Also present: Representative Widnall. Mrs. SULLIVAN. The Subcommittee ~n Consumer Aflairs will come to order. Before we start, I should explain that the Republican Members of the House are holding a meeting this morning at 10 o'clock, so we are starting earlier than usual so that they can hear some of the testimony, but they are going to have to miss some of the proceedings. Some of our members were invited down to the White House this morning, so that is why some of them are not here. I have a note that 10 of the 12 members will be here eventually, so I think we should start and get through as best we can until the others come in and make things a little more lively. I was very pleased with the thoroughness and interest with which our witnesses yesterday opened this series of hearings into consumer credit legislation. From the lineup of witnesses today, I am confident we will learn a good deal more about this important subject. Every member of this subcommittee has sponsored one or the other of two major bills before us, which indicates that we start with the Senate- passed bill as a minimum on which every member here can agree. How much, more than that we can succeed in writing into the legislation will depend upon the nature of the information we can develop in these hearings, for I am sure there is, on the part. of all of us, a will- ingness to look at the faôts and not foreclose any idea without a hearing. In seeking information on the subject of consumer credit, there is no better teacher in the country, and, I suspect, in the civilized world, than our first witness this morning, the economist who invented truth- in-lending legislation, and who spent 6 long, hard, dedicated, and re- markable years instructing the Senate Banking Committee, and the entire country, in the need for an effective law on credit disclosure. I think he has succeeded finally in convincing everyone of that. 157 PAGENO="0168" 158 CONSUMER CREDIT PROTECTION ACT Former S~n'ator Paul H. Douglas is a patient teacher as well as a brilliant economist, and we are about to enjoy a master class in a sub- ject which can often be made to sound incomprehensible when the purpose is to convince us that the problem is too complex to solve through legislation. We are counting on you, Senator, to pierce the fog for us and advise us, out of your great wisdom in this field, how we can truly protect the American consumer in his use of credit. We welcome you to the House Committee on Banking and Currency and are grateful to you for agreeing, to come here this morning, for we are carrying on a work you started and we want your guidance. Senator Douglas is still serving the people of the United States through official `office as Chairman of the Commission on Urban Prob- lems created by the Banking and Currency Committee of the House,. I might add, in the Housing Act of 1965. I am sure, Senator, that yqu see a very close connection between the problems of our cities and the prQblen~s which this legislation is intended to solve. ST4T~WENT 0]? HON. PAUL H. DOUGLAS, CHAiRMAN, NATIONAt COMMISSION `ON URBAN PROBLEMS; ACCOMPANIED BY STANLEY D. HLCH1VIAN Mr. DOUGLAS. Thank you very much, Madam Chairman. I will read part Of my statement and try to summarize another por- tion of it. Madam Chairman and members of the committee, I appreciate your inviting me to testify before your cc~mniittee. I had some hesitancy about accepting. I have always be1iev~d that ex~Senators should fade' away from Capitol Hill and not linger on as empty political ghosts. And, there is an added reason why a former denizen of the north side of the Capitol `should not come over to the south side. But Congresswoman `Sullivan was so generous and so hearty in her invitation that I swallowed my scruples and agreed to come. And, I hope you will not hold it against me because I am here. * I am, of course, tremendously pleased that the Senate passed a rela- tively good truth-in-lending bill on July 11, 1967, by the surprising itote of 92 toO. It may have marked the beginning of the end of a long, long `struggle and it was a great victory for Senator Proxmire and its supporters. As you stated, Madam Chairman, I' introduced the first truth-in-lending bill as long ago as the spring of 1960. But, despite 6 years ~of h~arings and study, we were never able to get it out of the basement ~f the subcommittee except for 1 brief day when the full committee under the able generalship of its then chairman proceeded to knock it on'the head and send it back tothe dark cellar. So this year is the only year that it has really seen the light of day. But times have changed. Public opinion has become informed. People are mOre and more coming to the conclusion that consumers should not be gulled by trickery but are entitled to the truth, and that this, app1ie~ to borrowers as well as buyers. Caveat emptor has gone out of vogue. Perhaps also the realization that the people could be helped in this `way without cost to the `Treasury was especially appeal- ing when the `need for improving American life was coming up against the budget restraints created by the war in Vietnam. It ls pleasant to do things for people if it does not cost you any money. PAGENO="0169" CONSUMER CREDIT PROTECTION ACT 159 That we were stymied for so long was due primarily to the unrelent- ing opposition of most of the private lending and selling agencies. From the very beginning, we were fought by the personal finance com- panies, the dealers in durable consumer goods sold on credit, mail- order houses, the department stores and retailers of soft goods, the chamber of commerce, the banks and the American Banking Associa- tion, the American Bar Association, and virtually all of the so-called financial and mercantile establishments. This was powerful opposition and it is no wonder that despite increasing popular interest and sup- port we were never able to get a favorable vote. It is being said. by some of the former opponents of the bill that if I had been willing to compromise, the bill could have passed long ago and that only my stubbornness prevented the opponents from joining the happy throng of supporters. I have reached that point, Madam Chairman, where I am no longer worried about praise or blame. We have passed the point of no re- turn, so to speak, and really what I care about is whether we enact a good bill into law. While I do not care about either praise or blame as long as a good bill is enacted into law, I must object to this remark. I was perfectly willing to compromise on less important features if I could only estab- lish the essential point; namely, to have the financial charges stated to buyers and borrowers as an annual rate on the amounts actually owed. But it was precisely this feature that my opponents were never will- ing to concede until now. They tried to argue that no one could com- pute the annual rate; that 3 percent a month was not 36 percent a year; and that 11/2 percent a month did not equal 18 percent a year. They wanted to retain the growing practice of concealing both the price and interest rate on many durable goods such as automobiles, television sets, furniture, and washing machines by the device of only quoting so much down and so much a month-only that and nothing more-and not always so much a month. They were reluctant to aban- don the practice in the case of personal loans of the banks charging interest on the original amount borrowed rather than on the declin- ing balance of the amounts actually owed. By this method they con- cealed the fact that the real rate of interest was approximately twice that which they actually quoted, and they were not averse to adding special charges such as finders' fees, filing fees, credit life insurance at high rates, et cetera, et cetera. During those 6 years of struggle, I was never once able to get our opponents to agree on the basic principle of the annual rate on the amounts actually owed. It is a tribute to the merits of the democratic process, however, that gradually the public became convinced of the essential soundness of this simple principle. The abuses were becoming more important as the amount of consumer debt rose from $56 billion in 1960 to $93 billion in the spring of this year-since I wrote these lines it has gone up to $94 billion-while mortgage debt on single family homes and those of less than five family units increased from $141 billion to $227 billion. With the total personal debt rising to $321 billion-only $10 billion or 4 percent less than the national pnblie debt of $831 billion-~-people slowly concluded that it was time to stop, look, and listen. Support PAGENO="0170" 160 CONSUMER CREDIT PROTECTION ACT came from a number of public-minded groups such as the credit unions, the mutual savings banks of the Northeast, the industrial unions, and various consumer groups. God bless all of them and the hundreds of devoted men and women who rallied to the cause. Finally after our subcommittee held hearings in Boston and after a scandal involv- ing the personal credit industry had besmirched leaders in the Massa- chusetts Legislature, the public-spirited citizens of that State got the legislature to pass a series of good truth-in-lending bills. Senator Brooke was very helpful getting those bills passed. These are now in effect and are apparently working well. The opposition began to weaken. Senator Proxmire took up the battle after my defeat of last fall, gave able and devoted leadership, and finally got a bill through both the committee and the Senate. In order to get anything passed, against heavy odds, he had to agree to several compromises. The most important of these was the virtual exemption of most of the so-called revolving credit from the require- ment of stating the annual rather than the monthly rates. Here the mail order companies, the department stores, and the merchants who are now extending about $5 billion of such credit were simply too strong. It was impossible for Senator Proxmire to get his bill through unless he aècepted the exemption. Having been voted down in com- mittee on revolving credit, it was a case of yielding on that point or else. He should not be blamed in the slightest. In a similar situation I would have done the same thing. In order to reduce the danger that a larger and larger proportion of credit would be channeled through the revolving credit loophole, Senator Proxmire, however, was able to limit this exemption by providing: (1) That it would not prevail where the seller had the right to repossess the goods upon default in the schedule of payments. This barred the door to exemption for most of the sales of durable goods such as auths, television and radio sets, furniture, washing machines, refrigerators, et cetera, and tended to limit the exemption primarily to soft goods and credit cards. (2) That where less than 60 percent of the initial price was to be repaid in the first year, this exemption was not to apply, or to state the matter in another way, when 60 percent of the purchase price is to be repaid within the year, exemption would be granted. That comes to a maximum of about 22 months. In practice these provisions will exempt S~ars, Roebuck, but will include Montgomery Ward and Spiegels, the latter now owned by Beneficial Finance, that is, owned by a personal finance company itself. In order to smooth the way for his bill, Senator Proxmire also felt compelled to exempt first mortgage credit on homes as well as in those cases where the total finance charges came to less than $10. It is fortunate, however, that we have two legislative chambers whereby one body can correct the errors and omissions of the other. Mrs. Sullivan and her associates have produced an able bill in H.R. 11601 which corrects some of the weaknesses-indeed all of the weak- nes~es-which Senator Proxmire was unwillingly forced to accept, and they have added certain additional features of their own. To my eyes, the r~iost important improvement in the Sullivan bill over the PAGENO="0171" CONSUMER CREDIT PROTECTION ACT 161 Senate bill is that it completely eliminates the exemption for revolving credit. It also omits the exemptions on first mortgage credit and on finance charges of less than $10 and includes both. While the Sullivan bill, like that of the Senate, also gives the ad- ministrative jurisidiction over the measure to the Federal Reserve Board with its penalty of double damages for knowing violations, it also provides the additional power of issuing cease-and-desist orders. Then in addition H.R. 11601 requires `truth in the advertising of credit and sets up a commission to study consumer credit. These are features which were never included in any Senate bill. The Sullivan bill-}]I.R. 11601-also sets a maximum legal rate ceil- ing of 18 percent on consumer and personal loans; gives authority for the Federal Reserve Board `to regulate credit used in trading in com- modity futures; and gives the President power to regulate other terms of consumer credit in periods of national emergency. Finally, in title II, the Sullivan bill prohibits the garnishment of the wages or salary of an employee to collect an otherwise unpaid debt. It is obvious that you in the House have been giving this matter deep study for a long period of time. On the whole the Sullivan bill is extremely good and, except on a few doubtful points, it is in- trinsically superior, as I hope to show, to the Senate bill. Now, we have all seen many funny things happen `to good measures on their way to and through the forum. But as seasoned veterans well trained in parliamentary maneuvers, I am sure that you will not be led down the garden path by the honeyed words of crafty seducers to ultimate obfuscation. And, I also know tha't you are even more aware than I am of the dangers of stirring up added and otherwise non.. existent opposition to the main principles by loading the ship with more burdens than it can legislatively carry into port. Thus I am sure we all have our eyes on `the ball; namely, the effective requirement of an annual rate on the outstanding unpaid balance of as large a pro- portion of consumer debt and personal loans as possible. With that as a guide, we cannot go wrong. I am of course happy that most of the Republican members of your committee under the leadership of my longtime friend Bill Widnall- with whom I have served on housing groups and who has made a fine contribution to housing-have adopted the Senate bill-S. 5-lock, stock and barrel in their H.R. 11602. I only wish I had enjoyed the companionship of these genial and fairminded gentlemen on our Senate committee during the 6 frustrating years which we spent try- ing to get the simple basic principles agreed upon. Unless there are aces up their sleeves, which in our innocence we do not see nor even suspect, the Widnall bill should narrow the differences between us and make the issue not whether we can get any decent bill at all, but whether we cannot improve on S. 5 and still get it adopted. We should-and I hope we can-improve on the Senate bill, and I congratulate Mrs. Sullivan and her gallant cosponsors for trying. The most important Improvement which you have made over the Senate bill in your H.R. 11601 is to include revolving and open-end credit. There is every reason to do so. Revolving credit is increasing in importance, having apparently risen from $~`/2 billion to $5 billion while the Proxmire bill was under consideration. The spreading use PAGENO="0172" 162 CONSUMER CREDIT PROTECTION ACT of credit cards is increasing this still further, and there is every pros- pect that this trend will persist. The rate now charged is almost urn- formly 11/2 percent a month on the amount due at the beginning of a monthly billing period. In spite of all the hairsplitting this is the equiv- alent of 18 percent a year, and there is no legitimate reason for not quoting this rate alongside and with the monthly rate. The same amount of free riding on credit purchases within the previous billing month which is now granted under revolving credit would still be ac- corded th& buyers-but no more and no less. If this practice is proper now, it wotild be proper then, and industry opponents cannot condemn this feature of the Sullivan bill without condemning their present practices. As is now true, credit would be measured from the date the service charge begins and not from the date of purchase. The existing freeloading of credit up to the time that the service charge is made is probably already reflected in a higher price. It would be wrong to charge customers twice, in interest as well as price, for the same service. Therefore, friends, let the nonsense cease. There are 12 months in the ye~r, as any kindergarten child knows, and a monthly rate of 11/2 percent is an approximate 18 percent yearly rate and an approxi- mate yearly rate is all the Sullivan bill requires. There is no point in at- tempting to refine the percentage to a thousandth of 1 percent or even to a hundredth of a percent. A tenth of a percent would be enough and even the nearest quarter of a percent. I believe this is all that the Sullivan bill requires. A further powerful objection to the exemption given certain forms o~ revolving credit is that it would favor some mercantile establish- ments at the e~~cpense of others. Thus Sears, Roebuck would be exempt- ed, but Montgomery Ward and Spiegels included. The furniture in- dustry would be covered, but department stores would not. I think you will find many business and financial groups favor including all forms of consumer credit rather than merely including some types and excluding others. These views are stated in "Revolving Credit Provisions of Truth in Lending," a hearing before the Committee on Banking and Currency of the U.S. Senate, during the 90th Congress, first session, on S. 5, June 23, 1967, page 65. I should like to present a further brief summary if I may of 12 reasons why I believe revolving or open-end credit should be included without any exemption. (1) A monthly rate is inherently misleading. It tends to minimize the cost ~f credit. A rate of 11/2 percent a month sounds a lot cheaper than 18 percent a year. (2) A monthly rate for revolving credit prevents a consumer from comparing the cost of revolving credit with alternative sources of credit which would b~ quoted on an annual basis. Why shouldn't a housewife know that her credit is costing her 18 percent a year? Per- haps she could borrow somewhere else at a cheaper rate. (3) A monthly rate on revolving credit prevents a direct compari- son with the interest earned on savings accounts. It might be more profitable to use savings which are only earning 4 percent a year rather than using the store's credit at 18 percent. A monthly rate obscures these comparisons. PAGENO="0173" CONSUMER CREDIT PROTECTION ACT 163 (4) A monthly rate for revolving credit gives department stores an unfair competitive advantage over small stores which cannot afford revolving credit and which, therefore, must disclose an annual rate. A furniture store might be required to quote 14 percent a year on its installment contracts, while a large department store down the street, selling the same furniture, could quote 11/2 percent a month. The furm- ture dealer's credit sounds higher, but it is actually cheaper. (5) The distinction between ordinary revolving credit and install- ment-type revolving credit is essentially arbitrary and gives some revolving credit plans an unfair competitive advantage over other re- volving credit plans. For example, Sears can quote 11/2 percent a month, but Mongomery Ward must~ quote 18 percent a year. So must Spiegels. (6) There are no valid reasons why an annual rate cannot be dis- closed. It requires no extra computation or bookkeeping on the part of the store. Monthly statements would simply have 18 percent per year printed on them as well as 1½ percent per month. (7) The claim that 18 percent a year is inaccurate is not true from the viewpoint of the consumer. The consumer must make up his mind to incur or avoid the service charge, not when he makes the purchase, but 30 to 60 days thereafter when the service charge is about to begin. This is the relevant decision time for the consumer to compare credit alternatives. When the rate is measured from this point in time, it will alwayswork out to be 18 percent. This is the most meaningful rate for the consumer. If he can borrow elsewhere for less than 18 percent, it might pay him to do so and discharge his debt to the store. (8) The Massachusetts truth-in-lending law requires the annual rate on all revolving credit. There have been no difficulties. The credit manager of a Massachusetts store testified his firm had absolutely no trouble with disclosing the annual rate on revolving credit and be- lieved such disclosure to be fair and accurate. (9) Other knowledgeable groups support the annual rate disclosure for all revolving credit including the influential National Confere~ice of Commissioners on Uniform State Laws. They have been working on a State consumer credit code for 3 years and have recommended S. 5 be amended to repeal the special exemption for revolving credit. (10) Academic experts support the disclosure of an annual rate for all revolving credit. In fact, the retailers' star witness against the Douglas bill-Prof. Richard Vancil, of the Harvard Business School- has endorsed the revolving credit provisions of the original Proxmire bill. Professor Vancil is a leading expert on the mathematics of finance. (11) Labor and consumer groups, including the AFL-CIO and the National Consumers League, support the annual rate for all revolving credit. (12) Revolving credit is one of the fastest growing forms of con- sumer credit. Some have predicted that 50 percent of consumer credit will be revolving-type credit within 5 years. Thus, the exemption, though small today, could grow into an enormous loophole. A second improvement in the Sullivan bill is to extend the require- ment of truth to the advertisements of credit instead of confining them to the terms of the credit contract. As a matter of fact, advertising is a PAGENO="0174" 164 CONSUMER CI~EDIP PROT~ECTION ACT more important factor in leading people to sign up for credit than are the written terms of the contract or the guarded verbal statements of the salesman. A man's mind is commonly made up by the time he goes to the second-hand car dealer, the furniture store, or the finance com- pany. By that time he is commonly "hooked." The abuses in the advertising of credit are widespread. The em- phasis is commonly laid on low downpayments and on so much a month in dollars without stating the cash price of the article or the actual interest rate. The second improvement in the Sullivan bill is to extend the requirement, as I said. I took a couple of newspapers last night and ripped out the pages on advertising of automobiles, generally second-hand automobiles. I would like to pass them up. We have checked some of them which indicate weaknesses. In some cases they don't even mention the amount of the monthly payment or the number of months, merely mention a low downpayment. When one of the bills was before the Senate I staged a chamber of horrors. We clipped these papers from all over the country, blew them up, and filled the Senate room with charts showing these rates and I tried to get hold of them for this morn~ng's hearing, but they are gone. I found some in the files. Here is a very chaste advertisement from a bank which reads, "Hotdog cash," and the advertisement is a sandwich with a hotdog in it. I may say that it does not give the annual rate. I will send this up, too. In order to preserve the good will of the press I `ask the name of the newspapers in which these ads appear should not be included in the record. Mrs. Srn~LIvAN. That will be agreeable, I'm sure. Mr. DotrGrAs. Here is another one which does not give the rate. Mrs. STIJLLIVAN. We will include some of these in the hearing record, Senator, following your statement. (The clippings referred to may be found in the appendix, p. 928.) Mr. DOUGLAS. Sometimes a monthly, but not a yearly, rate is given. Often the rate is advertised on the original amount borrowed or owed but not on the unpaid declining balance. It may be remembered that it was on this latter ground that the Federal Trade Commission years ago compelled General Motors to revise its advertising and that the Federal circuit court upheld the legality and constitutionality of this ruling. General Motors appealed to the Supreme Court. The Supreme Court denied granting GM the right of certiorari so the appeal was not heard. I have always thought that `this constituted some affirmation by the Supreme Court but my lawyer friends tell me this silence on the part of the Court and refusal of the Court to hear the case does not close the constitutional issue. But I confess I never dared to include advertising in any `of my bills because I was afraid that if I did so it would cause the newspapers to come out in active opposition to the `bill and thus kill any chance of passage. Bill, I am glad to see you. I have just paid you some compliments. Mr. WIDNALL. Will the gentleman yield? I in turn `would like to pay you a great compliment, a great compliment for all the work you did, not ~just in this field but in other areas while you were here on the Hill. I am sure, even th'ough I am from the other party, we all miss PAGENO="0175" CONSUMER CREDIT PROTECTION ACT 165 you and we know what a solid contribution you have made and are making today. Good to see you. Mr. DOUGLAS. Thank you very much. I was just saying Inever had Mrs. Sullivan's courage. I never dared to include advertising in my bill because I was afraid that if I did so the newspapers would come out in `opposition and would kill the whole thing. Mrs. SULLIVAN, Senator, from what you have shown us, do you think it is needed? Mr. DOUGLAS. I think they need it. Perhaps I was too fearful and was not sufficiently appreciative of the sterling idealism of the Ameri- can press. You are far better judges. I think you have trust in your fellow men which I thought I once had and which I am trying to regain. We certainly need a cleanup in the advertising of credit as well as in the formal terms of sale and if you think it is safe to proceed, I would defer to your judgment. 3. I also like the way you include under your rules those credit charges which are under $10 as well as those over that amount. The $10 limit may still conceal a very high interest rate even though it is so small, and by its very nature, this will weigh most heavily on the poor and the very poor, who necessarily must buy in small quantities at high prices and on usurious credit terms. The relative abuses perpetrated upon these poor folk are far greater than on any other class and you will have to weigh these considerations against the extra trouble caused to small businessmen on small amounts and also with the harsh political realities in the country and here in the House and Senate. Mrs. SULLIVAN. Senatoi, on that one point, I think many people, as they have read about this $10 credit charge exemption, feel that it refers to a $10 purchase. Mr. DOUGLAS. It is $10 credit charge. Mrs. SULLIVAN. And to many of the poor who buy on credit, a $10 credit charge means a $100 purchase, or one in that neighborhood; does it not? Mr. DOUGLAS. It could be 20 percent on a $45 purchase. It could be an interest rate of 20 percent and only a $9 charge but an interest rate of 20 percent. Mrs. SULLIVAN. It would hit the small borrowers and small buyers- those who need the benefits of this bill the most. Mr. DOUGLAS. That is right. I think it is a fine feature of your bill. 4. I always included in my bills first mortgage credit on homes. I did not do so because of any deception about the annual rate. Since the financial groups in real estate had always followed the correct policy of quoting it on a yearly basis on the unpaid balance. In this respect they have been impeccable. I did include home mortgage credit, how- ever, so that the prospective house buyer could know the total amount which he was to pay for interest over the life of the mortgage. On a aO-year mortgage, if he didn't pay out until the full 30 years, the amount paid in interest is more than the amount of principal, gen- erally. I was pleased that the real estate industry did not seem to be alarmed by this provision and that the Housing and Home Finance PAGENO="0176" 166 CONSUMER CREDIT PROTECTION ACT Agency adopted it at my suggestion in much of their literature. This did not seem to hurt the purchase of homes or the real estate business. I will frankly admit, however, that somewhere along the parliamen- tary route I fully expected to run into a roadblock on this issue and I was ready to throw this provision overboard, if it became necessary, to insure passage. The case for including home mortgages, however, has been greatly strengthened by the current practice of discounting these mortgages at given rates. If one agrees to pay 6 percent on a $10,000 mortgage for 30 years, but with a discount of 5 percent, and hence receives $9,500 in cash, the real interest rate which he is to pay is not 6 percent, but 6½ percent over the full life of the mortgage and 62/3 percent if he pays out in 12 years. If discounts could be eliminated by letting the stated rate become the market rat&-and I am more and more becom- ing in favor of that-the case for including real estate mortgages would revert to the original purpose of knowing the total paid out in interest ~ver the life of the mortgage. Until this is done, however, there will b~ a double advantage in knowing the annual rate as well as the total amount. 5. I think Mrs. Sullivan's idea of a public commission on consumer credit is excellent, and I am sure also that none of us want this to be used as a substitute for a good bill. It should instead be supplementary and a means of exploring new ground. 6. In theory I approve of title II of H.R. 11601 which prohibits the garnishment of wages. A century and a half ago, as John B. McMaster shows in his "History of the United States," there were tens of thou- sands of m~n put in jail up and down the Atlantic coast for the non~ payment of dc~bts. I spent a few days in the Congressional Library, over 50 years ago, looking up those cases ~nd I was startled to find enormous numbers of men during the late 1820's and early 1830's who were iii jail sometimes for debts of less than $1. In a number of cases it was for a debt of 1 cent-i penny-and in jail the prisoner was not able to earn anything for the support of his family. The movement of Jacksonian democracy in the 1830's and 1840's abolished this prac- tice. That was one of the great contributions of Jacksonian democracy along with public schools. Garnishing wages has destructive results very similar to imprison- ment. It often causes men to lose their jobs and shuts off needed in- come to their family. But whether this prohibition should be put into effect now, and on the national rather than the State level, is another matter which I must leave to you. I am informed that only three States have such a provision at present. 7. The next important provision in the Sullivan bill is the im- position of an 18-percent ceiling on consumers' loans. I am compelled to say that I do not favor this provision for a variety of reasons. First, it has been my belief that if She borrowers and buyers could only be informed of the real cost of credit that the measm~re would then largely become self-policing-particularly when accompanied by double liability-while the abuses would also be largely self-correcting. Publicity and complete comparability of rates and amounts would drive down usurious charges. And it would PAGENO="0177" CONSUMER CREDIT PROTECTION ACT 167 oniy need a minority of the buyers and borrowers to become credit and interest conscious for firms to compete for business by lowering the rates. In other words, not everyone has to become conscious, a minority could do it. I tend also to be wary of direct price regulation by the Government except in grave national emergencies such as war, since the rates would be inflexible and require a lot of redtape and policing to administer. Having had some experience in rent control after the war, I must ad- mit that I am cool to the idea. In addition, there is a general tendency for the legal maximum charge to become the prevailing rate. This is seen in the fixation by the States of maximum interest rates on small loans. Here the ceiling has virtually become the floor. Mrs. SULLIVAN. What we are attempting to do on credit controls, Senator, is simply give the Federal Reserve the power to put on such controls in case of a national emergency, so that they do not have to present it to the Congress and wait months after an emergency begins before the legislation is enacted. We attempted to do this last year on the Defense Production Act, but we were defeated badly on the House floor. The gist of the opposition was that the President did not ask for this authority and we did not hold hearings on it. Mr. DOUGLAS. I shall not argue the point. I felt that in all honesty I had to mention the chief reservation that I have. I do not want to see this happen in the whole field of personal fi- nance. Much and probably most of the credit could be extended profit- ably at far less than 18 percent. They started at 31/s percent a month, 42 percent a year, a philan- thropy of 42 percent a year and now they have been cut somewhat, to a lower maximum and a scale graduated according to the amount of the loan. I once collected a lot of the prevailing rates-I think Missouri, Mrs. Sullivan, and Illinois-I found that the actual rates were virtually the maximum rates. 8. By adding cease-and-desist procedures to the punitive damages provision of 5. 5, the Sullivan bill `strengthens the enforcement weap- ons which are at the disposal of the Federal Reserve Board. This `may be needed and I `see no substantive objection to it. You are the best judge as to political `maneuverability. On other subjects which I have not `discussed, such as the regulation of commodity exchanges, and emergency credit control's, I `do not regard myself `as qualified to speak. May I thank `the committee again for invifing me to appear and to express my hope that Congress may pass a strong and meaningful bill. And on the `basis of past experience I believe that in `any eyeball-to- eyeball `confrontation with Members of the Senate the Representatives of the House will more than hold their own in both resolution and astuteness. Mrs. `SULLIVAN. Thank you, Senator. Your testimony has `been very enlightening. When I interrupted you to explain why we included standby `credit controls, I see now that you were referriii.g instead to the 18-percent ceiling on finance charges. Of course that is a completely different matter. Because our Republican members are going to have to leave for their meeting, I am going to give Mr. Wylie a chance to do his questioning first. Then we will take the rest in order. 83-340----G7---pt. 1-12 PAGENO="0178" 168 CONSUMER CREDIT PROTECTION ACT Mr. Wylie? Mr. WYLIE. Thank you, Madam Chairman, and thank you, Senator iDouglas, for being here this morning. It has been a real pleasure and an enlightening experience for me to listen to your teStimony. Mr. DoUGlAS. Thank you. Mr. WY~JIE. I think much has been said about this, but I would just like to hear from you for the record the definition of various terms which we are using in this bill. The term "installment credit," for instance, takes on the aura of being a long-term credit arrangement on staple items like automobiles and so forth. The term "revolving credit," as I understand it, is applied to an account at the beginning of each month and usually it would be applied generally to soft goods-shirts, socks, underwear, and that sort of thing. The "open-end account" is similar to "revolving credit arrange- rnents." Mr. DOUGLAS. The two are used almost interchangeably. "Open-end" is used almost interchangeably with "revolving credit." Mr. Wrr~IE. Could you give us an example of the use of the install- ment credit plan and the use of the revolving credit plan and maybe an open-end account plan? You said revolving credit and open-end credit are used interchangeably. Using an interest rate of 12 percent annually, how that might work out, using an installment plan and a revolving credit plan? Mr. DOUGLAS. Well, there is a certain amount of so-called freeload- ing which is now contained in revolving credit. Suppose a purchase is made oft the 10th of May and on the 1st of June the balance owed is stated. Tike interest rate is then quoted for that month on the amount due on the lst-on the amount which is owed on the 1st of June which means that the seller carries the interest cost between the time of purchase and the time of billing and if he charges a rate of 1½ percent per month from then on, both the Sullivan bill and the Senate bill which you gentlemen have adopted provide that the annual rate is just 12 times that monthly rate. So that if the present charge is correct, then the yearly charge is correct, disregarding differences in the num- ber of days per month. Mr. W~rLIE. On the adjusted balance existing at the beginning of each month which you referred to, you can have a freeloading period each month? Mr. DOUGLAS. That is right. Mr. WYLIE. Not just the opening month? Mr. DOUGLAS. Sometimes it may go up-it may be carried to the following month, but whenever the credit charge begins on revolving credit then the credit charge would begin under this bill but be taken as 12 times the monthly rate. That is the only difference. Both rates can of course be requested. Mr. WYLIE. On an installment arrangement it is easy to figure an annual rite. I might suggest that what I would like to see is a state- ment as ~o the annual rate and the actual cost prior to sale. What would yoft think of that? Mr. DOUGLAS. The annual cost? Mr. WYLIE. On the installment plan and the revolving credit plan, the annual cost prior to sale. PAGENO="0179" CONSUMER CREDIT PROTECTION ACT 169 Mr. DOUGLAS. You mean the cost of the article? Mr. WYLIE. Cost of the article and the interest rate and the service charges. Mr. DOUGLAS. Yes, that could be. The bills provide that the cost of the article shall be stated. With revolving credit a number of purchases may be made during the course of the month and when they are deal- ing not with any one purchase but with the totality of purchases they figure interest not on the amount for each article but on the total amount due. Mr. WYLIE. The cost of the article plus the cost of the service charge, interest rate, or whatever else might be added? Mr. DOUGLAS. No; the cost of the article and then the interest rate is stated as of the first of the billing month. Mr. WYLIE. I am not making myself clear. Mr. DOUGLAS. I am probably stupid. Mr. WYLIE. You are the expert in this field. Mr. DOUGLAS. I am not. An expert is a man who is a long way from home. Mr. WYLIE. I will state it a little differently. Do you not think that the disclosure of the annualized rate prior to the sale, that is, prior to signing a contract for an account, an installment account or revolving account is more important? Mr. DOUGLAS. I would not object to an agreement which a man or a woman would sign in order to get revolving credit which would state what the annual rate actually was, say 18 percent. Now, whether that should do away with the later statement on each monthly billing that comes to 18 percent, I am not certain. I think no harm is done by doing both; 11/2 percent a month is on the annual bill, why not stamp beside it 18 percent a year? Mr. WYLIE. My point is that it might be more important for a full disclosure at the outset. Mr. DOUGLAS. I would not object to that. It might be a very good idea, but at the moment I don't think that it should do away with the monthly statement of what it will be. It is well to keep this in mind- you know- Mr. WYLIE. This goes back to my first question and I want to try to determine if it is feasible to state interest and service charges on an annual basis prior to establishing a revolving credit account. Mr. DOUGLAS. On the sale of each article? Mr. WYLIE. How about on the sale of each article. Mr. DOUGLAS. I don't say that is correct on the sale of each article, because take a department store where you buy stockings, underclothes, and neckties and all kinds of mentionables and unmentionables. You are going to state that for each article, some of them being only 45 or 99 cents-treat the account as a whole? Mr. WYLIE. This is one of the difficulties then as I understand it of attempting to state an annual rate for the revolving credit arrange- inent, the fact that there may be many small purchases of soft goods. Mr. DOUGLAS. Mr. Congressman, the point that I am trying to make is that it is no more difficult to state an annual rate than it is to state a monthly rate, and the monthly rate is now being stated and carries with it a certain amount of freeloading before the interest charge is PAGENO="0180" 170 CONSUMER CREDIT PROTECTION ACT paid. This would carry with it a certain amount of freeloading but no more than is now given. Mr. WYLu~. Then would you state that if the monthly rate on a re~ volving account is 11/2 percent that it would be 18 percent? Is that what you are sayi~g? Mr. DOUGLAS. Yes, sir. Mr. WYLiE. On each item? Mr. DOUGLAS. No, on the account, not on the item when purchased but on the account when the credit is given. Mr. WYLIE. On the account? Mr. DOUGLAS. On the account; yes, sir. Mr. WYLIE. As you find it at the beginning of each month? Mr. DoUGLAS. At the beginning of a billing month. Now, the billing month is different from the calendar month because when you have a big volume of work they will stagger the days. Mr. WYLIE. All right. Did you comment on the advertising features of the Sullivan bill? Mr. DOUèLAS. Yes, I tried to. Mr. WYLIE. Wherein they require an annual rate disclosure in the advertising for all types of accounts across the board? Mr. DOUGLAS. Yes. I think that the people are frequently taken in by these ads. The banks-even the most reputable banks with the ex~ ception of the savings banks in New York will quote a rate on :the original amount of the loan, even though it is being cut down on a gradual scale through installments and the average amount of the loan owed will only be about half the original amount. So that the real rate is generally about twice the stated rate and yet banks will continue to~ advertise in this fashion. Mr. WYLIE. I understand my time is up. May I have just one more question? Mrs. SULLIVAN. If `there is no objection, you may go ahead. Mr. WYLIE. The bill as it passed the Senate, S. 5, passed by 92 to 0 vote. Mr. DOUGLAS. A Notre Dame football score of the old days. Mr. WYLIE. That is rather persuasive. Do you recognize or is it fair to state that the major controversy involved in `this piece of legislation involves or' revolves around the so-called revolving credit accounts? Mr. DOI~GLAS. I think that was the chief concession, the chief con- cession Senator Proxmire felt forced to make. That is the price he had to pay for getting the support of `the objectors. Mr. WYLIE. And the difficulty of stating an annual rate? Mr. DOUGLAS. I don't think it was that difficulty. It was the unwill- ingness of those who handled revolving credit to admit that they had a high interest rate of 18 percent. They don't want to admit that they have a 18-percent interest rate. So `they cover that up by saying 11/2 percent a month. Mr. WYLIE. That an interest rate of 11/2 percent per month on the unpaid bajance could result in a lower than 18-percent annual rate. Mr. DOVGLAS. Well, you mean because of variations in the number of days in `the month? Mr. WYLIE. Yes, right; and because of the freeloading period and so forth. PAGENO="0181" CONSUMER CREDIT PROTECTION ACT 171 Mr. DOUGLAs. You can slice things pretty thin and get a difference. But as I said, the difference of a quarter of a percent, that is relatively minor. The important thing is that 1l/2 percent a month is 18 a year. It might be 18.007 or 17.993. Mr. WYLIE. Some of the retailers tell me that they charge 1l/2-per- cent interest a month. Depending on the activity in the account, and the freeloading period-~some retailers tell me that the interest rate actually comes out to about 9 or 10 percent annually on many accounts, which is quite a different amount than 18 percent. Mr. DOUGLAS. I wou'ld like to see how large an area that actually is. Mrs. SULLIVAN. Senator, is it not true that if it is difficult or in- accurate to figure it at 18 percent a year it is just as difficult or inac- curate to say it is 11/2 percent per month? Mr. DOUGLAS. That is right. Mrs. SULLIVAN. It works the same way? Mr. DOUGLAS. In other words, every difficulty connected with a yearly rate is already connected with a monthly rate and the industry has chosen to use the monthly rate and if they use the monthly rate why should they object to having attention called to the fact that there are 12 months in the year? Mr. WYLIE. That was one of the points I attempted to make in the beginning, that if you had some arrangement prior to sale- Mr. DOUGLAS. Of each article? Mr. WYLIE. Is it possible on each article? Mr. DOUGLAS. That would be too cumbersome. Take a woman who goes to the department store every day during the month and makes some small purchase, to be totaled every month-that would impose a terrible burden on the retailer. I don't want to expose American retailers to that degree of Government regulation, Mr. Congressman. Mrs. SULLIVAN. I think we have been on that subject long enough, and we do have to move on. Mr. WYLIE. Thank you. I appreciate your testimony. Mr. DOUGLAS. Thank you, Congressman. Mrs. SULLIVAN. Mr. Halpern. Mr. HALPERN. Thanks very much, Madam Chairman. I wish to welcome our distinguished witness. The name Paul Douglas is synonymous with consumer credit legislation and I was privileged 7 years ago to join him as a sponsor in his truth-in-lending bill in this House, and I am privileged indeed to welcome him to this committee today to discuss this legislation which is so dear to his heart. Our witness has served the Nation with great distinction and is continuing his dedication to public good, as again exemplified by his appearance here today and, Madam Chairman, I would like to com- mend our distinguished, our outstanding, our very able and beloved witness-to compliment you, sir, on your excellent testimony and congratulate you, and I am sure in the deliberations of this commit- tee that we can shape up a meaningful and most effective bill. Mr. DOUGLAS. Thank you very much. Mr. HALPERN-. Now, Senator, one of the basic purposes of the con- sumer protection bill along with the desire to end the abuses unwit- tingly suffered by many customers is to promote economic stabilization PAGENO="0182" 172 CONSUMER CREDIT PROTECTION ACT through more informed use of credit. Now, could you tell us first, whether you believe that the great growth of consumer credit that you cite in your statement has been the stabilizing or destabilizing force in our economy, and, second, would you give us your views as to the likelihood that better disclosure will lead to a use of credit more in tune with the general trends of the economy, particularly in view of the fact that many studies seem to show a relative lack of sensitivity to finance rates among most customers? Mr. DOUGLAS. That is a very good question. I think to the degree that consumer credit has concealed the real costs of consumer credit which had an expansionary influence on de- mand-it has caused people to mortgage their future in order to make purchases in the present. Now I am in favor of installment buying because it permits people to enjoy commodities in the present which otherwise they would have to put off for a long, long time. Just as an example of that is home mortgages. If people waited until they could pay for the entire house their children would have grown up and the purpose of the house would largely have passed. So I want it understood that I am in favor of installment selling and the rest. Nevertheless, it can be abused. And to the degree that the real costs are not stated it does lead perhaps to a greater mortgaging of future credit than would otherwise be the case. To this degree it accelerates an upswing, I think beyond question. Then, if we should have a de- pression or a very serious recession, if unemployment were to be per- vasive, in ç~onabination with the repossession provisions it could ac- celerate th~ downswing, too. So I think the best remedy for this is that people should know how much the credit costs. This would somewhat restrain purchases on the upswing and therefore reduce the slide down on the downswing. So I think this does have a stabilizing influence. In general the greater the degree of truth the more rational the choice. Mr. HALPERN. In suggesting that better disclosure might lead to en- hanced competition in the credit industry you have indicated that only a small minor percentage-a small minority of cost-conscious buyers would be necessary to accomplish this purpose. Yet studies show that the more cost~sensitive customers come from a distinct group of credit users, generally those to whom the availability of credit is the greatest and whose demand for credit is weakest. Considering the fact that such low-risk customers probably avail themselves of only certain types of credit, do you feel that the competitive pressures that they generate will `penetrate down through the entire spectrum of credit sources? Mr. DoUGLAs. I think it will have this effect and if I may use some experiences with which we `are all familiar, you know when we run for office it is the marginal vote which either elects us or defeats us. Each party has a body of loyal supporters. Elections are decided, say, by that 10 percent except the safe districts. That 10 percent may swing from one party to another and from one candidate to another. In making one's appeals you primarily appeal for this undecided vote. James Eussell Lowell put it in some lines when he said: l~very fool knows that a man represents not the fellows that sent him, but them ~on the fence. PAGENO="0183" CONSUMER CREDIT PROTECTION ACT 173 It is the fence riders that determine elecLions and help to sway the issues. Now, similarly, it is the undecided minority that influences the sel- lers. So you need only have, in my judgment, about 10-percent cost conscious and they will get the firms competing for that 10 percent. Mr. HALPERN. Do you not think there is a logical inconsistency in sug- gesting that the annual rate should be stated in the initial agreement but not in the monthly statement? That is, would not the retailer in effect be saying that he will tell the customer the annual rate once and then hope that the customer forgets it? Mr. DOUGLAS. That is the point that I tried to make to your col- league. I quite agree that once is not enough. I would not have it done every day. Mr. WYLIE. Or each item. Mr. DOUGLAS. That is overdoing a good thing. But it should be stamped on the monthly statement. Mr. HALPERN. One more if I may. Mr. DOUGLAS. You replied to your colleague much better than I did. Mrs. SULLIVAN. Senator, because some of the Republicans are in a caucus and some of our other colleagues ar~ at the White House and have not been able to hear you and question you, if questions are sub- mitted `to you in writing, will you answer them for the record? Mr. DOUGLAS. Yes; I will try to answer them. Mrs. SULLIVAN. I think we had better do it that way. Mr. DOUGLAS. I want to thank you, Congressman. Mr. HALPERN. Thank you, Senator. Thank you, Madam Chairman. Mrs. SULLIVAN. I have a letter from a constituent in St. Louis which tells a story. I think it is typical of what would happen if we exempted the $10 credit charge as is done in the Senate bill. My constituent tells me that one day, several years ago, "a girl called from one of the short- term-loan companies in St. Louis which does a big radio advertising business in the area, and the ad comes over the radio, `Need money for any legitimate reason? Go to Friendly So-and-So and they will give it to you.' The girl on the phone wanted to know about my clean- ing woman as a credit risk. I told her the women was honest, hard working, reliable, and had been with me for 10 years-that her hus- band was a houseman, also honest, regularly employed, thoroughly re- liable. They did not have a car but `they did have a daughter in high school and were trying to buy a house. In short, they were excellent risks. The next day when my cleaning woman came in, I asked her about the loan and she told me that she was to pay $60 for a 3-month loan of $50. I was scandalized and proceeded to show her that $10 in interest for a $50 loan would amount to 20 percent for a year, but this was for 3 months only and it would be 80 percent and that she must not be gouged this way. I lent her the money, interest free, of course, and she paid it back faithfully. But ever since that episode I never heard one of those beguiling radio aids without my anger com- ing up. And I think this is so true in the advertising, whether it be done on the air or in the paper." That is the substance of the letter. Mr. DOUGLAS. I think you are completely correct and we will try to find more of these ads. PAGENO="0184" 174 CONSUMER CREDIT PROTECTION ACT I woul4 like to submit those that we have and identify what is wrong with each one, if I may. Mrs. SULLIVAN. By all means, please do. Senator, in connection with your present official assignment in inves- tigating building codes and zoning regulations and the general obso- lescence of many of the regulations and requirements of our major cities, tell us something about the problem of the poor families being enticed into buying big old homes that they cannot handle financially except through having many roomers or maybe a family to a room. Jilow much has this been a factor contributing to the deterioration of our central cities and how much has the unscrupulous use of credit through i~ery high rate second or third mortgages or ballooned notes or things of that kind contributed to this? Mr. DOUGLAS. A great deal-families, wanting to get a home and having very little money, make a downpayment as you say, not only taking a first mortgage, but a second or third mortgage and then being unable to meet the payments, the house is taken back. I am told that there is a name for this-it is called Lassie's after the movie called "Lassie Come Home." rrhese are the houses that are repossessed. In the meantime~ the families have been stripped of their savings and in order to try to peep up the payments they will take in lodgers and boarders, overcrowd the house or apartment, and leave a very deteriorated building. If they knew what the credit terms were this would be a deterrent on an unwise purchase-and this is also true, if you give publicity to these rates, mere publicity will shame a lot of people into charging a more decent rate. Sonic of these rates are so outrageous they cannot stand the light of day. I remember we held a hearing in New York. You were there, Con- gressman Halpern. We had one woman on the stand and she had purchased furniture and we figured out that it came to 149 percent. She thought it was a low interest rate. We asked her. "If you had known it was 149 percent would you have bought this?" and she said, "I sure wouldn't." There is a lot of that stuff going on. Auto- mobiles, furniture, homes-what have you. Mrs. SULLIVAN. Senator, we have in our central city some 2,400 family units that have been solid in this way. They are in a rehabilita- tion area. They now want to refinance their homes and, of course, when they go to get refinancing the homes are only valued now at half of what they paid for them because of age, deterioration, and so forth. To find answers to problems of this kind is almost impossible. These people, without a doubt, were missold and oversold and gouged in the financing of these homes that they bought in the hope of finding a decent p'ace in which to live. Mr. DbUGLAS. Publicity on the original terms would help. I want to pay a compliment to this committee and also to Congress- man Widnall, if I may, because it was Congressman Widnall who proposed that there should be low-interest loans to families for the rehabilitation of homes up to $3,000 and that if a family had an in- come of less than $3,000 they could get a grant of $1,500. Now, there has been a lot of redtape which has surrounded that provision, but the purpose is good. And if I were on the Senate Banking and Currency Committee now, I would try to continue it. Of course, the trouble is PAGENO="0185" CONSUMER CREDIT PROTECTION ACT 175 we never appropriate enough money to carry out the programs which we authorize and without being disrespectful, I can say after some experience generally members of the Appropriations Committees are much more conservative than the Members of the legislative bodies. That is true in our side of the aisle as well as your side. Mrs. SULLIVAN. Thank you. Mr. Gonzalez? Mr. GONzALEz. Thank you, Madam Chairmau. Senator, we are delighted that you could be with us this morning. Those of us who recall with gratitude before we got to the Congress the great service you performed for the Nation and then the great privilege we had to share with you some experiences such as with the Mexico-TJnited States Interparliamentary Group can recall only with regret that you are not sharing the forum in the Senate. Mr. DOUGLAS. It happens to everyone, Congressman. Mr. GONZALEZ. It happens to us now and then. Mr. DOUGLAS. It happens to everyone. You must be resigned to it. I remember when I was a boy reading a book by Ernest Thompson Seton, the nature writer, who said that the end of every wild animal is a tragedy. The end of every politician is, in one sense, a tragedy. We must be prepared for it. It is part of life. Mr. GONZALEZ. In your case the only tragedy is that you do not have the forum in the Senate which would enhance the magnitude of your contribution to the national well-being and interest. Nonetheless, I am delighted that you put aside this rule you mentioned about Sena- tors who were defeated because you have a lot to contribute. Mr. DOUGLAS. I meant that. I have been sickened by seeing so many people trying to hang onto what is nonexistent. You had better get out when you are beaten. Mr. GONZALEZ. In any event, I take this opportunity to tell you that some of the parliamentary colleagues of Mexico inquired about you this year. Mr. DOUGLAS. Thank you. Mr. GONZALEZ. This was at a conference. Mr. DOUGLAS. I have a very bad accent and they had hard work in trying to understand me. Mr. GONZALEZ. I notice in your statement that you are convinced that the impact of truth in `lending-that is, full disclosure-would be the main contribution in legislation of this type as distinguished from those who advocate governmental regulation with a fixed limit of 18 percent. I think it shows your ultimate faith in the free enterprise system. Mr. DOUGLAS. Well, I have tried to convince the voters of Illinois for many years that those were my beliefs; sometimes with success, sometimes with less Success. Mr. `GONZALEZ. I think this shows clearly that you do have that faith. Mr. DOUGLAS. Yes; I do. Mr. GONZALEZ. Considering that with full `disclosure and truth the processes of the market will take care of themselves. Mr. DOUGLAS. If people are substantially equal iii bargaining power. Truth is not enough if a person is essentially weak in comparison with PAGENO="0186" 176 CONSUMER CREDIT' PROTECTION ACT others. I want to make an exception to that degree. But truth is a cleansing and purifying force. Mr. GONZALEZ. In view of that, you really feel that conditions being what they are and all, that it is not desirable to have a fixed, regulated amount in the legislation? Mr. DoUGLAs. As I sai'd, my own preference is the other way, be- cause I think that furnished the facts you can depend upon consumers to protect themselves, providing you have laws against fraud, and as I say, you only have to have a minority of alert buyers or borrowers to police the industry. You have got a self-correcting system. Truth, if I may itisea `big'word, has a therapeutic value. Jt ~heals~ I haveJie3ter been psychoanalyzed and I do not kno'w the secrets of so-called psy- chiatry, but as I read psychiatry the essential point is that people should not be afraid of the truth. If you are afraid of the truth you are likely to get a split personality or you get complexes or whatnot. But a full statement of the truth is healing. `Sometimes it is hard but it helps and it is a corrective of future action. I think it has been stated-and that New York furniture dealer, who, by the way, is a very nice man personally, if he could have been compelled to state that his interest rate was 149 percent, that poor woman, up in Harlem never would have been charged it. He couldn't bear to' face his friends with an ~terest rate like that. And I think one great advantage of this legislation is that it will improve the morals of American busi- iiess, which many businessmen regard as more important than money. Mr. GONZALEZ. I see you believe in the scriptural statement which is engraved at the university of Texas above the entrance: "You shall knoweth the truth and the truth shall make you free." Mr. DOUflIAS. That is right. Mr. GONZALEZ. To me it is very encouraging because it shows that you have an essential and residual faith in the goodness of American society essentially. Many of our citizens have lost that faith and there are some who say, well, as in the case of the furniture dealer perhaps the bruthl truth of advertising would prevent his charging 149 per- cent but would not he find some other stratagem to do the same thing. This is the same type of thinking that says this legislation would be useless anyway. We have a lot of laws but nobody seems really to be respecting them so one more will not make any difference. There will be all kinds of stratagems and their escape clauses that will enable the person who wants to charge an unconscionable amount to' do' it. But I agree wi'th you, I think that by far and large this is the excep- tion,not therule, and that truth inlending would indeed go along w~y in resolving some of the lower and other problem's that confront us. I war4t to thank you again for being present here, Senator. Mr. DOUGLAS. Thank you, Congressman, very much. I do not know if there is any response needed to that excellent state- ment. I say that the laws against murder do not prevent all murders but they do reduce the number of murders. You have two enforcement weapons in your bill. In the first place you have this double penalty for knowing violations and those suits can be brought by those who have been aggrieved and there can be associations of cons~imers to take up their causes for them and fight these cases so there is a double penaity+ And this can be a stimulus to young lawyers to take up the PAGENO="0187" CONSUMER CREDIT PROTECTION ACT 177 case, too, because they can get part of the extra fee, and then you have got the cease-and-desist order singling out particularly bad violations. Mr. GONZALEZ. Thank you. Mrs. SULLIVAN. Mr. Minish? Mr. MINISH. Thank you, Madam Chairman. Senator,. it is `a distinct ho'nor for me to have you before the com- mittee. While the legislation, as it left the other House, h'as the name of Senator Proxmire on it, and when it finally leaves here it may be the Proxrnire-Suflivan bill, I am certain that the American public will get to know it as the Douglas bill. Mr. DOUGLAS. I appreciate that. It r~aliy does `not ~matter whose name is attached to it. The important thing is to get a good bill through. That is the important thing. The world will little note nor long remember who sponsored this. Mr. MINISH. Senator, you said in your statement that you had some trouble getting it out of the basement of the subcommittee except for one brief day when the full committee under the able generalship of the then chairman proceeded to knock it on the head and send it back to the dark cellar. You are no longer in the Senate and the bill passed t~2 to nothing. What do you attribute that to? Mr. DOUGLAS. Well, you know my enemies have been unkind enough to say that once I was out of the way they decided that they would be willing to pass the bill. I prefer to think the public opinion changed. Mr. MINISH. Do I understand that to be the case? Mr. DOUGLAS. I might say there were also some fortunate removals, too. Mr. MINISIE. Do I understand that to mean that you support the House version of the bill? Mr. DOUGLAS. Yes; I prefer the House version except I don't think you need to have everything in the House bill. But on the point specifically dealing with consumer credit_-your bill-and I am happy that Congressman Gonzalez and you and Con- gressman Annunzio, my old friend, are cosponsors of this bill. Your bill is superior to the Senate bill. And I think if you got Senator Prox- mire here, he would say so, too. He had his back to the wall. He was fighting for his life against a hostile committe.e, remember that. It is marvelous that he got it through over the privileged opposition. Mr. MINISH. Thank you. Mrs. SULLIVAN. Mr. Hanna? Mr. HANNA. Senator, I would like to be associated with all the kind things that have been so eloquently said about you. Mr. DOUGLAS. One of the pleasures of being politically dead and yet still alive is that you get to hear these things. I could not have arranged for a better funeral. Mr. HANNA. Senator, in the studies that you have made was there any time at which there developed figures about the cost to the credit availability of the credit abusers among the credit users? Mr. DOUGLAS. You mean how much is the present cost and how much would such a bill reduce the cost? Mr. HANNA. In studying this credit system it seems to me'it'must be apparent that there are people who abuse it on both sides. Mr. DOUGLAS. Yes. PAGENO="0188" 178 CONSUMER CREDIT PROTECTION ACT Mr. HANNA. It seems a great deal of light has been turned on the abuses of the credit seller, but it seems to me that there have not been-there has not been a very significant input in terms of the buyer credit abuser because to me they are just as much the enemy. Mr. DOUGLAS. Through borrowing when you are not going to repay and so forth, that is right. That is an abuse. If you know of some way of removing that abuse I would favor it. * Mr. HA~NA. We do not have any figures on that. Mr. DOtT~LAS. No, we do not. I think it would be interesting to get the varions credit groups to give the percentages of nonpayment. In the past those have been, so far as personal loans are concerned, rela- tFv~ely low, but I would like to get those percentages. This is one reason why I never' favored these usury laws of 6 percent. Six percent is alto- gether too low a figure for a consumer on personal lOans because in addition to the difficulty of administration there is also-there are many small accounts and there is also, as you say, the danger of non- payment. So I would be opposed to these laws which say the interest rate shoula not go above 6 percent. Mr. HA~cNA. A related question, in all fairness, we have to keep an eye on the level of tolerance of the low credit system as to the credit availability. In your studies have you had any input which you can say, taking away all of the available remedies, or a certain number of remedies for the credit given, reducing the amount of return on the credit in terms of percentages `would make a certain class of credit unavailable for certain people? Mr. DOUGLAS. I do not think so. Mr. IJANNA. Can we say as reasonable men you have to anticipate there is a certain point at which remedies are reduced and interest rates are reduced and credit will not be available to certain segments of society? Mr. DokJGIAS. You mean that the interest rate might be so high that they wor~ld not accept it or simply decide some people should not have any èredit? Mr. H~NNA. That is right. Mr. DOUGLAS, That is quite possible. That even if the rate were stated the lender would not want to lend. The lender should have that right not to lend. Mr. HANNA. I just bring this up because I think at some point we have to consider this as part of the overall problem. Although myself, I am in very strong agreement' with the bill' and I intend to support it and I think you have to use this other input. In other words, say, what are you doing? Because I do not think the people are going to thank you if you turn up with a bill that tells them you cannot get any credit. Mr. DOUGLAS. I would be willing to join others at an appropriate time in pointing out some of the costs of lending which make, for instance, a 6-percent loan in my judgment uneconomic and people with high risks should pay higher rates. But why not state it? That is all. Mr. HANNA. I think we could safely~ say that the mass product of ~availability h~s more or less, come about through our division of labor for the making' of `the product atid the division of payments for con- sumer pi~oducts and both of these have had some contribution to the dynamics of movement of goods in America, would you not agree? PAGENO="0189" CONSTJMER CREDIT PROTECTION ACT 179 Mr. DouGLAS. Yes, indeed. Mr. HANNA. Therefore I think what we need to do is to bring out a bill in which we can maintain the health of that situation, maintain the health. What we want to do is to' get at the abuses in a way in which we d& not-perhaps make the patient much more weak. Mr. DOUGLAS. Congressman, although I am not a doctor I do wish to say that I think truth is a cure. Mr. HANNA. I agree. Mr. DOUGLAS. I think it is good for everybody. Mr. HANNA. We have just learned from you about psychotic mer- chandising in the United States and if we do have it, I would like to see it cured. Mr. DOUGLAS. You knew, when we first brought this bill there would be an objection which would come out-not initially advanced-but after a time it would come out and that is, that if you tell the people the truth as to what the interest rates actually are, it is said that they won't buy or they won't borrow. That implies that you can only keep the system going if you keep the consumers and borrowers deceived. I used to say that it reminds me of a story by Stephen Leacock who in the days of my youth was a very well-known humorist. He wrote a little story called "Homer and Humbug," and in it he said, "My friend the professor of classics says that a knowledge of Greek has made him ivhat he is." Then he said, "This is a very grave charge if true." I would say it would be a very grave charge if truth, knowing the truth about the interest rate, ruined business. Mr. HANNA. My time has expired. Thank you. Mrs. SULLIVAN. Mr. Annunzio? Mr. ANNUNZIO. Thank you, Madam Chairman. Senator, as an old friend of 30 years- Mr. DOUGLAS. Friend since the memory of man knoweth not to the contrary. Mr. ANNUNZIO. We first met in 1937 in south Chicago. At that time you were engaged in a struggle to help organize unorganized people of that community and since then you have carried on in your private and public life a program to make sure these people could keep what they were earning. I join my colleagues on this committee in stating that we deeply appreciate your coming before the committee. Your very construc- tive and cogent statement, and your analysis of the Proxmire bill compared with the Sullivan bill will be most helpful to us, and I l~now when this subcommittee goes into executive session that some of the statements in your presentation before the committee will weigh heavily with the members of this committee. Congressman Minish made reference to your great contribution. Sen~ ator, you stated that "the world will little note nor long remember what we say here." I know that this is a quote from Lincoln's Gettysburg Address, and that the people have not forgotten Lincoln. It has often been said that he belongs to the ages. As far as the people of Illinois and the people of America are concerned, they will always remember Paul Douglas of Illinois. Mr. DOUGLAS. Thank you. Mr. ANNUNZIO. Thank you, Madam Chairman. PAGENO="0190" 180 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. Mr. Bingham? Mr. BINGHAM. Thank you, Madam Chairman. Senator, I will not attempt to surpass those eloquent remarks of my colleague, Mr. Annunzio. I have not had the privilege of knowing you as long as 30 years, but I sincerely share the admiration for you and all that you have done expressed here by others today. Senator, I would like to ask you one or two questions about the problem of first mortgage interest which you touched on rather lightly in your statement. I take it that you do not consider the inclusion of the first mortgages as being of primary importance. Mr. DOUGLAS. No, the real estate industry is to be commended for always quoting an annual rate and to do it on the amount owed. This is a tremendous forward step that they have taken. I only wish this practice had been carried out by other lending agencies. I felt originally because of the length the mortgage ran for such a period that the people should know the total cost in dollars as well as the annual rate, the total cost, because a mortgage going 30 years, paying 6 percent-that will be more than the original price, of the price of th~ house, the principal. But as I said, I would be willing to throw it overboard if that is the necessary price for passage. Now, the introduction of discount does mean however that the nominal rate is not the real rate. You sign a note for $10,000 but you will be told, "Well, you asked for the $10,000, you do not get the $10,000, you get the $10,000 minus the discount. The discount is 6 percent and you actually only get $9,400." So that the rate is not 6 percent on $9,400 but 6 percent of $10,000 for which you only re- ceive $9,400. The real rate on a 30-year mortgage will be slightly more than 62/3 percent. Now, pef~sonally, I have come to feel that we should allow the market rate on hotising mortgages and that we go through a lot of flimflam in housing legislation fixing a maximum rate on these housing mort- gages. Let the stated rate be fluid in accordance with the market. I hope that will come sometime. Congressman Bingham, desirable at `this i$, I put it relatively low on the score of desirability. Mr. BINGUAM. How would you handle. Senator, the problem of the extra charges that are added on at the time of closing? Mr. Doi~oi~s. I feel quite firmly those should be included. Take credit life insurance, for instance. A person buys a car and then he finds that in the terms which he signed in fine print that he agrees to take out life instirance-made out not to his family but to the creditors. And generally l~his credit life insurance has a very high premium rate at- tached to it, a very high rate. We got some testimony, Congressman Bingham, which indicated there were kickbacks on this insurance, too. We got close to-I will say frankly we got close to what I thought was a widespread scandal but we did not get enough evidence to justify it. It is a smelly business. Mr. BINGHAM. As far as I know, however, the credit life insurance problem does not arise in the first mortgage field. Mr. DOITGLAS. No, no. That is where you run the risk of dying before you finish the payment and the real estate people have not PAGENO="0191" CONSUMER CREDIT PROTECTION ACT 181 asked that as far as I know. But automobiles will, sellers of auto~ mthiles will, or expensive durables. Yes, those charges ought to be included, because if it were not for the purchase on credit they would not be made. Mr. BINGHAM. If I could just ask one more question about the first mortgage situation. We had a rather interesting argument made here yesterday by one of the administration witnesses that if you translate the initial charges that are made at the time of closing on first mort- gages into an interest rate spread over the period of the loan it actually understates the importance of those charges. This is a curious reverse twist. Would you comment on that? Mr. DOUGLAS. I would like to read the testimony on that. That is a new one. I would like to read it. Mr. BINGHAM. Thank you very much. Mrs. SULLIvAN. Senator, thank you very, very much for coming here this morning. Mr. DOUGLAS. Thank you very much. You will get me in the habit of coming over here more often than I should. You have treated me so nicely. Mrs. SUlLIvAN. You have been an inspiration to us all. We appreciate your giving us this time. Mr. DOUGLAS. I would like to submit some evidence if I may. I would also like to send up to the desk these very simple slide rules. Mrs. SULLIvAN. I have been wanting to see them,. Mr. DOUGLAS. If anyone wants to see a circular slide rule we will give it to you. It will show the interest rate down to a tenth of a percent and I will send that over, too. Mrs. SULLIVAN. Thank you. Our next witness is a former and very effective Member of the House of Representatives who has for many years represented the millions of members of the American Federation of Labor and Congress of Indus- trial Organizations on all matters involving national legislation. As a resolution on consumer issues adopted by the AFL-CIO Executive Council earlier this year pointed out, this is probably the largest organized group of consumers in the country. The AFL-CIO has fought for most of the progressive consumer legislation enacted in the last generation, and we now welcome Mr. Andrew J. Biemiller to outline the position of the Nation's largest labor organization on consumer credit legislation. STATEMENT OF ANDREW J. BIEMILLER, DIRECTOR, DEPARTMENT OP LEGISLATION, AMERICAN FEDERATION OF LABOR AND CON- G1tESS OP INDUSTRIAL ORGANIZATIONS; ACCOMPANIED BY MISS ANNE DRAPER, ECONOMIST, AFL-CIO Mr. BIEMILLER. My name is Andrew J. Biemiller. I am director of the department of legislation of the American Federation of Labor and Congress of Industrial Organizations. I am happy to be here today to testify on consumer credit legisla- tion under consideration by this subcommittee. I am accompanied by Miss Anne Draper, an economist with the AFL-CIO PAGENO="0192" 182 CONSUMllR CfiEDIT PROTECTION ACT I will submit my full statement and summarize it. Mrs. SULLIVAN. Your full statement will be made a part of the record at this point. (The preparea statement follows:) STATEMENT BY ANDREW J. BIEMILLIiR, DIRECTOR, DEPARTMENT OF LEGISIATIOE, AMERIOA1~ FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZA- TIONS; ACCOMPANIED BY Miss ANNE DRAPER, EcONoMIsT, AFL-CIO My name is Andrew J. Biemiller. I am Director of the Department of Legis1atioi~ Of the American Federation of Labor and Congress of Industrial Organizations. I am happy to be here today to testify on consumer credit legislation under consideration by this Subcommittee. The Chairman has introduced HR. 11601, the Consumer Credit Protection Act, and several memberS of the House have sponsored a companion bill, HR. 11806. H.R. 11602 is identical witji 5. 5, the Truth-in-Lending Act, which passed the Senate on July 11. ~~~~;ainly there is today legitimate concern over the terms and conditions on which credit is made available to consumers. The bills before this Sub- committee obviously reflect this concern-especially HR. 11601, which deals not only With full disclosure of credit terms to consumers, but includes direct Federal regulation of certain aspects of consumer credit and creates a National Commissiob on Consumer Finance to make further studies and recommenda- tions in the consumer finance field. Since 1960, total consumer credit (exclusive of mortgage debt) has risen by 69 percent. At the end of 1966 it reached an all-time high~ of $94.7 billion or approximately $480 for every man, woman and child in the United States. Installment debt-the major share of this credit-has risen even faster. It is up by 74 percent to a new high of $74.7 billion at the end of 1906. During 1966, the proportion of after-tax personal income going into repay- ment of installment debt also reached a new high-14.4 percent as ~comp'ared with 13.1 percent for 1960. Interest on consumer debt which totaled $12.7 billion in 1966, is up by 74 percent st~ice 1960. This debt is owed-and this interest is paid-by a great many people. According to the 1966 Survey of Consumer Finances, conducted by the Survey Research Center of the University of Michigan, 49 percent of all American families are making installment payments. Half of these families owe $850 or more. We ba~e reason to believe that the proportion of installment borrowers is even higher among union families. Special tables prepared for the AFL-CIO in the course of the 1960 Survey of Consumer Financei~ showed that 65 percent of union families were then making payments. Consumer bankruptcies have risen even faster than consumer debt-80 percent sthce 1960. There were nearly 176,000 consumer bankruptcies in fiscal 1966, and the forecast for fiscal 1967 is 188,600. TRUTH-IN-LENDING In the field of consumer credit legislation the national AFL-CIO ha's', since 1960, given top priority to enactment of Federal legislation to' require disclosure of the effective annual interest rates' and total dollar costs `of consumer loans, mortgages, and conditional sales contracts. Now more than seven years after the first truth-in~lending bill was introduced by the distinguished Senator from Illinois, the Honorable Paul Douglas, the Senate has acted on a bill. This bill falls short of the hopes and expectations' of those who' have labored so long in behalf of truth-In-lending. The disclosure provisions' of H.R. 11601 are prefer- able to those of S. 5 and H.R. 116O~ and we urge their `approval for reasons we will describe in our more detailed comments on this portion of the bill. In vieW of the widespread use o'f consumer credit and its, `increasing volume, there is itfliple reason to insist that at the very least and as the first order of business vonsumers be given elementary information on what this credit costs them, in terms they can understand. No one can seriously dispute the fact that at present, th'e rate's at which credit costs are applied are either not disclosed at all, or are quoted in a manner other than a's true `annual percentages. PAGENO="0193" CONSUMER CREDIT PROTECTION ACT 183 The consumer Is hurt in two ways: First, he eann~t readil3r compare the costs of competing credit offers. Second, he is led to believe that credit costs are low~er than they actually are. Rates are quoted in ways that imply that they are very low, and to give the impression that they are effective annual rates when they are not. What ordinary shopper is likely to multiply out the 1~ percent a month on a revolving charge account by 12, to arrive at the true annual rate of 18 per- cent? Will a borrower from a small loan company translate three percent a month into an astonishing 36 percent a year? Would lie-or could he-ever figure out an annual rate equivalent for the split-level type of monthly finance rate-three percent on the first $150; 2½ percent on the next $150 and one percent on the remainder to $1,000? A new car buyer purchasing at a $5 per $100 per year "add-on" rate under- standably thinks this is an annual interest rate. So does the borrower from a bank who takes out an installment loan at an annual rate of five percent "dis- count." Very few can translate these Into actual affectve rates of 9.2 percent and ~.7 percent, respectively. In no other field of lending does such disorder and confusion prevaiL Business borrowers from banks and other financial institutions would not put up with the flim-fiam in credit cost quotations that is defended as appropriate and even necessary in the consumer market. Surveys have amply demonstrated that few consumers have any real knowledge of how much they pay for installment credit, and especially what they are paying in terms of annual interest. For example, in 1960 the National Bureau of Econonomic Research found that 840 Consumers Union subscribers who reported the rates they paid on recent Installment purchases estimated on the average, that they paid 8.3 percent. But the actual interest they paid as computed by the Bureau, was 23.2 percent. Borrowers who knew the true rate paid an average of 12.1 percent on loans under $500. Those who were completly uninformed paid an average of 37 percent. Whatever the mysteries of consttmer credit financing, there is little mystery about why consumer borrowers know so little about its costs. They are con- cealed behind a curtain woven out of indecipherable statistics; a curtain that's pure gold on the side of the lender. Stating credit costs on a uniform, annual effective rate basis would not only make it possible for consumers to shop readily among competing credit sources, but would stimulate such shopping. Many witnesses in the Senate field hearings of 1963-64 said, in effect, "If I had known the rate was 40 percent, I would have looked elsewhere," or "I would have made other arrangements." If rates are soothingly low-sounding, such as two percent a month or $7, $8, or $9 per $100 per year, shopping for credit may not seem really necessary or worth while. The truth-In-lending bill, as passed by the Senate does reflect overwhelming acceptance of the need for disclosure of finance charges on an effective annual rate basis, as well as the less controversial idea that full dollar costs be dis- closed. But unfortunately the bill contains several exemptions, which will greatly weaken Its effectiveness if ultimately accepted by the Congress. 1. RevolDing credit The most serious defect of S. 5 as it passed the Senate and of HR. 11602 is its virtually complete exemption from annual rate disclosure requirements of so-called "revolving credit," widely used in department stores and banks. Probably less than 15 percent of an estimated $3.5 billion of revolving credit would be covered. In future years revolving credit will become an increasingly im- portant segment of the consumer lending Industry. The customary retailer charge on revolving credit is 11/2 percent per month, or a true annual rate of 18 percent per year. We see no reason why a store or bank that charges at the rate of 1~/2 percent per month on the unpaid balance should not be required to translate this per- centage into 18 percent per year. Despite all the protestations of retailer repre- sentatives to the effect that 18 percent per year overstates the actual rate of charge on an annual basis, straight reasoning on this point has demonstrated that 11/2 percent is, in fact, 18 percent per year, when computed without regard to the so-called "free ride period" thiring which no finance charge is imposed. 83-340-67-pt. 1-13 PAGENO="0194" 184 CONSUMER CREDIT PROTECTION ACT We regard any provision exempting ordinary revolving credit as both unfair to the consumer and as discriminatory against other types of creditors. It permits one segment of the credit community to continue to use statements. which give misleading impressions of the cost of credit. This loophole is effectively closed by HR. 11601. 2. First n$rtgagies We are glad that H.R. 11601 makes no provision relieving first mortgaged lenders from the obligation to disclose annual rates of charge (defined to include such extraS as "points") and the total dollar costs that will accumulate over the life of the loan. Even though simple annual rate co'rqputation is characteristic on mortgages, `~points" are not taken into account in the calculation, thus result- ing in an understatement of the true rate of charge. Further, we think it is important for home-buyers to have a clear understanding of the substantial dollar costs of interest on long-term loans-often exceeding the amount of the loan itself. This will enable the individual to weigh the advantages of `shorter-term mortgages, as well as to appreciate the effect of seemingly small changes in the annual rate. A Hse from 51/2 percent to 61/2 percent on a 25~year, $20,000 mortgage, for example, adds more than $8,600 in total interest costs to be paid by the buyer. 3. Finance charges under VO The Senate bill regrettably exempts from annual rate disclosure, any retail credit trai~saction on which total finance charges are less than $10. We see no excuse for this exemption, which creates a wide potential for evasion. Large bills made up of small purchases would completely escape annual rate disclosure. If a person buys several items, on no one of which would a finance charge amount to as much as $10, no rate disclosure would be required even though the combined total of purchases could be substantial as well as the combined finance charges. In particular, the inclusion of revolving credit in the general coverage of the bill will be made meaningless if this finance charge exemption is retained. Large monthly bills are often run up in department stores on the basis of an accumulation of relatively small purchases on which the individual finance charge wotild certainly come to less than $10. At an 1i8 percent `annual rate, no disclosure would have to `be made so long as the buyer never made any single purchase amounting to more than $100. 4. Definition of finance charge We support the provisions of H.R. 11601 rather than those of the Senate bill with respect Ito the definition of finance charge. The finance `charge `should proper- ly include all items which the buyer must pay as a condition of obtaining the credit, and which would not be present if the purchase were made on a cash basis. Credit life, health and accident insurance clearly fall in this category, as does property and liability insurance which `creditors naturally require in connection with loans. The Senate bill, however, permits their exclusion, so long as the cost is itemized. Under H.R. 11601 they are properly covered as part of the finance charge. We beli~ve that the disclosure provisions of HR. 11601 on credit contracts are quite satisfactory and we urge their approval by the Subcommittee. I now turn to the remaining provisions of H.R. 11601, which have no counter- part in the Senate bill or in HR. 11602. While the AFL-CIO has placed primary emphasis on the long-standing truth-in-lending proposals, we have an inescapable and natural concern for other aspects of consumer credit. The AFL-CIO Execu- tive Council in its February 24, 1967 Statement on Consumer Legislation included a specific endorsement of legislation to end misleading advertising on consumer credit costs and urged the Congress to undertake or authorize a comprehensive study of consumer credit laws and practices. A copy of this statement is attached. Both these matters are substantively dealt with in HR. 11601, and we warmly support their enactment, namely the provisions of Title I, relating to credit ad- vertisements and Title III, establishing a Commission on Consumer Finance. CRuDIT ADVERTISING It would be a simple matter to compile an exhibit of typical advertising copy op credit offers-stressing "low, easy" payments, giving the weekly payments or the monthly payments, but with no mention of total costs, much less of interest PAGENO="0195" CONSUMER CREDIT PROTECTION ACT 185 charges. If interest is mentioned at all, it is likely to be described in such terms as "Sensational Financing-No Payments Until May-3%%! !" There is no clue as to the meaning of the 31/2 percent. The not infrequent boast of "bank financing" on the part of automobile dealers discloses not a word about actual rates but clear- ly conveys an impression that interest charges will be at rock bottom. We are in full accord with the proposal to put an end to these abuses, as set forth in HR. 11601. NATIONAL COMMISSION ON CONSUMER FINANCE We are very pleased with the provision of H.R. 11601 establishing a National Commission on Consumer Finance. Because consumer credit has heretofore been so firmly the province of state legislation, there has been little investigation or concern by the Federal government either in the Congress or the Executive Branch with the complexities of present arrangements under state laws, their abuses, nor any realistic assessment of their adequacy in protecting the borrower. With the mounting use of consumer credit and its importance in the economy, certainly an overall investigation plus delineation of areas in which Federal regulation would be desirable is long overdue. FEDERAL REGULATION OF CONSUMER-DEBTOR RELATIONSHIPS In other major provisions, HR. 11601 would enact immediate substantive legis- lation in the consumer credit field, beyond the requirement for simple disclosure. The bill would establish a maximum finance charge of 18 percent per year, abolish cognovit notes, and outlaw wage garnishments, matters currently regulated en- tirely by state law. Within the AFL-CIO, efforts to reduce excessive finance charges and reform abusive or inadequate provisions of state laws with respect to debtor-creditor relatiOnships have in most instances been concentrated on state legislatures by state AFL-CIO organizations, operating within their specific jurisdictioris. No formal or specific national policy has been developed by the national AFL-CIO with respect to desirable specifications, standards and reforms with respect to interest rate maximums, garnishments, cognovit notes nor on most other ele- ments of the complex web of state legislation, and private legal obligations in creditor-debtor contracts. For the most part these matters have had little or no exploration at the Fe~1eral level, although the President has called for a special study of t:he wage garnish- merit problem by the Department of Justice, in cooperation with the Department of Labor and the Office of Economic Opportunity. Nor have we ourselves been in a position to accumulate the necessary documentation and evidence necessary for arriving at conclusions on what form Federal legislation should take. It is our best judgment that the subjects of maximum finance charges, cognovit notes, and even wajge garnishment are properly ones for inclusion in the investigations by the proposed National Commission on Consumer Finance to be established by Title III of H.R. 11601, rather than for immediate legislative consideration in this bill. We can readily agree, however, with the sponsors of HR. 11601 and HR. 11806 that these particular subjects have a high priority in consideration of consmner finance issues. Finance charges on retail sales credit, falling outside the definition of "inter- est", escape coverage under state usury statutes. Special legislation to establish lids on such charges is often either missing or inadequate as to coverage. Permitted rates of charge under such laws and under small loan legislation can be very high. Oognovit notes and wage garnishments have long been a subject of complaint to state legislatures, which have moved slowly or not at all to remedy the abuses. Chief of the complaints about wage garnishments are; they frequently result in the firing of the worker hy his employer on account of the garnishment. The employer simply does not wish to be put to the trouble of processing the garnish- ment through the courts. Further, the amount of wages that creditors are per- mitted to seize under state laws too often does not leave enough income for the wage earner and his family to live on. Or the legal proesdures for obtaining allowable exemptions may be onerously difficult, so that the worker does not even get the income he is entitled to. The worker who faces garnishment or is even threatened with garnishment- whether carried out or not-will go enormous lengths to avoid garnishment in PAGENO="0196" 186 CONSUMER CREDIT PROTECTION ACT order to protect his job-go to loan sharks, agree to pay upon an unjust debt, ac- cept a "settlØmeut" ~r declare bankruptcy. If tie loses his job, his financial disaster Is compounded, especially since he is unlikely to he able to collect unemployment insurance, having been fired cf or "just cause". Increasing~y, harsh wage garnlshmeifts are being recogniz~d as a significant tactcr in the ~raultiply1ng number of consmnerbankruptcies. Unions have persistently sought amendments to wage garnishment laws to prohibit discharge for garnishment and to liberalize wage exemptions provided by garnishment laws. In some instances they have called for complete abolition of garnishment. They have somettn~es succeeded in easing exemptions, but rarely has there been any success in prohibiting discharge. New York enacted a law in 1906 prohibitIng discharge but only for the first garnishment. There are of course a large number of other debtor-creditor issues which should also be considered by such a Commission, of which we can supply only a partial listing-debt pooling; credit life, health and accident insurance; deficiency judgments; the absence of defenses against "holders in due course" of credit agreements ~igned with original sellers; the adequacy of property exemptions against debt payment; the establishment of nonprofit debt counseling services, bankruptcy (including the vicious practices of creditors who pursue bankrupts in state courts after discharge under the Federal Bankruptcy Act); unconscion- able prices charged for goods on credit; and we except, many others. E~fEBGENCY CONTROLS ON CONSUMER CBEL~IT H.R. 11601 sets up standby controls over consumer credit, to be authorized by the President iii case of national emergency and to be administered by the Federal Reserve Board. In a genuine emergency situation, there is' no doubt that such controls would have to be ii~iposed, as during World War II and the Korean War. However, we would prefei~ that such authorization be included in an over-all package of emer- gency meas~res, such as way become necessary, rather than as an Isoisted prçvi- sion applying to one segment of the ecohomy. Under emergency circumstances, obviously art Administration will nec4 a large and flexible repertory of economic controls to combat inflation and to insure the orderly functioning of the economy. We would support consumer credit eontrol~ as part of an over-all emergency bill. CONCLUSION Madam Obairman, we wish to compliment the courage and Initiative of the sponsors of an. 11601 in opening up a general exploration of the thorny problems of consumer credit. We know that some of the more direct interventions proposed with respect to state laws will meet with stiff resistance, but we hope that the Subeommitt~e's hearings will have laid the groundwork for further work by the National Oo~nmission on Consumer Finance for Items that cannot be immediately enacted. And we trust that truth-in-lending can be reported out immediately, without looJ?hoies. This modest contribution to credit reform has been through seven years of study and has been explored in every minute detail. Mr. BIEMILLER. In the field of consumer credit legislation the na- tional AFL-CIO has, since 1960, given top priority to enactment of Federal legislation to require disclosure of the effective annual interest rates and total dollar costs of consumer loans, mortgages, and con- ditional sales contracts. Now more than 7 years after the first truth-in- lending bill was introduced by the distinguished Senator from Illinois, the Honorthle Paul Douglas, the Senate has acted on a bill. This bill falls short~ of the hop~s and expectations o~f those who have labored so long ii~ behalf of truth in lending. The disclosure provisions of H.R. 11601 are preferable to those of S. 5 and H.R. 1160~ and we urge their approval for reasons we will describe in ou~ more detailed comments on this portion of the bill. In view of the widespread use of consumer credit and its increasing volume, there is ample reason to insist that at the very least and as PAGENO="0197" CONSIJMER CREDIT PROTECTION ACT 187 the first order of business consumers be given elementary information on what this crcdit costs them, in terms they can understand. No one can seriously dispute the fact that at present, the rates at which credit costs are applied are either not disclosed at all, or are quoted in a manner other than as true annual percentages. The consumer is hurt in two ways: First, he cannot readily com~ pare the costs of competing credit offers. Second, he is led to believe that credit costs are lower than they actually are. Rates are quoted in ways that imply that they are very low, and to give the impression that they are effective annual rates when they are not. What ordinary shopper is likely to multiply out the 11/2 percent a month on a revolving charge account by 12, to arrive at the true annual rate of 18 percent? Will a borrower from a small loan company translate 3 percent a month into an astonishing 3 percent a year? Would he-or could he-ever figure out an annual rate equivalent for the split-level type of monthly finance rate--3 percent on the first $150; 21/2 percent on the next $150 and 1 percent on the remainder to $1,000? A new car buyer purchasing at a $5 per $100 per year "add-on" rate understandably thinks this is an annual interest rate. So does the borrower from a bank who takes out an installment loan at an annual rate of 5 percent "discount." Very few can translate these into actual effective rates of 9.2 percent and 9.7 percent, respectively. In no other field of lending does such disorder and confusion pre- vail. Business borrowers from banks and other financial institutions would not put up with the ifim-flam in credit cost quotations that is defended as appropriate and even necessary in the consumer market. Surveys have amply demonstrated that few consumers have any real knowledge of how much they pay for installment credit, and especially what they are paying in terms of annual in~erest. For example, in 19~0 the National Bureau of Economic Research found that 840 Consumers Union subscribers who reported the rates they paid on recent installment purchases estimated on the average, that they paid 8.3 percent. But the actual interest they paid as com- puted by the Bureau, was 23.2 percent. Borrowers who knew the true rate paid an average of 12.1 percent on loans under $500. Those who were completely uninformed paid an avera~e of ~7 percent. Whatever the mysteries of consumer credit financing, there is little mystery about why consumer borrowers know so little about its costs. They are concealed behind a curtain woven of indecipherable statis- tics; a curtain that's pure gold on the side of the lender. Stating credit costs on a uniform, annual effective rate basis would not only make it possible for consumers to shop readily among com- peting credit sources, but would stimulate such shopping. Many wit- nesses in the Senate field hearings of 1963-~4 said, in effect, "If I had known the rate was 40 percent, I would have looked elsewhere," or "I would have made other arrangements." If rates are soothingly low sounding, such as 2 percent a month or $7, $8, or $9 per $100 per year, shopping for credit may not seem really necessary or worth while. The truth-in-lending bill, as passed by the Senate, does reflect over- whelming acceptance of the need for disclosure of finance charges PAGENO="0198" 188 CONSUMER CREDIT PROTECTION ACT on an effective annual-rate basis, as well as the less controversial idea that full dollar costs be disclosed. But unfortunately, the bill con- tains several exemptions, which will greatly weaken its effectiveness if ultimately accepted by the Congress. The most serious defect of S. 5 as it passed the Senate and of H.R. 11602 is its virtually complete exemption from annual rate disclosure requirements of so-called "revolving credit," widely used in depart- ment stores and banks. Probably less than 15 percent of an estimated $3.5 billion of revolving credit would be covered. In future years re- volving credit will become an increasingly important segment of the consumer lending industry. The customary retailer charge on revolving credit is 11/2 percent per months or a true annual rate of 18 percent per year. We see ho reason why a store or bank that charges at the rate of 11/2 percent per month on the unpaid balance should not be required to translate this percentage into 18 percent per year. Despite all the protestations of retailer representatives to the effect that 18 percent per year overstates the actual rate of charge on an annual basis, straight reasoning on this point has demonstrated that 11/2 percent is, in fact, 18 percent per year, when computed without regard to the so-called "free ride period" during which no finance charge is im- posed. We regard any provision exempting ordinary revolving credit as both unfair to the consumer and discriminatory against other types of creditors. It permIts one segment of the credit community to continue to use statements which give misleading impressions of the cost of credit. This loophole is effectively closed by ll.IR. 11601. We are glad that H.R. 11601 makes no provision relieving first mortgage lenders from the obligation to disclose annual rates of charge (defined to `include such extras as "points") and the total dollar costs that will accumulate over the life of the loan. Even though simple annual rate computation is characteristic on mort- gages, "points" are not taken into account in the calculation, thus resulting ln an understatement of the true rate of charge. I want to emphasize there, as Senator Douglas just has, that particularly in recent years with the widespread use of points we no longer are getting the true interest rate on the statements that are made on mortgages. In some of our earlier testimony on this legislation before the `Senate committee we stated that we did not see any need for including first mortgages at that time and in fact complimented the industry on the fact that it did use a true annual interest rate, but I checked only yesterday with our financial adviser in the AFL-CIO Building and he tells me that now that 5 or 6 points is virtually common iii any kind of conventional mortgage transaction which means that the true annual interest rate is now 6.5 or 6.6 instead of 6 percent, using that as a basic figure on mortgages and he tells me roughly it would translate into one-tenth of a percentage for each point-one-tenth of a percentage above the stated percentage figure. Further, we think it is important for home buyers to have a clear understanding of the substantial dollar costs of `interest on long-term loans-often exceeding the amount of the loan itself. This will enable the individual to weigh the advantages of shorter-term mortgages, as well as to appreciate the effect of seemingly small changes in the PAGENO="0199" CONSUMER CREDIT PROTECTIO~ ACT 189 annual rate. A rise from ~~/2 to ~1/2 percent on a 25-year, $20,000 mortgage, for example, adds more than $3,600 in total interest costs to be paid by the buyer. The Senate bill regrettably exempts from annual rate disclosure any retail credit transaction on which total finance charges are less than $10. We see no excuse for this exemption, which creates a wide potential for evasion. Large bills made up of small purchases would completely escape annual rate disclosure. If a person buys several items, on no one of which a finance charge amounts to as much as $10, no rate disclosure would be required even though the combined total of purchases could be substantial as well as the combined finance charges. In particular, the inclusion of revolving credit in the gen- eral coverage of the bill will be made meaningless if this finance charge exemption is retained. Large monthly bills are often run up in department stores on the basis of an accumulation of relatively small purchases on which the individual finance charge would cer- tainly come to less than $10. At an 18-percent annual rate, no dis- closure would have to be made so long as the buyer never made any single purchase amounting to more than $100. Mrs. SULLIVAN. May I interrupt you there? Would that be true of the average revolving account in a department store where they do not show the charges until the end of the month when the bills come in? Mr. BIEMILLER. We are simply pointing out that this could be done under the bill as it passed the Senate, that this loophole is there for any corporation or person who wanted to take advantage of it. I agree with you it is not normally done. The normal procedure is simply to put the charge of 11/2 percent per month on the balance at the beginning of the month. Mrs. SULLIVAN. Thank you. Mr. BIEMILLER. Definition of finance charge. We support the pro- visions of H.R. 11601 rather than those of the Senate bill with respect to the definition of finance charge. The finance charge should properly include all items which the buyer must pay as a condition of obtaining the credit, and which would not be present if the purchase were made on a cash basis. Credit life, health, and accident insurance clearly fall in this category, as does property and liability insurance which cred- itors naturally require in connection with loans. The Senate bill, how- ever, permits their exclusion, so long as the cost is itemized. TJnder H.R. 11601 they are properly covered as part of the finance charge. We believe that the disclosure provisions of H.R. 11601 on credit contracts are quite satisfactory and we urge their approval by the subcommittee. I now turn to the remaining provisions of. H.R. 11601 which have no ~counterpart in the Senate bill or in H.R. 11602. While the AFL-CIO has placed primary emphasis on the long-standing truth-in-lending proposals, we have an inescapable and natural concern for other as- pects of consumer credit. The AFL-CIO executive council in its February 24, 1967, statement on consumer legislation included a specific endorsement of legislation to end misleading advertising on consumer credit costs and urged the Congress to undertake or authorize a' comprehensive study of consumer credit laws and practices. A copy of this statement is attached. (The statement referred to follows:) PAGENO="0200" 190 CONSUMER CREDIT PROTECTION ACT STATEMENT ~Y THE AFL-CIO EXECUTIVE COUNCIL oN CONSUMER LEGISLATION High on the list of items which demand immediate and extensive attention from the 90th Congress are the problems of the American consumer. Of primary concern to consumers are the specific products bought for per- sonal use. Consumers need and should have adequate protection against fraudu- lent practices, assurances that the products are safe to use, and that product and price information is a~equate and accurate. In testing. the current state of affairs by these standards, we find that much Congressiotiál concern and action is needed. Specifically we will seek: 1. Action to remedy the exploitation of consumers by those who provide con- sumer credit, Consumer~ are Indebted for loans and installment sales purchases in an amount totaling $95 billion. They are paying finance and interest charges at the rate of $13 billion a year on this debt. A first step toward consumer self-protection In this area is the enactment of the long-standing "Truth-in-Lending" Bill to re- quire all credit vendors to tell the borrower what the dollar cost of the finance charges will be on his credit and to state these charges in terms of a true annual interest rate. Legislation is also needed to end misleading price advertising of articles sold. on credit, where the reader is told only the monthly payment required and not the total actual cost of the article if bought on time. High pressure door-to~door salesmen frequently sign up buyers on the spot for produeth they may not really want and for costly credit obligations they cannot carry. Legislation should be enacted to give buyers a legal "breathing spell" to eha~ge their minds. The tar~gl~d field of coustuneir credit is not limited to these abuses. We urge the Congress to underta~ce to authorize a comprehensive study of consumer credit laws apd practices. 2. A generaj Investigation by the Congress of the insurance industry in all Its aspects. There is mounting evidence ~f excessive chargea for credit lif~ Insurance In consumer credit contracts, fraud in the sale of mail-order insurance, and auto- mobile insurance that is overpriced, often capriciously cancelled, and of con- sumer losses from liquidations o~ "high risk" insurers. Congress shofild devise and enact legislative remedies for these conditions and bring the entire industry under federal regulation. 3. Action on the overpricirig of key consumer products. We ask for a reopening of general ~vestigatiofls into the pricing of pre- seri~tten~ drugs with a view to framing new legisiation to curb excessive costs to the buyiI~g public and to goverumeut purchasing agencies. Special legislation is needed to prevent overcharging and overprescribing by physicians with a di- rect financial state in the products they prescribe. In the past yeat the rising price of food has caused widespread publie concern. We ask that the food price sitnath)n be thoroughly reviewed, with special eim. phasis on the briilt4i~ cost-plus effect of e~cesses in advertising' games, trading stamps and other promotional gimmicks. Congress should maintain a continuing review of the facts on the market structure and competitive situation in the food Industry. 4. LegislatIon tO pro~iide consumers~W'ith nublased prod~uct infOrmation to aid In the wise purghase Of Oonsumer pi~odueta and to end misleadIng, fake or fraud- ulent infori~atLon about. consui~er products Including- the ~aie of land. Approprinte support should be given both to strengthening the authority and to increasing the appropriations of the Federal Trale Qommission as the public's principal a~eut against frauds, swindles and misleading advertising in Inter- state commerce. The Department of ~g~culture, which now administers a voluntary food grading system, should be authorized to establl~sh a compulsory consumer grad- ing system for basic food products. Such a system would aid in the economical and satisfying procurement of these necessities of life based on knowledge rather than promotional claims. We are convinced of the value of consumer education to supply Impartial informatioii about consumer products aud product characteristics t~r the myriad of items competing for the consumer's pocketbook. We support Increased govern- mont effort to make information available and we will continue the AFL-CIO'S own efforth In this area that are conducted by our Community Servicea Department. PAGENO="0201" CONSIJME~ Ct~EflIT PROTECTION ACT 191 5. Swift action to insure the safety of consumer products and to prerent sA~ci- ~dental death and injury to those who buy them. The Food, Drug and Cosmetic Act should be tightened to insure that all drugs sold for human use actually meet prescribed staiidards of safety, quality and efficacy, that cosmetics are tested for safety before sale to the public, and that medical equipment and devices are safe and effective before being prescribed by doctors. Accidents from consumer misuse of drugs, cosmetics and pressurized food containers can be reduced by requiring clear and adequate warning labels. Indiscriminate distribution of "drug samples" should be brought under control as a further safety measure. In the food field, consumer safety requires Inspection for Wholesomeness and cleanliness of all meat and poultry, whether or not the meat crosses interstate lines. The Flammable Fabrics Act needs updating to reach beyond its limited cov- erage of flammable clothing. A National Commission on Product Safety, as proposed In a bill sponsored by Senator Warren Magnuson, should be established to study the need for compul- sory safety standards in the design of other household equipment and appliances. 6. Establishment of formal governmental machinery to help assure that con- sumer problems will receive the attention they deserve and that solutions will not only be devised but aggressively promoted both by the Congres~ and the Executive Branch. We welcome the formation of consumer subcommittees as parts of existing standing committees of the Congress. In the Executive Branch, we endorse the long-standing proposal for the creation of either a Department of Consumer Affairs or a statutory Office of Consumer Affairs. President Johnson has focused the attention Of the Congress and the nation on the problems of the consumer in his far-reaching message to the Congress last week. The AFL-CIO, which is probably the largest orga~iized group of consumers In the nation, is delighted that `the President has signaled out the problems of the consumer for concerted action. The Administration intends `to make this a major legislative understaking and ~o do we. The 90th Congress can-and should-~become the consumer-conscience Congress and we are going to do our pai~t to make sure that it does. Mr. BIEMIr~a,ER. Both these matters are substantively dealt with in H.R. 11601, and we warmly support their enactment; namely,the pro- visions of title I, relating to credit advertisements and title III, establishing a Commission on Consumer Finance. We are very pleased with the provision df H.~R. 11601 establishing a National Commission~on Consumer Finance. Because consumer credit has heretofore been so firmly in the province of State legislat4on, there has been little investigation or concern by the Federal Government either in the Congress or the executive branch with the complexities of present arrangements under State laws, their abuses, nor any real- istic assessment of their adequacy in protecting the borrower. With the mounting use of consumer credit and its importance in the economy, certainly an overall investigation plus delineation of areas in which Federal regulation would be desirable is long overdue. In other major provisions, H.E. 11601 would enact immediate sub- stantive legislation in the consumer credit field, ~beyond the require- ment for simple disclosure. Phe bill would establish a maximum~ finance charge of 18 percent per year, abolish cognovit notes, and outlaw wage garnishments, matters currently regulated entirely by State law. Within the AFL-CIO, efforts to reduce excessive finance charges and reform abusive or inadequate provisions of State laws with respect to debtor-creditor relationships have in ~most instances been concen- trated on State legislatures by State AFL-CIO organizations, operat- ing within their specific jurisdictions. On the other hand, no formal PAGENO="0202" 192 CONSUMER CREDIT PROTECTION ACT or specific national policy has been developed by the national AFL- ClO with respect to desirable specifications, standards, and reforms with respect to interest rate maximums, garnishments, cognovit notes nor on most other elements of the complex web of State legislation, and private legal obligations in creditor-debtor co~itracts. For the most part these matters have had little or no exploration at the Federal level, although the President has called for a special study of the wage garnishment problem by the Department of Justice, in cooperation with the Department of Labor and the Office of Eco- nomic Opportunity. Nor have we ourselves been in a position to accu- mulate the necessary documentation and evidence necessary for arriv- ing at conclusions on what form Federal legislation should take. It is our best judgment that the subjects of maximum finance charges, cog- novit notes, and even wage garnishment are properly ones for inclu- sion in the investigations by the proposed National Commission on Consumer Finance to be established by title III of H.R. 11601, rather than for immediate legislative consideration in this bill. We can readily agree, however, with the sponsors of H.R. 11601 and H.iR. 11806 that these particular subjects have a high priority in con- sideration Of consumer finance issues. H.R. 11601 sets up standby controls over consumer credit, to be authorized by the President in case of national emergency and to be administered by the Federal Reserve Board. In a genuine emergency situation, there is no doubt that such con- trols would have to be imposed, as during World War II and the Korean war. However, we would prefer that such authorization be included in an overall package of emergency measures, such as may become necessary, rather than as an isolated provision applying to one segment of the economy. Under emergency circumstances, ob- viously an administration will need a large and flexible repertory of economic controls to combat inflation and to insure the orderly func- tioning of~ the economy. We would support consumer credit controls as part of an overall emergency bill. In conclusion, Madam Chairman, we wish to compliment the courage and initiative of the sponsors of H.R. 11601 in opening up a general exploration of the thorny problems of consumer credit. We know that some of the more direct interventions proposed with respect to State laws will meet with stiff resistance, but we hope that the subcommittee's hearings will have laid the groundwork for further work by the Na- tional Commission on Consumer Finance for items that cannot be immediately enacted. And we trust that truth in lending can be re- ported out immediately without loopholes. This modest contribution to credit reform has been through 7 years of study and has been ex- plored in every minute detail. Mrs. SULLIVAN. Let me refer first to the section of your statement on emergency control on consumer credit, because you have opened up a very interesting aspect here. What kind of emergency bill are you proposing for "a large and flexible repertory of economic controls to combat inflation" which you say the credit control provision should be made part of? That is on page 9 of your statement. Mr. BIEMILLER. The AFL-CIO Executive Council has repeatedly said that if there are to be controls imposed on the economy, they PAGENO="0203" CONSUMER CREDIT PROTECTION ACT 193 should be controls across the board, controlling profits, incomes, wages, prices, and hence as part of price control the whole question of control of installment credit. This position has been reiterated over and over again. We, on the other hand, object to the imposition of any part of those controls without the total package. Mrs. SULLIVAN. When should that legislation be taken up? Should we be drafting it now and working on it now? Mr. BIEMILLER. We have no objection to such things being done. But we just don't believe it should be done piecemeal, one part at a time. Mrs. SULLIVAN. We plan to hear the Office of Emergency Plan- ning on this issue. That agency is supposed to be working now on standby controls and anti-inflation machinery for a genuine emergency. Have they consulted with your people or have your people consulted with them on what should be included in such legislation? Mr. BIEMthL1~, I would have to consult with the director of our re- search department. I assume he has been consulting-~---I have not been in such discussions if they have been going on. Mrs. SULLIVAN. Do you not think these problems should be worked out in a calm atmosphere before any bombs are dropping on our cities or before the economy is careening from inflationary pressures growing out of a war or war scare? Mr. BIEMILLER. Most certainly. Mrs. SULLIVAN. You say that in a genuine emergency credit controls would be necessary and should be provided. Why can we not pass the laws now, then put them in mothballs and have them on hand? Mr. BIEMILLER. We have no objection to it being done. But we repeat, we think it ought to be an integrated program of controls over all as- pects of our economic life and not just over this one aspect. Mrs. SULLIVAN. Now, to turn to another subject, is the problem of garnishment a new problem? Mr. BIEMILLER. It is not a new problem as far as State legislation is concerned. It has never been raised to the best of my knowledge as a Federal matter. Mrs. SULLIVAN. Is it not true that you testifie.d in the Douglas hear- ings back in 1961-I think it is on page 418 of that volume-and intro- duced into the record articles from the Milwaukee Journal dealing with the problems of personal bankruptcy and garnishment? That was at least 6 years ago. Mr. BIEMILLER. Simply as evidence to show our belief in the need for disclosure legislation. We agree with Senator Douglas that such legis- lation would go a long way toward stopping the very improper use of pressure credit which is one of the reasons we harve so many garnishments. Mrs. SULLIVAN. In your statement you say that the AFL-CIO has not been in a position to "accumulate the necessary documentation and evidence necessary for arriving at conclusions on what form the Fed- eral legislation should take" with regard to garnishment. Mr. BIEMILLER. That is correct. Mrs. SULLIVAN. How much time does it take to get that information? Mr. BIEMILLER. This is the first time the issue has ever been raised in a piece of legislation, hence we have no action by any convention, or by any executive council meeting on this matter. It has always been con- PAGENO="0204" 194 CONSUlt CREDIT PROTECTION ACT sidered a State matter and has never been considered by the AFL-CIO as a Federal question. Mrs. SULLIVAN. And yet, knowing what a 4ig problem it is, I am amazed that the AFL-CIO has not already made a nationwide study of the gari~ishment problem. Probably that is as good a reason as any why the problem has had, as you put it, little or no exploration. Mr. Bir~n. Our State organizations have lots of studies on this question which we would be happy to get for you. All I am saying is, that the national organization has never been confronted with this problem in any way, shape, form, or manner. Mrs. SULLIvAN. It is true this is largely a State problem and has been, but so is truth in lending and so are the other things in this bill which you do support. Mr. Bi umt. Truth in lending has been a national issue now for at least ~ ~~ears and we have been working on the matter during that time. The question of Federal garnishment has not been. Furthermore, on the whole question of Federal garnishment legis- lation or usury legislation, our lawyers want to look at it very carefully before we would begin to take a firm position on the matter. Mrs. SULLIVAN. But you say that many of the unions in the States do have this information. It would seem to me that any local union or any union member could tell you what the garnishment system has meant in terms of hardship. Mr. BIi~tw~R. We wonid i~e very happy to supply you with ma- terialfrem our State legislative bodies. The poixit that 11 am ~uakm.g i~, we are not in a position to take a firm stand on Federal legislation. We have a very firm stand, trying to stra&ghten oi~it the evils of garnishment problems in our State legis- latures, but we are not as yet convinced that it is a Federal problem and we are-I repeat-we are hopeful you will establish your National Commission, that it will go into the matter and come up with a firm conclusion as to whether or not this is a proper subject for national legislation and whether that is the best way to handle the problem. Mrs. SULLIVAN. We see in the Federal laws that most workers must receive a speci~1ed minimum wage, and yet in millions of instances the people who work to earn their pay often see very little of it be- cause they have fallen into the trap of excessive credit and garnish- ment. What is the solution if we do not get at it from a Federal level? Mr. BI~LILLER. We are asking that your National Commission go into this matter and investigate it thoroughly. Mrs. SVLLIVAN. Thank you. Mr. Stephens? Mr. SrEPIIENS. Thank you for coming before us with the informa- ti~n that you have given us. You made use of the words, as I under- stand you eorireotly, tMt I would like to get you to define a little further~-w1aen you use the words "pressure credit"? Did you use that terminolQgy? Mr. BIE~ILLER. Yes. Mr. Si~Pm~Ns. Would you explain wihat that is? Mr. BII*~LLER. I think you meet it partly in the question of ad- vertising that this bill is attempting to regulate, and partly in terms of the kind of just selling pressures that one gets, to induce people PAGENO="0205" CONSUMER CREDIT PEOTECPIO~t AC1~ 195 to buy beyond any conceivable means of meeting the installments on their purchases. We have it right in this city and I imderstand at this moment that the Washington Board of `f~rade is Vrying to find ways of correcting this' evil. Unfortunately the victims come from the lowest economic' strat& in our society. Mr. ST~rIn~s. I appreciate' your bringing that forward. because I believe there is a Federal responsibility abont overselling by a person who is making the sale as well as responsibility in trying to protect the consumer who is making a purchase from excessive charges, at least to let him know what he is getting~ I do think that we ought to look intu that matter also, and I like your expres~on, "pressure credit," where people are oversold and where this happens. I know from. the experience of my nephew who worked far a bank. The bank had an arrangement with a company whereby the company would `make a sale and would sell the contract to the bank. The bank took the responsibility of repossessing; if nec~ essary, the purchased merchandise. In one instance, my nephew was called upon to go out and repossess a grand piano. He went out to this house in Atlanta. it was a two-room house. One'room was filled with the grand piano and he asked the logical question of the purchaser. He said, "What in the world did you want to buy a grand piano for when you have a two~room house and your incothe is of snch a low level ?" The answer was, "Well, I just' always wanted a grand piano." The man who had sold him that was using pressure tactics. He had no idea of finding out whether or not the man could buy it and I think, Madam Chairman, I hope part of our investigation here will bring out more of the responsibility of a lender `to find out whether or not the purchaser can pay on the instnllmenit basis. Mrs. StTLLIVAN. May I say, if the gentleman will yield, that this is a part of the reason why a prohibition of garnishment of wages is in this bill~-to `make the seller just a little thore careful about the kind of credit they give to people who have great desires but not the financial ability to fulfill those desires by paying for them. If they can buy what they desire so easily, without worrying about how to repay then it is enticing them into buying something' which they are too weak to resist. Mr. STEPhENS. One question I would like to ask, Mr. Biemifier. You are advocating provisions of H.R 11601, as opposed to the lack of provision of S. 5, about finance charges under $10. I would like to know if you know the reason why that was left' out of S. 5? What are the reasons advanced for it being left out of S. 5? Miss DRAPER. As I recall this, the idea was that it would be less~ burdensome on small merchants if `they didn't `have to worry about the finance charges on relatively small amounts. However, our prob- lem is, we think, it will create evasion. I suspect the revolving credit in particular would benefit by this provision. This is not a stated reason. The stated reason was to ease the burden on small merchants. Mr. S1i~PHENs. Let me get into the field of garnishments just a minute. I was very much interested in what you said about having no official position on that at the present time. PAGENO="0206" 196 CONSUMER CREDIT PROTECTION ACT Mr. BIEMILLER. Federal garnishment. Mr. STEPHENS. As far as this bill was concerned. That's what I meant. Is at not true that if you go into the question of garnishment, garnishment is probably the least of the steps that are involved, is that not true? When you get a garnishment against a persdn, you have to have taken a judgment out initially, in order to run yOur garnish- ment? You just cannot go and tell the owner of the business that his employee owes you money. You still have to go through the process of suing the person on the account, get a judgment, and there are costs involved in that. If you are going to look into the question of garnishment, that is merely an easier way to collect a judgment. You could proceed in that way or against any other property he might have, and that would not be a garnishment. You could attach his property. So we would have to look into that and look into attachments, and we are going to get so far afield that we will never get anything accomplished in truth in lending. Garnishment is only one facet of it. I am sure that we would like to see some of the studies that your State groups have done. Miss DRAPER. I don't think we have studies by our State groups. `There have been resolutions. Mr. BIEMILLER. We have them. Miss DRAPER. At any rate, I have not seen them. Mr. ANNUNZIO. Will the gentleman yield? Has the lady ever paid dues in a union? Miss DRAPER. Yes. Mr. ANNtTNzI0. What local? Miss DRAPER. American Newspaper Guild. Mr. ANNtTNZIO. Did you ever attend a meeting of the State conven- tion or a city council meeting, or industrial group or trade group? How can you sit there and say there have been no resolutions on garnishment or wages? Miss DRAPER. I didn't say that. There have. This is what I was saying. Mr. BIEMILLER. Mr. Congressman, you misunderstood the witness. She said there had been resolutions but she was not aware of any studies. I say there have been some studies made by our large State organizations. Miss DRAPER. I might say I have seen some of the resolutions. They vary as to what they recommend be done about garnishment. There are some that wish to reform garnishment and some that wish to abolish it. Some say, don't have a wage garnishment without a court judgment. Now, there are situations in which garnishments are made without court judgments possibly because of a cognovit note, or possibly the garnishment by default where the person does not show up in court after receiving `a notice of garnishment and the garnishment is ex- ecuted, and the judgment is issued. Perhaps this is the situation where it occur's. Not being a lawyer, it is a little hard for me to untangle what is causing what in this `area. There' are different kinds of judgments you scan get-the circumstances where `the person is apt to be caught in ~ trap. PAGENO="0207" CONSUMER CREDIT~ PROTECTION ACT 197 Mr. STEPHENS, Thank you. My time is up. Mrs. SULLIVAN. Mr. Annimzio? Mr. ANNUNZI0. Thank you, Madam Chairman. Mr. Biemiller, yesterday I read a letter from a vice president of the Inland Steel Co. in Chicago and, as you know, the Inland Steel Co. has a contract with the United Steelworkers of America. They have a union shop contract. I wrote Joseph Block, chairman of the board of Inland Steel, whom I kn'ow, and I asked for the position of the company with reference to garnishment of wages. As one of the spon- sors of the bill with Mrs. Sullivan, I share her deep concern about garnishment of wages. In their answer to me, they cited provisions of the proposed bill which have a direct relationship fo their operations. They endorsed legislation which. would require the full disclosure of credlit terms and which would prohibit `the garnishment of wages. Inland Steel stated, `~We are in favor of both `of these provisions in the bill." Here we have a company which, because of their experiences with garnishment problems totaling annual]y $500,000 a year, has stated forthrightly `to me that they are in favor of the garnishment provisions in this bill. Also, yesterday, when Miss Furness appeared before the subcom- mittee representing the administration in a light vein, I took her to task because 5 month's ago the administration ordered an investigation of this garnishment problem, along with the Department of Labor and the Office of Economic Opportunity, and a's I understand it, for `over 5 months there has been no concrete proposal forthcoming from the administration on this. I `sympathize with your problem. This is a Federal problem. But as you know, I am a former officer of a State labor organization, an industrial organization, and I was chairman of the legislative commit- tee in Illinois of our State organization, and this is a problem that we have struggled with for many, many years. In fact, the problem is so severe and so great that I now liken this problem to many of the situations which are occurring in the large cities. As an example, the local governments are spending through the courts thousands and millions of dollars in litigation. This money, which they are spending in the courts for garnishment of wages could be rechanneled and put into other programs that would help the people who need help. We have a tremendous backlog in most of the courts in our big cities-in Cook County, in Los Angeles County, and so forth. This backlog includes personal injury cases, workmen's coinpen- sation cases, unemployment compensation cases, and so forth. We likewise have a big backlog of garnishment cases that `are encroaching on the time which could be devoted to settling these other cases. And, actually, I am disappointed that the national AFL-CIO could not take a position at this time on this legislation. I am hoping that soon if the national AFL-CIO does conduct a study or has `a meeting of the minds that we on this subcommittee can know about it. Mr. BIEMIT~LEn. Congressman Annunzio, with your background in the labor movement, you understand fully the fact that in the labor movement we do not move in areas of legislation without authorization PAGENO="0208" 198 CONSUMER CREDIT PROPEOTION ACT of conventIons or between conventions, executive council actions. So this is exactly the situation which now prevails. Furthermore, one of the things that we agree with you on is, we think the Federal Government by now should have come u~ with.~ some answers but we also think that one of the kmds of problems which your proposed National Commission could well go into is whether you might not run into even worse situations in clogged courts, and so on, if you had a Federal law on this subject. This is one of the problems that we want to thrash out and thrash out. pretty thoroughly. I would~ also add that I am delighted to learn Mr. Block, whom I also know, would like to see a garnishment law, but I would suggest that if Inland Steel would exert a little of its influence on the Indiana. Legislature you might get some quicker action-he might get some quicker action than he would out of the Congress. Mr. ANNUNzI0. He has been doing a good job with the Illinois Legislature. I am not familiar with what they are doing with the Indiana Legislature. But again,, you made a statement about first mortgages and points. Mr. BIEMIu~a~. Yes, Mr. ANNUNZIO. Can I have about 2 minutes? Mrs. SULLIVAN. Without objection. Mr. ANm~uNzIo. Mr. Biemiller, you made reference to points in your prepared statement to the committee. Points are extra charges made to people buying large apartment buildings and other types of real estate. As you know, many unions are investing in large real estate holdings and they are paying points. I am talking now about a steel- worker who buys a $20,000 or $25,000 home, and if he is fortunate enough, his first mortgage is paid up and he owns the home. Then he finds that this home is in need of repairs. So he goes out and they repair the roof and do many other things, and he has to go back to the bank and he has to get a first mortgage because he finds himself in the hands of unscrupulous outfits who are in the renovation business. I know you are familiar with them, and these outfits have to be paid once a commitment is made. How ca~i we write into this bill some sort of legislation to prevent a homeowner from being victimized by this unscrupulous operator who makes these repairs on a home that is already paid for, causing a steelworker to go out afld get a first mortgage in order to pay for these repairs? Mr. BIEMILLiat Are you referring now to the finance problem Or to the gyp artist problem? Mr. ANNUNzI0. Both. You say you have changed your position in thetestim'ony? Mr. BIEMILLER, The finance problem is very simple. Take a $10,000 mortgage. If you pay 6 points', you get $~,400. You don't get $10,000 and the ti~ue interest rate then on a 30-year mortgage is 6.59 percent. That is the point that we are making. Now as far as the gyp artist is concerned, that is a problem that I don't think you can approach by this kind of financial legislation. You have a problem there of just plain fraud and unfortunately if people get caught by the gyp artist who travels around, and there are even bands of them in some parts of the country who do this, you have PAGENO="0209" CONSUMER CREDIT PROTECTION ACT 199 to rely on the commonsense of the individual and the local police en- forcement agencies to' track down these people who do' shoddy work. I, for example, just pi~in flatly say no to anybody who comes off the street and says, "I would like to get up on your roof to see if it needs repairing, or something." That kind of person you better be pretty suspicious of. But on the financing matter, it is just the question, I repeat, the points have be- come so common-discounting of even smaller sized home improve- ment loans-that the true interest rate is not reflected as it was for many, many years in the question of mortgages. So that a 6-percent rate on a $10,000 mortgage with 6 points becomes 6.59 percent. That is the only point we are making. Mr. ANNUNZIO. Thank you. Mrs. SULLIVAN. Mr. Bingham? Mr. BINGIIAM. Thank you, Madam Chairman. Mr. Biemiller, I would like to compliment you on your statement so far as it deals with the truth-in-lending part of this legislation. I confess that I, too, am somewhat disappointed that you have no wisdom for us on the new substantive provisions that are contained in this legislation. I would like to ask you whether you have a means of determining from your constituent unions the kind of complaints that come in from your members. Mr. BIEMILLER. On garnishments, you mean, particularly? Mr. BINGHAM. No; I am thinking of the whole problem of consumer credit. The legal aid societies and other such services around the coun~ try get an enormous number of complaints in this area. I wondered if there was any special area that your members have complained of? Miss DRAPER. One that I know comes up a great many times is the situation where the person buys from the seller of goods, gets some shoddy goods, goes to complain to the merchant, and then finds that the note has been discounted to a finance company. This seems to be the most enraging of the complaints that come to my attention. Incidentally, he is forced to keep on paying to the second buyer of that note and has no leverage over the original seller and this, I would say, has bcen the most frequent complaint I personally have come across just from exposure. The next thing is the deficiency judgment where the person can't keep up his payments. The seller comes in, repossesses the goods, and what happens then is that he sells them at a nominal price and the wage earner then must continue to pay, so as to make up the difference between the balance that he owes and the amount that is realized from the sale of the property. This has been a source of cheating, fraud, and this has also been a subject suggested for abolition, the deficiency judgment. Mr. BINGUAM. Have you made any proposals for legislation to deal with either of these evils? Miss DRAPER. No. There are so many things I expect that are wrong with the creditor-debtor problem within the State situation that no- body has come up with a rounded set of proposals, probably because up to this point the prospect of Federal entry was perhaps the last thing on earth anybody thought would happen. There are a lot more. You get into a great many problems. 83-34O~-67-pt. 1-i4 PAGENO="0210" 200 CONSUMER CREDIT PROTECTION ACT I am ju4 mentioning two that have happened to come to my atten- tion. Mr. BINGHAM. What about the area of the first mortgages? Miss DRAPER. On first mortgages? I can't say that I personally have heard much about this, except complaints about the points that greatly add to the cost of the loan. Mr. BIEMILLER. This, I might add, is a comparatively recent devel- (opment. Points have not been widespread in most parts of the country. They have been common on the Pacific coast for many, many years, but in general, it is only within the last 2 or 3 years that we are getting this complaint on points generally. Mr. BINOHAM. What about the revolving type of credit? Mr. BIEi~1ILLER. We get a lot on this. Our people don't realize they ~are paying 18 percent annually. They have a feeling they are paying about 1½ percent in many cases. You know, you get into the sort of thing, too-there is a certain credit service in this city that is now trying to heavily promote revolving credit, and in their brochure that they enclose with their bills urging you to get into revolving credit, they don't say 11/2 percent a month. All they say is, a very nominal charge of 11/2 cents per dollar. They don't say month, year, or anything. This is ~tbout the extreme that I have run into on this. But this is the kind o~ abuse that we think is going around. Mr. BINóHAM. That, by the way, is the kind of speci~lc that *ould `be helpful for the committee to have. If you can lay your hands on ~that brochure, I think we ought to have it for the record. Thank you. Mrs. SULLIVAN. Mr. Halpern? Mr. HALPERN. Thank you. I wish to compliment Mr. Biemiller, a distinguished former Mem- ber of this House, on his perceptive testimony this morning. Although I share the views of my colleague from New York, Mr. Bingham, that I wish they extended more to the full objectives of this legislation. The opinions of organized labor are vital to this com- mittee `and I wish to commend the gentleman for his fine presentation here this morning. Do you feel that the Federal Trade Commission would be more ap- propriate to do the regulation of advertising rather than the Federal Reserve? Miss DRAPER. I don't suppose we care too much who does it, just so it gets done. The Federal Trade Commission has had some prior ex- perience in this field, and from that viewpoint- Mr. HAT4PERN. You would have no objection? Miss DRAPER. No. Mr. HALPERN. This is an important point. Miss DRAPER. Unless the coverage `of `the Federal Trade Commission Act is somewhat less. We haven't given that a lot of thought. Mr. HAL1~EnN. I think the committee should consider this aspect and I would like to suggest to our chairman that maybe it would be a good idea to have a representative of the Federal Trade Commission here at these hearings in connection with the advertising rather than the Federal Reserve. Mrs. SUILIVAN. The Chairman of the Federal Trade Commission has been invited to testify and will appear here tomorrow afternoon, I believe. PAGENO="0211" CONSUMER CREDIT PROTECTION ACT 201 Mr. HALPERN. I think that would be an excellent idea. Mr. Bierniller, you mentioned in your statement that there is a larger proportion of installment buyers among union members than in the economy as a whole. Now do you have any idea as to why this might be so? Miss DRAPER. This survey which was done in 1960, the survey of con- sumer finances, I think it was partly a matter of age-the active union members are in the age group that most use installment credit. I think that would be a major factor. Mr. JIALFERN. Does the union through the lines of communicaton available to it, ever attempt to educate its niembers ~n the proper use of credit? Miss DRAPER. Oh, yes. We have a consumer education program that is run by the community service department of the AFL-CIO and they use our little booklet here, "Consumer Beware." If the committee would like to have it, we would be happy to leave it with you. Mr. HALPERN. I think it would be very helpful, and I commend the union. Do many workers lose their jobs as has been pointed out as a result of garnishment of their wages. Is this issue ever considered in union negotiations with management, and, if so, what sort of reasons are made? Miss DRAPER. Yes, it is. The main thing that comes up as a subject in collective bargaining is trying to get an agreement that the employer will not fire a worker when he is served with a garnishment. I couldn't really testify just what kind of provisions are in the contracts. My guess would be that sometimes they can at least succeed in preventing discharge until after there have been multiple offenses. It is not always successful-the union won't necessarily go out on strike with this provision, and the employer is very reluctant to give up the preroga- tives of management. So it is not an easy thing to negotiate. Mr. HALPERN. Are many union members subject to this difficulty of garnishment? Miss DRAPER. I would think so. We have no figures on this, but I certainly think it would be a considerable problem. Mr. HALPERN. Do you feel the practice should be completely abolished, or do you feel that some compromise should be worked out that would give creditors some security while safeguarding workers against abuses? Miss DRAPER. This is one reason we are not able to take a flat posi- tion on just what is in this bill. Honestly, I don't know. The resolu- tions that I was referring to, some of them advocate abolition; others advocate reform. Mr. BIEMILLER. I might add on that, as Miss Draper said, our State organizations don't have a consistent policy on this matter. MiSS DRAPER. If they had, I think we would have been able to. Mr. HALPERN. I have one more question. I was interested in your observation on page 5 of your testimony that the inclusion of revolving credit in the general coverage of the bill will be made meaningless if this finance charge exemption is retained. It does seem likely that much revolving credit applies to purchases under $100 in price. What are your views on the suggestion that inclusion of small transactions might create such a burden for the lender that this type PAGENO="0212" 202 CONSUMER CREDIT PROTECTION ACT of credit might become unavailable to the consumer and what of the related idea that the finance charges are often necessarily high and rather than be forced into disclosure of these rates the lender would simply not supply this kind of service. Miss DRAPER. I am not sure I can fully respond to that. One thing that occurred to me when I was considering that last point was why they should make big credit charges on such small items at all. I think the nierchants can probably speak to this point better than we can, as to how burdensome it would be. Mr. BIEMILLER. Let me add to that. What we are particularly con- cerned about here is the sort of merchant that Congressman Stephens was referring to-in my dialog with him-the type of unscrupluous merchant who. we think would use such a loophole to sell a~ family a $55 item,. a $44 item, and a $33 item at the same time. That he will insist, under the Senate-passed bill, in not diselosin~ what his finance charges were. This is the kind of thing we are talking about. I think also the poiat that Mrs. Sullivan made toward the end of her colloquy with Senator Douglas about the finance charges was a very excellent example of the kind:o.f thing we are after here. I repeat, as I also said to the chairman, during an earlier colloquy, I am not saying that everyone would do this, and I think most de- partment stores would not do it, but I am talking about the fact that loophole does exist. Furthermore, I don't know why a. $55 item is an.y different than a $120 item in terms of the fact that I think there ought to be dis- closure of the finance charges. Mr. STEPHENS. One question. If that is possible under the Senate bill, it is p~ssible for an amendment to be made where the $10 could still be exempt but the account must be considered as one entity and this would ~top the loophole. Mr. BIEMILLER. That would correct that type of loophole but not the type of example Mrs. Sullivan gave. Miss DRAPER. It wouldn't help too much on the revolving credit, assuming it gets put back in the bill. I think the average revolving credit balance is somewhere in the neighborhood of $100 and they could just manage to stay under it even if you included thewhoie thing. Mrs. SULLIVAN. Frankly, I do not think it would involve the revolv- ing credit plan except for those who wanted to seek a loophole. Mr. BIEMILLER. That isri~ht. Mrs. SULLIVAN. I think it would apply more often in single pur- chases-single personal loans. I would say the majority of those who need money desperately often are those who have to go and borrow $55 or $100, and have to have it right now, and it makes no difference to them what they have to pay for it. But if they can be educated they can be protected against their own lack of knowledge on credit costs. These changes are needed and would be helpful. Mr. BIEMILLER. And also, may I add to what you said-I quite agree with everything you have said-those people who get pressured into buying a $55 item without being told what the finance charges are, I think sometimes those of us who live in the comparatively affluent society, as most of us do, forget how many people will buy a $55 item and pay for it in six or seven installments. This is the kind of thing. This is where the real evil would be. Mrs. SULLIVAN. I have had many experiences with this problem in my city because I have stayed very close to my constituents in the low- PAGENO="0213" CONSUMER CREDIT PROTECTION ACT 203 income group. I have tried to help them and to advise them on h~w to buy and how to use credit. But I have seen some of these unscrupulous people that we are talking about sell them items of furniture, for in~ stance, and I have seen, in a number of instances, where they are charged twice the value of the furniture and the people are told, "Now we do not want you to pay this all at once; we want to make it easy on you. All you have to do is pay so much a week and you do not have to pay anything down." I have gotten hold of some of these furniture companies and others back in St. Louis, and I can say that two of them, after 8 or 10 years of operating in the town, sold out because the people became aware of the bad practices of overpricing on the one hand, and then charging a very, very high rate of interest on the debt, getting people coming and going. So again, it is like every law that is made, you make it to cover the violators of good practices, and, of course, then, everybody has to be subjected to it. We appreciate your coming, Mr. Biemiller, and also Miss Draper. We were a bit rough on you, perhaps, on the garnishment issue, but in your position, knowing that this is a very serious part of the problem today-not only garnishment of wages, but the personal bankruptcies involving people who get involved in credit deeper than they should-you realize, I am sure, and agree with us, that the prob- lem is growing each day. I just think that you people have a respon- sibility as legislative representatives of a big union, to get deep enough into this to give us some help and guidance. Mr. BIEMILLER. Madam Chairman, I want to add something on that point so our position is clearly understood. We are constantly accused when we come before the Congress of not speaking for our members- of simply speaking our own ideas, Now actually this is never true. We never testify on legislation unless there has been action by our conventions or between conventions by our executive council. And all I am saying is that we have no such action and hence we cannot testify on matter on which there has been no action taken by the AFL-~CIO through its official procedures. That is the only reason we are not testifying on this question. Mrs. SULLIVAN. All right. Thank you very mueh, both of you, for coming. Mr. Bx~ILr1ER, Happy to have the opportunity, and we are de~ lighted that you are pressing ahead with this legislation. Mrs. SULLIVAN. I have just learned that there is t~Pouble on the floor in getting unanimous consent to hold a hearing this afternoon. Every request of this nature must be asked under unanimous consent and is sometimes refused. At this time we do not know Whether we can continue here this afternoon. If I can have the indulgence of my col- leagues and get a few more members back, I would like to continue our sesssion now until the bells ring, and at least hear some of the other witnesses that we had scheduled to ,go on toda3r, in case we cannot come back this afternoon at 1:30, as schethtled. Are the gentlemen from the American Retail Federation here- Mr. DeShazor from Montgomery Ward? Before you gentlemen set up all of your paraphernelia, I wnatt to say that we are anxious `to hear you. We know that you are here in opposition to Some of the provisions of the bill. I do not think it is fair to have lust two of us hear your statement. Are you able to stay over and come back in the morning? PAGENO="0214" 204 CONSUMER CREDIT PROTECTION ACT Mr. DESHAZOR. I could arrange to do that. Mrs. SULLIVAN. If things should clear up on the House floor in the next hour so that we can meet this afternoon, is there some place we could contact you and have you here this afternoon? Mr. DESHAZOR. It would be convenient for us to stay and have lunch somewhere nearby. Mrs. SULLIVAN. All right. If you gentlemen will do that-have your lunch and then check with the Banking and Currency office-~we will keep i~i touch with them, too. If we can come back, we would like to give you a proper hearing and have enough members present to make your presentation worth while. Mr. DESHAZOR. Thank you. That is very kind of you. Mrs. SULLIVAN. Mr. Klein? Are you in the audience? (No response.) Mrs. SULLIVAN. If we do not reconvene here this afternoon, we will meet again in the morning. Numerous Members of Congress are interested in this legislation and have inquired about the possibility of testifying before the sub- committee. In view of our very heavy schedule of administration and outside witnesses, I have urged interested Members of Congress to sub- mit statements for the record outlining their views, and then, if we' need additional informotion or data, we can perhaps have a separate' hearing just for Members of Congress. The first Member to take my suggestion and submit a statement is Representative Edna F. Kelly of New York, who was prepared to testify and is most anxious to demonstrate her support for "truth in. lending" legislation. I am going to insert her statement at this point Ia the record, as follows: STATEME~T `OP HON. EDNA P. KELLY, 1VIE1VLBER OF CONGRESS FROM THE 12TH DISTRICT, BROOKLYN, NEW YORK Madam Chairman and distinguished Members of this Committee: I am most happy that this Subcommittee on Consumer Affairs of the House Committee on Banking and Currency, chaired by our able col- league, Hon. Leonor K. Sullivan, has begun extensive hearings on H.R. 11601, the "Consumer Credit Protection Act"-legislation which is vitally needed to protect all of our fellow Americans, and particularly those of modest or low income. Lending of money and the extension of credit are now among the largest businesses in the United States. Most often, those who are least able to protect their own interests and who do not fully understand complex lending and credit techniques, are the people who rely most on loans and the purchase of goods on credit. The magnitude of the prob- lems involved is evidenced by the scheduled long hours of investiga- tion, study and hearings that are being devoted by this subcommittee to this legislation. On February 1st of this year, I introduced H.R. 4485, the "Truth in Lending Act," which would accomplish many of the objectives of Title I of H.R. 11601. A bill with provisions similar to mine, S. 5, but with certain exemptions I do not support, passed the Senate on July 11, 1967. On the other hand, the bill before the Committee today, H.R. 11601, includes additional consumer credit safeguards which I do support. PAGENO="0215" CONSuMER CREDIT PROTECTION ACT 205 One of the most significant of these additional safeguards is the prohibition against the garnishment of wages to satisfy debts. While it is true that people must learn to pay their debts and meet their obli- gations, when the salary of a working person is garnisheed, there is not only no incentive to continue to work, but often the person gar- nisheed is fired and cannot obtain other employment. This is tragic. In my State, New York, only up to 10% of one's wages is sub- ject to garnishment and there is a prohibition against an employer dismissing an employee for a single garnishment. This is the mini- mum an antigarnishment law should provide. I strongly believe, how- ever, that garnishments should be done away with completely, because they encourage the worst abuses in the consumer credit field. The most important similarity between H.R. 11601, under consid- eration, and my bill is the requirement in both bills for full doselosure of all finance charges in terms of dollars and cents and also of an annual percentage rate in all consumer credit transactions, without the weakening exemptions of the Senate bill. This provision will insure that a borrower is informed of the full cost of credit, including the true rate of interest being charged, instead of being led to believe by the lending institution, as so often happens, that a lesser rate is being charged. For example, lending institutions discounting interest in ad- vance on monthly payment loans would have to reveal that they are charging between 11% and 12% interest, when they now claim the rate is only 6%. Most importantly, the public will be made aware of the fact that interest is being paid on the full amount of the loan and not merely on the unpaid balance. A lending institution will no longer be able to claim that is ic charging only 6% interest if it discounts in advance $7.20 on a $120.00, one-year, monthly payment loan when, in fact, 6% interest computed on the unpaid balance would amount to only $3.90 for a year, and $7.20 would represent an annual rate of between 11% and 12% on the actual amount received of $112.80. On an "add-on" basis of $7.20 in interest for $120.00, repayable in 12 installments of $10.60 each, the rate would still be 11%, even though the claim is made that it is only 6%. In addition, H.R. 11601 would establish a Federal ceiling of 18% on the annual percentage rate in any extension of credit to an indi- vidual without disturbing State laws which provide lower ceilings. This bill is a major forward step in protecting consumers in their dealings with lenders and with those who provide goods and services on credit. There are many other areas that require study leading to remedial legislation, and, in this regard, H.R. 11601 would create a Na- tional Commission on Consumer Finance to investigate all aspects of the consumer finance industry and report back to Congress no later than December 31, 1969. I respectfully urge that the basic provisions of this legislation be favorably reported and speedily enacted so that the consumer will no longer be deceived or defrauded in the expanding use of credit. TJn- doubtedly, this is a field in which the consumer needs far more pro- tection than is presently available to him. Mrs. SULLIVAN. With that, we will recess the committee until we can get a better idea of the situation in the House, relative to an afternoon session. (Whereupon, at 12:15 p.m., the subcommittee recessed to reconvene at 9 a.m., Wednesday, August 9, 1967.) PAGENO="0216" PAGENO="0217" CONSUMER CREDIT PROTECTION ACT WEDNESDAY, AUGUST 9, 1967 HOUSE or REPRE5ENTATIviIS, SUBCOMMITTEE ON CONSUMER AFFAIRS OF THE COMMITTEE ON BANKING AND CURRENCY, W~hi~gton, D.C. The subcommittee met, pursuant to recess, at 9 a.m., in room 2128, Rayburn House Office Building, Hon. Leonor K. Sullivan (chairman of the subcommittee) presiding. Members of the subconunittee present: Representatives Sullivan, Stephens, Gonzalez, Minish, Hanna, Annunzio, Bingham, Dwyer, Fino, Halpern, Wylie, and Williams. Also present: Representatives Widnall and Brown. Mrs. SULLIVAN. Good morning. The subcommittee will come to order. I want to say, first, that I am sorry that this very early hour will cause some inconvenience to all of us, but this is the only way we could assure an opportunity for the gentlemen who were scheduled to testify yesterday afternoon to be heard without having to come back to Washington at another time. We had hoped to be able to sit yesterday afternoon, but it requires the unanimous consent of the entire House for a committee to meet when the House is in session. We cannot meet if there is an objection in the House, and yesterday all such requests for permission for committee hearings or meetings during the afternoon were objected to. Our first witnesses today are from the American Retail Federation, which represents many National and State associations of retailers. I understand that Mr. Eugene Keeney, executive vice president, is here and will introduce the witnesses to us. Before we start, I would like to announce that we are going to set aside the time between now and a few minutes before 10 o'clock for this discussion, but at 10 the Secretary of Commerce and the Director of the Office of Economic Opportunity are to be heard. They were originally scheduled to come at 9:30, but when we sched- uled you gentlemen for 9 a.m. we notified Secretary Trowbridge and Mr. Shriver to come at 10 o'clock instead of 9:30 and so we will recess for a few minutes when we are through with you gentlemen, before the others go on. If we still have questions for~ you at that time, we will ask you to answer them in writing when you receive the transcript of your testimony, and then you can send it back to us with your further answers by the first of next week. So with that understanding, we will be happy to hear you. Mr. Keeney, you may introduce the gentlemen. 207 PAGENO="0218" :208 CONSUMER CREDIT PRO'T~TION ACT STATEMENT OF EUGENE A. KEENLY, EXECUTIVE VICE PRESIDENT, AMERICAN RETAIL FEDERATION Mr. KEENLY. Madam Chairman and members of the subcommittee, my name is Eugene A. Keeney. I am the executive vice president of the American Retail Federation which appears here today to present comments on H.R. 11601 and H.R. 11602. The field of consumer credit is complex and highly technical. A thorough knowledge of its workings and an appreciation of the effect of proposed legislation on this economy's established systems of consumer credit can be acquired only through intensive study and experience. I, therefoire, am honored and highly pleased to present to this com- mittee, on behalf of the American Retail Federation, a man whose ex- perience in retailing spans a quarter century of merchandising~ Mr. Ashley D. DeShazor, vice president, Montgomery Ward & Co., Inc. With him are Mr. Joseph Garcia, credit manager for Federated De- partment Stores, `Cincinnati, Ohio, and Dr. James Wooley `of the international accounting firm of Touche, Ross, Bailey & Smart, New York, N.Y. These gentlemen meet the criteria most needed in your consideration of consumer credit legislation. Mrs. SULLIVAN. May I suggest this? I believe that when the letters went out inviting you to appear, it was explained that if you have a prepared statement `the full statement will be placed in the record, and in order to give us time to question and discuss the issues back and forth, you could summarize your statement instead of reading through the whole thing since the entire statement will be put in the record, we could `save time. Mr. DESUAZOR. Madam Chairman, I intend to do exactly that. On parts of the prepared statement I would like to read certain parts in the beginning and then go' on to certain revisions which I think are indicated by some of the previous testimony, where we feel that certain clarifications may be in order. I don't need to read it all. Mrs. SULtJVAN. What about the other two gentlemen? Mr. GARCIA. I have no statement. Dr. WOOLLY. I have no prepared statement. I am just going to use the illustration. Mrs. SULLIVAN. Very well, you may proceed. STATEMENT OP ASHLEY D. DeSHAZOR, VICE PRESIDENT OP CREDIT, MONTGOMERY WARD & CO., INC., CHICAGO, ILL.; AC- COMPANIED BY JOSEPH GARCIA, CREDIT MANAGER, PEflER- ATED DEPARTMENT STORES, OINCINNATI, OHIO; AND' DR. JAMES WOOLLY, OP TOUCHE, ROSS, BAILEY & SMART~ NEW YORK, N.Y. Mr. DESHAZOR. Madam Chairman and members of the subcommit- tee, I am Ashley DeShazor, vice president of credit for Montgomery Ward & Co., Inc., Chicago, Ill. I appear here on behalf of the Amer- ican Retail Federation, and I am grateful for the opportunity to present theviews of the federation on H.R. 11601 and H.R. 11602. The American Retail Federation is a federation of 26 national retail associations and 47 statewide associations of retailers. There is agree- PAGENO="0219" CONSUMER CREDIT PROTECTION ACT 209 ment within the federation on the majority of the points we are making. The policy of the federation on consumer credit and economic con- troTs is as follows: The American Retail Federation is committed to the principle of honest, reasonable, and meaningful disclosure by all parties to con- sumer transactions, `and to the vital freedom of choice among credit methods. The American Retail Federation is opposed to Federal regulation of credit which would limit the consumer's choice or add significantly to the cost of providing credit or decrease competition by standardizing ~the methods of doing a retail credit business. The American Retail Federation is opposed to legislation creating standby authority to impose price, wage, and other direct economic controls. These policies were reaffirmed at the annual meeting of the federa- tion on May 15, 1967. With respect to H.R. 11601, the association members of the federa- tion are opposed to some of its disclosure provisions and most of its regulatory provisions. The committee also has before it H.R. 11602 which is identical with S. 5 as passed by the Senate. On this bill the membership of the federation is not in complete agreement. While most believe that the bill represents a real step toward a workable disclosure bill, some feel that their own particular lines of business, or their own credit methods will suffer a competitive disadvantage. DISCLOSURE ll.R. 11601 provides for a single yardstick of rate disclosure, an annual percentage rate. Insistence on an annual percentage rate for all credit was the stumbling block with delayed passage for so long in the Senate because it is simply impossible to state a truthful and mean- ingful annual rate on revolving credit. Efforts to devise a formula which would produce such a rate for revolving credit have been made for 7 years by government and in- dustry alike, but the impossibility of doing so was acknowledged in the final draft of S. 5. Thus, H.R. 11601 represents a backward step. It moves toward the Massachusetts example which as yon know is currently being challenged in the courts. Because of what was said Monday, with respect to revolving credit, I feel that I should make some explanations in addition to my pre- pared statement, which I hope will shed some light on the matters ~discussed by both Mr. Barr and Governor Robertson. First, I hope that everyone on the committee understands very clearly that the "exemption" spoken of for revolving credit contracts is by no means an exemption from the requirements of the bill. There will be disclosed, under S. 5, a full and complete statement of dollar cost of credit for every retail transaction. No one will be ignorant of what he is paying. From the questions asked, as well as some of the answers given, it appeared that some members of the committee were under the impression that any one offering revolving credit need make no disclosure statement at all. That, of course, is not the fact. PAGENO="0220" 210 CONSUMER CREDIT ~RQ'TECTION ACT What S. S does not require, however, is disclosure in terms of an annual rate. The reason is simple~-it cannot be truthfully clone on revolving charges. The only real yardstick in this area is the dollar cost. This must be disclosed under S. 5-and we do not object to such disclosure. Now let me turn to another statement of Mr. Barr's, which was reiterated in substance by Governor Robertson. This was the comment which he made, under questioning, that we retailers are right about our 1½ monthly revolving charges not being 18 percent a year if you assume that the credit is extended at the time of the sale. Let us look at the assumption itself. This is precisely the situation based not on artificial assumptions but on plain. commonsense. When a customer walks from the store, any one of our stores, with a' purchase under her arm for which she has not paid, this is either a' credit sale or shoplifting. Without money in hand, it is not a cash sale. If it is not a cash sale, it is a credit bale. If it is a credit sale, credit has been extended as `of that moment. From this simple reasoning, I think it is clear that credit is e~tended to the customer at the time of the' transaction. The Barr assumption to the eontrar~ is a fallacy and the conclusion is, therefore, erroneous. I should now like to' introduce Dr. James. Wooley of the interna- tional accounting firm `of Touche, Ross, Bailey & Smart, who will' explain to the committee why it is impossible to annualize a monthly charge in revolving credit. Dr. WooLny. My name is James Wooley. I am testifying `as a tech- nical witness for the American Retail Federation in regards to `truth- in-lending bills before this committee. My purpose is to illustrate for' you the annualized interest charge, service charge on revolving credit accounts. `The principles I will use `are those principles which `are taught early in schooling around `the ei~th and seventh grade, de- pending where one attends school, to deal with the principle, time rate' equar interest, WRT equally, and the variances thereto. I have a large graph which illustrates this for you. However, you have a copy in appendix A of the printed testimony which has a dupli- cation of this graph. I would like to stand up and' run through this illustration with you' and make somecomments. This is an actual customer account taken from a department store which demonstrates the' aunrual service charge rate and is involved- what is involved in preparing `this calculation. The period `which is involved runs from February 1, 1966, to Jan- uary 31, 1967. The columns are as indicated-there is a p'urchase column indicated without bracket and payment column with' `bracket. In addition to the monthly service charge, charges to the account during the year are' placed in the appropriate month and appropriate date when the charge was made. The balance of the account ~s also shown `at each da~ on which there is a transaction occurring through- out the entire year. This' information is in essence what appears `on `the customer's charge card and on his charge record. You will note that there is a total service charge of $2.14. These last two columns, number of days and dollar' days' are simply taking the PAGENO="0221" CONSUME1~ CEEDIT PIIOTECPION A~T 211 number of days in the month that this balance was present on the card. For example, in the first case the balance of $41.26 was carried from February 1 to February 18, a total of 18 days. The $742 is simply an extension of 18 times $41 26, giving $7426 Each of these items is in the far right column, on my left, and is the result of the calculation of daily balance times the number of days outstanding. Now, this is necessary because we have to convert this to an annual- ized rate. We have to come up with an average for each day during the year in which credit was outstanding, in which credit was extended and in that way we can convert it back to a 365-day year. Without this we could not come up with an annualized rate. In this particular illustration, as I indicated, the total service charge was $2.14 during the year. The number of days during which credit was outstanding during the year was 319 days and the total dollar days during the year came to $6,791.97. What we do at this point, and this may be a little difficult for you to read, is, we determine an average daily balance. This is no more than dividing 319, the number of days credit was outstanding into the total dollar days, leaving us an average daily balance of $21.29. We then also determine an average daily service charge, taking the $2.14, total service charge charged to this account during the year and dividing that by 319 days, thus giving us an average daily service charge of approximately two-thirds of a cent. We then convert this to an annual service charge rate and this is simply dividing the total daily interest, which is two-thirds of a cent by the average daily balance and multiplying that by the number of days in a year giving us an annual service charge rate of 11.49 percent. Mrs. SULLIVAN. May I interrupt you just a moment? Where do you get your 11/2 percent per month? How do you arrive at it? Dr. WOOLEY. The 11/2 percent is not 11,4 percent a month. It is 11/2 percent on the beginning balance. Now, there is a big difference. Mrs. SULLIVAN. You lost me there and I think I know a little bit about interest. Dr. W00LEY. The difference is simply stated, when a service charge is charged to an account, revolving credit account, it is charged at a point in time, the point being the first day of the month. It is not charged on all of the amounts outstanding during that month, only On the amount at that given point of time. The charge does not read 11/2 percent per month. It reads 11/2 percent on the end of the month bal- ance, and these are two different distinct things, because as you can see, many things can happen during the month. The balance in this account, April 1 was $27.14 and that held up for months-for most of the month of April. In reality the service charge which was taken at the end of June was only taken on the balance at the last day of the preceding month, May 30, $13, 11,4 percent of that-13 plus a half being 7 or 20 cents in this case. So we are not-the service charge as charged is not 11/2 percent per month, it is simply 11/2 percent of a balance at a given point in time. And this is why-this. is where the problem comes in trying to state this. as a percentage rate, because depending on how the customer pays his bill, this is the determining factor as to what is annualized, what his annualized rate will be, it is really impossible to tell a person in advance what his charge will be. PAGENO="0222" 212 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. Now, what I am interested in knowing-you or Mr. DeShazor mentioned the moment that a purchase is made on credit, at that moment the credit charge starts. What about the people who come in and pay cash? Do you not think they ought to have a discount? Mr. DESJIAZOR. Madam Chairman, here is exactly what I think, and we discussed this again last night, because it is an interesting question. Under the IRS rulings and for the reason I stated a moment ago, at the moment of that transaction none of us can determine with any individual customer just exactly what his intentions may be in the future. We have to classify as an account receivable at that moment in time. The customer may elect 30 days after that or whenever his cycle billing comes up to pay that bill. Now, our own continuing studies of this kind indicate that more often than not it is not the same customer every month. If we knew that it would be one situation it would be different, but we don't know that. We know that a given percentage in our company, for example, pay every month. But of that percentage a very small fraction of them repeat every month. So in our own price policies, to come back to your question, we try very hard in this competitive environment that we have, and it is competitive, to eliminate from our cash prices anything related to credit. In fact, I think we do. Now, in those cases where a customer in fact does not pay, that is a cost of doing business, it is a general administrative expense which we have to bear. Now, I think that varies considerably by type of operatio~i in a store where most of the business is on a 30-day charge business, then the general administrative expense would be higher to carry that than in a store that did a large part on time payment contracts or ii~ some other method of credit. And it is a factor increasingly in the cash price of goods as that happens. But where we do up to 45, 50 percent of our business on credit and maybe 10 or 15 percent of that is payable monthly, then you have an entirely different set of criteria with which to work. Mr. WILLIAMS. Madam Chairman, may I ask a question? Mrs. SULLIVAN. Yes. Just let me finish this one thought. I can appreciate that it might cost any firm doing a credit business 18 percent a year, as has been discussed over the years. You have to charge that and I think you should disclose it if you have to charge it. But whatever started the revolving credit in the first place? I know it is only in recent years that I discovered it-I guess in the last 4 or 5 years. Mr. DESIIAZOE. I think I will refer that question to Mr. Garcia, if I may. He has been with us a great many years, longer than I have in credit. Would you care to answer that? Mr. GARCIA. The question, Madam Chairman-how did revolving credit start? Well, I guess it started because our customers asked for it. Mrs. SULLIVAN. You mean they were not paying their bills on time? Mr. GARCIA. Credit as we know it started on a big ticket item-type of transactions-people required more time to pay for refrigerators and major appliances and furniture. That was just about the only form of credit that could be paid over a period of time. PAGENO="0223" CONSUMER CREDIT PROTECTION ACT 213~ Mrs. SULLIVAN. That is the installment-type. Mr. GARCIA. People were given books to come into the store and pay so much a week or whatever it may be. The other form of credit available at that time was the 30-day charge account. This was given to people who really didn't need credit. It was a convenienc~. These people didn't like to carry a lot of cash with theni. These accounts' were used primarily for everyday needs. They didn't require the long' term. Now, there are other groups of people who wanted to buy every- day items but couldn't afford to pay for it in full-small items, soft goods. And this is where the revolving budget accounts, which is a takeover from the 30-day charge account- Mrs. SULLIVAN. How long has that been in existence? Mr. GARCIA. Since World War II, shortly after World War II. I think it was Wanamaker in Philadelphia who originated it. Mrs. SULLIVAN. Mr. Williams? Mr. WILLIAMS. Without making it appear that I either skipped the fifth or sixth grade which Dr. Wooley referred to, I would like to ask a question about this chart. First of all, you are starting out here, Doctor, with an already existing account? Dr. W00LEY. Yes, sir. This is an actual account. Mr. WILLIAMS. So you do not show an account that is being started with a purchase. Dr. WOOLEY. No. That is why you will note the monthly service charge here at the end of February is 48 cents. The balance at January 31 is here. Mr. WILLIAMS. Is not the reason you started this way that you did not want to show that you were charging interest from the day the purchase is made? Dr. WOOLEY. I really had no ulterior motives. I just chose an account which we felt was a typical account showing typical transactions throughout the year. Mr. WILLIAMs. What you actually do is, you take all the trans- actions, new purchases or payments and whatever is owed by the cus- tomer the first of the following month, even though he has only had' the use of that money for perhaps only a very few days. You are show- ing that you are making an interest charge on him already just exactly as though he had just had the use of the money for the entire month.. Dr. WOOLEY. I think you will note that the service charge is applied on the balance on the preceding month. For example, the $26.74 is the balance on February 28. The 11/2 percent is taken on March 31, one month later, on a preceding month's balance. Let me illustrate what happens. Mr. WILLIAMS. In other words, on any purchases made during the previous month you do not place any interest charge on the purchases~ made during that month? Dr. W00LEY. That's correct, in this particular store, In most stores' this is the way it works. Mr. WILLIAMS. Why did Mr. DeShazor say as soon as the purchase is made that the interest charge `is started? Dr. WOOLEY. He said as soon as the purchase is made the store is' extending credit. He does not say that the store is charging for that credit at that point. There is a distinction-a distinction that the store is actually granting to the customer. PAGENO="0224" 214 CONSUMER CREDIT PROTECTION ACT Mr. WILLIAMS. That `is a controversial question. But Madam Chair- man, as I u~iderstand this thing, what they are actually doing is çharg- ing the int4erest rate, whatever monthly interest charges they are charging, not on the balance, it is on the balance of the previous month, so you are not charging 1½ percent on the unpaid balance at the time the statement is issued. Dr. W00LEY. That is correct. Mr. DESHAZOR. That is correct. Mr. WILLIAMS. This is a little different thing than we have been hearing about. Mrs. StTI4LIvAN. I think each store has its own way of doing it. They all do not charge in the same manner. Mr. DEST~IAZOR. You are correct, but this is the most frequently used method. Dr. Wooi4EY. One other thing, this business about your extending credit as soon as the purchase is made-I don't think that is the attitude you take with your regular charge account customers to whom you send the bill to the first of the month and `they remit to you a check or complete payment. You are regarding payments within 30 days as payments. The same happens here as you will note down here, the individual had a balance on June 30 of $27.20-July 31, $27.56. He paid that off on August 20, therefore at the end of August there was no service charge. Mr. WILI~IAMS. What I am saying, there has been `a statement made that you ar~ extending credit the minute the customer walks out of the store with a package under his or her arm but this is not borne out by this chart and neither is it borne out 1y the fact that your regular charge accounts are considered as being cash or in 30 days. Mr. DESHAZOR. May I comment on that? We do consider anyone who handles his account `as a 30-day charge account, and some of them do, as 30-day customers. Now we also, the moment they execute a transaction with us, consider it a credit transaction. The truth is, that if every one of those 30-day customers paid every 30 days, we might be able to consider it differently, but a very high percentage of them don't. Mr. WILUAM5. What I am saying is, you actually have a normal charge account and you have a revolving charge account and the reason for this revolving charge account coming into existence, which is just exactly what Mrs. Sullivan implied, is because people could not pay their bills on the 1st of the month and they needed to have additional credit. Mr. DESHAZOR. `There is a further reason I think if I may say so. There is another reason where the conditional time payment con- tract-that means that with every transaction that yOur customer has with you in the control of that type of legal document which is executed with each additional purchase, it means that your customer has to go tO the credit department, go through all of the usual legal forms and it is not as convenient for a great many people, including many in this room, to go into the store each time, to go to the èr~dit department and answer certain questions and have that additional contract executed. Mr. WILLIAMS. We understand that. `" Mr. DESHAZOR. This is a matter of convenience `as well as credit. PAGENO="0225" CONSUMER CREDIT PROTECTION ACT 215 Mr. WILLIAMS. I do not want to intrude further on your time. I just want to make a concluding observation, that what you are show- ing here today would indicate that your charge would not be 18 percent~ Dr. WOOLEY. That is the purpose of illustrating it. Mrs. SULLIVAN. Mr. Stephens? Mr. STEPHENS. Thank you very much for coming back today and as our chairman told you, we are sorry you had to stay over. I would like to make one observation on the question that Mrs. Sullivan asked about how this kind of transaction began. I think partially responsible for this type of transaction is the practice that had developed where a small store owner did not have the capital to carry a lot of credit accounts. He would take to a bank a bunch of accounts that he felt reasonably certain were going to be paid off over a period of time. He had been carrying such accounts for 3 months on the basis of payment without any charges. When he took these accounts down to the bank, he was getting paid the full amount by the bank and he was paying interest himself on the amount of money that he was borrowing from the bank. He was using his credit to borrow rather than the purchaser's credit to borrow. Finally he decided that he would just put that interest charge on the purchaser because he was borrowing it for him so he could carry it for 3 or 4 months. I think that is partially the way it got started and then when a company had enough capital to carry these accounts they decided they would charge you the interest rate, themselves, so to speak, rather than go to the bank and let the bank charge it and become part of the cost. Let me ask one question I think would throw some light on some differences in treating a revolving fund and installment credit fund. Could you point out why they are treated differently in S. 5; that is, the revolving fund and an installment credit contract? Why? Mr. DESHAZOR. Why are they treated differently? Where you have, and perhaps Dr. Wooley should answer this, but I will attempt to, and if I make any mistakes you correct me. Where you have a closed-end installment contract I think all of us in this group would have to say that you can figure the annual rate, and we don't contest that. In our company we have that type of contract. In fact, we are dedicated to a policy of trying to gear our different credit plans to the needs of our customers. So therefore we have both types. Some of them prefer on&-down in Texas, for ex- ample, time payment contracts are very popular. They have been all the time. In the Southeast that is true and a heavy percentage of the business done is done on that type of contract. In other areas the reverse is true. When you get into the revolving charge our position has been for 7 years that if we do state it as has been discussed, that we then are not stating the truth. That precisely is our position as this illustration bears out. Mr. STEPHENS. You say it is a closed end. You mean there is the same payment each month on that installment contract except usually at the end where you have a small one? Mr. DESHAZOR. it could b~ the same payment each month. Now, ir~ time payment comtracts some companies have time payment con- 83-340-67-pt. 1-15 PAGENO="0226" 216 CONSUMER CREDIT PROTECTION ACT tracts with a total maturity of 18 months, 24 months, 36, and even 5 years. When you get into a 3-year contract the payments per month obviously would be less than if you elected to take a 2-year c~ontract. Mr. STEPHENS. Once you elect it you can tell exactly wtit~t the rate of interest is because each payment is going th be the same. Mr. DESHAZOR. Exactly, that is right. Mrs. SULLIVAN. Before I call on Mrs. Dwyer, I would just like to say that we can argue for the next 7 years, as the Senate committee did for the past 7 years, whether 11/2 percent a month on the unpaid balance is an annual rate of 18 percent on that particular amount. No matter how you figure your service charge, whether on the begin- ning balance or the end of the month balance, there is a certain prin- cipal amount on which you charge a percentage rate for a period of 1 morth. Let us do it the way the mortgage companies do, each month you owe interest. You take `the full amount owed, multiply it by the interest rate-S percent or wha'tever it is-and then you divide it by 12. If you do the same thing on one of your revolving charges, multiply the unpaid balance by 18 percen't, and then divide the result by 12, do you no't always come ou't to `the very same thing that you do by computing 11/2 percent o'f `the balance? Dr. WOOLEY. No. Mr. DESHAZOR. No. Dr. WOOLEY. Y'ou do not, the simple reason being that that amount which is outstanding on the mortgage contract is the same throughout the month and in `the revolving credit account it is no't. Mrs. SULLIVAN. But when you take your balance-whatever it is- and apply your percent of charge to it, what percent do you apply to that balance? Dr. WOOLEY. You are applying 11/2 percent of the e~d of the month balance. Mrs. SULLIVAN. You come to the same `thing'if you multiply by 18 percent and divide by 12. Dr. WOOLEY. That is not a percentage. That is 1½ percent of a bal- ance. It `is n'ot 11/2 percent interest on the outstanding balance through- out the month. There is a great amount of difference there. Mrs. SULLIVAN. I think maybe we were taught the wrong method of figuring interest. Mr. HANNA. Would the Chairman yield? Mrs. SULLIVAN. I yield. Mr. HANNA. I have been listening with interest to the discussions of both sides on this question, Doctor. It appears to me that the point of departure is in talking about interest rate applied and effective interest. The interest applied is obviously 1½ percent. You know what hiterest you are going to pay when you apply it. So if you are talking about just applied interest, there is no question that one side loses the argu- ment because they say 1% percent when applied is 18 percent a year, approximately, when applied. And you come back and talk ti,bout effective interest and say yes, but when y'ou take, into consideration the time at which the article was purchased and the time at which the in- terest was applied, then the length of time over which it was applied, you then figure that out on an annual basis which you have done on the chart, and you do not come up with 18 percent at all. PAGENO="0227" CONSUMER CREDIT PROTECTION ACT 217 So, Madam Chairman, as long as one side is going to talk about effec- tive interest and the other side is going to talk about applied interest you are going to have two battles going and they are going to be on different fields. Am I incorrect? Dr. W00LEY. I would agree with that. Mrs. SULLIVAN. I think we had better go on to other subjects-we are not convincing each other on this one. With that I turn it over to Mrs. Dwyer. Mrs. DWYER. I have just one more question. I may not phrase it very well. Is it true that most department stores make their greatest profits on credit accounts rather than on cash or 30-day accounts? Mr. DESHAZOR. Our studies of that certainly don't indicate that. As a matter of fact, we do not have an up-to-date audit of a cross section of all of the retailers in the country, but we did have one several years ago and that indicated that the stores did not make money in credit. Now, it varies considerably by store. If it is all 30-day charge busi- ness they have to lose a substantial amount of money on that operation. If a portion of it does carry a service charge, and I prefer to call it a service charge, because with this average balance even in this account, and this is not an untypical account-it is a typical account-I don't believe any operation could come out with a profit on that account. So what I am saying in effect is that the average retailer, depending on the type of mix of the different types of credit balance in 30-day business, will cover varying portions of his cost of credit, but I would doubt very seriously if they would ever recover at all. Mrs. Dwn~R. Why is there so much competition for credit these days? Mr. DESUAZOR. The basic reason for that, and I think this is a fact, and you will cOrrect me if I am wrong, Mr. Garcia, we know that the average credit customer of a department store, any store that-cus- tomers are more loyal to a store of this type than they would be to a store in which he casually shops once in a while. That is why it is im- portant to us to build on an adequate base credit customers and you will see considerable promotion by department stores and others to build their base of credit customers because they hope-and our experi- ence has been that these people do come in more frequently to our stores and that they do in fact shop more with us if they are on our books. That is our basic purpose. And we think it is sound. Mrs. IDwYER. Then you are saying that the industry, the retail in- dustry, makes their profit on the merchandise rather than on their credit extensions? Mr. DESHAZOR. Well, our whole policy, and it is similar to other companies, is exactly that, that the credit operation is a supporting function of the basic purpose of the business which is merchandising or the sale of goods. Mrs. DWYER. You would say this applies to most of the largest retail stores of the country? Mr. DESHAZOR. I would guess that it would apply to all of them. Mrs. Dw~n~n. You would guess? Mr. DESHAZOR. I would have to say guess because I haven't read their policies, but I have read several la'rge companies' policies, in- PAGENO="0228" 218 CONSuMER CREDIT PROTECTION ACT cluding the largest company we have, and there is in-theirs is iden- tical to that. Mrs. Dw~n. Thank you. Mrs. STJIJLIVAN. Mr. Gonzalez? Mr. GONZALEZ. Mr. DeShazor, on page 5, at the bottom of the page, you state: With respeet to garnishment of wages, the same point applies. The possibility of restriction of credit extension by reputable credit grantors is very real with the resultant rush to the loan sharks by those least capable of paying the ex- orbitant and ~tlready illegal rates. You do have outlets in Texas? Mr. DES~1AZOR. Yes, sir. Mr. GONZALEZ. And in those States which, either through con~ti- tutional or statutory prohibition, prevent garnishment of wages? What is your experience there? Mr. DESHAZOR. Well, I would like to say at the outset-I was Eeated here yesterday when comments were made on garnishments and I think therefore there have been abuses on garnishments. I think most of us would say that there hasn't. On the other hand, we feel that where a customer has the capacity to pay and where he does; not do so, that there have to be remedies available. Now, as you review the individual States you will find that the creditor remedies vary considerably by State. The National Confer- ence of Commissioners has done quite a bit of work lately on consumer- protection features of v~hat they intend to recommend versus creditor remedies. In one State there is only one remaining creditor remedy available to the creditor. Now we, through many agencies, attempt very hard to avoid o~erpressing and using garnishments where it is a real hard- ship on th~t family. As a matter of fact, just 5 weeks ago in Detroit, Akron, and a number of areas where they are having problems, we issued a corporate policy to the effect that these people were not to be pressed for these payments, that they were to be asked to come in and work out whatever arrangements they reasonably could, and this would apply in Texas or anywhere else, so that I think most reputable businesses would not use these remedies such as garnishments and all of these things except where they have to, because obviously when you do you have lost a customer. It is far better to educate that customer in the wise use of this credit. We all participate in that, too. Mr. GONZALEZ. The only point there, though, is that in enacting laws we cannot consider that they are going to be carried out by angels. We have to assume that they will be carried out by the worst depraved men. Your statement is pretty fixed and determined against any pos- sibility of a national enactment with respect to garnishment of wages and statistically these States having these prohibitions show the least amount of consumer bankruptcy as far as statistics are concerned. As far as the corporate practice, it is fine, and I am sure Montgomery Ward is considerate and humane. But that is not the point. In enact- ing a law we cannot take it from the standpoint that only angels and well-intended corporations are going to be involved. Mr. DESIIAZOR, I agree with you and I think my associates would agree that first, and one good source of this I think that p~robably PAGENO="0229" CONSUMER CREDIT PROTE~flON ACT 219 should be pulled into this committee is the review of everything that we do have out in the States in terms of creditor remedies, No. 1. Because to eliminate one segment without consideration of all of them I think could be wrong. Now, that was mentioned in testimony yesterday. I think we should look at the various creditor remedies. I think we feel more strongly about some than others. But finally, I don't think any of us would object to there being features of the control of garnishments which would elimin~te the kind of thing that you are talking about, and I am not sure we should eliminate the kind of thing that you are talking about, and I am not sure we should eliminate garnishments entirely without consider- ing all creditor remedies. Mr. GONZALEZ. Thank you very much. My time has expired. Mrs. SLTLLIVAN. Mr. Fino? Mr. FIN0. Thank you, Mrs. Sullivan. Gentlemen, for my own edification, let us take a balance of $25 and also let us take a month of 31 days. Do I understand you gentlemen correctly that the 11/2 percent service charge is made on the balance of $25 on the first of the month- the 11/2 percent service charge is made on the first of the month on that balance of $25, even though the customer during that month has bought on credit another $50 worth of merchandise, is that correct? Dr. WooLLY. His balance now stands at $75? Mr. FIN0. Right, but the interest charge at this point still is 11/2 percent on the $25 which was at the beginning of the mor~th. Dr. WOOLLY. Yes, sir. Mr. FIN0. During that month the customer has purchased $50 worth of merchandise. Now, if the customer pays off $60 on the 31st of that same month, will be the 11/2 percent charge be based on the $15 balance the next day, which is the first of the new month? Dr. WOOLLY. No. It will be based on the $25. Mr. FINO. The same original $25? Mr. WOOLLY. Yes. Mr. FINO. You say that the service charge is based on the balance at the beginning of the month. Is it the previous month that you are talking about? Dr. WOOLLY. Yes, sir. If that purchase were to have been made prior to the first of the month in order to be a balanee~-I should say that purchase would have had to be m~tch~ prior to the first of the month in order to be on that balance. Mr. FIN0. Let us take July 1. On July 1 I have a balance due to Sears, Roebuck & Co., your corn- petitor-$25 the 1st of July 1967. During that month I go to the Sears, Roebuck & Co. and buy $60 worth of merchandise or $50 more worth of merchandise. But before August 1 I pay ofT $60 towarcimy balance which was $75. So that on August 1 my balance is $15. Now, are you telling this ~ornmittee that the chatge of 1% percent is not on the $15 but on the original $25 bill? Dr. WooLLY. Yes,.sir. Mr. FINO. Why? Dr. WOOLLY. Because that amount was the amount that. was out~ standing in a previous month. The individual had to make that pur.~ chase prior to the 1st of July. PAGENO="0230" 220 CONSUMER CREDIT PROTECTION ACT Mr. FIN0. Well, purchases were made prior to July and were carried over into July 1, that balance. During that month I made purchases and I made payments so that in the next month, August 1, I have a balance now of $15. Why should I pay a service charge on the original $25 when I have paid off $60 Dr. WOOLEY. The basis is that the service charge is charged on a month-~a beginning-of-the-month balance. We are not trying to as- sociate it with an interest rate, we are just charging that service charge based on a point in time. The very first case up there is a perfect ex- ample. That particular customer's balance on February 1 is $42.26- $41.26. The service charge is 48 cents on February 28. This example does not show that on January 31, the person made a purchase of $15. The 48 cents is 11/2 percent of $32.26, which was the balance in the account when the service charge was computed. In other words, they made a purchase as of that balance. So yes, the individual can have a smaller balance at the end of the month when the statement is ren- dered and still be charged a service charge on the larger balance from the beginning of the month. But conversely, an individual can have a large balance at the begin- ning of the month paid off and have no balance and receive no service charge. Mr. FIN0. It is common knowledge and indisputable that in order to have charge accounts and service charges and in order to keep books and records you have to have additional employees-an accounting department, so to speak-many employees. Now, taking this account, is this basic-what account is this here, the actual customer's account? Dr. W00LEY. From a small store in Virginia. (The following letter was subsequently received for inclusion in the record:) CONGRESS OF THE UNITED STATES, HOUSE OF REPRESENTATIVES, Washington, D.C., August 1~, 1967. Hon. LEONOR K. SULLIVAN, House of Representatives, Washington, D.C. DEAR MRS. SULLIVAN: Enclosed herewith you will find a copy of a letter I have recently received regarding the authenticity of Dr. James Wooley's testimony before the Subcommittee on Consumer Affairs. I would very much appreciate it if you would have this statement be made a part of the record of the Subcommittee. Kindest personal regards. Sincerely, LAWRENCE G. WILLIAMS, Member of Congress. SOUTHERN DEPARTMENT STORES, Iwo. Petersburg, Va., August 11, 1967. Hon. LAWRENCE G. WILLIAMS, Consumer Affairs ~~uboommittee, House Banking and Currency Committee, Washington, D.C. DEAR MR. WILLIAMS: I am advised that some question was raised regarding the authenticity of the revolving credit account introduced during the recent hearings of the Consumnr Affairs Subcommittee of the House Banking and Currency Committee, by the American Retail Federation witness, Dr. James Wooley. This account is an actual one selected from the credit files of a store owned and op. PAGENO="0231" CONSUMER CREDIT PROTECTION ACT 221 erated by our company. In my opinion this record represents normal activity in a typical revolving budget account in a retail department store. I respectfully request that this statement be made a part of the record of the Subcommittee. Very truly yours, EUGnNE B. SYDNOR, Jr., President. Mr. FIN0. Based on all of the charges made and payments made during the course of that year you figure that the service charge was 11.49 percent. Does that figure represent what it costs to maintain this service? Dr. WooLnY. In no way does it attempt to represent cost. All we are trying to do is to illustrate the impossibility of stating in ad- vance an annual effective interest rate on an account. We are not try- ing to equate this with the cost of maintaining that account. Mr. FIN0. I am sure that the department store, whether it is small or large, is not going to run this business of customer accounts and service charges and what have you with additional employees unless they could pay for that through the customer. You are not giving them any extra benefit-you are not giving any extra benefit to the customer, are you? Dr. W00LEY. I think you are. You are allowing the customers to buy something without having to have the cash in his pocket to do this. This is a service. Mr. FIN0. But you are charging a service charge for that. What I am trying to find out is, does the service charge of 11.49 percent cover the cost of that service? Dr. Woou~~. I know of no department store where the service charges cover the cost of running their credit operation and I recently completed a survey for a large store in the New York area which was contemplating going into the credit market and they in no way could expect to cover their costs of maintaining that credit operation by service charges. The only way they could do it is by increasing sales. Mrs. SULLIVAN. Members of the committee, we are going to have to cut off this questioning. Before some of you came in we explained to the witnesses that because of the fact that we could not meet yester day afternoon we set up this special hearing for them for 1 hour, from 9 a.m. to 10 a.m., at which time other witnesses were to be heard. Mr. WILLIAMS. Madam Chairman, may I make a comment? It seems to me that one of the most troublesome points of this bill are the provisions relative to the revolving charge accounts. It seems to me these gentlemen have an extensive background in this field and I would like to suggest that we ask them for any closing comments that they may have which would be helpful to us in our deliberations. Mrs. S LJ~VAN. I wanted you to know that there are other witnesses scheduled at 10 a.m. Mr. WILLIAMS. I understand that. The other groups coming in I do not think have had the exact or had the actual experience with this particular troublesome question that these witnesses have. I would like to ask for a concluding statement from them of anything they might care to conclude with that may be helpful to us in our delihera- tion~. Mrs. SULLIVAN. I will ask them to do that, but again I want to ex- plain to the committee members who were not here when we started PAGENO="0232" 222 CONSUMER CREDIT PROTECTION ACT at 9 a.m. that these gentlemen have agreed to ans*er in writing ques- tions that we would like to ask them now, aud, they can answer in the record when they receive their transcripts in the next few days. If they will reply by the first part of the week to any question that we put to' them, we can have time to go over it and study it. Mr. DESHAZOR. Madam Chairman, may I make one comment? There is one closing comment here which I would like to read'to you because I think it is terribly important in another area of your con- sideration and I will omit everything else and I would like to make that. * Mrs. SULLIVAN. All right, just one moment before you do. `Mr. FIN0. One question for a yes or no answer. That is all. What in your opinion is more important to the customer, annual rates or the annual charge as a percentage of the amounts purchased? Dr. WOtLEY. Run that through once more. Mr. FIN0. What is more important to the customer, the annual rate or the annual charges of the percentage of the amounts purChased? Dr. WOOLEY. The dollar charge has to be the most important. Mr. FIN0. Thank you. Mr. HANNA. Madam Chairman? Mrs. SULLIVAN. If you could read in your question that would be all right. Would you do that? Mr. HANNA. I would like to have the gentleman prepare a comment on the applied rate versus the effective `rate. I think the committee needs to get very clear the position on this. Mr. DE~HAZOR. I think you are absolutely right and I have a note here that one of my examples did touch on that when 1 referred to closed end versus open end. You see the real problem here that ~ny one of us has, is that in figuring, as Madam Chah~mait referred to this, what the rate is going to b~; there are several factors. you have to know. One of those, obviously, is the rate itself. In a mortgage, for example~ you know what the rate is, you know what the amount of the transaction is and you know what the time is. I think they are the three sigtuficant elements of any figuring of interest-or carrying charges or whatever you want to call it. Now, you' don't have that in revolving eharges and that is basic, that is the basic thing we are. still stumbling over here this morning in this question. ~* . . Mr. HANNA. If you will just make that clear and avoid any kind of technical language about open end or closed end or anything like that, but just the three things we are talking about and figure out this both as applied and effective. Th~n the . other thing that I would like to ask you, if you would please answer these two questions for me in regard to the exemptions of the $1Ocharge. `Mr. DESHAZOR. That is the point that I would like to read to the committee, if I may. Mr. IL~NNA. Let me ask you a question and you can say to the com- mittee what you will.. ` My question is, Is there any reason why that should not be $5, No. 1,, and No.2, would you'object to any language whirh would be added into this section to make it clear that it would be iliegal~to split sales for the purpose of evading disclosure? PAGENO="0233" CONSUMER CREDIT PRQTECTION ACT 223 Mr. DESHAZOR. That is a two-part question. I think the $10 figure is reasonable, to answer that part of it. The second part of it, we would have absolutely no objection to the kind of prohibition you are referring to In fact, we think it would be unconscionable to do the sort of thing you refer to. Mr. HANNA. I wanted to address myself to both of those. I think those are the two main questions. The other questions I have for other witnesses. Mr. STaPHENS. I have one question, Madam Chairman; and you need not answer this now, but I would like to have an answer be prepared. I agree with the statement and the position that you cannot tell at the beginning of the year what rate of interest is going to be charged on this chart. What would be the objection to figuring what you have clone here and tell the person who has had an annual account like this how much, percentagewise, he did pay the prior year? I think you can put a percentage on it that way. Mr. DESHAZOR. Just one objection. We carry in our own company some six and a half million in credit accounts. Now, clearly, we could do what you are suggesting. It would be just an enormous expense to do so. Mr. STEPHENS. I would like for you to give me some of the reasons why that cannot be done. (The material referred to follows:) To determine the annual rate in terms of interest at the end of each year for Ci/2 million individual accounts would require a complete recapitulation of every single transaction for a period of 12 months. This would require the most enor- mous expenditure of time, effort, and money imaginable. What is more, we would question the value to the customer of the information derived from this suggestion, since the transactions would all have been made in the past and could not be changed. We fail to see the value in informing customers, on a blanket basis, that they could have incurred, over a 12 mOnth perio4, rates from 0% to 540% on their revolving accounts. Mrs. SULLIVAN. Mr. Halpern? Mr. HALPERN. Thank you, Madam Chairman. Very briefly. Mr. DeShazor, what wou'd be your response to the following sug- gestion as a solution to the revolving credit bottleneck-instead of being required to state that the annual rate by which revolving account charges are calculated is 18 percent per. annum, disclosure would in- volve a statement of a range of rates which are actually paid, with 18 percent per annum specified as the outer limit or maximum rate which might be imposed on the account if payment is delayed a full 12 months beyond the initial imposition of credit charges? Mrs. SULLIVAN. We have to get on. They can answer that for the record. (The material referred to follows:) We would agree that Mr. Halpern's suggestion is one which deserves careful attention and one which we consider a constructive approach to this ditflcult question on revolving credit. We also agree that 1~/~ % each month cannot be cal- culated as 18% per annum. We wotild not object to considering appropriate language jn the bIll so worded to authorize the Federal Reserve Board authority to delineate procedures which would requi~e disclosure in a range of rates which are actually paid. Eighteen PAGENO="0234" 224 CONSUMER CREDIT PROTECTION ACT percent per annum should not be specified as the maximum rate which cGuld be imposed. We haste~i to remind the Subcommittee that a similar procedure was consid- ered at some length in the Senate deliberations and was eventually rejected. The position of the American Retail Federation, however, must remain the same and We cannot endorse any annualization on revolving credit accounts without all of the information necessary to determine an effective rate. As has been stated before, this can only come about after the transactions have all been completed, and not in advance. Mr. HALPERN. How would you resolve the issue of discrimination against installment credit sources if revolving credit is to be exempted from the disclosure provisions of this legislation? Mr. DESIJAZOR. We will answer that, too, sir. (The material referred to follows:) Revolving credit is not exempt from the bilL The provisions covering revolving credit are ~arefully spelled out, and the only "exemption" for revolving credit applies to the statement of an annual rate on relatively short term purchases. Inasmuch as almost all installment credit is offered for longer terms-over 18 months to pay-there is no "exemption" under S. 5 for revolving plans which offer comparable terms. Installment sellers who sell small items likely to compete with those offered on short term revolving plans have an "exemption" of their own under the terms of S. 5, if the finance charge of the contract is less than $10. Thus, the provisions of the bill balance themselves out and work no particular hardship on anyone. There is, therefore, no real discrimination. The reasonable distinction made by the Senate outlines the justification and reasons for the new category, The Senate Report reads: "section 4(d) (2) (0)-Disclosure method of determining the finance charge.- This paragifaph requires dis~losure of the complete method for determi~ting the finance cba~ge including the imposition of any fixed or minimum fees. Many department stores have minimum fees while bank check credit plans often have a 25-~ents-per-cbeck charge. By requiring separate disclosure of these charges, the new version also recognizes such charges cannot be included in the rate. "The section also requires disclosure of the periodic rate. In addition, install- ment open-end credit plans, as defined by section 3(h), would disclose the annual percentage rate which would be 12 times the monthly rate. "This provision reflects a major recommendation of the committee to exempt open-end credit plans from the annual rate, but to include installment open-end credit plans. "Such plans are ordinarily used to finance large purchases and are distin- guished from ordinary revolving credit by the extended length of time permitted for repayment and the maintenance of a security interest in the merchandise. Such plans would be covered if less than 60 percent of any amount of credit was payable in 1 year, or if the seller maintained a security interest, or if accel- erated payments are applied to future payments. "The purpose of this distinction is to eliminate any incentive to convert closed- end installment credit to revolving credit merely to escape annual rate disclosure. The amendment also provides greater comparability between installment open- end credit plans and installment closed-end credit plans. Smaller merchants who extend credit through installment contracts can compete on a comparable basis with the larger stores who use extended payment revolving credit." pps. 16 and 17, Report No. 392, Calendar No. 378. The American Retail Federation thinks this reasoning is logical, and generally acceptable. Mrs. SUtLIVAN. Mr. Wylie? Mr. WrLIE. I have just one question which Mr. DeShazor may have answered before I came in. I am sorry I was a little late, You were here yesterday and heard us pursue several questions regarding revolving credit with Senator Douglas trying to point out that disclosure of an exact amount of interest was not possible carried PAGENO="0235" CONSUMER CREDIT PROTECTION ACT 225 to its logical extreme. You can't have a disclosure of interest rates on every item of soft goods at the time of purchase for instance. If we went to the optimum in a truth-in-lending bill there would be a full disclosure of all elements of cost prior to sale. That is the pomt that I was trying to make. You are saying that it is not possible to fix an annual interest rate in the case of a revolving charge account, as I understand it. Mr. DESITAZOR. That is correct. Mr. WYLIE. My question is this: Do you, when you talk to a customer about setting up a revolving charge account, and I assume he signs some kind of contract at the beginning, do you disclose to him the various possibilities as to the charges which might be incurred by him if a cer- tain balance is in the account at the beginning of each month? Do you understand the question? Mr. DESHAZOR. Yes, I do understand it and I think our statement is very clear and most of us do show examples of what it could be. Mr. Wmin. The next question is, do you think it is feasible, and should we write that into this bill, a requirement that an indication of the range of interest that might be charged? Mr. DESHAZOR. I would like to study that and give you a written reply. (The material referred to follows:) The answer to Mr. Wylie's question is the same as our reply to Mr. Halpern's question on providing true rates in a series of ranges with 18% as the maximum annual rate. Such a requirement would tend to regiment credit systems to the detriment of many methods now in use by credit grantors. Mrs. SULLIVAN. Mr. Williams? Mr. WILLIAMS. Yes, I have three quick questions. First of all, does `the monthly statement that you send to your re- volving charge account customers include in it as a dollar value the monthly service charge? Do you have to pledge your accounts receivable in order for you to obtain credit to continue in your operation and, three, is it true that any revolving charge account customer who has a balance, using your illustration, say on July 31 of $27.56, but who pays that balance off any time during the following month after August in effect receives a bonus in the way of the monthly charge-no monthly charge for the balance that was outstanding on July 31? Is it true that he receives a bonus in the way of no monthly charge for the balance that was outstanding on July 31? Those are my questions. (The material referred to follows:) Yes! The monthly statement sent to revolving charge account customers in- eludes the dollar value of the monthly service charge. Yes! Accounts receivable are pledged in order to obtain credit to continue operations. Yes! Customers using revolving charge accounts do not incur a service charge when the balance at the end of the preceding month is paid in full. The Subcommittee has been made aware that service charges are computed not only on the beginning balance method, but also on an en~fing balance method and also on an adju8te~f balance method, depending upon the policy of the par- ticular retail establishment. Mrs. SULLIVAN. I have several questions that I am going to submit to the reporter to include at this point for your written answers. They are as follows: PAGENO="0236" 226 CONSUMER CREDIT PR9PECTION ACT 1. Mr. D~Shazo~r in connection with this $10 e mption, you talk in your prepared statement about "the vexing administrative problems which are particularly burdensome to small business.", Now, certainly, we appreciate your acting as a spokesman for small business; but, in fact, you are, a representative of very big business, are you not, and the fact of the n~iatter is that Montgomery Ward, with its electronic com- puters, would have very little difficulty in complying with the provi- sions of this act. Is that not so? As far as ~mall business is concerned, small businessmen do not seem to ~have too ~iuch difficulty in computing the sales tax they must charge c~istomers and I frankly do not think that when regulations have been issued and rate books have been devised, that they will have any more difficulty in complying with the requirements of this legislation. 2. Next, Mr. DeShazor, you criticize the advertisement disclosure provisions of this bill, suggesting that it would discourage advertise- ment of credit terms because of fear that the ad would not make proper disclosure of such ii~iformation. However, isn't it a fact that the Food and Drug Administration and the Federal Trade Commission have been dealing with problems of misleading labels or advertisements for years and we certainly don't seem to have suffered from any diminu- tion of advertising as a result of their efforts. If truth in such adver- tising has not produced the dire results you fear, why do you suggest that truth-in-credit advertising would produce such dire results? Now, Mr. DeShazor, I believe you have a concluding statement. Mr. DESUAZOR. If I can rush tkrough this I would like to. It has been talked about a good bit in the testimony before and we do have a point which we wish to make. This is on installment credit. With regard to the requirements prescribed for closed-end or in- stallment credit, we urge this committee to retain the exemption for annual rate disclosure in the case of installment transactions in which the total finatuce charges do not exceed $10. I want to make sure that the reasons for not requiring annual rate disclosure in, small transactions where the finance charge is $10 or less are fully understood. First, this feature is applicable only to installment accounts. It has no application to revolving charge accounts. I was not sure some of the witnesses yesterday understood that point. Second, let me make clear that S. 5 requires all of the other elements of disclosure-the cash price, the amount of the financing charge, the amount of each monthly payment, the date of each monthly payment, and the number of monthly payments. The only thing that ~. ~ does, is to exempt the small transactions from the one requirement of annual rate disciosuk-ali of the other requirements of disclosure must he made. The primary reason for the $10 exclusion is to preserve the extension of small amounts of credit to consumers. In addition, it would relieve some of the vexing administrative problems which are particularly burdensome to small business. The exclii~ion is included in H.R. 11602 but was not incorpor~tied in H.R. 11601. It has been endorsed and supported by the Federal PAGENO="0237" CONSUMER CREDIT PROTECTION ACT 227 Reserve Board, the National Small Business Association, and retailers in general. In fact, the $10 exemption was first proposed by the Federal Reserve Board. Perhaps I don't have to read all of this statement of Governor Robertson, but I thought it was very succinct and it is included here in this written statement, but in deference to your requirements of time I will omit rereading Governor Robertson's statement; but I would appreciate it if you would go through that. Mrs. SULLIVAN. It is already in the record and most of us, I believe, heard Mr. Robertson make the statement. Mr. DESIJAZOR. These observations by Governor Robertson are not based on speculation. The consequences outlined in his testimony were in fact realized in States whose law required disclosure of annual rate without allowing for a small transaction exemption. This is borne out by the experience of another witness who `appeared before the Senate subcommittee, Charles H. Gushie, president of Financial Publishing House. He testified, based on his experience in Massa- chusetts and Nova Scotia that without exemption from annual rate for small amounts of crelit, a small area of consumer finance, which is unprofitable to lenders, but which is socially desirable, will be withdrawn from the marketplace. Mrs. SULLIVAN. Those points are in the record and most of us have seen or heard them previous to this moment. Mr. DESHAZOR. Madam Chairman, I appreciate your hearing us out and I know that the pressures of time are on you and I hope that if you do have any further questions you will let us know and we shall answer them. Mrs. SULLIVAN. We shall, and I want to say to you gentlemen that I think your statement was right to the point-and the point, I believe, is that if you had your choice in the matter, you would prefer that we drop the whole thing. Mr. DESHAZOR. We are in favor of truth in lending. Mrs. SULLIVAN. Is that not a fair summary? Mr. DESIJAz0R. No, Madam Chairman; as a matter of fact, in my conclusion which I did not read I make the statement that given the simple choice that we do favor H.R. 11602. We feel that H.R. 11602 poses certain problems for us. It poses problems for my company in terms of costs of certain things that we will have to do. But we~ also feel that based upon the last year of everything we have Seen in the States and in Washington, that the people across the country do want a truth-in-lending national law. Now, we would hope that there would be something which in fact would give the truth, but at the same time not impose upon literally thousands of businesses, a lot of `burdensome and ad~ministrative expense which, frankly we can't afford. Mrs. SVLLIVA*. Well, as' Senator Douglas ~~id yesterday, the truth should not hurt; furthermore, we want the truth to have some real meaning. I want to say to you gentlemen in conclusion that you are fortunate to have had the attention of this many members of the con~mittee at this early hour of the morning. I appreciate the very good turuout PAGENO="0238" 228 CONSUMER CREDIT PROTECTION ACT of all the members and I also appreciate the willingness of you gentlemen in waiting over from yesterday. Thank you. Mr. FIN0. Madam Chairman, may I ask a question? Mrs. SUI~IAIVAN. Yes. Mr. FIN0. Does the committee intend to allot more time to the in- dustry representatives? Mrs. Suu~vAN. Yes, there are more coming. Mr. FIN0. Because so far we have heard from the administration and not from the industry. The only ones who can teach us anything on this legislation are these very people who handle these problems every day. Mrs. SULLIVAN. I think we have been as fair as we could be and I think the gentlemen will realize that. Thank you very much. Mr. WIDNALL. Madam Chairman? Mrs. SULLIVAN. Mr. Widnall? Mr. WIDNALL. May I have time to ask a couple of questions? Mrs. SLTLIliVAN. If you could read them into the record as did the others, Mr. Widnall, it would be appreciated, because we have had to delay our other witnesses this morning for more than a half hour after having had them come a half hour later than originally scheduled. Mr. WIDNALL. May I read these now? Mrs. SULLIVAN. Yes. Mr. WIDNALL. First, I would like to know what the average credit charge of the first purchase is in the account. Second, of that number of people, how many or what percent pays off in 30 days. Third, what percentage of their accounts-what percentage owe balances in their accounts without ever paying off the full balance? Thank you. (The mate~rial referred to follows:) Based on a survey of 50,000 individual transactions, the average beginning purchase is between $20 and $26. The average purchase in the spring of tb~ year is approximately $20, while the average purchase in the fall of the year is ap. proximately $26. Based on these same 50,000 transactions selected at random, less than 18% incur no service charge because their accounts are paid in full but not necessarily within 30 days. Many credit systems allow considerably more than 30 days free credit. Full maturity on credit accounts is reached in 82.3% of the 50,000 transactions sampled. Mrs. SULLIVAN. Thank you. (The complete statement of Mr. DeShazor follows:) STATEMENT OF THE AMRRIOAN Rm~AIL FEDERATION, PRESENTED BY ASHLEY DESHASOR, VtcE PRESIDENT FOR CREDIT, MONTGOMERY WARD & Co. Madame Chairman and members of the Subcommittee, I am Ashley DeSbazor, Vice President of Credit for Montgomery Ward and Company, Chicago, Illinois. I appear here on behalf of the American Retail Federation, and I a~n grateful for the opportunity to present the views of the Federation on H.R. 11601 and HR. 11602. The American Retail Federation is a federation of 26 national retail associa~ tions and 47 state-wide associations of retailers. There is agreement within the Federation on the majority of the points we are making. The policy Of the Federation on consumer credit and economic controls is as follows: PAGENO="0239" CONSUMER CREDIT PROTECTION ACT 229 "The American Retail Federation is committed to the principle of honest, reasonable, and meaningful disclosure by all parties to consumer transactions, and to the vital freedom of choice among credit methods. "The American Retail Federation is opposed to federal regulation of credit which would limit the consumer's choice or add significantly to the cost of pro- viding credit or decrease competition by standardizing the methods of dqing a retail credit business. "The American Retail F~ç1eration is opposed to legislation creating standby authority to impose price, wage, and other direct economic controls." These policies were reaffirmed at the Annual Meeting of the Federation on May 15, 1967. With respect to H.R. 11601, the association members of the Federation are opposed to some of its disclosure provisions and most of its regulatory provisions. The Committee also has before it HR. 11602 which is identical with S. 5 as passed by the Senate. On this bill the membership of the Federation is not in complete agreement. While most believe that the bill represents a real step toward a workable disclosure bill, some feel that their own particular lines of business, or their own credit methods will suffer a co'mipetitive dlis- advantage. DISCLOSURE H.R. 11601 provides for a single yardstick of rate disclosure, an annual percentage rate. Insistence on an annual percentage rate for all credit was the stumbling block which delayed passage for so long in the Senate because it is simply impossible to state a truthful and meaningful annual rate on revolving credit. Efforts to devise a formula which would produce such a rate for revolving credit have been made for seven years by government and industry alike, but the impossibility of doing so was acknowledged in the final draft of 5. 5. Thus, HR. 11601 represents a backward step. It moves toward the Massachusetts example which as you know is currently being challenged in the courts. Because of what was said Monday, with respect to revolving credit, I feel that I should make some explanations in addition to my prepared statement, which I hope will shed some light on the matters discussed by both Mr. Barr and Governor Robertson. First, I hope that everyone on the Committee understands very clearly that the "exemption" spoken of for revolving credit contracts is by no means an exemption from the reqnirenients of the bill. There will be disclosed, under S. 5, a full and complete statement of dollar cost of credit for every retail transaction. No one will be ignorant of what he is paying. From the questions asked, as well as some of the ~nsw.ers given, it appeared that some members of the Committee were under the impression `that anyone offering revolving credit need make no disclosure statement at all. That, of course, is not the fact. What S. 5 does not require, however, is disclosure in terms of an annual rate. The reason is simple-it cannot be truthfully done on revolving charges. The only real yardstick in this area is `the dollar cost. This must `be disclosed under S. 5-and we do not object to such disclosure. Now let `me turn to another statement of Mr. Barr's, which was reiterated in substance by Governor Robertson. This was the comment which he made, under questioning, that we retailers are righ't about our 1l/2% monthly revolv- ing charges not being 18% a year if you assum,e that the credit is extended at the time of `the sale. Let us look at the assumption itself. This is precisely the situation based not on artificial assumptions but on plain common ~ense. When a customer walks from the store, any one of our `stores, with a pur- chase, under her arm for which she has not paid, ~his is either a credit sale or shoplifting. Wi'thout `money in hand, it is not a `cash sale. If it `is not a cash sale, it `is a credit sale. If it is a credit sale, credit has been extended as of that moment. From `this simple reasoning, I think it is clear that credit is extended to the customer at the time of the `transaction. The Ba'rr assumption to the contrary is a fallacy `and `the &m'clusion is, therefore, erroneous. I should now like to intro4uce Dr. James Wooley of the international ac- counting firm of Touche, Ross, Bailey, anld Smart who will explain `to the Committee why is it impositible to annualize a monthly charge in revolving credit. PAGENO="0240" 230 CO~SU~fER C1~tBDIP ?~OThC~TO~ AC~I~ x~TAtLMnI~T OREIaT With regard to the requiremento prescribed for closed-end or installment credit, we u~'ge this Committee to retain the exemption for annual rate disclosure in the case of installment transactions in which the total `finance charges do not ~xceed ten dollars. I `want to make sure that the reasons for not requiring annual rate disclosure in small tra*sactions where the finance charge is $10 or less are fully und,erstQod. First, this feature is applicable only to installment accounts. It has not appli- cation to revolving charge accounts. Second, let me make clear that S. 5 requires all of the other elements of dis- closure-the cash price, the amount of the finance charge, the amount of each monthly payment, the date of each monthly payment, and the number of monthly payments. The only thing that 5. 5 does, is to exempt the small tranSactions from the one requirement of annual rate disclosure-all of the other require- ments of disclosure must be made. The primary reason for the $10 exclusion is to preserve the extension of small amounts of credit to consumers. In addition, it would relieve some of the vexing administrative problems which are particularly burdensome to small bnsiness. The exclusion is included in H.R. 11602 but was not incorporated in HR. 11601. It b~s been endorsed and supported by the Federal Reserve Board, the National Small Business Association, and retailers in general. In fact, the $1~ exemption was first proposed by the Federal Reserve Board. These observations by Governor Robertson are not based on speculation. The consequences outlined in his testimony were in fact realized In states whose law required disclosure of annual rate without allowing for a small transaction exemption. This `is borne out by the experience of another witness who appeared before the Senate Subcommittee, Charles H. Gushie, President of Financial Publishing House. He testified, based on his experience in Massachusetts and Nova Scotia, that without exemption from annual rate for small amounts of credit, a small area of consumer finance, which is unprofitable to lenders, but which is socially desirable, will be withdrawn from the marketplace. When opehing a small installment account, merchants ordinarily require a mini- mum amount of finance charge, which is simply enough to allow the merchant t~ cover the expense of opening and administering the account. For example, on a sale of $21.00, payable $4 monthly, a finance charge of $ is added. The contract will call for six monthly payments of $4 each. In such a transaction, the merchant would incur the expense of a credit itdrestigation and recording, opening an account and recording six monthly payments. Collecting $3 from the buyer will not cover the expense. Yet, if the finance charge has to be stated as an annual rate, th'e~ rate quoted' would have to be stated as about 49% per year. This would make for a disproportionate and misleading statement The charge is not a charge that is made for the use of the money. It is unrelated to the $21 or the six months. It is slmp~y a minimum charge like the one that the telephone company might make for ii~stalling and furnishing a telephone for one day-on which the tele- phone user only makes one call. The single telephone ball might' cost $~, which would seem exorbitant. But it is not excessive in any sense, for It is merely a reimbursement of expense. There are many people who need to buy small items and pay for them in install- ments. But, if a merchant is obliged to quote 49% interest, rather than expose himself to a charge of exploiting his customers, he would simply discontinue these transactions and deprive these people of needed credit. ADVERTISING CREDIT TERMS HR. 11601 would require that any advertisement of a credit sale which is made in interstate commerce must contain all of the disclosure items required in an installment contract or in a revolving credit agreement To all Intents and pur- poses, all newspaper advertising is in interstate commerce, since almost every newspaper has some, interstate circulation. Thus, this restriction would apply to practically ~(ll retail advertising of merchandise. The net result would be discouragement of any advertisement of credit terms either out of fear that the ad did not disclose enough information or disclosed so much that it obscured the basic produce it was trying to sell. AJso, item 2 on page 16 would eliminate the advertising of special sales or promotions f~athring delayed payment or special credit terms since they would not be "usually and cus- PAGENO="0241" CO~SIJMER CREDIT PROTECTION ACT 231 tomarily" offered to the public. The advertisement of special credit terms applied to a one-time purchase and sale of "buy in February, pay in June" sales of air conditioners, for example, wouJ~d be outlawed. We fail to see how coflsflmer in- formation is increased when advertising is curtailed. A CEILING ON RATES HR. 11601 provides that no finance charge shall exceed the maximum Tate permitted under an applicable state law or 18 per cent per annum, whichever is the lesser of the two. We do not believe that a provision of this sort belongs in a federal law. The regulation of maximum rates is and has always been a state matter having in some cases been made part of the state constitution itself. We strongly urge that the states be permitted to use their own judgments as to the maximum rate permissible. There is another consideration which should be kept in mind. Such a limit will tend to restrict the granting of credit in marginal cases where risks of collection loss are high. Some may say that the poorer credit risks should not be given credit anyway; but as a matter of fact, the poorer risks need credit and make sincere efforts to pay their bills in most cases. If denied credit by reputable sources, many will go elsewhere and suffer accordingly, thus thwarting the "pro-~ tection" proposed by the bill. With respect to garnishment of wages, the same point applies. The possibility of restriction of credit extension by reputable credit grantors is very real with the resultant rush to the "loan sharks" by those least capable of paying the cx-- borbitant and already illegal rates. CONFESSION OF JUDGMENT We would oppose the provision prohibiting confession of judgment because we- think that it also is more properly a state matter. The proposed nation~wide prohibition of confession of judgment does not take into account the status of the laws of those states where confession of judgment is the only security provision available to the creditor. We know of no study of state laws to determine whether the impact of 11601 would be beneficial. Without such information, a sweeping federal "brushing aside" of these laws could well be disastrous. Parenthetically, without making a special point of it, our feelings about garnishment of wages are the same. STANDBY CONTROLS As stated at the beginning, the policy of the Federation is in opposition t~ standby controls. In the past, the Congress has always acted with speed in na~ tional emergenëies. We do not believe, therefore, that it is wise to issue a "blank check" in advance, especially since it has not been requested by either the Presi- dent or the Federal Reserve Board. Under the provisions of the bill, the Board, acting under an Executive Orderr could prohibit granting certain forms of credit, or prohibit credit for special pur- poses. It could also regulate the amount, or rate of credit charges, and the forms and contents of credit contracts or almost anything else. A brief review of history explains why Congress, rather than the President or the Board, should determine the scope of emergency credit controls. In the Pefen~e Production Act of 1950 (September 8, 1950), the Congress restored to the Board the power to control consumer ~redlt under the anth~rity of the same Executive Order (E.O. 8893, August 9, 1941), which empowered the Board to issue Regulation W in World War II. (This authority had been rescinded by the Congress in an act approved August 8, 1947.) However, a few months later, the Congress (Act of July 31, 1951), found it necessary to place limitations and restrictions on the Board's authority. The Board was prohibited from requiring down payment in excess of specified percentages of the selling price in install- ment sales. It was also prevented from requiring that payment be completed in a specified periOd Of time varying with the type of merchandise involved in the transaction. We submit that if such regulation should be needed, it should be done by the Congress so that members of the business community will have a forum in which to state their case on any ~iropOsed requirements. 88-840-67-pt. 1-16 PAGENO="0242" 232 CONStIMER CREDIT PROTECTION ACT ENFORCEMENT H.R. 11601 would give the Federal Reserve Board new and wide-ranging reg- iulatory and enforcement power over retailers, For example, it would direct the Board to issue complaints, hold hearings, issue cease and desist orders, and require records and reports. We note that the Board has said many times that it çloes not want this authority for a number of reasons. We much prefer H.R. 11602 which leaves the major part of enforcement to civil suits, making the Board responsible only for regulations with respect to methods of disclosure and establishing reasonable tolerances of accuracy. We believe that a self-enforcing law is preferable whenever possible Cer- ;tainly self-enfOrcement should be given a chance to prove itself. NATIONAL COMMISSION ON CONSUMER FINANCE H.R. 11601 would set up a Presidential Commission to study the entire field of consumer credit. The group would make a full report on its findings with respect to prevailing credit practices and the various regulatory agencies dealing with those practices. At the same time, it contains the language of S. 5 under which an advisory committee is to be set up to do much the same thing, reporting its findings to the Federal Reserve Board. We feel that this is unnecessary duplication, and that one such Board will certainly be enough. Of the two groups mentioned in the bill, we would prefer the advisory corn- mittee assigned to work with the Federal Reserve Board. They would be a continuous group, and not under the pressures of a deadline for a specific single report. OTHER FACTORS There are other factors of which the Committee should be aware. Some seg- ments of the industry who offer revolving credit while retaining title to the merchandise are concerned with the revolving credit provisions of H.R. t1602 (S. 5). Under these provisions, if there is title retention, the finance charge must be expressed a~ an annual percentage rate in open-end credit. If title is not re- tained, the sellOr discloses the monthly percentage charge. In those states which permit title retention on revolving credit accounts, stores which retain title feel that they may be hurt competitively by stores with identical payment terms which relinquish title. However, it is thought essential to develop a means to discourage transactions normally made on an installment basis from being converted to revolving credit for the sole purpose of evading disclosure of an annual rate. This was the means ~chosen after thorough consideration. As was said many times on the Senate floor, the final Compromise worked out on revolving credit by the Senate com- mittee has not satisfied everyone. As you consider these points, we wish to make it clear that the one thing about which all retailers do agree is that an annual statement of revolving charge is misleading and would be improper, as Doctor Wooley has pointed out. CONCLUSION We are opposed to ER. 11601. It is impossible to state truthfully an annual percentage rate for revolving ~credit transactions as the bill requires. Requiring a statement of annual rate in the case of installment credit where the finance charge does not exceed $10.00 will eliminate a socially desirable seg- ment of consumer credit to the detriment of the less affluent consumer. H.R. 11601 wOuld discourage the advertising of needed credit information. By placing a ceiling on finance charges and undertaking a piecemeal excursion into the area of creditor remedies, the bill invades areas' where the state~ are br more competent to provide meaningful consumer protection than is the iederal government. The imposition of standby controls would be contrary to Congress' own ex- perience in this field. The placing of far-ranging enforcement powers in the Federal Reserve BOard is unwarranted and i's contrary to the Board's own wishes. HR. 116~O2 (S. 5) creates some problems for retailers. We would hope that `changes in it would be made before the House agreed to the Senate version. How- ever, if faced with a simple choice between H.R. 11601 and HR. 11602, the vast majority of the members of the American Retail Federation would prefer KR. 111602. PAGENO="0243" CONSUMER CREDIT PROTECTION ACT 233 APP. A.-AN ACTUAL CUSTOMER ACCOUNT FROM A DEPARTMENT STORE DEMONSTRATING CALCULATION OF ANNUAL SERVICE CHARGE RATE Date Purchase (payment) Monthly service charge Balance X Number of days Dollar days Jan.29 Feb. 1 Feb. 18 Feb.28 Mar.31 Apr.21 Apr. 30 May3 May 13 June 8 June 30 July11 Aug. 20 Sept. 6 Sept. 9 Sept.16 Oct.21 Oct.31 Nov.22 Dec. 21 Dec. 27 Jab. 31 Total 1$9~3Q 2 (15 00) (15.00) 13.00 (12. 32) 11.00 1 3.00 (27. 56) 3.08 3. 08 4.12 1.55 (11.98) 10.82 14. 01 -- - $0.48 (32.26) .40 (26.74) . 18 (12. 14) , 20 (13. 00) .36 (24.20) .15 (10.28) .37 (24.83) 2.14 $41.26 41.26 26. 26 26.74 27.14 12.14 12. 32 25.32 13. 00 24.00 27. 20 27.56 3. 08 6. 16 10.28 11.83 11.98 10.82 24. 83 25.20 18 10 31 21 9 3 10 26 22 31 20 3 7 35 10 22 6 35 319 $742.68 262. 60 828.94 569.94 109.26 36. 96 253.20 338. 00 528.00 843. 20 551.20 9. 24 43. 12 359.80 118.30 263.56 64.92 869. 05 6,791.97 1 Finance charges are 1~/~ percent each month, calculated on an adjusted balance. The 27th is the closing date for pur- poses of billing, which means transactions in the last few days of each month are not included in the chargable balance of the succeeding billing period. 2 It is the policy of the store from which this actual account was taken to immediately credit payments in excess of 50 percent of the outstanding unpaid balance in any billing period before computing the service charge. Whenever less than 50 percent of the unpaid balance is paid, the service charge is computed on the full balance at the beginning of the billing period. (6791.97) . (2.14) Note: Average daily balance=$21.29 (31-~--~ average daily service charge=$0.0067 ~p-~-); annual service charge (0.0067X365). rate=11.49 percent APPENDIX 13 LEGIslATIvE ANALYSIS Rn PENDING CREDIT BILLS H,R. 11601, H.R. 11602, S. 5, AND R.R. 12100 QUESTIONS AND ANSWERS ON TIlE $10 EXEMPTION PROVIDED IN S. 5, H.R. 11602, AND H.R. 12100 Question: Does the $10 exemption apply to all credit transactions? Answer: No. The $10 exemption applies only to closed-end (installment) credit transactions when the finance charge does not exceed $10. It has absolutely no application to open-end (revolving) credit transactions. Question: Does the exemption extend to all of the prescribed disclosure requirements? Answer: No. The exemption applies only to the disclosure of an annual rate. All other items of disclosure required by the bills must be made. These other items include: the cash price, the amount of each monthly payment, the date of each monthly payment, and the number of monthly payments. Question: Who supports the $10 exemption? Answer: The $10 exemption was first proposed by the Federal Reserve Board. Subsequently, it was endorsed by the following: National Small Business As- sociation; United States Chamber of Commerce; American Retail Federation; American Bankers Association; Independeut Bankers Association; National Retail Merchants Association; National Retail Jewelers Association; National Appliance Radio & TV Dealers Association; National Association of House to house Installment Companies; National Association of Music Merchants, Inc.; National Retail Furniture Association; National Retail Hardware Association; and National Sporting Goods Association. Question: Why would legitimate creditors stop making small loans (up to $100) if the $10 exemption is not enacted? Answer: This is explained in the testimony of Governor Robertson, Vice- Chairman of the Federal Reserve Board, He explained that, "In a closed-end credit transaction involving a small amount, a high effective rate may be jus- PAGENO="0244" 234 CONSUMER CREDIT PROTECTION ACT tilled to compensate the creditor for the relatively high out-of-i~ocket costs of handling the transaction. However, he may be understandably reluctant to dis- close the very high rate-perhaps 50 or 100 per cent-and might decide instead~ simply to discontinue this type of credit transaction." This is exactly what will happen, especially since the creditor takes a loss on loans which return a finance charge of less than $10. Question: Has there been any actual experience that consumers are unable to receive small, short-term credit in the absence of an exemption? Answer: Yes. This has occurred in the State of Massachusetts and in Nova Scotia. Question: How much does it cost a creditor to set up a small, short-term loan? Answer: (1) A witness from the Bank of America testified that his "cost analy- sis say it costs ~13.50, and that these are facts, not a supposition, to put a loan on. the books, whether it be $100, $150, or $200." He further stated that, "Therefore,. we charge a minimum charge of $15. We are not about to make loans at a loss. * * * This has nothing to do with finance charges. It is merely a cost charge for putting the loan on the books." (2) The Executive Vice President of the American Bankers Association testified that a $15 cost was on the low side. An ABA survey in connection with the guaranteed student loan program showed an average cost of up to $20. (3) Assistant Secretary Barr testified that in an area of small transactions. "You cannot get it on the books for much less than $10. There is a bookkeeping and accounting cost." Question: Is there a danger that the exemption could be subject to abuse by the device of dividing a single sales transaction into parts? Answer: This possibility exists, but can be eliminated by appropriate amend- ment such as contained in Congressman Hanna's bill, II.R. 12100. Section 4(b) (7) of HR. 12100 permits the exemption, "provided that a creditor shall not divide or spltt up a consumer credit sale with the intent of avoiding disclosure of an annual percentage rate." Question: For what reasons did the Senate vote unanimously in favor of the $10 exemption? Answer: Relevant portions of the Senate debate, reproduced on the following pages, show that its reasons were: (1) To preserve the extension of small amounts of Instalment credit to consumers; and (2) TO alleviate some of the difficult administrative burdens on small business. A small transaction exemption was not included in the Pruth-in-Lending laws of Massachusetts and Nova Scotia-What has been the result? "* * * The area of minimum charge in my experience in Massachusetts and Nova Scotia, is the one area where you are killing a very small segment of Consumer finance." Without providing a minimum charge exemption "you will kill a very small area of finance which is unprofitable to the lenders, it is true, but which may have a socially desirable purpose." Statement of Charles H. Gushee, President, Financial Publishing House, before Senate Subcommittee on Banking and Currency (S. 5, April 20. 1967, p. 520). All witnesses agree that legitimate lenders will stop making loans of small amounts (up to $100) if the $10 exemption Is not enacted. Why? It costs even the Bank of America at least $13~50 j~ist to put a loan on the books! (Hearings on S. 5, June 23, 1967, p. 23). From ths ~orrgressIonal Record, July 11, 19671 ExCERPTs FROM SENATE DEBATE ON TBtJP1I-T~LENDJNG ACT DEALING Wriui $10 ERnMPTI0N Mr. EYED of West Virginia. Mr. President, I ask unanimous consent that the Senate proceed to the consideration of Calendar Order No. 378, S. 5, the unfin- ished business. * * * Mr. BENNETT. I feel that there should be full disclosure of the dollar costs and under some cjrcumstances, where it is appropriate, a percentage, whether it is stated by the month or by the year, but I do not approve to trying to force all statements of the cost of credit into the straitjacket of a simple annual rate. I think that as the testimony develops before the committee we will diSeofer that there ar~ some types of consumer credit that cannot be forced Into that straitjacket. PAGENO="0245" CONSUMER CREDIT PROTECTION ACT 235 One of the first problerns that came to my attention during those first hearings involved the application of a mitdmum dollar charge, *h1cI~ whfle r~asonable In terms of dollars, became ridiculOus when translated into an annual rate. To illustrate th~ problem, let me tell the story of a man who went Into a gas station one morning. His car battery was dead. tie whs the driver in a carpool that week. He could not wait. He had rio money in his pocket, so he could not make a downpayment. The service station operator said, "The battery costs $20. I will make a credit charge of $2. You pay me $5 every payday until you pay off the amount." Those figures are small enough so that everybody can understand them. When I tried to figure out the annual rate of interest on that simple transaction, I became involved in a process that eventually ended in some of the largest uni- versities in the West. Every man who figured that annual rate reached a different answer. All I could finally determine was that the annual rate was somewhere between 115 and 130 percent. The rate statement on such purchases may appear unreasonably high yet when one talks about paying $~ for the privilege of having credit, under those circumstances, it does not seem to be too bad. Fortunately, the bill takes care of such a case, because it exempts all install- ment transactions in which the charge for credit is no more than $10. In prac- tice, this provision would exempt purchases Which could be as high as $110, if paid off in 1 year, even at an annual rate of 18 percent, and the value of the purchase could go higher at lower percentage rates or a more rapid payoff. The committee agreed that this exemption was necessary to protect the poor be- cause rather than to state an extremely high rate like that in the battery case, sellers would simply dry up the credit on small loans or purchases. * * * Mr. HOLLAND. I thank the distinguished Senator for yielding. Mr. President, of course I presume all Senators received, as I did, many corn- plaints as to the original bill that was pending in the Senate for several sessions prior to this one. I have had very few complaints on the pending bill. I am sure the committee must have made many changes that are helpful, and that have tended to clear up the difficulties in the old bill. I have received only one recent complaint, and it is that about whleh I wish to question the distinguished Senator. It has come from small merchants who do business by way of installment sales, and then have to be financed b~ selling that paper to small finance companies-local finance companies, I think I should say, though they are not large concerns-and from some of the small finance companies. They say the pending bill would make it increasingly difficult for small mer- chants who do that type of business, and small finance companies which finance that type of business, to stay in operation, because of the fact that the large concerns which have their own finance companies are able to distribute their profits between the selling operation and the financing operation in a way which will be hurtful to the small merchant and the small finance company. * * * Mr. SPARKMAN. Mr. President, I merely wanted to add that there is another provision in the bill which is helpful to the small businessman, and that is the $10 exemption. Mr. BENNETT. Yes. I covered that before the Senator came in. Mr. SPARKMAN. I was hoping the Senator would cover it in' connection with the question raised by the Senator from Florida. Mr. BENNETT. I thank the Senator. I shall do so, rfhe bill provides an exemption for every sale ozi credit where the total credit charge is less than $10-which translates into a sale as high as $110, to be paid for over a year. So the little man ba~ that protection at the low end of his business. * * * Mr. HOLLAND. Is it true that this particular point, the application of the law to small businesses and small financing companies, was of concern to the committee? Mr. PR0xMIRR. Yes. It gave us the deepest concern. The Senator from Alabama is the Senate's outstanding man in the small busi' ness field. For years be has been chairman of the Select Committee on Small Business. I have been chairman of the Subcommittee on Small Business of the Committee on Banking and Currency. We have both been deeply concerned, and other Senators have been very concerned, that we do all we could to protect and safeguard small business. PAGENO="0246" 236 CONSUMER CREDIT PROThCTTON ACT That is die reason tha~t tha $10 provision was written in. We scrutinized every part of the bill ECcplicitly With reference to the particular point which the Senator from Florida is so right in raising. If the bill were badly drafted and written, it could make it difficult for small business. But we are convinced that the pending bill will not make it difficult for small business. * * * Mr. SPARTcMAN. As explained in the colloquy on the floor of the Senate, initiated by the senier Senator from Florida [Mr. HOLLAND], we have tried to take care of small business and the different viewpoints as between disclosing dollars and cents and annual percentage rates; and we tried to take care of differir~g views of revo1vin~ credit. I believe we have worked out the best bill that can be worked outánd, as I have said, a finely balanced bill. Mr. President, I hope the bill will be accepted without amendment because I believe it is just that finely balanced. (Congresswoman Sullivan subsequently submitted the following:) CONSUMEE AFFAIRS SUBCOMMITTEE STAFF ANALysIs OF AN ACTUAL CUSTOMEIt ACCOUNT SUBMITTED BY THE AMEIiICAN RETAIL FEDERATION The American Retail Federation (ARF) submitted to the Subcommittee, as a part of Its t~sthnony, "A Copy Of An Actual Customer Account From A Depart- ment Store Demonstrating Calculation of Annual Service Charge Rate." (Appen- dix "A". p. 233.) The form in which the submission of the account wa/s made shows "dollar days" for various periods of time during which credit was ettended to the customer. However, such "dollar days," as shown on Appendix A, are merely a deVice used by the American Retail Federation to illustrate a Coinci- dental but erroneous conclusion. The contract terms which govern the computation of service charges in the ARF example follow: The service charge is determined by multiplying an adjusted balance on the 27th of each month by 11/2 percent. The adjusted balapce is the balance in the account on the 27th of the preceding month, plus the service c~iarge levied on the 27th of the preceding month, less the amount of any J~aymenljs or returns, if such payments or returns are greater than hal~ of the adjusted balance at the immediately preceding billing date. If the Payments or returns are less than 50 percent of said balance, they do not affect the amount used to compute the service charge. The assessment of service charges has nothing to do with "dollar days" or average daily balances or daily average service charges. Customers are charged 11/2 percent, and only 11/2 percent monthly on what is called an adjusted balance. The "dollar-day" concept, employed by the ARF, is developed only to demonstrate that the yield to the department store of the account as a whole is less than the 18 percent a~nua1 rate applied monthly to the adjusted. balance in the account. However, despite this mathematical prestidigitation, the fact remains that a monthly rate of 11/2 percent is' an annual rate of 18 percent. The service charge yield from the account is different from the service charge rate applied ~o the account because the rate is applied to selected balances in accordance with certain stated contractual rules. The yield on the other hand will vary from account to account depending upon the billing policies of the retailers and decisions entirely within the power of their customers. A customer of this store can have considerable credit without paying any service charges so long as he pays, by the 27th of the month, the amount of the ul3paid balance in his account at the beginning of the billing period. In effect, the department store says in its exhibit, "We have granted $6,791.97 `dollar-days' of credit." It does not say, what is in fact the case, "We have billed some of these `dollar-days' and some we have not billed." To clarify the rtiatter, the following is an analysis of the department store's account, as submitted by the ARF, precisely in accordance with the contractual rules set forth by the department sl~ore, showing both the "dollar-days" billed and the "dollar~days" not billed. In other words, the ARF computation of the annual rate includes days for which no credit charge was imposed. The staff analysis eliminates these "dollar days" not billed from its computations on the assumption that this so-called "free ride" period i~ the same for both cash and credit customers since payment during the "free ride?' period is still considered as a cash transaction for billing purposes. PAGENO="0247" CONSUMER CREDIT PROTECTION ACT 237 Thus, the staff analysis demonstrates that the applied rate is 18 percent per atinum. The following narrative illustrates what has taken place on ~Sch~edule A which follows below. Amounts in the Purchase- (Payments) column on Schedule A have been keyed to related amounts in the credit column. For example, $ (a) 32.26. in the Purchase-(PaymentS) column is the basis for the $ (a) 32.26 in the credit column. The balance in the account on January 27 was $32.26. Because 50 percent of this balance was not paid before February 27, a service charge of 1½ percent for one month, amounting to $.48, was made for 31 days ($32.26X .015) and added' to the account. A purchase was made on January 29 amounting to $9.00. Since this was not a part of the January 27 balance, no service charge was made for 29 days. No transactions took place during March and. on March 27, a service charge' of $.40 was made against the balance on February 27 which covered one month of 28 days ($26.74 X .015). The customer paid ~15.00 on his account on April 21. Since this payment was more than 50 percent of the account balance on March 27, it eliminated $15.00 from any service charge computation. Therefore, $15.00 of credit for 25 days was not billed. On April 27 the account balance was $12.14, which was part of the balance at March 27. The applicable service charge of $.18 for the month of 31 days was applied ($12,14X .015). A purchase amounting to $13.00 was made on May 3. On May 13, the customer paid off the balance in the account of $12.32 at April 27, thereby stopping the' computation of a service charge on that balance. Credit advanced of $12.32 was not billed for 16 days. Since the purchase on May 3 was not in the balance at April 27, no service charge was made on May 27, i.e. $13.00 credit for 24 days was not billed. On June 27 the account was reviewed, The opening balance of $13.00 had not been reduced during the month, so a service charge of $.20 for one month of 31 days was applied ($13.OOX .015). No charge was made on the $11.00 purchase of June 8, because it was not part of the opening balance; hence, $11.00 credit for 19 days was not billed. The review of the account at July 27 found a balance of $27.20, of which $24.2O~ was the balance at June 27 and $3.00 reflected a purchase made on June 30. Pursuant `to the rules, credit for a nionth of 30 days was charged on $24.20 ($24.20X .015$.36) but no charge was levied on $3.00 for 27 days credit. On August 27 there was no balance in the account; hence no service charge was made. flowever, the account balanCe of $27.56 at July 27 was not paid until August 20; hence credit of $27.56 for 24 days was not billed. Since there was no balance in the account on August 27, there was no service' charge on September 27. Purchases charged during the month were given a "free ride" in accordance with the store's policy. These were dollar-days not billed. The October 27 billing date found a balance of $10.28 that was in the account at September 27. The service charge of $15 for the 30-day month was applied ($10.28X.015$.15). The "free ride" on the purchase for $1.55 made on October 21 was not billed. The balance in the account of $11.98 on October 27 was paid off on November 22; hence the customer was not charged for the credit allowed for 26 days. No credit charge was made for December because there was no balance in the' account on November 27. Purchases during the month were in the "free-ride" category and not billed. Because the balance in the account on December 27 bad not been paid prior to `January 27, a service charge of $.37 was made for the 31-day month ($24.83 x .015==$.37). The conversion of "Credit-Days" and "Credit-Amounts" into "dollar days" is done by multiplying these two factors, providing us with a common denominator called "dollar days." Thus, total "dollar days" on Appendix A are computed by multiplying each cumulative balance in the account by the number of days such balance prevailed. The total "dollar days" for the year shown, both billed and not billed, amounts to $6,979.95 as listed on Schedule A. In effect, all of the credit granted during the year has been converted to the equivalent amount of credit advanced for one day. To convert this amount into an equivalent amount of credit for one year, we divide by 365 and obtain the amount of $19.12. The `effective annual return or yield on the account can now be determined by dividing $2.14 total service c'harges by $19.12, the average annual credit allowed, PAGENO="0248" 238 CONSTJMEE CREDIT PROTECTION ACT The r~tsu1t is 11.2 pt~rcent. ~y following, a slightly dLffei~'ent method of deter- mining dollar days, the ARF arrives at an annual service charge return or yield of 11.49 percent. If the customer had cleared hi~ account by the 27th of each month, tbe yield or return to the store for credit would have been nothing. However, the contra~t between the store and the customer has nothing to do with yield to the stoa~e and is completely silent on that point. The contract deals with a rate of 11/2 j~ercent applied to certain defined balances that have been outstanding for one month. One cannot escape the logic that 11/2 percent per month for 12 months is 18 percent per year. When the "dollar days" not billed are deducted from the total "dollar days," we find that the effective annual rate is 18 percent, as compared with a yield or return of 11.2 percent. As may be seen on Schedule A, "dollar days" billed amounted to $4,332.25. This amount divided by 365 days equals $11.87, which is the equivalent amount of credit for one year. This amountdlvided into the total service charges of $2.14 gives us the result of 18 percent, which is the rate charged. SCHEDULE A.-ANAL~YSIS OF ~N ACTUAL CUSTOMER ACCOUNT FROM A DEPARTMENT STORE DEMONSTRATING CALCULATION OF ANNUAL SERVICE CHARGE RATE SHOWING DOLLAR-DAYS BILLED AND NOT BILLED Purchase Service Credit Dollar-dayt Transaction dates (payment) charge ------~-~ ---`-- amounts Amount Days Billed Not billed Priorto January 27 (a)$32.26 January 29 19.00 $9.00 29 $261.00 February 18 2 (15. 00) February 27 $0.48 (a)32.26 31 $1,000.06 March 1 Balance (b)26.74 March 27 .40 (b)26.74 28 748.72 April 1 Balance~ (c)27. 14 (c)15. 00 25 375. 00 April21 (15.00) April 27 .18 (c)12.14 31 376.34 _~_~ Mayl Balance (d)12.32 12.32 16 197.12 May3 13.00 13.00 24 312.00 June 1 Balance (e)13.00 June8 11.00 11.00 19 209.00 June 27 - .20 (e)13.00 31 403.00 ~__ June 30 3.00 July 1 Balance (f)27. 20 - (f)3. Q0 27 81. 00 July 27 . 36 (f)24. 20 30 726. 00 August 1 Balance - -- 27. 56 August 20 (27.56) 27.56 24 661.44 August27 0 September 1 Balance 0 September 6 (g)3.08 (~)3.08 21 64.68 September 9 (g)3. 08 (g)3. 08 18 55. 44 September16 (g)4.12 (g)4.12 11 45.32 September 27 0 October 1 Balance....~ (h)10. 28 October 21 1.55 1.55 6 9.30 October27 .15 (h)10.28 30 308.40 November 1 Balance.. 11. 9~ November22 (11.98) 11.98 26 311.48 November27 0 - December 1 Balance._ 0 December 21 10.82 10.82 6 64.92 December27 14.01 14.01 0 December 27 0 January 1 Balance - 24.83 January 27 .37 24.83 31 769.73 `February 1 Balance 25.20 Totals. 2. 14 -_ _ 4,332. 25 2, 647. 70 Total, dollar-days Less free ride (dollar-days not billed) 2,647. 70 Net dollar-days (doll4r-days billed) 4,332. 25 ÷365 Yearly equlimlent (dollar-years billed) 11. 87 Annual percentage rate total ~ervice ch~rg~s 2. 14 ~ percent per year yeariy equivalent ICIY I Finance charges are 13-~ percent each month, calculated on an adjusted balance. The 27th isthe closing date for pur- poses of billing, which means transactions in the last few days of each month are not included in the chargeable balance of the succeeding billing period. 2 It is the policy of the store from which this actual account was teken to immediately credit payments in excess of 50 percent of the outst~rnding unpaid balance in any billing period before computing the service charge. Whenever less than 50 percent of the unpaid balance is paid, the service charge in computed on the full balance at the beginning of the billing period. PAGENO="0249" CONSUMER CREt~IT PROTECTION ACT 239 Mrs. SULLIVAN. The committee will recess for 2 minutes. (Short recess.) Mrs. SULLIVAN. The committee will come to order. It is my privilege this morning to welcome to the Subcommittee on Consumer Affairs two of the foremost officials of the Government of the United States, the Honorable Alexander B. Trowbridge, Sec- retary of Commerce, and the Honorable Sargent Shriver, Director of the Office of Economic Opportunity. Secretary Trowbridge has as his constituency-if a Cabinet mem- ber can be said to have a constituency-the business community of this Nation, while Mr. Shriver speaks for what President Franklin D. Roosevelt referred to as one-third of a N~ttion ill housed, ill clothed~ ill fed. The percentage is undoubtedly much smaller than in the 1930's, but the number of our poor remains distres~ingly high. We are not planning to have you gentlemen engage in ~i debate, but since Secre- tary Trowbridge deals with the business community in so many ways and since Mr. Shriver deals with the people who suffer the most from the kind of credit practices we are trying to eliminate, I think it is fortunate for us, and extremely useful in developing information,. that we could have you both here at one time. Secretary Trowbridge once served in the House as a staff assistant to Congressman Franklin P. Roosevelt, Jr., before joining the Marin~ Corps and going to Korea, and then going on to a distinguished career in business. So it is good to see a former congressional staff employee back here as a Cabinet officer. Mr. Shriver may never have served in any capacity on Capitol Hill that I know of, but for the past 6 years he has probably been up here more often than a lot of the people who work here, for he is always in great demand as a witness before congressional committees. I know of no greater tribute to anyone's ability to talk well and make sense than to be a favorite witness of congre~sional committees. Welcome to both of you. I want to say in the beginning that Mr. Shriver is not able tO stay here after 10:30. I am terribly sorry that we could not' reach him by 10 o'clock, as I had hoped. I tried to hurry. Would it be all right with you, Mr. Secretary~ if we can have Mr. Shriver talk a3~out the prob- lems of consumer~ credit for the next few minutes until he has to go? Secretary Tnow~iimo~. It certainly is. Mrs. SULLIVAN. If you will, Mr. Shriver; we will be happy to have you proceed as you wish. STATEMENT `OP HON. R. SAR~+ENT S1fltI~Elt, Dfl~ECTOR, OTPICt or ECONOMIC OPPORTUNITY; ACCOMPANIED BY ~BEBThAND M. HARDING, DEPUTY DIRECTOR, O~TICE OP ECONOMIC OPPOR- T~TNITY Mr. SHmVER. Thank you very much, Madam Chairman, and mem- berg of the committee, `and Secretary Trowbridge. I would like to express my regrets that I cannot stay here as long as I would like to, but I am very happy to have this opportunity to express our position on the pending legislation ~nd in doing so to express my own personal point of view; namely, that there `is no-or PAGENO="0250" 240 CONSUMER CREDIT PROTEØ~eION A~T there should be no conflict between businessmen represented by the Secretary of Commerce and the poor for whom we try to speak. In fact, it isn't the bi~isinessman whom the Secretary of Commerce is try- ing to protect who is threatened by the legislation before your corn- inittee; it is the unscrupulous businessman or the unscrupulous and gouging merchant that your legislation is trying to protect the poor against and the Secretary of Commerce is not trying to defend that kind of merchant, I am sure of that. So from my own point of view there is no genuine conflict or there should be no genuine, honest conflict between his presentation ot~ his attitude and mine and I don't think there will be. The magnitude of this problem with the poor has been summa~ized in a short saying that the poor pay more and get less with their dollar than the rich do. There seems to be really no doubt about that fact. There are n~any reasons for it. Among the reasons would be mere ignorance on the part of the poor. Another reason is that they don't have the freedom of choice to go to a great variety of stores, for ex- ample, and to shop around, to use a phrase. Third, they are restricted to stores in their neighborhoods which `better people, economically speaking, are not restricted to. In other words, they have no automobile to go around town looking for ~bar- ~gains. Fourth, many of the poorest people, especially in the northern cities are p~op1e who have never participated actively in a cash economy. These are just `some of the reasons why the poor are very much in- terested in the passage of this legislation. One statistic might be interesting. In the last 9 months the Neigh- borhood Legal Service Systems, financed by OEO, have handled more' than 9,000 cases involving con'sumer problems stemming from `sales contracts and repossession, all the way over to garnishment cases. The American Bar Association has estimated that there are over 1 million cases per annum of injustice to the poor where the poor today have no JegaJ representation at. all. Out of these more tJ~an~ ~ `million cases of injustice a substantial portion of them involve con- sumer protection. In other words, the poor are getting gouged for many reasons and they do not have as a class the kind of help or protection which most of the rest of us enjoy. We support, therefore, the general purposes of this bill which is pending before your committee. We support the disclosure requirement of the annual percentage rate by all creditors without exception. We `support the provisions which would extend the disclosure of credit costs to advertising. I appreciate that this is different from the bill that the Senate ha~ passed. But we support the version pending here. We do not believe that su'bjects not related to disclosure should be allowed to postpone the enactment of this legislation. On the subject bf garnishment, for example, we believe a great interest has been expressed here and we have a great interest in this on behalf of the poor. The President has directed the Attorney General in consultation with the Secretary of Labor and OEO to make a comprehensive study of the wage, garnishment situation and that study we hope will be completed very shortly. PAGENO="0251" CONSUMER CREDIT PROTECTION ACT 241 It is my thought that that kind of an issue should not delay the passage of the bill which you have. Other controls ordered by this bill such as those regulating the amount of credit that may be extended or maintained on commodity lutures contracts are also under study by Government agencies directly concerned, and once again it is our position that those studies or those problems should not postpone this legislation. Finally, I might say we do not object to a comprehensive study of the consumer finance industry. It seems to us that that study might be conducted best by existing Government agencies or by the Congress rather than through the establishment of the proposed bipartisan Commission on Consumer Finance. I brought with me today on my right the Deputy Director of OEO, Bertrand Harding who will be able, along with other associates of his and mine, to answer specific questions we hope about what we are doing and what we think. Let me just say that Bert Harding before coming to us was the Deputy Director of the Internal Revenue Service and he has been a Government servant for a number of years and has received many of the highest awards in the civil service system and the Arthur Fleming Award and Rockefeller awards and so on. I consider him to be one of our distinguished civil servants here in Washington. I am happy he is here with me today and will be able to stay as long as the committee would like. Let me just conclude by saying that OEO, our agency, has not done ~s much as we would have liked to have done in the area of consumer education, but we have done some things. We have financed a number of consumer education programs which involve the creation of credit unions among the poor, education of poor people of how to purchase, how to use the foods they buy, what kinds of contracts to avoid, and we think that these programs that we have started-I might say just barely started-will in the long run prove very helpful to them. But no matter what we do our efforts must be supported by legislation of the type that is before this committee today and we therefore support the bill pending here with great enthusiasm. Thank you, Madam Chairman. (The complete statement of Mr. Shriver follows:) STATEMENT OF HON. SARGENT SHRIVER, DIREcToR, OFFICE OF ECONOMIC OPPORTUNITY Chairman Sullivan and members of the Subcommittee on Consumer Affairs, the Office of Economic Opportunity supports this bill. Indeed, adequate protec- tion, through legislation, of the low-income consumer in his credit transactions is vital to the lasting success of many of our own programs. Honest disclosure, in clear and simple terms, of all the elements of the lending or credit transaction, including the expression of the finance charge as an annual. percentage rate, is the keystone to this protection. For the middle class consumer with a "line of credit" it is probably enough; for he can shop for credit from the bargaining position that comes with being a good risk and a good customer. But our agency's concern is with the disadvantaged, low-income consumer, who has too little money to be either a good risk or a good customer. Consequently be has no choice, but must take the only credit he can find, which too often is that offered by an unscrupulous merchant or small loan office in the ghetto. Of course I am not saying that all merchants or lenders are unscrupulous; nor that all merchants and lenders in the ghetto are dishonest. As a matter of fact we recently funded a demonstration consumer project in the Bedford Stuyvesant area of Brooklyn in which local neighborhood merchants and i~esidents will work PAGENO="0252" 242 !iONSUMER CREDIT PROTECTION ACT together to solve tl~e.ir common problems. Many, of these merchants have much the same credit problems as the consum~ers; and it is clear that an effective disclosure law will be as valnable to them as a protection from the public dis- trust created by unscrupulous competitors as it will be to the consumers them- selves. But the fact is that it is the low-income consumer who is most likely ta fall prey to the unscrupulous merchant or lender, because it is the low-income consnmer who is under-educated, who needs the credit, and who must hunt for the bargain with the low down payment. And so the records' of committee hear- ings of this tEouse and of the Senate are already full of examples of the injus- tices suffere~ by t1~ose who, because of their circumstances, have no effective choice, but zZ~ust eilllier accept credit on the terms offered by unscrupuloi~s mer- chants and binders or do without the necessities of life. And the problem* to which this bill addresses itself will increase as tue War on Poverty succeeds in creating new buying power among our country's low- income citizens. It Is a sad fact that as those with limited education, those who come to the cities from depressed rural communities, manage after much effort and fortitude to reach that point where they are able to buy life's necessities- and maybe if they are fortunate enough, even a few of those amenities that go to make up the "American Way of Lifo"-they find themselves facing a system based on a common law built to meet the needs of the Industrial Revolution and adapted since to serve the interests of the Affluent Society. In short, a system of credit with very,little relevance to the ghetto resident or the sharecropper. A system whose ri1les~all were designed to increase the flow of comtnerce, and whose roots were in the d~ctrine of Ca~teat Fknptor---Let the Buyer Beware. All this is a very important part of what is meant when we hear it said that the poor are "outsjde the mainstream of American Life"; it is central to that system of entrenched values and favored relationships known to the poor as The Establishment; and it is a key factor in the often referred-to difficulty in "breaking the cycle of poverty'~, a cycle which is often characterized by a spiral of Increasing debt weighed `down by. penalties and interest charges from `which there is little hope of ever extricating oneself. I would suggest to you that this system of consumer credit to which this `bill addresses itself has been a major contributor to the frustrations `and the despair which finally led' to the tragic upheavals which have recently rocked Newark, Detroit and so many other cities. Disclosure alone Will not solve all the credit problems of the poor; but without a good disclosure law these problems are not ]ikely to be solved. Disclosure presupposes th'e ability to choose, ,which is just what the poor do not have; disclosure does not ~wotect the consumer from abuses connected with acceleration, repOssession, and `quality of merehabdise to which the poor are particularly susceptible. We at OEO lQok upon our task as that of helping the low-incofrne consumer to develop sources of low cost credit that will offer him a choice; and to work with neighborhood residents and local law makers to build protection from possible abuse's. We have been active in this field. In addition to the grants made this past year under Section 206(b) for the Parbsteln Emergency Loan Program, we funded five Consumer Action Demonstration Programs, all of which involve the setting up or strengthening of low-income Credit Unions, around which are built a host of consumer and legal services designed to improve the choices open to loW-Income consumers. We also are providing technical assistance through conttact~ *ith CVNA International and the Bureau of E'ederal Credit Unions `to a l~rge' nbm'bevof low-income Credit Unions around the cOuntr~r, with the ~reeise äl~rn oft providing loW-IncOme consum'er~ with *sourCe~ of low cost crodi1~ Our N~ighbo~hood Legal S~rtice programs across the country are actively involved in represe~itation of consumers and in the `development of ease law as well as lc~eal le~islaC1on whieh ~ifl protect con5uni~ts from abuse. `We hope that our programs can do mUch t~ solve' the credit problems of the poor: but they cannot do `so withotit legisldti~m requiring honest and clear diSclosure of all the elemetits OJ~ the'Credit ttansactiOn. We the~efOre urge you to enact the basic disclosure provision of RIl. 11601. I particuIarl~ support the langu~uge of section 203(d) (3) (B) requiring that the finance èharge in ` open end* credit `plans be expressed as an a~nua~ percentage rate. Phi~ differs from-and Is preferable' to-the provision of ~ as finally pas~ed by the Senate. If diSclostire Is `to be of any help to the Iow-incothe con- sttmer, *then,~t musts he deer and consistent. To permit statement of the linance charge in ope~I en4 *red'it plans as a monthly percentage rate, as does the Senate bIll, while rdquirin~ annual rates in other types of transactions, would only PAGENO="0253" CONSUMER CREDIT PROTECTION ACT 243 serve to confuse an already unsure consumer. The hope of the disclosure acts is that clear and full disclosure of price and finance and other charges will enable the consumer to ~uy wisely and not be taken advantage of. Fu1lflllp~unt of this hope will be difficult enough without the. confusion of inconsistency. Similarly I support your decision not to exempt small loans of under $10 and first mortgages. I might call to your attention a minor point that should perhaps be clarified. Section 203(d) (3) (13) calls for periodic statements including "a brief ideiitillca7 tion (unless previously furnished) of the goods or services purchased." For clarification, ~tnd in order to Insure that this requirement not be interpreted as being satiSfied by the giving of a sales slip at the time of purchase, I would suggest that the parenthetical phrase be changed to "unless furnished in a previous statement pursuant to this subparagraph". We urge you to adopt these much needed disclosure provisions; and we do not believe that subjects not related to disclosure should be allowed to delay enactment of this legislation. On the subject of garnishment, for example, the President has directed the Attorney General, in copsultation with the Secretary of Labor and the Director of OEO, to make a con~iprehensive study of the problems of wage garnishment (President's Message on Urban and Rural Poverty of March 15,1967). Other controls added by this bill such as those regulating the amount of credit that may be extended or maintained on commodity futures con' tracts are also under study by the Government agencies directly concerned. We do not believe that legislation dealing with these subjects should be enacted until these studies are completed. Finally, we question the wisdom at this time ~of a legislative limitation of the finance rate, as proposed in Section 203(1). Not only would inclusion of such a provision be likely to delay passage of the bill, but If adopted there is a strong possibility that the rate, adopted as a ceiling, would become a floor. Let us first see if effective disclosure will, as hoped, permit the forces of competition to operate in limiting Interest rates. Madam Chairman, I thank you for the opportunity of appearing before you today and of offering my comments on this important bill. You may rest as- sured that the Office of Economic Opportunity is vitally interested in the whole field of consumer protection legislation, and that if there is any way that I or my staff can be of assistance to you in helping the low-income consumer, we will be more than happy to do so. Adoption of effective disclosure legislation is a vital and urgently needed step. Thank you. Mrs. SULLIVAN. Thank you, Mr. Shriver. We will defer our ques- tions to Mr. Harding until after Secretary Trowbridge makes his statement. I would just like to ask you one thing before you leave, Mr. Shriver. Is it your opinion that while an annual interest rate might mean little to an uneducated person needing credit, yet if everyone had to show him an annual interest rate on anything he went out to buy on credit, wouldn't he know whether or not the credit cost would be greater in one case than another, and certainly, wouldn't he know more than if it was not shown at alH Perhaps many of them would not know what the rate meant or how to figure it. But if they could com- pare 18 percent with 40 percent or 30 percent, they would know the difference between these figures and this is one of the reasons I am so strong for an annual interest rate to be shown. Have you any opinion on that~ Mr. SRRIVTER. We agree with you, that it is desirable, No. 1. No. 2, as we are able to educate the poor more through the kind of educational programs I have referred to just briefly, they, too, will be able to understand what that annual interest rate charge means. Second, our legal services programs are not restricted to merely handling cases which are about to go into a court. One of the most important parts of the legal services program is education of people PAGENO="0254" 244 CONSUMER CREDIT PROTECTION ACT about their legal rights and their legal responsibilities. It is helping to avoid them getting into trouble rather than merely taking care of them after they are in trouble. Now, all of these legal programs contain education about the very subject you are talking about-information about what is meant by an annual interest rate. So we do have the potential here over the next few years of doing a large-scale educational job on such a point as you have just brought up. Therefore, we agree with you that it is desirable to have it shown-not because everybody will understand it right away-even some of the richer people are not too good at working on interest rat~s. But the poor will certainly be able to learn and will be helped by it. Mrs. SULLIVAN. Thank you. While I would like to permit all of the members to ask questions of Mr. Shriver, we will have to defer the questions and have Mr. Harding answer them later. Mr. SHRIVER. May I say, Mrs. Sullivan, if your hearing is to go on for an exteflded period of time I will do my best to come back and be available as soon as I can. As soon as I get through with my conflict- ing engagement I will come back. Mrs. SULLIVAN. We are not certain we can sit this afternoon. In the meantime, we appreciate your offer to come back if you can. We would love to have you for a longer period. Mr. FIN0. I just want to ask Mr. Shriver a question. Mr. Shriver, as you well know, this legislation concerns itself with disclosure of consumer credit charges. Is it not a fact that the morc acute problem with the poor is the actual sale of commodities rather than the credit purchases? Mr. SHElVER. Not necessarily. The poor unfortunately not only have to pay more on a direct sale but they are also getting cheated-a strong word-r---maybe too strong-they are getting overcharged through high interest charges which they don't understand frequently. Mr. FINO. You are getting back to the credit part. I am getting to the actual purchase. Have you checked with the attorney general of `the State of New York where they have a consumer fraud bureau? If you check with him you will find that there are hundreds and hundreds of cases that come in every day of the poor, minority, coming in complaining of having bought TV sets or a radio sold to them~ allegedly as a 1967 product and actually being a 1964 or 1965 model. So I think our concern, your concern-you are interested so much in the poor-is to recommend legislation to tighten the reins upon these cheaters-that is what they are, cheaters-that are selling merchandise as a 1967 product when in fact it is a 1964 product and 1965 product. We have seen that with automobiles as well. The poor buy automobiles, too, and they have been cheated in the pur- chase of these cars. So I was wondering whether you have made any such recommenda- tions to the administration. Mr. SHElvER. Let me respond to that that we agree with you that that is an important problem and the poor do get cheated in that way. PAGENO="0255" CONSUMER CREDIT PROTECTION ACT 245 Second, I didn't understand that to be a detriment to the enactment of this legislation. We are here to testify in support of this legislation which is related to a different issue, and, therefore, we support what is here. Third, in terms of recommendations within the executive branch about legislation we have discussed, legislation of the type you describe is under consideration within the executive department, but no such legislation has yet been proposed over here. The Attorney General and the Secretary of Labor are going over the whole area and we will have some recommendations to submit to Congress soon. We have been in the process of doing that, I think since last January when the Special Committee got going on that. Not just the Govern- ment Committee, but with the help of outside advisers and con- sultants. Mr. FIN0. You indicated that you were for this legislation. Do you mean Mrs. Sullivan's bill or the Senate bill? Mr. SITRIVER. The bill here. The Senate bill, with some modifica- tions which I alluded to-in other words, I like the bill here more than the one there. Mrs. Strr4LIvAN. If the gentleman will yield, FLR. 11601 calls for administrative enforcement of the disclosure provisions. S. 5, the Senate bill, or H.R. 11602 does not. Now, as it concerns the people you represent, would they be likely to bring their own lawsuits to obtain truth-in-lending or do they need public enforcement of those provisions to make it work? This is one of the things in H.R. 11601 that is not provided for in the Senate bill or FLR. 11602. So there are many things in here that are quite controversial; the two bills are quite different. Mr. SHRIVER. As I tried to testify a moment ago we are in favor of H.R. 11601 and those differences you just mentioned are only a few of the differences which make H.B. 11601 to us more desirable than S. 5. Mr. FIN0. If the chairlady will yield, IEE.R. 11601 has a section, title II, prohibition of garnishment of wages. You in your statement would like to defer that because a study is being made? Mr. SHElvER. Yes, I tried to indicate those areas where I felt ER. 11601 was better than S. 5 and the one area where I felt perhaps it would be desirable to wait until this Commission finished its special study was this. In other words, I tried to cover the points where I think ll.R. 11601 is better, and the one place where I think it might be well to postpone a decision as far as this Commission is concerned. But basically if I have to choose on the basis of what is there, we are for H.R. 11601. Mr. FIN0. I have not had an opportunity to read your statement, but do you mention* anything in your statement about the standby controls? Mr. SHElvER. Standby controls? I don't think we have that in there. Mrs. SuLLIvAN. Mr. Fino, we will have to excuse Mr. Shriver now and have him answer any further questions later. Mr. SHElVER. I will come back if you are still in session. Mr. HALPERN. I do not have a question but I would like to commend you for your superb testimony which I am sure will be most helpful PAGENO="0256" 246 CONSUMER CREDIT PROTECTION ACT in helping this committee to shape up a good bill. Thank you and compliments to you. Mr. SHRIVEn. Thank you. Mrs. SULLIVAN. Mr. Secretary, would you like to read your state- ment now? Secretary Z~ROWBRIDGE. Yes, if I may. STATEMENT OP HON. ALEXANDER B. TROWERIDGE, SECRETARY OP COMMERCE; ACCOMPANIED BY JAMES L PAflRIS, ACTING GENERAL COUNSEL, DEPARTMENT OP COMMERCE Secretary TROWBRIDGE. Thank you, Madam Chairman. I am accompanied by the Acting General Counsel of the Department of Commerce, Mr. James Parris, to my left. I have a short statement which I wouid like to read, and afterward I will be happy to answer any questions that you or the members of the committee may have. Chairman Sullivan and members of the Subcommittee on Consumer Affairs, I am glad to have this opportunity to express my Depart- ment's strong support of full-disclosure-in-lending legislation, as re- flected in title I of H.R. 11601, cited as the "Consumer Credit Protec- tion Act." We firmly favor legislation requiring disclosure of finance charges in lending and credit transactions. Such disclosure, we believe, should benefit consu~mers, enhance efficiency in distribution, encourage corn. petion in the credit market, and put the credit grantor and the con- sumer on a more equal bargaining basis. Disclosure to the purchaser of the annual pbrcentage rate for consumer credit charges, as required by the bill, would provide a common denominator by which a con- sumer may know what he is paying for credit, and how it compares with credit term.s of other merchants or lenders. Thus, we agree with Chairman Sullivan's statement that: Required disclosure of finance costs iii credit transactions is vitally important to the intelligent use of credit. Today consumer credit-not including long-term credit such as real estate mortgages-totals about $95 billion. Interest payments aloi~e on this sum exceed $12 billion. Installment credit rose from about $29 billion in 1955 to $43 billion in 1960, and to $75 billion in 1966. The sheer size of this consumer debt-its rapid rate of growth-its po- tential impact on the economy, make it clearly desirable to provide maximum disclosure of information about credit terms. We know that the large majority of American businessmen, who extend credit to consumers, are as principled as they are practical in their daily business transactions. Full disclosure will, in practice, free the majority of businessmen from unfair competition of that minority who engage in deceptive practices. It will tend to clear away the be- wildering variety of practices and terminology that have arisen in dif- ferent parts of the credit industry. In our report dated April 13, 1967, to the Senate Banking and Cur- rency Committee on the original S. 5, the Department favored ei~act- ment of that bill, with a few suggested modifications. One of these was to insert the word "approximate" before the term "annual percentage. rates," wherever that term appeared in the bill. In both S. 5, as passed PAGENO="0257" CONS~ThtER CI~EDIT PROTECTION ACT 247 by the Senate, and H.R. 11601, two provisions, taken tbgetiher, will accommodate our recommendation. The first, which appears in sec- tion 202(f) of the House bill, definesthe term "annual percentage rate" as "the nominal annual rate determined by the actuarial method (TJ.S. rule) ." The second appears in sections 204 (a) and (b) of the bill, directing the Federal Reserve Board to prescribe "regulations with respect to reasonable tolerances of accuracy." These two provisions taken together should greatly simplify computation of anmual percent- age rates by the creditor. We are happy to note that two of our suggested amendments are contained both in 5. 5 and }LR. 11601. One, which appears in section 204-"Regulations"-of tie House bill, concerned the use of standard- ized charts and tables in the satisfaction of the disclosure requirement. Use of these, we believe, could greatly lessen the computation burden upon businessmen. The other, appearing in section 205 (a) of the Honse bili-"Effect on State Laws"-makes clear that the provisions of this law for disclosure of finance charges are not intended to affect State usury statutes dealing with interest rates-as compared to finance charges covering servicing. The above changes, together with the provisions of the bill giving broad authority to the Federal Reserve Board to prescribe reguls~tions to carry out the purposes of the act, to set forth guidelines for the use of simple rate charts and to permit adjustments and exceptions, will provide assurance to businessmen that a full disólosure law will not impose needless administrative burdens upon their daily business operations. In my view the disclosure-in-lending provisions of H.R. 11601 would carry out President johnson's recommendation in his message to the Congress on February 16, 167, on consumer protection, when he said: I recommend legislation to assure gull and accurate information to the bor- rower; and simple and routine calculations for the lender. While the bill contains a number of other provisions not directly related to disclosure in lending, I have directed my remarks to those proposals in the bill which have been subjected to thorough debate over the last several years. While some of these other proposals which do not relate to disclosure in lending deserve study, it is our opinion that action should not be delayed on legislation requiring the full disclosure of charges in credit transactions, to make it possible for borrowers and charge account customers to compare credit costs and shop wisely for the best terms. We respectfully suggest, therefore, that these additional proposals be deferred for further study by Congress and the executive branch. Some opponents of credit disclosure legislation have suggested that its enactment would result in a substantial decrease in consumer credit, with adverse effects on business. In am sympathetic with their concern but do not believe such apprehensions are justified. On the contrary, a full disclosure in lending law will be beneficial to the economy and üncourage the sound use of consumer credit. I am confident that with a full-disclosure law, business will be better off-that the benefits to business will more than offset whatever initial compliance problems may be encountered. These benefits would include: (1) Better educated customers who will understand the mechanics and use of credit, the costs to business in extending credit, the meaning 83-340-67-pt. 1-17 PAGENO="0258" 248 CONSIJMER CREDIT PROTECTION ACT of finance charges-for example, investigation fees, collection costs, clerical and recordkeeping expenses. (2) Generating of customer respect and confidence in the credit grantor. (3) Greater use of credit by consumers who have been fearful of using much credit because of its complexities. (4) Providing an incentive for the development of maximum effi- ciency in the extension of credit. We feel that the great progress made by the Congress in developing truth-in-lending legislation that is practicable and workable for credi- tors and consumers should be promptly brought to fruition. Madam Chairman, that is the end of my prepared statement. I know that there may be some questions and I will be glad to try to a~iswer whatever ones I can and I know that my colleagues here will help me out on any that I cannot. Mrs. SULLIVAN. Thank you. I have probably taken more than my share of the time this morning so I am going to start the questioning with Mrs. Dwyer. Mrs. DwYER. No questions. Mrs. SULLIVAN. Mr. Stephens? Mr. STEPHENS. I want to thank you for coming, also to see if I fully understand the effects of your statement-it is that you want the full disclosure provisions and would like to have them now. But the ques- tions of garnishment, of the Consumer Finance Commission and of regulation of the commodity exchange to be deferred-that we delete it from the House bill and more or less what S. 5 proposes you favor? Secretary TROWERIDOP. Mr. Stephens, it seems to me that the dis- closure provisions in this bill and in the bill that passed the Senate, having had some 7 years of scrutiny, public debate, and study, surely are ripe for enactment and deserve it on the basis of all of the tremen- dous effort that has been put forward in the Congress so far. I think that the other portions of H.R. 11601 not dealing with disclosure deserve a good deal more scrutiny because we just haven't had time to really focus on the problems that they may create. The questions of garnishment are multiple in their impact, both on business and the consumer. The question of ceilings on interest rates of 18 percent I think has many ramifications we ought to know more about. So my own feeling would be, yes, sir, we ought to move ahead on those areas that we have looked at very carefully; that the balance of the provisions in H.R. 11601 would be best left for further scrutiny. Mr. STEPHENS. I appreciate that position that you have taken. As I have said, that is more or less my position, but I think I would agree with your position. Thank you. Mrs. SULLIVAN. Mr. Fino? Mr. FIN0. Thank you, Madam Chairman. Mrs. Sullivan's bill provides for standby credit controls. Now, yes- terday the representative of the AFL-CIO appeared before this committee and expressed opposition to the standby credit controls un- less it included wages, prices, profits as well as the cOnsumer credit.. How does your Department feel about that? PAGENO="0259" CONSUMER CREDIT PROTECTION ACT 249 Secretary TROWBRIDGE. Mr. Fino, since this is one of the provisions in IEI.R. 11601 which is well beyond the disclosure aspect of the bill, I think we ought to wait on that. It just seems to me in all candor that the declaration of an emergency situation by the President with his eye only on the credit side of the economy would be, I think, meeting only part of the problem and I would guess frankly that if things got to the point where the President had to declare an emergency the proposal would probably include provisions on wages, prices, credit and other aspects of the economy. I think therefore, my own personal opinion would be that to pro- vide this standby authority at this point would be premature. Mr. FIN0. You also agree that the provisions for garnishment of salary should be held up also, is that right? Secretary TROWBRIDGE. I personally would agree to that. Mr. FIN0. So when you take those two provisions out, are we not going back to S. 5? Secretary TROWBRIDGE. As I understand there is quite a significant difference in some of the exemptions that S. 5 provided in the disclosure area which E[.R. 11601 closes as exemptions. I think }I.R. 1~1601 is a stronger bill, I think that it sets up some benchmarks which are good benchmarks in our competitive economy and I think that it is a prefer- able bill. Mr. FIN0. That is all. Mrs. SULLIVAN. Mr. Gonzalez? Mr. GONZALEZ. Mr. Secretary, have you had a chance to look over the provisions in this bill with respect to garnishment of wages, salaries? Secretary TROWBRIDGE. I am a recent expert on some of the questions of this bill, Congressman Gonzalez. I don't really mean to underline the word "expert," either. The question of garnishments is one which again I would favor deferring for more concentrated study. I realize that there is a very large amount of salary garnishment in the private and public sec- tors of the economy. It seems to me that we have to know what the impact of such a prohibition would be. Mr. GONZALEZ. I come from a State th'at has a constitutional pro- hibition. It goes back to the days when Texas `was really a populist State. It still is substantially, but some people think it is not. My contention is that it is pretty much in the Constitution and in the Constitution you have the real consumer protection of that day. The Texas constitution, which is the 1875 constitution, for instance, has' homestead provisions, a homesteader is exempted from foreclosure except taxes and one or two other exemptions. A man's tools of trade-the utensils, all of those are by constitutional definition exempt,, and along with that is garnishment. Now, do you find there is any difference in availability of credit in those States that have this type of prohibition such as Texas and' the few others-Florida has a similar provision, not the same but similar-do you find there is any difference in the availability of consumer credit in Tex'as and these other States as compared to~ the States of the type that have some type of garnishment? Secretary TROWJ3RIDGE. If I could I would answer your question~ I just don't know what the comparison between th~ States is In con- sumer credit availability. PAGENO="0260" 250 CONSUMER CREDIT PROTECTION ACT Mr. GONZA~LEZ. Would it be possible to get some kind of statistical evaluation, if feasible ~ Secretary TROWERIDGE. I would be more than happy to try to find it, but I will have to start from scratch as far as I know. I don't think we have it in the Department of Commerce at this point. We may be able to find it from the various sources in State governments, but if you will allow me, I will take a look. Mr. GONZMJEZ. I would be most grateful to you. (The information requested follows:) Unfortunately, a valid and meaningful statistical evaluation of the availability of consumer credit, overall, State-by-State, is not attainable at this time. The Department does not have consumer credit data tabulated State-by-State. Al- though the Federal Reserve Board, in its monthly Bulletia, publishes data on short- and intermediate-term consumer credit, these data are reported onl~- for the nation as a whole. The Federal Deposit Insurance Corporation, however, publishes data on bank loans, by State, for all insured banks. Consumer credit data, reported officially by some States, are not comparable because the types of credit on which data are reported vary from State to State. Most States, we are informed, do not have composites on financing of autoS and durable goods. Although no data are published by the states on retail install- ment credit, s6me `do report partial data. on installment credit contracts iSsued by finance companies. We are informed, however, that the Associated Credit Bureaus of California a few years ago issued a report, based on Its own unofficial estimates, showing that the extension of consumer credit is unrelated to garnishment laws. Their data reveal that in 1963 about $6.6 billion of installment credit was extended in California, which has a stringent garnishment law, and about $6.1 bjlli~n in New York, which has a moderate garnishment law. This, according to their report, amounts to 24.6 percent of total retail sales in California during 1963 and 25.5 percent of retail sales in New York. Estimiates by the same source on the ratio of installment credit to retail sales in a number of other States show little variation among those States. Assuming the accuracy of these esti,Ziates, it would appear that the correlation of installment credit to retail sales does not vary in accordance with garnishment laws. Mounting evidence in recent years clearly shows a correlation of wage gatnish- ment to the rise in personal bankruptcies. Yet, in any analysis of the compara- tive availability of credit, factors in addition to the existence or non-existence of wage garnishment laws would demand consideration. Such factors as c!iffer- ences in local and regional economic conditions (e.g., depressed areas, pockets of unemployment, etc.), in the relative stability of employee-income, iti the prospects of future employee-income, in variations of screening policies of credit extenders-all of these are variables difficult to measure. I suggest, therefore, that it would be extremely difficult, if not virtually impossible, to establish a clear correlation between the availability of credit and the existence or non-existence of a State garnishment law. Mr. GONZ4LEZ. By way of a parenthesis, the Department of Com- merce has ti4emendous reservoirs of information. Secretary TROWERIDGE. Sometimes we have more than we know about. Mr. GONZALEZ. When I came here, the first big difference I found between local, State, and Federal Government was exemplified by your Department. I had a request from a constituent who wanted to know exactly how much in quantity-how many Jalapeflo peppers were being imported into the United States and within 3 hours I had the exact numbers, down to the last thousand. It is a tremendous number that are being imported. So that I could pick up the phone here at this level, call somebody like the Department of Commerce and we hav~ a ready answer which is not available at the local and State levels of government. PAGENO="0261" CONSUMER CREDIT PROTECTION ACT 251 Secretary TROWBRIDGE. I am delighted to give you such good service and we will in this case, but I will need a little time. Mrs. SUI4IAIVAN. Mr. Halpern? Mr. IJALPERN. Mr. Secretary, you suggest that better credit dlis- closure, that better disclosure of credit terms might generate an ex- pansion in the use of credit as consumers gain confidence and under- standing of its mechanisms. Do you feel that people who until this point have been able to get by without Using credit are likely to switch from cash to credit when they see the real costs involved? Secretary TROWBRIDGE. I am not sure that- Mr. HALPERN. Or from credit to cash? Secretary TROWBRIDGE. It seems to me we have a parallel in history where, although conditions were obviously different, there was a need for greater disclosure on the makeup of stocks. Many people were buy- ing stocks without really knowing what the commodity was that they were buying and whether it was worth it and what it might do and what the backup of the company was. When we had the disclosure provisions of the Securities and Exchange Commission, there was a good deal, I think, of concern, if my memory of history is correct, as to what impact this disclosure provision would have on the stock market and I think history is certainly proving that confidence re- sulted from disclosure, that greater purchase of stocks resulted, that the economy was benefited from it. I would hope that there is a paral~. lel in this case. It seems to me that the American consumer, once he understands more about what he is buying, and has more confidence in it, would react more positively. I think that is the general philosophy of this proposal and I think it makes sense. Mr. HALPERN. There is general agreement that revolving credit has not only been in the recent past--~but will continue to be-the fastest growing type of credit arrangement. Do you foresee any increased economic instability inherent in the expanding use of such credit, where people feel they can continue to buy and still forestall payment? Secretary TROWERIDGE. No, I don't see any inherent instability in this situation. it seems to me we have a growing national prod- uct, we have a growing retail sales level every year. A very important part of this is the extension of credit. rfhe use of that credit by the American customer is the spur and impetus for much of our economic well-being. I don't see any adverse impact from this. Mr. HALPERN. Thank you. Mrs. SULLIVAN. Mr. Minish? Mr. MINI5H. Mr. Harding, one of your O~O programs has as an objective the establishment of credit unions in the poverty areas. Can you tell us how this program and these objectives might relate to the current bill under discussion? Mr. HARDING. Mr. Shriver talked briefly on this before he had to leave and the general import of what he was trying to communicate to the committee was the fact that among the poor there is a very real educational problem involved in consumer purchasing and in con- sumer credit and one of the main purpses of these credit union opera- tions is an educational purpose, to acquaint the poor with buying, credit, other factors in the economy, and this is one of the purposes. PAGENO="0262" ~52 CONSUMER CREDIT PROTECTION ACT ~fle other purpose, of course, is to encourage thrift, to encourage capital accumulation. Mr. MINISH. The Senate-passed bill contains an exemption for credit transactions where the finance charge is less than $10. That is where the purchase price is roughly $100 per item. Such purchases are related to us as-represented to us as a transaction for the people you are trying to help. Is a purchase of $100 a small transaction? Mr. HARDING. No, sir; it is not a small transaction at all for our clientele. Mr. MINIsru. Thank you. Mr. HARDING. And in our testimony we propose that that restriction which appears in the Senate bill not appear in the House bill. Mr. MINI5II. Does OEO favor the House bill over the Senate bill? Mr. HAEDING. Over the Senate bill with modifications to the House bill. Mr. MINI5H. How do you feel about the same question, Mr. Secre- tary? Secretary TR0WBRIPGD. I favor H.R. 11601 over the Senate bill, 5. 5, when comparing the disclosure provisions of the two bills. My own per- sonal opinion is that the balance of the provisions in H.R. 11601 which deal with other areas of this problem would better be left for further scrutiny, frankly, for two reasons. One, I think they deserve a little bit more and secondly, I think if we get bogged down in debate over many of these additional features, the time will run out on the chance to pass the disclosure bill which the Congress has the oppor- tunity to do. Mr. MINISH. Thank you, Mr. Secretary. Mrs. SULLIVAN. Mr. Wylie? Mr. WYLIE. Thank you, Madam Chairman. The other day I asked Mr. Barr about the Internal Revenue Service's regulation which states that an interest amount equal to 6 percent of the average unpaid balance of the installment contract during the year ~or the portion of the total carrying charge allocable to the year, which- ~ever is lesser, can be deducted as an expense on the Federal income tax return. Would you favor a change in that regulation if a disclosure bill such as this is passed, so that we know what the interest rate might be so the full amount could be deducted as an expense. Mr. HARDING. Are you speaking to me, Mr. Wylie, in my former capacity with the Internal Revenue Service or my present capacity with the poor, or does it make any difference? Mr. WYLIE. I am trying not to make such a distinction. It seems to me we are talking about legislation here to assist the poor and this regulation ~nitigates against the poor, limiting the deduction to 6 per- cent. As I understood it from Secretary Trowbridge and from Mr. Shriver, the persons who are hit the hardest by these service charges, interest rates and so forth, are the poor and very poor. They can't figure out these charges. Could we not help them if that is who we are trying to help by saying, "you can deduct whatever the actual amount is on your income-tax return"? Mr. hARDING. I think it wouid certainly be a gesture in that direc- tion, Mr. Wylie. I think that the people we are talking about here are not people who are probably-they are probably not taxpayers to PAGENO="0263" CONSCJMER CREDIT PROTECTION ACT 253 begin with, and secondly, if they are taxpayers they are taking the standard deduction and are not itemizing their deductible items and therefore I think frankly it would be more apparent than real in the effect on our clientele, which, as you know, are people generally under the $3,000-a-year limit. Mr. WYLIE. Would you favor an amendment or disclosure provision which would require an indication of the actual cash amount paid out in interest and service `charges during the year? Mr. hARDING. Disclosure by whom? Mr, WYLIE. By the merchant or by the seller? Mr. HARDING. You mean in some form he would supply the pur- chaser with a statement as to the amount that had been paid? Mr. WxLIE. Like a form 1099 which requires disclosure of interest or dividends received, a form which would show the amount which has been paid out during the year in interest or service charges. Mr. HARDING. I think that could be very valuable for many tax- payers, Mr. Wylie. Again, I say probably it will not be of any great value to the taxpayers in the poverty population. Mr. WYLIE. What do you think about that, Mr. Secretary? Secretary TROWBRIGDE. That last proposal sounds like it might place quite an administrative burden, Mr. Wylie, on a given merchant. I don't know what kind of load this might put on him as far as mdi- viduai advice. I gather you are describing an advice at the end of the year as to the total amount of the interest charges which a given account or purchase involved as far as the individual customers are concerned. The customer would use that information for credit on his income tax. Mr. WYLIE. In other words, what I am suggesting is, that we con- sider a change in the regulations and at the same time consider a change in this bill so that a full disclosure of the amount, the exact amount, of money paid out by buyer in interest charges and that a deduction could be made on the income tax return in that amount. Secretary TROWBEIDGE. If there were revolving credit on installment plan accounts with these disclosure provisions, though, I would think that a customer could take a series of monthly statements or quarterly, or whatever the statements are and isolate out the interest charges from it. I am not sure whether it would be necessary to reconcile at the end of the year to the total amount collected. I don't know. Mr. WYLIE. If a monthly statement lists charges it would be a simple proposition to add them up at the end of the year. Secretary TROWBRIDGE. To annualize. Mr. WYLIE. Disclosure of a 1%-percent interest rate as you pointed out, still does not relieve the difficulty of the average person to convert to cash as to how much he has actually paid out. Mr. HARDING. The annual rate is contemplated in the bill as I understand it. Mr. WYLIE. That is right. Mr. hARDING. I would like to add to what Secretary Trowbridge said. I happened to be involved in the problems incident to the expansion of the 1099 regulations in connection with Revenue's computer system.. Even for banks and large financial institutions this did represent a tremendous problem for them to accommodate to the law. To place this PAGENO="0264" 254 CONSUMER CREDIT PROTECTION ACT burden upon a large number of relatively small merchants throughout the country wi1~hout th~ advantage of computerized accounting equip- ment would, as~ the Secretary indicates, probably represent somethi~ig of a rather horrendous nature. Secretary TROWBRIDGE. It would probably involve that-perhaps you can check me if I am right-but I think it would involve also the establishment of some identification number like the social security number which is used in the tax forms on the part of the small business- man. Mr. W~iir. We had testimony here this morning, in which the word "approximate" is used-you used the word "approximate" in your statement-~-wthild you require an "approximate" annual interest rate? Even though the revolving charge is 1½ percent a month, the interest may come out on annualized rate, to anyplace between 10, 15, or even 24 percent. Secretary TROWBRIDOE. Are we not talking about two different things, Mr. Wylie-of disclosure by the seller to the customer and of the an- nual rate that is involved in the given transaction? I understand your proposal to b~ one in which the seller would then, in addition to dis- closure, have to provide some sort of formal notice at the end of the year or at son~e tax period of the amount of interest for tax purposes. One is agood deal more complicated than the other. Mr. WmIE~ Would it not be better to show the actual cash amount paid out rather than requiring an annual interest rate? Because that amount could be used in the buyer's tax return and also it is u~ore meaningful to: him to show what the interest rate was. Mrs. SULLIVAN. Would the gentleman yield? Mr. WYLIE. Glad to yield, Madam Chairman. Mrs. SULLIVAN. Is it not to the taxpayer's advantage to keep all these interest charges that he pays so. he can deduct the amounts at the end of the year? It is a little different from showing the income on his incpme tax. He~i~y l~e reluctant. to show all the income but he is very anxious to show what he has paid out which is deductible. Mr. Wm~ It is to the taxpayer's advantage. But how many of them do it? With the multitude of forms and receipts you have to keep during the year I find it very hard myself to figure any deductions. This form 1099 which I like makes it very easy for me to include interest and dividends, Mrs. SULLIVAN. People who itemize are always seeking things to deduct. They are not always as conscientious in seeking things to show as income. S'o this idea of putting the burden on the poor store, the department store, or the person who gives the credit- Mr. WYLI~. I think it would be less burdensome on the stores to show at the efrid of the year how much has been paid out in dollars and cents than it ~vould to show an annual interest rate. Mrs. SULIJIVAN. The store shows each month what it charges. It is shown each month. Mr. WYLIE. That is what I am saying. At the end of the year why do they not add up the m~nth1y amounts and say, "This amount has been paid out" and send it in this form to the buyer rather than requiring a computation uf the interest rate? Mrs. SUULIVAN. As, I said this morning, we could argue it 7 years; 11/2 percent is 18 percent a year and if they are going to charge 1% PAGENO="0265" CONStJMER CREDIT PROTECTION ACT 255 percent a month and that is exactly what they do, regardless of what they showed us in this table this morning, they are still basing it on 11/2 percent a month. Mr. WYLIE. But it does not add to 18 percent. Mrs. SULLIVAN. Nobody is going to multiply the number of days that that balance stayed on the books in order to arrive at dollar days as shown in that elaborate chart he showed us this morning. I have done enough detail work in offices to know that this never would be done. Mr. WYLIE. That is true. Mrs. SULLIVAN. They do not u~e any other rate except the 11/2 percent. Mr. WYLIE. But if we had a true full disclosure this is what they would have to do. Mr. STEPHENS. Would the gentleman yield? Mr. WYLIE. Happy to yield. Mr. STEPHENS. Remember I asked Mr. DeShazor to answer this question: What would be the objections to giving the interest on a revolving credit program at the end of the year and let people know what they had paid? I asked him to give us some detail. In addition to that, as to giving the amount of money at the same time- Mr. WYLIE. I do not believe that the average person is interested in interest rates and I do not think it is meaningful to them. I think they want to know how much they ha1ve paid out in dollars and cents for their purchase. It seems to me if we are going to do this at all, that this is real truth in lending or truth in spending. This is my thinking right now. Mrs. SULLIVAN. Thank you. Mr. Hanna? Mr. HANNA. Thank you, Madam Chairman. May I say to the chairlady and for the benefit of the witnesses previously before us, I still maintain that you have fought a very huzd battle in your ring in your own way in terms of the abstract principle of the applied interest rate and they never laid a glove on you. On the other hand, they fought an equally good battle in another arena of the effective rate and when you get all through. nobody laid a glove on them. So I expect these battles will still continue in their separate rings. I would like to ask Mr. Harding, regarding this section about garnishment, and I commend the lady from Missouri for putting this in the bill. I think the attention of the people ought to be brought to this socioeconomic problem. In your experience, garnishment and other credit remedies, as far as they have been applied were originally contemplated to be a shield for the honest merchant, to encourage him to extend credit; is that not true? Mr. HARDING. Yes, sir. Mr. HANNA. Is it your experience, as it has been my experience as an attorney, that garnishment has turned out ~to be in most instances a poor shield for the honest merchant and really a sword in the hands of those who would pursue these remedies as a crutch against proceeding in proper credit screening? Is not this one of the problems that we have in this whole area of credit remedies? PAGENO="0266" 256 CONSUMER CREDIT PROTECTION ACT Mr. HARDINd. I think there is a great deal of truth in what you say,. that in fact these are not effective remedies at times. But I would a~d that the reason we suggest that the subject of garnishment not be tackled at this time in this bill is because it is a tremendously complex problem. IE[arkening back to the Revenue Service, for example, this' is an extremely effective remedy among defaulting taxpayers, and I would despair of our ability to operate the tax system a't the rate at which we operate and with the problems we have without the author- ity of the Intei~nal Revenue Service to levy on wages. So that, and the' matrimonial ptoblems, where the garnishment is in connection with a court order in a divorce case, I think these are two matters that must be dealt with and which the committee, composed of Justice, Labor~ and OEO are consideri~ ~ at this point. Mr. ITANNA. I would agree with you 100 percent. The reason that I think it is important here-I was looking at the first point that the Secretary made on page 5 in which he indicated that we ought to be better educated about the cost of credit-and when you set out the investigation fees `and collection costs, I find a tradeoff here, but to `those stores that do not do very much in terms of investigating credit and scr~ening credit, they turn up loading collection costs, so my experience is that they put a tremendous burden on the people who are paying `their bills because they do not protect them against the deadbeats until the end of the line. So then they become an added collection cost. So in that degree I think your fourth point ties in here, Mr. Secretary, that what we hope this bill' will do is to get every- body to maximize the efficiencies of the credit system and until we can get better screening of credit risks we are not going to have an effi- cient credit system. I would ask the Secretary of Commerce if he does not think that perhaps his I~epartment could actually help us in reporting better facts on our ctedit economy. It occurs to me that the committee ought to `be aware, as I am `aware, and I think that you gentlemen are fully aware, that 5~ percent of `the American population `do not use credit and the people who do use credit, 98 percent is used by people between the ages of 21 and 35 and by the poor. So the credit use, when reported on average statistics is always distorted. We really do not know what the story is in our credit economy because we do not have credit report- ing on the basis of age and income. So I think, Mr. Secretary, you and your Department could begin to develop figures for the use of Congress and for your own use in the admirnstratidn of the real dynamics in credit where it has happened. and we would be in better shape than we are art the present time. Do you agr~e that this is so? Secretary TROWBRIDOE. Yes; I think so, Congressman Hanna. And I would think, too, that passage of this bill, which would put some rather standard measurements into the credit field which don't exist now where we have quite a vast variety of different forms, would help, to the extent that there would be a hit more uniformity, in the use of the compilation. I would be more than happy to provide you with in- formation as to what we do have at the present time and what we contemplate ~tdding to our statistical capahility in this field. I think we all have to recognize that the requirements for more in- formation from ell parts of the economy are just getting very, very PAGENO="0267" CONSUMER CREDIT PROTECTION ACT 257 large and we have to allocate our own resources in this field. We will do the best jc~b we can.. Mr. HANNA. Madam Chairman, I will a~k unanimous consent at this point in the record that the Secretary be allowed to make avai1.~ able to the committee exactly what he just described so we will have it available. Mrs. SULLIVAN. Without objection, if you will supply that, we will make it part of the record. (The material referred to follows:) The Department, through its Oensus Bureau, presently collects sample statis~ ticial information on consumer credit outstanding generated at retail outlets throughout the economy. Our interest in collecting and publishing information of this nature stems from our concern over quantifying the important factors that impinge on economic progress in the retail marketing sectors of the econ- omy. In addition to the published monthly series on total credit outstanding, the Census Bureau has been collecting on an experimental basis data on consumer repayments of installment credit to retail outlets. We contemplate that our statistical capability in quantifying consumer in- stallment credit will increase over the coming years. One of the measurement problems in our total installment credit outstanding series has been the difficulty in differentiating between consumer installment accounts and charge accounts at retail outlets. The development of the repayment series last year has provided considerable insight into this question. That is, by studying the repayment sched- ule by consumers to retail outlets we are better able to understand the composi- tion of total installment credit generated in the retail stores. We expect to obtain more sophisticated information on this repayment series as our numierieal samplings increase, and it is believed that within the foreseeable future we will be in a position to publish these statistical series monthly. Noteworthy is the fact that the Federal Reserve Board has traditionally been the prime collection unit for consumer installment credit statistics. The Federal Reserve has long-established relationships with commercial banks, sales finance companies, and consumer finance companies. It is logical for the Federal Reserve to continue this role in the future. Moreover, the Federal Reserve has established the technical experience in specialized sampling in conjunction with the Univer- sity of Michigan and on occasion with assistance of the Census Bureau in order to obtain detailed installment credit information by the income distribution and other key economic variables. The Department of Commerce will continue to improve its sampling techniques to measure more precisely the consumer's in- stallment credit profile at retail outlets. For broader consumer installment credit questions I believe that the Federal Reserve is the logical reporting source. As an allusion to possible future Departmental statistical programs, I stated at the hearing that the Department is devoting attention, more and more, to the marketing and distribution aspects of the economy. Last November, for example, the Department sponsored a National Marketing Conference here in Washington. In a subsequent Report To The Beoretary, the Conference recom- mended the following: "With full recognition that social responsibilities are inseparable from eco- nomic activities, the Conference believes that the interests of the U.S. Depart- ment of Commerce, the business community, and `the consumer are a `trinity of common purpose and advantage. It sees an increasingly important role for the Department in bridging the chasm that frequently develops between business and consumer spokesmen." Supplementing this recommendation, the Conference suggested `that "the De- partment should be the source, the Government authority, on marketing. The Department would require fresh and superior information, as well as informed insight for the interpretation of facts and figures". A result of the Conference was the creation by the Secretary of Commerce of a National Marketing Advisory Committee, composed of 5~ marketing special- ists from business and academic fields. An Executive Committee, which advises the Department on directing the work of the main advisory body, may recommend the establishment of task force groups to focus on specific issue areas of impor- tance to marketing. One of these groups, for example, could examine `and recom- mend ways by which the Department could report more extensively information on the cost, use, and Impact of consumer credit in our economy. PAGENO="0268" 258 CONSUMER CREDIT PROTECTION ACT Mr. WYLIE. Will you yield for one other bit of information ~ Mr. HANNA. My time has expired. Mr. WYLIE. I wonder if you might supply information as to h4~w many garuishii~ieuts the Internal Revenue Servicer-how many were in- stituted by the Internal Revenue Service. Secretary TRowERnxiE. Mr. Harding used to be with the IRS. Mr. HANNA. I do not think he can supply it now. Mr. WmIE. j do not mean to have him search. Mr. IIARDIN~. I could obtain the %ure for you and insert it in the record. I don't recall offhand the number of those actions. Mrs. SULLIVAN. Ple~tse do that if you can. (The information referred to follows:) Fiscal year 1965 Fiscal year 1966 Fiscal year 1967 LIens Levies - $eizures 222,000 770,000 17, 000 214,000 773~ 000 15, 000 229,000 863,000 ~6, 000 Mrs. SULLIVAN. Mr. Annunzio? Mr. ANNUN~Io. Thank you, Mrs. Sullivan. I want to join my colleagues on this panel in paying tribute to you. I joined you as one of the sponsors of H.R. 11601. Now with reference to the section on garnishment of wages; I would like to set the record straight. We had Miss Furness he-re representing the administration and she is against this section, pendin~ further study. Mr. Barr, Governor Ro~ber~soE, a~d now we have the Secretary of Commerce, ~tnd the distinguished representative of the AFL-CTO who said that at this time his national organization has no policy on a national Federal law to abolish garnishment. Bnt there are -three States in the country, Texas, Pennsylvania, and Florida who abolished garnishment of wages. I wrote to one of the largest steel companies in my area and I was very happy that Joseph Block., chairman of the Inland Steel Co., joined us in siiipporting the garnishment section of the bill. If we have done nothing else we at least have made the ad- ministration aware of the garnishment problem faced by both the employers and the employees. 1 have -been disappointed that the study of garnishments is ~ot completed. We are looking for answers. This is a very serious problem confronting the country. I have stated that there are millions of dollars being spent in large court systems like Los Angeles ~nd Cook County in garnishment liti- gation. There are thousands of people in the courts who are waiting for adjudication of other problems such as workmen~s compensation, per- sonal injury cases, unemployment compensation cases and that this is a problem that is causing tremendous upheaval in many sections of our large cities. There have been cases recorded where people have committed suicide because of the garnishment `law, so that I do hope, Mr. Secretary and Mr. ITarding, that you will use the prestige of your office to expedite the study that is being made so that this subcommittee can have the. thinking of and the results of the study as soon as possible. PAGENO="0269" CONSUMER CREDIT PROTECTION ACT 259 Now, Mr. Harding, recent figures from the Department. of Com- merce indicate that 27 percent of the repayment on debts are for in- terest. Do you have any figures to indicate what would be a compara- ble figure as far as the poor are concerned. Would~ repayment for in- terest constitute more or less of the 27 percent to the payments made in the United States by those classified in the poverty? In other words, do. you have any figures which indicate what percentage of the in- come of the poverty group is spent for the repayment of interest? Do you feel that your OEO poverty workers could make good use of pro- visions of H.R. 11601 to reeducate the poverty groups and protect them from sharp practices-to protect them from practices as indi- cated in this bill such as disclosure of interest and honest advertising? In other words, do you feel that consumer credit protection, that the act, the Consumer Credit Protection Act of 1967 could be of assistance in helping those people get out of the vicious poverty cycle that they are now in? Mrs. SULLIVAN. May I suggest-because you have a lot of questions in that question, and I think that he may have some figures-that he may furnish these figures for the record later and answer a little more fully, if that is all right with you. Mr. ANNU.NZIO. Fine. Mrs. SULLIVAN. Y~u Can defer your answer, Mr. Harding, until you get a copy of the transcript. Mr. HARDING. I will be happy to see what we have and put whatever we have in the record. I seriously doubt if our statistical background is quite that fine in terms of the payment by these people. But we will see what we have and supply it for the record. (The material referred to follows:) The Office of Ecenomle Op~iortun.1ty does not have such specific figures at this time. There is a need for research In this area. However, we expect tor haive' some of this data as a result of five demonstration programs this agehcy~ funded toward the latter part of the fiscal year 1967. Our experience however would Indicate that the poor do pay more for credit In general since they are limited in almost all cases to the' small loan Company, the corner "mom and pop" store, the "loan shark," or other "Informal" credit sources. Such interest rates are of course much higher than banks, credit unionS, or savings and loan associations. The disclosure aspects of this bill together with strong educational programs and legal services which actually reach the poor, Will be of definite assistance to the `low-income consumer. Mr. HARDINO. On the second question I would say to you, sir, that we definitely feel that the enactment of this bill would assist our operation, particularly our legal services operations in protecting the interests of the poor against gouging by unscrupulous merchants. Mrs. SULLIVAN. Mr. Bingham? Mr. BINCHAM. Thank you, Madam Chairman. First of all, I would like to take this opportunity to express my great personal, pleasure in our being able to welcome here Secretary Trowbridge. I believe this is his first appearance before this com- mittee as Secretary of Commerce, although he has appeared before in the past .as Acting. Secretary. In the space of less than 10 years Secretary Trowbridge has risen from a lowly position on a congressional staff through the ranks in business and government to a Cabinet post in our Government. ~Ie has done this on his own, through hard work and ability and without PAGENO="0270" 260 CONSUMER CREDIT PROTECTION ACT any special advantages, political or otherwise. It seems to me that this is a remarkable record and one that should provide inspiration to young people throughout the country. It shows that this is still a land of opportunity. Now, I would like to ask both of you gentlemen a question with re- gard to the $101 exemption in the Senate bill. This committee had testi- mony this morning from representatives of the American Retail Fed- eration in whith the argument was made that the $10 exemption is needed to preserve the extension of ci~edit in small amounts to cdii- sumers, presumably many of those in the poverty category. The argu- merit seems to be that because of the interest rates being so high on these small transactions, that they should not be disclosed because that will either discourage the buyers from making the purchases or maybe the sellers will be ashamed to reveal the percentage rates involved. All I would like to know is whether you feel that there will be an ~tdverse effect, either on businessmen who sell these small amorints or on the purchasers~ and I am not particularly interested on that side of it, on whether th~ purchasers will be deprived of making purchases that they should be allowed to make. Secretary TROWBRIDGE. If I could start by thanking you very sin- ~erely for your very kind remarks and say how much I appreciate the pleasure I have had in working with you and all of your colleagues here in the last 2 years in public service. In answer to your direct question, it seems to me that one of the arguments against the $10 exemption is one of additional burden on the businessman. I find it a little bit hard to give too much credence to that, because basically the tables for calculation of the annual rate of financial cha~rge cover anything above the $10 credit cost level in aiiy event. I would, think that the addition to those tables of another col- umn covering eiverything down to $10 and below would not be that much of an administrative burden. Secondly, I feel that the average American businessman is a v~ry reputable guy and I don't see why he should be embarraied by the ex- planation to his customer of the financial charges involved in the sale of an item of say $100 value that might have financial charges in the $10 range or below. It is, I would think, to the advantage of the businessman extending such credit to know that the customer is looking at his offer in relation to a competititre offer and both offers are being made under the same ground rules. Thirdly, I would think there is a real advantage to the customer in a better knowledge of just what he is buying. So the one possible detriment in my mind is that of an additional administrative burden, which I think can be handled by the expansion of the interest-rate tables, financial charge tables; and surely by the time this bill would be entering into effectr-T gather the dates are either mid-1968 or mid- 1969-I am not sure which will come out as the final one, but there is obviously tim~ ahead for adjustment to this requirement-these tables will be available. Those various factors seem to me persuasive in arguing against the $10 exemption. Mr. HARDD~G. Of course, I think we perhaps feel even more strongly than would most `agencies about the need for protection in this lo~ver end of the spectrum. PAGENO="0271" CONSUMER CREDIT PROTECTION ACT 261 Therefore, from a social, from a moral viewpoint I would say that our agency very much favors the elimination of that restriction in the Senate bill. On the question of whether this would have an adverse effect on purchasing, I am inclined `to think that it would not. For one thing, as we have testified earlier, one of the main programs that we have underway' in this particular-in the consumer credit field are credit unions, and one of the major purposes they serve is to afford the poor people a choice in their purchasing procedures, so that if a hundred- dollar purchase is ~dvertised at 20 or 25 percent, or whatever the merchant feels is necessary to put on that purchase, we hope to provide through these credit unions a viable choice where money can be pro- cured at considerably lower interest rates and therefore hopefully purchased on a cash basis and eliminate what I consider to be a usurious charge. Mrs. SULLIVAN. Would the gentleman yield? Would it not perhaps be better in some cases if the knowledge of the actual full cost of credit that has to be paid on an item did dis- courage some buying-that is, by some `of those who overbuy, and buy when they really cannot afford the object t.hat they are buying? Mr. HARDING. I think a: good consumer education program would lead in that direction `and should lead in that direction. Mr. BINGHAM. Thank you. That is all. Mrs. SULLIVAN. I have not had a chance to ask any questions, and I have a few for both of you. This will not take very lo~ig. Mr. Secretary, I believe your business career was spent largely in the petroleum industry? Secretary TROWBRIDGE. That is correct. Mrs. SULLIVAN. Did you read about. Congressman Widnall's com- ments here Monday morning to Miss Betty Furness and Tinder Secre- tary Barr of the Treasury on the mailing out of unsolicited credit cards by gasoline companies? Secretary TROWBRIDGE. Yes. Mrs. SULLIVAN. These seem to be sent out almost at random, with no effort to check on people's credit ratings or even whether they want a credit card. One of our staff received such a card and noted the warn- ing that he would be held responsible for any purchases made with it and, when he found he could not tear it or burn it, he sent it back to the company by registered mail. He will never buy that company's gasoline, I am sure. What is happening to the cost of doing business as a result of credit cards going to unreliable credit risks, and are the rest of us having to pay those costs in the form of higher prices? Secretary TROWBRIDGE. Madam Chairman, I have been the recipient and expediter of petroleum credit cards. I used .to authorize the issu- ance of credit cards and since leaving the petroleum business I have received some of `these cards from companies that I used to compete against, and I never wss terribly impressed by the fact that somebody put me on a mailing list and sent me a credit card, frankly. Because the way I preferred to handle it, I would like to know more about the potential customer. PAGENO="0272" 262 cb~sui~i~ C~~DIT PR0T~ECTI0N ~CT I think what has happened in the credit card business is that, like many things, v~him& makes a whale of a difference. The actuad losses, at least in the petroleum credit car~l, field, if my memory serves me correctly, are very, very sma~ll, somewhere in the range of a tenth of 1 percent. In other word~, thiswould indicate tome that the petroleum industry in their credit card issuance has done a reasonablygoQeF job of selecting good mailing lj~ts and I think this is where the midpoint between á full credit investigation and a randbm issuance of card~ pr&bablycome~, that mailing 1i~ts becOme available an~ they are made up of people id~ntified~ in sel~cted~ brackets, with certaii~ responsibilities iii the comi-. munity and generaily regard~d as having a good credit rating. There- f~re, in answer t&your question, I d~ubt becatise of the relatively smal~ losses in the peti'oleum credit cardi field, and~ because of what T think is a fairly good ~hance of credit stability in the, peQple to whom these cards are directed, that there is a substantial, amount of exces~ ~cost in the pe~rol~um c~edit card business which is then passed on to th~ customer. r think it is a good means of guaranteeing repeat business. I think that the question i~ not asked often enough by the companies, "Do you really want a card?" 1 think that sometimes the cOm~anics get a little too eager in this random~ mailing, but that the selection of the mailing list is probably pretty well done. ~frs. &CTJLIVAN. With the card that 1! have been usiug'-and 1 have had this over 35 years, and I got it at my own req,uest-you' must pay your bill at the end of each month, and if something happens such a~ did he~ppen once4-i was on vacation at the end of the month and dic~ not ~et my mail and I was notified that I was overdtte. There is no credit charge. Secretary TROW'BThIDGIPk N~ interest charge. Mrs, SULLIVANL This is on a monthly basis and you'mu~t pay prompt- lyto retain theprivilege of charging. Secretary TROWERIDOE. It provides a service to the customer. Mrs. SULLIVAN. Mr. Brown? M~. BnowN. Thank you, Madam Chairman. Although I ami not a member of the subcommittee, I think there are a couple of statements that should be corrected. First of all, sp~aking as a lawyer, if someone received one of these card~ that was ui~solicited and he did not "accept" it by use or in any other way, there would be no responsibility on his part f~r its unau- thorized use in case of theft and so forth. I think the company would have a difficult time collecting from the original recipient for its use. Secretary TROWERIOGE. P~robahly the vast majprity of credit cards are issued at the request of the customer. Mr.~ BROWN. When a request is made there is an implied contract, and therefore you would be responsible to a certain extent for its use, whether authorized by you or not. The second statement I would like to correct' is that gasoline credit card purchases tcday are subject to a charge, a carrying charge, or an interest charge if the account is past due. Mrs~ SULLIVAN. I have not been charged ever, and I have had one for over 35 years. On the rare occasion when I was ltLte in paying, all I receiv~d was a reminder. PAGENO="0273" CONSUM]t1~ Ct~EDTT PttOPECPION' ACT 263 Mr. Secretary, is your Department involved in any way in helping the credit industry to organize better channels of information about individual applicants for credit? I have been amazed by some of. the cases I have hea~rd about~ where a career deadbeat will go from store to store, from city to city, and never seem to have any difficulty buying on credit. And them, on the other hand, you have cases of decent people being hounded by a false or inaccurate credit rating which never seems to get corrected. Does your Department work with business on any of these problems? Secretary Tuowmrncir. Madam Chairman, we do work with busi- ness closely' on this type of problem and we' are trying to expand our services to business in the whole marketin,g~servi'ces fieldc in the De~part- meat of Commerce. We frankly have been very much' oriented I think toward' the manufacturing side of business and within the limits of our resources we are trying to expand ou~ marketing services to dis- tribution services and `to get a better fix on the cost of marketing distribution, so that we can give some benchmarks to that part of the business just as productivity in the manufacturing phase gives some indicators as to how your cost picture is. In my personal view, the American economy, with its 200 million people and its tremendous amount of consumer credit~ is really quite an aaiia~ing bit of economic organthzati'on~ considering it has grown from within. We are surely going to have some instances I know, as you suggested, of' the deadbeat who can gb from town to town'. It seems to me' that pretty soon he' gets caught on some of the crech't- rating lists that people do have in the credit field. To the extent that such persons are discovered in such schemes, I would imagine that prosecutions are fairly extensive, although I don't know what the number' of prosecutions are. In brief, our Department is working with' businessmen on this prob~ lem. We are' trying to find' ways in' which we can be of better service to th'e business community. There is a great deal of self-generated effort by the businessmen in this' s~ that they don't have to rely on the Fed- erail Government itself, and I' hope it continues that' way. Mrs SuT~LIvAw. We ran across some interesting situations when we were making searches through the' bankruptcy cases. One young man came f rein the State of New York with some thousands of dollars being owed, came to Washington and' the first thing he bought was a Cadillac on credit-a Gadillac convertible, ~ years old. The second thing he bought was a rifle-he did not pay for' it, but he' got it on credit. Then he went into'one of the well-known stores at~d bought a hi-fl. After he `bought the hi-fl on credit he' started buying other things in that same store. When we caught' up' wi'th his cases he was over' $3,000 to $5,000 in debt-a'll' on credit purchases-not having paid 5 cents on' any of the accounts We took this up' with' a i~epresentactive of one of' the stores-in fact, he had just come in to see me because' I had introduced one of the Douglas `bills, back in the early 1960's, and I said: You are just the man I want to see because I wonder if you will tell me how much you look up a peraon~s credit When he' applies to you for credit on some piece of merchandise that he wanii~s to' buy. He said: Oh, we go into very detailed background search before we open up new credit. 83 340-G7-pt. i-iS PAGENO="0274" 264 CONSUMER CREDIT PROTECTION ACT Well, when we showed him what had happened-how this man who had gone into bankruptcy and left big debts in New York as well as here, the store checked further and then reported back to me, with some embarrassment, that after they learned that the man was mar- ried and came ~n to buy furniture and they assumed he was setting up a household in a new place, he would need furniture, and he had a job, so they didn't go as far as they should in finding out about his credit. All they checked was his account with the same store in a New York State town. Well, this man was smart enough to know that he could go from `State to State and we have 50 States to go through before he is caught up with. All he needed was one good credit reference-just one- to give whenever he applied for credit and apparently everyone he applied to just~ checked that one reference. It goes back to the original idea I had 15 years ago that I think we ought to have a central spot in the United States where all credit risks can be cleared. If we can have a central roster on social security and all our income that conies in is recorded On `a social security form, we ought to have some place- and I do not say the Government necessarily should do it, some good credit firm could do it-where we would have a nationwide credit agency and when anyone has so much credit outstanding that it reaches a certain amount of his income he could not get credit until he reduced what he owed. That would put a credit limit on some of these "credit addicts." I know it sounds a little unorthodox. But I think all we have to do today is look at the experience of the bank- ruptcy courts and see the tremendous number of personal bankrupt- cies today and how they are increasing year after year. Frankly, this is one of the re~tsons prohibition of garnishment of wages is in the bill. We must emphasize this in some way-and I am sorry now that the press table is almost cleared-but we must have some way to empha- size what this easy credit is doing to people who have great desires but not the ability to pay for the fulfillment of their desires from their income. We keep on making credit so easy for them to get, know- ing they can never pay it back. But a law of this kind on garnishment might have some effect with those who give too freely of this easy credit, and make it possible for those of us who do pay our bills to pay lower pric~s and not to have to continue to pay prices which make up the debts of those who are just buying and using and never paying. I have some~ very short questions I would like to ask you, Mr. Harding. If you cannot answer them now you can answer them in writing when you get your transcript. One, do you have any facts to indicate, or do you feel, that the people at the poverty level suffer more from unscrupulous lenders, garnish- ments, and so forth, than do those above the poverty level? Mr. HAIWINO. The only facts that I think we have, Madam Chair- man, are really indirect facts and may relate to the figure which Sargent Shriv~r quoted to the committee during his opening state- ment. The number of cases that are being brought into our legal services offices involving this type of situation indicate to' us an outpouring of these problems just recently afforded an opportunity to be exposed. PAGENO="0275" CONSUMER CREDIT PROTECTION ACT 265 Up until this point in time these people really suffered pretty much in silence. They had no local way of expressing the difficulties that they were in. The legal service program is providing them not only with an opportunity to be heard, but actually an opportunity to have many of the injustices rectified. I think that that about comes as near as we can to a factual basis or our belief that we do have, within the poverty area, an extremely serious problem involved in the matter of gouging, excessive interest rates, unfair garnishments, sales that should not have been made, and problems of this sort in the consumer credit area. Mrs. SULLIVAN. Have you found that the very poor, in order to get some of these things that they would like to have in household articlesr- and many of them do need them-would go to some of `these unscrupu- lous dealers in household furniture or appliances, rather than to a legitimate firm which would give them a more reasonable credit trans- action ~ Mr. HARDING. I don't think there is any doubt that this is really the sort of merchant that in many cases they are forced to deal with. The merchant who is willing to accept an admittedly poor credit risk on the theory that there will be repossession of the article. Many of these articles will turn over time after time-these people are by their circumstances forced into this environment. Then you add to that the lact that many of them, because of their educational level, really have no concept of what it is they are getting into in these sales con- tracts. So you've a double motivation working that puts these people in a tremendously disadvantaged position, vis-a-vis the rest of us. Mrs. SULLIVAN. The repossession of many of these articles and then reselling them could account for some of the things Mr. Fino men- tioned, too, where a firm will sell a television or something as a new article when it may be 1 or more years old and it may have been in two or three households. Mr. HARDING. In many cases the obligation remains on the person, even though the article has been repossessed. Mrs. STILLIVAN. Yes. Some of our witnesses have had the impression that the Consumer Credit Protection Act of 1967, H.R. 11601, or S. 5, the truth-in-lending bill, passed by the Senate is primarily for the urban population. Can you indicate to us the number of families liv- ing in the rural areas that you feel this legislation will help? Mr. HARDING. We do have facts relative to the proportion of the poor `that are in nonurban centers `and the figures represent a very con- siderable percentage of the total 30 million poor people in this country. We will be happy to supply that for the record and we feel that directly or indirectly this bill will benefit all of these people. (The material referred to follows:) Of the total rural po~nilatiofl (55 million), 15 million, or 26.9 percent, are poor; all of whom would benefit directly `or indirectly. Mrs. SULLIVAN. Do you provide legal service to the rural poor as well as the urbaii poor? Mr. HARDING. Yes, Madam Chairman, we have the legal services- it is not as extensive in the rural areas. There is a consumer action demonstration that is just beginning in rural Ohio which should be able to give us more of this information. PAGENO="0276" 266 CONSUMER Ch~DIT PROTECTION ACT Mr. S~tr~m~s. At this point, would the merchant that these people in rural. communities deal with have service charges on any accouxus? Would they Uot be small stores where they would jmst carry it until they could pay~ it? They wouldF not have any credit arrangement in a small store, would they? Mr. HARDING. I think my experience would be, Mr. Stephens~ that there are perh~ps s~rne not inv~lved, but they have credit arrange- ments in the rural areas. This is in hardware stores. Mr. STEPhENS. I am talking about the country grocery and general store or something of that nature. They would not be extending credit on which they would charge interest. Mr. Di~G~ Perhaps in the grocery situation you are correct, b~~t in the hard~war~ situation there would be a credit charge, even in the rural areas. Mr. S~rin~s. In hardware. Mr. HARDING. Yes. Mrs. StTLLIVAJN. What standard doe~ your offia~ use in terms of in- come to determine the extent of poverty in the United States? How many families or individuals,, according to this definition, have you cssffied~ as living below the minim-inn' levels of health and decency? You could supply that for the record. Mr. HAaDTNG. We- would be'huppy to supply yorv the detailed stand- ards we use anid they are based u~pon standards developed by the Social S~curity Administration. Roughly they come omt to about $3,000 for' a family of fotir and our current figure is about 29.7 million people in this country that are ~t or bel~w that poverty~ level. Mrs$ Suruv~. Letme go back to the wage' garnishment issue. On March 15 of this year the Presrdent asked that a study of wage garnishment be carried on by the Departments of Ju~tice and Labor and the Office of Economic Opportunity. The President, in his message, stated that hundreds of workers among the poor lost their jobs and most of their wages as a result of garmshment proceedings. In many cases wages aret garnished by unscrupulous merchants and lenders whose practices 1~rap the unwitting workers. We `see a note of urgency in respect to this study and I am sure yoi~i do, toot Mr. HARDING. It is my understanding that the report of the joint group' with whOm we are working on this issue will probably be rendered some time-this month. Mrs. SULLIVAN. I hope so. One other question I want to ask the Secretary. Mr. Secretary, you appeared to have said that we must wait until w~ are in a national emergency before Congress should start thinkino~ about any standI~y credit controls.. Some~ of us-do not think we shoul~ wait for the near panic of a war situation but should try to prepare now for any danger to our economic system. Is not now the time to think about the kinds of controls which would be needed then? That is all we are trying to do here, to provide standby authority_-to orga- nize such a system to be used only if absolutely necessary. We now have the authority in law to ration all critical materials and take other extreme steps to assure defense production. Can we not trust the Fed- eral Reserve Board to use some sense in using standby credit controls ?~ PAGENO="0277" CONSUMER CREDIT PROTECTION ACT 267 Secretary TROWBEIDGE. I am sure, Madam ~Chairman, that if such controls were authorized on a standby basis you could certainly ~br~v~st the Federal Reserve Board to administer them justly. My thought goes back to the fact that inthe Defense Produotim Act, if I am not mistaken, the authority to have controls of prices and wages-il am not sure whether credit was part of that-which were made available to the President in the J(orean war situation was specifically taken out of that act by the Congress in 1953 or 1954:. Mrs. SULLIVAN. I was against that step at the time, I can t~ll you. Secretary TR0wERIIXiB. It would seem to me the reinstitution of such capability on the part of the President almost has to be the whole package; again, that you have to say that an emergency of that scope and nature would probably require action in the wage, price, and credit field; and therefore it seems to me that the provision here which deals with only one part of the equation would be, let us say, either premature or really not the total answer to the contemplated emer- gency situation. Mrs. SULLIVAN. I agree with you, except that we are dealing in this bill with consumer credit and that is why we are proposing credit controls in this bill. We took a beating in the Congress last year when we tried to get this provision into the bill extending the Defense Pro- duction Act. At that time the opponents said, No. 1, we did not have hearings on it and No. 2, the President had not asked for it. But if the President has to ~sk for such powers it is usually in a time of urgent need and you know Congress `well enough to know that we do not get things passed overnight. So our thought was-and this was the argu- ment some of us used back in 1953 when it was deleted from the Defense production Aot-~we do not want to use it if we do not have to have it. But it is so much better to have it there-to have the tools ready just in case of need-so `it can be put on immediately when the need arises. We are now in a calm atmosphere when consideration of such controls could not `be misconstrued as representing a present emergency. We could do a better job on this now before it becomes a necessity. I hope it never `becomes a necessity. Mr. WmIE. Will the gentlelady yield? Mrs. SULLIVAN. Yes. Mr. WYLIE. Would the Secretary comment as to the possibility of having the Federal `Trade `Commission administer the `provisions of this truth-in-lending bill rather than the Federal Reserve Board and also comment on having FTC handle just the advertising aspects of H.R. 11601? Secretary TRoWBmixm. You mean the administration of the pro- visions of this bill, E[.R. 11601? Mr. WYLIE. I was thinking of `both `bills on administration and then the other question, how about FTC administering the advertising provisions of H.IR. 11601? I am not sure I know the scope of the au- thority of each of the two agencies. Mrs. SULLIVAN. If the gentleman would yield, is it not true, Mr. Secretary, that if we would give the authority for the administration of the advertising to the Federal Reserve, they in turn could assign this responsibility to the Federal Trade `Commission? `Secretary TROwInUDGB. I think if such delegation were allowed for in this statute that could happen. PAGENO="0278" 268 CONSUMER CREDIT PROTECTION ACT Mr. WrLn~. Does not the Federal Trade Commission handle the matter of advertising as far as fair trade practices? They have experi.- ence in this `field. That is the point `that I am making and they are better equipped to handle it as far as this H.R. 11601 is concerned. Secretary TROWBEIDGE. Yes. I frankly find it a little hard to came to a conclusion on that question right off the bat. I know that the logical place, or certainly the depository of the greatest amount of intelligence on the whole financial credit field, is probably in the Federal Reserve Board as well as in the Treasury. In terms of the administration of the advertising pi~ovisions as called for in this law I would have to think about that question. I would rather not give an off-the-cuff anskver' because I think it is an important question. I would be happy to give' some thought to it. Mr. WYLIE. I would appreciate it if you would supply it for the record. (The material referred to follows:) THE SECRETARY OF COMMERCE, Washington, D.C., August 22,1967. Ron. LEONOR I~. SULLIVAN, Cha4rman, ~ubooinin,ittee on Consumer Affa4rs, Comsnittee on Banking and Currency, House of Representatives, Washington, D.C. Dn&B CHAIRMJ~N SULLIVAN: During my testimony before your Subcommittee August 9, 1967, o~i ER. 11601, the Consumer Credit Protection Act, Congressipan Wylie asked me Ito consider whether it would be more appropriate for the Fed~raI Trade Commission rather than the Federal Reserve Board to administer the advertising provisions of H.R. 11601. (Pages 378-379 of transcript.) I concur generally in the views expressed on this subject by Vice-Chairman Robertson of the Federal Reserve Board in his statement before your Com- mittee. In my opinion, the civil remedies, supplemented by criminal sanctions, provided for in Section 206 of H.R. 11601,, should prove adequhte to enforce the' provisions relating to credit disclosure in closing individual transactions. Por- tions of the bill's requirements concerning disclosure in the advertising of credit may also be enforceable in many instances in the same manner; however, other' portions, (such as the provision prohibiting creditors from advertising "that a specified periodic eredit amount or inst~tllment amount can be arranged, unless the creditor usually and customarily arranges credit payments or installments for that period and in that amount") present difficult problems of proof which might discourage individual debtors from employing the civil remedy. Moreover, as I view it, a major purpose of the advertising provisions is the prevention of unfair competition with ethical creditors. For the reasons indicated, I do not feel that this purpose can be fully accomplished in the case of credit advertising without the use of cease and desist orders. The Federal Reserve Board does not have the long experience of the FTC in regulating advertising. Further, the Federal Trade Commission's regulation of' advertising has included the use of cease and desist orders. As Vice-Chairman Robertson noted, the FTC "has the benefit of years of experience in regulating advertising, and has an investigative staff and established administrative pro- cedures for effective enforcement." Under these ciilcumstances it seems to me that the administrative enforcement provisions contained `in Section 209 of H.R. 11601 should be limited to violationu of the advertising provisions contained in Sections 203 (j) and (k) and that all powers with respect to advertising vested by ER. 11601 in the Federhl Resetve Board should be vested in the FTC instead. We have been advised by the Bureau of the Budget that there would be no objection to the submission of our letter to the Congress and that the Bureau of the Budget concurs in the recommendations herein. Sincerely yours, A. B. TROWBRIDGE, secretary of Co'insnerce. PAGENO="0279" CONSUMER CREDIT PROTECTION ACT 24E~9~ Mrs. SULLIVAN. Mr. Fino? Mr. FINO. Mr. Secretary, as I understood your testimony here this morning, you are also opposed to an 18-percent national usury limit as proposed in Mrs. Sullivan's bill? Secretary TROWBRIDQE. I think that along with the other portions of the nondisclosure part of the bill, those things ought to be looked at more thoroughly, Mr. Fino. Mr. FIN0. The reason is, since most of the revolving charge accounts are using 1½ percent per month at this time which could not reach the 18-percent limit, there is a fear that requiring annualizing it to 18 percent might encourage businessmen to use that 18-percent figure. Secretary TROWBRIDGE. Either that or it would build in-again I am talking from a personal point of view-it would build in a certain amount of inflexibility in the credit field that I think would put some limitations in certain areas. I can visualize the need for more options on the part of businessmen to engage in various types of business deals than this might imply. I just have a feeling that if you put a ceiling on something then you are limiting the amount of free choice in an area which has a hundred different aspects to it. Mr. HALPERN. Will the gentleman yield? Mr. FIN0. I yield. Mr. HALPERN. Would you object if this disclosure involved a state- ment of the range of rate which actually was paid with the 18 percent specified as the outer or maximum rate-I will ask this again. Would you object if the disclosure would involve a statement of a range of rates which are actually paid, with 18 percent per year speci- fied as the outer limit or maximum rate which might be imposed on the account if payment is delayed the full 12 months? Secretary TEOWBRIDGE. Even under that condition the 18 percent would be the ceiling, so it would be effectively the same thing. It would be the maximum but there would be a ceiling under that provision. Mr. FIN0. It would encourage the businessman to use that ceiling of 18 percent. Secretary TROWBRIDGE. Maybe; it might. Mr. HALPERN. But the customer would be warned in advance that if he delays payments to a full 12 months that is what it could amount to. But it would be made quite clear there would be a range of rates and it would be that much less if he paid it that much sooner. Mrs. SULLIVAN. Are you talking about the annualization of revolv- ing credit charges of 1½ percent or are you talking about a maximum rate of interest in credit transactions? Mr. HALPERN. I am talking about the top. Mr. FIN0. Madam Chairman, one observation. I hate to disagree with my distinguished chairman of this very important committee, but just a while ago you cited a number of personal bankruptcies in the United States and from what you said you created an erroneous impression that the credit system in the United States is pretty bad. I do not think that is true. The number of credit losses that have' been sustained in the United States I think are infinitesimal in com- parison to the credit repayments. Secretary TItowBRInoE. We have an economy that lives very strong- ly on the principle of credit and obviously a lot of our progress has PAGENO="0280" 270 CONSUMER CREDIT PROTECTION ACT been because we have learned how to handle it. When you go into the economies of developing countries as I have wørked in, this question of credit is totally unknown as a concept. The assumption underlying all of credit is the responsibility of the individual. Happily, by and large, we ~have that in our country atid many countries `need to come a long sway betforethey will match our record. Mrs. SULLIVAN. May I make an observation? We empha~ized~-~aimost every one of us has emphasized-that we think credit i~ a good thing that `has m~ade our economy grow. But it is the misuse of credit we are concerned about. When you realize that in this past year approximateiy'$ll/2 `billion was lest in personal bank- ruptcies, and that the bankruptcy rate went from 19,03~3 people in 1950'to ~O3~000 this year- Mr. Fn~o. We have had an increase in population and an expan- sion in business, also. Mrs. SULLrVAN. Of course we have. But it `is the overselling, and overuse of credit, and the misuse of credit that have caused the ma- jority `of bankruptcies, not sickness and mis!fortune. Many times it is just things like this~-the attractive `advertising of easy credit- ~Jome and get it." "You do `not need any `money down." "Sign your name and you can walk away with your purchase"-thatt causes much `of the diffitulty. Mr. `Wvi~ir~. Will the chainnan yield? Mrs. `SULLIVAN. Yes, Mr. Wylie. Mr. Wmni~. Just one otherthought. We are talking about full disclosure, `as much disclosure as we can get in truth in lending. Mention has been made of the so-called free period during which `time no interest is c'harged. Do you `think a `state- ment regarding this should'be in the `bill? Mr. Se'crethry or Mr. harding-_should we have a requirement in which a time' period allows no interest to be charged-30 days, 60 ~ays, orno grace period? Secretary TROWBRIDGE. It seems to me that it is very often common practice in 30, 60-day credit accounts, for companies or lenders `to give such a grace period and then put their interest charges into effect at the end of that period. This is part of the way of doing business and I would support the interpretation that you calculate your rate of charges, financial charges, on the basis of the time they enter into ~ffect, rather than the date that the purchase ~happens to be made. Mr. WYLIE. Thai~ik you. Mr. HALPERN. I have one question, Mrs. Sullivan. Mr. Secretary, can you contemplate a distortion of resources as the credit facet, of consumption assuming an increasing role, with prices reflecting less the value of the object purchased and more `the credit terms on which it was bought? Secretary TEowERIrxiE. In other words, credit having an inflationary effect? Mr. ITALPERN. Yes. Secretary TRowBRIroE. I don't think that that is potentially a major problem, because we still have so much competition. It seems to me that as we have gone through the process of building up credit as an PAGENO="0281" CONSUMER CREDIT PROTECTION ACT 271 instrument of economic activity, we have learned how to deal with huge volumes. We have gotten the cost per credit transaction way down. We have had to, because the fellow down the street is offering some pretty good terms, too. One thing which this bill would do, I think, would be to put some- as I mentioned before-common benchmarks by which everyone would set up their credit terms and describe them. And I would think that this would help put a little stronger base into the competitive area. Competition will still be there, and I would guess that that will con- tinue to hold the cost of credit down to a pretty good or at least to a fair figure. Mr. HALPERN. Thank you. Mrs. SULLIVAN. Thank you, Mr. Secretary and Mr. Harding, for helping us this morning by answering all the questions that were put to you. I appreciate your coming. Secretary TROWBRIDGE. Thank you. Mr. HARDING. Thank you. Mrs. SULLIVAN. I want to announce that our afternoon session will depend upon our obtaining the unanimous consent of the House to sit. If we meet it will be at 1 :30 p.m. to hear the Chairman of the Fed~ eral Trade Commission and the Administrator of the Small Business Administration. If we cannot meet this afternoon* we will begin to- morrow morning at 9:30 with Secretary Weaver and the American Bankers Association and if we can work them in, perhaps Mr. Moot of the Small Business Administration or Mr. Dixon of the Federal Trade Commission. We will just have to work that out depending upon the situation this afternoon. At our afternoon session Thursday we are to have the National Farmers Union and the Reverend Robert J. McEwen of the Council on Consumer Information. The committee will now recess. (Whereupon, at 12:15 p.m., the subcommittee recessed, to reconvene at 1:45 p.m. the same day.) A~rERNooN SESSION Mrs. SULLIVAN. The Subcommittee on Consumer Affairs will come to order. We did not finish our morning session imtil after noon. The mem- bers were in full attendance this morning and as soon as they can they will be back this afternoon. In the meantime, we are, delighted to welcome Mr. Paul Rand Dixon, Chairman of the Federal Trade Com- mission, and his associates. We expected Mr. Robert C. Moot, the Administrator of the Small Business Administration, and I under- stand that he has a conflict involving the Se~nate Appropriations Com- mittee at this moment so Mr. Greenberg will testify on his behalf. Would you gentlemen please come up to the table? May I suggest that you both read your statements and then we will question the two of you. Before that time, I am sure some of the other members will be here. Mr. Dixon, may I ask that you read yours first? PAGENO="0282" 272 CONSUMER CREDIT PROTECTION ACT STATEMENT OF HON. PAUL RAND DIXON, CHAIRMAN, FEDERAL TRADE COMMISSION Mr. DIxON. It is always most pleasant and gratifying to appear before your subcommittee. I am appearing before you today to submit my personal views on H.R. 11601, 90th Congress, first session, the proposed "Consumer Credit Protection Act." Because of the short time since the date when the bill was submitted to the Commission for comment and because of its complexity and scope, the whole Commission has not had sufficient opportunity to analyze the bill so as to be in a position to express its views as a whole concerning it. I might say as an aside, Mrs. Sullivan, my colleagues are on vaca- tion. The poor Chairman, and along with you, are still in town. That is the principal reason that I could not take this up with the full Commission. However, I can speak for all the members of the Commission in saying that we share your desire to safeguard the public in the field of consumer protection generally and in the area of credit transactions specifically. As I am sure you know, one of the primary objectives of the Federal Trade Commission is to protect the consumer from acts and practices in interstate commerce which fall within the realm of unfair trade practices. As you pointed out when we spoke a moment ago, we are creatures of the commerce clause of the Constitution. So for us to have jurisdic- tion, the act or practice must be in commerce, as defined in the Federal Trade Commission Act. This, of course, includes false, misleading, and deceptive practices in advertising ~s well as acts and practices which take place during the sales transaction. In its report on S. 5 to the chairman of the Senate Committee on Banking and Currency on April 12, 1967, the Commission endorsed and urged the passage of that bill. I can unequivocally say that the Commission endorses the principles which are the basis for H.R. 11601; that is, to safeguard the consumer in connection with the utilization of credit by requiring full disclosure of the terms and conditions of finance charges in credit transactions and in offers to extend credit. We are fully in accord with your stated declaration of purpose that economic stabilization would be enhanced and competition among the. various finance institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed u~se of credit. We agree that significant segments of the population are misled by the manner in which the terms and conditions of credit are offered and contracted ~or, as well as by advertising in or affecting commerce, which fail adequately to disclose the credit terms offered to buyers in making purchases. The President made his support for the principles clear when he said in his message to Congress on February 16, 1967: As a matter of f~Jr play to the consumer, the cost of credit should be disclosed fully, simply and clearly. The Federal `lt'rade Commission continues its longstanding support for truth-in-lending legislation, which will assure that full and ac- curate disclosure of credit costs is given to the consumer at the time ~credit is extended to him. PAGENO="0283" CONSUMER CREDIT PROTECTION ACT 273 As I interpret H.R. 11601, under title II: Credit Transactions, pro- vision is made for such full disclosure of the terms and conditions of credit in virtually all credit transactions extended to consumers. As I understand this particular title of the bill, it is in substance the same as S. 5 as passed by the Senate. However, there are changes upon which I will comment. One of the most significant of these changes is that section 203(d) of H.R. 11601 would require disclosure of the finance charges ex- pressed as an annual percentage rate in open-end credit plans or re- volving credit transactions, whereas S. 5, as passed by the Senate, would require disclosure in such transactions expressed as a percent- age rate per period. It is my opinion that in this regard H.R. 11601 is preferable. The bill's requirement of such disclosure has the advantage of requiring that all creditors be treated alike. I know of no valid reason why re- volving credit transactions should be excluded from the requirement of disclosing the finance charges expressed as an annual percentage rate. I believe there should be a uniform standard for credit transactions, thereby enabling those seeking credit to have a truly informed basis for comparing the offers of competing creditors. A significant addition to truth-in-lending legislation is the require- ment of disclosure that any advertisement specifying credit terms in or affecting interstate commerce must clearly and conspicuously set forth: the each sale price; the number and amount of each installment period; the downpayment, if any; the time sale price; and the finance charge expressed as an annual percentage rate; it also' would require additional information in advertisements of open-end credit plans. None of these provisions is in S. 5. I am `in favor of such disclosure `requirements in advertising, in spite of the fact that, assuming jurisdiction, some of the information to be required might `be required by the Federal Trade Commission under section 5 of its existing statute. Enforcing such standards of disclosure presently is recdiving study by our staff, but this does ilot obviate the necessity for enactment of the legislation proposed. How- ever, I believe that any legislation pertaining to the advertising of credit transactions should be contained in a separate bill in order to assure speedy passage of needed truth-in-lending legislation during this session. Madam Chairman, as an aside, I think this legislation is so sorely needed that it would be tragic if this was the sole stumbling block. But I have faith in the ability of the two branches of the Congress to get together on the matter and if it can be so arrived at, and if it is the desire of the Congress that this facet of this legislation be vested in the Federal Trade Oommis#sion a's Congressman Hanna has pro- posed in a bill, that he has introduced, I feel certain that we would do the best we could to do a competent job in this regard. Mrs. SULLIVAN. Mr. Dixon, do you not think that the advertising provision is needed in a disclosure act? When we are requiring the dis- closure of the amount and percentage rate, and yet allow credit adver- tising to go on that is definitely misleading, are we not helping to defeat the purpose of the legislation? Mr. DIXON. I am sure you are aware there is quite a bit of a differ- ence of a jurisdictional track. One comes out of Commerce-section 5 PAGENO="0284" 274 CONSUMER CREDIT PROTECTION ACT of the Federal Trade Commission Actr-"Unfair Methods of Competi- tion in Comtnerce"-"An unfair or deceptive act or practice in com- merce is hereby declared unIawful"-somethin~ to that effect. Now, this `means ir~ conmierce. So we could only act, strictly speaking, within the domain of "in commerce" clause here. Mrs. SULLIVAN. You do say in your statement enactment of l~gis- lation is necessary in order to carry this out ~ Mr. Dixon. This is quite right. One thing about this bill, you are riding the monetary clause and the monetary clause is much broader than the interstate commerce clause. I would say if it is the desire of this committee and the Congress to include this in the bill and leave it in the bill I think it is well that it is left in the bill, and if you as- sign it to the Commission it will clarify and strengthen our hand of jitirisdiction. I think this would be a proper way to approach it, be- cause were it not in the bill, we still ar~ charged with moving ag~unst deceptive pntctices and the failure to put something in advertising has been established as a deceptive practice, but the failure-our problem comes somewhat as to whether or not it is in commerce. Now, cie~rly, here within the District of Columbia where we have complete respon- sibility, there is no problem, but as to whether a small vendor in Inch- anapolis, md., sitting in the center of a St'ate~ not in interstate ~om- merce, fails to advertise and disclose everything that he should as to whether or not we have the proper tool now to move down az~d pro- ceed against him is quite questionable, although I believe we do have the j~irisclict:ion if it should be placed in a newspaper that by ha~pen- stance~ would go `across tbe line, but this opens up a completely new vista for the Federal Trade Commission in responsibility, and I think it would be desirable as you have encompassed it in this bill-4f you are going to go in this direction, and I have read GQvernor' Robert~ son's presentation to the committee~ I think he mentioned that lie felt the Federal Trade Commissiou had more expertise and you ougbt to reconsider if it is going to be done perhaps assigning it there. I think that is true. I think very definitely th~ Federal Trade Conunission has the expertise in the Government establishment in this area. Mrs: SUL1~IVAN. I would like to clarify something in my own mind pertaining t~ this. I realize that not all of the specific terms `and details are written down here. But if a bank wanted to advertise or a~ loan company wanted to advertise easy credit terms, this would not be mis~ leading as long as they stop there. But if they were to advertise easy credit termsat 4 percent interest---~-- Mr. DIXON. , That was not 4 percent interest- Mrs. SULLIVAN. That could be anything from 4 to 40. Mr. DIXON. In the next paragraph, we state we have proceeded against the General Motors Corp. in such a case. There wasn't `any ques- tion about General Motors being h~ commerce, but the `bank in Indi- anapolis or Tennessee-all those transactions take place right there. The question here is you have to have someone move down there in the Federal Est~blishment, to do something about that. Mrs. SULtIVAN. And you can do something about it now or~ly if it were in interstate commerce Mr. DIXON. This clearly has been the track we have proceeded on there for 50 years. PAGENO="0285" CONSUMER CREDIT PROTECTION ACT 275 I am not saying that under a test ease that if that ad was put in the Nashville paper, and the Nashville paper because it is read widely, is sent to Washington and other places, we could not say the adver- tising itself is in commerce and proceed against it. I am saying if we do that, then if we pursue and open that avenue of jurisdiction at the Federal Trade Commission, I have got to have a pretty good-sized barn to receive all the complaints we are going to get because then I am in business against the corner grocery store mail, everybody in the United States that advertises anywhere on any condition because nearly everything goes in commerce today-the papers and even the little weeklies get across the line. Mrs. SULLIVAN. If we are able to keep this provision in H.R. 11601 and we still left it under the jurisdiction of the Federal Reserve Board, it is not limited to interstate commerce, is it? Mr. DIxoN. No, the Federal Reserve Board is under the monetary clause. The jurisdiction there is under the monetary clause and it goes right down. Mrs. SULLIVAN. If they do not have the proper facilities for policing this, is there any way under the bill that they could designate the Federal Trade Commission to handle this for them? Mr. DIXON. I `don't know of any ready way that can be doiTe because they could not transfer their responsibility. We would still-~-we would still `be the Federal Trade Commission and have all the authority of our basic statute'. We are a statutory creature and we must live directly and strictly within it. Mrs. SULLIVAN. In order to let this authority be used anyplace in the United States, would this bill need some `sort `of amendment? Mr. DIxoN. Congressman Hanna has a section in here that has `the language that will do it. On page 1~ of H.R. 12100 he has a section (m) under section 4(m) way over, right at the end, he would add this language, "authority for prescribing regulations and enforcement of regulations relative to subsection (j) `and (k), and this advertising of this `section shall he vested in the Federal Trade Commission." Mrs. SULLIVAN. Would that preclude you from doing anything on advertising that is not interstate? Mr. DIxoN. This `would broaden clearly the `circumstances-the jurisdictional base of the Federal Trade Commission to move against this type `of `advertising. Now, you have here on (j)-this i's the lan- guage of your bill now: No creditor in order to aid, promote, or assist, directly or indirectly, In any consumer credit sale, extension of credit or open-end credit plan may state or otherwise represent in any advertisement In interstate commerce or affecting interstate commerce. That is broader language, you see. What Congressman Hanna has done is to say, "That authority shall be vested in the Federal Trade Commission with the responsibility of enforcing sections (j) and (k) ." That is the way it could be accomplished. Mrs. SULLIVAN. I would like to ask you right at this point, as con- cerns the matter of credit advertising in H.R. 11601-we have placed the responsibility for such enforcement in the Federal Reserve Board and they have indicated, as you say- PAGENO="0286" 276 CONSUMER CREDIT PROTECTION ACT Mr. DIXoN. Enforcement you vest in them-if I read it clearly, the responsibility to promulgate regulations, not enforcement. The en- forcement ii~ this bill is vested in the private citizens through civil suits and in the Department of Justice for the criminal rights. Now, the Federal Reserve Board is not going to enforce this bill. They are going to promulgat&-under your grantr-regulations and then the enforcement is going to come by the private citizen and the De- partment of Justice. Mr. BINOHAM. Will you yield, Madam Chairman? Mrs. SULLIVAN. Yes. Mr. BINGUAM. I think the Commissioner is speaking in regard to the Senate bill and not in regard to the Sullivan bill. Mr. Dixoie. I may be mixed up. Mr. BINGI~AM. It is the Federal Reserve Board that is given the power. Mr. DIXoN. I am wrong. I thank you for correcting me. Mrs. SULLIVAN. This is what we want to accomplish. Mr. DIXON. I am in error. I have too many bills floating around. Mrs. SULLIVAN. Tell me, how do you think the Federal Trade Com- mission would feel about this if the responsibility were given to the Federal Trade Commission? Mr. DIXON. Well, I read Governor Robertson's statement here. I think that the Federal Reserve Board welcomes the responsibility of promulgation of the regulations as 5. 5 provided. I think he recom- mended agahTlst the addition of this advertising section in the bill and suggested that they perhaps didn't have the background or the staff or expeirtise to carry it out and it more properly should be con- sidered, and if promulgated or passed it should be assigned to the Federal Trade Commission. I think that in essence is what I got out of this statement. Mrs. StTLLIvAN. If we have the legislation worded accordingly and you have the manpower to handle it, could you handle it well? Mr. DIXON. We would do our best. That is the best way we would say it. I think the Senate's approach is rather ingenious in some re- spects. Their approach is the true enforcement here shall come I think from the aggrieved citizen going into any court of competent juris- diction-this means any State court or Federal court and to bring a suit. And theh with respect to the question of intent, the Attorney General through his respective U.S. assistant attorneys in the Fed- eral courts brings suits, criminal suits for violation of the statutes or regulations. Certainly that is one way to obtain enforcement. This is saying to the aggrieved citizen, "Here you are, if you have been aggrieved, you can get your lawyer, bring your suit and if you are successful the fees-the attorney fees-they get twice `the aggrie~red amount paid to them." Well, this would be quite a challenge. Every- body will be looking around and if they have been aggrieved I think they will get a lawyer and I believe they will find lawyers, too. If they are going to be paid their fee, if they win they will get lawyers. This is a new avenue. The other avenue would have to be your avenue, leave the enforce- ment entirely in a governmental agency and follow a civil approach PAGENO="0287" CONSUMER CREDIT PROTECTION ACT 277 with which most of the regulatory agencies are vested, only that power toward cease and desist, leave it here, then all complaints would come to the agency and then the agency would have to investigate and carry the burden of proof. Under our basic law if we say it is deceptive we must prove deception. You draw this statute and you say it shall be. You see, if it does do that, that is deception under this bill. So if you were to assign us the responsibility you could be sure we will say any- thing that doesn't fulfill what is required in sections (j) and (k) shall constitute a violation of the Federal Trade Commission Act and the Federal Trade Commission should proceed under our basic author- ity which, in your bill you have pretty well armed the Federal Reserve Board with. Mrs. SULLIvAN. I am sorry that I interrupted your statement before you finished. When you both get through with your statements, I am going to turn over the legal aspects to some of the lawyers on the committee. They know more about it than I. Please continue with your statement. Mr. DIxON. I was at the point of talking about this matter. Further, should Congress see fit to enact legislation requiring such advertising disclosures, it may be that jurisdiction to enforce such a law should be conferred upon the Federal Trade Commission. Our agency has accumulated much expertise in the prevention of false and deceptive advertising under section 5 of the Federal Trade Com- mission Act. The authority of the Commission over practices in inter- state commerce involving financial transactions was sustained in General Motors Corp. v. Federal Trade Co~1mmission, 114 F. 2d 33 (2d Cir. 1940), and Ford Motor Co. v. Federal Trade Comniission, 120 F. 2d 175 (6th Cir. 1941). Other changes which the subject bill would make in S. 5, as passed by the Senate, are: (a) it would eliminate the exemptions, provided in S. 5, for transactions involving less than $10 credit charges and for first mortgages on real estat.e; (b) it would prohibit the demand or acceptance of any note authorizing confession of judgment-cognovit notes; and (e) it would make the effective date July 1, 1968, rather than July 1, 1969. The Senate version of truth-in-lending legislation would defer until January 1, 1972, the requirement of disclosure of rates expressed as percentage rates. Until that time such rate may be expressed either as a percentage rate per year or as a dollars per hun- dred per year rate. I support the provisions of H.R. 11601, which would require disclosure of finance charges expressed as an annual percentage rate almost immediately upon passage of this legislation as opposed to deferring this significant requirement for several years. In my opinion the parts of this proposed legislation which deal with setting a maximum rate of interest, the regulation of commodity fu- tures trading and the prohibition of the garnishment of wages, should be the subject of separate legislation since they are not directly related to the problem of disclosure of the cost of credit. I agree that these matters should receive extensive study, but, in my view their consid- eration by your committee at the present time, could serve to delay action on this needed truth-in-lending legislation if passed. Mrs. SULLIVAN. Thank you. Now, we will hear Mr. Greenberg and then we will have the questioning. PAGENO="0288" 278 CONSUMER CREDIT PROTRCTION ACT STATEMENT~ OF HON. ROBERT C. MOOT, ADIVIINISTRATOR, SiV~ALL BUSINESS ADMINISTRATION, PRESENTED BY HOWARD GR~EN- BERG, DEPUTY ADMINISTRATOR Mr. GRI~ENBERG. Thank you, Madam Chairman. As you pointed out at the beginning of the hearing, Administrator Robert C. Moot was unable to be here because of a conflict with another committee and I asked that I read the statement which he has pre- pared for presentation to the committee. "Madam Chairman and members of the subcommittee, I am very pleased to have the opportunity to express my view~ on H.R. 11601- th~ Consumer Credit Protection. Act. In his message to the Congress ~n consumer interest last February 16, President Johnson said, `As a ~matter of fair play to the consumer, the cost of credit should be dis- closed fully, simply, and clearly.' "The Small Business Administration is on record in support of the original Senate bill, S. 5, and Madam Chairman, I today reiterate my support of the full disclosure provisions of H.R. 11601. "This subcommittee and other committees of the Congress have heard and will continue to hear from many of the departments and agencies of the executive branch. Each of us has his own constituency, hi the case of SBA the nearly 5 million small businesses in America today. But we all have something in common, and that is that each of our eon- ~stituents, just ~s each of yours, is `a consumer, and as a consumer he is ~entitled to certain basic rights. I believe that it is basically right t1i~t each consumer should know exactly how much he is to pay for an item when he buys on credit. "Credit purchasing is becoming more and more a way of life with the American buying public. Last year interest costs alone tot'a~ed nearly $13 billion. This is to the good. It is good for our economy and it is good for the purchaser, particularly those with moderate or low incomes. Credit makes it possible for these people to own and enjoy the increasing variety of products and services supplied by our free enterprise systhrn, products and services designed to make life easier and more bountiful. "The fundamental test for success under our economic system has always been ba~sed upon competition, that is, the best product at the best price. Ingenuity, inventiveness, and plain hard work have always been the hallmarks of our most successful businessmen and industritd- ists. And the consumer has been the beneficiary. "However, as our competitive system has grown and flourished, so has the marketplace presented an ever more vast panoply of products and services fo~ the consumer to choose from. The buyer has had to become more selective, more sophisticated in his buying habits. And if it is good that American productive genius continues to turn out ~n increasing variety of goods for the consumer to choose from, then it is also right that the buyer should be able easily and quickly to deter- mine the total price that he is paying for a product. "The full disclosure provisions of }]I.R. 11601 are, I believe, totally essential to aid the consumer in arriving at an intelligent and eco- iiomical decision when he is about to make a purchase on credit. And I believe, Madam Ohairman, that the time for this legislation is now. PAGENO="0289" CONSUMER CREDIT 1~ROTECTION ACT 279 For this reason,. I would hope it would be possible that other sections of the bill might be deferred fo~ more intensive study, and that em- phasis be placed on quick passage of the full disclosure provisions. "One of these other sections, which is already under study, is the one which would prohibit garnishment of wages in collection of debts. Garnishment is very often the only legitimate means available to a businessman for final satisfaction of debts due him. Many States al- ready have laws which protect a specified percentage of a worker's wages or take-home pay against garnishment by creditors. We feel this is a most complex area, Madam Chairman, and would hope that further careful and thoughtful study could be given it. "Likewise, we would hope more time could be given to looking into the areas of a national usury law, the provision outlining confession of judgment, and the setting up of a National Commission on Con- sumer Finance. "Also, Madam Chairman, we believe it is most important that in implementation of any full-disclosure law the burden does not fall unfairly upon the small businessman. We think it essential that there be equal treatment and equal requirements for big and small business. "In this regard, Madam Chairman, I was gratified by the remarks of the Honorable Joseph Barr, the Under Secretary of the Treasury in appearing before this committee August 7, when he said, and I quote, `The practical application of the annual rate requirement has been studied at length and we have concluded that this requirement will impose no significant burden or difficulty with respect to the over- whelming majority of credit transactions in the United States.' "I would stress that it is incumbent upon us to make it as easy as possible for the businessman, especially the small businessman, to be able to compute the annual percentage rate called for in this legisla- tion, for we must keep in mind that in assigning additional respon- sibilities of this sort the burden always falls heaviest upon the small- est businessman whose resources are most limited. "In closing, Madam Chairman, it is my belief that every hard-work- ing and honest small businessman in this Nation stands ready to state simply and truthfully the total cost of his products and services, in- cluding the cost of credit charges. I am happy, therefore, to fully sup- port the disclosure portions of this bill. "Thank you." Mrs. SULLIVAN. Thank you, Mr. Greenberg. I have two short questions, one for you and one for Mr. Dixon and then I am going to call on the other members. Mr. Greenberg, in your testimony you state that interest costs alone under consumer credit purchases total nearly $13 billion and you state, "This is to the good. It is good for our economy and it is good for the purchaser, particularly those with moderate or low incomes." How good is it for people on low income when they have to pay in many instances what are exorbitant interest charges? Mr. GREENBERG. May I clarify that? When I said "this is good," this referred to the credit aspects of purchases rather than to the in- terest costs, obviously. I am sorry that the development of the state- ment did not make that clearer. Mrs. SULLIVAN. Thank you. 88-840-67-pt. 1-19 PAGENO="0290" 280 CONSUMER CREDIT PROTECTION ACT Mr. Dixon, you suggest that the setting of margins on commodity futures be handled in a separate bill. Has the Federal Trade Commis- sion drafted or submitted such legislation? Mr. DIXON. No, we haven't. Mrs. SULLIVAN. Do you remember back in 1954 in your coffee in- vestigation you showed how excessive speculation on borrowed money led and contributed to a price spiral? Mr. DIXON. Yes, we did, and we along with you at that time, as I remember, were worrying about just how all these prices were arrived at. I don't think at that time we were worrying so much about credit transactions that went with it. If I read very carefully a statement-I don't know whether it was Mr. Barr or 1~ot, in this respect-but the logic of it impressed me. I think he suggested that if in this respect you wish to really do some- thing, it should, practically speaking, be vested over in the Agricul- ture Department. Mrs. SULLIVAN. That one bill on regulation of coffee futures trading that I introduced originally in 1954 on the suggestion of the Federal Trade Commission has languished in the Committee on Agriculture ever since. And the same thing happened in sugar in 1963 that happened in coffee in 1954, did it not? Mr. DIxoN. I remember the men that we detailed to work upon them. There was a strong belief by many that they were similar. Mrs. SULLIVAN. Our concern is not just with futures trading in agricultural commodities, but in anything which affects consutner prices, including silver, copper, zinc, lead, platinum, rubber, and all these other things that are traded on the futures exchanges. Mr. DIXON. I am not an expert in futures nor in the stock market, but I understand, with the little knowledge I have here the margins that must be provided in order to get in and out of the market, re- gardless of what they are trading in. Here in this legislation it seems to me there is a kind of departure if you move over into the futures market. We are now talking about addressing ourselves here to the thought of goods and services that are sold and the amount of credit that is involved if you engage in such transactions. Mrs. SULLIVAN. This is perhaps a little farfetched as far as the rest of the bill is concerned, but after all these years and all the attempts we have made to have something done about this problem, the fact is that it has been pushed from one department or one committee to another and gets nowhere. I know you were not responsible for that FTC report on coffee back in 1954, but I am certain you are familiar with it because I believe you were on the Hill at the time. But is there no way that the Federal Trade Commission could police the futures markets? Could we give the authority to you? Mr. DIxON. You know, the Federal Trade is a creature of the Congress and 1 think the Federal Trade is kind of a catch-all for the Congress because we have so many different responsibilities where the Congress doesn't specifically vest them in other agencies like in the Federal Reserve, which has banking, communications in the FCC, power in the Federal Power Commission-everything else under the commerce clause-if there is anything *rOng with it or unfair it is vested in the Federal Trade Commission from the law enforcement sn~ndpoint. PAGENO="0291" CONSUMER CREDIT PROTECTION ACT 281 Then we do have a broad responsibility to the Congress because we were the successors to the old Bureau of Corporations that had only one power, the power to investigate and report to the Congress. We still retain that responsibility. Specifically, when we get to agricultural products, the question of international trade in agricultural products, you begin to run across the responsibility of the Secretary of Agricul- ture and responsibilities that have been specifically vested in that Department by the Congress. Obviously anything the Congress wishes for us to do we will do. Mrs. SULLIVAN. Have you read the report on the National Com- mission on Food Marketing? Mr. DIXON. I sure have, from cover to cover. Mrs. SULLIVAN. There is a lot of meat in there that we are hoping to turn over to your department if we ever get around to it because there is much more than can be done. Mr. DIXON. Yes, the recommendation out of there finally said in effect-the recommendation was that we pick up- the Federal Trade Commission pick up where that National Food Commission left it and continue. I have said in answer to others who have put it to me, we can do that provided we are adequately staffed. Mrs. SULLIVAN. Have you ever asked the Appropriations Commit- tee for staffing for that particular job? Mr. DIxoN. The House subcommittee asked me no questions about it, but the Senate subcommittee-Senator McGee specifically came in for that purpose and we had quite a colloquy and I told him that I had no recommendation in my budget for that, and that we did not intend to do that unless we had money and that I would wish he would pro- vide the money if it was the will of the Congress for us to do it and we left it there. Mrs. SULLIVAN. I doubt if anyone on the House Subcommittee on Appropriations ever saw the report of the Commission. Mr. DIXON. It was a fine report. Mrs. SULLIVAN. Not as strong as some of us wanted it to be, but it contained a lot of meat. Mr. DIXON. Senator Magnuson said Congress provided that com- mittee about $2 million and I think I could have done a pretty job, a starting job with about $250,000. Mrs. SULLIVAN. Next time if you ask for that, I will try to help you get it. Mr. Stephens? Mr. STEPHENS. I am interested in one of the conclusions that you have reached that you believe the provisions of H.R. 11601 are better than the provisions of Senate bill 5. When it comes to the reporting or the disclosure of financial charges you do not see why it should not be applied to the revolving credit transactions. We had the representa- tive of Montgomery Ward to present a chart here demonstrating that it would be impossible for a real true picture to be given of the revolv- ing credit transaction over a year's time and in an annual interest rate before the year is out because you do not know how much will be paid each month and you cannot tell how much that actually will be. Would you reconcile your ideas with theirs? Mr. DIXON. I think if you care to, you could carry this criticism to other things other than revolving credit. I know of no more sensible PAGENO="0292" 282 CONSUMER CREDIT PROTECTION ACT way to apprise the consumer for comparison purposes. I prefer to use the word "competitive" purposes because we do hold ourselves out as a competitive society, than to express it in the annual rate, and 1½ times 12 is 18 and it is just that simple to me. No, he may come in here and say to you, "Well, we don't keep our books that way." I have got one of those things that comes to my house and I cannot tell what Sears, Roebuck is charging me. I can't tell whether he adds it at the be- ginning of the month before I pay him or at the other end. It may be more than 18 percent if you really looked at it real close. I examined it recently and I see that the charge is expressed in dollars so much per month, how would you determine from this what the actual percent is? But for comparison purposes I don't know why they don't want to say "18 perceut." That is what it is. It is to me like what the banks aJ- ways used to say, 6 percent. It was never 6 percent, it was more than that. I don't know what it was-about 11 point something, I think. It was the lawsuits against General Motors that said 6 percent there. It was not 6 percent, 12 percent, something like that. It is like borrowing money and .you pay it off at one-half of 1 percent per month~ Well, what is that? "What is that in annual interest rate?" you say. Mr. STEPHENS. You hayc not had the advantage of seeing the chart. But if you take 11/2 percent a month it would arrive at 18 percent. His figures show that it was 11.49 percent based upon that particular cus- tomer's charge and the way he paid and what he paid. We have asked for some clarification of that as to where you start calculating the 1% percent, whether it is the first of the month, the last of the month, or what it is that maJ~es the difference. I would agree, it is a compari~on to see what a person is paying-if it says 12 percent, and you óan equate those things more readily. But the physical difficulty they allege, the truth in lending is not truth if you say it is 18 percent when ~ou figure out at the end of the year that it is 11½ percent. Mr. DIXON. I don'.t know a better title to give the bill than "truth in lending." Like truth in packaging, these are very good titles. I wouldn't want `to lose the title for `this bill because that is the purpo'se. But even within this definition, as you say here, you `are hearing people say really, this does a little violence to the truth. It is like in States-of oourseI `am sure you have heard this testimony, how States have laws against usurio'us interest rates and yet it is just quite comn'~on for States to allow 3 percent per month `and then on top of that add the legal rate on top of that which is 42 per'~ent and then they sky, "Now, if you dare `to require this you will be talking `about 42 percent and we never have that. We ought to have 3, because if we didn't, you would never get the money." In the first place you go in there to get it `and you start retiring it, the principal goes with it each month, it is going down and you are usually paying constantly-but for com- parison purposes it is high time in my opinion Americans knew what they were paying for money by the fairest and the best method possible. I have~foliowed `this legislation since Senator Douglas thought of it and put it in and I have heard this `argument over the years usually, the first attack on it was that no one could figure out `a sen- sible way to state it in annual interest. Finally, with `the simplified charls Joe Bare brought up here he showed you it wasn't so hard if you really wanted to do it. PAGENO="0293" CONSUMER CREDIT PROTECTION ACT 283 Mr. STEPHENS. That is right, hut you would require them to make a different capitalization each month. Mr. DIXON. We are saying to him, if I would understand, at some sensible time in the beginning, that the man or the lady that accepts this way of purchasing goods is informed-so that if they don't want to buy it this way maybe they might want to go down to the bank and borrow money for 60 day's and pay what they have to pay for the goods. I have the feeling that maybe `Sears, Roebuck is making as much money out of financing as they are good's. Mr. STEPHENS. We asked for some information along that line. Of course, when we make a real analysis of the cost `of `a home-if I buy a house `and pay for it in 30 years and I do not pay $30,000 for that house, I pay much more than that over `the 30 years with the interest rates and everything like that. Mr. DIXON. But it would seem nice to know in `advance what it is, so if you have a choice to buy it `a different w'ay it might `be helpful. I live and have lived `all my life at the Federal Trade Commission, except during the time in the service, and when I was working with the Senate Antitrust Committee-I have lived my whole life within the philosophy of `the greatness that has come to America out of a free, competitive enterprise system. You are no't going to be free if you do not know the truth `and you are not going `to be competitive if you don't have a choice to compare things. Now, we are either going to follow and pursue that philosophy or we are going to duck it. I have a hard `time seeing how we are going to lose if we keep aspiring fo'r truth-if it is open disclosure, com- parative disclosure, give it whatever connotation you wish-I know, and I know the members of the committee of Congress in this com- mittee want to know something that would cause us to get to this and we want to do something that would avoid greater confusion. There has been a lot of explanation and a lot of experts have testified on this bill, prior bills, and the question of eliminating revolving credit might very well cause people to-in great mass to move toward that method of financing simply to hide what they are doing. Now, I would suggest that we not give `them that opportunity. Put it out in the open. I don't think it is going to hurt their business. I am not one of those that thinks people will run from it a great deal. I ju'st think `that people will be better off to know and if they do know, all right. If you borrow a small amount of money or if you buy `a small purchase and have a small charge, I think maybe that ought to be examined very carefully as to whether that small charge ought to be eliminated, because the fact that no one will loan anybody any money unless they can really fleece them down in that area does not `set very good with me. Mr. STEPHENS. Th'ank you. Mrs. SULLIVAN. I woul'd just like to comment here, that no one we questioned from the retailers could answer our questions satisfactorily on this matter of `the 18 percent. When we would put the question to them, "How did you arrive at 1'1/~ a month?" the answer was, "Well, we just charge 11/2 percent. But 11/2 percent is not 18 percent." And we argued and argued over this and I think we ought to get off the subject because we are never going to get a PAGENO="0294" 284 CONSUMER CREDIT PROTECTION ACT meeting of the minds on it. The figures they showed us on the chart this morning are not the kind of figures they use when they figure the interest on any of these charges for these people. Mr. Dixo~i. One thing is clear, Madam Chairman, the purpose of this legislation is to state it in simple interest aimually and if you charge something-if you set out with a figure 1'/2 percent then stated annually it comes to 18 percent. Maybe that is too simple. Mr. STEPHENS. If that is true, provided you have the same amount that you put in, it is 1½ percent on each month. If you have a dif- ferent amount it does not amount to 18 percent. Mrs. SULLIVAN. They still charge 11/2 percent for a given period of timer-a month. Mr. DIxoN. They still charge 1½ percent per month. You are going to pay 18 percent-maybe the amount will vary, but at the end of the year you paid 18 percent on something if you still owed them something. Mrs. SULLIVAN. Mr. Wylie? Mr. WmIE. Thank you, Madam Chairman. First of all, Mr. Dixon, I would like to clarify one point. I asked Secretary Trowbridge this morning this question, whether he thought the administrative enforcement of the Sullivan bill would be better left to the Federal Trade Commission and then I asked the alterna- tive question, would the administration of the provisions with refer- ence to advertising perhaps be better left with the Federal Trade Commission? As I understood from what you said, you thought ma3tbe the administrative provisions of any truth-in-lending act could well be left to the Federal Trade Commission. Did I interpret correctly? Is that a fair statement of what you said? Mr. DIxoN. With respect to the advertising part of it, yes. Mr. WYLIE. Advertising only? Mr. DIXON. Yes. Mr. WYLIE. All right. Mr. DIxoN. If you are going to adopt the Senate version, the en- forcement of the bill is going to be left to the private citizen, plus a criminal enfor~ement part of it, if necessary, by the Department of Justice. There, under S. 5, the function of the Federal Reserve would be to promote the regulations and what have you, and any enforcement will come by the private citizen in any competent court. If you adopt Mrs. Sullivan's bill, then this encompasses the tradi- tional point of enforcement entirely by Government and, as provided in her bill, which is practically a rewrite of sectionS of the Federal Trade Commission Act of how we must proceed to enforce, but this does not mean that the Federal Reserve Board could not follow those proce- dures. When I was talking about this-I think I was making reference pri- manly to Goveitnor Robertson's reference to the advertising, the adver- tising sections of your bill, Mrs. Sullivan. Mr. WmIE. Just to pursue that, one more question. Do you think jurisdiction should be left more properly with the Federal Trade Commission or with the Federal Reserve Board? That will require an answer as to one or the other. PAGENO="0295" CONSIJMER CREDIT PROTECTION ACT 285 Mr. DIXON. Or-I wOuld leave it where it is, in the Federal Reserve Board, but with respect to sections (j) and (k) on advertising. I would suggest that if it is the will of the committee that you examine Con- gressman Illanna's bill because he seems to have resolved that difficulty that Governor Robertson shied away from that was in this bill, and suggested that we had more expertise and that perhaps under separate legislation you might wish to assign to the Federal Trade Commission this responsibility. Mr. WYLIE. There is not any question in your mind that we could delegate to the Federal Trade Commission any authority we want to delegate, is there? Mr. DIxoN. None whatsoever, under commerce, monetary. Mr. WYLIE. This is spelled out in the law and the Constitution, you have whatever authority Congress gives you. Mr. DIXoN. That is right. In this bill, either in commerce or affecting commerce is in. It is in (j). This broadens section 5, which is our basic law. Mr. WYLIE. Your jurisdiction has been extended to where almost any act affects interstate commerce, directly or indirectly? Mr. DIXON. I think that, too, I have spent my life with mighty high- priced lawyers trying to litigate that. Mr. WYLIE. I would like to ask Mr. Greenberg a couple of questions. Since you administer the Small Business Administration Act and the Small Business Investment Corporation Act, you have more deal- ings with the small businessman than probably anyone else who has been before us or maybe aiiyone who will come before us. I have been asking some questions about the possibility of stating the amount of money which is actually paid in interest charges or service charges, rather than in an annual interest rate. I don't agree with Mr. Dixon that it is as simple as he states. They have open-end periods, load-on periods, and so forth. But under the Internal Revenue Service regula- tion there is a provision that allows for. a deduction of 6-percent inteI~- est or the actual amount paid, whichever is lesser. In other words, the deduction cannot exceed 6 percent. If we pass a truth-in-lending bill and it provides for disclosure of any rate of up to 18 percent, would it not be better to express that in a cash amount so that the person who was making the deduction on his income tax would know exactly how much he could deduct? Do you follow me? Mr. GREENBERG. Not exactly. But let me see if I understand your question. You are talking from the consumer standpoint or the small businessman? Mr. WYLIE. I want to ask you what the obligation might be as far as the small businessman is concerned. One objection has been stated that it would put too much burden on small businesses. Mr. GREENBERG. Well, we discussed this point at some length, Mr. Wylie, and our position is somewhat as follows: We are talking about the small businessman and we are talking about comparatively small costs. In the Senate bill, S. 5, which exempted a charge under $10, we believe everybody should be treated equally. We don't believe from what we have seen that the burden on the small businessman would be so great and so burdensome that he wouldn't be able to do this. We be- lieve, too, that exempting the $10 charge would in effect be discrimi- PAGENO="0296" 286 CONSUMER CREDIT PROThCTION ACT natory again~t the very people who are possibly less able to a~ord this kind of thing and would not give them the opportunity to make the kind of cOmparative ai~d competitive test that Chairman Dixon so aptly described. With respect to the consumer himself- Mr. WYuE. Before we leave it, you say you do not believe it would be too burdensome to disclose interest rates? Could we not state the rate in dollar amounts just as easily or more easily, for that matter, based on testimony regarding some of these complicated interest tables? Mr. GREaNEERO. The rate in dollar amounts? Mr. Wn~IE. Yes, sir. Mr. GREENI~ERO. I am sorry but I am not able to understand this. Mr. WYLIE, If 18 percent of $100 comes out to $18, just say at the end of the year that the interest rate is $18. Now, the reason I am getting at that is, 18 percent on $100 is more than 18 percent on $90, of course. Where there is a variance in the revolving credit account from month to month, the actual rate charge on the amount of the items charged to the account, as has been pointed out here, may come to a little over 11 percent, even where the monthly rate is 11/2 percent. You have to be an expert or a CPA to determine what the rate is actually going to be. Mr. GREEN1~ERG. Let me speak as a comparative neophyte relative to other witnesses here. I have been in the financial business all my life and I hai!=e never seen any difficulty in terms of what a rate is, an annual rate. Obviously the rate is established based upon some calcu- lations somebody made. Obviously 11/2 percent a month from the dis- cussions I have heard conceivably could be said to be 18 or some figure less than 18, depending on the declining balance that exists during the period under repayment. But it also appears to me that if the initial charge is based upon a set figure that this could be converted to an annual rate. With respect to slight differences, I understand there is a tolerance, some tolerance levels in the bill-the bill is not trying to make a~tu~ aries or statisticians out of businessmen. We are trying to get a fairly close approximation. I don't think anybody would be prosecuted to the full extent of the law if they stated 36 percent or 33 percent. But I think that rather than stating anything there should be some ap- proximation of the amount of interest rate involved. Now, this figure 11/2 percent a month-of course, maybe with the new math is figured differently-comes to 18 percent a year. Obviously if there are any declining balances or prepayments the amount of interest might flot come out to 18 percent a year. But at the time that contract was entered into, it was entered into on the basis of 18 percent a year. Mr. WYLIE. May I have unanimous consent to ask one mOre question? Mrs. SULLIVAN. Yes. Mr. WYLIE. I am not so much interested at this point in the interest rate or interest rate on a revolving account as I am that which could be deducted on an income tax return, and some of the gentlemen who have testified here-as a matter of fact, Mr. Barr said he thought maybe the regulation should be changed if a truth-in-lending bill is adopted so that the full amount of the interest rate and service charge PAGENO="0297" CONSUMER CREDIT PROTECTION ACT 287 could be deducted. If it is a good principle at 6 percent or less it is a good principle at another figure, if the figure is known. I think my question was, is this an unreasonably burdensome thing to ask of small businesses? We now require the form 1099 of financial institutions to show in advance what amount has to be included in income. Why would it not be just as reasonable to require some form which would indicate the amount which could be deducted? Mr. GREENBERG. Well, this is getting a little beyond my field, but to answer your specific question, I know that with respect to interest deductions for income tax purposes, the taxpayer is to determine that the amount that is being deducted relates only to interest and finance charges and no other costs. To answer your specific question, again, far afield, I would say that some consideration should be given to the problem of determining what deductions the taxpayer could take under the tax laws. But I am not competent to discuss this. Mr. Wmu~. Mrs. Sullivan, based on the statement from Mr. Dixon you might want to amend the title of your bill. It is entitled "Consumer Credit Protection Act." Don't you want it to be a "Truth-in-Lending Act"? Mrs. SuLLIvAN. I think mine covers more fully what we are trying to do in ILR. 11601. Mr. VYLIE. That was a poor attempt to be facetious. Mrs. SULLIVAN. Mr. Hanna? Mr. HANNA. Thank you, Madam Chairman. I appreciate the comments that have been made about the bill I intro- duced. I thought that the Federal Trade Commission is a crack agency to carry out this obligation. Is it not true from the legal standpoint that as long as the goods are in interstate commerce and it is pretty hard to say there are very many goods that are not in interstate commerce that the sale of those goods can be considered in interstate commerce, whether it was in fact intrastate? Mr. DIXON. Yes, sir, this would be so, but I think before you arrived here I had reached the point in my statement and in an aside I pointed out that traditionally in enforcing section 5 of our law, the Federal Trade Commission Act, we have stayed pretty much in the vein of re- quiring a sale of a commodity in addition to an ad that flowed across the line. Now, when you get down to dealing with credit terms and finance charges and whatever, usually these things, as far as the transaction that is involved-it took place at a very narrow situs and although we could possibly reach it because if there was an ad it is pretty hard to advertise today in any kind of a newspaper, even a weekly, that does not get across a State line, and we could technically say that we were after a deceptive ad. Even though the sale was local. I hope I did no violence when I interpreted the purpose of your bill, but I thought the purpose was to clarify the point that had been raised that the Commission does have a great deal of expertise in this area. Mr. HANNA. That is correct. M~. DIXON. If the failure to do the things set out in (j) and (k), if there is a failure, if the purpose of your bill is to make those failures PAGENO="0298" 288 CONSUMER CREDIT PRODECTION ACT a violation of section 5 of the Federal Trade Commission Act, then this would b~ a traditional approach to these types of problems. Mr. IJANNA. Thank you very much. May I say in further edification that the gentleman who finds it difficult to make a distinction between stating a simple annual rate, and the testimony of the gentlemen who have been here before us this morning, I can assure you it is not diffi- cult at all in connection between the two for it has to do with the magic of time. There is no problem in setting an annual rate. If it is 11/2 percent per nionth it figures out to 18 percent applied rate. But there is a little thing about time. Mr. Barr testified about this and he very casually went over it and said, "Well, it is true that there is a certain grace period before the interest is applied." There are some purchases that are made in the middle of the month-in other words, you have got a 30-day applied interest rate on something you might have pur- chased 48 days ago. So you have got some days of grace. The difference between those who apply it and the simple interest rate approach, and those who say it is difficult lies in the days of the month that vary between purchase and payment because payment can come on the 10th one month, the 7th, the 13th, the ~d, the purchases can be made from any spectrum of one to 30 and there will be a variety of balances that peel out ~nd there will be a variety of days in which the interest was actually applied as against when the purchase was really made.. Now, the argument is simply, on one side if you are going to make it a simple interest rate, you simply say to the businessman, "You have got to pretend you did not extend credit on any of the days ex- cept at the time you apply it." And their argument is that that is non- sense. "We are only doing this to maintain a sensible approach to bookkeeping. The cost of making it apply from the day they pick it up are such that we are better. off to arbitrarily say 1% percent a month and we do not understand that and we do not know what the argument is all about." If it is true that when they say they applied 11/2 percent and they allow a variety of differences of gross for any one particular account, when the effect of interest is applied against that which is the total amount at any time you are going to come out with a variety of rates of 11 percent to fully the figure 18 percent. But my fear is this, gentlemen, that if you insist upon the figure 18-percent interest charge being stated, that will be the interest charge against everybody. They will say, "Well, we did not want to charge you that much but the Government insisted that we are going to charge 18 per- cent from the date of purchase." I think what we will have done is have increased the interest rate for a number of purchases. I think, Mad~m Chairman, I have been thinking about this thing very seriously ahd I think that if you really wanted to make a contri- bution in this area, you leave the appropriate operator alone, and get to the bad ones ~nd you can say anybody who is applying an interest rate action and talk about the thing-whose applied interest rate exceeds 18 percent, that they must report this actual interest rate or else have them report it as applied because that is the truth of the matter. That is the applied interest rate and not necessarily the effec- tive interest rate and you will never get me to accept the fact that there is not a distinction between the applied interest rate and the effective interest rate, because anybody who knows the simple application of PAGENO="0299" CONSUMER CREDIT PROTECTION ACT 289 time knows that the effective interest rate will come out differently given different days of grace where you charge no interest. What the gentleman is arguing is that we ought to get some credit for the time we are applying no rate at all. So this comes out to what the effective interest rate is. Honest to goodness, Madam Chairman, that is the crux of the whole matter. It is just as simple as that. If you insist on making the rate 18 percent then I think that you may be doing that-I `am not sure about this-~but what you might be doing is establishing that everybody is going to pay 18 percent, although there are many people who are not paying 18 percent right now. What would you say to that? Mr. BINGHAM. Could I ask, is the gentleman referring to the 18 per- cent requirement in our bill? Or is that full disclosure of the annual interest rate? Mr. HANNA. On the usual revolving credit, the greater percentage of which-I think you will find this is true as the American Retail Federation has reported, that most of the people who are legitimate people that belong to this organization do charge and apply 11/2 per- cent interest rate which figures out to be an annual rate of 18 percent. But they do that in a way in which they are continually giving the purchaser a difference of days of grace against which no interest is charged under that particular purchase. Do you understand? Mr. BINGITAM. I do. But I do not see there is any difference in their stating that they charge 11/2 percent monthly credit charge and stating they charge 18 percent annual charge. Most people do not understand what 11/2 percent monthly means. Mr. HANNA. What you are saying is because they insist that you ought to give them some credit for their effective interest rate which is the fact that there are a variety of numbers of days in which the pur- chaser gets his purchases in there, that the effective interest rate against the total business they do with the client and the total credit they expend will affect it. Mr. BINGRAM. They do not make that plain when they are talking about the figure 11/2 percent monthly. Mr. HANNA. They made it very clear. I did not know anything about this until I heard the testimony and that is when I heard it, from what they said. It seemed to me pretty clear and I am just saying I do not see the difference-I know what the difficulties are. I know what th~ differences are. I understand what you are doing. I think what you may be doing is cutting the customer out of the opportunity of getting any days of grace at all. I think they will then say, "You do not get any-we will have to involve our bookkeeping a little more instead of simplifying it." Mr. BINGITAM. I would like to pursue this with you. Mr. HANNA. I would like to pursue it with you. I am no expert. I just got educated recently on this thing. It is amazing that people start talking about twodifferent things all the time. Now, as the chairman has said, nobody has laid a glove on her. Mrs. SULLIVAN. Mr. Williams. Mr. WILLIAMS. Thank you, Madam Chairman. PAGENO="0300" 290 CONSITMER CREDIT PROTECTION ACT Mr. Dixon made a point, the Senate bill was called truth-in-lending and this billwe have has a slightly different title, "Consumer Protec- tion Act." I think Mr. Dixon does have an excellent point. Whatever we do we have to be accurate or be truthful. It seems to me that much of the confusion that is revolving around these revolving charge ac- counts is resulting from the fact that in some types of credit transac- tions the interest is set before the transaction is consummated. So there is no difficulty in figuring the interest, say, on the first mortgage or sec- ond-first mortgage or something of this nature. But in these revolv- ing credit accounts we are talking about computing in advance an interest rate on the basis of 11/2 percent for 12 months, but then the way it is being applied, the interest has got to be computed after the fact or at the end of the year, to see how much interest the customer has actually paid. Now, one misstatement that has been made here this morning and one misstatement that was made by Mr. Barr of the Treasury Depart- metn is that the department stores on revolving charge accounts are charging 1½ percent on the unpaid balance each month. This is not a correct statement. In the testimony we heard this morn- ing, if that testimony was accurate, and I questioned the witnesses this morning carefully to determine the way they are computing this interest cost and I heard no one raise any question about whether this was the actual practice or not on the part 0_f the American Retail Federation. Now, they are not charging li/2 percent per month on the unpaid balance for that month. They are charging 1½ percent per mozith on the unpaid balance of the previous month. In other words, if, on the list of July, a customer owes $100, and even then if he pays the $100 off during the month of July, in the statement the customer re- ceives the 1st of August there is no service o'r interest charge at all. The interest `or service charge would be $1.50 for the balance outstand- ing as `of the 1st of July. So you cannot say, you cannot apply to' ac~ tual practice if the testimony we heard this morning is correct, that they are paying 1½ percent per month and charging that amount on the unpaid balance. So what we have here is two `separate factors, one, a type of transaction, first mortgages where you compute the interest in advance and kn'o'w exactly how much you are paying and the other is the type of transaction where `the interest rate cannot be computed and we can only come to the conclusion at the end of the year. So to say 18 percent per annum interest charge on revolving charge accounts an incorrect statement if the testimony we have heard here is correct. I want to say something else to' you, Mr. Dixon. You made the statement that some department stores are probably making as much money `out o'f financing as they are out of the sale of products. I do not believe that is a correct statement. I believe the charge accOunts were developed to increase sales volumes. I think the revolving charge accounts evolve from regular charge accounts; in order to further increase sales volume. I do not believe that there is a department store `or merchant in this country, if th.ey could convert to an entirely cash operation tomorrow without reducing their sales volume, they would not be happy to do so. Because the greatest in- PAGENO="0301" CONSUMER CREDIT PROTECTION ACT 291 cidence of loss experienced by merchants today, especially the small businessmen in poorer areas Occurs in these charge accounts and re- volving charge accounts and these merchants have got to make up the money somehow. So I would like to know if you disagree with the statement I just made. Mr. DIxON. I still think a great deal of money is being made on credit. Mr. WILLIAMS. I am talking about department store credit. Mr. DIXON. I am talking about department stores, too. I remember reading somewhere-I do not know how authentic it was as to when Sears, Roebuck instituted revolving credit-I believe they were the first, as I read it, and I believe when they came into an area like Washington, I believe their statistics showed pretty well they could afford to extend it broadly to all classes as to terms and conditions offered. Maybe they would give a different definition, but I don't know whether that is before this committee as to why. Because if they desired-1they could set whatever rate they desired to set as long as they did not do any violence to the interpretation of the usury laws. Apparently 11/2 percent on the unpaid balance was enough to protect their risk and I think the average person they do business with is a pretty good risk. Mr. WILLIAMS. It is not the average person you got to worry about. Mr. DIXON. That fellow that you are worrying about we find from our study in the District of Columbia, he is down on 7th Street buying his goods and you can't even get this type of credit. He can't even get it extended to him. Mr. WILLIAMS. Let me say this: We have had testimony from Mr. Barr in which he stated that he did not believe that merchants could operate on less than 18 percent `annual interest charge on revolving charge accounts and break even on it. It also remember that we did have testimony this morning that in- dicated that Wanamaker's started revolving credit charges. I do not know whether this is factual, but this is what we heard. One other question. As far as commodity credit is concerned, the margin that is put down is really earnest money. I have difficulty accepting this as a credit transaction. Do you think commodity trading should be included in this bill in any way? Mr. DIxoN. No, I do not. I had that difficulty myself. Mr. WILLIAMS. Thank you. Mrs. SULLIVAN. Mr. Bingham? Mr. BINGUAM. Thank you, Madam Chairman. First of all, I would like to ask Mr. Dixon a little bit about something he said-clarify something about the possibility of this, the `achnini's- tration of this enforcement being given to the Federal Trade Commis- sion as far as the advertising is concerned. Would you expect that you `could undertake that respionsibility with your existing structure, existing personnel? Mr. DIxON. You mean if you included in the final passage? Yes, we `could. But I think to do an adequate job' we would have to `have some in- crease in personnel, and I would want to have the opportunity of looking at that very carefully without shooting from the hip, without seeing how many more personnel we would need. PAGENO="0302" 292 CONSUMER CREDIT PROTECTION ACT Mr. BINOIIAM. I think it would be helpful to have an estimate on that. Mr. DIXON. I shall submit it to the committee. (The material referred to follows:) May I say at the outset that, in answer to Congressman Bingham's question, I can only give an estimate as to what increases would be required in personnel and appropriations should Congress decide the responsibility of enforcing the advertising provisions of HR. 11601 is to be placed with the Federal Trade Com- mission. Much will depend on the scope of a "Truth-In-Lending" bill as it is finally enacted into law. As now drawn, as I interpret H.R. 11601, it covers every form of eonsu~ner credit. Thus, in enforcing the advertising provisions of the bill, the Commission will be charged with the responsibility of observing and review- ing the advertising of many types of creditors, such as loan companies, depart- ment stores, real estate operators, etc., to determine whether their advertise- ments contains the disclosures required by the bill. As I envisage the responsibility of the Commission, its first duty would be the promulgation of proper regulations to assure that the advertisements do contain the required disclosures. To prepare such regulations and perform the duties necessary to assure their proper promulgations in accordance with the provisions of the bill as well as of the Administrative Procedure Act. I think the Commission would require as a minimum an increase of its present personnel of two additional attorneys and two clerks. After such promulgation is completed, to be certain that all creditors, subject to th~ provisions of the bill, are complying in their advertising with the bill's require4nents and with the Commission's regulations, my estimate is that for the first sear the Commission probably will require four more attorneys and four more clerks. Thus, for the first year my belief-and it is merely my belief- is that the Commission probably could adequately perform its functions, with reference to the advertising provisions of the bill, by an increase in its ap- propriations of approximately $75,000 to $100,000. After the first year, the personnel may have to be increased or decreased. de- pending upon the extent to which there has been compliance with the provisions ~f the law atid the Commission's regulations. I would not venture an estimate at this time as to what increase or possible decrease in the appropriations of the Commission should be made for the following years. Mr. DIXON. One must keep in mind-I am quite sure each time you pass a statute such as this you would be hopeful that it would volun- tarily be complied with. The Senate approach was one way. The Sen- ate approach was to turn it over to the private citizen and criminal law enforcement. In your version here in the House is to do it difFerently. You will turn it over, as the bill provides, entirely to the Federai Reserve Board to enforce. Mr. BINGIIAM. But under the provisions we are talking about, if that part of the enforcement job were turned over to you, you would not be starting from scratch. Mr. DIXON. No, we would not. Mr. BINGHAM. As the Federal Reserve Board would. Mr. DIXON. This is correct. It would be a better dollar buy to buy going expe~rtise than to try to duplicate it. I think I get your point and that is quite right. Mr. BThrGHAM. Did I understand you to say as far as the other ad- ministrative enforcement is concerned, apart from advertising that you do not favor a governmental plan of administrative enforcement, that you favor leaving it to the individual? Mr. DIXON. I think I would try that first. If this works-this has been bandied about up. here on other bills and other subjects, that if would relieve a Government expenditure. PAGENO="0303" CONSUMER CREDIT PROTECTION ACT 293 Mr. BINGIIAM. Do you not feel, however, that small purchasers are the ones most likely to take advantage of this and they are not going to be the ones who will go to court to protect themselves? Mr. DIxoN. It is a fear, a legitimate fear. On the other hand here, the small party would be afforded under S. 5 approach, would be afforded if his cause was just, would be af- forded double his loss in effect, plus attorneys fees, and I would think that maybe there might be enough inducement for attorneys to get quite interested in this type of practice. Mr. BINGHAM. I would like to address some questions to Mr. Green- berg. In Mr. Moot's statement concerning the issue of garnishment, there was this statement: Garnishment is very often the only legitimate means available to a business- man for final satisfaction of debts due him. If my understanding is correct, Mr. Moot, the Administrator, comes from the State of Texas? Mr. GREENBERG. No, sir; that is not correct. Mr. BINOHAM. What I wanted to point out is, three States do have statutes prohibiting garnishment and we have information available to the committee, some of it summarized but there is no correlation, ap- parently, in the amount of installment credit which is extended in those States that have tough antigarnishment laws and those that have none. Mr. GREENBERG. First, Mr. Moot comes from New Jersey and is liv- ing in the State of Virginia. I think what Administrator Moot was trying to say is that this is not the only means, but is an important means. Further, because of the complexities of the situation he suggests that the subject be given further study and then all available inforinatton be before the Congress and the appropriate committees before any final action is taken. Mr. BINCHAM. I understand that is the position not only of the SBA but the position of all of the executive agencies, the administration's position, and as I said before, I am very much disappointed that we are not being given any more useful comment from the executive agencies. If I may, I would like to get briefly to the question of revolving credit and particularly on the matter that Mr. Dixon was discussing with Mr. Stephens. The difficulty or the alleged difficulty of calculat- ing an annual percentage rate-I would like to call your attention to subparagraph 3 on page 7 of our bill, III.R. 11601, where the definition of "equivalent annual percentage rate" is given as the rate or rates computed by multiplying the rate or rates used to compute the finance charge for any period by the number of periods in a year. In other words, under this bill all the retailer has to do if he has not been making the monthly charge of 11~'~ percent and he called it 1½ percent a month, all we are asking him to do is that in effect that is 18 percent per annum. Is it not true, Mr. Dixon, that this poses no burden on the businessman at all? Mr. DIXON. I didn't think it would impose one on him; no sir. Be- cause I thought that was what the bill was addressed to. You weren't trying to arrive at how to compare rates, you were trying to set a per annum expression so it could be compared. PAGENO="0304" 294 CONSUMER CREDIT PROPECTION ACT Mr. BINGHAM. When we speak of interest rate per annum that does not mean we are talking about a full year's payment of a fixed amount. Mr. DIxoN. Or a varying amount that may vary from month to month. Mr. BINGHAM. It can be that but it is still a rate per annum. Mr. DIxoN. That is what I thought. Mr. BINGFtAM. It seems to me to make a further comment on that, that every criticism that the businessman addresses to the annual-rate question they could equally well address to their now current custom of using the monthly percentage rates. Because if it is an inaccurate rate annually it is inaccurate monthly. Do you agree with that? Mr. DIxON. I tried to say it. You said it so much better than I did. Mr. BINGIJAM. Finally, I would like to make this comment. I am beginning to wonder, having seen some of the material that we are going to be presented with next week, whether s~ome of these retail establishments are not really concerned about the annual interest rate, not because of the difficulty of translating a monthly rate to an annual rate, but beca~use their annual rate in effect is a lot higher than 18 per- cent. We are going to have to have information presented here show- ing that the ~vay they do their billing in some cases, they are not giv- ing credit fo~ payment made during the monthly period and the net effective annual rate in many cases is up in the sixties and seventies' and I think this is going to be a shock to us. Thank you, Madam Chairman. Mrs. SUWvAN. Mr. Greenberg, I think you might be interested in this letter that just came from Kansas City. This is from a small business firm and they have no revolving charge. They say: Please be adVised that we are not in favor of S. 5 as it now stands. We Urge support of any credit service charge disclosure proposal that requires the uni- versal applicati~n in either dollars or cents or in identical rates for all credit, whether it be nkontbly, monthly and annual or any other rate that will enable customers to compare the terms and see which is the cheapest rate available in the marketplace. We feel that the S. 5 bill as it now stands' does just the opposite. To sum up-and this is addressed to both Mr. Dixon and Mr. Green- berg-you both made a good case for full disclosure of finance. charges~ in consumer credit. But I would like to take you back to S. 5 as it passed the Senate and see if we understand exactly what that bill would do and would not do. First, it would leave out first mortgages, the biggest credit trans-~ action which most families ever experienc&-and one which most families now do experience-and would require no disclosure of the~ percentage rates of finance costs or of other costs in a first mortgage,. right? Mr. DIXON. Right. Mr. GREENBERG. Right. Mrs. SULLIVAN. Next, it would exempt from the requirement to give an annual percentage rate any purchase or credit transactIon in which the credit charge is $10 or less, meaning usually items costing up to~ around $100; is that not right? Mr. GREENB~RG. That is ngk. Mr. DIXON. That is right. PAGENO="0305" CONSUMER CREDIT PROTECTION ACT 295 Mrs. SULLIVAN. Third, it would not require an annual percentage rate disclosure on open-end credit plans such as department store revolving charges and gasoline and other credit card plans; is that not right? Mr. GREENBERG. That's correct. Mr. DIxoN. That is right. Mrs. SULLIVAN. Fourth, it would require an annual percentage rate disclosure only for large ticket items-installment transactions like automobiles, television sets, sizable loans, second and third mortgages, and so forth. But none of those would have to give an annual per- centage rate until July of 1972, which is 5 years away. All right, so no one would be covered and nothing would be covered that would mean anything to anyone in terms of an annual percentage rate for 5 years; is that right? Mr. DIXON. That is right. Mrs. SULLIVAN. Is dollars per hundred on the average unpaid bal- ance the same as the annual percentage rate which they would have to show after 1972? Mr. GREENBERG. It isn't clear. Mr. DIXON. It is not the same? Mrs. SULLIVAN. I think it was testified that when they said $12 per hundred per year on the average unpaid balance it meant 12 percent. Mr. GREENBERG. On the average unpaid balance-if you consider a hundred as a basis for percentage, conceivably this might be so. I would have to sit down and figure that out. Mrs. SULLIVAN. This is the interpretation we were given-that it means the same thing. If so, then why did the Senate provide a 5-year moratorium on stating the percentage rate if this phraseology means exactly the same thing? We were told it was because of the State usury laws. In your statement I think you made it clear that this fear was unfounded and I think Secretary Barr did the same thing-thus mak- ing this provision of the Senate bill unnecessary; is that true? Mr. GREENBERG. That appears to be correct. Mrs. SULLIVAN. I am worried, however, that this is possibly subject to a different interpretation; that is, that under the language of S. 5 they could for 5 years quote a discount rate as $6 per hundred per year instead of the actual rate of 12 percent. Mr. DIxoN. I think you could. Six dollars per hundred per year. Mr. GREENBERG. I would have to study that. Mrs. SULLIVAN. When you get a copy of the transcript-let me read that once more. I want to know if the provision of 5. 5 is possibly subject to a different interpretation than the one we were given; that is, that under the language they could for 5 years quote the discount rate as $6 per hundred per year, when it is actually a 12-percent rate. Mr. DIXON. I think I would want to look at that and want my book- ket~per to give me some advice. Mrs. SULLIVAN. I wish you would go over these I ast few questions because we have been told that dollars per hundred per year on the average unpaid balance, as provided for 5 years in S. 5, actually is the same as the annual percentage rate specified in H.R. 11601. 83-340 0-67-pt. 1-20 PAGENO="0306" 296 CONSUMER CREDIT PROTECTION ACT Mr. BINGHAM. Would the chairlady yield on that point? Mrs. SULLIVAN. Yes, Mr. Bingham. Mr. BINGIIAM. It might be of some help in preparing an answer if you look at pages 18 and 19 of the Senate committee report, because they do indicate there the purpose of giving the 5 years grace on that which will allow the States to change their usury laws. Personally I do not feel there is any problem in this interpretation, that this could be used to excuse a discount rate. Mrs. SULLIVAN. Maybe you can clarify that when you get the transcript. (The material referred to follows:) REPLY OF SMALL BUSINESS ADMINISTRATION It appears to SBA that section 4(1) (1) of Senate-passed S. 5, which allows disclosure of a "dollars per hundred per year rate of the average unpaid bal- ance" in certain cases, could not be used to quote a discount rate of $6 per hundred per year when it is actually a 12 percent rate. This is so because the dollars per hundred per year rate must be computed on the "average unpaid balance", and such balance would reflect any initial discount or declining balance during the period over which the credit is extended. REPLY OF FEDERAL TRADE CoMMIssIoN FEDERAL TRADE COMMISSION, Washington, D.C., August 18, 1967. Hon. IEONOR K. SULLIVAN, Chairman, subcommittee on Consumer Affairs, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR CHAIRMAN SULLIVAN: As you suggested, having had an opportunity to read the testimony which I gave before your subcommittee on August 9, 1~67, concerning H.R. 11601, I reviewed the answers to the questions which you pro- pounded to Mr. Greenberg and me with reference to 5. 5 as it passed the Senate. You first asked if that bill would leave out first mortgages, which you classified as the biggest credit transaction most families ever experience. In reply I said that you were right. There is no question but that subsection 4 of section 8 of the bill does specifically exempt from its provisions extensions of credit secured by first mortgages on real estate. As to whether such mortgages constitute the biggest transaction most families ever experience. I do not know. I presume that's true, but have no particular knowledge in support of the belief. You next asked if S. 5, as passed by the Senate, would exempt from the finance rate any credit transaction in which the credit charge is $10 or less, and further, whether this does not mean usually items costing around $100. Section 4(b) (~ does specifically exempt such credit charges. I would assume that a finance charge of $10 or more would usually apply to purchases of $100 or more, but I have no specific knowledge to sustain this assumption. Your third inquiry is whether S. 5 as passed by the Senate would not require an annual percentage rate disclosure on open end credit plans such as depart- ment store revolving charges and gasoline and other credit plans. That bill would not require diseiO~nre of the annual percentage rate on revolving open end credit plans, but only a disclosure of the perc"ntage rate per period (sectioh 4(d) (1) (C)). Unquestionably, this exemption would apply to revolving charge accounts usually employed by department stores. However, as to whether the exemption also would apply to gasoline and other credit card plans, I have no knowledge, and while this probably is true in most instances, I am not In a posi- tion to say it is accurate as to all such plans. Fourth, your inquiry as to whether the exemption of the requirement of dis- closure on annual percentage rates on open end credit plans would only leave "large ticket itenn~, installment transactions like automobiles, television sets, sizeable loans, second and third mortgages, and so forth." You further added as to none of these items would the annual percentage rate have to be given "until July 1972." PAGENO="0307" CONSUMER CREDIT PROTECTION ACT 297 S. 5 as passed by the Senate does provide specifically that whenever an annual percentage rate is required to be disclosed, it may be expressed either as a per- centage rate per year or as a dollars per hundred per year. rate of the average unpaid balance, and that it is only after Janury 1, 1972 that all such rates re- quiring disclosure must be expressed as percentage rates (section 4(i) (1)). A~; to whether this provision applies only to large ticket items, installment transactions like automobiles as you mentioned, I have no special knowledge. Your final inquiry was whether or not the provisions in 5. 5 as passed by the Senate could not be subject to the interpretation that for five years the creditor could quote the "discount rate as $6 per hundred per year, when it is actually 12 percent rate." Section 4(i) (1) (A) reads: "whenever an annual percentage rate is required to be disclosed by this section, such rate may be expressed either as a percentage rate per year, or as a dollars per hundred per year rate of the average unpaid balance". (Italic supplied.) As I interpret this section, the key words are "dollars per year rate of the average unpaid balance." Undoubtedly, in your question you meant to include the underscored wording. My belief is that if a discount rate of $6 per hundred per year is expressed as a true percentage, the interest rate would amount to 12 percent on the average unpaid balance of $50 as the amount of the loan is paid in equal monthly install- ments so that by the end of six months, one-half of the loan would have been paid off. Since the interest paid amounts to $6 on an average unpaid balance of $50, S. 5 as passed by the Senate would require a statement of the interest, if ex- pressed in dollars, at the rate of $12 per hundred per year on said average unpaid balance. You recall with reference to this last inquiry, I stared (transcript 440 and lines 11 and 12) "I think I would want to look at that and want my bookkeeper to give me some advice." I have looked at your statement and have been advised by members of the staff that the above answer is in accord with the advice they gave me. May I thank you for having given me this opportunity of reviewing my answers to the questions or statements by you which I have enumerated. I ask that this letter be made part of the transcript of my testimony of August 9, 1967. Kindest personal regards. Sincerely yours, PAUL RAND DIxoN, Chairman. Mrs. SULLIVAN. I just have one more question, Mr. Dixon. In answer to Mr. Williams' question about margins in commodities being earnest money and not credit, you said the provision we have in section 207 should not be in this bill. Should such a provision be in any bill? Do you believe commodity futures trading requires no margin regulation, ever? Mr. DIXON. It is something that should be studied-after study given here by the Federal Reserve Board-because of various contingencies that might arise. Mrs. SULLIVAN. They do not want to touch it, I can tell you that. May I say this before you answer. If you recall in the sugar specula- tion in 1963 they only required 7l/2-percent margin to be put on and this meant that anyone-and many did-who wanted to turn over a fast dollar for a few hundred dollars could get in and trade day to day $20,000 and $25,000 worth of futures with just putting down a couple of hundred dollars of margin. Mr. DIXON. It could be argued that that has an advantage during some times and disadvantages during other times. Mrs. SULLIVAN. They said they needed speculators to come in and gamble in order to make a market. But nevertheless, what excessive speculation on very low margin did to sugar was, in a very few months, PAGENO="0308" 298 CONSUMER CREDIT PROTECTION ACT to double the price. The sugar market went completely out of bounds and the world sugar price later collapsed and never got back since to what it should be.. We found out in our investigation that people who had never before speculated in sugar futures were in it in a big way, some making a very good profit and others taking a loss which in some cases they could not afford. They didn't realize the price could fall so far so fast, just as it had previously soared. Only because of the way this affects the consumer do we feel that this needs some disaussion out loud. It was not being discussed anywhere else; therefore we put it in this bill. Mr. Tialpern? Mr. HALPERN. Thank you, Madam Chairman. Mr. Dixon, you mentioned that certain of the advertising provisions in H.R. 11601 might duplicate regulations already in existence under the Federal Trade Commission statute. I wonder what the nature of the prOtection is that consumers cur- rently received in view of the many advertisements of credit arrange- ments that have been cited which may not be false but which, in their choice of items disclosed, are certainly highly misleading? Mr. DIXON. I wouldn't want to try to make out a case that we have done any great job in this field. I cited two types of cases that we pro- ceeded against-General Motors and Ford Motor Co. Certainly where we found such transactions taking place in commerce, and we had rea- son to believe there was deception or something unfair with it, we have a statute that is broad enough to enable us to proceed against such practices. But the problem that this bill is addressed to is far greater than this-it is failure to do certain things. It is failure to make clear for one reason or another what this bill is addressed to. We had in the General Motors case, for instance, what we considered an affirmative misrepresentation, that is, citing 6 per- cent when it was more than that. If someone just failed to disclose what credit terms were, just didn't recite anything, just said the to- tal price for instance was $400, then you get into the fringe area of our society where people don't have good credit rating and cannot get credit ratings, maybe for good reasons or bad reasons-sometimes we found that there is no credit terms mentioned, just said you want this television or this radio, it will be $400 to you. Now, that is the total cost. What is the price? It might be adver- tised for, say $2.50 per week. They do not tell you what the price is or how many weeks or anything. Now, should they be told? Certainly, $2.25 a week is truthful. It is not misrepresenting. The failure there, if there is any deception, is the failure to give enough information. Now, here in the District of Columbia we have enough jurisdiction I think to do something about some of these types of problems. But when you get across the broad scope of America I think that our prob- lems are a little more difficult. Mr. HALPERN. What is your opinion of the provisions in H.R. 11601 which prohibit statement of credit terms, unless such terms are "usually and customarily" arranged? Mr. DIXON. Specific downpayment is required unless the creditor usually and customarily arranges downpayments in that amount? PAGENO="0309" CONSUMER CREDIT PROTECTION ACT 299 Mr. HALPERN. Yes. Mr. DIXON. This will be a prohibition. Mr. HALPERN. What is your opinion about that? Mr. DIXON. I think it would be a good provision, I think it would be helpful. In other words, I don't see anything basically wrong in th~ purpose-whether it is the Senate version or this version or the many others, that as long as the section is, within a reasonable manner, forcing enough disclosure so that a purchaser is properly apprised of the complete cost of credit and finance charges when he comes into it. Mr. HALPERN. Do you feel that advertisers could comply with th~ provisions requiring specification of all credit terms if any terms a1~ mentioned without necessitating highly unwieldy advertisements? Mr. DIXON. I don't think this will kill advertising, no, sir. I will tell you, I believe in advertising and I don't think truthful adver- tising hurts anybody. Mr. HALPERN. I am saying, would the advertising- Mr. DIXON. They would just not advertise if you had to do all that. I think that business says if you want people to know you have ~ better product, you better tell them about it. Mr. HALPERN. How do you feel the advertising could comply with it? Mr. DIXON. Well- Mr. HALPERN. Do you think-do you feel the advertising could comply with it? Mr. DIXON. I do. I think within a reasonable fashion, yes. Mr. HALPERN. Thank you, Mr. Dixon. Mr. Greenberg, how have small businesses fared, in general, as a result of the expanded use of credit rather than cash transactions? Mr. GREENBERG. I couldn't give you the information. I would like to supply it for the record. (The material referred to follows:) In general, it appears to SBA that the expanded use of consumer credit has had a beneficial effect upon small business. The availability of consumer credit has helped sustain consumer demand, thereby helping to sustain sales volume of small retailers, distributors, service industries, and manufacturers of con- sumer goods. There appears little doubt that small businesses extend consumer credit to their customers for competitive reasons, and that the costs of credit selling may cause greater financial strain on the small business than on the large. However, available data indicates that the great bulk of the large increase in consumer credit over the past twent-five years has been supplied by financial institutions. The extra expenses which small concerns may incur in extending consumer credit are generally more than compensated for in added business receipts. Mr. HALPERN. I will submit the question to you exactly as I pre- sented it to you and I would appreciate your response. How do you feel about the exemption of small transactions from the disclosure provisions of truth-in-lending legislation? Do you think that this might have the effect of exempting many small retail businesses from disclosure altogether? Mr. GREENBERG. Well, the position of the agency is that we think all credit transactions should be covered. We think they should all be treated alike. We feel, too, excluding this kind of thing would in effect be affecting the very people who we think are most in need of PAGENO="0310" 300 CONSUMER CREDIT PROTECTION ACT this kind of information. We, therefore, agree with the original S. 5 and the elimination of that exemption as proposed in ELR. 11601. Mr. HALPERN. Thank you. Thank you, Madam Chairman. Mrs. SULLIVAN. I want to thank bGth you gentlemen for your patience. It is obvious we are not united on this subcommittee on the product of 12 times 11/2 or the quotient of one-twelfth of 18. Eventually we will have to use our best judgment on this question of annualizing revolving credit accounts. The subcommittee will meet tomorrow morning at 10 o'clock when we will hear Secretary Weaver and witnesses from the American Bankers Association. (Whereupon at 3:40 p.m., the subcommittee recessed, to reconvene Thursday, August 10, 1967, at 10a.m.) PAGENO="0311" CONSUMER CREDIT PROTECTION ACT THURSDAY, AUGUST 10, 1967 HOUSE OF REPRESENTA~nVES, SUBcOMMITTEE ON CONSUMER AFFAIRS OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to recess, at 10:15 a.m., in room 2128, Rayburn House Office Building, Hon. Leonor K. Sullivan (chairman of the subcommittee) presiding. Present: Representatives Sullivan, Stephens, Gonzalez, Minish, Hanna, Annunzio, Bingham, Dwyer, Fino, Halpern, Wylie, and Williams. Mrs. SULLIVAN. The Subcommittee on Consumer Affairs will come to order. We are honored again today to have as a witness on consumer credit legislation a member of President Johnson's Cabinet, the Honorable Robert C. Weaver, Secretary of the Department of Housing and Urban Development, a distinguished educator who began working on the problems of the poor people of this country during the days of the depression more than 35 years ago, with ever-increasing responsibili- ties in this field ever since, particularly in the area of housing. Dr. Weaver is accompanied by Assistant Secretary for Mortgage Credit and FHA Commissioner Philip N. Brownstein, one of the most highly respected career men in the entire Federal service, who guided the GI home loan program for the Veterans' Administration with great success before becoming FHA Commissioner. We welcome you both as old friends of the Committee on Banking and Currency. I appreciate very much the sacrifices in time and effort being made by Secretary Weaver to squeeze this appearance into a brutally crowded schedule and I want to assure you that we will not hold you overly long, since Mr. Brownstein can ably answer our ques- tions, I am sure. Your presence here in support of effective credit disclosure legisla- tion is further evidence of the strong drive behind such legislation by the executive department. I understand, Mr. Secretary, as soon as you make your statement that you are going to have to leave. Secretary WEAVER. Yes. Mrs. SULLIVAN. While we hate to see you do so, we will ask Mr. Brownstein to take over. Your statement is short. You would probably like to read it just as it is. You may proceed. 301 PAGENO="0312" 302 CONSTJMER CREDIT PROTECTION ACT STATEMENT OF HON. ROBERT C. WEAVER, SECRETARY OF HOUS- ING AND URBAN DEVELOPMENT; ACCOMPANIED BY PHILIP N. BROWNStEIN, ASSISTANT SECRETARY FOR MORTGAGE CREDIT AND FEDERAL HOUSING COMMISSIONER, DEPARTMENT OP HOUSING AND URBAN DEVELOPMENT Secretary Ws~AVER. Madam Chairman and members of the commit- tee, it is a pleasure for me and Assistant Secretary Brownstein to appear before your committee in support of truth-in-lending legis- lation and to dscuss with you additional provisions in your Consumer Credit Proteef on Act (H.R. 11601). Mr. Brownstein is responsible for the programs of the Department of Housing and Urban Development which would be directly affected by the provisions of Senate-passed S. 5 and H.R. 11601. He will give you specific views as to the effect of the bills on those programs. He will tell you, also, of the steps that have already been taken by the Depart- ment to implement the truth-in-lending legislation. I have been in complete accord with the objectives of the truth-in- lending bill since its inception. Truth-in-lending legislation was re- quested by the President in his message to the Congress on consumer protection early this year. It has been supported by the administration since 1962. The availability of easy credit is a mixed blessing to many of our people-particularly those who need it the most. Like all good things, it can and has been abused and misused. Some, at least, of the unhappi- ness and discontent of the riot areas can be attributed to these misuses. The report of the Governor's commission on the Los Angeles riots states: Another problem is "easy credit" which can become harsh indeed if the dis- advantaged person defaults on his installment obligations. The debtor may ex- perience the loss of his property through repossession, or the loss of his job through repeated garnishments of his wages. While it is easy to say that the improvident debtor brought this state upon himself, we deplore the tactics of some merchatits and lenders who help induce low-income persons to' become heavily debt-bttrdened. The truth-in-lending legislation will not of course correct this situa- tion completely any more than any one other piece of legislation. It can, however, be a major part of the consumer education program being sponsored by the President through the work of his Special Assistant for Consumer Affairs. As Under Secretary Barr told you, it is not only the poor and dis- advantaged who do not understand or comprehend all the current lend- ing practices. Even those sophisticated in finance have difficulty in dis- tinguishing between the various methods used in imposing charges for credit. The truth-in-lending legislation would lead the way in providing this simplification and uniformity. It will give the people the infor- mation they need to compare costs and make intelligent decisions as to what they purchase, from whom they purchase, and when. This is important not only in connection with consumer installment and revolving credit purchases, but it is also important to families- particularly to low-income families- who are interested in purchasing a home. They should be fully informed as to the total amount in dol- lars they will pay for their homes and the annual rate of financing included in the total dollar amounts. PAGENO="0313" CONSUMER CREDIT PROTECTION ACT 303 At the request of the Senate Subcommittee on Production and Stabi- lizatidn, when it was considering the truth-in-lending bill in 1962, we furnished to the committee information on State laws relating to the subject matter of the bill. Among other things, this information showed he inadequacy of most State laws in this field. As you know, H.R. 11601 contains more than just truth-in-lending provisions. It would, in addition~ put an arbitrary limit on financing charges, authorize consumer credit control during national emergen- cies, prohibit garnishment of wages, establish a National Commission on Consumer Finance, and prohibit confession-of-judgment notes. As indicated by Under Secretary Barr, these provisions are complex and have not had the benefit of complete study by the Congress and the administration. I concur with his view that they should be explored more fully before enactment into law. On the other hand, enactment of the truth-in-lending provisions should not be delayed. They have been under consideration for at least 6 or 7 years. Truth in lending is one of the ways we can help the poor without extensive expenditures. Mr. Brownstein is here and will discuss further with you the effects of this legislation on our programs. Mrs. SULLIVAN. Thank you, Mr. Secretary, I know that you must go so we will direct our questions to Mr. Brownstein, and we will excuse you. Secretary WEAVER. Thank you. Mrs. SULLIVAN. Thank you for coming. I know how hard it is for a Cabinet officer to fit in all of the demands upon his time. I have just one question I want to ask you, Mr. Brownstein, before I pass to the others. Today we ~re going to reverse the order of question- ing and start down at the end of the table instead of up here at the top. I understand that you have a statement of your own that you would like to read first. Mr. BROWNSTEIN. I have a brief statement, Madam Chairman. Mrs. SULLIVAN. Will you read your statement, then, before we question you ~ STATEMENT OP HON. PHILIP N. BROWNSTEIN, ASSISTANT SECRE- TARY FOR MORTGAGE CREDIT, AND FEDERAL HOUSING COMMIS- SIONER, DEPARTMENT OP HOUSING AND URBAN DEVELOPMENT Mr. BROWNSTEIN. Madam Chairman and members of the committee, I am glad to appear before your committee today and testify on the Consumer Credit Protection Act. A major portion of this bill consists of what has been known as the truth-in-lending bill. The Department of Housing and Urban De- velopment has consistently supported the objectives of the truth-in- lending bill during the years of its consideration. In fact, starting in 1961, the Department has put into effect procedures designed to accom- plish those objectives. The truth-in-lending provisions would require creditors who extend credit in connection with the sale of goods or services to give the pe~- sons to whom credit is extended information prescribed by the bill aimed at assuring that the purchasers are fully aware of the finance charge they are paying for the credit. Long-term mortgage debt accounts for around $230 billion in out- standing debt. American consumers now owe in the neighborhood of PAGENO="0314" 304 CONSUMER CREDIT PROTECTION ACT $95 billion in short and intermediate debt. The rate of consumer debt is growing rapidly. Since 1945, consumer oredib-exciuding real estate-has increased from $5.6 to $94.8 billion. In 19~6 FHA insured almost 422,000 mortgages on homes totaling close to $6.1 ~billion in amount. These figures, while incomplete, indicate the volume of credit with which this bill would be involved. They also give some indication of the volume of home mortgages that would be covered by the bill. Unlike S. 5, H.R. 11601 would require full disclosure of finance charges for home mortgages as well as other credit sales transactions. It is customary in mortgage transactions to set forth the financing charge in terms of a simple annual interest rate based on the outstand- ing balance of the loan but the borrower is generally unaware of the total dollar amount of the finance charge involved over the life of the loan. Even though many loans are paid in full prior to maturity, through refinancing, or from the mortgagor's personal savings, we favor requiring full disclosure of the total number of dollars which would be paid over the life of the mortgage if it runs to maturity in order that the mortgagor will have all of the facts available to him when negotiating for a mortgage loan. In most instances buying a home is a major transaction to the family involved. Most people buy a home only once or twice during their lives. Many of them do not think of the total amount they will pay over the life of the mortgage, but think in terms of whether they have the necessary downpaymentand can make the monthly payments. Often, in determining what they can afford, monthly payments are compared with what had been their rental. Debt-free ownership may not be as strong a motivation as in the purchase of consumer goods. The family which is able to do so should be encouraged to make a larger than minimum downpayment and borrow less and for a shorter period of years so that they will reduce the interest costs over the life of the loan. The FHA has procedures in effect which are designed to achieve many of the objectives in the truth-in-lending bill. These procedures place emphasis upon the consumer credit program where relatively short-term loans are obtained to finance repairs and property improite- ments. Printed tables appear on the application form for these loans showing the true interest rates and total interest charges involved Ôver varying amortization periods. While the equivalent interest rate on a property improvement loan can be as high as 91/2 percent on a 12- month loan, our disclosure requirements have received favorable acceptance. The FHA has prepared and distributed in large quantities a guide to home buyers and owners containing information on mortgage and property improvement financing. Charts are provided in the publica- tion which `show specific monthly payments and total interest costs in varying amounts for varying amortization periods. The home buyer is urged to study these figures and to make a careful decision as to relative advantages of longer or shorter term loans based upon his particular financial situation and his plans for the future. For example, the chart explains that a 30-year loan costs about 60 percent more in total interest than a 20-year loan. We tell the home buyer that he may need the long-term financing in order to own a home but if he can afford `slightly larger monthly payments it is distinctly to his ad- vantage not to apply for the maximum term. PAGENO="0315" CONSUMER CREDIT PROTECTEON ACT 305 If the truth-in-lending provisions of the bill become law some changes in our procedures would be necessary in order to assure com- plete compliance with all of its provisions. We are prepared to do this immediately when the bill is enacted. H.R. 11601 also contains provisions for standby authority to re- strict or control the use of consumer credit during national emer- gencies, prohibit the garnishment of wages or salaries, and establish a National Commission on Consumer Finance. The Commission would be directed to study the function and struc- ture of the consumer financing industry and report to Congress its findings with respect to (1) the adequacy of the provisions of consumer financing at reasonable rates, (2) the adequacy of existing super- visory and regulatory mechanisms to protect the public, and (3) the desirability of Federal chartering of consumer finance companies or other Federal regulatory measures. With respect to the prohibition of garnishment of wages we suggest that the committee should study alternatives before approving this provision. As an example, in the District of Columbia the amount which a creditor may garnish in one pay period is limited to a per- centage of the total wages. This makes the proceeding less harsh but preserves it for use where needed. In most States garnishment is the only effective means for a creditor to obtain satisfaction of a judgment debt when a wage earner has no property upon which execution of a judgment can be levied. While we agree that the relative ease of garnishment may frequently influence a creditor to make an unwar- ranted extension of credit and that a garnishment action will often result in disruption of employment, we believe that the elimination of garnishment could cause greater problems than those eliminated. If creditors were not able to rely on garnishment as a resource for collec- tion, fewer would be willing to extend the credit needed by many wage earners. The cost of credit might also increase because of the greater risk of ultimate losses. We suggest that the studies proposed to be made by the Commis- sion which would be established could just as well be carried out by an existing Federal agency or by the Congress. We also believe that the provision in the bill for establishment of standby consumer credit controls and other provisions in the bill not related to truth in lending should be given further study before enactment. Mrs. SuLLIVAN. Thank you very much, Mr. Brownstein. I think the major questions that we would like to put to you would be on rnortgages-first mortgages and other mortgages which would be covered by }II.R. 11601. As the questioning develops we will prob- ably go into that more deeply. I just want to ask `two things now. First, what do we now have on the books under the jurisdiction of }TTJD to make loans available to homeowners for extensive repairs, and how do you go about making this information known across the country? Mr. BR0wNSITIN. We have several programs, Madam Chairman, that deal with this. One is the 203(k) provision which permits a sec- ond mortgage in back of a primary mortgage for a 20-year term, $10,000 maximum mortgage amount. We have 220(h) for use in re- newal areas. We have title I, the FITA improvement program, and 203 (b) may be used to refinance an existing mortgage and include an additional advance to cover the cost of the improvement. The way `that we go about advising people of this is a consumer PAGENO="0316" 306 CONSUMER CREDIT PROTECTION ACT bulletin which we have published that we call "Three Ways To Finance Home Improvements Through FHA." Mrs. SULZaVAN. With these four provisions that you mentioned, what is the limit of a loan thait can be made under FHA? Mr. BROWNSTEIN. There are different limits under each of these. The largest of course would be in the 203(b) program where the maximum limitation on a single home loan is $30,000. Mrs. SULLIVAN. For extensive repairs? Mr. BROWNSTEIN. This could be the refinancing of the existing house and repair of it. Mrs. SULLIVAN. At what rate of interest? Mr. BROWNSTEIN. Six percent. Mrs. SULLIVAN. Six percent? Would this be available to, say, a homeowner whose home has been paid for? Mr. BROWNSTEIN. It would be used principally for that type `of per- son or one who still has a mortgage on it but needs extensive repairs and he refinances the balance due on the existing mortgage and in- cludes an additional advance to cover the repairs. Mrs. SULLIVAN. This 203(b) loan could be as high as $30,000 on an individual home? Mr. BROW~STEIN. Yes. Mrs. SULLIVAN. Now let me ask this: If the home should be in such condition that-it is in poor condition-and the family has a low income but is a good credit risk, could they borrow up to $10,000 for a home that perhaps is not worth $10,000 in order to bring it up to par by putting extensive repairs into that home? Mr. BROWNSTEIN. The as-repaired value of the house would have to meet the requirements of the law and the appraisal cannot be exceeded. Mrs. SUlLIvAN. In other words, if the hiouse is only worth $6,000 now and they want to apply for a $10,000 loan; when the repairs and ex- tensions are added to the house, it would have to `then have a value, a real value of some~ $16,000 in order to get that loan; is that what you mean? Mr. B.ROWNSTEIN. If it has a current value, a current as-is value of $6,000 and the cost of the repairs is $10,000 and they need $16,000, yes, it would have to have to appraise at that amount in order to get the loan. Mrs. SULLIVAN. They can get that now under FHA at a 6-percent rate? Mr. BROWNSTEIN. Yes, madam. Mrs. SULLIVAN. In most cities, would loans of that kind be dis- counted-with points? Mr. BROWNSPEIN. At the present time in most cities I would say yes, there probably would be a discount. Mrs. SULLIVAN. So the rate then would really be higher if they have to pay points? Mr. BROWNSTEIN. The cost to the mortgagor would be higher, yes. Mrs. SULLIVAN. I believe that it would be helpful for us at this point in the record if you would put this information chart that you have just shown us into the record so that we would know what is available for any kind of repair loan, whether the house is already mortgaged or whether it is free of mortgage. Mr. BRowNs~vEIx. It is covered in this pamphlet. (The pamphlets referred to follow:) PAGENO="0317" CONSUMER CREDIT PROTECTION ACT 307 PAGENO="0318" 308 CONSUMER CREDIT PROTECTION ACT INTRODUCTION Few families are able to pay cash for their homes. A basic purpose of the Federal Housing Administration is to help the family that finances its home purchase to buy it on a sound basis. Under the Fl/A system a home buyer makes a small down payment and obtains a mortgage loan for the rest of the purchase price. The mortgage contract calls for month- ly payments over a long term of years. The loan is made by a bank, building and loan association, mortgage com- pany, insurance company, or othet FHA-approved lender, and is insured by the Fl/A. It is not a Government loan. The Fl/A does not lend money or build homes. FHA mortgage insurance protects the lender against loss on the loan. Because the loan is insured, the lender is ~ible to lend on more liberal terms than the home buyer might otherwise be able to obtain. In this way, many more families can own their homes. ~ortgages insured by the FHA can be used to pay for building, buying, or refinancing homes. Philip N. Browns tein, Assistant Secretary-Commissioner Federal Housing Administration Department of Housing and Urban Development THE FHA AND THE HOME BUYER WHO CAN BORROW? An FHA borrower must have a good credit record, He must have the cash needed at closing. He must have enough steady income to make the monthly mortgage payments without hardship. The FHA has no rigid age limit for a borrower. Nor does it say he must have a certain amount of income to buy a home at a certain price. His age and his income will be censidered along with other factors that help the FHA to judge whether or not he will be able to repay the loan. THE PROPERTY. It must at least meet FHA minithum standards. The house must be well planned, well built, and located in a suitable neighborhood, HOW TO APPLY. Application can be made to any lender that has been approved by the FHA to make insured mort- gage loans. If the lender is willing to make the loan, he provides the necessary forms and helps the borrower to complete them. Then he forwards the papers to the FHA insuring office that serves the area in which the property is located. The FHA office reviews the forms in order to judge wheth~r the loan would be a reasonable one for the bor- rower to take on. The FHA tells the lender what it has decided. The lender informs the borrower. If FHA has appro~/ed the application the lender arranges with the bor- rower for the closing of the loan. PAGENO="0319" CONSUMER CREDIT PROPECTION ACT 309 An owner who wishes to sell a home can obtain from the FHA, before the house is listed for sale, a statement of the mortgage amount that the FHA will insure on it for a buyer acceptable to the FHA. This is done by ap~ plying through an FHA'.approved mortgage lender for a conditional commitment from the FHA. BUILDER'S WARRANTY When the FHA approves a home before the building is begun, the builder must warrant that the house conforms substantially to the plans and specifications on which the FHA based its appraisal. The warranty is in effect for one year. The year dates from the time the first buyer takes title to the home,or from the time the home is first * lived in-~~ whichever occurs first. If during that year the owner notices defects that he believes the builder should correct, he should ask the builder in writing to correct them. If the builder fails to do so, the owner should write to the FHA insuring office. He should be sure to mention his FHA case number, If inspection by the FHA shows the builder to be at fault, the FHA will try to persuade him to correct the defects. If he does not, the owner can take legal action. Most builders take pride in their work and will correct defects for which they are to blame. They cannot be expected to correct damage caused by normal wear and tear or by poor upkeep. THE FHA.INSURED MORTGAGE INTEREST RATE. Interest rates vary from time to time with changes in the supply of and demand for mortgage money. At present the FHA rate for any insured home mortgage is not more than 5% percent a year. The longer the term of a mortgage, the lower the month~. ly payment will be but the more interest will be paid over the entire term. On a 20.~year loan of $10,000 at 5.3/4 percent, the monthly payment to principal and interest is $70.30. Over 20 years the interest adds up to $6,830.93. On a 30~year loan, the monthly payment to principal and interest is only $58.40, but the total interest over 30 years will be $10,983.21. MORTGAGE INSURANCE PREMIUM. The FHA charges a mortgage insurance premium of 1/2 percent a year on the average scheduled loan balance outstanding during the year. The amount charged does not take into account delinquent payments or payments made in advance. The FHA uses the income from premiums, and from fees and investments, to pay its expenses and insurance losses and to maintain its insurance reserves. The premium is included in the monthly mortgage payment. CLOSING COSTS AND PREPAID ITEMS. Closing costs may include the FHA application fee, a lender's service charge, costs of title search, charges for preparing, record.. ing, and notarizing the deed and mortgage, and other items. The borrower may also be asked at closing to make pay- ments in advance for such items as taxes and fire insur- ance. PAGENO="0320" 310 CONSUMER CREDIT PROTECTION ACT A lender cannot collect a discount from an FHA home buyer. But the FHA cannot prevent the lender from ask- ing a borrower to pay a charge of that kind If he is build- ing houses for sale, or building a home to live in, or re- financing a mortgage. Nor can the FHA prevent the charge if the borrower is buying a home from a Government agency that cannot pay a discount MONTHLY PAYMENT The monthly mortgage payment includes interest, part of the loan balance, and amounts for mortgage insurance premium, fire and other property insurance, and taxes and special assessments. ADVANCE PAYMENTS. A home owner can pay off his entire mortgage balance, or make one or more extra pay- ments of principal, whenever he makes a regular monthly payment. But he must give his lender written notice at least 30 days in advance that he intends to do this. By making extra payments, he can repay his loan faster and save interest. If in any calendar year extra payments of principal total more than 15 percent of the original loan, the FHA may charge an adjusted premium when the loan is paid off. The charge is not made if the mortgage insurance has been in force for at least ten years when final payment is made. Nor is it made if the owner pays the loan in full when a new FHA-insured mortgage is placed on the home by him or by a new owner. THE RESALE. If a home is sold while the insured mort- gage is in force, there are several ways in which the buyer can finance. The person who sells the home should talk with his mortgage lender about this and be sure he understands how the financing will affect him. 1. The buyer can pay cash, and the seller can pay off the mortgage balance. This ends the seller's obliga- tion. 2. With the consent of the FHA, the lender can put the new owner's name on the mortgage and take the sell- er's name off. This ends the seller's obligation. The buy~r must be approved by the FHA and he must make a down payment equal to the difference between the selling price of the home and the unpaid mortgage balance. 3. The buyer can buy the home subject to the mortgage. FHA approval is not needed; but the seller's name will still be on the mortgage, and if the buyer fails to make the mortgage payments the lender will look to the seller for payment. This could damage the seller's credit; it could result in serious claims against him; and it could have other undesirable re- sults. Also, he might not be able to obtain an in- sured mortgage loan on another house while he was still liable on the old mortgage. The first or second arrangement mentioned above is usually better for the seller. TWO PLANS OF FHA HOME MORTGAGE INSURANCE What has been said so far applies to any home mortgage insured by the Fl-IA. But the FHA has two major plans of home mortgage insurance. The special features of each plan are outlined here. PAGENO="0321" CONSITh4ER CREDIT PROTECTION ACT 311 Most home mortgages insured by the FHA are insured under Section 203 of the National Housing Act. This is the basic FHA program. The second plan is provided under Section 221 of the National Housing Act. It applies to homes for families forced to move because of urban renewal or other govern- mental action such as highway building. It also applies to homes for other families of low and moderate income. Mortgages on 2-, 3-, and 4-family homes as well as on one-family homes can be insured under Section 203 and tar displaced families under Section 221. Because nearly all FHA-insured home mortgages are for one-family homes, the information that follows is for one-family homes only. Mutual Mortgage Insurance (Section 203) LOAN AMOUNT. Under Section 203 (b), mortgage amounts insured can be as high as $30,000 on one-family homes. Mortgage amounts can be higher in Alaska, Hawaii, and Guam because costs are higher there. RATIO OF LOAN TO PROPERTY VALUE, The amount of a mortgage insured under Section 203(b) cannot be more than 97 percent of $15,000of the FHA estimate of the prop- erty value, plus 90 percent of the next $5,000 of value, plus 80 percent of the remaining value. For qualified vet- erans who have not received any home financing aid through the Veterans Administration, the mortgage limit is 100 per- cent of $15,000, plus 90 percent of the next $5,000, plus 85 percent of any remaining value. The veteran must make a cash investment of at least $200. The $200 requirement applies to a home costing $15,000 or less. It also applies to the first $15,000 of value if the home costs more than $15,000 For a home approved for mortgage insurance after build- ing is begun and before the house is a year old, the mort- gage amount insured under Section 203(b) cannot be more than 90 percent of $20,000 of value, plus 80 percent (or 85 percent for veterans) of value above $20,000. A Section 203(b) loan to refinance a home cannot be more than (1) 85 percent of the amount that can be insured when the borrower is buying or building a home to live in, or (2) the unpaid balance of the old mortgage plus the cost of any repairs or improvements, plus the costs of obtain. ing the loan. A loan to buy or build a home as an invest- rnent is also limited to not more than 85 percent of the amount that can be insured for a borrower who is buying or building a home to live in. Section 203(i) mortgages are insured by the FHA in amounts up to $12,500 on homes in areas that do not meet the location requirements under Section 203(b). A Section 203(i) mortgage cannot be more than 97 per. cent of appraised value. If the home is approved for mort- gage insurance after building is started and before the house is a year old, the limit is 90 percent of value. A Section 203(i) loan made to someone who does not intend to live in the house cannot be more than 85 percont of the FHA-appraised value. If an owner who lives in his house wishes to refinance an old mortgage, the new mort- gage cannot be more than (1) 85 percent of appraised val- 83-340 0 - 67 - pt. 1 - 21 PAGENO="0322" 312 CONSUMER CREDIT I'ROTECTION ACT tie, or (2) the old mortgage balance plus the cost of re- pairs or improvements and the costs of getting the loan. DOWN PAYMENT. Under Section 203 the down payment is the difference between the insured mortgage and the acquisition cost of the home. (Acquisition cost is the purchase price plus closing costs. It does not include prepaid items.) The insured mortgage is a percentage of the FFIA estimate of value or of the acquisition cost, whichever is less. The purchase price and the FHA value are not always the same. If the purchase price is more than the FHA val- ue, the home buyer pays the difference in cash. If the purchase price is less than the FHA value, the ratio of ben to acquisition cost is figured in the same way as the ratio of loan to property value. Under Section 203(b) a borrower must be prepared to pay the down payment (including closing costs) and the prepaid items in cash or the equivalent of cash. If he owns his lot, that may count as all or part of the down payment, depending on the value of the lot and how much he has paid on it. A buyer 62 years of age or older may borrow the money for down payment and prepaid items from a person or corporation approved by the FHA. TIME ALLOWED FOR REPAYMENT OF LOAN. A Sec- tion 203 (b) or 203 (i) loan may be repaid in monthly pay- ments over a term of 10, 15, 20, 25, or 30 years. In a few special cases the term may be 35 years. MINtMUM PROPERTY STANDARDS. The minimum stand- ards for property as well as for location are somewhat low- er for Section 203(i) loans than for Section 203(b) loans. Low and Moderate Priced Homes (Section 221) LOAN AMOUNT. A mortgage insured under Section 221 on a one-family home is limited to not more than $11,000. This limit may be increased to as much as $15,000 in high-cost areas. Limits have been set by the FHA for the area served by each of its insuring offices, based on cost levels in the area. RATIO OF LOAN TO PROPERTY VALUE. A Section 221 mortgage for the full value of the property can be in- sured if the owner is to occupy it as his home. There is an e~tception to this. If the house is approved for mort- gage insurance after building was started and before the house is a year old, the mortgage cannot be more than 90 percent of value. For a borrower who is ~uying and improving a home to live in, the mortgage amount insured under Section 221 cannot exceed the estirnaled cost of repairs pius the es- timated value of the home before the improvements are made. For a borrower other than an owner-occupant, a Section 221 mortgage cannot be more than (1) 85 percent of the amount FHA can insure for an owner-occupant, or (2) 85 percent of the property value - - whichever is less. If an owner-occupant borrows to refinance, the mortgage limit is set in one of two ways. The 85 percent ratio can apply. Or the limit can be the amount of his present mortgage balance plus the cost of repairs or rehabilitation and the costs of getting the loan. PAGENO="0323" CONSUMER CREDIT PROTECTION ACT 313 DOWN PAYMENT AND INITIALS CHARGES. Under Sec- tion 221, a displaced family must make a down payment of at least $200. The $200 can be applied to closing costs and prepaid items. Other families must make a down pay- ment of at least 3 percent of acquisition cost. TIME ALLOWED FOR REPAYMENT OF LOAN. Under Section 221, except in a few special cases, the longest term is 30 years. MINIMUM PROPERTY STANDARDS. The FHA minimum standards for low-cost housing apply to one-family homes financed under Section 221. The location standards are the same as under Section 203 (b). TYPiCAL TRANSACTIONS On the next two pages are tables showing, for homes of various values, the highest mortgage amounts that can be insured under Section 203 and under Section 221. Also shown are the smallest down payments that can be made, and the monthly payments to interest, principal, and mort- gage insurance premium. Amounts for other items included in the monthly payment, such as taxes and fire insurance, vary from place to place and are not shown in these tables. The tables apply only to homes that the owners are to live in. EQUAL OPPORTUNITY IN HOUSING Fl/il regulatwns under the President's Executive Order 11063 of .\overnber 20, 1962 require that housing provided with FF11 assistance be made available 14ithout discrimination because of race, color, creed, or national origin. The regulations prohibit any person, firm, or group re- ceizing the benefits of FF1.1 mortgage insurance or doing business with FF1.4 from practicing such discrimination in lending or in the sale, rental, or other disposition of the propcrt-i. Violations may result in discontinuation of PHI assistance. One- or teeo-famih dwellings which have been occu- pied ty the owner arc exempt from the regulations; but if the purchaser of such a home u'i~hes to finance it with an FF14-insured mortgage' the' lender may not refuse to make the loan because of the bu-~e'r's race', color, creed, or national origin. PAGENO="0324" -~-~ ~ ~ ~ oo000 ooooo ooooo ooooo 00000 00000 ;;;;; ~ ~;;;; ~;;;; ;;;;; ;;~;; 00000 00000 00000 00000 00000 00000 ~i ~ ~~t-C5~~DC DC--- ~ 00000 00000 00000 00000 00000 00000 ~CD0 -P--C ~C:-~CD OaO O~ OCDC~ 0DC , U: li ;~ Q~ ~ U a ~a ~ (C .< tQ 4 0 -3 0 (1~0 ~ 01'- --C Crj~~ 00 DC10 *4 1' --C 0 *4 0 0 DCI C) 0 CI) C) 0 C) 0 C) 0 0 -3 -3 ~- ~- or or p. p. COOt'- Do - 0 0-0-0 0 -~ -j a- a- rro DC00 -3 r-~4D-D-3t4 -Cr-C-Cr~-C r--CO--urO ~0(9-4*- 000-0(CC ~ CD 0'4 0 ~ ~a-~ ~0000 ~rrrr- r~-----*- o~--~- - ~ 00000 00000 00000 00000 00000 00000 ~u CDCDCD a -~ DCI CDX a I. ~ ~1 I 0-0 -`it' PAGENO="0325" CONSUMER CREDIT PROTECTION ACT 315 SECTION 221 MAXIMUM MORTGAGE AMOUNTS MINIMUM DOWN PAYMENTS, AND MONTHLY MORTGAGE PAYMENTS FOR OWNER-OCCUPIED 1-FAMILY HOMES Mortgagor, displaced from as, uoba enewal occup ing a nen or existing structure Any other too- or moderate-income mortgagor Propertyapproved by FHA or VA before construction and inspected by FH~ or VA during construction Property not approved by FHA or VA before construction and not inspected by FHA or VA during construction Acquisition cost plus prrpaid items 1/ Maoimum mortgage amount ~/ Mortgagor's minimum investment~/ Monthly payment 30-year term Maximum mortg0ge amount $1 Mortgagor'n minimum investment Monthly payment 30-year trem ~/ Maximum mortgage amount Mortgagor's minimum investment Monthly payment 30-year term $1 $ 6,000 7,000 8,000 9.000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 $ 0,800 6,800 7,800 8,800 9.800 10,800 11,800 ~` 12,800 ~/ 13,800 $1 14,800 ~" 15,000 $1 $ 200 200 200 200 200 200 200 255 200 200 1,000 $36.27 42.53 48.78 05.03 61.29 67.54 73.80 80.05 86.31 92.56 93.81 $ 5,800 6,750 7,750 8,700 9,700 10,680 11,600 ~1 12,600 ~J 13.550 ~/ 14,550 J 15,000 $1 $ 200 250 250 300 300 350 400 400 450 450 1,000 $36.27 42.22 48.47 54.41 60.67 66.61 72,84 78.80 84.74 91.00 93.81 $ 5,400 6,300 7,200 8,100 9,000 9,900 10,800 11,700 12,600 J 13,500 J 14,400 kI' $ 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 1,600 $33.78 39.40 45.03 50.66 56.29 61.92 67,84 73.18 78.80 84.43 90,06 1/ Acquisition cost includes settlement expenses. Items of prepaid expense include initial payrcento for taxes, hazard insurance premiums, mortgage insurance premiums, and othe prepaid raproses. $J Mortgageamount cannot exceed chichever is less: 100% of FHA value; or 100% of FHA value plus prepaid expense items, minus $200. L' Mortgagor's minimum investment may include amounts' covering settlement expenses and items of prrpaid expense. !z/ Monthly payment inoludes principal, interest at 5-3/4% per annum, and 1/12th of the first annual mortgage insurance premium at 1/2% per annum. ,$J Mortgage amount cannot racerd ohichevrr is less; 100% of FHA value; or 97% of FHA value plus prepaid expense items. 6/ Mortgage amount is limited to $11,000, except that, io'geograpliical areas chere FHA finds cost levels require a higher amount, it may be increased to not over $15,000. PAGENO="0326" 316 CONSUMER CREDIT PROTECTION ACT THE FHA IN BRIEF Since its establishment in 1934, the Federal Housing Administration has written mortgage and loan insurance aggregating $107 billion, covering S million homes, more than a million living units in multifamily projects, and nearly 28 million property improvement loans. FHA has helped more than 37 million families improve their hous- ing standards and conditions. Congress provided the FHA mortgage and loan insurance system to encourage improvement in housing standards, to promote sound financing practices in the housing field, and to act as a stabilizing force in the mortgage market. The FHA is self-supporting through income derived from fees, insurance premiums, and investments, and its insurance reserves are well over a billion dollars. The Agency does not build houses or lend money. It ants only as an insurer of privately made loans from ap- proved lenders. in addition to its original programs of insurance for home improvement loans, borne mortgages, and multifamily rental housing mortgages, FHA now insures mortgages through its 76 field offices on land development; housing for families of low and moderate income; housing in urban renewal areas; housing for the elderly or handicapped; nutsing homes; cooperative housing; condominiums; experi- mental housing; housing at military installations; and long-term loans for major home improvements. In over 31 years of operation, FHA has significantly in- fluenced the location, volume, and kind of housing built in the United States. The agency has helped to make the low-downpayment, long-term, fully amortized mortgage the standard in mortgage lending. The soundness of the FHA concept has been demon- strated over the years, and millions of mortgage and prop- erty improvement loans insured by FHA have been made by banks, building and loan associations, mortgage companies, and other FHA-approved lending institutions. By protecting these lenders against loss, FHA insurance enables them to advanpe credit on more liberal terms than might otherwise be available to families with moderate means. The FHA-insured mortgage also is marketable on a national scale. This fact helps to keep localities supplied with mortgage money by enabling lenders to sell mortgages in return for new supplies of cash. In 1947, the Federal Housing Administration was made a constituent agency of the Housing and Home Finance Agehcy. In 1965, it was made a part of the Department of Houair~g and Urban Development. PAGENO="0327" CONSUMER CREDIT PROTECTION ACT 317 OTHER FHA CONSUMER BULLETINS * FHA No. 106 FHA Mortgage insurance for Veterans * FHA No. 206 FHA insured Loans for Major Home Improvement * FHA No. 221 FHA Mortgage insurance for Rental and Cooperative Housing for Per- sons of Low and Moderate income - * FHA No. 227 FHA's Cooperative Housing Program * FHA No. 246 FHA Experimental Housing Program * * FHA No. 247 FHA Mortgage Insurance on Hous- ing for the Elderly * FHA No. 415 FHA's Rental Housing Program * FHA No. 428 FHA Financing for Home Purchases and Home Improvements * FHA No. 428-A An FHA "Quick Guide" to Buying a Home o FHA No. 467 FHA Forbearance Provisions o FHA No. 491 FHA Mortgage Insurance on Condo- miniums * FHA No. 512 Title 1 Property Improvement Loans * FHA No. 528 FHA Mortgage lnsurance for Urban F~enewal * FHA No. 696 FHA Nursing-Home Mortgage Insurance * FHA No. 770 A Comparison of FHA Home improve- ment Programs * FHA No. 793 FHA Assistance for Home Trade-Ins o FHA No. 895 FHA and the Home-Buying Service- man * FHIA No. 2575 Digest of insurable Loans Information contained in this publication is subject to regulatory and statutory changes. Far sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C., 20402 - Price 10 cents PAGENO="0328" 318 CONSUMER CREDIT PROTECTION ACT ALABAMA, BIRMS4GHAM 35203 2121 8th Aueo,,e Noeth Tel. 325.3264 ALASKA, ANCHORAGE 95501 Rome 228, Federal Bldg., P.O. Box 480 Tel. 272-5451 ARIZONA, PHOENIX 85002 244 West Osborne RoeS, P.O. Box 13468 Tel. 2614434 ARKANSAS, LITTLE ROCK 72203 3433 Fedetel Office Bldg., 700 W. Cepital Ace. Tel. 372.3404 CALIFORNIA, LOS ANGELES 90013 5th 8. Btood,coy BIdg.,312 W. 5th Stteet Tel. 680-5127 SACRAMENTO 95909 1800-I Street Tel. 449-3471 SAN DIEGO 92181 1415 SIxth Ace~ue Tel. 203-5310 SAN FP.ANCISCO 94111 100 Celilctnia Srteet Tel. 556.2238 SANTA ANA 92701 Fteeeuay Center Bldg.,1440 Eest First St. Tel. 543.0401 COLORADO, DENVER 80252 Railccoy Eochonge Bldg., 909 17th St. Tel. 297.4521 CONNECTICUT. HARTFORD 06103 Federel Office Bldg., 450 Male Stteer Tel. 244-3639 DELAWARE, WILMINGTON 19801 536 Wilo,iegtcn Trust Bldg. Tel. 654-6361 DISTRICT OF COLUMBIA, WASHINGTON 20412 Reilscey Lebot Bldg.,400 Flt~t St., N. W. Tel. 783.4591 FLORIDA, CORAL GABLES 33134 3001 Poeco do Leon BIod, Tel. 445-2561 JACKSONVILLE 32201 21 West Chuech Sttert Tel. 354.7221 TAMPA 33609 4224-28 Hrodeesoo Blud.,P.D. Boo 18165 Tel. 228.7510 GEORGIA, ATLANTA 30303 230 Peochttee Street Tel. 526-6595 HAWAII, HONOLULU 96801 P.O. Boo 3377 Tel. 508-552 IDAHO, BOISE 83701 331 Idaho Street Tel. 342.2231 ILLINOIS, CHICAGO 60604 219 5. Deotbcro Street Tel. 828.7660 SPRINGFIELD 62705 628 East Adoots Sr., P. 0. ~oc 1628 Tel. 525.4414 INDIANA, INDIANAPOL1S 46209 Arch. & Builders Bldg., 333 N. Peon. St. Tel. 633-7189 IOWA, DES MOINES 50309 615 Perk Stteet Tel. 254-4451 KANSAS, TOPEKA 66603 700 Korsos Accrue Tel. 234-0241 KENTUCKY, LOUISViLLE 40202 Modtid Bldg., Third & Guthele Ste. Tel. 582.3252 LOU1SIANA, NEW ORLEANS 70113 Fedeeel Bldg., 701 Loyola A venue Tel. 527-2563 FHA SHREVEPORT 71101 627 Spring Slreet Tel. 425.6600 MAINE, BANGOR 04401 Exchange Bldg., 27 State Sttret Tel. 942.8242 MARYLAND, BALTIMORE 21231 404 Notth Bond Street Tel. 685.8320 MASSACH8SETTS BOSTON 02116 100 Bcylstce Stteet Tel. 223-2741 MICHIGAN, DETROIT 48226 1249 Wosh., Blvd., Book Bldg., Tel. 226-6216 GRAND RAPIDS 49503 921 Diojsioo hoerce North Tel. 4562225 MINNESOTA, MINNEAPOLIS 55401 110 South~ Fourth Street Tel. 334-2641 MISSISSIPPI, JACKSON 39201 381 Bldg.,301 N. Loerae St. Tel. 940-2267 MISSOURI, KANSAS CITY 64106 601 East 12th Street Tel. 221.3201 ST. LOUIS 63101 315 N. Seventh Street Tel. 622.4761 MONTANA, HELENA 59601 Sreomboor Olcck,616 Helene Ace. Tel. 442.3211 NEBRASKA, OMAHA 60102 215 North 17th Street Tel. 221-3740 NEVADA, REISO 89505 70 Linden Street, P.O. Boo 4700 Tel, 784-5213 NEW HAMPSHIRE, M.ANCHESTER 03105 P. 0. Bldg., Het,ooet & Chestnut Srs. Tel. 669-7753 NEW JERSEY, CAMDEN 08103 The Perbodc Bldg., 519 Federal St. Tel. 963-2301 NEWARK 07102 10 Conorterce Court Tel. 645-3410 NEW MEXICO, ALBUQUERQUE 87110 625 Truman Street, II. E. Tel. 256.9034 NEW YORK, ALBANY 12207. City & County Sooings Bork Sldg. Tel. 472-3567 BUFFALO 14202 304 U. S. Court House Tel. 842-3510 HEMPSTEAI) 11550 175 Fsltoo A uenue Tel, 485-5000 NEW YcIRK 10016 2 PetIt A venue Tel. 532.09C0 NORTH CAROLIMA, GREENSBORO 27401 221 Sour1, Ache Street Tel. 275-9361 NORTH DAKOTA, FARGO 58102 7012 Seuenrh Street, South Tel. 237.5136 OHIO, CINCINNATI 45202 Federal OItice Bldg., 530 Mom Stvnet Tel. 684-3451 CLEVELAND 44115 1375 Euclid A scene Tel. 241.7340 COLUMBUS 43215 Old P. 0. Building Tel. 469.7345 OKLAHOMA, OKLAHOMA CITY 73103 1401 North Robinson Tel. 236-2293 TULSA 74103 9 East 4th St. Bldg. Tel. 584-7435 OREGON, PORTLIuND 97204 Cascade Bldg., 520 S. W. Sloth Ate., Tel. 226-3963 PENNSYLVANIA, PHILADELPHIA 19102 2 Penn Center Plaza Tel. 597-2350 PITTSBURGH 15222 l500Libnrty Ave., Tel. 644.2002 PUERTO RICO, SANTURCE 00910 Gatralon Bldg., 1608 Ponce de Leon Ant,, P. 0. Boo 8065 Tel. 724-5976 RHODE ISLAND, PROVIDENCE 02903 P. 0. Arceo Tel. 528-4391 SOUTH CAROLINA, COLUMBIA 29281 1515 Lody Street Tel. 253-3361 SOUTH DAKOTA, SIOUX FALLS 57102 225 South Male A venue Tel. 336-2222 TENNESSEE, KNOXVILLE 37902 725 Gay Street, S. W. Tel. 524-3144 MEMPHIS 30103 Rn,. 447, Federal Office Bldg., Tel. 534-3141 TEXAS, DALLAS 75201 Wilson Bldg., 1621 Main Street Tel. 749.2651 FORT WORTH 76102 lllWrstSeueeth Street Tel. 335-2601 HOUSTON 77502 Rm. 7419, Fedrral Bldg..5lSRcsbAue., Tel. 228-4335 LUBBOCK 79401 1601 Ace, N, P. 0. Box 1647 Tel. 765.8271 SAN ANTONIO 78204 535 South Main Accent Tel. 225-5673 UTAH. SALT LAKE CITY 84111 P. 0. Bee 11009 Tel. 524'5237 VERMONT, BIJRLINGT~F4 05402 Federol Bldg., Elrnwovd Ace. Tel. 862-6274 VIIIGINIA, RICHMOND 23240 400 N. Eighth Street Tel. 649-2721 WASHINGTON, SEATTLE 98104 Norton Bldg., 801 Second Ave., Tel. 583.7457 SPOKANE 99201 501 Ant. Legion Bldg., 105 N. Wash.,St. Tel. 830-3203 WEST VIRGINIA, CHARLESTON 25301 500 QcerrieeSlreet Tel. 343.1321 WISCONSIN, M!LWAUKEE 53203 744 Novth 4th Street Tel. 272-3222 WYOMING, CASPER 82601 P. 0. Eon 500 Tel. 265-3252 PAGENO="0329" CONSUMER CREDIT PROTECTION ACT 319 PAGENO="0330" 320 CONSUMER CREDIT PROTECTION ACT "If the consumer is to be a wise sovereign in our progressive market economy, he must be fully informed. Free consumer choice-indeed, our free enterprise system-must rest on a firm foundation of reliable information on the costs and contents of the products we buy." Lyndon B. Johnson PAGENO="0331" CONSUMER CREDIT PROTECTION ACT 321 Three Types of Loans There are three main ways in which FHA helps in the financing of home im- provements. They are: loans insured under Title I of the National Housing Act; re- financing mortgages insured under Section 203 (b); and loans insured under Sections 203(k) and 220(h). The 220(h) loans are like 203 (k) loans in all except minor de- tails, but they can be used only in urban renewal areas. This publication is intended to help the borrower in choosing the type of FHA insured loan best suited to his situation. Deciding on the Financing Method Choice of the financing method to use should be made only after careful study. From the borrower's standpoint the choice depends on a number of factors. For in- stance: What kind of, and how much, debt is already on the property? What is the borrower's financial condition? What type of, and how much, work is to be done? In most cases, a Title I loan would be best for minor improvements and a 203 (k) loan for major changes. In some cases, it might be more advantageous to refinance and include the cost of the improvements in the new mortgage. Choosing Between Title I and 203(k) When a choice between Title I and 203 (k) is to be made, the amount of loan needed is a deciding factor. If more than $3,500 is needed, Title I, which has a top limit of $3,500, cannot be used. To obtain a Title I loan the borrower needs a good credit standing and enough income to repay the loan over its term. Security other than his signature is seldom required. A 203 (k) loan is secured by a lien against the property. It takes about one to three days to get a Title I loan and about two to three weeks to get a 203 (k) loan. Improvements under PAGENO="0332" 322 CONSUMER CREDIT PROTECTION ACT 203 (k) have the advantage of being made according to approved specifications and usually under FHA inspection. Initial fees or charges are not paid by the borrower on Title I loans. Loans under 203 (k) involve an FHA application fee, a lender's origination and closing charge, and other closing costs that vary from one place to another. These costs can be in- cluded in the loan. Title I loans may be obtained quickly. No FHA processing is involved. Except for a $3 credit investigation fee, there is no lender's service charge. These are "plus" points for Title I. Nevertheless, a borrower who needed $3,500 and was willing to pay the closing cost of a 203 (k) loan might find such a loan more practical than a Title I loan if he required a longer time to pay than the five years allowed under Title I. Under 203 (k) he would also have the benefit of FHA's processing of the loan and inspection of the work. The financing charge on a Title I loan, which includes an FHA insurance premium, is $5 discount per $100 per year on the first $2,500 and $4 per $100 per year on the amount above $2,500. On a simple in- terest basis this equals ar~, interest rate ranging from 8.54 percent to 9.58 percent. The interest rate ceiling on a 203 (k) is 6 percent, and the FHA insurance premium is ½ of 1 percent. For minor repairs and for loans under $3,500 that the borrower plans to pay off in 5 years or less, Title I would be used. For jobs ranging up from $2,500 the ad- vantage begins to swing to 203 (k). For 5- year loans in the $2,500 area there is little difference between the monthly payments under Title I and under 203 (k), but the overall amount paid for financing is more under Title I. The monthly payment, including the financing charge, on a $3,500 Title I loan made for 5 years would be $71.89. On a $3,500 203 (k) loan made for 5 years, the monthly payment to principal, interest, and PAGENO="0333" CONSUMER CREDIT PROTECTION ACT 323 FHA insurance premium during the first year would be $69.03. For a 203(k) loan in the same amount made for 10 years, the monthly payment would be $40.30. Choosing Between 203(k) and Refinancing When the costs will be large for a home improvement, the home owner should first decide whether he would be better off to buy another home rather than improve the one he has. He should give careful thought to whether the changes would add enough value and appeal to his property to merit their cost or whether they would over- improve his home. He should decide whether staying in his present house means enough to him to warrant the costs in- volved. If he settles in favor of home improve- ment, he should then decide whether he would do better to obtain a long-term 203 (k) loan or to refinance. The first thing to consider is the existing debt on the property and the effect it would have on the amount that could be borrowed for improvements. Other factors include: what kind of loan the borrower has-con- ventional, FHA, or VA; what interest rate he is paying; how much equity he has in his home; whether the loan can be prepaid, and if so what prepayment premium is required. With a 203 (k) loan the borrower could get up to $10,000 if that amount, added to the outstanding debt on the property, did not exceed the dollar limit and loan-value ratio set by law for a mortgage insured under Section 203 (b). He could pay off the loan over a period ranging from 3 to 20 years. His closing costs would normally be less than for refinancing, and on a long- term loan he would save in total interest paid. The borrower who can afford the monthly payments of a 203 (k) on top of his present mortgage will pay less in the long run than PAGENO="0334" a4 a- 3 p.) ~. g C 33 ~ca a 3 o.< 33 4D 3. 33 I-a 6° 3 3 a 3 a. 0 (0 a (a 0 0 0 0 0 0 0 0 0 0 a! a- 0 3 ~0 0 3 3 0 a m -~ rn .0 C a 0 3 3- -a a 3 3 0 -a 3 -a a a 3 a. 0 3 3. a a 3 0 3 3- 0 a C., 0~ 0 3 3- 0 a 3 0 3- 0 a 3 a. 0 0 3 3. 0 a 3 a4 0~ CD U, a p.) 0 3 3- 3 CD 3 0 ca 3 CD a 0~ ~0 a 3 3 C 3 a 3 a. 3 C a 3 CD C) C C) C C) C C) :.~;*~ PAGENO="0335" CONSUMER CREDIT PROTECTION ACT 325 the borrower who refinances. Also, lenders cannot charge borrowers a discount on 203 (k) `s, whereas on 203 (b) refinancing mortgages they can. Assume, for instance, that it will take $6,000 to improve a home bought in 1957. The house was financed with a conventional $11,000, 20-year mortgage at 5½ percent interest. It has monthly payments of $75.68 excluding taxes and insurance. Say the owner still owes $6,927 on the mortgage, and that the value of the prop- erty when the improvements are finished will be $18,000. If the home owner obtained a 20-year 203 (k) loan of $6,000 at 6 percent, his monthly payment would be $45.49. This amount added to his monthly mortgage payment of $75.68 would total $121.17. So he would pay $121.17 per month for ten years-until his mortgage was paid off- and for the next ten years he would pay $45.49 per month. If he refinanced with a 203 (b) mortgage of $13,400 ($6,927 balance on present mortgage, plus $6,000 for improvements, plus $500 for loan cost~-with the mort- gage amount adjusted to the next lower $50 multiple) at 6 percent interest, his monthly payments excluding taxes would be $101.60 on a 20-year loan and $85.95 on a 30-year loan. His total interest and premiums on the 20-year 203 (k) loan and the future inter- est payments on his outstanding mortgage would be $6,740. His total interest and premiums for refinancing would be $10,425 on a 20-year mortgage and $16,774 on a 30-year mortgage. Factors other than costs to bear in mind are: * To be eligible for a 203 (k) loan a home must be at least 10 years old, unless the loan is to be used mainly for major struc- tural changes or, in some cases, to correct defects. This does not apply in 203 (b) refinancing. PAGENO="0336" 326 CONSUMER CREDIT PROTECTION ACT * Work already started is not eligible under 203 (k) but may be financed under 203(b). * Under 203 (k), luxury or unessential items cannot be financed. Such items may be included in 203 (b) refinancing if they add value to the property. Changes financed with either a Title I or a 203 (k) loan must be essential to the livability and usefulness of the home. Changes financed with the 203 (b) loan must add to the value of the property. The tables on pages 6 and 7 outline vari- ous payment features of Title I loans, 203(k) loans, and 203 (b) refinancing loans. Equal Opportunity in Housing FHA regulations under the President's Executive Order 11063 of November 20, 1962, require that housing provided with FHA assistance be made available with- out discrimination because of race, color, creed, or national origin. The regulations prohibit any person, firm, or group receiving the benefits of FHA mortgage insurance or doing busi- ness with FHA from practicing such dis- crimination in lending or in the sale, rental, or other disposition of the prop- erty. Violations may result in discon- tiPuation of FHA assistance. One- or two-family dwellings which have been occupied by the owner are exempt from the regulations; but if the purchaser of such a home wishes to fi- nance it with an FHA-insured mortgage the lender may not refuse to make the loan because of the buyer's race, color, creed, or national origin. PAGENO="0337" CONSUMER CREDIT PROTECTION ACT 327 The FHA in Brief Since its establishment in 1934, the Federal Housing Administration has written mortgage and loan insurance in a total amount of well over a hundred billion dollars. This amount covers mort- gage insurance on millions of homes, on more than a million living units in multi- family projects, and on many millions of property improvement loans. Altogether, FHA has helped between 35 million and 40 million families to improve their housing standards and conditions. Congress provided the FHA mortgage and loan insurance system to help im- prove housing standards, to promote the use of sound financing methods, and to help keep the mortgage market steady. FHA supports itself through income derived from fees, insurance premiums, and investments. Its insurance reserves are well over a billion dollars. All loans insured under FHA pro- grams are made by private FHA- approved lenders. FHA does not lend money or build housing. The first FHA programs dealt with insured home improvement loans, home mortgage loans, and rental housing mort- gage loans. Through its 76 field offices FHA now also insures mortgages to develop land, and to provide homes for servicemen and their families, housing for people of low and moderate income, housing in urban renewal areas, housing for the elderly or handicapped, nursing homes, cooperative housing, condomin- iums, experimental housing, housing at or near military centers; and long-term loans for major home improvements. ~FHA has had a marked influence on the location, volume, and kind of housing built in the United States. It has helped to make the low-downpayment, long- term, fully amortized mortgage the standard in mortgage lending. 83-340 0 - 67 - pt. I - 22 PAGENO="0338" 328 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. I announced earlier that the questioning today would start at the other end of the line and let the newer members have the privilege of asking questions first. Mr. Williams, you may have your 5 minutes. Mr. WILLIAMs. Thank you, Madam Chairman. I certainly appre- ciate this change in the procedure. I may recommend it to the chairman of the full committee. Mr. Brownstein, I noted with great interest your comments on garnishment of wages, and your comments to the effect that the mer- chant must have some way for recovering his loss of those-his losses of those who do not pay if he is going to be fair with the rest of his customers. But obviously, if we prohibit garnishment of wages, the only way the merchant can recover his losses is to increase his price to other customers which is most certainly unfair. If we do away with garnishment of wages, what alteimatives would you suggest? Mr. BRowi~smIN. I think this is something, Mr. Williams, that ought to be studied. Mr. WILLIAMS. Are you recommending that we do not do away with garnishment of wages as long as it is done sensibly? Mr. BROWNSTEIN. I think all of the alternatives ought to be ex- amined before anything is done to eliminate this. Mr. WILLIAMS. You `refer to a system used here in the District of Columbia where the garnishing is limited to a percentage to pay for any given pay period. What is that percentage. Mr. BROWNSrEIN. I can't tell you what it is, Mr. Williams. Mr. WILLIAMS. But if it were a reasonable small percentage so it would not affect the man's ability to live otherwise, then you seem to indicate in your testimony that you think this is a reasonable approach. Mr. BROWNSTeIN. I think that doing away with them could result in the purchaser having difficulty, in having credit extended to him. Or, if it is extended, it would be more costly. Mr. WILLIAMS~ Rather than limiting the garnishment to a percent- age of the wages, is there any other alternative that you can think of right now? Mr. BROWNSPEIN. No; I have none to offer on this. This is not an area in which I profess any expertness. PAGENO="0339" CONSUMER CREDIT PROTECTION ACT 329 Mr. WILLIAMS. You also tie your testimony into the ability of people to obtain credit. In your opinion, if a person wanted to make a pur- chase, would it make any difference to that purchaser, even though the interest was fully disclosed, even though it was as high as 20- percent interest that he would be paying on his purchase, do you think if this full disclosure of the interest to be paid would deter him from overextending his repayment ability--do you think this full disclosure of the interest to be paid would deter him from overextending his re- payment ability? Mr. BROWNSTEIN. I think it would depend on the purchaser, Mr. Williams. Mr. WILLIAMS. What about the average purchaser in the poorer area? Mr. BROWNSTEIN. I think the important thing here is that he be fully apprised of what the cost to him will be and then he will have to consider this in the light of his own circumstances and decide which way he wants to go. Mr. WILLIAMS. I want to determine the impact that it would have on the average purchaser to know the full interest that he is going to pay. Would this deter him from making purchases? Mr. BROWNSTEIN. I believe it would depend entirely on what his needs are and what his attitude is toward the extension of credit that he seeks. Mr. WILLIAMS. I understand that the maximum garnishment of wages in the District of Columbia is 10 percent. Now, do you think that is too high? Mr. BROWNSTEIN. Would I think what? Mr. WILLIAMS. I understand that the garnishment ceiling on wages in the District of Columbia is 10 percent. Do you think that is too high? Mr. BROWNSTEIN. I am really not in a position to discuss the merits or demerits of this, Mr. Williams. Mr. WILLIAMS. On page 3 of your testimony, at the bottom of the page, you talk about guides that have been prepared for homeowners and charts are provided. Will you please make these available for the committee and for the record? Mr. BROWNSTEIN. I'll be glad to. I have them right here. (The material referred to follows:) PAGENO="0340" 330 CONSUMER CREDIT PROTECTION ACT App~~d B~d~t ~ N~. 6aRH187.1 FHAMORTGAGEEP4O r V FHA I * * FEDERAL HOUSING ADMINISTRATION LOPM NT ~ CASE STATEMENT OF APPRAISED VALUE FOR PROPERTY ADDRESS A MORTGAGE TO BE INSURED UNDER THE NATIONAL HOUSING ACT EJ SEC.203(b) :~ SEC. - MORTGAGEE ESTIMATED FHA VALUE MONTHLY ESTIMATES F ~ S V.th., (E~1.Cl.C.~es) . ~ S ~~__ ~ ~ *~ ~ * : . ~t~::::::~ STATEMENTISSUEDBY(A..th.:i~dAA~.t) DATE THIS COMMITMENT Iss~d: 196 - D~.pi..s: 196 DEFINITION OF APPRAISED VALUE tiSI~ eeidene~, eeee~di~g f~s, SIc. ~ th ese~e tien~ ef th~ Netiee~S Heusieg Act (seth as 253 et 220) teheec the e~eiteee. The Fedecel lle~&~eg Coeehissioeee h~ eeh~ed She e~beve identified peepeely foe neetgege 6 e~ee~ee p~epeses in the emeect ehotee. FHA~testiteeteef~~Vt1ee'~et"Rep1acteeeetCest'(Seetjee253et 220) deern tet tie ~ ~Itt ptiee; deet tet iedie~tt FHA tppee~tS ef t pueehttet ef the ptepety; eec deet it ittdiette the ttteteet ef ~tt itt- t~t~d eteetgtge th~t eeeeld bS ~ppteeed. "Vttue" tttttt titttted tetal ptiee ef e ptepetty, eteeledittg ptyttteett fee ciesittg eeet& ted pttp&id eepeetett~te h tt t aeetttt d I tttuteteet . Vat tteaasa act the ptepetty it held itt fee eittple eeithtat special aseect tteott. V~SttC" shtll be deeeted te ecte `teplaetmeet eott" tee eeetgegt ~ tttttCttCt PtttPOtCS. The lete teqeit'es thtt F'HA ttettgeg ettteee ice e statemtttt ef "tp- P t8!tC d Ciittt" petet It the ttlt of the prepeety. If the sties eeete~et h~s b eetttigttt 6 befeee the teettgeget teed eetsec Ii a statetttettt, the eanteiet east eaetaitt, at least be atteedad te leelade, the follawiag loageage: "R 1 C " ~ I f h d h p p ety I d g I d 1 h It p d w h I g p ht lthgpyw t I p pid p h di g . FHA VALUE' Is the saw of the estiwate foe "value" or replace. meet cost" and the FHA estimate of eloslsg costs, such assurve y, La...agteed that the poeohesee shall sot be obligated to topl h th 11 h ih pot h writ Sty ~ ~ w t~ gfeth th S fth pprtyf mrigg pats osess at less thee $___________ . The patchaser shall have the peivilege...of peaceedisgwiih...Ihis oostract without regaed to the amoust of the...valuatiss." ADVICE TO 0MB BUYERS ADVANCE PAYMENTS".Mabe estra paymests whes able. You pay less Istereat and have your ht,me paid for tosser. Notify the lesdee in mrltlsg at least 30 days btfore the regular paymest date os which you Intend to make as advance paymest. CLOSING COSTS . Is the heading Is EllA's estimate of astlelpated closlsg costs, such as fees fee prepeeatlss of meetgsge tstteumestn, attoeseyt' feet, title Issurasce, erigisatiun fees asd docuwestary stamp tanes. The estimate dees sat Seclude charges for such prepay- able items as tenet, flee Isnurauce. DELINQUENT PAYMENTS..Monthly paymests are doe the first day of each month ned should he wade os or before that date. The lesdee may maht a late charge up to 2 rests for each dollar of asy payment more thas 15 days late. If you fall for 30 days to make a paymest, y IdI y hm dmgy y dii dp' ~ your obtaining further mortgage bass. If eotraordinaty clfcumstances prevent your making payments os time, see your lender at 00cc, If you ace tempocarily unable to make yeor paymenit because of Illness, loss of job, etc., your lendar may be able to help you. Ask your lander to enplaln Fl-IA's forbearance policy. YOUR CREDIT IS AN IMPOSt. TANT ASSET; DON'T LOSE IT THROUGH NEGLECT , ADJUSTED PREMIUM CHARGE--If you make extra payments In any year of more than 10% of the ori~gtsal mortgage amount, you may have to pay as adjusted premium charge. Thin charge in 1% of the original mortgage. ERA in authorized in charge a premium of net lees than `4 of 1% nor more than 1% per year, but has set ike premium at `/, of 1% assuming It will be paid over tkC whole mortgage term. tVhen a mort. Is paid off imudvanee, the premiums collected do not cover ERA it end an udjosted premium in charged to offset the lots. If thin chnrge were not mede, the premium would hnve to be higher. An ad' josied premium is not made if a new P'RA mortgage Is placed on the property, or if the ERA Insurance Is in force for 50 years or longer. TAXES, ASSESSMENTS, AND INSUNANCS'.'Send your lender bills foe tanco, special assessments, or fits innocence that come to you. The fire insurance the lende, requires you to carry usually covert only the babence of the loan, Check thin with your lender, Yon may with to take out additinnel Insucance no that If the house is damaged yone loin will be coveced en well as the lender's. Sf your home is damaged by fire, windutoem, or uthgr canoe, write yote lender at once. Tenet foe the coming year eun't be knowS until the bible are received. If they eoeeed the amount eccumulated from youe peymentu, you will hoouecooforms to PItA approved plass, Thit warranty Is foe 1 year following the date to which title Is conveyed to the original buyer or the doto on wkichthahouoe weufirut occupied whichovec occoetfirut. Sf6 igth m typ idy I df t f mhlhy bll the builder is. responsible, sub him is writing to correct thorn, If ha fails to do so, sotify the PItA isnoring office in meltisg. Metitlos tb, ERA case number shown is the heading. If tsspectios shows the builder to be at fault, the Fl-IA mill tey to persuade him to make cne~ eection. If hr does not, you may seek legal relief ssdee the builder's warranty. Most builders take pride in their work and will make jun11' flable coerectinni, They cannot be expected to correct damage caused by ordinary mcar atd tear or by poor maintenance. Keeping the house In good condition is the nwser's responsibilIty. OPERATING EXPENSES-'.In theheading srep'IIA estimates of monthly ensin ef lanes, heat and utilities, fire insurance, maintenance and re~ paIrs. The antimated figures mIll prnbebly have to be adjunted vibes yen receive the actual billu. BEAR IN MIND THAT IN MOST COM. MUNITIES TAXES AND OTHER OPERATING-COSTS ARE INCREAS. HG. The estimatee should give some idea of whet lou ens enpect the casts to be at the beginning. Sn tome areas FRAn estimate of tunes may also include local charges such as sewer chargea, garbage collection fees, mater rates etc. II' YOU SELL...If you sell while the mortgage enists, the buyer may finance eeveeai wiye. Understand how the in arrange masts may at. feet you. Coneult your lender, 1. You may tell for all cash and pay off your mortgage. This ends your liability. 2. The hoyee cm ~nsume the mnctgsge and pay the differeuce be- tweet, the unpaid balance and the selling price In each. If the ERA and the lender ate willing In accept the boyce as a murt' Eager, you can be released from further liability, This requiren Ike specific approval of the lender and Ike Fl-lA, (EITHER OP THE ABOVE TWO METHODS IS PREFERABLE TO METHOD NUMBER 3.) be asked to pay ike difference. If they ire lent, the difference mill be credited to your eccoont, The tame ii true of fire insurance. Inme Stetei allow homestead or vrttean1s ten ruemptions. Apply fur any enempilos to which you rosy be entitled. When ills approved, notify your lender. S The buyer can psy ihe difference Is cash and poeehaae inbjecl to the unpaid mutt see balance. ERA oclendee I revel It not seedier BUT YOWl REMAIN LIABLE FOR TIlE DEBT. IF THE BUYER DEFAULTS, IT COULD RESULT IN A DEFI. CIENCY JUDGMENT AND IMPAIR YOUR CREDIT STANDING. THE COST 0' BORROWING lIken you burrow Is buy a heme, you pay interest and niher chacges beeS; but In 30 yeses yos pay $4,373.25, oc 62% more Interest than Is chick add to ysur coil. A larger dnotspsymest will result In a smaller 211 years. Loan, lOurrow an lilile an you need 5sd cepay in the shortest time. If Thetablea show the monthly payments, interest aedmortgage Insurance you borrow $56,050 ci 6%, the monthly peymeni to principal and is- forsene lypleabboens ni 5%, Tanes and fleelosurance are not shun ernst ii $11.70 lets fur a 30.yeue lean than it would he foe e 20.year Is the tables, although they are Included in yonc monthly pnyme,sti. MONTHLY PAYMENTS, PRINCIPAL & IN'FEREST, MORT. INS. PREMIUM, TOTAL INTEREST & MORT. INS. PREMIUMS PAID@ 6% $15 SOS LOAN ,_,~, fl$~$$' LOAl-4 $25 $00 LOAN Into P,is. & Itt, Totet Mtg.te~. Prnc,lreo Ma. Payl. Icr, Ma. Pets. Intel Ptie, & itt. Mn, Peyt. Intel tnt. ,~j50jna. Pteeicnr Mo, Peyt. Tatai Prin. & let Fatal M9g lea, Prvyrtron Me, Payt. Itt. Ma. Peyt. Intel 25%,, $71.75 $ 7,10156 $4.12 $596.48 2$ ` 64.50 9,301.51 4.15 775.14 II " 00,00 11,554.01 4.14 962.90 $157.55 96.75 90.00 $15,772.34 13,952.27 17232.22 $t.17 $ 897.72 dli 162.71 6.21 - 1,444.35 $143.40 514,3t3.tl $5.22 $l,l9t.96 129.00 18,603.02 6.27 1,550.20 120.00 22,109.63 5.29 1,925.50 FHA FORM NO. 2080.6 Ooo. 5/07 tEPID TO MORTGAGEE FOR DELIVERY TO NONE BUYER PAGENO="0341" CONSUMER CREDIT PROTECTION ACT 331 PH-i DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT ~ A nsned Rn,. N 64 FEDERAL HOUSING ADMINISTRATION Badger Boraao No. 63.R037.t0 CREDIT APPLICATION FOR PROPERTY IMPROVEMENT LOAN This apptioatioe iS submittod to obtain oredit undor thu provisions of Title I of the Natioeal Nausiog Aot (PLEASE ANSWER ALL QUESTIONS) TO: Lending Inetitotion nhiclt out ptuaido tho funds: Date 1. Do you have ony past due obligations owed to or soured by soy agency of the Federal Goverotneot? (If the anSwer iS "YeS", yen ace not eligible to apply for an FR/A Title / Loan until the existing debt has been brought current) . ~J YES L1 NO 2 ,0 you any other application for an FHA Title I Improvement Loan pending at 3. I hereby apply s time? ~ YES [J ND (If yes, with whona-naese and addresa) for a loan of: $ _____________________ (Net) To be repaid in ____________________ Months 4. APPLICANT-ni. None Aao Marital Status Namber of Dapeodeets Addnesa Heo erg Nama- Wits/Husband Ago Hoes Phuee Pretinos Address rfon beg Name and Address of neatest relntise not linina delarioenhip 5-EMPLOYMENT AND SALARIES: (If applicant self-employ: submit current financial statensent) Empluyor- None and Business Address type of monk nr paeitinn ~ Oaeinose Phone Salary (Week/Month) $ per Preninas Employer - Nama and Business Addtnss Wits's Employer. Name and Boniness Address Type of ao,k on position N0, at Boniness Phonn Sabory (WInk/Month) $_________ per 0" r muons - Scorns (Listf . amount (tPeok/AtEcnth) 6. BANK ACCOUNT: ElITES []NO L]ChoekingNcntandAddrnns.BanksrBtttCh ~J Sanings 7. CREDIT ACCOUNTS: (GAo none end address of finance companins or stores which hoc, estended credit and which you hove paid in full.) 8. DEBTS List all fixed obligations, installment accounts, FHA loans, and debts to banks, finance companies, and Government agencies. (If more space nec/cd, list all additional debts on an astached sheet) PHA Ins. ~ Ta Whom Indebted (Nsoosc) City and State Dens Inconred Original Amount Present O,danno Mnnthty Pnyments Amount Past Dan "~"j" -I.-.--- ~ ~ Mortg,ge/Ccnt,not S S I $ $ $ $ V $ $_________ $_______ I_______ A~ ro $ $ $ $____ Lint Hnlder Tent and Make $ $ I 1 (1Mb) PAGENO="0342" 332 P5.1 Hun. 9/64 CONSUMER CREDIT PROTECTION ACT 9. PROPERTY TO BE IMrRovELe-3, - If this is a residential structure, hait bee ~ or longer? Ho Address (NcaAen, SHeet, City end State) Type - Meter, Apt. Stuns, Fern, N fTlHld 0 1 M i~h Purchased P d ::: ::5 Platte and Address of Title Holder Naoe af Landlord Address Mace Paid Rent Par Manth 4 10. PROCEEDS OF THIS LOAN WILL BE USED TO IMPROVE THE DESCRIBED PROPERTY AS FOLLOWS: - Describe Eanf~ lntptaae,nnnt Planned Harts and Address Conrraorcn/Dealsr Estinreted Cast WARNING IMPORTANT - APPLICANT READ BEFORE SIGNING The selection a( a Contractor an Dealer, atceprance cf nnrtenials used, and aicrb pertoroed is~y~ responsibility. Neither the FHA nor the Financial Institution auaraetees the oaterial or sucnboarnship en inspects the a,orh perfcroed, I IWel terrify rhar the abcae srateeenrs are true, accurate, and coeplete ro the best of try burl bnoniledae and belief. This applicanion shall retrain the prcperry cf the Lendina lnnniturictn tc a,hinh subn,irred for rhe parpcse of obtaining a loon. (Applicant) lLSl Noes (Applicatit) ILSI NOTETO Op dwlfbdb dtthCtt/ttl thp ~llgtlrb d bdmp mtortg SALESMEN: the fall owing cprtilicatioe. I lWscerrifyrhar: 1.1 IWeleelanelrhe persorlslcahcecfdrheiob. 2.TheCcetrncrcentainrrhencheleaareenentcithrhebottoner. 3-Theba7roctr has ncr been amen en pronised a tech psynenr an nebcre nan has in been nepresenred to the bcrrcarer rhsr he trill reosiae a oash bcnoe or teranissi6n an sales as an indocen,en r ten the ccnsceentian of rhis rnceeacnicn; rhan the :tnprcaeeenrs hone ncr been cisnepresenredi rhsr rhere ann na guaronrees bepand rhcse ef the nrenafncruner; nc prcrtiees iepcesible at arraineenr; nc eneconaaetnenr af rnisl purchases; no prontist rher the inrprcaertenns clii be used as a rrcdsl for adoerrisine en other derrcnerraricy purpcsesi and no cffer of dsbr ccnsclidaricn. ILSI Harts (My tnae sense unit oigs010rP any no Stiawo atoep) lLSl If applicanian is prepared by one other than the applicant, rha person prepanina rhe application west sign belac, I IWeb terrify that the statseents trade herein ate based open infnreonion amen to as (usl by the borracen(s) and are accurate nn the beet of ny burl bnooledae and beliaf. (Sigoatuye of pl'epaPet oche~ than baprooinp) - Title I Protidss a lieited harts lttpret'etnenr pnoanae eith a eatrieoe lean aneunt af $3500 and a eaaieoe tens at 00 eanths. The lender is allawedtc char e a disoooer nf nat acre rhan $5 per $100 per year en the first $2500 ef th~ loan and $4 per $100 en the aeeont ebece $2500.The $5 on $4 diseuanr sha:.'ldnatbeinterpreredas5 perceor an4 pertenninreresr.Therablebelaatsha'cssatnetypioalboansaedntaothly ayments under Title Iandthsequio' air merest rats fan rhe ar,conr af disenont thoo'n. The floe eafuene at rh~ right of the table shoe the tonal cent af interest fan these leans. AMOUNI OF ADVANC ~~it~t0r Pss Pear Per $100 Mcnrhly Paynreor lnmenssr Rare -- Equic. Monrhly ltrt:neet Payment Rare Mcnthly Payment Eqoin- lnten'sst Rate Eqoia. Equmt. Monrhly lntsrest Mcnrhly ln$er:~t Payeser Rate Peyrmerr Rate 12 34 36 49 enth Month Month MennhlMenrh Lean Loan Loan Laan Lean $ 50$ $1,000 $2,500 $3,500 $5 5 5 5&4 $43.06 07.72 219.30 306.11 9,50% 9.50 9.58 9.01 $ 22.95 9.43% 45.09 9.43 114.71 9.43 159.72 0.09 $ 15.97 31.94 79.85 110.93 9.30% 9.30 9.30 8.77 $ 2.40 9.10% $ 10.40 9.05% 24.97 9.10 20.79 9.0$ 62.42 9.18 51.96 9.0$ 86.53 0.65 71.00 8.54 $ 26 $ 5t $ 75 $ 9[~f~' 53 101 150 190 247 132 253 374 496 617 173 333 493 653 013 Title I Prapsctp Ietpi'snemset Leans With Equsl Meeehly Peyteeets te Prmseipet end stereet 12 MONTH LOAN 36 Mt.se,s,st,ase TOTAL COST OF INTEREST P5.1 Rn'c.9/64 PAGENO="0343" CONSUMER CREDIT PROTECPION ACT 333 Mr. WILLIAMS. That is all I have. Thank you. Mrs. SULLIVAN. Mr. Bingham? Mr. BINGUAM. Thank you, Madam Chairman. I, too, appreciate the opportunity for questioning earlier in the proceedings. I would like to ask you primarily about the first mortgage coverage. First of all, can you give us an idea of the percentage of home mort- gages that are insured by the FHA? Mr. BROWNSTEIN. Well, on new construction, about 17 percent of all new housing starts come under FHA. However, our new homes busi- ness is only about 20 percent of the total of FHA business. Nearly 80 percent of the mortgages that we insure are on existing construction. Mr. BINGUAM. What does that amount to percentagewise in rela- tion to the total of such mortgage financing? Mr. BROWNSTEIN. I don't have that, Mr. Bingham. I might add one other thing, though. I think a rather significant figure is the fact that on houses costing $17,500 and less, the FHA percentage is about 42 percent. So you see it is the low- and moderate-income family that is being served through the FHA program. Mr. BINGHAM. Now, your statement does not clearly indicate, as I read it, what your position is on the inclusion of first mortgages in the truth-in-lending bill. Are you in favor of that? Mr. BRowNsa~IN. We favor this. Mr. BINGHAM. I notice that you indicate that you would have to make some changes in your procedures in order to comply. Will you list the essential nature of the changes that you have to make? Mr. BROWNSTEIN. Mr. Williams asked that I put into the record what we now are doing and what we have here on the appraisal form, for example, that goes to the mortgagor on a home mortgage case, we show the monthly payments, we show the total interest that he will pay over a 20-year period, a 25-year period, and 30-year period. This is on a $10,000 loan, a $15,000 loan, and a $20,000 loan. But we don't have in here the FHA insurance premium. I don't believe that this bill excludes that. It would require some modification to take care of this and some of the other provisions. Mr. BINGUAM. Are you familiar with the provisions of H.R. 11601 on page 5 where the definition of finance charges is specified and cer- tain items relating to closings are excluded? Mr. BROWNSTEIN. Yes. Mr. BINGHAM. The suggestion has been made that the appraisal fees and credit reports which are excluded under this section are properly credit charges that would not be incurred if there was no mortgage and should be excluded under the total finance charges. Mr. BROWNSTEIN. I don't believe that they should be included under the total of finance charges. This is not a return to the lender on the amount of his investment in any way. This is an out-of-pocket charge that has to be paid for, a particular service. Furthermore, I think to try and spread this over the entire term of the loan and translate it into an equivalent charge would be rather meaningless. Mr. BINGHAM. Is it not true that these are charges that would not be incurred if the buyer were to buy the home for cash? PAGENO="0344" 334 CONSUMER CREDIT PROTECTION ACT Mr. BROWNSTEIN. They may or may not be. I would think the buyer buying a home for cash would still want an appraisal made and it would cost him an appraisal fee. So that he would know that the amount that he is paying for the home would be in line. Let me `say also, that the purchaser is aware in the usual mortgage transaction of all of these things because they are delineated on a set- tlement sheet which in practically every mortgage transaction is given to the buyer at the time of settlement. Mr. BINGIJAM. Yes; but the purpose of specifying the total finance charge is to give the purchaser a way of telling how much he is going to have `to pay if he uses credit for his purchases; is that not correct? How much extra it is going to cost him if he borrows? Mr. BROWNSTEIN. I think that the important thing here is that he know what these charges are, and these are afl outlined on the settle- ment sheets. Mr. BINGITAM. I do not think that is quite responsive to my que~~- tion. He may know what the charges are but he may not know which of those charges `could `be eliminated if he were not to borrow for the purpose of making the purchase. Of course, this may be more theoreti- cal in the case of a home purchase where a cash purchase is very rare than it is in the case of small appliances and so forth. I realize that. Mr. BROWNSTEIN. I would think, Mr. Bingham, for the most part, that `somebody who is in a position to pay all cash for a hon~e probably is pretty knowledgeable in this particular area. Mr. BINGHAM. What we have tried to do in the bill, however, is to divide those items that are properly attributable to mortgage financing and those that would normally occur as part of a closing. What 1 was trying to get from you was your opinion as to whether the list that we have specified here for exclusion is the correct list. Perhaps you might like to look at that further and give us an an- swer for the record. My time has expired. Mr. BROWNSTEIN. I would prefer answering it for the record, but offhand I believe that they are proper exclusions. (The information referred to follows:) The items set forth in section 202(d) of HR. 11601 as exclusions are believed to be an appropriate and proper listing of exclusions for computing the finance charge in a real estate transaction. Mr. BI~GHAM. Thank you. Mrs. SULLIVAN. Mr. Wylie? Mr. Wmn~. Thank you, Madam Chairman. Mr. Brownstein, I would like to get into a discussion of this matter of adding points at the time of closing. I mentioned this the other day. I have represented many sellers at real estate closings wherein there was a contract in advance. The seller had a pretty good notion how much he was going to get for the sale of his property, he thought. At the time of closing someone from the bank would rush in and say we must add two points, two discount points or three points, and so forth. I wonder if you could explain a little bit to me and to the committee how this works-how are these points determined? Who fixes the points, and why they are necessary? Mr. BROWNSTEIN. Well, the points or the discount is a mechanism by which an instrument having a fixed coupon rate such as a mortgage, PAGENO="0345" CONSUMER CREDIT PROTECTION ACT 335 bond, or another security is made to yield an amount necessary to attract investment capital. In the case of mortgages, if the fixed interest rate is inadequate to compete successfully in the capital market, then the way that the yield is brought up is through the charge of points or a discount. In the case of FIIA, we do not permit the mortgagor, the borrower, to pay these points. Therefore, it is the builder or seller who has to absorb the discount. The amount is set entirely by the parties to the transaction-this is the seller and the lender. They are the ones who must agree on this. I agree with you that this is extremely onerous on the part of the seller and none of us like discounts. The seller may consider various alternatives. If he chooses, of course, he could perhaps suggest to the buyer that he arrange financing elsewhere, since he declines to absorb these points, or possibly, if there is an existing mortgage on the prop- erty he could sell, subject to the existing mortgage and take back a second mortgage to cover his equity. These are alternatives that he could consider, Mr. Wylie. Mr. WYLIE. In one instance I represented a seller where two points were added at closing. I advised him to forget about the whoie uans- action and leave. We then made an arrangement whereby he would sell the house for a little more money and realize the amount that he thought he was going to have available in the first instance, so he pur- ~chased another house. But this causes a lot of anxiety and heartache. I am wondering, sinc.e we are talking about truth in lending, if there is a way in which we could know in advance what these discount points might be, or if it is feasible to establish a point in time-for instance, the first of the month and say during the month no more than one point may be added. We could establish that no more than one point will be added or no more than two points will be added this month, so there could be some disclosure in this area and we would not run into this situation where at the closing table somebody runs in and says we just checked and we must add three more points. Mr. BROWNSTEIN. FHA has nothing to do with setting these points. Mr. WYLIE. I understand that the lending institution actually fixes the amount, but they do it ostensibly at least, with approval of FHA- if not through overt approval of the FHA, certainly with the implied approval. Mr. BROWNSTEIN. Well, let me say, Mr. Wylie, two times Congress has tried to legislate out these points or this discount. One time they required that the discounts be established as reasonable in the FITA- VA program, and another time a somewhat similar law was passed. It was found that all this really did was impede the flow of mortgage credit and it did not result in the kind of a benefit that was hoped for and that had been expected. So Congress repealed this section both times in order to free up the flow of mortgage funds. Mr. WYLIE. I think it was Mr. Barr who suggested that the only way you could eliminate this practice is to remove the ceiling on inter- est rates. Would you say whether that should or should not be done? What do you think about removing the ceiling on interest rates? I am not suggesting this be done. I am just asking you to express your expert opinion. PAGENO="0346" 336 CONSUMER CREDIP PR0TECTrON ACT Mr. BROWNSTIMN. I think that unquestionably, the way that the discount is eliminated is to have a yield through an interest rate that will be competitive and will attract the capital. Mr. WYLIE. My time has expired. I would just like to end with one more question. Mrs. SULLIVAN. All right. Mr. WYLIE. Do you have any suggestion or feeling as to whether this point practice should be eliminated, and if so, how we might do it? Mr. BR0wN5mIN. I think I share the wish of every member, of not only this committee, but in the Congress, and all the people in the executive branch who have a responsibility here, Mr. Wylie, that we deplore the discounts that are typified. Mr. Wmm. I did not mean to be repetitious. The next question is, do you or anyone in your Department have a suggestion hOw the prac- tice of adding discount points might be eliminated on FHA loans? Mr. BROWNSPEIN. The only way you can eliminate them is by hav- ing an interest rate which is adequate to attract the flow of mortgage funds. Mr. WYLIE. By removing the ceiling on interest rates? Mr. BROWNSTEIN. By at least leaving enough flexibility so `that the rate can be fixed at a competitive level. Mrs. SULLIVAN. May I answer that? I think if you read over our `bill and help get this bill passed, we can eliminate these points. I offer this as a recommendation to back up my statement-this is an article that comes from the Kiplinger magazine of June 196~ and it says, "How Much Your Mortgage Really Costs." They have a table here that shows what the nominal interest rate is for a 20-year mortgage or 25-year mortgage and the effective rate if loan is repaid after S years, 10 years, 15 years, 20 years, 25 years, if points are charged. So that if someone would quote a 6-percent interest rate for a 25-year mortgage, and they would add on five points to that mortgage, the interest rate for a 25-year loan at 6 percent would not be 6 percent, it would be 6.55 percent. So that the man who had this information would know he is not getting a mortgage for 6 percent; he would have to pay 6.55. `This gives him a chance then to try to `find some other financing agency for his mortgage. Mr. WYLIE. I would like to work with you on this, Madam Chair- man, but I do not want to be maneuvered into a situation where the ceiling will be fixed at 18 percent. Mrs. SULLIVAN~ I think that is a little different. Mr. Annunzio? Mr. ANNUNZIO. Thank you, Madam Chairman. I appreciate your forthright statement before the committee. You always make a con- structive contribution. I myself disagre'e with your statement of garnishment of wages. As you know, the President in his statement before `the Congress some 5 or 6 months ago referred to a prevision of garnishment of wages and the Department of Labor, Office `of Economic Opportunity, and other departments have studied this problem for 6 months. It takes 5 or 6 years to get to this state with the truth-in-leanding bill, so it will probably take us 5 or 6 years to have courage `to say that garnish- ment of wages at the 100-percent level should be exempt from every State in the Union. PAGENO="0347" CONSUMER CREDIT PROTECTION ACT 337 I want to call the attention of my colleagues on this committee, while this committee has been studying this for 5 months, I got from the U.S. Department of Labor a list which lists the 50 States and, Mr. Williams of Pennsylvania, I want to call to your attention that Penn- sylvania has 100 percent of earnings that are exempt. The District of Columbia has 90 percent exempt. The State of New York has 90 percent exempt. Now, these various State legislatures- Mr. WILLIAMS. Will the gentleman yield? Mr. ANNUNZIO. I will be happy to yield to my distinguished col- league from Pennsylvania. Mr. WILLIAMS. When you say 90 percent, you mean 90 percent of the wages are exempt, 10 percent is what is garnished? Mr. ANNTJNZIO. That is right. As I stated before the committee, an example from my own State is the Inland Steel Co. which has an 85-percent exemption. This company is harassed by a volume of gar- nishment that exceeds $500,000 a year. What I want my colleagues to understand is that it is not only the cost to the companies, their legal departments, and the people; it is also a tremendous cost to the cities and the counties where the courts are located and this expenditure of money could be used to alleviate much of the suffering in the poor com- munities of the large cities of America~ So, Madam Chairman, I ask unanimous consent that, at this point in the record, this insert be made on the exemptions involving all 50 States in the Union. Mrs. SULLIVAN. For garnishment? Mr. ANNUNZIO. For garnishment of wages. Mrs. SULLIVAN. Without objection it will be made part of the record. (The material referred to may be found in the appendix, p. 935.) Mrs. SULLIVAN. Mr. Halpern? Mr. HALPERN. Madam Chairman, first I wish to commend our dis- tinguished witness and also our outstanding and very valuable Secre- tary of Housing and Urban Development for their frank presenta- tions this morning which I am certain will prove most helpful to the committee in our deliberations. Mr. Brownstein, we have been exposed to many disturbing statistics about the abuses in the credit industry and the unfortunate conse- quences in terms of bankruptcies which all too often result. Now, first, in the home buying sector do you feel there are many in- tentional abuses on the part of creditors taking advantage of the ignor- ance of the customer? Mr. BROWNSTEIN. This will be a very difficult question to answer, Mr. Halpern. I can speak principally from the FHA's side and what we find there. Mr. HALPERN. If I may interrupt, let me add a second part to that question. Do you believe that many personal bankruptcies tend to re- sult from unwise mortgage arrangements or are the customers in the home ownership sector generally sufficiently well informed and have high enough income levels at least to prevent the ultimate economic catastrophe of bankruptcy? Mr. BROWNSTEIN. Again, this is strictly my own impression, but I would believe that the bankruptcie's would be aggravated much more by installment credit than by home purchase credit. PAGENO="0348" 338 CONSUMER CREDIT PROTECTION ACT Mr. HALPERN. Does the Department of Housing and Urban De- velopment provide any advisory facilities whereby a prospective home- owner can have a consultation with an expert on the type of home he should buy, given his financial position and so forth, the best source of mortgage credit and so forth? Mr. BROWNSTEIN. Just last week, Mr. Halpern, we put into effect in five cities a housing counseling service that will do this. Mr. HALPERN. I am glad to hear that. But has it been in effect? Mr. BRowNs11~aN. No, we have not had this type of service in effect before. We have just initiated it in five of the cities of our country, and as we gain experience with t his we plan to broaden it. Mr. HALPERN. Very glad to hear that. That is all, Madam Chairman. Mrs. SULLIVAN. Mr. Hanna? Mr. HANNA, Thank you, Madam Chairman. We are delighted to have you before us again, Mr. Brownstein, on this very important legislation. I certainly want to be associated with the remarks of my colleague from Illinois about the concern we have for the costs in time, in money, and in the people's feelings in terms of the garnishment situation; and I commend him for having made available this important information. In talking about this point system, if we might go back to that, Mr. Brownstein, am I incorrect in my understanding that the point system itself has a great deai to do with the competitiveness-first of all in the mortgage mark~t as to certain pressures that come upon the flow of funds into mortgages where there is a fixed interest rate and there has to be some kind of response to the competitive position of the mortgage instruments, and has that been reflected in the FNMA discount to a great degree? Mr. BROWNSTEIN. The points or discounts are totally as a result of what is called for in the capital market to attract the flow of funds to mortgages. Mr. HANNA. Is it not also part of the problem of cash flow into places where there is mortgage money need, and the place where the money is, so that the point system itself operates as part of the mechanism for cash flow? Mr. BROWNSPEIN. Unquestionably this is the case, Congressman Hanna. Mr. HANNA, Then it would seem to me that there are considerations, some very complicated considerations that have to do with the mort- gage interest situation that are very much involved with this whole problem that are not part of the other credit interest structure, is that not correct? Mr. BROWNSTEIN. Well, I doubt that the matter of discounting is quite as pronounced in some of the other sectors as it is in the mortgage sector because there, particularly on your consumer credit the rate can be sufficiently high so that this kind of discount is not nece~sary. Mr. HANNA. What you are saying is that there they have a flexibility in the interest rate itself which will accommodate this and they do not have to fall as heavily back on discount as we would, for instance, in FHA or VA mortgage situation where there is no flexibility in the interest rate itself, is that not true? PAGENO="0349" CONSUMER CREDIT PROTECTION ACT 339 Mr. BROWNSTEIN. We have always found, Congressman Hanna, that when the interest rate itself was adequate to attract the flow of mort- gage credit, then there was a very small discount or none at all. Mr. HANNA. I think, Madam Chairman, that that is the important point of the discussion on the mortgage industry. If your mortgage interest was responsive to, No. 1, the flow of funds requirements as be- tween regions, and No. 2, were responsive to the actual pressures of the money market then you would have just a modicum of influence on points. But absent that flexibility I think you are always going to be dealing with the point system, and unfortunately, the point system falls on the transaction a little differently than the interest rate, is that not true? Mr. BROWNSTEIN. Yes, as has been pointed out here before, if the discount itself is absorbed by the seller or the builder and it is passed on to the buyer only to the degree that an increase in the price can be made to accommodate this, but I would say also that FHA does not recognize in its valuations the amount of the discount. Mr. WYLIE. Would the gentleman yield? Mrs. SULLIVAN. However, that is just under FHA, is it not? Mr. BROWNSTEIN. FHA and VA. Mr. HANNA. Under FHA and VA. In the conventional mortgage there is more flexibility in the interest rate itself. You would find the interest rate responding to these two pressures I am talldng about, whereas in the FHA and VA there is no flexibility, therefore the response is in the points. Mrs. SULLIVAN. That is why, in this chart from the Kiplinger maga- zine that I quoted, it would not reflect as much what FHA does as it would on a conventional mortgage. Mr. HANNA. I think the committee would make a mistake to move in this area about interest and the declaration of interest rates in first mortgages. I think the logical step is to leave the VA and FHA mort- gage interest open-ended so there will be a true reflection of what the market requires. Mr. WYLIE. Would the gentleman yield on that? Mr. HANNA. Yes; I'll be glad to yield. Mr. WYLIE. The point that I want to make is that the discount points or interest when it is reflected in the form of discount points at the time of closing is absorbed immediately by the seller, whereas if it is in the form of fixed interest which is allowed to adjust according to the market, it is absorbed over a period of 25, 30 years, whatever the period of the loan is, this indicates the hardship on the seller, I think. Mr. HANNA. That would be true if you assume under most circum- stances the seller really absorbs it and does not put it in the price of the goods. This is something the committee has to be aware of all the way along, that to a degree, when we start monkeying around with the interest rates we may be affecting price levels, also. Because there is only one way to skin a cat and if you think there is not an imaginative response possible with the enterprising entrepreneuer in American society, you have pretty much downgraded the fellow where he really ought to be. Because I think this is what would happen, because the point is reflected in the price in most instances, believe me-in most instances. PAGENO="0350" 340 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. I cannot help hut point out that there really is more than one way to skin a cat, and I think these cats have proven that the American consumer has been skinned a number of times. Mr. Fino? Mr. FIN0. Thank you, Madam Chairman. Mr. Brownstein, regarding the requirement for full disclosure of finance charges for homebuyers, is it not a fact that a homebuyer will purchase the home whether or not he is apprised of the entire interest cost because in most cases, and I will speak as a lawyer, there are three important factors entering his mind. No. 1, a desire to own his own home. No. 2, whether the rent he is now paying for his apartment will be sufficient to cover the carrying charges on the mortgage. And No. 3, the knowledge that at the end of the mortgage period he will own his own home. So that if you tell him that his mortgage is going to cost him $10,000 more at the end of 30 years than what it was in the beginning, this is not going to change his mind about buying a home. Do you agree? Mr. BROWNSTEIN. I think that the three elements that you men- tioned, Mr. Fino, are all very important considerations. However, I don't think really there is any such thing as a typical homebuyer. I think that the typical homebuyer is about as typical as any other American citizen-there will be various patterns that are developed among homebuyers the same as in any other walk of life. There are people who decide that this may not be the time that they want to buy because they think that perhaps if they wait a little while they can get either a better price on the unit they want to buy or a little better deal on the financing. This is entirely a matter of personal belief and per- sonal preference. Mr. FIN0. Getting to the garnishment of salaries. Is it not true that if we were to eliminate the garnishment of salaries that the poor people would be the ones that would be the most affected? Mr. BROWNST1~IN. What we are suggesting, Mr. Fino, on that is that it ought to be considered because it could possibly have this kind of consequence. Mr. FIN0. H.R. 11601, the bill introduced by Mrs. Sullivan, pro- vides for a ceiling of 18 percent on revolving `charge accounts. We had testimony before this committee which has shown service charges run 10, 11, 12, 15 percent. Do you not feel that if we were to set a ceiling at 18 percent, that that might encourage businessmen to go to that figure and use that figure in the operation of their business? Mr. BROWNSTEIN. Well, we believe that this, too, is something that ought to be looked at very `carefully, Mr. Fino, so that it does not have a consequence opposite to that that is desired. Mrs. SULLIVAN. May I interrupt just a moment, Mr. Fino? Mr. FIN0. Are you asking me to yield? Mrs. SULLIVAN. Will you yield? Mr. FIN0. Yes. Mrs. SULLIVAN. My bill does not set a `ceiling of 18 percent on the revolving `charges. Mr. FIN0. You have that in your bill. Mrs. SULLIVAN. That is on all credit that we are talking about in this bill, not just revolving credit. PAGENO="0351" CONSUMER CREDIT PROTECTION ACT 341 Mr. FIN0. Yes. Mrs. SULLIVAN. It is not directed specifically and exclusively to the revolving charge. But on the revolving charge issue, I do not think the committee has been shown that 11/2 percent a month is not 18 per- cent a year. That is all I want to call your attention to. Mr. FIN0. We have testimony here from Montgomery Ward or Sears, Roebuck and they charged 11, 12 percent. Mrs. SULLIVAN. If the gentleman will yield, you may have believed them on that, but I do not think some of us did. Mr. FIN0. You tell me that you can always play around with figures. Mrs. SULLIVAN. You can indeed. Mr. FIN0. While it is true that we could play around with figures, I think I have sufficient trust and confidence in the business people of this country that they are not out to fleece and cheat the American public. I am sure we have certain unscrupulous business people, but they are by and far in the minority in comparison to all the business people in this country. Mrs. SULLIVAN. If the gentleman will yield further, I certainly agree that the average business is not out to cheat the customer. But I think they were trying to demonstrate something in that chart pre- sented yesterday that they do not actually practice in their own busi- ness. You have got to show me-I am from Missouri-that that is the way they actually compute their credit charge. Mr. WILLIAMS. Would you yield? I would like to suggest that this is the second or third time I have heard the comment that the testimony we heard yesterday from representatives of the American Retail Fed- eration is not true. Now, I think this is au important point to resolve and I would like to suggest that you have our staff make a check as to the actual practices that are being used by the members of the Ameri- can Retail Federation to determine if their testimony is true or not. Mrs. SULLIVAN. If the gentleman will yield, my comment was that the method of computation they showed us from the chart is not the way they actually figure their interest. Mr. WILLIAMS. I understand your `comment. All I am saying is that they came in here with testimony and while they were here I did not hear any comment made to the effect that this was not the practice they are following. I believe it is very important for us to know whether this is the practice they are following or not. Certainly, with the extensive staff this committee has we can give them the assignment of determining whether or not their testimony yesterday was true and that the practices they outlined to us yesterday in the application of interest rates on revolving charge accounts was true or untrue. Mrs. SULLIVAN. I hope we can prove that before this committee. Mr. WILLIAMS. I certainly think we should make that a first point of order. Mrs. SULLIVAN. Mr. Fino, I am sorry to have taken up your time. Mr. FIN0. I have no further questions. Mrs. SULLIVAN. Mr. Minish? Mr. MINISH. Thank you, Madam Chairman. Mr. WILLIAMS. I had one additional comment. As I remember the testimony yesterday, they said this was an actual account that was selected because it was typical. PAGENO="0352" 342 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. I `do not attempt to disprove that, Mr. Williams. I say the way they figured the finance charge on that account is not the method they are actually using in assessing credit charges. What they were trying to prove-they were `trying to prove that they charge a low rate of interest, but it is not a typical way of figuring interest, no matter how they slice it. Go ahead, Mr. Minish. Mr. MINIsH. Thank you, Madam Chairman. Mr. Brownstein, it is nice to have you before this committee and I want `to concur in the remarks of the chairwoman-she said you are one of the most highly dedicated public servants. I see in your testimony that you have your own little truth-rn- lending operation at FIIA. We have been meeting here morning and afternoon trying to learn how this bill will affect the public and getting the views of different witnesses. Maybe you can tell us what you are `doing in your Department along these lines. Mr. BROWNSTEIN. We have, Mr. Mini'sh, in practically all of our publications, references to what `the actual interest rate is and what the entire amount of interest would be over the full term of the loan. I `was asked to put into the record some of the pamphlets and some of the forms that `deal with this. But we do make a concerted effort to see to it that the prospective home purchaser or home repair person is fully advised of what the cost to him will be. Mr. MINISH. Thank you. That is all. Mrs. Strr1LIvAN. Mrs. Dwyer? Mrs. DWYER. Thank you, Madam Chairman. Mr. Brownstein, the FRA or VA could reveal to the homeowner the total dollar amount of first mortgage interest payments on its own without any legislation; could they not? Mr. BROWNSTEIN. Yes, Mrs. Dwyer, and in fact we do. Mrs. DWYER. Just how do you do that? Mr. BROWNSTEIN. On the appraisal form which the home buyer gets, or the prospective home buyer gets in the case of FHA, we show the amount of principal and interest that he pays each month, we show what the total amount of interest is for a 20-year term, 25-year term, and 30-year term at varying loan amounts. Mrs. DWYER. Secretary Weaver said that the average home buyer purchases only one or two homes during his lifetime. This understates recent experience, I think, does it not, that millions of American families purchase at least three homes during their lifetime? Mr. BROWNSTEIN. I think I am the one who said it, who said the one or two, Mrs. Dwyer, and this is the best of my information. I don't know whether it is three-it could be that in our affluent society it has now gone up. Mrs. DWYER. With homebuilding starts down, do you not think that if telling a potential homebuyer that he will pay $28,000 in in- terest over 30 years for a $25,000 home that it might discourage sales, especially when such a disclosure overstates the true interest? Mr. BROWNSTEIN. I don't believe that any mechanism which is aimed at making a person more knowledgeable or in a better position to judge what in his circumstance he ought to do is undesirable, and I think further, that if the person is dedicated to homeownership, as the vast majority of the American public is today, that they will take this into account, but they also will take into account all of the other advantages of homeownership. PAGENO="0353" CONSUMER CREDIT PROTECTION ACT 343 Mrs. DWYER. Mr. Brownstein, is it the considered judgment of the economists in your Department that the FHA and VA requirements that points be paid only by the seller in fact means that the final mci- dénce of these charges is ultimately on the seller? Mr. BROWNSTEIN. I am not going to say to anyone, Mrs. Dwyer, that appraisal is such a precise science, that you can appraise out to- tally the amount of the discount. I will say, however, that we do not in our replacement costs take the discount into consideration. Mrs. DWYER. Let me ask you this question, then. Is it not likely, in the highly competitive real estate market, that the buyer really ends up paying these points in the form of a higher price for the house? Mr. BROWNSTEIN. About all I can do is repeat what I said earlier, I believe it depends a good deal on the market condition. For example, there are many sellers of homes who offer the house, either FHA, VA, or conventionally. Now, on the conventional mortgage it may well be that there is no discount involved. Nevertheless, the sales price of the house in the vast majority of the cases would not vary irrespective of whether it is financed FHA, VA, or conventionally. So to this degree in very large measure the discounts are in fact absorbed by the sellers. Mrs. DWYER. That will be all. Thank you. Mrs. SULLIVAN. Mr. Stephens? Mr. HANNA. I wonder if we might make a point here. I think it is important from what the gentlelady said-is it not observable that when the seller has to pick up the cost of selling, that there is then less inducement to sell and in what we have seen in the movement of hous- ing, that when this phenomenon occurs that the seller has to pick up the points, that there are less houses being sold and therefore it affects the whole dynamics of homebuilding because it seems to me it has been observable by me at least that the movement in housing is that the new house is usually sold to somebody who already had a house and he has to sell that to somebody else before he moves up in class, and that is really the dynamics of the modern house operation, as I see it in my area. Mr. BROWNSTEIN. I don't think there is any question but what this is true, Mr. Hanna. For example, I think that our experience last year verifies this fact. We had a very sharp reduction in FHA activity in the existing house field, and the reason that I think we had this re- duction in activity was because of the very deep discounts that the sellers were asked to absorb in connection with the sale of their houses. And they in turn, who perhaps had been looking at new houses that. they might want to buy, decided that the house they were living in looked much better to them at that point. And the equity that they thought they had been developing over the years was, in fact, being evaporated because of the discount that would be involved in the sale of the house. Mr. HANNA. And I think there is only one point, one other point that I wanted to make, and following along the lady's remarks, and that is the magic word is equity. When you talk about homeownership in the United States today I think you would have to look at it just. as we do with automobile ownership. I would say many of the people in front of me and many. of us back in the stands never get to the point where we have the pink slip of the automobile or the deed to the house in our hands. We have an equity, and when I see the FHA setting up 83-340 0-67-pt. 1-23 PAGENO="0354" 344 CONSUMER CREDIT PROTECTION ACT 40-year mortgages for retirement villages, I think they understood it as equity. A person in the 55 to 65 age is not really looking forward to paying off a 40-year mortgage. Have we not moved into the field of really equity in ownership? Mr. STEPHENS. Would you yield back to me now? Mr. HANNA. I certainly would. Mr. STEPEtENS. I take it, Mr. Brownstein, what Mr. Hanna men- tioned there is like the experience I had in closing a sale for a man. I told the purchaser: "Here is the, warranty deed." He said, "I don't want that, I want the mortgage deed." I said, "Why ?" He said: "The last time I had the warranty deed the fellow who had the mortgage deed got the house." What I want to ask you about, in 5. 5 and in H.R. 11602, and the similar bill that I introduced, first mortgages have been exempt. What was the reasoning, in your understanding, in the Senate for leaving first mortgages out? Mr. BROWNSTEIN. I think probably because, Mr. Stephens, it was believed on the part of many that the interest rate which is stated in the first moztgage is the true interest rate that the buyer pays and that there probably was not the need for the full disclosure in the case of `the first mortgage as there was in other types of credit. Mr. STEPHENS. Would not the effect of that be that in the FHA rules a statement has to show the true interest rate? Mr. BROWNSTEIN. As a matter of fact, as I have testified earlier and have introduced into the record, `the FHA has gone beyond that and lets the buyer know exactly what he is paying, both in terms of rate and in dollar amount. Mr. STEPHENS. In Mr. Weaver's statement and in yours, but I think Mr. Weaver primarily pointed this out. He said that H.R. 11601 would take in more truth-in-lending provisions. Then he cites that putting an `arbitrary limit on financing charges, to authorize consumer credit control during ~ati'onal emergencies, prohibit garnishment of wages, establish a National Commission on Consumer Finance, and prohibit- ing confession of judgment notes, that ought to be looked into further. But nothing was mentioned about the proposal made in H.R. 11601 of truth in advertising. Do you all have any comments you w'ould like to make on the proposals in H.R. 11601 about advertising true rates, and so forth? Mr. BROWNST6IN. Well, I believe that the important thing, Mr. Stephens, is that the prospective borrower know what the true rate is and the amount that he is paying, and our concern would be that a mechanism be provided that would assure him of this kind of informa- tion. Mr. STEPHENS. I would like to make a comment in respect to the points that are charged. As you pointed out, it is reflective `of the marketplace. But if we begin `to try and make some kind of regulation in that we are going to have to go further. than just the mortgage business, because that is the essence of the bond business-the yield. A stockbroker will coun- sel with his client and tell him that if he buys `a certain municipal bond at a given price `c~ith this interest rate, then the yield that he will receive will be so mu'ch. We would have to go into that kind of borrow- ing as well when we get into points. Then we become involved in the PAGENO="0355" CONSUMER CREiMT PROTECTION ACT 345 transaetions that many banks make with Federal bonds and Federal securities, because they are looking for yield based upon what the market price of it is. The Government itself sells its instruments at a discount. If we are going to have to go into the questions of discount, we will have to go into it further than we are prepared to now. Mr. BR0WNSTEIN. Discounts are not confined to mortgages, as you suggest, Mr. Stephens. They are typified in the corporate bond market as well as the U.S. Government bond market. Mr. STEPHENS. Also not confined to consumer items. Sometimes a fellow gets into domestic difficulties, gets a judgment of alimony against him, and will not pay it and his wife cannot get the money out of him, so it is not confined completely to the question of this. Mrs. SULLIVAN. I would just like to comment that the legislation that we are considering would not apply to bonds or anything of that nature. Title I of this bill would only apply to consumer credit. It specifically says on page 17, line 14 of the bill, that the provisions of this section shall not apply to credit transactions involving extensions of credit for busines or commercial purposes, transactions in securities or commodities. So it would not apply to what Mr. Stephens was discussing. Mr. Brownstein, you are always a fine witness and a great help to us. Mr. FIN0. Madam Chairman, I have just one question I would like to ask Mr. Brownstein, if I may. Mrs. SULLIVAN. All right. Mr. FIN0. Mr. Brownstein, from your many years of experience with FHA have you found many cases where banks cheated in financial charges for home mortgages? Mr. BROWNSTEIN. Well, we have had cases, Mr. Fino, where some mortage originators who were then in the program-are not now in because of some irregularities-but this has been an extremely rare occasion. Mr. FINO. Rare case. So when you are speaking of rare occasions, are you speaking of banking institutions, financial institutions? Mr. BROWNSTEIN. Probably there have been a couple over the many years that FRA has been in existence, but it has been an extremely rare thing. Mr. FIN0. Thank you. Mrs. DWYER. Madam Chairman, I have just one more question. We are all concerned over the one major sector of our economy that is apparently depressed, namely the homebuilding industry. During a period of tight money or high interest rates if we were to reveal total dollar costs, would not potential home buyers delay home purchases until interest rates declined, thus sharpening the gyrations in an in- dustry that already suffers the effects of tight money? Mr. BR0WNSTEIN. I think it depends entirely, Mrs. Dwyer, on the particular home buyer and what his circumstance is and depends, if he finds a house that meets his family needs and if this is the house that he believes is what he wants, and if he can afford the down- payment and the monthly payments, these I think will be the elements of his primary consideration. Mrs. DWYER. Thank you. PAGENO="0356" 346 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. Thank you, Mr. Brownstein. As I said, you are a fine witness and you are always helpful to us. Mr. BROWNSTEIN. Thank you, Mrs. Sullivan. Mrs. SULLIVAN. This issue that we have pursued with you on mort- gages is extremely important to this legislation on credit disclosure for I think it is one of the major differences between the disclosure sections of H.R. 11601 and the Senate bill. We thank you very much for your contribution. Mr. BROWNSTEIN. Thank you. Mrs. SULLIVAN. Now we will call the witnesses from the American Bankers Association, Dr. Charls E. Walker, executive vice president, Mr. Thomas L. Bailey of the Marine Midland Corp., of Buffalo, and Mr. John F. Rolph, counsel. The American Bankers Association is represented frequently before this committee, of course, and we appre- ciate your willingness to participate with us in trying to work out the concept and details of this important legislation in the field of con- sumer credit. Dr. Walker, I am wondering if it is a mark of the traditional thrifti- ness of the banker that you save approximately 141/2 percent in the number of letters normally required to spell your first name. Would you gentlemen be able to come back this afternoon for ques- tioning? Mr. WALKER. Yes. Mrs. SULLIVAN. I am sure we can get permission to meet again at 1:30 and we want to give you all the time that is needed, and I know that we cannot do it in the time that is left. So I think between now and the time we recess we will have time to read your statement, and this afternoon we would like you to come back and talk with us. We would also like to ask you some questions. We also have this afternoon the Reverend Robert J. McEwen, chair- man of the Department of Economics at Boston College, who had a great deal to do with the truth-in-lending legislation that is operating now in Massachusetts. We would like later in the afternoon to hear his statement and to let him participate in some of the questions and answers as we are ques- tioning you gentlemen, so that we can have some experience on what has happened in one State on this problem and see how it relates to your position. Mr. WALKER. We shall be happy to do so. Mrs. SULLIVAN. With that understanding, would you proceed now to make your statement? STATEMENT OP CHAELS E. WALKER, EXECUTIVE~ VICE PRESIDENT, AMERICAN BANKERS ASSOCIATION; ACCOMPANIED BY THOMAS L. BAILEY, MARINE MIDLAND CORP. OP NEW YORK; AND JOHN P. ROLPH, AMERICAN BANKERS ASSOCIATION STAFF Mr. WALKER. We appear before you on behalf of the American Bankers AssociatiOn to give you the Views of the association on the bills pending before you-S. 5, as it passed the Senate, H.R. 11601, in- troduced by the subcommittee chairman for herself and other Con- gressmen, and }]I.R. 11602, introduced by Mr. Widnall for himself and other Congressmen, which I understand, is identical with S. 5. PAGENO="0357" CONSUMER CREDIT PROTECTION ACT 347 I am Charis E. Walker, executive vice president of the American Bankers Association. I plan to make a brief statement on behalf of the association and to submit a detailed statement on the disclosure bills for the information of the committee. Mrs. SULLIVAN. Without objection, your full statement will be made a part of the record. Mr: WALKER. We have also developed a statement on technical prob- lems involved in the legislation which we will have available for you before the hearings end. Mr. SULLIVAN. That will be fine. Mr. WALKER. Before I identify my associates I want to apologize for a few typographical errors in the statement. I will identify those as I go along. They have been corrected in the statement brought up today in our desire to get the statement before you as early as possible, and there were some unavoidable typographical errors. Mr. Thomas L. Bailey of the Marine Midland Corp. of New York has worked exteflsively with installment credit and bank credit cards and related matters and will answer questions in this field. Mr. John F. Rolph is a member of the ABA staff and will answer questions on legal and technical matters concerning these bills and related State laws. Consumer credit is vital to our productive and distributive sys- tems and to the health of the economy. Total consumer credit outstand- ing is over $90 billion, of which banks hold more than $30 billion. Con- sumer credit is being extended at the rate of $6 to $7 billion a month, and repayments are almost as large, the net increase during the past year amounting to almost $5 billion. First mortgages, which would also be affected by ILR. 11601, are equally vital to the homebuilding industry and to the economy, and they involve even more money. The total of residential mortgages outstanding is over $200 billion and the amount invested in them in recent years has been in the neighbor- hood of $35 billion per year-that is a gross figure, not a net figure. The ABA has historically endorsed the principle of full disclosure of consumer finance charges and we have strongly supported efforts to improve State laws in this field. As evidence of this we would call the committee's attention to the very substantial support both in time and money which the ABA has given over the past 4 years to the Uniform Consumer Credit Code project of the National Conference of Commissioners on Uniform State Laws. Other segments of the consumer credit industry, consumer groups and foundations have also contributed significantly to this project. Approximately $250,- 000 has been spent on this pro~ject. Our contribution has been approxi- mately $62,500, not counting thousands of dollars of ABA staff time. However, in spite of ABA's support of the principle of full dis- closure, we have been deeply concerned about the possible effect of earlier versions of the consumer credit disclosure proposal on con- sumers and on the con~umer credit industry, practically by reason of the relation between those proposals and the many different State laws applying to various aspects of the consumer credit business. We have also been deeply concerned about the workability of these earlier proposals and the administrative burdens they might impose on the Federal Reserve Board. PAGENO="0358" 348 CONSUMER CREDIT PROTECTION ACT The bill which the Senate recently passed, 5. 5, shows very careful attention to the issues which gave ABA so much concern. While we do not feel that the final Senate version is beyond the need for amendment, we feel it represents a great improvement over the earlier versions. We propose to suggest further amendments which we feel are consistent with the objectives of the proposal. The most important problem raised by the bill is the relationship between it and the many State statutes in the field. We conducted an intensive research project in connection with our testimony in the Sen- ate, and we estimate there are over 400 State statute's of this type which may be involved. In our work with the National Conference of Commissioners on Uniform State Laws on the proposed Uniform Consumer Credit `Code, we have learned of the many hundreds of State laws in this general field-disclosure laws, small loan laws, usury laws, garnishment laws, and so on. These laws differ widely. In some State$, they provide virtually all the protection suggested by any of the bills before the subcommittee. In a few States, legislation in this field is t~dmittedly limited. Still, one thing is clear: If the Fed- eral Government is to enter into this complicated field, it must do so carefully and cautiously; otherwise, the legislation could seriously disrupt existing relationships, to t.he detriment of borrowers and lenders alike. The bills before the committee recognize this problem and contain specific provisions as to `their impact on State laws. State laws would not be affected by the Federal statute except to the extent State laws are inconsistent, and the Federal Reserve Board must exempt from the Federal statute those credit transactions which are subject to State laws which are substantially similar. While there are some technical problems involved in the language of these provisions which are discussed in the detailed ABA statement, we agree with these gen- eral principles. I trust that we will be able `to continue our work with the Commissioners on Uniform State Laws and the ABA committees working in this field, so that the Federal and State laws would be fully coordinated. If all States should adopt laws which qualify for exemption under the Federal law, the new Federal law might even- tually become a standby measure. Until this cooEdination is accomplished, and the State laws are fully meshed in with the new Federal law, serious problems will arise. Many State laws limit finance charges or interest rates and require them to be stated in different ways-percent per month in `the case of credit unions, dollars per hundred or pe'rcent per month or per annum discount or add-on in the case of loans, or the time price in the case of sales. These States will have to decide whether to abandon these re- quirements or to require lenders and sellers to set forth finance charges in two different ways `on each transaction, with resulting danger of confusion. - Many States have stringent usury statutes, prohibiting mterest charges above 6 or 7 or 8 percent simple annual interest. Exceptions to these usury statutes have been carved out by judicial decision or by statute. But when a seller or a lender is required by the new Fed- eral law to state that the "finance charge" is 12, 18, or 24 percent-or PAGENO="0359" CONSUMER CREDIT PROTECTION ACT 349 whatever the charge may be-including credit life insurance and other costs under H.R. 11601 or a more limited group of costs under S. 5 and H.R. 11602, how many courts will disregard the time price doctrine or the add-on or discount statutes, taking the position that the percentage rate disclosed under the new Federal statute must be considered as the interest rate for the purpose of the State usury laws? The Senate committee has taken great pains to make it clear that this is not their intention. We hope all courts will accept this view, but we are dealing with the laws and the courts of 50 different States, and it seems to us unwise to assume that each of these courts will reach the result the Senate committee intended. These problems are compounded under H.R. 11601, which al~o ap- plies to first mortgages, and which imposes ceilings on the amount of finance charges. The problems of coordinating existing State statutes with the new Federal law make it essential to give adequate leadtime before the new law takes effect. In the Senate, the ABA recommended that a 3-year leadtime be provided, since many State legislatures meet only every other year, and some State constitutional amendments will be neces- sary. Another reason is that it will give more time for adoption of the Uniform Consumer Credit Code which is moving toward fruition that is very extensive and will take some time to enact. The Senate cut this down to something less than 2 years-giving a grace period up to July 1, 1969. H.R. 11601 would make title I, including the disclosure provisions, effective July 1, 1968-less than a year away. This, we feel, is entirely insufficient and would surely lead to serious problems in many States. It would lead to mechanical prthlems in the Federal Reserve Board with respect to `the issuance of regulations, as Governor Robertson pointed out the other afternoon. The Senate provided an important safeguard in the provision au- thorizing annual percentage rates to be stated either as a percentage rate per year or as a dollars per hundred per year rate-on the declin- ing balance of the loan-up to January 1, 1972. We believe this alter- native shoul4 continue indefinitely. In any event it is important that it should be continued at least until 1972. H.R. 11601 does not provide for this option. The ABA is also seriously concerned about the installment open-end credit plan provisions of S. 5 and IELR. 11602. These bill's seek to distin- guish between short-term revolving credit and long-term installment credit, using three standards to define plans which must set forth the finance charge on an annual basis: (1) retention of a security interest by the seller; (2) a repayment schedule calling for less than 60 percent of the balance to be paid within 12 month's; or (3) allocation of prepay- ments to future payments in order of due dates. The ABA agrees that finance charges should be stated on a monthly basis, but we oppose dis- criminatory use of different methods of time disclosure. S. 5 and H.R. 11602 would work a real hardship on bank revolving credit, including particularly bank credit card and check credit programs, because in most cases it would require banks to state their finance charges on an annual basis, while many competitors under similar circumstances could state their charges on a monthly basis. We can go into this in detail in the questiQns, if you so desire. PAGENO="0360" 350 CONSUMER CREDIT PROTECTION ACT By stating some types of finance charges on a monthly basis and others on an annual basis, S. 5 and H.R. 11602 would eliminated one of the major purposes of the consumer credit disclosure proposal; that is, to permit borrowers to compare different finance charges and to select the most favorable plan. In order to achieve comparability, we recommend that all finance charges be stated on a monthly basis. We feel there are many good reasons for this and urge your careful consideration of the suggestion. In addition, the elimination of discriminatory methods of quoting charges, monthly disclosure would also automatically solve problems relating to irregular installment contracts. You will be telling the borrower you are going to be charged one point a month, a half point a month, whatever it is. If you skip 2 months or 3 months no problems are involved, in that sort of quotation. There is this in translating it into an annuaj rate. Moreover, the consumer would be given all inf or- mation needed for comparing credit costs, and he could easily convert the monthly rate into an annual charge simply by multiplying by 12. If, however, a universal monthly basis for all consumer credit is not accepted, then we urge that all rates be stated on an annual basis, preferably in terms of dollars per hundred per year on the declining balance. We recognize that this may result in some problems in the case of revolving credit. We recognize also the question of allowing for grace periods, particularly what I am referring to does involve perhaps something misleading to the consumer. This is why we are strongly in favor of the monthly approach. However, these problems are not, in our view, as serious as those imposed on banks and many other creditors by the Senate bill, since the existence of interest-free grace periods and their effect on annual percentages may be adequately disclosed to custhmers under 5. 5. While the revolving provisions of the Senate bill might be revised so as to eliminate some or all of the discrimination against banks and other creditors on the basis of current practices, we believe that in the long run arbitrary statutory standards and definitions of this sort would be harmful. They would force the finance industry to adjust its operations to fit into an artificial mold, which would be detrimental to the best interests of consumers and the finance industry over the coming years. I would like now to turn to H.R. 11601, which contains several pro- visions which differ from the disclosure provisions of 5. 5 and H.IR. 11602. The definition of "finance charge" in H.R. 11601 apparently in- cludes credit life and accident and health insurance, and possibly fire and public liability insurance, all of which are specifically excluded from the finance charge under 5. 5 and H.R. 11602. We oppose this provision. Credit insurance will benefit the purchaser or borrower as well as the creditor; it is not part of the cost of credit, but the cost of an undertaking to ~ay the obligation on behalf of the debtor under certain circumstances-certain sorrowful circumstances at times. This provision will distort the credit charge., and make it difficult to achieve one of the objectives of the `bill-to enable a prospective borrower to compare interest costs with the interest he is getting on his savings or investments. PAGENO="0361" CONSUMER CREDIT PROTECTION ACT 351 We firmly believe that the $10 floor on disclosure in installment loans, as provided by S. 5 and H.R. 11602, must be contained in any Federal disclosure statute. This provision is essential if banks are to continue to make relatively high-cost loans of small amounts. HR. 11601 would include first mortgages, which were excluded from S. 5 on the ground that there was no evidence of substantial abuse in this area. The ABA also opposes this provision of H.R. 11601. H.R. 11601 would require all finance charges to be stated as an annual percentage rate, with no special provision for monthly rates for revolving credit, and without any option to use a dollars-per-hundred- per-year after the effective date. As I have said, the ABA favors uni- form statement of finance charges, in the interest of comparability, but we recommend use of monthly rates, not annual, and we would prefer dollars-per-hundred-per-year to an annual percentage rate. H.R. 11601 would require certain information about credit terms to be stated whenever specific credit terms are set forth in an advertise- ment. We go into this in detail in our supplementary statement. We would agree that if credit terms are advertised, the information sup- plied should be sufficiently complete so that the advertisement is not misleading. The detailed ABA statement contains suggestions for improving this provision. H.R. 11601 also contains several provisions completely unrelated to the disclosure objectives of S. 5 and H.R. 11602. H.R. 11601 would prohibit any finance charge in excess of the maxi- mum rate permitted by State law, or in excess of 18 percent per annum. Since the finance charge must include many items other than interest, such as insurance, service charges, loan fees, and discounts, this pro- vision might prohibit loans and mortgages made at the ceiling per- mitted under State law, if insurance or loan fees or discounts were involved. And since the ceiling of 18 percent on finance charges would also have to include these other items, the effective ceiling on true interest might be reduced appreciably below 18 percent, if any of these other charges were involved. The ABA strongly opposes the enactment of any Federal usury statute, and especially ~a Federal usury statute not based on interest charges in the same manner as State laws but on a much broader finance charge. There is no doubt in our minds that the imposition of the proposed usury statute would substantially reduce the availability of funds for consumer credit from responsible financial institutions and force poorer borrowers into the hands of loan sharks operating outside the bounds of law. H.R. 11601 would prohibit wage and salary garnishment in connec- tion with consumer credit. This is a substantial change in the law of creditors' remedies, which historically has been considered solely within the jurisdiction of the States. This proposal might have substantial effects on the availability of credit for less affluent borrowers. Clearly it has nothing to do with dis- closure of the cost of consumer credit-with "truth in lending." In the limited time since the introduction of H.R. 11601, we have not been able to make a thorough survey of the State laws on this subject, or to obtain the considered views of our members. We shall examine Mr. Anjiunzio's exhibit with considerable interest in that respect. PAGENO="0362" 352 1~ONSUMER CREDIT PROTECTION A~JT Fundamenthl legislation of this sort should be enacted only after thorough C ~sideration of its effect on State laws, on the consumer finance industry, and on the availability of credit for consumers. H.R. 11601 contains two anti-inflationary proposals-authority to regulate consumer credit along the lines of regulation W, and authority to regulate cr-~dit and credit margins on commodity exchanges. Consumer redit regulation was exercised during World War II and the Kore n onflict, as part of overall wage and price stabilization programs. An effort to reinstate consumer credit regulation, on a standby basis, ~ as made in 1966 as part of the extension of the De- fense Production Act. Although there were far greater and more im- mediate inflationary pressures at that time than at the present, the proposal was overwhelmingly defeated by the House. Regulation of commodity exchange credit was proposed by the administrwtiort in 1950 as part of its stabilization program in the De- fense Production Act. It was not adopted. Neither of these proposals has anything to do with disclosure of *the cost of consumer credit-with "truth in lending." We are not aware of `any evidence that inflationary pressures at the present time call for the direct controls which these provisions would authorize, with all their difficulties for the administering agencies, the finance industry, and those prospective consumers who are not so affluent that they can meet their needs without borrowing. On the contrary, the ABA is con- vinced that the current inflationary pressures can be held in check by more conventional and less troublesome methods. H.R. 11601 would establish a nine-member National Commission on Consumer Finance, which would be directed to study and appraise the functioning and structure of the consumer finance industry, in- cluding the adequacy of the existing industry to provide consumer financing at fair rates, the adequacy of existing supervisory and reg- ulatory mechanisms to protect the public from unfair practices, and the desirability of Federal chartering of consumer finance companies. The ABA cannot support this provision. The House and Senate Banking `and Currency Committees, the Joint Economic Committee, and the executive agencies can make any needed study of consumer financing and can give advice and recommendations to the Congress and the President. We have cooperated with the studies of these groups in the past; we shall continue to do so in the future. In summary, the ABA believes that S. 5 and H.R. 11602 represent great improvements over disclosure legislation introduced in Con- gress in recent years. We believe that H.R. 11601 would have a decidedly adverse impact on consumers, lenders, and the economy, and therefore oppose its enactment. Thank you very much. (The supplementary comments follow:) SUPPLEMENTARY COMMENTS AND RECOMMENDATIONS OF THE AMERICAN BANKERS ASSOCIATION These comments and recommendations of The American Bankers Associa- tion supplement the statement made before the House Banking and Currency Committee, on August 10, 1967, on 5. 5 and H.R. 11601 and other similar bills on the subject of the disclosure of finance charges in consumer credit trans- actions. PAGENO="0363" CONSUMER CREDIT PROTECTION ACT 353 The position of The American Bankers Association on the "truth-in-lending' bills before this Committee may be summarized as follows: 1. A single uniform method of time disclosure should be applied w-ithout discrimination to all creditors and all types of credit in order to provide con- sumers with a one unqualified test for comparing consumer credit costs. We recommend that the monthly method of time disclosure is best designed for this purpose. However, if the Congress does not agree, we believe that the annual method of disclosure should be uniformly applied to all creditors and all types of credit. 2. As provided by 5. 5, it is essential that creditors should be permitted the option of stating finance charges or rates in terms of dollars per hundred at least until January 1, 1972. S 3. As provided by S. 5, it is es~entia1 that the $10 floor on rate disclosure for installment loans be permanently retained if commercial banks are to continue to make small accommodation loans to certain classes of borrowers. 4. The effective date of any Federal disclosure act should be no earlier than July 1, 1970 in order to permit the State legislatures to take necessary action to amend affected State laws and to facilitgte the implementation of the Uniform Consumer Credit Code. 5. As provided by S. 5, finance charges to the extent that they are required to be stated as a rate should not include insurance charges. 6. As provided by S. 5, first mortgage real estate loans should be excluded from the disclosure requirements. 7. In accordance with S. 5, maximum interest rates or finance charges for consumer credit transactions should be left to the several States for determina- tion and should not be prescribed by a Federal law. 8. A Federal Act should not vest broad and cumbersome enforcement responsi- bilities in the Federal Reserve Board but should contain the system of "self- enforcement" provided by S. 5. 9. A Federal Act should not place any restriction on the traditional rights of creditors to collect unpaid debts which historically has been the subject of State jurisdiction. 10. Standby credit controls are not needed at this time and have no logical place in a Federal truth-in-lending law. 11. Provisions governing disclosure in advertising should be reasonable. We recommend that the approach in the Uniform Consumer Credit Code be adopted. COMMENTS ON S. 5 A UNIFORM METHOD OF TIME DISCLOSURE In testimony on 5. 5 before the Senate Banking and Currency Committee on June 23, 1967, representatives of The American Bankers Association urged that a single, uniform method of time disclosure for all creditors and classes of credit should be adopted in any Federal disclosure Act. This recommendation was based upon (1) the fact that Section 3(h) of 5. 5 contains a provision which would arbitrarily discriminate against certain creditors in different seg- ments of industry and (2) the need for a time disclosure method which provides consumers with a uniform and unqualified test for comparing credit costs. The "installment open-end credit plan" provision in Section 3(h) requires that an open-end credit plan which (1) creates a security interest in property, or (2) does n~t provide that at least 60 percent of the unpaid balance is to be paid within 12 months, or (8) provides that excess payments are applied to future payments-shall Je subject to an annual rate of disclosure. S. 5 would provide that all other open-end or revolving credit plans which do not contain any one or more of these three characteristics would be subject to monthly disclosure. On the basis of the hearings before the Senate Committee it is clear that the pro- vision in Section 3(h) is geared to the accounting methods and credit practices of a few large members of the retail industry. In the case of commercial banks, this provision is both arbitrary and dis- criminatory for two important reasons. The great majority of bank revolving check credit or credit card plans provide consumers with payment terms which are more liberal than the 60 percent 12 month pay-out requirement of Section 3(h). In other words, typical bank revolving credit plans permits a consumer at least 20 months, or in some cases 22 or 24 months, in which to pay off an PAGENO="0364" 354 CONSUMER CREDIT PROTECTION Ac~T obligation. In the future, and in the ajsence of any arbitrarily imposed stric- ture under Federal law, bank plans may well afford even more liberal terms. The typical "mix" in a bank revolving credit account involves customer pur- chases varying from automobile gasoline or low cost department or chain store iteius to refrig~rators, television sets or airplane tickets. In view of the fact that the majority of existing bank revolving credit plans provide payment terms of 20 months or longer, these bank pians do not meet the 60 percent, 12 month pay-out requirement under Section 3(h). The maximum pay-out under a 20 month bank plan would be slightly under 5 percent per month on the declining balance in the account. Most bank plans would not even closely approach the 60 percent pay-out requirement in Section 3(h). The 60 percent figure is truly arbitrary. The result would 1e that under this provision practically all existing bank revolving credit plans would be subject to an annual disclosure rate whereas competitors who may offer less flexible revolving credit terms would be able to quote a much lower monthly disclosure rate. It is also to be noted that many bank revolving check credit and credit card plans permit th~ taking of a security interest in property which a customer may charge to his rei'olving credit account. This feature, which is a growing develop- ment in bank revolving credit, provides definite and ascertainable benefits for the consumer. It means that the consumer need not seek an installment loan, with its attendant higher acquisition and servicing costs, on, for example, the purchase of a television set, but instead may charge the set to his revolving credit account. Acquisition and servicing costs in a revolving line of credit are sub- stantially lower than in individual installment loan or sale credit transactions where a new loan account must be set up for each transaction. As indicated in our testimony of June 23 before the Senate Committee, if banks are placed at a competitive disadvantage because they have to quote an annual rate in cases where security interests would be taken in revolving credit loans, many banks may restrict this economical form of credit. Many retailers, including small retailers who are not able to offer revolving credit terms on such items as furniture, television sets, or major home appliances, but who typically make such sales under installment credit arrangements involv- ing security interests, would be also subject to discrimination in that they would be restricted to annual rate disclosure while some of their larger retail competi- tors would be able to quote monthly rates. The net effect of the "installment open-end credit plan" in Section 3(b) is that banks, because of their flexible revolving credit terms, and many other ex- tenders of credit who are restricted to installment credit transactions, would be discriminated against without legitimate foundation. The end result is that the consumer is ultimately bound to suffer. It is paradoxical that the Senate Committee report on S. 5 supports the argu- ments of the banking industry and many other extenders of credit in behalf of uniform disclosure even though, despite these views and the urgings of industry, the Committee chose to retain this extremely discriminatQ~y provision. In elaborating upon the different practices which have developed historically in the consumer credit industry and in stressing the need for standardized legisla- tive requirements, the Committee report makes the following statement: "No one segment of the industry can afford to reform itself by disclosing the simple annual rate without incurring a competitive disadvantage. Clearly, the only solution is to require by legislation that all creditors use the same method in computing and quoting finance charges including the statement of an annual percentage rate. "The committee believes that by requiring all creditors to disclose credit inf or- mation in a uniform manner and by requiring all additional charges incident to credit to be included in the computation of the annual percentage rate, the Amer- ican consumer will be given the information he needs to compare the cost of credit and to make tile best informed decision on the use of credit." [Emphasis supplied.] Despite these commendable statements of principle, the Senate Committee voted to retain the controversial and discriminatory provision in Section 3(h). A.B.A. representatives at the June 23 hearings urged the Senate Committee to consider placing all consumer credit on a uniform monthly disclosure basis. Our reasons for this recommendation were that installment and revolving credit charges may be accurately calculated and disclosed on a monthly basis. Credit unions historically have used the monthly charge for rate calculation and dis- PAGENO="0365" CONSUMER CREDIT PROTECTION ACT 355 closure. The average consumer receives his income or salary, is billed for and makes payments for purchases and services and generally budgets his personal economy on a monthly basis. Monthly disclosure is more accurate in revolving credit than annual disclosure which may produce some distortions in the actual rate or charge to the consumer because of 30 to 60 day interest-free grace periods and because consumers frequently pay off revolving credit obligations in one, two, or three months in which case the rate actually charged may be sub- stantially less than an annual rate. It is for these reasons that The American Bankers Association recommended that the Senate Committee adopt the monthly method of time disclosure. In addition to avoiding a discriminatory effect among different creditors, one of the most important advantages to calculating and disclosing finance charges on a single and uniform basis is that this concept will permit the consumer to make a direct, uniforsi and accurate comparison of credit costs as between different categories of credit e~ctenders and as between different types of con- sumer credit. In other words, a single standard of time disclosure would permit the consumer to easily evaluate the comparative costs as between lender and vendor credit and as between installment and revolving credit. Although we have urged the Congress to adopt the principle of monthly time disclosure because we believe that this method is best designed to serve the needs of the consumer and the credit industry as a whole, it is the considered judgment of the banking industry that in the final analysis it is essential that whatever method is decided upon must involve a single nondiscrimimatorjj sys- tem of time disclosure to be uniformly applied to all creditors and all types of credit. Uniformity is essential if the consumer is to be given the means by which he may compare the costs of credit and if the credit industry is to be permitted to operate with optimum effectiveness. If the Congress should decide that monthly disclosure is not feasible for a Federal disclosure Act, then we urge that the annual method of time disclosure be adopted and applied uniformly and without discrimination to all creditors and all types of credit. DIscLosulm-TxIn OOLLAnS PER nu~rnurn OPTION As indicated in this statement and as previously expressed in the hearings and statements made in connection with the truth-in-lending bills which have been introduced since 1960, The American Bankers Association historically has endorsed the full and complete disclosure of finance charges in connection with all extensions of consumer credit Beginning in 1960, at the time of the first Senate committee hearings on truth-in-lending legislation, the Association urged that disclosure legislation should require the expression of finance charges in terms of a dollars per hundred rate of charge. We have believed that a finance charge expressed In terms of a dollars per hundred rate of charge, combined with an itemized statement of all credit charges in terms of their dollar costs, would provide consumers with a much more usable and eomprehensible~m.edium of measuring comparative credit costs than would be provided by either a simple annual rate or by an annual per- centage rate. It Is significant that the Special Committee of the National Con- ference of Commissioners on Uniform State Laws, after several years of inde- pendent study and research on the subject of various methods of finance charge disclosure, arrived at a similar conclusion in drafting the proposed Uniform Oousumer Credit Code. It is also significant that approximately half of the state statutes which govern consumer credit transactions require that finance charges either be cal- culated or disclosed in terms of dollars per hundred add-on or discount The great majority of these statutes, as well as the state credit statutes which require finance charge disclosure or rate calculation on a percentage add-on or discount basis, constitute statutory exceptions to the interest (usury) statutes Although contract interest rates under the state usury statutes vary from 6 per- cent to 21 percent simple interest, the majority of the usury ceilings for contracts range from 6 to 10 percent simple interest. A Federal finance charge disclosure act which would require that credit costs be stated in terms of annual percentage rates, without an option to express such rates in terms of dollars per hundred, would create serious problems with re- spect to potential litigation on the subject of usury In a substantial number of PAGENO="0366" 356 CONSUMER CREDIT PROTECTION ACT states. By wtty of illustration, a state statute governing interest rates on con- tracts may ix~ipose an 8 percent simple interest ceiling on such transactions. If we assume that there is a special installment loan law or small loan law in that state which expressly permits lenders to calculate and disclose interest charges on a $6 per $100 add-on or discount basis, it may be seen that a Federal Act re- quiring an annual percentage rate disclosure would produce a rate of charge in excess of 11 percent under the formula contained in the proposed Federal Act. Some State courts may interpret the disclosure requirement of the Federal Act as preempting or superseding the disclosure requirement of the special loan statute which would otherwise govern disclosure. The result would be that the rate required to he stated under the Federal Act would supersede the rate per- mitted under the special loan law and would exceed the 8 percent rate ceiling under the applicable state usury statute. It is acknowledged that the Senate Committee report on S. 5 and the bill itself do state that the disclosure provi- sions of the Federal Act are not intended to precipitate actions under the usury statutes of the ~everal states. Although this is a commendable statement of legis- lative intent, it is clearly not binding on the judgments of the courts of the fifty states with resp~ct to whether or not an action for usurious charges may exist. The constitutions of some states present special problems with respect to the implementation of the Federal Act. Some state constitutions contain express limitations on interest charges and also provide that the state legislatures may not enact special legislation on this subject. In some instances, dollars per hun- dred add-on of discount finance charge disclosure methods historically have been employed to produce rates which, because of the accepted method of quotation, do not conflict with the simple interest ceiling imposed by the state constitution. The annual percentage rate disclosure requirement under S. 5 may produce serious problems in these states. It is probable that constitutional amendments would be required in several states where special problems of this or a similar nature exist. It is for these i~easons that the A.B.A. has urged that any Federal credit dis- closure legislatioil should permit charges to be expressed in terms of a dollars per hundred rate. 5. 5. and H.R. 11602, in transactions where an annual percen- tage rate is required to be disclosed, permit such rate to be expressed either as a percentage rate per year or as a dollars per hundred per year rate of the average unpaid balance. Similarly, under these two bills a monthly percentage rate in the alternative may be expressed as a dollars per hundred per period rate. Under the Senate bill and H.R. 11601, the dollars per hundred rate disclosure alternative is permissible until January 1, 1972. Although the A.B.A. is indeed gratified that the Senate Banking and Currency Committee recognized the importance of a permissible dollars per hundred rate alternative until January 1, 1972, we are not fully convinced that the legislatures of the several states will be able to enact amendatory legislation by January 1, 1972, or to amend the constitutions of several states, by that date in order to bring applicable state laws into line with the requirements of the Senate bill and H.R. 11602. We are convinced that the continued smooth flow of credit to consumers re- quires that a dollars per hundred option be permitted under any Federal finance charge disclosure law. rim sio FLOOR ON SATE DISCLOSURE The disclosure provisions in Section 4(b) (7) relating to sales and in Section 4(e) (5) relating to loans in both S. S and H.R. 11602 require that the finance charge be expressed as an annual rate ". . . if the amount of such charge is $10 or more. . . ." Thus, the Senate bill exempts from the disclosure requirement installment sale and loan transactions in which the finance charge is less than $10. When S. 5 was under consideration, The American Bankers Association recommended that the rate disclosure provision relating to loans be amended to incorporate a $10 floor for disclosure purposes. From the point of view of the consumer lending industry, the $10 floor on rate disclosure in the case Qf loans is essential if banks are to continue to make "accommodation" loans. These are relatively high-cost loans of small amount which are made for the convenience or necessity of borrowers such as teachers, farmers and salesmen who have irregular incomes or borrowers who may be in marginal economic circumstances. Such loans usually are in amounts under PAGENO="0367" CONSUMER CREDIT PROTECTION ACT 357 $300 and are repaid within a matter of a few weeks or one to three months. The administrative or servicing costs in these loans are substantial in relation to the amount of credit extended and the yield thereon. Banks frequently have a minimum charge for these loans merely to cover the adm~nstrative costs of the transaction. A number of state statutes expressly exempt such minimum charges from rate disclosure. This provision of H.R. 11601 would have a serious impact on lenders. If banks are required under a Federal disclosure law to convert a $10 minimum charge to an annual percentage rate on a $150 loan which is to be repaid in forty-five days then banks may well stop making loans of this size. The annual percentage rate on such a loan would appear inordinately high in comparison to the rela- tively lower rate on the typical bank installment loan which is usually much larger in amount and much longer in term. Unless the $10 floor on disclosure is allowed, it is safe to predict that many banks may stop making small unsecured short-term loans to the detriment of less affluent consumers. The disclosure provisions of H.R. 11601 in Section 203(c) (5) relating to loans have omitted the $10 floor on rate disclosure. For the reasons above stated, we recommend that this Section be amended to correspond to the related provisions in S. 5 and H.R. 11602. THE EFFECTIVE DATE AND THE IMPACT ON SPATE LAW As indicated in our statement to the House Committee, one of the most important problems posed by S. 5 is its relationship to the more than 400 state statutes which govern or relate to consumer credit transactions. With the possible exception of the retail installment sales acts and laws governing the activities of small loan companies in some states, these statutes do not follow any clear or ascertainable pattern. They have been drafted at different times over the years and under circumstances when conditions have differed substantially. The statutes in many states have been designed to accommodate different regional economic and credit industry characteristics. For example, several different loan laws in a single state may govern different types of loans made by commercial banks in that state. No single statute may govern all of the loans made by com- mercial banks. In many states there are several special statutes which govern commercial bank loans and there are other statutes which individually govern loans made by industrial banks, Morris Plan banks, consumer finance companies, credit unions, savings and loan associations, mutual savings banks, pawnbrokers and real estate loans made by different lenders, The finance charge disclosure provisions in such statutes vary in great degree. Some statutes provide disclosure in terms of dollars per hundred per year add-on or discount. Others provide for monthly dollars per hundred add-on or discount, while still others provide for percent per month add-on or discount or percent per year add-on or discount disclosure. Some statutes do not require that a rate in fact be disclosed, but simply require that rates above stated maximums according to specified credit terms may not be charged. Some disclosure provisions are contained in general licensing statutes which govern a specific segment of indus- try. Many disclosure statutes have been specially enacted and relate to other statutes which contain general powers pnder which a given segment of industry may operate. Also, a number of statutes contain limitations on either the type of transaction to which the disclosure provisions relate or on the parties who may be subject to the requirements of a particular statute. Special constitutional limitations exist in several states which may well cause relatively serious legislative problems. In some of these cases, the state con- stitutions may have to be amended which may be a laborious and time-consuming procedure depending upon the particular method of amendment required under the constitution. It is possible that in one or two cases the state coimtitution may prohibit enactment of a law along the lines of the proposed Federal Act In which case the Federal Act may be the sole statutory authority governing transactions in the state. There is no consistent pattern in the state statutes relating to penalties imposed for a failure to disclose required information or for other types of violations of credit statutes. Many disclosure acts contain specific penalties for violations thereof while others do not contain specific penalties but may make the penalty for violation subject to the operation of the State usury statute. PAGENO="0368" 358 CONSUMER CREDIT PROTECTION ACT Thus, it may be clearly seen that there are many potential areas of conflict or difference between the proposed Federal Act and the hundreds of state statutes which will be affected thereby. The amendment of these state laws to conform to the requirements of the proposed Federal Act will be no simple matter. There will be a heavy burden on the legislatures of many states to amend affected statutes. Because of our concern about this problem and the potentially high degree of confusion that may well exist in the minds of creditors and consumers alike with respect to exactly what statute or provision may govern individual credit transac- tions, the A.B.A. has recommended that the states be given a three-year lead time to amend the state statutes or constitutions before the Federal Act takes effect. The Senate Committee cut this leadtime down to less than two years by making the effective date July 1, 1969. H.R. 11601 would make the effective date of the Federal Act July 1, 1968, which is less than a year away. We believe that these dates are entirely insufficient to provide the states with adequate time to amend their laws. The orderly functioning of the consumer credit industry must be maintained and the threat of pOtential litigation must be minimized-both to the maximum pos- sible degree. Moreover, the proposed Uniform Consumer Credit Code is nearing to com- pletion. If the proposed Federal Act becomes law, the Code will be amended to the extent necessary to incorporate the substantive provisions of the Federal Act. The present time table of the Uniform Law Commissioners envisions that the Code will be presented to their National Conference and the American Bar Asso- ciation in 1968 for ratification and that the Code will be submitted to the legisla- tures of the 50 States for adoption by January 1, 1969. The Uniform Code would supersede or replace virtually all state statutes governing consumer credit transac- tions, including the state usury statutes. The Code is a much more comprehensive legislative approach to all aspects of consumer credit and consumer interests than is the proposed Federal Act. In the long run, con$umers will derive substantially greater benefit from the Code than from the relatively limited legislative purpose of S. 5. Therefore, a strong case may be made for avoiding a two-step procedure whereby the states would be required (1) to amend state laws to conform to the Federal Act and (2) there- after adopt the relatively complex Uniform Code. It clearly would be best if the effective date of the Federal Act were delayed until 1970 in order that it should be made the primary inducement for the state legislatures to enact the Uniform Code immediately. There is a distinct possibility that if an early effective date, such as July 1, 1968 or July 1, 1969, is established under the Federal Act many states, after amending their statutes to conform to the Federal law, will there- after ignore the Uniform Code. This suggested approach is clearly consistent with the following statement contained in the Senate Committee Report: ". . . the National Conference of Commissioners on Uniform State laws has been working quite diligently on a proposed consumer credit code to recommend to the various State legislatures beginning in 1969. The committee applauds and endorses the worthwhile efforts of the National Conference of Commissioners on Uniform State Laws and urges that the States act favorably in adopting a unifor~u consumer credit code. Although this bill would be limited to the dis- closure aspects of consumer credit, the proposed consumer credit code goes considerably beyond disclosure and, in fact, proposes a variety of beneficial changes in the entire consumer credit area. The committee is hopeful that these worthwhile efforts will not be hampered by the passage of the Federal truth in lending law." [Emphasis supplied.] It is therefore recommended that the states be given at least a 30 month lead time from January ~, 1968 and that the effective date of the proposed Federal law should be no earlier than July 1, 1970. COMMENTS ON H.R. 11601 THE 18 PERCENT INTEREST CEILING H.R. 11601 in establishing an 18 percent finance charge ceiling goes far beyond the objectives of a~y previously proposed Federal Truth-in-Lending legislation. In the first place, the provision in Section 203 (1) which sets the ceiling at (1) the maximum rate permitted under State law, or (2) 18 percent per annum, whichever is less, is not supportable on either economic or legal grounds. Con- PAGENO="0369" CONSUMER CREDIT PROTECTION ACT 359 tract interest ceilings under the laws of the several States vary from 6 to 24 percent simple interest. These ceilings are contained in the State usury statutes. Four States have no usury ceilings on credit transactions subject to contract. As previously indicated in this statement, the State legislatures in the great majority of States have found that statutory usury limitations have been obso- lete and economically unfeasible when applied to many different types of credit transactions. As a result, they have enacted special legislation permitting interest rates in credit transactions which exceed the contract usury rates that would otherwise be applicable. The 18 percent ceiling is much more restrictive than the maximum interest or finance charge ceilings permitted under numerous existing State statutes govern- ing certain types of financial transactions. For example the small loan laws in a number of States permit ceilings in the range of $18 to $20 per hundred per year add-on (approximately 36 to 40 percent simple interest) or even higher rates in some cases, in loan transactions which may range up to $300. Small loan rates, and in many cases bank instalment loan rates, are graduated in accordance with the size of the loan and the maximum maturity prescribed by State law. The statutes which govern small loan company transactions, bank instalment loan transactions, and the transactions of consumer finance com- panies for the most part constitute intended exceptions to the State usury statutes. The higher rates permitted for small or medium-sized loan transac- tions are predicated upon the relatively high cost factor involved in such loans in proportion to their yield to the lender as well as, in certain cases, the rela- tively high risk factor. On balance, the great majority of commercial bank Instalment and revolving credit loans are made at rates less than 18 percent per annum. On the other hand as stated earlier in these remarks, banks do make accommodation loans which involve short-term small-amount advances. These accommodation loans, which generally may range from $100 to $300 may be made for anywhere be- tween 15 and 90 days. The acquisition and servicing costs involved in such a loan may amount `to between $10 and $15 per transaction. If a bank should be required to convert the minimum cost involved in accommodation loans to an annual percentage rate, this rate would substantially exceed 18 percent per annum. It is also pointed out that banks by-and-large do not make much profit from loans of this type. They are frequently made to accommodate people with irregular incomes and `less affluent borrowers. The imposition of an 18 percent ceiling on finance charges or interest cannot be countenanced if only for the reason that the consumer will be made to suffer significant economic harm. If legitimate lenders are cut off from making small loans at rates higher than 18 percent, marginal credit risk borrowers may be driven into the bands of loan sharks who will make advances at rates substan- tially in excess of the proposed 18 percent ceiling. It is highly significant that the Uniform Law Commissioners, after years of studying all aspects of the question of maximum loan charges, have proposed a scale of graduated rates in the Uniform Consumer Credit Code which con- siderably exceeds the 18 percent ceiling con'taixied in HR. 11601. The Code rate's would supersede or replace the ceilings imposed by State usury statutes and the numerous special laws which `today constitute exceptions to the usury statutes. These rates on closed-end loans range from a high of $18 per $100 (i.e., approxi- mately 36 percent) on loans of $300 or less to' a low of $8 per $100 (i.e., approxi- mately 16 percent) oh loans of $1,000 or more. An optional ceiling of 18 percent per annum according to the United States rule is permitted~ FINANCE CHARGES The definition of "finance charge" in Section 202(d) includes charges or premiums for property damage, liability, credit life, accident, and health insur- ance. It is to be noted that insurance charges or premiums of these types are expressly excluded from the definition of "finance charge" under `S. 5 and H.R. 11602. It is the considered opinion o~ The American Bankers Association that a finance charge in a credit transaction should not include the insurance charges so described. 5. 5 and H.R. 11602 quite correctly require that dollar charges of this nature be separately itemized and disclosed to the borrower or the credit purchaser. These forms of insurance generally are optional at the request of the borrower or credit purchaser and are for his direct benefit in that they afford 83-340-67-pt. l----24 PAGENO="0370" 360 CONSUMER CREDIT PROTECTION ACT protection against personal loss or assure the discharge of his obligation in the event of the occurrence of an unforeseen contingency. The requirement under H.R. 11601 that insurance charges or premiums be included in the finance charge upon which the annual rate is based would result in an unjustifiable inflation and distortion of the rate of charge. After all, the finance charge is the principal medium which enables a borrower or credit pur- chaser to compare the costs of credit. Finance charges are not truly comparable unless they relate solely to the service or commodity involved in the transaction. They should i~ot include miscellaneous or collateral charges such as insurance which may or may not be involved in a transaction depending upon the needs of a specific *ndivldu'al who seeks the extension of credit. A finance charge should involve a relatively fixed concept to `be of utility to consumers for the purpose of eom~áring credit costs. A requlremet~t that insurance or other miscellaneous charges be included in the finance charge Which must be converted to a rate would probably create problems unde~t the usury statutes of a number of States. For example, if a residential mortgage loan is made at the maximum contract interest rate per- mitted under `State law, the inclusion in the finance charge of insurance charges or various other charges which traditionally have not been required to be included in "interest" rates could drive the rate over the ceiling prescibed `by the State usury statute. DISCLOSURE-THE DOLLARS PER HUNDRED OPTION The Association urges that any Federal finance charge disclosure Act should contain a permi~s1ble option for expressing the finance charge in terms of dollars per hundred in lieu of a statement in terms of a percentage rate. As previously noted, S. 5 permits a dollars per hundred option until January 1, 1972. With regard to the dollars per hundred option, lIlt. 11601 contains provisions which are truly perplexing. Section 203(1) permIts the annual percentage rate to be expressed in the alternative as a dollars per hundred per year rate of the average unpaid balance prior to JuZy 1, 1968. Subsection (2) provides that after July 30, 1968, all rates must be expressed as percentage rates. This provision is altogether meaningless in view of the fact that the effective date of H.R. 11601 is stated in Section 211 to be J'uly 1, 1968. Thus, Section 208(1) permits the dollars per hundred option to operate before the Act becomes law! We can only assume that one or more of these dates is in E~rror. THE $10 FLOOR ON RATE DISCLOSURE As indicated In the remarks relating to S. 5 and ILR. 11602, the disclosure pro- visions of H.R. 11601 in Section 203(b) (7) relittlng to consumer credit sales and under Section 203(c) (5) relatIng to loans omit the $10 floor on rate disclosure. For the reasons previously elaborated, the Association urges that I1.R. 11601 be amended so that this provision will correspond to the related provisions under S. 5 and H.R. 11602 with the result that rate disclosure would be required only in instalment baits in transactions in which the finance charge Is $10 or more. ADVERTISING The disclosure in advertising provision In Section 203(j) (1) seems to us to be ambiguous. In ~ffect, this provision requires that certain information must be set forth If a creditor advertises that "specific credit terms are available." The question arises as' to whether the term "specific" relates to an advertisement which contains credit terms for a 8peeifie commodity, servi?e or loan or whether, in effect, this term Is intended to apply to au example or illustration of credit terms that may be provided by the creditor. In the event that the former assump- tion Is correct, it would be meaningless to state, as Is required, the down payment or the time sale price because these two factors vary according to the individual credit transaction. In other words, different constimers will make down pay- ments of different sizes and in an instalment loan or sale the size of the instal- ment payments and the term of the loan will vary from transaction to transac- tion. More important, from our point of view, is the fact that the items of informa- tion in Subsection (A) through (E) of this provision quite obviously do not PAGENO="0371" CONSUMER CREDIT PROTECTION ACT 361 relate to typical instalment or closed-end loan transactions. For example in the typical loan transaction there is no "cash sale price," "down payment," or "time sale price It is apparent that through obvious inadvertence this provision was designed to apply to consumer credit sales rather than to loans It is suggested that difficulties in terminology and application of the advertis ing disclosure provision may be resolved by deleting the existing provision and In lieu thereof adopting the approach to disclosure in advertising which has been developed by the Uniform Law Commissioners in the NC'CUSL Second Tentative Draft of the Uniform Consumer Credit Code. The Code contains advertising disclosure provisions for both sales and loans in Section 2.302 and 3.303, respectively. These provisions state that an advertisement is misleading (and the advertiser is subject to penalties) (1) if it states the rate of the finance charge in a form other than the form in which the rate is required to be disclosed by the Code, or (2) if it states the dollar amount of the finance charge or the installment payment, and does not also state the rate `of the loan finance charge~ and the number `and amount of installment payments. The advertising pro- visions of the Code also authorize the Administrator in each State to adopt rules which establish guidelines for determining the legality of advertising prac- tices within the framework of the substantive Code provisions on `advertising. We urge that, if the Congress should determine that it is appropriate to in- corporate provisions governing advertising practices IA consumer transactions in a Federal finance charge disclosure Act, the Uniform Consumer Credit Code approach to this subject above summarized be followed. Moreover, it is our recommendation that the Board of Governors of the Federal Reserve' System be expressly authorized to promulgate rules and regulations for `the purpose of establishing guidelines to implement such a provision. LIMITATIONS ON CREDITORS' RIGHTS HR. 11GO1 would prohibit creditors from `accepting a confession of judgment against a debtor `and would also prohibit the garnishment of wages or salary to satisfy an unpaid obligation `in connection with consumer credit transactions. The A.B.A. is opposed to these limitations on creditors' rights or remedies, pro- visions which are entirely outside the scope of the accepted legislative intent of the bills before this Committee-the disclosure of finance charges in consumer credit transactions. Historically, the question of creditors' rights or remedies with respect to col- lection of unsatisfied obligations has been within th'e jurisdiction of the several States. Limitations on creditors' remedies have been the subject of a serious and impartial study by the Uniform Law Commissioners. The proposed Uniform Consumer Credit Code contains some limitations on garnishment but these limitations by no means constitute an absolute prohibition on this traditional remedy. In abort, the Code proposes to prohibit garnishments prior to a creditor's obtaining a judgment against the debtor. After the creditor's claim has been reduced to judgment, the Code permits the creditor to garnishee the debtor's earnings in excess of a minimum total earnings figure. This figure is subject to adjustment by action of the State administrator or agency charged with admin- istering the provisions of the Code. The point to be stressed here is that the Chde would leave matters affecting creditors remedies to the jurisdictions of the individual States. Any prohibition or stringent limitation on the traditional right of a creditor to follow and collect on an obligation clctrly will have the ultimate effect of hurt- ings consumers generally. Such restrictions will doutless cut off or reduce the availability of credit to less effluent borrowers and other consumers who are in marginal economic circumstances. It is important to note that this situation may be influenced by the area and the size of the creditors. A large creditor for example a nationwide retailer or a bank with outlets or offices in major urban centers, may not find it necessary to resort to garnishment as frequently as a small creditor to collect on unpaid obligations. This may be due to a number of factors, including the volume of creditor's business, the efficiency of his col- lection procedures, the creditor's delinquency ratio generally, and any other con- siderations which affect the creditor's ability and need to collect on the obliga- tions. On the other hand, a small bank or retail merchant operating under limited capitalization and with less effective collection procedures may well have to resort to wage `attachment or garnishment in order to stay in business. PAGENO="0372" CONSUMER CREDIT PROTECTION ACT It is also important to note that many consumers who are in marginal economic circumstances or who have records of prior credit delinquency or bankruptcy may not be able to obtain credit because they lack the ability to produce as- surances against nonpayment. In these cases, the only assurance against non- payment may be the consumer's earning capacity, i.e., the ability of a creditor to look to a portion of the debtor's earnings for satisfaction. If confessions of judgment and garnishments are prohibited by Federal statute there l's a dis- tinct probability that many consumers who are essentially judgment-proof may be denied credit by legitimate lenders and may be forced to resort to the loan shark who lend~ at exorbitant and illegal rates. FIRST MORTGAGE REAL ESTATE LOANS S. 5 and H.I~. 11602 expressly exclude "transactions `involving extensions of credit secured by first mortgages on real estate" from the operation of these proposed Acts, Conversely, the exclusions provision in Section 203 (n) of H.It. 11601 does not exempt first mortgage real estate transactions from `coverage. It is the considered judgment of The American Bankers Association that these transactions should be expressly excluded from any Federal finance charge dis- closure law. The Senate Committee's decision to exclude first mortgage real estate loans was made in cognizance of the fact that there are very few known abuses in loans of this type and finance charge disclosure in this field is fully adequate. The Uniform Lm~w Commissioners have excluded first mortgages or first deeds of trust from `tl~e disclosure requirements of the proposed Uniform Consumer Credit Code for these reasons. Moreover, disclosure requirements for relatively short~term consumer credit are not appropriate for real estate loans which have maturities of 20 Or 30 years. The ABA. fully endorses the need for requiring disclosure `in all second mort- gage and second deed of trust transactions which relate to residential real estate. ,It is acknowledged that there have been flagrant abuses in `the form of inordi- nately high rates charged `by some unscrupulous lenders in transactions of this type. This problem would be rectified by a full and complete disclosure of finance charges in these transactions as is required under S. 5 and the two House bills. TIlE REGULATION OF TRADING IN COMMODITY FUTURES AND STANDBY CREDIT CONTROLS In 1950, the Ad~ninistration, as n part of its stabilization program under the Defense ProductiOn Act, proposed that all commodity exchange credit trans- actions be subjec1~ to Government regulation. This proposal was not adopted by the Congress. Standby consumer credit controls have been employed during emergency pe- riods such as World War II and Korean conflict. In `both cases, this program of credit regulation was an integral part `of a broad-based wage and price `stabiliza- tion program. An attempt was made in 1966 to reinstate consumer credit controls on a standby basis under `the Defense P'roduction Act, but this proposal was de- feated in the House `by a `substantial margin. In `connection with the proposed regulation of trading in commodity futures under Section 207 apd the proposed standby credit controls under Section 208, the A.B.A. urges that neither `of these proposals is relevant to the basic objectives of this legislation, i,e., the `disclosure of finance charges in consumer credit trans- actions. Moreover, mb evidence `has been suggested or produced which would in- di'cate that there i's a need for these `controls. It is our considered judgn~ent that current inflationary pressures can best be handled `through fiscal and monetary actions. ADMINISTRATIVE ENFORCEMENT The A.B.A. is critical of the extremely broad and relatively complex enforce- ment provisions contained in Section 269. We believe that the `scheme `of "self- enforcement" contained in S. 5 is basically a more practical and economical approach to this problem. The enforcement provisions would impose an onerous and complex burden upon the Board of Governors of the Federal Reserve System which will be heavily burdened by the ruI~ making and regulatory responsibility imposed by Section 204. From the point M view of `the banking industry, t'he enforcement burden con- ceivably could interf~re with and impede `the primary functions of the Federal Reserve Board, i.e., the making `of monetary policy and `the supervision of the member banks `of the Federal Reserve System. A 362 PAGENO="0373" CONSUMER CREDIT PROTECTION ACT 363 The Committee's attention is directed to the fact that the proposed Uniform Consumer Credit Code contains a broad and relatively far-reaching system for administrative regulations and enforcement at the State level. The Commissioners' approach to the problem of administration and enforcement by the States is more comprehensive than the proposal contained in Section 209. The provisions in Section 209 are patterned on the enforcement provisions relating to unfair methods of competition contained in the Federal Trade Com- mission Act, 15 U.S.C. 45. The provisions in question are more directly consistent with the regulatory functions of the Federal Trade Commission than with the functions exercised by the Federal Reserve Board. Therefore, it is the recommendation of the A.B.A. that the system of self- enforcement through the State and Federal Courts contained in 5. 5 should be given the opportunity to operate before any broad enforcement responsibility is imposed upon the Board. It is quite possible that the provisions of 5. 5, plus the system of administration and enforcement at the State level which will be ulti- mately produced by the Uniform Consumer Credit Code, will be entirely sufficient. THE EFFECTIVE DATE Section 211 provides that Title II relating to disclosure in credit transactions shall take effect on July 1, 1968. For the reasons elaborated in the comments on this subject regarding S. 5, the A.B.A. urges that the States be given a minimum of at least thirty month lead time in order to adopt the Uniform Consumer Credit Code, or in the alternative, to amend the more than four hundred State statutes which govern consumer credit transactions to conform to the Federal law. This grace period is essential in order to avoid confusion on the part of both creditors and consumers. Therefore, it is recommended that the effective date be no earlier than July 1, 1970. Mrs. SULLIVAN. Thank you, Mr. Walker. In view of the time, the committee will recess now until 1 :30, at which time you may come back and we will have an opportunity to discuss your testimony and ask questions. Mr. WALKER. We will be happy to. (Whereupon, at 12 noon, the subcommittee recessed, to reconvene at 1:30 p.m., the same day.) AFTERNOON SESSION Mrs. SULLIVAN. The Subcommittee on Consumer Affairs will resume its hearing. I ask that all of the witnesses for this morning and afternoon come to the witness table. STATEMENT O~ CHARLS E. WALKER; ACCOMPANIED BY THOMAS L. BAILEY, JOHN P. ROLPH (RESUMED), AND REV. ROBERT ~. MCEWEN, S.3., CH.AIR~/lAN, DEPARTMENT' OP ECONOMICS, BOS- TON COLLEGE, CHESTNUT HILL, MASS. Mrs. SULLIVAN. I am sure the other members will be here shortly but in the meantime, Father MeEwen, I would like you to read the part of your statement that you wish to give right now so we can ques- tion you later along with the other gentlemen. I think you know a great deal about how the credit disclosure law works in Massachusetts, since you had so much to do with its enactment. For tile benefit of the members and the audience I might say that in his prepared statement, our next witness, Father Robert J. McEwen, PAGENO="0374" 364 CONSUMER CREDIT PROTECTION ACT follows customary procedure before congressional committees by giv- ing his background and experience in the field of legislation under discussion. Since this is his first appearance before the House Com- mittee on Banking and Currency, it is possible that some of the mem- bers may not be familiar with the work of this outstanding Jesuit educator who has been responsible for making college economics and political science departments throughout the country far more con- scious of the need to teach consumer economics to their students. And, of course, he has taken this subject out of the classroom also, and into State and National governmental agencies with great suc- cess. Father McEwen is immediate past president of the National Council on Consumer Information; he is a former member of the President's Consumer Advisory Council; and he was chairman of the Massachusetts Consumer Council which pioneered truth-in-lending legislation on the State level and saw its efforts succeed. I do not know if all of you gentlemen know Father McEwen but he is chairman of the Department of Economics at Boston College and he has worked for years on consumer problems in the State and Nation, and particulai~ly in the field of consumer credit. Since we are taking up, at this point, time we had originally allotted to him this afternoon, I think it would save time and accomplish more if we have all of you on together. Father, you may proceed. Father MOEWEN. Ladies and gentlemen, my name is Father Robert J. McEwen. I am a member of the Jesuit order and chairman of the Department of Economics at Boston College. In addition to this, I served as first chairman of the Massachusetts Consumer Council, an agency created by the legislature as an independent office in the State government. Prior to that I served for 5 years as chairman of the advisory consu~ther council to the attorney general of Massachusetts. I was also one Qf the founders of the Massachusetts Consumer Asso- ciation. In 1965 I was appointed by the President as a member of his President's Committee on Consumer Interests. I have been twice presi- dent of the Council on Consumer Information. From this background I can tell you without reservation that con- sumer credit problems have been No. 1 on the list of items disturbing the consumers of this country for the 10-year period during which I have been connected with the consumer movement. I well remember that the one strong emotionaJ issue agitating the 200 people who gathered in 1959 to plan the formation of the Massachusetts Con- sumer Association was the desire to do somethino~ about consumer credit abuses. Nothing in the intervening years has I~'essened the inten- sity of public concern over the problems associated with consumer credit. I am proud and happy to say that the efforts of our consumer groups in Massachusetts, allied with the devoted work of labor and women's groups such as the Federation of Women's Clubs, have re- sulted in the passage of two credit acts, the Retail Installment Sales Act and the Truth in Lending Act. Madam Chairithn, may I assume that my statement and this article from the Boston College Law Review will be printed as a unit iii the record? PAGENO="0375" CONSUMER CREDIT PROTECTION ACT 365 Mrs. SULLIVAN. Yes, Father. Without objection, your entire statement will be put in at this point in the record as well as the article from the Boston College Law Review. (The article from the Boston College Law Review may be found in the appendix, p. 939.) (The prepared statement of Father McEwen follows:) STATEMENT OF Rnv. Ro]nurr J. MCEWEN, S.J., CHAIRMAN, DEPARTMENT OF EcoNoMIcs, BosToN COLLEGE, CHESTNUT HILL, MASS. Ladies and Gentlemen, my name is Father Robert J. MeEwen. I am a member of the Jesuit Order and Chairman of the Department of Economlcsi at Boston College. In addition to this, I served as first chairman of the Massachusetts Consumer Council, an agency created by the Legislature as an independent office in the state government. Prior to that I served for five years as Chairman of the Advisory Consumer Council to the Attorney General of Massachusetts. I was also one of the founders of the Massachusetts Consumer Association. In 1965 I was appointed hy the President as a member of his President's Committee on Consumer Interests. I have been twice President of the Council on Consumer Information. From this background I can tell you without reservation that consumer credit problems have been number one on the list of items disturbing the consumers of this country for the ten year period during which I have been connected with the consumer movement. I well remember that the one strong emotional Issue agitating the two hundred people who gathered in 1959 to plan the formation of the Massachusetts Consumer Association was the desire to do something about consumer credit abuses. Nothing In the intervening years has lessened the Inten- sity of public concern over the problems associated with consumer credit. I am proud and happy to say that the efforts of our consumer groups In Massachusetts, allied with the devoted work of labor and women's groups such as the Federation of Women's Clubs, have reSulted In the passage of two credit acts, the Retail Installment Sales Act and the Truth in Lending Act. Of these I will say a few things later, but now I want to pay tribute to one man who is responsible for our success in his field more than any other single Individual. He is the former Deputy Commissioner of Banking, John P. ClaIr, whose last public appearance (May 18) was before the Senate Antitrust and Monopoly Sub-Committee Hearing on Credit Insurance. He died very suddenly after a brief illness; and four days before be died, I visited him in the hospital and he told me he first began to feel sick on the plane returning from the Washington Hearing. We all know, in Massachusetts, that we have lost a truly great public servant, and I urge you to read his statement in the Senate Hearings. CONSUMER CREDIT AI3USRS AND RIoTS Since the recent rioting, I have been pondering the connection between consumer abuses, particularly in the credit field, and the emergence of these irrational riots. Now, no one of us in this room, and certainly no one responsible in a consumer field condon~s the senseless pillage, looting, destruction, hatred and the violation of in- dividual rights to life and property that have emerged in these riots. I have per- sonal knowledge of the unsettling effect these riots have had on people far distant from them and up to now totally dissociated from them, l~l1derly people are fearful for their families traveling outside of their home city, The elderly themselves are afraid to go out. I know in one ii~stanee a small businessman in an area near a previous riot area has been unable to find a buyer for his grocery and liquor busi- ness partly because new buyers hesitate to set themselves up in these areas, and partly beca~se banks are reluctant to lend to new owners of businesses in the cen- tral city danger areas. I am sure there are numerous instances of similar effects of the rioting on totally innocent people. But, Ladies and Gentlemen, the more I think about it, the more I am convinced that there is a definite connection between the public inability or refusal to do anything about consumer abuses and the violence of these riots. Take the simple case of Truth in Lending legislation. The disclosure of true interest rates seems to PAGENO="0376" 366 CONSUMER CREDIT PROTECTION ACT be such an elementary demand of equity and fairness that the simple people find it difficult to understand why legislatures at the state and federal level have balked for nearly ten years at meeting this simple demand. Social peace and social harmony are best preserved by the timely elimination and correction of social, political and economic abuses wherever or whenever they occur. I have oftei~ asked myself why, since the consumer abuses are not new, and in fact even worse things may have happened in our past history, why suddenly do I see a connection between these abuses and riots? Maybe because of two things, and now I refer not to the hoodlum elements who are taking advantage of this situ- ation but to the poor misguided slum dwellers, who have `been manipulated into being part of the mass that goes on a holiday spree. Why did older generations, why did the Irish, the Italians, the Jews, the Poles, and so forth work more or less within the law without resort to civil insurrection to correct inequities and abuses? I wonder if it's because European civilization has a long history of the people's slow fight for right, justice, and freedom. The European peoples know from their fathers and grandfathers that the achievement o'f a decent society is a slow and painful process and in most cases is able to be won through the civilized procedures `of law and government. Other people from other civilizations may be more simple an'd direCt. They instinctively see and feel the evil connected with exploitation, usury, and extor- `tion. And they make simple connections `between economic injustices and thiev- ery. They think society is unable or unwilling `to do anything. Therefore', they may see nothing wrong at all with returning one form of thievery for `ano'ther. Now, to the extent tha't our laws and commercial custom's `have been rigged in favor of the seller and against the consumer, to that extent they have perpetuated an alienation of the `people-~-a loss of conviction that they could work thr'ough the orderly processes of government and law for the amelioration of their `difficulties. Too often the law has been used against them. This breeds the conviction that `the law `and the forces of law `and order are the enemy. This is what I have preached right from the beginning o'f the Consumer Move- ment, namely, that government, `legislatures and courts `bad to convince the gen- eral public that they were on the side of fairness and equity to all and were not being mani~ulated `by special interests to hold down, exploit and deceive the people. Let me say, by way of digressdon, t'hat I am not here suggesting a cletfi-cut division `between white and black, because from several `sources I have `been in- formed that the poor people are exploited by black owners and landlord's just as much, if not more, than by any other seller. The main problem we are dealing with here is not one of color or race, but a problem of economic power and economic justice. Therefore it is high time for the government of this great country, through its legislature and courts, to set the balance right between consumers and `sellers with particular reference to access to credit. In addressing these words to you, gentlemen, I know I am echoing thoughts addressed by Cardinal O'Boyle "in a letter read to the people `of Washington on the National Day of prayer proclaimed `by President Johnson. The Cardinal called the riots "t~ie frenzied cry of alienated people who are trying to tell us, out of a sense of enervating `despair and u'tter hopelessness, that they want to be heard and war~t to participate as full-fledged American citizens in the eco- nomic, social `and cultural life of our cities and our nation." 1 I might call yoi~r attention also to the words of t'he Archbishop of Detroit after the recent, sorry spectacle. The Archbishop urges us to ask, "Was there something I could have done to `prevent this ?" He says: "E'ach of us mu'st begin to ask himself these questions: Have we Ignored for too long the conditions of slum dwellings. . . the countless humiliation `in every-day existence for the poor who see the products an'd the rewards of American middle-class prosperity, but can attain neither."2 These are only tWo voices out of the many who have urged us to delay no longer the injustie~s that make even good people willing to listen to outside agitators and distuikers. 1 The Anchor, "Urges Action to Eliminate Slum Evils," August 3 1967 p. 12. 2 The Anchor, "Prelate Says Riot Presents Concrete Test of Faith, August 3, 1967, p. 12. PAGENO="0377" CONSUMER CREDIT PROTECTION ACT 367 Finally, remember that Pope Paul in his profound "Letter on the Develop- ment of Peoples" treated of this general point in the following terms: "We must make haste: too many are suffering, and the distance is growing that separates the progress Of some and the stagnation, not to say the regres- sion, of others . "There are certainly situations whose injustice cries to heaven. When whole populations destitute of necessities live in a state of dependence barring them from all initiative and responsibility, and all opportunity to advance culturally and share in social and political life recourse to violence, as a means to right these wrongs to human dignity, is a grave temptation. "We know, however, that a revolutionary uprising-save where there is manifest, long.standing tyranny which would do great damage to funda- mental personal rights and dangerous harm to the common good of the country-~produces new injustices, throws more elements out of balance and brings on new disasters. A real evil should not be fought against at the cost of greater misery. "We want to be clearly understood: the present situation must be faced with courage and the injustices linked with it must~be fought against and overcome. Development demands bold transformations, Innovations that go deep. Urgent reforms should be undertaken without delay."3 I believe there is logic and reason in which I have said to you about this connection between consumer abuses and the riots, but is there also evidence? I believe there is more than enough evidence to fill a library, and current investi- gations at Federal and State levels will bring t~ls out. California apparently thinks so, If the news account of `the new' color film produced by the California Attorney General's Office is any indication. A news dispatch on the film says: "It aims to expose the `suede-shoe boys' wh'o garner millions of dollars every year with deceptive installment contracts. "It also aims as easing racial tensions in Watts and other troubled Negro areas by eradicating a major cause of resentment: the exploitation of the Negroes `by un'scruplous whites. - "The `commodities are generally legItimate, the swindle comes In the con- ditional sales `contracts `the buyers are talked into signing." Attorney General Lynch is then quoted as saying: "We found that the resulting resentments are a significant factor in the chronic hostile feelings' in minortit group areas."4 Ladies and Gentlemen, today I have no ifltention of repeating In great detail the arguments that consumer spokesmen have used for th'e last ten years to demonstrate `the necessity of both Truth in Lending and other measure's to remedy consumer credit abuses. The thousands of pages of testimony already on `the record contain the case for this reform of our credit laws, a't least with regard to full disclosure `of `interest rates. I will content myself, however, with making specific reference to several points raised In the course of previous debate. 1. I `cannot adequately express my dismay at th'ose who take diametrically opposite positions when `b'efore state and ~ederal legislatures. I quote from the July issue o'f Baakin,g, the official magazine of th'e American Bankers Association. There is a statement by Jack Conn, President of the ABA made on June 9, explaining the ABA position on the interest disclosure proposal. In it we rea'd, "Finally, it has always been the `position of the ABA that full and ade- quate interest disclosure is desirable, but that it should be legislated and administered at the state level." (p. 22) Still, I remember year after year the spokesman fo'r the Massachusetts Bank- ers Association appeared before legislative committees in our state and urged that nothing be done at the state level for two contradictory reasons; one, that the U. S. Senate was considering such a measure and therefore, the state should 3 EncyclIcal Letter of his holiness Pope Paul Vi On the Development of Peoples, p. 19, and 20, par. 29~-32 (Boston : Daughters of St. Paul). New York Times, Sunday, June 25, 1967. PAGENO="0378" 368 CONSUMER CREDIT PROTECTION ACT not act and two, that the U. S. Senate had held hearings on this measure for many years, and had done nothing about it and, therefoi~e, had found the whole proposal unacceptable. In considering this allegation by the American Bankers Association President, I ask the question: If all of you in the credit and lend- ing field have been so devoted to the proposition that full and adequate intere~t disclosure is desirable, why haven't you long ago come up with an agreed upon set of formulae that would have made entrance of the government into this field unnecessary? ~Vby haven't you voluntarily agreed on adequate interest dis- closure long ago? To me this is a prime example of the failure of an industry to meet its moral and social responsibilities. Into this vacuum, government must step, and I am proud to say that our representatives and Senators in Massachusetts paid no attention to these argu ments and did enact meaningful legislation. I may also tell you, gentlemen, that I have not found a single banker in Masaacbusetts who now privately claims any truth to the arguments advanced by business and banking spokesmen in the attempt to prevent this legislation. Privately to me not one of them has claimed inability to live with the disclosure provisions of our law. 2. The question of petcentage rate disclosure. I find it hard to understand why such violent objection is raised to the idea of percentage disclosure. Every finan- cial calculation that business men and bankers make for themselves and their clients is reduced to a percentage calculation. It's the one common language they use with one another to express rates of profit, return and so forth. Why do they think the consuthers have no right to the possession of such information? Knowl- edgeable people jn the field admit that talk of the impossibility of calculating such percentages is pure nonsense and the hearing records of state and local commit- tees contain many such statements in refutation of this point. And the Kiplinger Magazine, Changing Times, had recently a small box urging consumers to convert everything to percentages in order to be able to accurately appraise prices and savings and bargain.* 3. I see no particular reason for leaving out of consideration first mortgages. I am told that the Inclusion of first mortgages in Massachusetts has resulted in the complete elimination of that obnoxious point system that added a whole new calculation of d1~counts and premiums to the question of real estate purchases. THE MASSACHUSETTS LAWS Let me speak to you a moment, Gentlemen, about some investigations I have conducted into the effect of our Massachusetts laws. Ever since the passage of these credit bills I have had two or three graduate students doing research on the effects of the Massachusetts acts. I particularly asked our students to enquire into the effects of the disclosure of true interest rates. We were very anxious to find if the disclosure provisions were causing any hardship at all to businessmen in the state-partlcu1~trly to small businessmen. And I tell you, gentlemen, that all three students came back with the sameanswer, there Is no evidence at all that any hardship has been caused or will be caused to any small businessman by compliance with th~ disclosure requirements on interest rates. It appears that small businesses either (1) do not give credit or do not charge interest, or (2) participate in some credit card plan where the forms and the explanations are the responsibility of the credit card company, or (3) use the credit forms of a batik or other sales finance company~ In none of these cases is the small retailer faced with a problem as a result of the new laws. The real prob- lem, in my eyes, is that much of this business is channelled by the retailer into bank or finance company revolving credit accounts. I am very reluctant to see *The complete quotation from Changing Tinve8 reads as follows: PERCENTAGES "Notice how often items on these pages point out potential savings in percentages, rather than In dollars and cents. You can cut 10% off a month's fuel bill, for example, or save 54% buying the special on canned beans. "If you're really serious about trimming expenses, or are undertaking an all-out economy drive, try thinking percentages. A saving of a few cents or a few dollars may strike you as hardly worth the effort involved. But it could represent a saving of, say, 10%, which is well worth an~Tbody's effort. "So get in the habit of figuring the percent gain from money-saving operations. Or set yourself a goal-see, for instance, bow many expenses you could chop by at least 5%-and then watch the dollars and cents pile up." PAGENO="0379" CONSUMER CREDIT PROTECTION ACT 369 you pass a bill that exempts this form of credit from the disclosure provisions pertaining to annual rates. The following is a summary report given me by a graduate student who per- sonally interviewed the owner, man~ager, or credit manager, of 19 representative firms in various lines of business (A) GENERAL SUMMARY The results of the survey showed: 1. no problems exist in handling disclosure under the legislation. 2. no additional time is necessary to explain the credit side of the tran- sition. 3. the legislation is in no way a deterrent to sales. (B) BREAKDOWN BY TYPE OF RETAIL OPERATION (1) Automobile (New)-5 firms Comments: Approximately 75% of customers do not read the installment con- tract. Those that do, ask no questions. Absolutely no problems as these dealers see it. Legislation has had no effect. Customer is concerned with what he can afford to pay back per month. No dealer in this group opposed this legislation. (2) Automobile (Used)-one firm Comments: No discussion of credit with the customer. After agreeing to buy, customer is sent to a finance company for credit arrangements. No customer com- ment one way or the other, with respect to finance charges at time of sale. (3) Appliance-TV-4 firms Comments: Majority of customers do not read the credit agreement. No prob- lems encountered. Customer concerned only with dollar per month repayment. (4) Specialty Shops-two firms Comments: No problem. Bill has had no effect. (5) Home Repair and Modernizing-one firm Comments: No problem. No effect. (6) Discount (Multi-Product) three firms Comments: With the exception of * * * no problems encountered. Legislation has had no effect. Customer does not read credit agreement; is concerned only with what he can afford to repay per month. At * * * was told the following: a. disclosure does represent a problem. Many customers do not understand (or do not believe) that the "new" method of disclosure does not represent a change in company lending arrangements. b. Time consuming at first, but now felt to involve no additional delays or expense. c. Deterrent: On installment sales, about 25% question the rate. Of this group, about 20% will go elsewhere for more favorable credit arrangements (e.g. banks)-then return and purchase. Approximately 1% of such sales in this group are estimated to be lost. (7) Furniture-two firms Coniments: 1. disclosure Rarely does a customer question the retailer about the credit arrangements. When questioned, however, extremely difficult to ex- plain legislation to the customer's satisfaction. 2. problems (a) Interest rates: difficult to explain to customer what percentage of the finance charge he's entitled to when a loan is prepaid. Customer looks for a proportionate rebate. (b) conditional sales contracts: since passage of the legislation, rates on such contra~ts sold to banks have increased from 7 to (maximum) 10%. Effect: Banks more willing-finance companies less willing to purchase such contracts. (e) deterrent: no effect on sales. 3. position: both firms favor the legislation, admitting that unscrupulous elements in this industry have been guilty of defrauding the public. PAGENO="0380" 370 CONSUMER CREDIT PROTECTION ACT (C) INTE~VIEWER5 COMMENTS A number of retailers are seemingly unaware of the nature or purpose of the credit legislation. Thus it is impossible for them to adequately explain this legis- lation to the buying public. This seems to a4piy especially to the smaller shops. There appears to be a need to educate not only the public, but the retailer as well. Several HouSe bills before you differ from S. 5 as it passed the Senate mainly by the expanded area in which they attempt to legislate. The Senate bill was a simple disclosure act which is, as it were, the first step on the road to consumer credit protection for the people. After all, the Senate bill, as was emphasized in the debate, is not a regulatory measure at all in the sense that it forces anyone to do anything except reveal the true interest rate being charged. Of course, if this initial step cannot be taken, very little can be accomplished. I think the House bill (H.R. 11601) emphasizes the point that much more needs to be done beyond this initial step of accurate truthful disclosure, and for that reason I welcome it. The danger is that the public's surge of interest in credit problems would subside with the passage of a Truth in Lending Bill alone, under the mistaken notion that the credit problem had been solved. This is so far from the fact, that it would almost be better not to have any disclosure bill if its passage meant that we bad to do without corrective legislation on other aspects of the credit problem. Father MCEWEN. I want to call attention to the last sentence be- cause too much talk about the Massachusetts law speaks as if it were only a truth-in-lending bill. In my humble judgment the strongest features and assets of the Massachusetts law are not just the truth-in-lending provisions but the comprehensive Retail Installment Sales Act. When you question people about the effect of Massachusetts legislation you should attempt to distinguish l~etween the mere truth-in-lending disclosure, which in my estimation is the minor of the accomplishments and the features of the Retail Installment Sales Act. Of these I will say a few things later, but now I want to pay tribute to one man who is responsible for our success in this field more than any other single individual. He is the former deputy commissioner of banking, John P. Clair, whose last public appearance was before the Senate Banking and Currency Com- mittee hearing on truth in lending. He died very suddenly after a brief illness; and 4 days before he died, I visited him in the hospital and he told me he first began to feel sick on the plane returning from the Washington ~iearing. We all know, in Massachusetts, that we have lost a truly greai~ public servant, and I urge you to read his statement in the Senate hearings. Now, to a new subject, slightly. I would like to say a word about consumer credit abuses and the recent riots. Since the recent rioting, I have been pondering the connection be- tween consumer abuses, particularly in the credit field, and the emer- gence of these irrational riots. Now, no one of us in this room, and certainly no one responsible in a consumer field condones the sense- less pillage, looting, destruction, hatred, and the violation of individ- ual rights to life and property that have emerged in these riots. I have personal knowledge of the unsettling effect these riots have had on people far distant. from them and up to now totally dissociated from them. Elderly people are fearful for their families travelin.g outside of their home city. The elderly themselves are afraid to go out. I know in one instance a small businessman in an area near a previous riot PAGENO="0381" CONSUMER CREDIT PROTECTION ACT 371 area has been unable to find a buyer for his grocery and liquor busi ness partly because new buyers hesitate to set themselves up in these areas, and partly because banks are reluctant to lend to new owners of businesses in the central city danger areas I am sure there are numerous instances of similar effects of the rioting on totally innocent people. But, ladies and gentlemen, the more I think about it, the more I am convinced that there is a definite connection between the public inability or refusal to do anything about consumer abuses and the violence of these riots. Take the simple case of truth in lending leg- islation. The disclosure of true interest rates seems to `be such an elementary demand of equity and fairness that the simple people find it difficult to understand why legislatures at the State and Federal level have balked for nearly 10 years at meeting this simple demand. Social peace and social harmony are best preserved by the timely elimination and correction of social, political, and economic abuses wherever or whenever they occur. I have often asked myself why, since the consumer abuses are not new, and in fact even worse things may have happened in our past history, why suddenly do I see a connection between these abuses and riots? Maybe because of two things-and now I refer not to the hood- lum elements who are taking advantage of this situation but to the poor misguided slum dwellers who have been manipulated into being part of the mass that goes on a holiday spree. Why did older genera- tions, why did the Irish, the Italians, the Jews, the Poles, and so forth work more or less within the law without resort to civil insurrection to correct inequities and abuses? I wonder if it's because European civilization has a long history of the people's slow fight for right, jus- tice, and freedom. The European peoples know from their fathers and grandfathers that the achievement of a decent society is a slow' and painful process and in most cases is able to be won through the civil- ized procedures of law and government. Other people from other civilizations may be more simple and di- rect. They instinctively see `and feel the evil connected with exploita- ti'on, usury, and extortion. And they make simple connections between economic injustices and thievery. They think society `is unable or un- willing to do anything. Therefore, they may see nothing wrong at all with returning one form of thievery for ano'ther. Now, to the extent that our l'aws and commercial customs have been rigged in favor of the seller `and against the consumer, to that extent they have perpetuated an alienation of the people-a loss' of conviction that they could work through the `orderly processes of government and law for the amelioration of their difficulties. T'oo often the law has been used against them. This breeds the conviction that `the law `and the forces of law and order `are the enemy. This is what I h'ave preached right from the beginning of the con- sumer movement; namely, that government, legislatures, and courts had to convince the general public that they were on the side of fair- ness `and equity to all `and were not being manipulated by special in- terests to hold down, exploit, and deceive the people. Let me say, by way `of digression, that I am not here suggesting a clean-cut division between white and black, because from several PAGENO="0382" 372 CONSUMER CREDIT PROTECTION ACT sources I have been informed that the poor people are exploited by black owners and landlords just as much, if not more, than by any other seller. The main problem we are dealing with here is not one of color or race, but a problem of economic power and economic justice. Therefore it is high time for the Government of this great country, through its legislature and courts, to set the balance right between con- sumers and sellers with particular reference to access to credit. In addressing these words to you, gentlemen, I know I am echoing thoughts addressed by Cardinal O'Boyle in a letter read to the people of Washington on the National Day of Prayer proclaimed by President Johnson. The cardinal called the riots: "the frenzied cry of alienated people who are trying to tell us, out of a sense of enervating despair and utter hopelessness, that they want to be heard and want to partici- pate as full-fledged American citizens in the economic, social, and cul- tural life of our cities and our Nation." I might call your attention also to the words of the archbishop of Detroit after the recent, sorry spectacle. The archbishop urges us to ask, "Was there something I could have done to prevent this?" He says: "Each of us must begin to ask himself these questions: Have we ignored for too long the conditions of slum dwellings * * * the count- less humiliation in every day existence for the poor who see the prod- ucts and the rewards of American middle-class prosperity, but can at- tain neither." These are on~y two voices out of the many who have urged us to delay no longer in correcting the injustices that make even good people willing to listen to outside agitators and disturbers. Finally, remember that Pope Paul in his profound "Letter on the Development of Peoples" treated of this general point in the follow- ing terms: We must make haste: Too many are suffering, and the distance is growing that separates the progress of some and the stagnation, not to say the regression, of others. There are certainly situations whose injuStices cries to Heaven. When whole populations destitute of necessities live in a state of dependence barring them Tfrom all initiative and responsibility, and all opportunity to advance culturally and share in social and political life, recourse to violence, as a means to right these wrongs to human dignity, is a grave temptation. We know, however, that a revolutionary uprising-save where there is mani- fest, longstanding tyranny which would do great damage to fundamental per- sonal rights and dangerous harm to the common good of the country-produces new injustices, throws more elements out of balance and brings on new disasters. A real evil should not be fought against at the cost of greater misery. We want to be clearly understood: the present situation must be faced with courage and the injustices linked with it must be fought against and overcome. Development demands bold transformations, innovations that go deep. Urgent reforms should be undertaken without delay. I believe there i~ logic and reason in what I have said to you about this connection between consumer abuses and the riots, but is there also evidence? I believ~ there is more than enough evidence to fill a library, and current investigations at Federal and State levels will bring this out. California apparently thinks so, if the news account of the new color film produced by the California Attorney General's Office is any indication. A news dispatch on the film says: It aims to expose the "suede-shoe boys" who garner millions of dollars every year with deceptive installment contracts. PAGENO="0383" CONSUMER CREDIT PROTECTION ACT 373 It also aims at easing racial tensions in Watts and other troubled Negro areas by eradicating a major cause of resentment: the exploitation of the Negroes by unscrupulous whites. The next sentence describes the actions depicted in the film. The commodities are generally legitimate, the swindle comes in the conditional sales contracts the buyers are talked into signing. Attorney General Lynch is then quoted as saying: "We found that the resulting resentments are a significant factor in the chronic hostile feelings in minority group areas." I have no intention of repeating for this hearing the long and de- tailed statements of my position that can be found in the previous Senate hearings. At this point I will desist from the prepared statement in order to entertain discussion of the economic and moral issues involved. I do feel very strongly about the social matter of the connection be- tween consumer abuses and the disturbances that we have seen. I think it puts into focus the importance of the work that your committee has undertaken. The stakes are high, in my judgment, and we must fashion a proper, fair, equitable solution that will treat the financial and business interests fairly but will also immediately start to correct these sources of discontent that have too long been left alone. Mrs. SULLIVAN. Thank you very much, Father McEwen. We ap- preciate you bringing out this thought. You may have been here when Secretary Weaver started his testimony this morning and he cited the fact also that abuses in the financing of goods have been a partial cause, at least, of some disturbances and riots. Before we start to question the witnesses, I would like to say to you gentlemen representing the American Bankers Association, as well as to you, Father: you are all reasonable men-you men from the bank- ing business represent one of the most important groups in this coun- try, and Father McEwen is a distinguished educator and economist as well as being a spiritual leader. In coming here to discuss this leg- islation I am sure you all realize there are ways of finding corrections for abuses that will not hurt legitimate business, but at the same time will stop these unscrupulous practices that we see. I know that you have not closed your eyes to these things. I have sat on committees in the Congress for 15 years and when opposition comes in, it often comes in just to cast aside everything we are trying to do in a piece of legis- lation-instead of contributing ideas and suggestions on what we can do to make it work. It can work if there is a will to make it work. There is not anybody on this committee or in the entire Congress who wants to hurt legitimate busines~s. I think all of you know that. But we up here, are in a limited capacity, not having the full knowl- edge-the working knowledge-of every business that gives credit. We have a general knowledge of its results, of cours&-the good results and the bad results. All we are trying to do is to find a way to help people understand what they are doing when they are using someone else~s money to obtain and enjoy the necessities and pleasures of today when they cannot afford to go out and pay for them outright. I know that in H.R. 11601 I have introduced a tough bill. I ex- pected everybody in the credit field to be up here trying to cut my throat, and some of that has happened, but I do' not care. I know PAGENO="0384" 374 CONSUMER CREDIT PROTECTION ACT that we are not going to get the bill through in the form in which it was introduced. But if we do not introduce legislation sufficiently broad to co~~er the entire subject, and thus see what happens when bad credit practices are used on people-these problems will never be solved. We need to appeal to the national conscience. The people we are tryir~g to help, in many cases, do not know any better, and some could not care less. I know that we are going to have to cut down on many of the provisions in the bill. When you speak of garnishments, I do not know if it is good or bad to ban them entirely. But I certainly want to examine the argument that if such a ban would give pause to a man who carelessly gives credit to people who are not reliable-and I know that many of them need credit desperately and get credit when they are not good credit risks. If we can work out some way to protect these people from themselves~-not to stop all credit; we do not want to do that, because we all recognize that credit has made this country what it is-but I think many of us have seen a picture in the indiscriminate use of garnishments that is a horrifying spectacle. Tomorrow, we are going to have a panel of referees in bankruptcy from all over the country come up here and tell us about garnishment from the standpoint of its effect upon bankruptcy. They see it everyday. We seldom see it unless we go and search the court cases, which we have done in this subcommittee to a limited extent only. But I think all of this is a reflection of what happens when credit is used ir~ the wrong way. This is why garnishment and many of these other things are in H.R. 11601. I doubt if 18 percent is a realistic figure for a ceiling on credit charges. But we have to discuss this from some base. What should it be? When some people see 18 percent expressed as an annual rate of interest that they have to pay, they say, "Why, I would not think of paying it," and yet they pay it every day, and often they pay a great deal more. When we are talking about the revolving credit charges of the department stores, if every department store that charges one and a half percent a month had to show the overall an- nual rate as 18 percent-or if they charge 2 percent the annual rate is 24 percent-people who want this kind of credit service are prob- ably still going to pay it. But they would have a better understand- ing of what credit costs them, and perhaps would use credit more selectively. I will end my speech with a question to Mr. Walker. You said on page 6 of your statement, "In order to achieve comparability, we recommend that all finance charges be stated on a monthly basis." Would you be willing to have all interest paid by the banks on savings accounts or on certificates of deposit handled the same way? Mr. WALKER. I would not object. Mrs. SULLIVAN. That is, put on a monthly yield basis? Mr. WALKER. I would do it two ways. I would say to the person, "Take a 4-percent passbook savings, say the rate is one-twelfth of that a month"-this dOesn't bother me, this interchangeability. It is simple multiplication and division factor. Speaking as an economist, our point is that the closer you can cycle in your regulatory framework to the way the economy is cycled in, the less technical problems you have. PAGENO="0385" CONSUMER CREDIT PROTECTION ACT 375 Mrs. SULLIVAN. I agree with you that we want to put these things, as far as possible, into familiar terms and settings. Mr. WALKER. The economy is more closely cycled to a monthly basis and the smaller you can get the time period, the less problems you will have with the regular payment, skipped payments, and all of the~e various things that have been brought up and for which we have had to have a very complicated set of tables to work out. The monthly approach gets around all of these difficulties. Mrs. SULLIVAN. What is one-twelfth of 4 percent? It is one-third of 1 percent a month. I would like to quote that to the woman who is willing to pay one and a half percent a month on anything she buys on credit, and say, "Can you make that much money when you put your $20 in the bank?" Mr. WALKER. I have no objection to this. Relatively, it is all the same, whether you can compare 4 percent a year with 18 percer~t a year on this other figure on a monthly basis. The advantage of the monthly approach is to get around all the technical difficulties and quite frankly I can see no disadvantages to a monthly approach. A consumer can still shop, he can go from place to place. Mrs. SULLIVAN. We have people coming in who represent the finan- cial community and object that any proposed legislation would force expensive changes for every bank and credit union. Mr. WALKER. Credit unions are on a monthly basis. Banks ought to quote both rates and say a savings account is 4 percent a year or one- third of 1 percent a month. Mrs. SULLIVAN. That is all we want the other people to do-the stores. We want them to show it yearly as well as monthly. Mr. WALKER. May I respond just very, very briefly to your general statement and say that we subscribe 100 percent to the objectives which you state and we have a number of programs underway that I think could demonstrate our subscription to this-not just because we think it is important to citizens because also the success of a commercial bank is very much tied up with the community itself. In general a national corporation, the national corporation located in Pittsburgh or a city like that, it is concerned with the city but they can shift offices. But the bank in Pittsburgh is very much dependent upon Pittsburgh's success and for this reason bankers have always been in the forefront in the community programs~ which have been successful and I take Pitts- burgh as an example and Philadelphia as an example in urban renewal, slum clearance, and things of that type. So we share your concern 100 percent because we know that these situations which Father McEwen so vividly describes not only hurt the community, but hurt the banks, too. There are many banks that were broken into and pillaged, branch banks, in Detroit. However, I think that with all due respect, I must object to the inference that ours is a negative statement. We have worked on this problem for 6 years and we have supported the princi- ple of disclosure strongly all along, particularly in the 28-page state- ment you will find many positive statements and recommendations as to how we think this can be more effectively done. The final point that I would like to make, and to agree with Father McEwen, is that disclosure is only one part, and perhaps a small part 83-340-e7-pt. 1-25 PAGENO="0386" 376 CONSUMER CREDIT PROTECTION ACT of this whold~ problem. This is precisely why we have spent over $60,000 with the National Conference of Commissioners on Uniform State Laws dealing with the whole area of consumer credit, and we devoutly hope that nothing is done in the Congress which will impede or impair the effectiveness of this other approach which we think in the long run will help the consumer more. We would work with you to the maximum extent, Madam Chairman, to help the consumer. Mrs. SULLIVAN. Thank you. Father MCEwEN. Madam Chairman, is it permitted to comment on something Mr. Walker just said? I agree, the bankers association has been working on this for years, as he said. I also want to have it clear that I stopped reading my prepared statement at the point I did not because I don't subscribe to what I wrote about the American Bankers Association position in this state- ment, but for the sole purpose of allowing the hearing to proceed. Mr. Walker, in case you don't know what I am referring to, let me give you a prepared copy. I did refer in the present statement to something I quoted from Banking magazine, where Mr. Conn was quoted as saying he supported full disclosure as an official position. Then I went on to say that from my Massachusetts experience I recall the Massachusetts bankers coming before our State committees and for two contradictory reasons telling the committee they should not pass a truth-in-lending and retail-credit bill. First, because the U.S. Senate was considering such a matter and the State should not act while the U.S. Senate was considering it. The second contradictory reason to the first was that the U.S. Senate had considered it for so many years and had done nothing and therefore found it unacceptable and therefore the State should do nothing. And I did say, I view with a little dismay your insistence on State action in this field, when at the State level the bankers, the Massa- chusetts bankers~ or their representatives, come before the committee and say, "Don't jo anything at the State level because all the 50 States should be covered by a national law and you should wait for Congress to do something." Mr. WALKER. I am not familiar with their specific testimony to this effect, but I do know this and I will say this, that the thing that interested me 4 years ago in trying to sell ABA leadership, and there was no problem there, on joining in the conference in support of the National Conference of Commissioners, on Uniform State Laws was at the urging of the executive vice president of the Massachusetts Bankers Association and the commissioner who is most active in this area, Mr. W~lter Malcolm, who is a lawyer in Boston. I think the basic point favors the State approach-and this is why we are so happy that the Senate bill was amended and that your bill also, Madam Chairma~i, provides that the States, if they do the job correctly, will not be preempted by Federal legislation. We are so happy that the States will be given the opportunity to get their own houses in order. I will haVe to admit, if you pass legislation, S. 5 or H.R. 11601 or a meld of the two, it will be a stimulation to State action and adop- PAGENO="0387" CONSUMER CREDIT PROTECTION ACT 377 tion of the uniform code I just hope you give them enough time so they don't have to rush at breakneck speed. Many legislatures don't meet next winter. Mrs SULLIVAN I have one other question before passing to other members for questioning. Either Dr. Walker or one of his associates may want to answer this: I do not understand your strong support for a provision of the Senate bill which seems to be redundant or meaningless. If dollars per hundred per year on the average unpaid balance means the same thing exactly as an annual percentage rate, what is gained by per- mitting creditors to use the dollars per hundred term for 5 years before having to express the rate as an annual percentage rate? Mr. WALKER. What is gained is that there are two different parts of this problem which crop up in testimony all the time, is reference to the figure in S. 5 and in your bill as an interest rate. The Senate committee knows it is not an interest rate. I think you people know it is not an interest rate. It is a finance charge and when you start comparing the finance charge, and the many things in it beside interest, with the usury rates in the States which are normally on a simple interest basis, then we think you can have a great deal of trouble,, indeed. This can be avoided by the use of the dollars-per-hundred rate, even though the figures will be the same. In one instance you put a dollar sign in front and in the other instance you put a percent sign in the back but by Congress saying that dollars per year is adequate and full disclosure, which it would be, you are then saying more forcefully that this is not an interest rate for the purpose of State usury laws. Father MCEwEN. Madam Chairman, may I say something at this point? I listened to Mr. Bingham yesterday and I made a note that I thought he had accurately and succinctly expressed the point of monthly versus annual rates. If, as he said, anyone can express an accurate monthly rate he can also, as Mr. Walker said, by multiplying by 12 produce the accurate annual rate. I fully agree. There are two points of dissent that I have to take with Mr. Walker's present position. The annual rate is the normal rate for almost every other business transaction. Mr. WALKER. Interest rate or finance charge? Father MCEWEN. Percentage rates are quoted in almost every other type of financial calculation on an annual rate-savings banks, commercial banks and everyone else quotes to customers annual rates. Now, while you may be right about the small transaction you dealt with, a monthly rate would make it almost impossible, or very diffi- cult for instant comparison by a customer with other rates quoted annually and these rates quoted monthly. T~ that extent I don't think it gives full disclosure that we are after. In the revolving credit ques- tion that you brought up, I am convinced that the committee's con- fusion and dispute on this subject comes from including the free pe- riod, the free grace periods, in with the period in which an interest rate is charged. I think the simple solution is to say: "After a certain number of free grace days, a charge at the rate of w percent a year will be levied." PAGENO="0388" 378 CONSUMER CREDIT PROTECTION ACT A retailer ~I spoke to the day before I came down says he still runs a 90-day credit. He says to them, "If you pay this off in 90 days there isno charge, no interest charge. If you go over 90 days there is a charge of so much levied." Now, I don't see why competition among lenders can't be just as effective if you specifically express the number of free days-tell the people how many free days you give them before you start to run charges and then at what rate do you levy an interest or service charge? And I think that will keep the competitive truthfulness in existence so we will get both, we will get truth and competition. I couldn't agree more with the American Bankers' position ex- pressed in theSe two statements that the prime requisite is a single uni- form standard imposed on all grantors of credit on all transactions. I must say I do fully agree with that and I think it is a mistake to let anything out. And I am happy to say the Massachusetts legislators rejected these pleas to let things out and as you will get testimony and as I can attest-and I have sent students all around the city and the State looking for evidence of this-there is no problem as a result of the total inclusion of everybody in the laws. Mr. WALKER. May I ask a question there? I understand one major retailer had sued the State because the provisions of the Massachusetts law required it to disclose its revolving credit at a rate of, say-this may be the wrong figure-but I think 18 percent a year which was in view of the grace period it allowed and it claimed its rate was actually a smaller rate. I heard this and I don't have an actual fact of it. Is that correct? It seems to me if it is, you have a problem. Father MOE WEN. That is a court case that is going to be adjudicated, I trust, soon. But you are right in the way you expressed it. It is exactly that position by the company. But I think, as Mr. Bingham started to bring out yesterday, that this confuses the issue. When they do start to hwy a charge they levy it at the same rate `as everybody else and it only ~liffers-the only difference is in the number of their free days. Mr. WAI~xJ~n. t~on't free days make a difference? If I go into the store and on the one hand I buy a piece of goods on credit and the interest charge doesn't start for 30 days-am I not getting credit? I got the goods. I could have gone to a finance company or bank and bor- rowed the money and bought the goods with the money and certainly I would have been paying interest over that period. Don't I have credit when I get the goods? That is how I define it in my economics classes. Mrs. SULLIVAN. Is there is any reason why, in the original contract the person' signs ~srhen they contract for the credit, that all of this could not be explained, including the number of days of grace? Mr. WALKER. `Ths; it can. I think the argument people make, par- ticularly some of these retailers, is the truth-in-lending provision- is it truth in lending `to say the rate is 18 percent a year when the average on these aoconnts is actually 7, 8, 9, 10 percent a year? I have a revolving credit. What rate do I pay? I use it zero. I use it like an open account and pay it off during the grace period. So they say, "Is this truth in lending in the objective you make?" uniformity is the key because there is no question but what the Penney amendment-let us call it by that name-that the Penney PAGENO="0389" CONSUMER CREDIT PROTECTION ACT 379 amendment adopted iii the Senate discriminates against bank revolv ing credit cards, because we cannot qualify under the 60 pei cent rule Most bank credit cards are on a 1 or a 11/2 percent per month basis, but we will have to disclose 12 or 18 percent a year while the maj or re tailers disclose 1 or 11/2 percent a month We do not think that is truth in lending Mrs SULLIVAN Let us take the Penney amendment, as you call it. If they figure all of their revolving charges on the same basis and they find that the rate that they charg&-1l/2 percent a month-comes out, on the basis of the free or grace period they get for so many days, to a lower actual figure, can't they say on their contract that by doing such and such-paying before a certain date-the 1½ percent monthly or 18 percent annual charge comes to only 14 percent or whatever it is? Mr. WALKER. We say in our statement that these objections which have been raised are not insurmountable. Both S. 5 and H.R. 11601 permit other information, such as average rates, to be stated. If you will not take our monthly approach, which we think has a lot of ad- vantages-particularly because it takes care of this revolving credit problem-we would favor complete annual disclosure across the board with this sort of revelation to indicate the compliance and the compli- cations of the grace periods. But let us not say that we are being absolutely truthful in lending in stating an annual rate in revolving credit or with the Penney amendment because we are not. Mrs. SULLIVAN. These are the things that, in my own mind, can be ironed out, if 11/2 times 12 does not equal 18, because of certain condi- tions or circumstances in a particular situation. I have held this too long. Let me pass this on to others. Mrs. Dwyer? Mrs. DWYER. I would like to ask Mr. Walker does ABA desire the retention of annualized interest charges on credit resulting in finance charges of $10 or less because the cost to place on the books a $100 loan resulting in perhaps $9 interest is generally the same as the cost to place on your books a $1,000 loan? Mr. WALKER. Yes, ma'am, that is very much the case. Commercial banks and other lenders do make accommodation loans. Sometimes they are in installments. More frequently they might be single pay- ment loans. They are very important to schoolteachers, farmers, and others on a seasonal or irregular income basis. Just this morning, early this morning I made a little computation. Take a very simple case of a $50 loan for someone for 1 month. The interest is $5. Now, it normally costs above $10 to put a consumer loan on the books with the most efficient lenders. I think Mr. Bailey can give you some figures. I had a banker testifying with me in the Senate-his figure for $100 loans-it is no different than the $50 loan- is between $13 and $14. Banks make these loans for accommodation purposes. Now, I don't think many people would say, these are unreasonable dollar charges. I do not think many people would say the $5 is un- reasonable finance charge but that is an interest rate of 120 percent a year-$5 on $50 is 120 percent a year. Let us suppose, however, that the charge was $5.50. Is that much more than $5? I don't think any reasonable person would say there is a great deal of difference. You PAGENO="0390" 380 CONSUMER CREDIT PROTECTION ACT might shop around and take the $5 if you would get it You wouldn't go very far On the bus to find that little bit cheaper. But lo and behOld, what happens to the rate? It jumps from 120 percent a year to 132 percent a year. You are going to find a lot of institutions that make these loans on an accommodation basis saying that "We are not going to advertise that we are charging 120 percent a year. We just don't want to do that as reputable financial institions." So where does a person go? To the illegal loan shark and he pays a thousand percent a year, Mrs. DWYER. Would you make that loan if you had to reveal the high interest rate? Mr. WALKi~R. Speaking for a banker who testified with me who is with the biggest bank in the United States, he said he did not think the bank would make the loan. They would not want the unhappiness, the public relations situation of disclosing this tremendously high interest rate and they were losing money at the same time. I think Mr. Bailey might make some comments on this point if he would like. Mr. BAILEY. I would agree with what Mr. Walker has said in this regard. The cost of making the loan doesn't vary with the dollar amount, and if you attempt to reduce it to an annual interest rate the figures would become astronomical and people pick those things up quickly and start talking about an institution that is charging 120 percent and just don't agree with it. Mrs. DWYER. Would you not agree insofar as monthly interest rates that 18 percent stamped on the statement is as inaccurate to reflect the interest charge as 1½ percent a month and as confusing to the consumer? Mr. WALKER. I am not sure I quite understand. Is it as confusing as 1½ percent per month? Mrs. Dw1n~R. Yes. Mr. WALKER. I don't think 1i~4 percent a month is confusing. Mrs. DWYER. Is not confusing? Mr. WALKER. It is scary. Mrs. DwYER. Is one as accurate as the other? Mr. WALKER. I am not quite sure I know how to answer that. I read earlier testimony and I saw Betty Furness was shocked at the figure 18-percent interest rate which was referred to as a normal revolving credit rate. I am rather surprised, as an economist and a banker of sorts we tend to forget that that does sound like a very high rate. It isn't when you figure the cost of this credit and all the paperwork. I am not being responsive because I don't really quite understand. Mrs. DwYER. Does not 1½ percent sound low? Mr. WALKER. Yes. Mrs. DWYER. A~ compared to the figure 18-percent annual rate? Mr. WALKER. Yes, I would agree it does sound low. But it sounds more reasonable to the person-when you get back here-this goes way back in history, you get back to the myth of 6-percent interest. Six percent is the top legal rate of interest in a few cases, such as in mort- gage loans. This idea that anything above 6 or 8 percent is an uncon- scionable rate of interest is simply not true. When you ~et into the small loan transactions, into the paperwork, you get into revolving credit which is just not credit. This is a convenience operation. This PAGENO="0391" CONSUMER CREDIT PROTECTION ACT 381 is something where you can pull everything together and just write one bill a month-don't even write a check a month-it is handled in the bank and you automatically ~re debited. It is not just the cost of money, it is all the convenience invob ed Whether a rate is unconscionable largely depends upon the level of rates permitted under State laws which ai e express exceptions to the usury laws Maximum permissible statutory interest r'ites on closed end loans may range from 18 percent on loans of larger amounts to 36 or 40 percent on loans of smaller amounts. Also, statutory rates on revolving credit transactions range as high as 1V2 percent per month or 18 percent per year or higher in some cases. I think the average consumer, if you say, you know that that is 18 percent a year, he might blanch for a minute, but I am willing to pay a point and a half a month for this convenience, establish credit, and get the television set. Mrs. SnLIIvAN. This is what the gals have been paying for in food purchases-convenience. Instead of hiring a maid they get built-in maid service in the processed convenience foods for which they pay a great deal more. Mr. BINOHAM. Before we get too far away, I wonder if Mr. Walker would explain how he arrived at the figure of 120 percent for a $50 loan, $5 charge? Mr. WALKER. Pay it off in 1 month. Mr. BINOHAM. Paid off in 1 month? I didn't hear that. Mr. WALKER. And 2 months would be 60 percent and so on. Mrs. Dw~R. You refer to this 6 percent myth. Do not the bills before us threaten to create brand new myths, either an 18 percent myth or a 1% percent myth? Mr. WALKER. I think H.R. 11601-I think there is something in what Governor Robertson said, and to some extent some of the points brought up today about ceilings tending to become floors. As a market economist I resist this to a considerable extent because I think market forces are sufficiently strong to keep interest rates down except if the Congress enacts legislation and stamps 18 percent as a rate that the Congress has said is some sort of rate that has your imprimature, and I think some consumers are going to think, "Well, yes, the 18 percent is quite logical and this is only one objection to a Federal usury statue. There are much more. Mrs. DWYER. Will the ABA have exhibits and the Senate testi- mony-will that be included in the record here? Mr. WALKER. We would be glad to furnish our Senate testimony which is very comprehensive. Mrs. SULLIVAN. I do not know that it would have to be included in our printed hearings as long as we have access to it. Mrs. SULLIVAN. Mr. Gonzalez? Mr. GONZALEZ. Thank you, Madam Chairman. First, a comment, both with respect to Father MeEwen and what he said very eloquently, and some aspects of your testimony, Mr. Walker. There is no question in my mind that one index as to the well- being of a civilization is the interest rates chargeable in that society. I know societies where if `an ordinary citizen for my purpose, busi- ness or otherwise, can make a loan on which he can pay as little as 15 PAGENO="0392" 382 CONSUMER CREDIT PROTECTION ACT percent, he considers himself very, very lucky. I have been very much preoccupied and concerned since my State senate days, in the State of Texas, with respect to this very important aspect of American life, because more and more, with the type of society that has developed in our country, with its comp'ete dependence on the mechanisms of credit, iii ass p'lThlUCt1 on, premised on mass consumption, the install- ment purchase techniques and the lack of availability of credit will make or ruin an average family. I have some mixed emotions about regulations, beca~e I must con- fess to you that just a few years ago I found it necessary to go to finance companies in my State. I know what it is to be awakened at midnight by somebody knocking at the door saying that he repre- sents a finance company and I was behind two payments, where was my payment? Of course, I took a more direct action than the average. He claimed that I threatened to kill him. Mr. WALKER. You may have been justified. Mr. GONZALEZ. I felt justified, although I never did plead guilty one way or the other to the threats made. But he did not enter the house to repossess the furniture I had at that time. I finally worked it out. My situation was perhaps quite different from the `average family that will perennially find itself in that situation. I have also discovered that you may find yourself compelled to go to the only available resource. If you do not know of such a thing as a credit union-where would you go? I have reference to a statement you made in which you said that the success of the commercial bank is tied up with the community. How much of that community? Is it really all the community in its totality or just segments of it? I was asked by a reporter back home when, if at any time I felt there would not be any such things as rioting? I said, "I think that that will be whei~ the banks make loans in the ghettos" and he was confused. But what I meant was when we have the cohesiveness in our social structure where we do have this interdependence and communi- cation, and I want to ask you in that connection, what are the banks generally, as either through their organizations, either State or na- tional, what are they really doing to reach the lowest economic rungs of our social ladder? Do you have any programs developed or con- templated? Mr. WALKER. Yes. Let me say first of all that your State and my former State, and I was on the faculty at the University of Texas, and I think when ~~ou were in the State Senate and that has been until just a `few months ago-perhaps the most if not `among the most-if not the most backward State in the country with respect to its con- sumer credit situation and legislation. I say until a few months ago because the State legislature adopted the most comprehensive con- sumer credit code that now exists in any State in the Union, a~ucord- ing to the information that has come to me. That information indi- cates high hopes that the loan sharkism and these other abuses which not only has especially hit minority groups hard, but any poor people, and this will be corrected. PAGENO="0393" CONSUMER CREDIT PROTECTION ACT 383 How much, you ask, of the community is a commerciani bank tied up with? There is no doubt in my mind that it is tied up with the total community. If there is any banker who thought, 2 months ago, that this was not the case, I know that he thinks that it is tied up with the total community today as a result of the situation in Detroit and many other cities. In the cities in which you have had significant and measurable progress and success in a very spotty program of urban renewal and urban redevelopment there have been some very bad experiences and there have been very good experiences. I mentioned Philadelphia and Pittsburgh and I know the bankers personally that took leading roles in making these programs work. I have discussed with White House officials within the last few days ways and means for the American Bankers Association to pull the talent and know-how of these bankers from the city and from smaller communities where development has been pushed and discrimination has been reduced-how we can bring the ABA and the banking com- munity more into this role. We have a number of things in mind. We try to cooperate as best we can with such groups-they are in New York, they are in Watts, and other places where prosperous non- minority business people will work with minority groups, particu- larly small businessmen to try to get them on the right track and to get them credit worthy, whidh leads to the next point. You say there will not be a problem when loans are made by the banks and others in the ghetto. This is correct. But let us not get cause and effect mixed up or the cart before the horse. The loans can be made in the ghetto only when the businessmen and the workers have the skill and the training and the work habits necessary to provide basically what we call a bankable type loan or a credit worthy type operation. So pulling together here, it is not just going down and making a bunch of loans. That is the worst thing you could do if people are not quali- fied to use the money. It is the total operation of improvement. Now, Mr. Bailey has some personal experience as to what can and has been done, I presume, in his own area. Mr. BAILEY. Two things that I would like to mention that the indus- try is doing in an effort to help people that are affected in this work. Consumer counseling centers have been established in a number of cities around the country. Buffalo is one. There are several in Cali- fornia and throughout the Midwest. These are supported by the loca] lenders and department stores in their areas. Office space is rented and a professional counselor is hired and people are asked to come there that have financial problems and an effort is made to help them work it out for their budget. In addition to that~ Columbia University `conducted a consumer credit management program-they do this once a year and people who ha~re been through that program have formed together in a commit- tee called the Arden House `Consumer Credit Committee which pres- ently is working with Sargent Shriver in an effort to determine how we as an industry can be most helpful in areas with people who aren't sophisticated in the use of credit-who may not have the ability to even pay. The government in some way can help industry to provide credit to such people and teach them what to do with it once they have it. PAGENO="0394" 384 CONSUMER CREDIT PROTECTION ACT I think this particular approach should have fruit in the area. While I have the opportunity I would like to comment on Madam Chairman's remarks about garnishment, if I may, with one thought. Many of the people have become bankrupt at the time the loan was made with good credit risks. Their past credit history was good, their ability to pay was satisfactory. Frequently marital difficulties would come along, the family separates and the sense of responsibility for that loan sudd~nly disappears and this is a strong contributing factor to bankruptcy, Without recourse to the individual's assets, without recourse to his income I don't know how we could collect. There must be some way to effect collection in those instances, as well as others where credit was granted on a legitimate basis. Thank you. Mr. GONZALEZ. Thank you very much. I did not have in mind a willy-nilly doling out of loans by banks-of course not. But, for in- stance, we still do not know what, if any net result has come about from the announced intention on the part of the administration to. have equal employment opportunity compliance officers in the banking section. I know that very little if any identification has been had by the established banks in some of the communities that I am very well acquainted with with so-called minority groups even as to employment within the bank. If a family does not have economic means it cannot get the education. If it cannot get the education it cannot get the economic means. We have to find a way to break that. I personally feel if we could somehow marshal and galvanize the private sector of the community, not let the governmental responsibility go, neces- sarily, but galvanize the private sectors and I mean banks and every- thing else, then perhaps you really would have a stake in the full community and perha~ps we would not have to sit by and wait until the thing is destroyed to realize that we have to do something. In that connection, the Comptroller, for instance, the year before last ruled that the national banks in his opinion, and in his interpretation of the Federal law, iyere entitled to charge the highest permissible rates of interest even with small loans that are allowable by State law. Well, in States such as ours, even with the adoption of this Consumer Protection Law, it is still legal-and ironically enough in those areas in which high interest rates should be less-to charge as much as 230 percent. He would say that a national bank would be entitled to com- pete with the small lending institutions, loan companies defined by the small loan act of that State which means that the banks could charge conceivably up to 200 or so odd interest percentage charges. I did not hear aflybody from the national banking segment disagree or criticize the Comptroller's opinion. And I would think that there is a responsibility there on the part of your organization as well as other spokesmen for the banking industry to say: Look, Mr. Comptroller, it is all right for you to look out for the bankers' In- terests that are legitimate and should be protected, but for you to say that the national banks have reached the point where, in order to stay in the swim they have to go in and compete with the specially regulated small loan companies is ridiculous and besides, unconscionable. It is legalizing what for centuries has been defined as usurious. Mr. WALKER. Hdw many loans did they make, Mr. Gonzalez? Mr. GONZALEZ. It depends. PAGENO="0395" CONSUMER CREDIT PROTECTION ACT 385 Mr. WALKER. No, sir. I remember this ruling, and I did not agree with the ruling. The great majority of the national bankers looked upon it as we call it, ~ bottom drawer ruling. You take and look at it and put it in the bottom drawer. Mr. GONZALEZ. Did you ever disagree? Did you ever tell the Comp- troller he was wrong? Mr. WALKER. That particular Comptroller `and I had a communica- tions problem. This is not the significant point. Mr. GONZALEZ. Yes, it is. Mr. WALKER. Take the banks in Massachusetts. There is no usury law in Massachusetts, the banks in Massachusetts can charge consumers 10,000 percent a year. They don't. Competition-banks are not going out and charging that kind of rates. Mr. S'axon made this ruling which we th'ought had dubiou's legal status. I am not even sure the ruling is still in effect. It got a very big `scream from the State bankers in T'ex'as because of discrimination between the State `and n'ational banks. I would like to see evidence that one loan was made by one national bank anywher'e in Texas at anything other than the regular normal rates under that particular authority. Mr. GONZALEZ. You may check with the banking officials in the State of Wisconsin. In the State of Texas, why did the banking indus- try insist on the legislature's approval of the bill that the Governor vetoed af'ter a lot `of protest, that was reintroduced in this session and vetoed in the session before last that would allow the banks to enter this area even up to loans in the amount of $1,500. Mr. WALKER. If you have got efficient lenders-not the banks-but if you have got inefficient lenders that are allowed to charge rates on thes'e particular types of loans, would you rather not have efficient lenders coming in and compete with them? This is the way you get rates down, through `the competitive process. Or you can pass a law `and say you can't charge over 5 percent. So what happens? You don't get any loans. That is the d'anger of a Federal usury statute. Mr. GONZALEZ. I would like to continue with that, but I have just been advised that my time has long expired. Mr. WALKER. On equal employment, we have worked very hard on this with the Assistant Secretary of the Trea'sury Wallace. If you know of any abuses in commercial banks I would like for you `to communicate with me and A'ssistant Secretary Wallace immediately. We `are work- ing with various groups. We are having a panel discussion on how to promote equal employment opportunity in our convention in New York next month. The chairman of the panel is the head of the Ohase Manhattan Bank. The participants are Whitney Young, Morris Abrams-Whitney Young is the head of the Urban League and Morris Abrams is head of the American Jewish `Committee `and Robert Wal- lace is `the Assistant Secretary of the Treasury. On the question of what is the banking `community doing for social progress, the main point that I would state is the guaran'teed students' loan program. Banks made almost $400 million in loans to 480,000 students last year on a loss basis. The President yesterday after consultation with us announced a new program and we are going to push it even more strongly in the future. PAGENO="0396" 386 CONSUMER CREDIT PROTECTION ACT Mrs. SULLrVAN. Mr. Halpern? Mr. IIALPEIiN. Thank you, Madam Chairman. I want to compliment our distinguished panel for its valuable contribution to the deliberations of this committee on this very im- portant legislation and I am sure that their contributions will help us come up with a meaningful and effective bill. Mr. Walker, I wonder if you could clear something up for me about the ani~ual interest rates. If you put $100 in a savings bank with an inter~st rate of 4 percent, and at the end of the year you will have $4, i~ that not right? Mr. WALKER. $104, yes. Mr. IJIALPERN. If you had $100 in the bank. Mr. WALKER. They compound more often, but if there were no compounding within the year you would get $4. Mr. ETALPERN. Now, if you instead withdraw the money after 3 months, you will receive 1 percent interest or $1 and if you withdraw the money after 1 month you will receive one-third of 1 percent or about 33 cents as mentioned in your colloquy with Mrs. Sullivan, is that correct? Mr. WALKER. Yes, depending on the rules of the institution. The principle is correct. Mr. HALPERN. I would like to press this a bit further. Do you feel that people with savings accounts are being misled by the annual rate into thinking that they will get 4 percent interest or $4 after 1 month? Mr. WALKER. No, sir, I don't think so. Mr. HALPERN. You do not think so? Mr. WALKER. I think most people recognize what it is. Mr. HALPERN. In favoring uniform disclosure of credit charges on a monthly basis for purposes of comparison, are you not also logically compelled to fator disclosure of monthly rates on savings accounts, bank loans and savings bonds and so forth? Mr. WALKER. The point that I made earlier- Mr. HALPERN. In fact on every financial instrument which might conceivably be used as a substitute for consumer credit? Mr. WALKER. I would have no great objection to this. What the bankers would do is to state both the annual and monthly rate. But in that connection I would emphasize that the great value-I know the Treasury makes the argument that what you want is something so the consumer can say, "Should I borrow or should I take money out of my savings account?" I don't think many of them are going to look at it in that way. I think surveys have shown that a great majority of the people who borrow on consumer credit do maintain savings accounts as liquid reserve at the same time. The big advantage of legislation of this type, if it can be properly shaped, is that it gives the consumer a shop- ping comparison for the credit among different vendors and lenders and he can decide, shall I buy from the retailer? Shall I borrow from the bank and buy the TV set? How shall I do it-and the automobile particularly-exactly how much it costs. I do not give any great value to the ability to compare the income on a savings account and what it costs on a consumer loan. This is desirable but I don't think this is of very great social significance. PAGENO="0397" CONSUMER CREDIT PROTECTION ACT 387 Mr. HALPERN. As to whether 18 percent is or is not accurate, it seems to me that one can only emphasize again that 18 percent is the rate at which the finance charge is calculated and 18 percent per year is no more inaccurate than one and a half percent per month. If you want to include 30-day grace period to which the finance charge refers and if payment is being made after 60 days, it is my-it is by this calculation that you are only paying 9 percent per year. But by the same token you are only paying three-quarters percent per month, is that not so? Mr. WALKER. It is correct, but if you remember the original purpose of the legislation, it was to provide truth in lending on the basis of a simple annual interest rate to every borrower. You cannot do this on revolving credit with a grace period operation. As I said before you came in, I have a revolving account. What rate do I pay? Nothing. I pay it off every month. Yet, they have got to tell me the rate is 18 per- cent a year. I don't think this is insurmountable or a big problem. But it is not truth in lending as Paul Douglas originally envisioned it and the way I talked to him about it in the years gone by. Mr. HALPERN. Is not the figure one and a half percent equally inadequate? Mr. WALKER. Inadequate for what? If you want to know the yearly basis just multiply by 12. Mr. ITALPERN. As you pointed out earlier, and I cited an instance where you would only be paying three-quarters percent per month and yet you say 1½ percent. Mr. WALKER. You have this ambiguity either way. If you go the monthly rate you avoid a lot of disadvantages. The ambiguity is there as long as you have grace periods. Mr. HALPERN. With regard to the problem of including the free periods of the revolving accounts, it has been suggested that some peo- pie tend to look only at the interest rate and not notice the benefit of the free period. Now, if I am buying a TV set and I go to two stores and I see one TV set for $150 and one in the other store for $250, is that all I look at? Do I not look to see that one is a color set and one is a black and white, one has remote control and the other does not, and so forth? Therefore if I am applying for credit would I not check if one store gives 30 days' grace period and the other gives 60 days and would I not therefore take this extra benefit into account? Mr. WALKER. The rational consumer would. I have a feeling that the large portion of borrowers will not. I do not think they shop that much. I wish they would because quite frankly we have the lowest rate lenders in the business and we will ~et a lot more business if they will. Mr. HALPERN. Farther, in considering the credit problems of the poor one runs into a paradox. On the one hand these people need credit badly and to prevent them from getting it seems in some instances to be inhumane. On the other hand we have to come to realize that the more often credit is given without proper investigation of the backgrounds, the more important it becomes and the more deeply the borrower gets into debt. How do you feel about this problem of extending or withholding credit, the ease or stringency of background investigations and the availability of credit relative to the risk of the borrower? PAGENO="0398" 388 CONSUMER CREDIT PROTECTION ACT Should the poor person be offered extensive credit if he simply can~ not pay for it? Father MOEWEN. No, sir. Banks I don't believe have been the worst-or even high on the list of offenders in this matter. But I believe that loose granting of credit does a service to nobody and I think a lot of the resentment in this field has grown up from an unwise extension of credit by some lender who is taking too many chances from a finan- cial and busin~ss point of view. I agree with you, we will all be better off if the soundness of the ex- tension were examined more closely. I think if the sound business prob- ability of repayment cannot be seen, that type of borrower has to be taken care of by other instrumentalities-maybe not commercial. Mr. HALPERN. Thank you very much, Madam Chairman. Mrs. SULLIVAN. Mr. Minish? Mr. MINI5H. Thank you, Madam Chairman. Mr. Walker, why does the American Bankers Association oppose the mortgage section in the bill? Mr. WALKE~. We agree with the position of the Senate and the Federal Reserve Board as enunciated by Governor Robertson in his testimony earlier this week that there is no really substantial abuse in this area, ai~d I would add to that that if there are problems they tend to be in the area of Government guaranteed insured mortgages where you have the ceiling rates which give rise to the points and discounts. It seems to me that the answer to that is to get rid of the ceilings which give rise to the points and the discounts. This was recom- mended by Treasury Under Secretary Barr. Another thoiaght occurred to me this morning listening to Mr. Brownstein-I ~m not totally familiar with the FHA legislation-I am generally familiar with it-why could not the FIIA, if this is the big area administratively, then issue regulations having to do with disclosure of costs, rights, et cetera, in closing out any transaction? Mr. Mixisu. They can. However, we are talking about the total mortgage market. FHA does not represent all of that. Mr. WALKER. But everybody agrees there is practically no abuse, no problem in the conventional area because you don't have points. The rate can go up and down. Mr. Mixisu. What is wrong with the man who wants to buy a home knowing what it is going to cost him? The banks can take care of themselves because they are working in this field all the time. But the little fellow may be working in the fac- tory on an assembly line and he would like to know what the charges are going to be in dollars and cents. Maybe he can afford a larger down- payment to cut down the cost of the mortgage. Why do you oppose that? Mr. WALKEIL I think he should know what it will cost. He finds out what it will cost. But I don't see any real problem in connection with the simple interest rate portion on first mortgages. Now, you get into the problem of the very long term situation where as Governor Robertson pointed out, you have the question of whether it is desirable to disclose initially such very large amounts of in- terest payments when it can be demonstrated that these loans on the PAGENO="0399" CONSUMER CREDIT PROTECTION ACT 389 average are not going to maturity. There again you have a question of whether this is truth in lending or not. You scare the dickens out of this guy on a $20,000 home by telling him he is going to pay more in interest on the home costs on a 30-year mortgage when he is not going to do it. He will be out of that house and pay it off and be out of the situation in 5 to 10 years. Mr. MINI5H. Do you want to keep them in the dark? There is nothing wrong in the buyer knowing exactly what the costs will be. There is no reason to believe the truth will scare him. Mr. WALKER. You said that. I do not think it is necessary in the first mortgage field. I haven't seen it demonstrated that it is and the problem is in FHA and I think administratively they can handle that problem. Mrs. SULLIVAN. Would the gentleman yield? Mr. MINIsH. Yes, I yield. Mrs. SULLIVAN. When you say there are no abuses in this area of $230 billion in mortgages by the private lenders, I think you should ride out to St. Louis and look into what is a national scandal. People are paying 12 to 1~T percent on first mortgages, and they have second and third mortgages, besides, on houses that were sold to them at in- flated prices by unscrupulous real estate men. Mr. WALKER. Does Missouri have a usury statute? Mrs. SULLIVAN. No, I don't think so. Mr. WALKER. This is an abuse and the State legislature in Missouri ought to do something about it. Mrs. SULLIVAN. We tried to work this out with the real estate board and we got nowhere. We are trying to help these people refinance, but when they get their property appraised, they find it is worth less than half of what they paid for it about 8 years ago, because the house has been used and misused and of course the value was never there. Mr. WALKER. There is some misunderstanding. Mr. Roiph tells me that there is an 8 percent usury statute in Missouri. Mrs. SULLIVAN. I do not know enough about the statutes in Missouri to argue the legality of these high rates, but I have seen instances of people paying them. I can show you where we have tried to help these people to refinance-it is now a rehabilitation area where they are eligible for financing assistance from the Federal Government. But when they come to have the property refinanced the house is only valued at one-half of what they paid for it 8 or 10 years ago. Often it has not been kept up, that is true. But we have proof of these awful mortgage charges, too. These are the things we are trying to find the answer to~-trying to stop-and our real estate board in that area has not done a thing about it. Mr. WALKER. I wouldn't mess with them. It is an enforcement problem. Mrs. SULLIVAN. I wish I had the authority to do something about it. Mr. WILLIAMS. Will you yield, Madam Chairman? You were citing an illustration where somebody purchased a home 8 years ago and as I understand your comment that home is worth half as much today because it has not been kept up? Mrs. SULLIVAN. Right. PAGENO="0400" 390 CONSUMER CREDIT PROTECTION ACT Mr. WILLIAMS. Is that not due to negligence or neglect on the part of the owner? Mrs. SULLIVAN. Absolutely. Mr. WILLIAMS. It has nothing to do with the people who gave them the mortgage iii the first place. Mrs. SULLIV4N. It does, because, in the first place, the house should never have been sold to the person because he could not afford it. Mr. WILLIAMS. That has nothing to do with the value because it is not kept up. Mrs. SULLIVAN. It is part of the whole problem. They could not af- ford to buy this house but they had to have a place to live. So, in a place that is zoned for single-family homes the unscrupulous real estate man goes in and says, "Look, you can pay this off in 5 or 6 years. Get some roomers or get some additional families." And soon you have a family in each room, and before you know it the house is ruined. And because of this sort of thing, and because they did not enforce the restrictions on occupancy-and I blame my own city for not enforcing the zoning code-this neighborhood of some 1,800 houses is one of the worst slums in the whole wide world. Mr. WALKER. These were conventional mortgages? Mrs. SULLIVAN. Conventional mortgages. Mr. WALKER. I can't say I doubt it, but I will have to be convinced that disclosure would solve this sort of sharpy operation. These men, if they are that sharp are sharp enough to get around the disclosure provision. This is a law enforcement problem, because it is plain out-and-out usury. Mrs. SULLIVAN. If they do not have to disclose the finance charges, how can they be pulled in faster? Letters are in the hands of Secretary Weaver, and in the hands, too, of the FHA and the rehabilitation authority in St. Louis to try to find some way to help solve this awful problem. The people involved were often ignorant of the costs; they had never owned a home before and they did not know what it costs to buy one. This is what we have to correct with effective laws if we cannot correct it any other way. I am sorry to have taken your time,Mr. Minish. Mr. MINISH. Thank you. I am sorry to see the position you take, but I am pleased to say that members of your association in New Jersey do not entii~ely agree with you. Mr. WALKER. I have to respectfully say that you say you are pleased with the position I take? Mr. MINISH. No, 1 said I am sorry about the position you take, but I am pleased to say members of your organization in New Jersey do not entirely agree with the position you take on first mortgages. Mr. WALKER. The position that we take is that we are for full and adequate disclosure on every credit transaction. Mr. MINISH. That is alL Mrs. `SULLIVAN. Mr. Williams? Mr. WILLIAMS. Thank you, Madam Chairman. I see what I bel~eve to be a panel consisting of the representatives of the American 1~ankers Association, headed by Mr. Walker, and an eminent economist, Reverend McEwen. I will say that it has been my first experience with a panel of this type. I do not know whether PAGENO="0401" CONSUMER CREDIT PROTECTION ACT 391 this is always intended or not. But if it is, I think it has very bene~ ficial effects and I would like to suggest in the future when we have representatives before us from the various departments like. Housing and Urban Development, Treasury Department or the Federal Trade Commission that we also have . representatives of other associations before us such as the Federal Retail Federetion-the American Retail Associattion so we can have a little more meaningful discussion and develop the points a little more clearly. I have been listening to this discussion today about interest on re- volving charge accounts which I think more correctly could be called service charges or charge rates. Because obviously there is a lot of ad- ministrative work involved in charge accounts that are not neces- sarily in other types of credit transactions. Father MeEwen, you were referring earlier to a matter of litigation up in Massachusetts involving a department store and I believe over in the Senate they offered testimony where they claim they are being forced to disclose an incorrect interest rate when they say 18 liereent. They say that this statement of the statutory simple interest per annum rate misleads the consumer, including customers of the plain- tiff, because the plaintiff's true finance charge rates to its customer~ are normally much less than the rate which is required to be stated and depend upon the kinds and amounts of the customers' purchases and payments. You were here yesterday to hear Mr. Bingham's comments. I think you also heard my comments relative to testimony which had been re- ferred to at this subcommittee yesterday morning where they are now charging P12 percent a month on the unpaid balance but rather this interest or service charge is being placed on the balance on the firet of the previous month and if at any time during that month that balance is paid off there is no charge. So that in effect the interest or service charge which is being paid on the revolving charge account can only accurately~ be computed at the end of the year unlike other types of credit transactions. What is your reaction to that ~ Father M0EwEN. I did hear much of this testimony, Mr. Williams, and I took a `look at the testimony of the retail representative, though I wasn't here. I think there is a distinction between the actual, post-factum, to the decimal point, interest charge of a definite transaction such as was presented by that witness- Mr. WILLIAMS. Dr. Wooley ~ Father MOEWIN. I don't think that was his name. At any rate, that interest charge resulted from a combination of counting every second free of charge and every second and minute covered by the charge, but it also resulted, as Mr. Bingham was pointing out yesterday, when the time for the imposition of the charge came, that charge was levied at the rate of 11/2 percent a month, which is one and a half cents on every dollar `in the balance. As Mr. Walker's statement says, if it is accurate at that point, that is the 1½ percent charge, multiplying by 12 gives you an accurate annual charge. , . . Mr. WmLiAM5. That is not the way it'was applied'. 83-840-67-Pt. 1-26 PAGENO="0402" 392 CONSUMER CREDIT PROTECTION ACT Father MCEWEN. That is not true. It is actually levied, 1'/2 percent on the dollar, that is what is actually levied. Is that not true, Mr. Walker? One and a half cents on the balance, for each dollar in there, is what is actually levied? AIr. WALK~. That may be-there may be no balance. Father MC'$WEN. I am presuming there is a balance. Mr. WILLIAMS. Let me make this suggestion, please. Dr. Wooley was the man who did make the presentation on this chart before u~ and he did explain the chart which is part of appendix A of the statement made by the American Retail Federation and their representatives here yesterday. In addition ~o that, ni the test~motiy before the Senate, on page ~16, the company which is engaged in the litigation in Massachusetts has presented documentary evidence to the effect that the actual finance charge rate on the average charge account is 9.46 percent. They had some supporting evidence here. I would like to have your comments on both the information we re- ceived yesterday from the American Retail Federation and the testi- mony before the Senate which reports the fact that the way they are applying this supposed 1½ percent is the balance from the first of the previous month and often it much less than 18 percent per year. You can submit your comments for th~ record on that. I think that would be helpfuL Father MCEWEN. Well, Mr. Williams, there is no question in my mind but that they have worked out these cases truthfully and ac~ curately, but the question comes in the number of days in which there is no interest, as Dr. Walker said. And he said sometimes his accounts actually bear no interest. If you lump these two together you come up with the actual result. Mr. WuLIAMS. If we are looking for truth then we have got to take all these factors into consideration, and if on revolving credits or re- volving charge accounts, you are not paying 18 percent interest an- nually, then I can't see why we should force the people to say that they are. Father MOEWEN. Mr. Williams, the legislation asks that the credi- tor say not what you will be paying actually-~beeause he can't know that in advance-4-but at what rate is he levying a charge when and if you incur a charge. And he is levying a charge at the rate of one and a half cents per dollar. And that one and a half cents per dollar is one and a half percent per month and 18 percent a year. Mr. WuI~IAMs. I have no quarrel with forcing a full and complete disclosure of the interest or service charges, and everything else, but if it is going to require a more likely statement on the invoice or wherever it appears, fine, but we `have got to take the statement. And 18 percent per year, from the testimony `we have heard here, is not an accurate statement. Father MCEwIEN. I beg to differ. And as a matter of fact, if you will look at the'very sa~me Senate hearings on page 118, you will find an ad from a most reputhble firm in Boston, the First National Bank, which adsays: If you have signed up for a credit card lately, take a look at the back of it. What does it say you must pay to use it? One and a half percent a month. In terms of simple annual interest, that is' 18 percent. PAGENO="0403" CONSUMER CREI~IT PROTECTION ACT 393 Are you saying that the First National Bank is not telling the truth in this ad~ Mr. WILLIAMS. I will leave that up to the representatives of the American Banking Association. Mr. WALKER. I never disagree with my friends. Mr. MINISH. Let us hear from Mr. Walker on that. Mr. WILLIAMS. I am asking you to put something in the statement which will reconcile the fact that a large department store company is complaining that they are actually getting 8.426 interest as against 18 percent. Father MCEWEN. Mr. Williams, there was one other factor in here that you mentioned `but that I forgot to mention and that is the ques- tion of whether `these charges are levied on the opening of the mOnth balance, the middle of the month average balance, or the close of the month balance. And my information-and maybe Dr. Walker has something that he knows thout this practice-I guess it is obviOus that if you charge on `the opening balance of the month you get more than if you charge on the average or the closing balance of the month-my in- formation from Massachusetts is that some of the firms that had originally been charging on the closing balance have switched to charging on the opening balance, because there is nothing in the law that prohibits them from doing so. Now, I don't really know whether Penney is on the opening or clos- ing balance. And it may be that they are doing one practice that is different from some of the others. And that is part of why they are complaining about the uniform method of stating it, making them look worse than-or making them not iook as good as they really are, But I don't think you can get away from the fact that one and a half cents per month is levied when. `and if the period for charge arises. And that is as ~i'mple a statement of the fact as I think you can ever get. And that one and a half cents per dollar per month is an 18 per~ cent annual rate of charge. Mr. WILLIAMS. You are talking about certain adjustments which would eventually mean 18 percent a year-you say you,have looked at this appendix A an actual customer account of a department store demonstrating the calculation of annual service charge rate, you say ~ Father MOEWEN. I look at that. Mr. WILLIAMS. And do you `agree with this? F~.ther MCEWEN. I agree that that is an actual fact, that account actually took place. And when figured out with a slide rule that they have used for `this, including every minute of free time and every minute of charged time, those figures `are probably true. Mr. WILLIAMS. So that at the end of the year the actual interest or charge rate was 11.49 percent? Father McEWEN. That is correct. Actually it is a result though, of charges when incurred being levied at a rate of one and a half per- cent a month or 18 percent a year. Mr. WILLIAMS. Which resulted in an actual charge of 11.49 per- cent for the year. Mrs. SULLIVAN. Would the gentleman yieid for a moment? Father, would you say that that is the way-maybe some of you other gentlemen could answer it-do you think that is the way every PAGENO="0404" 394 CONSUMER CREDIT PROTECTION ACT department store account is figured-the way this one that he is talking about is figured? Father MCEwEN. We can turn that question around and ask Mr. Williams if that company levies an 11.6 annual service charge. And it doesn't. Mrs. SULLIVA~-. On each month? Father MCEI*TEN. On any month. Mr. WILLIA~$. I `don't quite get your answer. Mrs. Sullivan asked if you felt that this was the way this store, department store, actually computed this customer charge during the year. Father MOEWEN. When they levied a service charge they did not levy an 11 percent annual charge. Mr. WILLIAMS. They levied something else which resulted in 11.49 percent. Father MCEWEN Right They levied an 18 percent charge which, counting `all free periods and everything else, comes `out to the figures you have got there. Mr. WILLIAMS. Don't you agree that it would be an injustice to force the store to say that "We are going to charge 18 percent annually" when they are only charging, say, 11.49? Father MCEWEN. Not a bit, because that includes all the free days. And I agree with Mr. Walker that we must and can devise a formula that can be applied to them all. And you should ask, excluding the number of free days of grace, and taking the time when and if the charge is levied, $ what are you levying the charge? Mr. WALKER. Lsay it can be done. But let's not kid ourselves that this is what Paul Douglas was saying in' 1960. We are all mixed up with semantics here whether you are talking about the charge you levy or the simple annual interest rate that the fellow who gets the credit pays If you are asking if he pays 11.49 on the average, if you are asking the maximum rate y~u might pay, it is 18 percent. It is strictly' se antics but I want to rise to the defense of the First National Bank of Boston. You said it is the finest business institution in the city I will not dis agree, except that all other banks up there are just as fine, too, the way I look at these things. If they bad no~ published this ad in this way-and particularly Mr. Mini~h wanted me to respond to this point~-4f this ad had not been published as 331/3 percent o~, `18 percent a year, the First National Bank would have been in violation of section 4 of the Massachusetts act, chapter 58?, which requires them to advertise in precisely this way And this is why the State is now being sued by a major retailer, be cause they say it is not true. They didn't have any choice. Father MCEwEN. Do you mean that they deliberately published a' false ad? Mr WALKER They published an ad which they could only publish under the law if they were trying to tell the rates you. would pay on your bank credit card. Father ~{CEWEN That is the same question They published a false ad. Mr. WA.I~ER. What is false is .w'h~t~'the Stath'of Massachusetts says is false in all of its legislative rulings.'.' ` ` . Eather MOEwEN I cmi't accept that They know that that is accurate. PAGENO="0405" CONSUMER CREDIT PROTECTION ACT 395 Mr. BAILEY. May I speak to Mr. Williams' question? Mr. WIlLIAMs. I would like to ask Mr. Walker one question before we exonerate the First National Bank. Mr. MINISH. We are not going to exonerate it yet. Mr. WILLIAMs. We exonerated the First National Bank in place of the Massachusetts Legislature temporarily. Am I correct in my understanding that the U.S. Treasury Savings Bonds did not bear any interest to the holder for the first 6 months? Mr. WALKER. Only if cashed in. They bear interest-you get interest retroactively by holding them beyond that period. You cannot cash them in without foregoing the interest you would have gotten-it is 60 days or 6 months. Mr. WILLIAMS. Is that made clear in the Treasury Department? Mr. WALKER. There have been some mumblings about that recently, Congressman, that Treasury's savings bond advertising is not fully up to truth in lending. I have not personally made that criticism, but I have heard it. Mr. WILLIAMS. We should give some consideration to including the Treasury Department in this. Mrs. SULLIVAN. We will, don't worry. Mr. WALKER. Also we might ask them how much tax revenue they are going to forgo if this so-called independent charge is ratified by the Congress of the Internal Revenue Service on $90 billion worth of consumer loans on which they now allow a 6-percent-interest deduction as maximum, as I understand it, under Internal Revenu~ provisions. If I have got a 12-percent-automobile loan, for interest deductible purposes on income tax I can't take more than 6 percent. Now, on the $90 billion, 6 percent of $90 billion is $5.4 billion a year. And if you are in a 20-percent-average-tax bracket, that is a billion dollars or so a year. If the actual true rate on these consumer loans is in the neigh- borhood of 12 percent, this will automatically increase the deductibility of the interest to $10 billion. It is a pretty good hunk in a situation where we are asking for a tax increase to pay for-. Mrs. SULLIVAN. You are not talking about individual returns, are you? Mr. WALKER. Yes, ma'am, that is exactly what I am talking about. Mrs. SULLIVAN. Unfortunately, I don't have anything to deduct on interest paid out, because I am one of these Dutchmen who believe in paying as you go. But haven't you shown on your return how much money, how much interest is actually paid on your loan, and can't you deduct-' Mr. WALKER. Not if it is over 6 percent of the item. That is an arbitrary ruling. This is f~ percent-the Internal Revenue thinks every~ body borrows money at 6 percent interest. Mrs. SULLIVAN. I heard the Secretary say to us that he was going to change that if this bill passes. Mr. WALKER. He checked with his counsel and they had some other thoughts on it. Mrs. SULLIVAN. Mr. Annun~io. Mr. ANNtJNZIO. Thank you, Madame chafriady. I just want to comment briefly that it is a sad commentary on our civili~atitm to observe as I have since eO~nmg to Congress that the b'iy~wayr you can get legislatithi passed is for great numbers of disasters PAGENO="0406" ~396 CONSUMER CREDIT PROTECTION ACT to happen and great numbers of people to be killed. We had before us in the Congress a rat bill. That rat bill was treated badly. It was one of the few times that a bill such as this came out of the Rules Com- mittee and the greatest deliberative body in the world refused to de- bate the merits of the legislation. Had the Newark and the Detroit riots taken place before the death of the rat bill we would have had a rat bill enacted into law. So the Newark riots took place and the Detroit riots took place, and we have a truth in lending bill, S. 5 in the Senate by avote of 92 to 0. I want to ask you, Mr. Walker, does the ABA. endorse S. 5-I just want to get the record straight-does the ABA endorse now, the truth-in-lending bill? Paul Douglas has been trying since 1960 to get the truth-in-lending bill passed, but as I stated, the country wasn~t ready for it, and I don't think times have changed that much. I have only li~ed a little more than half a century and I remember the days when the country was ready to recognize the right of the people to join unions. But each time in history there has to be a catastrophe of some sort before positive, constructive action is taken. We have a bill, H.R. 11601. Just for my own purposes, Mr. Walker, what would you take out of H.R 11601? Mr. WALKER. All the items-all of our positions on 11601 are de- tailed in broad terms in our written statements. Mr. ANNUNZIO. I am assuming, Mr. Walker, that you are in favor of some truth-in-lending legislation. Mr. WALKER. Yes. And I will be specific. I just wanted to point out that all of our points in regard to H.R. 11601 are given in broad terms of pages 7 to 10 of the short statement, and pages 18 to 28 of the supplementary statement-you don't want me to go through all of those, do you, simply to say in general terms~- Mr. A~NUNZIO, In general terms on the 18 percent- Mr. WALKER. We oppose that. Mr. ANNUNZIQ. You are opposed to the 18 percent and you have stated your reasons. Mr. WALKER. Yes. Mr. ANNuNzIo~ On the $10 exemption that is in S. 5-. Mr. WALKER. We would retain that. Mr. ANNUNZIO. You would retain the $10 exemption? * Mr. WALKER. We would retain the S. 5 provision on first mortgages. We would retain the S. 5 provision divorcing insurance charges of any type from the finance charge. We would prefer that S. 5 be amended to allow the optional dollars per hundred or percent per annum to be on a permanent basis rather than expiring in 1972. We prefer the monthly method of disclosure which we think is best and solves all problems. We would recommend changes in the advertising provisions, which we think are am1~ignous. We have positive recommendations in our detailed statement. We would drop all parts of the bill which do not relate to disclosure, and urge further study of these items. That in- cludes the 18-percent-usury charge, it includes the garnishment pro- vision, it includes the standby regulation W, it includes the credit ~rn~rgins on commodity exchanges. And finally, we would not endorse the National Ooinmission ap~. proach in H.R. 11601. We think that this committee and other PAGENO="0407" CONSUMER CREDIT PROTE~T~ION ACT 397 congressional committees are fully capable of doing a topnotch job in these studies. We would also recommend that the effective date of the bill be delayed until 1970. Mr. ANNUNZIO. Is there anything in H.R. 11601, if we attempted in our judgment to strengthen S. 5, that you would accept so that we could strengthen S. 5? Mr. WALKER. Yes. I would take the advertising provision if recast to get rid of the ambiguity and the problems which we pointed out in our statement. If you have got to do certain things over the counter, there is no reason at all why your advertisement should not be fully consistent with that. That is constructive information. But the word- ing gives us a great deal of difficulty. The question is, who is going to administer the advertising require- ments? And the Fed wants the FTC to administer it. The more ad- ministrators you get into a given piece of legislation, as we have seen in the banking area, the more administrators you get the more chances we have for disagreement, and so on. And even though I sympathize with the Federal Reserve's idea not to get involved in administering the advertising provision, I think that since it is a credit and financial matter that it would be better to keep it in the Fed, and in fact keep all the regulations of the bill in the Fed. Also I didn't mention administrative enforcement. We very much prefer S. S's provision rather than the enforcement provisions of 1I.R. 11601. We would also request-and we think it is very important to give the uniform law commissioners time to bring their project to fruition. And believe me, we will push this very, very strongly in State legis- latures throughout the country. But please give us until 1970. Our next major legislative year is 1969. The uniform law commissioners approach is to repeal general usury statutes which give you so much trouble and to provide specific ceilings depending on the type of credit, which is a much more viable sort of situation. But if you force us to go in and try to promote this before the uniform law is ready, I think it can set back a valuable project, and might even kill it. Mr. ANNUNZIO. Do you feel that this legislation, Mr. Walker, after conducting very, very intensive and extensive hearings, will serve to narrow the gap between the middle class and poor people? This is what is causing our trouble, the gap is too great. Mr. WALKER. Not significantly. I just think-if you are talking about this particular bill-if you are talking about the uniform law commissioners' consumer credit code-this is another ambit-~--any- thing you can do to keep these people away from the loan sharks and into legitimate lenders is going to help and this specific usury ceiling approach by type of credit, you are not doing a poor person any good to say that usury is 6 percent. He ~an't borrow on that basis for an automobile. It is much better to say that he can pay up to 18 percent for an automobii.e if you really want him to get the credit. Yes, I think that could help significantly. Mr. ANNtJNzI0. Father McEwen, I wholeheartedly agree with your statement. And I do appreciate your coming before the committee. I feel that a lot of the problems that are caused in large cities, and I PAGENO="0408" 398 CONSUMER CREDIT PROTECTION ACT had a riot in my district last year, are caused because, as all of us know, the poor pay first-grade prices for fifth-grade merchandise. And it is the history o~f man that the poorer you are the more you are exploited; consequently we are under pressure here in Congress, and we must do something about it. In fact, Father, I feel that if the rat bill came up e would pass `that, too, now. Father MCEWEN. Mr. Annunzio, may I take this opportunity to say th'at I have been tremendously impressed by the effort of the sub- committee in thi's matter. And I have been tremendously impressed by the attention and the devotion that the members have displayed. In that connection I want to emphasize something to you ladies, and gentlemen. Tl~iere is an education function in these hearings `that have gone on in the Senate and the House that you should not underesti- mate-I think you are doing a tremendous educational Service to the country by the hearings and the coverage and the debate. And I can give you `an example of the opposite of that. A few years ago in Massachusetts we passed an abridgement `of the holder-in-due- course privilege pertaining to consumer notes. It was passed almost without debate~ and almost without even knowing that it was passed. The effect of that for several years was practically zero because of the lack of education about it, Even the lawyers didn't know that this was on the books, and they couldn't invoke it. I would urge-4 agree with the provision's of the American Bankers' statement about insurance, but I disagree ~n the National Commission. I thin~ `there are s'o many facets of this whole area of credit that you haven't mentioned, `such as the practices of collection agencies, the practices of credit bttreaus, that I think the Commission could spend a lot of time going into. So I en- courage the committee to push the commission idea. On the insurance, I think logic is with Dr. Walker on this one. If we are logical and consistent, the items in the finance `charge for `all lenders, and for all types of borrowing and lending, should be a's simi- lar as possible. I would recommend that you take charges like credit life `arid acci- dent and health ~n'surance pull them `out of the finance charge~ and im- pose specific ceilings on their rates. And I would suggest the Massa- chusetts rate of M~ cents a hundred on `credit life. Mrs. SULLIVAN. We will certainly go into th'at, Father. Th'e bells have rung for a vote. And again Mr. Bingham is last. But I think that we will have time to get your questions in, Mr. Bingham, before we have to leave. Mr. ANNUNZIO. Thank you, Father. I am sure that the others on the committee and myself appreciate your observations. One thing thal we have done is that we have been able to bring this problem to ~he attention of many, many people. And I appre- ciate your contribution. And I apprecii~te the contribution of Mr. Walker of the American Bankers Association. Mr. WALKER. Thank you. Mr. BINOHAM. Thank you, Madam Chairman. I would certainly like to agree that these have been wonderful wit- nesses and very helpful, even though they don't agree on everything. PAGENO="0409" CONSUMER CRE1~IT 1~ROTECT1ON AC~ 399 I would first like to ask two questions about the mortgage situation and the point system. I believe you said before, Mr Walker, that in the normal situation on a mortgage there ar~ lb points. Mr. WALKI~R. On conventional mortgages. There is a rate ceiling fixed on FRA mortgages which, if either the Administrator-if Mr. Brownstein does ilot move quickly enough, or if he reaches the con- gressional ceiling which is set, he can move no further. And if you want money to come into FRA mortgages, which tend to go into Government loans or other sources, the only wary they can be objective is for the mortgage to fall to a discount and sell at 99, 98~ 97 and last year 92, 91, and so on. This is because of the fixed rate on FHA mortgages. Conventional mortgages are not Government regulated, they have no ceiling, and the rate is free to go up and down, and therefore points do not come in-they do occasionally, but not like the FHA's. Mr. BINOHAM. Father McEwen, you stated in a part of your state- ment, which I don't think you read, that you understand the inclu- sioil of the first mortgages in the Massachusetts law has resulted in the complete elimination of the obnoxious point system. Would you com- ment further on that? Mr. Walker is shaking his head. Mr. WALKER. He can't eliminate them on FHA and ge~ any loans made. Father MCEWEN. I was told this by some Massachusetts banks that I queried about the effect of the law on the mortgage market. And technically if anyone gave points in Massachusetts it would revise the statement of an interest rate, wouldn't it? Mr. WALKER. As I understand the statute-which could be done. Father MCEwEN. It could be done, sure. Mr. WALKER. You mean they made the loans, instead of saying that this is-using the chairlady's figures this morning, instead of saying that this is a 6-percent loan at how many points discount, 5, 6, 7, or whatever you said, this is a 6.55-percent loan. Father MiEWEI~T. In other words it has to be an accurate expression of the interest rate. Mr. WALKER. But it still has the points, it is ~just expressed another way. Mr. BINGHAM. I would like to turn to the matter of revolving credit. I would like to say, Mr. Walker, that I am entirely in agreement with your position that there should not be discrimination between the types of revolving credit. They should all be treated alike. You make an excellent point there. Could you tell us a little bit briefly about the manner in which the banks operate these accounts and how they com- pare to the de1?artment store revolving credit accounts. And before you answer that, may I just ~ t~iis for the record. And I am sorry Mr. Williams isn't here any longer, because 1 think that the witnesses yesterday left the i~npression that the aet.u~al intere$ rate whicht is earned over a period of time is always l~ss than the 18 Iper- cent. The fact is that it can also be alot more than the 18 percent. I am. sure you will agree with me. PAGENO="0410" 400 CONSUMER CREDIT PROTECTION ACT Mr. WALKER. I know that. Mr. BINGITAM. I have a simple example here. The way they use these things, ~f your balance on the 1st of March is $100, and on the 5th of March you make a payment of $50, and on the 25th of March you make a purchase of $50, on April. 1 your balance is again $100, so you are going to pay a dollar and a half on that one but the ~yerage, bal- ance for that period is only $66, so you have been actually paying at an annual rate of 27 percent. If that is not right I would like to be corrected. But that is the way I understand their plan. Mr. WALKER. Now, I am going to ask Mr. Bailey to comment on that. I think it is the method which does vary. Mr. BAILEY4 Yes. I am not familiar with precisely how that com- pany does it. We levy the charge on the opening balance less any payments that have been received during that month. Mr. BINGHAM. But that is not what the department stores do. You see, they levy that charge on the opening balance regardless of any transactions during the mont~h, unless the account is wiped out, and then they don't charge anything. We are going to have testimony next week showing that because of this practice in some cases, the credit charges can run as high as 75 percent per annum. Mr. WALKER. On S. 5 they can say their monthly rates are 11/2 percent and we have to say our annual rate is 18 percent. Mr. BINGHA~. I agree with you on that. As far as the banks are concerned, how does it actually operate? Mr. BAILEY. As I stated, if you purchase something this particular month of, say, $100, the first of next month we would bill you for your monthly payment, but include no service charge, because from the time of purchase until billing would be free, there would be no charge to you. And at the end of the following month-let's assume that you have made no purchases at all, and you paid $10 during the second month-on the second billing we would bill you again for the monthly payment. And at that time we would charge one and a half percent on $90. That was th~ balance that was left after you had made the pay- ment. Is that clear? Mr. BINGHAM. So far. But what if you had also made a purchase during the second month? Mr. BAILEY. That would not be service charged until the second billing after that purchase is made. The same procedure follows through. Mr. BINGRAM. But you do give credit for the payment made dur- ing the month. Mr. BAILEY. Yes~ we do. Mr. BINGHAM. You deduct that from the balance at the beginning of the preceding month? Mr. BAu~Y. Yes, And I would like to comment on what Mr. Williams and Father McEwen were talking. about. If the effective rate on the money that was actually used in the example that was quoted was less than 12 percent, 11 point something-this is what the person actually paid for the use of that money during the life of that contract, a year's PAGENO="0411" CcT~stTM1~ cR1~t~iT ~ MYI' 4~fl time-I think we misinform him if we tell him it is going to be 18 percent, and he goes, then, and borrows cash somewhere for 12. Mr. BINOHAM. Yes. But my point is that the figure could also be much higher than 18 percent per annum2 depending on the timing of the various transactions. For instance, if he hadn't cleared his ac- counts a couple of times, which hel'ps very substantially in the total calcuIation-~-because if he clears his accounts one month he doesn't pay any service charge for that month or the following month-and if he made `his payments generally before he made his purchases, he could end up paying substantially more than 18 percent, per annum. I am not saying that is true of the banking system but I think it is true of the type of account that was presented to us yesterday by the department stores. Mr. WALKER. We are proud of our low-rate lending. Mr. BINGHAM. I want to pass to one other point. And I don't want to impose on the time of the committee. But I must say, Mr. Walker, I just simply can't agree-and I am surprised that Father McEwen apparently agrees with you that the credit life insurance is not part of the cost of credit. It may not be part of the cost of money, if you will, but the borrower it is something he has to pay. And I can give you an exawple right here from a folder of the Riggs Bank on the educational loan fund. They say that the discount rate is ~½ percent per annum, but then they go on to say that the bank does require life insurance, in this case on the parent or guardian, so that the total charges on the loan are $4 per hundred on. a discount basis, which means actually about 8 percent. Now, if the students want that loan, if they want to borrow, they have got to get the life insurance. I don't see how you can say that that is not part of the cost of the credit. I request that the Riggs Bank brochure appear in the record at this point. Mrs. SULLIVAN. Without objection, it will be included at this point. (The brochure referred to follows:) PAGENO="0412" 402 I~J~F `~` ~ r~L~ J~ -~ it ~ ~ ~ *i~. ~ PAGENO="0413" ~ONSt~M1~ ~1tEDI~r PR~Etfl~I~ A*~P 403 A. ~OMPU~Th P1~Oa1~AM Th~ Riggs ~d~u~atior~ Loan Program :~s~ unique, timely and t~OrnpIete4 It ~i'~l as~I~t those parents or guardians ~&ced with the prcblems of cost ~orn~tte'd With the education of )~ieli~' chiidren. The program provides money to cover tuition, room, board, books and other e~per~ses closely related ~o' the :st~dent's education. loans m~y b~ made to cover Pri~ th~tTy, Secondary, Prep~ratory, Uni~- varsity or Post~raduate work The p'an is tailored to meet the kdiv.id~ ual needs of each `applicant Aan~gem~mts can be made `to ac~ co~in~m~dat~. OflE: child or all of your children. Rig'g~ `Bank, b'ekig, well ~wa~re of the ever ~creasin~g costs ~dentai `to hi~h~r education, i~as di~r~d ii~ plan `to be a ~U5tom~ "rn~de m~ans ~tc ~meet The family. fi~n~cial. ne~4s. PAGENO="0414" 4q34 ~ THE COST, ~1/;~ P~R ~~f2 PiSCOUNTi~ The Riggs Plan ~ thearnowit needed by the borrower at 3~% per annum, In other words $3.50 per hundred dollars is chargedo~ the money advanced, enabling par~ ents or guardians to enjOy the minim mum cost. T~ie bank does re~jjré life ihsur~ce on the parent or guardi~~ with the Primary financial responsibility. therefore, the total charges on a loan are $4.00 per hundred dollars per year on moneys'advanced arid this includes credit~ life' insurance. Th~ following examples `would illus. trate the total charges. S M~TOTALTOTAL~~ AD VANCED CHARGES NOTE PAYM $1,000 $27 $1,027 8 $123.37 1,000. 33 1,033 ` 10 103.30 ~ 40 1,040 12 86.66 Life Insurance has been included. PAGENO="0415" CO~SJME~E CR13it~iT P1tOPE~TON AcP 405 It is advisable that you negotiate your loan at an eady date, prefeN ably as soon as possible after ac~ ceptance to the school. This wilt allow you to take advantage of our twelve month repayment schedule. Since Riggs Bank is most interested In providing education loans whIch best suit all of the family needs, a variation of plans may be arranged. The Riggs National Bank of Wash~ ington, ~D.C. invites parents and guardians to consult with the Family Bank at any time for additional in~ formation and fnancial aid at all levels of schooling. POR ADDITIONAL JNPOR~ATION Telephone 783~5600.. . or write to THE RIGGS.NATIONAL BANK Education Loan Division: 1913 Massachusetts Avenue, N.W. Washington, D.C. 20036 PAGENO="0416" 4~6 ~ cm~rn~ p~op~c'j~io~i ~ep ~tatistics show that ~il gr~c1~ uates earn mar1~y theusands ~f dol~ lars more durin8 thefr lifetime than non-graduates. The financial adv*an~ tage alone makes a college degree a good investment, but higher edu- cation also càfflbs with it such àddi- tiônäl Väliié~ a~ added ~p~Mige, jOb and ctwimuffl'ty b~pbttuMti'e«=, ~e~sOnal satisfactioi~, ar~d séif~ c~nfidênc~. With c~llér~ to~t~ t~g ~thUaIly, thtr~ ar~ f~w f~mHie~s whb ~tt f~ñance a cilleg~ edi~atiOn w~th~ut as~i~tancth However? sc~isMpS4 k~ans an~ other so~r~es cnak~ itpos' sible for almost ev&y~ambitious~and deserving young person to earn a college degree. As a Full Service b~nk~ u~tiö~i Loans are only one of the many, ways h~ Which w~ ~ be ~f ançe. A ~t t~ ~ otb4tith~ would enable u~s t6 dic~ssThe.p~ sibiljtt4es of $erving all ~f yofi~ cial requirements. PAGENO="0417" CONSUMER CREtflT PRO~FECTION ACT 407 rig. RIGGS NATIC~NAL BANK Washington, D.C. Founded 136 STerling 3~5600 MAIN OFFICE 1503 Pen~syh'ar.ia /wenue, N.W. INSTALLMENT ~REDiT DEPARTMENT Education loan DMslon 1913 Massachusetts Avenue, N.W. BRANCH OFFtCES DUPONT CIRCLE 1913 Massa~hUs~flts AvCntiè, N.W. PARK ROAD 14th Str~et and Park Road, N.W. CHEVY CHASE Connecticut Avenue and Mottson Street, N~W. WASHINC~rON WAN AND Tkust F Street at ~th, N.W. ~tIE~DSHtP Wisconsin Avenue and W~rreh ~treët, N.W. FARMERS AND MECHANICS Wiscons~n Avenue and M $treet4 N.W. NORTHEAST 1348-~~4Th Streets N.E. UNCOLN 17th and H St~eetc, N.W. SEVENTH STREET 7th ~d EVe `St~eët~, 4~4.W. NORThWEST 17~g CoMthia Road, N.W. FEDERAL 175b PéAn~~Ivania Avenue, N.W. S~VENTH A~ D STREET ~31B-.-7th Street, N.W. SOUTHEAST South capitol and Orandywine Streets, $~E. UNIVERSAL Connecticut Avenue and TStreet, N~W~ WALTER REED MEDICAL CENiER FACItITY Army Med1~aI Ceni:er WAT~R~ATE dFhCE Virginia and New 1-thn~psiiWe AV~flues, W.W. Member--Federat Deposit Insurance corporaflon Member-Federal Reserve System 83-340--67-pt. 1-27 PAGENO="0418" cm~i~rr ~rtti~rEc'rTö~ ~ Mrs. SULLIVAN. May I ask that you both comment on this matter in your transcripts when you get them to correct, because I think you want to answer in some detail, and you should have a chance. Is that nil right with you? Mr. BINGEIAM. Thank you very much. Mrs. SULLIVAN. And Father, when you correct your copy of the transcript, enlarge upon the Massachusetts allowance of a fixed in- ~urance charge. Father McI~WEN. I se~ what you mean~ M~dâm Chairman. Mrs. SULLIvAN.Will you explain that? Father MCEWEN. Yes. (The inform~ntion requusted ft~liows :`) SUPPLEMENTARY STATEMENT BY FATIma ROBERT J. MCEwEN, S.J., ON CREDIT LIFE IN$IJRANCE It has been the philosophy of the Massachusetts' Banking Department, for a long time, that insurance charges should be separated from the interest rate calculation, and this has been done for 10 years on all small loans. In the new bill on retail installment sales, credit life insurance may be included in the finance charge or expressed as a separate charge at 50 cents per $100. I am informed the same provision wiil be applied to the sale of automoXdles under a bill presently in the Massachusetts Legislature. However, a ceii~g fixed charge of 50 cents per $100 of insurance is written into our law for all ~t1~se categories of loans, and, new. hills will establish the same limit for accident and health. In as much as mpst companies can purchase credit life insurance, for instance, for somewhere between 33 cents and 39 cents a $100 the permitted charg~ o1~ 50 cents appears adequate, This whole area of credit life insurance and accident and health insurance as- sociated with lending operations is one that' h~s been un~1~r constant study by the Senate Anti-trust and Monopoly Subcommittee. Their latest hearing record, soon to be pu~lished, and their files contain startling tOstifnon~ to the relatively exorbitant profits made by financing firth~s' out of;the insurance they sell to cus- tomers on their loan~. Again it is the case of the tail wagging the dog, and it almost appears as if they are now making loans in order to get the profits from the in- .surance they sell assOciated with those loans. The Senate Oommittees' material documents the close interconnection between finance companies and insurance companies. In fact, in many cases, finance com- *panies have opened up their loan insurance subsidiaries in order, as one of them put it, to make a double profit on the same transaction. An examination of financial reports from several of these finance companies will `show a very substantial fraction of their net income as derived from their insurance operation. I am told that hearings on this subject wIll ~e held by the Senate Anti-trust Subcommittee in this coming fall and this should highlight the importance of these is~ues. The important consideration is that the House Truth in Lending Bill should contain either `the requirement that the credit life insurance charge be included `in the total financing ra~t~or the protision that a ceiling of 50 cents a $100 be established for a credit life insuranceebarge separated from the finance charge. I realize that this may be a revision of the McOarran Act, but I believe it is some- `thing that Congress is fully justified in doing at this juncture in the economic ~development of the le~n~Iing and insurance industries. May I quote from a ~tReport on Credit Insurance" j,y the Department of In- surance of the Comniotlwealth of Kentucky bearing a date of April, 1967. On page ~26 of this document, I read: "As reported by a leading investment advisory service, two of the largest independent companies in the consumer credit field, Commercial Credit Corporation and Associates Investment Company, derive substantial income PAGENO="0419" CONSt7M~1U ~Ml~UlDIP ~ A~P fromtheir insuraneeoperatlóms. Th~pereeatt of 1906 tncOme ~ren~ ea~h ~om,ce of these companies operations is showli as follows "(In percent( 409 "Net income from operations involving- Financing Inturance Allbther Commercial Credit Corp Associates Investment Co 47 41 52 50 1 9" Let me read to you from the annual report for 1966 of General Acceptance Corporation of Allentown, Pennsylvania under the heading, Life Insurance. On page 14 of this annual report we may read: ADVANTAGES TO GAO Our life insurance operations have consistently produced substantial earn- ings over the years. This is a good example in our company of the reaping of a second profit from essentially the same source of business. From the CIT Financial Corporation Annual Report for 1966 we read under the heading, Insurance Division, page 11: Net income derived from all insurance activities totalled $14.8 million in 1986, or slightly more than the $14.7 million earned in 1965. Automotive insurance operations, conducted by the Service Insurance Companies, contributed $7.3 million to the 1966 profit picture, equaling the 1965 figure. Income of the North American Company for Life, Accident and Health In- surance was higher in 1966. Life insurance added $7.5 million to our con- solidated income last year, compared with $7.4 million in 1965. The annual report of another large firm, Associates Investrient Oompany, shows a net income of $19.3 million for the year, 1966, while the net income of their life insurance operations was $5.5 million, From Best's Life Insurance Re- port for 1966, page 234, we may see that this llfe insurance company in 1965 had $1.~ billion of credit life insurance out of a total life insurance in force of $2 billion. New business written shows $919 million life insurance as a total out of which $670 million was credit life. These examples, I think, show very dramatically the point that we are making, that credit life and accident and health insurance have be~ome both very sub- stantial and very lucrative parts of the operations of lending firms. May I close with a quotation from John P. Clair, our late Deputy Commis- sioner of Banks in Massachusetts, in his testimony before. Senator Hart and the Antitrust Subcommittee in what was his last public appearance before his un- timely death. He said: But I will say this, that T think it is time in this country that we called a halt to the situation whfcb exists where the seller of money is making more money selling insurance than lie is selling money. Now this is basically wrong.. I think that certainly from the point of view of monopoly, the rela- tionship which exists between lenders and insurance companies where they are owned completely brings about a situation, I think, which is inh~ical, - From the Thursday, May 18, 1967 hearing on Consumer gredit Insurance. RESPONSE OF AMEIcICAN BANitEES ASSOCIATION oV CRuDIT LIFR IN5IJIcANCE In response to Congressman Bingham's question regarding credit life i~sur- ance, it is my view that charges for insurance coverage generally are not a part of the cost of credit. It is to be noted that commercial bank educational loans are not really typical of the great volume of consumer installment loans made by banks. Educational loans to parents or guardians are usually considerably larger in dollar amounts and longer in terms that typical consumer installment loanS. Also, educational loans are generally made at substantlflhly lower rates of interest, e.g., 6.5 percent simple interest in the case of Riggs N~tt&onal Baflk, than typical new car loans which are made at rates ranging from 9~5 to 10.5 percent. These loans may range from $5000 to $10,000 and may have ternis ranging from five to ten years. PAGENO="0420" 410 ~ONSVM~B CU~DIP ~ROTE~~ON ACT ~ ~ With ~gar~1 to the bulk of tank c~n~rn~r ~ aJs fai~ as w~ can Ietermine the great majo~r4ty ,~ ban1~s mttke lnstwanee e~rerages ~ptkTia1 to the borrower. One borrower may choose to take credit life insurance or accident and health coverage, whereas another , borrower may not take these coverages. To require that these insurance coverages be Included in the finance charge which would be converted to an annual percentage rate in many cases would suj~tluitla11~~ d~stO~ the lute and would not give the borrower a sn?gle umftrm measure for eo~nparing cre4it charges or rates. We clearly pt~fer the provisions of S 5 which do not require that Insurance c~~ages be ~icBided i~ the fleance~ c~iarg~,~ut wl~icb correctly require that these chdrges ~Inust iM~ epkrat~y~ itemized ~n~d dtsç~osed to the bOrrower in terhis of their respective dollar costs. The most important point to remember is that the borrower in a very direct sense derives the prlfnarl protection froih this t7pe of Insuaahce c era~5 If the borrower shoul4 the before the lush is paid off~ the iasurhnce w~nl4 dlsehar~e the unpaid balance of the obligation 5m1 the borrower u es~tate Would not be liable. On the other hand, if the insurance coverage had not existed, the lender would look to the decreased borrower's estate for satisfaction. It is clear that credit life insurance affords a very direct and beneficial form of protection to borrower~. Mrs. SULLIVAN. Dr. Walker, the staff has already pointed out to us the provision in H R 11601 which seems to permit lendeis to express a dellar pei hàdred~ rate on the irnptud hal~tnce oiil~ for the period between now a~d the time the mw would actually become ~ective. I am informed that was done in order to accommodate as much of the bill as possible to the exact language of S. 5, with only those changes essential to accomplish our purposes. Would it be a fair summary of your position to Say that, one, you think the States can and should handle this whole problem, but if we are not willing to wait for the final outcome of the 7~~year.drafting effort by the commis~ioners of uniform State laws, we should pass only a disclosure law, generally as passed by the Senate, but with one major change; and that is, remove the distinctions and discrimina~~ tion~ in expression of the rate between the revolving charge and the installment Ioe~n~ tansactious? Mr. WAi~En. ~ am not supporting 5. 5. Amendments are possible which would mai~e it gain our support. But S. 5 is a tremendous un- provement over original disclosure legislation, and far preferable to H.R. 11601 in our judgment. Mrs. SULLIVAN. But anyway, you ask that we remove the di~tinc- tions and discriminations between the two types of credit. And you sng~est that we do that by letting the installment loan transactions be dieclosed in tei~ins of a monthly percentage rate rather than an annff~i~pere'enta1'g& rate. Mr. WALK~it. Correct, Mrs. SULLIVAN. jiowever, if we decide against that, then you sug- gest that we should, in this one instance, follow the provisions of H.R. 11601 rather than the Senate bill, and require all types ~f transactions, including open ended revolving charge, to be disclosed on an annual percentage rate basis? Mr. WALKER. Hopefully with a permanent option between dollars per hundred and percent per year. Mrs. SrLLTVA~. Otherwise, outside of that, there isn't much else that you support in ItR. 11601. Mr. WALKER. The advertising has great promise. Mrs. SULLIVAN. I hope that we can get that in, too. PAGENO="0421" CONSUMER CREDIT PROTECTION ACT 411 Do you agree with me in my concept of the new "revolving math," that no matter how you slice it, or with what grace or grace period, that 11/2 percent service charge made by the stores is for a specific 30 or 31 days, one-twelfth of a year, that is 18 percent on an annual per- centage basis? * Mr. WALKER. Yes, but the customer may not be paying 18 percent in interest, but 18 percent is the rate. Mrs. SULLIVAN. Because it is assessed for a particular segment of the calendar consisting of 1 month, no more and no less. I want to thank you very much. You may not agree with everything in this legislation, but you have been helpful in sharpening up the 1ssues~ and you have made some good points which we will certainly consider. You seem to be under a misapprehension that the provisions of H.R. 11601 which are not restricted merely to disclosure of interest or finance charges are "outside of the scope of the accepted legislative intent of the bills before this committee," as your statement put it. Let me make clear that those of us who have sponsored H.R. 11601-the six of us on this subcommittee and some 22 other Members of the house-believe we need far more than mere disclosure to cor- rect inequities and abuses and misuse of credit by both lenders and borrowers. Nearly all of our witnesses so far have gone out of their way to avoid grappling with the issues which we raise in H.R. 11601 which go beyond disclosure, as if we really didn't mean any of them.. Well, we may not win them all, but we mean them. Don't be surprised if all these ideas eventually become Federal law in some form, because they are directed at balancing the economic scales, which is a tradi- tional Federal role. And my last comment, in thanking you gentlemen from the ABA for your testimony, is to assure you that we have no thought, idea, or intention of proposing standby controls for use now or in the fore- seeable future "to meet current inflationary pressures," as you put it. I am sure the ABA would be the last organization in the country to imply that the Federal Reserve Board would use a war club like standby credit controls in order to combat a 5-cents-a-pound increase in hotdogs in August. We appreciate your being here. And I thank you for your patience. When you correct your transcripts, you are free to add or correct anything that you wish and to send it back to us and let us have it as quickly as possible. Thank you very much, also, Father MoEwen. You have put this issue on a basis which is often ignored, but is mdeed vital, and that is the essential decency of bringing about long overdue reforms of credit abuses a's a spiritual obligation. Your service to the consumer cause in this country has been further demonstrated in your testi- mony today. 1~e wi'i~ adjourn until 10 o'clock Friday morning, when `we will hear a panel ~f outstanding Federal bankruptcy referees who have amassed great experience and knowledge about the tragic misuse of consumer credit leading to the wiping out of billions of dollars of obligations through the drastic remedy of bankruptcy. (Whereupon, at 3:45 p.m., the subcommittee adjourned, to recon- vene at 10 a.m., Friday, August 11, 1967.) PAGENO="0422" PAGENO="0423" CONSUMER CREDIT PROTECTION ACT FRIDAY, AUGUST 11, 1967 [lousE or REPRESENTATIVES, SuI3coMMrrrRE ON CONSUMER AFFAIRS OF TI~~ COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to recess, at 10:15 a.m. in room 2128, Rayburn House Office Building, Hon. Leonor K. Sullivan (chairman of the subcommittee) presiding. Present: Representatives Sullivan, Gonzalez, Hanna, Annunzio, Bingham, and Dwyer. Mrs. SULLIVAN. The Subcommittee on Consumer Affairs will come to order. I would like to just make a brief opening stat~ment before we start this morning's hearing. The Subcommittee on Consumer Affairs has held seven sessions during the past 4 days on the consumer credit legislation now before us-every morning and every afternoon except Tuesday when we could not obtain House permission to sit. We have begun as early as 9 o'clock in the morning and worked late into the afternoons. And we still have much ground to cover. I want to express my appreciation to the members of the subcom- mittee who have been so conscientious in attending the hearing and participating in the questioning. With so much work in our own of- fices, plus our responsibilities on legislation before the House, it is a real sacrifice to carve out so large a part of each day for so many days in a row for hearings on a specific piece of legislation. On the other hand, this legislation does indeed deserve such atten- tion. Even the mildest bill before us on "truth in lending" would re- quire a great deal of change in methodology and even in the language of ~the consumer credit industry, ~which now has loans outstanding amounting almost to the size of the Federal budget, in the neighbor- hood of $100 billion. And this, of course, does not include the hundreds of billions in real estate consumer credit. So we are dealing with a subject which affects nearly every busi- ness in the country, directly or indirectly, and every consumer, whether he pays cash for his purchases or defers payment through one or another of a great variety of devices for enjoying today what you possibly cannot afford today to pay for. We have heard from Cabinet officers, agency administrators, consumer representatives, ~nd spokesmen for the merchants and bankers covered by the legislation. This morning we are fortunate in having with us four men who daily confront the problems of those consumers who have used too 413 PAGENO="0424" CONSUMER CREDIT PROTECTION ACT much credit,~ and of the unlucky creditors who provided that credit and then face having to write off part or all of it under bankruptcy proceedings. The truly ~antastic increase in personal bankruptcies in this coun- try in recent years reflects the ease with which almost anyone can charge today's wants and purchases to tamorrow~s or nexty~ar's earn- ings, and it also reflects the agonies of repaying debts they could not handle. Our four witnesses this morning are among the foremost Federal referees in bankruptcy. They see the often tragic consequences of over- use of credit, and then it is up to them to try to pick up the pieces. Bankruptcy f~rmerly was a way primarily to settle and resolve busi- ness debts, but today the vast and overwhelming majority of cases in- volves consumers filing because of personal or family debts unrelated to business ventures. As the testin~ony this morning will develop, many of those who seek bankruptcy as a way out of their financial troubles haye. foutid them- selves in a position where their earnings are being garnished, depriving them of income needed for daily family living expenaes and' causing their employers great inconvenience and e~cpense. Often this leads to the discharge of the employee, who then cannot get another job because of the garnishr~ents which complicate the payroll and raise employers' costs. H.R. 116Q1, among other things, would prohibit garnishment `of wages to satisfy debts. Our witnesses this morning are here to give us information `on this issue and on other aspects of the legisiatirn~- based Qfl theii~ ~xposure e'ach d'ay to the problems we have been dis- cussing in our hearings. First I want to ask Mr. Royal Jackson, Chief of the Bankruptcy Division of the Administrative Office of the 1IJ.S~ Courts, to introduce our four witnesses and then tell us briefly what the national picture reflects in personal bankruptcies So that we will have the setting in which `these foni~ `district court referees have been developing the ex- periences th'ey will share with us. Mr. Jackson, ~ve~ appreciate the help your office has given this s~ib- committee, and 1~f you will. just tell us something about Mr. Snedecor, Mr. Moriarty, ~4r. Bare, and Mr. Whit~hurst.-who, I believe, is a former House of Representatives Judiciary. Committee ~counsel-we can then proceed to have them read their prepared statementh. ST~M~T OP ~OYAIJ E. ~A~KSQN, CRIE~ BANI~RU?TOT DIVI- SION, AD1VXINISTh4TIVE OFFICE, ~1.S. COU~T~, `~OCQ D ~Y JAMES E. M'O~TARTY, REP~RZ~ IN B~I VPTQY, V'S. DIST~~IOT `COURT, O~NT~4kL DISTRICT OF C~LIPQRNIA; CLIVE W. BARF~ RERER~EE IN BANKRU?TCY, EASTERN DISTRICT OF TENNZSSEE; ~STES SNEDE~OR, ~ TN BANI~RTYPTCT, 1'ORThAN~D, Ow.; ~ ELMO RIi~U1~8~ RiE~Z~ZZ IN~ BAB~Ufl~, DALLAS, TEX. Mr. JACKSON. Thank you Madam Chairman. Madam Chairman and members of the committee~ fliy name is Royal E. Jackson; I am the Chief of the Bankruptcy Division of `the Ad- ministrative Office ~f the U.S. Courts. A 414 PAGENO="0425" CONSUMER CREDIT PROTECTION ACT 41~ It gives me a great deal of pleasure to introduce the judicial officers who are here to testify this morning. On my right is the Honorable FAmore Whitehurst, referee in bank- iuptcy of the district court in Dallas, Texas As the Chairman knows, Mr. Whitehurst spent many years in Washington, served as clerk of the House Judiciary Committee, following that `as Assistant Director of the Administrative Office of the U.S. Courts prior to going to Dallas to become a bankruptcy judge. Referee Whitehurst is editor of the Journal of the National Con- ference of Referees in Bankruptcy. He is a member of the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States, and also a member of the National Bankruptcy Con- ference. As you are aware, the State of Texas has no garnishment statute and we believe that Mr. Whitehurst's testimony may shed some light on what effect, if any, a garnishment statute or the absence of one would have upon consumer credit. On my immediate right is the Honorable Estes Snedecor, one of the senior referees of this country and serving in the U.S. district court at Portland, Oreg. You have in your files and in hi's statement a r~sum& of his extensive experience both as a practicing lawyer and as a judicial officer. Referee Snedecor was engaged in the general practice of law in Portland for 26 years prior to his appointment as referee in bank- ruptcy on February 16, 1936. His service as referee in bankruptcy has been continuous since his original appointment and in recent years he has had a special interest in the garnishment statute in the State of Oregon and in its effect upon consumer bankrupts of that State. Approximately 2 years ago he testified at hearings in the Stt~te legislature in support of an amendment to modify the Oregon garnish- ment law so that it would be less severe. Referee Snedecor is a member of the Advisory Committee on Bankruptcy Rules of the Judicial Con- ference of the United States and also a member of the National Bank- ruptcy Conference. On my immediate left is the Honorable Clive W. Bare of the U.S.. district court at Knoxville, Tenn. Judge Bare worked in the U.S. dis- trict court prior to joining the `staff of attorneys in the Department of Ju~tice with whom he served with distinction for a number of years as ~ judicial examiner. Following his service in the t~epartment of Justice he became a bankruptcy judge at Knoxville on July 1, 1957, where he now serves. Referee Bare has been particularly ~oncerned with the problem of usury in the Eastern District of Tennessee and one of his landmark decisions was handed down in the matter of William Sylvester Branch, debtor, bankruptcy No. 22372, Eastern District of Tennessee, June 8, 1966. This decision is published in full at page 101 of the October 1966 issue of the Journal of the National Conference of Referees in Bankruptcy. Referee Bare has since 1964 served as a member of the Seminar Committee arid a discussion leader at the seminats for referees in bankruptcy held ~nnual1y during the third week of Mttrch in Wash- ington, D.C. since 1964. ,On my extreme left is the Honorable James E. Moriarty of the u.S. District `Court for the Central District of California at Los Angeles. Judge Moriarty is One of nine full-time referees in bank- PAGENO="0426" 416 CONSUMER CREDIT PROTECTION ACT ruptcy at Lds Angeles and, as you may know, the State of California alone has approximately 40,000 bankruptcy cases a year, just in that one State. Referee Moriarty served from 1950 to 1958 as an attorney in the Department of Justice at Washington, D.C. in the civil, criminal, and internal security divisions. From 1958 to 1963 Referee Moriarty was an assistant U.S. attorney at Los Angeles, Calif., and was appointed ref- eree in bankruptcy on January 21, 1963. I would like to only briefly review the situation as it appears na- tionally in reference to the volume of bankruptcy cases. I cannot speak specifically to this bill policywise because it has not been considered by the Judicial Conference of the United States which is the policymak- ing body for the Federal judiciary and until the Judicial Conference does consider the bill and take a policy position you will understand that I cannot speak policywise with respect to it. In the fiscal year ending June 30, 1967, a total of 208,3~9 bank- *ruptcy cases were filed in this country. This is an enormous volume `of business in our bankruptcy courts when you consider that at the close of World War II there were only slightly more than 10,000 cases a year filed in the country. One of the startling things about the 208,000 cases is that 92 per- cent of them are filed by consumer bankrupts and only 8 percent are business cases. The increase in 1967 fiscal year was almost 16,000 cases or 8.3 percent. We had the same percentage increase in the prior year. This is the 15th consecutive year in which there ha~ been an increase in the number of bankruptcy cases filed in our Federal courts. As a matter of fact, there has only been 1 year since World War IT when there wasn't an increase over the prior year and that `was in 1952 during the Korean conflict. I have been asked about the total liabilities in these so-called con- sumer bankruptcy cases. We do not publish these statistics any longer `because they are not strictly accurate. They were recorded in our statistics as a total of claims as filed by the bankrupts and we have learned by exper~ience that `they were not accurate. Sometimes the claims are understated, sometimes they are overstated, sometimes `claims are left o~it entirely. But as nearly as I can estimate in the 116,407 no-asset cases closed in 1966 fiscal year, the total liabilities were $1,242,000,000. So there is a great deal of money involved in ~even the small no-asset consumer bankruptcy. Now Madam Chairman and members of the committee that con- eludes my general statement. If there are any questions the committee members would lil~e to ask me I will do my best to answer them. Thank you. Mrs. SULLIVAN. thank you, Mr. Jackson. I think that it might be preferable if each of the witnesses would give their statements and then let us question all `of you at the same time. If there is any particular item, as you are going `through your statement, that the members want to ask short questions at the moment, I think we could do it. But it might be better if we hear the statements and then begin `the questioning. Would you start, Mr. Whitehurst? Mr. WI~ITEITURST. ~Madam Chairman, members of the committee, in view of what Mr. Jackson said I will' skip my background except PAGENO="0427" CONSUMER CREDIT PROTECTION ACT 417 to add that I am a member of the Supreme Court Advisory Com- mittee on Bankruptcy Rules, the National Bankruptcy Conference, secretary-treasurer of the National Conference of Referees in Bank- ruptcy, and editor of the quarterly journal of the conference. Title II of }LR. 11601, on page 33, prohibits garnishment of wages or salary due an employee and attaches a criminal penalty for the violation of the act. In my opinion the enactment of this provision would result in an immediate and drastic reduction in the number of bankruptcy cases filed in the United States. It would not of course prohibit those who engage in "predatory extensions of credit" as that term is used in the bill, from pursuing their debtors and attempting to collect debts by harassment, or other direct means, or legal action outside the bank- ruptcy court. Texas in its constitution and statutes has a prohibition against gar- nishment of current wages. The provisions of the constitution and statutes are as follows: CoNsTITUTIoN OF THE STATE OF TEXAS, ARTIcLE 16, SEcTIoN 28 SEc. 28. No current wages for personal service shall ever be subject to garnishment. VERNON'S TEXAS STATUTES ANNOTATED, ARTICLE 4099 Article 4099 Current wages. No current wages for personal service shall be subject to garnishment; and where it appears upon the trial that the garnishee is indebted to the defendant for such current wages, the garnishee shall nevertheless be discharged as to such indebtedness. Mr. WHITEHURST. It is my considered judgment that it is the result of these prohibitions and not a mere coincidence that the bankruptcy courts in Texas have a far smaller number of wage earner cases than States of lesser populations which have severe garnishment statutes. It has been, I believe, the finding of investigators who have studied the matter that garnishment of wages or the threat thereof triggers the filing of the great majority of no-asset wage earner cases where the only object of the proceeding is to secure a discharge in bankruptcy. The prohibition of garnishment of current wages has by no means put loan companies out of business in Texas. To the contrary, as far as I can observe there are as many loan companies operating in Dallas as in cities of comparable size in States which have garnishment statutes. I was in a department store the other day and saw on the cash register a big sign saying, "May I add this purchase to your account," calling attention of the salesperson to the requirement of the store, that they try to induce their customers to make purchases by credit rather than for cash. But we do not have the flood of no-asset wage earner bankruptcy cases which they have. (The prepared statement of Mr. Whitehurst follows:) STATEMENT OF ELMORE WHITEIIURST, REFEREE IN BANKRUPTCY, DALLAS, TEXAS My name is Elmore Whitehurst. I am the full-time I~eferee in Bankruptcy for the Northern District of Texas~ Dallas Division, with headquarters at Dallas, Texas. I have occupied this office for the past ten years. PAGENO="0428" 418 CONSUMER CREDIT PROTECTION ACT For the re~ord, my background is as follows: I graduated from Southern Methodist University with a BA. Degree in Economics in June of 1927. The fall of the same year I was appointed by the late Ilatton Sumners, then Representa- tive In Congre~s from the Fifth District of Dallas, to be his secretary arid served in that position for three years. In 1932 Mr. Sumners appointed me Clerk of the Judiciary Committee of the house of Representatives arid I served in that position from 1932 until 1939 when I was appointed Assistant Director of the Admini- strative Office of the United States Courts. I served in that position until July 1~ 1957, when I resigned to become Referee in Bankruptcy. I studied law in Washing- ton and Texas and was admitted to the Bar of Texas in 1934 and to the Bar of the United Staites Supreme Court in 1938~ I am a member of the Supreme Court Advisory Comn~ittee on Bankruptcy Rules, the National Bankruptcy Conference,. Secretary-Trea~urer of the National Conference of Referees in Bankruptcy, and Editor of the quarterly Journal of the Conference. PROHIBITION OF GARNISHMENT OF WAGES Title II of IL]~. 11601, on Page 33, prohibits garnishment of wages or salary due an employee arid attaches a criminal penalty for the violation of the Act. In my opinion the enactment of this provision would result in an immediate and drastic reduction in the number of bankruptcy cases tiled in the United States. It would not of course prohibit those who engage in "predatory exiten- sions of credit" as that term is used in the bill, from pursuing their debtors and attempting to collect debts by hbnrssment, or other direct means, or legal action outside tile Bank~?uptey Court~ Texas in its Constitution and Statutes has a prohibition against garnishment of current wage~. The provisions of the Constitution and Statutes are as follows: CoNsTIT1r~IoN OF THE STATE or TEXAS, AErtOLE 1~3, SnOTION 28 See. 28. No current Wages for personal service shall ever be subject to garnish- ment. VERNON'S TEXAS STATTJTES ANNOTATED, ARTICLE 4099 ART. 409i~ Current wages. No current wages for personal service shall be subject to garnishment; and where it appears u~pon the trial that the garnishee is indebted to the defendant for such current w~ges, the garnishee shall nevertheless be discharged as to such Indebtedness. It is my' considered judgment that It 1~ the result of these prohibitions and not a mere coincidence that the Bankruptcy Courts in Texas have a far smaller rium- her of wage earner cases than States of lesser populations which have severe garnishment statutes. It has been, I believe, the finding of Investigators who have studied the matter that garnishment of wages or the threat thereof triggers the filing of the great majority of no asset wage earner cases where the only object of the proceeding is to secure a discharge in bankruptcy. The prohibition o1~ garnishment of current wages has by no means put loan companies out of business in Texas. To the contTary, as far as I can observe there are as many loan companies operating in Dallas as iri cities of comparable size In States which have garnishment statutes. Bttt we do not hve the flood of no asset wage earuer baz~kruptcy eases which they have. Mr. Wrn~rnnuEs1r. Some of the bankruptcy referees in other States with severe garnishment laws handle 10 times `as many cases in number as I have. I have about 200 pending cases where they may have 2,000 on their docket. But that leaves me free to handle the type of cases which I think the Bankruptcy Act was really enacted to take care of. For example, at the present time through various trustees and receivers, I am operat- ing and trying to ~ehabiiitate with some degree of success~ among other corrcerns~ an t~inminuni extrusion plants several oil companies, an ice cream factory,~ and an apartment h~ni~ and motel. PAGENO="0429" CONSUMER CREDIT r~o~r~rno~ ~cp 419 Mrs. SULLIVAN, Thank you, Mr. Whitelntrst. Mr. Snedecor? Mr. SNEDECOR. My name is Estes Snedecor. I live in Portland, Oreg. After practicing law in Oregon for 26 years, I was appointed referee in bankruptcy in December 1936. This is my 31st year of service in that capacity. I am a member of the National Bankruptcy Conference, a past president of the National Conference of Referees in Bankruptcy, and am now serving on the advisory committee appointed by the Chief Justice of the Supreme Court to prepare uniform rules of procedure and practice in courts of bankruptcy I shall confine my testimony in favor of title II of your bill, H.R. 11601 which seeks to prohibit the garnishment of wages or salary due any employee. I think this is the most important part of your bill, I think it will he a godsend if something can be done about it. The underlying causes of personal or consumer bankruptcies are: unemployment, overextension of credit, deficiency claims arising from repossessions of automobiles and appliances sold on contract, excessive interest rates, and unusual medical and hospital bills; but the one over- riding cause precipitating consumer bankruptcies is the garnishment er threat of garnishment of wages coupled with an unrealistic wage exemption. This is dramatically demonstrated by comparing the num- her of consumer bankruptcies in States permitting garnishment of wages with those prohibiting garnishment entirely or restricting it to oniy a small portion of wages. To ilIu~trate, in fiscal year 1966 California had 37,545 bankruptcies while New York, with a comparable population, had only 7,462 bank- ruptcies. Why sh&uid there be so m~uiy in California and few in comparison in New York? It cannot be due to different economic condi- tion~ because less than 10 percent of these barikruptices represent busi. ness failures. Over 90 percent of the bankrupts are individuals whose' available income is in the form of a wage or salary, referred to as consumer bankrupts. In California, garnishment up to 50 percent of wages is permitted but the debtor must apply to the court to obtain a release of this amount of his wages. There is no autømatic exemption, whereas in New York 90 ~pei~ceiiit of wagè~ is a~tornaticaIly exempt. Only 10 per~ cent is `subject to garnishment at any time. The unique feature of the New York law is that the garnishment is a continuing levy of 10 percent of the man's net wages until the credi- tor's ju~clg,i'ient has been paid in full. }Towever, only one execution and garnishment at a time may be in effect~ If a second garnishment is I served, it must wait until the first judgment is satisfied. In effect this ]aw provides a simple and orderly method of satisfying old debts in installments not exceeding 10 percent of the laborer's net earnings. A similar statute is in effectin'Ne~ Jersey. New York and New Jersey have very few consumer bankruptcies. I dwell on this law because if yo'ct can't go all the way to prohibit garn- ishment. I hope yoi~ Will go as far as the New York law. Because as I say, there is 10 .per~ent off. the top oniy that can be applied to `these old debts and it may kelp many wage earners to pay them out over a period of time. PAGENO="0430" 420 CONSUMER CREDIT PROTECTION ACT A more dramatic illustration of the difference in the number of bankruptcies between States of comparable populations is displayed in a total of 32,118 bankruptcies in Ohio and Illinois as compared to only 1,951 bankruptcies in Pennsylvania and Texas. This startling difference in the number of bankruptcies must be attributed to the fact that the first-named States permit the garnishment of wages while no g~rnisbment of wages. whatsoever is permitted in Pennsylvania and Texas. Texas has gone so far as to include in its constitution that "no.. current wages for personal service shall ever be subject to garnish- ment." For the last 120 years Pennsylvania, has prohibited the garnish- ment' of wages of any laborer or the salary of any persop. in public or private employment. The legislative policy expressed by this law is: The preservation of employees and their families of the fruits of mental or manual lal?or in order that their earnings may goto supply their daily needs with- out hindrance from their creditors. Numerous other illustrations and comparisons could be made to in- dicate that the number of bankruptcies filed by debtors varies accord- ing to the harshness or the liberality of the wage exemption laws of the various States.~ What distin~b~ ne most is that garnishment affords these young people some jii~tification for wiping out their debts in bankruptcy. I say young people because the average age of bankruptcy is 2~ years a~d some of them come in as early as 23~ and 24 and 25 years~ They usually have two or three children. Many of them come to me after court is over to say that they would have been able in time to pay the just bills if they had been given an opportunity, but repeated garnishment had prevented them from holding steady jobs. Our present laws are nausing them to lose their sense of obiigati~r'.* They be~oine bitter and antagonistic toward some creditors :who $possess their property and sue for deficiencies.~They become discouraged after paying a long time on a small loan only to find that most of their payments have been consumed ifl annual interest at 36 percent on the first $300, 24 percent on the next $200, and 12 per- cent on the balance. Frequently in answer to an advertisement tocorne in and consolidate their bills, they borrow, let us say, $1,000 on their furniture and automobile, without realizing that the interest alone will begin at $18 a month and will continue ata hopelessly diminishing rate. Statistics will show that over the years the number of consumer bankrupts increased in about the same proportion as the rise in con- sumer debt The tecord low in the number of bankruptices occurred in fiscal year 1946 at the peak of World War II expenditures accom- pamed by rationing and credit restrictions Only 10,000 bankruptcies were filed in that year while consumer debt amounted to oniy $6 bil lion Fiscal year 1966 produced 192,354 bankruptcies while consumer debt rose to $90,650 million. It is now $94 billion. That was in 1966. In our expanded economy based almost entirely n sumers, no matter how improvide: v h~. with their creditor~ in such a wa' PAGENO="0431" CONSUMER CREDIT PROTECTION ACT 421 proper rearing of their children. This, they cannot do when one or two creditors insist upon being paid first by garnishing their wages.. Consumers throughout the Nation should be given an equal oppor- tunity of working out their credit problems without being driven to desperation and bankruptcy through garnishment of wages. May I just point out one or two illustrations to show you how bad it is in Oregon, Oregon, by the way, has one of the highest per capita percentage of bankruptcies in the country. And the garnishment of wages is 50 percent. Just the other day I had a bankrupt in court whose back was broken 3 years ago in an industrial accident. For over two years he and his family had existed on compensation from the industrial accident commission. Then for 6 months or more, on job training he became skilled for technical indoor work. Very soon after he obtained full- time work and was rehabilitated and was released from the accident commission his salary was garnished and being unable to maintain his family and meet the debts of his past misfortunes he resorted to bankruptcy in order to obtain a new start in life. It is not unusual for a collection agency tb garnish the wages of some handicapped person trying to earn his living at the Goodwill Industries in Portland. In fact, the welfare commission sometimes will pay the filing fee for a bankrupt in order that he can get a new start in life to rehabilitate him. Thank you very much. Mrs. SULLIVAN. These are the things, Mr. Snedecor, that I am glad you brought out. It is such examples as these that have shocked many of us. I just want to ask one think at this point. One of our members of this subcommittee from Pennsylvania,. Mr Williams, has indicated in his questioning of some of the previous witnesses that elimination of garnishment would work a hardship on business and would deny credit to people who need it most. Now, his State, according to what you have said, Mr. Snedecor~ has had such a ban for how long? Mr. SNEDECOR. 120 years. Mrs. SULLIVAN. I am sorry he is not here today. Mr. SNEDECOR. Not even the bankers or small loan companies that use garnishment to such an extent. It is collection agencies who take the dregs froi~i our overexpanded economy, thjpgs that ,hav~ been charged off and particul~rIy deficiency judgments and put in the hands of a collection agency for 50 percent of the amount they can collect. That's where all of this comes from. Mrs. SULLIVAN. Is that the same as a confession of judgment? Mr. SNEDECOR. No, a deficiency is where they take the automobile and sell it out wholesale and then sue for the balance of the purchase price plus attorney's fees because that is in there, too. And often those deficiency judgments will be $1,500 `on an automobile. Mrs. SULLIVAN. Some of the questions that I wanted to ask you have been partially answered but I am going to read into the record now so that when you read the transcript you can elaborate upon the things that you have mentioned in your statement I will just read these into the record and have you answer in writing. I wonder if you gentlemen or you,. Mr. Snedecor, could provide us with some basic information as to the type of individuals or families PAGENO="0432" 422 CO~&fflJMER CREDIT PROThcflON ACT that end up before you iii personal bankruptcy cases. You answered this partiall~. Generally speaking, how old is he, what is his income level? I think this is most important. What are his responsibilities in terms of family-you mentioned some two or three children. In a recent study published by Michigan State Uni~'-ersity entitled ~"An Analysis of Economic and Personal Factors Leading to Com. sumer Bankruptcy," by Robert Dolphin, Jr., it is stated that 80 per- ~cent of the ba*ikrul?t individuals interviewed indicated that they had been threaten~id with garnishment and further, that 75 percent of them indkated that actual garnishment or the threat of garnishment was their rea~on for filing for bankruptcy. We would like to have ~vt~P comment on that conclusion. You can file that for the record or if you can just answer this last question quicicly, whichever you prefer. I think maybe you c~ai file Sit, it might be a littie more in detail. Mr. SN~IThCOR. You prefer that I should file it? Mrs. SULLIVAN. Yes. Mr. SNEDECOL All right. (The infonn~vtion referred to follows:) Many bankrupts In Oregon are women whose husbands have deserted and left them with childreti to support and a burden of old family debts. When their wages are garn1sh~d they are compelled to file bankruptc~y in order to preserve their earnings and jobs for the benefit of themselves and their children. In my experience in dealing with state legislatures, it is difilcult to obtain relief on the state level from. garnishment of wages or to reduce interest rates on consumer loans. In state legislatures the consumer has no one to represent him, while the loan companies and collection agencies maintain powerful lobbies through- out the sessiops. For this reason It is my hope that your Committee will recommend federal legisla~on, either b~ one bill or separate bills, to prescribe uniform interest rates and prohibit garni~hImentof wages. From what I ba~ learned from other states, ~particularl5r Pennsylvai~ia, the credit losses on eot~sumer loans are not any grea~~er in states pro~jbltlng the garnishment of wages. Mrs. SULLIvAN. I see that Mr. Bare has some of this information in his statement. Let's go on with Mr. Bare. Mr. BARy. Madam Chairman, I am Clive W. Bare, referee in bank- ruptcy for the eastern district of Tennessee with headquarters at Knox- ville. I have served~ as referee for the past 10 years and during that time have handled more than 10,000 bankrttptcy proceedings. Within the past few years Tennessee has achieved a rather dubious distinction. It has become one of the leading States in the filing of bankruptcy petitions. During the fiscal year ending June 30, 1967, Tennessee with 10,~95 new cases ranked fifth in total filings among the 50 States. in the coi~ntry. Only debtors residing in California, Illinois, Ohio, and Alabama filed more bankruptcy petitions than debtors re- siding in Tennessee. Ninety percent of all cases filed were employee- type bankruptcies as distinguished from business failures. The principal reason for the large number of bankruptcy cases filed in Tennessee is that the garnishment of wages is permitted. Tennessee Bot only permits the garnishment of wages but its wage exemption statute is one of the lowest in the United States I believe the impa~ct of wage garnishments on bankruptcy cases can best be illustrated by pointing out the vast difference in the number of PAGENO="0433" PAGENO="0434" PAGENO="0435" NON ACT it is thi~gr~up words, the itidivLlttals whose wage~ are being ~ni~sheed are the very individuals whose total wages are requir~d for the payment of neces- sary living expenses: food, clothing, shelter, and medical expenses. I would like to point out three extth~iples which have ôoine before the bankruptcy court, not necessarily pertaining to garnIshñient but dealing with consumer credit proteotion These were actual cases that appeared in bankruptcy court d~aling p~'inicipally with the loan t~añ~- actions in Tennessee. In Tennessee the "flipping" of loans is not illegaL In 1958 the final report of the legislative counsel of the 8~Jth general assembly had this to say about such practice: Industrial loan and thrift companies freely e~igage in the practice of "flipping" whereby a borrower who has repaid a portion of a loan is allowed to make or is enticed to make another loan whereupon the new loan is set up com:biniii~ the new amount with the old balance on ~rhich all allowable charges have already been made, andy the full amount of allowable charges is again imposed on the new balance. Here are some of the results of flipping of loans. First example: A widow with $60 weekly income borrowed $1,685.72 repayable in monthly installments over a 3-year period. She was charged interest amounting to $427.68; investigation fees, $117.79; insurance premiums, $232.85; or a total charge of $776 on a $1,685 loan. Another example: A divorcee with a 2-year old daughter to support -~`~g $52 a week negotiated threeloans with the same loan com- pany within a period of 4months and received a total of $347.06. ~!1~he cost of these loans was $252.94. Third example: The debtor negotiated fiv~e loans with one coMpany during a period of 11 months afld receiVed1the total sum of $1;548.02. Interest ~ ~s on f ~ loans amot d of $716.58; investigation - ~- ~__~_1_~~i 1 1~~_1~1 - - ft PAGENO="0436" PAGENO="0437" CONSUMER CREDIT PROTECTION ACT 427 Mrs. SULLIVAN. Yes; that is already inserted in the record. Thank you very much. Now we will hear from Mr. Moriarty. Mr. MORIARTY. Madam Chairman, as Mr. Jackson said. I am one of nine referees serving in the U.S. District Court for the Central District of California. I served in the Department of Justice for some years, ending up as chief assistant U.S. attorney for the southern district of California. My entire legal career has been in the service of Federal Gove.rmnent. Since becoming a referee in 1963 I have devoted a considerable amount of my free time, which is not very much to helping the neigh- borhood legal services and the Legal Aid Society in working with the unfortunate people who cannot even afford to pay for the services of an attorney. In the 4½ years that I have served as a referee I have handled 8,210 bankruptcy matters. Of this number, approximately 90 percent, or roughly 7,500, have been what may be referred to as straight bank- ruptcies filed by wage earners. It. is my understanding that it is in this area that the committee is most. interested. It has been my experience that most persons seeking the protection of the Bankruptcy Act come before the courts because of excessive medical bills, lack of employ- ment domestic discord, easy credit, and other factors. While it may sounã strange, we had a very nasty experience several years ago in which certain debt consolidating firms, or proraters, actually caused a number of persons to come to the bankruptcy court for aid. They would bring these people in, charge them $300, give them a pro forma-type budget, and say this is what you are supposed to do. Eventually all of them ended up in the, bankruptcy court to get relief, including the $300 they owed the prorating firm. So you never can tel] what is going to bring a person to bankruptcy. Basically it is the ones that I set forth. T am sure that each member of the committee is well aware of the series of articles written by Miss Miriam Ottenberg, which appeared in the Washington Star within the last 6 months. This series of articles dealt with the vicious procedures used by many debt-coilsolidating firms. Mrs. SULLivAN. She has done an excefle.nt job of bringing these is- sues to the public's attention. Mr. MORIART~ California, and $rticulariy the central district of California, which thicompasses the metropolitan area of Los Angeles, has been referred to as the bankruptcy capital of the world. The figures support this dubious honor. You heard some of `my colleagues refer to the oTeat number f 1 - 1 T ri't n 1 to be defensive~utthesef PAGENO="0438" 428 CONSTJMER CREDIT PROTECTION ~CT fighting men, having ~pcnt time in California either in training or in transit to the Pacific theater of operations, found in Cali~ornia a way of life they desired, and at the cpnclnsion of World War II the influx of new resjdents~ re~hed its peak. This steady jow of persons has çont~nued to this d~t~.We h~vo wel&mied these people ~d they ~ai~ made our State the most populous in the Nation an~ t1~ey have con- tribute~l ~nueh~ to th~ indust~rial growth of California. Man~. ~ ~ new citizens ~came to O~ifornia withqnt jQbs audI he~vi1y in clcb~ so we inherited the problems that they thought they i~ft beiiin~Frpm p~onal e~pprience I car' state that I hay~ presided at h~rings.qx~ b~J~rupt's petJti~n in which notone s~ngla California creditor was li$t,ed. They o~me back from~ cthQ East-~-O'klaI,oma, Michigan, Virginia- we have had them. The creditors finally catch up with theni and they seaJ~ to, collect their moneys. So~ we get tho~e kind of ,~$opJ~e yery ~r~øqiiently. ~, ; Of equal ~~npor~tanc~ h~ been time ~relaxing o~' c~dIIt ~estrh~u~ In m~ inion~ perh~pa tii~z~iost frquent cmwse~,of bankruptcies~ is the relaxing o~f e~4~it restriqtions. Individual de~t~ not s~ `long ~go~ discouraged~ and r~g~rded with~ suspicion is no~ eucou~a'ged. More than encouraged; ~dI~bt today ~is rchan~i a~ xten~iv~y ~nd skillfully as anyvommod~ity, not~ v~ithstanding ~ce~i~na1 pi~s reminder to "never borrow money n~ed- lessly." Time cornmunieation media that touche~, ~ ~amily's' life constaTitly urges~it to~,buy ~ ~ terms, t~ open chatige accounts with "nomina" ~o~t)~yieryMe,q~arges, to~get a. ~ew ear ~t "bank" t~rn'is, tr*~yel ;no~ and pay~J~er--wkether the f~au~1y o~mn afl~or~1 it or not. . . ~ ` . ` ` ` Ma4y reearchkrw in the' f~e1d o~ cAn~sumer c~edft have `cpnci~ded t,hat a person cai~ become adclMted to e ess~y~ ore4it 1~n~ng ~ ~s one becomes addic~ted to alcohoj, narcotics, or. ~`ambling: :~ I would like to relate one very intersting experience which points up h~w easy it is to Qbtain credit, J think this apphes n~ti~nwide, not oxayto ~alifori~ia,',, , ,` , , ~, ` ` ,` ,~ Sho~y~t~ I 1peean~ a~e~er~e in Janaj.~a~y 19fi3, Lhad ~earing on a bankrupt's petition. ~he bankrupt waS a seaman secondej ~ Shipyard. ~ $2,000 in debts, of which over $1,~00 was ~ o~ ~f tJ~e .beti~r known ~ ~. L~n~ l3each. Th~ng~ t~e course o~ ~the this md ec~ss a~ci was advised by t~me bankrupt that ~--~n De- cember 1 and Dece~nber 15, 1962, he had pu~rchased over worth of merchandise to ~re sent to his, ~e1atives and frie~cls ~` ast as Christmas p~re~çnts~ ~Whil~ yon.rnight scy t~t tb~ ~ lmttlelarcQnym his] PAGENO="0439" CONSUMER CREDIT PROTECTION ACT 429 In the recent session of the State legislature which has just com- pleted its deliberations, several bills were introduced to tone down the effect of garnishment ~f wages. The fight for this legislation was led by freshmen members of the assembly. One bill that was not reported in my prepared statement-as you know, our legislature didn't adjourn until early Monday morning and in getting the material to~gether one bill was omitted. This bill, intro- duced by Assemblyman Burton, of San Francisco, which had for its purpose the abolishing of garnishments and it never was reported out of the committee. A bill, introduced by Assemblyman David Roberti, had for its pur- pose the prohibition against discharging an en~ploye~ due to th~ gar- nishment of wages. This bill passed the assemhly but was defeated on the floor of the Senate. Another bill, introduced by Ass~mhiywoman Yvonne Brathwaite, passed the assembly hy one vote but was killed in the senate finance committee., This latter bill originally provided for the exemption of one-half of "net earnings" or the first $100, which ever is greater. A 50-p~3~cent exemption is our current law. * By amendnient the tehn "net earnings" was deleted and ~he $100 limitation was ~reduced to $70. T14s bill would aTh~ have ~prohibited garnishment of wages before judgment.. I haye talked with mem~ts~ of the legislatu~sand have be~n advised that opposition to these bilis~ came from scoilection agencies, small jewelry shops, and neighbôrIio~d furniture stores. There was no n~ tjceable opposition from bai~ks, doctors~ smaIl-lô~n ~oiupauies-~oiie actually endorsed the ameiided. bill which ~pas~ed the ass&nbiy~or department stores. The ~uiwent failu~r~ cana~ aifter an. assembly interim. judidiary com- mittee studied the subject and concluded: (A) revision of the'law whh~h *ilI tn~i~a~e thWc1ebtor'~ protection b~ way of ~xernption and which ~vll4 fl~~kO th~át prOtek~tton ihOte ikitklera d~fld e4uai will be to benefit to both cMflors ~nid creditors. This c~nrIusiom i!efieets the ~iflderlyihg fact that neither 4ie~tor npr creditor benedts when the ciebter is financially crip- pled. A mere powethil ñemftion law Will help k~p the debtor from $nking further into a ladn~Ml áb~ss thid losIng ~11s job. At the sitttte tittie it will pro- tect the creditorS `to the extent thdt it alloWs tn.e debter to k~p gaftf~ an~ to avoid bankruptcy4 Incidental credit grantors ~ businessmen lose when a small loan copipany ga~ntsbees wages ap4 causes the debtor to be fired or run for bu~k~u~ptcy. A law wjth moI-e exem~t~on p~oteetioh will encourage the commer~ial ~edffgiMhfors 1*~ be more cateth~I i&cho~ing their credit risks. If the cteditor will ddtimi~, he *lli reththe his ~ad ddbt Ms~es. This induced care `nay result in same r~duetien of overall credit 1g~ranted, b~it the reduction will probably he small and will be justified by the decrease in human misery caused by extreme credit ~aiobleuis. Finally, an exemptiofl law can ~e taijOi~ed to en~du~age the d~b1~* tô tild a pt-ograth wbic1~ will' help him t~ ~hd his way outt øf~â had th~ane1al ~Ithatikm M~i1 hit~ a bette~ one. The Judiciary Comnndttee repOrt inadenö s~eelfic proposaLs. In my p~epar~d statemeht I also refer tothe st~ud1 rtu~d~é by George Brunn, which I tmderstatid the committee had fttfl :aicess to prior to m~ furnishiffg a copy sO I would nt make tt~b Much re?ferehce to that. This comprehensive study by Geo~ge Bmn.nn was pttblishdd in th~ California Law Review, December 1965, volume 53, No. 5, page 1~14. The Brunn report included an analysis of court records in San F~~an- cisco. There is attached to this statement an analysis of civil court filings of the Los Angeles Municipal Court. PAGENO="0440" PAGENO="0441" CONSUMER CREDIT PROTECTION ACT 431 Mr. MORIARTY. ~erIiaps you have beeii in touch with these people but I would be very happy to follow this up with some further written documentation. for you. Mrs. SULLIVAN. I wish you would do that. Mr MORIARTY I have delivered to the committee the following documents: 1 Pertinent section of the California Civil Code (Unruh Act) re lating to credit sales. 2 The complete text of the Rees Levering Act, California Auto mobile Sales Finance Act. 3. Pertinent section of the California Financial Code relating to small loan companies. 4 Pertinent sections of the California Code of Civil Procedure re lating to wage exemptions. 5. Pertinent sections of the California Labor Code relating to as~ signment of wages. 6. Wage garnishment in California: A study and recommenda- tions-Cahfornia Law Review article by George Brunn 7. Miscellaneous reports and papers relating to recent legislative efforts to `liberalize the wage exemption. (The documents referred to may be found in the appendix, p 980) (The complete statement of Mr. Moriarty follows:) STATEMENT or JAMES ~. MORIARTY, RETRims ix BANERUPTOY, U.S. DISTRICT COURT TOE THE CENTRAL Dxsrnior OF OALITOENIA Madam Chairmen, X am James E~ MoviErty, Referee in Bankruptcy, serving the United States District Court for the Central District of California I have been a Referee in Ba. ,nkruptcy since January 21, 1963. Prior thereto I had devoted my entire. legal career to the service of the Federal Government, serving in many legal capacities My presence here today is to assist as iest I can the Committee in its consideration of HR 11601 which is known as the Consumer Credit Pro tection Act." I would like to state at the outset that the position I hold does not permit me to make a policy recommendation for or against the pending legislation since this is solely within the jurisdiction of `the Judicial Conference of the United States. However, I would like to relate to the Committee my experiences as a Referee as it is pertinent to the legislation under consideration. Tn the four-an&one-half years that I have sCrved as a F 1 have handled - inkr `` `` ` . - woximah r roughly 7,500, rnerS.? PAGENO="0442" 432 CONSUMER CRE~IT PROTECTION ACT continued to thi~ day. With t~e conclusion of WWII many of, oi~r fIgl~ting menr bavlni spent~time in Oai~tcrnIa etther In' tr~ihing o~ lii trausit to the Pacifie the~tr~ Of opdr~4lons, f~ithdthi ~3a forii4~a tE `way of løe *ldeh `tb~y desired; and at the conclusioi~ of World War II the influx of new res~dients reached its peak. This steady fiowtof persons has ~on i~i~j ~to, thJ~ date. We h~ve welcomed these peo~p1e and the~~iayn. ma4~ oii~ state the `most pop~ot~ iii time nation and they et~on~tribiitedithnèii te the industrial growth of C~l~fbrn1a, Many of our n~w citizens came to Oalifornia without jobs and heavily in debt, so we inbei~jted, .t~Ie prob1em~ that they thought they left beJribd. ~tb~fl personal experience I can ~täte that I have presided at hearings on a i3an1~rupt's petition in which not one single Oalifor~ia creditor was listed. , Of equal impoiltance has been the rela~tlng of &ed~t restricti~ns. Individual debt, not so long ago was discouraged and regarded~*ith suspiciob, ~s i~ow en- courag~d. Mere than enccygraged, debt today is merebaadi~ed as e~ttens1ve1y and skillfully as any commodity, notwithstanding `occasional pi~ms ~minder to "miever borrow money~e~1lessl~". The ~om~qnn~açion ~p~dia timat~ofl~4i~s. a family's life constanHy urgeb ft to buy on' "etisy~' terms, to o'j~n chai~ge~ acCounts with ~nomi- nal" monthly servtce charges, to get a new ear at ~bank"~. terms, travel n'o~i and pay al*e~-~-wbe~lme~,the familrcbn afford itor net. ` ` Many researcheks in the field of consumer credit have concluded that a person, can become addicted, tq e~essive credit bitØng just as one bec'ømes addicted to alethol, narêOti~s .O~ bThlg.' " S I would like `t~ `~binte~aohe very i'nte~e~ting' e~peHencC wbhth ~oittts up h~w easy i~ ft~to obtain credi1, `Shortly after I became a ~Referee in January fl)63, I had a hearing on a Bankrupt's peti~ioim. The Ba~ikr~pt. was a Seaman 2/c, eta- tj'oneçl at time Iioz~g~ ,~eaqh Naval ShiWatd. 1l~ U~te4 ~appro~imately $2,OQO in debts of which &vO~? $1,700 was owing to one o1~ the better kn~~n, department stores in Long `Bea4h. lMtrlng the `Course of the examination of the i~ankrupt the Court inquired as ~o the nature of this indebtedness and wa~ advised by the' Bankrupt that t~een' rMiCenther 1 hi~4 December 15~ `1D62 h~ `had purChased over $1,700 worth ~f 1m~cbandise to~be. sent ~ his ~relatives and friends back East as Ohristmas j~resent's. While you might say that the gentleman had a little' larceny in his hea$, I think ~u nui~t have sonle eritic}snf of the department store for befn~ eo'lsi inthelr~ered1tf~rdeettm'es. S As a Referee I del not' like to `see credlt~r~ eurtain' losSes hut I must conclude that in most' eases t~ie creditor has In many respeeta created the very problem from which his loss arose. Each of us are paylng*fOr these losset when we pay our' monthly `bills. The' creditor merely adds to the normal price a sum sutflcient to write-off these losses. Reference `i's now made to some specific Cahiforhia Statutes which relSte to the~ legislation before this Committee GARNISHMENTS Tn the recent sessiçau of the State Legislature which has just completed its deliberations, sQveral pills were introduced `t~ tone dqwn the E of wages. The flgbt for this legisli tion v PAGENO="0443" CONSUMER CREDIT PROTECTION. AC~ garnishes wages and C the A law with more exemp Lou protect~or~ e co, iflercial crc t grantors to be ipore careful in choosing I~ I ~ creditor v 1 do this, he will reduce his bad debt losses. ~ in4uce4 care may result in some reduction of overall credit grante~ b the redpetion will probably be small and will be justified by the decrease in humtqi pilsery cattsed by extreme credit problems. Finally, an exempthip law can be tailored to encourage the debtor to find a program which will help him find his wa~ out of a bad financial situation and into a bqtter one. "The Judiciary Committee report made no specific proposals." Also, a comprehensive study b~ George Br~uu~ was published in the Cali- fornia Law Review, ~ccember 1965, Vol. 53, No. ~, page 1214. The Brunn RepQrt included an analysis of Court records In San Francisco. There is attached to this statement an analysis of Civil Court Filings of tbQ Los Angeles Municipal Court. The effect of a garnishment can be devastating to a debtor. Most employers dislike garnishments because of the extra work and cost. As a matter of policy many employers will fire an employee after the second garnishment. Since Cali- fornia law permits multiple levies a worker could be fired within an eight-day period, the time necessary to cover two weekly pay periods. Not only does this challenge the ability of the worker to provide for the family needs, but. a worker who has been fired because of garnishment can become a faceless person in the army of the unemployed. He may be a well-qualified machinist whose talents arein demand, but he is unemployable. At a time when skilled employees are in great demand we must conclude that the exclusion of such a worker from our work force is a great waste of manpower. ~iEEDIT SALES The State of California has enacted legi aliop that has fo~ its purpose the protection of the debtor who must resort to credit buying or credit t~nancing. In 1960 the Unruh Act (Civil Code 1801 et seq.) was passed by the legislature. Perhaps the most important provision js Sedtion 1812.5 which prohibits deficiency judgments resulting from repossession and sale of persondi property. Section 1803.1, 1803,2, 1803.3, 1804.4, 1803.5, 1803.6 and 1803.7 contain provisions relating to "Truth in Sales". AUTOMOBILES In the purchase of automobiles the Rees-Levering Act (Civil Code 2981, et Seq.) has given the purchaser certain protections Unlike other credit sales, the buyer is liable for any deficiency resulting from a repossession and sale (cc. Section 2983.2). Such deficiencies frequently constitute a sizeable part of the debts listed by bankrnpts. SMALL LOANS In the area of ~m&ll lpans (Financial Code $eetlon 240Q0 ~t seq.) Sections 24411, 24412, 24413 and 24414, the "Truth in bending" provisions give the bor- rower some protection. Section 24452, as amended, sets forth the maximum charges. It cannot be said that these provisions make the full disclosure that is sought by the provisions of H.R. 11601. EXEMPTION The exemptions granted under state law to a debtor are generally liberal and it has been the policy of our courts, both state and federal, to give these exemption statutes a liberal interpretation and to avoid forfeiture of these rights if, at all, possible. Briefly, a debtor's property which is exempt from execution includes in part; a homestead (husband and wife) $15,000.; deposits in qualified savings and loan associations $1,000.; deposits in credit associations $1,500.; one auto- mobile of a value notin excess of $350.; (This exemption has recently been in- PAGENO="0444" PAGENO="0445" CONSUMER CREPIT PROTECTION ACT 435 During the corresponding period of time, the Los Angeles County Marshal's Office made attempts to levy on debtors, or ~ersous holdjng debtor's funds as follows: `;, Tlnver 1968-64 ~___,._-_~.----... 108,201 1964-65 114, 972 1965-66 127, 762 These figures are maintained `by the Marshal's Office, but whether such attempt to reach the debtor's fund were successful is not recorded for percentage determination. III. RANDOM SAMPLING OF CIVIL FILE The cases filed in the Los Angeles 1~XunieipM Court during the first Quarter of 1965 IndIcated: Number Percent Contract action Torts (auto accident) Unlawful detalner Other 21,786 3,031 1,266 80. 5 11.2 4. 5 3. 8 Total cases filed 27, 080 100. 0 Source: Above figures from Los Angeles Municipal Court public records. A. The random sampling of this quarter indicated that 84% of the cases reviewed were based on contractual obligations; and, of these, 78% were filed by assignees. This would indicate that of 21,186 cases filed, 11,050 were filed by as- signees,2 or 6~ % of the "totaL' actions fUed. B. The random sampling as to the amount involved in the lawsuit indicated that, in those actions based on contract, 36.5% were for less than $200.00 (Small Claims jurisdictional amount) ; therefore 7,915 cases filed in this period were for less than $200.00 (approximately 30% of the "`total" cases filed in the Municipal Court). IV. I~ISFO5ITION OF CIVIL FILE The following statistics resulting from this random sampling of this period indicates the following as applied to the contract actions; - 1. Answers `to the complaint were filed irr only 8% (or 1,748) qf tl~e eases. 2. In 50.5% of the cases (or 11,0E~2), judgment again~t the defendant was entered by default, entry being made by the Clerk of (Jotirt. 3. Of 21% of the writs that indicated a return en tine levy of attaehinent ore~ "n: ~ were on wages were on bank accouut~ small number in relation to the total PAGENO="0446" 436 CONStJMER CREDIT PRO~ECTI0N ACT 13. Of these coptractual c~ses, 75% are filed by what is commonly known as collection agencie~ (2/3rds of the total cases filed). 1. That in over one-half of these cases judgment was entered by default. 2. That in ~nly 8% were the defendants able or willing to file an afl~wer. 0. ~Phat 80% of the ~cases filed~in the~Loa Angeles Municipal Court would be filed ~in the Small Claims Court, except that an assignee cannot~ sue in sueb~ourt, nor will a writ of attaclunent be issued. D. It Is a fair ~xmclu~ion that the results of the ~xaxMpatXo~i covered herein substantiates the articles referred to by George Erunn for the San ~raneisco area. Mr$. SULLIVA*. Thank you, sir. I just wish before we start questioning you if you would tell us something about the kind of case where a loan company or a store will have the borrower fill out an incomplete financial report. Mr. MoRIARn~ Very happy to do that. Mrs. SIJLLIVA*. Leaving out certain debts at their suggesti6i~ so that the borrower cannot later have that debt discharged through bankruptcy. Mr. MORIARTY. I hope Mr. Jackson won't mind if I drift into S. 578 in answering that. That's the bill we hope someday will give the bank- ruptcy court the right to determine the dischargeability of debts. Let me first go~back. You askej ~ questioi~ a moment ~tgo which I woul~1 like to cJe4~up, You jked about th~c~~sion o~f judgmei~t. The~y are not permitted in California. That is the type ~f situation where~ whei~ I coltiein to bc~Trrow itioney from you I sign~ confession at that po~nt. N&kv, we were t~iki~ig about d~fli~iency judgments. In California ~ ha~e a great numTbe~r of de~icien~y judgments in auto~ mobile financing. Under our other type credit sales which are covered by-we refer to tbat~ ~s t4he Unruh, Act-d~ficienc~y jwignisnt~ are not permitted, but with automobiles you can recover your deficiency. Nov, a small loan compan~r, a~id I don't want to pick on them as a particular c~iiè, b~t9ust tt~ke them as an. example-~they give to a bor- rower an appliçaUon, maybe the size of tb~is J~iñdicating]. It has certain basic employment information and then you will find an area which says, "Creditors" or some similar type of wording: It may have three lines. I have ~aever seen one th4t }ias mo~ t1i~n five lines. So, here is a man goin~ ~to a sniall loan because he q~nI~t get a eonven- tional loan and at tbemostthere a3fives PAGENO="0447" CONSUMER Ci~DIP P~O~±EcnON ACT 437 "I don't remember his name but he was in charg~ there." These people move abeut and he ~on~dh't remen~ber the n1~me. I can see what is happening there and I atn sure the gentleman at the table can see the same thing. This man will get his discharge about 6 weeks after his first meeting of creditors. After he has gotte~i his di~bharge-aM you must remember the small loan company will rarely object to ~he person's discharge, lie will get his discharge, the discharge will generally eliminate all other debts-the small loan company has ~ ~als~ axdial statement wkich is not dischargeable under ôhapt~r 1~ o~tli~ 13ankr~ptey Act. They go right aeros~ the street in the State court, they sue and the man says, "I got a di~chai'ge." "Sorry, you gave a filse fin~niciaI state- ment. You owe the finance compan~r $400 plus attor4~y!~ f~es for bring- ing this action." So the man walks out of bankruptc37 Wt, ttdnking he is ready to start a new life suddenly finds he still got the finance com- pany to contend with. And at thi~ point he has lost-while he is in bankruptcy they can- not haras~ him-we grant ~restraining orders. Suddenly he is out of the bankruptcy court, the t~reditor got a judgment in the State court and there ~s i~o way that this man can keep from being garnisheed. So that is the aftermath of what happens after we perform the services for them- they ~till have to face up to these otYier `j?roblems. It is one that is very frustrating because I get calls and I am sure the other referees, toO. Maybe this gentleman doesn't get one like this in Pe~asax~id they call up my office and they m~ast on talking tom~. I will talk to these ~veop1e. They say, "I got a dischatge, hciw can ~they ~dO' this to nip?" Many tithe~s they `do iwt"have an attorne~ tl~ey cathe ~iri without tI~ benefit of ah attortu~ or'if the.y haU an atto~nèy the att&ney has been paid and he doesn't~ai~t~to~aik totheñi.'Só yor~just have t9 te4 him, yeS, they conld be sued i~a the State court arid it is up tothe ht~te court to determine whethei~ the~e ~ehts are d~~chargeable. The questibn is, I asked them, why didn't you tell' u~ that?,1 ~frs. SuLLIv~. ~I'hi~ is what I wanted to get ~into the record. Before I turn the qth~stiptui~g ovç~t th ~r. Bin~ham-we are going to start at tl4~ loWe~nd again-I *ant to say that I ~ ~o i1rip~essed with the four statements that you gentlemen have ~rnad~ that ~L nm going to see if `ste can't ge~sothe ati4nt~on p~dd~ to them. I am going to put them in the Congressional 1teeO~d né~t ~MIoiid~ty because these things should be known. People should read them. Mr. WH~*~rTtS~. Madam Chairm~tñ,~ I mentioned earlLer that in my spare tithe and on *eékends I edit the Journal of tb~ National Conference Of Referees in Bankruptcy. ~tf the com~ittee wishes I will be glad to file a copy of the July 1966, iss~xe of the Journ~ul containing an article `eiktitled "`Schh~ckmeister's Jtubileer-Bankruptcy for the Poor," by Ralph t~ñde~'~nd La*rence Sch1s~rartz. This was given at a consumer conference' at the University of Ch!cago. It is a very per- ceptive article outlining the ways in which a discharge in bankruptcy does not always give the poor bankrupt the relief he thinks he is going to get. Also, a copy of the October 1966 issue which contains a reprint, in convenient form, of the opinion of Referee Bare. PAGENO="0448" PAGENO="0449" ~ONSUMER CREDIT PROTECTION ACT 439 Mr. BAm~. I think that creditors are concerned with the rising number of bankruptcies. These figuresniight be helpful. Of the total indebtedness owned by bankrupts, a survey of the 200 cases in Chattannooga indicated that 41 percent of the total indebted- ness was owed to loan companies and finance companies. Twelve percent, as I recall, was owed ~or automobiles-purchase of automobiles. Eleven percent for doctor bills. So, those three categories make up over 60 percent of the total indebtednesswhich means that department stores and others-their actual losses are not as great as bankruptcy might indicate. It is the loan companies that have the principal indebt- edness in bankruptcy cases. Mr. WHITEHTJRST. I was going to say that I was raising questions with creditors in one of my cases about what seemed to me to be rather loose credit practices. A banker said that a study of 3-year automobile loans which are customarily made, showed that at the end of the first year the value of the automobile averaged $750 less than the balance of the debt. But they didn't seem to be, disturbed about it and I found no evidence of great concern except when they happen to encounter a loss themselves personally and then they get pretty unhappy about it and would like to blame somebody else if they can besides themselves for having granted credit unwisely. Mr. BINOHAM. I was going to suggest that this rising tide of bank- ruptcies, because it would increase the number of loans and credit transactions that went sour, would actually raise the cost of credit to the consumer. Would any of you like to comment on that thought? Mr. BARE. I. have heard that premise advocated or stated. I am in North Carolina occasionally. North Carolina does not permit the gar- nishment of wages. I can't distinguish any difi~erence between the cost of credit in North Carolina and Tennessee. Mr. BINOEA~L. If I might just ask one more question. We have been going on the assumption that a lot of bankruptcies are a bad thing. I go along with that assumption, but we really don't have any state- ment in the record as to why that is so. Why is it? What is wrong with a lot of bankruptcies? Mr. SNED~ooR. I made the statement that T think the t1~ ~ that is ~thesei PAGENO="0450" 440 CO2~TSuM~I~ Crn~DIT PROTECTION Acrp PAGENO="0451" are ma ~charge accoun~s on are added, which is 18 perëent a year. I of the courthouse and almost throw a ro~k thrqttgh a half db~en different loan company offices. So I have seen no evidence of diminution in the amount of credit extended by reason of the absence of a garnishment law in the State. `That is what I had in mind. Mrs. DwYEn. Thank you very much. Mr. Bare, you cited a case of flipping loans in ~whith you said there *ere $2~900 in charges on $1,500 in loans and you reduced the charges to $1,500. That is 100 percent of the loan, is it not? My question is, Why did you not reduce the ~harges far below $1,500 or 100 percent of the loan? Mr. BARE. That was the decision in the Bro~nch case. The amount received by the debtor-he borrowed money from the loan company on five occasions within 11 months. The total amour~t that h~ received from the loan, company was $1,548,02. There were interest charges on ~those loans of $716.5$; investigation fees of $185'i~4; insttrance pre- mi~ ~ `~`~ charges, $9.50. Duritig that reriod the debtor ~`ruptcy CONSTJM1~R CREtIP PROTECTION ACT me if I wanted to add it to my account and obviously it wasc part of direction to the sales person or to the cashier-it i~ one of 1 self-service-type stores and I noticed the sign this large on the cash register that said som~thing to the e~ect, be sure aM a~k if this pur- `chase can be added to your charge account. I didn't `have an account. ~ You object to these procee D it. I think it g inve~ the writ ie insuran~ce, ,`... ~e insir~Lnce waS th~it~en by r. Dw~u~. One more question. All of the previous Go'vth~nm~nt witnesses have recommended that the garnishthent provisions of the bill not be included in~~ thi~ credit charge disclosure bill saying that `~arnishment needs far more study and if there is to be a Federal law :1i~ii I be ~eparate legislation. All of you apparently dis&gree with the administration. how do you explain this~~ Mr. MORIARTY, I think,yóu have two cju~stiOns there. We have been asked to testify on the advisability off, abolishing garnishments. The `bill contains other features as well. As a matter of fact, tine features rel&ting to SEC, I don't thuink any of us could give you a good answer, on that because that~ is not in our operation. PAGENO="0452" PAGENO="0453" `butlwiTlbehappytoj the chairman, to inform the adiuinistration, people that y~ available through your testimony if they need' advice in carrying on this study. I introduced for the record yesterday the exempt percentage for `each State and we have had the legisla~is~e director of the American Federation of Labor and 010 before this committee and do you know that this national labor organization doesn't have a national policy on ,garnishment of wages although 50 States' have some sort of garnish- ment law, so the problem is i~ery, very serious. At this point, Madam Chairman, I would like to insert in the record ~ study recently concluded in Chicago. This is a study of consunier credit litigation. I think this brief study is extremely revealing and I would oniy like to point out to the subcommittee that of the cases surveyed, the study shows, for example, that there are instances when over 280 percent in charges were assessç~d against purchasers of used cars-935 percent on purchases `of radios, TV's and hi-fl sets, 105 per- cent on purchases of, furnit~ire, 199 percent on purchases of clothing. I am putting this into the record becaii~e I think it is important for all of the American people to realize what they are really being called upon to pay in interest charges on their credit transactions. Mrs. SULI~IVAN. Without objection we will at least make this part `of the committee record. Whether or not it gets printed in the hearitigs will be determined later. In any event, it will be part of the subcoin- mittee records. It sounds like extremely useful information for us to have. Mr. ANNUNZIO. I would like also to make another brief ~tatemei'it before I ask a questioi~. The point was made that the Internal Re'~enue Service uses garnish'- ment to collect taxes. The fact that the Federal Government uses this ~ ~"~S I am conceri~ed. I would like PAGENO="0454" PAGENO="0455" CONSUMER CREDIT PROTECTION ACT 445 ruptoy in which garthshment o~ a wife against a husband 1~or the support o~ the ohi1dre~i has been a factor ? Mr. SNE~EOOR. I don't think that has been ~ factor very much be- cause it is not a dischargeable debt. Alimony or support for children is not dischargeable. Mr. HANNA. I hoped you put that in. Because that is the same situ- ation you find in ta~es because that is not dischargeable in bankruptcy and I think we need that, need to take that into consideration. The third argument seems to be more persuasive. I talk to you now as lawyers. When we talk about garnishment, we are talking about the total creditor debtor relationship and the basis of the respousibilities and the rights that are created when the crç~lit relationship arises and that you have not only garnishment but you have, for instance, in the creation of the debt things like assignments, mortgages, various other things that operate as the basis upon wh~cli the credit is extended. Then you have after the fact the question of w~e~..her confession of judgments, whether deficiency judgments, attachment or garnishments or other creditor reliefs are going to be made available. Is there a possibility of some merit in the argument that this is a piecemeal approach on a total debtor-creditor relationship that might be given consideration? Mr. MORIARTY. It seems to me like while the effects the basic remedy that certain people have, you know as a lawyer, sometime you may have rights but you have no remedies. That might be the situation we have here. Now, even if you abolished all garnishments, the person could still get a deficiency judgment. They may still be able to levy on property. We are only talking about wage `attachments now. It is on the property a man may have. If he has a bank account, has an interest in a cabin in the mountains or something like that, they may be able to reach it. I think Referee Whitehurst could tell you coming from a nong~rnish- ment States, could probably tell you how they collect bills in Pexas' where there is no garnishment at all. Mr. HANNA. Thank you. Mr. Whitehurst? Mr. WHITrIrnRST. Of course, if he has property that is subject to garnishment then garnishment is available. It is only current wages that are exempt. After money gets into his bank account it is no longer exempt. So, if he needs his wages for his daily living expenses he never lets them get into a bank account. Most of this type debtor have no bank accounts. They also collect it-I am sorry to say-by harassment, repeated telephone calls all day, and calls to employers, and I have had' people approach me, and they were so soared-they couldn't put you in jail I told them-and they say they can't~ Obviously, they had been threatened to be put in jail. Well, those strong-arm methods are not quite so much in use now as they were a few years ago before an attorney who made a specialty out of this type of thing succeeded in collecting some very large judgment for mental and physical damage' by harassment-he got some very substantial judgments against loan companies who went out of bounds in their efforts to collect. Also, the creditors take mortgages on all sorts of personal property' and sometimes we find the same furniture mortgaged five or six times PAGENO="0456" PAGENO="0457" CONSUMER CREDIT PROTECTION ACT 447 There was one question that I wanted to ask and see if you have any distilled sentiment as a result of your observations and experi- ments. It has to do with the use of credit insurance. Do you find a business in this practice leading to at least a predica- ment that some of the cases you haste confronted seemed to reflect as a factor in bankruptcy, the abuse of the credit insurance in either the loans or other experiences? Mr. WHITEHURST. I think Mr. Bare can best answer that. Mr. Go~iALEz. May I interrupt you to say this? I think perhaps Mr. Whitehurst will agree that Texas was in a large part populated by Tennesseans leaving because of garnishment and such practices. Mr. BARL That is right, including the formef Speaker for whom this building was named. He was born in Tennessee as well as Davy Crockett, Sam Houston, and many others. Mr. GONZALEZ. They say Davy Crockett was leaving Tennessee to escape garnishment. Mr. WHITEHURST. I was told that the last entry in most Tennessee insolvency case dockets was "G.T.T.'L-~Gone to Texas, and I think that these debtors must have gone to the Texas Legislature and written the debtor creditor laws. Mr. GONZALEZ. 1 know some of our ancestors came up from the South for worse than garnishment. They came- for their lives. Mrs. SULLIVAN. May I ask this and would this satisfy you, Mr. Gonzalez? We are pushing against time here and I think this matter of credit insurance is extremely important. Mr. Bare gave us some very good examples, but I wonder if again, when you correct your tran- scripts, if you, each of you, could give us some examples of this prob- lem in answer to Mr~ Gonzalez' questions. We~want to go into this, and we are going to try to get a little deeper iuto that with some of the retailers. But if you could give us, from your knowledge of the subject, the abuses or the necessity for legislation on it, we would appreciate full answers. Will that satisfy you, Mr. Gonzalez? Mr. GONZALEZ. Certainly. Mrs. SULLIVAN. I have :Jnst one further question and I don't know that it has to~be answered right now. Aga~in, it i~ sonaething you could answer in the transcript. But you gentlemen are all* distinguished lawyers with wi~e experience in Federal law. Would you see any conffi~t at all with State laws or State~ rights If we were to enact a Federal law on the subject of garnishment? Now this, too, could be answered ~vjt~ii~, thp~ next weeJ~ or 10 days so that each of you might haste sometifing~to say on it in the transcript. Mr. MORIAR'r~. ~I haven't ~`had a c~ha~n&to research it, but in reading the bill I notipe you tie it in with the- commerce clause and I think you are on a good start there. - - - - As to its constitutionality I~have had no opportunity to check into that particular field. But using the commerce cIau~e' as a vehicle, it seems to me to be a very wise move in this regard. Mrs.; SULLIVAN, - The staff advises me that the mOney clause is alsO tied in. - PAGENO="0458" OONStfl\~tER CREDIT PAGENO="0459" CONSUMER CREDIT PROTECTION ~A~P 449 We would like to point out in our convention that truth in lending is a top national program for the union, and we have spent quite a bit of time in coming in on this, and we have talked with our Congress- men and Senators concerning this legislation. Interest rates and credit practices are most crucial to farmers and ~we are very pleased in the Senate version that the agricultural imple- .ments and agricultural products are an important part of the bill. I have many, examples here in terms of the other parts of the truth-in-lending bill because we are affected as farm families. We `are receiving some of the same problems as urban areas and we have some very special problems. On page 2, we talk about the various consumer problems as we see `them. The thing that is most strikipg to~ us, at the bottom of page 2, is that there hasn't been any tight money pr~ces4i~ consumer areas. We have never found a department store who had a. tight mon~y situation. What we have seen, because of the high interest rates cha~rged, through deception, that it' bus. pulled credit from housing, from ~arm loans, and from other essential parts of our economy, and there is no reason why a lender or money source should lend money to a `farmer for 7 or 8 or 9 percent or 11 percent, when j~, can turn around and lend it to the same farmer on his ~ar through an indirect finance company or through a power dealer pr some `other sourcefpt 1~ `or 24 percent. It just doesn't make sense. It becomes exceedingly dimcult for farmers to get loans, and when the interest rates go so high it no longer becomes profitable to the farm, and this is what is happening to so many of our far~ns. On the `back I have a sheet which I.think is important to get a per- spective on the amount of interest the farmers are `paying. It ~s a stag- gering amount. This is a survey that was made of our farmers, union members in Minnesota, and this was before the tight money~ high interest rate period. It is a. very staggering amount. They are, paying more for interest than they are for many of the other essential in-' gredients of farming such as gasoline, fuel, feed end, chemipal fertilizers, and so forth. ` This outflow, coming back `to the main te~hnony, tl~ o~tfiow of money from the'usual channels fpr home loans and for ~arin io~ns a~ud in bonds and mortgages-Government bonds-'-bas be~~ yery great, It is increasing and it will continue to increase unless something is done to open it up for the average consumer to see what has actually happened. The next page talk~ a~bo~it 1~he increase, 1 would like to relate one personaLexaruple, if I might, ~bout a situatjon that has happened just recently, `Our refrigerator broke dawn and we' went into a plant, store here in Washington and asked to get a new refrigerator. We got a good buy and asked about eredit~ and to try to determine whether or not we should go to the bank and spend the extra time to arrange~for credit at the bapk or whether we should go through the ~qmpany's credit progr~m-i~esources. I `spent `almos,t a half hour because of my interest in the subj,1ect, trying to discover, along with tliç~ cb~ef sales- man, exactly what interest~ rate was being charged, and both of us are, I would say, a little bit more than usually acquainted with the interest rates, and neither of us, after a half hour of trying and all sorts of PAGENO="0460" PAGENO="0461" CONSUMER CRE1~IT PROTECTION ACT 45j This has, in our opinion, Jiad, a~i impact in terms of the riots and in terms of the problems of low-income families. Thank you. (The complete statement of Mr. Carstenson follOws:) TESTIMONY OF BLvm A. CARSTENSON, ASSISTANT LEOISLATIVE Diancron, NATIoNAL FAR~4ER$ UNIoN We are appreciativeJof the oppoi~tunity to testify before this CommitteeS on behalf of the membe~ o~ the National Farpiers Uniop~ Our position taken ~t our National Conventiop ip Oklahoma City in March of this year is clear and direct. As a part of our l~arget program for this year, our Convention passed this resolution: "Truth O~ Lending: We urge ad~pt'io~i of a financial disclosure act which will provide to the buyer or borrower in1~ormation of the total cost of bçrrowlng in~ eluding all carrying or service eharge~, spelled out ir~ dollars and in approximate annual interest rates." "High Interest Rates: We adopted our Nation Stop Buying Campaign in pro- lest against high interest rates, high Implement eo~ts~ and low farm prices. W~ believe that there are several reasons for the high interest rates and they are still high in `the countryside despite the partial decline of interest rates by a few New York banks and ~an easing of a few of the credit controls by the Federal Reserve Board. Further action is needed by `the "Fed" if interest rates are going to really go down in the rural areas. Also, farm prices must go up if farmers are going to be able to afford to take out loans at all." Our fears of continued high interest rates and tight money have proven true. One contributing factor to high interest rates to all Americans-not just con- ~sumers-is deceptive interest rate charges or in accurate language "deceptive usury". We ask that this committee strengthen the Senate passed bill and elimi- nate the loopholes in this bill. We strongly urge that all revolving and installment credit be included regardless of the length of the loan or the rate of interest. The Retailer as a Loan EThark The practice of concealing interest rates, confusing the consumer or the buyer has crept up on us. Deceptive interest rate practices on consumer loans has forced many respectable businessmen in effect to become "loan sharks" in order to compete. The practice is so widespread that it has been drawing in significant amounts of money from home mortgages, school and governmental bonds, farm loans, and business loans. It has also had a significant Inflationary impact upon interest rates In general. No banker is going to lend a farmer money at 7%, or prospective home owner ~--~y at 5% when be can directly through a bank credit card or indirectly -~ ~-~--- ~---------~- a b ~installrnent l~"- b an easy PAGENO="0462" PAGENO="0463" CONSUMER CREDIT PROTECTION ACT 453 ~ Loans ($31 BUlion c~timite) . Hid~èi~ interest ~i~a~ge~ here ar~ eVen more devious tliaii in the other fields. Most w~ed e~u~ deaiers~'s1mpiy don't Iik~ cash customers. ~ ~ Consumer In.~t~1Zlment D('bt Grow.~. At the e~id Ol' World Wmn~ II, ~mi1y 31/~% flf the iiidivlilual's income wa- spent to pay back consumer installment loans. 1:~y 1965, it hfl(l riseti to about 17%. It isis becoiiie a major item in the family budget. It used to be that the ` i iily could get food on redit but equiprnen ~ clothes, c~. he iaid casi ~ 1'. As . result, in low iconie families the~ a t ate. Ted ~ , they ca~i get ` `ythi ~ ~ except food on redit and the first Ii t get paid re the installm i payi nts. If there is uy left over it is s~ o t and stre ied to cover food id a I ~ other items. If people only knew how much interest they were being charged for installment loans they would go to a bank or credit union and get a regular loan and not only save money but would have the freedom to buy as they want to. Too many people buy what they can get on credit where they can get credit.. rThe families with lower income have greater consumer installment debt. One half of the fam,ilieswith a total income of between $3000 and $5000 have in- stalimenti deb'tsL If there has to ha achoice, it would~ ha preferable for the ~1aw to protect these families rather than the wealthier families. Therefore we plead the cause of the small consumer mrd urge that all lnstallmerfb loans be included under the law and not just the `big purchases usually made by the wealthier fanlilies. The Senate passed bill excludes much of the revolving credit and installment credit where the interest charge is less than $10.00. There is probably as much "deceptive usury" taking place where the interest charges are less than $10, as there is in the installment loans covered by the ~enatc passed bill. It is on the short term (6 to 12 months) small loan ($100 to $250) where the average con- sumer needs help. For example, one of the largest eleetrieal appliance conq~anies has an installment plan to cover such items as refrigerator, The ~refrigerator, at a price of $200, can be purchased through a local dealer through an installment plan from the company In 10 monthly payments. The chart supplied by the coln- pany to the dealer shows a fiat cash. chaj~ge for the Interest fez the 10 month period. If the bill is paid early, there is no decrease in the Interest charged. There is no percentage of interest charge of any type nor `could the interest rate be computed easily or even with difficulty by the average purchaser or salesman. The purchaser has to guess whether be sboulcj spend the time ~to go to a bank to borrow the $200 or simply pay the charge and hope that he wasn't "taken" too badly. It has been stated that many of our finance companies in this country are financed by banks. Some say that they receive from 70 to 80% of their funds from banks `directly or indirectly. The Federal Reserve Board reported last December that 350 large banks had loans to finance companies totaling nearly $7 billion. Perhaps the worst deceivers with regard to interest rates traditiouall~ have been those finance companies serving military personnel. Also those finance companies in the slums have not been noted for their honesty. Credit and loan practices by finance companies and retail stores have been a contributing factor to th~ violent attacks upon btainesses In the recent ghetto riots. However the deceptive credit practices have now spread to the white collar stores and even to the very expensive places. They have reached out and cor- ~ the lending practices in our small towns. The chain stores have spread a revolving credit plans with their deceptively low interest charges of 11/2% per month forcing the local merchants to do likewise. It is spreading to other types of ~business. A `big lUmber yard in Washington, D.C. has handled its re~ volving credit operations in' the same manner as the toughest finance company, giving a very unclear picture of the Interest that they are really charging. The act re~Zt, If the truth were known, ~e woñl~t find much of the revolving and `installment loans are ipade by the loc4 do Iment stores or other retail stores who turn around and borrow this froip t~a~anks, This practice ixmkes many of the retail merchants, who charge 2% per wonth, nothing more than d~ce~ptive loan ebarks. Often they make more on their rending business than they do on the actual sale. PAGENO="0464" PAGENO="0465" *CQNSTJMER CREDIT P~OTECTION ACT 455 SALES AND PROF1TS, LEADING FARM MACHINERY QOMPANI ES Dollar amounts in millionsi Profit 8fte ` Salds Ahiount rtaxevt/~" T~'T~ Pprcen,t retucri on net worth InOernational Harvester: 9 mo, ending July 31, 1965 9 mo., ending July 31, 1966 ~Deere& Co.; 9 mo., ending July 31, 1965 ~ me,, endtpgSept. 30, 1966 ..~ AllisOhalmers: &mo., ending Sept. 30, 196& 9 mci~, ending Sept. 30. 1966 Massey-Ferguson :~ ` 9 mo., ending July 31, 1965 9~mo., ending July 31, 1986 I. Case: Smo.,endingJuly3l, 1965 Smo.,enchngidly3l, 1966 2Wfrita Motor Co. " 9 so., endipg Sept. 30 1965 - - - 9 mo, ending Sept. 30, 1966 $1, 717 1, 905 ~ 656 783 526 683 56 683 203 240 481 597 574. 2 88. 8 239~j 624 ~ 16. 4' 21 3 23. 5 32. 7 ` 47.9 414,5 ` 15. 4 23.6. 9. 3 1i1. 6 ~ ~ 16.2 ~ ~, 3 ` 8. 2 ` 10. 8 13~ 5 ~ 14.5 23.1 ` ~3. 7 19.1 1 Annual rate. 2 Exclusive of 54800,000 net gain on chemical assets sale. a Dollarfigures are Canadian dollars. Company pays no income taxes because of losses incurred in preceding years, Cost to the Tao,payer We hope we have shown that deceptive consumer interest rate charg~s allow excessive interest rate charges. We hOpe we have shown that there `has been a major expansion of thi~ type of credit and that it has hurt the availability of lower interest rate, regular Jcank loans, ap4 that it has bad an inflationary affect upon interest rates. ` Theimpact on school, local and state governmental bonds and U1S~ TreaSury bonds and other governmental securities has also bOen sizable. M'anycscho~l bonds were not put on the market because of the high interest ra~tes. Even inthe fiseal year 1965-66; which was before the~ ~ituat1on was at its worst~ the average net interest cost for all school bond sales went up 42 basic points' from the 1964~-65 average, according to HEW. ` ` ` Local government was equally, hard hit. It is ~ `belief that part of the cry for tax shatth~g wan because' of `the difficulties in selling lotal and statO govOrn- `mental' bonds at a reasonAble rate of interest. Tile int~rest rate on high. grade municipal `bohd~ has almost `reached the high point of last year-over 4%. The `U.S. Government has `had to pay considerably more for the ~indney which ~it borrOc~s. The Sales Participation Act did not h~1p, `and as we `~redlctdd it did `increase the interest cost for all gbvernmental bends and ~ec~ritle5.' While lye all know that the national debt has Increased since 19fi0, Iauteregt costst~ the Federal Government have accelerated at a~ faster rate. In 196O~ the `U.S41ove~t- ment paid out $6 billion in interest rates while in 1967 it looks like we as tax- payers will be a~~4ag~cnlt about $4 `billion itt national debt servlc~é charges, plus what we pay out for the Sales Participation differential. we milst' as a Nat4On0'work at many levels to help prevent `the high. 1ntOu~est 4lisaster which bit us last year. The Truth in Lending Bill Is One tangible way lb whichhighIdtbrestrates througbdeception can be stopped A ~peoiaZ Farm Problem ` ` Increasing duri~g the past fewyears as. ~aznle1~s have needed more c~'edit than they could get.from their local baxilos, a~eW type. o~ bpsiness has d~yeloped ai~ound' the sale of cattl~e Farm journgls ha-~e; ]~ng ~ about where farmers could buy cattle and e~ive~,j~ut now poape flgipaare ad-v~rtisi~1g easy credit atailablee Some ot~the~ ~offer reasonab1~ credit. Others actu~lly use 12% to 18% credit, .p3,~s a big ma*~up m~e~apd above tbe~ actual. ma~t - value ~fi tht cow: However, you have `to' be a-l~wyer to re~4 the pQn~~aot i~ndba `maJtth geflius-to flnk~ the ii~teurest i~ates they charge. Some of the intez~est nat~s arid `0 ~ 0 ~ 2: ~ .~ " ` ~ 2 ~ ` 83-340-67-Pt. 1-80 PAGENO="0466" PAGENO="0467" CONSUMER CREDIT 1~ROPECTI()N ACT 457 contributing factors as why- bnsIne~s in ghetto ar~tas were targets during the recent riots. 1966 RETURN8 SHOW Tio~r Mo~nr AS 131G ITEM O3~ FARM BALANOE Sunar Intei~est charges on farm debt are one of the major items of the cost side of the farm balance sheet-and one of the greatest contributors to increased farm op- erating costs. Interest payments by farmers in 1966 are estimated by USDA at about $2.5 billions, an increase of 14% over the level of a year earlier. The Increasing burden Is due both to the larger amount of credit being carried bY farmers and the increase in the cost of money to the highest level in 4Q years. When farm interest payments are compared with other farm operating ex- penses, it can be seen that they are now heavier than property taxes, fertilizer purchases, and outlays for gasoline, fuel and oil. The interest costs of $2.2 billions paid by farmers in 1965 exceed the $1.8 billions for real estate and property taxes, the $1.6 billions expended for fertilizer and lime and the outlays of $1.4 billions for gasoline, fuel and oiL A survey of farms in the West Central Minnesota Farm Management Study for 1964 indicated that the average farm was laying out $1,632 per farm in interest payments, compared with an average of $736 per farm In payments for fertilizer and lime, $851 in property taxes and $823 in outlays for gasoline, fuel and oil. An examination of data from 1966 Schedule F federal income tax returns made available to Minnesota Farmers Union by individual farmers shows that the interest payments are a major expense item, overshadowing some of the other farm outlays. Each line in the accompanying tabulation represents the figures for an individual Minnesota farm for J966. SELECTED FARM EXPENSES ON ACTUAL MiNNESOTA FARMS (BASED ON 1966 FEDERAL iNCOME TAX RETURNS) Feed Fertilizer purchased and chemicals Real estate interest taxes payments Acres farmed Gas and fuel P.P. taxes 320 480 880 700 480 360 400 110 60 120 207 160 * $623 1,373 1 806 1502 611 1,000 623 425 100 325 1 006 874 $3,002 3,124 1,432 1,200 210 1,782 135 $731 1,358 1,924 921 533 800 1,391 600 200 400 931 283 $126 247 100 284 145 160 157 125 75 100 143 lii $552 809 984 474 646 1 300 565 300 500 - - - - $107 2600 528 713 479 1,600 1,378 - 210 105 190 160 80 380 225 160 200 320 260 80 1,360 1,002 370 1,000 751 1,110 111 1 299 927 262 12,125 11,735 310 295 1,451 2,984 1,670 358 1,317 767 221 924 1,246 98 3,933 235 360 110 211 207 114 167 64 17 153 126 11 733 911 537 343 506 893 672 1,839 1,104 4,002 120 210 231 74 135 1,378 2,722 2,138 221 160 322 239 148 160 119 313 440 240 120 247 200 188 320 350 182 160 RI 139 200 400 360 907 982 540 650 501 529 225 520 506 676 420 729 1,000 2 500 690 1,015 310 474 845 825 473 1,798 2,485 3,500 900 206 3,156 429 1,772 1,700 578 1,100 2,936 621 720 1, 322 6,799 1,350 85 3,508 1,150 350 77 1,029 260 1,197 200 670 458 1,800 1,647 708 365 25 32 556 950 91 194 850 225 120 38 208 19 112 128 200 70 301 160 105 84 83 114 225 204 448 1, 795 134 600 758 531 444 211 919 546 795 225 693 2,425 2,127 595 350 53~ 1,250 2,304 1100 305 506 213 20 417 810 2,050 1,609 132 735 3,400 PAGENO="0468" PAGENO="0469" c~T1EDrI~ E~T~i~ Am~ 45~ ACTUAL 1965 FARM OP~RATiNG FIGURES AS R~P0RTED Oft~CHEDULE F TAX F0RM-~-I(4T~REST cosT s F~Asi~ GROWiNG ITEM (Each line represents an individualfo~rmJ Farm number Gas an ~ d fuel Feed purchased Fertilizer and lime Property taxes Interest payments 1 2 3 4 $353 1,406 1,696 689 $433 224 1,244 849 $1,547 548 592 $~27 1,008 638 530 $120 382 1,243 386 5 6 7 8 9 10 ii 12 13 14 15 16~,, 17...... 18 19 20 21 22 23 24 25 26 27 - 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 - 51 52 53 54 55 56 57 1,553 1,381 24 270 1,190 520 1,023 434 544 915 1,954 1,933 1,769 1,125 837 647 2,~58 666 959 224 303 1,386 579 370 1,838 1,006 853 2,585 961 474 834 640 640 722 844 657 378 560 984 558 384 449 171 492 529 346 515 856 1,287 1,085 1,710 866 520 1,292 1,432 3,982 245 1,395 2,339 6,005 1,096 2,100 2,952 141 6,583 10,614 1,650 1,489 275 4,072 ~971 3,246 3,748 3,136 617 1,200 1,216 929 3,008 1,345 3,341 850 2,036 640 76 367 507 1,116 1,298 1,296 246 36 8,792 930 4,766 3,156 403 1,526 7,341 3,257 1,902 347 283 502 636 182 2,586 156 986 120 751 71 1,426 516 2,626 953 1,711 468 4,598 1,259 1,236 731 ..... 307 423 537 2,000 3,311 203 356 1 400 753 310 774 826 708 - 850 874 642 177 101 201 408 954 628 451 5,401 34 160 304 362 958 150 1,447 95 951 402 628 864 930 1,309 931 1~856 1,188 1,101 2,007 1,435 634 522 727 367 646 366 931 631 585 115 2,083 819 830 742 1 200 762 533 1,117 724 748 578 543 239 414 1106 1,425 525 454 604 848 930 1,~39 1,837 667 490 * * ~ * ~ ~ *- - ~ - ~ - - ~ - ~ 423 536 2,304 476 2,252 433 1,260 368 1,352 1,498 1,613 719 3,313 2,443 1,37O~ - 609 2,638 2,241 1,581 240 1,626- 152 1,004 350 1,716 490 1,304 350 2,931 493 663 1,672 5-28 1. 034 - 855 1,023 330 1,027 816 2-18 241 1,135 - 203 403 450 588 1,193 476 302 ~, ~ 3,138 338 722 ` . 58 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 670 506 919 588 973 1,467 524 1,341 1,106 698 579 1,037 1,485 797 540 3,177 577 1,730 510 553 1 083 6,208 1,916 4,649 4,430 2,136 4,862 639 14,446 1,387 631 18,750 597 228 440 1,598 1 306 883 319 397 614 178 518 261 1,683 806 1,537 275 708 615 1,996 1,272 1127 1,718 748 2,120 978 842 155 143 - 2, 100 509 795 1,211 540 1,259 1,334 344 937 1126 3,346 583 3,325 2,393 814 437 450 3,721 909 1,035 3,134 833 75 1,331 173 586 952 1,000 PAGENO="0470" PAGENO="0471" has had a detri ental effect in these been concerned about what has happened to housing, and perhaps ~ think that is a more essential thing, to build houses than it is to put the toaster in. Mr. BINGHAM. For example, if a provision prohibiting garnish- ment were to discourage credit transactions, would you say that was fine? Mr. CARSTENSON. We have had such an incr~ase in consumer credit, sometimes they have been given without much thought and has been pushed without much care. We have seen-some of our members have reported where department stores have in their back rooms signs that say, "Push credit, this is where the profits are." This has gone too far and the garnishment provision I think would tighten up the con- sumer credit and would allow more money to be available for essen- tials as building schools and houses and things of this sort. Mr. BINGI-TAM. Thank you very much. Mrs. SULLIVAN. As I remember, one of the witnesses said this morn- 4- 4-1-. $1.2 billion lost just last year in consumer debts the overextension of 4--- __1____________ PAGENO="0472" PAGENO="0473" CONSUMER CR1 IT PROTECTION ACT 6$ The current Federal Reserve policy of ti~bt money and high interest ratea- rates which have soared to 40-y'ear highs-has bee~i d~trimentai te consumers, a~ wage eathers, fau~ner~s, home buUder~ gr sm~I1 iusinessmen~. :7~be cu~rent~ tight money, ji~gb-inte~est rate policy ha~ not only t1~warted, but in many ,ca~es actu- ally wrecked President Johnson's Great ~oclety 1?rogram. The isiO~,ea5ed interest co~ta which will have to be paid `by the American peo- pie duC to increased cests of carrying Federal, State, and local debt, and the increased interest costs which the American consumer must bear for funds bor- rowed for borne purchases and other consumption needs will amount to many billions o1~ dollars. Tbis~ burden will have to ~e carried by coming~ generations `as well as the present. Many vital programs, such as rural electrification, cooperative housing, Farmers Hompe Administration loans, Veterans' benefits, education aids, other prOgr4~s, which ar~ dependent upon the Federal, State and local governments for dituct loans `ô~r insured loans cannot survive under curten't monatary policies. No one bOnCfits from a tight-money, high-interest rate pcdicy except those in the' fortupate position of having funds to. lend~ A high-Interest, tlgbt~-money policy promotes concentration of wealth rather than encouraging wide-spread distribution of income and money. ~be policy erodes the ~Amcrican trad~tion o~ advancing effective and efliclent small business, home ownership, an~ decent standards of living for all our people. Our present economically and socially undesirable monetary policy Is a diredt consequence of the refusal of the Federal Reserve Board System to operate in harmony with Congressional mandate and Executive po1~cy. ,In fact, the actions of the Federal Reserve Board and System over the last several years constitute a direct violation of the policies and objectives Contained in the Employment Act of 1946. For reasons presented in this brief review, `the delegates to this National Conference call upon the Congress and the President of the United States to take positive action now in reversing the present dangerous tight-money policies and inputting the country back on the road to growth and prosperity. Specifically, we urge an `action program which will include: 1. Prompt bearings by appropriate Congressional Committees to deter- mine how this country has been placed in the present dangerous situation and to initiate prompt and necessary action to correct and to prevent the recurrence of this situation. 2. Enactment of legislation to make the Federal Reserve System fully responsive to the Congress. 3. We urge the President not to reappoint MeOhesney Martin. If he IS reappointed we urge the Senate to reject his nomination. 4. Establishment of machinery to give representatives of consumers and other major groups of citizens an oppoi'tunity' to share in the design of monetary policies. 5. Utilization of all available and appropriate new direct and ~uarautced loan and credit programs wherever appropriate to strengthen the band of the consumer-the home owner, the bualneesniami, the fairmet, the working man, the borrower, the poor, the student, the elderly-41n hia efforts to share fairly in the growth of Anierica. 6. 1~teaffirmation of the 1~lmployment Act of t94l~ `which calls for conttuu- ing growth as a national gc~al, with full' ethployment of mhnpo*er, nia~dmtm utilir~ation of plant `and wise use of resources recognized as major objectives jn th,e public im4crcgt., An detegates of tills Nktional Conference, we are concerned that .~be Nation `be giten the opportunilLy td lñove forward.~'Wd extend an urgent invltation~to all. our l~ellow citizens 4o ~join with us in a crusade for sensible monetary policies. While the Federal Resotve Board ~has recently amid belatedly made small efforts tq loosen money, it is clear that `these modclst corrective polic~,as are still imieffective to achieve the flow o~ money and interett u~tes necessary i~6r a grow- `iñg and secure ecOnomy. Mr. ELLIS. I might say that we feel that credit hardships in the rural electric systems ~and among our menthers do exist throughout this Nation, throughout America. Mrs. &ngeyine~ will go into tha~t further in her statement. PAGENO="0474" PAGENO="0475" CONSUMER CREDIT PROTECTION ACT 465 credit system and it is still working. So we take more interest in credit as our people continue to move from the rural~reas to th~ cities. Too, much so, we think. Now, for the substantive statement for our organization, I defer to Mrs. Angevine who is our women's activities coordinator and works with various women's organizations in the States and in the regions. Mrs. SULLIVAN. We will insert your prepared statement at this point and then we will be glad to hear Mrs. Angevine. (The full statement of Mr. Ellis follows.) STATEMENT OF CLYDE P. ELLIs, GENERAL MANAGER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION, INC. My name is Clyde P. Ellis, and I am and have been for 25 years General Man- ager of the National Rural Electric Cooperative Association, which has its head- quarters in Washington, P.O. NRECA is the national trade and service organization ot 980 rural electric systems serving nearly 20 million consumers in 2,578 of the 3,072 counties In the continer~tal United States and in 9 of the 19 election districts of Alaska. With me is Mrs. Erina Angevine, Women's Activities Coordinator for NRECA, who has done much work in the area of consumer legislation in general and "truth-in-lending" measures in particular. Mrs. Angevine will detail NRECA's support of "truth-in-lending" legislation and our position in regard to the pro- posed Consumers Protection Act of 1967. Much of NRECA's active interest in "truth-in-lending" and similar consumer legislation stems from the speech made by your distinguished Chairman, Rep. Leonor Sullivan, to 1200 rural electric women at the NRECA annual meeting held in Miami Reach in 1965. At that time, she urged them to become "kitchen politicians" in behalf of legislation to protect the interest of consumers. Many of them are doing just that, on a ~ipartisan basis. The work of the rural electrics' "kitchen politicians" is evident in the consumer resolutions proposed that year and each subsequent year by the NRECA Women's Activities Standing Committee. These resolutions have been adopted by the NRECA membership without a dissenting vote. At the 1967 NREOA annual meeting, delegates representing the rural electric systems unanimously approved a "truth-in-lending" resolution which reaffirms support for legislation that "helps consumers shop for the best buy in credit by requiring a clear statement of the cost of credit and the annual rate of interest." I would like to si~bmit that resolution and t~ie 1966 NRECA resolution on con- sumer protection for the hearing record. Resolution adopted at 1967 NEECA annual meeting: "TRUTH IN LENDING "Whereas, widespread misrepresentation of interest rates~ vaguely worded credit contracts, unscrupulous repossession methods, trick payment clauses, high pressure door-to-door selling tactics, unconscionably high rates for credit, and other unsavory credit practices work severe hardships on consumers: Now, there- fore, be it "If e~olvetZ, That we reaffirm our support for legislation that helps consumers shop for the best buy In credit by requiring a clear statement of the cost of credit and the annual rate of interest." Resolution adopted at 1966 NRECA annual meeting: "CoNsuMER PROTECTION "Whereas, NRECA is an association of 979 consumer-owned and controlled electric systems, vitally Interested in all matters affecting consumers ; and "Whereas, we recognize consumers have a responsibility in the economic life of this country to support with their patronage the honest and Ofilcient producers and distributors who offier the best value for the lowest price: Now, therefore, be it "Resolved, That we support legislation that helps consumers fulfill their role in an intelligent and responsZble manner by giving them access to clear, unam- PAGENO="0476" CO~S1L~R, cR~D[T PEOTE~IQN. 40T biguous inforina~ipn about products a~nd services available for sale; and ~be it fdrther "Resoh'e~ ~há stt~po~gisi*d15fl thatJac~s c4m~umers sh~t~ for tI~hesI~ buy In credit by r4~quiring a clear statement of tue cost of cr~it4pd th~ u~w~ sate gf ii~tere~; a~4~e it further. "Resph'ed, That we ~upport legitiatiori that assures the safety bf f&od,th'1~gs, and cosmetics before they are offered for s~Ie; and~e it further "Resoh'od, That we reafflr~ our support~ for full re~resezitation ~f ti~e con-i sumer in the highest councils of gove~nn~ent and comme~id the Pro idEaLt~for again appointing a Consumer ~Advis&ry Council to work with his ~peci~l ~As sistant for Consumer Affairs; and ~be it further "Resolved, That we urge rural electric systems arid their stat~ à~n& tffit~onal associations to m4tke consumer information available to their members." Those of us wh~ work in the rural electrifleation ~yrogram are ~vel1 `awlire of the importance of credit and the significance of the terms and conditions at- tached to its use. ~II1~be very I~istory of rural electrification demonstrates the value of the exten~ióp~ ~f useable credit for a wo~thwhlle natiç~tal purpose-the con- struction of rur~d electric systems to provide electricit~~ to fltrms, homes, schools, ehiivcbes, and b~isinessesin rural America. This successful credit partnership of the Federal goverumezit and private citizens is one of the bright(tht chapters In our Nation's hist~ry, ~or rural electrification has been-and continues to b~-5~ dynamic factor in improving the living aiid working conditions of the people~ of rural America. It is an interesting but Often overlooked fact that the architects of the original Rural Electrification. Act of, 1930-the late Senator George Norris of Nebraska and the late Spe~tker Sam' Rayburn of Texas-wisely ln.cluded a provision for low-cost con~iim~ credit ~n. that landmark legisl~tio~. At thitt tiniO, the Th~it4d States was in the~mjdst of the great depression, and reasonably-priced coj~sumer credit was nou-exlistent in rural America. Because woultI$b~ ôonsumer-members of the rural electric coopehttives c~uld not borrow izlone* from private ~ources to finance the wiring o~ their homes and farmsteads, Section 5 of the Rural Electrification Act of 1936 specifically pro- vided for low-cost loans "for the ~izrpose of fina~clng the wiriñg'of th~ premises of persons in rural areas. and the acquisition and itistallaCiOn of electrical `and plumbing appliances and equipment." These consumer loans, comr~oni~y referred to as "Section 5 loans" did much to speed the initial electrifica~tioii of rural America anc1~tb~ subsequent modern.ization of its homes and farms. At this tiixie, I would liJ~e to intrOdpce Mrs. Erma Angevine, who will outline NBECA's j~ositløb in regard to `H.R. 1160j and other b~ls before this Subcom- mittee. `~ Mrs. SULLIV~N. Knowing tht~ thility. andbackground of Mrs. Ange- vine, I am delighted that you are testifying. We will be happy to hoar your statement, . Mrs. ANGEvINE. Thank you, Madam Chairman, Mr. Ellis. I am very pleased to have the opportunity to be the one to register NRECA's strong support for H.R. 11601, introduced by your dis~- tihguished chairman and also the identical bill, }]I.R. 11806. As Mr. Ellis mentioned and as he told you, ~ have two resolütion$ strongly endor~ing truth in. lendiug. These were pp~ssea in, 1~66. and earlyin 1967. I want to p~int out, because these rescdutions were based on the strong truth-in-lending bill of the former Senator Douglas, we there- f ore were disappointed in the provisions of S. 5 as passed by the `Senate.. We still strongly support truth in lending, but we are disappointed at a bill that leaves out first mortgages, revolving credit, some ir~ stailment loans, and for all practical purposes doesn't become effec- tive until July 1, 1972~ Currently, Arne~icans pay around' $22 billion a year on interest and finance char~e~. That's about a fourth of what they pay for groceries. We know ~t is hard, womeu know thisday to day, to go in and decide PAGENO="0477" CONSUMER CREDIT PROTECTION ACT 467 whether to buy six 5½-ounce cans at 98 cents or five G1/~-ounce cans at 89 cents. Yet it is much easier to make a decision like that than it is to go and try to buy credit where you have not the similarity of information IflOSt of the time. I read through the hearing records for the past several years on Senator Douglas' bill and find even bank presidents and government officials have admitted publicly in the hearings that they cannot understand what the lenders and vendors are saying in their credit contracts. If they are confused by add-ons and discounts and percent of original balance and so forth, you can imagine how confused an average consumer on a rural electric line is. According to a study that is called, "Consumer Sensitivity to Fi- nance Rates," 800 families in the study were asked to list how much interest they thought they paid. Then they averaged these interest rates out and discovered that the families thought they paid 8.3 per- cent interest. In reality these families were paying 23.2 percent interest. It seems to us that all consumers are entitled to know before they buy anything the price they are going to have to pay. This applies to credit as well as to anything else. We feel therefore that the dis- closure provisions in title I of H.R. 11601 will provide them the kind of information they need to make informed decisions. `We also support the provisions that would make this go into effect on July 1, 1968. We believe that any lender would have ample time to change his operations to take care of this deadline. The rural electrics heartily applaud the truth-in-advertising pro- visions in H.R. 11601 which extend the disclosure requirements to advertisement of credit as well as the conduct of an actual credit transaction. NRECA has long been in battles about truth in advertismg. Our rural electric systems have been the victims now and then of some vicious propagandizing, propaganda advertising campaigns. We therefore endorse any attempt to bring truth into the advertising field and believe that this is an area where reform has long been needed. Though we realize this is just one step, getting disclosure for credit advertising-it is that first step for truth in advertising. WTe cannot either oppose or support title II of the bill, which would prohibit the garnishment of wages. We say this because our member- ship has never had any reason to consider garnishment of wages and we therefore cannot go on record representing these members without having some information from them. I must make the same sta~tement in relation to the part of title I that deals with the regulation in credit for commodity futures trading. We have no position, have never made any, study nor have any in- formation from our members. We do understand, however, that the Department of Agriculture is noW reviewing an outside study which t.hey have made on the extent speculating trading affects the futures market and the value margins would have in controlling speculation. We defer to those who are more familiar with such operations. In regard to title III of H.R. 11601, we support, the. establishment of the proposed bipartisan National Commission on Consumer Finance. NRECA believes that the studies and recommendations of such a PAGENO="0478" 468 CONSUMER CREDIT PROTECTION ACT commission wkld be most helpful in pointing the way for future improvements In the field of consumed credit. We urge that provision be made for adequate representation of the rural users of credit when these Commissioners are appointed. We believe these Commissioners should not necessarily come from the rural areas, butt they should be people who are well aware that there ~re rural b~rro~er~ `as well as urban borrc~wer~. Rural rè~ide~nts are heavy users of ~redit fo~r severai~reasdns. $othe of them IYr. Cai'ste~on pointed out, sokçcf them Mr. Ellis l~a~s discussed. There is a growing need, `a growi~g' ~ti~end toward ,l~ger sized and increasingly mech- anized farms ~nd this of course means that the debt of the farmers has increased, also. Over the past 20 years, farm mortgage debt has quadrupled. On ~January 1,, 196~, the total farm debt exceeded $40 billion for the first time. That figure includes $21 billion in~ farm mbrtgage ~4ebt~p~l'$i9 billion, in deht~O~ machinery, equipment, and other fa p,~rati~g expenSes. This is a~heavy burden on any farmer, but it is part~cul~ly heav~ on y~mng people ~ho are just gettihg started Out in' farming. Because of this heavy in~esttnent to get a farm' started and because thete is such a narrow margin between the gross and ue~t income of any farmer, the farmer finds it necessary tQ borrow mo~1ey oftentimes as he did ba~ck in the depression days just to carry l{im b~tween planting .a crop ~n'd~ harvesting it. Ii~ adslIt1Qn~ I would like to pount out thi~t rural America, which ~has only 30 p~?1rcent of the tJ.S. popuiati~th, cbnta~n~ more than 40 percent of the N~1~~on's, poor, I am sure tft~t this corn iittee iS aWare and that several pther people have c~lle~ your attenfion ~o this, but it seemus ~o us that when we talk about credit, misuse of ciedit, we have t~ tlii~'~t~outth~e poor' people ~s being the ones *hó~e more ofte~i `victimlied. Enactnient of `meaiun~f~il truth-in-lending legislation we believe will `benefit e~eryone,' far, ~*e tecogi~ize all' 9f u~ are consUmers, But ~t~wil1 `be, mos~ helpful `to' those `who have the least to spend for the necessities of life. ` , Madam Chairman, we want to, oo~ipliment you and yoni~ colleagues for 1iutroduethg, a bill which is aimed at correcting a wide rang~e `of abuses, jn the ctedit field. We recogni~e that we have nOt ~mmented, oh `every section of IT.R. 11601. In so~ instances, it is becau~e we `have no guidance from our membership and we are a rnembershir or~ani- zation. We do believe, however, our s~irong support of the National ~Ommissiqn o~i `Cons,uuier ~F'~inanoe does'sh,ow our interest in further explOrations ot any area in fife coxsurner~1naime field. We look fo,rfw~ard to the enactmen~t of' ~ str~n~g truth4n-Iending bill, full disclo~ur~ hiw~ ,durmg,this ,sessi'on of the~ ~Oth Congress. Tbank'y,ou. ,~` `,, `,, ,` ` Mrs. Sx~. "P~iank you, Mrs. Angevme. You have given us exeeedi~gly u~terestrng and full sthtement, a~rid 4ve are delighted to have yonr support.'We k~iow that there `are sec~IQn~ of the ~bilI dealing with rnat~iers on which you would flQt h~e the experienCe in your ow~n organization to judg~ wh~th~r ,~r `not some oiie of these provisions should be enacted. For ihstance, we put in the cornmodit~ futures trading provi~ion because we have had some experience inthis sub- committee on this issue in investigations of coffee prices and sugar PAGENO="0479" CONSUMER CREDIT PROT~CT1ON ACT 469 prices. I have had bills before the Agriculture Committee shice 1954 to bring coffee futures trading under regulation,, and since 1963 tc bring sugar futures trading under regulation, and this year I added livestock and livestock products, based on the work we did in the National Commission on Food Marketing. I understand from what I heard yesterday that the Committee on Agriculture is about to con- sider legislation that will include eoifee, sugar, and liyestock, so we are finally making some progress there. I do not know what. is going to come out of it, but ~1n the mea~htiñ~e, in these hearings on ER. 11601, we are going tO ~hear from some experts on margins on com- modity futures trading and get some fw~ts in our record. (The complete statement of Mrs. Erma Angevine follows:) ~TATE~tJ~NT OT Mns. EnMA ANOEVINT, WoMisT's ACTIvITIES COORDINATOR ron NATIONAL RURAL ~LRCTEIC COOPERATIVE ASSOCIATION, INC. Madam Chairman and Members of the Subcommittee, my name is Erma Angevine, and I am Women's Activities Coordinator for the National Rural Electric Cooperative Association. I am very pleased to have this opportunity to register NREOA~S strong sup~~ port of 11.11. 11601, the Cobsunler Protection Act of 1967, which has been in- troduced by your dlstingW~hed Chairman, Representative Sullivan, and five other membets ~f tbls~Snbeomnilttee, and an identical bill, H.R. 11806, which has 17 House sponsó~s. A~ Mr~ Ellis mèbtioned, the rural electric Sy~teth~ have endOnled the enactme~it d± effective ~`ttutb-in-lendh~g" ~egislatiOn by res- olutions adopted unanimously ~t ~REOA's Th66 and 1961 ~ttnn1!tal meeting~s.~ However, we are disappointed in the ~&visl~ns of S. ~ a~ ~assed by the Senate, fOr our supporV was geared to the n~or~ ~ncluslve and t~iby more effective' "ti~uth-in-lenlhing" hitPnpOnsored in pr~e~riotts yea~ by fOI~ner~ &~to~ Patil Douglas. We be1ie~c4~ that the Sepate ~bf 11; b* ~èmpting first~ th~*t~gagea, revolving ~redit, some installment lô~ns ai~d ~ setting, for ~.ll practióat ~ur~- pose~ an effective date et ~Tu1y 1, ~I$i'2 will by that time ~ai,ly be protecting about ofi&4lfth of kll coa~uth~r credit ttansaetictiis~ Currently, Americans pay around $22 b~U,ion. a `year in I t~res1 ~ld~ cha~e~es. `Vhat~s almout as initCh as ihOy p~ ~ groceMesY Ahd~ hai~d ~ it m~y be to det~fnlne wbefhet si~ 5% oun~ ca?f~ at ~S ~thtts are ,~ beftet'buy than five 6% cnince cans at ~9 eenth, it's praettcally. child's ~flay compared to deter- mining drOdit chargea. Evdn batik ~residents and government dffieials have adniitted publicly to being confused by the practices now used b~ lenders and vendó~rs in stating their finance charges on e~nsumer credit. It they are confused, by the array of add-ons, dis- counts, per~ent of original balance, ~iontbly payment amount, term price differ- eTatini, ~sales price versus cash pried, and so dn, what chance does the average consumer have? According to a study called "Consumer Sensitivity to Finance Rates," we do not have as nmeh of a chance as we think ka'~. In the course of this study, 800 families were asked to estimate ho ii rest they were payhig. All of their estimates were put together and d. he average estimate was 8.3 percent. How much were they really p~ - `n ie average, they were paying 23.2 percent. All consumers are entitled to know in advance of a credit purchase the price they are going to have .to pay for the extension of credit. We feel that the dis- closure provisions contained in Title I of HR. 11601 will provide them with the kind of information they need to make an informed decision on a proposed credit purehose. We also support the provision that these requirements go into effect on July 1, 1968, as we believe this allows ample time for lenders to make the necessary changes in theit' present mode of operation in order to comply with the law. Th~ vural electrics heartily applaud the "truth-in-advertising" provisions of ILR. 11601, which extend the disclosure requirements to advertisement of credit as well as the conduct of an actual credit transactlofl. WRECA has long fought fot "trnth4ti-advertising," for the rural electric cooperatIves have been the victims of vicious propaganda advertising campaigns. `We efldorse completely PAGENO="0480" :~ ~ j ~ ~ ~ ~r ~ 470 CdNSIJMER CREDIT PROTECTION ACT tI~is bill p ~;1~Qrts 1~o ~tr~duc~ truth into th~e ~Uve~tis~ng ñeld This is an avea ~hei~e i~efot~ñ is thpW ov~i,duë. : ~ ~ W~ neitJ~3i~ áupii~*t 14oi~ dtii~ose fltie II of 1J1~; ~ the garntshnien1~ oii'4s~agea iOur member rural hlect~ic s~tems~ iaa~e~ nerr4a4~ cause tç) cet~ider. garn4~hmen~ of wages, 4~id therefore w~ b~ve w~ pa~it~o~ ou tl4~ m~tter~, ~ Would 1!1~O to ~n~1te the s~tmO stafrment on the se~tiou Of Title' I w'liicb deals *1't~hkthe rE~gülatidn ~of credit for othiuodity fttttir~~ tra~d1M~. `NR~A does not hare g, posibton of etther support Or, oppo~itIon to sueh,regul~t&on. We understand that hetLT.~POpa4~neut of 4~gricu~tur~uow has under review an outside study ~r~jcb b~s 1~ep, m~c1~ `oçi tbe. éxt~ent. specujat~v,e tra~ing affects the futures ma~~kOt~, ai~d the r~in~ mar~lus wei~l,t1 have bi couthdling speculation. We defer to those who are *kore fatalliar ~ft1i the ope~ations and effèet of commod{t~r, futures trad4ng. In regard to Titje III of H.R. 11601, we support the establishment of the propoSed' b4atrtlsaii Natioital VOmxuissiort `On Cdnsiinler J~inance. N~tEciA te~ lie'ves that `the stttd~es and' recothit~ondations ~f such a conimission would be most helpful in ~pointii~g1the way for future improvements in the ~eld ef consumer credit. We urge that provision be made for adequate representation of the rural users of credit by the appointment of commissioners who understand rural problems as well as ~urban problems. Rural residents are heavy users of credit ~or several reaaons~ T~ie growing trend toward larger-sized and izereaslng~y-m~cha4d~d farms has resulted in a ~Izab1e increase in t1~e cqst of farming . ., a,nd a c~r~spum1ing i~crea~~ in the size of ~he farm Ue1j~, Over the, p~s~~year~, far~j mortgage debt has ~uadruplOd~ Qu Jaiju~y 1, 1~~,'tç~' farm de~4 e~eede4 $4Q l~ill%on f~ the first time. That figur~ ineludes ~~ll~Ien in fari~' n~ga~e ~aJt `and $1~ biI1io~, in 4ebt for ~ ~ ~ , ~,, , T~~anc1~g ~w~4~n I p~rtiçn1a~r1y l~açvy ~n young pe~ple are just s~to~rti~ug ~ut in fa~g~ ai4 ~bo$e w~o are attem~ng to e~pand ~he~r oparat~on by the~ quisi4iofl~,e1~ i~cWe land f~ç t~ ,~urchase~f ailcUtienal niaç~ne~y ~ ~q$p~ne~u~. ~ca~se~'f tXi~ ~ea~y jn~es~çnt, r4~$~~ed `by moderfl agrJ~u1~ure~ an4 b~c~se the wa~i~ be~we~' g9ss~p~ net~o~ Is ~ i~erro~ `one, 1XLQfly~ fai,I1aer~ als~ lind it hecessary to borr,o~ ~iw~y to. car~~y. ,tbe~ bet~v~e~ ~e pla~t~ ~f .a~ ~op w4~l l?S harvest. ,, ` ,~ ~, ., )t, ` In ad4it1o.u,~ i~'u~l Amei~lç~a-wluch l~as e~~1y 80 p~cent~of the V S po.j~ulatzon-~-) cOnto.ius ~nzore than 40 peicen,t of the Natiop's 4~R'?"~ As ha~ beep pOipted out many times, it is th~ j~oor w~io o.u~' t~ie most `frpm ere~&t abu,ses, ~nactment of meaningful `~ti~ith-in-lending" legj4atlon will benefit everyone~4o~ we are all eonsumers-~,btsi~it will be mopt bel~ul to those who have the 2east to spepd fOr the nece~ss~t~e~ o~ life. , ,. Ma4aip á~ñ~n~ we compli~~nt you and your c~Ieagnesferiutroducjng a, bftl wb is .aim4d ~t, correçctipg ~ wide r~pge of abuse~ in th~ credit field. W~ look foçward to e,Pa~tment 0± a strOpg ~ law d~ripg this session of the 90th OOng~ess. , Thank you. , Mrs~ SuLLIvAN, ~ow we `will Elea~ Mr. ~ Stthie; ~ ~ ~ent~ ~ vary e~celleiit `orgai~izat4on tb~ we a~e ~I1 :tamiliar with' ~ afl think very high1y~of,'the Credit `Uuion `N~ti~ona~l Associat~oi~, We are mos~t happy to have your testimony oi~ th~ c~edit union ~o~E~tit~'. If yoiz wish, ~ stateu~ont `~sril~ b~ A~4p a~ pajrl o~li~e ;eeór4 ~ou i~nay e~tl~4r i~ea~ yo~r sta~te~iant o~ ~u iaq~e it~ a~a yQu~rpre~1?er SUT~MZNT 4~ ~tTI~flY$ ?ONZ Ofl~M~* Z~E~$AL A~W L~$t4.. T~ OOMMTTTE~, CUi~A INTDRN~TrOR~L, IN~C~ Mr. `Si~o~tE; I don't w~it~t~ `tr~s~a~s oil thè~4me'of th~ co~rjixdtte~. I thoug~ht tI~.4t ~d~ei~ if ~ ~tthi~tad t~ sUWli)arIze ~X w9uld bb ~aking up. too mue~i~ 1~ime.L,?e~haps you pught perniit me;to 4'ust t~teh'cu'pen a, few of tbe~h~gh spots that i~wouid `1ikb.to'~all to yollratt~rii,sion ahtl I would be glad to answer any questions you may have. PAGENO="0481" CONSUMER CREDIT PROTECTION ACT' 471 Mrs: Su~LIvAN Good, I just want to' say yrni are not trespassing on our time. You did come all the way down from `Boston and we want to ~h~i~ou. I am just'sorry w~do ~ot have the full membership present at this moment. Mr.~S~coNE., `Mad~u~ Cbairmalh members of the committee, my name is Julius Stone. Jam chairman of the Legal. and Legislative Commit- tee of CUNA International, Inc., and I a~n a director and past pre~i~ dent of OTJNA. CUNA International, Inc., i~ a nonprofit association of credit union leagues. I~this country, there are 48 State credit union leagues which represent a~pproxii~ately 22,000 credit unions and which comprise appfoximately 18 million `members. I am appearing before you today to testify in support of IELR. 11601,. the Consumer Oredit Protection Act. When the firs~t truth-in-lending bill was presented we came and testi-~ fled in behalf of this concept. As you know, credit unions are nonprofit mutual membership or~ ganizations chartered for the purpose of promoting thrift and provid- ing provident and productive loans. They are chartered by either the Federaj Uovernment o~ by one of the State governments, and they are supervised and examined by a State or Federal agency. They are exempt from Federal income taxes. Credit unions do not deal with the gefieral public. They must hav'e a common bond of membership and t1'~ey can only deal with memb~rs'. The community concept was conceived ~y Edward Filene when he' had the Massachusetts law enacted in 1909. But the common bond might be governn~e~t~l, municipal, might be industrial or it might be frater- n~d or it ~ 1~ a national background. AU~Q~ these types of credit unions with its membership having a comnmtin. l~ondgaithere~j together to assist each other and `to make their ftthds `kvailable to each~ther in thn~ of need. W~ like to. think of credit uàibijs' as being a Service Or- ~anization.. It iS~nore than a; thr~ft in s~vings type o~ organization~ It is the type of organization where we attempt to service~our members, and in attempting to service our members we felt that there has been an obligation upon us to educate them-to eththate them in connection with consumer credit, to educate them with, the problems `that arise daily. So in counection with this we would have schools, we have had educational programs in our various legislatio~q-CUNA International has submitted a ni±tnber of pamphlets and s~o~ne of them r think we wp~ld like, to snbniit~for the atte,~tion `~f the cqi~nii~tee and ~tlIis has been for the purpose ~f making our. membership aware of the needs bf bIrem~nibers~andt'h~ need ~f~checking' credit and misrepr~senta'tions, an4 repres~ntatioits ma4&~iti co~ectqon with the exteñ~ion of credit Mrs. S rLLIvAN.i~titj1öut oh Jectidil~ ~ou1~J1kb.to have tknt forthe u~e~ord, ` ` ` ;` ` ` (The material referred to follows ) [Consumer Pacts~-a s~rytee of ~yo~r~ c~edt1~ ~ioz~j ,~ , 1~UNAO±NG YOuR 1PAMXLY'~ Ci~nbir Br Ltwilè Kel,ehut E~enslon Spee1~1'ist in ~ta~agemen~, Michigan State tTniversity `~ ~ `. ` ` "~ ~,, Rutb~ 1~~ori sig~m,~ as ~1~e L *s~oye~ the `Jiili~ for `time ai'onth ftnd trie~ `to think how they'll stretch the paycheck that Jim will bring home tonight. Groceries will take $125. Then there's `the house payment, light bill, payment on the new washer~ payment on the car, shoes for Johnnie, and the telephone bill., 83-340-67-pt. 1-31 PAGENO="0482" 472 bNSUMER CREDIT PROTECTION ACT Already it adds up to almost as much as the check will be. And there's that bill for the things she charged at Jones'. A birthday gift to buy for Susan next week. Allowances for the children. And Jim really needs his new suit before that important trip at the end of the month. They've been plan- ning to get it from month to month but there never seems to be enough cash to go around. Ruth decides she'll talk with Jim about gettth~ th~ suit on an installment plan. They never have bought clot1ies~ "on 4~ime," hut site sees no otter way to get the suit by the time he ~ieeds it. 4iid soit goea-a~nother "easy" payment! MO1t~ imBT: dOOD OR BAD? Many other fam*ies are in the same boat a~ the Mason's--ush4g more and.thor~é credit to buy the things `they want. some folks say this is a bad situatiom Others say It's good-that wide use of credit is one of the things that helps to give us such a high st~dal'l of livipg in Arnerk~a. ` Good or bad, certainly many families and individuals do ~sè~credi~t in'or~er to enjoy today-~-rather than wat~iflg until they can dave tfie p~rchase i~ried-4u~1i * thing~ as automobileo, rehi~ei~iitors, aUtomatic washers, eddeatl4n Iu&d ~ven vacation trips. Ot~ier5 use credit in the form of a charge account ~im:ply as a convenience. StilL others borrow money to ~e~t ~merganeies, such a~ illness or being out of ~ork~ And some folks say that buying çquipment and 4i~nisbings for the borne on t~ie installment plan is a way of ~avlngL~~~that they ~Wouldn't be ebie to save the pi~rehaSe price of such items w{thcdlt a contract th m~l~ thera d~ 1t Mol'eover, ~orne~will say; even though it costaflioreto buy ¶`o&tirne," it's worth the ~e~tra cost to have certain eonvenie4ces ~tnd comforts ~vhile th~ fam1JE ts growi~Ig, rather titan to wait until savings ca~i be accumUlated. * * iv's Y0TJ MA?tA~55 CBRDIP ThAT COUN~\S Whatever your reason~, using credit in ~self tsp~t ne~essar~lygood~ ci bade It'~ the way you use it that thea~ eLth~r benefits or problems fbr~ ~o1~i. You h&v~ *to sur+zaUe er~fl& If ~jout4~3~t tMw~4ts `rôtl~ a~ ~~14th~P ~ ~ ~ ` ~. H ~i~ay n~t. *Ve titoag~t lof ~it iii s~ay, i~u1~ ~ c~n~dq~c~ Qtiters ~iave in ~ witi~1i. ~ak~es it possible for you to borrpw rnor~ey or to buy~n time-44s indeed a valua ie~erton~ti asset. * * The pth~pOse ~cvf ~b1s leaflet .~~~~J$ring together sOmO ideas which mbe*lMrfuil to y~u*InUs1flg rceilt to ~ ~ * * * * ** ` ~`~*~`I~ ** * * * ~W TQURSEL~~' vrntsn QUJ~$~hO~S * * I. ~heUI~use ~z~edit for tli4s p4~roha5e1 ` ` .~i ~ * lb order to answer this question for y'our~elf, there are many: others to~ thiin}k about: * ** * * How ~ilZ the pEpyments fit into ijour fa~iZy's reyuZar spendin9? i~ç y~pu. haven't been in the habit ~f budgeting (planning èxpéflsës before ~rôu .~pend), boW is~t~e time to start-before you take onlnstallfflent payments. Will you have tO gowith~ out necessities or~ other items that are more important to your family than this purchase? No on~ else can give *youthean5W0r Sometimes it~s learned the *hard way, by living wi4li jnstallmentpaytfl~nt5 tbat are too big for your income. S1ttl~g down together a~ a famlly~~nd figuring all (yo~1r living expenses ahead of time ~ ~dè*l~óf2E'éttl trouble. * How much wifl credit cost? What'stbe difterence between the cash price and the price you'll pay if you buy "on time"? I~ it worth the cost to y~u to be able to make the purchase now on credit, and pay later? Or would it be better to use savings? Or to wait Until you can save eUough to pay cash? WiU whatever you are plann4nfj to buij outiast the time you'ZZ be making pay- ments? Give long service? (It':S no fun to pay for "dead horses"!) Is this sometll4nfl that you wifl w~rntas maeir wheai ~oy~qre making the pay. ments as you do ~ow? * * * * * Will it mean ?~ietter fa4niljj livingt (Save time? * Save energy? Give satisfac- flon to the faIfall~? prote~t1bea1th? Make it~a~nIbI~ tO iricrea~O lneothe~?) PAGENO="0483" COWStJM~R OIIEDIT PROTECT1o~ ACT 473 Is your income certain for the lengik, of time that payments ~i11 run? And do you have enough life i~nsurapce protectian to cover the debt? 2. How do I shop for the best credit "buy"? Main sources of consumer credit are: Credit Unions Small Loan Colnpanies Personal Loan DepartiheMof Bai~ks Sales Finance Companies Retail Sales Establishments The charges from these different sources vary a great deal. Take time to in~ vestigate. Find out what kind of serviee~ you can expect, what the cost and repay- ment terms will be. Do this before you decide where to use your credit. Find out the doZier cost You probably compare prices on shoes, dresses, coats, housewayes. Why not on the cost of credit? There is no reason why you should feel embarrassed about asking f6r this information any more than you would hesitate to ask the price of merchandise you might be looking at in a store. Credit costs vary widely among different lenders and among stores that sell "on the installment plan." In fact, costs may differ considerably among the vari- ous "plans" available from a single store. It will pay to take time to get the facts. Often~the dbwp payment and monthly (for weekly) payments are the only. figures stat&l. You ~ t~çm~kn~w wore., Add up the total anlouht that yOu will ~ay `dn the joan (b±, ci~iTh~ püi~c1wse). Then subtract the amount of money you will receive from the lender (orthe cash purchase price of goods you buy in a store). ~`h~ difference is t~e q~oliar c0~ç of credit. It isn't always easy to get a statement of the dollar cost of cr~dit, but you can figure it out for yourself (at least roughly) if you lao*:' ~m) the rate of interest (an~J whether atated on an annual or monthly basis. One per cent per iapnth eq~,ials an annual rate of 12%.); b) the length of t4m~ fo~rep~y; c) and whether charges op~4~taflpwnt credi~~~,are fl'~ri~d~ 9~'pnpa44 bal- a'iice or on the original pr4~c4p'ql (as z~i~'a4~1 on" `disep~" t~m's)~ Look at aUthrea of the aboye in idgiug ~redtt termsoffered t~ yom~ For example, take a $500 ~ap or eredit purchase `to be repaid in one gear on a monthly installment plan. If the rate~ charged aye: 1% per month on unpaid balance, the dollar cost will he about $82.00; 0% annual interest on unpaid balance, the dollar cost will be aboat $i6~OO; 0% annual interest, "add-on,~' the dollar Oost will be about $80~00/ If the payments Were to be spread over 18' months, each payment wonid~ be smaller, but the total dollar coSt wQuld of coarse be higher, ~For~e~ampie,' at the flrst4isted rate (1% per' month on' unpaid bal4nce) lbe cost waald be a,bout ~47.00. (Compare to $32.00 for ~t2 months.) ` ` ` In order to compare costs, you need to get the fact~ With Inspect to terms offered to you in any given situation, and somet1mes'you:lrn~ve to,di'gfor the facts. Fin4orut th'tr "i rue" intere$t rate ` It is to your ~d~antage `~tó know the "true" annual rate of interest as well as the dollar cos~ of using credit. When you know the cost andtermhs, you can use this simple formala to cothpute the true `annual interest rate for a particular loan: 2~mD In this formula. r=annual rate of interest. m = number of paymn~ent~pertods in 1 year (12 if yo~ repay monthly, regard- less of the nambez~ ~f mouths toUr contract ~ up to rwi). D = total charge (doll~óoet). ` " , P = principal o1~âuh ~dv~nee (purchase p!1~e, `o~ cash you receive in the case of a loan). ` n = number of payments your contract actually calls for. PAGENO="0484" ~74 ~5àkstiMilR ~tEDrr b~Et~TIO~ A~öT fngenerttl, credi~ charges ma~ be stat~U thre~c1itf~rent ways: a) Interest chartied as ti discou~tt-d~dTh~ted 1~ro~m the' ê amount of' your note. (E~am.p1e: if you bortOw $lOtJ at 6\pe~cent discoant; you re~eive $94 and the note is for $100). b) As a finance charge added to the purchase price. The ~j~awge~i~ included with the prln~ipal in the amount of your cont et met~iu~es called "add- on." (Example: in the case of ~ ~s1~l~i ~r~iits~ o~[g~inal' unpaid~ balance is $100, plus 10% charge; contract ~. ~1~ç~' ~$jI~0~) c) As interest on the unpaid principaZ b~nqe~. ~ i~tt~st~ i~ included In the totaL amount you will repay and makes ~up par1~ of your monthly pay- meflt~. Each i~ionth the interest J~oeóme~ a smal)~er part of the payi~ep~t~ nncl~ the pr~iclpal paynient becoxties~~'lar~êr, ` Find out about service As you shop forlcredit consider other f~tctors beside cost. What service will you get? Are j~ayrnent arrangements convenient? `Are the paynlents spread' over a' long enough time ~o that you can ban41e them along with your Other expen~es?~ At the same t1rn~, are you pa3~tng ofl~ the loan. ~ quickly `as ponlible to saveS financing casts? Will you receive pleasant, courteous tr~atU~nt and privacy in doing bnsiness with the lender or the store? Will there be a pe4alty if y*u miss a payment?~Does `the contract allow repossession of goods?. Wage assignments? Dç~s the lender or' store have a good ~ep~tation for doi~g business In a soun~1 and 1~âIr way? SeIeel the cred plah `best suitOd 1~o your ueeds-reguiar 30-day charge account, 90-dat acconut, vip~ acc~nint, lnstallU~ent account, single p~yment ~oan~ `g3r mnstallmei~t loafri. (There are' variations, but these `a~ve the main choices $u'lli hate.) ` ` `~Vliat' dOe~ the ~tie ~i,int say~ ~ sure you knew before you sign the contrtict,~ because when ~ sign, you agree to all the `te~ns stated. 3. How is my "credit rating"? ~ou Often hear It said that it Is an' advantage to establish credit~but `perhapa n'ot as much is said about keeping tour eredit good. 0ri~e' you e~tablish credit, you are watched-not only your record of payments, but any ~`eports about your itc'tivltles ~from newSpaper~ and otli4t' `~onlrcOs~ Your credit rating' folloWs you~ all over the c&ffiltry tb~eOngIi tb~e N'atloflal Credit `E~chai~ge. This pan~iphlet~ is ~~iO of a s~rIOs on various C~nau~r9~Op1cs distributed b~ the ~red1t union for pout `benefit.' Yt~nr etedlt'unibn 1~ ~the best plal~e to Sitte auid' bor~ row money, and the best place' to get lmpartla~l tt'dvicet IE'lease let us kn~oW boW' we can serve ion best. ` Mr. .STQNE. ~ow, our Fede~ftl ci'edii~unions 1e~id money in terms of 1 percent~per i~onth and for many years we httve talked a'1i~out 1 per- ~ent per tho~tl~'ofl `the nnpa4.d baitrnce. An& ~ re~ali~e. that We are going to `haire'to change this type of .ath~ei~t~i~g á~4 t1~e~J~yp~' of pamphlets we W~l1 be putting out,;but we feel ~t is importan~t for the best interest' of our membership that we do this, th1at we place it on an annual basis, and we are ready and we have be~n fr9m~tbe time this concept was first presented to the Coti~ess. We ar~ ready to~ change, assume whatever sacrifit~e~ a~d &1igatiQ~istha~t tJjs~ill~ntti4l, ~to do whateve~r is ne~~essary to report. ~n th~ i~asis o~ an `annual per- .centage basis. ` ` ` ` ` ` Mrs. SULLIVAN. You are nQt afraid to tell them that 1 percent a month will be 12 percent a year ~ Mr. STONE. That's right. Mrs. DWYER, On page 4 you say: ` In supporting this bill we als~ xtdmlI~ that,' gedqrai1y~ spo~king, niost cl'edit unions quote an' inte~est rate on a ~in~iithly ~~rc~ptg~l ~ flistorically, we believe that thus practice originated w~thi the ~xecp é~id~Ll~I0n~ of the Russell Sage `Fottm~ia~flO1i. We 1ia~e not changett to `an animal l~ath ~c~the ~f the con- fusion which exIstS ~ tM mind of ~tl~credit ns~r ~ ~e~t' or con- sumer credit. TIlere' bdi~C been oeàa~4iOfl~ ~s*hen' ~~r~edlt thiioii~ hate `s*itehM to PAGENO="0485" CO~SUMEB, U~DIT pRoTEcmnpN AOT~ 474 ~an annuaJ interest rate but bad to go back to the monthly rate because it proved to be too dfflleiilt t ex~lai~n to the members the dfff~renee betweeit the annual rate charged by the credit union and the discount or add-on rate used b~ other lenders.. That isanunusuki `statenient'to make and then say yówsupport the Mr. S~oNE. We think th~t for One creditor to talk about monthly rates and another creditor to talk about annual t~tes, and te talk about expenses in connection and incidental to the extension of credit is confusing. And this is the thing about which we have been trying to educate our members. Mrs. DwYER. And if this bill passes, is it going to take a lot of education? Mr. STONIt. I don't think so. We have had in Massachusetts, when the truth in' lending went into effect on January 1, 1967, and in my own credit union, I can't see that it is going to taith much education. I think it would take a little' time. I think people are not used to this concept. I think that we have simple charts which are simple for Our staff to understand and communicate, and I think that it is just- going to be just as easy to understand after it is once explained that there will be a percentage rate which will be expressed in terms of sim- ple annual interest as it is in terms of monthly rates. Mrs. DWYER. And the 12 ,percent will not scare them? Mr. SToNE. I don't thin1~ !it will scare our members because I think ~óur members are going to be interested in what they have had to pay. I think-~and even if it did, it would seem to me that if everybody `were charging a rate that people could understand, whether ~it was expressed in terms of 12 percent or 15 percent or 18 percent or some- thing like that, where they could compare it, then it would seem to me that they would have something they could compare. Mrs. IDWYER. Thank you, Madam Chairman. Mrs. SULLIVAN. You may proceed. Mr. STONE. In addition to the truth-dI'i-lending bill we realize that this bill includes some changes. ~?or example, `with reference to first mortgages, I would think that first mortgages ought not to be treated any different than any other type of extension of credit. ~In the Mas~ sachusetts law they don't treat it differently than any other extension of credit. With reference to the matter of the revolving charge annual rate, I think that most people don't understand that what is involved is a matter of extension of credit, If I am buying something I have to pay *an interest charge on that, I'ought'tó know how much it is costing me and in Massachusetts, in our law, we include not only closed end trans~ actions, `open end transactions, and when we couldn't make our mind up whether, it was closed end or open end, we said ai~y transaction, whether it be closed end ir; open end, for the purpose of making it a comprehensive law, and I think that if we are thinking in terms of something like this, that is going to help the consnmer, we ought to think àf this with reference to' th~ revolving charge annual rate as well ~s in connection with the exteii~ion of credit as we understand it. My statement doesn't refer to the $10 exemption, but I personally don't see why there should be any such exemption. The people who are PAGENO="0486" 476 CONSUMER CREDIT PROTEcTION ACT affected by the $10 are the poorer people who need this kind of as- sistance most. I realize that this imposes a penalty and perhaps a lot of work on the part of the lender. But in the nature of hjs businesahe ought to be doing this ~n my credit unions we make loans of $50 and $100 which require jtist as much time and effort as a loan of $2,000 or real estate loans of $20,000. But the member is entitled to that kind of service and periliaps if he needs $100 or $200 he is entitled to the serviCC much quicker than the man who needs a $10 or $20 loan. Mrs. SULLIVAN. I might say that it has been an argument of almost everyone who i~s1sts upon having this $10 credit charge exempt, that it costs just as much to make a $5 loan or $50 loan as it does a $5,000 loan. But, as you point out, it is the man who has to borrow a small amount who really is most often victimized by excessive charges. Mr. STONE. That's right. Mr. BINGHA~L Madam Chairman, could I ask a question at this point? Mrs. StrLLIvA~. Yes. Mr. BINouA~x. I would like to ask Mr. Stone whether the credit unions typically make a minimum charge on a small loan for a short period? For example, a $100 loan for 3 months. Do you have a mini- mum charge? Mr. STONE. No. of course, traditionally, the Massachusetts State- chartered credit unions, we loan $100, charge him $6, and give him $94~ and ask him to repay this at $2 a week over a 50 week period This was the traditional type of loan. Mr. BINGHA~. You do ~not have short-term loans? Mr. STONE. Very rarely. When we do make a loan for 6 months or so and we l~ave to charge an interest rate, it is on the basis of the charge that has to be made and with no minimum. Mr. BINOHAM. Thank you. Mr. STONE. 1 might add that with reference to the Federal credit urnons, since they are charging 1 percent on the unpaid balance it really wouldn't make much difference whether it was for 1 month, 2 months, or 3 months. There would be no minimum if a man borrowed a certain amount of money and paid it at the end of 1 month-he would repay that on the unpaid balance. Now, with ireference to the garnishments~ the national usury, with reference to the national usury, we are committed, our credit unions, to a 1 percei~t a month or 12 percent maximum. So that this is traditionally the maximitm in the Federal Credit Union law and I think you will find that most of our State-chartered credit unions operate under very similar maximums. So we are not affected by this provision with reference to an 18 percent national usury limit, and I would just be expressing a personal opinion in which I am sure you are not interested. With reference to garnishment and one or two of these other things, I think that this is a matter that this Commission that this bill in- cludes might well study. I would like to say with reference to this, that we are very much in favor of this Commission on Consumer Finance. Mrs. SuLri~AN. Before we leave this subject, may I ask this ques- tion-and I ask it because I have a number of credit unions in my PAGENO="0487" CONSUMER CREDIT PROTECTION ACT 477 city which have raised the issue. These are credit unions of some of the large unions They are terribly concerned about the frequency of personal bankruptcies, particularly with eome of their members who are rather mobile. They will borrow to the hilt what they are allowed to borrow, and then, before they~ leave town they ta~ke bank- ruptcy. They then go to another State and start the same thing over. I thought bankruptcy was strictly a Federal matter but apparently bankruptcy in one State evidently does not always follow to another. I have correspondence with the chairman of the Judiciary Committee on the question of bankruptcies, and whether or not legislation is needed to handle that kind of problem. It is a sore spot. It has not been cured. Even though they feel that they know the people to whom they make these loans, because of the fact that they move from State to State, the credit unions have trouble in collecting what is owed. I wondered if that was your experi- ence in your part of the country. Mr. STONE. I think that some of the reports which I receive from the men with whom I talk is that they are concerned because some of the petitions in bankruptcy indicate that some of these petitioners have made loans from a number of finance companies and also from one or two credit unions. Now, the difficulty from the credit union viewpoint is that in most instances the credit unions' dealings with its members is confidential, it cannot be communicated to anybody else, so we don't have the means of communicating this credit information from one credit union to another. Of course, in many instances it is not necessary because of the com- mon bond. But obviously a man could belong to a certain fraternal order and be a post office employee and belong to two credit unions and borrow from both of them. And we have had a number of cases where this has been disturbing, but we feel that both this and the matter of garnishment ought to be further studied and researched and we have asked many of our people to do this and perhaps the next time I have an opportunity to talk to you, Madam Chairman, we will be in a position to give you better information concerning our statistics on this matter. Mrs. SULLIVAN. I would like to have anything you have, even if it is not for. the record-4nform~tion which might be useful for me in dis- cussing the problem with my people in St. Louis. Thank you. Mr. STONE. I would just like to add with reference to standby con- sumer credit controls, that we are on record as opposed to this. We have been opposed to it. We are familiar with the consumer credit controls. Some of us are familiar with regulation W. I was treasurer of the credit union when W went into effect in the early thirties. I was treasurer during the Korean conflict and I have some familiarity with the consumer credit controls. But the movement as a whole has been opposed to the consumer credit controls and they have asked me to record that for the record. Thank you very much. It has been a privilege and pleasure to have had this opportunity to appear before the committee. PAGENO="0488" ~ONSVME~ CREDIT PROTECTION ACT 1. Mrs. SULLIVA~. Thank you, and it has been most. enl~g1~ite~ing to hear from all tl~c~e of you Mr Stone, we will ph~c~e you~r eñtite state ment in the reec*'d at this pohit (The cQmplet~ statement of Mr Stone follpws ) STAraMaNT OE OUNA I1~T1~IIU~ATIONAL, i~o., cii~ ~ivixn.s STO~aI OIi~MA~, LE~iAL n~LEeist~&~iva c~LI~TEE Mr. Chairman, ~nembers ottho Com~nittee, m~ name i~ J~1mus~bone.~!J~ am chair- ~n1an Of the Legal hnd Legislative Committee of CUNA International, Inc., nnd .1 am a Dipector wici. Past President &f CTJNA. ~UNA Jnteynaiional, inc.~ is ~a r~oa-pr9lit association of credit union, leagues. I~itb4s country, ~bere aie 48 state credit union lea~ues which represe~ approximadely ~2,~0O éredit dniOn~ and which comprise approximately 18,niilli'on member~ .~ I am appear. befere ~`Ou `toda~'totestif~ in suu~port of ILR. i1~iOi~ the. Con- surner Credit Puro1~ection Act. " . As you know, `~edit ur4on~ a~p UQ pvofI~ mptual me ~~slUp ~orga~ujzatjons chartered ~ór `the, purpose of pçamoting ±brjft and providin~~~,vident e~nd pro- ductive loans They are chartered by eithè1~th l~ede1~al go~dnthent o~ b~r one of the state governments, and they are supervise,d and examined bya state or Fed- eral agency. They are exempt from Federal income ta~es Credit unions do not 4eal with the general public, They must have a common bond of mernber~hip ~and they can only deal with members~ Flach member ~f the credit uni'oh has one vote ~rliich be is free to exe~ci~e for the election of o~1cers ~and fd± many `other purposes. In order~ tOL becôtee a li~ein- her, an individual must pay a 25 cent admission fee and lie ~rnis't agree t~ ~ub- `scribe to one 5 dbiiar share. These facts are stated as a means of indicating the ~uniç~ue structure `of a credit union as compared to ether lenders. We in the ere~tit union movement like to believe that credit unions exist for one purpose-that purpos~ is to serve the members. Traditionally, we have fill- filled a substantial need for those who have' been unable to obtain credit. We like to believe that we have been responsible for proving to `other lenders tl~,at the "average man", whether he is a factory worker, an enlisted man in the military, a teacher, a civil servant, or a welfare recipient, has the capacity and the char- acter to repay bla loans if lie is dealt with fairly and counseled wisely. To `this end, ~ like to think of ourselves as `more than just a savings and lending `institutiç~. We believe that we are `also an educational. institution and a considerable amqunt of `our time is devoted to educating our members. We justify this und~rt~king on the theory that our `members `save `money not only by `depositing a `spehifie amount in the credit union each `thtLnth, `but, equally limper- taut, by becomin~..knowledgdable `buyers and `by~having adequate information with which to make `deelsions in the market pl4ce. ThIs consumer orientation is re- flected in many of the publications which are pro~luced by `CUNA International and by the various state credit union leagues. We publish a s~ries of'pa'mphlets known a's Consumer Facts which attempt to give the facts to our members so that they will bO able to get more for their mofley. These pamphlet's cover every- thing from "How to Save On Meat Purchases" to `the "Vete'rnn"s Be~iefl'ts Airall- able Under the C'old War GI Bill", Moreover, we publish a consumer's magazine known as Everybody's ~oney which has a cird~lat1on in excess of 1,500,000. This magazine is sent only to' credit union menibers ~nd1ts specific purpose is to provide theth with facts sO that they will `be'able to ~et more for their money. In ilddition, ~ve carry `on all kth4s of edueatie,nal pro~rarn~ for credit union volunteers and profcssione,ls. Among the juore importanl~ of these programs is our family financial counseling eouse which, in many~cases, is available to credit union `officials and members through a correspondencbcourse. . I We point all +f this out s'o that you will undpmtand puir position `on HR. 11601. We believe that H.R. 1h60L contains many prnvisions which ~re neces~ary~or the consumer credit user to know the fact~ which will allow him `to get more for his money. We `al'sc~ believe that ~R. 11&l1 introduced many new provisions ~hieh must `be examined more thoroughly before being acted upon. We have taken a favorable position on the Trutb-in-Len~Ii'ng bill ever `since it wa's first introduced by Senator Douglas, and we have wholeheartedly supported it. We continue to do so, even though we realize that the approximate annual interest rate disclosure PAGENO="0489" co~4~sT:~tER ~TU~DtT ~ ~OT1~CTTON * AC~ 479 may j~nit us at a ~di~advah1~age ~ince~Ther~ a~e some 1ender~ ~bat ha~~e a lqwer rate than Is a1s~ai1ab1é~f?óm m~iny~ credit ufliOns. We~t1i~nk this i~ good. If an indiv~ua1 can get a bètfer rate ~1sewhere ~ter comparing afl the facts, we think~he should go elsewhere. As a matter of ~aet, ~o~t~e survOys we ha~ee taken indicate that many members do just that. Phi~ has led some credit upf on people to believe that Ou~ educational endeavOr~ th~$ be just a little bit too: good.~ In exj~resslr1g our s~1ppo~rt Of this bill, we do `it with the re4llzation that credit unions Will ~be' able to' con~ply With~Oht ~mneh ~ditfIcu~ty. We~ht~ve sUbstantiated this 1n*previon~ hearings and we c'onthme to hold thi~ VieW. In Supporting this bill we áls~ admit that, goIieF~ally speaking,. ~no~t credit UMons quote an ibterest rate on a monthly pe~cent~e,baMs. Iflstb~icaiiy, We believe that this practice originated With the roeoj*thendations of the Russell Sage 1~omMation. We have i~ot changed to an annual rate becàiiso' of the eon- ft~sion which `exiSts In the mind `of the credit user coh~rni~ tb~ co~t of consumer credit. There haVO been oocasioiis whéñ ci~edjt'bniOns have `a~yitched to an apnuaj lntef-est rate `but ha~ to' go back `to the tho'nthly rate because it proved to be too' difficult to explain tO the methbers .tJ~e ~1iffe~renee `bOtwèen tli~ annual n-ate ch~nrged b~'the èredit unfon~ and the discount or add-on rOte used by Other lenders. Regard- leSs of these e~j~r1enôes; w~ remain convinced tha't If `all lenders o~i4 en-editors are reQuired to~ `diSclOse the intOA~est rate on a unifOrm basis, then the cQnsunier will be in a position to' make a knowledgeab1e,comparj~on. We want to make it quite'eleaf~ That Wh11e~ We luIve'aclhered to a ino~hry rate,. *~ have `made no' attemp~t tO'hidO' ~t1~e anneal percentage rate. M'a'ay Of onr pub-' li~at4crn~s clearly dtsclose'th~è áttiI~aJ~ rate. In educating our members, we coustantly ~i~e the `anknind `rate since `we haVe found' flriin e~eI4Once that it is the Qn& ade-' cluate meansof ~comparisou. Tht~ov'eF Silkiice tiu~ l~e~Ortthent'bf DOfèñ'Se hat `I~sUOd its thrOctiVe~ (`DOD DirOctl've 18 4T)'rO~lulrinè cO~-b*~te larrt,levs to disc'lo~e an `ap- pro~iaiate anna~ai perceutttge"rate, WO°haVé'k~oth~hiOd and~we `have no evi4ence' that this compliance has, adversely affecte4 credit union serv~ce. We must' a4mit. however, that in co~nnj~l~ing with'thc `~irect1ve We ~,eemed it necessafy to ihcl~u~e a ttatethent to the' effeCt that "a 1~pel~cent annual irate mO~n~ that ~ou wili:pay' approximately $6~5~ per y~ar `~ér~$1Od balance owed." This' proved neeessar~ for reasons indIcateff'pre*iOutly. ` `k~ , ~k' ~` We recogulSe `that' the growth Of conSumer credit `has been a Juig faM~or i~, the ~x~pa!riSIvc gVowth Of'~the Gross' NatiOnal product (~GNP) from which eve±y ~Oo'n-' smuer and busiues~s hi Atherick benefit~. OUr, credit amid the Anfreriqan eConidhiy h'a~e groWn tO~ether. WO ~Qiat this out be&n~se w4e believe that `th~e con Credit industry is ,stlllin ,~tt 1tif~ncy.~We behjOyO thgt au n~i'a1~rsis ot~ the pr~sent~ age di~tribUtion ~` the `~4~ul~t~h ~Of the TJ'miited States l'adi'CdtOs that coñsb,n~e~ ~edit `wIll hO grO4Vlmi~g Su'histantiaU~ in kthe~ peft ~5 years, Acc~rc1tng to a n~e'cOht at~Ilcle in 1Bân7~i~h~' ~f ~dth~e,k by ~98O thdtC44should be~ appi~o~imatei~ 14,8OO,Oo~ faibffies IC the 25 `to' 34 a*O gi~omip; an fncreh~ie1'of ~ otqr' 1~. In' the, same article, it is pointed out that between 19~O apd' `1~3~ ~7 ~ei~èe'nt o~ the' ~amil1es in this age gronj~ hadper~onal d4bt. 414 ` WhileW~e'ak1ng çtf the ~`5 to ~4'C~e gruu~, We rp~ilM ii6 to p1ohit out the ~t~tct that the pCople In i~iis age ~ro'u'~PlInve 0h' tfl~et~" ~uOw ~oncOpt of debt. To thOse' peo~le~ 4ebt IS actuttily beebu~h,ig a form of9'thrift. Wh&i these people borrow, they mu,si1set asIde a certai'a ~nart Ø~ Ihi,OIHucbme'tO ~a3r for propertf~they have alreak~ ,ac~uired. As' you Irnow, und~r'thO d~c~néept, `~bt *as eonSidef~ed to' be' somewhat `immoral 06 c~onsumen-s' wOuld tn~ to save `a~b~ne~ th'st and ~hCn use this money `to ~urch'asO p1k~ert~. This chdpghng c,onCept'Of'de'bt has been reeog~t1~ed~ by our Own credit umiion'managen-s amid by many Other hemicl~rs. This Is an irnp'ort~nt concept. If the con1temporar~ Consumer looks up~i1' debt a form of thrift, then 14t seems absolutely neCessary that we have available the thea~s to compare this new concept of thrift with .the traditional con~ept of thrift. In both, instances, the consumer i~ settln~ asiç~e a portion o~ hi$ income. When practicipgthrift accor4ing to ~he t clitimial concept~,be is quoted a ~imple ~nnuat rate. ~ut `~vhen practiCiflg tbi~ift a'ccOMh~g to the c9ntbmporary concept he i~ quoted a cliseouzit, atId-o~n ,or monthly `rate. A meanimi~ful comparison is' obviously dilficult. ` ` Because of the `s~Obstantial growth evpected In the consumer credit field; be- cause of the changing concept of thrift; and because of the Itck of meaningful disclosure of interest costs in the consumer credit industry, we think the time has come to provide the consumer ~credit user with the, facts necessary to make an intelligent decision. We believe it is~tlme to' destroy the 6 percent myth. The' myth serves no useful purpose in our contemporary economy. PAGENO="0490" 480 CONSUMER CREDIT PROTECTION ACT In turning to the bill itself the credit union movement contends that it is es- sential to retain the approximate annual percentage rate disclosure requirement, to retain the coverage of revolving and open-end credit, and to retain the in- clusion of all charges incident to the extension of credit. We believe the approximate annual percentage rate disclosure requirement is essential since it is the only fair means of disclosing the cost in a meaningful w-ay. The use of the cost of credit in dollars and cents does not tell the entire story since it is very difficult to make an adequate comparison only on the basis of dollars when the amounts of the downpayment or the length of the contract are varied. The use of a monthly percentage rate is substantively deceptive since it is misleading to the consumer. It is misleading because in almost every other instance the business world states the interest rate as an annual percentage rate. The annual percentage rate is used by commercial lending institutions when dealing with business firms. It is used by all government agency lenders and borrowers, including those lending directly to the consumer. The recent widespread publicity given to the prime rate being charged by commercial banks is an excellent example of the prevalence of the annual interest rate in the com- mercial world. It is not unfair to assume that the average individual reading about a 6 percent prhne rate in the newspaper jumps to the conclusion that this is necessarily so since lending institutions do not charge in excess of 6 percent on loans. In taking our stand on the annual percentage rate disclosure requirement, we realize that some confusion will result initially, We realize that adjustments in attitudes and practices will be necessary. However, as we previously indicated, we believe that the time has come to destroy the 6 percent myth and to put some facts back into the consumer lending business. Consumer credit has become too important to the econonmy to allow the perpetuation of such a meaningless fiction. We anticipate just as much confusion as do most other lenders, but we are prepared to handle it. We also believe that it is essentinl to retain revolving and open-end credit within the coverage of the bilL Credit unions have recently established means of extending open-end credit plans to their members. We believe that we will be able to adhere to the approximate annual percentage rate disclosure require- ment of the bill on these accounts. Possibly, since our system of computing in- terest rates is more simple than some other creditors, we fail to see the problems that other creditors will have. Yet, some ofthe testimony given before the Seuat~ Banking and Currency Committee Increases our confidence that there are means by which other lenders can comply. We are also of the opinion that to exclude revolving credit would be to defeat the purpose of th~ bill since It would eliminate one of the possible areas where a consumer would be able to Ixiake an intelligent comparison. We sti~ongly maintain that if the annual percentage rate disclosure requirement is to ~e maintained as a part of the bill, that it must be equally applicable to all creditors. We are also of the opinion that it is essential to Include all charges incident to the extension of credit. To do otherwise would be to destroy the yardstick of measurement. To allow a creditor to quote an interest rate and then add on extra fees would in effect increase the rate and effectively distort the disclosuv~. There are, of course, many situations in which it is difficult to determine whether a charge is incident to the extension of credit. However, we are of the opinion that such situations can be handled by the regulatory authority as they arise. The regulatory authority would be in a position to hold a public hearing and to receive briefs from interested parties. An adequate determination could then be made and the decision of the regulatory authority would ~e binding on all creditors. Federal credit unions have faced this problem without difficulty. Section 8 of the Federal Credit Union Act allows Federal credit unions to make loans "at rates of interest not exceeding 1 percentum per month on unpaid balances, inclu- sive of all charges incident to making the loan." Over the years there has been disagreement as to whether a particular charge was or was not incident to the making of the loan. After listening to arguments, the Bureau of Federal Credit Unions has made a decision and we have lived with it. Had we disagreed strongly, we could have appealed to the courts on the grounds that the decision was arbitrary and capricious. Advertising Turning our attention to specific sections of H.R. 11GO1 which were not included in time original Senate bill, we believe that section 203 which requires advertisers PAGENO="0491" CONSUMER CREDIT PROTECTION ACT 481 to make full disclosure in their advertising of loans or credit extensions, complements and strengthens the concept of full disclosure in credit trans- actions and is a logical extension of the full disclosure principle. Commodity Future Trading As to Section 207 of the bill which would grant to the Board of Governors of the Federal Reserve System the power to prescribe regulations governing the amount of credit for commodity future trading, we have no opinion to express since we do not have any expertise in this field. Emergency Control of Uon~surn~er Credit We do, however, have serious reservations aj~out section 208 which would grant to the Board of Governors of the Federal Reserve System the right to issue regulations to control consumer credit when the President determines that a national emergency exists. Our reservations with this particular section are not concerned with the exercise of powers during periods of national emergencies when such powers are necessary. Our concern is that consumer credit is being singled out for controls and that all other fornis of credit and other pertinent economic factors are exempt from controls, at least to the degree set forth in section 208. Moreover, serious questions arise as to the effectiveness of controlling consumer credit without placing comparable restrictions on wages and prices. We are of the opinion that actions such as this do not really solve the problem; although they lead many people to believe that the problem has been solved. Our experiences with Regulation Q indicate to us that the burdens placed on the borrower and on the lender greatly outweighed any benefits derived from the restrictions imposed by the Regulation. We give this opinion with the reali- zation that the average consumer is a man of intelligence who manages his financial affairs quite capably. Statistics have shown that during times of uncer- tainty the average consumer will begin repaying his loans and will decrease the extent of his borrowings. In view of this self-restraint that the consumer imposes upon himself, we see no need for the granting of such powers as are set forth in section 208. Comm4ssion on Consumer Finance We can wholeheartedly support the establishment of a Commission on Consumer Finance. According to section 204, the Commission would study and appraise the functioning and structure of the consumer finance industry, and several topics are ~et forth for the Commission to report and recommend to the Congress. We would urge the Committee to completely expand the concept of the Commission on consumer Finance and empower it to make a study of the entire consmner credit field, including credit life insurance, credit reporting, personal bank- ruptcies, wage garnishments, creditors', and debtors' rights, the availability of credit, and all other matters which the commission wotild feel would tend to give Congress a complete picture of the consumer credit field. Consumer credit is growing substantially and all indications are that it will continue to grow. It is amazing therefore how little we know about this field. While the National Commissioners on Uniform Laws have been engagedin study- ing some of the problems connected with consumer credit, we note that the mem- bers of this commission are financed by creditors and lenders, including ourselves. We would therefore tend to believe that any recommendations made by the com- missioners would be primarily for the benefit of lenders and creditors. however, it can be expected that a Commission appointed by the President with the consent of the Congress would be more free to take a broad look at the problems and to consider the rights of debtors on the same basis as they consider the rights of creditors. Other Provisions There are other provisions in this bill which we believe need further studying. The establishment of a Federal usury statute and the Prohibition of garnish- ments and cognovit notes are matters which need to be studied more extensively before appropriate action can be taken. We would strongly urge this Committee to refer these matters to the Commission on consumer Finance if such a Commission is established. Con Cl4lSion In conclusion, ChINA International continues to support full disclosure ~y all creditors and lenders, we oppose standby controls on consumer credit. and we support the creation of a Oommission on Coonsumer Finance with powers broad enough to consider other matters contained in this bill. PAGENO="0492" 482 CO~StMER CI~EDIT OT~C~ION ACT AN ACTUAL CREDIT IJNi~ôN MEM~ER~ACCOUJ'1T ~0M A WASHINGT0~D.~., CR~DI1~UNIOW, 10N AN AUT0-~ SECURED;LQAN AT ~ O~ 1~P~ERC~NT ~R ~IIONTI-I, ONA bAILY BA~S~S' .... *_. ....,.......~.. .....~ ~ :... ~ .. ~ Date Number of Interest Loin ~Bäla~te Shares days paytuent 1~63-May28 ~$2 000 00 -~ 44 ~$`14.68 ~ $50~88 ~ 1;949.l2 Aug.13 33 t j0~7~ 69:2i8. 1,879,84~ Sept. 23 31 12.84 57.16 1,822.68 Oct. 15 22 6.68 5L87 ~,Z63~S1 Nov.14 30 8.82 6618 1 697.63 D~c~ 13~. - - - 29 8. 20 89.43 1, 608~. 20 - 1964-Jan. 15~, J 33 8.84 59,86 1~ M8~ 84 ~ Feb. 17 - 8. 52 56,48 1, 49Z.~36~ -- Mar. 13 28 6. 21 88.79 1 43357~ ~ - -- - - Apr.18 33 7.88 5~.12 1,376.45k ~VIay ~ ~ 30 6.80 ~ 58.12 4,818 37 ~ I 41 ~ ~ ~`Adg~3L~L- ~ 42 ~t44 ~446r56 O1~,t48.58 4JlZc~ 6~k98 c~ 3~08Z.6Q * - S. * 377: %~r27t1r 9t7~c68~ ~ 34 ~ 5,~1~c th~.t8$; 857.80 ~-.A--~--.-- I ~ ~ ~ ~ ~ ~ ~ :::::::::::~ ~ A~ft ~ 16~~ ii 96 63L04 ~ 672 71 Apr. 38.-4~~~4--~--.- ;$6 . ;i3~9F ~8i09c~, h.~ 61Ot:6~. To~I `~ ~ ~IM ~ ji~i ~ii z~ -~ ~ 3 `$2,000 equals ~ &t3~3jot 1 4~eraeqt~percmOflth on,th~tcuipaidbaJancec Ave~rage month~y baI~r~ 2 years ~qua~S J~j 29913 ~ Average monthly intere~t paid over 2.year period equals $6.60=~-~-~ - c~ ~ 660 c~5~scc1 ~cc~1 ~ ~ e~u8l!6.080 ~ c cc~ c 73 was b~rrpe~ed and..retaineA byth~ bj~rrower on a note at 6 pOroent fo~ 2 ~eicra the~n~e~eat pplçl woplrt be M9ACTUAL&MEMBER0S ACCOUNT IYF AW GTO111).G~, 0REDI0tcW4~ON~O11 A 8lo1ftPIT~iRE LôAN~AEU F~ERCENT ~ A ~MON~I~H ON ~HE4JN~AID'BAANe3ION:IDAiL~?BAS1ScS `,c c 4 *~cc_4~ 5 ~.~1SS 4 * ~,, ~~I~I4 J1~ -c~ct- ~ c Date ~,ffiterest * ~rã~çip~~ * Bal~nçe * Days ~ .~ poI~ar ~.~c-.c1.c~c-~--4 ~c5~ OiiOG Aug.12 i~i.JJJ3~U. ~L'JJkti-~cJ i' $15O~0Q S $c~cr3 27 :c S~pt.8 c~ ~ ~ 1141350 ,cc 1533:cc~~S 00 ::::::!:!~~r?:~ 1 ~ ~ c ~ -c OctL2BUL_. ~ .i4~ `1 $O9c.3G~:1 fl2t97 ccc 17 c 3 1pS~ft 49 .556: ~ 9.44-c~c~;~- 1Q3.53 14 1,44942 Nov.23 ~.. ~1... * .52 9.48 04.05 15 `1 41075 l3ec 8 41 9 53 84 5~ 18 ` 51261 80 DdC. 23 :j': L_Ji -- - .133 ~: ~ 9. 27 c 75. 25 16 1,204 00 ~ .*~ S 155..27c * 54.98 14 c ~Q9 ~ J40.22 ~ .32' 9.63 55.30 * 17 940. 10 Feb.8 .281~)i4~ 9.72~ ~ * 45:5G 15 693.70 Feb. 23 - ~: - - . 23 9: 77 * 35. 85 13 -465. 53 Mar. 8 4 ~.., * * . 18 - 9.82 25. 9~ * 15, . 359. 85- Mar. 23 . 13 9. 87 - -` iS. 12 16 2537.92 Apr. 8. .08 9.92 6.20 15 98.00' Apr.23 .03 6.20 0.00 - Total -~ -155.~80 ~ ~254 i Figure roMrided to ~nc5ude 2Q.cênt intn.rest refund. S * NOTES (20 968,18) Average daily balance equals ~(254) =`$82.55. - Average daily service Sharge equals ~~-~=0.2374. - 5 5 Annual interest rate ohargect equals k~4S~)365)=1049PerC9flt (annual ratec)a (11.976 percent (without interest rSftind)) S - 5 5 5 This gives consideration to a 12~4 perce4t pa nage3refur~d~ returned to htembercatyearend. If there had not been a refund the annual interest rate Would have been 11.976 (at 1 percent a month on the unpaid balance charged). PAGENO="0493" CONSUMER C~~IT PROTEcTION A~T 483 Mrs. SULLIVAN. Let me asj~ this questioi~ ~for Mr. Hanna, who had tQ leave, I hcpe that I can cover it as he wanted. He says, "We must be concerned about truth in borroiving as well ~ag about truth in lending,~' and the question is this: "Woul~d your organization's member credit unions be willing to make available to other legitimate grOups, such as credit bureaus, an~ so forth, the information they have on the credit records ô~ their members when this would be useful in preventing excessive use oJ~ c~e~jt?" Mm~. STo~ti~. Sfleaking for the credit union~ I would say that flQW We are restridted from doing this because o1~ the~ law which requi1~es our dealings tQ be of a confidentiaj nature. But if we were released from that limitation I don't see whywe wouldn't be ready to do this. Mrs. SULLIVAN. What law do you refer to-a law dealing just with credit unions? A IFederal law, State law, or what? * Mr. STONE. In Massachusetts I know that the transactions of a ~member of a !crçdit union~-4ike ~the transactions of a member-1~hat a d~positor in a bank has is of ado~fldential nature and cannot be corn- mijnicated to others. Mrs. SULLIVAN. The suggestion has to do not with the balance in the credit union member's aecount~ but his credit record. * Mr. STONE. I think if we had a right t~ do it, we would be delighted *to exchange credit infOrmation. Mrs. SULLIVAN. It goes back to my hope, that I have expressed many times in the past 15 years, of finding some way to have a central uredit reporting system where everyone wh~ uses credit is recorded on the record, just as our income tax records or our records under social security are recorded, sO that when a person reaches a certain level cf ~bedit utilization, ~r a ôe~tajn apiount, basej on his income, that he get~iio more credit until he is able to pay back enough of what he owes so th~tt he again cohie's within a reasonaI~Ie Iev~l of credit. They tell me I an~ wrong, but 1 will bet you it will ilot be too many years before sqmething lij~e. this *ill happen, I, know we have many çre~1it bureaus and ~omc information is usually available. But we have found ou~ in the past few years, during the years we have been privately going into this, tii~at the full credit information oftcn i~ just not used, even when it is available *in the areas where the credit is being sought. Often, no reliable information is available. If private enter~rise does not get into this, the Government may havp to, or maybe sl~ou1d ~o it. It lias been one of my pet i4eas for ye~rs that we ought tO hare ~ cent~alcredit bureau where* everybody is iistëLd~ jims't as thO~ a~ as wage ea~rners un~.er the ~ocial security ~rcgram. * I think it could b~ done; ahd if it is done On a iai~ge enough scale it would ndt be t~ô expensive to run down the credit standing on every individual whç~ ~thted more cretht, especially ~ii traew of the fact tl~at there *as $1.~ billion in losses in cofisumer~ credit just last year from personal bankruptcies. ~, * The information ~ybii ha~rsgive~i ti~ has been extremely helpful, l~{r Stone I am sure the memb~t~ 1~*aiit t~'4ue~tion yOu and Mr Ellis ~indII~Vtr~. ~i1~~vine. ~ ~ ~ ~ ~ Mrs t~wyer~ PAGENO="0494" 484 CONSUMER CREDIT PROTEOTION ACT Mrs. Dwrn~. Thank you, Madam Chairman. Mr. Stone, you suggest that with an annualized credit charge ap- plied to all lenacrathat the consumer will shop for credit by being able to compare ch~rges. Is there any evidence to suggest that competition among revolving credit account$ will result? Mr STONE You ask me if there is any evidence to this effects Mrs. DWYER. Yes. Mr STONE No, I don't have any evidence to that elIect I was ex- pressing an opinion that I think a consumer with this information at his disposal wQuld be able to make a decision. Mrs DWYER Would not everybody go to 18 percent per annum ~ Mr. STONE. 1 didn't hear. Mrs Dwn~$ Would not everybody go to 18 percent ~ Mr STONE I don't think credit unions would As a matter of fact,~ in Texas they insisted that the law that was presented to the Texas Legislature provide for a 12 percent maximum as far as the credit unions were concerned Moreover, rede~al credit unions have a maxi mum 12-percent rate in the law now. I was privileged to go before the consumer credit code, committee in Chicago in June and ask that credit unions be exempted from the provisions of the consumer credit code because of our basic concept of 1 percent per month maximum or 12~ percent aimu~l maximum rate. Mrs. Dw~*. One more question. The other day an accountant took an actual retail account showin~ purchases an4 payments at an important outlet and actual charges o~ 11/2 percent a month was not 18 percent a year. Would yoU please submit for the record an actual credit union account over a 1-year period showing deposits and withdrawals for each month and then calculate how 1 percent works out to be 12 per- cent actual chaTge per year? Mr. SToNE. I would be glad to submit it to my people. I am not sure that I could do this. You are talking now about loans, not about the savings. Mrs. Div~a. Talking about `the loans. Mr STONE4 Then it is money paid back on the loans, not money in- vested in the savings. Mrs. DWY~R. That is right. We would like to have you do this for us. Another group presented their case on an actual account for a. year. Mr. STONE. You are asking me now to tell you what the annual rate would bO? Mrs DWY~R What it actually is It would look on the face of it to be 12 percent But what does it actually amount to at the end of the year ~ Make it for a period of 1 year, showing deposits and withdraw- als for' each month and `calculate how 1 percent works out fo be' 1~ percent annual charges per year. Mr STONE You are talking about a revolving credit arrangement If you had a loan made and repayment there wouldn't be deposits and advances. If you were making a loan `from a credit union and they advanced a certain sum of money, then you would make repayments on the loan and that could be figured out. PAGENO="0495" CONSUMER CREDIT PROTECTION ACT 485 Now, if you are talking about an advance to a certain person, usually I think this would be in the case of a sale with revolving credit where the debtor made certain payments and `bought some more merchandise and that was added on, and you then had to figure the interest, I think that is the kind of situation that you are talking about and I am not prepared to' answer it. Mr. BINGIIAM. Would you yield at that point? Mrs. DWYER. Yes Mr. BINGUAM. Perhaps this might clarify it a little bit. `Do you `have typically in a credit union account payments during the month and also further extensions of credit during the' month and then you have a billing period at the end of the month ~ Mr. STONE. We don't send out bills but we do have extensions of credit `and we have certain charges from the payment-if the payme~it which is due on a certain day is not made. Usually many of our loans are made on a weekly as well as on a monthly basis. And usually we won't start charging any penalties, unless the loan is 4,5 or 6 weeks in arrears. Mr. BINGUAM. I think what Mrs. Dywer is trying to get at, taking a typical account with a lot of transactions in and out over `a period of time, what is the actual interest rate charged for the balances that have accrued day by day? That is what this gentleman produced for us the other day. Mr STONE I can't do this because we wouldn't have this kind of transaction. We don't have in-and-out transactions. If I loaned a~ per~ son. $100 and he was supposed to pay this `back $2 a week and if he didn't pay it back on a certain time we would give him an extension without making any charge. Then, if his loan got 5 weeks in arrears we would make a charge on the loan at that time. But there would be no in-and-out transactions. I do not think the $2 situations are comparable. I can understanct why they cannot put that in. Mrs. 1)WYER. Just one more question. Is there any substantial degree of competition among credit unions, and rates charged and will there be any greater degree o'f competition. among credit unions if you are required to annualize? Mr. STONE;. The answer to the first part of the question is a qualified yes. I think that-I am not sure I would say it was competition in th~ normal sense because of the common bond limitation. For example, many credit unions charge three quarters of 1 per- cent a month instead of 1 percent. Some charge 1 percent a month~ and give you a' refund at the end of the year. So that the net. cost to the borrower is less I think they do this because it depends upon the policy of their boar4 of directors. This is my own feeling and not by reason of competition, but there is some degree of competition. Mrs. Dwyer. Is that not three quarters percent on security. loan~ Mr STONE Yes, on some automobile loans, that is true I think in many automobile loans it might be three quarters of 1 percent ancl~ seine even less. Mrs. DWYER. Then it is practically the same throughout the indus-~ try, is itnot? PAGENO="0496" 456 ~ CR~pIP PROTF1QTIO~T 4QT Mr. SToNE. YQU ~nean. asaiiaking that-~- Mrs. Dw~i~, `I~he three-quarters on a cu~ed loaii? Mr. STONE. I would say it was t~ same, but many of them do, especially the larger ones. They woujd charge th~ee-quarters of I percent. Sin~ailer credit unioith ipig~ht, charge the limit of 1 percent per month. Mrs. DWYER. That wi]~ealL Thank y~q~ ~. Mrs. SULLIVA*. Th~cou1ci not shop arourni l~ro~iii one ~redit~urnon ~o another, though~ Mr.~ STONE.1 Nb, be~ause they don't hs.v~ a ~~mn~ion bona. .~ cau only I~ei~5ng as I ~ to two Qredlt unions, I~can belpi~tg to' a credit uniou which is an officers' erçdit union aud I do belqug~to a Federal 9fficers' credit union awl ~[ ~c~n~belong to my own credit union, `but I couldn't join a number bf other ~re4it unions that~ limit its membership. Mrs. SULLIVAN. Mr. Gonzaleg? Mr. GOI~rZALE2. Thank you, Maclam Chaira~naxi., In your stat ent you speak in behalf1 oct th~ annual di~e1o~ire rate and y~t yëbt~day we had a gentlemen representing a very sub- stantial bank, tc~gether with the executive vice pr~sident of the Aaneri-~ can l3ankers i~sociation and he said this, ~nd I quote from his t~sti- mony yesterday~ The witne~s was Mr. Bailey,. I will agree with~wlu~t Mr. WaU~er has said in this regard. The cost of iniak~ tag a loan doesn't vary with the dollar amount, and if you attem~t to iredu'qe it through an annual interest rate the figures would hecome ~astronQmic's4 and peop1~ pi& those things up quickly `and start talking about a institrttion that is chargIng 120 i~eitdentand justdon't agree with it. Do you ha~e~äny. c~onmecn~t ~1ih respeôt to that statement ~ Mr BINGI1A~ Wi1d~th~ gei~tl~eitiaii yield ~ Mr k~zAL]~ I yield 11 Mr EINGIIA~r I ~ mvdhted m thtt.t coflo~y Whq~t they were referring to was, as I recall it, a $50 loan for t ~Q~iUi and the charg~ ~as $5 The aniMal rate of interest was 120 percent Mr. STONE. I can understand tch~s and tl~j~ 1~ the ç~uesti~n j7ou ~ked me as to whether we had a mininium rate ind I said no, weclidii't- ~iot in my crMit union. In the Federal credit i~thions it doesn't make any difference a~ io~g as they don't h~tve a minimtirn charge. It woàldn't make any differ~nce ho~ long the ldan is for since the charge is 1 percent per' month or less on the oiitst~u~ding balance Mr GONZAI4Z Eite~ in this e~t~where tl~e man was talking aliout $50 on a mont~hl~ M~i~ This ~s ~just ~or~1 month Suppose he 4pes n~t pay it in ~moñ1~h ~ What ]iap~ens ~theu ~ "kiiat usually h~pp4 ~then1, ` ]~Ir STONE T think, Mr Gonzalez, t~iat `n our credit unl9~i we would hacv~ to understand the positu~n of the banker. ~Thetidng that I ~hi4~, ~om~thnth people don't understand it, as far as credit unipms ar~ ~ou- cernecl~ is that we }pan i~oney tp a man nQt because we ai~e ~ure lie is ~ ~6 fepay-like a bankth~ has to loan di6ney-bu~ because we have 4ifid~nce tbat he will r~pay a~cl so we loan money t? a man ~v1~io ~i,s M~k or whO id iM~Mplo~ed Or ~ho~e f~rdkry ~ed~ assista~iee fo~r clif- ferent rea~ons than ~a bank dqes ;h~i~ess. , : Nó'~ 1 ldn't~rTtidi~e a~ batik' pers~nall~r ~é~Au~e t~ey ha~e to have a minimlim rate, and that amounted to a certain percentage. PAGENO="0497" CONSUMER CREDIT PROTECTXON ACT 487 I would think that in the nature of competitive business they have to do this. But with a credit union it is a little bit different. Mr. GONZALEZ. Actually the banks until lately have not gone into the small, small loan category, have they? Mr. STONE. No, I don't think the banks went into consumer credit loans until the credit unions made it respectable. It was not respectable for a bank to loan a man money and the average man could not get credit from the bank and when credit unions started to loan these men who couldn't get any credit anywhere else, and these people paid it back very successfully. Then the bankers began to realize that con- sumer credit was a good, profitable operation and until the credit unions demonstrated this, it was not respectable for banks to engage in consumer credit loans, in my opinion. Mr. GONZALEZ. All right. But even now, in the less than $100 loans do the banks compete substantially in that area? Mr. STONE. No. As a matter of fact, their rates are much higher on loans up to $300 or $500, something like that. I am sure they don't want to make a loan of $300 or $500 because they are losing money. Mr. GONZALEZ. Then in that case, I revert to the question that this one specific example of $50 for 1 month would not be a logical one against truth in lending as far as an annual disclosure rate. Mr. STONE. No, I don't think so. I think that the bank is entitled to get a certain return for its money, taking into consideration its overhead and other things. Mr. GONZALEZ. I agree. But the point is, is the consumer also entitled to have full disclosure as to the rate as well as to the yield? Mr. STONE. Yes. Mr. GONZALEZ. I notice some of the charges that were presented the other day with respect to the revolving credit accounts in depart- ment stores, the gentleman very skillfully talking about yield and there is a difference between that and a rate and it is this kind of thing that I believe the bill is attempting to try to remedy. That is, the theory that, in the feeling and confidence that the average citizen, no matter if he is the poorest of the poor is entitled to have the full truth as to the full amount that he will have to pay on the loan and he is entitled to that truth. I think most of us are very sympathetic and in fact have supported the credit union movement with respect to the purposes for which it was founded and which purposes have very well been carried out. I think you have stated a truth, that it has pioneered in the extension of consumer credit financing and that it has been to the good. So I compliment you in that respect. There is one thing, though, that discourages me and I was dis- appointed to hear your statement where you referred to the garnish- inent provisions of the bill. ~ou do not say we do not have enough knowledge or experience to advise you to or not to, but you are saying, "Do not do anything because we d~ not know enough about it yet." Mr. STONE. Well, I will tell you. This matter of garnishments is very interesting. When credit unions first were being considered in Massa- chusetts-I don't claim to have been at the age at that time when they 83-340-67----pt. 1-32 PAGENO="0498" 488 CONSUMER CREDIT PROTECTION ACT were first consic~ered-but I did become active in 1927 when I became treasurer of a c*edit union and in the early 1920's, one of the reasons for the developtuent of the credit unions was that people's pay was being garnished-we call it trusteed. Atid in many cases that meant that the employer insisted that he had to settle that case or lose his job. Some men who couldn't pay bills were placed in this kind of prob- lem and we made loans to this man to release the trustee in order for him to maintain his job. So that we did have some experience with garnishment. On the other hand, I was very much interested in what the chair- lady said about certain people who have talked to her because certain people have talked to me, too, and have said they are very much con- cerned with th~ effect this is having upon the membership in their credit union. What I tried to say, Mr. Gonzalez, is, that I don't think we are prepared to take a definite stand because the matter needs, from our viewpoint, further clarification. I would say that in the movement we have differences of opinion. Mr. GONZALEZ. That is the reason I wanted to draw you out on that clarifying statement, because the way it is written you may not necessarily have intended it that way. You are saying: The establisbm~?nt of a Federal usury statute and the prohibition of garnish- ments and cogno~it note are matters that need to be studied more extensively before appropriate action can be taken. It seems to me that what you are saying there is: We do not know enough about it but don't you take action whether you do know enough or not as a result of these hearings. That is what I wanted to get. Mr. STONE. We are hoping as a result of these hearings that the Congress would make the Commission study the problem in order to make recommendations. Perhaps then we would get this informa- tion so that we may take a position. Mr. GONZAL1~Z. That is why I wanted to clarify it. Thank you v~ry much. I have no further questions at this point in time. Mrs. SULLIvAN. Mr. Ellis, the REA co-ops have enjoyed good bor- rowing terms, but your members frequently have to pay very high credit costs on farm equipment and other things. Do you favor the provisions in our bill of an 18-percent ceiling on finance charges? Mr. ELLIS. We have not studied it with respect to the 18-percent ceiling. But we do favor the bill in general. Credit is drying up in rural areas mdre and more. Every time another family picks up and goes to towft ~t may affect the credit in the whole area. It may help close down a little bank, a branch bank or a bank itself. People aren't losing money on bank failures any more, but banks are still being closed out. Local credit sources, department stores, local stores, and others, as there are fewer people to trade with them, have to close down entirely. Some cannot give credit as mote and more people pick up and go to the city leaving more and more poor in these areas to drain upon the existing institutions. PAGENO="0499" CONSUMER CREDIT PROTECTION ACT 489 Mrs. SULLIVAN. You feel then the need definitely for the ability to shop for credit to anyone who must resort to it? Mr. ELLIs. Yes, our ability to shop in the rural areas is practically nil. We need that. Mrs. SULLIVAN. Mrs. Angevine, do you fell that you can organize the women of your organization into a solid drive to support the things in IE{.R. 11601 which you can endorse? If you can and you will, we will win. Mrs. ANGEVINE. Let me say I shall certainly try. I am sure that the women are very eager to have truth-in-lending bills. We are eager that we get the message out to them. I should say we could not bring any resolutions from them because there have been no meetings since this new bill came out. But we hope to get the talking started. Mrs. SULLIVAN. We want to bring out as strong a bill as we can from this committee, and it is not going to be easy. We do not want to stifle, or hamper in any way, the passage this year of a good truth- in-lending bill. I know this bill is loaded heavily with many other things that also concern credit. We want a bill, but I do not want a bill that has no meaning and is just a title. So we will need every bit of help we can get. Mr. Ellis, would you like to summarize what you have heard here today, or could you summarize some of the highlights of the legisla- tion from what you have heard this morning? Mr. ELLIS. Madam Chairman, I would he happy to do that for the record but I would need to make some further study of the specifics. We depend on Mrs. Angevine and some other sources for the specifics in these areas. She might like to do it this morning. I don't think I should attempt it without some further study. Mrs. SULLIVAN. All right. Mr. Bingham has another question. Mr. BINGHAM. I have not had an opportunity to question the witnesses. Mrs. SULLIVAN. I am so sorry. I thought I had started the ques- tioning with you, but I remember, that was earlier this morning when the other witnesses were on. I apologize. Mr. BINGHAM. I would like to compliment these witnesses. They have been very helpful. I would like to pursue with Mr. Stone for just a minute what Mr. Gonzalez raised. The point of the testimony that we heard yesterday, Mr. Stone, was that the bankers argued in favor of an exemption for the $10 finance charge or below on this basis. They said we do not make much money out of the small loans, these little short-term loans-some accommodation is made-as an accommodation we may loan a fellow $50 for I month and charge him $5. But if we have to tell him that that actual]y is a loan at 120 percent interest per annum that will look so bad that we just will not do it, Now, that is their argument. I do not say it is right or wrong. I would just like to have you comment on it. You said you felt a minimum charge with a short-term loan was justified. Do you think they are also justified in saying that if they have to say that is 120 percent per annum they would not make the loan? Mr. STONE. I appreciate the problem and perhaps a man ought to hesitate before he will pay 120 percent. PAGENO="0500" 490 CONSUMER CREDIT PROTECTION ACT But if the man needs it and he has to have it and he knows what he Is paymg, then it seems to me that it is not an excuse-it is no excuse that they feel he is paying a high rate and then I think there ought to be truth and lie ought to know what he is paying and whether it is ~0 or 80 or 120 percent, he ought to know that this is what it is costing him so he can go to another bank or to a credit union and say here, "I need this money, can I get it, and how much will you charge me." Mr. BINOHAM. In other words, you would be willing to take the chance that the banks will stop making these loans? Mr. STONE. That is right. Mr. BINUHAM. Mrs. Angevine, I would like to ask you to reexamine one statement that you make, because I think it is a little bit unfair- this is where you say, for all practical purposes the Senate bill sets an effective date of July 1 1972. As I understand the ~enate bill, the only respect that that is an effective date is with respect to the requirement that charges be stated as a percentage-percent per annum rather than dollars per hundred per annum. Is that not correct? Mrs. ANGEVINE. That is true. I think my implication, and I agree it is a judgment, it was that if we are not going to have the statement of interest in annual-rate terms until 1972, and if all revolving credit is taken out- Mr. BINGHA~1. I am not talking about that. I agree with you on that. Is there really so much difference between a statement of dollars per hundred per ye~ar and percent per year? Mrs. ANGEVINE. I think- Mr. BINGHAM. Is there so much difference? Mrs. ANGEVINE. I think there is a combination of so many things involved here, that if you are looking for a strong bill and this is taken out and that is taken out and finally in 1972 it all comes together, it just leaves those of us who are looking for a strong bill highly disappointed. Mr. BINGHAM. I agree with you about the other exemptions, but I am- Mrs. ANGEVtNE. I know there is a part that goes into effect in 1969. I know that. Mr. BINGHAM. But the reason for this particular section, in time as you probably know, is to give the States time to change their usury laws so that they would not be in conflict, and it seems to me that there is a point to that. I myself cannot get too excited about the difference between requiring a staten'ient of dollars per hundred and a percent- age. I think they are essentially the same thing. Mrs. ANGEVINE. As I say, this is a judgment on my part, and based on my disappointment in the whole bill. We are supporting full dis- closure and consider stating interest in annual percentage terms essentiaL Mr. BTNGH~M. All right. Mrs. SULLTVAN. May I inject my thought into this? When we quote dollars per hundred per year it should be the same as a percentage rate, except that when you go in to pay it back you PAGENO="0501" CONSUMER CREDIT PROTECTION ACT 491 will pay off part each month, so that it ends up not as 8 percent that you thought you paid, but it might be 12 percent or more, or 16 per- cent, according to how you paid if off. So I figure $8 per hundred per year might not be the accurate figure. Mr. BINOHAM. That is a different question. All I am saying is that if you have an accurate statement of dollars per hundred per year which this credit costs, that really is the same figure and same thing as the percentage figure and I have some sympathy with the position that if you require them to state it as a percentage figure they may run afoul of the State usury laws. Mrs. SULLIVAN. That $8 per hundred, would that be quoted as the aannual rate on the unpaid balance? Mr. BINGHAM. Whatever it is, it seems to me it is not deceptive or misleading to state it in terms of dollars per hundred per year rather than percentage. Mrs. SULLIVAN. I think `this is a thing still left up in the air that we will have to settle before~we get through with the hearings. If it means the same thing as a percentage rate I do not see how stating it one way would violate State laws and stating the same thing another way would not, providing they describe the same transactioii. Let me say this has been a most productive day and I am grateful to Mrs. Dwyer for being here from her side of the aisle. I am going to make sure, if I can, that our absent colleagues read today's record in full. You gentlemen and Mrs. Angevine have contributed greatly by your presence, by your statements, and by your help on this legislation. Monday will be another full day. We are having the well-known consumer writer Sidney Margolius; Prof. Richard Morse, of Kansas State University, who is an outstanding expert on consumer credit; and Mr. Louis Rothschild, of the Retail Menswear Association, fol- lowed in the afternoon by the chief of enforcement of the Truth in Lending Act in Massachusetts; the head of the Massachusetts Con- sumer Council; a leading retailer in Massachusetts, from Lechmere's; and then Mr. Robert J. Klein, economics editor of Consumers Union, who was not reached last Tuesday because our session then had to be canceled because the House would not give us permission to sit during the afternoon. The committee will recess until Monday morning at 10 o'clock. (Whereupon, at 1:40 p.m., the subcommittee recessed, to reconvene on Monday, August 14, 1967, at 10 a.m.) PAGENO="0502" PAGENO="0503" CONSUMER CREDIT PROTECTION ACT MONDAY, AUGUST 14, 1967 HøUSE oi~ REPRESENTATIVES, SUBCOMMITTEE ON CONSUMER AFFAIRS OF THE COMMITTEE ON BANKING AND CURRENCY, WasMngton, D.C. The subcommittee met, pursuant to recess, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Leonor K. Sullivan (chairman of the subcommittee) presiding. Present: Representatives Sullivan, Gonzalez, Hanna, Annunzio, Bingham, Dwyer, Wylie, and Williams. Mrs. SULLIVAN. The subcommittee will Come to order. Today, we begin our second full week of hearings into legislation dealing with the use and abuse of consumer credit and the problems they present for our economy and our people. I think the hearings so far have been informative, provocative; and nonrepetitious. I am sure they will continue equally interesting this week. Most of our testimony up to now has been directed primarily to the credit-term disclosure provisions of H.R. 11601, the Consumer Credit Protection Act, although there have been numerous references to other sections of the bill dealing with garnishments, an 18-percent Federal ceiling on finance charges, standby credit controls in times of national emergency, confession of judgment notes, and other provisions not related directly to the truth-in-lending theme. Tomorrow, we are. going to devote our hearing entirely to section 207, which relates to the setting of margins for trading in commodity futures. We will have repr~sentatives here from most of the major exchanges on which commodity futures are traded, and I think all of them are prepared to tell us section 207 is not a good idea. I am sure we will receive an education in the manner in which all manner of metals, minerals, agricultural commodities, and-beginning next week, I believe-even bags of 1,000 silver dollars are traded on paper. This morning, we are fortunate in ha:ving two outstanding and articulate spokesmen for consumer interests in this country appearing `before us. Mr. Sidney Margolius is best known to Members of Con- gress through his `columns in the prize-winning newspaper published by the Machinists Union, where I first saw it, but I have seen it also in many other periodica~ls which come acro~s my desk. I believe you were also a member of the President's Consumer Advisory Council, Mr. Margolius, as was Prof. Richard L. D. Morse of Kansas State University, who is also here this morning. I am going to call you both to come to the witness table together-as the best way to develop the most information in the period we have this morning.' 493 PAGENO="0504" 494 CONSUMER CREDIT PROTECTION ACT Later in the morning we will hear from Mr. Louis Rothschild on behalf of the Menswear Retailers of America, and then, this afternoon, we will have three witnesses who will discuss the truth-in-lending law enacted last year in Massachusetts and which has been in effect there since Nov~mber. Also, this afthrnoon we will have Mr. Robert J. Klein, economics editor of Consitmers Union of the United States, who was to have been one of our witnesses last Tuesday when we could not hold an afternoon session. With the exception of Mr. Rothschild, all of our witnesses today have come some distance and at some sacrifice to help us in our deliberations, so I have my fingers crossed that we will run into no complications in the House in sitting this afternoon. I think every member of the subcommittee will agree with me that in the pa~t week we have received a liberal education in the field of consum~r credit and its place in our economy-as well, I am afraid, as in tl~e bankruptcy courts and the riots which erupted in some of our cities. Truly, we are dealing with an explosive subject, which is also one which holds a very necessary place in our expanding economy. Mr. Margolius, may I suggest that you summarize in perhaps 10 or 15 minutes the excellent statement that you have filed with us, and I will ask Professor Morse to do the same, and then. we will spend the rest of the time in development of the many ideas and areas, of information you have covered in yoi~r presentations. STATEMENT QP SIDNEY 1V[ARGOLITJS~, POBT WASHINGTON, N.Y. Mr. MAROoLItTS. Thank you, Madam Chairman.. First, I would hl~e to say to this committee that family money losses arising from high-pressure credit selling today have become a serious national problem affecting the Nation's economy even beyond the problems that it has caused for the families themselves. Losses due to high credit fees and deceptions damage not only the families but causes a diversion of resources that is helping to frustrate vital family and national goals such as advanced education, better housings and th&antipo~erty program. 1~ coi~sider t~iis bill, H.R. 11601 has significance beyond even the urgent need to give consumers honest and reasonably accurate iuform~- tio~. `Ehis is a perceptiwe, intelligent, public spirited bill in the best national it~terest. You and your cosponsors are to be congratulated f~r drafting and o1~ering this bill which is a~ patriotic and practical as it is humane. Tbis~ bill a~ it now st~jids would benefit A~merica's families, help our n~a~tioi~1 and lpQal economies in, a number of ways, and aid reputable businessmen. ~1he $L3 bil4ion a year that consumers spend for credit fees is just the beginningI of the actual cost to consumers and the public of the present cr~dit situMio~ We also hajve a serious problem of overpricing made possible by the use of deëeptive credit plans plus many families' losses due to repossessions, payments for legal costs, and so on. Also, this bill especially benefits small businessmen who now must cope with hard-driving chainstore competition on the one hand PAGENO="0505" CONSUMER CREDIT PROTECTION ACT 495 which inexorably is pushiug extensive credit plans, and on the other hand, competition from fringe sellers who divert a surprising volume of sales from scrupulous business through deceptive credit-selling methods. Scrupulous businessmen should welcome this bill. Some lead- ing businessmen themselves have said credit reforms are needed. Any scrupulous business spokesman who fights this bill is fronting-_either unwittingly or short-si~'htedly__for the disreputable fringe sellers. I would like to mention a story in Home Furnishings Daily which reports that small businessmen are up in arms because the bill as written by the Senate would give department stores a competitive ~dvantage over furniture atid ~pociality shops and I do want to make that point especially, that including revolving credit in this bill would benefit not only the general public but small businessmen. It has become increasingly difficult for small businessmen to com- pete with the chains and mail-order sellers who peg their cash prices low, but then drive to get buyers to use their credit plans on which they make an additional profit. The damage to consumers themselves is greater than many of us may realize. To a large extent-_and this may seem a little ~tron~ to swallow at first-_consumer exploitation has replaced labor exploita- tion as the real problem of our times. We would not permit the things to be done to people as workers that we allow to be done to them as (consumers. Consider this incident that happened to one working woman. A salesman knocked on her door and showed her a set of stainless steel tableware at a price of $65. He said she didn't have to decide immediately, but after delivery could take a few days to decide whether to keep it. When the tableware arrived, the women signed what was described as a "receipt." But on closer inspection the set did not appear to be the same quality she had been shown. She wrote the seller to take it back. The only answer was a demand for payment. The "receipt" turned out to be an installment contract. The woman went to t'he Legal Aid Society, which was willing to intercede. But her employer's personnel office called her in and told her that a gar- nishee had been filed for $120, includimgfinance charge and legal costs, and that the employer would not tolerate prnish~es. To keep her job she had to settle with the seller. She settled for $75 for~a set of table- ware which another retailer subsequently estimated was worth $15. This woman earns just $60 a week. So she really had worked one week without pay because of the $60 she had overpaid for the tableware. If an employer had forced her to work a week without pay, we would all cry: "This is peonage." Congress would not tolerate labor peonage. But in many cases today we have substituted consumer peon- age for labor peonage. This is not an isolated example. Thousands of such incidents occur each week across the country, often involving much larger amounts. Some families even are then forced into bankruptcy or on welfare because they are snared by deceptive sellers who use th~ coercive levers provided by most State credit laws to set their traps. As is well known, there are more consumer bankruptcies today, than in the big depression of the 1930's. Such personal bankruptcies have increased every year forthe,pastL4 years,; in faet have rjun~ped 240 percent in the past 10 years. PAGENO="0506" 496 bONSTJMER CREDIT PROTECTION ACT But even Inor~ widespread, though better hidden from public aware- ness, is the number of people whose wages are attached or garnisheed because of debts. Several million wage earners a year suffer such garnishees. Various cities such as Chicago, Washington, Birmingham, Detroit, Akron, Portland, Oreg., and others, have reported anywhere from 12,000 to 100,000 garnishees a year each. Just as an informed guesstimate I would say there are somewhere between 3 and 6 million garnishments a year. Often the debts for which these workers are garnisheed were incurred through deceptive selling tactics as evidenced both by examination of specific cases and because a high percentage of garnishees are filed each year by the same sellers and finance com- panies in variouS cities, such as Chicago, Detroit, and so forth. Even when families do not reach the bankruptcy or garnishment stage, the habitual installment buying indulged in by about half of all families, causes a steady erosion of family income. In my statement I show some figures which you have probably heard before about how much faster consumer credit has risen in the population, an~I income and so forth. I make this point, that in the 10 years from the mid-1950's to the 1960's, the cou~itry's population increased 18 percent and disposable income rose 5~ percent. But installment debts jumped 130 percent. Not only are american families buying more goods on credit, in- cluding small items traditionally bought for cash, but they are paying higher finance rates and taking longer to pay. A family that usually carries $2,000 of installment debts very likely pays in the neighborhood of $300 a year in finance charges, or a total of about $9,000 over its major buying years. This family, if it is carrying a $16,000 to $17,000 mortgage on its home at 6 percent for 30 years, will pay an additional $20,000 just in interest fees on the mortgage. tAitogether a typical wage earner today works 4 or 5 years of his li~fe just to pay interest fees on installment debts and mortgage. Of all the dmissions in the Senate bill, perhaps the least under- standable is that the dollar amounts of mortgages need not be shown. The excuse given is that people would be discouraged from buying homes if it were shown that the total interest on the mortgage amounts to more than the cost of the home itself or more than the morgage. I don't think we need to fool people into buying homes and I don't think people are going to stop buying homes. They have very little choice. I think this is almost an immoral omisSion, let alone a very foolish one. I want to address myself particularly to two sections of the broader bill you have offered-the inclusion of revolving credit in the require- ment that true annual interest rates be disclosed, and the prohibition on garnishment of wages. There is real danger in omitting revolving credit from coverage. It is true that revolving credit represents only 5 percent of all con- sumer credit. But it is the fastest growing kind. Sears, Roebuck, one of the earlier and most active promoters of revolving cre~1it, now does approximately as much business on re- PAGENO="0507" CONSUMER CREDIT PROTECTION ACT 497 volving credit as on the traditional installment contracts. Sears now sells almost $4 billion worth of goods on credit (about 58 percent of all its sales). About 40 percent is for "soft goods" like clothing and domestic textiles which families traditionally bought for cash, but now often buy in revolving credit. Spiegel's, a mail-order house owned by Beneficial Finanëe Co., actu- ally does 90 percent of its business on various types of credit plans including revolving credit. A Spiegel official several years ago referred to his firm as a combined loan company and store. That is not the only large retail organiza- tion that has become a combined loan company and store. Some of America's largest merchandisers and manufacturers in effect have become combination stores and finanee companies, includ- ing many who until a few years ago sold very little on credit. Sears, Montgomery Ward, Penney's-traditionally a cash store and the last large holdout from credit-W. T. Grant, City Stores, Alden's, Gamble-Skogmo, and other large chains and catalog houses, now all own their own finance companies. What I am going to say next is very significant of why we have to be concerned. In reverse, some loan companies have been buying control of chains of stores which generate credit accounts for them. Beneficial Finance Co. now owns Western Auto Supply Stores as well as Spiegel's. Household Finance Co. now owns the White Stores, Coast-to-Coast Stores, Ben Franklin Stores, and the Colby Furniture Stores in Jill- nois-a total of over 4,500 stores. Most of these large retailers now are promoting revolving credit especially hard. Montgomery Ward, for example, devotes more than twice as much space in its catalog to its revolving credit plan than to its three traditional installment plans put together. I have no break- down on the proportion of its credit business Ward's now does through revolving credit, but Ward's now makes 47 percent of all its sales on credit even though it was a relatively late starter in pushing revolving credit. Even a variety chain like W. T. Grant which has broadened into a junior department store type of operation now does 25 percent of its business on credit, especially pushing a type of revolving credit called coupon books for small purchases. The true annual rate on coupon books-which you spend like cash in the store-can amount to as much as 31 percent for the smaller denominations. They are pushing credit at us from every direction. Recently a housewife bought a $9 bedspread from one of the large mail-order houses. When the bill arrived it gave her a choice of pay- ing the $9 in 20 days or paying it on revolving credit-$5 now and $4 the next month. An Akron family who had made purchases of a number of small items on a revolving credit account from Alden's found themselves behind in payments because of a work cutback. One day a letter arrived from the mail-order house warning that they would have to go to the man's employer. While the family was worrying because they knew that the employer fires for a garnishee, in the next mail another letter arrived from the same retailer urging them to make more pur- chases on their revolving credit account. PAGENO="0508" 498 CONSUMER CREDIT PROTECTION ACT T[ would like to mention just a few incidents to show the effect of this heavy p~ornothon of revol~viug `credit on American families. A coilege-edi$ated Atlanta housewife wrote me: As we added up' the interest we paid last year we found we were paying 18 percent, and had been persuaded into extended payments by phrases in the catalog like "No lump sum interest charged, only a small 1~/2 percent a month service charge with each payment." A Portland mother of 26, who has three little girls, wrote that she `has gone back to work to help pay off accumulated debts of $4,721. Her husband's take-home pay is $420 a month. They have 20 debts, including six d~part~nent stores. A Haverhill, Mass., couple with only $300 a month income obligated themselves for iinonthly payments `of $224 for bank notes and a re- volving charge accomit,. bank loans, plus accumulated bills for oil, insurance, and other needs. "The creditors are getting hard to handle," the wife wrote. "I am ready to jump in the river if I don't find a solution soon." For the many young families who are led into serious overindebted- ness, the effect often is a sense of despair and a shattering loss of `self- confidence. Panic accompanies the writing `of every cheek- The wife of a Lansing, Mich., schoolteacher wrote me- After two and `a 1~alf years of marriage and two babies, we `are paying 20 per- cent of our income on our debts. But what happens when the house needs repair, the transmission in your car collapses and your child is hospitalized-all in one month? A young wife in Phoenix with two small children, still in her early twenties looks forward only to a lifetime of debt: "It has finally hit us hard enough so that we have to face the fact that no matter what, we will never get out of debt." She and her husband married right out of high school. They were active and confident cOnsumers. They bought so much on credit that she ended up going to work as `a `secretary, for a finance company, appropriately enough. "With my working, we decided we could get out `of debt ea'~ily. But due to always seeing things we wanted, and with our good credit, we got in deeper. With the second baby I lost my job. Now ffiy husband is working only part time. We are con- stantly hounded by bill collectors." Now there are additional pressures to buy on revolving credit through the bank eredit card plans being promoted extensively. Obviously, excusing revolving credit from disclosing the true annual interest rate wbul'd leave a very large loophole. Of course young families will still buy on credit, and some will overbuy. Bu't ~t least the Atlanta housewife and others would know beforehand what annual interest rate they will have to pay, and will he better able to decide whether it is better to leave funds in a bank earning 4 to 5 percent while they pay a presumed 18 percent for revolving credit; whether it is preferable to pay 18 percent for a credit card plan when they could take out a personal loan from the same bank for a true annual 10 or 12 percent, or put more down, or pay moderate balances immediately, or use cash to buy small items PAGENO="0509" CONSUMER CREDIT PROTECTION ACT 499 instead of coupons "which you spend like eash"-almost like play money. Many excuses are being advanced for seeking exemption of revolvmg credit. Some of these seem to be a little academic. There would be nothing wrong with stating that there are free days and variations in billing as long as the seller complies with the requirement to state that when he does start charging for the credit, the rate is 11/2 percent a month or approximately 18 percent a year. The seller would be able to make it clear that if the buyer pays up in 1 month, for example, there is no charge. The bill as written provides for reasonable tolerances and also per- mits the proposed administering agency to make adjustments and exceptions for any class of transactions if the agency finds this neces- sary to secure compliance. If a revolving credit seller maintains that his charge of 11/2 percent a month is actually lower in terms of simple annual interest, because of his method of calculating these charges, then-as I read this bill-he can make a showing of why his annual rate differs-if 12 times 11/2 actually can differ from 18-and what tol- erances, adjustments, and exceptions may be fair and reasonable. He always can explain that competitively he can do things some of his competitors do not. I am referring to J. C. Penney when they argue that they give certain credits that most certain other retailers do not. There is nothing wrong with their explaining and advertising as much as they want that they do this, that they give credits which the other stores do not before they figure your finance charge for that month. Some such variations really affect only a minority of people. There are relatively few people who return merchandise for credit. If one chain overstated its actual rate in that case, still the great majority of the public would he benefited. Another useful addition in the House bill is the inclusion of debts on which the finance charge is $10 or less. Otherwise not only many of the high-rate "payday loans," but such fees as an extra `charge if you arrange to pay part of your auto insurance later, would not be cov- ered. The insurance company would not have to tell you that a charge of $2 for repaying say, $40 3 months later, is really the equivalent of a true annual interest rate of 20 percent. As one example of what loan companies can do if these smaller loans are not covered, a Chattanooga lawyer reported the case of a $39 loan renewed 18 times. The borrower got a total of $332 and paid $650, including $6~3.88 in investigation fees. Incidentally, we should be conscious that in the famous case here in the District in which Judge Skelly Wright enunciated the doctrine of the unconscionable contract, the furniture store involved had the customer sign 14 different notes instead of one large installment con- tract and when she failed to pay on the final note, he repossessed all the merchandise on the 13 previous notes. Leaving open this loophole would give credit sellers an opportunity to exploit the very-low-income consumers particularly. With regard to the proposed ban on garnishments, this ban would do more to eliminate many of the credit deceptions now used on work- ing people than any other action Congress or the individual States might take. There are a number of potential tools of deception written PAGENO="0510" 500 dONSUMER CREDIT PROTECTION ACT into most State laws which high-pressure sellers use. These include the right to repossess and also get a deficiency judgment; the con~ fession of judgment note which waives any defenses the buyer may have and the "holder in due course" provision which absolves the fi- nance company or bank of any responsibility for the seller's lack of performance or even outright verbal misrepresentation, even though the finance company may be perfectly aware of what is going on. But the garnishment is the lever of final coercion that makes most of these other tpols of deception work. Often an unscrupulous seller does not even h~tve to get a garnishee. He can merely threaten it and the victim often is frightened into paying even an unfair bill for fear of job loss. Often even the actual threat is not necessary when the victim knows that his employer fires for a garnishee, or at best con- dones only two or three. Here is the kind of awful incident that has been repeated actually hundreds of thousands of times in recent years in referral selling schemes, food freezer plans, carpet selling schemes, overpriced home improvement jobs, fake correspondence schools, and so on, with no way to stop these schemes as long as the garnishee law exists. A woman in Kansas City, Mo., wrote me: A salesman. cathe to my house with a camera. The setup was like this. You pay $20 for the c~tmera and that is all you have to pay. Then you send the com- pany customers and the camera is supposed to be yours. I sent the company over 20 customers and received no credit. Now they say I must pay for the camera because I signed the paper. I have a witness that I told the man if there was any more money involved I could not take the camera. These people sold the papers to a finance company. They have come four times to the company where I work, to garnishee my wages. I sent the camera back because I told them I could not afford to pay such a price-over $400. The company 1~as the camera but they say I still have to pay. I have talked to three lawyers and I get no help. They say I still have to pay. So far I have lost four days work over this matter with all kinds of trouble at work. I am a woman of 50 with a 12-year-old child to support. I need the little bit I make for living expenses. This woman is caught like a mouse in a trap. The trap is the State credit laws-stacked on the side of the seller and the finance company. She has no place to turn. She went, not only to the lawyers, but the better business bureau and the legal aid. "No one seems to be able to help me," she says. Many times working people return partly-paid-for goods in the belief that this will square off the debt, or because the machine does not work, or because they really did not save money on food by having a freezer. The~y found they still have to pay the whole bill though they no longer hav~ the goods. Sometimes people signed contracts for lessons or gymnasium courses, and even though a health reason may require them to drop out, even though the gym or judo club closed up, they still had to pay for all the lessons plus the finance charge. The things that go on are really incredible. Florence Rice, a New York antipoverty worker, tells about a woman who bought a TV set. Tt turned out to be for DC current. She had AC in her apartment. The seller refused to take in back. She threw it out. The seller simply threatened to get a garnishee. The woman now is paying off a ~total of $516, at $7 a week, even tho.ugh she has nothing to show for ~t. Can you believe consumer peonago? PAGENO="0511" CONSUMER CREDIT PROTECTION ACT 501 Another woman bought a watch priced at $59. When she fell be- hind in payments she was garnisheed for $113 including finance charges and legal fees. Another jeweler valued the watch at $19. Is it any wonder that in riots in Detroit and other cities, rioters also destroyed installment records in local credit stores? One can say that these people should be more careful, and should buy from reputable merchants. Without doubt such buyers are inno- cent and trusting. But the question before this country today, is whether we should permit laws that enable unscrupulous sellers to take advantage of innocence and trust. It is noticeable that the States with the toughest garnishment laws have the highest bankruptcy rates including California, Ohio, Vir- ginia, Michigan, and Minnesota. I think the bankruptcy referees Friday presented a good case in presenting that information in detail. Colorado, with much less population, had about 4,300 bankruptcies and wage earner plans in 1 recent year, compared to only 1,000 in Texas and Pennsylvania which do not permit garnishees. Virginia, with less population than Florida which does not permit garnishees, has eight times as many bankruptcies. Ohio, with about the same popu- lation as Texas, has about 50 times the bankruptcies. Certain installment dealers and finance companies in various cities alone produce hundreds of garnishees. A study reported by Dr. Milton Huber, of the University of Wisconsin, found that in Milwaukee County, of 6,744 garnishees in 1 year, 805 of them were by one finance and loan company; 783 were by one credit clothing and jewelry store; 640 came from one furniture and appliance store. Mrs. SULLIVAN. Mr. Margolius, I am going to call time for two reasons. I understand that you are recovering from a bout of tonsilitis and we want to conserve your voice so that we can discuss these points with you further and also we want to hear from Professor Morse. I know that all of the committee members have a lot of questions to put to both of you, so we will have Professor Morse summarize his statement and then go into the questioning. Mr. MARGOLIUS. I just want to make one point for the record that the credit business would not suffer if garnishments are removed. I have a letter from the manager of the Fort Worth, Tex., Credit Bureau who tells me that there is no more of a problem collecting debts in Texas which has no garnishees than in other States which do have garnishments. Thank you very ~much. Mr. SULLIVAN. We will have your entire statement placed in the record at this point. (The full statement of Mr. Margolius follows:) STATEMENT BY SIDNEY MARGOLIUS My name is Sidney Margolius. I reside at 74 DavIs Road, Port Washington, New York. I am a writer specializing in consumer economic problems. In addition to books, pamphlets and magazine articles, I write a syndicated consumer column published by 1O~ trade-union, consumer co~op, credit-union and other newspapers with a combined circulation o~ 14 million. I have devoted `myself solely to re- porting on consumer economic problems for over 30 years. In the light of this experience, I would say to this committee that family money losses arising from high~pressure credit selling today have become a serious PAGENO="0512" 502 ~iONSUMER CRJ~IDIT PROTI3)CPION ACT national problem, damaging not only the families tbemsel~es~ but causing a diversion of~ faInil~y resources that is helping to frustrate vital family and national goals sucl~ as advanced, education, better housing and the anti-poverty program. Never before have there been so many pressures on the public t& buy on 1n~ stalhnents and to borrow money; never before have so many families used credit so extensively; never have they paid as high rates for lit, and never have they been subjected to as many deceptions stem~mirig from obsolete state credit 1aw~ which originally were designed to protect sellers and lenders, not buyers, and which some unscr~Ipu1ous sellers have learned to use for outright deception. Per thiS reasons ILIt. 11601, the proposed Consumer Credit Protection Act has significance beyond even the urgent need to give consumers honest and reasonably accura~e information about installment and loan terms. This is a perceptive, inteilig~nt, practical, public-spirited bill in the best national interest. Your sub-committee' is to be cengratulated for drafting and offering this bill which is as patriotic and practical as it is humane. This bill as it now stands would benefit America's families, help our national and~ local economies in. a number of ways, and aid reputable businessmen. This bill would especia fly benefit small businessmen who now must cope with hard~driving con*etl'tion on one hand from national chains and mall-order houses who are inexorably pushing their extensive credit plans, and on the other hand, from a fringe sellers who divert a surprising volume of sales froth scrupulous business through deceptive credit-selling methods. Scrupulous busi- nessmen should welcome this bill. Some leading businessmen themselves have said credit reforms are needed. Any scrupulous business spokesman who fights this bill is frontir~g-either unwittingly or short-sightedly-for the disreputable fringe sellers. It has become increasingly difficult for small businessmen to compete with the chains and mail-order sellers who peg their cash prices low, but then drive to get buyers to use their credit plans on which they make an additional profit. The damage to consumers themselves is greater than many of us may realize. To a large extent-~-and `this may seem a little strong to swallow at firs't-~cons'umer exploitation has replaced labor exploitation as the real problem of our times. We would not permit the things to `be done to people as workers `that we allow to be done to them as consumers. Consider this incident that happened to one working `woman. A salesman knocked on her door and showed her a set of stainless steel tableware at a price of $65. He said she didn't `have to `decide immediately, but after delivery could take a few days to decide whether to keep it. When the tableware arrived, the woman signed what was described as a "receipt". But on closer inspection the set did not appe*~r `to be' the same' quality she had been shown. She wrote the seller to take It `back. The only answer was a demand for payment, The "receipt" `turned out to be an installment contract. The woman went to the Legal Aid Society, which was willing to intercede. But her employer's per- sonnel `office called her in and told her that a garnishee had been filed for $120, including finance charge's and legal costs, and that the employer would not tolerate garnis~es. To keep her joib she had to settle with the seller. She settled for $75 for a set of `tableware which another retailer subsequently estimated was worth $15. This woman earns just $60 a week. So she really had worked one week without pay because `of the $60 she had overpaid for the tableware. If an employer had forced her to work a week without pay, we would all cry: "This is peonage". ~Jongressm'en would not tolQrate labor' peonage. But in many cases today we ~iave substituted consumer peonage for labor peenage. This is not `an dsolated example. Thousands of such incidents occur each week across `the counfry, often involving much larger amoun't~. Some families even are forced into 1~ankruptcy or on welfare because they are snared by deceptive sellers who use the coercive levers provided by most State laws to set their traps. As is well known, there are more consumer bankruptcies today, than in the big denr'ssion of the 1930's, Such personal bankruptcies have increased every year for the past 14 years; in fact have jumped 240 per cent in the past ten years. But even more widespread, though better bidden from public awareness, is the number of people whose wages are attached or garnisheed because of debts. Sev- eral million wage-earners a year suffer such garnishees. Various cities such as Chicago, Washington, Birmingham, Detroit, Akron, Po~rtland (Oregon), and others, have reported anywhere from 12,000 to 100,000 garnishees a year each. PAGENO="0513" CONSUMER CREDIT PROTECTION ACT 503; Often the debts for which these workers are garnisheed were incurred througk deceptive selling tactics as evidenced both by examination of specific cases and because a high percentage of garnishees are filed each year by the same sellers and finance companies in various cities, such as Chicago, Detroit, etc. Even when families do not reach the bankruptcy or garnishment stage, the habitual installment buying indulged in by about half of all families, causes a steady erosion of family income. In the ten years from the mid-1950's to the 60's, the country's population in- creased 18 per cent and disposable income rose 59 per cent. But installment debts. jumped 130 per cent. Not only are American families buying more goods on credit, including small items traditionally bought for cash, but they are paying high finance rates and taking longer to pay. A family that usually carries $2000 of in- stallment debts very likely pays in the neighborhood of $300 a year in finance charges, or a total of about $9,000 over its major buying years. This family, if it is carrying a $16,00'O-$lT,OOO mortgage on its home at 6 per cent for 30 years~ will pay an additional $20,000 just in interest fees on the mortgage. Altogether a typi- cal wage-earner today works four or five years of his life just to pay interest fees on installment debts and mortgages. I want to address myself particularly to two sections of the bill-the inclusion of revolving credit in the requirement that true annual interest rates be dis- closed, and the prohibition on garnishment of wages. There is real danger in omitting revolving credit from coverage. It is true that revolving credit represents only 5 per cent of all consumer credit, But it is the fastest-growing kind. Sears Roebuck, one of the earlier and most active promoters of revolving credit, now does approximately as much business on revolving credit as on the traditional installment contracts. Sears now sells almost $4 billion worth of goods on credit (about 58 per cent of all its sales). About 40 per cent is for "soft goods" like clothing and domestic textiles which families traditionally bought for~ cash, but now often buy in revolving credit. Spiegel's, a mail-order house owned by Beneficial Finance Company, actually does 90 per cent of its business on various types of credit plans including re- volving credit~ Too, even though the Senate bill provides some safeguards against conversioii of installment accounts to revolving accounts, more retailers are expected to shift over to revolving credit if they don't have to tell the true interest rates. The president of one retail furpiture merchandising group already has advised his stores to set up revolving plans in view of the passage of truth-in-lending laws in. several states, and the proposed federal law. Some of America's largest merchandisers and manufacturers in effect have become combination stores and finance companies, including many who until a few years ago sold very little on credit. Sears, Montgomery Ward, Penney's (traditionally a cash store and the last large holdout from credit), W. T. Grant, City Stores, Alden's, Gamble-Skogmo, and other large chains and catalog houses, now all own their own finance com- panies~ In reverse, some loan companies have been buying control of chains of stores which generate credit accounts for them. Beneficial Finance Co. now owns Westerut Auto Supply Stores as well as Spiegel's. Household Finance Company now owns the White Stores, Coast-to-Coast Stores, Ben Franklin stores and the Colby Furni- ture stores in Illinois-a total of over 4500 stores. Most of these large retailers now are promoting revolving credit especially hard. Montgomery Ward, for example, devotes more than twice as much space in its catalog to its revolving credit plan than to its three traditional installment plans put together. I have no breakdown on the proportion of its credit business Ward now does through revolving credit, but Ward now makes 47 per cent of all its sales on credit even though it was a relatively late starter in pushing re- volving credit. Even a variety chain like W. T. Grant which has broadened inte a junior department store type ot operation now does 25 per cent of its business on credit, especially pushing a type of revolving credit called coupon books for small purchases. The true annual rate on coupon books-which you spend like cash in the store-can athount to as much as 31 per cent for the smaller denom- inations, You almost have to specify that you don't want to use a fee-charging revolving credit account when you seek to open an ordinary charge account these days, 88-340-67-pt. 1-33 PAGENO="0514" 504 ~11ONSUMER CREDIT PROTECTION ACT One alert woman tOld a large New York department store credit clerk, "I want to pay my bills monthly. I don't want a revolving charge account." The clerk responded, "It's a good thing you told me, because we automatically put you on revolving credit unless you ask for a regular charge account." In another case, a woman bought a $9 bedspread from one of the large mail- order houses. When the bill arrived it gave her a choice of paying the $9 in 20 days or paying it o~a revolving credit-$5 now and $4 the next month. An Akron famil~r who had made purchases of a number of small items on a revolving credit aécount from Alden's found themselves behind in payments because of a work cutback. On~ day a letter arrived from the mail-order house warning that they would have to go to the man's em'~loyer. While the family was worrying hecatise they knew that the employer fires for a garnishee, in the next mall another letter arrived from the same retailer urging them to make more purchases on their revolving credit account. Now I would like to mention just a few incidents to show the effect of this heavy promotion of revolving credit on American families. A college-educated Atlanta housewife wrote me: "As we added up the interest we paid last year we found we were paying 18 per cent, and had been persuaded into extended payments by phrases in the catalog like `No lump sum interest charge, only a sm~ll 1% per cent a month service charge with each payment.'" A Portland motliler of 26, who has three little girls, wrote that she' has gone back to work to help pay off accumulated debts of $4721. Her husband's take- home pay is $420 a month. They have 20 debts, including to six department stores. A Haverhill, Massachusetts couple with only $300 a i~nont'h income obligated themselves for monthly payments of $224 for bank notes and a revolving charge account, bank loans, plus accumulated bills for oil, insurance and other needs. "The creditors are getting hard to handle," the wife wrote me. "I am ready to jump in the river if I don't find a solution soon." For the many young families who are led into `serious overindebtedneSs, the effect often is a sense of despair and a shattering loss of `self-confidence. "Panic accompailies the writing of every check," the wife of a Lansing, Michi~ gan, school teacher wrote me. "After two and a half years of marriage and two babies, we are paying 20 per cent of our income on our debts. But what happens when the house needs repair, the transmission in your car collapses and your child is hospitalized-all in one month?" A young wife in Phoenix with two small children, still in her early twenties looks forward only to a lifetime of debt: "It has finally hit us' hard enough so that we have to face the fact that no matter what, we will never ge't out of debt." She and her husband married right out of high school. They were active' and confident consumers. They bought so much on credit that `she ended up going to work as a secretary, for a finance comp'any, appropriately enough. "With my working, we decided w!e could get out `of debt easily. But due to always seeing things we wante'd, and with our `go'od' credit, we got in deep'er. With the second baby I lost my job. Now my husband is working only part time. We are con- stantly hounded by bill collectors." Now there `are ~dditional pressures to buy on revolving credit through the bank credit-card plan's being promoted extensively. Obviously, excusing revolv- ing credit from disclosing the true annual interest rate would leave a very large loophole. Of course young families will still b'uy on credit, and some will overbuy. But at least the Atlanta housewife and others -~vouid know beforehand what annual interes't rate they will have to p'ay, and dec'ide whether it is' b'etter to leave funds in a bank earning 4 or 5 per cen't while they pay a presumed 18 per ce'nt for revolving credit; whether it is preferable to pay 18 per cent for a credit card plan when they could take out a personal loan from the same bank for a true annual 10 or 12 per cent, or put m'o'r'e down, or pay moderate balances immediately, o'r use cash to buy small items instead of coupons "which you spend like casb,"-almoSt like play money. Many excuses a~e being advanced for seeking exemption of revolving credit. Some of these seeit' to `be a little academic. There would be nothing wrong with stating that there are free days and variations in billing as long as the seller complies with the requiremhnt to s'tate that when he doe's' start charging for the credit, the rate i's 1% per cent a month or approximately 18 per cent a year. PAGENO="0515" CONSUMER CREDIT PROTECTION ACT 505 The seller would be able to make it clear that if the buyer pays up in one month, for example, there is no dharge. The bill as written provides for reasonable tolerances and also permits the proposed administering agency to make adjustments and exceptions for any class of transactions if the agency finds this necessary to secure compliance. If a revolving credit seller maintains that his charge of 11/2 per cent a month is actually lower in terma of simple annual interest, because of his method of calculating these charges, then-as I read this bill-he can make a showing of why his annual rate differs (if 12X1'/2 actually can differ from 18) and what tolerances, adjustments and exceptions may be fair and reasonable. After the seller states the required formula he still has the right to make a reasonable and accurate explanation of why one plan may have advantages over another even though both charge the same periodic rate. Another useful addition in the House bill is the illclusion of debts on which the finance charge is $10 or less. Otherwise not only many of the high-rate "pay- day loans," but such fees as an extra charge if you arrange to pay part of your auto insurance later, would not he covered. The insurance company would not have to tell you that a charge of $2 of repaying, say, $40 three months later, is really the equivalent of a true annual interest rate of 20 per cent. Another danger is that the practice of loan companies in some areas, of making several small loans rather than one loan, will spread. Selma Cash Paty, a Chat- tanooga lawyer, reported a $39 loan renewed 18 times. The borrower got a total of $443 and repaid $653 including $63.88 in "investigation fees." With regard to the proposed ban on garnishments, this ban would do more to eliminate many of the credit deceptions now used on working people than any other action Congress or the individual states might take. There are a number of potential tools of deception written into most state laws which high-pressure sellers use. These include the right to repossess and also get a deficiency judge- ment; the confession of judgement note which waives any defenses the buyer may have and the "holder in due course" provision which absolves the finance company or bank of any responsibility for the seller's lack of performance or even outright verbal misrepresentation, even though the finance company may be perfectly aware of what is going on. But the garnishment is the lever of final coercion that makes most of these other tools of deception work. Often an unscrupulous seller does not even have to get a garnishee. He can merely threaten it and the victim often is frightened into paying even an unfair bill for fear of job loss. Often even the actual threat is not necessary when the victim knows that his employer fires for a garnishee. or at best condones only two or three. Here is the kind of awful incident that has been repeated `actually hundreds of thousands of times in recent years in referral selling schemes, food freezer plans, carpet selling schemes, overpriced home improvement jobs, fake cor- respondence schools and so on, with no way to stop these schemes as long as the garnishee law exists. A woman in Kansas City, Mo., wrote me: "A salesman came to my house with a camera. The setup was like this. You pay $20 for the camera and that is all you have to pay. Then you send the company customers and the camera is supposed to be yours. I `sent the com- pany over 20 customers and received no credit. Now they say I must pay for the camera because I signed the paper. I have a witness that I told the man if there was any more money involved I could not take the camera. These people sold the papers to a finance company. They have come four times to the com- pany where I work, to garnishee my wages. I sent the camera back because I told them I could not afford to pay such a price-over $400. "The company has the camera but they say I still have to pay. I have talked to three lawyers and I get no help. They say I still have to pay. So far I have lost four days work over this matter, with all kinds of trouble at work. I am a woman of 50 with a 12-year-old child `to `support. I need the little bit I make for living expenses." This woman is caught like a mouse in a trap. The trap is the state credit laws-stacked on the `side of the seller and the finance Company. She has no place `to turn. She went, not only to the lawyers, but to the Better Business Bureau and the Legal Aid. "No one seems to be able to help' me," she says. Many times working people return partly-paid for goods in the belief that this will square off the debt, or because the machine does not work, or because they PAGENO="0516" 506 ~ONSTJMER CREDIT PROTECTION ACT. really did not save money on food by having a freezer. They found they still have to pay the whole bill though they no longer have the goods. Sometimes people signed contracts for lessons or gymnasium courses, and even though a health reason may require them to drop out, even though the gym or judo club closed up, they still bad to pay for all the lessons plus the finance charge. The things that go on are really incredible. Florence Rice, a New York antipoverty worker, tells about a woman who bought a TV set. It turned out to be for DC current. She had AC in her apartment. The seller refused to take it back. She threw it out. The seller simply threatened to get a garnishee. The woman now is~ paying off a total of $o16, at $7 a week, even though she has nothing to show for it. Oan you beli$ve consumer peonage? Another woman bought a watch priced at $59. When she fell behind in pay- ments she was ga~rnis'heed for $113 including finance charges and legal fees. Another jeweler valued the watch at $19. Is it any wonder that in riots in De- troit and other cities, rioters also destroyed installment records in local credit stores? One can say that these people should be more careful, and should buy from reputable merchants. Without doubt such buyers are innocent and trusting. But the question before this country today, is whether we should permit laws that enable unscrupulous sellers to take advantage of innocence and trust. It is noticeable that the states with the toughest garnishment laws have the' highest bankruptcy rates including California, Ohio, Virginia, Michigan and Minnesota. Colorado, with much less population, had about 4300 bankruptcies and wage-earner p~.ans in one recent year, compared to only about 1000 in Texas and Pennsylvania ~vhich do not permit garnishees. Virginia, with less population than Florida whic~i does not permit garnishees, has eight times as' many bank- ruptcies. Ohio, with about the same population `as Texa's', has about 50 times the bankruptcies. Certain installment dealers and finance companies in various cities alone produce hundreds of garnishees. A study r~ported by Dr. Milton. Huber, of the University of Wisconsin, found that in Milwaukee County, of 6744 garnishees in one year, 805 of them were by one finance and loan company; 783 were by one credit clothing and jewelry store; 640 came from one furniture and appliance store. Jasper Rowland, Manager of the Akron Better Business reports: "We have two retail establishments and two used-car dealers who entice poor credit risks into further debts and then use the garnishee route to enforce their collections." In one recent y~ar just one Akron retailer filed 1500 garnishments. This and another store accotinted for almost 20 per cent of all garnishments in Akron. In Detroit, whex~e 52,000 garnishments were filed in 1965, Jerry Dale reported In the United Auto Workers Solidarity, that the top filers included five leading small-loan chains and a group of large credit clothiers, credit jewelers, furni- ture and television stores. The New York City Labor Commissioner in 1966 said that some installment sellers deliberately run their businesses on the basis of getting garnishee if a buyer misses just one payment. If businessmen are against government intervention in their affairs, and in dealings between buyer and seller, then they should absolutely agree to elimi- nate garnishments. For garnishments are state intervention in its most drastic' and naked form. This is government intervention on behalf of the seller and lender to compel ~ debtor virtually forcibly, to pay debt, without his agreement, often without even a fair trial by court; without usually a genuine examination of the seller's clain~s. There just is nO need at all for garnishments from any point of view that of legitimate business as well as consumers. Sellers and lenders in the few states which do nOt permit garnishees do not suffer any greater losses than those in others. Garnishees are not permitted in Texas. I have a letter on file from the Fort Worth Credit Bureau stating that Texas merchants have no greater credit losses than those elsewhere. Nor does' the credit bus4ness~ really suffer. Berkeley Municipal rudge George Brunn points out that the ratio of installment credit to total sales varies little among hard-garnishee law California, Colorado and Alabama; mild-law New York, and no-garnishee Texas, Florida and North Carolina. HR. 11601, the' cons.nmer credit protection bill your subcommittee has pro- duced, is the real' bill of rights for consumers, and equally of benefit to busi- PAGENO="0517" CONSUMER CREDIT PROTECTION ACT 507 ness and the nation itself. Its passage would be the first real step yet taken toward eliminating some of the worst and most uhnecessary evils that have plagued American families in modern times. Mrs. SULLIVAN. Professor Morse, will you please summarize your statement? STATEMENT OP RICHARD L. D. MORSE, PROFESSOR OP PAMILY ECONOMICS, KANSAS STATE UNIVERSITY, MANHATTAN, KANS. Mr. MORSE. I am most appreciative for the opportunity to testify, particularly before this committee. 1 have known Mr. Annunzio through correspondence and our mutual interests in the Department of Defense directive. This bill couldn't come before a committee bet- ter chaired. I know the people of St. Louis are most indebted to the chairman for her dedication to consumer affairs and consumer inter- ests, I had hoped my own Congressman, a member of the Committee on Banking and Currency, Mr. Chet Mize, a Representative of my district would be here this morning but I think the schedule change in my appearance did not coincide with his plans. I know that he will do everything he can to support this bill and I hope that he will recognize those parts of it which are consumer-oriented and those parts which do not fulfill the full consumer orientation of this bill. I might also say I appreciate reading Mr. Halpern's letter in behaJf of Senate 5. The bipartisan support for this bill is wonderful. I have :gone around the country saying I don't see why such measures as this should be a party issue. We `are all in these United `States. I will just summarize and put the full statement in the record. There should be three documents_-the first is the statement itself, the second is a memorandum dated August 5 and t'he third is a list of exhibits. Mrs. SULLIVAN. Without objection, Professor, your statement will be included at this point and the supporting material will be placed in the appendix. (See p. 1067.) STATEMENT OF RICHARD L. D. MoRsE, PROFESSOR 01' FAMILY ECONOMICS, KANSAS STATE UNIVERSITY, MANHATTAN, KANS. Madame Chairman and Members of the Committee, I appreciate this oppor- tunity to appear before you to testify on hR. 11601, the "Consumer Credit Pro- tection Act." I appear in my private capacity and not as a representative of the University. However, I am confident that I represent fairly and adequately the views of the Kansas Home Economics Association, of which I am President, and which each year since 1959 has officially endorsed Truth in Lending. We have waited many years for this bill to come before the House. But never ~Iid I dream it would come before such a Competent committee. It is not by chance that Mrs. Sullivan is Chairman of the Consumer Affairs Subcommittee. For over ~a decade or so, I have heard St. Louis citizens speak proudly of her interest and activities in behalf of the consumer. Mr. Annunzjo provided the stimulus for the Department of Defense Directive on consumer credit, a most significant advance- ment in Truth in Lending. One of the best speeches I have heard on colisumer credit was given by Mr. Hanna. Mr. Halpern's letter in behalf of S. 5 contributed to the bipartisan support for this measure. And I know many consumers back home who feel confident that our capable Representative, Chet Mize, will ably represent our interests when this bill comes before the full committee in assur- thg that a good consumer-oriented bill is passed. I commend the sponsors for thittathig ~puhlic di~en~1on of various uspects of credit abuses which affect the lives of too many families. Full disclosure of PAGENO="0518" 508 CONSUMER CREDIT PROTECTION ACT credit terms offer~ no compensation to the employer burdened with collecting debts for cred'itor8 who resort to wage assignments and garnishment proceed- ings. Nor is full disclosure much comfort to the obligor who learns too late that be signed a confe~sion of judgment when he signed the contract. The first Con- sumer Advisory Council recommended in 1964 that study be made of the social pathology of the credit addict. (See June 10, 1964 press release). Hopefully, the proposed National Commission on Consumer Finance, would conduct or encourage such studies. Such a Commission is needed and I commend you for introducing its proposal in this bilL CONSUMER onEDIT COST AND ANNUAL RATE DISCLOSURE I will now focus my statement particularly on the "Truth in Lending" provi- sions of the bill for two reasons. First, as a teacher I say we desperately need the standardization of terminology which this bill provides. Teachers are greatly handicapped. We must combat the false misleading and deceptive advertising with its come-easy, go-easy, live-a-little, commercialized consumer education. This is our competitio~i-not for profits, but for developing a way of thinking and conceptualizing. We lack the basic and most elementary tool for efficient com- munication, a st~indard vocabulary. For example, at about the seventh grade level students learn about interest. They use the I=Prt formula to figure either the amount of interest, if the rate is given, or the rate, if the cost is given, for a given principal amount and time. Then later they learned that the cost is not in- terest at all, but a flna~we charge, a service charge, ~ time-price differential. And they also learn that bank 6% car financing isn't just 1% more than the bank's 5% on savings. . . . And bankers now say simple interest isn't simple, that interest rates are deceptive, yet banks continue to advertise their mythical low bank rates for financing cars and plaster billboards with percentage rates on savings. . . . Ther~ we hear from retailers and bankers that 1% % a month is not 18% a year.... S~ much classroom time is needed to bring a ray of light into this jungle of credit terminology, there is no time to discuss the Rule of 78's, dis- counts or points, much less focus attention on how to shop for credit and the major decisions of when and bow to use credit wisely. So as a teacher of family finance, I say we desperately need the disclosure and advertising provisions of this bill. Second, I wish to focus on the truth-in-lending aspects because out of necessity and curiosity I have developed some facility in this area. As I teach, I try to learn and then share this information with others. I have testified three times before the Senate subcommittee and twice in California. (S. 2755, 1968, pp. 583- 639; S. 1740, 1961, pp. 304-369, 1085-6; S. 1740, 1962, pp. 396 9; S. 750, 1963-4,. pp. 1366-77, 1622; S. 5, 1967, pp. 532-561 and Congressional Record, May 2, 1967, S. 6164-9). Three of my pamphlets written for the Council on Consumer Informa- tion were recentl~' published: Pamphlet Number 16, Shopping for Credit; Number' 17, Truth-M-Lending,~ and Number 18, Credit Cost Computations. And a graduate student, Miss Louise Leonard, published a study made under my direction on the "Impact of the Department of Defense Directive Number 1344.7 on Creditors Bordering Fort Riley." This is available from our department. Her master's thesis, giving further details, is available through the Kansas State University library. OBSERVATIONS Since these materials are readily available to the Committee, I thought it best to single out for your attention a few points: 1. The poor p~y more is clearly evident in the monthly payments required to raise $2,000. Thit is illustrated on page 17 in my pamphlet Shopping for Credit. If your eeonoi4ie position allows you to save up to spend, your monthly savings at 6% need be $~0.84. But if you are always behind and use credit to "save up" for what you've spent, your monthly payments are 80% higher borrowing at 3% a month, or even 31% higher if you borrow at the credit union and pay 12%, that is, 1% per month, or $6.50 add-on. Even if the rate is the same, the payments are about 20% higher (~0.84 $50.~ at tl'Z~.) Ths is hew miv'b mor'~ it co'~~s to' pay backward than forward, and even more so if the rate differential is high. 2. Today, the consumer who wants to know the annual rate on instalment credit and asks for it, is most likely to get a quotation that is only about half right. (This study is reported on pages 6 to 9 of the Truth in Lending pamphlet, and supporting data for a period of several years appear in the master's thesis, PAGENO="0519" CONSIJMER CREDIT PROTECTION ACT 509 Credit Quotatio~r,, Accuracy, by Norma J. Redeker from the Kansas State Univer- sity Library.) The reason for this is reflected in the cover picture of the Truth-in-Lending pamphlet showing a bank advertising 5% interest on Certificates of Deposit and 5% car financing. As the caption says, "Would you believe? This bank borrows and lends at 5% . . . and still makes a profit." The implication of this double or half-talk is horrendous for the teacher try- ing to help students learn how to make prudent financial decisions. I conclude that the cost of educating consumers up to the point they can distinguish com- petent between "straight" and "curved" answers from creditors would be far higher than most school systems could get taxpayers to support. I submit it would be much more efficient to teach all the creditors how to figure credit costs and rates than to teach all the consumers who want to know or should know. It is time we concern ourselves with methods for improving the efficiency of education. I assume there is no debate about the value of consumers learning how to price alternative credit services accurately when shopping for credit and its costs when they use credit. 3. There is substantial evidence that consumers can utilize to advantage all the information required by this bill. Consumers who know the down payment, the amount of each payment, the number of payments, the cost and the rate, make different and more confident credit decisions than when only some of these facts are disclosed. Furthermore, they will not all make the same choices; the lowest rate is not the most attractive for all. I base this on my 1961 testimony, reported on pages 4-7 of the Truth-in-Lending pamphlet. If you know someone who doubts the need for dollar and rate dis- closure, I suggest you play this game with them. 4. Now I wish to turn attention to the question of bow to figure the rate? First, this question has been blown up all out of proportion to its importance. Why not turn the question around and ask: How do you figure the cost? Second, once the bill is established, rate charts and tables will he published that will give an accurate reading of costs, monthly payments and rate. They will apply to most contracts since most are regular in repayment terms. But even the most irregular contract terms present no special problem if you start with the rate. I call your attention to page 20 of Consumer Credit Computa- tions for a ridiculously absurd schedule of payments. I solved this with the use of a simple credit union guide issued back in the days when most credit union treasurers were volunteers working without machine calculators. Even with sophisticated data processing equipment, it is also simple to start with the rate. How else do savings institutions figure credit cost on money you lend them? A more complicated procedure is to start with the cost and then figure the rate. How this is done is shown in Example Number 8 In Mr. Barr's testimony or Example 3 of Irregular Pay~nents in the Annual Rate Tables booklet prepared by the U.S. Treasury Department. 5. Graduated or Step Rates have no place in a consumer credit disclosure bill. Most states now give legislative anuthorization for such rate schedules as 2% % on the first $200, 2% on balances of $200-$500, and 5/6% over $500. But if you need $800, what is the rate? It is a blend of 30%, 24% and 10%. In my pamphlet, Consumer Credit Computations, beginning on page 12, I say: "The problem is analogous to figuring the average price per gallon if one had to fill a tank with 800 ballons of gas. Available are these pumps: One pumps gas at 300 a gallon, another at 240 a gallon, and the third at 100 a gallon. He is required to use all three pumps until 300 gallons is delivered, and then the 100 pump can no longer be used. The remaining 500 gallons would be supplied by the 240 and 300 pumps, with the 24c~ pump cutting off after 600 gallons were in. The remaining 200 gallons would come from the 300 pump, which has been pumping from the beginning. And since most loans are refinanced before they pay out, the 30% rate is the most persistent." I think this demonstrates sufficiently the hopeless problem the consumer con- fronts. It is a "money maker" for the creditor, but confusing to the consumer. I discuss this in detail in the pamphlet I bring it up here only to alert you to the problem. One of my recommendations (Number 6) in the attached memorandum, is to delete provisions for multiple rates. 6. There are at least eight methods for figuring the rate. In my S. 5 state- ment I submitted a table showing~ the difference in rates among five methods. PAGENO="0520" :510 CONSUMER CREDIT PROTECTION ACT I am pleased the debate over methods is settled in favor of the true rate, the actuarial rate. I want to emphasize a point often overlooked: This rate is usually not an ~asvnual rate, bat i~ customarily so ewpressed. It's natural or basic rate is what- ever period is used for figuring interest. This periodic rate is annualized by being multiplied bty however many such periods there are in a year. This annual- ized periodic rate is the quoted nominal annual percentage rate. A bank advertising 5% per annum compounded quarterly actuaRy means it pays $1.25 per ~1OO per quarter. That is, its basic rate is the periodic rate of 11/4% per quarter. After a year at this rate, the $100 will be worth $105.09, a yield rate of 5.09%. Thus, we see that a 114% per quarter at 5% actually costs the bank and pays the customer 5.09%. The critical and basic rate is the periodic rate! It is customary to quote nominal annual rates. These annualized rates are the only feasible way of comparing quotations for transactions having different `paymeilt periods and principal amounts. So the bill requires, quite properly, that all rates, wl~ether for contract closed-end credit or for `revolving open-end -credit, be expres~ed as a nominal annual percentage rate. Note: If you are -concerned, as I dnce was, that the consumer might be deceived by a nominal annual rate that ~ails to reflect the higher effective or yield rate as a result of compounding, I rOtor you to page 30 in Consumer Credit ComputOtions. 7. The actuarial rate table used by `the DOD has not caused any noticeable shock effect. Most of the creditors Miss Leonard interviewed found the table neither difficult to understand, nor to use. It is functional, particularly with the assumption provided in Section 202(f) (1) (B) for an odd payment, and well within the tolerance, especially with the amendment for Section 200(f) (1) (c) which suggest in the attached memoirandum. As Mr. Barr's testimony dem- onstrates, it can be applied to a variety of irregular payments. 8. RevolvIng credit is the easiest form of credit to adapt to an annual rate. On page 20 of my Truth-in-Le'iding pamphlet I show how simply a Sears state- ment could be adapted to disclose the annual rate and the balance on which it is imposed. In most cases only a printing problem is involved to disclose the ~annualized rate ~tnd the balance to which it is applied to obtain the finance -charge. 9. The problem the retailer~s and bankers raise is more fundamental than annualizing the periodic rate. The opponents are engaged in a public confes- sion of how understandardi2~ed their present practices are. Oharls E. Waiker of the American Bankers Association, testifying before the Senate Banking and Currency Committee, June 23, 1967, raises the point when he says: ". $ . Clearly, we think, that in the case of revolving credit, disclosure on `a monthly basis provides the consumer with a more accura~te statement of the finance rate than is possible with an annual expression." (Italics added) The annual expression is merely the periodic rate multiplied by the number -of periods in a year. Multiplication magnifies, but does not distort! He may have had in mind the "free ride" arguments so that, as Penney's testified, their akrerage customer `is paying only 10'/2% and n'ot the 18% the bill woul'd reqtUre to disclose. (Of course, I contend that Penney's charges 18% on all the credit they c'ha;rge for; they get 0% on all other "credit"). If so, there are two points: (a) the operation of savings accounts at banks Is very similar to that of revolving credit accounts. Neither the bank nor the eustomer knows, and there is no contract to specify how and when the money will flow into and out of savings. This is Just like open-end credit accounts. Customers who `withdraw before the interest `bearing date give the bank a "free ride" use of their money, unless the `bank pays interest to date of withdrawal, in which case `the bank's rate advertising Is "more accurate." Also the customer who saves as of the first of the month or quarter gives the bank 10 more days use of money than the customer who `deposits on the 10th. Furthermore, when the bank adverti~es 5% `and pays out amounts per $100 varying from $0 to $5.09, Is the bank's adv~rtislng of its annualized quarterly rate accurate? The first Comthmer Advisory Council was qntte explicit in Its recommei~datiOn that the rates fOr credit should be comparable with those used by savings In- stitutions. And this has been a cardinal `principal expounded by `the proponents of this bill. If the "inaccuracy" to which the ABA objocts Is u result df ~the ~ariOty of systems in use `by ~avtngs instltntbith with d~)On~td Oakth~g~ pl~ans Or ~tr~ed1'tOrS PAGENO="0521" CONSUMER CREDIT PROTECTION ACT 511 with open-end credit plans, and l~ this lack of standardized procedures is what makes the rates directly Inconiparable, their objection is valid, Yet, since it seems not to trouble them with respect to annualized rate disclosure on savings, why should it on credit? Most of us are familiar with the varieties of systems in use by banks and savings insti'tutions-~dai1y interest, days of grace, early withdrawal privileges, payment to date of withdrawal, etc. But most of us, at least I, had not been aware of the variety of revolving credit systems. I call your attention to `the six methods described on pp. 26-27 of my Truth-in-Le~uting pamphlet. You will note the costs range from $2.28 to $5.44. The same 11/2% per month rate is applied to the same six-month account. The disclosure of 18% is not what causes these discrepancies, for each charges Fy~% per month on every penny swbject to a credit charge under that system. Nor are these discrepancies attributable to inaccuracies. They are a result of the billing system. It is true that one customer could get his credit service at $2.28 while another at about twice this. Likewise, one customer could save at one bank and earn $0 while another would earn $5.09. I do not propose that this Committee consider legislation to standardize banks' methods of paying interest on open-end savings accounts, nor do I propose stand- ardization of open-end credit accounts. But this would be a way of meeting the ABA's concern for the inticcuracies of annualized rate disclosure on open-end accounts. Is standardization what they want? Since we are concerned here with a matter of public policy, I think it only fair to point out that the so called, "adjusted balance" system employed by Penny's and, according to previous testimony on 40% of revolving credit, is lower in cost because they credit every dollar in cash payment or in returned goods, as though it had been paid as of the first of the month; whereas other stores credit such payments only if sufficient to pay up in full that month's beginning balance. The retailers have submitted testimony to prove they lose money on such accounts. I raise the question of whether this type of loss lealer is desirable. It seems to me that this places the small businessman, whose access to replacement capital is more limited and at higher cost at a disadvantage. Should the cash customer subsidize the slow and deliberate-paying customer? This observation has nothing to do with the 18% disclosure, per se. Yet, it should give cause for concern to those who believe the 18% disclosure would be unfair to stores with liberal credit policies. Whereas in fact, they might better be concerned about how un- fair such policies are to cash customers and the implications for small business. 10. My last point relates to the argument that this is a matter for the states to regulate. According to an American Bankers Association executive, well over 50 percent of all consumer credit is extended by. lenders which are not subject to Federal regulation. So even if all Federal authorities adopted the provisions of H.R. 11601, most credit would not be covered. I believe whole- heartedly in the preservation of state's rights; B~ut noiv that we have such tremendous inter-state retail organizations as Sears, Wards, Penney's and credit institutions which span the United States or vast sectors of It, it Ia idle to believe that individual states can exercise e~ective and desirable authority- without conforming to other states. I have lived in New Jersey fOr 16 years, Ohio for 2, Wi*seonsjn fo~ 3, Illinois fpr 3, Iowa for 4, Oaiiforuia 1~or 2, Plorida for 8 and Kansas for 12. Many others have moved more than I. Why should we learn 50 different concepts of interest, finance cbaj~ges, service charges, with one set of terms applied `to motor vehicles, another to real property, another to cash loans, another to bou~ehold goods. "A pound is a pound the world around" the saying goes; isn't It time we define for every day use throughout `these United States the annual percentage rate? In 1964, a target date of 1966 was set for developing a final draft of a uniform or model credit law. In 1967, there seems little prospect of a single annual percentage rate dis- closure from that source. The only alternative is passage of H.R. 11601. RECOMMENDATIONS FOR IMPROVEMENT OF H.R. 11601 I submit for your study a memorandum giving nineteen recommendations that I believe would Improve an excellent bill. It Is my MffiMORANDUM dated August 5, 1967. In addition, I wish to commend you for not adopting all the provisions of 5. 5: 1. The instalment open-credit provision would have made no sense to the con- sumer. Her need for an annual rate does not change whether the item she buys PAGENO="0522" 512 CONSUMER CREDIT PROTECTION ACT has a lien on it o~' not, or whether she pays off 50% of the purchases or 60% in 12 months. Thi~ arbitrary classification would complicate administration, en- courage business 1~o increase the number of accounts, and not serve consumers. The $10 minimum was not necessary. Rate's can be applied just as easily to small amounts as to big ticket items; credit unions and small loans companies grew u'p making small loans, and using the actuarial rate. I am not convinced that the poor who allegedly would be denied credit to avoid disclosing a high rate such as 104% would be benefited by having such credit available anyway. Such high cost credit has a way of developing an insatiable appeti'te for more credit. And if the rate is high because the purchase is relatively small, revolv- ing credit will meet that need. Furthermore, it creates an unproductive admin- istrative problem of defining a single sale or loan for purposes of enforcement. 3. First mortgages might be exempted since an annualized monthly rate is so customarily disclOsed. Yet, by the same argument, it could so easily be dis- closed. Why then i~ there need for its exemption? The problem lies in that closing costs and discounts are often used to fatten the purse of cre~Iitors not satisfied with the stated annual rate. The wi~Ie variations in closing costs was noted in a resolution adopted in 1964 by the Consumer Advisory Council recommending study and policy review. (See The Washington Daily News, June 11, 1964, and the official press release from the Office of the Special Assistant to the President for Consumer Affairs POCI-64-28). House and Home followed this up with a very perceptive article, which I commend to your attention, not only because it illustrates the problems so well, but it shows that the problem has existed for many years. Solution has not been reached through study. Thus, I am impressed with the virtue of lumping all cost~ into one sum-interest, points, lender's fee, credit report, appraisal fee, and all other costs a cash buyer would not have to' pay-and express this finan~e charge relative to the principal amount as a single annual percentage rate. `]~his rate would be not only meaningful and useful to the con- sumer, but would help illuminate differences in efficiencies with which closing operations are co~tducted. It is significant `that Changing Times considered the matter of points to be of sufficient interest to publish a lead article in the June issue. (attached) I believe that disclosure of dollar costs would shock consumers, but not dis- courage home buying. In fact, it would generate a wholesome respect for the power of interest which is too often overlooked in contrasting the cost of home ownership with renting. For example, I conclude after my discussion on pages 32-4 in $hopping for Credit, that for only 29c more a day you could own your own $15,000 home after 40 years of payments rather than continue as a renter of a $15,000 home if money is worth 51/2%. The power of compound interest is demonstrated on pages 30-32 of consumer Credit ConiputaUbns where 1 discuss, not only the amount of time needed to double your mone~ but its relevance to the population explosion. CONCLUSION Specifically, in my judgment, this will be a fully consumer-oriented bill if it: 1. Broadens finance charges to include all of the charges that profit the creditor and accompany credit, and for which the consumer becomes liable if he bor- rows or buys on credit, including: Official fees, appraisal fees, credit reports, and insurance 2. Broadens the disclosure coverage to require the annual percentage rate be expressed on all consumer credit, including: First mortgages Small purcliases under contract credit Small ticket items or quick repayment credit under revolving credit. 3. Requires the annual percentage rate to be expressed as a single rate, not compromised by fixed charges, and represented by the % mark. 4. Delete language that will encourage loopholes, add to administrative ex- pense, grant favo~red treatment to a particular class of creditor or a particular type of transaction. 5. ~tequires rate disclosure prior to the extension of credit, such as in adver- tising, and full disclosure at the time the credit is extended. PAGENO="0523" CONSUMER CREDIT PROTECTION ACT 513 In conclusion, I want to assure you that although I feel very strongly about the, points included in this statement and the changes I recommend, I share your conviction that this legislation is too greatly needed and too important to war- rant further delay for perfecting amendments. Mr. MORSE. Thank you. I wish to explain my position in appearing here today. I come pri- marily as a teacher. Back in the seventh grade people learned a little formula, I equals PRT. They go out into the. real world only to find out that interest isn't interest at all, it is a service charge or something of this sort. Then they learn that when a bank advertises 5-percent on a car loan, this isn't the same 5-percent rate they are paying on their savings. For example, I was able to get a beautiful picture that appears on the front cover of my pamphlet, "Truth in Lending." It shows a bank advertising certificates of deposit at 5 percent and behind it on the wall of the bank is a billboard with car keys and an enticing "Yours for only 5 percent interest." "Would you believe, this bank borrows and lends at 5 percent and still makes a profit?" reads the caption. I originally thought of having two Russian individuals walking down the street. I though it would be better to have two kids here. The bank borrows and lends at 5 percent and makes a profit. Can you believe that? This has gone on for years. Back in 1964 we had banks offering to finance cars at 3 per- cent when they were paying higher than this on savings deposits. I refer to this in the exhibits. I refer specifically to the article which U.S. News & World Report featured. It is the next to the last exhibit where the first `Consumer Advisory Council was concerned with the methods by which interest rates or finance rates were being disclosed. I think it is rather signifi- cant that back in 1964 a publication which was not known to be par- ticularly radical should have seized upon this as being so newsworthy. But as a teacher, this is the kind of flack with which we have to deal in trying to help consumers make sense in this credit. world. I know there is tremendous interest in consumer education. I under- stand' that the Governor of Illinois yesterday or recently signed a bill to institute consumer-credit education in all of the schools of Illinois. We don't even have a vocabulary. We don't have a standard dic- tionary of terms. This committee has asked for a glossary and if I may I would like to insert a glossary into the record at a later time which may help you clarify some of the terms. Mr. SULLIVAN. Without objection we would like to have you do that. (The information referred to may be found in the appendix, p. 1093.) Mr. MoRsii. I will work on it this afternoon. As a teacher we need this bill very desperately because we need to know what is meant by ~mnnual percentage rate. We need to know what a finance charge is so we can discuss it intelligently in the classroom. We need more time to talk about more important issues PAGENO="0524" 514 CONSUMER CREDIT PROTECTION ACT such as to how to use credit wisely and when to use it. These are the real issues we oi~ght to' be spending our time on. Secondly, I would like to place emphasis on the truth-in-lending aspects of this bill because this is where I have spent most of my professional time outside of the classroom. I might say, in fairness to myself, that I haven't gone into this study of credit because of any special prejudgnllent. It is only because questions have come up in the classroom and questions have come up elsewhere where people say,. "How does this work?" As a result I have learned how revolving credit doesn't work or~ does work, and the fact that rates of credit are usually only half right.. I, therefore, have 10 observations to make, and I will skip through them as rapidly as possible. `The first is a rather technical one-demonstrating the mathematics that are involved. I look at credit as saving up after the purchase rather than before the purchase, so as a credit user you are always saving up for money you have spent. Even if you can get money at the same intere~t rate it costs approximately 20 percent more. So,. the poor do actually pay more. The second point is that in today's market the consumer who wants to know the annual rate on installment credit and asks for it-I repeat, wants to know and asks for it-only gets `a figure that is approximately half right. This is the present status of affairs. `We have doeumen~ tation of this; it is in my pamphlet. I have here a master's thesis written by a stiiident summarizing 5 years `of quotations. There is no question that when a citizen walks into `a financial institution or anyplace dealing with installment credit and asks what is the rate that is being cha~ged in annual percentage rate, he is going to get an answer which is half right. The third point relates to the concern that people might be confused with all of this information. Perhaps they could be told too much. At the Senate hearings we ran a game which was most `successful, I believe. It is given on pages 4 and 7 of this pamphlet, "Truth in Lending." We established the point that as an individual gets more information, mope th'an just the downpayment and number of pay- ments and amoutnt of the payment, but also the cost and the rate- he does two things-one, he changes his decision as to which is the better buy when given pairs of these and, secondly, not only does he change that but he becomes more confident that the last decision he made was the correct one. So more information, the kind of information which this bill would require to be disclosed will result in more confident credit shopping. The fourth point relates to the matter of figuring the rate. I would observe first that this is a question which is way out of proportion to its importance. Equally important is the other side o~f the coin: How doe~s one figure t~ie cost, given the rate? I `think that' M~r. parr's t~sti- mony has backed1 off the oppoiients, the crapehan~ers who said, "How are you going tp figure the rate for' the schoolteacher, the farmer, and that sort of creditor with irre~niar payment needs V' In th~ pam- PAGENO="0525" CONSUMER CREDIT PROTECTION ACT 515 phlet I show a most crazy case of irregular payments-on page 20 of the pamphlet-and show that if you start with the rate, then you can figure the cost. You don't always have to start with the cost to figure the rate. You can start with the rate. The credit unions have done this for years. They have done it without machine calculation and they have been able to figure the cost. This is no mystery. A point that I would like very much to call to the committee's atten- tion is my fifth point concerning this matter of graduated or step rates. They have no place in a consumer credit disclosure bill. Maybe you don't know what I am talking about. I have here from the Con- sumer Finance News a sort of editorial of a Mr. Redfield-then presi- dent-detailing how, in 1963, some 12 States had changed their laws. As an example, the State of West Virginia's old law was 1½ percent on the first $180 and 3~/2 percent on the next $300 and up. This is a two-step rate. They now have $19 add-on on $200, $15 on $600, $12 add-on on $800 or 3, 2, 1, and a half percent step rates. It is a little bit like public utilities. Mrs. SULLIVAN. Would it help after your No. 5 explanation that that be added? Mr. MORSE. Yes; I would like to have it added. It gives a historical perspective of what he calls progression, but I call it regression; that is, how the industry has been able to get into the various State laws-dollar add-on, precomputed and graduated rates. Mrs. SULLIVAN. I think without objection we will have that added after No. 5. Mr. MORSE. I am tempted to read this example here but it is in the text. In a sense it is like the gentleman or any one of us who would drive up to a filling station that uses three pumps running simult'ane- ously, one at 30 cents a gallon, one at 24 cents a gallon, and one at 10 cents a gallon. After pumping a certain number of gallons, all pumps running at the same time, the cheap pump cuts out. Then after another certain number of gallons the next lower price pump cuts out, so then the high rate pump continues. About this time, then, it is time to refinance so the debtor tends to stay in the high rate system, that is one thing. But secondly and more from the point of view of this bill, what is the price that you are paying for gasoline? You drive up and ask your station attendant to run both the ethyl and regular gas into your tank at the same time and say what is the average price? It is pretty hard to shop intelligently when you have this kind of mixture of rates. The textbooks would indicate that it is a horrendous problem- most difficult to figure what the blended rate is., I give as one of my recommendations in the attached memorandum, dated August 5, how this could be done and I don't think it would be any great task to knock out the graduated rates, or if they want to use them let them use them but also let them make the blended rate known. This is recommendation No. 6 on page 3 of my memo. PAGENO="0526" 516 CONSUMER CREDIT PROTECTION ACT The sixth observation is that there are at least eight methods for figuring the rate. I wish to emphasize that it is tremendous that we have now moved off of this issue as to what system to use, constant ratio method, et cetera, down to the actuarial rate. This is real progress. I would like to emphasize that although we refer to this as the annual rate, what really happens is that this annual rate is merely the annual expression of a more basic rate. For example, savings `banks now advertise 5 percent. They don't pay 5 pe.rcent-~--really-but if they are advertising 5 percent com- pounded quarterly-it is really 1.25 percent a quarter. Mr. HANNA. I want to ask you, right at this point when you make a distinction between rate and yield-because I think what you are saying bears right on that, does it not? Mr. MORSE. Yes, it does. There is no trickery involved here; a 5-percent compounded quar- terly will yield $5.09 or 5.09 percent. The nominal annual rate is 5 percent per year. It is based upon the time when you figure the in- terest-if interest is figured, in that case, quarterly and 4 times 1.25 gives you the nominal rate, in name only, and the bill does provide for this nominal annual percentage rate disclosure. Mr. JIANNA. What you are suggesting is that it would be an actual rate then that would be expressed if you went actuarially on the yield-the yield gives the annual rate? Mr. MORSE. The yield is what you will take home. The nominal rate is what you would be quoted. Going back to the first Consumer Ad- visory Council report we recommended that the rate be similar to that used by savings institutions. We are keeping the savings bank system. Mrs. Dwyi~. Mr. Morse, which is the most accurate rate for `the' customer? Mr. MORSE. The customer- Mrs. DWYERi What he takes home, 5 or 5.9? Mr. MORSE. Customers will take home zero dollars because they might withdntw just the day before payroll. The bank doesn't know what yield th~ individual is going to get oniy under certain circum- stances. But customers know and the bank knows-they know that we are going to pay at the rate of 1.25 percent per quarter. This is an accurate statement. If you leave your money there it will accumulate' interest and will pay 1.25 percen.t per quarter. This quarterly rate is the natural or nuclear rate. This is the basic unit. Now, you can express this in annual terms `by multiplying by 4 which would make S percent. Mrs. Dw~R. How many savers really know this? Mr. MORSE. Judging from much of the `advertising, particularly by the savings and loans that have now advertised-I have a quote here is my pamphlet from a west coast savings and loan-this is a few years ago-all paying 4.85, but because of their compounding you can make 4.94, except from one. PAGENO="0527" CONSUMER CREDIT PROTECTION ACT 517 One of them-here it is-is advertising it is paying 4.97. All the others pay 4.94 because they compound 4 times a year while this one compounds 365 times a year and gives 4.97. Mrs. DWYER. Isn't it true, Mr. Morse, what the saver really wants to know is how much interest they will be paying? Mr. MORSE. But the consumer-what he needs to know is what are the tools he has to work with as he makes his decisions. He doesn't know at the time that he puts his money in the savings account that he is going to get the full $5.09 per $100. He knows if he plays for keeps and keeps it there for the full 365 days he will get that yield. But he could have an emergency and withdraw the account so he needs a tool that he can put to use if and when needed. He needs to know all of these factors which bear upon the savings. One factor is the 1.25 percent per quarter; another is that he has 10 days of grace or doesn't have the 10 days and if withdrawn before the quarter ends he will lose interest. This is where I go on back to the American Bankers Association, represented by Mr. Charis Walker, who testified in the revolving credit ease that he thought that in the case of revolving credit the 11/2 percent disclosure was more accurate than its annual expression. He says disclosure on a monthly basis provides a consumer with a more accurate statement of finance rate than is possible with an annual expression. Now, I don't know what he is really saying here. Evidently he doesn't believe that the annual expression of savings banks is accurate. Mrs. DWYER. Isn't he saying the same thing that you are saying? Should it be told monthly or quarterly? Mr. MORSE. It is traditional in America. And as Mr. Barr testified, even the Treasury's 90-day bills are quoted in terms of annual rate. Annual rate is the common denominator, just like many things are expressed in pounds or tons. In the area of money and credit we traditionally speak in terms of annual rates. I pay 6 percent on my house mortgage. I actually don't. I pay a half percent a month. Those are my monthly payments. And it is annualized in terms of 6 percent per year. As long as we know what we are doing we are not being inaccurate. This is known and I understand this to be a nominal annual rate. Mr. Hanna has pointed this out. This is a nominal rate. This is not the yield or what it is going to cost the bank. As I pointed out, a bank that pays 5 percent may pay zero percent. I have had that unfortunate circumstance when I have needed money in a savings account and had to withdraw before the interest is paid. In regard to this matter of accuracy, then, we need to know how many days we are going to keep it in, when we are going to put it in, when will we withdraw it and then we can have in accurate playback of what we are going to get from that so-called 5 percent. PAGENO="0528" 518 CONSUMER CREDIT PROTECTION ACT We have gro~Vn up with this system of quoting nominal rates. And that is all. I think I have said all I have to say on this in that part of the state- ment. The rest ~f the statement deals with revolving credit, that you are going to take u~ maybe later on. I see Mr. Klein is going to bie testifying. I think he can do a better job here than I on this matter. I would like to emphasize one point, that they charge 11/2 percent on every penny of credit subject to their system's credit. You were talking with Mr~. Margolius about Penney's system. I have a Penney contract here. And I see nothing in the agreement about an adjusted balance or any other kind of balance. They don't go into all of these details. They charge on balances they really charge for. I pay 1½ percent on what they charge for and, annualizing it is 18 percent. Yet they seldom charge me anything. I escape. I try to scoot out before the charge time comes. But whatever balance they catch me with, I pay 18 percent on. My last p'oint-well, before that, I can't skip over my comments about the small business people. Really, those who are concerned with the plight of the small businessman ought to take a good look at this testimony from Penney's. Theirs is `a iQss leader. Many State statutes prohibit loss leadering. Penney's really gives credit up to 30 days and then they say, in effect, any other dollar that you pay in the next 30 days we will give you credit as of the first of the month. They can't borrow money `at this zero rate. They have to replace their capital. So this is a loss leader. Why aren't the small business people in here fighting for this bill? My last point hits at the State's rights issue. Frankly, I have live&- this is personal testimony-but I have lived in New Jersey for 16 years, Bergen county, and Ohio for 2, Wisconsin for 3, Illinois for 3, Iowa for 4, Flc~rida for 8, Kansas for 12 and this is just what happens to a fellow that goes into academic work, joins the Navy and does a few other things. I don't think I am unusual in this respect. A pound is a pound the world around. Why can't an annual percent- age rate be the same? Look at my record of seven different States, each with different concepts as to what is interest, service charges-each with different laws for cars, for revolving credit, others for credit uniofls, banks, and so forth. Frankly, this complexity is an insult to the American intelligence. I don't know whether we need a Federal system but we need some join- ing together t~ get this terminology straightened up so one c~n trade around the coi~intry without these trade barriers, and they are trade barriers of igi~orance. PAGENO="0529" CONSUMER CREDIT PROTECTION ACT 519 If we want to go back to State's rights, then we must start carving Sears, Penney's and Ward's into 50 different parts so we can handle them on State's basis. They are national and their interests are national in scope. This is one of the chief reasons why We need national legislation. Finally want to compliment you for leaving out the installment open-end j~rovision. This makes no consumer sense. If I know the rate is 18 p~rcent or,1½ percent a month, either way, there is no differ- ence wheth~r I have a lien on that property or don't have a lien on that property. 1~rom the consumer point of view it doesn't make any sense to have difl~erent kinds of credit. The $10 minimum, that's wonderful that you k~iocked that out. Mr. Bennett in the Senate used to cite his famous battery case which was 104 percent as an example of a small credit transaction that should be exempt. Any service station could have said, "Here is the battery, our interest rate is 2 percent a week." He would have come out with the same answer. If a serviice station attendant can figure 2 percent ~sales tax he can figure a 2-percent financing on the battery, too.~ I thixIk it is a shame Mr. Bennet~t got through the long history of Senate hearings with that silly sort oi~ case. That is a 104 percent annual rate. Thirdly, with respect to first mortgages, I have quite a bit to say here, but I kvould like to say first that back in 19(34 the Consumer Ad- visory Cou~cil was greatly concerned with home closing costs, and the variations ~f it around the country. Specifica~ly, our recommendation was that these variations in home ~1o~ing costs throughout the Tjnited States be subject to study. How sensitive a* issue it was is indicated by the fact that it ~as picked up by House afid Home magazine, a very stable and sophisticated journaL I have ii~icluded a copy of that article from House and Home of August 19~4. Specifically I thought their companion article, "How Bill Levitt1 Frees Buyers of Closings Costs" was most appropriate because it ~hows how Levitt was able to get closing costs down from $576 to $21$. This maifter of closing cost has been kicking around fpr at least 3 years. We haven't done much about it, that I know of, except stud~y it a little bit more. There is tremendous variation from place to place, but as I sa± in my testimony, what it boils down to is that the lender who can't make enough money through interest alone, must make money some other way, and the result is points, discount, closing costs, and so forti~. I review~d a case for the attorney general of Kansas in which the individual ~would have been better off if he had borrowed money for anything less than 200 percent after all of the costs were figured. But the individual needed the loan and the lender wanted to lend the 83-340-H67-pt. 1-34 PAGENO="0530" 520 CONSUMER CREDIT PROTECTION ACT money to him. They cut the same piece of property into four quarters, and they surveyed it four times so there were four survey costs for the same piece of property. This is the kind of crazy business that goes on. I say throw first mortgages back into the bill and what will happen is that the blended rate will be disclosed, I~f the lender can't get a sufficient return from interest, he~will get it out of the surveying or appraisal fees or some other system. Btit as far as I am concerned, as a consumer, let me lçitow the blended rat4~. Time is upon us, so I think I will conclude here, Madam Chairman, and stand ready to defend any of these points. Mrs. SUlLIvAN. I think we all have a number of questions that we want to put to both of you gentlemen. You both have made excellent statements. Mr. Margolius, from your wide readership in so many union and other newspapers, you have probably been in a better position over a longer period ~f time than any other person to tell us about the prob- lems of the indi~viduaI in coping with the foolishly tragic use of credit by people who were tricked or enticed into going into debt heavily over their heads. We discussed extensively, during our hearing with the bankruptcy referees last Friday, the vicious practice of using garnishment as a selling tool-as the main ingredient of determining a buyer's poten- tial as a credit risk. Certainly it is true that most reputable firms use this weapon only as a last resort-an~l then, only sparingly. But we touched Only briefly on the deficiency judgme~t resulting from repos- sessions. Tell us, froi~i your knowledge and information how this usually works-~where the buyer has lqst póss~sioh of the product but owes fantastic k~mounfs on something he no longer has. And ~tell us how you think ~Ve can cope with it. You gave us dome examples in your prepared statement. How can he cope with this ~ What does he do ~ Mr. MARGOLItJS. The buyer at this point has no way of coping with it because the credit laws are established altogether on the side of the seller. There has been some question raised about whether this new credit, bill would be a Government intervention in private enterprise. The garnishmei~t is the most naked form of Government intervention. It is Governm4nt interv~ntion on the side of the seller. Time after ~time, it works this way. A woman ha& bought a vacuum cleaner in New York City. It didn~t work well and she brought it back to the seller to have him repair it. He refused to repair it and said that service was not in the contract. So she left it there. She saw no point in taking it home. She got a notice that she had been garnisheed. Incidentally, she never received the actual summons. There is a good deal of incidence of "sewer service" in the States that have garnishees, PAGENO="0531" CONSUMER CREDIT PROTECTION ACT 521 although States like Colorado, Illinois, and Ohio don't have "sewer service" bscause when you have cognovit notes, who needs sewer service. The debtor already has waived his defenses. In States like New York there are instances which the U.S. Attorney General is now investigating. This woman never received proper court notice. All she got was a notice that her wages had been garnisheed. Mrs. SULLIYAN. What do you mean by "sewer service"? Mr. MARGOLIUS. The process server is supposed to serve the notice on the debtor that he is being sued on this contract but he never ac- tually sees the debtor. This happens many times. They found, for example, cases in which process servers had served notices on debtors in New York at addresses where they hadn't lived for years. In this typical ease of the vacuum cleaner the woman agreed to pay $80 for, she finally had to pay $120 for that and doesn't have the vacuum cleaner to show for it. Let me tell you about this woman worker on the East Side of New York who bought furniture for $800. She had paid $350 off on it s~hen ~he fell ill and fell behind in the payments. The fu~n'iture was repossessed. She was then presented with a new bill for $800 because the furniture brought very little on the resale and with the reposses- sion and legal costs and warehousing costs she now owed $800 and didn't even have the furniture to show for it. She not only lost the $350 but had to pay for the full balance. That happens time and time again. Mrs. SULLIVAN. There is no way, you say, for them to cope with this at all? Mr. MARG0LIUs. No way at all. In Colorado one of the vacuum cleaner companies selling vacuum cleaners on referral plans for $400, no less, ran their ads under job wanted ads. This woman answered an ad thinking she could make a little extra money to help her husband. The salesman came and told her all she had to do was send them customers and they would give her $20 for each referral but he asked her to take the cleaner and sign the receipt to show she had the vacuum cleaner. They found 70 cases like that with the seller advertising in the Denver Post, a fine respectable newspaper. The reputable businessman doesn't use garnishment as much as th~ disreputable ones. But respectable institutions are financing high- pressure sellers all the time. A big bank in Buffalo, N.Y., bad a half million dollars of food freezer contracts. A big bank in Detroit financed referral-plan carpet sellers. So did a large hank in Texas and so on. So the respectable institutions seem to close their eyes to what is going on. Mrs. SULLIvAN. One way they might have some help in coping with this is if we give them the tools through this legislation to be PAGENO="0532" 522 CONSUMER CREDIT PROTECTION ACT able to buy move intelligently. `We are not going to stop people from wanting things they cannot afford, but at least when they do buy it they should know what it is going to cost them and what percentage of the cost tihey are going to have to pay for using somebody else's money to satisfy their ~ants~on credit. Mr. MARGOI~IUS. If we take away the garnishee we take away the most important lever of the deceptive seller. Here is one case: There must be as many different types of gouges as there are poor gullible people who, through haste, are beitig taken- One woman r~cently wrote me. My husband ei~rolled in September, 1966 ~or a correspondence course jfl air conditioning, heating, etc. (with a "trades institute" in Chicago). He was sent it couple or three little booklets. The course and some parts and kits were to cost $495. We paid the we1l~trained salesman $25 and were t'o pay $15 a month. Besides having so many other bills piling up, and not being able to pay the $15, my husband found the course to be short of what the fast-talking salesman niade it sound to be. Now this outfit has been sending threatening letters. They want $193 within 10 days to can'ce~L the enrollment. We have paid $55. Tbi~' would make a total of $248 for notb~ng. It is so ridiculous my husband has told them to go ahead and turn it over to their collection agency. We are plugging away at our 1io~ies't debts and really struggling, as are many people to pay for goods actually received. Most working people are not well informed on their rights. Nor do they know what to do when these pressure tactics and sca1~e letters are used. A main's job is all be has to provide a little security for his family. My husband is almost 49. lIe is wondering if they will try to jeopardize his job. Note that la~st sentence-this man is being frightened into paying that bill because of `the threat. Mr. WILLIA~1S. I find these stories very enlightening. They remind me of many o~ the letters I get in my own congressional office. How- ever, the lette*s I get I investigate. I have found out that the facts tts described ih the letter are not facts at all. They are fantasies. Now~ this ~*stimony would be much more helpful if these things had been substantiated. Furthermore, Madam Chairman, you have just made `the statement as I believe is in the record that we can't stop people from buying that which `they cannot afford. We can let them know the interest rate the3r are going to be paying. Mr. Margolius makes the statement if we take the garnishee away we are going to be taking away the greatest tool that the unscrupulous seller has to use. You `are talking `about people w'ho are overextending themselves and can't past. Mr. Margol~us is speaking about taking something away from the seller. So I think we have a little conflict here. Mrs. 5uI~I~AN. I am sorry the gentleman from Pennsylvania wasn't here Friday. Because I think he would h'ave had his~ eyes opened. Mr. WILLIAMS. You can rest assured I will read the record of Fri- day and I hope I will find more substantiated statements than I hear here this morning. PAGENO="0533" CONSUMER C~DlT~ PROTECTION ACT ~23 Mrs. &TLLIVAN. These wore Federal court officials who have over 50 years of experience as referees in bankruptcy. Mr. WTLLIAMS. Permit me to say I hope their statements have been substantiated to a greater extent than some of the things I have heard here this morning. Mrs. SIJLLIVAN. Dr. Morse, you will certainly be interested-and perhaps a bit surprised, too-to know that the American Retail Fed- eration has been using your data on revolving charges in an effort to prove to us that it is impossible to figure the anni~ial percentage rate on such charges. They have sent around an excerpt from one of your publications, showing at least six different methods used by retailers in making the 1'/2-percent monthly ~harge-on the beginning balance, on the end-of-the-month balance, on the previous month'.s balance counting payments during the month, or not counting them, and so on. Does all this add up to the federation's claim that 11/2 percent per month is not 18 percent a year? Mr. MORSE. They have not honored me with a copy- (The information referred to follows:) AMERICAN RETAIL FEDERATION. Washington, D.C., August 11, 1967. Hon. LEONOR K. SULLIVAN, Chairman, Consumer Affairs $ubcommittee, Rayburn Building, Washington, D.C. DEAR CHAIRMAN SULLIVAN: As a result of the American Retail Federation testimony on truth-in-lending, some Subcommittee members apparently have the impression that all retailers use the same method for computing service charges on revolving credit accounts. This is not correct. The attached will clarify the situation. H.R. 11601 will force retailers to tell customers they will be charged 18 per- cent per year on revolving credit when, in fact, this i~ not so. Dr. Richard Morse has indicated six different methods used to compute 11/2 percent monthly service charges on revolving credit accounts and we feel that the Committee should be aware of these independent systems. Cordially. EUGENE A. KEs~NaY. PAGENO="0534" 524 CONSUMER CREDIP PROPECTIO~ AC1~ I ~ 1/ I / !~, ~ I- ii I I Iii i~~2~f `II 0 C~) cc o S C', 0 ci: 0 > -J 0 > 0 cc C~) LU > CO 0 LU LU A- LU p.. a. 0 p.- a CO I /// `CO ~ ~ I ~ a a. 0 000 .CO~ 000 p PAGENO="0535" CONSUMER CREDIT PROTEOTION ACT 525 9 ~ ~~JH ~ I I .9 *9~~ 0 H ii U fi CI)0I~ 0= 00 .00 PAGENO="0536" 526 wsUMcitti~tiIT ~?RO~ECT1ON ACIP Dr. Rich~rd Morse, a vocal proponent of Mrs. sullivan's bill, HR. 11(301, made a survey of 19 retail stores h~ 8 ~tate~ to demonstrate the variouu types or methods of assessing service charge on revolving credit account. Tbe5ur~ey is reported and contained in a booklet entitled "Trutb-in~Lendthg", published by the Council on Consumer Information. The above chart is found on pages 20~-27 of that pamphlet. All of the above retailers would be forced under H.R~ 11&~1 to tell customers they will be cha,rg~ed 18% annual rate. Query: How can the customer who pays and the customer who pays $2.28 both be paying 18%? The fact is neither are and one paysi less than half the rate of the other. Mr. ANNUNZtLO. Will you yield at this point before the professor answers? I would like ~I\{r. Margolius to answer Mr. Williams. He asked you a question; can you substantiate the facts? Mr. MARGOLITIS. I really resent that, Mr. Williams. You didn't ask me if I could substantiate it or not. Mr. WILLIAMS. I will ask you nOw. If you have substantiation, I don't know wh$~ you did not bring it out be~fore I had to ask you. Mr. MARGOLItS. The case of the- Mr. ANNnN~IO. On the letter of the. woman from Chicago-can you substantiate this letter? Mr. MARGOLi~trS. Do you want to read the letters? Mr. WILLIAMS. I assume the letters state what you state. Mr. MARGOLILS. The case of the Denver woman who bought the vacuum cleaner worth $70 on the referr~l plan. rThat was investigated by Gerald Kopel, a member of the Colorado State Legislature and editor of the Bankruptcy Newsletter which is a nationally used news- letter. The case of "sewer service" investigated by Assistant Attorney Gen- eral Frank Pai~nizio of New York City and hes~id that in 612 cases the post office ~ould not locate 201 persons at addresses where process servers swore they had served them. I am an old1 journalist, Mr. Willianis, an~I I am not Jikely to us~ cases that can~t be proven. I have, got all kinds, of documentation, letters and so on. Mr. WILLIAMS. Out of 600 and some addresses they couldn't nd anybody at 205 addresses. What p~viod of time had elapsed in be- tween the time that the complaint was filed and this investigation took place? Mr. MARGOLITJS. I don't know. I would have to go through this. Mr. WILLIAMS. That is important-in a period of 6 months a lot of people can ~iove. What addresses were used? Were they the ad- dresses the purchaser gave to .the person estending credit? Mr. MARGOLIIUS. That is not the point. The proces.s servers said they had served the people at these addresses, `The process servers swore they served them at these addresses but th~ post office could not locate 201 persons. , Mr. WILLIAMS. What perioa of tim~ ~lajised? L dxii interested in the time the process servers were supposed to serve the process. You say you don't know and I say that is a `very `important factor in. this investigation. . , Mr. BINGIIAM. Point of order. . Mrs. SULLIV4N. Let's go on with, the questioning. I want to say this: In my own files-and these are from m~ people in St,"Louis-I have PAGENO="0537" CONSUMER CREDIT PROTECTION ACT 527 complaint after complaint from people who have experienced just such a thing as you have described, Mr. Margolius. When they come to me I immediately send them to our circuit attorney and I have had them come back after investigating and say, "Yes, what the people said was true." The people who victimize consumers are often within the law and there isn't anything we can do unless we change the law. Mr. MARCoLIus. They are caught like mice in a trap, Mr. Williams, they are. I have hundreds of cases in my files from legal aid attorneys and others. Mr. WILLIAMS. I will defer this until my time to ask questions. Mrs. SULLIVAN. Dr:Morse, will you answer my question? Mr. MORSE. I have just seen the statement from the American Re- tail Federation. In the first place they don't quote me completely and I would like to give the conclusion-there is nothing wrong with my figures at all. But they do emphasize, I have emphasized in their que1~y: "How can the customer who pays $5.44 and the customer who pays $2.28 both be paying 18 percent?" The fact is neither are and one pays less than half the rate of the other. That is their statement. My statement is, that they are all paying 18 percent on the credit for which they are being charged. Then, I conclude with what they didn't say-I said thus: "Unless the base is uniformly defined * * ~" and this, Madam Chairman, your bill does not do. This bill does not regiment business and I would underscore this. This is what they are asking for. Mrs. SULLIVAN. To regiment? Mr. MORSE. Evidently. All your bill is doing is saying, whatever rate you are applying to whatever base you use, you must call it-you must disclose it. If ydu are using a monthly rate of 11/2 percent, it is annualized as 18 percent. The bill says nothing abont how to figure that base. If you want to give them a 30-day free ride~ 60-day free ride, 90 days, give them days of grace and so forth-adjusted balances, beginning bai~nce, whatever balance. Your bill only asks that these, too, be disclosed. So I say in my pamphlet: "unless the base is uniformly defined, stores will continue to ndjust their billing methods"--and here I imply why they adjust them-"to accommodate their merchandising and accounting methods and customer responses." I would like to see them asked why these variations prevail today. I think their answers would be, as I suggest, a result of~ the various patterns-we think our customers like it this way-we merchandise through credit. We have iBM or some other data processing, so we can't do it some other way. rrhey each have their own reasons for variations, The bill could require them to standardize this. Mrs. SULLIVAN. It does not do that. Mr. MORSE. It does not. But if the retailers want to press this point even further, then they are going to force a bill which would standard- ize these procedures. And I hope this doesn't come to pass. Mrs. SULLIVAN. I wanted you to see the letter and comment on it. Mrs. Dwyer? Mrs. DWYER. Thank you, Madam Chairman. PAGENO="0538" 528 CONSUMER CREDIT PROTECTION ~CT Professor Morse, if the Sullivan bill is pass~dthere certainly will be an 18 percent annual rate and no free ride, is that statement true? Mr. MORSE. No. Mrs. DWYER. What is your answer? Mr. Monsn. My answer is given in the literature that I have distrib- uted as exhibits-if I can find my exhibit-here it is-Sears, Roe- buck. This is my interpretation of your questioii applied to a specific company. I show, on page 20 of my truth-in-lending pamphlet, a Sears billing, and in my prepared statement I say essentially all that is involved i~ a printing problem. You will find it here. I think this Sears bill is tremendous. Look how much inki~ñaabion Sears gwth its customers. It tells them what they still owe-$56-they can go in;hock another $34 and still pay $10 a month. With their credit rating they could borrow$~94 more, but this will disturb their monthly paym~nt pattern of $10. This is really disclosure of four critical decisions which the consumer has to make. They give, the service charge ~of 96 cents. But how is that figured? They don't tell.~The bill-all th~ bill would require is to have printed "Monthly servièe charge is 1% percent (18 percent~ ~er year) of the previous balanc~." The previous balance is shown here in this top box, so they would have told how it was figured. That extra printing is all the bill would require. Mrs. DwYER. If the consumer feels that he is paying 18 percent, wouldn't all the retailers be forced to make the 18 percent if they wanted to or not? Mr. MoRsE. Retailers are engaged in undeistanding their customers. I don't knô~ b~w consuther will feel initiaily'orover a period of time after being told4they' are paying 18 percent. Secondly, I d~o uot~know how retailers will adjust to this attitude as manifested by the consumer. But I know retailing is capable of ad- justing to the ~1isposition of the people. I don't think ~there is any trickery involved here. I repeat to you that this is the same kind of message, this same kind of language, the same kind of. cOmmunica- tion that consumers now have, and the public has from quotations for savings accounts and on home mortgages. Mrs. Dw~eR.' What incentive would it give to a retailer to give any free ride ~tt all? Mr. MORSE. ties, it would. Mrs. Dw~R,~f the 18-percent charge goes into effect? Mr. MoRSE. they will just put oh~ `the statement, "Trade with us, don't pay for 30 days. Our credit doesn't start until 30 days after the billing." They ~vill advertise this without deception-just as savings and loans are advertising now, "We pay daily interest." This adver- tising for savings got a little out of hand, as your recall. In my Senate testimony I included a clarification on this point by the three agencies, FDJ~C, Federal Reserve Board, and Home Loan Bank Board as to what is meant by "simple interest." It had gotten out of hand. But disclosure of 18 percent would not require cessation of the 30- day free ride. As a matter of fact, they might increase it to 60-day free ride. This is merchandising. They will do that which they think will best represent them to their cuStomers. PAGENO="0539" CONSUMER CREDIT PROTECTION ACT 529 Mrs. DWYER. Do you know whether retailers charge less than 18 percent? How many do charge less than 18 percent? Mr. MORSE. Mrs. Dwyer, I am a little bit boxed in. I think this is a question the industry should answer. I don't have the resources to survey all of the various procedures. I walked into this matter of revolving credit cold, I used to give public lectures and be asked such questions as "What happens if I ~ay up on the 15th of the month ?" But I began serious study of it at the suggestion of Mrs. McNaughton, then a staff member of the Ame~jcan Home Economics Association, She said, "Dick, you have done a good job of figuring how qnr financ- ing works; how about getting students to figure out revolving credit?" I almost flunked two students before I found out they were right and I was wrong. I had worked out a sample billing problem in such away the retailers figured out there was no charge. rI~heI1 I began to learn what this 30-day free ride is about all. I don't know whether you wQuld be interested, and I don't nieap to fill the record, `but I have a rei3~ort ~f some practices. After the Sen- ate hearings I went home and compiled it, I, sent it to Mr. P~oxmire. I canvassed Topeka, Kansas City, and Manhattan, I~ns~, and I hap- pened to be down in Dallas, so I got together all the variations, of different stores and this is it, summarized. I can't answer your~question in terms of what is present practice because it is such a terrific amount of variation. None give-the top rate is 11/2 percent-this is answering your question. I think some give 11/4. Pennsylvania law is going to limit it to 11/4. Some have a graduated system whereby, if it is 1 percent or three- fourths percent on larger balances-a double system~-I have already spoken of that problem. Mr. WILLIAMS. Could we have that document in the record to which Dr. Morse is referring? Mrs. SULLIVAN. If he wishes lie can submit it and we will check it over. Mr. MORSE. This is a letter I wrote Senator Proxmire. Mr. WILLIAMs. Thank you. Mrs. DWYEE. Dr. Morse, there is a great deal of competition in the credit market? Mr. MORSE. Terrific. But- Mrs. DWYER. Under existing law ~ Mr. MORSE. Yes. I grew up in the days when we didn't have Little League ball games. We had a lot of competition then. But I think it is very organized at the present time and still much competition. The terms of the trade iii consumer credit are not sufficiently clear that you have clean competition in credit from the consumer's point of view. Mrs. SULLIVAN. Ninety days is still cash, isn't it? Mr. MORSE. One of these stores gives 90 ~days cash. Mrs. SULLIVAN. Mr. Gonzalez? Mr. G0NzAI.Ez. Thank you, Madam Chairman. First I wish to take this opportt~nity to-the first I have ever had to thank and congratulate Mr. Margolius for the tremendous job he has done over the course of years. I think my first acquaintance with his work was reading his articles in the Machinist magazine years ago PAGENO="0540" 530 CONSTJMER CEEDIT rRo~ECTIoN ACT in which many, ibany interesting and very educational facts and points and articles bro*ght to the attention of some of us the need to inform and I don't think the intangible work of writing an article can fully be described in the total contribution that it has made in concrete terms. So I take this opportunity to thank yon on behalf of many people who would not have a chance to acknowledge your work. I want to thank you for your support of the garnishment provision of this bill. I am intensely intere~ted in that although my State long ago, as early as 18Th by constitutidhal inhibition, prohibited garnish~ ment of wages and services. Why, may I 4sk you, does not the union movement nationally take a more militant and aggressive attitulë toward the need for this legisl~ti~ii? Would you be~able to hazard a guess? Mr. MAROOLITJS. I think they do. I think that perhaps tactically they felt it would be better just to get this much of the bill .through at this time. I think that they are very concerned about the garnishee problem. They are concerned because workers get fired. And in a uumb~r of States bills have been introduced to bar firing of workers for garnishees ;1 for example,. Ohio, New Je~s~y, and other States. But only two Stktes have managed `topass this. Hawaii recently passed a full ban for firiiig for garnishee, a 1~w which was secured by the Hawaii State ~ederation of Labor. New York has a modified law in which a wor~ker can~t be fired if he has just one garnishee in 1~ months. Unfortunately, these laws~ don't work too well and I think I can criticize them because I mys~1f proposed this way of trying to stop garnishee firings. I don't think it stops it because I understand from an assistant corporation counsel in New York City, Mr. Henry Stern, that small emp'oyers still don't want to bother with garnishees even if the law says rthey can't fire the employee. There are other ways to get rid of an employee. They don't want to bother with garnis~iees because of payroll problems. So the only solution has to be to elimiit~te garnishments altogether. If it ~doesn't cdme now it wil1~ome 6 months or a year from now but in the meantime several more million people will be aflected by it. Probably 5,000 to 6,000 people, as we sit here today, are getting hooked on plans which are based on the threat of a garnishment to make the final ~ol1ection. Now~, Mrs. Shllivan asked befth~e about deficieiic~ paymthts and I have' a well-documented case here, Mr. Williams. This is from the city of Chicago, a ~tudy made by Jerome Schur for John S. Boyle, chief judge of the Ci~rcuit Court of Cook County. They have a pretty rough problem there because they permit confession of judgment notes and they have 600 ~f these notes being filed a day. The lawyers put them through on an assembly line basis. The investigator found that very often they didn't even bother with the personal s~gnnture. The lawyer just rubberstamped the court notices as they put them through. Many of these are based on used-car contracts and used television sets. About ~5 percent are based on clothing which is a pretty serious problem when you get 4own' to where people are buying clothing on credit and being garhish~ed for clothing purchases. In the case of used cars, PAGENO="0541" CONSUMER CREDIT PROTECTION ACT 531 thn investigator studied 164 suits and he found that even after the downpayment, the monthly payment, and the repossession, sale pro- ceeds-when the car has been seized and sold-even after those pro- ceeds, the average buyer still owed more than half of the original price of the car. (The document referred to may be found on p. 1142:) So he had a big deficiency judgment against him. This is what they are suing on, They then have th'e garnishee to use against him. I don't know if you can get a garnishee through this year or not but the situation is there. 1 am documenting it as best I can. Mr. WILLIAMS. Were all of these people delinquent in their pay- ments at the time? Mr. MARGOLIUS. Yes, sure. This, is just a generalization and you will forgive me for that, Mrs. SULLI~-AN. Is this to be counted against your time, Mr. Wil- liams, or that ~f Mr. Gonzalez? He has `been recognized. $r. WILLIAMS. My question has been answered. I am sorry. Mr. GONZALEz. I wanted to thank Mr. Margolius'. My time has ex- pired. Mrs. SULLIvAN. I have received a statement from the National Fed- eration of Settlements & Neighborhood Centers in New York which I think is an `appropriate one for placing in the record at this' point because it relates to problems cited by Mr. Margolius. It expresses the view `that the proposed ban on garni~hment would influence iner- chants to be more cautious in extending credit to families which can- not meet the terms without extreme suffering. (The statement referred to follo~vs:) STATEMENT OF TIlE NATIONAL FEDERATION OF SETTLEMENTS AND NEIGHBORtIOOD CENTERS, Nuw YORK, N.Y. I am Gladys Duppsta'dt, Secretary for Social Education and Action for the National Federation of Settlements and Neighborhood Centers, 232 Madison Avenue, New York, New York 10010. I wish to speak in favor Of lilt. 11601, the proposed "Consumer Credit Protection Act." The National Federation of Settlements ha's 246 member agencies, and services 16 more, operating 399 neig~bo'ithood centers in 04 cities, 30 states and the Dis- trict of Columbia. Twenty-two metropolitan or regional federations of neighbor- hood centers are affiliates also. In addition, National Federation operates; a Na- tional Training Center based in Chicago. The National Federation of Settlements works to improve neighborhood conditions favorable to family life an'd helps its member centers throughout the nation to serve their neighborhoods effec- tively through a wide range of direct and advisory centers. Most of our member centers are engage4 in consumer programs, and have been over many years. Our support of H,R. 11601 is `based on a sOcial~ policy reaffirmed at our busi- lbs's meeting in Chicago May 1966, as follows: The Federation will support con- sumer education activities `and legialation for the consumer's protection, in- cluding `appropriate representation of consumers in the federal, `state `and local governments, and more intensive investigation and study of consumer pr~blems', especially installment buying and other forms of credit financing. A widely read `book, also used as the subject for a docume~ary film, "The Poor Pay More, Consumer Practices in Low-Income Families" by David Caplovitz was based on a joint Stu4y and program from three of our member houses, Henry `Street Settlement~ ~atnes Weldon Johnson, and Union Settlement. These particular settlements were located in New York City, but l~Lr. Caplovitz described buying habits practiced `by many of our low-income neighbors and dilemmas they encounter from overuse of credit in the 93 cIties we serve. While all three Titles of the proposed legislation reflect problem,s we have encountered for many years, we believe tha;t national laws are necessa~~,y' to PAGENO="0542" 532 CONSUMER CREDIT PROTECTION ACT ieiiifoi'iP the OdiliOtiffilal eftOrt~ we and sjin~lar groups 1iav~ ik'en makiog to train our neighbors to shop wisely, to examiiie the quality of goods being piirch~ised, and to try to know the actual terms and coiiditions for any credit transaction. A. comnion tool we have used in 0111' educat~oim1 ~rogri1n1 is the lust itution of credit unions. A few families have been helped by credit unions formed by neighbors under guidance of our settlement houses and have seen the adviuitage of knowing exactly what one is bargaining for wl'eti l~orrow1iIg money. However, we feel that our efforts have been hut ii small step in the right direction. We feel that the legislation hi Title II prombitmg garnishment nt wages will benefit our members. Usually we hear of a garnishmeuit titter the prsomi has lost his job because lie had his wages garnisheed several times and his employer disniissed him in anger. We would hope that this section would influence merchants to l)e more cautious in extefl(hiulg credit and to PrOV1(le reali~itic terms which can be met by a struggling family. Many of the ~~ople we have seen dismis~ed were heads of young families who needed hoi~sehoId goods. but who had many obligations because of children, and who were trying to work and improve their own skills and educatioii through extrajobs, but could i~ot "make ends meet." We urge that tile proposed Commission on Consumer Finance in Title III include strong spokesmen for consumer's interests. Mrs. StTLLTVAN. Mr. Wylie? Mr. `WYLIE. Thank you, Maclam Chairman. Mr. Morse, if 11 may ask you a couple of questions. You mclicated in your statement that the banks aren't really telling the truth when they say that you draw 5 percent interest on your money. You cited an example from your own personal experience where you had to withdraw money prior to the hme the interest was added so that you didn't get any interest. Am I stating that fairly? Mr. MoRsE. I raised the question I used as my point of reference, Mr. Charles Walker's statement, that an tumuaijzed expression of the monthly rate is not as accurate as the monthly imite. is. I tn ru this aroumi and I)omt out that a savings account is really like an open end revol vmg account. rFcieV don't know when I'll save. I am not oii contract to ~itve SO much a month or so much a week. They don't know when I tim going to \vithdlraw it. It applies like revolving credit account. They say they are going to pay 5 pe~cen~ auicl they add other words such as they are going to i~~v it compoimded quarterly. Mr. `WYLIE. If the interest was stated on a quarterly basis rather than annual basis, would it be more accurate? Mr. MORSE. It would not be more accurate or less accurate. One is the annual expression of the quarterly rate and given the way in which our seventh grade mathematics books and whole tradition has been built ill). Mr. `WYT!TE. Would it. he more accurate if interest rates were stated on a monthly btiSJS? Nh. NdIPSE. Not. if they compound quarterly or compound d~iilv. Mr. WYLTE. You are contradicting yourself, I think. Mi~ Mor~e. Mr. MORSE. No, sir; at least I dofl't metul to he. `What. T am saying is the basic unit i'ate is whenever the interest is counted and t.h~s i~ the accurate unit rt~te. Then it is annualized. Mr WYLiE I don't know if we can find, it hut in reference to a question from Mr. Fauna, is it. possible tc) read Mr. ILunna's c~uestion back? PAGENO="0543" CONSUMER CREDIT PROTECTION ACT 533 Mr. MORSE. It is clear in the writings, very clearly stated that the nominal annual rate is different from the yield rate or effective rate. Mr. WYLIE. It would be more accurate, though, if interest pay- ments could be stated on a shorter period basis. That is the point I am making. If the interest rate is based on a monthly rate so the banker would say "the interest rate is 0.41 percent plus"-~you divide by 5 per- cent by 12. Mr. MORSE, You put me into a bind, Mr. Wylie. Let me ask, for example, are bananas sold at 15 cents a pound, when I don't really buy exactly a pound of them, any more accurate than the actual price that I really pay for the bananas? I never really pay 15 cents. Bananas just don't come to weigh out exactly on the nose to be a pound. Or gasoline at 30 cents a gallon; is that inaccurate? Mr. WYLIE. You brought the subject up~ I don't think you are being any more accurate when you say interest paid at 5 percent per annum than it would be on the revolving credit if you required the retail stores to say we charge 18 percent per annum. That is the point that I am coming to, of course. `Mr. MORSE. I didn't-4n answering your question I did not come up with this-the question of accuracy. was raised by the bankers themselves and not by me. A penny an ounce is 16 cents a pound, and ~t penny an ounce is no less accurate than 16 cents a pound is. Mr. WYLIE. Isn't the customer more interested in the dollars and cents charged rather than the interest rate charged? Mr. MORSE. Is the customer? Mr. WYLIE. How much money he pays out on his account in inter- est or service charges~ Mr. MORSE. Depends where the customer is in the stage of his decisionmaking. Mr. WYLIE. Then- Mr. MORSE. If I may explain-when 1 am looking for gasoline I read the big billboard sign that says 30 cents a gallon, and if another one says 32 cents a gallon and if I am looking for lowest priced gas, I will drive into the station posting the lowest price per gallon. Now I still don't know how much I am going to buy or pay. He is not going to be satisfied, and I am not going to be, and we will not have reached an accommodation until I get the gas and he gets paid for it. Mr. WYnE. But there is no analogy there. That is like comparing apples ahd oranges. If a man goes in `and buys 5 gallons of gas at 35 cents a gallon, you know how much the cost will be in cash. But if `he has a revolving charge account, he doesn't par' cash-be can pay off part of the amount due. If he `doesn't pay off t~he full amount interest is added and you got an entirely different situation. Mr. MORSE. I know that the rate is 11/2 percent a month or expressed at 18 percent a year whenever I have to pay it, Mr. WYLIE. But you don't know how much interest you are going to get on your bank account even though it says 5 percent bnnually. I have had the same situation. I have had to withdra~w, put in~and withdraw from a savings accOunt. I don't know whether I am going to get 5 `percent, 4~/2 percent or what in actnal~ yielth But at the `end of the year the bank will tell me how much I have gained in dollars and cents. PAGENO="0544" 534 ~0NST~MER crn~mT PROTECTION ACT This is another point that I have been pursuing with some of the other gentlemen. The Internal Revenue Service allows us to deduct an amount in interest costs of 6 percent or the actual amount paid which- ever is lesser. Mr. MORSE. This i~ an area that I know nothing about. Mr. MARGoLIrJ~. It happens to be a source of great resentment among consumers that t1~ie Treasury Department does that. Mr. WmIL We have been pursuing the possibility of getting that regulation changed. I thought it would be better if it were stated in the form of dollars aftd cents, in cash, actually paid out in interest during the yeal rather than having it based on ~n annual percentage rate, Mr. MORSE. M~ay I answer the question~ by saying what is important depends on where you are in yotir decisionmaking. The kind of deci- sions to be made by a man sltting down making up his income tax form are~ not th~ same kind as made when shopping for credit. The man who is~ sho~ping for credit is not the man using credit. The deci- sion then-rate ts most important when you are shOpping, looking the field over. Wheill you are using credit, cost is important. And when you are paying income tax, that is another matter. Mr. MARGOLItf$. On this Treasury Departmen~ deal they were con~ vinced to do this by the finance companies who did not want :them to allow consumers to deduct the entire finance charge because that then would be considered interest and the finance companies always wanted to maintain this distinction between a time price and interest. So the businessman can deduct interest, whatever interest he pays, but the consumer is not permitted to. Hopefully th~t situation will not last too long. Mr. W~IE. My time has.expired. Mrs. SuLLIvA~. Mr. Hanna? Mr. HANNA. `thank you, Madam Chairman. I, too, want to say these gentlemen have contributed very sub- stantially to this committee's knowledge on this subject. I would like to make a couple of observations. First of all, in your vast experience, both of you, you know that in the law many times we have placed things that are supposed to be a shield and they turn out to be sword. I think that is true in the whole course of garnishments and particularly I am a~vare of what happens in mechanics liens law. ~i I have made a study of this mechanics law. I never will forget the retired marine coloneL who had all of the accoutrements of that fine background t~l1ing me in colorftil marine language the story of how he got a swimming pooi involvement on his property. He waS sold a swimming pool for $3,000 `with the understanding that he would get 10 percent off if he paid immediate cash, which he did. The s*imming pool company sent a subcontractor otit to make the bole in the back yard after he raised cain after paying the $2,700. Another 3 weeks he raised so1ne~ more hell and they brought the steel and dumped it in the hole. Ph~n the comj~any went broke. He found out that he had. a mechanics lie on this prOpert3~ of $240 for digging the hole and- $700 for diggthg~ the hole and $~0 for steel delivery. He ended np having to fill the hole ~thioh ~cost him $240 and rehabilitate the back- yard, $225, andhad to pay to have the steel hauled away. PAGENO="0545" CONSUMER CREDIT PROTECTION ACT 535 So his out-of-pocket expense was $1,590. lie was out really $4,290 and he didn't have a pool at all. All of that was legal. So, I can assure you that the application of the law did not follow- it is handled partially in some regards. As far as the discussion that we have had about the rate yield, I think this has been very helpful and I would draw your attention on page 86 of this article in the U.S. News & World Report. The thing that interested me wasn't in the article at all but on page 86 there is an ad in there for the savings and loan company there. Now, that tells you something ibetween applied rate and the yield. But further than that it gives you some additional information here because it tells you also they pay the postage for the deposit, and in addition to that I can remember at a time when ~they would give you a certifiqate if you made a deposit of a certain amount. So that it seems to me the total picture of credit, Madam Chairman, does not begin and end with the statement of a fixed rate of interest because you are going to be having these on his charge accounts. Let's talk about the "free ride." Lots of times it is not a free ride. It is an option for a free ride. It says you will get 30 days t~ddi- tional free credit if you pay on a specific date. If you don't you don't get the free ride. So, there are the symptoms to me, there is a whole plethora of different kinds of things that can occur prior. I want you to comment on this: what do you think will happen if we were to have this fixed annual rate, and I agree it could very well be legislated. There is nothing complicated about it. But what do you think would happen in terms of the competition between the various stores in relation to price, to charges like these credit charges, because you can give free credit if you have your price right and your finance charges-you could give free credit and still come out with an amount of money-aren't we dealing here in a matter that doesn't begin and end with a statement of a fixed rate of interest insofar as the load is going to be on the consumer and what the avenues of exploitation are for the seller? Will you please comment on that? Mr. MORSE. You are not talking about the other part of the bill dealing with the 18 percent ceiling, are you? You are talking about revolving credit. Mr. HANNA. Revolving credit. Mr. MORSE. Mr. Hanna, I don't think it would make a ripple of difference. I have shown how Sears ciuld show this by merely im- printing on their bill. Many of then~. are now quoting 11/2 percent. And I have yet to b~ impressed with the~ fact that people are going to shudder too much when told it is going to be 18 percent. And if this bill passes they will learn ~how their cars are being finaileed- they are going to get accustomed to knowing their rates are well above 6 percent. I don't think this would mal~e a whit of difference. I didn't answer Mrs. Dwyer's point very clearly. One other criteria that I use which I think is very importanit is that, information should be expressed S9 that the eustother can check back on the creditor. I think they, cati supply sufficient information that consumers can verify their own statements. This Sears bill giyes all that information, yet 53-340-67-pt. 1-85 PAGENO="0546" 536 CONSUMER CREDIT PROTECTION ACT in regard to that service charge of 96 cents, who would know whether that 96 cents was appropriate. There is nothing on their bill here giving the rules of the game as to how they figured it-1½ percent of what? I would like to be able to check back for errors in bookkeeping. It does irritate me that my saving and loan pass books don't tell me on which one of the~e b~iIances or by which rates they figured my interest. Fr~inkly, in an~wer to your questiOn, I don't think it would make an awful lot of difference, but would disclose very useful information to the consumer. Mr. IIA~NA. It does oceur to me because I am convinced that credit is only used to affect the yolume of sales. The only re~son those people are talking about it is just the same reason that a feed company a~- quire~ a chicken~ ranch. They found out they can m~tke mc~re money on their corn putting ~t through the chicken than selling it through corn. They found out the~ can make more money on their know-how and extensIon `of credit than p~itting that throuo~h a piece of merchandise t1~ian th~y can jn~t s~Iling the èredit. Looks t~mè like one and the same thiiig.. Mr. MORSE. They also found they can make money through insur- ance too. That i~ something we haven't talked about. X hope you will get that back into this bill. I have recommendations with respect to insurance. Mrs. SULLIVAN. Mr. Williams? Mr. WILLIAMS. Thank you, Madam Chairman. I would like to compliment you two gentlemen on your presenta- tion this morning. I don't agree with some of the things you said, but I do think your presentation has been well prepare4. Mr. Margoliu~, some of these questions we~ were talking about, on page S of your statement you refer to a. woman who bought a TV set, was made for d..c.-direct current-even though she had a,c. in her apartment and she threw out the television set. And, of course, this sort of thing rai~es some questions in my mind as to how accurate this case might be. First of all, is there any area of New York City where they have d.c. current? Mr. MARGOLII~S. Yes. This happened several years ago. Gradually the city has been,converted. Mr. WTLLIA~1S~th. I think the conver~ion was completed. Mr. MAROOI1It~S. It wasn't a~ number of years ago. There still were `a few sections that were d.c. Mr. WILLIAMS. You say the buyer refused to take back the TV. fl~ad the TV been dama~ged at all while it was in ~he purchaser's home? Mr. MARG0LIUS. That I can't state. That might give him an out if there were. But there was no testim'on~t' by either the antipoverty worker who investigated the caSe or- Mr. WILLIAMS. You are `familiar with the fact that you can buy `~ converter at a i~ather nominal price that will convert d.c. to a.c. and vice versa. Di~i the dealer off~r this ~oman a converter for her set ~ Mr.~MAROOLII~$. No; and ~ou have to understand that'type of dealer. That type of delaler-that type of dooi~-to-doOr SOlicitO~ or canvasser is i~nterested in getting the perso&S name `on the contract, ~liether it is PAGENO="0547" CONSITh~R CREDIT PROTECTION ACT 537 for a $12 set of plastic dishes that he seli~ her for $51 or for a second- hand television set or even clothing and wigs as they found in Chicago many times. Mr. WILLIAMS. I would like to suggest that the dealer-if he didn't offer her a converter she could have purchased one easily. I fail to un- derstand why she threw the. television set out. Obviously she is paying for something she cannot then have. Mr. MARG0LIUS. He didn't go after her for years. In fact, she moved and he found her again when she applied for credit. Again, she was getting into the same trap. She wanted to buy a f~w pieces of furni- ture on credit and the credit report went to the New~ York Cify Credit Bureau and that is when the first dealer found it. Mr. WILLIAMS. I know she is not paying for it willingly. But in your statement she says she is now paying for something when she has nothing. She threw the television set out and this is the reason she had nothing. Mr. MARGOLIUS. That is right. Mr. WILLIAMs. There is one point that I would like to develop a little more. As far as this 18 percent annual interest rate on revolving charge account-because we have had conflicting testimony. Assistant Secre- tary of the Treasury Barr and he made the statenient that these de- partment stores cannot operate on less than 18 percent in his opinion, On the other hand, we have had testimony from others, including a representative of the Federal Trade Commission who made the state- ment that he believed, and it turned out later that he had no proof of it, that many of these department stores were makingmore money out of credit than out of the sale `of goods. But I think most of us recognize that credit unions are a good thing and for the most part credit unions are not making much money. Some of them have a small surplus and that is about the size of it, but they are charging 12 percent a year. In most cases, many cases they are paying to their depositors a lower interest rate than the prime interest rate. And also many of them have voluntary help, low overhead for office space and that sort of thing. So, it seems to me that at 12 percent a credit union is working in a sit- nation where to duplicate the same situation the department store would have to charge an interest rate of closer to 15 or 16 percent. Do you agree with this? Mr. MARGOLIUS, It might have to be more. It doesn't `have to be 18 percent. I don't think they are making more money on the credit than they are on the merchandise; no. But Sears Roebuck Acceptance ~Orp. and the other subsidiary run- ning mates of the retailers, all are ~hOwIng a prbfit. Mr. WILtIAMs. What do you think from your experience would be the break-even point for a department store operation on revolving charge accounts? Mr. MARGOLIUS. If they cut down the cost ~f th~ operation and don't offer credit for a $9 bedspread I think prdbably they ought to be able to get down to 15 or 1~ pereent Mr. WILLIAM8~ Thankyoti. Mr. MARGOLIUS. They can charge 18, that doesn't matter. All We are asking is that they tell us what they are ~charging. PAGENO="0548" 538 CONSUMER CRJ~3DI1~ PROTECPION ACT Mr. WIuIA~S. You must bear in mind that in cutting down the cost of the credit, they have to reduce their incidence of loss because this is a tremendous factor. Mr. MARGoLIUS. There is one State recently-either Oregon or Wis- consin-where they require that one of the banks operating a bank credit card plan reduce the rate from 18 to 15 percent because it bumped up against the State usury law. It ~was either Oregon or Wis- consin. They did it and they are still operating. So, that is a similar plan to a depalitment stare plan. We want to remember that when the revolving cr~dit first started it was one half of 1 percent a month and it h'a~ gradi*lly thme up. After the war it caine to 9 percent and 11/4 and now 11/k. Whem the bank~ started the ciedit club plans they started out charging 1 percent. It was Ohase~Ma~Jiattan. I think you are right, they cam't~ operate at 1 percent. Chase~-Manhattan ha~ not gone into the credit card business as First National City has, because Chase says theycan't do it at 12 percent a year, they tried it and had to go out, and they won't do it at 18. Mr. WILLIA~1~. One quick question foi~ Mr. Morse. You made the statement that the poor are paying more for merchan- dise because they can't pay cash. I would like to suggest to you that so many middI~-ineome families are using credit and paying more because credit isn't free under any circumstances. But we have heard a lot of testimony, a lot of comment from some committee members about the plight of the poor-they seem to be paying more and getting inferior merchandise. It is my own belief that one of the reasons for this is because thei merchants in poorer areas do have a ~reaVer incidence of loss and if they don't recover these losses in some ~cay all the other customers a~e~going to pay more so we are just hurting the other ~p~oor people in that ~rea who aren't paying their bills. As long as garnishments are used pro~ier1y I fail to see why the honest small merchant that this country is doing everything to help through the SBA, we have people out advising them, we are lending them money and everything else, I don't see where they shouldn't have the protection of garnishment to collect money from people who just aren't going to pay ~ Mr. MARGOLUJS. Rudolph Severa, manager of the Greater New York Credit Bureau, a very experienced man in retail credit, and former credit manager of Macy's, says that credit ~well granted does not require a wage~assignm~nt. For the sake of ~ few honest merchants who may need that, an~ who have other collecting devices they can USBq you~ will turn alot~ of peoplo over~to the unscrupulous operators. Mr. WTLLIA~s. I ~ion't agte~e with that gentleman's ~statement. be- cause in poor areas, many people ~who are~now good risks will be a poor risk the first of the next month. Mr. MAEGOLTTJS. One of the benefits of get'ting rid of garnishments is that credit will be more carefully granted. Here is a statement from a credit bureau in a Pennsylvania city complaining that merchants are granting credit too loosely i~ order to make sales. Mr. WILLIAMS. The loss of creditito some people in poth~ areas might start~ ~a riot. We might no~ otveriöokthat one. PAGENO="0549" CONSUMER CREDIT PIIOTEOTTON ACT Mrs. SULLIVAN. If you will yield for a comment~ Mr. Wiliiams~ hasn't your State abolished garnishment for over 100 years? Mr. WILLIAMs. My State has never had garnishments. Mr. MAROOLIUS. It is a thriving State, Mr. Williams. So is Texas, so is Florida, so is North Carolina, which similarly do not permit garnishees. Mr. WILLIAMs. I appreciate your kind comments. Having lived there all my life I know we have many areas where we have problems. Mrs. SULLIVAN. I am sorry I interrupted you, Mr. Williams. How- ever, I believe your time has expired. Mr. WILLIAMS. I would just like to ask Mr. Morse. Mr. BINGIIAM. Regular order, Madam Chairman. I think that we should be strict in the rules and you are too gracious. Some members of the committee have been abusing the privilege of speaking out of turn. Mrs. SULLIVAN. In view of the time, would you give Mr. Morse that question and then, when he gets the transcript he may answer it for the record? (Mr. Morse submitted the following letter pertaining to Mr. Wil~ hams' line of questioning:) KANSAS STATE UNIVERSITY, DEPARTMENT OF FAMILY EcoNoMIcs, Manhattan, Kane., August 17, 1967. Mrs. LEON0R K. SuLLIVAN, CJiairn'~~an, Consumer Affairs ~S'ubeommittee, Com'~nittee on Banking and Currency, house of Representatives, ~ Washington, DC. DEAR MRS.~ ScLLIVAN. I am writing in reply to Mr. William's question concern- ing the poor credit user and why merchants should n~t have the prote~tion of garnishment to collect money from people wh~ just &te not going to pay (page 792 transcript). 1. The reference in my statement of the poor pay more was strictly mathe- matical. I contrasted the differences in monthly paym~nts between those who save after their purchases by using credit and those who save before their pur- chases by paying cash. 2. T call attention to the article attached to my statement reprinted from The (~Kaeisas) Consumer Credit Journal: "3~% too much? * too little?" The credi- tor, by charging a high rate, in effect collects premium from his customers to insure against the risk of credit losses from that class of credit customers. There should be a close relationship between rate and risk. One of the benefits of this hill will be to clarifycommunicatisim in the credit market so a better stratification of credit risks will prevail. The presence or absence of the right of garnishment will be only one of the many factors to be considered in tipping the scale as to whether a creditor with ~ reputation of charging certain rates will or will not lend or sell on credit to a class of customers with a given reputation of repayment habits. Because the situation is so fluid, creditors not protected by having garnish- ment available will be less inclined to lend to people "who just aren't going to pay" and thus be able to make credit available at a lower rate to people who just are going to pay. As a matter of public policy, is it not desirable to discourage extensions of credit to people who just aren't going to pay? The only losers would be bill collectors, proraters and others associated with pathogenic credit practices; the result would be no loss to society. Those creditors who extend credit to risk~ consumers unlikely to pay debts would charge a high enough rate to spread risk (insure) against losses. What I am saying is that garnishment is only one factor affecting the creditor's losses; (1) The loss potential started when the credit was extended. (2) The rate charged by the responsible creditor shOuld have been sufficiently high to cover the average cost of losses, and (3) Availability Or~non-availabi1ity of PAGENO="0550" 540 CONSUMER CREDIT PROTECTION ACT garnishment becontes only one o~ many factors for the creditor to consider in appraising the loss potential of cre~lit as it is being extended. If the creditor is denied the use of garnishment, he will not become disadvantaged, but relieved of considering this in establishing the credit worthiness of credit applicants. 3. I am not a student of wage assignment and garnishment. However, I am impressed by the ~buses of present procedures af1~ecting both the consumer and the employer. Furtlierixiore, I am impressed by the recommendation of the Corn- mittee of,tbe Ontario Legislation on Oonsumer Credit made .lune 10, 19~35 op~ posing "blanket or automatic type of wage. assignment" and recommending legis- ldtion "prohibiting any assignment or order, for payment of any salary, wage or other rompens~ation for services or any part, thereof earned or to be earned." (See recommendation number 15, paragraph 308 on page 44). In conclusion, I do not think it proper `to view garnishment strictly as a "pro- tection" for the creditot without also considering the rate; `both relate to risk ast~essment. SIncerely yours, RienAnD L. D. MOuSE, Professor and head. Mrs. SuLLIvAN. Mr. Annunzio? Mi~ ANNUNZI~O~ Thank yo11~ Madam' Chairman.. The hQur iS tate so I just will ask t~wo questions that I want answered for the record. ,Before I ask t~he questions I want to extend my deep appreciation to Mr. Margolius ~or his very constructive statement and the *drthwhile cases that he brought to the attention of this committee. I want to ex- tend my appreciation to my friend Professor Morse who has aided us so much on the Domestic Finance Subcommittee when we were study- ing the high u~urious interest rates being charged to servicemen on automobiles. I want Mr. Margolius to know `my own feeling on garnishment of wages. There a~e four titles to JI.R. 11601. If.'we lose'~all the titles and retained only the garnishment section we would be doing more for the consumers of Arnerica than has been done at any time during the his- tory of this country. The record bears this out. I think in your articles, that the American. Federation of Labor does need a little bit' of prodding. They have State organizations if we leave out Alaska and' llawaii, you have 48 States that have State organiza- tions. Every one of these organizations have conventions. I am quite certain in every one of these State conventions they have already passed a garnii~hment of wages resolution and it is unfortunate thai~ the national body in Washington has no policy. Professor Morse, I know that you have, made a study of the DOD directive on~truth in lending. Will you tell this committee what some of the results of that study have been? Will you also tell us about the loopholes in this directive? I specifically want you to mention the mandatory provision, and to dwell on this provision. I want to assure you that I am still pursuing the DOD on the mandatory disclosure provision. Mrs. StTLLIVAN. Did you say he could submit that for the record? Mr. ANNUNZiO. Yes Mrs. SULLIV4N. When you get the transcript you may answer it. Mr. MORSE. If I may just submit the recommendations and first seven pages of this report on the DOD directive. Mrs. SULLIVAN. All right, if you will do that. (The material referred to may be found in the appendix, p. 1097.) Mrs. SULLIVAN. Mr. Bingham? Mr. BINOHA~. Thank you, Madam Chairman, and I would like to thank my colleague for yielding me'time. PAGENO="0551" CONSTJMER CREDIT ~ROTECTION ACT 541 I have felt from time to time that those of us who were trying to stay within the 5-minute rule were being penalized a little bit `by efforts of others to secure exceptions to the rule. I would like to compliment both gentlemen on their statements. Mr. Margolius~ I think it would be a fair statement, would it not, that much of what you had to say about the abuses that havo made life miserable for small creditors deal more with the garnishment provision of the bill than the truth-in-lending provisions as such? Mr~ MARGOLIUS. The more flagrant abuses do arise from the garnishee power, yes. Mr. BINGIIA~[. Some of the things you were saying seem to me to reflect the problems of enforcing our statutes against fraud-the difficulties of providing legal services to the poor and such things as that that would not be dealt with in this bill. Mr. MARGOLIUS. The whole~ problem hinges o~n the fact that i~ is impossible to prove verbal fraud. It is the salesman's word against the customer's. Mr. BINGHAM. You don't have any proposal for us for legislation at the Federal level to deal with that problem, do you? Mr. MARGOLIUS.' I certainly do. I hereby proposed a cooling-off law, a revocation of the holder in due course provision and a provi- sion that a seller can repossess or sue for deficiency judgment; but he can't do both. Mr. BINGIIAM. I would welcome anything from the gentlemen either in the record or by letter-any proposals for additions to this bill. Professor Morse, I have been looking through your proposed amend- ments and I must say I am tremendously impressed with the amount of work and care with which you have studied this particular bill and made some specific suggestions. Some of them seem to be extremely well taken and I think you have attacked particularly the problem of the annual percentage rate on open end credit transactions with remarkable ingenuity. I have been concerned about the fact that even the existing provision in 11.R 11601 doesn't quite meet the problem because of some of the dis- Crepancies that exist in the way in which the bills are submitted and so forth. And I think your proposed language might b&a~great improvement. I would like to ask you a little bit more about your position on the graduated or step-rate problem and ask, Mr. Margolius, too, if he would comment on that. I take it that your proposals here on gradu- ated or step rates would make it almost impossible for them to be used, because they would have to vary their monthly percentage chai~ge every month to reflect the different blend. Mr. MORSE. I think I can come up with little nicer language. I don't propose eliminating them. They may use them hut. let them disclose to the consumer a single-blended rate. Mr. BINGHAM. That might vary month to month according to the blend of the charges posed; is that right? Mr. MORSE. Whatever rate they are charging. My position would be, if they find it convenient in their business to use graduated rates, this is an internal bookkeeping system. Maybe they prefer to use this system. As far as the consmner is concerned, however, the single rate is the meaningful iate. PAGENO="0552" 542 CONSUMER CREuIT PROTECTION ACT Mr. BINGUAM. I understand what you are trying to get at. Wouldn't you agree that aS a practical matter, referring to page 4 of your memo, on your suggestion for a blended rate, depending on the amount of the balance during the previous ~month, that the blended rate given to the consumer might vary from month to month? I would suggest that would be pi~obably a system that would not b~ workable. Mr. MORSE. Itftaries now month to month. They Would merely pest a schedule of single rates that would apply as I suggest here, if the balance is over $500, it is the 18-perceht rate. Actually for computer operations it aul~om~tical1y gets sorted into its proper rate category. They might find it simpler not to have such a complicated system as I sqggest here. Mr. B~NGIIAM~ That is my point. Mr. Margolius, what do you think about the graduated rates? Do you feel the pre~sure should be on them to do away with them? Mr. MARCOLIIiS. In the case of small loans? Mr. BINGITAML A certain percentage, if the balance is $500 or less and so on. Mr. MARGOLIU~S. Yes. The Pennsylvania State Labor Federation has made a particular point of that. The~y point out that unbeknown to the consumer the lowest rate part of the debt is paid off first and the highest rate part is jaid off last. So there is concern about that. Mr. BINGIIAM4 Do you want to add to your comment? Mr. MARGOLIUL I haven't given it enough thought. Mr. BINGITAM I mean Mr. Morse. Mr. Monsi~. I ~aught onto this in reading the testimony of the New York State Banikin~ Department. Their study alerted me to the prob- lems that are a ~esu~t of graduated rate system. It gets just too com- plicated to p~thphrase here, but discussion begins oil page 14, with respect to step rates in my pamphlet No. ~18, ~~Consumer Credit Com- putation." You may wish to look ~t that di~cussiÔn, for ~t gives the reason for my concern. Mr. BINGHAM. Do I understand that that is th~ genei~al practice, that the highest charge, highest rate is the last t2~iSè paid? Mr. MORSE. Yes. Mr. BING~tA~.Thank you very much. Mrs. SULLIvAN. Thank; you. I have tw~ questions that I would like to read into theire~Ord for you. Professor Morse-a~td you can answer them later-and two for you, Mr. Margoliiis. TJnfortunately time does not permit ~you~r answering now, so I *ill just read them into the record. First, it seems to me, Dr. Morse,1that the American Bankers Asso- ciation would probably be as good an authority ~s any on mdnthly versus annual rates, since their friembers deal in this subject everyday. And the ABA witnesses told us, in answer to my question, that once the basis is determined by the store on bOW it ~Ss~sses its charge of 11/2 percent, th~tt particular charge is at ail añnu~il rate of 18 percent. It covers a spe4ific 30- or 31-day period-one-twelfth of a year-re- gardless of when that period actually starts. Would you agree? Next, does 11.11. 11k301 require any amendment in your opinioii,~T)r~ Morse, to provide a means for the retailer to ~ompare and contrast his revolving charge system with a competitor so that, while both cite an PAGENO="0553" CONSUM~R CR~EDIT PROTECTION ACT 543 `annital rate of 18 pcr~en~, the customer can n~ve~theless gage which gives him the better break bn free or grace p~eriods, or on the cretht-~ ing of payments or returns? In other words, does H.R. 11601 provide sufficient `leeway for the Federal Reserve Board to issue regulations which allow, or permit, or encourage, full disclosure of these differ- ences within an identical annual rate? And now I want to ask Mr. Margolius: In your column you always make it clear to consumers that paying cash is usually a preferable way of buying because credit costs the store money `and somebody `has to pay for it. How do you get for the cash customer some of the benefits of the savings he affords the retailer? I've heard many coni- plaints from people who resent paying the same amount for a restau- rant check, ,for instance, as the party at the next table which charges it, thus forcing the restaurant to pay 7 percent to the credit `card company to collect. Should the cash custbmer complain-and what good does it do? Finally, Mr. Margolius, what was the name of the bank in Buffalo which was financing the freezer deals you mentioned? If you two will answer those questions when you get your transcripts, I will appreciate it. (The following information was submitted:) KANSAS STATE UNIVERSITY, DEPARTMENT OF FAMILY ECoNoMICS, Manhattan, Kans., August 18, 1967. Mrs. LE0N0R K. SULLIVAN, Chairman, Consumer Affairs ~S'ubcommittee, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MRS. SULLIVAN: I. You have asked whether I would agree with the reply given you by the AB~ witness. Yes, I agree that 11/2% for a period, which is 1/12 of a year, regardless of when that period starts, is at an annual rate of 18%.' To underscore this I quote from my statement on S. 5: "The nominal annual rate expresses the periodic rate multiplied b~ the num- ber of periods in a year. The annual rate is- "twelve times the monthly irate; "fifty-two times the weekly rate; ~ "four times the quarter1y~ tate; or "three-hundred-sixty-five times the daily rate. "The equivalent annual rate, so conceived, is just as informative and real as the motorists knowledge that he is traveling at a rate ~f 60 miles per hour by looking at the speedometer, regardless of ~hether he travels `the full hour at this rate or goes the full 60 mileS." II. Your second question asks whether FLR. 11601 provides sufficient lee*ay for the board to issue regulations which allow or permit or encourage fall dis- closure of the differences witbin an identical annual rate. I see no need for a change in H.R. 11601 hi this respect. section 203(d) (2) (C) and (D) and Section 203(d) (3)' (H) explicitly require disclosure at the outset of the method of fixing the charge, and with each billing, notice of the opportu- nity for free credit~ Furthermore Section 204 autborised the board to establi~h procedures under' (a) (2) `whereby the required ipformation be set forth con- spicuously, and clearly. However, should the committee f~iIow my recommendation No. 11, they may wish to also give the Board authority to set a~ minimum or fixed amounts as finance chargds, However, I believe the Boardwoujd have this authority under Section~2O4 (c) since such cases would be of a special class of creditors. Another alternative would be to authorize the board to stipulate the method of assessing charges, but I do not believe this authority is advisable or needed at this time. Respectfully submitted. RIOnARn L. D. MORSE, Professor and Head. PAGENO="0554" 544 CONSTJMFJ~ cR~nIT. ~RQTEOTIQN M~T Mrs. SULLIVA~.. And now, we have one other witness who is sclied- uled to be heard this mG~rning, Mr. Louis Eôthschild, executive direc- tor of the Menswear Retailers of America. If you would like to be heard now until the bells ring calling us to the House floor, we would be happy to have you testify at this time. Otherwise, I am willing to come back at 9:30 in the morning instead of 10, so that you could be heard then. Mr. ROTHSOHI~Jn. If the chairman would be kind enough I would appreciate the opportunity to appear at 9:30 tomorrow morning or whatever time suits the chairman. Mrs. SULLIVAN. We have other witnesses scheduled this afternoon and they are all from out of town, so if you can come tomorrow morning early, it would be better. Mr. Rom sCHI~D. Fortunately I am in Washington and I can ~`ne,et at your convenience. Mrs. SULLIVAN. If you. will appear tomorrow morning at 9:30 I will try to have as many members as possible join~ me then in hearing your statement. In the meantime, we will ~ow recess until 2 o~eiock this afternoon. (Whereupon, at 12:25 p.m., the committee recessed~ to reconvene at 2 p.m., the s~me day.) Ar~rmNooN SEssIoN Present: Representatives Sullivan (presiding), Bingham, Dwyer, `Wylie, and Williams. Mrs. SULLIVAN. The subcommittee will come to order. Will effective truth-in-lending legislation-a law which covers all types of consumer credit transactions-destroy American business or seriously intetfere with the free-en~erprise system~ What happens when cus~omers learn the truth about the interest rates or service charges they ar~ asked to pay for credit? Do they stop buying or borrowing? Do they begin calling legitimate businessmen aud b~nkers crooks and highways robbers? Is business foi~ced to such redtape and regimentation that profits disappear and businesses have to clos~ their doors, or hire armies of bookkeepers and mathematicians to makeS im- possible calculations? These are some of the questions which have been posed so far in our hearings on consumer credit legislation. This afternoon, we have a chance to obtain some authoritative answers to these hypothetical ~nestions, because in the Commonwealth of Massachusetts the ques- tions are no longer hypothetical and t.he answers are becoming avail- able on the basi~ of-not conjecture and guess but-actual experience. We are privileged to have with us two officials of the Common- wealth of Mass~chujsetts directly connected with the administration and concept of the Nation's first broadly based truth-in-lendim~ ~t.at- ute~ Dr. Edward R. Willett, chairman of the Department of Fipance and Insurance of Northeastern University at Boston who serves as chairman of the State's statutory consumers council: and the Honor- able Robert L. Meade, assistant attorney general of Massachusetts and chief of the consu~mer protection division in the attorney general's office. They are here to tell us how the two major laws recently enacted PAGENO="0555" CONSUMER CREDIT PROTECTION ACT 545 by Massachusetts ~On installment and other ctedit sales and ci~ed1t transactions are actually working. Accompanying them is a public-spirited Massachusetts business- man, Mr. Willett Smith, credit manager, Lechmere Sales Co., Cam- bridge, who is qualified to tell us from his own experience the effect of such legislation on retail business. The witnesses are accompanied by Mr. Dermot P. Shea. What is your official position, Mr. Shea? Mr. SHEA. Executive secretary of the State consumers' council, Madam Chairman. Mrs. SULLIVAN. We also have with us this afternoon Mr. Robert J. Klein, economics editor of Consumei- Report magazine, published by Consumers Union of the United States, Mount Vernon, N.Y. Mr. Klein, I wonder if you would come up to the table, also. Mr. Klein was here last Tuesday waiting to testify, and graciously agreed to ceme back again today. He tefls me that he can sulpmarize his testimony in 15 minutes. Then we will hear from you three gentlemen, and after that the subcommittee will be ready to question all o~ you. Mr. Klein, would you give us a rósum~ of your statement? STATEIVEENT OP 1~OBERT KLEIN, ECONOMICS EDITOR, CONSTTh~ER REPORTS 1V~AGA2IN~ Mr. KLEIN. Madam Chairman and members of the committee, my name is Robert J, Klein. I am economics editor of Consumer Reports magazine, published by Consumers Union, the nonprofit product- testing organization. Consumers Union long has favored a great many of the objectives of the Sullivan bill. We are pleased that it would include first mort- gages, though we favor a rate reflecting all the credit charges at a mortgage origination, including credit reports and appraisals if re- quired by the mortgage lender. We applaud including credit life insurance premiums in the finance charge and annual rate disclosure, though we think certain other insurance costs, such as commissions earned by auto dealers on car insurance in a finance deal, should be included. We agree that no $10 minimum should be set on finance charges required to show the annual rate. We have urged and still urge the abolishing of wage garnishments and confessions of judg- ment. There are several other inequitable collection practices that need congressional attentioii, lest the National Conference oh Uniform State Laws draft a weak-kneed Uniform Consumer Credit Code. We therefore favor a national commission to study credit laws. We en- dorse the Sullivan bill's concept of an active Government enforcement role. Consumers Union feels it can best contribute to your work on the bill by pointing out its most serious weakness as we see it. Consumer credit, its uses and abuses, has come in for frequent dis- cussion in our magazine during the past lecade. CU members, being quite highly educated and fairly well off as a group, rely less on installment credit than ~uost people do. But our members do use credit. When last. polled on the subiect, in 1965, about 25 nercent of them said they were buying automobiles on the installment plan. About PAGENO="0556" 546 ~O~STJM~R~ CR1~TT~ 4~ROT.EC~IGN AcT 30 percent, of 1Mm were ~paying finance charges, on re,volviiig ~red~t charge accounts.~ - Despite our n~embers' special interest in, mau~aging their uioiiey wisely, there is strong eyiden.ce ~a~t many of them cannot fathom the problem of buyiiig credit at something like its lowest available cost. A few years ago, for examp~e, the National Bureau of Economic Research polled `800 CTJ members on their credit experiences. Here are some of the findings: Only a small minority of the respondents even hazarded a guess as to the interest' rate on their debts. Those people who did guess cited interest rates th~t averaged about 8 percent per, annum. But other information theyr had supplied on their loans indicated that, on aver- age, they had p~id a true annual rate of 23~ percent. Only a few re- spondents either knew or correctly guessed the true interest rate on their loans. That knowledge had paid off rather well, it appears. Those who did know, or guessed right, had pa4d an average of 12 percei~t on loans of under $500, while those who woitld not even hazard a guess had paid an `average of 37 percent-~three times as much. Readers write in to us quite o-ften about their credit problems. Their letters usually express confusion, exasperation, and downright dis- trust Qf the cre4litor. If this grou~p ~of consumers, who can accurately be characterized as a consumer elite, is confused, it would be our guess that the vast majority of credit us~rs is hopelessly confused. Senate passage oQ S. 5, the tr~ith~in-lending bill, represented a 92- to-0 vote of confidence in the ability of consumers to shop wisely for credit when gi~en the essential facts. The Senate bill falls short, un- fortunately, of requiring all the information consinhiers will need if they are to compare `costs. The biggest loophole in the bill, by far, is its treatment of revolving credit. Most department stores, mail-order houses and banks would be permitted to continue stating a monthly .i~tere~t rate instead of an annual rateS The monthly rate is deceptively low, and anyone who, doubts that people are deceived by it has only to browse through th~ tra~nscript of the- Ji~ne 23 hearing on revolving credit before the Senate Banking Committee. Lender after lender shouted "discrimination'? ana forecast a large advantage for those who \vould stjll be alio~ed to-quote a monthly rate. Some- will say that revolving credit is only-a small, fraction of the totalconsum,er installment debt. That's true, Itrepresents abont 5 per- cent of a $75 hilijon tot~al balance dues Btit as you knQw banks arid gas- oline marketers are only lateJ,y entering the revolving credit business en masse. Some~members of the~banking industry speak their determi- nation to get a bigger piece çf they coxisumer credit action~ and Federal Reserve Board~ findings indicate `tl~t~ th~ banks are indeed moving strongly into the picture. The bank credit card looms as the poor mari~s version of the ~mevican Express or Diner's Club card. The big differ- ence is that the bank card charges a monthly service charge, usually de- scribed as small, though actually it,i~ 11/2 percent a month, which may be equivalent tp 18 percent per unnum, or, quite likely, considerably higher. ., , , - Exernptio~n of ro~~olving credit from annual rate disclosure would be very likely to accelerate the growth of~credit i-n that form. An `inc1~eas- ing portion of total installment debt would hecontracted without ben- PAGENO="0557" CdNSUMER CREDIT I~ROTECTI0N ACT 547 efit of the consumer's knowing the true annual rate or even the approx- imate annual rate. The interest of truth in lending-to help consumers stabilize the economy by the rational use of credit-would be largely defeated. Merchants and bankers used a shrewd argument against annual rate disclosure on revolving credit. They said that a charge a'ccount ~eusto- mer often gets the use of their money for longer than 1 month-some- times for almost 2 months-at a service charge of 11/2 percent. Thus, they argued, the service charge is a fee, not a periodic rate, and even if it were looked on as a rate it would translate to less than 18 percent per year. Their argument has a clever premise. Up to 59 days of credit are available interest free, but only on conditiop that the balance is paid in fui.l by the 59th day. It it is not paid in full, time runs back- ward to the date of purchase. Well, maybe an accountant can really make the calendar run in reverse, but one name for their magic is ac~ count juggling. The only reason for our mentioning it here is that there are many different sets of rules for juggling revolving credit. Different sto1~es and banks use different rules, and they are not just playing games. A revolving charge account can cost considerably more at one place than at another, though both seem to be charging the same interest rate. Professor Morse of Kansas State University illustrated the situ- ation dramatically in a recent pamphlet. lie showed six revolving credit billing systems, all in current use, and he showed how service charges can run more than twice as hikh in some storefrs as in others. The Senate truth-in-lending bill attempts to deal with this problem by requiring revolving credit lenders to explain their billing systems. 11.11. 11601 takes the same approach. But explanations presently offered by the major mail-order houses fail to clarify their billing systems well enough for consumers to understand them, and we seri- ously doubt that any verbal explanation ~will permit consumers to identify the store or bank with the least costly system. But I shall try to explain the problem tQ this committee, using the billing methods of Sears, Roebuck and Montgomery Ward, which I am told are identical, and that of J. C. Penney. I have prepared a written exhibit to go with this because I realize how hard it is to follow ~ dis- cussion involving a great many numbers. Our etbibit shows calcula- tions based on the premise-a fair one, we believe-that the J. C. Penney interest rate, charged on the adjusted monthly balance due, equals 18 percent per annum. The basic difference between the Sears-Wards method and the Penney's method is in the definitions of the amount of credit out- standing. To give you a simple example: Suppose I buy something for $100 at each store, and I charge it. Sometime within the next 30 days or so they will each send me a bill. It will show an opening balance due of $100. It will tell me to pay the $100 or, if I want to go on the installment plan, to pay only $jO. Let's say I pay only the $10. Next month, of course, I can expect to be assessed interest-or, as they prefer to say, a service charge or a time- sale price. Sure enough, when next month's bills arrive, each shows a service charge. Each bill shows what happened to my account during the past PAGENO="0558" 548 ~ONSUMER CREDIT PROTECTION ACT month. There was an opening balance of $100, a payment of $10 and a balance due of $90, plus service charge. But the service charge on the Sears and Wards bills is $1.50, whereas on Penney's bill it is $1.35. Here is why: Sears and Wards charge 11/2 percent of the opening balance, in this ease $100. Penney's charges 11/2 pe~cent of the actual balance due after deduction of payments and credits, in this case an adlusted balanc~ of $90. Sears and Wards actually charged me $1.50 on $90 due, or 1.67 percent or 20 percent per annum interest rate. What's more, as the balance of my account decreases month by month, Sears and Ward~ will be charging me a higher and higher rate, until, on my next-to-last payment the rate will be 39 percent. At the very least-assuming that new purchases restore each month's opening bal- ance to very nearly'$100, but no more than that-the annual rate will be about 20 percent. Penney's rate, on the other hand, is always 18 percent. But that's only the most conservative way to make the comparison. Si~ppose that, when that first bill for $100 comes, I look in my check- book and decid& that I can afford to pay $50 on account-a good and thrifty thing to ~o, you would agree. But not Sears and Wards. They will penalize my thrift on the very next bill. Their service charge remains $1.50, no matter how much I pay them, short of the whole $100. That's $1.50 on a $50 balance due, mind you, and it comes to a 3 percent mouthly rate, a S6 percent annual rate. Penney's would charge only 75 cents, the usual 18 percent per annum. We at Consumers Union are ~ot here to plug J. C. Penney or knock Sears and Wards. We are here to tell you consumers need full dis- closure of the annual rate-4he true annual rate-on revolving credit charge accounts~ That 36 percent per annum example I just cited is not drawn front the rarefied atmosphere of an ivory tower. Let me quote to you but one of quite a number of letters from our readers: I have recently been the victim of iin~th1cai practices and I think your other readers might appreciate a warning in your magazine. As you know, Sears, Roe- buck and Company charges an announced rate of 11/2% interest a month on the unpaid balance. I discovered recently that the credit department in our local store was only applying a portion of the money I paid them. . . . For example (and this is exactly what they did to me), I had an unpaid balance of $80.00 and made a payment of $5000. This left me a balance of $30.00-4the interest on which shou~d have been 4~. W1~en I got * my monthly statement, however, I found my service charge was 3 times as much as It should have been * * This~unethical practice meant in my ease that they were, in effect, *cha~ging me an interest rate o~ over 5% a month or 60% a year. .1 have noticed that other chain stores (like W. T. Grant) will do this if they can get away with it. I cer- tainly hope you w~ll find some way of drawing this dishonest policy to the atten- tion of your readers. The way I figure it, they charged him 48 percent; not 60 percent. Let me hasten to say th~A the writer of that letter came j~o unfair con- clusions about the way Sears, Grants, and others may be conducting their business. I3ut it is not hard to see how he came to think that he was receiving unethical treatment. He is not alone in this harsh judg- ment. A number of similar letters are appended to. our written testi~ mony. They kqep coming in, and in our opinion they should be a source of alarm~both to the retail and banking communities and to the Congress. PAGENO="0559" CONSUMER CREDIT PROTEOTtON ACT 549 The point is that hardly anybody can fathom the billing methods of revolving credit. Help is needed, and the need will become more and more pressing as banks and stores, spurred on by the availability of computerized billing systems, contend for revolving credit busi- ness. H.E. 11601 takes the important step of restoring the annual rate disclosure requirement for all revolving credit. Something more is necessary. It is our proposal that the Federal Reserve Board be as- signed by this legislation to tackle the billing problem and to find a fair and accurate way ocf expressing the differences in oo~t as differ- ences in the annual rate of charge. We recognize that it won't be a simple problem of rules making, but the problem must be dealt with. It exists, and J. C. Penney, in a suit aimed against the Massachusetts rate disclosure law, comes right to the point. I quote from the suit: Despite the differences in actual finance charge rates charged by the Plaintiff Penney and certain of its major competitors, all are required to state the identi- cal "simple Interest per annum rate." End of quote. Notice Penney's reference to "actual finance charge rates." Those words let the cat out of the bag. There really is a finance charge rate. Penney's knows it, Sears and Wards know it. Only the consumer is left in the dark. It would seem to be in Penney's best interest to have some simple yardstick for compulsory labeling of revolving credit prices at com- peting stores and banks. It would unquestionably be in the consumers' best interest and in the public interest, Surely a way can be found to fashion a yardstick that measur~s in terms of the annual rate. One approach might be to standardize the billing s~ste~n for all revolving credit accounts. Another might be a thorough statistical analysis of the various systems, with the aim of establishing their relative cost to the borrower. Perhaps the most logical avenue of attack, though, would be to let the public see what any well-managed retail business or bank must already be able to see-the overall annual percentage of gross yield on revolving credit outstanding. Each lender presumably has a fair idea of his own yield, and probably shares with others in the grade a knowledge of how various billing methods would affect the yield. To sum up, we submit that the consumer shopping for revolving credit should be given the right to know that whi'cih the lender already knows. As so often is the case2 the consumer i~ the only one in the deal who is deprived of complete information on its terms. lie very badly needs to be let in on the rate secret, Plainly, unless this Congress puts the ~Federal ~eserve Board to work on the problem of settmg standards for revolving credit annual rate disclosure, you will be leaving unfinished bUsiness for some future Congress. The time to finish the business is now. Thank you. (The complete statement of Mr. Klein and the exhibit referred to follow:) STATEMENT OF Ronnur J. KLEIN, ECONOMICS EDITOR. CONSUMER Rnron~s My name is Robert J. Klein. I am economics editor of Consumer Reports, a monthly publication of Consumers Union of the U~S., Inc., located at 25G Wash- ington Street, Mount Vernon, New York. Consumers Union is a honprofit mem- PAGENO="0560" 550 bONSITh~tIR CREDIT PROTECTION ACT bership organization chartered in 1936 under the laws of the State of New York for the purpose of providing information and counsel to consumers about goods and services and about the management of family expenditures. The financial support of the organization comes from its more than one million members, sub- scribers and newsstand buyers of its publications. Consumers. Union accepts no support from any commercial organization. Consumer Reports carries no ad- vertising. In addition to tpstin.~ and reporting te~t results on products, Consumer lIe- ports provides information on other aspects of the consumers' pi~oblerns. Nearly every issue contai4s articles on economic matters its they affect the market place, and legislative an~l other governmental dev~elopments which con~suiners. ought to know about for their own protection and w~ifare. ~onsun~ters Unip's close attention to the current obstacles to rational use of c~bdit date back to 1957, `whefi the late Mildred Edie Brady, an eminent atom- ber of our staff, wrote the first of several pioneering articles on the subjOct. it was CU's judgment then, as it is now, that full disclosure of interest costs held out by far the best promise for stabilization of the national economy, which, then as now, suffered erratic growth partly because of the use of installment credit to hypo sales in periods of surplus inventories. For example, in several recent years the consumer debt has expanded most steeply in the late months of the auto model year, July through September, as dealers frantically attempted to dispose ~f tbçir heavily floor pla~nned new car quota~. The sales tactic'stare f a- miliar-slashing o~! the quoted prices, with the dealer's profit retrievi~d through high credit cbarge~ concealed in easy (so-called) ~P~onthly payment~. Mrs. Brady repdrted on the failure of Federal consumer credit controls under Regulation W during the Korean conflict~ There were iimply too many ingenious ways of concealing credit in other costs, Let the market have a chance to work, she said. Give the consumer the information he needs in order to borrow ration- ally, and be will help the credit economy to regulate itself. The readers of CONSUMER REPORTS are not a typical cross-section of con- sumers. By their very interest in our publication, they show a special interest in managing their ihcome wisely and a consciouneSs of the difficulties involved. They are, as you n~ight ima~in~, better educated and better paid than the average American. It's no surprise, either, that they rely on the installment plan less~ frequently and 1es~ bettvily than most consumers do. Yet they do u~e credit~- Response to our Annual Questionnaire for 1965 showed that 25%i of :the respondents were paying off automobile loans. Most noteworthy to th~se proceedings., 58% of our questionnaire respondents in 1965 used 30-day chargp accounts and 29% used revolving credit charge accounts. A steady stream of letters to the editor recited complaints against these accounts, indicating ghimmetings of awareness that the service charges are not as small as the buyer was led to think. Several such letters have been appended to this testimony. They reveal a state of serious confusion-serious for the credit merchant and serious for a consumer-oriented economy. If this elite group of consumers is confused, we would think the vast majority are hopelessly confused. Senate passage of the Truth-in-Lending Bill last month represented a 92-to-O vote of confldenc4 in the ability of consumers to shop wisely for credit when given the essentiat facts. Those facts conëern the true price of money, whether borrowed directly from a lending Institution or indirectly through the purchase of goodsand servi*es on the installment p1kb. Except in the $alm of cOnsumer credit, the priç~e of money is everywhere ex- pressed as an annimi interest- rate-~the percentage of principal the borrower must pay for a ydar's use of someone else's motley. Truth-in-Lending legislation would simply give consumers the same information that has always formed the basis for noncotisunler borrowing. For the first time in the history of this buy- now-pay-later economy, consumers would `be able to make accurate price com- parisons in shopping for most types of credit. The one major exception-and it could easily become a gaping hole in the dike-is revolving credit. Fortunately, the House of Representatives still has an opportunity to repair the leak. HR. 11601 already goes part of the way toward requiring the type of annual rate di$closure that would most help consumers to compare revolving credit costs with, those of credit from other sources. Serious problems would nevertheless conitijnue to confront the consumer, in his attempt to compare the costs of competin~ revolving credit contracts. As you know, charge accounts have long been a pronlotlonal tool of' compethig department stores and mail-order PAGENO="0561" CONSUMER CREDIT PROTECTION ACT 551 houses. The contest for revolving credit busin~ess has recently been much in- tensified by the large-scale promotion of bank revolving credit cards and re- volving credit checking account sc1~emes. Later in this testimony, we will attempt to show that accurate cost comparisons among the various, often-competing, revolving credit plans will require more information than merely the equivalent annual rate derived from a stated monthly or other periodic rate. It is a great virtue of H.R. 11601 that it opens fresh avenues of approach to problems of installment-credit users scarcely touche~1 on in the six years of Sen- ate hearings and debate. Highly praiseworthy, for instance, are the bill's proposed remedies for the consumer wl~o faces high-handed collection and repossession methods ; ~ij is time to raise serious questions about the workings of legal mills grinding out judgments, ~epossessions, garnishments and wage~ assignme~~~, for which state, county arid local taxpayer must foot the. adn~inistrative bill. Some excellent studies have been made into the social ills and the rank in- equities visited especially on the underprivileged consumer by these collection methods. I would call tile eommittee's attention especially to a report ito the Mayor of Chicago, the I~on, Richard J. foley, by Jerome Schur, $pecial aSsist- ant to Chief ~fudge Boyle for Consumer Oredit. The report released on December 15, 196Q, examines copfessioi~ of ji~rdgment complaints filed in the Municipal Division of the Circuit Court of Cook County during two weeks In June 198g.., The study uncovered interest rates for used cars as high as 283%. Finance charges on money advanced to pay insurance premiums ranged up to 97%. The premiums themselves were found to be as high as $794 for 12 months' accident, credit life and health coverage. The study found that the courts had routinely processed judgments based on improperly drawn, incomplete or otherwise illegal credit contracts. (For this report see p. 1142.) If Mr. Sebur's report is not yet a part of your record, it should be, albeit that record is already rich with evidence. I refer especially to the 1965 Hearings of the Subcommittee on Domestic Finance into servicemen's credit problems. One outgrowth of those hearings was the Department of Defense directives on standards of fairness and full disclosure of credit terms offered to members of the Armed Forces. The directives represent a very big step toward a Truth-in- Lending Bill. House Banking and Currency Subcommittees are thus perform- ing indispensable work toward the achievement of truth and equity in lending. THE ECONOMIC GOALS The strengths and weaknesses of the bill as it shapes up thus far can be prop- erly understood only in terms of the purposes underlying it. Behind the progress of the Truth-in-Lending Bill is a vital need for marketing tools to help stabilize a most turbulent sector of the national economy. Total short-term consumer debt has been growing at a furious pace. In the past 15 years, it has quadrupled to a present level of around $95 billion. About $75 billion is installment debt, on which repayments last year were $73 billion. By comparison, total personal income has only a little more than doubled in the same 15 years, and now stands at about $505 billion, after taxes. Plain arith- metic thus says that about every seventh dollar in the average pay envelope is spent before it's earned. And plain arithmetic understates the case. You must add interest charges to about $12.5 billion per year. You must also take into account that only about half of the nation's wage earners have short-term installment debts. In- stallment debt alone, plus its intOrest, is generally estimated as laying prior claim to one dollar of every four in an average debtor's pay. Some observers of the economy fear that, with so large a part of future income committed in advance, any serious rise in unemployment or drop in wages would snowball into a major recession. For many people would have all they could do to make their payments; they would be in no pOsition to increase their debts, and their cash buying power would be harshly curtailed. Nevertheless, the present long-term economic boom has been stimulated by the huge and expanding wave of consumer credit. It is therefore understandable that nobody in the Govern- ment has come out against the fast-growing consumer installment debt as such. It's the turbulent fluctuations in credit expansions that cause official concern. Like Robert Louis Stevenson's little shadow, the rate of increase in Consumer credit sometimes shoots up taller like an India-rubber ball, and sometimes get so little that there's none of it at all. The pattern of sharp rises and falls over the 83-340-67--pt. [-36 PAGENO="0562" 552 ~oNsuM~ CREDIT PROTECTION~ ACT past 15 years is shown in the accompanying graph. It traces three periods of extraordinary credit growth. After the first two peaks, in 1955 and 1959, the rate of borrowing fell to around the break-even point, where, over a year's time,. the total of new borro~ring very nearly equaled the total of repayments. Do purch~ibing irlte~ntlens normally fluctuate so wildly? Or does some outsble force radically change them? Looking back from the vantagé~bint of the recession year 1958, OTJ saw signs of the lender's hai$ at work. "Suven million high-priced atttos were moved out of dealers' inventoi$4os (in 1955) in one of thel$i~gest sales blit~es~O1~ all time," we noted, "and~s~fe 6O~ or better of those cai's*ei~e sold on the ~ut to~eover~ one of the tool~~ ~ the blitz was an ëxtensinfl of Installment contracts tt 36 months. ~Oth~r sel~erS, competing with autos for their sbài~e ol! the consinner dollars, also offered terms of flotbing down and 36 months to pay forrugs, fürhi- ture, etct" The chief sym~tOfi~ of r~cessinn i~ a alackening ef e~ceomlc growtl~. Thus, in 1958 there was no hi~rease in the Gross National Product. Credit e~pansioix hit another new high in 1959, followed b~y almost no c~~dite~q9a~iislob in 1961. Again~ the trough on the ~raph was accompanied b~a sharp tapering off of ecoliOthi~ growth. To put It i~ai1dly, more orderl~r use of credit might have a less unsettliu& efft~ct on the general econOili~. PAGENO="0563" LI) ..1 0 0 0 U, z 0 C tHE GROWTH PATTEF~N OF CONSUMER INSTALLMENT DEBT 2 1 a 1952 0 z Wild waves of growth on the rising sea of installment debt have been economic storm si~nals. The gra~~h line 1954 1956 1958 1960 1962 1964 traces only the growth; the debt itself quadrupled from $18.7 bi1J~n in. 1952 to $74.6 bj.lliôz~ ~n 1~, 1966 1967 PAGENO="0564" 554 CONSUMER' :cm~D1T PROTECTION AOT The Truth-in-Lending Bills make no bones about it. Their first-mentioned pur- pose is "economic stabilization." Underlying full disclosure of credit costs is a two-part theory to which CU has long subscribed. First, disclosure of true annual interest rates will make people more sensitive to the high price they pay for most installment loans. When 800 CU members reported a few years ago to the Na- tional Bureau of Economic Research on recent credit deals ("Consumer Sen- sitivity to Finance Rates: an Empirical and Analytical Investigation" by F. Thomas Juster and Robert P. Shay, NBER, 1964), only a minority of them said they had any idea of the interest rate they had paid. Within that minority, the average rate they thosgM they had paid was about 8%. The rate they had actually paid aver~ged about 23%. The second par4 of the theory holds that people who are conscious of the price of credit wi~l shop, compare and buy that credit at as low a rate as they can find. Again, the data obtained from CU members accords with the theory. Those wh~i were ~1ble to report the true rate of interest on their loans paid an average, for lOans of under $500, of abotit 12%. Those who had nO idea of the rate paid a stattling average of about 37%. In its report onthe Truth-in-Lending Bill, the Senate Banking and Currency Committee took cognizance of that and other~ evidenCe. The Senate's vote of con- tidence in the consumer says, in so many words, "Here is the information you need. Now don't make waves." SPIICIAL TREATMENT FOR REVOLVING CREDIT The Senate bill ~falls short, howevef, of reqi~iring all the information consum- ers will need if thE& are to compare credit costs. At Senate ~earihgs last spring, a number of opponents of the bill concentrated their fire on One provision in particular. They sought to knock out any require- ment for annual rate disclosure on revolving credit charge accounts. And they largely succeeded. Un~ler the Senate bill, revolving credit as applied to most department store ncconnts and most of the new wave of revolving bank credit cards would continue to `be labeled; as it usually is now, with a deceptively low monthly percentag~ figure. Revolving credit is one kind of consumer credit most people are familiar with, whether or not they make a practice of buying on time. People who bny at all regularly in most department stores or from big mail order houses psually open charge accounts. Zt's convenient to pay the bill once a month, and, besides, there's usually no credih charge if you pay the bill within 30 days. Every customer, whether he pays kutsh ever the couiiTter or, says charge it, foots the costs of 30- day credit as park of the oveThead built into the price of the goods. Of course, most stores offer a choice of paying in full `or making a payment of, usually 10% per mOnth. It's what's called a "line of credit" or an "open-end" credit account. Each new purchase h~ added to the bill, and 10% of the total bal- ance at the end of each billing period is all you have to pay ad infinitum-all, that is, except for a "small" monthly service charge. Many states set a service charge ceiling of 1%% per month, and stores almost invariably charge th~ maxi- mum. A rate of 1~% a month equals an annt~al interest of 11/2 times 12, or 18%. The balance due on the nation's charge accounts has been runnjng at $10.5 billion. About $3.5 billina IS revolving credit. That's not mucb'next to the total installment credit outstanding. But it is probably not an accurate t1~ure at pres- ent, and it certainb~ won't be qj~ aecurate one in, the future, because it omnit~, among other things, the revolving Credit schemes now being heavily merchandised by banks. Until last year, bank revolving credit was probably not a major factor, although it has been on the scene n~1~ ~east since 1950. But in only the past year or two, according to the FederaL .~Reserve~ Board, the ngmber of banks issuing credit cards or operatipg open-end check crOdit plans reached ~27, plus several hundred local banks acting as agents for iarg~ pity banks' credit4lans. "The enthusiasm with which the supposedlç conservative banking profession has greeted this r~latively"new Consumer ~erVi1~O ik uinparállCled in the pages of modern banking hlstory" the American Bankers AssoCiation was told by a Chi- cago banker. And he explained why': "We are `begini4ng with this first step to recapture a larger share of the credit business which heretofore conceivably could have fallen into nCnbanking hands by default." The bank cred~t card, unlike the department store card, can be used to charge `purchases at many different stores-as many as can be recruited by the spon- PAGENO="0565" CONSIThfER CREDIT PROTE~lTIO~ ACT 555 soring bank. It is the poor man's version of the American Express or Dthers~ Club card. As The Wall Street Journal has rej~orted, `~Bank cards are issued lnrgel~ to lower-income consumers ~ * *~" A number of Midwest banks, operating jointly, "mailed mounds of credit `cards unsolicited to each other's customers and former customers, `some 4 million fam- ilies in all," the Journal `said. C. A. Agemian, executive vice président of the Ch~ so Manhattan Bank, told why in a reéent speech: "If you want to get cardholders, your card `has tO `have value. The cardholder need's stores to use it at. If you `want to attract merchants, you have tO be able to show or promise them a healthy looking number of car'dhoiding shoppers. What come's first, `the chicken or the egg? To choke off tompetition, you must flood the market with card's. Everybody gets cards `from every bank he does or does not do business with. People who may have a capacity to repay $500 may have received cards from various banks that could permit them to chargé up to $3000 or $4000 !" Where the final Truth-in-Lending law to exempt bank, department store and mail-order dharge accounts from annual rate `di~clo'sure, it would quite obviously withhold from the consumer an important tool he needs to shop wisely for creditS Yet the Senate bill exempts those `accounts, in most instance's. If the exemption is~ allowed to stand, only the `monthly rate `will be disclosed on most revolving credit deals: To compare the price of revolving credit with that of other forms of credit you would `have to convert the `monthly rate to an annual rate by multiplying it by 12. Many `people don't know that, however, and they might assume that a 1%% service charge is lower than, say the 12% annual rate genei'ally `charged by credit union's. `There i's thus `sohi~ likelihood that the exemp- tion would help a'c'cele~ate the growth of `revolving credit. To escape annual rate `disclosure for revolving credit, `merchants and bankers used a shrewd argument on the Senate subcommittee considering Truth-lu-Lend- ing and you will doubtless hear it repeated. A charge accouhj~eusto'xner, they said, often gets the use of their money at 11/2% for more than On~ m0flth~ Someofle who buy's `something `shortly after his mohthly bill ha's been made out, for in'stan'ce, would have as long as 59 day's of free time `befo're incurring a service charge, be- cause he would not receive `hi's next `bill, with the new item posted on it, for up to 29 `days and would have 30 additional days `after that to pay it. Therefore, the argument goes a 11/2% service charge does not accurately translate as 18% per annum and is usually lower. The argument ha's a `c~ite premise: Up to 59 days of credit time are available interest-free, but only on condition that the bill i's paid i~ ~full on the 59th day. If you don't pay in full, time `runs `backward tO the date oç pur~eha'se. `SVell, rnaybe an accountant can really make the calendar run in reverse: But one name for that `sort of magic is account jngg~ing. ~. The only reason for mentioning it here i's' tl~t there are many di~rent `sets of rules for juggling reyolving credit. t~iffer4~,stores use ~jffe'rerjt rule~ and they are not just plgy~ng games. A. revolving `charge account can cost considerably more at one store or `bank than another, though `both `seem to `be `charging 18% an- nual interest. Professor Richard L. D. Morse of Kansas State University has illustrated the situation dramatically in ~1 recent pamphlef (ace appendix A). He demonstrates six different revolving ered~t billing system's, all of them examples o~ systems in use, and `he allowed `bow service charges can run more than twice as high in some stores as in others. The drafters of the Senate Truth-in-Lending Bill `recognized this obstacle to credit price comparison's. Their `solution i's to require each revolving credit con- tract and monthly statement to explain its billing `sy'~tem. The rederal Reserve Board, `which will have to write the necessary regulations, has its wo'rk cut out. Here are excerpts from the contract applications of three mail-order houses ex- plaining their hilling `system's: `Sears, RoObuck and Co.: "an amount of time price dif1~erential computed at 11/2% of the balance at the beginnin~,pf each monthly billing period until the full amount o'f all `purchase's and ti'me price differential's thereon are paid in full." Montgomery Ward: "a time price differential or service charge of 11/~ % per month on the opening monthly balance of my account on amounts up to $500 and 1% per month on amounts In excess o~ $500" J. C. Penny Co.: "a~ time price differential (`service charge') computed by applying the rate cd 11/2% to `the unpaid balance of the cash sale price ~nd ~ny unpaid service charge on each of my monthly billing dates (pursuant to PAGENO="0566" 556 CONSUMER CREDIT PROTECTION ACT your then current $Wing schedule) commencing with the second monthly billing date foll~w1ng the~ date of purchase * * Professor Morse' being an expert on such things, was able to show that a certain six-month series of transactions costing $2.28 in service charges at Penneys could cost $2.74 at Sears or Wards and upwards of $5 at some other stores. Most people wouldn't get the message right away. A number of them, including a profes$or of economics and a professor of philosophy, have written to CU within the past year or so. One person wrote: "I hate to admit after many years of using my Sears account that I was never aware ~f paying such a high rate of inter~st." One of the maii~ areas of confusion plaguing consumers has to do with the amount of his bai~nce due to which the revolving credit service charge rate is being applied. The following letter from a Consumer Reports reader eloquently expresses the conf~tsion, which in this instance led to an unfair but nonetheless understandable presumption of unethical treatment: "I have recently theen the victim of unethical practices and I think your other readers might appreciate a warning in your magazi~ie. "As you know, Sears, Roebuck' and Company charges an announced rate of j'/~% interest a n1~nth on the nnpaid balance. I discovered recently `that the credit department in our local store was only applying a portion of the xnone~' ~ paid them and giving me credit for the halance, For example (and this is exactly wb~at they,did to me), I bad an unpaid `balance pf $80.00 and made a payment of $50.00. This left me a balance of $30.00-the interest on which should have been 450. When I got my monthly ntatenient, however, I found my service charge was 3 times as much as it should have been. "When ~i complained to the credit manager, he first lied to me and then explained tha~t be Iliad done me the service of crediting my account with only $1OMO of the nmou~t~ thad paid~,Tbe balance was applied as credit that I could use l~ter~cThl's. w~th4eal prac~ice meant in ipy ease that, they were, in effect, charging me an interest rate of over 5% a month or 60% a year. "I have noticed that other chain stores (like W. T. Grant) will do this if they can get away with .jt. I certainly hope you will find some way of drawing this dishonest policy to the attention of your readers." Bowling Green, Ky. A nnmbei~ of'sinilar letters are appended to this testimony. They keep coining, in quite regularly~ and' in our opluion `tl~ey should be a cahse f9r concern both to the retail conir4unl~ and' to this `subcommittee. The point, of coi~rse, `is'tha't hlnfdly anyone can f~tbom ~tI1e billing methods of revolving charge aiccourits. I1~lp us ~ñeeded, and the need will becothe Inore and more pressin~ ~s `bank~ an~ store~;spurrel on by' the avaiu1abliit~'óf computer- iséd billing systenks, countend for ~rø4~dvin~ cre~15t httsiness. R.R. 11601 would put revolviug credit back under fuli~-dtsclosnrë ~rovisLons.' WIth slight amend- ing, `it could assigji the Federal Re~erve Eoard to' tackle th&'billing problem. We recognize that it would be no simple problem in rules making. Eut it must be solved. J. C. Penney, now claiin~s, ,in a suit aithed against the Massachutetts rate disclosure law, that, "Despite the `difference In actual finance charge rates charged by the Plaintiff' ~PenneyC) and certain of its, major comtetitors, all are required to state the identical `simple interest per annum rate.' The Plaintiff thereby suffers substantial injury to its business by reason of the misleading and distorted ratO which results from the use of the statutory formula, the statement of wbicl~ misleads Plaintiff's customers and prevents them from being informed as to thet substantial savings to be gained by Plaintiff's regular charge account plan." It would seem to be in Penney's best interest as well as its customers' to have some simple yardstick for pricing the revolving credit at eompeting stores and banks. Consurtiers Union is convinced that a satisfactory way can be found `to solve the probleta. Several come to mhi~1: a single s'tandaFd1~ed billing system for all revolving credit accounts would be one approach, though certainly not the most desirabid from the standpoint of innovation. Another approach might be a thorough statistical analysis of the various billing methods, with an eye to establishing their relative coSt to the borrower. Perhaps the thost logical ave- nue `o~ attack, ho*ever, would be to view `the matter' the same way any well- managed retail bu~iness n~st already be viewing it-in terms `of'its ylelti. ThstI- PAGENO="0567" CONSUMER CREDIT PROTECTION ACT 557 mony by retail executives at the Senate hearings leaves no doubt that they know approximately how much of their charge account volume consists of par- chases on revolving credit. To that volume they can apply an annual rate to project their gross service charge revenues. If, as appears to be the case, the actual cost of revolving credit Varies significantly from store to store, then there must be different rates of yield Each store presumably has a fair idea of its own yield, and probably shares with others in the trade a good understanding of how various billing methods would affect that yield. May I quote an excerpt from the "Financial Rate Translater and Guide to Legal Installment Sales Rates," published by the Financial Publishing Company of Boston for their use by the credit industry: "Traditionally the return on money invested is stated as annual interest rate on the funds actually in use. For monthly payment loans the interest rate per month is 1/12 of the annual interest rate. In these tables we shall call this annual interest rate the actuarial rate * * ~. The actuarial rate expresses the true re- turn on investment * * *" Gentlemen, we submit that the consumer shopping for revolving credit, or any kiud of credit, should be allowed to share the knowledge belonging to those doing the lending. As so often is true, the Consumer is the only participant in the transaction who i~ deprived of full information. He very badly needs that information. One unwise deal, after all, means little to a busi~less conducting transactions by the thousands. But one unwise credit deal can be ruinous to the individual across the counter. Plainly, if the present Congress does not set the Federal ~Reserve Board to work on the problem of differentiating amount actual revolving credit rates, you will be leaving unfinished business for some future Congress-business that needs attending to right away. CLOSING OTHE]1 LOOPHOLES Consumers Union is especially pleased to see that H.R. 11601 closes other loopholes left in the Senate bill as it treats rate disclosure. We will mention here a few of the failings of S. 5. First mortgages on houses are exempt from disclosure regulations. It is true that mortgage interest is already stated `as a true annual rate. But certain fees are usually left out of the rate picture-such as mortgage placement and ap- praisal fees, credit report fees and points, or discounts, paid by the purchaser. According to recent figures from the Federal Home Loan Bank Board, just the placement fees and ~ptints on conventional new-home mortgages are now averag- ing almost 1% of the amount of the loan. In effect, the interest rate is higher than it looks. It should be fully disclosed. liE. 11601 only partly remedies the situation. In our opinion, it should count appraisal fees and credit reports as part of the finance charge on a mortgage. Premiums for credit life insurance would not be considered as finance charges or included in the annual interest rate. Yet many lenders and credit merchants require you to buy insurance for their pro~tectiou. Unless the option to buy is the borrower's, credit life insurance premiums should be counted as part of the in- terest rate. HR. 11601 does the job. Insurance commissions earned by used car dealers when they sell an acCident policy as part of the credit package on a car sale iy~ould not be counted in the interest rate. Some dealers have close ties with jnsnrauce agencies and pad the price of car financing with overpriced premiums. If accident insurance is part of a car deal, the dealer's take should be included in the interest rate, liE. 11601 does not include it. There is no regulation of credit advertising. Familiar and phony slogans like 4'low bank rates" and "no money down-easy monthly payments" would con- tinue to gull the unwary. Massachusetts law requires credit merchants to post the true annual interest rate in any advertisement making reference to credit terms. rederal law should follow~ suit. HR. 11601. does the job quite admirably. If the finance charge is $10 or less, the lender doesn't have to di~close his annual interest rate. ~ixample: A vacuu~n cleaner ~a1esi~ap knocks on the door with an offer of an $80 machine for $10 down and 12 monthly payments of ~6.65. The payments total $89.80. The finance charge Is $9.80 for $70 for one-year installment credit. The well-concealed true annual interest is 25%. Truth-in-Lend- ing should apply to small deals as well as big ones, H~R. lIilOj does the job. PAGENO="0568" 5~58 ~ONS1JMER CREDIT ~PROTECTION ACT The senate bill ~Tould'not go into effect until July 1, 1969. There is no reason ~ac&rding to testin~ony at the senate hearings, why the effective date could not be set much soonei~ after enactment. H.R. 11801's effective date of July 1, 1968 seems quite reasonable for most provisions of the bill. Credit sellers could judge their rate disclosure by stating it as dollars per hundred rather than as a percentage until January 1, 1972. HR. 11601 dIspenses with such nonsense as this. Confidence in tM consumer will be rewarded best if he is given a good yard- stick, if all credit s~llerS must adhere to its standard of mea surem~nt. and if ilie standard is invoked as soon as possible. This reqnires a Federal Truth-in-Lend- ing Bill without bol~s. APPENDIX A REvotvIxG OIrEDIT BILLrno SYSTEMS Service charges on revolving credit accounts vary widely from store to store and from bank to bank, even thq~igh the stated interest rate is usually the same. The `explanatiofi fQr this apparent contradiction ~s fairly simple. The service charge is the product of the balance 4ue times th~ montb~y interest rate. But diffhrent dqpertinept stores, mail-order houses and credIt-c~rd banks have differ- ent methods ~ ~ei~ermfning the' pert of your. monthly balance against which a service charge ~s as~essed. A recent suryey ~conducted!by tticbard L. D. Morse, `~irofessor of family eco- nomics at i~ansas State trniversity* makes two thipg~ quite clear. First, i~ is next tb impossible to tell which revolving credit account, offers t1~e best deaL "Methods , 6f ft~uriug' service c1~arges were too complex not only for the loea~l management to ttntder~tand and relay to customers wbQ wanted to know how it would work in practice, but for national [store chain] offices to interpret in terms of an annua~l percentage rate o1~ service charge," Professor Morse wrote. Second, store-to-store differences in credit `costs. can be quite significant. The Moyse survey isolated six bjlling methods, çacb arriving at a differept total of service charges for a given series of hypothetical transactions. The customer began with a clean slate-no balance due-on the first of the year. He then did business with the store as follows: , Purchases , Returns ` Payments January February ~,..,. March ` A~riI ~ May~. June $30 120 ` ~0' 10 10 10 $10 ` 30 40 $20 , 80 10 10 10 Here, from lowest `to htgh,est, Is the total of service `Charges, at 1%% per month, depending on which of the six billing methods is applied: Metho'd/ Option to pay itt full within 30 days of the billing date without incur- ring any service charge. Interest rate is applied to the previous month's closing balance, less any pt~ymeat a1~d returnS. Total service charge-$2.28. Metlthd: Same as preceding except returns are not credited before the interest `i~ttte i~ applied. Tot~tl service charge-$2.43. Met lvod~ Same a~s preceding except neither returns nor a payment Is credited before interest rat~e is applied, tinless the total of returns and payment equals or is higher than the previous month's closing, balance. Total service charge- $2.74. Method: Same as preceding except returfis are' never credited to the prevIous month's closing balance. Total Service cl~arge-$4.16. Method: No 30-day option to pay in, full without incurring a service charge. In- terest rate `Is applied to the previous month's closing balance. Total service charge-$4.47~ Method: Same a~ preceltng'except interest rate is applied to the balance at the end of the current pionth. Total sqrvice charge-$5.4'4. *"Truth h~ Lendin~," The Council ~on Consumer lifforniatlon, 15 Gwynn ttaii, T~nIverslty of MiSsouri, e~o1mnbl~, Mo. 652&1. PAGENO="0569" CONSUMER C1~EDIT PROTECTION ACT 559 Although typical, the six billing methodu by no means exhaust the possibilities. And all variations, with the possible exception of return credits, are open to bank revolving credit plans. Obviously, you can't make the most economic use of a charge acount unless you understand its billing system thoroughly. But, as Professor Morse found, the essential facts cannot readily be obtained. APPENDIX B The following is a selection of letters writt~n to Consumers Union by readers in 1966 and 1967, all complaining about revolving credit biUing methods. 4, * * B~eading your magazine has made us increasingly aware of deceptive practices such as the one mentioned in thefoll6~whig letter. MACY'S, Customer Relations, Herald Square, New York, N. Y. Dear Sir: Your letter of 1/21/67 confirmed the fact that your service charge of 11/2% per month is applied to items at their initial billing. This in fact means that, on the initial billing, customers having a C-~T type account are actually paying up to 45% per month service charge depending on the date they charge items in relation to your billing date. I can only assume that some loophole in New York law permits this seemingly usurious practice as this is not true of any of the se~era1 extended payment plan accounts which I hold in New Jersey, e.g. Snars, Bambergers, Chase. All the other accounts charge a 11/2% per month service charge on the unpaid balance from the previous billing. Accordingly, I am herewith returning my Macy's charge plate together with a cheek for $57.87 to cover the balance due on my account. Please close my account immediately. I realize that this misunderstanding is most likely my own fault as I should have read the fine print more carefully. However, I wonder how many of your C-T account customers realize the true amount of service charge they are paying. Let the buyer beware! Summit, N. J. * * * In your May [1967] issue a reader brought to your attention confusing state- ments issued by Sears Roebuck & Co. in regards to interest charges. I was recently surprised to learn that the Sears method of charging interest On 30-day or revolving accounts is not what it appears to be. Most custombrs and most Sears employees, including those in the credit department, assume that the method used by Sears is the same as that used by other department stores and by oil company credit card systems. This is not true. Sears does not charge 11/2 % per month on the unpaid balance, It charges interest on the total amount of the previous billing, regardless of the size of payment made, exclusive of a full pay- ment. As an example: a purchase of $100 is made and a billing is sent to the customer. The customer then pays $50. The next billing shows a $50 balance due plus $1.50 (1'/2% X$100) service, charge, not $0.75 (11/2 X$50) as one would expect. Thus, it is theoretically possible for a customer to pay the full $100 and then receive a billing with a balance of $0.00 but an interest charge of $1.50. For- tunately, Sears does not go that far in this unscrupulous practice. I hate to admit that after many years of nsing my Sears account I was never aware that I was paying such a high rate of interest. How many of your readers are aware of this? W.L., Norwalk, Calif. * * * To add more fuel to your truth in lending campaign, it may be of interest to your readerS that ~even such an otherwis~ reputable store as Sears may charge interest rates as lU~h as 72 per cent ~er~ annitm. Sears basic rate of interest on a revolving charge is 18 per cent per annum (1i/~ per cent per month) but it is based on the end of mouth balance. If a customéi'bought a $200 Item on Janu~r~' 23 and was billed for this on January 30, and he paid $100 on the same day, he would pay 1'/2 per cent on $200 or $3, the equivalent of 72 per cent simple inter- est per annum. PAGENO="0570" 560 C~NSUM~R CREDIT ?ROTECTION ACT If this is what rei~utable stores are charging, what are the 1es~ reputable doing? Pittslurgh, Pa. * Enclosed is a copy of my letter to Klein's Department Store requesting that they close my account and stating the reason therefore. I am confident that Klein's will not give me much trouble over this, but it occurred to me that thousands of customers accept these ~éharges without realizing the true interest, especially if the "m1nimnni'~ service charge is applied where the time payment plan is actually being used. [The enclosed letter follows] P1u5IDENT, 2. Klein on the 2~uare, $tamford, Conn. SIR: The enclose~ statement reflects a balance which is comprised entirely of service charges. Sipce I pay my entire purchase invoices due on the 15th day of every month, I do not pay or honor service charges. Unfortunately, I am quite busy and I musl select one montb~y remitting date for all accounts (this is the 15th.). If yoqr organization finds it convenient to choose the 15th, or 17th, as a billing date that is your concern. However, I will not honor erroneous service charges arislng from this practice. The enclosed statement contains a service charge o~ $0.50 on a balance of $4.25, all of. which consists of previous erroneous service charges. This comes to. interest an~nua~l of 141.7 charged on prior interest. This usurious practice of Klein's is by falj the worst I have encountered in all my experience with de- partment stores, discount stores, credit cards, etc. You are competing success- fully with the loai~ sb~rks if this type of item i~ generally collectable ip your experience. I am destroying my c1~arge card. Please close my account and I refuse to be responsible for any charges after the above date~ [End of enclosed letter] Another practice that I have noticed, is that some stores will compute the service charge on the entire balance carried forward from the previous month, even though they ~nay have entered a credit for a substantial payment. Thus charges are made on the amount remitted wWcli obviously should not be in- eluded in the time bklance. Phi~ade1phia, Pa.. * * *.~ I had a revealing experience with the Sears Roebuck credit system recefltly~ It involved the purëhase of two chairs on January 12th, and the monthly state- ment on the 18th that listed them accurately at $175. We were temporarily short, so I figured that a cheek for $100 would leave only $75 which at 11/~ % for a month would Cost me about $1.13. So on February 2nd we mailed a check for $100. Imagine our surprise when the statement arrived on February 18th. It showed a balance owned of $75 which was correct, and a service charge for $2.68! Inquiries at the local store established that the charge was figured on the previous month's b~tlauce, that is 11/2% on $175, I protested that the initial $100 had been paid well within the 30-day limit for cash-charge conditions but the only response was that the system was set up on the previous month's balance, I finally reached one official who read a regulation to the affect that since this was my first experience with their system, they would refund the fee charged on the $100 `that I had paid, but they could not be this generous the next time. After reaching the hierarchy in the Chicago office, I established that my first payment was unustially large and thus the system slipped and charged me what seemed too much. They would be glad to adjust this, and l~ ever this occurred again, just call. I w~as left with th~ ln~ipressiou that if we ha~t paid just $20, they would have assess?d mç~ for 1½~% ~ $175 and I would not have noticed the difference, i~ the F~,lkruavy bilUng. PAGENO="0571" CONSUMER CREDIT PROTECTLON ACT 561 Upon reading the fine print In the catalog, it is clear that Sears does indeed charge 11/2% on the previous month's billing Without adjusting for what was paid by the customer on that statement. The balance, however, on the next statement reflects what is truly owed-not the basis for calculating the service charge. It appears that Sears actually does much better than 11/2% on service charges. Had we not complained, we would have paid 31/2% for $75 for a month. By contrast Penney's catalog says 11/2% of the unpaid balance. Is Sears openly conducting a deception about their true service charge percentage, or is this just called sharp business? After doing our buying there for 30 yeats, we are not so sure about our Sears charge card. Have you any comments On this unusual way to do business? R. L., Mount Prospect, Ill. * * * Although aware of the exhorbitant interest rates charged by department stores, I purchased a new house and needed about $1,500 worth of odds and ends to make it livable. I compared the interest rates of several companies and noted the following in a Ward's catalog: "I will pay.. . charge of 11/2% per month on the opening monthly balance of my account on amounts up to $500 and 3/4% per month on amounts in excess of $500." This made `sense-much like the all- electric home does-the rates decrease as increased use is made of the service. I assumed that the cost of carrying an account was absorbed in the higher rate for the first $500 and then reasonably expected the lower Interest as an expres- sion of their lower costs, Thus, I placed all $1500 in purchases with Ward's rather than seeking to divide the purchases amor~g, several stores. When the bill caine I foun'd~ that I was charged interest at the full 11/2%. Upon inquiry, I was `told that the figures in the catalog pertain only to people who live in Mi'~souri, I insisted that their catalogs (which arrived via mails unsolicited at my home) induced me to make the indicated purchases.' Their reply was that when I first made a catalog order I was handed a small card to sign which had different interest figures on it-namely that I would pay 1~% of the unpaid balance regardless of how high it went. Letters to Ward's are rewarded by condescending letters which refuse to even consider the possibility of misleading. In recent months I purchased another $2500 worth of merchandise, nothing to be sure from Ward's'. Having long been a reader of Consumer Reports I should not have per- mitted myself to be trapped into these high interests. But, I had assumed my investigation of the rates as printed on the back of the contracts attached to the catalog was adequate. Apparently not. G. M., Edmond, Okia, * * * I would like to call your attention to what appears to be usury practiced by Montgomery Ward in their billing system. This company add's interest at the rate of 11/2% per month t~ the unpaid balance existing at the beginning of a billing period without deducting payments made during the `billing period. In effect they are charging interest on money which has already been paid on the account during `the billing period and prior to the `billing date. Why don't they calculate interest on' the balance remaining on the account at the end of the billing date? As an example, the following is my bill dated 5-25~-67. Last month's balance $157. 82 Service charge added 2.37 Payments & credits 118. 82 New balance 41.37 The $118.82 was paid on the account during the billing period yet interest is still charged to it. The actual interest rate charged on this bill is aln~ost 6% per month calculated on the balance remaining at the end of the month. I have already written Montgomery Ward regarding this practice but, as ex- pected, I have received no reply. I am sure Montgomery Ward would be among PAGENO="0572" 562 CONSUMER CREDIT PROTECTION ACT. the first to state that government controls are not needed in this area, but I would advise them ~o institute fair practices prior to such a statement. Ann Arbor, Mich. * * * Have any of the readers experionced Sears Roebuck's latest trick to increase their carrying charge?-~--Simple-iust don't bother to post credits to your ac- count until after the billing date. In this way they can collect your money and charge you interest, on it also. It piust be very prevalent as I caught it 3 times in 1 year on my account. Needless to say it's now closed. W. S., Glenview, Ill. Why don't you njention the deceptive billing practices currently used by such large companieS as Sears. Not only can't you read their statements (unless you look VERY closely)t but they add their "carrying charges" whether or not the bill is paid in 30 days! I have already returned one credit card from a local chain (Vain-Mart) be- cause they added carrying charges upon carrying charges, and I no longer shop at their local outlet. Currently (due to `a change in billing practice from local to Los Angeles) I am fighting the sa battles with Sears. At present 1 "owe" them $1.28 in earry~ ing charges over the past two months although I paid the bills within 10 da~rs of receiving them. Although I have written two letters, with a third to go out with this mail. I have yet to see the courtes~t of an answer. I may miss the con- venience of shoppirtg by phone; but Sears will probably get I~heir credit card back too! The convenience is the only reason why I have a card anyway. Incidentally, I 4Lo not have a Montgomery Ward credit card. Their latest practice is to add carrying charges immediately. There is another local outfit that cb~ rges you for the dubious `~p~easure," before you even buy, of having their credit card! Maybe I'm naive, but haVe 30 day charge accounts gone out of style? I may become a cash customer completely~ and forget about writing checks. I just don't like being taken. Federati Way, Wash. CONSUMERS UNION EXH~BlT-SEARS, ROEBUCK OR MONTGOMERY WARD REVOLVING CHARGE ACCOUNT- SERVICE CHARGES AND INTEREST RATES ON A $100 PURCHASE-MINIMUM MONTHLY PAYMENT AS INDI- CATED ON THE BILL, SERVICE CHARGE OF 1'3~ PERCENT Opening Payment Balance balance due ` Service Charge Ratio of service charge to balance due Monthly interest rate (percent) Annual interest rate (percent) 1st month $100. 00 $10. 00 $90. 00 $1. 50 $1. 50!$90, 00 1. 67 20. 0 2dmonth 91. 50 10. 00 81. 50 1. 37 1. 37/ 81. 50 1. 68 20. 0 3dlmonth ~ 82. 87 10. 00 72. 87 1. 24 1. 24/ 72. 87 1. 70 20. 0 4th month 74.11 10.00 64.11 1.11 1.11! 64.11 1.73 21.0 5th month 65. 22 10. 00 55. 22 . 97 . 97/ 55. 22 1. 76 21. 0 6th month 56. 19 10. 00 46. 19 . 84 . 84/ 46. 19 1. 82 22. 0 7th month 47.03 10. 00 37. 03 , 11 . 71/ 37. 03 1. 92 23. 0 8th month 37. 74 10. 00 27. 74 . 57 . 57/ 27. 74 2. 05 21. 0 9th month ` 28.31 10.00 18.31 .42 .42/ 18.31 2.29 27. 0 10th month ...-,.. - ` 18 73 1.0. 00 8. 73 . 28 . 28/ 8.73 3. 21 39. 0 11th month 9. 01 9. 01 Total 9.01 Average -. , 23.8 This type ot billing methOd applies service charge rate to the opening balance-There is no servicecharge if payments arid returns equal the opening balance, bUt if the cus- tem~r makes a larger part pay- ment than required, interest rate is higher than above, for example_ 100. 00 50. 00 50. 00 1. 50 1. 50/ 50, 00 3. 00 36. 0 PAGENO="0573" CONSUMER CREDIT PROTECTION ACT 563 CONSUMERS UNION EXHIBIT-i. C. PENNEY REVOLVING CHARGE ACCOUNT-SERVICE CHARGES AND INTEREST RATES ON A $100 PURCHASE SERVICE CHARGE OF 13-~ PERCENT -- Opening balance Payment Balance due Service charge Ratio of service charge to balance due Monthly interest rate (pdrcent) Annual interest rate (percent) - ~___.~__ ~ .~ ~-~--~ ,-- ...._,..__. ~_~_,,__-~ ---- ._ 1st month 2d month 3d month 4th month 5th month 6th month 7th moqth 8th month 9th month 10th month 11th month . $100.00 91.35 82. 57 73. 66 64. 61 5543 46.11 36. 65 27. 05 17.31 7.42 $10.00 10.00 10. 00 10. 00 10. 00 1000 10.00 10. 00 10. 00 10.00 7.42 $90.00 81.35 72. 57 63 66 54. 61 45.43 36.11 26. 65 17. 05 7.31 $1.35 1.22 1. 09 - . 95 . 82- .68 .54 . 40 . 26 .11 $1.35/$90.00 1.22/ 81.35 1. 09/ 72. 57 . 95/ 63. 66 . 82/ 54. 61 .68/ 4&43 .54/ 36.11 . 40/ 26. 65 . 26/ 17. 05 .11/ 7.31 1.50 1.50 1. 50 1. 50 1. 50 1.50 1.50 1. 50 1. 50 1.50 18 18 18 18 18 18 18 18 18 18 Total 7.42 Average 18 This type of billing method applies service charge rate to the balance due. There is no service charge if payments and returns equal the opening balance. The interest rate is the same regardless of the size of any partpayment. Forexample... 100. 00 - 50.00 50.00 .75 - ~ ~ .75/50.00 ~ 1.50 18 1 .- ~ ~..-. Mrs. SULLIVAN. Thank you, Mr. Klein. Mr. Willett, please make your statement next, aM th~n Mr~ Meade, followed by i\{r. Smith. Then we will question all of you. STATEMENT OP DR. ~DWARD - R~ WILLETT, CILAIIiMAN, CON.. SUMERS' COUNCIL OP ~1tE COMMONWEALTH OP ~A'SSAC1IUSETTS Mr. WILLETT. Thank you. - My name is Edward R. Willett. The purpose of my appearance here, today is to give testimony on the trnth-in4ending laws of the Commonwealth of Massachusetts. I have th~ honor of beii~g the chair- man of the Consumer's Council which is a statutory body in the executive government of the Commonwealth ~f Massachnsetts, I am also chaii'man of the Department of Ffriance and Insurance at North- eastern University, Boston, Mass. Finance has, for the past 20 years, been my area of specialization in the field of economics with special interest in investment and personal finance. The Mas~achusetts Consumers' Council, the first statutory body of its type in the country, functions as the advocate of the citizens of the Commonwealth on all matters pertainIng to consumer interest. in essence the council ~cts as au ombudsman in the area of consumer protection, It is this council, in coo~peration with the legislative lead- ers- of the Massachusetts. General Court~ which led the fight for the snccessful enactment of the first truth-in-lending statute in the country. - Mr. Dermot P. Shea, the executive secrethry of the council, who is here with me today acted as the council's legislative agent during the 2-year fight fOr the enkotment of thi~ legislation. Actually the truth-in-lending legislation is covered by tw~ chapters, "An Act Regu- lating Cectain Retail Installment Skies and Services" Cacts, 1966- oh. 284) and "An Act Requiring the Disclosure of Finance Charges PAGENO="0574" 564 CONSUMER CREDIT PROTECTION ACT in Connection W~th Extensions of Credit" (acts, 1966-ch. 587). This legislation cover~, `in addition to other consumer protection features, the entire spectrum of consumer finance including revolving credit and credit cards~ While the legislative battle was pending the oppo- nents of truth in lending stated among other things it was "unwork- `able" * * * "unconstitutional" * * * "discriminatory" * * * "will require an army of mathematicians" * * * "bookkeepers" * * * "damaging to business" * * * "simple annual interest just won't work in a store" * * * "imp~~ossible to compute percentage interest" * * * "cause a dk~op in sales" * * * "impossible and absurd to figure carrymg cost" * * * "too great burden on the banking industry and not necessary," a~nd so' forth. I am certain this committee has heard all this and much more. In Massachusetts everyone of the dire prophesies made have not come true. You have received the statement from the Banking De- partment of the Commonwealth of Massachusetts. You will also hear today further testimony supporting this view. As an economist, I am not aware of any indication that the Massa- chusetts truth-in-lending laws have had any negative effect on the economy of our Commonwealth. Indeed there is valid reason to `believe that the effect h~is been beneficial `and th'at the benefits will increase over the years. ~`nrthermore, as one who has devoted many years to the study of finam~e and firmly believes in our form of free enter- prise system, I believe that the general effect on financial firms and the general economy hasbeen and will be beneficial. It seems to me that every move to strengthen our system by pro- tecting the legitimate entrepreneur from the questionable practices of the unscrupulous, must benefit the business system of our country Every move to n~iore fully inform the consumer and ei'iforce fair treat ment should serVe to increase public faith in our system and increase its strength.. . . `~. I am pleased t~a~truth*in-iendinglegi'slatiC11 has been passed by the U S Senate It seems uflfortunate, however, that certain exemptions were made in the Senate' bill, S. 5, espec.ia~ly the exemption of re- volving credit plans. That distinguished Ameri~an, Senator Paul H. Douglas, the father of the truth-in-lending principle, emphasized this in his recent testimony before this committee. when he' said that the consumer should be told that revolving `accounts, offered at the pre- vailing rate of 11/2 percent a month, actually comes to 18 ~ercent a year. With this ~knowledge, `he said the buyer might prefer to borrow money elsewhei~e at ~a `lower rate to pay off his account: This ~typc of account has~ become extremely popular in this country and its omission wouldt leave a wide gap in consumer protection legislation We `in Massachusetts have followed Sena~tor Douglas' advice on `this matter and would respectfully suggest that the Congress might also heed his recommendation. Certainly Massachusetts has made him a prophet with honor. ` Truth-in-lending legislation is especially significant at this time. It is unfortunate that the greatest financial abuses appear to occur in transactions involving our citizens who are the least educated and PAGENO="0575" CONSUMER CREDIT PROTECTION ~ACT 565 in the lowest income segments of our pop~lation. An editorial in the Worcester (Mass.) Sunday Telegram of August `6, 1967 stated in part that "The high casualty rate ambn~gsuoh `buy now, pay later' stores was significant in the recent riots." As Mr. Malcolm C. Webber, chairman of the Commonwealth of Massachusetts Commission Against Discrimination states in the accompanying letter attached, "while not condoning, I do not believe it is by~ accident that nationally and locally during the recent riOts, there was much, burning and looting of loan companies and stores with reputations for nnscrtipulous busi- ness practices." In Mr. Webber's letter he goes on to point out that~truth.~in-lending legislation has served to improve this situation~ I `concur in this opinion: 6'The ethical merchant and money ie~der are no lon~er for4~ed to consider the institution of questionable practices to compete with those who are less scrupulous. Those who use misleading claims and cruel deceptions as a normal business practice' ar~. now in violation of the law and a decline in such practices is apparent" to the State Banking Department, the Consumers' Council and other State agencies such as the office of the attorney general. Revolving credit and credit cards are covered by our stathte's. In connection with revolving credit all that our acts require is that the customer be informed on his bill that the annual rate of interest is being charged. The. following is a sample of the' wording in boldface type on the back of the hill of one of Boston's largest department stores: NoTIcE TO BUYER 1. You may at any time pay off the full unpaid balance under this agreement. 2. When computed in accordance with the provisions of Chapter Z55D of the G~erteral Laws, the sim~1e interest per `annum rate that approximates rno~t closely the finance charge percentage rate is 18 percent on balances of $500.00 or less, and 12 percent on the excess over $500.00. This is all the law requires. While the maximum rate must be stated, there is nothing to prevent a store `froni indicating that the percentage rate will be less depending upon~the purchasing and pay- merit cycle established by the customer. We do not requini them to give the complete breakdown of such charges, but only the maximum rate. Incidentally, you might `be interested in knowing this sugges- tion for the handling~ of revolving credit problems came to the Con- sumer's Council from one of the leading business journals in the coun- try. All of the arguments proposed by the prophets Of' disaster if such legislation ,was passed have proven to be false.' Madam Chairman, these consumer protection laws passed in Mas~. sachu~etts because the public interest was recognized by th~ leader- `ship o~ the Gencr~l `Court, speaker of the house, the Honorable John F. X. Davoren, and the president of the senate, the Honora~ie Maurice A. Donahue, and the chief executive, Gov. John A. Volpe `who signed these laws. As chairman' of the Massachusetts Consumers' Council I earnestly recou~men~l that the Cong~e~s a4op~t s~ro~g truth.. in lending legislation similar to that existing in our Commonwealth PAGENO="0576" ~66 cbNst~tl~tt Clt1~DIT ~PROTECTION ACT (The letter ~ref di~red t~ ~oflows:) Tiai~ ~JO~MONWEALTH OF MAS5ACHI~SETPS, COMMISSION AGAINST DISCRIMINATION, Bo~tO*,A~tiU5t1,19G7. Mr. DERMOP SHEA, E~ecutivB gecretqr~, Uon$unIer~9' Uozt~cil, 100 Cav~bri~ge 2tre~t~ Bosto~v, Mq~a. DEAR Ma. Su~A: The passage and implementation of the so called, "Trutb4n~ Lending" l~gis1ation in this Commo~iwealtb has been a matter of great importance to this OøniI~ii5sion.~ Both historically and as a matter of immediate concern the minority groups of this Coaunonwealtb have ~c~nstituted a 1a~ge part of the lowest socio-economic status of our society. ~t is at this level that the greatest financial abuses and prpfi~eerftig take p~[ace, and it is at :tbis level that it can be le~t af~ordec1. ~E~aék of educatioh and sôpbIstlcatiOfl'ti~ake a natttral. prey of iminy of o5r poverty cifiznns, forthe uns~ruplous ~nd~dlshoneSt. While ~ot condo~,li13g, I do not believe it ~s by accident that nationally and `ocally, `during t~b~ receut riots, there was much burning and looting of loan companies and ~t9rës with reputations for unscrupuious~ business practices. Since passage o& this legislation, we are seeing the beginning of a correction of this ~ituat1On~9i~be ethical money lender is~ no longer forced to co~slder the institution of questionable practices to ~~ompete with those wh~ ~re less scrupu- ions. The latter person, who uses misleading c~la&ms artd eruel deceptions ~s a normal business pr~ctice, now is in violation of the law and a decline in such practices is apparent. This leglsiiltioli, I fe~l~ 15 of the greatest benefit to those who need it most and I eongr~tnlate~ you ofl its passage and i~nplementatloit. Very truly yours, MA~LCOLM ~. Wnnnim, Chairman. Mr. WIILETT. IL would at this time like to add an advertisement that we have to our testimony and leave it here. This advertisement ap- pears in subway~,'streetcarS, and has been `ptiblished by the Provident Institution for savings and shows a bank can advertise `in Massachu- setts, and with this as a chart accompanying it indicating what the percentage rates would be if a finance company edvertised in the same manner. Mrs. StrLtitvA*. Without objection this advertisement will be made part of y&ur testimony a~d part of `the record. (The documeilt referred to follows:) PERSONAL LOANS AVAILABLE Compare the Mqnt~y Pa~tn~nts-AnyWhere Amofint y~ou receive 12 months 18 months 24 months 1 $350 $30.91 $21.20 $16.33 ~.: k'~ ` $4417 , $30.28 $23.33 Annual percentage rate -~-~- 11.08 `11.37 11.52 $1000 $87.50 $5t~72 $45.83 $1500~_--- , $131.25 $89.58 $68.75 $2000 $175.00 $119.44 $91.67 Aniflial peaentage rate 9. 23 9.47 9.60 1 Losger termiavaILabIe~f3~ife'inSUraflce 1ncIu~tecI atnomtra çoat~ Pta~E dJ~D~6NT I2tST11~IYT~DN FOR SAvIf~ ~N TUE `I'oWN 033' BOSTON CALL MR. COFFIN AT 428-9600 36 Tem'tle P1. ~0 Winter St. 90 Federal St. Summer-Washington Subway 15 PrudentIal Center Plaza 25 State St. Charles River Plaza-1967 PAGENO="0577" CONsUi\~rEr~ CREDIT PROTECTIO]~ ACT 567 ANNuAL PIO1WENTAGE RATES BASED ON SMALL LOANS RATE PEIIMITTED BY LAW If a finance company advertised this some chart it would read as roliows under our Truth-in-Lending law: ~ .~ ~ ~ Annual percentage rate Amount ----- -- 12 months 18 months 24 months ` $350 29.90 30.50 31.11 $500 28. 73 29, 30 29. 84 $1,000 26.36 26.84 27.31 $1,500 23. 26 23. 67 24. 02 $2,000 - 20.68 21.00 21,26 Mr. WILLETT. Thank you. Mrs. SULLIVAN. I want to say also that Mr. Klein's statement will also appear in the record in full. Mr. M~ade? STATRMENT OP HON. ROBERT L. MEADE, ASSISTANT ATTORNEY GENERAL POR THE COMMONWEALTE OP MASSACHUSETTS AND CHIEP OP THE CONSUMER PROTECTION DIVISION `OP TEE DE~ PAETMENT OP THE ATTORNEY GENERAL Mr. MEADE, My name is Robert L. Meade. I am an assistant attorney general for the Commonwealth of Massachusetts and chief of the consumer protection division of the department of the attorney geii- eral. In this capacity, I am in charge of all matters relating to con- sumers' problems, and I have responsibilities in regard to our truth- in-lending law and our Truth-in-Installment-Sales Act, which I will call the truth-in-credit laws. In addition, I serve as the attorney gen- eral's representative on the Massachusetts Consumers' Council an agency in the executive branch of our State government. Between ~oth of these positions, si~ice January of this year~ I have come to see our truth-in-credit laws at work and I am convinced that they are of con- siderable benefit to consumers and that they impose no undue hardship on legitimate businessmen. - They have not stifled trade in Massachusetts nor have they brought about any recession; they have not provided unworkable practice nor have they resulted in the curtailment of consumer finance. Indeed, I can think of few laws on the statute books of Massachusetts that have helped to clear up so many areas of consumer discontent, or that have led to better relationships a~nd understanding between business Organizations and thQse who buy their goods or services. One only ha~ to look back to the years immediately prec~cling the enactment of this law to see the plethora of complaints regarding credit transactiotis; persons who thought that the cost of credit was much lower than it actually was; persons who discoyered that "easy financing" was not so "easy"; persons misled by typical a'dyertisements of rates and credit. Even quite sophisticated people were unable `to determine the true cost of their credit transactions and many were understandably shocked to discover that what they thought to be 6 percent annual interest turned out in fact to be almost double that rate. Surely if dis- closure of the true annual rate of interest would deter anyone from 83-340----67-pt. 1-37 PAGENO="0578" ~568 CONSIJ1VIER CREDIT PROTECTION AC~ buying, then that person had no business in. buying. the item in the first place. The fears expressed in certain circles prior to th~ passage of the Massachusetts legislation have not been proven justified. One com- mon complaint involved the alleged difficulty of expressing the true annual rate partikmlarly where revolving credit accounts were involved. The usual compkint was that the buyer, and not the seller, controls the dates of put~chases and payments and consequently can vary the rate of interest in accordance with his own schedule. Indeed, in many such accounts, if the buyer should pay his bill in full within 30 days of his purchase, then no interest charges at all would accrue. It seems to me that the buyer is interested in knowing what period he may carry indebtedness before incurring any interest charges and also is inter- ested in knowing what the interest will be when it does accrue. Nothing in the Massachu~etts laws prevents ~ny seller from disclosing the first of these items t~ the buyer although only the second is required to be disclosed by onr' laws. Surely, if one of the purposes of tru~th4n~credit legislation i~ to~ allow buyers to "shop" on credit-the critical time from the buyers' viewpoints is the point at which a credit charge be- comes due; that is the point at which his "shopping" becomes relevant, and at that point he should know the seller's true annual rate from then on so that he could, if he chose, compare that rate with some alternate source of credit. In Massachusetts, on a revolving credit ac- count 11/2 percent ~er month or 18 percent per year is the comn~ion rate of interest (aft~r interest begins to run) and if a buyer can (10 better elsewhere (agah~i at the point when interest l~egins to run) then he ought to at leas~ be given enough information tb enable him to make an intelligent choice. Whether the buyer so chooses or not is up to him and indeed furtker consumer education is obviously necessary to help buyers make. `a tational choice. But even if consumers currently were not making such a choice, and I believe they fre~uently are, it would still be no valid árgumeht~against passage of truth-in-lending legisla- tion. Once the facts are known, the consumer can be taught how to use those facts. In Massachu~etts, in my experience, retailers have generally been very eooperati~~ With our office in living up to the letter and spirit of the law~.I `ha~ heard no comthents from `ret~i1ers tior hate I ~eeti any evidence that tijeit ~tolume of business has dtopped off. I have spoken to bankers `~bot t,'t e~e~1f~ct of the lá~rs on their busirie~s and have be,en told that ther~ h~s been ~bso~httely' ho adverse efrecton theit bushie~s. These laws ate working ~eil in ~[a~saChusetts, ~I think that ~in~iilar legislation will wotk well~bn t~h~ Fedetal level, T~think that the puMic interest requires legislation of this hature. Thank you. ` ` ,` Mrs. SttLIVA~ Than1~ you, Mr. Meade. Those meihbers who have gone W votO will soon be back, I am sure. In the mea~tin4~, `Mr. Smith, Would you like to make yo~fr stat~tnent now? . PAGENO="0579" CONSUMER CREDIT PROTECTION ACT 59 ~STATEMENT OF WILLET SMITH, CREDIT ZANAGER, LECHMERE SALES CO. Mr. SMITH. Madam Chairman and members of the subcommittee, you have asked that I appear before you today in connection with RB. 11601, the Consumer Credit Protection Act, and other related bills. Gentlemen, I wish to make it clear that my testimony is based solely and completely upon our actual experience under the Massachusetts truth-in-lending statute. The Massachusetts credit law became effective November 1, 1966. In order to comply with the act the retailer was obliged to change his credit forms and credit applications Except for the minoi cost of changing these forms and applications, there was no extra expense to the retailer as aresult of the passing.of this law. Lechmere Sales does about $45 million volume annually of which approximately $22 million of business is done oil credit. Of this amount ~2O million is done on revolving credit and the balance on conditional sales contracts. We encountered no problems of any consequence either with our record keeping or our customers as a result of this law. So far as I have been able to determine the law is informative and fair for the consumer, workable and helpful to the businessman. It prevents tricky selling of credit programs which often call for low monthly payments but include a balloon-ending note which is triple or quadruple of any other scheduled payment, thereby hiding the true rost to the consumer. It is my feeling that anything that is good for the consumer is good for business. I believe that this law is good for the consumer because it corrects abuses in the extension of credit and eliminates gimmicky selling and advertising of credit.., I know of no instance where Lechmere Sales lost a single sale be- cause the law requiring that the customer be informed of the true interest rate or because of the use of the new eredll forms or apphca tion for credit A national truth-in-lending bill will permit companies doing busi- ness in different States to operate under reasonably uniform credit disclosure laws rather than under a comp'etely thfferdnt s~t of laws in each State of the Tlmted States I heartily endorse the law aspassed in the Commonwealth of Massa- chusetts based on the experience of my' company and myself as `credit managet Mr~ SULLIVAN Thank you, Mr Smith We are sorry that Mr Led better, assistant supervisor of the loan agencies in the Massachusetts Department of Banking, cOuld ~ot leave the jurisdiction because of a trial in which he is a witness, but we are glad that Mr Meade could come. We have a letter from Professor Willier of Boston College which ~will go into the recotd at this points PAGENO="0580" 570 C0~SUMER CREDIT PROTECTION ACT (The letter referred to follows:) BosToN COLLEGE LAW ScHooL, Brighton, Mass., August 5, 1967. Representative Lno~con K. SULLIVAN, $consinittee on Consumer Affairs, Committee on flanking and Currency, 2128 Rayburn ~Iouse Office Buittling, Washington, D.C. DEAR REPRESENT~&TIVE SULLIVAN: A prior commitment of considerable impor- tance makes it imj~ossib1e for me to testify before your subcommittee concerning the conSumer protection bill during the week of August 14. This Is with the deep- est regret because I have been fighting for over five years for such legislation and wish to help in any way now that victory is so close. I am certain, however, that my colleagues from Massachusetts will ably relate our experience over the past nine months with our new laws. The sudden death of Deputy Banking Commis- sioner Clair, who was our most effective advocate,, was most untimely. Let me say her~, with all of the urgency which a letter can impart, that the exemption in the ~enate bill for revolving accounts renders itu rate disclosure fel~ture virtually ~iseless. Revolving accounts in both consumer sales and con- sumer loans are catching on fast across the country. A safe guess ~is that about 80% of all eonsuxder eredjt transactions in Boston are nç~w under some revolving credit plan. The ex~mption would have three effects: (1) There will be no rate disclosure In a majority of credit transactions. (2) Creditors now using lnstalmetrt eredit~ will shift where possible to the exompt revolving credit. (3) Shopping by the consumer for the best~rice for credit, the major purpose of rate disclosure, will be no more po~si~le than it is now; in fact, rates in some but not all transactions will only add to ~he present confusion perpetrated by creditors. Tb~' last effect,~whieh Is the most important to the consumer, will result as ~e11 from exempting real estate trau~actiops and transaction~s which have a small dollar finance charge. Thus, I strongly urge your committee and the House itself to retain inclusion of these transactibns in H.R. 11001. A "truth in lending" law hi name only will not serve well either the consumer or th~ Congress. It would be~the grossest kind of hypocrisy. `I have read II.R. 11601 and must commend your draftsmen for a thorough. and well-organized ptoditct. The delineation into three credit categories (credit sales, non-sale credit and open end credit) is we~l done. This is our approach in Massa- chusetts, but with somewhat less clarity. 4n addition to rate discloSure, I suspect that the baMest oppositioll will come to the aUverti~ii~g, the 18% ç~eilin~ antI the anti-garnishment provisions. If necessary for O~uñmIttee and House eudorsemeut, I would suggest compromise of these provislo*s, but not their omission. For example, by statute ~and regula- tion we require tannual percentage rate disclosure in advertisements which sot ~ut precise terms, but do not otherwise prescribe coutent; garnishment be~ow ~ certain ~snm-~--say, $100 per week-may be prohibited with power in th~ Board' to es'~aiate that amount according to the cost of living index. If, after your hearings, such changes becom4~ necessa~y or desirable, I shall be most happy to a~slst `in working them out~or drafting them. This was my major function in connection with the Massa,~1iusetts statutes. My congratulations on your courageous support of consumer protection legislation. I am personally aware of the nature and tactics of the opponents which require tlie strongest conviction to resist. ~oura sincerely, WXLLIA~k F. WILLrER~ Pr~ofeseor of Law, `Mrs. SFLIflAN. All three of you gentlemen `have performed a fine pi~biic service in coming down here to tell us of your experience under the' kind of ~ffective truth-in-lending law which is part of H~R. 11601. Tn my opinion, your experience fully establishes that the fears and alarms expressed by some of our witnesses in previous sessions were based more on a desire to kill effective legislation than to help enact it. That is my opinion and, as I should add, may not necessarily reflect the views of all members of the subcommittee. But you have PAGENO="0581" CONSUMER CREDIT PROTECTION A~CT 571 operated under just such a law as the disclosure. sections of H.R. 11601 and found that it works without any hardship on business except to tell the customer what he has a right to know. Now, Mr. Smith, as the businessman in this group, as the credit manager on the firing line of truth in lending, will you tell us what the reaction of your customers is when you `tell them 11/2, percent a month service charge is 18 percent a year, or an installment contract may be 12 percent, or whatever you charge? What is the reaction? Mr. S1~nTH. The reaction by the consumer is not of any great im- poi~ance right now. Because the consumer is asking only one ques- tion, how much do I have to pay a month? This seems to be their prime question. However, we believe in full disclosure and when we state that it is 11/2 percent a month-equal to 18 percent a year---it seems to be accepted as a way of life and there is no derogatory reac~ tion of any sort whatsoever. Mrs. STJLLIVAN. When this first went into effect was it a shock that it was `18 percent and not 11/2 percent? Mr. SMiTH. It took off very slowly-the only people who showed an interest were the professional men-accountants, executives, busi- ness people, There was a smile on their faces that they seemed to realize that the moneys had not changed-that they are paying the same amount of money regardless of whether it says 6 or 12 percent simple interest. As a result, there was no shock whatsoever and no sales loss. Mrs. SULLIvAN. Mr. Smith, do you utilize garnishment in collecting debts from your customers? Mr. SMITH. We do not. Mrs. SULLIvAN. Dr. Willett, on Friday, Father MeEwen testified before us and noted a very direct relationship between credit abuses and the riots which have occurred in our cities. Your testimony also points to that fact. Would an 18-percent ceiling on finance charges be effective in cleaning up the worst aspects of credit practices? Mr. WILLETT. I think that it might very well be of considerable help. I am not necessarily agreeing that 18 `percent is or is not `the best exact number. It seems to me at the present time to be. I think the important point, though, the law does require in Massachusetts that the true interest rate be revealed and that this in itself brings confidence and helps the situation considerably. Mrs. SULLWAN. Would either of you gentleman have any idea on a better figure than 18 percent as the ceiling? Mr. WILLETP. If I may interject, I think that 18 percent is an ex- cellent figure and would be very happy to agree with it. However, I haven't done any work or research into whether some specific number is the best. I think in Massachusetts the outstanding feature of the law is the fact of reviewing the true rate and that this in itself is a tremendous boon. Mrs. SULLIVAN. Could you give us any idea of what ha~ happened in Massachusetts among the outfits which charged high credit costs? I am not talking about revolving credit now or the legitimate stor~s that you have dealt with. What happens in some of these uther stores where you were never quite sure of the charges for some of the large- ticket items such as refrigerators, TV sets~ and so on. Are the c~on- sumers getting better deals or are there still `sharp practices going on? PAGENO="0582" 572 C0~SUMER CEEDIT PROTECTION ACT Mr. WILLJcrr. We have had cases up here where action has been forced to be taken. The iegitimate businessmen who~fortunately does the greater ~rc~mtage of business similar to Lechmere Sales in Ins recent testimony~ reveals an interest rate rwhich is acceptable-has not been forced to change his methods of doing business or the rates charged. The unscrupulous businessman has been stopped. Fortunately he is, I believe, a small percentage, but ~infortunately a small group can quite often do a great deal in terms of destroying good public relations for all business. He is stopped immediately because of enforced re- quirements for revealing an interest rate. It is then a fairly difficult matter-a fairly simple matter, I should say, I believe, to regulate and stop this practi4e happening, although I believe the representative from Attorney Qeneral~s office could qualify how simple it is in actual practice. Mrs. SULLIVA*. Mr. Meade, I would like you to answer that, also. I would like to know what enforcement problems you have had in handling these oases. And I would also like to know what has~ been the reaction among the unscrupulous dealers. We all know them-and I am sure they have them in Massachusetts, just as we have bad them in Missouri and other States. He charges more for his merchandise than he should and, in addition, the customer has no knowledge of what interest'ra~e he is paying for credit, except that he is told that he pays so mucl~ a month for so many months. Can you give us any examples on wh~t is happening among this group ~ Mr. ML&DE. 1~Tell, we have no limitation on what somebody can charge for his goods. Mrs. StJLi~IvA±~. I realize that. Mr. MEADE. However, since they are limited in retail installment sales both on ordinary charge accounts and revolving credit ac- counts-there is a set limitation-competition would serve to keep the price at a competitive level; that is, the cost of goods totally. The interest rates, then, are generally a maximum that can be charged under the law aind the disclosure of these serves this purpose. But if a person decides that he cannot afford to pay 18 percent interest on a revolving credi1~ account, then he has two ch.oices. He can either shop for a better rate of credit-three cases-or he can shop for goods else- where and perhaps get a different price or thirdly he can decide that he doesn't need the type of goods that he may b~ buying. In this way regulation of credit has an indirect effect, I think, upon the total cost of goods that are sold and this in and of itself has helped clear up many problems. We just don't get a great many problems in this area. Most of the complaints that do reach my office really involves-or I think retail centers just by inadvertence forgot to put in some particular item that is required in our retail installment credit agree ments. When that happens there are certain penalties. in the law, both criminal and civil. I have~not yet found it necessary to invoke any criminal penalty Geneially a simple call to the seller reminding him about this particular provision serves to clear it up. I haven't dis- covered any pattern of abuse by any retailer of this credit law Mrs. SULLIVAN. I wondered what enforcement machinery you use in Massachusetts and. how it compares with the self enforcement pro- PAGENO="0583" CONSUMER CREDIT PROTECTION ACT 573 vision of S. 5 or th~ administrative enforceme~it provision of H.R. 11601. Mr. M1Mni~. The administrativ~e enforcement is probably the sim- plest way in Massachusetts. For example, in the lending laws then either by banks or finance companies, if they' abuse the law there- they are licensed-their license is subject to revocation by our banking department through an administrative process. There is-~-this is in addition to any criminal penalties that could be invoked against them. I think that the administrative sword of Damocles over their head is probably the most effec~tive method, rather than the court proceedings. Mrs. SULLIVAN. Could you tell me, Mr. Meade, whether S. 5, as now before us in the form in which it passed the Senate, would wipe out the requirements of your Massac~iusetts statute requiring an annual rate disclosure on revolving charges, first mOrtgages and items on which the credit charge is $10 or less? Mr. Mr~rii~. No, I don't believe it would. We would require in Mas- sachusetts and any provisions that go beyond 5. 5 would still be in- cluded in our law. Mrs. SULLIVAN. Are you positive of that? Mr. MEADE. I will certainly take that position before our courts any time. Mrs. SULLIVAN. The reason I ask that is that the intention of S. 5, as passed, seems to be to have the State laws supersede the Federal law, but only where the requirements of the State laws are "substan- tially similar" to tho~e required in S. 5 and "not inconsistent" with S. 5. If your State law goes beyond 5. 5, would that make it incon- sistent with it? Mr. MEADE. The question was raised whether our State law goes beyonñ S. 5 and if we were then inconsistent in what we require going beyond. KnOwingthe legislative history th~ S. s; I don't think that is what i~ meant by the' word "inconsistent." We would certainly take the position in Massachusetts, and I think correctly, that all of the requirements, not only of disclosure, but of substantive provisions in our act'would still be effective, regardless of S. 5. Mrs. SULLIVAN. Mr. Meade, what is your State law on confession of judgment notes? Do you permit them as part of the credit trans- action? Mr. MEADE. They are forbid~den. Mrs. SULLIVAN. Mr. Wiilett, do you think we should have in H.R; 11601 a provision similar to your installment sales law which gives the customer a cooling off period, after signing up for one of these credit deals, to get out of the contract? Mr~ WILLETT. Yes, very much ~o. Mrs. SULLIVAN. At this point we will recess until some of the other members come back. (Short recess.) Mrs. SULLIVAN.' All right, gentleman, let us resume. Mr. Meade, I asked you about your State law on confession of judg- ment notes. Would you repeat your answer? Mr. MEADE. I said confe~sion of judgntent clause is a prohibited term in installment cr~dit ~reemet~ts. This is part of our retail iu-~ staliment credit law that became effective November 1 of last year. PAGENO="0584" 574 CONSUMER CREDIT PROTECTION AC1~ Mrs, SVLLIVA~. So you prohibit the confession of judgrnentAnote. That is the same thing we do in H.R. 11601. Mr. MEADE. `I ~vill take your word for it. It is, prohibited in Massa- chusetts. Mrs. SULUVA~. Are there any other laws bearing' on credit re- cently enacted in Massachusetts that you would like to discuss with us? Mr. MEADE.'Well, I was just telling Mr. Shea,, as originally drafted, in fact as originally passed, chapter 25~ (d), which is the installment credit law, there may have been some question' th~re as to what, in addition to the , pimple annual interest rate, a ~seller øould disclose or require. There is no question now as of very early, January 1 of this year, an amendr~ent to the act makes it quito clear that as long as the retail seller discloses the simple annual interest rate, there is no reason `whatsover why tie, cannot also disclose that the rate only applies after the so-called free rider period, 30 days, 59 days, a~nd there is no reason why a retail seller cannot disclose that the rate oniy applies on balances after credit for payrnent is made, rather than on the open- ing balance. Again this is something that has been referred here earlier. This is not required, that a seller disclose this, but certainly he has that option if he chooses. Mr. WILLETT. Yes. M~r. WYLIE.. Will the chairman yield? Mrs. SULLIV4N. Yes. Mr. WYLIE. Do they have to advertise distinctions in credit prac- tices?' Mr. MEADE. ~ am not sure I understand the question. Mr. WYLIE.~ I am not sure if I know how to phrase this. In order for the buyer to really know if he is' getting a good deal, so to speak, or not, the distinction in the differences in the credit arrangement ought to be called to the customer's attention. Isn't this the real pur~ pose of this program? As I understand it, there is a section of your law which prohibits the advertising of distinctions or referring to the practices of another seller-another retail store's credit practices? Mr.' MEADE. ~Uhat is not so, sir. All that is required by a retail in- stallment credt agreement, if they are charging 11/2 percent a month, referring to revolving credit, that they say that this totals out to 18 percent a year. They are not prohibited `from, in any way, from say- ing on the~ agreement, orally, or advertising in any other way that the 11/2 percent only begins, say, after 30 days or 59 days, and if you pay the whole thing off within that period, then there is no charge what- soever. They are not prohibited from. saying that. In fact, it would be entirely to their advantage to do so. But there is nothing which prohibits it. Mr. WyI~IE..I want to pursue this a little more. I am wondering if there is anythiing in your law which prohibits or requires the adver- tising of a rat~ lower than ~ or 14 perceut,~if 4hat should be the actual charge? ` Mr. MEADE. No, they can advertise whatevtir the true rate is. In fact, that is the requirement of the law, that they have to. If they are going to make an advertisement of a rateit'has to be the true annual rate computed according to the formula. But there is nothing prohibit- PAGENO="0585" CONSUMER CREDIT PROTECTION ACT 575 ing them from going further and saying that this rate is based on- not on our opening balance, but on your opening balance with a credit for any payment you might have made during the month. So that the distinction that one of the other gentlemen drew between J. C. Penney and Sears, Roebuck, where Sears computes it on the beginning bal- ance-on the opening balance and Penney computes it on the opening balance with a credit for any payment made, that can be disclosed. Nothing prohibiting that~ It is not required. Mr. Wn4IE. They cannot disclose in advance-at the beginning of the year what the actual annual rate might be on a revolving, ac- count, can they? Mr. MEADE. Surely. It states very simply that the rate is 11/2 percent per month, 18 percent a year. But the 18 percent will only become ef- fective on the amount of credit that you use. For example, if they have a 30-day acco'unt, 30-day free rider period, they can put in there- they have to put it in, if it is 11/2 percent per month, that it is 18 per- cent a year. If yoi~ pay your account in~fuil in 30 days there is no interest charge. Mrs. SULLIvAN. What is the status of the, Penney ,lawsuit? Mr. MEAD~. Well, it j5 pending in our courts. It is sort of cooling fo~,,the summer. Penney has filed a complaint, of course, as I assume you know. Our office has filed what we call a demurrer to it as well a~ an answer to the coiriplaint. ]t is our position'that Peuney's is complaining that t~hey cannot do something and we say they .can do it if they want to. it is up to the court. Mrs. SUI~LIvAN. Mr. Klein, would Consumers Union regard S. 5 as passed by the Seuate as an effectiye law, to guide the consumer, if that were all. we could pass? Mr. KLEIN. It would be better than.ztothino, Madam Chairman. As I said in my opening. testimony, both t~ie. Senate bill and your bill would tend' to openup this large breach and it, would tend to en- courage many, n~any lenders to go into a revol~ving ci~edit type of bill- ing, and I think the purpose of the bill would be defeated. I think we must have revolving credit under the bill, and ~nost preferably in the fashion that I have suggested. Mrs. SULLIVAN. Thank you. ,Mr. Bingham? Mr. BrN~rnA~. Thank you, Madam Chairman. I would like to thank all the witnesses this afternoon, particularly these three who have cdme down from the State of Massachusetts to tell us about their experience. To them T would just like to addre~ one question, if they have ~any wisdom for us at `all on the proposal in the Sullivan bill for a prohibition of garnishment? Mr. MEADE. We don't have that in Massachusetts, so I can't speak on the basis of any experience. I am somewhat leery of makincr a na- tional law that would prohibit it. I don't believe in Massac~usetts most reputable retailers do seek this form of relief, But I think that lacking the experience ~ the Stath level, I will refrain from giving any off-the-cuff answer to your question; if I may. Mr. EINGIL&M. Thank you. I can understand your position. Mr. Klein, I devoted quite-a considi~rable time going over your state- ment in some detail. I must say I am very impressed by it. I hope Mr. PAGENO="0586" CONSUMER CREDIT PROTECTION ACT Williams will pt~y particular attention to ~the table that you have pre- sented as an exfhibit on the way in which the charges work out at Sears, Roebuck and Montgomery Ward. A great deal has been made in these hearin~ that the average earned or real interest will tome out to less than 18 percent. Mr. WILLIAMS. Will the gentleman yield? Mr. BINOHAM. You have demonstrated quite clearly that it may come out to more than 18 percent, and in some cases, as your example shows, it may come out to a great deal more than 18 percent. Mr. WILLIAMS. Will the gentleman yield for a question? Mr. BINGIIAML I would like to finish if you do not mind. Mr. WILUAMk Not at all. Mr. BINGHA1~. I nientiôned your name, so I will yield. Mr. WILLIAMS. I would like to ask where on this J. C. Penney re- volving charge account-what column do the monthly purchases appear? ~Mr. BINOIIA1~. I take it from this statèmeiit that these are refi~cting :a single purchase and that there are no other purchases.l3ut obviously I am not in a p~siti~& to answer your ~i1estion. Mr. WILLIAM~. If the gentleman will yield, if thatis simply pa~ying off a set. amount of mon~y, then this is a fine eñmple of instaili~i~nt purchasing. Mr. BINo~nAa~. I decline to yield further. It is ~p~rfectly clear from this and the other examples that ydu Ii~ie given, attached to your statement, Mr. Iclein, that the actual interest applied on a day-to-day balance of what may be owing at any given time may be mo~e or less than 18 percent, depending on the time pur~ha~es ~tnd payments are made, whether or not payments are credited, and ~o forth. What I do Want to ask you is whether you have any propbsal to specifically coritect this legislation to deal more effectively with this problem than flam afraid our present bill no~r does. You discuss this on. page 14 of ~our full statement, hut ~rou do not come to ally con- clu~ion. I am ce~h~ that &~n ~der ofl1~ ~resent~bill we are not g~tting at the ~ossibiIit~ that under these revoitring oharge plan~ in a gi~ren case so*ieone may be paying a lot more than 1$ percent and a lot more than 11/2 percent a month. Mr. KLEIN. Let me talk to Mr. Williams' point. No matter how much you buy, when, you buy it, how niany new pur- chases ar~ put on your bill, the rate will~ sti~i be 18 percent from J. C. Penney. In the Sears-Ward system, the ~rate wiji be at least 20 percent and almost .alw4ys higher than 20 percent because the installment pay- ment which thcfy require varies from 10 perceiit of your t tal bill to around 15 perc4ñt. In the case where it will be ~4~5 percent, the propor- tion of payment to actñal balance due, you see, is a little larger. The adjusted baIaiu~e duels therefore l~wer; yet the service charge re- mains the same-11/2 percent of the openingbalance. Now, as to yqur question, I have presented three suggestions as to how this might be handled, and I favored the third one, which is that the stores have a gross yield on an amix~al basis. Th~y know pretty much-they haye to~know the p~rçent~ge of revenues from service charges they ar~ going to reali~e~j;the ~c~onntsoutstanding as revolv- I I ~ PAGENO="0587" CONSUMER CREDIT PROTECTION ACT 577 ing credit. That is equivalent to what the consumer should be told is an annual rate. I would like to point out- Mr. BINGJIAM. If I may interrupt you, that would not correspond to the actual experience with any given consumer, so I do not believe now that would be any better than the 18 percent. Mr. KLEIN. It has been pointed out that consumers use these revolv- ing charge accounts at random, their times of purchase and payments do vary. But over the course of time the interest rate paid will gen- erally resemble the store's yield. I think this is a workable approach. But I suggest that I am not the person to say that. I am just a journal.. ist. You have people at the Federal Reserve Board who are highly competent to work this out, and it is workable, I am sure. Mr. BINGIJAM. Have you considered the revised language governing this problem, the annualpereentage rate on revolving credit, that was proposed by Professor Morse in his memorandum? Mi~. KLEIN; I have i~ot ~iad a chance to study it. Mr. BINGIIAM. Will you study it and give us your comments for the trecord? I think he has a rephrasing ~f'this that gets around the diM- culty of trying tb~státe an annual percentage rate while preserving the essence of what we have in the bill. Would you. do this and let us have at for the record? Mr. KLEIN. I will. (The material requested follows:) CONSUMERS UNION, Mount Vernon, N.Y., August 23, 1967. Mr. PAUL NELSON, Committee on Banking SGMl Currency, ~Rayburn House Office Buijaing, Washington~ D.C. DEAR Mn. Nnr~sou: At hearings before the Subcommittee on Consumer Affairs August 14, 1967, I had the privilege of presenting the views of Consumers Union on HR. 11601. The Consumer Credit Protection Act. At that time Congressman Bingham asked us to submit later, for the record, our comments on revised language, as proposed )~y Dr. Richard L. D. Morse, conc~rning disclosuz~e of the annual percentage rate on open end (revolving) credi~ plans. We are happy to ~comment herewith. On page 6 of his memorandum, Dr. Morse raises an objection to words .in Sec. :203(d) (2) (0) seeming to sanction the use of minithum or fixed finance charges for revolving credit. He notes that the practice can' `~be treated better by regi~la- tory authority." "The use of minima and fixed charges could be so abusively i~sed as to render the rate insignificant," he states. Consumers Union concurs and would support Dr. Morse's re~lsion of this aubsection. Also on wage 6 of his memorandum, Dr. Morse proposes revised language for Sec. 203(d) (3) (1~) ; this subsection lists items to be disclosed in monthly or periodic billings of rev'olvlng~ credit plans. Dr. Morse would add a requirement that the periodic percentage rate be disclosed at each billing, along with the annual percentage rate. Although Consumers Union would endorse this proposal, we wish to make clear our belief that it does not solve the disclosure problem for revolving credit charge accounts which we brought to the attention of the subcommittee. That problem is to disclose Cue tact that finance charge rates on revolving credit accounts `could and would differ from store to store even though all stores were disclosing the same periodic and/or annual perceptage rate. We illustrated the problem with a comparison of actual interest charges,. the customer would pay to Sears, Roebuck or Montgomery Ward, on the one hand, and to J. 0. Penney on the other. The example was of the retirement of a single $100 credit purchase. Paying installments as prescribed, the customer would have paid PAGENO="0588" 578 CONSUMER CREDIT PR'OTECTION. `ACT $9.01 in service charges to Sears or Wards, but only $7.42 to Penney's. We also showed bow the difference in charge might be expressed as a difference in peri- odic and annual percentage rates. It might be well to add to our previous testimony the following: We recognize that only one purchase was illustrated, whereas a revolving credit customer could be ~expected to make additional purchases while paying off the ~rst one. Addi- tional purchases would have the effect of changing percentage rate compari- sons to some extent. But assuming the same purchases and payments were made by customers at each store, and assuming each payment was no less than the minimum installment required by the store, the Penney's customer would always pay at least 10% l+wer' service charges than the Sears Ot Wards customer. One further. ob~~rvatton: Our illustratien makes the assumption that each month's service cb~rge is assessed a~ though tb~ customer had one month's use of the store's credit; actually, a customer may get more or less than one month's credit, depending on one's jnterpretation of the relation of "free-ride" period to the service charge. May we here reiterate our view that what the consumer needs in order to shop by price for revolving credit is disclosure, before opening an account and also at each billing, of an annual percentage rate accurately reflecting the differeuces in service charges resulting from various billing methods. The consumer ~bou1d be able to compare the price of one store's or bank's re'Voiving credit with the price at other ~bOres o~ hanks sand with the price of borrowing the mOn~y elsewhere. in ~nr jpd~uient~ the best ~a~d i~4eec1~ the only ~aetiea1 y~rdstick in most situa- tions wnuid be, tb4 annuat.percentage rate. Our proposlL]~ ~s 4t0 ha~me ILR. :11601 instr~uet the Fede~al Reserve Board to ~write the £ap~roj~riate i~egulation$, for estaiil1~hing the yardstick a!nd attahilug the obSeettves. RespectfuhlZ Ronnwr J. KLJ~I~r, Econoniics ~kZitor. Mr. KLEIN. tnless the consurflE~r seth `~ `p'ereentage, an~ annual per- centage, rate on his cori1~ract and on his bill as it comes in, he is going to be hard put to distinguish one store's rate from the other's. Mr. BTNGHAM. He does not get away from it. If I can just ask one final question. You suggested, I t~hirik properly, that ir~ many cases life, ipsurance and so forth shopld ,be included in finance charges,but what of the case where ~n ratic~ is optionial to the buyer~~ Would `you still require it to be stated as part of tI:1e finlu:1ce charge wh~re'it ~,s optional? ,` :`. `Mr. KtE±~. I döIi hink I would. ~`ththi~ if~i~ were `stated separately on the"contract and'not mad~ `th'andatory, I *oul~t say nO.4 Mr. B~NouA1~. Thank you. Mx~s. SULLIVA~. Mr. Wylie? `~`M~. WmiE. Thank you, ~adam Chairman. I, too, wish to thank the~entléwen fQr appearing hire and giving us tb~e benefit of,theirtestiinony. I do not want: to appear to be argumentative about many oLthe points that you have i~ade, and I am in favor àf th~oncept of trif~,in lend- ing--the id~aot truthin lendilig. I am 1~i~ some difi~eü1'ty in apply- ing the apnual1interest rate concept to th4e `revolving charge,4 account, and my questioi!is are along those lines. I doubt that reciting an interest rate on an annual or monthly basis is very meaningful `to too many customers. I have taken the position thnt it might be better if we can state the charge in dollars and cents so `that the customer would, in ~fact, actually know how much of his payment goes for interest or service charges. I see Mr. Wi~llett shaking his bead. Would you like t~ comment on that~, 4 Mr. WILLEr1j~. The dollarand cents figure is only important to a re- lationship in tl~e period of time of the balance b'orrowed; $50 charged PAGENO="0589" CONSUMER CREDIT PROTECTION ACT 579 for credit on a $1,000 loan-~how important this is depends on whether you borrow the thousand dollars for 1 mintli, 10 years, 5 years, and just a statement of the dollar amount Itself doesn't reveal enough in- formation. Mr. WYLIE. The person who borrows or establishes credit will know how long he has the loan, will he not? Mr. W~tLLETT. TJnfortunately in this type of advertising that I have seen in the past, the competition exists between people selling credit. One will say you borrow a thousand dollars and it only costs you $50 ~tnd another says you borrow a thousand dollars and it costs you $40, and both may be using a different time period over which you pay back the loan. The customer looks at the $40 figure and unfortunately, quite often, assumes this is the cheaper loan, because it is $40 instead of $50, where actually this one involves a shorter period of time and in the past it seemed to be a very easy system for people who wanted to give a false impression of their advertising. Now the statement of percentage rate does permit people like you and I-people like me to go to a store and say that if it costs me 18 percent a year to buy a television set on time at the store, I will be better off borrowing it from my local bank and paying an annual in- terest rate of ~½ percent and I can compare this. Mr. WYLIE. May I comment on that? That is another question. You have indicated that the Massachusetts law is working very well, in your opinion. What indications or evidence have you seen of this? I am trying to search facts to indicate that the law is working. Have pass- book loans been increased? I know in my case, if we get overextended maybe I will get a bank loan and pay off my revolving credit account. Mr. WILLETT. At the present time, since our law only came into effect really at the beginning of this year, I don't have numerical in- formation to prove statistically that this is true. But in discussing the situation with the stores and with various bankers, as Mr. Meade pointed out in his testimony, the general feeling on the part of the bankers and stores is that neither of them have suffered; that they are still doing business without any increase in difficulty, and that they are doing just as much business with this law as they would witMut it. It would be difficult until all of the statistics are gathered to prove whether or not passbook loans have increased or decreased. At the present time I don't know. I can only say, comparing us wIth the na- tional situation, that business in Massachusetts has not suffered. Mr. WYLIE. Have you heard anybody say that there has been any increased competition for credit in Massachusetts, which again would be a natural consequence if it is working? Mr. WILLETh We have had savings bank ~eoj~le-bankers loaning money say that customer~u~e now more interested ~n taking out loans to buy things based on the fact~that t1iey~ realize how much the interest is else~iere. . . ~Now, I would, like to tie two things together here, if I may. If the bank thYds, that a customer i~ borro~ing-a pnssbool~ loan, because `the customer h~s decjded that this isa ~heaper way of bbtrow- ing money shicé~he n~v can make a simpl~coniparison, th~ii it~ is true that the bu~inb~ ~t th,áI'parLicular thoinen~ mayi3e losing a credit cus- ton~e.r~ahd.turiibtghiin h~to a cash.customei~. Neverthele~s, If it is held tha~ this I~ub% deM~bké~, then it' wonld seeth to'~Wthat ~csrhat is being PAGENO="0590" 580 CONSUME~R CE]~IT PROPECTION ACT said is, the busin~ss should g'et a credit customer, ~ven though it is get~ ting him because of ignorance I think this destroys faith in our system I think the customer should be informed of many things. Mr. Wmxn. Are you in favor of a ceiling in the usury statute, 18- percent ceiling? Mr WILLErP Before the Truth in Lending Act in Massachusetts ~ ent into effect, we chdn't have any ceiling on retail installment sales But now we are limited to 18 percent and there is considerable more evidence, it seèin~ to me again, among the consumers that are a~ked about this of cori~parison shopping, where they will comparison shop on. the basis of th4s charge. * Mr Wmin Is tilero any indication or dangei that you feel that the ceiling might become tihe floor as far as interest rates are concerned ~ Mi WILi~urr I haven't seen any indication that it might become the floor. We needed this because before the act went into effect we had interest rates that i~ ere being charged in sqme of these instances that were substantially higher, and I am talking about 40 and 50 percent These especially occurred in the poorer neighborhoods, and we had letters from the group leaders in the poor neighborhoods in Boston, in the Boston area, ~pointing out that since the truth in lending law they have had people in that neighborhood come in and question them about a particular piece of merchandise that they were interested in acquir- ing and have been enabling to substantially help them by suggesting a less expensive source of borrowing the money to buy that article. Mr. WYLIE. Has there been any change in the credit, pnactic.es in Massachusetts, would you say? Mr. WILLErr. At the present tin~e- Mr WYLLFI I am referring to revolving charges, I would not think there would be ~ny in the installment field. Mr Wu~LErr ~liiere hasn't been any notable change of credit prac tices of the Firge4 legitimate organizations in Massachusetts The large, legitui~ate store in this area was not mistreating customers in the first place. And the credit practice has not changed. There has been change in the credit practice of the smaller store, especially, it seems to us, in the poorer neighborhoo~1s occupied by what quite' often is less well educated segments of `the population. Now, this has be~en~, I think, a very helpful chs~nge. This has been required because it i~ easy to see now what the rate of interest charged is. Mr. Wmre. W~itat `is the contention of the Penney Co. as far as their lawsuit is conceifned, `on what theçry is it brought? Mr. M~DE. It is a suit for a declaratory judgment, sir, that is brought on the theory that they are not allowed by the Massachusetts law to state that the customer, buyer, gets in, effect a free ride from them and for a certain period of time before an interest charge accrues, and also that they cannot disclose that the buyer only pays the interest charge on the adjusted balance and not on the opening balance. In other words, they are saying in effect that they are not allowed to tell the truth by our law, and that the purpose o~ the law, sup- posedly, is to enable the buyer, consumer, to make an informed choice as to sources of credit, and if that purpose is frustrated by the law itself, then that tlaw is unconstitutional, at least to that extent that it prohibits it. PAGENO="0591" CONSUMER CREDIT PROTECTION ACT 581 Mr. WYLIE. What clauses in the constitution? Mr. MEADE. It would be unconstitutional under our State constitu- tion, and I suppose it would be to a certain extent, they are making the argument that it comes under the first amendment that they are not allowed to tell the truth by Massachusetts law. All I can say is- I don't want to comment too much about it since I represent the banking department in that regard-but what they are saying they cannot do, they can do. There is nothing in thisr' act that prohibits them from saying what they want to say a's long as they do not mis- state the rate, which is 18 percent a year when the rate is in effect. They can go ahead and say that the rate does not become effective until 30 days or 60 days, or whatever the time period is. Nothing prohibits that. Mr. WYLIE. Could 1 just ask d'ne more question? The chairman has indicated my time is up. You have been very indulgent. Mrs. SULLIVAN. I just `want to be sure we can also give the other members time to . ask questions. Mr.' WYLIE. I have one and a half more questions. In the Penney lawsuit they are in effect saying that on the revolving charges where there are purchases during the month where they have these grace periods, if they do state 18 percent, that in fact is not true? Mr. MEADE. The other half is that they are not `allowing-that they are not allowed to go on further to state that, depending on the cus- tomer's schedule of payments on purchases, that it may work out to be less or that, in fact, there may not be any. credit charge because he may pay within, the. 30- or 60-day period. Mr~ WYLIE. Are they prevented from doing that? Mr. M.EADE. Yes. Mrs. SULLIVAN. Mrs. Dwyer? Mrs. DWYER. Thank you., Madam Chairman. I do not know whether these questions have been asked or not. When was the law passed in Massachusetts? What was the date of th\e signing by the Governor? Mr MEADE The signing I don t recall-the effectiver-we have two laws-~-and perhaps this should be made clear to `the committee. We have one law that regulates truth in lending, that is, the loans of money, and we have a separate law that regulates installment loans of goods and services. The Installment Sales and Services Act became effective November 1 of last year and the truth-in-lending law relatmg to money became effective the first of this year. Mrs. DWYER. How long was it from the time the' bills were signed into law and the effective date? Mr. MEADE. Normally there is a 90-day period unless the bill has an emergency preamble to it, and this was approved-the truth in lending-the Truth in Installment Sales Act was approved on May 16, 1966, became effective November 1, and the truth in lending law was approved on August 31, 1966, and became effective January 1, 1967. Mrs DWYER Do you think that in that short period of time-that it is ample to set up machinery to make the law effective? Would it disrupt anything in the retailer business? Mr. MEADE. Well, Mrs. Dwyer- Mrs. DWYER. Or should you offer a timetable? PAGENO="0592" 582 CONSUMER CREDIT PROTECTION ACT Mr. MEADE. Mr. Smith could probably answer it as far as Lechmere goes. As soon as this law was passed in the Iegi~lature and signed by the Governor, various legal stationers put out forms for our retail installment credit agreements, and they are very simple, things for retail establishments to buy, and I think I recall Mr. Smith saying it, was very simple for Lechmere to shift over forms. At any rate, I had heard no criticism of the time period in Massachusetts, at least since I have b~eh~handling these matters. Mrs. Dwn~a. I asked you that question because we had some wit~~ nesses that asked that the timetable be extended beyond the period in the Sullivan bill. M~*~MEAoi~. Well, I am i~ot sure that things are quite on a similar parallel. In Massachusetts our truth-in-lending law does not set ~tny rate on loans. ~`hc law is tied in with other laws that we previously. had as far as the rates ~n loans go. It does set a maximum rate on in- stallment sales on goods and services, and this rate pretty much fol- lowed-or the rates that are in there-~4hey varfr~-pretty much fol- lowed retailing~practice~ in the past and didn't cause any great disrup. tiou. If this were to~ be~done-~if there wereto be one law for the whole country that ~ould set a ceiling on something, that may be another question. S * Mrs. DWYER. One more question. In your experience has this law, truth-in-lending, stopped those people who cannot afford to buy this merchandise on credit? S In other words, we are talking about the poor and people who have been buying at high credit rates from unscrupulous merchants. Now that this law is, passed, arethese people continuing to hily, even though they cannot aftord it, seeing the 18 percent set for it by the retailer? Have you had any experience whether these people are continuing to buyq or has tIii~s. stopped them, knowing that the rate is 18 percent?. Mr. MEADE. I will defer to Mr. Willett on it because that one is out of my line. S~ S , Mr. WILLETT. There is evidence through the ABOD, which is the Action for Boston Oommunity Development, and other similar orga- nizations, that the consumer in the poorer neighborhood now has been stopped from purchasing goods from those merchants that were chang- ing unscrupulously high rates. That the organizations such as the ABOD that 1 mentioned ~have been able to help these c'onsumers in such in~tan~e~ to obtain~money for their purchases, if at all possible, in a more reasdnable source. .. : ` S Mrs. Dwyna. In other words, th~y ~re purchasing now from legiii- mateq conscienttous merchants? S Mr.'WILLETT.~ Yes. ,` S , ~ ` ~` 5 5 Mrs. DWYER. And .~eeing froi'n the ones who have oo~t them a great deal m~e in credit?., . .` . ` S S Mr. WILL !Yes,~Onte~of the. point5LithatI tried~to make in my opening statement, **hich~ to rne$san ex~t~emely important poi~it, is that unfortima~teiy,~ the büsine~s syste~n ~ ~fl as all kinds of other things ite~f ten .su~ffers from tlieacts*o~a very small group, `and I think such bi'ls as truth-in-lend~inga~tuâJiy help the le'giti,mate busi~ nessman and help the American~ business ~ystthn by preventihg nfl- scrupulous co~npetitors friSth being in the pietuFo, in forcing ~helegiti~ mate busines~man in considering methods to cope with him. PAGENO="0593" ~!iQNS~31~ CR~~I~ ~Q~ECT~QN Ao~~ 583 Mrs. Dwm~. Ibam just wondering how many people then are being turned down beq~use they cannot afford this credit oj~ they eannot afford to buy ths merchandise-will they then go back tQ the places they shopped beiFore and continue to buy thei~e when they are turned down because they are a bad credit risk? Wliai~ happens to these people? Mr. WILLETT. In some cases it would be my assumption that if the local agency is not able to help them find a place where credit is more reasonable because of the facts that they are a bad credit risk, that that particular person might not now be able to acquire the particular thing he is trying to buy. I am not completely certain-~4 have a feeling that quite often this is perhaps best for the person trying to buy that article, just as well as it is for everyone else-perhaps he would be better following the advice given to him by the local community group that is trying to help him, postponing the purchase of this article until he has a better credit rating. Mrs. DwYER. I wonder if the gentleman, Mr. Smith, would comment on that as far as this law is concerned? Mr. SMmI. If a poor credit risk is turned down by a legitimate busi- nessman due to the fact that he just doesn't want to take the risk on this particular person, and if he has it in his heart that he wants this merchandise~ he is going to go back to this person, and while he may pay this same rate of interest, he is going to pay a higher opening selling price. In other words, the selling price may be $15 or $20 additional to what the ordinary businessman would charge. And this is the way of getting around the finance law and compensating for the greater credit risk and higher losses. Mrs. DWYER. Thank you. Mr. SMITH. You just can't regulate a person when they want to have something and desire something. They are going to go for it, and we as credit grantors or credit counselors have advised them against doing so because of the fact that they cannot afford it, their debts are too outstanding-but they simply want this and they will go back to the smaller businessman who will charge them a higher price and still only `charge them the maximum of 18 percent, but this is a way of getting around the 18 percent. Mrs. DWYER. In other words, you cannot legislate against the desires of the people if they want something. Mr. SMITH. That is correct. Mrs. SULLIVAN. If the gentlelady will yield, the garnishment laws may also be a factor in determining whether the credit is extended. Under Massachusetts law, I believe, they can collect anything over $50 out of the weekly wages of the debtor. Mr. SMrm. However, it is very difficult to garnish wages in Massa- chusetts-very, very few businessmen resort to this. It is better to enter a legal suit and then if the customer so desires, to voluntarily repossess the merchandise and wind up the case. Mrs. SULLIVAN. Have you found in your business, which I under- stand is quite extensive, that most of the people want to pay their bills? Mr. SMITH. 99.99 percent of all the pe~ople are honest people. It is a very, very small segment of the buying public who will try to get away from paying their bills. 83-34O~-67-pt. 1-38 PAGENO="0594" 584 CONSUMER CR1~DIT PR~)TECTION ACT Mrs. SULLIvAN. Thank you. Mr. Williams? Mr. WILLIAMS. Thank you, Madam Chairman. Mr. Smith, i~ not what you just described a means of circumventing the Massachusotts law? Mr. SMITH. The Massachusetts law does not regulate the selling price; that is, ~the cash selling price of any article. Mr. WILLIA~iS. The unscrupulous businessman does have the means of circuinventihg this law? Mr. SMITH. That is correct. Mr WIu~IAMs Mr Meade, I note m your testimony that you speak almost entirely to the Massachusetts law on truth in lending. Have you made a study ef this bill that we have before us, H R 11601, and corn pared it with the Massachusetts law? Mr MEADE I wouldn't say I have made an extensive study, Mr Wil hams, but I har~re read it. Mr. WILLI4IS. I am very much interested in your testimony because you are in a p~sition very close to my heart, and I would like to have you, if possibl~, if it would not be too time consuming on your part, to make a compat~ison, to give this committee the difference between these two laws. Because obviously your law does not permit~-I should say it does permit garnishments. It does permit garnishments of wages and H.R, 11601 does not, and there are some differences, apparently. Mr. MEADE. We don't have anything to do with commodity futures in our law, another difference. Our truth-in-lending law as opposed to our truth-in-installment laws, sets out~uo rates whatsoever, maximum or minimum, on credit. Our truth-ih-installments sales and services does set maximum `rates. I gather H.R. 11601 would set it for both lending-in other words, the credit orithe sale of money as well as the sale of goods. Mr. WILLIAMS. If you could give us a breakdown for the record per- haps we could all have the advantage of whatever differences there are between H.R. 11601 and the Massachusetts law. I know that I am very much interested in it. Mr. MEADE, Certainly. (The information may be found on p. 891.) Mr. WILLIAMS, Relative to this Penney case, on this 1½ percent a month, I do not believe you are saying that they can do what they are saying they 4annot do. I think what you are saying is that they ëan put some adi~itional explanatory statements on their billings. Mr. MEADE. That is correct. They do have to put 11/2 percent a month, 18 percent a year, and I don't think they are complaining so much about that, per se, except that they say they cannot go further and explain it. Mr. WILLIAMS. In their testimony before the Senate committee, I believe it was, and I made it a part of this record last week, they are claiming that they object to saying they are charging 1½ percent a month, 18 percent a year, because it does not amount to tliat-what they are saying is that they are being forced to make an untruthful statement. Mr MEAD~ I don't think they are saying that in their suit They are saying they are being forced to make an untruthful statement because they cannot say the whole truth which is their way of thinking that PAGENO="0595" CQNSnME~ C~u~Drr PROTECTION ACT 585 from the date of purchase for the next 364 days that it does not figure necessarily to make 18 percent because they have this piirticular free ride in there. In fact, they are saying it never would work out to be 18 percent. Mr. W'u~IAMs. I `think you will find the way I stated it, is what their case avers. I am not positive but from the testimony I have seen-I have not actually read the case itself-I think that their con- tention ~s that if `they are forced `to say 18 percent a year `and it does not come out to that, and that is the very point they are objecting to, and if they are forced to say,it, `then in your answer, I do not think you have said they do not have to say 18 percent a year. Mr. ME~DE. They do have to say 18 percent a year. All I am saying is `that that is in fact true, that from the time that interest begins to run on any one of their accounts, it is at 1½ percent a month, and if you multiply that `by 12 you come ou't to 18. Now, the purpose of the law is to allow a customer to do some shopping for credit, an informed customer, if he wants to. If `the informed customer knows, and there is nothing to prevent his knowing on the agreement that he has a 30-day free ride period, he gets that anyway, it is at the end of the free ri4e period when interest begins to accrue. It is at that point tha't he can shop around, and if he can get a bank loan for 12 percent a year, pay off J. C. Penney account at the end of the 30 days, `then he is doing `better from that point on. `Tie gets `the 30 days anyway. Mr. WILLIAMs. Let me say after your explanation and my somewhat limited knowledge of this case, you are talking about interest-free periods, other adjustments that are being macje where it does not add up to 18 percent, then I do think some merit exists in the J. C. Penney argument. I do not `think we are going `to develop more information while pursuing that subject. Mr. Smith, what business is the Lechmere Sales engaged in? Mrs. StTLLIVAN. Would the gentleman yield a moment? I have the wording of the Penney testimony in the truth-in-lending hearings be- fore the Senate this year, and let us see if Mr. Meade could just answer this statement by the Penney board chairman, Mr. Batten. Hesays: Our attorneys have advised us' that we cannot run this ad in Massachusetts. It would violate the truth-in-lending act which prohibits `any statement in ad- vertising other than the one prescribed in the law. In other words, the law re- quires us to lie to our customers, then prevents us from telling them we cannot tell them the truth. To us the entire situation is intolerable and we are therefore challenging the law in the Massachusetts courts. Mr. WILLIAMs That is the part. I think after that it has an exact statement as to what they are averring, this does appear. Mr. Smith, in what business is the Lechmere Sales Co.? Mr. SMIni. We are hard-line merchandisers, retail distributors, TV's, ref rigera'tors. Mr. WILLIAMS. You are a distributor? Mr. SMITu. Retailer-hard-line merchandising. Mr. WILLIAMs. What could be referred to as big ticket items? Mr. SMITH. That's correct. Mr. WILLIAMS. You are not talking about the kind of thing we would have, say, in a normal department store? PAGENO="0596" 586 CONSUMER CREDIT PROTECTION ACT Mr. SMrnI. We have no clothing whatsoever. Mr. Wnia~u~i~. No what? Mr. SMITH. ~1o clothing whatsoever. Mr. WILLIAM~s. What do you believe would be a break-even point on interest charged on revolving credit accounts? Mr. SMITH. the `national average as computed and so stated in the Wall Street Journal of 2 months says 10 to 12 percent is the break-even point in revolving charge accounts. Mr. WIwAMs. For your kind of business? Mr. SMITH. Yes. Mr. WILLIAMS. What do you think it would be in a department store? Mr. SMITH. I could not give you that answer because I'm not familiar with it. Mr. WILLIANtS. Do you retain title to what you sell until it is paid for? Mr. SMITH. ~3u a conditional sales contract we do, sir. Mr. WILLIA~S~ As far as this revolving charge account exhibit, Mr. Klein, I do not `regard these as revolving charge accounts. You do not say any purchases made during the month for an 11-month period, and this certainly cannot conceivably be any type of typical revol~ving charge account. What you really have here is an installment plan where you are paying off on an article for which $100 has been paid, and I will appreciate actually adjusting these charts to show typical revolving charge accounts where purchases are being made during the month so we cain have a better idea of how these charge accounts actu- ally work out ~n actual practice. But I do have one question. Mr. KLEIN. May I answer that one? Mr. Wn~IAMs. Of course. Mr. KLEIN. The only difference between what I have shown you and what you have asked for is a succession of other purchases, in dif- ferent months, of course. Mr. WILLIAMS. That is the essence of the revolving charge account. Mr. KLEIN. I have extracted one of the transactions from a revolv- ing charge account, and I maintain, sir, that all other transactions will fall within thjs same pattern of percentage rates, never being other than 18 perceM at Penney's and never being less than 20 percent- but usually more-at Sears or Wards. Mr. WILLIAMS. I don't want one purchase extracted. Mr. KLEIN. Let me go on a bit. What you have in mind, I think, is the fact that people buy their items on different days, and there is a certain difference in the number of days before they get their bill- Mr. WILLIAMS. Some m.onths it is paid off. * Mr. KLEIN. In 30 days. It doesn't matter how much is paid off. The only variable you have to address yourself to, and I want to make the point that you don't have to address yourself to it, is the timing of the purchase or payments, on the theory that you then use a different period of time in credit. Mr. WILLIAMS. This eliminates not one variable but a number of variables. I want to see how this thing works in actual practice with Sears, Roebuck, Montgomery Ward, and J. C. Penney, and we just cannot extract one purchase and treat that purchase separately in view PAGENO="0597" CONSUMER CREDIT PROTECTION ACT 587 of the fact that the person is only paying off $10 a month. This again, as I say, I think this is almost exactly an illustration of an installment purchase or purchasing. Mr. KLEIN. No, sir, it is not. I have the Sears bill right before me, account balance of $10.01 to $100 a month, make a payment each month of $10. Mr. WILLIAMS. How do Sears and Montgomery Ward adjust their financing or interest rate or service charges in order to meet the Massachusetts law after it was passed, or is this what they are still doing? Mr. KLEIN. The Massachusetts law recognizes 18 percent. Mr. WILLIAMS. You are showing 23.8. Mr. KLEIN. I think the Massachusetts law allows a bit of variance from the truth. Mr. WILLIAMS. You mean to tell me that under the Massachusetts law somebody can charge 5.8 percent more interest a year and get away with it? You are showing a monthly interest rate of 1.67, 1.82, 1.92. What kind of law is this? Mr. KLEIN. Well, it is not good enough. It is a pioneering piece of consumer legislation and, as such, we at Consumers Union have praised it highly. But, like most innovations, it needs to be further improved. Mr. WILLIAMS. Thank you, Madam Chairman. Mrs. SULLIVAN. Mr. Klein, in our bill i.f life insurance is optional, is it not counted as a part of the annual rate? Mr. KLEIN. In your bill I think it is; yes. Mrs. SULLIVAN. Mr. Willett, do you set a ceiling of 50 cents per $100 on life insurance without counting it as part of the finance charge? Mr. WILLETT. Yes, Mrs. SULLIVAN. How did you arrive at the 50 cents? Mr. WILLETT. The banking department suggested this 50-cent figure as being `the correct one, and I would `have to rely on them to give you the reasoning that they used to derive this particular figure, unless someone else here knows more about the history than I do. Mr. MEADE. I understand that they took the national average-I un- derstand it came out to the cost of credit life, 39 cents per $100, the difference between the 39 and 50 allows' the company a reasonable re- turn on this particular type thing. Mrs. SULLIVAN. We have not had much information on average in- surance charges, and yet this is a big part of the finance charges in many credit transactions. I think before `the w'eek is out we will have someone scheduled to come in and explain this because we need more information on that particular item. Is the advertising of credit terms included in the Massachusetts law? Mr. MEADE. Yes; it is, Madam Chairman. I might also say that I think you asked me a question previously that I never did answer about J. C'. Penney's ad that they wanted to run. The banking department in Massachusetts and I, as a representative of the attorney general's office, have seen this ad, and if they had gone to the banking departn~ent or the attorney general's office we would have given the ad our blessing. `They could have run it. They can run it. PAGENO="0598" 588 CO~tSUMER Cfl~DIT ~ROT~dPION ~ Mr. BINGIIAM. Madam Chairman? Mrs. SVLLIVA~. Mr. Binghaiit? Mr. BINoHAi~. May I ask one more question of MF. Klein to try to clarify a little ~further this problem of What can happen under this Sears, Roebuck,~and Montgomery Ward type of account? Could I ask you to make a quick calculation, Mr. Klein? Supposing on April 1, a given month, you have a balance of $100 in th~ account. Five days later, on April 5, you make a payment of $75 and then 20 days later, on the 25th of the month you make a pur~hase of $75. At the end of the month your balance will be back up to $100, but for 20 out of the 30 days you actually only have a balance of $25. Mr. KLEIN. Yes. Mr. BINGHA$I. You are goilig to pay under the Sears and Mont- gomery Ward plan, you are going to pay 1½ percent of the $100 balance. But a4tually on the basis of your average daily outstanding balance the rate is much higher than that, is it not? Mr. KLEIN. Yes. If you don't confuse it in the future with what is on the bill when the bill opened, I think you will be a little clearer in your mind as to what is going on. These stores allow you 30 days to pay your bill in full without any service charge. Now, those new payments are on a new 30 days. But you must pay the whole bill in full, the new payments, and balance, to get rid of the service charge. What we are looking at is th~ previous month's transactions when you had a balance due, you paid a fair share of it. Because you wanted to be thrifty. Mr. BINGIIA~I. It seems to me that the Penney system of using the current month's balance is a much fairer system-current month as far as payments are concerned-it is much fairer and much less likely to mislead the consumer than the Sears and Montgomery system. Would you agree with that? Mr. KLEIN. I would make no characterization of fairness on either of these systems. The Penney system is less expensive. That is all we Want to know, which is the least expensive. But both can be expressed as an annual rato, and that will give us the dope. Mr. BTNGHAM. It is interesting that you say it is less expensive, because they bbth say they are charging the same interest. Mr. KLEIN. Which they are not. Mrs. SULLIVAN. If you do not pay the balance due-~that is, the pur- chase price plus service charge-then when they figure the service charge for the next payment date, do they charge a service charge on the previOus service charge that is not paid? Mr. KLEIN. Yes, they do. Penney's comes right out and says it in their contract, but others do, too. Mrs. SULLIVAN. That is like compound interest. Any other questions? Mrs. Dw~n. I have just one more. I believe this could be directed to Mr. Meade oh your Massachusetts law. Is the animal rate for revolving credit as contained in the Massa- chusetts law working because (a) it is accomplishing a worthwhile purpose, or (1) because it is minimus and consumers pay no attéhtion to it and simply causes no one any trouble? What positive e~dence do you have that hiany Massachusetts customers use annual rate as a yardstick toi~hop around and g~t the cheapest form of credit? PAGENO="0599" CO~St1MER C~E1~IT PROThCPION AC~ 589 Mr. MEADE. Well, I have spoken-my information comes to me some- what hearsay from conversations with certain retailers end certain bankers My family are in banking, and particularly the banking I suppose is more appropriate the aspect here-they are in competition with finance companies which, under our small loans law in Mas~a chusetts on certain small loans can charge as high es 33 percent a year on a sliding scale, whereas banks almost never go that high. I am told that certain people who can meet the requirements of loans from banks and credit requirements, but who formerly went to loan companies because they didn't think they could get a loan at the bank, or because they felt it was more convenient to go to the loan company on the corner-when they discovered they were bein.g charged an effective annual rate of 30 percent, say, decided they would at least check with the bank and see if they couldn't do a little better, and the banks in Massachusetts-I think that the ed that the Provi- dent Institution for Savings had that Dr. Willett introduced here has drawn business to lenders from people who in effect are shopping for credit, and this is the purpose of the Massachusetts legislation. Mrs. Dwmu. I have been hearing so many hearsay reports from many rank and file retailers in Massachusetts, that the law, as far as it in~volves annual rate for revolving credit, is, working primarily be- cause consumers ignore the erroneous 18-percent figure. Have you ever taken a scientific poll? Mr. MEADE. No; I haven't. I wouldn't be surprised that it might be true in many instances, that the persons are saying that they are really only interested in dollars they have to spend rather than the rate. But part of the effort that is necessary in the area is consumer education, and once the facts are available to the people, that is, the rates are sent out and disclosed to them, then the other facet of the job is to educate them in the use of these particular rates, The law doesn't do this. But this is part of the problem. Mr. KLEIN. May I comment on that? Mrs. DWYER. Yes; you may. Mr KLEIN For more than a generation consumers have had to buy their installment credit without any knowledge of the annual rate. You cannot expect them suddenly to take cognizance of it But, I referred to a study in my oral statement-I think it is in my written testimony, too, a random selection of Consumers Union subscribers, in a poil, were asked the details about their recent credit dealm~'s and the poll showed that a certain number of them, despite all the difficul- ties, because they are wily people, otherwise they wouldn't read Con sumer Reports, had accurately determined the interest rate on their credit. These people are sensitive to credit rates, The population, or a fair percentage of it, will become sensitive to' interest costs-and shop accordingly-as they are told the rates. Hardly' anybody can really be sensitive to those costs now. Mrs Dwn~E Are you advocating the sale of Consumer Reports ~ Mr. KLEIN. Any time. Mrs. Dw~u. One quickie for Mr. Smith. Even though your store is mostly installment contracts, have you noticed very many customers going to their banks or credit unions since the law was passed? Mr. SMrrn. We do offer a bank plan to the consumer if the con- sumer desires it. We act as an agent for the bank at bank rates, But PAGENO="0600" 590 CONSUMER CREDIT PROTECTION ACT there has been no great demand for the bank plan. The average revolv- in~ charge doesii'i~ usually run the length of the contract. It is usually paid off in advan~e and the customer is concerned with how much he will have to pay ~nonthly, and as a result he stays with the revolving charge plan While with a bank plan he is charged a minimum fee for setting up the contract, and if he pays it off early under the rule of 78's, which is a long and complicated formula, he will get very little back as a rebate, so they tend to stay with the revolving charge. Mrs DWYER I cannot envision many people going to the savings and loans and finding if they take out the money at the savings and loans they could savu some money. Mr. SMITH. It i~ not convenient for them. Mrs. Dwriai. It1is not. Thank you. Mrs. Sui1LIvAi4 In looking at the ads the banks are putting in the buses, or wherever they are placing them, I think the banks would be rather proud to advertise their rates at 9.23 for a 12-month loan, or 9.47, or 9.60 for 18 or 24 months when other plans for credit have to advertise around ~8 percent or more. Mr. Wxu~Err. May I say at this point, there is an accompanying table there indicating what the finance company will have to charge for the same loan,, and for 12 months, $350 loan, it would be 29 percent. This is computed by the State banking department to show the com- parison of the fliaance company ad with the bank advertisement that you have. Also, I wanted to bring up the point at this time, when people ask, is this law affecting anyone or not, that it surprised me and many others that one of the first groups to discover that they had been~ pay- ing more than they knew for interest on loans were some of the lead- ing universities in the Boston area that discovered that they had been recommending tuition loans to parents of students which were much higher than they could have obtained from a local bank, and they have now changed over to recommending loans at the local bank. Mr. WILLiAMs~ I have one question. Mrs. SULLIVAi~t. Mr. Williams~ Mr. WILLIAMS~ Once this Massachusetts law became effectb~e, did the banks and flnan~e companies raise their interest rates on loans other than passbook loans? Mr. WILLEPr. ~o. Mr WILLIAMS The only other suggestion I have is to Mr Meade, and I think if you are going to continue with this Penney case, I would make an effort to suppress Mr. Klein's testimony to the effect that even though they both quote 18 percent annual rates on their statements, actually Sears, Eoebuck and Montgomery Ward are charging more Mr. MEADE. I~r. KJein is saying we don't have-we have Sears-as to what the rate1~is based on-what fees, for example, are included in that base, and whether or not you include credit life insurance and that sort of thing.~Tiiis would make a considerable difference. Mrs. DWYER. I have a concluding question because this has bothered me ever since Mr. Smith's statement. The unscrupulous merchant who previously char~ed25 and~5O pe~rcthit creditnow recoups his credit loss by increasing the price of his product; does he not? PAGENO="0601" C t C Col concert / to the selling price to ma~ up fo~ Mrs. DWYER. Some of our poor pe just the same, regardless of the M~ losses. Mrs. crediti Mr. Mr. Kr~IN. May I point ing for credit he does not u / he buys at a store which has charge ace counts-available. I would just like to read from the Wall Street Journal last week. There was an article you may have seen on discounts-discount stores and how their discounts are dwindling away. ~-30-day c Many discount chains are raising markups partly to pay the costs of adding such conventional department store features as charge accounts, package deliv- eries and fancy merchandise displays and of hiring more sales clerks. Mrs. SULLIVAN. Thank you. Mr. WILIMrT. May I interrupt and interject one last word? Mrs. Dwyer, it seems to me in this case of increasing the price, if I could just say one word about that, at least you are forcing the un- scrupulous merchant into something that is much more easily notice- able. If a person goes in to buy a television set and is told that one that i~ advertised in the local press for $350 will cost him $400, at least this is something which unfortunately, he is still cheating him in in a sense, but it is of public record that he hopefully can see. The other type of situation where you hide this in an interest charge is a sneaky type situation that can't as easily be seen. Mrs. DwYER. It will take a lot of education though. Do you agree? Mr. WILLETT. Yes. Mrs. SULLIVAN. That is a good point. Mr. Smith, I understand that you advertise by brand name so the public knows what you charge. Mr. 5Mrrn. We are the National Brand Retailer of the Year. The second time we have won it. Mrs. SULLIVAN. Again, I want to thank all of you gentlemen for your fine cooperation with this subcommittee of the Congress of the PAGENO="0602" PAGENO="0603" PAGENO="0604"